<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, 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 July 31, 2000:
Class Number of Shares Outstanding
----- ----------------------------
Common 1,129,497,275
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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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------
(Dollars in millions except per-share data)
<S> <C> <C> <C> <C>
Net sales.............................................. $2,621.5 $2,341.6 $5,072.6 $4,597.2
Cost of sales.......................................... 491.7 491.1 1,000.4 984.6
Research and development............................... 508.8 460.5 967.3 873.6
Marketing and administrative........................... 795.4 649.6 1,483.7 1,242.5
Asset impairment and other site charges................ - - - 61.4
Interest expense....................................... 45.5 43.0 92.3 86.9
Other (income) expense - net........................... (74.0) (41.6) (347.7) 65.7
------------------------------------------------------------
1,767.4 1,602.6 3,196.0 3,314.7
------------------------------------------------------------
Income from continuing operations before income taxes.. 854.1 739.0 1,876.6 1,282.5
Income taxes........................................... 187.9 162.6 364.9 254.7
------------------------------------------------------------
Income from continuing operations...................... 666.2 576.4 1,511.7 1,027.8
Income from discontinued operations, net of tax........ - - - 174.3
------------------------------------------------------------
Net income............................................. $ 666.2 $ 576.4 $1,511.7 $1,202.1
------------------------------------------------------------
EARNINGS PER SHARE - BASIC:
Income from continuing operations.................... $ .62 $ .53 $ 1.40 $ .94
Income from discontinued operations.................. - - - .16
------------------------------------------------------------
Net income........................................... $ .62 $ .53 $ 1.40 $ 1.10
============================================================
EARNINGS PER SHARE - DILUTED:
Income from continuing operations.................... $ .61 $ .52 $ 1.38 $ .92
Income from discontinued operations.................. - - - .16
------------------------------------------------------------
Net income........................................... $ .61 $ .52 $ 1.38 $ 1.08
============================================================
Dividends paid per share............................... $ .26 $ .23 $ .52 $ .46
============================================================
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
2
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CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-----------------------------------------
(Dollars in millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 3,370.5 $ 3,700.4
Short-term investments............................................... 256.6 135.6
Accounts receivable, net of allowances
for doubtful amounts of $79.2 (2000)
and $79.9 (1999)................................................... 1,440.0 1,443.2
Other receivables.................................................... 218.4 399.6
Inventories.......................................................... 935.8 899.6
Deferred income taxes................................................ 170.4 240.3
Prepaid expenses..................................................... 360.4 236.8
-----------------------------------------
TOTAL CURRENT ASSETS................................................. 6,752.1 7,055.5
OTHER ASSETS
Prepaid retirement................................................... 894.8 741.1
Investments.......................................................... 615.9 180.3
Goodwill and other intangibles, net of
allowances for amortization of
$111.1 (2000) and $107.6 (1999).................................... 106.3 118.6
Sundry............................................................... 668.6 748.2
-----------------------------------------
2,285.6 1,788.2
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress........................................... 7,468.5 7,347.3
Less allowances for depreciation..................................... 3,476.6 3,365.8
-----------------------------------------
3,991.9 3,981.5
-----------------------------------------
$13,029.6 $12,825.2
=========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings................................................ $ 50.1 $ 241.5
Accounts payable..................................................... 390.0 445.5
Employee compensation................................................ 374.4 489.3
Dividends payable.................................................... 293.2 283.0
Income taxes payable................................................. 1,489.1 1,445.3
Other liabilities.................................................... 999.8 1,030.8
-----------------------------------------
TOTAL CURRENT LIABILITIES............................................ 3,596.6 3,935.4
LONG-TERM DEBT.......................................................... 2,797.4 2,811.9
DEFERRED INCOME TAXES................................................... 133.9 137.0
RETIREE MEDICAL BENEFIT OBLIGATION...................................... 115.2 115.7
OTHER NONCURRENT LIABILITIES............................................ 873.0 812.2
-----------------------------------------
3,919.5 3,876.8
COMMITMENTS AND CONTINGENCIES........................................... - -
SHAREHOLDERS' EQUITY
Common stock......................................................... 705.7 682.0
Additional paid-in capital........................................... 2,610.0 -
Retained earnings.................................................... 5,631.0 4,985.6
Employee benefit trust............................................... (2,635.0) -
