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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, 1998
Commission File Number 001-6351
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
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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 12, 1999 (Common Stock): $82,996,965,000.
Number of shares of common stock outstanding as of February 12, 1999:
1,101,256,334.
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, 1998
Registrant's Proxy Statement dated March 4, 1999 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 in one significant
business segment--pharmaceutical products. 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") business, which was sold in
January 1999, the Company provided health care management services in the United
States. See "Health Care Management" at page 3.
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 BUSINESS
SEGMENTS AND CLASSES OF PRODUCTS
Financial information relating to business segments and classes of
products, set forth in the Company's 1998 Annual Report at page 43 under
"Segment Information" (page 6 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:
Neuroscience products, the Company's largest-selling product
group, including Prozac(R), 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 Parkinson's
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.
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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; and
Humatrope(R), human growth hormone produced by recombinant DNA
technology;
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;
Vancocin(R) HCl, an injectable antibiotic used primarily to treat
staphylococcal 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; and Nebcin(R), an injectable aminoglycoside
antibiotic used in hospitals to treat various infections caused by
staphylococci and Gram-negative bacteria;
Cardiovascular agents, including ReoPro(R), a monoclonal antibody
product developed and manufactured by Centocor, Inc. and co-marketed by
the Company and Centocor for use as an adjunct to percutaneous coronary
intervention ("PCI"), including patients undergoing angioplasty,
atherectomy or stent placement and patients with unstable angina who
are not responding to conventional medical therapy when PCI is planned
within 24 hours; Dobutrex(R), an inotropic agent; and Cynt(TM),
marketed outside the United States for treatment of hypertension;
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;
Oncology products, including Gemzar(R), indicated for treatment
of advanced or metastatic pancreatic cancer and, in combination with
other agents, 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; and
Evista(R), a selective estrogen receptor modulator, indicated for
the prevention of osteoporosis in post-menopausal women, and in some
countries outside the United States, for the treatment of osteoporosis
in post-menopausal women.
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 Surmax(R) (sold as
Maxus(R) in some countries), a growth promotant for swine and poultry.
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Health Care Management Services
The Company's PCS business was sold to Rite Aid Corporation effective
January 22, 1999. The Company received approximately $1.6 billion, including
$1.5 billion in cash from Rite Aid and approximately $100 million in cash from
PCS. As a result of the sale, the operating results of PCS are included in the
Company's 1998 financial statements as discontinued operations. PCS provided
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 Cross/Blue Shield organizations that
underwrite or administer prescription benefit plans.
MARKETING
Most of the Company's major products are marketed worldwide. Health care
management services were marketed primarily in the United States.
Pharmaceuticals -- United States
In the United States, the Company distributes pharmaceutical products
principally through approximately 200 independent wholesale distributing
outlets. The Company's marketing policy is designed to assure that products are
immediately available to physicians, pharmacies, hospitals, and appropriate
health care professionals throughout the country. Four wholesale distributors in
the United States accounted for approximately 17%, 15%, 13%, and 10%,
respectively, of the Company's consolidated net sales in 1998. No other
distributor accounted for more than 7% 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. The Company
also advertises certain of its products directly to consumers in the United
States. The Company has created divisions of its sales force dedicated to
product lines or practice areas, such as primary care, neuroscience, diabetes
care, cardiovascular, endocrinology, and oncology. 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 discounts
or rebates on one or more Company products or other cost-sharing arrangements.
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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, neuroscience products 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 OTHER INTELLECTUAL PROPERTY RIGHTS
Intellectual property protection is, in the aggregate, material 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, formulations, 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,
formulations, 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.
The standard of intellectual property protection outside the United States
for pharmaceutical inventions varies widely. While many countries have strong
laws, many other countries provide little or no intellectual property
protection. In recent years, the adoption of international agreements such as
the new World Trade Agreement have resulted in a strengthening of intellectual
property laws in some countries, and the Company believes further improvements
are likely. The commercial significance of these changes to the Company is still
uncertain.
The expiration of a product patent often results in a loss of market
exclusivity and, particularly in the United States, can result in very
substantial reductions in sales of the patented product. However, in some cases
additional commercial benefits may be obtained from
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manufacturing trade secrets, later-expiring patents on processes, uses, or
formulations, or marketing exclusivity that may be provided by the
pharmaceutical regulatory laws in the United States or other countries.
Patent protection for certain products, processes, and uses--particularly
that relating to Prozac, Zyprexa, Axid, Humalog, ReoPro, Gemzar, and Evista--is
considered to be important to the operations of the Company. The United States
compound patent covering Prozac expires in February 2001 and a patent for the
process by which Prozac works expires in December 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 several years. Other U.S. compound patent expirations
include Axid, 2002; Zyprexa, 2011; Humalog, 2013; and ReoPro, 2015. 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.
Worldwide, all of the Company's major products are sold under trademarks
that are considered in the aggregate to be important to the Company. Trademark
protection varies widely throughout the world, with protection continuing in
some countries as long as the mark is used, and in other countries as long as it
is registered. Registrations are normally for fixed but renewable terms.
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 $138 million in 1998 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.
Important competitive factors include product efficacy, safety and ease of
use, price and demonstrated cost-effectiveness, 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 expiration
of market exclusivity, 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 and
pharmacy benefits management organizations has intensified price competition
significantly and has magnified the importance of demonstrating not only medical
benefits but also cost advantages as compared with other treatments.
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The Company believes its long-term competitive position depends upon the
success of its research and development endeavors in discovering and developing
innovative products that are clinically- and cost-effective, together with
increased productivity resulting from improved manufacturing methods and
effective sales and marketing efforts. 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 governments govern to varying degrees the
testing, approval, production, labeling, distribution, post-market surveillance,
advertising, dissemination of information, and promotion 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. Promotion, marketing and distribution of pharmaceutical products are
extensively regulated in all major world markets. In addition, the Company's
operations are subject to complex federal, state, local, and foreign
environmental and occupational safety laws and regulations. The Company
anticipates that compliance with regulations affecting the manufacture and sale
of current products and the introduction of new products 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, restrictions on reimbursement,
compulsory licenses and generic substitution. The Company expects that
governments inside and outside the United States will continue to propose and/or
adopt a variety of measures to contain health care costs, including
pharmaceutical costs, some of which could adversely affect the Company. As an
example, there are a number of legislative proposals in the United States at
both the state and federal levels intended to provide greater access to drugs
for the elderly that effectively would impose controls on the prices at which
the Company's products are sold for use by the elderly. The Company cannot
predict whether such proposals will be adopted or 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 the Company's long-term competitiveness. The growth in research
and development expenditures and personnel over the past several years
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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 1998, approximately 5,800 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 $1.19 billion on these
research and development activities in 1996, $1.37 billion in 1997, and $1.74
billion in 1998.
