Document


 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 2019
COMMISSION FILE NUMBER 001-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA
 
35-0470950
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant’s telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
  
 
 
 
  
Accelerated filer o
Non-accelerated filer o
  
 
  
Smaller reporting company o
 
  
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The number of shares of common stock outstanding as of April 29, 2019:
Class
 
Number of Shares Outstanding
Common
 
970,830,868


Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock (no par value)
LLY
New York Stock Exchange
1.000% Notes Due June 2, 2022
LLY22
New York Stock Exchange
7 1/8% Notes Due June 1, 2025
LLY25
New York Stock Exchange
1.625% Notes Due June 2, 2026
LLY26
New York Stock Exchange
2.125% Notes Due June 3, 2030
LLY30
New York Stock Exchange
6.77% Notes Due January 1, 2036
LLY36
New York Stock Exchange

 



Eli Lilly and Company
Form 10-Q
For the Quarter Ended March 31, 2019
Table of Contents
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 (Exchange Act), and the Private Securities Litigation Reform Act of 1995. 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 “Management's Discussion and Analysis of Results of Operations and Financial Condition” 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 (Lilly or the Company) 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:
•
uncertainties in the pharmaceutical research and development process, including with respect to the timing of anticipated regulatory approvals and launches of new products;
•
market uptake of recently launched products;
•
competitive developments affecting current products and our pipeline;
•
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 actions of governmental and private payers affecting pricing of, reimbursement for, and access to pharmaceuticals;
•
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 past, current, or future products as we are largely self-insured;
•
unauthorized disclosure, misappropriation, or compromise of trade secrets or other confidential data stored in our information systems, networks, and facilities, or those of third parties with whom we share our data;
•
changes in tax law, including the impact of United States tax reform legislation enacted in December 2017 and related guidance;
•
changes in foreign currency exchange rates, interest rates, and inflation;
•
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 related integration costs;
•
information technology system inadequacies or operating failures;
•
reliance on third-party relationships and outsourcing arrangements; and
•
the impact of global macroeconomic conditions.
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2018, particularly under the caption “Risk Factors.”
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into 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. Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars and shares in millions, except per-share data)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Revenue (Note 2)
$
5,092.2

 
$
4,963.8

Costs, expenses, and other:
 
 
 
Cost of sales
1,138.7

 
1,164.6

Research and development
1,230.5

 
1,107.5

Marketing, selling, and administrative
1,517.1

 
1,338.7

Acquired in-process research and development (Note 3)
136.9

 
—

Asset impairment, restructuring, and other special charges (Note 6)
423.9

 
56.8

Other–net, (income) expense (Note 13)
(86.0
)
 
(69.5
)
 
4,361.1


3,598.1

Income before income taxes
731.1


1,365.7

Income taxes (Note 9)
170.0

 
198.5

Net income from continuing operations
561.1

 
1,167.2

Net income from discontinued operations (Note 5)
3,680.5

 
50.2

Net income
$
4,241.6


$
1,217.4

 
 
 
 
Earnings per share:
 
 
 
Earnings from continuing operations - basic
$
0.57

 
$
1.11

Earnings from discontinued operations - basic
3.76

 
0.05

Earnings per share - basic
$
4.33

 
$
1.16

 
 
 
 
Earnings from continuing operations - diluted
$
0.57

 
$
1.11

Earnings from discontinued operations - diluted
3.74

 
0.05

Earnings per share - diluted
$
4.31

 
$
1.16

 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
Basic
979.9

 
1,048.0

Diluted
984.0

 
1,049.8

See notes to consolidated condensed financial statements.

4


Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Net income
$
4,241.6

 
$
1,217.4

Other comprehensive income (loss) from continuing operations, net of tax (Note 12)
(4.1
)
 
295.6

Other comprehensive income from discontinued operations, net of tax (Note 12) (1)
56.8

 
90.7

Other comprehensive income, net of tax (Note 12)
52.7

 
386.3

Comprehensive income
$
4,294.3


$
1,603.7

(1) For the three months ended March 31, 2019, other comprehensive income related to discontinued operations consisted of $45.8 million of accumulated other comprehensive income attributable to controlling interest and $11.0 million of accumulated other comprehensive income attributable to noncontrolling interest.
See notes to consolidated condensed financial statements.


5


Consolidated Condensed Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

 
March 31, 2019
 
December 31, 2018
Assets
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents (Note 7)
$
2,036.4

 
$
7,320.7

Short-term investments (Note 7)
100.7

 
88.2

Accounts receivable, net of allowances of $24.4 (2019) and $24.1 (2018)
4,200.5

 
4,593.9

Other receivables
977.5

 
1,182.9

Inventories
3,055.2

 
3,098.1

Prepaid expenses and other
2,227.2

 
2,036.7

Current assets of discontinued operations (Note 5)
—

 
2,229.1

Total current assets
12,597.5

 
20,549.6

Investments (Note 7)
2,111.4

 
2,005.4

Goodwill
3,855.9

 
1,366.6

Other intangibles, net
6,641.5

 
1,068.0

Deferred tax assets
2,511.0

 
2,613.7

Sundry
1,963.0

 
1,824.9

Property and equipment, net of accumulated depreciation of $8,792.0 (2019) and $8,666.9 (2018)
7,780.0

 
7,996.1

Operating lease assets (Note 8)
546.5

 
—

Noncurrent assets of discontinued operations (Note 5)
—

 
6,484.1

Total assets
$
38,006.8


$
43,908.4

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term borrowings and current maturities of long-term debt
$
2,354.9

 
$
1,102.2

Accounts payable
1,168.1

 
1,207.1

Employee compensation
511.7

 
955.6

Sales rebates and discounts
4,455.7

 
4,849.5

Dividends payable
—

 
650.8

Income taxes payable
491.4

 
393.4

Other current liabilities
2,254.3

 
2,036.7

Current liabilities of discontinued operations (Note 5)
—

 
692.8

Total current liabilities
11,236.1

 
11,888.1

Other Liabilities
 
 
 
