Company Name: Eli Lilly and Co.
Public Availability Date: 02-25-1993
[INQUIRY LETTER 1]
DEWEY BALLANTINE
1301 AVENUE OF THE AMERICAS
NEW YORK 10019-6092
TELEPHONE(212) 259-8000 December 23, 1992 Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549 Attention: Office of Chief Counsel
Division of Corporation Finance Re: Eli Lilly and Company -- Shareholder Proposal with Respect to the Drug
Pricing Policy of Eli Lilly and Company - File No. 1-6351 Dear Sirs: Enclosed on behalf of Eli Lilly and Company ("Lilly"), pursuant to Rule 14a-8(d)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are
six copies of a shareholder proposal by Ms. E. Kathryn Wadsworth (the
"Proposal") and supporting statement received by Lilly regarding the drug
pricing policy of Lilly. The purpose of this letter is to set forth the reasons why we believe Lilly may
properly omit the Proposal from Lilly's 1993 proxy statement. In accordance with Rule 14a-8(d), we are by separate letter advising the
proponent of the Proposal of Lilly's intention to omit the Proposal from its
proxy statement and providing her with a copy of this letter. The Proposal requests that Lilly's Board of Directors (i) seek input on pricing
policy from consumer groups and (ii) adopt a policy of price restraint by
November 1, 1993. Rule 14a-8(c)(7) permits a registrant to omit a shareholder proposal from its
proxy statement and form of proxy relating to an annual meeting of its
shareholders if such proposal deals with a matter relating to the conduct of the
ordinary business operations of the registrant. Lilly was founded in 1876 as a
drug manufacturing business. Today Lilly's principal business continues to be
the sale of pharmaceutical products. Most of these products were discovered or
developed through Lilly's research and development activities. Lilly's products
are sold in more than 110 countries. The Proposal requests that the Board of Directors seek input on drug pricing
policy from consumer groups and adopt a policy of price restraint by November 1,
1993. The Proposal deals with a matter relating to the conduct of Lilly's
ordinary business operations -- the prices charged by Lilly for its products. It
is a routine part of Lilly's business to make decisions concerning the prices
for which it will sell its products. The summary statement accompanying the
Proposal refers to different prices being charged to institutional buyers as
compared with individual consumers. This summary statement suggests that
shareholders should get involved in changing pricing policies by concluding that
shareholders "can support a return to fair and reasonable pricing policies by
voting yes to this resolution." Determining the pricing of pharmaceutical
products is not as simple as seeking consumer input. For a given drug it
encompasses a time period beginning in the early stages of the 7 to 10 year
period required for development and continues until marketing of the product is
discontinued. Many factors are considered in determining the price to charge for
a product. These include an evaluation of the clinical benefits of the product,
the cost to develop the product, an evaluation of Lilly's product compared to
other products in the marketplace, alternative forms of treatment which could
include surgery or other therapy, new competitive products, new competitive
companies, changes in indications for use of existing products, the expiration
of patents, and inflation. These factors are monitored routinely to determine
both the initial and ongoing prices charged for products. Prices charged for
products sold today must also be constantly monitored to assure that they will
continue to provide a stream of income to fund the risky and dramatically
increasing costs of research and development that will lead to advances in the
treatment of diseases-and continue to provide Lilly's shareholders with a return
on their investments. Pricing is very much a routine ordinary business operation
of Lilly involving the sales, marketing, research, production, and other
departments of Lilly. Thus, it seems to be very clear that the Proposal deals
with a matter relating to the conduct of the ordinary business operations of
Lilly. The staff has consistently allowed companies to omit proposals under Rule
14a-8(c)(7) when such proposals deal with matters relating to decisions
regarding the prices to be charged for their products. In American Telephone and
Telegraph Company (available December 31, 1991), a shareholder proposal
requested AT&T's Board of Directors to direct its officers to phase out the
present method of timing residential toll calls and phase in the present method
of timing business toll calls. The staff noted that the proposal related to
AT&T's method of timing and billing for residential toll calls. The staff
concluded that the proposal could be omitted pursuant to Rule 14a-8(c)(7)
because it dealt with a matter relating to the conduct of AT&T's ordinary
business operations -- the prices charged by the company. In Compaq Computer
Corp. (available April 12, 1985), a shareholder proposal requested that Compaq
"products be made available to shareholders at a cost no greater than, and/or a
discount no less than, that extended to any other individual, group of
individuals or purchasing entity." The staff allowed the company to omit the
proposal pursuant to Rule 14a-8(c)(7) because it dealt with a matter relating to
the conduct of the company's ordinary business operations -- discount policies.
