Eli Lilly and Company Annual Report 2015

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FY2015 Annual Report · Eli Lilly and Company

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MAKE IT BETTER AND BETTER

ELI LILLY AND COMPANY 2015 ANNUAL REPORT AND PROXY STATEMENT

FPO recycled paper

info here

Lilly is introducing an integrated report for 2015, combining two traditional

publications: our annual report, covering our business and ﬁ nancial results,

and our corporate responsibility report, focused on our broad-based social and

environmental goals, activities, and impacts. Our ﬁ rst integrated report, covering

our performance in 2015, will be posted online in May 2016 at www.lilly.com.

We are making this change to better capture all of the ways that Lilly’s business

performance and research progress, coupled with our corporate responsibility

activities, create value for our investors and other stakeholders over time. We

believe this approach will streamline our reporting, while providing a richer picture

of our company and how we operate.

YEARS OF SERVICEMAKE IT BETTER AND BETTER

ELI LILLY AND COMPANY 2015 ANNUAL REPORT AND PROXY STATEMENT

FPO recycled paper

info here

Lilly is introducing an integrated report for 2015, combining two traditional
publications: our annual report, covering our business and ﬁ nancial results,
and our corporate responsibility report, focused on our broad-based social and

environmental goals, activities, and impacts. Our ﬁ rst integrated report, covering

our performance in 2015, will be posted online in May 2016 at www.lilly.com.

We are making this change to better capture all of the ways that Lilly’s business
performance and research progress, coupled with our corporate responsibility
activities, create value for our investors and other stakeholders over time. We
believe this approach will streamline our reporting, while providing a richer picture
of our company and how we operate.

YEARS OF SERVICEolaratumab and abemaciclib, several important business

stubborn scourge of multidrug-resistant tuberculosis.

development deals in immuno-oncology, and the

Elanco continued its important work to address the key

approval of PortrazzaTM for the treatment of metastatic

link between nutrition and health through its partnership

squamous non-small cell lung cancer late in the year.

with Heifer International and through HATCHTM for

Our strong pipeline portends a lot of good news for

patients—the ultimate measure of our success. As of

Hunger, a community partnership to provide eggs to

undernourished people in the Midwest.

early 2016, we had nine molecules in Phase III testing

Over the past year, Lilly employees have added to our

or regulatory review, including potential medicines that

strong track record of volunteerism to strengthen

hold the promise of signiﬁ cant advances in the treatment

communities. In the ﬁ rst ﬁ ve years of our Connecting

of immunological disorders, Alzheimer’s disease, and

Hearts Abroad program, 1,000 Lilly employees have

various pain conditions.

Investors have taken note of how we’ve performed

and how we’ve kept our promises despite the challenges.

Our stock price was up 22 percent for the year, leading

to a 25 percent total shareholder return—once again

outperforming most of our peers.

worked a combined 64,000 hours during two-week

assignments in impoverished communities across Africa,

Asia, Eastern Europe, and Latin America. In addition, our

employees worldwide have volunteered 825,000 hours

since 2008 through our annual Global Day of Service. And

in 2015, we built on our legacy of support for United Way

by initiating a partnership approach that includes pairing

The bottom line is pretty simple. We have emerged from

Lilly teams with United Way agencies.

the so-called “YZ” years of patent expirations as a

better, stronger company. And a very promising future

is unfolding by the day!

Looking Ahead to More Growth in 2016

I could not be more excited about what lies ahead in

2016 as we look forward to additional launches and

some important pipeline milestones.

While recognizing the challenging environment ahead of

Lastly, we continue to demonstrate a ﬁ rm commitment

to operating responsibly in all areas of our business—

from being recognized year after year around the world

as a great place to work, to continually striving to reduce

our environmental footprint. 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.

us, we continue to believe that Lilly’s growth opportunities

Faithful to Our Mission, Conﬁ dent in Our Future

will depend largely on our own performance. This

Our company has been through some real challenges

includes realizing continued strong uptake of Cyramza,

these past few years. But we confronted them head

Trulicity, and Jardiance, and good launches of Portrazza

on, ﬁ gured out a strategy to handle what we faced, and

and the other products, such as ixekizumab, that we

executed that strategy with grit and determination.

hope will emerge from our pipeline in the months ahead.

We never wavered. And in 2015, we got sure signs that

I’m conﬁ dent that we’ve put the necessary investments

it’s working.

behind these recent and upcoming launches. At the

As we continue to honor Colonel Lilly’s instruction to

same time, we will continue to depend on strong sales of

his son, to “take what you ﬁ nd here and make it better

Alimta®, Forteo®, Cialis®, and our insulins—despite the

and better,” I believe uncertainty will once again give

necessary shift of some resources to the launch side.

way to conﬁ dence in what an enterprise such as ours—

Our Ongoing Commitment to Corporate Responsibility

In 2015, we also demonstrated our dedication to corporate

responsibility—a legacy dating back to our founder,

Colonel Eli Lilly.

Our greatest contribution to society will always be

making medicines that make life better.

Yet we ﬁ rmly believe that we have a further role to

play by collaborating with select partners to address

serious health challenges and to enhance access to

high-quality care for people around the world. In 2015,

we continued support of our two signature global health

programs—the Lilly NCD Partnership and the Lilly MDR-

TB Partnership—focused on the growing challenge of

non-communicable diseases, such as diabetes, and the

dedicated for 140 years to making lives better for people

all over the world—is able to accomplish.

I am honored to be a part of this work and grateful to

you for your support.

For the Board of Directors,

John C. Lechleiter, Ph.D.

Chairman, President, and Chief Executive Ofﬁ cer

John C. Lechleiter, Ph.D., Lilly’s chairman, president, and chief executive ofﬁ cer, and Jan Lundberg, Ph.D., president of Lilly Research

Laboratories, join with employees of the Lilly Cambridge Innovation Center in Cambridge, Massachusetts, at the center’s opening.

To Our Lilly Shareholders:

May 10, 2016, marks the 140th anniversary of the founding of
Eli Lilly and Company, a milestone that very few U.S. companies
our size have ever reached. We’ve done it by staying true to our
values—integrity, excellence, and respect for people—and to
our mission of discovering and developing new medicines that
make life better for people around the world.

In 2015, our commitment to innovation bore fruit in a
truly extraordinary year for Lilly. Even as we turned
the corner in our business results and began to grow
again after a prolonged period of patent expirations, we
achieved unprecedented progress across our research
and development efforts. Through it all, we honored our
commitments to those who have a stake in our business—
including patients, customers, physicians, the communities
where we operate, our shareholders, and our employees
who make it all possible.

2015 Business Results and Pipeline Progress

In 2015, despite unprecedented and substantial currency
headwinds brought on by the strengthening U.S. dollar, we
returned to revenue growth, led by Cyramza® and Trulicity®
following their strong launches, with signiﬁ cant contributions
from our enlarged Elanco animal health business. Revenue
increased 2 percent to $19.96 billion, as six of our products
and Elanco exceeded $1 billion in annual sales.

At the same time, as a result of lower expenses and higher
other income, earnings per share increased 13 percent to
$3.43 on a non-GAAP basis, which excludes adjustments
totaling $1.17 per share. Reported earnings per share
were $2.26. (For information on the items that were
adjusted for purposes of non-GAAP ﬁ nancial measures,
please see the 2015 Financial Highlights on the inside
front cover of the accompanying Financial Report.)

This progress occurred in the face of some serious challenges,
including a still-sluggish global economy, a signiﬁ cant
slowdown in China, and continued pricing pressures in the
United States and other established markets.

In 2015, Lilly achieved signiﬁ cant advances in our pipeline
of molecules in clinical development. Highlights include:
in diabetes, positive cardiovascular outcomes data for
Jardiance®; in immunology, four positive Phase III studies
on baricitinib and strong Phase III data on ixekizumab;
and in oncology, Breakthrough Therapy Designation for

olaratumab and abemaciclib, several important business
development deals in immuno-oncology, and the
approval of PortrazzaTM for the treatment of metastatic
squamous non-small cell lung cancer late in the year.

Our strong pipeline portends a lot of good news for
patients—the ultimate measure of our success. As of
early 2016, we had nine molecules in Phase III testing
or regulatory review, including potential medicines that
hold the promise of signiﬁ cant advances in the treatment
of immunological disorders, Alzheimer’s disease, and
various pain conditions.

Investors have taken note of how we’ve performed
and how we’ve kept our promises despite the challenges.
Our stock price was up 22 percent for the year, leading
to a 25 percent total shareholder return—once again
outperforming most of our peers.

The bottom line is pretty simple. We have emerged from
the so-called “YZ” years of patent expirations as a
better, stronger company. And a very promising future
is unfolding by the day!

Looking Ahead to More Growth in 2016

I could not be more excited about what lies ahead in
2016 as we look forward to additional launches and
some important pipeline milestones.

While recognizing the challenging environment ahead of
us, we continue to believe that Lilly’s growth opportunities
will depend largely on our own performance. This
includes realizing continued strong uptake of Cyramza,
Trulicity, and Jardiance, and good launches of Portrazza
and the other products, such as ixekizumab, that we
hope will emerge from our pipeline in the months ahead.

I’m conﬁ dent that we’ve put the necessary investments
behind these recent and upcoming launches. At the
same time, we will continue to depend on strong sales of
Alimta®, Forteo®, Cialis®, and our insulins—despite the
necessary shift of some resources to the launch side.

Our Ongoing Commitment to Corporate Responsibility

In 2015, we also demonstrated our dedication to corporate
responsibility—a legacy dating back to our founder,
Colonel Eli Lilly.

Our greatest contribution to society will always be
making medicines that make life better.

Yet we ﬁ rmly believe that we have a further role to
play by collaborating with select partners to address
serious health challenges and to enhance access to
high-quality care for people around the world. In 2015,
we continued support of our two signature global health
programs—the Lilly NCD Partnership and the Lilly MDR-
TB Partnership—focused on the growing challenge of
non-communicable diseases, such as diabetes, and the

stubborn scourge of multidrug-resistant tuberculosis.
Elanco continued its important work to address the key
link between nutrition and health through its partnership
with Heifer International and through HATCHTM for
Hunger, a community partnership to provide eggs to
undernourished people in the Midwest.

Over the past year, Lilly employees have added to our
strong track record of volunteerism to strengthen
communities. In the ﬁ rst ﬁ ve years of our Connecting
Hearts Abroad program, 1,000 Lilly employees have
worked a combined 64,000 hours during two-week
assignments in impoverished communities across Africa,
Asia, Eastern Europe, and Latin America. In addition, our
employees worldwide have volunteered 825,000 hours
since 2008 through our annual Global Day of Service. And
in 2015, we built on our legacy of support for United Way
by initiating a partnership approach that includes pairing
Lilly teams with United Way agencies.

Lastly, we continue to demonstrate a ﬁ rm commitment
to operating responsibly in all areas of our business—
from being recognized year after year around the world
as a great place to work, to continually striving to reduce
our environmental footprint. 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.

Faithful to Our Mission, Conﬁ dent in Our Future

Our company has been through some real challenges
these past few years. But we confronted them head
on, ﬁ gured out a strategy to handle what we faced, and
executed that strategy with grit and determination.
We never wavered. And in 2015, we got sure signs that
it’s working.

As we continue to honor Colonel Lilly’s instruction to
his son, to “take what you ﬁ nd here and make it better
and better,” I believe uncertainty will once again give
way to conﬁ dence in what an enterprise such as ours—
dedicated for 140 years to making lives better for people
all over the world—is able to accomplish.

I am honored to be a part of this work and grateful to
you for your support.

For the Board of Directors,

John C. Lechleiter, Ph.D.
Chairman, President, and Chief Executive Ofﬁ cer

John C. Lechleiter, Ph.D., Lilly’s chairman, president, and chief executive ofﬁ cer, and Jan Lundberg, Ph.D., president of Lilly Research

Laboratories, join with employees of the Lilly Cambridge Innovation Center in Cambridge, Massachusetts, at the center’s opening.

To Our Lilly Shareholders:

May 10, 2016, marks the 140th anniversary of the founding of

Eli Lilly and Company, a milestone that very few U.S. companies

our size have ever reached. We’ve done it by staying true to our

values—integrity, excellence, and respect for people—and to

our mission of discovering and developing new medicines that

make life better for people around the world.

In 2015, our commitment to innovation bore fruit in a

At the same time, as a result of lower expenses and higher

truly extraordinary year for Lilly. Even as we turned

other income, earnings per share increased 13 percent to

the corner in our business results and began to grow

$3.43 on a non-GAAP basis, which excludes adjustments

again after a prolonged period of patent expirations, we

totaling $1.17 per share. Reported earnings per share

achieved unprecedented progress across our research

were $2.26. (For information on the items that were

and development efforts. Through it all, we honored our

adjusted for purposes of non-GAAP ﬁ nancial measures,

commitments to those who have a stake in our business—

please see the 2015 Financial Highlights on the inside

including patients, customers, physicians, the communities

front cover of the accompanying Financial Report.)

where we operate, our shareholders, and our employees

who make it all possible.

2015 Business Results and Pipeline Progress

In 2015, despite unprecedented and substantial currency

headwinds brought on by the strengthening U.S. dollar, we

returned to revenue growth, led by Cyramza® and Trulicity®

following their strong launches, with signiﬁ cant contributions

from our enlarged Elanco animal health business. Revenue

increased 2 percent to $19.96 billion, as six of our products

and Elanco exceeded $1 billion in annual sales.

This progress occurred in the face of some serious challenges,

including a still-sluggish global economy, a signiﬁ cant

slowdown in China, and continued pricing pressures in the

United States and other established markets.

In 2015, Lilly achieved signiﬁ cant advances in our pipeline

of molecules in clinical development. Highlights include:

in diabetes, positive cardiovascular outcomes data for

Jardiance®; in immunology, four positive Phase III studies

on baricitinib and strong Phase III data on ixekizumab;

and in oncology, Breakthrough Therapy Designation for

“ Diversity fosters creativity.
Creativity drives innovation.
And innovation, ultimately,
leads to business success.”

— John C. Lechleiter, Ph.D., Chairman, President, and Chief Executive Ofﬁcer

Operating Responsibly

Improving Global Health

At Lilly, we hold steadfast to our long-standing 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.
We’re proud to be recognized as a company that works hard to support our
employees, both inside and outside of work. We also recognize that how we
do business is as important as what we do. We demonstrate our values
through responsible business practices that reﬂect our commitments to
strong governance principles. This sharpens our efforts in, and dedication to,
promoting ethics and transparency throughout the company, instilling
responsible supply chain management, tackling the problem of counterfeit
medicines, ensuring the ethical care and use of animals in research, and
fostering environmental stewardship.

At Lilly, we share the vision of a world where everyone is able to access basic
health care. Even as we develop strategies to bring medicines to more people
around the world, 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 for people in need today. We also
help providers, patients, and their families navigate the complexity of
healthcare challenges through a variety of offerings, including providing Lilly
medicines for people in the United States who otherwise couldn’t afford them.
And Elanco, our animal health business, is focused on the important link
between hunger and human health and is working to break the cycle of hunger
in 100 communities around the world by 2020.

Advancing Medical Science

Our greatest contribution to society is making life better by making medicines
that help people live longer, healthier, more active lives. Throughout our
company’s history, we’ve brought new and better medicines to people who
need them—commercializing the ﬁrst insulin, introducing important classes
of antibiotics, revolutionizing the treatment of mental illness, making
critical contributions in the treatment of cancer, and more. Today, we
remain committed to pursuing medicines for scourges such as diabetes
and Alzheimer’s disease. All along the way, we advance medical science by
learning more about disease pathways and human biology. We’re committed
to advancing the global body of scientiﬁc knowledge, working within a strong
framework of bioethics, with a commitment to patient safety and excellence.

QUALITY ACROSS THE MEDICATION LIFE CYCLE

DESIGN

DELIVER

MONITOR

Clinical Development

Safety & Efficacy Data

Safety

Product Development

Manufacturing &
Distribution

Product Complaints

Market Research

Product Information

Patient Experience

“ Take what you
ﬁnd here and
make it better
and better.”

— Colonel Eli Lilly, 1882

This is a snapshot representing key scientiﬁc breakthroughs, product launches,
and moments of caring throughout Lilly’s 140 year history. It is not intended to
be a comprehensive account of every innovation or activity.

Strengthening Communities

Our company vision calls on us to give back to the world around us. We give
of our ﬁnancial resources and our time to make a meaningful, measurable,
and sustainable difference in the communities where we operate. In the late
1800s, Colonel Lilly took an active leadership role in efforts to improve life in
Indianapolis, home to our global headquarters. Ever since, Lilly people have built
upon and continued this legacy. You can see this commitment in Lilly’s Global
Day of Service, which ranks among the largest single-day volunteer events of
any global enterprise; in our Connecting Hearts Abroad program, which places
Lilly volunteers in communities around the world; and in our ongoing work to
empower teachers, inspire students, and advocate to ensure that every student
has access to a great education.

800,000+

VIALS OF INSULIN DONATED
AS OF 2015 TO THE INTERNATIONAL
DIABETES FEDERATION’S
LIFE FOR A CHILD PROGRAM

$500M

DONATED IN PRODUCTS
IN 2015 THROUGH OUR PATIENT
ASSISTANCE PROGRAMS

100,000

EMPLOYEES HOURS
VOLUNTEERED
DURING 2015
GLOBAL DAY OF SERVICE

COUNTRIES
HOSTED VOLUNTEER SITES FOR
2015 GLOBAL DAY OF SERVICE

$13.2M

DONATED
TO UNITED WAY IN 2015

BUILDING OUR

FUTURE
LEGACY

CELEBRATING 140 YEARS OF SERVICE

1876

FOUNDING
Eli Lilly founded his company on May 10, 1876, in Indianapolis, Indiana. He
was among those first in the business to rely on pharmaceutical chemistry.
His purpose was to produce quality medicines to be given with a doctor’s
prescription—a new concept in a time of untested elixirs and potions peddled
by questionable characters. More than a century later, Lilly, the company,
remains recognized for its quality and values—integrity, excellence, and
respect for people.

1923

INSULIN
Our researchers collaborated with Frederick Banting and Charles Best of the
University of Toronto to isolate and purify insulin for the treatment of diabetes, a
fatal disease with no effective treatment options at the time. In 1923, their work
resulted in Lilly’s introduction of the world’s first commercially available insulin
product. Lilly would go on to focus on innovations in diabetes treatment that
continue to the present day.

1943PENICILLIN-G

Lilly was among the first companies to develop a method to mass-produce
penicillin, the world’s first antibiotic, marking the beginning of a sustained effort
to fight infectious diseases. Penicillin was especially critical during World War II
in helping to reduce the number of deaths and amputations caused by infected
battle wounds. Lilly’s antibiotics work would continue in the coming decades,
including the launch of a powerful antibiotic that today remains the last line of
defense against serious hospital infections.

1955POLIO VACCINE

From 1940 to the mid-1950s, polio struck 400,000 American children and millions
more worldwide. In 1954, Lilly was approached by the National Foundation
for Infantile Paralysis to produce a vaccine based on Dr. Jonas Salk’s method.
Ultimately, more than half of all the Salk vaccine used in the United States bore
the Lilly label. Today, polio is 99% eradicated around the world, with only three
countries reporting instances of the disease.

1988PROZAC®

With the introduction of Prozac in the United States, Lilly launched the first in a
new class of drugs used to treat clinical depression. Called selective serotonin
reuptake inhibitors, or SSRIs, the medicines are thought to affect the way that
serotonin acts—and neural pathways operate—inside the brain.

1886
Lilly hires first chemist,
Ernest Eberhardt.

1906
Lilly sends freight car of emergency
medical supplies to San Francisco
following earthquake.

1917
Partnering with the American Red Cross,
Lilly sets up a medical field hospital in
France, staffed by Indiana personnel, to
treat wounded soldiers of all
nationalities during World War I.

1923
ILETIN®
Lilly introduces
animal-source
insulin, the
world’s first
commercially
available insulin
product, for the
treatment of
diabetes.

1958
VANCOCIN®
Lilly introduces vancomycin hydrochloride,
an antibiotic for infections associated
with certain types of resistant bacteria.

1928
Lilly establishes first
distribution branch
outside of the United
States, in Shanghai.

1937
Lilly family creates the Lilly
Endowment, which has given
away more than $8.5 billion to
charitable organizations since
its founding.

1957
Lilly leaders become co-chair
and honorary chair of the
first United Fund Drive, an
antecedent to the modern-day
United Way of Central Indiana.

1961
VELBAN®
Lilly introduces
vinblastine sulfate,
the company’s first
oncology drug, for
treatment of several
types of cancer.

1979
CECLOR®
Lilly introduces
cefaclor, a member
of the cephalosporin
family, which
eventually becomes
the world’s top-selling
oral antibiotic.

1982
HUMULIN®
Lilly introduces human
insulin (rDNA origin),
insulin identical to that
produced by the human
body, and the world’s
first human healthcare
product created using
recombinant DNA
technology.

1996
ZYPREXA®
Lilly introduces olanzapine
for the treatment of
schizophrenia.

GEMZAR®
Lilly introduces gemcitabine
hydrochloride, a drug for the
treatment of pancreatic and
non-small cell lung cancer.

FUTURE

ONCOLOGY
We are committed to developing a
broad portfolio of therapies, including
those tailored to patients, and meaning-
ful support solutions that accelerate
the pace and progress of cancer care.

PAIN
It is estimated that nearly one in five
adults suffers from chronic pain.
Lilly is developing molecules to treat
cluster headaches, migraines, and
chronic pain caused by osteoarthritis
and cancer.

NEURODEGENERATION
Neurodegeneration is a key therapeutic
area for Lilly, given our strong legacy
and expertise in neuroscience. Our
discovery efforts are focused on the
areas of Alzheimer’s disease, dementia,
and schizophrenia.

DIABETES
Lilly is committed to meeting the
needs of people with diabetes by
offering a comprehensive and
complementary portfolio of medicines.
We help people with diabetes achieve
their treatment goals.

IMMUNOLOGY
Significant unmet medical need exists
for many prevalent immunologic
and autoimmune diseases, such
as rheumatoid arthritis, psoriasis,
and lupus. Several molecules in our
pipeline explore how to address
these diseases.

2003
Launch of the Lilly
MDR-TB Partnership,
providing critically
needed medicines for
multidrug-resistant
tuberculosis.

2011
Lilly launches Connecting
Hearts Abroad, an employee
volunteer program that sends
dozens of employees annually
to countries in Africa, Asia,
and Latin America.

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

ELI LILLY AND COMPANY

2015 FINANCIAL REPORT

NOTICE OF 2016 ANNUAL MEETING

PROXY STATEMENT

2015 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:

Novartis Animal Health 2014 results

Novartis Animal Health inventory step-up

Amortization of intangible assets

U.S. Branded Prescription Drug Fee

Acquired in-process research and development (IPR&D)

Asset impairment, restructuring, and other special charges

Net charge related to repurchase of debt

Income related to the transfer to Boehringer Ingelheim of rights to co-promote
linagliptin and empagliflozin in certain countries

Non-GAAP earnings per share—diluted2

Dividends paid per share

Capital expenditures

Employees3

Year Ended December 31

2015

2014

Change
%

$19,958.7

$19,615.6

4,796.4

24.0%

4,733.6

24.1%

$2,408.4

$2,390.5

2.26

2.23

—

0.10

0.39

—

0.33

0.25

0.09

—

3.43

2.00

1,066.2

41,275

(0.07)

—

0.32

0.11

0.12

0.38

—

(0.06)

3.03

1.96

1,162.6

39,135

(8)

1 For more information on these reconciling items, with the exception of the Novartis Animal Health 2014 results, see the Financial Results section of the Executive Overview on page F23 of
the Financial Report. For more information on the Novartis Animal Health 2014 results reconciling item, see Note 3 to the consolidated financial statements.
2 Numbers may not add due to rounding.
3 The 2015 employment total reflects additions from the acquisition of Novartis Animal Health on January 1, 2015.

Revenue Growth Across Therapeutic Areas
($ millions, percent growth)

Return on Assets and Shareholders’ Equity

Total Shareholder Return

$227.7
-21%

$3,181.0
+36%

$3,068.0
0%

$7,036.8
+1%

$3,509.8
+3%

$2,935.4
-18%

%
4
.
1
3

%
8
.
7
2

%
5
.
9
2

%
5
.
3
1

%
5
.
2
1

%
1
.
4
1

%
1
.
6
1

%
7
.
3
1

%
8
.
6

%
9
.
4
2

%
0
.
4
2

%
3
.
6
1

%
2
.
7

Endocrinology
Cardiovascular

Neuroscience
Animal Health

Oncology
Other Pharmaceutical

Revenue in Endocrinology increased 1 percent driven by
growth of Trulicity, Humalog, and Jardiance. Revenue in
Neuroscience decreased 18 percent due to the loss of
Cymbalta patent protection in the U.S. in December 2013.
Animal Health grew 36 percent, reflecting the acquisition of
Novartis Animal Health in the first quarter of 2015.

%
1
.
2

%
4
.
1

2011

2012

2013

2014

2015

2011

2012

2013

2014

2015

Return on Assets (ROA)

Return on Shareholders’ Equity (ROE)

Lilly

S&P 500

ROE increased in 2015 as a result of a decrease in
shareholders’ equity driven by the strengthening of the
US dollar against other currencies compared to prior year.
Net income remained flat, driven by strong operating
performance, offset by the impact of foreign exchange rates.

Over the past five years, Lilly’s annualized total
shareholder return has averaged 24 percent, compared
to 13 percent for the S&P benchmark, due to the
increase in the stock price and steady dividend stream.

%
8
.
9
3

%
4
.
2
3

%
4
.
5
2

%
7
.
3
1

YEAR IN REVIEW

2015 Financial Highlights

Table of Contents

YEAR IN REVIEW
2015 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Inside front cover
Pipeline of Molecules in Clinical Development. . . . . . . . . . . . . . . . . . . Inside back cover

FINANCIAL REPORT
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F1
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F15
Management’s Discussion and Analysis of Results of Operations and Financial Condition . .F22
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F45
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . .F46
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F47
Consolidated Statements of Shareholder’s Equity . . . . . . . . . . . . . . . . . . . . . . . . .F48
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F49
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . .F50
Management’s Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F95
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . .F97
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F100
Trademarks Used in this Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F102

PROXY
Notice of Annual Meeting of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1
Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P8
Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P27
Audit Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P53
Shareholder Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P56
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P57
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P61
Annual Meeting Admission Ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P65
Executive Committee and Senior Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . P67
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P68

2015 Financial Report

FINANCIAL REPORTTable of Contents

Forward-Looking Statements

Business

Risk Factors

F15

Management’s Discussion and Analysis of Results of Operations and Financial Condition

F22

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Balance Sheets

Consolidated Statements of Shareholder’s Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Management’s Reports

Reports of Independent Registered Public Accounting Firm

Selected Financial Data

Trademarks Used in this Report

F45

F46

F47

F48

F49

F50

F95

F97

F100

F102

FINANCIAL REPORTFINANCIAL REPORT

Forward-Looking Statements

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)

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 actions of governmental and private payers affecting pricing of, reimbursement for, and
access to pharmaceuticals;

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 past, current or future products as we are largely self-insured;

unauthorized disclosure or misappropriation of trade secrets or other confidential data stored in our
information systems, networks, and facilities, or those of third parties with whom we share our data;

changes in tax law;

changes in foreign currency exchange rates, interest rates, and inflation;

asset impairments and restructuring charges;

changes in accounting standards promulgated by the Financial Accounting Standards Board and the
Securities and Exchange Commission;

acquisitions and business development transactions and related integration costs;

information technology system inadequacies or operating failures;

reliance on third-party relationships and outsourcing arrangements; 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.

F11

FINANCIAL REPORTBusiness

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. Elanco food animal products help the food industry
produce an abundant supply of safe, nutritious and affordable food. Elanco companion animal products help
pets live longer, healthier, happier lives.

We manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 14
other countries. Our products are sold in approximately 125 countries.

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 and Japan in

2015)

(cid:127) Glyxambi®, a combination tablet of linagliptin and empagliflozin (Jardiance) for the treatment of type 2

diabetes (approved in the U.S. in 2015)

(cid:127) Synjardy®, a combination tablet of empagliflozin and metformin hydrochloride for the treatment of type

2 diabetes (approved in the U.S. and Europe in 2015)

(cid:127) Basaglar® (insulin glargine injection), a long-acting human insulin analog for the treatment of diabetes
(launched in Japan in 2015 and in Europe in 2015 under the trade name Abasaglar®). Basaglar was
also approved in the U.S. in 2015; under an agreement settling patent litigation with Sanofi-Aventis
U.S. LLC (Sanofi) regarding Sanofi's insulin glargine product, we will have the ability to launch
Basaglar in the U.S. on December 15, 2016. Under the terms of the agreement, Sanofi has granted
us a royalty-bearing license so we can manufacture and sell Basaglar in the Kwikpen™ device
globally.

(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

2
F2

FINANCIAL REPORT(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, fibromyalgia, and 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, in combination with chemotherapy, or in
combination with radiation therapy for the treatment of certain types of head and neck cancers

(cid:127) Cyramza®, for the treatment of various cancers, with approvals as follows:

approved in 2014 in the U.S. and the European Union (EU), and in Japan in 2015, both as a
single agent and in combination with another agent as a second-line treatment of advanced
or metastatic gastric cancer

approved in 2014 in the U.S., and in the EU in 2016, in combination with another agent as a
second-line treatment of metastatic NSCLC

approved in 2015 in the U.S., and in the EU in 2016, as a second-line treatment of metastatic
colorectal cancer

(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 EU for the
treatment of bladder cancer

(cid:127) Portrazza™, approved in 2015 in the U.S. for use in combination with other agents as a first-line

treatment of metastatic squamous NSCLC, and approved in 2016 in the EU for use in combination
with other agents as a first-line treatment for epidermal growth factor receptor expressing squamous
NSCLC

Cardiovascular products, including:

(cid:127) Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia

FINANCIAL REPORT(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

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
Imrestor™, a biopharmaceutical that restores neutrophil function in peri-parturient dairy cows

(cid:127)

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
(cid:127) Onsior®, a non-steroidal short-term pain reliever for cats administered orally or by injection

(cid:127)

Interceptor Plus®, a canine heartworm drug that fights tapeworms in addition to hookworms,
roundworms, and whipworms

(cid:127) Osurnia®, a gel formulation treatment for canine ear canal infection or inflammation

On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash
transaction for $5.28 billion. Novartis AH operates in approximately 40 countries. The combined organization
has added several hundred products to our animal health product portfolio, expanded our global commercial
presence, and augmented our animal health manufacturing and research and development. In particular, it
has provided Elanco with a greater commercial presence in the companion animal and swine markets,
expanded Elanco’s presence in equine and vaccines areas, and created an entry into the aquaculture market.
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

F44

FINANCIAL REPORTMarketing

We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various
countries to meet local customer 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 2015, 2014, and 2013, 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.

