Eli Lilly and Company Annual Report 2019

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FY2019 Annual Report · Eli Lilly and Company

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2 0 1 9 F I N A N C I A L R E P O R T
N O T I C E O F 2 0 2 0 A N N U A L M E E T I N G
P R O X Y S T A T E M E N T

TWENTYNINETEENELI LILLY ANDCOMPANYFINANCIALREPORT2019 Financial Highlights

E L I L I L L Y A N D C O M P A N Y A N D S U B S I D I A R I E S
(Dollars in millions, except per-share data)

2 0 1 9
Year ended December 31

2 0 1 8

C H A N G E %

REVENUE

RESEARCH AND DEVELOPMENT

RESEARCH AND DEVELOPMENT AS A PERCENT OF REVENUE

NET INCOME (LOSS)

EARNINGS (LOSS) PER SHARE—DILUTED

RECONCILING ITEMS:

Discontinued Operations from disposition of Elanco1

Asset impairment, restructuring, and other special charges¹

Gain on sale of China antibiotics business1

Charge related to repurchase of debt¹

Acquired in-process research and development¹

Amortization of intangible assets

Charges related to withdrawal of Lartruvo

Impact of reduced shares outstanding for non-GAAP reporting²

Income taxes³

Other, net

NON-GAAP EARNINGS PER SHARE—DILUTED3

DIVIDENDS PAID PER SHARE

CAPITAL EXPENDITURES

EMPLOYEES

$ 22,319.5

$ 21,493.3

5,595.0

25.1%

5,051.2

23.5%

$ 8,318.4

$ 3,232.0

8.89

3.13

11%

(3.93)

0.58

(0.26)

0.22

0.21

0.18

0.14

0.07

(0.05)

6.04

2.58

1,033.9

33,625

(0.08)

0.24

1.96

0.28

0.20

(0.27)

(0.02)

5.44

2.25

1,210.6

33,090

11%

15%

(15%)

1 For more information on these reconciling items, see the Financial Results section of the Executive Overview in Management’s Discussion and Analysis. 2 Non-GAAP earnings per share
assume that the disposition of Elanco occurred at the beginning of all periods presented and, therefore, exclude the approximately 65.0 million shares of Lilly common stock retired in the
Elanco exchange offer. 3 For 2019, amount relates to a tax benefit from a capital loss on the disposition of subsidiary stock. For 2018, amount relates to adjustments to the 2017 Toll Tax for
U.S. tax reform proposed regulations and tax expenses associated with the separation of Elanco. 4 Numbers may not add due to rounding.

REVENUE GROWTH ACROSS THERAPEUTIC AREAS
($ millions, percent growth)

OPERATING EXPENSES
($ millions, percent of revenue)

$21,493.3

$22,319.5

$19,973.8

Revenue in Endocrinology increased 10 percent primarily
driven by growth of Trulicity, Basaglar, and Jardiance.
Taltz drove the 57 percent revenue increase in Immunology.
Oncology revenue increased 8 percent due to Verzenio
launch in the US. Neuroscience experienced a 5 percent
decrease due to lower volume for Strattera as a result of
loss of patent protection, offset in part by the launch of
Emgality. Other Pharmaceutical revenue decreased
47 percent driven by lower volumes for Cialis, due to
patent losses.

$12,814.4
+10%

$1,374.5
-47%

$1,793.3
+57%

$4,614.4
+8%

$1,722.9
-5%

Endocrinology

Neuroscience

Oncology

Immunology

Other

Revenue

R&D

Marketing, Selling & Administrative

Over the past five years, Lilly has
maintained relatively flat operating
expenses while growing revenue, resulting
in steady improvement in operating
expense as a percent of revenue.

TOTAL SHAREHOLDER RETURN
Value of $100 invested in Lilly,
S&P 500 and Peer Group*

Lilly

S&P 500

Peer Group

Over the past five years, Lilly’s annualized
total shareholder return has averaged
16.7 percent, compared to 11.7 percent
for the S&P benchmark, due to the
increase in the stock price and increasing
dividend stream.

$17,050.5

$18,312.8

33.6%

31.9%

26.5%

27.5%

30.0%

25.5%

27.8%

23.5%

25.1%

2015

2016

2017

2018

2019

$225

$200

$175

$150

$125

$100

$75

2014

2015

2016

2017

2018

2019

* 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. See “Performance Graph”
for those companies included in our peer group.

Table of Contents

Y E A R I N R E V I E W

2019 Financial Highlights ....................................................................................................................Inside front cover

Corporate Information .........................................................................................................................Inside back cover

F I N A N C I A L R E P O R T

Forward-Looking Statements ..................................................................................................................................... F1

Business....................................................................................................................................................................... F2

Risk Factors ............................................................................................................................................................... F13

Management’s Discussion and Analysis of Results of Operations and Financial Condition .................................... F18

Consolidated Statements of Operations ................................................................................................................... F38

Consolidated Statements of Comprehensive Income (Loss) .................................................................................... F39

Consolidated Balance Sheets .................................................................................................................................... F40

Consolidated Statements of Shareholders’ Equity.................................................................................................... F41

Consolidated Statements of Cash Flows ................................................................................................................... F42

Notes to Consolidated Financial Statements ............................................................................................................ F43

Management’s Reports .............................................................................................................................................. F83

Reports of Independent Registered Public Accounting Firm .................................................................................... F85

Selected Financial Data ............................................................................................................................................. F89

Performance Graph ................................................................................................................................................... F90

Trademarks Used in this Report ................................................................................................................................ F91

P R O X Y

Notice of 2020 Annual Meeting of Shareholders ......................................................................................................... P1

Proxy Statement Summary .......................................................................................................................................... P2

Governance ................................................................................................................................................................ P10

Shareholder Engagement on Governance Issues ..................................................................................................... P31

Ownership of Company Stock .................................................................................................................................... P33

Compensation ............................................................................................................................................................ P34

Audit Matters ............................................................................................................................................................. P62

Management Proposals ............................................................................................................................................. P64

Shareholder Proposals .............................................................................................................................................. P67

Other Information ...................................................................................................................................................... P78

Appendix A ................................................................................................................................................................. P82

Appendix B ................................................................................................................................................................. P84

Directions and Parking .............................................................................................................................................. P88

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Forward-Looking Statements

This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, Section 21E of the Securities Exchange Act of 1934 (Exchange Act), and the Private Securities Litigation
Reform Act of 1995. 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 Results of Operations and Financial Condition” 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:

• uncertainties in the pharmaceutical research and development process, including with respect to the

timing of anticipated regulatory approvals and launches of new products;

• market uptake of recently launched products;

•

competitive developments affecting current products and our pipeline;

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, investigations, or other similar proceedings involving past, current, or future products or
commercial activities as we are largely self-insured;

• unauthorized disclosure, misappropriation, or compromise 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, including the impact of United States tax reform legislation enacted in December 2017
and related guidance, or events that differ from our assumptions related to tax positions;

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

asset impairments and restructuring charges;

changes in accounting and reporting 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.

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 a single business segment—human pharmaceutical products.

Our purpose is to unite caring with discovery to create medicines that make life better for people around the world.
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 or acquire, develop, and bring to market innovative new
medicines.

In September 2018 Elanco Animal Health Incorporated (Elanco), an animal health business previously wholly owned
by the company, completed an initial public offering of its common stock, which trades on the New York Stock
Exchange, and in March 2019, we completed the disposition of our remaining ownership of Elanco common stock.
For more information on the exchange offer, see “Management’s Discussion and Analysis - Results of Operations -
Executive Overview.”

We manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 8 other
countries. Our products are sold in approximately 120 countries.

Products
Our products include:

Diabetes and other endocrinology products, including:

• Baqsimi® (glucagon), a nasal powder formulation for the treatment of severe hypoglycemia in patients with

diabetes (approved in the U.S. and Europe in 2019)

• Basaglar® (insulin glargine injection), a long-acting human insulin analog for the treatment of diabetes

(launched in Japan and Europe under the trade name Abasaglar™)

•

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

• Humalog®, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, and insulin lispro, insulin

analogs for the treatment of diabetes

• Humatrope®, for the treatment of human growth hormone deficiency and certain pediatric growth

conditions

• Humulin®, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500, human insulins of recombinant DNA

origin for the treatment of diabetes

•

Jardiance®, for the treatment of type 2 diabetes and to reduce the risk of cardiovascular death in adult
patients with type 2 diabetes and established cardiovascular disease

Trajenta®, for the treatment of type 2 diabetes

Trulicity®, for the treatment of type 2 diabetes

Immunology products, including:

• Olumiant®, for the treatment of adults with moderately-to-severely active rheumatoid arthritis (approved in

Europe and Japan in 2017, and in the U.S. in 2018)

•

Taltz®, for the treatment of moderate-to-severe plaque psoriasis, active psoriatic arthritis (approved in the
U.S. in 2017, and in Europe in 2018), and ankylosing spondylitis (approved in the U.S. in 2019)

Neuroscience products, including:

• 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

• Emgality®, a once-monthly subcutaneously injected calcitonin gene-related peptide (CGRP) antibody for
migraine prevention (approved in the U.S. and Europe in 2018) and the treatment of episodic cluster
headache (approved in the U.S. in 2019)

• Reyvow™, an oral medicine for the acute treatment of migraine (launched in the U.S. in 2020)

FINANCIAL REPORT•

•

Strattera®, for the treatment of attention-deficit hyperactivity disorder

Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I
disorder, and bipolar maintenance

Oncology products, including:

• 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

• Cyramza®, for use as a single agent or in combination with another agent as a second-line treatment of

advanced or metastatic gastric cancer or gastro-esophageal junction adenocarcinoma; in combination with
another agent as a second-line treatment of metastatic NSCLC; in combination with another agent as a
second-line treatment of metastatic colorectal cancer; as a single agent as a second-line treatment of
hepatocellular carcinoma (approved in the U.S. in 2019); and in combination with another agent as a first-
line treatment of adult patients with metastatic NSCLC with activating epidermal growth factor receptor
(EGFR) mutations (approved in Europe in 2020)

• Erbitux®, indicated both as a single agent and in combination 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

•

Verzenio®, for use as a single agent and in combination with endocrine therapy for the treatment of a
certain type of metastatic breast cancer (approved in the U.S. in 2017 and in Europe and Japan in 2018)

Other products, including:

• Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia

Marketing
We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various
countries to meet local customer needs.

U.S.

In the U.S., most of our products are distributed through wholesalers that serve pharmacies, physicians and other
health care professionals, and hospitals. In 2019, 2018, and 2017, three wholesale distributors in the U.S. -
McKesson Corporation, AmerisourceBergen Corporation, and Cardinal Health, Inc. - each accounted for between 14
percent and 21 percent of our consolidated total revenue. No other distributor accounted for more than 10 percent
of our consolidated total revenue in any of those years.

We promote our major products in the U.S. through sales representatives who call upon physicians and other health
care professionals. We also promote to healthcare providers in medical journals and on-line health care channels,
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 to leverage our own
resources.

We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care
organizations, group purchasing 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.

Outside the U.S.

Outside the U.S., we promote our products to healthcare providers primarily through sales representatives and on-
line health care channels. While the products marketed vary from country to country, diabetes and other
endocrinology products constitute the largest single group in consolidated 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.

FINANCIAL REPORTMarketing Collaborations

Certain of our products are marketed in arrangements with other pharmaceutical companies, including the
following:

• We and Boehringer Ingelheim have a global agreement to develop and commercialize a portfolio of

diabetes products, including Trajenta, Jentadueto®, Jardiance, Glyxambi®, Synjardy®, Trijardy® XR, and
Basaglar.

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

Competition
Our products compete globally with products of many other companies in highly competitive markets.

Important competitive factors 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 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 efforts will result in commercially successful products, and it is
possible that our products will be, or 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 Europe, the
regulatory approval process for 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 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.

Biosimilars

Several of our current products, including Cyramza, Emgality, Erbitux, Taltz, and Trulicity 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 approved
innovator biologic that, due to its functional and structural similarity to the innovator biologic, is approved based on
an abbreviated data package that relies in part on the full testing required of the innovator biologic. Globally, most
governments have developed regulatory pathways to approve biosimilars as alternatives to innovator-developed
biologics, but the patent and regulatory exclusivity for the existing innovator biologic must expire in a given market
before biosimilars may enter that market. The extent to which a biosimilar, once approved, will be substituted for
the innovator biologic in a way that is similar to traditional generic substitution for non-biologic products, is not yet
entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing.

Biosimilars may present both competitive challenges and opportunities. For example, a competitor company has
developed a version of insulin lispro which competes with our product Humalog. On the other hand, with our
partner Boehringer Ingelheim, we developed Basaglar, a new insulin glargine product, which has the same amino
acid sequence as a product currently marketed by a competitor and has launched as a follow-on biologic in the U.S.,
and as a biosimilar in Europe and Japan. In March 2020, the U.S. regulatory status of all of our insulin products will
transition to become regulated as “biologics” rather than “drugs.” Based on recent U.S. Food and Drug
Administration (FDA) draft guidance, this change may lower the requirements for competitor biosimilar products to

FINANCIAL REPORTenter the market, some of which could be designated as interchangeable and therefore substituted for our insulin
products at U.S. pharmacies.

U.S. Private Sector Dynamics

In the U.S. private sector, consolidation and integration among healthcare providers is also a major factor in the
competitive marketplace for pharmaceuticals. Health plans and pharmacy benefit managers have been
consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. For example, in
2018 CVS Health, a large pharmacy benefit manager and pharmacy chain, acquired Aetna, a large national insurer,
and Cigna Corporation acquired Express Scripts in a similar transaction. More recently, in December 2019, Express
Scripts signed a three-year partnership agreement with another pharmacy benefit manager, Prime Therapeutics.

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. Value-based
agreements, where pricing is based on achievement, or not, of specified outcomes, are another tool which may be
utilized between payers and pharmaceutical companies as formulary placement and pricing are negotiated. 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 are
expected to continue to 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 effective intellectual property protection in
the form of data protection under pharmaceutical regulatory laws.

The patent protection anticipated to be of most relevance to 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 compounds are
generally filed during the Discovery 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:

• Patent term adjustment is a statutory right available to all U.S. patent applicants to provide relief in the

event that a patent grant is delayed during examination by the United States Patent and Trademark Office
(USPTO).

• Patent term restoration is a statutory right provided to U.S. patent holders that claim inventions subject to
review by the FDA. To make up for a portion of the time invested in clinical trials and the FDA review
process, a single patent for a pharmaceutical product may be eligible for patent term restoration. 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's expiration date may be extended beyond 14 years from FDA
approval. Some countries outside the U.S. also offer forms of patent term restoration. For example,
Supplementary Protection Certificates are available to extend the life of a European patent up to an
additional five years (subject to a 15-year cap from European Medicines Agency (EMA) approval). Similarly,
in Japan, South 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 pharmaceuticals, especially for non-biologic products, typically results in the
loss of effective market exclusivity for the product, which often results in severe and rapid decline in revenues for
the product. However, in some cases the innovator company may be protected from approval of generic, biosimilar,
or other follow-on versions of a new medicine beyond the expiration of the compound patent through manufacturing

FINANCIAL REPORTtrade secrets, later-expiring patents on manufacturing processes, methods of use or formulations, or data
protection that may be available under pharmaceutical regulatory laws. Changes to the laws and regulations
governing these protections could result in earlier loss of effective market exclusivity. The primary forms of data
protection are as follows:

• 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 generally five years in
the U.S. (12 years for new biologics as described below), effectively 10 years in Europe, 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.

• Under the Biologics Price Competition and Innovation Act of 2009 (the BPCI Act), 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 that the FDA will consider 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. The BPCI Act is part of the Affordable Care Act, the
constitutionality of which is currently being litigated.

•

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 within a specified time period. If
granted, this “pediatric exclusivity” provides an additional six months of exclusivity, which is 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. While the term of the pediatric exclusivity attaches to the term of any relevant patent,
pediatric exclusivity is a regulatory exclusivity, a bar to generic approval, not a patent right.

• Under the U.S. orphan drug law, a specific use of a drug or biologic 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 pharmaceuticals
varies widely, and in a number of these markets we are unable to patent our products or to enforce the patents we
receive for our products. 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.
Certain developing countries limit protection for biopharmaceutical products under their interpretation of
“flexibilities” allowed under the agreement. Thus, some types of patents, such as those on new uses of compounds
or new forms of molecules, are not available in certain developing countries. Further, many developing countries,
and some developed countries, do not provide effective data package protection even though it is specified in TRIPs.

Our 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. In addition to the data
protection and patents identified below, we may hold patents on manufacturing processes, formulations, devices, or
uses that extend exclusivity beyond the dates shown below.

The most relevant U.S. patent protection or data protection and associated expiry dates for our top-selling or
recently launched patent-protected marketed products are as follows:

• Alimta is protected by a vitamin regimen patent (2021) plus pediatric exclusivity (May 2022).

• Baqsimi is protected by data protection (July 2022).

• Cyramza is protected by a compound patent and biologics data protection (2026).

• Emgality is protected by a compound patent (2033).

FINANCIAL REPORT•

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

• Olumiant is protected by a compound patent (2030, not including possible patent extension).

• Reyvow is protected by a compound patent (2025, not including possible patent extension).

•

Taltz is protected by a compound patent (2026, not including possible patent extension) and by biologics
data protection (2028).

Trajenta and Jentadueto are protected by a compound patent (2023, not including possible patent
extension).

Trulicity is protected by a compound patent (2027).

Verzenio is protected by a compound patent (2029, not including possible patent extension).

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

• Alimta is protected by a vitamin regimen patent in major European countries (June 2021) and by patents

covering use to treat cancer concomitantly with vitamins in Japan (June 2021).

• Cyramza is protected by a compound patent in major European countries (2028) and Japan (2026).

• Emgality in is protected by a compound patent in major European countries (2033) and Japan (2031, not

including possible patent extension).

• Olumiant is protected by a compound patent in major European countries (2029, not including possible

patent extension) and Japan (2033).

•

Taltz is protected by a compound patent in major European countries (2031) and Japan (2030).

Trulicity is protected by a compound in major European countries and Japan (2029).

Verzenio is protected by a compound in major European countries and Japan (2029).

Baqsimi has been submitted for regulatory review in Japan, where it is expected to be protected by data protection
upon approval (6 years).

Flortaucipir has been submitted for regulatory review in the U.S. for use as a positron emission tomography (PET)
imaging agent and is protected by a compound patent (2029, not including possible patent extension).

Selpercatinib has been submitted for regulatory review in the U.S. for the treatment of cancers in certain patients
and is protected by a U.S. compound patent (2037, not including possible patent extension).

Tanezumab has been submitted for regulatory review in the U.S. for the treatment of osteoarthritis pain and is
expected to be protected by data protection upon approval (12 years).

Worldwide, we sell all of our major products under trademarks for names and unique product appearance (e.g., the
appearance of our Trulicity autoinjector) which we consider in the aggregate to be important to our operations.
Trademark protection varies throughout the world, with protection continuing in some countries as long as the
mark is used, and in other countries as long as it is registered. Registrations are normally for fixed but renewable
terms. Trademark protection often extends beyond the patent and data protection for a product.

Patent Licenses

Most of our major products are not subject to significant license agreements. For information on our license and
collaboration agreement with Incyte Corporation related to Olumiant, see "Financial Statements and
Supplementary Data - Note 4, Collaborations and Other Arrangements."

Patent Challenges

In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-
Waxman Act, authorizes the FDA to approve generic versions of innovative pharmaceuticals (other than biologics)
when the generic manufacturer has not conducted safety and efficacy studies but files an Abbreviated New Drug
Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only “bioequivalence” between the
generic version and the New Drug Application (NDA)-approved drug—not safety and efficacy. Establishing
bioequivalence is generally straightforward and inexpensive for the generic company.

Absent a patent challenge, the FDA cannot approve an ANDA until after certain of 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 or all of the patents listed in the innovator’s NDA are invalid or not infringed. This

FINANCIAL REPORTallegation is commonly known as a “Paragraph IV certification.” If the innovator responds by filing suit against the
generic manufacturer, the FDA is then prohibited from approving the generic company’s application for a 30-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
pharmaceuticals. In addition, generic companies have shown willingness to launch “at risk,” i.e., after receiving
ANDA approval but before final resolution of their patent challenge. We are currently in Hatch-Waxman litigation
involving Alimta with five generic manufacturers. For more information on Hatch-Waxman litigation involving the
company, see “Financial Statements and Supplementary Data - Note 16, Contingencies."

Under the BPCI Act, the FDA cannot approve a biosimilar application until data protection expires, 12 years after
initial marketing approval of the innovator biologic. However, the BPCI Act does provide a mechanism for a
competitor to challenge the validity of an innovator’s patents as early as four years after initial marketing approval
of the innovator biologic. The patent litigation scheme under the BPCI Act is complex and courts have held that
biosimilar applicants are not required to engage in it. Patent holders still have the right to bring suit under normal
patent law procedures if a biosimilar applicant attempts to commercialize a product prior to patent expiration.

In addition, there is a procedure in U.S. patent law known as inter partes review (IPR), which allows any member of
the public to file a petition with the USPTO seeking the review of any issued U.S. patent for validity. 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. Generic drug companies and even some investment firms have engaged in the IPR process in
attempts to invalidate our patents.

Outside the U.S., the legal doctrines and processes by which pharmaceutical patents can be challenged vary widely.
In recent years, we have experienced an increase in patent challenges from generic manufacturers in many
countries outside the U.S. For more information on administrative challenges and litigation involving our Alimta
patents in Europe and Japan, see “Financial Statements and Supplementary Data - Note 16, Contingencies.”

Government 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 pharmaceutical products are extensively regulated in all major 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. Compliance with 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 to our business is the FDA in the U.S. Pursuant to the Federal Food, Drug, and Cosmetic
Act, the FDA has jurisdiction over all of our products and devices 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 FDA extensively regulates all aspects of manufacturing quality for 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 EMA in Europe 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 in an effort 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 pharmaceutical manufacturers, as well as the manner in
which manufacturers interact with purchasers, prescribers, and patients, 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

FINANCIAL REPORTthe past several years, state and federal governments have increased their oversight, enforcement activities, and
intra-agency coordination with respect to pharmaceutical companies. Several claims brought by these agencies
against us and other companies under these and other laws have resulted in corporate criminal sanctions and very
substantial civil settlements.

The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits certain individuals and entities, including U.S.
publicly traded companies, from promising, offering, or giving anything of value to foreign officials with the corrupt
intent of influencing the foreign official for the purpose of helping the company obtain or retain business or gain any
improper advantage. The FCPA also imposes specific recordkeeping and internal controls requirements on U.S.
publicly traded companies. As noted above, outside the U.S., our business is heavily regulated and therefore
involves significant interaction with foreign officials. Additionally, in many countries outside the U.S., the health care
providers who prescribe pharmaceuticals are employed by the government and the purchasers of 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.

We are and could in the future become subject to 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 and Private Payer Actions Affecting 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 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. Additionally, an annual fee is imposed on
pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government
programs. Since 2019, the Bipartisan Budget Act has required manufacturers of brand-name drugs, biologics, and
biosimilars to provide a discount of 70 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), up from the
previous 50-percent discount.

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 2019, the White House signed into law targeted amendments to the Medicaid Drug Rebate Program statute, as
well as the Fair and Accurate Medicaid Pricing Act, which was part of the Continuing Appropriations Act. We do not
believe either will have a material impact to our business. Several states have passed importation legislation,
including Colorado, Florida, Maine, and Vermont. Specifically, the state of Florida is working with the Administration
to implement an importation program from Canada as early as 2020. We are currently reviewing the state
legislation, as well as corresponding proposed federal rulemaking and guidance recently published by the
Department of Health and Human Services and the FDA, the impact of which is uncertain at this time.

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 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.

FINANCIAL REPORTWe cannot predict the extent to which our business may be affected by these or other potential future legislative,
regulatory, or payer 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 products.

Research and Development
Our commitment to research and development dates back more than 140 years. We invest heavily in research and
development because we believe it is critical to our long-term competitiveness. At the end of 2019, we employed
approximately 7,810 people in pharmaceutical research and development activities, including a substantial number
of physicians, scientists holding graduate or postgraduate degrees, and highly skilled technical personnel.

Our internal pharmaceutical research focuses primarily on the areas of oncology, diabetes, neurodegeneration,
immunology, and pain. We believe that 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.

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
pharmaceutical products. We actively invest in external research and technologies that we believe 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.

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. The rate of
innovation cycles leading to medical improvements over initial inventions is accelerating, which has increased the
risk that we opt not to develop a late-stage asset or that new products fail to achieve commercial success due to
technical obsolescence - displacement by follow-on competitor products - before the period of exclusivity has
ended. 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. Consistent with their purpose, these studies have the potential to identify information
about problems with product safety or efficacy that result in product withdrawal. The following describes in more
detail the research and development process for pharmaceutical products:

Phases of New Drug Development

• Discovery 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.

•

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 or patients to assess safety and find the potential dosing range. After a safe dose range 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.

F10

FINANCIAL REPORT•

Product Phase

Product phase (Phase III) molecules have met initial safety requirements 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.

•

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 45 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; migraine; cluster headache; diabetes; obesity; and autoimmune diseases, including
alopecia areata, systemic lupus erythematosus, psoriasis, atopic dermatitis, Crohn's disease, and ulcerative colitis.
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 - Results of Operations - Executive
Overview - 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 or intermediate materials primarily from only one source. We generally seek to
maintain sufficient inventory to supply the market until an alternative source of supply could be implemented, in the
event one of these suppliers was unable to provide the materials or product. 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 sites we own in the U.S., Ireland, and Puerto Rico. 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 is
intended to 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, pharmaceutical production processes are complex, highly regulated, and vary widely from product to
product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital
expenditures, process modifications, and regulatory approvals. Accordingly, if we were to experience unplanned
plant shutdowns at one of our own facilities, significant failure of a contract supplier, or significant unanticipated
increases in demand, we could experience an interruption in supply of certain products or product shortages until
production could be resumed or expanded.

F11

FINANCIAL REPORTQuality 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 in an effort 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 thereof. Additional assurance of quality is provided by corporate quality-assurance groups that audit
and monitor all aspects of quality related to pharmaceutical manufacturing procedures and systems in company
operations and at third-party suppliers.

F12

FINANCIAL REPORTRisk 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, cash flows, 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.

• 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 that have lost or will soon lose intellectual property protection or are displaced by competing
products or therapies.

There are many difficulties and uncertainties inherent in 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 $2 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 or maintain necessary regulatory approvals or payer
reimbursement or coverage, limited scope of approved uses, changes in the relevant treatment standards or
the availability of new or better competitive products, difficulty or excessive costs to manufacture, or
infringement of the patents or intellectual property rights of others. Regulatory agencies continue to establish
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 revenue growth rates of new products.

We cannot state with certainty when or whether our products now under development will be approved or
launched; whether, if initially granted, such approval will be maintained; 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 revenues 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, and financial
position. See “Management’s Discussion and Analysis - Results of Operations - Executive Overview - Late-
Stage Pipeline” for more details.

• 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 has resulted and is likely to continue to result in rapid and severe declines in
revenues.

A number of our top-selling 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
(2019)
($ in millions)

Percent of
Worldwide
Revenues
(2019)

1,219.5

645.5

Product

Alimta

Forteo

Revenues
Outside U.S.
(2019)
($ in millions)

Percent of
Worldwide
Revenues
(2019)

Product

Alimta

896.4

Forteo

Cymbalta

759.1

675.8

Patent / Data Protection - U.S.

Vitamin regimen patent plus pediatric exclusivity will expire in May 2022

Formulation and related process patents expired in December 2018 and use
patents expired in August 2019

Patent / Data Protection - Major Europe / Japan

Major European countries: vitamin regimen patent will expire in June 2021
Japan: use patents to treat cancer concomitantly with vitamins will expire in June
2021

Japan: data package protection expired in July 2018; formulation and use patents
expired in August 2019

Japan: data package protection expired in January 2020

F13

FINANCIAL REPORTCertain other significant products no longer have effective exclusivity through patent protection or data
protection. For non-biologic products, loss of exclusivity (whether by expiration of legal rights or by termination
thereof 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 biologics (such as Humalog, Humulin, Erbitux, Cyramza, Trulicity, Taltz,
and Emgality), loss of exclusivity may or may not result in the near-term entry of competitor versions (i.e.,
biosimilars) due to many factors including development timelines, manufacturing challenges, and/or
uncertainties in the regulatory pathways for approval of the competitor versions.

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. See "Management’s Discussion
and Analysis - Results of Operations - Executive Overview - Other Matters - Patent Matters” and "Business -
Patents, Trademarks, and Other Intellectual Property Rights" for more details.

• 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 or acquire, 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, depending on
local laws and regulations. Changes to such laws and regulations could reduce protections for our innovative
products. In the U.S., in addition to the process for challenging patents set forth in the BPCI Act, which applies
to our biologic products, the Hatch-Waxman Act provides generic companies powerful incentives to seek to
invalidate our other pharmaceutical patents. As a result, we expect that our U.S. patents on major
pharmaceutical products will continue to be routinely challenged in litigation and may not be upheld. In
addition, a separate IPR process allows competitors to request review of issued patents by the USPTO without
the protections of the Hatch-Waxman Act. Our patents may be invalidated via this review process. Although
such a decision can be appealed to the courts, in certain circumstances a loss in such a proceeding could result
in a competitor entering the market, while a win provides no precedential value - the same patent can still be
challenged by other competitors. 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 revenues. 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 significant 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 16, Contingencies" for more details.

• Our 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
reputation or business.

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

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 and Private Payer
Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access” and “Management’s Discussion and
Analysis - Results of Operations - Executive Overview - Other Matters - Trends Affecting Pharmaceutical
Pricing, Reimbursement, and Access.”

F14

FINANCIAL REPORT• 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. Regulation of generic and biosimilar
products varies around the world. Particularly for biosimilars, changes to such regulations could make it easier,
less expensive, and less time consuming for competitor products to enter the market, some of which could be
substituted for our products at the pharmacy. Our revenues can also be adversely affected by treatment
innovations that eliminate or minimize the need for treatment with our drugs. See “Business - Competition”
and "Business - Research and Development" for more details.

• Changes in foreign currency rates or devaluation of a foreign currency can materially affect our revenue,

cost of sales, and operating expenses.

