ELI LILLY AND CO MPAN Y 2 0 14 ANNU AL R E PORT • N OTI CE OF 2 015 A NNU AL MEET IN G • PROX Y STATEMENT
It begins with
a promise…
Monica Kumado
Lilly Global
Manufacturing
It begins with a promise…
In 1876, Colonel Eli Lilly founded the company that bears his name to make trusted medicines of the highest possible quality, based
on the best science of the day.
In 2014, the people of Eli Lilly and Company launched three new medicines to treat diabetes and cancer and gained approval for a
fourth—medicines that represent the ongoing fulfillment of the promise made more than 138 years ago by our founder.
These new medicines, and more to come, are the fruit of the commitment we made late in the last decade, to sustain our investment
in innovation as we entered a challenging period of patent expirations on many of our key products.
These medicines also reflect Colonel Lilly’s promise of quality, brought to life every day by thousands of Lilly people in our
manufacturing and quality organizations.
Today, Eli Lilly and Company continues to pursue the promise of innovation—guided by our core values of integrity, excellence,
and respect for people—as we prepare to launch more new medicines to bring healing and hope to people around the world.
On the cover: Monica Kumado works on a packaging line for Humalog® vials in Lilly’s manufacturing operations in Indianapolis.
Generations of Lilly manufacturing employees have sustained Lilly’s commitment to producing quality medicines.
Lilly unites caring with discovery to make life
better for people around the world.
YEAR IN REVIEW
PROXY STATEMENT
1 Financial Highlights
2 Letter to Shareholders
6
12 Pipeline of Molecules in Clinical Development
It begins with a promise…
FINANCIALS
2 Business
15 Risk Factors
21 Management’s Discussion and Analysis of Results
of Operations and Financial Condition
41 Consolidated Statements of Operations
42 Consolidated Statements of Comprehensive Income
43 Consolidated Balance Sheets
44 Consolidated Statements of Shareholders’ Equity
45 Consolidated Statements of Cash Flows
46 Notes to Consolidated Financial Statements
87 Management’s Reports
89 Reports of Independent Registered Public Accounting Firm
91 Selected Financial Data
1 Notice of Annual Meeting of Shareholders
2 Proxy Statement Overview
8 Governance
28 Compensation
53 Audit Matters
55 Other Information
59 Appendix A
61 Annual Meeting Admission Ticket
63 Executive Committee and Senior Leadership
64 Corporate Information
For more information on Lilly’s commitment to corporate
responsibility, please see the inside back cover of this report.
2014 Financial Highlights
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
Revenue
Research and development
Research and development as a percent of revenue
Net income
Earnings per share—diluted
Reconciling items1:
Acquired in-process research and development (IPR&D)
Asset impairment, restructuring, and other special charges
U.S. Branded Prescription Drug Fee
Income related to the transfer to Boehringer Ingelheim of rights
to co-promote linagliptin and empagliflozin in certain countries
Income related to termination of the exenatide collaboration with Amylin
Non-GAAP earnings per share—diluted2
Dividends paid per share
Capital expenditures
Employees
Year Ended December 31
2014
2013
Change
%
$19,615.6
$23,113.1
4,733.6
24.1%
5,531.3
23.9%
$2,390.5
$4,684.8
2.23
4.32
(15)
(14)
(49)
(48)
0.12
0.38
0.11
(0.06)
—
2.78
1.96
0.03
0.08
—
—
(0.29)
4.15
1.96
1,162.6
39,135
1,012.1
37,925
(33)
15
3
1 For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 21 of the Financials.
2 Numbers in the 2013 column do not add due to rounding.
Revenue Growth Across Therapeutic Areas
($ millions, percent growth)
$287
+15%
$2,346.6
+9%
$3,053.5
+4%
$6,939.0
-5%
$3,393.0
+4%
$3,596.5
-50%
Endocrinology
Cardiovascular
Neuroscience
Animal Health
Oncology
Other Pharmaceutical
Revenue in Endocrinology decreased 5 percent due to the
loss of Evista patent protection in the U.S. in March 2014.
Excluding Evista, Endocrinology revenue grew 4 percent,
driven by growth of Humalog, Humulin, and Forteo. Revenue
in Neuroscience decreased 50 percent due to the loss of
Cymbalta patent protection in the U.S. in December 2013.
Animal Health grew 9 percent, reflecting the acquisition of
Lohmann Animal Health in the second quarter of 2014 and
growth in our food animal products.
Return on Assets and Shareholders’ Equity
Total Shareholder Return
%
1
.
6
4
+
%
7
.
7
1
+
%
4
.
1
3
+
%
8
.
7
2
+
%
5
.
9
2
+
%
4
.
3
1
+
%
3
.
2
1
+
%
8
.
3
1
+
%
7
.
3
1
+
%
8
.
6
+
%
8
.
9
3
%
4
.
2
3
%
9
.
4
2
%
0
.
4
2
%
0
.
5
1
%
7
.
3
+
%
1
.
2
%
3
.
6
1
%
2
.
7
%
7
.
3
1
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Return on Assets (ROA)
Return on Shareholders’ Equity (ROE)
Lilly
S&P 500
ROA and ROE decreased in 2014 as a result of a
decrease of net income mainly due to lower sales of
Cymbalta and Evista following U.S. patent expirations,
partially offset by ongoing cost-containment efforts.
Over the past five years, Lilly’s total shareholder return
has averaged nearly 20 percent, compared to nearly
16 percent for the S&P benchmark, due to the increase
in the stock price and steady dividend stream.
1
To Our Shareholders
This is an exciting moment for Eli Lilly and Company! We’re
transitioning from a challenging period of patent expirations to
a period of growth, driven by the launch of new products that
promise to provide new solutions to some of the most vexing
medical problems we face today. In my letter, I will discuss our
efforts to realize that promise for people around the world, and
to deliver on the promise of growth for shareholders.
PERFORMANCE AS PROMISED
Key Growth Contributors to 2014 Revenue
($ in millions represent growth in revenue, percent growth)
+3% +6% +32% +6% N/A
$89.0
$84.3
$79.6
$77.1
$75.6
Alimta
Humulin
Trajenta
Forteo
Cyramza
Seven products and a product line—Humalog, Cialis, Alimta, Humulin,
Trajenta, Forteo, and Cyramza along with Animal Health—together
generated revenue growth of $906 million during 2014 over 2013. This
collective growth was driven primarily by volume increases, including
the acquisition of Lohmann Animal Health in the second quarter of
2014. This growth partially offset the declines of Cymbalta and Evista
due to patent expirations.
To understand our future prospects, it’s important to consider
what Lilly was facing back in 2008. Over the period that lay
ahead—a period we dubbed “YZ”—
expiring patents would cause us to lose
one-third of our revenue, and a significantly
greater percentage of our profits.
+9%
In late 2009, we laid out a plan to
overcome this challenge and rebuild our
company. The results speak for themselves:
» We achieved strong performance in
+7%
+6%
Cialis
Humalog
$195.1
$174.0
$131.6
Animal
Health
each of the areas we identified to drive
underlying growth during this period.
Elanco was among the fastest-growing
animal health companies, and nearly
doubled its revenue. Lilly was among
the fastest-growing pharma companies
in Japan, where we doubled our sales
volume. We had good growth in
Emerging Markets—including doubling
our sales in China. And we saw solid
growth among our enduring brands, including Humalog,
Cialis®, Effient®, Forteo®, and Alimta®.
» We surpassed our pipeline goal of 10 potential new
medicines in Phase III clinical testing by 2011, with 12
in Phase III at the end of that year—peaking at 13 by early
2013 and leading to approvals of four new medicines in
2014, with more to come.
U.S. patent expirations, as well as the unfavorable impact of
foreign exchange rates. On a non-GAAP basis, which excludes
significant items totaling $0.55 per share, net income was
$2.99 billion, a decrease of 34 percent. Reported net income
was $2.39 billion.
Seven of our products and our Elanco animal health business
exceeded $1 billion in annual sales in 2014. Total reported
operating expenses decreased 10 percent, driven by lower
late-stage clinical development costs, reduced U.S. sales and
marketing activities for Cymbalta and Evista, and ongoing
cost-containment efforts.
Revenue Per Employee
($ thousands, percent growth)
Over the past five years, our stock price has
doubled—from $35 per share on the day
in December 2009 when we first shared
our strategy with investors, to over $70
+6%
as I write this letter in early 2015.
+11%
+3%
-8%
THE PROMISE OF DISCOVERY
-18%
$602
$638
Throughout the YZ period we stayed true to
our commitment to innovation. And now,
as our pipeline continues to advance, our
company is positioned to resume growth.
$501
$590
$609
2010
2011
2012
2013
2014
In 2014, we launched three new medicines:
In 2014, revenue per employee decreased 18 percent
Cyramza® for advanced gastric cancer
to $501,000, due primarily to a 15 percent decrease
and metastatic non-small cell lung cancer,
in revenue as the result of the Cymbalta and Evista
Jardiance® for type 2 diabetes—with
patent losses.
Boehringer Ingelheim, and Trulicity®
also for type 2 diabetes. We also received
approval for our insulin glargine product in Europe and
Japan and tentative approval in the U.S. (See pages 8-9.) We
filed for regulatory approval of necitumumab for first-line
squamous non-small cell lung cancer, and we anticipate
submissions in coming months for ixekizumab for psoriasis,
along with new indications for Cyramza.
Here’s a closer look at key therapeutic areas:
» We exceeded our goals to reduce projected headcount by
5,500 and our cost structure by $1 billion by the end of 2011.
» And we achieved our annual goals of $20 billion in revenues,
$3 billion in net income, and $4 billion in operating cash
flow each year through 2013.
Diabetes. We’re well on our way to launching—over a couple
of years—up to three new medicines that treat diabetes. This
will enable Lilly to offer a more complete range of medicines
than any of our competitors, from oral medicines to insulins.
Notably, our insulin glargine product has the potential to fill a
significant and longstanding gap in our insulin portfolio.
In 2014—the trough of this patent expiration period—we fell
just shy in revenue and net income, while exceeding our cash
flow goal. Revenue decreased 15 percent to $19.62 billion, due
primarily to lower demand for Cymbalta® and Evista® following
And we’re not stopping there. We’re committed to continued
advances in diabetes treatment by maintaining a strong
internal research effort, as well as searching for the best external
opportunities. In December, for example, we announced a
2
worldwide licensing collaboration with Adocia focused on
developing an ultra-rapid insulin.
Oncology. In oncology, our acquisition of ImClone in 2008 is
paying off, with one medicine—Cyramza (ramucirumab)—
on the market, another molecule—necitumumab—in
regulatory review, and a third—olaratumab—expected to enter
Phase III this year for soft tissue sarcoma.
In addition to approvals of Cyramza in the U.S. and Europe
for second-line advanced gastric cancer, we’ve been granted a
priority review in Japan, and we anticipate regulatory action in
the first half of 2015. The FDA also approved
Cyramza as a treatment for second-line
Key Growth Contributors to 2014 Revenue
non-small cell lung cancer, and in September
($ in millions represent growth in revenue, percent growth)
we reported positive top-line results for
ramucirumab in second-line metastatic
colorectal cancer. We expect to submit
ramucirumab in that indication this year.
+11%
+6%
+7%
+9%
+6%
Revenue Per Employee
($ thousands, percent growth)
-8%
+3%
-18%
(RA) who previously had an inadequate response to one or
more TNF inhibitors. In February 2015, we announced
that baricitinib showed statistically significant improvement
compared to placebo in a second Phase III trial in RA.
In the treatment of pain, our CGRP monoclonal antibody
is currently in Phase II. And should the FDA partial clinical
hold be removed, we’ll reinitiate Phase III trials for tanezumab
in collaboration with Pfizer.
In 2016, we expect readouts from our ongoing Phase III trials for
evacetrapib in high-risk vascular disease and for solanezumab in
Alzheimer’s disease, offering the potential
for what some have termed “biotech-like
upside” later in the decade.
In addition, last year we initiated Phase III
+3% +6% +32% +6% N/A
studies for abemaciclib, our CDK 4/6
inhibitor, in metastatic breast cancer and
$89.0
$131.6
non-small cell lung cancer.
$195.1
$174.0
$77.1
$79.6
$84.3
$75.6
$602
$638
$590
$609
$501
All of this is good news for the company
and for patients. And it validates the
decision we made many years ago, as
we entered a perilous period of patent
expirations, to sustain a robust investment
in research and development. We made a
big bet then, and it’s paying off!
I’m extremely proud of what my Lilly
colleagues have accomplished over the
past several years. But, as we all know, the
world did not stand still as we navigated
through a difficult period. So we must
continue to change and adapt in order to
2012
2013
2014
KEEPING OUR PROMISES
In 2014, revenue per employee decreased 18 percent
to $501,000, due primarily to a 15 percent decrease
in revenue as the result of the Cymbalta and Evista
patent losses.
Cialis
Forteo
Alimta
Trajenta
Cyramza
Humulin
Humalog
2010
2011
Animal
Health
In the area of immuno-oncology, we
announced early-stage collaborations in 2014
Seven products and a product line—Humalog, Cialis, Alimta, Humulin,
Trajenta, Forteo, and Cyramza along with Animal Health—together
with Immunocore and Zymeworks. And
generated revenue growth of $906 million during 2014 over 2013. This
in January of this year we announced two
collective growth was driven primarily by volume increases, including
the acquisition of Lohmann Animal Health in the second quarter of
additional clinical collaborations—one with
2014. This growth partially offset the declines of Cymbalta and Evista
Bristol-Myers Squibb and the other with
due to patent expirations.
Merck—exploring combinations of their
PD-1 therapies, Opdivo® and Keytruda®, with a number of our
marketed and pipeline medicines in a range of cancers.
Immunology. We also saw significant progress in our
emerging immunology platform, with positive data on two
late-stage development candidates.
» In August, we announced that ixekizumab met all primary
and key secondary objectives across three pivotal studies
of nearly 4,000 patients with moderate-to-severe plaque
psoriasis. In the trials, 78 to 90 percent of patients treated
with ixekizumab saw at least a 75 percent improvement
in their skin clearance at 12 weeks. In addition, 31 to
41 percent saw 100 percent clearance. We plan regulatory
submissions for ixekizumab in the first half of this year.
» In December, Lilly and our partner Incyte announced that
baricitinib—a once-daily, oral, selective JAK1 and JAK2
inhibitor—met the primary endpoint in a Phase III trial for
people with moderately-to-severely active rheumatoid arthritis
realize a promising future.
Back in 2008, as we began to prepare for YZ, the Great
Recession was gathering force, and the impact is still being
felt today. The Affordable Care Act in 2010 was the most
significant U.S. legislation of its kind since Medicare 45 years
earlier, and it is reshaping health care.
In countries around the world—including the U.S.—pressure
on health care budgets continues to constrain reimbursement,
as well as access, for many branded medicines. Our customers
are demanding ever-greater value for their money. Likewise over
this period, competition has stiffened, as numerous Big Pharma
and biotech companies have been attracted to the therapeutic
areas in which we compete. And we’ll continue to face patent
expirations, which are a fact of life in our business.
All of this is to say: even as we begin to turn the corner on YZ
with multiple product launches, we must operate effectively in
an external environment that has never been more challenging.
3
In response, we’re sharpening our focus on the areas where we’re
best positioned to compete and win. We believe this will lead
to a more sustainable flow of innovative medicines and stronger,
more consistent growth.
To complement our internal efforts, we’re also increasing our
business development activity—through partnerships, licensing,
and acquisitions—and pursuing deals and collaborations at
ever-earlier stages.
Commercial Focus. First of all, we aim to compete effectively
and to win in diabetes, oncology, and animal health. In the near
term and in the long term, these represent significant pillars of
growth for our company.
At the same time, our Bio-Medicines business is transitioning
from its longtime focus on psychiatric illness, bone health,
and men’s health to new areas that include immunologic
disorders, neurodegeneration (especially Alzheimer’s disease),
pain, and cardiovascular disease—all dependent, of course,
on the outcome of ongoing Phase III studies. Bio-Medicines
remains critically important, accounting for more than half
of our Phase III pipeline, and providing revenue from current
products to fuel our ambitious growth agenda.
In terms of geography, the U.S. market will continue to be of
preeminent importance to our company. Yet our attention will
increasingly shift to Asia, particularly China and Japan.
R&D Focus. Going forward, we’ll focus our research in
human health on three core areas—diabetes, oncology, and
neurodegeneration—and two emerging areas based on research
opportunities and clinical data—immunology and pain. In
each of these areas, we have compelling assets and growing or
already deep expertise.
Within these areas, we’ll pursue fewer research projects, so
that we can apply sufficient resources to deliver top-quality
candidates and maintain competitiveness for those we choose
to move forward. At Lilly’s size, we know we can’t participate
meaningfully in every therapeutic area. But where we choose to
play, we will play to win!
We’ve also embarked on an ambitious effort to reduce the time
to bring new medicines from our laboratory to the patient, and
we’re making good progress. Several important development
programs have already benefited in a substantial way, with years
having been trimmed off earlier planned timelines.
A PROMISING FUTURE
As we stand today, following our toughest year, this much is
clear: We are emerging from YZ as an independent company
charting our own destiny, launching new products and
competing more effectively, and in possession of one of the
strongest pipelines in our history. As I write this letter, new Lilly
medicines are helping more and more patients suffering from
the ravages of cancer and diabetes—and we’ll be touching even
more in the months and years ahead.
I want to offer my heartfelt thanks to our leadership team and to
Lilly people around the world for their outstanding performance
throughout the YZ period, and particularly in 2014. I also
want to acknowledge and thank Doug Oberhelman, who is
concluding his service on the board, for his wisdom and expert
guidance through this challenging period.
A key lesson—one that has been repeated throughout our 138-
year history—is to never underestimate what Lilly people are
capable of when we put our minds to a shared goal and work
together to achieve it.
Yes, we face new challenges, but now we have the wind at our
back, and the arrow is in the “up” direction. Ours increasingly
is a position of strength, which we intend to neither yield nor
squander. We have yet new chapters to write in medical history,
as we strive to deliver the promise of innovation to millions of
people whose lives will be made better when we succeed.
I remain very confident that we can and will succeed,
and I am grateful for your support.
For the Board of Directors,
John C. Lechleiter, Ph.D.
Chairman, President, and Chief Executive Officer
We are emerging from YZ as an independent company charting our own
destiny, launching new products and competing more effectively, and in
possession of one of the strongest pipelines in our history.
4
Elanco—Enriching Lives, Driving Growth
The vision of Elanco, our animal health business, is “food
and companionship enriching life.” Elanco helps make food
safe, affordable, and abundant, with products and services to
improve animal protein production. Its companion animal
products help pets live longer, healthier, higher-quality lives.
Animal health was a key growth driver during the YZ period of
patent expirations, and represents one of our important areas of
focus going forward.
Elanco’s success in recent years has resulted from a mix of
acquisitions and internally driven growth. With the acquisition
of Novartis Animal Health in January 2015, Elanco today is
a top-three animal health company—up from No. 8 just ten
years ago—with an expanded product portfolio, an enhanced
global footprint, and a robust pipeline.
At Elanco headquarters in Greenfield, Indiana, John C. Lechleiter,
Ph.D., Lilly chairman, president, and chief executive officer
(third from left), talks with Elanco’s Tracey Ward, director, global
regulatory brand assurance/pharmacovigilance; Scott Holmstrom,
senior director, regulatory affairs, North America, and global
capabilities; Tony Ezell, vice president and chief marketing officer;
José Simas, senior director, regulatory, market access, and knowledge
solutions; and Ericka Wheeler, operations manager, global
market access.
5
It begins with a promise …
Since our founding, the people of Lilly have worked to fulfill our promise to discover and develop
medicines that make life better. From the production of insulin and the polio vaccine, to the launch of
the biotechnology era with Humulin®, to the discovery of new medicines to treat psychiatric illness, we
have pioneered breakthroughs against some of humanity’s most stubborn and devastating diseases.
In 2014 Eli Lilly and Company delivered on the promise of discovery with new medicines for people
with diabetes and cancer. These medicines—in their discovery, development, and manufacture—reflect
the promise of quality that goes back to Colonel Eli Lilly.
The following pages highlight the new Lilly medicines
approved in 2014, with a particular focus on the outstanding
work of our manufacturing team to bring them to patients.
“Take what you find here and make it better and better.”
Colonel Eli Lilly to his son J.K. Sr. when he joined the company.
J.K. Lilly Sr. in his lab circa 1886
6
Bringing the Promise of Science
to People with Diabetes
Seeing Lilly’s Promise
from Both Sides
When people with diabetes filled
their first prescriptions for Trulicity
(dulaglutide) in November 2014, it
marked the culmination of well over
a decade of work by hundreds if not
thousands of Lilly employees. Tom
Hardy was one of them.
Tom earned an M.D. and a Ph.D. in
biochemistry, and was drawn to both
patient care and academic medical
research. After several years as an
endocrinologist in private practice,
Tom joined Lilly where, he says, “my
work applies all my training more than
anything else I’ve done.”
Thomas A. Hardy, M.D., Ph.D.
Lilly Research Laboratories
Tom became involved with dulaglutide as clinical team leader during
Phase I development. The dulaglutide molecule had been invented by
Lilly scientists—notably Wolfgang Glaesner, Ph.D., and Rohn Millican—
who had an idea for a once-weekly GLP-1 receptor agonist for diabetes
and applied Lilly’s capabilities in protein engineering to create it.
Tom recalls the excitement when data came back from Phase I testing
and the molecule showed potential efficacy with once-weekly dosing.
Subsequent testing confirmed that the Lilly scientists had “engineered
a protein that did exactly what it was intended to do.”
Tom’s colleagues applied some innovative ideas to advance dulaglutide.
The early- and late-phase clinical teams worked together to design a
seamless Phase II/III trial that embeds dose finding—typically done
during Phase II—in a large Phase III study of safety and efficacy,
eliminating the usual time gap between such trials.
Drawing on Lilly’s capabilities in pharmacokinetics and advanced
analytics, the team used sophisticated modeling and trial simulation
to predict what they were likely to learn from studies and adapt as the
trials proceeded.
Today, such approaches are being applied across Lilly to reduce the
time to advance new medicines from the lab to the patient.
In his current role at Lilly, Tom says his work reaches from “rubbing
shoulders” with discovery scientists to working with the medical and
commercial teams engaged with patients and physicians—just what
he was looking for when he joined Lilly. And, along with many Lilly
colleagues, he can take pride in helping bring a new treatment option
to people with diabetes.
Jeff Pettet joined Lilly in 2014 as the
company expanded its capacity to
manufacture new biologics for diabetes,
cancer, and other diseases, and he soon
found himself facing a serious threat to
his own health.
With 18 years of experience in sterile
injectable product manufacturing,
Jeff was hired to lead a process team
in our Cyramza vial filling operation in
Indianapolis. As he began his new job,
Jeff underwent a physical exam and
learned that he had type 2 diabetes.
Jeff Pettet
Lilly Global Manufacturing
“The results from the physical were so shocking because I have kids in
high school and college, and I don’t want to die prematurely with kids
still dependent on me,” Jeff says. In addition to taking medication, he
started working out, running, and watching his diet.
Jeff enrolled in a 12-week course as part of Lilly’s wellness programs.
Each class began with topics on managing diabetes—such as nutrition,
exercise, and foot care—followed by an exercise session. Most
important, Jeff says, was that class members began to bond, share
stories, and encourage each other in their common struggles.
“As scared as I was, I wouldn’t have come this far if it weren’t for
the course and the relationships that began there,” Jeff says. He’s
significantly lowered his hemoglobin A1c, from 10.7 to 7.7 so far, and
he’s training to run the “500” Mini-Marathon with his daughter.
In his work, Jeff leads a process team that maintains the highest
standards of quality and safety in filling vials of Cyramza that will treat
people with cancer. The facility where he works also produces Trulicity
pre-filled syringes for type 2 diabetes.
Jeff’s team adheres to strict procedures in order to maintain the
sterility of the facility and the process. The manufacturing process
itself has been thoroughly validated to ensure consistent identity,
strength, and purity in every Cyramza vial.
Jeff Pettet is part of Lilly’s promise of quality in the medicines we
make. And he’s learned about the challenges facing the people who
depend on them.
7
The Promise of Discovery
LILLY MEDICINES APPROVED IN 2014
APPROVED / LAUNCHED
APPROVED / LAUNCHED
Cyramza (ramucirumab)
Trulicity (dulaglutide)
Cyramza has been approved for the treatment of stomach
and lung cancers and is being studied in other tumors. It is a
vascular endothelial growth factor (VEGF) receptor 2 antagonist
designed to inhibit angiogenesis, the process of making new
blood vessels. In the case of cancer, angiogenesis provides a
tumor its own blood supply, allowing it to grow and spread.
In 2014, Cyramza received approvals in the U.S. and the
European Union, both as a single agent and in combination
with chemotherapy, to treat advanced or metastatic gastric
(stomach) cancer—the third leading cause of cancer death
worldwide.
We launched Cyramza in the U.S. with strong results to date
and positive customer feedback. In Japan, we’ve been granted
a priority review of ramucirumab for the treatment of second-
line gastric cancer, and we anticipate regulatory action in the
first half of 2015.
In December, Cyramza became the first treatment approved in
the U.S. for use in combination with docetaxel in second-line
metastatic non-small cell lung cancer (NSCLC). In early 2015,
Lilly submitted a marketing application in the EU for Cyramza
in NSCLC. NSCLC accounts for 85 percent of all cases of lung
cancer—the leading cause of cancer death in most countries.
In September, Lilly announced positive top-line results for
the Phase III study of Cyramza as a treatment for second-line
metastatic colorectal cancer. Several other studies are under way
or planned to investigate Cyramza in additional tumor types.
Trulicity is a once-weekly, injectable solution
designed to improve glycemic control in adults
with type 2 diabetes and should be used along
with diet and exercise. Trulicity is a glucagon-like
peptide-1 (GLP-1) receptor agonist that acts like
GLP-1, a natural hormone that helps the body
release its own insulin following a meal.
Discovered in Lilly Research Laboratories, Trulicity
was designed for the individual with diabetes
who’s making the transition to injectable therapy.
Trulicity comes in a ready-to-use single-dose
pen with a pre-attached, hidden needle. It does not require any
mixing, measuring, or needle preparation and can be taken any
time of day, with or without meals.
The approval of Trulicity was based on five Phase III clinical
trials. In all five, Trulicity met its primary endpoint—lowering
of hemoglobin A1c, a measure of average blood glucose—and
was superior to other, conventional treatments. In a sixth trial,
dulaglutide became the only GLP-1 agent in a Phase III study
to show non-inferiority to the highest dose of Victoza®.
Trulicity is now approved for adults in the United States,
Europe, Australia, and the United Arab Emirates as an adjunct
to diet and exercise for the treatment of type 2 diabetes. It is
currently in regulatory review in Japan as well as other regions.
8
APPROVED / LAUNCHED
APPROVED
Copyright © 2014 Boehringer Ingelheim Pharmaceuticals, Inc. All rights reserved. (05/14) JAR611803PROFB
Jardiance (empagliflozin)
Jardiance, co-developed by Lilly and Boehringer Ingelheim,
offers people with type 2 diabetes a new option to reduce blood
sugar levels. This once-daily oral tablet is a sodium glucose
co-transporter-2 (SGLT2) inhibitor. Today, the SGLT2 class is
the fastest-growing segment among diabetes therapies.
FILE BUILT AT 25% OF 58.625” X 95”
Jardiance acts by removing excess glucose through the urine
by blocking glucose reabsorption in the kidneys. Results of
10 multinational Phase III trials of more than 13,000 adults
with type 2 diabetes showed that after 24 weeks, empagliflozin
significantly reduced patients’ hemoglobin A1c. Although
Jardiance is not approved for lowering weight or blood pressure,
modest reductions in both were observed in clinical trials.
Jardiance has been approved in the U.S., the European Union,
Japan, and five other countries as an adjunct to diet and
exercise to improve blood-glucose levels in adults with type 2
diabetes. In addition, the FDA recently approved Glyxambi®,
a combination tablet of empagliflozin and linagliptin—the
DPP-4 inhibitor developed by our alliance with Boehringer
Ingelheim and marketed as Tradjenta®—for adults with type 2
diabetes. And we have submitted the fixed-dose combination of
empagliflozin and metformin in the U.S. and Europe.
Abasaglar
(insulin glargine injection)
Our insulin glargine product, developed by Lilly and
Boehringer Ingelheim, is a basal insulin treatment intended to
provide long-lasting blood-glucose control between meals and
at night, an integral part of glycemic control. This basal insulin
helps fill a longstanding gap in Lilly’s modern insulin portfolio.
In 2014, the European Commission granted marketing
authorization for Abasaglar™—the name of our insulin glargine
product in Europe—to treat diabetes in adults, adolescents, and
children aged two years and above.
In addition, we received tentative approval for the product
in the U.S.—where its approved name is Basaglar™—for
improving glycemic control in adults with type 2 diabetes and
in combination with mealtime insulin for adults and children
with type 1 diabetes. Final U.S. approval is delayed as a result
of patent infringement litigation filed by Sanofi, which makes
the currently marketed insulin glargine. Our insulin glargine
product has also been approved in Japan.
9
Marcia Candler,
Lilly Global
Manufacturing
Keeping Our Quality Promise
LILLY GLOBAL MANUFACTURING
“ If it bears a
red Lilly, it’s
right.”
– Product Label
c. 1900
Colonel Eli Lilly founded our company
with the singular purpose of producing
trusted, high-quality medicines. In 2014,
more than 9,000 Lilly employees in
our Global Manufacturing and Quality
organizations were working hard to keep
our founder’s promise.
Over the past decade, we’ve achieved a genuine transformation
in manufacturing as we prepare for a series of product launches;
adapt to changes in Lilly’s product portfolio and deliver a
growing array of biological products; and respond to new
demands for delivery devices, dosing, and packaging aimed at
meeting the needs of individual patients.
We’ve also strengthened our Quality organization, along with the
systems, processes, and mindset necessary to ensure consistent
performance in manufacturing and across the company.
Even in the midst of transformation, over the past five years the
people of Lilly manufacturing have improved safety and quality,
driven productivity gains, and maintained reliable supply,
all the while delivering a growing and increasingly complex
product portfolio. (See graphic on page 11.)
In particular, our colleagues in Indianapolis and Puerto Rico
are working to streamline our insulin manufacturing processes
to prepare for the production of our basal insulins and to meet
growing global demand. The plan includes technical initiatives
to improve production processes, expand capacity, and prepare
for the launches of a series of new medicines.
More broadly, we’re expanding our capacity in active
pharmaceutical ingredient (API) production, sterile injectable
product operations, and device manufacturing to deliver
new biological products—including Trulicity and Cyramza
and others in late-stage development, such as necitumumab
and ixekizumab. At the same time, small molecules remain
an important part of our pipeline, product portfolio, and
manufacturing focus.
In 2014, our Global Manufacturing operations comprised
27 internal sites in 13 countries and a large network of
partners. We continue to make major investments around the
world. In Kinsale, Ireland, we’ve expanded and transformed a
small-molecule site to a state-of-the-art facility that produces
both small molecules and biologics. In Suzhou, China, we’re
constructing a new insulin formulation and filling facility to
respond to significant demand in that country for our insulin
products. We’re also expanding sterile injectable product
manufacturing capacity in Sesto, Italy, and Fegersheim, France,
as well as in Indianapolis.
Most importantly, we’ve built a solid culture rooted in technical
excellence and continuous improvement. A skilled and engaged
workforce has delivered year-on-year progress in quality and
safety and has achieved a strong record of compliance. We
maintained this record through 2014, a year when pre-approval
inspections in preparation for new product launches drove a
30 percent increase in regulatory
inspections at our sites.
“ We make medicine, and people’s lives depend on it every day, so it has to be right
every time. That’s why our commitment to safety and quality is critical and is at
– Maria Crowe, President, Manufacturing Operations
the center of everything we do.”
10
Lilly Manufacturing Performance (2010-2014)1
We improved safety…
…maintained a strong
compliance record…
…and a high
level of service…
Serious
Injury
Rate
45%
decline
350
quality inspections
420
health, safety, and
environment inspections
INSPECTIONS
OF OUR SITES
BY REGULATORY
AGENCIES
OSSCE
Service
Rating2
96%
(Class A)
…while delivering a growing, more complex product portfolio.
Product Orders
Fulfilled
12.7m
Batches
Produced
37%
increase
End Items
(SKUs)
12%
increase
Molecular
Entities
121%
increase
We’ve improved our environmental performance…
ENVIRONMENTAL IMPACT/SUSTAINABILITY (2007-2013)
17%
improvement in
energy efficiency
35%
reduction in
water intake
73%
reduction in waste
to landfills
$185m
in savings from
these efforts
…invested $3.2B in our manufacturing facilities…
…and increased productivity.
CAPITAL INVESTMENT
$950m
$800m
Annual spending
$450m
$425m
$600m
New capability and
capacity expansion
Reinvestment in
existing facilities
2010
2011
2012
2013
2014
Projects Completed
1,700
Financial Benefits:
$770m
SIX-SIGMA
PROGRAM
1. Includes both human pharmaceutical and animal health manufacturing; time period unless otherwise noted. 2. Product supply to first-paying-customer remained above 95%, the
Operation Standards for Supply Chain Excellence standard for “A Class,” through this period.
11
Pipeline of Molecules in Clinical Development
REGULATORY REVIEW
Necitumumab
squamous NSCLC
PHASE III
Abemaciclib
metastatic breast
cancer/NSCLC
Baricitinib
rheumatoid
arthritis
Evacetrapib
high-risk vascular
disease
Tanezumab*
pain
Ixekizumab
psoriasis/PsA
Solanezumab
Alzheimer’s
disease
Basal insulin
peglispro
diabetes
PHASE II
PCSK9 MAb
cardiovascular
disease
Oxyntomodulin
peptide
diabetes
Glucagon-R
antagonist
diabetes
Florbenazine
imaging agent
Parkinson’s disease
TGFα/Epireg MAb
chronic kidney
disease
CGRP MAb
migraine
prevention
Blosozumab
osteoporosis
Myostatin MAb
disuse atrophy
NOC-1 antagonist
depression
Zosano-PTH
micro-needle patch
osteoporosis
Tau imaging agent
Alzheimer’s
disease
Chk1 inhibitor
cancer
BACE - AZD3293*
Alzheimer’s
disease
c-Met inhibitor
cancer
c-Met MAb
cancer
Galunisertib
cancer
Hedgehog/SMO
antagonist
cancer
Ferroportin MAb
anemia
p38 MAPK inhibitor
cancer
Olaratumab
cancer
FGF receptor
inhibitor
cancer
Edivoxetine
CNS disorder
PHASE I
chronic kidney
disease
hypoglycemia
cardiovascular
diabetic
nephropathy
N3pG-Aß MAb
Alzheimer’s
disease
diabetes
diabetes
diabetes
ulcerative
colitis
NOTCH inhibitor
cancer
P13 kinase/mTOR
dual inhibitor
cancer
Pomaglumetad
methionil
CNS disorder
CSF-1R MAb
cancer
p70S6/AKT
dual inhibitor
cancer
BACE inhibitor
Alzheimer’s
disease
lupus
anemia in CKD
Crohn’s disease
mGlu2/3 agonist
chronic pain
VEGFR-3 MAb
cancer
muscle
atrophy
MET/EGFR
bispecific antibody
cancer
hypertension
Pan-Raf inhibitor
cancer
rheumatoid
arthritis
mGlu2 agonist
CNS disorder
CXCR4 peptide
cancer
Information is current as of February 14, 2015. The search for new medicines is risky and uncertain, and there are no guarantees.
Remaining scientific, regulatory, or commercial hurdles may cause pipeline compounds to be delayed or to fail to reach the market.
12
New Chemical Entity
New Biological Entity
Diagnostic
* Commercial
collaboration
The Lilly pipeline currently
includes 57 molecules in
clinical development, including
eight molecules in Phase III or
regulatory review, 22 in Phase II,
and 27 in Phase I. Since our
last annual report, seven new
molecules advanced into Phase I
testing; three advanced into
Phase II testing; one molecule—
abemaciclib, our CDK 4/6 dual
inhibitor—entered Phase III;
necitumumab was submitted
for regulatory approval; and
four new molecular entities
were approved for marketing in
at least one major geography,
including empagliflozin and
insulin glargine (in collaboration
with Boehringer Ingelheim),
dulaglutide, and ramucirumab.
We terminated development
of eight molecules, including
tabalumab, which was being
evaluated in Phase III trials for
lupus. Additional information
and updates are available on
the Lilly Interactive Pipeline at
www.lilly.com.
In 2014, Elanco delivered
102 country-level approvals.
These products provided
comprehensive solutions for
customers and veterinarians
to help improve the lives and
health of animals. Many of the
approvals came in countries
within Asia and Western Europe,
bringing products that enhance
the health, well-being, and
performance of livestock
and pets.
Forward-Looking Statements
This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking
statements include all statements that do not relate solely to historical or current facts, and can generally be
identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,”
“anticipate,” “plan,” “continue,” or similar expressions.
In particular, information appearing under “Business,” “Risk Factors” and “Management's Discussion and
Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-
looking statements inherently involve many risks and uncertainties that could cause actual results to differ
materially from those projected in these statements. Where, in any forward-looking statement, we express an
expectation or belief as to future results or events, it is based on management's current plans and
expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no
assurance that any such expectation or belief will result or will be achieved or accomplished. The following
include some but not all of the factors that could cause actual results or events to differ materially from those
anticipated:
(cid:127)
the timing of anticipated regulatory approvals and launches of new products;
(cid:127) market uptake of recently launched products;
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
competitive developments affecting current products;
the expiration of intellectual property protection for certain of our products;
our ability to protect and enforce patents and other intellectual property;
the impact of governmental actions regarding pricing, importation, and reimbursement for
pharmaceuticals, including U.S. health care reform;
regulatory compliance problems or government investigations;
regulatory actions regarding currently marketed products;
unexpected safety or efficacy concerns associated with our products;
issues with product supply stemming from manufacturing difficulties or disruptions;
regulatory changes or other developments;
changes in patent law or regulations related to data-package exclusivity;
litigation involving current or future products as we are self-insured;
unauthorized disclosure or misappropriation of trade secrets or other confidential data stored in our
information systems and networks;
changes in tax law;
changes in inflation, interest rates, and foreign currency exchange rates;
asset impairments and restructuring charges;
changes in accounting standards promulgated by the Financial Accounting Standards Board and the
Securities and Exchange Commission (SEC);
acquisitions and business development transactions; and
the impact of global macroeconomic conditions.
Investors should not place undue reliance on forward-looking statements. You should carefully read the
factors described in the “Risk Factors” section of this Annual Report for a description of certain risks that
could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this report and are expressly qualified in their
entirety by the cautionary statements included in this report. Except as is required by law, we expressly
disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after
the date of this report.
1
1
Business
Eli Lilly and Company (the “company” or “registrant” or "Lilly") 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 market products in two business segments—human pharmaceutical products and
animal health products.
The mission of our human pharmaceutical business is to make medicines that help people live longer,
healthier, more active lives. Our vision is to make a significant contribution to humanity by improving global
health in the 21st century. 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, develop, and bring
to market innovative new medicines.
Our animal health business, operating through our Elanco division, develops, manufactures, and markets
products for both food animals and companion animals.
We manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 11
other countries. Our products are sold in approximately 120 countries.
Subsequent Event - Novartis Animal Health Acquisition
On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash
transaction for approximately $5.4 billion. Novartis AH operates in approximately 40 countries. We acquired
Novartis AH’s nine manufacturing sites, six dedicated research and development facilities, a global
commercial infrastructure with a portfolio of approximately 600 products, a pipeline with more than 40 projects
in development, and more than 3,000 employees. The combined organization is expected to increase our
animal health product portfolio, expand our global commercial presence, and augment our animal health
manufacturing and research and development. In particular, it is expected to provide Elanco with a greater
commercial presence in the companion animal and swine markets, expand Elanco’s presence in equine and
vaccines areas, and create an entry into the aquaculture market. As a condition to the clearance of the
transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of
Novartis AH, we divested certain companion animal assets in the U.S. related to the Sentinel® canine
parasiticide franchise to Virbac Corporation for approximately $410 million.
Human Pharmaceutical Products
Our human pharmaceutical products include:
Endocrinology products, including:
(cid:127) Humalog®, Humalog Mix 75/25™, and Humalog Mix 50/50™, insulin analogs for the treatment of
diabetes
(cid:127) Humulin®, human insulin of recombinant DNA origin for the treatment of diabetes
(cid:127) Trajenta®, for the treatment of type 2 diabetes
(cid:127)
Jentadueto®, a combination tablet of linagliptin (Trajenta) and metformin hydrochloride for use in the
treatment of type 2 diabetes
Jardiance®, for the treatment of type 2 diabetes (approved in the U.S., Europe, and Japan in 2014)
(cid:127)
(cid:127) Trulicity™, for the treatment of type 2 diabetes (approved in the U.S. and Europe in 2014)
(cid:127) Glyxambi®, a combination tablet of linagliptin and empagliflozin (Jardiance) for the treatment of type 2
diabetes (approved in the U.S. in January 2015)
(cid:127) Forteo®, for the treatment of osteoporosis in postmenopausal women and men at high risk for fracture
and for glucocorticoid-induced osteoporosis in men and postmenopausal women
(cid:127) Evista®, for the prevention and treatment of osteoporosis in postmenopausal women and for the
reduction of the risk of invasive breast cancer in postmenopausal women with osteoporosis and
postmenopausal women at high risk for invasive breast cancer
22
(cid:127) Humatrope®, for the treatment of human growth hormone deficiency and certain pediatric growth
conditions
(cid:127) Axiron®, a topical solution of testosterone, applied by underarm applicator, for replacement therapy in
men for certain conditions associated with a deficiency or absence of testosterone
Neuroscience products, including:
(cid:127) Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain,
generalized anxiety disorder, and in the U.S. for the management of fibromyalgia and of chronic
musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis
(cid:127) Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I
disorder, and bipolar maintenance
(cid:127) Strattera®, for the treatment of attention-deficit hyperactivity disorder
(cid:127) Prozac®, for the treatment of major depressive disorder, obsessive-compulsive disorder, bulimia
nervosa, and panic disorder
(cid:127) Amyvid®, a radioactive diagnostic agent for positron emission tomography imaging of beta-amyloid
neuritic plaques in the brains of adult patients with cognitive impairment who are being evaluated for
Alzheimer's disease and other causes of cognitive decline
Oncology products, including:
(cid:127) Alimta®, for the first-line treatment, in combination with another agent, of advanced non-small cell
lung cancer (NSCLC) for patients with non-squamous cell histology; for the second-line treatment of
advanced non-squamous NSCLC; as monotherapy for the maintenance treatment of advanced non-
squamous NSCLC in patients whose disease has not progressed immediately following
chemotherapy treatment; and in combination with another agent, for the treatment of malignant
pleural mesothelioma
(cid:127) Erbitux®, indicated both as a single agent and with another chemotherapy agent for the treatment of
certain types of colorectal cancers; and as a single agent or in combination with radiation therapy for
the treatment of certain types of head and neck cancers
(cid:127) Gemzar®, for the treatment of pancreatic cancer; in combination with other agents, for the treatment
of metastatic breast cancer, NSCLC, and advanced or recurrent ovarian cancer; and in the European
Union (EU) for the treatment of bladder cancer
(cid:127) Cyramza®, approved in 2014 in the U.S. and the EU both as a single agent and in combination with
another agent for advanced or metastatic gastric cancer; and approved in 2014 in the U.S. in
combination with another agent as a second-line treatment of metastatic NSCLC
Cardiovascular products, including:
(cid:127) Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia
(cid:127) Effient®, for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients
with acute coronary syndrome who are managed with an artery-opening procedure known as
percutaneous coronary intervention (PCI), including patients undergoing angioplasty, atherectomy, or
stent placement
(cid:127) ReoPro®, for use as an adjunct to PCI for the prevention of cardiac ischemic complications
33
Animal Health Products
Our products for food animals include:
(cid:127) Rumensin®, a cattle feed additive that improves feed efficiency and growth and also controls and
prevents coccidiosis
(cid:127) Posilac®, a protein supplement to improve milk productivity in dairy cows
(cid:127) Paylean® and Optaflexx®, leanness and performance enhancers for swine and cattle, respectively
(cid:127) Tylan®, an antibiotic used to control certain diseases in cattle, swine, and poultry
(cid:127) Micotil®, Pulmotil®, and Pulmotil AC™, antibiotics used to treat respiratory disease in cattle, swine, and
poultry, respectively
(cid:127) Coban®, Monteban®, and Maxiban®, anticoccidial agents for use in poultry
(cid:127) Surmax™ (sold as Maxus™ in some countries), a performance enhancer for swine and poultry
Our products for companion animals include:
(cid:127) Trifexis®, a monthly chewable tablet for dogs that kills fleas, prevents flea infestations, prevents
heartworm disease, and controls intestinal parasite infections
(cid:127) Comfortis®, a chewable tablet that kills fleas and prevents flea infestations on dogs
Recently acquired Novartis AH products include:
(cid:127) Denagard®, an antibiotic for the control and treatment of respiratory and enteric diseases in swine
and poultry
(cid:127) Milbemax®, a broad spectrum intestinal wormer which, if given monthly, also offers prevention against
heartworm
(cid:127) Sentinel (outside the U.S.), a monthly tablet for the prevention of flea populations, the concurrent
prevention of heartworm disease and the treatment of roundworms, hookworms, and whipworms in
dogs
(cid:127) Atopica®, for the treatment of chronic manifestations of atopic dermatitis in dogs and for the
symptomatic treatment of chronic allergic dermatitis in cats
(cid:127) Fortekor™, for the treatment of congestive heart failure in dogs and reduction of proteinurea
associated with chronic kidney disease in cats
Marketing
We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various
countries to meet local needs.
Human Pharmaceuticals—United States
In the U.S., we distribute human pharmaceutical products principally through independent wholesale
distributors, with some sales directly to pharmacies. In 2014, 2013, and 2012, three wholesale distributors in
the U.S.—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health, Inc.—each
accounted for between 8 percent and 19 percent of our consolidated total revenue. No other distributor
accounted for more than 10 percent of consolidated total revenue in any of those years.
We promote our major human pharmaceutical products in the U.S. through sales representatives who call
upon physicians and other health care professionals. We advertise in medical 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 U.S., and we maintain websites with information about our major
products. We supplement our employee sales force with contract sales organizations as appropriate to
leverage our own resources and the strengths of our partners in various markets.
4
4
We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care
organizations (MCOs), government and long-term care institutions, hospitals, and certain retail pharmacies.
We enter into arrangements with these organizations providing for discounts or rebates on our products.
Human Pharmaceuticals—Outside the United States
Outside the U.S., we promote our human pharmaceutical products primarily through sales representatives.
While the products marketed vary from country to country, endocrinology products constitute the largest
single group in total revenue. Distribution patterns vary from country to country. In most countries in which we
operate, we maintain our own sales organizations, but in some smaller countries we market our products
through independent distributors.
Human Pharmaceutical Marketing Collaborations
Certain of our human pharmaceutical products are marketed in arrangements with other pharmaceutical
companies, including the following:
(cid:127) Trajenta, Jentadueto, Jardiance, and Glyxambi are being jointly developed and commercialized with
us by Boehringer Ingelheim. Our collaboration with Boehringer Ingelheim also covers two potential
future diabetes products: our new insulin glargine product and a fixed-dose combination of
empagliflozin and metformin hydrochloride.
(cid:127) We co-promote Cymbalta in Japan with Shionogi & Co. Ltd.
(cid:127) Erbitux is marketed in the U.S. and Canada by Bristol-Myers Squibb. We have the option to co-
promote Erbitux in the U.S. and Canada. Outside the U.S. and Canada, Erbitux is commercialized by
Merck KGaA. We receive royalties from Bristol-Myers Squibb and Merck KGaA.
(cid:127) Effient is co-promoted with us by Daiichi Sankyo or affiliated companies in the U.S., major European
markets, Brazil, Mexico, and certain other countries. We retain sole marketing rights in Canada,
Australia, Russia, and certain other countries. Daiichi Sankyo retains sole marketing rights in Japan
and certain other countries.
Animal Health Products
Our Elanco animal health business unit employs field salespeople throughout the U.S. and has an extensive
sales force outside the U.S. Elanco sells its products primarily to wholesale distributors. Elanco promotes its
products primarily to producers and veterinarians for food animal products and to veterinarians for companion
animal products. Elanco also advertises certain companion animal products directly to pet owners.
Competition
Our human pharmaceutical products compete globally with products of many other companies in highly
competitive markets. Our animal health products compete globally with products of animal health care
companies as well as pharmaceutical, chemical, and other companies that operate animal health businesses.
Important competitive factors for both human pharmaceutical and animal health products include
effectiveness, safety, and ease of use; price and demonstrated cost-effectiveness; marketing effectiveness;
and research and development of new products, processes, and uses. Most new products that we introduce
must compete with other branded or generic products already on the market or products that are later
developed by competitors. If competitors introduce new products or delivery systems with therapeutic or cost
advantages, our products can be subject to decreased sales, progressive price reductions, or both.
We believe our long-term competitive success depends upon discovering and developing (either alone or in
collaboration with others) or acquiring innovative, cost-effective human pharmaceutical and animal health
products that provide improved outcomes and deliver value to payers, together with our ability to continuously
improve the productivity of our operations in a highly competitive environment. There can be no assurance
that our research and development efforts will result in commercially successful products, and it is possible
that our products will become uncompetitive from time to time as a result of products developed by our
competitors.
55
Generic Pharmaceuticals
One of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and the EU,
the regulatory approval process for human pharmaceuticals (other than biological products (biologics))
exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy,
allowing generic manufacturers to rely on the safety and efficacy of the innovator product. Therefore, generic
manufacturers generally invest far less than we do in research and development and can price their products
much lower than our branded products. Accordingly, when a branded non-biologic human pharmaceutical
loses its market exclusivity, it normally faces intense price competition from generic forms of the product.
Public and private payers typically encourage the use of generics as alternatives to brand-name drugs in their
healthcare programs. Laws in the U.S. generally allow, and in many cases require, pharmacists to substitute
generic drugs that have been rated under government procedures to be essentially equivalent to a brand-
name drug. Where substitution is mandatory, it must be made unless the prescribing physician expressly
forbids it. In many countries outside the U.S., intellectual property protection is weak and we must compete
with generic or counterfeit versions of our products. Many of our animal health products also compete with
generics.
Biosimilars
Several of our current products, including Cyramza, Erbitux, and ReoPro, and many of the new molecular
entities (NMEs) in our research pipeline are biologics. Competition for Lilly’s biologics may be affected by the
approval of follow-on biologics, also known as biosimilars. A biosimilar is a biologic for which marketing
approval is granted based on less than a full safety and efficacy package due to the physical/structural
similarity of the biosimilar to an already-approved biologic as well as reliance on the finding of safety and
efficacy of the already-approved product. Globally, governments have or are developing regulatory pathways
to approve biosimilars as alternatives to innovator-developed biologics, but the patent for the existing,
branded product must expire in a given market before biosimilars may enter that market. The extent to which
a biosimilar, once approved, will be substituted for the innovator biologic in a way that is similar to traditional
generic substitution for non-biologic products, is not yet entirely clear, and will depend on a number of
regulatory and marketplace factors that are still developing.
Biosimilars may present both competitive challenges and opportunities. For example, with our partner
Boehringer Ingelheim we have developed a new insulin glargine product which has the same amino acid
sequence as the currently marketed product. Our product has received marketing approval in the EU and
tentative approval in the U.S. We intend to begin European launches later in 2015 following expiration of the
compound patent for insulin glargine.
Managed Care Organizations
The growth of MCOs in the U.S. is also a major factor in the competitive marketplace for human
pharmaceuticals. It is estimated that approximately two-thirds of the U.S. population now participates in some
version of managed care. MCOs can include medical insurance companies, medical plan administrators,
health-maintenance organizations, Medicare Part D prescription drug plans, alliances of hospitals and
physicians, and other physician organizations. MCOs have been consolidating into fewer, larger entities, thus
enhancing their purchasing strength and importance.
MCOs typically maintain formularies specifying which drugs are covered under their plans. Exclusion of a
drug from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently,
pharmaceutical companies compete aggressively to have their branded products included. Where possible,
companies compete for inclusion based upon unique features of their products, such as greater efficacy,
fewer side effects, or greater patient ease of use. A lower overall cost of therapy is also an important factor.
Price is becoming an increasingly important factor in MCO formulary decisions, particularly in treatment areas
in which the MCO has taken the position that multiple branded products are therapeutically comparable. As
noted above, generic drugs typically have lower costs than brand-name drugs. MCOs often favor generics for
this reason.
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Patents, Trademarks, and Other Intellectual Property Rights
Overview
Intellectual property protection is critical to our ability to successfully commercialize our life sciences
innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a
large number of patents in the U.S. and many other countries relating to products, product uses, formulations,
and manufacturing processes. In addition, as discussed below, for some products we have additional effective
intellectual property protection in the form of data protection under pharmaceutical regulatory laws.
The patent protection anticipated to be of most relevance to human pharmaceuticals is provided by national
patents claiming the active ingredient (the compound patent), particularly those in major markets such as the
U.S., various European countries, and Japan. These patents may be issued based upon the filing of
international patent applications, usually filed under the Patent Cooperation Treaty (PCT). Patent applications
covering the compounds are generally filed during the Discovery Research Phase of the drug discovery
process, which is described in the “Research and Development” section of “Business.” In general, national
patents in each relevant country are available for a period of 20 years from the filing date of the PCT
application, which is often years prior to the launch of a commercial product. Further patent term adjustments
and restorations may extend the original patent term:
(cid:127) Patent term adjustment is a statutory right available to all U.S. patent applicants to provide relief in
the event that a patent is delayed during examination by the U.S. Patent and Trademark Office.
