e10vk
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, 2006
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 Act:
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Title of Each Class
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Name of Each Exchange On Which
Registered
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Common Stock(no par value)
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New York Stock Exchange
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Preferred Stock Purchase Rights
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New York Stock Exchange
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6.57% Notes Due
January 1, 2016
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New York Stock Exchange
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7-1/8% Notes
Due June 1, 2025
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New York Stock Exchange
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6.77% Notes Due
January 1, 2036
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New York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o 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 Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing
requirements for the past
90 days. Yes þ No o
Indicate by check mark 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 Registrants 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. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer.
þ Large accelerated
filer o Accelerated
filer o Non-accelerated
filer
Indicate by check mark whether the Registrant is a shell company
as defined in
Rule 12b-2
of the Act:
Yes o 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
Registrants most recently completed second fiscal quarter
(Common Stock): approximately $54,806,400,000
Number of shares of common stock outstanding as of
February 15, 2007: 1,134,034,234
Portions of the Registrants Proxy Statement to be filed on
or about March 5, 2007 have been incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Part I
Eli Lilly and Company (the Company or
Registrant, which may be referred to as
we, us, or our) 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
sell products in one significant business segment
pharmaceutical products. We also have an animal health business
segment, whose operations are not material to our financial
statements. We manufacture and distribute our products through
owned or leased facilities in the United States, Puerto Rico,
and 25 other countries. Our products are sold in approximately
140 countries.
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 and develop innovative
new pharmaceutical products. We direct our research efforts
primarily toward the search for products to prevent and treat
human diseases. We also conduct research to find products to
treat diseases in animals and to increase the efficiency of
animal food production.
Products
Our principal products are:
Neuroscience products, our largest-selling product
group, including:
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Zyprexa®,
for the treatment of schizophrenia, bipolar mania and
bipolar maintenance
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Cymbalta®,
for the treatment of depression and diabetic peripheral
neuropathic pain
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Strattera®,
for the treatment of attention-deficit hyperactivity
disorder in children, adolescents and adults
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Prozac®,
for the treatment of depression and, in many countries, for
bulimia and obsessive-compulsive disorder
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Permax®,
for the treatment of Parkinsons disease
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Symbyax®,
for the treatment of bipolar depression
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Yentreve®,
for the treatment of stress urinary incontinence (approved
in the European Union and several other countries outside the
United States)
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Sarafem®,
for the treatment of pre-menstrual dysphoric disorder.
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Endocrine products, including:
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Humalog®,
Humalog Mix
75/25®,
and Humalog Mix
50/50tm,
injectable human insulin analogs for the treatment of diabetes
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Humulin®,
injectable human insulin for the treatment of diabetes
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Actos®,
an oral agent for the treatment of type 2 diabetes
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Byetta®,
an injectable product for the treatment of type 2 diabetes
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Evista®,
an oral agent for the prevention and treatment of
osteoporosis in post-menopausal women
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Forteo®,
an injectable treatment for osteoporosis in postmenopausal
women and men at high risk for fracture
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Humatrope®,
an injectable for the treatment of human growth hormone
deficiency and idiopathic short stature.
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Oncology products, including:
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Gemzar®,
for the treatment of pancreatic cancer; in combination with
other agents, for treatment of metastatic breast cancer,
non-small cell lung cancer and advanced or recurrent ovarian
cancer; and in the European Union for the treatment of bladder
cancer
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Alimta®,
for the second-line treatment of non-small cell lung cancer;
and in combination with another agent, for the treatment of
malignant pleural mesothelioma.
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Animal health products, including:
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Rumensin®,
a cattle feed additive that improves feed efficiency and
growth and also controls and prevents coccidiosis
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Tylan®,
an antibiotic used to control certain diseases in cattle,
swine, and poultry
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Micotil®,
Pulmotil®,
and Pulmotil
AC®,
antibiotics used to treat respiratory disease in cattle,
swine, and poultry, respectively
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Paylean®
and
Optaflexx®,
leanness and performance enhancers for swine and cattle,
respectively
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Coban®,
Monteban®
and
Maxiban®,
anticoccidial agents for use in poultry
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Apralan®,
an antibiotic used to control enteric infections in calves and
swine
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Surmax®
(sold as
Maxus®
in some countries), a performance enhancer for swine and
poultry
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Elector®,
a parasiticide for use on cattle and premises.
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Cardiovascular agents, including:
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ReoPro®,
a treatment for use as an adjunct to percutaneous coronary
intervention (PCI), including patients undergoing
angioplasty, atherectomy or stent placement
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Xigris®,
for the treatment of adults with severe sepsis at high risk
of death.
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Anti-infectives, including:
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Vancocin®
HCl, used primarily to treat staphylococcal infections
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Ceclor®,
for the treatment of a wide range of bacterial infections.
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Other pharmaceutical products, including:
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Cialis®,
for the treatment of erectile dysfunction.
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Marketing
We sell most of our products worldwide. We adapt our marketing
methods and product emphasis in various countries to meet local
needs.
Pharmaceuticals
United States
In the United States, we distribute pharmaceutical products
principally through independent wholesale distributors, with
some sales directly to pharmacies. Our marketing policy is
designed to assure that products and relevant medical
information are immediately available to physicians, pharmacies,
hospitals, public and private payers, and appropriate health
care professionals throughout the country. Three wholesale
distributors in the United States AmerisourceBergen
Corporation, Cardinal Health, Inc., and McKesson
Corporation each accounted for between 14 and
21 percent of our worldwide consolidated net sales in 2006.
No other distributor accounted for more than 10 percent of
consolidated net sales. We also sell pharmaceutical products
directly to the United States government and other
manufacturers, but those sales are not material.
We promote our major pharmaceutical products in the United
States through sales representatives who call upon physicians,
wholesalers, hospitals, managed-care organizations, retail
pharmacists, and other health care
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professionals. We advertise in medical and drug 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 United
States and we maintain web sites with information about all our
major products. Divisions of our sales force are assigned to
therapeutic areas, such as neuroscience, diabetes, osteoporosis,
critical care, and oncology.
Large purchasers of pharmaceuticals, such as managed-care
groups, government agencies, and long-term care institutions,
account for a significant portion of total pharmaceutical
purchases in the United States. We have created special business
groups to service managed-care organizations, government and
long-term care institutions, hospital contract administrators,
and certain retail pharmacies. In response to competitive
pressures, we have entered into arrangements with a number of
these organizations providing for discounts or rebates on one or
more Lilly products.
Pharmaceuticals
Outside the United States
Outside the United States, we promote our pharmaceutical
products primarily through sales representatives. While the
products marketed vary from country to country, neuroscience
products constitute the largest single group in total sales.
Distribution patterns vary from country to country. In most
countries, we maintain our own sales organizations. In some
countries, however, we market our products through independent
distributors.
Pharmaceutical
Marketing Collaborations
Several of our significant products are marketed in
collaboration with other pharmaceutical companies:
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Cymbalta is co-promoted in the United States by Quintiles
Transnational Corp. and is co-promoted or co-marketed outside
the U.S. (except Japan) by Boehringer Ingelheim GmbH.
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Through January 2007, Cialis was sold in North America and most
of Europe by a joint venture between Lilly and
ICOS Corporation, and was sold by us alone in other
territories. On January 29, 2007, we acquired all the
outstanding common stock of ICOS. Following the acquisition,
Cialis is sold by Lilly in all territories.
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We co-promoted Actos with a unit of Takeda Chemical Industries
Ltd. in the United States until our U.S. marketing rights
expired in September 2006; however, we will receive residual
royalties on U.S. Actos sales for three years thereafter.
We continue to have exclusive and semi-exclusive marketing
rights to Actos in other countries.
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We co-promote Byetta with Amylin Pharmaceuticals, Inc. in
the United States and Puerto Rico, and we have exclusive
marketing rights in other territories.
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We have also entered into licensing arrangements under which we
have granted exclusive marketing rights to other companies in
specified countries for certain older products manufactured by
us, such as Ceclor and Vancocin.
Animal
Health Products
Our Elanco Animal Health business unit employs field salespeople
throughout the United States to market animal health products.
Elanco also has an extensive sales force outside the United
States. Elanco sells its products primarily to wholesale
distributors.
Competition
Our pharmaceutical products compete with products manufactured
by many other companies in highly competitive markets throughout
the world. Our animal health products compete on a worldwide
basis with products of animal health care companies as well as
pharmaceutical, chemical, and other companies that operate
animal health divisions or subsidiaries.
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Important competitive factors include product efficacy, safety,
and ease of use, price and demonstrated cost-effectiveness,
marketing effectiveness, service, and research and development
of new products and processes. If competitors introduce new
products, delivery systems or processes with therapeutic or cost
advantages, our products can be subject to progressive price
reductions or decreased volume of sales, or both. Most new
products that we introduce must compete with other products
already on the market or products that are later developed by
competitors. Manufacturers of generic pharmaceuticals typically
invest far less in research and development than research-based
pharmaceutical companies and therefore can price their products
significantly lower than branded products. Accordingly, when a
branded product loses its market exclusivity, it normally faces
intense price competition from generic forms of the product. In
many countries outside the United States, patent protection is
weak or nonexistent and we must compete with generic or
knockoff versions of our products. To successfully
compete for business with managed care and pharmacy benefits
management organizations, we must often demonstrate that our
products offer not only medical benefits but also cost
advantages as compared with other forms of care.
We believe our long-term competitive position depends upon our
success in discovering and developing innovative, cost-effective
products that serve unmet medical needs, together with our
ability to continuously improve the productivity of our
discovery, development, manufacturing, marketing and support
operations in a highly competitive environment. There can be no
assurance that our research and development efforts will result
in commercially successful products or that our products or
processes will not become uncompetitive from time to time as a
result of products or processes developed by our competitors.
Patents,
Trademarks, and Other Intellectual Property Rights
Overview
Intellectual property protection is, in the aggregate, material
to our ability to successfully commercialize our life sciences
innovations. We own, have applied for, or are licensed under, a
large number of patents, both in the United States and in other
countries, relating to products, product uses, formulations, and
manufacturing processes. There is no assurance that the patents
we are seeking will be granted or that the patents we have been
granted 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 from marketing
alternative products or formulations that might successfully
compete with our patented products. In addition, from time to
time, competitors or other third parties assert claims that our
activities infringe patents or other intellectual property
rights held by them. While there can be no assurance, we do not
believe that any such claims will have a material adverse effect
on our results of operations, liquidity, or financial position.
Outside the United States, the adequacy and effectiveness of
intellectual property protection for pharmaceuticals varies
widely. Under the Trade-Related Aspects of Intellectual Property
Agreement (TRIPs) administered by the World Trade Organization
(WTO), over 140 countries have now agreed to provide
non-discriminatory protection for most pharmaceutical inventions
and to assure that adequate and effective rights are available
to all patent owners. However, in many countries, this agreement
will not become fully effective for many years. It is still too
soon to assess when and how much, if at all, we will benefit
commercially from these changes.
When a product patent expires, the patent holder often loses
effective market exclusivity for the product. This can result in
a severe and rapid decline in sales of the formerly patented
product, particularly in the United States. However, in some
cases the innovator company may achieve exclusivity beyond the
expiry of the product patent through manufacturing trade
secrets; later-expiring patents on methods of use or
formulations; or data-based exclusivity that may be available
under pharmaceutical regulatory laws.
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 product patent.
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We have the following U.S. patent protection for major
marketed products:
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Alimta. We expect the U.S. compound patent for
Alimta will expire in 2016.
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Byetta. Relevant patents covering Byetta are
exclusively licensed or owned by our partner Amylin
Pharmaceuticals, Inc. A method of use patent focused on the
treatment of type 2 diabetes is expected to expire in the
U.S. in 2017. In addition, a patent covering the Byetta
formulation will expire in the U.S. in 2020.
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Cialis. For Cialis, compound and
method-of-use
patent protection exists in the U.S. that should provide
exclusivity until 2017.
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Cymbalta. For Cymbalta, we expect the
U.S. compound patent will expire in 2013. We also have a
formulation patent for Cymbalta until 2014.
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Evista. We hold a number of U.S. patents
covering Evista and its approved uses in osteoporosis prevention
and treatment that we believe should provide us exclusivity in
the United States until 2014.
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Gemzar. The Gemzar compound patent in the
U.S. expires in 2010, and a
method-of-use
patent covering treatment of neoplasms with Gemzar is in force
until 2012. We have also received an additional six months of
marketing exclusivity for Gemzar from the FDA under the terms of
the Food and Drug Administration Modernization Act of 1997, as a
result of our conducting clinical studies of Gemzar in pediatric
populations, which should provide us exclusivity until 2013.
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Humalog. The Humalog compound patent will expire in
2013.
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Strattera. For Strattera, a
method-of-use
patent in the U.S. for treating attention
deficit-hyperactivity disorder should provide exclusivity until
2016.
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Xigris. Xigris is a complex glycoprotein biologic
product that is produced through recombinant DNA technology.
Xigris is not subject to the Abbreviated New Drug Application
process under the Hatch-Waxman law as described below. In
addition, we hold patents on the DNA materials, certain uses,
manufacturing process, and the glycoprotein itself. We believe
the intellectual property protection for Xigris should provide
us marketing exclusivity in the U.S. until 2015.
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Zyprexa. The Zyprexa compound patent will expire in
2011.
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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
Challenges Under the Hatch-Waxman Act
The Drug Price Competition and Patent Term Restoration Act of
1984, commonly known as Hatch-Waxman, made a complex
set of changes to both patent and new-drug-approval laws in the
United States. Before Hatch-Waxman, no drug could be approved
without providing the Food and Drug Administration (FDA)
complete safety and efficacy studies, i.e., a complete
New Drug Application (NDA). Hatch-Waxman authorizes the FDA to
approve generic versions of innovative pharmaceuticals (other
than biological products) 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.
Absent a successful patent challenge, the FDA cannot approve an
ANDA until after the innovators 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 innovators 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. If one or more of the NDA-listed patents are
successfully
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challenged, the first filer of a Paragraph IV certification
may be entitled to a
180-day
period of market exclusivity over all other generic
manufacturers.
In recent years, generic manufacturers have used
Paragraph IV certifications extensively to challenge
patents on a wide array of innovative pharmaceuticals, and we
expect this trend to continue. We are currently in litigation
with numerous generic manufacturers arising from their
Paragraph IV certifications on Zyprexa, Evista, and Gemzar.
For more information on these, see Part II, Item 7,
Managements Discussion and Analysis
Legal and Regulatory Matters.
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 required governmental approvals
is extremely costly and can significantly delay product
introductions in a given market. Promotion, marketing,
manufacturing, and distribution of pharmaceutical and animal
health products are extensively regulated in all major world
markets. We are required to 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. 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 scientific and
technical effort, time, and expense and significant 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 products and administers
requirements covering the testing, safety, effectiveness,
manufacturing, quality control, distribution, labeling,
marketing, advertising, dissemination of information and
post-marketing surveillance of our pharmaceutical products. The
FDA, along with the U.S. Department of Agriculture (USDA),
also regulates our animal health products. The
U.S. Environmental Protection Agency also regulates some
animal health products.
Outside the United States, our products and operations are
subject to similar regulatory requirements, notably by the
European Medicines Agency (EMEA) in the European Union and the
Ministry of Health, Labor and Welfare (MHLW) in Japan.
Regulatory requirements vary from country to country.
The FDA extensively regulates all aspects of manufacturing
quality under its current Good Manufacturing Practices (cGMP)
regulations. In recent years, we have made, and we continue to
make, substantial investments of capital and operating expenses
to implement comprehensive, company-wide improvements in our
manufacturing, product and process development, and quality
operations to ensure sustained cGMP compliance. However, in the
event we fail to adhere to cGMP requirements in the future, we
could be subject to interruptions in production, fines and
penalties, and delays in new product approvals.
The marketing, promotional, and pricing practices of
pharmaceutical manufacturers, as well as the manner in which
manufacturers interact with purchasers and prescribers, are
subject to various other 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, 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, both the
FDA and many of these other agencies have increased their
enforcement activities with respect to pharmaceutical companies.
Over this period, several cases 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. Several pharmaceutical companies,
including Lilly, are currently subject to proceedings by one or
more of these agencies regarding marketing and promotional
practices. See Part II, Item 7,
Managements Discussion and Analysis
Legal and Regulatory Matters, for information about
currently pending marketing and promotional practices
investigations in which we are involved. It is possible that we
could become subject to additional administrative and legal
proceedings and actions, which could
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include claims for civil penalties (including treble damages
under the False Claims Act), criminal sanctions, and
administrative remedies, including exclusion from federal health
care programs. It is possible that an adverse outcome in such an
action could have a material adverse impact on our consolidated
results of operations, liquidity, and financial position.
Regulations
Affecting Pharmaceutical Pricing and Reimbursement
In the United States, we are required to provide rebates to
state governments on their purchases of certain of our products
under state Medicaid programs. Other cost containment measures
have been adopted or proposed by federal, state, and local
government entities that provide or pay for health care. In most
international markets, we operate in an environment of
government-mandated cost containment programs, which may include
price controls, reference pricing, discounts and rebates,
restrictions on physician prescription levels, restrictions on
reimbursement, compulsory licenses, health economic assessments,
and generic substitution.
In the U.S., implementation of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (MMA), providing a
prescription drug benefit under the Medicare program, took
effect January 1, 2006. See Part II, Item 7,
Managements Discussion and Analysis
Executive Overview Legal and Governmental
Matters for a discussion of the impact of MMA and other
federal and state healthcare cost containment measures.
International operations are also generally subject to extensive
price and market regulations, and there are many proposals for
additional cost-containment measures, including proposals that
would directly or indirectly impose additional price controls or
reduce the value of our intellectual property protection.
We cannot predict the extent to which our business may be
affected by these or other potential future legislative or
regulatory developments. However, we expect that pressures on
pharmaceutical pricing will continue to increase.
Research
and Development
Our commitment to research and development dates back more than
100 years. Our research and development activities are
responsible for the discovery and development of most of the
products we offer today. We invest heavily in research and
development because we believe it is critical to our long-term
competitiveness. At the end of 2006, we employed approximately
8,300 people in 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 $2.69 billion in 2004,
$3.03 billion in 2005, and $3.13 billion in 2006.
Our pharmaceutical research and development focuses on four
therapeutic categories: central nervous system and related
diseases; endocrine diseases, including diabetes, obesity and
musculoskeletal disorders; cancer; and cardiovascular diseases.
However, we remain opportunistic, selectively pursuing promising
leads in other therapeutic areas. We are actively engaged in
biotechnology research programs involving recombinant DNA,
therapeutic proteins and antibodies as well as genomics (the
development of therapeutics through identification of
disease-causing genes and their cellular function), biomarkers,
and targeted therapeutics. In addition to discovering and
developing new chemical entities, we look for ways to expand the
value of existing products through new uses and formulations
that can provide additional benefits to patients. We also
conduct research in animal health, including animal nutrition
and physiology, control of parasites, and veterinary medicine.
To supplement our internal efforts, we collaborate with others,
including educational institutions and research-based
pharmaceutical and biotechnology companies, and we contract with
others for the performance of research in their facilities. 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
products. We actively seek out investments in external research
and technologies that hold the promise to complement and
strengthen our own research efforts. These investments can take
many forms, including licensing arrangements, co-development and
co-marketing agreements, co-promotion arrangements, joint
ventures, and acquisitions.
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Drug development is time-consuming, expensive, and risky. On
average, only one out of many thousands of chemical compounds
discovered by researchers proves to be both medically effective
and safe enough to become an approved medicine. The process from
discovery to regulatory approval typically takes 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. Even after approval and
launch of a product, we expend considerable resources on
post-marketing surveillance and clinical studies. We believe our
investments in research, both internally and in collaboration
with others, have been rewarded by the number of new compounds
and new indications for existing compounds that we have in all
stages of development. Among our new investigational compounds
in the later stages of development are potential therapies for
diabetes and its complications, osteoporosis, cancer, and acute
coronary syndromes. Further, we are studying many other drug
candidates in the earlier stages of development, including
compounds targeting cancers, thrombotic disorders, diabetes,
obesity, Alzheimers disease, schizophrenia, depression,
pain and migraine, attention-deficit hyperactivity disorder
(ADHD), alcoholism, sleep disorders, and rheumatoid arthritis.
We are also developing new uses and formulations for many of our
currently marketed products, such as Zyprexa, Cymbalta, Gemzar,
Alimta, Cialis, Evista, Forteo, and Byetta.
Raw
Materials and Product Supply
Most of the principal materials we use in our manufacturing
operations are available from more than one source. We obtain
certain raw materials principally from only one source. In
addition, four of our significant products are manufactured by
others: Actos by Takeda; ReoPro by Centocor; Xigris by Lonza
Biologics (bulk product) and DSM, N.V. (finished product); and
Byetta by third-party suppliers to Amylin. If we were unable to
obtain certain materials from present sources, we could
experience an interruption in supply until we established new
sources or, in some cases, implemented alternative processes.
Our primary bulk manufacturing occurs at three sites in Indiana
as well as locations in Ireland, Puerto Rico, and the United
Kingdom. Finishing operations, including labeling and packaging,
take place at a number of sites throughout the world.
We seek to design and operate our manufacturing facilities and
maintain inventory in a way that will 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. However, pharmaceutical
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 and regulatory approvals. Accordingly, if
we were to experience extended plant shutdowns 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, and distribution. We have
implemented quality-assurance procedures relating to the quality
and integrity of scientific information and production processes.
Control of production processes involves rigid specifications
for 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
our 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 monitors existing
pharmaceutical and animal health manufacturing procedures and
systems in the parent company, subsidiaries and affiliates, and
third-party suppliers.
-8-
Executive
Officers of the Company
The following table sets forth certain information regarding our
executive officers. All executive officers have been employed by
the Company in 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 April 16, 2007, or on the date his or her successor is
chosen and qualified. No director or executive officer of the
Company has a family relationship with any other
director or executive officer of the Company, as that term is
defined for purposes of this disclosure requirement. There is no
understanding between any executive officer and any other person
pursuant to which the executive officer was selected.
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Name
|
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Age
|
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Offices
|
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Sidney Taurel
|
|
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58
|
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Chairman of the Board (since
January 1999) and Chief Executive Officer (since June
1998) and a Director
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John C. Lechleiter, Ph.D.
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53
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President and Chief Operating
Officer (since October 2005) and a Director
|
Steven M. Paul, M.D.
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56
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Executive Vice President, Science
and Technology (since July 2003)
|
Robert A. Armitage
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58
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Senior Vice President and General
Counsel (since January 2003)
|
Derica W. Rice
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42
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Senior Vice President and Chief
Financial Officer (since May 2006)
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Scott A. Canute
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46
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President, Manufacturing
Operations (since October 2004)
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Anthony J. Murphy, Ph.D.
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56
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Senior Vice President, Human
Resources (since June 2005)
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Gino Santini
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50
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Senior Vice President, Corporate
Strategy and Policy (since July 2004)
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Deirdre P. Connelly
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46
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President, U.S. Operations
(since June 2005)
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Lorenzo Tallarigo, M.D.
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56
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President, International
Operations (since January 2004)
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Employees
At the end of 2006, we employed approximately
41,500 people, including approximately 19,500 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 Part II, Item 8 of
this
Form 10-K,
Segment Information. That information is
incorporated here by reference.
The relative contribution of any particular product to our
consolidated net sales 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. In addition, margins
vary for our different products due to various factors,
including differences in the cost to manufacture and market the
products, the value of the products to the marketplace, and
government restrictions on pricing and reimbursement. Our major
product sales are generally not seasonal.
Financial
Information Relating to Foreign and Domestic
Operations
You can find financial information relating to foreign and
domestic operations in Part II, Item 8 of this
Form 10-K,
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 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.
-9-
In addition, changing currency values can either favorably or
unfavorably affect our financial position and results of
operations. We actively manage foreign exchange risk through
various hedging techniques including the use of foreign currency
contracts.
Available
Information on Our Web Site
We make available through our company web site, free of charge,
our company filings with the Securities and Exchange Commission
(SEC) as soon as reasonably practicable after we electronically
file them with, or furnish them to, the SEC. The reports we make
available include 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 web site link to our SEC filings is
http://investor.lilly.com/edgar.cfm.
In addition, the Corporate Governance portion of our web site
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://investor.lilly.com/corp-gov.cfm.
We will provide paper copies of our SEC filings and corporate
governance documents free of charge upon request to the
companys secretary at the address listed on the front of
this
Form 10-K.
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Item 1A:
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Risk
Factors; Cautionary Statement Regarding Forward Looking
Statements
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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.
We have made certain forward-looking statements in this
Form 10-K,
and company spokespeople may make such statements in the future
based on then-current expectations of management. Where
possible, we try to identify forward-looking statements by using
such words as expect, plan,
will, estimate, forecast,
project, believe,
anticipate, and similar expressions. Forward-looking
statements do not relate strictly to historical or current
facts. They are likely to address our growth strategy, sales of
current and anticipated products, financial results, the results
of our research and development programs, the status of product
approvals, and the outcome of contingencies such as litigation
and investigations. All forward-looking statements made by us
are subject to risks and uncertainties, including those
summarized below.
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We face intense competition. We compete with 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 sales can be adversely affected by the
introduction by competitors of branded products that are
perceived as superior by the marketplace, by generic versions of
our branded products, and by generic versions of other products
in the same therapeutic class as our branded products. See
Item 1, Business Competition, for
more details.
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Our long-term success depends on intellectual property
protection. 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, capital, and other expenditures
required to bring new drugs to the market. We currently expect
no major patent expirations in this decade, but several major
products will lose intellectual property protection in the first
half of the next decade.
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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 patents; as a result, we expect that our
U.S. patents on major products will be routinely
challenged, and there can be no assurance that our patents will
be upheld. See Item 1, Business Patents,
Trademarks, and Other Intellectual Property Protection,
for more details. 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
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-10-
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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.
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Our business is subject to increasing government price
controls and other health care cost containment
measures. Government health care cost-containment
measures can significantly affect our sales and profitability.
In many countries outside the United States, government agencies
strictly control, directly or indirectly, the prices at which
our products are sold. In the United States, we are subject to
substantial pricing pressures from state Medicaid programs and
private insurance programs, including those operating under the
Medicare pharmaceutical benefit effective January 2006. We
expect pricing pressures to increase. See Item I,
Business Regulations Affecting Pharmaceutical
Pricing and Reimbursement for more details.
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Pharmaceutical research and development is costly and
uncertain. There are many difficulties and uncertainties
inherent in new product research and development and the
introduction of new products. There is a high rate of failure
inherent in the research to develop new drugs to treat diseases.
To bring a pharmaceutical compound from the discovery phase to
market may take a decade or more and failure can occur at any
point in the process, including later in the process after
significant funds have been invested. As a result, there is a
significant risk that 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, limited scope of approved uses, difficulty or
excessive costs to manufacture, or infringement of the patents
or intellectual property rights of others. Delays and
uncertainties in the FDA approval process and the approval
processes in other countries 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.
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Pharmaceutical products can develop unexpected safety or
efficacy concerns. Unexpected safety or efficacy
concerns can arise with respect to marketed products, whether or
not scientifically justified, leading to product recalls,
withdrawals, or declining sales, as well as product liability
claims.
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We depend on key products for most of our revenues, cash
flows, and earnings. Zyprexa sales of
$4.417 billion represented 28 percent of our revenues
in 2006. Four other products Gemzar, Cymbalta,
Humalog, and Evista each contributed more than
$1 billion in revenues in 2006. If these or any of our
other key products were to become subject to a problem such as
loss of patent protection, materially adverse changes in
prescription growth rates, unexpected side effects, regulatory
proceedings, material product liability litigation, publicity
affecting doctor or patient confidence, or pressure from
competitive products, the adverse impact on our revenues, cash
flows and earnings could be significant.
