10-QPeriod: Q2 FY2002

ELI LILLY & Co Quarterly Report for Q2 Ended Jun 30, 2002

Filed August 14, 2002For Securities:LLY

Summary

Eli Lilly & Company (LLY) reported its second-quarter and first-half results for 2002, showing a decline in net sales and net income compared to the prior year. This downturn was largely attributed to the impact of generic competition for its key product, Prozac, which entered the U.S. market in August 2001. Despite the overall sales decrease, Lilly highlighted the strong growth of its "growth products" including Zyprexa, Humalog, Evista, Gemzar, Actos, and Xigris, which collectively showed a significant increase. The company also noted a reduction in research and development expenses, primarily due to lower late-stage clinical trial costs and incentive compensation, while marketing and administrative expenses saw a slight increase reflecting global sales force expansion. Financially, Lilly maintained a strong liquidity position with increased cash and cash equivalents, supported by operating cash flow and long-term debt issuance. However, the company faces ongoing regulatory scrutiny regarding its manufacturing practices, particularly at its Indianapolis facilities. The resolution of these manufacturing issues is critical for the approval of new products like Zyprexa IntraMuscular, Forteo, and Cymbalta. Despite these challenges, Lilly provided an earnings per share outlook for the third quarter and full year 2002, anticipating continued growth in 2003, though the precise timing of new product launches remains uncertain.

Key Highlights

  • 1Net sales for the second quarter of 2002 decreased by 9% to $2.78 billion, and for the first six months by 9% to $5.34 billion, primarily due to the impact of generic fluoxetine (Prozac).
  • 2Excluding Prozac, worldwide sales increased by 11% for the quarter and 10% for the six-month period, demonstrating growth in other product lines.
  • 3Zyprexa sales showed strong growth, increasing 23% in the quarter and 26% for the six-month period, reaching $906.8 million and $1.73 billion, respectively.
  • 4Net income for the second quarter decreased by 20% to $658.5 million ($0.61 per share), and for the first six months by 21% to $1.29 billion ($1.18 per share), impacted by the decline in Prozac sales and increased selling and marketing expenses.
  • 5Research and development expenses decreased by 3% for the quarter and 4% for the six-month period, attributed to lower incentive compensation and late-stage trial costs.
  • 6The company is implementing comprehensive improvements in its manufacturing operations in response to FDA observations and a warning letter, which could impact the approval timeline of new products.
  • 7Lilly provided an updated financial outlook, expecting full-year 2002 earnings per share between $2.60 and $2.62, and forecasting earnings growth for 2003, contingent on the resolution of manufacturing issues and product launch success.

Frequently Asked Questions

The primary reason for the decline in net sales and net income is the significant impact of generic competition for Prozac, which entered the U.S. market in August 2001. This led to a substantial decrease in Prozac sales, more than offsetting the growth seen in other key products.

Eli Lilly's 'growth products' are demonstrating strong performance. These include Zyprexa, Humalog, Evista, Gemzar, Actos, and Xigris. Zyprexa, in particular, saw significant increases in sales of 23% for the quarter and 26% for the six-month period.

The company is addressing manufacturing practice issues identified by the FDA, particularly at its Indianapolis facilities. These issues, including observations related to computer system validation and data handling, need to be resolved to the FDA's satisfaction. Failure to do so could delay or prevent the approval of new products like Zyprexa IntraMuscular, Forteo, and Cymbalta.

Eli Lilly maintains a strong liquidity position, with an increase in cash, cash equivalents, and short-term investments. Cash flow from operations and long-term debt issuances were used to fund operations, capital expenditures, dividends, and share repurchases. The company issued new debt in March and July 2002 to manage its financial needs and expects its current cash and future operating cash flow to be sufficient for its remaining 2002 obligations.