Long-term debt
13,610.2

 
9,196.4

Noncurrent operating lease liabilities (Note 8)
508.2

 
—

Accrued retirement benefits (Note 10)
2,757.6

 
2,802.2

Long-term income taxes payable
3,760.4

 
3,700.0

Deferred tax liabilities
2,399.5

 
1,312.7

Other noncurrent liabilities
1,169.8

 
1,357.6

Noncurrent liabilities of discontinued operations (Note 5)
—

 
2,742.3

Total other liabilities
24,205.7

 
21,111.2

Commitments and Contingencies (Note 11)
 
 
 
Eli Lilly and Company Shareholders’ Equity
 
 
 
Common stock
607.1

 
661.0

Additional paid-in capital
5,756.6

 
6,583.6

Retained earnings
4,879.4

 
11,395.9

Employee benefit trust
(3,013.2
)
 
(3,013.2
)
Accumulated other comprehensive loss (Note 12)
(5,687.5
)
 
(5,729.2
)
Cost of common stock in treasury
(62.1
)
 
(69.4
)
Total Eli Lilly and Company shareholders’ equity
2,480.3

 
9,828.7

Noncontrolling interests
84.7

 
1,080.4

Total equity
2,565.0

 
10,909.1

Total liabilities and equity
$
38,006.8

 
$
43,908.4

See notes to consolidated condensed financial statements.

6


Consolidated Condensed Statements of Equity
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES

 
Equity of Eli Lilly and Company Shareholders
 
 

(Dollars in millions, shares in thousands)
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Employee Benefit Trust
 
Accumulated Other Comprehensive Loss
 
Common Stock in Treasury
 
Noncontrolling Interests
Shares
 
Amount
Shares
 
Amount
Balance at January 1, 2018
1,100,672

 
$
687.9

 
$
5,817.8

 
$
13,894.1

 
$
(3,013.2
)
 
$
(5,718.6
)
 
664

 
$
(75.8
)
 
$
75.7

Net income


 


 


 
1,217.4

 


 


 


 


 
0.4

Other comprehensive income (loss), net of tax


 


 


 


 


 
386.3

 


 


 


Retirement of treasury shares
(14,088
)
 
(8.8
)
 


 
(1,091.2
)
 


 


 
(14,088
)
 
1,100.0

 


Purchase of treasury shares


 


 


 


 


 


 
14,088

 
(1,100.0
)
 


Issuance of stock under employee stock plans, net
2,650

 
1.7

 
(127.8
)
 


 


 


 
(60
)
 
6.5

 


Stock-based compensation


 


 
68.0

 


 


 


 


 


 


Adoption of new accounting standards


 


 


 
2,584.4

 


 
(105.2
)
 


 


 


Other


 


 


 
3.5

 


 


 


 


 
(15.3
)
Balance at March 31, 2018
1,089,234

 
$
680.8

 
$
5,758.0

 
$
16,608.2

 
$
(3,013.2
)
 
$
(5,437.5
)
 
604

 
$
(69.3
)
 
$
60.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
1,057,639

 
$
661.0

 
$
6,583.6

 
$
11,395.9

 
$
(3,013.2
)
 
$
(5,729.2
)
 
604

 
$
(69.4
)
 
$
1,080.4

Net income


 


 


 
4,241.6

 


 


 


 


 
22.2

Other comprehensive income, net of tax


 


 


 


 


 
41.7

 


 


 
11.0

Retirement of treasury shares
(89,197
)
 
(55.7
)
 


 
(10,771.8
)
 


 


 
(89,197
)
 
10,827.5

 


Purchase of treasury shares (1)


 


 
(700.0
)
 


 


 


 
24,196

 
(2,800.0
)
 


Issuance of stock under employee stock plans, net
2,921

 
1.8

 
(202.8
)
 


 


 


 
(63
)
 
7.3

 


Stock-based compensation


 


 
75.8

 


 


 


 


 


 


Acquisition of common stock in exchange offer


 


 


 


 


 


 
65,001

 
(8,027.5
)
 


Deconsolidation of Elanco


 


 


 


 


 


 


 


 
(1,028.9
)
Other


 


 


 
13.7

 


 


 


 


 


Balance at March 31, 2019
971,363

 
$
607.1

 
$
5,756.6

 
$
4,879.4

 
$
(3,013.2
)
 
$
(5,687.5
)
 
541

 
$
(62.1
)
 
$
84.7

(1) As of March 31, 2019, there was $3.10 billion remaining under our $8.00 billion share repurchase program authorized in June 2018. Our share repurchases are facilitated through payments to a financial institution that purchases the shares on our behalf. As of March 31, 2019, we had paid $700 million to a financial institution for shares that are expected to be repurchased in the second quarter of 2019.
See notes to consolidated condensed financial statements.



7


Consolidated Condensed Statements of Cash Flows
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
 
Three Months Ended
March 31,
 
2019
 
2018
Cash Flows from Operating Activities
 
Net income
$
4,241.6

 
$
1,217.4

Adjustments to Reconcile Net Income to Cash Flows from Operating Activities:
 
 
 
Gain related to disposition of Elanco (Note 5)
(3,680.5
)
 
—

Depreciation and amortization
356.5

 
422.8

Change in deferred income taxes
(72.4
)
 
(22.7
)
Stock-based compensation expense
75.8

 
68.0

Acquired in-process research and development (Note 3)
136.9

 
—

Other changes in operating assets and liabilities, net of acquisitions and divestitures
(714.3
)
 
(1,270.0
)
Other non-cash operating activities, net
(32.3
)
 
21.0

Net Cash Provided by Operating Activities
311.3

 
436.5

Cash Flows from Investing Activities
 
 
 
Net purchases of property and equipment
(203.7
)
 
(236.5
)
Proceeds from sales and maturities of short-term investments
35.9

 
450.7

Purchases of short-term investments
(33.7
)
 
(112.2
)
Proceeds from sales of noncurrent investments
83.6

 
310.5

Purchases of noncurrent investments
(60.6
)
 
(561.6
)
Cash paid for acquisitions, net of cash acquired (Note 3)
(6,917.7
)
 
—

Purchase of in-process research and development
(196.9
)
 
—

Other investing activities, net
(385.6
)
 
(21.2
)
Net Cash Used for Investing Activities
(7,678.7
)
 