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Regulatory compliance failures could be damaging to the
company. The marketing, promotional, and pricing
practices of 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 and state governmental
authorities and private payors and consumers. These claims could
result in substantial expense to the company. In particular, See
Item 7, Managements Discussion and
Analysis Legal and Regulatory Matters, for the
discussions of the U.S. sales and marketing practices
investigations. In addition, regulatory issues concerning
compliance with current Good Manufacturing Practice (cGMP)
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 cGMP issues. See Item 1,
Business Regulation of our Operations,
for more details.
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We face many product liability claims today, and future
claims will be largely self-insured. We are subject to
a substantial number of product liability claims involving
primarily Zyprexa, DES, and thimerosal, and because of the
nature of pharmaceutical products, it is possible that we could
become subject to large numbers of product liability claims for
other products in the future. See Item 7,
Managements Discussion and Analysis
Legal and Regulatory Matters and Item 3, Legal
Proceedings, for more information on our current product
liability litigation. In the past few years, we have experienced
difficulties in obtaining product liability insurance due to a
very restrictive insurance market. Therefore, for substantially
all our
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-11-
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currently marketed products we have been and expect that we will
continue to be largely self-insured for future product liability
losses. In addition, there is no assurance that we will be able
to fully collect from our insurance carriers on past claims.
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Manufacturing difficulties could lead to product supply
problems. Pharmaceutical manufacturing is complex and
highly regulated. Manufacturing difficulties can result in
product shortages, leading to lost sales. See Item 1,
Business Raw Materials and Product
Supply, for more details.
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We face other risks to our business and operating
results. Our business is subject to a number of other
risks and uncertainties, including:
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Economic factors over which we have no control, including
changes in inflation, interest rates and foreign currency
exchange rates, and overall economic conditions in volatile
areas can affect our results of operations.
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Changes in tax laws, including laws related to the remittance of
foreign earnings or investments in foreign countries with
favorable tax rates, and settlements of federal, state, and
foreign tax audits, can affect our net income.
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Changes in accounting standards promulgated by the Financial
Accounting Standards Board, the Securities and Exchange
Commission, and the Emerging Issues Task Force can affect
reported results.
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Our results can also be affected by internal factors, such as
changes in business strategies and the impact of restructurings,
asset impairments, technology acquisition and disposition
transactions, and business combinations.
|
We undertake no duty to update forward-looking statements.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
Our principal domestic and international executive offices are
located in Indianapolis. At December 31, 2006, we owned 13
production and distribution facilities in the United States and
Puerto Rico. Together with the corporate administrative offices,
these facilities contain an aggregate of approximately
11.7 million square feet of floor area dedicated to
production, distribution, and administration. Major production
sites include Indianapolis; Clinton and Lafayette, Indiana; and
Carolina and Guayama, Puerto Rico.
We own production and distribution facilities in 15 countries
outside the United States and Puerto Rico, containing an
aggregate of approximately 3.9 million square feet of floor
space. Major production sites include facilities in France,
Ireland, Spain, Italy, Brazil, Mexico, and the United Kingdom.
We lease production and warehouse facilities in Puerto Rico and
several countries outside the United States.
Our research and development facilities in the United States
consist of approximately 4.9 million square feet and are
located primarily in Indianapolis and Greenfield, Indiana. Our
major research and development facilities abroad are located in
United Kingdom, Canada, Singapore, Spain, Belgium, and Germany,
and contain an aggregate of approximately 700,000 square
feet. The sites in Belgium and Germany, containing an aggregate
of approximately 375,000 square feet, are scheduled to
close in 2007.
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.
-12-
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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 Part II, Item 7,
Managements Discussion and Analysis
Legal and Regulatory Matters. While it is not possible to
predict or determine the outcome of the legal actions,
investigations and proceedings brought against us, we believe
that, except as otherwise specifically noted in Part II,
Item 7, the resolution of all such matters will not have a
material adverse effect on our consolidated financial position
or liquidity, but could possibly be material to our consolidated
results of operations in any one accounting period.
Legal
Proceedings Described in Managements Discussion and
Analysis
See Part II, Item 7, Managements
Discussion and Analysis Legal and Regulatory
Matters, for information on various legal proceedings,
including but not limited to:
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The U.S. patent litigation involving Zyprexa, Evista,
Gemzar, and Xigris
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The civil investigation by the U.S. Attorney for the
Eastern District of Pennsylvania relating to our
U.S. sales, marketing, and promotional practices
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The Zyprexa product liability and related litigation, including
claims brought on behalf of healthcare payors
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The suits we have filed against several of our product liability
insurance carriers with respect to our coverage for the Zyprexa
product liability claims
|
That information is incorporated into this Item by reference.
Other
Patent Litigation
During 2005, two generic pharmaceutical manufacturers, Apotex
Inc. (Apotex) and Novopharm Ltd. (Novopharm) (a wholly-owned
subsidiary of Teva), challenged the validity of our Zyprexa
compound and
method-of-use
patent (expiring in 2011) in Canada. The generic companies
allege that our patent is invalid, obtained by fraud, or
irrelevant. We currently anticipate a decision from the Canadian
Federal Patent Court by April 2007 in the Apotex case and by
September 2007 in the Novopharm case. In May 2004,
Egis-Gyogyszergyar, a generic pharmaceutical manufacturer,
challenged the validity of our Zyprexa compound and
method-of-use
patents (expiring in 2011) in Germany. We currently
anticipate a decision from the German Patent Court in the second
or third quarter of 2007. We have received challenges to Zyprexa
patents in a number of other countries as well, including
several Eastern European countries. We are vigorously contesting
the various legal challenges to our Zyprexa patents. We cannot
predict or determine the outcome of this litigation.
In October 2002, Pfizer Inc. filed a lawsuit in the United
States District Court in Delaware against us, Lilly ICOS LLC,
and ICOS Corporation alleging that the proposed marketing
of Cialis for erectile dysfunction would infringe its newly
issued
method-of-use
patent. In September 2003, the U.S. Patent and Trademark
Office ordered that Pfizers patent be reexamined and in
March 2006, the PTO finally rejected the broad
method-of-use
claim. Pfizer is appealing that decision. Meanwhile, the
Delaware suit has been stayed pending the final outcome of the
reexamination. In the U.K., European Union and Australia, this
same patent has been held finally invalid and Pfizer has revoked
this patent in New Zealand and South Africa. In Brazil, Pfizer
is appealing a lower court decision holding this patent invalid.
In Mexico and Canada infringement and nullification actions are
still pending. We intend to vigorously defend this litigation
and expect to prevail. However, it is not possible to predict or
determine the outcome of this litigation.
Other
Product Liability Litigation
We are currently a defendant in a variety of product liability
lawsuits in the United States involving primarily Zyprexa,
diethylstilbestrol (DES) and thimerosal.
-13-
In approximately 85 U.S. actions involving approximately
140 claimants, plaintiffs seek to recover damages on behalf of
children or grandchildren of women who were prescribed DES
during pregnancy.
We have been named as a defendant in approximately 355 actions
in the U.S., involving approximately 930 claimants, brought in
various state courts and federal district courts on behalf of
children with autism or other neurological disorders who
received childhood vaccines (manufactured by other companies)
that contained thimerosal, a generic preservative used in
certain vaccines in the U.S. beginning in the 1930s. We
purchased patents and conducted research pertaining to
thimerosal in the 1920s. We have been named in the suits even
though we discontinued manufacturing the raw material in 1974
and discontinued selling it in the United States to vaccine
manufacturers in 1992. The lawsuits typically name the vaccine
manufacturers as well as Lilly and other distributors of
thimerosal, and allege that the childrens exposure to
thimerosal-containing vaccines caused their autism or other
neurological disorders. We strongly deny any liability in these
cases. There is no credible scientific evidence establishing a
causal relationship between thimerosal-containing vaccines and
autism or other neurological disorders. In addition, we believe
the majority of the cases should not be prosecuted in the courts
in which they have been brought because the underlying claims
are subject to the National Childhood Vaccine Injury Act of
1986. Implemented in 1988, the Act established a mandatory,
federally administered no-fault claims process for individuals
who allege that they were harmed by the administration of
childhood vaccines. Under the Act, claims must first be brought
before the U.S. Court of Claims for an award determination
under the compensation guidelines established pursuant to the
Act. Claimants who are unsatisfied with their awards under the
Act may reject the award and seek traditional judicial remedies.
Other
Marketing Practices Investigations
In 2002, 2003, and 2004, we received grand jury subpoenas from
the Office of Consumer Litigation, Department of Justice,
related to our marketing and promotional practices and physician
communications with respect to Evista. In the fourth quarter of
2004 we recorded a provision for $36.0 million in
connection with the matter. In December 2005, we reached a
settlement of the matter with the government, which was
subsequently approved by the U.S. District Court for the
Southern District of Indiana in February 2006. As part of the
settlement, we agreed to plead guilty to one misdemeanor
violation of the Food, Drug, and Cosmetic Act. The plea is for
the off-label promotion of Evista during 1998. The government
did not charge the company with any unlawful intent, nor do we
acknowledge any such intent. In connection with the overall
settlement, we paid a total of $36.0 million. In addition,
as part of the settlement, a civil consent decree requires us to
continue to have a compliance program and to undertake a set of
defined corporate integrity obligations related to Evista for
five years.
In August 2003, we received notice that the staff of the SEC is
conducting an investigation into the compliance by Polish
subsidiaries of certain pharmaceutical companies, including
Lilly, with the U.S. Foreign Corrupt Practices Act of 1977.
The staff has issued subpoenas to us requesting production of
documents related to the investigation. We are cooperating with
the SEC in responding to the investigation.
Other
Matters
In October 2005, we received a subpoena from the
U.S. Attorneys office for the District of
Massachusetts for the production of documents relating to our
business relationship with a long-term care pharmacy
organization concerning Actos, Humalog, Humulin, and Zyprexa. We
are cooperating in responding to the subpoena.
Between 2003 and 2005, various counties in New York sued us and
many other pharmaceutical manufacturers, claiming in general
that as a result of alleged improprieties by the manufacturers
in the calculation and reporting of average wholesale prices for
purposes of Medicaid reimbursement, the counties overpaid their
portion of the cost of pharmaceuticals. The suits seek monetary
and other relief, including civil penalties and treble damages.
A similar suit was filed against us and many other manufacturers
by the state of Mississippi. The suits have been transferred to
the U.S. District Court for the District of Massachusetts
for pretrial proceedings and are in the earliest stages
-14-
During 2004 we, along with several other pharmaceutical
companies, were named in one consolidated case in Minnesota
federal court brought on behalf of consumers alleging that the
conduct of pharmaceutical companies in preventing commercial
importation of prescription drugs from outside the United States
violated antitrust laws and one case in California state court
brought by several pharmacies in which plaintiffs claims
are less specifically stated, but are substantially similar to
the claims asserted in Minnesota. Both cases seek restitution
for alleged overpayments for pharmaceuticals and an injunction
against the allegedly violative conduct. The federal district
court in the Minnesota case has dismissed the federal claims,
ruling that the state claims must be brought in separate state
court actions. The Eighth Circuit Court of Appeals has affirmed
the district courts decision. In the California case,
summary judgment has been granted to Lilly and the other
defendants. The plaintiffs have appealed that decision.
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 and patent suits, of a character we
regard as normal to our business.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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During the fourth quarter of 2006, no matters were submitted to
a vote of security holders.
Part II
|
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Item 5.
|
Market for
the Registrants 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
Part II, Item 8 under Selected Quarterly Data
(unaudited) and Selected Financial 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, 2006:
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Total Number of Shares
|
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Approximate Dollar Value
|
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|
|
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Purchased as Part of
|
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of Shares that May Yet Be
|
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Total Number of
|
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Average Price Paid
|
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Publicly Announced
|
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Purchased Under the
|
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Shares Purchased
|
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per Share
|
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Plans or Programs
|
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Plans or Programs
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Period
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(a)
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(b)
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(c)
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(d)
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(in thousands)
|
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(Dollars in millions)
|
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October 2006
|
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30
|
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$57.50
|
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$419.2
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November 2006
|
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1
|
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56.98
|
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419.2
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December 2006
|
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419.2
|
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Total
|
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31
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The amounts presented in columns (a) and (b) above
represent purchases of common stock related to employee stock
option exercises. The amounts presented in columns (c) and
(d) in the above table represent activity related to our
$3.00 billion share repurchase program announced in March
2000. As of December 31, 2006, we have purchased
$2.58 billion related to this program.
-15-
|
|
Item 6.
|
Selected
Financial Data
|
You can find selected financial data for each of our five most
recent fiscal years in Part II, Item 8 under
Selected Financial Data (unaudited). That
information is incorporated here by reference.
|
|
Item 7.
|
Managements
Discussion and Analysis of Results of Operations and Financial
Condition
|
EXECUTIVE
OVERVIEW
This section provides an overview of our financial results,
significant business development, recent product and late-stage
pipeline developments, and legal and governmental matters
affecting our company and the pharmaceutical industry.
Financial Results
We achieved worldwide sales growth of 7 percent, primarily
as a result of strong growth of our newer products. We increased
our investment in marketing expenses in support of key products,
primarily
Cymbalta®
and diabetes care products, and continued our commitment to
research and development, investing approximately
20 percent of our sales during 2006. Our results also
benefited from continued growth in profitability of the Lilly
ICOS joint venture as well as cost-containment and productivity
initiatives. Net income was $2.66 billion, or
$2.45 per share, in 2006 as compared with
$1.98 billion, or $1.81 per share, in 2005,
representing an increase in net income and earnings per share of
35 percent. Net income comparisons between 2006 and 2005
are affected by the impact of the following significant items
that are reflected in our financial results (see
Notes 2, 4, and 13 to the consolidated financial
statements for additional information):
2006
|
|
|
We recognized asset impairments, restructuring and other special
charges of $450.3 million (pretax) in the fourth quarter,
which decreased earnings per share by $.31 (Note 4).
|
|
|
In the fourth quarter, we incurred a charge related to
Zyprexa®
product liability litigation matters of $494.9 million
(pretax), or $.42 per share (Notes 4 and 13).
|
2005
|
|
|
We incurred a charge related to product liability litigation
matters, primarily related to Zyprexa, of $1.07 billion
(pretax), which decreased earnings per share by $.90 in the
second quarter of 2005 (Notes 4 and 13).
|
|
|
We recognized asset impairments and other special charges of
$171.9 million (pretax) in the fourth quarter, which
decreased earnings per share by $.14 (Note 4).
|
|
|
We adopted Financial Accounting Standards Board (FASB)
Interpretation (FIN) 47, Accounting for Conditional Asset
Retirement Obligations, an interpretation of FASB Statement
No. 143, in the fourth quarter of 2005. The adoption of
FIN 47 resulted in an adjustment for the cumulative effect
of a change in accounting principle of $22.0 million
(after-tax), which decreased earnings per share by $.02
(Note 2).
|
-16-
Business
Development, and Recent Product and Late-Stage Pipeline
Developments
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 compounds currently in
development by other biotechnology or pharmaceutical companies.
We have achieved a number of successes with recent product
launches and late-stage pipeline developments, including:
|
|
|
On January 29, 2007, we completed the acquisition of
ICOS Corporation for approximately $2.3 billion in
cash. The acquisition brings the full value of
Cialis®
to us and enables us to realize operational efficiencies in the
further development, marketing and selling of this product. The
allocation of the purchase price has not yet been completed;
however, we anticipate that the one-time charge to earnings for
acquired in-process research and development (IPR&D) will
approximate $300 million (no tax benefit) (Note 3).
|
|
|
In November 2006, we received European Commission authorization
to market
Byetta®
as a treatment for type 2 diabetes with our partner, Amylin
Pharmaceuticals, Inc. (Amylin). In addition, in December 2006,
we received approval from the U.S. Food and Drug
Administration (FDA) for Byetta as an add-on therapy to improve
blood sugar control in people with type 2 diabetes who have not
achieved adequate control on a thiazolidinedione (TZD).
|
|
|
We submitted a New Drug Application (NDA) to the FDA for
Evista®
for the reduction in risk of invasive breast cancer in
postmenopausal women with osteoporosis and postmenopausal women
at high risk for breast cancer.
|
|
|
We initiated a Phase III clinical trial to study
enzastaurin as a maintenance therapy to prevent relapse in
patients with non-Hodgkins lymphoma. Additionally, we
closed the enrollment of a Phase III study of enzastaurin
for the treatment of recurrent glioblastoma after an external
data monitoring committee determined the study would likely not
meet its primary efficacy endpoint.
|
-17-
|
|
|
In July 2006, we received FDA approval for
Gemzar®for
the treatment of recurrent ovarian cancer in combination with
carboplatin. Additionally, the United Kingdoms National
Institute for Health and Clinical Excellence has recommended
Gemzar coverage under the UKs National Health Service for
the use of Gemzar, in combination with paclitaxel, within a
limited population of breast cancer patients.
|
|
|
In September 2006, we received an approvable letter from the FDA
for
Arxxanttm
for the treatment of diabetic retinopathy. The FDA has indicated
that it will require efficacy data from an additional
Phase III study before it will consider approving the
molecule. We decided to appeal the FDAs decision and began
discussions with the agency. There can be no assurance that our
appeal will be successful.
|
|
|
We submitted a supplemental NDA to the FDA for Cymbalta for the
treatment of generalized anxiety disorder. We are also
conducting Phase III studies on Cymbalta for the treatment
of fibromyalgia, a chronic, often debilitating pain disorder.
|
|
|
In January 2007, we licensed from OSI Pharmaceuticals, Inc.
(OSI), its glucokinase activator (GKA) program for the treatment
of type 2 diabetes, including the lead compound PSN010. We
received an exclusive license to develop and market any
compounds derived from the GKA program. Under the terms of the
agreement, we paid an upfront fee of $25.0 million (pretax)
(Note 3).
|
|
|
In January 2007, along with our partner, Daiichi Sankyo, we
announced that we completed enrollment in the TRITON study, a
Phase III
head-to-head
study comparing prasugrel to clopidogrel
(Plavix®)
in patients with acute coronary syndrome undergoing percutaneous
coronary intervention (PCI).
|
Legal and
Governmental Matters
In December 2006, the U.S. Court of Appeals for the Federal
Circuit affirmed a district court ruling upholding the validity
of our Zyprexa patent. We are very confident we will maintain
our U.S. patent protection on Zyprexa until 2011.
We have reached agreements with claimants attorneys
involved in U.S. Zyprexa product liability litigation to
settle a total of approximately 28,500 claims against us
relating to the medication. Approximately 1,300 claims remain.
As a result of our product liability exposures, the substantial
majority of which were related to
-18-
Zyprexa, we recorded net pretax charges of $1.07 billion in
the second quarter of 2005 and $494.9 million in the fourth
quarter of 2006.
In March 2004, we were notified by the U.S. Attorneys
office for the Eastern District of Pennsylvania that it had
commenced a civil investigation relating to our
U.S. marketing and promotional practices.
In the United States, implementation of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003
(MMA), which provides a prescription drug benefit under the
Medicare program, took effect January 1, 2006. In 2006, we
experienced a one-time sales benefit as a result of MMA;
however, in the long term there is additional risk of increased
pricing pressures. While the MMA prohibits the Secretary of
Health and Human Services (HHS) from directly negotiating
prescription drug prices with manufacturers, legislation was
passed in early 2007 by the U.S. House of Representatives
that would require HHS to negotiate directly with pharmaceutical
manufacturers. This legislation will be considered by the
U.S. Senate. MMA retains the authority of the Secretary of
HHS to prohibit the importation of prescription drugs.
Legislation to allow for broad-scale importation has been
presented to both the House of Representatives and the Senate.
The proposed legislation could remove that authority and allow
for the importation of products into the U.S. If adopted,
such legislation would likely have a negative effect on our
U.S. sales. Current importation language allows for
medication to be carried in person from Canada to the U.S. and
does not authorize mail or Internet importation. Further, the
language disallows certain medications including injectibles. We
believe the expanded prescription drug coverage for seniors
under the MMA has further alleviated the perceived need for a
federal importation scheme. However, notwithstanding the federal
law that continues to prohibit all but the very narrow drug
importation detailed above, several states have implemented
importation schemes for their citizens, usually involving a
website that links patients to selected Canadian pharmacies.
The successful implementation of the MMA may relieve some state
budget pressures but is unlikely to result in reduced pricing
pressures at the state level. A majority of states have
implemented supplemental rebates and restricted formularies in
their Medicaid programs, and these programs are expected to
continue in the
post-MMA
environment. Moreover, under the 2005 federal Deficit Reduction
Act, states will have greater flexibility to impose new
cost-sharing requirements on Medicaid beneficiaries for
non-preferred prescription drugs that will result in certain
beneficiaries bearing more of the cost. Several states also are
attempting to extend discounted Medicaid prices to non-Medicaid
patients. As a result, we expect pressures on pharmaceutical
pricing to continue.
As it relates to the Medicare program, Lilly has implemented the
LillyMedicareAnswers program. Lilly- MedicareAnswers is a new
patient assistance program that provides certain eligible
Medicare Part D enrolled patients access to a one
months-supply of select medications for a $25
administrative fee per prescription. Medications available via
the program include Zyprexa,
Forteo®,
and
Humatrope®.
International operations also are generally subject to extensive
price and market regulations, and there are many proposals for
additional cost-containment measures, including proposals that
would directly or indirectly impose additional price controls or
reduce the value of our intellectual property protection.
OPERATING
RESULTS 2006
Sales
Our worldwide sales for 2006 increased 7 percent, to
$15.69 billion, driven primarily by sales growth of
Cymbalta, Forteo, Byetta, Zyprexa, and
Alimta®.
Worldwide sales volume increased 3 percent and selling
prices increased sales by 4 percent. Foreign exchange rates
did not impact our overall sales growth. Sales in the
U.S. increased 10 percent, to $8.60 billion,
driven primarily by increased sales of Cymbalta, diabetes care
products, Forteo, and Zyprexa. U.S. growth comparisons
benefited from an estimated $170 million of wholesaler
destocking that had occurred in 2005 as a result of
restructuring our arrangements with our U.S. wholesalers in
the first quarter of 2005. Additionally, we experienced a
one-time sales benefit resulting from a shift of certain
low-income patients from Medicaid to Medicare and increased
access to medical coverage by certain patients previously
covered under our LillyAnswers program following the
implementation
-19-
of MMA in 2006. This contributed part of the increases in
U.S. net effective sales prices of 9 percent. Sales
outside the U.S. increased 4 percent, to
$7.09 billion, driven by growth of Cymbalta, Alimta, and
Zyprexa.
Zyprexa, our top-selling product, is a treatment for
schizophrenia, bipolar mania, and bipolar maintenance. Zyprexa
sales in the U.S. increased 4 percent in 2006, driven
by higher prices, offset in part by lower demand. The increase
in net effective selling prices was partially due to the
transition of certain low-income patients from Medicaid to
Medicare. Sales outside the U.S. increased 4 percent,
driven primarily by increased demand, offset in part by
declining prices.
The following table summarizes our net sales activity in 2006
compared with 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Percent
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
Change
|
|
Product
|
|
U.S.1
|
|
|
Outside U.S.
|
|
|
Total
|
|
|
Total
|
|
|
from 2005
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zyprexa
|
|
$
|
2,106.2
|
|
|
$
|
2,257.4
|
|
|
$
|
4,363.6
|
|
|
|
$ 4,202.3
|
|
|
|
4
|
|
Gemzar
|
|
|
609.8
|
|
|
|
798.3
|
|
|
|
1,408.1
|
|
|
|
1,334.5
|
|
|
|
6
|
|
Cymbalta
|
|
|
1,158.7
|
|
|
|
157.7
|
|
|
|
1,316.4
|
|
|
|
679.7
|
|
|
|
94
|
|
Humalog®
|
|
|
811.0
|
|
|
|
488.5
|
|
|
|
1,299.5
|
|
|
|
1,197.7
|
|
|
|
9
|
|
Evista
|
|
|
664.0
|
|
|
|
381.3
|
|
|
|
1,045.3
|
|
|
|
1,036.1
|
|
|
|
1
|
|
Humulin®
|
|
|
367.9
|
|
|
|
557.4
|
|
|
|
925.3
|
|
|
|
1,004.7
|
|
|
|
(8
|
)
|
Animal health products
|
|
|
405.9
|
|
|
|
469.6
|
|
|
|
875.5
|
|
|
|
863.7
|
|
|
|
1
|
|
Alimta
|
|
|
350.1
|
|
|
|
261.7
|
|
|
|
611.8
|
|
|
|
463.2
|
|
|
|
32
|
|
Forteo
|
|
|
416.2
|
|
|
|
178.1
|
|
|
|
594.3
|
|
|
|
389.3
|
|
|
|
53
|
|
Strattera®
|
|
|
509.2
|
|
|
|
69.8
|
|
|
|
579.0
|
|
|
|
552.1
|
|
|
|
5
|
|
Actos®
|
|
|
279.1
|
|
|
|
169.4
|
|
|
|
448.5
|
|
|
|
493.0
|
|
|
|
(9
|
)
|
Humatrope
|
|
|
202.3
|
|
|
|
213.3
|
|
|
|
415.6
|
|
|
|
414.4
|
|
|
|
0
|
|
Fluoxetine products
|
|
|
152.8
|
|
|
|
162.3
|
|
|
|
315.1
|
|
|
|
453.4
|
|
|
|
(31
|
)
|
ReoPro®
|
|
|
110.4
|
|
|
|
170.0
|
|
|
|
280.4
|
|
|
|
296.7
|
|
|
|
(5
|
)
|
Anti-infectives
|
|
|
25.1
|
|
|
|
249.5
|
|
|
|
274.6
|
|
|
|
443.9
|
|
|
|
(38
|
)
|
Byetta
|
|
|
219.0
|
|
|
|
|
|
|
|
219.0
|
|
|
|
39.6
|
|
|
|
NM
|
|
Cialis2
|
|
|
3.7
|
|
|
|
212.1
|
|
|
|
215.8
|
|
|
|
169.9
|
|
|
|
27
|
|
Xigris®
|
|
|
103.4
|
|
|
|
88.8
|
|
|
|
192.2
|
|
|
|
214.6
|
|
|
|
(10
|
)
|
Other pharmaceutical products
|
|
|
104.4
|
|
|
|
206.6
|
|
|
|
311.0
|
|
|
|
396.5
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
8,599.2
|
|
|
$
|
7,091.8
|
|
|
$
|
15,691.0
|
|
|
|
$14,645.3
|
|
|
|
7
|
|
|
|
|
|
|
|
NM
Not meaningful
|
|
|
1 |
|
U.S. sales include sales in
Puerto Rico.
|
|
2 |
|
Cialis had worldwide 2006 sales of
$971.0 million, representing an increase of 30 percent
compared with 2005. The sales shown in the table above represent
results only in the territories in which we market Cialis
exclusively. The remaining sales relate to the joint-venture
territories of Lilly ICOS LLC (North America, excluding Puerto
Rico, and Europe). Our share of the joint-venture territory
sales, net of expenses and income taxes, is reported in other
income net in our consolidated statements of income.
|
-20-
Diabetes care products, composed primarily of Humalog, our
insulin analog; Humulin, a biosynthetic human insulin; Actos, an
oral agent for the treatment of type 2 diabetes; and Byetta, the
first in a new class of medicines known as incretin mimetics for
type 2 diabetes that we market with Amylin, had aggregate
worldwide revenues of $2.96 billion in 2006, an increase of
6 percent. Diabetes care revenues in the
U.S. increased 8 percent, to $1.73 billion.
