<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, 1999
COMMISSION FILE NUMBER 001-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction of (I.R.S. Employer
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, 1999:
Class Number of Shares Outstanding
----- ----------------------------
Common 1,092,812,638
1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------------------------------------------
(Dollars in millions except per-share data)
<S> <C> <C> <C> <C>
Net sales........................................................ $2,341.6 $2,155.0 $4,597.2 $4,242.0
Cost of sales.................................................... 491.1 478.6 984.6 935.9
Research and development......................................... 460.5 416.7 873.6 779.6
Marketing and administrative..................................... 649.6 637.4 1,242.5 1,180.9
Asset impairment................................................. - - 61.4 -
Interest expense................................................. 43.0 42.7 86.9 90.6
Other (income) expense - net..................................... (41.6) (67.7) 65.7 (95.6)
------------------------------------------------------------------
1,602.6 1,507.7 3,314.7 2,891.4
------------------------------------------------------------------
Income from continuing operations before income taxes
and extraordinary item.......................................... 739.0 647.3 1,282.5 1,350.6
Income taxes..................................................... 162.6 156.4 254.7 328.1
------------------------------------------------------------------
Income from continuing operations before extraordinary item...... 576.4 490.9 1,027.8 1,022.5
Income (loss) from discontinued operations, net of tax........... - 0.4 174.3 (2.9)
Extraordinary item - loss on early redemption of debt, - - - (7.2)
net of tax.....................................................
==================================================================
Net income...................................................... $ 576.4 $ 491.3 $1,202.1 $1,012.4
==================================================================
EARNINGS PER SHARE - BASIC:
Income from continuing operations before
extraordinary item............................................ $ .53 $ .45 $ .94 $ .93
Discontinued operations......................................... - - .16 -
Extraordinary item.............................................. - - - (.01)
==================================================================
Net income.................................................... $ .53 $ .45 $ 1.10 $ .92
==================================================================
EARNINGS PER SHARE - DILUTED:
Income from continuing operations before $ .52 $ .44 $ .92 $ .91
extraordinary item...........................................
Discontinued operations........................................ - - .16 -
Extraordinary item............................................. - - - (.01)
------------------------------------------------------------------
Net income..................................................... $ .52 $ .44 $ 1.08 $ .90
==================================================================
Dividends paid per share......................................... $ .23 $ .20 $ .46 $ .40
==================================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION> June 30, 1999 December 31, 1998
----------------------------------------------------------------------
(Dollars in millions)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 2,031.7 $ 1,495.7
Short-term investments................................... 65.1 101.4
Accounts receivable, net of allowances
for doubtful amounts of $56.0 (1999)
and $64.3 (1998)....................................... 1,383.8 1,967.9
Other receivables........................................ 227.4 275.8
Inventories.............................................. 943.4 999.9
Deferred income taxes.................................... 276.7 332.7
Prepaid expenses......................................... 319.4 233.4
----------------------------------------------------------------------
TOTAL CURRENT ASSETS..................................... 5,247.5 5,406.8
OTHER ASSETS
Prepaid retirement....................................... 620.6 612.3
Investments.............................................. 174.2 204.0
Goodwill and other intangibles, net of
allowances for amortization of
$114.9 (1999) and $171.4 (1998)........................ 119.9 1,517.9
Sundry................................................... 804.6 758.2
----------------------------------------------------------------------
1,719.3 3,092.4
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress............................... 7,082.1 7,274.5
Less allowances for depreciation......................... 3,228.7 3,178.2
----------------------------------------------------------------------
3,853.4 4,096.3
----------------------------------------------------------------------
$10,820.2 $12,595.5
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings.................................... $ 358.7 $ 181.4
Accounts payable......................................... 345.2 1,186.0
Employee compensation.................................... 336.5 704.0
Dividends payable........................................ - 252.9
Income taxes payable..................................... 1,158.0 1,290.2
Other liabilities........................................ 841.3 992.7
----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES................................ 3,039.7 4,607.2
LONG-TERM DEBT.............................................. 1,979.1 2,185.5
DEFERRED INCOME TAXES....................................... 216.5 247.9
RETIREE MEDICAL BENEFIT OBLIGATION.......................... 114.6 114.7
OTHER NONCURRENT LIABILITIES................................ 1,019.5 1,010.6
----------------------------------------------------------------------
3,329.7 3,558.7
COMMITMENTS AND CONTINGENCIES............................... - -
SHAREHOLDERS' EQUITY
Common stock............................................. 683.4 686.5
Retained earnings........................................ 4,425.6 4,228.8
Deferred costs-ESOP...................................... (141.7) (146.9)
Accumulated other comprehensive income................... (408.2) (229.8)
----------------------------------------------------------------------
4,559.1 4,538.6
Less cost of common stock in treasury.................... 108.3 109.0
----------------------------------------------------------------------
4,450.8 4,429.6
----------------------------------------------------------------------
$10,820.2 $12,595.5
======================================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
-------------------------------------
(Dollars in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 1,202.1 $ 1,012.4
Adjustments to Reconcile Net Income to Cash
Flows from Operating Activities:
Changes in operating assets and liabilities........................... (699.5) (612.5)
Depreciation and amortization......................................... 224.4 236.4