We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care
organizations, 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) We and Boehringer Ingelheim have a diabetes alliance under which we jointly develop and

commercialize Trajenta, Jentadueto, Jardiance, Glyxambi, Synjardy, and Basaglar in major markets.

(cid:127) We co-promote Cymbalta in Japan with Shionogi & Co. Ltd.

(cid:127) Through September 30, 2015, Erbitux was marketed in the U.S. and Canada by Bristol-Myers Squibb
(BMS). Effective October 1, 2015, BMS transferred to us all commercialization rights for Erbitux in
those two countries. Outside the U.S. and Canada, Erbitux is commercialized by Merck KGaA, and
we receive royalties from Merck KGaA.

(cid:127) Effient is co-promoted with us by Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) in the U.S., Brazil, Mexico,

and certain other countries. Through the end of 2015, we also co-promoted Effient with Daiichi
Sankyo in major European markets. Effective January 2016, Daiichi Sankyo is exclusively promoting
Effient in major European markets; however, the economic results for these countries will continue to
be shared in the same proportion as under the previous arrangement. 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.

For additional information, see "Financial Statements and Supplementary Data—Note 4, Collaborations and
Other Arrangements."

FINANCIAL REPORTAnimal 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 in markets
where it is consistent with allowable promotional practices.

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, and continuously improving 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.

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, Trulicity, and Portrazza, 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 subsequent version
of an an approved innovator biologic that, due to its physical/structural similarity to the original product, is
approved based on an abbreviated data package that relies in part on the full testing required of the originator
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.

6
F6

FINANCIAL REPORTBiosimilars may present both competitive challenges and opportunities. For example, with our partner
Boehringer Ingelheim we have developed Basaglar, a new insulin glargine product which has the same amino
acid sequence as the product currently marketed by a competitor. Our product has launched in the EU and
Japan, and can be launched in the U.S. on December 15, 2016.

U.S. Private Sector Payer Consolidation

In the U.S. private sector, consolidation and integration among healthcare providers is also a major factor in
the competitive marketplace for human pharmaceuticals. Health plans and pharmaceutical benefit managers
have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance.

Payers typically maintain formularies which specify coverage (the conditions under which drugs are included
on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer). Formulary
placement can lead to reduced usage of a drug for the relevant patient population due to coverage
restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations which
result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance
levels, and higher deductibles. Consequently, pharmaceutical companies compete for formulary placement
not only on the basis of product attributes such as efficacy, safety profile, or patient ease of use, but also by
providing rebates. Price is an increasingly important factor in formulary decisions, particularly in treatment
areas in which the payer has taken the position that multiple branded products are therapeutically
comparable. These downward pricing pressures could negatively affect our future consolidated results of
operations.

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 below. 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 United States Patent and Trademark
Office (USPTO).

(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

F77

FINANCIAL REPORTsome 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 of 2010, the FDA has the authority to

approve biosimilars. A competitor seeking approval of a biosimilar must file an application to show its
molecule is highly similar to an approved innovator biologic 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.

(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. Implementation of this agreement differs between developed and developing
countries, with many developing countries limiting protection for biopharmaceutical products under their
interpretation of “flexibilities” allowed under the agreement. Thus, certain types of patents, such as those on
new uses of compounds or new forms of molecules, are not available in many developing countries. Further,
many developing countries do not provide effective data package protection even though it is specified in
TRIPs.

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 will 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 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.

F88

FINANCIAL REPORTOur Intellectual Property Portfolio

We consider intellectual property protection for certain products, processes, uses, and formulations—
particularly with respect to 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 top-selling or recently launched patent-
protected marketed products is as follows:

(cid:127) Alimta is protected by a compound patent (July 2016) plus pediatric exclusivity (January 2017), and a

vitamin regimen patent (2021) plus pediatric exclusivity (2022).

(cid:127) Cialis is protected by compound and use patents (November 2017).

(cid:127) Cyramza is protected by biologics data package protection (2026).

(cid:127) Effient is protected by a compound patent (April 2017) and patents covering methods of using Effient

with aspirin (2023).

(cid:127) Forteo is protected by patents primarily covering its formulation and related processes (2018) and use

patents (2019).

(cid:127)

Jardiance, and the related combination products Glyxambi and Synjardy, are protected by ---a
compound patent (2025 not including possible patent extension).

(cid:127) Portrazza is protected by a compound patent (2025 not including possible patent extension), and by

biologics data package protection (2027).

(cid:127) Strattera is protected by a patent covering its use in treating attention deficit-hyperactivity disorder

(2016) plus pediatric exclusivity (May 2017).

(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) and by

biologics data package protection (2026).

Outside the U.S., important patent protection or data protection includes:

(cid:127) Alimta in major European countries (compound patent December 2015, vitamin regimen patent 2021)
and Japan (compound patent December 2015, patents covering use to treat cancer concomitantly
with vitamins 2021)

(cid:127) Cialis in major European countries (compound patent November 2017)

(cid:127) Cymbalta in Japan (data package protection 2018). In major European countries, our Cymbalta data
package protection expired in 2014, and we experienced the entry of generic competitors in 2015 in
these markets.

(cid:127) Forteo in Japan (data package protection 2018; patent covering its formulation and related process

2019).

(cid:127) Zyprexa in Japan (patent for schizophrenia expired December 2015; patent for bipolar mania will

expire April 2016).

U.S. patent protection or data protection for our new molecular entities that have been submitted for
regulatory review is as follows (additional information about these molecules is provided in "Management’s
Discussion and Analysis—Late-Stage Pipeline”):

(cid:127)

Ixekizumab - compound patent 2026 (not including possible patent extension); biologics data
package protection for 12 years after approval

(cid:127) Baricitinib - compound patent 2030 (not including possible patent extension)

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

F99

FINANCIAL REPORTsome 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.

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. We are currently in
litigation with numerous generic manufacturers in Hatch-Waxman litigation involving Alimta and Effient,
among other products. For more information on Hatch-Waxman litigation involving the company, see
“Financial Statements and Supplementary Data—Note 15, Contingencies.”

The passage of the America Invents Act in 2011 added a new procedure to U.S. patent law. This procedure,
inter partes review (IPR), allows any member of the public to file a petition with the USPTO seeking the
review of any issued U.S. patent. IPRs are conducted before Administrative Patent Judges in the USPTO
using a lower standard of proof than used in Federal District Court. In addition, the challenged patents are not
accorded the presumption of validity as they are in Federal District Court. We are now seeing instances
where generic drug companies and some investment funds are attempting to invalidate our patents by filing
IPR challenges in the USPTO. For more information, see “Financial Statements and Supplementary Data—
Note 15, Contingencies.”

F1010

FINANCIAL REPORTOutside 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 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 U.S. 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.

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

F11

FINANCIAL REPORTheavily 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 (U.K.), 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.

Globally, public and private payers are increasingly restricting access to human pharmaceuticals based on
assessments of comparative effectiveness and value, including through the establishment of formal health
technology assessment processes. In addition, third party organizations, including professional associations,
academic institutions, and non-profit entities associated with payers, are conducting and publishing
comparative effectiveness and cost/benefit analyses on medicines, the impact of which are uncertain at this
time.

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
2015, we employed approximately 8,730 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
$4.80 billion in 2015, $4.73 billion in 2014, and $5.53 billion in 2013.

F1212

FINANCIAL REPORTOur internal human pharmaceutical research focuses primarily on the areas of cancer, diabetes,
neurodegeneration, immunology, and pain. We have a strong biotechnology research program, with more
than 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 farm animals and pets.

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 over a decade. 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 data 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 “candidate”
molecules and move to the next phase of development. The probability of any one candidate molecule
becoming a commercial product is extremely low.

(cid:127)

Early Development Phase

The early development phase involves refining candidate 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. In general, the first human tests (often referred to as Phase I) are 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 typically administered to small populations of patients (Phase II) to
look for initial signs of efficacy in treating the targeted disease, or biomarkers of the 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, approximately 10 percent move on to the product
phase. The early development phase can take several years to complete.

F13

FINANCIAL REPORT(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 may be 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.

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 50 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 various
cancers, Alzheimer’s disease, pain, migraines, rheumatoid arthritis, psoriasis, psoriatic arthritis, and severe
hypoglycemia. We are studying many other drug candidates in the earlier stages of development in our
chosen priority areas. 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 U.K. 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 use a variety of techniques including comprehensive quality systems,
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.

F1414

FINANCIAL REPORTRisk Factors

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 internal 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 corporate quality-assurance groups that audit
and monitor all aspects of quality related to human pharmaceutical and animal health manufacturing
procedures and systems in company operations and at third-party suppliers.

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. Certain of these risks could
also adversely affect the company's reputation.

(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 can take over a decade
and often costs in excess of $1 billion. Failure can occur at any point in the process, including in later
stages 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 or coverage, 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.

F15

FINANCIAL REPORT(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 U.S. as well as key countries
outside the U.S., as illustrated in the tables below:

U.S. Revenues
(2015)
($ in millions)
1,256.8
$

Percent of
Worldwide
Revenues
(2015)
6%

Product
Cialis

Patent / Data Protection - U.S.
Compound and use patents November 2017

Alimta

1,162.4

Compound patent plus pediatric exclusivity January 2017;
vitamin regimen patent plus pediatric exclusivity 2022

612.4

502.1

417.6

Formulation and related process patents 2018; use patents
2019

Use patent plus pediatric exclusivity May 2017

Compound patent April 2017; use patents 2023

Forteo

Strattera

Effient

Product
Alimta

Revenues
Outside U.S.
(2015)
($ in millions)
1,330.7
$

Percent of
Worldwide
Revenues
(2015)
7%

Cialis

1,053.9

Cymbalta

Zyprexa

Forteo

883.0

783.6

735.9

Patent / Data Protection - Major Europe / Japan
Major European countries: compound patent December 2015,
vitamin regimen patent 2021
Japan: compound patent December 2015, use patents to treat
cancer concomitantly with vitamins 2021

Major European countries: compound patent November 2017

Major European countries: data package protection 2014
Japan: data package protection 2018

Japan: Patent for schizophrenia December 2015; for bipolar
mania April 2016

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, especially in the U.S. Historically, outside the U.S. the market penetration of generics
following loss of exclusivity has not been as rapid or pervasive as in the U.S.; however, generic market
penetration is increasing in many markets outside the U.S., including Japan, Europe, and many countries
in the emerging markets. For biological products (such as Humalog, Humulin, Erbitux, and Cyramza), 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.

F1616

FINANCIAL REPORT(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.

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 in litigation and administrative proceedings, and may not be upheld. We face
many 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, which could
have a material adverse effect on our business.

Public and private payers are taking increasingly aggressive steps to control their expenditures for human
pharmaceuticals by placing restrictions on pricing and reimbursement for, and patient access to, our
medications. These pressures could negatively affect our future revenues and income.

In the U.S., public concern over prices for specialty and brand name pharmaceuticals continues to drive
the legislative debate. These policy and political issues increase the risk that taxes, fees, rebates or other
federal and state measures may be enacted. Key health policy proposals affecting biopharmaceuticals
include a reduction in biologic data exclusivity, modifications to Medicare Parts B and D, 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, and state-level proposals to reduce the cost of pharmaceuticals
purchased by government health care programs. Savings projected under these proposals are targeted
as a means to fund both health care expenditures and non-health care initiatives, or to manage federal
and state budgets.

In the U.S. private sector, health plans and pharmaceutical benefit managers have been consolidating
into fewer, larger entities, thus enhancing their purchasing strength and importance. Payers typically
maintain formularies specifying which drugs are covered and the cost to the consumer. Non-preferred
formulary placement, including the exclusion of a drug from a formulary, typically leads to its reduced
usage in the patient population. Consequently, pharmaceutical companies compete to have their branded
products included by, among other things, providing offsetting rebates. Price is an increasingly important
factor in formulary decisions, particularly in treatment areas in which payers take the position that multiple
branded products are therapeutically comparable.

The main coverage expansion provisions of the Affordable Care Act (ACA) are now in 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 patient out-of-pocket costs for pharmaceuticals. In addition
to the coverage expansions, many employers in the commercial market, driven in part by ACA changes
such as the 2020 implementation of the excise tax on employer-sponsored health care coverage for
which there is an excess benefit (the so-called "Cadillac tax"), 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 are placing demands on the pharmaceutical industry
to offer products with proven real-world outcomes data and a favorable economic profile.

F17

FINANCIAL REPORTInternational 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 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. For more details, see “Business—Regulations
Affecting Human Pharmaceutical Pricing, Reimbursement, and Access,” and “Management’s Discussion
and Analysis—Executive Overview—Other Matters.”

(cid:127) We face intense competition from multinational pharmaceutical companies, biotechnology

companies, and lower-cost generic and biosimilar manufacturers, and such competition could
have a material adverse effect on our business.

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.

(cid:127) Changes in foreign currency rates can materially affect our revenue, cost of sales, and operating

expenses.

(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. The U.S. and a number of other countries are actively considering or enacting
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. 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 issued its final recommendations of
international tax reform proposals to influence international tax policy in major countries in which we
operate. While outcomes of these initiatives continue to develop and remain uncertain, changes to key
elements of the U.S. or international tax framework could have a material adverse effect on our
consolidated operating results and cash flows.

See "Financial Statements and Supplementary Data—Note 13, Income Taxes," for more details.

F1818

FINANCIAL REPORT(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 us, 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 cGMP regulations (and comparable foreign regulations) for pharmaceutical products can lead to
product recalls and seizures, fines and penalties, 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) The loss, theft, or inadvertent disclosure of our confidential data could impair our valuable

intellectual property, harm our competitive position, and/or expose us to regulatory penalties and
other costs.

A great deal of confidential information owned by both us and our alliances is stored in our information
systems, networks, and facilities or those of 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 factors such as mobile
computing capacity, high-speed Internet access, and 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 trade secrets or 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.

(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.

F1919

FINANCIAL REPORT(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 product
approval could result in voluntary or mandatory product recalls or withdrawals from the market. Safety
issues could also result in costly product liability claims.

(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 Actos®, Byetta®, Cymbalta, and
Prozac among other products. 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 and animal health 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, mechanical or
information technology system failures, 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 corruption, 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 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.

F2020

FINANCIAL REPORT(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 our 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 and income.

(cid:127)

Integration of the Novartis Animal Health business could lead to additional unplanned expenses
and be disruptive to operations.

We are continuing to integrate into our operations the Novartis AH business which we purchased in
January 2015. This complex global integration is a multi-year process and could still be disruptive to the
ongoing operations of the Elanco business or to certain corporate support functions. Unexpected delays
and difficulties in the integration could lead to additional expenses and disruption to ongoing operating
results.

F21

FINANCIAL REPORTManagement’s Discussion and Analysis of Results of Operations and Financial Condition

Management’s Discussion and Analysis of Results of
Operations and Financial Condition

RESULTS OF OPERATIONS
(Tables present dollars in millions, except per-share data)

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 is presented on a diluted basis.

Financial Results

The following table summarizes our key operating results:

Revenue

Gross margin

Gross margin as a percent of revenue
Operating expense (1)
Acquired in-process research and development

Asset impairment, restructuring, and other special charges

Net income

Earnings per share

Year Ended,
December 31,

2015

$19,958.7

2014
$19,615.6

14,921.5

14,683.1

74.8%

74.9%

$11,329.4

$11,354.4

535.0

367.7

2,408.4

2.26

200.2

468.7

2,390.5

2.23

Percent
Change from

2014

2 %

— %

(22)%

1 %

(1) Operating expense consists of research and development and marketing, selling, and administrative expenses.

NM - not meaningful

Revenue and gross margin increased slightly in 2015. Operating expense in 2015 remained essentially flat as
a decrease in marketing, selling, and administrative expense was largely offset by increased research and
development expense. Net income and EPS increased slightly in 2015 as a higher gross margin, lower
income taxes, and decreased asset impairment, restructuring, and other special charges were largely offset
by increased acquired in-process research and development (IPR&D) charges and lower other income.

F2222

FINANCIAL REPORTThe following highlighted items affect comparisons of our 2015 and 2014 financial results:

2015

Acquisitions (Note 3 to the consolidated financial statements)

(cid:127) We recognized expense of $153.0 million (pretax), or $0.10 per share, related to the fair value adjustments

to Novartis Animal Health (Novartis AH) acquisition date inventory that has been sold.

Acquired IPR&D (Notes 3 and 4 to the consolidated financial statements)

(cid:127) We recognized acquired IPR&D charges of $535.0 million (pretax), or $0.33 per share, related to upfront
fees paid in connection with various collaboration agreements primarily with Pfizer, Inc. (Pfizer), as well
as the consideration paid to acquire the worldwide rights to Locemia Solutions' (Locemia) intranasal
glucagon.

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

(cid:127) We recognized charges of $367.7 million (pretax), or $0.25 per share, related to severance costs,

integration costs, and intangible asset impairments.

Debt Repurchase (Notes 7 and 10 to the consolidated financial statements)

(cid:127) We recognized net charges of $152.7 million (pretax), or $0.09 per share, attributable to the debt
extinguishment loss of $166.7 million from the purchase and redemption of certain fixed-rate notes,
partially offset by net gains from non-hedging interest rate swaps and foreign currency transactions
associated with the related issuance of lower interest rate euro-denominated notes.

2014

Acquired 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 various collaboration agreements.

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 United States 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.

F23

FINANCIAL REPORTLate-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 50 potential new drugs in
human testing or under regulatory review, and a larger number of projects in preclinical research.

The following new molecular entity (NME) was approved by regulatory authorities in at least one of the major
geographies for use in the disease described. The quarter in which the NME initially was approved in any
major geography is shown in parentheses:

Necitumumab* (Portrazza™) (Q4 2015)—an anti-epidermal growth factor receptor monoclonal
antibody for the treatment of metastatic squamous non-small cell lung cancer (NSCLC).

The following NMEs have been submitted for regulatory review in at least one of the major geographies for
potential use in the diseases described. The quarter in which each NME initially was submitted for any
indication is shown in parentheses:

Ixekizumab* (Q1 2015)—a neutralizing monoclonal antibody to interleukin-17A for the treatment of
psoriasis and psoriatic arthritis.

Baricitinib (Q1 2016)—a Janus tyrosine kinase inhibitor for the treatment of moderately-to-severely
active rheumatoid arthritis (in collaboration with Incyte Corporation).

The following NMEs and diagnostic agent are currently in Phase III clinical trial testing for potential use in the
diseases described. The quarter in which each NME and diagnostic agent 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.

CGRP monoclonal antibody* (Q2 2015)—a once-monthly subcutaneously injected calcitonin gene-
related peptide (CGRP) antibody for the treatment of cluster headache and migraine prevention.

Intranasal glucagon* (Q3 2013)—a glucagon nasal powder formulation for the treatment of severe
hypoglycemia in patients with diabetes treated with insulin.

Olaratumab* (Q3 2015)—a human lgG1 monoclonal antibody for the treatment of advanced soft
tissue sarcoma.

Solanezumab* (Q2 2009)—an anti-amyloid beta monoclonal antibody for the treatment of preclinical
and 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).

Tau Imaging Agent** (Q3 2015)—a positron emission tomography (PET) tracer intended to image
tau (or neurofibrillary) tangles in the brain, which are an indicator of Alzheimer's disease.

* Biologic molecule subject to the United States (U.S.) Biologics Price Competition and Innovation Act

** Diagnostic agent

The following table reflects the status of each NME and diagnostic agent within our late-stage pipeline
including developments since January 1, 2015:

Compound
Cardiovascular

Indication

Evacetrapib

High-risk
vascular
disease

U.S.

Europe

Japan

Developments

Terminated

Announced decision to discontinue
further development in October 2015.

F2424

FINANCIAL REPORTCompound
Endocrinology

Indication

Basal insulin
peglispro

Type 1
diabetes

Type 2
diabetes

Intranasal
glucagon

Severe
hypoglycemia

Type 1
diabetes

U.S.

Europe

Japan

Developments

Terminated

Phase III

Announced decision to discontinue
further development in December 2015.

Acquired worldwide rights to intranasal
glucagon in October 2015. See Note 3
to the consolidated financial statements
for information on the acquisition.

Phase III

Initiated Phase III study in July 2015.

Jardiance®

Type 2
diabetes

Launched

Basaglar®
(new insulin
glargine
product)

Trulicity®

Type 1
diabetes

Type 2
diabetes

Approved

Launched

Approved

Launched

Launched in first quarter of 2015 in
Japan. In first quarter of 2016, the U.S.
Food and Drug Administration (FDA)
accepted data from long-term clinical
trial investigating cardiovascular (CV)
outcomes in adults with type 2 diabetes
at high risk for CV events. Also
submitted CV data to European
regulatory authorities in fourth quarter of
2015.

Glyxambi®, combination tablet of
empagliflozin and linagliptin, approved
in the U.S. and launched in first quarter
of 2015. Submitted to European
regulatory authorities in fourth quarter of
2015.

Synjardy®, combination tablet of
empagliflozin and metformin
hydrochloride, approved and launched
in Europe in second and third quarters
of 2015, respectively. Approved and
launched in the U.S. in third and fourth
quarters of 2015, respectively.

First launch in Europe and Japan in
second and third quarter of 2015,
respectively. Approved in the U.S. in
fourth quarter of 2015. See Note 4 to
the consolidated financial statements for
information on the U.S. approval.

Launched in certain European countries
in first quarter of 2015. In Japan,
approved and launched in third quarter
of 2015.

F25

FINANCIAL REPORTCompound
Immunology

Indication

U.S.

Europe

Japan

Developments

Baricitinib

Rheumatoid
arthritis

Submitted

Phase III

Psoriasis

Submitted

Ixekizumab

Neuroscience

CGRP
monoclonal
antibody

Solanezumab

Psoriatic
arthritis

Cluster
headache

Migraine
prevention

Preclinical
Alzheimer's
disease

Mild
Alzheimer's
disease

Tanezumab

Osteoarthritis
pain

Chronic low
back pain

Cancer pain

Tau imaging
agent

Alzheimer's
disease

Phase III

Submitted

Phase III

Announced in February, September,
and October 2015 top-line results of
three Phase III trials which all met
primary endpoints. Submitted to
regulatory authorities in the U.S. and
Europe in first quarter of 2016.

Submitted to regulatory authorities in
the U.S., Europe, and Japan in first,
second, and third quarter of 2015,
respectively.

Announced in April 2015 top-line results
of Phase III trial which met primary
endpoints. Submitted to regulatory
authorities in Japan in third quarter of
2015.

Initiated first Phase III study in June
2015. Granted Fast Track Designation(1)
from the FDA in June 2015.

Initiated Phase III study in January
2016.

Phase III study in asymptomatic
Alzheimer's disease is ongoing.

Enrollment in the ongoing Phase III
study completed. In July 2015,
announced clinical trial results from
previous Phase III studies indicating the
treatment effect was preserved in
patients with mild Alzheimer's disease
who received solanezumab earlier in
disease, compared to patients
beginning treatment at later point.

FDA clinical hold lifted in March 2015.
Certain Phase III studies resumed in
July 2015.

Initiated Phase III study in September
2015.

F2626

FINANCIAL REPORTCompound
Oncology

Abemaciclib

Cyramza®

Indication

U.S.

Europe

Japan

Developments

Metastatic
breast cancer

NSCLC

Gastric cancer
(first-line)

Gastric cancer
(second-line)

NSCLC
(first-line)

NSCLC
(second-line)

Liver cancer
(second-line)

Metastatic
colorectal
cancer
(second-line)

Urothelial
(bladder)
cancer
(second-line)

Phase III

Launched

Phase III studies are ongoing.
Announced that abemaciclib was
granted Breakthrough Therapy
Designation(2) by the FDA.
Phase III study is ongoing.
Initiated Phase III study in January
2015.

Launched in certain European countries
in first quarter of 2015. In Japan,
approved in first quarter of 2015 and
launched in second quarter of 2015.

Phase III

Initiated Phase III study in May 2015.

Launched

Submitted

Launched in the U.S. in first quarter of
2015. Submitted in Japan in third
quarter of 2015. Approved in Europe
and launched in certain European
countries in first quarter of 2016.

Phase III

Initiated Phase III study in July 2015.

Launched

Submitted

Approved and launched in the U.S. in
second quarter of 2015. Submitted in
Japan in second quarter of 2015.
Approved in Europe and launched in
certain European countries in first
quarter of 2016.

Phase III

Initiated Phase III study in July 2015.

Olaratumab

Soft tissue
sarcoma

Phase III

Announced that olaratumab was
granted Breakthrough Therapy
Designation(2) by the FDA. In third
quarter of 2015, announced intention to
submit U.S. and European regulatory
applications based on Phase II clinical
trial data. Initiated a rolling submission
to FDA in fourth quarter of 2015.
Submission to European regulatory
authorities expected in 2016. Initiated
Phase III study of olaratumab in soft
tissue sarcoma in September 2015.

Portrazza

Metastatic
squamous
NSCLC
(first-line)

Launched Approved

Phase Ib/
II

Approved and launched in the U.S. in
fourth quarter of 2015. Approved in
Europe in first quarter of 2016.

(1) The FDA Fast Track designation is designed to facilitate the development, and expedite the review, of drugs which treat a serious or

life-threatening condition and fill an unmet medical need.

(2) The Breakthrough Therapy Designation is designed to expedite the development and review of potential medicines that are intended
to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement
over available therapy on a clinically significant endpoint.

F27

FINANCIAL REPORTThere are many difficulties and uncertainties inherent in pharmaceutical research and development 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 over a decade 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.

We manage research and development 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 research and
development spending. Due to the risks and uncertainties involved in the research and development process,
we cannot reliably estimate the nature, timing, completion dates, and costs of the efforts necessary to
complete the development of our research and development projects, nor can we reliably estimate the future
potential revenue that will be generated from a successful research and development project. Each project
represents only a portion of the overall pipeline, and none is individually material to our consolidated research
and development expense. While we do accumulate certain research and development 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 research and development costs by
project, by preclinical versus clinical spend, or by therapeutic category.

Other Matters

Novartis Animal Health Acquisition

On January 1, 2015, we completed our acquisition of Novartis AH in an all-cash transaction for $5.28 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 has increased our animal health product portfolio, expanded our
global commercial presence, and augmented our animal health manufacturing and research and
development. In particular, it has provided Elanco with a greater commercial presence in the companion
animal and swine markets, expanded Elanco’s presence in equine and vaccines areas, and created 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, in the aggregate, 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. In 2015, we saw the
entry of generic competition in all major European markets. The loss of exclusivity for Cymbalta in the
European markets has caused a rapid and severe decline in revenue for the product, which over time will, in
the aggregate, have a material adverse effect on our consolidated results of operations and cash flows. We
also lost patent exclusivity for the schizophrenia indication in December 2015 for Zyprexa® in Japan. We will
lose our patent protection for the bipolar mania indication in April 2016 for Zyprexa in Japan. Generic versions
of Zyprexa were approved in Japan in February 2016. We cannot speculate whether the generic company will
apply for pricing and proceed to launch.

F2828

FINANCIAL REPORTAdditionally, as described in Note 15 to the consolidated financial statements, the Alimta® vitamin 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 expired in major European countries
and Japan in December 2015. We expect that the entry of generic competition for Alimta into these markets
following the loss of effective patent protection will cause a rapid and severe decline in revenue for the
product, which will, in the aggregate, have a material adverse effect on our consolidated results of operations
and cash flows. We are aware that a generic competitor has received approval to market a generic version of
Alimta in a major European country, although we are not aware of whether this competitor's product has
entered the market. Notwithstanding our patents, generic versions of Alimta were approved in Japan in
February 2016. We filed preliminary injunctions against four generic competitors. We do not anticipate generic
competitors to proceed to launch prior to the completion of the Sawai invalidation trial, as described in Note
15 to the consolidated financial statements.
The U.S. compound patent for Humalog® expired in 2013. Thus far, the loss of compound patent protection
for Humalog has not resulted in a rapid and severe decline in revenue. Global regulators have different legal
pathways to approve similar versions of Humalog and to date none have been approved in the U.S. or
Europe. We are aware that other manufacturers have efforts underway to develop a similar version of
Humalog, and it is difficult to predict the likelihood, timing, and impact of these products entering the market.

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, Japanese yen, and British
pound, 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. Over
the past two years, we have seen significant foreign currency rate fluctuations as the U.S. dollar strengthened
compared to several other foreign currencies, including the euro, British pound, and 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

In the U.S., public concern over prices for specialty and brand name pharmaceuticals continues to drive the
legislative debate. These policy and political issues increase the risk that taxes, fees, rebates or other federal
and state measures may be enacted. Key health policy proposals affecting biopharmaceuticals include a
reduction in biologic data exclusivity, modifications to Medicare Parts B and D, 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, and state-level proposals to reduce the cost of pharmaceuticals purchased by government health
care programs. Savings projected under these proposals are targeted as a means to fund both health care
expenditures and non-health care initiatives, or to manage federal and state budgets.

In the U.S. private sector, consolidation and integration among U.S. healthcare providers is also a major
factor in the competitive marketplace for human pharmaceuticals. Health plans and pharmaceutical benefit
managers have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and
importance. Payers typically maintain formularies which specify coverage (the conditions under which drugs
are included on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer).
Formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage
restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations which
result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance
levels and higher deductibles. Consequently, pharmaceutical companies compete for formula placement not
only on the basis of product attributes such as greater efficacy, fewer side effects, or greater patient ease of
use, but also by providing rebates. Price is an increasingly important factor in formulary decisions, particularly
in treatment areas in which the payer has taken the position that multiple branded products are therapeutically
comparable. These downward pricing pressures could negatively affect future consolidated results of
operations.

