e10vkza
United
States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1 to 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, 2007
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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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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 $55,734,950,000
Number of shares of common stock outstanding as of
February 15, 2008: 1,136,985,018
Portions of the Registrants Proxy Statement to be filed on
or about March 10, 2008 have been incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
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Part II |
| Item 6 Selected Financial Data (See Item 8) |
| Item 7 Managements Discussion and Analysis of Results of Operations and Financial Condition - We have added an introductory paragraph summarizing the effect of the restatement, and we have updated the cross-references to the notes to the consolidated financial statements. |
| Item 8 Financial Statements and Supplementary Data - As described in the explanatory note, we have added Note 2, explaining the restatement, and renumbered the remaining notes. We have also amended and restated our consolidated balance sheets and selected financial data as of December 31, 2007 and 2006 and selected financial data as of December 31, 2005, 2004 and 2003. Conforming changes have also been made to Notes 10 and 12. |
Part IV |
| Item 15 Exhibits and Financial Statement Schedules (See Item 8) |
Part I |
| Item 1. Business |
| Item 1A: Risk Factors; Cautionary Statement Regarding Forward Looking Statements |
| Item 1B. Unresolved Staff Comments |
| Item 2. Properties |
| Item 3. Legal Proceedings |
| Item 4. Submission of Matters to a Vote of Security Holders |
Part II |
| Item 5. Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| Item 6. Selected Financial Data |
| Item 7. Managements Discussion and Analysis of Results of Operations and Financial Condition |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk |
| Item 8. Financial Statements and Supplementary Data |
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
| Item 9A. Controls and Procedures |
| Item 9B. Other Information |
Part III |
| Item 10. Directors, Executive Officers and Corporate Governance |
| Item 11. Executive Compensation |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| Item 13. Certain Relationships and Related Transactions, and Director Independence |
| Item 14. Principal Accountant Fees and Services |
| Item 15. Exhibits and Financial Statement Schedules |
EX-12 |
EX-21 |
EX-23 |
EX-31.1 |
EX-31.2 |
EX-32 |
Explanatory
Note
Overview
Eli Lilly and Company is filing this Amendment No. 1 to our
Annual Report on
Form 10-K
for the year ended December 31, 2007, to amend and restate
our consolidated balance sheets and selected financial data as
of December 31, 2007, 2006, and 2005, and selected
financial data as of December 31, 2004 and 2003. We are
also filing an amendment to our first quarter 2008
Form 10-Q
to restate our consolidated condensed balance sheet as of
March 31, 2008. As described below and in Note 2, the
restatement adjusts our return reserve for future product
returns for each period from January 1, 2003. The
restatement has no effect on our income, cash flows, or
liquidity, and its effects on our financial position at the end
of each of the respective restated periods are immaterial. In
addition, we modified our disclosure of certain deferred tax
assets, valuation allowances, and uncertain tax positions
included in Note 12 to our consolidated financial
statements. These modifications had no impact on our balance
sheets, income statements, cash flows, or liquidity. There have
been no changes from the original
Form 10-K
other than those described above. This Amendment No. 1 does
not reflect events occurring after the original filing of the
Form 10-K,
or modify or update in any way disclosures made in the
Form 10-K
other than as described above.
Background
During the second quarter of 2008, we determined that our
methodology for calculating our return reserve for future
product returns in accordance with Statement of Financial
Accounting Standard No. 48 (SFAS 48), Revenue
Recognition When Right of Return Exists, needed to be corrected.
Using the revised methodology, our return reserve was
understated by $247.5 million as of December 31, 2007,
2006, 2005, 2004 and 2003.
Effects
of Restatement
The tables below present the effect of the financial statement
adjustments related to the restatement of our previously
reported financial statements for the years ended
December 31, 2007, 2006 and 2005. The consolidated
statements of income were not adjusted for any of the years or
quarters because we concluded that the amount of the adjustment
calculated using the revised methodology was not material in any
previously presented period. The amount of the annual adjustment
for 2005, 2006, or 2007 would have been $.01 per share or less
of diluted earnings per share and .2 percent or less of
consolidated net sales. The aggregate statement of income impact
from December 31, 2004 to December 31, 2007 would have
been an additional expense of approximately $35 million on
a pretax basis (approximately $23 million net of tax).
The effect of the restatement on the consolidated balance sheets
as of December 31, 2007, 2006 and 2005 is as follows:
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2007
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As Reported
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Adjustments
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As Restated
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Current deferred tax asset
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$
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583.6
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$
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59.2
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$
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642.8
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Total current assets
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12,256.9
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59.2
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12,316.1
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Sundry (long-term deferred tax asset)
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1,252.8
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27.8
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1,280.6
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Total other assets
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5,955.8
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27.8
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5,983.6
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Total assets
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26,787.8
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87.0
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26,874.8
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Other current
liabilities1
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1,647.6
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168.5
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1,816.1
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Total current liabilities
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5,268.3
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168.5
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5,436.8
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Other noncurrent liabilities
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632.3
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79.0
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711.3
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Total other noncurrent liabilities
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7,855.1
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79.0
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7,934.1
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Retained earnings
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11,967.2
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(160.5
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11,806.7
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Total shareholders equity
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13,664.4
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(160.5
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13,503.9
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Total liabilities and shareholders equity
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26,787.8
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87.0
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26,874.8
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2006
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As Reported
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Adjustments
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As Restated
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Current deferred tax asset
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$
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519.2
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$
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59.2
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$
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578.4
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Total current assets
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9,694.4
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59.2
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9,753.6
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Sundry (long-term deferred tax asset)
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1,885.3
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27.8
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1,913.1
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Total other assets
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4,108.7
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27.8
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4,136.5
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Total assets
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21,955.4
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87.0
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22,042.4
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Other current liabilities
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1,822.9
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168.5
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1,991.4
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Total current liabilities
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5,085.5
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168.5
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5,254.0
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Other noncurrent liabilities
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745.7
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79.0
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824.7
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Total other noncurrent liabilities
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5,889.2
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79.0
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5,968.2
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Retained earnings
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10,926.7
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(160.5
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10,766.2
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Total shareholders equity
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10,980.7
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(160.5
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10,820.2
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Total liabilities and shareholders equity
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21,955.4
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87.0
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22,042.4
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2005
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As Reported
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Adjustments
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As Restated
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Current deferred tax asset
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$
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756.4
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$
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59.2
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$
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815.6
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Total current assets
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10,795.8
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59.2
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10,855.0
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Sundry (long-term deferred tax asset)
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2,156.3
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27.8
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2,184.1
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Total other assets
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5,872.5
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27.8
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5,900.3
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Total assets
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24,580.8
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87.0
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24,667.8
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Other current liabilities
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1,838.9
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168.5
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2,007.4
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Total current liabilities
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5,716.3
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168.5
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5,884.8
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Other noncurrent liabilities
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826.1
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79.0
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905.1
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Total other noncurrent liabilities
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8,072.6
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79.0
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8,151.6
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Retained earnings
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10,027.2
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(160.5
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9,866.7
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Total shareholders equity
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10,791.9
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(160.5
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10,631.4
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Total liabilities and shareholders equity
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24,580.8
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87.0
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24,667.8
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1 |
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The 2007 As Reported balance reflects the $94.1 million
reclassification made in the first quarter of 2008 from accounts
payable to other current liabilities. |
As of December 31, 2007 and 2006, we have reduced both
deferred tax assets and our valuation allowance by
$204.0 million and $63.9 million, respectively. Of the
2007 change, $92.1 million resulted in an increase in our
disclosed gross unrecognized tax benefits. These adjustments
impact the components of deferred taxes only and have no impact
on our consolidated financial position, income, cash flows, or
liquidity for any period presented. See Note 12 for
additional information.
Consistent with the information above, we have revised the
following items in this
Form 10-K/A:
Part II
Item 6 Selected
Financial Data (See Item 8)
Item 7 Managements Discussion and
Analysis of Results of Operations and Financial
Condition - We have added an introductory
paragraph summarizing the effect of the restatement, and we have
updated the cross-references to the notes to the consolidated
financial statements.
Item 8 Financial Statements and
Supplementary Data - As described in the explanatory
note, we have added Note 2, explaining the restatement, and
renumbered the remaining notes. We have also amended and
restated our consolidated balance sheets and selected financial
data as of December 31, 2007 and 2006 and selected
financial data as of December 31, 2005, 2004 and 2003.
Conforming changes have also been made to Notes 10 and 12.
Part IV
Item 15 Exhibits
and Financial Statement Schedules (See Item 8)
Our independent auditors, Ernst & Young, have dual
dated their report on the consolidated financial statements to
the board of directors and shareholders with regard to
Note 2 and their consent to the date of this filing, and we
have provided new
Rule 13a-14(a)
and Section 1350 certifications from our chief executive
officer and chief financial officer. Except to the extent
relating to the restatement of our consolidated balance sheets
and selected financial data described above, the consolidated
financial statements and other disclosures in this
Form 10-K/A
are unchanged and do not reflect any events that have occurred
after its initial filing on February 29, 2008.
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
135 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:
Neurosciences products, our largest-selling
product group, including:
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Zyprexa®,
for the treatment of schizophrenia, acute mixed or manic
episodes associated with bipolar I disorder and bipolar
maintenance
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Cymbalta®,
for the treatment of major depressive disorder, diabetic
peripheral neuropathic pain, and generalized anxiety disorder
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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 major depressive disorder,
obsessive-compulsive disorder, bulimia nervosa and panic disorder
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Symbyax®,
for the treatment of bipolar depression
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Endocrinology products, including:
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Humalog®
, Humalog Mix
75/25®,
and Humalog Mix
50/50tm,
for the treatment of diabetes
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Humulin®,
for the treatment of diabetes
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Actos®,
for the treatment of type 2 diabetes
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Byetta®,
for the treatment of type 2 diabetes
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Evista®,
for the prevention and treatment of osteoporosis in
post-menopausal women and for the reduction of the risk of
invasive breast cancer in postmenopausal women with osteoporosis
and postmenopausal women at high risk for invasive breast cancer.
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Forteo®,
for the treatment of osteoporosis in postmenopausal women
and men at high risk for fracture
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Humatrope®,
for the treatment of human growth hormone deficiency and
idiopathic short stature.
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-1-
Oncology products, including:
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Gemzar®,
for the treatment of pancreatic cancer; in combination with
other agents, for the 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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Cardiovascular products, including:
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Cialis®,
for the treatment of erectile dysfunction
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ReoPro®,
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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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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Two new products for dogs:
Comfortistm,
the first FDA-approved, chewable tablet that kills fleas and
prevents flea infestations on dogs; and
Reconciletm,
for treatment of canine separation anxiety in conjunction with
behavior modification training.
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Other pharmaceuticals, 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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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 12 and
16 percent of our worldwide consolidated net sales in 2007.
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.
-2-
We promote our major pharmaceutical products in the United
States through sales representatives who call upon physicians
and other health care 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, and oncology. We sometimes supplement our employee
sales force with contract sales organizations.
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 wholesalers, managed-care organizations,
government and long-term care institutions, hospitals, 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 are receiving residual
royalties on U.S. Actos sales at declining annual rates
through September 2009. 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.
-3-
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 versions of
our products. Increasingly, to obtain favorable reimbursement
and formulary positioning with government payers, managed care
and pharmacy benefits management organizations, we must
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 (either alone or in
collaboration with others) 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, or allege a third-party right of ownership
in our existing intellectual property.
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. Because of TRIPs transition provisions,
dispute resolution mechanisms, and substantive limitations, 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
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compound patent we hold other patents on manufacturing
processes, formulations, or uses that may extend exclusivity
beyond the expiration of the product patent.
The most relevant U.S. patent protection, together with
expected expiration, for our major marketed products is as
follows:
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Alimta is protected by a compound patent (2016).
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Byetta is protected by a patent covering its use in
treating type 2 diabetes (2017).
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Cialis is protected by compound and use patents
(2017).
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Cymbalta is protected by a compound patent
(2013) and a composition patent (2014).
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Evista is protected by patents on the treatment and
prevention of osteoporosis (2012 and 2014), and its dosage form
(2017). Evista for use in breast cancer risk reduction is
protected by orphan drug exclusivity (2014).
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Gemzar is protected by a compound patent
(2010) and a patent covering its antineoplastic use (2013).
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Humalog is protected by a compound patent (2013).
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Strattera is protected by a patent covering its use
in treating attention deficit-hyperactivity disorder (2016).
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Xigris is protected by a product patent (2015).
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Zyprexa is protected by a compound patent (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 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 Evista, Gemzar, and
Strattera. For more information on these, see Part II,
Item 7, Managements Discussion and
Analysis Legal and Regulatory Matters.
-5-
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. In 2007, Congress passed the Food and
Drug Administration Amendments Act (FDAAA) of 2007, which
imposes additional requirements for drug development and
commercialization and provides the FDA with further authorities
and resources, particularly in the area of drug safety.
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.
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. Specific
regulatory requirements vary from country to country.
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, the FDA,
the Department of Justice, 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
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.
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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, Regulatory, and Other
Matters for more discussion of MMA and other federal
healthcare cost containment measures. At the state level, budget
pressures are causing various states to impose cost-control
measures such as higher rebates and more restrictive formularies.
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,
limit access to or reimbursement for our products, 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 2007, we employed approximately
8,000 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 $3.03 billion in 2005,
$3.13 billion in 2006, and $3.49 billion in 2007.
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
(both food and companion animal).
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.
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 can take 12 to 15 years or
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longer. Drug candidates can fail at any stage of the process,
and even late-stage drug candidates sometimes fail to receive
regulatory approval or commercial success. 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
acute coronary syndromes, diabetes, osteoporosis, and cancer.
Further, we are studying many other drug candidates in the
earlier stages of development, including compounds targeting
cancers, diabetes, obesity, Alzheimers disease,
schizophrenia, multiple sclerosis, depression, sleep disorders,
pain and migraine, attention-deficit hyperactivity disorder
(ADHD), alcoholism, thrombotic disorders, and rheumatoid
arthritis. At present we have approximately 45 drug candidates
across all stages of clinical development. We are also
developing new uses and formulations for many of these compounds
as well as our currently marketed products, such as Zyprexa,
Cymbalta, Byetta, Gemzar, Alimta, Cialis, and Forteo.
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 21, 2008, 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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59
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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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54
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President and Chief Operating Officer (since October 2005) and a
Director
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Robert A. Armitage
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59
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Senior Vice President and General Counsel (since January 2003)
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Alex M. Azar II
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40
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Senior Vice President, Corporate Affairs and Communications
(since June 2007)
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Frank M. Deane, Ph.D.
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58
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President, Manufacturing Operations (since June 2007)
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Anthony J. Murphy, Ph.D.
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57
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Senior Vice President, Human Resources (since June 2005)
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Steven M. Paul, M.D.
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57
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Executive Vice President, Science and Technology (since July
2003)
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Derica W. Rice
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43
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Senior Vice President and Chief Financial Officer (since May
2006)
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Gino Santini
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51
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Senior Vice President, Corporate Strategy and Business
Development (since June 2007)
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Deirdre P. Connelly
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47
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President, U.S. Operations (since June 2005)
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Lorenzo Tallarigo, M.D.
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57
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President, International Operations (since January 2004)
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Mr. Taurel will retire as Chief Executive Officer as of
March 31, 2008, and as Chairman and a director as of
December 31, 2008. On April 1, 2008,
Dr. Lechleiter will become President and Chief Executive
Officer. Dr. Tallarigo will retire as of March 31,
2008, and on April 1, 2008, Bryce D. Carmine will become
Executive Vice President, Marketing and Sales.
Employees
At the end of 2007, we employed approximately
40,600 people, including approximately
19,100 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/A,
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.
-9-
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/A,
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. 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/A.
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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/A,
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/A,
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
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bring new drugs to the market. We currently expect no major
U.S. patent expirations in the next three years, but
several major products will lose intellectual property
protection beginning in 2011. See Item 1,
Business Patents, Trademarks, and Other
Intellectual Property Protection, for more details.
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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. We are increasingly facing generic
manufacturer challenges to our patents outside the U.S as well.
In addition, competitors or other third parties may claim that
our activities infringe patents or other intellectual property
rights held by them. If successful, such claims could result in
our being unable to market a product in a particular territory
or being required to pay damages for past infringement or
royalties on future sales.
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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. Many
federal and state legislative proposals would further negatively
affect our pricing
and/or
reimbursement for our products. 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
$4.76 billion represented 26 percent of our revenues
in 2007. Five other products Cymbalta, Gemzar,
Humalog, Cialis, and Evista each contributed more
than $1 billion in revenues in 2007. 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 payers 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
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-11-
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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 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.
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We undertake no duty to update forward-looking statements.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our principal domestic and international executive offices are
located in Indianapolis. At December 31, 2007, 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
13.0 million square feet of floor area dedicated to
production, distribution, and administration. Major production
sites include Indianapolis; Clinton and Lafayette, Indiana; and
Carolina, Mayaguez and Guayama, Puerto Rico.
We own production and distribution facilities in 14 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, Brazil, Italy, the United Kingdom, and Mexico.
We lease production and warehouse facilities in Puerto Rico and
several countries outside the United States.
-12-
Our research and development facilities in the United States
consist of approximately 4.1 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, and Spain, and contain an
aggregate of approximately 350,000 square feet.
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.
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Item 3.
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Legal
Proceedings
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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
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 Evista, Gemzar,
Strattera, and Xigris
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The patent litigation outside the U.S. involving Zyprexa
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The investigations by the U.S. Attorney for the Eastern
District of Pennsylvania and various state attorneys general
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 state Medicaid agencies and private
healthcare payers
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That information is incorporated into this Item by reference.
Other
Patent Litigation
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. On October 1, 2007, the
United States Supreme Court denied the generic companies
petition for certiorari, bringing this litigation to a close.
