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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 SEPTEMBER 30, 2000
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 October 31, 2000:
Class Number of Shares Outstanding
----- ----------------------------
Common 1,127,274,346
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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 Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------------------------------------------
(Dollars in millions except per-share data)
<S> <C> <C> <C> <C>
Net sales...................................................... $ 2,811.9 $2,585.2 $ 7,884.5 $7,182.4
Cost of sales................................................. 490.1 548.2 1,490.5 1,532.8
Research and development...................................... 506.1 442.9 1,473.4 1,316.5
Marketing and administrative.................................. 800.3 696.4 2,284.0 1,938.9
Asset impairment and other site charges....................... - - - 61.4
Interest expense.............................................. 44.1 45.9 136.4 132.8
Other income - net............................................ (27.1) (87.4) (374.8) (21.7)
--------------------------------------------------
1,813.5 1,646.0 5,009.5 4,960.7
--------------------------------------------------
Income from continuing operations before income taxes......... 998.4 939.2 2,875.0 2,221.7
Income taxes.................................................. 219.6 206.6 584.5 461.3
--------------------------------------------------
Income from continuing operations............................. 778.8 732.6 2,290.5 1,760.4
--------------------------------------------------
Income from discontinued operations, net of tax............... - - - 174.3
--------------------------------------------------
Net income.................................................... $ 778.8 $ 732.6 $ 2,290.5 $1,934.7
--------------------------------------------------
EARNINGS PER SHARE - BASIC:
Income from continuing operations........................... $ .72 $ .68 $ 2.12 $ 1.62
Income from discontinued operations......................... - - - .16
--------------------------------------------------
Net income.................................................. $ .72 $ .68 $ 2.12 $ 1.78
==================================================
EARNINGS PER SHARE - DILUTED:
Income from continuing operations........................... $ .71 $ .67 $ 2.09 $ 1.59
Income from discontinued operations......................... - - - .16
--------------------------------------------------
Net income.................................................. $ .71 $ .67 $ 2.09 $ 1.75
==================================================
Dividends paid per share...................................... $ .26 $ .23 $ .78 $ .69
==================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
---------------------------------------------
(Dollars in millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................... $ 3,116.2 $ 3,700.4
Short-term investments....................................... 738.5 135.6
Accounts receivable, net of allowances
for doubtful amounts of $91.7 (2000)
and $79.9 (1999)........................................... 1,394.7 1,443.2
Other receivables............................................ 240.2 399.6
Inventories.................................................. 905.0 899.6
Deferred income taxes........................................ 164.3 240.3
Prepaid expenses............................................. 333.2 236.8
----------------------------------
TOTAL CURRENT ASSETS......................................... 6,892.1 7,055.5
OTHER ASSETS
Prepaid retirement........................................... 896.2 741.1
Investments.................................................. 869.3 180.3
Goodwill and other intangibles, net of
allowances for amortization of
$114.9 (2000) and $107.6 (1999)............................ 108.1 118.6
Sundry....................................................... 815.8 748.2
----------------------------------
2,689.4 1,788.2
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress................................... 7,526.3 7,347.3
Less allowances for depreciation............................. 3,522.8 3,365.8
----------------------------------
4,003.5 3,981.5
----------------------------------
$13,585.0 $12,825.2
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings........................................ $ 45.0 $ 241.5
Accounts payable............................................. 375.9 445.5
Employee compensation........................................ 390.4 489.3
Dividends payable............................................ - 283.0
Income taxes payable......................................... 1,731.1 1,445.3
Other liabilities............................................ 1,151.6 1,030.8
----------------------------------
TOTAL CURRENT LIABILITIES.................................... 3,694.0 3,935.4
LONG-TERM DEBT.................................................. 2,785.4 2,811.9
DEFERRED INCOME TAXES........................................... 77.5 137.0
RETIREE MEDICAL BENEFIT OBLIGATION.............................. 94.1 115.7
OTHER NONCURRENT LIABILITIES.................................... 869.9 812.2
----------------------------------
3,826.9 3,876.8
COMMITMENTS AND CONTINGENCIES................................... - -
SHAREHOLDERS' EQUITY
Common stock................................................. 704.9 682.0
Additional paid-in capital................................... 2,610.0 -
Retained earnings............................................ 6,259.1 4,985.6
Employee benefit trust....................................... (2,635.0) -
Deferred costs-ESOP.......................................... (136.4) (139.9)
Accumulated other comprehensive income....................... (629.2) (406.4)
----------------------------------
6,173.4 5,121.3
Less cost of common stock in treasury........................ 109.3 108.3
----------------------------------
6,064.1 5,013.0
----------------------------------
$13,585.0 $12,825.2
