<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 1-6351
---
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant's telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock outstanding as of July 31, 1997:
Class Number of Shares Outstanding
----- ----------------------------
Common 556,243,558
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PART I FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
------------------------------------------------
(Dollars in millions except per-share data)
<S> <C> <C> <C> <C>
Net sales $ 1,988.7 $1,698.3 $ 3,941.7 $3,481.6
Cost of sales 548.8 505.1 1,090.1 1,023.1
Research and development 326.7 273.4 627.9 549.4
Marketing and administrative 572.7 479.0 1,044.4 939.0
Asset impairment 2,443.0 - 2,443.0 -
Gain on sale of DowElanco (618.2) - (618.2) -
Interest expense 62.5 75.5 123.1 145.4
Other income - net (57.9) (100.0) (56.5) (164.4)
--------- -------- --------- --------
3,277.6 1,233.0 4,653.8 2,492.5
Income (loss) before income
taxes (1,288.9) 465.3 (712.1) 989.1
Income taxes 443.2 119.6 587.4 254.2
--------- -------- --------- --------
Net income (loss) $(1,732.1) $ 345.7 $(1,299.5) $ 734.9
========= ======== ========= ========
Earnings (loss) per share $ (3.14) $ .63 $ (2.36) $ 1.34
Dividends paid per share $ .36 $ .3425 $ .72 $ .685
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
(PAGE 2)
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CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------------------
(Millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................... $ 1,853.0 $ 813.7
Short-term investments......................... 100.2 141.4
Accounts receivable, net of allowances for
doubtful amounts of $62.0 (1997) and
$82.4 (1996)................................. 1,387.8 1,474.6
Other receivables.............................. 277.6 262.5
Inventories.................................... 945.8 881.4
Deferred income taxes.......................... 189.3 145.2
Prepaid expenses............................... 238.4 172.5
--------- ---------
TOTAL CURRENT ASSETS........................... 4,992.1 3,891.3
OTHER ASSETS
Prepaid retirement............................ 567.3 512.9
Investments................................... 394.3 443.5
Goodwill and other intangibles, net of
allowances for amortization of
$93.8 (1997) and $311.0 (1996).............. 1,557.3 4,028.2
Sundry........................................ 621.4 1,124.3
--------- ---------
3,140.3 6,108.9
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress..................... 7,039.9 7,096.4
Less allowances for depreciation............... 2,883.4 2,789.4
--------- ---------
4,156.5 4,307.0
--------- ---------
$12,288.9 $14,307.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings.......................... $ 578.0 $ 1,212.9
Accounts payable............................... 815.4 829.3
Employee compensation.......................... 305.0 388.4
Dividends payable.............................. - 198.8
Income taxes payable........................... 1,117.8 691.8
Other liabilities.............................. 883.7 901.0
--------- ---------
TOTAL CURRENT LIABILITIES...................... 3,699.9 4,222.2
LONG-TERM DEBT................................... 2,501.8 2,516.5
DEFERRED INCOME TAXES............................ 401.6 376.0
RETIREE MEDICAL BENEFIT OBLIGATION............... 124.2 136.4
OTHER NONCURRENT LIABILITIES..................... 891.5 956.0
--------- ---------
3,919.1 3,984.9
COMMITMENTS AND CONTINGENCIES.................... - -
SHAREHOLDERS' EQUITY
Common stock................................... 355.6 355.6
Additional paid-in capital..................... - 67.4
Retained earnings.............................. 5,633.6 7,207.3
Deferred costs - ESOP.......................... (168.0) (176.9)
Currency translation adjustments............... (182.6) (57.4)
--------- ---------
5,638.6 7,396.0
Less cost of common stock in treasury.......... 968.7 1,295.9
--------- ---------
4,669.9 6,100.1
--------- ---------
$12,288.9 $14,307.2
========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
( PAGE 3 )
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
--------------------------
(Millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $(1,299.5) $ 734.9
Adjustments to reconcile net income (loss) to cash flows
from operating activities:
Changes in operating assets and liabilities............................. (140.3) (176.4)
Change in deferred taxes................................................ 11.5 151.3
Depreciation and amortization........................................... 275.0 268.9
Gain from sale of DowElanco, net of tax................................. (295.6) -
Asset impairment, net of tax............................................ 2,429.6 -
Other items, net........................................................ (33.6) (171.1)
--------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES................................ 947.1 807.6
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment................................. (136.0) (232.8)
Additions to sundry assets and intangibles.............................. (18.5) (19.8)
Reduction of investments................................................ 181.4 248.4
Additions to investments................................................ (124.8) (121.7)
Proceeds from sale of DowElanco......................................... 1,200.0 -
Acquisitions............................................................ (0.5) (89.1)
--------- --------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES........................... 1,101.6 (215.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.......................................................... (396.8) (375.1)
Purchases of common stock and other capital
transactions.......................................................... 97.5 (69.7)
Net additions(reductions) to short-term borrowings...................... (643.0) 19.7
Net additions to long-term debt......................................... 6.4 -
--------- --------
NET CASH USED FOR FINANCING ACTIVITIES.................................. (935.9) (425.1)
Effect of exchange rate changes on cash................................. (73.5) (42.0)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 1,039.3 125.5
Cash and cash equivalents at January 1.................................. 813.7 999.5
--------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30.................................... $ 1,853.0 $1,125.0
========= ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
{PAGE 4}
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the requirements of Form 10-Q and therefore do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, the
financial statements reflect all adjustments that are necessary for a fair
statement of the results for the periods shown. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures at the date of
the financial statements and during the reporting period. Actual results could
differ from those estimates.