Deferred costs--ESOP................................................. (137.7) (139.9)
Accumulated other comprehensive income............................... (553.1) (406.4)
-----------------------------------------
5,620.9 5,121.3
Less cost of common stock in treasury................................ 107.4 108.3
-----------------------------------------
5,513.5 5,013.0
-----------------------------------------
$13,029.6 $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>
Six Months Ended
June 30,
2000 1999
------------------------------
(Dollars in millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................... $ 1,511.7 $ 1,202.1
Adjustments to Reconcile Net Income to Cash
Flows from Operating Activities:
Changes in operating assets and liabilities........................ (182.8) (699.5)
Depreciation and amortization...................................... 237.4 224.4
Change in deferred taxes........................................... 87.7 9.5
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......................................................... (28.3) 5.0
------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 1,411.3 607.1
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment............................ (276.0) (194.0)
Purchase of investments............................................ (726.8) (34.8)
Proceeds from sale of investments.................................. 497.5 123.6
Other, net......................................................... (66.1) (111.3)
Proceeds from sale of PCS.......................................... - 1,600.0
------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................ (571.4) 1,383.5
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid..................................................... (563.3) (502.2)
Purchase of common stock and other capital
transactions.................................................... (502.4) (1,092.4)
Issuances under stock plans........................................ 120.4 201.9
Net change in short-term borrowings................................ (186.8) (19.5)
Net repayments of long-term debt................................... (14.0) (1.1)
------------------------------
NET CASH USED FOR FINANCING ACTIVITIES............................. (1,146.1) (1,413.3)
Effect of exchange rate changes on cash and cash equivalents....... (23.7) (41.3)
------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (329.9) 536.0
Cash and cash equivalents at January 1............................. 3,700.4 1,495.7
------------------------------
CASH AND CASH EQUIVALENTS AT JUNE 30............................... $ 3,370.5 $ 2,031.7
==============================
</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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net income....................................................... $666.2 $576.4 $1,511.7 $1,202.1
Other comprehensive loss/1/...................................... (58.5) (35.8) (146.7) (178.4)
------------------------------------------------------------------
Comprehensive income............................................. $607.7 $540.6 $1,365.0 $1,023.7
==================================================================
</TABLE>
/1/The significant component of other comprehensive loss was a loss of $50.6
million and $120.5 million from foreign currency translation adjustments for the
three months and six months ended June 30, 2000, respectively, as compared to a
loss of $38.7 million and $172.9 million for the three months and six months
ended June 30, 1999, respectively.
See Notes to Consolidated Condensed Financial Statements.
5
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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 $35 million and $30 million, respectively, for the three
months ended June 30, 2000 and 1999 and $80 million and $70 million,
respectively, for the six months ended June 30, 2000 and 1999.
SALES BY PRODUCT CATEGORY
Worldwide sales by product category for the three months and six months of 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Net sales - to unaffiliated customers
Neurosciences................................................. $1,236.4 $1,133.0 $2,340.6 $2,177.7
Endocrinology................................................. 648.7 494.2 1,224.0 887.4
Anti-infectives............................................... 221.6 226.5 454.2 496.8
Cardiovascular................................................ 149.0 157.5 307.0 308.1
Animal health................................................. 151.3 139.4 306.7 286.0
Oncology...................................................... 114.1 93.7 255.3 214.9
Gastrointestinal.............................................. 85.6 81.3 153.5 192.8
Other pharmaceuticals......................................... 14.8 16.0 31.3 33.5
---------------------------------------------------------------
Net sales........................................................ $2,621.5 $2,341.6 $5,072.6 $4,597.2
===============================================================
</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 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 was appealed to the Court of
Appeals for the Federal Circuit. 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. 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 intends to pursue its options for further
appeals of this decision, which include requesting a rehearing by the Court of
Appeals and/or petitioning the U.S. Supreme Court for a writ of certiorari.
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 2003 patent is invalid and unenforceable. 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. In
November 1999, Lilly filed a lawsuit against Cheminor Drugs and Schein
Pharmaceuticals, Inc., based on their ANDA filing for an additional dosage form.