(cid:127) Patent term restoration is a statutory right provided to U.S. patents that claim inventions subject to
review by the U.S. Food and Drug Administration (FDA). A single patent for a human pharmaceutical
product may be eligible for patent term restoration to make up for a portion of the time invested in
clinical trials and the FDA review process. Patent term restoration is limited by a formula and cannot
be calculated until product approval due to uncertainty about the duration of clinical trials and the time
it takes the FDA to review an application. There is a five-year cap on any restoration, and no patent
may be extended for more than 14 years beyond FDA approval. Some countries outside the U.S. also
offer forms of patent term restoration. For example, Supplementary Protection Certificates are
sometimes available to extend the life of a European patent up to an additional five years. Similarly, in
Japan, Korea, and Australia, patent terms can be extended up to five years, depending on the length
of regulatory review and other factors.
Loss of effective patent protection for human pharmaceuticals typically results in the loss of effective market
exclusivity for the product, which can result in severe and rapid decline in sales of the product. However, in
some cases the innovator company may be protected from approval of generic or other follow-on versions of
a new medicine beyond the expiration of the compound patent through manufacturing trade secrets, later-
expiring patents on methods of use or formulations, or data protection that may be available under
pharmaceutical regulatory laws. The primary forms of data protection are as follows:
(cid:127) Regulatory authorities in major markets generally grant data package protection for a period of years
following new drug approvals in recognition of the substantial investment required to complete clinical
trials. Data package protection prohibits other manufacturers from submitting regulatory applications
for marketing approval based on the innovator company’s regulatory submission data for the drug.
The base period of data package protection depends on the country. For example, the period is five
years in the U.S. (12 years for new biologics as described below), 10 years in the EU, and eight years
in Japan. The period begins on the date of product approval and runs concurrently with the patent
term for any relevant patent.
(cid:127) Under the Biologics Price Competition and Innovation Act (enacted in the U.S. in 2010), the FDA has
the authority to approve similar versions (biosimilars) of innovative biologics. A competitor seeking
approval of a biosimilar must file an application to show its molecule is highly similar to an approved
innovator biologic, address the challenges of biologics manufacturing, and include a certain amount
of safety and efficacy data which the FDA will determine on a case-by-case basis. Under the data
protection provisions of this law, the FDA cannot approve a biosimilar application until 12 years after
initial marketing approval of the innovator biologic, subject to certain conditions.
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(cid:127)
In the U.S., the FDA has the authority to grant additional data protection for approved drugs where
the sponsor conducts specified testing in pediatric or adolescent populations. If granted, this
“pediatric exclusivity” provides an additional six months, which are added to the term of data
protection as well as to the term of any relevant patents, to the extent these protections have not
already expired.
(cid:127) Under the U.S. orphan drug law, a specific use of a drug or biological product can receive "orphan"
designation if it is intended to treat a disease or condition affecting fewer than 200,000 people in the
U.S., or affecting more than 200,000 people but not reasonably expected to recover its development
and marketing costs through U.S. sales. Among other benefits, orphan designation entitles the
particular use of the drug to seven years of market exclusivity, meaning that the FDA cannot (with
limited exceptions) approve another marketing application for the same drug for the same indication
until expiration of the seven-year period. Unlike pediatric exclusivity, the orphan exclusivity period is
independent of and runs in parallel with any applicable patents.
Outside the major markets, the adequacy and effectiveness of intellectual property protection for human
pharmaceuticals varies widely. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs)
administered by the World Trade Organization, more than 140 countries have agreed to provide non-
discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights
are available to patent owners. Because of TRIPs transition provisions, dispute resolution mechanisms,
substantive limitations, and ineffectual implementation, it is difficult to assess when and how much we will
benefit commercially from this protection.
Certain of our Elanco animal health products are covered by patents or other forms of intellectual property
protection. Historically, upon loss of effective market exclusivity for our animal health products, we have not
generally experienced the rapid and severe declines in revenues that are common in the human
pharmaceutical segment.
There is no assurance that the patents we are seeking will be granted or that the patents we hold 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
marketing alternative products or formulations that compete with our patented products. In addition,
competitors or other third parties sometimes may assert claims that our activities infringe patents or other
intellectual property rights held by them, or allege a third-party right of ownership in our existing intellectual
property.
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 compound patent.
The most relevant U.S. patent protection or data protection for our larger or recently launched patent-
protected marketed products is as follows:
(cid:127) Alimta is protected by a compound patent (2016) plus pediatric exclusivity (2017), and a vitamin
dosage regimen patent (2021) plus pediatric exclusivity (2022).
(cid:127) Cialis is protected by compound and use patents (2017).
(cid:127) Cyramza is protected by biologics data package protection (2026).
(cid:127) Effient is protected by a compound patent (2017) and patents covering methods of using Effient with
aspirin (2022).
(cid:127) Forteo is protected by patents primarily covering its formulation and related processes (2018) and use
patents (2019).
(cid:127)
Jardiance is protected by a compound patent (2025 not including possible patent extension).
(cid:127) Strattera is protected by a patent covering its use in treating attention deficit-hyperactivity disorder
(2016) plus pediatric exclusivity (2017).
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(cid:127) Trajenta and Jentadueto are protected by a compound patent (2023), and Boehringer Ingelheim has
applied for a patent extension to 2025 under the patent restoration laws.
(cid:127) Trulicity is protected by a compound patent (2024 not including possible patent extension).
Outside the U.S., important patent protection or data protection includes:
(cid:127) Alimta in major European countries (compound patent December 2015, vitamin dosage regimen
patent 2021) and Japan (compound patent December 2015, patent covering use to treat cancer
concomitantly with vitamins 2021).
(cid:127) Cialis in major European countries (compound patent 2017).
(cid:127) Cymbalta in Japan (data package protection 2018). In major European countries, our Cymbalta data
package protection expired in 2014, and we expect the first entry of generic competitors in 2015.
(cid:127) Forteo in Japan (data package protection 2018; patent covering its formulation and related process
2019).
(cid:127) Zyprexa in Japan (compound patent December 2015).
Necitumumab, our NME that has been submitted for regulatory review, is protected by a compound patent
(2025 not including possible patent extension), and upon U.S. approval, would be protected for 12 years by
biologics data package protection. See "Management’s Discussion and Analysis—Late-Stage Pipeline”, for
more information about this molecule.
Worldwide, we sell all of our major products under trademarks that we consider in the aggregate to be
important to our operations. Trademark protection varies throughout the world, with protection continuing in
some countries as long as the mark is used, and in other countries as long as it is registered. Registrations
are normally for fixed but renewable terms.
Patent Licenses
Most of our major products were discovered in our own laboratories and are not subject to significant license
agreements. Two of our largest products, Cialis and Alimta, are subject to patent assignments or licenses
granted to us by others.
(cid:127) The compound patent for Cialis is the subject of a license agreement with GlaxoSmithKline (Glaxo),
which assigns to us exclusively all rights in the compound. The agreement calls for royalties of a
single-digit percentage of net sales. The agreement is not subject to termination by Glaxo for any
reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period.
(cid:127) The compound patent for Alimta is the subject of a license agreement with Princeton University,
granting us an irrevocable exclusive worldwide license to the compound patents for the lives of the
patents in the respective territories. The agreement calls for royalties of a single-digit percentage of
net sales. The agreement is not subject to termination by Princeton for any reason other than a
material breach by Lilly of the royalty obligation, after a substantial cure period. Alimta is also the
subject of a worldwide, nonexclusive license to certain patents owned by Takeda Pharmaceutical
Company Limited. The agreement calls for royalties of a single-digit percentage of net sales in
countries covered by a relevant patent. The agreement is subject to termination for material default
and failure to cure by Lilly and in the event that Lilly becomes bankrupt or insolvent.
Patent Challenges
In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the
Hatch-Waxman Act, made a complex set of changes to both patent and new-drug-approval laws for human
pharmaceuticals. Before the Hatch-Waxman Act, no drug could be approved without providing the FDA
complete safety and efficacy studies, i.e., a complete New Drug Application (NDA). The Hatch-Waxman Act
authorizes the FDA to approve generic versions of innovative human pharmaceuticals (other than biologics)
without such information by filing an Abbreviated New Drug Application (ANDA). In an ANDA, the generic
manufacturer must demonstrate only “bioequivalence” between the generic version and the NDA-approved
drug—not safety and efficacy.
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Absent a patent challenge, the FDA cannot approve an ANDA until after the innovator’s 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 innovator’s NDA are invalid or not infringed. This
allegation is commonly known as a “Paragraph IV certification.” The innovator must then file suit against the
generic manufacturer to protect its patents. The FDA is then prohibited from approving the generic company’s
application for a 30- to 42-month period (which can be shortened or extended by the trial court judge hearing
the patent challenge). If one or more of the NDA-listed patents are challenged, the first filer(s) of a Paragraph
IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers.
Generic manufacturers use Paragraph IV certifications extensively to challenge patents on innovative human
pharmaceuticals. In addition, generic companies have shown an increasing willingness to launch “at risk,” i.e.,
after receiving ANDA approval but before final resolution of their patent challenge. For example, we are
currently in litigation with numerous generic manufacturers arising from their Paragraph IV certifications
challenging the vitamin dosage regimen patent for Alimta. For more information on Hatch-Waxman litigation
involving the company, see “Financial Statements and Supplementary Data—Note 15, Contingencies."
Outside the U.S., the legal doctrines and processes by which pharmaceutical patents can be challenged vary
widely. In recent years, we have experienced an increase in patent challenges from generic manufacturers in
many countries outside the U.S., and we expect this trend to continue. For more information on administrative
challenges and litigation involving our Alimta vitamin dosage regimen patents in Europe and Japan, see
“Financial Statements and Supplementary Data—Note 15, Contingencies.”
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 governmental approvals is extremely costly and can significantly delay product introductions.
Promotion, marketing, manufacturing, and distribution of human pharmaceutical and animal health products
are extensively regulated in all major world markets. We conduct extensive post-marketing surveillance of the
safety of the products we sell. In addition, our operations are subject to complex federal, state, local, and
foreign laws and regulations concerning the environment, occupational health and safety, and privacy. Animal
health product regulations address the administration of the product in or on the animal, and in the case of
food animal products, the impact on humans who consume the food as well as the impact on the environment
at the production site. The laws and regulations affecting the manufacture and sale of current products and
the discovery, development, and introduction of new products will continue to require substantial effort,
expense, and capital investment.
Of particular importance is the FDA in the United States. Pursuant to the Federal Food, Drug, and Cosmetic
Act, the FDA has jurisdiction over all of our human pharmaceutical products and certain animal health
products in the U.S. and administers requirements covering the testing, safety, effectiveness, manufacturing,
quality control, distribution, labeling, marketing, advertising, dissemination of information, and post-marketing
surveillance of those products. The U.S. Department of Agriculture and the U.S. Environmental Protection
Agency also regulate some animal health products.
The FDA extensively regulates all aspects of manufacturing quality for human pharmaceuticals under its
current Good Manufacturing Practices (cGMP) regulations. Outside the U.S., our products and operations are
subject to similar regulatory requirements, notably by the European Medicines Agency in the EU and the
Ministry of Health, Labor and Welfare in Japan. Specific regulatory requirements vary from country to country.
We make substantial investments of capital and operating expenses to implement comprehensive, company-
wide quality systems in our manufacturing, product development, and process development operations to
ensure sustained compliance with cGMP and similar regulations. However, in the event we fail to adhere to
these requirements in the future, we could be subject to interruptions in production, fines and penalties, and
delays in new product approvals. Certain of our products are manufactured by third parties, and their failure to
comply with these regulations could adversely affect us through failure to supply product to us or delays in
new product approvals.
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The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the
manner in which manufacturers interact with purchasers and prescribers, are subject to various other U.S.
federal and state laws, including the federal anti-kickback statute and the False Claims Act and state laws
governing kickbacks, false claims, unfair trade practices, and consumer protection. These laws are
administered by, among others, the Department of Justice (DOJ), the Office of Inspector General of the
Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel
Management, and state attorneys general. Over the past several years, the FDA, the DOJ, and many of these
other agencies have increased their enforcement activities with respect to pharmaceutical companies and
increased the inter-agency coordination of enforcement activities. Several claims brought by these agencies
against Lilly and other companies under these and other laws have resulted in corporate criminal sanctions
and very substantial civil settlements.
The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits certain individuals and entities, including
U.S. publicly traded companies, from promising, offering, or giving anything of value to foreign officials with
the corrupt intent of influencing the foreign official for the purpose of helping the company obtain or retain
business or gain any improper advantage. The FCPA also imposes specific recordkeeping and internal
controls requirements on U.S. publicly traded companies. As noted above, outside the U.S., our business is
heavily regulated and therefore involves significant interaction with foreign officials. Additionally, in many
countries outside the U.S., the health care providers who prescribe human pharmaceuticals are employed by
the government and the purchasers of human pharmaceuticals are government entities; therefore, our
interactions with these prescribers and purchasers are subject to regulation under the FCPA.
In addition to the U.S. application and enforcement of the FCPA, the various jurisdictions in which we operate
and supply our products have laws and regulations aimed at preventing and penalizing corrupt and
anticompetitive behavior. In recent years, several jurisdictions, including China, Brazil, and the United
Kingdom, have enhanced their laws and regulations in this area, increased their enforcement activities, and/or
increased the level of cross-border coordination and information sharing.
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 U.S. federal and other health care programs.
It is possible that an adverse outcome in future actions could have a material adverse impact on our
consolidated results of operations, liquidity, and financial position.
Regulations Affecting Human Pharmaceutical Pricing, Reimbursement, and Access
In the U.S., we are required to provide rebates to the federal government and respective state governments
on their purchases of our human pharmaceuticals under state Medicaid and Medicaid Managed Care
programs (minimum of 23.1 percent plus adjustments for price increases over time) and rebates to private
payers who cover patients in certain types of health care facilities that serve low-income and uninsured
patients (known as 340B facilities). No rebates are required at this time in the Medicare Part B (physician and
hospital outpatient) program where reimbursement is set on an "average selling price plus 4.3 percent"
formula. Drug manufacturers are required to provide a discount of 50 percent of the cost of branded
prescription drugs for Medicare Part D participants who are in the “doughnut hole” (the coverage gap in
Medicare prescription drug coverage). Additionally, an annual fee is imposed on pharmaceutical
manufacturers and importers that sell branded prescription drugs to specified government programs.
Rebates are also negotiated in the private sector. We give rebates to private payers who provide prescription
drug benefits to seniors covered by Medicare and to private payers who provide prescription drug benefits to
their customers. These rebates are affected by the introduction of competitive products and generics in the
same class.
In most international markets, we operate in an environment of government-mandated cost-containment
programs, which may include price controls, international reference pricing (to other countries’ prices),
discounts and rebates, therapeutic reference pricing (to other, often generic, pharmaceutical choices),
restrictions on physician prescription levels, and mandatory generic substitution.
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Globally, public and private payers are increasingly restricting access to human pharmaceuticals based on the
payers' assessments of comparative effectiveness and value. The U.S. has established the Patient Centered
Outcomes Research Institute (PCORI), a federally-funded, private, non-profit corporation empowered to fund
and disseminate comparative effectiveness research (CER) and build infrastructure for improved outcomes
analysis. While PCORI has no authority to impose formulary changes directly in government-funded health
programs, they are expected to drive an increase in CER studies which payers can use for formulary
decisions and/or medical societies can use to inform medical guidelines development. Many countries outside
of the U.S. use formal health technology assessment processes to determine formulary placement and
purchase price.
We cannot predict the extent to which our business may be affected by these or other potential future
legislative or regulatory developments. However, in general we expect that state, federal, and international
legislative and regulatory developments could have further negative effects on pricing and reimbursement for
our human pharmaceutical products.
Research and Development
Our commitment to research and development dates back more than 100 years. We invest heavily in
research and development because we believe it is critical to our long-term competitiveness. At the end of
2014, we employed approximately 8,145 people in human 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
$4.73 billion in 2014, $5.53 billion in 2013, and $5.28 billion in 2012.
Our internal human pharmaceutical research focuses primarily on our core areas of cancer, diabetes, and
neurodegeneration, and two emerging areas, immunology and pain. We are investing in molecules with multi-
pathway pharmacological efficacy (e.g., dual-action bi-specific antibodies and antibody-drug conjugates) to
expand the potential of our therapeutic portfolio. We have a strong biotechnology research program, with
approximately half of our clinical-stage pipeline currently consisting of biologics. In addition to discovering and
developing NMEs, we seek to expand the value of existing products through new uses, formulations, and
therapeutic approaches that provide additional value to patients. Across all our therapeutic areas, we are
increasingly focusing our efforts on tailored therapeutics, seeking to identify and use advanced diagnostic
tools and other information to identify specific subgroups of patients for whom our medicines—or potentially
those of other companies—will be the best treatment option.
To supplement our internal efforts, we collaborate with others, including academic institutions and research-
based pharmaceutical and biotechnology companies. 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 human pharmaceutical products. We actively seek out external investments in research
and technologies that hold the promise to complement and strengthen our own efforts. These investments
can take many forms, including licensing arrangements, co-development and co-marketing agreements, co-
promotion arrangements, joint ventures, and acquisitions.
Our Elanco animal health innovation strategy is focused on identifying and developing promising technologies
and potential products from internal and external sources to meet unmet veterinary needs. Our animal health
scientists also leverage discoveries from our human health laboratories to develop products to enhance the
health and wellbeing of livestock and pets.
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Human pharmaceutical development is time-consuming, expensive, and risky. On average, only one out of
many thousands of molecules discovered by researchers ultimately becomes an approved medicine. The
process from discovery to regulatory approval can take 12 to 15 years or longer. Drug candidates can fail at
any stage of the process, and even late-stage drug candidates sometimes fail to receive regulatory approval
or achieve commercial success. After approval and launch of a product, we expend considerable resources
on post-marketing surveillance and additional clinical studies to collect and understand the benefits and
potential risks of medicines as they are used as therapeutics. The following describes in more detail the
research and development process for human pharmaceutical products:
Phases of New Drug Development
(cid:127) Discovery Research Phase
The earliest phase of new drug research and development, the discovery phase, can take many years.
Scientists identify, design, and synthesize promising molecules, screening tens of thousands of
molecules for their effect on biological “targets” that appear to play an important role in one or more
diseases. Targets can be part of the body, such as a protein, receptor, or gene; or foreign, such as a
virus or bacteria. Some targets have been proven to affect disease processes, but often the target is
unproven and may later prove to be irrelevant to the disease or to yield insufficient clinical benefit.
Molecules that have the desired effect on the target and meet other design criteria become “lead”
molecules and move to the next phase of development. The probability of any one such lead molecule
becoming a commercial product is extremely low.
(cid:127)
Early Development Phase
The early development phase involves refining lead molecules, understanding how to manufacture them
efficiently, and completing initial testing for safety and efficacy. Safety testing is done first in laboratory
tests and animals as necessary, to identify toxicity and other potential safety issues that would preclude
use in humans. The first human tests (often referred to as Phase I) are normally conducted in small
groups of healthy volunteers to assess safety and find the potential dosing range. After a safe dose has
been established, the drug is administered to small populations of patients (Phase II) to look for initial
signs of efficacy in treating the targeted disease and to continue to assess safety. In parallel, scientists
work to identify safe, effective, and economical manufacturing processes. Long-term animal studies
continue to test for potential safety issues. Of the molecules that enter the early development phase,
typically less than 10 percent move on to the product phase. The early development phase normally
takes several years to complete.
(cid:127)
Product Phase
Product phase (Phase III) molecules have already demonstrated safety and, typically, shown initial
evidence of efficacy. As a result, these molecules generally have a higher likelihood of success. The
molecules are tested in much larger patient populations to demonstrate efficacy to a predetermined level
of statistical significance and to continue to develop the safety profile. These trials are generally global in
nature and are designed to generate the data necessary to submit the molecule to regulatory agencies
for marketing approval. The potential new drug is generally compared with existing competitive
therapies, placebo, or both. The resulting data is compiled and submitted to regulatory agencies around
the world. Phase III testing varies by disease state, but can often last from three to four years.
(cid:127)
Submission Phase
Once a molecule is submitted to regulatory agencies, the time to final marketing approval can vary from
several months to several years, depending on variables such as the disease state, the strength and
complexity of the data presented, the novelty of the target or compound, and the time required for the
agency(ies) to evaluate the submission. There is no guarantee that a potential medicine will receive
marketing approval, or that decisions on marketing approvals or indications will be consistent across
geographic areas.
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We believe our investments in research, both internally and in collaboration with others, have been rewarded
by the large number of new molecules and new indications for existing molecules that we have in all stages of
development. We currently have approximately 55 drug candidates across all stages of human testing and a
larger number of projects in preclinical development. Among our new investigational molecules currently in
the product phase of development or awaiting regulatory approval or launch are potential therapies for
diabetes, various cancers, Alzheimer’s disease, pain, high-risk vascular disease, rheumatoid arthritis,
psoriasis, and psoriatic arthritis. We are studying many other drug candidates in the earlier stages of
development, including molecules targeting various cancers, diabetes, neurodegeneration, pain, immunologic
diseases, anemia, cardiovascular disease, musculoskeletal disorders, and renal diseases. We are also
developing new uses, formulations, or delivery methods for many of these molecules as well as several
currently marketed products. See "Management's Discussion and Analysis—Late-Stage Pipeline," for more
information on certain of our product candidates.
Raw Materials and Product Supply
Most of the principal materials we use in our manufacturing operations are available from more than one
source. However, we obtain certain raw materials principally from only one source. In the event one of these
suppliers was unable to provide the materials or product, we generally seek to maintain sufficient inventory to
supply the market until an alternative source of supply can be implemented. However, in the event of an
extended failure of a supplier, it is possible that we could experience an interruption in supply until we
established new sources or, in some cases, implemented alternative processes.
The majority of our revenue comes from products produced in our own facilities. Our principal active
ingredient manufacturing occurs at four owned sites in the U.S. as well as owned sites in Ireland, Puerto Rico,
and the United Kingdom. Finishing operations, including formulation, filling, assembling, delivery device
manufacturing, and packaging, take place at a number of sites throughout the world. We utilize third parties
for certain active ingredient manufacturing and finishing operations.
We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way
that should 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. To maintain a
stable supply of our products, we take a variety of actions including a company-wide, comprehensive quality
system, inventory management, and back-up sites.
However, human pharmaceutical and animal health 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, process modifications, and regulatory approvals. Accordingly, if we
were to experience extended plant shutdowns at one of our own facilities, extended failure of a contract
supplier, 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, distribution, and dissemination of information about our medicines.
Quality of production processes involves strict control of 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 Lilly 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 audits
and monitors all aspects of quality related to human pharmaceutical and animal health manufacturing
procedures and systems in the parent company, subsidiaries and affiliates, and third-party suppliers.
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Risk Factors
In addition to the other information contained in this Annual Report, 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.
(cid:127) Pharmaceutical research and development is very costly and highly uncertain; we may not succeed
in developing or acquiring commercially successful products sufficient in number or value to replace
revenues of products losing intellectual property protection.
There are many difficulties and uncertainties inherent in human pharmaceutical research and development
and the introduction of new products. There is a high rate of failure inherent in new drug discovery and
development. To bring a drug from the discovery phase to market typically takes over a decade and often
costs well in excess of $1 billion. Failure can occur at any point in the process, including late in the process
after substantial investment. As a result, most funds invested in research programs will not generate financial
returns. New product candidates that appear promising in development may fail to reach the market or may
have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary
regulatory approvals or payer reimbursement, limited scope of approved uses, difficulty or excessive costs to
manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies are
establishing increasingly high hurdles for the efficacy and safety of new products; delays and uncertainties in
drug approval processes 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.
We cannot state with certainty when or whether our products now under development will be approved or
launched; whether we will be able to develop, license or otherwise acquire additional product candidates or
products; or whether our products, once launched, will be commercially successful. We must maintain a
continuous flow of successful new products and successful new indications or brand extensions for existing
products sufficient both to cover our substantial research and development costs and to replace sales that
are lost as profitable products lose intellectual property exclusivity or are displaced by competing products or
therapies. Failure to do so in the short-term or long-term would have a material adverse effect on our
business, results of operations, cash flows, financial position and prospects.
(cid:127) We face intense competition from multinational pharmaceutical companies, biotechnology
companies, and lower-cost generic and biosimilar manufacturers.
We compete with a 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 revenues can be
adversely affected by the introduction by competitors of branded products that are perceived as superior by
the marketplace, by generic or biosimilar versions of our branded products, and by generic or biosimilar
versions of other products in the same therapeutic class as our branded products. Our revenues can also be
adversely affected by treatment innovations that eliminate or minimize the need for treatment with drugs.
See “Business—Competition,” for more details.
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15
(cid:127) We depend on products with intellectual property protection for most of our revenues, cash flows,
and earnings; we have lost or will lose effective intellectual property protection for many of those
products in the next several years, which may result in rapid and severe declines in revenues.
A number of our top-selling human pharmaceutical products have recently lost, or will lose in the next several
years, significant patent protection and/or data protection in the United States (U.S.) as well as key countries
outside the U.S., as illustrated in the tables below:
U.S. Revenues
(2014)
($ in millions)
1,229.5
$
Percent of
Worldwide
Revenues
(2014)
6%
1,039.9
539.0
452.5
394.5
207.2
5%
3%
2%
2%
1%
Revenues
Outside U.S.
(2014)
($ in millions)
1,562.5
$
Percent of
Worldwide
Revenues
(2014)
8%
1,251.1
1,194.2
917.5
783.0
6%
6%
5%
4%
Product
Alimta
Cialis
Forteo
Strattera
Effient
Evista
Product
Alimta
Cialis
Cymbalta
Zyprexa
Forteo
Patent / Data Protection - U.S.
Compound patent plus pediatric exclusivity 2017;
Vitamin dosage regimen patent plus pediatric exclusivity
2022
Compound patent 2017
Formulation and related process patents 2018; use patents
2019
Use patent plus pediatric exclusivity 2017
Compound patent 2017; use patents 2022
Use patents March 2014
Patent / Data Protection - Major Europe / Japan
Major European countries: compound patent December
2015, vitamin dosage regimen patent 2021
Japan: compound patent December 2015, use patent to
treat cancer concomitantly with vitamins 2021
Major European countries: compound patent 2017
Major European countries: data package protection 2014
Japan: data package protection 2018
Japan: Compound patent December 2015
Japan: Data package protection 2018; formulation and
related process patent 2019
Certain other significant products no longer have effective exclusivity through patent protection or data
protection. For non-biological products, loss of exclusivity (whether by expiration or as a consequence of
litigation) typically results in the entry of one or more generic competitors, leading to a rapid and severe
decline in revenues. For biological products (such as Humalog, Humulin, and Erbitux), loss of exclusivity
may or may not result in the near-term entry of competitor versions (i.e., biosimilars) due to development
timelines, manufacturing challenges, and/or uncertainties in the regulatory pathways for approval of the
competitor versions. See “Management’s Discussion and Analysis—Executive Overview—Other Matters,”
and "Business—Patents, Trademarks, and Other Intellectual Property Rights," for more details.
(cid:127) Our long-term success depends on intellectual property protection; if our intellectual property rights
are invalidated, circumvented, or weakened, our business will be adversely affected.
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 and
capital as well as other expenditures required to bring new drugs to the market.
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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 human
pharmaceutical patents; as a result, we expect that our U.S. patents on major pharmaceutical products will
be routinely challenged, and there can be no assurance that our patents will be upheld. We face generic
manufacturer challenges to our patents outside the U.S. as well. The entry of generic competitors typically
results in rapid and severe declines in sales. 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. See “Business—Patents, Trademarks, and Other Intellectual
Property Rights,” and "Financial Statements and Supplementary Data—Note 15, Contingencies," for more
details.
(cid:127) Our human pharmaceutical business is subject to increasing government price controls and other
public and private restrictions on pricing, reimbursement, and access for our drugs.
In the U.S., prices for specialty and brand name pharmaceuticals, congressional investigations into
manufacturer’s pricing policies, and the federal budget process continue to drive legislative debate. These
policy and political issues increase the risk that taxes, fees, rebates or other federal measures may be
enacted. As a result, pharmaceutical companies may see either a reduction in revenue or increase in
expenses. President Obama’s fiscal year 2016 budget includes a number of key health legislative proposals
affecting biopharmaceuticals, including a reduction in biologic data exclusivity, modifications to Medicare
Parts B and D, and new language that would allow the Department of Health and Human Services to
negotiate prices for biologics and drugs on the specialty tier in Part D. Savings projected under these
proposals are targeted as a means to fund health care expenditures, such as the Medicare Sustainable
Growth Rate, and non-health care expenditures. State and federal health care proposals, including price
controls, continue to be debated, and if implemented could negatively affect future consolidated results of
operations.
In the U.S. private sector, the growth of managed care organizations (MCOs) is also a major factor in the
competitive marketplace for human pharmaceuticals. It is estimated that approximately two-thirds of the U.S.
now participates in some form of managed care. MCOs have been consolidating into fewer, larger entities,
thus enhancing their purchasing strength and importance. MCOs typically maintain formularies specifying
which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply
reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete
aggressively to have their branded products included. Price is becoming an increasingly important factor in
MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that
multiple branded products are therapeutically comparable. These downward pricing pressures could
negatively affect future consolidated results of operations.
International operations also are generally subject to extensive price and market regulations. Cost-
containment measures exist in a number of countries, including additional price controls and mechanisms to
limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the
pressures on national and regional health care budgets that come from a growing aging population and
ongoing economic challenges. In addition, governments in many emerging markets are becoming
increasingly active in expanding health care system offerings. Given the budget challenges of increasing
health care coverage for citizens, policies may be proposed that promote generics only and reduce current
and future access to human pharmaceutical products.
We expect pricing, reimbursement, and access pressures from both governments and private payers inside
and outside the U.S. to become more severe. See “Business—Regulations Affecting Human Pharmaceutical
Pricing, Reimbursement, and Access,” for more details.
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(cid:127) Unanticipated changes in our tax rates or exposure to additional tax liabilities could increase our
income taxes and decrease our net income.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Changes in the relevant tax
laws, regulations, administrative practices, principles, and interpretations could adversely affect our future
effective tax rates and results of operations. The U.S. and a number of other countries are actively
considering changes in this regard. The Obama administration has proposed changes to the manner in
which the U.S. would tax the international income of U.S.-based companies, including unremitted earnings of
foreign subsidiaries. There have also been tax proposals under discussion or introduced in the U.S.
Congress that could change the manner in which, and rate at which, income of U.S. companies would be
taxed. While it is uncertain how the U.S. Congress may address U.S. tax policy matters in the future, reform
of U.S. taxation, including taxation of international income, will continue to be a topic of discussion for the
U.S. Congress and the Obama administration. Additionally, the Organisation for Economic Co-operation and
Development launched and continues to advance an initiative to analyze and potentially influence
international tax policy in major countries in which we operate. A significant change to the U.S. or
international tax framework, including changes to the taxation of international income, could have a material
adverse effect on our results of operations. See "Financial Statements and Supplementary Data—Note 13,
Income Taxes," for more details.
(cid:127) Changes in foreign currency rates can significantly affect our revenue and income.
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure
from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the
Japanese yen, and the British pound against the euro. While we manage a portion of these exposures
through hedging and other risk management techniques, significant fluctuations in currency rates can have a
substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses.
(cid:127) Regulatory compliance problems could be damaging to the company.
The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the
manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to extensive
regulation. Many companies, including Lilly, have been subject to claims related to these practices asserted
by federal, state and foreign governmental authorities, private payers, and consumers. These claims have
resulted in substantial expense and other significant consequences to us. It is possible that we could
become subject to such investigations and that the outcome could include criminal charges and fines,
penalties, or other monetary or non-monetary remedies, including exclusion from U.S. federal and other
health care programs. In addition, regulatory issues concerning compliance with current Good Manufacturing
Practices regulations (and comparable foreign 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 issues. See “Business—Regulation of our Operations,” for more
details.
(cid:127) Pharmaceutical products can develop unexpected safety or efficacy concerns, which could have a
material adverse effect on revenues and income.
Human pharmaceutical products receive regulatory approval based on data obtained in controlled clinical
trials of limited duration. After approval, the products are used for longer periods of time by much larger
numbers of patients; we and others (including regulatory agencies and private payers) collect extensive
information on the efficacy and safety of our marketed products by continuously monitoring the use of our
products in the marketplace. In addition, we or others may conduct post-marketing clinical studies on efficacy
and safety of our marketed products. New safety or efficacy data from both market surveillance and post-
marketing clinical studies may result in product label changes that could reduce the product's market
acceptance and result in declining sales. Serious safety or efficacy issues that arise after approval for
marketing could result in voluntary or mandatory product recalls or withdrawals from the market. Safety
issues could also result in costly product liability claims.
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(cid:127) We face many product liability claims and are self-insured; we could face large numbers of claims in
the future, which could adversely affect our business.
We are subject to a substantial number of product liability claims involving primarily Byetta®, Prozac, and
Actos®. See “Financial Statements and Supplementary Data—Note 15, Contingencies,” for more information
on our current product liability litigation. Because of the nature of pharmaceutical products, we could become
subject to large numbers of product liability claims for these or other products in the future, which could
require substantial expenditures to resolve and, if involving marketed products, could adversely affect sales
of the product. Due to a very restrictive market for product liability insurance, we are self-insured for product
liability losses for all our currently marketed products.
(cid:127) Manufacturing difficulties or disruptions could lead to product supply problems.
Pharmaceutical manufacturing is complex and highly regulated. Manufacturing difficulties at our facilities or
contracted facilities, or the failure or refusal of a contract manufacturer to supply contracted quantities, could
result in product shortages, leading to lost revenue. Such difficulties or disruptions could result from quality
or regulatory compliance problems, natural disasters, or inability to obtain sole-source raw or intermediate
materials. In addition, given the difficulties in predicting sales of new products and the very long lead times
necessary for the expansion and regulatory qualification of pharmaceutical manufacturing capacity, it is
possible that we could have difficulty meeting demand for new products. See “Business—Raw Materials and
Product Supply,” for more details.
(cid:127) We depend on information technology systems and infrastructure to operate our business; system
inadequacies or operating failures could harm our business.
We rely to a large extent on the efficient and uninterrupted operation of complex information technology
systems and networks, some of which are within the company and some of which are outsourced. These
systems and networks are potentially vulnerable to damage or interruption from a variety of sources,
including energy or telecommunications failures, breakdowns, natural disasters, terrorism, war, computer
malware or other malicious intrusions, and random attacks. To date, system interruptions have been
infrequent and have not had a material impact on our consolidated results of operations. We have
implemented extensive measures to prevent, respond to, and minimize the impact of system interruptions.
However, there can be no assurance that these efforts will prevent future interruptions that would have a
material adverse effect on our business.
(cid:127) The loss, theft, or inadvertent disclosure of our confidential data could impair our valuable
intellectual property, harm our competitive position, and expose us to regulatory penalties and other
costs.
A great deal of confidential information owned by both Lilly and our alliances is stored in our information
systems, networks, and facilities at third parties. This includes valuable trade secrets and intellectual
property, corporate strategic plans, marketing plans, customer information, and personally identifiable
information (such as employee and patient information). Some of this information is created, accessed, and/
or maintained by third parties. The confidentiality of this information may be breached in a variety of ways,
including but not limited to negligent or wrongful conduct by employees or others with permitted access to
our systems and data, or wrongful conduct by certain governments, hackers, unethical competitors, or
former workforce members. The rapid growth of social media exacerbates the risk of information security
breaches.
The theft or unauthorized disclosure of confidential information could impair our ability to secure and
maintain intellectual property rights, cause damage to company operations and reputation, and cause us to
lose other competitive advantages. Unauthorized disclosure of personally identifiable information could
expose us to sanctions for violations of data privacy laws and regulations and could damage the public trust
in our company. Information security breaches may be very difficult to detect, and once detected, their
impact may be very difficult to assess. To date, the information security breaches of which we have become
aware have been infrequent in occurrence and, to the extent we have been able to measure their financial
impact on our consolidated results of operations, such impact has not been material. We have invested and
continue to invest to prevent, monitor, detect, and respond to information security breaches by strengthening
our employee awareness and training, information technology systems, and business processes, and
strengthening data protection requirements for third parties that handle our confidential information.
However, despite these efforts, we expect information security breaches to continue, and there can be no
assurance that these efforts will prevent information security breaches that would have a material adverse
effect on our business.
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(cid:127) Reliance on third-party relationships and outsourcing arrangements could adversely affect our
business.
We utilize third parties, including suppliers, alliances with other pharmaceutical and biotechnology
companies, and third-party service providers, for selected aspects of product development, the manufacture
and commercialization of certain products, support for information technology systems, and certain financial
transactional processes. For example, we outsource the day-to-day management and oversight of our
clinical trials to contract research organizations. Outsourcing these functions involves the risk that the third
parties may not perform to our standards or legal requirements, may not produce reliable results, may not
perform in a timely manner, may not maintain the confidentiality of our proprietary information, or may fail to
perform at all. Failure of these third parties to meet their contractual, regulatory, confidentiality, or other
obligations to us could have a material adverse effect on our business.
(cid:127) Our animal health segment faces risks related to increased generic competition, food and animal
safety concerns, factors affecting global agricultural markets, and other risks.
The animal health operating segment may be impacted by, among other things, increased generic
competition; increased sales of companion animal products by non-veterinarian retail outlets; emerging
restrictions and bans on the use of antibacterials in food-producing animals; perceived adverse effects on
human health linked to the consumption of food derived from animals that utilize our products; increased
regulation or decreased governmental support relating to the raising, processing, or consumption of food-
producing animals; an outbreak of infectious disease carried by animals; adverse weather conditions and the
availability of natural resources; adverse global economic conditions affecting agricultural markets; and
failure of the research and development, acquisition, and licensing efforts to generate new products. The
failure to manage these risks could have a material adverse effect on our revenues.
(cid:127)
Integration of the newly-acquired Novartis Animal Health business could be disruptive to operations,
and if not done properly, could lead to a failure to achieve the intended benefits of the acquisition.
We are in the process of integrating into our operations the Novartis Animal Health business, which we
purchased in January 2015. This global integration is complex and potentially disruptive to the ongoing
operations of both the ongoing Elanco business and the acquired Novartis business. Unexpected delays and
difficulties in integrating the two businesses could lead to additional expenses, failure to achieve expected
operating efficiencies and sales synergies, and disruption to ongoing operating results.
(cid:127) Worsening economic conditions could adversely affect our business and operating results.
While human pharmaceuticals have not generally been sensitive to overall economic cycles, prolonged
economic slowdowns could lead to decreased utilization of drugs, affecting our sales volume. Declining tax
revenues attributable to economic downturns increase the pressure on governments to reduce health care
spending, leading to increasing government efforts to control drug prices and utilization. Additionally, some
customers, including governments or other entities reliant upon government funding, may be unable to pay in
a timely manner for our products. Also, if our customers, suppliers, or collaboration partners experience
financial difficulties, we could experience slower customer collections, greater bad debt expense, and
performance defaults by suppliers or collaboration partners.
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Management’s Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Executive Overview
This section provides an overview of our financial results, recent product and late-stage pipeline
developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share
(EPS) data are presented on a diluted basis.
Financial Results
Worldwide total revenue decreased 15 percent to $19.62 billion in 2014, primarily as a result of the loss of
United States (U.S.) patent exclusivity for Cymbalta® in December 2013 and to a lesser extent Evista® in
March 2014, partially offset by volume growth in several other products. In 2014, net income decreased 49
percent to $2.39 billion and EPS decreased 48 percent to $2.23, compared to 2013 net income and EPS of
$4.68 billion and $4.32, respectively. The decreases were due to lower gross margin, higher asset
impairment, restructuring, and other special charges and decreased other income, partially offset by lower
marketing, selling, and administrative expenses, research and development expenses, and income tax
expense.
The following highlighted items affect comparisons of our 2014 and 2013 financial results:
2014
Acquired In-Process Research & Development (IPR&D) (Notes 3 and 4 to the consolidated financial
statements)
(cid:127) We recognized acquired IPR&D charges of $200.2 million (pretax), or $0.12 per share, related to
acquired IPR&D from collaboration agreements with Adocia, AstraZeneca UK Limited, Boehringer
Ingelheim, and Immunocore Limited.
Collaborations (Note 4 to the consolidated financial statements)
(cid:127) We recognized income of $92.0 million (pretax), or $0.06 per share, related to the transfer of our
linagliptin and empagliflozin commercial rights in certain countries to Boehringer Ingelheim.
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
(cid:127) We recognized charges of $468.7 million (pretax), or $0.38 per share, related to severance costs
associated with our ongoing cost containment efforts to reduce our cost structure and global
workforce and asset impairments primarily associated with the closure of a manufacturing site in
Puerto Rico.
Other
(cid:127) We recognized a marketing, selling, and administrative expense of $119.0 million (non-tax
deductible), or $0.11 per share, for an extra year of the U.S. Branded Prescription Drug Fee (U.S.
Drug Fee) due to final regulations issued by the Internal Revenue Service (IRS) which required us to
accelerate into 2014 the recording of an expense for the 2015 fee.
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21
2013
Acquired IPR&D (Note 3 to the consolidated financial statements)
(cid:127) We recognized acquired IPR&D charges of $57.1 million (pretax), or $0.03 per share, resulting from our
acquisition of rights for a calcitonin gene-related peptide (CGRP) antibody currently being studied as a
potential treatment for the prevention of frequent, recurrent migraine headaches, following a successful
Phase II proof-of-concept study.
Collaborations (Note 4 to the consolidated financial statements)
(cid:127) We recognized income of $495.4 million (pretax), or $0.29 per share, related to the transfer to Amylin
Pharmaceuticals, Inc. (Amylin) of exenatide commercial rights in all markets outside the United States.
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
(cid:127) We recognized charges of $120.6 million (pretax), or $0.08 per share, primarily related to severance
costs for actions taken to reduce our cost structure and global workforce, as well as asset impairment
costs associated with the closure of a packaging and distribution facility in Germany.
Late-Stage Pipeline
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 molecules currently in development by other
biotechnology or pharmaceutical companies. We currently have approximately 55 potential new drugs in
human testing or under regulatory review, and a larger number of projects in preclinical research.
The following new molecular entities (NMEs) have been approved by regulatory authorities in the U.S.,
Europe, or Japan for use in the disease described. The quarter the NME initially was approved in the U.S.,
Europe, or Japan for any indication is shown in parentheses:
Dulaglutide* (Trulicity™) (Q3 2014)—a long-acting analog of glucagon-like peptide 1 for the
treatment of type 2 diabetes.
Empagliflozin (Jardiance®) (Q2 2014)—a sodium glucose co-transporter-2 inhibitor for the treatment
of type 2 diabetes (in collaboration with Boehringer Ingelheim).
New insulin glargine product (Q3 2014)—a new insulin glargine product for the treatment of type 1
and type 2 diabetes (in collaboration with Boehringer Ingelheim).
Ramucirumab* (Cyramza®) (Q2 2014)—an anti-vascular endothelial growth factor receptor-2
monoclonal antibody for the treatment of gastric cancer and non-small cell lung cancer (NSCLC).
The following NME has been submitted for regulatory review for potential use in the disease described. The
quarter the NME initially was submitted for any indication is shown in parentheses:
Necitumumab* (Q4 2014)—an anti-epidermal growth factor receptor monoclonal antibody for the
treatment of squamous NSCLC.
The following NMEs are currently in Phase III clinical trial testing for potential use in the diseases described.
The quarter in which each NME initially entered Phase III for any indication is shown in parentheses:
Abemaciclib (Q3 2014)—a small molecule cell-cycle inhibitor, selective for cyclin-dependent kinases
4 and 6 for the treatment of metastatic breast cancer and NSCLC.
Baricitinib (Q4 2012)—a Janus tyrosine kinase inhibitor for the treatment of rheumatoid arthritis (in
collaboration with Incyte Corporation).
Basal insulin peglispro* (Q4 2011)—a novel basal insulin for the treatment of type 1 and type 2
diabetes.
Evacetrapib (Q4 2012)—a cholesteryl ester transfer protein inhibitor for the treatment of high-risk
vascular disease.
Ixekizumab* (Q4 2011)—a neutralizing monoclonal antibody to interleukin-17A for the treatment of
psoriasis and psoriatic arthritis.
2222
Solanezumab* (Q2 2009)—an anti-amyloid beta monoclonal antibody for the treatment of mild
Alzheimer’s disease.
Tanezumab* (Q3 2008)—an anti-nerve growth factor monoclonal antibody for the treatment of
osteoarthritis pain, chronic low back pain, and cancer pain (in collaboration with Pfizer Inc. (Pfizer)).
Tanezumab is currently subject to a partial clinical hold by the U.S. Food and Drug Administration
(FDA) (see Note 4 to the consolidated financial statements).
* Biologic molecule subject to the U.S. Biologics Price Competition and Innovation Act
The following table reflects the status of each NME within our late-stage pipeline including developments
since January 1, 2014:
Indication
U.S.
Europe
Japan
Developments
High-risk
vascular
disease
Phase III
Phase III
Phase III
Studies are ongoing.
Compound
Cardiovascular
Evacetrapib
Endocrinology
Basal insulin
peglispro
Type 1 diabetes Phase III
Phase III
Phase III
Type 2 diabetes Phase III
Phase III
Phase III
Jardiance
Type 2 diabetes Approved Approved Approved
New insulin
glargine
product
Type 1 diabetes
Tentatively
approved
Approved Approved
Type 2 diabetes
Tentatively
approved
Approved Approved
Trulicity
Type 2 diabetes Approved Approved Submitted
Announced in September 2014 top-
line results of two clinical trials
which met primary endpoints.
Announced in May 2014 top-line
results of three clinical trials which
met primary endpoints.
Approved in the U.S., Europe and
Japan in August, May, and
December 2014, respectively.
Launched in the U.S. and certain
European countries in third quarter
of 2014.
Glyxambi®, combination tablet of
empagliflozin and linagliptin,
approved in the U.S. in January
2015. Intend to submit to European
regulatory authorities in late 2015.
FDA tentatively approved in August
2014, determining that it met all
regulatory requirements for
approval, but approval is subject to
automatic stay in the U.S. of up to
30 months as a result of the patent
litigation filed by Sanofi. Approved
in Europe and Japan in September
and December 2014, respectively.
We will work with Boehringer
Ingelheim to launch in Europe and
Japan on dates that do not infringe
valid and enforceable patents.
Approved in the U.S. and Europe in
September and November 2014,
respectively. Launched in the U.S.
in October 2014 and in certain
European countries in first quarter
of 2015. Submitted to regulatory
authorities in Japan in third quarter
of 2014.
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Compound
Immunology
Baricitinib
Ixekizumab
Indication
U.S.
Europe
Japan
Developments
Rheumatoid
arthritis
Phase III
Phase III
Phase III
Psoriasis
Phase III
Phase III
Phase III
Announced in December 2014 top-
line results of RA-BEACON trial
which met primary endpoint.
Announced in August 2014 top-line
results of three trials which met all
primary and secondary endpoints.
Intend to submit the first application
to regulatory authorities in the first
half of 2015.
Psoriatic
arthritis
Phase III
Phase III
Phase III
Studies are ongoing.
Tabalumab
Lupus
Terminated Terminated Terminated
Announced decision to stop
development of tabalumab in
October 2014 due to lack of
efficacy.
Neuroscience
Solanezumab
Tanezumab
Mild Alzheimer's
disease
Osteoarthritis
pain
Chronic low
back pain
Phase III
Phase III
Phase III
Studies are ongoing.
Phase III
Phase III
Phase III
Phase III
Phase III
Phase III
On partial clinical hold; expect
resolution in 2015.
Cancer pain
Phase III
Phase III
Phase III
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Indication
U.S.
Europe
Japan
Developments
Compound
Oncology
Abemaciclib
Cyramza
Metastatic
breast cancer
Phase III
Phase III
Phase III
NSCLC
Phase III
Phase III
Phase III
Gastric cancer
(first-line)
Phase III
Phase III
Phase III
Gastric cancer
(second-line)
Approved Approved Submitted
NSCLC
(second-line)
Approved Submitted Phase III
Liver cancer
Phase III
Phase III
Phase III
Metastatic
colorectal
cancer
Phase III
Phase III
Phase III
Necitumumab
Squamous
NSCLC
Submitted Submitted Phase Ib/II
Initiated Phase III study of
abemaciclib in combination with
fulvestrant in August 2014.
Initiated Phase III study of
abemaciclib in combination with
aromatase inhibitors in November
2014.
Initiated Phase III study of
abemaciclib in KRAS mutation-
positive NSCLC in December 2014.
Initiated Phase III study of Cyramza
in first-line gastric cancer in January
2015.
Approved as monotherapy in the
U.S. in April 2014. Launched in the
U.S. in second quarter of 2014.
Approved in combination with
paclitaxel in the U.S. in November
2014.
In Europe, approved in combination
with paclitaxel and as monotherapy
in patients for whom treatment in
combination with paclitaxel is not
appropriate in December 2014.
Submitted to Japanese regulatory
authorities in third quarter of 2014
with regulatory action anticipated in
first half of 2015.
Approved in the U.S. in December
2014. Submitted to European
regulatory authorities in first quarter
of 2015.
Announced in June 2014 that
REACH trial did not meet its
primary endpoint.
Announced in September 2014 that
RAISE trial met its primary endpoint
of overall survival. Intend to submit
first application to regulatory
authorities in first half of 2015.
Submitted in the U.S. and Europe in
fourth quarter of 2014. Anticipate
FDA action in late 2015.
There are many difficulties and uncertainties inherent in pharmaceutical research and development (R&D)
and the introduction of new products. A high rate of failure is inherent in new drug discovery and development.
The process to bring a drug from the discovery phase to regulatory approval can take 12 to 15 years or longer
and cost more than $1 billion. Failure can occur at any point in the process, including late in the process after
substantial investment. As a result, most research programs will not generate financial returns. New product
candidates that appear promising in development may fail to reach the market or may have only limited
commercial success. Delays and uncertainties in the regulatory approval processes in the U.S. and in other
countries can result in delays in product launches and lost market opportunities. Consequently, it is very
difficult to predict which products will ultimately be approved.
25
25
We manage R&D spending across our portfolio of molecules, and a delay in, or termination of, any one
project will not necessarily cause a significant change in our total R&D spending. Due to the risks and
uncertainties involved in the R&D process, we cannot reliably estimate the nature, timing, completion dates,
and costs of the efforts necessary to complete the development of our R&D projects, nor can we reliably
estimate the future potential revenue that will be generated from a successful R&D project. Each project
represents only a portion of the overall pipeline, and none is individually material to our consolidated R&D
expense. While we do accumulate certain R&D costs on a project level for internal reporting purposes, we
must make significant cost estimations and allocations, some of which rely on data that are neither
reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently
reliable data to report on total R&D costs by project, by preclinical versus clinical spend, or by therapeutic
category.
Other Matters
Subsequent Event - Novartis Animal Health Acquisition
On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash
transaction for approximately $5.4 billion. Novartis AH operates in approximately 40 countries. We acquired
Novartis AH’s nine manufacturing sites, six dedicated research and development facilities, a global
commercial infrastructure with a portfolio of approximately 600 products, a pipeline with more than 40 projects
in development, and more than 3,000 employees. The combined organization is expected to increase our
animal health product portfolio, expand our global commercial presence, and augment our animal health
manufacturing and research and development. In particular, it is expected to provide Elanco with a greater
commercial presence in the companion animal and swine markets, expand Elanco’s presence in equine and
vaccines areas, and create an entry into the aquaculture market. As a condition to the clearance of the
transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of
Novartis AH, we divested certain companion animal assets in the U.S. related to the Sentinel® canine
parasiticide franchise to Virbac Corporation for approximately $410 million. The Novartis AH business we
retained generated revenue of approximately $1.1 billion in 2014.
Patent Matters
We depend on patents or other forms of intellectual-property protection for most of our revenues, cash flows,
and earnings. The loss of U.S. patent exclusivity for Cymbalta in December 2013 and Evista in March 2014,
resulted in the immediate entry of generic competitors and a rapid and severe decline in revenue from the
affected products, having a material adverse effect on our consolidated results of operations and cash flows.
We lost our data package protection for Cymbalta in major European countries in 2014 and we anticipate the
entry of generic competition in these countries in 2015. We expect that the entry of generic competition for
Cymbalta into the markets where it has lost patent protection would cause a rapid and severe decline in
revenue, which would have a material adverse effect on our consolidated results of operations and cash
flows. We will also lose patent exclusivity in December 2015 for Zyprexa® in Japan.
Additionally, as described in Note 15 to the consolidated financial statements, the Alimta® vitamin dosage
regimen patent, which provides us with patent protection for Alimta through June 2021 in Japan and major
European countries, and through May 2022 in the U.S., has been challenged in each of these jurisdictions.
Our compound patent for Alimta will expire in the U.S. in January 2017, and in major European countries and
Japan in December 2015. We expect that the entry of generic competition for Alimta into the markets where it
has lost patent protection would cause a rapid and severe decline in revenue, which would have a material
adverse effect on our consolidated results of operations and cash flows.