Change in deferred taxes.............................................. 9.5 204.6
Gain on sale of PCS, net of tax....................................... (174.3) -
Asset impairment, net of tax.......................................... 39.9 -
Other items, net...................................................... 5.0 (49.5)
-------------------------------------
NET CASH FROM OPERATING ACTIVITIES.................................... 607.1 791.4
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment............................... (194.0) (177.5)
Additions to other assets............................................. (89.5) (35.3)
Reduction of investments.............................................. 123.6 160.7
Additions to investments.............................................. (34.8) (28.3)
Divestitures/(acquisitions)........................................... (21.8) -
Proceeds from sale of PCS............................................. 1,600.0 -
-------------------------------------
NET CASH FROM (USED FOR) INVESTING ACTIVITIES......................... 1,383.5 (80.4)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid........................................................ (502.2) (440.7)
Purchase of common stock and other capital
transactions....................................................... (890.5) (864.0)
Net reductions to short-term borrowings............................... (19.5) (14.4)
Net reductions to long-term debt...................................... (1.1) (23.0)
-------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES................................ (1,413.3) (1,342.1)
Effect of exchange rate changes on cash............................... (41.3) (1.2)
-------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................................ 536.0 (632.3)
Cash and cash equivalents at January 1................................ 1,495.7 1,947.5
-------------------------------------
CASH AND CASH EQUIVALENTS AT JUNE 30.................................. $ 2,031.7 $ 1,315.2
=====================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-----------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net income....................................................... $ 576.4 $ 491.3 $ 1,202.1 $ 1,012.4
Other comprehensive income (loss)/1/............................. (35.8) (20.7) (178.4) (31.7)
-----------------------------------------------------------
Comprehensive income............................................. $ 540.6 $ 470.6 $ 1,023.7 $ 980.7
===========================================================
</TABLE>
/1/ The significant components of other comprehensive income were losses of
$38.7 million and $172.9 million from foreign currency translation
adjustments for the three months and six months ended June 30, 1999,
respectively, as compared to losses of $2.8 million and $24.9 million for the
three months and six months ended June 30, 1998, respectively.
See Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
SALES BY PRODUCT CATEGORY
Worldwide sales by product category for the second quarter and six month
period of 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
----------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales - to unaffiliated customers
Neurosciences................................................. $ 1,133.0 $ 1,042.6 $ 2,177.7 $ 1,993.1
Endocrinology................................................. 427.7 371.4 766.3 679.1
Anti-infectives............................................... 226.8 271.6 497.3 590.1
Cardiovascular................................................ 157.5 137.8 308.1 248.1
Animal health................................................. 139.4 135.3 286.0 279.2
Oncology...................................................... 93.7 93.5 214.9 159.0
Gastrointestinal.............................................. 81.3 76.3 192.8 220.3
Other pharmaceuticals......................................... 82.2 26.5 154.1 73.1
---------------------------------------------------------
Net sales........................................................ $ 2,341.6 $ 2,155.0 $ 4,597.2 $ 4,242.0
=========================================================
</TABLE>
6
<PAGE>
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, all of which are of a normal
recurring nature, that are necessary for a fair statement of the results of
operations 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.
The Company operates in one significant business segment - pharmaceutical
products. Operations of the animal health business are not material.
CONTINGENCIES
Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva), have
each submitted an Abbreviated New Drug Application (ANDA) seeking FDA approval
to market generic forms of Prozac before the expiration of the Company's
patents. The ANDAs assert that two U.S. patents held by Lilly covering Prozac
are invalid and unenforceable. The Company filed suit against Barr and Geneva in
federal court in Indianapolis seeking a ruling that Barr's challenge to Lilly's
patents is without merit. On January 12, 1999, the trial court granted summary
judgment in favor of Lilly on two of the four claims raised by Barr and Geneva
against Lilly's patents. That decision has been appealed. On January 25, 1999,
Barr and Geneva dismissed their other two claims in exchange for a $4 million
payment, which Barr and Geneva will share with a third defendant. In late 1998,
three additional generic pharmaceutical companies, Zenith Goldline
Pharmaceuticals, Inc., Teva Pharmaceuticals USA and Cheminor Drugs, Ltd.,
together with one of its subsidiaries, filed ANDAs for generic forms of Prozac,
asserting that the later of the two patents (expiring in December 2003) is
invalid and unenforceable. Finally, in early 1999, Novex Pharma, a division of
Apotex, Inc., changed its previously-filed ANDA to assert that both the 2001 and
2003 patents are invalid and unenforceable. Lilly has filed suits against the
four companies in federal court in Indianapolis. The suits are in an early
stage. While the Company believes that the claims of the six generic companies
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 and results of
operations.
The Company has been named as a defendant in numerous product liability lawsuits
involving primarily two products, diethylstilbestrol and Prozac. 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 recoverables 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 less than 10 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 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.
7
<PAGE>
The environmental liabilities and litigation accruals have been reflected in the
Company's consolidated condensed balance sheet at the gross amount of
approximately $284.4 million at June 30, 1999. Estimated insurance recoverables
of approximately $227.1 million at June 30, 1999, have been reflected as assets
in the consolidated condensed balance sheet.
While it is not possible to predict or determine the outcome of the patent,
product liability, 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.