(170.3
)
Cash Flows from Financing Activities
 
 
 
Dividends paid
(637.2
)
 
(587.3
)
Net change in short-term borrowings
1,850.4

 
(1,202.5
)
Proceeds from issuance of long-term debt
4,448.3

 
—

Repayments of long-term debt
(600.0
)
 
(800.3
)
Purchases of common stock
(3,500.0
)
 
(1,100.0
)
Other financing activities, net
(193.7
)
 
(176.4
)
Net Cash Provided by (Used for) Financing Activities
1,367.8

 
(3,866.5
)
Effect of exchange rate changes on cash and cash equivalents
37.8

 
148.4

 
 
 
 
Net decrease in cash and cash equivalents
(5,961.8
)
 
(3,451.9
)
Cash and cash equivalents at January 1 (includes $677.5 (2019) and $324.4 (2018) of discontinued operations)
7,998.2

 
6,536.2

Cash and Cash Equivalents at March 31 (includes $264.5 (2018) of discontinued operations)
$
2,036.4

 
$
3,084.3

See notes to consolidated condensed financial statements.



8


Notes to Consolidated Condensed Financial Statements
(Tables present dollars in millions, except per-share data)
Note 1: Basis of Presentation and Implementation of New Financial Accounting Standards
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health (Elanco) common stock through a tax-free exchange offer. As a result, Elanco has been presented as discontinued operations in our consolidated condensed financial statements for all periods presented.
We have prepared the accompanying unaudited consolidated condensed financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. We issue our financial statements by filing with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, based on the weighted-average number of outstanding common shares plus the effect of incremental shares from our stock-based compensation programs.
Following the completion of the disposition of Elanco, we now operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Regional commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.
On January 1, 2019 we adopted Accounting Standards Update 2016-02, Leases, using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transitional practical expedients. The adoption of this standard resulted in recording of operating lease assets of approximately $530 million, which included reclassifying approximately $65 million of deferred rent and lease incentives, net of prepaid rent, as a component of the operating lease asset as of January 1, 2019. The adoption also resulted in recording operating lease liabilities of approximately $595 million as of January 1, 2019. Our accounting for finance leases remained substantially unchanged. The standard did not have an impact on our consolidated condensed statements of operations.
Note 2: Revenue
The following table summarizes our revenue recognized in our consolidated condensed statements of operations:
 
Three Months Ended
March 31,
 
2019
 
2018
Net product revenue
$
4,692.3

 
$
4,605.9

Collaboration and other revenue (1)
399.9

 
357.9

Revenue
$
5,092.2

 
$
4,963.8

(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $35.5 million and $50.1 million during the three months ended March 31, 2019 and 2018, respectively.
We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties and upfront and milestone payments we receive under these types of contracts. See Note 4 for additional information related to our

9


collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue from the Trajenta® and Jardiance® families of products resulting from our collaboration with Boehringer Ingelheim discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.
Disaggregation of Revenue
The following table summarizes revenue by product:
 
Three Months Ended
March 31,
 
2019
 
2018
 
United States (U.S.) (1)
Outside U.S.
Total
 
U.S. (1)
Outside U.S.
Total
Revenue—to unaffiliated customers:
 
 
 
 
 
 
 
Endocrinology:
 
 
 
 
 
 
 
Trulicity®
$
665.6

$
214.1

$
879.7

 
$
528.2

$
150.1

$
678.3

Humalog®
448.6

282.2

730.8

 
504.1

287.6

791.7

Forteo®
125.9

187.0

312.9

 
122.1

191.1

313.2

Humulin®
201.3

96.4

297.7

 
221.6

104.3

325.9

Basaglar®
198.2

53.2

251.4

 
126.7

39.3

166.0

Jardiance
125.2

78.4

203.6

 
95.0

56.0

151.0

Trajenta
47.4

84.6

131.9

 
54.1

87.0

141.1

Other Endocrinology
61.7

60.3

122.1

 
64.1

67.5

131.5

Total Endocrinology
1,873.9

1,056.2

2,930.1

 
1,715.9

982.9

2,698.7

 
 
 
 
 
 
 
 
Oncology:
 
 
 
 
 
 
 
Alimta®
281.8

217.4

499.2

 
245.3

254.3

499.6

Cyramza®
75.1

123.2

198.3

 
68.3

115.3

183.6

Erbitux®
113.3

5.1

118.4

 
121.3

28.3

149.6

Verzenio®
93.5

15.9

109.4

 
29.7

—

29.7

Other Oncology
30.2

57.3

87.4

 
45.6

48.4

94.1

Total Oncology
593.9

418.9

1,012.7

 
510.2

446.3

956.6

 
 
 
 
 
 
 
 
Neuroscience:
 
 
 
 
 
 
 
Cymbalta®
10.3

153.8

164.1

 
12.2

157.3

169.6

Zyprexa®
9.3

97.9

107.2

 
8.8

113.8

122.6

Strattera®
1.5

64.7

66.2

 
46.9

83.7

130.7

Emgality®
12.2

2.1

14.2

 
—

—

—

Other Neuroscience
17.8

23.5

41.4

 
23.3

26.7

49.8

Total Neuroscience
51.1

342.0

393.1

 
91.2

381.5

472.7

 
 
 
 
 
 
 
 
Immunology:
 
 
 
 
 
 
 
Taltz®
180.8

71.7

252.5

 
111.2

35.3

146.5

Other Immunology
6.4

75.7

82.2

 
—

32.2

32.2

Total Immunology
187.2

147.4

334.7

 
111.2

67.5

178.7

 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
Cialis®
143.2

164.9

308.2

 
313.4

182.0

495.4

Other
41.5

72.0

113.4

 
53.7

108.0

161.7

Total Other
184.7

236.9

421.6

 
367.1

290.0

657.1

Revenue
$
2,890.8

$
2,201.4

$
5,092.2

 
$
2,795.6

$
2,168.2

$
4,963.8

Numbers may not add due to rounding.
(1) U.S. revenue includes revenue in Puerto Rico.



