During Mitch Daniels’ decade at Eli Lilly, the drug giant paid billions in fines and settled thousands of lawsuits

Introduction

Indiana Gov. Mitch Daniels, a potential Republican presidential candidate respected for his fiscal prudence, credits his success in government to the business skills he learned as a pharmaceutical executive.

But when Daniels worked as a top executive at Eli Lilly & Co., one of the world’s largest drug firms, the pharmaceutical giant’s reputation was tarred by some of the nation’s ugliest drug scandals.

In the decade that Daniels climbed the corporate ladder at Eli Lilly, the company was illegally marketing its leading osteoporosis drug, Evista, as well as its blockbuster antipsychotic, Zyprexa, putting tens of thousands of patients in harm’s way. Lilly pleaded guilty to two criminal misdemeanors, paid more than $2.7 billion in fines and damages, settled more than 32,000 personal injury claims — and copped to one of the largest state consumer protection cases involving a drug company in U.S. history, a review by iWatch News shows.

The company also became embroiled in a high-profile legal brawl over its patent for the antidepressant Prozac.

Daniels became increasingly influential as he rose through the company’s ranks in positions that involved polishing the drugmaker’s image and then shaping its policies. He was vice president of corporate affairs, president of Lilly’s North American pharmaceutical operations, and finally in 1997, became senior vice president of corporate strategy and policy.

Decisions at pharmaceutical companies, whether scientific or commercial, aren’t made by any one executive, so Daniels’ precise role in decision-making about the controversial drugs is unclear. “These things transcend individuals — it’s more difficult to say this is the work of person A, B, or C,” said Dr. Sidney Wolfe, director of the Health Research Group at Public Citizen. “It’s industry-wide corporate culture.”

Daniels’ press secretary, Jane Jankowski, said, “He had zero to do with marketing plans that were created for Zyprexa and Evista.” On Prozac, she said, “The company was the object of a multimillion-dollar smear campaign by a self-interested organization that was trying to drive vulnerable patients away from medical treatment for depression.”

In a statement, Eli Lilly said the agreements to settle the Evista and Zyprexa criminal allegations did not happen under Daniels’ watch as president of North American operations.

But given his senior management position in the company, “I would have hoped that he would have known about some of these issues, and if he didn’t, why didn’t he? That needs to be evaluated” said Stephen Sheller, a Philadelphia class action attorney instrumental in the Zyprexa settlement.

“Bill Clinton had the bimbo factor. Mitch Daniels is going to need a strategy to counteract the assumption that will be made that he was somehow complicit in the misdeeds of Eli Lilly,” said Ira Loss, senior health care analyst at Washington Analysis, an investment research firm.

“It’s possible that he wouldn’t have known a thing,” Loss said, but added, “Mitch Daniels can’t walk into the presidential race and not expect questions about this issue.”

Lilly wasn’t the only drug company embroiled in multimillion-dollar drug scandals, although Zyprexa stands as one of the biggest cases of its kind on record. Critics say the big brand drug companies simply see fines and penalties as the cost of doing business. Indeed, in its recent annual SEC filing, Lilly itself, after a lengthy review of all the litigation, probes and investigations pending, noted, “We are also a defendant in other litigation and investigations, including product liability, patent, employment, and premises liability litigation, of a character we regard as normal to our business.”

Daniels boasts of his business background on his official website. “Governor Daniels came from a successful career in business and government, holding numerous top management positions in both the private and public sectors,” it says. “His work as CEO of the Hudson Institute and president of Eli Lilly and Company’s North American Pharmaceutical Operations taught him the business skills he brought to state government.”

As governor, Daniels persuaded several senior Lilly staffers to join his administration, said Donald Woodley, financial analyst at Woodley Farra Manion Portfolio Management in Indianapolis.

“He was an idea man, a thinker, and that’s why he ended up as head of corporate strategy and policy,” said Woodley, who describes himself as both an acquaintance and an admirer of Daniels.