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 also selectively pursues promising leads in
other therapeutic areas. The Company is actively engaged in biotechnology
research programs 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
pharmaceutical and biotechnology 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, joint ventures 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
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monitors existing pharmaceutical and animal health manufacturing procedures and
systems in the parent company, subsidiaries, and affiliates.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company. All but two of the executive officers have been
employed by the Company in executive or managerial positions during the last
five years. 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 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.
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 19, 1999, 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 57 Former Chairman of the Board (retired
as a director and employee December
31, 1998)
Sidney Taurel 50 Chairman of the Board (since January
1999), President and Chief Executive
Officer (since June 1998) and a
Director
Charles E. Golden 52 Executive Vice President and Chief
Financial Officer (since March 1996)
and a Director
August M. Watanabe, M.D. 57 Executive Vice President, Science and
Technology (since February 1996) and a
Director
Mitchell E. Daniels, Jr. 49 Senior Vice President, Corporate
Strategy and Policy (since June 1998)
Rebecca O. Goss 51 Senior Vice President and General
Counsel (since June 1998)
Pedro P. Granadillo 51 Senior Vice President, Human Resources
and Manufacturing (since June 1998)
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NAME AGE OFFICES
- -------------------------------------------------------------------------------
John C. Lechleiter 45 Senior Vice President, Pharmaceutical
Products (since June 1998)
Bryce D. Carmine 47 President, SERM and Skeletal Products
(since March 1999)*
Alan S. Clark 64 Former President, U.S. Operations and
Global Marketing (since January 1997)
(retiring April 1999)
Michael L. Eagle 51 Vice President, Manufacturing (since
January 1994)*
Brendan P. Fox, D.V.M. 55 President, Elanco Animal Health (since
January 1991)*
James A. Harper 51 President, Diabetes and Growth
Disorders Products (since August
1994)*
Gerhard N. Mayr 52 President, Intercontinental Operations
(since September 1997)*
Richard D. Pilnik 42 Vice President, Global Marketing
(since January 1998)*
Robert N. Postlethwait 50 Former President, Neuroscience
Products (since August 1994) (retiring
May 1999)
William R. Ringo, Jr. 53 President, Internal Medicine Products
(since January 1998)*
Gino Santini 42 President, U.S. Operations and Global
Marketing (since March 1999)*
Gary Tollefson, M.D., Ph.D. 48 President, Neuroscience Products
(since January 1999)*
Thomas Trainer 52 Former Vice President, Information
Technology, and Chief Information
Officer (since January 1995) (resigned
March 1999)
Albertus Van den Bergh 45 President, European Operations (since
September 1997)*
EMPLOYEES
At the end of 1998, the Company had approximately 29,800 employees
(excluding PCS), including approximately 15,400 employees outside the United
States. A substantial number of the Company's employees have long records of
continuous service.
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* Serves in office until successor is appointed.
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FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS
Financial information relating to foreign and domestic operations, set
forth in the Company's 1998 Annual Report at page 43 under "Segment Information"
(page 6 of Exhibit 13), is incorporated herein by reference.
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.
Item 2. PROPERTIES
The Company's principal domestic and international executive offices are
located in Indianapolis. At December 31, 1998, 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 dedicated to production,
distribution and administration. 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.
The Company owns production and distribution facilities in 19 countries
outside the United States and Puerto Rico, containing an aggregate of
approximately 4.1 million square feet of floor space. Major production sites
include facilities in the United Kingdom, France, Spain, Ireland, Brazil,
Mexico, and Italy. Leased production and warehouse facilities are utilized in
Puerto Rico and 18 countries outside the United States.
The Company's research and development facilities in the United States
consist of approximately 3.8 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 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"), a generic pharmaceutical manufacturer, 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
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the Company's U.S. patents covering Prozac are invalid and unenforceable. 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.
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 1997, the Company was
informed that Geneva Pharmaceuticals, Inc. ("Geneva"), another generic
manufacturer, 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. On January 12, 1999, the trial
court judge for the Southern District of Indiana granted partial summary
judgment in favor of the Company, dismissing the claims of Barr and Geneva based
on the patent doctrines of "best mode" and "double patenting." On January 25,
1999 (the day trial was to have begun), Barr and Geneva agreed to abandon their
remaining two claims (based on the patent doctrines of "anticipation" and
"inequitable conduct") in exchange for a payment of $4 million to be shared
among Barr, Geneva, and a third defendant, Apotex, Inc. Barr and Geneva have
appealed the trial court's January 12, 1999 rulings to the Court of Appeals for
the Federal Circuit.
In late 1998, three additional generic manufacturers, Zenith Goldline
Pharmaceuticals, Inc., Teva Pharmaceuticals USA, and Cheminor Drugs, Ltd.
together with one of its subsidiaries filed ANDAs for generic forms of Prozac,
asserting that the Company's December 2003 patent is invalid and unenforceable.
Finally, in January 1999, Novex Pharma, a division of Apotex, Inc. filed an ANDA
asserting that both the 2001 and 2003 patents are invalid and unenforceable. The
Company has filed lawsuits in the United States District Court of the Southern
District of Indiana seeking rulings that the four companies' challenges to the
patent(s) are without merit. These suits are in the preliminary stages.
The Company believes that the claims of the six generic manufacturers 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 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 liability litigation matters involving primarily
diethylstilbestrol ("DES") and Prozac. In approximately 100 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 10 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).
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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 (the "Federal Individual Actions"), 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.
In 1995, the Company and several other manufacturers agreed with the
plaintiffs to settle the Federal Class Action. In addition, in 1997 and again in
1998 the Company reached settlements with two large groups of retail pharmacy
and supermarket chains that were plaintiffs in the Federal Individual Actions.
As a result of the various settlements, the claims of the great majority of the
U.S. retailers are now dismissed. With respect to the remaining Federal
Individual Actions, 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 Federal Individual Actions
against nondesignated defendants, including the Company, are stayed.
In addition, a number of related state court cases were filed. The state
court suits typically seek money damages and injunctive relief against allegedly
discriminatory pricing practices. Cases were 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. Settlements have been approved
in Minnesota and Wisconsin and the cases in those states are now dismissed.
Cases were also 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. In all states except
Alabama and Tennessee, settlements in those cases have been approved and the
cases dismissed.