Diabetes care revenues outside the U.S. increased
2 percent, to $1.23 billion. Results from our primary
diabetes care products are as follows:
|
|
|
Humalog sales increased 10 percent in the U.S., due
primarily to higher prices and increased 7 percent outside
the U.S., due primarily to increased volume, offset partially by
lower prices.
|
|
|
Humulin sales in the U.S. decreased 10 percent due
primarily to decreased volume, offset partially by increased
selling prices. Outside the U.S., Humulin sales decreased
6 percent due to decreases in demand and selling prices.
|
|
|
Actos revenues in the U.S., the majority of which represent
service revenues from a copromotion agreement in the
U.S. with Takeda Pharmaceuticals North America (Takeda),
decreased 22 percent in 2006. Actos is manufactured by
Takeda Chemical Industries, Ltd., and sold in the U.S. by
Takeda. Our U.S. marketing rights with respect to Actos
expired in September 2006; however, we will continue receiving
royalties from Takeda. As a result, our revenues from Actos will
decline each year through September 2009. Our arrangement
outside the U.S. continues. Sales outside the
U.S. increased 23 percent, due primarily to increased
volume in addition to a favorable impact of foreign exchange
rates, offset in part by lower prices.
|
|
|
Sales of Byetta, launched in the U.S. in June 2005, were
$430.2 million for 2006. We report as revenue our
50 percent share of Byettas gross margin and our
sales of Byetta pen delivery devices to Amylin.
|
Sales of Gemzar, a product approved to fight various cancers,
increased 4 percent in the U.S., due primarily to higher
prices as well as the reductions in U.S. wholesaler
inventory levels in 2005. Gemzar sales increased 7 percent
outside the U.S., driven by strong volume.
Sales of Cymbalta, a product for the treatment of major
depressive disorder and diabetic peripheral neuropathic pain,
increased 82 percent in the U.S., due to strong demand.
Sales of Cymbalta outside the U.S. reflect international
launches. Worldwide sales exceeded $1 billion in 2006, the
products second full year on the market.
-21-
Sales of Evista, a product for the prevention and treatment of
osteoporosis, increased 2 percent in the U.S. due to
higher prices, offset partially by a decline in demand. Outside
the U.S., sales of Evista decreased 1 percent, driven by
lower prices, offset by an increase in demand.
Sales of Alimta, a treatment for malignant pleural mesothelioma
and second-line treatment for non-smallcell lung cancer (NSCLC),
increased 18 percent and 57 percent in the U.S. and
outside the U.S., respectively, due primarily to increased
demand.
Sales of Forteo, a treatment for severe osteoporosis, increased
57 percent in the U.S. In addition to increased
demand, U.S. sales significantly benefited from
patients access to medical coverage through the Medicare
Part D program and from decreased utilization of our
U.S. patient assistance program, LillyAnswers. Sales
outside the U.S. increased 43 percent, reflecting a
strong demand.
Sales of Strattera, a treatment for attention-deficit
hyperactivity disorder in children, adolescents, and adults,
increased 2 percent in the U.S. due to higher prices
as well as the reductions in U.S. wholesaler inventory
levels in 2005, offset by a decline in demand. Sales outside the
U.S. increased 31 percent due primarily to increased
demand in addition to a modest favorable impact of foreign
exchange rates, offset partially by lower prices.
Total product sales of Cialis, an erectile dysfunction
treatment, increased 38 percent in the U.S. and
24 percent outside the U.S. Worldwide Cialis sales
growth reflects the impact of market share gains, market growth,
and price increases during 2006. Cialis sales in our territories
are reported in net sales, while our 50 percent share of
the joint-venture net income is reported in other
income net. All sales of Cialis subsequent to the
ICOS acquisition in 2007 will be included in our revenue.
Animal health product sales in the U.S. increased
10 percent, due primarily to increased demand led by
Rumensin®
and
Tylan®.
Sales outside the U.S. decreased 5 percent, driven
primarily by the decrease in the sales of
Surmax®
as a result of the European Unions growth promotion use
ban on the product, effective January 1, 2006.
Gross Margin, Costs, and Expenses
The 2006 gross margin increased to 77.4 percent of sales
compared with 76.3 percent for 2005. This increase was
primarily due to increased product prices and increased
production volume, partially offset by higher manufacturing
expenses.
-22-
Operating expenses (the aggregate of research and development
and marketing and administrative expenses) increased
7 percent in 2006. Investment in research and development
increased 3 percent, to $3.13 billion, primarily due
to increases in discovery research and clinical trial costs. We
continued to be a leader in our industry peer group by investing
approximately 20 percent of our sales into research and
development during 2006. Marketing and administrative expenses
increased 9 percent in 2006, to $4.89 billion. This
increase was largely attributable to increased marketing
expenses in support of key products, primarily Cymbalta and the
diabetes care franchise, and an increase in litigation-related
costs.
Other income net decreased $76.4 million, to
$237.8 million, and consists of interest expense, interest
income, the after-tax operating results of the Lilly ICOS joint
venture, and all other miscellaneous income and expense items.
|
|
|
Interest expense for 2006 increased $132.9 million, to
$238.1 million. This increase is a result of higher
interest rates and less capitalized interest due to the
completion in late 2005 of certain manufacturing facilities.
|
|
|
Interest income for 2006 increased $49.8 million, to
$261.9 million, due to higher short-term interest rates.
|
|
|
The Lilly ICOS joint-venture income was $96.3 million in
2006 as compared to $11.1 million in 2005. The increase was
due to increased Cialis sales and decreased selling and
marketing expenses.
|
|
|
Net other miscellaneous income items decreased
$78.5 million to $117.7 million, primarily as a result
of less income related to the outlicensing of legacy products
and partnered compounds in development.
|
We incurred tax expense of $755.3 million in 2006,
resulting in an effective tax rate of 22.1 percent,
compared with 26.3 percent for 2005. The effective tax
rates for 2006 and 2005 were affected primarily by the product
liability charges of $494.9 million and $1.07 billion,
respectively. The tax expense of these charges was less than our
effective tax rate, as the tax expense was calculated based upon
existing tax laws in the countries in which we reasonably expect
to deduct the charge. See Note 10 to the consolidated
financial statements for additional information.
-23-
OPERATING
RESULTS 2005
Financial Results
We achieved worldwide sales growth of 6 percent, due in
part to the launch in 2004 of five new products as well as six
new indications or formulations for expanded use of new and
existing products in key markets. In addition, we launched one
new product in the U.S. and several new products, new
indications, or new formulations in key markets in 2005. We
continued our substantial investments in our manufacturing
operations and research and development activities, resulting in
cost of products sold and research and development costs
increasing at rates greater than sales. Despite product launch
expenditures, our cost-containment and productivity measures
contributed to marketing and administrative expenses increasing
at a rate less than sales. During 2005, we began to expense
stock options, which had the effect of increasing our research
and development and marketing and administrative expenses. We
also benefited from an increase in other income net,
due primarily to increased profitability of the Lilly ICOS joint
venture, and a decrease in the tax rate in 2005. Net income was
$1.98 billion, or $1.81 per share, in 2005 as compared
with $1.81 billion, or $1.66 per share, in 2004,
representing an increase in net income and earnings per share of
9 percent. Certain items, reflected in our operating
results for 2005 and 2004, should be considered in comparing the
two years. The significant items for 2005 are summarized in the
Executive Overview. The 2004 items are summarized as follows
(see Notes 1, 3, 4, 7, and 10 to the consolidated
financial statements for additional information):
|
|
|
In 2005, we began to expense stock options in accordance with
SFAS 123(R). Had we expensed stock options in 2004, our
2004 net income would have been lower by
$266.4 million, which would have decreased earnings per
share by $.24 per share (Notes 1 and 7).
|
|
|
We recognized asset impairment charges, streamlined our
infrastructure, and provided for the anticipated resolution of
the government investigation of Evista marketing and promotional
practices, resulting in charges of $108.9 million (pretax)
in the second quarter of 2004 and $494.1 million (pretax)
in the fourth quarter of 2004, which decreased earnings per
share by $.08 and $.30, respectively (Note 4).
|
|
|
We incurred charges for acquired in-process research and
development (IPR&D) of $362.3 million (no tax benefit)
in the first quarter of 2004 related to the acquisition of
Applied Molecular Evolution, Inc. (AME), and $29.9 million
(pretax) in the fourth quarter of 2004 related to our
acquisition of a Phase I compound under development as a
potential treatment for insomnia, which decreased earnings per
share by $.33 in the first quarter of 2004 and $.02 in the
fourth quarter of 2004 (Note 3).
|
|
|
We recognized tax expenses of $465.0 million in the fourth
quarter of 2004 associated with the anticipated repatriation in
2005 of $8.00 billion of our earnings reinvested outside
the U.S., as a result of the passage of the American Jobs
Creation Act of 2004 (AJCA). This tax expense decreased earnings
per share by $.43 in that quarter (Note 10).
|
Sales
Our worldwide sales for 2005 increased 6 percent, to
$14.65 billion, driven primarily by sales growth of
Cymbalta, Alimta, Forteo, and Gemzar. As a result of
restructuring our arrangements with our U.S. wholesalers in
early 2005, reductions occurred in wholesaler inventory levels
for certain products (primarily Strattera,
Prozac®,
and Gemzar) that reduced our sales by approximately
$170 million. Sales growth in 2005 was also affected by
decreased U.S. demand for Zyprexa, Strattera, and Prozac.
Despite this wholesaler destocking and decreased demand, sales
in the U.S. increased 2 percent, to
$7.80 billion, driven primarily by increased sales of
Cymbalta and Alimta. Sales outside the U.S. increased
11 percent, to $6.85 billion, driven by growth of
Zyprexa, Alimta, and Gemzar. Worldwide sales reflected a volume
increase of 3 percent, with global selling prices
contributing 1 percent and an increase due to favorable
changes in exchange rates contributing 1 percent. (Numbers
do not add due to rounding.)
-24-
The following table summarizes our net sales activity in 2005
compared with 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Percent
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Change
|
|
Product
|
|
U.S.1
|
|
|
Outside U.S.
|
|
|
Total
|
|
|
Total
|
|
|
from 2004
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zyprexa
|
|
$
|
2,034.9
|
|
|
$
|
2,167.4
|
|
|
$
|
4,202.3
|
|
|
|
$ 4,419.8
|
|
|
|
(5
|
)
|
Gemzar
|
|
|
586.1
|
|
|
|
748.4
|
|
|
|
1,334.5
|
|
|
|
1,214.4
|
|
|
|
10
|
|
Humalog
|
|
|
739.6
|
|
|
|
458.1
|
|
|
|
1,197.7
|
|
|
|
1,101.6
|
|
|
|
9
|
|
Evista
|
|
|
652.9
|
|
|
|
383.2
|
|
|
|
1,036.1
|
|
|
|
1,012.7
|
|
|
|
2
|
|
Humulin
|
|
|
410.7
|
|
|
|
594.0
|
|
|
|
1,004.7
|
|
|
|
997.7
|
|
|
|
1
|
|
Animal health products
|
|
|
370.3
|
|
|
|
493.4
|
|
|
|
863.7
|
|
|
|
798.7
|
|
|
|
8
|
|
Cymbalta
|
|
|
636.2
|
|
|
|
43.5
|
|
|
|
679.7
|
|
|
|
93.9
|
|
|
|
NM
|
|
Strattera
|
|
|
498.7
|
|
|
|
53.4
|
|
|
|
552.1
|
|
|
|
666.7
|
|
|
|
(17
|
)
|
Actos
|
|
|
355.7
|
|
|
|
137.3
|
|
|
|
493.0
|
|
|
|
452.9
|
|
|
|
9
|
|
Alimta
|
|
|
296.3
|
|
|
|
166.9
|
|
|
|
463.2
|
|
|
|
142.6
|
|
|
|
NM
|
|
Fluoxetine products
|
|
|
249.1
|
|
|
|
204.3
|
|
|
|
453.4
|
|
|
|
559.0
|
|
|
|
(19
|
)
|
Anti-infectives
|
|
|
133.3
|
|
|
|
310.6
|
|
|
|
443.9
|
|
|
|
478.0
|
|
|
|
(7
|
)
|
Humatrope
|
|
|
184.5
|
|
|
|
229.9
|
|
|
|
414.4
|
|
|
|
430.3
|
|
|
|
(4
|
)
|
Forteo
|
|
|
264.7
|
|
|
|
124.6
|
|
|
|
389.3
|
|
|
|
238.6
|
|
|
|
63
|
|
ReoPro
|
|
|
119.8
|
|
|
|
176.9
|
|
|
|
296.7
|
|
|
|
362.8
|
|
|
|
(18
|
)
|
Xigris
|
|
|
118.9
|
|
|
|
95.7
|
|
|
|
214.6
|
|
|
|
201.8
|
|
|
|
6
|
|
Cialis2
|
|
|
2.3
|
|
|
|
167.6
|
|
|
|
169.9
|
|
|
|
130.6
|
|
|
|
30
|
|
Symbyax®
|
|
|
52.6
|
|
|
|
1.3
|
|
|
|
53.9
|
|
|
|
70.2
|
|
|
|
(23
|
)
|
Other pharmaceutical products
|
|
|
91.5
|
|
|
|
290.7
|
|
|
|
382.2
|
|
|
|
485.6
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
7,798.1
|
|
|
$
|
6,847.2
|
|
|
$
|
14,645.3
|
|
|
|
$13,857.9
|
|
|
|
6
|
|
|
|
|
|
|
|
NM
Not meaningful
|
|
|
1 |
|
U.S. sales include sales in
Puerto Rico.
|
|
2 |
|
Cialis had worldwide 2005 sales of
$746.6 million, representing an increase of 35 percent
compared with 2004. The sales shown in the table above represent
results only in the territories in which we market Cialis
exclusively. The remaining sales relate to the joint-venture
territories of Lilly ICOS LLC (North America, excluding Puerto
Rico, and Europe). Our share of the joint-venture territory
sales, net of expenses and income taxes, is reported in other
income net in our consolidated statements of income.
|
Zyprexa sales in the U.S. decreased 16 percent in
2005, resulting from a decline in underlying demand due to
continuing competitive pressures. Sales outside the U.S. in
2005 increased 9 percent, driven by volume growth in a
number of major markets and the favorable impact of exchange
rates. Excluding the impact of exchange rates, sales of Zyprexa
outside the U.S. increased by 6 percent.
Diabetes care products had aggregate worldwide revenues of
$2.80 billion in 2005, an increase of 7 percent.
Diabetes care revenues in the U.S. increased
7 percent, to $1.59 billion, primarily driven by
higher prices, offset partially by a decline in underlying
demand due to continued competitive pressures in the insulins
market and reductions in wholesaler inventory levels of
insulins. Diabetes care revenues outside the U.S. increased
8 percent, to $1.20 billion. Humalog sales increased
8 percent in the U.S. and 10 percent outside the
U.S. Humulin sales in the U.S. decreased
3 percent, while Humulin sales outside the
U.S. increased 3 percent. Actos revenues increased
9 percent in 2005. Sales of Byetta were $74.6 million
following its June 2005 launch. Our reported net sales of Byetta
totaled $39.6 million in 2005.
Sales of Gemzar increased 4 percent in the U.S. in
2005 and were negatively affected by reductions in wholesaler
inventory levels as a result of our restructured arrangements
with our U.S. wholesalers. Gemzar sales increased
15 percent outside the U.S., driven by strong volume growth
in a number of cancer indications.
Sales of Evista decreased 2 percent in the U.S. due to
declines in U.S. underlying demand resulting from continued
competitive pressures and to reductions in wholesaler inventory
levels. This decline was partially
-25-
offset by price increases. Outside the U.S., sales of Evista
increased 11 percent, driven by volume growth in several
markets and the early 2004 launch of the product in Japan.
Cymbalta was launched in the U.S. in late August 2004 for
the treatment of major depressive disorder and in September 2004
for the treatment of diabetic peripheral neuropathic pain.
Cymbalta launches began in Europe for the treatment of major
depressive disorder during the first quarter of 2005. Cymbalta
generated $679.7 million in sales in 2005.
Sales of Strattera declined 24 percent in the U.S. in
2005 due to wholesaler destocking resulting from restructured
arrangements with our U.S. wholesalers and a decline in
underlying demand. Sales outside the U.S. were
$53.4 million in 2005, compared with $10.3 million in
2004, primarily reflecting launches in Australia, Canada,
Germany, Mexico, and Spain.
Alimta was launched in the U.S. in February 2004 for the
treatment of malignant pleural mesothelioma and in August for
second-line treatment of non-smallcell lung cancer (NSCLC).
Alimta was launched in several European countries in the second
half of 2004 and throughout 2005. Alimta generated sales of
$463.2 million in 2005.
Forteo increased 34 percent in the U.S. in 2005,
driven by strong growth in underlying demand. Sales growth was
offset, in part, by wholesaler destocking in the first half of
2005 related to our revised arrangements with
U.S. wholesalers.
Cialis worldwide sales of $746.6 million in 2005 reflected
an increase of 35 percent compared to 2004, and comprises
$169.9 million of sales in our territories, and
$576.7 million of sales in the joint-venture territories.
Within the joint-venture territories, U.S. sales of Cialis
were $272.9 million for 2005, an increase of
32 percent, despite wholesaler destocking in the first half
of the year as a result of our restructured arrangements with
our U.S. wholesalers.
Animal health product sales in the U.S. increased
9 percent, while sales outside the U.S. increased
7 percent, led by Rumensin and
Paylean®.
Gross Margin, Costs, and Expenses
The 2005 gross margin decreased to 76.3 percent of sales
compared with 76.7 percent for 2004. The decrease was
primarily due to higher manufacturing expenses, partially offset
by favorable product mix and lower factory inventory losses.
Operating expenses increased 8 percent in 2005. Investment
in research and development increased 12 percent, to
$3.03 billion, in 2005, due to the adoption of stock option
expensing in 2005, decreased reimbursements from collaboration
partners, and increased incentive compensation and benefits
expenses. We continued to be a leader in our industry peer group
by investing approximately 21 percent of our sales into
research and development during 2005. Marketing and
administrative expenses increased 5 percent in 2005, to
$4.50 billion, due to the adoption of stock option
expensing in 2005, and increased incentive compensation and
benefits expenses. This comparison also benefited from a
charitable contribution to the Lilly Foundation during the
fourth quarter of 2004. Research and development expenses would
have increased by 8 percent, and marketing and
administrative expenses would have been flat for 2005, if 2004
had been restated as if stock options had been expensed.
Other income net increased $35.8 million in
2005, to $314.2 million, due to the following:
|
|
|
Interest expense for 2005 increased $53.6 million, to
$105.2 million, primarily due to increased interest rates.
|
|
|
Interest income for 2005 increased $55.4 million, to
$212.1 million, due to increased investment balances and
interest rates.
|
-26-
|
|
|
Our net income from the Lilly ICOS joint venture was
$11.1 million for 2005, compared with a net loss of
$79.0 million in 2004. The joint venture became profitable
for the first time in the third quarter of 2005.
|
|
|
Net other miscellaneous income items decreased
$56.1 million to $196.2 million, primarily as a result
of less income related to the outlicense of legacy products and
partnered products in development.
|
The effective tax rate for 2005 was 26.3 percent, compared
with 38.5 percent for 2004. The effective tax rate for 2005
was affected by the product liability charge of
$1.07 billion. The tax benefit of this charge was less than
our effective tax rate, as the tax benefit was calculated based
upon existing tax laws in the countries in which we reasonably
expect to deduct the charge. The effective tax rate for 2004 was
affected by the tax provision related to the expected
repatriation of $8.00 billion of earnings reinvested
outside the U.S. pursuant to the AJCA and the charge for
acquired IPR&D related to the AME acquisition, which is not
deductible for tax purposes. See Note 10 to the
consolidated financial statements for additional information.
FINANCIAL
CONDITION
As of December 31, 2006, cash, cash equivalents, and
short-term investments totaled $3.89 billion compared with
$5.04 billion at December 31, 2005. Strong cash flow
from operations in 2006 of $3.98 billion was more than
offset by repayments of long-term debt of $2.78 billion,
dividends paid of $1.74 billion, and capital expenditures
of $1.08 billion.
Capital expenditures of $1.08 billion during 2006 were
$220.3 million less than in 2005, due primarily to the
management of capital spending and completion of key projects.
We expect near-term capital expenditures to remain approximately
the same as 2006 levels while we invest in our biotech and
research and development initiatives, continue to upgrade our
manufacturing facilities to enhance productivity and quality
systems, and invest in the long-term growth of our diabetes care
products.
Total debt as of December 31, 2006 was $3.71 billion,
reflecting a net repayment of $2.78 billion during 2006. In
early 2007, we issued approximately $2.5 billion of debt to
finance our acquisition of ICOS, including the acquisition of
ICOS stock and refinancing of ICOS debt. Our current debt
ratings from Standard & Poors and Moodys
remain at AA and Aa3, respectively.
Dividends of $1.60 per share were paid in 2006, an increase
of 5 percent from 2005. In the fourth quarter of 2006,
effective for the first-quarter dividend in 2007, the quarterly
dividend was increased to $.425 per share (a 6 percent
increase), resulting in an indicated annual rate for 2007 of
$1.70 per share. The year 2006 was the
122nd consecutive year in which we made dividend payments
and the 39th consecutive year in which dividends have been
increased.
-27-
We believe that cash generated from operations, along with
available cash and cash equivalents, will be sufficient to fund
our normal operating needs, including debt service, capital
expenditures, costs associated with product liability
litigation, dividends, and taxes in 2007. We believe that
amounts available through our existing commercial paper program
should be adequate to fund maturities of short-term borrowings,
if necessary. We currently have $1.21 billion of unused
committed bank credit facilities, $1.20 billion of which
backs our commercial paper program. Excluding the longterm debt
issued for the ICOS acquisition, we plan to use available cash
to repay approximately $1 billion of debt outside the
U.S. by the end of 2007. Various risks and uncertainties,
including those discussed in the Financial Expectations for 2007
section, may affect our operating results and cash generated
from operations.
-28-
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, 2006 and 2005, including
derivatives and other interest rate risk-sensitive instruments,
a hypothetical 10 percent change in interest rates applied
to the fair value of the instruments as of December 31,
2006 and 2005, respectively, would have no 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 and the Japanese yen. We face transactional currency
exposures that arise when we enter into transactions, generally
on an intercompany basis, denominated in currencies other than
the local currency. 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 use forward contracts and purchased
options to manage our foreign currency exposures. Our policy
outlines the minimum and maximum hedge coverage of such
exposures. Gains and losses on these derivative positions
offset, in part, the impact of currency fluctuations on the
existing assets, liabilities, commitments, and anticipated
revenues. Considering our derivative financial instruments
outstanding at December 31, 2006 and 2005, a hypothetical
10 percent change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2006 and 2005,
respectively, would have no material impact on earnings, cash
flows, or fair values of foreign currency rate risk-sensitive
instruments over a one-year period. These calculations do not
reflect the impact of the exchange gains or losses on the
underlying positions that would be offset, in part, by the
results of the derivative instruments.
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,
-29-
results of operations, liquidity, capital expenditures, or
capital resources. We acquire assets 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 of the
product for marketing by the appropriate regulatory agency). If
required by the arrangement, we may have to 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.
Our current noncancelable contractual obligations that will
require future cash payments are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
3-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-term debt, including interest
payments1
|
|
$
|
5,638.1
|
|
|
$
|
374.0
|
|
|
$
|
1,703.5
|
|
|
$
|
265.4
|
|
|
$
|
3,295.2
|
|
Capital lease obligations
|
|
|
152.6
|
|
|
|
19.8
|
|
|
|
36.1
|
|
|
|
24.2
|
|
|
|
72.5
|
|
Operating leases
|
|
|
412.2
|
|
|
|
92.2
|
|
|
|
136.0
|
|
|
|
76.8
|
|
|
|
107.2
|
|
Purchase
obligations2
|
|
|
2,105.0
|
|
|
|
1,879.4
|
|
|
|
140.9
|
|
|
|
68.3
|
|
|
|
16.4
|
|
Other long-term liabilities
reflected on our balance
sheet3
|
|
|
836.8
|
|
|
|
78.6
|
|
|
|
135.9
|
|
|
|
138.2
|
|
|
|
484.1
|
|
Other4
|
|
|
67.1
|
|
|
|
67.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,211.8
|
|
|
$
|
2,511.1
|
|
|
$
|
2,152.4
|
|
|
$
|
572.9
|
|
|
$
|
3,975.4
|
|
|
|
|
|
|
|
|
|
|
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, 2006 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 at our significant operating locations as of
December 31, 2006. 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 our long-term
liabilities consisting primarily of our nonqualified
supplemental pension funding requirements and deferred
compensation liabilities.
|
|
4 |
|
This category comprises primarily
minimum pension funding requirements.
|
Individually, these arrangements are not material in any one
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 any one period. The
inherent risk in pharmaceutical development makes it unlikely
that this will occur, as the failure rate for products in
development is very high. In addition, 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 clinical testing 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.
The contractual obligations table is current as of
December 31, 2006. The amount of these obligations can be
expected to change materially over time as new contracts are
initiated and existing contracts are completed, terminated, or
modified.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
In preparing our financial statements in accordance with
generally accepted accounting principles (GAAP), we must often
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues,
-30-
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 policies have been discussed with our audit
committee and are described below.
Revenue
Recognition and Sales 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. For more than 90 percent of our
sales, this is at the time products are shipped to the customer,
typically a wholesale distributor or a major retail chain. The
remaining sales are recorded at the point of delivery.
Provisions for discounts and rebates 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 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, redundant holiday
stocking, and changes in wholesaler business operations. An
unusual buying pattern compared with underlying demand of our
products outside the U.S. could also be the result of
speculative buying by wholesalers in anticipation of price
increases. 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 the amount is believed to be
material to the product sales trend; however, we are not always
able to accurately quantify the amount of stocking or destocking.
As a result of restructuring our arrangements with our
U.S. wholesalers in early 2005, reductions occurred in
wholesaler inventory levels for certain products (primarily
Strattera, Prozac, and Gemzar) that reduced our 2005 sales by
approximately $170 million. The modified structure
eliminates the incentive for speculative wholesaler buying and
provides us improved data on inventory levels at our
U.S. wholesalers. Wholesaler stocking and destocking
activity historically has not caused any material changes in the
rate of actual product returns, which have been approximately
1 percent of our net sales over the past three years and
have not fluctuated significantly as a percent of sales.
We establish sales rebate and discount accruals in the same
period as the related sales. The rebate/discount amounts are
recorded as a deduction to arrive at our net sales. Sales
rebates/discounts that require the use of judgment in the
establishment of the accrual include Medicaid, managed care,
Medicare, chargebacks,
long-term
care, hospital, discount card programs, and various other
government programs. We base these accruals primarily upon our
historical rebate/discount payments made to our customer segment
groups and the provisions of current rebate/discount contracts.
We calculate these rebates/discounts based upon a percentage of
our sales for each of our products as defined by the statutory
rates and the contracts with our various customer groups.
The largest of our sales rebate/discount amounts are rebates
associated with sales covered by Medicaid. Although we accrue a
liability for Medicaid rebates at the time we record the sale
(when the product is shipped), the Medicaid rebate related to
that sale is typically billed up to six months later. Due to the
time lag, in any particular period our rebate adjustments may
incorporate revisions of accruals for several periods. In
determining the appropriate accrual amount, we consider our
historical Medicaid rebate payments by product as a percentage
of our historical sales as well as any significant changes in
sales trends, an evaluation of the current Medicaid rebate laws
and interpretations, the percentage of our products that are
sold to Medicaid recipients, and our product pricing and current
rebate/discount contracts.
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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
pharmaceutical budget deficit 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 budget deficit, we adjust our rebate reserves.
We believe that our accruals for sales rebates and discounts are
reasonable and appropriate based on current facts and
circumstances. Federally mandated Medicaid rebate and state
pharmaceutical assistance programs (Medicaid) and Medicare
rebates reduced sales by $571.7 million,
$637.1 million, and $641.0 million in 2006, 2005, and
2004, respectively. A 5 percent change in the Medicaid and
Medicare rebate amounts we recognized in 2006 would lead to an
approximate $29 million effect on our income before income
taxes. As of December 31, 2006, our Medicaid and Medicare
rebate liability was $259.0 million.