The U.S. compound patent for Humalog® expired in May 2013. Thus far, the loss of compound patent
protection for Humalog has not resulted in a rapid and severe decline in revenue. To date, no biosimilar
version of Humalog has been approved in the U.S. or Europe; however, we are aware that other
manufacturers have efforts underway to develop biosimilar forms of Humalog, and it is difficult to predict the
likelihood, timing, and impact of biosimilars entering the market.
2626
Foreign Currency Exchange Rates
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure
from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the
Japanese yen, and the British pound against the euro. While we manage a portion of these exposures
through hedging and other risk management techniques, significant fluctuations in currency rates can have a
substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses. In
2014, we saw significant foreign currency rate fluctuations as the U.S. dollar strengthened compared to other
foreign currencies, including the euro and the Japanese yen. While there is uncertainty in the future
movements in foreign exchange rates, these fluctuations could negatively impact our future consolidated
results of operations.
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
United States
Prices for specialty and brand name pharmaceuticals, congressional investigations into manufacturer’s pricing
policies, and the federal budget process continue to drive legislative debate. These policy and political issues
increase the risk that taxes, fees, rebates or other federal measures may be enacted. As a result,
pharmaceutical companies may see either a reduction in revenue or increase in expenses. President
Obama’s fiscal year 2016 budget includes a number of key health legislative proposals affecting
biopharmaceuticals, including a reduction in biologic data exclusivity, modifications to Medicare Parts B and
D, and new language that would allow the Department of Health and Human Services to negotiate prices for
biologics and drugs on the specialty tier in Part D. Savings projected under these proposals are targeted as a
means to fund health care expenditures, such as the Medicare Sustainable Growth Rate, and non-health care
expenditures. State and federal health care proposals, including price controls, continue to be debated, and if
implemented could negatively affect future consolidated results of operations.
In the U.S. private sector, the growth of Managed Care Organizations (MCOs) is also a major factor in the
competitive marketplace for human pharmaceuticals. It is estimated that approximately two-thirds of the U.S.
now participates in some form of managed care. MCO’s have been consolidating into fewer, larger entities,
thus enhancing their purchasing strength and importance. MCO’s typically maintain formularies specifying
which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply
reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete
aggressively to have their branded products included. Price is becoming an increasingly important factor in
MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that
multiple branded products are therapeutically comparable. These downward pricing pressures could
negatively impact future consolidated results of operations.
In 2014, the main coverage expansion provisions of the Affordable Care Act (ACA) took effect through both
the launch of state-based exchanges and the expansion of Medicaid. An emerging trend has been the
prevalence of benefit designs containing high out-of-pocket costs for patients, particularly for
pharmaceuticals. In addition to the coverage expansions, many employers in the commercial market, driven
in part by changes resulting from the ACA, continue to evaluate strategies such as private exchanges and
wider use of consumer-driven health plans to reduce their healthcare liabilities over time. At the same time,
the broader paradigm shift towards quality-based reimbursement and the launch of several value-based
purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-
world outcomes data and a favorable economic profile.
International
International operations also are generally subject to extensive price and market regulations. Cost-
containment measures exist in a number of countries, including additional price controls and mechanisms to
limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the
pressures on national and regional health care budgets that come from a growing aging population and
ongoing economic challenges. In addition, governments in many emerging markets are becoming
increasingly active in expanding health care system offerings. Given the budget challenges of increasing
health care coverage for citizens, policies may be proposed that promote generics only and reduce current
and future access to human pharmaceutical products.
27
27
Tax Matters
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Changes in the relevant tax
laws, regulations, administrative practices, principles, and interpretations could adversely affect our future
effective tax rates. The U.S. and a number of other countries are actively considering changes in this regard.
For example, the Obama administration proposed changes to the manner in which the U.S. would tax the
international income of U.S.-based companies, including unremitted earnings of foreign subsidiaries, and
other tax proposals under discussion or introduced in the U.S. Congress could change the tax rate and
manner in which U.S. companies would be taxed. Additionally, the Organisation for Economic Co-operation
and Development launched and continues to advance an initiative to analyze and potentially influence
international tax policy in major countries in which we operate. While outcomes of these initiatives are
uncertain, changes to key elements of the U.S. or international tax framework could have a material effect on
our consolidated operating results and cash flows.
Legal Matters
Information regarding contingencies relating to certain legal proceedings can be found in Note 15 to the
consolidated financial statements and is incorporated here by reference.
Operating Results—2014
Revenue
Our worldwide revenue for 2014 was $19.62 billion, a decline of 15 percent compared with 2013. This
decrease was comprised of 13 percent due to volume, 2 percent due to the unfavorable impact of foreign
exchange rates and 1 percent due to lower prices (numbers do not add due to rounding). Total revenue in the
U.S. decreased 29 percent, to $9.13 billion, due to lower demand for Cymbalta and Evista following patent
expirations, and to a lesser extent, to wholesaler buying patterns. Revenue outside the U.S. increased 3
percent, to $10.48 billion, due to increased volume, partially offset by the unfavorable impact of foreign
exchange rates.
The following table summarizes our revenue activity in 2014 compared with 2013:
Product
Alimta . . . . . . . . . . . . . . . . . . . . . . . . . $
Humalog . . . . . . . . . . . . . . . . . . . . . . .
Cialis® . . . . . . . . . . . . . . . . . . . . . . . . .
Cymbalta . . . . . . . . . . . . . . . . . . . . . . .
Humulin® . . . . . . . . . . . . . . . . . . . . . . .
Forteo® . . . . . . . . . . . . . . . . . . . . . . . .
Zyprexa . . . . . . . . . . . . . . . . . . . . . . . .
Strattera® . . . . . . . . . . . . . . . . . . . . . .
Effient® . . . . . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . . . . . .
Animal health products . . . . . . . . . . . .
Total net product sales . . . . . . . . . .
Collaboration and other revenue(2) . . .
Total revenue . . . . . . . . . . . . . . . . . $
Year Ended
Year Ended
December 31, 2014
December 31,
2013
Percent
Change from
U.S.(1)
Outside U.S.
Total
Total
2013
1,229.5 $
1,627.6
1,039.9
420.5
713.1
539.0
119.8
452.5
394.5
207.2
647.5
1,274.4
8,665.5
468.6
(Dollars in millions)
1,562.5 $
1,157.6
1,251.1
1,194.2
687.0
783.0
917.5
286.0
127.7
212.6
910.3
1,072.2
10,161.7
319.8
2,703.0
2,611.2
2,159.4
5,084.4
1,315.8
1,244.9
1,194.8
709.2
508.7
1,050.4
1,672.3
2,151.5
22,405.6
707.5
9,134.1 $ 10,481.5 $ 19,615.6 $ 23,113.1
2,792.0 $
2,785.2
2,291.0
1,614.7
1,400.1
1,322.0
1,037.3
738.5
522.2
419.8
1,557.8
2,346.6
18,827.2
788.4
3
7
6
(68)
6
6
(13)
4
3
(60)
(7)
9
(16)
11
(15)
1 U.S. revenue includes revenue in Puerto Rico.
2 Collaboration and other revenue consists primarily of royalties for Erbitux® and revenue associated with Trajenta®.
2828
Sales of Alimta, a treatment for various cancers, increased 2 percent in the U.S., driven by increased volume.
Sales outside the U.S. increased 5 percent, driven by increased volume, partially offset by the unfavorable
impact of foreign exchange rates and lower prices.
Sales of Humalog, our injectable human insulin analog for the treatment of diabetes, increased 7 percent in
the U.S., driven by increased demand, partially offset by lower net effective selling prices as a result of payer
contracts and greater Medicaid and Medicare utilization, as well as wholesaler buying patterns. Sales outside
the U.S. increased 6 percent, driven by increased volume and, to a lesser extent, higher prices, partially offset
by the unfavorable impact of foreign exchange rates.
Sales of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia, increased 10 percent in
the U.S., driven by higher prices, partially offset by wholesaler buying patterns. Sales outside the U.S.
increased 3 percent, driven by higher prices and increased volume, partially offset by the unfavorable impact
of foreign exchange rates.
Sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic
pain, generalized anxiety disorder, and in the U.S. for the treatment of chronic musculoskeletal pain and the
management of fibromyalgia, decreased 89 percent in the U.S. due to the loss of U.S. patent exclusivity in
December 2013. Sales outside the U.S. increased 6 percent, driven by increased volume, partially offset by
the unfavorable impact of foreign exchange rates.
Sales of Humulin, an injectable human insulin for the treatment of diabetes, increased 5 percent in the U.S.,
primarily driven by increased demand, partially offset by wholesaler buying patterns. Sales outside the U.S.
increased 8 percent, driven by increased volume, partially offset by the unfavorable impact of foreign
exchange rates.
Sales of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for
fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women, increased 5
percent in the U.S., driven by higher prices, partially offset by decreased volume. Sales outside the U.S.
increased 7 percent, driven by increased volume, primarily in Japan, partially offset by the unfavorable impact
of foreign exchange rates, primarily the Japanese yen.
Sales of Zyprexa, a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I
disorder, and bipolar maintenance, decreased 3 percent in the U.S. Sales outside the U.S. decreased 14
percent, driven by decreased volume, the unfavorable impact of foreign exchange rates, primarily the
Japanese yen, and lower prices. We will lose patent exclusivity for Zyprexa in Japan in December 2015.
Zyprexa sales in Japan were approximately $465 million in 2014, compared to approximately $510 million in
2013.
Sales of Strattera, a treatment for attention-deficit hyperactivity disorder, increased 1 percent in the U.S.,
driven by higher prices, partially offset by decreased volume. Sales outside the U.S. increased 9 percent,
driven by increased volume, primarily in Japan, partially offset by the unfavorable impact of foreign exchange
rates, primarily the Japanese yen.
Sales of Effient, a product for the reduction of thrombotic cardiovascular events (including stent thrombosis) in
patients with acute coronary syndrome who are managed with an artery-opening procedure known as
percutaneous coronary intervention, including patients undergoing angioplasty, atherectomy, or stent
placement, increased 5 percent in the U.S., driven by higher prices, partially offset by wholesaler buying
patterns. Sales outside the U.S. decreased 3 percent, driven by lower volume.
Sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal women and for
reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal
women at high risk for invasive breast cancer, decreased 73 percent in the U.S., due to the loss of U.S. patent
exclusivity in March 2014. Sales outside the U.S. decreased 24 percent, driven primarily by the expiration of a
supply agreement in 2013, and to a lesser extent the unfavorable impact of foreign exchange rates.
Animal health product sales in the U.S. increased 4 percent, driven by increased volume in food animal
products and higher prices, partially offset by decreased volume in companion animal products due to
competitive pressure. Sales outside the U.S. increased 16 percent, driven by increased volume in food animal
products, due in part to the acquisition of Lohmann SE (Lohmann AH) and, to a lesser extent, higher prices,
partially offset by the unfavorable impact of foreign exchange rates.
29
29
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue was 74.9 percent in 2014, a decrease of 3.9 percentage points
compared with 2013, driven primarily by lower sales of Cymbalta and Evista following U.S. patent expirations.
Research and development expenses decreased 14 percent to $4.73 billion in 2014, driven primarily by lower
late-stage clinical development costs. Research and development expenses in 2013 included $97.2 million of
milestone payments made to Boehringer Ingelheim following regulatory submissions for empagliflozin.
Marketing, selling, and administrative expenses decreased 7 percent to $6.62 billion in 2014, driven primarily
by the reduction in U.S. sales and marketing activities for Cymbalta and Evista, as well as ongoing cost
containment efforts, partially offset by an additional $119.0 million charge in 2014 associated with the U.S.
Drug Fee, an annual non-tax deductible fee enacted by the Patient Protection and Affordable Care Act that is
imposed on us and others engaged in the business of manufacturing or importing branded prescription drugs.
The final regulations issued by the IRS in 2014, accelerated the expense recognition criteria for the fee
obligation by one year, from the year in which the fee is paid to the year in which the sales used to calculate
the fee occur. This change affected all entities conducting covered activities in 2014 and resulted in the need
to expense two years of the U.S. Drug Fee in 2014 to account for the fee imposed and paid in 2014 and the
fee that will be imposed and paid in 2015.
We recognized acquired IPR&D charges of $200.2 million in 2014 resulting from our collaboration
agreements with Adocia, AstraZeneca, and Immunocore Limited in addition to charges associated with the
transfer of commercial rights to us, from Boehringer Ingelheim, of the new insulin glargine product in certain
countries where it is not yet approved. There were $57.1 million of acquired IPR&D charges in 2013 related to
the acquisition of rights for the CGRP antibody. See Notes 3 and 4 to the consolidated financial statements for
additional information.
We recognized asset impairment, restructuring, and other special charges of $468.7 million in 2014. These
charges included $225.5 million of severance costs related to ongoing efforts to reduce our cost structure and
global workforce and $243.2 million of asset impairment and other special charges consisting primarily of a
$180.8 million asset impairment charge related to our decision to close and sell a manufacturing plant located
in Puerto Rico. In 2013, we recognized asset impairment, restructuring, and other special charges of $120.6
million. These charges included $30.0 million of asset impairments primarily associated with the closure of a
packaging and distribution facility in Germany, and $90.6 million of severance costs to reduce our cost
structure and global workforce. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of $340.5 million in 2014, compared with income of $518.9 million
in 2013. Other income in 2014 included net gains of $216.4 million on investments and $92.0 million of
income related to the transfer of commercial rights to linagliptin and empagliflozin in certain countries from us
to Boehringer Ingelheim. Other income in 2013 was primarily comprised of $495.4 million related to the
termination of the exenatide collaboration with Amylin. See Notes 4 and 17 to the consolidated financial
statements for additional information.
Our effective tax rate was 20.3 percent in 2014, compared with 20.5 percent in 2013. See Note 13 to the
consolidated financial statements for additional information.
3030
Operating Results—2013
Financial Results
Worldwide total revenue increased 2 percent to $23.11 billion in 2013, driven by growth in several products,
including Cialis, Humalog, Trajenta, Alimta, Forteo, and animal health products, partially offset by the
continued erosion of Zyprexa sales following the loss of patent exclusivity in the U.S. and most major markets
outside Japan. In 2013, net income increased 15 percent to $4.68 billion and EPS increased 18 percent to
$4.32, compared to 2012 net income and EPS of $4.09 billion and $3.66, respectively. The increases were
due to higher gross margin, lower marketing, selling, and administrative expenses, and, to a lesser extent, a
lower effective tax rate, partially offset by higher research and development expenses and lower other
income. EPS in 2013 also benefited from a lower number of shares outstanding as a result of our share
repurchase programs.
The 2013 highlighted items are summarized in the "Executive Overview" section. The 2012 highlighted items
are summarized as follows:
Collaborations (Note 4 to the consolidated financial statements)
(cid:127) We recognized income of $787.8 million (pretax), or $0.43 per share, related to the early payment of
the exenatide revenue-sharing obligation following the completion of Amylin's acquisition by Bristol-
Myers Squibb.
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
(cid:127) We recognized asset impairment, restructuring, and other special charges of $281.1 million (pretax),
or $0.16 per share, consisting of an intangible asset impairment related to liprotamase, restructuring
charges related to initiatives to reduce our cost structure and global workforce, charges associated
with the decision to stop development of a delivery device platform, and charges related to changes
in returns reserve estimates for the withdrawal of Xigris™.
Revenue
Our worldwide revenue for 2013 was $23.11 billion, a 2 percent increase compared with 2012 as an increase
of 5 percent due to higher prices was partially offset by a decrease of 2 percent due to the unfavorable impact
of foreign exchange rates and a 1 percent decrease due to lower volume. Total revenue in the U.S. increased
5 percent, to $12.89 billion, due to higher prices, partially offset by volume declines for Cymbalta and Zyprexa
due to the loss of patent exclusivity. Revenue outside the U.S. decreased 1 percent, to $10.22 billion, due
primarily to the unfavorable impact of the continued weakness of the Japanese yen and, to a lesser extent,
lower prices, partially offset by increased volume.
31
31
The following table summarizes our revenue activity in 2013 compared with 2012:
Product
Year Ended
Year Ended
December 31, 2013
December 31,
2012
Percent
Change from
U.S.(1)
Outside U.S.
Total
Total
2012
Cymbalta . . . . . . . . . . . . . . . . . . . . . . . $
Alimta . . . . . . . . . . . . . . . . . . . . . . . . . .
Humalog . . . . . . . . . . . . . . . . . . . . . . .
Cialis . . . . . . . . . . . . . . . . . . . . . . . . . .
Humulin . . . . . . . . . . . . . . . . . . . . . . . .
Forteo . . . . . . . . . . . . . . . . . . . . . . . . .
Zyprexa . . . . . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . . . .
Strattera . . . . . . . . . . . . . . . . . . . . . . . .
Effient. . . . . . . . . . . . . . . . . . . . . . . . . .
Other pharmaceutical products . . . . . .
Animal health products . . . . . . . . . . . .
Total net product sales. . . . . . . . . . .
Collaboration and other revenue(2). . . .
3,960.8 $
4,994.1
1,209.1
2,594.3
1,521.4
2,395.5
942.8
1,926.8
677.2
1,239.1
511.4
1,151.0
123.6
1,701.4
772.0
1,010.1
446.3
621.4
376.9
457.2
639.5
1,843.0
1,226.6
2,036.5
21,970.4
12,407.6
482.1
633.0
Total revenue. . . . . . . . . . . . . . . . . . $ 12,889.7 $ 10,223.4 $ 23,113.1 $ 22,603.4
(Dollars in millions)
1,123.6 $
1,493.9
1,089.8
1,216.6
638.6
733.5
1,071.2
278.4
262.9
131.8
1,032.8
924.9
9,998.0
225.4
5,084.4 $
2,703.0
2,611.2
2,159.4
1,315.8
1,244.9
1,194.8
1,050.4
709.2
508.7
1,672.3
2,151.5
22,405.6
707.5
2
4
9
12
6
8
(30)
4
14
11
(9)
6
2
12
2
1 U.S. revenue includes revenue in Puerto Rico.
2 Collaboration and other revenue in 2013 consists primarily of royalties for Erbitux and revenue associated with Trajenta. Collaboration
and other revenue in 2012 also includes revenue associated with exenatide in the United States.
Sales of Cymbalta increased 1 percent in the U.S., driven by higher prices, largely offset by lower demand
due to the loss of U.S. patent exclusivity in December 2013. Sales outside the U.S. increased 4 percent,
driven primarily by increased volume, partially offset by lower prices and the unfavorable impact of foreign
exchange rates.
Sales of Alimta increased 8 percent in the U.S., due to higher prices and increased demand. Sales outside
the U.S. increased 1 percent, driven by increased volume, partially offset by the unfavorable impact of foreign
exchange rates and lower prices.
Sales of Humalog increased 11 percent in the U.S., driven by higher prices, wholesaler buying patterns, and
increased demand. Sales outside the U.S. increased 6 percent, driven by increased volume, partially offset by
the unfavorable impact of foreign exchange rates.
Sales of Cialis increased 21 percent in the U.S., driven by higher prices. Sales outside the U.S. increased
6 percent, driven by higher prices and increased volume, partially offset by the unfavorable impact of foreign
exchange rates.
Sales of Humulin increased 14 percent in the U.S., driven by higher prices, partially offset by decreased
demand. Sales outside the U.S. decreased 1 percent, driven by the unfavorable impact of foreign exchange
rates, partially offset by increased volume.
Sales of Forteo increased 5 percent in the U.S., driven primarily by higher prices. Sales outside the U.S.
increased 11 percent, due to increased volume, primarily in Japan, partially offset by the unfavorable impact
of foreign exchange rates.
Sales of Zyprexa decreased 66 percent in the U.S. due to continued erosion following patent expiration in late
2011. Sales outside the U.S. decreased 20 percent, driven by the unfavorable effect of foreign exchange
rates, lower volume in markets outside of Japan, and lower prices.
3232
Sales of Evista increased 10 percent in the U.S., driven by higher prices, partially offset by decreased
demand. Sales outside the U.S. decreased 10 percent, driven by the unfavorable impact of foreign exchange
rates and lower prices, partially offset by increased volume in Japan.
Sales of Strattera increased 16 percent in the U.S., driven primarily by higher prices. Sales outside the U.S.
increased 11 percent, driven primarily by increased volume in Japan, partially offset by lower prices and the
unfavorable impact of foreign exchange rates.
Sales of Effient increased 11 percent in the U.S., driven primarily by higher prices. Sales outside the U.S.
increased 12 percent, driven primarily by increased volume.
Animal health product sales in the U.S. increased 6 percent driven primarily by increased volume for Trifexis®
and, to a lesser extent, higher prices. Sales outside the U.S. increased 6 percent, driven by increased volume
and, to a lesser extent, higher prices, partially offset by the unfavorable impact of foreign exchange rates.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue remained at 78.8 percent in 2013 as higher prices were offset by
the adverse impact of foreign exchange rates on international inventories sold, which significantly decreased
the cost of sales in 2012.
Marketing, selling, and administrative expenses decreased 5 percent to $7.13 billion in 2013, driven primarily
by lower selling and marketing expenses resulting from ongoing cost-containment efforts, including a
reduction in U.S. sales and marketing activities in anticipation of the loss of patent exclusivity for Cymbalta
and Evista, as well as the impact of foreign exchange rates.
Research and development expenses increased 5 percent to $5.53 billion in 2013, due to higher research
and clinical development expenses, including $97.2 million of milestone payments made to Boehringer
Ingelheim following regulatory submissions for empagliflozin.
We recognized an acquired IPR&D charge of $57.1 million in 2013 resulting from our acquisition of a CGRP
antibody. There were no acquired IPR&D charges in 2012. See Note 3 to the consolidated financial
statements for additional information.
We recognized asset impairment, restructuring, and other special charges of $120.6 million in 2013. These
charges included $30.0 million of asset impairments primarily associated with the anticipated closure of a
packaging and distribution facility in Germany, and $90.6 million of severance costs to reduce our cost
structure and global workforce. In 2012, we recognized asset impairment, restructuring, and other special
charges of $281.1 million. These charges included $122.6 million related to an intangible asset impairment for
liprotamase, $74.5 million related to restructuring to reduce our cost structure and global workforce, $64.0
million related to the asset impairment of a delivery device platform, and $20.0 million related to the
withdrawal of Xigris. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of $518.9 million in 2013, compared with income of $674.0 million
in 2012. The decrease was driven primarily by lower income related to the termination of the exenatide
collaboration with Amylin of $495.4 million in 2013 compared with $787.8 million in 2012, partially offset by
milestone payments received from Boehringer Ingelheim for regulatory submissions in the U.S., Europe, and
Japan. See Notes 4 and 17 to the consolidated financial statements for additional information.
Our effective tax rate was 20.5 percent in 2013, compared with 24.4 percent in 2012. The 2012 effective tax
rate reflected the expiration of the R&D tax credit at the end of 2011 and the tax impact of the payment
received from Amylin, partially offset by the tax benefit related to the intangible asset impairment for
liprotamase. The decrease in the 2013 effective tax rate reflects the reinstatement of the R&D tax credit in the
U.S. effective January 1, 2013 as well as the one-time impact of the reinstatement of the R&D tax credit for
2012 that was recorded in the first quarter of 2013. See Note 13 to the consolidated financial statements for
additional information.
33
33
FINANCIAL CONDITION
As of December 31, 2014, cash and cash equivalents remained essentially unchanged at $3.87 billion
compared with $3.83 billion at December 31, 2013. Significant sources of cash included cash flows from
operations of $4.37 billion, net proceeds from investment transactions of $3.62 billion, and net proceeds from
the issuance of short- and long-term debt of $2.64 billion. Significant uses of cash included dividends paid of
$2.10 billion, purchases of property and equipment of $1.16 billion, share repurchases of $800.0 million, and
the acquisition of Lohmann AH which amounted to $551.4 million. We also held $5.41 billion of cash in
escrow associated with the pending close of the Novartis AH acquisition which was reflected as restricted
cash as of December 31, 2014. In January 2015, we completed our acquisition of Novartis AH for
approximately $5.4 billion in an all-cash transaction. See "Executive Overview—Other Matters" for additional
details.
In addition to our cash and cash equivalents, we held total investments of $5.52 billion and $9.19 billion as of
December 31, 2014 and December 31, 2013, respectively. See Note 7 to the consolidated financial
statements for additional details.
As of December 31, 2014, total debt was $8.06 billion, an increase of $2.84 billion compared with $5.21 billion
at December 31, 2013. The increase is due primarily to the increase in short-term commercial paper
borrowings of $2.68 billion used primarily to finance the acquisition of Novartis AH. At December 31, 2014, we
had a total of $3.31 billion of unused committed bank credit facilities, $3.20 billion of which is available to
support our commercial paper program. Subject to market conditions, we intend to replace the majority of our
commercial paper borrowings with fixed-rate long term notes in the first half of 2015. See Note 10 to the
consolidated financial statements for additional details. We believe that amounts accessible through existing
commercial paper markets should be adequate to fund short-term borrowing needs.
For the 130th consecutive year, we distributed dividends to our shareholders. Dividends of $1.96 per share
were paid in both 2014 and 2013. In the fourth quarter of 2014, effective for the dividend to be paid in the first
quarter of 2015, the quarterly dividend was increased to $0.50 per share, resulting in an indicated annual rate
for 2015 of $2.00 per share.
Capital expenditures of $1.16 billion during 2014 were $150.5 million more than in 2013. We expect 2015
capital expenditures to be approximately $1.3 billion.
In 2014, we repurchased $800.0 million of shares under the $5.00 billion share repurchase program
previously announced in October 2013.
See "Executive Overview—Other Matters" for information regarding recent and upcoming losses of patent
protection for Cymbalta (U.S. and Europe), Evista (U.S.), Alimta (U.S., Europe, and Japan), and Zyprexa
(Japan).
At December 31, 2014, we had an aggregate of $8.54 billion of cash and investments at our foreign
subsidiaries. A significant portion of this amount would be subject to tax payments if such cash and
investments were repatriated to the United States. We record U.S. deferred tax liabilities for certain
unremitted earnings, but when foreign earnings are expected to be indefinitely reinvested outside the U.S., no
accrual for U.S. income taxes is provided. We believe cash provided by operating activities in the U.S. and
planned repatriations of foreign earnings for which tax has been provided should be sufficient to fund our
domestic operating needs, dividends paid to shareholders, share repurchases, and capital expenditures.
Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and “Risk
Factors,” may affect our operating results and cash generated from operations.
Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the
creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and
suppliers; the uncertain impact of health care legislation; and various international government funding levels.
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.
3434
Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an
effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and
floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based
on our overall interest rate exposure at December 31, 2014 and 2013, 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, 2014 and 2013, respectively, would not have a 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, Chinese yuan, and the Japanese yen, and the British pound against the euro. We face
foreign currency exchange exposures primarily when we enter into transactions, generally on an
intercompany basis, denominated in currencies other than the functional currency of the entity. We also face
currency exposure that arises from translating the results of our global operations to the U.S. dollar at
exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency
forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (principally
the euro, the British pound, and the Japanese yen). Our policy outlines the minimum and maximum hedge
coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of
currency fluctuations on the existing assets and liabilities. We analyze the fair values of the outstanding
foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A
hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) applied to the fair values
of our outstanding foreign currency derivative contracts as of December 31, 2014 and 2013, would not have a
material impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis
does not consider the impact that hypothetical changes in exchange rates would have on the underlying
foreign currency denominated transactions.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to
have a material future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on
potential products 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 for marketing by the appropriate regulatory agency or upon the
achievement of certain sales levels). If required by the arrangement, we may 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 below.
Individually, these arrangements are not material in any one annual reporting period. However, if milestones
for multiple products covered by these arrangements would happen to be reached in the same reporting
period, the aggregate charge to expense could be material to the results of operations in that period. See
Note 4 to the consolidated financial statements for additional details. 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
milestone 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.
35
35
Our current noncancelable contractual obligations that will require future cash payments are as follows (in
millions):
Payments Due by Period
Total
Less Than
1 Year
1-3
Years
3-5
Years
More Than
5 Years
. . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . $ 2,680.6 $ 2,680.6 $
Long-term debt, including interest
payments(1)
Capital lease obligations . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . .
Purchase obligations(2) . . . . . . . . . . . . . . . .
Other long-term liabilities reflected on our
balance sheet(3) . . . . . . . . . . . . . . . . . . . . .
2,137.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,867.1 $ 12,973.0 $ 3,392.9 $ 1,985.7 $ 7,515.5
8,168.6
28.8
602.4
11,166.8
1,588.7
14.7
216.7
782.1
1,143.3
3.8
126.3
420.6
185.9
10.3
138.7
9,957.5
5,250.7
—
120.7
6.6
3,219.9
— $
— $
790.7
291.7
—
—
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, 2014, to compute the amount of the contractual obligation for interest on the variable rate
debt instruments and swaps.
2 We have included the following:
(cid:127)
(cid:127)
Purchase obligations consisting primarily of all open purchase orders as of December 31, 2014. Some of these purchase
orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and
noncancelable purchase obligations.
Contractual payment obligations with each of our significant vendors, which are noncancelable and are not contingent.
3 We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and deferred
compensation liabilities. We excluded long-term income taxes payable of $998.5 million, because we cannot reasonably estimate the
timing of future cash outflows associated with those liabilities.
The contractual obligations table is current as of December 31, 2014. We expect the amount of these
obligations to change materially over time as new contracts are initiated and existing contracts are completed,
terminated, or modified.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the U.S.,
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 estimates have been discussed with our audit committee and are described below.
Revenue Recognition and Sales Return, Rebate, and Discount Accruals
We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer
assumes the risks and rewards of ownership. Provisions for returns, rebates, and discounts are established in
the same period the related sales are recorded.
We regularly review the supply levels of our significant products sold to major wholesalers in the U.S. and in
major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major
wholesalers and available prescription volume information for our products, or alternative approaches. We
attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a
consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or
anticipated product-supply issues, weather patterns, anticipated changes in the transportation network,
36
36
redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure
of our arrangements does not provide an incentive for speculative wholesaler buying and provides us with
data on inventory levels at our wholesalers. When we believe wholesaler purchasing patterns have caused an
unusual increase or decrease in the sales of a major product compared with underlying demand, we disclose
this in our product sales discussion if we believe the amount is material to the product sales trend; however,
we are not always able to accurately quantify the amount of stocking or destocking in the retail channel.
Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of
actual product returns.
When sales occur, we estimate a reserve for future product returns related to those sales. This estimate is
based on several factors, including: historical return rates, expiration date by product (generally, 24 to
36 months after the initial sale of a product to our customer), and estimated levels of inventory in the
wholesale and retail channels, among others, as well as any other specifically-identified anticipated returns
due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a
changing competitive environment. We maintain a returns policy that allows U.S. pharmaceutical customers
to return product for dating issues within a specified period prior to and subsequent to the product's expiration
date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated
level of product returns as product inventory remaining in the wholesale and retail channels expires.
Adjustments to the returns reserve may be required in the future based on revised estimates to our
assumptions, which would have an impact on our consolidated results of operations. We record the return
amounts as a deduction to arrive at our net product sales. Once the product is returned, it is destroyed. Actual
product returns have been less than 2 percent of our net sales over the past three years and have not
fluctuated significantly as a percentage of sales. We expect the ratio of actual product returns as a
percentage of net sales to increase in future periods as we begin to experience elevated return levels for
Cymbalta following the recent loss of patent exclusivity in the U.S. market.
We establish sales rebate and discount accruals in the same period as the related sales. The rebate and
discount amounts are recorded as a deduction to arrive at our net product sales. Sales rebates and discounts
that require the use of judgment in the establishment of the accrual include Medicaid, managed care,
Medicare, chargebacks, long-term care, hospital, patient assistance programs, and various other programs.
We base these accruals primarily upon our historical rebate and discount payments made to our customer
segment groups and the provisions of current rebate and discount contracts.
The largest of our sales rebate and discount amounts are rebates associated with sales covered by Medicaid
and managed care contracts. In determining the appropriate accrual amount, we consider our historical
Medicaid and managed care rebate payments by product as a percentage of our historical sales as well as
any significant changes in sales trends (e.g., patent expiries), an evaluation of the current Medicaid and
managed care contracts, the percentage of our products that are sold via Medicaid and managed care
contracts, and our product pricing. Although we accrue a liability for Medicaid and managed care rebates at
the time we record the sale (when the product is shipped), the Medicaid and managed care rebate related to
that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate
adjustments may incorporate revisions of accruals for several periods.
Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and
recognized in the same period as the related sales. In some large European countries, government rebates
are based on the anticipated budget for pharmaceutical payments 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 costs incurred by the
government, we adjust our rebate reserves.
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based
on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates
and discounts on our consolidated balance sheet. Our global sales return liability is included in other current
liabilities and other noncurrent liabilities on our consolidated balance sheet. As of December 31, 2014, a 5
percent change in our global sales return, rebate, and discount liability would lead to an approximate
$137 million effect on our income before income taxes.
3737
The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the
U.S. was 88 percent as of December 31, 2014 and 2013.
The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability
balances, including Medicaid and managed care (in millions):
2014
2013
Sales return, rebate, and discount liabilities, beginning of year . . . . . . . . . . . . . . . . $ 2,215.5 $ 1,584.5
4,723.3
(4,092.3)
Sales return, rebate, and discount liabilities, end of year . . . . . . . . . . . . . . . . . . . . . $ 2,241.4 $ 2,215.5
Reduction of net sales due to sales returns, discounts, and rebates(1) . . . . . . . . .
Cash payments of discounts and rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,707.8
(4,681.9)
1
Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1.5 percent of consolidated net
sales for each of the years presented.
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are, by their nature, uncertain and are based upon
complex judgments and probabilities. The factors we consider in developing our product litigation liability
reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature
and the number of other similar current and past litigation cases, the nature of the product and the current
assessment of the science subject to the litigation, and the likelihood of settlement and current state of
settlement discussions, if any. In addition, we accrue for certain product liability claims incurred, but not filed,
to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based
primarily on historical claims experience and data regarding product usage. We accrue legal defense costs
expected to be incurred in connection with significant product liability contingencies when both probable and
reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance.
In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for
denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and
length of time for collection. Due to a very restrictive market for product liability insurance, we are self-insured
for product liability losses for all our currently marketed products. In addition to insurance coverage, we also
consider any third-party indemnification we have, including the nature of the indemnification, the financial
condition of the indemnifying party, and the possibility of and length of time for collection.
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have
been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
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 14 to the consolidated financial statements for additional
information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension
and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality,
fixed income debt instruments to determine the discount rates. In evaluating the expected rate of return, we
consider many factors, with a primary analysis of current and projected market conditions, asset returns and
asset allocations (approximately 85 percent of which are growth investments); and the views of leading
financial advisers and economists. We may also review our historical assumptions compared with actual
results, as well as the discount rates, expected return on plan assets, and health-care-cost trend rates of
other companies, where applicable. 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.
38
38
If the health-care-cost trend rates were to increase by one percentage point, the aggregate of the service cost
and interest cost components of the 2014 annual expense would increase by $7.8 million. A one-percentage-
point decrease would decrease the aggregate of the 2014 service cost and interest cost by $6.6 million. If the
2014 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to
change by a quarter percentage point, income before income taxes would change by $35.4 million. If the
2014 expected return on plan assets for U.S. plans were to change by a quarter percentage point, income
before income taxes would change by $21.7 million. If our assumption regarding the 2014 expected age of
future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected
by $49.9 million. The U.S. plans, including Puerto Rico, represent approximately 80 percent of both the total
projected benefit obligation and total plan assets at December 31, 2014.
Impairment of Indefinite-Lived and Long-Lived Assets
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a
periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may
not be recoverable. We determine impairment by comparing the projected undiscounted cash flows to be
generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the
excess of the asset’s net book value over its fair value, and the cost basis is adjusted.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain
impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets
is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require
multiple assumptions. We utilize the “income method,” which applies a probability weighting that considers the
risk of development and commercialization to the estimated future net cash flows that are derived from
projected sales revenues and estimated costs. These projections are based on factors such as relevant
market size, patent protection, historical pricing of similar products, and expected industry trends. The
estimated future net cash flows are then discounted to the present value using an appropriate discount rate.
This analysis is performed for each project independently.
For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be
no certainty that these assets ultimately will yield a successful product, as discussed previously in the “Late-
Stage Pipeline” section. The nature of the pharmaceutical business is high-risk and requires that we invest in
a large number of projects to build a successful portfolio of approved products. As such, it is likely that some
acquired IPR&D assets will become impaired in the future.
Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and
projections, require management’s judgment. Actual results could vary from these estimates.
Income Taxes
We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates
based on these judgments and interpretations. In the normal course of business, our tax returns are subject to
examination by various taxing authorities, which may result in future tax, interest, and penalty assessments by
these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law
resulting from legislation, regulation, and/or as concluded through the various jurisdictions’ tax court systems.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on
the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The
amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example,
adjustments could result from significant amendments to existing tax law, the issuance of regulations or
interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of
an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay
assessments that may result from examinations of our tax returns. We recognize both accrued interest and
penalties related to unrecognized tax benefits in income tax expense.
3939
We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have
been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In
evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed
any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards
where history does not support such an assumption. Implementation of tax planning strategies to recover
these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these
valuation allowances and a reduction of income tax expense.
As of December 31, 2014, a 5 percent change in the amount of the uncertain tax positions and the valuation
allowance would result in a change in net income of $31.9 million and $30.1 million, respectively.
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 15 to the consolidated financial
statements and is incorporated here by reference.
FINANCIAL EXPECTATIONS FOR 2015
For the full year of 2015, we expect EPS to be in the range of $2.40 to $2.50. We anticipate that total revenue
will be between $19.5 billion and $20.0 billion. The acquisition of Novartis AH is expected to add significant
revenue.
We anticipate that gross margin as a percent of revenue will be approximately 75.0 percent in 2015.
Marketing, selling, and administrative expenses are expected to be in the range of $6.5 billion to $6.8 billion.
Research and development expenses are expected to be in the range of $4.7 billion to $4.9 billion, reflecting
an expected increase in Phase III trial expenses and the inclusion of Novartis AH. Other—net, (income)
expense is expected to be in a range between $75 million and $125 million of income.
The 2015 tax rate is expected to be approximately 18.5 percent, assuming a full-year 2015 benefit of the
research and development tax credit and other tax provisions up for extension. If these items are not
extended, the 2015 tax rate would be approximately 1.5 percentage points higher. The 2015 expected tax rate
includes the tax impact of costs associated with the Novartis AH and Lohmann AH acquisitions and
amortization of intangibles.
Capital expenditures are expected to be approximately $1.3 billion.
Our 2015 financial guidance does not include a potential charge related to the collaboration with Pfizer to
develop and commercialize tanezumab. If the partial clinical hold for the molecule is removed and we and
Pfizer move forward with development, we will pay a $200 million upfront fee to Pfizer. This charge would
reduce EPS by approximately $0.12 and would cause our tax rate to be approximately 1.0 percentage point
lower.
40
40
Financial Statements and Supplementary Data
Consolidated Statements of Operations
ELI LILLY AND COMPANY AND SUBSIDIARIES
Year Ended December 31
(Dollars in millions, except per-share data)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,615.6 $ 23,113.1 $ 22,603.4
4,796.5
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,278.1
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,513.5
Marketing, selling, and administrative . . . . . . . . . . . . . . . . . . . . . .
—
Acquired in-process research and development (Notes 3 and 4) .
Asset impairment, restructuring, and other special charges
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,932.5
4,733.6
6,620.8
200.2
4,908.1
5,531.3
7,125.6
57.1
2014
2012
2013
Other—net, (income) expense (Note 17) . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
468.7
(340.5)
16,615.3
3,000.3
609.8
2,390.5 $
120.6
(518.9)
17,223.8
5,889.3
1,204.5
4,684.8 $
281.1
(674.0)
17,195.2
5,408.2
1,319.6
4,088.6
Basic earnings per share:
Weighted-average number of common shares outstanding,
including incremental shares . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,069,932
1,080,874
2.23 $
4.33 $
1,113,178
3.67
Diluted earnings per share:
Weighted-average number of common shares outstanding,
including incremental shares and stock options . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,074,286
1,084,766
2.23 $
4.32 $
1,117,294
3.66
See notes to consolidated financial statements.
41
41
Consolidated Statements of Comprehensive Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,390.5 $ 4,684.8 $ 4,088.6
Other comprehensive income (loss):
Year Ended December 31
2012
2014
2013
Change in foreign currency translation gains (losses) . . . . . . . . . . . .
Change in net unrealized gains and losses on securities . . . . . . . . .
Change in defined benefit pension and retiree health benefit plans
(Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in effective portion of cash flow hedges . . . . . . . . . . . . . . . .
Other comprehensive income (loss) before income taxes . . . . . . . . .
Provision for income taxes related to other comprehensive income
(loss) items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(961.4)
(162.2)
36.2
204.3
(1,327.6)
2,592.2
(14.5)
(123.8)
(2,465.7)
2,708.9
160.9
88.5
(128.6)
8.7
129.5
476.6
(914.5)
(68.0)
Other comprehensive income (loss) (Note 16) . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1,989.1)
1,794.4
61.5
401.4 $ 6,479.2 $ 4,150.1
See notes to consolidated financial statements.
4242
Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
Assets
Current Assets
December 31
2014
2013
Cash and cash equivalents (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term investments (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowances of $55.0 (2014) and $62.2 (2013) . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Assets
3,871.6 $
955.4
3,234.6
566.7
2,740.0
811.5
12,179.8
3,830.2
1,567.1
3,434.4
588.4
2,928.8
755.8
13,104.7
—
Restricted cash (Note 3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,624.9
Investments (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,516.8
Goodwill (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,814.3
Other intangibles, net (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,212.5
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,168.5
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,975.5
Property and equipment, net (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,178.2 $ 35,248.7
Liabilities and Equity
Current Liabilities
5,405.6
4,568.9
1,758.1
2,884.2
2,417.7
17,034.5
7,963.9
Short-term borrowings and current maturities of long-term debt (Note 10) . . . $
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales rebates and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities
Long-term debt (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term income taxes payable (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,688.7 $
1,128.1
759.0
2,068.8
530.3
93.5
1,466.5
2,472.6
11,207.5
5,367.7
2,562.9
998.5
1,653.5
10,582.6
1,012.6
1,119.3
943.9
1,941.7
523.5
254.4
792.8
2,328.4
8,916.6
4,200.3
1,549.4
1,078.7
1,863.0
8,691.4
Commitments and contingencies (Note 15)
Eli Lilly and Company Shareholders' Equity (Notes 11 and 12)
Common stock—no par value
Authorized shares: 3,200,000
Issued shares: 1,111,437 (2014) and 1,117,628 (2013) . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefit trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss (Note 16) . . . . . . . . . . . . . . . . . . . . . .
Cost of common stock in treasury, 810 shares (2014) and 833 shares
(2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(93.6)
17,631.4
Total Eli Lilly and Company shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . .
9.3
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,640.7
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,178.2 $ 35,248.7
See notes to consolidated financial statements.
694.6
5,292.3
16,482.7
(3,013.2)
(3,991.8)
698.5
5,050.0
16,992.4
(3,013.2)
(2,002.7)
(91.4)
15,373.2
14.9
15,388.1
43
43
Consolidated Statements of Shareholders' Equity
ELI LILLY AND COMPANY AND
SUBSIDIARIES
(Dollars in millions, shares in
thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Common Stock in
Treasury
Shares
Amount
Employee
Benefit
Trust
Shareholders'
Equity
Balance at January 1, 2012 . . . .
1,158,644
$ 724.1
$ 4,886.8
$ 14,897.8
$
(3,858.6)
853
$
(95.3) $(3,013.1) $
13,541.7
Net income . . . . . . . . . . . . . . . . .
Other comprehensive income
(loss), net of tax . . . . . . . . . . . . .
Cash dividends declared per
share: $1.96 . . . . . . . . . . . . . . . .
Retirement of treasury shares . .
(14,912)
(9.3)
Purchase for treasury . . . . . . . . .
Issuance of stock under
employee stock plans-net. . . . . .
Stock-based compensation . . . .
Other . . . . . . . . . . . . . . . . . . . . .
2,761
1.8
(65.2)
141.5
4,088.6
(2,186.5)
(711.7)
61.5
(14,912)
721.1
16,918
(819.2)
(9)
1.0
4,088.6
61.5
(2,186.5)
0.1
(819.2)
(62.4)
141.5
(0.1)
(0.1)
Balance at December 31, 2012 .
1,146,493
716.6
4,963.1
16,088.2
(3,797.1)
2,850
(192.4)
(3,013.2)
14,765.2
Net income . . . . . . . . . . . . . . . . .
Other comprehensive income
(loss), net of tax . . . . . . . . . . . . .
Cash dividends declared per
share: $1.96 . . . . . . . . . . . . . . . .
Retirement of treasury shares . .
Purchase for treasury . . . . . . . . .
Issuance of stock under
employee stock plans-net . . .
Stock-based compensation . . . .
(32,406)
(20.3)
3,541
2.2
(58.0)
144.9
4,684.8
(2,102.8)
(1,677.8)
1,794.4
(32,406)
1,698.1
30,400
(1,600.0)
(11)
0.7
Balance at December 31, 2013 .
1,117,628
698.5
5,050.0
16,992.4
(2,002.7)
833
(93.6)
(3,013.2)
Net income . . . . . . . . . . . . . . . . .
Other comprehensive income
(loss), net of tax . . . . . . . . . . . . .
Cash dividends declared per
share: $1.97 . . . . . . . . . . . . . . . .
Retirement of treasury shares . .
Purchase for treasury . . . . . . . . .
Issuance of stock under
employee stock plans-net . . .
Stock-based compensation . . . .
(12,579)
(7.9)
6,388
4.0
86.3
156.0
2,390.5
(2,108.1)
(792.1)
(1,989.1)
(12,579)
800.0
12,579
(800.0)
(23)
2.2
4,684.8
1,794.4
(2,102.8)
—
(1,600.0)
(55.1)
144.9
17,631.4
2,390.5
(1,989.1)
(2,108.1)
—
(800.0)
92.5
156.0
Balance at December 31, 2014 .
1,111,437
$ 694.6
$ 5,292.3
$ 16,482.7
$
(3,991.8)
810
$
(91.4) $(3,013.2) $
15,373.2
4444
Consolidated Statements of Cash Flows
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Cash Flows from Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,390.5 $ 4,684.8 $ 4,088.6
Year Ended December 31
2014
2012
2013
Adjustments to Reconcile Net Income
to Cash Flows from Operating Activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . .
Net realized investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges, indefinite lived intangibles . . . . . . . . . . . . . .
Acquired in-process research and development, net of tax . . . . .
Income related to termination of the exenatide collaboration with
Amylin (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from terminations of interest rate swaps. . . . . . . . . . . .
Other non-cash operating activities, net . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of acquisitions:
Receivables—(increase) decrease . . . . . . . . . . . . . . . . . . . . . . .
Inventories—(increase) decrease . . . . . . . . . . . . . . . . . . . . . . . .
Other assets—(increase) decrease . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other liabilities—increase (decrease) . . .
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . .
Disposals of property and equipment . . . . . . . . . . . . . . . . . . . . . .
Cash restricted for pending acquisition (Note 3). . . . . . . . . . . . . .
Proceeds from sales and maturities of short-term investments . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of noncurrent investments. . . . . . . . . . . . . .
Purchases of noncurrent investments . . . . . . . . . . . . . . . . . . . . .
Purchase of product rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of in-process research and development . . . . . . . . . .
Cash paid for acquisitions, net of cash acquired . . . . . . . . . . . . .
Proceeds from prepayment of revenue-sharing obligation
(Note 4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used for Investing Activities . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Financing Activities
1,379.0
(36.4)
156.0
(195.1)
—
130.2
—
340.7
241.1
117.4
(307.1)
411.5
(260.7)
4,367.1
(1,162.6)
15.3
(5,405.6)
4,054.1
(1,637.8)
11,009.4
(9,802.7)
(308.3)
(95.0)
(551.4)
—
(24.5)
(3,909.1)
1,445.6
285.9
144.9
(41.0)
—
37.1
(495.4)
—
66.1
(152.7)
(286.5)
116.5
(70.3)
5,735.0
(1,012.1)
179.4
—
3,320.1
(1,531.0)
11,235.0
(14,041.9)
(24.1)
(57.1)
(43.7)
—
(97.4)
(2,072.8)
1,462.2
126.0
141.5
(66.9)
205.0
—
(787.8)
—
187.4
361.8
(307.9)
231.0
(336.1)
5,304.8
(905.4)
22.0
—
2,547.5
(2,172.4)
4,355.7
(7,618.6)
(138.8)
—
(199.3)
1,212.1
64.4
(2,832.8)
(2,187.4)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Net change in short-term borrowings . . . . . . . . . . . . . . . . . . . . . .
—
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . .
(1,511.1)
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
(721.1)
Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other financing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,419.6)
Net Cash Used for Financing Activities . . . . . . . . . . . . . . . . . . . . .
43.9
Effect of exchange rate changes on cash and cash equivalents. . . . .
(1,903.7)
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . .
5,922.5
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . .
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . $ 3,871.6 $ 3,830.2 $ 4,018.8
(2,120.7)
—
—
(10.5)
(1,698.1)
—
(3,829.3)
(21.5)
(188.6)
4,018.8
(2,101.2)
2,680.6
992.9
(1,034.8)
(800.0)
187.4
(75.1)
(341.5)
41.4
3,830.2
See notes to consolidated financial statements.
45
45
Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Tables present 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
principles 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 noncontrolling shareholders’ interests are reflected as
a separate component of equity. 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. We issued our financial statements by filing with the Securities and Exchange
Commission and have evaluated subsequent events up to the time of the filing.
Certain reclassifications have been made to prior periods in the consolidated financial statements and
accompanying notes to conform with the current presentation.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is,
based on the weighted-average number of outstanding common shares plus the effect of dilutive stock
options and other incremental shares.
Cash equivalents
We consider all highly liquid investments with a maturity of three months or less from the date of purchase to
be cash equivalents. The cost of these investments approximates fair value.
Inventories
We state all inventories at the lower of cost or market. We use the last-in, first-out (LIFO) method for the
majority of our inventories located in the continental United States (U.S.). Other inventories are valued by the
first-in, first-out (FIFO) method. FIFO cost approximates current replacement cost.
Investments
Substantially all of our investments in debt and marketable equity securities are classified as available-for-
sale. Investment securities with maturity dates of less than one year from the date of the balance sheet are
classified as short-term. Available-for-sale securities are carried at fair value with the unrealized gains and
losses, net of tax, reported in other comprehensive income (loss). The credit portion of unrealized losses on
our debt securities considered to be other-than-temporary is recognized in earnings. The remaining portion of
the other-than-temporary impairment on our debt securities is then recorded, net of tax, in other
comprehensive income (loss). The entire amount of other-than-temporary impairment on our equity securities
is recognized in earnings. 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 that were recorded
in earnings. Investments in companies over which we have significant influence but not a controlling interest
are accounted for using the equity method with our share of earnings or losses reported in other–net,
(income) expense. We own no investments that are considered to be trading securities.
4646
Risk-management instruments
Our derivative activities are initiated within the guidelines of documented corporate risk-management policies
and offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews
the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative 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
accumulated other comprehensive loss and reclassified into earnings in the same period the hedged
transaction affects earnings. Hedge ineffectiveness is immediately recognized in earnings. Derivative
contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss
recognized in current earnings during the period of change.
We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency
exchange rates (principally the euro, the British pound, and the Japanese yen). Foreign currency derivatives
used for hedging are put in place using the same or like currencies and duration as the underlying exposures.
Forward and option contracts are principally used to manage exposures arising from subsidiary trade and
loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value
with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward
and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts
generally have maturities not exceeding 12 months.
In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary
the costs of financing, investing, and operating. We address a portion of these risks through a controlled
program of risk management that includes the use of derivative financial instruments. The objective of
controlling these risks is to limit the impact of fluctuations in interest rates on earnings. Our primary interest-
rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage
interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and
investment positions and may enter into interest rate swaps or collars to help maintain that balance.
Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value
hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed
rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments
made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting
from the termination of interest rate swaps are classified as operating activities in our consolidated statement
of cash flows.
We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of
earnings and cash flow associated with forecasted sales of available-for-sale securities.
Investments in debt securities are subject to different interest rate risks based on their maturities. We may
manage the average maturity of our investments in debt securities to achieve economic returns using interest
rate contracts, none of which are designated as hedging instruments.
We may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of
any anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in
interest rates. Upon completion of a debt issuance and termination of the swap, the change in fair value of
these instruments is recorded as part of other comprehensive income (loss) and is amortized to interest
expense over the life of the debt agreement.
Goodwill and other intangibles
Goodwill results from excess consideration in a business combination over the fair value of identifiable net
assets acquired. Goodwill is not amortized.
Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging
from 3 to 20 years.
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The costs of in-process research and development (IPR&D) projects acquired directly in a transaction other
than a business combination are capitalized if the projects have an alternative future use; otherwise, they are
expensed immediately. The fair values of IPR&D projects acquired in business combinations are capitalized
as other intangible assets. Several methods may be used to determine the estimated fair value of the IPR&D
acquired in a business combination. We utilize the “income method,” which applies a probability weighting
that considers the risk of development and commercialization to the estimated future net cash flows that are
derived from projected revenues and estimated costs. These projections are based on factors such as
relevant market size, patent protection, historical pricing of similar products, and expected industry trends.
The estimated future net cash flows are then discounted to the present value using an appropriate discount
rate. This analysis is performed for each project independently. These assets are treated as indefinite-lived
intangible assets until completion or abandonment of the projects, at which time the assets are tested for
impairment and amortized over the remaining useful life or written off, as appropriate. For transactions other
than a business combination, we also capitalize milestone payments incurred at or after the product has
obtained regulatory approval for marketing and generally amortize those amounts over the remaining
estimated useful life of the underlying asset.
