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ELI LILLY & Co Annual Report, Year Ended Dec 31, 1998

Filing Date
Filed March 26, 1999
Period End
December 31, 1998
Security
LLY
In the record · 2016–202610-K1110-Q328-K110

LLY filed 11 annual reports (10-K), 32 quarterly reports (10-Q) and 110 current reports (8-K) between 2016 and 2026.

  1. Deal closed8-K · Mar ’19Mar ’19
  2. Leadership change8-K · Feb ’21Feb ’21
  3. Leadership change8-K · Mar ’23Mar ’23
  4. FY2024 annual report10-K · Feb ’25Feb ’25

01—Abstract

Summary

Summary of the 10-K filed March 26, 1999. Cited figures are marked; the original filing is the authoritative source.

Eli Lilly's fiscal 1998 10-K shows a company in strong operating momentum, with worldwide net sales rising 16% to $9.24 billiona and income from continuing operations before extraordinary item up 4% to $2.10 billion ($1.87 diluted EPS, or $1.94 excluding unusual items, a 19% increase on an underlying basis).

Growth was led by newer launches: Zyprexa (up 98% to $1.44 billionb), ReoPro (up 44%), Gemzar (up 76%), Evista (launched Q1 1998), and Humalog, while Prozac grew 10% to $2.81 billion. Gross margin improved to 78.2% from 75.6%, and R&D rose 27% to $1.74 billion, a deliberate reinvestment in the pipeline that management says includes 25 compounds in Phase II or III trials. Return on shareholders' equity reached 46.2%, supported by a $2 billion share repurchase completed in 1998 and a planned $1 billion repurchase in 1999.

The filing also flags material risks. The largest is the Prozac patent litigation: the U.S. compound patent expires in February 2001 and the process patent in December 2003, and six generic challengers have filed ANDAs. Management says an adverse outcome could be materially damaging.

Management also flagged that Prozac growth is expected to be only slight in 1999 due to wholesaler destocking and competition, anti-infective and Axid sales are expected to decline, and pricing pressure from managed care and Medicaid rebates (up to $278.6 millionc in 1998) continues to build. Divestiture of the PCS health-care-management unit to Rite Aid for $1.6 billion closed in January 1999, with a first-quarter gain of roughly $165-185 million expected.

For investors, the key questions are whether the newer-product portfolio (Zyprexa, Evista, Gemzar, ReoPro, Humalog) can offset the expected Prozac slowdown and the Prozac patent cliff, and whether the increased R&D spend converts into approvals. The balance sheet is solid, with $1.6 billiond in cash and short-term investments against $2.37 billion of total debt, and the dividend was raised 15% for 1999 to an indicated $0.92 per share, extending a 31-year streak of increases.

02—Key points

Key Highlights

  1. Net sales rose 16% to $9.24 billion, with U.S. sales up 20% to $5.84 billion and international sales up 9% to $3.40 billion.
  2. Diluted EPS from continuing operations was $1.87 (up from $1.78), or $1.94 excluding unusual items, a 19% underlying increase.
  3. Newer products drove growth: Zyprexa sales up 98% to $1.44 billion, Gemzar up 76% to $306.8 million, ReoPro up 44% to $365.4 million, and Evista launched at $144.1 million.
  4. Prozac sales reached $2.81 billion (up 10%), but management now expects only slight growth in 1999 due to wholesaler destocking and competition.
  5. Major patent risk: the U.S. Prozac compound patent expires February 2001 and the process patent December 2003, with six generic challengers litigating.
  6. R&D spending increased 27% to $1.74 billion, and gross margin improved to 78.2% from 75.6%.
  7. Completed a $2 billion share repurchase in 1998 (28.3 million shares), plans about $1 billion more in 1999, and raised the quarterly dividend 15% for an indicated $0.92 annual rate.

03—Questions

Frequently Asked Questions

  1. What is the biggest risk to Lilly's earnings going forward?

    The Prozac patent litigation is the largest identified risk. The U.S. compound patent expires in February 2001, and Prozac was $2.81 billion in 1998 sales, the company's largest product. Six generic manufacturers have challenged the patents, and management states that an unfavorable outcome could have a material adverse effect on financial position, liquidity, or results. Prozac sales are also expected to see only slight growth in 1999.

  2. Why did reported 1998 EPS look flat compared with the underlying growth rate?

    Reported diluted EPS from continuing operations was $1.87, versus $1.78 in 1997. However, 1998 included a $127.5 million one-time charge for the ICOS PDE5 collaboration (about $0.07 per share), and 1997 included unusual items, including a $631.8 million gain on the DowElanco sale and a $97.8 million asset impairment. Excluding these items, EPS was $1.94 in 1998 versus $1.62 in 1997, a 19% increase.

  3. Did the PCS divestiture affect the investment case?

    The sale of PCS Health Systems to Rite Aid for $1.6 billion closed in January 1999, removing a non-core health-care-management business. The company expects a first-quarter 1999 gain of roughly $165-185 million ($0.15-0.17 per share). PCS results are reported as discontinued operations, so continuing-operations figures reflect the pharmaceutical business only, and proceeds are earmarked for general corporate purposes.

  4. How strong is Lilly's balance sheet and shareholder return policy?

    At year-end 1998, cash and short-term investments totaled about $1.60 billion against total debt of $2.37 billion, with $2 billion of committed bank credit facilities backing commercial paper. Lilly completed its $2 billion share repurchase program in 1998, plans about $1 billion of buybacks in 1999, and raised its 1999 quarterly dividend 15%, extending a 31-year streak of consecutive dividend increases.

04—Continue

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