As presented herein, sales include sales of the Company's life-sciences products
and service revenue from PCS Health Systems, Inc. (PCS) and Integrated Medical
Systems, Inc. (IMS).
CONTINGENCIES
The Company has been named as a defendant in numerous product liability lawsuits
involving primarily two products, diethylstilbestrol and Prozac(R). The Company
has accrued for its estimated exposure, including costs of litigation, with
respect to all current product liability claims. In addition, the Company has
accrued for certain future anticipated product liability claims to the extent
the Company can formulate a reasonable estimate of their costs. The Company's
estimates of these expenses are based primarily on historical claims experience
and data regarding product usage. The Company expects the cash amounts related
to the accruals to be paid out over the next several years. The majority of
costs associated with defending and disposing of these suits are covered by
insurance. The Company's estimate of insurance recoveries is based on existing
deductibles, coverage limits, and the existing and projected future level of
insolvencies among its insurance carriers.
Under the Comprehensive Environmental Response, Compensation, and Liability Act,
commonly known as Superfund, the Company has been designated as one of several
potentially responsible parties with respect to certain sites. Under Superfund,
each responsible party may be jointly and severally liable for the entire amount
of the cleanup. The Company also continues remediation of certain of its own
sites. The Company has accrued for estimated Superfund cleanup costs,
remediation, and certain other environmental matters, taking into account, as
applicable, available information regarding site conditions, potential cleanup
methods, estimated costs, and the extent to which other parties can be expected
to contribute to the payment of those costs. The Company has reached a
settlement with its primary liability insurance carrier providing for coverage
for certain environmental liabilities and has instituted litigation seeking
coverage from certain excess carriers.
The Company has been named, along with numerous other U.S. prescription drug
manufacturers, as a defendant in a large number of related actions brought by
retail pharmacies alleging violations of federal and state antitrust and pricing
laws. The federal suits include a class action on behalf of the majority of
U.S. retail pharmacies. The Company and several other manufacturers agreed to
settle the federal class action case and the anticipated settlement was accrued
in the fourth quarter of 1995. The settlement has been approved by the U.S.
District Court but an appeal of that decision is pending. Separately, in June
1997 the Company reached a settlement with a large number of the remaining
plaintiffs in the federal cases. Related suits, brought in federal and several
state courts by a large number of retail pharmacies involving claims of price
discrimination or claims under other pricing laws, remain pending. Additional
cases have been brought on behalf of consumers in several states. The
environmental liabilities and litigation accruals have been reflected in the
Company's consolidated balance sheet at the gross amount of approximately $416
million at June 30, 1997. Estimated insurance recoverables have been
(PAGE 5)
<PAGE>
reflected as assets in the consolidated balance sheet of approximately $256
million at June 30, 1997.
Barr Laboratories, Inc. (Barr) and Geneva Pharmaceuticals, Inc. (Geneva) have
each submitted Abbreviated New Drug Applications (ANDAs) seeking FDA approval to
market generic forms of Prozac before the expiration of the Company's
patents. The ANDAs assert that Lilly's U.S. patents covering Prozac are invalid
and unenforceable. In April 1996, the Company filed suit against Barr in
federal court in Indianapolis seeking a ruling that Barr's challenge to Lilly's
patents is without merit. In June 1997, the Company filed a similar suit
against Geneva in the same court. While the Company believes that the claims of
Barr and Geneva are without merit, there can be no assurance that the Company
will prevail. An unfavorable outcome of this litigation could have a material
adverse effect on the Company's consolidated financial position, liquidity, or
results of operations.
While it is not possible to predict or determine the outcome of the product
liability, antitrust, patent, or other legal actions brought against the
Company, or the ultimate cost of environmental matters, the Company believes
that, except as noted above, the costs associated with all such matters will not
have a material adverse effect on its consolidated financial position or
liquidity but could possibly be material to the consolidated results of
operations in any one accounting period.
