FORM 10-K
United
States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended
December 31, 2008
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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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. þ
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 þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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 $46,687,100,000
Number of shares of common stock outstanding as of
February 13, 2009: 1,149,015,882
Portions of the Registrants Proxy Statement to be filed on
or about March 9, 2009 have been incorporated by reference
into Part III of this report.
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 products include:
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, generalized anxiety disorder, and
in the United States for the management of fibromyalgia
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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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Byetta®,
for the treatment of type 2 diabetes
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Actos®,
for the treatment of type 2 diabetes
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Evista®,
for the prevention and treatment of osteoporosis in
postmenopausal women and for the reduction of the risk of
invasive breast cancer in postmenopausal women with osteoporosis
and postmenopausal women at high risk for invasive breast cancer
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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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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 first-line treatment, in combination with another
agent, of non-small cell lung cancer for patients with
non-squamous histology; 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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Erbitux®,
a product of ImClone Systems Incorporated, joined our
oncology product portfolio upon our acquisition of ImClone in
late November 2008. Erbitux is indicated both as a single agent
and with other chemotherapy agents for the treatment of certain
types of colorectal cancers and as a single agent or in
combination with radiation therapy for head and neck cancers.
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Cardiovascular products, including:
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Cialis®,
for the treatment of erectile dysfunction
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Efient®,
for the prevention of atherothrombotic events in patients
with acute coronary syndromes undergoing percutaneous coronary
invention, was approved in February 2009 in the European
Union. The drug is undergoing final regulatory review in the
United States, where it would be marketed as
Effient®.
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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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Posilac®,
a protein supplement to improve milk productivity in dairy cows.
We acquired the worldwide rights to Posilac from Monsanto
Company in August 2008.
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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 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.
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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 2008. No other
distributor accounted for more than 10 percent of
consolidated net sales. We also sell pharmaceutical products
directly to the United States government and other
manufacturers, but those sales are not material.
We promote our major pharmaceutical products in the United
States through sales representatives who call upon physicians
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 supplement our employee sales
force with contract sales organizations as appropriate to
leverage our own resources and the strengths of our partners in
various markets.
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 maintain 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
We market certain of our significant products 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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Evista is marketed in major European markets by Daiichi Sankyo
Europe GmbH, a subsidiary of Daiichi Sankyo Co., Ltd. of Japan.
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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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Erbitux is marketed in North America by Bristol-Myers Squibb. We
co-promote Erbitux in North America. Outside North America,
Erbitux is commercialized by Merck KGaA. We receive royalties
from Bristol-Myers Squibb and Merck KGaA.
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Efient will be
co-promoted
with us in major European markets by Daiichi Sankyo Europe GmbH.
Assuming regulatory approvals, Daiichi Sankyo will also
co-promote
the product with us in the United States, Brazil, Mexico, China
and several other Asian countries. Daiichi Sanko retains sole
marketing rights in Japan, and we retain sole marketing rights
in Canada, Australia, Russia and certain other
countries.
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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.
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 or delivery systems with therapeutic or cost
advantages, our products can be subject to progressive price
reductions, 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 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 pharmaceutical 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
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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.
Some of our products, including Erbitux, Forteo, ReoPro, and
Xigris, are biological products, or biologics. Additionally,
many of the potential products in our research pipeline are
biologics. Currently, generic versions of biologics cannot be
approved under U.S. law. Competitors seeking approval of
biologics must file their own safety and efficacy data, and
address the challenges of biologics manufacturing, which
involves more complex and costly processes than those of
traditional pharmaceutical operations. However, the law could
change in the future to allow generic biologics. Even in the
absence of new legislation, the U.S. Food and Drug
Administration (FDA) is taking steps toward allowing generic
versions of certain biologics.
Our
Intellectual Property Portfolio
We consider intellectual property protection for certain
products, processes, and uses − particularly those
products discussed below − to be important to our
operations. For many of our products, in addition to the
compound patent we hold other patents on manufacturing
processes, formulations, or uses that may extend exclusivity
beyond the expiration of the product patent.
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).
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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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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
Licenses
Most of our important products were discovered in our own
laboratories and are not subject to significant license
agreements. Two of our larger products, Cialis and Alimta, are
subject to patent assignments or licenses granted to us by
others.
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The compound patent for Cialis is the subject of a license
agreement with Glaxo SmithKline which assigns to us exclusively
all rights in the compound. The agreement calls for royalties of
a single-digit percentage
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of net sales. The agreement is not subject to termination by
Glaxo for any reason other than a material breach by Lilly of
the royalty obligation, after a substantial cure period.
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The compound patent for Alimta is the subject of a license
agreement with Princeton University, granting us an irrevocable
exclusive worldwide license to the compound patents for the
lives of the patents in the respective territories. The
agreement calls for royalties of a single-digit percentage of
net sales. The agreement is not subject to termination by
Princeton for any reason other than a material breach by Lilly
of the royalty obligation, after a substantial cure period.
Alimta is also the subject of a worldwide, nonexclusive license
to certain compound and process patents owned by Takeda
Pharmaceutical Company Limited. The agreement calls for
royalties of a single-digit percentage of net sales in countries
covered by a relevant patent. The agreement is subject to
termination for material default and failure to cure by Lilly
and in the event that Lilly becomes bankrupt or insolvent.
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Patent
Challenges
In the United States, 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. Before Hatch-Waxman, no drug
could be approved without providing the 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 biologics)
without such information by filing an Abbreviated New Drug
Application (ANDA). In an ANDA, the generic manufacturer must
demonstrate only bioequivalence between the generic
version and the NDA-approved drug − not safety and
efficacy.
Absent a 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. The FDA is then prohibited from approving the generic
companys application for a 30- to
42-month
period (which can be shortened or extended by the trial court
judge hearing the patent challenge). If one or more of the
NDA-listed patents are challenged, the first filer 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. In addition, generic companies
have shown an increasing willingness to launch at
risk, i.e., after receiving ANDA approval but before final
resolution of their patent challenge. We are currently in
litigation with numerous generic manufacturers arising from
their Paragraph IV certifications on Alimta, Cymbalta,
Evista, Gemzar, and Strattera. For more information on these,
see Part II, Item 7, Managements
Discussion and Analysis − Legal and Regulatory
Matters.
Outside the United States, the legal doctrines and processes by
which pharmaceutical patents can be challenged vary widely. In
recent years, we have experienced an increase in patent
challenges from generic manufacturers in many countries outside
the United States, and we expect this trend to continue. For
more information on significant patent challenges outside the
United States, see Part II, Item 7,
Managements Discussion and Analysis −
Legal and Regulatory Matters.
Government
Regulation
Regulation
of Our Operations
Our operations are regulated extensively by numerous national,
state and local agencies. The lengthy process of laboratory and
clinical testing, data analysis, manufacturing development, and
regulatory review necessary for required governmental approvals
is extremely costly and can significantly delay product
introductions in a given market. Promotion, marketing,
manufacturing, and distribution of pharmaceutical and animal
health products are extensively regulated in all major world
markets. We are required to conduct extensive post-marketing
surveillance of the safety of the products we sell. In addition,
our operations are subject to complex
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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 and increased the inter-agency
coordination of enforcement activities. Over this period,
several claims brought by these agencies against Lilly and other
companies under these and other laws have resulted in corporate
criminal sanctions and very substantial civil settlements. See
Part I, Item 3, Legal Proceedings, and
Part II, Item 7, Managements Discussion
and Analysis − Legal and Regulatory
Matters, for information about currently pending and
recently resolved marketing and promotional practices
investigations involving Lilly, including information regarding
a Corporate Integrity Agreement entered into by Lilly in
connection with the resolution of a U.S. federal marketing
practices investigation and certain related state investigations
involving Zyprexa.
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 pending
or future actions could have a material adverse impact on our
consolidated results of operations, liquidity, and financial
position.
Regulations
Affecting Pharmaceutical Pricing and Reimbursement
In the United States, we are required to provide rebates to
state governments on their purchases of certain of our products
under state Medicaid programs. Other cost containment measures
have been adopted or proposed by federal, state, and local
government entities that provide or pay for health care. In most
international markets, we operate in an environment of
government-mandated cost containment programs, which may include
price controls, reference pricing, discounts and rebates,
restrictions on physician prescription levels, restrictions on
reimbursement, compulsory licenses, health economic assessments,
and generic substitution.
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In the U.S., the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (MMA), took effect in 2006, providing
a prescription drug benefit for seniors under the Medicare
program, known as Medicare Part D. Pricing to manufacturers
for drugs covered by the program is currently established
through competitive negotiations between the manufacturers and
private payers. However, various measures have been proposed
that would allow or require the federal government to negotiate
Medicare Part D drug prices directly with manufacturers. In
addition, various proposals have been introduced that would
increase the rebates we pay to the government. 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 become more severe.
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 2008, we employed approximately
8,600 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 $3.13 billion in 2006,
$3.49 billion in 2007, and $3.84 billion in 2008.
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 a
strong biotechnology research program including therapeutic
proteins, antibodies and antisense oligonucleotides 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,
formulations and therapeutic approaches 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
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
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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, musculoskeletal disorders,
lipid abnormalities, Alzheimers disease, schizophrenia,
multiple sclerosis, depression, sleep disorders, pain and
migraine, attention-deficit hyperactivity disorder (ADHD),
alcoholism, and autoimmune disorders including rheumatoid
arthritis. At present we have approximately 60 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 Alimta,
Byetta, Cialis, Cymbalta, Erbitux, Forteo, Gemzar, and Zyprexa.
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, Byetta is manufactured by third-party suppliers to
Amylin. In the event one of these suppliers was unable to
provide the materials or product, we generally have sufficient
inventory to supply the market until an alternative source of
supply can be implemented. However, in the event of an extended
failure of a supplier, it is possible that we could experience
an interruption in supply until we established new sources or,
in some cases, implemented alternative processes.
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.
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Executive
Officers of the Company
The following table sets forth certain information regarding our
executive officers. All executive officers except Mr. Azar
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 20, 2009, 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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John C. Lechleiter, Ph.D.
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55
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Chairman (since January 2009), President (since October 2005),
Chief Executive Officer (since April 2008) and a Director
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Robert A. Armitage
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60
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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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41
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Senior Vice President, Corporate Affairs and Communications
(since June 2007). From 2005 to 2007, Azar served as Deputy
Secretary of the U.S. Department of Health and Human Services
(HHS). From 2001 to 2005, he served HHS as General Counsel.
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Bryce D. Carmine
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57
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Executive Vice President, Marketing and Sales (since April 2008)
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Frank M. Deane, Ph.D.
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59
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President, Manufacturing Operations (since June 2007)
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Anthony J. Murphy, Ph.D.
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58
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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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58
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Executive Vice President, Science and Technology (since July
2003)
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Derica W. Rice
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44
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Senior Vice President and Chief Financial Officer (since May
2006)
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Gino Santini
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52
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Senior Vice President, Corporate Strategy and Business
Development (since June 2007)
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Employees
At the end of 2008, we employed approximately
40,500 people, including approximately
19,600 employees outside the United States. A substantial
number of our employees have long records of continuous service.
Financial
Information Relating to Business Segments and Classes of
Products
You can find financial information relating to our business
segments and classes of products in Part II, Item 8 of
this
Form 10-K,
Segment Information. That information is
incorporated here by reference.
The relative contribution of any particular product to our
consolidated net sales changes from year to year. This is due to
several factors, including the introduction of new products by
us and by other manufacturers and the introduction of generic
pharmaceuticals upon patent expirations. In addition, margins
vary for our different products due to various factors,
including differences in the cost to manufacture and market the
products, the value of the products to the marketplace, and
government restrictions on pricing and reimbursement. Our major
product sales are generally not seasonal.
Financial
Information Relating to Foreign and Domestic
Operations
You can find financial information relating to foreign and
domestic operations in Part II, Item 8 of this
Form 10-K,
Segment Information. That information is
incorporated here by reference.
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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.
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Item 1A:
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Risk
Factors; Cautionary Statement Regarding Forward Looking
Statements
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In addition to the other information contained in this
Form 10-K,
the following risk factors should be considered carefully in
evaluating our company. It is possible that our business,
financial condition, liquidity or results of operations could be
materially adversely affected by any of these risks.
We have made certain forward-looking statements in this
Form 10-K,
and company spokespeople may make such statements in the future
based on then-current expectations of management. Where
possible, we try to identify forward-looking statements by using
such words as expect, plan,
will, estimate, forecast,
project, believe,
anticipate, and similar expressions. Forward-looking
statements do not relate strictly to historical or current
facts. They are likely to address our growth strategy, sales of
current and anticipated products, financial results, the results
of our research and development programs, the status of product
approvals, and the outcome of contingencies such as litigation
and investigations. All forward-looking statements made by us
are subject to risks and uncertainties, including those
summarized below.
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Pharmaceutical research and development is very costly and
highly 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 bring
a pharmaceutical compound from the discovery phase to market
typically takes a decade or more and costs over $1 billion.
Failure can occur at any point in the process, including late 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 recent years, FDA
review times have increased substantially and fewer new drugs
are being approved. In addition, it can be very difficult to
predict sales growth rates of new products.
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We face intense competition. We compete with
large number of multinational pharmaceutical companies,
biotechnology companies and generic pharmaceutical companies. To
compete successfully, we must continue to deliver to the market
innovative, cost-effective products that meet important medical
needs. Our product sales can be adversely affected by the
introduction by competitors of branded products that are
perceived as superior by the marketplace, by generic versions of
our branded products, and by generic versions of other products
in the same therapeutic class as our branded products. See
Item 1, Business − Competition, for
more details.
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Our long-term success depends on intellectual property
protection. Our long-term success depends on our
ability to continually discover, develop, and commercialize
innovative new pharmaceutical products. Without strong
intellectual property protection, we would be unable to generate
the returns necessary to support the enormous investments in
research and development, capital, and other expenditures
required to bring new drugs to the market. Several major
products will lose intellectual property protection in the
U.S. in the next decade beginning in late 2011. Several of
these products will lose intellectual property protection in
various countries outside the U.S. even before then. 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 and pharmacy benefit managers,
including those operating under the Medicare Part D
pharmaceutical benefit. Many federal and state legislative
proposals would further negatively affect our pricing
and/or
reimbursement for our products. We expect pricing pressures from
both governments and private payers inside and outside the
United States to become more severe. See Item I,
Business − Regulations Affecting Pharmaceutical
Pricing and Reimbursement, for more details.
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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, leading to
product recalls, withdrawals, or declining sales, as well as
costly product liability claims.
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We depend on key products for most of our revenues, cash
flows, and earnings. Zyprexa sales of
$4.70 billion represented 23 percent of our revenues
in 2008, and Cymbalta sales of $2.70 billion constituted
13 percent of our 2008 revenues. Six other
products − Humalog, Gemzar, Cialis, Alimta, Evista,
and Humulin − each contributed more than
$1 billion in revenues in 2008. If these or 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 problems 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 have
resulted in substantial expense and other
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significant consequences to the company. It is possible other
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. In
particular, See Item 7, Managements Discussion
and Analysis − Legal and Regulatory Matters,
for the discussions of the U.S. sales and marketing
practices investigations. In addition, regulatory issues
concerning compliance with current Good Manufacturing Practice
(cGMP) regulations for pharmaceutical products can lead to
product recalls and seizures, interruption of production leading
to product shortages, and delays in the approvals of new
products pending resolution of the cGMP issues. We are now
operating under a Corporate Integrity Agreement with the Office
of Inspector General of the U.S. Department of Health and Human
Services that requires us to maintain comprehensive compliance
programs governing our research, manufacturing, and sales and
marketing of pharmaceuticals. Material failures to comply with
the Agreement could result in severe sanctions to the company.
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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The current volatility in financial markets could adversely
affect the cost and availability of
financing. Although the current contraction of
the credit markets has not yet materially affected our borrowing
costs or flexibility, if there is additional significant
contraction of the markets, it could adversely affect our
ability to obtain short-term or long-term financing at
reasonable rates.
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A prolonged economic downturn could adversely affect our
business and operating results. While
pharmaceuticals have not generally been sensitive to overall
economic cycles, a prolonged economic downturn coupled with
rising unemployment (and a corresponding increase in the
uninsured and underinsured population) could lead to decreased
utilization of drugs, affecting our sales volume. Declining tax
revenues attributable to the downturn may increase the pressure
on governments to reduce healthcare spending, leading to
increasing government efforts to control drug prices. In
addition, a prolonged economic downturn could have an adverse
impact on our investment portfolio, which could lead to the
recognition of losses on our corporate investments and increased
benefit expense related to our pension investments. Also, if our
customers, suppliers or collaboration partners experience
financial difficulties, we could experience slower customer
collections, greater bad debt expense, and performance defaults
by suppliers or collaboration partners.
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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 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, 2008, we owned 15
production and distribution facilities in the United States and
Puerto Rico. Together with the corporate administrative offices,
these facilities contain an aggregate of approximately
15.6 million square feet of floor area dedicated to
production, distribution, and administration. Major production
sites include Indianapolis, Clinton, and Lafayette, Indiana; two
sites in Puerto Rico; Branchburg, New Jersey; and Augusta,
Georgia.
We own production and distribution facilities in 15 countries
outside the United States and Puerto Rico, containing an
aggregate of approximately 3.9 million square feet of floor
space. Major production sites include facilities in France,
Ireland, Spain, Brazil, Italy, and the United Kingdom. We lease
production and warehouse facilities in Puerto Rico and several
countries outside the United States.
Our research and development facilities in the United States
consist of approximately 3.4 million square feet and are
located primarily in Indianapolis, with smaller sites in
San Diego and New York City. In October 2008 we sold our
Greenfield, Indiana research facility to Covance Inc. 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 Alimta, Cymbalta,
Evista, Gemzar, 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
Strattera: 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, and added Glenmark, Sun, Sandoz, Mylan, Teva,
Apotex, Aurobindo, Synthon, and Zydus as defendants in September
2007. 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. In June
2008, Glenmark agreed to entry of a permanent injunction,
enjoining it from selling a generic product prior to the
expiration of the U.S. patent. Also in June 2008, Synthon
notified us that it has withdrawn its ANDA and agreed to a
stipulated dismissal of all outstanding claims. For the
remaining defendants, trial is anticipated as early as December
2009.
Evista: 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. This matter
was settled in December 2008. The settlement did not have a
material impact on our consolidated results of operations,
liquidity, or financial position.
Cialis: 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. In January 2009, the district court judge
ruled in our favor, declining to add any of these scientists as
an inventor on either patent. The plaintiff may appeal this
ruling. We believe these claims are without legal merit and
expect to prevail in any appeal of 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 50 U.S. actions involving approximately 75
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 210 actions
in the U.S., involving approximately 285 claimants, brought in
various state courts and federal district courts on behalf of
children with autism or other
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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 November 2008, we received a subpoena from the
U.S. Department of Health and Human Services Office of
Inspector General in coordination with the U.S. Attorney
for the Western District of New York seeking production of a
wide range of documents and information relating to
reimbursement of Alimta. We are cooperating in this
investigation.
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 Corrupt Practices Act of 1977.
The staff has issued subpoenas to us requesting production of
documents related to the investigation. In connection with that
matter, staffs of the SEC and the Department of Justice (DOJ)
have asked us to voluntarily provide additional information
related to certain activities of Lilly affiliates in a number of
other countries. We are cooperating with the SEC and the DOJ in
this investigation.
Shareholder
Derivative Litigation
In 2007, the company received two demands from 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 through improper marketing of
Evista, Prozac, and 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. Since January 2008, we have
been served with seven shareholder derivative lawsuits:
Lambrecht, et al. v. Taurel, et al., filed
January 17, 2008, in the United States District Court for
the Southern District of Indiana; Staehr et al. v. Eli
Lilly and Company et al., filed March 27, 2008, in
Marion County Superior Court in Indianapolis, Indiana;
Waldman et al., v. Eli Lilly and Company et al.,
filed February 11, 2008, in the United States District
Court for the Eastern District of New York; Solomon v.
Eli Lilly and Company et al., filed March 27, 2008, in
Marion County Superior Court in Indianapolis, Indiana;
Robbins v. Taurel, et al., filed April 9, 2008,
in the United States District Court for the Eastern District of
New York; City of Taylor General Employees Retirement
System v. Taurel, et al., filed April 15, 2008, in
the United States
-16-
District Court for the Eastern District of New York; and
Zemprelli v. Taurel, et al., filed June 24,
2008, in the United States District Court for the Southern
District of Indiana. Two of these lawsuits were filed by the
shareholders who served the demands described above. All seven
lawsuits are nominally filed on behalf of the company, against
various current and former directors and officers and allege
that the named officers and directors harmed the company through
the improper marketing of Zyprexa, and in certain suits, Evista
and Prozac. The Zemprelli suit also claims that certain
defendants violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. We believe these lawsuits are
without merit and are prepared to defend against them vigorously.