In June 2005, Dr. Alan Schreiber filed a lawsuit against us
in the United States District Court for the Eastern District of
Pennsylvania raising a number of claims, including patent
infringement, misappropriation of trade secrets, breach of
contract, and unjust enrichment, and seeking a declaration for
inventorship of Lillys Evista method-of-use patents. After
the original lawsuit was filed, the University of Pennsylvania
was added as a plaintiff. No trial date has been scheduled. We
believe these claims are without legal merit and expect to
prevail in this litigation; however, it is not possible to
determine the outcome. An unfavorable final outcome could have a
material adverse impact on our consolidated results of
operations, liquidity, and financial position.
-13-
In July 2005, Vanderbilt University filed a lawsuit in the
United States District Court in Delaware against
ICOS Corporation seeking to add three of its scientists as
co-inventors on the Cialis compound and method-of-use patents.
The trial was held in front of the district court judge in
January 2008 but a decision has yet to be rendered. We believe
these claims are without legal merit and expect to prevail in
this litigation; however, it is not possible to determine the
outcome. An unfavorable final outcome could have a material
adverse impact on our consolidated results of operations,
liquidity, and financial position.
In October 2002, Pfizer Inc. was issued a method-of-use patent
in the United States and commenced a lawsuit in the United
States District Court in Delaware against us, Lilly ICOS LLC,
and ICOS Corporation (both now subsidiaries of Lilly)
alleging that the marketing of Cialis for erectile dysfunction
infringed this patent. This litigation has been stayed pending
the outcome of a reexamination of the patent by the
U.S. Patent and Trademark Office. The Office has now made a
final rejection of the relevant patent claims which Pfizer is
appealing. We believe Pfizers claims are without merit and
expect to prevail. However, it is not possible to 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.
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 220 actions
in the U.S., involving approximately 310 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 February 2006, we reached a settlement of an investigation by
the Office of Consumer Litigation, Department of Justice,
related to our marketing and promotional practices and physician
communications with respect to Evista. As part of the
settlement, we agreed to plead guilty to one misdemeanor
violation of the Food, Drug, and Cosmetic Act. The plea was 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
-14-
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.
Shareholder
Litigation
Two lawsuits that seek class action status were filed in the
United States District Court for the Eastern District of New
York against us and various current and former directors,
officers and employees (Smith et al. v. Eli Lilly and
Company et al., filed March 28, 2007, and
Valentine v. Eli Lilly and Company et al., filed
April 5, 2007). The suits have been consolidated under the
caption In re Eli Lilly and Company Securities
Litigation. In August 2007, the lead plaintiffs filed a
consolidated amended complaint, seeking certification of a
putative class of purchasers of our stock from August 1,
2002, through December 22, 2006. The complaint alleges that
the defendants made false and misleading statements regarding
Zyprexa in violation of the Securities Exchange Act of 1934, and
seeks unspecified compensatory damages and the costs of suit,
including attorneys fees. In October 2007, defendants
filed a motion to dismiss the consolidated amended complaint.
That motion has been converted in part to a motion for summary
judgment, and a hearing on the motion is scheduled in March
2008. We believe these claims are without merit and are prepared
to defend against them vigorously.
In April 2007, the company received demands from two
shareholders that the board of directors cause the company to
take legal action against current and former directors and
others for allegedly causing damage to the company with respect
to the allegedly improper marketing of Evista, Prozac, and
Zyprexa. We received a similar demand in September related only
to Zyprexa. In accordance with procedures established under the
Indiana Business Corporation Law (Ind. Code
§ 23-1-32), the board has appointed a committee of
independent persons to consider the demands and determine what
action, if any, the company should take in response. In January
2008, two of the three shareholders who had submitted the
demands filed a derivative suit in the United States District
Court for the Southern District of Indiana, nominally on behalf
of the company, against various current and former directors and
officers (Lambrecht, et al. v. Taurel, et al., filed
January 17, 2008). The suit alleges that the board of
directors constructively denied the shareholders prior
demands by failing to take action on the demands sufficiently
promptly. We believe this suit is without merit and are prepared
to defend against it vigorously.
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, Evista, Humalog, Humulin, and
Zyprexa. We are cooperating in responding to the subpoena.
Between 2003 and 2005, various municipalities 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
municipalities 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. In October and November of 2007, respectively, the
States of Iowa and Utah filed similar suits against Lilly and
several other pharmaceutical manufacturers. These suits are
pending either in the U.S. District Court for the District
of Massachusetts or in various state courts. All of these suits
are in the early stages.
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
-15-
decision, and the time for further appeals has lapsed. In the
California case, summary judgment has been granted to Lilly and
the other defendants. The plaintiffs have appealed that decision.
We have received requests for information about Zyprexa from the
offices of Representative Henry Waxman, Chair of the House
Committee on Oversight and Government Reform, and Senator
Charles Grassley, ranking member of the Senate Finance
Committee. We have also received a request from Representative
Waxmans office for information about drug pricing under
Medicare Part D. We are cooperating with these requests.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, commonly known as Superfund, we have been
designated as one of several potentially responsible parties
with respect to the cleanup of fewer than 10 sites. Under
Superfund, each responsible party may be jointly and severally
liable for the entire amount of the cleanup.
We are also a defendant in other litigation and investigations,
including product liability, patent and employment litigation,
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 2007, no matters were submitted to
a vote of security holders.
Part II
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Item 5.
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Market for
the Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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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, 2007:
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Total Number of Shares
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Approximate Dollar Value
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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 2007
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$
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$419.2
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November 2007
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1
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53.69
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419.2
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December 2007
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1
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52.79
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419.2
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Total
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2
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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, 2007, we have purchased
$2.58 billion related to this program.
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Item 6.
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Selected
Financial Data
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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.
-16-
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Item 7.
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Managements
Discussion and Analysis of Results of Operations and Financial
Condition
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As discussed in the explanatory note to this
Form 10-K/A
and in Note 2 to our consolidated financial statements, we
are restating our consolidated balance sheets and selected
financial data as of December 31, 2007, 2006, and 2005, and
selected financial data as of December 31, 2004 and 2003.
In a separate
Form 10-Q/A
filing, we are also restating our consolidated condensed balance
sheet as of March 31, 2008. As described in Note 2,
the restatement adjusts our return reserve for future product
returns for each period from January 1, 2003. In this
Item 7, we have updated cross-references to the notes to
the consolidated financial statements. The restatement has no
effect on our income, cash flows, or liquidity, and its effects
on our financial position at the end of each of the respective
restated periods are immaterial. In addition, we modified our
disclosure of certain deferred tax assets, valuation allowances,
and uncertain tax positions included in Note 12. These
modifications had no impact on our balance sheets, income
statements, cash flows, or liquidity. Except as described above,
the consolidated financial statements and other disclosures in
this
Form 10-K/A
are unchanged and do not reflect any events that have occurred
after its initial filing on February 29, 2008.
Review of
Operations
EXECUTIVE
OVERVIEW
This section provides an overview of our financial results,
significant business development, recent product and late-stage
pipeline developments, and legal, regulatory, and other matters
affecting our company and the pharmaceutical industry.
Financial
Results
We achieved worldwide sales growth of 19 percent. This
growth was primarily driven by volume increases in a number of
key products, with a significant portion of this increase in
volume resulting from the acquisition of ICOS. Our additional
investments in marketing and selling expenses in support of key
products, primarily
Cymbalta®
and the diabetes care products, contributed to this sales growth
and enabled us to increase our investment in research and
development 11 percent in 2007. While cost of sales and
operating expenses in the aggregate grew at approximately the
same rate as sales, other income net decreased and
the effective tax rate increased. As a result, net income and
earnings per share increased 11 percent, to
$2.95 billion, or $2.71 per share, in 2007 as compared with
$2.66 billion, or $2.45 per share, in 2006. Net income
comparisons between 2007 and 2006 are affected by the impact of
the following significant items that are reflected in our
financial results (see Notes 4, 5, and 14 to the
consolidated financial statements for additional information):
2007
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We recognized asset impairments, restructuring, and other
special charges of $98.2 million (pretax) in the fourth
quarter, which decreased earnings per share by $.07. In the
first quarter, we recognized similar charges associated with
previously announced strategic decisions affecting manufacturing
and research facilities of $123.0 million (pretax), which
decreased earnings per share by $.08 (Note 5).
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We incurred a special charge following a settlement with one of
our insurance carriers over
Zyprexa®
product liability claims, which led to a reduction of our
expected product liability insurance recoveries. This resulted
in a charge of $81.3 million (pretax), which decreased
earnings per share by $.06 in the third quarter (Notes 5
and 14).
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We incurred in-process research and development (IPR&D)
charges associated with our licensing arrangement with Glenmark
Pharmaceuticals Limited India of $45.0 million (pretax) and
our licensing arrangement with MacroGenics, Inc., of
$44.0 million (pretax), which decreased earnings per share
by $.05 in the fourth quarter (Note 4).
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We incurred IPR&D charges associated with the acquisition
of Hypnion, Inc. (Hypnion), of $291.1 million (no tax
benefit) and the acquisition of Ivy Animal Health, Inc. (Ivy),
of $37.0 million (pretax), which decreased earnings per
share by $.29 in the second quarter (Note 4).
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We incurred IPR&D charges associated with the acquisition
of ICOS of $303.5 million (no tax benefit) and a licensing
arrangement with OSI Pharmaceuticals of $25.0 million
(pretax), which decreased earnings per share by $.29 in the
first quarter (Note 4).
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2006
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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 5).
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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 5 and 14).
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Late-Stage
Pipeline Developments and Business Development
Activity
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 late-stage pipeline
developments and recent business development transactions within
the past year, including:
Pipeline
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On December 26, 2007, together with our collaboration
partner Daiichi Sankyo Company, Limited, we submitted a New Drug
Application (NDA) for prasugrel to the U.S. Food and Drug
Administration (FDA). The proposed trademark for prasugrel is
Effienttm.
The submission follows the release of results of the TRITON
TIMI-38 Phase III
head-to-head
study of prasugrel versus clopidogrel in November.
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In January 2008, the FDA approved
Cialis®
for once-daily use to treat erectile dysfunction. Cialis was
approved by the European Commission for once-daily use in June
2007.
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In November, the FDA approved Cymbalta for the maintenance
treatment of major depressive disorder in adults. In February,
the FDA approved Cymbalta for the treatment of generalized
anxiety disorder. During 2007, we submitted a Supplemental New
Drug Application to the FDA for Cymbalta for the management of
fibromyalgia.
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In October, with our collaboration partners Amylin
Pharmaceuticals, Inc., and Alkermes, Inc., we announced positive
results from a 30-week comparator study of once-weekly exenatide
long-acting release injection and
Byetta®
(exenatide) injection taken twice daily in patients with type 2
diabetes.
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In the second quarter, we submitted NDAs to the FDA and the
European Medicines Agency (EMEA) for approval of olanzapine
(Zyprexa) long-acting injection. In late February 2008, the FDA
issued a not approvable letter, stating it needs
more information to better understand the risk and underlying
cause of excessive sedation events that have been observed in
about one percent of patients in clinical trials.
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In September, the FDA approved
Evista®
for a new use to reduce the risk of invasive breast cancer in
two populations: postmenopausal women with osteoporosis and
postmenopausal women at high risk for invasive breast cancer.
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We submitted an application to the EMEA for centralized review
of
Alimta®,
in combination with cisplatin, for the first-line treatment of
non-small cell lung cancer.
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Business
Development
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In December, we entered into a licensing and development
agreement with BioMS Medical Corp. whereby we acquired exclusive
worldwide rights to a multiple sclerosis (MS) compound. The
compound is currently being evaluated in two pivotal
Phase III clinical trials in secondary progressive MS
(SPMS) and one Phase II clinical trial in
relapsing-remitting MS (RRMS). In connection with this
agreement, we will incur a charge to earnings for acquired
IPR&D of $87.0 million (pretax), which will be
included as expense in the first quarter of 2008.
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In October, we entered into an agreement with Glenmark
Pharmaceuticals Limited India whereby we acquired the rights to
a portfolio of transient receptor potential vanilloid
sub-family 1
(TRPV1) antagonist molecules, including a clinical-phase
compound. The compound is currently in Phase II development
as a potential next-generation treatment for various pain
conditions, including osteoarthritic pain.
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In October, we entered into a global strategic alliance with
MacroGenics, Inc., to develop and commercialize teplizumab, a
humanized anti-CD3 monoclonal antibody, as well as other
potential next-generation anti-CD3 molecules for use in the
treatment of autoimmune diseases. As part of the arrangement, we
acquired the exclusive rights to the molecule. Teplizumab is
currently being studied in the PROTÉGÉ trial, a global
pivotal Phase II/III clinical trial for individuals with
recent-onset type 1 diabetes.
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In June, we completed the acquisition of Ivy Animal Health,
Inc., a privately held applied research and pharmaceutical
product development company focused on the animal health
industry. The acquisition provides us with product lines that
complement those of our animal health business.
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In April, we completed the acquisition of Hypnion, Inc., a
privately held neuroscience drug discovery company focused on
sleep disorders. The deal expands our presence in the area of
sleep disorder research and provides ownership of a novel
Phase II insomnia compound with a dual mechanism of action
aimed at promoting better sleep onset and sleep maintenance.
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In January, we completed the acquisition of ICOS at a cost of
approximately $2.3 billion. 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.
|
|
|
In January, we licensed from OSI Pharmaceuticals its glucokinase
activator (GKA) program for the treatment of type 2 diabetes,
including the lead compound. Lilly received an exclusive license
to develop and market any compounds derived from the GKA program.
|
Legal,
Regulatory, and Other Matters
In October, the United States Supreme Court denied the petitions
for certiorari that were filed by Teva Pharmaceuticals and
Dr. Reddys Laboratories, bringing to an end the two
companies challenges to the validity of Lillys
U.S. Zyprexa patent.
In June, we received notice of two court rulings by the Canadian
Federal Court and the German Patent Court that permit the entry
of generic olanzapine (Zyprexa) by competitors into the Canadian
and German markets. Generic olanzapine is now available for sale
by competitors in Canada and Germany.
-19-
We have reached agreements with claimants attorneys
involved in U.S. Zyprexa product liability litigation to
settle a total of approximately 31,200 claims against us
relating to the medication. Approximately 1,235 claims remain.
As a result of our product liability exposures, since the
beginning of 2005, we have recorded aggregate net pretax charges
of $1.61 billion for Zyprexa product liability matters.
In March 2004, we were notified by the U.S. Attorneys
office for the Eastern District of Pennsylvania (EDPA) that it
had commenced an investigation relating to our
U.S. marketing and promotional practices for Zyprexa,
Prozac®,
and Prozac
Weeklytm.
In November 2007, we received a grand jury subpoena from the
EDPA requesting documents related to Zyprexa.
In the United States, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) continues to
effectively provide a prescription drug benefit under the
Medicare program (known as Medicare Part D). Various
measures have been discussed
and/or
passed in both the U.S. House of Representatives and
U.S. Senate that would impose additional pricing pressures
on our products, including proposals to legalize the importation
of prescription drugs and either allow, or require, the
Secretary of Health and Human Services to negotiate drug prices
within Medicare Part D directly with pharmaceutical
manufacturers. Additionally, various proposals have been
introduced that would increase the rebates we pay on sales to
Medicaid patients. We expect pricing pressures at the federal
and state levels to continue.
In 2007, the Centers for Medicare and Medicaid Services released
a final rule seeking to implement sections of the Deficit
Reduction Act of 2005. This rule relates to the Medicaid program
and among other things, sets out a methodology for the
calculation and use of Average Manufacturer Price and Best Price
for pharmaceuticals. We have implemented the final rule, which
has the effect of reducing net selling prices for Medicaid
sales; however, we do not expect the impact to be material to
our consolidated results of operations, liquidity, or financial
position.
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 2007
Sales
Our worldwide sales for 2007 increased 19 percent, to
$18.63 billion, driven primarily by the inclusion of Cialis
since our January 29, 2007 acquisition of ICOS and sales
growth of Cymbalta, Zyprexa, Alimta,
Gemzar®,
and
Humalog®.
Worldwide sales volume increased 12 percent, while selling
prices and foreign exchange rates each increased sales by
3 percent. (Numbers do not add due to rounding.) Sales in
the U.S. increased 18 percent, to $10.15 billion,
driven primarily by increased sales of Cymbalta, Zyprexa,
Alimta, and Byetta, and the inclusion of Cialis. Sales outside
the U.S. increased 20 percent, to $8.49 billion,
driven primarily by the inclusion of Cialis, and sales growth of
Zyprexa, Alimta, Gemzar, and Cymbalta.
Zyprexa, our top-selling product, is a treatment for
schizophrenia, acute mixed or manic episodes associated with
bipolar I disorder and bipolar maintenance. Zyprexa sales in the
U.S. increased 6 percent in 2007, driven by higher net
selling prices, partially offset by lower demand. Sales outside
the U.S. increased 12 percent, driven by the favorable
impact of foreign exchange rates and increased demand.
Sales of Cymbalta, a product for the treatment of major
depressive disorder, diabetic peripheral neuropathic pain, and
generalized anxiety disorder, increased 58 percent in the
U.S., driven primarily by strong demand. Sales outside the
U.S. increased 70 percent, driven by increased demand
and the favorable impact of foreign exchange rates.
Sales of Gemzar, a product approved to fight various cancers,
increased 10 percent in the U.S., driven by higher prices
and increased demand. Sales outside the U.S. increased
16 percent, driven by increased demand and the favorable
impact of foreign exchange rates.
Sales of Humalog, our injectable human insulin analog for the
treatment of diabetes, increased 9 percent in the U.S.,
driven by higher prices and increased demand. Sales outside the
U.S. increased 20 percent, driven by increased demand
and the favorable impact of foreign exchange rates, partially
offset by declining prices.