As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from
fluctuating currency exchange rates. While we seek to manage a portion of these exposures through hedging
and other risk management techniques, significant fluctuations in currency rates can have a material impact,
either positive or negative, on our revenue, cost of sales, and operating expenses. In the event of an extreme
devaluation of local currency, the price of our products could become unsustainable in the relevant market. See
“Management’s Discussion and Analysis - Financial Condition” for more details.

• 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, and in the course of our
business, we make judgments about the expected tax treatment of various transactions and events, including
the separation of Elanco. Changes in the relevant tax laws, regulations, administrative practices, principles, and
interpretations, as well as events that differ from our expectations, could adversely affect our future effective
tax rates. The U.S. enacted tax reform legislation significantly revising the U.S. tax law, effective January 2018,
and a number of other countries are actively considering or enacting tax changes. Modifications 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 “Management’s Discussion and Analysis - Results of Operations -
Executive Overview - Other Matters - Tax Matters” and "Financial Statements and Supplementary Data - Note
14, Income Taxes" for more details. Lilly has taken the position on the separation from Elanco, based on an
opinion of tax counsel, that the divestiture of Elanco common stock qualifies as a transaction that is tax-free for
U.S. federal income tax purposes. If any facts, assumptions, representations, and undertakings from Lilly and
Elanco regarding the past and future conduct of their respective businesses and other matters are incorrect or
not otherwise satisfied, the divestiture may not qualify for tax-free treatment, which could result in significant
U.S. federal income tax liabilities for both Lilly and its shareholders who exchanged their stock for Elanco stock.

• Failure, inadequacy, or breach of our information technology systems, infrastructure, and business
information or violations of data protection laws could result in material harm to our business and
reputation.

A great deal of confidential information owned by both us and our business partners is stored in our
information systems, networks, and facilities or those of third parties. This includes valuable trade secrets and
intellectual property, clinical trial information, corporate strategic plans, marketing plans, customer
information, and personally identifiable information, such as employee and patient information (collectively,
“confidential information”). We also rely to a large extent on the efficient and uninterrupted operation of
complex information technology systems, infrastructure, and hardware (together “IT systems”), some of which
are within the company’s control and some of which are within the control of third parties, to accumulate,
process, store, and transmit large amounts of confidential information and other data. We are subject to a
variety of continuously evolving and developing laws and regulations around the world related to privacy, data
protection, and data security. Maintaining the confidentiality, integrity and availability of our IT systems and
confidential information is vital to our business.

F15

FINANCIAL REPORTIT systems are vulnerable to system inadequacies, operating failures, service interruptions or failures, security
breaches, malicious intrusions, or cyber-attacks from a variety of sources. Cyber-attacks are growing in their
frequency, sophistication, and intensity, and are becoming increasingly difficult to detect, mitigate, or prevent.
Cyber-attacks come in many forms, including the deployment of harmful malware, exploitation of
vulnerabilities, denial-of-service attacks, the use of social engineering, and other means to compromise the
confidentiality, integrity and availability of our IT systems, confidential information, and other data. Breaches
resulting in the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized
disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with
our products and services, can occur 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 information, or wrongful conduct by
hackers, competitors, certain governments, or other current or former company personnel. Our third party
partners face similar risks.

The failure or inadequacy of our IT systems, the compromise, disruption, degradation, manipulation, loss, theft,
destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to,
disruption of, or interference with our products and services that rely on IT systems, could impair our ability to
secure and maintain intellectual property rights; result in a product manufacturing interruption or failure, or in
the interruption or failure of products or services that rely on IT systems; damage our operations, customer
relationships, or reputation; and cause us to lose trade secrets or other competitive advantages. Unauthorized
disclosure of personally identifiable information could expose us to significant sanctions for violations of data
privacy laws and regulations around the world and could damage public trust in our company.

To date, system inadequacies, operating failures, unauthorized access, service interruptions or failures,
security breaches, malicious intrusions, cyber-attacks, and the compromise, disruption, degradation,
manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information have not
had a material impact on our consolidated results of operations. We maintain cyber liability insurance; however,
this insurance may not be sufficient to cover the financial, legal, business, or reputational losses that may
result from an interruption or breach of our IT systems. We continue to implement measures in an effort to
protect, detect, respond to, and minimize or prevent these risks and to enhance the resiliency of our IT systems;
however, these measures may not be successful. If they are not successful, any of these events could result in
material financial, legal, business, or reputational harm to our business.

• Significant economic downturns or international trade disruptions or disputes could adversely affect our

business and operating results.

While pharmaceuticals have not generally been sensitive to overall economic cycles, prolonged economic
slowdowns could lead to decreased utilization of our products, 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. Similarly, in the event of a significant economic
downturn, we could have difficulty accessing credit markets.

Significant portions of our business are conducted in Europe, including the U.K.; Asia; and other international
geographies. Trade disputes and interruptions in international relationships, including pandemic diseases,
such as the coronavirus, could result in changes to regulations governing our products and our intellectual
property, or otherwise affect our ability to do business. While we do not expect either circumstance to
materially affect our business in a direct manner, these and similar events could adversely affect us, or our
business partners or customers.

• Pharmaceutical products can develop unexpected safety or efficacy concerns, which could have a material

adverse effect on revenues, income, and reputation.

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 or other measures 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.

F16

FINANCIAL REPORT• We face litigation and investigations related to our products and our pricing practices 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®, Axiron®, Byetta®, Cialis, and
Cymbalta among other products, as well as litigation and investigations related to the pricing of our products.
See “Financial Statements and Supplementary Data - Note 16, Contingencies” for more information on our
current product liability litigation, as well as pricing litigation, investigations, and inquiries. Because of the
nature of pharmaceutical products, we are and could in the future become subject to large numbers of product
liability claims for these or other products, or to further litigation or investigations into pricing or other
commercial practices. Such matters require substantial expenditures to resolve and, if involving marketed
products, could adversely affect sales of the product. Due to a very restrictive market for liability insurance, we
are self-insured for product liability losses for all our currently marketed products, as well as for litigation or
investigations related to our pricing practices or other similar matters.

• Regulatory compliance problems could be damaging to the company.

The marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in
which manufacturers interact with purchasers, prescribers, and patients, are subject to extensive regulation.
Many companies, including 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. We are and could in the future become subject to
such investigations, the outcomes of which 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 our 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 - Government Regulation of Our Operations” for more details.

• Manufacturing difficulties or disruptions could lead to product supply problems.

Pharmaceutical manufacturing is complex and highly regulated. Manufacturing difficulties at our facilities or
contracted facilities, or the failure or refusal of a contract manufacturer to supply contracted quantities, could
result in product shortages, leading to lost revenue. Such difficulties or disruptions could result from quality or
regulatory compliance problems; natural disasters or pandemic disease; mechanical or information technology
system vulnerabilities, such as system inadequacies, operating failures, service interruptions or failures,
security breaches, malicious intrusions, or cyber-attacks from a variety of sources; 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 unanticipated demand for new
products. See “Business - Raw Materials and Product Supply” for more details.

• Reliance on third-party relationships and outsourcing arrangements could adversely affect our business.

We rely on third parties, including suppliers, distributors, alliances with other pharmaceutical and
biotechnology companies, and third-party service providers, for selected aspects of product development,
manufacture, commercialization, support for information technology systems, product distribution, 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, integrity, and availability of our confidential
and proprietary information; may experience disruption or fail to perform due to information technology system
vulnerabilities, breaches, or cyber-attacks; or may fail to perform at all. Failure of these third parties to meet
their contractual, regulatory, confidentiality, privacy, security, or other obligations to us could have a material
adverse effect on our business.

F17

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

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

General
Management’s discussion and analysis of results of operations and financial condition is intended to assist the
reader in understanding and assessing significant changes and trends related to the results of operations and
financial position of our consolidated company. This discussion and analysis should be read in conjunction with the
consolidated financial statements and accompanying footnotes in this Annual Report. Certain statements in this
section of the Annual Report constitute forward-looking statements. Various risks and uncertainties, including
those discussed in "Forward-Looking Statements" and “Risk Factors” may cause our actual results, financial
position, and cash generated from operations to differ materially from these forward-looking statements.

Executive Overview
This section provides an overview of our financial results, recent product and late-stage pipeline developments, and
other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented
on a diluted basis.

On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health
Incorporated (Elanco) common stock through a tax-free exchange offer. As a result, we recognized a gain on the
disposition of approximately $3.7 billion in the first quarter of 2019 and now operate as a single segment. See Note
19 to the consolidated financial statements for further discussion.

Financial Results

The following table summarizes our key operating results:

Revenue

Gross margin

Gross margin as a percent of revenue

Operating expense

Acquired in-process research and development

Asset impairment, restructuring, and other special charges

Income before income taxes

Income taxes

Net income from continuing operations

Net income

EPS from continuing operations

EPS

NM - not meaningful

Year Ended
December 31,

2019

2018

22,319.5

21,493.3

17,598.3

16,811.6

78.8%

78.2%

11,808.8

11,026.3

239.6

575.6

5,265.9

628.0

4,637.9

8,318.4

4.96

8.89

1,983.9

266.9

3,680.1

529.5

3,150.6

3,232.0

3.05

3.13

Percent
Change

(88)

Revenue increased in 2019 driven by increased volume, partially offset by lower realized prices and the unfavorable
impact of foreign exchange rates. Operating expenses increased in 2019, reflecting higher late-stage development
expenses and increased marketing expenses for recently launched products, partially offset by lower marketing
expenses for late life-cycle products. The increases in net income and EPS in 2019 were driven primarily by the gain
recognized on the disposition of Elanco and, to a lesser extent, lower acquired in-process research and
development (IPR&D) charges. In addition to the increase in net income, EPS in 2019 significantly benefited from
lower weighted-average shares outstanding as a result of the Elanco exchange offer and share repurchases.

F18

FINANCIAL REPORTThe following highlighted items affect comparisons of our 2019 and 2018 financial results:

2019

Acquired IPR&D (Note 3 to the consolidated financial statements)

• We recognized acquired IPR&D charges of $239.6 million primarily related to collaborations with AC

Immune SA (AC Immune), Centrexion Therapeutics Corporation (Centrexion), ImmuNext, Inc. (ImmuNext),
and Avidity Biosciences, Inc. (Avidity).

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

• We recognized charges of $575.6 million primarily associated with the accelerated vesting of Loxo

Oncology, Inc. (Loxo) employee equity awards as a result of the closing of the acquisition of Loxo, and, to a
lesser extent, charges associated with the decision to close and sell a research and development facility
located in the United Kingdom (U.K).

Other–Net, (Income) Expense (Note 18 to the consolidated financial statements)

• We recognized a gain of $309.8 million on the sale of the company's antibiotics business in China.

• We recognized a debt extinguishment loss of $252.5 million related to the repurchase of debt.

Net Income from Discontinued Operations (Note 19 to the consolidated financial statements)

• We recognized a gain related to the disposition of Elanco of approximately $3.7 billion.

2018

Acquired IPR&D (Note 3 to the consolidated financial statements)

• We recognized acquired IPR&D charges of $1.98 billion primarily related to the acquisition of ARMO

BioSciences, Inc. (ARMO) and the collaboration with Dicerna Pharmaceuticals, Inc. (Dicerna).

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

• We recognized charges of $266.9 million primarily associated with asset impairments related to the sale of

the Posilac® (rbST) brand and the related sale of the Augusta, Georgia manufacturing site and with
expenses related to our efforts to reduce our cost structure.

Income Taxes (Note 14 to the consolidated financial statements)

• We recognized $313.3 million of income tax benefit primarily due to measurement period adjustments to
the one-time repatriation transition tax (also known as the 'Toll Tax') and the global intangible low-taxed
income (GILTI).

Late-Stage Pipeline

Our long-term success depends to a great extent on our ability to continue to discover and develop innovative
pharmaceutical products and acquire or collaborate on molecules currently in development by other biotechnology
or pharmaceutical companies. We have approximately 45 potential new drugs in human testing or under regulatory
review and a larger number of projects in preclinical research.

The following new molecular entities (NMEs) have been approved by regulatory authorities in at least one of the
major geographies for use in the conditions described. The first quarter in which the NMEs initially were approved
in any major geography for any indication is shown in parentheses:

Galcanezumab* (Emgality®) (Q3 2018)—a once-monthly subcutaneously injected calcitonin gene-related
peptide (CGRP) antibody for migraine prevention and for the treatment of episodic cluster headache. See
Note 16 to the consolidated financial statements for discussion of the legal proceedings involving Teva
Pharmaceuticals International GMBH and Teva Pharmaceuticals USA, Inc.

Lasmiditan (Reyvow™) (Q4 2019)—an oral 5-HT1F agonist for the acute treatment of migraine.

Nasal glucagon* (Baqsimi®) (Q3 2019)—a glucagon nasal powder formulation for the treatment of severe
hypoglycemia in patients with diabetes ages four years and above.

F19

FINANCIAL REPORTThe following NMEs and diagnostic agent have been submitted for regulatory review in at least one of the major
geographies for potential use in the conditions described. The first quarter in which each NME and the diagnostic
agent initially were submitted in any major geography for any indication is shown in parentheses:

Flortaucipir** (Q3 2019)—a positron emission tomography (PET) tracer intended to image tau (or
neurofibrillary) tangles in the brain, which are an indicator of Alzheimer's disease.

Selpercatinib (Q4 2019)—an oral drug for the treatment of patients with cancers that harbor abnormalities
in the rearranged during transfection (RET) kinase, specifically thyroid cancer and lung cancer.

Tanezumab* (Q4 2019)—an anti-nerve growth factor monoclonal antibody for the treatment of
osteoarthritis pain (in collaboration with Pfizer Inc. (Pfizer)).

Ultra-rapid Lispro* (Q1 2019)—an ultra-rapid insulin for the treatment of type 1 and type 2 diabetes.

The following NMEs are currently in Phase III clinical trial testing for potential use in the conditions described below
but have not yet been submitted for regulatory approval for any indication. The first quarter in which each NME
initially entered Phase III for any indication is shown in parentheses:

Mirikizumab* (Q2 2018)—a monoclonal antibody designed for the treatment of autoimmune diseases.

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

Tirzepatide* (Q4 2018)—a long-acting, combination therapy of glucose-dependent insulinotropic
polypeptide (GIP) and glucagon-like peptide 1 for the treatment of type 2 diabetes and obesity.

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

** Diagnostic agent

The following table reflects the status of the recently approved products, NMEs, and diagnostic agent set forth
above, as well as certain other developments to our late-stage pipeline since January 1, 2019:

Compound

Indication

U.S.

Europe

Japan

Developments

Endocrinology

Baqsimi

Tirzepatide

Severe
hypoglycemia

Type 2 diabetes

Obesity

Ultra-rapid Lispro

Type 1 and 2
diabetes

Immunology

Mirikizumab

Crohn's Disease

Psoriasis

Ulcerative colitis

Launched

Approved

Submitted

Phase III

Submitted

Phase III

Launched in the U.S. in third quarter of 2019.
Approved in Europe in the fourth quarter of 2019.
Submitted to the Japan regulatory authorities in
2019.

Phase III trials are ongoing.

Phase III trials were initiated in the fourth quarter
of 2019.

Submitted to regulatory authorities in Europe and
Japan in the first quarter of 2019. Submitted to the
U.S. Food and Drug Administration (FDA) in the
third quarter of 2019. In January 2020, the
European regulatory authorities issued a positive
opinion recommending approval.

Phase III trials were initiated during the third
quarter of 2019.

Phase III trials are ongoing.

F20

FINANCIAL REPORTCompound

Indication

U.S.

Europe

Japan

Developments

Neuroscience

Emgality

Cluster headache

Launched

Submitted

Phase III

Migraine
prevention

Launched

Submitted

Submitted to European regulatory authorities in
the first quarter of 2019. Approved and launched in
the U.S. in the second quarter of 2019.

Launched in Europe in the first quarter of 2019.
Submitted to Japanese regulatory authorities in
January 2020.

Flortaucipir

Alzheimer's
disease diagnostic

Submitted

Phase III

Submitted to the FDA in the third quarter of 2019.

Reyvow

Acute treatment
of migraine

Launched

Phase III

Solanezumab

Preclinical
Alzheimer's
disease

Phase III

Osteoarthritis pain

Submitted

Phase III

Chronic low back
pain

Phase III

Tanezumab

Oncology

Approved by the FDA in the fourth quarter of 2019.
Received Schedule V classification from the Drug
Enforcement Agency and launched in the U.S. in
January 2020.

Announced in February 2020 that a Phase III trial
for people with dominantly inherited Alzheimer's
disease (DIAD) did not meet the primary endpoint.
We do not plan to pursue submission for DIAD.
Phase III trial is ongoing for Anti-Amyloid
Treatment in Asymptomatic Alzheimer's.

In the third quarter of 2018 and the first quarter of
2019, announced multiple Phase III trials met
several primary endpoints. In the second quarter
of 2019, announced the results of the long-term
Phase III study in which the 5mg dose met two of
the three co-primary endpoints and the 2.5mg
dose did not meet any of the three co-primary
endpoints. In partnership with Pfizer, we
submitted to the FDA in the fourth quarter of 2019
and are pursuing submission in Europe and Japan
in 2020.

In the first quarter of 2019, announced Phase III
trial met primary endpoint for the 10mg dose and
did not meet primary endpoint on the 5mg dose. In
the third quarter of 2019, announced results from
a Phase III study evaluating long-term safety and
efficacy in Japan. In partnership with Pfizer,
announced in the third quarter of 2019 that we are
not planning regulatory submissions. We plan to
maintain an open dialogue with regulatory
authorities on potential future regulatory
pathways.

Cancer pain

Phase III

Phase III trial is ongoing.

Lartruvo®

Soft tissue
sarcoma

Withdrawn

Withdrawing

Not
Submitting

Pegilodecakin

Pancreatic cancer

Not Submitting

Selpercatinib
(LOXO-292)

Thyroid Cancer

Submitted

Phase III

Lung Cancer

Submitted

Phase III

In the first quarter of 2019, announced
confirmatory phase III trial did not meet primary
endpoint. As this trial did not confirm clinical
benefit, we suspended promotion globally and
withdrew the product in the U.S. in the third
quarter of 2019. For countries in Europe, we have
withdrawn or are in the process of withdrawing
the product.

In the fourth quarter of 2019, announced phase III
trial did not meet primary endpoint of overall
survival. Phase II trials for other indications also
did not meet primary endpoint. We do not plan to
initiate any new trials.

In the fourth quarter of 2019, submitted to the FDA
and European regulatory authorities based on
Phase II data. Granted Breakthrough Therapy
Designation(1). Granted Priority Review(2) from the
FDA in first quarter of 2020. Phase III trials were
initiated in the fourth quarter of 2019 in all major
geographies.

(1) 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.

(2) Priority Review is designed to expedite the review of potential medicines that, if approved, would be significant improvements in the
safety or effectiveness of the treatment, diagnosis, or prevention of serious conditions when compared to standard applications.

F21

FINANCIAL REPORTefficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement
or coverage, limited scope of approved uses, changes in the relevant treatment standards or the availability of new
or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or
intellectual property rights of others. Regulatory agencies continue to establish 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 revenue growth rates of
new products.

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, 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

Patent Matters

We depend on patents or other forms of intellectual-property protection for most of our revenue, cash flows, and
earnings.

We lost our patent exclusivity for Strattera® in the U.S. in May 2017, and generic versions of Strattera were approved
in the same month. Following a settlement related to the compound patent challenge for Effient®, generic products
launched in the U.S. in the third quarter of 2017. The entry of generic competition for these products has caused a
rapid and severe decline in revenue, which, in the aggregate, has had a material adverse effect on our consolidated
results of operations and cash flows.

Our compound patent protection for Cialis® (tadalafil) and Adcirca® (tadalafil) expired in major European markets
and the U.S. in November 2017; however, in the U.S., we were granted pediatric exclusivity through May 2018.
Another later expiring patent (October 2020) was the subject of U.S. patent litigation and pursuant to a settlement
agreement related thereto, generic tadalafil entered the U.S. market in September 2018. We have faced and remain
exposed to generic competition following the loss of exclusivity, which has rapidly and severely eroded revenue and
is likely to continue to erode revenue.

Our formulation patents for Forteo® expired in December 2018, and our use patents expired in August 2019 in major
European markets and the U.S. Both the formulation patent and the use patent expired in August 2019 in Japan. We
expect further volume decline as a result of the entry of generic and biosimilar competition following the loss of
patent exclusivity in these markets. In the aggregate, we expect that the decline in revenue will have a material
adverse effect on our consolidated results of operations and cash flows.

The Alimta® vitamin regimen patents, which we expect to provide us with patent protection for Alimta through June
2021 in Japan and major European countries, and through May 2022 in the U.S., have been challenged in each of
these jurisdictions. In the U.S., we and Eagle Pharmaceuticals, Inc. (Eagle) reached an agreement in December
2019 to settle all pending litigation, allowing Eagle a limited initial entry into the market with its product starting
February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022. Our
vitamin regimen patents have also been challenged in other smaller European jurisdictions. Our compound patent
for Alimta expired in the U.S. in January 2017, and expired in major European countries and Japan in December
2015. We are aware that several companies have received approval to market generic versions of pemetrexed in
major European markets (including Germany, France, and the Netherlands) and that additional generic competitors
may choose to launch at risk. Although we will continue to seek to remove any such products, generic product entry
is resulting in some loss in revenue in these jurisdictions. We expect that further entry of generic competition for
Alimta 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. See Note 16 to the consolidated financial statements for a more detailed account of the legal
proceedings currently pending in the U.S., Europe, and Japan regarding our Alimta patents.

The compound patent for Humalog® (insulin lispro) has expired in major markets. Global regulators have different
legal pathways to approve similar versions of insulin lispro. A competitor launched a similar version of insulin lispro
in certain European markets in 2017 and in the U.S. in the second quarter of 2018. While it is difficult to estimate the

F22

FINANCIAL REPORTseverity of the impact of insulin lispro products entering the market, we do not expect and have not experienced a
rapid and severe decline in revenue; however, we expect additional pricing pressure and some loss of market share
that would continue over time.

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 and Japanese yen. 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 expense. While there is uncertainty in the future movements in foreign exchange rates, fluctuations in
these rates could negatively impact our future consolidated results of operations and cash flows.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access

U.S.

In the U.S., public concern over access to and affordability of pharmaceuticals continues to drive the regulatory and
legislative debate. These policy and political issues increase the risk that taxes, fees, rebates, or other cost control
measures may be enacted to manage federal and state budgets. Key health policy initiatives affecting
biopharmaceuticals include:

•

foreign reference pricing in Medicare and private insurance,

• modifications to Medicare Parts B and D,

•

provisions that would allow the Department of Health and Human Services to negotiate prices for biologics
and drugs in Medicare,

a reduction in biologic data exclusivity,

proposals related to Medicaid prescription drug coverage and manufacturer drug rebates,

proposals that would require biopharmaceutical manufacturers to disclose proprietary drug pricing
information; and

state-level proposals related to prescription drug prices and reducing the cost of pharmaceuticals
purchased by government health care programs.

California and several other states have enacted legislation related to prescription drug pricing transparency and it
is unclear the effect this legislation will have on our business. The Bipartisan Budget Act, enacted in February 2018,
requires manufacturers of brand-name drugs, biologics, and biosimilars to pay a 70 percent discount in the
Medicare Part D Coverage Gap, up from the previous 50 percent discount. This increase in coverage gap discounts
became effective at the beginning of 2019. In 2019, the White House signed into law targeted amendments to the
Medicaid Drug Rebate Program statute, as well as the Fair and Accurate Medicaid Pricing Act, which was part of the
Continuing Appropriations Act. We do not believe these will have a material impact to our business. Several states
passed importation legislation, including Colorado, Florida, Maine, and Vermont. Specifically, the state of Florida is
working with the Administration to implement an importation program from Canada as early as 2020. We are
currently reviewing the state legislation, as well as corresponding proposed federal rulemaking and guidance
recently published by the Department of Health and Human Services and the FDA, the impact of which is uncertain
at this time.

In the private sector, consolidation and integration among healthcare providers is also a major factor in the
competitive marketplace for pharmaceuticals. Health plans, pharmacy benefit managers, wholesalers, and other
supply chain stakeholders have been consolidating into fewer, larger entities, increasingly through vertical
integration, 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 that 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 greater efficacy, fewer side effects, or
greater patient ease of use, but also by providing rebates. Value-based agreements are another tool which may be
utilized between payers and pharmaceutical companies as formulary placement and pricing are negotiated. 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 continue to negatively affect future consolidated results of operations. In addition to formulary placement,
changes in insurance designs continue to drive greater consumer cost sharing through high deductible plans and

F23

FINANCIAL REPORThigher co-insurance or co-pays (including co-pay accumulator and maximizer programs). We continue to invest in
patient affordability solutions (resulting in lower revenue) in an effort to assist patients in affording their medicines.

The main coverage expansion provisions of the Affordable Care Act (ACA) are currently in effect through both state-
based exchanges and the expansion of Medicaid. A 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 continue to evaluate strategies such as private exchanges and wider use of
consumer-driven health plans to reduce their healthcare liabilities over time. Federal legislation, litigation, or
administrative actions to repeal or modify some or all of the provisions of the ACA could have a material adverse
effect on our consolidated results of operations and cash flows. At the same time, the broader paradigm shift
towards performance-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. As additional reforms are finalized, we will assess their impact on future revenues. 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 and biosimilars only and reduce current and future access to branded human pharmaceutical
products.

Tax Matters

We are subject to income taxes and various other taxes in the U.S. and in many foreign jurisdictions; therefore,
changes in both domestic and international tax laws or regulations could adversely affect our effective tax rate,
results of operations, and cash flows. Countries around the world, including the U.S., actively consider and enact tax
law changes. Further, actions taken with respect to tax-related matters by associations such as the Organisation for
Economic Co-operation and Development and the European Commission could influence tax policy in countries in
which we operate. Modifications to U.S. and foreign tax laws or regulations are frequently enacted and could result
in material impacts to our results of operations and financial position.

Acquisitions

We strategically invest in external research and technologies that we believe to complement and strengthen our
own efforts. These investments can take many forms, including licensing arrangements, collaborations, and
acquisitions. We view our business development activity as an important way to achieve our strategies, as we seek
to bolster our pipeline and enhance shareholder value. We continue to evaluate business development transactions
that have the potential to strengthen our business.

In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. Under
the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib (LOXO-292),
an oral RET inhibitor that has been granted Breakthrough Therapy designation by the FDA, and LOXO-305, an oral
BTK inhibitor.

On January 10, 2020, we announced an agreement to acquire Dermira, Inc. for a purchase price of $18.75 per share,
or approximately $1.1 billion.The acquisition will expand our immunology pipeline with the addition of lebrikizumab,
a novel, investigational, monoclonal antibody designed to bind IL-13 with high affinity that is being evaluated in a
Phase III clinical development program for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab
was granted Fast Track designation from the FDA. The FDA's fast track designation is designed to expedite the
development and review of new therapies to treat serious conditions and address unmet medical needs.The
acquisition will also expand our portfolio of marketed dermatology medicines with the addition of Qbrexza®
(glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical treatment of primary axillary
hyperhidrosis (uncontrolled excessive underarm sweating). The transaction is not subject to any financing condition
and is expected to close by the end of the first quarter of 2020, subject to customary closing conditions, including
receipt of required regulatory approvals and the tender of a majority of the outstanding shares of Dermira's
common stock.

See Note 3 to the consolidated financial statements for further discussion regarding our recent acquisitions.

F24

FINANCIAL REPORTOperating Results—2019

Revenue

The following table summarizes our revenue activity by region:

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,

2019

2018

Percent Change

12,722.6

9,596.8

22,319.5

12,391.9

9,101.4

21,493.3

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

Volume

Price

Foreign exchange rates

Percent change

Numbers may not add due to rounding.

2019 vs. 2018

U.S.

Outside U.S.

Consolidated

6 %

(3)%

— %

3 %

10 %

(1)%

(3)%

5 %

8 %

(3)%

(1)%

4 %

In the U.S., the revenue increase in 2019 was driven by increased volume for Trulicity®, Taltz®, Verzenio®,
Jardiance®, Emgality, and Basaglar®. The increase in revenue was partially offset by decreased volume for products
that have lost exclusivity, primarily Cialis, lower volume for Forteo, and the impact from the product withdrawal of
Lartruvo®. Additionally, the increase in revenue was partially offset by lower realized prices for several products,
primarily Trulicity.

Outside the U.S., the revenue increase in 2019 was primarily driven by increased volume for Trulicity, Olumiant®,
Taltz, and Jardiance. The increase in revenue was partially offset by the unfavorable impact of foreign exchange
rates and, to a lesser extent, lower realized prices.

F25

FINANCIAL REPORTThe following table summarizes our revenue activity in 2019 compared with 2018:

Product

Trulicity

Humalog(2)

Alimta

Forteo

Taltz

Humulin®

Basaglar

Jardiance(3)

Cyramza®

Cialis

Cymbalta®

Trajenta®(4)

Verzenio

Erbitux®

Olumiant

Zyprexa®

Strattera

Emgality

Other products

Revenue

Year Ended
December 31,

2019

U.S.(1)

Outside U.S.

Total

3,155.2

972.7

4,127.8

1,669.7

1,219.5

645.5

1,016.8

879.7

876.2

565.9

335.3

231.7

49.6

224.8

454.8

487.9

42.2

41.0

30.8

154.9

641.1

1,151.0

896.4

759.1

349.6

410.4

236.3

378.3

589.9

658.8

675.8

365.8

124.9

55.4

384.7

377.6

211.7

7.7

990.7

2,820.7

2,115.8

1,404.7

1,366.4

1,290.1

1,112.6

944.2

925.1

890.5

725.4

590.6

579.7

543.4

426.9

418.7

242.5

162.5

2018

Total

Percent
Change

3,199.1

2,996.5

2,132.9

1,575.6

937.5

1,331.4

801.2

658.3

821.4

(6)

(1)

(11)

(3)

1,851.8

(52)

708.0

574.7

255.0

635.3

202.5

471.3

450.8

4.9

(14)

(11)

(46)

(13)

12,722.6

9,596.8

22,319.5

21,493.3

1,631.9

1,885.1

Numbers may not add due to rounding.

NM - Not meaningful

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

(2) Humalog revenue includes insulin lispro.

(3) Jardiance revenue includes Glyxambi® and Synjardy®.

(4) Trajenta revenue includes Jentadueto®.

