The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the requirements of
Form 10-Q and therefore do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations, and cash flows in conformity with generally accepted
accounting principles. In the opinion of management, the financial
statements reflect all adjustments, all of which are of a normal
recurring nature, that are necessary for a fair statement of the
results of operations for the periods shown. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses and related disclosures at the date of the
financial statements and during the reporting period. Actual results
could differ from those estimates.
The Company operates in one significant business segment -
pharmaceutical products. Operations of the animal health business
are not material.
Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc.
(Geneva), have each submitted an Abbreviated New Drug Application
(ANDA) seeking FDA approval to market generic forms of Prozac
®
before the expiration of the Company's patents. The ANDAs assert that
two U.S. patents held by Lilly covering Prozac are invalid and
unenforceable. The Company filed suit against Barr and Geneva in
federal court in Indianapolis seeking a ruling that Barr's challenge
to Lilly's patents is without merit. On January 12, 1999, the trial
court granted summary judgment in favor of Lilly on two of the four
claims raised by Barr and Geneva against Lilly's patents. That
decision has been appealed. On January 25, 1999, Barr and Geneva
dismissed their other two claims in exchange for a $4 million
payment, which Barr and Geneva will share with a third defendant. In
late 1998, three additional generic pharmaceutical companies, Zenith
Goldline Pharmaceuticals, Inc., Teva Pharmaceuticals USA and
Cheminor Drugs, Ltd., together with one of its subsidiaries, filed
ANDAs for generic forms of Prozac, asserting that the later of the
two patents (expiring in December 2003) is invalid and
unenforceable. Finally, in early 1999, Novex Pharma, a division of
Apotex, Inc., changed its previously-filed ANDA to assert that both
the 2001 and 2003 patents are invalid and unenforceable. Lilly has
filed suits against the four companies in federal court in
Indianapolis. Those suits are in an early stage. A trial date of
October 30, 2000 has now been set for the cases involving Zenith
Goldline Pharmaceuticals, Inc., Teva Pharmaceuticals USA, and
Cheminor Drugs, Ltd. While the Company believes that the claims of
the six generic companies are without merit, there can be no
assurance that the Company will prevail. An unfavorable outcome of
this litigation could have a material adverse effect on the
Company's consolidated financial position, liquidity and results of
operations.
The Company has been named as a defendant in numerous product
liability lawsuits involving primarily two products,
diethylstilbestrol and Prozac. The Company has accrued for its
estimated exposure with respect to all current product liability
claims. In addition, the Company has accrued for 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.
Under the Comprehensive Environmental Response, Compensation, and
Liability Act, commonly known as Superfund, the Company has been
designated as one of several potentially responsible parties with
respect to less than 10 sites. Under Superfund, each responsible
party may be jointly and severally liable for the entire amount of
the cleanup. The Company also continues remediation of certain of
its own sites. The Company has accrued for estimated Superfund
cleanup costs, remediation and certain other environmental matters,
taking into account, as applicable, available information regarding
site conditions, potential cleanup methods, estimated costs and the
extent to which other parties can be expected to contribute to
payment of those costs. The Company has reached a settlement with
its primary liability insurance carrier providing for coverage for
certain environmental liabilities and has instituted litigation
seeking coverage from certain excess carriers.
The environmental liabilities have been reflected in the Company's
consolidated condensed balance sheet at the gross amount of
approximately $277.3 million at September 30, 1999. Estimated
insurance recoverables of approximately $226.9 million at September
30, 1999, have been reflected as assets in the consolidated
condensed balance sheet.
While it is not possible to predict or determine the outcome of the
patent, product liability, or other legal actions brought against
the Company or the ultimate cost of environmental matters, the
Company believes that, except as noted above, the costs associated
with all such matters will not have a material adverse effect
on its consolidated financial position or liquidity but could possibly
be material to the consolidated results of operations in any one
accounting period.
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).
In June 1998, Statement of Financial Accounting Standards ("
SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The statement permits early
adoption as of the beginning of any fiscal quarter after its
issuance. The statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. Hedge
ineffectiveness, the amount by which the change in the value of a
hedge does not exactly offset the change in the value of the hedged
item, will be immediately recognized in earnings. Statement 133 was
amended in June 1999, and is now required to be adopted in years
beginning after June 15, 2000. The Company has not yet determined
what the effect of Statement 133 will be on the consolidated
earnings and financial position of the Company or when the statement
will be adopted.
Effective January 1, 1999, the Company adopted the American
Institute of Certified Public Accountants Statement of Position
(SOP) 98-5, "Reporting the Costs of Start-up Activities."
The SOP requires that start-up costs capitalized prior to January 1,
1999 be written off and any future start-up costs be expensed as
incurred. The unamortized balance of start-up costs was written off
as of January 1, 1999. The effect of this change in accounting
principle on consolidated earnings was immaterial.