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.
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.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, 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 1998 Annual
Report under "Selected Quarterly Data (unaudited)," at page 44 (pages 7-8 of
Exhibit 13), and "Selected Financial Data (unaudited)," at page 45 (page 9 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 1998 Annual Report under "Selected Financial
Data (unaudited)," at page 45 (page 9 of Exhibit 13), are incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
REVIEW OF OPERATIONS
Sale of PCS Health-Care-Management Business
In November 1998, the Company signed a definitive agreement to sell to
Rite Aid Corporation the Company's PCS health-care-management subsidiary for
$1.60 billion in cash. The sale, which was completed in January 1999, will allow
the Company to further focus on pharmaceutical innovation and the realization of
optimal demand for Company products in the marketplace. As a consequence of the
divestiture, the operating results of PCS have been reflected as "discontinued
operations" in the Company's financial statements for all periods and have been
excluded from consolidated sales and expenses reflected therein. The net gain on
disposal will be recognized in the first quarter of 1999. See Note 3 to the
consolidated financial statements for further discussion.
Operating Results From Continuing Operations--1998
Income from continuing operations (before the 1998 extraordinary charge of
$7.2 million, or $.01 per share) was $2.10 billion, or $1.87 per share, in 1998
and $2.02 billion, or $1.78 per share, in 1997. Comparisons between 1998 and
1997 are made difficult by the impact of several unusual transactions that are
reflected in the Company's operating results for both years. Excluding these
unusual items, which are discussed further below, income from continuing
operations before extraordinary item for 1998 and 1997 would have been $2.17
billion, or $1.94
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per share, and $1.83 billion, or $1.62 per share, respectively. This represents
an increase in earnings and earnings per share of 19 percent and 20 percent,
respectively. The 1998 increases are attributed to increased sales, improved
gross margin, reduced interest expense and a lower effective tax rate, partially
offset by increases in operating expenses.
During 1998, the Company announced a collaboration with ICOS Corporation
to jointly develop and globally commercialize a phosphodiesterase type 5 (PDE5)
inhibitor as an oral therapeutic agent for the treatment of both male and female
sexual dysfunction. The compound is in the development phase (Phase II clinical
trials) and no alternative future uses have been identified. As with many Phase
II compounds, launch of the product, if successful, would not be expected in the
near term. Accordingly, under current accounting rules, the Company's payments
to acquire rights to this compound were required to be charged as a one-time
expense of $127.5 million, which reduced earnings per share by approximately
$.07 net of tax. The Company's reported tax rate was also affected by this item.
The Company's reported results from continuing operations for 1997 include
the following unusual transactions: a pretax gain of $631.8 million from the
sale of the Company's interest in the DowElanco joint venture, a $97.8 million
noncash charge for an asset impairment as discussed further in the 1997
operating results section, a charge for the settlement of a significant portion
of the Company's remaining retail pharmacy pricing litigation, and a $24.1
million charge for the discontinuance of the research collaboration with
Somatogen, Inc. The Company's reported tax rate for 1997 was also affected by
these transactions.
The Company's sales for 1998 increased 16 percent, to $9.24 billion. Sales
in the U.S. were $5.84 billion, a 20 percent increase, while sales outside the
U.S. were $3.40 billion, a 9 percent increase. Worldwide sales reflected volume
growth of 15.3 percent and a 2.1 percent increase in selling prices, which were
partially offset by an unfavorable exchange rate impact of 1.8 percent.
Worldwide pharmaceutical sales increased 17 percent, to $8.62 billion.
Sales growth was led by four of the Company's newer products: Zyprexa, a
treatment for schizophrenia and related psychoses; the cardiovascular agent
ReoPro; the oncolytic product Gemzar; and the osteoporosis prevention agent
Evista, which was launched in the first quarter of 1998; as well as the
antidepressant Prozac. Revenue growth was partially offset by lower sales of
anti-infective products and the antiulcer agent Axid due to continuing generic
competition and other competitive pressures. Total U.S. pharmaceutical sales
increased 20 percent, to $5.55 billion. Growth was driven primarily by increased
volumes. International pharmaceutical sales increased 10 percent, to $3.07
billion. Strong volume growth drove the increase, offset by the effect of
unfavorable exchange rates with selling prices remaining relatively stable. The
adverse exchange rate impact in the Asia-Pacific region did not have a material
impact on worldwide sales in 1998. The Company expects that the deterioration of
the Brazilian economy will have a slight adverse impact on 1999 sales and net
income due to a combination of the negative impact of the changing exchange
rates and weakening local demand.
Worldwide sales of Prozac in 1998 were $2.81 billion, representing an
increase of 10 percent. Prozac sales in the U.S. increased 13 percent, to $2.27
billion. Sales of Prozac outside the U.S. were substantially the same as 1997.
Continued competitive pressures affected sales globally. In addition, during the
first quarter of 1999 it became apparent that U.S. wholesaler stocking in late
1998 would have a greater negative impact on 1999 sales than had been
anticipated. Based on the 1999 results to date, the Company now anticipates only
slight growth in worldwide Prozac sales in 1999. The actual sales levels will
depend upon the effectiveness of
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the Company's marketing efforts in offsetting increased competition, the rate of
growth of the antidepressant market, and U.S. wholesaler stocking patterns.
Zyprexa posted worldwide sales of $1.44 billion in 1998, representing an
increase of 98 percent. U.S. sales of Zyprexa increased 91 percent, to $1.12
billion. Sales outside the U.S. increased 127 percent, to $317.9 million. Sales
comparisons for Zyprexa benefited to some extent from U.S wholesaler stocking in
the fourth quarter of 1998. The Company expects continued strong sales growth
for Zyprexa in 1999 but at a lower percentage than in 1998.
Worldwide insulin sales, composed of Humulin, the Company's biosynthetic
human insulin; Humalog, the Company's insulin analog; and the animal-source
insulin Iletin, increased 8 percent, to $1.15 billion, in 1998. Insulin sales in
the U.S. increased 4 percent, to $701.5 million. Insulin sales outside the U.S.
increased 14 percent, to $453.4 million. Worldwide Humulin sales increased 3
percent. U.S. Humulin sales were flat compared with 1997 as they were affected
by both increased sales of Humalog and competition from oral antidiabetic
agents. Humulin sales outside the U.S. increased 8 percent. Worldwide Humalog
sales were $129.6 million, representing an increase of 91 percent, or $61.9
million, over 1997. Iletin sales were essentially flat compared with 1997. The
Company expects moderate growth in worldwide insulin sales in 1999.
