How much of Lilly's revenue depends on Prozac, and what happens when it loses exclusivity?

Prozac and Sarafem generated $2.57 billion in 2000, about 24% of net sales. Management expects a very substantial decline in U.S. Prozac sales in the 12 months after generic fluoxetine enters, which could come around August 2001. Management says the loss of exclusivity will not have a material adverse effect on consolidated financial position or liquidity, while acknowledging that the actual impact depends on the appeal, generic entrant count and pricing, and growth of other products. Newer products such as Zyprexa, Evista, Gemzar, diabetes care, and the pending sepsis drug are expected to offset the decline.

Is the 2000 earnings growth sustainable, given the one-time items?

Reported EPS of $2.79 included unusual gains, most notably a $214.4 million gain on the Kinetra/WebMD transaction (about $0.20 per share). Excluding unusual items, EPS was $2.65, up 16%, which is the better base for judging underlying growth. Operating expenses grew 16% and R&D rose 13% to $2.02 billion, so future margin gains depend on sales growth from newer products. Management's 2001 guidance of $2.75 to $2.85 implies only single-digit growth from the $2.65 base.

What regulatory or legal risks could affect Lilly beyond Prozac?

In March 2001 the FDA issued a warning letter after an inspection of a manufacturing facility tied to a pending Zyprexa rapid-acting IM application, citing cGMP deviations. Management does not expect a material financial impact but says resolution timing depends on demonstrating manufacturing control to the FDA. Other risks include the Zyprexa Paragraph IV challenge by Zenith Goldline, an FTC investigation into rebate practices, product liability suits over DES and Prozac, and U.S. drug reimportation legislation, which management says could materially hurt results if widespread reimports occur.

How is Lilly returning cash to shareholders and how strong is its balance sheet?

Lilly paid $1.04 per share in dividends in 2000 and raised the quarterly rate to $0.28, an indicated 2001 annual rate of $1.12. It completed $1.09 billion of its $3 billion repurchase program in 2000, and it also funded a 40 million share employee benefit trust. Cash and short-term investments reached $4.62 billion, and total debt fell $235 million to $2.82 billion. Management expects operating cash flow to cover debt service, capital expenditures (which are expected to rise from the 2000 level of $677.9 million), and dividends in 2001.

What drove the improvement in gross margin and what does the company expect in 2001?

Gross margin rose to 81.1% in 2000 from 79.0%, mainly because newer, higher-margin products grew as a share of sales, with some help from higher production volume. For 2001, management expects gross margin to decline 0.5 to 1.0 percentage points because Prozac sales will fall. It expects tax rates near 22%, marketing and administrative expense growth in the low-to-mid single digits (with underlying marketing spend for non-Prozac products rising in double digits), and R&D growth in the low double digits.

LLY 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2001. Cited figures are marked; the original filing is the authoritative source.

Eli Lilly closed fiscal 2000 with record results: net sales rose 9% to $10.86 billion^a, and income from continuing operations reached $3.06 billion, or $2.79 per diluted share (up from $2.30).

Excluding unusual items, EPS was $2.65^b, up 16%. Growth was led by Zyprexa (+25% to $2.35 billion), Evista (+60%), Gemzar (+23%) and diabetes products (+22%). Gross margin expanded to 81.1% from 79.0%, while operating expenses grew 16% as R&D rose 13% to $2.02 billion and marketing and administrative spending rose 17%.

Reported earnings also benefited from a $214 million^c gain on the Kinetra/WebMD transaction and roughly $267.9 million of net other income, largely from higher interest income on the cash balance. The central risk for investors is Prozac, which contributed about 24% of 2000 sales. The Federal Circuit upheld Lilly's February 2001 compound patent but invalidated the December 2003 method-of-use patent, and the company is seeking rehearing.

Absent a reversal, generic fluoxetine could enter the U.S. around August 2001, and management expects a very substantial decline in U.S. Prozac sales over the following 12 months. For 2001, management guided to EPS of $2.75 to $2.85^d excluding unusual items, which implies single-digit growth, with strong first-half growth expected to offset second-half Prozac erosion. Sales growth is guided to single digits overall but to the mid-teens excluding Prozac.

Balance-sheet and capital-return items are also significant. Cash and short-term investments totaled $4.62 billion, debt was $2.82 billion, and the company repurchased about $1.09 billion of stock under its $3 billion program. The quarterly dividend was raised 8% to $0.28, an indicated annual rate of $1.12, marking 33 consecutive years of increases.