In November 1998, the Company signed a definitive agreement for
Rite Aid Corporation to acquire PCS, the Company's
health-care-management subsidiary, for $1.60 billion in cash. The
transaction closed on January 22, 1999, and generated a gain of
$174.3 million ($.16 per share), net of $8.7 million tax benefit, in
the first quarter of 1999. The results of operations from PCS prior
to the close of the sale were not material, and have been classified
as discontinued operations in the consolidated condensed statements
of income. The prior period has been restated.
The consolidated condensed balance sheet and consolidated condensed
statements of cash flows include PCS through the date of disposal.
Selected balances, excluding intercompany amounts, as of December
31, 1998 were as follows (in millions):
| Current assets
|
$
528.7
|
| Goodwill
|
1,397.4
|
| Total assets
|
2,026.5
|
| Current liabilities
|
886.3
|
SPECIAL CHARGES AND ASSET IMPAIRMENT CHARGE
During the first quarter, the Company recognized a pre-tax charge
of $150.0 million, which resulted from funding commitments made to
the Eli Lilly and Company Foundation, the non-profit foundation
through which the Company makes charitable contributions. The charge
for the funding commitment, which has been included in other expense
in the consolidated condensed statement of income, reduced earnings
per share by approximately $.09 in the first quarter of 1999.
During the first quarter, the Company also recognized a pre-tax
asset impairment charge of $61.4 million to adjust the carrying
value of certain manufacturing assets, in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." The asset impairment
charge reduced earnings per share by $.04 in the first quarter of
1999. The major portion of the charge related to the decommissioning
of a building previously used for antibiotic manufacturing, which
resulted from the consolidation of certain manufacturing processes.
The Company has no planned future use for the vacated building. The
fair value of the facility was estimated using a discounted cash
flow analysis.
During the third quarter of 1998, the Company announced a
collaboration with ICOS Corporation to jointly develop and
commercialize a phosphodiesterase type 5 (PDE 5) inhibitor as an
oral therapeutic agent for the treatment of both male and female
sexual dysfunction. The compound was in the development phase (Phase
II clinical trials) and no alternative future uses were identified.
As with many Phase II compounds, launch of the product, if
successful, was not expected in the near term. The Company's
payments to acquire rights to this compound were required to be
charged as an expense of $127.5 million, which reduced earnings per
share by approximately $.07, net of tax.
SALE OF MARKETING RIGHTS
During the third quarter, the Company recognized a pre-tax gain of
$67.8 million on the sale of the U.S. and Puerto Rican marketing
rights of Lorabid®
, an antibiotic used in the treatment of bacterial infections, to King
Pharmaceuticals, Inc. The gain, which has been included in other
income in the consolidated condensed statement of income, increased
earnings per share by approximately $.05 in the third quarter of
1999. The Company will manufacture Lorabid for King and has an
opportunity to receive additional payments if certain sales
performance milestones are achieved.
BORROWINGS
On August 5, 1999, a wholly-owned subsidiary ("Issuer")
of the Company issued $300 million Resettable Coupon Capital
Securities due 2029 and $525 million Floating Rate Capital
Securities due 2029.
The Resettable Coupon Capital Securities will pay cumulative
interest at an annual rate of 7.717 percent until August 1, 2004. At
this date and every fifth anniversary thereafter, the interest rate
will be reset equal to the weekly average interest rate of U.S.
treasury securities having an index maturity of five years for the
week immediately preceding the reset date plus a predetermined
spread. The securities may be redeemed by the Issuer on August 1,
2004, and anytime thereafter for a defined redemption price.
The Floating Rate Capital Securities will pay cumulative interest
at an annual rate equal to LIBOR plus a predetermined spread, reset
quarterly. The initial quarterly interest rate is 6.57 percent. The
securities may be redeemed at any time on or after August 5, 2004,
for a defined redemption price.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
SALE OF PCS HEALTH-CARE-MANAGEMENT BUSINESS
In November 1998, the Company signed a definitive agreement to sell
to Rite Aid Corporation the Company's PCS health-care-management
subsidiary for $1.60 billion in cash. The sale, which was completed
in January 1999, will allow the Company to further focus on
pharmaceutical innovation and the realization of optimal demand for
Company products in the marketplace. As a consequence of the
divestiture, the operating results of PCS have been reflected as
"discontinued operations" in the Company's financial
statements for all periods and have been excluded from consolidated
sales and expenses reflected therein. The Company recognized a gain
on disposal of $174.3 million, net of $8.7 million tax benefit,
which increased earnings per share by approximately $.16, net of
tax, in the first quarter of 1999.