In March 2000, another generic company, Alphapharm Pty., Ltd., 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 those two
companies. 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
suit against Alphapharm in Indianapolis. For more discussion on the expected
financial impact of the recent Court of Appeals ruling regarding Prozac, see
"Recent Development" under Part I, Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
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 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.
7
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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 $157.2 million at June 30, 2000. Estimated insurance recoverables
of approximately $82.8 million at June 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).
EMPLOYEE BENEFIT TRUST
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.
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 adopt SAB
No. 101 by the end of 2000. Currently, the company does not expect that SAB No.
101 will have a material effect on its reported earnings. However, it is
anticipated that the SEC will issue additional guidance in the third quarter of
2000 and the company will need to reevaluate the impact of SAB No. 101 at that
time.
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
8
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in the value of the hedged item) will be immediately recognized in earnings. The
company has determined that adopting Statement 133 and applying it to the
company's interest rate derivatives will not have a material effect on the
earnings and financial position of the company based on the interest rate
derivatives owned by the company at June 30, 2000. The effect of applying
Statement 133 to the company's foreign currency derivative instruments cannot be
determined at this time as foreign currency hedging instruments currently owned
by the company will expire prior to year-end.
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 Healtheon/WebMD Corporation
(Healtheon) in exchange for shares of Healtheon 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 Healtheon stock. The gain is
included in other income (expense) 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 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
(expense) 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 $666.2 million, or $.61 per share, for the
second quarter of 2000, compared with $576.4 million, or $.52 per share, for the
second quarter of 1999, representing increases in earnings and earnings per
share of 16 percent and 17 percent, respectively. Reported income from
continuing operations was $1.51 billion, or $1.38 per share, for the first six
months of 2000, compared with $1.03 billion, or $.92 per share, for the first
six months of 1999. Comparisons between the six 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 six
month periods of 2000 and 1999 would have been $1.36 billion, or $1.24 per
share, and $1.17 billion, or $1.05 per share, respectively. This represents
increases in earnings and earnings per share of 17 percent and 18 percent,
respectively, for the six month period. Income from continuing operations for
the quarter and six 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. Earnings per share
for the second quarter and
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six 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 six month periods of 2000 and 1999. These transactions are
summarized as follows (see "Unusual Items" 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 Healtheon and the subsequent sale of Healtheon 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 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 second quarter of 2000 increased 12 percent, to
$2.62 billion, compared with the second quarter of 1999. Sales growth was led
by Zyprexa, diabetes care products, Evista, and Gemzar, partially offset by
lower sales of Prozac, ReoPro, and anti-infectives. Sales in the U.S. increased
13 percent, to $1.65 billion, for the second quarter of 2000 compared with the
second quarter of 1999. Sales outside the U.S. increased 11 percent, to $967.8
million, for the second quarter of 2000, compared with the second quarter of
1999. Worldwide sales for the second quarter reflected volume growth of 15
percent, partially offset by an unfavorable exchange rate impact of 2 percent
and a 1 percent decline in global selling prices.
The company's reported sales for the first six months of 2000 increased 10
percent, to $5.07 billion, compared with the first six months of 1999. Sales
growth was led by diabetes care products, Zyprexa, Evista, and Gemzar, partially
offset by lower sales of Prozac, anti-infectives, and Axid. Sales in the U.S.
increased 12 percent, to $3.17 billion, for the six month period of 2000
compared with the six month period of 1999. Sales outside the U.S. increased 8
percent, to $1.91 billion, for the six month period of 2000, compared with the
six month period of 1999. Worldwide sales reflected volume growth of 13
percent, partially offset by an unfavorable exchange rate impact of 2 percent
and a 1 percent decline in global selling prices.
