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 QUARTER ENDED MARCH 31, 1996
COMMISSION FILE NUMBER 1-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA 35-0470950
(State or other jurisdiction 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
April 30, 1996:
Class Number of Shares Outstanding
----- ----------------------------
Common 552,523,346
1
PART I FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months
Ended March 31,
1996 1995
-----------------
(Dollars in millions
except per-share data)
Net sales $1,783.3 $1,717.3
Cost of sales 518.0 512.5
Research and development 276.0 236.7
Marketing and administrative 460.0 407.2
Interest expense 69.9 66.2
Other income - net (64.4) (33.2)
------- -------
1,259.5 1,189.4
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Income from continuing operations
before income taxes 523.8 527.9
Income taxes 134.6 153.1
----- -----
Income from continuing operations 389.2 374.8
Income from discontinued operations,
next of tax - 18.4
----- -----
Net income $389.2 $393.2
===== =====
Earnings per share:
Income from continuing operations $ .71 $ .65
Income from discontinued operations - .03
---- ----
Net income $ .71 $ .68
==== ====
Dividends paid per share $ .3425 $ .3225
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
Eli Lilly and Company and Subsidiaries
March 31, December 31,
1996 1995
----------------------------
(Millions)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 898.4 $ 999.5
Short-term investments 95.0 84.6
Accounts receivable, net of
allowances of $57.4 (1996)
and $55.1 (1995) 1,494.7 1,520.5
Other receivables 255.2 287.9
Inventories 843.7 839.6
Deferred income taxes 116.3 259.2
Prepaid expenses 144.2 147.3
------- -------
TOTAL CURRENT ASSETS 3,847.5 4,138.6
OTHER ASSETS
Prepaid retirement 486.6 484.2
Investments 578.7 573.8
Goodwill and other intangibles, net
of allowances for amortization of
$221.9 (1996) and $192.2 (1995) 4,114.2 4,105.2
Sundry 919.3 871.4
------- -------
6,098.8 6,034.6
PROPERTY AND EQUIPMENT
Land, buildings, equipment, and
construction-in-progress 6,837.4 6,828.3
Less allowances for depreciation 2,623.3 2,589.0
------- -------
4,214.1 4,239.3
------- -------
$14,160.4 $14,412.5
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 2,027.6 $ 1,908.8
Accounts payable 815.4 1,018.0
Employee compensation 202.5 316.0
Dividends payable - 189.1
Income taxes payable 593.4 660.5
Other liabilities 797.6 874.6
------- -------
TOTAL CURRENT LIABILITIES 4,436.5 4,967.0
LONG-TERM DEBT 2,576.2 2,592.9
DEFERRED INCOME TAXES 309.4 295.5
RETIREE MEDICAL BENEFIT OBLIGATION 137.7 147.8
OTHER NONCURRENT LIABILITIES 855.0 976.7
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock 355.6 355.6
Additional paid-in capital 351.0 418.3
Retained earnings 6,881.6 6,484.3
Deferred costs-ESOP (195.9) (199.5)
Currency translation adjustments (42.8) (0.6)
------- -------
7,349.5 7,058.1
Less cost of common stock in
treasury 1,503.9 1,625.5
------- -------
5,845.6 5,432.6
------- -------
$14,160.4 $14,412.5
======== ========
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
Three Months Ended
March 31,
1996 1995
---------------
(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $389.2 $393.2
Adjustments to Reconcile Net Income to
Cash
Flows from Operating Activities:
Changes in operating assets and (395.4) (288.5)
liabilities
Change in deferred taxes 157.2 60.9
Depreciation and amortization 132.7 140.1
Other items, net (62.7) (21.9)
----- -----
NET CASH FLOWS FROM OPERATING ACTIVITIES 221.0 283.8
CASH FLOWS FROM INVESTING ACTIVITIES
Net additions to property and equipment (101.1) (96.9)
Additions to sundry assets and (9.6) (3.4)
intangibles
Reduction of investments 55.5 129.9
Additions to investments (75.7) (57.0)
Acquisitions (86.0) (28.4)
---- ----
NET CASH USED FOR INVESTING ACTIVITIES (216.9) (55.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (187.6) (186.6)
Purchase of common stock and other
capital transaction (7.8) (22.4)
Net additions to short-term borrowings 109.6 412.2
Net reductions to long-term debt (0.4) (15.2)
----- ----
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES (86.2) 188.0
Effect of Exchange Rate Changes on Cash (19.0) 25.9
----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (101.1) 441.9
Cash and cash equivalents at January 1 999.5 536.9
----- -----
CASH AND CASH EQUIVALENTS AT MARCH 31 $898.4 $978.8
===== =====
See Notes to Consolidated Condensed Financial Statements.