Goodwill and other indefinite-lived intangible assets are reviewed for impairment at least annually and when
impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets
is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived
IPR&D assets for impairment testing purposes, we utilize the "income method" discussed in the previous
paragraph. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is
present.
Property and equipment
Property and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment
are computed generally by the straight-line method at rates based on their estimated useful lives (12 to
50 years for buildings and 3 to 25 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 asset’s net book value over its fair value, and the cost basis is
adjusted.
Litigation and environmental liabilities
Litigation accruals, environmental liabilities, and the related estimated insurance recoverables are reflected on
a gross basis as liabilities and assets, respectively, on our consolidated balance sheets. With respect to the
product liability claims currently asserted against us, we have accrued for our estimated exposures to the
extent they are both probable and reasonably estimable based on the information available to us. We accrue
for certain product liability claims incurred but not filed to the extent we can formulate a reasonable estimate
of their costs. We estimate these expenses based primarily on historical claims experience and data
regarding product usage. Legal defense costs expected to be incurred in connection with significant product
liability loss contingencies are accrued when both probable and reasonably estimable. Due to a very
restrictive market for product liability insurance, we are self-insured for product liability losses for all our
currently marketed products.
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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. Provisions for returns, discounts, and rebates are established in
the same period the related sales are recognized.
In arrangements involving the delivery of more than one element (e.g., research and development, marketing
and selling, manufacturing, and distribution), each required deliverable is evaluated to determine whether it
qualifies as a separate unit of accounting. Our determination is based on whether the deliverable has
"standalone value" to the customer. If a deliverable does not qualify as a separate unit of accounting, it is
combined with the other applicable undelivered item(s) within the arrangement and these combined
deliverables are treated as a single unit of accounting. The arrangement's consideration that is fixed or
determinable is then allocated to each separate unit of accounting based on the relative selling price of each
deliverable.
Initial fees we receive in collaborative and other similar arrangements from the partnering of our compounds
under development are generally deferred and amortized into income through the expected product approval
date. Initial fees may also be received for out-licensing agreements that include both an out-license of our
marketing rights to commercialized products and a related commitment to supply the products. When we
have determined that the marketing rights do not have standalone value, the initial fees received are generally
deferred and amortized to income as net product sales over the term of the supply agreement.
Royalty revenue from licensees, which is based on third-party sales of licensed products and technology, is
recorded as earned in accordance with the contract terms when third-party sales can be reasonably
measured and collection of the funds is reasonably assured. This royalty revenue is included in collaboration
and other revenue.
Profit-sharing due from our collaboration partners, which is based upon gross margins reported to us by our
partners, is recognized as collaboration and other revenue as earned.
Developmental milestone payments earned by us are generally recorded in other–net, (income) expense. We
immediately recognize the full amount of developmental milestone payments due to us upon the achievement
of the milestone event if the event is objectively determinable and the milestone is substantive in its entirety. A
milestone is considered substantive if the consideration earned 1) relates solely to past performance, 2) is
commensurate with the enhancement in the pharmaceutical product's value associated with the achievement
of the important event in its development life cycle, and 3) is reasonable relative to all of the deliverables and
payment terms within the arrangement. If a milestone payment to us is part of a multiple-element
commercialization arrangement and is triggered by the initiation of the commercialization period (e.g.,
regulatory approval for marketing or launch of the product) or the achievement of a sales-based threshold, we
amortize the payment to income as we perform under the terms of the arrangement. See Note 4 for specific
agreement details.
Research and development expenses and acquired IPR&D
Research and development expenses include the following:
(cid:127) Research and development costs, which are expensed as incurred.
(cid:127) Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued
when the event requiring payment of the milestone occurs.
Acquired IPR&D expense includes the initial costs of IPR&D projects, acquired directly in a transaction other
than a business combination, that do not have an alternative future use.
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 U.S. and be taxable. When foreign
earnings are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. income taxes is
provided.
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We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on
the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
Earnings per share
We calculate basic earnings per share (EPS) based on the weighted-average number of common shares
outstanding and incremental shares. We calculate diluted EPS based on the weighted-average number of
common shares outstanding, including incremental shares and dilutive stock options.
Stock-based compensation
We recognize the fair value of stock-based compensation as expense over the requisite service period of the
individual grantees, which generally equals the vesting period. Under our policy, all stock-based awards are
approved prior to the date of grant. The compensation committee of the board of directors approves the value
of the award and date of grant. Stock-based compensation that is awarded as part of our annual equity grant
is made on a specific grant date scheduled in advance.
Note 2: Implementation of New Financial Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue
recognition. Under the new standard, an entity should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In order to do so, an entity would follow the five-step process
for in-scope transactions: 1) identify the contract with a customer, 2) identify the separate performance
obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the separate
performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a
performance obligation. For public entities, the provisions of the new standard are expected to become
effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted.
An entity can apply the new revenue standard retrospectively to each prior reporting period presented or
retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial
application in retained earnings. We are in the process of determining our approach to the adoption of this
new revenue recognition standard, as well as the anticipated impact to our consolidated financial statements.
In July 2013, the FASB issued a clarification regarding the presentation of an unrecognized tax benefit related
to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Under this new standard,
the liability related to an unrecognized tax benefit, or a portion thereof, should be presented in the financial
statements as a reduction to a deferred tax asset if available under the tax law of the applicable jurisdiction to
settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, the
unrecognized tax benefit should be presented in the financial statements as a separate liability. The
assessment is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date.
The provisions of the new standard are effective on a prospective basis beginning in 2014 for annual and
interim reporting periods. Adoption of this standard in the first quarter of 2014 resulted in an immaterial impact
to our consolidated balance sheet and did not affect our consolidated statements of operations.
Note 3: Acquisitions
During 2014 and 2012, we completed the acquisitions of Lohmann SE (Lohmann AH) and ChemGen
Corporation (ChemGen), respectively. These acquisitions were accounted for as business combinations
under the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at
their respective fair values as of the acquisition date in our consolidated financial statements. The
determination of estimated fair value required management to make significant estimates and assumptions.
The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been
recorded as goodwill. The results of operations of these acquisitions are included in our consolidated financial
statements from the date of acquisition. Neither acquisition was material to our consolidated financial
statements.
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During 2014, we announced an agreement to acquire Novartis Animal Health (Novartis AH), which was
subsequently completed in January 2015. Details of our acquisitions of businesses are further discussed
below.
In addition to the acquisitions of businesses, we also acquired assets in development in 2014 and 2013 which
are further discussed below in Product and Other Acquisitions and in Note 4. Upon acquisition, the acquired
IPR&D related to these products was immediately written off as an expense because the products had no
alternative future use. For the years ended December 31, 2014 and 2013, we recorded acquired IPR&D
charges of $200.2 million and $57.1 million, respectively, associated with these transactions. There were no
acquired IPR&D charges in 2012.
Acquisitions of Businesses
Subsequent Event - Novartis AH Acquisition
Overview of Transaction
On January 1, 2015, we acquired from Novartis AG all of the shares of certain Novartis subsidiaries and all of
the assets of other Novartis subsidiaries that are exclusively related to the Novartis AH business in an all-cash
transaction for a total purchase price of approximately $5.4 billion, subject to working capital and other
adjustments. As of December 31, 2014, there was $5.41 billion of cash held in escrow for the pending
acquisition of Novartis AH. This cash was classified as restricted cash, a noncurrent asset, on our
consolidated balance sheet. The accounting for the acquisition and the results of the Novartis AH operations
will be included in our financial statements for the period beginning on January 1, 2015.
As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvement Act,
following the closing of the acquisition of Novartis AH, we divested certain animal health assets in the U.S.
related to the Sentinel® canine parasiticide franchise to Virbac Corporation for approximately $410 million.
The acquired Novartis AH business consists of the research and development, manufacture, marketing, sale
and distribution of veterinary products to prevent and treat diseases in pets, farm animals, and farmed fish.
Under the terms of the agreement, we acquired manufacturing sites, research and development facilities, a
global commercial infrastructure and portfolio of products, a pipeline of projects in development, and
employees.
Assets Acquired and Liabilities Assumed
The initial accounting for this acquisition is incomplete. Significant, relevant information needed to complete
the initial accounting is not available because the valuation of the assets acquired and liabilities assumed is
not complete. As a result, determining these values is not practicable and we are unable to disclose these
values or provide other related disclosures at this time.
Supplemental Pro Forma Information
Our unaudited pro forma consolidated revenue for 2014 is approximately $20.7 billion. This amount was
determined as if the portion of Novartis AH that we retained after the sale to Virbac had been acquired as of
January 1, 2014. This unaudited pro forma consolidated revenue is not necessarily indicative of what our
consolidated revenues actually would have been had we completed the acquisition on January 1, 2014.
Lohmann AH Acquisition
On April 30, 2014, we acquired Lohmann AH, a privately-held company headquartered in Cuxhaven,
Germany, through a stock purchase for a total purchase price of $591.2 million, comprised of $551.4 million of
net cash plus $39.8 million of assumed debt. Lohmann AH is a global leader in poultry vaccines. As part of
this transaction, we acquired the rights to a range of vaccines, commercial capabilities, and manufacturing
sites in Germany and the United States. Preliminary amounts currently recorded in connection with this
acquisition include $275.4 million of marketed product assets, $23.9 million of other intangible assets, $89.8
million of property and equipment, $243.7 million of goodwill, and $92.7 million of deferred tax liability, with
$51.1 million of other net assets. The final determination may result in asset and liability fair values that differ
from the preliminary estimates, but it is not expected that these differences will be material to our consolidated
financial statements. Goodwill associated with this acquisition is not deductible for tax purposes.
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ChemGen
On February 17, 2012, we acquired all of the outstanding stock of ChemGen, a privately-held bioscience
company specializing in the development and commercialization of innovative feed-enzyme products that
improve the efficiency of poultry, egg, and meat production, for total purchase consideration of $206.9 million
in cash. In connection with this acquisition, we recorded $151.5 million of marketed product assets and $55.4
million of other net assets.
Product and Other Acquisitions
In connection with the arrangements described below, our partners may be entitled to future royalties based
on sales should these products be approved for commercialization and/or milestones based on the successful
progress of the drug candidate through the development process.
In July 2014, we entered into a co-discovery and co-development collaboration with Immunocore Limited to
research and potentially develop pre-clinical novel T cell-based cancer therapies. Upon entering the
agreement, we paid an upfront fee of $45.0 million in cash and a related charge was recorded for acquired
IPR&D.
In September 2014, we entered into a collaboration agreement with AstraZeneca UK Limited (AstraZeneca)
for the worldwide co-development and co-commercialization of AstraZeneca’s oral beta-secretase cleaving
enzyme inhibitor known as AZD3293, a compound being investigated for the potential treatment of
Alzheimer’s disease. At the time of the agreement, AZD3293 had completed Phase I testing in patients with
early Alzheimer’s disease. We will be responsible for leading development efforts, while AstraZeneca will be
responsible for manufacturing efforts. If successful, both parties will take joint responsibility for
commercialization of AZD3293. Under the agreement, both parties will share equally in the ongoing
development costs, gross margins and certain other costs associated with the commercialization of the
compound. Upon execution of the agreement, we immediately recorded, as an acquired IPR&D charge, our
obligation associated with a payment of $50.0 million which we will pay to AstraZeneca in 2015.
In December 2014, we entered into a collaboration agreement with Adocia for the worldwide development and
commercialization of Adocia's ultra-rapid insulin, known as BioChaperone Lispro, a compound being
developed for the treatment of patients with type 1 and type 2 diabetes. BioChaperone Lispro is currently in
Phase I studies. We will be responsible for leading development, manufacturing, and commercialization
efforts. Upon entering the agreement, we paid an upfront fee of $50.0 million in cash and a related charge
was recorded for acquired IPR&D.
In December 2013, we acquired for $57.1 million in cash, all development and commercial rights for a
calcitonin gene-related peptide antibody being studied as a potential treatment for the prevention of frequent,
recurrent migraine headaches. At the time of the purchase, the product had completed a successful Phase II
proof-of-concept study and a related charge was recorded for acquired IPR&D.
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Note 4: Collaborations and Other Arrangements
We often enter into collaborative and other similar arrangements to develop and commercialize drug
candidates. Collaborative activities may include research and development, marketing and selling (including
promotional activities and physician detailing), manufacturing, and distribution. These arrangements often
require milestone and royalty or profit-share payments, contingent upon the occurrence of certain future
events linked to the success of the asset in development, as well as expense reimbursements or payments to
the collaboration partner. Elements within a collaboration are separated into individual units of accounting if
they have standalone value from other elements within the arrangement. In these situations, the arrangement
consideration is allocated to the elements on a relative selling price basis. Revenues related to products we
sell pursuant to these arrangements are included in net product sales, while other sources of revenue (e.g.,
royalties and profit sharing due from our partner) are included in collaboration and other revenue. For the
years ended December 31, 2014, 2013, and 2012, we recognized collaboration and other revenue of
$788.4 million, $707.5 million, and $633.0 million, respectively. Operating expenses for costs incurred
pursuant to these arrangements are reported in their respective expense line item, net of any payments due
to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the
time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant
arrangements are discussed below.
Diabetes Collaboration
We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of
diabetes compounds. Currently, the compounds included in the collaboration are Boehringer Ingelheim’s two
oral diabetes agents, linagliptin (trade name Trajenta® ) and empagliflozin (trade name Jardiance®), and our
new insulin glargine product (trade name Basaglar® in the U.S.).
Trajenta was approved in 2011 and launched in the U.S., Japan, certain countries in Europe, and other
countries. Jardiance was approved in Europe, the U.S., and Japan in May, August, and December 2014,
respectively. The product was launched in certain European countries and the U.S. in the third quarter of
2014. Our new insulin glargine product was approved by the European Commission in Europe in September
2014 and regulatory authorities in Japan in December 2014. Basaglar received tentative approval in the U.S.
in August 2014. The U.S. Food and Drug Administration (FDA) has determined that Basaglar meets all
regulatory requirements for approval, but final approval is subject to a delay of up to 30 months as a result of
patent infringement litigation filed by Sanofi, which makes Lantus®, the only currently marketed insulin
glargine. Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman
Act), the initiation of the lawsuit automatically invoked a stay of final FDA approval for a period of 30 months
(until July 2016), which may be shortened in the event of an earlier court decision in our favor.
In connection with the approval of Trajenta in the U.S., Japan, and Europe, we paid $478.7 million in success-
based regulatory milestones, all of which were capitalized as intangible assets and are being amortized to
cost of sales.
In connection with the approval of Jardiance in Europe, the U.S., and Japan, we incurred success-based
regulatory milestones of $300.5 million, which were capitalized as intangible assets and will be amortized to
cost of sales. We incurred milestone-related expenses of $97.2 million in connection with regulatory
submissions for Jardiance in Europe, the U.S., and Japan during 2013. These regulatory submission
milestones were recorded as research and development expenses.
Upon the approval of our new insulin glargine product in Europe and Japan during 2014, we recorded, as
deferred revenue, $62.5 million in milestones which will be amortized to collaboration and other revenue upon
product launch in Europe and Japan through the term of the collaboration (2029). During 2013, we earned
$50.0 million in milestones for the regulatory submissions of our new insulin glargine product in the U.S.,
Europe, and Japan. These submission milestones were recorded as income in other–net, (income) expense.
In the future, we will be eligible to receive up to $187.5 million in success-based regulatory milestones on our
new insulin glargine product.
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In October 2014, we and Boehringer Ingelheim agreed upon certain changes to the operational and financial
structure of our diabetes collaboration. Under the revised agreement the companies will continue their co-
promotion work in 17 countries, representing over 90 percent of the collaboration’s anticipated market
opportunity. In the other countries, the companies will exclusively commercialize the respective molecules
they brought to the collaboration. The modifications became effective at the end of 2014, and will change the
financial terms related to the modified countries; however, the financial impact resulting from the revised
terms of the agreement in these countries is not anticipated to be material. As a result of these changes, in
the fourth quarter of 2014, we recorded a gain of $92.0 million related to the transfer to Boehringer Ingelheim
of our license rights to co-promote linagliptin and empagliflozin in these countries, which was recorded as
income in other–net, (income) expense. We also incurred a charge of $55.2 million related to the transfer to
us of Boehringer Ingelheim's rights to co-promote our new insulin glargine product in countries where it is not
yet approved, which was recorded as acquired IPR&D expense.
With the exception of the countries affected by the amendment to the collaboration agreement, the companies
share equally the ongoing development costs and, if successful, commercialization costs and gross margin
for any product resulting from the collaboration. We record our portion of the gross margin associated with
Boehringer Ingelheim's compounds as collaboration and other revenue, and we record our portion of the
commercialization costs as marketing, selling, and administrative expense. Each company will also be entitled
to potential performance payments on sales of the molecules they contribute to the collaboration. Our
revenue related to Trajenta was $328.8 million, $249.2 million, and $88.6 million for the years ended
December 31, 2014, 2013, and 2012, respectively. Our revenue related to Jardiance was not material for the
year ended December 31, 2014.
Effient®
We are in a collaborative arrangement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) to develop, market, and
promote Effient. We and Daiichi Sankyo co-promote Effient in certain territories (including the U.S. and five
major European markets), while we have exclusive marketing rights in certain other territories. Daiichi Sankyo
has exclusive marketing rights in Japan and certain other territories. The parties share approximately 50/50 in
the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party
manufactures bulk product, and we produce the finished product for our exclusive and co-promotion
territories. We record product sales in our exclusive and co-promotion territories. In our exclusive territories,
we pay Daiichi Sankyo a royalty specific to these territories. Profit-share payments due to Daiichi Sankyo are
recorded as marketing, selling, and administrative expenses. All royalties due to Daiichi Sankyo and the third-
party manufacturer are recorded in cost of sales. Effient sales were $522.2 million, $508.7 million, and
$457.2 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Erbitux®
We have several collaborations with respect to Erbitux. The most significant collaborations are in the U.S.,
Canada, and Japan (Bristol-Myers Squibb Company); and worldwide except the U.S. and Canada (Merck
KGaA). Upon expiration of the agreements, all of the rights to Erbitux in the U.S. and Canada return to us and
certain rights to Erbitux outside the U.S. and Canada will remain with Merck KGaA (Merck).
The following table summarizes our revenue recognized with respect to Erbitux:
2014
Net product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
46.1
Collaboration and other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
327.2
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 373.3
$
2013
58.5
315.2
$ 373.7
$
2012
76.4
320.6
$ 397.0
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Bristol-Myers Squibb Company
Pursuant to commercial agreements with Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS),
we are co-developing Erbitux in the U.S. and Canada with BMS through September 2018, exclusively, and in
Japan with BMS and Merck through 2032. Under these arrangements, Erbitux research and development and
other costs are shared by both companies according to a predetermined ratio.
Responsibilities associated with clinical and other ongoing studies are apportioned between the parties under
the agreements. Collaborative reimbursements due to us for supply of clinical trial materials; for research and
development; and for a portion of marketing, selling, and administrative expenses are recorded as a reduction
to the respective expense line items on the consolidated statement of operations. We receive a distribution
fee in the form of a royalty from BMS, based on a percentage of net sales in the U.S. and Canada, which is
recorded in collaboration and other revenue. Royalties due to third parties are recorded as a reduction of
collaboration and other revenue, net of any royalty reimbursements due from third parties.
We are responsible for the manufacture and supply of all requirements of Erbitux in bulk-form active
pharmaceutical ingredient (API) for clinical and commercial use in the U.S. and Canada, and BMS will
purchase all of its requirements of API for commercial use from us, subject to certain stipulations per the
agreement. Sales of Erbitux to BMS for commercial use are reported in net product sales.
Merck KGaA
A development and license agreement grants Merck exclusive rights to market Erbitux outside of the U.S. and
Canada, and expires in December 2018. A separate agreement grants co-exclusive rights among Merck,
BMS, and us in Japan and expires in 2032.
Merck manufactures Erbitux for supply in its territory as well as for Japan. We receive a royalty on the sales of
Erbitux outside of the U.S. and Canada, which is included in collaboration and other revenue as earned.
Royalties due to third parties are recorded as a reduction of collaboration and other revenue, net of any
royalty reimbursements due from third parties.
Exenatide
In November 2011, we agreed with Amylin Pharmaceuticals, Inc. (Amylin) to terminate our collaborative
arrangement for the joint development, marketing, and selling of Byetta® (exenatide injection) and other forms
of exenatide such as Bydureon® (exenatide extended-release for injectable suspension). Under the terms of
the termination agreement, Amylin made a one-time, upfront payment to us of $250.0 million. Amylin also
agreed to make future revenue-sharing payments to us in an amount equal to 15.0 percent of its global net
sales of exenatide products until Amylin made aggregate payments to us of $1.20 billion plus interest, which
would accrue at 9.5 percent. Upon completion of the acquisition of Amylin by Bristol-Myers Squibb Company
in August 2012, Amylin's obligation of $1.26 billion, including accrued interest, was paid in full, with $1.21
billion representing a prepayment of the obligation. We will also receive a $150.0 million milestone payment
contingent upon FDA approval of a once-monthly suspension version of exenatide.
Commercial operations were transferred to Amylin in the U.S. in late 2011. Outside the U.S., we transferred to
Amylin exenatide commercial rights and control in all markets during the first quarter of 2013. We were
responsible for certain development costs related to certain clinical trials outside the U.S. that we were
conducting as of the date of the termination agreement as well as commercialization costs outside the U.S.
until the commercial rights were transferred to Amylin.
Payments received from Amylin were allocated 65 percent to the U.S., which was treated as a contract
termination, and 35 percent to the business outside the U.S., which was treated as the disposition of a
business. The allocation was based upon relative fair values. The revenue-sharing income allocated to the
U.S. was recognized as collaboration and other revenue, consistent with our policy for royalty revenue, while
the income related to the prepayment of Amylin's obligation allocated to the U.S. was recognized in other-net,
(income) expense. All income allocated to the business outside the U.S. that was transferred during the first
quarter of 2013 was recognized as a gain on the disposition of a business in other–net, (income) expense, net
of the goodwill allocated to the business transferred.
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Under the terms of our prior arrangement, we reported as net product sales 100 percent of sales outside the
U.S. and our sales of Byetta pen delivery devices to Amylin. We paid Amylin a percentage of the gross margin
of exenatide sales outside of the U.S., and these costs were recorded in cost of sales. This arrangement for
the commercial operations outside the U.S. continued until those rights were transferred to Amylin during the
first quarter of 2013.
Total revenue related to exenatide was insignificant in 2014. The following table summarizes the revenue and
other income recognized with respect to exenatide for the years ended December 31, 2013 and 2012:
Net product sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133.1
Collaboration and other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133.1
2013
2012
$ 207.8
70.1
$ 277.9
Income related to termination of the exenatide collaboration with Amylin(1) . . . . . . $ 495.4
$ 787.8
1 Presented in other-net, (income) expense
Solanezumab
We have an agreement with an affiliate of TPG-Axon Capital (TPG) whereby TPG funded a portion of the
Phase III development of solanezumab. Under the agreement, TPG’s obligation to fund solanezumab costs
ended in 2011. In exchange for their funding, TPG may receive success-based sales milestones totaling
approximately $70 million and mid-single digit royalties contingent upon the successful development of
solanezumab. The royalties would be paid for approximately 10 years after launch of a product.
Baricitinib
We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte) which provides us
the development and commercialization rights to its Janus tyrosine kinase inhibitor compound, now known as
baricitinib, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases.
Incyte has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging
up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to
co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated
development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for
increased tiered royalties ranging up to percentages in the high twenties. In 2010, Incyte exercised its option
to co-develop baricitinib in rheumatoid arthritis. The agreement also provides Incyte with an option to co-
promote in the U.S. and calls for payments associated with certain development, success-based regulatory,
and sales-based milestones. Upon initiation of Phase III trials for the treatment of rheumatoid arthritis in the
fourth quarter of 2012, we incurred a milestone-related expense of $50.0 million which was recorded as
research and development expense. As of December 31, 2014, Incyte is eligible to receive up to
$415.0 million of additional payments from us contingent upon certain development and success-based
regulatory milestones as well as an additional $150.0 million of potential sales-based milestones.
5656
Tanezumab
In October 2013, we entered into a collaboration agreement with Pfizer Inc. to jointly develop and globally
commercialize tanezumab for the potential treatment of osteoarthritis pain, chronic low back pain and cancer
pain. Tanezumab is currently in Phase III development and is subject to a partial clinical hold by the FDA
pending submission of nonclinical data to the FDA. Under the agreement, the companies share equally the
ongoing development costs and, if successful, in gross margins and certain commercialization expenses.
Contingent upon the parties continuing in the collaboration after receipt of the FDA's response to the
submission of the nonclinical data, we will be obligated to pay an upfront fee of $200.0 million. This payment
would be immediately expensed. In addition to this fee, we may pay up to $350.0 million in success-based
regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent upon the
commercial success of tanezumab. Both parties have the right to terminate the agreement under certain
circumstances.
Summary of Commission and Profit-Share Payments
The aggregate amount of marketing, selling, and administrative expense associated with our commission and
profit-sharing obligations for the collaborations and other arrangements described above was $211.2 million,
$203.7 million, and $188.5 million for the years ended December 31, 2014, 2013, and 2012, respectively.
Note 5: Asset Impairment, Restructuring, and Other Special Charges
The components of the charges included in asset impairment, restructuring, and other special charges in our
consolidated statements of operations are described below. Substantially all of these expenses relate to our
human pharmaceutical business segment.
Severance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 225.5
Asset impairment and other special charges . . . . . . . . . . . . . . . . .
243.2
Asset impairment, restructuring, and other special charges . . . . . . $ 468.7
2014
$
2013
90.6
30.0
$ 120.6
$
2012
74.5
206.6
$ 281.1
Severance costs listed above for all years relate to ongoing cost containment efforts as we continue our
initiatives to reduce our cost structure and global workforce. Substantially all of the severance costs incurred
during the year ended December 31, 2014 are expected to be paid by the end of 2015, and substantially all of
the severance costs incurred during the years ended December 31, 2013 and 2012 have been paid.
For the year ended December 31, 2014, we incurred $243.2 million of asset impairment and other special
charges consisting primarily of a $180.8 million asset impairment charge related to our decision to close and
sell a manufacturing plant located in Puerto Rico. The manufacturing plant was written down to its estimated
fair value, which was based primarily on recent sales of similar assets.
For the year ended December 31, 2013, we incurred $30.0 million of asset impairment and other special
charges related primarily to costs associated with the closure of a packaging and distribution facility in
Germany.
For the year ended December 31, 2012, we incurred $206.6 million of asset impairment and other special
charges consisting of $122.6 million related to an intangible asset impairment for liprotamase (see Note 8) net
of the reduction of the related contingent consideration liability, $64.0 million related to the recognition of an
asset impairment associated with the decision to stop development of a delivery device platform, and $20.0
million resulting from a change in our estimates of returned product related to the withdrawal of Xigris™ from
the market during the fourth quarter of 2011.
57
57
Note 6: Inventories
Inventories at December 31 consisted of the following:
2014
Finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
838.0
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,715.4
Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
315.0
Total (approximates replacement cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,868.4
Reduction to LIFO cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(128.4)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,740.0
$
2013
968.1
1,868.3
259.0
3,095.4
(166.6)
$ 2,928.8
Inventories valued under the LIFO method comprised $1.09 billion and $1.02 billion of total inventories at
December 31, 2014 and 2013, respectively.
Note 7: Financial Instruments
Financial instruments that potentially subject us to credit risk consist principally of trade receivables and
interest-bearing investments. Wholesale distributors of life-science products account for a substantial portion
of trade receivables; collateral is generally not required. The risk associated with this concentration is
mitigated by our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few
major financial institutions. We monitor our exposures with these institutions and do not expect any of these
institutions to fail to meet their obligations. Major financial institutions represent the largest component of our
investments in corporate debt securities. In accordance with documented corporate policies, we monitor the
amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related
losses in the event of nonperformance by counterparties to risk-management instruments but do not expect
any counterparties to fail to meet their obligations given their high credit ratings.
At December 31, 2014, we had outstanding foreign currency forward commitments to purchase 330.6 million
U.S. dollars and sell 270.3 million euro; commitments to purchase 1.18 billion euro and sell 1.45 billion U.S.
dollars; commitments to purchase 190.4 million British pounds and sell 242.4 million euro; and commitments
to purchase 332.6 million U.S. dollars and sell 40.04 billion Japanese yen, which will all settle within 30 days.
At December 31, 2014, substantially all of our total long-term debt is at a fixed rate. We have converted
approximately 55 percent of our long-term fixed-rate notes to floating rates through the use of interest rate
swaps.
At December 31, 2014, the total notional amounts of forward-starting interest rate contracts in designated
cash flow hedging instruments were $1.35 billion, which will all settle within three months.
5858
The Effect of Risk Management Instruments on the Statement of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense:
Fair value hedges:
Effect from hedged fixed-rate debt . . . . . . . . . . . . . . . . . . . . . . . . $ 156.9
Effect from interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . .
(156.9)
$ (308.2)
308.2
$
51.5
(51.5)
2014
2013
2012
Cash flow hedges:
Effective portion of losses on equity contracts reclassified from
accumulated other comprehensive loss(1) . . . . . . . . . . . . . . . . .
Effective portion of losses on interest rate contracts reclassified
from accumulated other comprehensive loss . . . . . . . . . . . . . .
Net (gains) losses on foreign currency exchange contracts not
designated as hedging instruments . . . . . . . . . . . . . . . . . . . . . . .
Net losses on interest rate contracts not designated as hedging
instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129.0
9.0
(20.4)
3.4
—
9.0
15.4
—
—
9.0
(35.8)
—
1
Realized gains on the sale of underlying equity securities recognized in other-net, (income) expense were $260.8 million during the
year ended December 31, 2014. There were no realized gains on the sale of underlying equity securities during the years ended
December 31, 2013 and 2012.
During the years ended December 31, 2014, 2013, and 2012, net losses related to ineffectiveness, as well as
net losses related to the portion of our risk-management hedging instruments, fair value hedges, and cash
flow hedges that were excluded from the assessment of effectiveness, were not material.
Fair Value Hedges
During the year ended December 31, 2014, we terminated certain interest rate swaps designated as fair value
hedges with an aggregate notional amount of $1.30 billion. As a result of the termination, we received cash of
$340.7 million, which represented the fair value of the interest rate swaps at the time of termination. The
related fair value adjustment was recorded as an increase to the carrying value of the underlying fixed-rate
debt and will be amortized into earnings as a reduction of interest expense over the remaining life of the
underlying debt.
Cash Flow Hedges
The effective portion of equity contracts in designated cash flow hedging relationships recorded in other
comprehensive income (loss) was $149.6 million and $(149.6) million during the years ended December 31,
2014 and 2013, respectively. There were no equity contracts in designated cash flow hedging relationships in
2012. During the year ended December 31, 2014, we sold all of the underlying equity securities that had been
in designated cash flow hedging relationships. At the time of the sales, we reclassified to earnings the
accumulated other comprehensive loss related to the cash flow hedges and the previously unrealized gains
on the underlying equity securities.
For forward-starting interest rate swaps in designated cash flow hedging relationships associated with an
anticipated debt issuance, the effective portion of net gains (losses) recorded in other comprehensive income
(loss) was $(164.7) million and $16.7 million for the years ended December 31, 2014 and 2013. There were
no forward-starting interest rate swaps in designated cash flow hedging relationships in 2012.
During the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings
$9.0 million of pretax net losses on cash flow hedges of the variability in expected future interest payments on
our floating rate debt.
Non-Hedging Instruments
During the year ended December 31, 2014, we settled fixed-rate interest contracts used to manage interest
rate risks on our investments in debt securities, which were not designed as hedging instruments. The
aggregate notional amount of the settled contracts was $876.0 million, and we paid $3.4 million of cash to the
counterparties upon settlement.
59
59
Fair Value of Financial Instruments
The following tables summarize certain fair value information at December 31 for assets and liabilities
measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain
other investments:
Fair Value Measurements Using
Description
December 31, 2014
Cash equivalents . . . . . . . . . . . $ 2,443.5 $ 2,443.5 $
Carrying
Amount
Amortized
Cost
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
2,415.5 $
28.0 $
— $ 2,443.5
Short-term investments:
U.S. government and
agencies . . . . . . . . . . . . . . . $
Corporate debt securities . . .
Other securities . . . . . . . . . . .
Short-term investments . . . . . $
185.5 $
767.4
2.5
955.4 $
185.6 $
766.7
2.5
954.8
156.5 $
—
—
29.0 $
767.4
2.5
— $
—
—
185.5
767.4
2.5
Noncurrent investments:
U.S. government and
agencies . . . . . . . . . . . . . . . $
756.7 $
757.5 $
Corporate debt securities . . .
Mortgage-backed . . . . . . . . .
Asset-backed. . . . . . . . . . . . .
Other securities . . . . . . . . . . .
Marketable equity . . . . . . . . .
Equity method and other
2,462.7
217.0
477.8
3.2
204.8
2,468.9
217.6
478.0
3.2
44.0
investments(1) . . . . . . . . . . .
446.7
Noncurrent investments. . . . . $ 4,568.9 $ 4,415.9
446.7
747.5 $
—
—
—
—
204.8
9.2 $
2,462.7
217.0
477.8
3.2
—
— $
—
—
—
—
—
756.7
2,462.7
217.0
477.8
3.2
204.8
December 31, 2013
Cash equivalents . . . . . . . . . . . $ 2,574.7 $ 2,574.7 $
2,517.1 $
57.6 $
— $ 2,574.7
Short-term investments:
U.S. government and
agencies . . . . . . . . . . . . . . . $
276.6 $
929.8
Corporate debt securities . . .
2.7
Other securities . . . . . . . . . . .
Marketable equity . . . . . . . . .
75.0
Short-term investments . . . . . $ 1,567.1 $ 1,284.1
276.4 $
931.7
2.7
356.3
Noncurrent investments:
U.S. government and
agencies . . . . . . . . . . . . . . . $ 1,115.6 $ 1,126.1 $
Corporate debt securities . . .
Mortgage-backed . . . . . . . . .
Asset-backed. . . . . . . . . . . . .
Other securities . . . . . . . . . . .
Marketable equity . . . . . . . . .
Equity method and other
4,940.5
636.0
490.0
7.3
81.2
4,933.7
652.4
494.5
8.3
22.8
investments(1) . . . . . . . . . . .
354.3
Noncurrent investments. . . . . $ 7,624.9 $ 7,592.1
354.3
276.4 $
—
—
356.3
— $
931.7
2.7
—
— $
—
—
—
276.4
931.7
2.7
356.3
1,035.6 $
—
—
—
—
81.2
80.0 $
4,940.5
636.0
490.0
7.3
—
— $ 1,115.6
4,940.5
—
636.0
—
490.0
—
7.3
—
81.2
—
1 Fair value not applicable
6060
Description
Short-term commercial paper borrowings
December 31, 2014 . . . . . . . . . . . . . . . . . . . $ (2,680.6) $
December 31, 2013 . . . . . . . . . . . . . . . . . . . .
—
Carrying
Amount
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
— $ (2,680.6) $
—
—
— $ (2,680.6)
—
—
Long-term debt, including current portion
December 31, 2014 . . . . . . . . . . . . . . . . . . . $ (5,375.8) $
December 31, 2013 . . . . . . . . . . . . . . . . . . . .
(5,212.9)
— $ (5,722.1) $
—
(5,490.9)
— $ (5,722.1)
(5,490.9)
—
Description
December 31, 2014
Risk-management instruments
Interest rate contracts designated as
hedging instruments:
Other receivables . . . . . . . . . . . . . . . . . . $
Other current liabilities . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . .
Foreign exchange contracts not designated
as hedging instruments:
Other receivables . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . .
December 31, 2013
Risk-management instruments
Interest rate contracts designated as
hedging instruments:
Other receivables . . . . . . . . . . . . . . . . . . $
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . .
Foreign exchange contracts not designated
as hedging instruments:
Other receivables . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . .
Equity contracts designated as hedging
instruments:
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair
Value
102.5 $
(149.5)
(0.7)
— $
—
—
102.5 $
(149.5)
(0.7)
— $
—
—
102.5
(149.5)
(0.7)
9.1
(14.0)
—
—
9.1
(14.0)
—
—
9.1
(14.0)
20.1 $
278.7
(0.9)
— $
—
—
20.1 $
278.7
(0.9)
— $
—
—
20.1
278.7
(0.9)
6.7
(7.1)
—
—
—
6.7
(7.1)
(149.6)
—
—
—
6.7
(7.1)
(149.6)
Other current liabilities . . . . . . . . . . . . . .
(149.6)
Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff
associated with certain of the risk-management instruments above that are subject to an enforceable master
netting arrangement or similar agreements. Although various rights of setoff and master netting arrangements
or similar agreements may exist with the individual counterparties to the risk-management instruments above,
individually, these financial rights are not material.
61
61
We determine fair values based on a market approach using quoted market values, significant other
observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. The fair
value of equity method investments and other investments is not readily available.
The table below summarizes the contractual maturities of our investments in debt securities measured at fair
value as of December 31, 2014:
Maturities by Period
Total
Within
1 Year
After 1 Year
Through 5
Years
After 5
Years
Through 10
Years
After
10 Years
Fair value of debt securities . . . . . . . . . . . . . . $ 4,872.8 $
955.4 $ 3,462.1 $
230.7 $
224.6
A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the
amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows:
Unrealized gross gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171.9
Unrealized gross losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.3
Fair value of securities in an unrealized gain position . . . . . . . . . . . . . . . . . . . . . .
1,778.8
Fair value of securities in an unrealized loss position . . . . . . . . . . . . . . . . . . . . . .
3,129.2
2014
2013
$ 375.6
59.8
4,982.7
3,664.7
Other-than-temporary impairment losses on investment securities of $12.5 million, $11.3 million, and
$22.6 million were recognized in the consolidated statements of operations for the years ended December 31,
2014, 2013, and 2012, respectively. For fixed-income securities, the amount of credit losses represents the
difference between the present value of cash flows expected to be collected on these securities and the
amortized cost. Factors considered in assessing the credit loss were the position in the capital structure,
vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.
The securities in an unrealized loss position include fixed-rate debt securities of varying maturities. The value
of fixed-income securities is sensitive to changes in the yield curve and other market conditions.
Approximately 90 percent of the securities in a loss position are investment-grade debt securities. At this time,
there is no indication of default on interest or principal payments for debt securities other than those for which
an other-than-temporary impairment charge has been recorded. We do not intend to sell, and it is not more
likely than not we will be required to sell, the securities in a loss position before the market values recover or
the underlying cash flows have been received, and we have concluded that no additional other-than-
temporary loss is required to be charged to earnings as of December 31, 2014.
Activity related to our investment portfolio, substantially all of which related to available-for-sale securities,
was as follows:
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,609.5
Realized gross gains on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
353.5
Realized gross losses on sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
29.4
2014
2013
$ 13,753.5
49.5
15.4
2012
$ 6,529.8
82.3
10.9
Note 8: Goodwill and Other Intangibles
Goodwill and other indefinite-lived intangible assets at December 31 were as follows:
Goodwill (by segment):
Human pharmaceutical products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Animal health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total indefinite-lived intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,354.3 $
403.8
1,758.1
11.4
1,769.5 $
1,354.7
162.1
1,516.8
33.6
1,550.4
2014
2013
6262
The increase in goodwill for the animal health segment in 2014 is a result of the acquisition of Lohmann AH
(Note 3).
No impairments occurred with respect to the carrying value of goodwill for the years ended December 31,
2014, 2013, and 2012.
IPR&D consists of the acquisition date fair value of products under development acquired in business
combinations that have not yet achieved regulatory approval for marketing, adjusted for subsequent
impairments, if any. As discussed in Note 1, we use the "income method" to calculate the fair value of the
IPR&D assets, which is a Level 3 fair value measurement.
No material impairments occurred with respect to the carrying value of IPR&D for the years ended
December 31, 2014 and 2013. In 2012, we recorded impairment charges of $205.0 million related to
liprotamase as a result of changes in key assumptions used in the valuation, based upon additional
communications with the FDA regarding the clinical trial that would be required for resubmission, and our
expectations for the product.
The components of finite-lived intangible assets at December 31 were as follows:
Description
Marketed products . . . . . . $
Other . . . . . . . . . . . . . . . .
Total finite-lived intangible
assets . . . . . . . . . . . . . . $
2014
2013
Carrying
Amount—
Gross
5,684.3 $ (2,915.6) $
Accumulated
Amortization
149.3
(45.2)
Carrying
Amount—
Net
2,768.7 $
104.1
Carrying
Amount—
Gross
5,136.1 $ (2,447.2) $
Accumulated
Amortization
164.8
(73.0)
Carrying
Amount—
Net
2,688.9
91.8
5,833.6 $ (2,960.8) $
2,872.8 $
5,300.9 $ (2,520.2) $
2,780.7
Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and
approved for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone
payments. Other intangibles consist primarily of the amortized cost of licensed platform technologies that
have alternative future uses in research and development, manufacturing technologies, and customer
relationships from business combinations. No material impairments occurred with respect to the carrying
value of finite-lived intangible assets for the years ended December 31, 2014, 2013 and 2012.
See Note 3 for further discussion of intangible assets acquired in recent business combinations and Note 4
for additional discussion of recent capitalized milestone payments.
As of December 31, 2014, the remaining weighted-average amortization period for finite-lived intangible
assets is approximately 10 years. Amortization expense was $535.9 million, $555.0 million, and $563.0 million
for the years ended December 31, 2014, 2013, and 2012, respectively. The estimated amortization expense
associated with our current finite-lived intangible assets for each of the next five years approximates
$465 million in 2015, $360 million in 2016, $325 million in 2017, $215 million in 2018, and $185 million in
2019. These estimated amounts exclude the amortization related to the acquired intangible assets which will
be recorded in association with the January 1, 2015 acquisition of Novartis AH. Amortization expense is
included in either cost of sales, marketing, selling, and administrative or research and development
depending on the nature of the intangible asset being amortized.
Note 9: Property and Equipment
At December 31, property and equipment consisted of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
205.2
6,516.2
7,609.7
1,698.2
16,029.3
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,065.4)
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,963.9
$
2013
198.7
6,489.9
7,752.7
1,205.4
15,646.7
(7,671.2)
$ 7,975.5
63
63
Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $759.1 million,
$774.8 million, and $754.0 million, respectively. Capitalized interest costs were not material for the years
ended December 31, 2014, 2013, and 2012, respectively. Total rental expense for all leases, including
contingent rentals (not material), amounted to $227.3 million, $227.2 million, and $262.2 million for the years
ended December 31, 2014, 2013, and 2012, respectively. Assets under capital leases included in property
and equipment, net on the consolidated balance sheets, capital lease obligations entered into, and future
minimum rental commitments are not material.
Note 10: Borrowings
Debt at December 31 consisted of the following:
Short-term commercial paper borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.95 to 7.13 percent long-term notes (due 2016-2044) . . . . . . . . . . . . . . . . . . . . .
Other long-term debt, including capitalized leases . . . . . . . . . . . . . . . . . . . . . . . .
Fair value adjustment on long-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014
2,680.6 $
4,887.3
33.1
455.4
8,056.4
(2,688.7)
5,367.7 $
2013
—
4,887.3
27.1
298.5
5,212.9
(1,012.6)
4,200.3
At December 31, 2014, we had $2.68 billion outstanding borrowings under our commercial paper program.
There were no amounts outstanding under our commercial paper program at December 31, 2013. The
weighted-average effective borrowing rate on outstanding commercial paper at December 31, 2014 was 0.18
percent.
At December 31, 2014, we had a total of $3.31 billion of unused committed bank credit facilities. In August
2014, we refinanced our revolving bank credit facilities and entered into a $1.20 billion credit facility with a
five-year term and a $2.00 billion credit facility with a 364-day term, both of which are available to support our
commercial paper program. There were no amounts outstanding under the revolving credit facility during the
year ended December 31, 2014. 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.
In February 2014, we issued $600.0 million of 1.95 percent and $400.0 million of 4.65 percent fixed-rate notes
with interest to be paid semi-annually and maturity dates of March 15, 2019, and June 15, 2044, respectively.
Current maturities of long-term notes of $1.00 billion were repaid in March 2014.
The aggregate amounts of maturities on long-term debt for the next five years are $8.1 million in 2015,
$208.5 million in 2016, $1.01 billion in 2017, $203.8 million in 2018, and $601.0 million in 2019.
We have converted approximately 55 percent of our long-term fixed-rate notes to floating rates through the
use of interest rate swaps. The weighted-average effective borrowing rates based on long-term debt
obligations and interest rates at December 31, 2014 and 2013, including the effects of interest rate swaps for
hedged debt obligations, were 3.69 percent and 3.10 percent, respectively.
For the years ended December 31, 2014, 2013, and 2012, cash payments for interest on borrowings totaled
$140.4 million, $139.7 million, and $171.9 million, respectively, net of capitalized interest.
In accordance with the requirements of derivatives and hedging guidance, the portion of our fixed-rate debt
obligations that is hedged, as a fair value hedge, is reflected in the consolidated balance sheets as an amount
equal to the sum of the debt’s 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.
6464
Note 11: Stock-Based Compensation
Stock-based compensation expense of $156.0 million, $144.9 million, and $141.5 million was recognized for
the years ended December 31, 2014, 2013, and 2012, respectively, as well as related tax benefits of $54.6
million, $50.7 million, and $49.5 million, respectively. Our stock-based compensation expense consists of
performance awards (PAs), shareholder value awards (SVAs), and restricted stock units (RSUs). We
recognize stock-based compensation expense over the requisite service period of the individual grantees,
which equals the vesting period. We provide newly issued shares and treasury stock to satisfy stock option
exercises and for the issuance of PA, SVA, and RSU shares. We classify tax benefits resulting from tax
deductions in excess of the compensation cost recognized for exercised stock options as a financing cash
flow in the consolidated statements of cash flows.
At December 31, 2014, additional stock-based compensation awards may be granted under the 2002 Lilly
Stock Plan for not more than 101.0 million shares.
Performance Award Program
PAs are granted to officers and management and are payable in shares of our common stock. The number of
PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-
per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing
stock price on the date of grant and fully vest at the end of the measurement periods. The fair values of PAs
granted for the years ended December 31, 2014, 2013, and 2012 were $48.81, $50.19, and $35.74,
respectively. The number of shares ultimately issued for the PA program is dependent upon the earnings
achieved during the vesting period. Pursuant to this plan, approximately 0.7 million shares, 0.7 million shares,
and 1.6 million shares were issued during the years ended December 31, 2014, 2013, and 2012, respectively.
Approximately 0.5 million shares are expected to be issued in 2015. As of December 31, 2014, the total
remaining unrecognized compensation cost related to nonvested PAs was $19.8 million, which will be
amortized over the weighted-average remaining requisite service period of 12 months.
Shareholder Value Award Program
SVAs are granted to officers and management and are payable in shares of our common stock at the end of a
three-year period. The number of shares actually issued, if any, varies depending on our stock price at the
end of the three-year vesting period compared to pre-established target stock prices. We measure the fair
value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple
input variables that determine the probability of satisfying the market condition stipulated in the award grant
and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied
volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly,
the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free
interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average
fair values of the SVA units granted during the years ended December 31, 2014, 2013, and 2012 were
$41.97, $45.17, and $30.35, respectively, determined using the following assumptions:
(Percents)
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Range of volatilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
3.50%
.08-.71
18.87-21.56
3.50%
.08-.43
18.95-22.37
4.50%
.10-.36
22.40-25.64
A summary of the SVA activity is presented below:
Units Attributable to SVAs (in thousands)
Outstanding at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
6,636
1,987
(2,224)
(300)
6,099
7,539
1,795
(2,397)
(301)
6,636
7,036
2,439
(973)
(963)
7,539
65
65
Approximately 2.2 million shares are expected to be issued in 2015. As of December 31, 2014, the total
remaining unrecognized compensation cost related to nonvested SVAs was $53.8 million, which will be
amortized over the weighted-average remaining requisite service period of 20 months.
Restricted Stock Units
RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are
accounted for at fair value based upon the closing stock price on the date of grant. The corresponding
expense is amortized over the vesting period, typically 3 years. The fair values of RSU awards granted during
the years ended December 31, 2014, 2013, and 2012 were $52.72, $54.10, and $39.65, respectively. The
number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures.
Pursuant to this plan, 1.2 million, 1.1 million, and 1.4 million shares were granted during the years ended
December 31, 2014, 2013, and 2012, respectively, and approximately 0.9 million, 0.8 million, and 0.3 million
shares were issued during the years ended December 31, 2014, 2013, and 2012, respectively. Approximately
0.8 million shares are expected to be issued in 2015. As of December 31, 2014, the total remaining
unrecognized compensation cost related to nonvested RSUs was $87.9 million, which will be amortized over
the weighted-average remaining requisite service period of 27 months.
Stock Option Program
Stock options were granted prior to 2007 to officers, management, and board members at exercise prices
equal to the fair market value of our stock at the date of grant. Options fully vested 3 years from the grant date
and have a term of 10 years.
Stock option activity during the year ended December 31, 2014 is summarized below:
Outstanding at January 1, 2014. . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2014 . . . . .
Exercisable at December 31, 2014 . . . . .
Shares of
Common Stock
Attributable to
Options
(in thousands)
16,140
(3,670)
(10,154)
2,316
2,316
Weighted-
Average
Exercise
Price of Options
66.66
$
55.86
72.93
56.26
56.26
Weighted-
Average
Remaining
Contractual Term
(in years)
Aggregate
Intrinsic
Value
0.9
0.9
$ 29.6
29.6
The intrinsic value of options exercised during 2014, 2013, and 2012 amounted to $31.2 million, $0.5 million,
and $1.4 million, respectively. We received cash of $188.1 million, $11.3 million, and $1.0 million from
exercises of stock options during 2014, 2013, and 2012, respectively, and recognized related tax benefits of
$8.9 million, $0.2 million, and $0.5 million during those same years.
Note 12: Shareholders' Equity
During 2014 and 2013, we repurchased $800.0 million and $500.0 million, respectively, of shares associated
with our $5.00 billion share repurchase program announced in 2013. As of December 31, 2014, there were
$3.70 billion of shares remaining in that program. During 2013 and 2012, we repurchased $1.10 billion and
$400.0 million, respectively, of shares, completing our $1.50 billion share repurchase program announced in
2012. During 2012, we also repurchased $419.2 million of shares to complete our $3.00 billion share
repurchase program announced in 2000.
We have 5.0 million authorized shares of preferred stock. As of December 31, 2014 and 2013, no preferred
stock has been issued.
We have an employee benefit trust that held 50.0 million shares of our common stock at both December 31,
2014 and 2013, to provide a source of funds to assist us in meeting our obligations under various employee
benefit plans. The cost basis of the shares held in the trust was $3.01 billion at both December 31, 2014 and
2013, and is shown as a reduction in shareholders’ equity. Any dividend transactions between us and the trust
are eliminated. Stock held by the trust is not considered outstanding in the computation of EPS. The assets of
the trust were not used to fund any of our obligations under these employee benefit plans during the years
ended December 31, 2014, 2013, and 2012.
66
66
Note 13: Income Taxes
Following is the composition of income tax expense:
2014
2013
2012
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
168.9 $
406.2
(2.1)
573.0
(83.3)
120.2
(0.1)
36.8
609.8 $
259.1 $
553.2
126.3
938.6
297.0
(28.2)
(2.9)
265.9
1,204.5 $
596.8
540.6
56.2
1,193.6
87.0
29.9
9.1
126.0
1,319.6
Significant components of our deferred tax assets and liabilities as of December 31 are as follows:
2014
2013
Deferred tax assets:
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Purchases of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax loss carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product return reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany profit in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
897.3 $
473.3
279.4
265.5
241.8
176.0
68.9
—
633.3
3,035.5
(601.1)
2,434.4
Deferred tax liabilities:
Unremitted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment
Prepaid employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(737.1)
(684.6)
(582.6)
(424.7)
(275.8)
(161.5)
(2,866.3)
Deferred tax liabilities - net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(431.9) $
639.8
418.8
494.6
311.7
313.7
110.0
106.0
104.5
595.0
3,094.1
(647.1)
2,447.0
(898.3)
(685.6)
(598.9)
(379.1)
(446.2)
(109.6)
(3,117.7)
(670.7)
At December 31, 2014 and 2013, no individually significant items were classified as “Other” deferred tax
assets.
The deferred tax asset and related valuation allowance amounts for U.S. federal and state net operating
losses and tax credits shown above have been reduced for differences between financial reporting and tax
return filings.
Based on filed tax returns, we have tax credit carryforwards and carrybacks of $459.9 million available to
reduce future income taxes; $180.5 million, if unused, will expire by 2021. The remaining portion of the tax
credit carryforwards is related to federal tax credits of $80.3 million, international tax credits of $104.4 million,
and state tax credits of $94.7 million, all of which are substantially reserved.
67
67
At December 31, 2014, based on filed tax returns we had net operating losses and other carryforwards for
international and U.S. income tax purposes of $493.9 million: $74.6 million will expire by 2019; $366.1 million
will expire between 2019 and 2029; and $53.2 million of the carryforwards will never expire. Net operating
losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved.
Deferred tax assets related to state net operating losses of $97.0 million and other state carryforwards of
$8.9 million are fully reserved.