OPERATING RESULTS FROM CONTINUING OPERATIONS:
The Company's sales for the third quarter of 1999 increased 10
percent from the third quarter of 1998. Sales in the U.S. increased
7 percent, while sales outside the U.S. increased 14 percent.
Compared with the third quarter of 1998, worldwide sales reflected
volume growth of 9 percent and a 2 percent increase in global
selling prices, offset by a 1 percent decrease in growth associated
with exchange rates.
The Company's sales for the first nine months of 1999 increased 9
percent compared with the same period in 1998. Sales in the U.S.
increased 8 percent, while sales outside the U.S. increased 11
percent. Compared with the first nine months of 1998, worldwide
sales reflected volume growth of 10 percent and a 1 percent decrease
in exchange rates while selling prices remained flat.
Worldwide pharmaceutical sales for the quarter were $2.43 billion
and for the nine month period were $6.74 billion, reflecting
increases of 10 percent and 9 percent, respectively, compared with
the same periods of 1998. Sales growth for the quarter and the nine
month period was led by Zyprexa®
, Gemzar®
, Evista®
, ReoPro®
, and diabetes care products. Revenue growth for the quarter and the
nine month period was partially offset by lower sales of Prozac and
Axid®
as well as lower sales of anti-infectives. Total U.S. pharmaceutical
sales for the quarter increased 7 percent, to $1.60 billion, and for
the nine month period increased 8 percent, to $4.30 billion. Growth
in both periods was primarily a result of increased volume.
International pharmaceutical sales for the quarter increased 16
percent, to $838.1 million, and for the nine month period increased
11 percent, to $2.44 billion, compared with the same periods in
1998. Volume increases were the primary reason for growth in both
periods.
Worldwide sales of Prozac were $690.2 million for the quarter and
$1.97 billion for the nine month period, representing decreases of
13 percent and 5 percent, respectively, compared with the same
periods of 1998. Prozac sales in the U.S. decreased 15 percent, to
$565.2 million, for the quarter and 5 percent, to $1.58 billion for
the nine month period. Prozac sales outside the U.S. decreased 2
percent for both the quarter and nine month period, to $125.0
million and $386.7 million, respectively. The decline in U.S. sales
in the third quarter was largely caused by wholesaler stocking that
occurred during the third quarter of 1998 creating a significant
adverse impact on third quarter sales comparisons in 1999. Prozac
sales in the U.S. were also adversely affected by increased
competition from new antidepressants. For both 1999 and 2000, the
Company expects slight declines in worldwide Prozac sales compared
to prior years due to increased competition from new antidepressants
in the U.S. Patent expirations occurring outside the U.S. in the
year 2000 will result in increased generic competition. 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.
Zyprexa posted worldwide sales of $502.9 million for the quarter
and $1.30 billion for the nine month period, representing increases
of 27 percent and 28 percent, respectively, over the same periods of
1998. U.S. sales of Zyprexa increased 19 percent for both the
quarter and nine month period, to $370.5 million, and $945.0
million, respectively, compared with the same periods of 1998. Sales
outside the U.S. increased 57 percent, to $132.4 million, for the
quarter and increased 65 percent, to $352.2 million, for the nine
month period. The Company expects continued strong sales growth for
Zyprexa for the full year 1999, but at a lower rate than the 98
percent achieved in 1998.
Worldwide ReoPro sales of $107.3 million for the quarter and $322.5
million for the nine month period reflected increases of 24 percent
and 25 percent, respectively, over the same periods of 1998. U.S.
sales of ReoPro increased 21 percent, to $85.9 million, and 20
percent, to $258.7 million, for the third quarter and nine month
period, respectively. International sales of ReoPro increased 35
percent, to $21.4 million, and 52 percent, to $63.8 million, for the
third quarter and nine month period, respectively.
Worldwide Gemzar sales of $119.2 million for the quarter and $320.1
million for the nine month period reflected increases of 72 percent
and 51 percent, respectively, over the same periods of 1998. Sales
in the U.S. increased 119 percent, to $71.3 million, for the quarter
and increased 59 percent, to $185.1 million, for the nine month
period, compared to the same periods of 1998. Gemzar U.S. sales
comparisons for the third quarter versus a year ago were affected by
U.S. wholesaler stocking that occurred during the second quarter of
1998. International sales increased 30 percent, to $47.9 million,
for the quarter and 41 percent, to $135.0 million, for the nine
month period.
Worldwide diabetes care revenues, composed of Humulin®
, Humalog®
, Iletin®
, and ACTOSTM increased 30 percent, to $374.1
million for the quarter, and increased 18 percent, to $962.6
million, for the nine month period. Diabetes care revenue in the
U.S. for the quarter increased 32 percent, to $234.8 million, and
for the nine month period increased 18 percent, to $570.5 million.