4
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 flow in
conformity with generally accepted accounting principles. In
the opinion of management, the financial statements reflect all
adjustments (consisting only of normal recurring accruals) that
are necessary for a fair statement of the results for the
periods shown. The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial
statements and during the reporting period. Actual results
could differ from those estimates.
As a consequence of the 1995 divestiture, the operating results
of the Medical Device and Diagnostics businesses have been
reflected as "discontinued operations" in the Company's 1995
financial statements and have been excluded from consolidated
sales and expenses reflected therein.
As presented herein, sales include sales of the Company's life-
sciences products and service revenue from PCS Health Systems,
Inc. (PCS) and Integrated Medical Systems, Inc. (IMS).
CONTINGENCIES
The Company has been named as a defendant in numerous product
liability lawsuits involving primarily two products,
diethylstilbestrol and ProzacR. The Company has accrued for its
estimated exposure, including costs of litigation, with respect
to all current product liability claims. In addition, the
Company has accrued for certain future anticipated product
liability claims to the extent the Company can formulate a
reasonable estimate of their costs. The Company's estimates of
these expenses are based primarily on historical claims
experience and data regarding product usage. The Company expects
the cash amounts related to the accruals to be paid out over the
next several years. The majority of costs associated with
defending and disposing of these suits are covered by insurance.
The Company's estimate of insurance recoveries is based on
existing deductibles, coverage limits, and the existing and
projected future level of insolvencies among its insurance
carriers.
Under the Comprehensive Environmental Response, Compensation, and
Liability Act, commonly known as Superfund, the Company has been
designated as one of several potentially responsible parties with
respect to certain sites. Under Superfund, each responsible
party may be jointly and severally liable for the entire amount
of the cleanup. The Company also continues remediation of
certain of its own sites. The Company has accrued for estimated
Superfund cleanup costs, remediation, and certain other
environmental matters, taking into account, as applicable,
available information regarding site conditions, potential
cleanup methods, estimated costs, and the extent to which other
parties can be expected to contribute to the payment of those
costs. The Company has reached a settlement with its primary
liability insurance carrier providing for coverage for
certain environmental liabilities and has reserved its right to
pursue claims against its excess carriers. However, because of
uncertainties with respect to the timing and ultimate realization
of recoveries under the primary and excess policies, the Company
has not recorded any environmental insurance recoverables.
The Company has been named, along with numerous other U.S.
prescription drug manufacturers, as a defendant in a large number
of related actions brought by retail pharmacies alleging
violations of federal and state antitrust and pricing laws. The
federal suits include a class action on behalf of the majority of
U.S. retail pharmacies. The Company and several other
manufacturers agreed to settle the federal class action case and
the anticipated settlement was accrued in the fourth quarter of
1995. In April
5
1996, the U.S. District Court rejected the proposed settlement,
reversing the court's preliminary approval granted in February
1996. Thereafter, the Company and most of the original settling
defendants have reached a new tentative settlement, subject to
court approval, intended to address the court's objections to the
original settlement. The District Court has preliminarily
approved the new settlement and a final hearing on the settlement
has been scheduled for June 11, 1996. The new settlement
provides for payment of the same amount by the Company;
accordingly, amounts recorded for the anticipated settlement in
the fourth quarter of 1995 are unchanged at March 31, 1996.
Other related suits, brought by several thousand pharmacies,
involve claims of price discrimination or claims under other
pricing laws. Additional cases have been brought on behalf of
consumers in eight states.
