Eli Lilly & Company – 2011

Forest David

A. Case Abstract
Eli Lilly is a comprehensive strategic management case that includes the company’s year-end 2010
financial statements, organizational chart, competitor information and more. The case time setting is the
year 2011. Sufficient internal and external data are provided to enable students to evaluate current
strategies and recommend a three-year strategic plan for the company. Headquartered in Indianapolis,
Indiana, Eli Lilly’s common stock is publicly traded under the ticker symbol LLY.

Headquartered in Indianapolis, Indiana, Eli Lilly is well known for its popular antidepressant drug, Prozac.
Eli Lilly produces and markets scores of other medicines for a wide variety of ailments, including its top-
selling drug Zyprexa, a neurological therapy for treating schizophrenia and bipolar disorder. Zyprexa
however lost patent exclusivity in major markets in October 2011 and generic options quickly dominated
that market. Eli Lilly has other top drugs that include Cymbalta (depression), cancer treatments Gemzar
and Alimta, and endocrinology (hormone-related) products such as Humalog insulin and osteoporosis
medication Evista. Eli Lilly also makes cardiovascular therapies and anti-infective agents, as well as animal
health products. The company sells its products in about 140 countries.

B. Vision Statement (proposed)

To be the leading drug company in the world for the creation of new drugs.

C. Mission Statement (proposed)

Eli Lilly prides ourselves on research and development (7) in creating the best drugs to treat and cure many
diseases in society (5, 8) for our customers (1). In pursuit of our mission, we operate globally (3) to
research finding of cures for serious ailments. We use the most advanced equipment (4) and people to
ensure the most promising product development. At Eli Lilly, we believe good ethics is good business and
strive to exceed all government regulations in every phase of drug development (6). We believe with power
comes great responsibility and we are focused on educating in health concerns and promoting awareness
among our customers to help them prevent illnesses before they occur. We embrace a diverse workforce
(9) with a inclusive culture in which the health, professional development, safety, work-life balance, and
respectful treatment of our employees (8) are among our highest priorities.

1. Customers
2. Products or services
3. Markets
4. Technology
5. Concern for survival, growth, and profitability
6. Philosophy
7. Self-concept

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 8. Concern for public image
9. Concern for employees

D. External Audit
Opportunities

1. Global pharmaceutical sales are expected to expand up to 7 percent over 2011.

2. Pfizer’s Lipitor and Bristol-Meyer’s Plavix patents expire in 2011.
3. Specialty drugs have accounted for close to 2/3 of all new drugs launched.
4. The industry has some of the highest barriers to entry of any US industry.
5. Generic drugs are only slightly less expensive than branded ones in Japan and Europe.
6. FDA will often allow drugs to become OTC drugs as their patent ends.
7. By 2020, McKinsey & Co. predicts that consumer spending in Africa to double to nearly $1.8 trillion,
up from about $860 million in 2008.

Threats

1. The two provisions of the US health care over haul: 1) an annual fee on pharmaceutical companies,
and 2) new discounts for Medicare patients who hit the prescription coverage gap.
2. For every 5,000 compounds discovered only one reaches the pharmacist’s shelf.
3. Less than 1/3 of all marketed drugs achieve enough commercial success to recoup their R&D
investments.
4. With regulations it can take 12 to 15 years from discovery to market for a drug.
5. Many competitors in the market with Pfizer being the largest yet only having 8% of the market.
6. Patent infringement in developing countries not honoring patents from other nations.
7. FDA requires 3 phases of expensive human testing before a drug can be approved.
8. Drug discovery and development often takes years to complete and may cost more than $500 million
with no guarantee of eventual approval for the market.

