LLY-2014.12.31-10K


United States
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, 2014
Commission file number 001-06351
Eli Lilly and Company
An Indiana corporation
 
I.R.S. employer identification no. 35-0470950
Lilly Corporate Center, Indianapolis, Indiana 46285
(317) 276-2000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
 
Name of Each Exchange On Which Registered
Common Stock (no par value)
 
New York Stock Exchange
6.57% Notes Due January 1, 2016
 
New York Stock Exchange
7 1/8% Notes Due June 1, 2025
 
New York Stock Exchange
6.77% Notes Due January 1, 2036
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act. Yes þ No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes þ 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. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 under the Exchange Act. (Check one):
Large accelerated filer  þ
  
Accelerated filer  ¨
  
Non-accelerated filer   ¨
  
Smaller reporting company  ¨
Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 under the Exchange Act: Yes ¨ No þ
Aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (Common Stock): approximately $60,777,000,000
Number of shares of common stock outstanding as of February 13, 2015: 1,111,103,942
Portions of the Registrant’s Proxy Statement to be filed on or about March 23, 2014 have been incorporated by reference into Part III of this report.

1


Eli Lilly and Company
Form 10-K
For the Year Ended December 31, 2014
Table of Contents
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue,” or similar expressions.
In particular, information appearing under “Business,” “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
•
the timing of anticipated regulatory approvals and launches of new products;
•
market uptake of recently launched products;
•
competitive developments affecting current products;
•
the expiration of intellectual property protection for certain of our products;
•
our ability to protect and enforce patents and other intellectual property;
•
the impact of governmental actions regarding pricing, importation, and reimbursement for pharmaceuticals, including U.S. health care reform;
•
regulatory compliance problems or government investigations;
•
regulatory actions regarding currently marketed products;
•
unexpected safety or efficacy concerns associated with our products;
•
issues with product supply stemming from manufacturing difficulties or disruptions;
•
regulatory changes or other developments;
•
changes in patent law or regulations related to data-package exclusivity;
•
litigation involving current or future products as we are self-insured;
•
unauthorized disclosure or misappropriation of trade secrets or other confidential data stored in our information systems and networks;
•
changes in tax law;
•
changes in inflation, interest rates, and foreign currency exchange rates;
•
asset impairments and restructuring charges;
•
changes in accounting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC);
•
acquisitions and business development transactions; and
•
the impact of global macroeconomic conditions.

Investors should not place undue reliance on forward-looking statements. You should carefully read the factors described in the “Risk Factors” section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.

3


Part I
Item 1.
Business
Eli Lilly and Company (the “company” or “registrant” or "Lilly") was incorporated in 1901 in Indiana to succeed to the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and market products in two business segments—human pharmaceutical products and animal health products.
The mission of our human pharmaceutical business is to make medicines that help people live longer, healthier, more active lives. Our vision is to make a significant contribution to humanity by improving global health in the 21st century. Most of the products we sell today were discovered or developed by our own scientists, and our success depends to a great extent on our ability to continue to discover, develop, and bring to market innovative new medicines.
Our animal health business, operating through our Elanco division, develops, manufactures, and markets products for both food animals and companion animals.
We manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 11 other countries. Our products are sold in approximately 120 countries.
Subsequent Event - Novartis Animal Health Acquisition
On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash transaction for approximately $5.4 billion. Novartis AH operates in approximately 40 countries. We acquired Novartis AH’s nine manufacturing sites, six dedicated research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, a pipeline with more than 40 projects in development, and more than 3,000 employees. The combined organization is expected to increase our animal health product portfolio, expand our global commercial presence, and augment our animal health manufacturing and research and development. In particular, it is expected to provide Elanco with a greater commercial presence in the companion animal and swine markets, expand Elanco’s presence in equine and vaccines areas, and create an entry into the aquaculture market. As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of Novartis AH, we divested certain companion animal assets in the U.S. related to the Sentinel® canine parasiticide franchise to Virbac Corporation for approximately $410 million.
Human Pharmaceutical Products
Our human pharmaceutical products include:
Endocrinology products, including:
•
Humalog®, Humalog Mix 75/25™, and Humalog Mix 50/50™, insulin analogs for the treatment of diabetes
•
Humulin®, human insulin of recombinant DNA origin for the treatment of diabetes
•
Trajenta®, for the treatment of type 2 diabetes
•
Jentadueto®, a combination tablet of linagliptin (Trajenta) and metformin hydrochloride for use in the treatment of type 2 diabetes
•
Jardiance®, for the treatment of type 2 diabetes (approved in the U.S., Europe, and Japan in 2014)
•
Trulicity™, for the treatment of type 2 diabetes (approved in the U.S. and Europe in 2014)
•
Glyxambi®, a combination tablet of linagliptin and empagliflozin (Jardiance) for the treatment of type 2 diabetes (approved in the U.S. in January 2015)
•
Forteo®, for the treatment of osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women

4


•
Evista®, for the prevention and treatment of osteoporosis in postmenopausal women and for the reduction of the risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer
•
Humatrope®, for the treatment of human growth hormone deficiency and certain pediatric growth conditions
•
Axiron®, a topical solution of testosterone, applied by underarm applicator, for replacement therapy in men for certain conditions associated with a deficiency or absence of testosterone
Neuroscience products, including:
•
Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the U.S. for the management of fibromyalgia and of chronic musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis
•
Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance
•
Strattera®, for the treatment of attention-deficit hyperactivity disorder
•
Prozac®, for the treatment of major depressive disorder, obsessive-compulsive disorder, bulimia nervosa, and panic disorder
•
Amyvid®, a radioactive diagnostic agent for positron emission tomography imaging of beta-amyloid neuritic plaques in the brains of adult patients with cognitive impairment who are being evaluated for Alzheimer's disease and other causes of cognitive decline
Oncology products, including:
•
Alimta®, for the first-line treatment, in combination with another agent, of advanced non-small cell lung cancer (NSCLC) for patients with non-squamous cell histology; for the second-line treatment of advanced non-squamous NSCLC; as monotherapy for the maintenance treatment of advanced non-squamous NSCLC in patients whose disease has not progressed immediately following chemotherapy treatment; and in combination with another agent, for the treatment of malignant pleural mesothelioma
•
Erbitux®, indicated both as a single agent and with another chemotherapy agent for the treatment of certain types of colorectal cancers; and as a single agent or in combination with radiation therapy for the treatment of certain types of head and neck cancers
•
Gemzar®, for the treatment of pancreatic cancer; in combination with other agents, for the treatment of metastatic breast cancer, NSCLC, and advanced or recurrent ovarian cancer; and in the European Union (EU) for the treatment of bladder cancer
•
Cyramza®, approved in 2014 in the U.S. and the EU both as a single agent and in combination with another agent for advanced or metastatic gastric cancer; and approved in 2014 in the U.S. in combination with another agent as a second-line treatment of metastatic NSCLC
Cardiovascular products, including:
•
Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia
•
Effient®, for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary intervention (PCI), including patients undergoing angioplasty, atherectomy, or stent placement
•
ReoPro®, for use as an adjunct to PCI for the prevention of cardiac ischemic complications

5


Animal Health Products
Our products for food animals include:
•
Rumensin®, a cattle feed additive that improves feed efficiency and growth and also controls and prevents coccidiosis
•
Posilac®, a protein supplement to improve milk productivity in dairy cows
•
Paylean® and Optaflexx®, leanness and performance enhancers for swine and cattle, respectively
•
Tylan®, an antibiotic used to control certain diseases in cattle, swine, and poultry
•
Micotil®, Pulmotil®, and Pulmotil AC™, antibiotics used to treat respiratory disease in cattle, swine, and poultry, respectively
•
Coban®, Monteban®, and Maxiban®, anticoccidial agents for use in poultry
•
Surmax™ (sold as Maxus™ in some countries), a performance enhancer for swine and poultry
Our products for companion animals include:
•
Trifexis®, a monthly chewable tablet for dogs that kills fleas, prevents flea infestations, prevents heartworm disease, and controls intestinal parasite infections
•
Comfortis®, a chewable tablet that kills fleas and prevents flea infestations on dogs
Recently acquired Novartis AH products include:
•
Denagard®, an antibiotic for the control and treatment of respiratory and enteric diseases in swine and poultry
•
Milbemax®, a broad spectrum intestinal wormer which, if given monthly, also offers prevention against heartworm
•
Sentinel (outside the U.S.), a monthly tablet for the prevention of flea populations, the concurrent prevention of heartworm disease and the treatment of roundworms, hookworms, and whipworms in dogs
•
Atopica®, for the treatment of chronic manifestations of atopic dermatitis in dogs and for the symptomatic treatment of chronic allergic dermatitis in cats
•
Fortekor™, for the treatment of congestive heart failure in dogs and reduction of proteinurea associated with chronic kidney disease in cats
Marketing
We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various countries to meet local needs.
Human Pharmaceuticals—United States
In the U.S., we distribute human pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies. In 2014, 2013, and 2012, three wholesale distributors in the U.S.—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health, Inc.—each accounted for between 8 percent and 19 percent of our consolidated total revenue. No other distributor accounted for more than 10 percent of consolidated total revenue in any of those years.
We promote our major human pharmaceutical products in the U.S. through sales representatives who call upon physicians and other health care professionals. We advertise in medical journals, distribute literature and samples of certain products to physicians, and exhibit at medical meetings. In addition, we advertise certain products directly to consumers in the U.S., and we maintain websites with information about our major products. We supplement our employee sales force with contract sales organizations as appropriate to leverage our own resources and the strengths of our partners in various markets.

6


We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care organizations (MCOs), government and long-term care institutions, hospitals, and certain retail pharmacies. We enter into arrangements with these organizations providing for discounts or rebates on our products.
Human Pharmaceuticals—Outside the United States
Outside the U.S, we promote our human pharmaceutical products primarily through sales representatives. While the products marketed vary from country to country, endocrinology products constitute the largest single group in total revenue. Distribution patterns vary from country to country. In most countries in which we operate, we maintain our own sales organizations, but in some smaller countries we market our products through independent distributors.
Human Pharmaceutical Marketing Collaborations
Certain of our human pharmaceutical products are marketed in arrangements with other pharmaceutical companies, including the following:
•
Trajenta, Jentadueto, Jardiance, and Glyxambi are being jointly developed and commercialized with us by Boehringer Ingelheim. Our collaboration with Boehringer Ingelheim also covers two potential future diabetes products: our new insulin glargine product and a fixed-dose combination of empagliflozin and metformin hydrochloride.
•
We co-promote Cymbalta in Japan with Shionogi & Co. Ltd.
•
Erbitux is marketed in the U.S. and Canada by Bristol-Myers Squibb. We have the option to co-promote Erbitux in the U.S. and Canada. Outside the U.S. and Canada, Erbitux is commercialized by Merck KGaA. We receive royalties from Bristol-Myers Squibb and Merck KGaA.
•
Effient is co-promoted with us by Daiichi Sankyo or affiliated companies in the U.S., major European markets, Brazil, Mexico, and certain other countries. We retain sole marketing rights in Canada, Australia, Russia, and certain other countries. Daiichi Sankyo retains sole marketing rights in Japan and certain other countries.
Animal Health Products
Our Elanco animal health business unit employs field salespeople throughout the U.S. and has an extensive sales force outside the U.S. Elanco sells its products primarily to wholesale distributors. Elanco promotes its products primarily to producers and veterinarians for food animal products and to veterinarians for companion animal products. Elanco also advertises certain companion animal products directly to pet owners.
Competition
Our human pharmaceutical products compete globally with products of many other companies in highly competitive markets. Our animal health products compete globally with products of animal health care companies as well as pharmaceutical, chemical, and other companies that operate animal health businesses.
Important competitive factors for both human pharmaceutical and animal health products include effectiveness, safety, and ease of use; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products, processes, and uses. Most new products that we introduce must compete with other branded or generic products already on the market or products that are later developed by competitors. If competitors introduce new products or delivery systems with therapeutic or cost advantages, our products can be subject to decreased sales, progressive price reductions, or both.
We believe our long-term competitive success depends upon discovering and developing (either alone or in collaboration with others) or acquiring innovative, cost-effective human pharmaceutical and animal health products that provide improved outcomes and deliver value to payers, together with our ability to continuously improve the productivity of our operations in a highly competitive environment. There can be no assurance that our research and development efforts will result in commercially successful products, and it is possible that our products will become uncompetitive from time to time as a result of products developed by our competitors.

7


Generic Pharmaceuticals
One of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and the EU, the regulatory approval process for human pharmaceuticals (other than biological products (biologics)) exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy of the innovator product. Therefore, generic manufacturers generally invest far less than we do in research and development and can price their products much lower than our branded products. Accordingly, when a branded non-biologic human pharmaceutical loses its market exclusivity, it normally faces intense price competition from generic forms of the product. Public and private payers typically encourage the use of generics as alternatives to brand-name drugs in their healthcare programs. Laws in the U.S. generally allow, and in many cases require, pharmacists to substitute generic drugs that have been rated under government procedures to be essentially equivalent to a brand-name drug. Where substitution is mandatory, it must be made unless the prescribing physician expressly forbids it. In many countries outside the U.S., intellectual property protection is weak and we must compete with generic or counterfeit versions of our products. Many of our animal health products also compete with generics.
Biosimilars
Several of our current products, including Cyramza, Erbitux, and ReoPro, and many of the new molecular entities (NMEs) in our research pipeline are biologics. Competition for Lilly’s biologics may be affected by the approval of follow-on biologics, also known as biosimilars. A biosimilar is a biologic for which marketing approval is granted based on less than a full safety and efficacy package due to the physical/structural similarity of the biosimilar to an already-approved biologic as well as reliance on the finding of safety and efficacy of the already-approved product. Globally, governments have or are developing regulatory pathways to approve biosimilars as alternatives to innovator-developed biologics, but the patent for the existing, branded product must expire in a given market before biosimilars may enter that market. The extent to which a biosimilar, once approved, will be substituted for the innovator biologic in a way that is similar to traditional generic substitution for non-biologic products, is not yet entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing.
Biosimilars may present both competitive challenges and opportunities. For example, with our partner Boehringer Ingelheim we have developed a new insulin glargine product which has the same amino acid sequence as the currently marketed product. Our product has received marketing approval in the EU and tentative approval in the U.S. We intend to begin European launches later in 2015 following expiration of the compound patent for insulin glargine. See Item 3, "Legal Proceedings," for information on legal proceedings relating to this product.
Managed Care Organizations
The growth of MCOs in the U.S. is also a major factor in the competitive marketplace for human pharmaceuticals. It is estimated that approximately two-thirds of the U.S. population now participates in some version of managed care. MCOs can include medical insurance companies, medical plan administrators, health-maintenance organizations, Medicare Part D prescription drug plans, alliances of hospitals and physicians, and other physician organizations. MCOs have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance.
MCOs typically maintain formularies specifying which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their branded products included. Where possible, companies compete for inclusion based upon unique features of their products, such as greater efficacy, fewer side effects, or greater patient ease of use. A lower overall cost of therapy is also an important factor. Price is becoming an increasingly important factor in MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that multiple branded products are therapeutically comparable. As noted above, generic drugs typically have lower costs than brand-name drugs. MCOs often favor generics for this reason.