The environmental liabilities and litigation accruals have been
reflected in the Company's consolidated balance sheet at the
gross amount of approximately $301.3 million at March 31, 1996.
Estimated insurance recoverables have been reflected as assets in
the consolidated balance sheet of approximately $125.6 million
at March 31, 1996.
Barr Laboratories, Inc. (Barr) has asserted a claim that the U.S.
patents covering Prozac, which are material to the Company, are
invalid and unenforceable. The Company has filed suit in federal
court in Indianapolis seeking a ruling that Barr's challenge to
Lilly's patents is without merit. While the Company believes
Barr's claims are without merit, there can be no assurance that
the Company will prevail. An unfavorable outcome of this claim
could have a material adverse effect on the Company's
consolidated financial position, liquidity, or results of
operations.
While it is not possible to predict or determine the outcome of
the product liability, antitrust, patent, or other legal actions
brought against the Company or the ultimate cost of environmental
matters, the Company believes that, except as noted above, the
costs associated with all such matters will not have a material
adverse effect on its consolidated financial position or
liquidity but could possibly be material to the results of
operations in any one accounting period.
EARNINGS PER SHARE
Earnings per share are calculated based on the weighted average
number of outstanding common shares. The number of shares of
common stock and per-share data have been restated for previously
reported periods to reflect the impact of the Company's two-for-
one stock split in the fourth quarter of 1995.
ACCOUNTING CHANGES
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". This statement requires that impairments,
measured using fair market value, are recognized whenever events
or changes in circumstances indicate that the carrying amount of
long-lived assets may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than
its carrying value. Adoption of this statement did not impact
the Company's consolidated results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Stock Based Compensation". This statement requires a company to
choose between two different methods of accounting for stock
options. The statement defines a fair-value-based method of
accounting for stock options but allows an entity to continue to
measure compensation cost for stock options using the accounting
prescribed by APB No. 25 (APB 25), "Accounting for Stock Issued
to Employees". The Company has elected to continue applying
accounting prescribed by APB No. 25.
6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations
OPERATING RESULTS OF CONTINUING OPERATIONS:
The Company's sales for the first quarter increased 4 percent as
compared with the first quarter of 1995. Sales inside the United
States were flat while sales outside of the United States
increased 10 percent. Compared with the first quarter of 1995,
volume increased 3 percent, foreign exchange rates had a
favorable effect of 1 percent, and prices remained stable.
Worldwide pharmaceutical sales increased 3 percent in the first
quarter compared with the same period last year. Contributing
significantly to the growth of worldwide pharmaceutical products
were Prozac and ReoProTM, a product launched in February 1995 that
prevents abrupt reclosure of the artery following angioplasty
procedures. Worldwide sales of Prozac in the first quarter of
1996 were $579 million, an increase of 27 percent over the first
quarter of 1995. The Company expects continued growth of Prozac
sales for the remainder of the year, but at a lower rate. Among
other major products, HumulinR declined 3 percent to $207
million; CeclorR declined 41 percent to $157 million; and AxidR
increased 5 percent to $150 million. PCS service revenues were
$73 million for the quarter, an increase of 16 percent.
U.S. pharmaceutical sales were relatively flat compared to the
first quarter of 1995 as decreased anti-infective sales (52
percent)and Humulin sales (16 percent) were offset by increased
Prozac (36 percent) and ReoPro sales. The decline in anti-
infective sales was driven largely by cefaclor, which experienced
a decrease of 84 percent compared to the previous year as a
consequence of intense generic competition and a flu season which
peaked in December 1995. Since May 1995, several companies have
been marketing generic forms of cefaclor in the United States and
quantities of the generic product have been greater than
anticipated by the Company. The Company expects that generic
cefaclor competition, together with strong competition from other
anti-infectives, will result in a continued decline in U.S.
cefaclor sales for the remainder of 1996. Although the impact of
competition cannot be predicted with certainty, it is not
expected to have a material adverse effect on the Company's 1996
consolidated results of operations. Sales of Humulin declined as
compared to the first quarter of 1995 due in part to wholesaler
purchasing patterns, which were affected by the timing of price
increases.
