Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 1-6351
ELI LILLY AND COMPANY
AN INDIANA CORPORATION I.R.S. EMPLOYER NUMBER 35-0470950
ADDRESS: LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
TELEPHONE NUMBER, INCLUDING AREA CODE: (317) 276-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock New York and Pacific Stock Exchanges
Preferred Stock Purchase Rights New York and Pacific Stock Exchanges
8-1/8% Notes Due December 1, 2001 New York Stock Exchange
8-3/8% Notes Due December 1, 2006 New York Stock Exchange
6.57% Notes Due January 1, 2016 New York Stock Exchange
6.77% Notes Due January 1, 2036 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 X No
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
Aggregate market value of voting stock of the Registrant held by non-affiliates
as of February 13, 1998 (Common Stock): $59,637,592,293.
Number of shares of common stock outstanding as of February 13, 1998:
1,111,258,506.
Portions of the following documents have been incorporated by reference into
this report:
DOCUMENT PARTS INTO WHICH INCORPORATED
-------- -----------------------------
Registrant's Annual Report to Shareholders Parts I, II, and IV
for fiscal year ended December 31, 1997
Registrant's Proxy Statement dated March 4, 1998 Part III
PART I
ITEM 1. BUSINESS
Eli Lilly and Company was incorporated in 1901 under the laws of Indiana to
succeed to the drug manufacturing business founded in Indianapolis, Indiana, in
1876 by Colonel Eli Lilly. The Company*, including its subsidiaries, discovers,
develops, manufactures, and sells products and provides services in one industry
segment--Life Sciences. Products are manufactured or distributed through owned
or leased facilities in the United States, Puerto Rico, and 27 other countries.
Its products are sold in approximately 160 countries. Through its PCS Health
Systems ("PCS") and Integrated Medical Systems ("IMS") subsidiaries, the Company
provides health care management services in the United States.
Most of the Company's products were discovered or developed through the
Company's research and development activities, and the success of the Company's
business depends to a great extent on the continued introduction of new products
resulting from these research and development activities. Research efforts are
primarily directed toward discovering and developing products to diagnose and
treat diseases in human beings and animals and to increase the efficiency of
animal food production.
FINANCIAL INFORMATION RELATING TO INDUSTRY
SEGMENTS AND CLASSES OF PRODUCTS
Financial information relating to industry segments and classes of
products, set forth in the Company's 1997 Annual Report at pages 32-33 under
"Segment Information" (pages 14-15 of Exhibit 13 to this Form 10-K), is
incorporated herein by reference.
Due to several factors, including the introduction of new products by the
Company and other manufacturers, the relative contribution of any particular
Company product to consolidated net sales is not necessarily constant from year
to year, and its contribution to net income is not necessarily the same as its
contribution to consolidated net sales.
PRODUCTS AND SERVICES
PHARMACEUTICAL PRODUCTS
Pharmaceutical products include
Central-nervous-system agents, the Company's largest-selling product
group, including Prozac'r', a selective serotonin reuptake inhibitor,
indicated for the treatment of depression and, in many countries, for
bulimia and obsessive-compulsive disorder; Zyprexa'r', a product for the
treatment of schizophrenia; the Darvon'r' line of analgesic products;
and Permax'r', a treatment for Parkinsonis disease;
- --------
*The terms "Company" and "Registrant" are used interchangeably herein to refer
to Eli Lilly and Company or to Eli Lilly and Company and its consolidated
subsidiaries, as the context requires.
-1-
Endocrine products, including Humulin'r', human insulin produced
through recombinant DNA technology; Humalog'r', a rapid-acting
injectable human insulin analog of recombinant DNA origin; Iletin'r',
animal-source insulin in its various pharmaceutical forms; Humatrope'r',
human growth hormone produced by recombinant DNA technology; and
Evista'r', cleared for marketing in the United States in late 1997 and
launched in early 1998 for the prevention of osteoporosis in
post-menopausal women;
Anti-infectives, including the oral cephalosporin antibiotics
Ceclor'r' (cefaclor), Keflex'r', and Keftab'r', used in the treatment of
a wide range of bacterial infections; the oral carbacephem antibiotic
Lorabid'r', used to treat a variety of bacterial infections; the oral
macrolide antibiotic Dynabac'r'; the injectable cephalosporin
antibiotics Tazidime'r', Kefurox'r', and Kefzol'r', used to treat a wide
range of bacterial infections in the hospital setting; Nebcin'r', an
injectable aminoglycoside antibiotic used in hospitals to treat various
infections caused by staphylococci and Gram-negative bacteria; and
Vancocin'r' HCI, an injectable antibiotic used primarily to treat
staphylococcal infections;
An antiulcer agent, Axid'r', an H2 antagonist, indicated for the
treatment of active duodenal ulcer, for maintenance therapy for duodenal
ulcer patients after healing of an active duodenal ulcer, for reflux
esophagitis, and for benign gastric ulcer;
Cardiovascular agents, including ReoPro'r', a monoclonal antibody
product developed and manufactured by Centocor, Inc. and marketed by the
Company for use in all patients undergoing angioplasty and patients with
unstable angina who are not responding to conventional therapy and who
are scheduled to have angioplasty within 24 hours; Dobutrex'r', an
inotropic agent; and Cynt'tm', marketed outside the United States for
treatment of hypertension; and
Oncolytic agents, including Gemzar'r', indicated for treatment of
advanced or metastatic pancreatic cancer, and, in many countries outside
the United States, for treatment of non-small-cell lung cancer;
Oncovin'r', indicated for treatment of acute leukemia and, in
combination with other oncolytic agents, for treatment of several
different types of advanced cancers; Velban'r', used in a variety of
malignant neoplastic conditions; and Eldisine'r', indicated for
treatment of acute childhood leukemia resistant to other drugs.