8


Patents, Trademarks, and Other Intellectual Property Rights
Overview
Intellectual property protection is critical to our ability to successfully commercialize our life sciences innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a large number of patents in the U.S. and many other countries relating to products, product uses, formulations, and manufacturing processes. In addition, as discussed below, for some products we have additional effective intellectual property protection in the form of data protection under pharmaceutical regulatory laws.
The patent protection anticipated to be of most relevance to human pharmaceuticals is provided by national patents claiming the active ingredient (the compound patent), particularly those in major markets such as the U.S., various European countries, and Japan. These patents may be issued based upon the filing of international patent applications, usually filed under the Patent Cooperation Treaty (PCT). Patent applications covering the compounds are generally filed during the Discovery Research Phase of the drug discovery process, which is described in the “Research and Development” section of Item 1, “Business.” In general, national patents in each relevant country are available for a period of 20 years from the filing date of the PCT application, which is often years prior to the launch of a commercial product. Further patent term adjustments and restorations may extend the original patent term:
•
Patent term adjustment is a statutory right available to all U.S. patent applicants to provide relief in the event that a patent is delayed during examination by the U.S. Patent and Trademark Office.
•
Patent term restoration is a statutory right provided to U.S. patents that claim inventions subject to review by the U.S. Food and Drug Administration (FDA). A single patent for a human pharmaceutical product may be eligible for patent term restoration to make up for a portion of the time invested in clinical trials and the FDA review process. Patent term restoration is limited by a formula and cannot be calculated until product approval due to uncertainty about the duration of clinical trials and the time it takes the FDA to review an application. There is a five-year cap on any restoration, and no patent may be extended for more than 14 years beyond FDA approval. Some countries outside the U.S. also offer forms of patent term restoration. For example, Supplementary Protection Certificates are sometimes available to extend the life of a European patent up to an additional five years. Similarly, in Japan, Korea, and Australia, patent terms can be extended up to five years, depending on the length of regulatory review and other factors.
Loss of effective patent protection for human pharmaceuticals typically results in the loss of effective market exclusivity for the product, which can result in severe and rapid decline in sales of the product. However, in some cases the innovator company may be protected from approval of generic or other follow-on versions of a new medicine beyond the expiration of the compound patent through manufacturing trade secrets, later-expiring patents on methods of use or formulations, or data protection that may be available under pharmaceutical regulatory laws. The primary forms of data protection are as follows:
•
Regulatory authorities in major markets generally grant data package protection for a period of years following new drug approvals in recognition of the substantial investment required to complete clinical trials. Data package protection prohibits other manufacturers from submitting regulatory applications for marketing approval based on the innovator company’s regulatory submission data for the drug. The base period of data package protection depends on the country. For example, the period is five years in the U.S. (12 years for new biologics as described below), 10 years in the EU, and eight years in Japan. The period begins on the date of product approval and runs concurrently with the patent term for any relevant patent.
•
Under the Biologics Price Competition and Innovation Act (enacted in the U.S. in 2010), the FDA has the authority to approve similar versions (biosimilars) of innovative biologics. A competitor seeking approval of a biosimilar must file an application to show its molecule is highly similar to an approved innovator biologic, address the challenges of biologics manufacturing, and include a certain amount of safety and efficacy data which the FDA will determine on a case-by-case basis. Under the data protection provisions of this law, the FDA cannot approve a biosimilar application until 12 years after initial marketing approval of the innovator biologic, subject to certain conditions.

9


•
In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing in pediatric or adolescent populations. If granted, this “pediatric exclusivity” provides an additional six months, which are added to the term of data protection as well as to the term of any relevant patents, to the extent these protections have not already expired.
•
Under the U.S. orphan drug law, a specific use of a drug or biological product can receive "orphan" designation if it is intended to treat a disease or condition affecting fewer than 200,000 people in the U.S., or affecting more than 200,000 people but not reasonably expected to recover its development and marketing costs through U.S. sales. Among other benefits, orphan designation entitles the particular use of the drug to seven years of market exclusivity, meaning that the FDA cannot (with limited exceptions) approve another marketing application for the same drug for the same indication until expiration of the seven-year period. Unlike pediatric exclusivity, the orphan exclusivity period is independent of and runs in parallel with any applicable patents.
Outside the major markets, the adequacy and effectiveness of intellectual property protection for human pharmaceuticals varies widely. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization, more than 140 countries have agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to patent owners. Because of TRIPs transition provisions, dispute resolution mechanisms, substantive limitations, and ineffectual implementation, it is difficult to assess when and how much we will benefit commercially from this protection.
Certain of our Elanco animal health products are covered by patents or other forms of intellectual property protection. Historically, upon loss of effective market exclusivity for our animal health products, we have not generally experienced the rapid and severe declines in revenues that are common in the human pharmaceutical segment.
There is no assurance that the patents we are seeking will be granted or that the patents we hold would be found valid and enforceable if challenged. Moreover, patents relating to particular products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or marketing alternative products or formulations that compete with our patented products. In addition, competitors or other third parties sometimes may assert claims that our activities infringe patents or other intellectual property rights held by them, or allege a third-party right of ownership in our existing intellectual property.
Our Intellectual Property Portfolio
We consider intellectual property protection for certain products, processes, and uses—particularly those products discussed below—to be important to our operations. For many of our products, in addition to the compound patent, we hold other patents on manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the compound patent.
The most relevant U.S. patent protection or data protection for our larger or recently launched patent-protected marketed products is as follows:
•
Alimta is protected by a compound patent (2016) plus pediatric exclusivity (2017), and a vitamin dosage regimen patent (2021) plus pediatric exclusivity (2022).
•
Cialis is protected by compound and use patents (2017).
•
Cyramza is protected by biologics data package protection (2026).
•
Effient is protected by a compound patent (2017) and patents covering methods of using Effient with aspirin (2022).
•
Forteo is protected by patents primarily covering its formulation and related processes (2018) and use patents (2019).
•
Jardiance is protected by ­­­a compound patent (2025 not including possible patent extension)
•
Strattera is protected by a patent covering its use in treating attention deficit-hyperactivity disorder (2016) plus pediatric exclusivity (2017).

10


•
Trajenta and Jentadueto are protected by a compound patent (2023), and Boehringer Ingelheim has applied for a patent extension to 2025 under the patent restoration laws.
•
Trulicity is protected by a compound patent (2024 not including possible patent extension)
Outside the U.S., important patent protection or data protection includes:
•
Alimta in major European countries (compound patent December 2015, vitamin dosage regimen patent 2021) and Japan (compound patent December 2015, patent covering use to treat cancer concomitantly with vitamins 2021)
•
Cialis in major European countries (compound patent 2017)
•
Cymbalta in Japan (data package protection 2018). In major European countries, our Cymbalta data package protection expired in 2014, and we expect the first entry of generic competitors in 2015.
•
Forteo in Japan (data package protection 2018; patent covering its formulation and related process 2019).
•
Zyprexa in Japan (compound patent December 2015).
Necitumumab, our NME that has been submitted for regulatory review, is protected by a compound patent (2025 not including possible patent extension), and upon U.S. approval, would be protected for 12 years by biologics data package protection. See Item 7, "Management’s Discussion and Analysis—Late-Stage Pipeline”, for more information about this molecule.
Worldwide, we sell all of our major products under trademarks that we consider in the aggregate to be important to our operations. Trademark protection varies 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.
Patent Licenses
Most of our major products were discovered in our own laboratories and are not subject to significant license agreements. Two of our largest products, Cialis and Alimta, are subject to patent assignments or licenses granted to us by others.
•
The compound patent for Cialis is the subject of a license agreement with GlaxoSmithKline (Glaxo), which assigns to us exclusively all rights in the compound. The agreement calls for royalties of a single-digit percentage of net sales. The agreement is not subject to termination by Glaxo for any reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period.
•
The compound patent for Alimta is the subject of a license agreement with Princeton University, granting us an irrevocable exclusive worldwide license to the compound patents for the lives of the patents in the respective territories. The agreement calls for royalties of a single-digit percentage of net sales. The agreement is not subject to termination by Princeton for any reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period. Alimta is also the subject of a worldwide, nonexclusive license to certain patents owned by Takeda Pharmaceutical Company Limited. The agreement calls for royalties of a single-digit percentage of net sales in countries covered by a relevant patent. The agreement is subject to termination for material default and failure to cure by Lilly and in the event that Lilly becomes bankrupt or insolvent.
Patent Challenges
In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, made a complex set of changes to both patent and new-drug-approval laws for human pharmaceuticals. Before the Hatch-Waxman Act, no drug could be approved without providing the FDA complete safety and efficacy studies, i.e., a complete New Drug Application (NDA). The Hatch-Waxman Act authorizes the FDA to approve generic versions of innovative human pharmaceuticals (other than biologics) without such information by filing an Abbreviated New Drug Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only “bioequivalence” between the generic version and the NDA-approved drug—not safety and efficacy.

11


Absent a patent challenge, the FDA cannot approve an ANDA until after the innovator’s patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA alleging that one or more of the patents listed in the innovator’s NDA are invalid or not infringed. This allegation is commonly known as a “Paragraph IV certification.” The innovator must then file suit against the generic manufacturer to protect its patents. The FDA is then prohibited from approving the generic company’s application for a 30- to 42-month period (which can be shortened or extended by the trial court judge hearing the patent challenge). If one or more of the NDA-listed patents are challenged, the first filer(s) of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers.
Generic manufacturers use Paragraph IV certifications extensively to challenge patents on innovative human pharmaceuticals. In addition, generic companies have shown an increasing willingness to launch “at risk,” i.e., after receiving ANDA approval but before final resolution of their patent challenge. For example, we are currently in litigation with numerous generic manufacturers arising from their Paragraph IV certifications challenging the vitamin dosage regimen patent for Alimta. For more information on Hatch-Waxman litigation involving the company, see Item 8, “Financial Statements and Supplementary Data—Note 15, Contingencies” and Item 3, "Legal Proceedings."
Outside the U.S., the legal doctrines and processes by which pharmaceutical patents can be challenged vary widely. In recent years, we have experienced an increase in patent challenges from generic manufacturers in many countries outside the U.S., and we expect this trend to continue. For more information on administrative challenges and litigation involving our Alimta vitamin dosage regimen patents in Europe and Japan, see Item 8, “Financial Statements and Supplementary Data—Note 15, Contingencies.”
Government Regulation
Regulation of Our Operations
Our operations are regulated extensively by numerous national, state, and local agencies. The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals is extremely costly and can significantly delay product introductions. Promotion, marketing, manufacturing, and distribution of human pharmaceutical and animal health products are extensively regulated in all major world markets. We conduct extensive post-marketing surveillance of the safety of the products we sell. In addition, our operations are subject to complex federal, state, local, and foreign laws and regulations concerning the environment, occupational health and safety, and privacy. Animal health product regulations address the administration of the product in or on the animal, and in the case of food animal products, the impact on humans who consume the food as well as the impact on the environment at the production site. The laws and regulations affecting the manufacture and sale of current products and the discovery, development, and introduction of new products will continue to require substantial effort, expense, and capital investment.
Of particular importance is the FDA in the United States. Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over all of our human pharmaceutical products and certain animal health products in the U.S. and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, advertising, dissemination of information, and post-marketing surveillance of those products. The U.S. Department of Agriculture and the U.S. Environmental Protection Agency also regulate some animal health products.
The FDA extensively regulates all aspects of manufacturing quality for human pharmaceuticals under its current Good Manufacturing Practices (cGMP) regulations. Outside the U.S., our products and operations are subject to similar regulatory requirements, notably by the European Medicines Agency in the EU and the Ministry of Health, Labor and Welfare in Japan. Specific regulatory requirements vary from country to country. We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems in our manufacturing, product development, and process development operations to ensure sustained compliance with cGMP and similar regulations. However, in the event we fail to adhere to these requirements in the future, we could be subject to interruptions in production, fines and penalties, and delays in new product approvals. Certain of our products are manufactured by third parties, and their failure to comply with these regulations could adversely affect us through failure to supply product to us or delays in new product approvals.

12


The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers and prescribers, are subject to various other U.S. federal and state laws, including the federal anti-kickback statute and the False Claims Act and state laws governing kickbacks, false claims, unfair trade practices, and consumer protection. These laws are administered by, among others, the Department of Justice (DOJ), the Office of Inspector General of the Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel Management, and state attorneys general. Over the past several years, the FDA, the DOJ, and many of these other agencies have increased their enforcement activities with respect to pharmaceutical companies and increased the inter-agency coordination of enforcement activities. Several claims brought by these agencies against Lilly and other companies under these and other laws have resulted in corporate criminal sanctions and very substantial civil settlements.
The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits certain individuals and entities, including U.S. publicly traded companies, from promising, offering, or giving anything of value to foreign officials with the corrupt intent of influencing the foreign official for the purpose of helping the company obtain or retain business or gain any improper advantage. The FCPA also imposes specific recordkeeping and internal controls requirements on U.S. publicly traded companies. As noted above, outside the U.S., our business is heavily regulated and therefore involves significant interaction with foreign officials. Additionally, in many countries outside the U.S., the health care providers who prescribe human pharmaceuticals are employed by the government and the purchasers of human pharmaceuticals are government entities; therefore, our interactions with these prescribers and purchasers are subject to regulation under the FCPA.
In addition to the U.S. application and enforcement of the FCPA, the various jurisdictions in which we operate and supply our products have laws and regulations aimed at preventing and penalizing corrupt and anticompetitive behavior. In recent years, several jurisdictions, including China, Brazil, and the United Kingdom, have enhanced their laws and regulations in this area, increased their enforcement activities, and/or increased the level of cross-border coordination and information sharing.
It is possible that we could become subject to additional administrative and legal proceedings and actions, which could include claims for civil penalties (including treble damages under the False Claims Act), criminal sanctions, and administrative remedies, including exclusion from U.S. federal and other health care programs. It is possible that an adverse outcome in future actions could have a material adverse impact on our consolidated results of operations, liquidity, and financial position.
Regulations Affecting Human Pharmaceutical Pricing, Reimbursement, and Access
In the U.S., we are required to provide rebates to the federal government and respective state governments on their purchases of our human pharmaceuticals under state Medicaid and Medicaid Managed Care programs (minimum of 23.1 percent plus adjustments for price increases over time) and rebates to private payers who cover patients in certain types of health care facilities that serve low-income and uninsured patients (known as 340B facilities). No rebates are required at this time in the Medicare Part B (physician and hospital outpatient) program where reimbursement is set on an "average selling price plus 4.3 percent" formula. Drug manufacturers are required to provide a discount of 50 percent of the cost of branded prescription drugs for Medicare Part D participants who are in the “doughnut hole” (the coverage gap in Medicare prescription drug coverage). Additionally, an annual fee is imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs.
Rebates are also negotiated in the private sector. We give rebates to private payers who provide prescription drug benefits to seniors covered by Medicare and to private payers who provide prescription drug benefits to their customers. These rebates are affected by the introduction of competitive products and generics in the same class.
In most international markets, we operate in an environment of government-mandated cost-containment programs, which may include price controls, international reference pricing (to other countries’ prices), discounts and rebates, therapeutic reference pricing (to other, often generic, pharmaceutical choices), restrictions on physician prescription levels, and mandatory generic substitution.

13


Globally, public and private payers are increasingly restricting access to human pharmaceuticals based on the payers' assessments of comparative effectiveness and value. The U.S. has established the Patient Centered Outcomes Research Institute (PCORI), a federally-funded, private, non-profit corporation empowered to fund and disseminate comparative effectiveness research (CER) and build infrastructure for improved outcomes analysis. While PCORI has no authority to impose formulary changes directly in government-funded health programs, they are expected to drive an increase in CER studies which payers can use for formulary decisions and/or medical societies can use to inform medical guidelines development. Many countries outside of the U.S. use formal health technology assessment processes to determine formulary placement and purchase price.
We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, in general we expect that state, federal, and international legislative and regulatory developments could have further negative effects on pricing and reimbursement for our human pharmaceutical products.
Research and Development
Our commitment to research and development dates back more than 100 years. We invest heavily in research and development because we believe it is critical to our long-term competitiveness. At the end of 2014, we employed approximately 8,145 people in human pharmaceutical and animal health research and development activities, including a substantial number of physicians, scientists holding graduate or postgraduate degrees, and highly skilled technical personnel. Our research and development expenses were $4.73 billion in 2014, $5.53 billion in 2013, and $5.28 billion in 2012.
Our internal human pharmaceutical research focuses primarily on our core areas of cancer, diabetes, and neurodegeneration, and two emerging areas, immunology and pain. We are investing in molecules with multi-pathway pharmacological efficacy (e.g., dual-action bi-specific antibodies and antibody-drug conjugates) to expand the potential of our therapeutic portfolio. We have a strong biotechnology research program, with approximately half of our clinical-stage pipeline currently consisting of biologics. In addition to discovering and developing NMEs, we seek to expand the value of existing products through new uses, formulations, and therapeutic approaches that provide additional value to patients. Across all our therapeutic areas, we are increasingly focusing our efforts on tailored therapeutics, seeking to identify and use advanced diagnostic tools and other information to identify specific subgroups of patients for whom our medicines—or potentially those of other companies—will be the best treatment option.
To supplement our internal efforts, we collaborate with others, including academic institutions and research-based pharmaceutical and biotechnology companies. We use the services of physicians, hospitals, medical schools, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of our human pharmaceutical products. We actively seek out external investments in research and technologies that hold the promise to complement and strengthen our own efforts. These investments can take many forms, including licensing arrangements, co-development and co-marketing agreements, co-promotion arrangements, joint ventures, and acquisitions.
Our Elanco animal health innovation strategy is focused on identifying and developing promising technologies and potential products from internal and external sources to meet unmet veterinary needs. Our animal health scientists also leverage discoveries from our human health laboratories to develop products to enhance the health and wellbeing of livestock and pets.