F29

FINANCIAL REPORTThe main coverage expansion provisions of the Affordable Care Act (ACA) are now in 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 ACA changes such
as the 2020 implementation of the excise tax on employer-sponsored health care coverage for which there is
an excess benefit (the so-called "Cadillac tax"), 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.

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 or enacting 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.
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 issued its final recommendations of international tax reform proposals to influence
international tax policy in major countries in which we operate. While outcomes of these initiatives continue to
develop and remain uncertain, changes to key elements of the U.S. or international tax framework could have
a material adverse effect on our consolidated operating results and cash flows.

Operating Results—2015

Revenue

The following table summarizes our revenue activity by jurisdiction:

Year Ended,
December 31,

Change in

2015
10,097.4 $
9,861.3
19,958.7 $

2014

Dollars

Percent

9,134.1 $

10,481.5

19,615.6 $

963.3

(620.2)

343.1

11 %

(6)%

2 %

U.S. (1)
Outside U.S.

Revenue

Numbers may not add due to rounding.

(1) U.S. revenue includes revenue in Puerto Rico.

F3030

FINANCIAL REPORTThe following are components of the change in revenue compared to the prior year:

Volume

Price

Foreign exchange rates

Percent change

Numbers may not add due to rounding.

2015 vs. 2014

Outside U.S. Consolidated
8 %

9 %

(2)%

(13)%

(6)%

1 %

(7)%

2 %

U.S.

—%

11%

In the U.S., the volume increase in 2015 was driven by the inclusion of revenue from Novartis AH and
increased volumes for several pharmaceutical products, partially offset by the residual impact of the loss of
exclusivity for Cymbalta and Evista.

Outside the U.S., the volume increase in 2015 was driven by the inclusion of revenue from Novartis AH and
increased volumes for several pharmaceutical products.

On a pro forma basis, which reflects the 2014 revenues of Novartis AH as described in Note 3 to the
consolidated financial statements, our consolidated volume in 2015 would have increased by 2 percent
compared with 2014.

The following table summarizes our revenue activity in 2015 compared with 2014:

Year Ended

December 31, 2015

December 31,
2014

Percent
Change from

Product
Humalog
Alimta
Cialis®
Forteo®
Humulin®
Cymbalta
Zyprexa
Strattera®
Effient®
Cyramza
Trulicity
Evista
Other pharmaceutical products(2)
Animal health products

Total net product revenue

Collaboration and other revenue(3)

U.S.(1)
1,772.3 $
1,162.4
1,256.8
612.4
764.4
144.6
156.7
502.1
417.6
277.7
207.7
61.7
738.4
1,541.2
9,616.0
481.4

Revenue

$ 10,097.4 $

(1) U.S. revenue includes revenue in Puerto Rico.

Outside U.S.

1,069.6 $
1,330.7
1,053.9
735.9
543.0
883.0
783.6
281.9
105.4
106.1
41.0
175.6
785.1
1,639.8
9,534.6
326.7

Total
Total
2,785.2
2,841.9 $
2,792.0
2,493.1
2,291.0
2,310.7
1,322.0
1,348.3
1,400.1
1,307.4
1,614.7
1,027.6
1,037.3
940.3
738.5
784.0
522.2
523.0
75.6
383.8
10.2
248.7
419.8
237.3
1,472.0
1,523.5
2,346.6
3,181.0
18,827.2
19,150.6
788.4
808.1
9,861.3 $ 19,958.7 $ 19,615.6

2014
2
(11)
1
2
(7)
(36)
(9)
6
—
NM
NM
(43)
3
36
2
2
2

(2) Other pharmaceutical products includes revenue of $175.6 million and $46.1 million in 2015 and 2014, respectively, for Erbitux®. The

2015 revenue is primarily associated with net product revenue from third parties subsequent to the transfer of commercialization rights
in the U.S. and Canada (collectively, North America) from Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS) to us in
the fourth quarter. See Note 4 to the consolidated financial statements.

(3) Collaboration and other revenue consists primarily of revenue associated with Trajenta® (which includes Jentadueto®) of $356.8 million
and $328.8 million in 2015 and 2014, respectively, as well as royalties for Erbitux prior to the transfer of commercialization of rights in
North America from BMS to us of $309.4 million and $327.2 million in 2015 and 2014, respectively. See Note 4 to the consolidated
financial statements.

NM - not meaningful

F31

FINANCIAL REPORT
Revenues of Humalog, our injectable human insulin analog for the treatment of diabetes, increased 9 percent
in the U.S., driven by higher realized prices and, to a lesser extent, increased volume. Revenues outside the
U.S. decreased 8 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by
higher volume.

Revenues of Alimta, a treatment for various cancers, decreased 5 percent in the U.S., driven by decreased
demand and, to a lesser extent, lower realized prices. Revenues outside the U.S. decreased 15 percent,
driven by the unfavorable impact of foreign exchange rates and, to a lesser extent, lower realized prices,
partially offset by increased volume.

Revenues of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia, increased 21
percent in the U.S., driven by higher realized prices. Revenues outside the U.S. decreased 16 percent, driven
by the unfavorable impact of foreign exchange rates.

Revenues 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 14
percent in the U.S., driven by higher realized prices, partially offset by decreased volume. Revenues outside
the U.S. decreased 6 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by
increased volume.

Revenues of Humulin, an injectable human insulin for the treatment of diabetes, increased 7 percent in the
U.S., driven by higher realized prices and, to a lesser extent, wholesaler buying patterns, partially offset by
decreased demand. Revenues outside the U.S. decreased 21 percent, driven by decreased volume, primarily
due to the loss of a government contract in Brazil, and the unfavorable impact of foreign exchange rates.

Revenues of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral
neuropathic pain, generalized anxiety disorder, chronic musculoskeletal pain, and the management of
fibromyalgia, decreased 66 percent in the U.S. due to the loss of U.S. patent exclusivity in December 2013.
Revenues outside the U.S. decreased 26 percent, driven by the unfavorable impact of foreign exchange rates
and the loss of exclusivity in Europe in 2014.

Revenues of Zyprexa, a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I
disorder, and bipolar maintenance, increased 31 percent in the U.S., driven by adjustments to the return
reserve resulting from the expiration of the period to return expired product for credit. Revenues outside the
U.S. decreased 15 percent, driven primarily by the unfavorable impact of foreign exchange rates. We lost
patent exclusivity for Zyprexa in Japan in December 2015. Zyprexa revenues in Japan were $415.9 million in
2015, compared with $466.2 million in 2014. The revenue decrease in Japan was due to the unfavorable
impact of foreign exchange rates.

Revenues of Strattera, a treatment for attention-deficit hyperactivity disorder, increased 11 percent in the U.S.,
driven by higher realized prices and, to a lesser extent, increased demand. Revenues outside the U.S.
decreased 1 percent, driven by the unfavorable impact of foreign exchange rates, largely offset by increased
volume.

Revenues 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 6 percent in the U.S., driven by higher realized prices, partially offset by
decreased demand. Revenues outside the U.S. decreased 17 percent, driven primarily by the unfavorable
impact of foreign exchange rates.

Revenues 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 70 percent in the U.S., due to the
loss of patent exclusivity in March 2014. Revenues outside the U.S. decreased 17 percent, driven primarily by
the unfavorable impact of foreign exchange rates.

Revenues of animal health products in the U.S. increased 21 percent and animal health product revenues
outside the U.S. increased 53 percent. The increases were driven by the inclusion of revenue from Novartis
AH.

F3232

FINANCIAL REPORTOn a pro forma basis, which reflects the 2014 revenues of Novartis AH as described in Note 3 to the
consolidated financial statements, revenues of animal health products in the U.S. would have decreased 1
percent, driven primarily by decreased volume in food animal products. Revenues outside the U.S. would
have decreased 13 percent, driven by the unfavorable impact of foreign exchange rates and decreased
volume in companion animal products, partially offset by higher realized prices and volume for food animal
products.

Gross Margin, Costs, and Expenses

Gross margin as a percent of total revenue was 74.8 percent in 2015, essentially flat compared with 2014 as
the unfavorable impacts of the inclusion of Novartis AH and inventory step-up and amortization costs were
offset by the favorable impact of foreign exchange rates on international inventories sold.

Research and development expenses increased 1 percent to $4.80 billion in 2015, driven primarily by higher
late-stage clinical development costs, the inclusion of Novartis AH, and an increase in charges associated
with the termination of late-stage molecules, primarily evacetrapib and basal insulin peglispro, of
approximately $135 million, partially offset by the favorable impact of foreign exchange rates.

Marketing, selling, and administrative expenses decreased 1 percent to $6.53 billion in 2015, due to the
favorable impact of foreign exchange rates and a 2014 charge associated with the U.S. Drug Fee, partially
offset by the inclusion of Novartis AH and expenses related to new product launches.

We recognized acquired IPR&D charges of $535.0 million in 2015 resulting from various collaboration
agreements, primarily with Pfizer, as well as the consideration paid to acquire the worldwide rights to
Locemia's intranasal glucagon. There were $200.2 million of acquired IPR&D charges in 2014 related to
various collaboration agreements, including charges associated with the transfer of commercial rights to us,
from Boehringer Ingelheim, of the new insulin glargine product in certain countries where it was not yet
approved. See Notes 3 and 4 to the consolidated financial statements for additional information.

We recognized asset impairment, restructuring, and other special charges of $367.7 million in 2015. The
charges relate to severance costs, integration costs for Novartis AH, and asset impairments. In 2014, we
recognized charges of $468.7 million for asset impairment, restructuring, and other special charges. The
charges included severance costs, asset impairments primarily associated with the closure of a
manufacturing site in Puerto Rico, and integration costs for the then-pending acquisition of Novartis AH. See
Note 5 to the consolidated financial statements for additional information.

Other—net, (income) expense was income of $100.6 million in 2015, compared with income of $340.5 million
in 2014. Other income in 2015 included net gains of $236.7 million on investments, partially offset by a net
charge of $152.7 million related to the repurchase of $1.65 billion of debt. Other income in 2014 included net
gains of $216.4 million on investments and $92.0 million of income associated with the transfer of commercial
rights to linagliptin and empagliflozin in certain countries from us to Boehringer Ingelheim. See Notes 4 and
17 to the consolidated financial statements for additional information.

Our effective tax rate was 13.7 percent in 2015, compared with 20.3 percent in 2014. The effective tax rate for
2014 reflects the impact of a $119.0 million nondeductible charge associated with the U.S. Drug Fee. The
decrease in the tax rate for 2015 compared with 2014 is primarily due to a favorable tax impact of the net
charges related to the repurchase of debt, acquired IPR&D, and asset impairment, restructuring, and other
special charges. See Note 13 to the consolidated financial statements for additional information.

F33

FINANCIAL REPORTOperating Results—2014

Financial Results

The following table summarizes our key operating results:

Revenue

Gross margin

Gross margin as percent of revenue
Operating expense (1)
Acquired in-process research and development

Asset impairment, restructuring, and other special charges

Net income

Earnings per share

Year Ended,
December 31,

2014
$19,615.6

2013
$23,113.1

14,683.1

18,205.0

74.9%

78.8%

$11,354.4

$12,656.9

200.2

468.7

57.1

120.6

2,390.5

4,684.8

2.23

4.32

Percent
Change from

2013

(15)%

(19)%

(10)%

(49)%

(48)%

(1) Operating expense consists of research and development and marketing, selling, and administrative expenses.

NM - not meaningful

Revenue and gross margin decreased in 2014. The decrease in operating expense in 2014 was due to
decreases in both research and development and marketing, selling, and administrative expenses. The
decreases in net income and EPS for 2015 were due to lower gross margin, higher asset impairment,
restructuring, and other special charges, and decreased other income, partially offset by lower operating
expenses, and income tax expense.

Certain items affect the comparisons of our 2014 and 2013 results. The 2014 highlighted items are
summarized in the "Results of Operations—Executive Overview" section. The 2013 highlighted items are
summarized as follows:

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 CGRP monoclonal antibody (see "Results of Operations—Executive Overview
—Late-Stage Pipeline" section).

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 U.S.

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, as well as asset impairment costs associated with the closure of a packaging and distribution
facility in Germany.

34
F34

FINANCIAL REPORTRevenue

The following table summarizes our revenue activity by jurisdiction:

U.S. (1)
Outside U.S.

Revenue

Numbers may not add due to rounding.

(1) U.S. revenue includes revenue in Puerto Rico.

Year Ended,
December 31,

2014

9,134.1 $

2013
12,889.7 $

10,481.5

10,223.4

Change in

Dollars

Percent

(3,755.6)

258.1

19,615.6 $

23,113.1 $

(3,497.5)

(29)%

3 %

(15)%

The following are components of the change in revenue compared to the prior year:

Volume

Price

Foreign exchange rates

Percent change

Numbers may not add due to rounding.

2014 vs. 2013

Outside U.S. Consolidated
(13)%

7 %

(1)%

(3)%

3 %

(1)%

(2)%

(15)%

U.S.

(28)%

(1)%

— %

(29)%

In the U.S., the volume decrease in 2014 was due to lower demand for Cymbalta and Evista following patent
expirations, and to a lesser extent, to wholesaler buying patterns.

The following table summarizes our revenue activity in 2014 compared with 2013:

Year Ended

December 31, 2014

December 31,
2013

Percent
Change from

Product
Alimta
Humalog
Cialis
Cymbalta
Humulin
Forteo
Zyprexa
Strattera
Effient
Evista
Other pharmaceutical products
Animal health products

Total net product revenue

Collaboration and other revenue(2)

Revenue

(1) U.S. revenue includes revenue in Puerto Rico.

Outside U.S.

U.S.(1)
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

Total
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

Total
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

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

2013
3
7
6
(68)
6
6
(13)
4
3
(60)
(7)
9
(16)
11
(15)

(2) Collaboration and other revenue consists primarily of royalties for Erbitux and revenue associated with Trajenta.

Revenues of Alimta increased 2 percent in the U.S., driven by increased volume. Revenues outside the U.S.
increased 5 percent, driven by increased volume, partially offset by the unfavorable impact of foreign
exchange rates and lower realized prices.

F35

FINANCIAL REPORT
Revenues of Humalog increased 7 percent in the U.S., driven by increased demand, partially offset by lower
realized prices as a result of payer contracts and greater Medicaid and Medicare utilization, as well as
wholesaler buying patterns. Revenues outside the U.S. increased 6 percent, driven by increased volume and,
to a lesser extent, higher realized prices, partially offset by the unfavorable impact of foreign exchange rates.

Revenues of Cialis increased 10 percent in the U.S., driven by higher realized prices, partially offset by
wholesaler buying patterns. Revenues outside the U.S. increased 3 percent, driven by higher realized prices
and increased volume, partially offset by the unfavorable impact of foreign exchange rates.

Revenues of Cymbalta decreased 89 percent in the U.S. due to the loss of U.S. patent exclusivity in
December 2013. Revenues outside the U.S. increased 6 percent, driven by increased volume, partially offset
by the unfavorable impact of foreign exchange rates.

Revenues of Humulin increased 5 percent in the U.S., primarily driven by increased demand, partially offset
by wholesaler buying patterns. Revenues outside the U.S. increased 8 percent, driven by increased volume,
partially offset by the unfavorable impact of foreign exchange rates.

Revenues of Forteo increased 5 percent in the U.S., driven by higher realized prices, partially offset by
decreased volume. Revenues 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.

Revenues of Zyprexa decreased 3 percent in the U.S. Revenues outside the U.S. decreased 14 percent,
driven by decreased volume, the unfavorable impact of foreign exchange rates, primarily the Japanese yen,
and lower realized prices.

Revenues of Strattera increased 1 percent in the U.S., driven by higher realized prices, partially offset by
decreased volume. Revenues 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.

Revenues of Effient increased 5 percent in the U.S., driven by higher realized prices, partially offset by
wholesaler buying patterns. Revenues outside the U.S. decreased 3 percent, driven by lower volume.

Revenues of Evista decreased 73 percent in the U.S., due to the loss of U.S. patent exclusivity in March
2014. Revenues 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 revenues in the U.S. increased 4 percent, driven by increased volume in food animal
products and higher realized prices, partially offset by decreased volume in companion animal products due
to competitive pressure. Revenues outside the U.S. increased 16 percent, driven by increased volume in food
animal products, due in part to the acquisition of Lohmann SE and, to a lesser extent, higher realized prices,
partially offset by the unfavorable impact of foreign exchange rates.

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 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 would be imposed and paid in 2015.

36
F36

FINANCIAL REPORTWe recognized acquired IPR&D charges of $200.2 million in 2014 resulting from our collaboration
agreements with Adocia, AstraZeneca UK Limited, 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 was 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 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. 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.

FINANCIAL CONDITION

As of December 31, 2015, cash and cash equivalents was $3.67 billion, a decrease of $205.2 million,
compared with $3.87 billion at December 31, 2014. Refer to the Consolidated Statements of Cash Flows for
additional details on the significant sources and uses of cash for the years ended December 31, 2015 and
December 31, 2014.

In addition to our cash and cash equivalents, we held total investments of $4.43 billion and $5.52 billion as of
December 31, 2015 and December 31, 2014, respectively. See Note 7 to the consolidated financial
statements for additional details.

As of December 31, 2015, total debt was $7.98 billion, a slight decrease of $43.0 million compared with
$8.02 billion at December 31, 2014. This decrease is due primarily to $2.68 billion of net repayments of short-
term commercial paper borrowings, the repayment of $1.78 billion of fixed-rate notes in connection with the
purchase and redemption of certain U.S. dollar-denominated notes in June 2015, and, to a lesser extent, the
decrease in fair value of our hedged debt. These decreases were largely offset by the issuance of $4.45
billion of fixed-rate notes during 2015. At December 31, 2015, we had a total of $1.30 billion of unused
committed bank credit facilities, $1.20 billion of which is available to support our commercial paper program.
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 $2.00 per share
and $1.96 per share were paid in 2015 and 2014, respectively. In the fourth quarter of 2015, effective for the
dividend to be paid in the first quarter of 2016, the quarterly dividend was increased to $0.51 per share,
resulting in an indicated annual rate for 2016 of $2.04 per share.

Capital expenditures of $1.07 billion during 2015 were $96.4 million less than in 2014. We expect 2016 capital
expenditures to be approximately $1.1 billion.

In 2015, we repurchased $749.5 million of shares under the $5.00 billion share repurchase program
previously announced in October 2013.

See "Results of Operations—Executive Overview—Other Matters" section for information regarding the actual
or anticipated effect of losses of exclusivity for Cymbalta (U.S. and Europe), Evista (U.S.), Alimta (U.S.,
Europe, and Japan), and Zyprexa (Japan).

F37

FINANCIAL REPORTAt December 31, 2015, we had an aggregate of $7.12 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 U.S. 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,
however, 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.

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, 2015 and 2014, 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, 2015 and 2014, 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, Japanese yen, and British pound, and the British pound against the euro. We face foreign
currency exchange exposures when we enter into transactions arising from subsidiary trade and loan
payables and receivables denominated in foreign currencies. 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 corporate risk-management 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 periodically 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, 2015 and 2014, 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.

38
F38

FINANCIAL REPORTIndividually, these arrangements are not material in any one annual reporting period. However, if milestones
for multiple products covered by these arrangements were reached in the same reporting period, the
aggregate charge to expense could be material to the results of operations or cash flows 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.

Our current noncancelable contractual obligations that will require future cash payments are as follows:

Payments Due by Period

Total

(Dollars in millions)
Long-term debt, including interest payments(1) $ 10,880.2 $
Capital lease obligations
Operating leases
Purchase obligations(2)
Other long-term liabilities reflected on our
balance sheet(3)
Total

15.8
934.4
13,786.7

Less Than
1 Year

1-3
Years

3-5
Years

More Than
5 Years

192.0 $ 1,792.4 $

4.9
132.5
12,982.2

8.5
244.9
678.9

939.2 $ 7,956.6
—
375.9
2.9

2.4
181.1
122.7

2,054.8

1,484.1
$ 27,671.9 $ 13,311.6 $ 3,105.9 $ 1,434.9 $ 9,819.5

189.5

381.2

—

(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, 2015, 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)

Purchase obligations consisting primarily of all open purchase orders as of December 31, 2015. Some of these purchase
orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and
noncancelable purchase obligations.

(cid:127)

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 $868.9 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, 2015. 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.

F39

FINANCIAL REPORT
Sales Returns - Background and Uncertainties

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,
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 loss of patent exclusivity in the U.S. market.

Sales Rebates and Discounts - Background and Uncertainties

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.

40
F40

FINANCIAL REPORTFinancial Statement Impact

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, 2015, a 5
percent change in our global sales return, rebate, and discount liability would have led to an approximate
$158 million effect on our income before income taxes.

The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the
U.S. was 87 percent and 88 percent as of December 31, 2015 and 2014, respectively.

The following represents a roll-forward of our most significant U.S. pharmaceutical sales return, rebate, and
discount liability balances, including Medicaid and managed care:

(Dollars in millions)
Sales return, rebate, and discount liabilities, beginning of year

Reduction of net sales due to sales returns, discounts, and rebates(1)
Cash payments of discounts and rebates

$ 2,241.4 $ 2,215.5
4,707.8
(4,681.9)
$ 2,558.6 $ 2,241.4
(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1.5 percent of consolidated net

Sales return, rebate, and discount liabilities, end of year

6,245.1
(5,927.9)

2015

2014

sales for each of the years presented.

Product Litigation Liabilities and Other Contingencies

Background and Uncertainties

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 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 to which we are entitled, including the nature of the indemnification,
the financial condition of the indemnifying party, and the possibility of and length of time for collection.

Financial Statement Impact

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.

Retirement Benefits Assumptions

Background and Uncertainties

Defined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate,
retirement age, and expected return on plan assets. 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.

F41

FINANCIAL REPORTAnnually, 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 return on plan
assets, we consider many factors, with a primary analysis of current and projected market conditions, asset
returns and asset allocations (approximately 80 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 and expected return on plan assets 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.

Financial Statement Impact

If the 2015 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 $42.9 million. As
of January 1, 2016, we changed the method used to estimate the service and interest cost components of the
net periodic pension and retiree health benefit plan costs. Prior to this change, the service and interest costs
were determined using a single weighted-average discount rate based on yield curves of high quality, fixed
income debt instruments used to measure the benefit obligation at the beginning of the period. This new
method uses the spot yield curve approach to estimate the service and interest costs by applying the specific
spot rates along the yield curve to the projected cash outflows of our obligations. The new method provides a
more precise measure of interest and service costs by improving the correlation between the projected benefit
cash flows and the specific spot yield curve rates. The change does not affect the measurement of the total
benefit obligations as the change in service and interest costs is recorded in the actuarial gains and losses
recorded in accumulated other comprehensive loss. We will account for this as a change in estimate
prospectively beginning in the first quarter of 2016. The decrease in the 2016 service and interest costs is
expected to be approximately $110 million compared to the previous method.

If the 2015 expected return on plan assets for U.S. plans were to change by a quarter percentage point,
income before income taxes would change by $22.7 million. If our assumption regarding the 2015 expected
age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be
affected by $50.4 million. The U.S. plans, including Puerto Rico, represent approximately 75 percent of both
the total projected benefit obligation and total plan assets at December 31, 2015.

Impairment of Indefinite-Lived and Long-Lived Assets

Background and Uncertainties

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,” as described in Note 8 to the consolidated financial
statements.

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 materially from these estimates.

F4242

FINANCIAL REPORTIncome Taxes

Background and Uncertainties

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.

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.

Financial Statement Impact

As of December 31, 2015, 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 $20.2 million and $29.5 million, respectively.

Acquisitions

Background and Uncertainties

To determine whether acquisitions or licensing transactions qualify as a business combination or as an asset
acquisition, we make certain judgments, which include assessing whether the acquired set of activities would
meet the definition of a business under the relevant accounting rules. This involves determining the inputs,
processes, and outputs associated with the acquired set of activities.

If the acquired set of activities meets the definition of a business, assets acquired and liabilities assumed are
required to be recorded at their respective fair values as of the acquisition date. The excess of the purchase
price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired
set of activities does not meet the definition of a business, the transaction is recorded as an acquisition of
assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense
at the acquisition date, and goodwill is not recorded. Refer to Note 3 to the consolidated financial statements
for additional information.

The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed
in a business combination, as well as estimated asset lives, can materially affect our consolidated results of
operations. The fair values of intangible assets, including acquired IPR&D, are determined using information
available near the acquisition date based on expectations and assumptions that are deemed reasonable by
management. Depending on the facts and circumstances, we may deem it necessary to engage an
independent valuation expert to assist in valuing significant assets and liabilities.

The fair values of identifiable intangible assets are primarily determined using an "income method," as
described in Note 8 to the consolidated financial statements.

F43

FINANCIAL REPORTThe fair value of any contingent consideration liability that results from a business combination is determined
using a market approach based on quoted market values, significant other observable inputs for identical or
comparable assets or liabilities, or a discounted cash flow analysis. Estimating the fair value of contingent
consideration requires the use of significant estimates and judgments, including, but not limited to, revenue and
the discount rate.

Financial Statement Impact

As of December 31, 2015, a 5 percent change in the contingent consideration liability would result in a change
in income before income taxes of $33.5 million.

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 2016

For the full year of 2016, we expect EPS to be in the range of $2.83 to $2.93. We anticipate that total revenue
will be between $20.2 billion and $20.7 billion. Excluding the unfavorable impact of foreign exchange rates,
we expect revenue growth from a number of established products including Humalog, Trajenta, Cialis, Forteo,
Strattera, Erbitux, and animal health products, as well as higher revenues from new products including
Cyramza, Trulicity, Jardiance, Portrazza, and Basaglar. We expect this revenue growth to be partially offset by
lower revenue from Alimta as a result of increased competitive pressures.

We anticipate that gross margin as a percent of revenue will be approximately 74 percent in 2016. Research
and development expenses are expected to be in the range of $4.8 billion to $5.0 billion. Other—net, (income)
expense is expected to be income of up to $75 million. Marketing, selling, and administrative expenses are
expected to be in the range of $6.0 billion to $6.2 billion.

The 2016 tax rate is expected to be approximately 21 percent.

Capital expenditures are expected to be approximately $1.1 billion.

Amortization associated with the transfer of Erbitux commercialization rights included in our 2016 financial
guidance is subject to final acquisition accounting adjustments.

Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and “Risk
Factors,” may cause our actual results to differ materially from these forward-looking statements.

44
F44

FINANCIAL REPORTConsolidated Statements of Operations

Financial Statements and Supplementary Data

Consolidated Statements of Operations

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions and shares in thousands,
except per-share data)
Revenue

Costs, expenses, and other:

Year Ended December 31

Cost of sales
Research and development
Marketing, selling, and administrative
Acquired in-process research and development (Notes 3 and
4)

Asset impairment, restructuring, and other special charges
(Note 5)

Other—net, (income) expense (Note 17)

Income before income taxes
Income taxes (Note 13)
Net income

Earnings per share:

Basic
Diluted

Shares used in calculation of earnings per share:

Basic

Diluted

2015

2014
$ 19,958.7 $ 19,615.6 $ 23,113.1

2013

5,037.2
4,796.4
6,533.0

4,932.5
4,733.6
6,620.8

4,908.1
5,531.3
7,125.6

535.0

200.2

57.1

367.7
(100.6)
17,168.7
2,790.0
381.6
2,408.4 $

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

2.27 $
2.26

2.23 $
2.23

4.33
4.32

1,061,913

1,065,720

1,069,932

1,080,874

1,074,286

1,084,766

See notes to consolidated financial statements.

F45

FINANCIAL REPORTConsolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive Income

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Net income

Other comprehensive income (loss):

Year Ended December 31

2015

2014
$ 2,408.4 $ 2,390.5 $ 4,684.8

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

Other comprehensive income (loss) (Note 16)

Comprehensive income

(859.8)

(138.1)

572.9

(42.0)

(467.0)

(961.4)

(162.2)

36.2

204.3

(1,327.6)

2,592.2

(14.5)

(123.8)

(2,465.7)

2,708.9

(121.9)

476.6

(914.5)

(588.9)
$ 1,819.5 $

(1,989.1)

1,794.4

401.4 $ 6,479.2

See notes to consolidated financial statements.

46
F46

FINANCIAL REPORTConsolidated Balance Sheets

Consolidated Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
Assets
Current Assets

December 31

2015

2014

Cash and cash equivalents (Note 7)
Short-term investments (Note 7)
Accounts receivable, net of allowances of $44.3 (2015) and $55.0 (2014)
Other receivables
Inventories (Note 6)
Prepaid expenses and other

Total current assets
Other Assets

Restricted cash (Note 3)
Investments (Note 7)
Goodwill (Note 8)
Other intangibles, net (Note 8)
Sundry

Total other assets
Property and equipment, net (Note 9)
Total assets
Liabilities and Equity
Current Liabilities

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)
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

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: 1,106,063 (2015) and 1,111,437 (2014)
Additional paid-in capital
Retained earnings
Employee benefit trust
Accumulated other comprehensive loss (Note 16)
Cost of common stock in treasury

Total Eli Lilly and Company shareholders' equity
Noncontrolling interests
Total equity
Total liabilities and equity

3,666.4 $
785.4
3,513.0
558.6
3,445.8
604.4
12,573.6

3,871.6
955.4
3,234.6
566.7
2,740.0
560.0
11,928.3

—
3,646.6
4,039.9
5,034.8
2,220.5
14,941.8
8,053.5

5,405.6
4,568.9
1,758.1
2,884.2
1,798.6
16,415.4
7,963.9
$ 35,568.9 $ 36,307.6

6.1 $

1,338.2
967.0
2,560.1
539.0
358.9
2,460.3
8,229.6

7,972.4
2,160.3
868.9
1,747.4
12,749.0

2,688.7
1,128.1
759.0
2,068.8
530.3
93.5
2,472.6
9,741.0

5,332.8
2,562.9
998.5
2,284.3
11,178.5

691.3
5,552.1
16,011.8
(3,013.2)
(4,580.7)
(90.0)
14,571.3
19.0
14,590.3

694.6
5,292.3
16,482.7
(3,013.2)
(3,991.8)
(91.4)
15,373.2
14.9
15,388.1
$ 35,568.9 $ 36,307.6

See notes to consolidated financial statements.