Revenue of Trulicity, a treatment for type 2 diabetes, increased 25 percent in the U.S., driven by higher demand,
partially offset by lower realized prices. Revenue outside the U.S. increased 42 percent primarily driven by increased
volume, partially offset by the unfavorable impact of foreign exchange rates and, to a lesser extent, lower realized
prices.

Revenue of Humalog, an injectable human insulin analog for the treatment of diabetes, decreased 7 percent in the
U.S., primarily driven by lower realized prices and decreased demand. Revenue outside the U.S. decreased 5
percent, primarily driven by the unfavorable impact of foreign exchange rates. Included in the revenue of Humalog
in the U.S. is our own insulin lispro authorized generic, which was launched in the second quarter of 2019 in order
to lower out-of-pocket costs for patients. A competitor launched a similar version of insulin lispro in certain
European markets in 2017 and in the U.S. in the second quarter of 2018. While it is difficult to estimate the severity
of the impact of similar insulin lispro products entering the market, we do not expect and have not experienced a
rapid severe decline in revenue. However, due to the impact of competition and due to pricing pressure in the U.S.
and some international markets, we expect some price decline and loss of market share to continue over time.

Revenue of Alimta, a treatment for various cancers, increased 8 percent in the U.S., driven by increased demand,
partially offset by lower realized prices. Revenue outside the U.S. decreased 11 percent, driven by lower realized
prices, and to a lesser extent, the unfavorable impact of foreign exchange rates and lower volume resulting from the
entry of generic pemetrexed in Germany. We have faced and remain exposed to generic entry in multiple countries,
which has eroded revenue and is likely to continue to erode revenue in those countries from current levels.

Revenue 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, decreased 15 percent in
the U.S., primarily driven by decreased demand. Revenue outside the U.S. decreased 7 percent, driven by decreased
volume and, to a lesser extent, the unfavorable impact of foreign exchange rates and lower realized prices. We
expect further volume decline as a result of competitive dynamics in the U.S. and the entry of generic and biosimilar

F26

FINANCIAL REPORT
competition following the loss of patent exclusivity in the third quarter of 2019 in the U.S., Japan, and major
European markets. See "Executive Overview - Other Matters - Patent Matters" for more information.

Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active psoriatic arthritis, and ankylosing
spondylitis, increased 38 percent in the U.S., primarily driven by increased demand, partially offset by lower realized
prices. Revenue outside the U.S. increased 76 percent, driven by increased volume from recent launches, partially
offset by the unfavorable impact of foreign exchange rates.

Revenue of Humulin, an injectable human insulin for the treatment of diabetes, decreased 3 percent in the U.S.,
driven by lower realized prices, partially offset by increased volume. Revenue outside the U.S. decreased 3 percent,
primarily driven by the unfavorable impact of foreign exchange rates, partially offset by increased volume and, to a
lesser extent, higher realized prices.

Revenue of Basaglar, a long-acting human insulin analog for the treatment of diabetes, increased 41 percent in the
U.S., driven by higher realized prices and increased demand. Revenue outside the U.S. increased 32 percent driven
by increased volume, partially offset by the unfavorable impact of foreign exchange rates and, to a lesser extent,
lower realized prices.

Revenue of Jardiance, a treatment for type 2 diabetes and to reduce the risk of cardiovascular death in adult
patients with type 2 diabetes and established cardiovascular disease, increased 41 percent in the U.S., driven by
increased demand. Revenue outside the U.S. increased 47 percent, primarily driven by increased volume, partially
offset by the unfavorable impact of foreign exchange rates.

Revenue of Cyramza, a treatment for various cancers, increased 15 percent in the U.S., driven by increased demand
and, to a lesser extent, higher realized prices. Revenue outside the U.S. increased 11 percent, primarily due to
increased volume, partially offset by the unfavorable impact of foreign exchange rates and lower realized prices.

Revenue of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia, decreased 79 percent in the
U.S., driven by decreased demand due to generic competition. Revenue outside the U.S. decreased 9 percent, driven
by the unfavorable impact of foreign exchange rates, lower volume due to the loss of exclusivity in Europe and, to a
lesser extent, lower realized prices. We lost our compound patent protection for Cialis in major European markets
in November 2017 and U.S. exclusivity ended in late September 2018. We have faced and remain exposed to generic
competition following the loss of exclusivity, which has eroded revenue and is likely to continue to rapidly and
severely erode revenue from current levels. See "Results of Operations - Executive Overview - Other Matters -
Patent Matters" for more information.

Gross Margin, Costs, and Expenses

Gross margin as a percent of total revenue was 78.8 percent in 2019, an increase of 0.6 percentage points compared
with 2018, primarily due to the favorable impact of foreign exchange rates on international inventories sold and
lower intangibles amortization expense, partially offset by unfavorable product mix, the impact of lower realized
prices on revenue, and charges resulting from the product withdrawal of Lartruvo.

Research and development expenses increased 11 percent to $5.60 billion in 2019 driven by higher late-stage
development expenses.

Marketing, selling, and administrative expenses increased 4 percent to $6.21 billion in 2019 primarily due to
increased marketing expenses for recently launched products, partially offset by lower expenses for late life-cycle
products.

We recognized acquired IPR&D charges of $239.6 million in 2019 resulting from business development transactions
with AC Immune, Centrexion, ImmuNext, and Avidity. In 2018, we recognized acquired IPR&D charges of $1.98
billion primarily related to the acquisition of ARMO and the collaboration with Dicerna.

We recognized asset impairment, restructuring, and other special charges of $575.6 million in 2019. The charges
were primarily associated with the accelerated vesting of Loxo employee equity awards as part of the closing of the
acquisition of Loxo, and, to a lesser extent, the charges associated with the decision to close and sell a research and
development facility located in the U.K. In 2018, we recognized $266.9 million of asset impairment, restructuring,
and other special charges primarily associated with asset impairments related to the sale of the Posilac (rbST)
brand and the related sale of the Augusta, Georgia manufacturing site and with expenses associated with efforts to
reduce our cost structure.

Other—net, (income) expense was income of $291.6 million in 2019 compared to income of $145.6 million in 2018
primarily driven by higher net gains on investment securities and the gain on the sale of the company's antibiotics
business in China, partially offset by the charge related to the repurchase of debt and higher net interest expense.

Our effective tax rate was 11.9 percent in 2019, compared with 14.4 percent in 2018. The higher effective tax rate in
2018 was primarily due to non-deductible acquired IPR&D charges.

F27

FINANCIAL REPORTOperating Results—2018

Financial Results

The following table summarizes our key operating results:

Revenue

Gross margin

Gross margin as a percent of revenue

Operating expense

Acquired in-process research and development

Asset impairment, restructuring, and other special charges

Income before income taxes

Income taxes

Net income (loss) from continuing operations

Net income (loss)

Earnings (loss) per share from continuing operations

Earnings (loss) per share

NM - not meaningful

Year Ended
December 31,

2018

2017

21,493.3

19,973.8

16,811.6

15,526.1

78.2%

77.7%

11,026.3

11,078.6

1,983.9

266.9

3,680.1

529.5

3,150.6

3,232.0

3.05

3.13

1,112.6

1,331.6

2,304.8

2,391.2

(86.4)

(204.1)

(0.08)

(0.19)

Percent
Change

—

(80)

(78)

Revenue increased in 2018 driven by increased volume and, to a lesser extent, the favorable impact of foreign
exchange rates, partially offset by lower realized prices. The increases in net income and EPS in 2018 were driven
by lower income taxes, higher gross margin, and lower asset impairment, restructuring, and other special charges,
partially offset by higher acquired IPR&D charges.

Certain items affect the comparisons of our 2018 and 2017 results. The 2018 highlighted items are summarized in
the "Results of Operations - Executive Overview" section. The 2017 highlighted items are summarized as follows:

Acquired IPR&D (Note 3 to the consolidated financial statements)

• We recognized acquired IPR&D charges of $1.11 billion primarily related to the acquisition of CoLucid

Pharmaceuticals, Inc. (CoLucid).

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

• We recognized charges of $1.33 billion primarily associated with efforts to reduce our cost structure,

including the U.S. voluntary early retirement program.

Income Taxes (Note 14 to the consolidated financial statements)

• We recognized a provisional tax expense of $1.91 billion due to the Tax Cuts and Jobs Act (2017 Tax Act).

Revenue

The following table summarizes our revenue activity by region:

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,

2018

2017

Percent Change

12,391.9

9,101.4

21,493.3

11,414.4

8,559.4

19,973.8

F28

FINANCIAL REPORTThe following are components of the change in revenue in 2018 compared with 2017:

Volume

Price

Foreign exchange rates

Percent change

Numbers may not add due to rounding.

2018 vs. 2017

U.S.

Outside U.S.

Consolidated

9 %

(1)%

— %

9 %

8 %

(4)%

2 %

6 %

9 %

(2)%

1 %

8 %

In the U.S., the revenue increase in 2018 was driven by increased volume for newer products, including Trulicity,
Basaglar, Taltz, Verzenio, and Jardiance. The increase in revenue was partially offset by decreased volume for
products that have lost exclusivity, including Cialis, Effient, and Strattera, as well as lower realized prices for
several products, including Trulicity, Basaglar, Forteo, and Taltz.

Outside the U.S., the revenue increase in 2018 was due to increased volume for several newer products, primarily
driven by Trulicity, Olumiant, and Taltz and, to a lesser extent, the favorable impact of foreign exchange rates. The
increase in revenue was partially offset by lower realized prices for several products.

The following table summarizes our revenue activity in 2018 compared with 2017:

Product

Trulicity

Humalog

Alimta

Cialis

Forteo

Humulin

Taltz

Cyramza

Basaglar

Cymbalta

Jardiance(2)

Erbitux

Trajenta(3)

Zyprexa

Strattera

Other products

Revenue

2017

Total

Percent
Change

Year Ended
December 31,

2018

U.S.(1)

Outside U.S.

Total

2,515.8

683.3

3,199.1

1,787.8

1,131.0

1,129.2

757.9

910.2

738.7

291.5

622.8

54.3

400.2

531.6

224.2

36.2

89.7

1,208.7

1,001.9

722.7

817.7

421.2

198.7

529.9

178.5

653.7

258.1

103.8

350.5

435.1

361.1

2,996.5

2,132.9

1,851.8

1,575.6

1,331.4

937.5

821.4

801.2

708.0

658.3

635.3

574.7

471.3

450.8

2,029.8

2,865.2

2,062.5

2,323.1

1,749.0

1,335.4

559.2

758.3

432.1

757.2

447.5

645.9

537.9

581.2

618.2

1,170.8

1,176.5

2,347.5

2,271.3

12,391.9

9,101.4

21,493.3

19,973.8

(20)

(10)

—

(6)

(2)

(19)

(27)

Numbers may not add due to rounding.

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

(2) Jardiance revenue includes Glyxambi and Synjardy.

(3) Trajenta revenue includes Jentadueto.

Revenue of Trulicity increased 56 percent in the U.S., driven by higher demand. Revenue outside the U.S. increased
63 percent primarily driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange
rates, partially offset by lower realized prices.

Revenue of Humalog increased 4 percent in the U.S., primarily driven by increased demand and, to a lesser extent,
higher realized prices due to changes in estimates to rebates and discounts. Revenue outside the U.S. increased 5
percent, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially
offset by lower realized prices.

F29

FINANCIAL REPORT
Revenue of Alimta increased 9 percent in the U.S., driven by increased demand and higher realized prices. Revenue
outside the U.S. decreased 3 percent, driven by lower volume due to competitive pressure and the loss of exclusivity
in certain European countries, including Germany, and lower realized prices, partially offset by the favorable impact
of foreign exchange rates.

Revenue of Cialis decreased 17 percent in the U.S., driven by decreased demand primarily due to the entry of
generic tadalafil, partially offset by higher realized prices. Revenue outside the U.S. decreased 25 percent, driven by
the loss of exclusivity in Europe.

Revenue of Forteo decreased 21 percent in the U.S., driven by decreased demand, and, to a lesser extent, lower
realized prices. Revenue outside the U.S. increased 4 percent, driven by increased volume and the favorable impact
of foreign exchange rates, partially offset by lower realized prices.

Revenue of Humulin increased 3 percent in the U.S., driven by increased volume, partially offset by lower realized
prices primarily due to changes in segment mix and, to a lesser extent, the impact of patient affordability programs.
Revenue outside the U.S. decreased 7 percent, primarily driven by decreased volume and, to a lesser extent, lower
realized prices.

Revenue of Taltz increased 52 percent in the U.S., primarily driven by increased demand, partially offset by lower
realized prices. Revenue outside the U.S. increased $125.6 million, driven by increased volume from recent
launches, partially offset by lower realized prices.

Revenue of Cyramza increased 5 percent in the U.S., driven by increased demand and, to a lesser extent, higher
realized prices. Revenue outside the U.S. increased 10 percent, primarily due to increased volume and, to a lesser
extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices.

Revenue of Basaglar increased $311.7 million in the U.S., driven by increased demand, partially offset by lower
realized prices due to increased volume in Medicare Part D. Revenue outside the U.S. increased $57.5 million
primarily driven by increased volume.

Revenue of Cymbalta, a treatment for major depressive disorder, diabetic peripheral neuropathic pain, generalized
anxiety disorder, chronic musculoskeletal pain, and the management of fibromyalgia, decreased 53 percent in the
U.S. driven by decreased volume, partially offset by higher realized prices. Revenue outside the U.S. increased 2
percent, driven by increased volume in Japan.

Gross Margin, Costs, and Expenses

Gross margin as a percent of total revenue was 78.2 percent in 2018, an increase of 0.5 percentage points compared
with 2017, primarily due to manufacturing efficiencies and lower amortization expenses, offset by the impact of
foreign exchange rates on international inventories sold, the timing of manufacturing production, and the negative
impact of price on revenue.

Research and development expenses decreased 1 percent to $5.05 billion in 2018 driven by lower development
expenses for lanabecestat, partially offset by higher expenses for other late-stage assets.

Marketing, selling, and administrative expenses remained flat in 2018 compared to 2017.

Both research and development expenses and marketing, selling, and administrative expenses benefited during
2018 from actions taken to reduce our cost structure.

We recognized acquired IPR&D charges of $1.98 billion in 2018 primarily related to the acquisition of ARMO and the
collaboration with Dicerna. In 2017, we recognized acquired IPR&D charges of $1.11 billion primarily related to the
acquisition of CoLucid.

We recognized asset impairment, restructuring, and other special charges of $266.9 million in 2018. The charges
are primarily associated with asset impairments related to the sale of the Posilac (rbST) brand and the related sale
of the Augusta, Georgia manufacturing site and with expenses associated with efforts to reduce our cost structure.
In 2017, we recognized $1.33 billion of asset impairment, restructuring, and other special charges primarily
associated with efforts to reduce our cost structure, including the U.S. voluntary early retirement program, and
asset impairments related to lower projected revenue for Posilac (rbST).

Other—net, (income) expense was income of $145.6 million in 2018 compared to income of $301.5 million in 2017
driven by lower net gains on sales of investments.

During 2018, we recorded income tax expense of $529.5 million while earning $3.68 billion of income before income
taxes. We recognized $313.3 million of income tax benefit primarily due to measurement period adjustments to the
Toll Tax and GILTI. During 2017, we recorded income tax expense of $2.40 billion, which included a provisional tax
charge of $1.91 billion, despite earning $2.30 billion of income before income taxes. The provisional tax charge was
a result of the 2017 Tax Act, including the Toll Tax.

F30

FINANCIAL REPORTFINANCIAL CONDITION

Cash and cash equivalents decreased to $2.34 billion as of December 31, 2019, compared with $7.32 billion at
December 31, 2018. Net cash provided by operating activities was $4.84 billion in 2019, compared with $5.52 billion
in 2018. Net cash provided by operating activities in 2019 included approximately $360 million of cash paid to settle
the accelerated vesting of Loxo employee equity awards (see Note 5 to the consolidated financial statements). Net
cash provided by operating activities in 2018 included approximately $500 million of net cash provided by operating
activities related to our discontinued operations (See Note 19 to the consolidated financial statements). 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, 2019 and 2018.

In addition to our cash and cash equivalents, we held total investments of $2.06 billion and $2.09 billion as of
December 31, 2019 and 2018, respectively. See Note 7 to the consolidated financial statements for additional
details.

In February 2019, we completed our acquisition of Loxo for $235 per share or approximately $6.9 billion, which was
funded through a mixture of cash and debt. See Note 3 to the consolidated financial statements for additional
information.

As of December 31, 2019, total debt was $15.32 billion, an increase of $5.02 billion compared with $10.30 billion at
December 31, 2018. The increase primarily related to the net proceeds of $4.45 billion from the issuance of senior
notes in February 2019. The proceeds from these notes were used to repay commercial paper that was issued in
connection with the acquisition of Loxo and for general corporate purposes. See Note 11 to the consolidated
financial statements for additional details.

As of December 31, 2019, we had a total of $5.21 billion of unused committed bank credit facilities, $5.00 billion of
which is available to support our commercial paper program. See Note 11 to the consolidated financial statements
for additional details. We believe that amounts accessible through existing commercial paper markets should be
adequate to fund any short-term borrowing needs.

For the 134th consecutive year, we distributed dividends to our shareholders. Dividends of $2.58 per share and $2.25
per share were paid in 2019 and 2018, respectively. In the fourth quarter of 2019, effective for the dividend to be paid
in the first quarter of 2020, the quarterly dividend was increased to $0.74 per share, resulting in an indicated annual
rate for 2020 of $2.96 per share.

Capital expenditures of $1.03 billion during 2019, compared to $1.21 billion in 2018.

In 2019, we repurchased $4.40 billion of shares under our $8.00 billion share repurchase program authorized in
June 2018. As of December 31, 2019, we had $1.50 billion remaining under this program. See Note 13 to the
consolidated financial statements for additional details.

On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco common stock
through a tax-free exchange offer, which resulted in a reduction in shares of our common stock outstanding by
approximately 65 million as of that date.

In January 2020, we announced an agreement to acquire Dermira, Inc. for $18.75 per share, or approximately $1.1
billion. The acquisition will be funded through cash on hand and the issuance of commercial paper. See Note 3 to
the consolidated financial statements for additional information.

See "Results of Operations - Executive Overview - Other Matters - Patent Matters" for information regarding recent
and upcoming losses of patent protection.

We believe cash provided by operating activities, along with available cash and cash equivalents, should be
sufficient to fund our normal operating needs, including installment payments of the Toll Tax, dividends paid to
shareholders, share repurchases, and capital expenditures.

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 seek to address a portion of these
risks through a controlled program of risk management that includes the use of derivative financial instruments.
The objective of this risk management program 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

F31

FINANCIAL REPORTpositions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest
rate exposure at December 31, 2019 and 2018, 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, 2019 and 2018, 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 and Japanese yen. 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 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, 2019 and 2018, 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 product in the event that
regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not
included in the table of contractual obligations below.

Individually, these arrangements are generally 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 or aggregate milestone payments made could be material to our results of operations
or cash flows, respectively, 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.

F32

FINANCIAL REPORTOur current noncancelable contractual obligations that will require future cash payments were as follows as of
December 31, 2019:

(Dollars in millions)

Payments Due by Period

Total

Less Than
1 Year

1-3
Years

3-5
Years

More Than
5 Years

Long-term debt, including interest payments(1)

20,934.9

382.2

2,173.8

1,381.3

16,997.6

Finance lease obligations

Operating lease liabilities

Purchase obligations(2)

2017 Tax Act Toll Tax(3)

Other long-term liabilities reflected on our balance sheet(4)

19.0

720.4

7.0

138.1

15,897.1

15,452.8

2,630.0

1,800.1

225.3

—

8.8

193.3

239.6

507.4

421.2

3.2

116.3

204.7

1,109.9

193.8

—

272.7

—

787.4

1,185.1

Total

42,001.5

16,205.4

3,544.1

3,009.2

19,242.8

(1) Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the

interest rate forward curve at December 31, 2019, to compute the amount of the contractual obligation for interest on the variable rate
debt instruments and swaps.

(2) We have included the following:

•

Purchase obligations consisting primarily of all open purchase orders as of December 31, 2019. Some of these purchase
orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and
noncancelable purchase obligations.

•

Contractual payment obligations with each of our significant vendors, which are noncancelable and are not contingent.

(3) The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight-year period. We made this

election; therefore, we have included future Toll Tax payments accordingly.

(4) We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and other
post-employment benefit liabilities. We excluded long-term income taxes payable of $1.20 billion, because we cannot reasonably
estimate the timing of future cash outflows associated with those liabilities.

The contractual obligations table is as of December 31, 2019. 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.
(GAAP), we must often make estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and
consequently actual results could differ from those estimates. For any given individual estimate or assumption we
make, it is possible that other people applying reasonable judgment to the same facts and circumstances could
develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any
such other reasonable judgment would cause a material adverse effect on our consolidated results of operations,
financial position, or liquidity for the periods presented in this report. Our most critical accounting estimates have
been discussed with our audit committee and are described below.

Revenue Recognition and Sales Return, Rebate, and Discount Accruals

Background and Uncertainties

We recognize revenue primarily from two different types of contracts, product sales to customers (net product
revenue) and collaborations and other arrangements. For product sales to customers, provisions for returns, rebate
and discounts are established in the same period the related product sales are recognized. To determine the
appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we
estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the
distribution chain under the terms of our contracts. Significant judgments are required in making these estimates.
The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care,
Medicare, Medicaid, and chargeback contracts in the U.S. In determining the appropriate accrual amount, we
consider our historical rebate payments for these programs by product as a percentage of our historical sales as
well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the
current contracts for these programs, the percentage of our products that are sold via these programs, and our
product pricing.

F33

FINANCIAL REPORT
Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales
return, rebate, and discount accruals.

Revenue recognized from collaborations and other arrangements will include our share of profits from the
collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts.

Financial 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, 2019, a 5 percent change in
our global sales return, rebate, and discount liability would have led to an approximate $270 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 approximately 90 percent as of December 31, 2019 and 2018.

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

(Dollars in millions)

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

Reduction of net sales(1)

Cash payments

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

2019

2018

4,670.9

4,134.0

15,490.2

(15,525.6)

13,424.9

(12,888.0)

4,635.5

4,670.9

(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were approximately 1 percent of consolidated

net 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 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 matters, 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 consider any third-party
indemnification to which we are entitled or under which we are obligated. With respect to our third-party
indemnification rights, these considerations include the nature of the indemnification, the financial condition of the
indemnifying party, and the possibility of and length of time for collection.

The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been
reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.

Acquisitions

Background and Uncertainties

To determine whether acquisitions or licensing transactions should be accounted for as a business combination or
as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities
and assets would meet the definition of a business under the relevant accounting rules.

If the acquired set of activities and assets 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

F34

FINANCIAL REPORTpurchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the
acquired set of activities and assets 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 estimates and assumptions that are deemed reasonable by management. Significant
estimates and assumptions include, but are not limited to, probability of technical success, revenue growth and
discount rate. 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.

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 (or asset
group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be
generated by the asset (or asset group) 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, or more frequently if
impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than
not that the fair value of the intangible asset is less than its carrying amount. If we conclude it is more likely than
not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the
intangible asset to its carrying value 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 “Results of
Operations - Executive Overview - Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and
requires that we invest in a large number of projects to maintain 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.

Retirement Benefits Assumptions

Background and Uncertainties

Defined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate,
expected return on plan assets, and retirement age. These assumptions have a significant effect on the amounts
reported. In addition to the analysis below, see Note 15 to the consolidated financial statements for additional
information regarding our retirement benefits.

Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and
retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income
debt instruments to determine the discount rates. In evaluating the expected return on plan assets, we consider
many factors, with a primary analysis of current and projected market conditions, asset returns and asset
allocations (approximately 70 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.

F35

FINANCIAL REPORTAnnually, we determine the fair value of the plan assets in our defined benefit pension and retiree health benefit
plans. Approximately 40 percent of our plan assets are in hedge funds and private equity-like investment funds
(collectively, alternative assets). We value these alternative investments using significant unobservable inputs or
using the net asset value reported by the counterparty, adjusted as necessary. Inputs include underlying net asset
values, discounted cash flows valuations, comparable market valuations, and adjustments for currency, credit,
liquidity and other risks.

Financial Statement Impact

If the 2019 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 $29.6 million. If the 2019
expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income
taxes would change by $26.5 million. If our assumption regarding the 2019 expected age of future retirees for U.S.
plans were adjusted by one year, our income before income taxes would be affected by $45.9 million. The U.S. plans,
including Puerto Rico, represent approximately 75 percent and 80 percent of the total projected benefit obligation
and total plan assets, respectively, at December 31, 2019.

Adjustments to the fair value of plan assets are not recognized in pension and retiree health benefit expense in the
year that the adjustments occur. Such changes are deferred, along with other actuarial gains and losses, and are
amortized into expense over the expected remaining service life of employees.

Income Taxes

Background and Uncertainties

We prepare and file tax returns based upon our interpretation of tax laws and regulations and record estimates
based upon these 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. Inherent uncertainties
exist in estimates of many tax positions due to changes in tax law resulting from legislation and regulation 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 changes to existing tax law, the issuance of
regulations by the taxing authorities, new information obtained during a tax examination, or resolution of a tax
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, 2019, a 5 percent change in the amount of uncertain tax positions and the valuation allowance
would result in a change in net income of $76.5 million and $30.8 million, respectively.

LEGAL AND REGULATORY MATTERS

Information relating to certain legal proceedings can be found in Note 16 to the consolidated financial statements
and is incorporated here by reference.

F36

FINANCIAL REPORTFINANCIAL EXPECTATIONS FOR 2020

For the full year of 2020, we expect EPS to be in the range of $6.18 to $6.28, which includes the anticipated impact
of the Dermira acquisition. We anticipate that total revenue will be between $23.7 billion and $24.2 billion. Revenue
growth is expected to be driven by volume from Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant,
Emgality, Baqsimi, and the launch of Reyvow. Revenue growth is expected to be partially offset by lower revenue for
products that have lost patent exclusivity, including the expected entry of generic competition for Forteo in the U.S.
Revenue growth is also expected to be partially offset by a low-single digit net price decline in the U.S. driven
primarily by rebates and legislated increases to Medicare Part D cost sharing, patient affordability programs, and
net price declines in China, Japan and Europe.

We anticipate that gross margin as a percent of revenue will be approximately 79 percent in 2020. Research and
development expenses are expected to be in the range of $5.6 billion to $5.9 billion. Marketing, selling, and
administrative expenses are expected to be in the range of $6.2 billion to $6.4 billion. Other—net, (income) expense
is expected to be expense in the range of $100 million to $250 million.

The 2020 effective tax rate is expected to be approximately 15 percent.

F37

FINANCIAL REPORTFinancial Statements and Supplementary Data

Consolidated Statements of Operations

Year Ended December 31

2019

2018

2017

22,319.5

21,493.3

19,973.8

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

Revenue

Costs, expenses, and other:

Cost of sales

Research and development

Marketing, selling, and administrative

Acquired in-process research and development (Note 3)

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

Other—net, (income) expense (Note 18)

Income before income taxes

Income taxes (Note 14)

Net income (loss) from continuing operations

Net income (loss) from discontinued operations (Note 19)

Earnings (loss) per share:

Earnings (loss) from continuing operations - basic

Earnings (loss) from discontinued operations - basic

Earnings (loss) per share - basic

Earnings (loss) from continuing operations - diluted

Earnings (loss) from discontinued operations - diluted

Earnings (loss) per share - diluted

Shares used in calculation of earnings (loss) per share:

Basic

Diluted

4,447.7

5,096.2

5,982.4

1,112.6

1,331.6

(301.5)

17,669.0

2,304.8

2,391.2

(86.4)

(117.7)

(204.1)

(0.08)

(0.11)

(0.19)

(0.08)

(0.11)

(0.19)

4,721.2

5,595.0

6,213.8

239.6

575.6

(291.6)

4,681.7

5,051.2

5,975.1

1,983.9

266.9

(145.6)

17,053.6

17,813.2

5,265.9

628.0

4,637.9

3,680.5

3,680.1

529.5

3,150.6

81.4

4.98

3.95

3.07

0.07

8.93

3.14

4.96

3.93

3.05

0.08

8.89

3.13

931,059

935,684

1,027,721

1,033,667

1,052,023

Net income (loss)

8,318.4

3,232.0

See notes to consolidated financial statements.

F38

FINANCIAL REPORTConsolidated Statements of Comprehensive Income (Loss)

Year Ended December 31

2019

2018

2017

8,318.4

3,232.0

(204.1)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Net income (loss)

Other comprehensive income (loss) from continuing operations:

Change in foreign currency translation gains (losses)

Change in net unrealized gains (losses) on securities

Change in defined benefit pension and retiree health benefit plans (Note 15)

Change in effective portion of cash flow hedges

Other comprehensive income (loss) from continuing operations before income taxes

Benefit (provision) for income taxes related to other comprehensive income (loss) from

continuing operations

Other comprehensive income (loss) from continuing operations, net of tax (Note 17)

Other comprehensive income (loss) from discontinued operations, net of tax (Note 17)

Other comprehensive income (loss), net of tax (Note 17)

Comprehensive income (loss)

(89.9)

34.4

(970.0)

34.3

(991.2)

151.0

(840.2)

56.8

(783.4)

(429.6)

(8.8)

544.0

(6.0)

99.6

(30.3)

69.3

14.3

83.6

362.9

(181.3)

(566.8)

27.8

(357.4)

402.7

45.3

129.2

174.5

7,535.0

3,315.6

(29.6)

See notes to consolidated financial statements.