14


Human pharmaceutical development is time-consuming, expensive, and risky. On average, only one out of many thousands of molecules discovered by researchers ultimately becomes an approved medicine. The process from discovery to regulatory approval can take 12 to 15 years or longer. Drug candidates can fail at any stage of the process, and even late-stage drug candidates sometimes fail to receive regulatory approval or achieve commercial success. After approval and launch of a product, we expend considerable resources on post-marketing surveillance and additional clinical studies to collect and understand the benefits and potential risks of medicines as they are used as therapeutics. The following describes in more detail the research and development process for human pharmaceutical products:
Phases of New Drug Development
•
Discovery Research Phase
The earliest phase of new drug research and development, the discovery phase, can take many years. Scientists identify, design, and synthesize promising molecules, screening tens of thousands of molecules for their effect on biological “targets” that appear to play an important role in one or more diseases. Targets can be part of the body, such as a protein, receptor, or gene; or foreign, such as a virus or bacteria. Some targets have been proven to affect disease processes, but often the target is unproven and may later prove to be irrelevant to the disease or to yield insufficient clinical benefit. Molecules that have the desired effect on the target and meet other design criteria become “lead” molecules and move to the next phase of development. The probability of any one such lead molecule becoming a commercial product is extremely low.
•
Early Development Phase
The early development phase involves refining lead molecules, understanding how to manufacture them efficiently, and completing initial testing for safety and efficacy. Safety testing is done first in laboratory tests and animals as necessary, to identify toxicity and other potential safety issues that would preclude use in humans. The first human tests (often referred to as Phase I) are normally conducted in small groups of healthy volunteers to assess safety and find the potential dosing range. After a safe dose has been established, the drug is administered to small populations of patients (Phase II) to look for initial signs of efficacy in treating the targeted disease and to continue to assess safety. In parallel, scientists work to identify safe, effective, and economical manufacturing processes. Long-term animal studies continue to test for potential safety issues. Of the molecules that enter the early development phase, typically less than 10 percent move on to the product phase. The early development phase normally takes several years to complete.
•
Product Phase
Product phase (Phase III) molecules have already demonstrated safety and, typically, shown initial evidence of efficacy. As a result, these molecules generally have a higher likelihood of success. The molecules are tested in much larger patient populations to demonstrate efficacy to a predetermined level of statistical significance and to continue to develop the safety profile. These trials are generally global in nature and are designed to generate the data necessary to submit the molecule to regulatory agencies for marketing approval. The potential new drug is generally compared with existing competitive therapies, placebo, or both. The resulting data is compiled and submitted to regulatory agencies around the world. Phase III testing varies by disease state, but can often last from three to four years.
•
Submission Phase
Once a molecule is submitted to regulatory agencies, the time to final marketing approval can vary from several months to several years, depending on variables such as the disease state, the strength and complexity of the data presented, the novelty of the target or compound, and the time required for the agency(ies) to evaluate the submission. There is no guarantee that a potential medicine will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.

15


We believe our investments in research, both internally and in collaboration with others, have been rewarded by the large number of new molecules and new indications for existing molecules that we have in all stages of development. We currently have approximately 55 drug candidates across all stages of human testing and a larger number of projects in preclinical development. Among our new investigational molecules currently in the product phase of development or awaiting regulatory approval or launch are potential therapies for diabetes, various cancers, Alzheimer’s disease, pain, high-risk vascular disease, rheumatoid arthritis, psoriasis, and psoriatic arthritis. We are studying many other drug candidates in the earlier stages of development, including molecules targeting various cancers, diabetes, neurodegeneration, pain, immunologic diseases, anemia, cardiovascular disease, musculoskeletal disorders, and renal diseases. We are also developing new uses, formulations, or delivery methods for many of these molecules as well as several currently marketed products. See Item 7, "Management's Discussion and Analysis—Late-Stage Pipeline," for more information on certain of our product candidates.
Raw Materials and Product Supply
Most of the principal materials we use in our manufacturing operations are available from more than one source. However, we obtain certain raw materials principally from only one source. In the event one of these suppliers was unable to provide the materials or product, we generally seek to maintain sufficient inventory to supply the market until an alternative source of supply can be implemented. However, in the event of an extended failure of a supplier, it is possible that we could experience an interruption in supply until we established new sources or, in some cases, implemented alternative processes.
The majority of our revenue comes from products produced in our own facilities. Our principal active ingredient manufacturing occurs at four owned sites in the U.S. as well as owned sites in Ireland, Puerto Rico, and the United Kingdom. Finishing operations, including formulation, filling, assembling, delivery device manufacturing, and packaging, take place at a number of sites throughout the world. We utilize third parties for certain active ingredient manufacturing and finishing operations.
We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way that should allow us to meet all expected product demand while maintaining flexibility to reallocate manufacturing capacity to improve efficiency and respond to changes in supply and demand. To maintain a stable supply of our products, we take a variety of actions including a company-wide, comprehensive quality system, inventory management, and back-up sites.
However, human pharmaceutical and animal health production processes are complex, highly regulated, and vary widely from product to product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital expenditures, process modifications, and regulatory approvals. Accordingly, if we were to experience extended plant shutdowns at one of our own facilities, extended failure of a contract supplier, or extraordinary unplanned increases in demand, we could experience an interruption in supply of certain products or product shortages until production could be resumed or expanded.
Quality Assurance
Our success depends in great measure upon customer confidence in the quality of our products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of our operations, including research and development, purchasing, facilities planning, manufacturing, distribution, and dissemination of information about our medicines.
Quality of production processes involves strict control of ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. We perform tests at various stages of production processes and on the final product to assure that the product meets all regulatory requirements and Lilly standards. These tests may involve chemical and physical chemical analyses, microbiological testing, testing in animals, or a combination. Additional assurance of quality is provided by a corporate quality-assurance group that audits and monitors all aspects of quality related to human pharmaceutical and animal health manufacturing procedures and systems in the parent company, subsidiaries and affiliates, and third-party suppliers.

16


Executive Officers of the Company
The following table sets forth certain information regarding our executive officers. Except as otherwise noted, all executive officers have been employed by the company in management or executive positions during the last five years.
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 May 4, 2015, or on the date his or her successor is chosen and qualified. No director or executive officer 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 and any other person pursuant to which the executive officer was selected.
 
Name
Age
Offices and Business Experience
John C. Lechleiter, Ph.D.
61
Chairman (since January 2009), President (since October 2005), Chief Executive Officer (since April 2008), and a Director (since October 2005)
Melissa S. Barnes
46
Senior Vice President, Enterprise Risk Management and Chief Ethics and Compliance Officer (since January 2013)
Enrique A. Conterno
48
Senior Vice President and President, Lilly Diabetes (since November 2009)
Maria A. Crowe
55
President, Manufacturing Operations (since January 2012)
Stephen F. Fry
49
Senior Vice President, Human Resources and Diversity (since February 2011)
Michael J. Harrington
52
Senior Vice President and General Counsel (since January 2013)
Jan M. Lundberg, Ph.D.
61
Executive Vice President, Science and Technology, and President, Lilly Research Laboratories (since January 2010). From 2002 until he joined Lilly in January 2010, Dr. Lundberg was executive vice president and head of discovery research at AstraZeneca.
Susan Mahony, Ph.D.
50
Senior Vice President and President, Lilly Oncology (since February 2011)
Barton R. Peterson
56
Senior Vice President, Corporate Affairs and Communications (since June 2009).
Derica W. Rice
50
Executive Vice President, Global Services (since January 2010) and Chief Financial Officer (since May 2006)
David A. Ricks
47
Senior Vice President and President, Lilly Bio-Medicines (since January 2012)
Jeffrey N. Simmons
47
Senior Vice President and President, Elanco Animal Health (since January 2008)
Fionnuala M. Walsh
55
Senior Vice President, Global Quality (since July 2007)
Alfonso Zulueta
52
Senior Vice President and President, Emerging Markets (since January 2014)
Employees
At the end of 2014, we employed approximately 39,135 people, including approximately 21,920 employees outside the United States. A substantial number of our employees have long records of continuous service.
Financial Information Relating to Business Segments and Classes of Products
You can find financial information relating to our business segments and classes of products in Item 8, "Financial Statements and Supplementary Data—Note 18, Segment Information." That information is incorporated here by reference.
The relative contribution of any particular product to our consolidated revenue changes from year to year. This is due to several factors, including the introduction of new products by us and by other manufacturers and the introduction of generic pharmaceuticals upon patent expirations. Our major product revenues are generally not seasonal.

17


Financial Information Relating to Foreign and Domestic Operations
You can find financial information relating to foreign and domestic operations in Item 8, “Financial Statements and Supplementary Data—Note 18, Segment Information.” That information is incorporated here by reference. To date, our overall operations abroad have not been significantly deterred by local restrictions on the transfer of funds from branches and subsidiaries located abroad, including the availability of U.S. dollar exchange. We cannot predict what effect these restrictions or the other risks inherent in foreign operations, including possible nationalization, might have on our future operations or what other restrictions may be imposed in the future. In addition, changing currency values can either favorably or unfavorably affect our financial position, liquidity, and results of operations. We mitigate foreign exchange risk through various hedging techniques including the use of foreign currency contracts.
Available Information on Our Website
We make available through our company website, free of charge, our company filings with the Securities and Exchange Commission (SEC) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. These include our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents. The company website link to our SEC filings is http://investor.lilly.com/sec.cfm.
In addition, the Corporate Governance portion of our website includes our corporate governance guidelines, board and committee information (including committee charters), and our articles of incorporation and by-laws. The link to our corporate governance information is http://www.lilly.com/about/corporate-governance/Pages/corporate-governance.aspx.
We will provide paper copies of our SEC filings free of charge upon request to the company’s secretary at the address listed on the front of this Form 10-K.
Item 1A.
Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our company. It is possible that our business, financial condition, liquidity, or results of operations could be materially adversely affected by any of these risks.
•
Pharmaceutical research and development is very costly and highly uncertain; we may not succeed in developing or acquiring commercially successful products sufficient in number or value to replace revenues of products losing intellectual property protection. 
There are many difficulties and uncertainties inherent in human pharmaceutical research and development and the introduction of new products. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market typically takes over a decade and often costs well in excess of $1 billion. Failure can occur at any point in the process, including late in the process after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals or payer reimbursement, limited scope of approved uses, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies are establishing increasingly high hurdles for the efficacy and safety of new products; delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict sales growth rates of new products.
We cannot state with certainty when or whether our products now under development will be approved or launched; whether we will be able to develop, license or otherwise acquire additional product candidates or products; or whether our products, once launched, will be commercially successful. We must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products sufficient both to cover our substantial research and development costs and to replace sales that are lost as profitable products lose intellectual property exclusivity or are displaced by competing products or therapies. Failure to do so in the short-term or long-term would have a material adverse effect on our business, results of operations, cash flows, financial position and prospects.

18


•
We face intense competition from multinational pharmaceutical companies, biotechnology companies, and lower-cost generic and biosimilar manufacturers.
We compete with a large number of multinational pharmaceutical companies, biotechnology companies, and generic pharmaceutical companies. To compete successfully, we must continue to deliver to the market innovative, cost-effective products that meet important medical needs. Our product revenues can be adversely affected by the introduction by competitors of branded products that are perceived as superior by the marketplace, by generic or biosimilar versions of our branded products, and by generic or biosimilar versions of other products in the same therapeutic class as our branded products. Our revenues can also be adversely affected by treatment innovations that eliminate or minimize the need for treatment with drugs. See Item 1, “Business—Competition,” for more details.
•
We depend on products with intellectual property protection for most of our revenues, cash flows, and earnings; we have lost or will lose effective intellectual property protection for many of those products in the next several years, which may result in rapid and severe declines in revenues.
A number of our top-selling human pharmaceutical products have recently lost, or will lose in the next several years, significant patent protection and/or data protection in the United States (U.S.) as well as key countries outside the U.S., as illustrated in the tables below:
Product
U.S. Revenues
(2014)
($ in millions)
Percent of Worldwide Revenues
(2014)
Patent / Data Protection - U.S.
Alimta
$
1,229.5

6%
Compound patent plus pediatric exclusivity 2017;
Vitamin dosage regimen patent plus pediatric exclusivity 2022
Cialis
1,039.9

5%
Compound patent 2017
Forteo
539.0

3%
Formulation and related process patents 2018; use patents 2019
Strattera
452.5

2%
Use patent plus pediatric exclusivity 2017
Effient
394.5

2%
Compound patent 2017; use patents 2022
Evista
207.2

1%
Use patents March 2014
Product
Revenues Outside U.S.
(2014)
($ in millions)
Percent of Worldwide Revenues
(2014)
Patent / Data Protection - Major Europe / Japan
Alimta
$
1,562.5

8%
Major European countries: compound patent December 2015, vitamin dosage regimen patent 2021
Japan: compound patent December 2015, use patent to treat cancer concomitantly with vitamins 2021
Cialis
1,251.1

6%
Major European countries: compound patent 2017
Cymbalta
1,194.2

6%
Major European countries: data package protection 2014
Japan: data package protection 2018
Zyprexa
917.5

5%
Japan: Compound patent December 2015
Forteo
783.0

4%
Japan: Data package protection 2018; formulation and related process patent 2019
Certain other significant products no longer have effective exclusivity through patent protection or data protection. For non-biological products, loss of exclusivity (whether by expiration or as a consequence of litigation) typically results in the entry of one or more generic competitors, leading to a rapid and severe decline in revenues. For biological products (such as Humalog, Humulin, and Erbitux), loss of exclusivity may or may not result in the near-term entry of competitor versions (i.e., biosimilars) due to development timelines, manufacturing challenges, and/or uncertainties in the regulatory pathways for approval of the competitor versions. See Item 7, “Management’s Discussion and Analysis—Executive Overview—Other Matters,” and Item 1, "Business—Patents, Trademarks, and Other Intellectual Property Rights," for more details.