Diabetes care revenue outside the U.S. increased 27 percent, to
$139.3 million, for the quarter and increased 19 percent, to $392.1
million, for the nine month period. Worldwide Humulin sales
increased 22 percent, to $292.3 million, for the quarter and 14
percent, to $773.5 million, for the nine month period. U.S. Humulin
sales increased 22 percent for the quarter and 15 percent for the
nine month period. Humulin sales outside the U.S. increased 21
percent for the quarter and 13 percent for the nine month period.
Worldwide Humalog sales were $58.7 million for the quarter and
$151.6 million for the nine month period, representing increases of
84 percent and 76 percent for the quarter and nine month period,
respectively, compared with the same
periods of 1998. 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 co-promoted by the Company.
The Company received service revenues of $17.4 million for both the
quarter and nine month period.
For the quarter and the nine month period, worldwide sales of
anti-infectives decreased 2 percent, to $246.2 million, and 12
percent, to $743.5 million, respectively, compared with the same
periods of 1998, as a result of continuing competitive pressures.
U.S. and international anti-infectives sales declined 10 percent and
increased 2 percent, respectively, for the quarter, and declined 17
percent and 9 percent, respectively, for the nine month period.
Cefaclor and Lorabid accounted for the majority of the decline in
anti-infective sales, offsetting growth in Vancocin®
outside the U.S.
Evista sales increased $59.8 million, to $92.8 million, for the
quarter and increased $132.6 million, to $213.9 million, for the
nine month period. Evista was launched in the first quarter of 1998
in the U.S. for the prevention of osteoporosis in postmenopausal
women. On September 30, 1999, the Company received approval from the
U.S. FDA to promote Evista for the treatment of postmenopausal
osteoporosis. While most of the sales dollar growth for Evista was
in the U.S., international Evista sales reflect strong percentage
growth for both periods. The Company anticipates continued strong
growth in worldwide Evista sales for 1999.
Worldwide sales of Axid decreased 15 percent, to $82.0 million, for
the third quarter and decreased 13 percent, to $274.8 million, for
the nine month period, compared to the same periods for 1998.
Worldwide sales of animal health products of $149.5 million for the
quarter were essentially flat compared with the third quarter of
1998, and sales of $435.5 million for the nine month period
reflected a 2 percent increase over the same period of 1998.
Excluding unfavorable exchange rates, sales growth was 4 percent and
6 percent for the quarter and nine month period, respectively.
Higher than normal purchasing of the Company's products in the
remaining months of 1999 related to Y2K concerns may affect sales
and the results of operations in the fourth quarter of 1999 and
early 2000.
The third quarter of 1999 gross margin was 78.8 percent, a decrease
of 0.2 percentage points compared with the third quarter of 1998, as
unfavorable product mix was partially offset by improvements in
productivity and throughputs. Gross margin for the nine month period
was 78.7 percent, representing a 0.4 percentage point increase over
the nine month period of 1998, which was attributed to favorable
product mix and production efficiencies, as well as the expiration
of Humulin and Humalog royalties in August 1998.
Several significant transactions affect the nine month comparisons.
Two of these occurred during the first quarter of 1999. The first
charge relates to a pre-tax asset impairment charge of approximately
$61.4 million to adjust the carrying value of certain manufacturing
assets. The major portion of the charge related to the write-down of
a Clinton, Indiana manufacturing facility to its fair value, which
was estimated using a discounted cash flow analysis. This asset
impairment charge reduced earnings per share by approximately $.04
in the first quarter. The second pre-tax charge of $150.0 million
resulted from funding commitments made to the Eli Lilly and Company
Foundation, the non-profit foundation through which the Company
makes charitable contributions. The charge for the funding
commitment reduced earnings per share by approximately $.09 in the
first quarter of 1999. A third significant transaction took place
during the third quarter of 1999 when the Company recognized a
pre-tax gain of $67.8 million from the sale of Lorabid marketing
rights. The gain from this transaction increased earnings per share
by approximately $.05 in the third quarter. Finally, during the
third quarter of 1998, the Company announced a collaboration with
ICOS Corporation to jointly develop and commercialize a
phosphodiesterase type 5 (PDE 5) inhibitor as an oral therapeutic
agent for the treatment of both male and female sexual dysfunction.
The compound was in the development phase. The Company's payments to
acquire rights to this compound were required to be charged as an
expense of $127.5 million, which reduced earnings per share by
approximately $.07, net of tax. See "Special Charges and Asset
Impairment Charge" and "Sale of Marketing Rights" in
the Notes to Consolidated Condensed Financial Statements for
additional information.