F39

FINANCIAL REPORTDecember 31

2019

2018

2,337.5

101.0

4,547.3

994.2

3,190.7

2,538.9

—

7,320.7

88.2

4,593.9

1,182.9

3,098.1

2,036.7

2,229.1

13,709.6

20,549.6

Consolidated Balance Sheets

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

Assets

Current Assets

Cash and cash equivalents (Note 7)

Short-term investments (Note 7)

Accounts receivable, net of allowances of $22.4 (2019) and $24.1 (2018)

Other receivables

Inventories (Note 6)

Prepaid expenses and other

Current assets of discontinued operations (Note 19)

Total current assets

Investments (Note 7)

Goodwill (Note 8)

Other intangibles, net (Note 8)

Deferred tax assets (Note 14)

Property and equipment, net (Note 9)

Operating lease assets (Note 10)

Other noncurrent assets

Noncurrent assets of discontinued operations (Note 19)

Total assets

Liabilities and Equity

Current Liabilities

Short-term borrowings and current maturities of long-term debt (Note 11)

Accounts payable

Employee compensation

Sales rebates and discounts

Dividends payable

Income taxes payable (Note 14)

Other current liabilities

Current liabilities of discontinued operations (Note 19)

Total current liabilities

Other Liabilities

Long-term debt (Note 11)

Noncurrent operating lease liabilities (Note 10)

Accrued retirement benefits (Note 15)

Long-term income taxes payable (Note 14)

Other noncurrent liabilities

Deferred tax liabilities (Note 14)

Noncurrent liabilities of discontinued operations (Note 19)

Total other liabilities

Commitments and Contingencies (Note 16)

Eli Lilly and Company Shareholders' Equity (Notes 12 and 13)

Common stock—no par value
Authorized shares: 3,200,000
Issued shares: 958,056 (2019) and 1,057,639 (2018)

Additional paid-in capital

Retained earnings

Employee benefit trust

Accumulated other comprehensive loss (Note 17)

Cost of common stock in treasury

Total Eli Lilly and Company shareholders' equity

Noncontrolling interests

Total equity

Total liabilities and equity

See notes to consolidated financial statements.

1,962.4

3,679.4

6,618.0

2,572.6

7,872.9

532.1

2,339.1

—

2,005.4

1,366.6

1,068.0

2,613.7

7,996.1

—

1,824.9

6,484.1

39,286.1

43,908.4

1,499.3

1,405.3

915.5

4,933.6

671.5

160.6

2,189.4

—

11,775.2

13,817.9

486.7

3,698.2

3,607.2

1,014.3

2,187.5

—

1,102.2

1,207.1

955.6

4,849.5

650.8

393.4

2,036.7

692.8

11,888.1

9,196.4

—

2,802.2

3,700.0

1,357.6

1,312.7

2,742.3

24,811.8

21,111.2

598.8

6,685.3

4,920.4

(3,013.2)

(6,523.6)

(60.8)

2,606.9

92.2

2,699.1

39,286.1

661.0

6,583.6

11,395.9

(3,013.2)

(5,729.2)

(69.4)

9,828.7

1,080.4

10,909.1

43,908.4

F40

FINANCIAL REPORTConsolidated Statements of Shareholders' Equity

Equity of Eli Lilly and Company Shareholders

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

Common Stock

Amount

Additional
Paid-in
Capital

Retained
Earnings

Employee
Benefit
Trust

Accumulated
Other
Comprehensive
Loss

Common Stock in
Treasury

Amount

Noncontrolling
Interest

Balance at January 1, 2017

1,101,586

$ 688.5

$ 5,640.6

$ 16,046.3

$ (3,013.2) $

(5,274.0)

711

(80.5) $

199.0

(4,390)

4,390

359.8

(359.8)

(47)

4.7

Net income (loss)

Other comprehensive income
(loss), net of tax

Cash dividends declared per
share: $2.12

Retirement of treasury shares

(4,390)

(2.7)

(204.1)

(2,234.6)

(357.1)

Purchase of treasury shares

Issuance of stock under
employee stock plans, net

Stock-based compensation

Reclassification of stranded tax
effects (Note 1)

Other

3,476

2.1

60.0

(164.1)

281.3

643.6

(643.6)

Balance at December 31, 2017

1,100,672

687.9

5,817.8

13,894.1

(3,013.2)

(5,718.6)

664

(75.8)

Net income

Other comprehensive income
(loss), net of tax

Cash dividends declared per
share: $2.33

Retirement of treasury shares

(45,882)

(28.7)

Purchase of treasury shares

Issuance of stock under
employee stock plans, net

Stock-based compensation

Adoption of new accounting
standards (Note 1)

Sale of Elanco Stock (Note 19)

Other

2,849

1.8

(139.0)

279.5

629.2

(3.9)

3,232.0

(2,372.0)

(4,122.0)

763.8

(45,882)

4,150.7

45,882

(4,150.7)

(60)

6.4

85.6

(105.2)

9.0

Balance at December 31, 2018

1,057,639

661.0

6,583.6

11,395.9

(3,013.2)

(5,729.2)

604

(69.4)

Net income

Other comprehensive income
(loss), net of tax

Cash dividends declared per
share: $2.68

Retirement of treasury shares

(102,640)

(64.1)

8,318.4

(2,430.5)

(12,363.4)

Purchase of treasury shares

Issuance of stock under
employee stock plans, net

Stock-based compensation

Acquisition of common stock in
exchange offer

Deconsolidation of Elanco

Other

3,057

1.9

(210.7)

312.4

(794.4)

(102,640)

12,427.5

37,639

(4,400.0)

(74)

8.6

65,001

(8,027.5)

Balance at December 31, 2019

958,056

$ 598.8

$ 6,685.3

$ 4,920.4

$(3,013.2) $

(6,523.6)

530

$ (60.8) $

See notes to consolidated financial statements.

72.8

30.5

(24.5)

(3.1)

75.7

3.7

(2.0)

1,017.2

(14.2)

1,080.4

37.7

11.0

(1,028.9)

(8.0)

92.2

F41

FINANCIAL REPORTYear Ended December 31

2019

2018

2017

8,318.4

3,232.0

(204.1)

Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

Cash Flows from Operating Activities

Net income (loss)

Adjustments to Reconcile Net Income (Loss)
to Cash Flows from Operating Activities:

Gain related to disposition of Elanco (Note 19)

Gain on sale of antibiotic business in China (Note 3)

Depreciation and amortization

Change in deferred income taxes

Stock-based compensation expense

Acquired in-process research and development (Note 3)

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

Income taxes payable—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

Proceeds from sales and maturities of short-term investments

Purchases of short-term investments

Proceeds from sales of noncurrent investments

Purchases of noncurrent investments

Purchases of in-process research and development

Cash paid for acquisitions, net of cash acquired (Note 3 and 19)

Cash distributed to Elanco upon disposition

Cash received for sale of antibiotic business in China

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

Net proceeds from Elanco initial public offering (Note 19)

Other financing activities, net

Net Cash Provided by (Used for) Financing Activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

(3,680.5)

(309.8)

1,232.6

62.4

312.4

239.6

348.7

(127.2)

(258.7)

(602.3)

(221.3)

(477.7)

—

1,609.0

326.8

279.5

1,983.9

472.0

(996.7)

7.8

(980.0)

(125.3)

(284.5)

4,836.6

5,524.5

(1,033.9)

136.6

(42.7)

609.8

(247.5)

(319.6)

(6,917.7)

(374.0)

354.8

(248.7)

(8,082.9)

(2,409.8)

995.4

6,556.4

(2,866.4)

(4,400.0)

—

(200.1)

(2,324.5)

(89.9)

(5,660.7)

(1,210.6)

2,552.5

(112.2)

3,509.5

(837.9)

(1,807.6)

—

(187.7)

1,906.0

(2,311.8)

(2,197.9)

2,477.7

(1,009.1)

(4,150.7)

1,659.7

(372.8)

(5,904.9)

(63.6)

1,462.0

—

1,567.3

(787.9)

281.3

1,112.6

441.5

(357.0)

(253.9)

(590.1)

3,489.6

916.3

5,615.6

(1,076.8)

4,852.5

(3,389.7)

2,586.0

(4,611.6)

(1,086.8)

(882.1)

—

(175.1)

(3,783.6)

(2,192.1)

1,397.5

2,232.0

(630.6)

(299.8)

—

(364.4)

142.6

(20.5)

1,954.1

Cash and cash equivalents at beginning of year (includes $677.5 (2019), $324.4 (2018), and
$258.8 (2017) of discontinued operations)

Cash and Cash Equivalents at End of Year (includes $677.5 (2018) and $324.4 (2017) of
discontinued operations)

7,998.2

6,536.2

4,582.1

2,337.5

7,998.2

6,536.2

See notes to consolidated financial statements.

F42

FINANCIAL REPORTNotes 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 and
Implementation of New Financial Accounting Standards

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 (SEC) and
have evaluated subsequent events up to the time of the filing of our Form 10-K.

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.

On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health
Incorporated (Elanco) common stock through a tax-free exchange offer. As a result, Elanco has been presented as
discontinued operations in our consolidated financial statements for all periods presented.

Following the completion of the disposition of Elanco, we now operate as a single operating segment engaged in the
discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global
research and development organization and a supply chain organization are responsible for the discovery,
development, manufacturing, and supply of our products. Regional commercial organizations market, distribute,
and sell the products. The business is also supported by global corporate staff functions. Our determination that we
operate as a single segment is consistent with the financial information regularly reviewed by the chief operating
decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation
targets, and planning and forecasting for future periods.

Research and Development Expenses and Acquired In-Process Research and
Development (IPR&D)

Research and development expenses include the following:

• Research and development costs, which are expensed as incurred.

• Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued

when the event requiring payment of the milestone occurs.

Acquired IPR&D expense includes the initial costs of externally developed IPR&D projects, acquired directly in a
transaction other than a business combination, that do not have an alternative future use.

Earnings Per Share (EPS)

We calculate basic 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

F43

FINANCIAL REPORTtranslated 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).

Advertising Expenses

Costs associated with advertising are expensed as incurred and are included in marketing, selling, and
administrative expenses. Advertising expenses, comprised primarily of television, radio, print media, and Internet
advertising, totaled approximately $1.1 billion, $900 million, and $700 million in 2019, 2018, and 2017, respectively,
which was less than 5 percent of revenue each year.

Other Significant Accounting Policies

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

Implementation of New Financial Accounting Standards

Effective January 1, 2019 we adopted Accounting Standards Update 2016-02, Leases, using the modified
retrospective approach, applied at the beginning of the period of adoption, and we elected the package of
transitional practical expedients. The adoption of this standard resulted in recording of operating lease assets of
approximately $530 million, which included reclassifying approximately $65 million of deferred rent and lease
incentives, net of prepaid rent, as a component of the operating lease assets as of January 1, 2019. The adoption
also resulted in recording operating lease liabilities of approximately $595 million as of January 1, 2019. Our
accounting for finance leases remained substantially unchanged. The standard did not have an impact on our
consolidated statements of operations.

Effective January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with
Customers, and other related updates. This standard requires entities to recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. We applied this standard to contracts for which performance
was not substantially complete as of the date of adoption. For those contracts that were modified prior to the date of
adoption, we reflected the aggregate effect of those modifications when determining the appropriate accounting
under the new standard. We don’t believe the effect of applying this practical expedient resulted in material
differences. We applied this standard through a cumulative effect adjustment to retained earnings as of the
beginning of the year of adoption. Upon adoption, the cumulative effect of applying this standard resulted in an
increase of approximately $5 million to retained earnings as of January 1, 2018. Revenue presented for periods
prior to 2018 was accounted for under previous standards and has not been adjusted. Revenue and net income for
2018 did not differ materially from amounts that would have resulted from application of the previous standards.

Effective January 1, 2018, we adopted Accounting Standards Update 2016-01 (ASU 2016-01), Financial Instruments -
Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires 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). We applied the new standard through a cumulative effect adjustment to retained earnings as of the
beginning of the year of adoption. Upon adoption, we reclassified from accumulated other comprehensive loss the
after-tax amount of net unrealized gains resulting in an increase to retained earnings of approximately $105 million.
Adoption of this standard did not result in a material change in net income in the year of adoption.

Effective January 1, 2018, we adopted Accounting Standards Update 2016-16, Income Taxes: Intra-Entity Transfers of
Assets Other Than Inventory. This standard requires entities to recognize the income tax consequences of intra-entity
transfers of assets other than inventory at the time of transfer. We adopted this standard using a modified
retrospective approach. Upon adoption, the cumulative effect of applying this standard resulted in an increase of
approximately $700 million to retained earnings, $2.5 billion to deferred tax assets, and $1.8 billion to deferred tax
liabilities as of January 1, 2018. Adoption of this standard did not result in a material change in net income in the
year of adoption.

We elected to early adopt Accounting Standards Update 2018-02, Income Statement-Reporting Comprehensive
Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, as of December 31,
2017, which allowed a reclassification from accumulated other comprehensive loss to retained earnings for
stranded tax effects resulting from the Tax Cuts and Jobs Act (2017 Tax Act - see Note 14). This standard allowed us
to reclassify the effect of remeasuring deferred tax liabilities and assets related to items within accumulated other
comprehensive loss using the then newly enacted 21 percent federal corporate income tax rate. The provisional
effect of this early adoption was a reclassification from accumulated other comprehensive loss, which resulted in an
increase to retained earnings of $643.6 million as of December 31, 2017.

F44

FINANCIAL REPORTNote 2: Revenue
The following table summarizes our revenue recognized in our consolidated statements of operations:

Net product revenue

Collaboration and other revenue(1)

Revenue

2019

2018

2017

20,377.3

19,866.4

1,942.2

1,626.9

22,319.5

21,493.3

18,776.5

1,197.3

19,973.8

(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $301.5 million, $303.2 million, and

$144.9 million during the years ended 2019, 2018, and 2017, respectively.

We recognize revenue primarily from two different types of contracts, product sales to customers (net product
revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other
arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone
payments we receive under these types of contracts. See Note 4 for additional information related to our
collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue
from the Trajenta® and Jardiance® families of products resulting from our collaboration with Boehringer Ingelheim
discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts
accounted for as contracts with customers.

Net Product Revenue

Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we
satisfy our performance obligation, which generally is at the time we ship the product to the customer. Payment
terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from
30 to 70 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a
financing component as we expect, at contract inception, that the period between when we transfer control of the
product and when we receive payment will be one year or less. Any exceptions are either not material or we collect
interest for payments made after the due date. Provisions for rebates, discounts, and returns are established in the
same period the related sales are recognized. We generally ship product shortly after orders are received;
therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting
period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a
separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by
a governmental authority that are imposed on our sales of product and collected from a customer.

Most of our products are sold to wholesalers that serve pharmacies, physicians and other health care professionals,
and hospitals. For the years ended December 31, 2019, 2018, and 2017, our three largest wholesalers each
accounted for between 14 percent and 21 percent of consolidated total revenue. Further, they each accounted for
between 19 percent and 25 percent of accounts receivable as of December 31, 2019 and 2018.

Significant judgments must be made in determining the transaction price for our sales of products related to
anticipated rebates, discounts and returns. The following describe the most significant of these judgments:

Sales Rebates and Discounts - Background and Uncertainties

• We initially invoice our customers at contractual list prices. Contracts with direct and indirect customers
may provide for various rebates and discounts that may differ in each contract. As a consequence, to
determine the appropriate transaction price for our product sales at the time we recognize a sale to a
direct customer, we must estimate any rebates or discounts that ultimately will be due to the direct
customer and other customers in the distribution chain under the terms of our contracts. Significant
judgments are required in making these estimates.

•

The rebate and discount amounts are recorded as a deduction to arrive at our net product revenue. Sales
rebates and discounts that require the use of judgment in the establishment of the accrual include
managed care, Medicare, Medicaid, chargebacks, long-term care, hospital, patient assistance programs,
and various other programs. We estimate these accruals using an expected value approach.

The largest of our sales rebate and discount amounts are rebates associated with sales covered by
managed care, Medicare, Medicaid, chargeback, and patient assistance programs in the U.S. In
determining the appropriate accrual amount, we consider our historical rebate payments for these
programs by product as a percentage of our historical sales as well as any significant changes in sales
trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these
programs, the percentage of our products that are sold via these programs, and our product pricing.
Although we accrue a liability for rebates related to these programs at the time we record the sale, the

F45

FINANCIAL REPORTrebate 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. An estimate of these
rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as
the related sale.

Sales Returns - Background and Uncertainties

• When product sales occur, to determine the appropriate transaction price for our sales, we estimate a

reserve for future product returns related to those sales using an expected value approach. This estimate
is based on several factors, including: historical return rates, expiration date by product (on average,
approximately 24 months after the initial sale of a product to our customer), and estimated levels of
inventory in the wholesale and retail channels, 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. 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 have been and may in the future be required based on revised
estimates to our assumptions. We record the return amounts as a deduction to arrive at our net product
revenue. Once the product is returned, it is destroyed; we do not record a right of return asset. Our returns
policies outside the U.S. are generally more restrictive than in the U.S. as returns are not allowed for
reasons other than failure to meet product specifications in many countries. Our reserve for future product
returns for product sales outside the U.S. is not material.

• As a part of our process to estimate a reserve for product returns, 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 provides us with data on inventory levels at our wholesalers; however, our data on inventory
levels in the retail channel is more limited. Wholesaler stocking and destocking activity historically has not
caused any material changes in the rate of actual product returns.

• Actual product returns have been less than 2 percent of our net revenue over each of the past three years

and have not fluctuated significantly as a percentage of revenue, although fluctuations are more likely in
periods following loss of patent exclusivity for major products in the U.S. market.

Adjustments to Revenue

Adjustments to revenue recognized as a result of changes in estimates for the judgments described above for our
most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous
periods were approximately 2 percent and 1 percent of U.S revenue during 2019 and 2018, respectively.

Collaboration and Other Arrangements

We recognize several types of revenue from our collaborations and other arrangements, which we discuss in
general terms immediately below and more specifically in Note 4 for each of our material collaborations and other
arrangements. Our collaborations and other arrangements are not contracts with customers but are evaluated to
determine whether any aspects of the arrangements are contracts with customers.

• Revenue related to products we sell pursuant to these arrangements is included in net product revenue,
while other sources of revenue (e.g., royalties and profit sharing from our partner) are included in
collaboration and other revenue.

•

Initial fees and developmental milestones 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.

F46

FINANCIAL REPORT• 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.

• Royalty revenue from licensees, which is based on sales to third-parties of licensed products and

technology, is recorded when the third-party sale occurs and the performance obligation to which some or
all of the royalty has been allocated has been satisfied (or partially satisfied). This royalty revenue is
included in collaboration and other revenue.

• For arrangements involving multiple goods or services (e.g., research and development, marketing and

selling, manufacturing, and distribution), each required good or service is evaluated to determine whether
it is distinct. If a good or service does not qualify as distinct, it is combined with the other non-distinct
goods or services within the arrangement and these combined goods or services are treated as a single
performance obligation for accounting purposes. The arrangement's transaction price is then allocated to
each performance obligation based on the relative standalone selling price of each performance obligation.
For arrangements that involve variable consideration where we have sold intellectual property, we
recognize revenue based on estimates of the amount of consideration we believe we will be entitled to
receive from the other party, subject to a constraint. These estimates are adjusted to reflect the actual
amounts to be collected when those facts and circumstances become known.

• Significant judgments must be made in determining the transaction price for our sales of intellectual
property. Because of the risk that products in development will not receive regulatory approval, we
generally do not recognize any contingent payments that would be due to us upon or after regulatory
approval.

• We have entered into arrangements whereby we transferred rights to products and committed to supply for
a period of time. For those arrangements for which we concluded that the obligations were not distinct, any
amounts received upfront are being amortized to revenue as net product revenue over the period of the
supply arrangement as the performance obligation is satisfied.

Contract Liabilities

Our contract liabilities result from arrangements where we have received payment in advance of performance
under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are
generally due to either receipt of additional advance payments or our performance under the contract.

The following table summarizes contract liability balances:

Contract liabilities

264.6

294.9

2019

2018

The contract liabilities balances disclosed above as of December 31, 2019 and 2018 were primarily related to the
remaining license period of symbolic intellectual property and obligations to supply product for a defined period of
time.

During the years ended December 31, 2019 and 2018, revenue recognized from contract liabilities as of the
beginning of the year was not material. Revenue expected to be recognized in the future from contract liabilities as
the related performance obligations are satisfied is not expected to be material in any one year.

F47

FINANCIAL REPORT
Disaggregation of Revenue

The following table summarizes revenue by product:

Revenue—to unaffiliated customers:

Endocrinology:

Trulicity®

Humalog® (2)

Forteo®

Humulin®

Basaglar®

Jardiance (3)

Trajenta (4)

Other Endocrinology

Total Endocrinology

Oncology:

Alimta®

Cyramza®

Verzenio®

Erbitux®

Other Oncology

Total Oncology

Immunology:

Taltz®

Olumiant®

Total Immunology

Neuroscience:

Cymbalta®

Zyprexa®

Strattera®

Emgality®

Other Neuroscience

Total Neuroscience

Other:

Cialis ®

Other

Total Other

2019

U.S.(1)
2018

2017

2019

Outside U.S.
2018

2017

3,155.2

2,515.8

1,609.8 $

972.7

683.3

419.9

1,669.7

1,787.8

1,717.8

1,151.0

1,208.7

1,147.4

645.5

879.7

876.2

565.9

224.8

293.7

757.9

910.2

622.8

400.2

224.2

292.7

965.2

884.6

311.1

290.4

213.2

380.9

759.1

410.4

236.3

378.3

365.8

230.1

817.7

421.2

178.5

258.1

350.5

272.5

783.8

450.7

121.0

157.0

324.7

307.7

8,310.7

7,511.6

6,373.0

4,503.7

4,190.5

3,712.2

1,219.5

1,131.0

1,034.3

335.3

454.8

487.9

111.0

291.5

248.5

531.6

200.6

278.8

21.0

541.7

174.6

896.4

589.9

124.9

55.4

339.3

1,001.9

529.9

6.6

103.8

215.1

1,028.2

479.6

—

104.2

149.6

2,608.5

2,403.2

2,050.4

2,005.9

1,857.3

1,761.6

1,016.8

42.2

1,059.0

49.6

41.0

30.8

154.9

80.2

356.5

231.7

156.2

387.9

738.7

6.7

745.4

54.3

36.2

89.7

4.9

92.3

277.4

486.0

—

486.0

114.9

75.5

284.9

—

115.7

591.0

349.6

384.7

734.3

675.8

377.6

211.7

7.7

93.6

198.7

195.9

394.6

653.7

435.1

361.1

—

93.4

73.2

45.8

119.0

642.2

505.7

333.3

—

98.9

1,366.4

1,543.3

1,580.1

1,129.2

325.1

1,454.3

1,358.6

555.4

1,914.0

658.8

327.7

986.5

722.7

393.0

964.5

422.0

1,115.7

1,386.5

Revenue

12,722.6

12,391.9

11,414.4 $

9,596.8

9,101.4

8,559.4

Numbers may not add due to rounding.

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

(2) Humalog revenue includes insulin lispro.

(3) Jardiance revenue includes Glyxambi® and Synjardy®.

(4) Trajenta revenue includes Jentadueto®.

The following table summarizes revenue by geographical area:

Revenue—to unaffiliated customers(1):

U.S.

Europe

Japan

Other foreign countries

Revenue

Numbers may not add due to rounding.

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

2019

2018

2017

12,722.6

12,391.9

11,414.4

3,765.0

2,547.6

3,284.3

3,663.1

2,407.4

3,030.9

3,390.6

2,339.5

2,829.3

22,319.5

21,493.3

19,973.8

F48

FINANCIAL REPORTNote 3: Acquisitions and Divestiture

In February 2019, we completed the acquisition of Loxo Oncology, Inc. (Loxo). This transaction, as further discussed
in this note below in Acquisition of a Business, was accounted for as a business combination under the acquisition
method of accounting. Under this method, 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 Loxo have been included in our consolidated financial statements from the date of
acquisition.

We acquired assets in development in 2019, 2018, and 2017, which are further discussed in this note below in Asset
Acquisitions. Upon acquisition, the acquired IPR&D charges related to these products were immediately expensed
because the products had no alternative future use. For the years ended December 31, 2019, 2018, and 2017, we
recorded acquired IPR&D charges of $239.6 million, $1.98 billion, and $1.11 billion, respectively.

Acquisition of a Business

Loxo Acquisition

Overview of Transaction

In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. The
accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset
impairment, restructuring, and other special charges during the year ended December 31, 2019 (see Note 5).

Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib
(LOXO-292), an oral RET inhibitor granted Breakthrough Therapy designation by the U.S. Food and Drug
Administration, and LOXO-305, an oral BTK inhibitor.

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 February 15, 2019

Acquired IPR&D(1)

Finite-lived intangibles(2)

Deferred income taxes

Other assets and liabilities - net

Total identifiable net assets

Goodwill(3)

Total consideration transferred - net of cash acquired

(1) $4.60 billion of the acquired IPR&D relates to selpercatinib (LOXO-292).

4,670.0

980.0

(1,032.8)

(26.4)

4,590.8

2,326.9

6,917.7

(2) Contract-based intangibles (primarily related to Vitrakvi) which are being amortized to cost of sales on a straight-line basis over their
estimated useful lives, were expected to have a weighted average useful life of approximately 12 years from the acquisition date.

(3) The goodwill recognized from this acquisition is attributable primarily to future unidentified projects and products and the assembled

workforce for Loxo and is not deductible for tax purposes.

Our consolidated statement of operations for the year ended December 31, 2019 includes Loxo revenues of $136.7
million, primarily due to regulatory approval and sales milestones received. We are unable to provide the results of
operations for the year ended December 31, 2019 attributable to Loxo as those operations were substantially
integrated into our legacy business.

Pro forma information has not been included because this acquisition did not have a material impact on our results
of operations for the years ended December 31, 2019 and 2018.

F49

FINANCIAL REPORTAsset Acquisitions

The following table and narrative summarize our asset acquisitions during 2019, 2018, and 2017.

Counterparty

Compound(s),Therapy, or Asset

Acquisition
Month

Phase of
Development(1)

Acquired IPR&D
Expense

AC Immune SA

Tau aggregation inhibitor small
molecules for the potential treatment of
Alzheimer's disease and other
neurodegenerative diseases

January 2019
& September
2019(2)

Pre-clinical

127.1

ImmuNext, Inc.

Novel immunometabolism target

March 2019

Pre-clinical

Avidity Biosciences, Inc.

Centrexion Therapeutics Corporation

Potential new medicines in immunology
and other select indications

CNTX-0290, a novel, small molecule
somatostatin receptor type 4 agonist

April 2019

Pre-clinical

July 2019

Phase I

Sigilon Therapeutics

Encapsulated cell therapies for the
potential treatment of type 1 diabetes

AurKa Pharma, Inc.

AK-01, an Aurora kinase A inhibitor

ARMO BioSciences, Inc. (ARMO)

Cancer therapy - pegilodecakin

Anima Biotech

Translation inhibitors for selected
neuroscience targets

April 2018

Pre-clinical

June 2018

Phase I

Phase III

July 2018

Pre-clinical

SIGA Technologies, Inc.

Priority Review Voucher

October 2018

Not applicable

Chugai Pharmaceutical Company

OWL833, an oral non-peptidic GLP-1
receptor agonist

October 2018

Pre-clinical

NextCure, Inc.

Immuno-oncology cancer therapies

Dicerna Pharmaceuticals, Inc.

Hydra Biosciences

Cardio-metabolic disease,
neurodegeneration, and pain

TRPA1 antagonists program for the
potential treatment of chronic pain
syndromes

November
2018

December
2018

Pre-clinical(3)

Pre-clinical

CoLucid Pharmaceuticals, Inc. (CoLucid)

KeyBioscience AG

Oral therapy for the acute treatment of
migraine - lasmiditan

Multiple molecules for treatment of
metabolic disorders

March 2017

Phase III

July 2017

Phase II

Nektar Therapeutics

Immunological therapy - NKTR-358

August 2017

Phase I

CureVac AG

Cancer vaccines

November
2017

Pre-clinical

40.0

25.0

47.5

66.9

81.8

1,475.8

30.0

80.0

50.0

28.1

148.7

22.6

857.6

55.0

150.0

50.0

(1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most

advanced asset acquired, where applicable.

(2) We recognized acquired IPR&D expenses of $96.9 million in January 2019 upon entering into a license agreement and $30.2 million in

September 2019 upon entering into an amendment to the license agreement.

(3) This research and development collaboration agreement has been terminated, to be effective March 2020.

In connection with these arrangements, our partners may be entitled to future royalties and/or commercial
milestones based on sales should products be approved for commercialization and/or milestones based on the
successful progress of compounds through the development process.

Divestiture

In October 2019, we completed a transaction in which we sold the rights in China for two legacy antibiotic
medicines, as well as a manufacturing facility in Suzhou, China to Eddingpharm, a China-based specialty
pharmaceutical company. In connection with the sale, we received net cash proceeds of $354.8 million from
Eddingpharm in 2019, with an additional payment of $40.3 million due to us in 2020. We accounted for the
transaction as the sale of a business. We recorded a gain of $309.8 million in Other—net, (income) expense upon
closing the transaction in 2019.

Subsequent Event - Dermira, Inc. (Dermira) Acquisition

On January 10, 2020, we announced an agreement to acquire Dermira for a purchase price of $18.75 per share, or
approximately $1.1 billion. The acquisition will expand our immunology pipeline with the addition of lebrikizumab, a
novel, investigational, monoclonal antibody designed to bind IL-13 with high affinity that is being evaluated in a
Phase III clinical development program for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab
was granted Fast Track designation from the U.S. Food and Drug Administration (FDA). The FDA's fast track

F50

FINANCIAL REPORTdesignation is designed to expedite the development and review of new therapies to treat serious conditions and
address unmet medical needs. The acquisition will also expand our portfolio of marketed dermatology medicines
with the addition of Qbrexza® (glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical
treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating). The transaction is not
subject to any financing condition and is expected to close by the end of the first quarter of 2020, subject to
customary closing conditions, including receipt of required regulatory approvals and the tender of a majority of the
outstanding shares of Dermira's common stock.

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 from or payments to the collaboration partner.
See Note 2 for amounts of collaboration and other revenue recognized from these types of arrangements.

Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense
line item, net of any payments due to or reimbursements due from our collaboration partners, with such
reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in
nature, and our more significant arrangements are discussed below.

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, Synjardy, and Trijardy® XR as well as our basal insulin, Basaglar. Jentadueto is
included in the Trajenta product family. Glyxambi, Synjardy, and Trijardy XR are included in the Jardiance product
family.

The table below summarizes significant milestones (deferred) capitalized for the compounds included in this
collaboration:

Product Family

Trajenta(2)

Jardiance(3)

Basaglar

Milestones
(Deferred) Capitalized(1)

446.4

289.0

(250.0)

(1) In connection with the regulatory approvals of Basaglar in the U.S., Europe, and Japan, milestone payments received were recorded as

contract liabilities 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 to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been
(deferred) or capitalized from the start of this collaboration through the end of the reporting period.