ANIMAL HEALTH PRODUCTS
Animal health products include Tylan'r', an antibiotic used to control
certain diseases in cattle, swine, and poultry and to improve feed efficiency
and growth; Rumensin'r', a cattle feed additive that improves feed efficiency
and growth; Coban'r', Monteban'r' and Maxiban'r', anticoccidial agents for use
in poultry; Apralan'r', an antibiotic used to control enteric infections in
calves and swine; Micotil'r' and Pulmotil'r', antibiotics used to treat
respiratory disease in cattle and swine, respectively; and other products for
livestock and poultry.
HEALTH CARE MANAGEMENT SERVICES
PCS provides computer-based prescription drug claims processing, pharmacy
benefit administration and management services, mail order pharmacy services,
data management and disease-management services to health plan sponsors,
including insurance companies, third-party administrators, self-insured
employers, health maintenance organizations, and Blue
-2-
Cross/Blue Shield organizations that underwrite or administer prescription
benefit plans. PCS helps these customers manage prescription benefit costs by
providing drug utilization reviews, clinically-based formularies, generic
substitution programs, and disease-management programs. RECAP'r', PCS's on-line
prescription claims management system, is linked with over 95% of retail
pharmacies in the U.S. In 1996, PCS introduced a mail order pharmacy program for
its customers known as Performance Mail. Integrated Medical Systems operates
physician-based electronic communication networks, called IMS MEDACOM'r'
networks, that deliver clinical, administrative, and financial information to
hospitals, payers/managed-care plans, laboratories, and physicians. In March
1998, the Company and Electronic Data Systems Corporation (EDS) formed Kinetra,
a joint venture to develop a comprehensive, interactive electronic health
information network for physicians and other health care professionals. IMS
operations will become part of Kinetra, which is 51 percent owned by EDS and 49
percent owned by the Company.
MARKETING
Most of the Company's major products are marketed worldwide. Health care
management services are marketed primarily in the United States.
Pharmaceuticals -- United States
In the United States, the Company distributes pharmaceutical products
principally through approximately 195 independent wholesale distributing
outlets. Marketing policy is designed to assure that products are immediately
available to physicians, pharmacies, hospitals, and appropriate health care
professionals throughout the country. Five wholesale distributors in the United
States accounted for approximately 15%, 12%, 11%, 11%, and 6%, respectively, of
the Company's consolidated net sales in 1997. No other distributor accounted for
as much as 2% of consolidated net sales. The Company also sells pharmaceutical
products directly to the United States government and other manufacturers, but
those direct sales are not material to consolidated net sales.
The Company's major pharmaceutical products are promoted in the United
States under the Lilly and Dista trade names by Company sales forces employing
salaried sales representatives. These sales representatives, many of whom are
registered pharmacists, call upon physicians, wholesalers, hospitals,
managed-care organizations, retail pharmacists, and other health care
professionals. Their efforts are supported by the Company through advertising in
medical and drug journals, distribution of literature and samples of certain
products to physicians, and exhibits for use at medical meetings. In 1997, the
Company began advertising certain of its products directly to consumers in the
United States. The Company has created specialized sales forces dedicated to
specific products and product lines, such as diabetes care, Gemzar, ReoPro, and
Zyprexa. The Company has entered into licensing arrangements under which certain
products manufactured by the Company, such as Ceclor CD, Dynabac, Keftab, and
Permax, are marketed by other pharmaceutical companies.
Large purchasers of pharmaceuticals, such as managed-care groups and
government and long-term care institutions, now account for a significant
portion of total pharmaceutical purchases in the United States. The Company has
created special sales groups to service managed-care organizations, government
and long-term care institutions, hospital contract administrators, and certain
retail pharmacies. In response to competitive pressures, the Company has entered
into arrangements with a number of these organizations providing for
-3-
discounts or rebates on one or more Company products or other cost-sharing
arrangements. The Company has also entered into agreements with generic
pharmaceutical companies for the promotion, distribution and/or supply of
generic forms of certain of the Company's products.
Pharmaceuticals -- Outside the United States
Outside the United States, pharmaceutical products are promoted primarily
by salaried sales representatives. While the products marketed vary from country
to country, anti-infectives constitute the largest single group in total sales.
Distribution patterns vary from country to country. In recent years, the Company
has significantly expanded its marketing efforts in a number of overseas
markets, including emerging markets in Central and Eastern Europe, Latin
America, Asia and Africa.
Animal Health Products
Elanco Animal Health, a division of the Company, employs field salespeople
throughout the United States to market animal health products. Sales are made to
wholesale distributors, retailers, feed manufacturers, or producers in
conformance with varying distribution patterns applicable to the various types
of products. The Company also has an extensive sales force outside the United
States to market its animal health products.
RAW MATERIALS
Most of the principal materials used by the Company in manufacturing
operations are chemical, plant, and animal products that are available from more
than one source. Certain raw materials are available or are purchased
principally from only one source. Unavailability of certain materials from
present sources could cause an interruption in production pending establishment
of new sources or, in some cases, implementation of alternative processes.
Although the major portion of the Company's sales abroad are of products
manufactured wholly or in part abroad, a principal source of active ingredients
for these manufactured products continues to be the Company's facilities in the
United States.
PATENTS AND LICENSES
Patent protection is important to the Company's ability to successfully
commercialize its life sciences innovations. The Company owns, has applications
pending for, or is licensed under, a substantial number of patents, both in the
United States and in other countries, relating to products, product uses, and
manufacturing processes. There can be no assurance that patents will result from
the Company's pending applications. Moreover, patents relating to particular
products, uses, or processes do not preclude other manufacturers from employing
alternative processes or from successfully marketing substitute products to
compete with the patented products or uses. Outside the United States, patent
protection varies widely. In many countries, patent protection is weak or
nonexistent.
