e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
COMMISSION FILE NUMBER 001-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
|
|
|
INDIANA
(State or other jurisdiction of
incorporation or organization)
|
|
35-0470950
(I.R.S. Employer
Identification No.) |
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrants telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes
þ No o
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes
o No þ
The number of shares of common stock outstanding as of October 20, 2007:
|
|
|
Class
|
|
Number of Shares Outstanding |
|
|
|
Common
|
|
1,134,312,781 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
(Dollars in millions except per-share data) |
Net sales |
|
$ |
4,586.8 |
|
|
$ |
3,864.1 |
|
|
$ |
13,443.9 |
|
|
$ |
11,445.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
1,054.6 |
|
|
|
860.4 |
|
|
|
2,976.0 |
|
|
|
2,527.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
844.5 |
|
|
|
755.7 |
|
|
|
2,533.1 |
|
|
|
2,271.3 |
|
Marketing and administrative |
|
|
1,477.8 |
|
|
|
1,198.2 |
|
|
|
4,339.3 |
|
|
|
3,579.0 |
|
Acquired in-process research and development |
|
|
|
|
|
|
|
|
|
|
656.6 |
|
|
|
|
|
Asset impairments, restructuring, and other special charges |
|
|
81.3 |
|
|
|
|
|
|
|
204.3 |
|
|
|
|
|
Other income net |
|
|
(49.8 |
) |
|
|
(56.0 |
) |
|
|
(89.9 |
) |
|
|
(135.1 |
) |
|
|
|
|
|
|
3,408.4 |
|
|
|
2,758.3 |
|
|
|
10,619.4 |
|
|
|
8,242.7 |
|
|
|
|
Income before income taxes |
|
|
1,178.4 |
|
|
|
1,105.8 |
|
|
|
2,824.5 |
|
|
|
3,203.0 |
|
Income taxes |
|
|
252.1 |
|
|
|
232.2 |
|
|
|
725.9 |
|
|
|
672.6 |
|
|
|
|
Net income |
|
$ |
926.3 |
|
|
$ |
873.6 |
|
|
$ |
2,098.6 |
|
|
$ |
2,530.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
.85 |
|
|
$ |
.80 |
|
|
$ |
1.93 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
.85 |
|
|
$ |
.80 |
|
|
$ |
1.93 |
|
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share |
|
$ |
.425 |
|
|
$ |
.40 |
|
|
$ |
1.275 |
|
|
$ |
1.20 |
|
|
|
|
See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
Eli Lilly and Company and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
|
|
(Dollars in millions) |
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,495.5 |
|
|
$ |
3,109.3 |
|
Short-term investments |
|
|
1,070.3 |
|
|
|
781.7 |
|
Accounts receivable, net of allowances
of $97.2 (2007) and $82.5 (2006) |
|
|
2,516.3 |
|
|
|
2,298.6 |
|
Other receivables |
|
|
422.4 |
|
|
|
395.8 |
|
Inventories |
|
|
2,498.0 |
|
|
|
2,270.3 |
|
Deferred income taxes |
|
|
380.9 |
|
|
|
519.2 |
|
Prepaid expenses |
|
|
1,070.3 |
|
|
|
319.5 |
|
|
|
|
TOTAL CURRENT ASSETS |
|
|
10,453.7 |
|
|
|
9,694.4 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Prepaid pension |
|
|
1,161.8 |
|
|
|
1,091.5 |
|
Investments |
|
|
570.6 |
|
|
|
1,001.9 |
|
Goodwill and other intangibles net |
|
|
2,453.6 |
|
|
|
130.0 |
|
Sundry |
|
|
1,893.1 |
|
|
|
1,885.3 |
|
|
|
|
|
|
|
6,079.1 |
|
|
|
4,108.7 |
|
PROPERTY AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land, buildings, equipment, and construction-in-progress |
|
|
14,577.2 |
|
|
|
13,716.7 |
|
Less allowances for depreciation |
|
|
(6,136.5 |
) |
|
|
(5,564.4 |
) |
|
|
|
|
|
|
8,440.7 |
|
|
|
8,152.3 |
|
|
|
|
|
|
$ |
24,973.5 |
|
|
$ |
21,955.4 |
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
442.1 |
|
|
$ |
219.4 |
|
Accounts payable |
|
|
744.9 |
|
|
|
789.4 |
|
Employee compensation |
|
|
635.5 |
|
|
|
607.7 |
|
Dividends payable |
|
|
|
|
|
|
463.3 |
|
Income taxes payable |
|
|
130.6 |
|
|
|
640.6 |
|
Other current liabilities |
|
|
2,118.5 |
|
|
|
2,365.1 |
|
|
|
|
TOTAL CURRENT LIABILITIES |
|
|
4,071.6 |
|
|
|
5,085.5 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
4,532.2 |
|
|
|
3,494.4 |
|
Accrued retirement benefit |
|
|
1,550.4 |
|
|
|
1,586.9 |
|
Long-term income taxes payable |
|
|
1,079.6 |
|
|
|
|
|
Deferred income taxes |
|
|
55.8 |
|
|
|
62.2 |
|
Other noncurrent liabilities |
|
|
737.0 |
|
|
|
745.7 |
|
|
|
|
|
|
|
7,955.0 |
|
|
|
5,889.2 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Common stock |
|
|
709.5 |
|
|
|
707.9 |
|
Additional paid-in capital |
|
|
3,747.3 |
|
|
|
3,571.9 |
|
Retained earnings |
|
|
12,090.1 |
|
|
|
10,926.7 |
|
Employee benefit trust |
|
|
(2,635.0 |
) |
|
|
(2,635.0 |
) |
Deferred costs-ESOP |
|
|
(97.0 |
) |
|
|
(100.7 |
) |
Accumulated other comprehensive loss |
|
|
(767.6 |
) |
|
|
(1,388.7 |
) |
|
|
|
|
|
|
13,047.3 |
|
|
|
11,082.1 |
|
Less cost of common stock in treasury |
|
|
100.4 |
|
|
|
101.4 |
|
|
|
|
|
|
|
12,946.9 |
|
|
|
10,980.7 |
|
|
|
|
|
|
$ |
24,973.5 |
|
|
$ |
21,955.4 |
|
|
|
|
See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
|
|
(Dollars in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,098.6 |
|
|
$ |
2,530.4 |
|
Adjustments to reconcile net income to cash flows
from operating activities: |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions
of ICOS Corporation, Hypnion, Inc., and Ivy Animal Health,
Inc. |
|
|
(628.5 |
) |
|
|
(1,318.6 |
) |
Depreciation and amortization |
|
|
773.1 |
|
|
|
628.2 |
|
Stock-based compensation expense |
|
|
214.5 |
|
|
|
274.3 |
|
Change in deferred taxes |
|
|
(245.0 |
) |
|
|
130.5 |
|
Acquired in-process research and development, net of tax |
|
|
634.7 |
|
|
|
|
|
Asset impairments, restructuring, and other special charges,
net of tax |
|
|
107.4 |
|
|
|
|
|
Other, net |
|
|
(30.0 |
) |
|
|
(126.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
2,924.8 |
|
|
|
2,118.2 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Net purchases of property and equipment |
|
|
(715.7 |
) |
|
|
(667.8 |
) |
Net change in short-term investments |
|
|
(225.2 |
) |
|
|
580.4 |
|
Purchases of noncurrent investments |
|
|
(471.3 |
) |
|
|
(1,218.7 |
) |
Proceeds from sales and maturities of noncurrent investments |
|
|
924.7 |
|
|
|
1,135.1 |
|
Cash paid for ICOS Corporation, Hypnion, Inc., and Ivy Animal
Health, Inc., net of cash acquired |
|
|
(2,667.5 |
) |
|
|
|
|
Purchase of in-process research and development |
|
|
(25.0 |
) |
|
|
|
|
Other, net |
|
|
(84.0 |
) |
|
|
124.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(3,264.0 |
) |
|
|
(46.6 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(1,389.8 |
) |
|
|
(1,301.5 |
) |
Proceeds from issuance of long-term debt |
|
|
2,500.0 |
|
|
|
|
|
Repayment of long-term debt |
|
|
(1,057.7 |
) |
|
|
(1,599.0 |
) |
Purchase of common stock |
|
|
|
|
|
|
(122.1 |
) |
Issuances of common stock under stock plans |
|
|
21.6 |
|
|
|
44.2 |
|
Net change in short-term borrowings |
|
|
(432.1 |
) |
|
|
(1.8 |
) |
Other, net |
|
|
3.8 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN FINANCING ACTIVITIES |
|
|
(354.2 |
) |
|
|
(2,973.9 |
) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
79.6 |
|
|
|
65.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(613.8 |
) |
|
|
(836.8 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at January 1 |
|
|
3,109.3 |
|
|
|
3,006.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 |
|
$ |
2,495.5 |
|
|
$ |
2,169.9 |
|
|
|
|
See Notes to Consolidated Condensed Financial Statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
Net income |
|
$ |
926.3 |
|
|
$ |
873.6 |
|
|
$ |
2,098.6 |
|
|
$ |
2,530.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income1 |
|
|
374.4 |
|
|
|
132.3 |
|
|
|
621.1 |
|
|
|
433.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
1,300.7 |
|
|
$ |
1,005.9 |
|
|
$ |
2,719.7 |
|
|
$ |
2,963.4 |
|
|
|
|
|
|
|
1 |
|
The significant components of other comprehensive income were gains from foreign
currency translation adjustments of $304.3 million and $495.9 million for the three months and nine
months ended September 30, 2007, respectively, and $123.4 million and $346.7 million for the three
months and nine months ended September 30, 2006, respectively. |
See Notes to Consolidated Condensed Financial Statements.
5
SEGMENT INFORMATION
We operate in one significant business segment pharmaceutical products. Operations of our animal
health business segment are not material and share many of the same economic and operating
characteristics as our pharmaceutical products. Therefore, they are included with pharmaceutical
products for purposes of segment reporting. Our business segments are distinguished by the
ultimate end user of the product: humans or animals. Performance is evaluated based on profit or
loss from operations before income taxes. Income before income taxes for the animal health
business was $32.0 million and $47.8 million for the quarters ended September 30, 2007 and 2006,
respectively, and $99.5 million and $122.9 million for the nine months ended September 30, 2007 and
2006, respectively.
SALES BY PRODUCT CATEGORY
Worldwide sales by product category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
Net sales to unaffiliated customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurosciences |
|
$ |
1,903.6 |
|
|
$ |
1,676.1 |
|
|
$ |
5,682.1 |
|
|
$ |
4,869.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endocrinology |
|
|
1,363.7 |
|
|
|
1,221.0 |
|
|
|
3,990.1 |
|
|
|
3,680.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncology |
|
|
609.4 |
|
|
|
511.8 |
|
|
|
1,776.9 |
|
|
|
1,477.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiovascular1 |
|
|
419.0 |
|
|
|
172.3 |
|
|
|
1,154.9 |
|
|
|
549.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Animal health |
|
|
236.6 |
|
|
|
216.2 |
|
|
|
666.4 |
|
|
|
615.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-infectives |
|
|
53.4 |
|
|
|
58.5 |
|
|
|
165.2 |
|
|
|
216.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other pharmaceuticals |
|
|
1.1 |
|
|
|
8.2 |
|
|
|
8.3 |
|
|
|
37.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,586.8 |
|
|
$ |
3,864.1 |
|
|
$ |
13,443.9 |
|
|
$ |
11,445.7 |
|
|
|
|
|
|
|
1 |
|
2007 Cialis® sales are included in Cardiovascular and 2006 Cialis sales have been
reclassified from Other pharmaceuticals to be consistent with the 2007 presentation. |
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
We have prepared the accompanying unaudited consolidated condensed financial statements in
accordance with the requirements of Form 10-Q and, therefore, they do not include all information
and footnotes necessary for a fair presentation of financial position, results of operations, and
cash flows in conformity with accounting principles generally accepted in the United States (GAAP).
In our opinion, the financial statements reflect all adjustments (including those that are normal
and recurring) that are necessary for a fair presentation of the results of operations for the
periods shown. In preparing financial statements in conformity with GAAP, we must make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures at the date of the financial statements and during the reporting period.
Actual results could differ from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with
our consolidated financial statements and accompanying notes included in our Annual Report on Form
10-K for the year ended December 31, 2006.