Competitive Profile Matrix

Eli Lilly Pfizer Merck

Critical Success Factors Weight Rating Score Rating Score Rating Score
Advertising 0.05 2 0.10 4 0.20 3 0.15
Market Penetration 0.12 2 0.24 4 0.48 3 0.36
Sales 0.15 2 0.30 4 0.60 3 0.45
Product Quality 0.15 2 0.30 4 0.60 3 0.45
R&D 0.12 2 0.24 4 0.48 3 0.36
Products Offered 0.10 2 0.20 4 0.40 3 0.30
Financial Profit 0.16 2 0.32 4 0.64 3 0.48
Market Share 0.15 2 0.30 4 0.60 3 0.45
Totals 1.00 2.00 4.00 3.00

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 EFE Matrix

Opportunities Weight Rating Weighted Score

1. Global pharmaceutical sales are expected to expand up to 7 0.08 4 0.32
percent over 2011.
2. Pfizer’s Lipitor and Bristol-Meyer’s Plavix patents expire in 2011. 0.08 2 0.16
3. Specialty drugs have accounted for close to 2/3 of all new drugs 0.08 2 0.16
launched.
4. The industry has some of the highest barriers to entry of any US 0.07 3 0.21
industry.
5. Generic drugs are only slightly less expensive than branded 0.06 3 0.18
ones in Japan and Europe.
6. FDA will often allow drugs to become OTC drugs as their patent 0.05 3 0.15
ends.
7. By 2020, McKinsey & Co. predicts that consumer spending in 0.05 2 0.10
Africa to double to nearly $1.8 trillion, up from about $860 million
in 2008.

Threats Weight Rating Weighted Score

1. The two provisions of the US health care over haul: 1) an annual
fee on pharmaceutical companies, and 2) new discounts for 0.05 3 0.15
Medicare patients who hit the prescription coverage gap.
2. For every 5,000 compounds discovered only one reaches the
0.06 4 0.24
pharmacist’s shelf.
3. Less than 1/3 of all marketed drugs achieve enough commercial
0.08 4 0.32
success to recoup their R&D investments.
4. With regulations it can take 12 to 15 years from discovery to
0.07 4 0.28
market for a drug.
5. Many competitors in the market with Pfizer being the largest yet
0.08 3 0.24
only having 8% of the market.
6. Patent infringement in developing countries not honoring
0.07 4 0.28
patents from other nations.
7. FDA requires 3 phases of expensive human testing before a drug
0.06 3 0.18
can be approved.
8. Drug discovery and development often takes years to complete
and may cost more than $500 million with no guarantee of 0.06 3 0.18
eventual approval for the market.
TOTALS 1.00 3.15

E. Internal Audit
Strengths

1. 10th largest pharmaceutical company in the world.

2. Currently have 70 potential new drugs in human testing phase.
3. In June 2011, the European Commission granted marketing authorization for Bydureon the first once
weekly treatment for type 2 diabetes.
4. In July 2011, Eli Lilly acquired the animal health business of Janseen Pharmaceutica from Johnson &
Johnson.

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5. Blood thinning drug Efferent, similar to Plavix, was approved in 2011.
6. No goodwill on balance sheet.
7. Debt to equity ratio of 0.47 versus 1.03 industry average.

Weaknesses

1. Between 2010 and 2012, Eli Lilly lost US patent protection on drugs that accounted for 46% of its
2010 revenues.
2. EPS for the 2nd quarter 2011 decreased 11% from 2nd quarter 2010.
3. Weak mission and vision statements.
4. More sales in the US than the rest of the world combined.
5. No clear chain of command on organization chart.
6. Stock price is down over 60% since 2000.
7. Inventory turnover of 1.9 versus 2.7 industry average.

Financial Ratio Analysis

Growth Rate Percent Eli Lilly Industry S&P 500

Sales (Qtr vs year ago qtr) 8.70 6.00 14.50
Net Income (YTD vs YTD) NA NA NA
Net Income (Qtr vs year ago qtr) -5.10 64.80 47.20
Sales (5-Year Annual Avg.) 9.52 7.59 8.31
Net Income (5-Year Annual Avg.) 20.43 2.49 8.76
Dividends (5-Year Annual Avg.) 4.94 9.90 5.70

Profit Margin Percent

Gross Margin 79.6 69.7 39.8
Pre-Tax Margin 23.4 -28.9 18.2
Net Profit Margin 19.1 15.6 13.2
5Yr Gross Margin (5-Year Avg.) 79.1 71.2 39.8