Worldwide sales of Prozac for the second quarter and six month period of 2000
were $627.4 million and $1.22 billion, respectively, representing decreases of 9
percent and 4 percent, compared with the same periods of 1999. Prozac sales in
the U.S. decreased 4 percent, to $539.8 million, for the quarter due to
continued competitive pressures and increased 3 percent, to $1.05 billion, for
the six month period due to abnormally low wholesaler buying during the first
quarter of 1999. Sales outside the U.S. decreased 31 percent, to $87.6 million,
for the quarter and 33 percent, to $175.8 million, for the six month period,
primarily due to continuing generic competition in the U.K. The company
continues to expect slight declines in worldwide Prozac sales in 2000 compared
with 1999. 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 the stocking patterns of wholesalers,
retailers, and consumers. See also "Recent Development" below.
Zyprexa had worldwide sales of $550.7 million and $1.01 billion for the second
quarter and six month period of 2000, respectively, representing increases of 40
percent and 27 percent, compared with the same periods of 1999. U.S. sales
increased 43 percent, to $396.6 million, for the quarter and 21 percent, to
$696.4 million, for the six month period. The sales comparisons in the U.S. for
the six month period were negatively affected by wholesaler stocking in the
first quarter of 1999. Sales outside the U.S. increased 33 percent, to $154.1
million, for the quarter and 42 percent, to $312.4 million, for the six month
period. During the
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second quarter of 2000, the company launched a new dispersible tablet form of
Zyprexa in Europe and received approval for the new formulation in the U.S.
Evista sales were $133.7 million for the second quarter of 2000 and $234.3
million for the six month period of 2000, representing increases of 101 percent
and 93 percent, respectively, over the same periods of 1999. These increases
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.
Additionally, Evista was launched in a number of European countries during the
second quarter of 2000 as a treatment for postmenopausal osteoporosis. While
most of the sales dollar growth for Evista occurred in the U.S., international
Evista sales reflected strong percentage growth.
Worldwide Gemzar sales were $107.9 million in the second quarter of 2000, an
increase of 25 percent, compared with the second quarter of 1999 and $243.9
million for the six month period of 2000, an increase of 21 percent, compared
with the six month period of 1999. Sales in the U.S. increased to $49.1
million, or 15 percent, for the quarter and $127.9 million, or 12 percent, for
the six month period. Sales outside the U.S. increased to $58.9 million, or 34
percent, for the quarter and $116.0 million, or 33 percent, for the six month
period.
ReoPro sales for the second quarter and six month period of 2000 were $104.5
million and $214.8 million, respectively, which reflected a decrease of 9
percent for the quarter while the six month period remained flat. The decline
in sales in the second quarter was due to increased competition in the U.S. For
the year, the company anticipates a decline in worldwide sales of ReoPro.
Diabetes care revenues, composed primarily of Humulin, Humalog, and Actos,
increased 24 percent, to $440.0 million, compared with the second quarter of
1999 and 35 percent, to $845.7 million, compared with the six month period of
1999. Diabetes care revenues increased 20 percent and 38 percent in the U.S.,
to $265.2 million and $504.1 million, for the quarter and six month period,
respectively. Sales increased 30 percent and 32 percent outside the U.S., to
$174.8 million and $341.5 million, for the quarter and six month period,
respectively. Worldwide Humulin sales of $265.0 million declined 5 percent for
the quarter due, in part, to U.S. wholesaler purchasing that benefited the
second quarter of 1999. Worldwide Humulin sales of $538.7 million increased 12
percent for the six month period. Worldwide Humalog sales of $76.7 million for
the quarter and $148.7 million for the six month period increased 52 percent and
60 percent, respectively. Sales of Humalog for the quarter and six 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 $75.2 million and $117.7
million, respectively, for the second quarter and six month period of 2000
relating to sales of Actos, a portion of which was attributed to the withdrawal
of a competitive product from the market in the first quarter of 2000. 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.
The second quarter growth in Actos revenues benefited from a periodic payment to
the company for past promotional activities.
For the second quarter and six month period of 2000, worldwide sales of anti-
infectives decreased 2 percent, to $221.6 million, and 9 percent, to $454.2
million, respectively, as a result of continuing competitive pressures. Sales
in the U.S. decreased 12 percent and 11 percent for the quarter and six month
period, respectively. Sales outside the U.S. increased 1 percent for the
quarter and decreased 8 percent for the six month period. Cefaclor and Lorabid
accounted for the majority of the decline in anti-infective sales.
