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Lilly Endowment crawls toward diversification goal: Bear market, low Lilly stock price slow selloff

September 15, 2008

Lilly Endowment Inc. is still on its journey to sell off $2 billion of its Eli Lilly and Co. shares.

But after a slow start and a few stops for rest, it may take a little longer to get there than originally thought.

The endowment, the single largest holder of Lilly stock, announced its plan to diversify its holdings back in July 2006. For nearly 70 years, the not-for-profit held its wealth almost exclusively in the pharmaceutical company's stock.

So far, it has sold off no more than $390 million in Lilly shares-less than 20 percent of its stated goal-and put the money in mutual funds.

Trouble is, the endowment is nearly halfway through the time frame it gave to complete this sell-off: the end of 2010.

But the endowment will take more time to reach its $2 billion goal, if necessary.

"We'd like to do it by then, certainly. But the way things are looking out there, it's trickier to do that," said Gretchen Wolfram, endowment spokeswoman.

Indeed, with the nation's stock markets in bear territory (off more than 20 percent from their peaks) and Lilly shares trading near an 11-year low, it's not a good time to be trying to unload millions of shares.

Both those factors have slowed the endowment's pace of selling, Wolfram said. The endowment has made a flurry of sales since July, but they were the first since September 2007.

The endowment's decision to put all its eggs in one basket had seemed like a great idea until Aug. 9, 2000, the day a court unexpectedly stripped Lilly of its patents on the antidepressant Prozac, which at the time was Lilly's best seller.

Since then, Lilly's share price has fallen 57 percent. Of course, the endowment didn't buy its shares for $108.55-Lilly's closing price the day before it lost its Prozac patent. The endowment received its holdings from three Lilly family members, who founded the organization in 1937.

Still, the total value of the endowment's assets has fallen from $15.6 billion in 2000 to $7.7 billion at the end of 2007.

The decline in assets has reduced the amounts the endowment doles out in grants for religious, educational and community development projects in Indiana. The endowment must give away a certain percentage of its assets each year, according to federal tax law. In 2007, it passed out $335 million in grants.

What are the chances Lilly's share price will increase from its doldrums below $47 per share?

Most analysts are optimistic. Based on the company's profit outlook, several analysts expect the stock to hit $55 by 2010.

Bert Hazlitt, a pharmaceuticals analyst for BMO Capital Markets, predicts Lilly's pipeline of new drugs will give its share price a boost, vaulting it to $64 by 2010.

But some think the stock is overvalued, even at its current low price.

David Moskowitz, an analyst at Caris & Co. in New York, thinks Lilly's shares are worth only about $42. That's because Lilly will lose patent protection on its two best-selling drugs, the antipsychotic Zyprexa and the antidepressant Cymbalta, in 2011 and 2013, respectively.

Whichever way the stock goes, don't expect the endowment's sales, as large as they are, to sway the price, said Mark Foster, chief investment officer of money manager Kirr Marbach & Co. in Columbus, Ind.

The endowment has sold 8 million shares since July 2006. But more than 5 million shares of Lilly stock trade, on average, every single day.

"I can't imagine that [the endowment sell-off] has any overall impact," he said.


Indianapolis-based hospital system Clarian Health continues to expand its reach, working to bring Muncie's Cardinal Health System into the fold by the end of the year, the parties announced Sept. 8. In exchange for gaining control of all Cardinal assets, including Ball Memorial Hospital and Blackford Community Hospital, Clarian would add $25 million to Ball Memorial's BMH Foundation, bringing total assets to $75 million. In June, the governing body of Bloomington Hospital approved a merger with Clarian.

Local insurer WellPoint Inc. expects to lose $214 million of the $243 million it invested in troubled housing lenders Fannie Mae and Freddie Mac, the Indianapolisbased health insurer said Sept. 10. WellPoint said it would take a charge in the third quarter.

Health care firm Arcadia Resources Inc. plans to hire 130 employees for a new pharmacy operation in Indianapolis that will package medications for seniors, the company said Sept. 11. Arcadia, which moved its headquarters from Michigan to Indianapolis last year, anticipates going to have 400 employees in the state.

The years-long legal battle over 2.3 acres of prime downtown real estate was settled Sept. 9, when the owners of the property-sandwiched between Lucas Oil Stadium and the RCA Dome-agreed to sell it to the Indiana Stadium and Convention Building Authority. The agency, which wants a portion of the property for a pedestrian walkway linking the new stadium to the Indiana Convention Center, went to court after the owners turned down a $4.3 million offer; it was appraised for $7 million. The sales price won't be disclosed until the agency's board formally approves the deal Sept. 22.

An Indianapolis startup has acquired the intellectual assets of American Sentry Guard, a Greenwood security-system company that closed suddenly last month after its bank called in loans. Integrated Security Solutions, which also handles security equipment, said Sept. 11 it bought the shuttered firm's Web sites, names and a list of 15,000 customers-all for $250,000. Named to last year's Inc. 500 list of fastest-growing private companies, American Sentry reported annual revenue of $8 million in 2007.

The long-awaited restaurant at Buggs Temple on the Central Canal closed Sept. 10. Creation Cafe, a casual restaurant and coffee shop that shared space in the building, remains open. The upscale Tavern at the Temple survived about 11 months before succumbing to what the owners called "financial demands." Buggs Temple opened in October after a $3.5 million renovation of the 1918 building dragged on for several years.

Indianapolis-based Ingersoll Rand Security Technologies plans to expand its east-side manufacturing operation, creating 40 jobs, the Indiana Economic Development Corp. said Sept. 5. The 100-year-old company, which makes panic release bars and electronic security products for exits, will invest $6.1 million to upgrade equipment at its Tobey Drive plant, which already employs 530.

The founder of an Indianapolis not-for-profit that claimed to provide counseling for disabled people was sentenced Sept. 9 to 10 years in prison for defrauding Medicaid. Varnador K. Sutton also was ordered to pay back more than $3 million. Prosecutors say the Sutton-led Regenerations submitted bills for 84,000 counseling sessions on behalf of 2,500 Medicaid recipients, but virtually none of the sessions took place.

THE WEEK AHEAD

Visit IBJ.comfor business news 24/7.

A public hearing on a $15.7 million plan to expand The Children's Museum of Indianapolis is slated for Sept. 17 before the Metropolitan Development Commission. The 37,500-square-foot project is expected to be finished in time for the arrival of a blockbuster King Tut exhibit scheduled to open in June 2009.

Metropolitan Development Commission

members are scheduled to make a final decision Sept. 17 on a project that would transform the former Paul C. Stetson School at Fall Creek Parkway and College Avenue. The plan won the blessing of a hearing examiner in late August. Mapleton Fall Creek Development Corp. and Stetson Senior Apartments LP are proposing a 47-unit senior apartment complex. The 1924 building most recently served as offices and The Saint Christopher Center, an early childhood education program.
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