Fitch affirms Eli Lilly

Fitch Ratings has affirmed Eli Lilly and Co.'s AA issuer default, bank loan and senior unsecured debt ratings and F1+ commercial paper rating. The outlook is stable.

The agency said Lilly has refreshed its pharmaceutical product portfolio since the patent expiration of its once top-selling drug, Prozac in August 2001. Pharmaceuticals launched over the past four years have collectively generated $3.18 billion of sales for the last-12-month period ended June 30 and grew 58% over the same period in 2005. Sustained successful commercialization of new products eases revenue and earnings concentration with the Zyprexa franchise, currently representing 27.8% of total sales for the last-12-month period ended June 30, down from 34% at the end of 2003.

Fitch's primary concern is litigation risk with an emphasis on legal challenges to Zyprexa, Gemzar and Evista patents and exposure from a rapidly increasing number of Zyprexa liability claims outside of the master settlement agreement established in September 2005. Additionally, Lilly's $1.38 billion of cash flow from operations for the last-12-month period ended June 30 was completely utilized by the company's dividend payments of $1.70 billion and capital expenditures of $1.07 billion, and the agency believes that free cash flow generation will remain weak for the rating category in 2006.

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