Lilly’s fortunes soared in the 1990s. Corporate assets rose from $5.8 billion to $12.8 billion, revenues doubled from $5 billion to $10 billion and income expanded from $1.1 billion to $2.6 billion, Woodley said.

Cutting his teeth on politics

Daniels grew up in Indiana, and was in and out of politics, starting as a young aide to then-Indianapolis Mayor Richard Lugar in the 1970s. He moved to Washington when Lugar won his Senate seat, and later was a senior White House political aide to President Ronald Reagan.

In 1987, he left government to head the conservative Hudson Institute, a think tank then based in Indianapolis. In 1990, he made the switch to Lilly, where he stayed for a decade until he returned to public life as budget director for President George W. Bush in 2001.

In his Lilly years, 1990 through the 2000 election cycle, the drug company’s political contributions to Republican causes and candidates more than tripled from $120,000 to $416,000. Donations to Democrats doubled, from $54,000 to $120,000.

Federal lobbying records are not available for his entire tenure at Lilly, but the company spent more than $4.1 million in 1996 and $3.8 million in 1997, before dropping to between $2.5 million and $3 million annually from 1998-2000. Drug policy was front and center in Washington in the 1990s, because of the failed Clinton health care plan in 1993-94, the 1996-97 overhaul of the Food and Drug Administration, and assorted other prescription drug pricing and purchasing policies involving Medicaid and Medicare in an era of high growth and high competition in the drug industry.

Later, when Daniels sought elective office, he received at least $80,000 from top Lilly executives in the 2004 and 2008 election cycles, according to an analysis of data from the National Institute on Money in State Politics. An additional $86,750 went to Daniels’ campaigns courtesy of the company’s political action committee.

Protecting Prozac

Daniels’ early years at Lilly were dominated by the company’s new blockbuster drug: Prozac, a drug that not only changed depression treatment but became part of U.S. popular culture.

The antidepressant, the first of its kind, faced product liability lawsuits and was under siege by the Church of Scientology. Indiana news reports from the time described Daniels, then vice president of corporate affairs, as heading a pitched public relations battle — an assessment shared by one of Lilly’s outside public relations consultants at the time. The Church of Scientology named Daniels in a $20 million libel suit, which a federal judge dismissed in 1992.

“The Church of Scientology is no church,” Daniels said in a 1991 interview published by USA Today, in which he criticized the Church of Scientology’s anti-Prozac advertisements. “It’s a commercial enterprise. Every judge and every investigative journalist who has ever looked at it has come away with that conclusion. It is organized for only one purpose, which is to make money.”

The Scientology wars, which were fought on both public relations and legal fronts, may have captured the most public attention. The second battle pitted Lilly against generic drugmaker Barr Pharmaceuticals Inc., which wanted to get its own version of Prozac on the market sooner rather than later.

Brand-name and generic drug makers sue each other frequently, but they don’t often have as much at stake as in the case of Prozac, which was bringing Lilly up to $3 billion a year or about 35 to 40 percent of companywide sales in the mid to late 1990s.

Prozac “was the golden goose,” said Woodley. Profits from the drug allowed the company to invest in research, expand its sales force and raise its dividend — all of which contributed to the rising stock prices that helped Lilly stay independent in an era of mergers and consolidation among the pharmaceutical giants.

Holding onto that patent — the ability to legally keep generic competitors off the market — was important. Billions were at stake.

In 2001, Barr won a case arguing that Lilly had improperly “double-patented” Prozac, or had gotten two patents, only one of which was on a genuinely “new” compound as defined by pharmaceutical patent law. That second patent would have allowed the drugmaker to prolong the period of time it could exclusively sell Prozac.The ruling in favor of Barr cost Lilly two years of patent exclusivity, although Lilly did manage to patent a once-a-week version of the drug in June 1999, and to patent a version of the drug it named Sarafem, in a lavendar and pink capsule, for a severe form of premenstrual syndrome. It was further able to extend its regular Prozac patent for six months by testing it on children.