(2) The collaboration agreement with Boehringer Ingelheim for Trajenta ends upon expiration of the compound patent and any

supplementary protection certificates or extensions thereto.

(3) The collaboration agreement with Boehringer Ingelheim for Jardiance ends upon expiration of the compound patent and any

supplementary protection certificates or extensions thereto.

Through December 31, 2019, in the most significant markets, we and Boehringer Ingelheim shared equally the
ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from
the collaboration. We recorded our portion of the gross margin associated with Boehringer Ingelheim's products as
collaboration and other revenue. We recorded our sales of Basaglar to third parties as net product revenue 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 recorded our portion of the development and commercialization costs as
research and development expense and marketing, selling, and administrative expense, respectively. Each company
was entitled to potential performance payments depending on the sales of the molecules it contributes to the
collaboration. These performance payments may have resulted in the owner of the molecule retaining a greater
share of the agreed upon gross margin of that product. Subject to achieving these thresholds, in a given period, our
reported revenue for Trajenta and Jardiance may have been reduced by any performance payments we make
related to these products. Similarly, performance payments we may have received related to Basaglar effectively
reduced Boehringer Ingelheim's share of the gross margin, which reduced our cost of sales.

F51

FINANCIAL REPORTEffective January 1, 2020, we and Boehringer Ingelheim modernized the alliance. In the most significant markets,
we and Boehringer Ingelheim share equally the ongoing development costs and commercialization costs for the
Jardiance product family. We receive a royalty on net sales of Boehringer Ingelheim's products in the most
significant markets and recognize the royalty as collaboration and other revenue. We pay to Boehringer Ingelheim a
royalty on net sales for Basaglar in the U.S. We record our sales of Basaglar to third parties as net product revenue
with the royalty payments made to Boehringer Ingelheim recorded as cost of sales. For the Jardiance product
family, we record our portion of the development and commercialization costs as research and development
expense and marketing, selling, and administrative expense, respectively. Boehringer Ingelheim is entitled to
potential performance payments depending on the net sales of the Jardiance product family; therefore, our
reported revenue for Jardiance may be reduced by any potential performance payments we make related to this
product. Beginning January 1, 2021, the royalty received by us related to the Jardiance product family may also be
increased or decreased depending on whether net sales for this product family exceed or fall below certain
thresholds.

The following table summarizes our net product revenue recognized with respect to Basaglar and collaboration and
other revenue recognized with respect to the Trajenta and Jardiance families of products:

Basaglar

Jardiance

Trajenta

Olumiant

2019

2018

2017

1,112.6

801.2

944.2

590.6

658.3

574.7

432.1

447.5

537.9

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 (JAK) inhibitor compound, now known as
Olumiant, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte
has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging up to 20
percent. The agreement calls for payments by us to Incyte associated with certain development, success-based
regulatory, and sales-based milestones.

The following table summarizes our significant milestones achieved:

2018

2017

Year

Event

Regulatory approval in the U.S.

Classification

Amount

Intangible asset

100.0

Began Phase III testing for systemic lupus erythematosus (SLE)

R&D Expense

Regulatory approval in Europe

Regulatory approval in Japan

Began Phase III testing for atopic dermatitis

Intangible asset

R&D expense

20.0

65.0

15.0

30.0

As of December 31, 2019, Incyte is eligible to receive up to $130.0 million of additional payments from us contingent
upon certain development and success-based regulatory milestones. Incyte is also eligible to receive up to $150.0
million of potential sales-based milestones.

The agreement provided Incyte with options to co-develop the compound subject to the collaboration on an
indication-by-indication basis by funding 30 percent of the associated development costs from the initiation of a
Phase IIb trial through regulatory approval in exchange for increased tiered royalties ranging up to percentages in
the high twenties. Incyte previously exercised its option to co-develop Olumiant in rheumatoid arthritis, atopic
dermatitis, alopecia areata, and SLE; however, it opted-out of co-development of all indications as of January 1,
2019. As a result, we will solely fund all further development and pay a lower royalty rate to Incyte on sales.

We record our sales of Olumiant to third parties as net product revenue with the royalty payments made to Incyte
recorded as cost of sales. The following table summarizes our net product revenue recognized with respect to
Olumiant:

Olumiant

2019

2018

2017

426.9

202.5

45.8

F52

FINANCIAL REPORTTanezumab

We have 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 pain. Under the agreement, the
companies share equally the ongoing development costs and, if successful, in gross margins and certain
commercialization expenses. As of December 31, 2019, Pfizer is eligible to receive up to $350.0 million in success-
based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent upon the
commercial success of tanezumab.

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

Pension and post-retirement medical charges associated with U.S. voluntary early
retirement program (see Note 15)

Asset impairment and other special charges

Total asset impairment, restructuring, and other special charges

2019

2018

2017

77.8

127.8

—

497.8

—

139.1

601.0

446.7

283.9

575.6

266.9

1,331.6

Severance costs recognized during the years ended December 31, 2019, 2018 and 2017 were incurred as a result of
actions taken to reduce our cost structure. Severance costs recognized in 2017 were primarily associated with the
U.S. voluntary early retirement program. During 2017, severance costs recognized in the U.S. and outside the U.S.
were $368.3 million and $232.7 million, respectively. Substantially all of the severance costs incurred in 2017 and
2018 have been paid. Substantially all of the severance costs incurred during the year ended December 31, 2019 are
expected to be paid in the next 12 months.

Asset impairment and other special charges recognized during the year ended December 31, 2019 consisted of
$400.7 million related to the acquisition of Loxo, substantially all of which is associated with the accelerated vesting
of Loxo employee equity awards. In addition, we incurred an asset impairment charge related to our decision to
close and sell a research and development facility located in the United Kingdom (U.K). The facility 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, 2018 resulted
primarily from asset impairment and other special charges related to the sale of the Posilac® (rbST) brand and the
associated Augusta, Georgia manufacturing site.

Asset impairment and other special charges recognized during the year ended December 31, 2017 resulted
primarily from asset impairments related to lower projected revenue for Posilac (rbST). The assets associated with
Posilac (rbST) were written down to their fair values, which were determined based upon a discounted cash flow
valuation. Impairment charges were recorded for the associated fixed assets and intangible asset of $151.5 million
and $50.0 million, respectively. In addition, we incurred approximately $43.4 million of costs associated with the
temporary shut down of our Puerto Rico facility following Hurricane Maria.

Note 6: Inventories

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 measured using LIFO must be valued at the lower of cost or market. Inventories measured using FIFO
must be valued at the lower of cost or net realizable value.

Inventories at December 31 consisted of the following:

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

2019

2018

647.3
2,067.6
424.6
3,139.5
51.2
3,190.7

577.8
2,057.8
426.1
3,061.7
36.4
3,098.1

Inventories valued under the LIFO method comprised $1.20 billion and $1.37 billion of total inventories at
December 31, 2019 and 2018, respectively.

F53

FINANCIAL REPORTNote 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 our trade
receivables; collateral is generally not required. We seek to mitigate the risk associated with this concentration
through 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 risk-management 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.

Our equity investments are accounted for using three different methods depending on the type of equity investment:

•

Investments in companies over which we have significant influence but not a controlling interest are
accounted for using the equity method, with our share of earnings or losses reported in other-net, (income)
expense.

• For equity investments that do not have readily determinable fair values, we measure these investments at
cost, less any impairment, plus or minus changes resulting from observable price changes in orderly
transactions for the identical or similar investment of the same issuer. Any change in recorded value is
recorded in other-net, (income) expense.

• Our public equity investments are measured and carried at fair value. Any change in fair value is

recognized in other-net, (income) expense.

We review equity investments other than public equity investments for indications of impairment and observable
price changes on a regular basis.

Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and
are intended to 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 instruments 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 instruments that are designated and qualify as cash flow hedges, gains
and losses are reported as a component of accumulated other comprehensive loss and reclassified into earnings in
the same period the hedged transaction affects earnings. For derivative and non-derivative instruments that are
designated and qualify as net investment hedges, the foreign currency translation gains or losses due to spot rate
fluctuations are reported as a component of accumulated other comprehensive loss. Derivative contracts that are
not designated as hedging instruments are recorded at fair value with the gain or loss recognized in 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, 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, 2019, we had outstanding foreign currency forward commitments to
purchase 447.9 million U.S. dollars and sell 402.9 million euro; commitments to purchase 1.81 billion euro and sell
2.02 billion U.S. dollars; commitments to purchase 308.3 million U.S. dollars and sell 33.49 billion Japanese yen,
commitments to purchase 101.4 million Swiss francs and sell 103.5 million U.S. dollars, and commitments to
purchase 236.2 million British pounds and sell 310.9 million U.S. dollars which all settled within 30 days.

F54

FINANCIAL REPORTForeign currency exchange risk is also managed through the use of foreign currency debt and cross-currency
interest rate swaps. Our foreign currency-denominated notes had carrying amounts of $5.49 billion and $3.40
billion as of December 31, 2019 and 2018, respectively, of which $4.10 billion and $2.65 billion have been designated
as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations
as of December 31, 2019 and 2018, respectively. At December 31, 2019, we had outstanding cross currency swaps
with notional amounts of $1.45 billion swapping U.S. dollars to euro, $1.00 billion swapping swiss francs to U.S.
dollars, and $396.0 million swapping U.S. dollars to British pounds, which have settlement dates ranging through
2028. Our cross-currency interest rate swaps, for which a majority convert a portion of our U.S. dollar-denominated
floating rate debt to foreign-denominated floating rate debt, have also been designated as, and are effective as,
economic hedges of net investments.

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 seek to 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 statements of cash flows. At
December 31, 2019, substantially all of our total long-term debt is at a fixed rate. We have converted approximately
11 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.

We 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. The change in fair value of these instruments is recorded as part of other comprehensive income (loss), and
upon completion of a debt issuance and termination of the swap, is amortized to interest expense over the life of the
underlying debt. As of December 31, 2019, the total notional amounts of forward-starting interest rate contracts in
designated cash flow hedging instruments were $1.00 billion, which have settlement dates ranging between 2023
and 2025.

The Effect of Risk Management Instruments on the Consolidated Statements 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:

Effective portion of losses on interest rate contracts reclassified from accumulated

other comprehensive loss

Cross-currency interest rate swaps

Net losses on foreign currency exchange contracts not designated as hedging

instruments

Total

2019

2018

2017

112.1

(112.1)

15.9

(17.1)

61.9

60.7

(40.9)

40.9

14.8

—

100.0

114.8

(14.1)

14.1

14.8

—

97.9

112.7

During the years ended December 31, 2019 and 2018, the amortization of losses related to the portion of our risk
management hedging instruments, fair value hedges, and cash flow hedges that was excluded from the
assessment of effectiveness was not material.

During the year ended December 31, 2017, 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.

F55

FINANCIAL REPORTThe Effect of Risk-Management Instruments on Other Comprehensive Income
(Loss)

The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is
as follows:

Net investment hedges:

Foreign currency-denominated notes

Cross-currency interest rate swaps

Foreign currency exchange contracts

Cash flow hedges:

Forward-starting interest rate swaps

Cross-currency interest rate swaps

2019

2018

2017

40.1

110.4

47.4

—

31.6

(8.3)

96.8

5.7

—

(361.5)

(126.6)

—

13.0

—

In 2020, we expect to reclassify $16.3 million of net losses on cash flow hedges from accumulated other
comprehensive loss to other–net, (income) expense. During the year ended December 31, 2019 and 2018, the
amounts excluded from the assessment of hedge effectiveness recognized in other comprehensive income (loss)
were not material.

F56

FINANCIAL REPORT7.2

81.4

2.6

9.8

77.2

271.1

101.1

30.0

60.0

718.6

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

Carrying
Amount

Cost (1)

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

1,025.4

— $

1,025.4

Description

December 31, 2019

Cash equivalents

Short-term investments:

U.S. government and agency securities $

7.2

— $

Corporate debt securities

Asset-backed securities

Other securities

81.4

2.6

9.8

81.1

2.6

9.8

—

81.4

2.6

—

9.8

Short-term investments

101.0

Noncurrent investments:

U.S. government and agency securities $

77.2

76.3

77.2

— $

Corporate debt securities

Mortgage-backed securities

Asset-backed securities

Other securities

Marketable equity securities

Equity investments without readily

determinable fair values(2)

Equity method investments(2)

Noncurrent investments

December 31, 2018

Cash equivalents

Short-term investments:

267.8

99.6

29.6

27.4

254.4

—

718.6

271.1

101.1

30.0

—

60.0

—

271.1

101.1

30.0

60.0

718.6

405.0

299.4

1,962.4

5,727.1

— $

5,727.1

U.S. government and agency securities $

16.9

17.1

16.9

— $

Corporate debt securities

Asset-backed securities

Other securities

Short-term investments

Noncurrent investments:

62.2

7.6

1.5

88.2

62.6

7.7

1.5

—

62.2

7.6

1.5

—

U.S. government and agency securities $

149.1

153.6

149.1

— $

Corporate debt securities

Mortgage-backed securities

Asset-backed securities

Other securities

Marketable equity securities

Equity investments without readily

determinable fair values(2)

Equity method investments(2)

568.0

111.4

27.7

87.8

357.5

414.7

289.2

Noncurrent investments

2,005.4

587.8

114.5

27.9

29.7

238.3

—

357.5

568.0

111.4

27.7

—

87.8

—

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

(2) Fair value disclosures are not applicable for equity method investments and investments accounted for under the measurement

alternative for equity investments.

16.9

62.2

7.6

1.5

149.1

568.0

111.4

27.7

87.8

357.5

F57

FINANCIAL REPORT

Description

Short-term commercial paper borrowings

December 31, 2019

December 31, 2018

Long-term debt, including current portion

December 31, 2019

December 31, 2018

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

(1,494.2) $

— $

(1,491.6) $

— $

(1,491.6)

(498.9)

—

(497.6)

—

(497.6)

(13,823.0) $

— $

(15,150.0) $

— $

(15,150.0)

(9,799.7)

—

(9,989.4)

—

(9,989.4)

F58

FINANCIAL REPORT

Fair Value Measurements Using

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

Significant
Other
Observable
Inputs
(Level 2)

Carrying
Amount

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

Description

December 31, 2019

Risk-management instruments

Interest rate contracts designated as fair value hedges:

Other noncurrent assets

72.0

— $

72.0

— $

72.0

Interest rate contracts designated as cash flow hedges:

Other noncurrent assets

Cross-currency interest rate contracts designated as net

investment hedges:

Other noncurrent assets

Other current liabilities

Other noncurrent liabilities

Cross-currency interest rate contracts designated as cash

flow hedges:

Other noncurrent assets

Other noncurrent liabilities

Foreign exchange contracts not designated as hedging

instruments:

Other receivables

Other current liabilities

December 31, 2018

Risk-management instruments

Interest rate contracts designated as fair value hedges:

Other noncurrent assets

Other current liabilities

Other noncurrent liabilities

Cross-currency interest rate contracts designated as net

investment hedges:

Other receivables

Other noncurrent assets

Other current liabilities

Cross-currency interest rate contracts not designated as

hedging instruments:

Other noncurrent liabilities

Foreign exchange contracts not designated as hedging

instruments:

Other receivables

Other current liabilities

43.3

45.1

(21.4)

(5.7)

3.0

(20.1)

18.4

(11.9)

4.5

(22.3)

(19.0)

69.2

8.2

(9.2)

(25.8)

11.3

(16.3)

—

43.3

45.1

(21.4)

(5.7)

3.0

(20.1)

18.4

(11.9)

4.5

(22.3)

(19.0)

69.2

8.2

(9.2)

(25.8)

11.3

(16.3)

—

43.3

45.1

(21.4)

(5.7)

3.0

(20.1)

18.4

(11.9)

4.5

(22.3)

(19.0)

69.2

8.2

(9.2)

(25.8)

11.3

(16.3)

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 enforceable master netting
arrangements 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. Level 3 fair value measurements for other investment securities are determined using unobservable
inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. The
fair values of equity method investments and investments measured under the measurement alternative for equity
investments that do not have readily determinable fair values are not readily available.

F59

FINANCIAL REPORT

The table below summarizes the contractual maturities of our investments in debt securities measured at fair value
as of December 31, 2019:

Maturities by Period

Total

Less Than
1 Year

1-5 Years

6-10 Years

More Than
10 Years

Fair value of debt securities

570.6

91.2

276.5

80.4

122.5

The net unrealized gains (losses) recognized in our consolidated statements of operations for equity securities were
$395.3 million and $(20.1) million for the years ended December 31, 2019 and 2018, respectively.

We adjust our equity investments without readily determinable fair values based upon changes in the equity
instruments' values resulting from observable price changes in orderly transactions for an identical or similar
investment of the same issuer. Downward adjustments resulting from an impairment are recorded based upon
impairment considerations, including the financial condition and near term prospects of the issuer, general market
conditions, and industry specific factors. Adjustments recorded for the years ended December 31, 2019 and 2018
were not material.

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 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

2019

2018

10.3

4.0

429.5

141.1

0.8

29.0

84.3

858.6

We periodically assess our investment in available-for-sale securities for other-than-temporary impairment losses.
Other-than-temporary impairment losses were not material in 2019, and there were no other-than-temporary
impairment losses in 2018 or 2017.

For debt 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 credit losses include the position in the capital structure, vintage and amount of collateral, delinquency
rates, current credit support, and geographic concentration.

As of December 31, 2019, the available-for-sale securities in an unrealized loss position include primarily fixed-rate
debt securities of varying maturities, which are sensitive to changes in the yield curve and other market conditions.
Approximately 56 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities.
As of December 31, 2019, 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 or principal payments for any of our debt securities.

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

Proceeds from sales

Realized gross gains on sales

Realized gross losses on sales

2019

2018

2017

655.5

5,668.0

5,769.3

40.0

7.9

11.8

51.3

176.0

5.8

Realized gains and losses on sales of available-for-sale 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.

Accounts Receivable Factoring Arrangements

We have entered into accounts receivable factoring agreements with financial institutions to sell certain of our non-
U.S. accounts receivable. These transactions are accounted for as sales and result in a reduction in accounts
receivable because the agreements transfer effective control over and risk related to the receivables to the buyers.
Our factoring agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest
in the underlying accounts receivable once sold. We derecognized $678.8 million and $696.2 million of accounts
receivable as of December 31, 2019 and 2018, respectively, under these factoring arrangements. The costs of
factoring such accounts receivable on our consolidated results of operations for the years ended December 31,
2019, 2018, and 2017 were not material.

F60

FINANCIAL REPORT

Note 8: Goodwill and Other Intangibles

Goodwill

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, or more frequently if
impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than
not that the fair value is less than its carrying amount. If we conclude it is more likely than not that the fair value is
less than the carrying amount, a quantitative test that compares the fair value to its carrying value is performed to
determine the amount of any impairment. The change in goodwill during 2019 was primarily related to our
acquisition of Loxo. See Note 3 for further discussion.

No impairments occurred with respect to the carrying value of goodwill for the years ended December 31, 2019,
2018, and 2017.

Other Intangibles

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

Description

Finite-lived intangible assets:

Marketed products

Other

Total finite-lived intangible assets

Indefinite-lived intangible assets:

2019

2018

Carrying
Amount,
Gross

Accumulated
Amortization

Carrying
Amount,
Net

Carrying
Amount,
Gross

Accumulated
Amortization

Carrying
Amount,
Net

3,150.2

(1,244.6) $

1,905.6

2,077.2

(1,069.0) $

1,008.2

94.2

3,244.4

(51.8)

(1,296.4)

42.4

1,948.0

89.5

2,166.7

(29.7)

(1,098.7)

59.8

1,068.0

Acquired IPR&D

Other intangibles

4,670.0

—

4,670.0

—

7,914.4

(1,296.4) $

6,618.0

2,166.7

(1,098.7) $

1,068.0

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, if any, are capitalized as other intangible assets.

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, analyst expectations, 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 intangible assets in 2019 were primarily related to our acquisition of Loxo.

Other indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if
impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than
not that the fair value of the asset is less than its carrying amount. If we conclude it is more likely than not that the
fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to
its carrying value is performed to determine the amount of any impairment. Finite-lived intangible assets are
reviewed for impairment when an indicator of impairment is present. When required, a comparison of fair value to

F61

FINANCIAL REPORT
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 as well as the fair value of finite-lived intangible assets for impairment
testing purposes, we utilize the "income method" discussed above.

Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging from
three to 20 years. As of December 31, 2019, the remaining weighted-average amortization period for finite-lived
intangible assets was approximately 10 years.

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

Amortization expense

2019

2018

2017

225.8

361.3

462.2

The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets
as of December 31, 2019 is as follows:

Estimated amortization expense

234.3

235.2

227.3

215.6

165.7

2020

2021

2022

2023

2024

Amortization expense is included in either cost of sales, marketing, selling, and administrative or research and
development depending on the nature of the intangible asset being amortized.

Note 9: Property and Equipment

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 three 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

Depreciation expense related to property and equipment was as follows:

Depreciation expense

2019

2018

169.5

7,067.3

7,913.3

1,884.4

17,034.5

(9,161.6)

165.5

7,116.6

7,792.3

1,588.6

16,663.0

(8,666.9)

7,872.9

7,996.1

2019

2018

2017

814.7

797.1

681.7

Capitalized interest costs were not material for the years ended December 31, 2019, 2018, and 2017.

The following table summarizes long-lived assets by geographical area:

Long-lived assets(1):

U.S. and Puerto Rico

Ireland

Other foreign countries

Long-lived assets

2019

2018

5,595.4

1,454.8

1,758.3

8,808.5

5,425.0

1,351.3

1,769.9

8,546.2

(1) Long-lived assets consist of property and equipment, net, operating lease assets, and certain other noncurrent assets.

F62

FINANCIAL REPORTNote 10: Leases

We determine if an arrangement is a lease at inception. We have leases with terms up to 13 years for corporate
offices, research and development facilities, vehicles, and equipment, including some of which have options to
extend and/or early-terminate the leases. We determine the lease term by assuming the exercise of any renewal
and/or early-termination options that are reasonably assured.

Beginning January 1, 2019, operating lease right-of-use assets have been presented in operating lease assets in
our consolidated balance sheet, and the current and long-term portions of operating lease liabilities are included in
other current liabilities and noncurrent operating lease liabilities, respectively, in our consolidated balance sheet.
Short-term leases, which are deemed at inception to have a lease term of 12 months or less, are not recorded on
the consolidated balance sheet.

Operating lease assets represent our right to use an underlying asset for the lease term and operating lease
liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and
liabilities are recognized at commencement date based on the present value of lease payments over the lease term.
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the
information available at commencement date in determining the present value of lease payments.

Lease expense for operating lease assets, which is recognized on a straight-line basis over the lease term, was
$172.8 million during the year ended December 31, 2019. Variable lease payments, which represent non-lease
components such as maintenance, insurance and taxes, and which vary due to changes in facts or circumstances
occurring after the commencement date other than the passage of time, are expensed in the period in which the
payment obligation is incurred and were not material during the year ended December 31, 2019. Short-term lease
expense was not material during the year ended December 31, 2019.

Supplemental balance sheet information related to operating leases as of December 31, 2019 was as follows:

Weighted-average remaining lease term

Weighted-average discount rate

8 years

3.6%

Supplemental cash flow information related to operating leases during the year ended December 31, 2019 was as
follows:

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for new operating lease liabilities

153.6

81.2

The annual minimum lease payments of our operating lease liabilities as of December 31, 2019 were as follows:

Year 1

Year 2

Year 3

Year 4

Year 5

After Year 5

Total lease payments

Less imputed interest

Total

138.1

111.0

82.3

60.6

55.7

272.7

720.4

112.0

608.4

Rental expense for all leases, including contingent rentals (not material), was $175.7 million and $177.4 million for
the years ended December 31, 2018 and 2017, respectively.

Finance leases are included in property and equipment, short-term borrowings and current maturities of long-term
debt, and long-term debt in our consolidated balance sheets. Finance leases are not material to our consolidated
financial statements.

F63

FINANCIAL REPORTNote 11: Borrowings

Debt at December 31 consisted of the following:

Short-term commercial paper borrowings
0.15 to 7.13 percent long-term notes (due 2022-2059)
Other long-term debt
Unamortized debt issuance costs
Fair value adjustment on hedged long-term notes
Total debt
Less current portion
Long-term debt

2019

2018

1,494.2
13,638.5
12.9
(73.6)
245.2
15,317.2
(1,499.3)
13,817.9

498.9
9,640.8
10.1
(28.4)
177.2
10,298.6
(1,102.2)
9,196.4

The weighted-average effective borrowing rate on outstanding commercial paper at December 31, 2019 was 1.65
percent.

At December 31, 2019, we had a total of $5.21 billion of unused committed bank credit facilities, which consisted
primarily of a $3.00 billion credit facility that expires in December 2024 and a $2.00 billion 364-day facility that
expires in December 2020, both of which are available to support our commercial paper program. We have not
drawn against the $3.00 billion and $2.00 billion facilities. Of the remaining committed bank credit facilities, the
outstanding balances as of as December 31, 2019 and December 31, 2018 were not material. Compensating
balances and commitment fees are not material, and there are no conditions that are probable of occurring under
which the lines may be withdrawn.

In February 2019, we issued $1.15 billion of 3.38 percent fixed-rate notes due in March 2029, $850.0 million of 3.88
percent fixed-rate notes due in March 2039, $1.50 billion of 3.95 percent fixed-rate notes due in March 2049, and
$1.00 billion of 4.15 percent fixed-rate notes due in March 2059, with interest to be paid semi-annually. We used the
net proceeds of $4.45 billion from the offering to repay commercial paper that was issued in connection with the
acquisition of Loxo and for general corporate purposes.

In November 2019, we issued euro-denominated notes consisting of €600.0 million of 0.625 percent fixed-notes due
November 2031 and €1.00 billion of 1.70 percent fixed-rate notes due in November 2049 with interest to be paid
annually. We paid $2.27 billion, comprised of $1.75 billion of net cash proceeds from the offering and proceeds from
commercial paper, to purchase and redeem certain higher interest rate U.S. dollar denominated notes with an
aggregate principal amount of $2.00 billion and a net carrying value of $2.01 billion, resulting in a debt
extinguishment loss of $252.5 million. This loss was included in other-net, (income) expense in our consolidated
statement of operations during the year ended December 31, 2019.

In November 2019, we issued Japanese Yen-denominated notes consisting of ¥22.92 billion of 0.42 percent fixed-
rate notes due in November 2029, ¥9.28 billion of 0.56 percent fixed-rate notes due in November 2034, and ¥7.64
billion of 0.97 percent fixed-rate notes due in November 2049, with interest to be paid semi-annually. We used the
net cash proceeds from the offering of $356.6 million for general corporate purposes, including to repay
outstanding commercial paper.

The aggregate amounts of maturities on long-term debt for the next five years are as follows:

Maturities on long-term debt

7.0

5.9

1,424.7

1.9

619.6

2020

2021

2022

2023

2024

We have converted approximately 11 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, 2019 and 2018, including the effects of interest rate swaps for hedged debt
obligations, were 2.88 percent and 3.13 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

305.5

223.8

192.7

2019

2018

2017

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.

F64

FINANCIAL REPORTNote 12: 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.

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

Stock-based compensation expense

Tax benefit

2019

2018

2017

306.8

253.5

64.4

53.2

256.3

64.1

At December 31, 2019, stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not
more than 54.6 million additional shares.

Performance Award Program

PAs are granted to officers and management and are payable in shares of our common stock. The number of PA
shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share
targets over a two-year period. PA shares are accounted for at fair value based upon the closing stock price on the
date of grant and fully vest at the end of the measurement period. The fair values of PAs granted for the years
ended December 31, 2019, 2018, and 2017 were $112.09, $71.63, and $73.54, respectively. The number of shares
ultimately issued for the PA program is dependent upon the EPS achieved during the vesting period. Pursuant to
this program, approximately 1.2 million shares, 0.9 million shares, and 1.3 million shares were issued during the
years ended December 31, 2019, 2018, and 2017, respectively. Approximately 1.1 million shares are expected to be
issued in 2020. As of December 31, 2019, the total remaining unrecognized compensation cost related to nonvested
PAs was $63.2 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, 2019, 2018, and 2017 were $95.01, $48.51, and $66.25, respectively, determined using the following
assumptions:

(Percents)

Expected dividend yield

Risk-free interest rate

Volatility

2019

2018

2017

2.50%

2.46

21.00

2.50%

2.31

22.26

2.50%

1.38

22.91

Pursuant to this program, approximately 1.0 million shares, 0.7 million shares, and 1.1 million shares were issued
during the years ended December 31, 2019, 2018, and 2017, respectively. Approximately 0.8 million shares are
expected to be issued in 2020. As of December 31, 2019, the total remaining unrecognized compensation cost
related to nonvested SVAs was $56.1 million, which will be amortized over the weighted-average remaining
requisite service period of 20 months.

F65

FINANCIAL REPORTRestricted 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, 2019, 2018, and 2017 were $108.43, $70.95, and $72.47, respectively. The number of shares ultimately
issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this program, 1.5
million, 1.3 million, and 1.4 million shares were granted and approximately 0.8 million, 1.0 million, and 0.9 million
shares were issued during the years ended December 31, 2019, 2018, and 2017, respectively. Approximately 0.7
million shares are expected to be issued in 2020. As of December 31, 2019, the total remaining unrecognized
compensation cost related to nonvested RSUs was $134.9 million, which will be amortized over the weighted-
average remaining requisite service period of 27 months.

Note 13: Shareholders' Equity

During 2019, 2018, and 2017, we repurchased $4.40 billion, $4.15 billion and $359.8 million, respectively, of shares
associated with our share repurchase programs. As of December 31, 2019, we had $1.50 billion remaining under
our $8.00 billion share repurchase program that our board authorized in June 2018.

We have 5.0 million authorized shares of preferred stock. As of December 31, 2019 and 2018, no preferred stock
was issued.

We have an employee benefit trust that held 50.0 million shares of our common stock at both December 31, 2019
and 2018, 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, 2019 and 2018, and is shown as
a reduction of 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, 2019, 2018, and
2017.