Worldwide sales of anti-infectives decreased 9 percent, to $1.16 billion.
U.S. and international anti-infectives sales declined 20 percent and 4 percent,
respectively. These declines were due, in part, to continued generic competition
in certain markets and the impact of unfavorable exchange rates. Cefaclor,
Lorabid, and Vancocin accounted for the majority of the decline in
anti-infectives sales with declines of 10 percent, 14 percent and 5 percent,
respectively. The Company anticipates that 1999 worldwide sales of
anti-infectives will be below 1998 levels largely due to continued pricing
pressures as a result of generic competition.
Worldwide Axid sales decreased 20 percent, to $418.0 million, due to
continuing competition from other branded and generic antiulcer agents. The
Company expects a continued decline in Axid sales in 1999.
As mentioned above, the newer products ReoPro and Gemzar, along with
Evista, which was launched in the first quarter of 1998, contributed
significantly to worldwide sales growth. Worldwide ReoPro sales of $365.4
million reflected an increase of 44 percent. Worldwide Gemzar sales increased 76
percent, to $306.8 million. The Company expects the sales of both ReoPro and
Gemzar to increase in 1999 but at a lower rate than in 1998. Evista had
worldwide sales of $144.1 million and had been introduced in approximately 20
countries by the end of 1998. Sales of Evista benefited somewhat from U.S.
wholesaler stocking in the fourth quarter of 1998. The Company anticipates
strong growth in worldwide Evista sales for 1999.
Worldwide sales of animal health products increased 4 percent, to $614.4
million. Sales increased 7 percent in the U.S. and 2 percent outside the U.S.
The worldwide sales growth was driven primarily by Micotil, an antibiotic for
bovine respiratory disease; Tylan, an antibiotic for promoting feed efficiency
and growth in swine and cattle; and Surmax, a feed additive performance enhancer
for poultry. Weakness in the general economic condition of the Asia-Pacific
region negatively affected sales of animal health products outside the U.S.
These products have a greater sensitivity to adverse economic conditions in the
Asia-Pacific region than pharmaceutical products.
-15-
The Company's payments under federally mandated Medicaid rebate programs
reduced 1998 sales by approximately $278.6 million compared with approximately
$199.1 million in 1997. The Company anticipates that Medicaid rebates will
increase in 1999 due, in part, to the continuing growth in Zyprexa sales.
The gross margin improved to 78.2 percent of sales compared with 75.6
percent for 1997. This increase was primarily the result of favorable changes in
product mix and productivity improvements. The Company anticipates that the
gross margin percentage will continue to improve in 1999 due largely to
favorable product mix and the expiration of a royalty obligation on Humulin and
Humalog sales in August 1998.
Operating expenses (the aggregate of research and development and
marketing and administrative expenses) for 1998, excluding the effect of the
one-time expenses for acquired in-process technology related to the ICOS
collaboration, increased 22 percent. The increase reflects a 27 percent growth
rate in research and development, to $1.74 billion. This growth is the result of
greater investments in both internal research efforts and external research
collaborations. The Company expects research and development expenses in 1999 to
increase at a significantly lower rate but still approximating that of sales
growth. The actual 1999 increase will vary depending upon a number of factors,
particularly the level of research collaboration activity. Marketing and
administrative expenses increased 19 percent, to $2.66 billion. This increase
was driven by increased expenditures to support continued new product launches
around the world, including the U.S. launch of Evista and direct-to-consumer
advertising campaigns in the U.S. In addition to the above, operating expenses
were also affected by investments in the Company's global information technology
capabilities, which include expenditures relating to the Company's Year 2000
computer initiatives and increased compensation accruals due to the Company's
performance-based bonus programs. The Company expects marketing and
administrative expenses to increase at a significantly lower rate in 1999, due
in part to expense-management programs initiated in early 1999.
Interest expense in 1998 decreased $51.4 million, or 22 percent, due
largely to declines in the Company's borrowings.
Net other income for 1998 was $149.3 million, a decrease of $12.1 million
from 1997. Net other income in 1998 benefited from gains on the sale of certain
investments and increased interest income. Also, in comparison with 1997, 1998
benefited from the inclusion in the 1997 amount of the charges associated with
the discontinuance of a collaboration with Somatogen, Inc. These increases were
more than offset by the absence of both DowElanco joint venture income and
certain license fee income in 1998.
The Company's effective tax rate for 1998 was 21.3 percent compared with
30.5 percent for 1997. The Company's 1997 effective tax rate was distorted by
the gain from the sale of DowElanco and the asset impairment charge. The
Company's tax rate for 1997, excluding the impact of these items, was 24.1
percent. Excluding the ICOS transaction discussed previously, the Company's
effective tax rate for 1998 was 22.2 percent. The lower 1998 rate is primarily
the result of changes in the mix of earnings between jurisdictions with lower
tax rates and those with higher rates. The Company expects that a tax rate in
the range of 22 percent to 22.5 percent will be sustainable under present law
for the near term. See Note 11 to the consolidated financial statements for
additional information.
-16-
The Company refinanced an ESOP debenture during 1998. An extraordinary
charge of $7.2 million, net of a $4.8 million income tax benefit, was recorded
as a result of this refinancing.
Operating Results From Continuing Operations--1997
The Company's operating results from continuing operations for both 1997
and 1996 reflect the impact of several unusual transactions that make
comparisons difficult. As noted above, the Company's reported results from
continuing operations for 1997 include several unusual transactions. As a
consequence of these transactions, 1997 income from continuing operations was
$2.02 billion, or $1.78 per share. This compares with income from continuing
operations in 1996 of $1.63 billion, or $1.45 per share.
Excluding the unusual items noted previously, income from continuing
operations for 1997 would have been $1.83 billion, or $1.62 per share. After
excluding the income from the sale of the U.S. marketing rights for Ceclor CD
and Keftab to Dura Pharmaceuticals, Inc., from the 1996 amounts, 1997 income and
earnings per share from continuing operations, without the unusual items,
reflect increases from 1996 of 18 and 17 percent, respectively. The 1997
increases are attributed to increased sales, improved gross margin and reduced
interest expense, partially offset by decreased other income.
The Company's sales for 1997 increased 14 percent, to $7.99 billion. Sales
in the U.S. were $4.88 billion, a 25 percent increase, while sales outside the
U.S. were $3.11 billion, a 1 percent increase. Worldwide sales volume growth of
16 percent and a 2 percent increase in global selling prices were partially
offset by unfavorable exchange rates, which decreased sales by 4 percent.