19


•
Our long-term success depends on intellectual property protection; if our intellectual property rights are invalidated, circumvented, or weakened, our business will be adversely affected.
Our long-term success depends on our ability to continually discover, develop, and commercialize innovative new pharmaceutical products. Without strong intellectual property protection, we would be unable to generate the returns necessary to support the enormous investments in research and development and capital as well as other expenditures required to bring new drugs to the market.
Intellectual property protection varies throughout the world and is subject to change over time. In the U.S., the Hatch-Waxman Act provides generic companies powerful incentives to seek to invalidate our human pharmaceutical patents; as a result, we expect that our U.S. patents on major pharmaceutical products will be routinely challenged, and there can be no assurance that our patents will be upheld. We face generic manufacturer challenges to our patents outside the U.S. as well. The entry of generic competitors typically results in rapid and severe declines in sales. In addition, competitors or other third parties may claim that our activities infringe patents or other intellectual property rights held by them. If successful, such claims could result in our being unable to market a product in a particular territory or being required to pay damages for past infringement or royalties on future sales. See Item 1, “Business—Patents, Trademarks, and Other Intellectual Property Rights,” Item 3, "Legal Proceedings," and Item 8, "Financial Statements and Supplementary Data—Note 15, Contingencies," for more details.
•
Our human pharmaceutical business is subject to increasing government price controls and other public and private restrictions on pricing, reimbursement, and access for our drugs. 
In the U.S., prices for specialty and brand name pharmaceuticals, congressional investigations into manufacturer’s pricing policies, and the federal budget process continue to drive legislative debate. These policy and political issues increase the risk that taxes, fees, rebates or other federal measures may be enacted. As a result, pharmaceutical companies may see either a reduction in revenue or increase in expenses. President Obama’s fiscal year 2016 budget includes a number of key health legislative proposals affecting biopharmaceuticals, including a reduction in biologic data exclusivity, modifications to Medicare Parts B and D, and new language that would allow the Department of Health and Human Services to negotiate prices for biologics and drugs on the specialty tier in Part D. Savings projected under these proposals are targeted as a means to fund health care expenditures, such as the Medicare Sustainable Growth Rate, and non-health care expenditures. State and federal health care proposals, including price controls, continue to be debated, and if implemented could negatively affect future consolidated results of operations.
In the U.S. private sector, the growth of managed care organizations (MCOs) is also a major factor in the competitive marketplace for human pharmaceuticals. It is estimated that approximately two-thirds of the U.S. now participates in some form of managed care. MCOs have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. MCOs typically maintain formularies specifying which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their branded products included. Price is becoming an increasingly important factor in MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that multiple branded products are therapeutically comparable. These downward pricing pressures could negatively affect future consolidated results of operations.
International operations also are generally subject to extensive price and market regulations. Cost-containment measures exist in a number of countries, including additional price controls and mechanisms to limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the pressures on national and regional health care budgets that come from a growing aging population and ongoing economic challenges. In addition, governments in many emerging markets are becoming increasingly active in expanding health care system offerings. Given the budget challenges of increasing health care coverage for citizens, policies may be proposed that promote generics only and reduce current and future access to human pharmaceutical products.
We expect pricing, reimbursement, and access pressures from both governments and private payers inside and outside the U.S. to become more severe. See Item I, “Business—Regulations Affecting Human Pharmaceutical Pricing, Reimbursement, and Access,” for more details.

20


•
Unanticipated changes in our tax rates or exposure to additional tax liabilities could increase our income taxes and decrease our net income. 
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Changes in the relevant tax laws, regulations, administrative practices, principles, and interpretations could adversely affect our future effective tax rates and results of operations. The U.S. and a number of other countries are actively considering changes in this regard. The Obama administration has proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies, including unremitted earnings of foreign subsidiaries. There have also been tax proposals under discussion or introduced in the U.S. Congress that could change the manner in which, and rate at which, income of U.S. companies would be taxed. While it is uncertain how the U.S. Congress may address U.S. tax policy matters in the future, reform of U.S. taxation, including taxation of international income, will continue to be a topic of discussion for the U.S. Congress and the Obama administration. Additionally, the Organisation for Economic Co-operation and Development launched and continues to advance an initiative to analyze and potentially influence international tax policy in major countries in which we operate. A significant change to the U.S. or international tax framework, including changes to the taxation of international income, could have a material adverse effect on our results of operations. See Item 8, "Financial Statements and Supplementary Data—Note 13, Income Taxes," for more details.
•
Changes in foreign currency rates can significantly affect our revenue and income.
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the Japanese yen, and the British pound against the euro. While we manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses.
•
Regulatory compliance problems could be damaging to the company.
The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to extensive regulation. Many companies, including Lilly, have been subject to claims related to these practices asserted by federal, state and foreign governmental authorities, private payers, and consumers. These claims have resulted in substantial expense and other significant consequences to us. It is possible that we could become subject to such investigations and that the outcome could include criminal charges and fines, penalties, or other monetary or non-monetary remedies, including exclusion from U.S. federal and other health care programs. In addition, regulatory issues concerning compliance with current Good Manufacturing Practices regulations (and comparable foreign regulations) for pharmaceutical products can lead to product recalls and seizures, interruption of production leading to product shortages, and delays in the approvals of new products pending resolution of the issues. See Item 1, “Business—Regulation of our Operations,” for more details.
•
Pharmaceutical products can develop unexpected safety or efficacy concerns, which could have a material adverse effect on revenues and income. 
Human pharmaceutical products receive regulatory approval based on data obtained in controlled clinical trials of limited duration. After approval, the products are used for longer periods of time by much larger numbers of patients; we and others (including regulatory agencies and private payers) collect extensive information on the efficacy and safety of our marketed products by continuously monitoring the use of our products in the marketplace. In addition, we or others may conduct post-marketing clinical studies on efficacy and safety of our marketed products. New safety or efficacy data from both market surveillance and post-marketing clinical studies may result in product label changes that could reduce the product's market acceptance and result in declining sales. Serious safety or efficacy issues that arise after approval for marketing could result in voluntary or mandatory product recalls or withdrawals from the market. Safety issues could also result in costly product liability claims.
•
We face many product liability claims and are self-insured; we could face large numbers of claims in the future, which could adversely affect our business.
We are subject to a substantial number of product liability claims involving primarily Byetta®, Prozac, and Actos®. See Item 8, “Financial Statements and Supplementary Data—Note 15, Contingencies,” and Item 3, “Legal Proceedings,” for more information on our current product liability litigation. Because of the nature of pharmaceutical products, we could become subject to large numbers of product liability claims for these or

21


other products in the future, which could require substantial expenditures to resolve and, if involving marketed products, could adversely affect sales of the product. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products.
•
Manufacturing difficulties or disruptions could lead to product supply problems. 
Pharmaceutical manufacturing is complex and highly regulated. Manufacturing difficulties at our facilities or contracted facilities, or the failure or refusal of a contract manufacturer to supply contracted quantities, could result in product shortages, leading to lost revenue. Such difficulties or disruptions could result from quality or regulatory compliance problems, natural disasters, or inability to obtain sole-source raw or intermediate materials. In addition, given the difficulties in predicting sales of new products and the very long lead times necessary for the expansion and regulatory qualification of pharmaceutical manufacturing capacity, it is possible that we could have difficulty meeting demand for new products. See Item 1, “Business—Raw Materials and Product Supply,” for more details.
•
We depend on information technology systems and infrastructure to operate our business; system inadequacies or operating failures could harm our business.
We rely to a large extent on the efficient and uninterrupted operation of complex information technology systems and networks, some of which are within the company and some of which are outsourced. These systems and networks are potentially vulnerable to damage or interruption from a variety of sources, including energy or telecommunications failures, breakdowns, natural disasters, terrorism, war, computer malware or other malicious intrusions, and random attacks. To date, system interruptions have been infrequent and have not had a material impact on our consolidated results of operations. We have implemented extensive measures to prevent, respond to, and minimize the impact of system interruptions. However, there can be no assurance that these efforts will prevent future interruptions that would have a material adverse effect on our business.
•
The loss, theft, or inadvertent disclosure of our confidential data could impair our valuable intellectual property, harm our competitive position, and expose us to regulatory penalties and other costs.
A great deal of confidential information owned by both Lilly and our alliances is stored in our information systems, networks, and facilities at third parties. This includes valuable trade secrets and intellectual property, corporate strategic plans, marketing plans, customer information, and personally identifiable information (such as employee and patient information). Some of this information is created, accessed, and/or maintained by third parties. The confidentiality of this information may be breached in a variety of ways, including but not limited to negligent or wrongful conduct by employees or others with permitted access to our systems and data, or wrongful conduct by certain governments, hackers, unethical competitors, or former workforce members. The rapid growth of social media exacerbates the risk of information security breaches.
The theft or unauthorized disclosure of confidential information could impair our ability to secure and maintain intellectual property rights, cause damage to company operations and reputation, and cause us to lose other competitive advantages. Unauthorized disclosure of personally identifiable information could expose us to sanctions for violations of data privacy laws and regulations and could damage the public trust in our company. Information security breaches may be very difficult to detect, and once detected, their impact may be very difficult to assess. To date, the information security breaches of which we have become aware have been infrequent in occurrence and, to the extent we have been able to measure their financial impact on our consolidated results of operations, such impact has not been material. We have invested and continue to invest to prevent, monitor, detect, and respond to information security breaches by strengthening our employee awareness and training, information technology systems, and business processes, and strengthening data protection requirements for third parties that handle our confidential information. However, despite these efforts, we expect information security breaches to continue, and there can be no assurance that these efforts will prevent information security breaches that would have a material adverse effect on our business.
•
Reliance on third-party relationships and outsourcing arrangements could adversely affect our business.
We utilize third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third-party service providers, for selected aspects of product development, the manufacture and commercialization of certain products, support for information technology systems, and certain financial

22


transactional processes. For example, we outsource the day-to-day management and oversight of our clinical trials to contract research organizations. Outsourcing these functions involves the risk that the third parties may not perform to our standards or legal requirements, may not produce reliable results, may not perform in a timely manner, may not maintain the confidentiality of our proprietary information, or may fail to perform at all. Failure of these third parties to meet their contractual, regulatory, confidentiality, or other obligations to us could have a material adverse effect on our business.
•
Our animal health segment faces risks related to increased generic competition, food and animal safety concerns, factors affecting global agricultural markets, and other risks.
The animal health operating segment may be impacted by, among other things, increased generic competition; increased sales of companion animal products by non-veterinarian retail outlets; emerging restrictions and bans on the use of antibacterials in food-producing animals; perceived adverse effects on human health linked to the consumption of food derived from animals that utilize our products; increased regulation or decreased governmental support relating to the raising, processing, or consumption of food-producing animals; an outbreak of infectious disease carried by animals; adverse weather conditions and the availability of natural resources; adverse global economic conditions affecting agricultural markets; and failure of the research and development, acquisition, and licensing efforts to generate new products. The failure to manage these risks could have a material adverse effect on our revenues.
•
Integration of the newly-acquired Novartis Animal Health business could be disruptive to operations, and if not done properly, could lead to a failure to achieve the intended benefits of the acquisition.
We are in the process of integrating into our operations the Novartis Animal Health business, which we purchased in January 2015. This global integration is complex and potentially disruptive to the ongoing operations of both the ongoing Elanco business and the acquired Novartis business. Unexpected delays and difficulties in integrating the two businesses could lead to additional expenses, failure to achieve expected operating efficiencies and sales synergies, and disruption to ongoing operating results.
•
Worsening economic conditions could adversely affect our business and operating results. 
While human pharmaceuticals have not generally been sensitive to overall economic cycles, prolonged economic slowdowns could lead to decreased utilization of drugs, affecting our sales volume. Declining tax revenues attributable to economic downturns increase the pressure on governments to reduce health care spending, leading to increasing government efforts to control drug prices and utilization. Additionally, some customers, including governments or other entities reliant upon government funding, may be unable to pay in a timely manner for our products. Also, if our customers, suppliers, or collaboration partners experience financial difficulties, we could experience slower customer collections, greater bad debt expense, and performance defaults by suppliers or collaboration partners.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2014, we owned 12 production and distribution sites in the United States (U.S.) and Puerto Rico. Together with the corporate administrative offices, these facilities contain an aggregate of approximately 10.4 million square feet of floor area dedicated to production, distribution, and administration. Major production sites include Indianapolis and Clinton, Indiana; Carolina, Puerto Rico; and Branchburg, New Jersey.
We own production and distribution sites in 11 countries outside the U.S. and Puerto Rico, containing an aggregate of approximately 4.7 million square feet of floor area. Major production sites include facilities in France, the United Kingdom (U.K.), Spain, Ireland, Italy, and China.
In the U.S., our research and development facilities contain an aggregate of approximately 3.9 million square feet of floor area, primarily consisting of owned facilities located in Indianapolis. We also lease smaller sites in San Diego and New York City. Outside the U.S., we own smaller research and development facilities in the U.K. and Spain, and lease smaller sites in China.

23


We believe that none of our 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. The buildings we own are of varying ages and in good condition.
Item 3.
Legal Proceedings
We are a party to various currently pending legal actions, government investigations, and environmental proceedings, and we anticipate that such actions could be brought against us in the future. The most significant of these matters are described below or, as noted, in Item 8, "Financial Statements and Supplementary Data—Note 15, Contingencies." While it is not possible to determine the outcome of the legal actions, investigations, and proceedings brought against us, we believe that, except as otherwise specifically noted in Item 8—Note 15, the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could be material to our consolidated results of operations in any one accounting period.
Legal Proceedings Described in Note 15 to the Consolidated Financial Statements
See Item 8, "Financial Statements and Supplementary Data—Note 15, Contingencies," for information on various legal proceedings, including but not limited to:
•
The patent litigation and administrative proceedings involving Alimta and Effient
•
The product liability litigation involving Actos, Byetta, and Prozac
•
The employee litigation in Brazil.
That information is incorporated into this Item by reference.
Other Product Liability Litigation
We are currently a defendant in a variety of other product liability lawsuits in the United States (U.S.).
In October 2012, we were named as a defendant in a purported class-action lawsuit in the U.S. District Court for the Central District of California (Saavedra et al v. Eli Lilly and Company) involving Cymbalta. The plaintiffs assert claims under the consumer protection statutes of four states and seek declaratory, injunctive, and monetary relief for various alleged economic injuries arising from discontinuing treatment with Cymbalta and purported to represent a class of all persons within the U.S. who purchased and/or paid for Cymbalta. In December 2014, the district court denied the plaintiffs' motion for class certification. Plaintiffs have filed a petition with the 9th Circuit Court of Appeals requesting permission to file an interlocutory appeal of the denial of class certification.
Additionally, we have been named in approximately 45 individual lawsuits filed in various federal courts by claimants alleging injuries arising from discontinuation of treatment with Cymbalta. Counsel for plaintiffs filed a petition seeking to have those cases and an unspecified number of future cases coordinated into a federal multi-district litigation (MDL) in the Central District of California. In December 2014, the Judicial Panel on Multidistrict Litigation denied the plaintiffs' petition for creation of an MDL.
We believe all these Cymbalta lawsuits and claims are without merit and are prepared to defend against them vigorously.
We have been named as a defendant in approximately 105 U.S. product liability lawsuits involving Axiron. In some of the cases other manufacturers of testosterone are named as co-defendants. These lawsuits have been consolidated in a federal MDL in the U.S. District Court for the Northern District of Illinois. The cases generally allege cardiovascular injuries. We believe these claims are without merit and are prepared to defend against them vigorously.