Note 14: Income Taxes

In December 2017, the President of the U.S. signed into law the 2017 Tax Act. The 2017 Tax Act included significant
changes to the U.S. corporate income tax system, such as the reduction in the corporate income tax rate from 35
percent to 21 percent, transition to a territorial tax system, changes to business related exclusions, deductions and
credits, and modifications to international tax provisions, including a one-time repatriation transition tax (also
known as the ‘Toll Tax’) on unremitted foreign earnings and a global intangible low-taxed income (GILTI) provision,
the new U.S. minimum tax on the earnings of our foreign subsidiaries. In 2017, we recognized a provisional amount
of $1.91 billion, which was included as a component of income tax expense from continuing operations. This amount
represented approximately $3.6 billion attributable to the Toll Tax, partially offset by the changes in deferred taxes
resulting from the transition to a U.S. territorial system, including the re-measurement of deferred taxes. In 2018,
we recorded $313.3 million of income tax benefit, mainly attributable to measurement period adjustments to the
Toll Tax and GILTI.

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. Deferred taxes related to GILTI are also recognized for the future tax
effects of temporary differences.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position,
based on its technical merits, will be sustained upon examination by the taxing authority. 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.

F66

FINANCIAL REPORTFollowing is the composition of income tax expense:

Current:

Federal(1)

Foreign

State

Total current tax expense

Deferred:

Federal(2)

Foreign

State

Total deferred tax (benefit) expense

Income taxes

2019

2018

2017

280.2

169.6

3,181.0

299.8

(14.4)

565.6

141.3

(24.1)

(54.8)

62.4

106.8

4.7

281.1

(3.7)

248.7

3.4

248.4

628.0

529.5

47.5

(5.4)

3,223.1

(601.2)

(230.9)

0.2

(831.9)

2,391.2

(1) The 2019 current tax expense includes $153.1 million of tax benefit from utilization of net operating loss carryforwards. The 2018 and
2017 current tax expense includes $201.5 million and $3.25 billion of tax expense, respectively, related to effects of the 2017 Tax Act.

(2) The 2018 and 2017 deferred tax benefit includes $26.2 million and $1.33 billion of tax benefit, respectively, related to the effects of the

2017 Tax Act.

Significant components of our deferred tax assets and liabilities as of December 31 were as follows:

Deferred tax assets:

Purchases of intangible assets

Compensation and benefits

Tax credit carryforwards and carrybacks

Tax loss carryforwards and carrybacks

Sales rebates and discounts

Operating lease liabilities

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:

Earnings of foreign subsidiaries

Intangibles

Inventories

Prepaid employee benefits

Property and equipment

Financial instruments

Operating lease assets

Total deferred tax liabilities

Deferred tax assets - net

2019

2018

2,512.4

2,627.7

934.3

455.8

318.8

197.3

140.6

98.1

59.6

53.9

835.7

5,606.5

(616.5)

4,990.0

(1,776.4)

(1,298.0)

(686.4)

(305.9)

(274.1)

(139.4)

(124.7)

(4,604.9)

385.1

781.6

359.4

248.2

45.5

—

95.3

68.9

40.3

646.3

4,913.2

(574.8)

4,338.4

(1,745.3)

(86.9)

(681.3)

(240.1)

(260.9)

(22.8)

—

(3,037.3)

1,301.1

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.

At December 31, 2019, based on filed tax returns we have tax credit carryforwards and carrybacks of $799.2 million
available to reduce future income taxes; $149.3 million, if unused, will expire by 2026, and $55.6 million, if unused,
will expire between 2032 and 2038. The remaining portion of the tax credit carryforwards is related to federal tax
credits of $86.6 million, international tax credits of $114.7 million, and state tax credits of $393.0 million, all of
which are substantially reserved.

At December 31, 2019, based on filed tax returns we had net operating losses and other carryforwards for
international and U.S. federal income tax purposes of $949.7 million: $181.4 million will expire by 2024;
$345.4 million will expire between 2025 and 2039; and $422.9 million of the carryforwards will never expire. Net

F67

FINANCIAL REPORToperating 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 $116.1 million and other state carryforwards
of $3.6 million are fully reserved as of December 31, 2019.

Domestic and Puerto Rican companies contributed approximately 44 percent, 15 percent, and 16 percent for the
years ended December 31, 2019, 2018, and 2017, 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 2031.

The 2017 Tax Act introduced international tax provisions that fundamentally change the U.S. taxation of foreign
earnings. As a result, substantially all of the unremitted earnings of our foreign subsidiaries are considered to not
be indefinitely reinvested for continued use in our foreign operations. At December 31, 2019, we had accrued an
immaterial amount of foreign withholding taxes and state income taxes that would be owed upon future
distributions of unremitted earnings of our foreign subsidiaries that are not indefinitely reinvested. For the amount
considered to be indefinitely reinvested, it is not practicable to determine the amount of the related deferred income
tax liability due to the complexities in the tax laws and assumptions we would have to make.

Cash payments of U.S. federal, state, and foreign income taxes, net of refunds, were as follows:

Cash payments of income taxes

2019

2018

2017

1,180.5

1,076.7

221.5

The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight-year
period. We made this election; therefore, we have included Toll Tax payments accordingly.

Following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income before
income taxes to reported income tax expense:

Income tax at the U.S. federal statutory tax rate

Add (deduct):

International operations, including Puerto Rico

General business credits

Non-deductible acquired IPR&D(1)

2017 Tax Act

Other

Income taxes

2019

2018

2017

1,105.8

772.8

806.7

(242.0)

(108.8)

—

(127.0)

(627.1)

(87.4)

309.9

175.3

(14.0)

(480.8)

(66.8)

300.1

1,914.0

(82.0)

628.0

529.5

2,391.2

(1) Non-deductible acquired IPR&D was related to ARMO in 2018 and CoLucid in 2017. See Note 3 for additional information related to

acquisitions.

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

2019

2018

2017

2,034.6

1,000.8

187.2

425.3

(100.3)

(260.5)

(161.5)

(16.2)

798.2

410.9

(115.4)

(33.2)

(20.5)

(6.2)

843.3

133.8

93.8

(59.3)

(2.4)

(19.3)

10.9

Ending balance at December 31

2,108.6

2,034.6

1,000.8

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was
$1.53 billion and $1.48 billion at December 31, 2019 and 2018, 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 2011.

The U.S. examination of tax years 2013-2015 began in 2016, and certain matters were effectively settled during the
second quarter of 2019. As a result, our gross uncertain tax positions were reduced by approximately $200 million,
we made a cash payment of approximately $125 million, and our consolidated results were benefited by an
immaterial reduction in tax expense. During the fourth quarter of 2019, certain matters for tax year 2015 were
effectively settled upon conclusion of the Internal Revenue Service's (IRS) examination which resulted in an

F68

FINANCIAL REPORTimmaterial reduction in tax expense and gross uncertain tax positions. Also in the fourth quarter of 2019, the IRS
began its examination of tax years 2016-2018.

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

2019

2018

2017

(26.4) $

25.1

22.8

At December 31, 2019 and 2018, our accruals for the payment of interest and penalties totaled $150.8 million and
$183.9 million, respectively.

Note 15: Retirement Benefits

We use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets,
funded status, and amounts recognized in the consolidated balance sheets at December 31 for our defined benefit
pension and retiree health benefit plans, which were as follows:

Change in benefit obligation:

Benefit obligation at beginning of year

Service cost

Interest cost

Actuarial (gain) loss

Benefits paid

Plan amendments

Curtailment (gain) loss

Foreign currency exchange rate changes and other adjustments

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2019

2018

2019

2018

13,427.1

14,839.7 $

1,540.0

1,718.7

250.4

486.0

2,631.7

(584.2)

—

(16.8)

56.8

292.7

458.5

(1,386.5)

(579.4)

17.6

(43.9)

(171.6)

36.3

58.0

54.3

(87.3)

—

(0.5)

0.6

41.5

57.3

(176.9)

(82.8)

(14.1)

2.5

(6.2)

Benefit obligation at end of year

16,251.0

13,427.1

1,601.4

1,540.0

Change in plan assets:

Fair value of plan assets at beginning of year

Actual return on plan assets

Employer contribution

Benefits paid

Foreign currency exchange rate changes and other adjustments

10,932.6

2,012.0

429.9

(584.2)

67.7

11,713.0

2,398.1

2,372.4

(360.1)

319.0

(579.4)

(159.9)

444.1

13.2

(87.3)

0.1

32.6

75.9

(82.8)

—

Fair value of plan assets at end of year

12,858.0

10,932.6

2,768.2

2,398.1

Funded status

Unrecognized net actuarial (gain) loss

Unrecognized prior service (benefit) cost

Net amount recognized

Amounts recognized in the consolidated balance sheet consisted of:

Other noncurrent assets

Other current liabilities

Accrued retirement benefits

Accumulated other comprehensive (income) loss before income taxes

(3,393.0)

6,177.6

17.4

(2,494.5)

5,011.3

25.0

1,166.8

(111.6)

(236.4)

2,802.0

2,541.8 $

818.8

858.1

140.6

(299.9)

698.8

163.3

193.7 $

1,381.3

1,043.6

(65.3)

(3,491.0)

6,195.0

(64.2)

(2,624.0)

5,036.3

(7.3)

(207.2)

(348.0)

(7.3)

(178.2)

(159.3)

698.8

Net amount recognized

2,802.0

2,541.8 $

818.8

The unrecognized net actuarial loss (gain) and unrecognized prior service cost (benefit) have not yet been
recognized in net periodic pension costs and were included in accumulated other comprehensive loss at
December 31, 2019.

Market variables associated with the remeasurement, specifically a decrease in the discount rate partially offset by
higher return on plan assets, were the primary drivers for the $2.89 billion increase in the benefit obligation in
2019.

F69

FINANCIAL REPORT

In July 2018, we announced that we would amend our defined benefit pension and retiree health benefit plans to
freeze or reduce benefits for certain employees effective January 1, 2019. We remeasured the impacted pension and
retiree health plans’ benefit obligations as of July 31, 2018, which resulted in a net curtailment gain of $28.0 million,
which was recorded in asset impairment, restructuring, and other special charges. Market variables associated
with this remeasurement, specifically an increase in the discount rate, were the primary driver for the $1.59 billion
decrease in the benefit obligations in 2018.

The workforce reduction plan initiated in 2017 included a curtailment loss of $159.0 million and a special
termination benefit of $354.7 million, of which $446.7 million was recorded in asset impairment, restructuring, and
other special charges and $67.0 million was recorded in discontinued operations, as a result of a remeasurement
as of October 31, 2017. The special termination benefits related to early retirement incentives offered as part of a
voluntary early retirement program for the U.S. plan in the fourth quarter of 2017. This program allowed certain
employees the opportunity to voluntarily leave the Company.

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

2019

2018

2017

2019

2018

2017

3.0%

4.0%

3.4%

4.0

3.3

3.4

7.4

3.4

7.4

3.9

3.4

7.4

3.3%

4.4

4.4%

3.7

3.7%

4.3

6.0

8.0

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, healthcare-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

Retiree health benefit plans

2020

2021

2022

2023

2024

2025-2029

614.5

621.8

641.0

652.3

682.4

3,712.1

93.7

93.8

92.9

91.7

94.3

469.8

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

2019

2018

14,039.7

11,584.2

10,483.4

8,895.6

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

2019

2018

2019

2018

13,063.7

10,837.8 $

214.4

10,483.4

8,895.6

—

189.4

—

The total accumulated benefit obligation for our defined benefit pension plans was $15.17 billion and $12.57 billion
at December 31, 2019 and 2018, respectively.

F70

FINANCIAL REPORT

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

Components of net periodic (benefit) cost:

Service cost

Interest cost

Expected return on plan assets

Amortization of prior service (benefit) cost

Recognized actuarial loss

Curtailment (gain) loss

Special termination benefit

Net periodic (benefit) cost

Defined Benefit
Pension Plans
2018

2019

2017

2019

Retiree Health
Benefit Plans
2018

2017

250.4

292.7

320.8 $

36.3

41.5

486.0

(839.6)

6.1

284.9

2.2

—

458.5

(842.1)

4.6

332.5

1.3

—

411.6

(773.6)

5.6

286.8

93.5

317.2

58.0

(144.3)

(62.9)

1.9

—

57.3

(177.9)

(79.5)

6.1

(29.3)

—

46.4

52.9

(160.7)

(90.0)

18.4

65.5

37.5

190.0

247.5

661.9 $

(111.0) $

(181.8) $

(30.0)

The following represents the amounts recognized in other comprehensive income (loss) for the years ended
December 31, 2019, 2018, and 2017:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

Actuarial gain (loss) arising during period

(1,461.0) $

182.8

(898.1) $

246.1

37.5

261.3

2019

2018

2017

2019

2018

2017

Plan amendments during period

Curtailment gain (loss)

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

—

19.0

6.1

284.9

(7.7)

(17.6)

45.2

4.6

332.5

47.1

—

3.2

5.6

286.8

(108.8)

—

(62.9)

1.9

3.6

14.1

(31.8)

(79.5)

6.1

(0.1)

—

(39.7)

(90.0)

18.4

(3.3)

(1,158.7) $

594.6

(711.3) $

188.7

(53.7) $

146.7

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 $145.2 million, $132.6 million, and $147.0 million for the years ended December 31, 2019,
2018, and 2017, 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, 2019, 2018, and 2017 were not material.

Benefit Plan Investments

Our benefit plan investment policies are set with specific consideration of return and risk requirements in
relationship to the respective liabilities. U.S. and Puerto Rico plans represent approximately 80 percent of our
global investments. Given the long-term nature of our liabilities, these plans have the flexibility to manage an
above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically
prohibited investments. However, within individual investment manager mandates, restrictions and limitations are
contractually set to align with our investment objectives, ensure risk control, and limit concentrations.

We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition,
within a category we use different managers with various management objectives to eliminate any significant
concentration of risk.

Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local investment
policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease exposure to a
particular public equity, fixed income, commodity, or currency market more rapidly or less expensively than could
be accomplished through the use of the cash markets. The plans utilize both exchange-traded and over-the-counter
instruments. The maximum exposure to either a market or counterparty credit loss is limited to the carrying value
of the receivable, and is managed within contractual limits. We expect all of our counterparties to meet their

F71

FINANCIAL REPORT

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 70 percent growth investments and 30 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, commercial mortgage-backed obligations,
and any related repurchase agreements.

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 in
fund-of-funds structures and directly into hedge funds. 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, special situations, private debt, and private real
estate investments. 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 equity-like 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 public 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 such. These NAVs are developed with
inputs including discounted cash flow, independent appraisal, and market comparable analyses.

Other assets include cash and cash equivalents and mark-to-market value of derivatives.

The cash value of the trust-owned insurance contract is primarily invested in investment-grade publicly traded
equity and fixed-income securities.

Other than hedge funds, private equity-like investments, and a portion of the real estate holdings, 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.

F72

FINANCIAL REPORTThe fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2019 by asset
category were as follows:

Asset Class

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)

Investments
Valued at Net
Asset Value(1)

Defined Benefit Pension Plans

Public equity securities:

U.S.

International

Fixed income:

Developed markets

Developed markets - repurchase
agreements

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

794.2

532.5

2,439.2

1,046.8

—

3,661.4

(1,659.1)

648.0

2,897.9

2,279.3

570.3

1,226.8

4.8

—

18.5

—

166.2

62.9

2,658.9

(1,659.1)

277.4

—

222.6

12,858.0

1,831.7

1,499.8

76.5

152.6

82.7

58.5

250.8

187.4

1,832.2

31.3

96.2

52.1

60.8

—

16.2

11.4

—

56.3

27.0

—

1,832.2

—

7.9

2,768.2

140.5

1,923.4

—

4.1

—

16.8

—

6.6

27.5

—

0.4

—

1.6

—

0.7

2.7

261.7

1,392.4

997.7

—

348.0

2,897.9

2,262.5

404.1

934.7

9,499.0

24.4

91.8

26.4

31.1

250.8

185.8

—

15.1

76.2

701.6

(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been

classified in the fair value hierarchy.

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2019. The
activity in the Level 3 investments during the year ended December 31, 2019 was not material.

F73

FINANCIAL REPORT

The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2018 by asset
category were as follows:

Asset Class

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)

Investments
Valued at Net
Asset Value(1)

Defined Benefit Pension Plans

Public equity securities:

U.S.

International

Fixed income:

Developed markets

Developed markets - repurchase
agreements

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

617.7

2,117.8

2,933.4

(1,225.5)

565.2

2,795.3

1,893.5

505.7

729.5

409.1

828.8

—

17.2

2,173.3

—

3.4

—

147.1

213.0

(1,225.5)

255.8

—

83.7

—

1.8

—

6.1

—

16.8

—

208.6

1,287.2

742.9

—

299.9

2,795.3

1,876.7

358.6

432.8

10,932.6

1,618.6

1,287.3

24.7

8,002.0

59.9

127.0

69.1

53.5

245.8

169.2

1,574.7

27.7

71.2

41.0

50.5

—

14.7

38.1

61.5

25.5

—

1,574.7

—

(3.8)

—

0.2

—

0.6

—

1.7

—

18.9

76.3

7.6

27.4

245.8

167.5

—

13.0

36.9

2,398.1

144.3

1,657.9

2.5

593.4

(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been

classified in the fair value hierarchy.

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2018. The
activity in the Level 3 investments during the year ended December 31, 2018 was not material.

In 2020, we expect to contribute approximately $40 million to our defined benefit pension plans to satisfy minimum
funding requirements for the year. Additional discretionary contributions are not expected to be significant.

F74

FINANCIAL REPORT

Note 16: 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.

Patent Litigation

Alimta Patent Litigation and Administrative Proceedings

A number of manufacturers are seeking approvals in the U.S., a number of countries in Europe, and Japan 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 generic 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 in the U.S. 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 in any of the below jurisdictions would result in a rapid and severe decline in
future revenue for the product in the relevant market.

U.S. Patent Litigation and Administrative Proceedings

We filed a lawsuit in the U.S. District Court for the District of Delaware against Eagle Pharmaceuticals, Inc. (Eagle)
in response to its application to market a product using an alternative form of pemetrexed (the active ingredient in
Alimta). In December 2019, we and Eagle reached an agreement to settle all pending litigation, allowing Eagle a
limited initial entry into the market with its product starting February 2022 (up to an approximate three-week
supply) and subsequent unlimited entry starting April 2022. Alimta is protected by a vitamin regimen patent (2021)
plus pediatric exclusivity through May 2022.

In June 2018, the U.S. District Court for the Southern District of Indiana ruled in our favor in two similar cases,
finding Dr. Reddy's Laboratories' (Dr. Reddy) and Hospira, Inc.'s (Hospira) proposed products would infringe our
method of use patent under the doctrine of equivalents. The district court also ruled that the use of Hospira’s
proposed product would literally infringe our method of use patent. In August 2019, the U.S. Court of Appeals for the
Federal Circuit affirmed the district court’s ruling that the use of Dr. Reddy’s and Hospira’s proposed products
would infringe our patent under the doctrine of equivalents but reversed the finding of literal infringement with
respect to Hospira’s product. In November 2019, the court denied Dr. Reddy and Hospira’s petition for rehearing of
the court’s doctrine of equivalents ruling. Dr. Reddy and Hospira have petitioned the U.S. Supreme Court to review
the case.

We have lawsuits pending alleging infringement against Actavis LLC (Actavis) and Apotex Inc. (Apotex) in response
to their applications to market products using alternative forms of pemetrexed. In December 2019, the U.S. District
Court for the Southern District of Indiana granted our motion for summary judgment of infringement under the
doctrine of equivalents and denied Apotex’s motion. Apotex has appealed. The lawsuit against Actavis has been
stayed, pending the conclusion of the Dr. Reddy and Hospira appeals (described above).

European Patent Litigation

Legal proceedings are ongoing in various national courts throughout Europe. We are aware that several companies
have received approval to market generic versions of pemetrexed in major European markets (including generics
currently on the market at risk in France, Germany, and the Netherlands) and that additional generic competitors
may choose to launch at risk. We will continue to seek to remove any generic pemetrexed products launched at risk
in European markets and seek damages with respect to such launches, and defend our patents against validity
challenges.

F75

FINANCIAL REPORTJapanese Administrative Proceedings

Three separate sets of demands for invalidation of our two Japanese vitamin regimen patents, involving several
companies, have been filed with the Japanese Patent Office (JPO). The JPO rejected a demand for invalidation by
Sawai Pharmaceutical Co., Ltd., which was affirmed on appeal in 2017. In July 2018, the JPO issued written
decisions dismissing demands brought by Nipro Corporation (Nipro) for invalidation of our two Japanese vitamin
regimen patents. In November 2019, the IP High Court in Tokyo affirmed the dismissal of Nipro’s demand for
invalidation. The JPO scheduled a hearing in March 2020 concerning the demands brought by Hospira. If upheld
through all challenges, these patents would provide intellectual property protection for Alimta until June 2021.
Notwithstanding our patents, generic versions of Alimta received regulatory approval in Japan starting in February
2016. We do not currently anticipate that generic versions of Alimta will proceed to pricing approval.

Jardiance Patent Litigation

Boehringer Ingelheim, our partner in marketing and development of Jardiance, initiated U.S. patent litigation in the
U.S. District Court of Delaware involving Jardiance, Glyxambi, and Synjardy in accordance with the procedures set
out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). Several
companies submitted Abbreviated New Drug Applications seeking approval to market generic versions of Jardiance
prior to the expiration of the relevant patents, alleging certain patents, including in some allegations the compound
patent, are invalid or would not be infringed. Trial is scheduled in April 2021.

Taltz Patent Litigation

We have been named as a defendant in litigation filed by Genentech, Inc. in the U.S. District Court for the Southern
District of California seeking a ruling that Genentech’s patent would be infringed by our continued sales of Taltz.
Separately, the U.S. Patent and Trademark Office (USPTO) has granted our request to initiate a post grant review
(PGR) to examine the validity of Genentech’s patent asserted against us in the litigation. We expect USPTO’s
decision on the merits in the fourth quarter of 2020. The litigation in the U.S. District Court for the Southern District
of California has been stayed pending the outcome of the PGR. We have also been named as defendant in litigation
filed by Genentech in Germany asserting infringement of a related Genentech patent and seeking a similar ruling of
patent infringement by sales of Taltz in Germany. We expect a trial to assess Genentech's infringement claims could
take place in late 2020 or early 2021. We have ongoing litigation in the U.K. in which Genentech has asserted similar
claims regarding Genentech’s corresponding U.K. patent. We believe all of these lawsuits are without merit and we
are vigorously defending against them.

Emgality Patent Litigation

We have been named as a defendant in litigation filed by Teva Pharmaceuticals International GMBH and Teva
Pharmaceuticals USA, Inc. (collectively, Teva) in the U.S. District Court for the District of Massachusetts seeking a
ruling that various claims in nine different Teva patents would be infringed by our launch and continued sales of
Emgality for the prevention of migraine in adults. We believe this lawsuit is without merit and are defending against
it vigorously. Separately, the USPTO granted our request to initiate an inter partes review (IPR) to reexamine the
validity of the nine Teva patents asserted against us in the litigation. In February 2020, the USPTO ruled in our favor
and found that all claims asserted against us in six of Teva's nine patents were invalid. We expect the USPTO to
issue a decision on the remaining three Teva patents in the second quarter of 2020. The litigation in the U.S. District
Court for the District of Massachusetts has been stayed pending the outcome of the USPTO's decision on all nine of
Teva's patents.

Product Liability Litigation

Cymbalta Product Liability Litigation

We were named as a defendant in a purported class-action lawsuit in the U.S. District Court for the Central District
of California (now called Strafford et al. v. Eli Lilly and Company) involving Cymbalta. The plaintiffs, purporting to
represent a class of persons who purchased and/or paid for Cymbalta, asserted claims under the consumer
protection statutes of California, Massachusetts, Missouri, and New York, and sought declaratory, injunctive, and
monetary relief for various alleged economic injuries arising from their purchases. After the district court denied
the plaintiffs' motions for class certification, plaintiffs voluntarily dismissed their claims. The plaintiffs subsequently
appealed to the U.S. Court of Appeals for the Ninth Circuit. In November 2017, the U.S. Court of Appeals for the
Ninth Circuit dismissed the appeal for lack of jurisdiction. In July 2018, the U.S. District Court for the Central
District of California denied the plaintiffs’ motion to reopen the case. The plaintiffs appealed this denial to the U.S.
Court of Appeals for the Ninth Circuit and in January 2020, the Ninth Circuit affirmed the district court’s decision.
The plaintiffs have filed a petition for rehearing before the Ninth Circuit.

F76

FINANCIAL REPORTOther Matters

Brazil Litigation – Cosmopolis Facility

Labor Attorney Litigation

Our subsidiary in Brazil, Eli Lilly do Brasil Limitada (Lilly Brasil), is named in a lawsuit brought by the Labor
Attorney for the 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 Brasil manufacturing facility
in Cosmopolis, Brazil, operated by the company between 1977 and 2003. In May 2014, the labor court judge ruled
against Lilly Brasil, ordering it to undertake several actions of unspecified financial impact, including paying lifetime
health coverage 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. We appealed this decision. In July
2018, the appeals court affirmed the labor court's ruling with the total financial impact of the ruling estimated to be
approximately 500 million Brazilian real (approximately $125 million as of December 31, 2019). The appeals court
restricted the broad health coverage awarded by the labor court to health problems that claimants could show
arose from exposure to the alleged contamination. In August 2019, Lilly Brasil filed an appeal to the superior labor
court. In September 2019, the appeals court stayed a number of elements of its prior decision, including the
obligation to provide health coverage for contractors, their children, and children of employees who worked at the
Cosmopolis facility, pending the determination of Lilly Brasil’s appeal to the superior labor court.

In June 2019, the Labor Attorney filed an application in the labor court for enforcement of the healthcare coverage
granted by the appeals court in its July 2018 ruling and requested restrictions on Lilly Brasil’s assets in Brazil. In
July 2019, the labor court issued a ruling requiring either a freeze of Lilly Brasil’s immovable property or,
alternatively, a security deposit of 500 million Brazilian real (approximately $125 million as of December 31, 2019).
Lilly Brasil filed a writ of mandamus challenging this ruling, but the court has stayed its decision on this writ and
instead directed the parties to attend conciliation hearings, a process which is ongoing. The labor court also stayed
the Labor Attorney’s application to enforce the previous healthcare coverage ruling until after the appeals court
ruled on the various motions pending before it. If the conciliation hearings are unsuccessful, once concluded, we
intend to file a motion to strike the Labor Attorney’s application to enforce the previous healthcare coverage given
the appeals court’s stay in September 2019 of a number of elements of its prior decision described above.

Individual Former Employee Litigation

We are also named in approximately 30 lawsuits filed in the same labor court by individual former employees
making similar claims. These lawsuits are each at various stages in the litigation process, with judgments being
handed down in approximately half of the lawsuits, nearly all of which are on appeal in the labor courts.

We believe all of these lawsuits are without merit and are defending against them vigorously.

Pricing Litigation, Investigations, and Inquiries

Litigation

We, along with Sanofi and Novo Nordisk, are named as defendants in a consolidated purported class action
lawsuit, In re. Insulin Pricing Litigation, in the U.S. District Court of New Jersey relating to insulin pricing. Plaintiffs
seek damages under various state consumer protection laws and the Federal Racketeer Influenced and Corrupt
Organization Act (federal RICO Act). Separately, we, along with Sanofi and Novo Nordisk, are named as defendants
in MSP Recovery Claims, Series, LLC et al. v. Sanofi Aventis U.S. LLC et al., in the same court, seeking damages under
various state consumer protection laws, common law fraud, unjust enrichment, and the federal RICO Act. Also, in
the same court, we, along with Sanofi and Novo Nordisk, had been named as defendants in a purported class action
lawsuit, Prof’l Drug Co., Inc. & FWK Holdings, LLC v. Novo Nordisk Inc. et al., seeking damages under the federal and
New Jersey RICO Acts. Plaintiffs in that matter voluntarily dismissed their lawsuit in January 2020.

The Minnesota Attorney General’s Office filed a complaint against us, Sanofi, and Novo Nordisk, State of Minnesota
v. Sanofi-Aventis U.S. LLC et al., in the U.S. District Court of New Jersey, alleging unjust enrichment, and violations
of various Minnesota state consumer protection laws and the federal RICO Act. Additionally, the Kentucky Attorney
General’s Office filed a complaint against us, Sanofi, and Novo Nordisk, Commonwealth of Kentucky v. Novo
Nordisk, Inc. et al., in Kentucky state court, alleging violations of the Kentucky consumer protection law, false
advertising, and unjust enrichment. Harris County in Texas filed a complaint against us, Sanofi, Novo Nordisk,
Express Scripts, CVS, Optum, and Aetna, County of Harris Texas v. Eli Lilly & Co., et al., in federal court in the Southern
District of Texas, alleging violations of the federal RICO Act and RICO conspiracy, federal and state anti-trust law,
and the state deceptive trade practices-consumer protection act. Harris County also alleges common law claims
such as, fraud, unjust enrichment, and civil conspiracy. This lawsuit relates to our insulins as well as Trulicity.

We believe all of these claims are without merit and are defending against them vigorously.

F77

FINANCIAL REPORTInvestigations, Subpoenas, and Inquiries

We have received a subpoena from the New York Attorney General’s Office and civil investigative demands from the
Washington, New Mexico, and Colorado Attorney General Offices relating to the pricing and sale of our insulin
products. The Offices of the Attorney General in Mississippi, Washington D.C., California, Florida, Hawaii, and
Nevada have requested information relating to the pricing and sale of our insulin products. We also received
interrogatories from the California Attorney General's Office regarding our competition in the long-acting insulin
market. We received two requests from the House of Representatives’ Committee on Energy and Commerce and a
request from the Senate’s Committee on Health, Education, Labor, and Pensions, seeking certain information
related to the pricing of insulin products, among other issues. We also received requests from the House of
Representatives’ Committee on Oversight and Reform and the Senate’s Committee on Finance, which seek detailed
commercial information and business records. We are cooperating with all of these aforementioned requests and
investigations.

Product Liability Insurance

Because of the nature of pharmaceutical products, it is possible that we could become subject to large numbers of
additional 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 and previously marketed products.