==================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------------------------
(Dollars in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................. $2,290.5 $1,934.7
Adjustments to Reconcile Net Income to Cash
Flows from Operating Activities:
Changes in operating assets and liabilities............................. 206.2 (741.0)
Depreciation and amortization........................................... 359.9 340.4
Change in deferred taxes................................................ (74.9) 184.3
Gain related to sale of Kinetra, net of tax............................. (214.4) -
Gain related to sale of PCS, net of tax................................. - (174.3)
Asset impairment, net of tax............................................ - 39.9
Other, net.............................................................. 84.3 84.5
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................... 2,651.6 1,668.5
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment................................. (433.0) (320.2)
Purchase of investments................................................. (1,484.5) (36.2)
Proceeds from sale of investments....................................... 534.7 126.3
Other, net.............................................................. (96.9) (92.7)
Proceeds from sale of PCS............................................... - 1,600.0
--------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES..................... (1,479.7) 1,277.2
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid.......................................................... (845.0) (751.5)
Purchase of common stock and other capital
transactions......................................................... (754.2) (1,292.7)
Issuances under stock plans............................................. 124.5 132.0
Net change in short-term borrowings..................................... (191.4) (34.8)
Net repayments of long-term debt........................................ (23.9) 832.3
--------------------------
NET CASH USED FOR FINANCING ACTIVITIES.................................. (1,690.0) (1,114.7)
Effect of exchange rate changes on cash and cash equivalents............ (66.1) (34.8)
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (584.2) 1,796.2
Cash and cash equivalents at January 1.................................. 3,700.4 1,495.7
--------------------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30............................... $3,116.2 $3,291.9
==========================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
4
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CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net income............................................................ $778.8 $732.6 $2,290.5 $1,934.7
Other comprehensive income/(loss)/1/.................................. (76.1) 37.4 (222.8) (141.0)
--------------------------------------------------
Comprehensive income.................................................. $702.7 $770.0 $2,067.7 $1,793.7
==================================================
</TABLE>
/1/The significant component of other comprehensive income/(loss) was a
loss of $96.1 million and $216.6 million from foreign currency translation
adjustments for the three months and nine months ended September 30, 2000,
respectively, as compared to gains of $32.7 million and losses of $140.2
million for the three months and nine months ended September 30, 1999,
respectively.
See Notes to Consolidated Condensed Financial Statements.
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SEGMENT INFORMATION
The company operates in one significant business segment - pharmaceutical
products. Operations of the animal health business are not material and share
many of the same economic characteristics as pharmaceutical products. The
company's business segments are distinguished by the ultimate end user of the
product: humans or animals. Performance is evaluated based on profit or loss
from operations before income taxes. Income before income taxes for the
animal health business was $47 million and $36 million, respectively, for the
three months ended September 30, 2000 and 1999 and $127 million and $105
million, respectively, for the nine months ended September 30, 2000 and 1999.
SALES BY PRODUCT CATEGORY
Worldwide sales by product category for the three months and nine months of
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales - to unaffiliated customers
Neurosciences...................................................... $1,385.9 $1,252.3 $3,726.5 $3,430.0
Endocrinology...................................................... 669.6 558.4 1,893.4 1,445.8
Anti-infectives.................................................... 194.4 245.8 648.6 742.6
Animal health...................................................... 164.4 149.5 471.1 435.5
Oncology........................................................... 160.5 126.3 415.8 341.2
Cardiovascular..................................................... 137.9 151.1 445.0 459.3
Gastrointestinal................................................... 79.5 82.0 232.9 274.8
Other pharmaceuticals.............................................. 19.7 19.8 51.2 53.2
--------------------------------------------------
Net sales.............................................................. $2,811.9 $2,585.2 $7,884.5 $7,182.4
==================================================
</TABLE>
6
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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, 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.
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(R) 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. In January 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 was appealed to the Court of
Appeals for the Federal Circuit. Barr and Geneva dismissed their other two
claims in exchange for a $4 million payment. On August 9, 2000, the Court of
Appeals upheld the 2001 compound patent but held that the 2003 method of use
patent was invalid. The company has filed a petition for rehearing by the Court
of Appeals.