-20-
The following table summarizes our net sales activity in 2007
compared with 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Percent
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
Change
|
|
Product
|
|
U.S.1
|
|
|
Outside U.S.
|
|
|
Total
|
|
|
Total
|
|
|
from 2006
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zyprexa
|
|
$
|
2,236.0
|
|
|
$
|
2,525.0
|
|
|
$
|
4,761.0
|
|
|
$
|
4,363.6
|
|
|
|
9
|
|
Cymbalta
|
|
|
1,835.6
|
|
|
|
267.3
|
|
|
|
2,102.9
|
|
|
|
1,316.4
|
|
|
|
60
|
|
Gemzar
|
|
|
670.0
|
|
|
|
922.4
|
|
|
|
1,592.4
|
|
|
|
1,408.1
|
|
|
|
13
|
|
Humalog
|
|
|
888.0
|
|
|
|
586.6
|
|
|
|
1,474.6
|
|
|
|
1,299.5
|
|
|
|
13
|
|
Cialis2
|
|
|
423.8
|
|
|
|
720.0
|
|
|
|
1,143.8
|
|
|
|
215.8
|
|
|
|
NM
|
|
Evista
|
|
|
706.1
|
|
|
|
384.6
|
|
|
|
1,090.7
|
|
|
|
1,045.3
|
|
|
|
4
|
|
Animal health products
|
|
|
480.9
|
|
|
|
514.9
|
|
|
|
995.8
|
|
|
|
875.5
|
|
|
|
14
|
|
Humulin®
|
|
|
365.2
|
|
|
|
620.0
|
|
|
|
985.2
|
|
|
|
925.3
|
|
|
|
6
|
|
Alimta
|
|
|
448.0
|
|
|
|
406.0
|
|
|
|
854.0
|
|
|
|
611.8
|
|
|
|
40
|
|
Forteo®
|
|
|
494.1
|
|
|
|
215.2
|
|
|
|
709.3
|
|
|
|
594.3
|
|
|
|
19
|
|
Strattera®
|
|
|
464.6
|
|
|
|
104.8
|
|
|
|
569.4
|
|
|
|
579.0
|
|
|
|
(2
|
)
|
Humatrope®
|
|
|
213.6
|
|
|
|
227.2
|
|
|
|
440.8
|
|
|
|
415.6
|
|
|
|
6
|
|
Actos®
|
|
|
150.8
|
|
|
|
219.8
|
|
|
|
370.6
|
|
|
|
448.5
|
|
|
|
(17
|
)
|
Byetta
|
|
|
316.5
|
|
|
|
14.2
|
|
|
|
330.7
|
|
|
|
219.0
|
|
|
|
51
|
|
Other pharmaceutical products
|
|
|
452.3
|
|
|
|
760.0
|
|
|
|
1,212.3
|
|
|
|
1,373.3
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
10,145.5
|
|
|
$
|
8,488.0
|
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
|
19
|
|
|
|
|
|
|
|
NM Not meaningful
|
|
|
1 |
|
U.S. sales include sales in Puerto
Rico.
|
|
2 |
|
Prior to the acquisition of ICOS,
the Cialis sales shown in the table above represent results only
in the territories in which we marketed 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 income statement. Subsequent to the acquisition,
all Cialis product sales are reported in our net sales.
|
-21-
Total worldwide sales of Cialis, a treatment for erectile
dysfunction, were $1.22 billion and $971.0 million
during 2007 and 2006, respectively. This includes
$72.7 million of sales in the Lilly ICOS joint-venture
territories for the 2007 period prior to the acquisition of
ICOS. Worldwide sales grew 25 percent in 2007.
U.S. sales increased 20 percent in 2007, driven by
increased demand and higher prices. Sales outside the
U.S. increased 28 percent in 2007, driven by increased
demand, the favorable impact of foreign exchange rates, and
higher prices. Prior to the ICOS acquisition, Cialis sales in
our territories were reported in net sales, while our
50 percent share of the joint-venture net income was
reported in other income net. All sales of Cialis
subsequent to the ICOS acquisition are reported in our net sales.
Sales of Evista, a product for the prevention and treatment of
osteoporosis in postmenopausal women and for risk reduction of
invasive breast cancer in postmenopausal women with osteoporosis
and postmenopausal women at high risk for invasive breast
cancer, increased 6 percent in the U.S., driven by higher
prices. Sales outside the U.S. increased 1 percent,
driven by the favorable impact of foreign exchange rates,
partially offset by lower prices and lower demand.
Sales of Humulin, an injectable human insulin for the treatment
of diabetes, decreased 1 percent in the U.S., driven by
lower demand, partially offset by higher prices. Sales outside
the U.S. increased 11 percent, driven by increased
demand and the favorable impact of foreign exchange rates,
partially offset by lower prices.
Sales of Alimta, a second-line treatment for non-small cell lung
cancer and in combination with another agent, for the treatment
of malignant pleural mesothelioma, increased 28 percent in
the U.S., driven by increased demand and to a lesser extent,
higher prices. Sales outside the U.S. increased
55 percent, driven by increased demand and to a lesser
extent, the favorable impact of foreign exchange rates.
Sales of Forteo, an injectable treatment for osteoporosis in
postmenopausal women and men at high risk for fracture,
increased 19 percent in the U.S., driven by higher net
selling prices. U.S. sales growth benefited from access to
medical coverage through the Medicare Part D program and
decreased utilization of our U.S. patient assistance
program and to a lesser extent, increased demand. Sales outside
the U.S. increased 21 percent, driven by increased
demand and the favorable impact of foreign exchange rates.
Sales of Strattera, a treatment for attention-deficit
hyperactivity disorder in children, adolescents, and adults,
decreased 9 percent in the U.S., as a result of decreased
demand. Sales outside the U.S. increased 50 percent,
driven by increased demand and the favorable impact of foreign
exchange rates.
-22-
Our revenues from Actos, an oral agent for the treatment of type
2 diabetes, a portion of which represent revenues from a
copromotion agreement in the U.S. with Takeda
Pharmaceuticals North America (Takeda), decreased
46 percent in the U.S. 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 continue to receive royalties from
Takeda through September 2009 at rates that decline each year.
Our arrangement outside the U.S. continues. Sales outside
the U.S. increased 30 percent, driven primarily by
increased demand and to a lesser extent, the favorable impact of
foreign exchange rates.
Worldwide sales of Byetta, an injectable product for the
treatment of type 2 diabetes, which we market with Amylin
Pharmaceuticals (Amylin), increased 51 percent to
$650.2 million during 2007. We report as revenue our
50 percent share of Byettas gross margin in the U.S.,
100 percent of Byetta sales outside the U.S., and our sales
of Byetta pen delivery devices to Amylin. Our revenues increased
51 percent to $330.7 million in 2007.
Animal health product sales in the U.S. increased
18 percent, driven by increased demand, the acquisition of
Ivy Animal Health, and new companion-animal product launches.
Sales outside the U.S. increased 10 percent, driven by
the favorable impact of foreign exchange rates and increased
demand.
Gross
Margin, Costs, and Expenses
The 2007 gross margin decreased to 77.2 percent of
sales compared with 77.4 percent for 2006. This decrease
was primarily due to the expense resulting from the amortization
of the intangible assets acquired in the ICOS acquisition, the
unfavorable impact of foreign exchange rates, and production
volumes growing at a slower rate than sales, offset partially by
manufacturing expenses growing at a slower rate than sales.
Operating expenses (the aggregate of research and development
and marketing, selling, and administrative expenses) increased
19 percent in 2007. Investment in research and development
increased 11 percent, to $3.49 billion. In addition to
the acquisition of ICOS, this increase was due to increases in
discovery research and late-stage clinical trial costs. We
continued to be a leader in our industry peer group by investing
approximately 19 percent of our sales into research and
development during 2007. Marketing, selling, and administrative
expenses increased 25 percent in 2007, to
$6.10 billion. This increase was largely due to the impact
of the ICOS acquisition, as well as increased marketing and
selling expenses in support of key
-23-
products, primarily Cymbalta and the diabetes care products, and
the unfavorable impact of foreign exchange rates.
Acquired IPR&D charges were $745.6 million in 2007 and
related to the acquisitions of ICOS, Hypnion, and Ivy, as well
as our licensing arrangements with OSI, MacroGenics, and
Glenmark. We incurred asset impairments, restructuring, and
other special charges of $302.5 million in 2007 as compared
to $945.2 million in 2006. See Notes 4, 5 and 14 to
the consolidated financial statements for additional information.
Other income net decreased $115.8 million, to
$122.0 million. This line item 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 2007 decreased $9.8 million, to
$228.3 million. This decrease is a result of lower average
debt balances in 2007 compared to 2006.
|
|
|
Interest income for 2007 decreased $46.6 million, to
$215.3 million, due to lower cash balances in 2007 compared
to 2006.
|
|
|
The Lilly ICOS joint-venture income was $11.0 million in
2007 as compared to $96.3 million in 2006, due to the
acquisition of ICOS on January 29, 2007.
|
|
|
Net other miscellaneous income items increased $6.3 million
to $124.0 million.
|
We incurred tax expense of $923.8 million in 2007,
resulting in an effective tax rate of 23.8 percent,
compared with 22.1 percent for 2006. The effective tax
rates for 2007 and 2006 were affected primarily by the
nondeductible ICOS and Hypnion IPR&D charges of
$594.6 million in 2007, and the product liability charges
of $494.9 million in 2006. The tax effect of the product
liability 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.
See Note 12 to the consolidated financial statements for
additional information.
-24-
OPERATING
RESULTS 2006
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 the 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. Certain items,
reflected in our operating results for 2006 and 2005, should be
considered in comparing the two years. The significant items for
2006 are summarized in the Executive Overview. The 2005 items
are summarized as follows (see Notes 3, 5, and 14 to the
consolidated financial statements for additional information):
|
|
|
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 (Notes 5 and 14).
|
|
|
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 5).
|
|
|
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. 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 3).
|
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 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 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 sales in the U.S. increased 4 percent in 2006,
driven by higher prices, offset in part by lower demand. The
increase in net 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.
Diabetes care products 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.
|
-25-
|
|
|
Actos revenues in the U.S. decreased 22 percent in
2006, due to the expiration of our U.S. marketing rights in
September 2006. 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.
|
|
|
Total sales of Byetta, launched in the U.S. in June 2005,
were $430.2 million for 2006.
|
Sales of Gemzar 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 increased 82 percent in the U.S., due to
strong demand. Sales of Cymbalta outside the U.S. reflect
international launches.
Sales of Evista 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.
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
|
|
Byetta
|
|
|
219.0
|
|
|
|
|
|
|
|
219.0
|
|
|
|
39.6
|
|
|
|
NM
|
|
Cialis2
|
|
|
3.7
|
|
|
|
212.1
|
|
|
|
215.8
|
|
|
|
169.9
|
|
|
|
27
|
|
Other pharmaceutical products
|
|
|
496.1
|
|
|
|
877.2
|
|
|
|
1,373.3
|
|
|
|
1,805.1
|
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 marketed 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.
|
Sales of Alimta increased 18 percent and 57 percent in
the U.S. and outside the U.S., respectively, due primarily
to increased demand.
Sales of Forteo 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
strong demand.
-26-
Sales of Strattera 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 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.
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.
Operating 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, selling, and administrative expenses
increased 9 percent in 2006, to $4.89 billion. This
increase was largely attributable to increased marketing and
selling 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.
|
|
|
Interest expense for 2006 increased $132.9 million, to
$238.1 million. This increase was 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 benefit associated with these charges 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. See
Note 12 to the consolidated financial statements for
additional information.
FINANCIAL
CONDITION
As of December 31, 2007, cash, cash equivalents, and
short-term investments totaled $4.83 billion compared with
$3.89 billion at December 31, 2006. Cash flow from
operations in 2007 of $5.15 billion and net proceeds from
the issuance of long-term debt of $1.45 billion exceeded
the total of the net cash paid for corporate acquisitions of
$2.67 billion, dividends paid of $1.85 billion, and
purchases of property and equipment of $1.08 billion.
Capital expenditures of $1.08 billion during 2007 were
consistent with 2006, due primarily to the management of capital
spending. We expect near-term capital expenditures to remain
approximately the same as 2007 levels while we invest in our
biotech and research and development initiatives, continue to
upgrade our
-27-
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, 2007 increased
$1.29 billion, to $5.01 billion, reflecting the
$2.50 billion of debt we issued in 2007 to finance our
acquisition of ICOS, offset by long-term debt repayment of
$1.06 billion. Our current debt ratings from
Standard & Poors and Moodys remain at AA
and Aa3, respectively.
Dividends of $1.70 per share were paid in 2007, an increase of
6 percent from 2006. In the fourth quarter of 2007,
effective for the first-quarter dividend in 2008, the quarterly
dividend was increased to $.47 per share (a 10.6 percent
increase), resulting in an indicated annual rate for 2008 of
$1.88 per share. The year 2007 was the 123rd consecutive
year in which we made dividend payments and the
40th consecutive year in which dividends have been
increased.
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 2008. We believe that
amounts accessible through existing commercial paper markets
should be adequate to fund short-term borrowings, if necessary.
We currently have $1.24 billion of unused committed bank
credit facilities, $1.20 billion of which backs our
commercial paper program. Our access to credit markets has not
been adversely affected by the recent illiquidity in the market.
Various risks and uncertainties, including those discussed in
the Financial Expectations for 2008 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, 2007 and 2006, 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, 2007
and 2006, 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, and the British pound against the
euro. 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, 2007 and 2006, a hypothetical 10 percent
change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2007 and 2006,
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.
-29-
Off-Balance
Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have a material
current effect or that are reasonably likely to have a material
future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources. We
acquire and partner 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 or upon the
achievement of certain sales levels). 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.
Individually, these arrangements are not material in any one
annual reporting period. However, if milestones for multiple
products covered by these arrangements would happen to be
reached in the same reporting period, the aggregate charge to
expense could be material to the results of operations in 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.
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
|
|
$
|
9,582.3
|
|
|
$
|
645.6
|
|
|
$
|
522.4
|
|
|
$
|
1,000.7
|
|
|
$
|
7,413.6
|
|
Capital lease obligations
|
|
|
72.5
|
|
|
|
15.5
|
|
|
|
20.3
|
|
|
|
5.8
|
|
|
|
30.9
|
|
Operating leases
|
|
|
305.4
|
|
|
|
93.7
|
|
|
|
129.5
|
|
|
|
76.2
|
|
|
|
6.0
|
|
Purchase
obligations2
|
|
|
5,101.7
|
|
|
|
4,575.5
|
|
|
|
330.3
|
|
|
|
149.7
|
|
|
|
46.2
|
|
Other long-term liabilities reflected on our balance
sheet3
|
|
|
829.3
|
|
|
|
|
|
|
|
154.3
|
|
|
|
159.7
|
|
|
|
515.3
|
|
Other4
|
|
|
146.3
|
|
|
|
146.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,037.5
|
|
|
$
|
5,476.6
|
|
|
$
|
1,156.8
|
|
|
$
|
1,392.1
|
|
|
$
|
8,012.0
|
|
|
|
|
|
|
|
|
|
|
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, 2007 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, 2007. 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. Liabilities for unrecognized tax
benefits of $1.57 billion are excluded as reasonable
estimates could not be made regarding the timing of future cash
outflows associated with those liabilities.
|
|
4 |
|
This category comprises primarily
minimum pension funding requirements.
|
-30-
The contractual obligations table is current as of
December 31, 2007. 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, 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, patient
assistance 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.
The largest of our sales rebate/discount amounts are rebates
associated with sales covered by Medicaid. 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
-31-
recipients, and our product pricing and current rebate/discount
contracts. 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 paid 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.
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 $642.1 million,
$571.7 million, and $637.1 million in 2007, 2006, and
2005, respectively. A 5 percent change in the Medicaid and
Medicare rebate amounts we recognized in 2007 would lead to an
approximate $32 million effect on our income before income
taxes. As of December 31, 2007, our Medicaid and Medicare
rebate liability was $308.8 million.
Approximately 75 percent and 85 percent of our global
rebate and discount liability resulted from sales of our
products in the U.S. as of December 31, 2007 and 2006,
respectively. The following represents a roll-forward of our
most significant U.S. rebate and discount liability
balances, including Medicaid (in millions):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Rebate and discount liability, beginning of year
|
|
$
|
383.3
|
|
|
$
|
379.4
|
|
Reduction of net sales due to discounts and
rebates1
|
|
|
1,314.1
|
|
|
|
1,246.1
|
|
Cash payments of discounts and rebates
|
|
|
(1,228.6
|
)
|
|
|
(1,242.2
|
)
|
|
|
|
|
|
|
Rebate and discount liability, end of year
|
|
$
|
468.8
|
|
|
$
|
383.3
|
|
|
|
|
|
|
|
|
|
|
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.
-32-
Pension
and Retiree Medical Plan Assumptions
Pension benefit costs include assumptions for the discount rate,
retirement age, and expected return on plan assets. Retiree
medical plan costs include assumptions for the discount rate,
retirement age, expected return on plan assets, and
health-care-cost trend rates. These assumptions have a
significant effect on the amounts reported. In addition to the
analysis below, see Note 13 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 2007 annual expense
would increase by approximately $28 million. A
one-percentage-point decrease would lower the aggregate of the
2007 service cost and interest cost by approximately
$23 million. If the 2007 discount rate for the
U.S. defined benefit pension and retiree health benefit
plans (U.S. plans) were to be changed by a quarter
percentage point, income before income taxes would change by
approximately $32 million. If the 2007 expected return on
plan assets for U.S. plans were to be changed by a quarter
percentage point, income before income taxes would change by
approximately $14 million. If our assumption regarding the
2007 expected age of future retirees for U.S. plans were
adjusted by one year, our income before income taxes would be
affected by approximately $31 million. The U.S. plans
represent approximately 80 percent of the total accumulated
postretirement benefit obligation and approximately
83 percent of total plan assets at December 31, 2007.