EARNINGS PER SHARE
All per share amounts, unless otherwise noted in the footnotes, are presented on
a diluted basis, that is, based on weighted average number of outstanding common
shares and the effect of all potentially dilutive common shares (primarily
unexercised stock options).
ACCOUNTING CHANGES
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. The
statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. Hedge
ineffectiveness, the amount by which the change in the value of a hedge does not
exactly offset the change in the value of the hedged item, will be immediately
recognized in earnings. Statement 133 was amended in June 1999, and is now
required to be adopted in years beginning after June 15, 2000. The Company has
not yet determined what the effect of Statement 133 will be on the consolidated
earnings and financial position of the Company or when the statement will be
adopted.
Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position (SOP) 98-5, "Reporting the
Costs of Start-up Activities." The SOP requires that start-up costs capitalized
prior to January 1, 1999 be written off and any future start-up costs be
expensed as incurred. The unamortized balance of start-up costs was written off
as of January 1, 1999. The effect of this change in accounting principle on
consolidated earnings was immaterial.
DISCONTINUED OPERATIONS
In November 1998, the Company signed a definitive agreement for Rite Aid
Corporation to acquire PCS, the Company's health-care-management subsidiary, for
$1.60 billion in cash. The transaction closed on January 22, 1999, and generated
a gain of $174.3 million ($.16 per share), net of $8.7 million tax benefit, in
the first quarter of 1999. The results of operations from PCS prior to the close
of the sale were not material, and have been classified as discontinued
operations in the consolidated condensed statements of income. The prior period
has been restated.
The consolidated condensed balance sheet and consolidated condensed statements
of cash flows include PCS through the date of disposal. Selected balances,
excluding intercompany amounts, as of December 31, 1998 were as follows (in
millions):
<TABLE>
<S> <C>
Current assets..................................... $ 528.7
Goodwill........................................... 1,397.4
Total assets....................................... 2,026.5
Current liabilities................................ 886.3
</TABLE>
8
<PAGE>
SPECIAL CHARGES AND ASSET IMPAIRMENT CHARGE
During the first quarter, the Company recognized a pre-tax charge of $150.0
million, which resulted from funding commitments made to the Eli Lilly and
Company Foundation, the non-profit foundation through which the Company makes
charitable contributions. The charge for the funding commitment, which has been
included in other expense in the consolidated condensed statement of income,
reduced earnings per share by approximately $.09 in the first quarter of 1999.
During the first quarter, the Company also recognized a pre-tax asset impairment
charge of $61.4 million to adjust the carrying value of certain manufacturing
assets, in accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." The asset impairment
charge reduced earnings per share by $.04 in the first quarter of 1999. The
major portion of the charge related to the decommissioning of a building
previously used for antibiotic manufacturing, which resulted from the
consolidation of certain manufacturing processes. The Company has no planned
future use for the vacated building. The fair value of the facility was
estimated using a discounted cash flow analysis.
SUBSEQUENT EVENTS
On August 2, 1999, the Company signed a definitive agreement to sell the U.S.
rights to Lorabid (R), an antibiotic used in the treatment of bacterial
infections, to King Pharmaceuticals, Inc. for $90.5 million (most of which will
be recorded as other income in the third quarter) plus sales performance
milestones. The Company will manufacture Lorabid for King. The transaction is
expected to close in the third quarter of 1999, subject to review under the
Hart-Scott-Rodino Act.
On August 5, 1999, a wholly-owned subsidiary ("Issuer") of the Company issued
$300 million Resettable Coupon Capital Securities due 2029 and $525 million
Floating Rate Capital Securities due 2029.
The Resettable Coupon Capital Securities will pay cumulative interest at an
annual rate of 7.717 percent until August 1, 2004. At this date and every fifth
anniversary thereafter, the interest rate will be reset equal to the weekly
average interest rate of U.S. treasury securities having an index maturity of
five years for the week immediately preceding the reset date plus a
predetermined spread. The securities may be redeemed by the Issuer on August 1,
2004, and anytime thereafter for a defined redemption price.
The Floating Rate Capital Securities will pay cumulative interest at an annual
rate equal to LIBOR plus a predetermined spread, reset quarterly. The initial
quarterly interest rate is 6.57 percent. The securities may be redeemed at any
time on or after August 5, 2004, for a defined redemption price.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SALE OF PCS HEALTH-CARE-MANAGEMENT BUSINESS
In November 1998, the Company signed a definitive agreement to sell to Rite Aid
Corporation the Company's PCS health-care-management subsidiary for $1.60
billion in cash. The sale, which was completed in January 1999, will allow the
Company to further focus on pharmaceutical innovation and the realization of
optimal demand for Company products in the marketplace. As a consequence of the
divestiture, the operating results of PCS have been reflected as "discontinued
operations" in the Company's financial statements for all periods and have been
excluded from consolidated sales and expenses reflected therein. The Company
recognized a gain on disposal of $174.3 million, net of $8.7 million tax
benefit, which increased earnings per share by approximately $.16, net of tax,
in the first quarter of 1999.
OPERATING RESULTS FROM CONTINUING OPERATIONS:
The Company's sales for the second quarter of 1999 increased 9 percent from the
second quarter of 1998. Sales in the U.S. increased 10 percent, while sales
outside the U.S. increased 6 percent. Compared with the second quarter of 1998,
worldwide sales reflected volume growth of 9 percent and a 1 percent increase in
global selling prices, offset by a 1 percent decrease in growth associated with
exchange rates.