10


The following table summarizes revenue by geographical area:
 
Three Months Ended
March 31,
 
2019
 
2018
Revenue—to unaffiliated customers (1):
 
 
 
United States (2)
$
2,890.8

 
$
2,795.6

Europe
900.3

 
864.2

Japan
543.7

 
537.0

Other foreign countries
757.4

 
767.1

Revenue
$
5,092.2

 
$
4,963.8

Numbers may not add due to rounding.
(1) Revenue is attributed to the countries based on the location of the customer.
(2) U.S. revenue includes revenue in Puerto Rico.
Adjustments to Revenue
Adjustments to revenue recognized as a result of changes in estimates for our most significant U.S. sales returns, rebates, and discounts liability balances during the three months ended March 31, 2019 and 2018 for products shipped in previous periods were approximately 3 percent of revenue and 4 percent of U.S. revenue, respectively.
Contract Liabilities
Our contract liabilities result from arrangements where we have received payment in advance of performance under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract.
The following table summarizes contract liability balances:
 
March 31, 2019
 
December 31, 2018
Contract liabilities
$
286.4

 
$
298.7

Revenue recognized from contract liabilities during the three months ended March 31, 2019 and 2018 was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.



11


Note 3: Acquisitions and Divestiture
In February 2019, we completed the acquisition of Loxo Oncology, Inc. (Loxo). This transaction, as further discussed in this note below in Acquisition of a Business, was accounted for as a business combination under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated condensed financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of this acquisition have been included in our consolidated condensed financial statements from the date of acquisition.
In addition to the acquisition of Loxo, we acquired assets in development in the three months ended March 31, 2019, which are further discussed in this note below in Asset Acquisitions. Upon acquisition, the acquired in-process research and development (IPR&D) charges related to these products were immediately expensed because the products had no alternative future use. We incurred acquired IPR&D charges of $136.9 million for the three months ended March 31, 2019. There were no acquired IPR&D charges for the three months ended March 31, 2018.
Acquisition of a Business
Loxo Acquisition
Overview of Transaction
In February 2019, we acquired all shares of Loxo for a purchase price $6.92 billion, net of cash acquired. The accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset impairment, restructuring, and other special charges during the three months ended March 31, 2019.
Under the terms of the agreement, we acquired a pipeline of investigational medicines, including LOXO-292, an oral RET inhibitor that has been granted Breakthrough Therapy designation by the U.S. Food and Drug Administration, and LOXO-305, an oral BTK inhibitor.
Assets Acquired and Liabilities Assumed
Our access to Loxo information was limited prior to the acquisition. As a consequence, we are in the process of determining fair values and tax bases of a significant portion of the assets acquired and liabilities assumed, including the identification and valuation of intangible assets, property and equipment, accrued expenses, and tax exposures. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date. The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized.
The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
Estimated Fair Value at February 15, 2019
Acquired in-process research and development
$
4,670.0

Definite-lived intangibles (1)
960.0

Deferred income taxes
(1,170.2
)
Other assets and liabilities - net
(31.4
)
Total identifiable net assets
4,428.4

Goodwill (2)
2,489.3

Total consideration transferred - net of cash acquired
$
6,917.7

(1) Contract-based intangibles, which are being amortized to cost of sales on a straight-line basis over their estimated useful lives, are expected to have a weighted average useful life of approximately 12 years.
(2) The goodwill recognized from this acquisition is attributable primarily to future unidentified projects and products and the assembled workforce for Loxo and is not deductible for tax purposes.

12


Asset Acquisitions
The following table summarizes our asset acquisitions during the three months ended March 31, 2019. There were no asset acquisitions during the three months ended March 31, 2018.
Counterparty
Compound(s) or Therapy
Acquisition Month
 
Phase of Development (1)
 
Acquired IPR&D Expense
AC Immune SA
Tau aggregation inhibitor small molecules for the potential treatment of Alzheimer's disease and other neurodegenerative diseases
January 2019
 
Pre-clinical
 
$
96.9

ImmuNext, Inc.
Novel immunometabolism target
March 2019
 
Pre-clinical
 
40.0

(1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.
In connection with these arrangements, our partners may be entitled to future royalties and/or commercial milestones based on sales should products be approved for commercialization and/or milestones based on the successful progress of compounds through the development process.
Subsequent Events
In April 2019, we entered into a license and research collaboration agreement with Avidity Biosciences, LLC for the discovery, development, and commercialization of potential new medicines in immunology and other select indications. Under terms of the agreement, we paid an upfront fee of $20.0 million and made an investment of $15.0 million. As a result of the transaction, we will record an acquired IPR&D expense of approximately $25 million in the second quarter of 2019.
In April 2019, we announced an agreement to sell the rights in China for two legacy antibiotic medicines, as well as a manufacturing facility in Suzhou, China to Eddingpharm, a China-based specialty pharmaceutical company. Under terms of the agreement, we will receive a deposit of $75.0 million, followed by a payment of $300.0 million upon successful closing of the transaction. The transaction is subject to customary closing conditions and regulatory approval.

13


Note 4: Collaborations and Other Arrangements
We often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone and royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the collaboration partner. See Note 2 for amounts of collaboration and other revenue recognized from these types of arrangements.
Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant arrangements are discussed below.
Boehringer Ingelheim Diabetes Collaboration
We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of diabetes compounds. Currently included in the collaboration are Boehringer Ingelheim’s oral diabetes products: Trajenta, Jentadueto®, Jardiance, Glyxambi®, and Synjardy®, as well as our basal insulin, Basaglar.
The table below summarizes significant milestones (deferred) capitalized for the compounds included in this collaboration:
Product Family
 
Milestones
(Deferred) Capitalized (1)
Trajenta (2)
 
$
446.4

Jardiance (3)
 
