EDITORIAL: Lilly’s strategy wooed investors

Eli Lilly and Co. shares have more than doubled over the past four years, an impressive run-up that has as much to do with the company’s well-crafted investor-relations message as it does scientific innovation.

Lilly brass should take that as a compliment, not a criticism.

Investors had every reason to feel anxious as a succession of blockbusters began going off patent, starting with Zyprexa in 2011. The expirations put incredible pressure on Lilly to replenish the pipeline to replace lost sales and to eke every dollar out of its remaining stable of patented drugs.

It’s too early to judge those efforts a wholesale success—though analysts are becoming more upbeat about potential new drugs and less concerned about the potential for a catastrophic drop-off in revenue.

What is clear is that company brass, led by CEO John Lechleiter, has done a remarkable job keeping investors in the fold during one of the most vulnerable stretches for Lilly in its 130-plus-year history.

It started with Lechleiter’s cautiously optimistic, soothing tone. Typical was this 2011 remark: “There is absolutely no doubt in my mind that this portfolio of molecules you’ve seen in our pipeline today is going to result in a number of very good products.”

Then there was management’s savvy use of the company’s rich cash dividend—49.5 cents per quarter—to serve as scaffolding for the stock price.

Lilly shares now fetch about $55 apiece. Back in early 2009, when the stock traded in the high $20s, it had an annual dividend topping 7 percent—attractive enough to win over investors who otherwise might have stashed their money elsewhere.

And because Lilly had built a huge cash stockpile, executives were able to unequivocally pledge that the company would be able to maintain its dividend for years to come.

As Chief Financial Officer Derica Rice said in 2011, “We will continue to pay the dividend at least at its current level. It is critically important to management, our board of directors and our shareholders, and we have no intention of cutting it.”

Lilly has had its bumps along the way—and more surely lie ahead. But executives have proved skillful at managing those peaks and valleys.

For example, when analysts in 2011 fixated on solanezumab, the company’s potentially breakthrough Alzheimer’s treatment, executives tamped down expectations without exuding pessimism.

That optimistic bent has been a hallmark of successful Lilly executives over the years. Vaughn Bryson, who was ousted as CEO in 1993, just 20 months into the job, lost the confidence of the board in part because “he talked down the company,” former Chairman Richard Wood told IBJ years later.

Bryson and his executive team said, “We have all these problems, and what are we going to do about them?” recalled Wood, Lilly’s CEO from 1972 to 1991. “The management has to be the cheerleader for the troops.”•

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