Patent protection of certain products, processes, and uses--particularly
that relating to Prozac, Axid, Gemzar, Lorabid, Zyprexa, and Evista--is
considered to be important to the operations of the Company. The United States
compound patent covering Prozac expires in 2001 and a patent for the process by
which Prozac works expires in 2003. See "Legal Proceedings" at pages 10-11 for a
discussion of certain litigation involving these two patents. In other
countries, Prozac patents generally either have expired or will expire over the
next
-4-
several years. Other U.S. compound patent expirations include the following:
Axid, 2002; Lorabid, 2006; and Zyprexa, 2011. The Gemzar compound patent in the
U.S. expires in 2006, but a use patent covering treatment of neoplasms with
Gemzar is in force until 2012. The Company holds a number of U.S. patents
covering Evista that the Company believes will provide exclusivity in the United
States until at least 2012.
The Company also grants licenses under patents and know-how developed by
the Company and manufactures and sells products and uses technology and know-how
under licenses from others. Royalties paid by the Company in relation to
pharmaceuticals amounted to approximately $140 million in 1997 and royalties
received were not material.
COMPETITION
The Company's pharmaceutical products compete with products manufactured by
many other companies in highly competitive markets in the United States and
throughout the world. The Company's animal health products compete on a
worldwide basis with products of pharmaceutical, chemical, and other companies
that operate animal health divisions or subsidiaries. PCS faces strong
competition from other pharmacy benefit management companies and claims
processors in the United States. For certain accounts, PCS competes with some
retail pharmacy chains, mail order programs and organized groups of independent
pharmacists.
Important competitive factors include price and demonstrated
cost-effectiveness, product characteristics and dependability, service, and
research and development of new products and processes. The introduction by
competitors of new products and processes with therapeutic or cost advantages
can result in progressive price reductions or decreased volume of sales of the
Company's products, or both. New products introduced with patent protection
usually must compete with other products already on the market at the time of
introduction or products developed by competitors after introduction.
Manufacturers of generic products typically invest far less in research and
development than research-based pharmaceutical companies and accordingly are
able to price their products significantly lower than branded products.
Therefore, upon patent expiration, branded products often face intense price
competition from generic forms of the product. In many countries outside the
United States, patent protection is weak or nonexistent. The growth of managed
care organizations has intensified price competition significantly in the United
States and in varying degrees in some other countries.
The Company believes its long-term competitive position depends upon the
success of its research and development endeavors in discovering and developing
innovative, demonstrably cost-effective products, together with increased
productivity resulting from improved manufacturing methods, marketing efforts,
and the provision of value-added services to its customers. There can be no
assurance that the Company's research and development efforts will result in
commercially successful products or that products manufactured or processes used
by the Company will not become outmoded from time to time as a result of
products or processes developed by its competitors.
GOVERNMENTAL REGULATION
For many years the Company's operations have been regulated extensively by
the federal government, to some extent by state governments, and in varying
degrees by foreign governments. The Federal Food, Drug, and Cosmetic Act, other
federal statutes and regulations, various state statutes and regulations, and
laws and regulations of foreign
-5-
governments govern testing, approval, production, labeling, distribution,
post-market surveillance, advertising, and promotion of most of the Company's
products. The lengthy process of laboratory testing, clinical testing, data
analysis and regulatory review necessary for required governmental approvals is
extremely costly and can significantly delay product introductions in a given
market. In addition, the Company's operations are subject to complex federal,
state, local, and foreign environmental and occupational safety laws and
regulations. PCS and its customers operate in a rapidly-changing regulatory
environment affecting all aspects of the health insurance and managed care
marketplace. It is anticipated that compliance with regulations affecting the
manufacture and sale of current products and services and the introduction of
new products and services will continue to require substantial scientific and
technical effort, time, and expense and significant capital investment.
In the United States, the Omnibus Budget Reconciliation Act of 1990
requires the Company to provide rebates to state governments on their purchases
of certain Company products under state Medicaid programs. Other cost
containment measures have been adopted or proposed by federal, state, and local
government entities that provide or pay for health care. In most international
markets, the Company operates in an environment of government-mandated cost
containment programs, which may include price controls, discounts and rebates,
restrictions on physician prescription levels, compulsory licenses and generic
substitution. The Company expects that governments inside and outside the United
States will continue to adopt a variety of measures to contain health care
costs, including pharmaceutical costs. Recently, the U.S. FDA issued for comment
a draft guidance in which FDA has asserted that it has the authority to regulate
certain communications of pharmacy benefit managers (PBMs) owned by
pharmaceutical manufacturers (such as PCS) as if those communications were made
by the manufacturer. The draft guidance also extends to certain PBMs that are
not owned by manufacturers but have contracts with them. The Company cannot
predict the extent to which its business may be affected by these or other
potential future legislative or regulatory developments.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are responsible for the
discovery or development of most of the products the Company offers today. Its
commitment to research and development dates back more than 100 years. The
Company invests heavily in research and development, which management believes
is critical to long-term competitiveness in the pharmaceutical industry. The
growth in research and development expenditures and personnel over the past
several years demonstrates both the continued vitality of the Company's
commitment and the increasing costs and complexity of bringing new products to
the market. At the end of 1997, approximately 5,750 people, including a
substantial number who are physicians or scientists holding graduate or
postgraduate degrees or highly skilled technical personnel, were engaged in
pharmaceutical and animal health research and development activities. The
Company expended $1.04 billion on these research and development activities in
1995, $1.19 billion in 1996, and $1.38 billion in 1997.