In Texas Air Corp. (available March 29, 1985), the staff allowed Texas Air to
omit a shareholder proposal requesting that the company prepare a report on
fare-setting policies of the company's subsidiaries. The staff concluded that
the proposal could be properly omitted pursuant to Rule 14a-8(c)(7) because it
dealt with a matter relating to the conduct of the company's ordinary business
operations -- the determination to report to shareholders regarding fare-setting
policies. The Proposal clearly deals with a matter relating to the conduct of Lilly's
ordinary business operations -- the prices to be charged by Lilly for its
products. The language of Rule 14a-8(c)(7), the policies underlying the Rule and
past staff interpretations of the Rule support the conclusion that Lilly may
properly omit the Proposal from its proxy materials in connection with its 1993
Annual Meeting of Shareholders. On behalf of Lilly, we respectfully request your confirmation that the Division
of Corporation Finance will not recommend to the Commission any action if Lilly
omits the Proposal from its proxy materials for its 1993 Annual Meeting of
Shareholders. We would appreciate your response no later than February 8, 1993
so that Lilly may be able to meet its timetable for distributing its proxy
materials. Should you disagree with the conclusions set forth herein, we would appreciate
an opportunity to confer with you prior to the issuance of the staff's Rule
14a-8(d) response. If you have any questions with respect to the foregoing,
please do not hesitate to call me at 212-259-6630. Please acknowledge receipt of this letter and the attached material by stamping
and returning the enclosed copy of this letter in the self-addressed stamped
envelope. Very truly yours, Steven P. Lund Enclosure
[INQUIRY LETTER 2]
E. Kathryn Wadsworth
484 Somerset Avenue
Indianapolis, Indiana 46241
TELEPHONE( Original Text Illegible ) 241-0127 Mr. Vaughn Bryson
Chief Executive Officer
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, IN 46285 Dear Mr. Bryson, As a Lilly stockholder, I am very concerned about the impact of high
prescription drug prices on the elderly and everyone with limited income and
inadequate insurance coverage. I want our company to have the highest standards
of responsibility and fairness to the consumers who rely on our products. The
high and escalating prices of prescription drugs has become a nationally
recognized crisis. I want our company to be a leader in addressing this crisis. This is to notify you that I wish to co-file the enclosed resolution submitted
by Johanna and Donald L. Austill for consideration and action by the
stockholders at the 1993 annual meeting, and for inclusion in the proxy
statement in accordance with Rule 14-a-8 of the general rules and regulations of
the Securities Exchange Act of 1934. I own in excess of 100 shares of Eli Lilly and Company Common Stock. Proof of
ownership will be provided. I will continue to be a stockholder through the 1993
shareholder meeting. Sincerely, E. Kathryn Wadsworth RESOLUTION ON DRUG PRICING POLICY WHEREAS the cost of prescription drugs has skyrocketed since 1980, and has
become a severe burden for millions of elderly and low-income Americans. Eli Lilly and Company has been increasing the price to wholesalers of its
commonly prescribed drugs at three times the general inflation rate for the past
twelve years. Eli Lilly and Company maintains a discriminatory pricing policy that includes
deep discounts for institutional buyers, while offering no discounts whatever to
pharmacies who sell prescription drugs to the public. This policy has meant
sharply higher prices for those who can afford them the least. Six major drug companies have made public pledges to address this problem by
limiting future price increases. Eli Lilly and Company's refusal to commit
itself to a policy of price restraint violates its corporate pledge to conduct
its activities with a "customer orientation." Eli Lilly and Company's excessive price increases have contributed to bringing
us to the brink of federal action to control drug prices. RESOLVED that the shareholders request the Board of Directors to seek input on
pricing policy from consumer groups, and adopt a policy of price restraint by
November 1, 1993. SUMMARY STATEMENT Eli Lilly and Company is operating in an environment in which individual
consumers need our products to preserve their health, and are unable to exercize
any choice of drugs in most cases. In this environment there is little market
pressure on manufacturers to set fair and reasonable prices. Institutional buyers, on the other hand, have been able to exert considerable
market pressure on prices through the use of restricted formularies which force
manufacturers to compete against one another. Eli Lilly is one of the
manufacturers that has responded to this environment by dramatically increasing
prices for the individual consumer market, while deep discounting prices to the
institutional market. This policy, while understandable in these market conditions, is unfair and
damaging to millions of Americans. Thousands of people simply don't take the
medicines they need because they can't afford them. Thousands more have to make
a cruel choice between medicine and food. Management has claimed that research costs are the reason for escalating drug
prices. But that claim does not hold water when one examines marketing practices
and costs, and the wide variation in prices for institutional buyers versus
pharmacies (not to mention foreign sales). Would not a fair pricing policy
spread the cost of research evenly? Management also points to the limited time they have to recover the cost of
research before a drug goes off patent. Yet the price of Keflex has skyrocketed
since it went off patent, just as it did when it was still under patent. You can support a return to fair and reasonable pricing policies by voting "yes"
to this resolution.