Worldwide pharmaceutical sales increased 15 percent, to $7.39 billion. The
sales growth was led by three of the Company's newer products, Zyprexa, ReoPro
and Gemzar, as well as increased sales of Prozac and insulin products. The 1997
growth was achieved despite lower sales of anti-infective products. Total U.S.
pharmaceutical sales increased 25 percent, to $4.61 billion, primarily as a
result of increased volume. International pharmaceutical sales increased 1
percent, to $2.78 billion. Sales volume growth outside the U.S. of 12 percent
was offset largely by unfavorable exchange rates (9 percent) and decreased
selling prices (2 percent).
Worldwide sales of Prozac in 1997 were $2.56 billion, an increase of 8
percent. Prozac sales in the U.S. increased 17 percent, to $2.02 billion.
International sales of Prozac experienced a decline of 14 percent due largely to
the effects of unfavorable exchange rates, continuing generic competition in
Canada and competitive pressures in France.
Three of the Company's newer products contributed significantly to the
worldwide sales growth. Specifically, in 1997, Zyprexa, launched in the fourth
quarter of 1996, contributed $729.9 million to worldwide sales and $589.7
million to U.S. sales, which represent increases of $643.0 million and $511.4
million, respectively. ReoPro, launched in 1995, reported worldwide sales of
$254.4 million, reflecting an increase of $105.1 million. Worldwide sales of
Gemzar, launched in the U.S. in May 1996, grew to $174.8 million, representing
an increase over 1996 of $112.9 million.
Worldwide insulin sales in 1997 increased 9 percent, to $1.07 billion.
Insulin sales in the U.S. increased 6 percent, to $673.8 million, and insulin
sales outside the U.S. increased 14 percent, to $398.2 million. Worldwide sales
of Humulin increased 6 percent, to $934.9 million, for 1997. U.S. Humulin sales
increased 4 percent, to $585.7 million, with growth due to
-17-
wholesaler buying patterns being offset partially by the combined effect of
competition from oral antidiabetic agents and increased sales of Humalog.
International Humulin sales increased 9 percent.
Among other major products, worldwide sales of Axid decreased 1 percent,
to $525.4 million. Axid sales declined 2 percent in the U.S. and increased 3
percent outside the U.S. Worldwide sales of the human growth hormone Humatrope
declined 3 percent.
Compared with 1996, worldwide anti-infectives sales in 1997 decreased
$193.1 million (13 percent). This decline was due primarily to continued generic
competition in certain markets and the impact of unfavorable exchange rates.
Sales of cefaclor decreased 18 percent, to $442.2 million, accounting for the
majority of this decline. Both U.S. and international anti-infectives sales
reflected declines.
Worldwide sales of animal health products increased 8 percent over 1996,
driven by volume growth of 10 percent. Sales increased 15 percent in the U.S.
and 2 percent outside the U.S. The worldwide sales increase was primarily due to
increased sales of Micotil and Tylan.
The Company's payments under federally mandated Medicaid rebate programs
reduced 1997 sales by approximately $199.1 million.
Gross margin improved to 75.6 percent of sales compared with 73.2 percent
for 1996. This increase was primarily the result of favorable product mix,
production efficiencies and procurement savings.
Research and development expenses in 1997 increased 15 percent. Expenses
in support of global clinical trials, as well as an increase in external
research collaborations relating to the discovery and development of new
technologies, compounds and delivery systems, drove this increase.
Marketing and administrative expenses increased 18 percent over 1996.
Overall, the increase was largely due to increased expenditures to support
continued new product launches around the world, including the January 1998
launch of Evista, the Prozac direct-to-consumer advertising campaign,
investments in the Company's global information technology capabilities and
increased compensation accruals due to the Company's performance-based bonus
programs. The charge for the settlement of a significant portion of the
Company's remaining retail pharmacy pricing litigation also contributed to the
1997 increase.
The asset impairment represents a pretax noncash charge of $97.8 million,
recorded in the second quarter of 1997, primarily to adjust to their fair value
the carrying value of certain long-lived assets of a small portion of the
Company's health-care-management business that was not sold. Fair value was
determined based upon anticipated future cash flows, discounted at a rate
commensurate with the risk involved. This business is now part of a joint
venture, the results of which are immaterial to the consolidated financial
statements.
On June 30, 1997, The Dow Chemical Company acquired the Company's 40
percent interest in the DowElanco joint venture. The cash purchase price was
$1.2 billion, resulting in an after-tax gain of $303.5 million, or $.27 per
share.
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Interest expense in 1997 decreased $55.3 million (19 percent) due
primarily to a decline in the Company's borrowings.
Net other income for 1997 amounted to $161.4 million, which was $213.6
million lower than in 1996. The decrease was primarily the result of several
nonrecurring items reflected in the 1996 amount, including the sale of the U.S.
marketing rights for Ceclor CD and Keftab ($91.8 million), income from
codevelopment and comarketing contracts, the sale of marketing rights for ReoPro
in Japan and Tapazole(R) in the U.S., and a higher level of sales of certain
equity securities held by the Company. Net other income for 1997 benefited from
income from outlicensing activity. These increases were partially offset by the
charge for the discontinuance of the collaboration with Somatogen, Inc.
The Company's reported tax rates for 1997 reflect the effects of the
unusual transactions that occurred during the year. The Company's 1997 tax rate,
excluding the impact of these items, was 24.1 percent compared with the 1996 tax
rate of 23.7 percent.
Discontinued Operations
Discontinued operations consists of the Company's PCS
health-care-management business. As noted previously, in November 1998, the
Company entered into an agreement to sell PCS for $1.6 billion in cash. The sale
was closed in January 1999 and the resulting net gain on disposal will be
recognized in the first quarter of 1999. See Note 3 to the consolidated
financial statements for further information.
In the second quarter of 1997, the Company recognized an asset impairment
(a noncash charge) of approximately $2.3 billion to adjust the carrying value of
PCS's long-lived assets, primarily goodwill, to their fair value of
approximately $1.5 billion. The Company determined that PCS's estimated future
undiscounted cash flows were below the carrying value of PCS's long-lived
assets. As a consequence, the carrying value was adjusted to estimated fair
value based on anticipated future cash flows, discounted at a rate commensurate
with the risk involved.