F78

FINANCIAL REPORTNote 17: Other Comprehensive Income (Loss)

The following table summarizes the activity related to each component of other comprehensive income (loss):

(Amounts presented net of taxes)

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

Discontinued
Operations

Accumulated
Other
Comprehensive
Loss

Beginning balance at January 1, 2017 (1) $

(1,686.6)

224.0

(3,352.0)

(210.9)

(200.3)

(5,225.8)

Continuing Operations

525.6

(15.7)

(532.1)

8.5

127.7

114.0

Other comprehensive income (loss)
before reclassifications

Net amount reclassified from
accumulated other comprehensive
loss

Net other comprehensive income
(loss)

Reclassifications of stranded tax
effects (Note 1)

Balance at December 31, 2017(2)

Reclassification due to adoption of
new accounting standard(3)

Other comprehensive income (loss)
before reclassifications

Net amount reclassified from
accumulated other comprehensive
loss

Net other comprehensive income
(loss)

Balance at December 31, 2018(4)

Other comprehensive income (loss)
before reclassifications

Net amount reclassified from
accumulated other comprehensive
loss

Net other comprehensive income
(loss)

8.1

(110.6)

533.7

(126.3)

(38.8)

(1,191.7)

15.8

113.5

151.9

(380.2)

(579.1)

(4,311.3)

9.6

18.1

(41.5)

(234.3)

—

(128.9)

—

(378.0)

24.5

250.7

(16.3)

1.5

129.2

—

(71.1)

—

12.2

2.1

14.3

(56.8)

60.5

174.5

(643.6)

(5,694.9)

(128.9)

(106.9)

190.5

83.6

(5,740.2)

—

(378.0)

(1,569.7)

(46.2)

(62.1)

(108.3)

(31.2)

(6.7)

(22.1)

28.9

(1.9)

27.0

4.9

207.9

458.6

(3,852.7)

11.7

(4.6)

(238.9)

(967.6)

14.5

(27.2)

(997.6)

181.7

(785.9)

12.5

27.0

84.0

56.8

214.2

(783.4)

(4,638.6)

(211.9)

— $

(6,523.6)

Ending balance at December 31, 2019

(1,678.0)

(1) Accumulated other comprehensive loss as of January 1, 2017 consists of $5.27 billion of accumulated other comprehensive loss
attributable to controlling interest and $48.2 million of accumulated other comprehensive income attributable to noncontrolling
interest.

(2) Accumulated other comprehensive loss as of December 31, 2017 consists of $5.72 billion of accumulated other comprehensive loss
attributable to controlling interest and $23.7 million of accumulated other comprehensive income attributable to noncontrolling
interest.

(3) This reclassification consists of $105.2 million of accumulated other comprehensive loss attributable to controlling interest and $23.7
million of accumulated other comprehensive loss attributable to noncontrolling interest. Refer to Note 1 for further details regarding
the reclassification due to the adoption of ASU 2016-01.

(4) Accumulated other comprehensive loss as of December 31, 2018 consists of $5.73 billion of accumulated other comprehensive loss

attributable to controlling interest and $11.0 million of accumulated other comprehensive loss attributable to noncontrolling interest.

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 benefit (expense)

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

2019

2018

2017

(18.4)

(7.4)

184.1

(7.3)

51.6

2.1

(85.3)

1.3

170.8

55.0

186.6

(9.7)

Benefit/(provision) for income taxes allocated to other comprehensive income (loss)
items

151.0

(30.3)

402.7

Except for the tax effects of foreign currency translation gains and losses related to our foreign currency-
denominated notes, cross-currency interest rate swaps, and other foreign currency exchange contracts designated
as net investment hedges (see Note 7), income taxes were not provided for foreign currency translation. Generally,
the assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For
those operations, changes in exchange rates generally do not affect cash flows; therefore, resulting translation
adjustments are made in shareholders' equity rather than in the consolidated statements of operations.

F79

FINANCIAL REPORTReclassifications out of accumulated other comprehensive loss were as follows:

Details about Accumulated Other
Comprehensive Loss Components

Amortization of retirement benefit items:

Year Ended December 31,

2019

2018

2017

Affected Line Item in the Consolidated
Statements of Operations

Prior service benefits, net

(56.8)

(74.9)

(84.4)

Other—net, (income) expense

Actuarial losses

Total before tax

Tax benefit

Net of tax

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

Realized gains, net

Tax expense

Net of tax

Other, net of tax

Reclassifications from continuing
operations (net of tax)

Reclassifications from discontinued
operations (net of tax)

286.8

230.0

(48.3)

181.7

(2.4)

0.5

(1.9)

(49.6)

130.2

84.0

338.6

263.7

(55.8)

207.9

(39.5)

8.3

(31.2)

11.7

188.4

2.1

Total reclassifications for the period, net of
tax

214.2

190.5

Note 18: Other–Net, (Income) Expense

Other–net, (income) expense consisted of the following:

Interest expense

Interest income

Debt extinguishment loss (Note 11)

Gain on sale of antibiotic business in China (Note 3)

Retirement benefit

Other (income) expense

Other–net, (income) expense

Other—net, (income) expense

305.2

220.8

(68.9)

Income taxes

151.9

(170.2)

Other—net, (income) expense

59.6

Income taxes

(110.6)

17.7

Other—net, (income) expense

59.0

1.5

60.5

Net income (loss) from discontinued
operations

2019

2018

2017

400.6

242.5

225.0

(159.3)

(166.4)

(80.4)

252.5

(309.8)

(209.9)

(344.6)

—

(240.5)

11.7

—

(249.0)

(111.1)

(301.5)

(291.6)

(145.6)

For the years ended December 31, 2019 and 2017, other income was primarily related to net gains on investments
(Note 7).

Note 19: Discontinued Operations
On September 24, 2018, Elanco completed its initial public offering (IPO) resulting in the issuance of 72.3 million
shares of its common stock, which represented 19.8 percent of Elanco's outstanding shares, at $24 per share.

In connection with the completion of the IPO, through a series of equity and other transactions, we transferred to
Elanco the animal health businesses that formed its business. In exchange, Elanco transferred to us consideration
of approximately $4.2 billion, which consisted primarily of the net proceeds from the IPO and the net proceeds from
a $2.00 billion debt offering and a $500.0 million three-year term loan facility entered into by Elanco in August 2018.
The consideration that we received was used for debt repayment, dividends, and share repurchases. The excess of
the net proceeds from the IPO over the net book value of our divested interest was $629.2 million and was recorded
in additional paid-in capital. As of December 31, 2018, the noncontrolling interest of $1.02 billion associated with
Elanco was reflected in noncontrolling interests in the consolidated balance sheet.

Through March 11, 2019, we continued to consolidate Elanco, as we retained control over Elanco. We completed the
disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer that
closed on on March 11, 2019 (the disposition date). The earnings attributable to the divested, noncontrolling interest
for the period from the IPO until disposition were not material.

F80

FINANCIAL REPORTAs a result of the disposition, in the first quarter of 2019, we recognized a gain related to the disposition of
approximately $3.7 billion, and we presented Elanco, including the gain related to the disposition, as discontinued
operations in our consolidated financial statements for all periods presented.

The following table sets summarizes revenue and net income (loss) from discontinued operations:

Revenue from discontinued operations

Net income (loss) from discontinued operations

2019

2018

2017

580.0

3,062.4

3,680.5

81.4

2,897.5

(117.7)

The following table presents the major classes of assets and liabilities from discontinued operations at December
31, 2018:

December 31, 2018

Inventories

Other current assets

Current assets of discontinued operations

Goodwill

Other intangibles, net

Property and equipment, net

Other assets

Noncurrent assets of discontinued operations

Current liabilities of discontinued operations

Long-term debt

Other liabilities

Noncurrent liabilities of discontinued operations

1,013.7

1,215.4

2,229.1

2,980.9

2,453.0

923.4

126.8

6,484.1

692.8

2,443.3

299.0

2,742.3

The gain related to the disposition of Elanco in the consolidated statement of cash flows includes the operating
results of Elanco through the disposition date, which were not material. Net cash flows of our discontinued
operations for operating and investing activities for the year ended December 31, 2019 were not material. Net cash
provided by operating activities related to our discontinued operations was approximately $500 million and $300
million for the years ended December 31, 2018 and 2017, respectively. Net cash used by investing activities related
to our discontinued operations was approximately $130 million and $960 million for the years ended December 31,
2018 and 2017, respectively.

We entered into a transitional services agreement (TSA) with Elanco that is designed to facilitate the orderly
transfer of various services to Elanco. The TSA relates primarily to administrative services, which are generally to
be provided over 24 months from the disposition date. This agreement is not material and does not confer upon us
the ability to influence the operating and/or financial policies of Elanco subsequent to the disposition date.

F81

FINANCIAL REPORTNote 20: Selected Quarterly Data (unaudited)

2019

Revenue

Cost of sales

Operating expenses(1)

Acquired IPR&D

Asset impairment, restructuring, and other special charges(2)

Income before income taxes

Income taxes

Net income from continuing operations

Net Income from discontinued operations

Net income

EPS from continuing operations - basic

EPS from discontinued operations - basic

EPS—basic

EPS from continuing operations - diluted

EPS from discontinued operations - diluted

EPS—diluted

Dividends paid per share

2018

Revenue

Cost of sales

Operating expenses(1)

Acquired IPR&D(3)

Asset impairment, restructuring, and other special charges

Income before income taxes

Income taxes(4)

Net income (loss) from continuing operations

Net Income (loss) from discontinued operations

Net income (loss)

Earnings (loss) per share from continuing operations - basic

Earnings (loss) per share from discontinued operations - basic

Earnings (loss) per share—basic

Earnings (loss) per share from continuing operations - diluted

Earnings (loss) per share from discontinued operations - diluted

Earnings (loss) per share—diluted

Dividends paid per share

Fourth

Third

Second

First

6,114.0

5,476.6

5,636.7

5,092.2

1,282.6

3,279.5

—

151.7

1,663.1

167.4

1,495.7

—

1,175.0

2,793.2

77.7

—

1,405.8

151.9

1,253.9

—

1,124.9

2,988.5

25.0

—

1,465.9

138.7

1,327.2

—

1,495.7

1,253.9

1,327.2

1.64

—

1.64

—

1.64

1.37

—

1.37

—

1.37

1.44

—

1.44

—

1.44

1,138.7

2,747.6

136.9

423.9

731.1

170.0

561.1

3,680.5

4,241.6

0.57

3.76

4.33

0.57

3.74

4.31

0.6450

Fourth

Third

Second

First

5,637.6

5,306.9

5,585.0

4,963.8

1,129.9

3,085.5

329.4

192.7

931.6

(189.8)

1,121.4

3.7

1,125.1

1.11

—

1.11

1.10

—

1.10

1,152.9

2,738.1

30.0

42.9

1,341.1

247.5

1,093.6

55.9

1,149.5

1.07

0.06

1.13

1.07

0.05

1.12

1,234.3

2,756.6

1,624.5

(25.5)

41.7

273.3

(231.6)

(28.3)

(259.9)

(0.22)

(0.03)

(0.25)

(0.22)

(0.03)

(0.25)

1,164.6

2,446.2

—

56.8

1,365.7

198.5

1,167.2

50.2

1,217.4

1.11

0.05

1.16

1.11

0.05

1.16

0.5625

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

(2) Asset impairment, restructuring, and other special charges in the first quarter of 2019 were primarily associated with the accelerated

vesting of Loxo employee equity awards as a result of the closing of the acquisition of Loxo. See Note 5 for further discussion.

(3) Acquired IPR&D charges in the second quarter of 2018 were primarily due to the ARMO acquisition. See Note 3 for further discussion.

(4) Income taxes in the fourth quarter of 2018 were a tax benefit primarily due to adjustments associated with U.S. tax reform. See Note 14

for further discussion.

Our common stock is listed under the ticker symbol LLY on the New York Stock Exchange (NYSE).

F82

FINANCIAL REPORTManagement’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 chief executive
officer and all financial management must sign a financial code of ethics, which further reinforces their ethical and
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 our Annual Report.
Ernst & Young reports directly to the audit committee of the board of directors.

Our audit committee includes five nonemployee members of the board of directors, all of whom are independent
from our company. The committee charter, which is available on our website, outlines the members’ roles and
responsibilities. 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 are
subject to 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.

We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in "2013 Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations
of the Treadway Commission.

F83

FINANCIAL REPORTBased on our evaluation under this framework, we concluded that our internal control over financial reporting was
effective as of December 31, 2019. 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, 2019.
Their responsibility is to evaluate whether internal control over financial reporting was designed and operating
effectively.

David A. Ricks

Joshua L. Smiley

Chairman, President and Chief Executive Officer

Senior Vice President and Chief Financial Officer

February 19, 2020

F84

FINANCIAL REPORTReport of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Eli Lilly and Company

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive
income (loss), shareholders‘ equity and cash flows for each of the three years in the period ended December 31,
2019, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company at
December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, 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, 2020 expressed an unqualified opinion
thereon.

Adoption of Accounting Standards Update ("ASU") No. 2016-16

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for
the recognition of income tax consequences of intra-entity transfers of assets other than inventory in 2018 due to
the adoption of ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), using the modified
retrospective adoption method.

Basis for Opinion

These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an
opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.

F85

FINANCIAL REPORTMedicaid, Managed Care, and Medicare sales rebate accruals

Description of the
Matter

As described in Note 1 to the consolidated financial statements under the caption “Revenue Recognition,” the
Company establishes provisions for sales rebate and discounts in the same period as the related sales occur. At
December 31, 2019 the Company had $4,933.6 million in sales rebate and discount accruals. A large portion of
these accruals are rebates associated with sales in the United States for which payment for purchase of the
product is covered by Medicaid, Managed Care, and Medicare.

Auditing the Medicaid, Managed Care, and Medicare sales rebate and discount liabilities is challenging because of
the subjectivity of certain assumptions required to estimate the rebate liabilities. In calculating the appropriate
accrual amount, the Company considers historical Medicaid, Managed Care, and Medicare rebate payments by
product as a percentage of their historical sales as well as any significant changes in sales trends, the lag in
payment timing, an evaluation of the current Medicaid and Medicare laws and interpretations, the percentage of
products that are sold via Medicaid, Managed Care, and Medicare, and product pricing. For Medicaid, there is
significant complexity associated with calculating the legislated Medicaid rebates. Management utilizes employees
with legislative experience and knowledge in developing assumptions used to calculate Medicaid rebates.
Similarly, for Managed Care and Medicare, given variability in prescription drug costs, continued historical year
over year increases in enrollees and variability in prescription data, historical rebate information may not be
predictive for management to estimate the rebate accrual and thus, management supplements its historical data
analysis with qualitative adjustments based upon current utilization.

How We Addressed the
Matter in Our Audit

We tested the Company’s controls addressing the identified risks of material misstatement related to the valuation
of the sales rebate and discount liabilities. This included testing controls over management’s review of the
significant assumptions used to calculate the Medicaid, Managed Care, and Medicare rebate liabilities, including
the significant assumptions discussed above. This testing also included management’s control to compare actual
activity to forecasted activity and controls to ensure the data used to evaluate the significant assumptions was
complete and accurate.

Description of the
Matter

Our audit procedures included, among others, evaluating for reasonableness the significant assumptions in light of
economic trends, product profiles, and other regulatory factors. Our testing involved assessing the historical
accuracy of management’s estimates by comparing actual activity to previous estimates and performing analytical
procedures, based on internal and external data sources, to evaluate the completeness of the reserves.
Additionally, our procedures included reviewing a sample of contracts, testing a sample of rebate payments and
testing the underlying data used in management’s evaluation. For Medicaid, we involved our professional with an
understanding of the statutory reimbursement requirements to assess the consistency of the Company’s
calculation methodologies with the applicable government regulations and policy. For Medicare we evaluated the
reasonableness of assumptions made by management in estimating the Medicare coverage gap liability.

Retirement Benefits - Valuation of Alternative Investments

As described in Note 15 to the consolidated financial statements under the caption “Benefit Plan Investments,” the
Company’s benefit plan investment policies are set with specific consideration of return and risk requirements in
relationship to the respective liabilities. At December 31, 2019 the Company had $15,626.2 million in plan assets
related to the defined benefit pension plans and retiree health benefit plans. Approximately 40% of the total
pension and retiree assets are in hedge funds and private equity-like investment funds (“alternative investments”).
These alternative investments are valued using significant unobservable inputs or are valued at net asset value
(NAV) reported by the counterparty, adjusted as necessary.

Auditing the fair value of these alternative investments is challenging because of the higher estimation uncertainty
of the inputs to the fair value calculations, including the underlying net asset values (“NAVs”), discounted cash flow
valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks.
Additionally, certain information regarding the fair value of these alternative investments is based on unaudited
information available to management at the time of valuation.

How We Addressed the
Matter in Our Audit

We tested the Company’s controls addressing the risks of material misstatement relating to valuation of
alternative investments. This included testing management’s review controls over alternative investment valuation,
which included a comparison of returns to benchmarks and in-person or telephonic meetings with investment
firms to discuss valuation policies and procedures.

Our audit procedures included, among others, comparing fund returns to selected relevant benchmarks and
understanding variations, obtaining the latest audited financial statements and comparing to the Company’s
estimated fair values and reconciling any differences. We also inquired of management about changes to the
investment portfolio and/or related investment strategies and considerations. We assessed the historical accuracy
of management’s estimates by comparing actual activity to previous estimates. We evaluated for contrary evidence
by confirming the fair value of the investments and ownership interest directly with the trustees and a sample of
managers at year end.

Valuation of intangible assets related to the Loxo Oncology (Loxo) Acquisition

Description of the
Matter

As described in Note 3 to the consolidated financial statements, in February 2019, the Company completed its
acquisition of Loxo Oncology, Inc. (Loxo) for a purchase price of $6.92 billion, net of cash acquired. As a result of
the acquisition, the Company acquired a pipeline of investigational medicines, including LOXO-292, an oral RET
inhibitor that has been granted Breakthrough Therapy designation by the U.S. Food and Drug Administration.
LOXO-292 was accounted for as an indefinite-lived in-process research and development (IPR&D) asset and valued
at $4.60 billion.

Auditing the valuation of the LOXO-292 IPR&D asset was complex because of the significant estimation uncertainty
in determining the fair value of the asset. The fair value determination is based on a discounted cash flow model
using certain assumptions for which there is high subjectivity, such as revenue growth, probability of technical
success and discount rate. These significant assumptions are forward-looking and could be affected by future
economic and market conditions. Further, the estimated fair value of the IPR&D asset was sensitive to changes in
these assumptions.

F86

FINANCIAL REPORTHow We Addressed the
Matter in Our Audit

We tested the Company’s controls addressing the identified risks of material misstatement related to the valuation
of the IPR&D asset. For example, we tested controls over management’s review of the significant assumptions
used to calculate the valuation of the intangible assets acquired including forecasts of future cash flows and review
of the valuation model.

Our audit procedures included, among others, obtaining an understanding of management’s approach to
developing the probability of technical success and evaluating the reasonableness by comparing to analyst
expectations, historical results of similar products in development and industry trends, to the extent applicable.
We also evaluated the reasonableness of the projected revenue growth used within the valuation against analyst
expectations, industry trends, market trends, other market information and identified contrary evidence. We
involved our valuation specialist to evaluate the discounted cash flow model used by the Company and to test the
discount rate utilized in the Company’s valuation. Lastly, we evaluated the appropriateness of the Company’s
related disclosures.

We have served as the Company‘s auditor since 1940.

Indianapolis, Indiana

February 19, 2020

F87

FINANCIAL REPORTReport of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Eli Lilly and Company

Opinion on Internal Control Over Financial Reporting

We have audited Eli Lilly and Company and subsidiaries’ internal control over financial reporting as of December 31,
2019, 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). In our opinion, Eli
Lilly and Company and subsidiaries (the Company) maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive income (loss), shareholders‘ equity and cash flows for each
of the three years in the period ended December 31, 2019, and the related notes and our report dated February 19,
2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s 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 are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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.

Definition and Limitations of Internal Control Over Financial Reporting

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.

Indianapolis, Indiana

February 19, 2020

F88

FINANCIAL REPORTSelected Financial Data (unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except revenue per
employee and per-share data)

Operations(1)

Revenue

Cost of sales

Research and development

Marketing, selling, and administrative

Other(2)

Income before income taxes

Income taxes(3)

Net income (loss) from continuing operations

Net income (loss)(4)

Earnings (loss) per share from continuing
operations—diluted

Earnings (loss) per share—diluted(4)

Dividends declared per share

Weighted-average number of shares outstanding

—diluted (thousands)

2019

2018

2017

2016

2015

22,319.5

21,493.3

19,973.8

18,312.8

17,050.5

4,721.2

5,595.0

6,213.8

523.6

5,265.9

628.0

4,637.9

8,318.4

4.96

8.89

2.68

4,681.7

5,051.2

5,975.1

2,105.2

3,680.1

529.5

3,150.6

3,232.0

3.05

3.13

2.33

4,447.7

5,096.2

5,982.4

2,142.7

2,304.8

2,391.2

(86.4)

(204.1)

(0.08)

(0.19)

2.12

4,160.5

5,040.0

5,841.9

(5.9)

3,276.3

551.4

2,724.9

2,737.6

2.57

2.58

2.05

3,373.1

4,514.2

5,732.4

538.9

2,891.9

379.7

2,512.2

2,408.4

2.36

2.26

2.01

935,684

1,033,667

1,052,023

1,061,825

1,065,720

Financial Position(1)

Total assets

Long-term debt

Supplementary Data(1)

Return on total equity(4)

Return on assets(4)

Revenue per employee

Number of employees

Number of shareholders of record

39,286.1

43,908.4

44,981.0

38,805.9

35,568.9

13,817.9

9,196.4

9,940.0

8,367.4

7,971.4

184.9%

21.0%

25.7%

7.3%

(1.5)%

(0.5)%

18.5%

7.5%

16.1%

6.8%

664,000

650,000

575,000

510,000

490,000

33,625

22,600

33,090

24,000

34,750

25,300

35,910

26,800

34,790

28,000

(1) On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health (Elanco) common

stock through a tax-free exchange offer. As a result, Elanco has been presented as discontinued operations in our consolidated
financial statements for all periods presented. See Note 19 to the consolidated financial statements for discussion regarding
discontinued operations.

(2) Other includes acquired in-process research and development, asset impairment, restructuring, and other special charges, and other

—net, (income) expense. See Note 3 to the consolidated financial statements for discussion regarding in-process research and
development charges. See Note 5 to the consolidated financial statements for discussion regarding asset impairment, restructuring,
and other special charges.

(3) See Note 14 to the consolidated financial statements for discussion regarding income taxes.

(4) The 2019 increase was primarily driven by a gain of approximately $3.7 billion related to the disposition of Elanco. The 2019 increase in
earnings (loss) per share and return on equity were also driven by the reduction of common stock related to the disposition of Elanco.
See Note 19 to the consolidated financial statements for discussion regarding discontinued operations.

F89

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 2015 through 2019. The graph assumes that, on December 31, 2014, a person invested $100 each in
Lilly stock, the S&P 500 Stock Index, and the peer group's collective 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 2014
Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, Peer Group(1) and Peer
Group (Previous)(2)

Lilly

Peer Group

Peer Group
(Previous)

S&P 500

100.00

125.37

112.36

132.40

185.96

215.99

100.00

104.58

98.05

114.47

119.86

142.01

100.00

101.48

98.82

115.88

123.99

146.32

100.00

101.38

113.51

138.29

132.23

173.86

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

(1) We constructed the peer group as the industry index for this graph. It is comprised of the following companies in the pharmaceutical and

biotech industries: AbbVie Inc.; Allergan plc; Amgen Inc.; AstraZeneca plc; Biogen Inc.; Bristol-Myers Squibb Company; Gilead Sciences Inc.;
GlaxoSmithKline plc; Johnson & Johnson; Merck & Co., Inc.; Novartis AG.; Novo Nordisk A/S; Pfizer Inc.; Roche Holding AG; Sanofi; and
Takeda Pharmaceutical Company Limited. The peer group used for performance benchmarking aligns with the peer group used for executive
compensation purposes for 2019 other than our peer group for performance benchmarking excludes Celgene Corporation and Shire plc as
they were acquired in 2019.

(2)

Our previous peer group is the same as the peer group, except that Allergan plc, Novo Nordisk A/S and Takeda Pharmaceutical Company
Limited were added to and Baxter International Inc. and Medtronic plc were removed from the peer group. Our peer group (previous)
excludes Celgene Corporation and Shire plc as they were acquired in 2019. The peer group (previous) total shareholder return is not
presented in the graph above as the graph substantially overlapped the peer group total shareholder return.

F90

FINANCIAL REPORTTrademarks Used In This Report
Trademarks or service marks owned by Eli Lilly and Company or its 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.

Byetta® is a trademark of Amylin Pharmaceuticals, Inc.

Glyxambi®, Jardiance®, Jentadueto®, Synjardy®, Trajenta®, and Trijardy® are trademarks of Boehringer Ingelheim
GmbH.

Posilac® is a trademark of Union Agener and Elanco US Inc.

Qbrexza® is a trademark of Dermira, Inc.

Viagra® is a trademark of Pfizer Inc.

F91

FINANCIAL REPORTNotice of 2020 Annual Meeting
of Shareholders and Proxy Statement

Y O U R V O T E I S I M P O R T A N T

Please vote online, by telephone, or by signing, dating,
and returning the enclosed proxy card by mail.

Letter from Our Chairman and Lead Independent Director

Dear fellow Lilly shareholders,

Thank you for your continued support of Eli Lilly and Company. We cordially invite you to attend the 2020 Annual Meeting
of Shareholders. We are pleased with Lilly's strong performance in 2019 and look forward to an exciting year in 2020.

Board engagement with shareholders and other key stakeholders is core to how we govern the company. In 2019, we
spoke with a number of investors on topics such as eliminating the company's classified board and supermajority voting
requirements; environmental, social, and governance topics including drug pricing, product quality, and safety; our board
and corporate culture; litigation and key enterprise risks; the company's executive compensation; and proxy access,
among other topics. As a result of input from stakeholders, we recently amended the company's bylaws to include proxy
access provisions. Further, this year, as in past years, the board is putting forward management proposals to eliminate the
classified board structure and supermajority voting provisions.

We are dedicated to effective oversight of our business and believe that governance is key to the board's oversight of our
long-term performance, strategy, key risks, and compliance. Our board believes independence is essential to strong
corporate governance. Having both an executive chair and a strong, lead independent director is important in balancing
inputs. Our chief executive officer provides strong operational leadership coupled with a long-term strategic agenda. This
is vital to our innovative research and development business with prolonged product development cycles. Further, the lead
independent director, currently a chief executive officer for a Fortune 100 company, drives an “outside in” analysis of
company decisions and performance and leads our independent directors in their important oversight function.

We remain committed to serving you and the millions of patients around the world whose lives it is our mission to make
better. We look forward to seeing you at the 2020 Annual Meeting of Shareholders.

Sincerely,

David A. Ricks
Chairman, President, and CEO

Juan Luciano
Lead Independent Director

PROXY STATEMENT

Table of Contents

Notice of Annual Meeting of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proxy Statement Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Proposals to Eliminate Classified Board and Supermajority Voting Provisions . . . . . .

Shareholder Proposals and Nominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ownership of Company Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2 - Advisory Vote on Compensation Paid to Named Executive Officers . . . . . . . . . . . . . . . . .
Compensation Committee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3 - Proposal to Ratify the Appointment of Independent Auditor . . . . . . . . . . . . . . . . . . . . . . .
Management Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 4 - Proposal to Amend the Company's Articles of Incorporation to Eliminate the

Classified Board Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 5 - Proposal to Amend the Company's Articles of Incorporation to Eliminate

Supermajority Voting Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6 - Proposal to Disclose Direct and Indirect Lobbying Activities and Expenditures . . . . . . .
Item 7 - Proposal to Publish a Report on the Effectiveness of the Forced Swim Test . . . . . . . . . .
Item 8 - Proposal to Amend the Bylaws to Require an Independent Board Chair . . . . . . . . . . . . .

Item 9 - Proposal on Board Diversity Requesting Disclosures of Specific Minimum

Qualifications and Board Nominee Skills, Experience, and Ideological Perspective . . .

Item 10 - Proposal to Publish Feasibility Report on Incorporating Public Concern Over Drug

Prices into Senior Executive Compensation Arrangements . . . . . . . . . . . . . . . . . . . . . . .
Item 11 - Proposal to Implement a Bonus Deferral Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12 - Proposal to Disclose Clawbacks on Executive Incentive Compensation Due to

Misconduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meeting and Voting Logistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix A - Summary of Adjustments Related to the Annual Cash Bonus
and Performance Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendix B - Proposed Amendments to the Company's Articles of Incorporation . . . . . . . . .
Directions and Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1
P2

P10

P10
P10
P20
P21
P23
P24
P25
P27
P27
P31
P32
P32
P33
P34
P34
P35
P36
P52
P62
P62
P64

P64

P65

P67
P67
P68
P70

P72

P74

P75

P76

P78
P78
P80

P82
P84
P88

PROXY STATEMENTNotice of 2020 Annual Meeting of Shareholders

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

The 2020 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below:

TIME AND DATE

LOCATION*

WHO CAN VOTE

11:00 a.m. EDT, Monday,
May 4, 2020

The Lilly Center Auditorium
Lilly Corporate Center
Indianapolis, Indiana 46285

Shareholders of record at close of business on March 9, 2020

This proxy statement is dated March 20, 2020, and is first being sent or given to our shareholders on or about that date.

ITEMS OF BUSINESS

Management Proposals

Board Voting Recommendation

Page Reference

Election of the five directors listed in the proxy statement to serve
three-year terms

FOR
each of the director nominees

Item 1

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 independent auditor for 2020

Item 4

Item 5

Approve amendments to the Articles of Incorporation to eliminate the
classified board structure

Approve amendments to the Articles of Incorporation to eliminate
supermajority voting provisions

Shareholder Proposals

Item 6

Item 7

Item 8

Item 9

Shareholder proposal to disclose direct and indirect lobbying activities
and expenditures

Shareholder proposal to publish a report on the effectiveness of the
forced swim test

Shareholder proposal to amend the bylaws to require an independent
board chair

Shareholder proposal on board diversity requesting disclosures of
specific minimum qualifications and board nominee skills, experience,
and ideological perspective

Item 10 Shareholder proposal to publish feasibility report on incorporating

public concern over drug prices into senior executive compensation
arrangements

Item 11 Shareholder proposal to implement a bonus deferral policy

Item 12 Shareholder proposal to disclose clawbacks on executive incentive

compensation due to misconduct

FOR

AGAINST

Admission procedure for attending the annual meeting: In 2019, we introduced a new admission procedure to
attend the annual meeting, and we will be utilizing the same procedure again this year. To attend the meeting, you
must preregister for an admission ticket before 5:00 p.m. on April 28, 2020. For further details on the admission
process and for information regarding how to attend the meeting, see the section titled "Other Information -
Meeting and Voting Logistics."