Domestic and Puerto Rican companies contributed approximately 20 percent, 60 percent, and 55 percent for
the years ended December 31, 2014, 2013, and 2012, respectively, to consolidated income before income
taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of
2016. A similar, new tax incentive grant will begin in 2017 and will be in effect for 15 years.
At December 31, 2014, U.S. income taxes have not been provided on approximately $25.7 billion of
unremitted earnings of foreign subsidiaries as we consider these unremitted earnings to be indefinitely
invested for continued use in our foreign operations. Additional tax provisions will be required if these
earnings are repatriated in the future to the United States. Due to complexities in the tax laws and
assumptions that we would have to make, it is not practicable to determine the amount of the related
unrecognized deferred income tax liability.
Cash payments of income taxes totaled $729.7 million, $1.26 billion, and $992.0 million, for the years ended
December 31, 2014, 2013, and 2012, respectively.
Following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income
before income taxes to reported income tax expense:
Income tax at the U.S. federal statutory tax rate. . . . . . . . . . . . . . . $
Add (deduct):
International operations, including Puerto Rico . . . . . . . . . . . . . .
General business credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014
1,050.1 $
2013
2,061.3 $
2012
1,892.9
(344.8)
(44.3)
(51.2)
609.8 $
(778.3)
(175.6)
97.1
1,204.5 $
(593.8)
(11.2)
31.7
1,319.6
The American Taxpayer Relief Act of 2012, which included the reinstatement of the research tax credit for the
year 2012, was enacted in early 2013. Therefore, the research tax credits for the years 2012 and 2013 are
both included in 2013 with general business credits.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
Beginning balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions based on tax positions related to the current year . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lapses of statutes of limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes related to the impact of foreign currency translation . . . .
Ending balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014
1,136.4 $
126.4
132.6
(32.1)
(4.2)
(3.5)
(16.8)
1,338.8 $
2013
1,534.3 $
142.5
251.5
(358.2)
(404.9)
(24.9)
(3.9)
1,136.4 $
2012
1,369.3
144.8
70.1
(38.5)
(9.2)
(4.6)
2.4
1,534.3
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was
$638.8 million and $523.3 million at December 31, 2014 and 2013, respectively.
We file income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions.
We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in most major
taxing jurisdictions for years before 2007.
6868
During 2013, we reached resolution on the remaining matters related to tax years 2008–2009 that were not
settled as part of a previous U.S. examination. Considering the impact of this resolution on periods that have
not yet been examined, as well as its impact on tax asset carryforwards, there was an immaterial benefit to
our consolidated results of operations. We made cash payments of approximately $135 million related to tax
years 2008–2009 after application of available tax credit carryforwards and carrybacks. The examination of
tax years 2010-2012 commenced during the fourth quarter of 2013. While it is reasonably possible that the
U.S. examination of 2010-2012 could conclude within the next 12 months, resolution of certain matters is
dependent upon a number of factors, including the potential for formal administrative and legal proceedings.
As a result, it is not possible to estimate the range of the reasonably possible changes in unrecognized tax
benefits that could occur within the next 12 months related to these years, nor is it possible to reliably
estimate the total future cash flows related to these unrecognized tax benefits.
We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
During the years ended December 31, 2014, 2013, and 2012, we recognized income tax expense (benefit) of
$35.9 million, $(10.9) million, and $42.3 million, respectively, related to interest and penalties. At
December 31, 2014 and 2013, our accruals for the payment of interest and penalties totaled $207.2 million
and $161.5 million, respectively.
69
69
Note 14: Retirement Benefits
We use a measurement date of December 31 to develop the change in benefit obligation, change in plan
assets, funded status, and amounts recognized in the consolidated balance sheets at December 31 for our
defined benefit pension and retiree health benefit plans, which were as follows:
Change in benefit obligation:
Defined Benefit
Pension Plans
Retiree Health
Benefit Plans
2014
2013
2014
2013
Benefit obligation at beginning of year . . . . . . . . . . . . . $ 9,976.4 $ 10,423.8 $ 1,757.2 $ 2,337.7
49.9
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
98.1
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
(642.5)
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(79.6)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4.1)
Foreign currency exchange rate changes and other
240.9
472.6
1,996.3
(421.2)
(2.4)
33.0
85.6
293.5
(76.1)
(533.6)
287.1
437.2
(792.2)
(402.3)
(0.1)
adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . .
(250.2)
12,012.4
22.9
9,976.4
Change in plan assets:
Fair value of plan assets at beginning of year . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes and other
adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . .
9,481.7
813.6
127.2
(421.2)
(165.6)
9,835.7
8,286.6
1,144.6
428.9
(402.3)
23.9
9,481.7
Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . .
Unrecognized prior service (benefit) cost . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,981.7 $ 3,102.3 $
(2,176.7)
5,114.9
43.5
(494.7)
3,546.3
50.7
(6.1)
1,553.5
1,879.6
157.4
(42.2)
(76.1)
—
1,918.7
365.2
439.5
(666.7)
138.0 $
(2.3)
1,757.2
1,518.0
365.7
75.5
(79.6)
—
1,879.6
122.4
178.1
(171.5)
129.0
Amounts recognized in the consolidated balance sheet
consisted of:
Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive (income) loss
before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
211.2 $
(62.3)
(2,325.6)
881.2 $
(62.8)
(1,313.1)
609.4 $
(6.9)
(237.3)
366.4
(7.7)
(236.3)
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,981.7 $ 3,102.3 $
5,158.4
3,597.0
(227.2)
138.0 $
6.6
129.0
The unrecognized net actuarial loss and unrecognized prior service cost (benefit) have not yet been
recognized in net periodic pension costs and are included in accumulated other comprehensive loss at
December 31, 2014.
A change to our U.S. retiree health benefit plan was approved in 2014 and communicated to retirees in
January 2015. Beginning in 2016, Medicare-eligible retirees and Medicare-eligible dependents will choose
health care coverage from insurance providers through a private Medicare supplement marketplace, while still
receiving financial support from Lilly. This change decreased our retiree health benefit obligation and
increased our unrecognized prior service benefit as of December 31, 2014 by $520.8 million.
7070
During 2015, we expect the following components of accumulated other comprehensive loss to be recognized
as components of net periodic benefit cost:
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrecognized prior service (benefit) cost . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
387.4 $
10.3
397.7 $
37.9
(92.1)
(54.2)
Defined Benefit
Pension Plans
Retiree Health
Benefit Plans
We do not expect any plan assets to be returned to us in 2015.
The following represents our weighted-average assumptions as of December 31:
(Percents)
Discount rate for benefit obligation . . . . . . . . . . . . . . . . . . . . . . .
Discount rate for net benefit costs . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase for benefit obligation . . . . . . . . .
Rate of compensation increase for net benefit costs . . . . . . . . .
Expected return on plan assets for net benefit costs . . . . . . . . .
Defined Benefit
Pension Plans
Retiree Health
Benefit Plans
2014
4.0
4.9
3.4
3.4
8.1
2013
4.9
4.3
3.4
3.4
8.4
2012
4.3
5.0
3.4
3.7
8.4
2014
4.1
5.0
2013
5.0
4.3
2012
4.3
5.1
8.5
8.8
8.8
We annually evaluate the expected return on plan assets in our defined benefit pension and retiree health
benefit plans. In evaluating the expected rate of return, we consider many factors, with a primary analysis of
current and projected market conditions; asset returns and asset allocations; and the views of leading
financial advisers and economists. We may also review our historical assumptions compared with actual
results, as well as the assumptions and trend rates utilized by similar plans, where applicable. Health-care-
cost trend rates are assumed to increase at an annual rate of 6.4 percent for the year ended December 31,
2015, decreasing by approximately 0.2 percent per year to an ultimate rate of 5.0 percent by 2023.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid
as follows:
Defined benefit pension plans . . $ 428.7
2015
2016
$ 439.3
2017
$ 452.3
2018
$ 467.9
2019
$ 487.7
2020-2024
$ 2,783.6
Retiree health benefit plans-
gross . . . . . . . . . . . . . . . . . . . $
Medicare rebates. . . . . . . . . . . .
Retiree health benefit plans-net. $
91.6
(6.5)
85.1
$
$
75.6
(2.1)
73.5
$
$
77.2
(0.7)
76.5
$
$
79.3
(0.7)
78.6
$
$
81.2
(0.8)
80.4
$ 430.3
(4.9)
$ 425.4
Amounts relating to defined benefit plans with projected benefit obligations in excess of plan assets were as
follows at December 31:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,537.2 $
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,149.2
2014
2013
1,773.6
395.4
Amounts relating to defined benefit plans with accumulated benefit obligations in excess of plan assets were
as follows at December 31:
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2,179.8 $
700.9
2013
1,384.6
181.8
The total accumulated benefit obligation for our defined benefit pension plans was $10.88 billion and
$9.13 billion at December 31, 2014 and 2013, respectively.
71
71
Net pension and retiree health benefit expense included the following components:
Components of net periodic benefit cost:
Defined Benefit
Pension Plans
Retiree Health
Benefit Plans
2014
2013
2012
2014
2013
2012
Service cost . . . . . . . . . . . . . . . . . . . . . $ 240.9 $ 287.1 $ 253.1 $
Interest cost . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . .
Amortization of prior service (benefit)
472.6
(756.6)
437.2
(701.9)
455.1
(684.8)
cost . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss. . . . . . . . . . .
Net periodic benefit cost . . . . . . . . . . . . $ 242.8 $ 440.8 $ 313.3 $
3.6
282.3
4.2
285.7
3.7
414.7
33.0 $
85.6
(146.4)
49.9 $
98.1
(130.7)
63.3
114.9
(127.2)
(37.6)
20.7
(44.7) $
(35.6)
100.5
(39.8)
98.4
82.2 $ 109.6
If the healthcare-cost trend rates were to be increased by one percentage point, the December 31, 2014,
accumulated postretirement benefit obligation would increase by $50.2 million and the aggregate of the
service cost and interest cost components of the 2014 annual expense would increase by $7.8 million. A one
percentage point decrease in these rates would decrease the December 31, 2014, accumulated
postretirement benefit obligation by $52.7 million, and the aggregate of the 2014 service cost and interest cost
by $6.6 million.
The following represents the amounts recognized in other comprehensive income (loss) for the year ended
December 31, 2014:
Defined Benefit
Pension Plans
Retiree Health
Benefit Plans
Actuarial loss arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Plan amendments during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service (benefit) cost included in net income . . . . . . . . . .
Amortization of net actuarial loss included in net income . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes and other . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive income during period . . . . . . . . . . . . . . . . . . . . . . . $
(1,939.3) $
2.4
3.6
282.3
89.6
(1,561.4) $
(282.9)
533.6
(37.6)
20.7
—
233.8
We have defined contribution savings plans that cover our eligible employees worldwide. The purpose of
these plans is generally to provide additional financial security during retirement by providing employees with
an incentive to save. Our contributions to the plans are based on employee contributions and the level of our
match. Expenses under the plans totaled $153.3 million, $147.7 million, and $136.3 million for the years
ended December 31, 2014, 2013, and 2012, 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 for the years
ended December 31, 2014, 2013, and 2012 were not material.
Benefit Plan Investments
Our benefit plan investment policies are set with specific consideration of return and risk requirements in
relationship to the respective liabilities. U.S. and Puerto Rico plans represent approximately 80 percent of our
global investments. Given the long-term nature of our liabilities, these plans have the flexibility to manage an
above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically
prohibited investments. However, within individual investment manager mandates, restrictions and limitations
are contractually set to align with our investment objectives, ensure risk control, and limit concentrations.
We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In
addition, within a category we use different managers with various management objectives to eliminate any
significant concentration of risk.
7272
Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local
investment policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease
exposure to a particular public equity, fixed income, commodity, or currency market more rapidly or less
expensively than could be accomplished through the use of the cash markets. The plans utilize both
exchange-traded and over-the-counter instruments. The maximum exposure to either a market or
counterparty credit loss is limited to the carrying value of the receivable, and is managed within contractual
limits. We expect all of our counterparties to meet their obligations. The gross values of these derivative
receivables and payables are not material to the global asset portfolio, and their values are reflected within
the tables below.
The defined benefit pension and retiree health benefit plan allocation for the U.S. and Puerto Rico currently
comprises approximately 85 percent growth investments and 15 percent fixed-income investments. The
growth investment allocation encompasses U.S. and international public equity securities, hedge funds,
private equity-like investments, and real estate. These portfolio allocations are intended to reduce overall risk
by providing diversification, while seeking moderate to high returns over the long term.
Public equity securities are well diversified and invested in U.S. and international small-to-large companies
across various asset managers and styles. The remaining portion of the growth portfolio is invested in private
alternative investments.
Fixed-income investments primarily consist of fixed-income securities in U.S. treasuries and agencies,
emerging market debt obligations, corporate bonds, mortgage-backed securities, and commercial mortgage-
backed obligations.
Hedge funds are privately owned institutional investment funds that generally have moderate liquidity. Hedge
funds seek specified levels of absolute return regardless of overall market conditions, and generally have low
correlations to public equity and debt markets. Hedge funds often invest substantially in financial market
instruments (stocks, bonds, commodities, currencies, derivatives, etc.) using a very broad range of trading
activities to manage portfolio risks. Hedge fund strategies focus primarily on security selection and seek to be
neutral with respect to market moves. Common groupings of hedge fund strategies include relative value,
tactical, and event driven. Relative value strategies include arbitrage, when the same asset can
simultaneously be bought and sold at different prices, achieving an immediate profit. Tactical strategies often
take long and short positions to reduce or eliminate overall market risks while seeking a particular investment
opportunity. Event strategy opportunities can evolve from specific company announcements such as mergers
and acquisitions, and typically have little correlation to overall market directional movements. Our hedge fund
investments are made through limited partnership interests primarily in fund-of-funds structures to ensure
diversification across many strategies and many individual managers. Plan holdings in hedge funds are
valued based on net asset values (NAVs) calculated by each fund or general partner, as applicable, and we
have the ability to redeem these investments at NAV.
Private equity-like investment funds typically have low liquidity and are made through long-term partnerships
or joint ventures that invest in pools of capital invested in primarily non-publicly traded entities. Underlying
investments include venture capital (early stage investing), buyout, and special situation investing. Private
equity management firms typically acquire and then reorganize private companies to create increased long
term value. Private equity-like funds usually have a limited life of approximately 10-15 years, and require a
minimum investment commitment from their limited partners. Our private investments are made both directly
into funds and through fund-of-funds structures to ensure broad diversification of management styles and
assets across the portfolio. Plan holdings in private equity-like investments are valued using the value
reported by the partnership, adjusted for known cash flows and significant events through our reporting date.
Values provided by the partnerships are primarily based on analysis of and judgments about the underlying
investments. Inputs to these valuations include underlying NAVs, discounted cash flow valuations,
comparable market valuations, and may also include adjustments for currency, credit, liquidity and other risks
as applicable. The vast majority of these private partnerships provide us with annual audited financial
statements including their compliance with fair valuation procedures consistent with applicable accounting
standards.
73
73
Real estate is composed of both public and private holdings. Real estate investments in registered investment
companies that trade on an exchange are classified as Level 1 on the fair value hierarchy. Real estate
investments in funds measured at fair value on the basis of NAV provided by the fund manager are classified
as Level 3. These NAVs are developed with inputs including discounted cash flow, independent appraisal,
and market comparable analyses.
Other assets include cash and cash equivalents and mark-to-market value of derivatives.
The cash value of the trust-owned insurance contract is invested in investment-grade publicly traded equity
and fixed-income securities.
Other than hedge funds, private equity-like investments, and real estate, which are discussed above, we
determine fair values based on a market approach using quoted market values, significant other observable
inputs for identical or comparable assets or liabilities, or discounted cash flow analyses.
The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2014 by
asset category are as follows:
Asset Class
Defined Benefit Pension Plans
Public equity securities:
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S.
International . . . . . . . . . . . . . . . . . . . . . . . .
411.4
2,337.8
$
Fixed income:
Developed markets . . . . . . . . . . . . . . . . . .
Emerging markets . . . . . . . . . . . . . . . . . . .
1,230.7
374.7
Private alternative investments:
183.8
999.7
112.2
8.7
3,277.6
Hedge funds . . . . . . . . . . . . . . . . . . . . . . . .
1,146.6
Equity-like funds . . . . . . . . . . . . . . . . . . . . .
569.0
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
487.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,835.7
—
—
403.1
229.8
$ 1,937.3
Retiree Health Benefit Plans
Public equity securities:
$
227.6
1,338.1
$
1,118.5
364.2
1,694.5
75.2
—
258.1
$ 5,076.2
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S.
International . . . . . . . . . . . . . . . . . . . . . . . .
39.2
158.9
$
17.2
58.8
$
Fixed income:
Developed markets . . . . . . . . . . . . . . . . . .
Emerging markets . . . . . . . . . . . . . . . . . . .
Private alternative investments:
Hedge funds . . . . . . . . . . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . . . . . . . . . . .
61.8
35.5
282.7
92.3
—
—
—
—
22.0
100.1
61.8
35.3
158.7
—
Cash value of trust owned insurance
1,189.2
contract . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.0
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,918.7
—
39.0
7.6
122.6
1,189.2
—
12.5
$ 1,579.6
$
—
—
—
1.8
1,583.1
1,071.4
165.9
—
$ 2,822.2
$
$
—
—
—
0.2
124.0
92.3
—
—
—
216.5
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31,
2014.
74
74
The activity in the Level 3 investments during the year ended December 31, 2014 was as follows:
Fixed
Income:
Developed
Markets
Fixed
Income:
Emerging
Markets
Hedge
Funds
Equity-
like
Funds
Real
Estate
Total
Defined Benefit Pension Plans
Beginning balance at January 1, 2014 . . . $
Actual return on plan assets, including
changes in foreign exchange rates:
Relating to assets still held at the
reporting date . . . . . . . . . . . . . . . . . . . . .
Relating to assets sold during the
period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, sales, and settlements, net . .
Transfers into (out of) Level 3. . . . . . . . . .
Ending balance at December 31, 2014 . . $
Retiree Health Benefit Plans
Beginning balance at January 1, 2014 . . . $
Actual return on plan assets, including
changes in foreign exchange rates:
Relating to assets still held at the
reporting date . . . . . . . . . . . . . . . . . . . . .
Relating to assets sold during the
period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, sales, and settlements, net . .
Transfers into (out of) Level 3. . . . . . . . . .
Ending balance at December 31, 2014 . . $
15.9 $
— $1,440.4 $ 993.5 $ 153.4 $2,603.2
(0.4)
(0.8)
(3.3)
(11.4)
0.1
—
1.7
—
44.6
108.2
0.2
152.7
—
98.1
—
—
(30.3)
—
—
12.3
—
(0.8)
78.5
(11.4)
— $
1.8 $1,583.1 $1,071.4 $ 165.9 $2,822.2
1.6 $
— $ 120.6 $
88.9 $
— $ 211.1
(0.1)
(0.1)
(0.3)
(1.1)
—
—
0.2
—
1.2
—
2.2
—
6.0
—
(2.6)
—
—
—
—
—
7.1
(0.1)
(0.5)
(1.1)
— $
0.2 $ 124.0 $
92.3 $
— $ 216.5
75
75
The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2013 by
asset category are as follows:
Asset Class
Defined Benefit Pension Plans
Public equity securities:
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S.
International . . . . . . . . . . . . . . . . . . . . . . . .
400.3
2,483.8
$
189.2
1,045.8
$
211.1
1,438.0
$
Fixed income:
Developed markets . . . . . . . . . . . . . . . . . .
Emerging markets . . . . . . . . . . . . . . . . . . .
Private alternative investments:
Hedge funds . . . . . . . . . . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Retiree Health Benefit Plans
Public equity securities:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S.
International . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income:
Developed markets . . . . . . . . . . . . . . . . . .
Emerging markets . . . . . . . . . . . . . . . . . . .
Private alternative investments:
Hedge funds . . . . . . . . . . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . . . . . . . . . . .
Cash value of trust owned insurance
contract
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,036.1
382.6
2,902.3
1,069.9
521.4
685.3
9,481.7
39.4
167.2
54.7
38.2
266.4
88.9
1,136.8
36.7
51.3
1,879.6
$
$
$
170.2
—
—
—
368.0
245.2
2,018.4
18.3
61.6
—
—
—
—
—
36.7
18.0
134.6
$
$
$
—
—
15.9
—
1,440.4
993.5
153.4
—
$ 2,603.2
850.0
382.6
1,461.9
76.4
—
440.1
4,860.1
21.1
105.6
$
53.1
38.2
145.8
—
1,136.8
—
33.3
1,533.9
$
—
—
1.6
—
120.6
88.9
—
—
—
211.1
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31,
2013.
7676
The activity in the Level 3 investments during the year ended December 31, 2013 was as follows:
Fixed
Income:
Developed
Markets
Hedge
Funds
Equity-like
Funds
Real
Estate
Total
Defined Benefit Pension Plans
Beginning balance at January 1, 2013 . . . . . . . . $
Actual return on plan assets, including changes
in foreign exchange rates:
Relating to assets still held at the reporting
date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Relating to assets sold during the period . . . . .
Purchases, sales, and settlements, net. . . . . . . .
Transfers into (out of) Level 3 . . . . . . . . . . . . . . .
Ending balance at December 31, 2013 . . . . . . . . $
Retiree Health Benefit Plans
Beginning balance at January 1, 2013 . . . . . . . . $
Actual return on plan assets, including changes
in foreign exchange rates:
Relating to assets still held at the reporting
date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Relating to assets sold during the period . . . . .
Purchases, sales, and settlements, net. . . . . . . .
Transfers into (out of) Level 3 . . . . . . . . . . . . . . .
Ending balance at December 31, 2013 . . . . . . . . $
3.7 $ 1,218.1 $
910.5 $
142.6 $ 2,274.9
(3.0)
—
3.7
11.5
15.9 $ 1,440.4 $
123.4
—
98.9
—
155.7
—
(72.7)
—
993.5 $
8.5
—
2.3
—
284.6
—
32.2
11.5
153.4 $ 2,603.2
0.4 $
99.9 $
81.9 $
— $
182.2
(0.3)
—
0.4
1.1
1.6 $
10.3
—
10.4
—
120.6 $
13.9
—
(6.9)
—
88.9 $
—
—
—
—
— $
23.9
—
3.9
1.1
211.1
In 2015, we expect to contribute approximately $40 million to our defined benefit pension plans to satisfy
minimum funding requirements for the year, along with approximately $270 million of additional discretionary
contributions.
Note 15: Contingencies
We are a party to various legal actions and government investigations. The most significant of these are
described below. It is not possible to determine the outcome of these matters, and we cannot reasonably
estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any
of these matters; however, we believe that, except as noted below with respect to the Alimta® patent litigation
and administrative proceedings, 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.
Alimta Patent Litigation and Administrative Proceedings
A number of generic manufacturers are seeking approvals in various countries to market generic forms of
Alimta prior to the expiration of our vitamin dosage regimen patents, alleging that those patents are invalid,
not infringed, or both. We believe our Alimta vitamin dosage patents are valid and enforceable against these
generic manufacturers and we expect to prevail in these proceedings. However, it is not possible to determine
the ultimate outcome of the proceedings, and accordingly, we can provide no assurance that we will
prevail. An unfavorable outcome could have a material adverse impact on our future consolidated results of
operations, liquidity, and financial position. We expect that a loss of exclusivity for Alimta would result in a
rapid and severe decline in future revenues in the relevant market.
77
77
U.S. Patent Litigation
We are engaged in various U.S. patent litigation matters involving Alimta brought pursuant to procedures set
out in the Hatch-Waxman Act. Teva Parenteral Medicines, Inc. (Teva); APP Pharmaceuticals, LLC (APP); Barr
Laboratories, Inc. (Barr); Pliva Hrvatska D.O.O. (Pliva); Accord Healthcare Inc. (Accord), Apotex Inc. (Apotex),
Sun Pharmaceutical Industries, Ltd. (Sun); Sun Pharma Global FZE (Sun Global); and Glenmark Generics
Inc., USA (Glenmark), Nang Kuang Pharmaceutical Co., Ltd. (Nang Kuang), and Sandoz Inc. (Sandoz) each
submitted Abbreviated New Drug Applications (ANDAs) seeking approval to market generic versions of Alimta
prior to the expiration of our vitamin dosage regimen patent (expiring in 2021 plus pediatric exclusivity
expiring in 2022) and alleging the patent is invalid.
In October 2010, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Teva,
APP, Pliva, and Barr seeking rulings that the U.S. vitamin dosage regimen patent is valid and infringed (the
Teva/APP litigation). Teva and APP stipulated to infringement of our vitamin dosage regimen patent, with the
contingency that Teva and APP would be permitted to litigate the issue of infringement if the U.S. Supreme
Court vacated an en banc decision of the Federal Circuit that dealt with the issues of liability related to
infringement (Akamai v. Limelight Networks). Thus, the sole issue before the district court was to determine
the issue of patent validity.
Trial in the Teva/APP litigation occurred in August 2013. In March 2014, the court ruled that the asserted
claims of the vitamin dosage patent are valid. The defendants filed their notice of appeal in April 2014.
In June 2014, the U.S. Supreme Court vacated the Akamai decision. In July 2014, the court of appeals in the
Teva/APP litigation entered an order remanding the case back to the district court to consider the issue of
infringement. A hearing on the question of infringement has been scheduled for February 2015.
In January 2012 and April 2012, we filed similar lawsuits in the U.S. District Court for the Southern District of
Indiana against Accord and Apotex, respectively. We filed a second lawsuit against Accord in February 2013.
The Accord and Apotex cases have been consolidated and stayed by the court and the parties have agreed to
be bound by the outcome of the Teva/APP litigation. In September 2013, we filed a similar lawsuit in the same
court against Sun and Sun Global seeking a ruling that our patent is valid and infringed. This case has been
stayed, and we and Sun have agreed to be bound by the outcome of the Teva/APP litigation. In January
2014, we filed a similar lawsuit in the same court against Glenmark seeking a ruling that our patent is valid
and infringed. That case was amended in March 2014 to add two related Glenmark companies. This case has
been stayed, and Lilly and Glenmark have agreed to be bound by the outcome of the Teva/APP litigation. In
October 2014, we filed a lawsuit against Nang Kuang in the same court, seeking a ruling that our patents are
valid and infringed. In December 2014, Lilly filed a lawsuit against Sandoz in the same court, seeking a ruling
that our patent is valid and infringed.
European Patent Litigation and Administrative Proceedings
Generic manufacturers filed an opposition to the European Patent Office's decision to grant us a vitamin
dosage regimen patent. The Opposition Division of the European Patent Office upheld the patent and the
generic manufacturers lodged an appeal. In addition, in the United Kingdom (U.K.), Actavis Group ehf and
other Actavis companies filed litigation asking for a declaratory judgment that commercialization of certain salt
forms of pemetrexed (the active ingredient in Alimta) would not infringe the vitamin dosage regimen patents in
the U.K., Italy, France, and Spain. This trial occurred in April 2014. In May 2014, the court ruled that the
vitamin dosage patents for Alimta would not be infringed by the defendants' commercialization of alternative
salt forms of pemetrexed, after expiration of the compound patents in December 2015. We filed a motion to
appeal the court's ruling in June 2014, and a hearing is scheduled to occur in March 2015.
We commenced separate infringement proceedings against certain Actavis companies in Germany. The
German case was heard by the trial court in March 2014. In April 2014, the German trial court ruled in our
favor. The defendants filed their notice of appeal in May 2014, and a hearing is scheduled to occur in March
2015.
78
78
Japanese Administrative Proceedings
Sawai Pharmaceutical Company Limited, has filed a demand for invalidation of our vitamin dosage regimen
patents with the Japanese Patent Office. A hearing date has been scheduled for February 2015.
Effient Patent Litigation and Administrative Proceedings
We, along with Daiichi Sankyo, Daiichi Sankyo, Inc., and Ube Industries (Ube) are engaged in various U.S.
patent litigation matters involving Effient brought pursuant to procedures set out in the Hatch-Waxman Act.
Accord Healthcare Inc., USA (Accord USA); Amneal Pharmaceuticals LLC (Amneal); Apotex; Aurobindo
Pharma Limited (Aurobindo); Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. (Dr. Reddy’s);
First Time US Generics LLC (FTUG); Glenmark; Hetero USA Inc. and Hetero Labs Limited Unit V (Hetero);
Mylan Pharmaceuticals Inc. (Mylan); Panacea Biotec, Ltd. (Panacea); Sun Global; Teva Pharmaceuticals
USA, Inc. (Teva USA); Watson Laboratories, Inc. (Watson); and Zydus Pharmaceuticals USA, Inc. (Zydus)
each submitted ANDAs seeking approval to market generic versions of Effient prior to the expiration of Daiichi
Sankyo’s and Ube’s patents (expiring in 2022) covering methods of using Effient with aspirin, and alleging the
patents are invalid. The ANDA filed by Mylan also alleges that the compound patent for Effient (expiring in
2017) is invalid.
In March 2014, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Accord
USA, Amneal, Aurobindo, Dr. Reddy’s, Glenmark, Hetero, Mylan, Sun Global, Teva USA, Watson and Zydus,
and their related companies, seeking a ruling that the patents are valid and infringed. We filed similar lawsuits
in the same court against Apotex (April 2014), Panacea (June 2014), and FTUG (July 2014). In October 2014,
the court consolidated the pending cases. The lawsuits against Aurobindo, Hetero, and FTUG have been
stayed, and the parties have agreed to be bound by the outcome of the consolidated litigation.
We believe the Effient patents are valid and enforceable against these generic manufacturers and we expect
to prevail in these proceedings. However, it is not possible to determine the outcome of the proceedings, and
accordingly, we can provide no assurance that we will prevail. We expect a loss of exclusivity for Effient would
result in a rapid and severe decline in future revenues for the product in the relevant market.
Actos® Product Liability Litigation
We are named along with Takeda Chemical Industries, Ltd., and Takeda affiliates (collectively, Takeda) as a
defendant in approximately 5,275 product liability cases in the U.S. related to the diabetes medication Actos,
which we co-promoted with Takeda in the U.S. from 1999 until September 2006. In general, plaintiffs in these
actions allege that Actos caused or contributed to their bladder cancer. Almost all of the active cases have
been consolidated in federal multi-district litigation in the Western District of Louisiana or are pending in a
coordinated state court proceeding in California or a coordinated state court proceeding in Illinois. We believe
these lawsuits are without merit, and we and Takeda are prepared to defend against them vigorously.
In April 2014, a jury in the Western District of Louisiana found in favor of the plaintiffs in the case of Terrence
Allen, et al. v. Takeda Pharmaceuticals, et al., no. 6:12-md-00064. In September 2014, judgment was entered
awarding $1.3 million in compensatory damages to plaintiffs (allocated 75 percent to Takeda and 25 percent
to us) and punitive damages of $6.00 billion against Takeda and $3.00 billion against us. In October 2014, the
judge issued an order substantially reducing the amount of punitive damages awarded to approximately $28
million against Takeda and approximately $9 million against us. We continue to believe the evidence did not
support plaintiffs’ claims and strongly disagree with the verdict. We and Takeda intend to vigorously challenge
this outcome through all available legal means. We and Takeda have appealed this judgment and plaintiffs
have filed a cross-appeal objecting to the reduction in punitive damages.
Our agreement with Takeda calls for Takeda to defend and indemnify us against our losses and expenses
with respect to the U.S. product liability litigation and other related expenses in accordance with the terms of
the agreement. After the jury reached its verdict in Allen, Takeda notified us that it was reserving its right to
challenge its obligations to defend and indemnify us with respect to the Allen case. We believe we are entitled
to full indemnification of our losses and expenses in Allen and all other U.S. cases; however, there can be no
guarantee we will ultimately be successful in obtaining full indemnification.
7979
We are also named along with Takeda as a defendant in three purported product liability class actions in
Canada related to Actos, including one in Ontario (Casseres et al. v. Takeda Pharmaceutical North America,
Inc., et al.), one in Quebec (Whyte et al. v. Eli Lilly et al.), and one in Alberta (Epp v. Takeda Canada et al.).
We promoted Actos in Canada until 2009. We believe these claims are without merit and are prepared to
defend against them vigorously.
Byetta Product Liability Litigation
We are named as a defendant in approximately 415 Byetta product liability lawsuits involving approximately
920 plaintiffs. Approximately 95 of these lawsuits, covering about 540 plaintiffs, are filed in California state
court and coordinated in a Los Angeles Superior Court. Approximately 310 lawsuits, covering about 350
plaintiffs, are filed in federal court, the majority of which are coordinated in a multi-district litigation in the
Southern District of California. The remaining approximately 10 lawsuits, representing about 30 plaintiffs, are
in various state courts. Approximately 350 of the lawsuits, involving approximately 540 plaintiffs, contain
allegations that Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic cancer or thyroid
cancer). We are aware of approximately 395 additional claimants who have not yet filed suit. The majority of
these additional claims allege damages for pancreatitis. We believe these lawsuits and claims are without
merit and are prepared to defend against them vigorously.
Prozac® Product Liability Litigation
We are named as a defendant in approximately 10 U.S. lawsuits primarily related to allegations that the
antidepressant Prozac caused or contributed to birth defects in the children of women who ingested the drug
during pregnancy. We are aware of approximately 470 additional claims related to birth defects, which have
not yet been filed. We believe these lawsuits and claims are without merit and are prepared to defend against
them vigorously.
Brazil–Employee Litigation
Our subsidiary in Brazil, Eli Lilly do Brasil (Lilly Brasil), is named in a lawsuit brought by the Labor Attorney for
15th Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm to employees
and former employees caused by exposure to heavy metals at a former Lilly manufacturing facility in
Cosmopolis, Brazil, operated by the company between 1977 and 2003. The plaintiffs allege that some
employees at the facility were exposed to benzene and heavy metals; however, Lilly Brasil maintains that
these alleged contaminants were never used in the facility. In May 2014, the labor court judge ruled against
Lilly Brasil. The judge's ruling orders Lilly Brasil to undertake several actions of unspecified financial impact,
including paying lifetime medical insurance for the employees and contractors who worked at the Cosmopolis
facility more than six months during the affected years and their children born during and after this period.
While we cannot currently estimate the range of reasonably possible financial losses that could arise in the
event we do not ultimately prevail in the litigation, the judge has estimated the total financial impact of the
ruling to be approximately 1.0 billion Brazilian real (approximately $375 million as of December 31, 2014) plus
interest. We strongly disagree with the decision and filed an appeal in May 2014. We are also named in
approximately 30 lawsuits filed in the same court by individual former employees making similar claims. We
believe these lawsuits are without merit and are prepared to defend against them vigorously.
Product Liability Insurance
Because of the nature of pharmaceutical products, it is possible that we could become subject to large
numbers of product liability and related claims in the future. Due to a very restrictive market for product liability
insurance, we are self-insured for product liability losses for all our currently marketed products.
80
80
Note 16: Other Comprehensive Income (Loss)
The following table summarizes the activity related to each component of other comprehensive income (loss):
(Amounts presented net of taxes)
Beginning balance at January 1, 2012 $
Foreign
Currency
Translation
Gains (Losses)
265.9
Unrealized Net
Gains (Losses)
on Securities
14.8
$
Defined Benefit
Pension and
Retiree Health
Benefit Plans
$ (4,032.2)
Effective
Portion of
Cash Flow
Hedges
(107.1)
$
Accumulated
Other
Comprehensive
Loss
$ (3,858.6)
Unrealized gain (loss) . . . . . . . . . . . .
Net amount reclassed to net income
Net other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . .
160.9
Balance at December 31, 2012 . . . . .
426.8
104.1
(46.4)
57.7
72.5
—
5.9
5.9
61.5
(163.0)
(4,195.2)
(101.2)
(3,797.1)
Other comprehensive income (loss)
before reclassifications . . . . . . . . . . .
Net amount reclassified from
accumulated other comprehensive
loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . .
36.2
138.9
1,387.1
(86.5)
1,475.7
—
(6.2)
319.0
5.9
318.7
36.2
132.7
1,706.1
(80.6)
1,794.4
Balance at December 31, 2013 . . . . .
463.0
205.2
(2,489.1)
(181.8)
(2,002.7)
Other comprehensive income (loss)
before reclassifications . . . . . . . . . . .
Net amount reclassified from
accumulated other comprehensive
loss . . . . . . . . . . . . . . . . . . . . . . . . . .
Net other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . . . . . . .
(961.4)
105.2
(1,098.5)
(15.2)
(1,969.9)
—
(210.7)
185.6
5.9
(19.2)
(961.4)
(105.5)
(912.9)
(9.3)
(1,989.1)
Ending Balance at December 31,
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . $
(498.4)
$
99.7
$ (3,402.0)
$
(191.1)
$ (3,991.8)
The tax effects on the net activity related to each component of other comprehensive income (loss) for the
years ended December 31, were as follows:
Tax (expense) benefit
Unrealized net gains (losses) on securities . . . . . . . . . . . . . . . . . . . $
Defined benefit pension and retiree health benefit plans . . . . . . . . .
Effective portion of cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes related to other comprehensive income
(loss) items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014
2013
2012
56.7
414.7
5.2
$
(71.6)
$
(886.1)
43.2
(30.8)
(34.4)
(2.8)
476.6
$
(914.5)
$
(68.0)
Income taxes were not provided for foreign currency translation. 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.
8181
Details about Accumulated Other
Comprehensive Loss Components
Amortization of defined benefit items:
Reclassifications Out of
Accumulated Other
Comprehensive Loss
Year Ended December 31,
2014
2013
Affected Line Item in the
Consolidated Statements of
Operations
Prior service benefits, net . . . . . . . . . . . . . . $
Actuarial losses . . . . . . . . . . . . . . . . . . . . . .
Total before tax
Tax benefit
Net of tax
(34.0)
303.0
269.0
(83.4)
185.6
$
(31.9)
515.2
483.3
(164.3)
319.0
(1)
(1)
Income taxes
Unrealized gains/losses on available-for-sale
securities:
Realized gains, net . . . . . . . . . . . . . . . . . . .
Impairment losses . . . . . . . . . . . . . . . . . . . .
Total before tax
Tax expense
Net of tax
(324.1)
—
(324.1)
113.4
(210.7)
(12.0) Other—net, (income) expense
Other—net, (income) expense
2.4
(9.6)
3.4
(6.2)
Income taxes
Other, net of tax . . . . . . . . . . . . . . . . . . . . . . . . .
5.9
5.9
Other—net, (income) expense
Total reclassifications for the period (net of tax). $
(19.2)
$
318.7
1 These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 14).
Note 17: Other–Net, (Income) Expense
Other–net, (income) expense consisted of the following:
Income related to termination of the exenatide collaboration with
Amylin (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148.8
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(121.0)
Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(368.3)
Other–net, (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (340.5)
$ (495.4)
160.1
(119.7)
(63.9)
$ (518.9)
$ (787.8)
177.8
(105.0)
41.0
$ (674.0)
2014
2013
2012
For the year ended December 31, 2014, other–net, (income) expense is primarily related to net gains on
investments (Note 7) and income related to the transfer to Boehringer Ingelheim of our license rights to co-
promote linagliptin and empagliflozin in certain countries (Note 4). For the years ended December 31, 2013
and 2012, other–net, (income) expense primarily consists of income related to the termination of the
exenatide collaboration with Amylin, including income recognized from the transfer to Amylin of exenatide
commercial rights in all markets outside the U.S. in 2013 and income recognized from the early payment of
the exenatide revenue-sharing obligation by Amylin in 2012 (Note 4).
8282
Note 18: Segment Information
We operate in two business segments—human pharmaceutical products and animal health. 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 the same as those described in the summary of significant accounting policies in
Note 1 to the consolidated financial statements.
Our human pharmaceutical products segment includes the discovery, development, manufacturing,
marketing, and sales of human pharmaceutical products worldwide in the following therapeutic areas:
endocrinology, neuroscience, oncology, cardiovascular, and other. We lost U.S. patent exclusivity for
Cymbalta® in December 2013 and Evista® in March 2014, which resulted in the immediate entry of generic
competitors and a rapid and severe decline in revenue.
Our animal health segment, operating through our Elanco animal health division, includes the development,
manufacturing, marketing, and sales of animal health products worldwide for both food and companion
animals. Animal health products include Rumensin®, Posilac®, Tylan®, Optaflexx®, Maxiban® and other
products for livestock and poultry, as well as Trifexis®, Comfortis®, and other products for companion animals.
Most of our pharmaceutical products are distributed through wholesalers that serve pharmacies, physicians
and other health care professionals, and hospitals. For the years ended December 31, 2014, 2013, and 2012,
our three largest wholesalers each accounted for between 8 percent and 19 percent of consolidated total
revenue. Further, they each accounted for between 9 percent and 18 percent of accounts receivable as of
December 31, 2014 and 2013. Animal health products are sold primarily to wholesale distributors.
We manage our assets on a total company basis, not by operating segment, as the assets of the animal
health business are intermixed with those of the pharmaceutical products business. Therefore, our chief
operating decision maker does not review any asset information by operating segment and, accordingly, we
do not report asset information by operating segment.
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.
The following table summarizes our revenue activity for the years ended December 31, 2014, 2013, and
2012:
Segment revenue—to unaffiliated customers:
Human pharmaceutical products:
2014
2013
2012
Endocrinology:
Humalog® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Humulin® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forteo® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Evista . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trajenta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Endocrinology . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Endocrinology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,785.2 $
1,400.1
1,322.0
419.8
328.8
683.1
6,939.0
Neuroscience:
Cymbalta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Zyprexa® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strattera® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Neuroscience . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Neuroscience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,614.7
1,037.3
738.5
206.0
3,596.5
2,611.2 $
2,395.5
1,315.8
1,244.9
1,050.4
249.2
832.9
7,304.4
5,084.4
1,194.8
709.2
227.8
7,216.2
1,239.1
1,151.0
1,010.1
88.6
926.6
6,810.9
4,994.1
1,701.4
621.4
258.2
7,575.1
8383
Oncology:
Alimta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Erbitux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Oncology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Oncology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cardiovascular:
Cialis® . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Cardiovascular . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cardiovascular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
2,792.0
373.3
227.7
3,393.0
2,291.0
522.2
240.3
3,053.5
2,703.0
373.7
191.8
3,268.5
2,159.4
508.7
255.1
2,923.2
2,594.3
397.0
290.3
3,281.6
1,926.8
457.2
248.5
2,632.5
Other pharmaceuticals . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total human pharmaceutical products . . . . . . . . . . . . . . . . . . . . .
Animal health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
266.8
20,566.9
2,036.5
Total segment revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,615.6 $ 23,113.1 $ 22,603.4
249.3
20,961.6
2,151.5
287.0
17,269.0
2,346.6
Segment profits(1):
Human pharmaceutical products . . . . . . . . . . . . . . . . . . . . . . . . . $
Animal health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total segment profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,132.0 $
564.2
3,696.2 $
5,015.0 $
556.6
5,571.6 $
4,393.4
508.1
4,901.5
Reconciliation of total segment profits to consolidated income
before taxes:
Segment profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other profits (losses):
Income related to termination of the exenatide collaboration
with Amylin Pharmaceuticals, Inc. (Note 4) . . . . . . . . . . . . .
Income related to transfer of linagliptin and empagliflozin
rights in certain countries to Boehringer Ingelheim (Note 4) . .
Acquired in-process research and development (Notes 3 and
4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,696.2 $
5,571.6 $
4,901.5
—
92.0
495.4
787.8
—
—
—
(200.2)
(57.1)
Asset impairment, restructuring, and other special charges
(281.1)
(Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Branded Prescription Drug Fee . . . . . . . . . . . . . . . . . . . .
—
Total consolidated income before taxes . . . . . . . . . . . . . . . . . . . . . . $
5,408.2
1 Human pharmaceutical products segment profit includes total depreciation and amortization expense of $1.27 billion, $1.35 billion, and
(468.7)
(119.0)
3,000.3 $
(120.6)
—
5,889.3 $
$1.37 billion for the years ended December 31, 2014, 2013, and 2012, respectively. Animal health segment profit includes total
depreciation and amortization expense of $111.5 million, $99.4 million, and $91.1 million for the years ended December 31, 2014,
2013, and 2012, respectively.
For internal management reporting presented to the chief operating decision maker, certain costs are fully
allocated to our human pharmaceutical products segment and therefore are not reflected in the animal health
segment's profit. Such items include costs associated with treasury-related financing, global administrative
services, certain acquisition-related transaction costs, and certain manufacturing costs.
84
84
Geographic Information
Revenue—to unaffiliated customers(1):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,134.1 $ 12,889.7 $ 12,313.1
4,259.7
4,338.4
4,506.7
2,246.2
2,063.8
2,027.1
3,784.4
3,821.2
3,947.7
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,615.6 $ 23,113.1 $ 22,603.4
2014
2013
2012
Long-lived assets(2):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1 Revenue is attributed to the countries based on the location of the customer.
2 Long-lived assets consist of property and equipment and certain sundry assets.
4,566.2 $
2,401.5
80.4
1,499.1
8,547.2 $
4,649.6 $
2,469.7
81.1
1,540.9
8,741.3 $
5,064.7
2,281.1
101.5
1,543.2
8,990.5
85
85
Note 19: Selected Quarterly Data (unaudited)
First
Third
Fourth
Second
2014
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,121.3 $ 4,875.6 $ 4,935.6 $ 4,683.1
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,222.7
Operating expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,594.2
Acquired IPR&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Asset impairment, restructuring, and other special charges .
31.4
Other—net, (income) expense . . . . . . . . . . . . . . . . . . . . . . .
(56.0)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
890.8
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
727.9
Earnings per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . .
0.68
Earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . .
0.68
Dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,253.1
2,985.6
105.2
401.0
(137.2)
513.6
428.5
0.40
0.40
1,267.0
2,915.3
95.0
36.3
(93.5)
655.5
500.6
0.47
0.47
1,189.7
2,859.3
—
—
(53.8)
940.4
733.5
0.68
0.68
0.49
0.49
0.49
0.49
Common stock closing prices:
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72.83
61.90
66.59
60.35
63.10
58.21
59.85
50.73
2013
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,808.8 $ 5,772.6 $ 5,929.7 $ 5,602.0
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,158.3
Operating expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,000.1
Acquired IPR&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,386.5
3,429.0
1,198.1
3,029.8
1,165.2
3,198.0
Second
Fourth
Third
First
57.1
—
—
—
Asset impairment, restructuring, and other special charges .
Other—net, (income) expense . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock closing prices:
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.4
(9.1)
909.9
727.5
0.68
0.67
0.49
51.34
47.65
—
31.3
1,513.4
1,203.1
1.11
1.11
0.49
54.96
49.92
63.5
(11.9)
1,514.9
1,206.2
21.7
(529.2)
1,951.1
1,548.0
1.12
1.11
0.49
58.33
49.06
1.42
1.42
0.49
56.79
49.51
1 Includes research and development, marketing, selling, and administrative expenses
Our common stock is listed on the New York Stock Exchange (NYSE), NYSE Euronext, and SIX Swiss
Exchange.
86
86
Management’s Reports
Management’s 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 management’s 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. All employees must
take training annually on The Red Book and 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 and all financial management must sign a financial code of ethics, which further
reinforces their fiduciary responsibilities.
The consolidated 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 & Young’s opinion with respect to the fairness of the presentation of the statements is
included in Item 8 of our annual report on Form 10-K. 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 available on our website, outlines the
members’ roles and responsibilities and is consistent with enacted corporate reform laws and regulations. It is
the audit committee’s responsibility to appoint an independent registered public accounting firm subject to
shareholder ratification, approve both audit and non-audit 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.
Management’s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and
Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934. We have global financial policies that govern critical areas, including
internal controls, financial accounting and reporting, fiduciary accountability, and safeguarding of corporate
assets. Our internal accounting control systems are designed to provide reasonable assurance that assets
are safeguarded, that transactions are executed in accordance with management’s 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.
87
87
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in "2013 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 control over financial reporting was effective as of December 31, 2014. However, because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
The internal control over financial reporting has been assessed by Ernst & Young LLP as of December 31,
2014. Their responsibility is to evaluate whether internal control over financial reporting was designed and
operating effectively.
John C. Lechleiter, Ph.D.
Chairman, President, and Chief Executive Officer
Derica W. Rice
Executive Vice President, Global Services and Chief
Financial Officer
February 19, 2015
8888
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Eli Lilly and Company
We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries
as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive
income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2014. These financial statements are the responsibility of the Company's 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, 2014 and 2013,
and the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2014, 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), Eli Lilly and Company and subsidiaries' internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report
dated February 19, 2015, expressed an unqualified opinion thereon.
Indianapolis, Indiana
February 19, 2015
8989
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Eli Lilly and Company
We have audited Eli Lilly and Company and subsidiaries’ internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (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
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s 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, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, 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 company’s 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 company’s 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 company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, Eli Lilly and Company and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the 2014 consolidated financial statements of Eli Lilly and Company and subsidiaries and our
report dated February 19, 2015 expressed an unqualified opinion thereon.
Indianapolis, Indiana
February 19, 2015
90
90
Selected Financial Data (unaudited)
ELI LILLY AND COMPANY AND
SUBSIDIARIES
(Dollars in millions, except revenue per
employee and per-share data)
Operations
Revenue . . . . . . . . . . . . . . . . . . . $ 19,615.6
Cost of sales . . . . . . . . . . . . . . . .
4,932.5
Research and development . . . . .
4,733.6
Marketing, selling, and
2014
2013
2012
2011
2010
$ 23,113.1
4,908.1
5,531.3
$ 22,603.4
4,796.5
5,278.1
$ 24,286.5
5,067.9
5,020.8
$ 23,076.0
4,366.2
4,884.2
administrative . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . .
Income taxes . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Net income as a percent of
revenue . . . . . . . . . . . . . . . . . . .
Net income per share—diluted . . $
Dividends declared per share . . .
Weighted-average number of
shares outstanding—diluted
(thousands) . . . . . . . . . . . . . . . .
6,620.8
328.4
3,000.3
609.8
2,390.5
7,125.6
(341.2)
5,889.3
1,204.5
4,684.8
7,513.5
(392.9)
5,408.2
1,319.6
4,088.6
7,879.9
968.4
5,349.5
1,001.8
4,347.7
7,053.4
247.0
6,525.2
1,455.7
5,069.5
12.2%
2.23
1.97
$
20.3%
4.32
1.96
$
18.1%
3.66
1.96
$
17.9%
3.90
1.96
$
22.0%
4.58
1.96
1,074,286
1,084,766
1,117,294
1,113,967
1,105,813
Financial Position
Current assets . . . . . . . . . . . . . . . $ 12,179.8
Current liabilities . . . . . . . . . . . . .
11,207.5
Property and equipment—net . . .
7,963.9
Total assets . . . . . . . . . . . . . . . . .
37,178.2
Long-term debt
. . . . . . . . . . . . . .
5,367.7
Total equity. . . . . . . . . . . . . . . . . .
15,388.1
$ 13,104.7
8,916.6
7,975.5
35,248.7
4,200.3
17,640.7
$ 13,038.7
8,389.5
7,760.2
34,398.9
5,519.4
14,773.9
$ 14,248.2
8,930.9
7,760.3
33,659.8
5,464.7
13,535.6
$ 14,840.0
6,926.9
7,940.7
31,001.4
6,770.5
12,412.8
13.7%
6.8%
Supplementary Data
Return on total equity . . . . . . . . . .
Return on assets . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . $
Depreciation and amortization . . .
Effective tax rate . . . . . . . . . . . . .
Revenue per employee . . . . . . . . $ 501,000
Number of employees . . . . . . . . .
39,135
Number of shareholders of
1,162.6
1,379.0
20.3%
29.5%
13.8%
27.8%
12.3%
31.4%
13.4%
46.1%
17.7%
$
1,012.1
1,445.6
$
905.4
1,462.2
$
672.0
1,373.6
$
694.3
1,328.2
20.5%
24.4%
18.7%
22.3%
$ 609,000
37,925
$ 590,000
38,350
$ 638,000
38,080
$ 602,000
38,350
record . . . . . . . . . . . . . . . . . . . .
29,300
31,900
33,600
35,200
36,700
91
91
PERFORMANCE GRAPH
This graph compares the return on Lilly stock with that of the Standard & Poor’s 500 Stock Index and our peer
group for the years 2010 through 2014. The graph assumes that, on December 31, 2009, a person invested
$100 each in Lilly stock, the S&P 500 Stock Index, and the peer groups' common stock. The graph measures
total shareholder return, which takes into account both stock price and dividends. It assumes that dividends
paid by a company are reinvested in that company’s stock.
Value of $100 Invested on Last Business Day of 2009
Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group(1)
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Lilly
$ 100.00
$ 103.71
$ 129.79
$ 161.29
$ 172.96
$ 241.72
Peer Group
$ 100.00
99.27
$
$ 114.89
$ 135.23
$ 184.35
$ 214.86
S&P 500
$ 100.00
$ 115.06
$ 117.49
$ 136.30
$ 180.44
$ 205.14
1
We constructed the peer group as the industry index for this graph. It comprises the public companies in the pharmaceutical and
biotech industries that we used to benchmark the compensation of executive officers for 2014: Abbott Laboratories; AbbVie Inc.;
Allergan Inc.; Amgen Inc.; AstraZeneca PLC; Baxter International Inc.; Biogen Idec Inc.; Bristol-Myers Squibb Company; Celgene
Corporation; Gilead Sciences Inc.; GlaxoSmithKline plc; Johnson & Johnson; Medtronic, Inc.; Merck & Co., Inc.; Novartis AG.; Pfizer
Inc.; and Sanofi-Aventis.
92
92
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 ™, as applicable. In subsequent
uses of the marks in the report, the symbols may be omitted.
Actos® is a trademark of Takeda Pharmaceutical Company Limited.