289.0

Basaglar
 
(250.0
)
(1) In connection with the regulatory approvals of Basaglar in the U.S., Europe, and Japan, milestone payments received were recorded as contract liabilities and are being amortized through the term of the collaboration (2029) to collaboration and other revenue. In connection with the regulatory approvals of Trajenta and Jardiance, milestone payments made were capitalized as intangible assets and are being amortized to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been (deferred) or capitalized from the start of this collaboration through the end of the reporting period.
(2) Jentadueto is included in the Trajenta product family. The collaboration agreement with Boehringer Ingelheim for Trajenta ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
(3) Glyxambi and Synjardy are included in the Jardiance product family. The collaboration agreement with Boehringer Ingelheim for Jardiance ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
In the most significant markets, we and Boehringer Ingelheim share equally the ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from the collaboration. We record our portion of the gross margin associated with Boehringer Ingelheim's products as collaboration and other revenue. We record our sales of Basaglar to third parties as net product revenue with the payments made to Boehringer Ingelheim for its portion of the gross margin recorded as cost of sales. For all compounds under this collaboration, we record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company is entitled to potential performance payments depending on the sales of the molecules it contributes to the collaboration. These performance payments result in the owner of the molecule retaining a greater share of the agreed upon gross margin of that product. Subject to achieving these thresholds, in a given period, our reported revenue for Trajenta and Jardiance may be reduced by any performance payments we make related to these products. Similarly, performance payments we may receive related to Basaglar effectively reduce Boehringer Ingelheim's share of the gross margin, which reduces our cost of sales.
The following table summarizes our net product revenue recognized with respect to Basaglar and collaboration and other revenue recognized with respect to the Trajenta and Jardiance families of products:
 
Three Months Ended
March 31,
 
2019
 
2018
Basaglar
$
251.4

 
$
166.0

Jardiance
203.6

 
151.0

Trajenta
131.9

 
141.1


14


Olumiant® 
We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte), which provides us the development and commercialization rights to its Janus tyrosine kinase (JAK) inhibitor compound, now known as Olumiant, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging up to 20 percent. The agreement calls for payments by us to Incyte associated with certain development, success-based regulatory, and sales-based milestones.
The following table summarizes our significant milestones achieved:
Year
Event
Classification
Amount
2018
Regulatory approval in the U.S.
Intangible asset
$
100.0

Began Phase III testing for systemic lupus erythematosus (SLE)
R&D Expense
20.0

2017
Regulatory approval in Europe
Intangible asset
65.0

Regulatory approval in Japan
Intangible asset
15.0

Began Phase III testing for atopic dermatitis
R&D expense
30.0

2016
Regulatory submissions in the U.S. and Europe
R&D expense
55.0

As of March 31, 2019, Incyte is eligible to receive up to $130.0 million of additional payments from us contingent upon certain development and success-based regulatory milestones. Incyte is also eligible to receive up to $150.0 million of potential sales-based milestones.
The agreement provided Incyte with options to co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for increased tiered royalties ranging up to percentages in the high twenties. Incyte exercised its option to co-develop Olumiant in rheumatoid arthritis in 2010 and atopic dermatitis, alopecia areata, and SLE in 2017. In April 2019, Incyte opted-out of co-development of all indications as of January 1, 2019. As a result, we will solely fund all future development and pay a lower royalty rate to Incyte on future sales.
Tanezumab
We have a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and globally commercialize tanezumab for the treatment of osteoarthritis pain, chronic low back pain, and cancer pain. Under the agreement, the companies share equally the ongoing development costs and, if successful, in gross margins and certain commercialization expenses. As of March 31, 2019, Pfizer is eligible to receive up to $350.0 million in success-based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent upon the commercial success of tanezumab.
Note 5: Discontinued Operations
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer. As a result, we have presented Elanco as discontinued operations in our consolidated condensed financial statements for all periods presented.
We recognized a gain related to the disposition of approximately $3.7 billion, which was recorded in net income from discontinued operations in the consolidated condensed statement of operations for the three months ended March 31, 2019. The operating results of Elanco were reported as net income from discontinued operations in the consolidated condensed statements of operations through March 11, 2019, the date of disposition, and were not material. Net income from discontinued operations for the three months ended March 31, 2018 included Elanco's operating results.

15


In the consolidated condensed balance sheet as of December 31, 2018, the assets and liabilities associated with Elanco are classified as assets of discontinued operations and liabilities of discontinued operations, as appropriate. The following table presents the major classes of assets and liabilities from discontinued operations:
 
December 31, 2018
Inventories
$
1,013.7

Other current assets
1,215.4

Current assets of discontinued operations
$
2,229.1

 
 
Goodwill
$
2,980.9

Other intangibles, net
2,453.0

Property and equipment, net
923.4

Other assets
126.8

Noncurrent assets of discontinued operations
$
6,484.1

 
 
Current liabilities of discontinued operations
$
692.8

 
 
Long-term debt
$
2,443.3

Other liabilities
299.0

Noncurrent liabilities of discontinued operations
$
2,742.3

The gain related to the disposition of Elanco in the consolidated condensed statement of cash flows includes the operating results of Elanco, which were not material. The net cash flows of our discontinued operations for operating and investing activities were not material for either period presented.
We entered into a transitional services agreement (TSA) with Elanco that is designed to facilitate the orderly transfer of various services to Elanco. The TSA relates primarily to administrative services, which are generally to be provided over the next 24 months. This agreement is not material and does not confer upon us the ability to influence the operating and/or financial policies of Elanco subsequent to March 11, 2019, the full disposition date.
Note 6: Asset Impairment, Restructuring, and Other Special Charges
The components of the charges included in asset impairment, restructuring, and other special charges in our consolidated condensed statements of operations are described below.
 
Three Months Ended
March 31,
 
2019
 
2018
Severance
$
(3.6
)
 
$
7.3

Asset impairment and other special charges
427.5

 
49.5

Total asset impairment, restructuring, and other special charges
$
423.9

 
$
56.8

Asset impairment and other special charges recognized during the three months ended March 31, 2019 consisted of $400.7 million related to the acquisition of Loxo, substantially all of which is associated with the accelerated vesting of Loxo employee equity awards.
Asset impairment, restructuring, and other special charges recognized during the three months ended March 31, 2018 were primarily associated with asset impairment, exit costs, and severance costs related to the decision to end Posilac® (rbST) production at the Augusta, Georgia manufacturing site.