Operating expenses increased 3 percent for the third quarter and 6
percent for the first nine months, excluding the first quarter asset
impairment charge and the 1998 third quarter acquired in-process
technology charge. Marketing and administrative expenses increased 4
percent for the third quarter and 5 percent for the first nine
months. The increases were due to increased spending to support new
product launches around the world and enhancements to the Company's
global information technology systems, including Y2K readiness
efforts. However, the impact of these increases was mitigated by
expense management initiatives and reduced incentive compensation
accruals.
Research and development investments increased 1 percent, to $442.9
million, for the third quarter, and 8 percent, to $1.32 billion, for
the first nine months, as the Company continues to build internal
and external capabilities. The reduced incentive compensation
accruals noted above significantly offset the expense growth. In
addition, Phase III clinical trials for certain compounds were
discontinued in the first half of 1999 which contributed to the
reduction in the growth rate for the third quarter. The Company
anticipates growth in research and development expense at a rate
less than sales growth for the full year 1999.
Interest expense was essentially flat for the third quarter and
decreased $3.2 million (2 percent) for the nine month period,
compared with the same periods of 1998. The Company anticipates an
increase in interest expense for the fourth quarter due to an
increase in borrowings in the third quarter.
Net other income for the third quarter of 1999 was $19.6 million,
excluding the income from the sale of Lorabid marketing rights, an
increase of $3.8 million, compared with the third quarter of 1998.
Net other income for the nine month period was $103.9 million,
excluding the charge for the funding commitment to the Eli Lilly and
Company Foundation and the income from the sale of Lorabid marketing
rights, representing a decrease of $7.5 million, compared with the
same period of 1998. The nine month period of 1998 benefited from
gains generated from the sale of investments.
For the third quarter of 1999, the Company's effective tax rate was
22 percent, which was 7.5 percentage points above the third quarter
of 1998. The effective tax rate comparison between the third quarter
1999 and the third quarter 1998 was impacted by the 1998 acquired
in-process technology charge of $127.5 million. Additionally, the
third quarter of 1998 benefited from a reduction of the estimated
effective tax rate for the year from 25 percent to approximately 23
percent. The effective tax rate for the nine month period was 21
percent, which was impacted by the $61.4 million asset impairment
charge, the $150.0 million funding commitment to Eli Lilly and
Company Foundation, the $67.8 million gain from the sale of Lorabid,
and the 1998 acquired in-process technology charge of $127.5
million. Excluding these items, the effective tax rate for the nine
month periods of 1999 and 1998 was 22 percent.
During the first quarter of 1998, the Company refinanced an ESOP
debenture, which resulted in a one-time extraordinary charge of $7.2
million net of a $4.8 million tax benefit ($.01 per share).
Third quarter net income was $732.6 million, or $.67 per share,
compared with $518.2 million for the third quarter of 1998, or $.46
per share. Net income for the third quarter of 1999 benefited from
increased sales and the $67.8 million gain on the sale of Lorabid
marketing rights while 1998 third quarter net income included the
acquired in-process technology charge of $127.5 million. In
addition, marketing and administrative expense increases were held
to 4 percent and research and development expense increases were
held to 1 percent compared to the third quarter of 1998 due to
expense management programs and lower incentive compensation
accruals in effect for 1999. These favorable variances were offset
by a higher effective tax rate compared to the third quarter of
1998. Excluding the third quarter gain on the sale of Lorabid of
$67.8 million and the 1998 third quarter acquired in-process
technology charge of $127.5 million, net income and earnings per
share for the third quarter increased 15 percent and 17 percent,
respectively, as compared to 1998. Net income for the nine month
period was $1.93 billion, or $1.75 per share, compared to $1.53
billion, or $1.36 per share, for the same period of 1998. The
results for the nine month period of 1999 were affected by the
previously mentioned gain on disposal of the PCS
health-care-management business of $174.3 million, the pre-tax asset
impairment charge of $61.4 million, the pre-tax charge for funding
commitments to the Eli Lilly and Company Foundation of $150 million,
and the pre-tax gain from the sale of Lorabid marketing rights of
$67.8 million. Excluding these non-recurring items, the 1998
discontinued operations and the 1998 acquired in-process technology
charge, net income and earnings per share for the nine month period
increased 15 percent and 17 percent, respectively, as compared to
1998. For the nine month period of 1999, net income was favorably
impacted by increased sales, improved margins and a lower effective
tax rate. Earnings per share for the third quarter and nine month
period of 1999 benefited from a lower number of shares outstanding
resulting from the Company's share repurchase programs.