The Company's sales for the first six months of 1999 increased 8 percent
compared with the same period in 1998. Sales inside the U.S. increased 8
percent, while sales outside the U.S. increased 9 percent. Compared with the
first six months of 1998, worldwide sales reflected volume growth of 9 percent
and a 1 percent decrease in exchange rates while selling prices remained flat.
9
<PAGE>
Worldwide pharmaceutical sales for the quarter were $2.20 billion and for the
six month period were $4.31 billion, reflecting increases of 9 percent for both
periods compared with the same periods of 1998. Sales growth for the quarter was
led by Zyprexa(R), Humulin(R) and Humalog(R). Sales growth for the six month
period was led by Zyprexa, Gemzar(R) and ReoPro(R). In addition, the quarter and
the six month periods benefited from Evista(R), which was launched in the first
quarter of 1998 in the U.S. for the prevention of osteoporosis in postmenopausal
women. Revenue growth for the quarter was partially offset by lower sales of
anti-infectives. Revenue growth for the six month period was also partially
offset by lower sales of anti-infectives as well as lower sales of Axid(R).
Total U.S. pharmaceutical sales for the quarter increased 11 percent, to $1.41
billion, and for the six month period increased 9 percent, to $2.70 billion.
Growth in both periods was primarily a result of increased volume. International
pharmaceutical sales for the quarter increased 6 percent, to $790.7 million, and
for the six month period increased 9 percent, to $1.61 billion, compared with
the same periods in 1998. Strong sales volume growth for the quarter and six
month period of 8 percent and 11 percent, respectively, was mitigated by the
effect of unfavorable exchange rates while selling prices were relatively flat.
Worldwide sales of Prozac for the quarter were $688.1 million and for the six
month period were $1.28 billion, representing an increase for the quarter of 4
percent and no change for the six month period. Prozac sales in the U.S.
increased 7 percent, to $561.8 million, for the quarter and 1 percent, to $1.02
billion, for the six month period. U.S. sales in both periods were negatively
affected by increased competition from other branded antidepressants. Sales
growth for the second quarter benefited slightly from the initial stocking of 10
mg scored tablets as well as wholesaler stocking of 10 mg capsules. Sales of
Prozac outside the U.S. declined 7 percent, to $126.3 million, for the quarter,
due to the effects of unfavorable exchange rates and continued competitive
pressures, and declined 3 percent, to $261.7 million, for the six month period.
For the full year, the Company anticipates slight growth in worldwide Prozac
sales. Actual sales levels will depend on the effectiveness of the Company's
marketing efforts in offsetting increased competition, the rate of growth of the
antidepressant market, and stocking patterns of wholesalers, retailers and
consumers.
Zyprexa posted worldwide sales for the quarter of $393.0 million and $794.3
million for the six month period, representing increases of 20 percent and 29
percent, respectively, over the same periods of 1998. U.S. sales of Zyprexa
increased 8 percent, to $276.8 million, for the quarter and increased 18
percent, to $574.5 million, for the six month period. Zyprexa sales growth in
the U.S. for both periods was dampened somewhat by continued work-down of excess
inventories held at year-end 1998 by wholesalers. Sales outside the U.S.
increased 62 percent, to $116.3 million, for the quarter and increased 71
percent, to $219.8 million, for the six month period as the Company continues to
launch products in new markets. The Company expects continued strong sales
growth for Zyprexa for the full year 1999 but at a lower percentage than the 98
percent achieved in 1998.
Worldwide ReoPro sales of $114.2 million for the quarter and $215.2 million for
the six month period reflected increases of 13 percent and 26 percent,
respectively, over the same periods of 1998. U.S. sales of ReoPro increased 7
percent, to $92.4 million, and 19 percent, to $172.8 million, for the second
quarter and six month period, respectively. International sales of ReoPro
increased 51 percent, to $21.8 million, and 61 percent, to $42.4 million, for
the second quarter and six month period, respectively.
Worldwide Gemzar sales of $86.5 million for the quarter and $200.9 million for
the six month period reflected increases of 1 percent and 41 percent,
respectively, over the same periods of 1998. Sales in the U.S. decreased by
$10.2 million, or 19 percent, to $42.6 million, for the quarter, but increased
by $30.2 million, or 36 percent, to $113.7 million, for the six month period
compared to the same periods of 1998. Gemzar sales comparisons in the U.S.
during the second quarter versus a year ago were negatively affected by U.S.
wholesaler stocking that occurred during both the first quarter of 1999 and the
second quarter of 1998. International sales increased 34 percent, to $43.8
million, for the quarter and 48 percent, to $87.1 million, for the six month
period.