24


Other Patent Litigation
We have filed applications with the U.S. Food and Drug Administration (FDA) and regulators in Europe, Japan, and other countries seeking approval to market our new insulin glargine product following the expiration of the compound patent for insulin glargine (generally May 2015). In January 2014, Sanofi-Aventis U.S. LLC (Sanofi) filed a lawsuit against us in the U.S. District Court for the District of Delaware alleging patent infringement with respect to our product. Sanofi asserts infringement of three U.S. patents relating to pen injector devices and two U.S. patents relating to insulin glargine formulations. Under the Hatch-Waxman Act, the initiation of the lawsuit automatically invoked a stay of final FDA approval for a period of 30 months (until June 2016), which may be shortened in the event of an earlier court decision in our favor. In July 2014, Sanofi filed a second lawsuit against us in the same court alleging infringement of patents relating to the use of our insulin glargine formulation in a cartridge. In August 2014, we received tentative FDA approval for our insulin glargine product under the trade name Basaglar®, with final approval subject to the stay described above. Trials have been scheduled in the District of Delaware for September 2015 for the first lawsuit and March 2016 for the second lawsuit.
Legal proceedings are also underway in France, Japan, and Canada related to various patents asserted by Sanofi against our insulin glargine product. Sanofi has also asserted certain device patents against Humalog and Humulin pen devices in France and Japan in these proceedings. Proceedings brought in the U.K., which were related to device patents, were resolved in December 2014 with a declaration of non-infringement in favor of Lilly.
We do not believe our insulin glargine product infringes any valid claim of the asserted patents, and we believe we will prevail in the various proceedings related to the patents.
In Canada, several generic companies challenged the validity of our Zyprexa patent. In September 2012, the Canadian Court of Appeals affirmed the lower court's decision that the patent was invalid for lack of utility. In 2013, our petition for leave to appeal the decision to the Supreme Court of Canada was denied. Two of the generic companies, Apotex Inc. and Teva Canada Limited, pursued claims for damages arising from Lilly’s enforcement of the patent under Canadian regulations. In April 2014, the Supreme Court of Canada dismissed Apotex's damages suit. Teva's claim for damages remains, and the total amount of damages that may be awarded to Teva will be determined through a separate trial, which is scheduled for May 2016.
Marketing Practices Investigations
In August 2003, we received notice that the staff of the Securities and Exchange Commission (SEC) was conducting an investigation into the compliance by Lilly's Polish subsidiary with the U.S. Foreign Corrupt Practices Act of 1977 (FCPA). Subsequently, we were notified that the SEC had expanded its investigation to other countries and that the Department of Justice (DOJ) was conducting a parallel investigation. In December 2012, we announced that we had reached an agreement with the SEC to settle its investigation. The settlement relates to certain activities of Lilly subsidiaries in Brazil, China, Poland, and Russia from 1994 through 2009. Without admitting or denying the allegations, we consented to pay a civil settlement amount of $29.4 million and agreed to have an independent compliance consultant conduct a 60-day review of our internal controls and compliance program related to the FCPA. In January 2015, the DOJ advised us that they have closed their investigation into this matter.
Shareholder Derivative Litigation
In 2011, the company received a letter sent on behalf of shareholder Kim Barovic demanding that the board of directors cause the company to take (1) legal action against certain of its current and former officers and board members for allegedly causing damage to the company by failing to exercise proper oversight over the company’s compliance with the FCPA, and (2) all necessary actions to reform and improve certain corporate governance and internal procedures. The board established a committee of disinterested directors to consider the demands and determine what action, if any, the company should take in response. In February 2013, following its investigation, the committee determined, among other things, that it would not be in the best interests of the company to take any of the actions demanded by Ms. Barovic.

25


In August 2013, Ms. Barovic brought a shareholder derivative suit (Barovic v. Lechleiter, et al.), filed in Marion County (Indiana) Superior Court. The suit sought to maintain the action purportedly on behalf of the company against certain current and former directors and officers of the company, alleging breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The company was named in the suit as a nominal defendant. The suit did not seek damages from the company, but instead requested damages in an unspecified amount and certain equitable relief on the company’s behalf.
In September 2014, following submission by the defendants of a motion to dismiss, Ms. Barovic agreed to voluntarily dismiss the suit without prejudice, subject to approval by the Superior Court. In October 2014, the Superior Court ordered the case dismissed without prejudice.
Other Matters
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as "Superfund," we have been designated as one of several potentially responsible parties with respect to the cleanup of fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup.
We are also a defendant in other litigation and investigations, including product liability, patent, employment, and premises liability litigation, of a character we regard as normal to our business.
Item 4.
Mine Safety Disclosures
Not applicable.

26


Part II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
You can find information relating to the principal market for our common stock and related stockholder matters at Item 6, "Selected Financial Data (unaudited)" and Item 8, "Financial Statements and Supplementary Data—Note 19, Selected Quarterly Data (unaudited).” That information is incorporated here by reference.
The following table summarizes the activity related to repurchases of our equity securities during the fourth quarter ended December 31, 2014:
Period
Total Number of
Shares Purchased
(in thousands)
Average Price Paid
per Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
(in thousands)
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs
(dollars in millions)
October 2014
1,571.3

$
63.62

1,571.3

$
3,900.0

November 2014
2,972.5

67.26

2,972.5

3,700.0

December 2014
—

—

—

3,700.0

Total
4,543.8

66.00

4,543.8

 
During the fourth quarter of 2014, we repurchased $300.0 million of shares associated with our $5.00 billion share repurchase program announced in October 2013.


27


PERFORMANCE GRAPH
This graph compares the return on Lilly stock with that of the Standard & Poor’s 500 Stock Index and our peer group for the years 2010 through 2014. The graph assumes that, on December 31, 2009, a person invested $100 each in Lilly stock, the S&P 500 Stock Index, and the peer groups' common stock. The graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company’s stock.
Value of $100 Invested on Last Business Day of 2009
Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group(1) 

 
 
Lilly
 
Peer Group
 
S&P 500
Dec-09
 
$
100.00

 
$
100.00

 
$
100.00

Dec-10
 
$
103.71

 
$
99.27

 
$
115.06

Dec-11
 
$
129.79

 
$
114.89

 
$
117.49

Dec-12
 
$
161.29

 
$
135.23

 
$
136.30

Dec-13
 
$
172.96

 
$
184.35

 
$
180.44

Dec-14
 
$
241.72

 
$
214.86

 
$
205.14


1 
We constructed the peer group as the industry index for this graph. It comprises the public companies in the pharmaceutical and biotech industries that we used to benchmark the compensation of executive officers for 2014: Abbott Laboratories; AbbVie Inc.; Allergan Inc.; Amgen Inc.; AstraZeneca PLC; Baxter International Inc.; Biogen Idec Inc.; Bristol-Myers Squibb Company; Celgene Corporation; Gilead Sciences Inc.; GlaxoSmithKline plc; Johnson & Johnson; Medtronic, Inc.; Merck & Co., Inc.; Novartis AG.; Pfizer Inc.; and Sanofi-Aventis.


28


Item 6. Selected Financial Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except revenue per employee and per-share data)
2014
 
2013
 
2012
 
2011
 
2010
Operations
 
 
 
 
 
 
 
 
 
Revenue
$
19,615.6

 
$
23,113.1

 
$
22,603.4

 
$
24,286.5

 
$
23,076.0

Cost of sales
4,932.5

 
4,908.1

 
4,796.5

 
5,067.9

 
4,366.2

Research and development
4,733.6

 
5,531.3

 
5,278.1

 
5,020.8

 
4,884.2

Marketing, selling, and administrative
6,620.8

 
7,125.6

 
7,513.5

 
7,879.9

 
7,053.4

Other
328.4

 
(341.2
)
 
(392.9
)
 
968.4

 
247.0

Income before income taxes
3,000.3

 
5,889.3

 
5,408.2

 
5,349.5

 
6,525.2

Income taxes
609.8

 
1,204.5

 
1,319.6

 
1,001.8

 
1,455.7

Net income
2,390.5

 
4,684.8

 
4,088.6

 
4,347.7

 
5,069.5

Net income as a percent of revenue
12.2
%
 
20.3
%
 
18.1
%
 
17.9
%
 
22.0
%
Net income per share—diluted
$
2.23

 
$
4.32

 
$
3.66

 
$
3.90

 
$
4.58

Dividends declared per share
1.97

 
1.96

 
1.96

 
1.96

 
1.96

Weighted-average number of shares outstanding—diluted (thousands)
1,074,286

 
1,084,766

 
1,117,294

 
1,113,967

 
1,105,813

 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
Current assets
$
12,179.8

 
$
13,104.7

 
$
13,038.7

 
$
14,248.2

 
$
14,840.0

Current liabilities
11,207.5

 
8,916.6

 
8,389.5

 
8,930.9

 
6,926.9

Property and equipment—net
7,963.9

 
7,975.5

 
7,760.2

 
7,760.3

 
7,940.7

Total assets
37,178.2

 
35,248.7

 
34,398.9

 
33,659.8

 
31,001.4

Long-term debt
5,367.7

 
4,200.3

 
5,519.4

 
5,464.7

 
6,770.5

Total equity
15,388.1

 
17,640.7

 
14,773.9

 
13,535.6

 
12,412.8

 
 
 
 
 
 
 
 
 
 
Supplementary Data
 
 
 
 
 
 
 
 
 
Return on total equity
13.7
%
 
29.5
%
 
27.8
%
 
31.4
%
 
46.1
%
Return on assets
6.8
%
 
13.8
%
 
12.3
%
 
13.4
%
 
17.7
%
Capital expenditures
$
1,162.6

 
$
1,012.1

 
$
905.4

 
$
672.0

 
$
694.3

Depreciation and amortization
1,379.0

 
1,445.6

 
1,462.2

 
1,373.6

 
1,328.2

Effective tax rate
20.3
%
 
20.5
%
 
24.4
%
 
18.7
%
 
22.3
%
Revenue per employee
$
501,000

 
$
609,000

 
$
590,000

 
$
638,000

 
$
602,000

Number of employees
39,135

 
37,925

 
38,350

 
38,080

 
38,350

Number of shareholders of record
29,300

 
31,900

 
33,600

 
35,200

 
36,700


29


Item 7.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
Executive Overview
This section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented on a diluted basis.
Financial Results
Worldwide total revenue decreased 15 percent to $19.62 billion in 2014, primarily as a result of the loss of United States (U.S.) patent exclusivity for Cymbalta® in December 2013 and to a lesser extent Evista® in March 2014, partially offset by volume growth in several other products. In 2014, net income decreased 49 percent to $2.39 billion and EPS decreased 48 percent to $2.23, compared to 2013 net income and EPS of $4.68 billion and $4.32, respectively. The decreases were due to lower gross margin, higher asset impairment, restructuring, and other special charges and decreased other income, partially offset by lower marketing, selling, and administrative expenses, research and development expenses, and income tax expense.
The following highlighted items affect comparisons of our 2014 and 2013 financial results:
2014
Acquired In-Process Research & Development (IPR&D) (Notes 3 and 4 to the consolidated financial statements)
•
We recognized acquired IPR&D charges of $200.2 million (pretax), or $0.12 per share, related to acquired IPR&D from collaboration agreements with Adocia, AstraZeneca UK Limited, Boehringer Ingelheim, and Immunocore Limited.
Collaborations (Note 4 to the consolidated financial statements)
•
We recognized income of $92.0 million (pretax), or $0.06 per share, related to the transfer of our linagliptin and empagliflozin commercial rights in certain countries to Boehringer Ingelheim.
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•
We recognized charges of $468.7 million (pretax), or $0.38 per share, related to severance costs associated with our ongoing cost containment efforts to reduce our cost structure and global workforce and asset impairments primarily associated with the closure of a manufacturing site in Puerto Rico.
Other
•
We recognized a marketing, selling, and administrative expense of $119.0 million (non-tax deductible), or $0.11 per share, for an extra year of the U.S. Branded Prescription Drug Fee (U.S. Drug Fee) due to final regulations issued by the Internal Revenue Service (IRS) which required us to accelerate into 2014 the recording of an expense for the 2015 fee.

30


2013
Acquired IPR&D (Note 3 to the consolidated financial statements)
•
We recognized acquired IPR&D charges of $57.1 million (pretax), or $0.03 per share, resulting from our acquisition of rights for a calcitonin gene-related peptide (CGRP) antibody currently being studied as a potential treatment for the prevention of frequent, recurrent migraine headaches, following a successful Phase II proof-of-concept study.
Collaborations (Note 4 to the consolidated financial statements)
•
We recognized income of $495.4 million (pretax), or $0.29 per share, related to the transfer to Amylin Pharmaceuticals, Inc. (Amylin) of exenatide commercial rights in all markets outside the United States.
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•
We recognized charges of $120.6 million (pretax), or $0.08 per share, primarily related to severance costs for actions taken to reduce our cost structure and global workforce, as well as asset impairment costs associated with the closure of a packaging and distribution facility in Germany.
Late-Stage Pipeline
Our long-term success depends to a great extent on our ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on molecules currently in development by other biotechnology or pharmaceutical companies. We currently have approximately 55 potential new drugs in human testing or under regulatory review, and a larger number of projects in preclinical research.
The following new molecular entities (NMEs) have been approved by regulatory authorities in the U.S., Europe, or Japan for use in the disease described. The quarter the NME initially was approved in the U.S., Europe, or Japan for any indication is shown in parentheses:
Dulaglutide* (Trulicity™) (Q3 2014)—a long-acting analog of glucagon-like peptide 1 for the treatment of type 2 diabetes.
Empagliflozin (Jardiance®) (Q2 2014)—a sodium glucose co-transporter-2 inhibitor for the treatment of type 2 diabetes (in collaboration with Boehringer Ingelheim).
New insulin glargine product (Q3 2014)—a new insulin glargine product for the treatment of type 1 and type 2 diabetes (in collaboration with Boehringer Ingelheim).
Ramucirumab* (Cyramza®) (Q2 2014)—an anti-vascular endothelial growth factor receptor-2 monoclonal antibody for the treatment of gastric cancer and non-small cell lung cancer (NSCLC).
The following NME has been submitted for regulatory review for potential use in the disease described. The quarter the NME initially was submitted for any indication is shown in parentheses:
Necitumumab* (Q4 2014)—an anti-epidermal growth factor receptor monoclonal antibody for the treatment of squamous NSCLC.
The following NMEs are currently in Phase III clinical trial testing for potential use in the diseases described. The quarter in which each NME initially entered Phase III for any indication is shown in parentheses:
Abemaciclib (Q3 2014)—a small molecule cell-cycle inhibitor, selective for cyclin-dependent kinases 4 and 6 for the treatment of metastatic breast cancer and NSCLC.
Baricitinib (Q4 2012)—a Janus tyrosine kinase inhibitor for the treatment of rheumatoid arthritis (in collaboration with Incyte Corporation).
Basal insulin peglispro* (Q4 2011)—a novel basal insulin for the treatment of type 1 and type 2 diabetes.
Evacetrapib (Q4 2012)—a cholesteryl ester transfer protein inhibitor for the treatment of high-risk vascular disease.
Ixekizumab* (Q4 2011)—a neutralizing monoclonal antibody to interleukin-17A for the treatment of psoriasis and psoriatic arthritis.

31


Solanezumab* (Q2 2009)—an anti-amyloid beta monoclonal antibody for the treatment of mild Alzheimer’s disease.
Tanezumab* (Q3 2008)—an anti-nerve growth factor monoclonal antibody for the treatment of osteoarthritis pain, chronic low back pain, and cancer pain (in collaboration with Pfizer Inc. (Pfizer)). Tanezumab is currently subject to a partial clinical hold by the U.S. Food and Drug Administration (FDA) (see Note 4 to the consolidated financial statements).
*
Biologic molecule subject to the U.S. Biologics Price Competition and Innovation Act
The following table reflects the status of each NME within our late-stage pipeline including developments since January 1, 2014:
Compound
Indication
U.S.
Europe
Japan
Developments
Cardiovascular
Evacetrapib
High-risk vascular disease
Phase III
Phase III
Phase III
Studies are ongoing.
Endocrinology
Basal insulin peglispro
Type 1 diabetes
Phase III
Phase III
Phase III
Announced in September 2014 top-line results of two clinical trials which met primary endpoints.
Type 2 diabetes
Phase III
Phase III
Phase III
Announced in May 2014 top-line results of three clinical trials which met primary endpoints.
Jardiance
Type 2 diabetes
Approved
Approved
Approved
Approved in the U.S., Europe and Japan in August, May, and December 2014, respectively. Launched in the U.S. and certain European countries in third quarter of 2014.