International pharmaceutical sales growth of 9 percent in the
first quarter was driven by Prozac and Humulin which increased 7
and 32 percent, respectively, as compared to the first quarter of
1995. International sales growth relates largely to volume
growth resulting from the Company's continued globalization
efforts.
Worldwide sales of animal health products increased 10 percent
over the first quarter of 1995. The increase resulted from
strong performance across a majority of the product line in
international markets.
Cost of sales decreased in the first quarter to 29.0 percent of
sales from 29.8 percent of sales in the same quarter of 1995.
This decrease is primarily the result of continued productivity
improvements and favorable impacts from changes in product mix
and foreign exchange rates. These improvements were partially
offset by increases in the cost of services at PCS.
Operating expenses increased 14 percent in the first quarter
compared with the same period in 1995. The increase reflects a
17 percent growth in research and development due to the large
number of compounds that have entered the later and more
expensive phases of clinical research to support the Company's
extensive pipeline of potential new products, including
raloxifene. Marketing and administrative expenses increased 13
percent from the first quarter of 1995 primarily due to
additional employee costs associated with expansion in new and
emerging markets, increased information technology capabilities,
and accruals for performance-related compensation.
7
Net other income for the quarter was $31.2 million more than that
of 1995. This increase relates largely to non-recurring income
received under a co-development and co-marketing contract and the
sale of U.S. marketing rights to TapazoleR.
The Company's estimated tax rate was 25.7 percent in the first
quarter of 1996 versus a tax rate of 29.0 percent in the first
quarter of 1995. The estimated effective tax rate for the first
quarter 1996 essentially equals the annual 1995 rate of 26
percent. The decline from the first quarter of 1995 is primarily
the result of changes in the mix of earnings between
jurisdictions having lower tax rates compared with those having
higher rates and the effectiveness of various tax planning
strategies. The Company expects current tax strategies will
allow its 1996 effective tax rate to remain approximately the
same as the 1995 annual rate.
For the first quarter of 1996, the growth in sales-related gross
margins, the reduced estimated tax rate and increased other
income was largely offset by the growth in operating expenses.
As a consequence, income from continuing operations reflected an
increase of 4 percent to $389.2 million and earnings per share
from continuing operations increased 9 percent to $0.71. After
considering the impact of income from discontinued operations
during the first quarter of 1995, net income decreased 1 percent
and earnings per share increased 4 percent for the first quarter
of 1996. Earnings per share calculations for the quarter
benefited by a reduction of approximately 32 million shares of
stock outstanding as a result of the Guidant split-off completed
in September, 1995.
FINANCIAL CONDITION
As of March 31, 1996, cash, cash equivalents, and short term
investments totaled $993.4 million as compared with $1,084.1
million at December 31, 1995. Total debt at March 31, 1996, was
$4,603.8 million, an increase of $102.1 million from December 31,
1995. The increase primarily reflects additional borrowings
necessary to fund normal seasonal operating needs. Short-term
debt aggregating $2,027.6 million is primarily in the form of
commercial paper.
The Company believes that cash generated from operations, along
with available cash and equivalents, will be sufficient to fund
essentially all the Company's operating needs, including debt
service, capital expenditures, and dividends for the remainder of
1996. The Company believes that amounts available through
existing commercial paper programs should be adequate to fund
maturities of short-term borrowings. The outstanding commercial
paper is also backed up by committed bank credit facilities.