ASSET IMPAIRMENT
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the Company evaluated the
recoverability of the long-lived assets, including intangibles, of its PCS
health-care-management businesses. While revenues and profits are growing and
new capabilities are being developed at PCS, the rapidly changing, competitive
and highly regulated environment in which PCS operates has prevented the Company
from significantly increasing PCS' operating profits from levels which existed
prior to the acquisition. In addition, since the acquisition, the health-care
industry trend toward highly managed care has been slower than originally
expected and the possibility of selling a portion of PCS' equity to a strategic
partner has not been realized. In the second quarter, concurrent with PCS'
annual planning process, the Company determined that PCS' estimated future
undiscounted cash flows were below the carrying value of PCS' long-lived assets.
Accordingly, during the second quarter of 1997, the Company adjusted the
carrying value of PCS' long-lived assets, primarily goodwill, to their estimated
fair value of approximately $1.5 billion resulting in a noncash impairment loss
of approximately $2.4 billion ($4.41 per share). The estimated fair value was
based on anticipated future cash flows, discounted at a rate commensurate with
the risk involved.
GAIN ON SALE OF DOWELANCO JOINT VENTURE
On June 30, 1997, The Dow Chemical Company acquired the Company's 40% interest
in DowElanco. The cash purchase price was $1.2 billion resulting in a gain of
$618.2 million ($295.6 million after-tax, or $.54 per share).
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted-average number of
outstanding common shares. Had it not been for the impairment loss incurred
during the quarter, the Company would have been required to report its earnings
per share on a fully-diluted basis. Current accounting rules require the
elimination of common stock equivalents when they are anti-dilutive. It is
anticipated, with the recent increase in the stock price, that the Company could
be required to report its third-quarter earnings on a fully-diluted basis and to
restate previously reported periods. This would have the effect of decreasing
reported earnings per share by approximately 3%. In addition, further changes
to the calculation of earnings per share will be required as a consequence of
new accounting pronouncements as described in the "Accounting Changes" section.
(PAGE 6)
<PAGE>
ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, operations of the Company are exposed to
continuing fluctuations in currency values and interest rates. These
fluctuations can vary the costs of financing, investing and operating. The
Company addresses these risks through a controlled program of risk management
that includes the use of derivative financial instruments. The Company's
derivative activities, all of which are for purposes other than trading, are
initiated within the guidelines of documented corporate risk-management policies
and do not create additional risk because gains and losses on derivative
contracts offset losses and gains on the assets, liabilities and transactions
being hedged. As derivative contracts are initiated, the Company designates
derivative financial instruments individually to underlying financial
instruments or anticipatory transactions (i.e., underlying exposures).
Management reviews the correlation and effectiveness of its derivatives on a
periodic basis. Derivative contracts which do not qualify for deferral hedge
accounting are marked to market.
For terminations of derivatives receiving deferral accounting, gains and losses
are deferred when the related underlying exposures remain outstanding and are
included in the measurement of the related transaction or balance. In addition,
upon termination of the underlying exposures, the derivative is marked to market
and the resulting gain or loss is included with the gain or loss on the
terminated transaction. The Company may re-designate the remaining derivative
instruments to other underlying exposures.
Foreign Exchange Risk Management: The Company enters into foreign currency
forward and option contracts to reduce the effect of fluctuating currency
exchange rates (principally European currencies and the Japanese yen).
Generally, foreign currency derivatives used for hedging are put in place using
the same or like currencies and duration as the underlying exposures. Forward
contracts are principally used to manage exposures arising from affiliate
foreign currency balances. These contracts are marked to market with gains and
losses recognized currently in income to offset the respective losses and gains
recognized on the underlying exposures. The Company also enters into option
contracts to hedge anticipated foreign currency transactions, primarily
intercompany inventory purchases expected to occur within the next year, and
foreign currency forward contracts and currency swaps to hedge firm commitments.
Gains and losses on these contracts that qualify as hedges are deferred and
recognized as an adjustment of the subsequent transaction when it occurs.
Forward and option contracts generally have maturities not exceeding 12 months.
Interest Rate Risk Management: The Company enters into interest rate swaps to
lower funding costs, to diversify sources of funding or to alter interest rate
exposures arising from mismatches between assets and liabilities. The Company
designates the interest rate swaps as hedges of either underlying debt or
anticipated debt issuances. Interest expense on the debt is adjusted to include
the payments made or received under the swap agreements.
ACCOUNTING CHANGES
Effective January 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement requires that each
party to a transfer analyze the components of financial asset transfers and
recognize only assets it controls and liabilities it has incurred, derecognize
assets only when control has been surrendered and derecognize liabilities only
when they have been extinguished. Adoption of this statement did not have a
material impact on the Company's consolidated results of operations or financial
position. In February 1997, SFAS No. 128, "Earnings per Share", was issued. The
statement must be adopted by the Company on December 31, 1997 for the fourth
quarter and the year then ended. Under provisions of this statement, the Company
will be required to change the method currently used to compute earnings per
share as presented on the income statement and Exhibit 11 to the Form 10-Q and
present both "basic" and "diluted" earnings per share on the
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income statement. As a consequence of this change, earnings per share for
previously reported periods will be restated. Implementation of this standard is
not expected to materially impact earnings per share as reported by the Company.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. The
statement must be adopted by the Company in the first quarter of 1998. Under
provisions of this statement, the Company will be required to change the
financial statement presentation of comprehensive income and its components to
conform to these new requirements. As a consequence of this change, certain
reclassifications will be necessary to previously reported amounts to achieve
the required presentation of comprehensive income. Implementation of this
disclosure standard will not affect financial position or results of operations.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. The statement must be adopted by the Company
on December 31, 1998 for the year then ended. Under provisions of this
statement, the Company will be required to change the financial statement
disclosures for operating segments, products and services, geographic areas, and
major customers. Implementation of this disclosure standard will not affect
financial position or results of operations.