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, interest, and
penalty assessments by these authorities. Inherent uncertainties
exist in estimates of many tax positions due to changes in tax
law resulting from legislation, regulation
and/or as
concluded through the various jurisdictions tax court
systems. We recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax
position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The
tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a
greater than 50 percent likelihood of being realized upon
ultimate resolution. The amount of unrecognized tax benefits is
adjusted for changes in facts and circumstances. For example,
adjustments could result from significant amendments to existing
tax law and the issuance of regulations or interpretations by
the taxing authorities, new information obtained during a tax
examination, or resolution of
-33-
an examination. We believe that our estimates for uncertain tax
positions are appropriate and sufficient to pay assessments that
may result from examinations of our tax returns. We recognize
both accrued interest and penalties related to unrecognized tax
benefits in income tax expense.
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 carryforwards where history does not
support such an assumption. Implementation of tax planning
strategies to recover these deferred tax assets or future income
generation in these jurisdictions could lead to the reversal of
these valuation allowances and a reduction of income tax expense.
We believe that our estimates for the uncertain tax positions
and valuation allowances against the deferred tax assets are
appropriate based on current facts and circumstances. A
5 percent change in the amount of the uncertain tax
positions and the valuation allowance would result in a change
in net income of approximately $78 million and
$26 million, respectively.
FINANCIAL
EXPECTATIONS FOR 2008
For the full year of 2008, we expect earnings per share to be in
the range of $3.80 to $3.95. This guidance includes the
anticipated acquired in-process research and development charges
of $.05 related to the BioMS in-licensing agreement. We expect
sales to grow in the mid-to high-single digits, driven primarily
by increased volume and strong sales growth for Cymbalta,
Cialis, Byetta, Alimta, and Humalog. We expect modest
improvement in gross margin as a percent of net sales, driven
primarily by manufacturing expenses growing more slowly than
sales. In addition, we expect operating expenses to grow more
slowly than sales in 2008, with growth in the mid-single digits.
Marketing, selling, and administrative expenses are expected to
grow in the low-single digits, driven by investments in
prasugrel, Cymbalta, Evista for invasive breast cancer risk
reduction, Humalog, and Byetta, offset by decreases in other
areas. Research and development expenses are expected to grow in
the high-single to low-double digits. Other income
net is expected to contribute less than $100 million. The
effective tax rate is expected to be approximately
23 percent. We expect 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;
changes in effective tax 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 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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Barr Laboratories, Inc. (Barr), submitted an Abbreviated New
Drug Application (ANDA) in 2002 seeking permission to market a
generic version of Evista prior to the expiration of our
relevant U.S. patents (expiring
|
-34-
|
|
|
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 similar lawsuit against Teva
in the U.S. District Court for the Southern District of
Indiana. The lawsuit against Teva is currently scheduled for
trial beginning March 9, 2009, while no trial date has been
set in the lawsuit against Barr. We believe that Barrs and
Tevas claims are without merit and we expect to prevail.
However, it is not possible to 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.
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Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma (USA) Inc.
(Mayne), and Sun Pharmaceutical Industries Inc. (Sun) each
submitted ANDAs seeking permission to market generic versions of
Gemzar prior to the expiration of our relevant U.S. patents
(compound patent expiring in 2010 and method-of-use patent
expiring in 2013), and alleging that these patents are invalid.
We filed lawsuits in the U.S. District Court for the
Southern District of Indiana against Sicor (February 2006) and
Mayne (October 2006), seeking rulings that these patents are
valid and are being infringed. In November 2007, the lawsuit
against Mayne was stayed and administratively closed by the
court. Also in November 2007, Sun filed a declaratory judgment
action in the United States District Court for the Eastern
District of Michigan, seeking a ruling that our method-of-use
patent is invalid or unenforceable, or would not be infringed by
the sale of Suns generic product. Sun informed us in
December 2007 that it is also challenging our compound patent,
and that patent has now been added to the declaratory judgment
action. In January 2008, we filed a second lawsuit against Mayne
in response to a second ANDA filed by Mayne for a new dosage
strength. We expect to prevail in this litigation and believe
that these claims are without merit. However, it is not possible
to 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.
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Actavis Elizabeth LLC (Actavis), Glenmark Pharmaceuticals Inc.,
USA (Glenmark), Sun Pharmaceutical Industries Limited (Sun),
Sandoz Inc. (Sandoz), Mylan Pharmaceuticals Inc. (Mylan), Teva
Pharmaceuticals USA, Inc. (Teva), Apotex Inc. (Apotex),
Aurobindo Pharma Ltd. (Aurobindo), Synthon Laboratories, Inc.
(Synthon), and Zydus Pharmaceuticals, USA, Inc. (Zydus) each
submitted an ANDA seeking permission to market generic versions
of Strattera prior to the expiration of our relevant
U.S. patent (expiring in 2017), and alleging that this
patent is invalid. We filed a lawsuit against Actavis in the
United States District Court for the District of New Jersey in
August 2007. Sandoz filed a declaratory judgment action in the
same court, but its case has been dismissed. In September 2007,
we amended the complaint in the New Jersey lawsuit to add
Glenmark, Sun, Sandoz, Mylan, Teva, Apotex, Aurobindo, Synthon,
and Zydus as defendants. We filed a second action against
Synthon in the United States District Court for the Eastern
District of Virginia. Synthon has filed a motion to dismiss our
lawsuit in New Jersey. In December 2007, Zydus agreed to entry
of a consent judgment in which Zydus conceded the validity and
enforceability of the patent and agreed to a permanent
injunction. We expect to prevail in this litigation and believe
that these claims are without merit. However, it is not possible
to 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.
|
We have received challenges to Zyprexa patents in a number of
countries outside the U.S.:
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|
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In Canada, several generic pharmaceutical manufacturers have
challenged the validity of our Zyprexa compound and
method-of-use patent (expiring in 2011). In April 2007, the
Canadian Federal Court ruled against the first challenger,
Apotex Inc. (Apotex), and Apotex has appealed that ruling. In
June 2007, the Canadian Federal Court held that the invalidity
allegations of a second challenger, Novopharm Ltd. (Novopharm),
were justified and denied our request that Novopharm be
prohibited from receiving marketing approval for generic
olanzapine in Canada. Novopharm began selling generic olanzapine
in Canada in the third quarter of 2007. We have appealed that
decision and sued Novopharm for patent infringement. The appeal
was dismissed. In November 2007, Apotex filed an action seeking
a declaration of the invalidity of
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-35-
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our Zyprexa compound and method-of-use patents (expiring in
2011). The trial court ruled in our favor in February 2007.
Apotex will likely appeal.
|
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In Germany, generic pharmaceutical manufacturers
Egis-Gyogyszergyar and Neolabs Ltd. challenged the validity of
our Zyprexa compound and method-of-use patents (expiring in
2011). In June 2007, the German Federal Patent Court held that
our patent is invalid. We are appealing the decision. Generic
olanzapine was launched by competitors in Germany in the fourth
quarter of 2007.
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We have received challenges in a number of other countries,
including Spain, the United Kingdom (U.K.), and several smaller
European countries. In Spain, we have been successful at both
the trial and appellate court levels in defeating the generic
manufacturers challenge, but we anticipate further legal
challenges from generic manufacturers. In the U.K., a trial date
has tentatively been set for July 2008.
|
We are vigorously contesting the various legal challenges to our
Zyprexa patents on a country-by-country basis. We cannot
determine the outcome of this litigation. The availability of
generic olanzapine in Canada and Germany will have a material
adverse impact on our consolidated results of operations. The
availability of generic olanzapine in additional markets could
have a material adverse impact on our consolidated results of
operations.
In June 2002, 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
sued us, 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. 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. In addition, a separate bench trial
with the U.S. District Court of Massachusetts was held in
August 2006, on our contention that the patent is unenforceable
and impermissibly covers natural processes. In June 2005, the
United States Patent and Trademark Office (USPTO) commenced a
reexamination of the patent, and in August 2007 took the
position that the Ariad claims at issue are unpatentable, a
position that Ariad continues to contest. In September 2007, the
Court entered a final judgment indicating that Ariads
claims are patentable, valid, and enforceable, and finding
damages in the amount of $65 million plus a
2.3 percent royalty on net U.S. sales of Xigris and
Evista since the time of the jury decision. However, the Court
deferred the requirement to pay any damages until after all
rights to appeal have been exhausted. We plan to appeal this
judgment. 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 and Related Litigation
In March 2004, the Office of the U.S. Attorney for the
Eastern District of Pennsylvania (EDPA) advised us that it had
commenced an 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
November 2007, we received a grand jury subpoena from the EDPA
for a broad range of documents related to Zyprexa. A number of
State Medicaid Fraud Control Units are coordinating with the
EDPA in its investigation of any Medicaid-related claims
relating to our marketing and promotion of Zyprexa. In October
2005, the EDPA 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 our Medicaid best price reporting related
to the product sales covered by the rebate agreements.
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.
-36-
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.
In February 2007, we received a subpoena from the Office of the
Attorney General of the State of Illinois, seeking production of
documents and information relating to sales of Zyprexa and our
marketing and promotional practices, including our
communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa.
Beginning in August 2006, we have received civil investigative
demands or subpoenas from the attorneys general of a number of
states under various state consumer protection laws. 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 approximately 30 states are
participating in this joint effort, and it is possible 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. In
addition, we have been named as a defendant in a private suit in
California State Court, which was removed to federal court,
alleging violations of the California False Claims Act with
respect to certain Zyprexa marketing and promotional practices.
This suit was brought by an individual on behalf of the
government, under the qui tam provision of the California False
Claims Act.
We are cooperating in each of these investigations, including
providing a broad range of documents and information relating to
the investigations. 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
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 31,200
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.
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|
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 paid during 2007.
-37-
We are prepared to continue our vigorous defense of Zyprexa in
all remaining claims. The U.S. Zyprexa product liability
claims not subject to these agreements include approximately 325
lawsuits in the U.S. covering approximately 1,235
plaintiffs. Trial dates have been set for June 23, 2008, in
the Eastern District of New York, for several of the
U.S. plaintiffs.
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, and a second has been certified in Ontario and includes
all Canadian residents, except for residents of Quebec and
British Columbia. The allegations in the Canadian actions are
similar to those in the litigation pending in the U.S.
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 was the subject
of litigation in the federal court in Indianapolis against
certain of the carriers and in arbitration in Bermuda against
other carriers. In the second half of 2007, we reached
settlements resolving the vast majority of the disputed
insurance claims, and a portion of the insurance proceeds were
paid to us prior to the end of 2007.
Since the beginning of 2005, we have recorded aggregate net
pretax charges of $1.61 billion for Zyprexa product
liability matters. The net charges, which take into account our
actual and expected insurance recoveries, covered the following:
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|
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The cost of the Zyprexa product liability settlements to
date; and
|
|
|
Reserves for product liability exposures and defense costs
regarding the known Zyprexa product liability claims and
expected future 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. We have been
served with similar lawsuits filed by the states of Alaska,
Mississippi, Montana, New Mexico, Pennsylvania, South Carolina,
Utah, and West Virginia in the courts of the respective states.
The Mississippi, Montana, New Mexico, and West Virginia cases
have been removed to federal court and are now part of the MDL
proceedings in the Eastern District of New York. The Alaska case
is scheduled for trial beginning March 3, 2008.
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. In
2007, The Pennsylvania Employees Trust Fund brought claims
in state court in Pennsylvania as insurer of Pennsylvania state
employees, who were prescribed Zyprexa on similar grounds as
described in the New York cases. 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 determine with certainty the additional number of
lawsuits and claims that may be asserted. 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.
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.
-38-
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.
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|
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.
-39-
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Item 8.
|
Financial
Statements and Supplementary Data
|
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Dollars in millions, except per-share data)
|
|
|
Net sales
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
Cost of sales
|
|
|
4,248.8
|
|
|
|
3,546.5
|
|
|
|
3,474.2
|
|
Research and development
|
|
|
3,486.7
|
|
|
|
3,129.3
|
|
|
|
3,025.5
|
|
Marketing, selling, and administrative
|
|
|
6,095.1
|
|
|
|
4,889.8
|
|
|
|
4,497.0
|
|
Acquired in-process research and development (Note 4)
|
|
|
745.6
|
|
|
|
|
|
|
|
|
|
Asset impairments, restructuring, and other special charges
(Note 5)
|
|
|
302.5
|
|
|
|
945.2
|
|
|
|
1,245.3
|
|
Other income net
|
|
|
(122.0
|
)
|
|
|
(237.8
|
)
|
|
|
(314.2
|
)
|
|
|
|
|
|
|
|
|
|
14,756.7
|
|
|
|
12,273.0
|
|
|
|
11,927.8
|
|
|
|
|
|
|
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
3,876.8
|
|
|
|
3,418.0
|
|
|
|
2,717.5
|
|
Income taxes (Note 12)
|
|
|
923.8
|
|
|
|
755.3
|
|
|
|
715.9
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
2,953.0
|
|
|
|
2,662.7
|
|
|
|
2,001.6
|
|
Cumulative effect of a change in accounting principle, net of
tax (Note 3)
|
|
|
|
|
|
|
|
|
|
|
(22.0
|
)
|
|
|
|
|
|
|
Net income
|
|
$
|
2,953.0
|
|
|
$
|
2,662.7
|
|
|
$
|
1,979.6
|
|
|
|
|
|
|
|
Earnings per share basic (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
$1.84
|
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
Net income
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
$1.82
|
|
|
|
|
|
|
|
Earnings per share diluted (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
$1.83
|
|
Cumulative effect of a change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
Net income
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
$1.81
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-40-