Approximately 85 percent and 90 percent of our global
rebate and discount liability resulted from sales of our
products in the U.S. as of December 31, 2006 and 2005,
respectively. The following represents a roll-forward of our
most significant U.S. rebate and discount liability
balances, including Medicaid (in millions):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Rebate and discount liability,
beginning of year
|
|
$
|
379.4
|
|
|
$
|
367.9
|
|
Reduction of net sales due to
discounts and
rebates1
|
|
|
1,246.1
|
|
|
|
1,300.1
|
|
Cash payments of discounts and
rebates
|
|
|
(1,242.2
|
)
|
|
|
(1,288.6
|
)
|
|
|
|
|
|
|
Rebate and discount liability, end
of year
|
|
$
|
383.3
|
|
|
$
|
379.4
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Adjustments of the estimates for
these rebates and discounts to actual results were less than
0.3 percent of 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 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 position of the insurers, and
the possibility of and the 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.
We believe that the accruals and related insurance recoveries we
have established for product litigation liabilities and other
contingencies are appropriate based on current facts and
circumstances.
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
-32-
reported. In addition to the analysis below, see Note 12 to
the consolidated financial statements for additional information
regarding our retirement benefits.
Periodically, we evaluate the discount rate and the expected
return on plan assets in our defined benefit pension and retiree
health benefit plans. In evaluating these assumptions, we
consider many factors, including an evaluation of the discount
rates, expected return on plan assets and the health-care-cost
trend rates of other companies; our historical assumptions
compared with actual results; an analysis of current market
conditions and asset allocations (approximately 85 percent
to 95 percent of which are growth investments); and the
views of leading financial advisers and economists. We use an
actuarially-determined, company-specific yield curve to
determine the discount rate. 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.
We believe our pension and retiree medical plan assumptions are
appropriate based upon the above factors. If the
health-care-cost trend rates were to be increased by one
percentage point each future year, the aggregate of the service
cost and interest cost components of the 2006 annual expense
would increase by approximately $28 million. A
one-percentage-point decrease would decrease the aggregate of
the 2006 service cost and interest cost by approximately
$24 million. If the discount rate for 2006 were to be
changed by a quarter percentage point, income before income
taxes would change by approximately $28 million. If the
expected return on plan assets for 2006 were to be changed by a
quarter percentage point, income before income taxes would
change by approximately $14 million. If our assumption
regarding the expected age of future retirees for 2006 were
adjusted by one year, our income before income taxes would be
affected by approximately $29 million.
Impairment
of Long-lived Assets
We review the carrying value of long-lived assets 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. Impairment is determined by comparing 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 assets net book value
over its fair value, and the cost basis is adjusted. The
estimated future cash flows, based on reasonable and supportable
assumptions and projections, require managements 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 and interest
assessments by these authorities. Inherent uncertainties exist
in estimates of tax contingencies due to changes in tax law
resulting from legislation, regulation
and/or as
concluded through the various jurisdictions tax court
systems. We record a liability for tax contingencies when we
believe it is probable that we will be assessed and the amount
of the contingency can be reasonably estimated. The tax
contingency reserve is adjusted for changes in facts and
circumstances and additional uncertainties. For example,
adjustments could result from significant amendments to existing
tax law and the issuance of regulations or interpretations by
the taxing authorities, new information obtained during a tax
examination, or resolution of an examination. We believe that
our estimates for tax contingency reserves are appropriate and
sufficient to pay assessments that may result from examinations
of our tax returns.
We have recorded valuation allowances against certain of our
deferred tax assets, primarily those that have been generated
from net operating losses 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 carry forwards where history does not
support such an assumption. Implementation of tax planning
strategies to recover these deferred tax assets or future
-33-
income generation in these jurisdictions could lead to the
reversal of these valuation allowances and a reduction of income
tax expense.
We believe that our estimates for the valuation allowances
against the deferred tax assets are appropriate based on current
facts and circumstances. A 5 percent change in the
valuation allowance would result in a change in net income of
approximately $25 million.
FINANCIAL
EXPECTATIONS FOR 2007
For the full year of 2007, we expect earnings per share to be in
the range of $2.89 to $2.99. This guidance includes the
estimated $.10 per share dilutive impact of the ICOS
acquisition related to the incremental interest expense on debt
used to finance the acquisition, the amortization of ICOS
intangibles and other integration costs. A disproportionate
amount of this dilution is expected to be incurred in the first
half of the year. This guidance also includes the IPR&D
charges related to the ICOS acquisition and the in-licensing of
a diabetes compound from OSI, together estimated to be a total
of $.29 per share as discussed in Note 3, as well as
additional restructuring and other special charges as discussed
in Note 4, estimated to be $.07 per share. We expect
sales to grow in the high single or low double digits, impacted
favorably by the inclusion of all Cialis revenue subsequent to
the acquisition. Gross margins as a percent of sales are
expected to improve slightly compared with 2006. In addition, we
expect operating expenses to grow in the low double digits,
driven primarily by the inclusion of all Cialis operating
expenses subsequent to the acquisition and increased marketing
and selling expenses in support of Cymbalta, Zyprexa, and the
diabetes care franchise, as well as ongoing investment in
research and development that will continue to place Lilly among
the industry leaders in terms of research and development as a
percent of sales. We also expect other income net to
contribute less than $100 million, a reduction from 2006
due to the removal of the Lilly ICOS joint venture after-tax
profit. Other income will primarily include net interest income
and income from the partnering and out-licensing of molecules.
In terms of cash flow, we expect a continuation of strong cash
flow trends in 2007, with capital expenditures of approximately
$1.1 billion.
Actual results could differ materially and will depend on, among
other things, the continuing growth of our currently marketed
products; developments with competitive products; the timing and
scope of regulatory approvals and the success of our new product
launches; asset impairments, restructurings, and acquisitions of
compounds under development resulting in acquired in-process
research and development charges; foreign exchange rates;
wholesaler inventory changes; other regulatory developments,
litigation and government investigations; and the impact of
governmental actions regarding pricing, importation, and
reimbursement for pharmaceuticals. We undertake no duty to
update these forward-looking statements.
LEGAL AND
REGULATORY MATTERS
We are a party to various legal actions and government
investigations. The most significant of these are described
below. While it is not possible to predict or determine the
outcome of these matters, we believe that, except as
specifically noted below, the resolution of all such matters
will not have a material adverse effect on our consolidated
financial position or liquidity, but could possibly be material
to our consolidated results of operations in any one accounting
period.
Patent
Litigation
We are engaged in the following patent litigation matters
brought pursuant to procedures set out in the Hatch-Waxman Act
(the Drug Price Competition and Patent Term Restoration Act of
1984):
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|
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Dr. Reddys Laboratories, Ltd. (Reddy), Teva
Pharmaceuticals, and Zenith Goldline Pharmaceuticals, Inc.,
which was subsequently acquired by Teva Pharmaceuticals
(together, Teva), each submitted Abbreviated New Drug
Applications (ANDAs) seeking permission to market generic
versions of Zyprexa prior to the expiration of our relevant
U.S. patent (expiring in 2011) and alleging that this
patent was invalid or not enforceable. We filed lawsuits against
these companies in the U.S. District Court for the Southern
District of Indiana, seeking a ruling that the patent is valid,
enforceable and being infringed. The district court ruled in our
favor on all counts on April 14, 2005, and on
December 26, 2006, that ruling was upheld by the Court
|
-34-
|
|
|
of Appeals for the Federal Circuit. Reddy and Teva are seeking a
review of that decision. We are confident Reddys and
Tevas claims are without merit and we expect to prevail.
An unfavorable outcome would have a material adverse impact on
our consolidated results of operations, liquidity, and financial
position.
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|
|
|
Barr Laboratories, Inc. (Barr), submitted an ANDA in 2002
seeking permission to market a generic version of Evista prior
to the expiration of our relevant U.S. patents (expiring in
2012-2017)
and alleging that these patents are invalid, not enforceable, or
not infringed. In November 2002, we filed a lawsuit against Barr
in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that these patents are valid,
enforceable, and being infringed by Barr. Teva has also
submitted an ANDA seeking permission to market a generic version
of Evista. In June 2006, we filed a lawsuit against Teva in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that our relevant U.S. patents are valid,
enforceable, and being infringed by Teva. No trial date has been
set in either case. We believe Barrs and Tevas
claims are without merit and we expect to prevail. However, it
is not possible to predict or determine the outcome of this
litigation, and accordingly, we can provide no assurance that we
will prevail. An unfavorable outcome could have a material
adverse impact on our consolidated results of operations,
liquidity, and financial position.
|
|
|
Sicor Pharmaceuticals, Inc. (Sicor), a subsidiary of Teva,
submitted ANDAs in November 2005 seeking permission to market
generic versions of Gemzar prior to the expiration of our
relevant U.S. patents (expiring in 2010 and 2013), and
alleging that these patents are invalid. In February 2006, we
filed a lawsuit against Sicor in the U.S. District Court
for the Southern District of Indiana, seeking a ruling that
these patents are valid and are being infringed by Sicor. In
response to our lawsuit, Sicor filed a declaratory judgment
action in the U.S. District Court for the Central District
of California. Sicor also moved to dismiss our lawsuit in
Indiana, asserting the Indiana court lacks jurisdiction. The
California action has been dismissed. In September 2006, we
received notice that Mayne Pharma (USA) Inc. (Mayne) filed a
similar ANDA for Gemzar. In October 2006, we filed a lawsuit
against Mayne in the Southern District of Indiana in response to
the ANDA filing. In response to our lawsuit, Mayne filed a
motion to our lawsuit, asserting the Indiana court lacks
jurisdiction. In October 2006, we received notice that Sun
Pharmaceutical Industries Inc. (Sun) filed an ANDA for Gemzar,
alleging that the 2013 patent is invalid. In December 2006, we
filed a lawsuit against Sun in the Southern District of Indiana
in response to Suns ANDA filing. We expect to prevail in
litigation involving our Gemzar patents and believe that claims
made by these generic companies that our patents are not valid
are without merit. However, it is not possible to predict or
determine the outcome of this litigation, and accordingly, we
can provide no assurance that we will prevail. An unfavorable
outcome could have a material adverse impact on our consolidated
results of operations, liquidity, and financial position.
|
In June 2002, we were sued by Ariad Pharmaceuticals, Inc., the
Massachusetts Institute of Technology, the Whitehead Institute
for Biomedical Research and the President and Fellows of Harvard
College in the U.S. District Court for the District of
Massachusetts alleging that sales of two of our products, Xigris
and Evista, were inducing the infringement of a patent related
to the discovery of a natural cell signaling phenomenon in the
human body, and seeking royalties on past and future sales of
these products. In June 2005, the United States Patent and
Trademark Office commenced a re-examination of the patent in
order to consider certain issues raised by us relating to the
validity of the patent. On May 4, 2006, a jury in Boston
issued an initial decision in the case that Xigris and Evista
sales infringe the patent. The jury awarded the plaintiffs
approximately $65 million in damages, calculated by
applying a 2.3 percent royalty to all U.S. sales of
Xigris and Evista from the date of issuance of the patent
through the date of trial. We are seeking to have the jury
verdict overturned by the trial court judge, and if
unsuccessful, will appeal the decision to the Court of Appeals
for the Federal Circuit. In addition, a separate bench trial
with the U.S. District Court of Massachusetts was held the
week of August 7, 2006, on our contention that the patent
is unenforceable and impermissibly covers natural processes. No
decision has been rendered. We believe that these allegations
are without legal merit, that we will ultimately prevail on
these issues and therefore that the likelihood of any monetary
damages is remote.
-35-
Government
Investigations
In March 2004, the office of the U.S. Attorney for the
Eastern District of Pennsylvania advised us that it had
commenced a civil investigation related to our
U.S. marketing and promotional practices, including our
communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa, Prozac, and
Prozac
Weeklytm. In
October 2005, the U.S. Attorneys Office advised that
it is also conducting an inquiry regarding certain rebate
agreements we entered into with a pharmacy benefit manager
covering
Axid®,
Evista, Humalog, Humulin, Prozac, and Zyprexa. The inquiry
includes a review of Lillys Medicaid best price reporting
related to the product sales covered by the rebate agreements.
We are cooperating with the U.S. Attorney in these
investigations, including providing a broad range of documents
and information relating to the investigations. In June 2005, we
received a subpoena from the office of the Attorney General,
Medicaid Fraud Control Unit, of the State of Florida, seeking
production of documents relating to sales of Zyprexa and our
marketing and promotional practices with respect to Zyprexa. In
September 2006, we received a subpoena from the California
Attorney Generals office seeking production of documents
related to our efforts to obtain and maintain Zyprexas
status on Californias formulary, marketing and promotional
practices with respect to Zyprexa, and remuneration of health
care providers. Beginning in August 2006, we have received civil
investigative demands or subpoenas from the attorneys general of
a number of states. Most of these requests are now part of a
multistate investigative effort being coordinated by an
executive committee of attorneys general. We are aware that
26 states are participating in this joint effort, and we
anticipate that additional states will join the investigation.
These attorneys general are seeking a broad range of Zyprexa
documents, including documents relating to sales, marketing and
promotional practices, and remuneration of health care
providers. It is possible that other Lilly products could become
subject to investigation and that the outcome of these matters
could include criminal charges and fines, penalties, or other
monetary or nonmonetary remedies. We cannot predict or determine
the outcome of these matters or reasonably estimate the amount
or range of amounts of any fines or penalties that might result
from an adverse outcome. It is possible, however, that an
adverse outcome could have a material adverse impact on our
consolidated results of operations, liquidity, and financial
position. We have implemented and continue to review and enhance
a broadly based compliance program that includes comprehensive
compliance-related activities designed to ensure that our
marketing and promotional practices, physician communications,
remuneration of health care professionals, managed care
arrangements, and Medicaid best price reporting comply with
applicable laws and regulations.
Product
Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa
product liability lawsuits in the United States and have been
notified of many other claims of individuals who have not filed
suit. The lawsuits and unfiled claims (together the
claims) allege a variety of injuries from the use of
Zyprexa, with the majority alleging that the product caused or
contributed to diabetes or high blood-glucose levels. The claims
seek substantial compensatory and punitive damages and typically
accuse us of inadequately testing for and warning about side
effects of Zyprexa. Many of the claims also allege that we
improperly promoted the drug. Almost all of the federal lawsuits
are part of a Multi-District Litigation (MDL) proceeding
before The Honorable Jack Weinstein in the Federal District
Court for the Eastern District of New York (MDL No. 1596).
Since June 2005, we have entered into agreements with various
claimants attorneys involved in U.S. Zyprexa product
liability litigation to settle a substantial majority of the
claims. The agreements cover a total of approximately 28,500
claimants, including a large number of previously filed lawsuits
and other asserted claims. The two primary settlements were as
follows:
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|
|
In June 2005, we reached an agreement in principle (and in
September 2005 a final agreement) to settle more than 8,000
claims for $690.0 million plus $10.0 million to cover
administration of the settlement. That settlement is being
administered by special settlement masters appointed by Judge
Weinstein.
|
|
|
In January 2007, we reached agreements with a number of
plaintiffs attorneys to settle more than 18,000 claims for
approximately $500 million.
|
-36-
The 2005 settlement totaling $700.0 million was paid during
2005. The January 2007 settlements were recorded in other
current liabilities in our December 31, 2006 consolidated
balance sheet and will be paid in the first quarter of 2007.
The U.S. Zyprexa product liability claims not subject to
these agreements include approximately 340 lawsuits in the
U.S. covering approximately 900 claimants and an additional
400 claims of which we are aware. In addition, we have been
served with a lawsuit seeking class certification in which the
members of the purported class are seeking refunds and medical
monitoring. In early 2005, we were served with four lawsuits
seeking class action status in Canada on behalf of patients who
took Zyprexa. One of these four lawsuits has been certified for
residents of Quebec. The allegations in the Canadian actions are
similar to those in the litigation pending in the U.S.
We are prepared to continue our vigorous defense of Zyprexa in
all remaining cases. We currently anticipate that trials in
seven cases in the Eastern District of New York will begin in
the second quarter of 2007.
We have insurance coverage for a portion of our Zyprexa product
liability claims exposure. The third party insurance carriers
have raised defenses to their liability under the policies and
are seeking to rescind the policies. The dispute is now the
subject of litigation in the federal court in Indianapolis
against certain of the carriers and in arbitration in Bermuda
against other carriers. While we believe our position has merit,
there can be no assurance that we will prevail.
In addition, we have been named as a defendant in numerous other
product liability lawsuits involving primarily
diethylstilbestrol (DES) and thimerosal. The majority of these
claims are covered by insurance, subject to deductibles and
coverage limits.
In the second quarter of 2005, we recorded a net pretax charge
of $1.07 billion for product liability matters. The charge
took into account our estimated recoveries from our insurance
coverage related to these matters. The charge covered the
following:
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The cost of the June 2005 Zyprexa settlements described
above; and
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|
Reserves for product liability exposures and defense costs
regarding the then-known and expected product liability claims
to the extent we could formulate a reasonable estimate of the
probable number and cost of the claims. A substantial majority
of those exposures and costs were related to then-known and
expected Zyprexa claims.
|
As a result of the January 2007 settlements discussed above, we
incurred a pretax charge of $494.9 million in the fourth
quarter of 2006. The charge covered the following:
|
|
|
The cost of the January 2007 Zyprexa settlements; and
|
|
|
Reserves for product liability exposures and defense costs
regarding the then-known and expected Zyprexa product liability
claims to the extent we could formulate a reasonable estimate of
the probable number and cost of the claims.
|
In December 2004, we were served with two lawsuits brought in
state court in Louisiana on behalf of the Louisiana Department
of Health and Hospitals, alleging that Zyprexa caused or
contributed to diabetes or high blood-glucose levels, and that
we improperly promoted the drug. These cases have been removed
to federal court and are now part of the MDL proceedings in the
Eastern District of New York. In these actions, the Department
of Health and Hospitals seeks to recover the costs it paid for
Zyprexa through Medicaid and other drug-benefit programs, as
well as the costs the department alleges it has incurred and
will incur to treat Zyprexa-related illnesses. In 2006, we were
served with similar lawsuits filed by the states of Alaska, West
Virginia, New Mexico, and Mississippi in the courts of the
respective states.
In 2005, two lawsuits were filed in the Eastern District of New
York purporting to be nationwide class actions on behalf of all
consumers and third-party payors, excluding governmental
entities, which have made or will make payments for their
members or insured patients being prescribed Zyprexa. These
actions have now been consolidated into a single lawsuit, which
is brought under certain state consumer protection statutes, the
federal civil RICO statute, and common law theories, seeking a
refund of the cost of Zyprexa, treble damages,
-37-
punitive damages, and attorneys fees. Two additional
lawsuits were filed in the Eastern District of New York in 2006
on similar grounds. As with the product liability suits, these
lawsuits allege that we inadequately tested for and warned about
side effects of Zyprexa and improperly promoted the drug.
We cannot predict with certainty the additional number of
lawsuits and claims that may be asserted. In addition, although
we believe it is probable, there can be no assurance that the
January 2007 Zyprexa product liability settlements described
above will be concluded. The ultimate resolution of Zyprexa
product liability and related litigation could have a material
adverse impact on our consolidated results of operations,
liquidity, and financial position.
Because of the nature of pharmaceutical products, it is possible
that we could become subject to large numbers of product
liability and related claims for other products in the future.
In the past few years, we have experienced difficulties in
obtaining product liability insurance due to a very restrictive
insurance market. Therefore, for substantially all of our
currently marketed products, we have been and expect that we
will continue to be largely self-insured for future product
liability losses. In addition, as noted above, there is no
assurance that we will be able to fully collect from our
insurance carriers on past claims.
PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 A CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution investors that any
forward-looking statements or projections made by us, including
those made in this document, are based on managements
expectations at the time they are made, but they are subject to
risks and uncertainties that may cause actual results to differ
materially from those projected. Economic, competitive,
governmental, technological, legal, and other factors that may
affect our operations and prospects are discussed earlier in
this section and our most recent report on
Forms 10-Q
and 10-K
filed with the Securities and Exchange Commission. We undertake
no duty to update forward-looking statements.
|
|
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 Part II,
Item 7 at Review of Operations Financial
Condition. That information is incorporated in this report
by reference.
-38-
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(Dollars in millions, except per-share data)
|
|
|
Net sales
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
$
|
13,857.9
|
|
Cost of sales
|
|
|
3,546.5
|
|
|
|
3,474.2
|
|
|
|
3,223.9
|
|
Research and development
|
|
|
3,129.3
|
|
|
|
3,025.5
|
|
|
|
2,691.1
|
|
Marketing and administrative
|
|
|
4,889.8
|
|
|
|
4,497.0
|
|
|
|
4,284.2
|
|
Acquired in-process research and
development (Note 3)
|
|
|
|
|
|
|
|
|
|
|
392.2
|
|
Asset impairments, restructuring,
and other special charges (Note 4)
|
|
|
945.2
|
|
|
|
1,245.3
|
|
|
|
603.0
|
|
Other income net
|
|
|
(237.8
|
)
|
|
|
(314.2
|
)
|
|
|
(278.4
|
)
|
|
|
|
|
|
|
|
|
|
12,273.0
|
|
|
|
11,927.8
|
|
|
|
10,916.0
|
|
|
|
|
|
|
|
Income before income taxes and
cumulative effect of a change in accounting principle
|
|
|
3,418.0
|
|
|
|
2,717.5
|
|
|
|
2,941.9
|
|
Income taxes (Note 10)
|
|
|
755.3
|
|
|
|
715.9
|
|
|
|
1,131.8
|
|
|
|
|
|
|
|
Income before cumulative effect of
a change in accounting principle
|
|
|
2,662.7
|
|
|
|
2,001.6
|
|
|
|
1,810.1
|
|
Cumulative effect of a change in
accounting principle, net of tax (Note 2)
|
|
|
|
|
|
|
(22.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,662.7
|
|
|
$
|
1,979.6
|
|
|
$
|
1,810.1
|
|
|
|
|
|
|
|
Earnings per share
basic (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
a change in accounting principle
|
|
$
|
2.45
|
|
|
$
|
1.84
|
|
|
$
|
1.67
|
|
Cumulative effect of a change in
accounting principle
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.45
|
|
|
$
|
1.82
|
|
|
$
|
1.67
|
|
|
|
|
|
|
|
Earnings per share
diluted (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
a change in accounting principle
|
|
$
|
2.45
|
|
|
$
|
1.83
|
|
|
$
|
1.66
|
|
Cumulative effect of a change in
accounting principle
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.45
|
|
|
$
|
1.81
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-39-
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,109.3
|
|
|
$
|
3,006.7
|
|
Short-term investments
|
|
|
781.7
|
|
|
|
2,031.0
|
|
Accounts receivable, net of
allowances of $82.5 (2006) and $66.3 (2005)
|
|
|
2,298.6
|
|
|
|
2,313.3
|
|
Other receivables
|
|
|
395.8
|
|
|
|
448.4
|
|
Inventories
|
|
|
2,270.3
|
|
|
|
1,878.0
|
|
Deferred income taxes
(Note 10)
|
|
|
519.2
|
|
|
|
756.4
|
|
Prepaid expenses
|
|
|
319.5
|
|
|
|
362.0
|
|
|
|
|
|
|
|
Total current assets
|
|
|
9,694.4
|
|
|
|
10,795.8
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid pension (Note 12)
|
|
|
1,091.5
|
|
|
|
2,419.6
|
|
Investments (Note 5)
|
|
|
1,001.9
|
|
|
|
1,296.6
|
|
Sundry (Note 8)
|
|
|
2,015.3
|
|
|
|
2,156.3
|
|
|
|
|
|
|
|
|
|
|
4,108.7
|
|
|
|
5,872.5
|
|
|
|
|
|
|
|
Property and Equipment,
net
|
|
|
8,152.3
|
|
|
|
7,912.5
|
|
|
|
|
|
|
|
|
|
$
|
21,955.4
|
|
|
$
|
24,580.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings and current
maturities of long-term debt (Note 6)
|
|
$
|
219.4
|
|
|
$
|
734.7
|
|
Accounts payable
|
|
|
789.4
|
|
|
|
781.3
|
|
Employee compensation
|
|
|
607.7
|
|
|
|
548.8
|
|
Sales rebates and discounts
|
|
|
508.3
|
|
|
|
491.2
|
|
Dividends payable
|
|
|
463.3
|
|
|
|
436.5
|
|
Income taxes payable (Note 10)
|
|
|
640.6
|
|
|
|
884.9
|
|
Other current liabilities
(Note 8)
|
|
|
1,856.8
|
|
|
|
1,838.9
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,085.5
|
|
|
|
5,716.3
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt (Note 6)
|
|
|
3,494.4
|
|
|
|
5,763.5
|
|
Accrued retirement benefit
(Note 12)
|
|
|
1,586.9
|
|
|
|
787.9
|
|
Deferred income taxes
(Note 10)
|
|
|
62.2
|
|
|
|
695.1
|
|
Other noncurrent liabilities
(Note 8)
|
|
|
745.7
|
|
|
|
826.1
|
|
|
|
|
|
|
|
|
|
|
5,889.2
|
|
|
|
8,072.6
|
|
Commitments and contingencies
(Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
(Notes 7 and 9)
|
|
|
|
|
|
|
|
|
Common stock no par
value
|
|
|
|
|
|
|
|
|
Authorized shares: 3,200,000,000
|
|
|
|
|
|
|
|
|
Issued shares: 1,132,578,231
(2006) and 1,131,070,629 (2005)
|
|
|
707.9
|
|
|
|
706.9
|
|
Additional paid-in capital
|
|
|
3,571.9
|
|
|
|
3,323.8
|
|
Retained earnings
|
|
|
10,926.7
|
|
|
|
10,027.2
|
|
Employee benefit trust
|
|
|
(2,635.0
|
)
|
|
|
(2,635.0
|
)
|
Deferred costs ESOP
|
|
|
(100.7
|
)
|
|
|
(106.3
|
)
|
Accumulated other comprehensive
loss (Note 14)
|
|
|
(1,388.7
|
)
|
|
|
(420.6
|
)
|
|
|
|
|
|
|
|
|
|
11,082.1
|
|
|
|
10,896.0
|
|
Less cost of common stock in
treasury
|
|
|
|
|
|
|
|
|
2006
909,573 shares
|
|
|
|
|
|
|
|
|
2005
933,584 shares
|
|
|
101.4
|
|
|
|
104.1
|
|
|
|
|
|
|
|
|
|
|
10,980.7
|
|
|
|
10,791.9
|
|
|
|
|
|
|
|
|
|
$
|
21,955.4
|
|
|
$
|
24,580.8
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-40-
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Cash Flows From Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,662.7
|
|
|
$
|
1,979.6
|
|
|
$
|
1,810.1
|
|
Adjustments To Reconcile Net
Income To Cash Flows From Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
801.8
|
|
|
|
726.4
|
|
|
|
597.5
|
|
Change in deferred taxes
|
|
|
346.8
|
|
|
|
(347.5
|
)
|
|
|
772.4
|
|
Stock-based compensation expense
|
|
|
359.3
|
|
|
|
403.5
|
|
|
|
53.0
|
|
Acquired in-process research and
development, net of tax
|
|
|
|
|
|
|
|
|
|
|
381.7
|
|
Asset impairments, restructuring,
and other special charges, net of tax
|
|
|
797.4
|
|
|
|
1,128.7
|
|
|
|
374.3
|
|
Other, net
|
|
|
(196.8
|
)
|
|
|
(30.0
|
)
|
|
|
171.5
|
|
|
|
|
|
|
|
|
|
|
4,771.2
|
|
|
|
3,860.7
|
|
|
|
4,160.5
|
|
Changes in operating assets and
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables (increase)
decrease
|
|
|
243.9
|
|
|
|
(286.4
|
)
|
|
|
(240.8
|
)
|
Inventories (increase)
decrease
|
|
|
(60.2
|
)
|
|
|
72.1
|
|
|
|
(111.6
|
)
|
Other assets increase
|
|
|
(43.0
|
)
|
|
|
(269.4
|
)
|
|
|
(765.2
|
)
|
Accounts payable and other
liabilities decrease
|
|
|
(936.0
|
)
|
|
|
(1,463.4
|
)
|
|
|
(173.4
|
)
|
|
|
|
|
|
|
|
|
|
(795.3
|
)
|
|
|
(1,947.1
|
)
|
|
|
(1,291.0
|
)
|
|
|
|
|
|
|
Net Cash Provided by Operating
Activities
|
|
|
3,975.9
|
|
|
|
1,913.6
|
|
|
|
2,869.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,077.8
|
)
|
|
|
(1,298.1
|
)
|
|
|
(1,898.1
|
)
|
Disposals of property and equipment
|
|
|
65.2
|
|
|
|
11.1
|
|
|
|
20.5
|
|
Net changes in short-term
investments
|
|
|
1,247.5
|
|
|
|
62.7
|
|
|
|
(1,119.0
|
)
|
Proceeds from sales and maturities
of noncurrent investments
|
|
|
1,507.7
|
|
|
|
545.1
|
|
|
|
14,849.3
|
|
Purchases of noncurrent investments
|
|
|
(1,313.2
|
)
|
|
|
(1,183.1
|
)
|
|
|
(11,967.7
|
)
|
Purchases of in-process research
and development
|
|
|
|
|
|
|
|
|
|
|
(29.9
|
)
|
Cash paid for acquisition of
Applied Molecular Evolution, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(71.7
|
)
|
Other, net
|
|
|
179.0
|
|
|
|
(353.6
|
)
|
|
|
(468.2
|
)
|
|
|
|
|
|
|
Net Cash Provided by (Used for)
Investing Activities
|
|
|
608.4
|
|
|
|
(2,215.9
|
)
|
|
|
(684.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,736.3
|
)
|
|
|
(1,654.9
|
)
|
|
|
(1,539.8
|
)
|
Purchases of common stock
|
|
|
(122.1
|
)
|
|
|
(377.9
|
)
|
|
|
|
|
Issuances of common stock under
stock plans
|
|
|
59.6
|
|
|
|
105.9
|
|
|
|
117.9
|
|
Net changes in short-term borrowings
|
|
|
(8.4
|
)
|
|
|
(1,988.7
|
)
|
|
|
1,478.2
|
|
Proceeds from issuance of long-term
debt
|
|
|
|
|
|
|
3,000.0
|
|
|
|
1,000.0
|
|
Repayments of long-term debt
|
|
|
(2,781.5
|
)
|
|
|
(1,004.7
|
)
|
|
|
(839.2
|
)
|
Other, net
|
|
|
9.9
|
|
|
|
39.8
|
|
|
|
(13.4
|
)
|
|
|
|
|
|
|
Net Cash Provided by (Used for)
Financing Activities
|
|
|
(4,578.8
|
)
|
|
|
(1,880.5
|
)
|
|
|
203.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
97.1
|
|
|
|
(175.8
|
)
|
|
|
220.6
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
102.6
|
|
|
|
(2,358.6
|
)
|
|
|
2,609.0
|
|
Cash and cash equivalents at
beginning of year
|
|
|
3,006.7
|
|
|
|
5,365.3
|
|
|
|
2,756.3
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End
of Year
|
|
$
|
3,109.3
|
|
|
$
|
3,006.7
|
|
|
$
|
5,365.3
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-41-
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Net income
|
|
$
|
2,662.7
|
|
|
$
|
1,979.6
|
|
|
$
|
1,810.1
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains
(losses)
|
|
|
542.4
|
|
|
|
(533.4
|
)
|
|
|
441.7
|
|
Net unrealized gains (losses) on
securities
|
|
|
(3.2
|
)
|
|
|
0.3
|
|
|
|
(25.9
|
)
|
Minimum pension liability
adjustment
|
|
|
(18.8
|
)
|
|
|
(87.8
|
)
|
|
|
(4.4
|
)
|
Effective portion of cash flow
hedges
|
|
|
143.3
|
|
|
|
(81.7
|
)
|
|
|
(53.7
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss)
before income taxes
|
|
|
663.7
|
|
|
|
(702.6
|
)
|
|
|
357.7
|
|
Provision for income taxes related
to other comprehensive income (loss) items
|
|
|
(43.1
|
)
|
|
|
63.4
|
|
|
|
21.0
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
(Note 14)
|
|
|
620.6
|
|
|
|
(639.2
|
)
|
|
|
378.7
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,283.3
|
|
|
$
|
1,340.4
|
|
|
$
|
2,188.8
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-42-
Segment
Information
We operate in one significant business segment
pharmaceutical products. Operations of the animal health
business segment are not material and share many of the same
economic and operating characteristics as pharmaceutical
products. Therefore, they are included with pharmaceutical
products for purposes of segment reporting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Net sales to
unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurosciences
|
|
$
|
6,728.5
|
|
|
$
|
6,080.0
|
|
|
$
|
6,052.5
|
|
Endocrinology
|
|
|
5,014.5
|
|
|
|
4,636.9
|
|
|
|
4,290.9
|
|
Oncology
|
|
|
2,020.2
|
|
|
|
1,801.0
|
|
|
|
1,366.2
|
|
Animal health
|
|
|
875.5
|
|
|
|
863.7
|
|
|
|
798.7
|
|
Cardiovascular
|
|
|
514.6
|
|
|
|
608.9
|
|
|
|
658.7
|
|
Anti-infectives
|
|
|
274.6
|
|
|
|
443.9
|
|
|
|
478.0
|
|
Other pharmaceuticals
|
|
|
263.1
|
|
|
|
210.9
|
|
|
|
212.9
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
$
|
13,857.9
|
|
|
|
|
|
|
|
Geographic
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to
unaffiliated
customers1
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
8,599.2
|
|
|
$
|
7,798.1
|
|
|
$
|
7,668.5
|
|
Europe
|
|
|
3,894.3
|
|
|
|
3,818.6
|
|
|
|
3,536.2
|
|
Other foreign countries
|
|
|
3,197.5
|
|
|
|
3,028.6
|
|
|
|
2,653.2
|
|
|
|
|
|
|
|
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
$
|
13,857.9
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
6,207.4
|
|
|
$
|
6,524.5
|
|
|
$
|
5,874.1
|
|
Europe
|
|
|
1,733.8
|
|
|
|
1,554.9
|
|
|
|
1,619.0
|
|
Other foreign countries
|
|
|
1,718.4
|
|
|
|
1,748.9
|
|
|
|
1,565.0
|
|
|
|
|
|
|
|
|
|
$
|
9,659.6
|
|
|
$
|
9,828.3
|
|
|
$
|
9,058.1
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Net sales are attributed to the countries based on the location
of the customer. |
The largest category of products is the neurosciences group,
which includes Zyprexa, Cymbalta, Strattera, and Prozac.