The Company's research is concerned primarily with the effects of synthetic
chemicals and natural products on biological systems. The results of that
research are applied to develop products to treat diseases in humans and
animals. The primary effort is devoted to human pharmaceutical products. The
Company concentrates its pharmaceutical research and development efforts in five
therapeutic categories: central nervous system and related diseases; endocrine
diseases, including diabetes and osteoporosis; infectious diseases; cancer; and
cardiovascular diseases. The Company is engaged in biotechnology research
programs
-6-
involving recombinant DNA, proteins, and genomics (the development of
therapeutics through identification of disease-causing genes and their cellular
function).
In addition to the research carried on in the Company's own laboratories,
the Company sponsors and underwrites the cost of research and development by
independent organizations, including educational institutions and research-based
human health care companies, and contracts with others for the performance of
research in their facilities. It utilizes the services of physicians, hospitals,
medical schools, and other research organizations in the United States and many
other countries to establish through clinical evidence the safety and
effectiveness of new products. The Company actively seeks out opportunities to
invest in external research and technologies that hold the promise to complement
and strengthen the Company's own research efforts. These investments can take
many forms, including licensing arrangements, co-development and co-marketing
agreements, and outright acquisitions.
Extensive work is also conducted in the animal sciences, including animal
nutrition and physiology and veterinary medicine. Certain of the Company's
research and development activities relating to pharmaceutical products may be
applicable to animal health products. An example is the search for agents that
will cure infectious disease.
QUALITY ASSURANCE
The Company's success depends in great measure upon customer confidence in
the quality of the Company's products and in the integrity of the data that
support their safety and effectiveness. The quality of the Company's products
arises from the total commitment to quality in all parts of the Company,
including research and development, purchasing, facilities planning,
manufacturing, and distribution. Quality-assurance procedures have been
developed relating to the quality and integrity of the Company's scientific
information and production processes.
Control of production processes involves rigid specifications for
ingredients, equipment, facilities, manufacturing methods, packaging materials,
and labeling. Control tests are made at various stages of production processes
and on the final product to assure that the product meets all regulatory
requirements and the Company's standards. These tests may involve chemical and
physical chemical analyses, microbiological testing, testing in animals, or a
combination of these tests. Additional assurance of quality is provided by a
corporate quality-assurance group that monitors existing pharmaceutical and
animal health manufacturing procedures and systems in the parent company,
subsidiaries, and affiliates.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding the executive
officers of the Company. All but three of the executive officers have been
employed by the Company in executive or managerial positions during the last
five years. Randall L. Tobias became Chairman of the Board and Chief Executive
Officer in June 1993. He had served as Vice Chairman of the Board of AT&T from
1986 until he assumed his present position. He has been a member of the Board of
Directors of the Company since 1986. Charles E. Golden joined the Company as
Executive Vice President and Chief Financial Officer and was elected to the
Board of Directors in March 1996. He previously had held a number of executive
positions with General Motors Corporation ("GM") including Vice President of GM
and Chairman and
-7-
Managing Director of Vauxhall Motors Limited, a GM subsidiary in the United
Kingdom, from 1993 to 1996, Vice President and Treasurer from 1992 to 1993, and
Treasurer from 1989 to 1992. Thomas Trainer joined the Company in January 1995.
Since 1991 he had served as Vice President and Chief Information Officer of
Reebok International Ltd. Prior to joining Reebok, he was Senior Vice President
of Operations of A.C. Nielson Co.
Except as indicated in the following table, the term of office for each
executive officer expires on the date of the annual meeting of the Board of
Directors, to be held on April 20, 1998, or on the date his or her successor is
chosen and qualified. No director or executive officer of the Company has a
"family relationship" with any other director or executive officer of the
Company, as that term is defined for purposes of this disclosure requirement.
There is no understanding between any executive officer of the Company and any
other person pursuant to which the executive officer was selected.
NAME AGE OFFICES
- ----------------------------------------------------------------------------------------------
Randall L. Tobias 56 Chairman of the Board and Chief Executive Officer
(since June 1993) and a Director
Sidney Taurel 49 President and Chief Operating Officer (since February
1996) and a Director
Charles E. Golden 51 Executive Vice President and Chief Financial Officer
(since March 1996) and a Director
August M. Watanabe, M.D. 56 Executive Vice President, Science and Technology
(since February 1996) and a Director
Mitchell E. Daniels, Jr. 48 Vice President, Corporate Strategy and Policy (since
January 1997)
Rebecca O. Goss 50 Vice President and General Counsel (since March 1995)
Pedro P. Granadillo 50 Vice President, Human Resources (since April 1993)
Bryce D. Carmine 46 President and General Manager, Eli Lilly Japan K.K.
(since May 1995)*
Alan S. Clark 63 President, U.S. Operations (since January 1997)*
Michael L. Eagle 50 Vice President, Manufacturing (since January 1994)*
Brendan P. Fox, D.V.M. 54 President, Elanco Animal Health Business Unit (since
January 1991)*
Michael E. Hanson 50 President, Internal Medicine Business Unit (since
August 1994)(retired December 31, 1997)
- ----------
* Serves in office until successor is appointed.
-8-
NAME AGE OFFICES
- ----------------------------------------------------------------------------------------------
James A. Harper 50 President, Endocrine Business Unit (since August 1994)*
Gerhard N. Mayr 51 President, Intercontinental Operations (since
September 1997)*
Richard D. Pilnik 41 Vice President, Strategy and Marketing (since January
1998)*
Robert N. Postlethwait 49 President, Neuroscience Business Unit (since August
1994)*
William R. Ringo, Jr. 52 President, Internal Medicine Business Unit (since
January 1998)*
Gino Santini 41 President, Women's Health Business Unit (since August
1997)*
Thomas Trainer 51 Vice President, Information Technology, and Chief
Information Officer (since January 1995)*
Albertus Van den Bergh 44 President, European Operations (since September 1997)*
EMPLOYEES
At the end of 1997, the Company had approximately 31,100 employees,
including approximately 15,100 employees outside the United States. A
substantial number of the Company's employees have long records of continuous
service.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
Financial information relating to foreign and domestic operations, set
forth in the Company's 1997 Annual Report at pages 32-33 under "Segment
Information" (pages 14-15 of Exhibit 13), is incorporated herein by reference.