In late 1998, three additional generic pharmaceutical companies, Zenith
Goldline Pharmaceuticals, Inc. (Zenith); Teva Pharmaceuticals USA (Teva); and
Cheminor Drugs, Ltd. (Cheminor), together with one of its subsidiaries, filed
ANDAs for generic forms of Prozac, asserting that the 2003 patent is invalid and
unenforceable. Also in late 1998, 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. In November 1999, Lilly filed a lawsuit
against Cheminor and Schein Pharmaceuticals, Inc. (Schein), based on their ANDA
filing for an additional dosage form. In March 2000, another generic company,
Alphapharm Pty., Ltd. (Alphapharm) filed an ANDA challenging the company's
patents. In April 2000, Barr notified the company that it filed a second ANDA
for an additional dosage form. In May 2000, the company filed suits in federal
court in Indianapolis against Barr and Alphapharm. In June 2000, the company
received notice that Alphapharm had filed an amended ANDA for an additional
dosage form. In July 2000, the company received notice that Teva filed a
second ANDA for an additional dosage form. In August 2000, the company filed a
suit against Alphapharm in Indianapolis. In September 2000, the company filed a
second suit against Teva in federal court in Indianapolis.
Assuming the Prozac patent ruling is not overturned and assuming the FDA grants
the company market exclusivity in the U.S. until August 2, 2001 in connection
with pediatric studies, the company expects a very substantial decline in Prozac
sales in the U.S. in the twelve months following the entry of generic fluoxetine
in the U.S. market in August, 2001. Prozac sales in the U.S. represent a
significant portion of the company's overall sales, accounting for approximately
21 percent of the company's consolidated worldwide sales in the first nine
months of 2000. The company believes that the Prozac patent litigation will not
have a material adverse effect on the company's consolidated financial position
or liquidity.
The company has been named as a defendant in numerous product liability
lawsuits involving primarily two products, diethylstilbestrol (DES) and Prozac.
The company has accrued for its estimated exposure with respect to all current
product liability claims. In addition, the company has accrued for certain
claims incurred, but not filed, 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
7
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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 fewer 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.
The environmental liabilities and litigation accruals have been reflected in the
company's consolidated condensed balance sheet at the gross amount of
approximately $151.8 million at September 30, 2000. Estimated insurance
recoverables of approximately $91.7 million at September 30, 2000, have been
reflected as assets in the consolidated balance sheet.
While it is not possible to predict or determine the outcome of the patent,
product liability, antitrust, or other legal actions brought against the company
or the ultimate cost of environmental matters, the company believes that, except
as noted above with respect to the Prozac patent litigation, 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).
SHAREHOLDER'S EQUITY
During the second quarter of 2000, the company funded an employee benefit trust
with 40,000,000 shares of Lilly common stock to provide a source of funds to
assist the company in meeting its obligations under various employee benefit
plans. The funding had no net impact on shareholders' equity as the employee
benefit trust is consolidated with the company. The cost basis of the shares
held in the trust is shown as a reduction in shareholders' equity, which offsets
the resulting increases in additional paid-in capital and common stock. Any
dividend transactions between the company and the trust are eliminated. Stock
held by the trust is not considered outstanding in the computation of earnings
per share.
The company announced a $3 billion share repurchase program in 2000.
Approximately 11.2 million shares were repurchased through the nine-month period
ended September 30, 2000, at a cost of approximately $775 million. In connection
with the share repurchase program, the company has entered into agreements to
purchase shares of the company's stock. As of September 30, 2000, the company
has agreements to purchase up to approximately 4.5 million shares of company
stock from an independent third party at various times through the expiration of
the agreements in December 2002, at prices ranging from $78 to $100 per share.
The number of shares to be purchased will be reduced ratably each quarter
through the expiration of the agreements. In addition, as of September 30, 2000,
written equity put options, purchased call options and other derivative
contracts for purchase of a total of approximately 3 million shares remain
outstanding at prices ranging from $69 to $80 per share with expiration dates
ranging from October 2000 to November 2002. If the options are exercised, the
contracts allow the company, at its option, to repurchase the shares for cash or
deliver to the holder cash or shares for the difference between the contractual
8
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exercise price and the market price of the company's stock. The company's
objective with the above hedging agreements is to reduce the average price of
repurchased shares.
ACCOUNTING CHANGES
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which summarized the SEC staff's views regarding the recognition
and reporting of revenues in certain transactions. The company must comply with
SAB No. 101 by the end of 2000. The company does not expect that SAB No. 101
will have a material effect on its consolidated results of operations.
In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued.
Statement 133 was amended in June 1999 and is now required to be adopted in
years beginning after June 15, 2000. The statement permits early adoption as of
the beginning of any fiscal quarter after its issuance. The company will adopt
Statement 133 on January 1, 2001. 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. The company anticipates that adopting Statement 133 will
not have a material effect on the consolidated results of operations and
financial position of the company based on the derivatives owned by the company
at September 30, 2000, anticipated derivative purchases prior to adoption, and
anticipated market rates as of January 1, 2001.
9
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DISCONTINUED OPERATIONS
In January 1999, the company sold PCS, its health-care-management subsidiary,
to Rite Aid Corporation for $1.60 billion in cash. The transaction 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.