(PAGE 8)
<PAGE>
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
OPERATING RESULTS:
The Company's sales for the second quarter of 1997 increased 17 percent compared
with the second quarter of 1996. Sales inside the United States increased 29
percent while sales outside of the United States increased 2 percent. Compared
with the second quarter of 1996, worldwide sales reflected volume growth of 19
percent and a 1 percent increase in selling prices which were partially offset
by the unfavorable impact of exchange rates of 3 percent.
The Company's sales for the first six months of 1997 increased 13 percent
compared to the same period in 1996. Sales inside the United States increased 25
percent while sales outside the United States declined 2 percent. Compared with
the first six months of 1996, worldwide sales reflected volume growth of 15
percent and a 1 percent increase in selling prices which were partially offset
by unfavorable exchange rate comparisons of 3 percent.
Worldwide pharmaceutical sales increased 18 percent and 14 percent for the
second quarter and six months, respectively, compared with the same periods of
1996. Pharmaceutical sales growth for both the second quarter and the first six
months of the year was led by strong performances by three of the Company's
newer products, Gemzar/R/, ReoPro/TM/ and Zyprexa/R/. Launched in the fourth
quarter of 1996, Zyprexa had second quarter sales of $156.0 million and six
month sales of $261.4 million. Gemzar sales grew to $41.0 million in the second
quarter and $74.0 million in the six month period, representing increases over
the same periods in 1996 of $29.4 million and $58.5 million, respectively.
ReoPro sales of $59.8 million in the second quarter and $111.5 million in the
first half of the year reflected increases of $22.6 million and $51.5 million,
respectively, as compared to the same periods in 1996. In addition, the quarter
and six month period benefited from increased Prozac sales and increased
health-care-management revenues. Prozac sales in the second quarter of 1997 were
$597.6 million, an increase of 11 percent from the second quarter of 1996. For
the first six months of 1997, Prozac sales were $1.2 billion, an increase of 4
percent. The Company expects moderate growth in Prozac sales for the full year
of 1997. Strong growth in health-care-management revenues also contributed to
the sales increases for the quarter and six months. Among other major products,
Humulin/R/ increased 3 percent to $219.1 million for the second quarter and 2
percent to $428.8 million for the first six months of 1997, while Axid/R/
increased 1 percent to $119.4 million and 6 percent to $283.0 million for the
respective periods. The pharmaceutical sales growth was partially offset by
lower sales of anti-infectives which decreased $47.0 million (14 percent) in the
second quarter and $89.3 million (13 percent) in the six month period. This
decline was due in part to continued generic competition in certain markets and
the impact of unfavorable exchange rates. Ceclor/R/ decreased 19 percent in the
second quarter and 14 percent in the six month period, accounting for the
majority of the decline in anti-infectives sales. The Company anticipates that
1997 sales of anti-infectives will be below 1996 levels due largely to continued
pricing pressures as a result of generic competition.
The U.S. pharmaceutical sales growth of 31 percent ($272.6 million) during the
second quarter and 26 percent ($473.7 million) in the six month period was
primarily due to increased volume. Of the second quarter and year-to-date sales
increases, Zyprexa contributed $125.8 million and $217.1 million, ReoPro
contributed $17.4 million and $41.0 million, and Gemzar contributed $16.4
million and $35.4 million, respectively. In addition, Prozac sales in the U.S.
increased 24 percent to $459.0 million in the second quarter and 13 percent to
$894.7 million in the six month period. U.S. sales comparisons for Prozac
benefited in the second quarter of 1997 from wholesaler stocking in the first
quarter of 1996 which depressed sales levels in the second quarter of that year.
Health-care-management revenues increased 41 percent for the second quarter and
46 percent for the six month period of 1997. These increases were offset, in
part, by declines in the second quarter and six month sales of anti-infectives
and Humulin. Anti-infectives declined 13 percent in the quarter and 7 percent
for the first six months due to continued generic competition. Humulin sales
declined 6 and 5 percent for the quarter and six
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month periods, respectively, largely from the combined effect of competition
from oral anti-diabetic agents and increased sales of the Company's insulin
analogue, Humalog/R/.