Liquidity Ratios
Debt/Equity Ratio 0.47 1.03 1.00
Current Ratio 1.8 0.8 1.3
Quick Ratio 1.5 0.7 0.9

Profitability Ratios
Return On Equity 33.9 30.0 26.0
Return On Assets 14.8 8.8 8.9
Return On Capital 19.2 11.4 11.8
Return On Equity (5-Year Avg.) 24.8 22.9 23.8
Return On Assets (5-Year Avg.) 9.7 10.3 8.0
Return On Capital (5-Year Avg.) 13.4 13.8 10.8

Efficiency Ratios
Income/Employee 121,489 90,604 126,905
Revenue/Employee 636,947 652,532 1 Mil
Receivable Turnover 7.1 5.6 15.4
Inventory Turnover 1.9 2.7 12.5

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 Net Worth Analysis (in millions)

Stockholders Equity $12,420

Net Income x 5 $25,345
(Share Price/EPS) x Net Income $45,040
Number of Shares Outstanding x Share Price $43,187
Method Average $31,498

IFE Matrix

Strengths Weight Rating Weighted Score

1. 10th largest pharmaceutical company in the world. 0.12 4 0.48
2. Currently have 70 potential new drugs in human testing phase. 0.10 4 0.40
3. In June 2011, the European Commission granted marketing
authorization for Bydureon the first once weekly treatment for 0.10 4 0.40
type 2 diabetes.
4. In July 2011, Eli Lilly acquired the animal health business of
0.05 4 0.20
Janseen Pharmaceutica from Johnson & Johnson.
5. Blood thinning drug Efferent, similar to Plavix, was approved in
0.08 3 0.24
2011.
6. No goodwill on balance sheet. 0.08 4 0.32
7. Debt to equity ratio of 0.47 versus 1.03 industry average. 0.08 4 0.32

Weaknesses Weight Rating Weighted Score

1. Between 2010 and 2012, Eli Lilly lost US patent protection on
0.12 1 0.12
drugs that accounted for 46% of its 2010 revenues.
2. EPS for the 2nd quarter 2011 decreased 11% from 2nd quarter
0.05 1 0.05
2010.
3. Weak mission and vision statements. 0.03 2 0.06
4. More sales in the US than the rest of the world combined. 0.05 2 0.10
5. No clear chain of command on organization chart. 0.05 2 0.10
6. Stock price is down over 60% since 2000. 0.06 1 0.06
7. Inventory turnover of 1.9 versus 2.7 industry average. 0.03 2 0.06
TOTALS 1.00 2.91

F. SWOT
SO Strategies
1. Increase R&D by $300M (S1, O1).
2. Start marketing Efferent to replace Plavix (S5, O2).

WO Strategies
1. Work with FDA to get approval of OTC for expiring patented drugs (W1, O6).
2. Develop a SBU structure to better take advantage of world markets including Africa (W5, O7).

ST Strategies
1. Increase market research by $100M to better determine how to market OTC drugs (S1, T4).
2. Develop marketing strategies for the 5 drugs nearest FDA approval (S2, O7).

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 WT Strategies
1. Work with developing markets to have drugs approved that are still under FDA testing (W4, T4).

G. SPACE Matrix

FP
Conservative Aggressive
7

CP IP
-7 -6 -5 -4 -3 -2 -1 1 2 3 4 5 6 7
-1

-2

-3

-4

-5

-6

-7
Defensive Competitive
SP

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)
Gross Margin 4 Rate of Inflation -2
Sales 4 Technological Changes -6
Debt/Equity Ratio 6 Regulations -7
ROE 4 Competitive Pressure -5
ROA 5 R&D Expenses -7
Financial Position (FP) Average 4.6 Stability Position (SP) Average -5.4

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Internal Analysis: External Analysis:
Competitive Position (CP) Industry Position (IP)
Market Share -4 Growth Potential 5
Product Quality -3 Financial Stability 5
Customer Loyalty -3 Ease of Entry into Market 6
Technological know-how -4 Resource Utilization 5
Control over Suppliers and Distributors -2 Profit Potential 5
Competitive Position (CP) Average -3.2 Industry Position (IP) Average 5.2