FINANCIAL CONDITION
As of September 30, 1999, cash, cash equivalents and short-term
investments totaled $3.36 billion as compared with $1.60 billion at
December 31, 1998. The net increase in cash was due primarily to
$1.60 billion received from the sale of PCS, proceeds of $825.0
million from the third quarter debt offering, and operating cash
flow of $1.55 billion, which was offset by $751.5 million in
dividends paid and $1.04 billion in shares repurchased. The purchase
of shares was pursuant to the Company's plan to repurchase shares of
approximately $1.5 billion in 1999. Total debt at September 30,
1999, was $3.16 billion, an increase of $795.0 million from December
31, 1998. See "Borrowings" in the Notes to Consolidated
Condensed Financial Statements for additional information.
The Company believes that cash generated from operations in 1999,
along with available cash and cash equivalents, will be sufficient
to fund essentially all of the 1999 operating needs, including debt
service, capital expenditures, share repurchases, and dividends.
YEAR 2000 READINESS DISCLOSURE
Many of the Company's global information technology (IT) systems
and non-IT systems, including laboratory and process automation
devices, have required modification or replacement in order to
render the systems ready for the year 2000 (Y2K). In late 1996, the
Company initiated a comprehensive program to reduce the likelihood
of a material impact on the business. The numerous activities that
are intended to enable the Company to obtain Y2K readiness utilize
both internal and external resources and are being centrally managed
through a program office. Monthly reports are made to senior
management and a business council comprising various management
representatives. In addition, regular reports are made to the audit
committee of the board of directors.
The Company's inventory of IT systems, including software
applications, has been divided into various categories. Those most
critical to the Company's global operations were generally assessed
and renovated, when necessary, first. The Company has instituted a
process to monitor all critical and essential replacement and
upgrade projects of existing systems to assist in managing them
toward completion in a timely manner. The Company has completed
renovation of substantially all of its applications that needed some
form of renovation. The Company anticipates that the remaining
applications will be completed by year-end.
The most important non-IT systems are various laboratory and
process automation devices. The Company has completed a global
assessment of all devices. Based on this assessment, only a small
percentage (15 percent) of all automation devices appear to require
upgrade or replacement. As of September 30, 1999, the Company had
completed remediation of the critical devices which represents 100%
of the devices that are available to be fixed. The remaining devices
are scheduled for completion throughout the remainder of 1999 during
routine scheduled maintenance.
The representatives of the program office have visited numerous
global sites to assess the progress being made toward site
readiness. In addition, several global training programs have
occurred to foster the consistent application of the chosen
methodologies. The Company is actively participating in industry
efforts in the U.S. to communicate with advocacy groups, as well as
governmental groups, about the readiness of the Company and industry
as a whole.
The Company mailed letters to thousands of vendors, service
providers and customers to determine the extent to which they are
prepared for the Year 2000 issue. These activities are being
coordinated through a global network of regional site and functional
coordinators. Many responses have been received and the Company has
identified the vendors, service providers and customers that are
critical to the Company through a business impact analysis. At
September 30, 1999, all contingency plans have been completed for
the Company's critical vendors.
The Company has completed a comprehensive risk management analysis
of the operational problems and costs (including loss of revenues)
that would be reasonably likely to result from the failure by the
Company and certain third parties to complete efforts necessary to
achieve Year 2000 compliance on a timely basis or from abnormal
wholesaler or consumer buying patterns in anticipation of the Year
2000. Contingency plans have been developed for the Company and its
critical vendors, customers and suppliers to address the flow of
products to the consumer. The contingency planning involves a
multifaceted approach, which includes additional purchases of raw
materials and/or locating inventories of products closer to the
consumer. The Company has made the decision to increase inventories
of certain key products in order to have additional finished stock
in the event excessive consumer purchasing occurs in late 1999.
Business continuity plans have been developed to address the
Company's approach for dealing with extended disruptions. In
addition, "rapid response" teams are being established to
respond to any issues that occur around the millennium. The Company
has completed its analysis and has contingency plans in place.
The costs of the Company's Year 2000 efforts are based upon
management's best estimates, which are derived using numerous
assumptions regarding future events, including the continued
availability of certain resources, third-party remediation plans and
other factors. There can be no assurance that these estimates will
prove to be accurate, and actual results could differ materially
from those currently anticipated. The
Company currently estimates it will spend between $160 and $175
million over the life of the program and that approximately 80
percent to 85 percent of the anticipated costs were incurred by
September 30, 1999. Expenses associated with addressing the Year
2000 issues are being recognized as incurred.
The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the Company's results of operations. In addition,
higher than normal purchasing of the Company's products during the
fourth quarter of 1999 could result in localized inventory
imbalances in the supply chain resulting in the Company's temporary
inability to allocate product to where it is needed. Due to the
uncertainty inherent in the Year 2000 problem, the Company is unable
to determine, at this time, whether the consequences of Year 2000
failures will have a material impact on the Company's results of
operations. The Year 2000 project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000
problem, and, in particular, about the Year 2000 compliance and
readiness of its vendors, service suppliers and customers. The
Company believes that, with the completion of the project as
scheduled, the possibility of a material interruption of normal
operations has been reduced.