Eli Lilly International Corporation, a subsidiary, coordinates the
Company's manufacture and sale of products outside the United States.
Local restrictions on the transfer of funds from branches and subsidiaries
located abroad (including the availability of dollar exchange) have not to date
been a significant deterrent in the Company's overall operations abroad. The
Company cannot predict what effect these restrictions or the other risks
inherent in foreign operations, including possible nationalization, might have
on its future operations or what other restrictions may be imposed in the
future. In addition, changing currency values can either favorably or
unfavorably affect the financial position and results of operations of the
Company. The Company actively manages its foreign exchange risk through various
hedging techniques including the use of foreign currency contracts.
- ----------
* Serves in office until successor is appointed.
-9-
ITEM 2. PROPERTIES
The Company's principal domestic and international executive offices are
located in Indianapolis. At December 31, 1997, the Company owned 14 production
and distribution facilities in the United States and Puerto Rico. Together with
the corporate administrative offices, these facilities contain an aggregate of
approximately 9.5 million square feet of floor area. Major production sites
include Indianapolis; Clinton and Lafayette, Indiana; and Carolina and Mayaguez,
Puerto Rico. The Company also leases sales offices in a number of cities located
in the United States and abroad. PCS owns or leases administrative facilities in
Scottsdale, Arizona, containing an aggregate of approximately 480,000 square
feet, and leases a 94,000 square foot mail-order pharmacy facility in Fort
Worth, Texas. It also leases administrative space in other cities in the United
States. Integrated Medical Systems leases administrative space in a number of
locations.
The Company owns production and distribution facilities in 18 countries
outside the United States and Puerto Rico, containing an aggregate of
approximately 4.0 million square feet of floor space. Leased production and
warehouse facilities are utilized in Puerto Rico and 17 countries outside the
United States.
The Company's research and development facilities in the United States
consist of approximately 3.7 million square feet and are located primarily in
Indianapolis and Greenfield, Indiana. Its major research and development
facilities abroad are located in Belgium, Germany, and the United Kingdom and
contain approximately 387,000 square feet. The Company also owns two tracts of
land, containing an aggregate of approximately 1,700 acres, a portion of which
is used for field studies of products.
The Company believes that none of its properties is subject to any
encumbrance, easement, or other restriction that would detract materially from
its value or impair its use in the operation of the business of the Company. The
buildings owned by the Company are of varying ages and in good condition.
ITEM 3. LEGAL PROCEEDINGS
Prozac Patent Litigation. In March 1996 the Company was informed by Barr
Laboratories, Inc. ("Barr") that it had submitted an abbreviated new drug
application ("ANDA") to the U.S. FDA seeking to market a generic form of Prozac
in the United States several years before the expiration of the Company's
patents. Barr has alleged that the Company's U.S. patents covering Prozac are
invalid and unenforceable. On April 11, 1996, the Company filed suit in the
United States District Court for the Southern District of Indiana seeking a
ruling that Barr's challenge to the Company's patents is without merit. In the
second quarter of 1997, the Company was informed that Geneva Pharmaceuticals,
Inc. ("Geneva") had submitted a similar ANDA and, like Barr, had asserted that
the Company's U.S. Prozac patents are invalid and unenforceable. On June 23,
1997, the Company sued Geneva in the same court seeking a similar ruling as in
the Barr suit. The two suits have been consolidated and discovery is proceeding.
The compound patent expires in February 2001 and a patent for the process by
which Prozac operates expires in December 2003. These patents are material to
the Company. The Company believes that the claims of Barr and Geneva are without
merit and that the Company should be successful in this litigation. However, it
is not possible to predict or determine the outcome of this litigation and
accordingly there can be no assurance that the
-10-
Company will prevail. An unfavorable outcome could have a material adverse
effect on the Company's consolidated financial position, liquidity, or results
of operations.
Product Liability Litigation. The Company is currently a defendant in a
variety of product litigation matters involving primarily diethylstilbestrol
("DES") and Prozac. In approximately 170 actions, including several with
multiple claimants, plaintiffs seek to recover damages on behalf of children or
grandchildren of women who ingested DES during pregnancy. In another
approximately 15 actions, plaintiffs seek to recover damages as a result of the
ingestion of Prozac.
Pricing Litigation. The Company has been named, together with numerous
other U.S. prescription pharmaceutical manufacturers and in some cases
wholesalers or distributors, as a defendant in a large number of related actions
brought by retail pharmacies and consumers of prescription pharmaceuticals in
the United States alleging violations of federal or state antitrust laws, or
both, based on the practice of providing discounts or rebates to managed-care
organizations and certain other purchasers. The federal cases have been
consolidated or coordinated in the Northern District of Illinois as In re Brand
Name Prescription Drugs Antitrust Litigation (MDL No. 997).
The federal suits include a certified class action on behalf of a majority
of retail pharmacies in the United States (the "Federal Class Action"). The
class plaintiffs allege an industrywide agreement in violation of the Sherman
Act to deny favorable pricing on sales of brand-name prescription
pharmaceuticals to certain retail pharmacies in the United States. The other
federal suits, brought as individual claims by several thousand pharmacies,
allege price discrimination in violation of the Robinson-Patman Act as well as
Sherman Act claims. The suits seek treble damages and injunctive relief against
allegedly discriminatory pricing practices.
The Company and several other manufacturers have agreed to settle the
Federal Class Action and that settlement is now final. The settlement amount,
which is not material, was accrued by the Company in the fourth quarter of 1995.