Glyxambi®, combination tablet of empagliflozin and linagliptin, approved in the U.S. in January 2015. Intend to submit to European regulatory authorities in late 2015.
New insulin glargine product
Type 1 diabetes
Tentatively approved
Approved
Approved
FDA tentatively approved in August 2014, determining that it met all regulatory requirements for approval, but approval is subject to automatic stay in the U.S. of up to 30 months as a result of the patent litigation filed by Sanofi. Approved in Europe and Japan in September and December 2014, respectively. We will work with Boehringer Ingelheim to launch in Europe and Japan on dates that do not infringe valid and enforceable patents.
Type 2 diabetes
Tentatively approved
Approved
Approved
Trulicity
Type 2 diabetes
Approved
Approved
Submitted
Approved in the U.S. and Europe in September and November 2014, respectively. Launched in the U.S. in October 2014 and in certain European countries in first quarter of 2015. Submitted to regulatory authorities in Japan in third quarter of 2014.

32


Compound
Indication
U.S.
Europe
Japan
Developments
Immunology
Baricitinib
Rheumatoid arthritis
Phase III
Phase III
Phase III
Announced in December 2014 top-line results of RA-BEACON trial which met primary endpoint.
Ixekizumab
Psoriasis
Phase III
Phase III
Phase III
Announced in August 2014 top-line results of three trials which met all primary and secondary endpoints. Intend to submit the first application to regulatory authorities in the first half of 2015.
Psoriatic arthritis
Phase III
Phase III
Phase III
Studies are ongoing.
Tabalumab
Lupus
Terminated
Terminated
Terminated
Announced decision to stop development of tabalumab in October 2014 due to lack of efficacy.
Neuroscience
Solanezumab
Mild Alzheimer's disease
Phase III
Phase III
Phase III
Studies are ongoing.
Tanezumab
Osteoarthritis pain
Phase III
Phase III
Phase III
On partial clinical hold; expect resolution in 2015.
Chronic low back pain
Phase III
Phase III
Phase III
Cancer pain
Phase III
Phase III
Phase III

33


Compound
Indication
U.S.
Europe
Japan
Developments
Oncology
Abemaciclib
Metastatic breast cancer
Phase III
Phase III
Phase III
Initiated Phase III study of abemaciclib in combination with fulvestrant in August 2014.

Initiated Phase III study of abemaciclib in combination with aromatase inhibitors in November 2014.
NSCLC
Phase III
Phase III
Phase III
Initiated Phase III study of abemaciclib in KRAS mutation-positive NSCLC in December 2014.
Cyramza
Gastric cancer (first-line)
Phase III
Phase III
Phase III
Initiated Phase III study of Cyramza in first-line gastric cancer in January 2015.
Gastric cancer (second-line)
Approved
Approved
Submitted
Approved as monotherapy in the U.S. in April 2014. Launched in the U.S. in second quarter of 2014.

Approved in combination with paclitaxel in the U.S. in November 2014.

In Europe, approved in combination with paclitaxel and as monotherapy in patients for whom treatment in combination with paclitaxel is not appropriate in December 2014. Submitted to Japanese regulatory authorities in third quarter of 2014 with regulatory action anticipated in first half of 2015.
NSCLC (second-line)
Approved
Submitted
Phase III
Approved in the U.S. in December 2014. Submitted to European regulatory authorities in first quarter of 2015.
Liver cancer
Phase III
Phase III
Phase III
Announced in June 2014 that REACH trial did not meet its primary endpoint.
Metastatic colorectal cancer
Phase III
Phase III
Phase III
Announced in September 2014 that RAISE trial met its primary endpoint of overall survival. Intend to submit first application to regulatory authorities in first half of 2015.
Necitumumab
Squamous NSCLC
Submitted
Submitted
Phase Ib/II
Submitted in the U.S. and Europe in fourth quarter of 2014. Anticipate FDA action in late 2015.
There are many difficulties and uncertainties inherent in pharmaceutical research and development (R&D) and the introduction of new products. A high rate of failure is inherent in new drug discovery and development. The process to bring a drug from the discovery phase to regulatory approval can take 12 to 15 years or longer and cost more than $1 billion. Failure can occur at any point in the process, including late in the process after substantial investment. As a result, most research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success. Delays and uncertainties in the regulatory approval processes in the U.S. and in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be approved.
We manage R&D spending across our portfolio of molecules, and a delay in, or termination of, any one project will not necessarily cause a significant change in our total R&D spending. Due to the risks and

34


uncertainties involved in the R&D process, we cannot reliably estimate the nature, timing, completion dates, and costs of the efforts necessary to complete the development of our R&D projects, nor can we reliably estimate the future potential revenue that will be generated from a successful R&D project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated R&D expense. While we do accumulate certain R&D costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total R&D costs by project, by preclinical versus clinical spend, or by therapeutic category.
Other Matters
Subsequent Event - Novartis Animal Health Acquisition
On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash transaction for approximately $5.4 billion. Novartis AH operates in approximately 40 countries. We acquired Novartis AH’s nine manufacturing sites, six dedicated research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, a pipeline with more than 40 projects in development, and more than 3,000 employees. The combined organization is expected to increase our animal health product portfolio, expand our global commercial presence, and augment our animal health manufacturing and research and development. In particular, it is expected to provide Elanco with a greater commercial presence in the companion animal and swine markets, expand Elanco’s presence in equine and vaccines areas, and create an entry into the aquaculture market. As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of Novartis AH, we divested certain companion animal assets in the U.S. related to the Sentinel® canine parasiticide franchise to Virbac Corporation for approximately $410 million. The Novartis AH business we retained generated revenue of approximately $1.1 billion in 2014.
Patent Matters
We depend on patents or other forms of intellectual-property protection for most of our revenues, cash flows, and earnings. The loss of U.S. patent exclusivity for Cymbalta in December 2013 and Evista in March 2014, resulted in the immediate entry of generic competitors and a rapid and severe decline in revenue from the affected products, having a material adverse effect on our consolidated results of operations and cash flows.
We lost our data package protection for Cymbalta in major European countries in 2014 and we anticipate the entry of generic competition in these countries in 2015. We expect that the entry of generic competition for Cymbalta into the markets where it has lost patent protection would cause a rapid and severe decline in revenue, which would have a material adverse effect on our consolidated results of operations and cash flows. We will also lose patent exclusivity in December 2015 for Zyprexa® in Japan.
Additionally, as described in Note 15 to the consolidated financial statements, the Alimta® vitamin dosage regimen patent, which provides us with patent protection for Alimta through June 2021 in Japan and major European countries, and through May 2022 in the U.S., has been challenged in each of these jurisdictions. Our compound patent for Alimta will expire in the U.S. in January 2017, and in major European countries and Japan in December 2015. We expect that the entry of generic competition for Alimta into the markets where it has lost patent protection would cause a rapid and severe decline in revenue, which would have a material adverse effect on our consolidated results of operations and cash flows.
The U.S. compound patent for Humalog® expired in May 2013. Thus far, the loss of compound patent protection for Humalog has not resulted in a rapid and severe decline in revenue. To date, no biosimilar version of Humalog has been approved in the U.S. or Europe; however, we are aware that other manufacturers have efforts underway to develop biosimilar forms of Humalog, and it is difficult to predict the likelihood, timing, and impact of biosimilars entering the market.

35


Foreign Currency Exchange Rates
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the Japanese yen, and the British pound against the euro. While we manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses. In 2014, we saw significant foreign currency rate fluctuations as the U.S. dollar strengthened compared to other foreign currencies, including the euro and the Japanese yen. While there is uncertainty in the future movements in foreign exchange rates, these fluctuations could negatively impact our future consolidated results of operations.
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
United States
Prices for specialty and brand name pharmaceuticals, congressional investigations into manufacturer’s pricing policies, and the federal budget process continue to drive legislative debate. These policy and political issues increase the risk that taxes, fees, rebates or other federal measures may be enacted. As a result, pharmaceutical companies may see either a reduction in revenue or increase in expenses. President Obama’s fiscal year 2016 budget includes a number of key health legislative proposals affecting biopharmaceuticals, including a reduction in biologic data exclusivity, modifications to Medicare Parts B and D, and new language that would allow the Department of Health and Human Services to negotiate prices for biologics and drugs on the specialty tier in Part D. Savings projected under these proposals are targeted as a means to fund health care expenditures, such as the Medicare Sustainable Growth Rate, and non-health care expenditures. State and federal health care proposals, including price controls, continue to be debated, and if implemented could negatively affect future consolidated results of operations.
In the U.S. private sector, the growth of Managed Care Organizations (MCOs) is also a major factor in the competitive marketplace for human pharmaceuticals. It is estimated that approximately two-thirds of the U.S. now participates in some form of managed care. MCO’s have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. MCO’s typically maintain formularies specifying which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their branded products included. Price is becoming an increasingly important factor in MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that multiple branded products are therapeutically comparable. These downward pricing pressures could negatively impact future consolidated results of operations.
In 2014, the main coverage expansion provisions of the Affordable Care Act (ACA) took effect through both the launch of state-based exchanges and the expansion of Medicaid. An emerging trend has been the prevalence of benefit designs containing high out-of-pocket costs for patients, particularly for pharmaceuticals. In addition to the coverage expansions, many employers in the commercial market, driven in part by changes resulting from the ACA, continue to evaluate strategies such as private exchanges and wider use of consumer-driven health plans to reduce their healthcare liabilities over time. At the same time, the broader paradigm shift towards quality-based reimbursement and the launch of several value-based purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-world outcomes data and a favorable economic profile.
International
International operations also are generally subject to extensive price and market regulations. Cost-containment measures exist in a number of countries, including additional price controls and mechanisms to limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the pressures on national and regional health care budgets that come from a growing aging population and ongoing economic challenges. In addition, governments in many emerging markets are becoming increasingly active in expanding health care system offerings. Given the budget challenges of increasing health care coverage for citizens, policies may be proposed that promote generics only and reduce current and future access to human pharmaceutical products.

36


Tax Matters
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Changes in the relevant tax laws, regulations, administrative practices, principles, and interpretations could adversely affect our future effective tax rates. The U.S. and a number of other countries are actively considering changes in this regard. For example, the Obama administration proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies, including unremitted earnings of foreign subsidiaries, and other tax proposals under discussion or introduced in the U.S. Congress could change the tax rate and manner in which U.S. companies would be taxed. Additionally, the Organisation for Economic Co-operation and Development launched and continues to advance an initiative to analyze and potentially influence international tax policy in major countries in which we operate. While outcomes of these initiatives are uncertain, changes to key elements of the U.S. or international tax framework could have a material effect on our consolidated operating results and cash flows.
Legal Matters
Information regarding contingencies relating to certain legal proceedings can be found in Note 15 to the consolidated financial statements and is incorporated here by reference.
Operating Results—2014
Revenue
Our worldwide revenue for 2014 was $19.62 billion, a decline of 15 percent compared with 2013. This decrease was comprised of 13 percent due to volume, 2 percent due to the unfavorable impact of foreign exchange rates and 1 percent due to lower prices (numbers do not add due to rounding). Total revenue in the U.S. decreased 29 percent, to $9.13 billion, due to lower demand for Cymbalta and Evista following patent expirations, and to a lesser extent, to wholesaler buying patterns. Revenue outside the U.S. increased 3 percent, to $10.48 billion, due to increased volume, partially offset by the unfavorable impact of foreign exchange rates.
The following table summarizes our revenue activity in 2014 compared with 2013:
 
Year Ended
 
Year Ended
 
 
 
December 31, 2014
 
December 31, 2013
 
Percent
Change from 
Product
U.S.(1)
 
Outside U.S.
 
Total
 
Total
2013
  
(Dollars in millions)
 
 
Alimta
$
1,229.5

 
$
1,562.5

 
$
2,792.0

 
$
2,703.0

 
3

Humalog
1,627.6

 
1,157.6

 
2,785.2

 
2,611.2

 
7

Cialis®
1,039.9

 
1,251.1

 
2,291.0

 
2,159.4

 
6

Cymbalta
420.5

 
1,194.2

 
1,614.7

 
5,084.4

 
(68
)
Humulin®
713.1

 
687.0

 
1,400.1

 
1,315.8

 
6

Forteo®
539.0

 
783.0

 
1,322.0

 
1,244.9

 
6

Zyprexa
119.8

 
917.5

 
1,037.3

 
1,194.8

 
(13
)
Strattera®
452.5

 
286.0

 
738.5

 
709.2

 
4

Effient®
394.5

 
127.7

 
522.2

 
508.7

 
3

Evista
207.2

 
212.6

 
419.8

 
1,050.4

 
(60
)
Other pharmaceutical products
647.5

 
910.3

 
1,557.8

 
1,672.3

 
(7
)
Animal health products
1,274.4

 
1,072.2

 
2,346.6

 
2,151.5

 
9

Total net product sales
8,665.5

 
10,161.7

 
18,827.2

 
22,405.6

 
(16
)
Collaboration and other revenue(2)
468.6

 
319.8

 
788.4

 
707.5

 
11

Total revenue
$
9,134.1

 
$
10,481.5

 
$
19,615.6

 
$
23,113.1

 
(15
)
1
U.S. revenue includes revenue in Puerto Rico.
2
Collaboration and other revenue consists primarily of royalties for Erbitux® and revenue associated with Trajenta®.

37


Sales of Alimta, a treatment for various cancers, increased 2 percent in the U.S., driven by increased volume. Sales outside the U.S. increased 5 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and lower prices.
Sales of Humalog, our injectable human insulin analog for the treatment of diabetes, increased 7 percent in the U.S., driven by increased demand, partially offset by lower net effective selling prices as a result of payer contracts and greater Medicaid and Medicare utilization, as well as wholesaler buying patterns. Sales outside the U.S. increased 6 percent, driven by increased volume and, to a lesser extent, higher prices, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia, increased 10 percent in the U.S., driven by higher prices, partially offset by wholesaler buying patterns. Sales outside the U.S. increased 3 percent, driven by higher prices and increased volume, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the U.S. for the treatment of chronic musculoskeletal pain and the management of fibromyalgia, decreased 89 percent in the U.S. due to the loss of U.S. patent exclusivity in December 2013. Sales outside the U.S. increased 6 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Humulin, an injectable human insulin for the treatment of diabetes, increased 5 percent in the U.S., primarily driven by increased demand, partially offset by wholesaler buying patterns. Sales outside the U.S. increased 8 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women, increased 5 percent in the U.S., driven by higher prices, partially offset by decreased volume. Sales outside the U.S. increased 7 percent, driven by increased volume, primarily in Japan, partially offset by the unfavorable impact of foreign exchange rates, primarily the Japanese yen.
Sales of Zyprexa, a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance, decreased 3 percent in the U.S. Sales outside the U.S. decreased 14 percent, driven by decreased volume, the unfavorable impact of foreign exchange rates, primarily the Japanese yen, and lower prices. We will lose patent exclusivity for Zyprexa in Japan in December 2015. Zyprexa sales in Japan were approximately $465 million in 2014, compared to approximately $510 million in 2013.
Sales of Strattera, a treatment for attention-deficit hyperactivity disorder, increased 1 percent in the U.S., driven by higher prices, partially offset by decreased volume. Sales outside the U.S. increased 9 percent, driven by increased volume, primarily in Japan, partially offset by the unfavorable impact of foreign exchange rates, primarily the Japanese yen.
Sales of Effient, a product for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary intervention, including patients undergoing angioplasty, atherectomy, or stent placement, increased 5 percent in the U.S., driven by higher prices, partially offset by wholesaler buying patterns. Sales outside the U.S. decreased 3 percent, driven by lower volume.
Sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal women and for reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer, decreased 73 percent in the U.S., due to the loss of U.S. patent exclusivity in March 2014. Sales outside the U.S. decreased 24 percent, driven primarily by the expiration of a supply agreement in 2013, and to a lesser extent the unfavorable impact of foreign exchange rates.
Animal health product sales in the U.S. increased 4 percent, driven by increased volume in food animal products and higher prices, partially offset by decreased volume in companion animal products due to competitive pressure. Sales outside the U.S. increased 16 percent, driven by increased volume in food animal products, due in part to the acquisition of Lohmann SE (Lohmann AH) and, to a lesser extent, higher prices, partially offset by the unfavorable impact of foreign exchange rates.