F47

FINANCIAL REPORTConsolidated Statements of Shareholder’s Equity

Consolidated Statements of Shareholders' Equity

ELI LILLY AND COMPANY AND
SUBSIDIARIES
(Dollars in millions, shares in
thousands)

Common Stock

Amount

Additional
Paid-in
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Common Stock in
Treasury

Amount

Employee
Benefit
Trust

Shareholders'
Equity

Balance at January 1, 2013

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

(32,406)

(20.3)

Purchase for treasury

Issuance of stock under
employee stock plans, net

Stock-based compensation

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

4,684.8

1,794.4

(2,102.8)

—

(1,600.0)

(55.1)

144.9

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)

17,631.4

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

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

Net income

Other comprehensive income
(loss), net of tax
Cash dividends declared per
share: $2.01
Retirement of treasury shares

Purchase for treasury

Issuance of stock under

employee stock plans, net

Stock-based compensation

(9,877)

(6.2)

4,503

2.9

42.0

217.8

2,408.4

(2,136.0)

(743.3)

(588.9)

(9,877)

749.5

9,877

(749.5)

(14)

1.4

2,408.4

(588.9)

(2,136.0)

—

(749.5)

46.3

217.8

Balance at December 31, 2015

1,106,063

$ 691.3

$ 5,552.1

$ 16,011.8

(4,580.7)

796

(90.0) $(3,013.2) $

14,571.3

See notes to consolidated financial statements.

48
F48

FINANCIAL REPORTConsolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Cash Flows from Operating Activities
Net income

Adjustments to Reconcile Net Income
to Cash Flows from Operating Activities:

Year Ended December 31

2015

2014

2013

$ 2,408.4 $ 2,390.5 $ 4,684.8

Depreciation and amortization
Change in deferred income taxes
Stock-based compensation expense
Acquired in-process research and development
Income related to termination of the exenatide collaboration with
Amylin Pharmaceuticals, Inc. (Note 4)
Net proceeds from (payments for) terminations of interest rate
swaps
Other non-cash operating activities, net
Other changes in operating assets and liabilities, net of
acquisitions and divestitures:

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 released (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
Proceeds from sale of product rights
Purchase of product rights
Purchases of in-process research and development
Cash paid for acquisitions, net of cash acquired (Note 3)
Other investing activities, net

Net Cash Provided by (Used for) Investing Activities
Cash Flows from Financing Activities

Dividends paid
Net change in short-term borrowings
Proceeds from issuance of long-term debt
Repayments of long-term debt
Purchases of common stock
Other financing activities, net

Net Cash Used for Financing Activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and Cash Equivalents at End of Year

1,427.7
(748.4)
217.8
535.0

1,379.0
36.8
156.0
200.2

1,445.6
265.9
144.9
57.1

—

(495.4)

(186.1)
36.4

340.7
13.8

—
25.1

(304.5)
(736.3)
(338.8)
461.6
2,772.8

(1,066.2)
92.6
5,405.6
2,161.8
(842.2)
3,068.4
(3,226.5)
410.0
—
(560.0)
(5,283.1)
(133.6)
26.8

117.4
(307.1)
411.5
(371.7)
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)

(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)

(2,127.3)
(2,680.6)
4,454.7
(1,955.7)
(749.5)
139.2
(2,919.2)
(85.6)
(205.2)
3,871.6

(2,120.7)
—
—
(10.5)
(1,698.1)
—
(3,829.3)
(21.5)
(188.6)
4,018.8
$ 3,666.4 $ 3,871.6 $ 3,830.2

(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.

F49

FINANCIAL REPORTNotes to Consolidated Financial Statements

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 incremental shares
from our stock-based compensation programs.

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

F5050

FINANCIAL REPORTcommensurate with the enhancement in the pharmaceutical or animal health 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 in-process research and development

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 in-process research and development (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.

Earnings per share

We calculate basic earnings per share (EPS) based on the weighted-average number of common shares
outstanding and incremental shares from potential participating securities. We calculate diluted EPS based on
the weighted-average number of common shares outstanding, including incremental shares from our stock-
based compensation programs.

Foreign Currency Translation

Operations in our subsidiaries outside the United States (U.S.) are recorded in the functional currency of each
subsidiary which is determined by a review of the environment where each subsidiary primarily generates and
expends cash. The results of operations for our subsidiaries outside the U.S. are translated from functional
currencies into U.S. dollars using the weighted average currency rate for the period. Assets and liabilities are
translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net
assets of these subsidiaries are recorded in other comprehensive income (loss).

Other significant accounting policies

Our other significant accounting policies are described in the remaining appropriate notes to the consolidated
financial statements.

F51

FINANCIAL REPORTNote 2: Implementation of New Financial Accounting Pronouncements

The following table provides a brief description of accounting standards that have not yet been adopted that
could have a material effect on our financial statements:

Standard
Accounting
Standards Update
2014-09, Revenue
from Contracts with
Customers

Effective Date
This standard is
effective January
1, 2018, but we
are permitted to
adopt this
standard one year
earlier if we
choose. We are
evaluating our
anticipated date of
adoption.

Description
This standard will replace existing
revenue recognition standards and
will require entities to recognize
revenues 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. An entity can apply the
new revenue standard
retrospectively to each prior
reporting period presented or with
the cumulative effect of initially
applying the standard recognized
at the date of initial application in
retained earnings.

Accounting
Standards Update
2016-01, Financial
Instruments - Overall:
Recognition and
Measurement of
Financial Assets and
Financial Liabilities

This standard will require entities
to recognize changes in the fair
value of equity investments with
readily determinable fair values in
net income (except for
investments accounted for under
the equity method of accounting or
those that result in consolidation of
the investee). An entity should
apply the new standard through a
cumulative effect adjustment to
retained earnings as of the
beginning of the fiscal year of
adoption.

This standard is
effective January
1, 2018. Early
adoption of the
majority of the
amendments in
this standard is not
permitted,
however, early
application of
certain
amendments is
permitted. We
intend to fully
adopt this
standard on
January 1, 2018.

Effect on the financial
statements or other
significant matters
There are areas within
the standard that are
currently under review
and reconsideration by
the Financial Accounting
Standards Board,
including accounting for
licensing transactions,
which could lead to
updates to the standard.
As the outcomes of this
review and
reconsideration could
lead to significant
changes to the standard,
we are still in the process
of determining our
approach to the adoption
of the standard, as well
as the anticipated impact
to our consolidated
financial statements.

We are currently unable
to estimate the impact of
adopting this standard as
the significance of the
impact will depend upon
our equity investments on
hand as of the date of
adoption.

F5252

FINANCIAL REPORTThe following table provides a brief description of an accounting standard that has been adopted:

Standard
Accounting
Standards Update
2015-17, Income
Taxes: Balance Sheet
Classification of
Deferred Taxes

Description
This standard simplifies the
presentation of deferred income
taxes and requires that deferred
tax liabilities and assets be
classified as noncurrent in a
classified statement of financial
position. An entity can apply this
new standard either prospectively
to all deferred tax liabilities and
assets or retrospectively to all
periods presented.

Effective Date
We have adopted
this standard for
the annual period
beginning on
January 1, 2015.

Effect on the financial
statements or other
significant matters
We applied this standard
retrospectively.
As a result of adopting
this standard, all deferred
tax liabilities and assets
have been classified as
noncurrent. The balance
sheet as of December 31,
2014 was retrospectively
adjusted which resulted
in reductions to prepaid
expenses and other of
$251.5 million, sundry of
$584.2 million, and
deferred income tax
liabilities of $1.47 billion.
Other noncurrent
liabilities as of December
31, 2014 were increased
by $630.8 million as a
result of the adoption of
this standard.

Note 3: Acquisitions

During 2015 and 2014, we completed the acquisitions of Novartis Animal Health (Novartis AH) and Lohmann
SE (Lohmann AH), respectively. Additionally, on October 1, 2015, Bristol-Myers Squibb Company and E.R.
Squibb (collectively, BMS) transferred to us their commercialization rights with respect to Erbitux® in the U.S.
and Canada (collectively, North America) through a modification of our existing arrangement. These
transactions were accounted for as business combinations under the acquisition method of accounting. See
Note 4 for additional information related to the Erbitux arrangement. 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.

In addition to the acquisitions of businesses, we also acquired assets in development in 2015, 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, 2015, 2014, and 2013, we
recorded acquired IPR&D charges of $535.0 million, $200.2 million, and $57.1 million, respectively. The
charges were associated with the transactions discussed below in Product and Other Acquisitions, the 2015
upfront fee of $200.0 million related to tanezumab, and the 2014 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 was
not yet approved. See Note 4 for additional information related to the tanezumab and Boehringer Ingelheim
arrangements.

F53

FINANCIAL REPORTAcquisitions of Businesses

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 and liabilities of other Novartis subsidiaries that are exclusively related to the Novartis AH business
in an all-cash transaction for a total purchase price of $5.28 billion. 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.

As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvements 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 following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the
acquisition date:

Estimated Fair Value at January 1, 2015
Inventories

Acquired in-process research and development
Marketed products(1)
Property and equipment

Assets held for sale (primarily the U.S. Sentinel rights)

Accrued retirement benefits

Deferred income taxes

Other assets and liabilities - net

Total identifiable net assets
Goodwill(2)
Total consideration transferred - net of cash acquired

380.2

298.0

1,953.0

199.9

422.7

(108.7)

(60.1)

(73.0)

3,012.0

2,271.1

5,283.1

(1) These intangible assets, which will be amortized to cost of sales on a straight-line basis over their estimated useful lives, are expected

to have a weighted average useful life of 19 years.

(2) The goodwill recognized from this acquisition is attributable primarily to expected synergies that we believe will result from combining
the operations of Novartis AH with our legacy animal health business, future unidentified projects and products, and the assembled
workforce of Novartis AH. Approximately $950 million of the goodwill associated with this acquisition is estimated to be deductible for
tax purposes.

Actual and Supplemental Pro Forma Information

Our consolidated statement of operations for the year ended December 31, 2015 includes Novartis AH
revenue of $1.02 billion. Novartis AH has been partially integrated into our animal health segment and as a
result of these integration efforts, certain parts of the animal health business are operating on a combined
basis, and we cannot distinguish the operations between Novartis AH and our legacy animal health business.

F5454

FINANCIAL REPORTThe following unaudited pro forma financial information presents the combined consolidated results of our
operations with Novartis AH as if the portion of Novartis AH that we retained after the sale to Virbac had been
acquired as of January 1, 2014. We have adjusted the historical consolidated financial information to give
effect to pro forma events that are directly attributable to the acquisition. The unaudited pro forma financial
information is not necessarily indicative of what our consolidated results of operations would have been had
we completed the acquisition at the beginning of 2014. In addition, the unaudited pro forma financial
information does not attempt to project the future results of operations of our combined company.

Revenue

Net income

Diluted earnings per share

Unaudited Pro Forma Consolidated Results

2015

2014

19,958.7 $
2,518.1

2.36

20,696.7

2,127.9

1.98

The unaudited pro forma financial information above reflects primarily the following pro forma pretax
adjustments:

(cid:127) Additional amortization expense of approximately $104 million for the year ended December 31,

2014, related to the fair value of identifiable intangible assets acquired.

(cid:127) Additional cost of sales in 2014, and a corresponding reduction in cost of sales in 2015, of

approximately $153 million related to the fair value adjustments to acquisition date inventory that has
been sold in the year ended December 31, 2015.

(cid:127) A decrease to pro forma net income of approximately $112 million in the year ended December 31,

2014, associated with an increase to interest expense related to the incremental debt that we issued
to partially finance the acquisition and a reduction of interest income associated with investments
which would have been used to partially fund the acquisition.

In addition, all of the above adjustments were adjusted for the applicable tax impact. The taxes associated
with the adjustments above reflect the statutory tax rates in the various jurisdictions where the fair value
adjustments occurred.

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 was 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 U.S. The acquisition was not material to our consolidated financial statements.

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the
acquisition date:

Estimated Fair Value at April 30, 2014
Marketed products

Other intangible assets

Property and equipment

Deferred income taxes

Other assets and liabilities - net

Total identifiable net assets
Goodwill(1)
Total consideration transferred - net of cash acquired

(1) Goodwill associated with this acquisition is not deductible for tax purposes.

275.4

23.9

81.9

(92.7)

51.1

339.6
251.6

591.2

F55

FINANCIAL REPORTProduct and Other Acquisitions

The following table summarizes our product and other acquisitions which are discussed in detail below:

Counterparty

Innovent Biologics, Inc.
(Innovent)

Compound(s) or Therapy
Monoclonal antibody targeting
protein CD-20

Immuno-oncology molecule

cMet monoclonal antibody

Acquisition
Month

Phase of
Development(1)

Acquired IPR&D
Expense

March
2015

Pre-clinical(2) $

56.0

Hanmi Pharmaceutical Co., Ltd.
(Hanmi)

BTK Inhibitor - HM71224

April 2015

Phase I

BioNTech AG (BioNTech)

Cancer immunotherapies

May 2015

Pre-clinical

Locemia Solutions

Intranasal glucagon

Undisclosed

Technology collaboration

Halozyme Therapeutics, Inc.
(Halozyme)

Recombinant human
hyaluronidase enzyme -
rHuPH20

October
2015

December
2015

Phase III

N/A

Immunocore Limited
(Immunocore)

T cell-based cancer therapies

July 2014

Pre-clinical

AstraZeneca UK Limited
(AstraZeneca)

Oral beta-secretase cleaving
enzyme inhibitor - AZD3293

September
2014

Adocia

BioChaperone Lispro

December
2014

Phase I

50.0

30.0

149.0

25.0

45.0

50.0

Arteaus Therapeutics

Calcitonin gene-related
peptide (CGRP) monoclonal
antibody

December
2013

Phase II

57.1

(1) The phase of development presented is as of the date of the arrangement.
(2) Prior to acquisition, Innovent's monoclonal antibody targeting protein CD-20 had received investigational new drug approval in China

to begin Phase I development.

In connection with the arrangements described herein, 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.

Our collaboration agreement with Innovent is to develop and commercialize a portfolio of cancer treatments.
In China, we will be responsible for the commercialization efforts, while Innovent will lead the development
and manufacturing efforts. Innovent also has co-promotion rights in China. We will be responsible for
development, manufacturing, and commercialization efforts of Innovent's pre-clinical immuno-oncology
molecules outside of China. Separate from the collaboration, we will continue the development of our cMet
monoclonal antibody gene outside of China.

Our collaboration agreement with Hanmi is to develop and commercialize Hanmi's compound being
investigated for the treatment of autoimmune and other diseases. We received rights to the molecule for all
indications on a worldwide basis excluding China, Hong Kong, Taiwan, and Korea. We will be responsible for
leading development, regulatory, manufacturing, and commercial efforts in our territories.

Our research collaboration with BioNTech is to discover novel cancer immunotherapies.

Our global collaboration and license agreement with Halozyme is to develop and commercialize products
combining our proprietary compounds with Halozyme's ENHANZE™ platform to aid in the dispersion and
absorption of other injected therapeutic drugs.

F5656

FINANCIAL REPORTOur co-discovery and co-development collaboration with Immunocore is to research and potentially develop
pre-clinical novel T cell-based cancer therapies.

Our collaboration agreement with AstraZeneca is for the worldwide co-development and co-commercialization
of AstraZeneca’s molecule being investigated for the potential treatment of Alzheimer’s disease. We are
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 commercialization of the molecule.

Our collaboration agreement with Adocia is for the worldwide development and commercialization of Adocia's
ultra-rapid insulin, a molecule being developed for the treatment of patients with type 1 and type 2 diabetes.
We will be responsible for leading development, manufacturing, and commercialization efforts.

We acquired all development and commercial rights from Arteaus Therapeutics for a CGRP antibody being
studied as a potential treatment for the treatment of cluster headache and migraine prevention.

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 revenues, while other sources of revenue
(e.g., royalties and profit sharing due from our partner) are included in collaboration and other revenue.

The following table summarizes our collaboration and other revenue recognized:

Collaboration and other revenue

2015

2014

2013

808.1 $

788.4 $

707.5

Operating expenses for costs incurred pursuant to these arrangements are reported in their respective
expense line items, 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.

Boehringer Ingelheim Diabetes Collaboration

We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of
diabetes compounds. Currently, included in the collaboration are Boehringer Ingelheim’s oral diabetes
products: Trajenta®, Jentadueto®, Jardiance®, Glyxambi®, and Synjardy®, as well as our Basaglar®.

F57

FINANCIAL REPORTThe table below summarizes significant regulatory and commercialization events and milestones (received)
paid for the compounds included in this collaboration:

Product
Family

Product Status

U.S.

Europe

Japan

Milestones
(Earned) Expensed(1)
Year

Amount

Milestones
(Deferred) Capitalized(2)
Amount

Year

Trajenta(3)

Launched
2011

Jardiance(4)

Launched
2014

Launched
2015

Basaglar

Approved(5)

Launched
2015

2015

2014

2013

2015

2014

2013

2015

2014

2013

—
—

—

—
—

97.2

—
—

(50.0)

2015

2014

2013
Cumulative(6)
2015

2014

2013
Cumulative(6)
2015

2014

2013
Cumulative(6)

—
—

—

446.4

—
299.5

—

299.5

—
(62.5)

—

(62.5)

(1) Milestones earned for Basaglar as a result of regulatory submissions were recorded as income in other-net, (income) expense.

Milestones expensed for Jardiance as a result of regulatory submissions were recorded as research and development expenses.

(2) In connection with the regulatory approvals of Basaglar in Europe and Japan, milestone payments received were recorded as deferred
revenue and are being amortized through the term of the collaboration (2029) to collaboration and other revenue. In connection with
the regulatory approvals of Trajenta and Jardiance, milestone payments made were capitalized as intangible assets and are being
amortized through the term of the collaboration to cost of sales.

(3) Jentadueto is included in the Trajenta family of product results.

(4) Glyxambi and Synjardy are included in the Jardiance family of product results.

(5) In September 2015, we entered into a settlement agreement to resolve patent infringement litigation filed by Sanofi-Aventis U.S. LLC

(Sanofi), which markets Lantus® (insulin glargine). As part of the settlement agreement, the parties agreed that Basaglar can be
launched in the U.S. beginning on December 15, 2016. Basaglar received U.S. Food and Drug Administration (FDA) approval in
December 2015. As a result of receiving FDA approval, we received $187.5 million in 2016, which was recorded as deferred revenue
and will be amortized through the term of the collaboration to collaboration and other revenue upon product launch.

(6) The cumulative amount represents the total amounts as of the end of the reporting period that have been (deferred) or capitalized

since the start of this collaboration.

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 have continued their co-
promotion work in 17 countries, representing over 90 percent of the collaboration’s anticipated market
opportunity. In the other countries, the companies exclusively commercialize the respective molecules they
brought to the collaboration. The modifications became effective at the end of 2014 and changed the financial
terms related to the modified countries; however, the financial impact resulting from the revised terms of the
agreement in these countries has not been and is not anticipated to be material. As a result of these changes,
we recorded a gain of $92.0 million in 2014 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 Basaglar in countries where it was not yet approved, which was recorded as
acquired IPR&D expense.

58
F58

FINANCIAL REPORTWith the exception of the countries affected by the amendment to the collaboration agreement, the companies
share equally the ongoing development costs, 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. We record our sales of Basaglar to third parties
as net product revenues with the payments made to Boehringer Ingelheim for their portion of the gross margin
recorded as cost of sales. For all compounds under this collaboration, 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.

The following table summarizes our revenue recognized with respect to the Trajenta family of products:

Collaboration and other revenue

2015

2014

2013

356.8 $

328.8 $

249.2

Our revenues related to the Jardiance family of products were not significant for the years ended
December 31, 2015 and 2014. Our revenues related to Basaglar were not significant for the year ended
December 31, 2015.

Erbitux

We have several collaborations with respect to Erbitux. The most significant collaborations are in Japan, and
prior to the transfer of commercialization rights in the fourth quarter of 2015, the U.S. and Canada (Bristol-
Myers Squibb Company); and worldwide except North America (Merck KGaA). Certain rights to Erbitux
outside North America will remain with Merck KGaA (Merck) upon expiration of that agreement.

The following table summarizes our revenue recognized with respect to Erbitux:

Net product revenues - BMS
Net product revenues - third party
Collaboration and other revenue
Revenue

Bristol-Myers Squibb Company

2015
23.3
152.3
309.4
$ 485.0

2014
46.1
—
327.2
$ 373.3

2013
58.5
—
315.2
$ 373.7

Pursuant to commercial agreements with BMS, we had been co-developing Erbitux in North America with
BMS exclusively. A separate agreement grants co-exclusive rights among Merck, BMS, and us in Japan and
expires in 2032. On October 1, 2015, BMS transferred their commercialization rights to us with respect to
Erbitux in North America pursuant to a modification of our existing arrangement, and we began selling Erbitux
at that time. This modification did not affect our rights with respect to Erbitux in other jurisdictions. In
connection with the modification of terms, we will provide consideration to BMS based upon a tiered
percentage of net sales of Erbitux in North America estimated to average 38 percent through September
2018. The transfer of the commercialization rights was accounted for as an acquisition of a business.

The following table summarizes the preliminary amounts recognized for assets acquired and liabilities
assumed as of the acquisition date:

Estimated Fair Value at October 1, 2015
Marketed products(1)
Deferred tax asset

Deferred tax liability

Other assets and liabilities - net

Total identifiable net assets
Total consideration - contingent consideration liability(2)

602.1

232.2

(228.2)

57.2

663.3

(663.3)

(1) These intangible assets will be amortized to cost of sales using the straight-line method through the co-development period in North

America as set forth in the original agreement, which was scheduled to expire in September 2018.

(2) See Note 7 for discussion on the estimation of the contingent consideration liability.

F59

FINANCIAL REPORTThe final determination of these amounts will be completed as soon as possible but no later than one year
from the acquisition date and may result in asset and liability fair values that differ from preliminary estimates,
but it is not expected that these differences will be material to our consolidated financial statements.

Including the Erbitux business as if we had acquired it on January 1, 2015, our combined consolidated
unaudited pro forma revenue would have been approximately $20.2 billion for the year ended December 31,
2015. This unaudited pro forma financial information adjusts the historical consolidated revenue to give effect
to pro forma events that are directly attributable to the acquisition. There would have been no material change
to our historical consolidated net income. The unaudited pro forma financial information is not necessarily
indicative of what our consolidated revenues would have been had we completed the acquisition at the
beginning of 2015. In addition, the unaudited pro forma financial information does not attempt to project the
future results of operations of our combined company.

Until the effective date of the transfer of the business, the arrangements between us and BMS were as set
forth in this paragraph. Erbitux research and development and other costs were shared by both companies
according to a predetermined ratio. Responsibilities associated with clinical and other ongoing studies were
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 were recorded as a reduction to the respective expense line items on the
consolidated statement of operations. We received a distribution fee in the form of a royalty from BMS, based
on a percentage of net sales in North America, which was recorded in collaboration and other revenue.
Royalties due to third parties were recorded as a reduction of collaboration and other revenue, net of any
royalty reimbursements due from third parties. We were responsible for the manufacture and supply of all
requirements of Erbitux in bulk-form active pharmaceutical ingredient (API) for clinical and commercial use in
North America, and BMS purchased all of its requirements of API from us, subject to certain stipulations per
the agreement. Sales of Erbitux API to BMS were reported in net product revenues.

Merck KGaA

A development and license agreement grants Merck exclusive rights to market Erbitux outside of North
America until December 2018. A separate agreement grants co-exclusive rights among Merck, BMS, and us
in Japan and expires in 2032. This agreement was amended in 2015 to grant Merck exclusive
commercialization rights in Japan but did not result in any changes to our rights.

Merck manufactures Erbitux for supply in its territory as well as for Japan. We receive a royalty on the sales of
Erbitux outside of North America, 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.

Effient®

We are in a collaborative arrangement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) to develop, market, and
promote Effient. Marketing rights for major territories are shown below. We and Daiichi Sankyo each have
exclusive marketing rights in certain other territories.

Territory
U.S.

Marketing Rights
Co-promotion

Selling Party
Lilly

Major European markets

Co-promotion

Pre-January 1, 2016, Lilly
Post-January 1, 2016, Daiichi Sankyo

Japan

Exclusive

Daiichi Sankyo

Beginning January 1, 2016, while major European markets continue to be a co-promotion territory under the
terms of our arrangement, Daiichi Sankyo exclusively promotes Effient in these markets. The economic
results for the major European markets continue to be shared in the same proportion as they were previously.

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 continue to produce the finished
product for our exclusive and co-promotion territories, as well as the major European markets.

60
F60

FINANCIAL REPORTWe record net product revenue in our exclusive and co-promotion territories where we are the selling party.
Profit-share payments due to Daiichi Sankyo for co-promotion countries where we are the selling party are
We record net product revenue in our exclusive and co-promotion territories where we are the selling party.
recorded as marketing, selling, and administrative expenses. Beginning January 1, 2016, any profit-share
Profit-share payments due to Daiichi Sankyo for co-promotion countries where we are the selling party are
payments due to us from Daiichi Sankyo for the major European markets will be recorded as collaboration
recorded as marketing, selling, and administrative expenses. Beginning January 1, 2016, any profit-share
and other revenue. We also record our share of the expenses in these co-promotion territories as marketing,
payments due to us from Daiichi Sankyo for the major European markets will be recorded as collaboration
selling, and administrative expenses. In our exclusive territories, we pay Daiichi Sankyo a royalty specific to
and other revenue. We also record our share of the expenses in these co-promotion territories as marketing,
these territories. All royalties due to Daiichi Sankyo and the third-party manufacturer are recorded in cost of
selling, and administrative expenses. In our exclusive territories, we pay Daiichi Sankyo a royalty specific to
sales.
these territories. All royalties due to Daiichi Sankyo and the third-party manufacturer are recorded in cost of
sales.
The following table summarizes our revenue recognized with respect to Effient:

The following table summarizes our revenue recognized with respect to Effient:

2015

2014

2013

Revenue

Revenue
Baricitinib

523.0 $

2015

522.2 $

2014

508.7

2013

523.0 $

522.2 $

508.7

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
We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte) which provides us
baricitinib, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases.
the development and commercialization rights to its Janus tyrosine kinase inhibitor compound, now known as
Incyte has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging
baricitinib, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases.
up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to
Incyte has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging
co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated
up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to
development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for
co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated
increased tiered royalties ranging up to percentages in the high twenties. In 2010, Incyte exercised its option
development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for
to co-develop baricitinib in rheumatoid arthritis. The agreement also provides Incyte with an option to co-
increased tiered royalties ranging up to percentages in the high twenties. In 2010, Incyte exercised its option
promote in the U.S. and calls for us to make payments to Incyte associated with certain development,
to co-develop baricitinib in rheumatoid arthritis. The agreement also provides Incyte with an option to co-
success-based regulatory, and sales-based milestones. In 2016, we incurred milestone-related expenses of
promote in the U.S. and calls for us to make payments to Incyte associated with certain development,
$55.0 million in connection with regulatory submissions in the U.S. and Europe. These regulatory submission
success-based regulatory, and sales-based milestones. In 2016, we incurred milestone-related expenses of
milestones will be recorded as research and development expenses in 2016. In the future, Incyte will be
$55.0 million in connection with regulatory submissions in the U.S. and Europe. These regulatory submission
eligible to receive up to $360.0 million of additional payments from us contingent upon certain development
milestones will be recorded as research and development expenses in 2016. In the future, Incyte will be
and success-based regulatory milestones as well as an additional $150.0 million of potential sales-based
eligible to receive up to $360.0 million of additional payments from us contingent upon certain development
milestones.
and success-based regulatory milestones as well as an additional $150.0 million of potential sales-based
milestones.
Solanezumab

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
We have an agreement with an affiliate of TPG-Axon Capital (TPG) whereby TPG funded a portion of the
ended in 2011. In exchange for its funding, TPG may receive success-based sales milestones totaling
Phase III development of solanezumab. Under the agreement, TPG’s obligation to fund solanezumab costs
approximately $70 million and mid-single digit royalties contingent upon the successful development of
ended in 2011. In exchange for its funding, TPG may receive success-based sales milestones totaling
solanezumab. The royalties would be paid for approximately 10 years after launch of a product.
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.

Tanezumab

Tanezumab
In October 2013, we entered into a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and
globally commercialize tanezumab for the treatment of osteoarthritis pain, chronic low back pain and cancer
In October 2013, we entered into a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and
pain. Under the agreement, the companies share equally the ongoing development costs and, if successful, in
globally commercialize tanezumab for the treatment of osteoarthritis pain, chronic low back pain and cancer
gross margins and certain commercialization expenses. Following the FDA's decision in March 2015 to lift the
pain. Under the agreement, the companies share equally the ongoing development costs and, if successful, in
partial clinical hold on tanezumab, certain Phase III trials resumed in July 2015. Upon the FDA's lifting of the
gross margins and certain commercialization expenses. Following the FDA's decision in March 2015 to lift the
partial clinical hold and the decision to continue the collaboration with Pfizer, we paid an upfront fee of $200.0
partial clinical hold on tanezumab, certain Phase III trials resumed in July 2015. Upon the FDA's lifting of the
million which was expensed as acquired IPR&D. In addition to this fee, we may pay up to $350.0 million in
partial clinical hold and the decision to continue the collaboration with Pfizer, we paid an upfront fee of $200.0
success-based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent
million which was expensed as acquired IPR&D. In addition to this fee, we may pay up to $350.0 million in
upon the commercial success of tanezumab. Both parties have the right to terminate the agreement under
success-based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent
certain circumstances.
upon the commercial success of tanezumab. Both parties have the right to terminate the agreement under
certain circumstances.
Exenatide

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
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 61
61

F61

FINANCIAL REPORTof 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 and agreed to
make other payments. Upon completion of the acquisition of Amylin by Bristol-Myers Squibb Company in
August 2012, Amylin's obligation of $1.26 billion was paid in full. We would 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. 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.