Endocrinology products consist primarily of Humalog, Humulin,
Actos, Byetta, Evista, Forteo, and Humatrope. Oncology products
consist primarily of Gemzar and Alimta. Animal health products
include
Tylan®,
Rumensin®,
Coban®,
and other products for livestock and poultry. Cardiovascular
products consist primarily of ReoPro and Xigris. Anti-infectives
include primarily
Ceclor®
and
Vancocin®.
The other pharmaceuticals category includes Cialis, Axid, and
other miscellaneous pharmaceutical products and services.
Most of our pharmaceutical products are distributed through
wholesalers that serve pharmacies, physicians and other health
care professionals, and hospitals. In 2006, our three largest
wholesalers each accounted for between 12 percent and
17 percent of consolidated net sales. Further, they each
accounted for between 10 percent and 14 percent of
accounts receivable as of December 31, 2006. Animal health
products are sold primarily to wholesale distributors.
-43-
Our business segments are distinguished by the ultimate end user
of the product: humans or animals. Performance is evaluated
based on profit or loss from operations before income taxes. The
accounting policies of the individual segments are substantially
the same as those described in the summary of significant
accounting policies in Note 1 to the consolidated financial
statements. Income before income taxes for the animal health
business was approximately $184 million, $215 million,
and $223 million in 2006, 2005, and 2004, respectively.
The assets of the animal health business are intermixed with
those of the pharmaceutical products business. Long-lived assets
disclosed above consist of property and equipment and certain
sundry assets.
We are exposed to the risk of changes in social, political, and
economic conditions inherent in foreign operations, and our
results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates.
-44-
Selected
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
|
|
|
|
(Dollars in millions, except per-share data)
|
|
|
Net sales
|
|
$
|
4,245.3
|
|
|
$
|
3,864.1
|
|
|
$
|
3,866.9
|
|
|
$
|
3,714.7
|
|
Cost of sales
|
|
|
1,019.0
|
|
|
|
860.4
|
|
|
|
860.6
|
|
|
|
806.5
|
|
Operating expenses
|
|
|
2,168.8
|
|
|
|
1,953.9
|
|
|
|
2,012.7
|
|
|
|
1,883.7
|
|
Asset impairments, restructuring,
and other special charges
|
|
|
945.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income net
|
|
|
(102.7
|
)
|
|
|
(56.0
|
)
|
|
|
(46.9
|
)
|
|
|
(32.2
|
)
|
Income before income taxes
|
|
|
215.0
|
|
|
|
1,105.8
|
|
|
|
1,040.5
|
|
|
|
1,056.7
|
|
Net income
|
|
|
132.3
|
|
|
|
873.6
|
|
|
|
822.0
|
|
|
|
834.8
|
|
Earnings per share
basic
|
|
|
.12
|
|
|
|
.80
|
|
|
|
.76
|
|
|
|
.77
|
|
Earnings per share
diluted
|
|
|
.12
|
|
|
|
.80
|
|
|
|
.76
|
|
|
|
.77
|
|
Dividends paid per share
|
|
|
.40
|
|
|
|
.40
|
|
|
|
.40
|
|
|
|
.40
|
|
Common stock closing prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
58.25
|
|
|
|
57.32
|
|
|
|
55.27
|
|
|
|
58.86
|
|
Low
|
|
|
51.35
|
|
|
|
54.26
|
|
|
|
50.41
|
|
|
|
54.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,879.1
|
|
|
$
|
3,601.1
|
|
|
$
|
3,667.7
|
|
|
$
|
3,497.4
|
|
Cost of sales
|
|
|
898.2
|
|
|
|
845.7
|
|
|
|
871.3
|
|
|
|
859.0
|
|
Operating expenses
|
|
|
1,999.5
|
|
|
|
1,821.9
|
|
|
|
1,908.5
|
|
|
|
1,792.6
|
|
Asset impairments, restructuring,
and other special charges
|
|
|
171.9
|
|
|
|
|
|
|
|
1,073.4
|
|
|
|
|
|
Other income net
|
|
|
(85.2
|
)
|
|
|
(85.0
|
)
|
|
|
(45.4
|
)
|
|
|
(98.6
|
)
|
Income (loss) before income taxes
and cumulative effect of a change in accounting principle
|
|
|
894.7
|
|
|
|
1,018.5
|
|
|
|
(140.1
|
)
|
|
|
944.4
|
|
Net income (loss)
|
|
|
700.6
|
2,3
|
|
|
794.4
|
|
|
|
(252.0
|
)1
|
|
|
736.6
|
|
Earnings (loss) per
share basic
|
|
|
.64
|
|
|
|
.73
|
|
|
|
(.23
|
)
|
|
|
.68
|
|
Earnings (loss) per
share diluted
|
|
|
.64
|
|
|
|
.73
|
|
|
|
(.23
|
)
|
|
|
.68
|
|
Dividends paid per share
|
|
|
.38
|
|
|
|
.38
|
|
|
|
.38
|
|
|
|
.38
|
|
Common stock closing prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
57.81
|
|
|
|
57.26
|
|
|
|
60.44
|
|
|
|
57.78
|
|
Low
|
|
|
49.76
|
|
|
|
52.52
|
|
|
|
51.19
|
|
|
|
51.73
|
|
Our common stock is listed on the New York, London, and Swiss
stock exchanges.
|
|
|
1 |
|
In the second quarter of 2005, we incurred a tax expense of
$111.9 million despite reporting a net loss before income
taxes for the quarter. The product liability charge of
$1.07 billion (Note 13) in the second quarter
resulted in a tax benefit that was less than our effective tax
rate, as the tax benefit was calculated based upon existing tax
laws in the countries in which we reasonably expected to deduct
the charge. |
|
2 |
|
A fourth-quarter 2005 analysis, which included the impact of a
recently completed IRS examination for tax years 1998 to 2000,
led us to conclude that our tax rate for 2005 should be
26.3 percent. As a result, the fourth-quarter tax rate
declined to 19.2 percent. |
|
3 |
|
Reflects the impact of a cumulative effect of a change in
accounting principle in the fourth quarter of 2005 of
$22.0 million, net of income taxes of $11.8 million.
The diluted earnings per share impact of this cumulative effect
of a change in accounting principle was $.02. The net income per
diluted share before the cumulative effect of a change in
accounting principle was $.66. See Note 2 for additional
information. |
-45-
Selected
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
(Dollars in millions, except net sales per employee and
per-share data)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
$
|
13,857.9
|
|
|
$
|
12,582.5
|
|
|
$
|
11,077.5
|
|
Cost of sales
|
|
|
3,546.5
|
|
|
|
3,474.2
|
|
|
|
3,223.9
|
|
|
|
2,675.1
|
|
|
|
2,176.5
|
|
Research and development
|
|
|
3,129.3
|
|
|
|
3,025.5
|
|
|
|
2,691.1
|
|
|
|
2,350.2
|
|
|
|
2,149.3
|
|
Marketing and administrative
|
|
|
4,889.8
|
|
|
|
4,497.0
|
|
|
|
4,284.2
|
|
|
|
4,055.4
|
|
|
|
3,424.0
|
|
Other
|
|
|
707.4
|
|
|
|
931.1
|
|
|
|
716.8
|
|
|
|
240.1
|
|
|
|
(130.0
|
)
|
Income before income taxes and
cumulative effect of a change in accounting principle
|
|
|
3,418.0
|
|
|
|
2,717.5
|
|
|
|
2,941.9
|
|
|
|
3,261.7
|
|
|
|
3,457.7
|
|
Income taxes
|
|
|
755.3
|
|
|
|
715.9
|
|
|
|
1,131.8
|
|
|
|
700.9
|
|
|
|
749.8
|
|
Net income
|
|
|
2,662.7
|
|
|
|
1,979.6
|
1
|
|
|
1,810.1
|
|
|
|
2,560.8
|
|
|
|
2,707.9
|
|
Net income as a percent of sales
|
|
|
17.0
|
%
|
|
|
13.5
|
%
|
|
|
13.1
|
%
|
|
|
20.4
|
%
|
|
|
24.4
|
%
|
Net income per share
diluted
|
|
|
2.45
|
|
|
|
1.81
|
|
|
|
1.66
|
|
|
|
2.37
|
|
|
|
2.50
|
|
Dividends declared per share
|
|
|
1.63
|
|
|
|
1.54
|
|
|
|
1.45
|
|
|
|
1.36
|
|
|
|
1.27
|
|
Weighted-average number of shares
outstanding diluted (thousands)
|
|
|
1,087,490
|
|
|
|
1,092,150
|
|
|
|
1,088,936
|
|
|
|
1,082,230
|
|
|
|
1,085,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
9,694.4
|
|
|
$
|
10,795.8
|
|
|
$
|
12,835.8
|
|
|
$
|
8,768.9
|
|
|
$
|
7,804.1
|
|
Current liabilities
|
|
|
5,085.5
|
|
|
|
5,716.3
|
|
|
|
7,593.7
|
|
|
|
5,560.8
|
|
|
|
5,063.5
|
|
Property and equipment
net
|
|
|
8,152.3
|
|
|
|
7,912.5
|
|
|
|
7,550.9
|
|
|
|
6,539.0
|
|
|
|
5,293.0
|
|
Total assets
|
|
|
21,955.4
|
|
|
|
24,580.8
|
|
|
|
24,867.0
|
|
|
|
21,688.3
|
|
|
|
19,042.0
|
|
Long-term debt
|
|
|
3,494.4
|
|
|
|
5,763.5
|
|
|
|
4,491.9
|
|
|
|
4,687.8
|
|
|
|
4,358.2
|
|
Shareholders equity
|
|
|
10,980.7
|
|
|
|
10,791.9
|
|
|
|
10,919.9
|
|
|
|
9,764.8
|
|
|
|
8,273.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on shareholders equity
|
|
|
24.5
|
%
|
|
|
18.2
|
%
|
|
|
17.5
|
%
|
|
|
28.4
|
%
|
|
|
35.2
|
%
|
Return on assets
|
|
|
11.2
|
%
|
|
|
8.2
|
%
|
|
|
7.8
|
%
|
|
|
12.6
|
%
|
|
|
15.2
|
%
|
Capital expenditures
|
|
$
|
1,077.8
|
|
|
$
|
1,298.1
|
|
|
$
|
1,898.1
|
|
|
$
|
1,706.6
|
|
|
$
|
1,130.9
|
|
Depreciation and amortization
|
|
|
801.8
|
|
|
|
726.4
|
|
|
|
597.5
|
|
|
|
548.5
|
|
|
|
493.0
|
|
Effective tax rate
|
|
|
22.1
|
%
|
|
|
26.3
|
%
|
|
|
38.5
|
%
|
|
|
21.5
|
%
|
|
|
21.7
|
%
|
Net sales per employee
|
|
$
|
378,000
|
|
|
$
|
344,000
|
|
|
$
|
311,000
|
|
|
$
|
280,000
|
|
|
$
|
258,000
|
|
Number of employees
|
|
|
41,500
|
|
|
|
42,600
|
|
|
|
44,500
|
|
|
|
45,000
|
|
|
|
42,900
|
|
Number of shareholders of record
|
|
|
44,800
|
|
|
|
50,800
|
|
|
|
52,400
|
|
|
|
54,600
|
|
|
|
56,200
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Reflects the impact of a cumulative effect of a change in
accounting principle in 2005 of $22.0 million, net of
income taxes of $11.8 million. The diluted earnings per
share impact of this cumulative effect of a change in accounting
principle was $.02. The net income per diluted share before the
cumulative effect of a change in accounting principle was $1.83.
See Note 2 for additional information. |
-46-
Notes to
Consolidated Financial Statements
ELI LILLY AND COMPANY AND
SUBSIDIARIES
(Dollars in millions, except per-share data)
Note 1: Summary
of Significant Accounting Policies
Basis of presentation: The accompanying consolidated
financial statements have been prepared in accordance with
accounting practices generally accepted in the United States
(GAAP). The accounts of all wholly owned and majority-owned
subsidiaries are included in the consolidated financial
statements. Where our ownership of consolidated subsidiaries is
less than 100 percent, the outside shareholders
interests are reflected in other noncurrent liabilities. All
intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the date of the financial
statements and during the reporting period. Actual results could
differ from those estimates.
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 dilutive stock options and other incremental shares.
Cash equivalents: We consider all highly liquid
investments, with a maturity of three months or less, to be cash
equivalents. The cost of these investments approximates fair
value. If items meeting this definition are part of a larger
investment pool, they are classified consistent with the
classification of the pool.
Inventories: We state all inventories at the lower of
cost or market. We use the
last-in,
first-out (LIFO) method for substantially all our inventories
located in the continental United States, or approximately
46 percent of our total inventories. Other inventories are
valued by the
first-in,
first-out (FIFO) method. FIFO cost approximates current
replacement cost. Inventories at December 31 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Finished products
|
|
$
|
644.5
|
|
|
$
|
471.3
|
|
Work in process
|
|
|
1,551.5
|
|
|
|
1,272.4
|
|
Raw materials and supplies
|
|
|
187.0
|
|
|
|
214.7
|
|
|
|
|
|
|
|
|
|
|
2,383.0
|
|
|
|
1,958.4
|
|
Reduction to LIFO cost
|
|
|
(112.7
|
)
|
|
|
(80.4
|
)
|
|
|
|
|
|
|
|
|
$
|
2,270.3
|
|
|
$
|
1,878.0
|
|
|
|
|
|
|
|
Investments: Substantially all debt and marketable equity
securities are classified as
available-for-sale.
Available-
for-sale
securities are carried at fair value with the unrealized gains
and losses, net of tax, reported in other comprehensive income.
Unrealized losses considered to be
other-than-temporary
are recognized in earnings. Factors we consider in making this
evaluation include company-specific drivers of the decrease in
stock price, status of projects in development, near-term
prospects of the issuer, the length of time the value has been
depressed, and the financial condition of the industry. We do
not evaluate cost-method investments for impairment unless there
is an indicator of impairment. We review these investments for
indicators of impairment on a regular basis. Realized gains and
losses on sales of
available-for-sale
securities are computed based upon specific identification of
the initial cost adjusted for any
other-than-temporary
declines in fair value. 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 income net. We own no
investments that are considered to be trading securities.
Risk-management instruments: Our derivative activities
are initiated within the guidelines of documented corporate
risk-management policies and do not create additional risk
because gains and losses on derivative contracts offset losses
and gains on the assets, liabilities, and transactions being
hedged. As derivative
-47-
contracts are initiated, we designate the instruments
individually as either a fair value hedge or a cash flow hedge.
Management reviews the correlation and effectiveness of our
derivatives on a quarterly basis.
For derivative contracts 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 contracts that are designated and
qualify as cash flow hedges, the effective portion of gains and
losses on these contracts is reported as a component of other
comprehensive income and reclassified into earnings in the same
period the hedged transaction affects earnings. Hedge
ineffectiveness is immediately recognized in earnings.
Derivative contracts that are not designated as hedging
instruments are recorded at fair value with the gain or loss
recognized in current earnings during the period of change.
We enter into foreign currency forward and option contracts to
reduce the effect of fluctuating currency exchange rates
(principally the euro 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 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 income.
The purchased option contracts are used to hedge anticipated
foreign currency transactions, primarily intercompany inventory
activities expected to occur within the next year. These
contracts are designated as cash flow hedges of those future
transactions and the impact on earnings is included in cost of
sales. We may enter into foreign currency forward contracts and
currency swaps as fair value hedges of firm commitments. Forward
and option contracts generally have maturities not exceeding
12 months.
In the normal course of business, our operations are exposed to
fluctuations in interest rates. 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 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 or investments to a
floating rate are designated as fair value hedges of the
underlying instruments. Interest rate swaps or collars that
convert floating rate debt or investments 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.
Goodwill and other intangibles: Other intangibles with
finite lives arising from acquisitions and research alliances
are amortized over their estimated useful lives, ranging from 5
to 15 years, using the straight-line method. Goodwill is
not amortized. Goodwill and other intangibles are reviewed to
assess recoverability at least annually and when certain
impairment indicators are present. Goodwill and net other
intangibles with finite lives were $130.0 million and
$139.6 million, respectively, at December 31, 2006 and
2005, and were included in sundry assets in the consolidated
balance sheets. Goodwill is our only intangible asset with an
indefinite life. No material impairments occurred with respect
to the carrying value of our goodwill or other intangible assets
in 2006, 2005, or 2004.
Property and equipment: Property and equipment is stated
on the basis of cost. Provisions for depreciation of buildings
and equipment are computed generally by the straight-line method
at rates based on their estimated useful lives (12 to
50 years for buildings and 3 to 18 years for
equipment). We review the carrying value of long-lived assets
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. Impairment is determined by
comparing 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 assets net
book value over its fair value, and the cost basis is adjusted.
-48-
At December 31, property and equipment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Land
|
|
$
|
168.7
|
|
|
$
|
166.8
|
|
Buildings
|
|
|
4,852.8
|
|
|
|
4,584.5
|
|
Equipment
|
|
|
6,718.5
|
|
|
|
6,314.1
|
|
Construction in progress
|
|
|
1,976.7
|
|
|
|
2,070.6
|
|
|
|
|
|
|
|
|
|
|
13,716.7
|
|
|
|
13,136.0
|
|
Less allowances for depreciation
|
|
|
(5,564.4
|
)
|
|
|
(5,223.5
|
)
|
|
|
|
|
|
|
|
|
$
|
8,152.3
|
|
|
$
|
7,912.5
|
|
|
|
|
|
|
|
Depreciation expense for 2006, 2005, and 2004 was
$627.4 million, $577.2 million, and
$495.9 million, respectively. Approximately
$106.7 million, $140.5 million, and
$111.3 million of interest costs were capitalized as part
of property and equipment in 2006, 2005, and 2004, respectively.
Total rental expense for all leases, including contingent
rentals (not material), amounted to approximately
$293.6 million, $294.4 million, and
$286.8 million for 2006, 2005, and 2004, respectively.
Capital leases included in property and equipment in the
consolidated balance sheets, capital lease obligations entered
into, and future minimum rental commitments are not material.
Litigation and environmental liabilities: Litigation
accruals and environmental liabilities and the related estimated
insurance recoverables are reflected on a gross basis as
liabilities and assets, respectively, on our consolidated
balance sheets. With respect to the product liability claims
currently asserted against us, we have accrued for our estimated
exposures to the extent they are both probable and estimable
based on the information available to us. 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. Legal defense costs expected
to be incurred in connection with significant product liability
loss contingencies are accrued when probable and reasonably
estimable. A portion of the costs associated with defending and
disposing of these suits is covered by insurance. We record
receivables for insurance-related recoveries when it is probable
they will be realized. These receivables are classified as a
reduction of the litigation charges on the statement of income.
We estimate insurance recoverables based on existing
deductibles, coverage limits, our assessment of any defenses to
coverage that might be raised by the carriers, and the existing
and projected future level of insolvencies among the insurance
carriers.
Revenue recognition: 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. For more than
90 percent of our sales, this is at the time products are
shipped to the customer, typically a wholesale distributor or a
major retail chain. The remaining sales are recorded at the
point of delivery. Provisions for discounts and rebates are
established in the same period the related sales are recorded.
We also generate income as a result of collaboration agreements.
Revenue from copromotion services is based upon net sales
reported by our copromotion partners and, if applicable, the
number of sales calls we perform. Initial fees we receive from
the partnering of our compounds under development are amortized
through the expected product approval date. Initial fees
received from out-licensing agreements that include both the
sale of marketing rights to our commercialized products and a
related commitment to supply the products are generally
recognized as net sales over the term of the supply agreement.
We immediately recognize the full amount of milestone payments
due to us upon the achievement of the milestone event if the
event is substantive, objectively determinable, and represents
an important point in the development life cycle of the
pharmaceutical product. Milestone payments earned by us are
generally recorded in other income net.
Research and development: We recognize as incurred the
cost of directly acquiring assets to be used in the research and
development process that have not yet received regulatory
approval for marketing and for which no alternative future use
has been identified. Once the product has obtained regulatory
approval, we capitalize
-49-
the milestones paid and amortize them over the period benefited.
Milestones paid prior to regulatory approval of the product are
generally expensed when the event requiring payment of the
milestone occurs.
Other income net: Other income
net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Interest expense
|
|
$
|
238.1
|
|
|
$
|
105.2
|
|
|
$
|
51.6
|
|
Interest income
|
|
|
(261.9
|
)
|
|
|
(212.1
|
)
|
|
|
(156.7
|
)
|
Joint venture (income) loss
|
|
|
(96.3
|
)
|
|
|
(11.1
|
)
|
|
|
79.0
|
|
Other
|
|
|
(117.7
|
)
|
|
|
(196.2
|
)
|
|
|
(252.3
|
)
|
|
|
|
|
|
|
|
|
$
|
(237.8
|
)
|
|
$
|
(314.2
|
)
|
|
$
|
(278.4
|
)
|
|
|
|
|
|
|
The joint venture (income) loss represents our share of the
Lilly ICOS LLC joint venture results of operations, net of
income taxes. We acquired the complete ownership of the joint
venture in January 2007 as a result of our acquisition of ICOS.