16


Note 7: Financial Instruments
Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-science products account for a substantial portion of our trade receivables; collateral is generally not required. We seek to mitigate the risk associated with this concentration through our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations. Major financial institutions represent the largest component of our investments in corporate debt securities. In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.
We consider all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The cost of these investments approximates fair value.
Our equity investments are accounted for using three different methods depending on the type of equity investment:
•
Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other-net, (income) expense.
•
For equity investments that do not have readily determinable fair values, we measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any change in recorded value is recorded in other-net, (income) expense.
•
Our public equity investments are measured and carried at fair value. Any change in fair value is recognized in other-net, (income) expense.
We review equity investments other than public equity investments for indications of impairment on a regular basis.
Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and are intended to offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative instruments that are designated and qualify as fair value hedges, the derivative instrument is marked to market, with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative instruments that are designated and qualify as cash flow hedges, gains and losses are reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. For derivative and non-derivative instruments that are designated and qualify as net investment hedges, the foreign currency translation gains or losses due to spot rate fluctuations are reported as a component of accumulated other comprehensive loss. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in earnings during the period of change.
We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, British pound, and the Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward and option contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At March 31, 2019, we had outstanding foreign currency forward commitments to purchase 1.22 billion U.S. dollars and sell 1.08 billion euro, commitments to purchase 1.97 billion euro and sell 2.23 billion U.S. dollars, commitments to purchase 356.8 million U.S. dollars and sell 39.58 billion Japanese yen, and commitments to purchase 309.7 million British pounds and sell 409.1 million U.S. dollars, which will all settle within 30 days.

17


Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency interest rate swaps. Our foreign currency-denominated notes had carrying amounts of $3.33 billion and $3.40 billion as of March 31, 2019 and December 31, 2018, respectively, of which $2.33 billion and $2.38 billion have been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations as of March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, we had outstanding cross currency swaps with notional amounts of $1.86 billion swapping U.S. dollars to euro, $1.00 billion swapping Swiss francs to U.S. dollars, and $350.0 million swapping U.S. dollars to British pounds, which have settlement dates ranging through 2028. Our cross-currency interest rate swaps, for which a majority convert a portion of our U.S. dollar-denominated floating rate debt to foreign-denominated floating rate debt, have also been designated as, and are effective as, economic hedges of net investments.
In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. We seek to 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 of fluctuations in interest rates on earnings. 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 and investment positions and may enter into interest rate swaps or collars to help maintain that balance.
Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting from the termination of interest rate swaps are classified as operating activities in our consolidated condensed statements of cash flows. At March 31, 2019, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 15 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.
We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of earnings and cash flow associated with forecasted sales of available-for-sale securities.
We also may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of any anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in interest rates. Upon completion of a debt issuance and termination of the swap, the change in fair value of these instruments is recorded as part of other comprehensive income (loss) and is amortized to interest expense over the life of the underlying debt.
In February 2019, we issued $1.15 billion of 3.38 percent fixed-rate notes due in March 2029, $850.0 million of 3.88 percent fixed-rate notes due in March 2039, $1.50 billion of 3.95 percent fixed-rate notes due in March 2049, and $1.00 billion of 4.15 percent fixed-rate notes due in March 2059, with interest to be paid semi-annually. We used the net proceeds of $4.45 billion from the sale of these notes to fund the acquisition of Loxo and for general corporate purposes.


18


The Effect of Risk-Management Instruments on the Consolidated Condensed Statements of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense:
 
Three Months Ended
March 31,
 
2019
 
2018
Fair value hedges:
 
 
 
Effect from hedged fixed-rate debt
$
39.3

 
$
(54.8
)
Effect from interest rate contracts
(39.3
)
 
54.8

Cash flow hedges:
 
 
 
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss
3.8

 
3.6

Net losses on foreign currency exchange contracts not designated as hedging instruments
48.9

 
16.7

Total
$
52.7

 
$
20.3

During the three months ended March 31, 2019 and 2018, the amortization of losses related to the portion of our risk management hedging instruments, fair value hedges, and cash flow hedges that were excluded from the assessment of effectiveness were not material.
The Effect of Risk-Management Instruments on Other Comprehensive Income (Loss)
The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is as follows:
 
Three Months Ended
March 31,
 
2019
 
2018
Net investment hedges:
 
 
 
    Foreign currency-denominated notes
$
53.7

 
$
(107.7
)
    Cross-currency interest rate swaps
38.3

 
(31.5
)
Cash flow hedges:
 
 
 
    Forward-starting interest rate swaps
(11.7
)
 
—

    Cross-currency interest rate swaps
(30.0
)
 
—

During the next 12 months, we expect to reclassify $16.1 million of pretax net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense. During the three months ended March 31, 2019, the amounts excluded from the assessment of hedge effectiveness recognized in other comprehensive income (loss) was not material.

19


Fair Value of Financial Instruments
The following tables summarize certain fair value information at March 31, 2019 and December 31, 2018 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments: 
 
 
 
 
 
Fair Value Measurements Using
 
 
 
Carrying
Amount
 
Cost (1)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
806.2

 
$
806.2

 
$
806.2

 
$
—

 
$
—

 
$
806.2

 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
13.5

 
$
13.6

 
$
13.5

 
$
—

 
$
—

 
$
13.5

Corporate debt securities
81.7

 
81.7

 
—

 
81.7

 
—

 
81.7

Asset-backed securities
4.0

 
4.0

 
—

 
4.0

 
—

 
4.0

Other securities
1.5

 
1.5

 
—

 
1.5

 
—

 
1.5

Short-term investments
$
100.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
148.0

 
$
150.0

 
$
148.0

 
$
—

 
$
—

 
$
148.0

Corporate debt securities
533.6

 
535.2

 
—

 
533.6

 
—

 
533.6

Mortgage-backed securities
118.7

 
119.9

 
—

 
118.7

 
—

 
118.7

Asset-backed securities
36.2

 
36.2

 
—

 
36.2

 
—

 
36.2

Other securities
82.4

 
29.7

 
—

 
—

 
82.4

 
82.4

Marketable equity securities
502.1

 
238.7

 
502.1

 
—

 
—

 
502.1

Equity investments without readily determinable fair values (2)
414.6

 
 
 
 
 
 
 
 
 
 
Equity method investments (2)
275.8

 
 
 
 
 
 
 
 