UNUSUAL ITEMS
During the first quarter of 2000, the company sold its interest in Kinetra
LLC, a joint venture between the company and EDS, to WebMD Corporation (WebMD)
in exchange for shares of WebMD common stock. A gain of $214.4 million was
recognized on the combined effect of the transaction and the subsequent sale of
the majority of those shares of WebMD stock. The gain is included in other
income in the consolidated condensed statement of income.
During the fourth quarter of 1999, the company realized an estimated $91 million
of sales as a result of year-2000-related wholesaler buying that normally would
have been realized during the first quarter of 2000.
During the third quarter of 1999, the company recognized a pretax gain of $67.8
million on the sale of the U.S. and Puerto Rican marketing rights of Lorabid(R),
an antibiotic used in the treatment of bacterial infections, to King
Pharmaceuticals, Inc. The gain was included in other income in the consolidated
condensed statement of income. The company has an opportunity to receive
additional payments if certain sales performance milestones are achieved.
During the first quarter of 1999, the company recognized a pretax charge of
$150.0 million, which resulted from a contribution made to Eli Lilly and Company
Foundation, the non-profit foundation through which the company makes charitable
contributions. The charge for the contribution was included in other income in
the consolidated condensed statement of income.
During the first quarter of 1999, the company also recognized a pretax asset
impairment charge of $61.4 million to adjust the carrying value of certain
manufacturing assets to fair value. 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 planned to continue ownership of the vacated building although no
planned future uses had been identified. The fair value of the facility was
estimated based upon anticipated future cash flows, discounted at a rate
commensurate with the risk involved.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OPERATING RESULTS FROM CONTINUING OPERATIONS
Income from continuing operations was $778.8 million, or $.71 per share, for
the third quarter of 2000, compared with $732.6 million, or $.67 per share, for
the third quarter of 1999, representing increases in earnings and earnings per
share of 6 percent. Excluding the effect of a one-time gain on the sale of
Lorabid marketing rights during the third quarter of 1999 which is discussed
further below, earnings and earnings per share increased by 15 percent. Reported
income from continuing operations was $2.29 billion, or $2.09 per share, for the
first nine months of 2000, compared with $1.76 billion, or $1.59 per share, for
the first nine months of 1999. Comparisons between the nine month periods are
made difficult by the impact of several unusual items that are reflected in the
company's operating results for both periods. Excluding these unusual items,
which are discussed further below, income from continuing operations for the
nine month periods of 2000 and 1999 would have been $2.14 billion, or $1.95 per
share, and $1.84 billion, or $1.67 per share, respectively. This represents
increases in earnings and earnings per share of 16 percent and 17 percent,
respectively, for the nine month period. Income from continuing operations for
the quarter and nine month period was favorably affected by increased sales,
improved gross margins, and increased interest income, offset somewhat by higher
operating expenses (as defined below) as a percent of sales.
10
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Earnings per share for the nine month period of 2000 benefited from a lower
number of shares outstanding resulting from the company's share repurchase
programs.
As noted above, several unusual items are reflected in the company's operating
results for the nine month periods of 2000 and 1999. These transactions are
summarized as follows (see "Unusual Items" and "Discontinued Operations" in the
Notes to Consolidated Condensed Financial Statements for additional
information):
- The company recognized a gain of $214.4 million on the sale of its interest
in Kinetra LLC to WebMD and the subsequent sale of WebMD stock, which
increased earnings per share by approximately $.20 in the first quarter of
2000.
- The company realized an estimated $91 million of sales as a result of
year-2000-related wholesaler buying during the fourth quarter of 1999 that
normally would have been realized in the first quarter of 2000, which
decreased earnings per share by approximately $.06 in the first quarter of
2000.
- The company recognized a pretax gain of $67.8 million on the sale of the
U.S. and Puerto Rican marketing rights of Lorabid, which increased earnings
per share by approximately $.05 in the third quarter of 1999.
- The company recognized a pretax charge of $150.0 million as the result of a
contribution to Eli Lilly and Company Foundation, which decreased earnings
per share by approximately $.09 in the first quarter of 1999.
- The company recognized a pretax charge of $61.4 million associated with the
impairment of certain manufacturing assets, which decreased earnings per
share by approximately $.04 in the first quarter of 1999.
- The company recognized a gain on the disposal of PCS 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.