CONTINGENCIES
Patent Litigation
We are engaged in the following patent litigation matters brought pursuant to procedures set out in
the Hatch-Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
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Dr. Reddys Laboratories, Ltd. (Reddy), Teva Pharmaceuticals, and Zenith Goldline
Pharmaceuticals, Inc., which was subsequently acquired by Teva Pharmaceuticals (together,
Teva), each submitted Abbreviated New Drug Applications (ANDAs) seeking permission to
market generic versions of Zyprexa® prior to the expiration of our relevant U.S. patent
(expiring in 2011) and alleging that this patent was invalid or not enforceable. We filed
lawsuits against these companies in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that the patent is valid, enforceable, and being infringed. The
district court ruled in our favor on all counts on April 14, 2005, and on December 26,
2006, that ruling was upheld by the Court of Appeals for the Federal Circuit. On October
1, 2007, the United States Supreme Court denied the generic companies petition for
certiorari, bringing this litigation to a close. |
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Barr Laboratories, Inc. (Barr), submitted an ANDA in 2002 seeking permission to market a
generic version of Evista® prior to the expiration of our relevant U.S. patents (expiring
in 2012-2017) and alleging that these patents are invalid, not enforceable, or not
infringed. In November 2002, we filed a lawsuit against Barr in the U.S. District Court
for the Southern District of Indiana, seeking a ruling that these patents are valid,
enforceable, and being infringed by Barr. Teva has also submitted an ANDA seeking
permission to market a generic version of Evista. In June 2006, we filed a similar lawsuit
against Teva in the U.S. District Court for the Southern District of Indiana. The lawsuit
against Teva is currently scheduled for trial beginning March 9, 2009, while no trial date
has been set in the lawsuit against Barr. We believe that Barrs and Tevas claims are
without merit and we expect to prevail. However, it is not possible to predict or
determine the outcome of this litigation, and accordingly, we can provide no assurance that
we will prevail. An unfavorable outcome could have a material adverse impact on our
consolidated results of operations, liquidity, and financial position. |
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Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma (USA) Inc. (Mayne), and Sun
Pharmaceutical Industries Inc. (Sun) each submitted ANDAs seeking permission to market
generic versions of Gemzar® prior to the expiration of our relevant U.S. patents (expiring
in 2010 and 2013), and alleging that these patents are invalid. We filed lawsuits in the
U.S. District Court for the Southern District of Indiana against Sicor (February 2006),
Mayne (October 2006), and Sun (December 2006), seeking a ruling that these patents are
valid and are being infringed. Each generic company moved to dismiss our lawsuit, arguing
that the Indiana court lacks jurisdiction. The court denied Sicors motion in April 2007
and Maynes motion in August 2007. In September 2007, before the court ruled on Suns
motion to dismiss, we elected to voluntarily dismiss our lawsuit against Sun without
prejudice to our right to commence another infringement action against Sun should future
developments warrant. We expect to prevail in this litigation and believe that these
claims are without merit. However, it is not possible to predict or determine the outcome
of this litigation, and accordingly, we can provide no assurance that we will prevail. An
unfavorable outcome could have a material adverse impact on our consolidated results of
operations, liquidity, and financial position. |
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Actavis Elizabeth LLC (Actavis), Glenmark Pharmaceuticals Inc.,USA (Glenmark), Sun
Pharmaceutical Industries Limited (Sun), Sandoz Inc. (Sandoz), Mylan Pharmaceuticals Inc.
(Mylan), Teva Pharmaceuticals USA, Inc. (Teva), Apotex Inc. (Apotex), Aurobindo Pharma Ltd.
(Aurobindo), Synthon Laboratories, Inc. (Synthon), and Zydus Pharmaceuticals, USA, Inc. (Zydus)
each submitted an ANDA seeking permission to market generic versions of Strattera® prior to the expiration of |
7
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our relevant U.S. patent (expiring in 2017), and alleging that this patent is invalid. We filed a lawsuit against Actavis in
the United States District Court for the District of New Jersey in August 2007, and Sandoz
filed a declaratory judgment action in the same court. In September 2007, we amended the
complaint in the New Jersey lawsuit to add Glenmark, Sun, Sandoz, Mylan, Teva, Apotex,
Aurobindo, Synthon, and Zydus as defendants. We expect to prevail in this litigation and
believe that these claims are without merit. However, it is not possible to predict or
determine the outcome of this litigation, and accordingly, we can provide no assurance that
we will prevail. An unfavorable outcome could have a material adverse impact on our
consolidated results of operations, liquidity, and financial position. |
We have received challenges to Zyprexa patents in a number of countries outside the United
States:
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In Canada, several generic pharmaceutical manufacturers have challenged the validity of
our Zyprexa compound and method-of-use patent (expiring in 2011). In April 2007, the
Canadian Federal Court ruled against the first challenger, Apotex Inc. (Apotex), and Apotex
has appealed that ruling. In June 2007, the Canadian Federal Court held that the invalidity
allegations of a second challenger, Novopharm Ltd. (Novapharm), were justified and denied
our request that Novapharm be prohibited from receiving marketing approval for generic
olanzapine in Canada. Novapharm began selling generic olanzapine in certain provinces of
Canada in the third quarter of 2007. We have appealed that decision and sued Novopharm for
patent infringement. The appeal is scheduled to be heard November 6, 2007. The patent
infringement suit has been tentatively scheduled for trial in the third quarter of 2008. |
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In Germany, generic pharmaceutical manufacturers Egis-Gyogyszergyar and Neolabs Ltd.
challenged the validity of our Zyprexa compound and method-of-use patents (expiring in
2011). In June 2007, the German Federal Patent Court held that our patent is invalid. We
are appealing the decision. We anticipate generic olanzapine will be
launched by competitors in the fourth
quarter of this year. |
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We have received challenges in a number of other countries, including Spain, the UK, and
several smaller European countries. In Spain, we were successful in the trial court in
defeating the generic manufacturers challenge, but the case has been appealed. We
anticipate a decision in the first quarter of 2008. In the UK, a trial date has tentatively
been set for July 2008. |
We are vigorously contesting the various legal challenges to our Zyprexa patents on a
country-by-country basis. We cannot predict or determine the outcome of this litigation. The
availability of generic olanzapine in Canada and Germany will have a material adverse impact on
our consolidated results of operations. The availability of generic olanzapine in additional
markets could have a material adverse impact on our consolidated results of operations.
In June 2002, Ariad Pharmaceuticals, Inc., the Massachusetts Institute of Technology, the
Whitehead Institute for Biomedical Research, and the President and Fellows of Harvard College in
the U.S. District Court for the District of Massachusetts sued us, alleging that sales of two of
our products, Xigris® and Evista, were inducing the infringement of a patent related to the
discovery of a natural cell signaling phenomenon in the human body, and seeking royalties on past
and future sales of these products. On May 4, 2006, a jury in Boston issued an initial decision
in the case that Xigris and Evista sales infringe the patent. The jury awarded the plaintiffs
approximately $65 million in damages, calculated by applying a 2.3 percent royalty to all U.S.
sales of Xigris and Evista from the date of issuance of the patent through the date of trial. In
addition, a separate bench trial with the U.S. District Court of Massachusetts was held the week
of August 7, 2006, on our contention that the patent is unenforceable and impermissibly covers
natural processes. In June 2005, the United States Patent and Trademark Office (USPTO) commenced
a reexamination of the patent, and in August 2007 took the position that the Ariad claims at
issue are unpatentable, a position that Ariad continues to contest. In September 2007, the Court entered
a final judgment indicating that Ariads claims are patentable, valid, and enforceable, and
finding damages in the amount of $65 million plus a 2.3 percent royalty on net U.S. sales of
Xigris and Evista since the time of the jury decision. However, the Court deferred the
requirement to pay any damages until after all rights to appeal have been exhausted. We have
filed a motion for reconsideration of the verdict, or alternatively for a new trial. If it
becomes necessary, we will appeal any adverse decision. We believe that these allegations are
without legal merit, that we will ultimately prevail on these issues, and therefore that the
likelihood of any monetary damages is remote.
Government Investigations and Related Litigation
In March 2004, the Office of the U.S. Attorney for the Eastern District of Pennsylvania (EDPA)
advised us that it had commenced a civil investigation related to our U.S. marketing and
promotional practices, including our communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa, Prozac®, and Prozac WeeklyTM. A
number of State Medicaid Fraud Control Units are coordinating with the EDPA in its investigation of any
Medicaid-related claims relating to our marketing and promotion of Zyprexa. In October 2005, the
EDPA advised that it is also conducting an inquiry regarding certain rebate agreements we entered
into with a pharmacy benefit manager covering Axid®, Evista, Humalog®, Humulin®, Prozac, and
8
Zyprexa. The inquiry includes a review of Lillys Medicaid best price reporting related to the
product sales covered by the rebate agreements.
In June 2005, we received a subpoena from the Office of the Attorney General, Medicaid Fraud
Control Unit, of the State of Florida, seeking production of documents relating to sales of Zyprexa
and our marketing and promotional practices with respect to Zyprexa.
In September 2006, we received a subpoena from the California Attorney Generals Office seeking
production of documents related to our efforts to obtain and maintain Zyprexas status on
Californias formulary, marketing and promotional practices with respect to Zyprexa, and
remuneration of health care providers.
In February 2007, we received a subpoena from the Office of the Attorney General of the State of
Illinois, seeking production of documents and information relating to sales of Zyprexa and our
marketing and promotional practices, including our communications with physicians and remuneration
of physician consultants and advisors, with respect to Zyprexa.
Beginning in August 2006, we have received civil investigative demands or subpoenas from the
attorneys general of a number of states under various state consumer protection laws. Most of
these requests are now part of a multistate investigative effort being coordinated by an executive
committee of attorneys general. We are aware that approximately 30 states are participating in
this joint effort, and it is possible that additional states will join the investigation. These
attorneys general are seeking a broad range of Zyprexa documents, including documents relating to
sales, marketing and promotional practices, and remuneration of health care providers. In
addition, we have been named as a defendant in a private suit in California State Court, which was
recently removed to federal court, alleging violations of the California False Claims Act with
respect to certain Zyprexa marketing and promotional practices. This suit was brought by an
individual on behalf of the government, under the qui tam provision of the California False Claims
Act.
We are cooperating in each of these investigations, including providing a broad range of
documents and information relating to the investigations. It is possible that other Lilly
products could become subject to investigation and that the outcome of these matters could
include criminal charges and fines, penalties, or other monetary or nonmonetary remedies. We
cannot predict or determine the outcome of these matters or reasonably estimate the amount or
range of amounts of any fines or penalties that might result from an adverse outcome. It is
possible, however, that an adverse outcome could have a material adverse impact on our
consolidated results of operations, liquidity, and financial position. We have implemented and
continue to review and enhance a broadly based compliance program that includes comprehensive
compliance-related activities designed to ensure that our marketing and promotional practices,
physician communications, remuneration of health care professionals, managed care arrangements,
and Medicaid best price reporting comply with applicable laws and regulations.
Product Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa product liability lawsuits in the
United States and have been notified of many other claims of individuals who have not filed suit.
The lawsuits and unfiled claims (together the claims) allege a variety of injuries from the
use of Zyprexa, with the majority alleging that the product caused or contributed to diabetes or
high blood-glucose levels. The claims seek substantial compensatory and punitive damages and
typically accuse us of inadequately testing for and warning about side effects of Zyprexa. Many
of the claims also allege that we improperly promoted the drug. Almost all of the federal
lawsuits are part of a Multi-District Litigation (MDL) proceeding before The Honorable Jack
Weinstein in the Federal District Court for the Eastern District of New York (MDL No. 1596).
Since June 2005, we have entered into agreements with various claimants attorneys involved in
U.S. Zyprexa product liability litigation to settle a substantial majority of the claims. The
agreements cover a total of approximately 30,200 claimants, including a large number of
previously filed lawsuits and other asserted claims. The two primary settlements were as
follows:
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In June 2005, we reached an agreement in principle (and in September 2005 a final
agreement) to settle more than 8,000 claims for $690.0 million plus $10.0 million to
cover administration of the settlement. That settlement is being administered by special
settlement masters appointed by Judge Weinstein. |
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In January 2007, we reached agreements with a number of plaintiffs attorneys to
settle more than 18,000 claims for approximately $500 million. |
The 2005 settlement totaling $700.0 million was paid during 2005. The January 2007 settlements
were recorded in other current liabilities in our December 31, 2006 consolidated balance sheet; a
majority of these settlements have been paid and the remainder will be paid during 2007.
9
The U.S. Zyprexa product liability claims not subject to these agreements include approximately
310 lawsuits in the U.S. covering approximately 1,200 plaintiffs. Trial dates have been set
for February 19 and May 12, 2008, in the Eastern District
of New York, for several of
the U.S. plaintiffs. In early 2005, we were served with four lawsuits seeking class action
status in Canada on behalf of patients who took Zyprexa. One of these four lawsuits has been
certified for residents of Quebec, and a second has been certified in Ontario and includes all
Canadian residents, except for residents of Quebec and British Columbia. The allegations in the
Canadian actions are similar to those in the litigation pending in the U.S. We are prepared to
continue our vigorous defense of Zyprexa in all remaining cases.
