01—Abstract
Summary
Summary of the 10-K filed March 25, 1996. Cited figures are marked; the original filing is the authoritative source.
Eli Lilly's 1995 10-K reflects a company that completed a major portfolio reshaping while growing its core pharmaceutical business strongly.
Worldwide net sales rose 18% to $6.76 billiona, driven by a 17% increase in unit volume, with Prozac (up 24% to about $2.1 billion) leading growth. Income from continuing operations rose 10% to $1.31 billion, or $2.30 per share. Reported net income more than doubled to $2.29 billion ($4.03 per share), but this was inflated by a $921.5 million after-tax gain from the divestiture of the Medical Device and Diagnostics businesses, primarily the September 1995 Guidant splitoff.
Investors should therefore focus on the continuing-operations figures when judging underlying earnings power. The balance sheet and cash flow profile remain sound. Cash, equivalents and short-term investments reached $1.1 billionb, total debt fell $348.5 million to $4.5 billion largely because Guidant debt left the company, and operating cash flow was $1.82 billion.
However, interest expense rose to $286.3 millionc after the 1994 $4.1 billion PCS Health Systems acquisition, and goodwill amortization weighed on other income. Management guided that R&D spending will grow faster than sales for at least the next year as raloxifene and olanzapine advance through late-stage trials. The main risks are pricing and legal exposure.
U.S. cefaclor sales fell 42% to $227.5 milliond under generic competition, and management expects that decline to continue in 1996. Managed-care and Medicaid discounts are expected to rise, and the company faces a large set of antitrust and pricing suits, including a federal class action settled for an immaterial amount. Patent protection for Prozac (2001), Axid (2002) and Lorabid (2006) will eventually expire, so the company's long-term growth depends on its pipeline.
02—Key points
Key Highlights
- Net sales rose 18% to $6,763.8 million, with unit volume up 17% and prices down 1%; sales outside the U.S. grew 21% to $3.0 billion
- Income from continuing operations rose 10% to $1,306.6 million ($2.30 per share), while reported net income of $2,290.9 million ($4.03 per share) included a $921.5 million after-tax gain on the MDD divestiture
- Prozac sales increased 24% to about $2.1 billion, and the pharmaceutical segment grew about 19% overall; Humulin, Axid and Humatrope also posted solid gains
- U.S. cefaclor sales fell 42% to $227.5 million due to generic competition, and management expects further declines in 1996
- Interest expense rose to $286.3 million from $103.8 million following the PCS Health Systems acquisition, and total debt declined $348.5 million to $4.5 billion
- R&D spending rose 24% to $1,042.3 million, and management expects R&D growth to exceed sales growth for at least the next year
- Operating cash flow was $1.82 billion, and cash plus short-term investments totaled $1.1 billion; the 1996 dividend outlook is supported by continued cash generation
03—Questions
Frequently Asked Questions
How much of the 1995 net income increase reflects the underlying business?
Very little. Reported net income of $2.29 billion includes a $921.5 million after-tax gain from divesting the Medical Device and Diagnostics businesses, mainly Guidant. Income from continuing operations grew 10% to $1.31 billion, and EPS from continuing operations rose 12% to $2.30. Those figures better represent the recurring earnings base.
What are the main growth drivers and threats to the product portfolio?
Prozac is the main growth driver, with sales up 24% to about $2.1 billion. Insulin products (Humulin, Humatrope) and Axid also grew well. The main threat is cefaclor, whose U.S. sales fell 42% under generic competition. Compound patents for Prozac (2001), Axid (2002) and Lorabid (2006) limit the timeline for these products.
Is the company's balance sheet and debt position under pressure?
Debt is manageable but higher than before the PCS acquisition. Total debt fell to $4.5 billion, and management says operating cash flow covers debt service, capital expenditures and dividends. Interest expense more than doubled to $286.3 million, and the company's credit ratings were lowered in 1994 to AA (S&P) and Aa3 (Moody's).
What regulatory, pricing or legal risks could affect future results?
The company faces growing managed-care and Medicaid discounts, which management expects to increase in 1996. It is defendant in large antitrust and pricing suits brought by pharmacies and consumers, and in product liability suits involving DES and Prozac. Management says these actions will not materially affect financial position, but they could be material to results in a single period.
What is the outlook for research spending and tax rate?
R&D expenses are expected to grow faster than sales for at least the next year as raloxifene moves into final-stage clinical trials. The effective tax rate fell to 26% in 1995, and management expects the 1996 rate to be roughly the same.
04—Continue