See Note 3 for further discussion.
Income taxes: Deferred taxes are recognized for the
future tax effects of temporary differences between financial
and income tax reporting based on enacted tax laws and rates.
Federal income taxes are provided on the portion of the income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable. We record a liability for tax
contingencies when we believe it is probable that we will be
assessed and the amount of the contingency can be reasonably
estimated. The tax contingency reserve is adjusted for changes
in facts and circumstances, and additional uncertainties. See
Note 10 regarding the 2004 tax expense associated with the
completed repatriation of earnings reinvested outside the
U.S. pursuant to the American Jobs Creations Act.
Earnings per share: We calculate basic earnings per share
based on the weighted-average number of outstanding common
shares and incremental shares. We calculate diluted earnings per
share based on the weighted-average number of outstanding common
shares plus the effect of dilutive stock options and other
incremental shares.
Stock-based compensation:As discussed further in
Note 7, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), effective January 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based
compensation in net income. Stock-based compensation primarily
consists of stock options and performance awards. Stock options
are granted to employees at exercise prices equal to the fair
market value of our stock at the dates of grant. Options fully
vest three years from the grant date and have a term of
10 years. Performance awards are granted to officers and
key employees and are payable in shares of our common stock. The
number of performance award shares actually issued, if any,
varies depending on the achievement of certain
earnings-per-share
targets. Performance awards fully vest at the end of the fiscal
year of the grant. We recognize the stock-based compensation
expense over the requisite service period of the individual
grantees, which generally equals the vesting period. We provide
newly issued shares and treasury stock to satisfy stock option
exercises and for the issuance of performance awards.
Under our policy, all stock option awards are approved prior to
the date of grant and the exercise price is the average of the
high and low market price on the date of grant. The Compensation
Committee of the Board of Directors approves the value of the
award and the date of grant. Options that are awarded as part of
annual total compensation are made on specific grant dates
scheduled in advance. With respect to option awards given to new
hires, our policy requires approval of such awards prior to the
grant date, and the options are granted on a pre-determined
monthly date immediately following the date of hire.
Prior to January 1, 2005, we followed Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for our
stock options and performance awards. Under APB 25, because
the exercise price of our employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense was recognized. However, SFAS 123R
requires us to present pro forma information as if we had
accounted for our employee stock options and performance awards
under the fair value method of that statement. For purposes of
pro forma disclosure, the
-50-
estimated fair value of the options and performance awards at
the date of the grant is amortized to expense over the requisite
service period, which generally is the vesting period.
The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition
provisions of SFAS 123R to stock-based employee
compensation.
|
|
|
|
|
|
|
2004
|
|
|
|
|
Net income, as reported
|
|
$
|
1,810.1
|
|
Add: Compensation expense for
stock-based performance awards included in reported net income,
net of related tax effects
|
|
|
34.5
|
|
Deduct: Total stock-based employee
compensation expense determined under fair-value-based method
for all awards, net of related tax effects
|
|
|
(300.9
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
1,543.7
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic, as reported
|
|
$
|
1.67
|
|
|
|
|
|
|
Basic, pro forma
|
|
$
|
1.42
|
|
|
|
|
|
|
Diluted, as reported
|
|
$
|
1.66
|
|
|
|
|
|
|
Diluted, pro forma
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
Note 2:
|
Implementation
of New Financial Accounting Pronouncements
|
In June 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation (FIN) 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement
No. 109. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. The Interpretation is effective for fiscal
years beginning after December 15, 2006; therefore, we are
required to adopt this Interpretation in the first quarter of
2007. While we have not yet completed our analysis, we expect
the adoption of FIN 48 will not have a material impact on
retained earnings, and that we will reclassify approximately
$900 million to $960 million of income taxes payable
from current to noncurrent liabilities.
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans an amendment of FASB Statements
No. 87, 88, 106, and 132(R). SFAS 158 requires the
recognition of the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its
statement of financial position, the measurement of a
plans assets and its obligations that determine its funded
status as of the end of the employers fiscal year, and the
recognition of changes in that funded status through
comprehensive income in the year in which the changes occur.
Additional footnote disclosures are also required. SFAS 158
was effective December 31, 2006. See Note 12 for
further discussion of the impact of adopting this pronouncement.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108, which provides interpretive guidance on how
the effects of carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement.
SAB 108 is effective for fiscal years ending after
November 15, 2006, and did not have an impact on our
consolidated financial statements.
In 2005, the FASB issued FIN 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB
Statement No. 143. FIN 47 requires us to record the
fair value of a liability for conditional asset retirement
obligations in the period in which it is incurred, which is
adjusted to its present value each subsequent period. In
addition, we are required to capitalize a corresponding amount
by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related
long-lived asset. The adoption of FIN 47 on
December 31, 2005 resulted in a cumulative effect of a
change in accounting principle of $22.0 million, net of
income taxes of $11.8 million.
-51-
ICOS Corporation
Acquisition
On January 29, 2007, we acquired all of the outstanding
common stock of ICOS Corporation (ICOS), our partner in the
Lilly ICOS LLC joint venture that manufactures, markets and
sells Cialis for the treatment of erectile dysfunction. The
acquisition brings the full value of Cialis to us and will
enable us to realize operational efficiencies in the further
development, marketing and selling of this product.
Under the terms of the agreement, each outstanding share of ICOS
common stock was redeemed for $34 in cash for an aggregate
purchase price of approximately $2.3 billion, which was
financed through borrowings. While the allocation of the
purchase price has not been finalized, we anticipate that
approximately $1.7 billion of the purchase price will be
allocated to the acquired intangible asset related to Cialis and
approximately $300 million to acquired in-process research
and development (IPR&D). The intangible asset will be
amortized over Cialis remaining expected patent lives in
each country, which range from 2015 to 2017. A deferred tax
liability of approximately $700 million will be established
related to the intangible asset. Approximately $800 million
will be recorded as goodwill and is not expected to be
deductible for tax purposes. We will include the IPR&D as an
expense in the first quarter of 2007 and will include ICOS
results of operations subsequent to the acquisition in our 2007
consolidated financial statements. The IPR&D charge is not
deductible for tax purposes.
Applied
Molecular Evolution, Inc. Acquisition
On February 12, 2004, we acquired all of the outstanding
common stock of Applied Molecular Evolution, Inc. (AME) in a
tax-free merger. Under the terms of the merger agreement, each
outstanding share of AME common stock was exchanged for our
common stock or a combination of cash and our stock valued at
$18. The aggregate purchase price of approximately
$442.8 million consisted of issuance of 4.2 million
shares of our common stock valued at $314.8 million,
issuance of 0.7 million replacement options to purchase
shares of our common stock in exchange for the remaining
outstanding AME options valued at $37.6 million, cash of
$85.4 million for AME common stock and options for certain
AME employees, and transaction costs of $5.0 million. The
fair value of our common stock was derived using a per-share
value of $74.14, which was our average closing stock price for
February 11 and 12, 2004. The fair value for the options
granted was derived using a Black-Scholes valuation method using
assumptions consistent with those we used in valuing employee
options. Replacement options to purchase our common stock
granted as part of this acquisition have terms equivalent to the
AME options being replaced. AMEs results of operations
subsequent to the acquisition are included in our consolidated
financial statements.
We hired independent third parties to assist in the valuation of
assets that were difficult to value. Of the $442.8 million
purchase price, $362.3 million was attributable to acquired
IPR&D. The IPR&D represents compounds that were under
development at that time and that had not yet achieved
regulatory approval for marketing. AMEs two lead compounds
for the treatment of non-Hodgkins lymphoma and rheumatoid
arthritis represented approximately 80 percent of the
estimated fair value of the IPR&D. These IPR&D
intangible assets were written off by a charge to income
immediately subsequent to the acquisition because the compounds
did not have any alternative future use. This charge was not
deductible for tax purposes. The ongoing activity with respect
to each of these compounds under development is not material to
our research and development expenses.
There are several methods that can be used to determine the
estimated fair value of the acquired IPR&D. We utilized the
income method, which applies a probability weighting
to the estimated future net cash flows that are derived from
projected sales revenues and estimated costs. These projections
were 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 were then
discounted to the present value using an appropriate discount
rate. This analysis was performed for each project
independently. The discount rate we used in valuing the acquired
IPR&D projects was 18.75 percent.
-52-
Product
Acquisitions
In January 2007, we entered into an agreement with OSI
Pharmaceuticals, Inc. to acquire the rights to its compound for
the potential treatment of Type 2 diabetes. At the inception of
this agreement, this compound was in the development stage
(Phase I clinical trials) and had no alternative future
uses. As with many development phase compounds, launch of the
product, if approved, was not expected in the near term. Our
charge for acquired IPR&D related to this arrangement was
$25.0 million and will be included as expense in the first
quarter of 2007.
In 2004, we incurred an IPR&D charge of $29.9 million
related to a development stage compound acquired from Merck KGaA
for a potential treatment for insomnia. This compound did not
have any alternative future use.
|
|
Note 4:
|
Asset
Impairments, Restructuring, and Other Special Charges
|
The components of the charges included in asset impairments,
restructuring, and other special charges in our consolidated
statements of income are described below.
Asset
Impairments and Related Restructuring and Other
Charges
In the fourth quarter of 2006, management approved plans to
close two research and development facilities and one production
facility outside the U.S. Management also made the decision
to stop construction of a planned insulin manufacturing plant in
the U.S. in an effort to increase productivity in research
and development operations and to reduce excess manufacturing
capacity. These decisions, as well as other strategic changes,
resulted in non-cash charges of $308.8 million for the
write-down of certain impaired assets, substantially all of
which have no future use, and other charges of
$141.5 million, primarily related to severance and contract
termination payments. The impairment charges are necessary to
adjust the carrying value of the assets to fair value. In
addition, in early 2007 the Board approved other related actions
to offer voluntary severance to up to 250 employees at one of
our plants in the U.S. Severance and other costs related to
all of these actions will result in estimated additional charges
of approximately $125 million (pretax) in the first quarter
of 2007. We expect to complete these restructuring activities by
December 31, 2007.
In December 2005, management approved, as part of our ongoing
efforts to increase productivity and reduce our cost structure,
decisions that resulted in non-cash charges of
$154.6 million for the write-down of certain impaired
assets, and other charges of $17.3 million, primarily
related to contract termination payments. The impaired assets,
which have no future use, include manufacturing buildings and
equipment no longer needed to supply projected capacity
requirements, as well as obsolete research and development
equipment. The impairment charges are necessary to adjust the
carrying value of the assets to fair value.
During 2004, management approved actions designed to increase
productivity, to address current challenges in the marketplace,
and to leverage prior investments in our product portfolio.
These actions affected primarily operations in the
manufacturing, research and development, and sales and marketing
components and resulted in asset impairments, severance and
other related charges. As a result, we recognized asset
impairment charges of $486.3 million. We have ceased using
these assets, and have disposed of or destroyed substantially
all of the assets. The impairment charges are necessary to
adjust the carrying value of the assets to fair value. Other
site charges, including lease termination payments, were
$12.2 million. The restructuring and other charges incurred
and expended related to the elimination of positions as a result
of these actions totaled $68.5 million, including
$35.1 million of severance charges related to restructuring
activities in our overseas affiliates. The severance charges
consisted primarily of voluntary severance expenses.
Product
Liability and Other Special Charges
As discussed further in Note 13, we have reached agreements
with claimants attorneys involved in U.S. Zyprexa
product liability litigation to settle a total of approximately
28,500 claims against us relating to the medication.
Approximately 1,300 claims remain. As a result of our product
liability exposures, the substantial majority of which were
related to Zyprexa, we recorded net pretax charges of
$494.9 million in 2006 and $1.07 billion in 2005.
-53-
The other significant component of our 2004 special charges was
a provision for $36.0 million for the resolution of the
previously reported Evista marketing and promotional practices
investigation. See Note 13 for additional discussion.
|
|
Note 5:
|
Financial
Instruments and Investments
|
Financial instruments that potentially subject us to credit risk
consist principally of trade receivables and interest-bearing
investments. Wholesale distributors of life-sciences products
and managed care organizations account for a substantial portion
of trade receivables; collateral is generally not required. The
risk associated with this concentration is mitigated by our
ongoing credit review procedures. We place substantially all our
interest-bearing investments with major financial institutions,
in U.S. government securities, or with top-rated corporate
issuers. At December 31, 2006, our investments in debt
securities were comprised of 41 percent asset-backed
securities, 29 percent corporate securities, and
30 percent U.S. government securities. In accordance
with documented corporate policies, we limit 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 financial instruments but do
not expect any counterparties to fail to meet their obligations
given their high credit ratings.
Fair
Value of Financial Instruments
A summary of our outstanding financial instruments and other
investments at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
781.7
|
|
|
$
|
781.7
|
|
|
$
|
2,031.0
|
|
|
$
|
2,031.0
|
|
Noncurrent investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity
|
|
$
|
79.4
|
|
|
$
|
79.4
|
|
|
$
|
118.0
|
|
|
$
|
118.0
|
|
Debt securities
|
|
|
834.1
|
|
|
|
834.1
|
|
|
|
1,076.2
|
|
|
|
1,076.2
|
|
Equity method and other investments
|
|
|
88.4
|
|
|
|
N/A
|
|
|
|
102.4
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,001.9
|
|
|
|
|
|
|
$
|
1,296.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current
portion
|
|
$
|
(3,705.2
|
)
|
|
$
|
(3,682.7
|
)
|
|
$
|
(6,484.8
|
)
|
|
$
|
(6,484.2
|
)
|
Risk-management
instruments assets (liabilities)
|
|
|
19.7
|
|
|
|
19.7
|
|
|
|
(336.0
|
)
|
|
|
(336.0
|
)
|
We determine fair values based on quoted market values where
available or discounted cash flow analyses (principally
long-term debt). The fair value of equity method and other
investments is not readily available and disclosure is not
required. Approximately $1.2 billion of our investments in
debt securities mature within five years.
A summary of the unrealized gains and losses (pretax) of our
available-for-sale
securities in other comprehensive income at December 31
follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Unrealized gross gains
|
|
$
|
43.7
|
|
|
$
|
52.0
|
|
Unrealized gross losses
|
|
|
10.8
|
|
|
|
15.9
|
|
-54-
The net adjustment to unrealized gains and losses (net of tax)
on
available-for-sale
securities increased (decreased) other comprehensive income by
$0.3 million, $(4.6) million, and $(18.2) million
in 2006, 2005, and 2004, respectively. Activity related to our
available-for-sale
investment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
2,848.4
|
|
|
$
|
2,048.6
|
|
|
$
|
7,774.7
|
|
Realized gross gains on sales
|
|
|
63.5
|
|
|
|
25.6
|
|
|
|
37.3
|
|
Realized gross losses on sales
|
|
|
9.0
|
|
|
|
7.1
|
|
|
|
17.6
|
|
During the years ended December 31, 2006, 2005, and 2004,
net losses related to ineffectiveness and net losses related to
the portion of our risk-management hedging instruments, fair
value and cash flow hedges, excluded from the assessment of
effectiveness were not material.
We expect to reclassify an estimated $25.5 million of
pretax net losses on cash flow hedges of anticipated foreign
currency transactions and the variability in expected future
interest payments on floating rate debt from accumulated other
comprehensive loss to earnings during 2007. This assumes that
short-term interest rates remain unchanged from the prevailing
rates at December 31, 2006.
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
4.50 to 7.13 percent notes
(due 2012 2036)
|
|
$
|
1,487.4
|
|
|
$
|
1,487.4
|
|
2.90 percent notes (due
2006 2008)
|
|
|
300.0
|
|
|
|
811.4
|
|
Floating rate extendible notes
(due 2008)
|
|
|
1,000.0
|
|
|
|
1,500.0
|
|
Floating rate bonds (due 2008 and
2037)
|
|
|
400.0
|
|
|
|
1,939.2
|
|
Private placement bonds (due
2007 2008)
|
|
|
266.3
|
|
|
|
460.7
|
|
6.55 percent ESOP debentures
(due 2017)
|
|
|
91.6
|
|
|
|
92.6
|
|
Other, including capitalized leases
|
|
|
109.9
|
|
|
|
113.0
|
|
SFAS 133 fair value adjustment
|
|
|
50.0
|
|
|
|
80.5
|
|
|
|
|
|
|
|
|
|
|
3,705.2
|
|
|
|
6,484.8
|
|
Less current portion
|
|
|
(210.8
|
)
|
|
|
(721.3
|
)
|
|
|
|
|
|
|
|
|
$
|
3,494.4
|
|
|
$
|
5,763.5
|
|
|
|
|
|
|
|
In August 2005, Eli Lilly Services, Inc. (ELSI), our indirect
wholly-owned finance subsidiary, issued $1.50 billion of
13-month
floating rate extendible notes. The maturity date of these notes
is January 1, 2008, but holders of the notes may extend the
maturity of the notes, in monthly increments, until
September 1, 2010. These notes pay interest at essentially
a rate equivalent to LIBOR (5.34 percent at
December 31, 2006). We repaid $500.0 million of the
notes in December 2006. The parent company fully and
unconditionally guarantees the ELSI notes.
In September 2005, ELSI issued $1.50 billion of floating
rate bonds with a maturity date in 2008. We repaid
$1.00 billion of the notes in September 2006 and the
remaining $500.0 million in December 2006. The remaining
$400.0 million of floating rate bonds outstanding at
December 31, 2006 are due in 2037 and have variable
interest rates at LIBOR plus our six-month credit spread,
adjusted semiannually (total of 5.46 percent at
December 31, 2006). The interest was to accumulate over the
life of the bonds and be payable upon maturity. We had an option
to begin periodic interest payments at any time. We exercised
this option in November 2006 and paid all previously accrued
interest on the bonds.
Principal and interest on the private placement bonds due in
2007 and 2008 are due semiannually over the remaining terms of
each of these notes. In conjunction with these bonds, we entered
into interest rate swap
-55-
agreements with the same financial institution, which converts
the fixed rate into a variable rate of interest at essentially
LIBOR over the term of the bonds.
The 6.55 percent Employee Stock Ownership Plan (ESOP)
debentures are obligations of the ESOP but are shown on the
consolidated balance sheet because we guarantee them. The
principal and interest on the debt are funded by contributions
from us and by dividends received on certain shares held by the
ESOP. Because of the amortizing feature of the ESOP debt,
bondholders will receive both interest and principal payments
each quarter.
The aggregate amounts of maturities on long-term debt for the
next five years are as follows: 2007, $210.8 million; 2008,
$1.40 billion; 2009, $21.5 million; 2010,
$19.4 million; and 2011, $16.0 million.
At December 31, 2006 and 2005, short-term borrowings
included $8.6 million and $13.4 million, respectively,
of notes payable to banks and commercial paper. At
December 31, 2006, we have $1.21 billion of unused
committed bank credit facilities, $1.20 billion of which
backs our commercial paper program. Compensating balances and
commitment fees are not material, and there are no conditions
that are probable of occurring under which the lines may be
withdrawn.
We have converted substantially all fixed-rate debt to floating
rates through the use of interest rate swaps. The
weighted-average effective borrowing rates based on debt
obligations and interest rates at December 31, 2006 and
2005, including the effects of interest rate swaps for hedged
debt obligations, were 5.89 percent and 4.75 percent,
respectively.
In 2006 and 2005, cash payments of interest on borrowings
totaled $299.6 million and $32.0 million,
respectively, net of capitalized interest. In 2004, capitalized
interest exceeded cash payments of interest on borrowings, due
in large part to certain debt instruments requiring interest
payments only at maturity, as previously noted.
In accordance with the requirements of SFAS 133, the
portion of our fixed-rate debt obligations that is hedged is
reflected in the consolidated balance sheets as an amount equal
to the sum of the debts carrying value plus the fair value
adjustment representing changes in fair value of the hedged debt
attributable to movements in market interest rates subsequent to
the inception of the hedge.
We adopted SFAS 123 (revised 2004), Share-Based Payment
(SFAS 123R), effective January 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based
compensation in net income. Stock-based compensation primarily
consists of stock options and performance awards. Stock options
are granted to employees at exercise prices equal to the fair
market value of our stock at the dates of grant. Options fully
vest three years from the grant date and have a term of
10 years. Performance awards are granted to officers and
key employees and are payable in shares of our common stock. The
number of performance award shares actually issued, if any,
varies depending on the achievement of certain
earnings-per-share
targets. Performance awards fully vest at the end of the fiscal
year of the grant. We recognize the stock-based compensation
expense over the requisite service period of the individual
grantees, which generally equals the vesting period. We provide
newly issued shares and treasury stock to satisfy stock option
exercises and for the issuance of performance awards.
Prior to January 1, 2005, we followed Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for our
stock options and performance awards. Under APB 25, because
the exercise price of our employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense was recognized. See Note 1 for a
calculation of our net income and earnings per share if we had
applied the fair value recognition provisions of SFAS 123R
to stock-based employee compensation in 2004.
We elected the modified prospective transition method for
adopting SFAS 123R. Under this method, the provisions of
SFAS 123R apply to all awards granted or modified after the
date of adoption. In addition, the unrecognized expense of
awards not yet vested at the date of adoption, determined under
the original
-56-
provisions of SFAS 123, shall be recognized in net income
in the periods after the date of adoption. We recognized
stock-based compensation cost in the amount of
$359.3 million, $403.5 million, and
$53.0 million, in 2006, 2005, and 2004, respectively, as
well as related tax benefits of $115.9 million,
$122.9 million, and $18.5 million, respectively. The
amounts for 2004 relate only to expenses for performance awards
because no expense was recognized for stock options under
APB 25. In addition, after adopting SFAS 123R, we now
classify tax benefits resulting from tax deductions in excess of
the compensation cost recognized for exercised stock options as
a financing cash flow in the consolidated statements of cash
flows rather than an operating cash flow as under our previous
disclosure.
In connection with the adoption of SFAS 123R, we reassessed
the valuation methodology for stock options and the related
input assumptions. As a result, beginning with the 2005 stock
option grant, we utilized a lattice-based option valuation model
for estimating the fair value of the stock options. The lattice
model allows the use of a range of assumptions related to
volatility, risk-free interest rate, and employee exercise
behavior. Expected volatilities utilized in the lattice model
are based on implied volatilities from traded options on our
stock, historical volatility of our stock price, and other
factors. Similarly, the dividend yield is based on historical
experience and our estimate of future dividend yields. The
risk-free interest rate is derived from the U.S. Treasury
yield curve in effect at the time of grant. The model
incorporates exercise and post-vesting forfeiture assumptions
based on an analysis of historical data. The expected life of
the 2006 and 2005 grants are derived from the output of the
lattice model.
Prior to 2005, we utilized a Black-Scholes option-pricing model
to estimate the fair value of the options. This model did not
allow for the input of a range of factors. Accordingly,
volatility was derived from the historical volatility of our
stock price and the risk-free interest rate was derived from the
weighted-average yield of a treasury security with the same term
as the expected life of the options. The expected life of the
options was based on the weighted-average life of our historical
option grants and the dividend yield was based on our historical
dividends paid.
The weighted-average fair values of the individual options
granted during 2006, 2005, and 2004 were $15.61, $16.06, and
$26.19, respectively, determined using the following assumptions:
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
Dividend yield
|
|
2.0%
|
|
2.0%
|
|
1.57%
|
Weighted-average volatility
|
|
25.0%
|
|
27.8%
|
|
35.2%
|
Range of volatilities
|
|
24.8% - 27.0%
|
|
27.6% - 30.7%
|
|
|
Risk-free interest rate
|
|
4.6% - 4.8%
|
|
2.5% - 4.5%
|
|
3.43%
|
Weighted-average expected life
|
|
7 years
|
|
7 years
|
|
7 years
|
The fair values of performance awards granted in 2006, 2005, and
2004 were $56.18, $55.65, and $70.33, respectively.
Stock option activity during 2006 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Common Stock
|
|
|
Weighted-Average
|
|
|
Remaining
|
|
|
|
|
|
|
Attributable to Options
|
|
|
Exercise
|
|
|
Contractual Term
|
|
|
Aggregate
|
|
|
|
(in thousands)
|
|
|
Price of Options
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
Outstanding at January 1, 2006
|
|
|
90,082
|
|
|
|
$69.37
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,873
|
|
|
|
56.16
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,907
|
)
|
|
|
34.70
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(4,238
|
)
|
|
|
69.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
88,810
|
|
|
|
69.38
|
|
|
|
4.93
|
|
|
|
$8.6
|
|
Exercisable at December 31,
2006
|
|
|
64,638
|
|
|
|
70.42
|
|
|
|
3.91
|
|
|
|
8.6
|
|
-57-
A summary of the status of nonvested shares as of
December 31, 2006, and changes during the year then ended,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
|
(in thousands)
|
|
|
Fair Value
|
|
|
|
|
|
|
Nonvested at January 1, 2006
|
|
|
32,539
|
|
|
|
$22.75
|
|
Granted
|
|
|
4,873
|
|
|
|
15.61
|
|
Vested
|
|
|
(12,007
|
)
|
|
|
20.75
|
|
Forfeited
|
|
|
(1,233
|
)
|
|
|
22.46
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2006
|
|
|
24,172
|
|
|
|
22.32
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during 2006, 2005, and
2004 amounted to $40.8 million, $131.9 million, and
$163.8 million, respectively. The total grant date fair
value of options vested during 2006, 2005, and 2004, amounted to
$249.1 million, $265.5 million, and
$337.2 million, respectively. We received cash of
$66.2 million, $105.9 million, and $117.9 million
from exercises of stock options during 2006, 2005, and 2004,
respectively, and recognized related tax benefits of
$11.3 million, $36.8 million, and $36.8 million
during those same years.
As of December 31, 2006, the total remaining unrecognized
compensation cost related to nonvested stock options amounted to
$83.1 million, which will be amortized over the
weighted-average remaining requisite service period of
17 months. The number of shares ultimately issued for the
performance award program is dependent upon the earnings
achieved during the vesting period. Pursuant to this plan, no
shares were issued in 2004, and approximately 0.5 million
shares and 1.7 million shares were issued in 2005 and 2006,
respectively. Approximately 2.1 million shares are expected
to be issued in 2007.
At December 31, 2006, additional options, performance
awards, or restricted stock grants may be granted under the 2002
Lilly Stock Plan for not more than 45.2 million shares.
|
|
Note 8:
|
Other
Assets and Other Liabilities
|
Our sundry assets include our capitalized computer software,
estimated insurance recoveries from our product litigation and
environmental contingencies (Note 13), deferred tax assets,
goodwill and intangible assets (Note 1), and a variety of
other items. The decrease in sundry assets is primarily
attributable to the decrease in prepaid retiree health benefits
as a result of the adoption of SFAS 158 (Note 12).
Our other current liabilities include product litigation and
environmental liabilities (Note 13), other taxes, and a
variety of other items. The increase in other current
liabilities is caused primarily by an increase in product
litigation liabilities offset by a decrease in interest rate
swaps.
Our other noncurrent liabilities include product litigation and
environmental liabilities (Note 13), deferred income from
our collaboration and out-licensing arrangements, and a variety
of other items. The decrease in other noncurrent liabilities is
primarily attributable to a decrease in product litigation and
environmental liabilities, which is now reflected in other
current liabilities, offset by an increase in deferred income
from our collaboration and out-licensing arrangements.