Financial Condition
As of December 31, 1998, cash, cash equivalents and short-term investments
totaled approximately $1.60 billion compared with $2.02 billion at December 31,
1997. Total debt at December 31, 1998, was $2.37 billion, a decrease of $186.8
million. The decrease in cash was due primarily to stock repurchases and
repayment of debt. The Company has completed its previously announced $2 billion
share repurchase, acquiring approximately 28.3 million shares in 1998. The
Company expects to repurchase shares costing approximately $1 billion in 1999.
The Company believes that cash generated from operations, along with available
cash and cash equivalents, will be sufficient to fund essentially all the
Company's operating needs, including debt service, capital expenditures, share
repurchases and dividends in 1999. The Company anticipates using the proceeds
from the sale of PCS in 1999 for general corporate purposes.
The Company believes that amounts available through existing commercial
paper programs should be adequate to fund maturities of short-term borrowings.
The outstanding commercial paper is also backed by $2 billion of committed bank
credit facilities.
In the normal course of business, operations of the Company are exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the costs of financing, investing
-19-
and operating. The Company addresses a portion of these risks through a
controlled program of risk management that includes the use of derivative
financial instruments. The objective of controlling these risks is to limit the
impact on earnings of fluctuations in interest and currency exchange rates. All
derivative activities are for purposes other than trading.
The Company's primary interest rate risk exposure results from changes in
short-term U.S. dollar interest rates. In an effort to manage interest rate
exposures, the Company strives to achieve an acceptable balance between fixed
and floating rate debt positions and may enter into interest rate swaps to help
maintain that balance. Based on the Company's overall interest rate exposure at
December 31, 1998, including derivatives and other interest rate risk sensitive
instruments, a hypothetical 10 percent change in interest rates applied to the
fair value of the instruments as of December 31, 1998, would have no material
impact on earnings, cash flows or fair values of interest rate risk sensitive
instruments over a one-year period. Similarly, a hypothetical 10 percent change
in interest rates from 1997 applied to the fair value of the instruments as of
December 31, 1997, would have had no material impact on earnings, cash flows or
fair values of interest rate risk sensitive instruments during 1998.
The Company's foreign currency risk exposure results from fluctuating
currency exchange rates, primarily the strengthening of the U.S. dollar against
the Japanese yen and European currencies. The Company faces transactional
currency exposures that arise when its foreign subsidiaries (or the Company
itself) enter into transactions, generally on an intercompany basis, denominated
in currencies other than their local currency. The Company also faces currency
exposure that arises from translating the results of its global operations to
the U.S. dollar at exchange rates that have fluctuated from the beginning of the
period. The Company uses forward contracts and purchased options to manage its
foreign currency exposures. Company policy outlines the minimum and maximum
hedge coverage of such exposures. Gains and losses on these derivative positions
offset, in part, the impact of currency fluctuations on the existing assets,
liabilities, commitments and anticipated revenues. Considering the Company's
derivative financial instruments outstanding at December 31, 1998, a
hypothetical 10 percent weakening in the exchange rates (primarily against the
U.S. dollar) over a one-year period would decrease earnings by $26.1 million,
while a 10 percent strengthening in the exchange rates would increase earnings
by $45.9 million. Comparatively, considering the Company's derivative financial
instruments outstanding at December 31, 1997, a hypothetical 10 percent
weakening in the exchange rates (primarily against the U.S. dollar) over a
one-year period would have decreased earnings by $51.0 million, while a 10
percent strengthening in the exchange rates would have increased earnings by
$67.8 million. This calculation does not reflect the impact of exchange
gains/losses on the underlying positions that would be offset, in part, by the
results of the derivative instruments.
In connection with the sale of the Company's PCS subsidiary, PCS
repurchased the Class B stock that had been sold to an institutional investor in
1997. See Note 9 to the consolidated financial statements for additional
information.
Capital expenditures of $419.9 million during 1998 were $53.6 million more
than in 1997 as the Company continued to invest in research and development
initiatives and related infrastructure. The Company expects near-term capital
expenditures to increase from 1998 levels but to remain well below the
historical peaks of the early 1990s. Sufficient cash flows exist to meet these
near-term requirements.
-20-
Dividends of $.80 per share were paid in 1998, an increase of
approximately 8 percent from the $.74 per share paid in 1997. In the fourth
quarter of 1998, effective for the first quarter dividend in 1999, the quarterly
dividend was increased $.03 per share (15 percent), resulting in an indicated
annual rate for 1999 of $.92 per share. The year 1998 was the 114th consecutive
year in which the Company made dividend payments and the 31st consecutive year
in which dividends have been increased.
Year 2000 Readiness Disclosure
Many of the Company's global information technology (IT) systems and
non-IT systems, including laboratory and process automation devices, will
require modification or replacement in order to render the systems ready for the
year 2000 (Y2K). In late 1996, the Company initiated a comprehensive program to
reduce the likelihood of a material impact on the business. The numerous
activities that are intended to enable the Company to obtain Y2K readiness
utilize both internal and external resources and are being centrally managed
through a program office. Monthly reports are made to senior management and a
business council comprising various management representatives. In addition,
regular reports are made to the audit committee of the board of directors.
The Company's inventory of IT systems, including software applications,
has been divided into various categories. Those most critical to the Company's
global operations are generally being assessed and renovated, when necessary,
first. The Company has instituted a process to monitor all critical and
essential replacement and upgrade projects of existing systems to assist in
managing them toward completion in a timely manner. The Company has completed
renovation of approximately 95 percent of its critical applications. The Company
anticipates that substantially all the remaining critical applications will be
completed by March 31, 1999. Of applications deemed essential, the Company
anticipates Y2K readiness of approximately 95 percent by June 30, 1999.
The most important non-IT systems are various laboratory and process
automation devices. The Company has completed a global assessment of all
devices. Based on this assessment, only a small percentage (10 percent to 13
percent) of all automation devices appear to require upgrade or replacement. The
Company has begun the process of either remediating or replacing these devices
and anticipates that this process will be substantially complete by mid-1999.
The representatives of the program office have visited numerous global
sites to assess the progress being made toward site readiness. In addition,
several global training programs have occurred to foster the consistent
application of the chosen methodologies.
The Company has also mailed letters to thousands of vendors, service
providers and customers to determine the extent to which they are prepared for
the Year 2000 issue. These activities are being coordinated through a global
network of regional site and functional coordinators. Many responses have been
received and the Company is identifying the vendors, service providers and
customers that are critical to Lilly through a business impact analysis.
Follow-up interviews are more thoroughly assessing their readiness.