Employee
Litigation
In April 2006, three former employees and one current employee
filed a putative class action against the company in the
U.S. District Court for the Southern District of Indiana
(Welch, et al. v. Eli Lilly and Company, filed
April 20, 2006) alleging racial discrimination.
Plaintiffs have since amended their complaint twice, adding to
the lawsuit a total of 154 individual plaintiffs as well as the
national and local chapters of the National Association for the
Advancement of Colored People (NAACP). Under the current
schedule, the plaintiffs are to file their class certification
motion in March 2009. We believe this lawsuit is without merit
and are prepared to defend against it vigorously.
We have also been named as a defendant in a lawsuit filed in the
U.S. District Court for the Northern District of New York
(Schaefer-LaRose, et al., filed November 14,
2006) claiming that our pharmaceutical sales
representatives should have been categorized as
non-exempt rather than exempt employees,
and claiming that the company owes them back wages for overtime
worked, as well as penalties, interest, and attorneys fees.
Other pharmaceutical industry participants face identical
lawsuits. The case was transferred to the U.S. District
Court for the Southern District of Indiana in August 2007. In
February 2008, the Indianapolis court conditionally certified a
nationwide opt-in collective action under the Fair Labor
Standards Act of all current and former employees who served as
a Lilly pharmaceutical sales representative at any time from
November 2003 to the present. As of the close of the opt-in
period, fewer than 400 of the over 7,500 potential plaintiffs
elected to participate in the lawsuit. We believe this lawsuit
is without merit and are prepared to defend against it
vigorously.
We have been named in a lawsuit brought by the Labor Attorney
for
15th Region
in the Labor Court of Paulinia, State of Sao Paulo, alleging
possible harm to employees and former employees caused by
exposure to heavy metals. We have also been named in
approximately 50 lawsuits filed in the same court by individual
former employees making similar claims. We believe these
lawsuits are without merit and are prepared to defend against
them vigorously.
Other
Matters
In October 2005, the U.S. Attorneys office for the
Eastern District of Pennsylvania advised that it is 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. We are cooperating in this
matter.
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 this matter.
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. Similar suits were
filed against us and many other manufacturers by the States of
Mississippi, Iowa, Utah, and Kansas. 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 early stages or discovery is ongoing.
-17-
During 2004 we, along with several other pharmaceutical
companies, were named in a consolidated lawsuit in California
state 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. The case sought restitution for alleged
overpayments for pharmaceuticals and an injunction against the
allegedly violative conduct. Summary judgment was granted to us
and the other defendants. In July 2008, the California Court of
Appeals affirmed that decision. The California Supreme Court has
accepted plaintiffs appeal, and we expect it to be heard
later this year.
In July 2008, we received a request from the Civil Division of
the United States Department of Justice requesting the
production of documents related to nominal pricing. We are
cooperating in this matter.
We previously received requests for information about Zyprexa
from the offices of Representative Henry Waxman, former Chair of
the House Committee on Oversight and Government Reform, and
Senator Charles Grassley, ranking member of the Senate Finance
Committee. We also received a request from Representative
Waxmans office for information about drug pricing under
Medicare Part D. We are cooperating with these requests.
Along with over 100 other pharmaceutical companies operating in
Europe, we have received a questionnaire from the European
Commission as part of its ongoing inquiry into whether
pharmaceutical companies have improperly blocked or created
artificial barriers to pharmaceutical innovation or market entry
of medicines through the misuse of patent rights, settlement of
patent claims, litigation, or other means. We are cooperating
with this request.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, commonly known as Superfund, we have been
designated as one of several potentially responsible parties
with respect to the cleanup of fewer than 10 sites. Under
Superfund, each responsible party may be jointly and severally
liable for the entire amount of the cleanup.
We are also a defendant in other litigation and investigations,
including product liability, patent, employment, and premises
liability litigation, of a character we regard as normal to our
business.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
During the fourth quarter of 2008, no matters were submitted 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
|
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Approximate Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased as Part of
|
|
|
of Shares that May Yet Be
|
|
|
|
Total Number of
|
|
|
Average Price Paid
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Plans or Programs
|
|
|
Plans or Programs
|
|
Period
|
|
(a)
|
|
|
(b)
|
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|
(c)
|
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|
(d)
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
October 2008
|
|
|
4
|
|
|
$
|
33.47
|
|
|
|
|
|
|
|
$419.2
|
|
November 2008
|
|
|
2
|
|
|
|
32.34
|
|
|
|
|
|
|
|
419.2
|
|
December 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
419.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
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6
|
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|
|
|
|
|
|
|
|
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|
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|
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|
|
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|
-18-
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, 2008, we have purchased
$2.58 billion related to this program.
|
|
Item 6.
|
Selected
Financial Data
|
You can find selected financial data for each of our five most
recent fiscal years in Part II, Item 8 under
Selected Financial Data (unaudited). That
information is incorporated here by reference.
|
|
Item 7.
|
Managements
Discussion and Analysis of Results of Operations and Financial
Condition
|
Review of
Operations
EXECUTIVE
OVERVIEW
This section provides an overview of our financial results,
recent product and late-stage pipeline developments, significant
business development, and legal, regulatory, and other matters
affecting our company and the pharmaceutical industry.
Financial
Results
We achieved worldwide sales growth of 9 percent, which was
primarily driven by volume increases in several key products.
The favorable impact of foreign exchange rates on cost of sales
contributed to an improvement in gross margin. Marketing,
selling, and administrative expenses grew at the same rate as
sales, driven by pre-launch activities associated with
prasugrel, marketing costs associated with Cymbalta and Evista,
the impact of foreign exchange rates, and increased
litigation-related expenses; while our investment in research
and development grew 10 percent. We completed our
acquisition of ImClone Systems Inc. (ImClone), resulting in a
significant charge of $4.69 billion for acquired in-process
research and development (IPR&D) and reached resolution on
government investigations related to our past
U.S. marketing and promotional practices for Zyprexa,
resulting in an additional charge of $1.48 billion. We
incurred tax expense of $764.3 million, despite a loss
before income taxes of $1.31 billion, primarily caused by
the non-deductibility of the ImClone IPR&D charge and the
partial deductibility of the Zyprexa investigation settlements.
Accordingly, earnings decreased $5.02 billion, to a net
loss of $2.07 billion, and earnings per share decreased
$4.60, to a loss of $1.89 per share, in 2008 as compared with
net income of $2.95 billion, or earnings per share of $2.71
in 2007. Net income comparisons between 2008 and 2007 are
affected by the impact of the following significant items (see
Notes 3, 5, 12, and 14 to the consolidated financial
statements for additional information):
2008
Acquisitions
(Note 3)
|
|
|
We recognized charges totaling $4.73 billion (pretax)
associated with the acquisition of ImClone, which decreased
earnings per share by $4.46. These amounts include an IPR&D
charge of $4.69 billion (pretax). The remaining net
expenses are related to ImClones operating results
subsequent to the acquisition, incremental interest costs, and
amortization of the intangible asset associated with Erbitux. We
also incurred IPR&D charges of $28.0 million (pretax)
associated with the acquisition of SGX Pharmaceuticals, Inc.
(SGX), which decreased earnings per share by $.03.
|
|
|
We incurred IPR&D charges associated with licensing
arrangements with BioMS Medical Corp. (BioMS) and TransPharma
Medical Ltd. totaling $122.0 million (pretax), which
decreased earnings per share by $.07.
|
-19-
Asset Impairments and Related Restructuring and Other
Special Charges (Notes 5 and 14)
|
|
|
We recognized asset impairments, restructuring, and other
special charges totaling $497.0 million (pretax), which
decreased earnings per share by $.30. A similar charge of
$57.1 million (pretax), which decreased earnings per share
by $.04, was included in cost of sales. These charges were
primarily associated with the sale of our Greenfield, Indiana
site, the termination of the
AIR®
Insulin program, and strategic exit activities related to
manufacturing operations.
|
|
|
We recorded charges of $1.48 billion (pretax) related to
the federal and state Zyprexa investigations led by the
U.S. Attorney for the Eastern District of Pennsylvania
(EDPA), as well as the resolution of a multi-state investigation
regarding Zyprexa involving 32 states and the District of
Columbia, which decreased earnings per share by $1.20.
|
Other
(Note 12)
|
|
|
We recognized a discrete income tax benefit of
$210.3 million as a result of the resolution of a
substantial portion of the IRS audit of our federal income tax
returns for the years 2001 through 2004, which increased
earnings per share by $.19.
|
2007
Acquisitions
(Note 3)
|
|
|
We incurred IPR&D charges associated with the acquisitions
of ICOS Corporation (ICOS), Hypnion, Inc. (Hypnion), and
Ivy Animal Health, Inc. (Ivy), totaling $631.6 million
(pretax), which decreased earnings per share by $.57.
|
|
|
We incurred IPR&D charges associated with our licensing
arrangements with Glenmark Pharmaceuticals Limited India,
MacroGenics, Inc., and OSI Pharmaceuticals, totaling
$114.0 million (pretax), which decreased earnings per share
by $.06.
|
-20-
Asset
Impairments and Related Restructuring and Other Special Charges
(Notes 5 and 14)
|
|
|
We recognized asset impairments, restructuring, and other
special charges of $190.6 million (pretax), which decreased
earnings per share by $.12. These charges were primarily
associated with previously announced strategic decisions
affecting manufacturing and research facilities.
|
|
|
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, and other product liability charges. This
resulted in a charge totaling $111.9 million (pretax),
which decreased earnings per share by $.09.
|
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 biotech-nology or pharmaceutical companies.
There were a number of late-stage pipeline developments and
business development transactions within the past year,
including:
Pipeline
|
|
|
We, along with our partner Daiichi Sankyo Company Limited, are
seeking from the U.S. Food and Drug Administration (FDA)
approval for prasugrel as a treatment for patients with acute
coronary syndrome being managed with percutaneous coronary
intervention. The Cardiovascular and Renal Drugs Advisory
Committee of the FDA reviewed prasugrel during a hearing and
unanimously recommended it for approval. The FDA will consider
the recommendation as it continues its review and makes its
final decision.
|
|
|
Prasugrel was approved for marketing by the European Commission
under the trade name Efient in February 2009 for the prevention
of atherothrombotic events in patients with acute coronary
syndromes undergoing percutaneous coronary intervention.
|
|
|
We received a complete response letter from the FDA for
olanzapine long-acting injection (LAI) for acute and maintenance
treatment of schizophrenia in adults. We are continuing to work
with the agency on the new drug application (NDA). The FDA does
not require any additional clinical trials for the continued
review of the NDA. Per the agencys request, we are
preparing a proposed Risk Evaluation and Mitigation Strategy,
which will be submitted in the near future. In addition,
olanzapine long-acting injection was approved by the European
Commission under the trade name
Zypadheratm.
|
|
|
We withdrew our supplemental NDA from the FDA for Cymbalta for
the management of chronic pain. We plan to resubmit the
application in the first half of 2009, adding data from a
recently completed study in chronic osteoarthritis pain of the
knee.
|
|
|
The FDA approved Alimta, in combination with cisplatin, as a
first-line treatment for locally advanced and metastatic
non-small cell lung cancer (NSCLC) for patients with nonsquamous
histology. The European health authorities also approved Alimta,
in combination with cisplatin, as a first-line treatment for
non-small cell lung cancer patients with other than
predominantly squamous cell histology.
|
|
|
We submitted tadalafil as a treatment for pulmonary arterial
hypertension (PAH) to regulatory authorities in the U.S.,
Europe, and Japan.
|
|
|
The FDA approved Cymbalta for the management of fibromyalgia, a
chronic pain disorder. In addition, the European Commission
approved Cymbalta for the treatment of generalized anxiety
disorder (GAD).
|
|
|
We, along with our partner Amylin Pharmaceuticals, Inc.
(Amylin), submitted Byetta as a monotherapy treatment for type 2
diabetes to the FDA.
|
|
|
The European Commission approved a new indication for
Forsteo®
for the treatment of osteoporosis associated with sustained,
systemic glucocorticoid therapy in women and men at increased
risk for fracture. We have also received an approvable letter
from the FDA for Forteo for the same indication.
|
-21-
|
|
|
We terminated development of our AIR Insulin program, which was
being conducted in collaboration with Alkermes, Inc. The program
had been in Phase III clinical development as a potential
treatment for type 1 and type 2 diabetes. This decision was not
a result of any observations during AIR Insulin trials relating
to the safety of the product, but rather was a result of
increasing uncertainties in the regulatory environment and a
thorough evaluation of the evolving commercial and clinical
potential of the product compared to existing medical therapies.
|
Business
Development
|
|
|
We acquired all of the outstanding shares of ImClone for a total
purchase price of approximately $6.5 billion. This
strategic combination will offer both targeted therapies and
oncolytic agents along with an oncology pipeline spanning all
phases of clinical development. It also expands our
biotechnology capabilities.
|
|
|
We entered into a license and a supply arrangement with United
Therapeutics Corporation related to the
U.S. commercialization rights for the PAH indication of
tadalafil. We received an upfront payment of $150.0 million
in exchange for exclusive rights to commercialize tadalafil for
PAH in the U.S., as well as for a product manufacturing and
supply arrangement. As part of this arrangement, we acquired a
$150.0 million equity position in the company. The
indication is currently under review by the FDA.
|
|
|
We acquired the worldwide rights to the dairy cow supplement
Posilac, as well as the products supporting operations,
from Monsanto Company (Monsanto) for an upfront payment of
$300.0 million, as well as contingent consideration based
on future Posilac sales. The acquisition of Posilac provides us
with a product that complements those of our animal health
product line.
|
|
|
We sold our Greenfield Laboratories site in Greenfield, Indiana,
to Covance Inc. We also signed a
10-year
service agreement, under which Covance will assume
responsibility for our toxicology testing and other R&D
support activities at the site.
|
|
|
We acquired SGX for approximately $64 million in
cash. The acquisition allows us to integrate
SGXs structure-guided drug discovery platform into our
drug discovery efforts. It also gives us access to
FASTtm,
SGXs fragment-based, protein structure guided drug
discovery technology, and to a portfolio of preclinical oncology
compounds focused on a number of kinase targets.
|
|
|
We entered into a licensing and development agreement with
TransPharma Medical Ltd. (TransPharma) to acquire rights to its
product and related drug delivery system for the treatment of
osteoporosis. The product, which is administered transdermally
using TransPharmas proprietary technology, is currently in
Phase II clinical testing.
|
|
|
We entered into an agreement with an affiliate of TPG-Axon
Capital (TPG) for the Phase III development of our two lead
molecules for the treatment of Alzheimers disease. This
agreement provides TPG with success-based milestones and
royalties in exchange for clinical trial funding.
|
|
|
We entered into a licensing and development agreement with BioMS
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.
|
Legal,
Regulatory, and Other Matters
In March 2004, we were notified by the U.S. Attorneys
office for the EDPA that it had commenced an investigation
relating to our U.S. marketing and promotional practices
for Zyprexa, Prozac, and Prozac
Weeklytm.
In October 2008, we announced that we were in advanced
discussions to resolve the ongoing investigations led by the
EDPA, and we recorded a charge of $1.42 billion. In January
2009, we announced that the discussions had been successfully
concluded, and that we settled the Zyprexa-related federal
claims, as well as similar Medicaid-related claims of states
which decide to participate in the settlement.
Beginning in August 2006, we received civil investigative
demands or subpoenas from the attorneys general of a number of
states under various state consumer protection laws seeking
documents pertaining to Zyprexa. In
-22-
October 2008, we reached a settlement with 32 states and
the District of Columbia, under which we paid $62.0 million.
In December 2008, the Federal Supreme Court (BGH) in Germany
re-established our Zyprexa patent that had been declared invalid
in 2007 by the German Federal Patent Court. As a result of this
ruling, generic olanzapine has been withdrawn from the German
market as of the beginning of 2009.
We continue to reach agreements with claimants attorneys
involved in U.S. Zyprexa product liability litigation to
settle claims against us relating to the medication.
Approximately 120 claims remain.
In the third quarter of 2008, we initiated a strategic review of
our Tippecanoe manufacturing facility in Lafayette, Indiana.
Options being considered for this site include continuing
operations with a revised site mission, exploring opportunities
to sell the facility, and ceasing operations altogether. The
review is expected to last six to twelve months. No final
decisions have been made at this time; however, depending on the
decision, we could record significant charges.
In the United States, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA) continues to
provide an effective 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 or impose additional rebates on sales to
patients who receive their medicines through Medicare
Part D. Uncertainty exists surrounding the new
administration and Congress and the impact any government
decisions or programs will have on the pharmaceutical industry.
In addition, many states are facing substantial budget
difficulties due to the downturn in the economy and are expected
to seek aggressive cuts or other offsets in healthcare spending.
We expect pricing pressures at the federal and state levels to
become more severe, which could have a material adverse effect
on our consolidated results of operations.
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.
The following table summarizes our net sales activity in 2008
compared with 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
Percent
|
|
|
|
December 31, 2008
|
|
|
2007
|
|
|
Change
|
|
Product
|
|
U.S.1
|
|
|
Outside U.S.
|
|
|
Total
|
|
|
Total
|
|
|
from 2007
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zyprexa
|
|
$
|
2,202.5
|
|
|
$
|
2,493.6
|
|
|
$
|
4,696.1
|
|
|
$
|
4,761.0
|
|
|
|
(1
|
)
|
Cymbalta
|
|
|
2,253.8
|
|
|
|
443.3
|
|
|
|
2,697.1
|
|
|
|
2,102.9
|
|
|
|
28
|
|
Humalog
|
|
|
1,008.4
|
|
|
|
727.4
|
|
|
|
1,735.8
|
|
|
|
1,474.6
|
|
|
|
18
|
|
Gemzar
|
|
|
734.8
|
|
|
|
985.0
|
|
|
|
1,719.8
|
|
|
|
1,592.4
|
|
|
|
8
|
|
Cialis2
|
|
|
539.0
|
|
|
|
905.5
|
|
|
|
1,444.5
|
|
|
|
1,143.8
|
|
|
|
26
|
|
Alimta
|
|
|
561.9
|
|
|
|
592.8
|
|
|
|
1,154.7
|
|
|
|
854.0
|
|
|
|
35
|
|
Animal health products
|
|
|
537.3
|
|
|
|
556.0
|
|
|
|
1,093.3
|
|
|
|
995.8
|
|
|
|
10
|
|
Evista
|
|
|
700.5
|
|
|
|
375.1
|
|
|
|
1,075.6
|
|
|
|
1,090.7
|
|
|
|
(1
|
)
|
Humulin
|
|
|
380.9
|
|
|
|
682.3
|
|
|
|
1,063.2
|
|
|
|
985.2
|
|
|
|
8
|
|
Forteo
|
|
|
489.9
|
|
|
|
288.8
|
|
|
|
778.7
|
|
|
|
709.3
|
|
|
|
10
|
|
Strattera
|
|
|
437.8
|
|
|
|
141.7
|
|
|
|
579.5
|
|
|
|
569.4
|
|
|
|
2
|
|
Other pharmaceutical products
|
|
|
1,087.6
|
|
|
|
1,252.1
|
|
|
|
2,339.7
|
|
|
|
2,354.4
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
10,934.4
|
|
|
$
|
9,443.6
|
|
|
$
|
20,378.0
|
|
|
$
|
18,633.5
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
1 |
|
U.S. sales include sales in Puerto
Rico.
|
-23-
|
|
|
2 |
|
Prior to the acquisition of ICOS in
late January 2007, the Cialis sales shown do not include sales
in the joint-venture territories of Lilly ICOS LLC (North
America, excluding Puerto Rico, and Europe). Our share of the
joint-venture territory sales for January 2007, net of expenses
and income taxes, is reported in other net in our
consolidated statements of operations. Subsequent to the
acquisition, all Cialis product sales are reported in our net
sales. Worldwide 2008 sales for Cialis grew 19 percent from
2007 sales of $1.22 billion.
|
OPERATING
RESULTS 2008
Sales
Our worldwide sales for 2008 increased 9 percent, to
$20.38 billion, driven primarily by growth of Cymbalta,
Cialis, Alimta, Humalog, and Gemzar. Worldwide sales volume
increased 5 percent, while foreign exchange rates
contributed 3 percent, and selling prices contributed
2 percent. (Numbers do not add due to rounding.) Sales in
the U.S. increased 8 percent, to $10.93 billion,
driven primarily by increased sales of Cymbalta, Humalog,
Cialis, and Alimta. Sales outside the U.S. increased
11 percent, to $9.44 billion, driven primarily by the
sales growth of Alimta, Cialis, Cymbalta, and Humalog.
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. decreased 1 percent in 2008, driven by lower
demand, partially offset by higher prices. Sales outside the
U.S. decreased 1 percent, driven by decreased demand
and to a lesser extent, lower prices, partially offset by the
favorable impact of foreign exchange rates. Demand outside the
U.S. was unfavorably impacted by generic competition in
Germany and Canada. As noted previously, generic olanzapine has
been withdrawn from the German market as of the beginning of
2009.
Sales of Cymbalta, a product for the treatment of major
depressive disorder, diabetic peripheral neuropathic pain,
generalized anxiety disorder, and fibromyalgia, increased
23 percent in the U.S., driven by increased demand and, to
a lesser extent, higher prices. Sales outside the
U.S. increased 66 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates and higher prices. Higher demand outside the
U.S. reflects increased demand in established markets as
well as recent launches in new markets.
Sales of Humalog, our injectable human insulin analog for the
treatment of diabetes, increased 14 percent in the U.S.,
driven by increased demand and higher prices. Sales outside the
U.S. increased 24 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates.
-24-
Sales of Gemzar, a product approved to fight various cancers,
increased 10 percent in the U.S., driven by increased
demand and higher prices. Sales outside the U.S. increased
7 percent, driven primarily by the favorable impact of
foreign exchange rates and, to a lesser extent, increased
demand, partially offset by lower prices. We will likely face
increased generic competition in certain markets outside the
U.S. in 2009.
Our sales of Cialis, a treatment for erectile dysfunction,
increased 27 percent in the U.S., driven by increased
demand and higher prices. Sales outside the U.S. increased
26 percent, driven by increased demand and, to a lesser
extent, the favorable impact of foreign exchange rates and
higher prices. Total worldwide sales of Cialis increased
19 percent to $1.44 billion in 2008 as compared to
$1.22 billion in 2007. This includes $72.7 million of
sales in the Lilly ICOS joint-venture territories for the 2007
period prior to the acquisition of ICOS.
Sales of Alimta, a treatment for various cancers, increased
25 percent in the U.S., driven by increased demand and, to
a lesser extent, higher prices. Sales outside the
U.S. increased 46 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates.
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, decreased 1 percent in the U.S., driven by
decreased demand, partially offset by higher prices. Sales
outside the U.S. decreased 2 percent, driven by lower
demand and lower prices, partially offset by the favorable
impact of foreign exchange rates. As described in Legal and
Regulatory Matters, Evista is the subject of a Hatch-Waxman
patent challenge by Teva Pharmaceuticals USA, Inc. (Teva), which
has received tentative approval of its Abbreviated New Drug
Application (ANDA) from the FDA. Unless the current stay on
Tevas approved ANDA remains in force or Teva is
preliminarily enjoined from markets if the stay is lifted, it is
possible that Teva could choose to launch before the current
action against Teva is concluded. Such a launch could have a
material adverse impact on our future consolidated results of
operations.
Sales of Humulin, an injectable human insulin for the treatment
of diabetes, increased 4 percent in the U.S., driven by
higher prices. Sales outside the U.S. increased
10 percent, driven by the favorable impact of foreign
exchange rates and increased demand.
Sales of Forteo, an injectable treatment for osteoporosis in
postmenopausal women and men at high risk for fracture,
decreased 1 percent in the U.S., driven by decreased
demand, partially offset by higher prices. Sales outside the
U.S. increased 34 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates.
Sales of Strattera, a treatment for attention-deficit
hyperactivity disorder in children, adolescents, and adults,
decreased 6 percent in the U.S., driven by decreased
demand, partially offset by higher prices. Sales outside the
U.S. increased 35 percent, driven primarily by
increased demand.
Worldwide sales of Byetta, an injectable product for the
treatment of type 2 diabetes that we market with Amylin,
increased 16 percent to $751.4 million during 2008. 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 20 percent to
$396.1 million in 2008.
Animal health product sales in the U.S. increased
12 percent, driven by the inclusion of U.S. Posilac
sales since the date of acquisition. Sales outside the
U.S. increased 8 percent, driven by increased demand
and, to a lesser extent, the favorable impact of foreign
exchange rates.
Gross
Margin, Costs, and Expenses
The 2008 gross margin increased to 78.5 percent of
sales compared with 77.2 percent for 2007. This increase
was primarily due to the favorable impact of foreign exchange
rates.
-25-
Marketing, selling, and administrative expenses increased
9 percent in 2008, to $6.63 billion. This increase was
due to increased marketing and selling expenses, including
prelaunch expenses for prasugrel and marketing costs associated
with Cymbalta and Evista; the impact of foreign exchange rates;
and increased litigation-related expenses. Investment in
research and development increased 10 percent, to
$3.84 billion, due to increased late-stage clinical trial
and discovery research costs.
Acquired IPR&D charges related to the acquisitions of
ImClone and SGX, as well as our in-licensing arrangements with
BioMS and TransPharma, were $4.84 billion in 2008 as
compared to $745.6 million in
-26-
2007. We recognized asset impairments, restructuring, and other
special charges of $1.97 billion in 2008, as compared to
$302.5 million in 2007. The 2008 charges were primarily
associated with the resolution of Zyprexa investigations with
the U.S. Attorney for the EDPA and multiple states. See
Notes 3, 5 and 14 to the consolidated financial statements
for additional information.
Other net decreased $148.1 million, to a net
expense of $26.1 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 2008 was essentially flat at
$228.3 million. The impact of lower interest rates on our
debt was substantially offset by lower capitalized interest due
to lower
construction-in-progress
balances and increased interest expense due to the financing of
the ImClone acquisition.
|
|
|
Interest income for 2008 decreased $4.6 million, to
$210.7 million, as lower interest rates were partially
offset by higher cash balances.
|
|
|
The Lilly ICOS joint venture income prior to the 2007
acquisition was $11.0 million. Subsequent to the
acquisition, all activity related to ICOS is included in our
consolidated financial results.
|
|
|
Net other miscellaneous items decreased $132.5 million to a
loss of $8.5 million, primarily as a result of lower
outlicensing income and increased net losses on investment
securities in 2008 (the majority of which consisted of
unrealized losses).
|
We incurred tax expense of $764.3 million in 2008, despite
having a loss before income taxes of $1.31 billion. Our net
loss was driven by the $4.69 billion acquired IPR&D
charge for ImClone and the $1.48 billion Zyprexa
investigation settlements. The IPR&D charge was not tax
deductible, and only a portion of the Zyprexa investigation
settlements was deductible. In addition, we recorded tax expense
associated with the ImClone acquisition, as well as a discrete
income tax benefit of $210.3 million for the resolution of
the IRS audit. The effective tax rate was 23.8 percent in
2007. See Note 12 to the consolidated financial statements
for additional information.
OPERATING
RESULTS 2007
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 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
significant items that are reflected in our financial results.
The significant items for 2007 are summarized in the Executive
Overview. The 2006 items are summarized as follows (see
Notes 5 and 14 to the consolidated financial statements for
additional information):
|
|
|
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).
|
|
|
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).
|
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
-27-
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.
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 net in our
consolidated statements of operations. Subsequent to the
acquisition, all Cialis product sales are reported in our net
sales.
|
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 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 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 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.
Total worldwide sales of Cialis 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.
-28-
Sales of Evista 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 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 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 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 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.
Our revenues from Actos decreased 46 percent in the
U.S. 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 increased 51 percent to
$650.2 million during 2007. 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.
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
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 3, 5 and 14 to
the consolidated financial statements for additional information.
Other net decreased $115.8 million, to income
of $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.
|
-29-
|
|
|
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.
FINANCIAL
CONDITION
As of December 31, 2008, cash, cash equivalents, and
short-term investments totaled $5.93 billion compared with
$4.83 billion at December 31, 2007. Cash flow from
operations in 2008 of $7.30 billion and net proceeds from
the issuance of debt of $4.41 billion exceeded the total of
the net cash paid for corporate acquisitions of
$6.08 billion, dividends paid of $2.06 billion,
purchases of property and equipment of $947.2 million, and
net purchases of noncurrent investments of $815.1 million.
Capital expenditures of $947.2 million during 2008 were
$135.2 million less than in 2007. We expect 2009 capital
expenditures to be approximately $1.1 billion as we invest
in our biotechnology capabilities, continue to upgrade our
manufacturing and research 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, 2008 increased
$5.45 billion, to $10.46 billion, reflecting the
commercial paper we issued in November 2008 primarily to finance
our acquisition of ImClone, offset by long-term debt repayments
and paydown of commercial paper with cash and cash equivalents
on hand. Our current debt ratings from Standard &
Poors and Moodys are at AA and A1, respectively.
Dividends of $1.88 per share were paid in 2008, an increase of
11 percent from 2007. In the fourth quarter of 2008,
effective for the first-quarter dividend in 2009, the quarterly
dividend was increased to $.49 per share (a 4.3 percent
increase), resulting in an indicated annual rate for 2009 of
$1.96 per share. The year 2008 was the
-30-
124th consecutive year in which we made dividend payments
and the 41st consecutive year in which dividends have been
increased.
In recent months, global economic conditions have deteriorated.
Triggered by the liquidity crisis in the capital markets, the
implications have become more widespread, resulting in higher
unemployment and declines in real consumer spending. In
addition, many financial institutions have tightened lines of
credit, reducing funding available for near-term economic
growth. Pharmaceutical consumption has traditionally been
relatively unaffected by economic downturns; however, an
extended downturn could lead to a decline in overall
prescriptions corresponding with the growth of the uninsured and
underinsured population in the U.S. In addition, both
private and public health care payers are facing heightened
fiscal challenges due to the economic slowdown and are taking
aggressive steps to reduce the costs of care, including
pressures for increased pharmaceutical discounts and rebates and
efforts to drive greater use of generic drugs. We continue to
monitor the potential near-term impact of prescription trends,
the credit worthiness of our wholesalers and other customers and
suppliers, the decline of health insurance coverage in the
overall population, and the federal governments
involvement in the economic crisis.
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 litigation and government
investigations, and dividends in 2009. We believe that amounts
accessible through existing commercial paper markets should be
adequate to fund short-term borrowings. Our access to credit
markets has not been adversely affected by the recent
illiquidity in the market because of the high credit quality of
our short- and long-term debt. In 2009, we intend to fund
payments required in connection with the EDPA settlements, and
to further reduce outstanding commercial paper with cash and
cash equivalents on hand, cash generated from operations, and
the issuance of longterm debt. We currently have
$1.24 billion of unused committed bank credit facilities,
$1.20 billion of which backs our commercial paper program.
Additionally, in November 2008, we obtained a one-year
short-term revolving credit facility in the amount of
$4.00 billion as
back-up,
alternative financing. Various risks and uncertainties,
including those discussed in the Financial Expectations for 2009
section, may affect our operating results and cash generated
from operations.
-31-
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, 2008 and 2007, 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,
2008 and 2007, respectively, would have no material impact on
earnings, cash flows, or fair values of interest rate
risksensitive 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
may 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, 2008 and 2007, a hypothetical 10 percent
change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2008 and 2007,
respectively, would have no material impact on earnings, cash
flows, or fair values of foreign currency rate risk-sensitive
instruments over a one-year period. These calculations do not
reflect the impact of the exchange gains or losses on the
underlying positions that would be offset, in part, by the
results of the derivative instruments.
Off-Balance
Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have a material
current effect or that are reasonably likely to have a material
future effect on our financial condition, changes in financial
condition, revenues or expenses,
-32-
results of operations, liquidity, capital expenditures, or
capital resources. We acquire and collaborate on 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. 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
|
|
$
|
8,205.5
|
|
|
$
|
595.8
|
|
|
$
|
387.0
|
|
|
$
|
881.2
|
|
|
$
|
6,341.5
|
|
Capital lease obligations
|
|
|
41.3
|
|
|
|
13.1
|
|
|
|
17.0
|
|
|
|
5.2
|
|
|
|
6.0
|
|
Operating leases
|
|
|
335.3
|
|
|
|
90.8
|
|
|
|
141.4
|
|
|
|
73.6
|
|
|
|
29.5
|
|
Purchase
obligations2
|
|
|
7,923.0
|
|
|
|
5,976.3
|
|
|
|
723.5
|
|
|
|
388.5
|
|
|
|
834.7
|
|
Other long-term liabilities reflected on our balance
sheet3
|
|
|
1,088.8
|
|
|
|
|
|
|
|
316.7
|
|
|
|
185.0
|
|
|
|
587.1
|
|
Other4
|
|
|
157.1
|
|
|
|
157.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,751.0
|
|
|
$
|
6,833.1
|
|
|
$
|
1,585.6
|
|
|
$
|
1,533.5
|
|
|
$
|
7,798.8
|
|
|
|
|
|
|
|
|
|
|
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, 2008 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, 2008. Some of these purchase orders may be
cancelable; however, for purposes of this disclosure, we have
not distinguished between cancelable and noncancelable purchase
obligations.
|
|
|
|
Contractual payment obligations with each of our significant
vendors, which are noncancelable and are not contingent.
|
|
|
|
3 |
|
We have included long-term
liabilities consisting primarily of our nonqualified
supplemental pension funding requirements and deferred
compensation liabilities. We excluded liabilities for
unrecognized tax benefits of $906.2 million, as we cannot
reasonably estimate the timing of future cash outflows
associated with those liabilities.
|
|
4 |
|
This category comprises primarily
minimum pension funding requirements.
|
The contractual obligations table is current as of
December 31, 2008. We expect the amount of these
obligations to change materially over time as new contracts are
initiated and existing contracts are completed, terminated, or
modified.
-33-
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 Return, Rebate, and Discount
Accruals
We recognize revenue from sales of products at the time title of
goods passes to the buyer and the buyer assumes the risks and
rewards of ownership. 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, which are outside the U.S., are recorded at the
point of delivery. Provisions for returns, rebates, and
discounts are established in the same period the related sales
are recorded.
We regularly review the supply levels of our significant
products sold to major wholesalers in the U.S. and in major
markets outside the U.S., primarily by reviewing periodic
inventory reports supplied by our major wholesalers and
available prescription volume information for our products, or
alternative approaches. We attempt to maintain 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. In the
U.S., the current structure of our arrangements eliminates the
incentive for speculative wholesaler buying and provides us
improved data on inventory levels at our wholesalers. When we
believe wholesaler purchasing patterns have caused an unusual
increase or decrease in the sales of a major product compared
with underlying demand, we disclose this in our product sales
discussion if we believe the amount is material to the product
sales trend; however, we are not always able to accurately
quantify the amount of stocking or destocking. Wholesaler
stocking and destocking activity historically has not caused any
material changes in the rate of actual product returns.
We establish sales return accruals for anticipated product
returns. We record the return amounts as a deduction to arrive
at our net sales. Once the product is returned, it is destroyed.
Consistent with SFAS 48, Revenue Recognition When Right of
Return Exists, we estimate a reserve when the sales occur for
future product returns related to those sales. This estimate is
primarily based on historical return rates as well as
specifically identified anticipated returns due to known
business conditions and product expiry dates. Actual product
returns have been approximately one 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 and discount amounts are
recorded as a deduction to arrive at our net sales. Sales
rebates and discounts that require the use of judgment in the
establishment of the accrual include Medicaid, managed care,
Medicare, chargebacks, long-term-care, hospital, patient
assistance programs, and various other government programs. We
base these accruals primarily upon our historical rebate and
discount payments made to our customer segment groups and the
provisions of current rebate and discount contracts.
The largest of our sales rebate and discount amounts are rebates
associated with sales covered by Medicaid. In determining the
appropriate accrual amount, we consider our historical Medicaid
rebate payments by product as a percentage of our historical
sales as well as any significant changes in sales trends, an
evaluation of the current Medicaid rebate laws and
interpretations, the percentage of our products that are sold to
Medicaid recipients, and our product pricing and current rebate
and 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
-34-
to that sale is typically paid up to six months later. Because
of this time lag, in any particular period our rebate
adjustments may incorporate revisions of accruals for several
periods.
Most of our rebates outside the U.S. are contractual or
legislatively mandated and are estimated and recognized in the
same period as the related sales. In some large European
countries, government rebates are based on the anticipated
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 returns, rebates, and
discounts are reasonable and appropriate based on current facts
and circumstances. Sales returns, federally mandated Medicaid
rebate and state pharmaceutical assistance programs (Medicaid)
and Medicare rebates reduced sales by $1.03 billion,
$738.8 million, and $704.8 million in 2008, 2007, and
2006, respectively. A 5 percent change in the sales return,
Medicaid, and Medicare rebate amounts we recognized in 2008
would lead to an approximate $52 million effect on our
income before income taxes. As of December 31, 2008, our
sales returns, Medicaid, and Medicare rebate liability was
$618.5 million.
Our global rebate and discount liabilities are included in sales
rebates and discounts on our consolidated balance sheet. Our
global sales return liability is included in other current
liabilities and other noncurrent liabilities on our consolidated
balance sheet. Approximately 80 percent and 78 percent
of our global sales return, rebate, and discount liability
resulted from sales of our products in the U.S. as of
December 31, 2008 and 2007, respectively. The following
represents a roll-forward of our most significant
U.S. returns, rebate, and discount liability balances,
including Medicaid (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Sales return, rebate, and discount liabilities, beginning of year
|
|
$
|
693.5
|
|
|
$
|
614.5
|
|
Reduction of net sales due to sales returns, discounts, and
rebates1
|
|
|
1,864.9
|
|
|
|
1,404.0
|
|
Cash payments of discounts and rebates
|
|
|
(1,751.8
|
)
|
|
|
(1,325.0
|
)
|
|
|
|
|
|
|
Sales return, rebate, and discount liabilities, end of year
|
|
$
|
806.5
|
|
|
$
|
693.5
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Adjustments of the estimates for
these returns, rebates, and discounts to actual results were
less than 0.1 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 condition of the insurers, and
the possibility of and length of time for collection. 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 completely 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 in the future.
-35-
The litigation accruals and environmental liabilities and the
related estimated insurance recoverables have been reflected on
a gross basis as liabilities and assets, respectively, on our
consolidated balance sheets.
We believe that the accruals and related insurance recoveries we
have established for product litigation liabilities and other
contingencies are appropriate based on current facts and
circumstances.
Pension
and Retiree Medical Plan Assumptions
Pension benefit costs include assumptions for the discount rate,
retirement age, and expected return on plan assets. Retiree
medical plan costs include assumptions for the discount rate,
retirement age, expected return on plan assets, and
health-care-cost trend rates. These assumptions have a
significant effect on the amounts 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 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 88 percent
to 92 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 2008 annual expense
would increase by approximately $27 million. A
one-percentage-point decrease would lower the aggregate of the
2008 service cost and interest cost by approximately
$21 million. If the 2008 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 $26 million. If the 2008 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 $17 million. If our assumption regarding the
2008 expected age of future retirees for U.S. plans were
adjusted by one year, our income before income taxes would be
affected by approximately $28 million. The U.S. plans
represent approximately 83 percent of the total accumulated
postretirement benefit obligation and approximately
84 percent of total plan assets at December 31, 2008.
Impairment
of Long-Lived Assets
We review the carrying value of long-lived assets (both
intangible and tangible) for potential impairment on a periodic
basis and whenever events or changes in circumstances indicate
the carrying value of an asset may not be recoverable. We
determine impairment by comparing the projected undiscounted
cash flows to be generated by the asset to its carrying value.
If an impairment is identified, a loss is recorded equal to the
excess of the 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
-36-
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
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 and tax credit carryforwards in
certain taxing jurisdictions. In evaluating whether we would
more likely than not recover these deferred tax assets, we have
not assumed any future taxable income or tax planning strategies
in the jurisdictions associated with these carryforwards where
history does not support such an assumption. Implementation of
tax planning strategies to recover these deferred tax assets or
future income generation in these jurisdictions could lead to
the reversal of these valuation allowances and a reduction of
income tax expense.
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 $43.2 million and
$42.3 million, respectively.
FINANCIAL
EXPECTATIONS FOR 2009
For the full year of 2009, we expect earnings per share to be in
the range of $4.00 to $4.25. We expect volume growth in sales
again in 2009, driven by Cymbalta, Alimta, Cialis, Humalog, and
the anticipated launches of prasugrel, as well as by the Elanco
animal health division. However, the negative impact of weaker
foreign currencies, worldwide pricing pressures, and the impact
of generic competition in certain markets for Gemzar are
anticipated to partially offset these positive impacts. As a
result, we expect mid-single digit sales growth. We expect gross
margin as a percent of net sales to increase, driven by the
strengthening dollar. This increase could be more pronounced in
the first half of 2009. Marketing, selling, and administrative
expenses are expected to show flat to low-single digit growth.
Research and development expenses are projected to grow in the
low-double digits. Other net is expected to be a net
loss of between $200 million and $250 million. Capital
expenditures are expected to be approximately $1.1 billion,
and we expect continued strong operating cash flow.
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 and
global macroeconomic conditions; 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.
-37-
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):
|
|
|
Cymbalta: Sixteen generic drug manufacturers have
submitted ANDAs seeking permission to market generic versions of
Cymbalta prior to the expiration of our relevant
U.S. patents (the earliest of which expires in 2013). Of
these challengers, all allege non-infringement of the patent
claims directed to the commercial formulation, and eight allege
invalidity of the patent claims directed to the active
ingredient duloxetine. Of the eight challengers to the compound
patent claims, one further alleges invalidity of the claims
directed to the use of Cymbalta for treating fibromyalgia, and
one alleges the patent having claims directed to the active
ingredient is unenforceable. Lawsuits have been filed in
U.S. District Court for the Southern District of Indiana
against Activis Elizabeth LLC; Aurobindo Pharma Ltd.; Cobalt
Laboratories, Inc.; Impax Laboratories, Inc.; Lupin Limited;
Sandoz Inc.; Sun Pharma Global, Inc.; and Wockhardt Limited,
seeking rulings that the patents are valid, infringed, and
enforceable. Answers to the complaints are pending.
|
|
|
Gemzar: Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma
(USA) Inc. (Mayne), and Sun Pharmaceutical Industries Inc. (Sun)
each submitted an ANDA 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 and January 2008),
seeking rulings that these patents are valid and are being
infringed. The suit against Sicor has been scheduled for trial
in July 2009. Sicors ANDAs have been approved by the FDA;
however, Sicor must provide 90 days notice prior to
marketing generic Gemzar to allow time for us to seek a
preliminary injunction. Both suits against Mayne have been
administratively closed, and the parties have agreed to be bound
by the results of the Sicor suit. In November 2007, Sun filed a
declaratory judgment action in the United States District Court
for the Eastern District of Michigan, seeking rulings that our
method-of-use and compound patents are invalid or unenforceable,
or would not be infringed by the sale of Suns generic
product. This trial is scheduled for December 2009.
|
|
|
Alimta: Teva Parenteral Medicines, Inc. (Teva) and APP
Pharmaceuticals, LLC (APP) each submitted ANDAs seeking approval
to market generic versions of Alimta prior to the expiration of
the relevant U.S. patent (licensed from the Trustees of
Princeton University and expiring in 2016), and alleging the
patent is invalid. We, along with Princeton, filed lawsuits in
the U.S. District Court for the District of Delaware
against Teva and APP, seeking rulings that the compound patent
is valid and infringed. Trial is scheduled for November 8,
2010.
|
|
|
Evista: Barr Laboratories, Inc. (Barr) submitted an ANDA
in 2002 seeking permission to market a generic version of Evista
prior to the expiration of our relevant U.S. patents
(expiring in
2012-2017)
and alleging that these patents are invalid, not enforceable, or
not infringed. In November 2002, we filed a lawsuit against Barr
in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that these patents are valid,
enforceable, and being infringed by Barr. Teva Pharmaceuticals
USA, Inc. (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. In
April 2008, the FDA granted Teva tentative approval of its ANDA,
but Tevas ability to market a generic product is subject
to a statutory stay, which has been extended to expire on
March 9, 2009. If the stay expires and the company cannot
obtain preliminary relief from the court, Teva can launch its
generic product, regardless of the status of the current
litigation, but subject to our right to recover damages, should
we prevail at trial.
|
We believe each of these Hatch-Waxman challenges is without
merit and expect to prevail in this litigation. 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 in any of these cases could have a
material adverse impact on our future consolidated results of
operations, liquidity, and financial position.
-38-
We have received challenges to Zyprexa patents in a number of
countries outside the U.S.:
|
|
|
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 that ruling was affirmed on appeal in
February 2008. In June 2007, the Canadian Federal Court held
that an invalidity allegation of a second challenger, Novopharm
Ltd. (Novopharm), was 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 sued
Novopharm for patent infringement, and the trial began in
November 2008. We expect the trial to run through the first
quarter of 2009, with a decision in the second half of 2009. In
November 2007, Apotex filed an action seeking a declaration of
the invalidity of our Zyprexa compound and method-of-use
patents, and no trial date has been set. We have brought similar
actions against Pharmascience (August 2007), Sandoz (July 2007),
Nu-Pharm (June 2008), Genpharm (June 2008) and Cobalt
(January 2009); none of these suits has been scheduled for
trial. Pharmascience has agreed to be bound by the outcome of
the Novopharm suit, and, pending the outcome of the lawsuit, we
have agreed not to take any further steps to prevent the company
from coming to market with generic olanzapine tablets, subject
to a contingent damages obligation should we be successful
against Novopharm.
|
|
|
In Germany, generic pharmaceutical manufacturers
Egis-Gyogyszergyar and Neolab Ltd. challenged the validity of
our Zyprexa compound and method-of-use patent (expiring in
2011). In June 2007, the German Federal Patent Court held that
our patent is invalid. Generic olanzapine was launched by
competitors in Germany in the fourth quarter of 2007. We
appealed the decision to the German Federal Supreme Court and
following a hearing in December 2008, the Supreme Court reversed
the Federal Patent Court and found the patent to be valid.
Following the decision of the Supreme Court, the generic
companies either agreed to withdraw from the market or were
subject to preliminary injunction. We are pursuing these
companies for damages arising from infringement.
|
|
|
We have received challenges in a number of other countries,
including Spain, the United Kingdom (U.K.), France, and several
smaller European countries. In Spain, we have been successful at
both the trial and appellate court levels in defeating the
generic manufacturers challenges, but further legal
challenge is now pending before the Commercial Court in Madrid.
In the U.K., the generic pharmaceutical manufacturer
Dr. Reddys Laboratories (UK) Limited has challenged
the validity of our Zyprexa compound and method-of-use patent
(expiring in 2011). In October 2008, the Patents Court in the
High Court, London ruled that our patent was valid.
Dr. Reddys appealed this decision, and a hearing date
for the appeal has not been set.
|
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 additional markets could
have a material adverse impact on our consolidated results of
operations.
Xigris and Evista: 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 have appealed this
-39-
judgment. The Court of Appeals for the Federal Circuit heard
oral arguments on the appeal on February 6, 2009. 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 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 addition, the State Medicaid Fraud Control
Units of more than 30 states coordinated with the EDPA in
its investigation of any Medicaid-related claims relating to our
marketing and promotion of Zyprexa. In January 2009, we
announced that we reached resolution of this matter. As part of
the resolution, we pled guilty to one misdemeanor violation of
the Food, Drug, and Cosmetic Act and agreed to pay
$615.0 million. The misdemeanor plea is for the off-label
promotion of Zyprexa in elderly populations as treatment for
dementia, including Alzheimers dementia, between September
1999 and March 2001. We have also entered into a settlement
agreement resolving the federal civil claims, under which we
will pay approximately $438.0 million, although we do not
admit to the allegations. We have also agreed to settle the
civil investigations brought by the State Medicaid Fraud Control
Units of the states that have coordinated with the EDPA in its
investigation, and will make available a maximum amount of
approximately $362.0 million for payment to those states
that agree to settle. The charge we recorded for this matter in
the third quarter of $1.42 billion will be sufficient to
cover these payments. Also, as part of the settlement, we have
entered into a corporate integrity agreement with the Office of
Inspector General (OIG) of the U.S. Department of Health
and Human Services (HHS). This agreement will require us to
maintain our compliance program and to undertake a set of
defined corporate integrity obligations for five years. The
agreement also provides for an independent third-party review
organization to assess and report on the companys systems,
processes, policies, procedures and practices.
In June 2005, we received a subpoena from the Office of the
Attorney General, Medicaid Fraud Control Unit, of the State of
Florida, seeking production of documents relating to sales of
Zyprexa and our marketing and promotional practices with respect
to Zyprexa. In September 2006, we received a subpoena from the
California Attorney Generals Office seeking production of
documents related to our efforts to obtain and maintain
Zyprexas status on Californias formulary, marketing
and promotional practices with respect to Zyprexa, and
remuneration of health care providers. We expect these matters
to be resolved if Florida and California participate in the
state component of the EDPA resolution.
Beginning in August 2006, we 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 became part of a multistate investigative effort
coordinated by an executive committee of attorneys general. In
October 2008, we reached a settlement with 32 states and
the District of Columbia. While there is no finding that we have
violated any provision of the state laws under which the
investigations were conducted, we paid $62.0 million and
agreed to undertake certain commitments regarding Zyprexa for a
period of six years, through consent decrees filed in the
settling states. The 32 states participating in the
settlement are: Alabama, Arizona, California, Delaware, Florida,
Hawaii, Illinois, Indiana, Iowa, Kansas, Maine, Maryland,
Massachusetts, Michigan, Missouri, Nebraska, Nevada, New Jersey,
New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas,
Vermont, Washington, and Wisconsin.
Product
Liability and Related Litigation
We have been named as a defendant in a large number of Zyprexa
product liability lawsuits in the U.S. 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
-40-
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 32,670
claimants, including a large number of previously filed lawsuits
and other asserted claims. The two primary settlements were as
follows:
|
|
|
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.
|
|
|
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.
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 105
lawsuits in the U.S. covering approximately 120 plaintiffs,
of which about 80 cases covering about 90 plaintiffs are part of
the MDL. No trials have been scheduled related to these claims.
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.
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 insurance recoveries, covered the following:
|
|
|
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 (EDNY). 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, Arkansas, Connecticut, Idaho, Minnesota, Mississippi,
Montana, New Mexico, Pennsylvania, South Carolina, Utah, and
West Virginia in the courts of the respective states. The
Connecticut, Louisiana, Minnesota, Mississippi, Montana, New
Mexico, and West Virginia cases are part of the MDL proceedings
in the EDNY. The Alaska case was settled in March 2008 for a
payment of $15.0 million, plus terms designed to ensure,
subject to certain limitations and conditions, that Alaska is
treated as favorably as certain other states that may settle
with us in the future over similar claims. The following cases
have been set for trial in 2009: Connecticut in the EDNY in
June, Pennsylvania in November, and South Carolina in August, in
their respective states.
In 2005, two lawsuits were filed in the EDNY 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
EDNY in 2006 on similar grounds. In September
-41-
2008, Judge Weinstein certified a class consisting of
third-party payors, excluding governmental entities and
individual consumers. We appealed the certification order, and
Judge Weinsteins order denying our motion for summary
judgment, in September 2008. 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. The Pennsylvania case
is set for trial in October 2009.
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.
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 completely 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 in the
future.
PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 A CAUTION
CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution investors that any
forward-looking statements or projections made by us, including
those made in this document, are based on managements
expectations at the time they are made, but they are subject to
risks and uncertainties that may cause actual results to differ
materially from those projected. Economic, competitive,
governmental, technological, legal, and other factors that may
affect our operations and prospects are discussed earlier in
this section and our most recent report on
Forms 10-Q
and 10-K
filed with the Securities and Exchange Commission. We undertake
no duty to update forward-looking statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
You can find quantitative and qualitative disclosures about
market risk (e.g., interest rate risk) in Part II,
Item 7 at Review of Operations − Financial
Condition. That information is incorporated in this report
by reference.
-42-
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions, except per-share data)
|
|
|
Net sales
|
|
$
|
20,378.0
|
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
Cost of sales
|
|
|
4,382.8
|
|
|
|
4,248.8
|
|
|
|
3,546.5
|
|
Research and development
|
|
|
3,840.9
|
|
|
|
3,486.7
|
|
|
|
3,129.3
|
|
Marketing, selling, and administrative
|
|
|
6,626.4
|
|
|
|
6,095.1
|
|
|
|
4,889.8
|
|
Acquired in-process research and development (Note 3)
|
|
|
4,835.4
|
|
|
|
745.6
|
|
|
|
|
|
Asset impairments, restructuring, and other special charges
(Note 5)
|
|
|
1,974.0
|
|
|
|
302.5
|
|
|
|
945.2
|
|
Other net, expense (income)
|
|
|
26.1
|
|
|
|
(122.0
|
)
|
|
|
(237.8
|
)
|
|
|
|
|
|
|
|
|
|
21,685.6
|
|
|
|
14,756.7
|
|
|
|
12,273.0
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,307.6
|
)
|
|
|
3,876.8
|
|
|
|
3,418.0
|
|
Income taxes (Note 12)
|
|
|
764.3
|
|
|
|
923.8
|
|
|
|
755.3
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,071.9
|
)
|
|
$
|
2,953.0
|
|
|
$
|
2,662.7
|
|
|
|
|
|
|
|
Earnings (loss) per share basic and diluted
(Note 11)
|
|
$
|
(1.89
|
)
|
|
$
|
2.71
|
|
|
$
|
2.45
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-43-
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)}
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,496.7
|
|
|
$
|
3,220.5
|
|
Short-term investments
|
|
|
429.4
|
|
|
|
1,610.7
|
|
Accounts receivable, net of allowances of $97.4 (2008) and
$103.1(2007)
|
|
|
2,778.8
|
|
|
|
2,673.9
|
|
Other receivables (Note 9)
|
|
|
498.5
|
|
|
|
1,030.9
|
|
Inventories
|
|
|
2,493.2
|
|
|
|
2,523.7
|
|
Deferred income taxes (Note 12)
|
|
|
382.1
|
|
|
|
642.8
|
|
Prepaid expenses
|
|
|
374.6
|
|
|
|
613.6
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,453.3
|
|
|
|
12,316.1
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid pension (Note 13)
|
|
|
|
|
|
|
1,670.5
|
|
Investments (Note 6)
|
|
|
1,544.6
|
|
|
|
577.1
|
|
Goodwill and other intangibles net (Note 3)
|
|
|
4,054.1
|
|
|
|
2,455.4
|
|
Sundry (Note 9)
|
|
|
2,534.3
|
|
|
|
1,280.6
|
|
|
|
|
|
|
|
|
|
|
8,133.0
|
|
|
|
5,983.6
|
|
Property and Equipment, net
|
|
|
8,626.3
|
|
|
|
8,575.1
|
|
|
|
|
|
|
|
|
|
$
|
29,212.6
|
|
|
$
|
26,874.8
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt
(Note 7)
|
|
$
|
5,846.3
|
|
|
$
|
413.7
|
|
Accounts payable
|
|
|
885.8
|
|
|
|
924.4
|
|
Employee compensation
|
|
|
771.0
|
|
|
|
823.8
|
|
Sales rebates and discounts
|
|
|
873.4
|
|
|
|
706.8
|
|
Dividends payable
|
|
|
536.8
|
|
|
|
513.6
|
|
Income taxes payable (Note 12)
|
|
|
229.2
|
|
|
|
238.4
|
|
Other current liabilities (Note 9)
|
|
|
3,967.2
|
|
|
|
1,816.1
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,109.7
|
|
|
|
5,436.8
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt (Note 7)
|
|
|
4,615.7
|
|
|
|
4,593.5
|
|
Accrued retirement benefit (Note 13)
|
|
|
2,387.6
|
|
|
|
1,145.1
|
|
Long-term income taxes payable (Note 12)
|
|
|
906.2
|
|
|
|
1,196.7
|
|
Deferred income taxes (Note 12)
|
|
|
74.7
|
|
|
|
287.5
|
|
Other noncurrent liabilities (Note 9)
|
|
|
1,383.4
|
|
|
|
711.3
|
|
|
|
|
|
|
|
|
|
|
9,367.6
|
|
|
|
7,934.1
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
Shareholders Equity (Notes 8 and 10)
|
|
|
|
|
|
|
|
|
Common stock no par value
|
|
|
|
|
|
|
|
|
Authorized shares: 3,200,000,000
|
|
|
|
|
|
|
|
|
Issued shares: 1,136,948,610 (2008) and 1,135,212,894 (2007)
|
|
|
711.1
|
|
|
|
709.5
|
|
Additional paid-in capital
|
|
|
3,976.6
|
|
|
|
3,805.2
|
|
Retained earnings
|
|
|
7,654.9
|
|
|
|
11,806.7
|
|
Employee benefit trust
|
|
|
(2,635.0
|
)
|
|
|
(2,635.0
|
)
|
Deferred costs ESOP
|
|
|
(86.3
|
)
|
|
|
(95.2
|
)
|
Accumulated other comprehensive income (loss) (Note 15)
|
|
|
(2,786.8
|
)
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
6,834.5
|
|
|
|
13,604.4
|
|
Less cost of common stock in treasury
|
|
|
|
|
|
|
|
|
2008 888,998 shares
|
|
|
|
|
|
|
|
|
2007 899,445 shares
|
|
|
99.2
|
|
|
|
100.5
|
|
|
|
|
6,735.3
|
|
|
|
13,503.9
|
|
|
|
|
|
|
|
|
|
$
|
29,212.6
|
|
|
$
|
26,874.8
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-44-
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,071.9
|
)
|
|
$
|
2,953.0
|
|
|
$
|
2,662.7
|
|
Adjustments To Reconcile Net Income To Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,122.6
|
|
|
|
1,047.9
|
|
|
|
801.8
|
|
Change in deferred taxes
|
|
|
442.6
|
|
|
|
60.7
|
|
|
|
346.8
|
|
Stock-based compensation expense
|
|
|
255.3
|
|
|
|
282.0
|
|
|
|
359.3
|
|
Acquired in-process research and development, net of tax
|
|
|
4,792.7
|
|
|
|
692.6
|
|
|
|
|
|
Other, net
|
|
|
406.5
|
|
|
|
172.1
|
|
|
|
600.6
|
|
|
|
|
|
|
|
|
|
|
4,947.8
|
|
|
|
5,208.3
|
|
|
|
4,771.2
|
|
Changes in operating assets and liabilities, net of acquisitions
Receivables (increase) decrease
|
|
|
799.1
|
|
|
|
(842.7
|
)
|
|
|
243.9
|
|
Inventories (increase) decrease
|
|
|
84.8
|
|
|
|
154.3
|
|
|
|
(60.2
|
)
|
Other assets (increase) decrease
|
|
|
1,648.6
|
|
|
|
(355.8
|
)
|
|
|
(43.0
|
)
|
Accounts payable and other liabilities increase
(decrease)
|
|
|
(184.7
|
)
|
|
|
990.4
|
|
|
|
(936.0
|
)
|
|
|
|
|
|
|
|
|
|
2,347.8
|
|
|
|
(53.8
|
)
|
|
|
(795.3
|
)
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
7,295.6
|
|
|
|
5,154.5
|
|
|
|
3,975.9
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(947.2
|
)
|
|
|
(1,082.4
|
)
|
|
|
(1,077.8
|
)
|
Disposals of property and equipment
|
|
|
25.7
|
|
|
|
32.3
|
|
|
|
65.2
|
|
Net change in short-term investments
|
|
|
957.6
|
|
|
|
(376.9
|
)
|
|
|
1,247.5
|
|
Proceeds from sales and maturities of noncurrent investments
|
|
|
1,597.3
|
|
|
|
800.1
|
|
|
|
1,507.7
|
|
Purchases of noncurrent investments
|
|
|
(2,412.4
|
)
|
|
|
(750.7
|
)
|
|
|
(1,313.2
|
)
|
Purchases of in-process research and development
|
|
|
(122.0
|
)
|
|
|
(111.0
|
)
|
|
|
|
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(6,083.0
|
)
|
|
|
(2,673.2
|
)
|
|
|
|
|
Other, net
|
|
|
(284.8
|
)
|
|
|
(166.3
|
)
|
|
|
179.0
|
|
|
|
|
|
|
|
Net Cash Provided by (Used for) Investing Activities
|
|
|
(7,268.8
|
)
|
|
|
(4,328.1
|
)
|
|
|
608.4
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(2,056.7
|
)
|
|
|
(1,853.6
|
)
|
|
|
(1,736.3
|
)
|
Net change in short-term borrowings
|
|
|
5,060.5
|
|
|
|
(468.5
|
)
|
|
|
(8.4
|
)
|
Proceeds from issuance of long-term debt
|
|
|
0.1
|
|
|
|
2,512.6
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(649.8
|
)
|
|
|
(1,059.5
|
)
|
|
|
(2,781.5
|
)
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
(122.1
|
)
|
Issuances of common stock under stock plans
|
|
|
|
|
|
|
24.7
|
|
|
|
59.6
|
|
Other, net
|
|
|
(8.1
|
)
|
|
|
(0.6
|
)
|
|
|
9.9
|
|
|
|
|
|
|
|
Net Cash Provided by (Used for) Financing Activities
|
|
|
2,346.0
|
|
|
|
(844.9
|
)
|
|
|
(4,578.8
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(96.6
|
)
|
|
|
129.7
|
|
|
|
97.1
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
2,276.2
|
|
|
|
111.2
|
|
|
|
102.6
|
|
Cash and cash equivalents at beginning of year
|
|
|
3,220.5
|
|
|
|
3,109.3
|
|
|
|
3,006.7
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
5,496.7
|
|
|
$
|
3,220.5
|
|
|
$
|
3,109.3
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-45-
Consolidated
Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Net income (loss)
|
|
$
|
(2,071.9
|
)
|
|
$
|
2,953.0
|
|
|
$
|
2,662.7
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses)
|
|
|
(766.1
|
)
|
|
|
756.6
|
|
|
|
542.4
|
|
Net unrealized losses on securities
|
|
|
(190.6
|
)
|
|
|
(11.4
|
)
|
|
|
(3.2
|
)
|
Minimum pension liability adjustment (Note 13)
|
|
|
|
|
|
|
|
|
|
|
(18.8
|
)
|
Defined benefit pension and retiree health benefit plans
(Note 13)
|
|
|
(2,941.2
|
)
|
|
|
943.8
|
|
|
|
|
|
Effective portion of cash flow hedges
|
|
|
23.2
|
|
|
|
(0.1
|
)
|
|
|
143.3
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before income taxes
|
|
|
(3,874.7
|
)
|
|
|
1,688.9
|
|
|
|
663.7
|
|
Provision for income taxes related to other comprehensive income
(loss) items
|
|
|
1,074.7
|
|
|
|
(287.0
|
)
|
|
|
(43.1
|
)
|
|
|
|
|
|
|
Other comprehensive income (loss) (Note 15)
|
|
|
(2,800.0
|
)
|
|
|
1,401.9
|
|
|
|
620.6
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(4,871.9
|
)
|
|
$
|
4,354.9
|
|
|
$
|
3,283.3
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
-46-
Segment
Information
We operate in one significant business segment human
pharmaceutical products. Operations of the animal health
business segment are not material and share many of the same
economic and operating characteristics as human pharmaceutical
products. Therefore, they are included with pharmaceutical
products for purposes of segment reporting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Net sales to unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurosciences
|
|
$
|
8,371.5
|
|
|
$
|
7,851.0
|
|
|
$
|
6,728.5
|
|
Endocrinology
|
|
|
5,890.7
|
|
|
|
5,479.6
|
|
|
|
5,014.5
|
|
Oncology
|
|
|
2,874.5
|
|
|
|
2,446.4
|
|
|
|
2,020.2
|
|
Cardiovascular
|
|
|
1,882.7
|
|
|
|
1,624.1
|
|
|
|
730.4
|
|
Animal health
|
|
|
1,093.3
|
|
|
|
995.8
|
|
|
|
875.5
|
|
Other pharmaceuticals
|
|
|
265.3
|
|
|
|
236.6
|
|
|
|
321.9
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,378.0
|
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
|
|
|
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated
customers1
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
10,934.4
|
|
|
$
|
10,145.5
|
|
|
$
|
8,599.2
|
|
Europe
|
|
|
5,334.9
|
|
|
|
4,731.8
|
|
|
|
3,804.0
|
|
Other foreign countries
|
|
|
4,108.7
|
|
|
|
3,756.2
|
|
|
|
3,287.8
|
|
|
|
|
|
|
|
|
|
$
|
20,378.0
|
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
5,750.0
|
|
|
$
|
5,905.4
|
|
|
$
|
6,207.4
|
|
Europe
|
|
|
2,119.0
|
|
|
|
2,057.7
|
|
|
|
1,733.8
|
|
Other foreign countries
|
|
|
1,753.0
|
|
|
|
1,768.6
|
|
|
|
1,718.4
|
|
|
|
|
|
|
|
|
|
$
|
9,622.0
|
|
|
$
|
9,731.7
|
|
|
$
|
9,659.6
|
|
|
|
|
|
|
|
|
|
1 |
Net sales are attributed to the countries based on the location
of the customer.
|
The largest category of products is the neurosciences group,
which includes Zyprexa, Cymbalta, Strattera, and Prozac.
Endocrinology products consist primarily of Humalog, Humulin,
Byetta, Actos, Evista, Forteo, and Humatrope. Oncology products
consist primarily of Gemzar and Alimta. Cardiovascular products
consist primarily of Cialis, ReoPro, and Xigris. Animal health
products include Posilac, Tylan, Rumensin, Coban, and other
products for livestock and poultry, and Comfortis and other
products for companion animals. 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 2008, our three largest
wholesalers each accounted for between 12 percent and
16 percent of consolidated net sales. Further, they each
accounted for between 10 percent and 15 percent of
accounts receivable as of December 31, 2008. 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 animal health
business was approximately $192 million, $173 million,
and $184 million in 2008, 2007, and 2006, respectively.
-47-
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.
-48-
Selected
Quarterly Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
|
|
(Dollars in millions, except per-share data)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,210.5
|
|
|
$
|
5,209.5
|
|
|
$
|
5,150.4
|
|
|
$
|
4,807.6
|
|
Cost of sales
|
|
|
915.4
|
|
|
|
1,155.2
|
|
|
|
1,200.9
|
|
|
|
1,111.3
|
|
Operating expenses
|
|
|
2,785.9
|
|
|
|
2,602.2
|
|
|
|
2,651.6
|
|
|
|
2,427.6
|
|
Acquired in-process research and development
|
|
|
4,685.4
|
|
|
|
28.0
|
|
|
|
35.0
|
|
|
|
87.0
|
|
Asset impairments, restructuring, and other special charges
|
|
|
80.0
|
|
|
|
1,659.4
|
|
|
|
88.9
|
|
|
|
145.7
|
|
Other net, expense (income)
|
|
|
81.2
|
|
|
|
(2.5
|
)
|
|
|
(32.3
|
)
|
|
|
(20.3
|
)
|
Income (loss) before income taxes
|
|
|
(3,337.4
|
)
|
|
|
(232.8
|
)
|
|
|
1,206.3
|
|
|
|
1,056.3
|
|
Net income
(loss)1
|
|
|
(3,629.4
|
)
|
|
|
(465.6
|
)
|
|
|
958.8
|
|
|
|
1,064.3
|
|
Earnings (loss) per share basic and diluted
|
|
|
(3.31
|
)
|
|
|
(.43
|
)
|
|
|
.88
|
|
|
|
.97
|
|
Dividends paid per share
|
|
|
.47
|
|
|
|
.47
|
|
|
|
.47
|
|
|
|
.47
|
|
Common stock closing prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
43.69
|
|
|
|
49.25
|
|
|
|
53.06
|
|
|
|
57.18
|
|
Low
|
|
|
29.91
|
|
|
|
43.92
|
|
|
|
45.61
|
|
|
|
47.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
|
|
|
Third
|
|
|
Second
|
|
|
First
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 net, expense (income)
|
|
|
(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 and 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
|
|
Our common stock is listed on the New York, London, and Swiss
stock exchanges.
|
|
1 |
We incurred tax expense of $764.3 million in 2008, despite
having a loss before income taxes of $1.31 billion. Our net
loss was driven by the $4.69 billion acquired IPR&D
charge for ImClone in the fourth quarter and the
$1.48 billion Zyprexa investigation settlements recorded in
the third quarter. The IPR&D charge was not tax deductible,
and only a portion of the Zyprexa investigation settlements was
deductible. In addition, we recorded tax expense associated with
the ImClone acquisition in the fourth quarter, as well as a
discrete income tax benefit of $210.3 million in the first
quarter for the resolution of the IRS audit.
|
-49-
Selected
Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES
|
|
2008
|
|
|
20072
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
(Dollars in millions, except net sales per employee and
per-share data)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,378.0
|
|
|
$
|
18,633.5
|
|
|
$
|
15,691.0
|
|
|
$
|
14,645.3
|
|
|
$
|
13,857.9
|
|
Cost of sales
|
|
|
4,382.8
|
|
|
|
4,248.8
|
|
|
|
3,546.5
|
|
|
|
3,474.2
|
|
|
|
3,223.9
|
|
Research and development
|
|
|
3,840.9
|
|
|
|
3,486.7
|
|
|
|
3,129.3
|
|
|
|
3,025.5
|
|
|
|
2,691.1
|
|
Marketing, selling, and administrative
|
|
|
6,626.4
|
|
|
|
6,095.1
|
|
|
|
4,889.8
|
|
|
|
4,497.0
|
|
|
|
4,284.2
|
|
Other
|
|
|
6,835.5
|
4
|
|
|
926.1
|
|
|
|
707.4
|
|
|
|
931.1
|
|
|
|
716.8
|
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
(1,307.6
|
)
|
|
|
3,876.8
|
|
|
|
3,418.0
|
|
|
|
2,717.5
|
|
|
|
2,941.9
|
|
Income taxes
|
|
|
764.3
|
|
|
|
923.8
|
|
|
|
755.3
|
|
|
|
715.9
|
|
|
|
1,131.8
|
|
Net income (loss)
|
|
|
(2,071.9
|
)
|
|
|
2,953.0
|
|
|
|
2,662.7
|
|
|
|
1,979.6
|
1
|
|
|
1,810.1
|
|
Net income as a percent of sales
|
|
|
NM
|
|
|
|
15.8
|
%
|
|
|
17.0
|
%
|
|
|
13.5
|
%
|
|
|
13.1
|
%
|
Net income (loss) per share diluted
|
|
|
(1.89
|
)
|
|
|
2.71
|
|
|
|
2.45
|
|
|
|
1.81
|
|
|
|
1.66
|
|
Dividends declared per share
|
|
|
1.90
|
|
|
|
1.75
|
|
|
|
1.63
|
|
|
|
1.54
|
|
|
|
1.45
|
|
Weighted-average number of shares outstanding
diluted (thousands)
|
|
|
1,094,499
|
|
|
|
1,090,750
|
|
|
|
1,087,490
|
|
|
|
1,092,150
|
|
|
|
1,088,936
|
|
|
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
12,453.3
|
|
|
$
|
12,316.1
|
|
|
$
|
9,753.6
|
|
|
$
|
10,855.0
|
|
|
$
|
12,895.0
|
|
Current liabilities
|
|
|
13,109.7
|
|
|
|
5,436.8
|
|
|
|
5,254.0
|
|
|
|
5,884.8
|
|
|
|
7,762.2
|
|
Property and equipment net
|
|
|
8,626.3
|
|
|
|
8,575.1
|
|
|
|
8,152.3
|
|
|
|
7,912.5
|
|
|
|
7,550.9
|
|
Total assets
|
|
|
29,212.6
|
|
|
|
26,874.8
|
|
|
|
22,042.4
|
|
|
|
24,667.8
|
|
|
|
24,954.0
|
|
Long-term debt
|
|
|
4,615.7
|
|
|
|
4,593.5
|
|
|
|
3,494.4
|
|
|
|
5,763.5
|
|
|
|
4,491.9
|
|
Shareholders equity
|
|
|
6,735.3
|
|
|
|
13,503.9
|
|
|
|
10,820.2
|
|
|
|
10,631.4
|
|
|
|
10,759.4
|
|
|
|
|
|
|
|
Supplementary Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on shareholders equity
|
|
|
(16.3
|
)%
|
|
|
24.3
|
%
|
|
|
24.8
|
%
|
|
|
18.5
|
%
|
|
|
17.8
|
%
|
Return on assets
|
|
|
(7.5
|
)%
|
|
|
12.1
|
%
|
|
|
11.1
|
%
|
|
|
8.2
|
%
|
|
|
7.8
|
%
|
Capital expenditures
|
|
$
|
947.2
|
|
|
$
|
1,082.4
|
|
|
$
|
1,077.8
|
|
|
$
|
1,298.1
|
|
|
$
|
1,898.1
|
|
Depreciation and amortization
|
|
|
1,122.6
|
|
|
|
1,047.9
|
|
|
|
801.8
|
|
|
|
726.4
|
|
|
|
597.5
|
|
Effective tax rate
|
|
|
NM
|
3
|
|
|
23.8
|
%
|
|
|
22.1
|
%
|
|
|
26.3
|
%
|
|
|
38.5
|
%
|
Net sales per employee
|
|
$
|
504,000
|
|
|
$
|
459,000
|
|
|
$
|
378,000
|
|
|
$
|
344,000
|
|
|
$
|
311,000
|
|
Number of employees
|
|
|
40,450
|
|
|
|
40,600
|
|
|
|
41,500
|
|
|
|
42,600
|
|
|
|
44,500
|
|
Number of shareholders of record
|
|
|
39,800
|
|
|
|
41,700
|
|
|
|
44,800
|
|
|
|
50,800
|
|
|
|
52,400
|
|
|
|
|
|
|
|
NM Not Meaningful
|
|
|
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. |
|
2 |
|
Reflects the ICOS acquisition, effective January 29, 2007.
See Note 3 for additional information. |
|
3 |
|
We incurred tax expense of $764.3 million in 2008, despite
having a loss before income taxes of $1.31 billion. Our net
loss was driven by the $4.69 billion acquired IPR&D
charge for ImClone and the $1.48 billion |
-50-
|
|
|
|
|
Zyprexa investigation settlements. The IPR&D charge was not
tax deductible, and only a portion of the Zyprexa investigation
settlements was deductible. In addition, we recorded tax expense
associated with the ImClone acquisition, as well as a discrete
income tax benefit of $210.3 million for the resolution of
the IRS audit. |
|
4 |
|
The increase reflects the in-process research and development
expense of $4.69 billion associated with the ImClone
acquisition and $1.48 billion associated with the Zyprexa
investigation settlements. |
-51-
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 from the
date of purchase to be cash equivalents. The cost of these
investments approximates fair value. Included in cash
equivalents at December 31, 2008, is restricted cash of
$339.0 million related to the debt assumed with the ImClone
acquisition, which is expected to be paid in the first quarter
of 2009.
Inventories: We state all inventories at the lower of
cost or market. We use the
last-in,
first-out (LIFO) method for the majority of our inventories
located in the continental United States, or approximately
45 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:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Finished products
|
|
$
|
771.0
|
|
|
$
|
653.4
|
|
Work in process
|
|
|
1,657.1
|
|
|
|
1,803.0
|
|
Raw materials and supplies
|
|
|
236.3
|
|
|
|
202.7
|
|
|
|
|
|
|
|
|
|
|
2, 664.4
|
|
|
|
2,659.1
|
|
Reduction to LIFO cost
|
|
|
(171.2
|
)
|
|
|
(135.4
|
)
|
|
|
|
|
|
|
|
|
$
|
2,493.2
|
|
|
$
|
2,523.7
|
|
|
|
|
|
|
|
Investments: Substantially all of our investments in 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 fair value, 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 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
-52-
contracts offset losses and gains on the assets, liabilities,
and transactions being hedged. As derivative 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 may 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 net. 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 12 years. Amortization expense for 2008,
2007, and 2006 was $193.4 million, $172.8 million, and
$7.6 million before tax, respectively. The estimated
amortization expense for each of the five succeeding years
approximates $280 million before tax, per year.
Substantially all of the amortization expense is included in
cost of sales. See Note 3 for further discussion of
goodwill and other intangibles acquired in 2008 and 2007.
-53-
Goodwill and other intangible assets at December 31 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Goodwill
|
|
$
|
1,167.5
|
|
|
$
|
745.7
|
|
Developed product technology gross
|
|
|
3,035.4
|
|
|
|
1,767.5
|
|
Less accumulated amortization
|
|
|
(346.6
|
)
|
|
|
(162.6
|
)
|
|
|
|
|
|
|
Developed product technology net
|
|
|
2,688.8
|
|
|
|
1,604.9
|
|
Other intangibles gross
|
|
|
243.2
|
|
|
|
142.8
|
|
Less accumulated amortization
|
|
|
(45.4
|
)
|
|
|
(38.0
|
)
|
|
|
|
|
|
|
Other intangibles net
|
|
|
197.8
|
|
|
|
104.8
|
|
|
|
|
|
|
|
Total intangibles net
|
|
$
|
4,054.1
|
|
|
$
|
2,455.4
|
|
|
|
|
|
|
|
Goodwill and net other intangibles are reviewed to assess
recoverability at least annually and when certain impairment
indicators are present. No significant impairments occurred with
respect to the carrying value of our goodwill or other
intangible assets in 2008, 2007, or 2006.
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:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Land
|
|
$
|
219.0
|
|
|
$
|
180.0
|
|
Buildings
|
|
|
5,953.4
|
|
|
|
5,543.7
|
|
Equipment
|
|
|
8,045.2
|
|
|
|
7,454.9
|
|
Construction in progress
|
|
|
1,098.3
|
|
|
|
1,662.7
|
|
|
|
|
|
|
|
|
|
|
15,315.9
|
|
|
|
14,841.3
|
|
Less allowances for depreciation
|
|
|
(6,689.6
|
)
|
|
|
(6,266.2
|
)
|
|
|
|
|
|
|
|
|
$
|
8,626.3
|
|
|
$
|
8,575.1
|
|
|
|
|
|
|
|
Depreciation expense for 2008, 2007, and 2006 was
$731.7 million, $682.3 million, and
$627.4 million, respectively. Approximately
$48.2 million, $95.3 million, and $106.7 million
of interest costs were capitalized as part of property and
equipment in 2008, 2007, and 2006, respectively. Total rental
expense for all leases, including contingent rentals (not
material), amounted to approximately $327.4 million,
$294.2 million, and $293.6 million for 2008, 2007, and
2006, 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 with significant product liability
loss contingencies are accrued when probable and reasonably
estimable. A
-54-
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. However, for
substantially all of our currently marketed products, we are
completely self-insured for future product liability losses.
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 returns, 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 co-promotion services is based upon net sales
reported by our co-promotion 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 net.
Royalty revenue from licensees, which are based on third-party
sales of licensed products and technology, are recorded as
earned in accordance with the contract terms when third-party
sales can be reasonably measured and collection of the funds is
reasonably assured. This royalty revenue is included in net
sales.
Acquired 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 net: Other net consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Interest expense
|
|
$
|
228.3
|
|
|
$
|
228.3
|
|
|
$
|
238.1
|
|
Interest income
|
|
|
(210.7
|
)
|
|
|
(215.3
|
)
|
|
|
(261.9
|
)
|
Joint venture income
|
|
|
|
|
|
|
(11.0
|
)
|
|
|
(96.3
|
)
|
Other
|
|
|
8.5
|
|
|
|
(124.0
|
)
|
|
|
(117.7
|
)
|
|
|
|
|
|
|
|
|
$
|
26.1
|
|
|
$
|
(122.0
|
)
|
|
$
|
(237.8
|
)
|
|
|
|
|
|
|
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 3 for further discussion.
Income taxes: Deferred taxes are recognized for the
future tax effects of temporary differences between financial
and income tax reporting based on enacted tax laws and rates.
Federal income taxes are provided on the portion of the income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable.
We 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.
-55-
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. See Note 11 for further discussion.
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, 2007 and 2006 consolidated
financial statements and accompanying notes to conform with the
December 31, 2008 presentation.
|
|
Note 2:
|
Implementation
of New Financial Accounting Pronouncements
|
In March 2008, the Financial Accounting Standards Board (FASB)
issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB
Statement No. 133 (SFAS 161). SFAS 161 applies to
all derivative instruments and related hedged items accounted
for under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires
entities to provide enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments
and related hedged items are accounted for under Statement 133
and its related interpretations, and how derivative instruments
and related hedged items affect an entitys financial
position, results of operations, and cash flows. This Statement
is effective for us January 1, 2009.
We adopted the provisions of Emerging Issues Task Force (EITF)
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, on January 1, 2008. 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 to
be applied prospectively for contracts entered into on or after
the effective date.
We adopted the provisions of FASB Statement No. 157
(SFAS 157), Fair Value Measurements, on January 1,
2008. SFAS 157 defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about
fair value measurements. The implementation of this Statement
was not material to our consolidated financial position or
results of operations.
In December 2007, the FASB revised and issued Statement
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
-56-
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 Statement 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 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 will be material to our
consolidated financial position or results of operations.
In December 2007, the FASB ratified the consensus reached by the
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.
The implementation of this Issue will not be material to our
consolidated financial position or results of operations.
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.
During 2008 and 2007, we acquired several businesses. These
acquisitions were accounted for as business combinations under
the purchase method of accounting. Under the purchase method of
accounting, the assets acquired and liabilities assumed were
recorded at their respective fair values as of the acquisition
date in our consolidated financial statements. The determination
of estimated fair value required management to make significant
estimates and assumptions. The excess of the purchase price over
the fair value of the acquired net assets, where applicable, has
been recorded as goodwill. The results of operations of these
acquisitions are included in our consolidated financial
statements from the date of acquisition.
Most of these acquisitions included in-process research and
development (IPR&D), which represented compounds, new
indications, or line extensions under development that had not
yet achieved regulatory approval for marketing. There are
several methods that can be used to determine the estimated fair
value of the IPR&D acquired in a business combination. 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. In accordance with FIN 4,
Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, these
acquired IPR&D intangible assets totaling
$4.71 billion and $340.5 million in 2008 and 2007,
respectively, were expensed immediately subsequent to the
acquisition because the products had no alternative future use.
The ongoing activities with respect to each of these products in
development are not material to our research and development
expenses.
In addition to the acquisitions of businesses, we also acquired
several products in development. The acquired IPR&D related
to these products of $122.0 million and $405.1 million
in 2008 and 2007, respectively, was also written off by a charge
to income immediately upon acquisition because the products had
no alternative future use.
-57-
ImClone
Acquisition
On November 24, 2008, we acquired all of the outstanding
shares of ImClone Systems Inc. (ImClone), a biopharmaceutical
company focused on advancing oncology care, for a total purchase
price of approximately $6.5 billion, which was financed
through borrowings. This strategic combination will offer both
targeted therapies and oncolytic agents along with a pipeline
spanning all phases of clinical development. The combination
also expands our biotechnology capabilities.
The acquisition has been accounted for as a business combination
under the purchase method of accounting, resulting in goodwill
of $419.5 million. No portion of this goodwill is expected
to be deductible for tax purposes.
Allocation
of Purchase Price
We are currently determining the fair values of a significant
portion of these net assets. The purchase price has been
preliminarily allocated based on an estimate of the fair value
of assets acquired and liabilities assumed as of the date of
acquisition. The final determination of these fair values will
be completed as soon as possible but no later than one year from
the acquisition date. Although the final determination may
result in asset and liability fair values that are different
than the preliminary estimates of these amounts included herein,
it is not expected that those differences will be material to
our financial results.
|
|
|
|
|
Estimated Fair Value at November 24, 2008
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
982.9
|
|
Inventories
|
|
|
136.2
|
|
Developed product technology
(Erbitux)1
|
|
|
1,057.9
|
|
Goodwill
|
|
|
419.5
|
|
Property and equipment
|
|
|
339.8
|
|
Debt assumed
|
|
|
(600.0
|
)
|
Deferred taxes
|
|
|
(315.0
|
)
|
Deferred income
|
|
|
(127.7
|
)
|
Other assets and liabilities net
|
|
|
(72.1
|
)
|
Acquired in-process research and development
|
|
|
4,685.4
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
6,506.9
|
|
|
|
|
|
|
|
|
|
1 |
|
This intangible asset will be
amortized on a straight-line basis through 2023 in the U.S. and
2018 in the rest of the world.
|
All of the estimated fair value of the acquired IPR&D is
attributable to oncology-related products in development,
including $1.33 billion to line extensions for Erbitux. A
significant portion (81 percent) of the remaining value of
acquired IPR&D is attributable to two compounds in
Phase III clinical testing and one compound in
Phase II clinical testing, all targeted to treat various
forms of cancers. The discount rate we used in valuing the
acquired IPR&D projects was 13.5 percent, and the
charge for acquired IPR&D of $4.69 billion recorded in
the fourth quarter of 2008, was not deductible for tax purposes.
-58-
Pro
Forma Financial Information
The following unaudited pro forma financial information presents
the combined results of our operations with ImClone as if the
acquisition and the financing for the acquisition had occurred
as of the beginning of each of the years presented. We have
adjusted the historical consolidated financial information to
give effect to pro forma events that are directly attributable
to the acquisition. The unaudited pro forma financial
information is not necessarily indicative of what our
consolidated results of operations actually would have been had
we completed the acquisition at the beginning of each year. In
addition, the unaudited pro forma financial information does not
attempt to project the future results of operations of our
combined company.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Net sales
|
|
$
|
20,801.8
|
|
|
$
|
19,051.4
|
|
Net
income1
|
|
|
2,356.2
|
|
|
|
2,704.1
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2.15
|
|
|
|
2.48
|
|
|
|
|
1 |
|
The unaudited pro forma financial
information above excludes the non-recurring charge incurred for
acquired IPR&D of $4.69 billion and other
merger-related costs.
|
The unaudited pro forma financial information above reflects the
following:
|
|
|
a reduction of the amortization of ImClones deferred
income of $86.2 million (2008) and $98.4 million
(2007);
|
|
|
the increase of amortization expense of $78.8 million in
2008 and 2007 related to the estimated fair value of
identifiable intangible assets from the purchase price
allocation which are being amortized over their estimated useful
lives through 2023 in the U.S. and through 2018 in the rest
of the world. The change in depreciation expense related to the
change in the estimated fair value of property and equipment
from the book value at the time of the acquisition was not
material;
|
|
|
the adjustment to increase interest expense related to the debt
incurred to finance the acquisition and the adjustment to
decrease interest income related to the lost interest income on
the cash used to purchase ImClone by a total of
$301.0 million in 2008 and 2007;
|
|
|
the reduction of ImClones income tax expense to provide
for income taxes at the statutory tax rate and the adjustment to
income taxes for pro forma adjustments at the statutory tax
rate, totaling $139.3 million (2008) and
$189.5 million (2007). This excludes the acquired
IPR&D charge of $4.69 billion, which was not tax
deductible;
|
|
|
certain reclassifications to conform to accounting policies and
classifications that are consistent with our practices (e.g.,
ImClones license fees and milestones were classified as
other net, rather than net sales).
|
Posilac
On October 1, 2008, we acquired the worldwide rights to the
dairy cow supplement Posilac, as well as the products
supporting operations, from Monsanto Company (Monsanto). The
acquisition of Posilac provides us with a product that
complements those of our animal health business. Under the terms
of the agreement, we acquired the rights to the Posilac brand,
as well as the products U.S. sales force and
manufacturing facility, for an aggregate purchase price of
$403.9 million, which includes a $300.0 million
upfront payment, transaction costs, and an accrual for
contingent consideration to Monsanto based on estimated future
Posilac sales for which payment is considered likely beyond a
reasonable doubt.
This acquisition has been accounted for as a business
combination under the purchase method of accounting. We
allocated $204.3 million to identifiable intangible assets
related to Posilac, $167.6 million to inventories, and
$99.5 million of the purchase price to property and
equipment. We also assumed $67.5 million of liabilities.
Substantially all of the identifiable intangible assets are
being amortized over their estimated remaining useful lives of
20 years. The amount allocated to each of the intangible
assets acquired is deductible for tax purposes.
-59-
SGX
Pharmaceuticals, Inc.
On August 20, 2008, we acquired all of the outstanding
common stock of SGX Pharmaceuticals, Inc. (SGX), a collaboration
partner since 2003. The acquisition allows us to integrate
SGXs structure-guided drug discovery platform into our
drug discovery efforts. It also gives us access to
FASTtm,
SGXs fragment-based, protein structure guided drug
discovery technology, and to a portfolio of preclinical oncology
compounds focused on a number of kinase targets. Under the terms
of the agreement, the outstanding shares of SGX common stock
were redeemed for an aggregate purchase price, including
transaction costs, of $66.8 million.
The acquisition has been accounted for as a business combination
under the purchase method of accounting. We allocated
$29.6 million of the purchase price to deferred tax assets
and $28.0 million to acquired IPR&D. The acquired
IPR&D charge of $28.0 million was recorded in the
third quarter of 2008 and was not deductible for tax purposes.
ICOS
Corporation
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 sale of
Cialis for the treatment of erectile dysfunction. The
acquisition brought the full value of Cialis to us and enabled
us to realize operational efficiencies in the further
development, marketing, and selling of this product. The
aggregate cash purchase price of approximately $2.3 billion
was financed through borrowings.
The acquisition has been accounted for as a business combination
under the purchase method of accounting, resulting in goodwill
of $646.7 million. No portion of this goodwill was
deductible for tax purposes.
We determined the following estimated fair values for the assets
acquired and liabilities assumed as of the date of acquisition.
|
|
|
|
|
Estimated Fair Value at January 29, 2007
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
197.7
|
|
Developed product technology
(Cialis)1
|
|
|
1,659.9
|
|
Tax benefit of net operating losses
|
|
|
404.1
|
|
Goodwill
|
|
|
646.7
|
|
Long-term debt assumed
|
|
|
(275.6
|
)
|
Deferred taxes
|
|
|
(583.5
|
)
|
Other assets and liabilities net
|
|
|
(32.1
|
)
|
Acquired in-process research and development
|
|
|
303.5
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
2,320.7
|
|
|
|
|
|
|
|
|
|
1 |
|
This intangible asset will be
amortized over the remaining expected patent lives of Cialis in
each country; patent expiry dates range from 2015 to 2017.
|
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
acquired IPR&D. The remaining value of acquired IPR&D
represented several other products in development, with no one
asset comprising a significant portion of this value. The
discount rate we used in valuing the acquired IPR&D
projects was 20 percent, and the charge for acquired
IPR&D of $303.5 million recorded in the first quarter
of 2007 was not deductible for tax purposes.
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.
-60-
The acquisition of Hypnion provided 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 an acquired IPR&D
charge of $291.1 million, which 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 business. This acquisition has been
accounted for as a business combination under the purchase
method of accounting. We 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
other identifiable intangible assets are being amortized over
their estimated remaining useful lives of 10 to 20 years.
The $37.0 million allocated to acquired IPR&D was
charged to expense in the second quarter of 2007. Goodwill
resulting from this acquisition was fully allocated to the
animal health business segment. The amount allocated to each of
the intangible assets acquired, including goodwill of
$25.0 million and the acquired IPR&D of
$37.0 million, was deductible for tax purposes.
Product
Acquisitions
In June 2008, we entered into a licensing and development
agreement with TransPharma Medical Ltd. (TransPharma) to acquire
rights to its product and related drug delivery system for the
treatment of osteoporosis. The product, which is administered
transdermally using TransPharmas proprietary technology,
was in Phase II clinical testing, and had no alternative
future use. Under the arrangement, we also gained non-exclusive
access to TransPharmas ViaDerm drug delivery system for
the product. As with many development-phase products, launch of
the product, if approved, was not expected in the near term. The
charge of $35.0 million for acquired IPR&D related to
this arrangement was included as expense in the second quarter
of 2008 and is deductible for tax purposes.
In January 2008, our agreement with BioMS Medical Corp. to
acquire the rights to its compound for the treatment of multiple
sclerosis became effective. At the inception of this agreement,
this compound was in the development stage (Phase III
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. The charge of
$87.0 million for acquired IPR&D related to this
arrangement was included as expense in the first quarter of 2008
and is deductible for tax purposes.
In October 2007, we entered into an agreement with Glenmark
Pharmaceuticals Limited India to acquire the rights to a
portfolio of transient receptor potential vanilloid sub-family 1
(TRPV 1) antagonist molecules, including a clinical-phase
compound. The compound was 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. The charge of $45.0 million for acquired
IPR&D was deductible for tax purposes and was included as
expense in the fourth quarter of 2007. Development of this
compound has been suspended.
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. The charge of
$44.0 million for acquired IPR&D was 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. The charge of
$25.0 million
-61-
for acquired IPR&D related to this arrangement was included
as expense in the first quarter of 2007 and was deductible for
tax purposes.
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.
We often enter into collaborative arrangements to develop and
commercialize drug candidates. Collaborative activities might
include research and development, marketing and selling
(including promotional activities and physician detailing),
manufacturing, and distribution. These collaborations often
require milestone and royalty or profit share payments,
contingent upon the occurrence of certain future events linked
to the success of the asset in development, as well as expense
reimbursements or payments to the third party. Each
collaboration is unique in nature and our more significant
arrangements are discussed below.
Erbitux
Prior to our acquisition, ImClone entered into several
collaborations with respect to Erbitux, a product approved to
fight cancer, while still in its development phase. The most
significant collaborations operate in these geographic
territories: the U.S., Japan, and Canada (Bristol-Myers Squibb);
and worldwide except the U.S. and Canada (Merck KGaA). The
agreements are expected to expire in 2018, upon which all of the
rights with respect to Erbitux in the U.S. and Canada
return to us.
Bristol-Myers
Squibb Company
Pursuant to a commercial agreement with Bristol-Myers Squibb
Company and E.R. Squibb (collectively, BMS), relating to
Erbitux, ImClone is co-developing and co-promoting Erbitux in
North America with BMS, and is co-developing and co-promoting
Erbitux in Japan with BMS. The companies had jointly agreed to
expand the investment in the ongoing clinical development plan
for Erbitux to further explore its use in additional tumor
types. Under this arrangement, Erbitux research and development
and other costs, up to threshold amounts, are the sole
responsibility of BMS, with costs in excess of the thresholds
shared by both companies according to a predetermined ratio.
Responsibilities associated with clinical and other ongoing
studies are apportioned between the parties as determined
pursuant to the agreement. Collaborative reimbursements received
by ImClone for supply of product for research and development,
for a portion of royalty expenses, and for a portion of
marketing, selling, and administrative expenses, are recorded as
a reduction to the respective expense line items on the
consolidated statement of operations. Royalty expense paid to
third parties is included in costs of sales. We receive a
distribution fee in the form of a royalty from BMS, based on a
percentage of net sales in the U.S. and Canada, which is
recorded in net sales.
We are responsible for the manufacture and supply of all
requirements of Erbitux in bulk-form active pharmaceutical
ingredient (API) for clinical and commercial use in the
territory, and BMS will purchase all of its requirements of API
for commercial use from us, subject to certain stipulations per
the agreement. Sales of Erbitux to BMS for commercial use are
reported in net sales.
Merck
KGaA
A development and license agreement between ImClone and Merck
KGaA (Merck) with respect to Erbitux granted Merck exclusive
rights to market Erbitux outside of North America and
co-exclusive rights with BMS in Japan. Merck also has rights to
manufacture Erbitux for supply in its territory. We manufacture
and provide a portion of Mercks requirements for API; we
also receive a royalty on the sales of Erbitux outside of the
U.S. and Canada, both of which are included in net sales as
earned. Collaborative reimbursements received for supply of
product for research and development, reimbursement of a portion
of royalty expense, and marketing, selling, and administrative
expenses are recorded as a reduction to the respective expense
line items on the consolidated statement of operations. Royalty
expense paid to third parties is included in cost of sales.
-62-
Exenatide
We are in a collaborative arrangement with Amylin
Pharmaceuticals (Amylin) for the joint development, marketing,
and selling of Byetta and other forms of exenatide such as
exenatide once weekly. Byetta (exenatide injection) is presently
approved as an adjunctive therapy to improve glycemic control in
patients with type 2 diabetes who have not achieved adequate
glycemic control using metformin, a sulfonylurea
and/or a
thiazolidinediene (U.S. only), three common oral therapies
for type 2 diabetes. Lilly and Amylin are co-promoting exenatide
in the U.S. Amylin is responsible for manufacturing and
primarily utilizes third-party contract manufacturing
organizations to supply Byetta. However, Lilly is manufacturing
Byetta pen delivery devices for Amylin. Lilly is responsible for
development and commercialization costs outside the U.S.
Under the terms of our collaboration with Amylin, we report as
revenue our 50 percent share of gross margin on sales in
the U.S., 100 percent of sales outside the U.S., and our
sales of Byetta pen delivery devices to Amylin. We recorded
revenues of $396.1 million, $330.7 million, and
$219.0 million in 2008, 2007, and 2006, respectively, for
Byetta. We pay Amylin a percentage of the gross margin of
exenatide sales outside of the U.S., and these costs are
recorded in cost of sales. Under the
50/50
profit-sharing arrangement for the U.S., in addition to
recording as revenue our 50 percent share of
exenatides gross margin, we also report 50 percent of
U.S. research and development costs, and marketing and
selling costs in the research and development and marketing,
selling, and administrative line items, respectively, on the
consolidated statements of income.
Exenatide once weekly is presently in Phase III clinical
trials and has not received regulatory approval. Amylin is
constructing and will operate a manufacturing facility for
exenatide once weekly, and we have entered into a supply
agreement in which Amylin will supply exenatide once weekly
product to us for sales outside the U.S. The estimated
total cost of the facility is approximately $550 million.
In 2008, we paid $125.0 million to Amylin, which we will
amortize to cost of sales over the estimated life of the supply
agreement beginning with product launch. We would be required to
reimburse Amylin for a portion of any future impairment of this
facility, recognized in accordance with GAAP. A portion of the
$125.0 million payment we made to Amylin would be
creditable against any amount we would owe as a result of
impairment. We have also agreed to loan up to
$165.0 million to Amylin at an indexed rate beginning
December 1, 2009, and any borrowings have to be repaid by
June 30, 2014.
Cymbalta
Boehringer
Ingelheim
We are in a collaborative arrangement with Boehringer Ingelheim
(BI) to market and promote Cymbalta, a product for the treatment
of major depressive disorder, diabetic peripheral neuropathic
pain, generalized anxiety disorder, and fibromyalgia, outside
the U.S. Pursuant to the terms of the agreement, we
generally share equally in development, marketing, and selling
expenses, and pay BI a commission on sales in the co-promotional
territories. We manufacture the product for all territories.
Collaborative reimbursements or payments for the cost sharing of
marketing, selling, and administrative expenses are recorded in
the respective expense line items in the consolidated statement
of operations. The commission paid to BI is recognized in
marketing, selling, and administrative expenses.
Quintiles
We are in a collaborative arrangement with Quintiles
Transnational Corp. (Quintiles) to market and promote Cymbalta
in the U.S. Pursuant to the terms of the agreement,
Quintiles shares in the costs to co-promote Cymbalta with us. In
exchange, Quintiles receives a payment based upon net sales.
According to the current agreement, Quintiles obligation
to promote Cymbalta expires in 2009, and we will pay a lower
rate on net sales for three years post their promotion efforts.
The royalties paid to Quintiles are recorded in marketing,
selling, and administrative expenses.
-63-
Prasugrel
We are in a collaborative arrangement with Daiichi Sankyo
Company, Limited (D-S) to develop, market, and promote
prasugrel, an antiplatelet agent for the treatment of patients
with acute coronary syndromes (ACS) who are being managed with
an artery-opening procedure known as percutaneous coronary
intervention (PCI). Prasugrel was approved for marketing by the
European Commission under the tradename Efient in February 2009.
We have submitted a new drug application to the FDA and are
currently awaiting its decision. Within this arrangement, we
have agreed to co-promote under the same trademark in certain
territories (including the U.S. and five major European
markets), while we have exclusive marketing rights in certain
other territories. D-S has exclusive marketing rights in Japan.
Pursuant to the terms of the agreement, we paid D-S an upfront
license fee and agreed to pay future success milestones. Both
parties share in the costs of the development and marketing in
the co-promotion territories and share in the profits according
to the terms specified in the agreement. D-S is responsible for
supplying bulk product, but we will produce the finished product
for our exclusive and co-promotion territories. Profits in the
U.S. and other co-promotion territories will be shared
according to the agreement. In our exclusive territories, we
will pay D-S a royalty specific to those territories. Profit
share payments made to D-S will be recorded as marketing,
selling, and administrative expenses. All royalties paid to D-S
will be recorded in cost of sales.
TPG-Axon
Capital
In 2008, we entered into an agreement with an affiliate of
TPG-Axon Capital (TPG) for the Phase III development of our
gamma-secretase inhibitor and our A-beta antibody, our two lead
molecules for the treatment of mild to moderate Alzheimers
disease. Pursuant to the terms of the agreement, both we and TPG
will provide funding for the Alzheimers clinical trials.
Funding from TPG will not exceed $325 million and could
extend into 2014. In exchange for their funding, TPG may receive
success-based milestones totaling $330 million and mid- to
high-single digit royalties that are contingent upon the
successful development of the Alzheimers treatments. The
royalties will be paid for approximately eight years after
launch of a product. Reimbursements received from TPG for their
portion of research and development costs incurred related to
the Alzheimers treatments are recorded as a reduction to
the research and development expense line item on the
consolidated statement of operations. The reimbursement from TPG
is not expected to be material in any period.
|
|
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 $80.0 million in the fourth quarter of 2008.
These charges were the result of decisions approved by
management in the fourth quarter as well as previously announced
strategic decisions. The primary components of this charge
include non-cash asset impairments of $35.1 million for the
write down of impaired assets, all of which have no future use,
and other charges of $44.9 million, primarily related to
severance and environmental cleanup charges in connection with
previously announced strategic decisions made in prior periods.
We anticipate that substantially all of these costs will be paid
during the first quarter of 2009.
As discussed further in Note 14, in the third quarter of
2008, we recorded a charge of $1.48 billion related to the
Zyprexa investigations led by the U.S. Attorney for the
Eastern District of Pennsylvania, as well as the resolution of a
multi-state investigation regarding Zyprexa involving
32 states and the District of Columbia.
Further, in the third quarter of 2008, as a result of our
previously announced agreements with Covance Inc. (Covance),
Quintiles Transnational Corp. (Quintiles), and Ingenix
Pharmaceutical Services, Inc., doing business as i3 Statprobe
(i3), and as part of our efforts to transform into a more
flexible organization, we recognized asset impairments,
restructuring, and other special charges of $182.4 million.
We sold our Greenfield, Indiana site to Covance, a global drug
development services firm, and entered into a
10-year
service agreement under which Covance will provide preclinical
toxicology work and perform additional
-64-
clinical trials for us as well as operate the site to meet our
needs and those of other pharmaceutical industry clients. In
addition, we signed agreements with Quintiles for clinical trial
monitoring services and with i3 for clinical data management
services. Components of the third-quarter restructuring charge
include non-cash charges of $148.3 million primarily
related to the loss on sale of assets sold to Covance, severance
costs of $27.8 million, and exit costs of
$6.3 million. Substantially all of these costs were paid in
2008.
In the second quarter of 2008, we recognized restructuring and
other special charges of $88.9 million. In addition, we
recognized non-cash charges of $57.1 million for the write
down of impaired manufacturing assets that had no future use,
which were included in cost of sales. In April 2008, we
announced a voluntary exit program that was offered to employees
primarily in manufacturing. Components of the second-quarter
restructuring charge include total severance costs of
$53.5 million related to these programs and
$35.4 million related to exit costs incurred during the
second quarter in connection with previously announced strategic
decisions made in prior periods. Substantially all of these
costs were paid by the end of July 2008.
In March 2008, we terminated development of our AIR Insulin
program, which was being conducted in collaboration with
Alkermes, Inc. The program had been in Phase III clinical
development as a potential treatment for type 1 and type 2
diabetes. This decision was not a result of any observations
during AIR Insulin trials relating to the safety of the product,
but rather was a result of increasing uncertainties in the
regulatory environment, and a thorough evaluation of the
evolving commercial and clinical potential of the product
compared to existing medical therapies. As a result of this
decision, we halted our ongoing clinical studies and
transitioned the AIR Insulin patients in these studies to other
appropriate therapies. We implemented a patient program in the
U.S., and other regions of the world where allowed, to provide
clinical trial participants with appropriate financial support
to fund their medications and diagnostic supplies through the
end of 2008.
We recognized asset impairment, restructuring, and other special
charges of $145.7 million in the first quarter of 2008.
These charges were primarily related to the decision to
terminate development of AIR Insulin. Components of these
charges included non-cash charges of $40.9 million for the
write down of impaired manufacturing assets that had no use
beyond the AIR Insulin program, as well as charges of
$91.7 million for estimated contractual obligations and
wind-down costs associated with the termination of clinical
trials and certain development activities, and costs associated
with the patient program to transition participants from AIR
Insulin. This amount includes an estimate of Alkermes
wind-down costs for which we were contractually obligated. The
wind-down activities and patient programs were substantially
complete by the end of 2008. The remaining component of these
charges, $13.1 million, is related to exit costs incurred
in the first quarter of 2008 in connection with previously
announced strategic decisions made in prior periods.
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 were
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 related 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 these charges
related to the non-cash asset impairment was $67.6 million,
and were 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
-65-
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.
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 and $494.9 million in
2007 and 2006, 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 with this concentration is mitigated by our
ongoing credit review procedures and insurance. We place
substantially all of our interest-bearing investments with major
financial institutions, in U.S. government securities, or
with top-rated corporate issuers. At December 31, 2008, our
investments in debt securities were comprised of 41 percent
corporate securities, 34 percent asset-backed securities,
and 25 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
The following table summarizes certain fair value information at
December 31 for assets and liabilities measured at fair value on
a recurring basis, as well as the carrying amount of certain
other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
Description
|
|
Amount
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
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|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
429.4
|
|
|
$
|
212.3
|
|
|
$
|
217.1
|
|
|
$
|
|
|
|
$
|
429.4
|
|
|
$
|
1,610.7
|
|
|
$
|
1,610.7
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
1,194.9
|
|
|
$
|
179.2
|
|
|
$
|
1,004.6
|
|
|
$
|
11.1
|
|
|
$
|
1,194.9
|
|
|
$
|
408.3
|
|
|
$
|
408.3
|
|
Marketable equity
|
|
|
221.9
|
|
|
|
221.9
|
|
|
|
|
|
|
|
|
|
|
|
221.9
|
|
|
|
70.0
|
|
|
|
70.0
|
|
Equity method and other investments
|
|
|
127.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA
|
|
|
|
98.8
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,544.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
577.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$
|
(5,036.1
|
)
|
|
|
|
|
|
$
|
(5,180.1
|
)
|
|
|
|
|
|
$
|
(5,180.1
|
)
|
|
$
|
(4,988.6
|
)
|
|
$
|
(5,056.9
|
)
|
Risk-management instruments asset
|
|
|
455.0
|
|
|
|
|
|
|
|
455.0
|
|
|
|
|
|
|
|
455.0
|
|
|
|
23.6
|
|
|
|
23.6
|
|
NA Not available
-66-
We determine fair values based on a market approach using quoted
market values, significant other observable inputs for identical
or comparable assets or liabilities, or discounted cash flow
analyses, principally for long-term debt. The fair value of
equity method and other investments is not readily available.
Approximately $1.1 billion of our investments in debt
securities mature within five years.
A summary of the fair value of available-for-sale securities in
an unrealized gain or loss position and the amount of unrealized
gains and losses (pretax) in other comprehensive income at
December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Unrealized gross gains
|
|
$
|
69.9
|
|
|
$
|
43.5
|
|
Unrealized gross losses
|
|
|
239.0
|
|
|
|
22.0
|
|
Fair value of securities in an unrealized gain position
|
|
|
767.5
|
|
|
|
921.7
|
|
Fair value of securities in an unrealized loss position
|
|
|
1,046.1
|
|
|
|
964.6
|
|
The securities in an unrealized loss position are comprised of
fixed-rate debt securities of varying maturities. The value of
fixed income securities is sensitive to changes to the yield
curve and other market conditions which led to the decline in
value during 2008. Approximately 90 percent of the
securities in a loss position are investment-grade debt
securities. The majority of these securities first moved into an
unrealized loss position during 2008. At this time, there is no
indication of default on interest or principal payments for
asset-backed securities. We have the intent and ability to hold
the securities in a loss position until the market values
recover or all of the underlying cash flows have been received
and we have concluded that no other-than-temporary loss exists
at December 31, 2008. The fair values of all of our auction
rate securities and collateralized debt obligations held at
December 31, 2008 were determined using Level 3
inputs. We do not hold securities issued by structured
investment vehicles at December 31, 2008.
The net adjustment to unrealized gains and losses (net of tax)
on available-for-sale securities increased (decreased) other
comprehensive income by $(125.8) million,
$(5.4) million, and $0.3 million in 2008, 2007, and
2006, respectively. Activity related to our available-for-sale
investment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
1,876.4
|
|
|
$
|
1,212.1
|
|
|
$
|
2,848.4
|
|
Realized gross gains on sales
|
|
|
45.7
|
|
|
|
21.4
|
|
|
|
63.5
|
|
Realized gross losses on sales
|
|
|
8.7
|
|
|
|
6.1
|
|
|
|
9.0
|
|
During the years ended December 31, 2008, 2007, and 2006,
net losses related to ineffectiveness and net losses related to
the portion of our risk-management hedging instruments, fair
value and cash flow hedges, excluded from the assessment of
effectiveness were not material.
We expect to reclassify an estimated $10.2 million of
pretax net losses on cash flow hedges of the variability in
expected future interest payments on floating rate debt from
accumulated other comprehensive loss to earnings during 2009.
Available-for-sale investment securities are classified as
long-term investments when they are likely to be held for more
than one year because of our intent to hold securities in an
unrealized loss position until the market values recover or all
of the underlying cash flows have been received.
-67-
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
4.50 to 7.13 percent notes (due 2012 2037)
|
|
$
|
3,987.4
|
|
|
$
|
3,987.4
|
|
Floating rate bonds (due 2037)
|
|
|
400.0
|
|
|
|
400.0
|
|
2.90 percent notes (due 2008)
|
|
|
|
|
|
|
300.0
|
|
Other, including capitalized leases
|
|
|
116.8
|
|
|
|
222.0
|
|
SFAS 133 fair value adjustment
|
|
|
531.9
|
|
|
|
79.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,036.1
|
|
|
|
4,988.6
|
|
Less current portion
|
|
|
(420.4
|
)
|
|
|
(395.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,615.7
|
|
|
$
|
4,593.5
|
|
|
|
|
|
|
|
|
|
|
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).
The $400.0 million of floating rate bonds outstanding at
December 31, 2008 are due in 2037 and have variable
interest rates at LIBOR plus our six-month credit spread,
adjusted semiannually (total of 4.10 percent at
December 31, 2008). We pay interest monthly on this
borrowing program. We expect to refinance the bonds in 2009 and
have classified them as current at December 31, 2008.
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 balance was $81.9 million and
$90.6 million at December 31, 2008 and 2007,
respectively, and is included in Other in the table above.
The aggregate amounts of maturities on long-term debt for the
next five years are as follows: 2009, $420.4 million; 2010,
$19.7 million; 2011, $13.1 million; 2012,
$510.8 million; and 2013, $11.1 million.
At December 31, 2008 and 2007, short-term borrowings
included $5.43 billion and $18.6 million,
respectively, of notes payable to banks and commercial paper.
Commercial paper was issued in late 2008 for the acquisition of
ImClone. At December 31, 2008, we have $1.24 billion
of unused committed bank credit facilities, $1.20 billion
of which backs our commercial paper program. Additionally, in
November 2008, we obtained a one-year short-term revolving
credit facility in the amount of $4.00 billion as
back-up,
alternative financing. Compensating balances and commitment fees
are not material, and there are no conditions that are probable
of occurring under which the lines may be withdrawn.
We have converted approximately 50 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, 2008
and 2007, including the effects of interest rate swaps for
hedged debt obligations, were 4.77 percent and
5.47 percent, respectively.
In 2008, 2007, and 2006, cash payments of interest on borrowings
totaled $203.1 million, $159.2 million, and
$305.7 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.
-68-
Stock-based compensation expense in the amount of
$255.3 million, $282.0 million, and
$359.3 million was recognized in 2008, 2007, and 2006,
respectively, as well as related tax benefits of
$88.6 million, $96.4 million, and $115.9 million,
respectively. Our stock-based compensation expense consists
primarily of performance awards (PAs), shareholder value awards
(SVAs), 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, 2008, additional stock options, PAs, SVAs,
or restricted stock grants may be granted under the 2002 Lilly
Stock Plan for not more than 88.0 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 2008, 2007, and
2006 were $51.22, $54.23, and $56.18, 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 2.5 million shares,
2.3 million shares, and 1.7 million shares were issued
in 2008, 2007, and 2006, respectively. Approximately
2.8 million shares are expected to be issued in 2009.
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 weighted-average
fair values of the SVA units granted during 2008 and 2007 were
$43.46 and $49.85, respectively, determined using the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
3.00%
|
|
|
|
2.75%
|
|
Risk-free interest rate
|
|
|
2.05% - 2.29%
|
|
|
|
4.81% - 5.16%
|
|
Range of volatilities
|
|
|
20.48% - 21.48%
|
|
|
|
22.54% - 23.90%
|
|
-69-
A summary of the SVA activity is presented below:
|
|
|
|
|
|
|
Units Attributable to SVAs
|
|
|
|
(In thousands)
|
|
|
Outstanding at January 1, 2007
|
|
|
|
|
Granted
|
|
|
969
|
|
Issued
|
|
|
|
|
Forfeited or expired
|
|
|
(47
|
)
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
922
|
|
Granted
|
|
|
1,282
|
|
Issued
|
|
|
|
|
Forfeited or expired
|
|
|
(301
|
)
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
1,903
|
|
|
|
|
|
|
The maximum number of shares that could ultimately be issued
upon vesting of the SVA units outstanding at December 31,
2008, is 2.7 million. As of December 31, 2008, the
total remaining unrecognized compensation cost related to
nonvested SVAs amounted to $46.7 million, which will be
amortized over the weighted-average remaining requisite service
period of 21.6 months.
Stock
Option Program
Stock options were granted in 2006 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
2008 or 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 grants is derived from the output of
the lattice model. The weighted-average fair values of the
individual options granted during 2006 were $15.61, determined
using the following assumptions:
|
|
|
|
|
|
|
2006
|
|
|
Dividend yield
|
|
|
2.0%
|
|
Weighted-average volatility
|
|
|
25.0%
|
|
Range of volatilities
|
|
|
24.8%-27.0%
|
|
Risk-free interest rate
|
|
|
4.6%-4.8%
|
|
Weighted-average expected life
|
|
|
7 years
|
|
Stock option activity during 2008 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, 2008
|
|
|
81,149
|
|
|
$
|
69.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(145
|
)
|
|
|
19.69
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(8,979
|
)
|
|
|
72.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
72,025
|
|
|
|
69.35
|
|
|
|
3.6
|
|
|
$
|
1.9
|
|
Exercisable at December 31, 2008
|
|
|
68,033
|
|
|
|
70.04
|
|
|
|
3.4
|
|
|
|
1.9
|
|
-70-
A summary of the status of nonvested options as of
December 31, 2008, and changes during the year then ended,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Grant Date
|
|
|
|
(in thousands)
|
|
|
Fair Value
|
|
|
|
|
|
|
Nonvested at January 1, 2008
|
|
|
9,049
|
|
|
$
|
16.47
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(5,045
|
)
|
|
|
17.51
|
|
Forfeited
|
|
|
(12
|
)
|
|
|
15.76
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2008
|
|
|
3,992
|
|
|
|
15.26
|
|
|
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during 2008, 2007, and
2006 amounted to $4.8 million, $1.5 million, and
$40.8 million, respectively. The total grant date fair
value of options vested during 2008, 2007, and 2006 amounted to
$84.1 million, $381.8 million, and
$249.1 million, respectively. We received cash of
$2.9 million, $15.2 million, and $66.2 million
from exercises of stock options during 2008, 2007, and 2006,
respectively, and recognized related tax benefits of
$0.5 million, $0.4 million, and $11.3 million
during those same years.
As of December 31, 2008, there was no significant remaining
unrecognized compensation cost related to non-vested stock
options.
|
|
Note 9:
|
Other
Assets and Other Liabilities
|
Our other receivables include receivables from our collaboration
partners and a variety of other items. The decrease in other
receivables is primarily attributable to a decrease in income
tax receivable, and lower insurance recoverables.
Our sundry assets primarily include our deferred tax assets
(Note 12), capitalized computer software, and the fair
value of our interest rate swaps. The increase in sundry assets
is primarily attributable to an increase in deferred tax assets
and an increase in the fair value of our interest rate swaps.
Our other current liabilities include product litigation, tax
liabilities, and a variety of other items. The increase in other
current liabilities is caused primarily by an increase in
product litigation liabilities, specifically, the
$1.42 billion related to the EDPA settlements discussed in
Note 14, and an increase in current deferred taxes.
Our other noncurrent liabilities include deferred income from
our collaboration and out-licensing arrangements, the long-term
portion of our estimated product return liabilities, product
litigation, and a variety of other items. The increase in other
noncurrent liabilities is primarily due to an increase in
deferred income attributable to our 2008 acquisitions and other
business development arrangements.
-71-
|
|
Note 10:
|
Shareholders
Equity
|
Changes in certain components of shareholders equity were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
Common Stock in Treasury
|
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Capital
|
|
|
ESOP
|
|
|
Deferred Costs
|
|
|
(in thousands)
|
|
|
Amount
|
|
|
|
|
Balance at January 1, 2006
|
|
$
|
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
|
|
Net loss
|
|
|
|
|
|
|
(2,071.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share: $1.90
|
|
|
|
|
|
|
(2,079.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(170
|
)
|
|
|
(11.1
|
)
|
Issuance of stock under employee stock plans net
|
|
|
(84.9
|
)
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
9.8
|
|
Stock-based compensation
|
|
|
255.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
11.9
|
|
|
|
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
3,976.6
|
|
|
$
|
7,654.9
|
|
|
$
|
(86.3
|
)
|
|
|
889
|
|
|
$
|
99.2
|
|
|
|
|
|
|
|
As of December 31, 2008, we have purchased
$2.58 billion of our announced $3.0 billion share
repurchase program. We acquired approximately 2.1 million
shares in 2006 under this program. No shares were repurchased in
2008 or 2007.
We have 5 million authorized shares of preferred stock. As
of December 31, 2008 and 2007, no preferred stock has been
issued.
We have funded an employee benefit trust with 40 million
shares of Lilly common stock to provide a source of funds to
assist us in meeting our obligations under various employee
benefit plans. The funding had no net impact on
shareholders equity as we consolidate the employee benefit
trust. The cost basis of the shares held in the trust was
$2.64 billion and is shown as a reduction in
shareholders equity, which offsets the resulting
-72-
increases of $2.61 billion in additional paid-in capital
and $25.0 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 2008, 2007, or 2006. In the first quarter of 2009, we
contributed an additional 10.0 million shares to the trust.
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 $200.0 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.
|
|
Note 11:
|
Earnings
(Loss) Per Share
|
Following is a reconciliation of the denominators used in
computing earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
(Shares in thousands)
|
|
|
Income (loss) available to common shareholders
|
|
|
$(2,071.9
|
)
|
|
|
$2,953.0
|
|
|
|
$2,662.7
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding, including
incremental shares
|
|
|
1,094,499
|
|
|
|
1,090,430
|
|
|
|
1,086,239
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
$(1.89
|
)
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
1,092,041
|
|
|
|
1,088,929
|
|
|
|
1,085,337
|
|
Stock options and other incremental shares
|
|
|
2,458
|
|
|
|
1,821
|
|
|
|
2,153
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
diluted
|
|
|
1,094,499
|
|
|
|
1,090,750
|
|
|
|
1,087,490
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
$(1.89
|
)
|
|
|
$2.71
|
|
|
|
$2.45
|
|
|
|
|
|
|
|
Following is the composition of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(207.6
|
)
|
|
$
|
489.5
|
|
|
$
|
197.7
|
|
Foreign
|
|
|
623.6
|
|
|
|
412.1
|
|
|
|
390.6
|
|
State
|
|
|
(44.6
|
)
|
|
|
27.7
|
|
|
|
(25.2
|
)
|
|
|
|
|
|
|
|
|
|
371.4
|
|
|
|
929.3
|
|
|
|
563.1
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
363.0
|
|
|
|
53.0
|
|
|
|
78.3
|
|
Foreign
|
|
|
23.7
|
|
|
|
(27.9
|
)
|
|
|
113.5
|
|
State
|
|
|
6.2
|
|
|
|
(30.6
|
)
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
392.9
|
|
|
|
(5.5
|
)
|
|
|
192.2
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
764.3
|
|
|
$
|
923.8
|
|
|
$
|
755.3
|
|
|
|
|
|
|
|
-73-
Significant components of our deferred tax assets and
liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
1,154.6
|
|
|
$
|
654.8
|
|
Tax credit carryforwards and carrybacks
|
|
|
755.0
|
|
|
|
361.5
|
|
Intercompany profit in inventories
|
|
|
585.0
|
|
|
|
810.5
|
|
Tax loss carryforwards and carrybacks
|
|
|
562.3
|
|
|
|
712.2
|
|
Contingencies
|
|
|
345.2
|
|
|
|
49.3
|
|
Asset purchases
|
|
|
251.5
|
|
|
|
174.6
|
|
Debt
|
|
|
211.6
|
|
|
|
27.7
|
|
Sale of intangibles
|
|
|
117.9
|
|
|
|
69.1
|
|
Product return reserves
|
|
|
100.8
|
|
|
|
110.0
|
|
Other
|
|
|
313.6
|
|
|
|
302.1
|
|
|
|
|
|
|
|
|
|
|
4,397.5
|
|
|
|
3,271.8
|
|
Valuation allowances
|
|
|
(845.4
|
)
|
|
|
(354.2
|
)
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,552.1
|
|
|
|
2,917.6
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(860.2
|
)
|
|
|
(532.5
|
)
|
Property and equipment
|
|
|
(620.7
|
)
|
|
|
(662.2
|
)
|
Inventories
|
|
|
(542.7
|
)
|
|
|
(432.4
|
)
|
Unremitted earnings
|
|
|
(467.3
|
)
|
|
|
(65.3
|
)
|
Prepaid employee benefits
|
|
|
|
|
|
|
(675.9
|
)
|
Other
|
|
|
(287.8
|
)
|
|
|
(133.0
|
)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,778.7
|
)
|
|
|
(2,501.3
|
)
|
|
|
|
|
|
|
Deferred tax assets net
|
|
$
|
773.4
|
|
|
$
|
416.3
|
|
|
|
|
|
|
|
At December 31, 2008, we had net operating losses and other
carryforwards for international and U.S. income tax
purposes of $1.24 billion: $84.3 million will expire
within 10 years; $1.09 billion will expire between 10
and 20 years; and $63.1 million of the carryforwards
will never expire. The primary component of the remaining
portion of the deferred tax asset for tax loss carryforwards and
carrybacks is related to net operating losses for state income
tax purposes that are fully reserved. We also have tax credit
carryforwards and carrybacks of $755.0 million available to
reduce future income taxes; $295.1 million will be carried
back; $84.1 million of the tax credit carryforwards will
expire after 5 years; and $13.0 million of the tax
credit carryforwards will never expire. The remaining portion of
the tax credit carryforwards is related to federal tax credits
of $97.4 million and state tax credits of
$265.4 million, both of which are fully reserved.
Domestic and Puerto Rican companies generated the entire
consolidated loss before income taxes in 2008 and contributed
approximately 7 percent and 18 percent in 2007 and
2006, respectively, to consolidated income before income taxes.
We have a subsidiary operating in Puerto Rico under a tax
incentive grant. The current tax incentive grant will not expire
prior to 2017.
At December 31, 2008, we had an aggregate of
$13.31 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 additional income tax expense at
approximately the U.S. statutory rate.
Cash payments (refunds) of income taxes totaled
$(52.0) million, $1.01 billion, and
$864.0 million in 2008, 2007, and 2006, respectively.
-74-
Following is a reconciliation of the income tax expense
(benefit) applying the U.S. federal statutory rate to
income (loss) before income taxes to reported income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Income tax (benefit) at the U.S. federal statutory tax rate
|
|
$
|
(457.7
|
)
|
|
$
|
1,356.9
|
|
|
$
|
1,196.3
|
|
Add (deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions and non-deductible acquired in-process research and
development
|
|
|
1,819.4
|
|
|
|
208.1
|
|
|
|
|
|
International operations, including Puerto Rico
|
|
|
(641.3
|
)
|
|
|
(450.7
|
)
|
|
|
(229.9
|
)
|
Government investigation charges
|
|
|
359.3
|
|
|
|
|
|
|
|
|
|
IRS audit conclusion
|
|
|
(210.3
|
)
|
|
|
|
|
|
|
|
|
General business credits
|
|
|
(58.0
|
)
|
|
|
(60.3
|
)
|
|
|
(47.6
|
)
|
Sundry
|
|
|
(47.1
|
)
|
|
|
(130.2
|
)
|
|
|
(163.5
|
)
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
764.3
|
|
|
$
|
923.8
|
|
|
$
|
755.3
|
|
|
|
|
|
|
|
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 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:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Beginning balance at January 1
|
|
$
|
1,657.4
|
|
|
$
|
1,470.8
|
|
Additions based on tax positions related to the current year
|
|
|
115.6
|
|
|
|
206.4
|
|
Additions for tax positions of prior years
|
|
|
288.8
|
|
|
|
35.6
|
|
Reductions for tax positions of prior years
|
|
|
(234.9
|
)
|
|
|
(53.1
|
)
|
Lapses of statutes of limitation
|
|
|
(216.2
|
)
|
|
|
|
|
Settlements
|
|
|
(598.4
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,012.3
|
|
|
$
|
1,657.4
|
|
|
|
|
|
|
|
The total amount of unrecognized tax benefits that, if
recognized, would affect our effective tax rate was
$863.8 million at December 31, 2008.
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
2002. During the first quarter of 2008, we completed and
effectively settled our Internal Revenue Service (IRS) audit of
tax years
2001-2004
except for one matter for which we will seek resolution through
the IRS administrative appeals process. As a result of the IRS
audit conclusion, gross unrecognized tax benefits were reduced
by approximately $618 million, and the consolidated results
of operations were benefited by $210.3 million through a
reduction in income tax expense. The majority of the reduction
in gross unrecognized tax benefits related to intercompany
pricing positions that were agreed with the IRS in a prior audit
cycle for which a prepayment of tax was made in 2005.
Application of the prepayment and utilization of tax carryovers
resulted in a refund of approximately $50 million. The IRS
began its examination of tax years
2005-2007
during the third quarter of 2008. We do not believe it is
reasonably possible that the total amount of unrecognized tax
benefits will significantly increase or decrease within the next
twelve months.
We recognize both accrued interest and penalties related to
unrecognized tax benefits in income tax expense. During the
years ended December 31, 2008, 2007, and 2006, we
recognized income tax expense (benefit) of
$(118.0) million, $66.6 million, and
$51.2 million, respectively, related to interest and
penalties. At December 31, 2008 and 2007, our accruals for
the payment of interest and penalties totaled
$177.6 million
-75-
and $364.2 million, respectively. Substantially all of the
expense (benefit) and accruals relate to interest. The change in
the 2008 accrual reflects the impact of the effective settlement
of the IRS audit discussed above.
|
|
Note 13:
|
Retirement
Benefits
|
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
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
6,561.0
|
|
|
$
|
6,480.3
|
|
|
$
|
1,622.8
|
|
|
$
|
1,740.7
|
|
Service cost
|
|
|
260.1
|
|
|
|
287.1
|
|
|
|
62.1
|
|
|
|
70.4
|
|
Interest cost
|
|
|
409.8
|
|
|
|
362.4
|
|
|
|
105.7
|
|
|
|
101.4
|
|
Actuarial (gain) loss
|
|
|
(257.4
|
)
|
|
|
(373.1
|
)
|
|
|
101.6
|
|
|
|
16.4
|
|
Benefits paid
|
|
|
(338.4
|
)
|
|
|
(311.0
|
)
|
|
|
(92.2
|
)
|
|
|
(81.6
|
)
|
Plan amendments
|
|
|
(2.4
|
)
|
|
|
32.7
|
|
|
|
|
|
|
|
(227.7
|
)
|
Foreign currency exchange rate changes and other adjustments
|
|
|
(279.0
|
)
|
|
|
82.6
|
|
|
|
(3.7
|
)
|
|
|
3.2
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
6,353.7
|
|
|
|
6,561.0
|
|
|
|
1,796.3
|
|
|
|
1,622.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
7,304.2
|
|
|
|
6,519.0
|
|
|
|
1,348.5
|
|
|
|
1,157.3
|
|
Actual return on plan assets
|
|
|
(2,187.8
|
)
|
|
|
833.8
|
|
|
|
(438.6
|
)
|
|
|
147.4
|
|
Employer contribution
|
|
|
223.7
|
|
|
|
202.9
|
|
|
|
87.9
|
|
|
|
125.4
|
|
Benefits paid
|
|
|
(326.1
|
)
|
|
|
(301.4
|
)
|
|
|
(92.2
|
)
|
|
|
(81.6
|
)
|
Foreign currency exchange rate changes and other adjustments
|
|
|
(217.9
|
)
|
|
|
49.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
4,796.1
|
|
|
|
7,304.2
|
|
|
|
905.6
|
|
|
|
1,348.5
|
|
|
|
|
|
|
|
Funded status
|
|
|
(1,557.6
|
)
|
|
|
743.2
|
|
|
|
(890.7
|
)
|
|
|
(274.3
|
)
|
Unrecognized net actuarial loss
|
|
|
3,474.8
|
|
|
|
1,143.3
|
|
|
|
1,409.6
|
|
|
|
820.3
|
|
Unrecognized prior service cost (benefit)
|
|
|
72.7
|
|
|
|
88.4
|
|
|
|
(261.6
|
)
|
|
|
(297.7
|
)
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,989.9
|
|
|
$
|
1,974.9
|
|
|
$
|
257.3
|
|
|
$
|
248.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consisted of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension
|
|
$
|
|
|
|
$
|
1,670.5
|
|
|
$
|
|
|
|
$
|
|
|
Other current liabilities
|
|
|
(52.9
|
)
|
|
|
(47.9
|
)
|
|
|
(7.8
|
)
|
|
|
(8.6
|
)
|
Accrued retirement benefit
|
|
|
(1,504.7
|
)
|
|
|
(879.4
|
)
|
|
|
(882.9
|
)
|
|
|
(265.7
|
)
|
Accumulated other comprehensive loss before income taxes
|
|
|
3,547.5
|
|
|
|
1,231.7
|
|
|
|
1,148.0
|
|
|
|
522.6
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
1,989.9
|
|
|
$
|
1,974.9
|
|
|
$
|
257.3
|
|
|
$
|
248.3
|
|
|
|
|
|
|
|
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, 2008.
In 2009, we expect to recognize from accumulated other
comprehensive loss as components of net periodic benefit cost,
$97.5 million of unrecognized net actuarial loss and
$8.7 million of unrecognized prior service cost related to
our defined benefit pension plans, and $69.4 million of
unrecognized net actuarial loss and
-76-
$35.9 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 2009.
The following represents our weighted-average assumptions as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
|
Retiree Health Benefit Plans
|
|
(Percents)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Weighted-average assumptions as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for benefit obligation
|
|
|
6.7
|
|
|
|
6.4
|
|
|
|
6.9
|
|
|
|
6.7
|
|
Discount rate for net benefit costs
|
|
|
6.4
|
|
|
|
5.7
|
|
|
|
6.7
|
|
|
|
6.0
|
|
Rate of compensation increase for benefit obligation
|
|
|
4.1
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase for net benefit costs
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets for net benefit costs
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
9.0
|
|
In evaluating the expected return on plan assets, we have
considered our historical assumptions compared with actual
results, an analysis of current market conditions, asset
allocations, and the views of leading financial advisers and
economists. Our plan assets in our U.S. defined benefit
pension and retiree health plans comprise approximately
84 percent of our worldwide benefit plan assets. Including
the investment losses due to overall market conditions in 2001,
2002, and 2008, our
20-year
annualized rate of return on our U.S. defined benefit
pension plans and retiree health benefit plan was approximately
8.2 percent as of December 31, 2008. Health-care-cost
trend rates are assumed to increase at an annual rate of
8.5 percent in 2009, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014-2018
|
|
|
|
|
Defined benefit pension plans
|
|
$
|
360.5
|
|
|
$
|
378.6
|
|
|
$
|
384.8
|
|
|
$
|
392.4
|
|
|
$
|
403.3
|
|
|
$
|
2,234.0
|
|
|
|
|
|
|
|
Retiree health benefit plans gross
|
|
$
|
103.3
|
|
|
$
|
106.0
|
|
|
$
|
109.8
|
|
|
$
|
110.3
|
|
|
$
|
114.7
|
|
|
$
|
599.0
|
|
Medicare rebates
|
|
|
(11.6
|
)
|
|
|
(7.9
|
)
|
|
|
(8.7
|
)
|
|
|
(10.0
|
)
|
|
|
(10.6
|
)
|
|
|
(69.0
|
)
|
|
|
|
|
|
|
Retiree health benefit plans net
|
|
$
|
91.7
|
|
|
$
|
98.1
|
|
|
$
|
101.1
|
|
|
$
|
100.3
|
|
|
$
|
104.1
|
|
|
$
|
530.0
|
|
|
|
|
|
|
|
The total accumulated benefit obligation for our defined benefit
pension plans was $5.64 billion and $5.69 billion at
December 31, 2008 and 2007, 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 $6.35 billion and
$4.80 billion, respectively, as of December 31, 2008,
and $1.04 billion and $160.9 million, respectively, as
of December 31, 2007. 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 $4.98 billion and $4.06 billion,
respectively, as of December 31, 2008, and
$825.8 million and $46.9 million, respectively, as of
December 31, 2007.
-77-
Net pension and retiree health benefit expense included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Retiree Health
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
260.1
|
|
|
$
|
287.1
|
|
|
$
|
280.0
|
|
|
$
|
62.1
|
|
|
$
|
70.4
|
|
|
$
|
72.2
|
|
Interest cost
|
|
|
409.8
|
|
|
|
362.4
|
|
|
|
343.5
|
|
|
|
105.7
|
|
|
|
101.4
|
|
|
|
97.9
|
|
Expected return on plan assets
|
|
|
(603.0
|
)
|
|
|
(548.2
|
)
|
|
|
(494.8
|
)
|
|
|
(118.4
|
)
|
|
|
(102.1
|
)
|
|
|
(89.9
|
)
|
Amortization of prior service cost (benefit)
|
|
|
8.2
|
|
|
|
7.7
|
|
|
|
8.3
|
|
|
|
(36.0
|
)
|
|
|
(15.7
|
)
|
|
|
(15.6
|
)
|
Recognized actuarial loss
|
|
|
76.6
|
|
|
|
130.0
|
|
|
|
149.6
|
|
|
|
62.7
|
|
|
|
95.0
|
|
|
|
107.9
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
151.7
|
|
|
$
|
239.0
|
|
|
$
|
286.6
|
|
|
$
|
76.1
|
|
|
$
|
149.0
|
|
|
$
|
172.5
|
|
|
|
|
|
|
|
If the health-care-cost trend rates were to be increased by one
percentage point each future year, the December 31, 2008,
accumulated postretirement benefit obligation would increase by
$247.8 million (13.9 percent) and the aggregate of the
service cost and interest cost components of the 2008 annual
expense would increase by $26.9 million
(16.0 percent). A one-percentage-point decrease in these
rates would decrease the December 31, 2008, accumulated
postretirement benefit obligation by $192.0 million
(10.8 percent) and the aggregate of the 2008 service cost
and interest cost by $20.7 million (12.3 percent).
The following represents the amounts recognized in other
comprehensive income (loss) in 2008:
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
|
|
|
Retiree Health
|
|
|
|
Pension Plans
|
|
|
Benefit Plans
|
|
|
|
|
Actuarial loss arising during period
|
|
$
|
2,533.4
|
|
|
$
|
658.6
|
|
Plan amendments during period
|
|
|
(2.4
|
)
|
|
|
|
|
Amortization of prior service cost (benefit) included in net
income
|
|
|
(8.2
|
)
|
|
|
36.0
|
|
Amortization of net actuarial loss included in net income
|
|
|
(76.6
|
)
|
|
|
(62.7
|
)
|
Foreign currency exchange rate changes
|
|
|
(130.4
|
)
|
|
|
(6.5
|
)
|
|
|
|
|
|
|
Total other comprehensive loss during period
|
|
$
|
2,315.8
|
|
|
$
|
625.4
|
|
|
|
|
|
|
|
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 $114.1 million,
$112.3 million, and $106.5 million, for the years
2008, 2007, and 2006, 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 2008, 2007, and 2006 were not significant.
Our U.S. defined benefit pension and retiree health benefit
plan investment allocation strategy currently comprises
approximately 88 percent to 92 percent growth
investments and 8 percent to 12 percent fixed-income
investments. Within the growth investment allocation, 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 allocation includes alternative investments.
-78-
Our defined benefit pension plan and retiree health plan asset
allocations as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Percentage of
|
|
|
|
Pension Plan
|
|
|
Retiree Health
|
|
|
|
Assets
|
|
|
Plan Assets
|
|
(Percents)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities and equity-like instruments
|
|
|
70
|
|
|
|
75
|
|
|
|
74
|
|
|
|
78
|
|
Debt securities
|
|
|
12
|
|
|
|
10
|
|
|
|
14
|
|
|
|
11
|
|
Real estate
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
17
|
|
|
|
14
|
|
|
|
12
|
|
|
|
11
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
In 2009, we expect to contribute approximately $55 million
to our defined benefit pension plans to satisfy minimum funding
requirements for the year. In addition, we expect to contribute
approximately $15 million of additional discretionary
funding in 2009 to our defined benefit plans. We do not expect
to make any contributions to our post-retirement health benefit
plans during 2009.
We are a party to various legal actions, government
investigations, and environmental proceedings. The most
significant of these are described below. While it is not
possible to 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):
|
|
|
Cymbalta: Sixteen generic drug manufacturers have
submitted Abbreviated New Drug Applications (ANDAs) seeking
permission to market generic versions of Cymbalta prior to the
expiration of our relevant U.S. patents (the earliest of
which expires in 2013). Of these challengers, all allege
non-infringement of the patent claims directed to the commercial
formulation, and eight allege invalidity of the patent claims
directed to the active ingredient duloxetine. Of the eight
challengers to the compound patent claims, one further alleges
invalidity of the claims directed to the use of Cymbalta for
treating fibromyalgia, and one alleges the patent having claims
directed to the active ingredient is unenforceable. Lawsuits
have been filed in U.S. District Court for the Southern
District of Indiana against Activis Elizabeth LLC; Aurobindo
Pharma Ltd.; Cobalt Laboratories, Inc.; Impax Laboratories,
Inc.; Lupin Limited; Sandoz Inc.; Sun Pharma Global, Inc.; and
Wockhardt Limited, seeking rulings that the patents are valid,
infringed, and enforceable. Answers to the complaints are
pending.
|
|
|
Gemzar: Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma
(USA) Inc. (Mayne), and Sun Pharmaceutical Industries Inc. (Sun)
each submitted an ANDA 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 and January 2008),
seeking rulings that these patents are valid and are being
infringed. The suit against Sicor has been scheduled for trial
in July 2009. Sicors ANDAs have been approved by the FDA;
however, Sicor must provide 90 days notice prior to
marketing generic Gemzar to allow time for us to seek a
preliminary injunction. Both suits against Mayne have been
administratively closed, and the parties have agreed to be bound
by the results of the Sicor suit. In November 2007, Sun filed a
declaratory judgment action in the United States District Court
for the Eastern District of Michigan, seeking rulings that our
method-of-use and
|
-79-
|
|
|
|
|
compound patents are invalid or unenforceable, or would not be
infringed by the sale of Suns generic product. This trial
is scheduled for December 2009.
|
|
|
|
Alimta: Teva Parenteral Medicines, Inc. (Teva) and APP
Pharmaceuticals, LLC (APP) each submitted ANDAs seeking approval
to market generic versions of Alimta prior to the expiration of
the relevant U.S. patent (licensed from the Trustees of
Princeton University and expiring in 2016), and alleging the
patent is invalid. We, along with Princeton, filed lawsuits in
the U.S. District Court for the District of Delaware
against Teva and APP, seeking rulings that the compound patent
is valid and infringed. Trial is scheduled for November 8,
2010.
|
|
|
Evista: Barr Laboratories, Inc. (Barr) submitted an ANDA
in 2002 seeking permission to market a generic version of Evista
prior to the expiration of our relevant U.S. patents
(expiring in
2012-2017)
and alleging that these patents are invalid, not enforceable, or
not infringed. In November 2002, we filed a lawsuit against Barr
in the U.S. District Court for the Southern District of
Indiana, seeking a ruling that these patents are valid,
enforceable, and being infringed by Barr. Teva Pharmaceuticals
USA, Inc. (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. In
April 2008, the FDA granted Teva tentative approval of its ANDA,
but Tevas ability to market a generic product is subject
to a statutory stay, which has been extended to expire on
March 9, 2009. If the stay expires and the company cannot
obtain preliminary relief from the court, Teva can launch its
generic product, regardless of the status of the current
litigation, but subject to our right to recover damages, should
we prevail at trial.
|
We believe each of these Hatch-Waxman challenges is without
merit and expect to prevail in this litigation. 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 in any of these cases could have a
material adverse impact on our future consolidated results of
operations, liquidity, and financial position.
We have received challenges to Zyprexa patents in a number of
countries outside the U.S.:
|
|
|
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 that ruling was affirmed on appeal in
February 2008. In June 2007, the Canadian Federal Court held
that an invalidity allegation of a second challenger, Novopharm
Ltd. (Novopharm), was 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 sued
Novopharm for patent infringement, and the trial began in
November 2008. We expect the trial to run through the first
quarter of 2009, with a decision in the second half of 2009. In
November 2007, Apotex filed an action seeking a declaration of
the invalidity of our Zyprexa compound and method-of-use
patents, and no trial date has been set. We have brought similar
actions against Pharmascience (August 2007), Sandoz (July 2007),
Nu-Pharm (June 2008), Genpharm (June 2008) and Cobalt
(January 2009); none of these suits has been scheduled for
trial. Pharmascience has agreed to be bound by the outcome of
the Novopharm suit, and, pending the outcome of the lawsuit, we
have agreed not to take any further steps to prevent the company
from coming to market with generic olanzapine tablets, subject
to a contingent damages obligation should we be successful
against Novopharm.
|
|
|
In Germany, generic pharmaceutical manufacturers
Egis-Gyogyszergyar and Neolab Ltd. challenged the validity of
our Zyprexa compound and method-of-use patent (expiring in
2011). In June 2007, the German Federal Patent Court held that
our patent is invalid. Generic olanzapine was launched by
competitors in Germany in the fourth quarter of 2007. We
appealed the decision to the German Federal Supreme Court and
following a hearing in December 2008, the Supreme Court reversed
the Federal Patent Court and found the patent to be valid.
Following the decision of the Supreme Court, the generic
companies either agreed to withdraw from the market or were
subject to preliminary injunction. We are pursuing these
companies for damages arising from infringement.
|
-80-
|
|
|
We have received challenges in a number of other countries,
including Spain, the United Kingdom (U.K.), France, and several
smaller European countries. In Spain, we have been successful at
both the trial and appellate court levels in defeating the
generic manufacturers challenges, but further legal
challenge is now pending before the Commercial Court in Madrid.
In the U.K., the generic pharmaceutical manufacturer
Dr. Reddys Laboratories (UK) Limited has challenged
the validity of our Zyprexa compound and method-of-use patent
(expiring in 2011). In October 2008, the Patents Court in the
High Court, London ruled that our patent was valid.
Dr. Reddys appealed this decision, and a hearing date
for the appeal has not been set.
|
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 o