Bydureon® and Byetta® are trademarks of Amylin Pharmaceuticals, Inc.
Glyxambi®, Jardiance®, Jentadueto®, and Trajenta® are trademarks of Boehringer Ingelheim GmbH.
Keytruda® is a trademark of Merck Sharp & Dohme Corp.
Lantus® is a trademark of Sanofi-Aventis Deutschland GmbH.
Opdivo® is a trademark of Bristol-Myers Squibb Company.
Sentinel® is a trademark of Virbac Corporation.
Victoza® is a trademark of Novo Nordisk A/S.
Xigris™ is a trademark of Biocritica, Inc.
9393
Notice of 2015 Annual Meeting
of Shareholders and Proxy
Statement
Your vote is important
Please vote by using the Internet, telephone, or by signing, dating, and returning the enclosed proxy card.
Table of Contents
Notice of Annual Meeting of Shareholders
Proxy Statement Overview
Governance
Item 1 - Election of Directors
Board Operations and Governance
Director Compensation
Director Independence
Committees of the Board of Directors
Membership and Meetings of the Board and Its Committees
Board Oversight of Compliance and Risk Management
Highlights of the Company's Corporate Governance
Shareholder Engagement on Governance Issues
Prior Management Proposals to Eliminate Classified Board
Shareholder Proposals and Nominations
Ownership of Company Stock
Compensation
Item 2 - Advisory Vote on Compensation Paid to Named Executive Officers
Compensation Discussion and Analysis
Executive Compensation
Compensation Committee Matters
Audit Matters
1
2
8
8
8
15
17
19
21
21
22
25
25
26
27
28
28
29
42
51
53
Item 3 - Proposal to Ratify the Appointment of Principal Independent Auditor 53
Other Information
Meeting and Voting Logistics
Other Matters
Appendix A - Summary of Adjustments Related to the Annual Bonus and
Performance Award
Annual Meeting Admission Ticket
55
55
58
59
61
Notice of Annual Meeting of Shareholders
To the holders of Common Stock of Eli Lilly and Company:
The 2015 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below:
WHEN:
WHERE:
11:00 a.m. EDT, Monday, May 4, 2015
The Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285
ITEMS OF BUSINESS: Election of the four directors listed in the proxy statement to
serve three-year terms
Approval, by non-binding vote, of the compensation paid to the
company's named executive officers
Ratification of Ernst & Young LLP as the principal independent
auditors for 2015
Shareholders of record at the close of business on February 27,
2015
WHO CAN VOTE:
See the back page of this report for information regarding how to attend the meeting. Every shareholder vote
is important. If you are unable to attend the meeting in person, please sign, date, and return your proxy and/or
voting instructions by mail, telephone or through the Internet promptly so that a quorum may be represented
at the meeting.
By order of the Board of Directors,
James B. Lootens
Secretary
March 23, 2015
Indianapolis, Indiana
Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 4,
2015: The annual report and proxy statement are available at http://www.lilly.com/pdf/lillyar2014.pdf
11
Proxy Statement Overview
General Information
This overview highlights information contained elsewhere in this proxy statement. It does not contain all the
information you should consider, and you should read the entire proxy statement carefully before voting.
Meeting:
Time:
Annual Meeting of Shareholders
Date:
May 4, 2015
11:00 a.m. EDT
Location:
Record Date:
February 27, 2015
The Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285
Items of Business:
Item 1: Election of the four directors listed in this proxy statement to serve
three-year terms.
Item 2: Approval, by non-binding vote, of the compensation paid to the
company's named executive officers.
Item 3: Ratification of Ernst & Young LLP as the principal independent auditors
for 2015.
What Is New In This Year's Proxy Statement
Below is a summary of changes to our compensation programs in 2014:
In anticipation of significant revenue declines due to major product patent expirations, we took two significant
compensation actions for 2014 in order to devote the resources necessary to launch three major new
products, aggressively advance our pipeline of potential new medicines, and provide appropriate capital
returns to our shareholders:
(cid:127) A freeze on salary increases for most employees, including executive officers; and
(cid:127) A one-time reduction of the company annual bonus payout.
Additionally, effective in 2014 we adopted a policy prohibiting all members of senior management (and
outside directors) from pledging company shares (i.e., using them as collateral for a loan). This formalizes a
practice that had already been in effect.
Highlights of 2014 Company Performance
The following provides a brief look at our 2014 performance in three dimensions: operating performance,
innovation progress, and returns to shareholders. See our 2014 annual report on Form 10-K for more details.
Operating Performance
Last year was one of the most challenging years in our history – the final year in a multi-year period of patent
expirations of several major products. In 2014, we experienced severe declines in revenue and net income
due to the expiration of the U.S. patents for the blockbuster drugs Cymbalta® (our largest selling product) and
Evista®. We partially offset these declines with growth in several other brands; new product launches in
diabetes and oncology; growth in Japan, emerging markets, and our animal health business; and careful
expense management. Performance highlights included:
(cid:127)
(cid:127)
2014 revenue of $19.6 billion declined 15 percent but slightly exceeded our business plan target
2014 earnings per share (EPS) declined 48 percent on a reported basis to $2.23, and declined 33
percent on a non-GAAP basis to $2.78. The non-GAAP EPS results slightly exceeded our business
plan target.
(cid:127) Operating cash flows remained strong and exceeded our business plan target at $4.37 billion.
2
2
Innovation Progress
Innovation Progress
We made significant advances with our pipeline in 2014, including:
We made significant advances with our pipeline in 2014, including:
(cid:127) Approval and launch of three new products: Cyramza® for certain gastric and lung cancers, and
(cid:127) Approval and launch of three new products: Cyramza® for certain gastric and lung cancers, and
Jardiance® and Trulicity™ for type 2 diabetes
Jardiance® and Trulicity™ for type 2 diabetes
(cid:127) Approval of our insulin glargine product for diabetes in Europe and Japan and tentative approval in
(cid:127) Approval of our insulin glargine product for diabetes in Europe and Japan and tentative approval in
the U.S.
the U.S.
(cid:127) Submission of necitumumab for squamous cell non-small cell lung cancer
(cid:127) Submission of necitumumab for squamous cell non-small cell lung cancer
(cid:127) Positive results in final-stage clinical trials for ixekizumab for psoriasis and baricitinib for rheumatoid
(cid:127) Positive results in final-stage clinical trials for ixekizumab for psoriasis and baricitinib for rheumatoid
arthritis.
arthritis.
Returns to Shareholders
Returns to Shareholders
We achieved strong total shareholder returns (share price appreciation plus dividends, reinvested quarterly)
We achieved strong total shareholder returns (share price appreciation plus dividends, reinvested quarterly)
for the one-, three-, and five-year periods through year-end 2014, including a 40 percent increase in 2014.
for the one-, three-, and five-year periods through year-end 2014, including a 40 percent increase in 2014.
Our returns exceeded the peer group in two of those periods and exceeded the S&P 500 in all three periods:
Our returns exceeded the peer group in two of those periods and exceeded the S&P 500 in all three periods:
Strong Total Shareholder Returns
142%
113%
105%
86% 87%
75%
)
4
1
/
1
3
/
2
1
f
o
s
a
(
h
t
w
o
r
G
%
160%
140%
120%
100%
80%
60%
40%
20%
0%
40%
16% 14%
1-year
3-year
5-year
LLY
Peer Group
S&P 500
Consistent with our commitment to returning excess cash to shareholders, we returned approximately $2.9
Consistent with our commitment to returning excess cash to shareholders, we returned approximately $2.9
billion in cash to shareholders in 2014 in the form of dividends and share repurchases, and we announced a
billion in cash to shareholders in 2014 in the form of dividends and share repurchases, and we announced a
dividend increase commencing in the first quarter of 2015. In the past three years, we have returned $6.9
dividend increase commencing in the first quarter of 2015. In the past three years, we have returned $6.9
billion in cash to shareholders through dividends and share repurchases.
billion in cash to shareholders through dividends and share repurchases.
p3 of proxy
3
3
3
Governance (pages 8-26)
Item 1: Election of Directors (pages 8-25)
Name and principal occupation
Joined the
Board
Age Public boards
Management
recommendation
Vote required to
pass
Katherine Baicker, Ph.D.
Professor of Health Economics - Harvard
University
J. Erik Fyrwald
President and CEO - Univar, Inc.
Ellen R. Marram
President - The Barnegat Group LLC
Jackson P. Tai
Former Vice Chairman and CEO - DBS Group
Holdings and DBS Bank
2011
43
None
2005
55
None
2002
68
Ford Motor Company
The New York Times
Company
The Bank of China, Limited
Vote FOR
Vote FOR
Vote FOR
2013
64
MasterCard Incorporated
Vote FOR
Royal Philips NV
Majority of
votes cast
Majority of
votes cast
Majority of
votes cast
Majority of
votes cast
Our Corporate Governance Policies Reflect Best Practices
(cid:127) Our Board membership is marked by leadership, experience, and diversity.
(cid:127) All 13 of our nonemployee directors, and all Board committee members, are independent.
(cid:127) We have a strong, independent lead director role.
(cid:127) Our Board actively participates in company strategy and CEO/senior executive succession planning.
(cid:127) Our Board oversees compliance and enterprise risk management practices.
(cid:127) We have in place meaningful stock ownership requirements.
(cid:127) We have a majority voting standard and resignation policy for the election of directors.
Compensation (pages 28-52)
Item 2: Advisory Vote on Compensation Paid to Named Executive
Officers (pages 28-29)
Item 2
Approve, by non-binding vote, compensation paid to the
company's named executive officers.
Management
recommendation
Vote FOR
Vote required to
pass
Majority of
votes cast
Our Executive Compensation Programs Reflect Best Practices
(cid:127) We have had strong shareholder support of compensation practices: in 2014, over 98 percent of
shares cast voted in favor of our executive compensation.
(cid:127) Our compensation programs are designed to align with shareholder interests and link pay to
performance through a blend of short- and long-term performance measures.
(cid:127) Our Compensation Committee annually reviews compensation programs to ensure appropriate risk
mitigation.
(cid:127) We have a broad compensation recovery policy that applies to all executives and covers a wide
range of misconduct.
(cid:127) Our executives and senior management are prohibited from hedging or pledging their company stock.
(cid:127) Our executives are subject to robust stock ownership guidelines.
(cid:127) We do not have "top hat" retirement plans - supplemental plans are open to all employees and are
limited to restoring benefits lost due to IRS limits on qualified plans.
(cid:127) We do not provide tax gross-ups to executive officers (except for limited gross-ups related to
international assignments).
(cid:127) We have a very restrictive policy on perquisites.
4
4
(cid:127) Our severance plans related to change-in-control generally require a double trigger.
(cid:127) We do not have employment agreements with any of our executive officers.
Executive Compensation Summary for 2014
The total compensation paid to our named executive officers (the five officers whose compensation is
disclosed in this proxy statement) for 2014 remained in the middle range of the company's peer group.
Consistent with the pay freeze for most company employees for 2014, there were no salary increases for the
named executive officers for 2014, and only our newest named executive officer received an increase in
target equity compensation. Incentive compensation program payouts were aligned with the company's
performance in 2014, as outlined below under "Pay for Performance."
Pay for Performance
As described more fully in the Compensation Disclosures and Analysis (CD&A) section, we link our incentive
pay programs to a balanced mix of measures on three dimensions of company performance: (1) operating
performance; (2) progress with our innovation pipeline; and (3) shareholder returns.
The summary information below highlights why the Compensation Committee believes our incentive pay
programs are appropriately aligned with company performance. Please see the CD&A for details of how our
three incentive pay programs work and how the payouts for 2014 were calculated.
2014 Annual Bonus Multiple
The company exceeded its annual bonus targets for revenue, adjusted non-GAAP EPS, and pipeline
progress. However, in order to manage expenses in light of the severe impact of the patent expirations, the
Compensation Committee reduced the bonus multiple by 0.25.
2014 Performance Multiples
2014 Performance Multiples
Resulting Bonus Multiple
Resulting Bonus Multiple
1.04
1.04
1.05
1.05
1.25
1.25
l
l
e
e
p
p
i
i
t
t
l
l
u
u
M
M
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
1.00
1.00
1.10
1.10
0.85
0.85
l
l
e
e
p
p
i
i
t
t
l
l
u
u
M
M
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
Revenue
Revenue
EPS Pipeline Score
EPS Pipeline Score
Target
Target
Actual Adjusted
Actual Adjusted
p5 and p37 of proxy
p5 and p37 of proxy
5
5
2014 Performance Award Multiple
2014 Performance Award Multiple
We fell short of our adjusted non-GAAP EPS targets under our Performance Award program, which targets
We fell short of our adjusted non-GAAP EPS targets under our Performance Award program, which targets
are based on expected EPS growth of peer companies over a two-year period.
are based on expected EPS growth of peer companies over a two-year period.
2013–2014 Annual EPS Growth
2013–2014 Annual EPS Growth
2013–2014 PA Multiple
2013–2014 PA Multiple
t
t
n
n
e
e
c
c
r
r
e
e
P
P
15
15
10
10
5
5
0
0
7.8%
7.8%
1.4%
1.4%
l
l
e
e
p
p
i
i
t
t
l
l
u
u
M
M
1.00
1.00
0.52
0.52
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
Target Annual Growth
Target Annual Growth
Actual Annual Growth
Actual Annual Growth
Target Multiple
Target Multiple
Actual Multiple
Actual Multiple
2014 Shareholder Value Award Multiple
2014 Shareholder Value Award Multiple
We significantly exceeded our stock price growth targets under our Shareholder Value Award program, which
We significantly exceeded our stock price growth targets under our Shareholder Value Award program, which
targets are based on expected large-cap company returns over a three-year period.
targets are based on expected large-cap company returns over a three-year period.
2012–2014 Lilly Stock Growth
2012–2014 Lilly Stock Growth
p6 and p38 of proxy
p6 and p38 of proxy
2012–2014 SVA Multiple
2012–2014 SVA Multiple
t
t
n
e
c
r
e
P
n
e
c
r
e
P
100
100
80
80
60
60
40
40
20
20
0
0
78.9%
78.9%
15.6%
15.6%
i
t
l
i
t
l
u
M
u
M
e
p
e
p
l
l
1.40
1.40
1.00
1.00
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
Target Stock Growth
Target Stock Growth
Actual Stock Growth
Actual Stock Growth
Target Multiple
Target Multiple
Actual Multiple
Actual Multiple
p6 and p38 of proxy
p6 and p38 of proxy
6
6
6
Audit Matters (pages 53-55)
Item 3: Proposal to Ratify Appointment of Independent Auditor (pages
53-55)
Item 3
Ratify the appointment of Ernst & Young LLP as the
company's principal independent auditor for 2015.
Management
recommendation
Vote required to
pass
Vote FOR
Majority of
votes cast
Other Information (pages 56-58)
How to Vote in Advance of the Meeting
Even if you plan to attend the 2015 Annual Meeting in person, we encourage you to vote prior to the meeting
via one of the methods described below. You can vote in advance via one of three ways:
Visit the website listed on your proxy card/voting instruction form to vote VIA THE INTERNET
Call the telephone number on your proxy card/voting instruction form to vote BY TELEPHONE
Sign, date and return your proxy card/voting instruction form to vote BY MAIL
Further information on how to vote is provided at the end of the proxy statement under "Meeting and Voting
Logistics".
Voting at our 2015 Annual Meeting
You may also opt to vote in person at the 2015 Annual Meeting, which will be held on Monday, May 4, 2015 at
the Lilly Corporate Center, Indianapolis, IN 46285, at 11:00 a.m., local time. See the section entitled "Meeting
and Voting Logistics" for more information.
77
Governance
Governance
Item 1. Election of Directors
Item 1. Election of Directors
Under the company’s articles of incorporation, the Board is divided into three classes with approximately one-
Under the company’s articles of incorporation, the Board is divided into three classes with approximately one-
third of the directors standing for election each year. The term for directors elected this year will expire at the
third of the directors standing for election each year. The term for directors elected this year will expire at the
annual meeting of shareholders held in 2018. Each of the nominees listed below has agreed to serve that
annual meeting of shareholders held in 2018. Each of the nominees listed below has agreed to serve that
term. If any director is unable to stand for election, the Board may, by resolution, provide for a lesser number
term. If any director is unable to stand for election, the Board may, by resolution, provide for a lesser number
of directors or designate a substitute. The following sections provide information regarding our directors
of directors or designate a substitute. The following sections provide information regarding our directors
including their qualifications, the director nomination process, and compensation, among other topics.
including their qualifications, the director nomination process, and compensation, among other topics.
Board Proposal on Item 1
Board Proposal on Item 1
The Board recommends that you vote FOR each of the following nominees:
The Board recommends that you vote FOR each of the following nominees:
(cid:127) Katherine Baicker, Ph.D.
(cid:127) Katherine Baicker, Ph.D.
(cid:127) J. Erik Fyrwald
(cid:127) J. Erik Fyrwald
(cid:127) Ellen R. Marram
(cid:127) Ellen R. Marram
(cid:127) Jackson P. Tai
(cid:127) Jackson P. Tai
Board Operations and Governance
Board Operations and Governance
Board of Directors
Board of Directors
From left to right: Michael L. Eskew, Katherine Baicker, Jackson P. Tai, Karen N. Horn, Franklyn G. Prendergast, J. Erik Fyrwald, R. David
From left to right: Michael L. Eskew, Katherine Baicker, Jackson P. Tai, Karen N. Horn, Franklyn G. Prendergast, J. Erik Fyrwald, R. David
Hoover, John C. Lechleiter, Douglas R. Oberhelman, Ellen R. Marram, Marschall S. Runge, William G. Kaelin, Jr., Kathi P. Seifert, Ralph
Hoover, John C. Lechleiter, Douglas R. Oberhelman, Ellen R. Marram, Marschall S. Runge, William G. Kaelin, Jr., Kathi P. Seifert, Ralph
Alvarez.
Alvarez.
Each of our directors is elected to serve until his or her successor is duly elected and qualified. If a nominee is
Each of our directors is elected to serve until his or her successor is duly elected and qualified. If a nominee is
unavailable for election, proxy holders may vote for another nominee proposed by the Board of Directors or,
unavailable for election, proxy holders may vote for another nominee proposed by the Board of Directors or,
as an alternative, the Board of Directors may reduce the number of directors to be elected at the annual
as an alternative, the Board of Directors may reduce the number of directors to be elected at the annual
meeting. Each nominee has agreed to serve on the Board of Directors if elected.
meeting. Each nominee has agreed to serve on the Board of Directors if elected.
8
8
8
Director Biographies
Set forth below is information as of March 11, 2015, regarding the nominees for election, which has been
confirmed by each of them for inclusion in this proxy statement. We have provided the most significant
experiences, qualifications, attributes, or skills that led to the conclusion that each director or director nominee
should serve as one of our directors in light of our business and structure. Full biographies for each of our
directors are available on our website at http://www.lilly.com/about/board-of-directors/Pages/board-of-
directors.aspx.
No family relationship exists among any of our director nominees or executive officers. To the best of our
knowledge, there are no pending material legal proceedings in which any of our directors or nominees for
director, or any of their associates, is a party adverse to us or any of our affiliates, or has a material interest
adverse to us or any of our affiliates. Additionally, to the best of our knowledge, there have been no events
under any bankruptcy act, no criminal proceedings and no judgments, sanctions, or injunctions that are
material to the evaluation of the ability or integrity of any of our directors or nominees for director during the
past 10 years.
Class of 2015
The following five directors’ terms will expire at this year’s annual meeting. Four of these directors are
standing for reelection; Mr. Oberhelman is not seeking reelection. Upon the expiration of Mr. Oberhelman's
term, the Board intends to reduce the size of the board until such time as it may identify and elect a new
director to fill the position. See “Item 1. Election of Directors” below for more information.
Katherine Baicker, Ph.D., age 43, director since 2011
Board Committees: Audit; Public Policy and Compliance
Career Highlights
Harvard University School of Public Health, Department of Health
Policy and Management
Industry Memberships
(cid:127) Commissioner of the Medicare Payment Advisory
Commission
(cid:127) Professor of health economics (2007 - present)
(cid:127) Chair of the Group Insurance Commission of
Massachusetts
(cid:127) C. Boyden Gray Professor and Acting Chair, department of health
(cid:127) Panel of Health Advisers to the Congressional Budget
economics (2014 - present)
Office
Council of Economic Advisers, Executive Office of the President
(cid:127) Member (2005 - 2007)
(cid:127) Senior Economist (2001 - 2002)
(cid:127) Editorial boards of Health Affairs; the Journal of Health
Economics
(cid:127) Member of the Institute of Medicine
Qualifications: Dr. Baicker is a leading researcher in the fields of health economics, public economics, and labor economics. As a
valued adviser to numerous health care-related commissions and committees, her expertise in health care policy and health care
delivery is recognized by both academia and government.
9
9
J. Erik Fyrwald, age 55, director since 2005
Board Committees: Public Policy and Compliance (chair); Science and Technology
Career Highlights
Univar, Inc., a leading distributor of industrial and specialty chemicals
and provider of related services
(cid:127) President and Chief Executive Officer (2012 - present)
Nalco Company, a provider of integrated water treatment and process
improvement services, chemicals and equipment programs for industrial
and institutional applications
(cid:127) Chairman and Chief Executive Officer (2008 - 2011)
E.I. duPont de Nemours and Company, a global chemical
company
(cid:127) Group Vice President, agriculture and nutrition (2003 -
2008)
Other Board Service
(cid:127) Non-profit boards: Society of Chemical Industry;
Amsted Industries; The Chicago Public Education Fund;
Field Museum of Chicago, Trustee
Qualifications: Mr. Fyrwald has a strong record of operational and strategic leadership in three complex worldwide businesses with a
focus on technology and innovation. He is an engineer by training and has CEO experience with Univar and Nalco.
Ellen R. Marram, age 68, director since 2002, Lead director since 2012
Board Committees: Compensation; Directors and Corporate Governance (chair)
Career Highlights
Other Board Service
The Barnegat Group LLC, provider of business advisory services
(cid:127) President (2006 - present)
North Castle Partners, LLC
(cid:127) Managing Director (2000 - 2006)
Tropicana Beverage Group
(cid:127) President and Chief Executive Officer (1993 - 1998)
Nabisco Biscuit Company, a unit of Nabisco, Inc.
(cid:127) President and Chief Executive Officer (1988 - 1993)
(cid:127) Public boards: Ford Motor Company, The New York
Times Company
(cid:127) Prior public board service: Cadbury plc
(cid:127) Private boards: Newman's Own, Inc.
(cid:127) Non-profit boards: Wellesley College; Institute for the
Future; New York-Presbyterian Hospital; Lincoln Center
Theater; and Families and Work Institute
Qualifications: Ms. Marram is a former CEO with a strong marketing and consumer-brand background. Through her nonprofit and
private company activities, she has a special focus and expertise in wellness and consumer health. Ms. Marram has extensive corporate
governance experience through service on other public company boards in a variety of industries.
Douglas R. Oberhelman, age 62, director since 2008
Board Committees: Audit; Finance
Career Highlights
Caterpillar Inc.
Other Board Service
(cid:127) Public boards: Caterpillar Inc.
(cid:127) Chairman and Chief Executive Officer (2010 - present)
(cid:127) Prior public board service: Ameren Corporation
(cid:127) Group President (2001 - 2010)
(cid:127) Chief Financial Officer (1995 - 1998)
Memberships and Other Organizations
(cid:127) Business Roundtable, Executive Committee
(cid:127) Business Council
(cid:127) National Association of Manufacturers, Chairman
(cid:127) Non-profit boards: Wetlands America Trust; Easter
Seals Foundation of Central Illinois
Qualifications: Mr. Oberhelman has a strong strategic and operational background as the CEO of Caterpillar, a leading manufacturing
company with worldwide operations and a special focus on emerging markets. He is an audit committee financial expert as a result of his
prior experience as CFO of Caterpillar and as a member and chairman of the audit committee of another U.S. public company.
10
10
Jackson P. Tai, age 64, director since 2013
Board Committees: Audit; Finance
Career Highlights
DBS Group Holdings and DBS Bank (formerly the Development
Bank of Singapore), one of the largest financial services groups in Asia
(cid:127) Vice Chairman and Chief Executive Officer (2002-2007)
(cid:127) President and Chief Operating Officer (2001-2002)
J.P. Morgan & Co. Incorporated, a leading global financial institution
(cid:127) 25 year career in investment banking, including senior management
responsibilities in New York, Tokyo and San Francisco
Other Board Service
(cid:127) Public boards: The Bank of China Limited, MasterCard
Incorporated, Royal Philips NV
(cid:127) Prior board service: Singapore Airlines; NYSE
Euronext; ING Groep NV; CapitaLand (Singapore); DBS
Group Holdings and DBS Bank
Qualifications: Mr. Tai is a former CEO with extensive experience in international business and finance, and is an audit committee
financial expert. He has deep expertise in the Asia-Pacific region, a key growth market for Lilly. He also has broad corporate governance
experience from his service on public company boards in the U.S., Europe, and Asia.
Class of 2016
The following four directors are serving terms that expire May 2016.
Ralph Alvarez, age 59, director since 2009
Board Committees: Compensation; Science and Technology
Career Highlights
Other Board Service
Skylark Co., Ltd., a leading restaurant operator in Japan
(cid:127) Executive Chairman (2013 - present)
McDonald's Corporation
(cid:127) President and Chief Operating Officer (2006 - 2009)
Memberships and Other Organizations
(cid:127) University of Miami: President's Council; School of Business
Administration Board of Overseers; International Advisory Board
(cid:127) Public boards: Skylark Co., Ltd.; Lowe's Companies,
Inc.; Dunkin' Brands Group, Inc.; Realogy Holdings Corp.
(cid:127) Prior public board service: McDonald's Corporation;
KeyCorp
Qualifications: Through his senior executive positions at Skylark Co., Ltd. and McDonald’s Corporation, as well as with other global
restaurant businesses, Mr. Alvarez has extensive experience in consumer marketing, global operations, international business, and
strategic planning. His international experience includes a special focus on emerging markets.
R. David Hoover, age 69, director since 2009
Board Committees: Finance; Public Policy and Compliance
Career Highlights
Other Board Service
Ball Corporation, a provider of packaging products and other
technologies and services to commercial and governmental customers
(cid:127) Public boards: Ball Corporation; Energizer Holdings,
Inc.; Steelcase, Inc.
(cid:127) Chairman (2002 - 2013)
(cid:127) President and Chief Executive Officer (2001 - 2010)
(cid:127) Chief Operating Officer (2000 - 2001)
(cid:127) Chief Financial Officer (1998 - 2000)
Memberships and Other Organizations
(cid:127) Non-profit boards: Boulder Community Hospital;
Children's Hospital Colorado
(cid:127) Prior public board service: Irwin Financial Corporation;
Qwest International, Inc.
Indiana University Kelley School of Business, Dean's Council
(cid:127) Board of Trustees of DePauw University
(cid:127)
Qualifications: Mr. Hoover has extensive CEO experience at Ball Corporation, with a strong record of leadership in operations and
strategy. He has deep financial expertise as a result of his experience as CEO and CFO of Ball. He also has extensive corporate
governance experience through his service on other public company boards.
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11
Franklyn G. Prendergast, M.D., Ph.D., age 70, director since 1995
Board Committees: Public Policy and Compliance; Science and Technology
Career Highlights
Mayo Medical School
Other Board Service
(cid:127) Public boards: Cancer Genetics Incorporated
(cid:127) Edmond and Marion Guggenheim Professor of Biochemistry and
Molecular Biology (1986 - 2014)
(cid:127) Professor of Molecular Pharmacology and Experimental Therapeutics
(1987 - 2014)
(cid:127) Mayo Clinic Center for Individualized Medicine, Director Emeritus
(2006 - 2012)
Qualifications: Dr. Prendergast is a prominent medical clinician, researcher, and academician. He has extensive experience in senior-
most administration at Mayo Clinic, a major medical institution, and as director of its renowned cancer center. He retired from Mayo at
the end of 2014. He has special expertise in two critical areas for Lilly—oncology and personalized medicine. As a medical doctor, he
brings an important practicing-physician perspective to the Board’s deliberations.
Kathi P. Seifert, age 65, director since 1995
Board Committees: Audit; Compensation
Career Highlights
Other Board Service
Kimberly-Clark Corporation, a global consumer products company
(cid:127) Executive Vice President (1999 - 2004)
(cid:127) Public companies: Revlon Consumer Products
Corporation; Lexmark International, Inc.
Katapult, LLC, a provider of pro bono mentoring and consulting services
to non-profit organizations
(cid:127) Private boards: Appvion, Inc.
(cid:127) Prior public board service: Supervalu Inc.; Appleton
(cid:127) Chairman (2004 - present)
Papers, Inc.
Qualifications: Ms. Seifert is a retired senior executive of Kimberly-Clark. She has strong expertise in consumer marketing and brand
management, having led sales and marketing for several worldwide brands, with a special focus on consumer health. She has extensive
corporate governance experience through her other board positions.
(cid:127) Non-profit boards: Community Foundation for the Fox
Valley Region; Fox Cities Building for the Arts; Fox Cities
Chamber of Commerce
Class of 2017
The following five directors are serving terms that expire May 2017.
Michael L. Eskew, age 65, director since 2008
Board Committees: Audit (chair); Finance
Career Highlights
United Parcel Service, Inc.
(cid:127) Chairman and Chief Executive Officer (2002 - 2007)
(cid:127) UPS Board of Directors (1998 - 2014)
(cid:127) Vice Chairman (2000 - 2002)
Other Board Service
(cid:127) Public boards: 3M Corporation; IBM Corporation;
Allstate Insurance Company
(cid:127) Non-profit boards: Chairman of the board of trustees of
The Annie E. Casey Foundation
Qualifications: Mr. Eskew has CEO experience with UPS, where he established a record of success in managing complex worldwide
operations, strategic planning, and building a strong consumer-brand focus. He is an Audit Committee financial expert, based on his
CEO experience and his service on other U.S. company audit committees. He has extensive corporate governance experience through
his service on the boards of other companies.
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12
Karen N. Horn, Ph.D., Age 71, Director since 1987
Board Committees: Compensation (chair); Directors and Corporate Governance
Career Highlights
Other Board Service
Brock Capital Group, a provider of financial advising and consulting
services
(cid:127) Public boards: T. Rowe Price Mutual Funds; Simon
Property Group, Inc.; Norfolk Southern Corporation
(cid:127) Senior Managing Director (2004 - present)
(cid:127) Prior public board service: Fannie Mae; Georgia-
Marsh, Inc., a global provider of risk and insurance services
Pacific Corporation
(cid:127) President, Private Client Services and Managing Director (1999 -
(cid:127) Non-profit boards: The National Bureau of Economic
2003)
Bank One, Cleveland, N.A.
(cid:127) Chairman and chief executive officer (1982 - 1987)
Research; The Florence Griswold Museum
Qualifications: Ms. Horn is a former CEO with extensive experience in various segments of the financial industry, including banking and
financial services. Through her for-profit and her public-private partnership work, she has significant experience in international
economics and finance. Ms. Horn has extensive corporate governance experience through service on other public company boards in a
variety of industries.
William G. Kaelin, Jr., M.D., age 57, director since 2012
Board Committees: Finance; Science and Technology
Career Highlights
Industry Memberships
Dana-Farber/Harvard Cancer Center
(cid:127) Professor of Medicine (2002 - present)
(cid:127)
Institute of Medicine; National Academy of Sciences;
Association of American Physicians; American Society of
Clinical Investigation
(cid:127) Associate director, Basic Science (2009 - present)
Honors
Qualifications: Dr. Kaelin is a prominent medical researcher and academician. He has extensive experience at Harvard Medical School,
a major medical institution, as well as special expertise in oncology—a key component of Lilly's business. He also has deep expertise in
basic science, including mechanisms of drug action, and experience with pharmaceutical discovery research.
(cid:127) Canada Gairdner International Award
(cid:127) Lefoulon-Delalande Prize - Institute of France
John C. Lechleiter, Ph.D., age 61, director since 2005
Board Committees: none
Career Highlights
Eli Lilly and Company
(cid:127) President and CEO (2008 - present)
(cid:127) Chairman of the Board (2009 - present)
Industry Memberships
(cid:127) American Chemical Society; Business Roundtable;
Pharmaceutical Research and Manufacturers of America;
U.S. - Japan Business Council, chairman
Honors
Other Board Service
(cid:127) Honorary doctorates: Marian University, University of Indianapolis,
the National University of Ireland, Indiana University, and Franklin
College
(cid:127) Public boards: Ford Motor Company; Nike, Inc.
(cid:127) Non-profit boards: United Way Worldwide, chairman;
Life Sciences Foundation; and the Central Indiana
Corporate Partnership
Qualifications: Dr. Lechleiter is our chairman, president, and chief executive officer. A Ph.D. chemist by training, Dr. Lechleiter has over
35 years of experience with the company in a variety of roles of increasing responsibility in research and development, sales and
marketing, and corporate administration. As a result, he has a deep understanding of pharmaceutical research and development, sales
and marketing, strategy, and operations. He also has significant corporate governance experience through service on other public
company boards.
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13
Marschall S. Runge, M.D., Ph.D., age 60, director since 2013
Board Committees: Science and Technology; Public Policy and Compliance
Career Highlights
University of Michigan
(cid:127) Executive Vice President for Medical Affairs (since March 2015)
University of North Carolina, School of Medicine
(cid:127) Executive Dean (2010 - 2015); Chair of the Department of Medicine
(2000 - 2015)
(cid:127) Principal Investigator and Director of the North Carolina Translational
and Clinical Sciences Institute
Industry Memberships
(cid:127) Experimental Cardiovascular Sciences Study Section of
the National Institutes of Health
Qualifications: Dr. Runge brings the unique perspective of a practicing physician who has a broad background in health care, clinical
research, and academia. He has extensive experience as a practicing cardiologist, and has deep expertise in biomedical research and
clinical trial design.
Director Qualifications and Nomination Process
Director Qualifications
The Board assesses Board candidates by considering the following:
Experience: Our directors are responsible for overseeing the company's business consistent with their
fiduciary duties. This significant responsibility requires highly skilled individuals with various qualities,
attributes, and professional experience. The Board, in conjunction with the Directors and Corporate
Governance Committee, has selected a well-rounded board with a balance of relevant perspectives and
experience, including CEO, global business, science and medicine, and government/policy or other health
care experience. The following chart highlights the mix of relevant skills and experiences of our directors.
CEO Experience:
Financial Expertise:
Relevant Scientific/Academic Expertise:
Healthcare Experience:
Operational/Strategic Expertise:
International Experience:
Marketing and Sales Expertise:
Gender/Ethnic Diversity:
6
6
6
7
7
7
4
4
As the following chart demonstrates, our director composition also reflects a mix of tenure on the Board,
which provides an effective balance of historical perspective and an understanding of the evolution of our
business with fresh perspectives and insights.
2 Years Tenure or Less:
2
3-5 Years:
6-10 Years:
More than 10 Years:
4
4
4
Diversity: The Board strives to achieve diversity in the broadest sense, including persons diverse in
geography, gender, ethnicity, and experiences. Although the Board does not establish specific diversity goals
14
14
or have a stand-alone diversity policy, the Board's overall diversity is a significant consideration in the director
selection and nomination process. The Directors and Corporate Governance Committee assesses the
effectiveness of board diversity efforts in connection with the annual nomination process as well as in new
director searches. The company's directors range in age from 43 to 71, and include four women and three
ethnically diverse members.
Character: Board members should possess the personal attributes necessary to be an effective director,
including unquestioned integrity, sound judgment, independence, a collaborative spirit, and commitment to the
company, our shareholders, and other constituencies.
Director Nomination Process
The Board delegates the director screening process to the Directors and Corporate Governance Committee,
which receives input from other Board members. Potential directors are identified from several sources,
including executive search firms retained by the committee, incumbent directors, management, and
shareholders.
The committee employs the same process for evaluating all candidates, including those submitted by
shareholders. The committee initially evaluates a candidate based on publicly available information and any
additional information supplied by the party recommending the candidate. If the candidate appears to satisfy
the selection criteria and the committee’s initial evaluation is favorable, the committee, assisted by
management or the search firm, gathers additional data on the candidate’s qualifications, availability, probable
level of interest, and any potential conflicts of interest. If the committee’s subsequent evaluation continues to
be favorable, the candidate is contacted by the Chairman of the Board and one or more of the independent
directors for direct discussions to determine the mutual levels of interest in pursuing the candidacy. If these
discussions are favorable, the committee makes a final recommendation to the board to nominate the
candidate for election by the shareholders (or to select the candidate to fill a vacancy, as applicable).
The Directors and Corporate Governance Committee performs an annual assessment of the overall
composition and skills of the Board in order to ensure that the Board and management are actively engaged
in succession planning for directors, and that our Board reflects the appropriate viewpoints and expertise
necessary to support our complex and evolving business. The results of this assessment inform the Board's
recommendations on nominations for directors at the annual meeting each year and help provide us with
insight on the types of experiences, skills, and other characteristics we should be seeking for future director
candidates. Based on this assessment, the committee has recommended that the four directors in the 2015
class who are standing for election be re-elected at the 2015 annual meeting.
Director Compensation
Director compensation is reviewed and approved annually by the Board, on the recommendation of the
Directors and Corporate Governance Committee. Directors who are employees receive no additional
compensation for serving on the Board.
Cash Compensation
In 2014, nonemployee directors received an annual retainer of $100,000 (payable in monthly installments). In
addition, certain Board roles received additional annual retainers:
Lead director: $30,000
Committee chairs: $12,000 ($18,000 for Audit Committee chair; $15,000 for Science and Technology
Committee chair)
Audit Committee/Science and Technology Committee members (including the chair): $3,000
Directors are reimbursed for customary and usual travel expenses. Directors may also receive additional cash
compensation for serving on ad hoc committees that may be assembled from time-to-time.
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15
Stock Compensation
Directors should hold meaningful equity ownership positions in the company; accordingly, a significant portion
of director compensation is in the form of Lilly stock. Directors are required to hold Lilly stock, directly or
through company plans, valued at not less than five times their annual cash retainer; new directors are
allowed five years to reach this ownership level.
Nonemployee directors receive $145,000 of stock compensation, deposited annually in a deferred stock
account in the Lilly Directors’ Deferral Plan (as described below), payable after service on the Board has
ended.
Lilly Directors’ Deferral Plan: allows nonemployee directors to defer receipt of all or part of their cash
compensation until after their service on the Board has ended. Each director can choose to invest the funds in
one or both of the following two accounts:
Deferred Stock Account. This account allows the director, in effect, to invest his or her deferred cash
compensation in company stock. In addition, the annual stock compensation award as noted above is
credited to this account. The number of shares credited is calculated by dividing the $145,000 annual
compensation figure by the closing stock price on a pre-set annual date. Funds in this account are credited as
hypothetical shares of company stock based on the market price of the stock at the time the compensation
would otherwise have been earned. Hypothetical dividends are “reinvested” in additional shares based on the
market price of the stock on the date dividends are paid. Actual shares are issued after the director ends his
or her service on the Board.
Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of
the applicable federal long-term rate, compounded monthly, as established the preceding December by the
U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code). The aggregate amount of interest that accrued in 2014 for the participating directors
was $178,000, at a rate of 3.92 percent. The rate for 2015 is 3.24 percent.
Both accounts may be paid in a lump sum or in annual installments for up to 10 years, beginning the second
January following the director’s departure from board service. Amounts in the deferred stock account are paid
in shares of company stock.
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2014 Compensation for Nonemployee Directors
Name
Mr. Alvarez
Dr. Baicker
Sir Winfried Bischoff (retired)
Mr. Eskew
Mr. Fyrwald
Dr. Gilman (retired)
Mr. Hoover
Ms. Horn
Dr. Kaelin
Ms. Marram
Mr. Oberhelman
Dr. Prendergast
Dr. Runge
Ms. Seifert
Mr. Tai
Fees Earned
or Paid in Cash ($)
$103,000
$103,000
$46,667
$121,000
$115,000
$49,167
$109,000
$112,000
$113,000
$142,000
$103,000
$103,000
$113,500
$103,000
$113,500
Stock Awards ($) 1
$145,000
$145,000
$60,417
$145,000
$145,000
$60,417
$145,000
$145,000
$145,000
$145,000
$145,000
$145,000
$145,000
$145,000
$145,000
All Other
Compensation
and Payments ($)2
$0
$0
$16,712 4
$5,250
$30,000
$28,576
$30,000
$4,700
$17,100
$30,000
$30,000
$0
$0
$13,881
$30,000
Total ($) 3
$248,000
$248,000
$123,796
$271,250
$290,000
$138,160
$284,000
$261,700
$275,100
$317,000
$278,000
$248,000
$258,500
$261,881
$288,500
1 Each nonemployee director received an award of stock valued at $145,000 (approximately 2,155 shares),
except Sir Winfried Bischoff and Dr. Gilman, who retired from the board in May and received a pro-rated
award for a partial year of service. This stock award and all prior stock awards are fully vested; however, the
shares are not issued until the director ends his or her service on the Board, as described above under “Lilly
Directors’ Deferral Plan.” The column shows the grant date fair value for each director’s stock award.
Aggregate outstanding stock awards are shown in the “Common Stock Ownership by Directors and
Executive Officers” table in the “Stock Units Not Distributable Within 60 Days” column.
2 This column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. ("Foundation")
under its matching gift program, which is generally available to U.S. employees as well as the outside
directors. Under this program, the Foundation matched 100 percent of charitable donations over $25 made
to eligible charities, up to a maximum of $30,000 per year for each individual. The Foundation matched
these donations via payments made directly to the recipient charity.
3 Directors do not participate in a company pension plan or non-equity incentive plan.
4 For Sir Winfried Bischoff, this column includes $16,712 for expenses for his spouse to travel to and
participate in board functions that included spouse participation.
2015 Director Compensation
For 2015, the following changes have been made to director compensation, representing the first increase in
director pay since 2011:
(cid:127) Annual retainer increased to $110,000
(cid:127) Annual committee retainer of $3,000 adopted for Compensation, Directors and Corporate
Governance, Finance, and Public Policy and Compliance Committee members (including the chairs)
(cid:127) Annual committee retainers for Audit and Science and Technology Committee members (including the
chairs) increased to $6,000 (a $3,000 increase).
Director Independence
The Board annually determines the independence of directors based on a review by the Directors and
Corporate Governance Committee. No director is considered independent unless the Board has determined
that he or she has no material relationship with the company, either directly or as a partner, significant
shareholder, or officer of an organization that has a material relationship with the company. Material
1717
relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial
relationships, among others. To evaluate the materiality of any such relationship, the Board has adopted
categorical independence standards consistent with the New York Stock Exchange (NYSE) listing standards,
except that the “look-back period” for determining whether a director’s prior relationship(s) with the company
impairs independence is extended from three to four years.
The company's process for determining director independence is set forth in our Standards for Director
Independence which can be found on our website at http://www.lilly.com/about/corporate-governance/Pages/
guidelines.aspx along with our Corporate Governance Guidelines.
On the recommendation of the Directors and Corporate Governance Committee, the Board determined that
all 13 nonemployee directors are independent, and that the members of each committee also meet our
independence standards. The Board determined that none of the 13 nonemployee directors has had during
the last four years (i) any of the relationships referenced above or (ii) any other material relationship with the
company that would compromise his or her independence. The table that follows includes a description of
categories or types of transactions, relationships, or arrangements the Board considered in reaching its
determinations.
Director
Organization
Type of
Organization
Relationship to
Organization
Primary Type of
Transaction /
Relationship /
Arrangement
2014 Aggregate
Magnitude of
Organization's
Revenue
K. Baicker
Harvard University
J. E. Fyrwald
Univar, Inc.
W. G. Kaelin, Jr.
Harvard University
Brigham and Women's
Hospital
Dana-Farber Cancer
Institute
Mayo Clinic and Mayo
Medical School
Educational
Institution
For-profit
Corporation
Educational
Institution
Health Care
Institution
Health Care
Institution
Health Care and
Educational
Institution
F. G. Prendergast
Mayo Foundation
Charitable
Organization
M. S. Runge
University of North
Carolina Medical School
Educational
Institution
Employee
Research grants
Less than 0.1 percent
Executive Officer
Purchases of products Less than 0.1 percent
Employee
Research grants
Less than 0.1 percent
Employee
Research grants
Less than 1 percent
Employee
Research grants
Less than 1 percent
Employee
Research grants
Less than 0.1 percent
Employee of
affiliated Mayo
Clinic and Mayo
Medical School
Contributions
Less than 0.1 percent
Executive Officer
Research grants
Less than 0.1 percent
All of the transactions described above were entered into at arm’s length in the normal course of business
and, to the extent they are commercial relationships, have standard commercial terms. Aggregate payments
to each of the relevant organizations, in each of the last four fiscal years, did not exceed the greater of $1
million or 2 percent of that organization's consolidated gross revenues in a single fiscal year for the relevant
four-year period. No director had any direct business relationships with the company or received any direct
personal benefit from any of these transactions, relationships, or arrangements.
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Committees of the Board of Directors
The duties and membership of the six Board-appointed committees are described below. All committee
members are independent as defined in the NYSE listing requirements, and the members of the Audit and
Compensation Committees each meet the additional independence requirements applicable to them as
members of those committees.
Committee membership and selection of committee chairs are recommended to the Board by the Directors
and Corporate Governance Committee after consulting the chairman of the Board and after considering the
backgrounds, skills, and desires of the Board members. The Board has no set policy for rotation of committee
members or chairs but annually reviews committee memberships and chair positions, seeking the best blend
of continuity and fresh perspectives.
The chair of each committee determines the frequency and agenda of committee meetings. The Audit,
Compensation, and Public Policy and Compliance Committees meet alone in executive session on a regular
basis; all other committees meet in executive session as needed.
All six committee charters are available online at http://investor.lilly.com/governance.cfm, or upon request to
the company's corporate secretary.
Audit Committee
Assists the Board of Directors in fulfilling its oversight responsibilities by monitoring:
(cid:127) The integrity of financial information which will be provided to the shareholders and others;
(cid:127) The systems of internal controls and disclosure controls which management has established;
(cid:127) The performance of internal and independent audit functions; and
(cid:127) The company's compliance with legal and regulatory requirements.
The committee has sole authority to appoint or replace the independent auditor, subject to shareholder
ratification.
The Board of Directors has determined that Mr. Eskew, Mr. Oberhelman, and Mr. Tai are Audit Committee
financial experts, as defined in the SEC rules.
Compensation Committee
(cid:127) Oversees the company’s global compensation philosophy and policies;
(cid:127) Establishes the compensation of our chief executive officer and other executive officers;
(cid:127) Acts as the oversight committee with respect to the company’s deferred compensation plans,
management stock plans, and other management incentive compensation programs; and
(cid:127) Reviews succession plans for the CEO and other senior leadership positions.
None of the Compensation Committee members:
(cid:127) Has ever been an officer or employee of the company
(cid:127)
Is or has been a participant in a related-person transaction with the company (see “Review and
Approval of Transactions with Related Persons” for a description of our policy on related-person
transactions).
None of our Board members or Compensation Committee members is an executive officer of another entity at
which one of our executive officers serves on the Board of Directors or Compensation Committee of the
Board.
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Directors and Corporate Governance Committee
(cid:127) Recommends to the Board candidates for membership on the Board and Board committees and for
lead director; and
(cid:127) Oversees matters of corporate governance, including Board performance, director independence and
compensation, and the corporate governance guidelines.
Finance Committee
Reviews and makes recommendations to the Board regarding financial matters, including:
(cid:127) Capital structure and strategies;
(cid:127) Dividends;
(cid:127) Stock repurchases;
(cid:127) Capital expenditures;
(cid:127)
(cid:127) Financial risk management; and
(cid:127) Significant business-development opportunities.
Investments, financings and borrowings;
Public Policy and Compliance Committee
(cid:127) Oversees the processes by which the company conducts its business so that the company will do so
in a manner that complies with laws and regulations and reflects the highest standards of integrity;
and
(cid:127) Reviews and makes recommendations regarding policies, practices, and procedures of the company
that relate to public policy and social, political, and economic issues.
Science and Technology Committee
(cid:127) Reviews and makes recommendations regarding the company’s strategic research goals and
objectives;
(cid:127) Reviews new developments, technologies, and trends in pharmaceutical research and development;
(cid:127) Reviews the progress of the company's new product pipeline;
(cid:127) Reviews the scientific aspects of significant business development opportunities; and
(cid:127) Oversees matters of scientific and medical integrity and risk management.
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Membership and Meetings of the Board and Its Committees
In 2014, each director attended at least 80 percent of the total number of meetings of the Board and the
committees on which he or she serves. In addition, all Board members are expected to attend the annual
meeting of shareholders, and all the directors attended in 2014. Current committee membership and the
number of meetings of the Board and each committee in 2014 are shown in the table below.
Directors and
Corporate
Governance
Finance
Public Policy
and
Compliance
Audit
Compensation
Member
Member
Chair
Member
Member
Board
Member
Member
Member
Member
Member
Member
Member
Chair
Name
Mr. Alvarez
Dr. Baicker
Mr. Eskew
Mr. Fyrwald
Mr. Hoover
Ms. Horn
Dr. Kaelin
Dr. Lechleiter
Ms. Marram
Mr. Oberhelman
Dr. Prendergast
Dr. Runge
Ms. Seifert
Mr. Tai
Number of 2014
Meetings
Chair
Member
Lead Director
Member
Chair
Member
Member
Member
Member
Member
Member
Member Member
Member
Chair
Member
Member
Member
Member
Chair
Member
Science and
Technology
Member
Member
Chair
Member
Member
Member
Member
9
11
7
4
11
6
7
Board Oversight of Compliance and Risk Management
The Board, together with the Audit and Public Policy and Compliance Committees, oversees the processes by
which the company conducts its business to ensure the company operates in a manner that complies with
laws and regulations and reflects the highest standards of integrity.
The company also has an enterprise risk management program overseen by its chief ethics and compliance
officer/senior vice president of enterprise risk management, who reports directly to the CEO. Enterprise risks
are identified and prioritized by management, and the top priorities are assigned to a Board committee or full
Board for oversight. Company management is charged with managing risk through robust internal processes
and controls. The enterprise risk management program as a whole is reviewed annually at a joint meeting of
the Audit and Public Policy and Compliance Committees, and enterprise risks are also addressed in periodic
business unit reviews and at the annual board and senior management strategy session.
Code of Ethics
The board approves the company's code of ethics, which is set out in:
The Red Book: a comprehensive code of ethical and legal business conduct applicable to all employees
worldwide and to our Board of Directors. The Red Book is reviewed and approved annually by the Board.
Code of Ethical Conduct for Lilly Financial Management: a supplemental code for our CEO and all
members of financial management, in recognition of their unique responsibilities to ensure proper accounting,
financial reporting, internal controls, and financial stewardship.
Both documents are available online at: http://www.lilly.com/about/business-practices/ethics-compliance, or
upon request to the company's corporate secretary.
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Highlights of the Company’s Corporate Governance
The company is committed to good corporate governance, which promotes the long-term interest of
shareholders and other company stakeholders, builds confidence in our company leadership, and strengthens
accountability for the Board and company management. The board has adopted corporate governance
guidelines that set forth basic principles of corporate governance by which the company operates. The
section that follows outlines a few key elements of the guidelines and other governance matters. Investors
can learn more by reviewing the full corporate governance guidelines document, which is available online at
http://investor.lilly.com/governance.cfm or upon request to the company’s corporate secretary.
Role of the Board
The directors are elected by the shareholders to oversee the actions and results of the company’s
management. The Board exercises oversight over a broad range of areas, but the Board's key responsibilities
include:
(cid:127) Providing general oversight of the business;
(cid:127) Approving corporate strategy;
(cid:127) Approving major management initiatives;
(cid:127) Selecting, compensating, evaluating, and, when necessary, replacing the chief executive officer, and
compensating other senior executives;
(cid:127) Ensuring that an effective succession plan is in place for all senior executives;
(cid:127) Overseeing the company’s ethics and compliance program and management of significant business
risks; and
(cid:127) Nominating, compensating, and evaluating directors.
Board Composition and Requirements
Mix of Independent Directors and Officer-Directors
There should always be a substantial majority (75 percent or more) of independent directors. The CEO should
be a Board member.
Voting for Directors
In an uncontested election, directors are elected by a majority of votes cast. An incumbent nominee who fails
to receive a majority of the votes cast will tender his or her resignation. The Board, on recommendation of the
Directors and Corporate Governance Committee, will decide whether to accept the resignation. The company
will promptly disclose the Board's decision, including, if applicable, the reasons why the Board rejected the
resignation.
Director Tenure and Retirement Policy
The company has in place policies for director tenure and retirement, which include the limitation that non-
employee directors must retire no later than the date of the annual meeting that follows their seventy-second
birthday. The Directors and Corporate Governance Committee, with input from all Board members, also
considers the contributions of the individual directors at least every three years when considering whether to
nominate the director to a new three-year term.
Other Board Service
No director may serve on more than three other public company boards. The Directors and Corporate
Governance Committee may approve exceptions if it determines that the additional service will not impair the
director's effectiveness on the Lilly Board.
Board Confidentiality Policy
The Board has adopted a Confidentiality Policy, applicable to all current and future members of the Board.
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The Policy prohibits a director from sharing confidential information obtained in his or her role as director with
any outside party except under limited circumstances where the director is seeking legal advice or is required
to disclose information by order of law. The Confidentiality Policy can be viewed on the company's website
here: http://www.lilly.com/about/corporate-governance/Pages/corporate-governance.aspx.