-58-
|
|
Note 9:
|
Shareholders
Equity
|
Changes in certain components of shareholders equity were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Common Stock in Treasury
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Deferred
|
|
|
Shares
|
|
|
|
|
|
|
Capital
|
|
|
Earnings
|
|
|
Costs ESOP
|
|
|
(in thousands)
|
|
|
Amount
|
|
|
|
|
Balance at January 1, 2004
|
|
$
|
2,610.0
|
|
|
$
|
9,470.4
|
|
|
$
|
(118.6
|
)
|
|
|
952
|
|
|
$
|
104.2
|
|
Net income
|
|
|
|
|
|
|
1,810.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share:
$1.45
|
|
|
|
|
|
|
(1,555.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(17.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
(17.6
|
)
|
Issuance of stock under employee
stock plans
|
|
|
110.7
|
|
|
|
|
|
|
|
|
|
|
|
262
|
|
|
|
17.2
|
|
Stock-based compensation
|
|
|
53.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
13.2
|
|
|
|
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
Acquisition of AME
|
|
|
349.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
3,119.4
|
|
|
|
9,724.6
|
|
|
|
(111.9
|
)
|
|
|
943
|
|
|
|
103.8
|
|
Net income
|
|
|
|
|
|
|
1,979.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share:
$1.54
|
|
|
|
|
|
|
(1,677.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(381.7
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,874
|
)
|
|
|
(386.0
|
)
|
Purchase for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,704
|
|
|
|
377.9
|
|
Issuance of stock under employee
stock plans
|
|
|
172.9
|
|
|
|
|
|
|
|
|
|
|
|
161
|
|
|
|
8.4
|
|
Stock-based compensation
|
|
|
403.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
9.7
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,323.8
|
|
|
|
10,027.2
|
|
|
|
(106.3
|
)
|
|
|
934
|
|
|
|
104.1
|
|
Net income
|
|
|
|
|
|
|
2,662.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share:
$1.63
|
|
|
|
|
|
|
(1,763.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(129.1
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,297
|
)
|
|
|
(130.6
|
)
|
Purchase for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,145
|
|
|
|
122.1
|
|
Issuance of stock under employee
stock plans net
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
5.8
|
|
Stock-based compensation
|
|
|
359.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
11.7
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
3,571.9
|
|
|
$
|
10,926.7
|
|
|
$
|
(100.7
|
)
|
|
|
910
|
|
|
$
|
101.4
|
|
|
|
|
|
|
|
As of December 31, 2006, we have purchased
$2.58 billion of our announced $3.0 billion share
repurchase program. We acquired approximately 2.1 million
and 6.7 million shares in 2006 and 2005, respectively,
under this program.
We have 5 million authorized shares of preferred stock. As
of December 31, 2006 and 2005, no preferred stock has been
issued.
We have funded an employee benefit trust with 40 million
shares of Lilly common stock to provide a source of funds to
assist us in meeting our obligations under various employee
benefit plans. The funding had no net impact on
shareholders equity as we consolidate the employee benefit
trust. The cost basis of the shares held in the trust was
$2.64 billion and is shown as a reduction in
shareholders equity, which offsets the resulting
-59-
increases of $2.61 billion in additional paid-in capital
and $25 million in common stock. Any dividend transactions
between us and the trust are eliminated. Stock held by the trust
is not considered outstanding in the computation of earnings per
share. The assets of the trust were not used to fund any of our
obligations under these employee benefit plans in 2006, 2005, or
2004.
We have an ESOP as a funding vehicle for the existing employee
savings plan. The ESOP used the proceeds of a loan from us to
purchase shares of common stock from the treasury. The ESOP
issued $200 million of third-party debt, repayment of which
was guaranteed by us (see Note 6). The proceeds were used
to purchase shares of our common stock on the open market.
Shares of common stock held by the ESOP will be allocated to
participating employees annually through 2017 as part of our
savings plan contribution. The fair value of shares allocated
each period is recognized as compensation expense.
Under a Shareholder Rights Plan adopted in 1998, all
shareholders receive, along with each common share owned, a
preferred stock purchase right entitling them to purchase from
the company one one-thousandth of a share of Series B
Junior Participating Preferred Stock (the Preferred Stock) at a
price of $325. The rights are exercisable only after the
Distribution Date, which is generally the 10th business day
after the date of a public announcement that a person (the
Acquiring Person) has acquired ownership of 15 percent or
more of our common stock. We may redeem the rights for
$.005 per right, up to and including the Distribution Date.
The rights will expire on July 28, 2008, unless we redeem
them earlier.
The rights plan provides that, if an Acquiring Person acquires
15 percent or more of our outstanding common stock and our
redemption right has expired, generally each holder of a right
(other than the Acquiring Person) will have the right to
purchase at the exercise price the number of shares of our
common stock that have a value of two times the exercise price.
Alternatively, if, in a transaction not approved by the board of
directors, we are acquired in a business combination transaction
or sell 50 percent or more of our assets or earning power
after a Distribution Date, generally each holder of a right
(other than the Acquiring Person) will have the right to
purchase at the exercise price the number of shares of common
stock of the acquiring company that have a value of two times
the exercise price.
At any time after an Acquiring Person has acquired
15 percent or more but less than 50 percent of our
outstanding common stock, the board of directors may exchange
the rights (other than those owned by the Acquiring Person) for
our common stock or Preferred Stock at an exchange ratio of one
common share (or one one-thousandth of a share of Preferred
Stock) per right.
Following is the composition of income taxes attributable to
income before cumulative effect of a change in accounting
principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
197.7
|
|
|
$
|
517.4
|
|
|
$
|
47.6
|
|
Foreign
|
|
|
390.6
|
|
|
|
649.8
|
|
|
|
519.9
|
|
State
|
|
|
(25.2
|
)
|
|
|
11.6
|
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
563.1
|
|
|
|
1,178.8
|
|
|
|
556.9
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
78.3
|
|
|
|
89.4
|
|
|
|
175.2
|
|
Foreign
|
|
|
113.5
|
|
|
|
(86.8
|
)
|
|
|
(74.0
|
)
|
State
|
|
|
.4
|
|
|
|
(.5
|
)
|
|
|
8.7
|
|
Unremitted earnings to be
repatriated due to change in tax law
|
|
|
|
|
|
|
(465.0
|
)
|
|
|
465.0
|
|
|
|
|
|
|
|
|
|
|
192.2
|
|
|
|
(462.9
|
)
|
|
|
574.9
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
755.3
|
|
|
$
|
715.9
|
|
|
$
|
1,131.8
|
|
|
|
|
|
|
|
-60-
Significant components of our deferred tax assets and
liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
713.4
|
|
|
$
|
396.6
|
|
Inventory
|
|
|
504.4
|
|
|
|
637.8
|
|
Other carryforwards
|
|
|
293.2
|
|
|
|
391.5
|
|
Tax credit carryforwards and
carrybacks
|
|
|
286.9
|
|
|
|
218.7
|
|
Sale of intangibles
|
|
|
161.3
|
|
|
|
235.7
|
|
Asset purchases
|
|
|
98.0
|
|
|
|
92.4
|
|
Asset disposals
|
|
|
94.6
|
|
|
|
45.5
|
|
Financial instruments
|
|
|
83.2
|
|
|
|
166.0
|
|
Other
|
|
|
276.2
|
|
|
|
414.8
|
|
|
|
|
|
|
|
|
|
|
2,511.2
|
|
|
|
2,599.0
|
|
Valuation allowances
|
|
|
(493.7
|
)
|
|
|
(455.7
|
)
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,017.5
|
|
|
|
2,143.3
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(701.2
|
)
|
|
|
(702.6
|
)
|
Prepaid employee benefits
|
|
|
(485.8
|
)
|
|
|
(1,145.6
|
)
|
Other
|
|
|
(237.0
|
)
|
|
|
(236.8
|
)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,424.0
|
)
|
|
|
(2,085.0
|
)
|
|
|
|
|
|
|
Deferred tax assets net
|
|
$
|
593.5
|
|
|
$
|
58.3
|
|
|
|
|
|
|
|
At December 31, 2006, we had other carryforwards, including
net operating loss carryforwards, for international and
U.S. income tax purposes of $34.7 million:
$29.1 million will expire within five years;
$5.6 million of the carryforwards will never expire. The
primary component of the remaining portion of the deferred tax
asset for other carryforwards is related to net operating losses
for state income tax purposes that are fully reserved. We also
have tax credit carryforwards and carrybacks of
$286.9 million available to reduce future income taxes;
$80.7 million will be carried back and $12.0 million
of the tax credit carryforwards will never expire. The remaining
portion of the tax credit carryforwards is related to state tax
credits that are fully reserved. The reduction in the deferred
tax liability for prepaid employee benefits was a result of the
adoption of SFAS 158 in 2006 (Note 12).
Domestic and Puerto Rican companies contributed approximately
18 percent, 43 percent, and 6 percent in 2006,
2005, and 2004, respectively, to consolidated income before
income taxes and cumulative effect of a change in accounting
principle. We have a subsidiary operating in Puerto Rico under a
tax incentive grant that begins to expire at the end of 2007. We
have a new tax incentive grant, not yet in effect, that will
last for a period of at least 10 years from its inception
date.
The American Jobs Creation Act of 2004 (AJCA) created a
temporary incentive for U.S. corporations to repatriate
undistributed income earned abroad by providing an
85 percent dividends received deduction for certain
dividends from controlled foreign corporations in 2005. We
recorded a related tax liability of $465.0 million as of
December 31, 2004, and subsequently repatriated
$8.00 billion in incentive dividends, as defined in the
AJCA, during 2005. At December 31, 2006, we had an
aggregate of $5.7 billion of unremitted earnings of foreign
subsidiaries that have been or are intended to be permanently
reinvested for continued use in foreign operations and that, if
distributed, would result in taxes at approximately the
U.S. statutory rate.
Cash payments of income taxes totaled $864.0 million,
$1.78 billion, and $487.0 million in 2006, 2005, and
2004, respectively. The higher cash payments of income taxes in
2005 are primarily attributable to the tax
-61-
liability associated with the implementation of the AJCA and the
resolution of an IRS examination for the years 1998 to 2000.
Following is a reconciliation of the effective income tax rate
applicable to income before income taxes and cumulative effect
of a change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
United States federal statutory
tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Add (deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
International operations,
including Puerto Rico
|
|
|
(6.7
|
)
|
|
|
(4.8
|
)
|
|
|
(19.1
|
)
|
Additional repatriation due to
change in tax law
|
|
|
|
|
|
|
|
|
|
|
15.8
|
|
Non-deductible acquired in-process
research and development
|
|
|
|
|
|
|
|
|
|
|
4.3
|
|
General business credits
|
|
|
(1.4
|
)
|
|
|
(1.5
|
)
|
|
|
(1.3
|
)
|
Sundry
|
|
|
(4.8
|
)
|
|
|
(2.4
|
)
|
|
|
3.8
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
22.1
|
%
|
|
|
26.3
|
%
|
|
|
38.5
|
%
|
|
|
|
|
|
|
|
|
Note 11:
|
Earnings
Per Share
|
The following is a reconciliation of the denominators used in
computing earnings per share before cumulative effect of a
change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
(Shares in thousands)
|
|
|
Income before cumulative effect of
a change in accounting principle available to common shareholders
|
|
$
|
2,662.7
|
|
|
$
|
2,001.6
|
|
|
$
|
1,810.1
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
shares outstanding, including incremental shares
|
|
|
1,086,239
|
|
|
|
1,088,754
|
|
|
|
1,083,887
|
|
|
|
|
|
|
|
Basic earnings per share before
cumulative effect of a change in accounting principle
|
|
$
|
2.45
|
|
|
$
|
1.84
|
|
|
$
|
1.67
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common
shares outstanding
|
|
|
1,085,337
|
|
|
|
1,088,115
|
|
|
|
1,083,677
|
|
Stock options and other
incremental shares
|
|
|
2,153
|
|
|
|
4,035
|
|
|
|
5,259
|
|
|
|
|
|
|
|
Weighted-average number of common
shares outstanding diluted
|
|
|
1,087,490
|
|
|
|
1,092,150
|
|
|
|
1,088,936
|
|
|
|
|
|
|
|
Diluted earnings per share before
cumulative effect of a change in accounting principle
|
|
$
|
2.45
|
|
|
$
|
1.83
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
Note 12:
|
Retirement
Benefits
|
On December 31, 2006, we adopted the recognition and
disclosure provisions of SFAS 158. SFAS 158 requires
that we recognize the funded status (i.e., the difference
between the fair value of plan assets and the projected benefit
obligation for our defined benefit pension plans and the
accumulated postretirement benefit obligation for our retiree
health benefit plans) of our defined benefit pension plans and
retiree health benefit plans in the December 31, 2006
balance sheet, with a corresponding adjustment to accumulated
other comprehensive loss, net of tax. The adjustment to
accumulated other comprehensive loss at adoption represents the
net unrecognized actuarial losses and unrecognized prior service
costs, which were previously netted against the plans
funded status in our consolidated balance sheet pursuant to the
prior accounting rules. The amounts in other comprehensive loss
will be subsequently recognized as net periodic pension cost
pursuant to the prior accounting rules for amortizing such
amounts, which were not changed by SFAS 158. Further,
actuarial gains
-62-
and losses that arise in subsequent periods and are not
recognized as net periodic pension cost in the same period will
be recognized as a component of other comprehensive income
(loss). Those amounts will be subsequently recognized as a
component of net periodic cost on the same basis as the amounts
recognized in accumulated other comprehensive income (loss) at
adoption of SFAS 158.
The incremental effects of adopting the provisions of
SFAS 158 on our consolidated balance sheet at
December 31, 2006 are presented in the following table. The
adoption of SFAS 158 had no effect on our consolidated
statement of income for the year ended December 31, 2006,
or for any prior period presented, and it will not affect our
operating results in future periods. Had we not been required to
adopt SFAS 158 at December 31, 2006, we would have
recognized an additional minimum liability pursuant to the prior
accounting rules. The effect of recognizing the additional
minimum liability is included in the table below in the column
labeled Prior to Adopting SFAS 158.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to
|
|
|
Effect of
|
|
|
As Reported at
|
|
|
|
Adopting
|
|
|
Adopting
|
|
|
December 31,
|
|
|
|
SFAS 158
|
|
|
SFAS 158
|
|
|
2006
|
|
|
|
|
Prepaid pension
|
|
$
|
2,380.8
|
|
|
$
|
(1,289.3
|
)
|
|
$
|
1,091.5
|
|
Sundry
|
|
|
2,341.2
|
|
|
|
(325.9
|
)
|
|
|
2,015.3
|
|
Total assets
|
|
|
23,570.6
|
|
|
|
(1,615.2
|
)
|
|
|
21,955.4
|
|
Other current liabilities
|
|
|
1,844.1
|
|
|
|
12.7
|
|
|
|
1,856.8
|
|
Accrued retirement benefit
|
|
|
905.8
|
|
|
|
681.1
|
|
|
|
1,586.9
|
|
Deferred income taxes
|
|
|
782.5
|
|
|
|
(720.3
|
)
|
|
|
62.2
|
|
Total liabilities
|
|
|
11,001.2
|
|
|
|
(26.5
|
)
|
|
|
10,974.7
|
|
Accumulated other comprehensive
income (loss)
|
|
|
200.0
|
|
|
|
(1,588.7
|
)
|
|
|
(1,388.7
|
)
|
Shareholders equity
|
|
|
12,569.4
|
|
|
|
(1,588.7
|
)
|
|
|
10,980.7
|
|
The following represents our weighted-average assumptions as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
Retiree Health Benefit Plans
|
|
(Percents)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Weighted-average assumptions as of
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for benefit
obligation
|
|
|
5.7
|
|
|
|
5.8
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Discount rate for net benefit costs
|
|
|
5.8
|
|
|
|
5.9
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Rate of compensation increase for
benefit obligation
|
|
|
4.6
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase for
net benefit costs
|
|
|
4.7
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets for
net benefit costs
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
9.0
|
|
In evaluating the expected return on plan assets, we have
considered our historical assumptions compared with actual
results, an analysis of current market conditions, asset
allocations, and the views of leading financial advisers and
economists. Our plan assets in our U.S. defined benefit
pension and retiree health plans comprise approximately
84 percent of our worldwide benefit plan assets. Including
the investment losses due to overall market conditions in 2001
and 2002, our 10- and
20-year
annualized rates of return on our U.S. defined benefit
pension plans and retiree health benefit plan were approximately
9.4 percent and 10.9 percent, respectively, as of
December 31, 2006. Health-care-cost trend rates were
assumed to increase at an annual rate of 8 percent in 2007,
decreasing 1 percent per year to 6 percent in 2009 and
thereafter.
-63-
We used a measurement date of December 31 to develop the
change in benefit obligation, change in plan assets, funded
status, and amounts recognized in the consolidated balance
sheets at December 31 for our defined benefit pension and
retiree health benefit plans, which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
Retiree Health Benefit Plans
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of
year
|
|
$
|
5,628.4
|
|
|
$
|
5,190.7
|
|
|
$
|
1,673.6
|
|
|
$
|
1,388.4
|
|
Service cost
|
|
|
280.0
|
|
|
|
297.4
|
|
|
|
72.2
|
|
|
|
61.5
|
|
Interest cost
|
|
|
343.5
|
|
|
|
296.2
|
|
|
|
97.9
|
|
|
|
80.7
|
|
Actuarial (gain) loss
|
|
|
64.9
|
|
|
|
261.7
|
|
|
|
(25.0
|
)
|
|
|
64.8
|
|
Benefits paid
|
|
|
(291.2
|
)
|
|
|
(270.4
|
)
|
|
|
(82.5
|
)
|
|
|
(77.2
|
)
|
Reduction in discount rate,
foreign currency exchange rate changes, and other adjustments
|
|
|
454.7
|
|
|
|
(147.2
|
)
|
|
|
4.5
|
|
|
|
155.4
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
6,480.3
|
|
|
|
5,628.4
|
|
|
|
1,740.7
|
|
|
|
1,673.6
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at
beginning of year
|
|
|
5,482.4
|
|
|
|
4,797.8
|
|
|
|
965.7
|
|
|
|
745.4
|
|
Actual return on plan assets
|
|
|
913.1
|
|
|
|
651.9
|
|
|
|
103.0
|
|
|
|
102.8
|
|
Employer contribution
|
|
|
221.3
|
|
|
|
375.0
|
|
|
|
171.1
|
|
|
|
194.7
|
|
Benefits paid
|
|
|
(287.9
|
)
|
|
|
(268.4
|
)
|
|
|
(82.5
|
)
|
|
|
(77.2
|
)
|
Foreign currency exchange rate
changes and other adjustments
|
|
|
190.1
|
|
|
|
(73.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end
of year
|
|
|
6,519.0
|
|
|
|
5,482.4
|
|
|
|
1,157.3
|
|
|
|
965.7
|
|
|
|
|
|
|
|
Funded status
|
|
|
38.7
|
|
|
|
(146.0
|
)
|
|
|
(583.4
|
)
|
|
|
(707.9
|
)
|
Unrecognized net actuarial loss
|
|
|
1,788.6
|
|
|
|
2,237.9
|
|
|
|
931.8
|
|
|
|
1,089.1
|
|
Unrecognized prior service cost
(benefit)
|
|
|
63.4
|
|
|
|
71.4
|
|
|
|
(85.7
|
)
|
|
|
(101.3
|
)
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,890.7
|
|
|
$
|
2,163.3
|
|
|
$
|
262.7
|
|
|
$
|
279.9
|
|
|
|
|
|
|
|
Amounts recognized in the
consolidated balance sheet consisted of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension
|
|
$
|
1,091.5
|
|
|
$
|
2,419.6
|
|
|
$
|
|
|
|
$
|
|
|
Sundry
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377.2
|
|
Other current liabilities
|
|
|
(43.4
|
)
|
|
|
(36.6
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
Accrued retirement benefit
|
|
|
(1,009.4
|
)
|
|
|
(530.9
|
)
|
|
|
(577.5
|
)
|
|
|
(97.3
|
)
|
Accumulated other comprehensive
loss before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes
|
|
|
1,852.0
|
|
|
|
311.2
|
|
|
|
846.1
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,890.7
|
|
|
$
|
2,163.3
|
|
|
$
|
262.7
|
|
|
$
|
279.9
|
|
|
|
|
|
|
|
Included in accumulated other comprehensive loss at
December 31, 2006 are the following amounts that have not
yet been recognized in net periodic pension cost: unrecognized
net actuarial losses of $1.79 billion and unrecognized
prior service costs of $63.4 million related to our defined
benefit pension plans and unrecognized net actuarial losses of
$931.8 million and unrecognized prior service benefits of
$85.7 million related to our retiree health benefit plans.
In 2007, we expect to recognize from accumulated other
comprehensive loss as components of net periodic benefit cost
$119.7 million of unrecognized net actuarial loss and
$7.7 million of unrecognized prior service cost related to
our defined benefit pension plans and $92.3 million of
unrecognized net actuarial loss and $15.6 million of
unrecognized prior service benefit related to our retiree health
benefit plans. We do not expect any plan assets to be returned
to us in 2007.
-64-
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Retiree Health
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
|
2007
|
|
$
|
292.5
|
|
|
$
|
85.2
|
|
2008
|
|
|
300.3
|
|
|
|
90.7
|
|
2009
|
|
|
307.7
|
|
|
|
95.9
|
|
2010
|
|
|
316.7
|
|
|
|
101.2
|
|
2011
|
|
|
326.7
|
|
|
|
107.3
|
|
2012 - 2016
|
|
|
1,847.0
|
|
|
|
615.8
|
|
The total accumulated benefit obligation for our defined benefit
pension plans was $5.65 billion and $4.88 billion at
December 31, 2006 and 2005, respectively. The projected
benefit obligation and fair value of the plan assets for the
defined benefit pension plans with projected benefit obligations
in excess of plan assets were $2.23 billion and
$1.22 billion, respectively, as of December 31, 2006,
and $1.51 billion and $870.3 million, respectively, as
of December 31, 2005.
Net pension and retiree health benefit expense included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Retiree Health
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Components of net periodic benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
280.0
|
|
|
$
|
297.4
|
|
|
$
|
238.8
|
|
|
$
|
72.2
|
|
|
$
|
61.5
|
|
|
$
|
47.6
|
|
Interest cost
|
|
|
343.5
|
|
|
|
296.2
|
|
|
|
286.4
|
|
|
|
97.9
|
|
|
|
80.7
|
|
|
|
62.5
|
|
Expected return on plan assets
|
|
|
(494.8
|
)
|
|
|
(445.9
|
)
|
|
|
(402.2
|
)
|
|
|
(89.9
|
)
|
|
|
(75.6
|
)
|
|
|
(60.2
|
)
|
Amortization of prior service cost
|
|
|
8.3
|
|
|
|
7.6
|
|
|
|
7.3
|
|
|
|
(15.6
|
)
|
|
|
(15.6
|
)
|
|
|
(15.6
|
)
|
Recognized actuarial loss
|
|
|
149.6
|
|
|
|
106.7
|
|
|
|
99.7
|
|
|
|
107.9
|
|
|
|
86.6
|
|
|
|
57.8
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
286.6
|
|
|
$
|
262.0
|
|
|
$
|
230.0
|
|
|
$
|
172.5
|
|
|
$
|
137.6
|
|
|
$
|
92.1
|
|
|
|
|
|
|
|
If the health-care-cost trend rates were to be increased by one
percentage point each future year, the December 31, 2006,
accumulated postretirement benefit obligation would increase by
11.0 percent and the aggregate of the service cost and
interest cost components of the 2006 annual expense would
increase by 16.4 percent. A one percentage-point decrease
in these rates would decrease the December 31, 2006,
accumulated postretirement benefit obligation by
9.9 percent and the aggregate of the 2006 service cost and
interest cost by 14.1 percent.
We have defined contribution savings plans that cover our
eligible employees worldwide. The purpose of these defined
contribution plans is generally to provide additional financial
security during retirement by providing employees with an
incentive to save. Our contributions to the plan are based on
employee contributions and the level of our match. Expenses
under the plans totaled $106.5 million, $96.1 million,
and $75.5 million for the years 2006, 2005, and 2004,
respectively.
We provide certain other postemployment benefits primarily
related to disability benefits and accrue for the related cost
over the service lives of employees. Expenses associated with
these benefit plans in 2006, 2005, and 2004 were not significant.
Our U.S. defined benefit pension and retiree health benefit
plan investment allocation strategy currently comprises
approximately 85 percent to 95 percent growth
investments and 5 percent to 15 percent fixed-income
investments. Within the growth investment classification, the
plan asset strategy encompasses equity and equity-like
instruments that are expected to represent approximately
75 percent of our plan asset portfolio of both public and
private market investments. The largest component of these
equity and equity-like instruments is public equity securities
that are well diversified and invested in U.S. and international
-65-
small-to-large
companies. The remaining portion of the growth investment
classification is represented by other alternative growth
investments.
Our defined benefit pension plan and retiree health plan asset
allocations as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Percentage of
|
|
|
|
Pension Plan Assets
|
|
|
Retiree Health Plan Assets
|
|
(Percents)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities and equity-like
instruments
|
|
|
78
|
|
|
|
75
|
|
|
|
80
|
|
|
|
80
|
|
Debt securities
|
|
|
9
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
Real estate
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
12
|
|
|
|
14
|
|
|
|
10
|
|
|
|
9
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
In 2007, we expect to contribute approximately $80 million
to our defined benefit pension plans to satisfy minimum funding
requirements for the year. In addition, we expect to contribute
approximately $80 million of additional discretionary
funding in 2007 to our defined benefit plans. We also expect to
contribute approximately $75 million of discretionary
funding to our postretirement health benefit plans during 2007.
We are a party to various legal actions, government
investigations, and environmental proceedings. The most
significant of these are described below. While it is not
possible to predict or determine the outcome of these matters,
we believe that, except as specifically noted below, the
resolution of all such matters will not have a material adverse
effect on our consolidated financial position or liquidity, but
could possibly be material to our consolidated results of
operations in any one accounting period.
Patent
Litigation
We are engaged in the following patent litigation matters
brought pursuant to procedures set out in the Hatch- Waxman Act
(the Drug Price Competition and Patent Term Restoration Act of
1984):
|
|
|
Dr. Reddys Laboratories, Ltd. (Reddy), Teva
Pharmaceuticals, and Zenith Goldline Pharmaceuticals, Inc.,
which was subsequently acquired by Teva Pharmaceuticals
(together, Teva), each submitted Abbreviated New Drug
Applications (ANDAs) seeking permission to market generic
versions of Zyprexa prior to the expiration of our relevant
U.S. patent (expiring in 2011) and alleging that this
patent was invalid or not enforceable. We filed lawsuits against
these companies in the U.S. District Court for the Southern
District of Indiana, seeking a ruling that the patent is valid,
enforceable and being infringed. The district court ruled in our
favor on all counts on April 14, 2005, and on
December 26, 2006, that ruling was upheld by the Court of
Appeals for the Federal Circuit. Reddy and Teva are seeking a
review of that decision. We are confident that Reddys and
Tevas claims are without merit and we expect to prevail.