Worldwide insulin sales, composed of Humulin, Humalog, and Iletin(R), increased
in the second quarter by 15 percent, to $334.9 million, and, for the six month
period, increased 12 percent, to $588.5 million. Insulin sales in the U.S. for
the quarter increased by 15 percent, to $203.4 million, and for the six month
period increased 10 percent, to $335.7 million. Insulin sales outside the U.S.
increased by 16 percent, to $131.5 million, for the quarter and increased 15
percent, to $252.7 million, for the six month period. Worldwide Humulin sales
increased by 14 percent, to $278.3 million, for the quarter and 10 percent, to
$481.2 million, for the six month period. U.S. Humulin sales increased for the
quarter by 18 percent and by 10 percent for the six month period. Humulin sales
outside the U.S. increased by 9 percent for both the quarter and six month
period. Worldwide Humalog sales were $50.4 million for the quarter and $92.9
million for the six month period, representing an increase of 71 percent for
both the quarter and six month
10
<PAGE>
period, over the same periods of 1998. The launch of Humulin and Humalog pens,
combined with the growth of Humalog fixed mixtures outside the U.S., helped
drive overall insulin sales.
For the quarter and the six month period, worldwide sales of anti-infectives
decreased 17 percent, to $207.8 million, and 16 percent, to $460.2 million,
respectively, compared with the same periods of 1998, as a result of continuing
competitive pressures. U.S. and international anti-infectives sales declined 13
percent and 18 percent, respectively, for the quarter, and 21 percent and 14
percent, respectively, for the six month period. Cefaclor and Lorabid accounted
for the majority of the decline in anti-infective sales.
Worldwide sales of Axid increased 7 percent, to $81.3 million, for the second
quarter and decreased by 12 percent, to $192.8 million, for the six month
period, compared to the same periods for 1998. Axid sales for the second
quarter benefited from wholesaler stocking.
Evista sales increased $51.5 million, to $66.6 million, for the quarter and
increased $72.8 million, to $121.2 million, for the six month period. While most
of the sales dollar growth for Evista was in the U.S., international Evista
sales reflect strong percentage growth for both periods. The Company anticipates
continued strong growth in worldwide Evista sales for 1999.
Worldwide sales of animal health products for the quarter increased 3 percent
over the second quarter of 1998, to $139.4 million, and 2 percent over the same
six month period of 1998, to $286.0 million. Excluding unfavorable exchange
rates, sales growth was 8 percent and 6 percent for the quarter and six month
periods, respectively.
The second quarter of 1999 gross margin was 79.0 percent, an increase of 1.2
percentage points over the second quarter of 1998. Gross margin for the six
month period was 78.6 percent, representing a 0.7 percentage point increase over
the six month period of 1998. The improvement in gross margin for both periods
was attributed to favorable product mix and production efficiencies, as well as
the expiration of Humulin and Humalog royalties in August 1998.
During the first quarter of 1999, the Company recognized two one-time charges
that affect the six month expense comparisons. The first charge relates to a
pre-tax asset impairment charge of approximately $61.4 million to adjust the
carrying value of certain manufacturing assets. The major portion of the charge
related to the write-down of a Clinton, Indiana manufacturing facility to its
fair value, which was estimated using a discounted cash flow analysis. This
asset impairment charge reduced earnings per share by approximately $.04 in the
first quarter. The second pre-tax charge of $150.0 million resulted from funding
commitments made to the Eli Lilly and Company Foundation, the non-profit
foundation through which the Company makes charitable contributions. The charge
for the funding commitment reduced earnings per share by approximately $.09 in
the first quarter of 1999. See "Special Charges and Asset Impairment Charge" in
the Notes to Consolidated Condensed Financial Statements for additional
information.
Operating expenses increased 5 percent for the second quarter and 8 percent for
the first six months, excluding the first quarter asset impairment charge.
Marketing and administrative expenses increased 2 percent in the second quarter
and 5 percent for the first six months. The increases were due to increased
spending to support new product launches around the world, enhancements to the
Company's global information technology systems, including Y2K readiness
efforts, and direct-to-consumer advertising campaigns in the U.S. However, the
impact of these increases was mitigated by expense management initiatives and
reduced incentive compensation accruals.
Research and development investments increased 11 percent, to $460.5 million,
for the second quarter, and 12 percent, to $873.6 million, for the first six
months, as the Company continues to build internal and external capabilities.
The reduced incentive compensation accruals noted above somewhat offset the
expense growth.
Interest expense was essentially flat in the second quarter of 1999 and
decreased $3.7 million (4 percent) compared with the first six months of 1998.
The decrease was primarily due to a decrease in the Company's borrowings.
Net other income for the second quarter of 1999 was $41.6 million, a decrease of
$26.1 million, compared with the second quarter of 1998. Net other income for
the six month period was $84.3 million, excluding the charge for the funding
commitment to the Eli Lilly and Company Foundation, representing a decrease of
$11.3 million, compared with the same period of 1998. The second quarter of 1998
benefited from gains generated from the sale of investments.
11
<PAGE>
For the second quarter of 1999, the Company's effective tax rate was 22 percent,
which was 2.2 percentage points below the second quarter of 1998. The effective
tax rate for the six month period was 20 percent, which was lowered by the
impact of the $61.4 million asset impairment charge and the $150.0 million
funding commitment to Eli Lilly and Company Foundation. Excluding these items,
the effective tax rate for the six month period was 22 percent, which was 2.3
percentage points below the same period in 1998, but was consistent with the tax
rate estimate provided by the Company at year-end 1998.
During the first quarter of 1998, the Company refinanced an ESOP debenture,
which resulted in a one-time extraordinary charge of $7.2 million net of a $4.8
million tax benefit ($.01 per share).