The company's sales for the third quarter of 2000 increased 9 percent, to
$2.81 billion, compared with the third quarter of 1999. Sales growth was led by
Zyprexa(R), diabetes care products, Evista(R), and Gemzar(R), partially offset
by lower sales of Prozac, anti-infectives, and ReoPro(R). Sales in the U.S.
increased 12 percent, to $1.87 billion, for the third quarter of 2000 compared
with the third quarter of 1999. Sales outside the U.S. increased 3 percent, to
$944.4 million. Worldwide sales for the quarter reflected volume growth of 10
percent and a 1 percent increase in selling prices, partially offset by an
unfavorable exchange rate impact of 2 percent.
The company's reported sales for the first nine months of 2000 increased 10
percent, to $7.88 billion, compared with the first nine months of 1999. Sales
growth was led by Zyprexa, diabetes care products, Evista, and Gemzar, partially
offset by lower sales of Prozac, anti-infectives, Axid(R), and ReoPro. Sales in
the U.S. increased 12 percent, to $5.03 billion, for the nine month period of
2000 compared with the nine month period of 1999. Sales outside the U.S.
increased 6 percent, to $2.85 billion. Worldwide sales reflected volume growth
of 12 percent, partially offset by an unfavorable exchange rate impact of 2
percent, while selling prices remained flat.
Prozac and Sarafem(TM) had combined worldwide sales of $680.2 million and $1.90
billion for the third quarter and nine month period of 2000, respectively,
representing decreases of 1 percent and 3 percent, compared with the same
periods of 1999. Sarafem, launched in the U.S. in August 2000 for the treatment
of premenstrual dysphoric disorder (PMDD), had sales of $10.0 million for the
third quarter of 2000. Prozac and Sarafem combined sales in the U.S. increased 6
percent, to $598.7 million for the quarter, primarily as a result of the Sarafem
launch and wholesaler stocking during the third quarter of 2000. For the nine
month period, sales increased 4 percent, to $1.65 billion, primarily due to
abnormally low wholesaler buying during the first quarter of 1999, as well as
the factors noted previously. Prozac sales outside the U.S. decreased 35
percent, to $81.5 million, for the quarter and 33 percent, to $257.3 million,
for the nine month period, primarily due to continuing generic competition in
the U.K. On August 9, 2000, the Court of Appeals for the Federal Circuit
affirmed a lower court decision upholding the company's February 2001 U.S.
patent on Prozac but ruled that the company's December 2003 patent is invalid.
Reference is made to the discussion of the Prozac patent litigation under Part
II, Item 1 of this Form 10-Q. For additional information on the expected
financial impact of the ruling, see the "Financial Expectations for 2001 and
2002" section below.
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Zyprexa had worldwide sales of $644.9 million and $1.65 billion for the third
quarter and nine month period of 2000, respectively, representing increases of
28 percent and 27 percent, compared with the same periods of 1999. Sales in the
U.S. increased 28 percent, to $474.6 million, for the quarter and 24 percent, to
$1.17 billion, for the nine month period. Sales outside the U.S. increased 29
percent, to $170.3 million, for the quarter and 37 percent, to $482.6 million,
for the nine month period.
Gemzar had worldwide sales of $155.1 million and $399.0 million for the third
quarter and nine month period of 2000, respectively, representing increases of
30 percent and 25 percent, compared with the same periods of 1999. Sales in the
U.S. increased 30 percent, to $92.8 million, for the quarter and 19 percent, to
$220.7 million, for the nine month period. Sales outside the U.S. increased 30
percent, to $62.3 million, for the quarter and 32 percent, to $178.3 million,
for the nine month period.
Evista had worldwide sales of $141.5 million and $375.7 million for the third
quarter and nine month period of 2000, respectively, representing increases of
53 percent and 76 percent, compared with the same periods of 1999. Sales in the
U.S increased 45 percent, to $119.3 million, for the quarter and 67 percent, to
$314.6 million, for the nine month period. Increases in Evista sales in the U.S.
were due, in part, to the FDA approval for the treatment of postmenopausal
osteoporosis in the U.S., which was received in September of 1999. Sales outside
the U.S. increased 108 percent, to $22.2 million, for the quarter and 142
percent, to $61.2 million, for the nine month period.
ReoPro had worldwide sales of $97.7 million and $312.5 million for the third
quarter and nine month period of 2000, respectively, representing decreases of 9
percent and 3 percent, compared with the same periods of 1999. The decline in
sales for both periods was due to increased competition in the U.S.