The Company has begun, but not yet completed, a comprehensive analysis of
the operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by the Company and certain third
parties to complete efforts necessary to achieve Year 2000 compliance on a
timely basis or from abnormal wholesaler or consumer buying patterns in
-21-
anticipation of the Year 2000. Contingency plans are beginning to be developed
for the Company and its critical vendors, customers and suppliers to address the
flow of products to the consumer. The contingency planning involves a
multifaceted approach, which may include additional purchases of raw materials,
manufacturing additional finished stock of critical products and/or locating
inventories of products closer to the consumer. Business continuity plans will
be developed to address the Company's approach for dealing with extended
disruptions. In addition, "rapid response" teams will be established to respond
to any issues that occur around the millennium. The Company currently plans to
complete analysis and have contingency plans in place by September 30, 1999.
The costs of the Company's Year 2000 efforts are based upon management's
best estimates, which are derived using numerous assumptions regarding future
events, including the continued availability of certain resources, third-party
remediation plans and other factors. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ materially
from those currently anticipated. The Company currently estimates it will spend
between $160 and $190 million over the life of the program and that
approximately 55 percent to 60 percent of the anticipated costs were incurred by
the end of 1998. Expenses associated with addressing the Year 2000 issues are
being recognized as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations. Due to the uncertainty inherent in the Year 2000 problem,
the Company is unable to determine, at this time, whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations. The Year 2000 project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its vendors, service suppliers
and customers. The Company believes that, with the completion of the project as
scheduled, the possibility of a material interruption of normal operations
should be reduced.
Euro Conversion
On January 1, 1999, 11 European nations adopted a common currency, the
euro, and formed the European Economic and Monetary Union (EMU). For a
three-year transition period, both the euro and individual participants'
currencies will remain in circulation. After July 1, 2002, at the latest, the
euro will be the sole legal tender for EMU countries. The adoption of the euro
will affect a multitude of financial systems and business applications as the
commerce of these nations will be transacted in the euro and the existing
national currency.
The Company is currently addressing euro-related issues and their impact
on information systems, currency exchange rate risk, taxation, contracts,
competition and pricing. Action plans currently being implemented are expected
to result in compliance with all laws and regulations; however, there can be no
certainty that such plans will be successfully implemented or that external
factors will not have an adverse effect on the Company's operations. Any costs
of compliance associated with the adoption of the euro will be expensed as
incurred and the Company does not expect these costs to be material to its
results of operations, financial condition or liquidity.
-22-
Legal And Environmental Matters
Barr Laboratories, Inc. (Barr), and Geneva Pharmaceuticals, Inc. (Geneva),
have each submitted an Abbreviated New Drug Application (ANDA) seeking FDA
approval to market generic forms of Prozac before the expiration of the
Company's patents. The ANDAs assert that two U.S. patents held by Lilly covering
Prozac are invalid and unenforceable. The Company filed suit against Barr and
Geneva in federal court in Indianapolis seeking a ruling that Barr's challenge
to Lilly's patents is without merit. On January 12, 1999, the trial court
granted summary judgment in favor of Lilly on two of the four claims raised by
Barr and Geneva against Lilly's patents. Barr and Geneva have appealed that
decision. On January 25, 1999, Barr and Geneva dismissed their other two claims
in exchange for a $4 million payment, which Barr and Geneva will share with a
third defendant. In late 1998, three other generic pharmaceutical companies,
Zenith Goldline Pharmaceuticals, Inc., Teva Pharmaceuticals USA, and Cheminor
Drugs, Ltd. together with one of its subsidiaries each filed ANDAs for generic
forms of Prozac, asserting that the later of the two patents (expiring in
December 2003) is invalid and unenforceable. Finally, in January 1999, Novex
Pharma, a division of Apotex, Inc., filed an ANDA challenging both patents.
Lilly has filed suits against the four companies in federal court in
Indianapolis. The suits are in a very early stage. While the Company believes
that the claims of the six generic companies are without merit, there can be no
assurance that the Company will prevail. An unfavorable outcome of this
litigation could have a material adverse effect on the Company's consolidated
financial position, liquidity or results of operations.
As with other industrial enterprises, the Company's operations are subject
to complex and changing federal, state and local environmental laws and
regulations, which will continue to require capital investment and operational
expenses. The Company also has been designated a potentially responsible party
under the Comprehensive Environmental Response, Compensation and Liability Act,
commonly known as Superfund, with respect to fewer than 10 sites with which the
Company had varying degrees of involvement. Further, the Company continues
remediation of certain of its own properties consistent with current
environmental practices. The Company has accrued for estimated Superfund costs
and remediation of its own properties, taking 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 those costs. The Company reached a settlement with its primary
liability insurance carrier providing for coverage for certain environmental
liabilities and has instituted litigation seeking coverage from certain excess
carriers. In addition, the Company has accrued for certain other environmental
matters.
During 1998, the Company continued to be named as a defendant in a small
number of product liability lawsuits involving Prozac. However, continuing a
trend seen in recent years, the number of pending cases declined from levels of
the previous year.
The Company continues to be a defendant, together with numerous other U.S.
prescription drug manufacturers, in related suits brought under federal and
state antitrust laws by many retail pharmacies and, in some cases, consumers.
The Company has now resolved the great majority of the retailer claims and,
subject in certain cases to court approval, has also settled the great majority
of the consumer claims.
While it is not possible to predict or determine the outcome of the
patent, product liability, antitrust or other legal actions brought against the
Company or the ultimate cost of environmental matters, the Company believes
that, except as noted above, the costs associated with all such
-23-
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. For additional information on
litigation and environmental matters, see Item 3 above and Note 13 to the
consolidated financial statements.
Private Securities Litigation Reform Act Of 1995 --
A Caution Concerning Forward-Looking Statements
Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, the Company cautions investors that any forward-looking
statements or projections made by the Company, including those made in this
document, are based on management's expectations at the time they are made, but
they are subject to risks and uncertainties that may cause actual results to
differ materially from those projected. Economic, competitive, governmental,
technological and other factors that may affect the Company's operations and
prospects are discussed in Exhibit 99 to the Company's most recent report on
Forms 10-Q and 10-K filed with the Securities and Exchange Commission.
Additional Information
Additional financial information, presented as graphs in the Company's
1998 Annual Report to Shareholders, is found at pages 29-32 of Exhibit 13 and is
incorporated herein by reference.