In addition, in June 1997 the Company reached a confidential settlement with a
number of retail pharmacy and supermarket chains that were plaintiffs in the
federal actions but had opted out of the Federal Class Action. With respect to
the remaining Robinson-Patman Act claims, the District Court has designated
certain plaintiffs and defendants named in the individual suits (not including
the Company) to participate in an initial trial or trials of the claims. No
trial dates have been set. Robinson-Patman claims asserted in the suits against
nondesignated defendants, including the Company, are stayed.
In addition, there are a number of related state court cases. The state
court suits typically seek money damages and injunctive relief against allegedly
discriminatory pricing practices. Cases have been brought in Alabama,
California, Minnesota, Mississippi, and Wisconsin by retail pharmacies alleging
violations of various state antitrust and pricing laws, purporting to be class
actions on behalf of all retail pharmacies in those states. The court in
California has certified a class of retail pharmacies, while a Mississippi trial
court has denied class certification. Settlements have been reached and approved
by the trial courts in the Minnesota and Wisconsin cases. Cases have also been
brought in state courts in Alabama, Arizona, California, District of Columbia,
Florida, Kansas, Maine, Michigan, Minnesota, New York, North Carolina,
Tennessee, and Wisconsin that purport to be class actions on behalf of consumers
of prescription pharmaceuticals, alleging violations of state antitrust, pricing
or consumer protection laws. The courts in California and the District of
Columbia have certified
-11-
classes of consumer plaintiffs, while the Maine, Michigan, and Minnesota courts
have denied class certification. The New York case has been dismissed and an
appeal is pending.
Other Matters. In March 1996, the Federal Trade Commission ("FTC")
commenced a non-public investigation focusing on the pricing practices described
under "Pricing Litigation" above. The Company has responded to two subpoenas
from the FTC requesting production of certain documents and other discovery
responses. The Company believes that all of its actions have been lawful and
proper and is cooperating with the investigation.
In October 1996, the FTC issued a subpoena to the Company and PCS
requesting production of certain documents in connection with a non-public
investigation reviewing whether the relationships and activities between
pharmacy benefit management companies and pharmaceutical companies have violated
federal antitrust law, including a review of whether the Company has violated
the consent decree it entered into at the time it acquired PCS in 1994. The
Company believes that all its actions and those of PCS have been lawful, proper
and in compliance with the PCS consent decree. The Company and PCS are
cooperating with the FTC's investigation.
The Company is also a defendant in other litigation, including product
liability and patent suits, of a character regarded as normal to its business.
While it is not possible to predict or determine the outcome of the legal
actions and investigations pending against the Company, the Company believes
that except as noted above, the costs associated with all such matters will not
have a material adverse effect on its consolidated financial position or
liquidity but could possibly be material to the consolidated results of
operations in any one accounting period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
During the fourth quarter of 1997, no matters were submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information relating to the principal market for the Company's common stock
and related stockholder matters, set forth in the Company's 1997 Annual Report
under "Selected Quarterly Data (unaudited)," at page 34 (page 16 of Exhibit 13),
and "Selected Financial Data (unaudited)," at page 35 (page 17 of Exhibit 13),
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for each of the Company's five most recent fiscal
years, set forth in the Company's 1997 Annual Report under "Selected Financial
Data (unaudited)," at page 35 (page 17 of Exhibit 13), are incorporated herein
by reference.
-12-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following portions of the Company's 1997 Annual Report (found at pages
1-8 and 36-38 of Exhibit 13) constitute management's discussion and analysis of
results of operations and financial condition and are incorporated herein by
reference:
"Review of Operations--Stock split and per-share data"
(page 22)
"Review of Operations--Operating results and net income--1997"
(pages 22-25)
"Review of Operations--Operating results and net income--1996"
(pages 25-26)
"Review of Operations--Financial condition" (pages 26-27)
"Review of Operations--Environmental and legal matters" (pages 27 and 30)
"Review of Operations--Private Securities Litigation Reform Act of 1995 --
a caution concerning forward-looking statements" (page 30)
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Quantitative and qualitative disclosures about market risk (e.g., interest
rate risk and foreign currency exchange risk) are set forth in the Company's
1997 Annual Report at "Review of Operations--Financial Condition" at page 27
(pages 5-6 of Exhibit 13) and are incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries,
listed in Item 14(a)1 and included in the Company's 1997 Annual Report at pages
24, 28, 29, and 31 (Consolidated Statements of Income, Consolidated Balance
Sheets, and Consolidated Statements of Cash Flows), pages 32 and 33 (Segment
Information), and pages 36-51 (Notes to Consolidated Financial Statements)
(together, pages 10-15 and 18-33 of Exhibit 13), and the Report of Independent
Auditors set forth in the Company's 1997 Annual Report at page 53 (page 35 of
Exhibit 13), are incorporated herein by reference.
Information on quarterly results of operations, set forth in the Company's
1997 Annual Report under "Selected Quarterly Data (unaudited)," at page 34 (page
16 of Exhibit 13), is incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
-13-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the Company's directors, set forth in the Company's
Proxy Statement dated March 4, 1998 (the "Proxy Statement"), under "Item 1.
Election of Directors" at pages 3-6, is incorporated herein by reference.