EURO CONVERSION
On January 1, 1999, 11 European nations adopted a common currency,
the euro, and formed the European Economic and Monetary Union (EMU).
For a three-year transition period, both the euro and individual
participants' currencies will remain in circulation. After July 1,
2002, at the latest, the euro will be the sole legal tender for EMU
countries. The adoption of the euro will affect a multitude of
financial systems and business applications as the commerce of these
nations will be 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.
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
PRICING LITIGATION
Reference is made to the discussion of the retail pharmacy
litigation, "In re Brand Name Prescription Drugs Antitrust
Litigation (MDL No.997)" and related cases, contained in the
Legal Proceedings portions of the Company's Form 10-K for the year
ended December 31, 1998, Form 10-Q for the quarter ended March 31,
1999, and Form 10-Q for the quarter ended June 30, 1999. Settlement
in a state court case in Tennessee has been approved and the case
dismissed; a state court case in another district in Tennessee is
still pending.
Item 6. Exhibits and Reports on Form 8-K
| (a) |
Exhibits. The following documents are filed
as exhibits to this Report: |
| |
|
|
| |
4.
|
Form of Indenture between Lilly del Mar,
Inc. and Citibank, N.A., Trustee, dated August 5, 1999, relating
to Resettable Coupon Capital Securities due 2029 and Floating Rate
Capital Securities due 2029 |
| |
|
|
| |
11.
|
Statement re: Computation of Earnings Per Share |
| |
|
|
| |
12.
|
Statement re: Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges |
| |
|
|
| |
27.
|
Financial Data Schedule |
| |
|
|
| |
99.
|
Cautionary Statement Under Private Securities
Litigation Reform Act of 1995 - "Safe Harbor" for
Forward-Looking Disclosures |
| |
|
|
| (b) |
Reports on Form 8-K.
|
| |
|
| |
The Company filed no
reports on Form 8-K during the third quarter of 1999. |
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 12, 1999
|
|
S/Alecia A. DeCoudreaux
Alecia A. DeCoudreaux
Secretary and Deputy General Counsel |
| |
|
|
|
| Date
|
November 12, 1999
|
|
S/Arnold C. Hanish
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer |
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
|
Exhibit
|
| 4. |
Form of Indenture between Lilly del Mar, Inc. and
Citibank, N.A., Trustee, dated August 5, 1999, relating to
Resettable Coupon Capital Securities due 2029 and Floating Rate
Capital Securities due 2029* |
| 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 |
| * |
This Exhibit is not filed with this Report. Copies
will be furnished to the Securities and Exchange Commission upon
request. |
EXHIBIT 11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------
(Dollars in millions except per-share data)
BASIC
Net income...................................................... $ 732.6 $ 518.2 $1,934.7 $1,530.6
Preferred stock dividends....................................... - (.2) (.1) (1.5)
-------------------------------------------------
Adjusted net income............................................. $ 732.6 $ 518.0 $1,934.6 $1,529.1
=================================================
Average number of common shares outstanding..................... 1,084.1 1,091.6 1,088.9 1,096.9
Contingently issuable shares.................................... - - .4 .4
-------------------------------------------------
Adjusted average shares......................................... 1,084.1 1,091.6 1,089.3 1,097.3
=================================================
Basic earnings per share........................................ $ .68 $ .47 $ 1.78 $ 1.39
=================================================
DILUTED
Net income...................................................... $ 732.6 $ 518.2 $1,934.7 $1,530.6
Preferred stock dividends....................................... - (.2) (.1) (1.5)
-------------------------------------------------
Adjusted net income............................................. $ 732.6 $ 518.0 $1,934.6 $1,529.1
=================================================
Average number of common shares outstanding..................... 1,084.1 1,091.6 1,088.9 1,096.9
Incremental shares - stock options and contingently
issuable shares............................................... 16.3 26.6 19.1 27.6
-------------------------------------------------
Adjusted average shares......................................... 1,100.4 1,118.2 1,108.0 1,124.5
=================================================
Diluted earnings per share...................................... $ .67 $ .46 $ 1.75 $ 1.36
=================================================
Shares in millions.