38


Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue was 74.9 percent in 2014, a decrease of 3.9 percentage points compared with 2013, driven primarily by lower sales of Cymbalta and Evista following U.S. patent expirations.
Research and development expenses decreased 14 percent to $4.73 billion in 2014, driven primarily by lower late-stage clinical development costs. Research and development expenses in 2013 included $97.2 million of milestone payments made to Boehringer Ingelheim following regulatory submissions for empagliflozin.
Marketing, selling, and administrative expenses decreased 7 percent to $6.62 billion in 2014, driven primarily by the reduction in U.S. sales and marketing activities for Cymbalta and Evista, as well as ongoing cost containment efforts, partially offset by an additional $119.0 million charge in 2014 associated with the U.S. Drug Fee, an annual non-tax deductible fee enacted by the Patient Protection and Affordable Care Act that is imposed on us and others engaged in the business of manufacturing or importing branded prescription drugs. The final regulations issued by the IRS in 2014, accelerated the expense recognition criteria for the fee obligation by one year, from the year in which the fee is paid to the year in which the sales used to calculate the fee occur. This change affected all entities conducting covered activities in 2014 and resulted in the need to expense two years of the U.S. Drug Fee in 2014 to account for the fee imposed and paid in 2014 and the fee that will be imposed and paid in 2015.
We recognized acquired IPR&D charges of $200.2 million in 2014 resulting from our collaboration agreements with Adocia, AstraZeneca, and Immunocore Limited in addition to charges associated with the transfer of commercial rights to us, from Boehringer Ingelheim, of the new insulin glargine product in certain countries where it is not yet approved. There were $57.1 million of acquired IPR&D charges in 2013 related to the acquisition of rights for the CGRP antibody. See Notes 3 and 4 to the consolidated financial statements for additional information.
We recognized asset impairment, restructuring, and other special charges of $468.7 million in 2014. These charges included $225.5 million of severance costs related to ongoing efforts to reduce our cost structure and global workforce and $243.2 million of asset impairment and other special charges consisting primarily of a $180.8 million asset impairment charge related to our decision to close and sell a manufacturing plant located in Puerto Rico. In 2013, we recognized asset impairment, restructuring, and other special charges of $120.6 million. These charges included $30.0 million of asset impairments primarily associated with the closure of a packaging and distribution facility in Germany, and $90.6 million of severance costs to reduce our cost structure and global workforce. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of $340.5 million in 2014, compared with income of $518.9 million in 2013. Other income in 2014 included net gains of $216.4 million on investments and $92.0 million of income related to the transfer of commercial rights to linagliptin and empagliflozin in certain countries from us to Boehringer Ingelheim. Other income in 2013 was primarily comprised of $495.4 million related to the termination of the exenatide collaboration with Amylin. See Notes 4 and 17 to the consolidated financial statements for additional information.
Our effective tax rate was 20.3 percent in 2014, compared with 20.5 percent in 2013. See Note 13 to the consolidated financial statements for additional information.

39


Operating Results—2013
Financial Results
Worldwide total revenue increased 2 percent to $23.11 billion in 2013, driven by growth in several products, including Cialis, Humalog, Trajenta, Alimta, Forteo, and animal health products, partially offset by the continued erosion of Zyprexa sales following the loss of patent exclusivity in the U.S. and most major markets outside Japan. In 2013, net income increased 15 percent to $4.68 billion and EPS increased 18 percent to $4.32, compared to 2012 net income and EPS of $4.09 billion and $3.66, respectively. The increases were due to higher gross margin, lower marketing, selling, and administrative expenses, and, to a lesser extent, a lower effective tax rate, partially offset by higher research and development expenses and lower other income. EPS in 2013 also benefited from a lower number of shares outstanding as a result of our share repurchase programs.
The 2013 highlighted items are summarized in the "Executive Overview" section. The 2012 highlighted items are summarized as follows:
Collaborations (Note 4 to the consolidated financial statements)
•
We recognized income of $787.8 million (pretax), or $0.43 per share, related to the early payment of the exenatide revenue-sharing obligation following the completion of Amylin's acquisition by Bristol-Myers Squibb.
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•
We recognized asset impairment, restructuring, and other special charges of $281.1 million (pretax), or $0.16 per share, consisting of an intangible asset impairment related to liprotamase, restructuring charges related to initiatives to reduce our cost structure and global workforce, charges associated with the decision to stop development of a delivery device platform, and charges related to changes in returns reserve estimates for the withdrawal of Xigris™.
Revenue
Our worldwide revenue for 2013 was $23.11 billion, a 2 percent increase compared with 2012 as an increase of 5 percent due to higher prices was partially offset by a decrease of 2 percent due to the unfavorable impact of foreign exchange rates and a 1 percent decrease due to lower volume. Total revenue in the U.S. increased 5 percent, to $12.89 billion, due to higher prices, partially offset by volume declines for Cymbalta and Zyprexa due to the loss of patent exclusivity. Revenue outside the U.S. decreased 1 percent, to $10.22 billion, due primarily to the unfavorable impact of the continued weakness of the Japanese yen and, to a lesser extent, lower prices, partially offset by increased volume.


40


The following table summarizes our revenue activity in 2013 compared with 2012:
 
Year Ended
 
Year Ended
 
 
 
December 31, 2013
 
December 31, 2012
 
Percent
Change from 
Product
U.S.(1)
 
Outside U.S.
 
Total
 
Total
2012
 
(Dollars in millions)
 
 
Cymbalta
$
3,960.8

 
$
1,123.6

 
$
5,084.4

 
$
4,994.1

 
2

Alimta
1,209.1

 
1,493.9

 
2,703.0

 
2,594.3

 
4

Humalog
1,521.4

 
1,089.8

 
2,611.2

 
2,395.5

 
9

Cialis
942.8

 
1,216.6

 
2,159.4

 
1,926.8

 
12

Humulin
677.2

 
638.6

 
1,315.8

 
1,239.1

 
6

Forteo
511.4

 
733.5

 
1,244.9

 
1,151.0

 
8

Zyprexa
123.6

 
1,071.2

 
1,194.8

 
1,701.4

 
(30
)
Evista
772.0

 
278.4

 
1,050.4

 
1,010.1

 
4

Strattera
446.3

 
262.9

 
709.2

 
621.4

 
14

Effient
376.9

 
131.8

 
508.7

 
457.2

 
11

Other pharmaceutical products
639.5

 
1,032.8

 
1,672.3

 
1,843.0

 
(9
)
Animal health products
1,226.6

 
924.9

 
2,151.5

 
2,036.5

 
6

Total net product sales
12,407.6

 
9,998.0

 
22,405.6

 
21,970.4

 
2

Collaboration and other revenue(2)
482.1

 
225.4

 
707.5

 
633.0

 
12

Total revenue
$
12,889.7

 
$
10,223.4

 
$
23,113.1

 
$
22,603.4

 
2

1
U.S. revenue includes revenue in Puerto Rico.
2
Collaboration and other revenue in 2013 consists primarily of royalties for Erbitux and revenue associated with Trajenta. Collaboration and other revenue in 2012 also includes revenue associated with exenatide in the United States.
Sales of Cymbalta increased 1 percent in the U.S., driven by higher prices, largely offset by lower demand due to the loss of U.S. patent exclusivity in December 2013. Sales outside the U.S. increased 4 percent, driven primarily by increased volume, partially offset by lower prices and the unfavorable impact of foreign exchange rates.
Sales of Alimta increased 8 percent in the U.S., due to higher prices and increased demand. Sales outside the U.S. increased 1 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and lower prices.
Sales of Humalog increased 11 percent in the U.S., driven by higher prices, wholesaler buying patterns, and increased demand. Sales outside the U.S. increased 6 percent, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Cialis increased 21 percent in the U.S., driven by higher prices. Sales outside the U.S. increased 6 percent, driven by higher prices and increased volume, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Humulin increased 14 percent in the U.S., driven by higher prices, partially offset by decreased demand. Sales outside the U.S. decreased 1 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by increased volume.
Sales of Forteo increased 5 percent in the U.S., driven primarily by higher prices. Sales outside the U.S. increased 11 percent, due to increased volume, primarily in Japan, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Zyprexa decreased 66 percent in the U.S. due to continued erosion following patent expiration in late 2011. Sales outside the U.S. decreased 20 percent, driven by the unfavorable effect of foreign exchange rates, lower volume in markets outside of Japan, and lower prices.

41


Sales of Evista increased 10 percent in the U.S., driven by higher prices, partially offset by decreased demand. Sales outside the U.S. decreased 10 percent, driven by the unfavorable impact of foreign exchange rates and lower prices, partially offset by increased volume in Japan.
Sales of Strattera increased 16 percent in the U.S., driven primarily by higher prices. Sales outside the U.S. increased 11 percent, driven primarily by increased volume in Japan, partially offset by lower prices and the unfavorable impact of foreign exchange rates.
Sales of Effient increased 11 percent in the U.S., driven primarily by higher prices. Sales outside the U.S. increased 12 percent, driven primarily by increased volume.
Animal health product sales in the U.S. increased 6 percent driven primarily by increased volume for Trifexis® and, to a lesser extent, higher prices. Sales outside the U.S. increased 6 percent, driven by increased volume and, to a lesser extent, higher prices, partially offset by the unfavorable impact of foreign exchange rates.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue remained at 78.8 percent in 2013 as higher prices were offset by the adverse impact of foreign exchange rates on international inventories sold, which significantly decreased the cost of sales in 2012.
Marketing, selling, and administrative expenses decreased 5 percent to $7.13 billion in 2013, driven primarily by lower selling and marketing expenses resulting from ongoing cost-containment efforts, including a reduction in U.S. sales and marketing activities in anticipation of the loss of patent exclusivity for Cymbalta and Evista, as well as the impact of foreign exchange rates.
Research and development expenses increased 5 percent to $5.53 billion in 2013, due to higher research and clinical development expenses, including $97.2 million of milestone payments made to Boehringer Ingelheim following regulatory submissions for empagliflozin.
We recognized an acquired IPR&D charge of $57.1 million in 2013 resulting from our acquisition of a CGRP antibody. There were no acquired IPR&D charges in 2012. See Note 3 to the consolidated financial statements for additional information.
We recognized asset impairment, restructuring, and other special charges of $120.6 million in 2013. These charges included $30.0 million of asset impairments primarily associated with the anticipated closure of a packaging and distribution facility in Germany, and $90.6 million of severance costs to reduce our cost structure and global workforce. In 2012, we recognized asset impairment, restructuring, and other special charges of $281.1 million. These charges included $122.6 million related to an intangible asset impairment for liprotamase, $74.5 million related to restructuring to reduce our cost structure and global workforce, $64.0 million related to the asset impairment of a delivery device platform, and $20.0 million related to the withdrawal of Xigris. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of $518.9 million in 2013, compared with income of $674.0 million in 2012. The decrease was driven primarily by lower income related to the termination of the exenatide collaboration with Amylin of $495.4 million in 2013 compared with $787.8 million in 2012, partially offset by milestone payments received from Boehringer Ingelheim for regulatory submissions in the U.S., Europe, and Japan. See Notes 4 and 17 to the consolidated financial statements for additional information.
Our effective tax rate was 20.5 percent in 2013, compared with 24.4 percent in 2012. The 2012 effective tax rate reflected the expiration of the R&D tax credit at the end of 2011 and the tax impact of the payment received from Amylin, partially offset by the tax benefit related to the intangible asset impairment for liprotamase. The decrease in the 2013 effective tax rate reflects the reinstatement of the R&D tax credit in the U.S. effective January 1, 2013 as well as the one-time impact of the reinstatement of the R&D tax credit for 2012 that was recorded in the first quarter of 2013. See Note 13 to the consolidated financial statements for additional information.
FINANCIAL CONDITION
As of December 31, 2014, cash and cash equivalents remained essentially unchanged at $3.87 billion compared with $3.83 billion at December 31, 2013. Significant sources of cash included cash flows from

42


operations of $4.37 billion, net proceeds from investment transactions of $3.62 billion, and net proceeds from the issuance of short- and long-term debt of $2.64 billion. Significant uses of cash included dividends paid of $2.10 billion, purchases of property and equipment of $1.16 billion, share repurchases of $800.0 million, and the acquisition of Lohmann AH which amounted to $551.4 million. We also held $5.41 billion of cash in escrow associated with the pending close of the Novartis AH acquisition which was reflected as restricted cash as of December 31, 2014. In January 2015, we completed our acquisition of Novartis AH for approximately $5.4 billion in an all-cash transaction. See "Executive Overview—Other Matters" for additional details.
In addition to our cash and cash equivalents, we held total investments of $5.52 billion and $9.19 billion as of December 31, 2014 and December 31, 2013, respectively. See Note 7 to the consolidated financial statements for additional details.
As of December 31, 2014, total debt was $8.06 billion, an increase of $2.84 billion compared with $5.21 billion at December 31, 2013. The increase is due primarily to the increase in short-term commercial paper borrowings of $2.68 billion used primarily to finance the acquisition of Novartis AH. At December 31, 2014, we had a total of $3.31 billion of unused committed bank credit facilities, $3.20 billion of which is available to support our commercial paper program. Subject to market conditions, we intend to replace the majority of our commercial paper borrowings with fixed-rate long term notes in the first half of 2015. See Note 10 to the consolidated financial statements for additional details. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowing needs.
For the 130th consecutive year, we distributed dividends to our shareholders. Dividends of $1.96 per share were paid in both 2014 and 2013. In the fourth quarter of 2014, effective for the dividend to be paid in the first quarter of 2015, the quarterly dividend was increased to $0.50 per share, resulting in an indicated annual rate for 2015 of $2.00 per share.
Capital expenditures of $1.16 billion during 2014 were $150.5 million more than in 2013. We expect 2015 capital expenditures to be approximately $1.3 billion.
In 2014, we repurchased $800.0 million of shares under the $5.00 billion share repurchase program previously announced in October 2013.
See "Executive Overview—Other Matters" for information regarding recent and upcoming losses of patent protection for Cymbalta (U.S. and Europe), Evista (U.S.), Alimta (U.S., Europe, and Japan), and Zyprexa (Japan).
At December 31, 2014, we had an aggregate of $8.54 billion of cash and investments at our foreign subsidiaries. A significant portion of this amount would be subject to tax payments if such cash and investments were repatriated to the United States. We record U.S. deferred tax liabilities for certain unremitted earnings, but when foreign earnings are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. income taxes is provided. We believe cash provided by operating activities in the U.S. and planned repatriations of foreign earnings for which tax has been provided should be sufficient to fund our domestic operating needs, dividends paid to shareholders, share repurchases, and capital expenditures. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, “Risk Factors,” may affect our operating results and cash generated from operations.
Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of health care legislation; and various international government funding levels.
In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address 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.
Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2014 and 2013, including derivatives and other interest

43


rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2014 and 2013, respectively, would not have a material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.
Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the Japanese yen, and the British pound against the euro. We face foreign currency exchange exposures primarily when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the functional currency of the entity. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). Our policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of currency fluctuations on the existing assets and liabilities. We analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts as of December 31, 2014 and 2013, would not have a material impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis does not consider the impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not included in the table of contractual obligations below.
Individually, these arrangements are not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements would happen to be reached in the same reporting period, the aggregate charge to expense could be material to the results of operations in that period. See Note 4 to the consolidated financial statements for additional details. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound successfully achieves milestone objectives. We also note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.