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Restated,
|
|
|
Restated,
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
See Note 2
|
|
|
See Note 2
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,220.5
|
|
|
$
|
3,109.3
|
|
Short-term investments
|
|
|
1,610.7
|
|
|
|
781.7
|
|
Accounts receivable, net of allowances of $103.1 (2007) and
$82.5 (2006)
|
|
|
2,673.9
|
|
|
|
2,298.6
|
|
Other receivables (Note 9)
|
|
|
1,030.9
|
|
|
|
395.8
|
|
Inventories
|
|
|
2,523.7
|
|
|
|
2,270.3
|
|
Deferred income taxes (Note 12)
|
|
|
642.8
|
|
|
|
578.4
|
|
Prepaid expenses
|
|
|
613.6
|
|
|
|
319.5
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,316.1
|
|
|
|
9,753.6
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid pension (Note 13)
|
|
|
1,670.5
|
|
|
|
1,091.5
|
|
Investments (Note 6)
|
|
|
577.1
|
|
|
|
1,001.9
|
|
Goodwill and other intangibles net (Note 4)
|
|
|
2,455.4
|
|
|
|
130.0
|
|
Sundry (Note 9)
|
|
|
1,280.6
|
|
|
|
1,913.1
|
|
|
|
|
|
|
|
|
|
|
5,983.6
|
|
|
|
4,136.5
|
|
Property and Equipment, net
|
|
|
8,575.1
|
|
|
|
8,152.3
|
|
|
|
|
|
|
|
|
|
$
|
26,874.8
|
|
|
$
|
22,042.4
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt
(Note 7)
|
|
$
|
413.7
|
|
|
$
|
219.4
|
|
Accounts payable
|
|
|
924.4
|
|
|
|
789.4
|
|
Employee compensation
|
|
|
823.8
|
|
|
|
641.6
|
|
Sales rebates and discounts
|
|
|
706.8
|
|
|
|
508.3
|
|
Dividends payable
|
|
|
513.6
|
|
|
|
463.3
|
|
Income taxes payable (Note 12)
|
|
|
238.4
|
|
|
|
640.6
|
|
Other current liabilities (Note 9)
|
|
|
1,816.1
|
|
|
|
1,991.4
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,436.8
|
|
|
|
5,254.0
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt (Note 7)
|
|
|
4,593.5
|
|
|
|
3,494.4
|
|
Accrued retirement benefit (Note 13)
|
|
|
1,145.1
|
|
|
|
1,586.9
|
|
Long-term income taxes payable (Note 12)
|
|
|
1,196.7
|
|
|
|
|
|
Deferred income taxes (Note 12)
|
|
|
287.5
|
|
|
|
62.2
|
|
Other noncurrent liabilities (Note 9)
|
|
|
711.3
|
|
|
|
824.7
|
|
|
|
|
|
|
|
|
|
|
7,934.1
|
|
|
|
5,968.2
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Notes 8 and 10)
|
|
|
|
|
|
|
|
|
Common stock no par value
|
|
|
|
|
|
|
|
|
Authorized shares: 3,200,000,000
|
|
|
|
|
|
|
|
|
Issued shares: 1,135,212,894 (2007) and 1,132,578,231 (2006)
|
|
|
709.5
|
|
|
|
707.9
|
|
Additional paid-in capital
|
|
|
3,805.2
|
|
|
|
3,571.9
|
|
Retained earnings
|
|
|
11,806.7
|
|
|
|
10,766.2
|
|
Employee benefit trust
|
|
|
(2,635.0
|
)
|
|
|
(2,635.0
|
)
|
Deferred costs ESOP
|
|
|
(95.2
|
)
|
|
|
(100.7
|
)
|
Accumulated other comprehensive income (loss) (Note 15)
|
|
|
13.2
|
|
|
|
(1,388.7
|
)
|
|
|
|
|
|
|
|
|
|
13,604.4
|
|
|
|
10,921.6
|
|
Less cost of common stock in treasury
|
|
|
|
|
|
|
|
|
2007 899,445 shares
|
|
|
|
|
|
|
|
|
2006 909,573 shares
|
|
|
100.5
|
|
|
|
101.4
|
|
|
|
|
|
|
|
|
|
|
13,503.9
|
|
|
|
10,820.2
|
|
|
|
|
|
|
|
|
|
$
|
26,874.8
|
|
|
$
|
22,042.4
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-41-
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,953.0
|
|
|
$
|
2,662.7
|
|
|
$
|
1,979.6
|
|
Adjustments To Reconcile Net Income To Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,047.9
|
|
|
|
801.8
|
|
|
|
726.4
|
|
Change in deferred taxes
|
|
|
122.9
|
|
|
|
346.8
|
|
|
|
(347.5
|
)
|
Stock-based compensation expense
|
|
|
282.0
|
|
|
|
359.3
|
|
|
|
403.5
|
|
Acquired in-process research and development, net of tax
|
|
|
692.6
|
|
|
|
|
|
|
|
|
|
Asset impairments, restructuring, and other special charges,
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
|
181.5
|
|
|
|
797.4
|
|
|
|
1,128.7
|
|
Other, net
|
|
|
(8.4
|
)
|
|
|
(196.8
|
)
|
|
|
(30.0
|
)
|
|
|
|
|
|
|
|
|
|
5,271.5
|
|
|
|
4,771.2
|
|
|
|
3,860.7
|
|
Changes in operating assets and liabilities, net of acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables (increase) decrease
|
|
|
(842.7
|
)
|
|
|
243.9
|
|
|
|
(286.4
|
)
|
Inventories (increase) decrease
|
|
|
154.3
|
|
|
|
(60.2
|
)
|
|
|
72.1
|
|
Other assets increase
|
|
|
(355.8
|
)
|
|
|
(43.0
|
)
|
|
|
(269.4
|
)
|
Accounts payable and other liabilities increase
(decrease)
|
|
|
927.2
|
|
|
|
(936.0
|
)
|
|
|
(1,463.4
|
)
|
|
|
|
|
|
|
|
|
|
(117.0
|
)
|
|
|
(795.3
|
)
|
|
|
(1,947.1
|
)
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
5,154.5
|
|
|
|
3,975.9
|
|
|
|
1,913.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,082.4
|
)
|
|
|
(1,077.8
|
)
|
|
|
(1,298.1
|
)
|
Disposals of property and equipment
|
|
|
32.3
|
|
|
|
65.2
|
|
|
|
11.1
|
|
Net (repayments) proceeds of short-term investments
|
|
|
(376.9
|
)
|
|
|
1,247.5
|
|
|
|
62.7
|
|
Proceeds from sales and maturities of noncurrent investments
|
|
|
800.1
|
|
|
|
1,507.7
|
|
|
|
545.1
|
|
Purchases of noncurrent investments
|
|
|
(750.7
|
)
|
|
|
(1,313.2
|
)
|
|
|
(1,183.1
|
)
|
Purchases of in-process research and development
|
|
|
(111.0
|
)
|
|
|
|
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(2,673.2
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(166.3
|
)
|
|
|
179.0
|
|
|
|
(353.6
|
)
|
|
|
|
|
|
|
Net Cash Provided by (Used for) Investing Activities
|
|
|
(4,328.1
|
)
|
|
|
608.4
|
|
|
|
(2,215.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,853.6
|
)
|
|
|
(1,736.3
|
)
|
|
|
(1,654.9
|
)
|
Net repayments of short-term borrowings
|
|
|
(468.5
|
)
|
|
|
(8.4
|
)
|
|
|
(1,988.7
|
)
|
Proceeds from issuance of long-term debt
|
|
|
2,512.6
|
|
|
|
|
|
|
|
3,000.0
|
|
Repayments of long-term debt
|
|
|
(1,059.5
|
)
|
|
|
(2,781.5
|
)
|
|
|
(1,004.7
|
)
|
Purchases of common stock
|
|
|
|
|
|
|
(122.1
|
)
|
|
|
(377.9
|
)
|
Issuances of common stock under stock plans
|
|
|
24.7
|
|
|
|
59.6
|
|
|
|
105.9
|
|
Other, net
|
|
|
(0.6
|
)
|
|
|
9.9
|
|
|
|
39.8
|
|
|
|
|
|
|
|
Net Cash Used for Financing Activities
|
|
|
(844.9
|
)
|
|
|
(4,578.8
|
)
|
|
|
(1,880.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
129.7
|
|
|
|
97.1
|
|
|
|
(175.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
111.2
|
|
|
|
102.6
|
|
|
|
(2,358.6
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
3,109.3
|
|
|
|
3,006.7
|
|
|
|
5,365.3
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
3,220.5
|
|
|
$
|
3,109.3
|
|
|
$
|
3,006.7
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-42-
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Net income
|
|
$
|
2,953.0
|
|
|
$
|
2,662.7
|
|
|
$
|
1,979.6
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses)
|
|
|
756.6
|
|
|
|
542.4
|
|
|
|
(533.4
|
)
|
Net unrealized gains (losses) on securities
|
|
|
(11.4
|
)
|
|
|
(3.2
|
)
|
|
|
0.3
|
|
Minimum pension liability adjustment (Note 13)
|
|
|
|
|
|
|
(18.8
|
)
|
|
|
(87.8
|
)
|
Defined benefit pension and retiree health benefit plans
(Note 13)
|
|
|
943.8
|
|
|
|
|
|
|
|
|
|
Effective portion of cash flow hedges
|
|
|
(0.1
|
)
|
|
|
143.3
|
|
|
|
(81.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before income taxes
|
|
|
1,688.9
|
|
|
|
663.7
|
|
|
|
(702.6
|
)
|
Provision for income taxes related to other comprehensive income
(loss) items
|
|
|
(287.0
|
)
|
|
|
(43.1
|
)
|
|
|
63.4
|
|
|
|
|
|
|
|
Other comprehensive income (loss) (Note 15)
|
|
|
1,401.9
|
|
|
|
620.6
|
|
|
|
(639.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
4,354.9
|
|
|
$
|
3,283.3
|
|
|
$
|
1,340.4
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-43-
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
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
Net sales to unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurosciences
|
|
$
|
7,851.0
|
|
|
$
|
6,728.5
|
|
|
$
|
6,080.0
|
|
Endocrinology
|
|
|
5,479.6
|
|
|
|
5,014.5
|
|
|
|
4,636.9
|
|
Oncology
|
|
|
2,446.4
|
|
|
|
2,020.2
|
|
|
|
1,801.0
|
|
Cardiovascular2
|
|
|
1,624.1
|
|
|
|
730.4
|
|
|
|
778.8
|
|
Animal health
|
|
|
995.8
|
|
|
|
875.5
|
|
|
|
863.7
|
|
Other pharmaceuticals
|
|
|
236.6
|
|
|
|
321.9
|
|
|
|
484.9
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
|
|
|
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated
customers1
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
10,145.5
|
|
|
$
|
8,599.2
|
|
|
$
|
7,798.1
|
|
Europe
|
|
|
4,844.5
|
|
|
|
3,894.3
|
|
|
|
3,818.6
|
|
Other foreign countries
|
|
|
3,643.5
|
|
|
|
3,197.5
|
|
|
|
3,028.6
|
|
|
|
|
|
|
|
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,905.4
|
|
|
$
|
6,207.4
|
|
|
$
|
6,524.5
|
|
Europe
|
|
|
2,057.7
|
|
|
|
1,733.8
|
|
|
|
1,554.9
|
|
Other foreign countries
|
|
|
1,768.6
|
|
|
|
1,718.4
|
|
|
|
1,748.9
|
|
|
|
|
|
|
|
|
|
$
|
9,731.7
|
|
|
$
|
9,659.6
|
|
|
$
|
9,828.3
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Net sales are attributed to the countries based on the location
of the customer. |
|
2 |
|
Cialis sales for 2007 are included in Cardiovascular, and 2006
and 2005 Cialis sales have been reclassified from other
pharmaceuticals to be consistent with the 2007 presentation. |
The largest category of products is the neurosciences group,
which includes Zyprexa, Cymbalta, Strattera, and Prozac.
Endocrinology products consist primarily Humalog, Humulin,
Actos, Byetta, Evista, Forteo, and Humatrope. Oncology products
consist primarily of Gemzar and Alimta. Cardiovascular products
consist primarily of Cialis,
ReoProR,
and Xigris. Animal health products include
Tylan®,
Rumensin®,
Coban®,
and other products for livestock and poultry. The other
pharmaceuticals category includes anti-infectives, primarily
Ceclor®
and
Vancocin®,
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 2007, our three largest
wholesalers each accounted for between 12 percent and
16 percent of consolidated net sales. Further, they each
accounted for between 9 percent and 13 percent of
accounts receivable as of December 31, 2007. Animal health
products are sold primarily to wholesale distributors.
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
-44-
animal health business was approximately $173 million,
$184 million, and $215 million in 2007, 2006, and
2005, 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.
-45-
Selected
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
|
|
(Dollars in millions, except per-share data)
|
|
Net sales
|
|
$
|
5,189
|
.6
|
|
$
|
4,586
|
.8
|
|
$
|
4,631
|
.0
|
|
$
|
4,226
|
.1
|
Cost of sales
|
|
|
1,272
|
.8
|
|
|
1,054
|
.6
|
|
|
998
|
.9
|
|
|
922
|
.5
|
Operating expenses
|
|
|
2,709
|
.4
|
|
|
2,322
|
.3
|
|
|
2,379
|
.1
|
|
|
2,171
|
.0
|
Acquired in-process research and development
|
|
|
89
|
.0
|
|
|
|
|
|
|
328
|
.1
|
|
|
328
|
.5
|
Asset impairments, restructuring, and other special charges
|
|
|
98
|
.2
|
|
|
81
|
.3
|
|
|
|
|
|
|
123
|
.0
|
Other income net
|
|
|
(32
|
.1)
|
|
|
(49
|
.8)
|
|
|
(1
|
.8)
|
|
|
(38
|
.3)
|
Income before income taxes
|
|
|
1,052
|
.3
|
|
|
1,178
|
.4
|
|
|
926
|
.7
|
|
|
719
|
.4
|
Net income
|
|
|
854
|
.4
|
|
|
926
|
.3
|
|
|
663
|
.6
|
|
|
508
|
.7
|
Earnings per share basic
|
|
|
|
.78
|
|
|
|
.85
|
|
|
|
.61
|
|
|
|
.47
|
Earnings per share diluted
|
|
|
|
.78
|
|
|
|
.85
|
|
|
|
.61
|
|
|
|
.47
|
Dividends paid per share
|
|
|
|
.425
|
|
|
|
.425
|
|
|
|
.425
|
|
|
|
.425
|
Common stock closing prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
59
|
.47
|
|
|
58
|
.44
|
|
|
60
|
.56
|
|
|
54
|
.99
|
Low
|
|
|
49
|
.09
|
|
|
54
|
.09
|
|
|
54
|
.39
|
|
|
51
|
.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
|
|
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
|
Our common stock is listed on the New York, London, and Swiss
stock exchanges.
-46-
Selected
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Restated
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
20072
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
(Dollars in millions, except net sales per employee and
per-share data)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
$18,633.5
|
|
|
|
$15,691.0
|
|
|
|
$14,645.3
|
|
|
|
$13,857.9
|
|
|
|
$12,582.5
|
|
Cost of sales
|
|
|
4,248.8
|
|
|
|
3,546.5
|
|
|
|
3,474.2
|
|
|
|
3,223.9
|
|
|
|
2,675.1
|
|
Research and development
|
|
|
3,486.7
|
|
|
|
3,129.3
|
|
|
|
3,025.5
|
|
|
|
2,691.1
|
|
|
|
2,350.2
|
|
Marketing, selling, and administrative
|
|
|
6,095.1
|
|
|
|
4,889.8
|
|
|
|
4,497.0
|
|
|
|
4,284.2
|
|
|
|
4,055.4
|
|
Other
|
|
|
926.1
|
|
|
|
707.4
|
|
|
|
931.1
|
|
|
|
716.8
|
|
|
|
240.1
|
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
3,876.8
|
|
|
|
3,418.0
|
|
|
|
2,717.5
|
|
|
|
2,941.9
|
|
|
|
3,261.7
|
|
Income taxes
|
|
|
923.8
|
|
|
|
755.3
|
|
|
|
715.9
|
|
|
|
1,131.8
|
|
|
|
700.9
|
|
Net income
|
|
|
2,953.0
|
|
|
|
2,662.7
|
|
|
|
1,979.6
|
1
|
|
|
1,810.1
|
|
|
|
2,560.8
|
|
Net income as a percent of sales
|
|
|
15.8
|
%
|
|
|
17.0
|
%
|
|
|
13.5
|
%
|
|
|
13.1
|
%
|
|
|
20.4
|
%
|
Net income per share diluted
|
|
|
2.71
|
|
|
|
2.45
|
|
|
|
1.81
|
|
|
|
1.66
|
|
|
|
2.37
|
|
Dividends declared per share
|
|
|
1.75
|
|
|
|
1.63
|
|
|
|
1.54
|
|
|
|
1.45
|
|
|
|
1.36
|
|
Weighted-average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding diluted (thousands)
|
|
|
1,090,750
|
|
|
|
1,087,490
|
|
|
|
1,092,150
|
|
|
|
1,088,936
|
|
|
|
1,082,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets3
|
|
|
$12,316.1
|
|
|
|
$9,753.6
|
|
|
|
$10,855.0
|
|
|
|
$12,895.0
|
|
|
|
$8,828.1
|
|
Current
liabilities3
|
|
|
5,436.8
|
|
|
|
5,254.0
|
|
|
|
5,884.8
|
|
|
|
7,762.2
|
|
|
|
5,729.3
|
|
Property and equipment net
|
|
|
8,575.1
|
|
|
|
8,152.3
|
|
|
|
7,912.5
|
|
|
|
7,550.9
|
|
|
|
6,539.0
|
|
Total
assets3
|
|
|
26,874.8
|
|
|
|
22,042.4
|
|
|
|
24,667.8
|
|
|
|
24,954.0
|
|
|
|
21,755.3
|
|
Long-term debt
|
|
|
4,593.5
|
|
|
|
3,494.4
|
|
|
|
5,763.5
|
|
|
|
4,491.9
|
|
|
|
4,687.8
|
|
Shareholders
equity3
|
|
|
13,503.9
|
|
|
|
10,820.2
|
|
|
|
10,631.4
|
|
|
|
10,759.4
|
|
|
|
9,604.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on shareholders
equity3
|
|
|
24.3
|
%
|
|
|
24.8
|
%
|
|
|
18.5
|
%
|
|
|
17.8
|
%
|
|
|
28.9
|
%
|
Return on
assets3
|
|
|
12.1
|
%
|
|
|
11.1
|
%
|
|
|
8.2
|
%
|
|
|
7.8
|
%
|
|
|
12.6
|
%
|
Capital expenditures
|
|
|
$1,082.4
|
|
|
|
$1,077.8
|
|
|
|
$1,298.1
|
|
|
|
$1,898.1
|
|
|
|
$1,706.6
|
|
Depreciation and amortization
|
|
|
1,047.9
|
|
|
|
801.8
|
|
|
|
726.4
|
|
|
|
597.5
|
|
|
|
548.5
|
|
Effective tax rate
|
|
|
23.8
|
%
|
|
|
22.1
|
%
|
|
|
26.3
|
%
|
|
|
38.5
|
%
|
|
|
21.5
|
%
|
Net sales per employee
|
|
|
$459,000
|
|
|
|
$378,000
|
|
|
|
$344,000
|
|
|
|
$311,000
|
|
|
|
$280,000
|
|
Number of employees
|
|
|
40,600
|
|
|
|
41,500
|
|
|
|
42,600
|
|
|
|
44,500
|
|
|
|
45,000
|
|
Number of shareholders of record
|
|
|
41,700
|
|
|
|
44,800
|
|
|
|
50,800
|
|
|
|
52,400
|
|
|
|
54,600
|
|
|
|
|
|
|
|
|
|
|
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 3 for additional information. |
|
2 |
|
Reflects the ICOS acquisition, effective January 29, 2007.
See Note 4 for additional information. |
|
3 |
|
Amounts restated as discussed in Note 2 to the consolidated
financial statements. As a result of the restatement, for all
years presented, current assets increased $59.2 million,
current liabilities increased $168.5 million, total assets
increased $87.0 million, and shareholders equity
decreased $160.5 million. The restatement had no effect on
income in any period presented. |
-47-
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
39 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:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Finished products
|
|
$
|
653.4
|
|
|
$
|
644.5
|
|
Work in process
|
|
|
1,803.0
|
|
|
|
1,551.5
|
|
Raw materials and supplies
|
|
|
202.7
|
|
|
|
187.0
|
|
|
|
|
|
|
|
|
|
|
2,659.1
|
|
|
|
2,383.0
|
|
Reduction to LIFO cost
|
|
|
(135.4
|
)
|
|
|
(112.7
|
)
|
|
|
|
|
|
|
|
|
$
|
2,523.7
|
|
|
$
|
2,270.3
|
|
|
|
|
|
|
|
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
-48-
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, the British pound, and the Japanese yen).
Foreign currency derivatives used for hedging are put in place
using the same or like currencies and duration as the underlying
exposures. Forward 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: Goodwill is not
amortized. All other intangibles arising from acquisitions and
research alliances have finite lives and are amortized over
their estimated useful lives, ranging from 5 to 20 years,
using the straight-line method. The weighted-average
amortization period for developed product technology is
approximately 10 years. Amortization expense for 2007,
2006, and 2005 was $172.8 million, $7.6 million, and
$5.4 million before tax, respectively. The estimated
amortization expense for the five succeeding years approximates
$180 million before tax, per year. Substantially all of the
amortization expense is included in cost of sales. See
Note 4 for further discussion of goodwill and other
intangibles acquired in 2007.
-49-
Goodwill and other intangible assets at December 31 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Goodwill
|
|
$
|
745.7
|
|
|
$
|
73.8
|
|
|
|
|
|
|
|
|
|
|
Developed product technology gross
|
|
|
1,767.5
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(162.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Developed product technology net
|
|
|
1,604.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles gross
|
|
|
142.8
|
|
|
|
89.2
|
|
Less accumulated amortization
|
|
|
(38.0
|
)
|
|
|
(33.0
|
)
|
|
|
|
|
|
|
Other intangibles net
|
|
|
104.8
|
|
|
|
56.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles net
|
|
$
|
2,455.4
|
|
|
$
|
130.0
|
|
|
|
|
|
|
|
Goodwill and net other intangibles are reviewed to assess
recoverability at least annually and when certain impairment
indicators are present. No material impairments occurred with
respect to the carrying value of our goodwill or other
intangible assets in 2007, 2006, or 2005.
