Lilly to try again to remove poison-pill provisions

  • Comments
  • Print

Shareholders of Eli Lilly and Co. will once again take aim at the drugmaker’s tough poison-pill provision against unwanted buyers.

Lilly’s board is recommending removal of an 80-percent approval threshold for hostile takeover bids during Lilly’s annual meeting of shareholders April 16 at the company’s Indianapolis headquarters.

To pass, the proposal itself must receive support from the owners of 80 percent of Lilly’s shares. It has fallen short each of the past two years, receiving 74 percent and 73 percent of all shares, respectively.

If passed, the proposal would require just a bare majority of shareholder votes to approve key moves commonly used in hostile takeovers.

The supermajority vote requirement dates from the 1980s, the heyday of “corporate raiders” making unsolicited bids to buy public companies. Lilly’s board, which has been fiercely independent during multiple waves of consolidation in the pharmaceutical industry, finally began to support removing the high threshold in 2010 because shareholders began favoring lower barriers.

“The board also considered that even without the supermajority vote, the company has defenses that work together to discourage a would-be acquirer from proceeding with a proposal that undervalues the company and to assist the board in responding to such proposals,” declared Lilly’s directors in its annual proxy statement, filed Monday with the U.S. Securities & Exchange Commission. “These defenses include other provisions of the company’s articles of incorporation and bylaws as well as certain provisions of Indiana corporation law.”

Indeed, Indiana laws raise some of the highest hurdles in the country for slowing down and thwarting hostile takeovers.

Investors typically favor low barriers to hostile takeovers because an acquiring company almost always pays a premium price to entice shareholders to approve such mergers. But the votes of the past two years were hindered because the owners of 13 percent or more shares did not vote on the measure.

Some investors suggest Lilly could be vulnerable to a takeover in the near future because its major patents expired late last year on its bestselling drug, the antipsychotic Zyprexa, allowing cheaper generic copies to rapidly drain the medicine’s $5 billion in annual revenue.

Zyprexa was the second in a string of five blockbuster Lilly drugs that lose patent protection between 2010 and 2014, sapping the company of more than $10 billion in annual revenue.

Lilly’s research-and-development efforts have produced little new revenue since a string of drugs were launched from 2002 to 2004. Investors are hoping a new Alzheimer’s drug, solanezumab, pans out and becomes a huge seller.

But if it doesn’t, Lilly may be forced to sell, wrote Nino Armienti, an options trader who holds Lilly shares.

“Lilly's bloated expenses ripen it for a buyout,” Armienti wrote in a blog post Monday. “In the 10 years ended December, the Indianapolis-based drugmaker spent $35 billion on research development. Yet, it hasn't produced a significant, internally developed new chemical since antidepressant Cymbalta won approval in August 2004.”

Armienti suggests Lilly would be attractive to United Kingdom-based AstraZeneca plc, which has pipeline problems just as bad as Lilly, or Canada-based Valeant Pharmaceuticals International Inc.

Armienti thinks Lilly could be purchased for as little as $44 billion and as much as $75 billion, but most likely for about $60 billion. At that price, Lilly shareholders would receive nearly $52 per share, a 32-percent premium to Monday’s closing price of $39.13.

Lilly CEO John Lechleiter has repeatedly rejected the notion of a mega-merger, and he has constantly argued that Lilly’s pipeline eventually will start producing new drugs—and badly needed revenue.

But, added Armienti, “sometimes reality forces a change of plans. Failure of solanezumab almost certainly prompt Lechleiter to smash the glass container housing Plan B.”


Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.