We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The
third-party insurance carriers have raised defenses to their liability under the policies and are
seeking to rescind the policies. The dispute is now the subject of litigation in the federal
court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other
carriers. While we believe our position has merit, there can be no assurance that we will
prevail. As discussed in Asset Impairments, Restructuring, and Other Special Charges, we have
reached a settlement with one of the insurance carriers that is part of this litigation.
In addition, we have been named as a defendant in numerous other product liability lawsuits
involving primarily diethylstilbestrol (DES) and thimerosal. The majority of these claims are
covered by insurance, subject to deductibles and coverage limits.
In the second quarter of 2005, we recorded a net pretax charge of $1.07 billion for product
liability matters. The charge took into account our estimated recoveries from our insurance
coverage related to these matters. The charge covered the following:
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The cost of the June 2005 Zyprexa settlements; and |
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Reserves for product liability exposures and defense costs regarding the then-known and
expected product liability claims to the extent we could formulate a reasonable estimate
of the probable number and cost of the claims. A substantial majority of those exposures
and costs were related to then-known and expected Zyprexa claims. |
As a result of the January 2007 settlements discussed above, we incurred a pre-tax charge of $494.9
million in the fourth quarter of 2006. The charge covered the following:
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The cost of the January 2007 Zyprexa settlements; and |
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Reserves for product liability exposures and defense costs regarding the then-known and
expected Zyprexa product liability claims to the extent we could formulate a reasonable
estimate of the probable number and cost of the claims. |
In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of
the Louisiana Department of Health and Hospitals, alleging that Zyprexa caused or contributed to
diabetes or high blood-glucose levels, and that we improperly promoted the drug. These cases have
been removed to federal court and are now part of the MDL proceedings in the Eastern District of
New York. In these actions, the Department of Health and Hospitals seeks to recover the costs it
paid for Zyprexa through Medicaid and other drug-benefit programs, as well as the costs the
department alleges it has incurred and will incur to treat Zyprexa-related illnesses. We have been
served with similar lawsuits filed by the states of Alaska, Mississippi, Montana, New Mexico,
Pennsylvania, South Carolina, Utah, and West Virginia in the courts of the respective states. The
Mississippi, Montana, New Mexico, and West Virginia cases have been removed to federal court and
are now part of the MDL proceedings in the Eastern District of New York.
In 2005, two lawsuits were filed in the Eastern District of New York purporting to be nationwide
class actions on behalf of all consumers and third-party payors, excluding governmental entities,
which have made or will make payments for their members or insured patients being prescribed
Zyprexa. These actions have now been consolidated into a single lawsuit, which is brought under
certain state consumer protection statutes, the federal civil RICO statute, and common law
theories, seeking a refund of the cost of Zyprexa, treble damages, punitive damages, and attorneys
fees. Two additional lawsuits were filed in the Eastern District of New York in 2006 on similar
grounds. As with the product liability suits, these lawsuits allege that we inadequately tested
for and warned about side effects of Zyprexa and improperly promoted the drug.
We cannot predict with certainty the additional number of lawsuits and claims that may be asserted.
The ultimate resolution of Zyprexa product liability and related litigation could have a material
adverse impact on our consolidated results of operations, liquidity, and financial position.
Because of the nature of pharmaceutical products, it is possible that we could become subject to
large numbers of product liability and related claims for other products in the future. In the
past few years, we have experienced difficulties in obtaining product liability insurance due to a
very restrictive insurance market. Therefore, for substantially all of our currently marketed
products, we have been and expect that we will continue to be largely self-insured for future
product liability losses. In addition, as noted above, there is no assurance that we will be able
to fully collect from our insurance carriers on past claims.
10
Environmental Matters
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as
Superfund, we have been designated as one of several potentially responsible parties with respect
to fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally
liable for the entire amount of the cleanup. We also continue remediation of certain of our own
sites. We have accrued for estimated Superfund cleanup costs, remediation, and certain other
environmental matters. This takes into account, as applicable, available information regarding
site conditions, potential cleanup methods, estimated costs, and the extent to which other parties
can be expected to contribute to payment of those costs. We have reached a settlement with our
liability insurance carriers providing for coverage for certain environmental liabilities.
The litigation accruals and environmental liabilities and the related estimated insurance
recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our
consolidated balance sheets.
While it is not possible to predict or determine the outcome of the patent, product liability, or
other legal actions brought against us or the ultimate cost of environmental matters, we believe
that, except as noted above, the resolution of all such matters will not have a material adverse
effect on our consolidated financial position or liquidity, but could possibly be material to the
consolidated results of operations in any one accounting period.
EARNINGS PER SHARE
Unless otherwise noted in the footnotes, all per-share amounts are presented on a diluted basis,
that is, based on the weighted-average number of outstanding common shares plus the effect of all
potentially dilutive common shares (primarily unexercised stock options).
STOCK-BASED COMPENSATION
The fair value of stock-based compensation is required to be recognized in net income. In 2007,
our stock-based compensation expense consists primarily of performance awards (PAs), shareholder
value awards (SVAs), and stock options. In 2006, our stock-based compensation expense consisted
primarily of PAs and stock options. We recognized pretax stock-based compensation cost in the
amount of $79.3 million and $83.0 million in the third quarter of 2007 and 2006, respectively. In
the nine months of 2007 and 2006, we recognized stock-based compensation expense of $214.5 million
and $274.3 million, respectively.
PAs are granted to officers and management and are payable in shares of our common stock. The
number of PA shares actually issued, if any, varies depending on the achievement of certain
earnings-per share targets over a one-year period. PA shares are accounted for at fair value based
upon the closing stock price on the date of grant and fully vest at the end of the fiscal year of
the grant.
In 2007 we implemented an SVA program that replaced our stock option program. SVAs are granted to
officers and management and are payable in shares of common stock at the end of a three-year
period. The number of shares actually issued varies depending on our stock price at the end of the
three-year vesting period compared to pre-established target prices. We measure the fair value of
the SVA unit on the grant date using a Monte Carlo simulation model. The Monte Carlo simulation
model utilizes multiple input variables that determine the probability of satisfying the market
condition stipulated in the award grant and calculates the fair value of the award.
As of September 30, 2007, the total remaining unrecognized compensation cost associated with our
equity programs is $138.9 million and the weighted-average remaining requisite service period is 15
months.
11
RETIREMENT BENEFITS
Net pension and retiree health benefit expense included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in millions) |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
62.9 |
|
|
$ |
67.8 |
|
|
$ |
194.9 |
|
|
$ |
206.1 |
|
Interest cost |
|
|
86.5 |
|
|
|
81.8 |
|
|
|
258.9 |
|
|
|
244.0 |
|
Expected return on plan assets |
|
|
(134.6 |
) |
|
|
(121.2 |
) |
|
|
(403.1 |
) |
|
|
(361.5 |
) |
Amortization of prior service cost |
|
|
1.4 |
|
|
|
1.4 |
|
|
|
4.0 |
|
|
|
4.3 |
|
Recognized actuarial loss |
|
|
30.9 |
|
|
|
31.8 |
|
|
|
93.1 |
|
|
|
94.9 |
|
|
|
|
Net periodic benefit cost |
|
$ |
47.1 |
|
|
$ |
61.6 |
|
|
$ |
147.8 |
|
|
$ |
187.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health Benefit Plans |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in millions) |
|
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
17.6 |
|
|
$ |
18.0 |
|
|
$ |
54.3 |
|
|
$ |
53.9 |
|
Interest cost |
|
|
25.3 |
|
|
|
24.4 |
|
|
|
76.0 |
|
|
|
73.3 |
|
Expected return on plan assets |
|
|
(25.3 |
) |
|
|
(22.5 |
) |
|
|
(77.0 |
) |
|
|
(67.4 |
) |
Amortization of prior service cost |
|
|
(3.9 |
) |
|
|
(3.9 |
) |
|
|
(11.7 |
) |
|
|
(11.6 |
) |
Recognized actuarial loss |
|
|
23.8 |
|
|
|
27.0 |
|
|
|
70.9 |
|
|
|
80.9 |
|
|
|
|
Net periodic benefit cost |
|
$ |
37.5 |
|
|
$ |
43.0 |
|
|
$ |
112.5 |
|
|
$ |
129.1 |
|
|
|
|
In 2007, we expect to contribute approximately $80 million to our defined benefit pension plans
to satisfy minimum funding requirements for the year. In addition, we expect to contribute
approximately $85 million of additional discretionary funding to our defined benefit plans and
approximately $50 million of discretionary funding to our post retirement health benefit plans.
As of September 30, 2007, approximately $160 million of the total $215 million expected 2007
contributions has been contributed.
OTHER INCOME NET
Other income net, was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
|
Interest expense |
|
$ |
55.8 |
|
|
$ |
62.7 |
|
|
$ |
167.9 |
|
|
$ |
193.5 |
|
Interest income |
|
|
(49.6 |
) |
|
|
(67.5 |
) |
|
|
(157.0 |
) |
|
|
(195.6 |
) |
Joint venture income |
|
|
|
|
|
|
(23.8 |
) |
|
|
(11.0 |
) |
|
|
(66.1 |
) |
Other |
|
|
(56.0 |
) |
|
|
(27.4 |
) |
|
|
(89.8 |
) |
|
|
(66.9 |
) |
|
|
|
|
|
$ |
(49.8 |
) |
|
$ |
(56.0 |
) |
|
$ |
(89.9 |
) |
|
$ |
(135.1 |
) |
|
|
|
The joint venture (income) loss represents our share of the Lilly ICOS LLC joint venture results of
operations, net of income taxes, prior to the acquisition of ICOS Corporation on January 29, 2007.
SHAREHOLDERS EQUITY
As of September 30, 2007, we have purchased $2.58 billion of our previously announced $3.0 billion
share repurchase program. During the third quarter of 2007, we did not acquire any shares pursuant
to this program, nor do we expect any share repurchases under this program for the remainder of
2007.
12
IMPLEMENTATION OF NEW FINANCIAL ACCOUNTING PRONOUNCEMENTS
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) No.
48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. As a result of the implementation of
FIN 48, we recognized an increase of $8.6 million in the liability for unrecognized tax benefits,
and an offsetting reduction to the January 1, 2007 balance of retained earnings. We also
reclassified $921.4 million of income taxes payable from current to non-current liabilities. The
total amount of gross unrecognized tax benefits at January 1, 2007 was $1.34 billion and the total
amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was
$1.27 billion at January 1, 2007.
We file income tax returns in the United States (U.S.) federal jurisdiction and various state,
local, and non-U.S. jurisdictions. We are no longer subject to U.S. federal, state and local, or
non-U.S. income tax examinations in major taxing jurisdictions for years before 2001.
We are currently under audit by the Internal Revenue Service (IRS) for tax years 2001-2004.
Management believes it is reasonably possible that this audit could conclude within the next 12
months, which could cause a significant change in the total amount of unrecognized tax benefits.
However, the ultimate resolution of the 2001-2004 IRS audit is dependent upon a number of factors,
including the potential for formal administrative and legal proceedings. As a result, it is not
possible to estimate the full range of the reasonably possible changes in unrecognized tax benefits
that could occur in total within the next 12 months, nor is it possible to estimate reliably the
total future cash flows related to these unrecognized tax benefits.
We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax
expense. At January 1, 2007, our accruals for the payment of interest and penalties totaled
approximately $171.8 million, substantially all of which relates to interest.
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force on Issue
No. 07-3 (EITF 07-3), Accounting for Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities. Pursuant to EITF 07-3, nonrefundable
advance payments for goods or services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should be recognized as an
expense as the related goods are delivered or services are performed, or when the goods or services
are no longer expected to be received. This Issue is effective for us beginning January 1, 2008,
and is to be applied prospectively for contracts entered into on or after the effective date.
While we have not yet completed our analysis, we do not anticipate the implementation of this Issue
to be material to our consolidated financial position or results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities. This Statement permits entities
to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is effective for us
beginning January 1, 2008, if adopted. We do not anticipate the implementation of this Statement
would be material to our consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair
value, establishes a framework for measuring fair value in GAAP, and expands disclosures about
fair value measurements. This Statement is effective for us beginning January 1, 2008, and
applies to interim periods. We do not anticipate the implementation of this Statement will be
material to our consolidated financial position or results of operations.
ACQUISITIONS
ICOS Corporation Acquisition
On January 29, 2007, we acquired all of the outstanding common stock of ICOS Corporation (ICOS),
our partner in the Lilly ICOS LLC joint venture for the manufacture and sales of Cialis for the
treatment of erectile dysfunction. The acquisition brings the full value of Cialis to us and
enables us to realize operational efficiencies in the further development, marketing, and selling
of this product. Under the terms of the agreement, each outstanding share of ICOS common stock was
redeemed for $34 in cash for an aggregate purchase price of approximately $2.3 billion, which was
financed through borrowings.