8
PART II OTHER INFORMATION
--------------------------
Item 1.LEGAL PROCEEDINGS
-----------------
Reference is made to the discussion of the antitrust litigation
brought by retail pharmacies against the Company and numerous
other U.S. prescription pharmaceutical manufacturers, contained
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 under Part I, Item 3, "Legal Proceedings". The
Company and several other manufacturers agreed to settle the
federal class action case and the anticipated settlement was
accrued in the fourth quarter of 1995. The Company has not
engaged in any wrongdoing, nor is there an admission of
wrongdoing in the settlement agreement. Rather, the Company
entered into the settlement agreement for the purpose of avoiding
the expense and uncertainty typically associated with cases of
this size and complexity. In April 1996, the U.S. District Court
rejected the proposed settlement, reversing the court's
preliminary approval granted in February 1996. In addition, the
District Court denied the manufacturer defendants' motions for
summary judgment but granted summary judgment to the wholesaler
defendants. The District Court also postponed the May 7, 1996
trial date, and no new date has been set. Subsequent to the
District Court's rulings, the Company and most of the original
settling defendants have entered into a new tentative settlement
agreement, subject to court approval, which is intended to
address the District Court's objections to the original
settlement. The District Court has preliminarily approved the
new settlement and a final hearing on the settlement has been
scheduled for June 11, 1996. The new settlement provides for
payment of the same amount by the Company; accordingly, amounts
recorded in the fourth quarter of 1995 for the anticipated
settlement are unchanged at March 31, 1996.
In March 1996, the Federal Trade Commission (FTC) commenced a
non-public investigation focusing on the pricing practices at
issue in the litigation described above. The Company has been
informed by the FTC of the investigation; however, to date, no
requests for information have been received. Should any such
requests be made, the Company intends to cooperate fully with the
Commission's investigation.
In March 1996, the Company was informed by Barr Laboratories,
Inc., (Barr) that it had submitted an abbreviated new drug
application seeking to market a generic form of Prozac in the
U.S. market several years before the expiration of the Company's
patents. Barr has alleged that Lilly's U.S. patents covering
Prozac are invalid and unenforceable. On April 11, 1996, the
Company filed suit in the United States District Court in
Indianapolis seeking a ruling that Barr's challenge to Lilly's
patents is without merit. The compound patent expires in
February, 2001, and a patent for the mechanism of action by which
Prozac operates expires in December, 2003. These patents are
material to the Company. The Company believes that Barr's claims
are without merit and that the Company should be successful in
this litigation. However, as with any litigation, there can be
no assurance that the Company will prevail. An unfavorable
outcome of this claim could have a material adverse effect on the
Company's consolidated financial position, liquidity, or results
of operations.
In October 1995, Pfizer, Inc. sued PCS in the New York Supreme
Court for New York County alleging that PCS breached a 1994
rebate agreement between the companies. The suit sought
injunctive relief and damages. In April 1996, the court ordered
PCS to pay Pfizer an immaterial amount of damages and issued an
injunction ordering PCS to take certain steps to comply with the
rebate agreement. In the opinion of the Company, compliance with
the court order will not have a material adverse effect on the
consolidated financial position, liquidity, or results of
operations of the Company.
Reference is made to the federal action in the Northern District
of California filed by a California retail pharmacy against the
Company and PCS seeking divestiture of PCS by the Company. On
April 29, 1996, the District Court denied the motion to dismiss
filed by the Company and PCS.
9
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.The following documents are filed as exhibits to
-------- this Report:
3.1. Amended Articles of Incorporation (as amended
through April 15, 1996)
3.2. By-Laws (as amended through April 15, 1996)
11. Statement re: Computation of Earnings Per Share on
Primary and Fully Diluted Bases
12. Statement re: Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges
27. Financial Data Schedule
(b) Reports on Form 8-K
On January 12, 1996, the Company filed a Form 8-K
relating to the issuance and sale by Eli Lilly and
Company of $200,000,000 aggregate principal amount of its
6.57% Notes Due 2016 and $300,000,000 aggregate principal
amount of its 6.77% Notes Due 2036.
10
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 May 10,1996 S/Daniel P. Carmichael
------------ -------------------------------
Daniel P. Carmichael
Secretary and Deputy General Counsel
Date May 10, 1996 S/Arnold C. Hanish
------------- -------------------------------
Arnold C. Hanish
Director, Corporate Accounting and
Chief Accounting Officer
11
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit
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3.1. Amended Articles of Incorporation
3.2. By-Laws
11. Statement re: Computation of Earnings Per
Share on Primary and Fully Diluted Bases
12. Statement re: Computation of Ratio of Earnings
from Continuing Operations to Fixed Charges
27. Financial Data Schedule