Leadership Structure; Oversight of Chairman, CEO, and Senior
Management
Leadership Structure
The Board currently believes that combining the role of chairman of the board and the CEO, coupled with a
strong lead director position, is the most efficient and effective leadership model for the company, fostering
clear accountability, effective decision-making, and alignment on corporate strategy. The Board periodically
reviews its leadership structure and developments in the area of corporate governance in order to ensure that
the company's approach continues to strike the appropriate balance for the company and our stakeholders.
Board Independence
The Board has put in place a number of governance practices to ensure effective independent oversight,
including:
(cid:127) Executive sessions of the independent directors: held after every regular board meeting.
(cid:127) Annual performance evaluation of the chairman and CEO: conducted by the independent
directors, the results of which are reviewed with the chief executive officer and considered by
Compensation Committee in establishing the CEO’s compensation for the next year.
(cid:127) A strong, independent, clearly defined lead director: The lead director's responsibilities include:
Leading the Board’s processes for selecting and evaluating the CEO;
Presiding at all meetings of the Board at which the chairman is not present;
Serving as a liaison between the chairman and the independent directors;
If requested by major shareholders, ensures that she is available for consultation and direct
communication;
Approving meeting agendas and schedules and generally approving information sent to the Board;
Conducting executive sessions of the independent directors; and
Overseeing the independent directors' annual performance evaluation of the chairman and CEO.
The lead director also has authority to call meetings of the independent directors and to retain
advisers for the independent directors.
The lead director is appointed annually by the Board. Currently Ms. Marram is the lead director.
(cid:127) Director access to management and independent advisors: Independent directors have direct
access to members of management whenever they deem it necessary; and the company's executive
officers attend part of each regularly scheduled Board meeting. The independent directors and all
committees are also free to retain their own independent advisors, at company expense, whenever
they feel it would be desirable to do so.
CEO Succession Planning
The Compensation Committee, Board and CEO annually review the company's succession plans for the CEO
and other key senior leadership positions. During these reviews, the CEO and independent directors discuss
future candidates for the CEO and other senior leadership positions, succession timing, and development
plans for the highest-potential candidates. The company ensures that the directors have multiple opportunities
to interact with the company's top leadership talent in both formal and informal settings in order to allow them
to most effectively assess the candidates' qualifications and capabilities.
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The independent directors and the CEO maintain a confidential plan for the timely and efficient transfer of the
CEO's responsibilities in the event of an emergency or his sudden departure, incapacitation, or death.
Board Education and Annual Performance Assessment
The company engages in a comprehensive orientation process for incoming new directors. Directors also
receive ongoing continuing educational sessions on areas of particular relevance or importance to our
company and we hold periodic mandatory training sessions for the Audit Committee.
Additionally, the Directors and Corporate Governance Committee conducts an annual assessment of the
Board's performance, Board committee performance, and all Board processes based on input from all
directors.
Conflicts of Interest and Transactions with Related Persons
Conflicts of Interest
Directors must disclose to the company all relationships that create a conflict or an appearance of a conflict.
The Board, after consultation with counsel, takes appropriate steps to identify actual or apparent conflicts and
ensure that all directors voting on an issue are disinterested. A director may be excused from discussions on
the issue, as appropriate.
Review and Approval of Transactions with Related Persons
The board has adopted a policy and procedures for review, approval, and monitoring of transactions involving
the company and related persons (directors and executive officers, their immediate family members, or
shareholders of 5 percent or greater of the company’s outstanding stock). The policy covers any related-
person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant
SEC rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a
direct or indirect material interest).
Policy: Related-person transactions must be approved by the Board or by a committee of the Board
consisting solely of independent directors, who will approve the transaction only if they determine that it is in
the best interests of the company. In considering the transaction, the Board or committee will consider all
relevant factors, including:
(cid:127) The company’s business rationale for entering into the transaction;
(cid:127) The alternatives to entering into a related-person transaction;
(cid:127) Whether the transaction is on terms comparable to those available to third parties, or in the case of
employment relationships, to employees generally;
(cid:127) The potential for the transaction to lead to an actual or apparent conflict of interest and any
safeguards imposed to prevent such actual or apparent conflicts; and
(cid:127) The overall fairness of the transaction to the company.
The Board or relevant committee will periodically monitor the transaction to ensure there are no changed
circumstances that would render it advisable to amend or terminate the transaction.
Procedures:
(cid:127) Management or the affected director or executive officer will bring the matter to the attention of the
chairman, the lead director, the chair of the Directors and Corporate Governance Committee, or the
secretary.
(cid:127) The chairman and the lead director shall jointly determine (or, if either is involved in the transaction,
the other shall determine) whether the matter should be considered by the Board or by one of its
existing committees.
If a director is involved in the transaction, he or she will be recused from all discussions and decisions
about the transaction.
(cid:127)
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(cid:127) The transaction must be approved in advance whenever practicable, and if not practicable, must be
ratified as promptly as practicable.
(cid:127) The Board or relevant committee will review the transaction annually to determine whether it
continues to be in the company’s best interests.
The Directors and Corporate Governance Committee has approved the following employment relationships
which are considered related-party transactions under the SEC rules.
We have three current employees who are relatives of executive officers. Dr. John Bamforth, vice president,
chief marketing officer, Lilly Bio-Medicines, is the spouse of Dr. Susan Mahony, an executive officer. Myles
O’Neill, senior vice president, global drug products, is the spouse of Dr. Fionnuala Walsh, an executive officer.
Finally, Andrew Lechleiter, associate brand manager, global marketing, is the son of Dr. Lechleiter. For 2014,
these three employees received compensation, including cash compensation, and in the case of Dr. Bamforth
and Mr. O'Neill, equity grants, of between $120,000 and $1.1 million.
All three individuals participate in the company’s benefit programs generally available to U.S. employees.
Their compensation is consistent with the compensation paid to other employees at their levels and with the
Company's overall compensation principles based on their years of experience, performance, and positions
within the company.
Communication with the Board of Directors
You may send written communications to one or more members of the Board, addressed to:
Board of Directors
Eli Lilly and Company
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, IN 46285
Shareholder Engagement on Governance Issues
Each year, the company engages large shareholders and other key constituents to discuss key areas of
interest or concern related to corporate governance, as well as any specific issues for the coming proxy
season. In 2014, we spoke with a number of our largest investors. Issues discussed included shareholders'
perspectives regarding a potential management proposal to eliminate the company's classified board and
supermajority voting requirements and the company's overall approach towards executive compensation,
among other topics. The overall tone from these conversations was positive and the investors with whom we
spoke were generally supportive of our overall compensation and governance policies. We have shared the
feedback we received from these conversations with our Compensation Committee and with our Directors
and Corporate Governance Committee, and we are committed to continuing to engage with our investors to
ensure their diverse perspectives are thoughtfully considered.
Prior Management Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Between 2007 and 2012, each year we submitted management proposals to eliminate the company's
classified board structure. The proposals did not pass because they failed to receive a “supermajority vote” of
80 percent of the outstanding shares, as required in the company's articles of incorporation. In addition, in
2010, 2011, 2012, we submitted management proposals to eliminate the supermajority voting requirements
themselves. Those proposals also fell short of the required 80 percent vote.
Prior to 2012, these proposals received support ranging from 72 to 77 percent of the outstanding shares. In
2012, the vote was even lower, approximately 63 percent of the outstanding shares, driven in part by a 2012
NYSE rule revision prohibiting brokers from voting their clients' shares on corporate governance matters
absent specific instructions from such clients. Based on our discussions with large shareholders as described
above, we have decided not to resubmit those proposals in 2015 based on our assessment that the proposals
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would not be successful. We will continue to monitor this situation and engage with our shareholders on these
and other topics to ensure that we continue to demonstrate strong corporate governance and accountability to
shareholders.
Shareholder proposals
If a shareholder wishes to have a proposal considered for inclusion in next year’s proxy statement, he or she
must submit the proposal in writing so that we receive it by November 24, 2015. Proposals should be
addressed to the company’s corporate secretary, Lilly Corporate Center, Indianapolis, Indiana 46285. In
addition, the company’s bylaws provide that any shareholder wishing to propose any other business at the
annual meeting must give the company written notice by November 24, 2015 and no earlier than September
25, 2015. That notice must provide certain other information as described in the bylaws. Copies of the bylaws
are available online at http://investor.lilly.com/governance.cfm or upon request to the company’s corporate
secretary.
Shareholder Recommendations and Nominations for Director Candidates
A shareholder who wishes to recommend a director candidate for evaluation should forward the candidate's
name and information about the candidate's qualifications to:
Chair of the Corporate Governance Committee
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, IN 46285
The candidate must meet the selection criteria described above and must be willing and expressly interested
in serving on the Board.
Under Section 1.9 of the company’s bylaws, a shareholder who wishes to directly nominate a director
candidate at the 2016 annual meeting (i.e., to propose a candidate for election who is not otherwise
nominated by the Board through the recommendation process described above) must give the company
written notice by November 23, 2015 and no earlier than September 24, 2015. The notice should be
addressed to the corporate secretary at the address provided above. The notice must contain prescribed
information about the candidate and about the shareholder proposing the candidate as described in more
detail in Section 1.9 of the bylaws. A copy of the bylaws is available online at http://investor.lilly.com/
governance.cfm. The bylaws will also be provided by mail upon request to the corporate secretary.
We have not received any shareholder nominations for board candidates for the 2015 meeting.
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Ownership of Company Stock
Common Stock Ownership by Directors and Executive Officers
The following table sets forth the number of shares of company common stock beneficially owned by the
directors, the named executive officers, and all directors and executive officers as a group, as of
February 20, 2015. None of the stock, stock options, or stock units owned by any of the listed individuals has
been pledged as collateral for a loan or other obligation.
Beneficial Owners
Common Stock 1
Shares Owned 2
Options Exercisable/Stock
Units Distributable Within
60 Days 3
Stock Units Not
Distributable Within
60 Days 4
Ralph Alvarez
Katherine Baicker, Ph.D.
Enrique A. Conterno
Michael L. Eskew
J. Erik Fyrwald
Michael J. Harrington
R. David Hoover
Karen N. Horn, Ph.D.
William G. Kaelin, Jr., M.D.
John C. Lechleiter, Ph.D.
Jan M. Lundberg, Ph.D.
Ellen R. Marram
Douglas R. Oberhelman
Franklyn G. Prendergast, M.D., Ph.D.
Derica W. Rice
Marschall S. Runge, M.D., Ph.D.
Kathi P. Seifert
Jackson P. Tai
All directors and executive officers as
a group (27 people):
—
—
116,492
—
100
38,922
1,000
—
—
880,680 5
78,434
1,000
—
—
342,152
—
3,533
32,088
—
—
6,928
—
—
6,024
—
—
—
140,964
—
—
—
—
57,108
—
—
—
26,712
8,387
30,360
28,779
48,204
9,066
28,290
70,058
7,012
46,623
15,541
42,007
22,819
60,216
19,685
3,132
54,748
2,643
2,111,219
243,102
677,670
1 The sum of the "Shares Owned" and "Options Exercisable/Stock Units Distributable Within 60 Days"
columns represents the shares considered "beneficially owned" for purposes of disclosure in the proxy
statement. Unless otherwise indicated in a footnote, each person listed in the table possesses sole voting
and sole investment power with respect to their shares. No person listed in the table owns more than 0.1
percent of the outstanding common stock of the company. All directors and executive officers as a group
own approximately 0.2 percent of the outstanding common stock of the company.
2 This column includes the number of shares of common stock held individually as well as the number of
401(k) plan shares held by the beneficial owners indirectly through the 401(k) plan.
3 This column includes stock options exercisable within 60 days and RSUs that vest within 60 days.
4 For the executive officers, this column reflects RSUs that will not vest within 60 days. For the independent
directors, this column includes the number of stock units credited to the directors' accounts in the Lilly
Directors' Deferral Plan.
5 The shares shown for Dr. Lechleiter include 51,588 shares that are owned by a family foundation for which
he is a director. Dr. Lechleiter has shared voting power and shared investment power with respect to the
shares held by the foundation. Also included are 2,672 shares held in family trusts. Pursuant to the terms of
the trusts, Dr. Lechleiter has shared investment power and no voting power over the shares held in the
trusts.
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Principal Holders of Stock
To the best of the company’s knowledge, the only beneficial owners of more than 5 percent of the outstanding
shares of the company’s common stock, as of December 31, 2014, are the shareholders listed below:
Name and Address
Lilly Endowment, Inc. (the Endowment)
2801 North Meridian Street
Indianapolis, Indiana 46208
BlackRock, Inc.
55 East 52nd Street
New York, New York 10022
Wellington Management Group, LLP
280 Congress Street
Boston, MA 02210
PRIMECAP Management Company
225 South Lake Ave., #400
Pasadena, CA 91101
Number of Shares
Beneficially Owned
131,405,804
Percent of Class
11.8%
59,635,631
58,251,797
57,592,701
5.4%
5.2%
5.1%
The Endowment has sole voting and sole dispositive power with respect to all of its shares. The Board of
Directors of the Endowment is composed of Thomas M. Lofton, chairman; N. Clay Robbins, president and
chief executive officer; Mary K. Lisher; William G. Enright; Daniel P. Carmichael; Charles E. Golden; Eli Lilly II;
David N. Shane; and Craig R. Dykstra.
BlackRock, Inc. provides investment management services for various clients. It has sole voting power with
respect to 50,064,212 shares and sole dispositive power with respect to all of its shares.
Wellington Management Group, LLP provides investment management services for various clients. It has
shared voting power with respect to 11,878,232 of its shares and shared dispositive power with respect to all
of its shares.
PRIMECAP Management Company acts as investment advisor to various clients. It has sole voting power
with respect to 9,139,372 shares and sole dispositive power with respect to all of its shares.
Compensation
Item 2. Advisory Vote on Compensation Paid to Named
Executive Officers
Section 14A of the Securities Exchange Act of 1934 provides the company's shareholders with the opportunity
to approve, on an advisory basis, the compensation of the Company's named executive officers as disclosed
in the proxy statement. As described in the Compensation Discussion and Analysis (CD&A) section below, our
compensation philosophy is designed to attract and retain highly-talented individuals and motivate them to
create long-term shareholder value by achieving top-tier corporate performance while embracing the
company’s values of integrity, excellence, and respect for people.
The Compensation Committee and the Board of Directors believe that our executive compensation aligns well
with our philosophy and with corporate performance. Executive compensation is an important matter for our
shareholders. We routinely review our compensation practices and engage in ongoing dialog with our
shareholders in order to ensure our practices are aligned with stakeholder interests and reflect best practices.
We request shareholder approval, on an advisory basis, of the compensation of the company’s named
executive officers as disclosed in this proxy statement in the CD&A, the compensation tables, and related
narratives. As an advisory vote, this proposal is not binding on the company. However, the Compensation
Committee values input from shareholders and will consider the outcome of the vote when making future
executive compensation decisions.
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Board Proposal on Item 2
The Board recommends that you vote FOR the approval, on an advisory basis, of the compensation
paid to the named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including
the CD&A, the compensation tables, and related narratives provided below in this proxy statement.
Compensation Discussion and Analysis
This CD&A provides a detailed description of our executive compensation philosophy, the Compensation
Committee's process for setting executive compensation, the elements of our compensation program, the
factors the committee considered when setting executive compensation in 2014, and how the company's
results impacted incentive payouts for 2014.
Say on Pay Results for 2014
At last year's annual meeting, in excess of 98 percent of the shares cast voted in favor of the company's Say
on Pay proposal on executive compensation. Management and the Compensation Committee view this vote
as supportive of the company's overall approach toward executive compensation.
Our Philosophy on Compensation
At Lilly, our mission is to make medicines that help people live longer, healthier, more active lives. In order to
accomplish our mission, we must attract, engage, and retain highly-talented individuals who are committed to
the company's core values of integrity, excellence, and respect for people. Our compensation programs are
designed to help us achieve these goals while balancing the long-term interests of our customers and
shareholders.
Objectives
Our compensation and benefits program is based on the following objectives:
(cid:127) Reflect both individual and company performance. We reinforce a high-performance culture by
linking pay with individual performance and company performance. As employees assume greater
responsibilities, the proportion of total compensation based on company performance and
shareholder returns increases. We perform an annual review to ensure the programs provide
incentive to deliver long-term, sustainable business results while discouraging excessive risk-taking,
or other adverse behaviors.
(cid:127) Attract and retain talented employees. Compensation opportunities should be competitive with our
peer group and reflect the level of job impact and responsibilities. Retention of talent is an important
factor in the design of our compensation and benefit programs.
(cid:127)
Implement broad-based programs. While the amount of compensation paid to employees varies,
the overall structure of our compensation and benefit programs is broadly similar across the
organization to encourage and reward all employees who contribute to our success.
(cid:127) Consider shareholder input. Management and the Compensation Committee consider the results of
our annual Say on Pay vote and other sources of shareholder feedback when designing
compensation and benefit programs.
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Compensation Committee's Processes and Analyses
Process for setting compensation
The Compensation Committee considers the following in determining executive compensation:
(cid:127) Assessment of the executive's individual performance and contribution.
(cid:127) CEO: The independent directors, under the direction of the lead director, meet with the CEO at
the beginning of each year to agree upon the CEO's performance objectives for the year. At the
end of each year, the independent directors meet to assess the CEO's achievement of those
objectives along with other factors, including contribution to the company's performance and
ethics and integrity. The year-end evaluation is used in setting the CEO's compensation for the
next year.
(cid:127) Other Executive Officers ("EOs"): The committee receives individual performance assessments
and compensation recommendations from the CEO and also exercises its judgment based on the
Board's knowledge and interactions with the EOs. As with the CEO, each EO's performance
assessment is based on his or her achievement of objectives established between the EO and
the CEO at the start of the year as well as other factors.
(cid:127) Assessment of company performance. The Compensation Committee considers company
performance in two ways:
(cid:127) As a factor in establishing potential compensation for the coming year, the committee considers
overall company performance during the prior year across a variety of metrics.
(cid:127) To determine payouts under the cash and equity incentive programs, the committee establishes
specific company performance goals related to revenue, earnings per share (EPS), progress of
our pipeline portfolio, and stock price growth.
(cid:127) Peer-group analysis. The committee uses peer-group data as a market check for compensation
decisions, but does not use this data as the sole basis for its compensation targets. The company
does not target a specific position within the range of market data.
(cid:127) The Compensation Committee seeks input from an independent compensation consultant
concerning CEO pay. The role of the independent compensation consultant is described in more
detail under "Compensation Committee Matters" that follows the CD&A.
Competitive pay assessment
Our peer group is comprised of companies that directly compete with us, operate in a similar business model,
and employ people with the unique skills required to operate an established biopharmaceutical company. In
selecting the peer group, the committee considers companies' market caps and revenue as measures of size,
and selects a peer group whose median market cap and revenues are similar to Lilly. The committee reviews
the peer group at least every three years. The group includes: Abbott, Abbvie, Allergan, Amgen, AstraZeneca,
Baxter, Biogen, Bristol-Myers Squibb, Celgene, Gilead, GlaxoSmithKline, Hoffman-La Roche, Johnson &
Johnson, Medtronic, Merck, Novartis, Pfizer, and Sanofi-Aventis. With the exception of Johnson & Johnson,
Novartis, and Pfizer, peer companies were no greater than three times our size with regard to both measures.
The committee included these three companies despite their size because they compete directly with Lilly,
have similar business models, and seek to hire from the same pool of management and scientific talent. In
the aggregate, the company’s total compensation to Named Executive Officers (NEOs) in 2014 was in the
middle range of the peer group.
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Components of Our Compensation
Our executive compensation has three components: (1) base salary; (2) an annual bonus, which is calculated
based on company performance on revenue, EPS, and the progress of the pipeline relative to internal targets;
and (3) two different forms of equity incentives: (i) "Performance Awards" (PAs) - performance-based equity
awards determined by the company's two-year growth in earnings per share (EPS) relative to the expected
peer group growth followed by a service-vesting period; and (ii) "Shareholder Value Awards" (SVAs) -
performance-based equity awards that pay out based on company stock price growth over a three-year
period. Executives also receive the company benefits package, described below under "Employee Benefits".
Adjustments to reported financial results
The Compensation Committee has authority to adjust the reported revenue and EPS on which incentive
compensation payouts are determined in order to eliminate the distorting effect of unusual income or expense
items that may occur during a given year that impact year-over-year growth percentages or to improve
comparability to peer companies. Further details on the adjustments for 2014 and the rationale for making
these adjustments are set forth in Appendix A, "Summary of Adjustments Related to the Annual Bonus and
Performance Award." For ease of reference, throughout the CD&A and the other compensation disclosures
we refer simply to "revenue" and "EPS" but we encourage you to review the information in Appendix A to
understand the revenue and EPS adjustments that were approved.
1. Base Salary
Base salaries are reviewed and established annually, and may be adjusted upon promotion, following a
change in job responsibilities, or to maintain market competitiveness. Salaries are based on each person's
level of contribution, responsibility, and expertise, along with peer group data.
Base salary increases, if granted during a given year, are established based upon a corporate budget for
salary increases, which is set considering company performance over the prior year, expected company
performance for the following fiscal year, and general external trends. In setting salaries, the Compensation
Committee seeks to retain, motivate, and reward successful performers while maintaining affordability within
the company's business plan.
2. Annual Bonus
The Eli Lilly and Company Bonus Plan ("Bonus Plan") is designed to align employees' individual goals with
the company's financial plans and pipeline objectives for the year. The bonus is based on company
performance in three areas over the course of the year, relative to internal targets: (1) revenue performance;
(2) EPS performance; and (3) progress on advancing our product pipeline.
Individual bonus targets are set at the beginning of each year, and actual bonuses can range from 0 to 200%
of each individual's bonus target. Company performance goals also are set at the beginning of each year. In
establishing the goals, the Compensation Committee references the annual operating plan. Each year, the
Compensation Committee reviews the relative weighting for each of the factors. The 2014 weightings
remained unchanged from the prior year:
Goal
Revenue performance
EPS performance
Pipeline progress
Weighting
25%
50%
25%
Based on this weighting, the company bonus multiple is annually calculated as follows:
(0.25 x revenue multiple) + (0.50 x EPS multiple) + (0.25 x pipeline multiple)
= company bonus multiple
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For 2014, in order to manage operating expenses to allow the company to fully invest in launching the
company's late stage pipeline assets, the company bonus multiple was reduced by 0.25. As a result,
individual payouts for 2014 were calculated according to the following formula:
company bonus multiple - 0.25 = adjusted bonus multiple
adjusted bonus multiple x individual bonus target x base salary earnings = payout
EOs are subject to the Executive Officer Incentive Plan ("EOIP"), which sets further limits on the allowable
bonus amounts. Under the EOIP, the maximum annual bonus allowable is calculated based on non-GAAP net
income (as defined under "Adjustments to Reported Results" in Appendix A to this proxy statement) for the
year. For the CEO, the maximum bonus award is 0.3 percent of non-GAAP net income. For other EOs, the
maximum amount is 0.15 percent of non-GAAP net income. EOs will not receive any annual cash incentive
payments unless the company has a positive non-GAAP net income for the year.
Once the maximum payout for an EO is determined, the Compensation Committee has the discretion to
reduce (but not increase) the amount of the bonus to be paid. In exercising this discretion, the committee
intends to generally award EOs the lesser of (i) the bonuses they would have received under the Bonus Plan
or (ii) the EOIP maximum amounts.
3. Equity Incentives
The company has two equity incentive programs - Performance Awards (PAs) and Shareholder Value Awards
(SVAs). The PAs are designed to focus company leaders on multi-year operational performance relative to
peer companies and the SVAs align compensation with long-term growth in shareholder value. The
Compensation Committee has the discretion to adjust downward (but not upward) any executive officer's
equity award payout from the amount yielded by the applicable formula.
Performance Awards
PAs are structured as a single award vesting over three years. Potential shares are earned based on
achieving EPS growth targets over a two-year period followed by an additional 13-month service-vesting
period. The growth rate targets are set relative to the median expected EPS growth for the peer group for the
period. These awards do not accumulate dividends during the two-year performance period, but do
accumulate dividends during the service-vesting period.
Performance and Service-Vesting Periods for PAs
Performance and Service-Vesting Periods for PAs
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
2017
2017
2012-2013 PA
2012–2013 PA
2013-2014 PA
2013–2014 PA
2014-2015 PA
2014–2015 PA
2015-2016 PA
2015–2016 PA
Performance Period
Performance Period
Service-vesting Period
Service-vesting Period
The Compensation Committee believes EPS growth is an effective measure of performance because it is
closely linked to shareholder value, is broadly communicated to the public, is easily understood by
employees, and allows for objective comparisons to peer-group performance. Consistent with our
compensation objectives, company performance exceeding the expected peer-group median will result in
above-target payouts, while company performance lagging the expected peer-group median will result in
below-target payouts. Possible payouts range from 0 to 150 percent of the target depending on the EPS
growth over the performance period.
The measure of EPS used in the PA program differs from the measure used in our annual bonus program in
two ways. First, the bonus program measures EPS over a one-year period, while the PA program measures
EPS over a two-year period. Second, the target EPS goal in the bonus program is set with reference to
internal goals that align to our annual operating plan for the year, while the target EPS goal in the PA program
is set relative to expected growth rates among our peer group.
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Shareholder Value Awards
Shareholder Value Awards
SVAs are structured as a schedule of shares of company stock that may be earned based on Lilly's share
SVAs are structured as a schedule of shares of company stock that may be earned based on Lilly's share
price performance over a three-year period. As reflected in the chart below, SVAs have a three-year
price performance over a three-year period. As reflected in the chart below, SVAs have a three-year
performance period and any shares paid out are subject to a one-year holding requirement. No dividends are
performance period and any shares paid out are subject to a one-year holding requirement. No dividends are
accrued during the performance period. SVAs pay out above target if Lilly stock outperforms an expected
accrued during the performance period. SVAs pay out above target if Lilly stock outperforms an expected
compounded annual rate of return and below target if company stock underperforms that rate of return. The
compounded annual rate of return and below target if company stock underperforms that rate of return. The
expected rate of return includes dividends and is based on the total three-year shareholder return (TSR) that
expected rate of return includes dividends and is based on the total three-year shareholder return (TSR) that
a reasonable investor would consider appropriate for investing in a basket of large-cap U.S. companies. The
a reasonable investor would consider appropriate for investing in a basket of large-cap U.S. companies. The
share price payout schedule is based on this expected rate of return less the company’s dividend yield,
share price payout schedule is based on this expected rate of return less the company’s dividend yield,
applied to the starting share price. Executive officers receive no payout if TSR for the three-year period is zero
applied to the starting share price. Executive officers receive no payout if TSR for the three-year period is zero
or negative.
or negative.
Performance and Holding Periods for SVAs
Performance and Holding Periods for SVAs
Performance and Holding Periods for SVAs
2015
2015
2015
2012
2012
2012
2014
2014
2014
2013
2013
2013
2012–2014 SVA
2012-2014 SVA
2012-2014 SVA
2013-2015 SVA
2013-2015 SVA
2013–2015 SVA
2014-2016 SVA
2014-2016 SVA
2014–2016 SVA
2015-2017 SVA
2015-2017 SVA
2015–2017 SVA
2016
2016
2016
2017
2017
2017
2018
2018
2018
Performance Period
Performance Period
Performance Period
Required Holding Period
Required Holding Period
Required Holding Period
Possible payouts range from 0 to 140 percent of the target amount, depending on stock performance over the
Possible payouts range from 0 to 140 percent of the target amount, depending on stock performance over the
period.
period.
Pay for Performance
Pay for Performance
The mix of compensation for the CEO and other NEOs reflects the company's desire to link executive
The mix of compensation for the CEO and other NEOs reflects the company's desire to link executive
compensation with company performance. As reflected in the charts below, a substantial portion of the target
compensation with company performance. As reflected in the charts below, a substantial portion of the target
pay for all NEOs is performance-based. Both the annual bonus and equity payouts are contingent upon
pay for all NEOs is performance-based. Both the annual bonus and equity payouts are contingent upon
company performance, with the bonus factoring in performance over a one-year period, and equity
company performance, with the bonus factoring in performance over a one-year period, and equity
compensation factoring in performance over a longer term (as described above under "Components of Our
compensation factoring in performance over a longer term (as described above under "Components of Our
Compensation - Equity Incentives").
Compensation - Equity Incentives").
p33 of proxy
CEO 2014 Target Compensation Mix
CEO 2014 Target Compensation Mix
NEO 2014 Target Compensation Mix (avg)
NEO 2014 Target Compensation Mix (avg)
12%
12%
15%
15%
73%
73%
64%
64%
21%
21%
15%
15%
Base Salary
Base Salary
Annual Bonus
Annual Bonus
Base Salary
Base Salary
Annual Bonus
Annual Bonus
Equity
Equity
Equity
Equity
p33 of proxy
p33 of proxy
33
33
33
2014 Target Total Compensation
Performance Review Process
In setting potential EO compensation for 2014, the Compensation Committee reviewed both individual and
company performance during 2013.
2013 Individual EO Performance
A summary of the committee's review of the individual EOs is provided below:
Dr. John Lechleiter: In accordance with the company's Corporate Governance Guidelines, the independent
directors conducted a review of Dr. Lechleiter's performance during 2013, which was provided to the
Compensation Committee during a private session. Despite numerous challenges including the continued
impact of patent expirations and other external downsides, under Dr. Lechleiter's leadership the company met
corporate goals for revenue and exceeded corporate goals for growth in cash flow, EPS and progressing the
company's pipeline, all while controlling operating expenses.
Dr. Lechleiter continued to set a strong cultural tone throughout the organization, consistently demonstrating
honesty, integrity, and transparency in his internal and external interactions. Dr. Lechleiter also successfully
oversaw the transition of a key executive leadership role during 2013, as well as a number of changes to the
composition of the Board of Directors. In addition, Dr. Lechleiter has continued his effective public advocacy
on behalf of the broader biopharmaceutical industry, via his key leadership roles in PhRMA and IFPMA,
among other organizations.
Derica Rice: Mr. Rice demonstrated skillful leadership in serving as interim CEO during Dr. Lechleiter's
medical leave in 2013, while maintaining strong performance of the global services organization. Mr. Rice has
also driven a culture of strong financial discipline within the organization and maintains an excellent external
reputation.
Dr. Jan Lundberg: Dr. Lundberg continued to oversee strong overall progress in the company pipeline and,
through his leadership, has helped strengthen discovery and early clinical research capabilities. Dr. Lundberg
has continued to reinvigorate the scientific culture within Lilly Research Labs (LRL) and has contributed
significantly to gains in LRL employee engagement and recruitment.
Michael Harrington: Mr. Harrington led significant efforts during 2013 to develop and implement the "Protect
Lilly" program, the company's comprehensive data protection program. Mr. Harrington also served as a
trusted advisor to the executive team and has contributed to a strong ethics and compliance tone within the
company.
Enrique Conterno: Mr. Conterno's leadership was critical to achieving strong operating results within the
diabetes business unit during 2013, along with strong and continually improving customer engagement
scores. During Mr. Conterno's tenure in his role, the company has made excellent progress with the diabetes
pipeline and insulin manufacturing technical agenda.
The information in the section below reflects target total compensation for executive officers for 2014. The
actual payouts made to the NEOs in the form of the 2014 annual bonus and equity awards that vested in
2014 are summarized in the next section, under "2014 Compensation Payouts".
Resulting Compensation Targets
Base Salary
As referenced in the "Proxy Statement Overview," most employees did not receive a salary increase for 2014.
Therefore, the Compensation Committee decided the executives' base salaries also should remain flat for
2014. Each executive's full base salary for 2014 is reflected in the "Summary Compensation Table" in the
"Executive Compensation" section of the proxy that follows.
34
34
Annual Bonus Targets
Based on a review of internal relativity, peer data, and individual performance, the committee decided to
maintain the same bonus targets for the NEOs for 2014 as were in place for 2013, shown in the table below
as a percentage of base salary:
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
2014 Bonus Target
140%
90%
90%
75%
75%
The Compensation Committee established the company performance targets for 2014 equal to the targets
specified in the company's 2014 corporate operating plan approved by the Board of Directors in 2013.
Total Equity Program - Target Grant Values
For 2014 equity grants, the committee set the total target values for NEOs based on internal relativity,
individual performance, and peer-group data. Mr. Harrington was the only NEO who received an increase in
equity grant value. The committee considered his strong performance, increased experience in the role and a
desire to position him more competitively in the market. The committee determined that for all NEOs a 50/50
split between PAs and SVAs appropriately balances company financial performance with shareholder return.
Total target values for the 2014 equity grant to the NEOs were as follows:
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
2014 Total Equity (in thousands)
$9,000
$3,800
$3,000
$1,900
$2,000
Performance Awards – 2014-2015 PA
The committee established the compounded EPS growth target at 7.6 percent across the two-year period (8
percent and 7 percent for 2014 and 2015, respectively), based on investment analysts’ published estimates
for the peer group. Possible payouts for the 2014-2015 PA range from 0 to 150 percent of the target, as
illustrated in the chart below:
50% payout
Target
Payout Multiple
0.00
0.50
0.75
1.00
1.25
1.50
Cumulative 2-Year
EPS
EPS Annual Growth
Rate
$4.15
$8.50
1.60%
$8.88
4.60%
$9.27
7.60%
$9.67
$10.07+
10.60%
13.60%
Shareholder Value Awards – 2014-2016 SVA
The starting price was $50.42 per share, representing the average of the closing prices of company stock for
all trading days in November and December 2013. The target ending share price range was established
based on the expected annual rate of return for large-cap companies (8 percent), less an assumed dividend
yield of 3.89 percent. The ending price to determine payouts will be the average of the closing prices of
company stock for all trading days in November and December 2016. The award is designed to deliver no
35
35
payout to EOs if the shareholder return (including projected dividends) is zero or negative. The target share
price growth of 4.1 percent per year is comparable to an annual total shareholder return of 7.8 percent.
Possible payouts are illustrated in the grid below.
Ending Stock Price
Compounded Annual
Share Price Growth
Rate (excluding
dividends)
Less than
$44.55
Less than
(4.0%)
$44.55-$48.62
$48.63-
$52.69
$52.70-
$56.94
$56.95-
$61.19
$61.20-
$65.44
Greater than
$65.44
(4.0%)-(1.2)% (1.2%)-1.5% 1.5%-4.1%
4.1%-6.7% 6.7% -9.1%
Greater than
9.1%
Percent of Target
0%
40%
60%
80%
100%
120%
140%
2014 Compensation Payouts
The information in this section reflects the amounts paid to NEOs for the 2014 annual bonus and payouts
from equity awards for which the relevant performance period ended in 2014.
2014 Company Performance
For 2014, the company slightly exceeded its revenue target with annual revenues of $19.5 billion after
adjustments as described in Appendix A. The company exceeded its EPS target, with EPS of $2.83 after
adjustments. The company also made significant progress on its pipeline, meeting or exceeding most targets
for pipeline progress, highlighted by regulatory approvals for four products - empagliflozin, dulaglutide,
ramucirumab, and new insulin glargine, along with 12 other new approvals or new indications or line
extensions ("NILEX") during 2014.
Bonus Award for 2014
The company's 2014 performance compared to targets for revenue, EPS, and pipeline progress, as well as
the resulting bonus multiple, are illustrated below.
Revenue
EPS
Pipeline score
2014 Corporate
Target
$19.4 billion
$2.81
3
Adjusted Results
$19.5 billion
Multiple
1.04
$2.83
3.5
Resulting Bonus Multiple
Downward Adjustment to Company Bonus Multiple for 2014
Adjusted Bonus Multiple
1.05
1.25
1.10
(0.25)
.85
36
36
2014 Performance Multiples
2014 Performance Multiples
Resulting Bonus Multiple
Resulting Bonus Multiple
e
p
e
p
l
l
i
t
l
i
t
l
u
u
M
M
1.04
1.04
1.05
1.05
1.25
1.25
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
e
p
e
p
l
l
i
t
l
i
t
l
u
u
M
M
1.00
1.00
1.10
1.10
0.85
0.85
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
Revenue
Revenue
EPS Pipeline Score
EPS Pipeline Score
Target
Target
Actual Adjusted
Actual Adjusted
The Science and Technology Committee assessed the company’s progress toward achieving product pipeline
goals at 3.5 (on a scale of 1 to 5) as follows:
(cid:127)
(cid:127)
(cid:127)
4 new molecular entity (NME) product approvals versus a goal of 3, and 12 other approvals versus a
goal of 6
1 NME entering into Phase III versus a goal of 2
30 percent of preclinical pipeline projects and 75 percent of clinical projects met their delivery
reliability goals, compared with targets of 60 and 75 percent, respectively
p5 and p37 of proxy
p5 and p37 of proxy
The Science and Technology Committee also performed a subjective assessment of the quality of the
pipeline, considering many factors, and awarded a score of 5, recognizing a record-setting year for
innovation. Based on the recommendation of the Science and Technology Committee, the Compensation
Committee certified a pipeline score of 3.5, resulting in a pipeline multiple of 1.25.
Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus multiple of 1.10. The company
bonus multiple was reduced by 0.25 for 2014 in order to manage operating expenses to allow the company to
fully invest in launching the company's late stage pipeline assets.
(0.25 x 1.04) + (0.50 x 1.05) + (0.25 x 1.25) = 1.10 bonus multiple
1.10 bonus multiple - 0.25 = 0.85 adjusted bonus multiple
The bonus amounts paid to NEOs for 2014 are reflected in the "Summary Compensation Table" below.
Equity Award Payouts in 2014
2013-2014 Performance Award
The target cumulative EPS for the 2013-2014 PA was set in January 2013 reflecting expected industry growth
of 7.78 percent each year. The company's two-year EPS growth was 1.4 percent, reflecting the negative
impact of multiple patent expirations.
The company's performance compared to targets (and the resulting multiple) for the 2013-2014 PA is
reflected in the charts below.
37
37
2013–2014 Annual EPS Growth
2013–2014 Annual EPS Growth
2013–2014 PA Multiple
2013–2014 PA Multiple
15
15
1.5
1.5
10
10
t
n
e
c
r
e
P
t
n
e
c
r
e
P
5
5
0
0
7.8%
7.8%
1.4%
1.4%
l
l
e
p
i
t
l
u
M
e
p
i
t
l
u
M
1.0
1.0
0.5
0.5
1.00
1.00
0.52
0.52
0.0
0.0
Target Annual Growth
Target Annual Growth
Actual Annual Growth
Actual Annual Growth
Target Multiple
Target Multiple
Actual Multiple
Actual Multiple
For the NEOs, the number of shares awarded in RSUs subject to an additional 13-month service-vesting
period under the 2013-2014 PA is reflected in the table below (this information is also included in footnote 5 to
the "Outstanding Equity Awards" table in the "Executive Compensation" section below):
Name
Dr. Lechleiter
p6 and p38 of proxy
p6 and p38 of proxy
Target Shares
89,659
RSUs Awarded
46,623
37,856
19,685
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
29,886
17,434
19,924
15,541
9,066
10,360
2012-2014 Shareholder Value Award
The target stock price of $44.64 for the 2012-2014 SVA was set in January 2012 based on a beginning stock
price of $38.64, which was the average closing price for Lilly stock for all trading days in November and
December 2011. The ending stock price of $69.13 represents stock price growth of approximately 79 percent
over the relevant three-year period. The company's performance compared to target (and the resulting payout
multiple) for the 2012-2014 SVA is shown below.
2012–2014 Lilly Stock Growth
2012–2014 Lilly Stock Growth
2012–2014 SVA Multiple
2012–2014 SVA Multiple
t
n
e
c
r
e
P
t
n
e
c
r
e
P
100
100
80
80
60
60
40
40
20
20
0
0
78.9%
78.9%
15.6%
15.6%
l
l
e
e
p
p
i
i
t
t
l
l
u
u
M
M
1.40
1.40
1.00
1.00
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
Target Stock Growth
Target Stock Growth
Actual Stock Growth
Actual Stock Growth
Target Multiple
Target Multiple
Actual Multiple
Actual Multiple
38
38
p6 and p38 of proxy
p6 and p38 of proxy
The number of shares paid to NEOs during 2014 for the 2012-2014 SVA were as follows:
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
Target Shares
141,938
Shares Paid Out
198,713
71,915
56,775
7,835
37,850
100,681
79,485
10,969
52,990
Other Compensation Practices and Information
Employee Benefits
The company offers core employee benefits coverage to:
(cid:127) provide our workforce with a reasonable level of financial support in the event of illness or injury,
(cid:127) provide post-retirement income; and
(cid:127) enhance productivity and job satisfaction through benefit programs that focus on overall well-being.
The benefits available are the same for all U.S. employees and include medical and dental coverage,
disability insurance, and life insurance. In addition, The Lilly Employee 401(k) plan (the 401(k) plan) and The
Lilly Retirement Plan (the retirement plan) provide U.S. employees a reasonable level of retirement income
reflecting employees’ careers with the company. To the extent that any employee’s retirement benefit exceeds
IRS limits for amounts that can be paid through a qualified plan, the company also offers a nonqualified
pension plan and a nonqualified savings plan. These plans provide only the difference between the calculated
benefits and the IRS limits, and the formula is the same for all U.S. employees. The cost of employee benefits
is partially borne by the employee, including each executive officer.
Perquisites
The company provides very limited perquisites to executive officers. The company does not allow personal
use of the corporate aircraft except the aircraft is made available for the personal use of Dr. Lechleiter in very
rare cases when the security and efficiency benefits to the company outweigh the expense. The company did
not incur any expenses for personal use by Dr. Lechleiter of its aircraft in 2014, nor did he receive any other
perquisites. Depending on seat availability, family members and personal guests of executive officers may
travel on the company aircraft to accompany executives who are traveling on business.
The Lilly Deferred Compensation Plan
Members of senior management may defer receipt of part or all of their cash compensation under The Lilly
Deferred Compensation Plan (the deferred compensation plan), which allows executives to save for
retirement in a tax-effective way at minimal cost to the company. Under this unfunded plan, amounts deferred
by the executive are credited at an interest rate of 120 percent of the applicable federal long-term rate, as
described in more detail following the “Nonqualified Deferred Compensation in 2014” table.
Severance Benefits
Except in the case of a change in control of the company, the company is not obligated to pay severance to
executive officers upon termination of their employment; any such payments are at the discretion of the
Compensation Committee.
The company has adopted change-in-control severance pay plans for nearly all employees, including the
executive officers. The plans are intended to preserve employee morale and productivity and encourage
39
39
retention in the face of the disruptive impact of an actual or rumored change in control. In addition, the plans
are intended to align executive and shareholder interests by enabling executives to evaluate corporate
transactions that may be in the best interests of the shareholders and other constituents of the company
without undue concern over whether the transactions may jeopardize the executives’ own employment.
Highlights of our change-in-control severance plans
All regular employees are covered
Up to two-year pay protection
Double trigger generally required
18-month benefit continuation
No tax gross-ups
Although benefit levels may differ depending on the employee’s job level and seniority, the basic elements of
the plans are comparable for all eligible employees:
(cid:127) Double trigger. Unlike “single trigger” plans that pay out immediately upon a change in control, the plans
generally require a “double trigger”—a change in control followed by an involuntary loss of employment
within two years thereafter. This is consistent with the plan's intent to provide employees with financial
protection upon loss of employment. A partial exception is made for outstanding PAs, a portion of which
would be paid out upon a change in control on a pro-rated basis for time worked based on the forecasted
payout level at the time of the change in control. This partial payment is appropriate because of the
difficulties in converting the company EPS targets into an award based on the surviving company’s EPS.
Likewise, if Lilly is not the surviving entity, a portion of outstanding SVAs would be paid out on a pro-rated
basis for time worked up to the change in control based on the merger price for company stock.
(cid:127) Covered terminations. Employees are eligible for payments if, within two years of the change in control,
their employment is terminated (i) without cause by the company or (ii) for good reason by the employee,
each as is defined in the plan. See “Potential Payments Upon Termination or Change in Control” for a
more detailed discussion, including a discussion of what constitutes a change in control.
(cid:127) Employees who suffer a covered termination receive up to two years of pay and 18 months of
benefits protection. These provisions assure employees a reasonable period of protection of their
income and core employee benefits.
(cid:127) Severance payment. Eligible terminated employees would receive a severance payment ranging
from six months’ to two years’ base salary. Executives are all eligible for two years’ base salary
plus two times the then-current year’s target bonus.
(cid:127) Benefit continuation. Basic employee benefits such as health and life insurance would be
continued for 18 months following termination of employment, unless the individual becomes
eligible for coverage with a new employer. All employees would receive an additional two years of
both age and years-of-service credit for purposes of determining eligibility for retiree medical and
dental benefits.
(cid:127) Accelerated vesting of equity awards. Any unvested equity awards vest at the time of termination of
employment.
(cid:127) Excise tax. In some circumstances, the payments or other benefits received by the employee in
connection with a change in control could exceed limits established under Section 280G of the Internal
Revenue Code. The employee would then be subject to an excise tax on top of normal federal income
tax. The company does not reimburse employees for these taxes. However, the amount of change in
control-related benefits will be reduced to the 280G limit if the effect would be to deliver a greater after-tax
benefit than the employee would receive with an unreduced benefit.
40
40
Share Ownership and Retention Guidelines; Prohibition on Hedging and
Pledging Shares
Share ownership and retention guidelines help to foster a focus on long-term growth. The CEO is required to
own company stock valued at least six times annual base salary. Other executive officers are required to own
a fixed number of shares based on their position. Until the required number of shares is reached, the
executive officer must retain 50 percent of net shares received from new equity payouts. Our executives have
a long history of maintaining extensive holdings in company stock. As of February 20, 2015, Dr. Lechleiter
held shares valued at approximately 44 times his annual salary. The following table shows the share
requirements for each NEO:
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
Share Requirement
Owns Required Shares
six times base salary
75,000
75,000
55,000
50,000
Yes
Yes
Yes
No1
Yes
1 As a newer executive officer, Mr. Harrington is required to retain at least half of all equity payouts until
he reaches the 55,000 share ownership requirement.
Executive officers are also required to hold all shares received from equity program payouts, net of acquisition
costs and taxes, for at least one year, even once share ownership requirements have been met. For PAs, this
holding requirement is met by the one-year service-vesting period on the RSUs awarded pursuant to the
program.
Employees are not permitted to hedge their economic exposures to company stock through short sales or
derivative transactions. Effective in 2014, the committee adopted a formal policy prohibiting outside directors
and all members of senior management from pledging any company stock (i.e., using company stock as
collateral for a loan or trading shares on margin).
Executive Compensation Recovery Policy
All incentive awards are subject to forfeiture upon termination of employment prior to the end of the
performance period or for disciplinary reasons. In addition, the Compensation Committee has adopted an
executive compensation recovery policy, which gives the committee broad discretion to claw back incentive
payouts from any member of senior management (approximately 160 employees) whose misconduct results
in a material violation of law or company policy that causes significant harm to the company, or who fails in his
or her supervisory responsibility to prevent such misconduct by others.
Additionally, the company can recover all or a portion of any incentive compensation in the case of materially
inaccurate financial statements or material errors in the performance calculation, whether or not they result in
a restatement and whether or not the executive officer has engaged in wrongful conduct. Recoveries under
the plan can extend back as far as three years.
The recovery policy covers any incentive compensation awarded or paid beginning in 2013 to an employee at
a time when he or she is a member of senior management. Subsequent changes in status, including
retirement or termination of employment, do not affect the company’s rights to recover compensation under
the policy.
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41
Looking Ahead to 2015 Compensation
As we move beyond the recent period of patent expirations, we plan to resume our custom and practice of
providing annual increases to base salaries and delivering bonuses reflective of company and individual
performance, without reductions, to eligible employees.
Executive Compensation
Summary Compensation Table
Name and
Principal Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($) 1
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($) 2
Change
in Pension
Value
($) 3
All Other
Compensation
($) 4
Total
Compensation
($)
John C. Lechleiter, Ph.D.
2014 $1,500,000
Chairman, President, and
Chief Executive Officer
Derica W. Rice
Executive Vice President,
Global Services and
Chief Financial Officer
2013 $1,500,000
2012 $1,500,000
2014 $1,019,700
2013 $1,014,750
2012
$990,000
Jan M. Lundberg, Ph.D.
2014 $1,007,855
Executive Vice President,
Science and Technology and
President, Lilly Research
Laboratories
2013 $1,002,963
2012
$978,500
Michael J. Harrington
2014
$765,000
Senior Vice President and
General Counsel
2013
$765,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,750,000
$6,750,000
$5,625,000
$2,850,000
$2,850,000
$2,850,000
$2,250,000
$2,250,000
$2,250,000
$1,425,000
$1,312,500
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$1,785,000 $4,356,142
$90,000
$14,481,142
$2,877,000
$0 5
$90,000
$11,217,000
$2,982,000 $4,423,633
$90,000
$14,620,633
$780,071 $2,023,458
$61,182
$6,734,411
$1,251,187
$0 5
$60,885
$5,176,822
$1,265,220 $1,770,767
$59,400
$6,935,387
$771,009
$517,761
$60,471
$4,607,096
$1,236,653
$224,741
$60,178
$4,774,535
$1,250,523
$307,275
$58,710
$4,845,008
$487,688 $1,330,586
$45,900
$4,054,174
$786,038
$264,784
$45,900
$3,174,222
2012
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Enrique A. Conterno
2014
$682,890
Senior Vice President and
President, Lilly Diabetes
2013
$680,658
2012
$669,500
$0
$0
$0
$1,500,000
$1,500,000
$1,500,000
$0
$0
$0
$435,342 $1,235,839
$40,973
$3,895,044
$699,376
$88,167
$40,840
$3,009,041
$713,018
$992,187
$40,170
$3,914,875
1 This column shows the grant date fair value of PAs and SVAs computed in accordance with FASB ASC
Topic 718. Values for awards subject to performance conditions (PAs) are computed based upon the probable
outcome of the performance condition as of the grant date. A discussion of assumptions used in calculating
award values may be found in Note 11 to our 2014 audited financial statements in our Form 10-K.
The table below shows the minimum, target, and maximum payouts (using the grant date fair value) for the
2014-2015 PA grant included in this column of the Summary Compensation Table.
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
Payout Date
Minimum Payout Target Payout Maximum Payout
January 2016
January 2016
January 2016
January 2016
January 2016
$0
$0
$0
$0
$0
$4,500,000
$1,900,000
$1,500,000
$950,000
$1,000,000
$6,750,000
$2,850,000
$2,250,000
$1,425,000
$1,500,000
2 Payments for 2014 performance under the bonus plan. All bonuses paid to NEOs were part of a non-equity
incentive plan.
3 The amounts in this column reflect the change in pension value for each individual, calculated by our actuary,
and are affected by additional service accruals and pay earned, as well as actuarial assumption changes. The
42
42
increases in pension values in 2014 were driven to a large extent by a lower discount rate and a new mortality
table that reflects longer expected lifetimes. The design of the pension benefit did not change. See the
Pension Benefits in 2014 table on page 46 for information about the standard actuarial assumptions used. No
named executive officer received preferential or above-market earnings on deferred compensation.
4 The amounts in this column are solely company matching contributions for each individual's 401(k) plan
contributions. The company does not reimburse executives for taxes outside of the limited circumstance of
taxes related to employee relocation or a prior international assignment. There were no reportable perquisites
or personal benefits.
5 The net present value of the pension benefits for Dr. Lechleiter and Mr. Rice reflect no change from 2013 due
to an increase in the discount rate over 2012. For the other named executive officers, increases in
pensionable earnings offset the impact of the increased discount rate.
Grants of Plan-Based Awards During 2014
The compensation plans under which the grants in the following table were made are described in the CD&A
and include the bonus plan (a non-equity incentive plan) and the 2002 Lilly Stock Plan (which provides for
PAs, SVAs, stock options, restricted stock grants, and RSUs).
Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards 1
Estimated Future
Payouts Under Equity
Incentive Plan Awards
Name
Award
Dr. Lechleiter
Grant
Date2
__
2014-2015 PA 2/6/2014
2014-2016 SVA 2/6/2014
Mr. Rice
__
2014-2015 PA 2/6/2014
2014-2016 SVA 2/6/2014
Dr. Lundberg
__
2014-2015 PA 2/6/2014
2014-2016 SVA 2/6/2014
Mr. Harrington
__
2014-2015 PA 2/6/2014
2014-2016 SVA 2/6/2014
Mr. Conterno
__
2014-2015 PA 2/6/2014
2014-2016 SVA 2/6/2014
3
4
3
4
3
4
3
4
3
4
Compensation
Committee
Action Date
Threshold
($)
Target
($)
Maximum
($)
Threshold
(# shares)
Target
(# shares)
Maximum
(# shares)
__
$52,500
$2,100,000 $4,200,000
12/16/2013
12/16/2013
46,097
92,194
138,291
49,194
122,984
172,178
__
$22,943
$917,730
$1,835,460
12/16/2013
12/16/2013
19,463
38,926
58,389
20,771
51,927
72,698
__
$22,677
$907,070
$1,814,139
12/16/2013
12/16/2013
15,366
30,731
46,097
16,398
40,995
57,393
__
$14,344
$573,750
$1,147,500
12/16/2013
12/16/2013
9,732
19,463
29,195
10,385
25,963
36,348
__
$12,804
$512,168
$1,024,335
12/16/2013
12/16/2013
10,244
20,488
30,732
10,932
27,330
38,262
All Other
Stock or
Option
Awards:
Number
of
Shares of
Stock,
Options,
or Units
0
0
0
0
0
Grant Date
Fair Value
of Equity
Awards
$2,250,000
$4,500,000
$950,000
$1,900,000
$750,000
$1,500,000
$475,000
$950,000
$500,000
$1,000,000
1 These columns show the threshold, target, and maximum payouts for performance under the bonus plan.
Bonus payouts range from 0 to 200 percent of target. The bonus payment for 2014 performance was 85
percent of target, and is included in the “Summary Compensation Table” in the column titled “Non-Equity
Incentive Plan Compensation.”