As Forbes magazine put it: “Barr Pharmaceuticals wrested Lilly’s Prozac patent away. Lilly lost 90 percent of its Prozac prescriptions over a year and $35 billion of its market value in a single day.”

Controversies over antipsychotic

The next Lilly blockbuster drug to hit the headlines, and the courts, was Zyprexa, the company’s antipsychotic that became one of the best-selling drugs in the world.

Ellen Liversidge believes “Eli Lilly killed my only son.” Her son Rob, 39, died in 2002 after taking Zyprexa. “I think they are terrible. They hid the side effects of so many drugs.”

Liversidge, who sued the company and settled for an undisclosed amount, said her son gained about 100 pounds in the two years he was taking Zyprexa. “I just thought his appetite had increased,” saidthe San Diego woman. She didn’t realize her son had developed severe hyperglycemia, abnormally high blood sugar that can be a side effect from Zyprexa.

When her son died and his doctor said he did not know why, Liversidge turned to the Internet and discovered that Japan and the United Kingdom had already mandated warning labels be put on Zyprexa to warn of the danger of diabetes, hyperglycemia and death. At that time, a Lilly spokeswoman said the company opposed a drug label warning in the United States because it had “the potential to misinform patients and their caregivers, causing them to cease taking the medication.”

Daniels was Lilly’s president of North American operations in 1996 when the FDA approved Zyprexa. Within a year, he rose to senior vice president for corporate strategy and policy as the company aggressively — and illegally — marketed the drug. Lilly ultimately pleaded guilty to a criminal misdemeanor and paid more than $2.7 billion in fines and damages for deceptive sales tactics.

Lilly paid $1.4 billion in 2009 to settle federal and state charges that it illegally marketed Zyprexa, then the largest government fine in U.S. history. In addition, it paid $1.2 billion to settle more than 32,000 personal injury claims by patients, as well as $62 million to 33 states to settle claims that it improperly marketed Zyprexa.

Insurers, pension funds, and unions also sued Lilly for $6.8 billion for misleading marketing, but a U.S. appeals court ruled last fall that the plaintiffs could not sue Lilly as a class. The U.S. Supreme Court is considering whether it will take the case.

Zyprexa, which generated more than one-fifth of Lilly’s $23 billion in revenues last year, became mired in controversy just weeks after it hit the market in 1996. Forty-five days after it approved Zyprexa, the FDA warned Lilly that it was breaking the law by claiming the drug could easily be used to treat the elderly and that the weight gain it caused was a therapeutic benefit. That was the first of literally tens of thousands of complaints and lawsuits about Zyprexa, which was approved only to treat schizophrenia and bipolar disorder.

Over the years, Lilly downplayed Zyprexa’s side effects of significant weight gain and increases in blood sugar that could cause diabetes. More than 16 percent of patients in the company’s clinical trials gained more than 66 pounds while taking the drug for one year.

In 1998, Lilly coached its salespeople about the weight gain controversy. “Don’t introduce the issue!!!” a presentation warned. “Be prepared for the issue and related concerns. No ‘flinch factor.’” In 1999, company officials concluded primary care physicians were “unaware of Zyprexa weight gain issue,” according to a memo. In 2000, during Daniels’ last year at the company, executives received advice from diabetes doctors retained as consultants, who warned: “Unless we come clean on this, it could get much more serious than we might anticipate,” according to an email obtained by The New York Times.

Throughout Daniels’ tenure, the company also aggressively pursued selling Zyprexa to the lucrative elderly market. Lilly asked the FDA to approve the drug for Alzheimer’s disease in 1998, even though its studies showed it didn’t alleviate dementia symptoms and that elderly dementia patients died at nearly twice the rate of those taking placebos in clinical trials, according to the U.S. attorney.

Although the company withdrew its application for the Alzheimer’s approval in 1999, it began marketing the drug to nursing homes the same year. Company officials told its salespeople to focus on “behavior treatment” at nursing homes, since the drug had never been approved for the elderly. It promoted the drug to nursing homes essentially as a chemical restraint to sedate disruptive patients, according to a statement from Brian Kenny, an attorney representing company whistleblowers.

