Market surge doesn’t lift Lilly Endowment

Lilly Endowment’s resistance to diversify its holdings reached a new height last year, as it failed to sell a single
share of the underperforming Eli Lilly and Co. stock while the broader market surged.

The estimated value of the endowment, which holds 95 percent of its assets in Lilly stock, fell 15 percent to $4.8 billion
in 2009. The endowment has lost two-thirds of its value since reaching a high of $15.6 billion in 2000.

Chairman Thomas Lofton announced in 2006 a plan to sell $2 billion in Lilly stock by 2010. Through September 2008, the endowment
sold $390 million in shares and reinvested the money in indexed mutual funds.

The endowment has not sold any Lilly shares since. Spokeswoman Gretchen Wolfram said
the endowment, which is handling diversification internally, has not abandoned its objective.

“We’re still at it,” she said.

Wolfram cited two reasons for the hiatus: With Lilly shares trading around $35, the stock is paying a rich dividend topping
5 percent. The endowment also is reluctant to sell when the shares are low. The stock is off 68 percent from its 2000 peak.

Financial advisers said those are valid reasons to hold onto Lilly stock for now. At the same time, they said there’s
no guarantee the stock won’t fall further as the company struggles to bring drugs to market to offset patent expirations
on its biggest sellers.

And they say the endowment’s halting pace is odd.

“Usually, when you put these programs in place, you go forward with them,” said Mark Foster, chief investment
officer at Kirr Marbach & Co. in Columbus, Ind.

Ted Jarvis, senior investment officer at Indiana Trust and Investment Management Co. in Muncie, said achieving diversification
sometimes means selling for less-than-palatable prices.

Lilly stock has been in decline since August 2000, when a federal appeals court invalidated patent protection for Prozac,
then the company’s best-seller. Shares ended 2009 at $35.70, down 61 percent from the 2000 close of $93.06.

The endowment’s value has fallen 69 percent over that same period. Tax law requires all not-for-profit foundations
to distribute at least 5 percent of their assets, so the endowment’s annual grants compounded the loss.

In 2009 alone, Lilly stock dropped 11.3 percent, while the S&P 500 Index gained 26.5 percent.

And Wall Street is not optimistic about the company’s future. The more bearish analysts predict profits falling 25
percent in the next five years, and the stock price dropping to nearly $20 a share.

One analyst, Jon LeCroy at Hapoalim Securities, wrote in a Jan. 29 research note, “Eli Lilly scores well below average
on 2010-2014 patent exposure, pipeline strength, and average on company-specific factors.”

Jeff Stroman, managing director at Oxford Financial in Carmel, said there’s often a strong emotional attachment to
a stock that’s created wealth for multiple generations.

Three Lilly family members—J.K. Lilly and his sons J.K. Jr. and Eli—started the endowment with a gift of company
stock in 1937. One of their descendents, Eli “Ted” Lilly II, now serves on the board.

Through his lawyer, Ted Lilly declined to comment.

“Families or institutions often have excuses,” Stroman said. “They may be contemplating the company’s
earnings or fortunes are going to improve. Whether that ever materializes is another issue.

“If you’re looking for reasons, there’s always a reason someone can say ‘now’s not the right
time,’” Stroman said.

Lilly Endowment is still among the nation’s largest private foundations, according to a ranking by the Foundation Center
in New York. In 2008, it approved $315 million in grants, most of which went to Indiana organizations.

Many top foundations were established with donor stock, but few have gripped that golden egg as tightly as Lilly Endowment.
The David and Lucile Packard Foundation, for example, announced a diversification plan in 2002, and by the end of 2008 held
just 7.6 percent of its assets in shares of Hewlett-Packard and Agilent Technologies, an HP spinoff.

The percentage of foundations holding donor stock fell from 30.2 percent to 12.4 percent between 2002 and 2007, according
to surveys by the Commonfund Institute of Wilton, Conn.

Letting go of more of the endowment’s 135.7 million Lilly shares could weaken the endowment’s influence over
the company, which has nearly 12,000 employees in the Indianapolis area.

The endowment is the largest shareholder, with 11.8 percent of shares outstanding. That stake gives it a key vote on matters
affecting the company’s future.

Current corporate-governance rules call for a supermajority of 80 percent to approve any unsolicited takeover, though Lilly
shareholders will consider a proposal at the annual meeting in April to lower that barrier to a simple majority.

Harold Bradley, chief investment officer at the Kauffman Foundation in Kansas City, said he would not consider Lilly Endowment’s
initial goal of selling $2 billion in shares real diversification.

He noted that, at the time it was announced, the endowment was worth $8.4 billion. If it had held that value, $2 billion
in shares would represent just 23 percent of the portfolio.

“At 20 percent, somebody’s putting pressure on them” to diversify, Bradley said.

Lofton certainly left plenty of wiggle room in his announcement.

“Nonetheless, there is wisdom in embarking on some level of diversification,” he said in a July 2006 press release.
“This transition will take time, and our thinking is fluid. Circumstances may change and alter our plans.”•