The acquisition has been accounted for as a business combination under the purchase method of
accounting. Under the purchase method of accounting, the assets acquired and liabilities assumed
from ICOS are recorded at their respective fair values as of the acquisition date in our
consolidated financial statements. The excess of the purchase price over the fair value of the
acquired net assets has been recorded as goodwill in the amount of $628.4 million. No portion of
this goodwill is expected to be deductible for tax purposes. ICOS results of operations are
included in our consolidated financial statements from the date of acquisition.
13
We have preliminarily determined the following estimated fair values for the assets purchased and
liabilities assumed as of the date of acquisition. The determination of estimated fair value
requires management to make significant estimates and assumptions. Although we do not anticipate
any significant adjustments, to the extent that our estimates used in the purchase accounting
allocation need to be adjusted, we will do so upon making that determination but not later than one
year from the date of acquisition.
|
|
|
|
|
|
|
Estimated Fair Value |
|
|
|
at January 29, 2007 |
|
|
|
(Dollars in millions) |
|
Cash and short-term investments |
|
$ |
197.7 |
|
Developed product technology (Cialis)1 |
|
|
1,659.9 |
|
Acquired in-process research and development |
|
|
303.5 |
|
Tax benefit of net operating losses |
|
|
404.1 |
|
Goodwill |
|
|
628.4 |
|
Other assets and liabilities net |
|
|
(19.5 |
) |
Deferred taxes |
|
|
(581.0 |
) |
Long-term debt assumed |
|
|
(275.6 |
) |
|
|
|
|
Total estimated purchase price |
|
$ |
2,317.5 |
|
|
|
|
|
|
|
|
1 |
|
The intangible asset will be amortized over Cialis remaining expected patent lives in
each country, which range from 2015 to 2017. |
The acquired in-process research and development (IPR&D) represents compounds currently under
development that have not yet achieved regulatory approval for marketing. New indications for and
formulations of the Cialis compound currently in clinical testing represent approximately 48
percent of the estimated fair value of the IPR&D. The remaining value of IPR&D represents several
other products in development, with no one asset comprising a significant portion of this value.
In accordance with FIN 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted
for by the Purchase Method, these IPR&D intangible assets totaling $303.5 million have been written
off by a charge to income immediately subsequent to the acquisition because the compounds do not
have any alternative future use. This charge is not deductible for tax purposes. The ongoing
activity with respect to each of these compounds under development is not material to our research
and development expenses.
There are several methods that can be used to determine the estimated fair value of the acquired
IPR&D. We utilized the income method, which applies a probability weighting to the estimated
future net cash flows that are derived from projected sales revenues and estimated costs. These
projections are based on factors such as relevant market size, patent protection, historical
pricing of similar products, and expected industry trends. The estimated future net cash flows are
then discounted to the present value using an appropriate discount rate. This analysis is
performed for each project independently. The discount rate we used in valuing the acquired IPR&D
projects was 20 percent.
Other Acquisitions
In October 2007, we entered into an agreement with Glenmark Pharmaceuticals Limited India whereby
we acquired the rights to a portfolio of transient receptor potential vanilloid sub-family 1
(TRPV1) antagonist molecules, including a clinical phase compound. The compound is currently in
early clinical phase development as a potential next-generation treatment for various pain
conditions, including osteoarthritic pain, and had no alternative future use. As with many
development-phase compounds, launch of the
product, if approved, was not expected in the near term. Our charge for acquired IPR&D was $45.0
million, is deductible for tax purposes, and will be included as expense in the fourth quarter of
2007.
In October 2007, we entered into a global strategic alliance with MacroGenics, Inc. (MacroGenics)
to develop and commercialize teplizumab, a humanized anti-CD3 monoclonal antibody, as well as other
potential next generation anti-CD3 molecules for use in the treatment of autoimmune diseases. As
part of the arrangement, we acquired the exclusive rights to the molecule, which was in the
development stage (Phase II/III clinical trial for individuals with recent-onset type 1 diabetes)
and had no alternative future use. As with many development-phase compounds, launch of the
product, if approved, was not expected in the near term. Our charge for acquired IPR&D was $44.0
million, is deductible for tax purposes, and will be included as expense in the fourth quarter of
2007.
During the second quarter of 2007, we acquired all of the outstanding stock of both Hypnion, Inc.
(Hypnion), a privately held neuroscience drug discovery company focused on sleep disorders, and Ivy
Animal Health, Inc. (Ivy), a privately held applied research and pharmaceutical product development
company focused on the animal health industry, for $445.0 million in cash. The ongoing activities
with respect to these companies products in development are not material to our research and
development expenses. The results of operations are included in our consolidated financial
statements from the respective dates of acquisition.
14
The acquisition of Hypnion provides us with a broader and more substantive presence in the area of
sleep disorder research and ownership of HY10275, a novel Phase II compound with a dual mechanism
of action aimed at promoting better sleep onset and sleep maintenance. This was Hypnions only
significant asset. For this acquisition, we recorded a charge of $291.1 million, representing the
estimated fair value of the acquired compound, to acquired IPR&D in the second quarter of 2007
because the development-stage compound acquired did not have any alternative future use. This
charge was not deductible for tax purposes. Because Hypnion was a development-stage company, the
transaction was accounted for as an acquisition of assets rather than as a business combination
and, therefore, goodwill was not recorded.
The acquisition of Ivy provides us with product lines that complement those of our animal health
business. This acquisition has been accounted for as a business combination under the purchase
method of accounting. While the allocation of the purchase price has not been finalized, we
anticipate that $88.7 million will be allocated to other identifiable intangible assets, primarily
related to marketed products, $37.0 million will be allocated to acquired IPR&D, and $25.0 million
will be recorded as goodwill. The IPR&D represents products in development that are not yet
approved for marketing and have no alternative future use. Accordingly, the $37.0 million
allocated to acquired IPR&D was expensed immediately subsequent to the acquisition. The other
identifiable intangible assets will be amortized over their estimated remaining useful lives of 10
to 20 years. Goodwill resulting from this acquisition has been fully allocated to the animal
health business segment. The amount allocated to each of the intangible assets acquired, including
goodwill, is expected to be deductible for tax purposes.
During the first quarter of 2007, we entered into an agreement with OSI Pharmaceuticals, Inc. to
acquire the rights to its compound for the treatment of type 2 diabetes. At the inception of this
agreement, this compound was in the development stage (Phase I clinical trials) and had no
alternative future use. As with many development-phase compounds, launch of the product, if
approved, was not expected in the near term. Our charge for acquired IPR&D related to this
arrangement was $25.0 million, is included as expense in the first quarter of 2007, and is
deductible for tax purposes.
ASSET IMPAIRMENTS, RESTRUCTURING, AND OTHER SPECIAL CHARGES
During the third quarter of 2007, following a settlement with one of our insurance carriers over
Zyprexa product liability claims, we reduced our expected product liability insurance recoveries.
This resulted in a charge of $81.3 million (pretax).
During the first quarter of 2007, in connection with previously announced strategic decisions, we
recorded asset impairment, restructuring, and other special charges of $123.0 million. These
charges primarily relate to a voluntary severance program at one of our U.S. plants and other costs
related to this action as well as the decision to stop construction of a planned insulin
manufacturing plant in the U.S. Also included are charges related to our previous decision to
close two research and development facilities and one production facility outside the U.S. The
component of this charge related to the non-cash asset impairment was $68.5 million (pretax) and
was necessary to adjust the carrying value of the assets to fair value. We expect to complete
these restructuring activities by December 31, 2007.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
OPERATING RESULTS
Executive Overview
I. Financial Results
Our worldwide sales increased 19 percent to $4.59 billion and 17 percent to $13.44 billion for the
third quarter and first nine months of 2007, respectively, as compared with the same periods of
2006. Net income was $926.3 million, or $.85 per share, for the third quarter of 2007 compared
with $873.6 million, or $.80 per share, for the third quarter of 2006, representing an increase of
6 percent in both net income and earnings per share. While sales increased 19 percent in the third
quarter of 2007, our earnings growth of 6 percent was impacted by cost of products sold increasing
at a rate higher than sales, as well as the special charge noted below. Net income was $2.10
billion, or $1.93 per share, for the first nine months of 2007 compared with $2.53 billion, or
$2.33 per share, for the first nine months of 2006, representing a decrease of 17 percent in both
net income and earnings per share. The decrease in earnings in the nine-month period was driven
primarily by the items discussed below. Net income comparisons between the periods are affected by
the following significant items, which occurred in 2007 and are reflected in our financial results:
|
|
|
We incurred a special charge following a settlement with one of our insurance carriers
over Zyprexa product liability claims, which led to a reduction of our expected product
liability insurance recoveries. This resulted in a charge of $81.3 million (pretax),
which decreased earnings per share by $.06 in the third quarter. |
15
|
|
|
We incurred in-process research and development (IPR&D) charges associated with the
acquisition of Hypnion of $291.1 million (no tax benefit) and the acquisition of Ivy of
$37.0 million (pretax), which decreased earnings per share by $.29 in the second quarter. |
|
|
|
|
We incurred IPR&D charges associated with the acquisition of ICOS of $303.5 million (no
tax benefit) and the licensing arrangement with OSI Pharmaceuticals of $25.0 million
(pretax), which decreased earnings per share by $.29 in the first quarter. |
|
|
|
|
We recognized asset impairments, restructuring, and other special charges associated
with previously announced strategic decisions affecting manufacturing and research
facilities of $123.0 million (pretax), which decreased earnings per share by $.08 in the
first quarter. |
II. Business Development and Recent Product and Late-Stage Pipeline Developments
Significant Items Since July 1, 2007:
|
|
|
In November, with our collaboration partner Daiichi Sankyo Company, Limited, we
announced that in the pivotal Phase III head-to-head TRITON TIMI-38 clinical trial our
investigational antiplatelet agent prasugrel produced a highly significant 19 percent reduction in
relative risk in the composite primary endpoint of cardiovascular death, non-fatal heart attack,
and non-fatal stroke when compared with clopidogrel (Plavix®) in the treatment of patients across
the full spectrum of acute coronary syndrome undergoing percutaneous coronary intervention. In a
key secondary endpoint analysis, patients on prasugrel experienced a 52 percent reduction in a
relative risk compared with clopidogrel in recurrence of stent-related thrombosis (clots).
Prasugrel-treated patients experienced a statistically significant increase in major bleeding
from causes other than coronary artery bypass grafting compared to clopidogrel-treated patients (2.4
percent vs. 1.8 percent, respectively), including higher rates of life-threatening bleeding (1.4
percent vs. 0.9 percent, respectively). In both treatment arms, the study identified three
distinct patient subpopulations with a higher risk of major bleeding: patients 75 years of age or
older, patients weighing less than 132 pounds, and patients with a history of transient ischemic
attack (a mild stroke) or stroke. We and Daiichi Sankyo are in the process of finalizing the
regulatory submission documents and are still hoping to complete our submission to the U.S. FDA by
year end. |
|
|
|
|
In October, with our collaboration partners, Amylin Pharmaceuticals, Inc. and Alkermes,
Inc., we announced positive results from a 30-week comparator study of once-weekly
exenatide long-acting release (LAR) injection and Byetta (exenatide) injection taken twice
daily in patients with type 2 diabetes. Once-weekly exenatide showed statistically
superior glucose control compared to Byetta. After 30 weeks of treatment, both once-weekly
exenatide and Byetta treatment resulted in average weight loss of approximately 8 pounds.
The side-effect profile of once-weekly exenatide was similar to that of Byetta. |
|
|
|
|
In October, we entered into an agreement with Glenmark Pharmaceuticals Limited India
whereby we acquired the rights to a portfolio of transient receptor potential vanilloid
sub-family 1 (TRPV1) antagonist molecules, including a clinical phase compound. The
compound is currently in early clinical phase development as a potential next-generation
treatment for various pain conditions, including osteoarthritic pain. Under the terms of
the agreement, we incurred a charge to earnings for acquired IPR&D of $45.0 million
(pretax) which will be included as expense in the fourth quarter of 2007. |
|
|
|
|
In October, we entered into a global strategic alliance with MacroGenics, Inc. to
develop and commercialize teplizumab, a humanized anti-CD3 monoclonal antibody, as well as
other potential next generation anti-CD3 molecules for use in the treatment of autoimmune
diseases. As part of the arrangement, we acquired the exclusive rights to the molecule.