Second quarter net income was $576.4 million, or $.52 per share, compared with
$491.3 million for the second quarter of 1998, or $.44 per share. Net income for
the second quarter benefited from increased sales as well as higher margins. In
addition, marketing and administrative expense increases were held to 2 percent
compared to the second quarter of 1998 due to expense management programs and
lower incentive compensation accruals in effect for 1999. A lower effective tax
rate for the quarter also had a favorable impact on net income compared to the
second quarter of 1998. These favorable variances were offset by an increase in
second quarter research and development spending compared to the second quarter
of 1998. Net income for the six month period was $1.20 billion, or $1.08 per
share, compared to $1.01 billion, or $.90 per share, for the same period of
1998. The results for the six month period of 1999 were affected by the
previously mentioned gain on disposal of the PCS health-care-management business
of $174.3 million, the pre-tax asset impairment charge of $61.4 million and the
pre-tax $150.0 million charge for funding commitments to the Eli Lilly and
Company Foundation. Excluding these non-recurring items and discontinued
operations in 1998, net income and earnings per share for the six month period
increased 15 percent and 17 percent, respectively, as compared to 1998. For the
six month period of 1999, net income was favorably impacted by increased sales,
improved margins and a lower effective tax rate, offset by slightly higher
research and development expenses as a percent of sales. Earnings per share for
the second quarter and six month period of 1999 benefited from a lower number of
shares outstanding resulting from the Company's share repurchase programs.
FINANCIAL CONDITION
As of June 30, 1999, cash, cash equivalents and short-term investments totaled
$2.10 billion as compared with $1.60 billion at December 31, 1998. The net
increase in cash was due primarily to $1.60 billion received from the sale of
PCS and operating cash flow of $607.1 million, which was offset by $502.2
million in dividends paid and $1.09 billion in shares repurchased. The purchase
of shares was pursuant to the Company's previously announced plan to repurchase
shares of approximately $1.0 billion in 1999. The board of the Company recently
authorized an expansion of the 1999 share repurchase program from $1.0 billion
to $1.5 billion. Total debt at June 30, 1999, was $2.34 billion, a decrease of
$29.1 million from December 31, 1998.
On August 5, 1999 a subsidiary of the Company issued debt totaling $825 million.
Proceeds from this debt issuance are intended to be used for general corporate
purposes. See Notes to the Consolidated Condensed Financial Statements.
The Company believes that cash generated from operations in 1999, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 1999 operating needs, including debt service, capital expenditures, share
repurchases, and dividends.
YEAR 2000 READINESS DISCLOSURE
Many of the Company's global information technology (IT) systems and non-IT
systems, including laboratory and process automation devices, have required
modification or replacement in order to render the systems ready for the year
2000 (Y2K). In late 1996, the Company initiated a comprehensive program to
reduce the likelihood of a material impact on the business. The numerous
activities that are intended to enable the Company to obtain Y2K readiness
utilize both internal and external resources and are being centrally managed
through a program office. Monthly reports are made to senior management and a
business council comprising various management representatives. In addition,
regular reports are made to the audit committee of the board of directors.
The Company's inventory of IT systems, including software applications, has been
divided into various categories. Those most critical to the Company's global
operations were generally being assessed and renovated, when necessary, first.
The Company has instituted a process to monitor all critical and essential
replacement and upgrade projects of existing systems to assist in managing them
toward completion in a
12
<PAGE>
timely manner. The Company has completed renovation of substantially all of its
critical applications. The Company anticipates that the remaining critical
applications will be completed by September 30, 1999. Of applications deemed
essential, the Company has completed renovation of approximately 95 percent by
June 30, 1999. The Company anticipates that the remaining essential applications
will be complete by September 30, 1999.
The most important non-IT systems are various laboratory and process automation
devices. The Company has completed a global assessment of all devices. Based on
this assessment, only a small percentage (15 percent) of all automation devices
appear to require upgrade or replacement. As of June 30, 1999, the Company had
completed remediation of approximately 90% of the critical devices which
represents 100% of the devices that are available to be fixed. The remaining
devices are scheduled for completion throughout the remainder of 1999 during
routine scheduled maintenance.
The representatives of the program office have visited numerous global sites to
assess the progress being made toward site readiness. In addition, several
global training programs have occurred to foster the consistent application of
the chosen methodologies. The Company is actively participating in industry
efforts in the U.S. to communicate with advocacy groups, as well as governmental
groups, about the readiness of the Company and industry as a whole.
The Company mailed letters to thousands of vendors, service providers and
customers to determine the extent to which they are prepared for the Year 2000
issue. These activities are being coordinated through a global network of
regional site and functional coordinators. Many responses have been received and
the Company has identified the vendors, service providers and customers that are
critical to the Company through a business impact analysis. At June 30, 1999,
essentially all contingency plans have been completed for the Company's critical
vendors.
The Company has begun, but not yet completed, a comprehensive risk management
analysis of the operational problems and costs (including loss of revenues) that
would be reasonably likely to result from the failure by the Company and certain
third parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis or from abnormal wholesaler or consumer buying patterns in
anticipation of the Year 2000. Contingency plans are being developed for the
Company and its critical vendors, customers and suppliers to address the flow of
products to the consumer. The contingency planning involves a multifaceted
approach, which may include additional purchases of raw materials and/or
locating inventories of products closer to the consumer. The Company has made
the decision to increase inventories of certain key products in order to have
additional finished stock in the event excessive consumer purchasing occurs in
late 1999. Business continuity plans are being developed to address the
Company's approach for dealing with extended disruptions. In addition, "rapid
response" teams will be established to respond to any issues that occur around
the millennium. The Company currently plans to complete analysis and have
contingency plans in place by September 30, 1999.