International pharmaceutical sales increased 1 percent in the second quarter
with volume growth of 10 percent being largely offset by an 8 percent
unfavorable exchange rate impact and a 1 percent reduction in selling prices.
For the six months, international pharmaceutical sales reflected a 2 percent
decline resulting from 8 percent volume growth which was more than offset by an
8 percent unfavorable exchange rate impact and a 2 percent decline in selling
prices. International pharmaceutical sales reflected increases in the sales of
Gemzar, Humulin, ReoPro and Zyprexa. Prozac sales experienced 17 percent
declines for both the second quarter and six month periods due to continuing
generic competition, primarily in Canada. In addition, Prozac continued to
experience competitive pressures in France. These negative impacts were
partially offset by sales growth in the United Kingdom. Anti-infective sales
decreased 15 percent in both the second quarter and year-to-date periods, due in
part to continued generic competition in certain markets.
Worldwide sales of animal health products increased 9 percent over the second
quarter of 1996 and 5 percent for the six month period, driven by volume growth
rates of 11 percent and 7 percent in each of those periods, respectively.
Cost of sales decreased in the second quarter to 27.6 percent of sales from 29.7
percent of sales in the same quarter of 1996. Cost of sales for the first six
months of 1997 was 27.7 percent of sales as compared to 29.4 percent in the
prior year. The decreases for both periods were primarily the result of
continued productivity improvements, enhanced plant utilization, and favorable
changes in product mix. These improvements were offset in part by increased
health-care-management service revenues, which have lower margins than
pharmaceutical products. For the year, the Company anticipates that cost of
sales as a percent of sales will approximate 1996 levels.
Operating expenses for 1997 increased 20 percent for the second quarter and 12
percent for the first half of the year. The increases reflect 19 percent and 14
percent growth rates in research and development for the second quarter and
first six months, respectively, due largely to clinical trial expenditures and
increased activity under external research collaborations. The Company expects
spending in research and development to increase approximately 14 to 17 percent
for 1997. Marketing and administrative expenses increased 20 percent from the
second quarter of 1996 and 11 percent from the first six months. The second
quarter increase in marketing and administrative expense is due in part to the
settlement of a significant portion of the Company's remaining retail pharmacy
pricing litigation. Excluding that charge, marketing and administrative expenses
would have increased at a rate below that of sales. In addition, the second
quarter and first six months of 1997 reflect increases in marketing and
administrative expenses resulting from continued new product launches around the
world, enhancements of the Company's global information technology capabilities
and accruals for the Company's performance-based compensation programs. To
support the global sales of its newer products, including future product
launches, the Company expects the rate of growth of marketing and administrative
expenses to increase in the last half of the year. However, this rate of growth
is expected to be less than that of sales for the period.
The asset impairment in the second quarter of 1997 represents a noncash charge
of approximately $2.4 billion ($4.41 per share) to adjust the carrying value of
PCS health-care-management businesses' (PCS) long-lived assets, primarily
goodwill, to their fair value of approximately $1.5 billion. While revenues and
profits are growing and new capabilities are being developed at PCS, the
rapidly changing, competitive and highly regulated environment in which PCS
operates has prevented the Company from significantly increasing PCS' operating
profits from levels which existed prior to the acquisition. In addition, since
the acquisition, the health-care industry trend toward highly managed care has
been slower than originally expected and the possibility of selling a portion of
PCS' equity to a strategic partner has not been realized. Consequently, in the
second quarter, concurrent with PCS' annual planning process, the Company
determined that PCS' estimated future undiscounted cash flows were below the
carrying value of PCS' long-lived assets. As a
(PAGE 10)
<PAGE>
consequence, the carrying value was adjusted to estimated fair value based on
anticipated future cash flows, discounted at a rate commensurate with the risk
involved.
On June 30, 1997, The Dow Chemical Company acquired the Company's 40% interest
in DowElanco. The cash purchase price was $1.2 billion resulting in a gain of
$618.2 million ($295.6 million after-tax, or $.54 per share).
Compared to the second quarter and six month period of 1996, interest expense
decreased $13.0 million (17 percent) and $22.3 million (15 percent) due to a
decline in the Company's short-term borrowings.
Net other income for the quarter was $42.1 million lower than the second quarter
of 1996 and $107.9 million lower than the first six months of 1996. The
decreases in both periods are due primarily to a higher level of sales in 1996
of equity securities held by the Company and income realized during 1996 from
the sale of certain marketing rights. In addition, the decrease for the six
month period reflects the impact of a $24 million charge in the first quarter of
1997 related to the discontinuance of a research collaboration with Somatogen,
Inc.