Teplizumab is currently being studied in the PROTÉGÉ trial, a global pivotal Phase II/III
clinical trial for individuals with recent-onset type 1 diabetes. Under the terms of the
agreement, we incurred a charge to earnings for acquired IPR&D of $44.0 million (pretax)
which will be included as expense in the fourth quarter of 2007. |
|
|
|
|
We submitted a supplemental new drug application to the U.S. Food and Drug
Administration (FDA) for Cymbalta® for the management of fibromyalgia. |
|
|
|
|
In September, the FDA approved Evista for a new use to reduce the risk of invasive
breast cancer in two populations: postmenopausal women with osteoporosis and postmenopausal
women at high risk for invasive breast cancer. |
|
|
|
|
We submitted an application with the European Medicines Agency for centralized review of
Alimta®, in combination with cisplatin, for the first-line treatment of advanced non-small
cell lung cancer. |
Significant Items Prior to July 1, 2007:
|
|
|
On January 29, 2007 we completed the acquisition of ICOS Corporation at a cost of
approximately $2.3 billion. The acquisition brings the full value of Cialis to us and
enables us to realize operational efficiencies in the further development, marketing, and
selling of this product. |
|
|
|
|
In January, we licensed from OSI Pharmaceuticals its glucokinase activator (GKA) program
for the treatment of type 2 diabetes, including the lead compound PSN010. Lilly received an
exclusive license to develop and market any compounds derived from the GKA program. |
|
|
|
|
On April 3, 2007, we completed the acquisition of Hypnion, Inc., a privately held
neuroscience drug discovery company focused on sleep disorders. The deal expands our
presence in the area of sleep disorder research and provides ownership of HY10275, a novel
Phase II insomnia compound with a dual mechanism of action aimed at promoting better sleep
onset and sleep maintenance. |
|
|
|
|
On June 29, 2007, we completed the acquisition of Ivy Animal Health, Inc., a privately
held applied research and pharmaceutical product development company focused on the animal
health industry. The acquisition provides us with product lines that complement those of
our animal health business. |
III. Legal, Regulatory, and Other Matters
In October 2007, the United States Supreme Court denied the petitions for certiorari that were
filed by Teva Pharmaceuticals and Dr. Reddys Laboratories, bringing to an end the two companies
challenges to the validity of Lillys U.S. Zyprexa patent.
In October 2007, as a part of ongoing discussions with the FDA, we updated the Zyprexa (olanzapine)
and Symbyax® (olanzapine and fluoxetine HCl) U.S. product labels. Specifically, the changes include
new warnings for weight gain and hyperlipidemia (elevation
16
of triglycerides and cholesterol) and updated information in the warning for hyperglycemia (elevated blood
sugar). The label also states that while relative risk estimates are inconsistent, the association between atypical
antipsychotics and increases in glucose levels appears to fall on a continuum and olanzapine
appears to have a greater association than some other atypical antipsychotics.
In October 2007, we announced an upcoming update to the Byetta U.S. label. The precautions
section of the label is being updated with information about acute pancreatitis, including
additional guidance regarding the symptoms that may be suggestive of acute pancreatitis and
subsequent patient management.
In June 2007, we received notice of two court rulings by the Canadian Federal Court and the
German Patent Court that permit the entry of generic olanzapine by competitors into the Canadian
and German markets. Generic olanzapine is available for sale in certain provinces in Canada. We
expect generic olanzapine to become available for sale by competitors in Germany during the fourth quarter of
2007.
In July 2007, the Centers for Medicare and Medicaid Services released a final rule seeking to
implement sections of the Deficit Reduction Act of 2005. This rule relates to the Medicaid Program
and seeks to cover the calculation and use of Average Manufacturer Price and Best Price for
pharmaceuticals. We do not anticipate that implementation of the final rule will be material to
our financial position or results of operations.
We have reached agreements with claimants attorneys involved in U.S. Zyprexa product liability
litigation to settle a total of approximately 30,200 claims against us relating to the
medication. Approximately 1,200 claims remain. As a result of our product liability
exposures, the substantial majority of which were related to Zyprexa, we recorded net pretax
charges of $1.07 billion in the second quarter of 2005 and $494.9 million in the fourth quarter
of 2006.
We have received requests for information about Zyprexa from the offices of Representative Henry
Waxman, Chair of the House Committee on Oversight and Government Reform, and Senator Charles
Grassley, ranking member of the Senate Finance Committee, and we are cooperating with their
requests.
In the United States, implementation of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA), which provides a prescription drug benefit under the Medicare
program, took effect January 1, 2006. Various measures have been discussed and/or passed in both
the U.S. House of Representatives and U.S. Senate that would legalize the importation of
prescription drugs and either allow or require the Secretary of Health and Human Services to
negotiate drug prices directly with pharmaceutical manufacturers. We expect pricing pressures at
the federal and state levels to continue.
In March 2004, we were notified by the U.S. Attorneys office for the Eastern District of
Pennsylvania that it had commenced a civil investigation relating to our U.S. marketing and
promotional practices.
International operations also are generally subject to extensive price and market regulations,
and there are many proposals for additional cost-containment measures, including proposals that
would directly or indirectly impose additional price controls or reduce the value of our
intellectual property protection.
Sales
Third-quarter and first-nine-months 2007 sales growth of 19 percent and 17 percent, respectively, was driven primarily by
increased volume of several products launched this decade, most notably Cymbalta, and by the inclusion of Cialis since our
January 29, 2007 acquisition of ICOS. Sales in the U.S. increased by $370.4 million, or 18 percent, and $1.05 billion, or 17 percent,
for the third quarter and first nine months of 2007, respectively, compared with the same periods of 2006. Sales outside the U.S.
increased $352.2 million, or 20 percent, and $946.1 million, or 18 percent, for the third quarter and first nine months of 2007, respectively.
For the third quarter, worldwide sales volume increased 14 percent, exchange rates increased sales 3 percent, and selling prices increased
sales 2 percentage points. For the first nine months of 2007, worldwide sales volume increased 12 percent, while exchange rates and selling
prices contributed 3 percent and 2 percent to sales growth, respectively.
17
The following tables summarize our net sales activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
Three Months Ended |
|
September 30, |
|
Percent |
|
|
September 30, 2007 |
|
2006 |
|
Change |
Product |
|
U.S.1 |
|
Outside U.S. |
|
Total |
|
Total |
|
From 2006 |
|
|
(Dollars in millions) |
Zyprexa |
|
$ |
540.6 |
|
|
$ |
625.5 |
|
|
$ |
1,166.1 |
|
|
$ |
1,084.7 |
|
|
|
8 |
|
Cymbalta |
|
|
444.3 |
|
|
|
68.9 |
|
|
|
513.2 |
|
|
|
348.6 |
|
|
|
47 |
|
Gemzar |
|
|
166.5 |
|
|
|
227.9 |
|
|
|
394.4 |
|
|
|
354.6 |
|
|
|
11 |
|
Humalog |
|
|
216.1 |
|
|
|
146.4 |
|
|
|
362.5 |
|
|
|
322.2 |
|
|
|
12 |
|
Cialis2 |
|
|
116.6 |
|
|
|
194.8 |
|
|
|
311.4 |
|
|
|
55.0 |
|
|
NM |
Evista |
|
|
169.5 |
|
|
|
93.7 |
|
|
|
263.2 |
|
|
|
257.9 |
|
|
|
2 |
|
Humulin |
|
|
90.8 |
|
|
|
152.5 |
|
|
|
243.3 |
|
|
|
230.0 |
|
|
|
6 |
|
Animal health products |
|
|
112.4 |
|
|
|
124.2 |
|
|
|
236.6 |
|
|
|
216.2 |
|
|
|
9 |
|
Alimta |
|
|
110.8 |
|
|
|
104.2 |
|
|
|
215.0 |
|
|
|
157.2 |
|
|
|
37 |
|
Forteo® |
|
|
124.8 |
|
|
|
55.7 |
|
|
|
180.5 |
|
|
|
149.1 |
|
|
|
21 |
|
Strattera |
|
|
103.6 |
|
|
|
26.9 |
|
|
|
130.5 |
|
|
|
126.4 |
|
|
|
3 |
|
Humatrope® |
|
|
51.5 |
|
|
|
54.1 |
|
|
|
105.6 |
|
|
|
101.6 |
|
|
|
4 |
|
Other pharmaceutical
products |
|
|
229.6 |
|
|
|
234.9 |
|
|
|
464.5 |
|
|
|
460.6 |
|
|
|
1 |
|
|
|
|
|
|
Total net sales |
|
$ |
2,477.1 |
|
|
$ |
2,109.7 |
|
|
$ |
4,586.8 |
|
|
$ |
3,864.1 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
Nine Months Ended |
|
September 30, |
|
Percent |
|
|
September 30, 2007 |
|
2006 |
|
Change |
Product |
|
U.S.1 |
|
Outside U.S. |
|
Total |
|
Total |
|
From 2006 |
|
|
(Dollars in millions) |
Zyprexa |
|
$ |
1,627.4 |
|
|
$ |
1,859.7 |
|
|
$ |
3,487.1 |
|
|
$ |
3,207.1 |
|
|
|
9 |
|
Cymbalta |
|
|
1,288.3 |
|
|
|
186.3 |
|
|
|
1,474.6 |
|
|
|
892.3 |
|
|
|
65 |
|
Gemzar |
|
|
495.0 |
|
|
|
671.9 |
|
|
|
1,166.9 |
|
|
|
1,036.9 |
|
|
|
13 |
|
Humalog |
|
|
639.4 |
|
|
|
421.0 |
|
|
|
1,060.4 |
|
|
|
947.3 |
|
|
|
12 |
|
Evista |
|
|
518.5 |
|
|
|
286.5 |
|
|
|
805.0 |
|
|
|
775.0 |
|
|
|
4 |
|
Cialis2 |
|
|
290.8 |
|
|
|
506.8 |
|
|
|
797.6 |
|
|
|
161.2 |
|
|
NM |
Humulin |
|
|
263.7 |
|
|
|
448.2 |
|
|
|
711.9 |
|
|
|
668.3 |
|
|
|
7 |
|
Animal health products |
|
|
301.3 |
|
|
|
365.2 |
|
|
|
666.5 |
|
|
|
615.5 |
|
|
|
8 |
|
Alimta |
|
|
322.2 |
|
|
|
287.8 |
|
|
|
610.0 |
|
|
|
440.4 |
|
|
|
39 |
|
Forteo |
|
|
355.7 |
|
|
|
155.4 |
|
|
|
511.1 |
|
|
|
422.2 |
|
|
|
21 |
|
Strattera |
|
|
338.4 |
|
|
|
74.2 |
|
|
|
412.6 |
|
|
|
422.7 |
|
|
|
(2 |
) |
Humatrope |
|
|
161.8 |
|
|
|
164.8 |
|
|
|
326.6 |
|
|
|
306.2 |
|
|
|
7 |
|
Other pharmaceutical
products |
|
|
689.3 |
|
|
|
724.3 |
|
|
|
1,413.6 |
|
|
|
1,550.6 |
|
|
|
(9 |
) |
|
|
|
|
|
Total net sales |
|
$ |
7,291.8 |
|
|
$ |
6,152.1 |
|
|
$ |
13,443.9 |
|
|
$ |
11,445.7 |
|
|
|
17 |
|
|
|
|
|
NM Not meaningful |
|
1
|
U.S. sales
include sales in Puerto Rico. |
|
2
|
Prior to the acquisition of ICOS, the Cialis sales shown in the table above represent
results only in the territories in which we marketed Cialis exclusively. The remaining sales
relate to the joint-venture territories of Lilly ICOS LLC (North America, excluding Puerto Rico,
and Europe). Our share of the joint-venture territory sales, net of expenses and taxes, is
reported in other income net in our consolidated condensed income statement. Subsequent to the
acquisition, all Cialis product sales are included in our net sales in our consolidated condensed
income statement. |
18
Product Highlights
U.S. sales of Zyprexa, a treatment for schizophrenia, bipolar mania, and bipolar maintenance,
increased 4 percent and 5 percent in the third quarter and first nine months of 2007, respectively,
compared with the same periods of 2006, due to higher prices, offset in part by declining demand.
Sales outside the U.S. increased 11 percent and 13 percent in the third quarter of 2007 and first
nine months of 2007, respectively, driven by the favorable impact of foreign exchange rates and
increased demand.
Results from our primary diabetes care products are as follows:
|
|
|
U.S. sales of Humalog, our insulin analog, increased 9 percent during the third
quarter and first nine months of 2007, due to increased prices and higher demand.