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 under Item 7 above
at "Review of Operations -- Financial Condition" 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 1998 Annual Report at pages
32, 36-37, 41 and 42 (Consolidated Statements of Income, Consolidated Balance
Sheets, Consolidated Statements of Cash Flows, and Consolidated Statements of
Comprehensive Income), page 43 (Segment Information), and pages 46-59 (Notes to
Consolidated Financial Statements) (together, pages 1-6 and 10-26 of Exhibit
13), and the Report of Independent Auditors set forth in the Company's 1998
Annual Report at page 61 (page 28 of Exhibit 13), are incorporated herein by
reference.
Information on quarterly results of operations, set forth in the Company's
1998 Annual Report under "Selected Quarterly Data (unaudited)," at page 44
(pages 7-8 of Exhibit 13), is incorporated herein by reference.
-24-
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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, 1999 (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 8-9 of this Form 10-K under "Executive Officers of the Registrant."
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 23, 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 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 percent 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
None.
-25-
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 1998 Annual Report at the pages
indicated in parentheses, are incorporated by reference in Item 8:
Consolidated Statements of Income--Years Ended December 31, 1998, 1997,
and 1996 (page 32) (page 1 of Exhibit 13)
Consolidated Balance Sheets--December 31, 1998 and 1997 (pages 36-37)
(pages 2-3 of Exhibit 13)
Consolidated Statements of Cash Flows--Years Ended December 31, 1998,
1997, and 1996 (page 41) (page 4 of Exhibit 13)
Consolidated Statements of Comprehensive Income--Years Ended December
31, 1998, 1997, and 1996 (page 42) (page 5 of Exhibit 13)
Segment Information (page 43) (page 6 of Exhibit 13)
Notes to Consolidated Financial Statements (pages 46-59) (pages 10-26
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 percent 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 20, 1998, between Eli Lilly
and Company and First Chicago Trust Company of New York, as
Rights Agent
4.2 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
-26-
4.3 Form of Standard Multiple-Series Indenture Provisions dated,
and filed with the Securities and Exchange Commission on,
February 1, 1991
4.4 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)
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 1989 Lilly Stock Plan, as amended(2)
10.2 1994 Lilly Stock Plan, as amended(2)
10.3 1998 Lilly Stock Plan(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,
1998 (portions incorporated by reference into this Form 10-K)
21. List of Subsidiaries
23. Consent of Independent Auditors
27. Financial Data Schedules for the periods indicated:
27.1 Year ended December 31, 1998
27.2 Restated for year ended December 31, 1996
27.3 Restated for quarter ended March 31, 1997
27.4 Restated for six months ended June 30, 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.
-27-
27.5 Restated for nine months ended September 30, 1997
27.6 Restated for year ended December 31, 1997
27.7 Restated for quarter ended March 31, 1998
27.8 Restated for six months ended June 30, 1998
27.9 Restated for nine months ended September 30, 1998
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
1998. During the third quarter, the Company filed a report on Form 8-K on July
23, 1998, in connection with the adoption of a new Shareholder Rights Plan to
replace the Plan that expired on July 28, 1998.
-28-
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/Sidney Taurel
---------------------
Sidney Taurel, Chairman of the Board,
President and Chief Executive Officer
March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 25, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE
- ------------------------------------------------------------------------------
/s/ Sidney Taurel Chairman of the Board, President, Chief
- ----------------------------- Executive Officer, and a Director
(SIDNEY TAUREL) (principal executive officer)
/s/ Charles E. Golden Executive Vice President, Chief Financial
- ----------------------------- Officer, and a Director (principal
(CHARLES E. GOLDEN) financial officer)
/s/ Arnold C. Hanish Chief Accounting Officer
- ----------------------------- (principal accounting officer)
(ARNOLD C. HANISH)
/s/ Steven C. Beering, M.D. Director
- -----------------------------
(STEVEN C. BEERING, M.D.)
/s/ Karen N. Horn Director
- -----------------------------
(KAREN N. HORN, Ph.D.)
-29-
SIGNATURE TITLE
- ------------------------------------------------------------------------------
/s/ Alfred G. Gilman, M.D., Ph.D. Director
- -----------------------------
(ALFRED G. GILMAN, M.D., 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/ August M. Watanabe, M.D. Director
- -----------------------------
(AUGUST M. WATANABE, M.D.)
/s/ Alva O. Way Director
- -----------------------------
(ALVA O. WAY)
-30-
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 to the Company's Report on
Form 10-Q for the quarter ended
September 30, 1998
3.2 By-laws Incorporated by reference from
Exhibit 3 to the Company's Report on
Form 10-Q for the quarter ended
June 30, 1998
4.1 Rights Agreement dated as of July 20, 1998, Incorporated by reference from
between Eli Lilly and Company and First Chicago Exhibit 1 to the Company's Report on
Trust Company of New York, as Rights Agent Form 8-K filed July 23, 1998
4.2 Form of Indenture with respect to Debt Securities Incorporated by reference from
dated as of February 1, 1991, between Eli Lilly Exhibit 4.1 to the Company's Registration
and Company and Citibank, N.A., as Trustee Statement on Form S-3, Registration No. 33-38347
4.3 Form of Standard Multiple-Series Indenture Incorporated by reference from
Provisions dated, and filed with the Securities Exhibit 4.2 to the Company's Registration
and Exchange Commission on February 1, 1991 Statement on Form S-3, Registration No. 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 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
10.2 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
10.3 1998 Lilly Stock Plan Incorporated by reference from
Exhibit A to the Company's proxy statement
dated March 4, 1998
10.4 The Lilly Deferred Compensation Plan, as amended Incorporated by reference from
Exhibit 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 Attached
10.6 The Eli Lilly and Company EVA(R)Bonus Plan, as Attached
amended
10.7 Eli Lilly and Company Change in Control Severance Attached
Pay Plan for Select Employees
12. Computation of Ratio of Earnings to Fixed Charges Attached
13. Annual Report to Shareholders for the Year Ended Attached
December 31, 1998 (portions incorporated by
reference in this
Form 10-K)
21. List of Subsidiaries Attached
23. Consent of Independent Auditors Attached
27. Financial Data Schedules for the periods
indicated:
27.1 Year ended December 31, 1998
27.2 Restated for year ended
December 31, 1996
27.3 Restated for quarter ended
March 31, 1997
27.4 Restated for six months ended
June 30, 1997
27.5 Restated for nine months ended
September 30, 1997
27.6 Restated for year ended
December 31, 1997
-3-
27.7 Restated for quarter ended
March 31, 1998
27.8 Restated for six months ended
June 30, 1998
27.9 Restated for nine months ended
September 30, 1998
99. Cautionary Statement Under Private Securities Attached
Litigation Reform Act of 1995 -- "Safe Harbor"
for Forward-Looking Disclosures