Lilly even devised a sales slogan, “5 at 5,” suggesting that patients get 5 milligrams of Zyprexa at 5 p.m. to keep them calm all night.

Zyprexa increased the risk of sudden death, heart failure and pneumonia in the elderly. The drug’s label carried a black box warning, cautioning an increased risk of death when used to treat elderly patients with dementia.

Off-labeling its osteoporosis drug

One more major legal case in the late 1990s, when Daniels was senior vice president of corporate strategy and policy, challenged Lilly’s promotion of off-label use of its osteoporosis drug Evista. The practice would cost it $36 million to settle criminal and civil charges. The FDA also warned the company about lack of balance and unproven claims in some of its direct-to-consumer advertising about the drug in Health and Prevention magazines.

Once a drug is approved by the FDA for a certain purpose, physicians can legally prescribe it for other “off-label” uses. But the company itself cannot market it for off-label use, as was alleged in the case. The Department of Justice in December 2005 announced a settlement: Lilly agreed to plead guilty to both criminal and civil charges. In the criminal case, the drugmaker agreed to pay $6 million for a violation of the Food, Drug and Cosmetic Act and forfeit an additional $6 million. The company also settled the civil case by paying the government $24 million, the Justice Department said.

The department noted that Evista’s first-year sales were less than a third of what Lilly had expected. “In October of 1998, the company reduced the forecast of Evista’s first year’s sales in the U.S. from $401 million to $120 million. An internal Lilly business plan noted that ‘Disappointing year versus original forecast.’” The Justice Department said that Lilly “sought to broaden the market for Evista by promoting it for unapproved uses.”

The government alleged that the branding and sales forces at Lilly promoted Evista not just for its approved use against osteoporosis, but also for reducing the risk of breast cancer and cardiovascular disease. “Lilly promoted Evista as effective for reducing the risk of breast cancer, even after Lilly’s proposed labeling for this use was specifically rejected by the FDA,” the Justice Department said. Lilly eventually did obtain FDA approval to market Evista for reducing the risk of invasive breast cancer in some post-menopausal women.

“The government’s position is that if a company wants to market a drug for a new intended use, it needs to go through the drug approval process,” government attorney Jeffrey Steger said at the settlement hearing, according to the transcript. “The drug approval process is very significant to protect the safety of the American people.”

Lilly is one of many pharmaceutical companies that have been forced to pay massive fines for marketing drugs for off-label uses, a punishment that critics say is ineffective and has failed to stop the practice. Just last fall, FDA deputy chief of litigation Eric Blumberg warned that the government might start criminal prosecutions of drug executives for off-label promotion, even if they claim they were unaware of what their marketing departments were doing.

“It’s clear we’re not getting the job done with large monetary settlements,” Blumberg said at a drug industry conference. “Unless the government shows more resolve to criminally charge individuals at all levels in the company, we cannot expect to make progress in deterring off-label promotion.”

Wolfe, of Public Citizen, said of the practice, “That’s how they [drug companies] operate. They have a fiduciary responsibility to stockholders, and sometimes in their zeal to carry out their fiduciary responsibilities they cheat, lie or engage in criminal activity — and it works.”

Daniels left Eli Lilly to become the director of the Office of Management and Budget for President George W. Bush in January 2001. He liquidated Lilly stock worth $27 million at the time.

In 2002, Congress inserted into the legislation creating the Homeland Security Department a provision that would have given Lilly, maker of a then-controversial vaccine preservative, protection from lawsuits. The provision was repealed a few months later.

Some parents of autistic children believe the preservative, thimerosal, caused autism but the scientific research that sought to establish that link has been proven to be fraudulent. Daniels told Congress in a letter he had not had any role in getting the Lilly-friendly liability provision passed — that he had not discussed it with Lilly representatives, nor with officials in the government.