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.
At December 31, property and equipment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Land
|
|
$
|
180.0
|
|
|
$
|
168.7
|
|
Buildings
|
|
|
5,543.7
|
|
|
|
4,852.8
|
|
Equipment
|
|
|
7,454.9
|
|
|
|
6,718.5
|
|
Construction in progress
|
|
|
1,662.7
|
|
|
|
1,976.7
|
|
|
|
|
|
|
|
|
|
|
14,841.3
|
|
|
|
13,716.7
|
|
Less allowances for depreciation
|
|
|
(6,266.2
|
)
|
|
|
(5,564.4
|
)
|
|
|
|
|
|
|
|
|
$
|
8,575.1
|
|
|
$
|
8,152.3
|
|
|
|
|
|
|
|
Depreciation expense for 2007, 2006, and 2005 was
$682.3 million, $627.4 million, and
$577.2 million, respectively. Approximately
$95.3 million, $106.7 million, and $140.5 million
of interest costs were capitalized as part of property and
equipment in 2007, 2006, and 2005, respectively. Total rental
expense for all leases, including contingent rentals (not
material), amounted to approximately $294.2 million,
$293.6 million, and $294.4 million for 2007, 2006, and
2005, respectively. Assets under 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
-50-
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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Interest expense
|
|
$
|
228.3
|
|
|
$
|
238.1
|
|
|
$
|
105.2
|
|
Interest income
|
|
|
(215.3
|
)
|
|
|
(261.9
|
)
|
|
|
(212.1
|
)
|
Joint venture income
|
|
|
(11.0
|
)
|
|
|
(96.3
|
)
|
|
|
(11.1
|
)
|
Other
|
|
|
(124.0
|
)
|
|
|
(117.7
|
)
|
|
|
(196.2
|
)
|
|
|
|
|
|
|
|
|
$
|
(122.0
|
)
|
|
$
|
(237.8
|
)
|
|
$
|
(314.2
|
)
|
|
|
|
|
|
|
The joint venture income represents our share of the Lilly ICOS
LLC joint venture results of operations, net of income taxes. We
acquired the outstanding ownership of the joint venture in
January 2007 as a result of our acquisition of ICOS. See
Note 4 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.
Effective January 1, 2007, we adopted the provisions of the
Financial Accounting Standards Board (FASB) Interpretation 48,
Accounting for Uncertainty in Income Taxes (FIN 48).
Pursuant to FIN 48, we must recognize the tax benefit from
an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position are measured based on the
largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate resolution.
-51-
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: We recognize the fair value of
stock-based compensation as expense over the requisite service
period of the individual grantees, which generally equals the
vesting period. Under our policy all stock-based awards are
approved prior to the date of grant. The Compensation Committee
of the Board of Directors approves the value of the award and
date of grant. Stock-based compensation that is awarded as part
of our annual equity grant is made on a specific grant date
scheduled in advance.
Reclassifications: Certain reclassifications have been
made to the December 31, 2006 and 2005 consolidated
financial statements and accompanying notes to conform with the
December 31, 2007 presentation.
|
|
Note 2:
|
Restatement
of Prior Period Financial Statements
|
During the second quarter of 2008, we determined that our
methodology for calculating our return reserve for future
product returns in accordance with Statement of Financial
Accounting Standard No. 48 (SFAS 48), Revenue
Recognition When Right of Return Exists, needed to be corrected.
Using the revised methodology, our return reserve was
understated by $247.5 million as of December 31, 2007
and 2006.
We performed an evaluation to determine if the errors resulting
in the return reserve liability calculated using the revised
methodology were material to any individual prior period, taking
into account the requirements of the Securities Exchange
Commission (SEC) Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(SAB 108). Based on this analysis, we concluded that while
the cumulative error would be material to 2008 and prior-year
financial statements, the correction of the error would not be
material to any individual period and, therefore, as provided
for by SAB 108, the correction of the error does not
require previously filed reports to be amended and the
correction may be made the next time we file our prior period
financial statements. However, we have elected to amend our
December 31, 2007
Form 10-K
and our March 31, 2008
Form 10-Q.
The restatement has no effect on our income, cash flows, or
liquidity, and its effects on our financial position at the end
of each of the respective restated periods are immaterial. This
adjustment affects disclosure in Notes 10 and 12. In
addition, we modified our disclosure of certain deferred tax
assets, valuation allowances, and uncertain tax positions
included in Note 12. These modifications had no impact on
our balance sheets, income statements, cash flows, or liquidity.
-52-
The tables below present the effect of the balance sheet
adjustments related to the restatement of our previously
reported consolidated financial statements as of
December 31, 2007, 2006 and 2005. The statements of income
were not adjusted for any of the years or quarters because we
concluded that the amount of the adjustment calculated using the
revised methodology was not material in any previously presented
period. The amount of the annual adjustment for 2005, 2006, or
2007 would have been $.01 per share or less of diluted earnings
per share and .2 percent or less of consolidated net sales.
The aggregate statement of income impact from December 31,
2004 to December 31, 2007 would have been an additional
expense of approximately $35 million on a pretax basis
(approximately $23 million net of tax).
The effect of the restatement on the consolidated balance sheets
as of December 31, 2007, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
583.6
|
|
|
$
|
59.2
|
|
|
$
|
642.8
|
|
Total current assets
|
|
|
12,256.9
|
|
|
|
59.2
|
|
|
|
12,316.1
|
|
Sundry (long-term deferred tax asset)
|
|
|
1,252.8
|
|
|
|
27.8
|
|
|
|
1,280.6
|
|
Total other assets
|
|
|
5,955.8
|
|
|
|
27.8
|
|
|
|
5,983.6
|
|
Total assets
|
|
|
26,787.8
|
|
|
|
87.0
|
|
|
|
26,874.8
|
|
Other current
liabilities1
|
|
|
1,647.6
|
|
|
|
168.5
|
|
|
|
1,816.1
|
|
Total current liabilities
|
|
|
5,268.3
|
|
|
|
168.5
|
|
|
|
5,436.8
|
|
Other noncurrent liabilities
|
|
|
632.3
|
|
|
|
79.0
|
|
|
|
711.3
|
|
Total other noncurrent liabilities
|
|
|
7,855.1
|
|
|
|
79.0
|
|
|
|
7,934.1
|
|
Retained earnings
|
|
|
11,967.2
|
|
|
|
(160.5
|
)
|
|
|
11,806.7
|
|
Total shareholders equity
|
|
|
13,664.4
|
|
|
|
(160.5
|
)
|
|
|
13,503.9
|
|
Total liabilities and shareholders equity
|
|
|
26,787.8
|
|
|
|
87.0
|
|
|
|
26,874.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
519.2
|
|
|
$
|
59.2
|
|
|
$
|
578.4
|
|
Total current assets
|
|
|
9,694.4
|
|
|
|
59.2
|
|
|
|
9,753.6
|
|
Sundry (long-term deferred tax asset)
|
|
|
1,885.3
|
|
|
|
27.8
|
|
|
|
1,913.1
|
|
Total other assets
|
|
|
4,108.7
|
|
|
|
27.8
|
|
|
|
4,136.5
|
|
Total assets
|
|
|
21,955.4
|
|
|
|
87.0
|
|
|
|
22,042.4
|
|
Other current liabilities
|
|
|
1,822.9
|
|
|
|
168.5
|
|
|
|
1,991.4
|
|
Total current liabilities
|
|
|
5,085.5
|
|
|
|
168.5
|
|
|
|
5,254.0
|
|
Other noncurrent liabilities
|
|
|
745.7
|
|
|
|
79.0
|
|
|
|
824.7
|
|
Total other noncurrent liabilities
|
|
|
5,889.2
|
|
|
|
79.0
|
|
|
|
5,968.2
|
|
Retained earnings
|
|
|
10,926.7
|
|
|
|
(160.5
|
)
|
|
|
10,766.2
|
|
Total shareholders equity
|
|
|
10,980.7
|
|
|
|
(160.5
|
)
|
|
|
10,820.2
|
|
Total liabilities and shareholders equity
|
|
|
21,955.4
|
|
|
|
87.0
|
|
|
|
22,042.4
|
|
-53-
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
756.4
|
|
|
$
|
59.2
|
|
|
$
|
815.6
|
|
Total current assets
|
|
|
10,795.8
|
|
|
|
59.2
|
|
|
|
10,855.0
|
|
Sundry (long-term deferred tax asset)
|
|
|
2,156.3
|
|
|
|
27.8
|
|
|
|
2,184.1
|
|
Total other assets
|
|
|
5,872.5
|
|
|
|
27.8
|
|
|
|
5,900.3
|
|
Total assets
|
|
|
24,580.8
|
|
|
|
87.0
|
|
|
|
24,667.8
|
|
Other current liabilities
|
|
|
1,838.9
|
|
|
|
168.5
|
|
|
|
2,007.4
|
|
Total current liabilities
|
|
|
5,716.3
|
|
|
|
168.5
|
|
|
|
5,884.8
|
|
Other noncurrent liabilities
|
|
|
826.1
|
|
|
|
79.0
|
|
|
|
905.1
|
|
Total other noncurrent liabilities
|
|
|
8,072.6
|
|
|
|
79.0
|
|
|
|
8,151.6
|
|
Retained earnings
|
|
|
10,027.2
|
|
|
|
(160.5
|
)
|
|
|
9,866.7
|
|
Total shareholders equity
|
|
|
10,791.9
|
|
|
|
(160.5
|
)
|
|
|
10,631.4
|
|
Total liabilities and shareholders equity
|
|
|
24,580.8
|
|
|
|
87.0
|
|
|
|
24,667.8
|
|
|
|
|
1 |
|
The 2007 As Reported balance reflects the $94.1 million
reclassification made in the first quarter of 2008 from accounts
payable to other current liabilities. |
As of December 31, 2007 and 2006, we have reduced both
deferred tax assets and our valuation allowance by
$204.0 million and $63.9 million, respectively. Of the
2007 change, $92.1 million resulted in an increase in our
disclosed gross unrecognized tax benefits. These adjustments
impact the components of deferred taxes only and have no impact
on our consolidated financial position, income, cash flows, or
liquidity for any period presented. See Note 12 for
additional information.
|
|
Note 3:
|
Implementation
of New Financial Accounting Pronouncements
|
In December 2007, the Financial Accounting Standards Board
(FASB) revised and issued Statement of Financial Accounting
Standard (SFAS) No. 141, Business Combinations
(SFAS 141(R)). SFAS 141(R) changes how the acquisition
method is applied in accordance with SFAS 141. The primary
revisions to this Statement require an acquirer in a business
combination to measure assets acquired, liabilities assumed, and
any noncontrolling interest in the acquiree at the acquisition
date, at their fair values as of that date, with limited
exceptions specified in the Statement. This Statement also
requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values (or other amounts determined in
accordance with the Statement). Assets acquired and liabilities
assumed arising from contractual contingencies as of the
acquisition date are to be measured at their acquisition-date
fair values, and assets or liabilities arising from all other
contingencies as of the acquisition date are to be measured at
their acquisition-date fair value, only if it is more likely
than not that they meet the definition of an asset or a
liability in FASB Concepts Statement No. 6, Elements of
Financial Statements. This Statement significantly amends other
Statements and authoritative guidance, including FASB
Interpretation No. 4, Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the
Purchase Method, and now requires the capitalization of research
and development assets acquired in a business combination at
their acquisition-date fair values, separately from goodwill.
SFAS No. 109, Accounting for Income Taxes, was also
amended by this Statement to require the acquirer to recognize
changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income
from continuing operations in the period of the combination or
directly in contributed capital, depending on the circumstances.
This Statement is effective for us for business combinations for
which the acquisition date is on or after January 1, 2009.
In December 2007, in conjunction with SFAS 141(R), the FASB
issued SFAS No. 160, Accounting for Noncontrolling
Interests. This Statement amends Accounting Research
Bulletin No. 51, Consolidated Financial Statements
(ARB 51), by requiring companies to report a noncontrolling
interest in a subsidiary as equity in its consolidated financial
statements. Disclosure of the amounts of consolidated net income
attributable to the parent and the noncontrolling interest will
be required. This Statement also clarifies that transactions
that result
-54-
in a change in a parents ownership interest in a
subsidiary that do not result in deconsolidation will be treated
as equity transactions, while a gain or loss will be recognized
by the parent when a subsidiary is deconsolidated. This
Statement is effective for us January 1, 2009, and we do
not anticipate the implementation to be material to our
consolidated financial position or results of operations.
In December 2007, the FASB ratified the consensus reached by the
Emerging Issues Task Force (EITF) on Issue
No. 07-1
(EITF 07-1),
Accounting for Collaborative Arrangements.
EITF 07-1
defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a
collaborative arrangement and between participants in the
arrangement and third parties. This Issue is effective for us
beginning January 1, 2009 and will be applied
retrospectively to all prior periods presented for all
collaborative arrangements existing as of the effective date.
While we have not yet completed our analysis, we do not
anticipate the implementation of this Issue to be material to
our consolidated financial position or results of operations.
In June 2007, the FASB ratified the consensus reached by the
EITF on Issue
No. 07-3
(EITF 07-3),
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities. Pursuant to
EITF 07-3,
nonrefundable advance payments for goods or services that will
be used or rendered for future research and development
activities should be deferred and capitalized. Such amounts
should be recognized as an expense when the related goods are
delivered or services are performed, or when the goods or
services are no longer expected to be received. This Issue is
effective for us beginning January 1, 2008, and is to be
applied prospectively for contracts entered into on or after the
effective date. We do not anticipate the implementation of this
Issue to be material to our consolidated financial position or
results of operations.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. This Statement is effective for us
beginning January 1, 2008, if adopted; however, we do not
anticipate adopting this Statement.
We adopted the provisions of FASB Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes, on
January 1, 2007. 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. See Note 12 for further
discussion of the impact of adopting this Interpretation.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP, and
expands disclosures about fair value measurements. This
Statement is effective for us beginning January 1, 2008,
and applies to interim periods. We do not anticipate the
implementation of this Statement will be material to our
consolidated financial position or results of operations.
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.
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 for the manufacture and sales of
Cialis for the treatment of erectile dysfunction. The
acquisition brings the full value of Cialis to us and enables us
to realize operational
-55-
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.
The acquisition has been accounted for as a business combination
under the purchase method of accounting. Under the purchase
method of accounting, the assets acquired and liabilities
assumed from ICOS are recorded at their respective fair values
as of the acquisition date in our consolidated financial
statements. The excess of the purchase price over the fair value
of the acquired net assets has been recorded as goodwill in the
amount of $646.7 million. No portion of this goodwill is
expected to be deductible for tax purposes. ICOSs results
of operations are included in our consolidated financial
statements from the date of acquisition.
We have determined the following estimated fair values for the
assets purchased and liabilities assumed as of the date of
acquisition. The determination of estimated fair value requires
management to make significant estimates and assumptions.
|
|
|
|
|
Estimated Fair Value at January 29, 2007
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
197.7
|
|
Developed product technology
(Cialis)1
|
|
|
1,659.9
|
|
Acquired in-process research and development
|
|
|
303.5
|
|
Tax benefit of net operating losses
|
|
|
404.1
|
|
Goodwill
|
|
|
646.7
|
|
Other assets and liabilities net
|
|
|
(32.1
|
)
|
Deferred taxes
|
|
|
(583.5
|
)
|
Long-term debt assumed
|
|
|
(275.6
|
)
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
2,320.7
|
|
|
|
|
|
|
|
|
|
1 |
|
The intangible asset will be
amortized over the remaining expected patent lives of Cialis in
each country, which range from 2015 to 2017.
|
The acquired in-process research and development (IPR&D)
represents compounds currently under development that have not
yet achieved regulatory approval for marketing. New indications
for and formulations of the Cialis compound in clinical testing
at the time of the acquisition represented approximately
48 percent of the estimated fair value of the IPR&D.
The remaining value of IPR&D represents several other
products in development, with no one asset comprising a
significant portion of this value. In accordance with
FIN 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method,
these IPR&D intangible assets totaling $303.5 million
have been written off by a charge to income immediately
subsequent to the acquisition because the compounds do not have
any alternative future use. This charge is 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
are based on factors such as relevant market size, patent
protection, historical pricing of similar products, and expected
industry trends. The estimated future net cash flows are then
discounted to the present value using an appropriate discount
rate. This analysis is performed for each project independently.
The discount rate we used in valuing the acquired IPR&D
projects was 20 percent.
Other
Acquisitions
During the second quarter of 2007, we acquired all of the
outstanding stock of both Hypnion, Inc. (Hypnion), a privately
held neuroscience drug discovery company focused on sleep
disorders, and Ivy Animal Health, Inc. (Ivy), a privately held
applied research and pharmaceutical product development company
focused on the animal health industry, for $445.0 million
in cash. The ongoing activities with respect to these
companies
-56-
products in development are not material to our research and
development expenses. The results of operations are included in
our consolidated financial statements from the respective dates
of acquisition.
The acquisition of Hypnion provides us with a broader and more
substantive presence in the area of sleep disorder research and
ownership of HY10275, a novel Phase II compound with a dual
mechanism of action aimed at promoting better sleep onset and
sleep maintenance. This was Hypnions only significant
asset. For this acquisition, we recorded a charge of
$291.1 million, representing the estimated fair value of
the acquired compound, to acquired IPR&D in the second
quarter of 2007 because the development-stage compound acquired
did not have any alternative future use. This charge was not
deductible for tax purposes. Because Hypnion was a
development-stage company, the transaction was accounted for as
an acquisition of assets rather than as a business combination
and, therefore, goodwill was not recorded.