Worldwide sales of Axid increased 5 percent, to $85.6 million, for the second
quarter of 2000, and decreased 20 percent, to $153.5 million, for the six month
period of 2000, compared with the same periods of 1999. The second quarter
increase in sales is due to an increase in sales outside the U.S.
For the second quarter of 2000, gross margins improved to 81.2 percent, compared
with 79.0 percent for the second quarter of 1999. For the six month period of
2000, gross margins improved to 80.3 percent, compared with 78.6 percent for the
six month period of 1999. The improved gross margin for both periods was
primarily the result of favorable product mix.
Operating expenses (the aggregate of research and development and marketing and
administrative expenses) increased 17 percent for the second quarter of 2000 and
16 percent for the six month period of
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2000, primarily due to worldwide sales force expansion and increased marketing
efforts. Investment in research and development increased 10 percent, to $508.8
million, for the second quarter and 11 percent, to $967.3 million, for the six
month period. Marketing and administrative expenses increased 22 percent from
the second quarter of 1999 and 19 percent from the six month period of 1999.
Net other income for the second quarter of 2000 increased $32.4 million, to
$74.0 million. Net other income for the six month period of 2000 increased
$50.0 million, to $134.3 million, excluding the first quarter 2000 gain on the
sale of Kinetra LLC 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 second quarters of 2000 and 1999, the effective tax rate was 22.0
percent. The effective tax rate for the six month period of 2000 was 19.4
percent compared with 19.8 percent for the six 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 six month periods.
FINANCIAL CONDITION
As of June 30, 2000, cash, cash equivalents and short-term investments totaled
$3.63 billion as compared with $3.84 billion at December 31, 1999. Cash flow
from operations of $1.41 billion was offset by dividends paid of $563.3 million,
shares repurchased of $502.4 million, a decrease in debt of $205.9 million, and
capital expenditures of $280.0 million. Total debt at June 30, 2000, was $2.85
billion, a decrease of $205.9 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.
RECENT DEVELOPMENT
Reference is made to the discussion of the Prozac patent litigation under Part
II, Item 1 of this Form 10-Q. On August 9, 2000, the U.S. Court of Appeals for
the Federal Circuit ruled that the company's compound patent on Prozac, expiring
February 2, 2001, is valid and enforceable but that the company's method of use
patent, expiring in December 2003, is invalid and unenforceable under the
doctrine of "double patenting." The company intends to pursue its avenues for
appeal of this decision. However, if the company is unsuccessful in reversing
the decision, Prozac will lose its U.S. patent protection after February 2,
2001. The company is eligible to receive an additional 180 days of U.S.
marketing exclusivity beyond the patent expiration, or through August 1, 2001,
under the terms of the Food and Drug Administration Modernization Act of 1997
("FDAMA"). In accordance with FDAMA the company has conducted clinical studies
of Prozac in
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<PAGE>
pediatric populations under a written request of the FDA. To obtain exclusivity,
the company must submit a report on these studies and the FDA must determine
that the studies have been conducted in accordance with the written request,
commonly accepted scientific principles and protocols, and the requirements of
FDAMA. Although the company expects to receive the additional 180 days of
exclusivity, there can be no assurance that this will occur.
The company expects that the entry of generic fluoxetine in the U.S. market will
result in a very substantial decline in Prozac sales in the United States.
Prozac sales in the U.S. represent a significant portion of the company's
overall sales, accounting for 21 percent of the company's consolidated worldwide
sales in the first six months of 2000. Based on current planning assumptions,
the company expects worldwide sales and earnings declines in the twelve months
following the entry of generic fluoxetine in the U.S. Assuming generic entry in
August, 2001, the company expects that sales and earnings increases in the first
half of 2001 and the last half of 2002 would more than offset the declines in
the last half of 2001 and first half of 2002. Therefore, the company
anticipates reporting single-digit sales and earnings per share growth in the
calendar years 2001 and 2002. The company believes that this development 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 any appeals of the Federal Circuit ruling; securing the additional
180 days of market exclusivity under FDAMA; 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.
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.