An unfavorable outcome would have a material adverse impact on
our consolidated results of operations, liquidity, and financial
position.
|
|
|
Barr Laboratories, Inc. (Barr), submitted an ANDA in 2002
seeking permission to market a generic version of Evista prior
to the expiration of our relevant U.S. patents (expiring in
2012-2017)
and alleging that these patents are invalid, not enforceable, or
not infringed. In November 2002, we filed a lawsuit against Barr
in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that these patents are valid,
enforceable, and being infringed by Barr. Teva has also
submitted an ANDA seeking permission to market a generic version
of Evista. In June 2006, we filed a lawsuit against Teva in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that our relevant U.S. patents are valid,
enforceable, and being infringed by Teva. No trial date has been
set in either case. We believe that Barrs and Tevas
claims are without merit and we expect to prevail. However, it
is not possible to predict or determine the outcome of this
litigation, and accordingly, we can provide no assurance that we
will prevail. An unfavorable outcome
|
-66-
|
|
|
could have a material adverse impact on our consolidated results
of operations, liquidity, and financial position.
|
|
|
|
Sicor Pharmaceuticals, Inc. (Sicor), a subsidiary of Teva,
submitted ANDAs in November 2005 seeking permission to market
generic versions of Gemzar prior to the expiration of our
relevant U.S. patents (expiring in 2010 and 2013), and
alleging that these patents are invalid. In February 2006, we
filed a lawsuit against Sicor in the U.S. District Court
for the Southern District of Indiana, seeking a ruling that
these patents are valid and are being infringed by Sicor. In
response to our lawsuit, Sicor filed a declaratory judgment
action in the U.S. District Court for the Central District
of California. Sicor also moved to dismiss our lawsuit in
Indiana, asserting that the Indiana court lacks jurisdiction.
The California action has been dismissed. In September 2006, we
received notice that Mayne Pharma (USA) Inc. (Mayne) filed a
similar ANDA for Gemzar. In October 2006, we filed a lawsuit
against Mayne in the Southern District of Indiana in response to
the ANDA filing. In response to our lawsuit, Mayne filed a
motion to our lawsuit, asserting that the Indiana court lacks
jurisdiction. In October 2006, we received notice that Sun
Pharmaceutical Industries Inc. (Sun) filed an ANDA for Gemzar,
alleging that the 2013 patent is invalid. In December 2006, we
filed a lawsuit against Sun in the Southern District of Indiana
in response to Suns ANDA filing. We expect to prevail in
litigation involving our Gemzar patents and believe that claims
made by these generic companies that our patents are not valid
are without merit. However, it is not possible to predict or
determine the outcome of this litigation, and accordingly, we
can provide no assurance that we will prevail. An unfavorable
outcome could have a material adverse impact on our consolidated
results of operations, liquidity, and financial position.
|
In June 2002, we were sued by Ariad Pharmaceuticals, Inc., the
Massachusetts Institute of Technology, the Whitehead Institute
for Biomedical Research and the President and Fellows of Harvard
College in the U.S. District Court for the District of
Massachusetts alleging that sales of two of our products, Xigris
and Evista, were inducing the infringement of a patent related
to the discovery of a natural cell signaling phenomenon in the
human body, and seeking royalties on past and future sales of
these products. In June 2005, the United States Patent and
Trademark Office commenced a re-examination of the patent in
order to consider certain issues raised by us relating to the
validity of the patent. On May 4, 2006, a jury in Boston
issued an initial decision in the case that Xigris and Evista
sales infringe the patent. The jury awarded the plaintiffs
approximately $65 million in damages, calculated by
applying a 2.3 percent royalty to all U.S. sales of
Xigris and Evista from the date of issuance of the patent
through the date of trial. We are seeking to have the jury
verdict overturned by the trial court judge, and if
unsuccessful, will appeal the decision to the Court of Appeals
for the Federal Circuit. In addition, a separate bench trial
with the U.S. District Court of Massachusetts was held the
week of August 7, 2006, on our contention that the patent
is unenforceable and impermissibly covers natural processes. No
decision has been rendered. We believe that these allegations
are without legal merit, that we will ultimately prevail on
these issues and therefore that the likelihood of any monetary
damages is remote.
Government
Investigations
In March 2004, the Office of the U.S. Attorney for the
Eastern District of Pennsylvania advised us that it had
commenced a civil investigation related to our
U.S. marketing and promotional practices, including our
communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa, Prozac, and
Prozac Weekly. In October 2005, the U.S. Attorneys
Office advised that it is also conducting an inquiry regarding
certain rebate agreements we entered into with a pharmacy
benefit manager covering Axid, Evista, Humalog, Humulin, Prozac,
and Zyprexa. The inquiry includes a review of Lillys
Medicaid best price reporting related to the product sales
covered by the rebate agreements. We are cooperating with the
U.S. Attorney in these investigations, including providing
a broad range of documents and information relating to the
investigations. In June 2005, we received a subpoena from the
Office of the Attorney General, Medicaid Fraud Control Unit, of
the State of Florida, seeking production of documents relating
to sales of Zyprexa and our marketing and promotional practices
with respect to Zyprexa. In September 2006, we received a
subpoena from the California Attorney Generals Office
seeking production of documents related to our efforts to obtain
and maintain Zyprexas status on Californias
formulary, marketing
-67-
and promotional practices with respect to Zyprexa, and
remuneration of health care providers. Beginning in August 2006,
we have received civil investigative demands or subpoenas from
the attorneys general of a number of states. Most of these
requests are now part of a multistate investigative effort being
coordinated by an executive committee of attorneys general. We
are aware that 26 states are participating in this joint
effort, and we anticipate that additional states will join the
investigation. These attorneys general are seeking a broad range
of Zyprexa documents, including documents relating to sales,
marketing and promotional practices, and remuneration of health
care providers. It is possible that other Lilly products could
become subject to investigation and that the outcome of these
matters could include criminal charges and fines, penalties, or
other monetary or nonmonetary remedies. We cannot predict or
determine the outcome of these matters or reasonably estimate
the amount or range of amounts of any fines or penalties that
might result from an adverse outcome. It is possible, however,
that an adverse outcome could have a material adverse impact on
our consolidated results of operations, liquidity, and financial
position. We have implemented and continue to review and enhance
a broadly based compliance program that includes comprehensive
compliance-related activities designed to ensure that our
marketing and promotional practices, physician communications,
remuneration of health care professionals, managed care
arrangements, and Medicaid best price reporting comply with
applicable laws and regulations.
Product
Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa
product liability lawsuits in the United States and have been
notified of many other claims of individuals who have not filed
suit. The lawsuits and unfiled claims (together the
claims) allege a variety of injuries from the use of
Zyprexa, with the majority alleging that the product caused or
contributed to diabetes or high blood-glucose levels. The claims
seek substantial compensatory and punitive damages and typically
accuse us of inadequately testing for and warning about side
effects of Zyprexa. Many of the claims also allege that we
improperly promoted the drug. Almost all of the federal lawsuits
are part of a Multi-District Litigation (MDL) proceeding
before The Honorable Jack Weinstein in the Federal District
Court for the Eastern District of New York (MDL No. 1596).
Since June 2005, we have entered into agreements with various
claimants attorneys involved in U.S. Zyprexa product
liability litigation to settle a substantial majority of the
claims. The agreements cover a total of approximately 28,500
claimants, including a large number of previously filed lawsuits
and other asserted claims. The two primary settlements were as
follows:
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|
|
In June 2005, we reached an agreement in principle (and in
September 2005 a final agreement) to settle more than 8,000
claims for $690.0 million plus $10.0 million to cover
administration of the settlement. That settlement is being
administered by special settlement masters appointed by Judge
Weinstein.
|
|
|
In January 2007, we reached agreements with a number of
plaintiffs attorneys to settle more than 18,000 claims for
approximately $500 million.
|
The 2005 settlement totaling $700.0 million was paid during
2005. The January 2007 settlements were recorded in other
current liabilities in our December 31, 2006 consolidated
balance sheet and will be paid in the first quarter of 2007.
The U.S. Zyprexa product liability claims not subject to
these agreements include approximately 340 lawsuits in the
U.S. covering approximately 900 claimants and an additional
400 claims of which we are aware. In addition, we have been
served with a lawsuit seeking class certification in which the
members of the purported class are seeking refunds and medical
monitoring. In early 2005, we were served with four lawsuits
seeking class action status in Canada on behalf of patients who
took Zyprexa. One of these four lawsuits has been certified for
residents of Quebec. The allegations in the Canadian actions are
similar to those in the litigation pending in the U.S.
We are prepared to continue our vigorous defense of Zyprexa in
all remaining cases. We currently anticipate that trials in
seven cases in the Eastern District of New York will begin in
the second quarter of 2007.
We have insurance coverage for a portion of our Zyprexa product
liability claims exposure. The third-party insurance carriers
have raised defenses to their liability under the policies and
are seeking to rescind the
-68-
policies. The dispute is now the subject of litigation in the
federal court in Indianapolis against certain of the carriers
and in arbitration in Bermuda against other carriers. While we
believe our position has merit, there can be no assurance that
we will prevail.
In addition, we have been named as a defendant in numerous other
product liability lawsuits involving primarily
diethylstilbestrol (DES) and thimerosal. The majority of these
claims are covered by insurance, subject to deductibles and
coverage limits.
In the second quarter of 2005, we recorded a net pretax charge
of $1.07 billion for product liability matters. The charge
took into account our estimated recoveries from our insurance
coverage related to these matters. The charge covered the
following:
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|
|
The cost of the June 2005 Zyprexa settlements described
above; and
|
|
|
Reserves for product liability exposures and defense costs
regarding the then-known and expected product liability claims
to the extent we could formulate a reasonable estimate of the
probable number and cost of the claims. A substantial majority
of those exposures and costs were related to then-known and
expected Zyprexa claims.
|
As a result of the January 2007 settlements discussed above, we
incurred a pretax charge of $494.9 million in the fourth
quarter of 2006. The charge covered the following:
|
|
|
The cost of the January 2007 Zyprexa settlements; and
|
|
|
Reserves for product liability exposures and defense costs
regarding the then-known and expected Zyprexa product liability
claims to the extent we could formulate a reasonable estimate of
the probable number and cost of the claims.
|
In December 2004, we were served with two lawsuits brought in
state court in Louisiana on behalf of the Louisiana Department
of Health and Hospitals, alleging that Zyprexa caused or
contributed to diabetes or high blood-glucose levels, and that
we improperly promoted the drug. These cases have been removed
to federal court and are now part of the MDL proceedings in the
Eastern District of New York. In these actions, the Department
of Health and Hospitals seeks to recover the costs it paid for
Zyprexa through Medicaid and other drug-benefit programs, as
well as the costs the department alleges it has incurred and
will incur to treat Zyprexa-related illnesses. In 2006, we were
served with similar lawsuits filed by the states of Alaska, West
Virginia, New Mexico, and Mississippi in the courts of the
respective states.
In 2005, two lawsuits were filed in the Eastern District of New
York purporting to be nationwide class actions on behalf of all
consumers and third-party payors, excluding governmental
entities, which have made or will make payments for their
members or insured patients being prescribed Zyprexa. These
actions have now been consolidated into a single lawsuit, which
is brought under certain state consumer protection statutes, the
federal civil RICO statute, and common law theories, seeking a
refund of the cost of Zyprexa, treble damages, punitive damages,
and attorneys fees. Two additional lawsuits were filed in
the Eastern District of New York in 2006 on similar grounds. As
with the product liability suits, these lawsuits allege that we
inadequately tested for and warned about side effects of Zyprexa
and improperly promoted the drug.
We cannot predict with certainty the additional number of
lawsuits and claims that may be asserted. In addition, although
we believe it is probable, there can be no assurance that the
January 2007 Zyprexa product liability settlements described
above will be concluded. The ultimate resolution of Zyprexa
product liability and related litigation could have a material
adverse impact on our consolidated results of operations,
liquidity, and financial position.
Because of the nature of pharmaceutical products, it is possible
that we could become subject to large numbers of product
liability and related claims for other products in the future.
In the past few years, we have experienced difficulties in
obtaining product liability insurance due to a very restrictive
insurance market. Therefore, for substantially all of our
currently marketed products, we have been and expect that we
will continue to be largely self-insured for future product
liability losses. In addition, as noted above, there is no
assurance that we will be able to fully collect from our
insurance carriers on past claims.
-69-
Environmental
Matters
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, commonly known as Superfund, we have been
designated as one of several potentially responsible parties
with respect to fewer than 10 sites. Under Superfund, each
responsible party may be jointly and severally liable for the
entire amount of the cleanup. We also continue remediation of
certain of our own sites. We have accrued for estimated
Superfund cleanup costs, remediation, and certain other
environmental matters. This takes into account, as applicable,
available information regarding site conditions, potential
cleanup methods, estimated costs, and the extent to which other
parties can be expected to contribute to payment of those costs.
We have reached a settlement with our liability insurance
carriers providing for coverage for certain environmental
liabilities.
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Note 14:
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Other
Comprehensive Income (Loss)
|
The accumulated balances related to each component of other
comprehensive income (loss) were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
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Foreign
|
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|
Unrealized
|
|
|
Pension
|
|
|
Effective
|
|
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Accumulated
|
|
|
|
|
|
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Currency
|
|
|
Gains
|
|
|
Liability
|
|
|
Portion of
|
|
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Other
|
|
|
|
|
|
|
Translation
|
|
|
on
|
|
|
and SFAS 158
|
|
|
Cash Flow
|
|
|
Comprehensive
|
|
|
|
|
|
|
Gains
|
|
|
Securities
|
|
|
Adjustment
|
|
|
Hedges
|
|
|
Loss
|
|
|
|
|
|
|
|
Beginning balance at
January 1, 2006
|
|
$
|
18.0
|
|
|
$
|
19.7
|
|
|
$
|
(202.9
|
)
|
|
$
|
(255.4
|
)
|
|
$
|
(420.6
|
)
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
542.4
|
|
|
|
0.3
|
|
|
|
(11.7
|
)
|
|
|
89.6
|
|
|
|
620.6
|
|
|
|
|
|
Adoption of SFAS 158 (Note 12)
|
|
|
|
|
|
|
|
|
|
|
(1,588.7
|
)
|
|
|
|
|
|
|
(1,588.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
560.4
|
|
|
$
|
20.0
|
|
|
$
|
(1,803.3
|
)
|
|
$
|
(165.8
|
)
|
|
$
|
(1,388.7
|
)
|
|
|
|
|
|
|
|
|
|
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The amounts above are net of income taxes. The income taxes
associated with the adoption of SFAS 158
(Note 12) were a benefit of $777.5 million. The
income taxes related to the components of comprehensive income
were not significant, as income taxes were not provided for
foreign currency translation.
The unrealized gains (losses) on securities is net of
reclassification adjustments of $16.9 million,
$9.1 million, and $9.8 million, net of tax, in 2006,
2005, and 2004, respectively, for net realized gains on sales of
securities included in net income. The effective portion of cash
flow hedges is net of reclassification adjustments of
$2.3 million, $3.8 million, and $23.1 million,
net of tax, in 2006, 2005, and 2004, respectively, for realized
losses on foreign currency options and $17.1 million,
$21.4 million, and $15.6 million, net of tax, in 2006,
2005, and 2004, respectively, for interest expense on interest
rate swaps designated as cash flow hedges.
Generally, the assets and liabilities of foreign operations are
translated into U.S. dollars using the current exchange
rate. For those operations, changes in exchange rates generally
do not affect cash flows; therefore, resulting translation
adjustments are made in shareholders equity rather than in
income.
-70-
Managements
Reports
Managements Report for Financial Statements
Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is
responsible for the accuracy, integrity, and fair presentation
of the financial statements. The statements have been prepared
in accordance with generally accepted accounting principles in
the United States and include amounts based on judgments and
estimates by management. In managements opinion, the
consolidated financial statements present fairly our financial
position, results of operations, and cash flows.
In addition to the system of internal accounting controls, we
maintain a code of conduct (known as The Red Book) that
applies to all employees worldwide, requiring proper overall
business conduct, avoidance of conflicts of interest, compliance
with laws, and confidentiality of proprietary information.
The Red Book is reviewed on a periodic basis with
employees worldwide, and all employees are required to report
suspected violations. A hotline number is published in The
Red Book to enable employees to report suspected violations
anonymously. Employees who report suspected violations are
protected from discrimination or retaliation by the company. In
addition to The Red Book, the CEO, the COO, and all
financial management must sign a financial code of ethics, which
further reinforces their fiduciary responsibilities.
The financial statements have been audited by Ernst &
Young LLP, an independent registered public accounting firm.
Their responsibility is to examine our consolidated financial
statements in accordance with generally accepted auditing
standards of the Public Company Accounting Oversight Board
(United States). Ernst & Youngs opinion with
respect to the fairness of the presentation of the statements
(see opinion on page 73) is included in our annual
report. Ernst & Young reports directly to the audit
committee of the board of directors.
Our audit committee includes four nonemployee members of the
board of directors, all of whom are independent from our
company. The committee charter, which is published in the proxy
statement, outlines the members roles and responsibilities
and is consistent with enacted corporate reform laws and
regulations. It is the audit committees responsibility to
appoint an independent registered public accounting firm subject
to shareholder ratification, approve both audit and nonaudit
services performed by the independent registered public
accounting firm, and review the reports submitted by the firm.
The audit committee meets several times during the year with
management, the internal auditors, and the independent public
accounting firm to discuss audit activities, internal controls,
and financial reporting matters, including reviews of our
externally published financial results. The internal auditors
and the independent registered public accounting firm have full
and free access to the committee.
We are dedicated to ensuring that we maintain the high standards
of financial accounting and reporting that we have established.
We are committed to providing financial information that is
transparent, timely, complete, relevant, and accurate. Our
culture demands integrity and an unyielding commitment to strong
internal practices and policies. Finally, we have the highest
confidence in our financial reporting, our underlying system of
internal controls, and our people, who are objective in their
responsibilities and operate under a code of conduct and the
highest level of ethical standards.
-71-
Managements
Report on Internal Control Over Financial Reporting
Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. We have global
financial policies that govern critical areas, including
internal controls, financial accounting and reporting, fiduciary
accountability, and safeguarding of corporate assets. Our
internal accounting control systems are designed to provide
reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with managements
authorization and are properly recorded, and that accounting
records are adequate for preparation of financial statements and
other financial information. A staff of internal auditors
regularly monitors, on a worldwide basis, the adequacy and
effectiveness of internal accounting controls. The general
auditor reports directly to the audit committee of the board of
directors.
We conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under this framework, we
concluded that our internal controls over financial reporting
were effective as of December 31, 2006. However, because of
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The internal control over financial reporting has been assessed
by Ernst & Young LLP. Their responsibility is to
evaluate managements assessment and evidence about whether
internal control over financial reporting was designed and
operating effectively. Ernst & Youngs report with
respect to the effectiveness of internal control over financial
reporting is included on page 55 of our annual report
(page 74 of Form 10-K).
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Sidney Taurel
|
|
John C. Lechleiter, Ph.D.
|
|
Derica W. Rice
|
Chairman of the Board and
Chief Executive Officer
|
|
President and Chief Operating
Officer
|
|
Senior Vice President and
Chief Financial Officer
|
February 9, 2007
-72-
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Eli Lilly and Company
We have audited the accompanying consolidated balance sheets of
Eli Lilly and Company and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of
income, cash flows, and comprehensive income for each of the
three years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Eli Lilly and Company and subsidiaries at
December 31, 2006 and 2005, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Eli Lilly and Company and subsidiaries
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated February 9, 2007 expressed an unqualified
opinion thereon.
As discussed in Notes 2 and 7 to the financial statements,
in 2005 Eli Lilly and Company and subsidiaries adopted new
accounting pronouncements for asset retirement obligations and
stock-based compensation. As discussed in Note 12 to the
financial statements, in 2006 Eli Lilly and Company and
subsidiaries adopted a new accounting pronouncement for defined
benefit pension and other postretirement plans.
Indianapolis, Indiana
February 9, 2007
-73-
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Eli Lilly and Company
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Eli Lilly and Company and subsidiaries
maintained effective internal control over financial reporting
as of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Eli Lilly and Company and
subsidiaries management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Eli Lilly and
Company and subsidiaries maintained effective internal control
over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Eli Lilly and Company and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2006, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2006 consolidated financial statements of Eli Lilly and Company
and subsidiaries and our report dated February 9, 2007,
expressed an unqualified opinion thereon.
Indianapolis, Indiana
February 9, 2007
-74-
|
|
Item 9.
|
Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
|
|
Item 9A.
|
Controls and
Procedures
|
Disclosure
Controls and Procedures
Under applicable SEC regulations, management of a reporting
company, with the participation of the principal executive
officer and principal financial officer, must periodically
evaluate the companys disclosure controls and
procedures, which are defined generally as controls and
other procedures of a reporting company designed to ensure that
information required to be disclosed by the reporting company in
its periodic reports filed with the commission (such as this
Form 10-K)
is recorded, processed, summarized, and reported on a timely
basis.
Our management, with the participation of Sidney Taurel,
chairman and chief executive officer, and Derica W. Rice,
senior vice president and chief financial officer, evaluated our
disclosure controls and procedures as of December 31, 2006,
and concluded that they are effective.
Internal
Control over Financial Reporting
Messrs. Taurel and Rice and Dr. John C. Lechleiter,
president and chief operating officer, provided a report on
behalf of management on our internal control over financial
reporting, in which management concluded that the companys
internal control over financial reporting is effective at
December 31, 2006. In addition, Ernst & Young LLP,
the companys independent registered public accounting
firm, provided an attestation report on managements
assessment of internal control over financial reporting. You can
find the full text of managements report and
Ernst & Youngs attestation report in
Part II, Item 8, and both reports are incorporated by
reference in this Item.
Changes
in Internal Controls
During the fourth quarter of 2006, there were no changes in our
internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
Part III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Directors
and Executive Officers
Information relating to our Board of Directors is found in our
Proxy Statement to be dated on or about March 5, 2007 (the
Proxy Statement) under Board of
Directors at
pages 62-65,
and is incorporated in this report by reference.
Information relating to our executive officers is found at
Part I, Item 1 of this
Form 10-K
under Executive Officers of the Company. In
addition, information relating to certain filing obligations of
directors and executive officers under the federal securities
laws is found in the Proxy Statement under Other
Matters Section 16(a) Beneficial Ownership
Reporting Compliance, at page 106. That information
is incorporated in this report by reference.
-75-
Code of
Ethics
We have adopted a code of ethics that complies with the
applicable SEC and New York Stock Exchange requirements. The
code is set forth in:
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The Red Book, a comprehensive code of ethical and legal
business conduct applicable to all employees worldwide and to
our Board of Directors; and
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Code of Ethical Conduct for Lilly Financial Management, a
supplemental code for our chief executive officer, chief
operating officer, and all members of financial management that
focuses on accounting, financial reporting, internal controls,
and financial stewardship.
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Both documents are online on our web site at
http://investor.lilly.com/code business
conduct.cfm.
In the event of any amendments to, or waivers from, a provision
of the code affecting the chief executive officer, chief
financial officer, chief accounting officer, controller, or
persons performing similar functions, we intend to post on the
above web site within four business days after the event a
description of the amendment or waiver as required under
applicable SEC rules. We will maintain that information on our
web site for at least 12 months. Paper copies of these
documents are available free of charge upon request to the
companys secretary at the address on the front of this
Form 10-K.
Corporate
Governance
In our proxy statements, we describe the procedures by which
shareholders can recommend nominees to our board of directors.
There have been no changes in those procedures since they were
last published in our proxy statement of March 13, 2006.
The board has appointed an audit committee consisting entirely
of independent directors in accordance with applicable SEC and
New York Stock Exchange rules for audit committees. The members
of the committee are Mr. J. Michael Cook (chairman),
Dr. Martin S. Feldstein, Dr. Franklyn G. Prendergast,
and Ms. Kathi P. Seifert. The board has determined that
Mr. Cook is an audit committee financial expert as defined
in the SEC rules.
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Item 11.
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Executive
Compensation
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Information on director compensation, executive compensation,
and compensation committee matters can be found in the Proxy
Statement under Directors Compensation at
pages 72-74,
Executive Compensation at
pages 77-94
(which includes the Compensation Committee Report), and
Compensation Committee Interlocks and Insider
Participation at page 77. That information is
incorporated in this report by reference.
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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Security
Ownership of Certain Beneficial Owners and Management
Information relating to ownership of the Companys common
stock by management and by persons known by the Company to be
the beneficial owners of more than five percent of the
outstanding shares of common stock is found in the Proxy
Statement under Ownership of Company Stock, at
pages 94-96.
That information is incorporated in this report by reference.
-76-
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table presents information as of December 31,
2006, regarding our compensation plans under which shares of
Lilly common stock have been authorized for issuance.
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(a) Number of
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(b) Weighted-
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(c) Number of
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securities to be
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average exercise
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securities remaining
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issued
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price of
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available for future
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upon exercise of
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outstanding
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issuance under equity
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outstanding
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options,
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compensation plans
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options,
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warrants,
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(excluding securities
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Plan category
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warrants, and rights
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and rights
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reflected in column (a))
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Equity compensation plans approved
by security holders
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79,012,219
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$68.59
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45,157,699
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Equity compensation plan not
approved by security holders(1)
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9,797,960
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75.74
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320,555
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Total
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88,810,179
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69.38
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45,478,254
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(1) Represents shares in the Lilly
GlobalShares Stock Plan, which permits the company to grant
stock options to nonmanagement employees worldwide. The plan is
administered by the senior vice president responsible for human
resources. The stock options are nonqualified for U.S. tax
purposes. The option price cannot be less than the fair market
value at the time of grant. The options shall not exceed
11 years in duration and shall be subject to vesting
schedules established by the plan administrator. There are
provisions for early vesting and early termination of the
options in the event of retirement, disability, and death. In
the event of stock splits or other recapitalizations, the
administrator may adjust the number of shares available for
grant, the number of shares subject to outstanding grants, and
the exercise price of outstanding grants.
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Item 13.
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Certain
Relationships and Related Transactions, and Director Independence
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Related
Person Transactions
Information relating to a time-share arrangement between the
company and Mr. Sidney Taurel, chairman and chief executive
officer, relating to his personal use of the corporate aircraft
can be found in the Proxy Statement under Related Person
Transaction at page 94, and information relating to
the boards policies and procedures for approval of related
person transactions can be found in the Proxy Statement under
Highlights of the Companys Corporate Governance
Guidelines Review and Approval of Transactions with
Related Persons at
pages 69-70.
That information is incorporated in this report by reference.
Director
Independence
Information relating to director independence can be found in
the Proxy Statement under Composition of the
Board Independence Determinations at
pages 66-67
and is incorporated in this report by reference.
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Item 14.
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Principal
Accountant Fees and Services
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Information related to the fees and services of our independent
auditor, Ernst & Young LLP, can be found in the Proxy
Statement under Services Performed by the Independent
Auditor and Independent Auditor Fees at
page 76. That information is incorporated in this report by
reference.
-77-
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Item 15.
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Exhibits and
Financial Statement Schedules
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(a)1. Financial
Statements
The following consolidated financial statements of the Company
and its subsidiaries are found at Part II, Item 8:
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Consolidated Statements of Income Years Ended
December 31, 2006, 2005, and 2004
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Consolidated Balance Sheets December 31, 2006
and 2005
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Consolidated Statements of Cash Flows Years Ended
December 31, 2006, 2005, and 2004
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Consolidated Statements of Comprehensive Income
Years Ended December 31, 2006, 2005, and 2004
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Segment Information
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Notes to Consolidated Financial Statements
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(a)2. Financial
Statement Schedules
The consolidated financial statement schedules of the Company
and its subsidiaries have been omitted because they are not
required, are inapplicable, or are adequately explained in the
financial statements.
Financial statements of interests of 50 percent or less,
which are accounted for by the equity method, have been omitted
because they do not, considered in the aggregate as a single
subsidiary, constitute a significant subsidiary.
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3
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.1
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Amended Articles of Incorporation
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3
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.2
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By-laws, as amended
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4
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.1
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Rights Agreement dated as of
July 20, 1998, between Eli Lilly and Company and Norwest
Bank Minnesota, N.A., as successor Rights Agent
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4
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.2
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Amendment No. 1 to Rights
Agreement dated as of May 27, 2003, between Eli Lilly and
Company and Wells Fargo Bank Minnesota, N.A., as successor
Rights Agent
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4
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.3
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Form of Indenture with respect to
Debt Securities dated as of February 1, 1991, between Eli
Lilly and Company and Citibank, N.A., as Trustee
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4
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.4
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