Lilly Eli & Co filed their quarterly 10-Q statement with the SEC on August 4th, which outlined their current financials and also brought to light the magnitude of lawsuits coming as a result of their two blockbuster drugs Zyprexa and Prosac. The company is also involved in several other lawsuits, including a class action lawsuit and corporate lawsuits involving insurance coverage.

The company was slammed back in 2005 when the U.S. Attorney General announced that it was investigating the company for Medicaid fraud. The government argues that Lilly illegally promoted Zyprexa for unapproved uses, and seeks to recover millions of dollars on behalf of customers. This case is still pending and, the company warned, could expand from Zyprexa to include other company drugs. The company also stated that it settled 10,500 Zyprexa-related lawsuits last year; however, 7,600 remain with 850 tolled claims. Both of these cases are still pending. The problem now is that insurance companies are attempting to reduce their liability in the matter. In their 10-Q filing, the company stated:

"We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The third-party insurance carriers have raised defenses to their liability under the policies and are seeking to rescind the policies. The dispute is now the subject of litigation in the federal court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other carriers. While we believe our position is meritorious, there can be no assurance that we will prevail."

Later in the filing, the company also notes:

"We have experienced difficulties in obtaining product liability insurance due to a very restrictive insurance market, and therefore will be largely self-insured for future product liability losses. In addition, as noted above, there is no assurance that we will be able to fully collect from our insurance carriers on past claims."

The company recorded a net pre-tax charge of $1.07b during the second quarter of 2005 to cover the Zyprexa lawsuits and reserves "to the extend that they can formulate a reasonable estimate of". While all pharmaceutical companies often experience a number of lawsuits centered around their drugs, Lilly's $1.07b charge was above average. And, the company could face even higher charges in the future if it fails to defend its right to insurance payouts, loses insurance coverage, or fails to defend itself in the large government and class action lawsuits that are currently pending. The result will either be a cheap buy, if the company prevails when the dust settles; or, it could mean a potential diseaster for the company. Either way, it is definitely something to keep an eye on.