Information relating to the Company's executive officers is set forth at pages
7-9 of this Form 10-K under "Executive Officers of the Company." Information
relating to certain filing obligations of directors and executive officers under
the federal securities laws, set forth in the Proxy Statement under "Other
Matters--Section 16(a) Beneficial Ownership Reporting Compliance" at page 25,
is also incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation, set forth in the Proxy
Statement under "Directors' Compensation", "Executive Compensation",
"Compensation Committee Interlocks", "Retirement Plan", and "Change-in-Control
Severance Pay Arrangements" at pages 9-18, is incorporated herein by reference,
except that the Compensation and Management Development Committee Report and
Performance Graph are not so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information relating to ownership of the Company's common stock by persons
known by the Company to be the beneficial owners of more than 5% of the
outstanding shares of common stock and by management, set forth in the Proxy
Statement under "Common Stock Ownership by Directors and Executive Officers," at
page 8, and "Principal Holders of Common Stock," at page 9, is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Proxy Statement entitled "Certain Business
Relationships" at page 18 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries, included in the Company's 1997 Annual Report at the pages
indicated in parentheses, are incorporated by reference in Item 8:
Consolidated Statements of Income--Years Ended December 31, 1997, 1996,
and 1995 (page 24)(page 10 of Exhibit 13)
-14-
Consolidated Balance Sheets--December 31, 1997 and 1996 (pages 28-29)
(pages 11-12 of Exhibit 13)
Consolidated Statements of Cash Flows--Years Ended December 31, 1997,
1996, and 1995 (page 31)(page 13 of Exhibit 13)
Segment Information (pages 32-33)(pages 14-15 of Exhibit 13)
Notes to Consolidated Financial Statements (pages 36-51)(pages 18-33
of Exhibit 13)
(a)2. FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules of the Company and its
subsidiaries have been omitted because they are not required, are inapplicable,
or are adequately explained in the financial statements.
Financial statements of interests of 50% or less, which are accounted for
by the equity method, have been omitted because they do not, considered in the
aggregate as a single subsidiary, constitute a significant subsidiary.
(a)3. EXHIBITS
3.1 Amended Articles of Incorporation
3.2 By-laws
4.1 Rights Agreement dated as of July 18, 1988, between Eli Lilly and
Company and Bank One, Indianapolis, NA
4.2 Form of Indenture dated as of February 21, 1989, between Eli
Lilly and Company and Merchants National Bank & Trust Company of
Indianapolis, as Trustee
4.3 Form of Eli Lilly and Company Five Year Convertible Note
4.4 Form of Indenture with respect to Debt Securities dated as of
February 1, 1991, between Eli Lilly and Company and Citibank,
N.A., as Trustee
4.5 Form of Standard Multiple-Series Indenture Provisions dated, and
filed with the Securities and Exchange Commission on, February 1,
1991
4.6 Form of Fiscal and Paying Agency Agreement dated July 8, 1993,
between Eli Lilly and Company and Citibank, N.A., Fiscal and
Paying Agent, including forms of Notes, relating to 5-1/2% Notes
Due 1998 (1)
4.7 Form of Fiscal and Paying Agency Agreement dated February 7,
1995, between Eli Lilly and Company and Citibank, N.A., Fiscal
and Paying Agent, including forms of Notes, relating to 8-1/8%
Notes Due February 7, 2000(1)
- ----------
(1) These exhibits are not filed with this Report. Copies will be furnished to
the Securities and Exchange Commission upon request.
-15-
4.8 Form of Fiscal and Paying Agency Agreement dated February 7,
1995, between Eli Lilly and Company and Citibank, N.A., Fiscal
and Paying Agent, including forms of Notes, relating to 8-3/8%
Notes Due February 7, 2005 (1)
10.1 1984 Lilly Stock Plan, as amended (2)
10.2 1989 Lilly Stock Plan, as amended (2)
10.3 1994 Lilly Stock Plan, as amended (2)
10.4 The Lilly Deferred Compensation Plan, as amended (2)
10.5 The Lilly Directors' Deferral Plan, as amended (2)
10.6 The Eli Lilly and Company EVA'r'Bonus Plan, as amended (2),
(3)
10.7 Eli Lilly and Company Change in Control Severance Pay Plan for
Select Employees (2)
12. Computation of Ratio of Earnings to Fixed Charges
13. Annual Report to Shareholders for the Year Ended December 31,
1997 (portions incorporated by reference into this Form 10-K)
21. List of Subsidiaries
23. Consent of Independent Auditors
27.1 Financial Data Schedule
27.2- Restated Financial Data Schedules for Years ended December 31,
27.9 1995 and 1996 and Periods ended March 31, 1996 and 1997,
June 30, 1996 and 1997, and September 30, 1996 and 1997
99. Cautionary Statement under Private Securities Litigation Reform
Act of 1995--"Safe Harbor" for Forward-Looking Disclosures
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the fourth quarter of 1997.
- ----------
(1) This exhibit is not filed with this Report. Copies will be furnished to
the Securities and Exchange Commission upon request.
(2) Indicates management contract or compensatory plan.
(3) EVA'r' is a registered trademark of Stern Stewart & Co.
-16-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ELI LILLY AND COMPANY
By s/Randall L. Tobias
_______________________________________
(Randall L. Tobias, Chairman of the Board
and Chief Executive Officer)
March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 19, 1998 by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
- --------------------------------------------------------------------------------------------
s/Randall L. Tobias Chairman of the Board, Chief Executive Officer,
__________________________________ and a Director (principal executive officer)
(RANDALL L. TOBIAS)
s/Charles E. Golden Executive Vice President, Chief Financial Officer,
__________________________________ and a Director (principal financial officer)
(CHARLES E. GOLDEN)
s/Arnold C. Hanish Chief Accounting Officer
__________________________________ (principal accounting officer)
(ARNOLD C. HANISH)
s/Evan Bayh Director
__________________________________
(EVAN BAYH)
s/Steven C. Beering, M.D. Director
__________________________________
(STEVEN C. BEERING, M.D.)
s/Karen N. Horn Director
__________________________________
(KAREN N. HORN, Ph.D.)