Under the terms of our prior arrangement, we reported as net product revenues 100 percent of sales outside
the U.S. 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.

The following table summarizes the revenue and other income recognized with respect to exenatide for the
year ended December 31, 2013:

Revenue
Income related to termination of the exenatide collaboration with Amylin(1)

(1) Presented in other-net, (income) expense.

2013

$ 133.1

495.4

Our revenue from exenatide was not significant in 2014. We have not recorded any additional revenue from
exenatide in 2015 and will not do so in future periods.

Summary of Commission and Profit-Share Payments

The following table summarizes our aggregate amount of marketing, selling, and administrative expense
associated with our commission and profit-sharing obligations for the collaborations and other arrangements
described above:

Marketing, selling, and administrative

2015

2014

2013

213.2 $

211.2 $

203.7

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.

Severance:
Human pharmaceutical products
Animal health
Total severance
Asset impairment and other special charges:
Human pharmaceutical products
Animal health
Total asset impairment and other special charges
Asset impairment, restructuring, and other special charges

2015

2014

2013

81.5 $
59.5
141.0

24.6
202.1
226.7
367.7 $

225.5 $
—
225.5

204.4
38.8
243.2
468.7 $

90.6
—
90.6

30.0
—
30.0
120.6

Severance costs recognized during the year ended December 31, 2015 resulted primarily from actions taken
to reduce our cost structure and the integration of Novartis AH. Severance costs recognized during the years
ended December 31, 2014 and 2013 related to ongoing cost containment efforts as we continued our
initiatives to reduce our cost structure and global workforce. Substantially all of the severance costs incurred
during the year ended December 31, 2015 are expected to be paid by the end of 2016, and substantially all of
the severance costs incurred during the years ended December 31, 2014 and 2013 have been paid.

F6262

FINANCIAL REPORTAsset impairment and other special charges recognized during year ended December 31, 2015 resulted
primarily from integration costs and asset impairments due to product rationalization and site closures
resulting from our acquisition and integration of Novartis AH.

Asset impairment and other special charges recognized during the year ended December 31, 2014 resulted
primarily from 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.

Asset impairment and other special charges recognized during the year ended December 31, 2013 resulted
from costs associated with the closure of a packaging and distribution facility in Germany.

In January 2016, we approved a plan to close an animal health manufacturing plant located in Ireland. As a
result of this action, we expect to record charges of approximately $100 million in our animal health business
segment during the first quarter of 2016.

Note 6: 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 U.S. Other inventories are valued by the first-in, first-out
(FIFO) method. FIFO cost approximates current replacement cost.

Inventories at December 31 consisted of the following:

Finished products
Work in process
Raw materials and supplies
Total (approximates replacement cost)
Reduction to LIFO cost
Inventories

2015
$ 1,053.4
2,058.1
403.0
3,514.5
(68.7)
$ 3,445.8

2014
838.0
1,715.4
315.0
2,868.4
(128.4)
$ 2,740.0

Inventories valued under the LIFO method comprised $1.30 billion and $1.09 billion of total inventories at
December 31, 2015 and 2014, 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.

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.

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.

F63

FINANCIAL REPORTInvestments 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.

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. At December 31, 2015, we had outstanding foreign
currency forward commitments to purchase 1.17 billion U.S. dollars and sell 1.06 billion euro; commitments to
purchase 1.85 billion euro and sell 2.04 billion U.S. dollars; commitments to purchase 187.7 million British
pounds and sell 258.4 million euro; commitments to purchase 288.3 million U.S. dollars and sell 190.6 million
British pounds, and commitments to purchase 561.7 million U.S. dollars and sell 67.78 billion Japanese yen,
which will all settle within 30 days.

Foreign currency exchange risk is also managed through the use of foreign currency debt. Our euro-
denominated notes issued in June 2015 and discussed in Note 10, which had a carrying amount of $2.27
billion as of December 31, 2015, have been designated as, and are effective as, economic hedges of net
investments in certain of our euro-denominated foreign operations. Accordingly, foreign currency translation
gains or losses due to spot rate fluctuations on the euro-denominated notes are included as a component of
other comprehensive income (loss). During the year ended December 31, 2015, we recorded a pretax foreign
currency translation gain of $5.6 million from the euro-denominated notes.

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. At December 31, 2015, substantially all of our total long-term debt is at a fixed rate. We have
converted approximately 40 percent of our long-term fixed-rate notes to floating rates through the use of
interest rate swaps.

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.

F64

FINANCIAL REPORTWe also 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 underlying debt.

The Effect of Risk Management Instruments on the Consolidated 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
Effect from interest rate contracts

Cash flow hedges:

2015

2014

2013

(11.9)
11.9

$ 156.9
(156.9)

$ (308.2)
308.2

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

—

13.7

129.0

9.0

—

9.0

(28.2)

(20.4)

15.4

(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, 2015 and 2013.

During the years ended December 31, 2015, 2014, and 2013, 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 years ended December 31, 2015 and 2014, we terminated certain interest rate swaps designated
as fair value hedges with an aggregate notional amount of $876.0 million and $1.30 billion, respectively. The
termination of certain interest rate swaps in 2015 was in connection with the note purchase and redemption
discussed at Note 10. As a result of the termination, we received cash of $20.2 million and $340.7 million in
2015 and 2014, respectively, which represented the fair value of the interest rate swaps at the time of
termination. In 2015, the related fair value adjustment was recorded as an increase to the carrying value of
the underlying notes and was included as a component of the debt extinguishment loss. In 2014, the related
fair value was recorded as an increase to the carrying value of the underlying notes and is being 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 and forward-starting interest rate swaps in designated cash flow
hedging relationships recorded in other comprehensive income (loss) was as follows:

Equity contracts

Forward-starting interest rate swaps

2015

2014

2013

— $

149.6 $

(149.6)

(56.7)

(164.7)

16.7

Upon issuance of the underlying fixed-rate notes in March 2015, which are discussed in Note 10, we
terminated forward-starting interest rate contracts in designated cash flow hedging instruments with an
aggregate notional amount of $1.35 billion and paid $206.3 million in cash to the counterparties for
settlement. The settlement amount represented the fair value of the forward-starting interest rate contracts at
the time of termination and was recorded in other comprehensive income (loss).

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.

F65

FINANCIAL REPORTDuring the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings
$14.8 million of pretax net losses on cash flow hedges of the variability in expected future interest payments
on our floating rate debt.

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

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

Carrying
Amount

Cost (1)

$ 1,644.4 $ 1,644.4 $

1,637.0 $

7.4 $

— $ 1,644.4

Description
December 31, 2015
Cash equivalents

Short-term investments:

U.S. government and agency

securities

Corporate debt securities
Asset-backed securities
Other securities
Short-term investments

Noncurrent investments:

U.S. government and agency

securities

153.2 $
625.8
3.3
3.1
785.4 $

153.4 $
626.9
3.3
3.1
786.7

284.5 $

286.0 $

Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Other securities
Marketable equity securities
Other investments(2)
Noncurrent investments

1,962.6
153.3
441.9
4.1
128.9
671.3

1,995.8
154.7
443.1
4.1
74.8
671.3
$ 3,646.6 $ 3,629.8

153.2 $
—
—
—

— $

625.8
3.3
3.1

— $
—
—
—

153.2
625.8
3.3
3.1

283.5 $
—
—
—
—
128.9

1.0 $

1,962.6
153.3
441.9
4.1
—

— $
—
—
—
—
—

284.5
1,962.6
153.3
441.9
4.1
128.9

December 31, 2014
Cash equivalents

Short-term investments:

U.S. government and agency

securities

Corporate debt securities
Other securities
Short-term investments

Noncurrent investments:

U.S. government and agency

securities

$ 2,443.5 $ 2,443.5 $

2,415.5 $

28.0 $

— $ 2,443.5

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

756.7 $

757.5 $

Corporate debt securities
Mortgage-backed securities
Asset-backed securities
Other securities
Marketable equity securities
Other investments(2)
Noncurrent investments

2,462.7
217.0
477.8
3.2
204.8
446.7

2,468.9
217.6
478.0
3.2
44.0
446.7
$ 4,568.9 $ 4,415.9

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

(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.

(2) Primarily includes investments accounted for under the cost method and equity method for which fair value disclosures are not

applicable.

F6666

FINANCIAL REPORT

Description
Short-term commercial paper borrowings
December 31, 2015
December 31, 2014

Long-term debt, including current portion
December 31, 2015
December 31, 2014

Description
December 31, 2015
Risk-management instruments

Interest rate contracts designated as

hedging instruments:
Sundry
Other noncurrent liabilities

Foreign exchange contracts not designated

as hedging instruments:
Other receivables
Other current liabilities

Contingent consideration liability(1):

Other current liabilities
Other noncurrent liabilities

December 31, 2014
Risk-management instruments

Interest rate contracts designated as

hedging instruments:
Sundry
Other current liabilities
Other noncurrent liabilities

Foreign exchange contracts not designated

as hedging instruments:
Other receivables
Other current liabilities

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

— $

(2,680.6)

— $
—

— $

(2,680.6)

— $
—

—
(2,680.6)

$ (7,978.5) $
(5,340.9)

— $ (8,172.0) $
—

(5,722.1)

— $ (8,172.0)
(5,722.1)
—

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

70.1 $
(0.4)

13.1
(17.3)

(243.7)
(427.2)

—
—

70.1 $
(0.4)

— $
—

70.1
(0.4)

13.1
(17.3)

—
—

13.1
(17.3)

—
—

(243.7)
(427.2)

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)

(1) The contingent consideration liability relates to the Erbitux arrangement with BMS discussed in Note 4.

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.

We determine our Level 1 and Level 2 fair value measurements 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.

F67

FINANCIAL REPORT

The fair value of the Erbitux contingent consideration liability was estimated using a discounted cash flow
analysis and Level 3 inputs, including projections representative of a market participant view for net sales in
North America over the three-year period ending in September 2018 and an estimated discount rate. The
amount to be paid is calculated as a tiered percentage of net sales (see Note 4) and will, therefore, vary
directly with increases and decreases in net sales of Erbitux in North America. There is no cap on the amount
that may be paid pursuant to this arrangement.

The table below summarizes the contractual maturities of our investments in debt securities measured at fair
value as of December 31, 2015:

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

$ 3,631.8 $

785.4 $ 2,516.8 $

164.0 $

165.6

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
Unrealized gross losses
Fair value of securities in an unrealized gain position
Fair value of securities in an unrealized loss position

2015
68.0
52.5
764.5
2,933.4

2014

$ 171.9
18.3
1,778.8
3,129.2

We periodically assess our investment securities for other-than-temporary impairment losses. Other-than-
temporary impairment losses recognized during the year ended December 31, 2015 totaled $42.6 million and
related primarily to our equity method and other investments. Other-than-temporary impairment losses
recognized during the years ended December 31, 2014, and 2013 totaled $12.5 million and $11.3 million,
respectively.

For fixed-income securities, the amount of credit losses are determined by comparing the difference between
the present value of future cash flows expected to be collected on these securities and the amortized cost.
Factors considered in assessing the credit losses include the position in the capital structure, vintage and
amount of collateral, delinquency rates, current credit support, and geographic concentration.

For equity securities, factors considered in assessing other-than-temporary impairment losses include the
length of time and the extent to which the fair value has been less than cost, the financial condition and near
term prospects of the issuer, our intent and ability to retain the securities for a period of time sufficient to allow
for recovery in fair value, and general market conditions and industry specific factors.

As of December 31, 2015, the securities in an unrealized loss position include primarily 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 85 percent of the securities in a loss position are investment-
grade debt securities. As of December 31, 2015, we do not intend to sell, and it is not more likely than not that
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 there is no indication of default on interest rate or principal payments for
any of our debt securities.

Activity related to our investment portfolio, substantially all of which related to available-for-sale securities,
was as follows:

Proceeds from sales
Realized gross gains on sales
Realized gross losses on sales

2015
$ 4,733.3
255.1
10.3

2014
$ 14,609.5
353.5
29.4

2013
$ 13,753.5
49.5
15.4

Realized gains and losses on sales of investments 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.

F68

FINANCIAL REPORT

Note 8: Goodwill and Other Intangibles

Goodwill

Goodwill by segment at December 31 was as follows:

Human pharmaceutical products
Animal health
Total goodwill

2015
1,366.5 $
2,673.4
4,039.9 $

2014
1,359.4
398.7
1,758.1

Goodwill results from excess consideration in a business combination over the fair value of identifiable net
assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually and when
impairment indicators are present. When required, a comparison of implied fair value to the carrying amount
of goodwill is performed to determine the amount of any impairment. The increase in goodwill for the animal
health segment in 2015 is a result of the acquisition of Novartis AH (Note 3).

No impairments occurred with respect to the carrying value of goodwill for the years ended December 31,
2015, 2014, and 2013.

Other Intangibles

The components of intangible assets other than goodwill at December 31 were as follows:

2015

2014

Carrying
Amount—
Gross

Accumulated
Amortization

Carrying
Amount—
Net

Carrying
Amount—
Gross

Accumulated
Amortization

Carrying
Amount—
Net

7,528.0 $ (2,706.4) $

151.1

(115.5)

4,821.6 $
35.6

5,684.3 $ (2,915.6) $

149.3

(45.2)

2,768.7
104.1

7,679.1

(2,821.9)

4,857.2

5,833.6

(2,960.8)

2,872.8

Description
Finite-lived intangible
assets:

Marketed products
Other

Total finite-lived

intangible assets
Indefinite-lived intangible

assets:
Acquired in-process

research and
development

Other intangibles

7,856.7 $ (2,821.9) $

177.6

—

177.6
5,034.8 $

11.4

—

11.4

5,845.0 $ (2,960.8) $

2,884.2

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. For transactions other than a business combination, we capitalize milestone payments incurred at
or after the product has obtained regulatory approval for marketing.

Other finite-lived 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.

Acquired IPR&D consists of the related costs capitalized, adjusted for subsequent impairments, if any. The
costs of acquired 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 acquired IPR&D projects acquired in business combinations are capitalized as other intangible
assets.

F69

FINANCIAL REPORT
Several methods may be used to determine the estimated fair value of other intangibles acquired in a
business combination. We utilize the “income method,” which is a Level 3 fair value measurement and 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 asset independently. The acquired IPR&D
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.

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. The increases in marketed products and
acquired IPR&D assets in 2015 are primarily due to the acquisition of Novartis AH and the transfer of the
Erbitux commercialization rights discussed in Notes 3 and 4, respectively.

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
acquired IPR&D assets for impairment testing purposes, we utilize the "income method" discussed above.
Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is present. No
material impairments occurred with respect to the carrying value of other intangible assets for the years
ended December 31, 2015, 2014 and 2013.

Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging
from 3 to 20 years. As of December 31, 2015, the remaining weighted-average amortization period for finite-
lived intangible assets is approximately 12 years.

Amortization expense related to finite-lived intangible assets was as follows:

Amortization expense

2015

2014

2013

631.8 $

535.9 $

555.0

The estimated amortization expense associated with our current finite-lived intangible assets for each of the
next five years is as follows:

Estimated amortization expense

2016

2018
$ 674.7 $ 641.8 $ 480.4 $ 302.7 $ 301.4

2020

2017

2019

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.

F7070

FINANCIAL REPORTNote 9: 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.

At December 31, property and equipment consisted of the following:

Land
Buildings
Equipment
Construction in progress

Less accumulated depreciation
Property and equipment, net

2015
220.6
6,786.5
7,988.5
1,665.3
16,660.9
(8,607.4)
$ 8,053.5

2014
205.2
6,516.2
7,609.7
1,698.2
16,029.3
(8,065.4)
$ 7,963.9

Depreciation expense related to property and equipment and rental expense for all leases, including
contingent rentals (not material), was as follows:

Depreciation expense

Rental expense

2015

2014

2013

717.6 $
225.7

759.1 $

227.3

774.8

227.2

Capitalized interest costs were not material for the years ended December 31, 2015, 2014, and 2013.

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
1.00 to 7.13 percent long-term notes (due 2017-2045)
Other long-term debt, including capitalized leases
Unamortized debt issuance costs
Fair value adjustment on hedged long-term notes
Total debt
Less current portion
Long-term debt

2015

— $

7,700.1
23.1
(37.1)
292.4
7,978.5
(6.1)
7,972.4 $

2014
2,680.6
4,872.8
33.1
(20.4)
455.4
8,021.5
(2,688.7)
5,332.8

There were no outstanding borrowings under our commercial paper program at December 31, 2015. We had
$2.68 billion in outstanding borrowings under our commercial paper program at December 31, 2014, with a
weighted-average effective borrowing rate of 0.18 percent.

At December 31, 2015, we had a total of $1.30 billion of unused committed bank credit facilities, which
consisted primarily of a $1.20 billion credit facility that expires in August 2020 and is available to support our
commercial paper program. During the year ended December 31, 2015, our $2.00 billion 364-day credit
facility expired unused and was not renewed. There were no amounts outstanding under the revolving credit
facilities during the years ended December 31, 2015 and 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.

F71

FINANCIAL REPORTIn March 2015, we issued $600.0 million of 1.25 percent fixed-rate notes due March 1, 2018, $800.0
million of 2.75 percent fixed-rate notes due June 1, 2025, and $800.0 million of 3.70 percent fixed-rate notes
due March 1, 2045 with interest to be paid semi-annually. The proceeds from the issuance of the notes were
used primarily to repay outstanding commercial paper issued in connection with our January 2015 acquisition
of Novartis AH.

In June 2015, we issued euro-denominated notes consisting of €600.0 million of 1.00 percent fixed-rate notes
due June 2, 2022, €750.0 million of 1.63 percent fixed-rate notes due June 2, 2026, and €750.0 million of 2.13
percent fixed-rate notes due June 3, 2030 with interest to be paid annually. The net cash proceeds of the
offering of $2.27 billion were used primarily to purchase and redeem certain higher interest rate U.S. dollar-
denominated notes and to repay outstanding commercial paper. We paid $1.95 billion to purchase and
redeem notes with an aggregate principal amount of $1.65 billion and a net carrying value of $1.78 billion in
June 2015, resulting in a pretax debt extinguishment loss of $166.7 million, which was included in other–net,
(income) expense in our consolidated statement of operations during the year ended December 31, 2015.

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 as follows:

Maturities on long-term debt

2016

2017

2018
6.1 $ 635.2 $ 803.2 $ 601.8 $

2019

2020

0.6

We have converted approximately 40 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, 2015 and 2014, including the effects of interest rate swaps for
hedged debt obligations, were 2.67 percent and 3.69 percent, respectively.

The aggregate amount of cash payments for interest on borrowings, net of capitalized interest, are as follows:

Cash payments for interest on borrowings

2015

2014

2013

129.6 $

140.4 $

139.7

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.

Note 11: Stock-Based Compensation

Our stock-based compensation expense consists of performance awards (PAs), shareholder value awards
(SVAs), and restricted stock units (RSUs). 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. We provide newly issued shares of our common stock and treasury stock to satisfy the issuance of
PA, SVA, and RSU shares. We classify tax benefits resulting from tax deductions in excess of the
compensation cost recognized for stock-based compensation as a financing cash flow in the consolidated
statements of cash flows.

Stock-based compensation expense and the related tax benefits were as follows:

Stock-based compensation expense

Tax benefit

2015

2014

2013

217.8 $
76.2

156.0 $

54.6

144.9

50.7

At December 31, 2015, additional stock-based compensation awards may be granted under the 2002 Lilly
Stock Plan for not more than 100.6 million shares.

72
F72

FINANCIAL REPORTPerformance 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 period. The fair values of PAs
granted for the years ended December 31, 2015, 2014, and 2013 were $70.34, $48.81, and $50.19,
respectively. The number of shares ultimately issued for the PA program is dependent upon the earnings
achieved during the vesting period. Pursuant to this program, approximately 0.5 million shares, 0.7 million
shares, and 0.7 million shares were issued during the years ended December 31, 2015, 2014, and 2013,
respectively. Approximately 0.5 million shares are expected to be issued in 2016. As of December 31, 2015,
the total remaining unrecognized compensation cost related to nonvested PAs was $69.5 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. 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, 2015, 2014, and 2013 were $54.81, $41.97, and $45.17,
respectively, determined using the following assumptions:

(Percents)
Expected dividend yield
Risk-free interest rate
Volatility

2015

2014

2013

2.50%
0.79
20.37

3.50%
.08-.71
18.87-21.56

3.50%
.08-.43
18.95-22.37

Pursuant to this program, approximately 1.4 million shares, 1.4 million shares, and 1.5 million shares were
issued during the years ended December 31, 2015, 2014, and 2013, respectively. Approximately 1.0 million
shares are expected to be issued in 2016. As of December 31, 2015, the total remaining unrecognized
compensation cost related to nonvested SVAs was $59.9 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 three years. The fair values of RSU awards granted
during the years ended December 31, 2015, 2014, and 2013 were $71.69, $52.72, and $54.10, respectively.
The number of shares ultimately issued for the RSU program remains constant with the exception of
forfeitures. Pursuant to this program, 0.9 million, 1.2 million, and 1.1 million shares were granted and
approximately 0.9 million, 0.9 million, and 0.8 million shares were issued during the years ended
December 31, 2015, 2014, and 2013, respectively. Approximately 0.6 million shares are expected to be
issued in 2016. As of December 31, 2015, the total remaining unrecognized compensation cost related to
nonvested RSUs was $103.0 million, which will be amortized over the weighted-average remaining requisite
service period of 24 months.

Note 12: Shareholders' Equity

During 2015, 2014, and 2013, we repurchased $749.5 million, $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, 2015, there were $2.95 billion of shares remaining in that program. During 2013, we

F73

FINANCIAL REPORTrepurchased $1.10 billion of shares, completing our $1.50 billion share repurchase program announced in
2012.

We have 5.0 million authorized shares of preferred stock. As of December 31, 2015 and 2014, 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,
2015 and 2014, 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, 2015 and
2014, 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, 2015, 2014, and 2013.

Note 13: 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.

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.

Following is the composition of income tax expense:

Current:
Federal
Foreign
State

Total current tax expense

Deferred:
Federal
Foreign
State

Total deferred tax (benefit) expense

Income taxes

2015

2014

2013

660.5 $
422.0
47.5
1,130.0

(689.6)
(66.0)
7.2
(748.4)
381.6 $

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

F7474

FINANCIAL REPORTSignificant components of our deferred tax assets and liabilities as of December 31 are as follows:

Deferred tax assets:

Compensation and benefits
Purchases of intangible assets
Tax credit carryforwards and carrybacks
Tax loss carryforwards and carrybacks
Contingent consideration
Product return reserves
Other comprehensive loss on hedging transactions
Debt
Other

Total gross deferred tax assets

Valuation allowances

Total deferred tax assets

Deferred tax liabilities:

Inventories
Intangibles
Property and equipment
Prepaid employee benefits
Unremitted earnings
Financial instruments

Total deferred tax liabilities
Deferred tax assets (liabilities) - net

2015

2014

1,034.6 $
637.2
294.2
247.8
214.6
212.1
129.7
111.3
628.6
3,510.1
(590.3)
2,919.8

(771.3)
(756.3)
(411.6)
(317.8)
(218.8)
(152.6)
(2,628.4)

291.4 $

976.3
473.3
279.4
265.5
—
241.8
115.3
176.0
623.2
3,150.8
(601.1)
2,549.7

(684.6)
(582.6)
(424.7)
(275.8)
(737.1)
(276.8)
(2,981.6)
(431.9)

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 $668.5 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 $93.4 million, international tax credits of $100.6 million,
and state tax credits of $294.0 million, all of which are substantially reserved.

At December 31, 2015, based on filed tax returns we had net operating losses and other carryforwards for
international and U.S. federal income tax purposes of $462.0 million: $38.0 million will expire by 2020;
$354.0 million will expire between 2020 and 2035; and $70.0 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 $93.2 million and other state
carryforwards of $8.8 million are fully reserved.

Domestic and Puerto Rican companies contributed approximately 35 percent, 20 percent, and 60 percent for
the years ended December 31, 2015, 2014, and 2013, 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, 2015, U.S. income taxes have not been provided on approximately $26.5 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 U.S. 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 were as follows:

Cash payments of income taxes

2015

2014

969.0 $

729.7 $

2013
1,255.6

F75

FINANCIAL REPORTFollowing 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

2015

976.5 $

2014
1,050.1 $

2013
2,061.3

(565.2)
(69.2)
39.5
381.6 $

(344.8)
(44.3)
(51.2)
609.8 $

(778.3)
(175.6)
97.1
1,204.5

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

2015
1,338.8 $
131.3
116.6
(45.2)
(446.2)
(4.0)
(24.7)
1,066.6 $

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

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was
$404.1 million and $638.8 million at December 31, 2015 and 2014, 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.

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 U.S. examination of tax years 2010-2012 commenced during the fourth quarter of 2013 and is expected
to conclude in the first quarter of 2016. In December 2015, we executed a closing agreement with the Internal
Revenue Service which effectively settled certain matters for tax years 2010-2012. Accordingly, we have
reduced our gross uncertain tax positions by approximately $320 million in 2015. There was an immaterial
impact to our consolidated results of operations during the fourth quarter related to issues settled in the
closing agreement. In the first quarter of 2016, we anticipate reaching resolution on the remaining issues
under examination and estimate that our gross uncertain tax positions will further be reduced by
approximately $100 million to $150 million. Additionally, we do not anticipate that resolution of the U.S.
examination will result in a material change to our consolidated financial position, and we expect that up to
$250 million of cash payments will be due upon resolution of these tax years. We expect the U.S. examination
of tax years 2013-2014, and possibly 2015, to begin in 2016.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
We recognized income tax (benefit) expense related to interest and penalties as follows:

Income tax (benefit) expense

2015

2014

2013

13.2 $

35.9 $

(10.9)

76
F76

FINANCIAL REPORTAt December 31, 2015 and 2014, our accruals for the payment of interest and penalties totaled $216.3 million
and $207.2 million, respectively.

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:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2015

2014

2015

2014

Change in benefit obligation:

Benefit obligation at beginning of year
Benefit obligation assumed in Novartis AH acquisition
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Plan amendments
Foreign currency exchange rate changes and other

adjustments

Benefit obligation at end of year

Change in plan assets:

Fair value of plan assets at beginning of year
Fair value of plan assets assumed in Novartis AH

acquisition

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

Funded status
Unrecognized net actuarial loss
Unrecognized prior service (benefit) cost
Net amount recognized

Amounts recognized in the consolidated balance sheet

consisted of:
Sundry
Other current liabilities
Accrued retirement benefits
Accumulated other comprehensive (income) loss

before income taxes
Net amount recognized

$ 12,012.4 $ 9,976.4 $ 1,553.5 $ 1,757.2
—
33.0
85.6
293.5
(76.1)
(533.6)

—
240.9
472.6
1,996.3
(421.2)
(2.4)

334.7
315.7
476.8
(812.4)
(437.8)
(0.4)

9.9
45.1
62.6
(113.5)
(77.5)
—

(169.8)
11,719.2

(250.2)
12,012.4

(12.7)
1,467.4

(6.1)
1,553.5

9,835.7

9,481.7

1,918.7

1,879.6

235.9
90.4
404.1
(437.8)

(132.7)
9,995.6

(1,723.6)
4,552.7
32.5

—
813.6
127.2
(421.2)

(165.6)
9,835.7

(2,176.7)
5,114.9
43.5

$ 2,861.6 $ 2,981.7 $

—
85.1
17.4
(77.5)

—
157.4
(42.2)
(76.1)

—
1,943.7

—
1,918.7

476.3
347.9
(574.8)
249.4 $

365.2
439.5
(666.7)
138.0

261.6 $
(63.8)
(1,921.4)

211.2 $
(62.3)
(2,325.6)

722.1 $
(6.9)
(238.9)

4,585.2

5,158.4

$ 2,861.6 $ 2,981.7 $

(226.9)
249.4 $

609.4
(6.9)
(237.3)

(227.2)
138.0

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, 2015.

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

F77

FINANCIAL REPORT
receiving financial support from us. This change decreased our retiree health benefit obligation and increased
our unrecognized prior service benefit as of December 31, 2014 by $520.8 million.

During 2016, 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

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

285.9 $

11.9

297.8 $

19.2
(85.8)
(66.6)

We do not expect any plan assets to be returned to us in 2016.

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

2015
4.3
4.0
3.4
3.4
7.4

2014
4.0
4.9
3.4
3.4
8.1

2013
4.9
4.3
3.4
3.4
8.4

2015
4.5
4.1

2014
4.1
5.0

2013
5.0
4.3

8.0

8.5

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.

Given the design of our retiree health benefit plans, heathcare-cost trend rates do not have a material impact
on our financial condition or results of operations.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid
as follows:

Defined benefit pension plans

458.4 $

465.2 $

480.3 $

498.8 $

2016

2017

2018

2019

2020

2021-2025
518.5 $ 2,987.5

Retiree health benefit plans

70.7

75.3

78.3

81.1

84.0

464.2

Amounts relating to defined benefit pension plans with projected benefit obligations in excess of plan assets
were as follows at December 31:

Projected benefit obligation
Fair value of plan assets

2015

2014

$ 10,054.1 $ 10,537.2
8,149.2

8,069.7

Amounts relating to defined benefit pension plans and retiree health 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

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2015

2014

2015

2014

$ 2,028.1 $ 2,179.8 $

844.9

700.9

245.8 $
—

244.2
—

The total accumulated benefit obligation for our defined benefit pension plans was $10.75 billion and
$10.88 billion at December 31, 2015 and 2014, respectively.

