Fitch Affirms Eli Lilly & Co.'s 'AA' Senior Unsecured Rating

Business Wire, August 25, 2005

CHICAGO -- Fitch Ratings has affirmed Eli Lilly and Co.'s (Lilly) 'AA' senior unsecured debt rating and 'F1 ' commercial paper rating. Simultaneously, Fitch has assigned an 'AA' bank loan rating and an 'AA' rating to Eli Lilly Services, Inc.'s (Eli Lilly Services) private issuance of $1.5 billion of extendible 13-month floating-rate senior unsecured notes, fully guaranteed by Lilly. The Ratings Outlook remains Stable.

Lilly mitigated the revenue loss from the patent expiration of Prozac in August 2001, with strong growth of its core product portfolio, including Zyprexa, Gemzar, and Evista and successful commercialization of the late-stage R&D pipeline, including the potential blockbuster drugs, Cymbalta, Strattera, Alimta, and Cialis. Strong growth of Lilly's newer human pharmaceutical product portfolio, launched within the past three years, has eased revenue and earnings concentration from the Zyprexa franchise. The Zyprexa franchise represented 30.1% of total revenues for the latest 12-month (LTM) period ending the second quarter of 2005, reduced from 33.3% at the end of 2002. Fitch expects continued growth of newly launched drug products (and commercialization of key late-stage R&D projects) coupled with restructuring actions and productivity initiatives will mitigate margin erosion (occurring since 2001) as well as further reducing revenue concentration from Zyprexa. Lilly commits approximately 20% of total sales to its R&D program, focused on developing novel therapies in four core areas, neuroscience, endocrine disorders, cancer, and cardiovascular diseases.

Lilly's current solid liquidity will be boosted by the repatriation of $8 billion in foreign earnings in 2005 at a reduced tax rate under the Jobs Creation Act of 2004. The company had cash and short-term investments of approximately $5.4 billion and cash, net of debt, of $726 million on June 30, 2005. Additionally, since achieving a low point in 2002, the level of cash flow from operations has remained solid at or above $2.9 billion annually. At the end of the second quarter, leverage as measured by total debt to LTM EBITDA was 1.1 times (x). Total leverage increased after the end of the second quarter in conjunction with the $1.5 billion private offering by the company's British Virgin Island subsidiary, Eli Lilly Services, ranked equally to Lilly's current senior unsecured debt. Fitch has confidence that Lilly will reduce leverage within the intermediate term from the continuation of solid generation of cash flow from operations.

Fitch's concerns include the company's modest free cash flow generation since 2002, negatively affected by large dividends and heavy investment in capital. Lilly generated cash flow from operations of $2.92 billion for the LTM period ending June 30, 2005, which was entirely consumed by dividends of $1.59 billion and capital expenditures of $1.55 billion. Fitch believes that free cash flow generation will remain modest, yet improve, through the long-term, despite increasing dividend payments and high levels of capital spending.

The credit profile could be negatively affected if patent challenges to Zyprexa and/or Evista are successful. The Zyprexa compound patent challenge may have been weakened by the favorable ruling by the U.S. District Court in Indianapolis in April 2005. However, there is still uncertainty regarding the outcome of the pending appeal, and if the ruling is overturned in favor of patent challenges to Zyprexa, the credit profile may be compromised and a downgrade could follow. Fitch will continue to monitor the appeals process and the progression of patent challenges to Evista.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.