 
 
Noncurrent investments
$
2,111.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
5,727.1

 
$
5,727.1

 
$
5,727.1

 
$
—

 
$
—

 
$
5,727.1

 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
16.9

 
$
17.1

 
$
16.9

 
$
—

 
$
—

 
$
16.9

Corporate debt securities
62.2

 
62.6

 
—

 
62.2

 
—

 
62.2

Asset-backed securities
7.6

 
7.7

 
—

 
7.6

 
—

 
7.6

Other securities
1.5

 
1.5

 
—

 
1.5

 
—

 
1.5

Short-term investments
$
88.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
149.1

 
$
153.6

 
$
149.1

 
$
—

 
$
—

 
$
149.1

Corporate debt securities
568.0

 
587.8

 
—

 
568.0

 
—

 
568.0

Mortgage-backed securities
111.4

 
114.5

 
—

 
111.4

 
—

 
111.4

Asset-backed securities
27.7

 
27.9

 
—

 
27.7

 
—

 
27.7

Other securities
87.8

 
29.7

 
—

 
—

 
87.8

 
87.8

Marketable equity securities
357.5

 
238.3

 
357.5

 
—

 
—

 
357.5

Equity investments without readily determinable fair values (2)
414.7

 
 
 
 
 
 
 
 
 
 
Equity method investments (2)
289.2

 
 
 
 
 
 
 
 
 
 
Noncurrent investments
$
2,005.4

 
 
 
 
 
 
 
 
 
 
(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.
(2) Fair value disclosures are not applicable for equity method investments, investments accounted for under the measurement alternative for equity investments, and cost method investments that do not have readily determinable fair values.

20


 
 
 
Fair Value Measurements Using
 
 
 
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
Short-term commercial paper borrowings
 
 
 
 
 
 
 
 
 
March 31, 2019
$
(2,349.6
)
 
$
—

 
$
(2,342.3
)
 
$
—

 
$
(2,342.3
)
December 31, 2018
(498.9
)
 
—

 
(497.6
)
 
—

 
(497.6
)
Long-term debt, including current portion
 
 
 
 
 
 
 
 
 
March 31, 2019
$
(13,615.5
)
 
$
—

 
$
(14,238.8
)
 
$
—

 
$
(14,238.8
)
December 31, 2018
(9,799.7
)
 
—

 
(9,970.0
)
 
—

 
(9,970.0
)

21


 
 
 
Fair Value Measurements Using
 
 
 
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
March 31, 2019
 
 
 
 
 
 
 
 
 
Risk-management instruments:
 
 
 
 
 
 
 
 
 
Interest rate contracts designated as fair value hedges:
 
 
 
 
 
 
 
 
 
Sundry
$
30.9

 
$
—

 
$
30.9

 
$
—

 
$
30.9

Other current liabilities
(0.3
)
 
—

 
(0.3
)
 
—

 
(0.3
)
Other noncurrent liabilities
(7.7
)
 
—

 
(7.7
)
 
—

 
(7.7
)
Cross-currency interest rate contracts designated as net investment hedges:
 
 
 
 
 
 
 
 
 
Other receivables
60.9

 
—

 
60.9

 
—

 
60.9

Sundry
26.9

 
—

 
26.9

 
—

 
26.9

Other current liabilities
(5.0
)
 
—

 
(5.0
)
 
—

 
(5.0
)
Cross-currency interest rate contracts designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
Other noncurrent liabilities
(27.6
)
 
—

 
(27.6
)
 
—

 
(27.6
)
Foreign exchange contracts not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Other receivables
11.2

 
—

 
11.2

 
—

 
11.2

Other current liabilities
(28.8
)
 
—

 
(28.8
)
 
—

 
(28.8
)
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
Risk-management instruments:
 
 
 
 
 
 
 
 
 
Interest rate contracts designated as fair value hedges:
 
 
 
 
 
 
 
 
 
Sundry
4.5

 
—

 
4.5

 
—

 
4.5

Other current liabilities
(22.3
)
 
—

 
(22.3
)
 
—

 
(22.3
)
Other noncurrent liabilities
(19.0
)
 
—

 
(19.0
)
 
—

 
(19.0
)
Cross-currency interest rate contracts designated as net investment hedges:
 
 
 
 
 
 
 
 
 
Other receivables
69.2

 
—

 
69.2

 
—

 
69.2

Sundry
8.2

 
—

 
8.2

 
—

 
8.2

Other current liabilities
(9.2
)
 
—

 
(9.2
)
 
—

 
(9.2
)
Cross-currency interest rate contracts not designated as hedging instruments
 
 
 
 
 
 
 
 
 
Other noncurrent liabilities
(25.8
)
 
—

 
(25.8
)
 
—

 
(25.8
)
Foreign exchange contracts not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Other receivables
11.3

 
—

 
11.3

 
—

 
11.3

Other current liabilities
(16.3
)
 
—

 
(16.3
)
 
—

 
(16.3
)
Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff associated with certain of the risk-management instruments above that are subject to an enforceable master netting arrangement or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management instruments above, individually, these financial rights are not material.

22


We determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. Level 3 fair value measurements for other investment securities are determined using unobservable inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. The fair values of equity method investments and investments measured under the measurement alternative for equity investments that do not have readily determinable fair values are not readily available.
The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of March 31, 2019:
 
Maturities by Period
  
Total
 
Less Than
1 Year
 
1-5
Years
 
6-10
Years
 
More Than
10 Years
Fair value of debt securities
$
935.7

 
$
99.3

 
$
539.9

 
$
121.3

 
$
175.2

The net unrealized gains and losses recognized in our consolidated condensed statements of operations for equity securities during the three months ended March 31, 2019 and 2018 were $149.6 million and $18.7 million, respectively.
We adjust our equity investments without readily determinable fair values are based upon changes in the equity instruments' values resulting from observable price changes in orderly transactions for an identical or similar investments of the same issuer. Downward adjustments resulting from an impairment are recorded based upon impairment considerations including the financial condition and near term prospects of the issuer, general market conditions, and industry specific factors. Adjustments recorded during the three months ended March 31, 2019 and 2018 were not material.
A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows: 
 