Diabetes care worldwide revenues, composed primarily of Humulin(R), Humalog(R),
and Actos(R), increased to $450.0 million and $1.30 billion for the third
quarter and nine month period of 2000, respectively, representing increases of
14 percent and 27 percent, compared with the same periods of 1999. Diabetes care
revenues in the U.S. increased 14 percent, to $285.1 million, for the quarter
and 28 percent, to $789.2 million, for the nine month period. Sales outside the
U.S. increased 16 percent, to $164.9 million, for the quarter and 26 percent, to
$506.4 million, for the nine month period. Worldwide Humulin sales of $282.6
million declined 3 percent for the quarter largely as a result of patients
shifting to Humalog and Humalog mix products. Worldwide Humulin sales of
$821.3 million increased 6 percent for the nine month period. Worldwid e Humalog
sales of $90.6 million for the quarter and $239.3 million for the nine month
period increased 54 percent and 58 percent, respectively. Sales of Humalog for
the quarter and nine month period benefited from the U.S. launch of Humalog
Mix75/25 Pen in the first quarter of 2000. The company received service revenues
of $61.2 million and $178.9 million, respectively, for the third quarter and
nine month period of 2000 relating to sales of Actos. Actos, an oral agent for
the treatment of type 2 diabetes, was introduced to the U.S. diabetes market in
the third quarter of 1999. Actos is manufactured and sold in the U.S. by Takeda
Chemical Industries, Ltd., and is copromoted by the company.
Anti-infectives had worldwide sales of $194.4 million and $648.6 million for the
third quarter and nine month period of 2000, respectively, representing
decreases of 21 percent and 13 percent, compared with the same periods of 1999.
Lower sales of anti-infectives for both periods were due to continuing
competitive pressures, with cefaclor and Lorabid accounting for the majority of
the decline. Sales in the U.S. decreased 41 percent and 21 percent for the
quarter and nine month period, respectively. Sales outside the U.S. decreased 15
percent and 10 percent for the quarter and nine month period, respectively.
Axid had worldwide sales of $79.5 million and $232.9 million for the third
quarter and nine month period of 2000, respectively, representing decreases of 3
percent and 15 percent, compared with the same periods of 1999.
For the third quarter of 2000, gross margins improved to 82.6 percent compared
with 78.8 percent for the third quarter of 1999. For the nine month period of
2000, gross margins improved to 81.1 percent compared with 78.7 percent for the
nine month period of 1999. The improved gross margin for both periods was
primarily the result of favorable product mix, and to a lesser extent
manufacturing volume increases.
Operating expenses (the aggregate of research and development and marketing
and administrative expenses) increased 15 percent for the third quarter of 2000
and for the nine month period of 2000.
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Investment in research and development increased 14 percent, to $506.1 million,
for the third quarter and 12 percent, to $1.47 billion, for the nine month
period, as the company continues to invest heavily in both its internal research
and development programs and external collaborations. Marketing and
administrative expenses increased 15 percent from the third quarter of 1999 and
18 percent from the nine month period of 1999, as the company continues to
invest in sales force expansions and increased marketing efforts.
Net other income for the third quarter of 2000 increased $7.5 million, to $27.1
million, excluding the third quarter 1999 gain on the sale of Lorabid marketing
rights. Net other income for the nine month period of 2000 increased $57.5
million, to $161.4 million, excluding the first quarter 2000 gain on the sale of
Kinetra LLC, the third quarter 1999 gain on the sale of Lorabid marketing
rights, and the first quarter 1999 charge from funding Eli Lilly and Company
Foundation. The increase for both periods was primarily due to an increase in
interest income.
For both the third quarters of 2000 and 1999, the effective tax rate was 22.0
percent. The effective tax rate for the nine month period of 2000 was 20.3
percent compared with 20.8 percent for the nine month period of 1999. Excluding
the impact of the unusual items discussed previously, the effective tax rate
would have been 22.0 percent for both nine month periods.
FINANCIAL CONDITION
As of September 30, 2000, cash, cash equivalents and short-term investments
totaled $3.85 billion as compared with $3.84 billion at December 31, 1999. Cash
flow from operations of $2.65 billion was offset primarily by dividends paid of
$845.0 million, shares repurchased and other capital transactions of $754.2
million, a decrease in debt of $223.0 million, and capital expenditures of
$442.0 million. Total debt at September 30, 2000, was $2.83 billion, a decrease
of $223.0 million from December 31, 1999, primarily due to the repayment of $200
million of euro bonds in February 2000. In March 2000, the company announced a
$3.0 billion share repurchase program, following successful completion of a $1.5
billion share repurchase in 1999.
The company believes that cash generated from operations in 2000, along with
available cash and cash equivalents, will be sufficient to fund essentially all
of the 2000 operating needs, including debt service, capital expenditures, share
repurchases, and dividends.
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. Greece is now expected to join the original
11 countries adopting the euro in 2002. The adoption of the euro affects a
multitude of financial systems and business applications as the commerce of
these nations is transacted in the euro and the existing national currency.
The company has created the capability to transact in both the euro and the
legacy currency and will continue to address 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.