The Company's reported tax rates for the second quarter and first six months of
1997 reflect the effects of the significant transactions which occurred during
the second quarter. The tax expense from the $618.2 million DowElanco gain was
$322.6 million while the tax benefit from the $2.4 billion PCS asset impairment
was $13.4 million. The Company's estimated tax rate, excluding the impacts of
those items, was 25.0 percent for both the second quarter and the first six
months of 1997 compared to a tax rate of 25.7 percent for the same periods in
1996. The estimated effective tax rate for the second quarter essentially equals
the annual 1996 rate of 25 percent. The decline from the second quarter and
first six months of 1996 is primarily the result of changes in the mix of
earnings between jurisdictions having different tax rates and the effectiveness
of various tax planning strategies. The Company expects current tax strategies
will allow its 1997 effective tax rate, excluding the impacts of the DowElanco
gain and PCS asset impairment, to remain approximately the same as the 1996
annual rate.
Driven by the PCS asset impairment and the litigation settlement which were
offset in part by the DowElanco gain, the second quarter of 1997 reflected a
$1,732.1 million net loss ($3.14 per share). Without these significant events,
second quarter net income would have been $417.2 million or $.76 per share on a
weighted average shares basis, reflecting a 21 percent increase as compared with
the second quarter of 1996 on a weighted average shares basis. These increases
were primarily driven by the growth in sales, lower manufacturing costs as a
percent of sales, reduced interest expense, and a lower estimated tax rate,
partially offset by a decrease in other income. For the six month period, the
net loss was $1,299.5 million or $2.36 per share. Net income without the second
quarter significant events would have been $849.8 million or $1.54 per share on
a weighted average shares basis, increases of 16 and 15 percent, respectively,
over the first six months of 1996. These increases were driven by sales growth,
lower manufacturing costs and operating expenses as a percent of sales, reduced
interest expense, and a lower estimated tax rate, partially offset by a decrease
in other income.
FINANCIAL CONDITION:
As of June 30, 1997, cash, cash equivalents and short-term investments totaled
$1,953.2 million as compared with $955.1 million at December 31, 1996, a net
increase of $998.1 million. Total debt at June 30, 1997, was $3,079.8 million, a
decrease of $649.6 million from December 31, 1996. These changes in cash, cash
equivalents, short-term investments and debt are primarily due to positive
operating cash flows and the proceeds from the sale of DowElanco, a portion of
which was used to pay down short-term borrowings (primarily commercial paper).
The Company believes that cash generated from operations in 1997, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1997 operating needs, including debt service, capital expenditures, and
dividends. The Company anticipates that amounts available through
(PAGE 11)
<PAGE>
existing commercial paper programs should be adequate to fund maturities of
short-term borrowings. The outstanding commercial paper is supported by
committed bank credit facilities.
Following the Company's announcement on June 23, 1997 of the noncash charge for
the PCS asset impairment, the credit rating agencies affirmed the Company's
current commercial paper and long-term debt ratings.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
Under the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995, the Company cautions investors that any forward-looking statements or
projections made by the Company are subject to risks and uncertainties which may
cause actual results to differ materially from those projected. Economic,
competitive, governmental, technological and other factors which may affect the
Company's operations are discussed in Exhibit 99 to this Form 10-Q filing.
(PAGE 12)
<PAGE>
PART II OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
Prozac Patent Litigation. Reference is made to the discussion in the Company's
1996 Form 10-K, under Part I, Item 3, "Legal Proceedings," of litigation between
the Company and Barr Laboratories, Inc. (Barr) relating to the Company's U.S.
Prozac patents. During the second quarter of 1997 the Company was informed that
Geneva Pharmaceuticals, Inc. (Geneva) submitted an Abbreviated New Drug
Application (ANDA) with the FDA for a generic formulation of Prozac. Like Barr's
ANDA, the Geneva ANDA asserts that the Company's U.S. patents covering Prozac
are invalid and unenforceable. On June 23, 1997, the Company sued Geneva in the
United States District Court for the Southern District of Indiana (where the
Barr suit is also pending) seeking a ruling that Geneva's challenge to the
Company's patents is without merit. The Company has sought to consolidate the
Barr and Geneva suits and the defendants have not opposed consolidation. A trial
date has been set in the Barr suit in April 1998.
The Company believes that the claims of Barr and Geneva are without merit and
that the Company should be successful in this litigation. However, it is not
possible to predict or determine the outcome of this litigation and accordingly
there can be no assurance that the Company will prevail. An unfavorable outcome
could have a material adverse effect on the Company's consolidated financial
position, liquidity, or results of operations.
Pricing Litigation. Reference is made to the discussion of In re Brand Name
Prescription Drugs Antitrust Litigation (MDL No. 997) and related cases
contained in the Company's 1996 Form 10-K under Part I, Item 3, "Legal
Proceedings," and in the Company's first quarter 1997 Form 10-Q under Part II,
Item 1, "Legal Proceedings." In June 1997, the Company reached a confidential
settlement with a number of retail pharmacy and supermarket chains that were
plaintiffs in the federal actions but had opted out of the federal class. These
claims represent a significant portion of the remaining federal claims. The
settlement resulted in a charge in the second quarter of 1997 that was not
material.