Other risks include an FDA warning letter (March 2001) concerning cGMP deficiencies at a manufacturing site tied to a pending Zyprexa IM application, the FTC rebate investigation, and U.S. drug reimportation legislation. Management does not expect a material financial impact from the warning letter.

02—Key points

Key Highlights

2000 net sales rose 9% to $10.86 billion (10% adjusted for year-2000 wholesaler buying in 1999), with U.S. sales up 12% to $7.00 billion.
Diluted EPS from continuing operations was $2.79 (up 21% reported); excluding unusual items it was $2.65, up 16%. Gross margin improved to 81.1% from 79.0%.
Zyprexa became the top-selling product in Q4 2000 with $2.35 billion in sales (+25%); Evista grew 60% to $521.5 million.
Prozac (including Sarafem) represented about 24% of 2000 sales, down from 34% in 1996, reducing but not eliminating patent-expiry exposure.
Prozac's 2003 method-of-use patent was invalidated by the Federal Circuit; generic entry could come around August 2001 absent a reversal on rehearing or appeal.
2001 guidance: EPS of $2.75 to $2.85 excluding unusual items (single-digit growth), with sales growth in the mid-teens excluding Prozac.
Returned capital through $1.09 billion of 2000 share repurchases and a dividend increase of 8% to $0.28 per quarter (33rd consecutive annual increase); cash and short-term investments were $4.62 billion against $2.82 billion of total debt.

03—Questions

Frequently Asked Questions

How much of Lilly's revenue depends on Prozac, and what happens when it loses exclusivity?
Prozac and Sarafem generated $2.57 billion in 2000, about 24% of net sales. Management expects a very substantial decline in U.S. Prozac sales in the 12 months after generic fluoxetine enters, which could come around August 2001. Management says the loss of exclusivity will not have a material adverse effect on consolidated financial position or liquidity, while acknowledging that the actual impact depends on the appeal, generic entrant count and pricing, and growth of other products. Newer products such as Zyprexa, Evista, Gemzar, diabetes care, and the pending sepsis drug are expected to offset the decline.
Is the 2000 earnings growth sustainable, given the one-time items?
Reported EPS of $2.79 included unusual gains, most notably a $214.4 million gain on the Kinetra/WebMD transaction (about $0.20 per share). Excluding unusual items, EPS was $2.65, up 16%, which is the better base for judging underlying growth. Operating expenses grew 16% and R&D rose 13% to $2.02 billion, so future margin gains depend on sales growth from newer products. Management's 2001 guidance of $2.75 to $2.85 implies only single-digit growth from the $2.65 base.
What regulatory or legal risks could affect Lilly beyond Prozac?
In March 2001 the FDA issued a warning letter after an inspection of a manufacturing facility tied to a pending Zyprexa rapid-acting IM application, citing cGMP deviations. Management does not expect a material financial impact but says resolution timing depends on demonstrating manufacturing control to the FDA. Other risks include the Zyprexa Paragraph IV challenge by Zenith Goldline, an FTC investigation into rebate practices, product liability suits over DES and Prozac, and U.S. drug reimportation legislation, which management says could materially hurt results if widespread reimports occur.
How is Lilly returning cash to shareholders and how strong is its balance sheet?
Lilly paid $1.04 per share in dividends in 2000 and raised the quarterly rate to $0.28, an indicated 2001 annual rate of $1.12. It completed $1.09 billion of its $3 billion repurchase program in 2000, and it also funded a 40 million share employee benefit trust. Cash and short-term investments reached $4.62 billion, and total debt fell $235 million to $2.82 billion. Management expects operating cash flow to cover debt service, capital expenditures (which are expected to rise from the 2000 level of $677.9 million), and dividends in 2001.
What drove the improvement in gross margin and what does the company expect in 2001?
Gross margin rose to 81.1% in 2000 from 79.0%, mainly because newer, higher-margin products grew as a share of sales, with some help from higher production volume. For 2001, management expects gross margin to decline 0.5 to 1.0 percentage points because Prozac sales will fall. It expects tax rates near 22%, marketing and administrative expense growth in the low-to-mid single digits (with underlying marketing spend for non-Prozac products rising in double digits), and R&D growth in the low double digits.

04—Continue

← View all 10-K filings