FINANCIAL EXPECTATIONS FOR FULL-YEAR 2000
Looking forward to full-year 2000 results excluding unusual items for 2000 and
1999, the company anticipates low double-digit sales growth combined with gross
margin improvements, leading to earnings per share growth of approximately 16
percent for 2000 over the 1999 normalized earnings per share of $2.28.
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The sales line will be driven by our portfolio of newer products and will grow
despite the expected slight decline in combined worldwide Prozac and Sarafem
sales for the full year. Actual Prozac 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 the stocking
patterns of wholesalers, retailers, and consumers. Notably, the company
anticipates that Zyprexa sales will grow in the range of 25 to 30 percent and
insulin products will increase in the low double digits. Gemzar, Evista, and
Actos are expected to continue strong growth for the balance of the year. The
company continues to anticipate a decline in worldwide sales of ReoPro.
In addition, the company expects the full-year improvement in gross margin to
be greater than 150 basis points. Research and development and marketing and
administrative expenses are expected to grow at a rate slightly above the rate
of sales as the company continues to invest in its commitment to scientific
innovation and increased sales and marketing efforts. The tax rate is expected
to remain at approximately 22 percent for the full year.
FINANCIAL EXPECTATIONS FOR 2001 AND 2002
Assuming the Prozac patent ruling is not overturned and assuming the U.S. FDA
grants the company market exclusivity in the U.S. until August 2, 2001 in
connection with pediatric studies, the company expects a very substantial
decline in Prozac sales in the U.S. in the twelve months following the entry of
generic fluoxetine in the U.S. market in August, 2001. Prozac sales in the U.S.
represent a significant portion of the company's overall sales, accounting for
approximately 21 percent of the company's consolidated worldwide sales in the
first nine months of 2000.
As a result of the above, excluding any unusual items, the company expects to
post single-digit sales and earnings-per-share growth in the calendar years 2001
and 2002, accelerating to double-digit sales and earnings growth in 2003. Solid
sales and earnings growth in the first half of 2001 are expected to more than
offset declines in the second half of 2001 due to the anticipated entry of
generic fluoxetine in August. For 2002, sales and earnings growth in the second
half of the year are expected to more than offset declines in the first half of
the year.
The company believes that the Prozac patent litigation will not have a material
adverse effect on the company's consolidated financial position or liquidity.
Actual results will depend on, among other things, the outcome of the appeal of
the Federal Circuit ruling; securing the additional six months of market
exclusivity from the FDA; the timing, number of entrants, and pricing strategies
of generic competitors; the continuing growth of the company's other currently
marketed products; and the expected introduction of new products.
RECENT DEVELOPMENT
On October 28, 2000, President Clinton signed the Agriculture, Rural
Development, Food and Drug Administration, and Related Agencies Appropriations
Act for fiscal year 2001. This legislation includes a provision that repeals the
federal ban on the reimportation of most prescription drugs by anyone other than
the manufacturer. Consequently, under the new law, wholesalers and pharmacists
may be permitted to reimport certain drugs approved for sale in the U.S. and
originally sold abroad, subject to several conditions. The law authorizes
reimportation from select jurisdictions, including Australia, Canada, Israel,
Japan, New Zealand, Switzerland, South Africa, and the European Union.
Reimportation of biological products, such as ReoPro, is prohibited.
Before the law takes effect, the Secretary of Health and Human Services (HHS)
must "demonstrate" to Congress that the law poses no additional risk to public
health and safety and will result in significant reductions in drug costs for
American consumers. If HHS can make that demonstration, then the FDA is to draft
regulations to implement the law. HHS has stated that it could take up to two
years to put regulations in place followed by a period of implementation.
Finally, the law expires five years after the regulations become effective.
The company cannot predict at this time the extent to which it will be impacted
by this legislation or potential future legislative or regulatory developments
in this area. However, if widespread reimportation
14
<PAGE>
of the company's products were to occur, this could have a material adverse
effect on the company's results of operations.
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. In particular,
the company's expectations may be affected by the timing of the entry of generic
fluoxetine in the U.S., by competitive developments affecting its growth
products, by the uncertainties of new product development, and possible U.S.
legislation affecting pharmaceutical pricing and reimbursement. The company
undertakes no duty to update forward-looking statements.
15
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
PROZAC PATENT LITIGATION
In March 1996 the company was informed by Barr Laboratories, Inc. (Barr), a
generic pharmaceutical manufacturer, that it had submitted an abbreviated new
drug application (ANDA) to the U.S. FDA seeking to market a generic form of
Prozac in the United States several years before the expiration of the company's
patents. Barr has alleged that the company's U.S. patents covering Prozac are
invalid and unenforceable. The compound patent expires in February 2001 and a
patent for the method of use of the compound expires in December 2003. These
patents are material to the company.