F7878

FINANCIAL REPORT

Net pension and retiree health benefit expense included the following components:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2015

2014

2013

2015

2014

2013

Components of net periodic (benefit) cost:

Service cost
Interest cost
Expected return on plan assets
Amortization of prior service (benefit) cost
Recognized actuarial loss
Net periodic (benefit) cost

$ 315.7 $ 240.9 $ 287.1 $
472.6
(756.6)
3.6
282.3

437.2
(701.9)
3.7
414.7
$ 403.8 $ 242.8 $ 440.8 $ (95.4) $ (44.7) $

45.1 $
62.6
(150.0)
(91.1)
38.0

33.0 $
85.6
(146.4)
(37.6)
20.7

476.8
(782.3)
10.4
383.2

49.9
98.1
(130.7)
(35.6)
100.5
82.2

As of January 1, 2016, we changed the method used to estimate the service and interest cost components of
the net periodic pension and retiree health benefit plan costs. This new method uses the spot yield curve
approach to estimate the service and interest costs by applying the specific spot rates along the yield curve to
the projected cash outflows of our obligations. Previously, those costs were determined using a single
weighted-average discount rate. The new method provides a more precise measure of interest and service
costs by improving the correlation between the projected benefit cash flows and the specific spot yield curve
rates. The change does not affect the measurement of the total benefit obligations as the change in service
and interest costs is recorded in the actuarial gains and losses recorded in accumulated other comprehensive
loss. We will account for this change as a change in estimate prospectively beginning in the first quarter of
2016.

The following represents the amounts recognized in other comprehensive income (loss) for the year ended
December 31, 2015:

Actuarial gain 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 (loss) during period

Defined Benefit
Pension Plans
$

Retiree Health
Benefit Plans
48.6
—
(91.1)
38.0
4.2
(0.3)

120.4 $
0.4
10.4
383.2
58.8

573.2 $

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 $162.4 million, $153.3 million, and $147.7 million for the years
ended December 31, 2015, 2014, and 2013, 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, 2015, 2014, and 2013 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 75 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.

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

F79

FINANCIAL REPORT
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 80 percent growth investments and 20 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.

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.

F8080

FINANCIAL REPORTOther 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, 2015 by
asset category are as follows:

Asset Class
Defined Benefit Pension Plans
Public equity securities:

U.S.
International
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

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

414.8
2,340.6

227.7
1,384.3

187.1
956.3

175.7
10.1

14.5
—
329.5
431.3
$ 2,104.5

1,140.9
375.3

1,537.9
67.4
10.8
295.7
$ 5,040.0

18.2
51.5

—
—

21.8
93.2

61.3
36.9

148.7
—

1,316.6
385.7

3,073.3
1,221.3
516.3
727.0
$ 9,995.6

40.0
144.7

61.3
36.9

272.3
104.5

1,209.7
33.2
41.1
$ 1,943.7

—
33.2
25.0
127.9

1,209.7
—
16.1
$ 1,587.7

—
—

—
0.3

1,520.9
1,153.9
176.0
—
$ 2,851.1

—
—

123.6
104.5

—
—
—
228.1

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31,
2015.

F81

FINANCIAL REPORT

The activity in the Level 3 investments during the year ended December 31, 2015 was as follows:

Defined Benefit Pension Plans
Beginning balance at January 1, 2015

Actual return on plan assets, including changes in

foreign exchange rates:

Relating to assets still held at the reporting date

Fixed
Income:
Emerging
Markets

Hedge
Funds

Equity-like
Funds

Real
Estate

Total

1.8 $ 1,583.1 $ 1,071.4 $ 165.9 $ 2,822.2

Relating to assets sold during the period

Purchases, sales, and settlements, net

Transfers into (out of) Level 3

Ending balance at December 31, 2015

Retiree Health Benefit Plans
Beginning balance at January 1, 2015

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

(0.1)

89.4

78.3

(6.1)

161.5

—

(0.3)

(1.1)

(111.5)

(40.1)

—

4.2

—

16.2

—

(111.5)

(20.0)

(1.1)

0.3 $ 1,520.9 $ 1,153.9 $ 176.0 $ 2,851.1

0.2 $ 124.0 $

92.3 $

— $ 216.5

—

(0.2)

14.7

10.3

(11.2)

(3.9)

—

1.9

—

25.0

(11.2)

(2.0)

(0.2)

Ending balance at December 31, 2015

— $ 123.6 $ 104.5 $

— $ 228.1

F8282

FINANCIAL REPORTThe 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:

U.S.
International
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

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

411.4
2,337.8

1,230.7
374.7

3,277.6
1,146.6
569.0
487.9
9,835.7

39.2
158.9

61.8
35.5

282.7
92.3

1,189.2
39.0
20.1
1,918.7

183.8
999.7

112.2
8.7

—
—
403.1
229.8
1,937.3

17.2
58.8

—
—

—
39.0
7.6
122.6

227.6
1,338.1

1,118.5
364.2

1,694.5
75.2
—
258.1
5,076.2

22.0
100.1

61.8
35.3

158.7
—

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.

F83

FINANCIAL REPORT

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,
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,
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)

0.1

44.6

108.2

0.2

152.7

(0.8)
(3.3)
(11.4)

— $

—
—
12.3
1.7
—
—
1.8 $ 1,583.1 $ 1,071.4 $ 165.9

—
(30.3)
—

—
98.1
—

(0.8)
78.5
(11.4)
$ 2,822.2

1.6 $

— $ 120.6 $

88.9 $

— $ 211.1

(0.1)

(0.1)
(0.3)
(1.1)

— $

—

1.2

6.0

—

7.1

—
0.2
—
0.2 $ 124.0 $

—
2.2
—

—
(2.6)
—
92.3 $

(0.1)
—
(0.5)
—
—
(1.1)
— $ 216.5

In 2016, we expect to contribute approximately $40 million to our defined benefit pension plans to satisfy
minimum funding requirements for the year, along with approximately $5 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.

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.

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 regimen patents, alleging that those patents are invalid, not
infringed, or both. We believe our Alimta vitamin regimen patents are valid and enforceable against these

F8484

FINANCIAL REPORTgeneric manufacturers. 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 for the
product in the relevant market.

U.S. Patent Litigation and Administrative Proceedings

We are engaged in various U.S. patent litigation matters involving Alimta brought pursuant to procedures set
out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). More
than ten Abbreviated New Drug Applications (ANDAs) seeking approval to market generic versions of Alimta
prior to the expiration of our vitamin regimen patent (expiring in 2021 plus pediatric exclusivity expiring in
2022) have been filed by a number of companies, including Teva Parenteral Medicines, Inc. (Teva) and APP
Pharmaceuticals, LLC (APP). These companies have also alleged the patent is invalid. In February 2016, we
filed a lawsuit alleging infringement against Dr. Reddy's Laboratories in response to their recently filed
abbreviated application.

In October 2010, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Teva,
APP and two other defendants seeking rulings that the U.S. vitamin regimen patent is valid and infringed (the
Teva/APP litigation). Teva and APP stipulated to infringement of our vitamin 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 U.S. Court of Appeals for the Federal Circuit that dealt with issues
of liability related to infringement (Akamai v. Limelight Networks). Thus, the sole issue before the district court
was to determine patent validity.

Trial occurred in August 2013. In March 2014, the court ruled that the asserted claims of the vitamin regimen
patent are valid. In June 2014, the U.S. Supreme Court vacated the Akamai decision, and the U.S. District
Court for the Southern District of Indiana held a hearing on the issue of infringement in May 2015. In
September 2015, the district court ruled that the vitamin regimen patent would be infringed by the generic
challengers' proposed products. Teva and APP filed a notice of appeal with respect to all of the district court’s
substantive decisions. A decision from the U.S. Court of Appeals for the Federal Circuit is expected in late
2016.

Throughout the course of 2012 through 2015, we filed similar lawsuits against other ANDA defendants
seeking a ruling that our patents are valid and infringed. Some of these cases have been stayed pending the
outcome of the Teva/APP litigation, and these parties have agreed to be bound by the outcome of the Teva/
APP litigation.

In 2015, Neptune Generics LLC and Sandoz International GmbH each submitted petitions to the United
States Patent and Trademark Office (USPTO), seeking inter partes review (IPR) of our vitamin regimen patent
by the USPTO. The USPTO is expected to decide whether to institute an IPR by mid-2016. If instituted, then
the final written decision on the merits will be issued by the USPTO by mid-2017.

European Patent Litigation and Administrative Proceedings

Generic manufacturers filed an opposition to the European Patent Office's (EPO) decision to grant us a
vitamin regimen patent. The Opposition Division of the EPO upheld the patent and the generic manufacturers
lodged an appeal. The EPO appeal hearing was scheduled for November 2015. In October 2015 the generic
manufacturers withdrew the appeal, and the hearing was canceled. As a result, the original EPO decision
upholding the patent is now final.

In addition, in the United Kingdom (U.K.), Actavis Group ehf and other Actavis companies (collectively,
Actavis) 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 regimen patents in the U.K., Italy,
France, and Spain. In May 2014, the trial court ruled that the vitamin regimen patents for Alimta would not be
infringed by commercialization of alternative salt forms of pemetrexed, after expiration of the compound
patents in December 2015. We appealed, and in June 2015, the U.K. Court of Appeal reversed the trial court,
ruling that the Alimta vitamin regimen patent in the U.K. would be indirectly infringed by commercialization of
Actavis' products as proposed prior to the patent's expiration in June 2021. The Court of Appeal also held
there was no difference between the law in the U.K. and that in France, Italy, and Spain as it relates to indirect

F85

FINANCIAL REPORTinfringement, and so reversed the trial court's decision granting declarations of noninfringement over the
Alimta vitamin regimen patents in those countries. In February 2016, the U.K. Supreme Court granted our and
Actavis' requests for permission to appeal different aspects of the judgment.

In February 2016, the trial court ruled that Actavis’ commercialization of a different proposed product would
not infringe the patent in the U.K., Italy, France, and Spain. We will seek permission to appeal this ruling.

We commenced separate infringement proceedings against certain Actavis companies in Germany. Following
a trial, in April 2014, the German trial court ruled in our favor. The defendants appealed, and after a hearing in
March 2015, the appellate court overturned the trial court and ruled that our vitamin regimen patent in
Germany would not be infringed by a dipotassium salt form of pemetrexed. In January 2016, the German
Federal Supreme court granted our request to appeal this matter. A hearing is scheduled for mid-2016.

In separate proceedings, in December 2015 we applied for and obtained a preliminary injunction against
Hexal AG (Hexal), which had stated their intention to launch a generic disodium salt product in Germany.
Hexal has appealed.

We are aware that a generic competitor has received approval to market a generic version of Alimta in a
major European market, although we are not aware of whether the competitor's product has entered the
market.

Japanese Administrative Proceedings

Three companies have filed separate demands for invalidation of our two vitamin regimen patents with the
Japanese Patent Office (JPO). In November 2015, the JPO issued a written decision in the invalidation trial
initiated by Sawai Pharmaceutical Co., Ltd. (Sawai), and joined by four other companies, upholding both
vitamin regimen patents. These patents provide intellectual property protection for Alimta until June 2021.
Sawai and Teva, one of the other companies in the Sawai invalidation trial, have filed appeals in both cases.
The remaining invalidation trials initiated by the other parties are currently suspended.

Notwithstanding our patents, generic versions of Alimta were approved in Japan in February 2016. We filed
preliminary injunctions against four generic competitors. We do not anticipate generic competitors to proceed
to launch prior to the completion of the Sawai invalidation trial.

Effient Patent Litigation and Administrative Proceedings

We, along with Daiichi Sankyo, Daiichi Sankyo, Inc., and Ube Industries (Ube) are engaged in U.S. patent
litigation involving Effient brought pursuant to procedures set out in the Hatch-Waxman Act. More than ten
different companies have submitted ANDAs seeking approval to market generic versions of Effient prior to the
expiration of Daiichi Sankyo’s and Ube’s patents (expiring in 2023) covering methods of using Effient with
aspirin, and alleging the patents are invalid. One of these ANDAs also alleges that the compound patent for
Effient (expiring in April 2017) is invalid.

Beginning in March 2014, we filed lawsuits in the U.S. District Court for the Southern District of Indiana
against these companies, seeking a ruling that the patents are valid and infringed. These cases have been
consolidated. Four generic companies have agreed to be bound by the outcome of the consolidated case.

In 2015, several generic pharmaceutical companies filed petitions with the USPTO, requesting IPR of the
method patents. In September 2015, the USPTO granted the generic pharmaceutical companies' request and
scheduled review in mid-2016. In light of these petitions, the district court in the consolidated lawsuit stayed
the case with respect to all parties.

We believe the Effient patents are valid and enforceable against these generic manufacturers. 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 have been named along with Takeda Chemical Industries, Ltd., and Takeda affiliates (collectively, Takeda)
as a defendant in approximately 6,500 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 2006. In general, plaintiffs in these

86
F86

FINANCIAL REPORTactions allege that Actos caused or contributed to their bladder cancer. Almost all of the active cases have
been consolidated in federal multi-district litigation (MDL) 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.

In April 2015, Takeda announced they will pay approximately $2.4 billion to resolve the vast majority of the
U.S. product liability lawsuits involving Actos, including the case of Allen, et al. v. Takeda Pharmaceuticals, et
al., no. 6:12-md-00064, in which a judgment of approximately $28 million was entered against Takeda and a
judgment of approximately $9 million was entered against us. In September 2015, Takeda announced that
more than 96 percent of eligible claimants have opted into the resolution program that was announced in April
2015. Takeda is now evaluating the submissions to determine whether they satisfy various criteria specified
under the terms of the resolution program. Takeda expects the resolution program to become effective upon
completion of that review.

Although the vast majority of U.S. product liability lawsuits involving Actos are included in the resolution
program announced in April 2015, there may be additional cases pending against Takeda and us following
completion of the resolution program. Our agreement with Takeda calls for Takeda to defend and indemnify us
against our losses and expenses with respect to the U.S. litigation arising out of the manufacture, use, or sale
of Actos and other related expenses in accordance with the terms of the agreement. We believe we are
entitled to full indemnification of our losses and expenses in the U.S. cases; however, there can be no
guarantee we will ultimately be successful in obtaining full indemnification.

We are also named along with Takeda as a defendant in four purported product liability class actions in
Canada related to Actos, including two in Ontario (Casseres et al. v. Takeda Pharmaceutical North America,
Inc., et al. and Carrier et al. v. Eli Lilly 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 lawsuits are without merit, and we and Takeda are prepared to defend against them
vigorously.

Byetta Product Liability Litigation

We are named as a defendant in approximately 510 Byetta product liability lawsuits in the U.S. involving
approximately 1,035 plaintiffs. Approximately 110 of these lawsuits, covering about 630 plaintiffs, are filed in
California state court and coordinated in a Los Angeles Superior Court. Approximately 395 lawsuits, covering
about 400 plaintiffs, are filed in federal court, the majority of which are coordinated in a MDL in the U.S.
District Court for the Southern District of California. The remaining approximately five lawsuits, representing
about five plaintiffs, are in various state courts. Approximately 450 of the lawsuits, involving approximately 690
plaintiffs, contain allegations that Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic
cancer or thyroid cancer). The federal and state trial courts granted summary judgment in favor of us and co-
defendants on the claims alleging pancreatic cancer; those rulings are being appealed by the plaintiffs. We
are aware of approximately 10 additional claimants who have not yet filed suit. These additional claims allege
damages for pancreatic cancer or thyroid cancer. We believe these lawsuits and claims are without merit and
are prepared to defend against them vigorously.

Cymbalta® Product Liability Litigation

In October 2012, we were named as a defendant in a purported class-action lawsuit in the U.S. District Court
for the Central District of California (Saavedra et al v. Eli Lilly and Company) involving Cymbalta. The
plaintiffs, purporting to represent a class of all persons within the U.S. who purchased and/or paid for
Cymbalta, asserted claims under the consumer protection statutes of four states, California, Massachusetts,
Missouri, and New York, and sought declaratory, injunctive, and monetary relief for various alleged economic
injuries arising from discontinuing treatment with Cymbalta. In December 2014, the district court denied the
plaintiffs' motion for class certification. Plaintiffs filed a petition with the U.S. Court of Appeals for the Ninth
Circuit requesting permission to file an interlocutory appeal of the denial of class certification, which was
denied. Plaintiffs filed a second motion for certification under the consumer protection acts of New York and
Massachusetts. The district court denied that motion for class certification in July 2015. The district court
dismissed the suit and plaintiffs are appealing to the U.S. Court of Appeals for the Ninth Circuit.

Additionally, we are named in approximately 140 lawsuits involving approximately 1,300 plaintiffs filed in
various federal and state courts alleging injuries arising from discontinuation of treatment with Cymbalta.

F87

FINANCIAL REPORTCounsel for plaintiffs in the federal court proceedings filed a petition seeking to have then-filed cases and an
unspecified number of future cases coordinated into a federal MDL in the U.S. District Court for the Central
District of California. In December 2014, the Judicial Panel on Multidistrict Litigation (JPML) denied the
plaintiffs' petition for creation of an MDL. Plaintiffs’ counsel subsequently filed a second petition seeking MDL
consolidation, which petition was denied by the JPML in October 2015. There have been approximately 35
individual and multi-plaintiff cases filed in California state court. Most of those cases have been centralized in
a California Judicial Counsel Coordination Proceeding pending in Los Angeles. The first individual product
liability cases were tried in August 2015 and resulted in defense verdicts against four plaintiffs. Two of those
plaintiffs are appealing the verdicts against them.

We believe all these Cymbalta 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 515 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 Limitada (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 $255 million as of December 31, 2015) plus
interest. We strongly disagree with the decision and filed an appeal in May 2014.

We are also named in approximately 25 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.

F8888

FINANCIAL REPORTNote 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, 2013 $

Foreign
Currency
Translation
Gains (Losses)
426.8

Unrealized Net
Gains (Losses)
on Securities
72.5
$

Defined Benefit
Pension and
Retiree Health
Benefit Plans
$ (4,195.2)

Effective
Portion of
Cash Flow
Hedges
(101.2)

Accumulated
Other
Comprehensive
Loss
$ (3,797.1)

Other comprehensive income (loss)
before reclassifications
Net amount reclassified from
accumulated other comprehensive
loss
Net other comprehensive income
(loss)

Balance at December 31, 2013

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

463.0

132.7

1,706.1

(80.6)

1,794.4

205.2

(2,489.1)

(181.8)

(2,002.7)

(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)

Balance at December 31, 2014

(498.4)

99.7

(3,402.0)

(191.1)

(3,991.8)

Other comprehensive income (loss)
before reclassifications

Net amount reclassified from
accumulated other comprehensive
loss

Net other comprehensive income
(loss)

Ending Balance at December 31,
2015

(861.8)

38.6

155.0

(36.9)

(705.1)

—

(128.2)

234.9

9.5

116.2

(861.8)

(89.6)

389.9

(27.4)

(588.9)

$ (1,360.2)

10.1

$ (3,012.1)

(218.5)

$ (4,580.7)

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
Foreign currency translation gains (losses)

Unrealized net gains (losses) on securities

Defined benefit pension and retiree health benefit plans

Effective portion of cash flow hedges

2015

2014

2013

(2.0)

— $

—

48.5

(183.0)

14.6

56.7

414.7

5.2

(71.6)

(886.1)

43.2

Provision for income taxes related to other comprehensive income
(loss) items

(121.9)

476.6

(914.5)

Except for the tax effects of foreign currency translation gains (losses) related to our euro-denominated notes
(see Note 7), income taxes were not provided for foreign currency translation.

F89

FINANCIAL REPORTReclassifications Out of Accumulated Other
Comprehensive Loss

Details about Accumulated Other
Comprehensive Loss Components
Amortization of defined benefit
items:

Prior service benefits, net

Actuarial losses

Total before tax
Tax benefit
Net of tax

Unrealized gains/losses on
available-for-sale securities:

Realized gains, net

Impairment losses

Total before tax
Tax expense
Net of tax

Year Ended December 31,

2015

2014

2013

Affected Line Item in the Consolidated
Statements of Operations

(80.7)
421.2
340.5
(105.6)
234.9

(209.3)
12.0
(197.3)
69.1
(128.2)

(34.0)

(31.9)

303.0
269.0
(83.4)
185.6

515.2
483.3
(164.3)
319.0

(1)

Income taxes

(324.1)

—
(324.1)
113.4
(210.7)

(12.0) Other—net, (income) expense

Other—net, (income) expense

Income taxes

2.4
(9.6)
3.4
(6.2)

Other, net of tax

9.5

5.9

Other—net, (income) expense

Total reclassifications for the
period (net of tax)

116.2

(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
Interest income
Debt extinguishment loss (Note 10)
Other income
Other–net, (income) expense

2015

2014

2013

—
161.2
(87.0)
166.7
(341.5)
$ (100.6)

—
148.8
(121.0)
—
(368.3)
$ (340.5)

$ (495.4)
160.1
(119.7)
—
(63.9)
$ (518.9)

For the year ended December 31, 2015, other income is primarily related to net gains on investments (Note
7). For the year ended December 31, 2014, other income 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).

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 throughout the notes to the consolidated financial
statements.

F90

FINANCIAL REPORTOur 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®, Denagard®, Maxiban®, Optaflexx®, and
other products for livestock and poultry, as well as Trifexis®, Comfortis®, and other products for companion
animals. The animal health segment amounts for the year ended December 31, 2015 include the results of
operations from Novartis AH, which was acquired on January 1, 2015 (Note 3).

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, 2015, 2014, and 2013,
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 16 percent of accounts receivable as of
December 31, 2015 and 2014. 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:

Segment revenue—to unaffiliated customers:

Human pharmaceutical products:

Endocrinology:
Humalog®
Forteo®
Humulin®
Trajenta
Trulicity®
Evista
Other Endocrinology

Total Endocrinology

Neuroscience:
Cymbalta
Zyprexa®
Strattera®
Other Neuroscience

Total Neuroscience

2015

2014

2013

2,841.9 $
1,348.3

1,307.4
356.8
248.7
237.3
696.4
7,036.8

1,027.6
940.3

784.0
183.5
2,935.4

2,785.2 $

2,611.2

1,322.0

1,400.1
328.8
10.2
419.8
672.9
6,939.0

1,614.7
1,037.3

738.5
206.0
3,596.5

1,244.9

1,315.8
249.2
—
1,050.4
832.9
7,304.4

5,084.4
1,194.8

709.2
227.8
7,216.2

F91

FINANCIAL REPORTOncology:
Alimta
Erbitux
Cyramza®
Other Oncology

Total Oncology

Cardiovascular:
Cialis®
Effient
Other Cardiovascular

Total Cardiovascular

Other pharmaceuticals

Total human pharmaceutical products
Animal health

Revenue

Segment profits:

Human pharmaceutical products
Animal health
Total segment profits

Reconciliation of total segment profits to consolidated income
before taxes:

Segment profits
Other profits (losses):

Inventory fair value adjustment related to Novartis AH (Note
3)

Acquired in-process research and development (Notes 3 and
4)

Asset impairment, restructuring, and other special charges
(Note 5)
Debt repurchase charges, net(1) (Note 10)
Amortization of intangible assets(2) (Note 8)
Income related to transfer of linagliptin and empagliflozin
rights in certain countries to Boehringer Ingelheim (Note 4)
U.S. Branded Prescription Drug Fee
Income related to termination of the exenatide collaboration
with Amylin Pharmaceuticals, Inc. (Note 4)

2015

2014

2013

2,493.1
485.0
383.8
147.9
3,509.8

2,310.7
523.0
234.3
3,068.0

2,792.0
373.3
75.6
152.1
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

227.7
16,777.7
3,181.0

249.3
20,961.6
2,151.5
$ 19,958.7 $ 19,615.6 $ 23,113.1

287.0
17,269.0
2,346.6

4,026.7 $
597.9
4,624.6 $

3,604.6 $
621.8
4,226.4 $

5,521.0
605.6
6,126.6

4,624.6 $

4,226.4 $

6,126.6

(153.0)

—

(535.0)

(200.2)

(57.1)

(367.7)

(152.7)

(626.2)

(468.7)

(120.6)

—

(530.2)

(555.0)

—
—

92.0
(119.0)

—
—

—
2,790.0 $

—
3,000.3 $

495.4
5,889.3

Consolidated income before taxes
(1) We recognized pretax net charges of $152.7 million for the year ended December 31, 2015, attributable to the debt extinguishment
loss of $166.7 million from the purchase and redemption of certain fixed-rate notes, partially offset by net gains from non-hedging
interest rate swaps and foreign currency transactions associated with the related issuance of euro-denominated notes.

(2) In 2015, the measurement of segment profitability was changed to exclude certain amortization of intangible assets. The prior periods

have been adjusted to conform with the 2015 presentation.

F92

FINANCIAL REPORTDepreciation and software amortization expense included in our segment profits was as follows:

Human pharmaceutical products
Animal health
Total depreciation expense included in segment profits

2015

2014

2013

720.7 $
80.8
801.5 $

790.0 $

58.8

848.8 $

838.8
51.8
890.6

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.

Geographic Information
Revenue—to unaffiliated customers(1):
United States
Europe
Japan
Other foreign countries

Revenue

Long-lived assets(2):
United States
Europe
Japan
Other foreign countries

Long-lived assets

2015

2014

2013

$ 10,097.4 $
3,943.6
2,033.1
3,884.6

9,134.1 $ 12,889.7
4,338.4
4,506.7
2,063.8
2,027.1
3,821.2
3,947.7
$ 19,958.7 $ 19,615.6 $ 23,113.1

4,576.8 $
2,306.4
89.2
1,724.2
8,696.6 $

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

(1) Revenue is attributed to the countries based on the location of the customer.

(2) Long-lived assets consist of property and equipment, net, and certain sundry assets.

F93

FINANCIAL REPORT
Note 19: Selected Quarterly Data (unaudited)

2015
Revenue

Cost of sales
Operating expenses(1)
Acquired in-process research and development

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

2014
Revenue

Cost of sales
Operating expenses(1)
Acquired in-process research and development

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

Fourth

Third

Second

First

$ 5,375.6 $ 4,959.7 $ 4,978.7 $ 4,644.7

1,389.2

3,242.6

1,236.9

2,719.1

1,218.4

2,804.9

1,192.7

2,562.8

199.0

144.9

(44.7)

444.6

478.4

0.45

0.50

87.52

76.98

—

42.4

(86.5)

1,047.8

799.7

0.75

0.50

89.98

78.26

80.0

72.4

123.3

679.7

600.8

0.57

0.56

0.50

86.59

70.89

256.0

108.0

(92.7)

617.9

529.5

0.50

76.36

68.41

Fourth

Third

Second

First

$ 5,121.3 $ 4,875.6 $ 4,935.6 $ 4,683.1

1,253.1

2,985.6

1,267.0

2,915.3

1,189.7

2,859.3

1,222.7

2,594.2

105.2

401.0

(137.2)

513.6

428.5

0.40

0.49

72.83

61.90

95.0

36.3

(93.5)

655.5

500.6

0.47

0.49

66.59

60.35

—

(53.8)

940.4

733.5

0.68

0.49

63.10

58.21

—

31.4

(56.0)

890.8

727.9

0.68

0.49

59.85

50.73

(1) Includes research and development and marketing, selling, and administrative expenses.

Our common stock is listed on the New York Stock Exchange (NYSE), NYSE Euronext, and SIX Swiss
Exchange.

F9494

FINANCIAL REPORTManagement’s Reports

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 four 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.

F95

FINANCIAL REPORTWe 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. Our evaluation excluded the current year acquisition of Novartis
Animal Health. The operations acquired from Novartis AG represented approximately 3% of our consolidated
total assets and 5% of our consolidated net sales as of and for the year ended December 31, 2015.

Based on our evaluation under this framework, we concluded that our internal control over financial reporting
was effective as of December 31, 2015. 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,
2015. 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, 2016

F9696

FINANCIAL REPORT
Reports of Independent Registered Public Accounting Firm

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, 2015 and 2014, 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, 2015. 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, 2015 and 2014, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended December 31,
2015, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for classifying
deferred tax liabilities and assets as a result of the adoption of the amendments to the FASB Accounting Standards
Codification resulting from Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred
Taxes.

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, 2015, 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,
2016, expressed an unqualified opinion thereon.

Indianapolis, Indiana

February 19, 2016

F97

FINANCIAL REPORTReport 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, 2015, 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.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did
not include the internal controls of Novartis Animal Health, which is included in the 2015 consolidated financial
statements of Eli Lilly and Company and subsidiaries and constituted 3% of total assets as of December 31,
2015 and 5% of revenues for the year then ended. Our audit of internal control over financial reporting of Eli Lilly
and Company and subsidiaries also did not include an evaluation of the internal control over financial reporting
of Novartis Animal Health.

98
F98

FINANCIAL REPORTIn our opinion, Eli Lilly and Company and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the 2015 consolidated financial statements of Eli Lilly and Company and subsidiaries and our
report dated February 19, 2016 expressed an unqualified opinion thereon.

Indianapolis, Indiana

February 19, 2016

F99

FINANCIAL REPORTSelected Financial Data

Selected Financial Data (unaudited)

ELI LILLY AND COMPANY AND
SUBSIDIARIES
(Dollars in millions, except revenue per
employee and per-share data)
Operations
Revenue
Cost of sales
Research and development
Marketing, selling, and

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)

2015

2014

2013

2012

2011

$ 19,958.7
5,037.2
4,796.4

$ 19,615.6
4,932.5
4,733.6

$ 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

6,533.0
802.1
2,790.0
381.6
2,408.4

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

12.1%

2.26
2.01

12.2%

2.23
1.97

20.3%

4.32
1.96

18.1%

3.66
1.96

17.9%

3.90
1.96

1,065,720

1,074,286

1,084,766

1,117,294

1,113,967

Financial Position
Current assets(1)
Current liabilities(1)
Property and equipment—net
Total assets(1)
Long-term debt
Total equity

Supplementary Data
Return on total equity
Return on assets(1)
Capital expenditures
Depreciation and amortization
Effective tax rate
Revenue per employee
Number of employees
Number of shareholders of

record

$ 12,573.6
8,229.6
8,053.5
35,568.9
7,972.4
14,590.3

$ 11,928.3
9,741.0
7,963.9
36,307.6
5,332.8
15,388.1

$ 12,820.4
8,123.8
7,975.5
35,210.8
4,200.3
17,640.7

$ 12,790.3
7,341.5
7,760.2
33,316.1
5,519.4
14,773.9

$ 13,884.6
8,508.6
7,760.3
33,216.5
5,464.7
13,535.6

16.1%
6.8%

13.7%
6.8%

29.5%
14.1%

27.8%
12.5%

31.4%
13.5%

1,066.2
1,427.7

1,162.6
1,379.0

1,012.1
1,445.6

905.4
1,462.2

672.0
1,373.6

13.7%

20.3%

20.5%

24.4%

18.7%

$ 484,000
41,275

$ 501,000
39,135

$ 609,000
37,925

$ 590,000
38,350

$ 638,000
38,080

28,000

29,300

31,900

33,600

35,200

(1) Amounts have been adjusted to reflect the retrospective application of Accounting Standards Update 2015-17 Income Taxes: Balance

Sheet Classification of Deferred Taxes. See Note 2 to consolidated financial statements.