There have also been developments in some of the related state court cases.
Lilly and other defendants have reached with the claimants an agreement in
principle, subject to court approval, to settle the retailer claims in Minnesota
and Wisconsin. The proposed settlement amounts are immaterial. A new suit has
been filed in state court in North Carolina on behalf of consumers of
prescription drugs in that state. The Tennessee consumer case has now been
transferred to the MDL court in the Northern District of Illinois.
(PAGE 13)
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 21, 1997. The
following is a summary of the matters voted on at the meeting.
(a) The five management nominees for Director were elected to serve three-year
terms ending in 2000, as follows:
<TABLE>
<CAPTION>
Nominee For Withhold Vote
------- --- -------------
<S> <C> <C>
Evan Bayh 394,127,549 108,228,491
Charles E. Golden 495,696,146 6,659,894
Kenneth L. Lay, Ph.D. 453,042,922 49,313,118
Sidney Taurel 495,699,850 6,656,190
Alva O. Way 402,981,654 99,374,386
</TABLE>
The terms of office of the following directors continued after the
meeting: Steven C. Beering, M.D., Alfred G. Gilman, M.D., Ph.D., Karen N.
Horn, Ph.D., J. Clayburn La Force, Jr., Ph.D., Franklyn G. Prendergast,
M.D., Ph.D., Kathi P. Seifert, Randall L. Tobias and August M. Watanabe,
M.D.
(b) The appointment of Ernst & Young LLP as the Company's principal
independent auditors was ratified by the following shareholder vote:
<TABLE>
<S> <C>
For: 500,637,540
Against: 679,173
Abstain: 1,039,327
</TABLE>
(PAGE 14)
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as exhibits to this
Report:
11. Statement re: Computation of Earnings Per Share on Primary and
Fully Diluted Bases
12. Statement re: Computation of Ratio of Earnings from Continuing
Operations to Fixed Charges
27. Financial Data Schedule
99. Cautionary Statement Under Private Securities Litigation Reform Act of
1995 - "Safe Harbor" for Forward-Looking Disclosures
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the second quarter of 1997.
(PAGE 15)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELI LILLY AND COMPANY
---------------------
(Registrant)
Date August 8, 1997 s/Daniel P. Carmichael
-------------- ----------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date August 8, 1997 s/Arnold C. Hanish
-------------- ------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
(PAGE 16)
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit Page
------- ----
11. Statement re: Computation of Earnings Per Share
on Primary and Fully Diluted Bases 18
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges 19
27. Financial Data Schedule 20
99. Cautionary Statement Under Private Securities
Litigation Reform Act of 1995 - "Safe Harbor"
for Forward-Looking Disclosures 21
(PAGE 17)
<PAGE>
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE ON PRIMARY
AND FULLY DILUTED BASES
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
--------- -------- --------- --------
<S> <C> <C> <C> <C>
(Dollars in millions except per-share data)
(Shares in thousands)
PRIMARY:
Net income (loss)...................... $(1,732.1) $ 345.7 $(1,299.5) $ 734.9
Preferred stock dividends.............. (.6) (1.7) (1.3) (1.7)
--------- -------- --------- --------
Adjusted net income (loss)............. $(1,732.7) $ 344.0 $(1,300.8) $ 733.2
========= ======== ========= ========
Average number of common shares
outstanding......................... 551,231 547,277 550,349 546,796
Incremental shares -
Stock options and contingent
payments............................ - 12,695 - 13,301
--------- -------- --------- --------
Adjusted average shares................ 551,231 559,972 550,349 560,097
========= ======== ========= ========
Primary earnings (loss) per share...... $ (3.14) $ .61 $ (2.36) $ 1.31
========= ======== ========= ========
FULLY DILUTED:
Net income (loss)...................... $(1,732.1) $ 345.7 $(1,299.5) $ 734.9
Preferred stock dividends.............. (.6) (1.7) (1.3) (1.7)
--------- -------- --------- --------
Adjusted net income (loss)............. $(1,732.7) $ 344.0 $(1,300.8) $ 733.2
========= ======== ========= ========
Average number of common shares
outstanding......................... 551,231 547,277 550,349 546,796
Incremental shares -
Stock options and contingent
payments............................ - 14,036 - 15,956
--------- -------- --------- --------
Adjusted average shares................ 551,231 561,313 550,349 562,752
========= ======== ========= ========
Fully diluted earnings (loss)
per share........................... $ (3.14) $ .61 $ (2.36) $ 1.30
========= ======== ========= ========
</TABLE>
For the three and six month periods ended June 30, 1997, since the inclusion of
stock options and contingent payments would be anti-dilutive, primary and fully
diluted earnings per share have been calculated assuming no incremental shares.