March 31, 2019
 
December 31, 2018
Unrealized gross gains
$
5.2

 
$
0.8

Unrealized gross losses
10.1

 
29.0

Fair value of securities in an unrealized gain position
338.9

 
84.3

Fair value of securities in an unrealized loss position
578.6

 
858.6

We periodically assess our investment in available-for-sale securities for other-than-temporary impairment losses. Other than temporary impairment losses were immaterial in the three months ended March 31, 2019. There were no other-than-temporary impairment losses in the three months ended March 31, 2018.
For debt securities, the amount of credit losses are determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing credit losses include the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.
As of March 31, 2019, the available-for-sale securities in an unrealized loss position include primarily fixed-rate debt securities of varying maturities, which are sensitive to changes in the yield curve and other market conditions. Approximately 60 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of March 31, 2019, we do not intend to sell, and it is not more likely than not that we will be required to sell the securities in a loss position before the market values recover or the underlying cash flows have been received, and there is no indication of default on interest or principal payments for any of our debt securities.



23


Activity related to our investment portfolio, substantially all of which related to equity and available-for-sale securities, was as follows:
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Proceeds from sales
 
$
93.7

 
$
592.6

Realized gross gains on sales
 
2.5

 
2.1

Realized gross losses on sales
 
0.4

 
1.6

Realized gains and losses on sales of available-for-sale investments are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.
Accounts Receivable Factoring Arrangements
We have entered into accounts receivable factoring agreements with financial institutions to sell certain of our non-U.S. accounts receivable. These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. Our factoring agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. We derecognized $638.3 million and $696.2 million of accounts receivable as of March 31, 2019 and December 31, 2018, respectively, under these factoring arrangements. The costs of factoring such accounts receivable on our consolidated condensed results of operations for the three months ended March 31, 2019 and 2018 was not material.
Note 8: Leases
We determine if an arrangement is a lease at inception. We have operating and finance leases for corporate offices, research and development facilities, vehicles, and equipment. Our leases have remaining lease terms of 1 to 14 years, some of which have options to extend the leases, and some of which include options to terminate the leases. Finance leases are included in property and equipment, short-term borrowings and current maturities of long-term debt, and long-term debt in our consolidated condensed balance sheets. Finance leases are not material to our consolidated condensed statements of operations, consolidated condensed balance sheets, and consolidated condensed statements of cash flows. Beginning January 1, 2019 operating leases are included in operating lease assets, other current liabilities, and noncurrent operating lease liabilities in our consolidated condensed balance sheet.
Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable. The operating lease assets also include any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain and there is a significant economic incentive to exercise that option.
Operating lease expense for operating lease assets is recognized on a straight-line basis over the lease term. Variable lease payments, which represent lease payments that vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the obligation for these payments was incurred. Variable lease expense recognized in the three months ended March 31, 2019 was not material.
We elected not to apply the recognition requirements of Accounting Standards Codification 842, Leases, to short-term leases, which are deemed to be leases with a lease term of 12 months or less. Instead, we recognized lease payments in the consolidated condensed statements of operations on a straight-line basis over the lease term and variable payments in the period in which the obligation for these payments was incurred. We elected this policy for all classes of underlying assets. Short-term lease expense recognized in the three months ended March 31, 2019 was not material.

24


The impact of operating leases to our consolidated condensed financial statements were as follows:
 
 
Three Months Ended
March 31,
 
 
2019
Lease cost
 

Operating lease cost
 
$
32.1

 
 
 
Other information
 
 
Operating cash flows from operating leases
 
36.9

Right-of-use assets obtained in exchange for new operating lease liabilities
 
35.1

Weighted-average remaining lease term - operating leases
 
8 years

Weighted-average discount rate - operating leases
 
3.7
%
As of March 31, 2019, the annual minimum lease payments of our operating lease liabilities were as follows:
 
 
Year 1
$
129.3

Year 2
111.7

Year 3
80.1

Year 4
69.5

Year 5
55.8

After Year 5
285.0

Total lease payments
731.4

Less imputed interest
(109.5
)
Total
$
621.9


25


Note 9: Income Taxes
The effective tax rates were 23.3 percent and 14.5 percent for the three months ended March 31, 2019 and 2018, respectively. The higher effective tax rate is primarily due to the non-deductibility of accelerated vesting of Loxo employee equity awards as part of the closing of the acquisition of Loxo, as well as tax expenses associated with the suspension of promotion of Lartruvo.
In 2017, the U.S. enacted the Tax Cuts and Jobs Act (2017 Tax Act), which significantly revised U.S. tax law. Guidance related to the 2017 Tax Act, including Notices, Proposed Regulations, and Final Regulations, has been issued, and we expect additional guidance will be issued in 2019. This additional guidance could materially impact our assumptions and estimates used to record our U.S. federal and state income tax expense resulting from the 2017 Tax Act.
The U.S. examination of tax years 2013-2015 began in 2016, and we believe it is reasonably possible that this examination could reach resolution within the next 12 months for the tax years 2013-2014 and certain matters under examination for tax year 2015, for which the examination remains ongoing. As a result, we currently estimate that gross uncertain tax positions may be reduced by approximately $450 million within the next 12 months. Additionally, we anticipate up to $150 million of cash payments will be due upon resolution.
Note 10: Retirement Benefits
Net pension and retiree health benefit (income) cost included the following components:
 
Defined Benefit Pension Plans
 
Three Months Ended
March 31,
 
2019
 
2018
Components of net periodic benefit cost:
 
 
 
Service cost
$
61.8

 
$
77.6

Interest cost
120.7

 
112.0

Expected return on plan assets
(211.1
)
 
(211.0
)
Amortization of prior service cost
1.5

 
1.2

Recognized actuarial loss
69.6

 
89.9

Net periodic benefit cost
$
42.5

 
$
69.7

 
Retiree Health Benefit Plans
 
Three Months Ended
March 31,
 
2019
 
2018
Components of net periodic benefit income:
 
 
 
Service cost
$
8.8

 
$
10.7

Interest cost
14.6

 
13.9

Expected return on plan assets
(36.0
)
 
(43.9
)
Amortization of prior service benefit