F100100

FINANCIAL REPORTPERFORMANCE 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 2011 through 2015. The graph assumes that, on December 31, 2010, 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 2010
Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group(1)

Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15

Lilly
$ 100.00
$ 125.15
$ 155.52
$ 166.77
$ 233.07
$ 292.20

Peer Group
$ 100.00
$ 115.41
$ 135.93
$ 187.14
$ 210.73
$ 218.03

S&P 500
$ 100.00
$ 102.11
$ 118.45
$ 156.82
$ 178.28
$ 180.75

(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 2015 (other than Allergan Inc.): Abbott
Laboratories; AbbVie 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 plc; Merck & Co., Inc.;
Novartis AG.; Pfizer Inc.; and Sanofi. The peer group total shareholder return reflected above excludes Allergan Inc. as it was
acquired in 2015.

101

F101

FINANCIAL REPORTTrademarks Used in this Report

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.
ENHANZE™ is a trademark of Halozyme Therapeutics, Inc.
Bydureon® and Byetta® are trademarks of Amylin Pharmaceuticals, Inc.
Glyxambi®, Jardiance®, Jentadueto®, Synjardy® and Trajenta® are trademarks of Boehringer Ingelheim GmbH.
Lantus® is a trademark of Sanofi-Aventis Deutschland GmbH.
Sentinel® is a trademark of Virbac Corporation.

F102

102

FINANCIAL REPORTPROXY

Notice of 2016 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 Qualifications and Nomination Process

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

Item 3 - Proposal to Ratify the Appointment of Principal Independent
Auditor

Shareholder Proposal

Item 4 - Shareholder Proposal on Issuing High Risks Regions Report

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

P13

P15

P17

P18

P19

P20

P24

P25

P26

P27

P28

P41

P51

P53

P56

P57

P59

P61

P64P65

Notice of Annual Meeting of Shareholders

To the holders of Common Stock of Eli Lilly and Company:

The 2016 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below:

WHEN:

WHERE:

11:00 a.m. EDT, Monday, May 2, 2016

The Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285

ITEMS OF BUSINESS: Election of the five 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 2016
If presented, a shareholder proposal seeking a report regarding
how we select the countries in which we operate or invest
Shareholders of record at the close of business on February 26,
2016

WHO CAN VOTE:

This proxy statement is dated March 21, 2016 and is first being sent or given to our shareholders on or about
the date.

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 21, 2016
Indianapolis, Indiana

Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 2,
2016: The annual report and proxy statement are available at https://www.lilly.com/_Assets/PDF/
lillyar2015.pdf.

P11

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 2, 2016

11:00 a.m. EDT

Location:

Record Date:

February 26, 2016

The Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285

Items of Business:

Item 1: Election of the five 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 2016.
Item 4: If presented, a shareholder proposal seeking a report regarding how we
select the countries in which we operate or invest.

What Is New In This Year's Proxy Statement

In 2015, we returned to revenue and earnings growth, launched a number of new products, made significant
late-stage pipeline progress, and delivered strong returns to shareholders. As a result, we resumed annual
increases to base salaries and delivered incentive compensation reflective of our performance.

Additionally, we restated our executive officers' share ownership requirements from a fixed number of shares
to a multiple of annual base salary for all executives, excluding the CEO. The CEO's requirement remains six
times annual base salary.

In February 2016, we welcomed Juan R. Luciano to the board. Mr. Luciano is the Chairman and CEO of
Archer Daniels Midland Company.

Highlights of 2015 Company Performance

The following provides a brief look at our 2015 performance in three dimensions: operating performance,
innovation progress, and returns to shareholders. See our 2015 annual report on Form 10-K for more details.

Operating Performance
In 2015, we returned to revenue and earnings growth following a multi-year period of patent expirations. This
growth was led by several pharmaceutical products, including Cyramza, Trulicity and Humalog, as well as
Erbitux due to the transfer of commercialization rights in North America. This growth was partially offset by the
residual impact of the loss of exclusivity for Cymbalta and Evista.

Performance highlights included:

(cid:127)
(cid:127)

2015 revenue increased 2 percent to approximately $20 billion.
2015 earnings per share (EPS) increased 1 percent on a reported basis to $2.26, and increased 13
percent on a non-GAAP basis to $3.43.

*A reconciliation of GAAP and externally reported non-GAAP measures is included in Appendix A.

Innovation Progress
We made significant advances with our pipeline in 2015, including:

(cid:127) U.S. FDA approval of six new products, including Portrazza™, in combination with gecitabine and
cisplatin, Cyramza® for treatment of colorectal cancer, Glyxambi®, Basaglar®, and Synjardy®.
(cid:127) A late-stage pipeline including 9 potential new medicines or diagnostic agents in either Phase III

development or submission stage.

(cid:127) FDA Breakthrough Therapy Designations for abemaciclib for patients with refractory hormone-
receptor-positive advanced or metastatic breast cancer and for olaratumab for advanced or
metastatic soft-tissue sarcoma.

(cid:127) Positive Phase III results for ixekizumab, an investigational medicine for patients with psoriatic

arthritis.

(cid:127) Positive Phase III results for baricitinib, an investigational medicine for patients with moderately-to-

severely active rheumatoid arthritis.

(cid:127) Positive results from a long-term clinical trial investigating cardiovascular outcomes for Jardiance®.

Returns to Shareholders
We generated strong total shareholder returns (share price appreciation plus dividends, reinvested quarterly)
for the one-, three-, and five-year periods through year-end 2015, including a 25% percent increase from
2014 to 2015. Our returns exceeded both the compensation peer group and the S&P 500 in all three periods:

Consistent with our ongoing commitment to returning excess cash to shareholders, we returned
approximately $2.9 billion in cash to shareholders in 2015 in the form of dividends and share repurchases. In
four
the past five years, we have returned $12.5 billion in cash to shareholders through dividends and share
repurchases.

P33

Governance (pages 8-27)

Item 1: Election of Directors (pages 8-25)

Name and principal occupation

Joined the
Board

Age Public boards

Management
recommendation

Vote required to
pass

Ralph Alvarez
Executive Chairman - Skylark Co., Ltd.

Skylark Co., Ltd.

2009

Lowe's Companies, Inc.

R. David Hoover
Former Chairman, President and CEO - Ball
Corporation

Juan R. Luciano
Chief Executive Officer and President - Archer
Daniels Midland Company

Franklyn G. Prendergast, M.D.,
Ph.D.
Former Edmond and Marion Guggenheim
Professor of Biochemistry and Molecular
Biology - Mayo Medical Clinic

Kathi P. Seifert
Former Executive Vice President - Kimberly-
Clark Corporation

Vote FOR

Majority of
votes cast

Dunkin' Brands Group, Inc.
Realogy Holdings Corp.

Ball Corporation

2009

Edgewell Personal Care Co.

Vote FOR

Steelcase, Inc.

Archer Daniels Midland Co.

2016

Vote FOR

Majority of
votes cast

Cancer Genetics
Incorporated

1995

Vote FOR

Majority of
votes cast

Investors Community Bank

1995

Lexmark International, Inc.

Vote FOR

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 27-52)

Item 2: Advisory Vote on Compensation Paid to Named Executive
Officers (pages 27-28)

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 2015, 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 are subject to robust stock ownership guidelines and are prohibited from hedging or

pledging their company stock.

(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.
(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 2015

At the time the total target compensation was established at the end of 2014, compensation for our named
executive officers (the five officers whose compensation is disclosed in this proxy statement) was in the
middle range of the company's peer group. Incentive compensation program payouts were increased,
consistent with the company's strong performance in 2015, 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 how our incentive pay programs align with company performance.
Please see the CD&A for details of how our three incentive pay programs work and how the payouts for 2015
were calculated. Please also see Appendix A for adjustments that were made to revenue and earnings per
share (EPS) for incentive compensation programs.

2015 Annual Bonus Multiple
The company exceeded its annual bonus targets for revenue, EPS, and pipeline progress.

2015 Performance Multiples

Resulting Bonus Multiple

2.00

1.37

1.06

e
p
i
t
l

u
M

2.0

1.5

1.0

0.5

0.0

1.61

1.00

e
p
i
t
l

u
M

2.0

1.5

1.0

0.5

0.0

Revenue

EPS Pipeline Score

Target

Actual

*Performance goal multiples are capped at 2.0.

p5 and p37 of proxy

P55

2015 Performance Award Multiple
We fell short of our EPS targets under our Performance Award program, which has targets based on
expected EPS growth of peer companies over a two-year period.

2015 Shareholder Value Award Multiple
We significantly exceeded our stock price growth targets under our Shareholder Value Award program, which
has targets based on expected large-cap company returns over a three-year period.

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 2016

Shareholder Proposal (pages 56-57)

Management
recommendation

Vote required to
pass

Vote FOR

Majority of
votes cast

Item 4: Proposal Seeking A Report Regarding How We Select the
Countries in Which We Operate and Invest (pages 56-57)

Item 4

Consider a shareholder proposal seeking a report regarding
how we select the countries in which we operate and invest

Vote
AGAINST

Majority of
votes cast

Management
recommendation

Vote required to
pass

Other Information (pages 58-61)
57-60

How to Vote in Advance of the Meeting
Even if you plan to attend the 2016 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 2016 Annual Meeting
You may also opt to vote in person at the 2016 Annual Meeting, which will be held on Monday, May 2, 2016 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.

P77

Governance

Item 1. Election of Directors

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 to be elected this year will expire
at the annual meeting of shareholders held in 2019. Each of the nominees listed below has agreed to serve
that term. The following sections provide information regarding our directors including their qualifications, the
director nomination process, and compensation, among other topics.

Board Recommendation on Item 1

The Board recommends that you vote FOR each of the following nominees:

(cid:127) Ralph Alvarez
(cid:127) R. David Hoover
(cid:127) Juan R. Luciano
(cid:127) Franklyn G. Prendergast
(cid:127) Kathi P. Seifert

Board Operations and Governance

Board of Directors

From left to right: Franklyn G. Prendergast, Michael L. Eskew, Karen N. Horn, Juan R. Luciano, Katherine Baicker, J. Erik Fyrwald, R.
David Hoover, John C. Lechleiter, Ralph Alvarez, Ellen R. Marram, Marschall S. Runge, William G. Kaelin, Jr., Kathi P. Seifert, and
Jackson P. Tai.

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,
as an alternative, the Board of Directors may reduce the number of directors to be elected at the annual
meeting.

Director Biographies

Set forth below is information as of March 9, 2016, 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 directors, 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 during
the past 10 years that are material to the evaluation of the ability or integrity of any of our directors or
nominees for director. There is no arrangement between any director or director nominee and any other
person pursuant to which he or she was or is to be selected as a director or director nominee.

Class of 2016

The following five directors will be seeking election at this year's annual meeting. Four of these directors are
standing for reelection; one director is seeking election for the first time. See “Item 1. Election of Directors”
above for more information.

Ralph Alvarez, age 60, 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) Public boards: Skylark Co., Ltd.; Lowe's Companies,
Inc.; Dunkin' Brands Group, Inc.; Realogy Holdings
Corp.

(cid:127) Prior public boards: McDonald's Corporation; KeyCorp

(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

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 Japan and emerging markets. He also has extensive
corporate governance experience through his service on other public company boards.

R. David Hoover, age 70, director since 2009

Board Committees: Finance (chair); Directors and Corporate Governance

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; Edgewell Personal

Care Co.; 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) Prior public boards: Qwest International, Inc.

(cid:127) Non-profit boards: Boulder Community Hospital;
Children's Hospital Colorado; DePauw University

Indiana University Kelley School of Business, Dean's Council

(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.

P99

Juan R. Luciano, age 54, director since 2016

Board Committees: Finance; Public Policy and Compliance

Career Highlights

Other Board Service

Archer Daniels Midland Company, a global food-processing and
commodities-trading company

(cid:127)
(cid:127)

Public boards: Archer Daniels Midland Company
Non-profit boards: Boys and Girls Clubs of America

(cid:127) Chairman (January 2016 - present)

(cid:127) Chief Executive Officer and President (2015 - present)

(cid:127) President (2014 - 2015)

(cid:127) Executive Vice President and Chief Operating Officer (2011 - 2014)
The Dow Chemical Company, a multi-national chemical company

(cid:127) Executive Vice President and President, Performance Division (2010

- 2011)

Qualifications: Mr. Luciano has CEO and global business experience with Archer Daniels Midland Company, where he has established
a reputation for strong result-oriented and strategic leadership, as well as many years of global leadership experience at The Dow
Chemical Company. He brings to the board a strong technology and operations background, along with expertise in the food and
agriculture sectors, an expanding area of focus for Lilly and its Elanco business.

Franklyn G. Prendergast, M.D., Ph.D., age 71, 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 66, 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 boards: Investors Community Bank; 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 boards: Albertsons; Revlon Consumer

(cid:127) Chairman (2004 - present)

Products Co.; Supervalu 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; New North

P10

Class of 2017

The following five directors will continue in office until May 2017, with the exception of Karen N. Horn, who will
retire from the Board on May 2, 2016, prior to the annual meeting of shareholders. The Directors and
Corporate Governance Committee has not yet identified and evaluated a candidate to fill the vacancy created
by Ms. Horn's retirement. Our board expects to reduce the size of the board until it identifies a candidate to fill
the vacancy.

Michael L. Eskew, age 66, director since 2008

Board Committees: Audit (chair); Finance; Directors and Corporate Governance

Career Highlights

United Parcel Service, Inc., a global shipping and logistics company

(cid:127) Chairman and Chief Executive Officer (2002 - 2007)

Other Board Service
(cid:127) Public boards: 3M Corporation; IBM Corporation;

Allstate Insurance Company

(cid:127) Vice Chairman (2000 - 2002)

(cid:127) UPS Board of Directors (1998 - 2014)

(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.

Karen N. Horn, Ph.D., Age 72, 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: Simon Property Group, Inc.; Norfolk

Southern Corporation

(cid:127) Senior Managing Director (2004 - present)

(cid:127) Prior public boards: T. Rowe Price Mutual Funds

(cid:127) President, Private Client Services and Managing Director (1999 -

2003)

(cid:127) Non-profit boards: The National Bureau of Economic
Research; The National Association of Corporate
Directors

Bank One, Cleveland, N.A.

(cid:127) Chairman and chief executive officer (1982 - 1987)

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 58, director since 2012

Board Committees: Finance; Science and Technology (chair)

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

P1111

John C. Lechleiter, Ph.D., age 62, 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; Pharmaceutical Research
and Manufacturers of America (PhRMA); 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;
Chemical Heritage 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
36 years of experience with the company in a variety of roles of increasing responsibility in research and development, pharmaceutical
operations, and corporate administration. As a result, he has a sound understanding of pharmaceutical research and development, sales
and marketing, and manufacturing. He also has significant corporate governance experience through his service on other public
company boards.

Marschall S. Runge, M.D., Ph.D., age 61, director since 2013

Board Committees: Science and Technology; Public Policy and Compliance

Industry Memberships

(cid:127) Experimental Cardiovascular Sciences Study Section of

the National Institutes of Health

Career Highlights

University of Michigan

(cid:127) CEO, University of Michigan Health System (2015 - present)

(cid:127) Executive Vice President for Medical Affairs (2015 - present)

(cid:127) Dean, Medical School (2015 - present)

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

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.

Class of 2018

The following four directors are serving terms that will expire in May 2018.

Katherine Baicker, Ph.D., age 44, director since 2011

Board Committees: Audit; Public Policy and Compliance

Career Highlights

Harvard T.H. Chan 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

Policy and Management (2014 - 2016)

Office

Council of Economic Advisers, Executive Office of the President

Health Economics

(cid:127) Editorial boards of Health Affairs and the Journal of

(cid:127) Member (2005 - 2007)

(cid:127) Senior Economist (2001 - 2002)

(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 in both academia and government.

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J. Erik Fyrwald, age 56, 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)

Ecolab, a leading cleaning and sanitization and water treatment
products and services company

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) Private boards: Amsted Industries

(cid:127) Non-profit boards: Society of Chemical Industry;

Amsted Industries; The Chicago Public Education Fund;
Field Museum of Chicago, Trustee

(cid:127) President (2012)
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 significant CEO experience with Univar and Nalco.

Ellen R. Marram, age 69, 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)

(cid:127) Public boards: Ford Motor Company, The New York

Times Company

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) Prior public boards: 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.

Jackson P. Tai, age 65, 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 boards: 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.

Director Qualifications and Nomination Process

Director Qualifications
The Board assesses Board candidates by considering the following:

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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 is well-rounded, with a balance of relevant perspectives
and experience, as illustrated in the following charts:

CEO Experience:

Financial Expertise:

Relevant Scientific/Academic Expertise:

Healthcare Experience:

Operational/Strategic Expertise:

International Experience:

Marketing and Sales Expertise:

Gender/Ethnic Diversity:

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:

3-5 Years:

6-10 Years:

More than 10 Years:

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
or have a stand-alone diversity policy, the Board's overall diversity is an important 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 fourteen directors range in age from 44 to 72, and include four women and
four 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, including the lead director, 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

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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 periodic assessments 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, diversity, 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 directors in the
2016 class who are standing for election be elected at the 2016 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 2015, nonemployee directors received an annual retainer of $110,000 (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): $6,000

All other Committee members (including the chairs): $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.

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 board retainer; new directors are
allowed five years to reach this ownership level. All directors are in compliance with these guidelines.

Nonemployee directors received $145,000 of stock compensation (but no more than 7,500 shares), deposited
annually in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below), payable after
their service on the Board has ended.

Lilly Directors’ Deferral Plan: In addition to stock compensation, this 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.

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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 2015 for the participating directors
was $171,916, at a rate of 3.2 percent. The rate for 2016 is 3.1 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.

2015 Compensation for Nonemployee Directors

Name1
Mr. Alvarez

Dr. Baicker

Mr. Eskew

Mr. Fyrwald

Mr. Hoover

Ms. Horn

Dr. Kaelin

Ms. Marram
Mr. Douglas Oberhelman5

Dr. Prendergast

Dr. Runge

Ms. Seifert

Mr. Tai

Fees Earned
or Paid in Cash ($)

$119,000

$140,000

$125,000

$128,000

$134,000

$158,000

$49,583

$119,000

$129,500

$119,000

$129,500

Stock Awards ($)2
$145,000

$145,000

$60,417

$145,000

All Other
Compensation
and Payments ($)3

$10,000

$12,500

$30,000

$3,050

$22,000

$30,000

$7,050

$30,000

Total ($)4
$264,000

$264,000

$295,000

$282,500

$303,000

$276,050

$279,000

$325,000

$140,000

$264,000

$274,500

$271,050

$304,500

1Mr. Luciano is not included in this chart as he became a board member effective February 2016.

2 Each nonemployee director received an award of stock valued at $145,000 (approximately 1,785 shares),
except Mr. Oberhelman, who retired from the board in May 2015 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.

3 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 non-employee
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. The amount for Ms. Horn includes
matching contributions for donations made at the end of 2014 ($1,700), for which the matching contribution
was not paid until 2015.

4 Directors do not participate in a company pension plan or non-equity incentive plan.

5 Mr. Olberhelman's term expired in May 2015, and he chose not to seek reelection.

2016 Director Compensation
In 2016, nonemployee directors will receive $160,000 in stock compensation. This is the first increase to
nonemployee directors' stock compensation in over ten years. All other elements of director compensation
remain the same as in 2015.

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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
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 current nonemployee directors, as well as Douglas Oberhelman, who served for part of 2015, are
independent, and that the members of each committee also meet our independence standards. The Board
determined that none of the 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

Dr. Baicker

Harvard University

Mr. Fyrwald

Univar, Inc.

Dr. Kaelin

Harvard University

Brigham and Women's
Hospital

Dana-Farber Cancer
Institute

Mr. Luciano

Archer Daniels Midland

Type of
Organization

Director
Relationship to
Organization

Primary Type of
Transaction/
Relationship/
Arrangement
between Lilly and
Organization

2015 Aggregate
Percentage of
Organization's
Revenue

Educational
Institution

For-profit
Corporation

Educational
Institution

Health Care
Institution

For-profit
Corporation

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 0.1 percent

Employee

Research grants

Less than 0.1 percent

Purchases of products Less than 0.1 percent

Executive Officer

Sales of products

Less than 0.1 percent
of Lilly's revenue

Dr. Prendergast

Dr. Runge

Mayo Clinic and Mayo
Medical School

Health Care and
Educational
Institution

Retired Employee Research grants

Less than 0.1 percent

Mayo Foundation

University of Michigan
Medical School

University of North
Carolina Medical School

Charitable
Organization

Educational
Institution

Employee of
affiliated Mayo
Clinic and Mayo
Medical School

Contributions

Less than 0.1 percent

Executive Officer

Research grants

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.

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 Lilly's independence standards,

and the members of the Audit and Compensation Committees each meet the additional independence

requirements applicable to them as members of those committees.

The Directors and Corporate Governance Committee makes recommendations to the board regarding

director committee membership and selection of committee chairs. 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 in fulfilling its oversight responsibilities by monitoring:

(cid:127) The integrity of financial information provided to the shareholders and others;

(cid:127) Management's systems of internal controls and disclosure controls;

(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

The Board of Directors has determined that Mr. Eskew and Mr. Tai are audit committee financial experts, as

ratification.

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.

Compensation Committee Interlocks and Insider Participation

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); or

(cid:127) Has any other interlocking relationships requiring disclosure under applicable SEC rules.

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personal benefit from any of these transactions, relationships, or arrangements.

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 Lilly's independence standards,
and the members of the Audit and Compensation Committees each meet the additional independence
requirements applicable to them as members of those committees.

The Directors and Corporate Governance Committee makes recommendations to the board regarding
director committee membership and selection of committee chairs. 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 in fulfilling its oversight responsibilities by monitoring:

(cid:127) The integrity of financial information provided to the shareholders and others;
(cid:127) Management's systems of internal controls and disclosure controls;
(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 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.

Compensation Committee Interlocks and Insider Participation

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); or

(cid:127) Has any other interlocking relationships requiring disclosure under applicable SEC rules.

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Directors and Corporate Governance Committee

(cid:127) Together with the lead director, leads the process for director recruitment;
(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, the corporate governance guidelines, and shareholder engagement on governance
matters.

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) Benefit plan funding and investments;
(cid:127) Financial risk management; and
(cid:127) Significant business-development opportunities.

Investments, financing, 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;
(cid:127) Together with the Audit Committee, oversees the company's enterprise risk management program;

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.

Membership and Meetings of the Board and Its Committees

In 2015, 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 2015. Current committee membership and the
number of meetings of the Board and each committee in 2015 are shown in the table below.

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Name

Mr. Alvarez

Dr. Baicker

Mr. Eskew

Mr. Fyrwald

Mr. Hoover

Ms. Horn

Dr. Kaelin

Dr. Lechleiter

Mr. Luciano

Ms. Marram

Dr. Prendergast

Dr. Runge

Ms. Seifert

Mr. Tai

Number of 2015
Meetings

Board

Member

Chair

Member

Audit

Compensation

Member

Chair

Directors and
Corporate
Governance

Finance

Public Policy
and
Compliance

Science and
Technology

Member

Chair

Member

Chair

Member

Chair

Member

Chair

Lead Director

Member

Chair

Member

Member Member

Member

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 through both top-down and bottom-up processes. 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.

These documents are available online at: http://www.lilly.com/about/business-practices/ethics-compliance and
https://www.lilly.com/About/Business-practices/Ethics-compliance/Code-of-conduct/code-of-conduct-financial-
management.aspx, or upon request to the company's corporate secretary.

Highlights of the Company’s Corporate Governance

The company is committed to good corporate governance, which promotes the long-term interests of
shareholders and other company stakeholders; builds confidence in our company leadership; and strengthens

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accountability for the Board and company management. The board has adopted corporate governance
guidelines that set forth the company's basic principles of corporate governance. The section that follows
outlines 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) Recruiting, 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
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 has authority to recommend
exceptions to this policy. The 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
In general, 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. The Directors and Corporate Governance Committee
reviewed an exception request for Mr. Alvarez (who serves on four other company boards), considering his
attendance record and continued engagement in board matters. Upon review, the committee determined that
he could effectively balance his other board responsibilities and continue to be a strong contributor to the Lilly
Board.

Board Confidentiality Policy
The Board has adopted a Confidentiality Policy, applicable to all current and future members of the Board.
The policy prohibits a director from sharing confidential information obtained in his or her role as director with

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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
this 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 role: 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;
Overseeing the independent directors' annual performance evaluation of the chairman and CEO;
and
Together with the Directors and Corporate Governance Committee, leading the director
recruitment process.

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

P22

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.

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

P23

(cid:127)

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) 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, advisor, strategy and operations, Amyvid, is the son of Dr. John Lechleiter, Lilly's
CEO. For 2015, these three employees received compensation, including cash compensation, and, in the
case of Dr. Bamforth and Mr. O'Neill, equity grants, of between $176,000 and $1.5 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 2015, 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, proxy access, board composition and recruitment, and the company's
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 Directors and Corporate Governance Committee. 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

P24

absent specific instructions from such clients. We have decided not to resubmit those proposals in 2016
based on our discussions with large shareholders as described above and our assessment that the proposals
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 21, 2016. 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 21, 2016 and no earlier than September
22, 2016. 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 Directors and 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 2017 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 21, 2016 and no earlier than September 22, 2016. 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 notice regarding shareholder nominations for board candidates or other
shareholder business to be presented at the meeting.

P2525

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 19, 2016. 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

Franklyn G. Prendergast, M.D., Ph.D.

Derica W. Rice

Marschall S. Runge, M.D., Ph.D.

Kathi P. Seifert

Jackson P. Tai

—

118,397

—

100

60,329

1,000

—

976,078

115,772

1,000

—

386,777

—

3,533

35,258

All directors and executive officers as
a group (26 people)7:

2,395,063

—

30,670

10,380

30,244

31,279

51,185

9,732

30,777

73,582

8,971

46,097

15,366

44,914

63,495

19,463

4,995

57,891

4,494

721,174

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 56,148 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 4,243 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.
6 The shares shown for Mr. Rice include 11,596 shares that are owned by a family foundation for which he is a
director. Mr. Rice has shared voting power and shared investment power with respect to the shares held by
the foundation.
7 Mr. Luciano joined the Board in February 2016, and currently does not beneficially own any shares.

P26

Compensation

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, 2015, 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 10055

The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355

PRIMECAP Management Company
225 South Lake Ave., #400
Pasadena, CA 91101

Number of Shares
Beneficially Owned

127,860,804

Percent of Class

11.5%

66,007,964

59,913,179

57,654,392

6.0%

5.4%

5.2%

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 N. Clay Robbins, chairman, president & chief executive officer;
Mary K. Lisher; William G. Enright; Daniel P. Carmichael; Charles E. Golden; Eli Lilly II; David N. Shane; Craig
Dykstra; and Jennett M. Hill.

BlackRock, Inc. provides investment management services for various clients. It has sole voting power with
respect to 57,088,447 of its shares and sole dispositive power with respect to 65,974,281 of its shares.

The Vanguard Group provides investment management services for various clients. It has sole voting power
with respect to 1,832,006 of its shares and sole dispositive power with respect to 57,973,673 of its shares.

PRIMECAP Management Company acts as investment advisor to various clients. It has sole voting power
with respect to 11,365,505 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 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. 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.

P27

Board Recommendation 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 describes 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 2015, and how the company's results affected incentive
payouts for 2015.

Say on Pay Results for 2015

At last year's annual meeting, more than 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 programs are 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.

P28

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 the 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. Each other EO's performance assessment is
based on achievement of objectives established between such 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)

Input from an independent compensation consultant concerning executive 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 broadly 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 NEOs, when reviewed at the end of 2014, was
in the middle range of the peer group.

P2929

Components of Our Compensation

Our executive compensation has three components: (1) base salary; (2) an annual cash bonus, which is
calculated based on company revenue, EPS, and the progress of the pipeline relative to internal targets; and
(3) two different forms of equity incentives: (i) Performance Awards ("PAs") - equity awards vesting over three
years, with a performance component measuring 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, followed by a one-year holding period. Executives also receive the company
benefits package, described below under "Other Compensation Practices and Information - 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. The Committee considers the adjustments approved by the Audit
Committee in reporting non-GAAP EPS and other adjustments, based on guidelines approved at the
beginning of the performance period. Further details on the adjustments for 2015 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 adjustments from GAAP revenue and EPS that were approved.

1. Base Salary

Base salaries are reviewed and established annually, and may also 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 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 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; (2) EPS; and
(3) pipeline progress.

Company performance goals and 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. In establishing the performance goals,
the Compensation Committee references the annual operating plan. Each year, the Compensation Committee
reviews the relative weighting for each of the factors. The 2015 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 calculated as follows:

P30

(0.25 x revenue multiple) + (0.50 x EPS multiple) + (0.25 x pipeline multiple)
= company bonus multiple

Multiples for performance goals can range from 0-2.0.

The payout is calculated as follows:

bonus multiple x individual bonus target x base salary earnings = payout

In order to preserve tax deductibility of bonus payouts, 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 (generally described in "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 bonuses.