H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Eli Lilly

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

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I. The Internal-External (IE) Matrix

The Total IFE Weighted Scores

Strong Average Weak
4.0 to 3.0 2.99 to 2.0 1.99 to 1.0
4.0 I II III

High

3.0 IV V VI

The
EFE
Total Medium Eli Lilly
Weighted
Scores

2.0 VII VIII IX

Low

1.0

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J. QSPM

Inrease
market
Increase
research to
R&D
market OTC
drugs
Opportunities Weight AS TAS AS TAS
1. Global pharmaceutical sales are expected to expand up to 7
0.08 3 0.24 4 0.32
percent over 2011.
2. Pfizer’s Lipitor and Bristol-Meyer’s Plavix patents expire in 2011. 0.08 4 0.32 2 0.16
3. Specialty drugs have accounted for close to 2/3 of all new drugs
0.08 1 0.08 4 0.32
launched.
4. The industry has some of the highest barriers to entry of any US
0.07 4 0.28 2 0.14
industry.
5. Generic drugs are only slightly less expensive than branded
0.06 0 0.00 0 0.00
ones in Japan and Europe.
6. FDA will often allow drugs to become OTC drugs as their patent
0.05 4 0.20 2 0.10
ends.
7. By 2020, McKinsey & Co. predicts that consumer spending in
Africa to double to nearly $1.8 trillion, up from about $860 million 0.05 2 0.10 3 0.15
in 2008.

Threats Weight AS TAS AS TAS

1. The two provisions of the US health care over haul: 1) an annual
fee on pharmaceutical companies, and 2) new discounts for 0.05 0 0.00 0 0.00
Medicare patients who hit the prescription coverage gap.
2. For every 5,000 compounds discovered only one reaches the
0.06 4 0.24 2 0.12
pharmacist’s shelf.
3. Less than 1/3 of all marketed drugs achieve enough commercial
0.08 4 0.32 3 0.24
success to recoup their R&D investments.
4. With regulations it can take 12 to 15 years from discovery to
0.07 3 0.21 1 0.07
market for a drug.
5. Many competitors in the market with Pfizer being the largest yet
0.08 0 0.00 0 0.00
only having 8% of the market.
6. Patent infringement in developing countries not honoring
0.07 0 0.00 0 0.00
patents from other nations.
7. FDA requires 3 phases of expensive human testing before a drug
0.06 4 0.24 2 0.12
can be approved.
8. Drug discovery and development often takes years to complete
and may cost more than $500 million with no guarantee of 0.06 4 0.24 2 0.12
eventual approval for the market.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

 Inrease
market
Increase
research to
R&D
market OTC
drugs
Strengths Weight AS TAS AS TAS
1. 10th largest pharmaceutical company in the world. 0.12 3 0.36 2 0.24
2. Currently have 70 potential new drugs in human testing phase. 0.10 2 0.20 4 0.40
3. In June 2011, the European Commission granted marketing
authorization for Bydureon the first once weekly treatment for 0.10 2 0.20 4 0.40
type 2 diabetes.
4. In July 2011, Eli Lilly acquired the animal health business of
0.05 0 0.00 0 0.00
Janseen Pharmaceutica from Johnson & Johnson.
5. Blood thinning drug Efferent, similar to Plavix, was approved in
0.08 3 0.24 2 0.16
2011.
6. No goodwill on balance sheet. 0.08 0 0.00 0 0.00
7. Debt to equity ratio of 0.47 versus 1.03 industry average. 0.08 0 0.00 0 0.00

Weaknesses Weight AS TAS AS TAS

1. Between 2010 and 2012, Eli Lilly lost US patent protection on
0.12 2 0.24 3 0.36
drugs that accounted for 46% of its 2010 revenues.
2. EPS for the 2nd quarter 2011 decreased 11% from 2nd quarter
0.05 0 0.00 0 0.00
2010.
3. Weak mission and vision statements. 0.03 0 0.00 0 0.00
4. More sales in the US than the rest of the world combined. 0.05 3 0.15 2 0.10
5. No clear chain of command on organization chart. 0.05 0 0.00 0 0.00
6. Stock price is down over 60% since 2000. 0.06 0 0.00 0 0.00
7. Inventory turnover of 1.9 versus 2.7 industry average. 0.03 0 0.00 0 0.00
TOTALS 3.86 3.52