18
EXHIBIT 12. STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS FROM CONTINUING
OPERATIONS TO FIXED CHARGES
(Unaudited)
Eli Lilly and Company and Subsidiaries
(Dollars in millions)
Nine Months
Ended
September
30, Years Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995 1994
-------------------------------------------------------------------
Consolidated Pretax
Income from Continuing
Operations before
Extraordinary Item.................. $2,221.7 $2,665.0 $2,901.1 $2,131.3 $1,866.6 $1,693.3
Interest from Continuing
Operations and Other
Fixed Changes....................... 152.6 198.3 253.1 323.8 323.9 128.7
Less Interest Capitalized
during the Period from
Continuing Operations............... (19.8) (17.0) (20.4) (35.8) (38.3) (25.4)
-------------------------------------------------------------------
Earnings.............................. $2,354.5 $2,846.3 $3,133.8 $2,419.3 $2,152.2 $1,796.6
===================================================================
Fixed Charges /1/..................... $ 152.7 $ 200.5 $ 256.8 $ 328.5 $ 323.9 $ 128.7
===================================================================
Ratio of Earnings to
Fixed Charges....................... 15.4 14.2 12.2 7.4 6.6 14.0
===================================================================
/1/ Fixed charges include interest from continuing operations for all years
presented and beginning in 1996, preferred stock dividends.
19
EXHIBIT 99. CAUTIONARY STATEMENT UNDER PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 - "SAFE HARBOR" FOR
FORWARD-LOOKING DISCLOSURES
Certain forward-looking statements are included in this Form 10-Q and may be
made by Company spokespersons based on current expectations of management. All
forward-looking statements made by the Company are subject to risks and
uncertainties. Certain factors, including but not limited to those listed
below, may cause actual results to differ materially from current expectations
and historical results.
- - Competitive factors, including generic competition as patents on key
products, such as Prozac, expire; pricing pressures, both in the U.S. and
abroad, primarily from managed care groups and government agencies; and new
patented products or expanded indications for existing products introduced
by competitors, which can lead to declining demand for the Company's
products.
- - Changes in inventory levels maintained by pharmaceutical wholesalers as a
result of wholesaler buying patterns, which can cause reported sales for a
particular period to differ significantly from underlying prescriber
demand.
- - Economic factors over which the Company has no control, including changes
in inflation, interest rates and foreign currency exchange rates, and
overall economic conditions in volatile areas such as Latin America.
- - Governmental factors, including laws and regulations and judicial decisions
at the state and federal level related to Medicare, Medicaid and health
care reform that could adversely affect pricing and reimbursement of the
Company's products; and laws and regulations affecting international
operations.
- - The difficulties and uncertainties inherent in new product development. New
product candidates that appear promising in development may fail to reach
the market or may have only limited commercial success because of efficacy
or safety concerns, inability to obtain necessary regulatory approvals,
difficulty or excessive costs to manufacture, or infringement of the
patents or intellectual property rights of others.
- - Delays and uncertainties in the FDA approval process and the approval
processes in other countries, resulting in lost market opportunity.
- - Unexpected safety or efficacy concerns arising with respect to marketed
products, whether or not scientifically justified, leading to product
recalls, withdrawals or declining sales.
- - Legal factors including unanticipated litigation of product liability or
other liability claims; antitrust litigation; environmental matters; and
patent disputes with competitors which could preclude commercialization of
products or negatively affect the profitability of existing products. In
particular, while the Company believes that its U.S. patents on Prozac are
valid and enforceable, there can be no assurance that the Company will
prevail in the various legal challenges to those patents.
- - Future difficulties obtaining or the inability to obtain existing levels of
product liability insurance.
- - Changes in tax laws, including laws related to the remittance of foreign
earnings or investments in foreign countries with favorable tax rates, and
settlements of federal, state, and foreign tax audits.
- - Changes in accounting standards promulgated by the Financial Accounting
Standards Board, the Securities and Exchange Commission, and the American
Institute of Certified Public Accountants which are adverse to the Company.
- - Internal factors such as changes in business strategies and the impact of
restructurings and business combinations.
- - The Company's statement that it expects to complete the Year 2000
modifications before December 31, 1999, is based on management's best
estimate, which was derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and
20
other factors. However, there can be no guarantee that timely completion
will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the ability to locate and correct all
relevant computer codes and the successful completion by key third parties
of their own Year 2000 modifications.
- - Uncertainty surrounding the extent to which Y2K concerns will lead to
higher than normal buying patterns for the Company's products in the
remaining months of 1999, affecting results of operations in the latter
half of 1999 and early 2000.
21
5
1,000
9-MOS
DEC-31-1999
JAN-01-1999
SEP-30-1999
3,291,948
66,278
1,455,926
60,095
1,029,269
6,595,337
7,210,154
3,321,531
12,330,760
3,187,434
2,816,189
0
0
682,363
4,184,094
12,330,760
7,182,449
7,182,449
1,532,771
1,532,771
3,316,870
0
132,833
2,221,702
461,257
1,760,445
174,296
0
0
1,934,741
1.78
1.75