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. 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." The company intends to pursue its options
for further appeals of this decision, which include requesting a rehearing by
the Court of Appeals and/or petitioning the U.S. Supreme Court for a writ of
certiorari. Petitions for rehearing by the Court of
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Appeals for the Federal Circuit are rarely granted. Likewise, writs of
certiorari are rarely accepted by the U.S. Supreme Court for cases involving
questions of patent law. There can be no assurance that the Court of Appeals for
the Federal Circuit will rehear this matter or that the U.S. Supreme Court will
accept a writ of certiorari and hear the company's appeal. There can also be no
assurance that, if the case is accepted for review by either court, the decision
invalidating the 2003 patent will be reversed.
In late 1998, three additional generic manufacturers, 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 December 2003 patent is invalid and unenforceable. Also, in
January 1999, Novex Pharma, a division of Apotex, Inc. filed an ANDA asserting
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 Drugs and Schein Pharmaceuticals, Inc., based on their
ANDA filing for an additional dosage form. In March 2000, the company received
notice that another generic manufacturer, Alphapharm Pty., Ltd., 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 those two companies 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. Finally, in
August, 2000, the company filed suit against Alphapharm in federal court in
Indianapolis.
For more discussion on the expected financial impact of this litigation, see
"Recent Development" under Part I, Item 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
PRICING LITIGATION
Reference is made to the discussion entitled "Pricing Litigation" in Part I,
Item 3 of the company's 1999 annual report on Form 10-K, and Part II, Item 1 of
the company's Form 10-Q for the first quarter of 2000. Since the filing of the
first quarter 10-Q, a final settlement has been reached in the Mississippi case
brought by retailers.
Item 4. Submission of Matters to a Vote of Security Holders
The company held its annual meeting of shareholders on April 17, 2000. The
following is a summary of the matters voted on at the meeting:
(a) The four management nominees for Director were elected to serve three-year
terms ending in 2003, as follows:
<TABLE>
<CAPTION>
Nominee For Withhold Vote
---------------------- ----------- ------------------
<S> <C> <C>
Charles E. Golden 948,908,539 10,324,009
Kenneth L. Lay, Ph.D. 949,495,356 9,737,192
Sidney Taurel 948,928,713 10,303,835
Alva O. Way 948,164,686 11,067,862
</TABLE>
The terms of the following directors continued after the meeting: Steven
C. Beering, M.D.; Alfred G. Gilman, M.D., Ph.D.; Karen N. Horn, Ph.D.;
Franklyn G. Prendergast, M.D., Ph.D.; Kathi P. Seifert; and August M.
Watanabe, M.D.
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<PAGE>
(b) The appointment of Ernst & Young LLP as the company's principal independent
auditors was ratified by the following shareholder vote:
For: 953,939,922
Against: 1,824,627
Abstain: 3,467,999
(c) By the following vote, the shareholders approved management's proposal to
amend the 1998 Lilly Stock Plan:
For: 921,797,709
Against: 31,861,226
Abstain: 5,573,613
(d) By the following vote, the shareholders defeated a shareholder proposal
that the company endorse the CERES (Coalition for Environmentally
Responsible Economies) Principles:
For: 37,858,066
Against: 761,029,691
Abstain: 35,304,541
Broker Nonvotes: 125,040,250
(e) By the following vote, the shareholders defeated a shareholder proposal
requesting that the Board of Directors take the necessary steps to
declassify the Board:
For: 367,524,744
Against: 456,914,607
Abstain: 9,750,256
Broker Nonvote: 125,042,941
(f) By the following vote, the shareholders defeated a shareholder proposal
requesting that the company implement a policy of price restraint on
pharmaceuticals for individual consumers and institutional purchasers and
to report to the shareholders on prices and procedures for pharmaceutical
pricing:
For: 24,620,451
Against: 795,146,956
Abstain: 14,419,091
Broker Nonvote: 125,046,050
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<PAGE>
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 second quarter of 2000.
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<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 14, 2000 S/Alecia A. DeCoudreaux
--------------- -----------------------
Alecia A. DeCoudreaux
Secretary and Deputy General Counsel
Date August 14, 2000 S/Arnold C. Hanish
--------------- ------------------
Arnold C. Hanish
Executive Director, Finance and
Chief Accounting Officer
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<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