Humalog sales outside the U.S. increased 19 percent and 16 percent during the third
quarter and first nine months of 2007, respectively, due to increased demand, as
well as a favorable impact of foreign exchange rates, offset in part by declining
prices. |
|
|
|
|
U.S. sales of Humulin, a biosynthetic human insulin, decreased 6 percent and
remained flat for the third quarter and first nine months of 2007, respectively,
driven primarily by lower demand, offset in part by higher prices. Humulin sales
outside the U.S. increased 14 percent and 11 percent during the third quarter and
first nine months of 2007, respectively, driven primarily by increased volume and
the favorable impact of foreign exchange rates, offset in part by declining prices. |
|
|
|
|
Sales of Byetta®, the first in a new class of medicines known as incretin
mimetics for type 2 diabetes that we market with Amylin Pharmaceuticals (Amylin),
were $164.8 million and $466.6 million during the third quarter and first nine
months of 2007, respectively. We report as revenue our 50 percent share of
Byettas gross margin in the U.S., 100 percent of Byetta sales outside the U.S.,
and our sales of Byetta pen delivery devices to Amylin, which increased 40 percent
to $87.1 million and 59 percent to $238.6 million during the third quarter and
first nine months of 2007, respectively, compared with the same periods in 2006. |
|
|
|
|
U.S. revenues of Actos®, an oral agent for the treatment of type 2 diabetes,
were $40.8 million and $122.3 million during the third quarter and first nine
months of 2007, respectively, as compared to $34.7 million and $237.0 million,
respectively, for the same periods in 2006. Actos is manufactured by Takeda
Chemical Industries, Ltd. Our U.S. marketing rights with respect to Actos expired
in September 2006; however, we will continue receiving royalties from Takeda
Pharmaceuticals North America at a declining rate through September 2009. We
continue to market the product in many countries outside the U.S. Sales outside
the U.S. increased 35 percent, to $57.1 million, and 27 percent, to $155.1million,
during the same periods, due to increased demand, as well as a favorable impact of
foreign exchange rates, offset in part by lower prices. |
U.S. sales of Cymbalta, a treatment of major depressive disorder, diabetic peripheral neuropathic
pain, and generalized anxiety disorder, increased 45 percent and 65 percent for the third quarter
of 2007 and first nine months of 2007, respectively, as compared with the same period last year,
due primarily to increased demand. Cymbalta sales outside the U.S. increased 64 percent and 69
percent for the third quarter and first nine months of 2007, respectively, driven primarily by
higher demand, and to a lesser extent the impact of foreign exchange rates and higher prices.
Cymbalta continues to gain market share in the U.S. and internationally.
U.S. sales of Gemzar, a product approved to fight various cancers, increased 9 percent for both the
third quarter and first nine months of 2007, as compared to the same periods in 2006, due to higher
prices and increased demand. Gemzar sales outside the U.S. increased 13 percent and 15 percent for
the third quarter and first nine months of 2007, respectively, due primarily to increased demand
and a favorable impact of foreign exchange rates.
Total worldwide sales of Cialis, a treatment for erectile dysfunction, were $311.4 million and
$870.3 million during the third quarter and first nine months of 2007, respectively. This includes
$72.7 million of sales in the Lilly ICOS joint-venture territories for the period prior to the
acquisition of ICOS. Worldwide sales grew 27 percent in the third quarter of 2007 and 24 percent
in the first nine months of 2007, compared with the same periods in 2006. U.S. sales increased 22
percent and 19 percent, during the third quarter and first nine months of 2007, respectively, due
to increased demand and prices. Sales outside the U.S. increased 30 percent and 27 percent during
the third quarter and first nine months of 2007, respectively, due to increased demand, a favorable
impact of foreign exchange rates, and increased prices. Prior to the ICOS acquisition, Cialis
sales in our territories were reported in revenue, while in the joint venture territories our 50
percent share of revenues, net of expenses and taxes, was reported in other income net.
U.S. sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal
women and for risk reduction of invasive breast cancer in postmenopausal women with osteoporosis
and postmenopausal women at high risk for invasive breast cancer, increased 4 percent and 6 percent
for the third quarter and first nine months of 2007, respectively, as compared to the same periods
in 2006, due primarily to higher prices. Evista sales outside the U.S. decreased 1 percent for the
third quarter and nine month periods of 2007, due primarily to lower prices, offset in part by a
favorable impact of foreign exchange rates.
U.S. sales of Alimta, a treatment for malignant pleural mesothelioma and second-line treatment of
non-small cell lung cancer, increased 23 percent and 26 percent for the third quarter and first
nine months of 2007, respectively, as compared to the same periods in 2006, due primarily to
increased demand. Alimta sales outside the U.S. increased 55 percent and 56 percent during the
third quarter and first nine months of 2007, respectively, due primarily to increased demand as
well as a favorable impact of foreign exchange rates.
19
U.S. sales of Forteo, a treatment for severe osteoporosis, increased 20 percent and 22 percent in
the U.S. in the third quarter and first nine months of 2007, respectively, as compared to the same
periods in 2006, due primarily to higher net effective selling prices. Sales outside the U.S.
increased 24 percent and 20 percent for the third quarter and first nine months of 2007,
respectively, due primarily to higher demand as well as a favorable impact in foreign exchange
rates.
U.S. sales of Strattera, a treatment of attention-deficit hyperactivity disorder in children,
adolescents, and adults, decreased 8 percent and 9 percent during the third quarter and first nine
months of 2007, respectively, as compared with the same periods in 2006, due to a decline in demand
in both periods, offset in part by increased prices in the first nine months of 2007. Strattera
sales outside the U.S. increased 91 percent and 51 percent for the third quarter and first nine
months of 2007, respectively, due primarily to higher demand.
Gross Margin, Costs, and Expenses
For the third quarter of 2007, gross margins as a percent of net sales decreased by 0.7 percentage
points, to 77.0 percent. This decrease was primarily due to planned third-quarter 2007 maintenance
shutdowns of certain manufacturing facilities, the expense resulting from the amortization of the
intangible assets acquired in the ICOS acquisition, and the impact of foreign exchange rates,
offset in part by manufacturing expenses growing at a slower rate than sales. For the first nine
months of 2007, gross margins as a percentage of net sales remained flat at 77.9 percent.
Overall, marketing and administrative expenses rose 23 percent, to $1.48 billion, and 21 percent,
to $4.34 billion for the third quarter and first nine months of 2007, respectively. This increase
was largely due to the impact of the ICOS acquisition, increased marketing and selling expenses
in support of key products (primarily Cymbalta and the diabetes care products) and, for the first
nine months of 2007, an increase in litigation-related costs. Research and development expenses
were $844.5 million and $2.53 billion for the third quarter and first nine months of 2007,
respectively. Compared with the third quarter and first nine months of 2006, research and
development expenses increased 12 percent. In addition to the acquisition of ICOS, this increase
was due to increases in incentive compensation, discovery research, and late-stage clinical trial
costs. Research and development expenses for the first nine months of 2007 also increased
compared with the same period in 2006 due to costs associated with the consequences of the FDAs
decision on ArxxantTM and the withdrawal of the Arxxant application in Europe.
In the third quarter of 2007, we incurred a special charge of $81.3 million related to a
reduction in our expected product liability insurance recoveries. With the acquisitions of
Hypnion and Ivy in the second quarter of 2007, and the acquisition of ICOS and the product
acquisition from OSI in the first quarter of 2007, total in-process research and development
charges for the first nine months of 2007 were $656.6 million.
Other income net decreased by $6.2 million, to $49.8 million, and by $45.2 million, to $89.9
million for the third quarter and first nine months of 2007, respectively. Other income net
consists of interest expense, interest income, the after-tax operating results of the Lilly ICOS
joint venture prior to the ICOS acquisition, and all other miscellaneous income and expense items.
|
|
|
Interest expense for the third quarter and nine-month period in 2007 decreased $6.9
million, to $55.8 million, and $25.6 million to $167.9 million, respectively, due to lower
average debt balances in 2007 as compared with the same periods of 2006. |
|
|
|
|
Interest income decreased $17.9 million, to $49.6 million and $38.6 million to $157.0
million for the third quarter and first nine months of 2007, respectively, due to lower
cash balances in 2007 as compared with the same periods of 2006. |
|
|
|
|
The Lilly ICOS joint venture income for the third quarter and first nine months of 2007
decreased by $23.8 million and $55.1 million, respectively, as a result of the acquisition.
Subsequent to the acquisition of ICOS, all sales and expenses associated with Cialis are
included in their respective lines on Lillys income statement. |
|
|
|
|
Net other miscellaneous income and expense items increased $28.6 million to $56.0
million and $22.9 million to $89.8 million for third-quarter 2007 and first nine months of
2007, respectively, as compared with the same periods in 2006. The increases are primarily
a result of higher business development income resulting from out-licensing of legacy and
development-stage products, offset by lower gains on sales of equity instruments. |
We incurred tax expense of $252.1 million and $725.9 million, for the third quarter and first nine
months of 2007, respectively. The effective tax rate was 21.4 percent and 25.7 percent, up from
21.0 percent for the comparable periods in 2006, primarily because the in-process research and
development charges associated with the acquisitions of ICOS and Hypnion were not deductible.
20
FINANCIAL CONDITION
As of September 30, 2007, cash, cash equivalents, and short-term investments totaled $3.57
billion compared with $3.89 billion at December 31, 2006. Cash flows from operations of $2.92
billion during the first nine months of 2007 and net proceeds from the issuance of long-term debt
of $1.44 billion were more than offset by the net cash paid for corporate acquisitions of $2.67
billion, dividends paid of $1.39 billion, and net purchases of property and equipment of $715.7
million.
Total debt at September 30, 2007, was $4.97 billion, an increase of $1.26 billion from December
31, 2006. In the first nine months of 2007, we issued approximately $2.5 billion of debt to
finance our acquisition of ICOS, including the acquisition of ICOS stock and refinancing of ICOS
debt, and repaid $1.06 billion of long-term debt. Our current debt ratings from Standard &
Poors and Moodys remain at AA and Aa3, respectively.
We believe that cash generated from operations, along with available cash and cash equivalents,
will be sufficient to fund our normal operating needs, including debt service, capital
expenditures, costs associated with product liability litigation, dividends, and taxes in 2007.
We believe that amounts available through our existing commercial paper program should be
adequate to fund maturities of short-term borrowings, if necessary. We currently have $1.20
billion of unused committed bank credit facilities, which backs our commercial paper program.
Various risks and uncertainties, including those discussed in the Financial Expectations for 2007
section, may affect our operating results and cash generated from operations.
LEGAL AND REGULATORY MATTERS
Patent Litigation
We are engaged in the following patent litigation matters brought pursuant to procedures set out in
the Hatch-Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
|
|
|
Dr. Reddys Laboratories, Ltd. (Reddy), Teva Pharmaceuticals, and Zenith Goldline
Pharmaceuticals, Inc., which was subsequently acquired by Teva Pharmaceuticals (together,
Teva), each submitted Abbreviated New Drug Applications (ANDAs) seeking permission to
market generic versions of Zyprexa prior to the expiration of our relevant U.S. patent
(expiring in 2011) and alleging that this patent was invalid or not enforceable. We filed
lawsuits against these companies in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that the patent is valid, enforceable, and being infringed. The
district court ruled in our favor on all counts on April 14, 2005, and on December 26,
2006, that ruling was upheld by the Court of Appeals for the Federal Circuit. On October
1, 2007, the United States Supreme Court denied the generic companies petition for
certiorari, bringing this litigation to a close. |
|
|
|
|
Barr Laboratories, Inc. (Barr), submitted an ANDA in 2002 seeking permission to market a
generic version of Evista prior to the expiration of our relevant U.S. patents (expiring in
2012-2017) and alleging that these patents are invalid, not enforceable, or not infringed.
In November 2002, we filed a lawsuit against Barr in the U.S. District Court for the
Southern District of Indiana, seeking a ruling that these patents are valid, enforceable,
and being infringed by Barr. Teva has also submitted an ANDA seeking permission to market
a generic version of Evista. In June 2006, we filed a similar lawsuit against Teva in the
U.S. District Court for the Southern District of Indiana. The lawsuit against Teva is
currently scheduled for trial beginning March 9, 2009, while no trial date has been set in
the lawsuit against Barr. We believe that Barrs and Tevas claims are without merit and
we expect to prevail. However, it is not possible to predict or determine the outcome of
this litigation, and accordingly, we can provide no assurance that we will prevail. An
unfavorable outcome could have a material adverse impact on our consolidated results of
operations, liquidity, and financial position. |
|
|
|
|
Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma (USA) Inc. (Mayne), and Sun
Pharmaceutical Industries Inc. (Sun) each submitted ANDAs seeking permission to market
generic versions of Gemzar prior to the expiration of our relevant U.S. patents (expiring
in 2010 and 2013), and alleging that these patents are invalid. We filed lawsuits in the
U.S. District Court for the Southern District of Indiana against Sicor (February 2006),
Mayne (October 2006), and Sun (December 2006), seeking a ruling that these patents are
valid and are being infringed. Each generic company moved to dismiss our lawsuit, arguing
that the Indiana court lacks jurisdiction. The court denied Sicors motion in April 2007
and Maynes motion in August 2007. In September 2007, before the court ruled on Suns
motion to dismiss, we elected to voluntarily dismiss our lawsuit against Sun without
prejudice to our right to commence another infringement action against Sun should future
developments warrant. We expect to prevail in this litigation and believe that these
claims are without merit. However, it is not possible to predict or determine the outcome
of this litigation, and accordingly, we can provide no assurance that we will prevail. An
unfavorable outcome could have a material adverse impact on our consolidated results of
operations, liquidity, and financial position. |
21
|
|
|
Actavis Elizabeth LLC (Actavis), Glenmark Pharmaceuticals Inc.,USA (Glenmark), Sun
Pharmaceutical Industries Limited (Sun), Sandoz Inc. (Sandoz), Mylan Pharmaceuticals Inc.