-17-
SIGNATURE TITLE
- --------------------------------------------------------------------------------------------
s/Alfred G. Gilman, M.D., Ph.D. Director
__________________________________
(ALFRED G. GILMAN, M.D., Ph.D.)
s/J. Clayburn La Force, Jr., Ph.D. Director
__________________________________
(J. CLAYBURN LA FORCE, JR., Ph.D.)
s/Kenneth L. Lay, Ph.D. Director
__________________________________
(KENNETH L. LAY, Ph.D.)
s/Franklyn G. Prendergast, M.D., Ph.D. Director
______________________________________
(FRANKLYN G. PRENDERGAST, M.D., Ph.D.)
s/Kathi P. Seifert Director
__________________________________
(KATHI P. SEIFERT)
s/Sidney Taurel Director
__________________________________
(SIDNEY TAUREL)
s/August M. Watanabe, M.D. Director
__________________________________
(AUGUST M. WATANABE, M.D.)
s/Alva O. Way Director
__________________________________
(ALVA O. WAY)
-18-
TRADEMARKS USED IN THIS REPORT
Trademarks or service marks owned by Eli Lilly and Company or its
subsidiaries or affiliates, when first used in this Report, appear with an
initial capital and are followed by the symbol 'r' or 'tm', as applicable. In
subsequent uses of the marks in the Report, the symbols are omitted.
INDEX TO EXHIBITS
The following documents are filed as part of this report:
Exhibit Location
- ------- --------
3.1 Amended Articles of Incorporation Incorporated by reference from Exhibit
3.1 to the Company's Report on Form 10-Q
for the quarter ended March 31, 1996
3.2 By-laws Incorporated by reference from Exhibit 3
to the Company's Report on Form 10-Q for
the quarter ended September 30, 1997
4.1 Rights Agreement dated as of July 18, 1988, Incorporated by reference from Exhibit
between Eli Lilly and Company and Bank 4.11 to the Company's Report on Form
One, Indianapolis, N.A. 10-K for the fiscal year ended December
31, 1993
4.2 Form of Indenture dated as of February 21, Incorporated by reference from Exhibit
1989, between Eli Lilly and Company and 4.3 to the Company's Report on Form 10-K
Merchants National Bank & Trust Company for the fiscal year ended December 31,
of Indianapolis, as Trustee 1994
4.3 Form of Eli Lilly and Company Five Year Incorporated by reference from Exhibit
Convertible Note 4.4 to the Company's Report on Form 10-K
for the fiscal year ended December 31,
1994
4.4 Form of Indenture with respect to Debt Incorporated by reference from Exhibit
Securities dated as of February 1, 1991, 4.1 to the Company's Registration
between Eli Lilly and Company and Statement on Form S-3, Registration No.
Citibank, N.A., as Trustee 33-38347
4.5 Form of Standard Multiple-Series Indenture Incorporated by reference from Exhibit
Provisions dated, and filed with the 4.2 to the Company's Registration
Securities and Exchange Commission on Statement on Form S-3, Registration No.
February 1, 1991 33-38347
Exhibit Location
- ------- --------
4.6 Form of Fiscal and Paying Agency *
Agreement dated July 8, 1993, between Eli
Lilly and Company and Citibank, N.A.,
Fiscal and Paying Agent, including forms of
Notes, relating to 5-1/2% Notes Due 1998
4.7 Form of Fiscal and Paying Agency *
Agreement dated February 7, 1995, between
Eli Lilly and Company and Citibank, N.A.,
Fiscal and Paying Agent, including forms of
Notes, relating to 8-1/8% Notes Due
February 7, 2000
4.8 Form of Fiscal and Paying Agency *
Agreement dated February 7, 1995, between
Eli Lilly and Company and Citibank, N.A.,
Fiscal and Paying Agent, including forms of
Notes, relating to 8-3/8% Notes Due
February 7, 2005
10.1 1984 Lilly Stock Plan, as amended Incorporated by reference from Exhibit
10.1 to the Company's Report on Form
10-K for the fiscal year ended December
31, 1994
10.2 1989 Lilly Stock Plan, as amended Incorporated by reference from Exhibit
10.2 to the Company's Report on Form
10-K for the fiscal year ended December
31, 1993
10.3 1994 Lilly Stock Plan, as amended Incorporated by reference from Exhibit
10 to the Company's Report on Form 10-Q
for the quarter ended September 30, 1996
10.4 The Lilly Deferred Compensation Plan, as Incorporated by reference from Exhibit
amended 10.4 to the Company's Report on Form
10-K for the fiscal year ended December
31, 1994
-2-
Exhibit Location
- ------- --------
10.5 The Lilly Directors' Deferral Plan, as amended Incorporated by reference from Exhibit
10.5 to the Company's Report on Form
10-K for the fiscal year ended December
31, 1996
10.6 The Eli Lilly and Company EVA'r' Bonus Attached
Plan, as amended
10.7 Eli Lilly and Company Change in Control Incorporated by reference from Exhibit
Severance Pay Plan for Select Employees 10 to the Company's Report on Form 10-Q
for the quarter ended March 31, 1995
12. Computation of Ratio of Earnings to Fixed Attached
Charges
13. Annual Report to Shareholders for the Year Attached
Ended December 31, 1997 (portions
incorporated by reference in this Form 10-K)
21. List of Subsidiaries Attached
23. Consent of Independent Auditors Attached
27.1 Financial Data Schedule Attached
27.2- Restated Financial Data Schedules Attached
27.9 for Years ended December 31, 1995 and
1996 and Periods ended March 31, 1996
and 1997, June 30, 1996 and 1997,
and September 30, 1996 and 1997
99. Cautionary Statement Under Private Attached
Securities Litigation Reform Act of 1995 --
"Safe Harbor" for Forward-Looking
Disclosures
-3-
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as................................'tm'
The registered trademark symbol shall be expressed as......................'r'
Characters normally expressed as subscript shall be expressed as baseline
characters.