44


Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):
 
Payments Due by Period
 
Total
 
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
More Than
5 Years
Short-term borrowings
$
2,680.6

 
$
2,680.6

 
$
—

 
$
—

 
$
—

Long-term debt, including interest payments(1)
8,168.6

 
185.9

 
1,588.7

 
1,143.3

 
5,250.7

Capital lease obligations
28.8

 
10.3

 
14.7

 
3.8

 
—

Operating leases
602.4

 
138.7

 
216.7

 
126.3

 
120.7

Purchase obligations(2)
11,166.8

 
9,957.5

 
782.1

 
420.6

 
6.6

Other long-term liabilities reflected on our balance sheet(3)
3,219.9

 
—

 
790.7

 
291.7

 
2,137.5

Total
$
25,867.1

 
$
12,973.0

 
$
3,392.9

 
$
1,985.7

 
$
7,515.5

1
Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the interest rate forward curve at December 31, 2014, to compute the amount of the contractual obligation for interest on the variable rate debt instruments and swaps.
2
We have included the following:
•
Purchase obligations consisting primarily of all open purchase orders as of December 31, 2014. Some of these purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and noncancelable purchase obligations.
•
Contractual payment obligations with each of our significant vendors, which are noncancelable and are not contingent.
3
We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and deferred compensation liabilities. We excluded long-term income taxes payable of $998.5 million, because we cannot reasonably estimate the timing of future cash outflows associated with those liabilities.
The contractual obligations table is current as of December 31, 2014. We expect the amount of these obligations to change materially over time as new contracts are initiated and existing contracts are completed, terminated, or modified.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the U.S., we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this report. Our most critical accounting estimates have been discussed with our audit committee and are described below.
Revenue Recognition and Sales Return, Rebate, and Discount Accruals
We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. Provisions for returns, rebates, and discounts are established in the same period the related sales are recorded.
We regularly review the supply levels of our significant products sold to major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network,

45


redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements does not provide an incentive for speculative wholesaler buying and provides us with data on inventory levels at our wholesalers. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the sales of a major product compared with underlying demand, we disclose this in our product sales discussion if we believe the amount is material to the product sales trend; however, we are not always able to accurately quantify the amount of stocking or destocking in the retail channel. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
When sales occur, we estimate a reserve for future product returns related to those sales. This estimate is based on several factors, including: historical return rates, expiration date by product (generally, 24 to 36 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, among others, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows U.S. pharmaceutical customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. Adjustments to the returns reserve may be required in the future based on revised estimates to our assumptions, which would have an impact on our consolidated results of operations. We record the return amounts as a deduction to arrive at our net product sales. Once the product is returned, it is destroyed. Actual product returns have been less than 2 percent of our net sales over the past three years and have not fluctuated significantly as a percentage of sales. We expect the ratio of actual product returns as a percentage of net sales to increase in future periods as we begin to experience elevated return levels for Cymbalta following the recent loss of patent exclusivity in the U.S. market.
We establish sales rebate and discount accruals in the same period as the related sales. The rebate and discount amounts are recorded as a deduction to arrive at our net product sales. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include Medicaid, managed care, Medicare, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We base these accruals primarily upon our historical rebate and discount payments made to our customer segment groups and the provisions of current rebate and discount contracts.
The largest of our sales rebate and discount amounts are rebates associated with sales covered by Medicaid and managed care contracts. In determining the appropriate accrual amount, we consider our historical Medicaid and managed care rebate payments by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries), an evaluation of the current Medicaid and managed care contracts, the percentage of our products that are sold via Medicaid and managed care contracts, and our product pricing. Although we accrue a liability for Medicaid and managed care rebates at the time we record the sale (when the product is shipped), the Medicaid and managed care rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.
Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. A best estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale. If our estimates are not reflective of the actual pharmaceutical costs incurred by the government, we adjust our rebate reserves.
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our global sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As of December 31, 2014, a 5 percent change in our global sales return, rebate, and discount liability would lead to an approximate $137 million effect on our income before income taxes.

46


The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the U.S. was 88 percent as of December 31, 2014 and 2013.
The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability balances, including Medicaid and managed care (in millions):
 
2014
 
2013
Sales return, rebate, and discount liabilities, beginning of year
$
2,215.5

 
$
1,584.5

Reduction of net sales due to sales returns, discounts, and rebates(1)
4,707.8

 
4,723.3

Cash payments of discounts and rebates
(4,681.9
)
 
(4,092.3
)
Sales return, rebate, and discount liabilities, end of year
$
2,241.4

 
$
2,215.5

1 
Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1.5 percent of consolidated net sales for each of the years presented.
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors we consider in developing our product litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant product liability contingencies when both probable and reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products. In addition to insurance coverage, we also consider any third-party indemnification we have, including the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
Pension and Retiree Medical Plan Assumptions
Pension benefit costs include assumptions for the discount rate, retirement age, and expected return on plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age, expected return on plan assets, and health-care-cost trend rates. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 14 to the consolidated financial statements for additional information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt instruments to determine the discount rates. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately 85 percent of which are growth investments); and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates, expected return on plan assets, and health-care-cost trend rates of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages.

47


If the health-care-cost trend rates were to increase by one percentage point, the aggregate of the service cost and interest cost components of the 2014 annual expense would increase by $7.8 million. A one-percentage-point decrease would decrease the aggregate of the 2014 service cost and interest cost by $6.6 million. If the 2014 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to change by a quarter percentage point, income before income taxes would change by $35.4 million. If the 2014 expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income taxes would change by $21.7 million. If our assumption regarding the 2014 expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by $49.9 million. The U.S. plans, including Puerto Rico, represent approximately 80 percent of both the total projected benefit obligation and total plan assets at December 31, 2014.
Impairment of Indefinite-Lived and Long-Lived Assets
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We determine impairment by comparing the projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions. We utilize the “income method,” which applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently.
For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in the “Late-Stage Pipeline” section. The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to build a successful portfolio of approved products. As such, it is likely that some acquired IPR&D assets will become impaired in the future.
Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management’s judgment. Actual results could vary from these estimates.
Income Taxes
We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities, which may result in future tax, interest, and penalty assessments by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions’ tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law, the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

48


We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.
As of December 31, 2014, a 5 percent change in the amount of the uncertain tax positions and the valuation allowance would result in a change in net income of $31.9 million and $30.1 million, respectively.
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 15 to the consolidated financial statements and is incorporated here by reference.

FINANCIAL EXPECTATIONS FOR 2015
For the full year of 2015, we expect EPS to be in the range of $2.40 to $2.50. We anticipate that total revenue will be between $19.5 billion and $20.0 billion. The acquisition of Novartis AH is expected to add significant revenue.
We anticipate that gross margin as a percent of revenue will be approximately 75.0 percent in 2015. Marketing, selling, and administrative expenses are expected to be in the range of $6.5 billion to $6.8 billion. Research and development expenses are expected to be in the range of $4.7 billion to $4.9 billion, reflecting an expected increase in Phase III trial expenses and the inclusion of Novartis AH. Other—net, (income) expense is expected to be in a range between $75 million and $125 million of income.
The 2015 tax rate is expected to be approximately 18.5 percent, assuming a full-year 2015 benefit of the research and development tax credit and other tax provisions up for extension. If these items are not extended, the 2015 tax rate would be approximately 1.5 percentage points higher. The 2015 expected tax rate includes the tax impact of costs associated with the Novartis AH and Lohmann AH acquisitions and amortization of intangibles.
Capital expenditures are expected to be approximately $1.3 billion.
Our 2015 financial guidance does not include a potential charge related to the collaboration with Pfizer to develop and commercialize tanezumab. If the partial clinical hold for the molecule is removed and we and Pfizer move forward with development, we will pay a $200 million upfront fee to Pfizer. This charge would reduce EPS by approximately $0.12 and would cause our tax rate to be approximately 1.0 percentage point lower.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
You can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) in Item 7 at “Management’s Discussion and Analysis—Financial Condition.” That information is incorporated in this report by reference.


49


Item 8.
Financial Statements and Supplementary Data
Consolidated Statements of Operations
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
 
Year Ended December 31
 
2014
 
2013
 
2012
Revenue
 
$
19,615.6

 
$
23,113.1

 
$
22,603.4

Cost of sales
 
4,932.5

 
4,908.1

 
4,796.5

Research and development
 
4,733.6

 
5,531.3

 
5,278.1

Marketing, selling, and administrative
 
6,620.8

 
7,125.6

 
7,513.5

Acquired in-process research and development (Notes 3 and 4)
 
200.2

 
57.1

 
—

Asset impairment, restructuring, and other special charges
(Note 5)
 
468.7

 
120.6

 
281.1

Other—net, (income) expense (Note 17)
 
(340.5
)
 
(518.9
)
 
(674.0
)
 
 
16,615.3

 
17,223.8

 
17,195.2

Income before income taxes
 
3,000.3

 
5,889.3

 
5,408.2

Income taxes (Note 13)
 
609.8

 
1,204.5

 
1,319.6

Net income
 
$
2,390.5

 
$
4,684.8

 
$
4,088.6

 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
Weighted-average number of common shares outstanding, including incremental shares
 
1,069,932

 
1,080,874

 
1,113,178

Basic earnings per share
 
$
2.23

 
$
4.33

 
$
3.67

Diluted earnings per share:
 
 
 
 
 
 
Weighted-average number of common shares outstanding, including incremental shares and stock options
 
1,074,286

 
1,084,766

 
1,117,294

Diluted earnings per share
 
$
2.23

 
$
4.32

 
$
3.66


See notes to consolidated financial statements.

50


Consolidated Statements of Comprehensive Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
Year Ended December 31
 
2014
 
2013
 
2012
Net income
 
$
2,390.5

 
$
4,684.8

 
$
4,088.6

Other comprehensive income (loss):
 
 
 
 
 
 
Change in foreign currency translation gains (losses)
 
(961.4
)
 
36.2

 
160.9

Change in net unrealized gains and losses on securities
 
(162.2
)
 
204.3

 
88.5

Change in defined benefit pension and retiree health benefit plans (Note 14)
 
(1,327.6
)
 
2,592.2

 
(128.6
)
Change in effective portion of cash flow hedges
 
(14.5
)
 
(123.8
)
 
8.7

Other comprehensive income (loss) before income taxes
 
(2,465.7
)
 
2,708.9

 
129.5

Provision for income taxes related to other comprehensive income (loss) items
 
476.6

 
(914.5
)
 
(68.0
)
Other comprehensive income (loss) (Note 16)
 
(1,989.1
)
 
1,794.4

 
61.5

Comprehensive income
 
$
401.4

 
$
6,479.2

 
$
4,150.1


See notes to consolidated financial statements.

51


Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
 
December 31
 
2014
 
2013
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents (Note 7)
 
$
3,871.6

 
$
3,830.2

Short-term investments (Note 7)
 
955.4

 
1,567.1

Accounts receivable, net of allowances of $55.0 (2014) and $62.2 (2013)
 
3,234.6

 
3,434.4

Other receivables
 
566.7

 
588.4

Inventories (Note 6)
 
2,740.0

 
2,928.8

Prepaid expenses and other
 
811.5

 
755.8

Total current assets
 
12,179.8

 
13,104.7

Other Assets
 
 
 
 
Restricted cash (Note 3)
 
5,405.6

 
—

Investments (Note 7)
 
4,568.9

 
7,624.9

Goodwill (Note 8)
 
1,758.1

 
1,516.8

Other intangibles, net (Note 8)
 
2,884.2

 
2,814.3

Sundry
 
2,417.7

 
2,212.5

Total other assets
 
17,034.5

 
14,168.5

Property and equipment, net (Note 9)
 
7,963.9

 
7,975.5

Total assets
 
$
37,178.2

 
$
35,248.7

Liabilities and Equity
 
 
 
 
Current Liabilities
 
 
 
 
Short-term borrowings and current maturities of long-term debt (Note 10)
 
$
2,688.7

 
$
1,012.6

Accounts payable
 
1,128.1

 
1,119.3

Employee compensation
 
759.0

 
943.9

Sales rebates and discounts
 
2,068.8

 
1,941.7

Dividends payable
 
530.3

 
523.5

Income taxes payable (Note 13)
 
93.5

 
254.4

Deferred income taxes (Note 13)
 
1,466.5

 
792.8

Other current liabilities
 
2,472.6

 
2,328.4

Total current liabilities
 
11,207.5

 
8,916.6

Other Liabilities
 
 
 
 
Long-term debt (Note 10)
 
5,367.7

 
4,200.3

Accrued retirement benefits (Note 14)
 
2,562.9

 
1,549.4

Long-term income taxes payable (Note 13)
 
998.5

 
1,078.7

Other noncurrent liabilities
 
1,653.5

 
1,863.0

Total other liabilities
 
10,582.6

 
8,691.4

Commitments and contingencies (Note 15)
 
 
 
 
Eli Lilly and Company Shareholders' Equity (Notes 11 and 12)
 
 
 
 
Common stock—no par value
   Authorized shares: 3,200,000
   Issued shares: 1,111,437 (2014) and 1,117,628 (2013)
 
694.6

 
698.5

Additional paid-in capital
 
5,292.3

 
5,050.0

Retained earnings
 
16,482.7

 
16,992.4

Employee benefit trust
 
(3,013.2
)
 
(3,013.2
)
Accumulated other comprehensive loss (Note 16)
 
(3,991.8
)
 
(2,002.7
)
Cost of common stock in treasury, 810 shares (2014) and 833 shares (2013)
 
(91.4
)
 
(93.6
)
Total Eli Lilly and Company shareholders' equity
 
15,373.2

 
17,631.4

Noncontrolling interests
 
14.9

 
9.3

Total equity
 
15,388.1

 
17,640.7

Total liabilities and equity
 
$
37,178.2

 
$
35,248.7

See notes to consolidated financial statements.

52


Consolidated Statements of Shareholders' Equity
 
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Loss
 
Common Stock in Treasury
 
Employee Benefit Trust
 
Shareholders' Equity
Shares
 
Amount
Shares
 
Amount
Balance at January 1, 2012
1,158,644

 
$
724.1

 
$
4,886.8

 
$
14,897.8

 
$
(3,858.6
)
 
853

 
$
(95.3
)
 
$
(3,013.1
)
 
$
13,541.7

Net income
 
 
 
 
 
 
4,088.6

 
 
 
 
 
 
 

 
4,088.6

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
61.5

 
 
 
 
 

 
61.5

Cash dividends declared per share: $1.96
 
 
 
 
 
 
(2,186.5
)
 
 
 
 
 
 
 

 
(2,186.5
)
Retirement of treasury shares
(14,912)

 
(9.3
)
 


 
(711.7
)
 
 
 
(14,912)

 
721.1

 


 
0.1

Purchase for treasury


 


 


 
 
 
 
 
16,918

 
(819.2
)
 


 
(819.2
)
Issuance of stock under employee stock plans-net
2,761

 
1.8

 
(65.2
)
 
 
 
 
 
(9)

 
1.0

 

 
(62.4
)
Stock-based compensation
 
 
 
 
141.5

 
 
 
 
 
 
 
 
 

 
141.5

Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(0.1
)
 
(0.1
)
Balance at December 31, 2012
1,146,493

 
716.6

 
4,963.1

 
16,088.2

 
(3,797.1
)
 
2,850

 
(192.4
)
 
(3,013.2
)
 
14,765.2

Net income
 
 
 
 
 
 
4,684.8

 
 
 
 
 
 
 

 
4,684.8

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
1,794.4

 
 
 
 
 

 
1,794.4

Cash dividends declared per share: $1.96
 
 
 
 
 
 
(2,102.8
)
 
 
 
 
 
 
 

 
(2,102.8
)
Retirement of treasury shares
(32,406)

 
(20.3
)
 
 
 
(1,677.8
)
 
 
 
(32,406)

 
1,698.1

 


 
—

Purchase for treasury


 


 
 
 
 
 
 
 
30,400

 
(1,600.0
)
 


 
(1,600.0
)
Issuance of stock under employee stock plans-net
3,541

 
2.2

 
(58.0
)
 
 
 
 
 
(11)

 
0.7

 


 
(55.1
)
Stock-based compensation


 


 
144.9

 
 
 
 
 
 
 
 
 

 
144.9

Balance at December 31, 2013
1,117,628

 
698.5

 
5,050.0

 
16,992.4

 
(2,002.7
)
 
833

 
(93.6
)
 
(3,013.2
)
 
17,631.4

Net income
 
 
 
 
 
 
2,390.5

 
 
 
 
 
 
 
 
 
2,390.5