The acquisition of Ivy provides us with products that complement
those of our animal health product line. This acquisition has
been accounted for as a business combination under the purchase
method of accounting. We have allocated $88.7 million of
the purchase price to other identifiable intangible assets,
primarily related to marketed products, $37.0 million to
acquired IPR&D, and $25.0 million to goodwill. The
IPR&D represents products in development that are not yet
approved for marketing and have no alternative future use.
Accordingly, the $37.0 million allocated to acquired
IPR&D was expensed immediately subsequent to the
acquisition. The other identifiable intangible assets will be
amortized over their estimated remaining useful lives of 10 to
20 years. Goodwill resulting from this acquisition has been
fully allocated to the animal health business segment. The
amount allocated to each of the intangible assets acquired,
including goodwill, is expected to be deductible for tax
purposes.
Product
Acquisitions
In October 2007, we entered into an agreement with Glenmark
Pharmaceuticals Limited India whereby we acquired the rights to
a portfolio of transient receptor potential vanilloid
sub-family 1
(TRPV1) antagonist molecules, including a clinical-phase
compound. The compound is currently in early clinical phase
development as a potential next-generation treatment for various
pain conditions, including osteoarthritic pain, and had no
alternative future use. 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 was
$45.0 million, is deductible for tax purposes, and was
included as expense in the fourth quarter of 2007.
In October 2007, we entered into a global strategic alliance
with MacroGenics, Inc. (MacroGenics) to develop and
commercialize teplizumab, a humanized anti-CD3 monoclonal
antibody, as well as other potential next-generation anti-CD3
molecules for use in the treatment of autoimmune diseases. As
part of the arrangement, we acquired the exclusive rights to the
molecule, which was in the development stage (Phase II/III
clinical trial for individuals with recent-onset type 1
diabetes) and had no alternative future use. 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 was $44.0 million, is deductible for tax
purposes, and was included as expense in the fourth quarter of
2007.
In January 2007, we entered into an agreement with OSI
Pharmaceuticals, Inc. to acquire the rights to its compound for
the 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 use. 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,
was included as expense in the first quarter of 2007, and is
deductible for tax purposes.
In December 2007, we entered into an agreement with BioMS
Medical Corp. to acquire the rights to its compound for the
treatment of multiple sclerosis. This agreement was contingent
upon clearance under the
Hart-Scott-Rodino
Anti-Trust Improvements Act and became effective after
clearance was received in January 2008. This compound is in the
development stage (Phase III clinical trials) and has no
alternative future use. 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 $87.0 million, is deductible for tax
purposes, and will be included as expense in the first quarter
of 2008.
-57-
In connection with these arrangements, our partners are
generally entitled to future milestones and royalties based on
sales should these products be approved for commercialization.
|
|
Note 5:
|
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
We incurred asset impairment, restructuring, and other special
charges of $67.6 million in the fourth quarter of 2007.
These charges were a result of decisions approved by management
in the fourth quarter as well as previously announced strategic
decisions. Components of this charge include non-cash charges of
$42.5 million for the write-down of impaired assets, all of
which have no future use, and other charges of
$25.1 million, primarily related to additional severance
and environmental cleanup charges related to previously
announced strategic decisions. The impairment charges are
necessary to adjust the carrying value of the assets to fair
value. These restructuring activities were substantially
complete at December 31, 2007.
In connection with previously announced strategic decisions, we
recorded asset impairment, restructuring, and other special
charges of $123.0 million in the first quarter of 2007.
These charges primarily relate to a voluntary severance program
at one of our U.S. plants and other costs related to this
action as well as management actions taken in the fourth quarter
of 2006 as described below. The component of this charge related
to the non-cash asset impairment was $67.6 million, and was
necessary to adjust the carrying value of the assets to fair
value. These restructuring activities were substantially
complete at December 31, 2007.
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 were necessary to
adjust the carrying value of the assets to fair value. These
restructuring activities were substantially complete at
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 had no future use, included manufacturing buildings and
equipment no longer needed to supply projected capacity
requirements, as well as obsolete research and development
equipment. The impairment charges were necessary to adjust the
carrying value of the assets to fair value.
Product
Liability and Other Special Charges
As a result of our product liability exposures, the substantial
majority of which were related to Zyprexa, we recorded net
pretax charges of $111.9 million, $494.9 million, and
$1.07 billion in 2007, 2006, and 2005, respectively. These
charges, which are net of anticipated insurance recoveries,
include the costs of product liability settlements and related
defense costs, reserves for product liability exposures and
defense costs regarding known product liability claims, and
expected future claims to the extent we could formulate a
reasonable estimate of the probable number and cost of the
claims. See Note 14 for further discussion.
|
|
Note 6:
|
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
-58-
with this concentration is mitigated by our ongoing credit
review procedures and insurance. 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, 2007, our investments in debt
securities were comprised of 40 percent asset-backed
securities, 23 percent corporate securities, and
37 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Carrying Amount
|
|
|
Fair Value
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
1,610.7
|
|
|
$
|
1,610.7
|
|
|
$
|
781.7
|
|
|
$
|
781.7
|
|
Noncurrent investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity
|
|
$
|
70.0
|
|
|
$
|
70.0
|
|
|
$
|
79.4
|
|
|
$
|
79.4
|
|
Debt securities
|
|
|
408.3
|
|
|
|
408.3
|
|
|
|
834.1
|
|
|
|
834.1
|
|
Equity method and other investments
|
|
|
98.8
|
|
|
|
NA
|
|
|
|
88.4
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
577.1
|
|
|
|
|
|
|
$
|
1,001.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
(4,988.6
|
)
|
|
$
|
(5,056.9
|
)
|
|
$
|
(3,705.2
|
)
|
|
$
|
(3,682.7
|
)
|
Risk-management instruments assets
|
|
|
23.6
|
|
|
|
23.6
|
|
|
|
19.7
|
|
|
|
19.7
|
|
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 $1.9 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:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Unrealized gross gains
|
|
$
|
43.5
|
|
|
$
|
43.7
|
|
Unrealized gross losses
|
|
|
22.0
|
|
|
|
10.8
|
|
The net adjustment to unrealized gains and losses (net of tax)
on
available-for-sale
securities increased (decreased) other comprehensive income by
$(5.4) million, $0.3 million, and $(4.6) million
in 2007, 2006, and 2005, respectively. Activity related to our
available-for-sale
investment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
1,212.1
|
|
|
$
|
2,848.4
|
|
|
$
|
2,048.6
|
|
Realized gross gains on sales
|
|
|
21.4
|
|
|
|
63.5
|
|
|
|
25.6
|
|
Realized gross losses on sales
|
|
|
6.1
|
|
|
|
9.0
|
|
|
|
7.1
|
|
During the years ended December 31, 2007, 2006, and 2005,
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.
-59-
We expect to reclassify an estimated $21.3 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 2008.
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
4.50 to 7.13 percent notes (due
2012-2037)
|
|
$
|
3,987.4
|
|
|
$
|
1,487.4
|
|
2.90 percent notes (due 2008)
|
|
|
300.0
|
|
|
|
300.0
|
|
Floating rate extendible notes (due 2008)
|
|
|
|
|
|
|
1,000.0
|
|
Floating rate bonds (due 2037)
|
|
|
400.0
|
|
|
|
400.0
|
|
Private placement bonds (due 2007 and 2008)
|
|
|
72.1
|
|
|
|
266.3
|
|
6.55 percent ESOP debentures (due 2017)
|
|
|
90.6
|
|
|
|
91.6
|
|
Other, including capitalized leases
|
|
|
59.3
|
|
|
|
109.9
|
|
SFAS 133 fair value adjustment
|
|
|
79.2
|
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,988.6
|
|
|
|
3,705.2
|
|
Less current portion
|
|
|
(395.1
|
)
|
|
|
(210.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,593.5
|
|
|
$
|
3,494.4
|
|
|
|
|
|
|
|
|
|
|
In March 2007, we issued $2.50 billion of fixed-rate notes
($1.00 billion at 5.20 percent due in 2017;
$700.0 million at 5.50 percent due in 2027; and
$800.0 million at 5.55 percent due in 2037).
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. These notes paid interest at
essentially a rate equivalent to LIBOR. We repaid
$500.0 million of the notes in December 2006 and the
remaining $1.00 billion of the notes in March 2007.
The $400.0 million of floating rate bonds outstanding at
December 31, 2007 are due in 2037 and have variable
interest rates at LIBOR plus our six-month credit spread,
adjusted semiannually (total of 4.99 percent at
December 31, 2007). 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 are due
semiannually over the remaining terms of each of these notes. In
conjunction with these bonds, we entered into interest rate swap
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: 2008, $395.1 million; 2009,
$31.1 million; 2010, $16.7 million; 2011,
$11.2 million; and 2012, $510.9 million.
At December 31, 2007 and 2006, short-term borrowings
included $18.6 million and $8.6 million, respectively,
of notes payable to banks and commercial paper. At
December 31, 2007, we have $1.24 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.
-60-
We have converted approximately 40 percent of 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, 2007 and
2006, including the effects of interest rate swaps for hedged
debt obligations, were 5.47 percent and 5.89 percent,
respectively.
In 2007, 2006, and 2005, cash payments of interest on borrowings
totaled $159.2 million, $305.7 million, and
$38.2 million, respectively, net of capitalized interest.
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 recognize the fair value of stock-based compensation in net
income. Stock-based compensation cost in the amount of
$282.0 million, $359.3 million, and
$403.5 million was recognized in 2007, 2006, and 2005,
respectively, as well as related tax benefits of
$96.4 million, $115.9 million, and
$122.9 million, respectively. In 2007, our stock-based
compensation expense consisted primarily of performance awards
(PAs), shareholder value awards (SVAs), and stock options. In
2006 and 2005, our stock-based compensation expense consisted
primarily of PAs and stock options. 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 PA and SVA
shares. We 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.
At December 31, 2007, additional stock options, PAs, SVAs,
or restricted stock grants may be granted under the 2002 Lilly
Stock Plan for not more than 46.6 million shares.
Performance
Award Program
Performance awards (PAs) are granted to officers and management
and are payable in shares of our common stock. The number of PA
shares actually issued, if any, varies depending on the
achievement of certain pre-established
earnings-per-share
targets over a one-year period. PA shares are accounted for at
fair value based upon the closing stock price on the date of
grant and fully vest at the end of the fiscal year of the grant.
The fair values of performance awards granted in 2007, 2006, and
2005 were $54.23, $56.18, and $55.65, respectively. 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, approximately 2.3 million shares,
1.7 million shares, and 0.5 million shares were issued
in 2007, 2006, and 2005, respectively. Approximately
2.4 million shares are expected to be issued in 2008.
Shareholder
Value Award Program
In 2007, we implemented a shareholder value award (SVA) program,
which replaced our stock option program. SVAs are granted to
officers and management and are payable in shares of common
stock at the end of a three-year period. The number of shares
actually issued varies depending on our stock price at the end
of the three-year vesting period compared to pre-established
target stock prices. We measure the fair value of the SVA unit
on the grant date using a Monte Carlo simulation model. The
Monte Carlo simulation model utilizes multiple input variables
that determine the probability of satisfying the market
condition stipulated in the award grant and calculates the fair
value of the award. Expected volatilities utilized in the 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
-61-
weighted-average fair values of the SVA units granted during
2007 were $49.85 determined using the following assumptions:
|
|
|
|
|
Expected dividend yield
|
|
|
2.75%
|
|
Risk-free interest rate
|
|
|
4.81% - 5.16%
|
|
Range of volatilities
|
|
|
22.54% - 23.90%
|
|
We granted approximately 970,000 SVA units in February 2007 as
part of the annual total compensation award, of which the
majority remains outstanding at December 31, 2007. None of
the SVA units are vested. The maximum number of shares that
could ultimately be issued upon vesting of the SVA units
outstanding at December 31, 2007, is 1.4 million. As
of December 31, 2007, the total remaining unrecognized
compensation cost related to nonvested SVAs amounted to
$34.0 million, which will be amortized over the
weighted-average remaining requisite service period of
25.5 months.
Stock
Option Program
Stock options were granted in 2006 and 2005 to officers and
management at exercise prices equal to the fair market value of
our stock price at the date of grant. No stock options were
granted in 2007. Options fully vest three years from the grant
date and have a term of 10 years. 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 is derived from the
output of the lattice model. The weighted-average fair values of
the individual options granted during 2006 and 2005 were $15.61
and $16.06, respectively, determined using the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Dividend yield
|
|
|
2.0%
|
|
|
|
2.0%
|
|
Weighted-average volatility
|
|
|
25.0%
|
|
|
|
27.8%
|
|
Range of volatilities
|
|
|
24.8% - 27.0%
|
|
|
|
27.6% - 30.7%
|
|
Risk-free interest rate
|
|
|
4.6% - 4.8%
|
|
|
|
2.5% - 4.5%
|
|
Weighted-average expected life
|
|
|
7 years
|
|
|
|
7 years
|
|
Stock option activity during 2007 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, 2007
|
|
|
88,810
|
|
|
$
|
69.38
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(283
|
)
|
|
|
53.83
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(7,378
|
)
|
|
|
67.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
81,149
|
|
|
|
69.57
|
|
|
|
4.15
|
|
|
$
|
8.4
|
|
Exercisable at December 31, 2007
|
|
|
72,100
|
|
|
|
71.15
|
|
|
|
3.73
|
|
|
|
8.4
|
|
-62-
A summary of the status of nonvested options as of
December 31, 2007, and changes during the year then ended,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
|
(in thousands)
|
|
|
Fair Value
|
|
|
|
|
|
|
Nonvested at January 1, 2007
|
|
|
24,172
|
|
|
$
|
22.32
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(14,668
|
)
|
|
|
26.03
|
|
Forfeited
|
|
|
(455
|
)
|
|
|
19.08
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
|
9,049
|
|
|
|
16.47
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during 2007, 2006, and
2005 amounted to $1.5 million, $40.8 million, and
$131.9 million, respectively. The total grant date fair
value of options vested during 2007, 2006, and 2005 amounted to
$381.8 million, $249.1 million, and
$265.5 million, respectively. We received cash of
$15.2 million, $66.2 million, and $105.9 million
from exercises of stock options during 2007, 2006, and 2005,
respectively, and recognized related tax benefits of
$0.4 million, $11.3 million, and $36.8 million
during those same years.
As of December 31, 2007, the total remaining unrecognized
compensation cost related to nonvested stock options amounted to
$23.8 million, which will be amortized over the
weighted-average remaining requisite service period of
12 months.
|
|
Note 9:
|
Other
Assets and Other Liabilities
|
Our other receivables include income tax receivable, insurance
recoverables, interest receivable, and a variety of other items.
The increase in other receivables is primarily attributable to
an increase in income tax receivable.
Our sundry assets include our capitalized computer software,
estimated insurance recoveries from our product litigation
(Note 14), deferred tax assets (Note 12), and a
variety of other items. The decrease in sundry assets is
primarily attributable to a decrease in product liability
recoverables and a decrease in deferred tax assets.
Our other current liabilities include product litigation, other
taxes, and a variety of other items. The decrease in other
current liabilities is caused primarily by a decrease in product
litigation liabilities.
Our other noncurrent liabilities include product litigation,
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 liabilities.
-63-
|
|
Note 10:
|
Shareholders
Equity
|
Changes in certain components of shareholders equity were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
Common Stock in Treasury
|
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Deferred
|
|
|
Shares
|
|
|
|
|
|
|
Capital
|
|
|
(Restated)
|
|
|
Costs ESOP
|
|
|
(in thousands)
|
|
|
Amount
|
|
|
|
|
Balance at January 1,
20051
|
|
$
|
3,119.4
|
|
|
$
|
9,564.1
|
|
|
$
|
(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
|
|
|
|
84
|
|
Stock-based compensation
|
|
|
403.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
9.7
|
|
|
|
|
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
3,323.8
|
|
|
|
9,866.7
|
|
|
|
(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
|
|
|
|
10,766.2
|
|
|
|
(100.7
|
)
|
|
|
910
|
|
|
|
101.4
|
|
Net income
|
|
|
|
|
|
|
2,953.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share: $1.75
|
|
|
|
|
|
|
(1,903.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(76
|
)
|
|
|
(3.9
|
)
|
Issuance of stock under employee stock plans net
|
|
|
(55.2
|
)
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
3.0
|
|
Stock-based compensation
|
|
|
282.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
10.4
|
|
|
|
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
FIN 48 implementation (Note 12)
|
|
|
|
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,805.2
|
|
|
$
|
11,806.7
|
|
|
$
|
(95.2
|
)
|
|
|
899
|
|
|
$
|
100.5
|
|
|
|
|
|
|
|
|
|
1 |
As discussed in Note 2, retained earnings at January 1,
2005 decreased $160.5 million as a result of the restatement.
|
As of December 31, 2007, 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. No shares were repurchased in 2007.
We have 5 million authorized shares of preferred stock. As
of December 31, 2007 and 2006, no preferred stock has been
issued.
-64-
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 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 2007, 2006, or
2005.
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 7). 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.