On April 11, 1996, the company filed suit in the United States District Court
for the Southern District of Indiana seeking a ruling that Barr's challenge to
the two patents is without merit. In 1997, Geneva Pharmaceuticals, Inc.
(Geneva), another generic manufacturer, submitted a similar ANDA and, like Barr,
asserted that the company's U.S. Prozac patents are invalid and unenforceable.
On June 23, 1997, the company sued Geneva in the same court seeking a similar
ruling as in the Barr suit. The two suits were consolidated. On January 12,
1999, the trial court judge for the Southern District of Indiana granted partial
summary judgment in the company's favor, dismissing the claims of Barr and
Geneva based on the patent doctrines of "best mode" and "double patenting." On
January 25, 1999, Barr and Geneva agreed to abandon their remaining two claims
(based on the patent doctrines of "anticipation" and "inequitable conduct") in
exchange for a payment of $4 million to be shared among Barr, Geneva, and a
third defendant, Apotex, Inc. (Apotex). Barr, Geneva, and Apotex appealed the
trial court's January 12, 1999 rulings to the Court of Appeals for the Federal
Circuit. On August 9, 2000, the Court of Appeals upheld the 2001 compound patent
but held that the 2003 method of use patent was invalid on the basis of "double
patenting." On October 6, 2000, the company petitioned for a rehearing by the
Court of Appeals. Petitions for rehearing by the Court of Appeals for the
Federal Circuit are rarely granted; therefore there can be no assurance that the
court will rehear this matter. There can also be no assurance that, if the case
is accepted for review by the court, the decision invalidating the 2003 patent
will be reversed. Should the company be unsuccessful in overturning the decision
upon a rehearing, the company would petition the U.S. Supreme Court for a writ
of certiorari. However, the U.S. Supreme Court rarely grants such petitions in
patent cases.
In late 1998, three additional generic manufacturers, Zenith Goldline
Pharmaceuticals, Inc. (Zenith), Teva Pharmaceuticals USA (Teva), and Cheminor
Drugs, Ltd. (Cheminor) together with one of its subsidiaries filed ANDAs for
generic forms of Prozac, asserting that the December 2003 patent is invalid and
unenforceable. Also, in December 1998, Novex Pharma, a division of Apotex,
changed its previously-filed ANDA to assert that both the 2001 and 2003 patents
are invalid and unenforceable. The company filed lawsuits in the United States
District Court of the Southern District of Indiana seeking rulings that the four
companies' challenges to the patent(s) are without merit. In November 1999, the
company filed a lawsuit in federal court in Indiana against Cheminor and Schein
Pharmaceuticals, Inc. (Schein), based on their ANDA filing for an additional
dosage form. In March 2000, the company received notice that another generic
manufacturer, Alphapharm Pty., Ltd. (Alphapharm), had filed an ANDA for one
dosage form, asserting that both the 2001 and 2003 patents are invalid and
unenforceable. In April 2000, Barr notified the company that it filed a second
ANDA for an additional dosage form. In May 2000, the company filed suits in
federal court in Indianapolis against Barr and Alphapharm, seeking rulings that
their challenges to the company's patents are without merit. In June 2000, the
company received notice that Alphapharm had filed an amended ANDA on an
additional dosage form. In July 2000, the company received notice that Teva has
filed a second ANDA for an additional dosage form. In August 2000, the company
filed a second suit against Alphapharm in federal court in Indianapolis. In
September 2000, the company filed a second suit against Teva in federal court in
Indianapolis.
For more discussion on the expected financial impact of this litigation, see
"Financial Expectations for 2001 and 2002" under Part I, Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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Item 2. Changes in Securities and Use of Proceeds
Reference is made to the information on sales of put options and other equity
derivatives related to repurchases of Lilly stock as described in the
accompanying notes to consolidated condensed financial statements. All such
transactions were exempt from registration under Section 4(2) of the Securities
Act of 1933. No public offering or public solicitation was used in the offering
of these securities. The transactions were privately negotiated, and all
offerees and purchasers were accredited investors and/or qualified institutional
buyers.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following documents are filed as exhibits to this Report:
--------
EXHIBIT 11. Statement re: Computation of Earnings Per Share
EXHIBIT 12. Statement re: Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges
EXHIBIT 27. Financial Data Schedule
EXHIBIT 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 third quarter of 2000.
17
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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 November 14, 2000 /s/ Alecia A. DeCoudreaux
------------------------- ---------------------------
Secretary and Deputy General Counsel
Date November 14, 2000 /s/ Arnold C. Hanish
------------------------- ---------------------------
Arnold C. Hanish
Executive Director, Finance and Chief
Accounting Officer
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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