(Mylan), Teva Pharmaceuticals USA, Inc. (Teva), Apotex Inc. (Apotex), Aurobindo Pharma Ltd.
(Aurobindo), Synthon Laboratories, Inc. (Synthon), and Zydus Pharmaceuticals, USA, Inc.
(Zydus) each submitted an ANDA seeking permission to market generic versions of Strattera
prior to the expiration of our relevant U.S. patent (expiring in 2017), and alleging that
this patent is invalid. We filed a lawsuit against Actavis in the United States District
Court for the District of New Jersey in August 2007, and Sandoz filed a declaratory
judgment action in the same court. In September 2007, we amended the complaint in the New
Jersey lawsuit to add Glenmark, Sun, Sandoz, Mylan, Teva, Apotex, Aurobindo, Synthon, and
Zydus as defendants. We expect to prevail in this litigation and believe that these claims
are without merit. However, it is not possible to predict or determine the outcome of this
litigation, and accordingly, we can provide no assurance that we will prevail. An
unfavorable outcome could have a material adverse impact on our consolidated results of
operations, liquidity, and financial position. |
We have received challenges to Zyprexa patents in a number of countries outside the United
States:
|
|
|
In Canada, several generic pharmaceutical manufacturers have challenged the validity of
our Zyprexa compound and method-of-use patent (expiring in 2011). In April 2007, the
Canadian Federal Court ruled against the first challenger, Apotex Inc. (Apotex), and Apotex
has appealed that ruling. In June 2007, the Canadian Federal Court held that the invalidity
allegations of a second challenger, Novopharm Ltd. (Novapharm), were justified and denied
our request that Novapharm be prohibited from receiving marketing approval for generic
olanzapine in Canada. Novapharm began selling generic olanzapine in certain provinces of
Canada in the third quarter of 2007. We have appealed that decision and sued Novopharm for
patent infringement. The appeal is scheduled to be heard November 6, 2007. The patent
infringement suit has been tentatively scheduled for trial in the third quarter of 2008. |
|
|
|
|
In Germany, generic pharmaceutical manufacturers Egis-Gyogyszergyar and Neolabs Ltd.
challenged the validity of our Zyprexa compound and method-of-use patents (expiring in
2011). In June 2007, the German Federal Patent Court held that our patent is invalid. We
are appealing the decision. We anticipate generic olanzapine will be
launched by competitors in the fourth
quarter of this year. |
|
|
|
|
We have received challenges in a number of other countries, including Spain, the UK, and
several smaller European countries. In Spain, we were successful in the trial court in
defeating the generic manufacturers challenge, but the case has been appealed. We
anticipate a decision in the first quarter of 2008. In the UK, a trial date has tentatively
been set for July 2008. |
We are vigorously contesting the various legal challenges to our Zyprexa patents on a
country-by-country basis. We cannot predict or determine the outcome of this litigation. The
availability of generic olanzapine in Canada and Germany will have a material adverse impact on
our consolidated results of operations. The availability of generic olanzapine in additional
markets could have a material adverse impact on our consolidated results of operations.
In June 2002, Ariad Pharmaceuticals, Inc., the Massachusetts Institute of Technology, the
Whitehead Institute for Biomedical Research, and the President and Fellows of Harvard College in
the U.S. District Court for the District of Massachusetts sued us, alleging that sales of two of
our products, Xigris® and Evista, were inducing the infringement of a patent related to the
discovery of a natural cell signaling phenomenon in the human body, and seeking royalties on past
and future sales of these products. On May 4, 2006, a jury in Boston issued an initial decision
in the case that Xigris and Evista sales infringe the patent. The jury awarded the plaintiffs
approximately $65 million in damages, calculated by applying a 2.3 percent royalty to all U.S.
sales of Xigris and Evista from the date of issuance of the patent through the date of trial. In
addition, a separate bench trial with the U.S. District Court of Massachusetts was held the week
of August 7, 2006, on our contention that the patent is unenforceable and impermissibly covers
natural processes. In June 2005, the United States Patent and Trademark Office (USPTO) commenced
a reexamination of the patent, and in August 2007 took the position that the Ariad claims at
issue are unpatentable, a position that Ariad continues to contest. In September 2007, the Court entered
a final judgment indicating that Ariads claims are patentable, valid, and enforceable, and
finding damages in the amount of $65 million plus a 2.3 percent royalty on net U.S. sales of
Xigris and Evista since the time of the jury decision. However, the Court deferred the
requirement to pay any damages until after all rights to appeal have been exhausted. We have
filed a motion for reconsideration of the verdict, or alternatively for a new trial. If it
becomes necessary, we will appeal any adverse decision. We believe that these allegations are
without legal merit, that we will ultimately prevail on these issues, and therefore that the
likelihood of any monetary damages is remote.
Government Investigations and Related Litigation
In March 2004, the Office of the U.S. Attorney for the Eastern District of Pennsylvania (EDPA)
advised us that it had commenced a civil investigation related to our U.S. marketing and
promotional practices, including our communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa, Prozac, and Prozac Weekly. A number of State
22
Medicaid Fraud Control Units are coordinating with the EDPA in its investigation of any
Medicaid-related claims relating to our marketing and promotion of Zyprexa. In October 2005, the
EDPA advised that it is also conducting an inquiry regarding certain rebate agreements we entered
into with a pharmacy benefit manager covering Axid, Evista, Humalog, Humulin, Prozac, and Zyprexa.
The inquiry includes a review of Lillys Medicaid best price reporting related to the product sales
covered by the rebate agreements.
In June 2005, we received a subpoena from the Office of the Attorney General, Medicaid Fraud
Control Unit, of the State of Florida, seeking production of documents relating to sales of Zyprexa
and our marketing and promotional practices with respect to Zyprexa.
In September 2006, we received a subpoena from the California Attorney Generals Office seeking
production of documents related to our efforts to obtain and maintain Zyprexas status on
Californias formulary, marketing and promotional practices with respect to Zyprexa, and
remuneration of health care providers.
In February 2007, we received a subpoena from the Office of the Attorney General of the State of
Illinois, seeking production of documents and information relating to sales of Zyprexa and our
marketing and promotional practices, including our communications with physicians and remuneration
of physician consultants and advisors, with respect to Zyprexa.
Beginning in August 2006, we have received civil investigative demands or subpoenas from the
attorneys general of a number of states under various state consumer protection laws. Most of
these requests are now part of a multistate investigative effort being coordinated by an executive
committee of attorneys general. We are aware that approximately 30 states are participating in
this joint effort, and it is possible that additional states will join the investigation. These
attorneys general are seeking a broad range of Zyprexa documents, including documents relating to
sales, marketing and promotional practices, and remuneration of health care providers. In
addition, we have been named as a defendant in a private suit in California State Court, which was
recently removed to federal court, alleging violations of the California False Claims Act with
respect to certain Zyprexa marketing and promotional practices. This suit was brought by an
individual on behalf of the government, under the qui tam provision of the California False Claims
Act.
We are cooperating in each of these investigations, including providing a broad range of
documents and information relating to the investigations. It is possible that other Lilly
products could become subject to investigation and that the outcome of these matters could
include criminal charges and fines, penalties, or other monetary or nonmonetary remedies. We
cannot predict or determine the outcome of these matters or reasonably estimate the amount or
range of amounts of any fines or penalties that might result from an adverse outcome. It is
possible, however, that an adverse outcome could have a material adverse impact on our
consolidated results of operations, liquidity, and financial position. We have implemented and
continue to review and enhance a broadly based compliance program that includes comprehensive
compliance-related activities designed to ensure that our marketing and promotional practices,
physician communications, remuneration of health care professionals, managed care arrangements,
and Medicaid best price reporting comply with applicable laws and regulations.
Product Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa product liability lawsuits in the
United States and have been notified of many other claims of individuals who have not filed suit.
The lawsuits and unfiled claims (together the claims) allege a variety of injuries from the
use of Zyprexa, with the majority alleging that the product caused or contributed to diabetes or
high blood-glucose levels. The claims seek substantial compensatory and punitive damages and
typically accuse us of inadequately testing for and warning about side effects of Zyprexa. Many
of the claims also allege that we improperly promoted the drug. Almost all of the federal
lawsuits are part of a Multi-District Litigation (MDL) proceeding before The Honorable Jack
Weinstein in the Federal District Court for the Eastern District of New York (MDL No. 1596).
Since June 2005, we have entered into agreements with various claimants attorneys involved in
U.S. Zyprexa product liability litigation to settle a substantial majority of the claims. The
agreements cover a total of approximately 30,200 claimants, including a large number of
previously filed lawsuits and other asserted claims. The two primary settlements were as
follows:
|
|
|
In June 2005, we reached an agreement in principle (and in September 2005 a final
agreement) to settle more than 8,000 claims for $690.0 million plus $10.0 million to
cover administration of the settlement. That settlement is being administered by special
settlement masters appointed by Judge Weinstein. |
|
|
|
|
In January 2007, we reached agreements with a number of plaintiffs attorneys to
settle more than 18,000 claims for approximately $500 million. |
23
The 2005 settlement totaling $700.0 million was paid during 2005. The January 2007 settlements
were recorded in other current liabilities in our December 31, 2006 consolidated balance sheet; a
majority of these settlements have been paid and the remainder will be paid during 2007.
The U.S. Zyprexa product liability claims not subject to these agreements include approximately
310 lawsuits in the U.S. covering approximately 1,200 plaintiffs. Trial dates have been set
for February 19 and May 12, 2008, in the Eastern
District of New York, for several of
the U.S. plaintiffs. In early 2005, we were served with four lawsuits seeking class action
status in Canada on behalf of patients who took Zyprexa. One of these four lawsuits has been
certified for residents of Quebec, and a second has been certified in Ontario and includes all
Canadian residents, except for residents of Quebec and British Columbia. The allegations in the
Canadian actions are similar to those in the litigation pending in the U.S. We are prepared to
continue our vigorous defense of Zyprexa in all remaining cases.
We have insurance coverage for a portion of our Zyprexa product liability claims exposure. The
third-party insurance carriers have raised defenses to their liability under the policies and are
seeking to rescind the policies. The dispute is now the subject of litigation in the federal
court in Indianapolis against certain of the carriers and in arbitration in Bermuda against other
carriers. While we believe our position has merit, there can be no assurance that we will
prevail. As discussed in Asset Impairments, Restructuring, and Other Special Charges, we have
reached a settlement with one of the insurance carriers that is part of this litigation.
In addition, we have been named as a defendant in numerous other product liability lawsuits
involving primarily diethylstilbestrol (DES) and thimerosal. The majority of these claims are
covered by insurance, subject to deductibles and coverage limits.
In the second quarter of 2005, we recorded a net pretax charge of $1.07 billion for product
liability matters. The charge took into account our estimated recoveries from our insurance
coverage related to these matters. The charge covered the following:
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The cost of the June 2005 Zyprexa settlements; and |
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Reserves for product liability exposures and defense costs regarding the then-known and
expected product liability claims to the extent we could formulate a reasonable estimate
of the probable number and cost of the claims. A substantial majority of those exposures
and costs were related to then-known and expected Zyprexa claims. |
As a result of the January 2007 settlements discussed above, we incurred a pre-tax charge of $494.9
million in the fourth quarter of 2006. The charge covered the following:
|
|
|
The cost of the January 2007 Zyprexa settlements; and |
|
|
|
|
Reserves for product liability exposures and defense costs regarding the then-known and
expected Zyprexa product liability claims to the extent we could formulate a reasonable
estimate of the probable number and cost of the claims. |
In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of
the Louisiana Department of Health and Hospitals, alleging that Zyprexa caused or contributed to
diabetes or high blood-glucose levels, and that we improperly promoted the drug. These cases have
been removed to federal court and are now part of the MDL proceedings in the Eastern District of
New York. In these actions, the Department of Health and Hospitals seeks to recover the costs it
paid for Zyprexa through Medicaid and other drug-benefit programs, as well as the costs the
department alleges it has incurred and will incur to treat Zyprexa-related illnesses. We have been
served with similar lawsuits filed by the states of Alaska, Mississippi, Montana, New Mexico,
Pennsylvania, South Carolina, Utah, and West Virginia in the courts of the respective states. The
Mississippi, Montana, New Mexico, and West Virginia cases have been removed to federal court and
are now part of the MDL proceedings in the Eastern District of New York.