3. Equity Incentives

The company grants two types of equity incentives to EOs - PAs and SVAs. The PAs are designed to focus
company leaders on multi-year operational performance relative to peer companies and the SVAs align
earned 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 vest 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 in the form of restricted stock unites
("RSUs"). The growth rate targets are set relative to the median expected EPS growth for the peer group.
These awards do not accumulate dividends during the two-year performance period, but do accumulate
dividends during the service-vesting period.

The Compensation Committee believes EPS growth is an effective measure of operational 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 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 uses 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.

P3131

Shareholder Value Awards
SVAs may be earned based on Lilly's share price performance over a three-year period. SVAs have a three-
year 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 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 a reasonable investor would consider appropriate for investing in a basket of large-cap U.S.
companies, as determined by the Compensation Committee. The target share price 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 or negative.

Possible payouts range from 0 to 140 percent of the target amount, depending on stock performance over the
period.

Pay for Performance

The mix of compensation for the CEO and other NEOs reflects our desire to link executive 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 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 - 3. Equity
Incentives").

2015 Target Total Compensation

Performance Review Process
In setting potential EO compensation for 2015, the Compensation Committee considered both individual and
company performance during 2014.

2014 Individual EO Performance
A summary of the committee's review of the individual EOs is provided below:

P32

Dr. John Lechleiter: In accordance with the company's Corporate Governance Guidelines, the independent
directors conducted a review of Dr. Lechleiter's performance during 2014, which was provided to the
Compensation Committee during a private session. Under Dr. Lechleiter's leadership the company exceeded
key financial targets and saw the successful approval and launch of three new products - Trulicity®,
Jardiance® and Cyramza®. In addition, the company controlled operating expenses, while setting a clear
strategic plan towards sustained growth. Dr. Lechleiter continued his effective leadership and public advocacy
on behalf of the broader biopharmaceutical industry, via his key leadership roles in the U.S.-Japan Business
Council and PhRMA, among other organizations. Dr. Lechleiter continued to set a strong cultural tone
throughout the organization, consistently demonstrating honesty, integrity, and transparency in his internal
and external interactions throughout a particularly challenging period of patent expirations.

Derica Rice: Mr. Rice demonstrated exemplary leadership by helping to navigate the company through a very
challenging period of patent expirations of many of our major products, while maintaining strong performance
of the global services organization. He played key roles in numerous business development activities,
including the Novartis Animal Health acquisition, and strongly influenced the company's external research and
development strategy.

Dr. Jan Lundberg: Dr. Lundberg led the research and development organization through one of its most
productive years in recent history and played a key leadership role in portfolio prioritization.

Michael Harrington: Mr. Harrington provided outstanding leadership of the company’s legal division, and
effectively managed a number of key legal matters throughout the year. He also excelled in building effective
partnerships with the leadership teams of our various business areas.

Enrique Conterno: Mr. Conterno drove above-plan revenues and earnings and increased Lilly’s market share
in the diabetes therapeutic area. Through his leadership, the Lilly Diabetes business achieved three product
approvals and two launches during the year.

The information in the section below reflects target total compensation for executive officers for 2015. The
actual payouts made to the NEOs in the form of the 2015 annual bonus and equity awards that vested in
2015 are summarized in the next section, under "2015 Compensation Payouts".

Rationale for Changes to NEO Target Compensation
The committee established 2015 target total compensation opportunities for each executive based on the
executive’s 2014 performance, internal relativity, and peer-group data. The committee determined an increase
to Dr. Lechleiter’s total compensation was appropriate given overall company results and his strong
leadership over several years. The committee decided his increase should be delivered entirely in
performance-based compensation, leaving his base salary unchanged from prior years but increasing his
bonus target and the target value of his equity. For Dr. Lundberg, the committee believed his target cash
compensation was appropriate but increased his target equity award reflecting the strategic importance and
long-term impact of the R&D organization’s success. Messrs. Rice, Harrington and Conterno received salary
increases reflecting their contributions over time and aligned with the company’s annual increase guidelines.
In light of strong performance since assuming the General Counsel role, Mr. Harrington also received an
increase to his equity.

Resulting Compensation Targets

Base Salary

The following table outlines salary increases, if any, for each executive approved by the committee in 2015.
Each executive's actual base salary earned during 2015 is reflected in the "Summary Compensation Table" in
the "Executive Compensation" section of the proxy that follows.

P33

Name

2014 Annual Base Salary 2015 Annual Base Salary Increase (effective March 1, 2015)

Dr. Lechleiter

Mr. Rice

Dr. Lundberg

Mr. Harrington

Mr. Conterno

$1,500,000

$1,019,700

$1,007,855

$765,000

$682,890

$1,500,000

$1,050,300

$1,007,855

$788,000

$710,205

—

Annual Bonus Targets

Based on a review of internal relativity, peer data, and individual performance, the committee decided to
maintain the same 2014 bonus targets for all NEOs in 2015, except Dr. Lechleiter. Based on the rationale
described above, Dr. Lechleiter's target was increased. Bonus targets are 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

2015 Bonus Target

140%
90%
90%
75%
75%

150%
90%
90%
75%
75%

Total Equity Program - Target Grant Values

For 2015 equity grants, the committee set the total target values for NEOs based on internal relativity,
individual performance, and peer-group data. The committee determined that for all NEOs a 50/50 split
between PAs and SVAs would continue to appropriately balance company financial performance with
shareholder return. Total target values for the 2014 and 2015 equity grants to the NEOs were as follows:

Name

Dr. Lechleiter

Mr. Rice

Dr. Lundberg

Mr. Harrington

Mr. Conterno

2014 Total Equity

2015 Total Equity

$9,000,000

$3,800,000

$3,000,000

$1,900,000

$2,000,000

$10,000,000

$3,800,000

$3,400,000

$2,300,000

$2,000,000

Performance Goals for 2015 Incentive Programs

2015 Annual Bonus Goals
The Compensation Committee established the company performance targets for 2015 at the targets specified
in the company's 2015 corporate operating plan approved by the Board of Directors in 2014.

Performance Awards – 2015-2016 PA
In January 2015, the committee established an EPS growth target based on investment analysts’ peer group
estimates at that time. However, the first two months of 2015 saw an extraordinarily rapid and steep decline in
the value of several currencies against the U.S. dollar, significantly driving down the median of analysts'
growth expectations for our peer group. As a result, in March 2015, less than 90 days into the two-year
performance period, the committee reset the target at one percent compounded annually to reflect revised
investment analysts' estimates for the peer group.

Possible payouts for the 2015-2016 PA range from 0 to 150 percent of the target, as illustrated in the chart
below:

P34

50% payout
50% payout

Payout Multiple
Payout Multiple
Cumulative 2-Year
EPS
Cumulative 2-Year
EPS
EPS Annual Growth
Rate
EPS Annual Growth
Rate

0.00
0.00

$3.03
$3.03

0.50
0.50

$5.61
$5.61
(5.00)%
(5.00)%

0.75
0.75

$5.88
$5.88
(2.00)%
(2.00)%

Target
Target

1.00
1.00

$6.15
$6.15
1.00%
1.00%

1.25
1.25

$6.43
$6.43
4.00%
4.00%

1.50
1.50

$6.71+
$6.71+
7.00%
7.00%

Shareholder Value Awards – 2015-2017 SVA
Shareholder Value Awards – 2015-2017 SVA
For purposes of establishing the stock price target for the SVAs, the starting price was $69.13 per share,
For purposes of establishing the stock price target for the SVAs, the starting price was $69.13 per share,
representing the average of the closing prices of company stock for all trading days in November and
representing the average of the closing prices of company stock for all trading days in November and
December 2014. The target ending share price range was established based on the expected annual rate of
December 2014. 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 2.89 percent, rounded up to the
return for large-cap companies (8 percent), less an assumed dividend yield of 2.89 percent, rounded up to the
nearest $0.05. The ending price to determine payouts will be the average of the closing prices of company
nearest $0.05. 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 2017. The award is designed to deliver no payout to
stock for all trading days in November and December 2017. The award is designed to deliver no payout to
EOs if the shareholder return (including projected dividends) is zero or negative. The target share price
EOs if the shareholder return (including projected dividends) is zero or negative. The target share price
growth of 5.1 percent per year is comparable to a compounded annual total shareholder return of 7.9 percent.
growth of 5.1 percent per year is comparable to a compounded annual total shareholder return of 7.9 percent.
Possible payouts based on share price ranges are illustrated in the grid below.
Possible payouts based on share price ranges are illustrated in the grid below.

Ending Stock Price
Ending Stock Price
Compounded Annual
Share Price Growth
Compounded Annual
Rate (excluding
Share Price Growth
dividends)
Rate (excluding
dividends)
Percent of Target
Percent of Target

Less than
$63.02
Less than
$63.02

Less than
(3.0%)
Less than
(3.0%)

0%
0%

$63.02-$68.72
$63.02-$68.72

$68.73-
$74.41
$68.73-
$74.41

$74.72-
$80.29
$74.72-
$80.29

$80.30-
$86.17
$80.30-
$86.17

(3.0%)-(0.2)% (0.2%)-2.5% 2.5%-5.1%
(3.0%)-(0.2)% (0.2%)-2.5% 2.5%-5.1%

5.1%-7.6%
5.1%-7.6%

40%
40%

60%
60%

80%
80%

100%
100%

$86.18-
$92.04
$86.18-
$92.04

7.6% -
10.0%
7.6% -
10.0%

120%
120%

Greater than
$92.04
Greater than
$92.04

Greater than
10.0%
Greater than
10.0%

140%
140%

2015 Compensation Payouts
2015 Compensation Payouts
The information in this section reflects the amounts paid to NEOs for the 2015 annual bonus and payouts
The information in this section reflects the amounts paid to NEOs for the 2015 annual bonus and payouts
from equity awards for which the relevant performance period ended in 2015.
from equity awards for which the relevant performance period ended in 2015.

2015 Company Performance
2015 Company Performance
For 2015, the company slightly exceeded its revenue target with annual revenues of $20.6 billion after
For 2015, the company slightly exceeded its revenue target with annual revenues of $20.6 billion after
adjustments as described in Appendix A. The company substantially exceeded its EPS target, with EPS of
adjustments as described in Appendix A. The company substantially exceeded its EPS target, with EPS of
$3.49 after adjustments as described in Appendix A. The company also made significant progress on its
$3.49 after adjustments as described in Appendix A. The company also made significant progress on its
pipeline, meeting or exceeding most targets for pipeline progress, highlighted by regulatory approval for
pipeline, meeting or exceeding most targets for pipeline progress, highlighted by regulatory approval for
necitumumab, along with 10 other new approvals, indications, or line extensions during 2015.
necitumumab, along with 10 other new approvals, indications, or line extensions during 2015.
Bonus Award for 2015
Bonus Award for 2015
The company's 2015 performance compared to targets for revenue, EPS, and pipeline progress, as well as
The company's 2015 performance compared to targets for revenue, EPS, and pipeline progress, as well as
the resulting bonus multiple, are illustrated below.
the resulting bonus multiple, are illustrated below.

2015 Corporate
2015 Corporate
Target
Target
$20.4 billion
$20.4 billion
$3.19
$3.19
3
3

Revenue
Revenue
EPS
EPS
Pipeline score
Pipeline score
Resulting Bonus Multiple
Resulting Bonus Multiple

Adjusted Results
Adjusted Results
$20.6 billion
$20.6 billion
$3.49
$3.49
3.7
3.7

Multiple¹
Multiple¹
1.06
1.06
2.00
2.00
1.37
1.37
1.61
1.61

¹Performance goal multiples are capped at 2.0.

The Science and Technology Committee assessed the company's progress toward achieving product pipeline

goals at 3.7 (on a scale of 1 to 5) including:

(cid:127)

1 new molecular entity (NME) product approval consistent with goal, and 10 other significant

approvals versus a goal of 6.

5 NMEs entering into Phase III versus a goal of 2 entrants.

60 percent of preclinical pipeline projects and 66 percent of clinical projects met their delivery

reliability goals, compared with targets of 60 and 75 percent, respectively.

(cid:127) Subjective assessment of the quality of the pipeline, considering many factors -- awarded a score of

5, recognizing another record-setting year for innovation.

Based on the recommendation of the Science and Technology Committee, the Compensation Committee

certified a pipeline score of 3.7, resulting in a pipeline multiple of 1.37.

Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus multiple of 1.61.

(0.25 x 1.06) + (0.50 x 2.00) + (0.25 x 1.37) = 1.61 bonus multiple

The bonus amounts paid to NEOs for 2015 are reflected in the "Summary Compensation Table" below.

Equity Award Payouts in 2015

2014-2015 Performance Award

The target cumulative EPS for the 2014-2015 PA was set in January 2014 reflecting expected industry growth

of 7.6 percent each year. The company's two-year EPS growth decreased by 19.3%, reflecting the negative

impact of multiple patent expirations.

The company's performance compared to targets (and the resulting multiple) for the 2014-2015 PA is

reflected in the charts below.

35
35
P35

¹Performance goal multiples are capped at 2.0.

2015 Performance Multiples

Resulting Bonus Multiple

2.00

1.37

1.06

e
p
i
t
l
u
M

2.0

1.5

1.0

0.5

0.0

1.61

1.00

e
p
i
t
l
u
M

2.0

1.5

1.0

0.5

0.0

Revenue

EPS Pipeline Score

Target

Actual

The Science and Technology Committee assessed the company's progress toward achieving product pipeline
goals at 3.7 (on a scale of 1 to 5) including:

(cid:127)

(cid:127)
(cid:127)

1 new molecular entity (NME) product approval consistent with goal, and 10 other significant
approvals versus a goal of 6.
5 NMEs entering into Phase III versus a goal of 2 entrants.
60 percent of preclinical pipeline projects and 66 percent of clinical projects met their delivery
reliability goals, compared with targets of 60 and 75 percent, respectively.

p5 and p37 of proxy

(cid:127) Subjective assessment of the quality of the pipeline, considering many factors -- awarded a score of

5, recognizing another record-setting year for innovation.

Based on the recommendation of the Science and Technology Committee, the Compensation Committee
certified a pipeline score of 3.7, resulting in a pipeline multiple of 1.37.

Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus multiple of 1.61.

(0.25 x 1.06) + (0.50 x 2.00) + (0.25 x 1.37) = 1.61 bonus multiple

The bonus amounts paid to NEOs for 2015 are reflected in the "Summary Compensation Table" below.

Equity Award Payouts in 2015

2014-2015 Performance Award
The target cumulative EPS for the 2014-2015 PA was set in January 2014 reflecting expected industry growth
of 7.6 percent each year. The company's two-year EPS growth decreased by 19.3%, reflecting the negative
impact of multiple patent expirations.

The company's performance compared to targets (and the resulting multiple) for the 2014-2015 PA is
reflected in the charts below.

P36

For the NEOs, the number of shares subject to an additional 13-month service-vesting period under the
2014-2015 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

Mr. Rice

Dr. Lundberg

Mr. Harrington

Mr. Conterno

Target Shares
92,194

RSUs Earned
46,097

38,926

30,731

19,463

20,488

19,463

15,366

9,732

10,244

2013-2015 Shareholder Value Award
The target stock price of $57.65 for the 2013-2015 SVA was set in January 2013 based on a beginning stock
price of $48.43, which was the average closing price for Lilly stock for all trading days in November and
December 2012. The ending stock price of $83.74 represents stock price growth of approximately 73 percent
over the relevant three-year period. The company's performance compared to target (and the resulting payout
multiple) for the 2013-2015 SVA is shown below.

P37

The shares paid to NEOs during 2015 for the 2013-2015 SVA were as follows:

Name
Dr. Lechleiter

Mr. Rice

Dr. Lundberg

Mr. Harrington

Mr. Conterno

Target Shares
110,756

Shares Paid Out
155,058

46,763

36,919

21,536

24,612

65,468

51,687

30,150

34,457

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 2015, 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. There is no
incremental cost to the company for these trips.

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 2015” 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.

P38

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
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

(cid:127) All regular employees are covered
(cid:127) Double trigger generally required
(cid:127) No tax gross-ups

(cid:127) Up to two-year pay protection
(cid:127) 18-month benefit continuation

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, our 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 “Executive Compensation - 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 would 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.

P39

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. During 2015, the requirement for other
executive officers changed from a fixed number of shares to a multiple of annual base salary (2 or 3 times
annual base salary depending on the 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 significant levels of company stock. As of February 19, 2016, Dr. Lechleiter held shares
valued at approximately 49 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

three times base salary

Yes

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 that applies after the end of the
performance period.

Employees are not permitted to hedge their economic exposures to company stock through short sales or
derivative transactions. Non-employee directors and all members of senior management are prohibited 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.

The recovery policy covers any incentive compensation awarded or paid 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. Recoveries under
the plan can extend back as far as three years.

P40

Looking Ahead to 2016 Compensation

We periodically review our incentive programs to ensure alignment with our business strategy and the views
of our stakeholders. As a result of a review conducted in 2015, it was concluded that the current programs
have worked well, i.e., paid for performance, provided appropriate incentives for our executives, and met the
interests of our external stakeholders as evidenced by strong say-on-pay vote outcomes and the positive
feedback received during shareholder outreach calls. However, this review identified some enhancements to
the Shareholder Value Award (SVA) for executive officers to be implemented in 2016, as follows:

(cid:127) Changed the payout threshold and maximum to 50% and 150% (from 40% and 140%) to align with

the PA’s threshold and maximum payout levels.

(cid:127) Added a "relative TSR modifier" to reflect our performance compared with the median performance of

our peer group. This will incent our executives to deliver top performance within the industry in
addition to driving absolute shareholder return. The number of shares to be paid will increase or
decrease by 1% for every percentage point Lilly’s three-year TSR deviates from our peer group’s
median three-year TSR (capped at +/-20%).
Increased the portion of equity being awarded as SVAs (from 50% to 60%) to incent behaviors
aligned with long-term growth.

(cid:127)

We also approved minor changes to our peer group, adding Shire Plc and removing Abbott and also Allergan,
which was acquired by Actavis in 2015.

Executive Compensation

Summary Compensation Table

Year

Salary
($)

Bonus
($)

Stock
Awards
($) 1

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($) 2

Change in
Pension
Value
($) 3, 5

All Other
Compensation
($) 4

Total
Compensation
($)

Name and Principal
Position

John C. Lechleiter,
Ph.D.

Chairman, President, and
Chief Executive Officer

2015

$1,500,000

2014

$1,500,000

2013

$1,500,000

Derica W. Rice

2015

$1,045,200

Executive Vice President,
Global Services and
Chief Financial Officer

2014

$1,019,700

2013

$1,014,750

Jan M. Lundberg,
Ph.D.
Executive Vice President,
Science and Technology
and President, Lilly
Research Laboratories
Michael J. Harrington

Senior Vice President and
General Counsel

Enrique A. Conterno

Senior Vice President and
President Diabetes
Business Unit

2015

$1,007,855

2014

$1,007,855

2013

$1,002,963

2015

2014

2013

2015

2014

2013

$784,167

$765,000

$705,653

$682,890

$680,658

$11,350,000

$6,750,000

$4,313,000

$2,850,000

$3,859,000

$2,250,000

$2,610,500

$1,425,000

$1,312,500

$2,270,000

$1,500,000

$3,622,500

$90,000

$16,562,500

$1,785,000

$4,356,142

$90,000

$14,481,142

$2,877,000

$1,514,495

$780,071

$2,023,458

$1,251,187

$90,000

$11,217,000

$62,712

$61,182

$60,885

$6,935,407

$6,734,411

$5,176,822

$1,460,382

$390,645

$60,471

$6,778,353

$771,009

$517,761

$60,471

$4,607,096

$1,236,653

$224,741

$946,881

$391,899

$487,688

$1,330,586

$786,038

$264,784

$852,075

$435,342

$1,235,839

$699,376

$88,167

$60,178

$47,050

$45,900

$42,339

$40,973

$40,840

$4,774,535

$4,780,497

$4,054,174

$3,174,222

$3,870,067

$3,895,044

$3,009,041

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. The PA grant values includes in the "Stock
Awards" column are based on the probable payout outcome anticipated at the time of grant, which was

P4141

different from the target value in each year. For purposes of comparison, the supplemental table below
shows the total target grant values:

Name

2013 Total Equity 2014 Total Equity 2015 Total Equity

Dr. Lechleiter

Mr. Rice

Dr. Lundberg

Mr. Harrington

Mr. Conterno

$9,000,000

$3,800,000

$3,000,000

$1,750,000

$2,000,000

$9,000,000

$3,800,000

$3,000,000

$1,900,000

$2,000,000

$10,000,000

$3,800,000

$3,400,000

$2,300,000

$2,000,000

The table below shows the minimum, target, and maximum payouts (using the grant date fair value) for the
2015-2016 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 2017

$5,000,000

$1,900,000

$1,700,000

$1,150,000

$1,000,000

$7,500,000

$2,850,000

$2,550,000

$1,725,000

$1,500,000

2 Payments for 2015 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
changes in pension values in 2015 were driven to a large extent by a higher discount rate which lowered the
net present value of pensions. The design of the pension benefit did not change. See the Pension Benefits in
2015 table on page 47 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 In some years, the net present value of the pension benefits for Dr. Lechleiter, Mr. Rice, and Mr. Conterno
reflect no change from the previous year due to an increase in the discount rate over the prior year. For the
other named executive officers, increases in pensionable earnings offset the impact of the increased discount
rate.

Grants of Plan-Based Awards During 2015
The compensation plans under which the grants in the following table were made are described in the CD&A
and consist of 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).

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Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards1

Estimated Future
Payouts Under Equity
Incentive Plan Awards

Name

Award

Grant Date2

Compensation
Committee
Action Date

Threshold
($)

Target
($)

Maximum
($)

Threshold
(# shares)

Target
(# shares)

Maximum
(# shares)

Dr. Lechleiter

$56,250

$2,250,000 $4,500,000

2015-2016 PA

3/30/2015 3

3/28/2015

2015-2017 SVA 2/2/2015

1/26/2015

35,542

71,083

106,625

45,015

112,537

157,552

Mr. Rice

$23,517

$940,680

$1,881,360

2015-2016 PA

3/30/2015 3

3/28/2015

2015-2017 SVA 2/2/2015

1/26/2015

Dr. Lundberg

$22,677

$907,070

$1,814,139

2015-2016 PA

3/30/2015 3

3/28/2015

2015-2017 SVA 2/2/2015

1/26/2015

Mr. Harrington

$14,703

$588,125

$1,176,250

2015-2016 PA

3/30/2015 3

3/28/2015

2015-2017 SVA 2/2/2015

1/26/2015

Mr. Conterno

$13,231

$529,239

$1,058,479

2015-2016 PA

3/30/2015 3

3/28/2015

2015-2017 SVA 2/2/2015

1/26/2015

13,506

27,012

40,518

17,106

42,764

59,870

12,084

24,168

36,252

15,305

38,262

53,567

8,175

16,349

24,524

10,353

25,883

36,236

7,109

9,003

14,217

21,326

22,507

31,510

All Other
Stock or
Option
Awards:
Number
of
Shares of
Stock,
Options,
or Units

Grant Date
Fair Value
of Equity
Awards

$6,350,000

$5,000,000

$2,413,000

$1,900,000

$2,159,000

$1,700,000

$1,460,500

$1,150,000

$1,270,000

$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 2015 performance was 161
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. Equity awards to new hires and other off-cycle grants are effective on the
first trading day of the following month.

3 This row shows the range of payouts for 2015-2016 PA grants. This PA will pay out in January 2017, 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 greater than the target value.

4 This row shows the range of payouts for 2015-2017 SVA grants. This SVA will pay out in January 2018, 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, retirement, or reallocation).
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.

43
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Outstanding Equity Awards at December 31, 2015
The 2015 closing stock price applied to the values in the table below was $84.26.

Stock Awards1

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 ($)

157,552 2
172,178 3
35,542 4

$13,275,332

$14,507,718

$2,994,769

46,097 5
46,623 6

$3,884,133

$3,928,454

19,463 5
19,685 6

$1,639,952

$1,658,658

15,366 5
15,541 6

$1,294,739

$1,309,485

9,732 5
9,066 6

$820,018

$763,901

10,244 5
10,360 6
20,000 7

$863,159

$872,934

$1,685,200

59,870 2
72,698 3
13,506 4

$5,044,646

$6,125,533

$1,138,016

53,567 2
57,393 3
12,084 4

$4,513,555

$4,835,934

$1,018,198

36,236 2
36,348 3
8,175 4

$3,053,245

$3,062,682

$688,826

31,510 2
38,262 3
7,109 4

$2,655,033

$3,223,956

$599,004

Name

Award

Dr. Lechleiter

2015-2017 SVA

2014-2016 SVA

2015-2016 PA

2014-2015 PA

2013-2014 PA

Mr. Rice

2015-2017 SVA

2014-2016 SVA

2015-2016 PA

2014-2015 PA

2013-2014 PA

Dr. Lundberg

2015-2017 SVA

2014-2016 SVA

2015-2016 PA

2014-2015 PA

2013-2014 PA

Mr. Harrington

2015-2017 SVA

2014-2016 SVA

2015-2016 PA

2014-2015 PA

2013-2014 PA

Mr. Conterno

2015-2017 SVA

2014-2016 SVA

2015-2016 PA

2014-2015 PA

2013-2014 PA

RSU

1 The chart no longer includes stock option awards as the company has not awarded stock options to
employees since 2006 and there are no outstanding stock option awards.

2 SVAs granted for the 2015-2017 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 2017 is over
$92.04. 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, 2015, the
payout would have been 100 percent of target.

3 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, 2015, the
payout would have been 140 percent of target.

4 This number represents the threshold value of PA shares that could pay out for 2015-2016 performance,
provided performance goals are met. Once the combined cumulative EPS result and associated payout level
is determined, RSUs vesting in February 2018 will be issued. Actual payouts may vary from 0 to 150 percent

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of target. The number of shares recorded in the table reflects the payout if the combined cumulative EPS for
2015 and 2016 is $6.15.

5 The 2014-2015 PA was determined to be 50 percent of target in January 2016 and the resulting RSUs will
vest February 2017.

6 RSUs vested February 2016 from the 2013-2014 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 2015

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 ($)

140,964

$2,864,829

57,108

$1,024,145

6,024

6,928

$88,613

$169,875

Number of Shares
Acquired on Vesting (#)
52,462 2
155,058 3
26,581 2
65,468 3
20,985 2
51,687 3

30,150 3
13,990 2
34,457 3

Value Realized
on Vesting ($) 1

$3,777,264

$12,708,586

$1,913,832

$5,365,774

$1,510,920

$4,236,234

$2,471,127

$1,007,280

$2,824,079

1 Amounts reflect the market value of the stock on the day the stock vested.

2 RSUs resulting from the 2012-2013 PA vested in February 2015.

3 Payout of the 2013-2015 SVA at 140 percent of target.

Retirement Benefits
We provide retirement income to eligible U.S. employees, including executive officers, through the following
plans:

(cid:127) The 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 base 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 under the 401(k) Plan for
the named executive officers.

(cid:127) The Retirement Plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See
the “Pension Benefits in 2015” 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 ($265,000 in 2015 and 2016) as well as the amount of annual earnings that can
be used to calculate a pension benefit. 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.

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The following table shows benefits that the named executive officers have accrued under the Retirement Plan
and the nonqualified pension plan.

Pension Benefits in 2015

Plan

Number of Years of
Credited Service

Present Value of
Accumulated Benefit ($) 1

Payments During
Last Fiscal Year
($)

Name

Dr. Lechleiter

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

$1,496,356

$203,236

$27,379,687

$3,396,749

$32,476,028

$762,942

$121,986

$6,246,898

$933,180

$8,065,006

$212,890

$1,546,009

$1,758,899

$727,073

$133,848

$2,419,836

$426,410

$3,707,167

$648,486

$116,454

$2,906,865

$494,664

$4,166,469

1 The following standard actuarial assumptions were used to calculate the present value of each individual’s
accumulated pension benefit:

Discount rate:

4.75 percent

Mortality (post-retirement decrement only):

RP2006 with generational projection using Scale MP2015

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

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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 were closer to retirement or had been with the company longer
at the time the plan was changed. 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.

Nonqualified Deferred Compensation in 2015

Name

Plan

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

Dr. Lechleiter

nonqualified savings

$74,100

deferred compensation

$1,249,500

total

$1,323,600

Mr. Rice

nonqualified savings

$46,812

deferred compensation

total

Dr. Lundberg

nonqualified savings

deferred compensation

total

Mr. Harrington

nonqualified savings

deferred compensation

total

Mr. Conterno

nonqualified savings

deferred compensation

total

$46,812

$44,571

$31,150

$26,439

$100,000

$126,439

$74,100

$46,812

$44,571

$31,150

$26,439

$300,087

$424,443

$724,530

$102,420

$53,817

$2,740

$4,544

$7,284

$53,868

$31,344

$85,212

$3,466,951

$12,069,225

$15,536,176

$1,437,499

$698,107

$296,231

$140,233

$436,464

$648,314

$884,918

$1,533,232

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.

P4747

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

2015 ($)

Previous Years ($)

Total ($)

$1,397,700

$10,631,831

$12,029,531

$93,624

$89,142

$62,300

$152,878

$705,338

$438,535

$121,800

$452,166

$798,962

$527,677

$184,100

$605,044

The "Nonqualified Deferred Compensation in 2015" 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 3.2 percent for 2015 and is 3.1 percent for 2016. 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.

Payments Upon Termination or Change in Control (as of December 31, 2015)
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.

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Continuation
of Medical /
Welfare
Benefits
(present
value) 2

Cash
Severance
Payment 1

Value of
Acceleration
of Equity
Awards

Total
Termination
Benefits

$7,500,000

$16,334

$14,738,376

$22,254,710

$3,991,140

$287,391

$7,234,362

$11,512,893

$3,829,849

$18,872

$6,017,402

$9,866,123

$2,758,000

$265,548

$3,922,532

$6,946,080

$2,485,718

$31,739

$4,305,551

$6,823,008

Dr. Lechleiter

(cid:127) Voluntary retirement

(cid:127)

Involuntary retirement or termination