The costs of the Company's Year 2000 efforts are based upon management's best
estimates, which are derived using numerous assumptions regarding future events,
including the continued availability of certain resources, third-party
remediation plans and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. The Company currently estimates it will spend
between $160 and $180 million over the life of the program and that
approximately 75 percent to 80 percent of the anticipated costs were incurred by
June 30, 1999. Expenses associated with addressing the Year 2000 issues are
being recognized as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations. Due to the uncertainty inherent in the Year 2000 problem,
the Company is unable to determine, at this time, whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations. The Year 2000 project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its vendors, service suppliers
and customers. The Company believes that, with the completion of the project as
scheduled, the possibility of a material interruption of normal operations
should be reduced.
EURO CONVERSION
On January 1, 1999, 11 European nations adopted a common currency, the euro, and
formed the European Economic and Monetary Union (EMU). For a three-year
transition period, both the euro and individual participants' currencies will
remain in circulation. After July 1, 2002, at the latest, the euro will be the
sole legal tender for EMU countries. The adoption of the euro will affect a
multitude of financial systems and
13
<PAGE>
business applications as the commerce of these nations will be transacted in the
euro and the existing national currency.
The Company is currently addressing euro-related issues and their impact on
information systems, currency exchange rate risk, taxation, contracts,
competition and pricing. Action plans currently being implemented are expected
to result in compliance with all laws and regulations; however, there can be no
certainty that such plans will be successfully implemented or that external
factors will not have an adverse effect on the Company's operations. Any costs
of compliance associated with the adoption of the euro will be expensed as
incurred and the Company does not expect these costs to be material to its
results of operations, financial condition or liquidity.
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, including those made in this document, are
based on management's expectations at the time they are made, but they are
subject to risks and uncertainties that may cause actual results to differ
materially from those projected. Economic, competitive, governmental,
technological and other factors that may affect the Company's operations and
prospects are discussed in Exhibit 99 to this Form 10-Q filing.
14
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings
PROZAC PATENT LITIGATION
Reference is made to the discussion of the Prozac patent litigation contained in
Part II, Item 1 of the Company's Form 10-Q for the quarter ended March 31, 1999.
A trial date of October 30, 2000 has now been set for the cases involving Zenith
Goldline Pharmaceuticals, Inc., Teva Pharmaceuticals USA, and Cheminor Drugs,
Ltd.
PRICING LITIGATION
Reference is made to the discussion of the retail pharmacy litigation, "In re
Brand Name Prescription Drugs Antitrust Litigation (MDL No.997)" and related
cases, contained in the Legal Proceedings portions of the Company's Form 10-K
for the year ended December 31, 1998, and Form 10-Q for the quarter ended March
31, 1999. Additional cases have been filed in state courts in New Mexico, South
Dakota, and West Virginia that purport to be class actions on behalf of
pharmaceutical consumers in those states.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on April 19, 1999. The
following is a summary of the matters voted on at the meeting:
(a) The three management nominees for Director were elected to serve three-year
terms ending in 2002, as follows:
Nominee For Withhold Vote
------- --- -------------
Alfred G. Gilman, M.D., Ph.D. 902,316,827 59,912,995
Karen N. Horn, Ph.D. 901,630,829 60,598,993
August M. Watanabe, M.D. 901,819,698 60,410,124
(b) The appointment of Ernst & Young LLP as the Company's principal independent
auditors was ratified by the following shareholder vote:
For: 958,613,701
Against: 2,176,329
Abstain: 1,439,792
(c) By the following vote, the shareholders defeated a shareholder proposal
requesting the Company to endorse the CERES (Coalition for Environmentally
Responsible Economies) principles:
For: 54,965,778
Against: 739,852,854
Abstain: 54,994,551
(d) By the following vote, the shareholders defeated a shareholder proposal
requesting the Board of Directors to take the necessary steps to declassify
the Board:
For: 311,337,987
Against: 526,123,328
Abstain: 12,028,053
15
<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
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.
-------------------
The Company filed no reports on Form 8-K during the second quarter of 1999.