In 2005, two lawsuits were filed in the Eastern District of New York purporting to be nationwide
class actions on behalf of all consumers and third-party payors, excluding governmental entities,
which have made or will make payments for their members or insured patients being prescribed
Zyprexa. These actions have now been consolidated into a single lawsuit, which is brought under
certain state consumer protection statutes, the federal civil RICO statute, and common law
theories, seeking a refund of the cost of Zyprexa, treble damages, punitive damages, and attorneys
fees. Two additional lawsuits were filed in the Eastern District of
New York in 2006 on similar grounds. As with the product liability suits, these lawsuits allege
that we inadequately tested for and warned about side effects of Zyprexa and improperly promoted
the drug.
We cannot predict with certainty the additional number of lawsuits and claims that may be asserted.
The ultimate resolution of Zyprexa product liability and related litigation could have a material
adverse impact on our consolidated results of operations, liquidity, and financial position.
24
Because of the nature of pharmaceutical products, it is possible that we could become subject to
large numbers of product liability and related claims for other products in the future. In the
past few years, we have experienced difficulties in obtaining product liability insurance due to a
very restrictive insurance market. Therefore, for substantially all of our currently marketed
products, we have been and expect that we will continue to be largely self-insured for future
product liability losses. In addition, as noted above, there is no assurance that we will be able
to fully collect from our insurance carriers on past claims.
Environmental Matters
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as
Superfund, we have been designated as one of several potentially responsible parties with respect
to fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally
liable for the entire amount of the cleanup. We also continue remediation of certain of our own
sites. We have accrued for estimated Superfund cleanup costs, remediation, and certain other
environmental matters. This takes into account, as applicable, available information regarding
site conditions, potential cleanup methods, estimated costs, and the extent to which other parties
can be expected to contribute to payment of those costs. We have reached a settlement with our
liability insurance carriers providing for coverage for certain environmental liabilities.
The litigation accruals and environmental liabilities and the related estimated insurance
recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our
consolidated balance sheets.
While it is not possible to predict or determine the outcome of the patent, product liability, or
other legal actions brought against us or the ultimate cost of environmental matters, we believe
that, except as noted above, the resolution of all such matters will not have a material adverse
effect on our consolidated financial position or liquidity, but could possibly be material to the
consolidated results of operations in any one accounting period.
FINANCIAL EXPECTATIONS FOR 2007
We have updated our earnings guidance for the full year of 2007, and now expect earnings per share
to be in the range of $2.74 to $2.79, representing growth of 12 to 14 percent as compared with
full-year 2006 results. We expect fourth-quarter earnings per share of $.81 to $.86. The earnings
per share guidance includes an anticipated increase in the effective tax rate for the fourth
quarter, the acquired in-process research and development charges related to the MacroGenics and
Glenmark in-licensing agreements, the impact of the potential launch of generic olanzapine by
competitors in Germany, normally scheduled manufacturing shutdowns, and additional investments in
research and development and sales and marketing to drive future growth. We have reconfirmed our
full-year 2007 sales guidance, and continue to expect sales to grow in the mid-teens and gross
margin as a percent of net sales to improve slightly compared with 2006. In addition, we continue
to expect operating expenses (the aggregate of research and development and marketing and
administrative expenses) percentage growth to be in the mid-teens, driven primarily by the
inclusion of all Cialis operating expenses subsequent to the acquisition, as well as increased
investment in research and development and ongoing expenditures for marketing and selling efforts
in support of Cymbalta and the diabetes care products. We have raised our guidance on other income
net, and now expect other income net to be approximately $100 million. We expect a
continuation of strong cash flow trends in 2007, with capital expenditures of approximately $1.1
billion.
We caution investors that any forward-looking statements or projections made by us, including those
above, are based on managements belief at the time they are made. However, they are subject to
risks and uncertainties. Actual results could differ materially and will depend on, among other
things, the continuing growth of our currently marketed products; developments with competitive
products; the timing and scope of regulatory approvals and the success of our new product launches;
asset impairments and restructuring charges; acquisitions and business development transactions;
foreign exchange rates; wholesaler inventory changes; other regulatory developments, litigation,
and government investigations; and the impact of governmental actions regarding pricing,
importation, and reimbursement for pharmaceuticals or the protection of intellectual property
rights. Other factors that may affect our operations and prospects are discussed in Item 1A of our
2006 Form 10-K, Risk Factors. We undertake no duty to update these forward-looking statements.
AVAILABLE INFORMATION ON OUR WEBSITE
We make available through our company website, free of charge, our company filings with the
Securities and Exchange Commission (SEC) as soon as reasonably practicable after we electronically
file them with, or furnish them to, the SEC. The reports we make available include annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements,
registration statements, and any amendments to those documents.
The website link to our SEC filings is http://investor.lilly.com/edgar.cfm.
25
Item 4. Controls and Procedures
(a) |
|
Evaluation of Disclosure Controls and Procedures. Under applicable SEC regulations,
management of a reporting company, with the participation of the principal executive officer
and principal financial officer, must periodically evaluate the companys disclosure controls
and procedures, which are defined generally as controls and other procedures of a reporting
company designed to ensure that information required to be disclosed by the reporting company
in its periodic reports filed with the commission (such as this Form 10-Q) is recorded,
processed, summarized, and reported on a timely basis. |
|
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|
Our management, with the participation of Sidney Taurel, chairman and chief executive officer,
and Derica W. Rice, senior vice president and chief financial officer, evaluated our disclosure
controls and procedures as of September 30, 2007, and concluded that they are effective. |
|
(b) |
|
Changes in Internal Controls. During the third quarter of 2007, there were no changes in
our internal control over financial reporting that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. |
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 2, Managements Discussion and Analysis, Legal, Regulatory, and Other Matters,
for information on various legal proceedings, including but not limited to:
|
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The patent litigation involving Zyprexa, Evista, Gemzar, and Strattera |
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|
The investigations by the U.S. Attorney for the Eastern District of Pennsylvania and
various state attorneys general relating to our U.S. sales, marketing, and promotional
practices |
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The Zyprexa product liability and related litigation, including claims brought on behalf
of healthcare payors |
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The legal proceedings we have filed against several of our product liability insurance
carriers with respect to our coverage for the Zyprexa product liability claims |
That information is incorporated into this Item by reference.
Other Patent Litigation
In July 2005, Vanderbilt University filed a lawsuit in the United States District Court in
Delaware against ICOS Corporation seeking to add three of its scientists as co-inventors
on the Cialis compound and method-of-use patents. Lilly intends to vigorously defend this
litigation. The trial has been scheduled for January 2008. We believe these claims are
without legal merit and expect to prevail in this litigation; however, it is not possible
to predict or determine the outcome. An unfavorable outcome could have a material adverse
impact on our consolidated results of operations, liquidity, and financial position.
Other Product Liability Litigation
We refer to Part I, Item 3, of our Form 10-K annual report for 2006 for the discussion of product
liability litigation involving diethylstilbestrol (DES) and vaccines containing the preservative
thimerosal. In the DES litigation, we have been named as a defendant in approximately 55 suits
involving approximately 100 claimants including one lawsuit filed in the Eastern District of New
York purporting to be a nationwide class action on behalf of women who allegedly either have
developed, or are at an extremely high risk of developing, breast cancer as a result of their in
utero exposure to DES. In the thimerosal litigation, we have been named as a defendant in
approximately 350 suits, with approximately 930 claimants.
Shareholder Litigation
Two putative class action lawsuits filed in the United States District Court for the Eastern
District of New York against us and various current and former directors, officers and employees
(Smith et al. v. Eli Lilly and Company et al., filed March 28, 2007, and Valentine v. Eli Lilly and
Company et al., filed April 5, 2007) have been consolidated under the caption In re Eli Lilly and
Company Securities Litigation. In August 2007, the lead plaintiffs filed a consolidated amended
complaint, seeking certification of a putative class of purchasers of our stock from August 1,
2002, through December 22, 2006. The complaint alleges that the defendants made false and
misleading statements regarding Zyprexa in violation of the Securities Exchange Act of 1934, and
seeks unspecified compensatory damages and the costs of suit, including attorneys fees. In
October 2007, defendants filed a motion to dismiss the consolidated amended complaint. We believe
these claims are without merit and intend to defend against them vigorously.
In April 2007, the company received demands from two shareholders that the board of directors cause
the company to take legal action against current and former directors and others for allegedly
causing damage to the company with respect to the allegedly
26
improper marketing of Evista, Prozac,
and Zyprexa. We received a similar demand in September related only to Zyprexa. In accordance
with procedures established under the Indiana Business Corporation Law (Ind. Code §23-1-32), the
board has appointed a committee to consider the demands and determine what action, if any, the
company should take in response.
Other Matters
Between 2003 and 2005, various counties in New York sued us and many other pharmaceutical
manufacturers, claiming in general that as a result of alleged improprieties by the manufacturers
in the calculation and reporting of average wholesale prices for purposes of Medicaid
reimbursement, the counties overpaid their portion of the cost of pharmaceuticals. The suits seek
monetary and other relief, including civil penalties and treble damages. A similar suit was filed
against us and many other manufacturers by the state of Mississippi. The suits have been
transferred to the U.S. District Court for the District of Massachusetts for pretrial proceedings
and are in the earliest stages. In October 2007, the State of Iowa reportedly filed a similar suit
against Lilly and 78 other pharmaceutical companies. Lilly has not yet been served with that
complaint.
While it is not possible to predict or determine the outcome of the patent, product liability, or
other legal actions brought against us or the ultimate cost of environmental matters, we believe
that, except as noted above, the resolution of all such matters will not have a material adverse
effect on our consolidated financial position or liquidity but could possibly be material to the
consolidated results of operations in any one accounting period.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the activity related to repurchases of our equity securities during
the three-month period ended September 30, 2007:
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Total Number of |
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Approximate Dollar |
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Shares Purchased |
|
Value of Shares that |
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as Part of Publicly |
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May Yet Be |
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Total Number of |
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Average Price Paid |
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Announced Plans |
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Purchased Under the |
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Shares Purchased |
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per Share |
|
or Programs |
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Plans or Programs |
Period |
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(a) |
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(b) |
|
(c) |
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(d) |
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(in thousands) |
|
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(in thousands) |
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(in millions) |
July 2007 |
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$ |
|
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|
|
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$ |
419.2 |
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August 2007 |
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1 |
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55.44 |
|
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419.2 |
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September 2007 |
|
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|
|
|
|
|
|
|
|
|
|
419.2 |
|
|
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|
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Total |
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|
1 |
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The amounts presented in columns (a) and (b) above represent purchases of common stock related to
employee stock option exercises. The amounts presented in columns (c) and (d) in the above table
represent activity related to our $3.0 billion share repurchase program announced in March 2000.
As of September 30, 2007, we have purchased $2.58 billion related to this program. During the
third quarter of 2007, no shares were repurchased pursuant to this program and we do not expect to
purchase any shares under this program during the remainder of 2007.
Item 6. Exhibits
The following documents are filed as exhibits to this Report:
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EXHIBIT 11.
|
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Statement re: Computation of Earnings per Share |
|
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EXHIBIT 12.
|
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Statement re: Computation of Ratio of Earnings to Fixed Charges |
|
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EXHIBIT 31.1
|
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Rule 13a-14(a) Certification of Sidney Taurel, Chairman of the Board and Chief
Executive Officer |
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EXHIBIT 31.2
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Rule 13a-14(a) Certification of Derica W. Rice, Senior Vice President and Chief
Financial Officer |
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EXHIBIT 32.
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Section 1350 Certification |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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ELI LILLY AND COMPANY
(Registrant) |
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Date November 1, 2007
|
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/s/James B. Lootens
James B. Lootens
|
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Secretary and Deputy General Counsel |
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Date November 1, 2007
|
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/s/Arnold C. Hanish
Arnold C. Hanish
|
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Executive Director, Finance, and
Chief Accounting Officer |
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28
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
|
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EXHIBIT 11.
|
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Statement re: Computation of Earnings per Share |
|
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EXHIBIT 12.
|
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Statement re: Computation of Ratio of Earnings to Fixed Charges |
|
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EXHIBIT 31.1
|
|
Rule 13a-14(a) Certification of Sidney Taurel, Chairman of the Board and Chief
Executive Officer |
|
|
|
EXHIBIT 31.2
|
|
Rule 13a-14(a) Certification of Derica W. Rice, Senior Vice President and Chief
Financial Officer |
|
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EXHIBIT 32.
|
|
Section 1350 Certification |
29