Why did Lilly report a net loss in 1997?

The loss was driven by a roughly $2.44 billion noncash impairment charge to write down goodwill and long-lived assets of PCS Health Systems, the pharmacy benefit management business acquired in 1994 for about $4.1 billion. Slower-than-expected managed care trends and the failure to sell an equity stake to a strategic partner led management to conclude the carrying value was not recoverable. The charge was partly offset by a $631.8 million pretax gain on the sale of the DowElanco joint venture interest.

How strong is the underlying business excluding the one-time items?

Quite strong. Adjusted net income was $1.77 billion, a 22% increase over 1996 on a comparable basis, with sales up 16% on 18% volume growth. Gross margin improved to 72.3% from 71.2%, and the company expects a modestly higher margin in 1998 from pharmaceutical product mix.

What are the biggest risks to future earnings?

The main risks are patent expirations and generic competition. Prozac's U.S. compound patent expires in February 2001, and Barr and Geneva are challenging it; an adverse ruling could be material. Anti-infective sales are already declining under generic pressure and are expected to fall further in 1998. Medicaid rebates reduced 1997 sales by about $200 million and are expected to rise. Pricing litigation and an FTC investigation into PBM relationships add further uncertainty.

Is the company's balance sheet and dividend secure?

Yes, based on this filing. Debt fell to $2.55 billion, cash and short-term investments reached about $2.02 billion, and the company holds $2 billion in committed bank credit lines. Its S&P rating is AA and Moody's is Aa3. Operating cash flow of $2.40 billion covered $818 million in dividends paid during the year, and the indicated 1998 dividend rate is $0.80 per share.

Which products are driving growth and which are under pressure?

Zyprexa, Gemzar, and ReoPro are the main growth drivers, along with Prozac and insulin products. Zyprexa sales of $730 million reflect a launch in late 1996. Humulin grew 6% to $936 million, though competition from oral antidiabetic agents and Humalog is a factor. Anti-infectives fell 12%, led by cefaclor, which dropped 18%. Axid declined 1%, and Humatrope declined 3%.

LLY 10-K FY1997 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 24, 1998. Cited figures are marked; the original filing is the authoritative source.

Eli Lilly's 1997 10-K presents a year split between a large non-cash hit and a strong underlying business.

Reported 1997 results include a net loss of $385.1 million^a ($0.35 per share), the company's first annual loss in its history, driven by a $2.44 billion asset impairment on goodwill and long-lived assets of its PCS Health Systems pharmacy benefit management unit, partly offset by a $631.8 million pretax gain from the sale of its 40% DowElanco stake to Dow Chemical. Excluding these significant items, management reports 1997 net income of $1.77 billion ($1.57 per diluted share), up roughly 22% on an adjusted basis, on sales that rose 16% to $8.52 billion. The operating story is one of growth led by newer products.

Zyprexa (schizophrenia) contributed $730 million^b in sales, Gemzar and ReoPro grew sharply, and Prozac reached $2.56 billion worldwide, though its U.S. patent expiration in 2001 and ongoing Barr and Geneva patent challenges are material risks. Anti-infective sales fell 12% under generic pressure, and management expects further declines in 1998. Gross margin improved to 72.3%, and the company continued to invest heavily in R&D, which rose 16% to $1.38 billion.

Balance sheet and cash flow remained solid. Operating cash flow was $2.40 billion^c, total debt fell $1.18 billion to $2.55 billion, and cash and short-term investments rose to about $2.02 billion. The quarterly dividend was raised to an indicated $0.80 annual rate for 1998, extending a 30-year record of increases.

Key legal exposures include Prozac patent litigation, product liability suits involving DES and Prozac, and industry-wide pharmacy pricing antitrust cases. The company also faces a pending FTC investigation into its PBM relationships.

02—Key points

Key Highlights

Reported 1997 net loss of $385.1M ($0.35/share), the first annual loss in company history, due to a $2.44B non-cash PCS asset impairment
Excluding one-time items, 1997 net income was $1.77B ($1.57 diluted EPS), up about 22% from 1996 on an adjusted basis
Net sales rose 16% to $8.52B, with U.S. sales up 27% to $5.41B and international sales up only 1%
Growth led by Zyprexa ($730M), Prozac ($2.56B worldwide), ReoPro ($254M) and Gemzar ($175M); anti-infectives fell 12%
Operating cash flow of $2.40B; total debt reduced by $1.18B to $2.55B; cash and short-term investments of about $2.02B
Dividend increased to an indicated $0.80/share for 1998, the 30th consecutive year of dividend increases
Material legal risks: Prozac patent challenges by Barr and Geneva (compound patent expires 2001), DES and Prozac product liability, pharmacy pricing antitrust suits, and an FTC investigation

03—Questions

Frequently Asked Questions

Why did Lilly report a net loss in 1997?
The loss was driven by a roughly $2.44 billion noncash impairment charge to write down goodwill and long-lived assets of PCS Health Systems, the pharmacy benefit management business acquired in 1994 for about $4.1 billion. Slower-than-expected managed care trends and the failure to sell an equity stake to a strategic partner led management to conclude the carrying value was not recoverable. The charge was partly offset by a $631.8 million pretax gain on the sale of the DowElanco joint venture interest.
How strong is the underlying business excluding the one-time items?
Quite strong. Adjusted net income was $1.77 billion, a 22% increase over 1996 on a comparable basis, with sales up 16% on 18% volume growth. Gross margin improved to 72.3% from 71.2%, and the company expects a modestly higher margin in 1998 from pharmaceutical product mix.
What are the biggest risks to future earnings?
The main risks are patent expirations and generic competition. Prozac's U.S. compound patent expires in February 2001, and Barr and Geneva are challenging it; an adverse ruling could be material. Anti-infective sales are already declining under generic pressure and are expected to fall further in 1998. Medicaid rebates reduced 1997 sales by about $200 million and are expected to rise. Pricing litigation and an FTC investigation into PBM relationships add further uncertainty.
Is the company's balance sheet and dividend secure?
Yes, based on this filing. Debt fell to $2.55 billion, cash and short-term investments reached about $2.02 billion, and the company holds $2 billion in committed bank credit lines. Its S&P rating is AA and Moody's is Aa3. Operating cash flow of $2.40 billion covered $818 million in dividends paid during the year, and the indicated 1998 dividend rate is $0.80 per share.
Which products are driving growth and which are under pressure?
Zyprexa, Gemzar, and ReoPro are the main growth drivers, along with Prozac and insulin products. Zyprexa sales of $730 million reflect a launch in late 1996. Humulin grew 6% to $936 million, though competition from oral antidiabetic agents and Humalog is a factor. Anti-infectives fell 12%, led by cefaclor, which dropped 18%. Axid declined 1%, and Humatrope declined 3%.

04—Continue

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