2 To assure grant timing is not manipulated for employee gain, the annual grant date is established in advance
by the Compensation Committee and consistently falls in the first week of February. Equity awards to new
hires and other off-cycle grants are effective on the first trading day of the following month.
43
43
3 This row shows the range of payouts for 2014-2015 PA grants. This PA will pay out in January 2016, with
payouts ranging from 0 to 150 percent of target. The grant-date fair value of the PA reflects the probable
payout outcome anticipated at the time of grant, which was less than the target value.
4 This row shows the range of payouts for 2014-2016 SVA grants. This SVA will pay out in January 2017, with
payouts ranging from 0 to 140 percent of target. We measure the fair value of the SVA on the grant date using
a Monte Carlo simulation model.
To receive a payout under the PA or the SVA, a participant must remain employed with the company through
the end of the relevant performance period (except in the case of death, disability, or retirement). No
dividends accrue on either PAs or SVAs during the performance period. Non-preferential dividends accrue
during the earned PA’s one-year restriction period (following the two-year performance period) and are paid
upon vesting.
Outstanding Equity Awards at December 31, 2014
The 2014 closing stock price applied to the values in the table below was $68.99.
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable 1
Option
Exercise
Price
($)
Option
Expiration
Date
Name
Dr. Lechleiter
140,964
$56.18
02/09/2016
Mr. Rice
30,000
27,108
$52.54
$56.18
04/29/2016
02/09/2016
Dr. Lundberg
Mr. Harrington
Mr. Conterno
6,024
$56.18
02/09/2016
6,928
$56.18
02/09/2016
Number of
Shares or
Units of Stock
That Have Not
Vested (#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units,
or Other Rights
That Have Not
Vested (#)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units,
or Other Rights
That Have Not
Vested ($)
172,178 2
155,058 3
92,194 4
$11,878,533
$10,697,479
$6,360,464
46,623 5
52,462 6
$3,216,521
$3,619,353
19,685 5
26,581 6
$1,358,068
$1,833,823
15,541 5
20,985 6
$1,072,174
$1,447,755
9,066 5
$625,463
10,360 5
13,990 6
20,000 7
$714,736
$965,170
$1,379,800
72,698 2
65,468 3
38,926 4
$5,015,421
$4,516,651
$2,685,505
57,393 2
51,687 3
30,731 4
$3,991,683
$3,594,803
$1,068,671
36,348 2
30,150 3
19,463 4
$2,507,662
$2,080,076
$1,342,752
38,262 2
34,457 3
20,488 4
$2,639,695
$2,377,175
$1,413,467
Award
2014-2016 SVA
2013-2015 SVA
2014-2015 PA
2013-2014 PA
2012-2013 PA
2014-2016 SVA
2013-2015 SVA
2014-2015 PA
2013-2014 PA
2012-2013 PA
2014-2016 SVA
2013-2015 SVA
2014-2015 PA
2013-2014 PA
2012-2013 PA
2014-2016 SVA
2013-2015 SVA
2014-2015 PA
2013-2014 PA
2014-2016 SVA
2013-2015 SVA
2014-2015 PA
2013-2014 PA
2012-2013 PA
RSU
44
44
1 These options vested as listed in the table below by expiration date.
Expiration Date
4/29/2016
2/9/2016
Vesting Date
5/1/2009
2/10/2009
2 SVAs granted for the 2014-2016 performance period. The number of shares reported reflects the maximum
payout, which will be made if the average closing stock price in November and December 2016 is over
$65.44. Actual payouts may vary from 0 to 140 percent of target. Net shares from any payout must be held by
executive officers for a minimum of one year. Had the performance period ended December 31, 2014, the
payout would have been 140 percent of target.
3 SVAs granted for the 2013-2015 performance period. The number of shares reported reflects the maximum
payout, which will be made if the average closing stock price in November and December 2015 is over
$62.64. Actual payouts may vary from 0 to 140 percent of target. Net shares from any payout must be held by
executive officers for a minimum of one year. Had the performance period ended December 31, 2014, the
payout would have been 140 percent of target.
4 This number represents the threshold value of PA shares that could pay out for 2014-2015 performance,
provided performance goals are met. Any award resulting from this program will be made in the form of RSUs,
vesting February 2017. Actual payouts may vary from 0 to 150 percent of target. The number of shares
recorded in the table reflects the payout if the combined cumulative EPS for 2014 and 2015 is $9.27.
5 The 2013-2014 PA was determined to be 52 percent of target in January 2015 and the resulting RSUs will
vest February 2016.
6 RSUs vested February 2015 from the 2012-2013 PA.
7 This grant was made in 2008 outside of the normal annual cycle and will vest on May 1, 2018.
Options Exercised and Stock Vested in 2014
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
Option Awards
Stock Awards
Number of Shares
Acquired on Exercise
(#)
Value Realized
on Exercise ($)
127,811
$1,173,305
23,077
$196,155
0
2,722
7,101
$0
$14,780
$117,593
Number of Shares
Acquired on Vesting (#)
58,778 2
198,713 3
29,781 2
100,681 3
21,552 2
79,485 3
0
10,969 3
15,674 2
52,990 3
Value Realized
on Vesting ($) 1
$3,174,600
$14,102,662
$1,608,472
$7,145,331
$1,164,024
$5,641,050
$0
$778,470
$846,553
$3,760,700
1 Amounts reflect the market value of the stock on the day the stock vested.
2 RSUs resulting from the 2011-2012 PA vested in February 2014.
3 Payout of the 2012-2014 SVA at 140 percent of target.
4545
Retirement Benefits
We provide retirement income to U.S. employees, including executive officers, through the following plans:
(cid:127) The Lilly Employee 401(k) plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of
the Internal Revenue Code. Participants may elect to contribute a portion of their salary to the plan, and
the company provides matching contributions on employees’ contributions up to 6 percent of base salary
up to IRS limits. The employee contributions, company contributions, and earnings thereon are paid out in
accordance with elections made by the participant. See the "All Other Compensation" column in the
“Summary Compensation Table” for information about company contributions for the named executive
officers.
(cid:127) The Lilly Retirement Plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees.
See the “Pension Benefits in 2014” table below for additional information about the value of these pension
benefits.
Sections 401 and 415 of the Internal Revenue Code generally limit the amount of annual pension that can be
paid from a tax-qualified plan ($260,000 in 2014) as well as the amount of annual earnings that can be used
to calculate a pension benefit ($265,000 in 2015). However, since 1975 the company has maintained a
nonqualified pension plan that pays retirees the difference between the amount payable under the retirement
plan and the amount they would have received without the Internal Revenue Code limits. The nonqualified
pension plan is unfunded and subject to forfeiture in the event of bankruptcy.
The following table shows benefits that the named executive officers have accrued under the retirement plan
and the nonqualified pension plan.
Pension Benefits in 2014
Name
Plan
Dr. Lechleiter
2
retirement plan (pre-2010)
retirement plan (post-2009)
nonqualified plan (pre-2010)
nonqualified plan (post-2009)
total
Mr. Rice
retirement plan (pre-2010)
retirement plan (post-2009)
nonqualified plan (pre-2010)
nonqualified plan (post-2009)
total
Dr. Lundberg
retirement plan (post-2009)
nonqualified plan (post-2009)
total
Mr. Harrington
retirement plan (pre-2010)
retirement plan (post-2009)
nonqualified plan (pre-2010)
nonqualified plan (post-2009)
total
Mr. Conterno
retirement plan (pre-2010)
retirement plan (post-2009)
nonqualified plan (pre-2010)
nonqualified plan (post-2009)
total
Number of Years of
Credited Service
Present Value of
Accumulated Benefit ($) 1
Payments During
Last Fiscal Year
($)
30
5
30
5
20
5
20
5
5
5
18
5
18
5
17
5
17
5
$1,541,888
$169,651
$28,686,987
$2,883,320
$33,281,846
$768,623
$106,428
$6,405,948
$828,832
$8,109,831
$176,997
$1,191,257
$1,368,254
$790,202
$115,845
$2,091,265
$317,956
$3,315,268
$656,075
$102,010
$2,998,204
$441,843
$4,198,132
$0
$0
$0
$0
$0
46
46
1 The following standard actuarial assumptions were used to calculate the present value of each individual’s
accumulated pension benefit:
Discount rate:
4.33 percent
Mortality (post-retirement decrement only):
RP2014 with generational projection using Scale MP2014
Pre-2010 joint and survivor benefit (% of pension):
50% until age 62; 25% thereafter
Post-2009 benefit payment form:
life annuity
2 Dr. Lechleiter is currently eligible for full retirement benefits under the old plan formula (pre-2010 benefits) and
qualifies for early retirement under the new plan formula (post-2009 benefits) as described below.
The retirement plan benefits shown in the table are net present values. The benefits are not payable as a
lump sum; they are generally paid as a monthly annuity for the life of the retiree and, if elected, any qualifying
survivor. The annual benefit under the retirement plan is calculated using years of service and the average of
the annual earnings (salary plus bonus) for the highest five out of the last 10 calendar years of service (final
average earnings).
Post-2009 Plan Information: Following amendment of our retirement plan formulae, employees hired on or
after February 1, 2008 have accrued retirement benefits only under the new plan formula. Employees hired
before that date have accrued benefits under both the old and new plan formulae. All eligible employees,
including those hired on or after February 1, 2008, can retire at age 65 with at least five years of service and
receive an unreduced benefit. The annual benefit under the new plan formula is equal to 1.2 percent of final
average earnings multiplied by years of service. Early retirement benefits under this plan formula are reduced
6 percent for each year under age 65. Transition benefits were afforded to employees with 50 points (age plus
service) or more as of December 31, 2009. These benefits were intended to ease the transition to the new
retirement formula for those employees who are closer to retirement or have been with the company longer.
For the transition group, early retirement benefits are reduced 3 percent for each year from age 65 to age 60
and 6 percent for each year under age 60. All named executive officers except Dr. Lundberg are in this
transition group.
Pre-2010 Plan Information: Employees hired prior to February 1, 2008 accrued benefits under both plan
formulae. For these employees, benefits that accrued before January 1, 2010 were calculated under the old
plan formula. The amount of the benefit is calculated using actual years of service through December
31, 2009, while total years of service is used to determine eligibility and early retirement reductions. The
benefit amount is increased (but not decreased) proportionately, based on final average earnings at
termination compared to final average earnings at December 31, 2009. Full retirement benefits are earned by
employees with 90 or more points (the sum of his or her age plus years of service). Employees electing early
retirement receive reduced benefits as described below:
(cid:127) The benefit for employees with between 80 and 90 points is reduced by 3 percent for each year under
90 points or age 62.
(cid:127) The benefit for employees who have less than 80 points, but who reached age 55 and have at least
10 years of service, is reduced as described above and is further reduced by 6 percent for each year
under 80 points or age 65.
4747
Nonqualified Deferred Compensation in 2014
Name
Plan
Dr. Lechleiter
nonqualified savings
deferred compensation
total
Mr. Rice
nonqualified savings
deferred compensation
total
Dr. Lundberg
nonqualified savings
deferred compensation
total
Mr. Harrington
nonqualified savings
deferred compensation
total
Mr. Conterno
nonqualified savings
deferred compensation
total
Executive
Contributions in
Last Fiscal Year
($) 1
Registrant
Contributions in
Last Fiscal Year
($) 2
Aggregate
Earnings in
Last Fiscal Year
($)
Aggregate
Withdrawals/
Distributions in
Last Fiscal Year
($)
Aggregate
Balance at Last
Fiscal Year End
($) 3
$74,400
$719,250
$793,650
$45,582
$0
$45,582
$44,871
$0
$44,871
$30,300
$0
$30,300
$25,373
$100,000
$125,373
$74,400
$74,400
$45,582
$45,582
$44,871
$44,871
$30,300
$30,300
$25,373
$474,090
$450,438
$924,528
$187,135
$0
$187,135
$58,118
$0
$58,118
$14,654
$5,290
$19,944
$76,100
$32,709
$25,373
$108,809
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,018,664
$12,069,225
$15,087,889
$1,241,455
$0
$1,241,455
$555,147
$0
$555,147
$231,191
$140,233
$371,424
$541,568
$884,918
$1,426,486
1 The amounts in this column are also included in the “Summary Compensation Table,” in the “Salary” column
(nonqualified savings) or the “Non-Equity Incentive Plan Compensation” column (deferred compensation).
2 The amounts in this column are also included in the “Summary Compensation Table,” in the “All Other
Compensation” column as a portion of the savings plan match.
3 Of the totals in this column, the following amounts have previously been reported in the “Summary
Compensation Table” for this year and for previous years:
Name
Dr. Lechleiter
Mr. Rice
Dr. Lundberg
Mr. Harrington
Mr. Conterno
2014 ($)
$868,050
$91,164
$89,741
$60,600
$150,746
Previous Years ($)
Total ($)
$9,763,781
$10,631,831
$614,174
$348,794
$61,200
$301,420
$705,338
$438,535
$121,800
$452,166
The "Nonqualified Deferred Compensation in 2014" table above shows information about two company
programs: the nonqualified savings plan and the deferred compensation plan. The nonqualified savings plan
is designed to allow each employee to contribute up to 6 percent of his or her base salary, and receive a
company match, beyond the contribution limits prescribed by the IRS with regard to 401(k) plans. This plan is
administered in the same manner as the 401(k) plan, with the same participation and investment elections.
Executive officers and other U.S. executives may also defer receipt of all or part of their cash compensation
under the deferred compensation plan. Amounts deferred by executives under this plan are credited with
interest at 120 percent of the applicable federal long-term rate as established the preceding December by the
U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code with monthly compounding,
which was 3.9 percent for 2014 and is 3.2 percent for 2015. Participants may elect to receive the funds in a
lump sum or in up to 10 annual installments following retirement, but may not make withdrawals during their
employment, except in the event of hardship as approved by the Compensation Committee. All deferral
elections and associated distribution schedules are irrevocable. Both plans are unfunded and subject to
forfeiture in the event of bankruptcy.
48
48
Payments Upon Termination or Change in Control (as of December 31, 2014)
The following table describes the potential payments and benefits under the company’s compensation and
benefit plans and arrangements to which the named executive officers would be entitled upon termination of
employment. Except for certain terminations following a change in control of the company, as described
below, there are no agreements, arrangements, or plans that entitle named executive officers to severance,
perquisites, or other enhanced benefits upon termination of their employment. Any agreement to provide such
payments or benefits to a terminating executive officer (other than following a change in control) would be at
the discretion of the Compensation Committee.
Continuation
of Medical /
Welfare
Benefits
(present
value) 2
Cash
Severance
Payment 1
Value of
Acceleration
of Equity
Awards 3
Total
Termination
Benefits
$0
$0
$0
$0
$0
$0
$0
$0
$7,200,000
$15,726
$13,134,476
$20,350,202
$0
$0
$0
$0
$0
$0
$0
$0
$3,874,860
$35,355
$5,548,794
$9,459,009
$0
$0
$0
$0
$0
$0
$0
$0
$3,829,849
$18,194
$4,380,679
$8,228,722
$0
$0
$0
$0
$0
$0
$0
$0
$2,677,500
$35,355
$2,639,138
$5,351,993
$0
$0
$0
$0
$0
$0
$0
$0
$2,390,115
$30,547
$3,563,403
$5,984,065
Dr. Lechleiter
(cid:127) Voluntary retirement
(cid:127)
(cid:127)
Involuntary retirement or termination
Involuntary or good reason termination
after change in control
Mr. Rice
(cid:127) Voluntary termination
(cid:127)
(cid:127)
Involuntary retirement or termination
Involuntary or good reason termination
after change in control
Dr. Lundberg
(cid:127) Voluntary retirement
(cid:127)
(cid:127)
Involuntary retirement or termination
Involuntary or good reason termination
after change in control
Mr. Harrington
(cid:127) Voluntary retirement
(cid:127)
(cid:127)
Involuntary retirement or termination
Involuntary or good reason termination
after change in control
Mr. Conterno
(cid:127) Voluntary termination
(cid:127)
(cid:127)
Involuntary retirement or termination
Involuntary or good reason termination
after change in control
1 See “Change-in-Control Severance Pay Plan” below.
2 See “Accrued Pay and Regular Retirement Benefits” and “Change-in-Control Severance Pay Plan—
Continuation of medical and welfare benefits” below.
3 Equity grants include an individual performance criterion to vest. As a result, even retirement-eligible
employees have the possibility of forfeiting their grants.
Accrued Pay and Regular Retirement Benefits. The amounts shown in the table above do not include
certain payments and benefits to the extent they are provided on a non-discriminatory basis to salaried
employees generally upon termination of employment. These include:
(cid:127)
accrued salary and vacation pay.
49
49
(cid:127)
regular pension benefits under the retirement plan and the nonqualified pension plan. See “Retirement
Benefits” above.
(cid:127) welfare benefits provided to all U.S. retirees, including retiree medical and dental insurance. The amounts
(cid:127)
shown in the table above as “Continuation of Medical / Welfare Benefits” are explained below.
distributions of plan balances under the 401(k) plan and the nonqualified savings plan. See the narrative
following the “Nonqualified Deferred Compensation in 2014” table for information about these plans.
Deferred Compensation. The amounts shown in the table do not include distributions of plan balances under
the deferred compensation plan. Those balances are shown in the “Nonqualified Deferred Compensation in
2014” table.
Death and Disability. A termination of employment due to death or disability does not entitle named
executive officers to any payments or benefits that are not available to U.S. salaried employees generally.
Termination for Cause. Executives terminated for cause receive no severance or enhanced benefits and
forfeit any unvested equity grants.
Change-in-Control Severance Pay Plan. As described in the CD&A under “Severance Benefits,” the
company maintains a change-in-control severance pay plan for nearly all employees, including the named
executive officers. The change-in-control plan defines a change in control very specifically, but generally the
terms include the occurrence of one of the following: (i) acquisition of 20 percent or more of the company’s
stock; (ii) replacement by the shareholders of one half or more of the Board of Directors; (iii) consummation of
a merger, share exchange, or consolidation of the company; or (iv) liquidation of the company or sale or
disposition of all or substantially all of its assets. The amounts shown in the table for “involuntary or good-
reason termination after change in control” are based on the following assumptions and plan provisions:
(cid:127) Covered terminations. The table assumes a termination of employment that is eligible for severance
under the terms of the plan, based on the named executive officer’s compensation, benefits, age, and
service credit at December 31, 2014. Eligible terminations include an involuntary termination for reasons
other than for cause or a voluntary termination by the executive for good reason, within two years
following the change in control.
(cid:127) A termination of an executive officer by the company is for cause if it is for any of the following
reasons: (i) the employee’s willful and continued refusal to perform, without legal cause, his or her
material duties, resulting in demonstrable economic harm to the company; (ii) any act of fraud,
dishonesty, or gross misconduct resulting in significant economic harm or other significant harm to the
business reputation of the company; or (iii) conviction of or the entering of a plea of guilty or nolo
contendere to a felony.
(cid:127) A termination by the executive officer is for good reason if it results from: (i) a material diminution in
the nature or status of the executive’s position, title, reporting relationship, duties, responsibilities, or
authority, or the assignment to him or her of additional responsibilities that materially increase his or
her workload; (ii) any reduction in the executive’s then-current base salary; (iii) a material reduction in
the executive’s opportunities to earn incentive bonuses below those in effect for the year prior to the
change in control; (iv) a material reduction in the executive’s employee benefits from the benefit
levels in effect immediately prior to the change in control; (v) the failure to grant to the executive stock
options, stock units, performance shares, or similar incentive rights during each 12-month period
following the change in control on the basis of a number of shares or units and all other material
terms at least as favorable to the executive as those rights granted to him or her on an annualized
average basis for the three-year period immediately prior to the change in control; or (vi) relocation of
the executive by more than 50 miles.
(cid:127) Cash severance payment. The cash severance payment amounts to two times the executive officer's
annual base salary plus two times the executive officer’s bonus target for that year under the bonus plan.
(cid:127) Continuation of medical and welfare benefits. This amount represents the present value of the change-in-
control plan’s guarantee, following a covered termination, of 18 months of continued coverage equivalent
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to the company’s current active employee medical, dental, life, and long-term disability insurance. Similar
actuarial assumptions to those used to calculate incremental pension benefits apply to the calculation for
continuation of medical and welfare benefits, with the addition of actual COBRA rates based on current
benefit elections.
(cid:127) Acceleration of equity awards. Upon a covered termination, any unvested equity awards would vest upon
consummation of a change in control and a partial payment of outstanding PAs would be made, reduced
to reflect the portion of the performance period worked prior to the change in control. Likewise, in the
case of a change in control in which Lilly is not the surviving entity, SVAs would pay out based on the
change-in-control stock price and be prorated for the portion of the three-year performance period
elapsed. The amount in this column represents the value of the acceleration of unvested equity grants.
(cid:127) Excise taxes. Upon a change in control, employees may be subject to certain excise taxes under
Section 280G of the Internal Revenue Code. The company does not reimburse the affected employees
for those excise taxes or any income taxes payable by the employee. To reduce the employee's exposure
to excise taxes, the employee’s change-in-control benefit may be decreased to maximize the after-tax
benefit to the individual.
Payments Upon Change in Control Alone. In general, the change-in-control plan is a “double trigger” plan,
meaning payments are made only if the employee suffers a covered termination of employment within
two years following the change in control. There are limited exceptions for PAs and SVAs as noted above
under "Acceleration of equity awards."
Compensation Committee Matters
Background
Role of the Independent Consultant In Assessing Executive Compensation
The committee has retained Cimi B. Silverberg of Frederic W. Cook & Co., Inc., as its independent
compensation consultant to assist the committee. Ms. Silverberg reports directly to the committee. Neither
she nor her firm is permitted to have any business or personal relationship with management or the members
of the Compensation Committee. The consultant’s responsibilities are to:
(cid:127) Review the company’s total compensation philosophy, peer group, and target competitive positioning for
reasonableness and appropriateness
(cid:127) Review the company’s executive compensation program and advise the committee of evolving best
practices
(cid:127) Provide independent analyses and recommendations to the committee on the CEO’s pay
(cid:127) Review draft “Compensation Discussion and Analysis” and related tables for the proxy statement
(cid:127) Proactively advise the committee on best practices for board governance of executive compensation
(cid:127) Undertake special projects at the request of the committee chair
Ms. Silverberg interacts directly with members of company management only on matters under the
committee’s oversight and with the knowledge and permission of the committee chair.
Role of Executive Officers and Management In Assessing Executive Compensation
With the oversight of the CEO and the senior vice president of human resources and diversity, the company’s
global compensation group formulates recommendations on compensation philosophy, plan design, and
compensation for executive officers (other than the CEO, as noted below). The CEO provides the committee
with a performance assessment and compensation recommendation for each of the other executive officers.
The committee considers those recommendations with the assistance of its consultant. The CEO and the
senior vice president of human resources and diversity attend committee meetings but are not present for
executive sessions or for any discussion of their own compensation. Only nonemployee directors and the
committee’s consultant attend executive sessions.
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The CEO does not participate in the formulation or discussion of his pay recommendations and has no prior
knowledge of the recommendations that the consultant makes to the committee.
Risk Assessment Process
As a part of the company's overall enterprise risk management program, in 2014 the committee reviewed the
company’s compensation policies and practices and concluded that the programs and practices are not
reasonably likely to have a material adverse effect on the company. The committee noted numerous design
features of the company’s cash and equity incentive programs that reduce the likelihood of inappropriate risk-
taking, including, but not limited to:
(cid:127) The Compensation Committee is comprised of independent directors only.
(cid:127) The committee engages its own independent compensation consultant.
(cid:127) The committee has downward discretion to lower compensation plan payouts.
(cid:127) The committee approves all adjustments to financial results that affect compensation calculations.
(cid:127) Different measures and metrics are used across multiple incentive plans which appropriately balance
cash/stock, fixed/variable pay, short-term/long-term incentives.
(cid:127) Incentive plans have predetermined maximum payouts.
(cid:127) Performance objectives are challenging but achievable.
(cid:127) Programs with operational metrics have a continuum of payout multiples based upon achievement of
performance milestones.
(cid:127) A compensation recovery policy is in place for all members of senior management; negative
compensation consequences can be applied in cases of serious compliance violations.
(cid:127) Meaningful share ownership requirements are in place for all members of senior management.
Compensation Committee Report
The Compensation Committee evaluates and establishes compensation for executive officers and oversees
the deferred compensation plan, the company’s management stock plans, and other management incentive
and benefit programs. Management has the primary responsibility for the company’s financial statements and
reporting process, including the disclosure of executive compensation. With this in mind, the Compensation
Committee has reviewed and discussed with management the CD&A above. The committee is satisfied that
the CD&A fairly and completely represents the philosophy, intent, and actions of the committee with regard to
executive compensation. The committee recommended to the Board of Directors that the CD&A be included
in this proxy statement for filing with the SEC.
Compensation Committee
Karen N. Horn, Ph.D., Chair
Ralph Alvarez
Ellen R. Marram
Kathi P. Seifert
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Audit Matters
Item 3. Proposal to Ratify the Appointment of Principal
Independent Auditor
Audit Committee Oversight of Independent Auditor
The Audit Committee is responsible for the appointment, compensation, retention and oversight of the
independent external auditor, and oversees the process for selecting, reviewing, and evaluating the lead audit
partner. Further information regarding the committee's oversight of the independent auditor can be found in
the Audit Committee charter, available online at http://investor.lilly.com/governance.cfm, or upon request to
the company's corporate secretary.
In connection with the decision regarding whether to re-appoint the independent auditor each year (subject to
shareholder ratification), the committee conducts an annual assessment of the independent auditor's
performance. This assessment examines three primary criteria: (1) the independent auditor's qualifications
and experience; (2) the communication and interactions with the auditor over the course of the year; and (3)
the auditor's independence, objectivity, and professional skepticism. These criteria are assessed against an
internal and an external scorecard, and are discussed with management during a private session, as well as
in executive session. The committee also periodically considers whether a rotation of the company's
independent auditor is advisable.
Ernst & Young, LLP (EY) served as the principal independent auditor for the company in 2014. Based on this
year's assessment of EY's performance, the Audit Committee believes that the continued retention of EY to
serve as the company's principal independent auditor is in the best interests of the company and its investors,
and has therefore reappointed the firm of EY as principal independent auditor for the company for 2015. In
accordance with the bylaws, this appointment is being submitted to the shareholders for ratification.
Representatives of EY are expected to be present at the annual meeting and will be available to respond to
questions. Those representatives will have the opportunity to make a statement if they wish to do so.
Board Proposal on Item 3
The Board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as
principal independent auditor for 2015.
Audit Committee Report
The Audit Committee reviews the company’s financial reporting process on behalf of the Board. Management
has the primary responsibility for the financial statements and the reporting process, including the systems of
internal controls and disclosure controls. In this context, the committee has met and held discussions with
management and the independent auditor. Management represented to the committee that the company’s
consolidated financial statements were prepared in accordance with generally accepted accounting principles
(GAAP), and the committee has reviewed and discussed the audited financial statements and related
disclosures with management and the independent auditor, including a review of the significant management
judgments underlying the financial statements and disclosures.
The independent auditor reports to the Audit Committee, which has sole authority to appoint and to replace
the independent auditor.
The committee has discussed with the independent auditor matters required to be discussed with the Audit
Committee by the standards of the Public Accounting Oversight Board (PCAOB) and the NYSE, including the
quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments,
and the clarity of the disclosures in the financial statements. In addition, the committee has received the
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written disclosures and the letter from the independent auditor required by applicable requirements of the
PCAOB regarding communications with the Audit Committee concerning independence, and has discussed
with the independent auditor the auditor’s independence from the company and its management. In
concluding that the auditor is independent, the committee determined, among other things, that the nonaudit
services provided by EY (as described below) were compatible with its independence. Consistent with the
requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the committee has adopted
policies to ensure the independence of the independent auditor, such as prior committee approval of nonaudit
services and required audit partner rotation.
The committee discussed with the company’s internal and independent auditors the overall scope and plans
for their respective audits, including internal control testing under Section 404 of the Sarbanes-Oxley Act. The
committee periodically meets with the internal and independent auditors, with and without management
present, and in private sessions with members of senior management (such as the chief financial officer and
the chief accounting officer) to discuss the results of their examinations, their evaluations of the company’s
internal controls, and the overall quality of the company’s financial reporting. The committee also periodically
meets in executive session.
In reliance on the reviews and discussions referred to above, the committee recommended to the Board (and
the Board subsequently approved the recommendation) that the audited financial statements be included in
the company’s annual report on Form 10-K for the year ended December 31, 2014, for filing with the SEC.
The committee has also appointed the company’s independent auditor, subject to shareholder ratification, for
2015.
Audit Committee
Michael L. Eskew, Chair
Katherine Baicker, Ph.D.
Douglas R. Oberhelman
Kathi P. Seifert
Jackson P. Tai
Services Performed by the Independent Auditor
The Audit Committee preapproves all services performed by the independent auditor, in part to assess
whether the provision of such services might impair the auditor’s independence. The committee’s policy and
procedures are as follows:
(cid:127) The committee approves the annual audit services engagement and, if necessary, any changes in terms,
conditions, and fees resulting from changes in audit scope, company structure, or other matters. Audit
services include internal controls attestation work under Section 404 of the Sarbanes-Oxley Act. The
committee may also preapprove other audit services, which are those services that only the independent
auditor reasonably can provide.
(cid:127) Audit-related services are assurance and related services that are reasonably related to the performance
of the audit, and that are traditionally performed by the independent auditor. The committee believes that
the provision of these services does not impair the independence of the auditor.
(cid:127) The committee believes that, in appropriate cases, the independent auditor can provide tax compliance
services, tax planning, and tax advice without impairing the auditor’s independence.
(cid:127) The committee may approve other services to be provided by the independent auditor if (i) the services
are permissible under SEC and PCAOB rules, (ii) the committee believes the provision of the services
would not impair the independence of the auditor, and (iii) management believes that the auditor is the
best choice to provide the services.
(cid:127) At the beginning of each audit year, management requests prior committee approval of the annual audit,
statutory audits, and quarterly reviews for the upcoming audit year as well as any other services known at
that time. Management will also present at that time an estimate of all fees for the upcoming audit year.
As specific engagements are identified thereafter, they are brought forward to the committee for approval.
To the extent approvals are required between regularly scheduled committee meetings, preapproval
authority is delegated to the committee chair.
For each engagement, management provides the committee with information about the services and fees,
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sufficiently detailed to allow the committee to make an informed judgment about the nature and scope of the
services and the potential for the services to impair the independence of the auditor.
After the end of the audit year, management provides the committee with a summary of the actual fees
incurred for the completed audit year.
Independent Auditor Fees
The following table shows the fees incurred for services rendered on a worldwide basis by EY in 2014 and
2013. All such services were pre-approved by the committee in accordance with the pre-approval policy.
Audit Fees
(cid:127) Annual audit of consolidated and subsidiary financial statements, including Sarbanes-Oxley
404 attestation
(cid:127) Reviews of quarterly financial statements
(cid:127)
Other services normally provided by the auditor in connection with statutory and regulatory
filings
2014
($ millions)
2013
($ millions)
$10.3
$8.7
Audit-Related Fees
$1.3
$0.7
(cid:127) Assurance and related services reasonably related to the performance of the audit or
reviews of the financial statements
– 2014 and 2013: primarily related to employee benefit plan and other ancillary
audits, and due diligence services on potential acquisitions
Tax Fees
All Other Fees
Total
(cid:127) 2014 and 2013: primarily related to tax consulting and tax compliance services
(cid:127) 2014: primarily related to compliance services outside the U.S.
$2.3
$1.3
$0.1
$0
$14.0
$10.7
Other Information
Meeting and Voting Logistics
Additional items of business
We do not expect any items of business other than those above because the deadline for shareholder
proposals and nominations has passed. Nonetheless, if necessary, the accompanying proxy gives
discretionary authority to the persons named on the proxy with respect to any other matters that might be
brought before the meeting. Those persons intend to vote that proxy in accordance with their best judgment.
Voting
Shareholders as of the close of business on February 27, 2015 (the record date) may vote at the annual
meeting. You have one vote for each share of common stock you held on the record date, including shares:
(cid:127) held directly in your name as the shareholder of record
(cid:127) held for you in an account with a broker, bank, or other nominee
(cid:127) attributed to your account in the 401(k) plan.
If you are a shareholder of record, you may vote your shares in person at the meeting. However, we
encourage you to vote by mail, by telephone, or on the Internet even if you plan to attend the meeting.
Required vote
Below are the vote requirements for the various proposals:
(cid:127) The four nominees for director will be elected if the votes cast for the nominee exceed the votes cast
against the nominee. Abstentions will not count as votes cast either for or against a nominee.
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(cid:127) The following items of business will be approved if the votes cast for the proposal exceed those cast
against the proposal:
(cid:127) advisory approval of executive compensation; and
(cid:127) ratification of the appointment of principal independent auditor.
Abstentions will not be counted either for or against these proposals.
Quorum
A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual
meeting. As of the record date, 1,111,005,041 shares of company common stock were issued and
outstanding.
Voting by proxy
If you are a shareholder of record, you may vote your proxy by any one of the following methods:
On the Internet. You may vote online at www.proxyvote.com. Follow the instructions on your proxy
card or notice. If you received these materials electronically, follow the instructions in the e-mail
message that notified you of their availability. Voting on the Internet has the same effect as voting by
mail. If you vote on the Internet, do not return your proxy card.
By telephone. Shareholders in the U.S., Puerto Rico, and Canada may vote by telephone by
following the instructions on your proxy card or notice. If you received these materials electronically,
follow the instructions in the e-mail message that notified you of their availability. Voting by telephone
has the same effect as voting by mail. If you vote by telephone, do not return your proxy card.
By mail. Sign and date each proxy card you receive and return it in the prepaid envelope. Sign your
name exactly as it appears on the proxy. If you are signing in a representative capacity (for example,
as an attorney-in-fact, executor, administrator, guardian, trustee, or the officer or agent of a
corporation or partnership), please indicate your name and your title or capacity. If the stock is held in
custody for a minor (for example, under the Uniform Transfers to Minors Act), the custodian should
sign, not the minor. If the stock is held in joint ownership, one owner may sign on behalf of all owners.
If you return your signed proxy but do not indicate your voting preferences, we will vote on your behalf
with the Board’s recommendations.
If you did not receive a proxy card in the materials you received from the company and you wish to
vote by mail rather than by telephone or on the Internet, you may request a paper copy of these
materials and a proxy card by calling 317-433-5112. If you received a notice or an e-mail message
notifying you of the electronic availability of these materials, please provide the control number, along
with your name and mailing address.
You have the right to revoke your proxy at any time before the meeting by (i) notifying the company’s
secretary in writing, or (ii) delivering a later-dated proxy via the Internet, by mail, or by telephone. If you are a
shareholder of record, you may also revoke your proxy by voting in person at the meeting.
Voting shares held by a broker
If your shares are held by a broker, the broker will ask you how you want your shares to be voted. You may
instruct your broker or other nominee to vote your shares by following instructions that the broker or nominee
provides to you. Most brokers offer voting by mail, by telephone, and on the Internet.
If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one
of two things can happen, depending on the type of proposal. For the ratification of the auditor, the broker
may vote your shares in its discretion. For all other proposals, the broker may not vote your shares at all.
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Voting shares held in the 401(k) plan
You may instruct the plan trustee on how to vote your shares in the 401(k) plan via the Internet, by mail, or by
telephone as described above, except that, if you vote by mail, the card that you use will be a voting
instruction form rather than a proxy card.
In addition, unless you decline, your vote will apply to a proportionate number of other shares held by
participants in the 401(k) plan for which voting directions are not received (except for a small number of
shares from a prior stock ownership plan, which can be voted only on the directions of the participants to
whose accounts the shares are credited).
All participants are named fiduciaries under the terms of the 401(k) plan and under the Employee Retirement
Income Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the
portion of undirected shares to which their vote applies. Under ERISA, fiduciaries are required to act prudently
in making voting decisions.
If you do not want to have your vote applied to the undirected shares, you must so indicate when you vote.
Otherwise, the trustee will automatically apply your voting preferences to the undirected shares proportionally
with all other participants who elected to have their votes applied in this manner.
If you do not vote, your shares will be voted by other plan participants who have elected to have their voting
preferences applied proportionally to all shares for which voting instructions are not otherwise received.
Proxy cards and notices
If you received more than one proxy card, notice, or e-mail related to proxy materials, you hold shares in more
than one account. To ensure that all your shares are voted, sign and return each card. Alternatively, if you
vote by telephone or on the Internet, you will need to vote once for each proxy card, notice, or e-mail you
receive. If you do not receive a proxy card, you may have elected to receive your proxy statement
electronically, in which case you should have received an e-mail with directions on how to access the proxy
statement and how to vote your shares. If you wish to request a paper copy of these materials and a proxy
card, please call 317-433-5112.
Vote tabulation
Votes are tabulated by an independent inspector of election, IVS Associates, Inc.
Attending the annual meeting
Attendance at the meeting will be limited to shareholders, those holding proxies from shareholders, and
invited guests from the media and financial community. All shareholders as of the record date may attend by
presenting the admission ticket that appears at the end of this proxy statement. Please fill it out and bring it
with you to the meeting. The meeting will be held at the Lilly Center Auditorium. Please use the Lilly Center
entrance to the south of the fountain at the intersection of Delaware and McCarty streets. You will need to
pass through security, including a metal detector. Present your ticket to an usher at the meeting.
Parking will be available on a first-come, first-served basis in the garage indicated on the map at the end of
this report. If you have questions about admittance or parking, you may call 317-433-5112 (prior to the annual
meeting).
The 2016 annual meeting
The company’s 2016 annual meeting is currently scheduled for May 2, 2016.
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Other Matters
Other information regarding the company’s proxy solicitation
We will pay all expenses in connection with our solicitation of proxies. We will pay brokers, nominees,
fiduciaries, or other custodians their reasonable expenses for sending proxy material to and obtaining
instructions from persons for whom they hold stock of the company. We expect to solicit proxies primarily by
mail, but directors, officers, and other employees of the company may also solicit in person or by telephone,
fax, or electronic mail. We have retained Georgeson Inc. to assist in the distribution and solicitation of proxies.
Georgeson may solicit proxies by personal interview, telephone, fax, mail, and electronic mail. We expect that
the fee for those services will not exceed $17,500 plus reimbursement of customary out-of-pocket expenses.
Section 16 (a) beneficial ownership reporting compliance
Under SEC rules, our directors and executive officers are required to file with the SEC reports of holdings and
changes in beneficial ownership of company stock. We have reviewed copies of reports provided to the
company, as well as other records and information. Based on that review, we concluded that all reports were
timely filed, except that Jackson Tai amended his Form 3 in May 2014 to reflect his ownership of an additional
120 shares of company stock that were inadvertently excluded in the original filing.
By order of the Board of Directors,
James B. Lootens
Secretary
March 23, 2015
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Appendix A - Summary of Adjustments Related to the Annual
Bonus and Performance Award
Consistent with past practice, the Compensation Committee adjusted the reported financial results on which
the 2014 annual bonus and the 2013-2014 Performance Awards were determined to eliminate the distorting
effect of certain unusual items on year-over-year growth percentages. The adjustments are intended to:
(cid:127) align award payments with the underlying performance of the core business
(cid:127) avoid volatile, artificial inflation or deflation of awards due to unusual items in either the award year or the
previous (comparator) year
(cid:127) eliminate certain counterproductive short-term incentives—for example, incentives to refrain from
acquiring new technologies, to defer disposing of underutilized assets, or to defer settling legacy legal
proceedings to protect current bonus payments.
To assure the integrity of the adjustments, the Compensation Committee establishes adjustment guidelines at
the beginning of the year. These guidelines are generally consistent with the company guidelines for reporting
non-GAAP financial measure to the investment community, which are reviewed by the Audit Committee. The
adjustments apply equally to income and expense items. The Compensation Committee reviews all
adjustments and retains downward discretion, i.e., discretion to reduce compensation below the amounts that
are yielded by the adjustment guidelines.
Adjustments for 2014 Bonus Plan
For the 2014 bonus calculations, the Compensation Committee made the following adjustments to reported
EPS consistent with our reporting of non-GAAP financial measures:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Eliminated the impact of the charge for an extra year of the U.S. Branded Prescription Drug Fee.
Eliminated the impact of the charges recognized for acquired in-process research and development
related to collaboration agreements with Adocia, AstraZeneca UK Limited, Boehringer Ingelheim, and
Immunocore Limited.
Eliminated the impact of significant asset impairments, restructuring and other special charges.
Eliminated the impact of gain related to transfer of our linagliptin and empagliflozin commercial rights
in certain countries to Boehringer Ingelheim.
Additionally, when the Compensation Committee set 2014 bonus targets, the Lohmann Animal Health
acquisition (which occurred in April 2014) was not contemplated. Accordingly, the committee adjusted the
2014 results to neutralize the expected revenue and EPS impact of the acquisition.
Reconciliations of these adjustments to our reported revenue are below.
(Dollars in millions)
Revenue as reported
Lohmann Animal Health acquisition adjustment
Adjusted Non-GAAP Revenue
Reconciliations of these adjustments to our reported EPS are below.
EPS as reported
Eliminate additional U.S. Drug Fee
Eliminate IPR&D charges for acquisition and in-licensing transactions
Eliminate asset impairments, restructuring and other special charges
Eliminate gain related to transfer of commercial rights to Boehringer Ingelheim
Non-GAAP EPS
Lohmann Animal Health acquisition adjustment
Adjusted Non-GAAP EPS
2014
$19,616
$(86)
$19,530
2014
$2.23
$0.11
$0.12
$0.38
$(0.06)
$2.78
$0.05
$2.83
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Adjustments for 2013-2014 PA
For the 2013-2014 PA payout calculations, the Compensation Committee made the following adjustments to
reported EPS consistent with our reporting of non-GAAP financial measures:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
2014: Eliminated the impact of the charge for an extra year of the U.S. Branded Prescription Drug
Fee.
2014 and 2013: Eliminated the impact of the charges recognized for acquired in-process research
and development related to acquisitions and in-licensing transactions.
2014, 2013, and 2012: Eliminated the impact of significant asset impairments, restructuring and other
special charges.
2014: Eliminated the impact of gain related to transfer of our linagliptin and empagliflozin commercial
rights in certain countries to Boehringer Ingelheim.
2013 and 2012: Eliminated the impact of income received related to the termination of the exenatide
collaboration with Amylin.
Additionally, when the Compensation Committee set 2013-2014 PA targets, the Lohmann Animal Health
acquisition was not contemplated. Accordingly, the committee adjusted the 2014 results to neutralize the
expected EPS impact of the acquisition.
Reconciliations of these adjustments to our reported EPS are below.
EPS as reported
Eliminate IPR&D charges for acquisitions and in-
licensing transactions
Eliminate asset impairments, restructuring and
other special charges
Eliminate additional U.S. Drug Fee
2014
$2.23
$0.12
$0.38
$0.11
2013
$4.32
$0.03
$0.08
_—_
Eliminate gain related to transfer of commercial
rights to Boehringer Ingelheim
$(0.06)
—
% Growth
2014 vs. 2013
(48.4)%
Eliminate income from the termination of the
exenatide collaboration with Amylin
Non-GAAP EPS
Lohmann Animal Health Acquisition Adjustment
Adjusted Non-GAAP EPS
Numbers do not add due to rounding
—
$2.78
$0.05
$2.83
$(0.29)
$4.15
—
$4.15
(33.0)%
(31.8)%
2012
$3.66
—
$0.16
—
—
$(0.43)
$3.39
—
$3.39
% Growth
2013 vs. 2012
18.0%
22.4%
22.4%
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Annual Meeting Admission Ticket
Eli Lilly and Company 2015 Annual Meeting of Shareholders
Monday, May 4, 2015
11:00 a.m. EDT
Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285
The top portion of this page will be required for admission to the meeting.
Please write your name and address in the space provided below and present this ticket when you enter the Lilly Center.
Doors open at 10:15 a.m.
Name
Address
City, State, and Zip Code
e
r
e
h
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a
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D
Parking Pass
Detach here
DIRECTIONS AND PARKING
From I-70 take Exit 79B; follow signs to McCarty Street. Turn right (east) on McCarty Street; go straight into
Lilly Corporate Center. You will be directed to parking. Be sure to take the admission ticket (the top portion of this
page) with you to the meeting and leave this parking pass on your dashboard.
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TAKE THE TOP PORTION OF THIS PAGE WITH YOU TO THE MEETING.
Detach here
D
e
t
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h
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r
e
Eli Lilly and Company
Annual Meeting of Shareholders
May 4, 2015
Complimentary Parking
Lilly Corporate Center
Please place this identifier on the dashboard of your car as you enter Lilly Corporate
Center so it can be clearly seen by security and parking personnel.
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Executive Committee
Senior Leadership
John C. Lechleiter, Ph.D.
Chairman, President, and Chief Executive Officer
Melissa Stapleton Barnes
Senior Vice President, Enterprise Risk Management, and Chief
Ethics and Compliance Officer
E. Paul Ahern, Ph.D.
Senior Vice President, Global API and Dry Products Manufacturing
and Continuous Improvement
Alex M. Azar II
President, Lilly USA
Enrique A. Conterno
Senior Vice President, and President, Lilly Diabetes
Robert B. Brown
Senior Vice President, Marketing, and Chief Marketing Officer
Maria Crowe
President, Manufacturing Operations
Stephen F. Fry
Senior Vice President, Human Resources and Diversity
Michael J. Harrington
Senior Vice President and General Counsel
Jan M. Lundberg, Ph.D.
Executive Vice President, Science and Technology, and President,
Lilly Research Laboratories
Susan Mahony, Ph.D.
Senior Vice President, and President, Lilly Oncology
Barton R. Peterson
Senior Vice President, Corporate Affairs and Communications
Derica W. Rice
Executive Vice President, Global Services, and Chief Financial Officer
David A. Ricks
Senior Vice President, and President, Lilly Bio-Medicines
Jeffrey N. Simmons
Senior Vice President, and President, Elanco Animal Health
Fionnuala Walsh, Ph.D.
Senior Vice President, Global Quality
Alfonso G. Zulueta
Senior Vice President, and President, Emerging Markets
Thomas F. Bumol, Ph.D.
Senior Vice President, Biotechnology and Autoimmunity
Research, and President, Applied Molecular Evolution
Darren J. Carroll
Senior Vice President, Corporate Business Development
Timothy J. Garnett, M.D.
Senior Vice President, Lilly Research Laboratories,
and Chief Medical Officer
Richard B. Gaynor, M.D.
Senior Vice President, Global Oncology Development
and Medical Affairs
Thomas W. Grein
Senior Vice President, Finance, and Treasurer
William F. Heath Jr., Ph.D.
Senior Vice President, Product and Clinical: Design,
Development, and Delivery
Andrew Hotchkiss
President, Europe/Australia/Canada Operations
Stephen H. Jenison
Senior Vice President, Elanco Manufacturing
Ina B. Kamenz
Senior Vice President, Information Technology, and
Chief Information Officer
Myles O’Neill
Senior Vice President, Global Parenteral Drug Product and
Delivery Devices Manufacturing
Ora Hirsch Pescovitz, M.D.
Senior Vice President, and U.S. Medical Leader,
Lilly Bio-Medicines
Daniel M. Skovronsky, M.D., Ph.D.
Senior Vice President, Clinical and Product Development,
Lilly Research Laboratories
Joshua L. Smiley
Senior Vice President, Finance, and Chief Financial Officer,
Lilly Research Laboratories
J. Anthony Ware, M.D.
Senior Vice President, Product Development, Lilly Bio-Medicines
63
Corporate Information
Annual meeting
The annual meeting of shareholders will be held at
the Lilly Center Auditorium, Lilly Corporate Center,
Indianapolis, Indiana, on Monday, May 4, 2015, at
11:00 a.m. EDT. For more information, see the proxy
statement section of this report.
10-K and 10-Q reports
Paper copies of the company’s annual report to the Securities
and Exchange Commission on Form 10-K and quarterly
reports on Form 10-Q are available upon written request to:
Eli Lilly and Company
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, Indiana 46285
To access these reports more quickly, you can find all of our
SEC filings online at: http://investor.lilly.com/sec.cfm.
Stock listings
Eli Lilly and Company common stock is listed on the New
York Stock Exchange, NYSE Euronext, and SIX Swiss
Exchange. NYSE ticker symbol: LLY. Most newspapers list
the stock as “Lilly (Eli) and Co.”
CEO and CFO certifications
The company’s chief executive officer and chief financial
officer have provided all certifications required under
Securities and Exchange Commission regulations with
respect to the financial information and disclosures in this
report. The certifications are available as exhibits to the
company’s Form 10-K and 10-Q reports.
In addition, the company’s chief executive officer has filed
with the New York Stock Exchange a certification to the
effect that, to the best of his knowledge, the company is in
compliance with all corporate governance listing standards
of the Exchange.
Transfer agent and registrar
Wells Fargo Shareowner Services
Mailing address:
Shareowner Relations Department
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Overnight address:
Shareowner Relations Department
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
Telephone: 1-800-833-8699
E-mail: stocktransfer@wellsfargo.com
Internet: www.shareowneronline.com
Dividend reinvestment and stock purchase plan
Wells Fargo Shareowner Services administers the Shareowner
Service Plus Plan, which allows registered shareholders to
purchase additional shares of Lilly common stock through
the automatic investment of dividends. The plan also allows
registered shareholders and new investors to purchase
shares with cash payments, either by check or by automatic
deductions from checking or savings accounts. The minimum
initial investment for new investors is $1,000. Subsequent
investments must be at least $50. The maximum cash
investment during any calendar year is $150,000. Please direct
inquiries concerning the Shareowner Service Plus Plan to:
Wells Fargo Shareowner Services
Shareowner Relations Department
P.O. Box 64854
St. Paul, Minnesota 55164-0854
Telephone: 1-800-833-8699
Online delivery of proxy materials
Shareholders may elect to receive annual reports and proxy
materials online. This reduces paper mailed to the share-
holder’s home and saves the company printing and mailing
costs. To enroll, go to http://investor.lilly.com/services.cfm
and follow the directions provided.
For information on Lilly’s commitment to corporate responsibility, see www.lilly.com/responsibility
For information on Lilly’s commitment to transparency and links to the Lilly Clinical Trial Registry, Lilly Grant Registry, and
Lilly political contributions, see www.lilly.com/about/business-practices/Pages/transparency.aspx
For information on Lilly and pharmaceutical industry patient-assistance programs, see Lilly TruAssist: www.lillytruassist.com or
call toll-free 1.855.LLY.TRUE (1.855.559.8783)
For the Partnership for Prescription Assistance (sponsored by America’s pharmaceutical research companies), see www.pparx.org
For more information about Lilly on social media, you can follow Eli Lilly and Company on Facebook, visit LillyPad—our
blog focusing on public policy issues—at lillypad.lilly.com, or follow @LillyPad on Twitter.
64
© 2015 Eli Lilly and Company YEAR2014AR
Our name is a promise.
Lilly’s commitment to corporate responsibility reflects a
legacy going back to our founder, Colonel Eli Lilly. In
our Corporate Responsibility Update, we report on Lilly’s
performance in four key areas:
ADVANCING MEDICAL SCIENCE
Colonel Lilly set out to establish public trust in medicine
at a time when many others were selling untested elixirs.
Throughout our company’s history, we’ve earned that trust
by bringing safe and effective medicines to people around the
world. Today, we’re increasingly using our assets and expertise
to find new, sustainable global health solutions, and working
to expand access to people who need our medicines.
IMPROVING GLOBAL HEALTH
Our signature global health programs—the Lilly NCD
Partnership and the Lilly MDR-TB Partnership—are
helping to improve health outcomes and expand access to
medicines to thousands of people today with the potential
to benefit millions tomorrow. Elanco, our animal health
business, is focused on the important link between hunger
and health and is working to break the cycle of hunger in
100 communities by 2017.
STRENGTHENING COMMUNITIES
The Lilly family was committed to improving life in
Indianapolis, where we have our global headquarters.
Ever since, Lilly people have honored this tradition by
strengthening the communities where we work and live.
Lilly’s Global Day of Service ranks among the largest
single-day volunteer events of any U.S. company. And Lilly
employees serve in vulnerable communities around the world
as part of our Connecting Hearts Abroad program.
OPERATING RESPONSIBLY
At Lilly, we hold to our longstanding values of integrity,
excellence, and respect for people. We strive to create a
culture that fosters engagement and teamwork, rewards
diligence and ethical action, and inspires creativity. This
commitment extends to our support for the United Nations
Global Compact and its principles related to human rights,
labor, the environment, and anti-corruption.
For more information, please see our 2014 Corporate
Responsibility Update, posted online in May 2015 at
www.lilly.com/responsibility.
A PROMISE FULFILLED—NASCAR driver Ryan Reed, in the No. 16 Ford Mustang for Lilly Diabetes
and the American Diabetes Association, wins his first Xfinity Series race at Daytona International Speedway
on February 21, 2015. When Ryan was diagnosed with type 1 diabetes four years ago, he was told he would
never race again. During his post-race interview on national television, Ryan—a Lilly Diabetes ambassador—
reminded others with diabetes that they can accomplish their goals. For more on Ryan’s story,
visit www.drivetostopdiabetes.org.
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285 USA
317-276-2000 • www.lilly.com