[INQUIRY LETTER 3]
E. Kathryn Wadsworth
484 Somerset Avenue
Indianapolis, Indiana 46241
TELEPHONE( Original Text Illegible ) 241-0127 January 21, 1993 Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549 Attention: Ms. Amy Freed
Office of Chief Counsel
Division of Corporation Finance Re: Eli Lilly and Company - Shareholder Proposal With Respect To The Drug
Pricing Policies Of Eli Lilly and Company - File No. 1-6351 Dear Ms. Freed, This letter is in response to the December 23, 1992 letter from Dewey
Ballantine, representing Eli Lilly and Company, stating Lilly's intention to
omit my shareholder proposal requesting that the Lilly Board of Directors seek
input on drug pricing policy from consumer groups and adopt a policy of price
restraint by November 1, 1993. The essential claim in the letter stating Lilly's position is that my proposal
"deals with a matter relating to the conduct of Lilly's ordinary business
operations -- the prices charged by Lilly for its products." While the setting of specific prices on its products is certainly a matter of
ordinary business operations, my proposed shareholder resolution deals with a
far different matter - the issue of a general policy of pricing fairness and
restraint. Far from being simply a matter of ordinary business operations, the issue of
pricing fairness and restraint is a crucial national issue - and the key issue
facing the pharmaceutical industry. President Clinton specifically mentioned
pharmaceutical pricing during the presidential debates, and in his election
night acceptance speech. The U.S. Senate Special Committee on Aging has made
pharmaceutical pricing fairness and restraint (or lack thereof) a central issue
in its work over the past few years. National media has devoted considerable
attention to this issue. In addition to coverage of the issue throughout the
country on radio stations, TV, and in newspapers, feature stories on drug
pricing have been run by the Wall Street Journal, the Philadelphia Inquirer, and
ABC Prime Time Live, to name a few. It is clear that the subject of my
resolution - drug pricing fairness and restraint - is a major national issue. It is also the key issue for the pharmaceutical industry, which will be deeply
impacted by the outcome of the national debate. The extent to which
pharmaceutical companies have in the past, and decide now, to follow policies of
pricing fairness and restraint has significant impact on the prospects for
federal regulation of prices in some form. Shareholders will be seriously
affected by the general pricing policies of pharmaceutical companies, and the
federal actions which respond to those policies. If ever there was a matter in which I, as an owner of Eli Lilly and Company,
along with other owners, should have a clear right to some voice, this should be
it. My proposed resolution does not seek to involve shareholders in the ordinary
business of setting specific prices. My proposed resolution does not in any way
seek to inhibit the ability of management to consider, in its specific pricing
decisions, each and every factor cited in the second paragraph on page two of
its letter to you. My proposed resolution does seek to give shareholders a voice in the crucial
issue of drug pricing fairness and restraint by giving shareholders an
opportunity to vote on requesting our Board of Directors to seek input from
consumer groups (because that could help in addressing the fairness of pricing
policy), and to adopt a policy of price restraint. Six pharmaceutical companies have publicly announced a policy of holding future
price increases to the rate of inflation in the CPI as long as that is
consistent with sound fiscal management (Source: Dr. John Coster, U.S. Senate
Special Committee on Aging.) These price restraint policies, far from being
ordinary business, are unprecedented pricing policy commitments made in response
to the national debate on drug pricing. My resolution does not specify what
policy Eli Lilly and Company should adopt, but simply calls on the Board of
Directors to adopt a policy of restraint. This resolution, if passed, would not
involve shareholders in ordinary business in any way - rather it would provide
very general direction to the Board of Directors on a crucial policy issue. To deny shareholders the right to vote on this resolution would deny a basic
right of ownership - a voice in the most basic and most crucial policy decisions
facing our company. I respectfully urge you to uphold shareholder rights by acting to assure that my
proposed resolution is presented to the shareholders. As the Lilly letter requests the opportunity to confer with you if you disagree
with their conclusions, I would appreciate an equal opportunity to confer with
you as this decision is made. You can reach me at 317-241-0127; or you may
contact Paul Severance of United Senior Action of Indiana who is working with me
on this matter. Paul's number is 317-634 0872. Thank you for your consideration of my position. Sincerely, E. Kathryn Wadsworth
[STAFF REPLY LETTER]
February 25, 1993 RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE RE: Eli Lilly and Company (the "Company")
Incoming letter dated December 23, 1992 The proposal requests the Company to seek input on its pricing policy from
consumer groups, and to adopt a policy of price restraint by November 1, 1993. The Division is unable to concur in your view that the proposal may be excluded
under Rule 14a-8(c)(7). That provision allows the omission of a proposal that ".
. . deals with a matter relating to the conduct of the ordinary business
operations of the registrant". In the staff's view the proposal, which relates
to the Company's fundamental business strategy with respect to its pricing
policy for pharmaceutical products, involves issues that are beyond matters of
the Company's ordinary business operations. Under these circumstances the staff
does not believe that the Company may rely on Rule 14a-8(c)(7) as a basis to
exclude the proposal from its proxy materials. Sincerely, William H. Carter
Special Counsel
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