16
<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 12, 1999 /s/ Daniel P. Carmichael
----------------- -------------------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date August 12, 1999 /s/ Arnold C. Hanish
----------------- -------------------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
17
<PAGE>
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit
-------
11. Statement re: Computation of Earnings Per
Share
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule (Edgar filing only)
99. Cautionary Statement Under Private Securities Litigation
Reform Act of 1995 - "Safe Harbor" for Forward-Looking
Disclosures
18
<PAGE>
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in millions except per-share data)
BASIC
Net income....................................................... $ 576.4 $ 491.3 $ 1,202.1 $ 1,012.4
Preferred stock dividends........................................ - (.7) (.1) (1.3)
------------------------------------------------------------
Adjusted net income.............................................. $ 576.4 $ 490.6 $ 1,202.0 $ 1,011.1
============================================================
Average number of common shares outstanding...................... 1,090.4 1,098.2 1,091.3 1,099.6
Contingently issuable shares..................................... - - .5 .6
============================================================
Adjusted average shares.......................................... 1,090.4 1,098.2 1,091.8 1,100.2
Basic earnings per share......................................... $ .53 $ .45 $ 1.10 $ .92
============================================================
DILUTED
Net income....................................................... $ 576.4 $ 491.3 $ 1,202.1 $ 1,012.4
Preferred stock dividends........................................ - (.7) (.1) (1.3)
------------------------------------------------------------
Adjusted net income.............................................. $ 576.4 $ 490.6 $ 1,202.0 $ 1,011.1
============================================================
Average number of common shares outstanding...................... 1,090.4 1,098.2 1,091.3 1,099.6
Incremental shares - stock options and contingently
issuable shares................................................ 17.7 26.8 20.2 28.2
============================================================
Adjusted average shares.......................................... 1,108.1 1,125.0 1,111.5 1,127.8
Diluted earnings per share....................................... $ .52 $ .44 $ 1.08 $ .90
============================================================
</TABLE>
Shares in millions.
19
<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,
----------------------------------------------------
1999 1998 1997 1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Pretax
Income from Continuing
Operations before
Extraordinary Item.................... $ 1,282.5 $2,665.0 $2,901.1 $2,131.3 $1,866.6 $1,693.3
Interest from Continuing
Operations and Other
Fixed Changes......................... 97.7 198.3 253.1 323.8 323.9 128.7
Less Interest Capitalized
during the Period from
Continuing Operations................. (10.8) (17.0) (20.4) (35.8) (38.3) (25.4)
--------------------------------------------------------------------
Earnings............................... $ 1,369.4 $2,846.3 $3,133.8 $2,419.3 $2,152.2 $1,796.6
====================================================================
Fixed Charges /1/ ..................... $ 97.8 $ 200.5 $ 256.8 $ 328.5 $ 323.9 $ 128.7
====================================================================
Ratio of Earnings to
Fixed Charges......................... 14.0 14.2 12.2 7.4 6.6 14.0
====================================================================
</TABLE>
/1/ Fixed charges include interest from continuing operations for all years
presented and beginning in 1996, preferred stock dividends.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,031,665
<SECURITIES> 65,142
<RECEIVABLES> 1,439,745
<ALLOWANCES> 55,957
<INVENTORY> 943,376
<CURRENT-ASSETS> 5,247,549
<PP&E> 7,082,130
<DEPRECIATION> 3,228,711
<TOTAL-ASSETS> 10,820,182
<CURRENT-LIABILITIES> 3,039,676
<BONDS> 1,979,090
0
0
<COMMON> 683,430
<OTHER-SE> 3,767,324
<TOTAL-LIABILITY-AND-EQUITY> 10,820,182
<SALES> 4,597,158
<TOTAL-REVENUES> 4,597,158
<CGS> 984,551
<TOTAL-COSTS> 984,551
<OTHER-EXPENSES> 2,177,557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,936
<INCOME-PRETAX> 1,282,478
<INCOME-TAX> 254,695
<INCOME-CONTINUING> 1,027,783
<DISCONTINUED> 174,296
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,202,079
<EPS-BASIC> 1.10
<EPS-DILUTED> 1.08
</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.
- -- 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 new
patented products or expanded indications for existing products introduced
by competitors, which can lead to declining demand for the Company's
products.
- -- Changes in inventory levels maintained by pharmaceutical wholesalers as a
result of wholesaler buying patterns, which can cause reported sales for a
particular period to differ significantly from underlying prescriber
demand.
- -- Economic factors over which the Company has no control, including changes
in inflation, interest rates and foreign currency exchange rates, and
overall economic conditions in volatile areas such as Latin America.
- -- Governmental factors, including laws and regulations and judicial decisions
at the state and federal level related to Medicare, Medicaid and health
care reform that could adversely affect pricing and reimbursement of the
Company's products; and laws and regulations affecting international
operations.
- -- The difficulties and uncertainties inherent in new product development. New
product candidates that appear promising in development may fail to reach
the market or may have only limited commercial success 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 or
other 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. In
particular, while the Company believes that its U.S. patents on Prozac are
valid and enforceable, there can be no assurance that the Company will
prevail in the various legal challenges to those patents.
- -- Future difficulties obtaining or the inability to obtain existing levels of
product liability insurance.
- -- Changes in tax laws, including laws related to the remittance of foreign
earnings or investments in foreign countries with favorable tax rates, and
settlements of federal, state, and foreign tax audits.
- -- 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.
- -- Internal factors such as changes in business strategies and the impact of
restructurings and business combinations.
- -- The Company's statement that it expects to complete the Year 2000
modifications before December 31, 1999, is based on management's best
estimate, which was derived utilizing numerous assumptions of
21
<PAGE>
future events, including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that timely completion will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and
correct all relevant computer codes, and the successful completion by key
third parties of their own Year 2000 modifications.
- -- Uncertainty surrounding the extent to which consumer concerns about the
possibility of Y2K-related product shortages will lead to higher than
normal buying patterns for company products in the remaining months of
1999, affecting results of operations in the latter half of 1999 and early
2000.
22
