01—Abstract
Summary
Summary of the 10-K filed March 20, 2003. Cited figures are marked; the original filing is the authoritative source.
Eli Lilly's 2002 10-K shows a company whose reported earnings fell while its growth pipeline matured.
Net income was $2.71 billiona, or $2.50 per diluted share, down 3% from $2.78 billion ($2.55) in 2001. Excluding unusual items (mainly acquired in-process R&D), adjusted EPS declined about 8% to $2.55 from $2.76. The decline was driven by the loss of U.S. patent protection for Prozac in August 2001, which cut worldwide reported sales 4% to $11.08 billion.
U.S. sales fell 11% to $6.54 billionb, while sales outside the U.S. rose 9% to $4.54 billion. The growth story is concentrated in a few products. Zyprexa (up 20% to $3.69 billion), Humalog, Evista, Gemzar and Xigris together generated $6.7 billion, or 61% of 2002 net sales, up from 48% in 2001.
Management guided 2003 EPS, excluding unusual items, to $2.50 to $2.60c. It also flagged roughly $200 million of incremental annual gross-margin costs tied to manufacturing upgrades, and said unusual restructuring and asset-impairment charges could follow. The main risks are regulatory and legal.
The FDA has issued a warning letter on current good manufacturing practices (cGMP) and has not cleared all Indianapolis plants, which could delay approvals of Zyprexa IntraMuscular and Cymbalta. Lilly faces Paragraph IV generic challenges on Zyprexa and Evista, with an unfavorable outcome in either case described as potentially material.
It also faces a DOJ subpoena on Evista promotion, product liability suits over thimerosal and DES, and a Zyprexa product-liability suit. Balance-sheet leverage rose, with total debt up $1.49 billion to $4.90 billiond, and the dividend was raised 8% to an indicated $1.34 per share for 2003.
02—Key points
Key Highlights
- Net income fell 3% to $2.71 billion ($2.50 diluted EPS) in 2002; adjusted EPS fell about 8% to $2.55 excluding unusual items.
- Worldwide net sales declined 4% to $11.08 billion, driven by a 63% drop in Prozac/Sarafem sales after U.S. generic entry in August 2001.
- Six key growth products (Zyprexa, Humalog, Evista, Gemzar, Xigris, Actos) grew 22% to $6.7 billion, or 61% of net sales versus 48% in 2001.
- Zyprexa reached $3.69 billion in sales (up 20%), becoming the first Lilly product with over $1 billion in non-U.S. sales.
- Gross margin declined to 80.4% from 81.3%, reflecting Prozac's loss and roughly $200 million in expected incremental annual manufacturing costs in 2003.
- Regulatory overhang: an FDA cGMP warning letter remains open, with Indianapolis plants not yet cleared and approvals of Zyprexa IntraMuscular and Cymbalta contingent on resolution.
- Total debt rose $1.49 billion to $4.90 billion, and the dividend was increased 8% to an indicated $1.34 per share for 2003.
03—Questions
Frequently Asked Questions
Why did Eli Lilly's earnings and sales decline in 2002?
The main driver was the loss of U.S. patent protection for Prozac, which led to generic competition beginning in August 2001. Fluoxetine product sales fell 63% worldwide, and U.S. sales fell 73%. Growth in Zyprexa, diabetes products, Gemzar, Evista and Xigris only partially offset that decline, and worldwide sales fell 4% to $11.08 billion.
What is the outlook for 2003 earnings?
Lilly guided 2003 EPS, excluding unusual items, to $2.50 to $2.60 for the full year and $0.57 to $0.59 for the first quarter. Management expects continued Zyprexa growth but a slight near-term dip in its market share as competition increases. Gross margins are expected to absorb about $200 million in incremental annual manufacturing costs. Unusual restructuring (about 700 positions eliminated) and asset-impairment charges could also be recorded.
What are the biggest legal and regulatory risks?
Key risks include Paragraph IV patent litigation from generic makers on Zyprexa (trial scheduled for January 2004) and Evista, where an unfavorable result could be materially adverse. There is also an FDA cGMP warning letter tied to Indianapolis manufacturing, which could delay approvals or lead to production interruptions or fines. Additional exposures include a DOJ subpoena on Evista promotion, a Zyprexa product-liability suit, over 200 thimerosal vaccine suits, and DES cases. Management believes most of these will not materially affect financial position, but they could affect results in a given period.
How strong is the balance sheet and how is capital being returned to shareholders?
Total debt rose to $4.90 billion, up $1.49 billion, mainly from new 10-year notes, a private placement and floating-rate bonds. Cash and short-term investments were about $3.65 billion, and the company held $1.23 billion in unused credit lines. Dividends paid in 2002 totaled $1.24 per share, up 11%, and the 2003 quarterly dividend was raised to $0.335. Lilly also repurchased $389 million of stock in 2002 under a $3 billion program, of which $1.80 billion had been completed. Credit ratings were AA (S&P) and Aa3 (Moody's).
Which products are the company's main growth drivers?
Zyprexa for schizophrenia and bipolar mania is the largest, with $3.69 billion in worldwide sales in 2002. Other growth contributors include Humalog (up 33% to $834 million), Evista (up 24% to $822 million), Gemzar (up 21% to $875 million) and Xigris (sales of $100 million, up from $21 million). Pipeline products with 2003 approvals or filings include Strattera, Forteo, Cialis and Cymbalta, with Forteo and Strattera approved in November 2002.
04—Continue