K. Recommendations
1. Increase R&D by $300M
2. Start marketing Efferent to replace Plavix at $400M.
3. Work with FDA to get approval of OTC for expiring patented drugs.
4. Develop a SBU structure to better take advantage of world markets including Africa for $100M.
5. Increase market research by $100M to better determine how to market OTC drugs.

L. EPS/EBIT Analysis (in millions)

Amount Needed: $900M
Stock Price: $37.37
Shares Outstanding: 1,160
Interest Rate: 5%
Tax Rate: 22%

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 Common Stock Financing Debt Financing
Recession Normal Boom Recession Normal Boom
EBIT $5,000 $7,000 $9,000 $5,000 $7,000 $9,000
Interest 0 0 0 45 45 45
EBT 5,000 7,000 9,000 4,955 6,955 8,955
Taxes 1,100 1,540 1,980 1,090 1,530 1,970
EAT 3,900 5,460 7,020 3,865 5,425 6,985
# Shares 1,184 1,184 1,184 1,160 1,160 1,160
EPS 3.29 4.61 5.93 3.33 4.68 6.02

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom
EBIT $5,000 $7,000 $9,000 $5,000 $7,000 $9,000
Interest 36 36 36 9 9 9
EBT 4,964 6,964 8,964 4,991 6,991 8,991
Taxes 1,092 1,532 1,972 1,098 1,538 1,978
EAT 3,872 5,432 6,992 3,893 5,453 7,013
# Shares 1,165 1,165 1,165 1,179 1,179 1,179
EPS 3.32 4.66 6.00 3.30 4.62 5.95

M. Epilogue
In Q3 of 2011, Eli Lilly's earnings fell 5 percent, partly because their top selling drug, Zyprexa, generated
$1.18 billion in sales in Q3 of 2011, or 19 percent of total revenue, and now there is "rapid and severe
erosion" of Zyprexa sales due to generic alternatives. Eli Lilly is today relying heavily on its animal health
business, emerging markets like China, sales in Japan and its pipeline of drugs under development. The
company has 10 potential drugs in late-stage testing, the last phase before seeking regulatory approval,
including treatments for Alzheimer's disease and depression. Lilly today is collaborating with German
drugmaker Boehringer Ingelheim to develop diabetes drugs. High R&D expenditures for that drug is
another key factor behind the company’s 10 percent rise in operating expenses to about $3.2 billion in Q3
and the Q3 earnings decline.

In Q3 of 2011, Lilly’s net income was $1.24 billion, or $1.11 per share, down from $1.3 billion, or $1.18
per share, in last year's Q3. Revenue for Q3 climbed 9 percent to a better-than-expected $6.15 billion. Lilly
at the end of Q3 said the U.S. health care overhaul, which aims to eventually cover millions of uninsured
people, lowered their Q3 revenues by $465 million. Rebates for Medicare prescription drug coverage alone
reduced Lilly’s revenue by $330 million, and a drugmaker's fee increased expenses by $135 million.

Also in Q3, revenue from Lilly's second-best seller, the antidepressant drug Cymbalta, rose 29 percent to
$1.07 billion, while revenue from the company’s animal health business jumped 28 percent to $451
million. However in Q3, Lilly’s cancer drug Gemzar's revenue plunged 72 percent to $91 million since that
drug lost patent protection in 2010. Lilly also loses U.S. patent protection for Cymbalta in 2013. Lilly
today faces one of the steepest so-called patent cliffs in the pharmaceutical industry. Consequently,
analysts expect Lilly earnings to drop through about 2014 before possibly rebounding with newer revenue
sources. Some analysts have questioned Lilly's ability to maintain its dividend, which currently stands at a
quarterly rate of 49 cents per share.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall.