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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, 2005
Commission file number 001-6351
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 |
Preferred Stock Purchase Rights
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New York Stock Exchange |
8-3/8% Notes Due December 1, 2006
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New York Stock Exchange |
6.57% Notes Due January 1, 2016
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New York Stock Exchange |
7-1/8% Notes Due June 1, 2025
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New York Stock Exchange |
6.77% Notes Due January 1, 2036
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New York Stock Exchange |
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 X No
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes No X
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 X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
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.
[ ]
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer.
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[X] Large accelerated
filer [ ]
Accelerated
filer [ ]
Non-accelerated filer |
Indicate by check mark whether the Registrant is a shell company
as defined in
Rule 12b-2 of the
Act: Yes No X
Aggregate market value of the common equity held by
non-affiliates computed by reference to the price at which the
common equity was last sold as of the last business day of the
Registrants most recently completed second fiscal quarter
(Common Stock): approximately $54,624,800,000
Number of shares of common stock outstanding as of
February 15, 2006: 1,129,982,580
Portions of the Registrants Proxy Statement to be filed on
or about March 13, 2006 have been incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Part I
Eli Lilly and Company (the Company or
Registrant, which may be referred to as
we, us, or our) was
incorporated in 1901 in Indiana to succeed to the drug
manufacturing business founded in Indianapolis, Indiana, in 1876
by Colonel Eli Lilly. We discover, develop, manufacture,
and sell products in one significant business
segment pharmaceutical products. We also have an
animal health business segment, whose operations are not
material to our financial statements. We manufacture and
distribute our products through owned or leased facilities in
the United States, Puerto Rico, and 26 other countries. Our
products are sold in approximately 135 countries.
Most of the products we sell today were discovered or developed
by our own scientists, and our success depends to a great extent
on our ability to continue to discover and develop innovative
new pharmaceutical products. We direct our research efforts
primarily toward the search for products to prevent and treat
human diseases. We also conduct research to find products to
treat diseases in animals and to increase the efficiency of
animal food production.
Products
Our principal products are:
Neuroscience products, our largest-selling product group,
including:
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Zyprexa®,
for the treatment of schizophrenia, bipolar mania and bipolar
maintenance |
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Cymbalta®,
for the treatment of depression and diabetic peripheral
neuropathic pain |
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Strattera®,
for the treatment of attention-deficit hyperactivity disorder in
children, adolescents and adults |
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Prozac®,
for the treatment of depression and, in many countries, for
bulimia and obsessive-compulsive disorder |
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Permax®,
for the treatment of Parkinsons disease |
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Sarafem®,
for the treatment of pre-menstrual dysphoric disorder |
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Symbyax®,
for the treatment of bipolar depression |
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Yentreve®,
for the treatment of stress urinary incontinence (approved in
2004 in the European Union and several other countries outside
the United States). |
Endocrine products, including:
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Humalog®,
Humalog Mix
75/25®,
and Humalog Mix
50/50,
injectable human insulin analogs for the treatment of diabetes |
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Humulin®,
injectable human insulin for the treatment of diabetes |
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Actos®,
an oral agent for the treatment of type 2 diabetes |
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Byetta®,
an injectable product for the treatment of type 2 diabetes |
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Evista®,
an oral agent for the prevention and treatment of osteoporosis
in post-menopausal women |
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Humatrope®,
for the treatment of human growth hormone deficiency and
idiopathic short stature |
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Forteo®,
an injectable treatment for severe osteoporosis in women and men. |
Oncology products, including:
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Gemzar®,
for the treatment of pancreatic cancer; in combination with
other agents, for treatment of metastatic breast cancer and
non-small cell lung cancer; and in the European Union for
bladder and ovarian cancers |
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Alimta®,
for the treatment of malignant pleural mesothelioma and for
second-line treatment of non- small cell lung cancer (approved
in 2004 in the U.S. and several other countries). |
Animal health products, including:
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Tylan®,
an antibiotic used to control certain diseases in cattle, swine,
and poultry |
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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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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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Micotil®,
Pulmotil®,
and Pulmotil
AC®,
antibiotics used to treat respiratory disease in cattle, swine,
and poultry, respectively |
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Surmax®
(sold as
Maxus®
in some countries), a performance enhancer for swine and poultry |
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Paylean®
and
Optaflexx®,
leanness and performance enhancers for swine and cattle,
respectively |
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Elector®,
a parasiticide for use on cattle and premises. |
Cardiovascular agents, including:
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ReoPro®,
a treatment for use as an adjunct to percutaneous coronary
intervention (PCI), including patients undergoing
angioplasty, atherectomy or stent placement |
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Xigris®,
for the treatment of adults with severe sepsis at high risk of
death. |
Anti-infectives, including:
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Ceclor®,
for the treatment of a wide range of bacterial infections |
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Vancocin®
HCl, used primarily to treat staphylococcal infections. |
Other pharmaceutical products, including:
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Cialis®,
for the treatment of erectile dysfunction. |
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. 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 17 percent of our worldwide
consolidated net sales in 2005. No other distributor accounted
for more than 10 percent of consolidated net sales. We also
sell pharmaceutical products directly to the United States
government and other manufacturers, but those sales are not
material.
We promote our major pharmaceutical products in the United
States through sales representatives who call upon physicians,
wholesalers, hospitals, managed-care organizations, retail
pharmacists, and other health care 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 product lines or practice areas, such as
primary care, neuroscience, acute care, endocrinology, and
oncology.
Large purchasers of pharmaceuticals, such as managed-care
groups, government agencies, and long-term care institutions,
account for a significant portion of total pharmaceutical
purchases in the United States. We have created special sales
groups to service managed-care organizations, government and
long-term care institutions, hospital contract administrators,
and certain retail pharmacies. In response to competitive
pressures, we have entered into arrangements with a number of
these organizations providing for discounts or rebates on one or
more Lilly products or other cost-sharing arrangements.
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 and distribution
organizations. In some countries, however, we market our
products through independent distributors.
Pharmaceutical Marketing Collaborations
Several of our significant products are marketed in
collaboration with other pharmaceutical companies:
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Cymbalta is co-promoted in the United States by Quintiles
Transnational Corp. and is co-promoted or co-marketed outside
the U.S. (except Japan) by Boehringer Ingelheim GmbH. |
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Cialis is sold in North America and most of Europe by a joint
venture between Lilly and ICOS Corporation, and is sold by
us alone in other territories. |
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We co-promote Actos with a unit of Takeda Chemical
Industries Ltd. in the United States and certain other countries
and we sell it alone in other countries. Our U.S. marketing
rights with respect to Actos expire in September 2006; however,
we will receive residual royalties on U.S. Actos sales for
three years thereafter. |
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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. |
We have also entered into licensing arrangements under which we
have granted exclusive marketing rights to other companies in
specified countries for certain older products manufactured by
us, such as Permax, Sarafem, Vancocin, the anti-ulcer agent
Axid®,
the analgesic
Darvon®,
and the anti-infectives Ceclor,
Keflex®,
Keftab®,
and
Lorabid®.
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, delivery systems or processes with therapeutic or cost
advantages, our products can be subject to progressive price
reductions or decreased volume of sales, or both. Most new
products that we introduce must compete with other products
already on the market or products that are later developed by
competitors. Manufacturers of generic pharmaceuticals typically
invest far less in research and development than research-based
pharmaceutical companies and therefore can price their products
significantly lower than branded products. Accordingly, when a
branded product loses its market exclusivity, it normally faces
intense price competition from generic forms of the product. In
many countries outside the United States, patent protection is
weak or nonexistent and we must compete with generic or
knockoff versions of our products. To successfully
compete for business with managed care and pharmacy benefits
management organizations, we must often demonstrate that our
products offer not only medical benefits but also cost
advantages as compared with other forms of care.
We believe our long-term competitive position depends upon our
success in discovering and developing innovative, cost-effective
products that serve unmet medical needs, together with our
ability to continuously improve the productivity of our
discovery, development, manufacturing, marketing and support
operations in a highly competitive environment. There can be no
assurance that our research and development efforts will result
in commercially successful products or that our products or
processes will not become uncompetitive from time to time as a
result of products or processes developed by our competitors.
Patents, Trademarks, and Other Intellectual Property
Rights
Overview
Intellectual property protection is, in the aggregate, material
to our ability to successfully commercialize our life sciences
innovations. We own, have applied for, or are licensed under, a
large number of patents, both in the United States and in other
countries, relating to products, product uses, formulations, and
manufacturing processes. There is no assurance that the patents
we
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are seeking will be granted or that the patents we have been
granted would be found valid and enforceable if challenged.
Moreover, patents relating to particular products, uses,
formulations, or processes do not preclude other manufacturers
from employing alternative processes or from marketing
alternative products or formulations that might successfully
compete with our patented products. In addition, from time to
time, competitors or other third parties assert claims that our
activities infringe patents or other intellectual property
rights held by them. While there can be no assurance, we do not
believe that any such claims will have a material adverse effect
on our results of operations, liquidity, or financial position.
Outside the United States, the adequacy and effectiveness of
intellectual property protection for pharmaceuticals varies
widely. Under the Trade-Related Aspects of Intellectual Property
Agreement (TRIPs) administered by the World Trade Organization
(WTO), over 140 countries have now agreed to provide
non-discriminatory protection for most pharmaceutical inventions
and to assure that adequate and effective rights are available
to all patent owners. However, in many countries, this agreement
will not become fully effective for many years. It is still too
soon to assess when and how much, if at all, we will benefit
commercially from these changes.
When a product patent expires, the patent holder often loses
effective market exclusivity for the product. This can result in
a severe and rapid decline in sales of the formerly patented
product, particularly in the United States. However, in some
cases the innovator company may achieve exclusivity beyond the
expiry of the product patent through manufacturing trade
secrets; later-expiring patents on methods of use or
formulations; or data-based exclusivity that may be available
under pharmaceutical regulatory laws.
Our Intellectual Property Portfolio
We consider intellectual property protection for certain
products, processes, and uses particularly those
products discussed below to be important to our
operations. For many of our products, in addition to the
compound patent we hold other patents on manufacturing
processes, formulations, or uses that may extend exclusivity
beyond the expiration of the product patent.
United States compound patent expirations include those claiming
the respective active ingredients in Zyprexa, 2011, and Humalog,
2013. The Gemzar compound patent in the U.S. expires in
2010, and a
method-of-use patent
covering treatment of neoplasms with Gemzar is in force until
2012. We have also received an additional six months of
marketing exclusivity for Gemzar from the FDA under the terms of
the Food and Drug Administration Modernization Act of 1997, as a
result of our conducting clinical studies of Gemzar in pediatric
populations, which should provide us exclusivity until 2013. We
hold a number of U.S. patents covering Evista and its
approved uses in osteoporosis prevention and treatment that we
believe should provide us exclusivity in the United States until
2014. For Strattera, a
method-of-use patent in
the U.S. for treating attention deficit-hyperactivity
disorder should provide exclusivity until 2016. For Cymbalta, we
expect the U.S. compound patent will expire in 2013. We
also have a formulation patent for Cymbalta until 2014. We
expect the U.S. compound patent for Alimta will expire in
2016. For Cialis, compound and
method-of-use patent
protection exists in the U.S. that should provide
exclusivity until 2017. In the United States, the Actos compound
patent extends beyond the duration of our co-promotion
agreement, which is in force until September 2006. Xigris is a
complex glycoprotein biologic product that is produced through
recombinant DNA technology. Xigris is not subject to the
Abbreviated New Drug Application process under the Hatch-Waxman
law as described below. In addition, we hold patents on the DNA
materials, certain uses, manufacturing process, and the
glycoprotein itself. We believe the intellectual property
protection for Xigris should provide us marketing exclusivity in
the U.S. until 2015. Relevant patents covering Byetta are
exclusively licensed or owned by our partner
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Amylin Pharmaceuticals, Inc. A method of use patent focused on
the treatment of type 2 diabetes is expected to expire in the
U.S. in 2017. In addition, a patent covering the Byetta
formulation will expire in the U.S. in 2020.
Worldwide, we sell all of our major products under trademarks
that we consider in the aggregate to be important to our
operations. Trademark protection varies throughout the world,
with protection continuing in some countries as long as the mark
is used, and in other countries as long as it is registered.
Registrations are normally for fixed but renewable terms.
Patent Challenges Under the Hatch-Waxman Act
The Drug Price Competition and Patent Term Restoration Act of
1984, commonly known as Hatch-Waxman, made a complex
set of changes to both patent and new-drug-approval laws in the
United States. Before Hatch-Waxman, no drug could be approved
without providing the Food and Drug Administration
(FDA) complete safety and efficacy studies, i.e., a
complete New Drug Application (NDA). Hatch-Waxman authorizes the
FDA to approve generic versions of innovative medicines without
such information by filing an Abbreviated New Drug Application
(ANDA). In an ANDA, the generic manufacturer must demonstrate
only bioequivalence between the generic version and
the NDA-approved drug not safety and efficacy.
Absent a successful patent challenge, the FDA cannot approve an
ANDA until after the innovators patents expire. However,
after the innovator has marketed its product for four years, a
generic manufacturer may file an ANDA alleging that one or more
of the patents listed in the innovators NDA are invalid or
not infringed. This allegation is commonly known as a
Paragraph IV certification. The innovator must
then file suit against the generic manufacturer to protect its
patents. If one or more of the NDA-listed patents are
successfully challenged, the first filer of a Paragraph IV
certification may be entitled to a
180-day period of
market exclusivity over all other generic manufacturers.
In recent years, generic manufacturers have used
Paragraph IV certifications extensively to challenge
patents on a wide array of innovative pharmaceuticals, and we
expect this trend to continue. We are currently in litigation
with numerous generic manufacturers arising from their
Paragraph IV certifications on Zyprexa, Evista, and Gemzar.
For more information on these, see Item 7,
Managements Discussion and Analysis
Legal and Regulatory Matters.
Government Regulation
Regulation of Our Operations
Our operations are regulated extensively by numerous national,
state and local agencies. The lengthy process of laboratory and
clinical testing, data analysis, manufacturing development, and
regulatory review necessary for required governmental approvals
is extremely costly and can significantly delay product
introductions in a given market. Promotion, marketing,
manufacturing, and distribution of pharmaceutical and animal
health products are extensively regulated in all major world
markets. We are required to conduct extensive post-marketing
surveillance of the safety of the products we sell. In addition,
our operations are subject to complex federal, state, local, and
foreign environmental and occupational health and safety laws
and regulations. The laws and regulations affecting the
manufacture and sale of current products and the introduction of
new products will continue to require substantial scientific and
technical effort, time, and expense and significant capital
investment.
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Of particular importance is the FDA in the United States.
Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA
has jurisdiction over all of our products and administers
requirements covering the testing, safety, effectiveness,
manufacturing, quality control, distribution, labeling,
marketing, advertising, dissemination of information and
post-marketing surveillance of our pharmaceutical products. The
FDA, along with the U.S. Department of Agriculture (USDA),
also regulates our animal health products. The
U.S. Environmental Protection Agency also regulates some
animal health products.
Outside the United States, our products and operations are
subject to similar regulatory requirements, notably by the
European Medicines Agency (EMEA) in the European Union and
the Ministry of Health, Labor and Welfare (MHLW) in Japan.
Regulatory requirements vary from country to country.
The FDA extensively regulates all aspects of manufacturing
quality under its current Good Manufacturing Practices (cGMP)
regulations. In recent years, we have made, and we continue to
make, substantial investments of capital and operating expenses
to implement comprehensive, company-wide improvements in our
manufacturing, product and process development, and quality
operations to ensure sustained cGMP compliance. However, in the
event we fail to adhere to cGMP requirements in the future, we
could be subject to interruptions in production, fines and
penalties, and delays in new product approvals.
The marketing, promotional, and pricing practices of
pharmaceutical manufacturers, as well as the manner in which
manufacturers interact with purchasers and prescribers, are
subject to various other federal and state laws, including the
federal anti-kickback statute and the False Claims Act and state
laws governing kickbacks and false claims. These laws are
administered by, among others, the Department of Justice, the
Office of Inspector General of the Department of Health and
Human Services, the Federal Trade Commission, the Office of
Personnel Management and state attorneys general. Over the past
several years, both the FDA and many of these other agencies
have increased their enforcement activities with respect to
pharmaceutical companies. Over this period, several cases
brought by these agencies against other companies under these
and other laws have resulted in corporate criminal sanctions and
very substantial civil settlements. Several pharmaceutical
companies, including Lilly, are currently subject to proceedings
by one or more of these agencies regarding marketing and
promotional practices. See Item 7, Managements
Discussion and Analysis Legal and Regulatory
Matters, for information about currently pending marketing
and promotional practices investigations in which we are
involved. It is possible that we could become subject to
additional administrative and legal proceedings and actions,
which could include claims for civil penalties (including treble
damages under the False Claims Act), criminal sanctions, and
administrative remedies, including exclusion from federal health
care programs. It is possible that an adverse outcome in such an
action could have a material adverse impact on our consolidated
results of operations, liquidity, and financial position.
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., implementation of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (MMA), providing a
prescription drug benefit under the Medicare program, took
effect January 1, 2006. See Item 7,
Managements Discussion and Analysis
Executive Overview Legal and Governmental
Matters for a discussion of the anticipated impact of MMA
and other federal and state healthcare cost containment measures.
International operations are also generally subject to extensive
price and market regulations, and there are many proposals for
additional cost-containment measures, including proposals that
would directly or indirectly impose additional price controls or
reduce the value of our intellectual property protection.
We cannot predict the extent to which our business may be
affected by these or other potential future legislative or
regulatory developments. However, we expect that pressures on
pharmaceutical pricing will continue.
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 2005, we employed approximately
8,400 people in pharmaceutical and animal health research
and development activities, including a substantial number of
physicians, scientists holding graduate or postgraduate degrees,
and highly skilled technical personnel. Our research and
development expenses were $2.35 billion in 2003,
$2.69 billion in 2004, and $3.03 billion in 2005.
Our pharmaceutical research and development focuses on four
therapeutic categories: central nervous system and related
diseases; endocrine diseases, including diabetes, obesity and
musculoskeletal disorders; cancer; and cardiovascular diseases.
However, we remain opportunistic, selectively pursuing promising
leads in other therapeutic areas. We are actively engaged in
biotechnology research programs involving recombinant DNA,
therapeutic proteins and antibodies as well as genomics (the
development of therapeutics through identification of
disease-causing genes and their cellular function), biomarkers,
and targeted therapeutics. In addition to discovering and
developing new chemical entities, we look for ways to expand the
value of existing products through new uses and formulations
that can provide additional benefits to patients. We also
conduct research in animal health, including animal nutrition
and physiology, control of parasites, and veterinary medicine.
To supplement our internal efforts, we collaborate with others,
including educational institutions and research-based
pharmaceutical and biotechnology companies, and we contract with
others for the performance of research in their facilities. We
use the services of physicians, hospitals, medical schools, and
other research organizations worldwide to conduct clinical
trials to establish the safety and effectiveness of our
products. We actively seek out investments in external research
and technologies that hold the promise to complement and
strengthen our own research efforts. These investments can take
many forms, including licensing arrangements, co-development and
co-marketing agreements, co-promotion arrangements, joint
ventures, and acquisitions.
Drug development is time-consuming, expensive, and risky. On
average, only one out of many thousands of chemical compounds
discovered by researchers proves to be both medically effective
and safe enough to become an approved medicine. The process from
discovery to regulatory approval typically takes 12 to
15 years or longer. Drug candidates can fail at any stage
of the
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process, and even late-stage drug candidates sometimes fail to
receive regulatory approval. We believe our investments in
research, both internally and in collaboration with others, have
been rewarded by the number of new compounds and new indications
for existing compounds that we have in all stages of
development. Among our new investigational compounds in the
later stages of development are potential therapies for diabetes
and its complications, osteoporosis, cancer, and acute coronary
syndromes. Further, we are studying many other drug candidates
in the earlier stages of development, including compounds
targeting cancers, thrombotic disorders, atherosclerosis,
Alzheimers disease, diabetes, obesity, and sleep
disorders. We are also developing new uses and formulations for
many of our currently marketed products, such as Zyprexa,
Gemzar, Alimta, Cialis, Cymbalta, Evista, Forteo, and Byetta.
Raw Materials and Product Supply
Most of the principal materials we use in our manufacturing
operations are available from more than one source. We obtain
certain raw materials principally from only one source. In
addition, four of our significant products are manufactured by
others: Actos by Takeda; ReoPro by Centocor; Xigris by Lonza
Biologics (bulk product) and DSM, N.V. (finished product); and
Byetta by third-party suppliers to Amylin. If we were unable to
obtain certain materials from present sources, we could
experience an interruption in supply until we established new
sources or, in some cases, implemented alternative processes.
Our primary bulk manufacturing occurs at three sites in Indiana
as well as locations in Ireland, Puerto Rico, and the United
Kingdom. Finishing operations, including labeling and packaging,
take place at a number of sites throughout the world.
We seek to design and operate our manufacturing facilities and
maintain inventory in a way that will allow us to meet all
expected product demand while maintaining flexibility to
reallocate manufacturing capacity to improve efficiency and
respond to changes in supply and demand. However, pharmaceutical
production processes are complex, highly regulated, and vary
widely from product to product. Shifting or adding manufacturing
capacity can be a very lengthy process requiring significant
capital expenditures. 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.
9
Executive Officers of the Company
The following table sets forth certain information regarding our
executive officers. All executive officers have been employed by
the Company in executive positions during the last five years.
The term of office for each executive officer expires on the
date of the annual meeting of the Board of Directors, to be held
on April 24, 2006, or on the date his or her successor is
chosen and qualified. No director or executive officer of the
Company has a family relationship with any other
director or executive officer of the Company, as that term is
defined for purposes of this disclosure requirement. There is no
understanding between any executive officer and any other person
pursuant to which the executive officer was selected.
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Name |
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Age | |
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Offices |
|
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Sidney Taurel
|
|
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57 |
|
|
Chairman of the Board (since January 1999) and Chief Executive
Officer (since June 1998) and a Director |
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John C. Lechleiter, Ph.D.
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|
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52 |
|
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President and Chief Operating Officer (since October 2005) and a
Director |
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Charles E. Golden
|
|
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59 |
|
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Executive Vice President and Chief Financial Officer (since
March 1996) and a Director |
|
Steven M. Paul, M.D.
|
|
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55 |
|
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Executive Vice President, Science and Technology (since July
2003) |
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Robert A. Armitage
|
|
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57 |
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Senior Vice President and General Counsel (since January 2003) |
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Scott A. Canute
|
|
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45 |
|
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President, Manufacturing Operations (since October 2004) |
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Anthony J. Murphy, Ph.D.
|
|
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55 |
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Senior Vice President, Human Resources (since June 2005) |
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Gino Santini
|
|
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49 |
|
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Senior Vice President, Corporate Strategy and Policy (since July
2004) |
|
Deirdre P. Connelly
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|
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45 |
|
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President, U.S. Operations (since June 2005) |
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Lorenzo Tallarigo, M.D.
|
|
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55 |
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President, International Operations (since January 2004) |
Employees
At the end of 2005, we employed approximately 42,600 people,
including approximately 20,000 employees outside the United
States. A substantial number of our employees have long records
of continuous service.
10
Financial Information Relating to Business Segments and
Classes of Products
You can find financial information relating to our business
segments and classes of products in Item 8 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 Item 8 of this
Form 10-K,
Segment Information. That information is
incorporated here by reference.
To date, our overall operations abroad have not been
significantly deterred by local restrictions on the transfer of
funds from branches and subsidiaries located abroad, including
the availability of dollar exchange. We cannot predict what
effect these restrictions or the other risks inherent in foreign
operations, including possible nationalization, might have on
our future operations or what other restrictions may be imposed
in the future. 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.
Item 1A. Risk
Factors
In addition to the other information contained in this
Form 10-K, the
following risk factors should be considered carefully in
evaluating our company. It is possible that our business,
financial condition, liquidity or results of operations could be
materially adversely affected by any of these risks.
11
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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. |
|
|
Our long-term success depends on intellectual property
protection. Our long-term success depends on our ability to
continually discover, develop, and commercialize innovative new
pharmaceutical products. Without strong intellectual property
protection, we would be unable to generate the returns necessary
to support the enormous investments in research and development,
capital, and other expenditures required to bring new drugs to
the market. We currently expect no major patent expirations in
this decade, but several major products will lose intellectual
property protection in the first half of the next decade. |
|
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Intellectual property protection varies throughout the world and
is subject to change over time. In the U.S., the Hatch-Waxman
Act provides generic companies powerful incentives to seek to
invalidate our patents; as a result, we expect that our
U.S. patents on major products will be routinely
challenged, and there can be no assurance that our patents will
be upheld. See Item 1, Business Patents,
Trademarks, and Other Intellectual Property Protection,
for more details. In addition, competitors or other third
parties may claim that our activities infringe patents or other
intellectual property rights held by them. If successful, such
claims could result in our being unable to market a product in a
particular territory or being required to pay damages for past
infringement or royalties on future sales. |
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Our business is subject to increasing government price
controls and other health care cost containment measures.
Government health care cost-containment measures can
significantly affect our sales and profitability. In many
countries outside the United States, government agencies
strictly control, directly or indirectly, the prices at which
our products are sold. In the United States, we are subject to
substantial pricing pressures from state Medicaid programs and
private insurance programs, including those operating under the
new Medicare pharmaceutical benefit effective January 2006. We
expect pricing pressures to increase. See Item I,
Business Regulations Affecting Pharmaceutical
Pricing and Reimbursement for more details. |
|
|
Pharmaceutical research and development is costly and
uncertain. There are many difficulties and uncertainties
inherent in new product development and introduction of new
products. New product candidates that appear promising in
development may fail to reach the market or may have only
limited commercial success because of efficacy or safety
concerns, inability to obtain necessary regulatory approvals,
limited scope of approved uses, difficulty or excessive costs to
manufacture, or infringement of the patents or intellectual
property rights of others. Delays and uncertainties in the FDA
approval process and the approval processes in other countries
can result in delays in product launches and lost market
opportunity. In addition, it can be very difficult to predict
sales growth rates of new products. |
|
|
Pharmaceutical products can develop unexpected safety or
efficacy concerns. Unexpected safety or efficacy concerns
can arise with respect to marketed products, whether or not
scientifically justified, leading to product recalls,
withdrawals, or declining sales, as well as product liability
claims. |
12
|
|
|
Zyprexa contributes a major portion of our sales and
earnings. Zyprexa, our largest-selling product, contributes
a significant proportion of our total sales and income, and we
believe Zyprexa will continue to be a major contributor to our
sales and earnings for several years. An unexpected steep and
extended decline in Zyprexa sales (resulting from, for example,
an unexpected safety or efficacy concern, regulatory action, or
premature loss of patent protection) could have a material
adverse impact on our results of operations, financial condition
and liquidity. |
|
|
Regulatory compliance failures could be damaging to the
company. The marketing, promotional, and pricing practices
of pharmaceutical manufacturers, as well as the manner in which
manufacturers interact with purchasers and prescribers, are
subject to extensive regulation. Many companies, including
Lilly, have been subject to claims related to these practices
asserted by federal and state governmental authorities and
private payors and consumers. These claims could result in
substantial expense to the company. In particular, See
Item 7, Managements Discussion and
Analysis Legal and Regulatory Matters, for the
discussions of the U.S. sales and marketing practices
investigations. In addition, regulatory issues concerning
compliance with current Good Manufacturing Practice (cGMP)
regulations for pharmaceutical products can lead to product
recalls and seizures, interruption of production leading to
product shortages, and delays in the approvals of new products
pending resolution of the cGMP issues. See Item 1,
Business Regulation of our Operations,
for more details. |
|
|
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. We have experienced difficulties in
obtaining product liability insurance due to a very restrictive
insurance market, and therefore will 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. |
|
|
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. |
|
|
We face other risks to our business and operating
results. Our business is subject to a number of other risks
and uncertainties, including: |
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|
Economic factors over which we have no control, including
changes in inflation, interest rates and foreign currency
exchange rates, and overall economic conditions in volatile
areas can affect our results of operations. |
|
|
|
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. |
|
|
|
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. |
13
|
|
|
|
|
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. |
Cautionary Statement Regarding
Forward-Looking
Statements
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 above, that may cause actual results to differ
materially from our expectations.
We undertake no duty to update forward-looking statements.
|
|
Item 1B. |
Unresolved Staff Comments |
Not applicable.
Our principal domestic and international executive offices are
located in Indianapolis. At December 31, 2005, we owned 13
production and distribution facilities in the United States and
Puerto Rico. Together with the corporate administrative offices,
these facilities contain an aggregate of approximately
12.2 million square feet of floor area dedicated to
production, distribution, and administration. Major production
sites include Indianapolis; Clinton and Lafayette, Indiana; and
Carolina, Guayama, and Mayaguez, Puerto Rico. We are
constructing a new production facility in Prince William County,
Virginia.
We own production and distribution facilities in
13 countries outside the United States and Puerto Rico,
containing an aggregate of approximately 4 million square
feet of floor space. Major production sites include facilities
in the United Kingdom, France, Ireland, Spain, Italy, Brazil,
and Mexico. We lease production and warehouse facilities in
Puerto Rico and several countries outside the United States.
Our research and development facilities in the United States
consist of approximately 4.6 million square feet and are
located primarily in Indianapolis and Greenfield, Indiana. Our
major research and development facilities abroad are located in
Belgium, United Kingdom, Germany, Canada, and Spain and contain
an aggregate of approximately 700,000 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. |
Legal Proceedings |
We are a party to various currently pending legal actions,
government investigations, and environmental proceedings, and we
anticipate that such actions could be brought against us in the
future. The most significant of these matters are described
below or, as noted, in Item 7,
14
Managements Discussion and Analysis
Legal and Regulatory Matters. While it is not possible to
predict or determine the outcome of the legal actions,
investigations and proceedings brought against us, we believe
that, except as otherwise specifically noted in 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 Item 7, Managements Discussion and
Analysis Legal and Regulatory Matters, for
information on various legal proceedings, including but not
limited to:
|
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The U.S. patent litigation involving Zyprexa, Evista, and
Gemzar |
|
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|
The civil investigation by the U.S. Attorney for the
Eastern District of Pennsylvania relating to our
U.S. sales, marketing, and promotional practices |
|
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|
The Zyprexa product liability and related litigation, including
claims brought on behalf of healthcare payors |
|
|
|
The suits we have filed against several of our product liability
insurance carriers with respect to our coverage for the Zyprexa
product liability claims |
That information is incorporated into this Item by reference.
Other Patent Litigation
During 2005, two generic pharmaceutical manufacturers, Apotex
Inc. (Apotex) and Novopharm Ltd. (Novopharm) (a wholly-owned
subsidiary of Teva), challenged the validity of our Zyprexa
compound and
method-of-use patent
(expiring in 2011) in Canada. We currently anticipate a decision
from the Canadian Federal Patent Court by January 2007 in the
Apotex case and by September 2007 in the Novopharm case. The
generic companies allege that our patent is invalid, obtained by
fraud, or irrelevant. In May 2004, Egis-Gyogyszergyar, a generic
pharmaceutical manufacturer, challenged the validity of our
Zyprexa compound and
method-of-use patent
(expiring in 2011) in Germany. We currently anticipate a
decision from the German Patent Court in 2006 or 2007. In
addition to our patents, we have data package exclusivity in
Germany through September 2006. We have received challenges to
Zyprexa patents in a number of other countries as well,
including Spain, China, Russia, and several Eastern European
countries. We are vigorously contesting the various legal
challenges to our Zyprexa patents. We cannot predict or
determine the outcome of this litigation.
In October 2002, Pfizer Inc. filed a lawsuit in the United
States District Court in Delaware against us, Lilly ICOS LLC,
and ICOS Corporation alleging that the proposed marketing
of Cialis for erectile dysfunction would infringe its newly
issued method-of-use
patent. In September 2003, the U.S. Patent and Trademark
Office, on its own initiative, ordered that Pfizers patent
be reexamined. The Delaware suit has been stayed pending the
outcome of the reexamination. In the European Union, the
Technical Board of Appeal of the European Patent Office revoked
Pfizers
method-of-use patent in
its entirety in February 2005. The U.K. Court of Appeal has also
held the U.K. counterpart to this patent invalid. Litigation
relating to the corresponding patent is also pending in
Australia, Brazil, Canada, Mexico, New Zealand, and South
Africa. We intend to vigorously defend this litigation and
expect to prevail. However, it is not possible to predict or
determine the outcome of this litigation .
15
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 125 U.S. actions involving approximately
200 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
340 actions in the U.S., involving approximately
1,020 claimants, brought in various state courts and
federal district courts on behalf of children with autism or
other neurological disorders who received childhood vaccines
(manufactured by other companies) that contained thimerosal, a
generic preservative used in certain vaccines in the
U.S. beginning in the 1930s. We purchased patents and
conducted research pertaining to thimerosal in the 1920s. We
have been named in the suits even though we discontinued
manufacturing the raw material in 1974 and discontinued selling
it in the United States to vaccine manufacturers in 1992. The
lawsuits typically name the vaccine manufacturers as well as
Lilly and other distributors of thimerosal, and allege that the
childrens exposure to thimerosal-containing vaccines
caused their autism or other neurological disorders. We strongly
deny any liability in these cases. There is no credible
scientific evidence establishing a causal relationship between
thimerosal-containing vaccines and autism or other neurological
disorders. In addition, we believe the majority of the cases
should not be prosecuted in the courts in which they have been
brought because the underlying claims are subject to the
National Childhood Vaccine Injury Act of 1986. Implemented in
1988, the Act established a mandatory, federally administered
no-fault claims process for individuals who allege that they
were harmed by the administration of childhood vaccines. Under
the Act, claims must first be brought before the U.S. Court
of Claims for an award determination under the compensation
guidelines established pursuant to the Act. Claimants who are
unsatisfied with their awards under the Act may reject the award
and seek traditional judicial remedies.
Other Marketing Practices Investigations
In 2002, 2003, and 2004, we received grand jury subpoenas from
the Office of Consumer Litigation, Department of Justice,
related to our marketing and promotional practices and physician
communications with respect to Evista. In the fourth quarter of
2004 we recorded a provision for $36.0 million in
connection with the matter. In December 2005, we reached a
settlement of the matter with the government, which was
subsequently approved by the U.S. District Court for the
Southern District of Indiana in February 2006. As part of the
settlement, we agreed to plead guilty to one misdemeanor
violation of the Food, Drug, and Cosmetic Act. The plea is for
the off-label promotion of Evista during 1998. The government
did not charge the company with any unlawful intent, nor do we
acknowledge any such intent. In connection with the overall
settlement, we paid a total of $36.0 million. In addition,
as part of the settlement, a civil consent decree requires us to
continue to have a compliance program and to undertake a set of
defined corporate integrity obligations related to Evista for
five years.
In August 2003, we received notice that the staff of the SEC is
conducting an investigation into the compliance by Polish
subsidiaries of certain pharmaceutical companies, including
Lilly, with the U.S. Foreign Corrupt Practices Act of 1977.
The staff has issued subpoenas to us requesting production of
documents related to the investigation. We are cooperating with
the SEC in responding to the investigation.
16
Other Matters
In August 2005, we received a civil subpoena from office of the
Attorney General of Connecticut for production of documents
related to Healthcare Research & Development Institute
LLC, an organization of executives of hospitals, healthcare
systems, and other companies in the healthcare field, of which
we are a corporate member. We are cooperating in responding to
the subpoena.
In October 2005, we received a subpoena from the
U.S. Attorneys office for the District of
Massachusetts for the production of documents relating to our
business relationship with a long-term care pharmacy
organization concerning Actos, Humalog, Humulin, and Zyprexa. We
are cooperating in responding to the subpoena.
Between 2003 and 2005, various counties in New York sued us and
many other pharmaceutical manufacturers, claiming in general
that as a result of alleged improprieties by the manufacturers
in the calculation and reporting of average wholesale prices for
purposes of Medicaid reimbursement, the counties overpaid their
portion of the cost of pharmaceuticals. The suits seek monetary
and other relief, including civil penalties and treble damages.
The suits have been transferred to the U.S. District Court
for the District of Massachusetts for pretrial proceedings. The
suits are in the earliest stages. Similar suits were filed
against us and many other manufacturers by the states of Alabama
and Mississippi. In December 2005, Alabama voluntarily dismissed
its case against us. The Mississippi case, pending in state
court in Hinds County, is in the earliest stages.
During 2004 we, along with several other pharmaceutical
companies, were named in one consolidated case in Minnesota
federal court brought on behalf of consumers alleging that the
conduct of pharmaceutical companies in preventing commercial
importation of prescription drugs from outside the United States
violated antitrust laws and one case in California state court
brought by several pharmacies in which plaintiffs claims
are less specifically stated, but are substantially similar to
the claims asserted in Minnesota. Both cases seek restitution
for alleged overpayments for pharmaceuticals and an injunction
against the allegedly violative conduct. The federal district
court in the Minnesota case has dismissed the federal claims and
ruled that the state claims must be brought in separate state
court actions. Plaintiffs have appealed that decision to the
Eighth Circuit Court of Appeals. The California case is
currently in discovery.
Under the Comprehensive Environmental Response, Compensation,
and Liability Act, commonly known as Superfund, we have been
designated as one of several potentially responsible parties
with respect to the cleanup of fewer than 10 sites. Under
Superfund, each responsible party may be jointly and severally
liable for the entire amount of the cleanup.
We are also a defendant in other litigation and investigations,
including product liability and patent suits, of a character we
regard as normal to our business.
|
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Item 4. |
Submission of Matters to a Vote of Security Holders |
During the fourth quarter of 2005, no matters were submitted to
a vote of security holders.
17
Part II
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Item 5. |
Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities |
You can find information relating to the principal market for
our common stock and related stockholder matters at 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, 2005:
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|
Total Number of Shares | |
|
Approximate Dollar Value | |
|
|
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|
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|
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) | |
|
(c) | |
|
(d) | |
| |
|
|
(in thousands) | |
|
|
|
(in thousands) | |
|
(Dollars in millions) | |
October 2005
|
|
|
61 |
|
|
|
$51.86 |
|
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|
|
|
|
|
$920.0 |
|
November 2005
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
920.0 |
|
December 2005
|
|
|
6,717 |
|
|
|
56.36 |
|
|
|
6,704 |
|
|
|
541.3 |
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|
|
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Total
|
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|
6,778 |
|
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|
|
|
|
|
6,704 |
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The amounts presented in columns (a) and (b) above
include purchases of common stock related to our share
repurchase program and employee stock option exercises. The
amounts presented in columns (c) and (d) in the above
table represent activity related only to our $3.0 billion
share repurchase program announced in March 2000. As of
December 31, 2005, we have purchased $2.46 billion
related to this program.
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Item 6. |
Selected Financial Data |
You can find selected financial data for each of our five most
recent fiscal years in Item 8 under Selected
Financial Data (unaudited). That information is
incorporated here by reference.
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Item 7. |
Managements Discussion and Analysis of Results of
Operations and Financial Condition |
Executive Overview
This section provides an overview of our financial results,
product launches and late-stage product pipeline developments,
and legal and governmental matters affecting our company and the
pharmaceutical industry.
Financial Results
We achieved worldwide sales growth of 6 percent, due in
part to the launch in 2004 of five new products as well as six
new indications or formulations for expanded use of new and
existing products in key markets. In addition, we launched one
new product in the U.S. and several new products, new
indications, or new formulations in key markets in 2005. We
continued our substantial investments in our manufacturing
operations and research and development activities, resulting in
cost of products sold and research and development costs
increasing at rates greater than sales. Despite product launch
expenditures, our cost-containment and productivity measures
18
contributed to marketing and administrative expenses increasing
at a rate less than sales. During 2005, we began to expense
stock options, which had the effect of increasing our research
and development and marketing and administrative expenses. We
also benefited from an increase in net other income due
primarily to increased profitability of the Lilly ICOS joint
venture and a decrease in the tax rate in 2005. Net income was
$1.98 billion, or $1.81 per share, in 2005 as compared
with $1.81 billion, or $1.66 per share, in 2004,
representing an increase in net income and earnings per share of
9 percent. Net income comparisons between 2005 and 2004 are
also affected by the impact of the following significant items
that are reflected in our financial results (see
Notes 1, 2, 3, 4, 7, 11, and 13 to the
consolidated financial statements for additional information):
2005
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We incurred a charge related to product liability litigation
matters, primarily related to
Zyprexa®,
of $1.07 billion (pretax), which decreased earnings per
share by $.90 in the second quarter of 2005 (Notes 4 and
13). |
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In 2005, we began to expense stock options in accordance with
SFAS 123(R). Had we expensed stock options in 2004, our
2004 net income would have been lower by
$266.4 million, which would have decreased earnings per
share by $.24 per share (Notes 1 and 7). |
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We recognized asset impairment and other special charges of
$171.9 million (pretax) in the fourth quarter, which
decreased earnings per share by $.14 (Note 4). |
|
|
We adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) 47, Accounting for
Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143, in the fourth quarter of 2005. The
adoption of FIN 47 resulted in an adjustment for the
cumulative effect of a change in accounting principle of
$22.0 million (after-tax), which decreased earnings per
share by $.02 (Note 2). |
19
2004
|
|
|
We recognized asset impairment charges, streamlined our
infrastructure, and provided for the anticipated resolution of
the government investigation of
Evista®
marketing and promotional practices, resulting in charges of
$108.9 million (pretax) in the second quarter and
$494.1 million (pretax) in the fourth quarter, which
decreased earnings per share by $.08 and $.30, respectively
(Note 4). |
|
|
We incurred charges for acquired in-process research and
development (IPR&D) of $362.3 million (no tax benefit)
in the first quarter related to the acquisition of Applied
Molecular Evolution, Inc. (AME), and $29.9 million
(pretax) in the fourth quarter related to our acquisition
of a Phase I compound currently under development as a
potential treatment for insomnia, which decreased earnings per
share by $.33 in the first quarter and $.02 in the fourth
quarter (Note 3). |
|
|
As discussed further in Financial Condition, we recognized tax
expenses of $465.0 million in the fourth quarter associated
with the anticipated repatriation in 2005 of $8.00 billion
of our earnings reinvested outside the U.S., as a result of the
passage of the American Jobs Creation Act of 2004 (AJCA). This
tax expense decreased earnings per share by $.43 in that quarter
(Note 11). |
Recent Product Launches and Late-Stage Product Pipeline
Developments
Our long-term success depends, to a great extent, on our ability
to continue to discover and develop innovative pharmaceutical
products and acquire or collaborate on compounds currently in
development by other biotechnology or pharmaceutical companies.
We have achieved a number of successes with recent product
launches and late-stage pipeline developments, including:
|
|
|
We are in the process of rolling out the global launches of a
number of new products, including
Alimta®,
Byetta®,
Cialis®,
Cymbalta®,
Forteo®,
Strattera®,
Symbyax®,
and
Yentreve®.
In addition, we recently launched new indications or
formulations of Alimta, Cymbalta,
Gemzar®,
Humatrope®,
and Zyprexa. |
|
|
We launched Cymbalta for the treatment of major depressive
disorder in the U.S. in August 2004. In September 2004,
Cymbalta received its second U.S. approval and became the
first FDA-approved treatment for diabetic peripheral neuropathic
pain (DPNP). Cymbalta was launched in the United Kingdom and
Germany in the first quarter of 2005 for the treatment of major
depressive episodes. Other launches in the European Union are
expected to occur throughout 2006. The European Commission also
granted marketing authorization of Cymbalta for the treatment of
DPNP in adults in July 2005. Cymbalta has achieved
$728.9 million in U.S. sales since its launch. |
|
|
In June 2005, Lilly and Amylin Pharmaceuticals, Inc., launched
Byetta (exenatide), the first in a new class of medicines known
as incretin mimetics, in the U.S. for the treatment of type
2 diabetes. In the fourth quarter of 2005, we submitted Byetta
for the treatment of type 2 diabetes in Europe. |
|
|
We expect to advance our pipeline during 2006 with three
significant submissions anticipated, including
Arxxanttm
for diabetic retinopathy, Cymbalta for generalized anxiety
disorder, and Evista for breast cancer risk reduction in
postmenopausal women. |
20
Legal and Governmental Matters
Certain generic manufacturers have challenged our
U.S. compound patent for Zyprexa and are seeking permission
to market generic versions of Zyprexa prior to its patent
expiration in 2011. On April 14, 2005, the
U.S. District Court in Indianapolis ruled in our favor on
all counts, upholding our patents. The decision has been
appealed.
In 2005, we entered into an agreement with plaintiffs
attorneys involved in certain U.S. Zyprexa product
liability litigation to settle a majority of the claims against
us relating to the medication. We established a fund of
$690 million for the claimants who agree to settle their
claims. Additionally, we paid $10 million to cover
administration of the settlement. As a result of our product
liability exposures, the substantial majority of which were
related to Zyprexa, we recorded a net pretax charge of
$1.07 billion in the second quarter of 2005.
In March 2004, we were notified by the U.S. Attorneys
office for the Eastern District of Pennsylvania that it has
commenced a civil investigation relating to our U.S. sales,
marketing, and promotional practices.
In the United States, implementation of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(MMA), which provides a prescription drug benefit under the
Medicare program, took effect January 1, 2006. While it is
difficult to predict the business impact of this legislation, we
currently anticipate a modest short-term increase in sales.
However, in the long term there is additional risk of increased
pricing pressures. While the MMA prohibits the Secretary of
Health and Human Services (HHS) from directly negotiating
prescription drug prices with manufacturers, we expect continued
challenges to that prohibition over the next several years.
Also, the MMA retains the authority of the Secretary of HHS to
prohibit the importation of prescription drugs, but we expect
Congress to consider several measures that could remove that
authority and allow for the importation of products into the
U.S. regardless of their safety or cost. If adopted, such
legislation would likely have a negative effect on our
U.S. sales. We believe there is some chance that the new
and expanded prescription drug coverage for seniors under the
MMA will alleviate the need for a federal importation scheme.
As a result of the passage of the MMA, aged and disabled
patients jointly eligible for Medicare and Medicaid began
receiving their prescription drug benefits through the Medicare
program, instead of Medicaid, on January 1, 2006. This may
relieve some state budget pressures but is unlikely to result in
reduced pricing pressures at the state level. A majority of
states have begun to implement supplemental rebates and
restricted formularies in their Medicaid programs, and these
programs are expected to continue in the post-MMA environment.
Several states are also attempting to extend discounted Medicaid
prices to non-Medicaid patients. Additionally, notwithstanding
the federal law prohibiting drug importation, approximately a
dozen states have implemented importation schemes for their
citizens, usually involving a website that links patients to
selected Canadian pharmacies. One state has such a program for
its state employees. As a result, we expect pressures on
pharmaceutical pricing to continue.
International operations are also generally subject to extensive
price and market regulations, and there are many proposals for
additional cost-containment measures, including proposals that
would directly or indirectly impose additional price controls or
reduce the value of our intellectual property protection.
21
Operating Results 2005
Sales
Our worldwide sales for 2005 increased 6 percent, to
$14.65 billion, driven primarily by sales growth of
Cymbalta, Alimta, Forteo, and Gemzar. As a result of
restructuring our arrangements with our U.S. wholesalers in
early 2005, reductions occurred in wholesaler inventory levels
for certain products (primarily Strattera,
Prozac®,
and Gemzar) that reduced our sales by approximately
$170 million. Sales growth in 2005 was also affected by
decreased U.S. demand for Zyprexa, Strattera, and Prozac.
Despite this wholesaler destocking and decreased demand, sales
in the U.S. increased 2 percent, to
$7.80 billion, driven primarily by increased sales of
Cymbalta and Alimta. Sales outside the U.S. increased
11 percent, to $6.85 billion, driven by growth of
Zyprexa, Alimta, and Gemzar. Worldwide sales reflected a volume
increase of 3 percent, with global selling prices
contributing 1 percent and an increase due to favorable
changes in exchange rates contributing 1 percent. (Numbers
do not add due to rounding.)
The following table summarizes our net sales activity in 2005
compared with 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
|
|
|
|
December 31, 2005 | |
|
Year Ended | |
|
Percent | |
|
|
| |
|
December 31, 2004 | |
|
Change | |
Product |
|
U.S.(1) | |
|
Outside U.S. | |
|
Total | |
|
Total | |
|
from 2004 | |
| |
(Dollars in millions) |
|
|
Zyprexa
|
|
$ |
2,034.9 |
|
|
$ |
2,167.4 |
|
|
$ |
4,202.3 |
|
|
$ |
4,419.8 |
|
|
|
(5 |
) |
Gemzar
|
|
|
586.1 |
|
|
|
748.4 |
|
|
|
1,334.5 |
|
|
|
1,214.4 |
|
|
|
10 |
|
Humalog
|
|
|
739.6 |
|
|
|
458.1 |
|
|
|
1,197.7 |
|
|
|
1,101.6 |
|
|
|
9 |
|
Evista
|
|
|
652.9 |
|
|
|
383.2 |
|
|
|
1,036.1 |
|
|
|
1,012.7 |
|
|
|
2 |
|
Humulin
|
|
|
410.7 |
|
|
|
594.0 |
|
|
|
1,004.7 |
|
|
|
997.7 |
|
|
|
1 |
|
Animal health products
|
|
|
370.3 |
|
|
|
493.4 |
|
|
|
863.7 |
|
|
|
798.7 |
|
|
|
8 |
|
Cymbalta
|
|
|
636.2 |
|
|
|
43.5 |
|
|
|
679.7 |
|
|
|
93.9 |
|
|
|
NM |
|
Strattera
|
|
|
498.7 |
|
|
|
53.4 |
|
|
|
552.1 |
|
|
|
666.7 |
|
|
|
(17 |
) |
Actos
|
|
|
355.7 |
|
|
|
137.3 |
|
|
|
493.0 |
|
|
|
452.9 |
|
|
|
9 |
|
Alimta
|
|
|
296.3 |
|
|
|
166.9 |
|
|
|
463.2 |
|
|
|
142.6 |
|
|
|
NM |
|
Fluoxetine products
|
|
|
249.1 |
|
|
|
204.3 |
|
|
|
453.4 |
|
|
|
559.0 |
|
|
|
(19 |
) |
Anti-infectives
|
|
|
133.3 |
|
|
|
310.6 |
|
|
|
443.9 |
|
|
|
478.0 |
|
|
|
(7 |
) |
Humatrope
|
|
|
184.5 |
|
|
|
229.9 |
|
|
|
414.4 |
|
|
|
430.3 |
|
|
|
(4 |
) |
Forteo
|
|
|
264.7 |
|
|
|
124.6 |
|
|
|
389.3 |
|
|
|
238.6 |
|
|
|
63 |
|
ReoPro®
|
|
|
119.8 |
|
|
|
176.9 |
|
|
|
296.7 |
|
|
|
362.8 |
|
|
|
(18 |
) |
Xigris®
|
|
|
118.9 |
|
|
|
95.7 |
|
|
|
214.6 |
|
|
|
201.8 |
|
|
|
6 |
|
Cialis(2)
|
|
|
2.3 |
|
|
|
167.6 |
|
|
|
169.9 |
|
|
|
130.6 |
|
|
|
30 |
|
Symbyax
|
|
|
52.6 |
|
|
|
1.3 |
|
|
|
53.9 |
|
|
|
70.2 |
|
|
|
(23 |
) |
Other pharmaceutical products
|
|
|
91.5 |
|
|
|
290.7 |
|
|
|
382.2 |
|
|
|
485.6 |
|
|
|
(21 |
) |
|
|
|
|
Total net sales
|
|
$ |
7,798.1 |
|
|
$ |
6,847.2 |
|
|
$ |
14,645.3 |
|
|
$ |
13,857.9 |
|
|
|
6 |
|
|
|
|
NM Not meaningful
(1) U.S. sales include
sales in Puerto Rico.
(2) Cialis had worldwide 2005
sales of $746.6 million, representing an increase of
35 percent compared with 2004. The sales shown in the table
above represent results only in the territories in which we
market Cialis exclusively. The remaining sales relate to the
joint-venture territories of Lilly ICOS LLC (North America,
excluding Puerto Rico, and Europe). Our share of the
joint-venture territory sales, net of expenses, is reported in
net other income in our consolidated income statement.
22
Zyprexa, our top-selling product, is a treatment for
schizophrenia, bipolar mania, and bipolar maintenance. Zyprexa
sales in the U.S. decreased 16 percent in 2005,
resulting from a decline in underlying demand due to continuing
competitive pressures. Sales outside the U.S. in 2005
increased 9 percent, driven by volume growth in a number of
major markets and the favorable impact of exchange rates.
Excluding the impact of exchange rates, sales of Zyprexa outside
the U.S. increased by 6 percent. In September 2005,
the National Institute of Mental Health released the results of
its Clinical Antipsychotic Trial of Intervention Effectiveness
(CATIE) study, which showed that Zyprexa was statistically
superior on time to discontinuation in patients with
schizophrenia as compared to other medications. Patients taking
Zyprexa also experienced significantly fewer hospitalizations
for schizophrenia than patients taking other medications. In
addition, the study noted that Zyprexa patients experienced
greater weight gain and increases in measures of glucose and
lipid metabolism than patients using other antipsychotics.
Diabetes care products, composed primarily of
Humalog®,
our insulin analog;
Humulin®,
a biosynthetic human insulin;
Actos®,
an oral agent for the treatment of type 2 diabetes; and
recently-launched Byetta, the first in a new class of medicines
known as incretin mimetics for type 2 diabetes that we market
with Amylin Pharmaceuticals, had aggregate worldwide revenues of
$2.80 billion in 2005, an increase of 7 percent.
Diabetes care revenues in the U.S. increased
7 percent, to $1.59 billion, primarily driven by
higher prices, offset partially by a decline in underlying
demand due to continued competitive pressures in the insulins
market and reductions in wholesaler inventory levels of
insulins. Diabetes care revenues outside the U.S. increased
8 percent, to $1.20 billion. Humalog sales increased
8 percent in the U.S. and 10 percent outside the
U.S. Humulin sales in the U.S. decreased
3 percent, while Humulin sales outside the
U.S. increased 3 percent. Actos revenues, the majority
of which represent service revenues from a copromotion agreement
in the U.S. with Takeda Pharmaceuticals North America
(Takeda), increased 9 percent in 2005. Actos is
manufactured by Takeda Chemical Industries, Ltd., and sold in
the U.S. by Takeda. Our U.S. marketing rights with
respect to Actos expire in September 2006; however, we will
continue receiving royalties from Takeda. As a result, our
revenues from Actos will decline each year from 2006 through
2009. Our arrangement in the U.S. ceases after October
2009. Sales of Byetta were $74.6 million following its June
2005 launch. We report as revenue our 50 percent share of
Byettas gross margin and our sales of Byetta pen delivery
devices to Amylin. This revenue totaled $39.6 million in
2005.
Sales of Gemzar, a product approved to fight various cancers,
increased 4 percent in the U.S. Sales growth in the
U.S. in 2005 was negatively affected by reductions in
wholesaler inventory levels as a result of our restructured
arrangements with our U.S. wholesalers. Gemzar sales
increased 15 percent outside the U.S., driven by strong
volume growth in a number of cancer indications.
23
Sales of Evista, a product for the prevention and treatment of
osteoporosis, decreased 2 percent in the U.S. due to a
decline in U.S. underlying demand resulting from continued
competitive pressures and reductions in wholesaler inventory
levels. This decline was partially offset by price increases.
Outside the U.S., sales of Evista increased 11 percent,
driven by volume growth in several markets and the early 2004
launch of the product in Japan.
Cymbalta was launched in the U.S. in late August 2004 for
the treatment of major depressive disorder and in September 2004
for the treatment of diabetic peripheral neuropathic pain.
Cymbalta launches began in Europe for the treatment of major
depressive disorder during the first quarter of 2005, with
additional launches expected through 2006. Cymbalta has been
well accepted, generating $679.7 million in sales in 2005.
Sales of Strattera, the only nonstimulant medicine approved for
the treatment of attention-deficit hyperactivity disorder in
children, adolescents, and adults, declined 24 percent in
the U.S. in 2005 due to wholesaler destocking resulting
from restructured arrangements with our U.S. wholesalers
and a decline in underlying demand. Sales outside the
U.S. were $53.4 million in 2005, compared with
$10.3 million in 2004, primarily reflecting recent launches
in Australia, Canada, Germany, Mexico, and Spain. In the third
quarter of 2005, we announced an important update to the
Strattera label, communicating new information regarding
uncommon reports of suicidal thoughts among children and
adolescents. We have added a boxed warning to the label in the
U.S. and are working with other regulatory agencies in countries
where Strattera is approved to update the label information
appropriately.
Alimta was launched in the U.S. in February 2004 for the
treatment of malignant pleural mesothelioma and in August for
second-line treatment of non-small-cell lung cancer (NSCLC).
Alimta was launched in several European countries in the second
half of 2004 and throughout 2005. Alimta generated sales of
$463.2 million in 2005.
24
Forteo, a treatment for both men and postmenopausal women
suffering from severe osteoporosis, increased 34 percent in
the U.S. in 2005, driven by strong growth in underlying
demand. Sales growth was offset, in part, by wholesaler
destocking in the first half of 2005 related to our new
arrangements with U.S. wholesalers.
Cialis, an erectile dysfunction treatment, is promoted in North
America and Europe jointly by Lilly and ICOS Corporation,
and by Lilly exclusively in the rest of the world. The
$746.6 million of worldwide Cialis sales in 2005, an
increase of 35 percent compared to 2004, comprises
$169.9 million of sales in our territories, which are
reported in our net sales, and $576.7 million of sales in
the joint-venture territories. Within the joint-venture
territories, U.S. sales of Cialis were $272.9 million
for 2005, an increase of 32 percent, despite wholesaler
destocking in the first half of the year as a result of our
restructured arrangements with our U.S. wholesalers. Cialis
continues to increase its market share in most major markets in
this extremely competitive category.
Animal health product sales in the U.S. increased
9 percent, while sales outside the U.S. increased
7 percent, led by Rumensin and Paylean.
Gross Margin, Costs, and Expenses
The 2005 gross margin decreased to 76.3 percent of sales
compared with 76.7 percent for 2004. The decrease was
primarily due to higher manufacturing expenses, partially offset
by favorable product mix and lower factory inventory losses.
Operating expenses (the aggregate of research and development
and marketing and administrative expenses) increased
8 percent in 2005. Investment in research and development
increased 12 percent, to $3.03 billion, in 2005, due
to the adoption of stock option expensing in 2005, decreased
reimbursements from collaboration partners, and increased
incentive compensation and benefits expenses. We continued to be
a leader in our industry peer group by investing
25
approximately 21 percent of our sales into research and
development during 2005. Marketing and administrative expenses
increased 5 percent in 2005, to $4.50 billion, due to
the adoption of stock option expensing in 2005, and increased
incentive compensation and benefits expenses. This comparison
also benefited from a charitable contribution to the Lilly
Foundation during the fourth quarter of 2004. Research and
development expenses would have increased by 8 percent, and
marketing and administrative expenses would have been flat for
2005, if 2004 had been restated as if stock options had been
expensed.
Net other income for 2005 increased $89.4 million, to
$419.4 million, primarily due to the Lilly ICOS LLC joint
venture becoming profitable during 2005 and increased interest
income, partially offset by less income related to the
outlicense of legacy products and partnered products in
development. We report our 50 percent share of the
operating results of the Lilly ICOS joint venture in our net
other income. For 2005, our net income from the joint venture
was $11.1 million, compared with a net loss of
$79.0 million in 2004. The joint venture became profitable
for the first time in the third quarter of 2005.
Interest expense for 2005 increased $53.6 million, to
$105.2 million, primarily due to an increase in interest
rates.
The effective tax rate for 2005 was 26.3 percent, compared
with 38.5 percent for 2004. The effective tax rate for 2005
was affected by the product liability charge of
$1.07 billion. The tax benefit of this charge was less than
our effective tax rate, as the tax benefit was calculated based
upon existing tax laws in the countries in which we reasonably
expect to deduct the charge. The effective tax rate for 2004 was
affected by the tax provision related to the expected
repatriation of $8.00 billion of earnings reinvested
outside the U.S. pursuant to the AJCA and the charge for
acquired IPR&D related to the AME acquisition, which is not
deductible for tax purposes. See Note 11 to the
consolidated financial statements for additional information.
26
Operating Results 2004
Financial Results
We achieved worldwide sales growth of 10 percent, due in
part to the launch during the year of five new products as well
as six new indications or formulations for expanded use of new
and existing products in key markets. We continued our
substantial investments in our manufacturing operations and
research and development activities, resulting in costs of
products sold and research and development costs increasing at
rates greater than sales. Despite significant product launch
expenditures, our cost-containment and productivity measures
resulted in marketing and administrative expenses increasing at
a rate significantly less than sales. We also benefited from an
increase in net other income in 2004. Net income was
$1.81 billion, or $1.66 per share, in 2004, as
compared with $2.56 billion, or $2.37 per share, in
2003, decreases of 29 and 30 percent, respectively.
Certain items, reflected in our operating results for 2004 and
2003, should be considered in comparing the two years. The
significant items for 2004 are summarized in the Executive
Overview. The 2003 items are summarized as follows (see
Note 4 to the consolidated financial statements for
additional information).
|
|
|
We recognized asset impairments, primarily relating to
manufacturing assets in the U.S., and streamlined our
infrastructure, resulting in severance-related and other charges
totaling $167.1 million (pretax) in the first quarter
and $28.3 million (pretax) in the fourth quarter,
which decreased earnings per share by approximately $.10 and
$.02 in the first and fourth quarters of 2003, respectively
(Note 4). |
|
|
Separately, we recognized asset impairments and other charges of
$186.8 million (pretax) in the first quarter of 2003
related primarily to our common stock ownership and loan
agreements with Isis Pharmaceuticals, Inc. (Isis), which
decreased earnings per share by $.13 in that quarter
(Note 4). |
|
|
In the fourth quarter of 2003, we recorded a gain of
$65.0 million (pretax) related to the sale of patent
rights to dapoxetine for development in the field of
genitourinary disorders to PPD, Inc., which increased earnings
per share by $.04 in that quarter. |
Sales
Our worldwide sales for 2004 increased 10 percent, to
$13.86 billion, due primarily to the increased global sales
of Strattera, Gemzar, Forteo, Zyprexa, Evista, Humatrope, and
Cialis, and sales related to the launches of Alimta and
Cymbalta. Sales in the U.S. increased 6 percent, to
$7.67 billion. Sales outside the U.S. increased
15 percent, to $6.19 billion. Worldwide sales
reflected a volume increase of 5 percent, with global
selling prices contributing 2 percent and an increase due
to favorable changes in exchange rates contributing
3 percent.
27
The following table summarizes our net sales activity in 2004
compared with 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 | |
|
Year Ended | |
|
Percent | |
|
|
| |
|
December 31, 2003 | |
|
Change | |
Product |
|
U.S.(1) | |
|
Outside U.S. | |
|
Total | |
|
Total | |
|
from 2003 | |
| |
|
|
(Dollars in millions) | |
Zyprexa
|
|
$ |
2,422.2 |
|
|
$ |
1,997.6 |
|
|
$ |
4,419.8 |
|
|
$ |
4,276.9 |
|
|
|
3 |
|
Gemzar
|
|
|
565.1 |
|
|
|
649.3 |
|
|
|
1,214.4 |
|
|
|
1,021.7 |
|
|
|
19 |
|
Humalog
|
|
|
685.4 |
|
|
|
416.2 |
|
|
|
1,101.6 |
|
|
|
1,021.3 |
|
|
|
8 |
|
Evista
|
|
|
667.9 |
|
|
|
344.8 |
|
|
|
1,012.7 |
|
|
|
922.1 |
|
|
|
10 |
|
Humulin
|
|
|
422.7 |
|
|
|
575.0 |
|
|
|
997.7 |
|
|
|
1,060.4 |
|
|
|
(6 |
) |
Animal health products
|
|
|
338.9 |
|
|
|
459.8 |
|
|
|
798.7 |
|
|
|
726.6 |
|
|
|
10 |
|
Strattera
|
|
|
656.4 |
|
|
|
10.3 |
|
|
|
666.7 |
|
|
|
370.3 |
|
|
|
80 |
|
Fluoxetine products
|
|
|
327.3 |
|
|
|
231.7 |
|
|
|
559.0 |
|
|
|
645.1 |
|
|
|
(13 |
) |
Anti-infectives
|
|
|
110.2 |
|
|
|
367.8 |
|
|
|
478.0 |
|
|
|
489.9 |
|
|
|
(2 |
) |
Actos
|
|
|
340.4 |
|
|
|
112.5 |
|
|
|
452.9 |
|
|
|
431.2 |
|
|
|
5 |
|
Humatrope
|
|
|
204.8 |
|
|
|
225.5 |
|
|
|
430.3 |
|
|
|
370.9 |
|
|
|
16 |
|
ReoPro
|
|
|
175.4 |
|
|
|
187.4 |
|
|
|
362.8 |
|
|
|
364.4 |
|
|
|
0 |
|
Forteo
|
|
|
198.0 |
|
|
|
40.6 |
|
|
|
238.6 |
|
|
|
65.3 |
|
|
|
NM |
|
Xigris
|
|
|
123.3 |
|
|
|
78.5 |
|
|
|
201.8 |
|
|
|
160.4 |
|
|
|
26 |
|
Alimta
|
|
|
121.8 |
|
|
|
20.8 |
|
|
|
142.6 |
|
|
|
|
|
|
|
NM |
|
Cialis(2)
|
|
|
1.4 |
|
|
|
129.2 |
|
|
|
130.6 |
|
|
|
73.5 |
|
|
|
78 |
|
Cymbalta
|
|
|
92.7 |
|
|
|
1.2 |
|
|
|
93.9 |
|
|
|
|
|
|
|
NM |
|
Symbyax
|
|
|
70.1 |
|
|
|
0.1 |
|
|
|
70.2 |
|
|
|
|
|
|
|
NM |
|
Other pharmaceutical products
|
|
|
144.5 |
|
|
|
341.1 |
|
|
|
485.6 |
|
|
|
582.5 |
|
|
|
(17 |
) |
|
|
|
|
Total net sales
|
|
$ |
7,668.5 |
|
|
$ |
6,189.4 |
|
|
$ |
13,857.9 |
|
|
$ |
12,582.5 |
|
|
|
10 |
|
|
|
|
NM Not meaningful
(1) U.S. sales include
sales in Puerto Rico.
(2) Cialis had worldwide 2004
sales of $552.3 million, an increase of 172 percent
compared with 2003. The sales shown in the tables above
represent results in the territories in which we market Cialis
exclusively. The remaining sales relate to the joint-venture
territories of Lilly ICOS LLC (North America, excluding Puerto
Rico, and Europe). Our share of the joint-venture territory
sales, net of expenses, is reported in net other income in our
consolidated income statement.
Zyprexa sales in the U.S. decreased 8 percent in 2004
due to a decline in underlying demand from continued competitive
pressures. Zyprexa sales outside the U.S. increased
22 percent, driven by volume growth in a number of major
markets outside the U.S. International Zyprexa sales growth
also benefited from the impact of foreign exchange rates.
Excluding the impact of exchange rates, sales of Zyprexa outside
the U.S. increased 13 percent in 2004.
Diabetes care products had aggregate worldwide revenues of
$2.61 billion in 2004, an increase of 2 percent.
Diabetes care revenues in the U.S. decreased
6 percent, to $1.49 billion. Diabetes care revenues
outside the U.S. increased 14 percent, to
$1.12 billion. Humulin sales in the U.S. decreased
19 percent, driven primarily by volume declines due to
competitive pressures. Humulin sales outside the
U.S. increased 7 percent. Humalog sales in the
U.S. increased 3 percent as increased prices offset
slight volume declines. Humalog sales outside the
U.S. increased 16 percent, to $416.2 million.
Actos revenues increased 5 percent in 2004.
Sales of Gemzar increased 8 percent in the
U.S. largely due to the May 2004 approval for the treatment
of late-stage metastatic breast cancer. Gemzar sales increased
31 percent outside the U.S.,
28
driven by strong volume growth in a number of cancer indications
as well as favorable foreign exchange rates.
Sales of Evista increased 1 percent in the U.S. due to
continued competitive pressures. Outside the U.S., Evista
maintained a strong growth rate of 32 percent, driven by
volume growth in several markets and the early 2004 launch of
the product in Japan.
In 2004, Strattera generated an 80 percent increase over
2003 sales despite a very competitive landscape. In December
2004, we added a bolded warning to the product label, which
indicates that the medication should be discontinued in patients
with jaundice (yellowing of the skin or whites of the eyes) or
in the event of laboratory evidence of liver injury.
Forteo generated $238.6 million in sales in 2004,
continuing the products strong growth trajectory following
its U.S. launch in December 2002 and European launches in
late 2003 and during 2004.
The $552.3 million of worldwide Cialis sales in 2004, an
increase of 172 percent compared to 2003, comprises
$130.6 million of sales in our territories, which are
reported in our net sales, and $421.7 million of sales in
the joint-venture territories. Within the joint-venture
territories, U.S. sales of Cialis were $206.6 million
for 2004.
Animal health product sales in the U.S. increased
9 percent, while sales outside the U.S. increased
10 percent, led by
Tylan®,
Rumensin, and Paylean.
Gross Margin, Costs, and Expenses
The 2004 gross margin decreased to 76.7 percent of sales
compared with 78.7 percent for 2003. The decrease was due
primarily to continued investment in our manufacturing technical
capabilities and capacity and the impact of foreign exchange
rates, offset partially by favorable changes in product mix due
to growth in sales of higher margin products.
Operating expenses increased 9 percent in 2004. Investment
in research and development increased 15 percent, to
$2.69 billion, due to increased clinical trial and
development expenses and increased incentive compensation and
benefits expenses, partially offset by reimbursements for
research activities from our collaboration partners. We
reinvested more than 19 percent of our sales into research
and development. Marketing and administrative expenses increased
6 percent in 2004, to $4.28 billion, attributable
primarily to increased selling expenses in support of the new
and anticipated product launches, the impact of foreign exchange
rates, increased incentive compensation and benefits expenses,
increased charitable contributions to the Lilly Foundation, and
increased product liability expenses, offset partially by
ongoing marketing cost-containment measures and marketing
expense reimbursement from collaboration partners. A majority of
the reimbursements are ongoing.
Net other income for 2004 increased $126.9 million to
$330.0 million. The increase for 2004 was primarily due to
income related to the outlicensing of legacy products outside
the United States, milestone payments from collaborations on the
duloxetine molecule, income related to a previously assigned
patent arrangement of $30.0 million, and other
miscellaneous income. This was offset partially by an increase
in the net loss of the Lilly ICOS LLC joint venture, due
primarily to increased marketing costs of Cialis in
joint-venture territories, and the 2003 sale of dapoxetine
patent rights. For 2004, our net loss from the joint venture was
$79.0 million, compared with $52.4 million in 2003.
The effective tax rate for 2004 was 38.5 percent, compared
with 21.5 percent for 2003. The increase in the effective
tax rate was caused by the tax provision related to the expected
repatriation
29
of $8.00 billion of earnings reinvested outside the
U.S. pursuant to the AJCA and the charge for acquired
IPR&D related to the AME acquisition, which is not
deductible for tax purposes. See Note 11 to the
consolidated financial statements for additional information.
Financial Condition
As of December 31, 2005, cash, cash equivalents, and
short-term investments totaled $5.04 billion compared with
$7.46 billion at December 31, 2004. Cash flow from
operations of $1.91 billion and net issuances of long-term
debt of $2.00 billion were more than offset by net
repayments of short-term debt of $1.99 billion, dividends
paid of $1.65 billion, capital expenditures of
$1.30 billion, net purchases of noncurrent investments of
$638.0 million, and repurchases of common stock of
$377.9 million.
Capital expenditures of $1.30 billion during 2005 were
$600.0 million less than in 2004, due primarily to the
management of capital spending and completion of key projects.
We expect near-term capital expenditures to remain approximately
the same as 2005 levels while we continue to invest in the
long-term growth of our diabetes care and other products, as
well as research and development activities.
Total debt at December 31, 2005, was $6.50 billion,
essentially unchanged compared to December 31, 2004. Our
current debt ratings from Standard & Poors and
Moodys remain at AA and Aa3, respectively.
Dividends of $1.52 per share were paid in 2005, an increase
of 7 percent from 2004. In the fourth quarter of 2005,
effective for the first-quarter dividend in 2006, the quarterly
dividend was increased to $.40 per share (a 5 percent
increase), resulting in an indicated annual rate for 2006 of
$1.60 per share. The year 2005 was the
121st consecutive year in which we made dividend payments
and the 38th consecutive year in which dividends have been
increased.
30
On October 22, 2004, President Bush signed into law the
American Jobs Creation Act of 2004 (AJCA), which created a
temporary incentive for U.S. corporations to repatriate
undistributed income earned abroad by providing an
85 percent dividends received deduction for certain
dividends from controlled foreign corporations. We planned to
repatriate $8.00 billion in incentive dividends, as defined
in the AJCA, during 2005 and accordingly, we recorded a related
tax liability of $465.0 million as of December 31,
2004. During 2005, we repatriated all $8.00 billion of
eligible incentive dividends. The proceeds from the incentive
dividends have been or will be used for research and development
activities, capital asset expenditures, and other permitted
activities.
We believe that cash generated from operations, along with
available cash and cash equivalents, will be sufficient to fund
our operating needs, including debt service, capital
expenditures, dividends, and taxes in 2006. We believe that
amounts available through our existing commercial paper program
should be adequate to fund maturities of short-term borrowings,
if necessary. Our commercial paper program is also currently
backed by $1.23 billion of unused committed bank credit
facilities. We currently expect to repay approximately
$1.5 billion of debt by the end of 2006, using available
cash. Various risks and uncertainties, including those discussed
in the Financial Expectations for 2006 section, may affect our
operating results and cash generated from operations.
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
31
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, 2005
and 2004, 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, 2005 and 2004, respectively,
would have no material impact on earnings, cash flows, or fair
values of interest rate risk-sensitive instruments over a
one-year period.
Our foreign currency risk exposure results from fluctuating
currency exchange rates, primarily the U.S. dollar against
the euro and the Japanese yen. We face transactional currency
exposures that arise when we enter into transactions, generally
on an intercompany basis, denominated in currencies other than
the local currency. We also face currency exposure that arises
from translating the results of our global operations to the
U.S. dollar at exchange rates that have fluctuated from the
beginning of the period. We use forward contracts and purchased
options to manage our foreign currency exposures. Our policy
outlines the minimum and maximum hedge coverage of such
exposures. Gains and losses on these derivative positions
offset, in part, the impact of currency fluctuations on the
existing assets, liabilities, commitments, and anticipated
revenues. Considering our derivative financial instruments
outstanding at December 31, 2005 and 2004, a hypothetical
10 percent change in exchange rates (primarily against the
U.S. dollar) as of December 31, 2005 and 2004,
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, results of operations,
liquidity, capital expenditures, or capital resources. We
acquire assets still in development and enter into research and
development arrangements with third parties that often require
milestone and royalty payments to the third party contingent
upon the occurrence of certain future events linked to the
success of the asset in development. Milestone payments may be
required contingent upon the successful achievement of an
important point in the development life cycle of the
pharmaceutical product (e.g., approval of the product for
marketing by the appropriate regulatory agency). If required by
the arrangement, we may have to make royalty payments based upon
a percentage of the sales of the pharmaceutical product in the
event that regulatory approval for marketing is obtained.
Because of the contingent nature of these payments, they are not
included in the table of contractual obligations.
These arrangements are not material individually. However, if
milestones for multiple products covered by these arrangements
would happen to be reached in the same year, the aggregate
charge to expense could be material to the results of operations
in any one period. The inherent risk in pharmaceutical
development makes it unlikely that this will occur, as the
failure rate for products in development is very high. In
addition, these arrangements often give us the discretion to
unilaterally terminate development of the product, which would
allow us to avoid making the contingent payments; however, we
are unlikely to cease development if the compound successfully
achieves clinical testing objectives. We also note that, from a
business perspective, we view these payments as positive because
they signify that the product is successfully moving through
development and is now generating or is more likely to generate
cash flows from sales of products.
32
Our current noncancelable contractual obligations that will
require future cash payments are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
|
|
|
|
Less | |
|
|
|
More | |
|
|
|
|
Than | |
|
1-3 | |
|
3-5 | |
|
Than | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
Long-term debt, including interest payments(1)
|
|
$ |
12,024.1 |
|
|
$ |
983.3 |
|
|
$ |
3,893.8 |
|
|
$ |
187.6 |
|
|
$ |
6,959.4 |
|
Capital lease obligations
|
|
|
177.1 |
|
|
|
21.0 |
|
|
|
36.5 |
|
|
|
31.4 |
|
|
|
88.2 |
|
Operating leases
|
|
|
335.5 |
|
|
|
86.5 |
|
|
|
130.2 |
|
|
|
84.5 |
|
|
|
34.3 |
|
Purchase obligations(2)
|
|
|
2,388.5 |
|
|
|
2,299.5 |
|
|
|
58.1 |
|
|
|
28.5 |
|
|
|
2.4 |
|
Other long-term liabilities reflected on our balance sheet(3)
|
|
|
599.7 |
|
|
|
|
|
|
|
90.6 |
|
|
|
90.6 |
|
|
|
418.5 |
|
Other(4)
|
|
|
73.1 |
|
|
|
73.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15,598.0 |
|
|
$ |
3,463.4 |
|
|
$ |
4,209.2 |
|
|
$ |
422.6 |
|
|
$ |
7,502.8 |
|
|
|
|
(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, 2005 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, 2005. Some of these purchase orders may be
cancelable; however, for purposes of this disclosure, we have
not distinguished between cancelable and noncancelable purchase
obligations. |
|
|
|
Contractual payment obligations with each of our significant
vendors, which are noncancelable and are not contingent. |
(3) We have included our
long-term liabilities consisting primarily of our nonqualified
supplemental pension funding requirements and deferred
compensation liabilities.
(4) This category comprises
primarily minimum pension funding requirements.
The contractual obligations table is current as of
December 31, 2005. The amount of these obligations can be
expected to change materially over time as new contracts are
initiated and existing contracts are completed, terminated, or
modified.
Application of Critical Accounting Policies
In preparing our financial statements in accordance with
generally accepted accounting principles (GAAP), we must often
make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, expenses, and related
disclosures. Some of those judgments can be subjective and
complex, and consequently actual results could differ from those
estimates. For any given individual estimate or assumption we
make, it is possible that other people applying reasonable
judgment to the same facts and circumstances could develop
different estimates. We believe that, given current facts and
circumstances, it is unlikely that applying any such other
reasonable judgment would cause a material adverse effect on our
consolidated results of operations, financial position, or
liquidity for the periods presented in this report. Our most
critical accounting policies have been discussed with our audit
committee and are described below.
Revenue Recognition and Sales Rebate and Discount Accruals
We recognize revenue from sales of products at the time title of
goods passes to the buyer and the buyer assumes the risks and
rewards of ownership. This is generally at the time products are
shipped to the customer, typically a wholesale distributor or a
major retail chain. Provisions for discounts and rebates to
customers are established in the same period the related sales
are recorded.
33
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. We are
generally able to determine when significant wholesaler stocking
or destocking has occurred during a particular period, but we
are not always able to accurately quantify the amount of
stocking or destocking. Causes of unusual buying patterns
include actual or anticipated product supply issues, weather
patterns, anticipated changes in the transportation network,
redundant holiday stocking, and changes in wholesaler business
operations. An unusual buying pattern compared with underlying
demand of our products outside the U.S. could also be the
result of speculative buying by wholesalers in anticipation of
price increases. When we believe wholesaler purchasing patterns
have caused an unusual increase or decrease in the sales of a
major product compared with underlying demand, we disclose this
in our product sales discussion if the amount is believed to be
material to the product sales trend.
As a result of restructuring our arrangements with our
U.S. wholesalers in early 2005, reductions occurred in
wholesaler inventory levels for certain products (primarily
Strattera, Prozac, and Gemzar) that reduced our sales by
approximately $170 million. The new structure eliminates
the incentive for speculative wholesaler buying we have seen in
the past and provides us improved data on inventory levels at
our U.S. wholesalers. Wholesaler stocking and destocking
activity historically has not caused any material changes in the
rate of actual product returns, which have been approximately
1 percent or less of our net sales over the past three
years and have not fluctuated significantly as a percent of
sales.
We establish sales rebate and discount accruals in the same
period as the related sales. The rebate/discount amounts are
recorded as a deduction to arrive at our net sales. Sales
rebates/discounts that require the use of judgment in the
establishment of the accrual include Medicaid, managed care,
chargebacks, long-term-care, hospital, discount card programs,
and various other government programs. We base these accruals
primarily upon our historical rebate/discount payments made to
our customer segment groups and the provisions of current
rebate/discount contracts. We calculate these rebates/discounts
based upon a percentage of our sales for each of our products as
defined by the statutory rates and the contracts with our
various customer groups.
The largest of our sales rebate/discount amounts are rebates
associated with sales covered by Medicaid. Although we accrue a
liability for Medicaid rebates at the time we record the sale
(when the product is shipped), the Medicaid rebate related to
that sale is typically billed up to six months later. Due to the
time lag, in any particular period our rebate adjustments may
incorporate revisions of accruals for several periods. In
determining the appropriate accrual amount, we consider our
historical Medicaid rebate payments by product as a percentage
of our historical sales as well as any significant changes in
sales trends, an evaluation of the current Medicaid rebate laws
and interpretations, the percentage of our products that are
sold to Medicaid recipients, and our product pricing and current
rebate/discount contracts.
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.
34
We believe that our accruals for sales rebates and discounts are
reasonable and appropriate based on current facts and
circumstances. Federally mandated Medicaid rebate and state
pharmaceutical assistance programs reduced sales by
$626.6 million, $641.0 million, and
$567.6 million in 2005, 2004, and 2003, respectively. A
5 percent change in the Medicaid rebate expense we
recognized in 2005 would lead to an approximate $31 million
effect on our income before income taxes and cumulative effect
of change in accounting principle. As of December 31, 2005,
our Medicaid rebate liability was $272.5 million.
Approximately 90 percent and 86 percent of our global
rebate and discount liability results from sales of our products
in the U.S. as of December 31, 2005 and 2004,
respectively. The following represents a roll-forward of our
most significant U.S. rebate and discount liability
balances, including Medicaid (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
Rebate and discount liability, beginning of year
|
|
$ |
367.9 |
|
|
$ |
398.0 |
|
|
Reduction of net sales due to discounts and rebates(1)
|
|
|
1,289.6 |
|
|
|
1,157.0 |
|
|
Cash payments of discounts and rebates
|
|
|
(1,288.6 |
) |
|
|
(1,187.1 |
) |
|
|
|
Rebate and discount liability, end of year
|
|
$ |
368.9 |
|
|
$ |
367.9 |
|
|
|
|
(1) Adjustments of the
estimates for these rebates and discounts to actual results were
less than 0.3 percent of net sales for each of the years
presented.
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are, by
their nature, uncertain and are based upon complex judgments and
probabilities. The factors we consider in developing our product
litigation liability reserves and other contingent liability
amounts include the merits and jurisdiction of the litigation,
the nature and the number of other similar current and past
litigation cases, the nature of the product and the current
assessment of the science subject to the litigation, and the
likelihood of settlement and current state of settlement
discussions, if any. In addition, we have accrued 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. In assessing our insurance coverage, we consider the
policy coverage limits and exclusions, the potential for denial
of coverage by the insurance company, the financial position of
the insurers, and the possibility of and the length of time for
collection.
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 12 to the consolidated financial
statements for additional information regarding our retirement
benefits.
35
Periodically, we evaluate the discount rate and the expected
return on plan assets in our defined benefit pension and retiree
health benefit plans. In evaluating these assumptions, we
consider many factors, including an evaluation of the discount
rates, expected return on plan assets and the health-care-cost
trend rates of other companies; our historical assumptions
compared with actual results; an analysis of current market
conditions and asset allocations (approximately 85 percent
to 95 percent of which are growth investments); and the
views of leading financial advisers and economists. We use an
actuarially-determined, company-specific yield curve for
purposes of determination of 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 2005 annual expense
would increase by approximately $26 million. A
one-percentage-point decrease would decrease the aggregate of
the 2005 service cost and interest cost by approximately
$22 million. If the discount rate for 2005 were to be
changed by a quarter percentage point, income before income
taxes and cumulative effect of change in accounting principle
would change by approximately $27 million. If the expected
return on plan assets for 2005 were to be changed by a quarter
percentage point, income before income taxes and cumulative
effect of change in accounting principle would change by
approximately $13 million. If our assumption regarding the
expected age of future retirees for 2005 were adjusted by one
year, our income before income taxes and cumulative effect of
change in accounting principle would be affected by
approximately $22 million.
Income Taxes
We prepare and file tax returns based on our interpretation of
tax laws and regulations and record estimates based on these
judgments and interpretations. In the normal course of business,
our tax returns are subject to examination by various taxing
authorities, which may result in future tax and interest
assessments by these authorities. Inherent uncertainties exist
in estimates of tax contingencies due to changes in tax law
resulting from legislation, regulation and/or as concluded
through the various jurisdictions tax court systems. We
record a liability for tax contingencies when we believe it is
probable that we will be assessed and the amount of the
contingency can be reasonably estimated. The tax contingency
reserve is adjusted for changes in facts and circumstances, and
additional uncertainties. For example, adjustments could result
from significant amendments to existing tax law and the issuance
of regulations or interpretations by the taxing authorities, new
information obtained during a tax examination, or resolution of
an examination. We believe that our estimates for tax
contingency reserves are appropriate and sufficient to pay
assessments that may result from examinations of our tax returns.
We have recorded valuation allowances against certain of our
deferred tax assets, primarily those that have been generated
from net operating losses in certain taxing jurisdictions. In
evaluating whether we would more likely than not recover these
deferred tax assets, we have not assumed any future taxable
income or tax planning strategies in the jurisdictions
associated with these 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 valuation allowances
reserved against the deferred tax assets are appropriate based
on current facts and circumstances. A 5 percent change in
the valuation allowance would result in a change in net income
of approximately $23 million.
36
Financial Expectations for 2006
For the full year of 2006, we expect earnings per share to be in
the range of $3.10 to $3.20. We expect sales to grow 7 to
9 percent and gross margins as a percent of sales to
improve modestly compared with 2005. In addition, we expect
operating expenses to grow in the mid-single digits in the
aggregate, with marketing and administrative expenses
accelerating while research and development expense growth
moderates somewhat. However, we will continue to be among the
industry leaders in terms of research and development investment
as a percent of sales. We also expect other income, net of
interest expense, to contribute approximately $175 million
to $275 million; this ongoing net contribution is expected
to be driven primarily by net interest income, Lilly ICOS joint
venture after-tax profit, and partnering and out-licensing of
molecules. We also anticipate the effective tax rate to be
approximately 21 percent.
Actual results could differ materially and will depend on, among
other things, the continuing growth of our currently marketed
products; developments with competitive products; the timing and
scope of regulatory approvals and the success of our new product
launches; asset impairments, restructurings, and acquisitions of
compounds under development resulting in acquired in-process
research and development charges; foreign exchange rates;
wholesaler inventory changes; other regulatory developments,
litigation, and government investigations; the outcome of the
Zyprexa patent appeal; 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
Three generic pharmaceutical manufacturers, Zenith Goldline
Pharmaceuticals, Inc. (Zenith), Dr. Reddys
Laboratories, Ltd. (Reddy), and Teva Pharmaceuticals (Teva),
submitted abbreviated new drug applications (ANDAs) seeking
permission to market generic versions of Zyprexa in various
dosage forms several years prior to the expiration of our
U.S. patents for the product. The generic companies alleged
that our patents are invalid, unenforceable, or not infringed.
We filed suit against the three companies in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that the challenges to our compound patent
(expiring in 2011) are without merit. The cases were
consolidated, and on April 14, 2005, the district court
upheld our 2011 U.S. patent on Zyprexa. In the case of Eli
Lilly and Company v. Zenith Goldline Pharmaceuticals
et al., the court ruled in our favor on all counts,
including the patent doctrines of obviousness, double patenting,
inequitable conduct, novelty, and public use. The decision has
been appealed. We are confident, and the trial court confirmed,
that the generic manufacturers claims are without merit,
and we expect to prevail in this litigation. However, it is not
possible to predict or determine the outcome of this litigation
and, accordingly, we can provide no assurance that we will
prevail on appeal. An unfavorable outcome would have a material
adverse impact on our consolidated results of operations,
liquidity, and financial position.
In 2002, Barr Laboratories, Inc. (Barr), submitted an ANDA with
the FDA seeking permission to market a generic version of Evista
(raloxifene) several years prior to the expiration of our
U.S. patents covering the product, alleging that the
patents are invalid or not infringed. In November 2002, we filed
suit against Barr in the U.S. District Court for the
Southern District of Indiana, seeking a ruling that Barrs
challenges to our patents claiming the methods of use and
pharmaceutical form (expiring from 2012 to 2017) are without
merit. Barr has also asserted that the method of use patents are
unenforceable. The U.S. Patent and Trademark Office issued
to us two new patents (expiring in 2017) directed to
pharmaceutical compositions containing raloxifene and a
37
method for preventing postmenopausal osteoporosis and a third
(expiring in 2012) directed to methods of inhibiting
postmenopausal bone loss by administering a single daily oral
dose of raloxifene. These patents have been listed in the
FDAs Orange Book. Barr has challenged these
patents, alleging that each is invalid, unenforceable, or will
not be infringed. These patents have been added to the pending
suit. The suit is in discovery. No trial date has been set at
this time. While we believe that Barrs claims are without
merit and we expect to prevail, it is not possible to predict or
determine the outcome of the litigation. Therefore, we can
provide no assurance that we will prevail. An unfavorable
outcome could have a material adverse impact on our consolidated
results of operations, liquidity, and financial position.
In January 2006, we were notified that Sicor Pharmaceuticals,
Inc. (Sicor), a subsidiary of Teva, submitted an ANDA with the
FDA seeking permission to market a generic version of Gemzar
several years prior to the expiration of two U.S. patents
covering the product. Sicor alleged that both U.S. patents
are invalid. In February, we filed suit against Sicor in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that Sicors challenges to our patents
claiming the compound (expiring in 2010) and the methods of use
(expiring in 2012) are without merit. While we believe that
Sicors claims are without merit and we expect to prevail,
it is not possible to predict or determine the outcome of the
litigation. Therefore, we can provide no assurance that we will
prevail. An unfavorable outcome could have a material adverse
impact on our consolidated results of operations.
In July 2002, we received the first of several grand jury
subpoenas for documents from the Office of Consumer Litigation,
U.S. Department of Justice, related to our marketing and
promotional practices and physician communications with respect
to Evista. We reached a settlement with the U.S. Department
of Justice in the fourth quarter of 2005, which was subsequently
approved by the U.S. District Court for the Southern
District of Indiana in February 2006. As part of the settlement,
Lilly pleaded guilty to one misdemeanor violation of the Food,
Drug, and Cosmetic Act. The plea is for the off-label promotion
of Evista during 1998. The government did not, however, charge
the company with any unlawful intent, nor do we acknowledge any
such intent. In connection with the overall settlement, we
agreed to pay a total of $36 million. As previously
reported, Lilly took a charge in the fourth quarter of 2004 in
connection with this investigation. The 2004 charge was
sufficient to cover this settlement payment; consequently, no
further charge will be necessary.
In March 2004, the office of the U.S. Attorney for the
Eastern District of Pennsylvania advised us that it has
commenced a civil investigation related to our
U.S. marketing and promotional practices, including our
communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa, Prozac, and
Prozac
Weeklytm.
In October 2005, the U.S. Attorneys office advised
that it is also conducting an inquiry regarding certain rebate
agreements we entered into with a pharmacy benefit manager
covering Axid, Evista, Humalog, Humulin, Prozac, and Zyprexa.
The inquiry includes a review of Lillys Medicaid best
price reporting related to the product sales covered by the
rebate agreements. We are cooperating with the
U.S. Attorney in these investigations, including providing
a broad range of documents and information relating to the
investigations. In June 2005, we received a subpoena from the
office of the Attorney General, Medicaid Fraud Control Unit, of
the State of Florida, seeking production of documents relating
to sales of Zyprexa and our marketing and promotional practices
with respect to Zyprexa. It is possible that other Lilly
products could become subject to investigation and that the
outcome of these matters could include criminal charges and
fines, penalties, or other monetary or nonmonetary remedies. We
cannot predict or determine the outcome of these matters or
reasonably estimate the amount or range of amounts of any fines
or penalties that might result from an adverse outcome. It is
possible, however, that an adverse outcome could have a material
adverse impact on
38
our consolidated results of operations, liquidity, and financial
position. We have implemented and continue to review and enhance
a broadly based compliance program that includes comprehensive
compliance-related activities designed to ensure that our
marketing and promotional practices, physician communications,
remuneration of health care professionals, managed care
arrangements, and Medicaid best price reporting comply with
applicable laws and regulations.
We have been named as a defendant in a large number of Zyprexa
product liability lawsuits in the United States and have been
notified of several thousand claims of individuals who have not
filed suit. The lawsuits and unfiled claims (together the
claims) allege a variety of injuries from the use of
Zyprexa, with the majority alleging that the product caused or
contributed to diabetes or high blood-glucose levels. The claims
seek substantial compensatory and punitive damages and typically
accuse us of inadequately testing for and warning about side
effects of Zyprexa. Many of the claims also allege that we
improperly promoted the drug. Almost all of the federal lawsuits
are part of a Multi-District Litigation (MDL) proceeding
before The Honorable Jack Weinstein in the Federal District
Court for the Eastern District of New York (MDL No. 1596).
The MDL includes three lawsuits requesting certification of
class actions on behalf of those who allegedly suffered injuries
from the administration of Zyprexa. We have entered into
agreements with various plaintiffs counsel halting the
running of the statutes of limitation (tolling agreements) with
respect to a large number of claimants who do not have lawsuits
on file.
In June 2005, we entered into an agreement in principle
(followed by a definitive master settlement agreement in
September 2005) with a group of plaintiffs attorneys
involved in U.S. Zyprexa product liability litigation to
settle a majority of the claims. The agreement covers more than
8,000 claimants, including a large number of previously filed
lawsuits (including the three purported class actions), tolled
claims, and other informally asserted claims. We established a
fund of $690 million for the claimants to settle their
claims, and $10 million to cover administration of the
settlement. The settlement fund is being overseen and
distributed by claims administrators appointed by the court. The
agreement and the distribution of funds to participating
claimants are conditioned upon, among other things, our
obtaining full releases from no fewer than 7,193 claimants.
Following this settlement, the remaining U.S. Zyprexa
product liability claims include approximately 150 lawsuits in
the U.S. covering 465 claimants, and approximately 825
tolled claims. In addition, we have been informally advised of a
number of additional potential U.S. claims, but to date
have received no substantiation of the claims. Also, in early
2005, we were served with five lawsuits seeking class action
status in Canada on behalf of patients who took Zyprexa. The
allegations in the Canadian actions are similar to those in the
litigation pending in the United States. We are prepared to
continue our vigorous defense of Zyprexa in all remaining cases.
In 2005, two lawsuits were filed in the Eastern District of New
York purporting to be nationwide class actions on behalf of all
consumers and third party payors, excluding governmental
entities, which have made or will make payments on account of
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. In
addition, in 2006 a similar lawsuit was filed in the Eastern
District of New York on similar grounds. As with the product
liability suits, these lawsuits allege that we inadequately
tested for and warned about side effects of Zyprexa and
improperly promoted the drug.
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
39
to diabetes or high blood-glucose levels, and that we improperly
promoted the drug. These cases have been removed to federal
court and are now part of the MDL proceedings in the Eastern
District of New York. In these actions, the Department of Health
and Hospitals seeks to recover the costs it paid for Zyprexa
through Medicaid and other drug-benefit programs, as well as the
costs the department alleges it has incurred and will incur to
treat Zyprexa-related illnesses.
In connection with the Zyprexa product liability claims, certain
of our insurance carriers have raised defenses to their
liability under the policies and to date have failed to
reimburse us for claim-related costs despite demand from the
first-layer carriers for payment. However, in our opinion, the
defenses identified to date appear to lack substance. In March
2005, we filed suit against several of the carriers in state
court in Indiana to obtain reimbursement of costs related to the
Zyprexa product liability litigation. The matter has been
removed to the federal court in Indianapolis. Several carriers
have asserted defenses to their liability, and some carriers are
seeking rescission of the coverage. While we believe our
position is meritorious, there can be no assurance that we will
prevail.
In addition, we have been named as a defendant in numerous other
product liability lawsuits involving primarily
diethylstilbestrol (DES) and thimerosal.
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. In addition, we have accrued for
certain product liability claims incurred but not filed to the
extent we can formulate a reasonable estimate of their costs. We
estimate these expenses based primarily on historical claims
experience and data regarding product usage. Legal defense costs
expected to be incurred in connection with significant product
liability loss contingencies are accrued when probable and
reasonably estimable. A portion of the costs associated with
defending and disposing of these suits is covered by insurance.
We record receivables for insurance-related recoveries when it
is probable they will be realized. These receivables are
classified as a reduction of the litigation charges on the
statement of income. We estimate insurance recoverables based on
existing deductibles, coverage limits, our assessment of any
defenses to coverage that might be raised by the carriers, and
the existing and projected future level of insolvencies among
the insurance carriers.
In the second quarter of 2005, we recorded a net pre-tax charge
of $1.07 billion for product liability matters, which
includes the following:
|
|
|
The $700 million Zyprexa settlement and administration fee; |
|
|
Reserves for product liability exposures and defense costs
regarding currently known and expected claims to the extent we
can formulate a reasonable estimate of the probable number and
cost of the claims. A substantial majority of these exposures
and costs relate to current and expected Zyprexa claims not
included in the settlement. We have estimated these charges
based primarily on historical claims experience, data regarding
product usage, and our historical product liability defense cost
experience. |
The $1.07 billion net charge took into account our
estimated recoveries from our insurance coverage related to
these matters. The after-tax impact of this net charge was
$.90 per share. The $700 million for the Zyprexa
settlement was paid during 2005, while the cash related to the
other reserves for product liability exposures and defense costs
is expected to be paid out over the next several years. The
timing of our insurance recoveries is uncertain.
We cannot predict with certainty the additional number of
lawsuits and claims that may be asserted. In addition, although
we believe it is probable, there can be no assurance that the
Zyprexa
40
settlement described above will be concluded. The ultimate
resolution of Zyprexa product liability and related litigation
could have a material adverse impact on our consolidated results
of operations, liquidity, and financial position.
We are subject to a substantial number of product liability
claims, 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. We
have experienced difficulties in obtaining product liability
insurance due to a very restrictive insurance market, and
therefore will 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.
While it is not possible to predict or determine the outcome of
the patent, product liability, or other legal actions brought
against us, we believe that, except as noted above, 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 the consolidated results of
operations in any one accounting period.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
You can find quantitative and qualitative disclosures about
market risk (e.g., interest rate risk) in Item 7 at
Financial Condition at pp. 31-32. That
information is incorporated in this report by reference.
41
|
|
Item 8. |
Financial Statements and Supplementary Data |
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
ELI LILLY AND COMPANY AND SUBSIDIARIES |
|
| |
(Dollars in millions, except per-share data) |
|
2005 | |
|
2004 | |
|
2003 | |
| |
Net sales
|
|
$ |
14,645.3 |
|
|
$ |
13,857.9 |
|
|
$ |
12,582.5 |
|
|
Cost of sales
|
|
|
3,474.2 |
|
|
|
3,223.9 |
|
|
|
2,675.1 |
|
Research and development
|
|
|
3,025.5 |
|
|
|
2,691.1 |
|
|
|
2,350.2 |
|
Marketing and administrative
|
|
|
4,497.0 |
|
|
|
4,284.2 |
|
|
|
4,055.4 |
|
Acquired in-process research and development (Note 3)
|
|
|
|
|
|
|
392.2 |
|
|
|
|
|
Asset impairments, restructuring, and other special charges
(Note 4)
|
|
|
1,245.3 |
|
|
|
603.0 |
|
|
|
382.2 |
|
Interest expense
|
|
|
105.2 |
|
|
|
51.6 |
|
|
|
61.0 |
|
Other income net
|
|
|
(419.4 |
) |
|
|
(330.0 |
) |
|
|
(203.1 |
) |
|
|
|
|
|
|
11,927.8 |
|
|
|
10,916.0 |
|
|
|
9,320.8 |
|
|
|
|
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
2,717.5 |
|
|
|
2,941.9 |
|
|
|
3,261.7 |
|
Income taxes (Note 11)
|
|
|
715.9 |
|
|
|
1,131.8 |
|
|
|
700.9 |
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
2,001.6 |
|
|
|
1,810.1 |
|
|
|
2,560.8 |
|
Cumulative effect of a change in accounting principle, net of
tax (Note 2)
|
|
|
(22.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,979.6 |
|
|
$ |
1,810.1 |
|
|
$ |
2,560.8 |
|
|
|
|
|
|
|
|
Earnings per share basic (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
$ |
1.84 |
|
|
$ |
1.67 |
|
|
$ |
2.38 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.82 |
|
|
$ |
1.67 |
|
|
$ |
2.38 |
|
|
|
|
|
|
|
|
Earnings per share diluted (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
$ |
1.83 |
|
|
$ |
1.66 |
|
|
$ |
2.37 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1.81 |
|
|
$ |
1.66 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
See notes to consolidated financial statements.
42
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
ELI LILLY AND COMPANY AND SUBSIDIARIES |
|
| |
(Dollars in millions) |
|
2005 | |
|
2004 | |
| |
Assets
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3,006.7 |
|
|
$ |
5,365.3 |
|
Short-term investments
|
|
|
2,031.0 |
|
|
|
2,099.1 |
|
Accounts receivable, net of allowances of $66.3 (2005) and
$66.1 (2004)
|
|
|
2,313.3 |
|
|
|
2,058.7 |
|
Other receivables
|
|
|
448.4 |
|
|
|
494.3 |
|
Inventories
|
|
|
1,878.0 |
|
|
|
2,291.6 |
|
Deferred income taxes (Note 11)
|
|
|
756.4 |
|
|
|
255.3 |
|
Prepaid expenses
|
|
|
362.0 |
|
|
|
271.5 |
|
|
|
|
|
Total current assets
|
|
|
10,795.8 |
|
|
|
12,835.8 |
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Prepaid pension (Note 12)
|
|
|
2,419.6 |
|
|
|
2,253.8 |
|
Investments (Note 5)
|
|
|
1,296.6 |
|
|
|
561.4 |
|
Sundry (Note 8)
|
|
|
2,156.3 |
|
|
|
1,665.1 |
|
|
|
|
|
|
|
5,872.5 |
|
|
|
4,480.3 |
|
Property and Equipment, net
|
|
|
7,912.5 |
|
|
|
7,550.9 |
|
|
|
|
|
|
$ |
24,580.8 |
|
|
$ |
24,867.0 |
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt
(Note 6)
|
|
$ |
734.7 |
|
|
$ |
2,020.6 |
|
Accounts payable
|
|
|
781.3 |
|
|
|
648.6 |
|
Employee compensation
|
|
|
548.8 |
|
|
|
471.6 |
|
Sales rebates and discounts
|
|
|
491.2 |
|
|
|
475.3 |
|
Dividends payable
|
|
|
436.5 |
|
|
|
414.4 |
|
Income taxes payable (Note 11)
|
|
|
884.9 |
|
|
|
1,703.9 |
|
Other current liabilities (Note 8)
|
|
|
1,838.9 |
|
|
|
1,859.3 |
|
|
|
|
|
Total current liabilities
|
|
|
5,716.3 |
|
|
|
7,593.7 |
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Long-term debt (Note 6)
|
|
|
5,763.5 |
|
|
|
4,491.9 |
|
Deferred income taxes (Note 11)
|
|
|
695.1 |
|
|
|
620.4 |
|
Other noncurrent liabilities (Note 8)
|
|
|
1,614.0 |
|
|
|
1,241.1 |
|
|
|
|
|
|
|
8,072.6 |
|
|
|
6,353.4 |
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
|
Shareholders Equity (Notes 7 and 9)
|
|
|
|
|
|
|
|
|
Common stock no par value
|
|
|
|
|
|
|
|
|
|
Authorized shares: 3,200,000,000
|
|
|
|
|
|
|
|
|
|
Issued shares: 1,131,070,629 (2005) and 1,132,884,801 (2004)
|
|
|
706.9 |
|
|
|
708.0 |
|
Additional paid-in capital
|
|
|
3,323.8 |
|
|
|
3,119.4 |
|
Retained earnings
|
|
|
10,027.2 |
|
|
|
9,724.6 |
|
Employee benefit trust
|
|
|
(2,635.0 |
) |
|
|
(2,635.0 |
) |
Deferred costs ESOP
|
|
|
(106.3 |
) |
|
|
(111.9 |
) |
Accumulated other comprehensive income (loss) (Note 14)
|
|
|
(420.6 |
) |
|
|
218.6 |
|
|
|
|
|
|
|
10,896.0 |
|
|
|
11,023.7 |
|
Less cost of common stock in treasury
|
|
|
|
|
|
|
|
|
|
2005 933,584 shares
|
|
|
|
|
|
|
|
|
|
2004 942,677 shares
|
|
|
104.1 |
|
|
|
103.8 |
|
|
|
|
|
|
|
10,791.9 |
|
|
|
10,919.9 |
|
|
|
|
|
|
$ |
24,580.8 |
|
|
$ |
24,867.0 |
|
|
|
|
See notes to consolidated financial statements.
43
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
ELI LILLY AND COMPANY AND SUBSIDIARIES |
|
| |
(Dollars in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
| |
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,979.6 |
|
|
$ |
1,810.1 |
|
|
$ |
2,560.8 |
|
Adjustments To Reconcile Net Income To Cash Flows From
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
726.4 |
|
|
|
597.5 |
|
|
|
548.5 |
|
|
Change in deferred taxes
|
|
|
(347.5 |
) |
|
|
772.4 |
|
|
|
130.9 |
|
|
Stock-based compensation expense
|
|
|
403.5 |
|
|
|
53.0 |
|
|
|
|
|
|
Acquired in-process research and development, net of tax
|
|
|
|
|
|
|
381.7 |
|
|
|
|
|
|
Asset impairments, restructuring, and other special charges, net
of tax
|
|
|
1,128.7 |
|
|
|
374.3 |
|
|
|
261.7 |
|
|
Other, net
|
|
|
(30.0 |
) |
|
|
171.5 |
|
|
|
61.0 |
|
|
|
|
|
|
|
3,860.7 |
|
|
|
4,160.5 |
|
|
|
3,562.9 |
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables increase
|
|
|
(286.4 |
) |
|
|
(240.8 |
) |
|
|
(195.1 |
) |
|
|
Inventories (increase) decrease
|
|
|
72.1 |
|
|
|
(111.6 |
) |
|
|
(170.8 |
) |
|
|
Other assets increase
|
|
|
(269.4 |
) |
|
|
(765.2 |
) |
|
|
(211.9 |
) |
|
|
Accounts payable and other liabilities increase
(decrease)
|
|
|
(1,463.4 |
) |
|
|
(173.4 |
) |
|
|
661.6 |
|
|
|
|
|
|
|
(1,947.1 |
) |
|
|
(1,291.0 |
) |
|
|
83.8 |
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
1,913.6 |
|
|
|
2,869.5 |
|
|
|
3,646.7 |
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,298.1 |
) |
|
|
(1,898.1 |
) |
|
|
(1,706.6 |
) |
Disposals of property and equipment
|
|
|
11.1 |
|
|
|
20.5 |
|
|
|
61.2 |
|
Net change in short-term investments
|
|
|
62.7 |
|
|
|
(1,119.0 |
) |
|
|
774.0 |
|
Proceeds from sales and maturities of noncurrent investments
|
|
|
545.1 |
|
|
|
14,849.3 |
|
|
|
6,762.4 |
|
Purchase of noncurrent investments
|
|
|
(1,183.1 |
) |
|
|
(11,967.7 |
) |
|
|
(7,005.3 |
) |
Purchase of in-process research and development
|
|
|
|
|
|
|
(29.9 |
) |
|
|
|
|
Cash paid for acquisition of Applied Molecular Evolution, net of
cash acquired
|
|
|
|
|
|
|
(71.7 |
) |
|
|
|
|
Other, net
|
|
|
(353.6 |
) |
|
|
(468.2 |
) |
|
|
(217.2 |
) |
|
|
|
Net Cash Used in Investing Activities
|
|
|
(2,215.9 |
) |
|
|
(684.8 |
) |
|
|
(1,331.5 |
) |
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,654.9 |
) |
|
|
(1,539.8 |
) |
|
|
(1,443.0 |
) |
Purchase of common stock
|
|
|
(377.9 |
) |
|
|
|
|
|
|
(276.8 |
) |
Issuances of common stock under stock plans
|
|
|
105.9 |
|
|
|
117.9 |
|
|
|
99.3 |
|
Net change in short-term borrowings
|
|
|
(1,988.7 |
) |
|
|
1,478.2 |
|
|
|
(247.3 |
) |
Proceeds from issuance of long-term debt
|
|
|
3,000.0 |
|
|
|
1,000.0 |
|
|
|
830.0 |
|
Repayments of long-term debt
|
|
|
(1,004.7 |
) |
|
|
(839.2 |
) |
|
|
(540.0 |
) |
Other, net
|
|
|
39.8 |
|
|
|
(13.4 |
) |
|
|
(.5 |
) |
|
|
|
Net Cash (Used for) Provided by Financing Activities
|
|
|
(1,880.5 |
) |
|
|
203.7 |
|
|
|
(1,578.3 |
) |
|
Effect of exchange rate changes on cash
|
|
|
(175.8 |
) |
|
|
220.6 |
|
|
|
73.5 |
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(2,358.6 |
) |
|
|
2,609.0 |
|
|
|
810.4 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
5,365.3 |
|
|
|
2,756.3 |
|
|
|
1,945.9 |
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
3,006.7 |
|
|
$ |
5,365.3 |
|
|
$ |
2,756.3 |
|
|
|
|
See notes to consolidated financial statements.
44
Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
ELI LILLY AND COMPANY AND SUBSIDIARIES |
|
| |
(Dollars in millions) |
|
2005 | |
|
2004 | |
|
2003 | |
| |
Net income
|
|
$ |
1,979.6 |
|
|
$ |
1,810.1 |
|
|
$ |
2,560.8 |
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gains (losses)
|
|
|
(533.4 |
) |
|
|
441.7 |
|
|
|
473.0 |
|
|
Net unrealized gains (losses) on securities
|
|
|
0.3 |
|
|
|
(25.9 |
) |
|
|
72.0 |
|
|
Minimum pension liability adjustment
|
|
|
(87.8 |
) |
|
|
(4.4 |
) |
|
|
(9.8 |
) |
|
Effective portion of cash flow hedges
|
|
|
(81.7 |
) |
|
|
(53.7 |
) |
|
|
(2.1 |
) |
|
|
|
|
Other comprehensive income (loss) before income taxes
|
|
|
(702.6 |
) |
|
|
357.7 |
|
|
|
533.1 |
|
Provision for income taxes related to other comprehensive income
(loss) items
|
|
|
63.4 |
|
|
|
21.0 |
|
|
|
(22.4 |
) |
|
|
|
Other comprehensive income (loss) (Note 14)
|
|
|
(639.2 |
) |
|
|
378.7 |
|
|
|
510.7 |
|
|
|
|
|
Comprehensive income
|
|
$ |
1,340.4 |
|
|
$ |
2,188.8 |
|
|
$ |
3,071.5 |
|
|
|
|
See notes to consolidated financial statements.
45
Segment Information
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
We operate in one significant business segment
pharmaceutical products. Operations of the animal health
business segment are not material and share many of the same
economic and operating characteristics as pharmaceutical
products. Therefore, they are included with pharmaceutical
products for purposes of segment reporting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
| |
Net sales to unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neurosciences
|
|
$ |
6,080.0 |
|
|
$ |
6,052.5 |
|
|
$ |
5,554.8 |
|
|
Endocrinology
|
|
|
4,636.9 |
|
|
|
4,290.9 |
|
|
|
3,926.7 |
|
|
Oncology
|
|
|
1,801.0 |
|
|
|
1,366.2 |
|
|
|
1,039.8 |
|
|
Animal health
|
|
|
863.7 |
|
|
|
798.7 |
|
|
|
726.6 |
|
|
Cardiovascular
|
|
|
608.9 |
|
|
|
658.7 |
|
|
|
669.3 |
|
|
Anti-infectives
|
|
|
443.9 |
|
|
|
478.0 |
|
|
|
489.9 |
|
|
Other pharmaceutical
|
|
|
210.9 |
|
|
|
212.9 |
|
|
|
175.4 |
|
|
|
|
Net sales
|
|
$ |
14,645.3 |
|
|
$ |
13,857.9 |
|
|
$ |
12,582.5 |
|
|
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
7,798.1 |
|
|
$ |
7,668.5 |
|
|
$ |
7,221.6 |
|
|
Europe, Middle East, and Africa
|
|
|
4,184.0 |
|
|
|
3,858.4 |
|
|
|
3,355.8 |
|
|
Other foreign countries
|
|
|
2,663.2 |
|
|
|
2,331.0 |
|
|
|
2,005.1 |
|
|
|
|
|
|
$ |
14,645.3 |
|
|
$ |
13,857.9 |
|
|
$ |
12,582.5 |
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
6,524.5 |
|
|
$ |
5,874.1 |
|
|
$ |
5,296.0 |
|
|
Europe, Middle East, and Africa
|
|
|
1,563.1 |
|
|
|
1,627.9 |
|
|
|
1,299.9 |
|
|
Other foreign countries
|
|
|
1,740.7 |
|
|
|
1,556.1 |
|
|
|
1,188.4 |
|
|
|
|
|
|
$ |
9,828.3 |
|
|
$ |
9,058.1 |
|
|
$ |
7,784.3 |
|
|
|
|
(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, Prozac,
Permax®,
Symbyax, and Yentreve. Endocrinology products consist primarily
of Humalog, Humulin, Actos, Byetta, Evista, Forteo, and
Humatrope. Oncology products consist primarily of Gemzar and
Alimta. Animal health products include
Tylan®,
Rumensin®,
Coban®,
and other products for livestock and poultry. Cardiovascular
products consist primarily of ReoPro and Xigris. Anti-infectives
include primarily
Ceclor®
and
Vancocin®.
The other pharmaceutical product group includes Cialis, Axid,
and other miscellaneous pharmaceutical products and services.
Most of the pharmaceutical products are distributed through
wholesalers that serve pharmacies, physicians and other health
care professionals, and hospitals. In 2005, our three largest
wholesalers each accounted for between 12 percent and
17 percent of consolidated net sales. Further, they each
accounted for between less than 1 percent and
13 percent of accounts receivable as of December 31,
2005. 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.
46
Income before income taxes and cumulative effect of a change in
accounting principle for the animal health business was
approximately $215 million, $223 million, and
$204 million in 2005, 2004, and 2003, respectively.
The assets of the animal health business are intermixed with
those of the pharmaceutical products business. Long-lived assets
disclosed above consist of property and equipment and certain
sundry assets.
We are exposed to the risk of changes in social, political, and
economic conditions inherent in foreign operations, and our
results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates.
47
Selected Quarterly Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Fourth | |
|
Third | |
|
Second | |
|
First | |
| |
Net sales
|
|
$ |
3,879.1 |
|
|
$ |
3,601.1 |
|
|
$ |
3,667.7 |
|
|
$ |
3,497.4 |
|
Cost of sales
|
|
|
898.2 |
|
|
|
845.7 |
|
|
|
871.3 |
|
|
|
859.0 |
|
Operating expenses
|
|
|
1,999.5 |
|
|
|
1,821.9 |
|
|
|
1,908.5 |
|
|
|
1,792.6 |
|
Asset impairments, restructuring, and other special charges
|
|
|
171.9 |
|
|
|
|
|
|
|
1,073.4 |
|
|
|
|
|
Other net
|
|
|
(85.2) |
|
|
|
(85.0) |
|
|
|
(45.4) |
|
|
|
(98.6) |
|
Income (loss) before income taxes and cumulative effect of a
change in accounting principle
|
|
|
894.7 |
|
|
|
1,018.5 |
|
|
|
(140.1) |
|
|
|
944.4 |
|
Net income (loss)
|
|
|
700.6( |
2)(4) |
|
|
794.4 |
|
|
|
(252.0) |
(1) |
|
|
736.6 |
|
Earnings (loss) per share basic
|
|
|
.64 |
|
|
|
.73 |
|
|
|
(.23 |
) |
|
|
.68 |
|
Earnings (loss) per share diluted
|
|
|
.64 |
|
|
|
.73 |
|
|
|
(.23 |
) |
|
|
.68 |
|
Dividends paid per share
|
|
|
.38 |
|
|
|
.38 |
|
|
|
.38 |
|
|
|
.38 |
|
Common stock closing prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
57.81 |
|
|
|
57.26 |
|
|
|
60.44 |
|
|
|
57.78 |
|
|
Low
|
|
|
49.76 |
|
|
|
52.52 |
|
|
|
51.19 |
|
|
|
51.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
Fourth | |
|
Third | |
|
Second | |
|
First | |
| |
Net sales
|
|
$ |
3,644.3 |
|
|
$ |
3,280.4 |
|
|
$ |
3,556.3 |
|
|
$ |
3,376.9 |
|
Cost of sales
|
|
|
865.7 |
|
|
|
810.1 |
|
|
|
796.4 |
|
|
|
751.7 |
|
Operating expenses
|
|
|
1,803.7 |
|
|
|
1,606.7 |
|
|
|
1,854.4 |
|
|
|
1,710.5 |
|
Acquired in-process research and development
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
362.3 |
|
Asset impairments, restructuring, and other special charges
|
|
|
494.1 |
|
|
|
|
|
|
|
108.9 |
|
|
|
|
|
Other net
|
|
|
(69.1) |
|
|
|
(104.6) |
|
|
|
(41.6) |
|
|
|
(63.1) |
|
Income before income taxes
|
|
|
520.0 |
|
|
|
968.2 |
|
|
|
838.2 |
|
|
|
615.5 |
|
Net income (loss)
|
|
|
(2.4) |
(3) |
|
|
755.2 |
|
|
|
656.9 |
|
|
|
400.4 |
|
Earnings per share basic
|
|
|
.00 |
|
|
|
.70 |
|
|
|
.61 |
|
|
|
.37 |
|
Earnings per share diluted
|
|
|
.00 |
|
|
|
.69 |
|
|
|
.60 |
|
|
|
.37 |
|
Dividends paid per share
|
|
|
.35 |
5 |
|
|
.35 |
5 |
|
|
.35 |
5 |
|
|
.35 |
5 |
Common stock closing prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
62.01 |
|
|
|
69.37 |
|
|
|
76.26 |
|
|
|
74.70 |
|
|
Low
|
|
|
50.44 |
|
|
|
60.05 |
|
|
|
67.60 |
|
|
|
65.00 |
|
Our common stock is listed on the New York, London, and other
stock exchanges.
(1) In the second quarter of
2005, we incurred a tax expense of $111.9 million despite
reporting a net loss before income taxes for the quarter. The
product liability charge of $1.07 billion (Note 13) in
the second quarter resulted in a tax benefit that was less than
our effective tax rate, as the tax benefit was calculated based
upon existing tax laws in the countries in which we reasonably
expect to deduct the charge.
(2) A fourth-quarter 2005
analysis, which included the impact of a recently completed IRS
examination for tax years 1998 to 2000, led us to conclude that
our tax rate for 2005 should be 26.3 percent. As a result,
the fourth-quarter tax rate declined to 19.2 percent.
(3) The net loss in the
fourth quarter of 2004 included tax expenses of
$465.0 million associated with the anticipated repatriation
of $8.00 billion of our earnings reinvested outside the
U.S. as a result of the American Jobs Creation Act
(Note 11).
(4) Reflects the impact of a
cumulative effect of a change in accounting principle in the
fourth quarter of $22.0 million, net of income taxes of
$11.8 million. The diluted earnings per share impact of
this cumulative effect of a change in accounting principle was
$.02. The net income per diluted share before the cumulative
effect of a change in accounting principle was $.66. See
Note 2 for additional information.
48
Selected Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ELI LILLY AND COMPANY AND SUBSIDIARIES |
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per-share data) |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
14,645.3 |
|
|
$ |
13,857.9 |
|
|
$ |
12,582.5 |
|
|
$ |
11,077.5 |
|
|
$ |
11,542.5 |
|
Cost of sales
|
|
|
3,474.2 |
|
|
|
3,223.9 |
|
|
|
2,675.1 |
|
|
|
2,176.5 |
|
|
|
2,160.2 |
|
Research and development
|
|
|
3,025.5 |
|
|
|
2,691.1 |
|
|
|
2,350.2 |
|
|
|
2,149.3 |
|
|
|
2,235.1 |
|
Marketing and administration
|
|
|
4,497.0 |
|
|
|
4,284.2 |
|
|
|
4,055.4 |
|
|
|
3,424.0 |
|
|
|
3,417.4 |
|
Other
|
|
|
931.1 |
|
|
|
716.8 |
|
|
|
240.1 |
|
|
|
(130.0 |
) |
|
|
222.9 |
|
Income before income taxes and cumulative effect of a change in
accounting principle
|
|
|
2,717.5 |
|
|
|
2,941.9 |
|
|
|
3,261.7 |
|
|
|
3,457.7 |
|
|
|
3,506.9 |
|
Income taxes
|
|
|
715.9 |
|
|
|
1,131.8 |
|
|
|
700.9 |
|
|
|
749.8 |
|
|
|
726.9 |
|
Net income
|
|
|
1,979.6 |
(1) |
|
|
1,810.1 |
|
|
|
2,560.8 |
|
|
|
2,707.9 |
|
|
|
2,780.0 |
|
Net income as a percent of sales
|
|
|
13.5 |
% |
|
|
13.1 |
% |
|
|
20.4 |
% |
|
|
24.4 |
% |
|
|
24.1 |
% |
Net income per share diluted
|
|
|
1.81 |
|
|
|
1.66 |
|
|
|
2.37 |
|
|
|
2.50 |
|
|
|
2.55 |
|
Dividends declared per share
|
|
|
1.54 |
|
|
|
1.45 |
|
|
|
1.36 |
|
|
|
1.27 |
|
|
|
1.15 |
|
Weighted-average number of shares outstanding
diluted (thousands)
|
|
|
1,092,150 |
|
|
|
1,088,936 |
|
|
|
1,082,230 |
|
|
|
1,085,088 |
|
|
|
1,090,793 |
|
|
|
|
|
Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
10,795.8 |
|
|
$ |
12,835.8 |
|
|
$ |
8,768.9 |
|
|
$ |
7,804.1 |
|
|
$ |
6,938.9 |
|
Current liabilities
|
|
|
5,716.3 |
|
|
|
7,593.7 |
|
|
|
5,560.8 |
|
|
|
5,063.5 |
|
|
|
5,203.0 |
|
Property and equipment net
|
|
|
7,912.5 |
|
|
|
7,550.9 |
|
|
|
6,539.0 |
|
|
|
5,293.0 |
|
|
|
4,532.4 |
|
Total assets
|
|
|
24,580.8 |
|
|
|
24,867.0 |
|
|
|
21,688.3 |
|
|
|
19,042.0 |
|
|
|
16,434.1 |
|
Long-term debt
|
|
|
5,763.5 |
|
|
|
4,491.9 |
|
|
|
4,687.8 |
|
|
|
4,358.2 |
|
|
|
3,132.1 |
|
Shareholders equity
|
|
|
10,791.9 |
|
|
|
10,919.9 |
|
|
|
9,764.8 |
|
|
|
8,273.6 |
|
|
|
7,104.0 |
|
|
|
|
|
Supplementary Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on shareholders equity
|
|
|
18.2 |
% |
|
|
17.5 |
% |
|
|
28.4 |
% |
|
|
35.2 |
% |
|
|
42.3 |
% |
Return on assets
|
|
|
8.2 |
% |
|
|
7.8 |
% |
|
|
12.6 |
% |
|
|
15.2 |
% |
|
|
17.8 |
% |
Capital expenditures
|
|
$ |
1,298.1 |
|
|
$ |
1,898.1 |
|
|
$ |
1,706.6 |
|
|
$ |
1,130.9 |
|
|
$ |
884.0 |
|
Depreciation and amortization
|
|
|
726.4 |
|
|
|
597.5 |
|
|
|
548.5 |
|
|
|
493.0 |
|
|
|
454.9 |
|
Effective tax rate
|
|
|
26.3 |
% |
|
|
38.5 |
% |
|
|
21.5 |
% |
|
|
21.7 |
% |
|
|
20.7 |
% |
Number of employees
|
|
|
42,600 |
|
|
|
44,500 |
|
|
|
45,000 |
|
|
|
42,900 |
|
|
|
40,500 |
|
Number of shareholders of record
|
|
|
50,800 |
|
|
|
52,400 |
|
|
|
54,600 |
|
|
|
56,200 |
|
|
|
57,700 |
|
|
|
|
(1) Reflects the impact of a
cumulative effect of a change in accounting principle in 2005 of
$22.0 million, net of income taxes of $11.8 million.
The diluted earnings per share impact of this cumulative effect
of a change in accounting principle was $.02. The net income per
diluted share before the cumulative effect of a change in
accounting principle was $1.83. See Note 2 for additional
information.
49
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 and the
effect of all potentially dilutive common shares (primarily
unexercised stock options).
Cash equivalents: We consider all highly liquid
investments, generally with a maturity of three months or less,
to be cash equivalents. The cost of these investments
approximates fair value. If items meeting this definition are
part of a larger investment pool, they are classified consistent
with the classification of the pool.
Inventories: We state all inventories at the lower of
cost or market. We use the
last-in, first-out
(LIFO) method for substantially all our inventories located
in the continental United States, or approximately
49 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:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
| |
Finished products
|
|
$ |
471.3 |
|
|
$ |
717.5 |
|
Work in process
|
|
|
1,272.4 |
|
|
|
1,356.3 |
|
Raw materials and supplies
|
|
|
214.7 |
|
|
|
305.7 |
|
|
|
|
|
|
|
1,958.4 |
|
|
|
2,379.5 |
|
Reduction to LIFO cost
|
|
|
(80.4 |
) |
|
|
(87.9 |
) |
|
|
|
|
|
$ |
1,878.0 |
|
|
$ |
2,291.6 |
|
|
|
|
Investments: Substantially all debt and marketable equity
securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value with the
unrealized gains and losses, net of tax, reported in other
comprehensive income. Unrealized losses considered to be
other-than-temporary are recognized in earnings. Factors we
consider in making this evaluation include company-specific
drivers of the decrease in stock price, status of projects in
development, near-term prospects of the issuer, the length of
time the value has been depressed, and the financial condition
of the industry. We do not evaluate cost-method investments for
impairment unless there is an indicator of impairment. We review
these investments for indicators of impairment on a regular
basis. Realized gains and losses on sales of available-for-sale
securities are computed based upon specific identification of
the initial cost adjusted for any other-than-temporary declines
in fair value.
50
Investments in companies over which we have significant
influence but not a controlling interest are accounted for using
the equity method with our share of earnings or losses reported
in other income. We own no investments that are considered to be
trading securities.
Derivative financial instruments: Our derivative
activities are initiated within the guidelines of documented
corporate risk-management policies and do not create additional
risk because gains and losses on derivative contracts offset
losses and gains on the assets, liabilities, and transactions
being hedged. As derivative contracts are initiated, we
designate the instruments individually as either a fair value
hedge or a cash flow hedge. Management reviews the correlation
and effectiveness of our derivatives on a quarterly basis.
For derivative contracts that are designated and qualify as fair
value hedges, the derivative instrument is marked to market with
gains and losses recognized currently in income to offset the
respective losses and gains recognized on the underlying
exposure. For derivative contracts that are designated and
qualify as cash flow hedges, the effective portion of gains and
losses on these contracts is reported as a component of other
comprehensive income and reclassified into earnings in the same
period the hedged transaction affects earnings. Hedge
ineffectiveness is immediately recognized in earnings.
Derivative contracts that are not designated as hedging
instruments are recorded at fair value with the gain or loss
recognized in current earnings during the period of change.
We enter into foreign currency forward and option contracts to
reduce the effect of fluctuating currency exchange rates
(principally the euro and the Japanese yen). Generally, 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 currency. These contracts are
recorded at fair value with the gain or loss recognized in other
income. The purchased option contracts are used to hedge
anticipated foreign currency transactions, primarily
intercompany inventory activities expected to occur within the
next year. These contracts are designated as cash flow hedges of
those future transactions and the impact on earnings is included
in cost of sales. We may enter into foreign currency forward
contracts and currency swaps as fair value hedges of firm
commitments. Forward and option contracts generally have
maturities not exceeding 12 months.
In the normal course of business, our operations are exposed to
fluctuations in interest rates. These fluctuations can vary the
costs of financing, investing, and operating. We address a
portion of these risks through a controlled program of risk
management that includes the use of derivative financial
instruments. The objective of controlling these risks is to
limit the impact of fluctuations in interest rates on earnings.
Our primary interest rate risk exposure results from changes in
short-term U.S. dollar interest rates. In an effort to
manage interest rate exposures, we strive to achieve an
acceptable balance between fixed and floating rate debt and
investment positions and may enter into interest rate swaps or
collars to help maintain that balance. Interest rate swaps or
collars that convert our fixed rate debt or investments to a
floating rate are designated as fair value hedges of the
underlying instruments. Interest rate swaps or collars that
convert floating rate debt or investments to a fixed rate are
designated as cash flow hedges. Interest expense on the debt is
adjusted to include the payments made or received under the swap
agreements.
Goodwill and other intangibles: Other intangibles with
finite lives arising from acquisitions and research alliances
are amortized over their estimated useful lives, ranging from 5
to 15 years, using the straight-line method. Goodwill is
not amortized. Goodwill and other intangibles are reviewed to
assess recoverability at least annually and when certain
impairment indicators are present. Goodwill and net other
intangibles with finite lives were $139.6 million and
$110.3 million, respectively, at
51
December 31, 2005 and 2004, and were included in sundry
assets in the consolidated balance sheets. We currently have no
other intangible assets with indefinite lives. No material
impairments occurred with respect to the carrying value of our
goodwill or other intangible assets in 2005, 2004, or 2003.
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 (generally 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 the assets fair value, and the cost basis
is adjusted.
At December 31, property and equipment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
| |
Land
|
|
$ |
166.8 |
|
|
$ |
147.0 |
|
Buildings
|
|
|
4,584.5 |
|
|
|
3,569.5 |
|
Equipment
|
|
|
6,314.1 |
|
|
|
5,627.2 |
|
Construction in progress
|
|
|
2,070.6 |
|
|
|
2,995.2 |
|
|
|
|
|
|
|
13,136.0 |
|
|
|
12,338.9 |
|
Less allowances for depreciation
|
|
|
5,223.5 |
|
|
|
4,788.0 |
|
|
|
|
|
|
$ |
7,912.5 |
|
|
$ |
7,550.9 |
|
|
|
|
|
|
|
Depreciation expense for 2005, 2004, and 2003 was
$577.2 million, $495.9 million, and
$469.3 million, respectively. Approximately
$140.5 million, $111.3 million, and $61.0 million
of interest costs were capitalized as part of property and
equipment in 2005, 2004, and 2003, respectively. Total rental
expense for all leases, including contingent rentals (not
material), amounted to approximately $294.4 million,
$286.8 million, and $268.5 million for 2005, 2004, and
2003, respectively. Capital leases included in property and
equipment in the consolidated balance sheets, capital lease
obligations entered into, and future minimum rental commitments
are not material.
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. This is
generally at the time products are shipped to the customer.
Provisions for discounts and rebates to customers are
established in the same period the related sales are recorded.
We also generate income as a result of collaboration agreements.
Revenue from copromotion services (primarily Actos) is based
upon net sales reported by our copromotion partner and, if
applicable, the number of sales calls we perform. We immediately
recognize the full amount of milestone payments due to us upon
the achievement of the milestone event if the event is
substantive, objectively determinable, and represents an
important point in the development life cycle of the
pharmaceutical product. Milestone payments earned by us are
generally recorded in other income-net. 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
52
related commitment to supply the products are generally
recognized as net sales over the term of the supply agreement.
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.
Income taxes: Deferred taxes are recognized for the
future tax effects of temporary differences between financial
and income tax reporting based on enacted tax laws and rates.
Federal income taxes are provided on the portion of the income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable. We record a liability for tax
contingencies when we believe it is probable that we will be
assessed and the amount of the contingency can be reasonably
estimated. The tax contingency reserve is adjusted for changes
in facts and circumstances, and additional uncertainties. See
Note 11 regarding the 2004 tax expense associated with the
now completed repatriation of earnings reinvested outside the
U.S. pursuant to the American Job Creations Act.
Earnings per share: We calculate basic earnings per share
based on the weighted-average number of outstanding common
shares and incremental shares. We calculate diluted earnings per
share based on the weighted-average number of outstanding common
shares plus the effect of dilutive stock options and other
incremental shares.
Stock-based compensation: As discussed more fully in
Note 7, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), effective January 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based
compensation in net income. Stock-based compensation primarily
consists of stock options and performance awards. Stock options
are granted to employees at exercise prices equal to the fair
market value of our stock at the dates of grant. Generally,
options fully vest three years from the grant date and have a
term of 10 years. Performance awards are granted to
officers and key employees and are payable in shares of our
common stock. The number of performance award shares actually
issued, if any, varies depending on the achievement of certain
earnings-per-share targets. In general, performance awards fully
vest at the end of the fiscal year of the grant. We recognize
the stock-based compensation expense over the requisite service
period of the individual grantees, which generally equals the
vesting period. We provide newly issued shares and treasury
stock to satisfy stock option exercises and for the issuance of
performance awards.
Prior to January 1, 2005, we followed Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for our
stock options and performance awards. Under APB 25, because
the exercise price of our employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense was recognized. However, SFAS 123R
requires us to present pro forma information as if we had
accounted for our employee stock options and performance awards
under the fair value method of that statement. For purposes of
pro forma disclosure, the estimated fair value of the options
and performance awards at the date of the grant is amortized to
expense over the requisite service period, which generally is
the vesting period.
53
The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition
provisions of SFAS 123R to stock-based employee
compensation.
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
| |
Net income, as reported
|
|
$ |
1,810.1 |
|
|
$ |
2,560.8 |
|
Add: Compensation expense for stock-based performance awards
included in reported net income, net of related tax effects
|
|
|
34.5 |
|
|
|
|
|
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards, net of
related tax effects
|
|
|
(300.9 |
) |
|
|
(210.8 |
) |
|
|
|
Pro forma net income
|
|
$ |
1,543.7 |
|
|
$ |
2,350.0 |
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic, as reported
|
|
$ |
1.67 |
|
|
$ |
2.38 |
|
|
|
|
|
|
|
|
Basic, pro forma
|
|
$ |
1.42 |
|
|
$ |
2.18 |
|
|
|
|
|
|
|
|
Diluted, as reported
|
|
$ |
1.66 |
|
|
$ |
2.37 |
|
|
|
|
|
|
|
|
Diluted, pro forma
|
|
$ |
1.42 |
|
|
$ |
2.17 |
|
|
|
|
|
|
|
|
|
Note 2: |
Implementation of New Financial Accounting Pronouncements |
In 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN) 46,
Consolidation of Variable Interest Entities. FIN 46 defines
a variable interest entity (VIE) as a corporation,
partnership, trust, or any other legal structure that does not
have equity investors with a controlling financial interest or
has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46
requires consolidation of a VIE by the primary beneficiary of
the assets, liabilities, and results of activities. FIN 46
also requires certain disclosures by all holders of a
significant variable interest in a VIE that are not the primary
beneficiary. We do not have any material investments in variable
interest entities; therefore, the adoption of this
interpretation in the first quarter of 2004 had no material
impact on our consolidated financial position or results of
operations.
In 2005, the FASB issued FIN 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of FASB
Statement No. 143. FIN 47 requires us to record the
fair value of a liability for conditional asset retirement
obligations in the period in which it is incurred, which is
adjusted to its present value each subsequent period. In
addition, we are required to capitalize a corresponding amount
by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related
long-lived asset. The adoption of FIN 47 on
December 31, 2005 resulted in a cumulative effect of a
change in accounting principle of $22.0 million, net of
income taxes of $11.8 million.
As discussed previously, we adopted SFAS 123R effective
January 1, 2005. The adoption of this standard required
recognition of the fair value of stock-based compensation in net
income.
Applied Molecular Evolution, Inc. Acquisition
On February 12, 2004, we acquired all the outstanding
common stock of Applied Molecular Evolution, Inc. (AME) in
a tax-free merger. Under the terms of the merger agreement, each
outstanding share of AME common stock was exchanged for our
common stock or a combination of cash and our stock valued at
$18. The aggregate purchase price of approximately
$442.8 million
54
consisted of issuance of 4.2 million shares of our common
stock valued at $314.8 million, issuance of
0.7 million replacement options to purchase shares of our
common stock in exchange for the remaining outstanding AME
options valued at $37.6 million, cash of $85.4 million
for AME common stock and options for certain AME employees, and
transaction costs of $5.0 million. The fair value of our
common stock was derived using a per-share value of $74.14,
which was our average closing stock price for February 11
and 12, 2004. The fair value for the options granted was
derived using a Black-Scholes valuation method using assumptions
consistent with those we used in valuing employee options.
Replacement options to purchase our common stock granted as part
of this acquisition have terms equivalent to the AME options
being replaced.
In addition to acquiring the rights to two compounds currently
under development, we expected the acquisition of AMEs
protein optimization technology to create synergies that will
accelerate our ability to discover and optimize biotherapeutic
drugs for cancer, critical care, diabetes, and obesity, areas in
which proteins are of great therapeutic benefit.
In accordance with SFAS 141, Business Combinations, the
acquisition was accounted for as a purchase business
combination. Under the purchase method of accounting, the assets
acquired and liabilities assumed from AME at the date of
acquisition were recorded at their respective fair values as of
the acquisition date in our consolidated financial statements.
The excess of the purchase price over the fair value of the
acquired net assets was recorded as goodwill in the amount of
$9.6 million. Goodwill resulting from this acquisition was
fully allocated to the pharmaceutical products segment. No
portion of this goodwill is expected to be deductible for tax
purposes. AMEs results of operations are included in our
consolidated financial statements from the date of acquisition.
As of the date of acquisition, we determined the following
estimated fair values for the assets purchased and liabilities
assumed. The determination of estimated fair value requires
management to make significant estimates and assumptions. We
hired independent third parties to assist in the valuation of
assets that were difficult to value.
|
|
|
|
|
|
Estimated Fair Value at February 12, 2004 |
|
|
| |
Cash and short-term investments
|
|
$ |
38.7 |
|
Acquired in-process research and development
|
|
|
362.3 |
|
Platform technology
|
|
|
17.9 |
|
Goodwill
|
|
|
9.6 |
|
Other assets and liabilities net
|
|
|
14.3 |
|
|
|
|
|
|
Total estimated purchase price
|
|
$ |
442.8 |
|
|
|
|
|
The acquired in-process research and development (IPR&D)
represents compounds currently under development that have not
yet achieved regulatory approval for marketing. The estimated
fair value of these intangible assets was derived using a
valuation from an independent third party. AMEs two lead
compounds for the treatment of non-Hodgkins lymphoma and
rheumatoid arthritis represent approximately 80 percent of
the estimated fair value of the IPR&D. In accordance with
FIN 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method,
these IPR&D intangible assets were written off by a charge
to income immediately subsequent to the acquisition because the
compounds did not have any alternative future use. This charge
was not deductible for tax purposes. The ongoing activity with
respect to each of these compounds under development is not
material to our research and development expenses.
55
There are several methods that can be used to determine the
estimated fair value of the acquired IPR&D. We utilized the
income method, which applies a probability weighting
to the estimated future net cash flows that are derived from
projected sales revenues and estimated costs. These projections
were based on factors such as relevant market size, patent
protection, historical pricing of similar products, and expected
industry trends. The estimated future net cash flows were then
discounted to the present value using an appropriate discount
rate. This analysis was performed for each project
independently. The discount rate we used in valuing the acquired
IPR&D projects was 18.75 percent.
Product Acquisition
In October 2004, we entered into an agreement with Merck KGaA
(Merck) to acquire Mercks compound for a potential
treatment for insomnia. At the inception of this agreement, this
compound was in the development stage (Phase I clinical
trials) and no alternative future uses were identified. As with
many development phase compounds, launch of the product, if
approved, was not expected in the near term. Our charge for
acquired in-process research and development expense related to
this arrangement was $29.9 million in the fourth quarter of
2004.
|
|
Note 4: |
Asset Impairments, Restructuring, and Other Special
Charges |
The components of the charges included in asset impairments,
restructuring, and other special charges in our consolidated
statements of income are described below.
In December 2005, management approved, as part of our ongoing
efforts to increase productivity and reduce our cost structure,
decisions that resulted in non-cash charges of
$154.6 million for the write-down of certain impaired
assets, and other charges of $17.3 million, primarily
related to contract termination payments. The impaired assets,
which have no future use, include manufacturing buildings and
equipment no longer needed to supply projected capacity
requirements, as well as obsolete research and development
equipment. The impairment charges are necessary to adjust the
carrying value of the assets to fair value.
As discussed further in Note 13, in 2005 we entered into a
master settlement agreement with plaintiffs attorneys
involved in the U.S. Zyprexa product liability litigation
to settle a majority of the claims against us relating to the
medication. According to the agreement, we established a fund of
$690 million for the claimants who agreed to settle their
claims. Additionally, $10 million was paid to cover
administration of the settlement. In the second quarter of 2005,
we recorded a net pre-tax charge of $1.07 billion for
product liability matters, which included the following:
|
|
|
|
|
The $700 million Zyprexa settlement and administration fee; |
|
|
|
Reserves for product liability exposures and defense costs
regarding currently known and expected claims to the extent we
can formulate a reasonable estimate of the probable number and
cost of the claims. A substantial majority of these exposures
and costs relate to current and expected Zyprexa claims not
included in the settlement. We have estimated these charges
based primarily on historical claims experience, data regarding
product usage, and our historical product liability defense cost
experience. |
The $1.07 billion net charge takes into account our
estimated recoveries from our insurance coverage related to
these matters. The after-tax impact of this net charge is
$.90 per share. The $700 million for the Zyprexa
settlement was paid during 2005, while the other product
liability exposures and defense costs are expected to be paid
out over the next several years. The timing of our insurance
recoveries is uncertain.
56
In the fourth quarter of 2004, management approved actions
designed to increase productivity, to address current challenges
in the marketplace, and to leverage prior investments in our
product portfolio. These actions, which are described further
below, affect primarily operations in the manufacturing,
research and development, and sales and marketing components and
resulted in asset impairments, severance and other related
charges. These actions were substantially completed during 2005.
|
|
|
|
|
We discontinued our plans to produce the bulk active ingredient
for Xigris at our Indianapolis operations. Although we remain
committed to this important lifesaving product, we have
determined that our manufacturing partner, Lonza Biologics plc,
has enough capacity to supply anticipated Xigris demand for the
foreseeable future. In addition, we determined that a redesign
of our Prince William County, Virginia, facility that is
currently under construction was warranted. This decision
rendered obsolete certain engineering and construction costs
that have already been incurred. Also, the mission of our
Clinton, Indiana, manufacturing site has been narrowed to make
products solely for the Elanco Animal Health business. The
portion of that site that produced human pharmaceutical products
has ceased operation. |
|
|
|
We have focused our research efforts on the therapeutic areas of
neuroscience, endocrine, oncology, and cardiovascular and have
discontinued our efforts in inflammation. In addition to this
narrowing of therapeutic focus, we have closed our RTP
Laboratory site in Research Triangle Park, North Carolina. This
site has historically been our center for high-throughput
screening and combinatorial chemistry, but much of that
technology has evolved such that these operations can be more
efficiently performed in existing facilities in Indianapolis.
The site has been written down to fair value less cost to sell
and is currently held for sale. |
|
|
|
We closed all district and regional sales offices throughout the
United States, and these operations are now managed from
home-based offices. In addition, we reorganized our
U.S. sales force to create an organization that better
meets customer needs and maximizes sales potential. We also
streamlined some sales and marketing support activities as well
as our field-based operations that support our medical function. |
As a result of these actions, we recognized asset impairment
charges of $377.4 million in the fourth quarter of 2004. We
have ceased using these assets, and have disposed of or
destroyed substantially all of the assets. The impairment
charges are necessary to adjust the carrying value of the assets
to fair value. Other site charges, including lease termination
payments, were $12.2 million.
In addition, nearly 1,400 positions globally were
eliminated as a result of these actions. While a substantial
number of the affected employees were successfully placed in
other positions in the company, severance expenses were incurred
in the fourth quarter of 2004 for those employees who elected a
severance package. The restructuring and other special charges
incurred in the fourth quarter of 2004 related to the
elimination of positions totaled $68.5 million, including
$35.1 million of severance charges related to restructuring
activities in our overseas affiliates. The severance charges
consisted primarily of voluntary severance expenses. All of this
charge has been expended.
The other significant component of our fourth-quarter 2004
special charges was a provision for $36.0 million for the
anticipated resolution of the previously reported Evista
marketing and promotional practices investigation. See
Note 13 for additional discussion.
57
In addition, in the second quarter of 2004, as part of our
ongoing review of our manufacturing and research and development
strategies to maximize performance and efficiencies, including
the streamlining of manufacturing operations and research and
development activities, we made decisions that resulted in the
impairment of certain assets. This review did not result in any
closure of facilities or layoffs, but certain assets located at
various sites were affected. We have ceased using these assets,
written down their carrying value to zero, and have disposed of
or destroyed substantially all of the assets. The asset
impairment charges incurred in the second quarter of 2004
aggregated $108.9 million.
Similar to 2004, during 2003, management approved global
manufacturing strategies across our product portfolio to improve
plant performance and efficiency, including the outsourcing of
production of certain anti-infective products. These decisions
resulted in the impairment of certain assets, primarily
manufacturing assets in the U.S. This review did not result
in any closure of facilities, but certain assets located at
various manufacturing sites were affected. We have ceased using
these assets, and substantially all of these assets have been
disposed of or destroyed. The impairment charges were necessary
to adjust the carrying value of these assets to zero. These
asset impairment charges incurred totaled $142.9 million,
of which $114.6 million was incurred in the first quarter
of 2003 with the remaining $28.3 million incurred in the
fourth quarter of 2003.
In December 2002, we initiated a plan of eliminating
approximately 700 positions worldwide in order to streamline our
infrastructure. While a substantial majority of affected
employees were successfully placed in other positions in the
company, severance expenses were incurred in the first quarter
of 2003 for those employees who elected a severance package. The
restructuring and other special charges incurred in the first
quarter of 2003 were $52.5 million, consisting primarily of
voluntary severance expenses. All of this charge has been
expended.
In 2001, we licensed from Isis Pharmaceuticals, Inc. (Isis),
Affinitak, a non-small-cell lung cancer drug candidate, and
entered into an agreement regarding an ongoing research
collaboration. In conjunction with this agreement, we purchased
approximately 4.2 million shares of Isis common stock with
a cost basis of approximately $68.0 million, and we
committed to loan Isis $100 million over the four-year term
of the research agreement. The Isis loan was repayable at the
end of the research agreement term in cash or Isis stock, at
Isiss option, using a conversion price of $40 per
share. In addition, we committed to loan Isis $21.2 million
for the building of a manufacturing suite for Affinitak. On
March 17, 2003, we announced, along with Isis, the results
of the Phase III trial that evaluated Affinitak when
combined with chemotherapy in patients with advanced
non-small-cell lung cancer. No difference was observed in the
overall survival of the two groups. Due to this announcement and
the decline in Isiss stock price that occurred in the
previous 12 months, we concluded in the first quarter of
2003 that our investment in Isis common stock was
other-than-temporarily impaired as defined by generally accepted
accounting principles. For the same reasons, it was probable
that the value of the consideration that we would be eligible to
receive from Isis pursuant to the terms of the loan agreements
would be less than the carrying amount of the loans. Therefore,
in the first quarter of 2003, we recognized an impairment in our
investment in Isis common stock of $55.0 million and a
reserve related to the loans of $92.9 million. In addition,
we recognized a charge of $38.9 million for contractual
obligations related to Affinitak. The primary portion of this
charge resulted from our supply agreement with Isis. The supply
agreement obligated us to pay certain costs associated with
work-in-process and raw
materials and other costs that were triggered when we canceled
our order of Affinitak. The remaining portion of the charge
resulted from our contractual obligations related to the conduct
of Affinitak clinical trials. All our contractual obligations
have been fulfilled. The stock and loan impairments and other
special charges incurred in the first quarter of 2003 related to
this relationship totaled $186.8 million. In
58
the third quarter of 2005, Isis exercised its option to repay
its loan obligation with 2.5 million shares of Isis common
stock.
|
|
Note 5: |
Financial Instruments and Investments |
Financial instruments that potentially subject us to credit risk
consist principally of trade receivables and interest-bearing
investments. Wholesale distributors of life-sciences products
and managed care organizations account for a substantial portion
of trade receivables; collateral is generally not required. The
risk associated with this concentration is mitigated by our
ongoing credit review procedures. We place substantially all our
interest-bearing investments with major financial institutions,
in U.S. government securities, or with top-rated corporate
issuers. At December 31, 2005, our investments in debt
securities were comprised of 41 percent asset-backed
securities, 34 percent corporate 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
A summary of our outstanding financial instruments and other
investments at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Carrying Amount | |
|
Fair Value | |
|
Carrying Amount | |
|
Fair Value | |
| |
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$ |
2,031.0 |
|
|
$ |
2,031.0 |
|
|
$ |
2,099.1 |
|
|
$ |
2,099.1 |
|
Noncurrent investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity
|
|
$ |
118.0 |
|
|
$ |
118.0 |
|
|
$ |
80.4 |
|
|
$ |
80.4 |
|
|
Debt securities
|
|
|
1,076.2 |
|
|
|
1,076.2 |
|
|
|
366.1 |
|
|
|
366.1 |
|
|
Equity method and other investments
|
|
|
102.4 |
|
|
|
N/A |
|
|
|
114.9 |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,296.6 |
|
|
|
|
|
|
$ |
561.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
$ |
6,484.8 |
|
|
$ |
6,484.2 |
|
|
$ |
4,858.5 |
|
|
$ |
4,868.6 |
|
Risk-management instruments liabilities
|
|
|
336.0 |
|
|
|
336.0 |
|
|
|
213.4 |
|
|
|
213.4 |
|
We determine fair values based on quoted market values where
available or discounted cash flow analyses (principally
long-term debt). The fair value of equity method and other
investments is not readily available and disclosure is not
required. Approximately $2.6 billion of our investments in
debt securities mature within five years.
A summary of the unrealized gains and losses (pretax) of
our available-for-sale securities in other comprehensive income
at December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
| |
Unrealized gross gains
|
|
$ |
52.0 |
|
|
$ |
43.7 |
|
Unrealized gross losses
|
|
|
15.9 |
|
|
|
7.9 |
|
The net adjustment to unrealized gains and losses (net of tax)
on available-for-sale securities increased
(decreased) other comprehensive income by
($4.6) million, ($18.2) million, and
59
$45.4 million in 2005, 2004, and 2003, respectively.
Activity related to our available-for-sale investment portfolio
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
| |
Proceeds from sales
|
|
$ |
2,048.6 |
|
|
$ |
7,774.7 |
|
|
$ |
5,303.7 |
|
Realized gross gains on sales
|
|
|
25.6 |
|
|
|
37.3 |
|
|
|
72.1 |
|
Realized gross losses on sales
|
|
|
7.1 |
|
|
|
17.6 |
|
|
|
26.4 |
|
Interest income
|
|
|
212.1 |
|
|
|
156.7 |
|
|
|
143.1 |
|
During the years ended December 31, 2005, 2004, and 2003,
net losses related to ineffectiveness and net losses related to
the portion of fair value and cash flow hedging instruments
excluded from the assessment of effectiveness were not material.
We expect to reclassify an estimated $4.7 million of pretax
net losses on cash flow hedges of anticipated foreign currency
transactions and the variability in expected future interest
payments on floating rate debt from accumulated other
comprehensive loss to earnings during 2006. This assumes that
short-term interest rates remain unchanged from the prevailing
rates at December 31, 2005.
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
| |
4.50 to 7.13 percent notes (due 2012-2036)
|
|
$ |
1,487.4 |
|
|
$ |
1,4874 |
|
2.90 to 8.38 percent notes (due 2006-2008)
|
|
|
811.4 |
|
|
|
811.4 |
|
Floating rate extendible notes (due 2007)
|
|
|
1,500.0 |
|
|
|
|
|
Floating rate bonds (due 2008-2037)
|
|
|
1,939.2 |
|
|
|
1,424.7 |
|
Private placement bonds (due 2007-2008)
|
|
|
460.7 |
|
|
|
652.6 |
|
8.38 percent eurodollar bonds (due 2005)
|
|
|
|
|
|
|
150.0 |
|
6.55 percent ESOP debentures (due 2017)
|
|
|
92.6 |
|
|
|
93.6 |
|
Other, including capitalized leases
|
|
|
113.0 |
|
|
|
122.8 |
|
SFAS 133 fair value adjustment
|
|
|
80.5 |
|
|
|
116.0 |
|
|
|
|
|
|
|
6,484.8 |
|
|
|
4,858.5 |
|
Less current portion
|
|
|
721.3 |
|
|
|
366.6 |
|
|
|
|
|
|
$ |
5,763.5 |
|
|
$ |
4,491.9 |
|
|
|
|
In September 2005, Eli Lilly Services, Inc. (ELSI), our indirect
wholly-owned finance subsidiary, issued $1.5 billion of
floating rate notes (4.53 percent at December 31,
2005). The notes mature in September 2008 and pay interest
quarterly at LIBOR plus 5 basis points. The notes may be
redeemed at our option beginning in September 2006. In August
2005, ELSI issued $1.5 billion of
13-month floating rate
extendible notes. The maturity date of these notes is
January 1, 2007, but holders of the notes may extend the
maturity of the notes, in monthly increments, until
September 1, 2010. These notes pay interest at essentially
a rate equivalent to LIBOR (4.26 percent at
December 31, 2005). The parent company fully and
unconditionally guarantees the ELSI notes.
In August 2004, we issued $1.00 billion of floating rate
notes due in 2007. We repaid these notes in August 2005. In
March 2003, we issued $300.0 million of 2.9 percent
5-year notes and
$200.0 million of 4.5 percent
15-year notes. In July
2002 and May 2001, we issued $150.0 million and
$250.0 million, respectively, of floating rate bonds that
mature in 2037. The variable interest
60
rate on these bonds is at LIBOR plus our six-month credit
spread, adjusted semiannually (total of 4.64 percent at
December 31, 2005). The interest accumulates over the life
of the bonds and is payable upon maturity. We have an option to
begin periodic interest payments at any time. At the time of
option exercise, we would owe all previously accrued interest on
the bonds. Additionally, in July 2003 and July 2002,
respectively, we executed a $330.0 million and
$542.8 million private placement note with a financial
institution. Principal and interest are due semiannually over
the five-year terms of each of these notes. In conjunction with
these notes, we entered into interest rate swap agreements with
the same financial institution, which converts the fixed rate
into a variable rate of interest at essentially LIBOR over the
term of the notes.
The 6.55 percent Employee Stock Ownership Plan
(ESOP) debentures are obligations of the ESOP but are shown
on the consolidated balance sheet because we guarantee them. The
principal and interest on the debt are funded by contributions
from us and by dividends received on certain shares held by the
ESOP. Because of the amortizing feature of the ESOP debt,
bondholders will receive both interest and principal payments
each quarter.
The aggregate amounts of maturities on long-term debt for the
next five years are as follows: 2006, $721.3 million; 2007,
$1.71 billion; 2008, $1.89 billion; 2009,
$17.7 million; and 2010, $15.9 million.
At December 31, 2005 and 2004, short-term borrowings
included $13.4 million and $1.65 billion,
respectively, of notes payable to banks and commercial paper. At
December 31, 2005, unused committed lines of credit totaled
approximately $1.23 billion. Compensating balances and
commitment fees are not material, and there are no conditions
that are probable of occurring under which the lines may be
withdrawn.
We have converted substantially all fixed rate debt to floating
rates through the use of interest rate swaps. The
weighted-average effective borrowing rate based on debt
obligations and interest rates at December 31, 2005 and
2004, including the effects of interest rate swaps for hedged
debt obligations, were 4.75 percent and 2.7 percent,
respectively.
In 2005 and 2003, cash payments of interest on borrowings
totaled $32.0 million and $44.7 million, respectively,
net of capitalized interest. In 2004, capitalized interest
exceeded cash payments of interest on borrowings, due in large
part to certain debt instruments requiring interest payments
only at maturity, as previously noted.
In accordance with the requirements of SFAS 133, the
portion of our fixed-rate debt obligations that is hedged is
reflected in the consolidated balance sheet as an amount equal
to the sum of the debts carrying value plus the fair value
adjustment representing changes in fair value of the hedged debt
attributable to movements in market interest rates subsequent to
the inception of the hedge.
We adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), effective January 1, 2005. SFAS 123R
requires the recognition of the fair value of stock-based
compensation in net income. Stock-based compensation primarily
consists of stock options and performance awards. Stock options
are granted to employees at exercise prices equal to the fair
market value of our stock at the dates of grant. Generally,
options fully vest three years from the grant date and have a
term of 10 years. Performance awards are granted to
officers and key employees and are payable in shares of our
common stock. The number of performance award shares actually
issued, if any, varies depending on the achievement of certain
earnings-per-share targets. In general, performance awards fully
vest at the end of the fiscal year of the grant.
61
We recognize the stock-based compensation expense over the
requisite service period of the individual grantees, which
generally equals the vesting period. We provide newly issued
shares and treasury stock to satisfy stock option exercises and
for the issuance of performance awards.
Prior to January 1, 2005, we followed Accounting Principles
Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for our
stock options and performance awards. Under APB 25, because
the exercise price of our employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense was recognized. See Note 1 for a
calculation of our net income and earnings per share if we had
applied the fair value recognition provisions of SFAS 123R
to stock-based employee compensation prior to January 1,
2005.
We have elected the modified prospective transition method for
adopting SFAS 123R. Under this method, the provisions of
SFAS 123R apply to all awards granted or modified after the
date of adoption. In addition, the unrecognized expense of
awards not yet vested at the date of adoption, determined under
the original provisions of SFAS 123, shall be recognized in
net income in the periods after the date of adoption. We
recognized stock-based compensation cost in the amount of
$403.5 million, $53.0 million, and $0 in 2005, 2004,
and 2003, respectively, as well as related tax benefits of
$122.9 million, $18.5 million, and $0, respectively.
The amounts for 2004 relate only to expenses for performance
awards because no expense was recognized for stock options under
APB 25. In addition, after adopting SFAS 123R, we now
classify tax benefits resulting from tax deductions in excess of
the compensation cost recognized for exercised stock options as
a financing cash flow in the consolidated statements of cash
flows rather than an operating cash flow as under our previous
disclosure.
As a result of the adoption of SFAS 123R and compensation
plan structural changes effective January 1, 2005, the
incremental impact on our stock compensation expense caused our
income before income taxes and cumulative effect of a change in
accounting principle and net income for the year ended
December 31, 2005, to be $318.5 million and
$225.4 million lower, respectively, than if we had
continued to account for our equity compensation programs under
APB 25. As a result, the reported basic and diluted
earnings per share for the year ended December 31, 2005 are
$.21 lower than they would have been had we not adopted
SFAS 123R effective January 1, 2005.
In connection with the adoption of SFAS 123R, we reassessed
the valuation methodology for stock options and the related
input assumptions. As a result, beginning with the 2005 stock
option grant, we utilized a lattice-based option valuation model
for estimating the fair value of the stock options. The lattice
model allows the use of a range of assumptions related to
volatility, risk-free interest rate, and employee exercise
behavior. Expected volatilities utilized in the lattice model
are based on implied volatilities from traded options on our
stock, historical volatility of our stock price, and other
factors. Similarly, the dividend yield is based on historical
experience and our estimate of future dividend yields. The
risk-free interest rate is derived from the U.S. Treasury
yield curve in effect at the time of grant. The model
incorporates exercise and post-vesting forfeiture assumptions
based on an analysis of historical data. The expected life of
the 2005 grants is derived from the output of the lattice model.
Prior to 2005, we utilized a Black-Scholes option-pricing model
to estimate the fair value of the options. This model did not
allow for the input of a range of factors. Accordingly,
volatility was derived from the historical volatility of our
stock price and the risk-free interest rate was derived from the
weighted-average yield of a treasury security with the same term
as the expected life of the options. The expected life of the
options was based on the weighted-average life of our historical
option grants and the dividend yield was based on our historical
dividends paid.
62
The weighted-average fair values of the individual options
granted during 2005, 2004, and 2003 were $16.06, $26.19, and
$20.59, respectively, determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
|
Dividend yield
|
|
|
2.0% |
|
|
|
1.57% |
|
|
|
1.50% |
|
Weighted-average volatility
|
|
|
27.8% |
|
|
|
35.20% |
|
|
|
35.10% |
|
Range of volatilities
|
|
|
27.6%-30.7% |
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.5%-4.5% |
|
|
|
3.43% |
|
|
|
3.32% |
|
Weighted-average expected life
|
|
|
7 years |
|
|
|
7 years |
|
|
|
7 years |
|
The fair values of performance awards granted in 2005 and 2004
were $55.65 and $70.33, respectively. No performance awards were
granted in 2003.
Stock option activity during 2005 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, 2005
|
|
|
93,658 |
|
|
$ |
68.02 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,084 |
|
|
|
55.65 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,338 |
) |
|
|
24.42 |
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(4,322 |
) |
|
|
69.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
90,082 |
|
|
|
69.37 |
|
|
|
5.59 |
|
|
$ |
57.3 |
|
Exercisable at December 31, 2005
|
|
|
57,543 |
|
|
|
71.64 |
|
|
|
4.27 |
|
|
|
52.7 |
|
A summary of the status of nonvested shares as of
December 31, 2005, and changes during the year then ended,
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average | |
|
|
Shares | |
|
Grant Date Fair | |
|
|
(in thousands) | |
|
Value | |
| |
Nonvested at January 1, 2005
|
|
|
39,342 |
|
|
$ |
24.45 |
|
Granted
|
|
|
5,084 |
|
|
|
16.06 |
|
Vested
|
|
|
(10,220 |
) |
|
|
25.98 |
|
Forfeited
|
|
|
(1,667 |
) |
|
|
22.66 |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2005
|
|
|
32,539 |
|
|
|
22.75 |
|
|
|
|
|
|
|
|
The intrinsic value of options exercised during 2005, 2004, and
2003 amounted to $131.9 million, $163.8 million, and
$178.6 million, respectively. The total grant date fair
value of options vested during 2005, 2004, and 2003, amounted to
$265.5 million, $337.2 million, and
$236.2 million, respectively. We received cash of
$105.9 million, $117.9 million, and $99.3 million
from exercises of stock options during 2005, 2004, and 2003,
respectively, and recognized related tax benefits of
$36.8 million, $36.8 million, and $44.3 million
during those same years.
As of December 31, 2005, the total remaining unrecognized
compensation cost related to nonvested stock options amounted to
$216.2 million, which will be amortized over the
weighted-average remaining requisite service period of
16 months. The number of shares ultimately issued for the
performance award program is dependent upon the earnings
achieved during the vesting period. Pursuant to this plan, no
shares were issued in 2003 or 2004, and approximately
0.5 million shares were issued in 2005. Approximately
1.7 million shares are expected to be issued in 2006.
63
At December 31, 2005, additional options, performance
awards, or restricted stock grants may be granted under the 2002
Lilly Stock Plan for not more than 49.1 million shares.
|
|
Note 8: |
Other Assets and Other Liabilities |
Our sundry assets include our capitalized computer software,
estimated insurance recoveries from our product litigation and
environmental contingencies (Note 13), prepaid retiree
health benefit (Note 12), goodwill and intangible assets
(Note 1), and a variety of other items. The increase in
sundry assets is primarily attributable to an increase in
estimated insurance recoveries relating to litigation.
Our other current liabilities include the fair value of interest
rate swaps and related accrued interest of $443.1 million
associated with our borrowings, product litigation and
environmental liabilities (Note 13), other taxes, and a
variety of other items. The decrease in other current
liabilities is caused primarily by a reduction in deferred
income from our collaboration and out-licensing arrangements
offset by an increase in product litigation liabilities and the
interest rate swaps.
Our other noncurrent liabilities include the accrued liabilities
from our pension and retiree health plans (Note 12),
product litigation and environmental liabilities (Note 13),
deferred income from our collaboration and out-licensing
arrangements, and a variety of other items. The increase in
other noncurrent liabilities is primarily attributable to an
increase in product litigation and environmental liabilities.
None of the components of sundry assets exceeds 5 percent
of total assets, and none of the components of other current
liabilities (except for the interest rate swaps) or other
noncurrent liabilities exceeds 5 percent of current or
total liabilities, respectively.
64
|
|
Note 9: |
Shareholders Equity |
Changes in certain components of shareholders equity were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
|
in Treasury | |
|
|
Additional | |
|
|
|
|
|
| |
|
|
Paid-in | |
|
Retained | |
|
Deferred | |
|
Shares | |
|
|
|
|
Capital | |
|
Earnings | |
|
Costs ESOP | |
|
(in thousands) | |
|
Amount | |
| |
Balance at January 1, 2003
|
|
$ |
2,610.0 |
|
|
$ |
8,500.1 |
|
|
$ |
(123.3 |
) |
|
|
1,008 |
|
|
$ |
109.5 |
|
Net income
|
|
|
|
|
|
|
2,560.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share: $1.36
|
|
|
|
|
|
|
(1,465.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(289.1 |
) |
|
|
|
|
|
|
|
|
|
|
(3,180 |
) |
|
|
(291.2 |
) |
Purchase for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,976 |
|
|
|
276.8 |
|
Issuance of stock under employee stock plans
|
|
|
150.4 |
|
|
|
|
|
|
|
|
|
|
|
148 |
|
|
|
9.1 |
|
ESOP transactions
|
|
|
13.6 |
|
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
|
|
Reclassification
|
|
|
125.1 |
|
|
|
(125.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
2,610.0 |
|
|
|
9,470.4 |
|
|
|
(118.6 |
) |
|
|
952 |
|
|
|
104.2 |
|
Net income
|
|
|
|
|
|
|
1,810.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share: $1.45
|
|
|
|
|
|
|
(1,555.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(17.4 |
) |
|
|
|
|
|
|
|
|
|
|
(271 |
) |
|
|
(17.6 |
) |
Issuance of stock under employee stock plans
|
|
|
110.7 |
|
|
|
|
|
|
|
|
|
|
|
262 |
|
|
|
17.2 |
|
Stock-based compensation
|
|
|
53.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
13.2 |
|
|
|
|
|
|
|
6.7 |
|
|
|
|
|
|
|
|
|
Acquisition of AME
|
|
|
349.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
3,119.4 |
|
|
|
9,724.6 |
|
|
|
(111.9 |
) |
|
|
943 |
|
|
|
103.8 |
|
Net income
|
|
|
|
|
|
|
1,979.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share: $1.54
|
|
|
|
|
|
|
(1,677.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
|
(381.7 |
) |
|
|
|
|
|
|
|
|
|
|
(6,874 |
) |
|
|
(386.0 |
) |
Purchase for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,704 |
|
|
|
377.9 |
|
Issuance of stock under employee stock plans
|
|
|
172.9 |
|
|
|
|
|
|
|
|
|
|
|
161 |
|
|
|
8.4 |
|
Stock-based compensation
|
|
|
403.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP transactions
|
|
|
9.7 |
|
|
|
|
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
3,323.8 |
|
|
$ |
10,027.2 |
|
|
$ |
106.3 |
|
|
|
934 |
|
|
$ |
104.1 |
|
|
|
|
As of December 31, 2005, we have purchased
$2.46 billion of our announced $3.0 billion share
repurchase program. We acquired approximately 6.7 million
and 3.0 million shares in 2005 and 2003 under this program.
We have 5 million authorized shares of preferred stock. As
of December 31, 2005 and 2004, 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 consolidated the employee
benefit trust. The cost basis of the shares held in the trust
was $2.64 billion and is shown as a reduction in
shareholders equity, which offsets the resulting increases
of $2.61 billion in additional paid-in capital and
$25 million in common stock. Any dividend transactions
between us and the trust are eliminated. Stock held by the trust
is not considered outstanding in the computation of earnings per
65
share. The assets of the trust were not used to fund any of our
obligations under these employee benefit plans in 2005, 2004, or
2003.
We have an ESOP as a funding vehicle for the existing employee
savings plan. The ESOP used the proceeds of a loan from us to
purchase shares of common stock from the treasury. The ESOP
issued $200 million of third-party debt, repayment of which
was guaranteed by us (see Note 6). The proceeds were used
to purchase shares of our common stock on the open market.
Shares of common stock held by the ESOP will be allocated to
participating employees annually through 2017 as part of our
savings plan contribution. The fair value of shares allocated
each period is recognized as compensation expense.
Under a Shareholder Rights Plan adopted in 1998, all
shareholders receive, along with each common share owned, a
preferred stock purchase right entitling them to purchase from
the company one one-thousandth of a share of Series B
Junior Participating Preferred Stock (the Preferred Stock) at a
price of $325. The rights are exercisable only after the
Distribution Date, which is generally the 10th business day
after the date of a public announcement that a person (the
Acquiring Person) has acquired ownership of 15 percent or
more of our common stock. We may redeem the rights for
$.005 per right, up to and including the Distribution Date.
The rights will expire on July 28, 2008, unless we redeem
them earlier.
The rights plan provides that, if an Acquiring Person acquires
15 percent or more of our outstanding common stock and our
redemption right has expired, generally each holder of a right
(other than the Acquiring Person) will have the right to
purchase at the exercise price the number of shares of our
common stock that have a value of two times the exercise price.
Alternatively, if, in a transaction not approved by the board of
directors, we are acquired in a business combination transaction
or sell 50 percent or more of our assets or earning power
after a Distribution Date, generally each holder of a right
(other than the Acquiring Person) will have the right to
purchase at the exercise price the number of shares of common
stock of the acquiring company that have a value of two times
the exercise price.
At any time after an Acquiring Person has acquired
15 percent or more but less than 50 percent of our
outstanding common stock, the board of directors may exchange
the rights (other than those owned by the Acquiring Person) for
our common stock or Preferred Stock at an exchange ratio of one
common share (or one one-thousandth of a share of Preferred
Stock) per right.
66
|
|
Note 10: |
Earnings Per Share |
The following is a reconciliation of the denominators used in
computing earnings per share before cumulative effect of a
change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
|
(Shares in thousands) | |
Income before cumulative effect of a change in accounting
principle available to common shareholders
|
|
$ |
2,001.6 |
|
|
$ |
1,810.1 |
|
|
$ |
2,560.8 |
|
|
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding, including
incremental shares
|
|
|
1,088,754 |
|
|
|
1,083,887 |
|
|
|
1,076,547 |
|
|
|
|
|
Basic earnings per share before cumulative effect of a change in
accounting principle
|
|
$ |
1.84 |
|
|
$ |
1.67 |
|
|
$ |
2.38 |
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
1,088,115 |
|
|
|
1,083,677 |
|
|
|
1,076,547 |
|
|
Stock options and other incremental shares
|
|
|
4,035 |
|
|
|
5,259 |
|
|
|
5,683 |
|
|
|
|
|
Weighted-average number of common shares outstanding
diluted
|
|
|
1,092,150 |
|
|
|
1,088,936 |
|
|
|
1,082,230 |
|
|
|
|
|
Diluted earnings per share before cumulative effect of a change
in accounting principle
|
|
$ |
1.83 |
|
|
$ |
1.66 |
|
|
$ |
2.37 |
|
|
|
|
Following is the composition of income taxes attributable to
income before cumulative effect of a change in accounting
principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
517.4 |
|
|
$ |
47.6 |
|
|
$ |
391.2 |
|
|
Foreign
|
|
|
649.8 |
|
|
|
519.9 |
|
|
|
284.7 |
|
|
State
|
|
|
11.6 |
|
|
|
(10.6 |
) |
|
|
(6.2 |
) |
|
|
|
|
|
|
1,178.8 |
|
|
|
556.9 |
|
|
|
669.7 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
89.4 |
|
|
|
175.2 |
|
|
|
(112.9 |
) |
|
Foreign
|
|
|
(86.8 |
) |
|
|
(74.0 |
) |
|
|
138.2 |
|
|
State
|
|
|
(.5 |
) |
|
|
8.7 |
|
|
|
5.9 |
|
|
Unremitted earnings to be repatriated due to change in tax law
|
|
|
(465.0 |
) |
|
|
465.0 |
|
|
|
|
|
|
|
|
|
|
|
(462.9 |
) |
|
|
574.9 |
|
|
|
31.2 |
|
|
|
|
Income taxes
|
|
$ |
715.9 |
|
|
$ |
1,131.8 |
|
|
$ |
700.9 |
|
|
|
|
67
Significant components of our deferred tax assets and
liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
| |
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$ |
637.8 |
|
|
$ |
538.4 |
|
|
Compensation and benefits
|
|
|
396.6 |
|
|
|
320.7 |
|
|
Other carryforwards
|
|
|
391.5 |
|
|
|
492.5 |
|
|
Sale of intangibles
|
|
|
235.7 |
|
|
|
411.5 |
|
|
Tax credit carryforwards and carrybacks
|
|
|
218.7 |
|
|
|
220.6 |
|
|
Financial instruments
|
|
|
166.0 |
|
|
|
117.1 |
|
|
Asset purchases
|
|
|
92.4 |
|
|
|
88.6 |
|
|
Asset disposals
|
|
|
45.5 |
|
|
|
165.3 |
|
|
Other
|
|
|
414.8 |
|
|
|
359.7 |
|
|
|
|
|
|
|
2,599.0 |
|
|
|
2,714.4 |
|
|
Valuation allowances
|
|
|
(455.7 |
) |
|
|
(508.4 |
) |
|
|
|
|
|
Total deferred tax assets
|
|
|
2,143.3 |
|
|
|
2,206.0 |
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Prepaid employee benefits
|
|
|
(1,145.6 |
) |
|
|
(952.8 |
) |
|
Property and equipment
|
|
|
(702.6 |
) |
|
|
(681.3 |
) |
|
Unremitted earnings to be repatriated due to change in tax law
|
|
|
|
|
|
|
(465.0 |
) |
|
Unremitted earnings
|
|
|
|
|
|
|
(327.4 |
) |
|
Other
|
|
|
(236.8 |
) |
|
|
(215.5 |
) |
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,085.0 |
) |
|
|
(2,642.0 |
) |
|
|
|
Deferred tax assets (liabilities) net
|
|
$ |
58.3 |
|
|
$ |
(436.0 |
) |
|
|
|
At December 31, 2005, we had other carryforwards, primarily
net operating loss carryforwards, for international and
U.S. income tax purposes of $89.4 million:
$54.6 million will expire within five years and
$1.9 million thereafter; $32.9 million of the
carryforwards will never expire. The primary component of the
remaining portion of the deferred tax asset for other
carryforwards is related to net operating losses for state
income tax purposes that are fully reserved. We also have tax
credit carryforwards and carrybacks of $218.7 million
available to reduce future income taxes; $80.7 million will
be carried back and $12.0 million of the tax credit
carryforwards will never expire. The remaining portion of the
tax credit carryforwards is related to state tax credits that
are fully reserved.
Domestic and Puerto Rican companies contributed approximately
30 percent, 6 percent, and 22 percent in 2005,
2004, and 2003, respectively, to consolidated income before
income taxes and cumulative effect of a change in accounting
principle. We have a subsidiary operating in Puerto Rico under a
tax incentive grant that begins to expire at the end of 2007.
The American Jobs Creation Act of 2004 (AJCA) created a
temporary incentive for U.S. corporations to repatriate
undistributed income earned abroad by providing an
85 percent dividends received deduction for certain
dividends from controlled foreign corporations in 2005. Although
the deduction is subject to a number of limitations and
uncertainty remained as to how to interpret certain provisions
of the AJCA, we believed we had the information necessary to
make an informed decision on the impact of the AJCA on our
repatriation plans as of December 31, 2004. Based on that
decision, we recorded a related tax liability of
$465.0 million as of December 31,
68
2004, and subsequently repatriated $8.00 billion in
incentive dividends, as defined in the AJCA, during 2005.
At December 31, 2005, we had an aggregate of
$4.1 billion of unremitted earnings of foreign subsidiaries
that have been or are intended to be permanently reinvested for
continued use in foreign operations and that, if distributed,
would result in taxes at approximately the U.S. statutory
rate. The amount of unremitted earnings for which no tax has
been provided decreased substantially in 2004 due to the change
in tax law described above, which caused us to change our
previous plans to permanently reinvest a portion of those
unremitted earnings.
Cash payments of income taxes totaled $1.78 billion,
$487.0 million, and $614.0 million in 2005, 2004, and
2003, respectively. The higher cash payments of income taxes in
2005 are primarily attributable to the tax liability associated
with the implementation of the AJCA and the resolution of an IRS
examination for the years 1998 to 2000.
Following is a reconciliation of the effective income tax rate
applicable to income before income taxes and cumulative effect
of a change in accounting principle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
| |
United States federal statutory tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Add (deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International operations, including Puerto Rico
|
|
|
(9.5 |
) |
|
|
(19.1 |
) |
|
|
(15.7 |
) |
|
Additional repatriation due to change in tax law
|
|
|
|
|
|
|
15.8 |
|
|
|
|
|
|
Non-deductible acquired in-process research and development
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
General business credits
|
|
|
(1.5 |
) |
|
|
(1.3 |
) |
|
|
(0.7 |
) |
|
Sundry
|
|
|
2.3 |
|
|
|
3.8 |
|
|
|
2.9 |
|
|
|
|
Effective income tax rate
|
|
|
26.3 |
% |
|
|
38.5 |
% |
|
|
21.5 |
% |
|
|
|
69
|
|
Note 12: |
Retirement Benefits |
We used a measurement date of December 31 to develop the
change in benefit obligation, change in plan assets, funded
status, and amounts recognized in the consolidated balance
sheets at December 31 for our defined benefit pension and
retiree health benefit plans, which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit | |
|
Retiree Health | |
|
|
Pension Plans | |
|
Benefit Plans | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$ |
5,190.7 |
|
|
$ |
4,703.1 |
|
|
$ |
1,388.4 |
|
|
$ |
1,039.6 |
|
|
Service cost
|
|
|
297.4 |
|
|
|
238.8 |
|
|
|
61.5 |
|
|
|
47.6 |
|
|
Interest cost
|
|
|
296.2 |
|
|
|
286.4 |
|
|
|
80.7 |
|
|
|
62.5 |
|
|
Actuarial loss
|
|
|
261.7 |
|
|
|
39.7 |
|
|
|
64.8 |
|
|
|
161.2 |
|
|
Benefits paid
|
|
|
(270.4 |
) |
|
|
(259.4 |
) |
|
|
(77.2 |
) |
|
|
(71.5 |
) |
|
Reduction in discount rate, foreign currency exchange rate
changes, and other adjustments
|
|
|
(147.2 |
) |
|
|
182.1 |
|
|
|
155.4 |
|
|
|
149.0 |
|
|
|
|
|
Benefit obligation at end of year
|
|
|
5,628.4 |
|
|
|
5,190.7 |
|
|
|
1,673.6 |
|
|
|
1,388.4 |
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
4,797.8 |
|
|
|
3,721.9 |
|
|
|
745.4 |
|
|
|
553.9 |
|
|
Actual return on plan assets
|
|
|
651.9 |
|
|
|
494.6 |
|
|
|
102.8 |
|
|
|
58.7 |
|
|
Employer contribution
|
|
|
375.0 |
|
|
|
784.0 |
|
|
|
194.7 |
|
|
|
204.3 |
|
|
Benefits paid
|
|
|
(268.4 |
) |
|
|
(257.3 |
) |
|
|
(77.2 |
) |
|
|
(71.5 |
) |
|
Foreign currency exchange rate changes and other adjustments
|
|
|
(73.9 |
) |
|
|
54.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
5,482.4 |
|
|
|
4,797.8 |
|
|
|
965.7 |
|
|
|
745.4 |
|
|
|
|
|
Funded status
|
|
|
(146.0 |
) |
|
|
(392.9 |
) |
|
|
(707.9 |
) |
|
|
(643.0 |
) |
|
Unrecognized net actuarial loss
|
|
|
2,237.9 |
|
|
|
2,339.7 |
|
|
|
1,089.1 |
|
|
|
979.5 |
|
|
Unrecognized prior service cost (benefit)
|
|
|
71.4 |
|
|
|
66.0 |
|
|
|
(101.3 |
) |
|
|
(116.9 |
) |
|
|
|
|
Net amount recognized
|
|
$ |
2,163.3 |
|
|
$ |
2,012.8 |
|
|
$ |
279.9 |
|
|
$ |
219.6 |
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consisted of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension
|
|
$ |
2,419.6 |
|
|
$ |
2,253.8 |
|
|
$ |
377.2 |
|
|
$ |
310.4 |
|
|
Accrued benefit liability
|
|
|
(567.5 |
) |
|
|
(464.4 |
) |
|
|
(97.3 |
) |
|
|
(90.8 |
) |
|
Accumulated other comprehensive loss before income taxes
|
|
|
311.2 |
|
|
|
223.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
2,163.3 |
|
|
$ |
2,012.8 |
|
|
$ |
279.9 |
|
|
$ |
219.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined | |
|
|
|
|
Benefit | |
|
Retiree Health | |
|
|
Pension Plans | |
|
Benefit Plans | |
|
|
| |
|
| |
(Percents) |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
Weighted-average assumptions as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate for benefit obligation
|
|
|
5.8 |
|
|
|
5.9 |
|
|
|
6.0 |
|
|
|
6.0 |
|
|
Discount rate for net benefit costs
|
|
|
5.9 |
|
|
|
6.2 |
|
|
|
6.0 |
|
|
|
6.2 |
|
|
Rate of compensation increase for benefit obligation
|
|
|
4.7 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase for net benefit costs
|
|
|
5.6 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets for net benefit costs
|
|
|
9.0 |
|
|
|
9.2 |
|
|
|
9.0 |
|
|
|
9.3 |
|
70
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
87 percent of our worldwide benefit plan assets. Including
the investment losses due to overall market conditions in 2001
and 2002, our 10- and
20-year annualized
rates of return on our U.S. defined benefit pension plans
and retiree health benefit plan were approximately
9.3 percent and 11.3 percent, respectively, as of
December 31, 2005. Health-care-cost trend rates were
assumed to increase at an annual rate of 9 percent in 2006,
decreasing 1 percent per year to 6 percent in 2009 and
thereafter.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit | |
|
Retiree Health | |
|
|
Pension Plans | |
|
Benefit Plans | |
| |
2006
|
|
$ |
271.7 |
|
|
$ |
85.4 |
|
2007
|
|
|
278.2 |
|
|
|
92.3 |
|
2008
|
|
|
285.3 |
|
|
|
98.1 |
|
2009
|
|
|
293.1 |
|
|
|
104.3 |
|
2010
|
|
|
302.8 |
|
|
|
110.1 |
|
2011-2015
|
|
|
1,702.7 |
|
|
|
645.7 |
|
The total accumulated benefit obligation for our defined benefit
pension plans was $4.88 billion and $4.55 billion at
December 31, 2005 and 2004, respectively. The projected
benefit obligation and fair value of the plan assets for the
defined benefit pension plans with projected benefit obligations
in excess of plan assets were $1.51 billion and
$870.3 million, respectively, as of December 31, 2005,
and $1.33 billion and $780.3 million, respectively, as
of December 31, 2004.
Net pension and retiree health benefit expense included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit | |
|
Retiree Health | |
|
|
Pension Plans | |
|
Benefit Plans | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
| |
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
297.4 |
|
|
$ |
238.8 |
|
|
$ |
195.4 |
|
|
$ |
61.5 |
|
|
$ |
47.6 |
|
|
$ |
38.2 |
|
|
Interest cost
|
|
|
296.2 |
|
|
|
286.4 |
|
|
|
267.2 |
|
|
|
80.7 |
|
|
|
62.5 |
|
|
|
60.4 |
|
|
Expected return on plan assets
|
|
|
(445.9 |
) |
|
|
(402.2 |
) |
|
|
(382.7 |
) |
|
|
(75.6 |
) |
|
|
(60.2 |
) |
|
|
(53.6 |
) |
|
Amortization of prior service cost
|
|
|
7.6 |
|
|
|
7.3 |
|
|
|
11.9 |
|
|
|
(15.6 |
) |
|
|
(15.6 |
) |
|
|
(15.6 |
) |
|
Recognized actuarial loss
|
|
|
106.7 |
|
|
|
99.7 |
|
|
|
52.4 |
|
|
|
86.6 |
|
|
|
57.8 |
|
|
|
50.6 |
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
262.0 |
|
|
$ |
230.0 |
|
|
$ |
144.2 |
|
|
$ |
137.6 |
|
|
$ |
92.1 |
|
|
$ |
80.0 |
|
|
|
|
If the health-care-cost trend rates were to be increased by one
percentage point each future year, the December 31, 2005,
accumulated postretirement benefit obligation would increase by
14.0 percent and the aggregate of the service cost and
interest cost components of the 2005 annual expense would
increase by 18.4 percent. A one-percentage-point decrease
in these rates would decrease the December 31, 2005,
accumulated postretirement benefit obligation by
12.2 percent and the aggregate of the 2005 service cost and
interest cost by 15.5 percent.
We have defined contribution savings plans that cover our
eligible employees worldwide. The purpose of these defined
contribution plans is generally to provide additional financial
security during retirement by providing employees with an
incentive to save. Our contributions to the plan
71
are based on employee contributions and the level of our match.
Expenses under the plans totaled $96.1 million,
$75.5 million, and $72.9 million for the years 2005,
2004, and 2003, 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 2005, 2004, and 2003 were not significant.
Our U.S. defined benefit pension and retiree health benefit
plan investment allocation strategy currently comprises
approximately 85 percent to 95 percent growth
investments and 5 percent to 15 percent fixed-income
investments. Within the growth investment classification, the
plan asset strategy encompasses equity and equity-like
instruments that are expected to represent approximately
75 percent of our plan asset portfolio of both public and
private market investments. The largest component of these
equity and equity-like instruments is public equity securities
that are well diversified and invested in U.S. and international
small-to-large
companies. The remaining portion of the growth investment
classification is represented by other alternative growth
investments.
Our defined benefit pension plan and retiree health plan asset
allocations as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of | |
|
|
Percentage of | |
|
Retiree | |
|
|
Pension Plan Assets | |
|
Health Plan Assets | |
|
|
| |
|
| |
(Percents) |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities and equity-like instruments
|
|
|
75 |
|
|
|
74 |
|
|
|
80 |
|
|
|
78 |
|
|
Debt securities
|
|
|
10 |
|
|
|
9 |
|
|
|
11 |
|
|
|
10 |
|
|
Real estate
|
|
|
1 |
|
|
|
1 |
|
|
|
0 |
|
|
|
1 |
|
|
Other
|
|
|
14 |
|
|
|
16 |
|
|
|
9 |
|
|
|
11 |
|
|
|
|
|
Total
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
|
|
|
In 2006, we expect to contribute approximately $26 million
to our defined benefit pension plans to satisfy minimum funding
requirements for the year. In addition, we expect to contribute
approximately $125 million of additional discretionary
funding in 2006 to our defined benefit plans. We also expect to
contribute approximately $120 million of discretionary
funding to our postretirement health benefit plans during 2006.
Three generic pharmaceutical manufacturers, Zenith Goldline
Pharmaceuticals, Inc. (Zenith), Dr. Reddys
Laboratories, Ltd. (Reddy), and Teva Pharmaceuticals (Teva),
submitted abbreviated new drug applications (ANDAs) seeking
permission to market generic versions of Zyprexa in various
dosage forms several years prior to the expiration of our
U.S. patents for the product. The generic companies alleged
that our patents are invalid, unenforceable, or not infringed.
We filed suit against the three companies in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that the challenges to our compound patent
(expiring in 2011) are without merit. The cases were
consolidated, and on April 14, 2005, the district court
upheld our 2011 U.S. patent on Zyprexa. In the case of Eli
Lilly and Company v. Zenith Goldline Pharmaceuticals
et al., the court ruled in our favor on all counts,
including the patent doctrines of obviousness, double patenting,
inequitable conduct, novelty, and public use. The decision has
been appealed. We are confident, and the trial court confirmed,
that the generic manufacturers claims are without merit,
and we expect
72
to prevail in this litigation. However, it is not possible to
predict or determine the outcome of this litigation and,
accordingly, we can provide no assurance that we will prevail on
appeal. An unfavorable outcome would have a material adverse
impact on our consolidated results of operations, liquidity, and
financial position.
In 2002, Barr Laboratories, Inc. (Barr), submitted an ANDA with
the FDA seeking permission to market a generic version of Evista
(raloxifene) several years prior to the expiration of our
U.S. patents covering the product, alleging that the
patents are invalid or not infringed. In November 2002, we filed
suit against Barr in the U.S. District Court for the
Southern District of Indiana, seeking a ruling that Barrs
challenges to our patents claiming the methods of use and
pharmaceutical form (expiring from 2012 to 2017) are without
merit. Barr has also asserted that the method of use patents are
unenforceable. The U.S. Patent and Trademark Office issued
to us two new patents (expiring in 2017) directed to
pharmaceutical compositions containing raloxifene and a method
for preventing postmenopausal osteoporosis and a third (expiring
in 2012) directed to methods of inhibiting postmenopausal bone
loss by administering a single daily oral dose of raloxifene.
These patents have been listed in the FDAs Orange
Book. Barr has challenged these patents, alleging that each
is invalid, unenforceable, or will not be infringed. These
patents have been added to the pending suit. The suit is in
discovery. No trial date has been set at this time. While we
believe that Barrs claims are without merit and we expect
to prevail, it is not possible to predict or determine the
outcome of the litigation. Therefore, we can provide no
assurance that we will prevail. An unfavorable outcome could
have a material adverse impact on our consolidated results of
operations, liquidity, and financial position.
In January 2006, we were notified that Sicor Pharmaceuticals,
Inc. (Sicor), a subsidiary of Teva, submitted an ANDA with the
FDA seeking permission to market a generic version of Gemzar
several years prior to the expiration of two U.S. patents
covering the product. Sicor alleged that both U.S. patents
are invalid. In February, we filed suit against Sicor in the
U.S. District Court for the Southern District of Indiana,
seeking a ruling that Sicors challenges to our patents
claiming the compound (expiring in 2010) and the methods of use
(expiring in 2012) are without merit. While we believe that
Sicors claims are without merit and we expect to prevail,
it is not possible to predict or determine the outcome of the
litigation. Therefore, we can provide no assurance that we will
prevail. An unfavorable outcome could have a material adverse
impact on our consolidated results of operations.
In July 2002, we received the first of several grand jury
subpoenas for documents from the Office of Consumer Litigation,
U.S. Department of Justice, related to our marketing and
promotional practices and physician communications with respect
to Evista. We reached a settlement with the U.S. Department
of Justice in the fourth quarter of 2005, which was subsequently
approved by the U.S. District Court for the Southern
District of Indiana in February 2006. As part of the settlement,
Lilly pleaded guilty to one misdemeanor violation of the Food,
Drug, and Cosmetic Act. The plea is for the off-label promotion
of Evista during 1998. The government did not, however, charge
the company with any unlawful intent, nor do we acknowledge any
such intent. In connection with the overall settlement, we
agreed to pay a total of $36 million. As previously
reported, Lilly took a charge in the fourth quarter of 2004 in
connection with this investigation. The 2004 charge was
sufficient to cover this settlement payment; consequently, no
further charge will be necessary.
In March 2004, the office of the U.S. Attorney for the
Eastern District of Pennsylvania advised us that it has
commenced a civil investigation related to our
U.S. marketing and promotional practices, including our
communications with physicians and remuneration of physician
consultants and advisors, with respect to Zyprexa, Prozac, and
Prozac Weekly. In October 2005, the U.S. Attorneys
73
office advised that it is also conducting an inquiry regarding
certain rebate agreements we entered into with a pharmacy
benefit manager covering Axid, Evista, Humalog, Humulin, Prozac,
and Zyprexa. The inquiry includes a review of Lillys
Medicaid best price reporting related to the product sales
covered by the rebate agreements. We are cooperating with the
U.S. Attorney in these investigations, including providing
a broad range of documents and information relating to the
investigations. In June 2005, we received a subpoena from the
office of the Attorney General, Medicaid Fraud Control Unit, of
the State of Florida, seeking production of documents relating
to sales of Zyprexa and our marketing and promotional practices
with respect to Zyprexa. It is possible that other Lilly
products could become subject to investigation and that the
outcome of these matters could include criminal charges and
fines, penalties, or other monetary or nonmonetary remedies. We
cannot predict or determine the outcome of these matters or
reasonably estimate the amount or range of amounts of any fines
or penalties that might result from an adverse outcome. It is
possible, however, that an adverse outcome could have a material
adverse impact on our consolidated results of operations,
liquidity, and financial position. We have implemented and
continue to review and enhance a broadly based compliance
program that includes comprehensive compliance-related
activities designed to ensure that our marketing and promotional
practices, physician communications, remuneration of health care
professionals, managed care arrangements, and Medicaid best
price reporting comply with applicable laws and regulations.
We have been named as a defendant in a large number of Zyprexa
product liability lawsuits in the United States and have been
notified of several thousand claims of individuals who have not
filed suit. The lawsuits and unfiled claims (together the
claims) allege a variety of injuries from the use of
Zyprexa, with the majority alleging that the product caused or
contributed to diabetes or high blood-glucose levels. The claims
seek substantial compensatory and punitive damages and typically
accuse us of inadequately testing for and warning about side
effects of Zyprexa. Many of the claims also allege that we
improperly promoted the drug. Almost all of the federal lawsuits
are part of a Multi-District Litigation (MDL) proceeding before
The Honorable Jack Weinstein in the Federal District Court for
the Eastern District of New York (MDL No. 1596). The MDL
includes three lawsuits requesting certification of class
actions on behalf of those who allegedly suffered injuries from
the administration of Zyprexa. We have entered into agreements
with various plaintiffs counsel halting the running of the
statutes of limitation (tolling agreements) with respect to a
large number of claimants who do not have lawsuits on file.
In June 2005, we entered into an agreement in principle
(followed by a definitive master settlement agreement in
September 2005) with a group of plaintiffs attorneys
involved in U.S. Zyprexa product liability litigation to
settle a majority of the claims. The agreement covers more than
8,000 claimants, including a large number of previously filed
lawsuits (including the three purported class actions), tolled
claims, and other informally asserted claims. We established a
fund of $690 million for the claimants to settle their
claims, and $10 million to cover administration of the
settlement. The settlement fund is being overseen and
distributed by claims administrators appointed by the court. The
agreement and the distribution of funds to participating
claimants are conditioned upon, among other things, our
obtaining full releases from no fewer than 7,193 claimants.
Following this settlement, the remaining U.S. Zyprexa
product liability claims include approximately 150 lawsuits in
the U.S. covering 465 claimants, and approximately 825
tolled claims. In addition, we have been informally advised of a
number of additional potential U.S. claims, but to date
have received no substantiation of the claims. Also, in early
2005, we were served with five lawsuits seeking class action
status in Canada on behalf of patients who took Zyprexa. The
allegations in the Canadian actions are similar to those in the
litigation pending in the United States. We are prepared to
continue our vigorous defense of Zyprexa in all remaining cases.
74
In 2005, two lawsuits were filed in the Eastern District of New
York purporting to be nationwide class actions on behalf of all
consumers and third party payors, excluding governmental
entities, which have made or will make payments on account of
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. In
addition, in 2006 a similar lawsuit was filed in the Eastern
District of New York on similar grounds. As with the product
liability suits, these lawsuits allege that we inadequately
tested for and warned about side effects of Zyprexa and
improperly promoted the drug.
In December 2004, we were served with two lawsuits brought in
state court in Louisiana on behalf of the Louisiana Department
of Health and Hospitals, alleging that Zyprexa caused or
contributed to diabetes or high blood-glucose levels, and that
we improperly promoted the drug. These cases have been removed
to federal court and are now part of the MDL proceedings in the
Eastern District of New York. In these actions, the Department
of Health and Hospitals seeks to recover the costs it paid for
Zyprexa through Medicaid and other drug-benefit programs, as
well as the costs the department alleges it has incurred and
will incur to treat Zyprexa-related illnesses.
In connection with the Zyprexa product liability claims, certain
of our insurance carriers have raised defenses to their
liability under the policies and to date have failed to
reimburse us for claim-related costs despite demand from the
first-layer carriers for payment. However, in our opinion, the
defenses identified to date appear to lack substance. In March
2005, we filed suit against several of the carriers in state
court in Indiana to obtain reimbursement of costs related to the
Zyprexa product liability litigation. The matter has been
removed to the federal court in Indianapolis. Several carriers
have asserted defenses to their liability, and some carriers are
seeking rescission of the coverage. While we believe our
position is meritorious, there can be no assurance that we will
prevail.
In addition, we have been named as a defendant in numerous other
product liability lawsuits involving primarily
diethylstilbestrol (DES) and thimerosal.
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. In addition, we have accrued for
certain product liability claims incurred but not filed to the
extent we can formulate a reasonable estimate of their costs. We
estimate these expenses based primarily on historical claims
experience and data regarding product usage. Legal defense costs
expected to be incurred in connection with significant product
liability loss contingencies are accrued when probable and
reasonably estimable. A portion of the costs associated with
defending and disposing of these suits is covered by insurance.
We record receivables for insurance-related recoveries when it
is probable they will be realized. These receivables are
classified as a reduction of the litigation charges on the
statement of income. We estimate insurance recoverables based on
existing deductibles, coverage limits, our assessment of any
defenses to coverage that might be raised by the carriers, and
the existing and projected future level of insolvencies among
the insurance carriers.
75
In the second quarter of 2005, we recorded a net pre-tax charge
of $1.07 billion for product liability matters, which
includes the following:
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The $700 million Zyprexa settlement and administration fee; |
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Reserves for product liability exposures and defense costs
regarding currently known and expected claims to the extent we
can formulate a reasonable estimate of the probable number and
cost of the claims. A substantial majority of these exposures
and costs relate to current and expected Zyprexa claims not
included in the settlement. We have estimated these charges
based primarily on historical claims experience, data regarding
product usage, and our historical product liability defense cost
experience. |
The $1.07 billion net charge took into account our
estimated recoveries from our insurance coverage related to
these matters. The after-tax impact of this net charge was
$.90 per share. The $700 million for the Zyprexa
settlement was paid during 2005, while the cash related to the
other reserves for product liability exposures and defense costs
is expected to be paid out over the next several years. The
timing of our insurance recoveries is uncertain.
We cannot predict with certainty the additional number of
lawsuits and claims that may be asserted. In addition, although
we believe it is probable, there can be no assurance that the
Zyprexa settlement described above will be concluded. The
ultimate resolution of Zyprexa product liability and related
litigation could have a material adverse impact on our
consolidated results of operations, liquidity, and financial
position.
We are subject to a substantial number of product liability
claims, 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. We
have experienced difficulties in obtaining product liability
insurance due to a very restrictive insurance market, and
therefore will 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.
Also, under the Comprehensive Environmental Response,
Compensation, and Liability Act, commonly known as Superfund, we
have been designated as one of several potentially responsible
parties with respect to fewer than 10 sites. Under Superfund,
each responsible party may be jointly and severally liable for
the entire amount of the cleanup. We also continue remediation
of certain of our own sites. We have accrued for estimated
Superfund cleanup costs, remediation, and certain other
environmental matters. This takes into account, as applicable,
available information regarding site conditions, potential
cleanup methods, estimated costs, and the extent to which other
parties can be expected to contribute to payment of those costs.
We have reached a settlement with our liability insurance
carriers providing for coverage for certain environmental
liabilities.
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.
While it is not possible to predict or determine the outcome of
the patent, product liability, or other legal actions brought
against us or the ultimate cost of environmental matters, we
believe that, except as noted above, 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 the consolidated results of operations in any one
accounting period.
76
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Note 14: |
Other Comprehensive Income (Loss) |
The accumulated balances related to each component of other
comprehensive income (loss) were as follows:
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Foreign | |
|
Unrealized | |
|
Minimum | |
|
Effective | |
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Accumulated | |
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Currency | |
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Gains | |
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Pension | |
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Portion of | |
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Other | |
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Translation | |
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(Losses) on | |
|
Liability | |
|
Cash Flow | |
|
Comprehensive | |
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Gains (Losses) | |
|
Securities | |
|
Adjustment | |
|
Hedges | |
|
Income (Loss) | |
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| |
Beginning balance at January 1, 2005
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$ |
551.4 |
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|
$ |
24.3 |
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|
$ |
(147.0 |
) |
|
$ |
(210.1 |
) |
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$ |
218.6 |
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Other comprehensive loss
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(533.4 |
) |
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(4.6 |
) |
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|
(55.9 |
) |
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(45.3 |
) |
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(639.2 |
) |
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Balance at December 31, 2005
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$ |
18.0 |
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$ |
19.7 |
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$ |
(202.9 |
) |
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$ |
(255.4 |
) |
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$ |
(420.6 |
) |
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The amounts above are net of income taxes. The income taxes
related to other comprehensive income were not significant, as
income taxes were generally not provided for foreign currency
translation.
The unrealized gains (losses) on securities is net of
reclassification adjustments of $9.1 million,
$9.8 million, and $37.4 million, net of tax, in 2005,
2004, and 2003, respectively, for net realized gains on sales of
securities included in net income. The effective portion of cash
flow hedges is net of reclassification adjustments of
$3.8 million, $23.1 million, and $27.2 million,
net of tax, in 2005, 2004, and 2003, respectively, for realized
losses on foreign currency options and $21.4 million,
$15.6 million, and $14.2 million, net of tax, in 2005,
2004, and 2003, respectively, for interest expense on interest
rate swaps designated as cash flow hedges.
Generally, the assets and liabilities of foreign operations are
translated into U.S. dollars using the current exchange
rate. For those operations, changes in exchange rates generally
do not affect cash flows; therefore, resulting translation
adjustments are made in shareholders equity rather than in
income.
77
Managements Reports
Managements Report for Financial Statements
Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is
responsible for the accuracy, integrity, and fair presentation
of the financial statements. The statements have been prepared
in accordance with generally accepted accounting principles in
the United States and include amounts based on judgments and
estimates by management. In managements opinion, the
consolidated financial statements present fairly our financial
position, results of operations, and cash flows.
In addition to the system of internal accounting controls, we
maintain a code of conduct (known as The Red Book) that
applies to all employees worldwide, requiring proper overall
business conduct, avoidance of conflicts of interest, compliance
with laws, and confidentiality of proprietary information.
The Red Book is reviewed on a periodic basis with
employees worldwide, and all employees are required to report
suspected violations. A hotline number is published in The
Red Book to enable employees to report suspected violations
anonymously. Employees who report suspected violations are
protected from discrimination or retaliation by the company. In
addition to The Red Book, the CEO, the COO, and all
financial management must sign a financial code of ethics, which
further reinforces their fiduciary responsibilities.
The financial statements have been audited by Ernst &
Young LLP, an independent registered public accounting firm.
Their responsibility is to examine our consolidated financial
statements in accordance with generally accepted auditing
standards of the Public Company Accounting Oversight Board
(United States). Ernst & Youngs opinion with
respect to the fairness of the presentation of the statements
(see opinion on page 80) is included in our annual report.
Ernst & Young reports directly to the audit committee
of the board of directors.
Our audit committee includes five nonemployee members of the
board of directors, all of whom are independent from our
company. The committee charter, which is published in the proxy
statement, outlines the members roles and responsibilities
and is consistent with enacted corporate reform laws and
regulations. It is the audit committees responsibility to
appoint an independent registered public accounting firm subject
to shareholder ratification, approve both audit and nonaudit
services performed by the independent registered public
accounting firm, and review the reports submitted by the firm.
The audit committee meets several times during the year with
management, the internal auditors, and the independent public
accounting firm to discuss audit activities, internal controls,
and financial reporting matters, including reviews of our
externally published financial results. The internal auditors
and the independent registered public accounting firm have full
and free access to the committee.
We are dedicated to ensuring that we maintain the high standards
of financial accounting and reporting that we have established.
We are committed to providing financial information that is
transparent, timely, complete, relevant, and accurate. Our
culture demands integrity and an unyielding commitment to strong
internal practices and policies. Finally, we have the highest
confidence in our financial reporting, our underlying system of
internal controls, and our people, who are objective in their
responsibilities and operate under a code of conduct and the
highest level of ethical standards.
Managements Report on Internal Control Over Financial
Reporting Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rules 13a-15(f) and
78
15d-15(f) under the
Securities Exchange Act of 1934. We have global financial
policies that govern critical areas, including internal
controls, financial accounting and reporting, fiduciary
accountability, and safeguarding of corporate assets. Our
internal accounting control systems are designed to provide
reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with managements
authorization and are properly recorded, and that accounting
records are adequate for preparation of financial statements and
other financial information. A staff of internal auditors
regularly monitors, on a worldwide basis, the adequacy and
effectiveness of internal accounting controls. The general
auditor reports directly to the audit committee of the board of
directors.
We conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under this framework, we
concluded that our internal controls over financial reporting
were effective as of December 31, 2005.
The internal control over financial reporting has been assessed
by Ernst & Young LLP. Their responsibility is to
evaluate managements assessment and evidence about whether
internal control over financial reporting was designed and
operating effectively. Ernst & Youngs report with
respect to the effectiveness of internal control over financial
reporting is included on page 81 of our annual report.
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Sidney Taurel
Chairman of the Board and Chief Executive Officer |
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John C. Lechleiter, Ph.D.
President and Chief Operating Officer |
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Charles E. Golden
Executive Vice President and Chief Financial Officer |
February 13, 2006
79
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Eli Lilly and Company
We have audited the accompanying consolidated balance sheets of
Eli Lilly and Company and subsidiaries as of December 31,
2005 and 2004, and the related consolidated statements of
income, cash flows, and comprehensive income for each of the
three years in the period ended December 31, 2005. These
financial statements are the responsibility of the
companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Eli Lilly and Company and subsidiaries at
December 31, 2005 and 2004, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Eli Lilly and Company and subsidiaries
internal control over financial reporting as of
December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 13, 2006 expressed an
unqualified opinion thereon.
As discussed in Notes 2 and 7 to the financial statements,
in 2005 Eli Lilly and Company adopted new accounting
pronouncements for asset retirement obligations and stock-based
compensation.
Indianapolis, Indiana
February 13, 2006
80
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Eli Lilly and Company
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Eli Lilly and Company and subsidiaries
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Eli Lilly and Company and
subsidiaries management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect mis-statements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Eli Lilly and
Company and subsidiaries maintained effective internal control
over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Eli Lilly and Company and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2005, based on
the COSO criteria.
81
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
2005 consolidated financial statements of Eli Lilly and Company
and subsidiaries and our report dated February 13, 2006
expressed an unqualified opinion thereon.
Indianapolis, Indiana
February 13, 2006
82
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Item 9. |
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure |
None.
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Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures
Under applicable SEC regulations, management of a reporting
company, with the participation of the principal executive
officer and principal financial officer, must periodically
evaluate the companys disclosure controls and
procedures, which are defined generally as controls and
other procedures of a reporting company designed to ensure that
information required to be disclosed by the reporting company in
its periodic reports filed with the commission (such as this
Form 10-K) is
recorded, processed, summarized, and reported on a timely basis.
Our management, with the participation of Sidney Taurel,
chairman and chief executive officer, and Charles E. Golden,
executive vice president and chief financial officer, evaluated
our disclosure controls and procedures as of December 31,
2005, and concluded that they are effective.
Internal Control over Financial Reporting
Messrs. Taurel and Golden and Dr. Lechleiter provided
a report on behalf of management on our internal control over
financial reporting, in which management concluded that the
companys internal control over financial reporting is
effective at December 31, 2005. In addition,
Ernst & Young LLP, the companys independent
auditor, provided an attestation report on managements
assessment of internal control over financial reporting. You can
find the full text of managements report and
Ernst & Youngs attestation report in Item 8,
and both reports are incorporated by reference in this Item.
Changes in Internal Controls
During the fourth quarter of 2005, there were no changes in our
internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Item 9B. Other
Information
Not applicable.
Part III
Item 10. Directors
and Executive Officers of the Registrant
Information relating to our Board of Directors is found in our
Proxy Statement to be dated on or about March 13, 2006 (the
Proxy Statement) under Board of
Directors at
pages 64-66, and
is incorporated in this report by reference.
The Board has appointed an audit committee consisting entirely
of independent directors in accordance with applicable SEC and
New York Stock Exchange rules. The members of the
83
committee are Sir Winfried Bischoff (chairman), Mr. J.
Michael Cook, Dr. Martin Feldstein, Dr. Franklyn G.
Prendergast, and Ms. Kathi P. Seifert. The Board has
determined that Sir Winfried Bischoff and Mr. J. Michael
Cook are audit committee financial experts as defined in the SEC
rules.
Information relating to our executive officers is found at
Part I, Item 1 of this
Form 10-K under
Executive Officers of the Company. In addition,
information relating to certain filing obligations of directors
and executive officers under the federal securities laws is
found in the Proxy Statement under Other
Matters Section 16(a) Beneficial Ownership
Reporting Compliance, at page 93. That information is
incorporated in this report by reference.
We have adopted a code of ethics that complies with the
applicable SEC and New York Stock Exchange requirements. The
code is set forth in:
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The Red Book, a comprehensive code of ethical and legal
business conduct applicable to all employees worldwide and to
our Board of Directors; and |
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Code of Ethical Conduct for Lilly Financial Management, a
supplemental code for our chief executive officer, chief
operating officer, and all members of financial management that
focuses on accounting, financial reporting, internal controls,
and financial stewardship. |
Both documents are online on our web site at
http://investor.lilly.com/code business
conduct.cfm. In the event of any amendments to, or waivers
from, a provision of the code affecting the chief executive
officer, chief financial officer, chief accounting officer,
controller, or persons performing similar functions, we intend
to post on the above web site within four business days after
the event a description of the amendment or waiver as required
under applicable SEC rules. We will maintain that information on
our web site for at least 12 months. Paper copies of these
documents are available free of charge upon request to the
companys secretary at the address on the front of this
Form 10-K.
Item 11. Executive
Compensation
Information on executive compensation and director compensation
is found in the Proxy Statement under Directors
Compensation at page 72 and Executive
Compensation at pages 76-82. That information is
incorporated in this report by reference, except that the
Compensation Committee Report is not incorporated in this report.
Item 12. Security
Ownership of Certain Beneficial Owners and Management
and
Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and
Management
Information relating to ownership of the Companys common
stock by management and by persons known by the Company to be
the beneficial owners of more than five percent of the
outstanding shares of common stock is found in the Proxy
Statement under Ownership of Company Stock, at
page 84. That information is incorporated in this report by
reference.
84
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table presents information as of December 31,
2005, regarding our compensation plans under which shares of
Lilly common stock have been authorized for issuance.
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Plan category |
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(a) Number of | |
|
(b) Weighted- | |
|
(c) Number of | |
|
|
securities to be | |
|
average exercise | |
|
securities remaining | |
|
|
issued | |
|
price of | |
|
available for future | |
|
|
upon exercise of | |
|
outstanding | |
|
issuance under equity | |
|
|
outstanding | |
|
options, | |
|
compensation plans | |
|
|
options, | |
|
warrants, | |
|
(excluding securities | |
|
|
warrants, and rights | |
|
and rights | |
|
reflected in column (a)) | |
| |
Equity compensation plans approved by security holders
|
|
|
79,741,504 |
|
|
|
$ |
68.55 |
|
|
|
|
49,127,003 |
|
|
Equity compensation plan not approved by security holders(1)
|
|
|
10,340,400 |
|
|
|
|
75.73 |
|
|
|
|
320,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
90,081,904 |
|
|
|
|
69.37 |
|
|
|
|
49,447,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents shares in the
Lilly GlobalShares Stock Plan, which permits the company to
grant stock options to nonmanagement employees worldwide. The
plan is administered by the senior vice president responsible
for human resources. The stock options are nonqualified for
U.S. tax purposes. The option price cannot be less than the
fair market value at the time of grant. The options shall not
exceed 11 years in duration and shall be subject to vesting
schedules established by the plan administrator. There are
provisions for early vesting and early termination of the
options in the event of retirement, disability, and death. In
the event of stock splits or other recapitalizations, the
administrator may adjust the number of shares available for
grant, the number of shares subject to outstanding grants, and
the exercise price of outstanding grants.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Information related to a time-share arrangement between the
company and Mr. Sidney Taurel, chairman and chief executive
officer, relating to his board-mandated personal use of the
corporate aircraft, can be found in the Proxy Statement under
Related Transaction at page 82. That
information is incorporated in this report by reference.
|
|
Item 14. |
Principal Accountant Fees and Services |
Information related to the fees and services of our independent
auditor, Ernst & Young LLP, can be found in the Proxy
Statement under Services Performed by the Independent
Auditor and Independent Auditor Fees at
pages 74-75. That information is incorporated in this
report by reference.
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a)1. Financial
Statements
The following consolidated financial statements of the Company
and its subsidiaries are found at Item 8:
|
|
|
|
|
Consolidated Statements of Income Years Ended
December 31, 2005, 2004, and 2003 |
|
|
|
Consolidated Balance Sheets December 31, 2005
and 2004 |
|
|
|
Consolidated Statements of Cash Flows Years Ended
December 31, 2005, 2004, and 2003 |
|
|
|
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2005, 2004, and 2003 |
85
|
|
|
|
|
Segment Information |
|
|
|
Notes to Consolidated Financial Statements |
(a)2. Financial
Statement Schedules
The consolidated financial statement schedules of the Company
and its subsidiaries have been omitted because they are not
required, are inapplicable, or are adequately explained in the
financial statements.
Financial statements of interests of 50 percent or less,
which are accounted for by the equity method, have been omitted
because they do not, considered in the aggregate as a single
subsidiary, constitute a significant subsidiary.
(a)3. Exhibits
|
|
|
|
|
|
3 |
.1 |
|
Amended Articles of Incorporation |
|
|
3 |
.2 |
|
By-laws |
|
|
4 |
.1 |
|
Rights Agreement dated as of July 20, 1998, between Eli
Lilly and Company and Norwest Bank Minnesota, N.A., as successor
Rights Agent |
|
|
4 |
.2 |
|
Amendment No. 1 to Rights Agreement dated as of
May 27, 2003, between Eli Lilly and Company and Wells Fargo
Bank Minnesota, N.A., as successor Rights Agent |
|
|
4 |
.3 |
|
Form of Indenture with respect to Debt Securities dated as of
February 1, 1991, between Eli Lilly and Company and
Citibank, N.A., as Trustee |
|
|
4 |
.4 |
|
Form of Standard Multiple-Series Indenture Provisions
dated, and filed with the Securities and Exchange Commission on,
February 1, 1991 |
|
|
4 |
.5 |
|
Form of Indenture dated March 10, 1998, among The Lilly
Savings Plan Master Trust Fund C, as issuer; Eli Lilly
and Company, as guarantor; and The Chase Manhattan Bank, as
Trustee, relating to ESOP Amortizing Debentures due
20171 |
|
|
4 |
.6 |
|
Form of Fiscal Agency Agreement dated May 30, 2001, between
Eli Lilly and Company and Citibank, N.A., Fiscal Agent, relating
to Resetable Floating Rate Debt Security due May 15,
20371 |
|
|
4 |
.7 |
|
Form of Resetable Floating Rate Debt Security due May 15,
20371 |
|
|
4 |
.8 |
|
Form of Indenture, dated as of August 9, 2005, by and among
Eli Lilly and Company, Eli Lilly Services, Inc., and Citibank,
N.A., as
trustee1 |
|
|
4 |
.9 |
|
Form of Floating Rate Note of Eli Lilly Services, Inc. due
September 12,
20081 |
1This
exhibit is not filed with this report. Copies will be furnished
to the Securities and Exchange Commission upon request.
2Indicates
management contract or compensatory plan.
86
|
|
|
|
|
|
10 |
.1 |
|
1994 Lilly Stock Plan, as
amended2 |
|
|
10 |
.2 |
|
1998 Lilly Stock Plan, as
amended2 |
|
|
10 |
.3 |
|
2002 Lilly Stock Plan, as
amended2 |
|
|
10 |
.4 |
|
Lilly GlobalShares Stock Plan, as
amended2 |
|
|
10 |
.5 |
|
The Lilly Deferred Compensation Plan, as
amended2 |
|
|
10 |
.6 |
|
The Lilly Directors Deferral Plan, as
amended2 |
|
|
10 |
.7 |
|
The Eli Lilly and Company Bonus Plan, as
amended2 |
|
|
10 |
.8 |
|
Eli Lilly and Company Change in Control Severance Pay Plan for
Select Employees, as
amended2 |
|
|
10 |
.9 |
|
2007 Change in Control Severance Pay Plan for Select
Employees2 |
|
|
10 |
.10 |
|
Summary of 2006 Compensation for Non-employee
Directors2 |
|
|
10 |
.11 |
|
Summary of 2006 Compensation for Named Executive
Officers2 |
|
|
10 |
.12 |
|
Letter agreement between the company and Charles E. Golden
concerning retirement
benefits2 |
|
|
10 |
.13 |
|
Letter agreement between the company and Steven M.
Paul, M.D. concerning retirement
benefits2 |
|
|
10 |
.14 |
|
Arrangement regarding retirement benefits for Robert A.
Armitage2 |
|
|
10 |
.15 |
|
Time Sharing Agreement between the company and Sidney Taurel for
use of corporate aircraft |
|
|
10 |
.16 |
|
Master Settlement Agreement regarding Zyprexa product liability
claims |
|
|
12 |
. |
|
Computation of Ratio of Earnings from Continuing Operations to
Fixed Charges |
|
|
21 |
. |
|
List of Subsidiaries |
|
|
23 |
. |
|
Consent of Independent Registered Public Accounting Firm |
|
|
31 |
.1 |
|
Rule 13a-14(a) Certification of Sidney Taurel, Chairman of
the Board and Chief Executive Officer |
|
|
31 |
.2 |
|
Rule 13a-14(a) Certification of Charles E. Golden,
Executive Vice President and Chief Financial Officer |
|
|
32 |
. |
|
Section 1350 Certification |
2Indicates
management contract or compensatory plan.
87
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Eli Lilly and Company
Sidney Taurel, Chairman of the Board and Chief Executive Officer
February 28, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on February 28,
2006 by the following persons on behalf of the Registrant and in
the capacities indicated.
|
|
|
|
|
|
|
Title |
Signature |
|
|
|
|
/s/ Sidney Taurel
SIDNEY TAUREL |
|
Chairman of the Board, Chief Executive Officer, and a Director
(principal executive officer) |
|
/s/ Charles E. Golden
CHARLES E. GOLDEN |
|
Executive Vice President, Chief Financial Officer, and a
Director (principal financial officer) |
|
/s/ Arnold C. Hanish
ARNOLD C. HANISH |
|
Chief Accounting Officer (principal accounting officer) |
|
/s/ Sir Winfried Bischoff
SIR WINFRIED BISCHOFF |
|
Director |
|
/s/ J. Michael Cook
J. MICHAEL COOK |
|
Director |
|
/s/ Martin S. Feldstein, PH.D
MARTIN S. FELDSTEIN, PH.D |
|
Director |
|
/s/ J. Erik Fyrwald
J. ERIK FYRWALD |
|
Director |
|
/s/ George M. C. Fisher
GEORGE M. C. FISHER |
|
Director |
|
/s/ Karen N. Horn, PH.D
KAREN N. HORN, PH.D |
|
Director |
|
/s/ Alfred G. Gilman, M.D.,PH.D
ALFRED G. GILMAN, M.D.,PH.D |
|
Director |
|
/s/ John C. Lechleiter, PH.D
JOHN C. LECHLEITER, PH.D |
|
Director |
88
|
|
|
|
|
|
|
Title |
Signature |
|
|
|
|
/s/ Ellen R. Marram
ELLEN R. MARRAM |
|
Director |
|
/s/ Franklyn G. Prendergast, M.D.,PH.D |
|
|
|
|
|
FRANKLYN G. PRENDERGAST, M.D.,PH.D |
|
/s/ Kathi P. Seifert
KATHI P. SEIFERT |
|
Director |
89
Trademarks Used In This Report
Trademarks or service marks owned by Eli Lilly and Company or
its subsidiaries or affiliates, when first used in this report,
appear with an initial capital and are followed by the symbol
®
or
tm,
as applicable. In subsequent uses of the marks in the report,
the symbols are omitted.
Index to Exhibits
The following documents are filed as part of this report:
|
|
|
|
|
|
|
Exhibit |
|
|
|
Location |
|
|
|
|
|
|
3 |
.1 |
|
Amended Articles of Incorporation |
|
Incorporated by reference from Exhibit 3.1 to the Companys
Report on Form 10-K for the year ended December 31, 2003 |
|
3 |
.2 |
|
By-laws, as amended |
|
Attached |
|
4 |
.1 |
|
Rights Agreement dated as of July 20, 1998, between Eli
Lilly and Company and Wells Fargo Bank Minnesota, N.A., as
successor Rights Agent |
|
Incorporated by reference from Exhibit 4.1 to the
Companys Report on Form 10-K for the year ended
December 31, 2003 |
|
4 |
.2 |
|
Amendment No. 1 to Rights Agreement dated as of
May 27, 2003, between Eli Lilly and Company and Wells Fargo
Bank Minnesota, N.A., as successor Rights Agent |
|
Incorporated by reference from Exhibit 4.2 to the
Companys Form 8-A/A, Amendment No. 1, dated
May 29, 2003 |
|
4 |
.3 |
|
Form of Indenture with respect to Debt Securities dated as of
February 1, 1991, between Eli Lilly and Company and
Citibank, N.A., as Trustee |
|
Incorporated by reference from Exhibit 4.1 to the
Companys Registration Statement on Form S-3,
Amendment No. 1, Registration No. 333-106478 |
|
4 |
.4 |
|
Form of Standard Multiple-Series Indenture Provisions
dated, and filed with the Securities and Exchange Commission on
February 1, 1991 |
|
Incorporated by reference from Exhibit 4.2 to the
Companys Registration Statement on Form S-3,
Amendment No. 1, Registration No. 333-106478 |
|
4 |
.5 |
|
Form of Indenture dated March 10, 1998, among The Lilly
Savings Plan Master Trust Fund C, as issuer; Eli Lilly
and Company, as guarantor; and The Chase Manhattan Bank, as
Trustee, relating to ESOP Amortizing Debentures due 2017 |
|
* |
|
4 |
.6 |
|
Form of Fiscal Agency Agreement dated May 30, 2001, between
Eli Lilly and Company and Citibank, N.A., Fiscal Agent, relating
to Resettable Floating Rate Debt Security due May 15, 2037 |
|
* |
|
4 |
.7 |
|
Form of Resettable Floating Rate Debt Security due May 15,
2037 |
|
* |
|
4 |
.8 |
|
Form of Indenture dated as of August 9, 2005, by and among
Eli Lilly and Company, Eli Lilly Services, Inc., and Citibank,
N.A. as trustee |
|
* |
|
4 |
.9 |
|
Form of Floating Rate Note of Eli Lilly Services, Inc. due
September 12, 2008 |
|
* |
|
10 |
.1 |
|
1994 Lilly Stock Plan, as amended |
|
Incorporated by reference from Exhibit 10.1 to the
Companys Report on Form 10-Q for the quarter ended
September 30, 2001 |
|
|
|
|
|
|
|
Exhibit |
|
|
|
Location |
|
|
|
|
|
|
10 |
.2 |
|
1998 Lilly Stock Plan, as amended |
|
Incorporated by reference from Exhibit 10.2 to the
Companys Report on Form 10-Q for the quarter ended
September 30, 2001 |
|
10 |
.3 |
|
2002 Lilly Stock Plan, as amended |
|
Incorporated by reference from Exhibit 10 to the
Companys Report on Form 10-Q for the quarter ended
September 30, 2004 |
|
10 |
.4 |
|
The Lilly GlobalShares Stock Plan, as amended |
|
Incorporated by reference from Exhibit 10.5 to the
Companys Report of Form 10-K for the year ended
December 31, 2003 |
|
10 |
.5 |
|
The Lilly Deferred Compensation Plan, as amended |
|
Incorporated by reference from Exhibit 10.1 to the
Companys Report on Form 10-Q for the quarter ended
June 30, 2004 |
|
10 |
.6 |
|
The Lilly Directors Deferral Plan, as amended |
|
Incorporated by reference from Exhibit 10.7 to the
Companys Report on Form 10-K for the year ended
December 31, 2003 |
|
10 |
.7 |
|
The Eli Lilly and Company Bonus Plan, as amended |
|
Attached |
|
10 |
.8 |
|
Eli Lilly and Company Change in Control Severance Pay Plan for
Select Employees, as amended |
|
Incorporated by reference from Exhibit 10.2 to the
Companys Report on Form 10-Q for the quarter ended
June 30, 2004 |
|
10 |
.9 |
|
2007 Change in Control Severance Pay Plan for Select Employees |
|
Incorporated by reference from Exhibit 10.3 to the
Companys Report on Form 10-Q for the quarter ended
June 30, 2004 |
|
10 |
.10 |
|
Summary of 2006 Compensation for Non- employee Directors |
|
Attached |
|
10 |
.11 |
|
Summary of 2006 Compensation for Named Executive Officers |
|
Attached |
|
10 |
.12 |
|
Letter agreement between the Company and Charles E. Golden
concerning retirement benefits |
|
Incorporated by reference from Exhibit 10.13 to the
Companys Report on Form 10-K for the year ended
December 31, 2004 |
|
10 |
.13 |
|
Letter agreement between the Company and Steven M. Paul, M.D.
concerning retirement benefits |
|
Incorporated by reference from Exhibit 10.14 to the
Companys Report on Form 10-K for the year ended
December 31, 2004 |
|
10 |
.14 |
|
Arrangement regarding retirement benefits for Robert A. Armitage |
|
Incorporated by reference from Exhibit 10.15 to the
Companys Report on Form 10-K for the year ended
December 31, 2004 |
|
|
|
|
|
|
|
Exhibit |
|
|
|
Location |
|
|
|
|
|
|
10 |
.15 |
|
Time Sharing Agreement between the Company and Sidney Taurel for
use of corporate aircraft |
|
Incorporated by reference from Exhibit 10.16 to the
Companys Report on Form 10-K for the year ended
December 31, 2004 |
|
10 |
.16 |
|
Master Settlement Agreement regarding Zyprexa product liability
claims |
|
Incorporated by reference from Exhibit 10.2 to the
Companys Report on Form 10-Q for the quarter ended
September 30, 2005 |
|
12 |
. |
|
Statement regarding Computation of Ratio of Earnings from
Continuing Operations to Fixed Charges |
|
Attached |
|
21 |
. |
|
List of Subsidiaries |
|
Attached |
|
23 |
. |
|
Consent of Independent Registered Public Accounting Firm |
|
Attached |
|
31 |
.1 |
|
Rule 13a-14(a) Certification of Sidney Taurel, Chairman of
the Board and Chief Executive Officer |
|
Attached |
|
31 |
.2 |
|
Rule 13a-14(a) Certification of Charles E. Golden,
Executive Vice President and Chief Financial Officer |
|
Attached |
|
32 |
|
|
Section 1350 Certification |
|
Attached |
*Not filed with this report. Copies will be furnished to the
Securities and Exchange Commission upon request.