(PAGE 18)
<PAGE>
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS FROM
CONTINUING OPERATIONS TO FIXED CHARGES
(Unaudited)
Eli Lilly and Company and Subsidiaries
(Dollars in Millions)
<TABLE>
<CAPTION>
Six Months
Ended June 30, Years Ended December 31,
------------- ----------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated
Pretax Income (Loss)
from Continuing
Operations before
Accounting Changes $(712.1) $2031.3 $1765.6 $1698.6 $662.8 $1193.5
Interest from Continuing
Operations 136.5 324.9 324.6 129.2 96.1 108.4
Less Interest Capitalized
during the Period from
Continuing Operations (13.4) (36.1) (38.3) (25.4) (25.5) (35.2)
------- ------- ------- ------- ------ -------
Earnings (Loss) $(589.0) $2320.1 $2051.9 $1802.4 $733.4 $1266.7
======= ======= ======= ======= ====== =======
Fixed Charges/1/ $ 138.2 $ 329.6 $ 324.6 $ 129.2 $ 96.1 $ 108.4
======= ======= ======= ======= ====== =======
Ratio of Earnings to
Fixed Charges N/M/2/ 7.0 6.3 14.0 7.6 11.7
======= ======= ======= ======= ====== =======
</TABLE>
/1/Fixed charges include interest from continuing operations for all years
presented and beginning in 1996, preferred stock dividends.
/2/Included in the 1997 earnings is a noncash charge of approximately $2.4
billion due to an asset impairment. (See notes to consolidated condensed
financial statements.) Due to the resulting loss, the Company was unable to
fully cover the indicated fixed charges. Earnings did not cover fixed charges
by $727.2 million in 1997. If the asset impairment charge had not occurred,
the ratio of earnings to fixed charges would have been 13.4.
(PAGE 19)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,853,011
<SECURITIES> 100,138
<RECEIVABLES> 1,449,845
<ALLOWANCES> 62,019
<INVENTORY> 945,831
<CURRENT-ASSETS> 4,992,080
<PP&E> 7,039,912
<DEPRECIATION> 2,883,445
<TOTAL-ASSETS> 12,288,903
<CURRENT-LIABILITIES> 3,699,847
<BONDS> 2,501,817
0
0
<COMMON> 355,564
<OTHER-SE> 4,314,379
<TOTAL-LIABILITY-AND-EQUITY> 12,288,903
<SALES> 3,724,943
<TOTAL-REVENUES> 3,941,728
<CGS> 929,557
<TOTAL-COSTS> 1,090,131
<OTHER-EXPENSES> 4,115,329<F1>
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 123,090
<INCOME-PRETAX> (712,096)
<INCOME-TAX> 587,384
<INCOME-CONTINUING> (1,299,480)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,299,480)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
<FN>
<F1> Amounts include research and development, selling and general
administrative expenses, and asset impairment.
<F2> The information called for is not given as the balances are not
individually significant.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99. CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 - "SAFE HARBOR" FOR FORWARD-LOOKING DISCLOSURES
Certain forward-looking statements are included in this Form 10-Q and may be
made by Company spokespersons based on current expectations of management. All
forward-looking statements made by the Company are subject to risks and
uncertainties. Certain factors, including, but not limited to those listed
below, may cause actual results to differ materially from current expectations
and historical results.
- Economic factors over which the Company has no control, including changes in
inflation, interest rates and foreign currency exchange rates.
- Competitive factors including generic competition as patents on key products,
such as Prozac, expire; pricing pressures, both in the U.S. and abroad,
primarily from managed care groups and government agencies; and technological
advances and patents obtained by competitors.
- Governmental factors including laws and regulations and judicial decisions at
the state and federal level related to Medicare, Medicaid and healthcare
reform; and laws and regulations affecting international pricing and
pharmaceutical reimbursement.
- The difficulties and uncertainties inherent in new product development. New
product candidates that appear promising in development may fail to reach the
market because of efficacy or safety concerns, inability to obtain necessary
regulatory approvals, difficulty or excessive costs to manufacture, or
infringement of the patents or intellectual property rights of others.
- Delays and uncertainties in the FDA approval process and the approval
processes in other countries, resulting in lost market opportunity.
- Unexpected safety or efficacy concerns arising with respect to marketed
products, whether or not scientifically justified, leading to product
recalls, withdrawals or declining sales.
- Legal factors including unanticipated litigation of product liability claims;
antitrust litigation; environmental matters; and patent disputes with
competitors which could preclude commercialization of products or negatively
affect the profitability of existing products.
- Future difficulties obtaining or the inability to obtain existing levels of
product liability insurance.
- Changes in tax laws, including the amendment to the Section 936 income tax
credit, and future changes in tax laws related to the remittance of foreign
earnings or investments in foreign countries with favorable tax rates.
- Changes in accounting standards promulgated by the Financial Accounting
Standards Board, the Securities and Exchange Commission, and the American
Institute of Certified Public Accountants which are adverse to the Company.
- Factors such as changes in business strategies and the impact of
restructurings, impairments in asset carrying values and business
combinations.
(PAGE 21)