-65-
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(Shares in thousands)
|
|
Income before cumulative effect of a change in accounting
principle available to common shareholders
|
|
|
$2,953.0
|
|
|
|
$2,662.7
|
|
|
|
$2,001.6
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding, including
incremental shares
|
|
|
1,090,430
|
|
|
|
1,086,239
|
|
|
|
1,088,754
|
|
|
|
|
|
|
|
Basic earnings per share before cumulative effect of a change in
accounting principle
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
$1.84
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
1,088,929
|
|
|
|
1,085,337
|
|
|
|
1,088,115
|
|
Stock options and other incremental shares
|
|
|
1,821
|
|
|
|
2,153
|
|
|
|
4,035
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
diluted
|
|
|
1,090,750
|
|
|
|
1,087,490
|
|
|
|
1,092,150
|
|
|
|
|
|
|
|
Diluted earnings per share before cumulative effect of a change
in accounting principle
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
$1.83
|
|
|
|
|
|
|
|
|
|
Note 12:
|
Income
Taxes (Restated)
|
Following is the composition of income taxes attributable to
income before cumulative effect of a change in accounting
principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
489.5
|
|
|
$
|
197.7
|
|
|
$
|
517.4
|
|
Foreign
|
|
|
412.1
|
|
|
|
390.6
|
|
|
|
649.8
|
|
State
|
|
|
27.7
|
|
|
|
(25.2
|
)
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
929.3
|
|
|
|
563.1
|
|
|
|
1,178.8
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
53.0
|
|
|
|
78.3
|
|
|
|
89.4
|
|
Foreign
|
|
|
(27.9
|
)
|
|
|
113.5
|
|
|
|
(86.8
|
)
|
State
|
|
|
(30.6
|
)
|
|
|
0.4
|
|
|
|
(0.5
|
)
|
Unremitted earnings to be repatriated due to change in tax law
|
|
|
|
|
|
|
|
|
|
|
(465.0
|
)
|
|
|
|
|
|
|
|
|
|
(5.5
|
)
|
|
|
192.2
|
|
|
|
(462.9
|
)
|
|
|
|
|
|
|
Income taxes
|
|
$
|
923.8
|
|
|
$
|
755.3
|
|
|
$
|
715.9
|
|
|
|
|
|
|
|
-66-
Significant components of our deferred tax assets and
liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Intercompany profit in inventories
|
|
$
|
810.5
|
|
|
$
|
713.3
|
|
Tax loss carryforwards and carrybacks
|
|
|
712.2
|
|
|
|
293.2
|
|
Compensation and benefits
|
|
|
654.8
|
|
|
|
713.4
|
|
Tax credit carryforwards and carrybacks
|
|
|
361.5
|
|
|
|
286.9
|
|
Product return reserves
|
|
|
110.0
|
|
|
|
110.1
|
|
Asset purchases
|
|
|
95.4
|
|
|
|
98.0
|
|
Financial instruments
|
|
|
83.6
|
|
|
|
83.2
|
|
Sale of intangibles
|
|
|
69.1
|
|
|
|
161.3
|
|
Asset disposals
|
|
|
62.9
|
|
|
|
94.6
|
|
Other
|
|
|
311.8
|
|
|
|
270.2
|
|
|
|
|
|
|
|
|
|
|
3,271.8
|
|
|
|
2,824.2
|
|
Valuation allowances
|
|
|
(354.2
|
)
|
|
|
(473.1
|
)
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,917.6
|
|
|
|
2,351.1
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Prepaid employee benefits
|
|
|
(675.9
|
)
|
|
|
(485.8
|
)
|
Property and equipment
|
|
|
(662.2
|
)
|
|
|
(701.2
|
)
|
Intangibles
|
|
|
(532.5
|
)
|
|
|
|
|
Inventories
|
|
|
(432.4
|
)
|
|
|
(333.4
|
)
|
Other
|
|
|
(198.3
|
)
|
|
|
(150.2
|
)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,501.3
|
)
|
|
|
(1,670.6
|
)
|
|
|
|
|
|
|
Deferred tax assets net
|
|
$
|
416.3
|
|
|
$
|
680.5
|
|
|
|
|
|
|
|
At December 31, 2007, we had net operating losses and other
carryforwards for international and U.S. income tax
purposes of $1.15 billion: $27.0 million will expire
within 10 years; $1.09 billion will expire between 10
and 20 years; and $36.9 million of the carryforwards
will never expire. The primary components of the remaining
portion of the deferred tax asset for tax loss carryforwards and
carrybacks are related to net operating losses for state income
tax purposes that are fully reserved and a capital loss of
$433.6 million, which we expect to be carried back. We also
have tax credit carryforwards and carrybacks of
$361.5 million available to reduce future income taxes;
$80.7 million will be carried back; $34.1 million of
the tax credit carryforwards will expire after 5 years; and
$13.3 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
increase in both the deferred tax asset for tax loss
carryforwards and carrybacks and the deferred tax liability for
intangibles resulted primarily from the acquisition of ICOS. See
Note 4 for further discussion. Certain of the tax loss
carryforwards and carrybacks could be reduced upon examination
of our income tax returns by the tax authorities in the various
jurisdictions. Beginning with the adoption of FIN 48 in
2007, we reduced the deferred tax assets and related valuation
allowances recorded for these tax loss carryforwards and
carrybacks to reflect the estimated resolution of the
examinations. The reduction in the total valuation allowances in
2007 resulted primarily from this change.
Domestic and Puerto Rican companies contributed approximately
7 percent, 18 percent, and 43 percent in 2007,
2006, and 2005, 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. The current tax incentive grant will not
expire prior to 2017.
-67-
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, 2007, we had an
aggregate of $8.79 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 $1.01 billion,
$864.0 million, and $1.78 billion in 2007, 2006, and
2005, respectively. The higher cash payments of income taxes in
2005 are primarily attributable to the tax 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
United States federal statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Add (deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
International operations, including Puerto Rico
|
|
|
(11.6
|
)
|
|
|
(6.7
|
)
|
|
|
(4.8
|
)
|
Non-deductible acquired in-process research and development
|
|
|
5.4
|
|
|
|
|
|
|
|
|
|
General business credits
|
|
|
(1.6
|
)
|
|
|
(1.4
|
)
|
|
|
(1.5
|
)
|
Sundry
|
|
|
(3.4
|
)
|
|
|
(4.8
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
23.8
|
%
|
|
|
22.1
|
%
|
|
|
26.3
|
%
|
|
|
|
|
|
|
We adopted FIN 48 on January 1, 2007. 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. As a
result of the implementation of FIN 48, we reclassified
$921.4 million of income taxes payable from current to
non-current liabilities. We also recognized an increase of
$8.6 million in the liability for unrecognized tax
benefits, and an offsetting reduction to the January 1,
2007 balance of retained earnings. A reconciliation of the
beginning and ending amount of gross unrecognized tax benefits
is as follows:
|
|
|
|
|
Beginning balance at January 1, 2007
|
|
$
|
1,470.8
|
|
Additions based on tax positions related to the current year
|
|
|
206.4
|
|
Additions for tax positions of prior years
|
|
|
35.6
|
|
Reductions for tax positions of prior years
|
|
|
(53.1
|
)
|
Settlements
|
|
|
(2.3
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,657.4
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect our effective tax rate was
$1.46 billion at December 31, 2007.
We file income tax returns in the U.S. federal jurisdiction
and various state, local, and
non-U.S. jurisdictions.
We are no longer subject to U.S. federal, state and local,
or
non-U.S. income
tax examinations in major taxing jurisdictions for years before
2001. We are currently under audit by the Internal Revenue
Service (IRS) for tax years
2001-2004,
and management believes it is reasonably possible that a
substantial portion of this audit will conclude within the next
12 months; however, the ultimate resolution of all issues
in the audit period is dependent upon a number of factors,
including the potential for formal administrative and legal
proceedings. Resolution of a substantial portion of the audit
would bring certainty to specific tax positions addressed in the
audit, allowing for a reduction in gross unrecognized tax
benefits. If such resolution is reached within the next
12 months, we estimate a reduction in gross unrecognized
tax benefits in the range of $600 million to
$700 million. As a result, our consolidated results of
operations could benefit up to $190 million through a
reduction in income tax expense. The majority of this reduction
in unrecognized tax benefits relates to
-68-
intercompany pricing positions that were agreed with the IRS in
a prior audit cycle for which a prepayment of tax was made in
2005. We anticipate that any tax due upon such resolution has
been prepaid or tax carryovers will be utilized, which will
result in no additional cash payments.
We recognize both accrued interest and penalties related to
unrecognized tax benefits in income tax expense. During the
years ended December 31, 2007, 2006, and 2005, we
recognized $66.6 million, $51.2 million, and
$44.2 million in interest and penalties, respectively. At
December 31, 2007 and 2006, our accruals for the payment of
interest and penalties totaled $364.2 million and
$262.6 million, respectively. Substantially all of the
expense and accruals relate to interest.
|
|
Note 13:
|
Retirement
Benefits
|
In September 2006, the FASB issued SFAS 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 required 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. We
adopted the provisions of SFAS 158 on December 31,
2006.
-69-
We use 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
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
6,480.3
|
|
|
$
|
5,628.4
|
|
|
$
|
1,740.7
|
|
|
$
|
1,673.6
|
|
Service cost
|
|
|
287.1
|
|
|
|
280.0
|
|
|
|
70.4
|
|
|
|
72.2
|
|
Interest cost
|
|
|
362.4
|
|
|
|
343.5
|
|
|
|
101.4
|
|
|
|
97.9
|
|
Actuarial (gain) loss
|
|
|
(373.1
|
)
|
|
|
64.9
|
|
|
|
16.4
|
|
|
|
(25.0
|
)
|
Benefits paid
|
|
|
(311.0
|
)
|
|
|
(291.2
|
)
|
|
|
(81.6
|
)
|
|
|
(82.5
|
)
|
Plan amendments
|
|
|
32.7
|
|
|
|
|
|
|
|
(227.7
|
)
|
|
|
|
|
Foreign currency exchange rate changes and other adjustments
|
|
|
82.6
|
|
|
|
454.7
|
|
|
|
3.2
|
|
|
|
4.5
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
6,561.0
|
|
|
|
6,480.3
|
|
|
|
1,622.8
|
|
|
|
1,740.7
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
6,519.0
|
|
|
|
5,482.4
|
|
|
|
1,157.3
|
|
|
|
965.7
|
|
Actual return on plan assets
|
|
|
833.8
|
|
|
|
913.1
|
|
|
|
147.4
|
|
|
|
103.0
|
|
Employer contribution
|
|
|
202.9
|
|
|
|
221.3
|
|
|
|
125.4
|
|
|
|
171.1
|
|
Benefits paid
|
|
|
(301.4
|
)
|
|
|
(287.9
|
)
|
|
|
(81.6
|
)
|
|
|
(82.5
|
)
|
Foreign currency exchange rate changes and other adjustments
|
|
|
49.9
|
|
|
|
190.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
7,304.2
|
|
|
|
6,519.0
|
|
|
|
1,348.5
|
|
|
|
1,157.3
|
|
|
|
|
|
|
|
Funded status
|
|
|
743.2
|
|
|
|
38.7
|
|
|
|
(274.3
|
)
|
|
|
(583.4
|
)
|
Unrecognized net actuarial loss
|
|
|
1,143.3
|
|
|
|
1,788.6
|
|
|
|
820.3
|
|
|
|
931.8
|
|
Unrecognized prior service cost (benefit)
|
|
|
88.4
|
|
|
|
63.4
|
|
|
|
(297.7
|
)
|
|
|
(85.7
|
)
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,974.9
|
|
|
$
|
1,890.7
|
|
|
$
|
248.3
|
|
|
$
|
262.7
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consisted of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension
|
|
$
|
1,670.5
|
|
|
$
|
1,091.5
|
|
|
$
|
|
|
|
$
|
|
|
Other current liabilities
|
|
|
(47.9
|
)
|
|
|
(43.4
|
)
|
|
|
(8.6
|
)
|
|
|
(5.9
|
)
|
Accrued retirement benefit
|
|
|
(879.4
|
)
|
|
|
(1,009.4
|
)
|
|
|
(265.7
|
)
|
|
|
(577.5
|
)
|
Accumulated other comprehensive loss before income taxes
|
|
|
1,231.7
|
|
|
|
1,852.0
|
|
|
|
522.6
|
|
|
|
846.1
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,974.9
|
|
|
$
|
1,890.7
|
|
|
$
|
248.3
|
|
|
$
|
262.7
|
|
|
|
|
|
|
|
The unrecognized net actuarial loss and unrecognized prior
service cost (benefit) have not yet been recognized in net
periodic pension costs and are included in accumulated other
comprehensive loss at December 31, 2007.
In 2008, we expect to recognize from accumulated other
comprehensive loss as components of net periodic benefit cost
$71.5 million of unrecognized net actuarial loss and
$9.5 million of unrecognized prior service cost related to
our defined benefit pension plans and $65.2 million of
unrecognized net actuarial loss and $36.0 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 2008.
-70-
The following represents our weighted-average assumptions as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
Retiree Health Benefit Plans
|
|
(Percents)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Weighted-average assumptions as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for benefit obligation
|
|
|
6.4
|
|
|
|
5.7
|
|
|
|
6.7
|
|
|
|
6.0
|
|
Discount rate for net benefit costs
|
|
|
5.7
|
|
|
|
5.8
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Rate of compensation increase for benefit obligation
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase for net benefit costs
|
|
|
4.6
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
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
83 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
8.9 percent and 11.3 percent, respectively, as of
December 31, 2007. Health-care-cost trend rates were
assumed to increase at an annual rate of 9.3 percent in
2008, decreasing by approximately 0.6 percent per year to
an ultimate rate of 5.5 percent by 2014.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013-2017
|
|
|
|
|
Defined benefit pension plans
|
|
$
|
324.2
|
|
|
$
|
347.5
|
|
|
$
|
362.5
|
|
|
$
|
367.8
|
|
|
$
|
374.1
|
|
|
$
|
2,012.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree health benefit plans gross
|
|
$
|
86.0
|
|
|
$
|
95.9
|
|
|
$
|
99.1
|
|
|
$
|
101.7
|
|
|
$
|
102.4
|
|
|
$
|
527.9
|
|
Medicare rebates
|
|
|
(5.8
|
)
|
|
|
(7.9
|
)
|
|
|
(8.5
|
)
|
|
|
(8.9
|
)
|
|
|
(9.8
|
)
|
|
|
(56.2
|
)
|
|
|
|
|
|
|
Retiree health benefit plans net
|
|
$
|
80.2
|
|
|
$
|
88.0
|
|
|
$
|
90.6
|
|
|
$
|
92.8
|
|
|
$
|
92.6
|
|
|
$
|
471.7
|
|
|
|
|
|
|
|
The total accumulated benefit obligation for our defined benefit
pension plans was $5.69 billion and $5.65 billion at
December 31, 2007 and 2006, 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 $1.04 billion and
$160.9 million, respectively, as of December 31, 2007,
and $2.23 billion and $1.22 billion, respectively, as
of December 31, 2006. The accumulated benefit obligation
and fair value of the plan assets for the defined benefit
pension plans with accumulated benefit obligations in excess of
plan assets were $825.8 million and $46.9 million,
respectively, as of December 31, 2007, and
$805.0 million and $37.7 million, respectively, as of
December 31, 2006.
Net pension and retiree health benefit expense included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Retiree Health
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
287.1
|
|
|
$
|
280.0
|
|
|
$
|
297.4
|
|
|
$
|
70.4
|
|
|
$
|
72.2
|
|
|
$
|
61.5
|
|
Interest cost
|
|
|
362.4
|
|
|
|
343.5
|
|
|
|
296.2
|
|
|
|
101.4
|
|
|
|
97.9
|
|
|
|
80.7
|
|
Expected return on plan assets
|
|
|
(548.2
|
)
|
|
|
(494.8
|
)
|
|
|
(445.9
|
)
|
|
|
(102.1
|
)
|
|
|
(89.9
|
)
|
|
|
(75.6
|
)
|
Amortization of prior service cost (benefit)
|
|
|
7.7
|
|
|
|
8.3
|
|
|
|
7.6
|
|
|
|
(15.7
|
)
|
|
|
(15.6
|
)
|
|
|
(15.6
|
)
|
Recognized actuarial loss
|
|
|
130.0
|
|
|
|
149.6
|
|
|
|
106.7
|
|
|
|
95.0
|
|
|
|
107.9
|
|
|
|
86.6
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
239.0
|
|
|
$
|
286.6
|
|
|
$
|
262.0
|
|
|
$
|
149.0
|
|
|
$
|
172.5
|
|
|
$
|
137.6
|
|
|
|
|
|
|
|
-71-
If the health-care-cost trend rates were to be increased by one
percentage point each future year, the December 31, 2007,
accumulated postretirement benefit obligation would increase by
$226.6 million (14.0 percent) and the aggregate of the
service cost and interest cost components of the 2007 annual
expense would increase by $27.8 million
(16.2 percent). A one-percentage-point decrease in these
rates would decrease the December 31, 2007, accumulated
postretirement benefit obligation by $187.9 million
(11.6 percent) and the aggregate of the 2007 service cost
and interest cost by $22.7 million (13.2 percent).
The following represents the amounts recognized in other
comprehensive income in 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Retiree Health
|
|
|
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
|
Plan amendments during period
|
|
$
|
32.7
|
|
|
$
|
(227.7
|
)
|
|
$
|
(195.0
|
)
|
Amortization of prior service cost (benefit) included in net
income
|
|
|
(7.7
|
)
|
|
|
15.7
|
|
|
|
8.0
|
|
|
|
|
|
|
|
Net change in unrecognized prior service cost (benefit) not
recognized in net income during period
|
|
|
25.0
|
|
|
|
(212.0
|
)
|
|
|
(187.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain arising during period
|
|
|
(515.3
|
)
|
|
|
(16.5
|
)
|
|
|
(531.8
|
)
|
Amortization of net actuarial loss included in net income
|
|
|
(130.0
|
)
|
|
|
(95.0
|
)
|
|
|
(225.0
|
)
|
|
|
|
|
|
|
Net change in unrecognized net actuarial loss not included in
net income during period
|
|
|
(645.3
|
)
|
|
|
(111.5
|
)
|
|
|
(756.8
|
)
|
|
|
|
|
|
|
Total other comprehensive income during period
|
|
$
|
(620.3
|
)
|
|
$
|
(323.5
|
)
|
|
$
|
(943.8
|
)
|
|
|
|
|
|
|
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 $112.3 million,
$106.5 million, and $96.1 million for the years 2007,
2006, and 2005, 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 2007, 2006, and 2005 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
small-to-large
companies. The remaining portion of the growth investment
classification