01—Abstract
Summary
Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.
Eli Lilly's 10-K for fiscal 1999 shows a company in a strong growth phase after divesting its PCS Health Systems pharmacy benefit business in January 1999 for $1.60 billiona.
Net income was $2.72 billionb ($2.46 diluted EPS), including a $174.3 million gain from the PCS sale and several unusual items. Income from continuing operations rose to $2.55 billion ($2.30 per share), and excluding unusual items, continuing income grew about 16% to $2.52 billion ($2.28 per share). Worldwide sales grew 8% to $10.0 billion, with volume growth of 9%, led by Zyprexa (+31%), Gemzar (+49%), ReoPro (+22%), diabetes care (+19%), and Evista (+126%).
Prozac, the largest franchise at $2.61 billionc, declined 7%, and anti-infectives fell 12%. For investors, the main watch items are patent exposure and product concentration. Prozac's U.S. compound patent expires in February 2001, and seven generic filers are challenging its patents, with a trial set for October 2000.
Management also flagged pricing pressure from Medicaid rebates ($352.5 milliond in 1999), managed-care discounting, and a pricing antitrust suit. The balance sheet strengthened, with cash and short-term investments of $3.84 billion against total debt of $3.05 billion. The company completed a $1.5 billion share buyback in 1999 and raised its quarterly dividend 13% to $0.26 for 2000.
Management guides to continued strong growth for Zyprexa, Gemzar, ReoPro, and Evista in 2000, slight declines in Prozac, and a continued decline in anti-infectives. Reported 1999 results benefited from roughly $0.20 per share of net unusual gains, including a $110 million litigation settlement, a $67.8 million gain on the Lorabid sale, and about $90 million of Y2K-related wholesaler buying, offset by a $150 million Foundation contribution and asset impairment charges. Investors should separate these items from underlying operating trends.
02—Key points
Key Highlights
- Net sales rose 8% to $10.0 billion in 1999; U.S. sales were $6.23 billion (+7%) and international sales were $3.77 billion (+11%).
- Diluted EPS was $2.46 on net income of $2.72 billion, which included a $174.3 million PCS divestiture gain; continuing operations EPS was $2.30 (about $2.28 excluding unusual items, up 18% from $1.94 in 1998, or 18% growth on that basis).
- Growth was led by Zyprexa (+31% to $1.89 billion), Gemzar (+49%), Evista (+126% to $326.1 million), and ReoPro (+22%); diabetes care rose 19% to $1.38 billion.
- Prozac, the largest product at $2.61 billion, fell 7%, and management expects slight further declines in 2000 as generic competition builds outside the U.S.
- Key patent risk: Prozac's U.S. compound patent expires in February 2001, and seven generic challengers face litigation with a trial date of October 30, 2000.
- The balance sheet strengthened, with cash and short-term investments of $3.84 billion versus total debt of $3.05 billion; the company completed a $1.5 billion share buyback in 1999 and raised its 2000 quarterly dividend 13% to $0.26.
- Gross margin improved to 79.0% from 78.2%, and the effective tax rate was 21.5%, with management expecting comparable rates in the near term.
03—Questions
Frequently Asked Questions
How much of Lilly's 1999 earnings came from one-time items?
Net unusual items were a meaningful net positive. The PCS sale gain ($174.3 million, about $0.16 per share) and litigation settlement gain ($110 million) plus the Lorabid sale gain ($67.8 million) were offset by the $150 million Foundation contribution and asset impairment and site charges. The filing states that excluding these items, continuing-operations EPS was $2.28 versus $2.30 reported, so the net effect on continuing operations was small, but the PCS gain materially lifted total net income.
What is the main risk to Lilly's revenue over the next few years?
Prozac faces patent expiry in February 2001 (U.S. compound patent), with the method-of-use patent running to December 2003. Seven generic companies are contesting the patents, and management warns that an unfavorable outcome could materially affect financial position and results. Prozac generated $2.61 billion in 1999 sales, so loss of exclusivity would be a significant earnings headwind.
Which products are the growth drivers heading into 2000?
Management expects strong 2000 growth for Zyprexa (schizophrenia and an anticipated bipolar mania indication), Gemzar, ReoPro, and Evista, and very strong growth for Actos, which Takeda manufactures and Lilly co-promotes. Diabetes care excluding Actos is expected to grow moderately. Anti-infectives are expected to keep declining.
How is Lilly returning cash to shareholders?
Lilly paid $0.92 per share in dividends in 1999 (up 15%) and declared a first-quarter 2000 dividend of $0.26 per share, an indicated annual rate of $1.04. It completed a $1.5 billion share repurchase in 1999, acquiring about 19.1 million shares, following a $2.0 billion program in 1998 that retired 28.3 million shares.
What are the broader pricing pressures on the business?
Medicaid rebates reduced 1999 sales by about $352.5 million (versus $278.6 million in 1998), and management expects these to rise in 2000 with Zyprexa growth. Large managed-care and government purchasers are demanding discounts, and the company faces a federal and state pricing antitrust litigation campaign plus an FTC investigation. Proposed U.S. and foreign price-control legislation could further affect results.
04—Continue