Every shareholder vote is important. Even if you plan to attend the meeting in person, we encourage you to sign,
date, and return your proxy card or voting instructions by mail, or to vote by telephone or online promptly so that a
quorum may be represented at the meeting.

By order of the Board of Directors,

Bronwen L. Mantlo
Secretary

March 20, 2020
Indianapolis, Indiana

*As part of our precautions regarding the coronavirus or COVID-19, we are planning
for the possibility that the annual meeting may be held by means of remote
communication. If we take this step, we will announce the decision to do so in
advance, and details on how to participate will be available at investor.lilly.com/
proxy.

Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 4, 2020: The annual report and proxy
statement are available at lilly.com/disclosures/2019-annual-report.

PROXY STATEMENTProxy Statement Summary

New in This Year's Proxy Statement
In May 2019, Ellen Marram retired from the board; Juan Luciano was elected by the board to serve as the board's
lead independent director following the 2019 annual meeting of shareholders.

After considering the interests of the company and our shareholders, we recently amended the company's bylaws to
include proxy access provisions. Further, this year, as in past years, the board has approved, and recommends that
the shareholders approve, the following management proposals at this year's meeting. The board recommends
approval of amendments to the company’s articles of incorporation to eliminate the classified board structure (see
Item 4 herein) and to eliminate supermajority voting provisions (see Item 5 herein). The board believes these two
proposals balance shareholder interests and demonstrate its accountability and willingness to take steps that
address shareholder-expressed concerns.

The information contained in, or that can be accessed through, our website is not a part of, or incorporated by
reference in, this proxy statement.

Highlights of 2019 Company Performance
The following provides a brief look at our 2019 performance in three dimensions: operating performance, progress
in our innovation pipeline, business development, and shareholder return (both absolute and relative). See our 2019
annual report on Form 10-K for more details.

Operating Performance
Performance highlights:

•
•

•

2019 revenue increased 4 percent to approximately $22.3 billion.
2019 earnings per share (EPS) on a reported basis were $8.89, compared to 2018 EPS on a reported basis
of $3.13.
2019 EPS increased 11 percent on a non-GAAP basis to $6.04.

Reported results were prepared in accordance with U.S. generally accepted accounting principles (GAAP), include
all revenue and expenses recognized during the periods, and reflect Elanco Animal Health as discontinued
operations. A reconciliation of EPS on a reported basis to EPS on a non-GAAP basis is included in Appendix A.

2019 Innovation and Business Development Progress
We made significant pipeline advances in 2019, including:

• U.S. approval of Reyvow™ (lasmiditan), an oral medication for the acute treatment of migraine.
• U.S. approval of Baqsimi® (glucagon) nasal powder for the treatment of severe hypoglycemia in people with

diabetes.

• U.S. approval of a new indication for Emgality® (galcanezumab-gnlm) for the treatment of episodic cluster

headache.

• U.S. approval of a new indication for Taltz® (ixekizumab) for the treatment of active ankylosing spondylitis,

also known as radiographic axial spondyloarthritis.

• U.S. approval of a new indication for Alimta® (pemetrexed for injection) in combination with Keytruda® and

platinum chemotherapy for the first-line treatment of patients with metastatic nonsquamous non-small
cell lung cancer.

• EU approval of an update to the Trulicity® (dulaglutide) label and indication statement to include results

•

from the REWIND™ cardiovascular outcomes trial.
Introduction in the U.S. of Insulin Lispro, a lower-priced version of Humalog®, providing patients with
diabetes an insulin option with a list price 50 percent lower than the current Humalog list price.

We also completed multiple significant strategic development activities in 2019, including:

•
•

the divestiture of Elanco Animal Health, Inc.
acquisitions, license agreements, and research collaborations to strengthen our pipeline, including the
acquisition of Loxo Oncology, Inc., broadening the scope of Lilly's oncology portfolio into precision
medicines through the addition of a promising pipeline of investigational medicines, including LOXO-292
(selpercatinib), a first-in-class oral RET inhibitor, and LOXO-305, an oral BTK inhibitor.

PROXY STATEMENTShareholder Returns
We generated strong shareholder returns (share price appreciation plus dividends, reinvested quarterly) through
year-end 2019. Our returns significantly exceeded both the compensation peer group and the S&P 500 across the
three- and five-year time periods presented below:

PROXY STATEMENT
Governance

Item 1: Election of Directors

Further information see page 10

Name and principal occupation

Public boards

Management
recommendation

Vote required
to pass

Michael L. Eskew, 70

Retired Chairman and CEO, United Parcel
Service, Inc.

Director since 2008

3M Corporation
IBM Corporation
Allstate Insurance
Company

Vote FOR

Majority of
votes cast

William G. Kaelin, Jr., M.D., 62

Sidney Farber Professor of Medicine
Harvard Medical School

Director since 2012

David A. Ricks, 52

Chairman, President, and CEO, Eli Lilly and
Company

Adobe

Director since 2017

Marschall S. Runge, M.D., Ph.D., 65

Executive Vice President for Medical Affairs
and Medical School Dean, University of
Michigan; CEO Michigan Medicine

Director since 2013

Karen Walker, 58

Senior Vice President and Chief Marketing
Officer, Intel Corporation

Director since 2018

Vote FOR

Majority of
votes cast

Vote FOR

Majority of
votes cast

Vote FOR

Majority of
votes cast

Vote FOR

Majority of
votes cast

Our Corporate Governance Policies Reflect Best Practices
Strategy and risk oversight

Our board actively oversees and approves our corporate strategy.
Our board and board committee agendas are structured to engage our directors in informed reviews of

strategic and forward-looking issues, as well as in constructive challenge to management initiatives and
programs.

Our board oversees the state of our compliance program and reviews our enterprise-level risks and risk
management practices.
We have a comprehensive code of ethical and legal business conduct applicable to our board and all
employees worldwide. This code is reviewed and approved annually by the board.

PROXY STATEMENTWe have 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.
The charters of the board committees clearly establish the committees’ respective roles and responsibilities.
We have an annual cap on director compensation.

Board skills and experience

Our board membership is characterized by leadership, experience, and diversity.
We conduct orientation and continuing education programs for directors.
Our board conducts a robust annual assessment of board performance led by the lead independent director,
including an annual assessment of each individual director.
We are committed to board refreshment and seek to balance continuity and fresh perspectives. Our director
composition reflects a mix of tenure on the board. Currently, eight directors have served on the board for six
years or more and five directors have served on the board for five years or less.

Focus on independence

12 of our 13 directors are independent.
We have a strong, independent, clearly defined lead independent director role with significant governance
duties, including conducting regular executive sessions of independent directors.
All standing board committees are composed solely of independent directors.
Our board holds executive sessions of the independent directors at every regular board meeting and most
committee meetings.
Our independent directors actively engage in board meetings, have direct access to management, and have sole
discretion to hire independent advisors at the company’s expense.
Our independent directors select and evaluate our CEO and ensure we have a strong succession plan for
executive officer roles. Our Compensation Committee determines the compensation for our CEO and other
executive officers.
Our conflict of interest policy requires disclosures of potential conflicts to Lilly and clarifies when Lilly board
service must be disclosed to others.

Governance and accountability to shareholders

Our board values active shareholder engagement. In response to input from shareholders, we have put
forward for consideration at this year's annual meeting management proposals to eliminate our classified
board structure and supermajority voting provisions.
In addition, in December 2019, the board amended the company’s bylaws to add proxy access rights for
shareholders holding at least three percent of the company’s stock for at least three years to nominate board
candidates for up to 20 percent of the board seats.
We have a majority voting standard and resignation policy for the election of directors in uncontested
elections.
We have no shareholder rights plan (“poison pill”).
We have meaningful stock ownership and retention guidelines for our directors and executive officers to foster
alignment with shareholders.

Sustainability

Our board has a longstanding commitment to corporate responsibility.
We have strong governance and disclosure of corporate political spending.
We have transparent public policy engagement.
Our board oversees and maintains ongoing engagement with our senior executives on key environmental,
social, and governance matters, including cybersecurity, sustainability, and human capital management.

We publish annual corporate responsibility reports describing our corporate citizenship efforts across key focus

areas.

PROXY STATEMENT
Compensation

Item 2: Advisory Vote on Compensation Paid
to Named Executive Officers

Further information see page 34

Management
recommendation

Vote required to
pass

Vote FOR

Majority of votes
cast

Our Executive Compensation Programs Reflect Best Practices

We have had strong shareholder support of our compensation practices: for the last five consecutive years, over
97 percent of shares cast voted in favor of our executive compensation programs.
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.
Our Compensation Committee annually reviews our compensation programs to ensure they provide incentives
to deliver long-term, sustainable business results while discouraging excessive risk-taking and other adverse
behaviors.
We have a broad compensation recovery or "clawback" policy that applies to all executives and covers a wide
range of misconduct.
Our executive officers are subject to robust stock ownership and retention guidelines and are prohibited from
hedging or pledging their company stock.
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.
We do not provide tax gross-ups to executive officers (except for limited gross-ups related to international
assignments).
We have a very restrictive policy on perquisites.
Our severance plans related to change-in-control generally require a double trigger.
We do not have employment agreements with any of our executive officers.

Executive Compensation Summary for 2019
At the time the total target compensation was established at the end of 2018, target compensation for our named
executive officers (the five officers whose compensation is disclosed in this proxy statement) was slightly below
median of the company's peer group. Incentive compensation payouts exceeded target, consistent with the
company's strong performance in 2019.

Pay for Performance
As described in the Compensation Discussion and Analysis (CD&A), we link our incentive pay programs to a mix of
measures on three dimensions of company performance: operating performance; progress with our innovation
pipeline; and shareholder return (both absolute and relative). The Compensation Committee adjusts reported EPS
results to eliminate the distorting effect of certain unusual items on incentive compensation performance
measures.

The summary below highlights how our incentive pay programs are intended to align with company performance.
Please also see Appendix A for any adjustments that were made to EPS for incentive compensation programs.

PROXY STATEMENT2019 Bonus Plan Multiple
The company exceeded its annual cash bonus targets for EPS and pipeline progress and nearly achieved its target
for revenue. See the CD&A for further discussion on the Eli Lilly and Company Bonus Plan (Bonus Plan). For
purposes of the bonus, EPS was adjusted for the same items reflected in the non-GAAP financial results included in
our 2019 earnings announcement.

2018-2020 Performance Award Multiple
We exceeded the EPS growth targets under our performance award program, which has targets based on expected
EPS growth of peer companies over a two-year period. For purposes of the performance award, EPS was adjusted
as detailed in Appendix A. This performance resulted in a performance award payout above target. See the CD&A
for further discussion on the performance award program.

2017-2019 Shareholder Value Award Multiple
Our stock price growth exceeded the target range (16.1 percent to 28.6 percent) under our shareholder value award
program, which is based on expected large-cap company returns over a three-year period. This performance
resulted in a shareholder value award payout above target.

For individuals who were executive officers when the award was granted, shareholder value award payouts were
modified based on a three-year cumulative total shareholder return (TSR) relative to peer companies. Our relative
TSR was 32 percent above the peer group median, resulting in a +20 percent modifier, which resulted in a final
payout of 1.80 percent of target. See the CD&A for further discussion on the shareholder value award program and
the TSR modifier.

PROXY STATEMENTAudit Matters

Item 3: Ratification of Appointment of Independent
Auditor

Management
recommendation

Vote required to
pass

Further information see page 62

Vote FOR

Majority of votes
cast

Management Proposals

Item 4: Approval of Amendments to the Articles of
Incorporation to Eliminate the Classified Board Structure

Management
recommendation

Vote required to
pass

Further information see page 64

Vote FOR

80% of
outstanding
shares

Item 5: Approval of Amendments to the Articles of
Incorporation to Eliminate Supermajority Voting
Provisions

Further information see page 65

Management
recommendation

Vote required to
pass

Vote FOR

80% of
outstanding
shares

PROXY STATEMENTShareholder Proposals

Item 6: Proposal to Disclose Direct and Indirect Lobbying
Activities and Expenditures

Management
recommendation

Vote required to
pass

Further information see page 67

Vote AGAINST

Majority of
votes cast

Item 7: Proposal to Publish a Report on the Effectiveness
of the Forced Swim Test

Management
recommendation

Vote required to
pass

Further information see page 68

Vote AGAINST

Majority of
votes cast

Item 8: Proposal to Amend the Bylaws to Require an
Independent Board Chair

Management
recommendation

Vote required to
pass

Further information see page 70

Vote AGAINST

Majority of
votes cast

Item 9: Shareholder Proposal on Board Diversity
Requesting Disclosures of Specific Minimum
Qualifications and Board Nominee Skills, Experience,
and Ideological Perspective

Management
recommendation

Vote required to
pass

Vote AGAINST

Majority of
votes cast

Further information see page 72

Item 10: Proposal to Publish Feasibility Report on
Incorporating Public Concern Over Drug Prices into
Senior Executive Compensation Arrangements

Further information see page 74

Management
recommendation

Vote required to
pass

Vote AGAINST

Majority of
votes cast

Item 11: Proposal to Implement a Bonus Deferral Policy

Further information see page 75

Management
recommendation

Vote required to
pass

Vote AGAINST

Majority of
votes cast

Item 12: Proposal to Disclose Clawbacks on Executive
Incentive Compensation Due to Misconduct

Management
recommendation

Vote required to
pass

Further information see page 76

Voting

Vote AGAINST

Majority of
votes cast

How to Vote in Advance of the Meeting
Even if you plan to attend the 2020 annual meeting in person, we encourage you to vote prior to the meeting via one
of the methods described below.

PROXY STATEMENTONLINE
Visit the website listed on your proxy
card or voting instruction form

BY TELEPHONE
Call the telephone number on your
proxy card or voting instruction form

BY MAIL
Sign, date, and return your proxy
card or voting instruction form

Further information on how to vote is provided at the end of the proxy statement under "Other Information."

Voting at our 2020 Annual Meeting
You may also opt to vote in person at the 2020 annual meeting, which will be held on Monday, May 4, 2020, at the
Lilly Corporate Center, Indianapolis, IN 46285, at 11:00 a.m., EDT. See the section titled "Other Information" for
instructions.

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 2023. Each of the director nominees listed below has agreed to serve that
term. The following sections provide information about our directors, including their qualifications, the director
nomination process, and director compensation.

Board Recommendation on Item 1

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

• Michael L. Eskew
• Williams G. Kaelin, Jr., M.D.
• David A. Ricks
• Marschall S. Runge, M.D., Ph.D.
• Karen Walker

Board Operations and Governance

Board of Directors
Each of our directors is elected to serve until his or her successor is duly elected and qualified. If a bona fide
nominee set forth in this proxy statement is unable to serve or for good cause will not serve, proxy holders may vote
for another nominee proposed by the board or, as an alternative, the board may reduce the number of directors to
be elected at the annual meeting.

Director Biographies
Set forth below is information as of March 20, 2020, 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, and skills that led to the conclusion that each director or director nominee should serve
as a director in light of our business and structure. Full biographies for each of our directors are available on our
website at 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

P10

PROXY STATEMENTthe 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 2020
The five directors listed below will seek election at this year's annual meeting. Four of these directors are standing
for reelection; Karen Walker was appointed to the board in December 2018 to replace a retiring director and is
seeking election for the first time. See “Item 1. Election of Directors” above for more information.

Michael L. Eskew
Age: 70, Director since 2008, Board Committees: Audit; Compensation; Directors and Corporate Governance (chair)

NON-PROFIT BOARDS
Chairman of the board of trustees of The Annie E. Casey Foundation

PUBLIC BOARDS
3M Corporation;
IBM Corporation;
Allstate Insurance Company
CAREER HIGHLIGHTS
• United Parcel Service, Inc., a global shipping and logistics company
- UPS Board of Directors (1998 - 2014)
- Chairman and CEO (2002 - 2007)
- Vice Chairman (2000 - 2002)
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. public company audit committees. He has extensive corporate
governance experience through his service on the boards of other companies.

P11

PROXY STATEMENTWilliam G. Kaelin, Jr., M.D.
Age: 62, Director since 2012, Board Committees: Finance; Science and Technology (chair)

HONORS
Nobel Prize in Physiology or Medicine;
Albert Lasker Basic Medical Research Award;
Wiley Prize in Biomedical Sciences from the Rockefeller University;
Steven C. Beering Award from the Indiana University School of

INDUSTRY MEMBERSHIPS
National Academy of Medicine;
National Academy of Sciences;
American College of Physicians;
Association of American Physicians;
American Society of Clinical Investigation (ASCI) Medicine; ASCI's Stanley J. Korsmeyer Award; Paul Marks Prize for
Cancer Research from the Memorial Sloan Kettering Cancer Center;
Richard and Hinda Rosenthal Prize from the American Association for
Cancer Research; Scientific Grand Prix of the Foundation Lefoulon-
Delalande; Canada Gairdner International Award; Doris Duke
Distinguished Clinical Scientist Award; Helis Award from Baylor
College of Medicine; Massry Prize from the Meira and Shaul G.
Massry Foundation

CAREER HIGHLIGHTS
• Harvard Medical School
- Sidney Farber Professor of Medicine (2002 - present)
• Brigham and Women's Hospital
- Professor (2002 - present)
• Howard Hughes Medical Institute
- Investigator (2002 - present)
- Assistant Investigator (1998 - 2002)
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.

P12

PROXY STATEMENTDavid A. Ricks
Age: 52, Director since 2017, Board Committees: none

PUBLIC BOARDS NON-PROFIT BOARDS
Adobe

Board of Governors for Riley Children's Foundation;
Central Indiana Corporate Partnership

INDUSTRY MEMBERSHIPS
International Federation of Pharmaceutical
Manufacturers & Associations (IFPMA);
Pharmaceutical Research and Manufacturers
of America (PhRMA)

CAREER HIGHLIGHTS
• Eli Lilly and Company
- Chairman, President, and CEO (2017 - present)
- Senior Vice President and President, Lilly Bio-Medicines (2012 - 2016)
QUALIFICATIONS
Mr. Ricks was named President and CEO on January 1, 2017, and Chairman on June 1, 2017. Mr. Ricks joined Lilly in 1996
and most recently served as President of Lilly Bio-Medicines. He has deep expertise in product development, global
sales and marketing, as well as public policy. He has significant global experience in leading the company's commercial
operations.

Marschall S. Runge, M.D., Ph.D.
Age: 65, Director since 2013, Board Committees: Public Policy and Compliance; Science and Technology

MEMBERSHIPS + OTHER ORGANIZATIONS
Experimental Cardiovascular Sciences Study Section of the National Institutes of Health

NON-PROFIT BOARDS
Michigan Medicine
CAREER HIGHLIGHTS
• University of Michigan
- CEO, Michigan Medicine (2015 - present)
- Executive Vice President for Medical Affairs (2015 - present)
- Dean, Medical School (2015 - present)
• University of North Carolina, School of Medicine
- Executive Dean (2010 - 2015)
- Chair of the Department of Medicine (2000 - 2015)
- Principal Investigator and Director of the North Carolina Translational and Clinical Sciences Institute (2010 - 2015)
QUALIFICATIONS
Dr. Runge brings the unique perspective of a practicing physician who has a broad background in health care and
academia. He has extensive experience as a practicing cardiologist, a strong understanding of health care facility
systems, and deep expertise in biomedical research and clinical trial design.

P13

PROXY STATEMENTKaren Walker
Age: 58, Director since 2018, Board Committees: Audit; Public Policy and Compliance

MEMBERSHIPS + OTHER ORGANIZATIONS
Association of National Advertisers; Sprout Social

NON-PROFIT BOARDS
Salvation Army Advisory Board of Silicon Valley
CAREER HIGHLIGHTS
• Intel Corporation, a leader in the semiconductor industry
- Senior Vice President and Chief Marketing Officer (2019 - present)
• Cisco Systems, a provider of packaging products, aerospace, and other technologies and services to commercial and
governmental customers
- Senior Vice President and Chief Marketing Officer (2015 - 2019)
- Senior Vice President, Marketing (2013 - 2015)
- Senior Vice President of Segment, Services and Partner Marketing (2012 - 2013)
QUALIFICATIONS
Ms. Walker brings extensive marketing and digital expertise. She has valuable commercial experience developed
through her business and consumer leadership positions in the information technology industry and is a recognized
industry authority on both technology and marketing. Her business expertise includes senior field and marketing roles
in Europe, North America, and the Asia-Pacific region.

Class of 2021
The following four directors are serving terms that will expire in May 2021.

Katherine Baicker, Ph.D.
Age: 48, Director since 2011, Board Committees: Audit, Public Policy and Compliance (chair)

MEMBERSHIPS + OTHER ORGANIZATIONS
Board member of HMS Holdings; Panel of Health Advisers to the Congressional Budget Office? Advisory Board
of the National Institute for Health Care Management; Editorial Board of Health Affairs; Research Associate
of the National Bureau of Economic Research; Trustee of the Mayo Clinic; Member of the Mayo Clinic; Member of the
National Academy of Medicine; The National Academy of Social Insurance; The Council on Foreign Relations; and
American Academy of Arts and Sciences
CAREER HIGHLIGHTS
• Harris School of Public Policy, University of Chicago
- Dean and the Emmett Dedmon Professor (2017 - present)
• Harvard T.H. Chan School of Public Health, Department of Health Policy and Management
- C. Boyden Gray Professor (2014 -2017)
- Acting Chair (2014 - 2016)
- Professor of health economics (2007 - 2017)
• Council of Economic Advisers, Executive Office of the President
- Member (2005 - 2007)
- Senior Economist (2001 - 2002)
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 policy and health care
delivery is recognized in both academia and government.

P14

PROXY STATEMENTJ. Erik Fyrwald
Age: 60, Director since 2005, Board Committees: Compensation; Science and Technology

PUBLIC BOARDS
Bunge Limited

PRIVATE BOARDS
Syngenta International

NON-PROFIT BOARDS
UN World Food Program Farm to Market Initiative;
CropLife International; Swiss-American Chamber of Commerce;
Syngenta Foundation for Sustainable Agriculture (chair)

CAREER HIGHLIGHTS
• Syngenta, a global Swiss-based agriculture technology company that produces agrochemicals and seeds
- CEO (2016 - present)
• Univar, Inc., a leading distributor of chemicals and provider of related services
- President and CEO (2012 - 2016)
• Ecolab, a leading provider of cleaning, sanitization, and water products and services
- President (2012)
• Nalco Company, a leading provider of water treatment products and services
- Chairman and Chief Executive Officer (2008 - 2011)
• E.I. duPont de Nemours and Company, a global chemical company
- Group Vice President, agriculture and nutrition (2003 - 2008)
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 Syngenta,
Univar, and Nalco.

Jamere Jackson
Age: 51, Director since 2016, Board Committees: Audit (chair); Finance

CAREER HIGHLIGHTS
• Hertz Global Holdings Inc., a global vehicle rental, leasing, and fleet management business
- Chief Financial Officer (2018 - present)
• Nielsen Holdings plc, a global measurement and data analytics company
- Chief Financial Officer (2014 - 2018)
• GE
- Vice President and CFO, GE Oil & Gas, drilling and surface division (2013 - 2014)
- Senior Executive, Finance, GE Aviation (2007 - 2013)
- Finance Executive, GE Corporate (2004 - 2007)
QUALIFICATIONS
Through his senior financial roles at Hertz, Nielsen, and GE, Mr. Jackson brings to the board significant global financial
expertise and a strong background in strategic planning, having spent his professional career in a broad range of
financial and strategic planning roles. He is an audit committee financial expert, based on his CFO experience and
his training as a certified public accountant.

P15

PROXY STATEMENTJackson P. Tai
Age: 69, Director since 2013, Board Committees: Audit; Directors and Corporate Governance; Finance

PUBLIC BOARDS

PRIOR PUBLIC BOARDS

NON-PROFIT BOARDS

Canada Pension Plan

MasterCard Incorporated;
HSBC Holdings (chair, Group Investment Board;
Royal Phillips NV;
Risk Committee)
The Bank of China Limited;
Singapore Airlines;
NYSE Euronext;
ING Group NV;
CapitaLand (Singapore);
DBS Holdings and DBS Bank

Metropolitan Opera;
Rensselaer Polytechnic
Institute

MEMBERSHIPS + OTHER
ORGANIZATIONS

Harvard Business School;
Asia-Pacific Advisory Board

CAREER HIGHLIGHTS
• DBS Group Holdings Ltd and DBS Bank Ltd (formerly the Development Bank of Singapore), one of the largest
financial services groups in Asia
- Vice Chairman and Chief Executive Officer (2002 - 2007)
- President and Chief Operating Officer (2001 - 2002)
- Chief Financial Officer (1999 - -2001)
• J.P. Morgan & Co. Incorporated, a leading global financial institution
- Managing Director in the Investment Banking Division (1974 - 1999)
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, an important growth market for Lilly. He also has
broad corporate governance experience from his service on public company boards in North America, Europe, and Asia.

P16

PROXY STATEMENTClass of 2022
The following four directors are serving terms that will expire in May 2022.

Ralph Alvarez
Age: 64, Director since 2009, Board Committees: Compensation (chair); Science and Technology

MEMBERSHIPS + OTHER ORGANIZATIONS
University of Miami: President's Council

PRIOR PUBLIC BOARDS
McDonald's Corporation; KeyCorp;
Skylark Co., Ltd.; Realogy Holdings Corp.

PUBLIC BOARDS
Lowe's Companies, Inc.;
Dunkin' Brands Group, Inc.
CAREER HIGHLIGHTS
• Advent International Corporation, a leading global private equity firm
- Operating Partner (2017 - present)
• Skylark Co., Ltd., a leading restaurant operator in Japan
- Chairman of the Board (2013 - 2018)
• McDonald's Corporation
- President and Chief Operating Officer (2006 - 2009)
QUALIFICATIONS
Through his 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.

P17

PROXY STATEMENTCarolyn R. Bertozzi, Ph.D.
Age: 53, Director since 2017, Board Committees: Public Policy and Compliance; Science and Technology

MEMBERSHIPS + OTHER ORGANIZATIONS

National Institute of Medicine; National Academy of Sciences; Foreign Member of the
Royal Society; and American Academy of Arts and Sciences

NON-PROFIT BOARDS
Glenn Foundation;
Grace Science Foundation
HONORS
Solvay Prize for the Future of Chemistry; MacArthur Foundation Fellowship; Lemelson MIT Prize; Heinrich Wieland
Prize; National Academy of Sciences Award in the Chemical Sciences; UC Berkeley Distinguished Teaching Award;
Donald Sterling Noyce Prize for Excellence in Undergraduate Teaching
CAREER HIGHLIGHTS
• Stanford University
- Anne T. and Robert M. Bass Professor of Chemistry, Professor of Chemical and Systems Biology and
Radiology by courtesy (2015 - present)
- Baker Family Co-Director of Stanford ChEM-H (2017 - present)
• Howard Hughes Medical Institute
- Investigator (2000 - present)
• University of California, Berkeley
- T.Z. and Irmgard Chu Professor of Chemistry and Professor of Molecular and Cell Biology (1996 - 2015)
QUALIFICATIONS
Dr. Bertozzi is a prominent researcher and academician. She has extensive experience at Stanford University and the
University of California, Berkeley, two major research institutions. Her deep expertise spans the disciplines of
chemistry and biology, with an emphasis on studies of cell surface glycosylation associated with cancer, inflammation,

and bacterial infection and exploiting this knowledge for development of diagnostic and therapeutic approaches.

Juan R. Luciano
Age: 58, Director since 2016, Lead Independent Director since 2019. Board Committees: Directors and Corporate
Governance; Finance (chair)

PUBLIC BOARDS

NON-PROFIT BOARDS

MEMBERSHIPS + OTHER ORGANIZATIONS

Archer Daniels Midland Company;

Intersect Illinois;

Economic Club of Chicago; Commercial Club of Chicago

Boys and Girls Clubs of America;

Kellogg School of Management,

Northwestern University

CAREER HIGHLIGHTS

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

- Chairman (2016 - present)

- CEO and President (2015 - present)

- President (2014 - 2015)

- Executive Vice President and Chief Operating Officer (2011 - 2014)
• The Dow Chemical Company, a multinational chemical company

- 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 results-oriented and strategic leadership, as well as many years of global leadership at The Dow

Chemical Company. He brings to the board a strong technology and operations background, along with expertise in the

highly regulated food and agriculture sectors.

P18

PROXY STATEMENTKathi P. Seifert
Age: 70, Director since 1995, Board Committees: Compensation; Directors and Corporate Governance

PUBLIC BOARDS
Investors Community Bank Albertsons;

PRIOR PUBLIC BOARDS

Revlon Consumer Products Co.;
Supervalu Inc.;
Lexmark International, Inc.

NON-PROFIT BOARDS
Community Foundation for the Fox Valley Region;
Fox Cities Building for the Arts;
Fox Cities Chamber of Commerce; New North;
Greater Fox Cities Area Habitat for Humanity;
Riverview Gardens; Bubolz Nature Preserve; Fox Valley
Humane Association

CAREER HIGHLIGHTS
• Katapult, LLC, a provider of pro bono mentoring and consulting services to nonprofit organizations
- Chairman (2004 - present)
• Kimberly-Clark Corporation, a global consumer products company
- Executive Vice President (1999 - 2004)
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.

P19

PROXY STATEMENTDirector Qualifications and Nomination Process

Director Qualifications
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. We believe the board is well-rounded, with a balance of relevant perspectives and
experience, as illustrated in the following chart. Categories referencing "expertise" indicate that the director is an
expert in the field, while "experience" indicates direct experience, including management and oversight of
significant operations:

CEO Experience:

Financial Expertise:

Relevant Scientific/Academic Expertise:

Healthcare Experience:

Operational/Strategic Expertise:

International Experience:

Marketing and Sales Expertise:

Digital Expertise:

Board Tenure: As the following chart demonstrates, our director composition 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.

3 Years 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, age, and experiences. Although the board does not establish specific diversity goals or have a
standalone 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 13 directors range in age from 48 to 71 and include four women and five members of underrepresented
groups.

Character: Board members should possess the personal attributes necessary to be an effective director, including
unquestioned integrity, sound judgment, a collaborative spirit, and commitment to the company, our shareholders,
and other constituencies.

Director Refreshment
The Directors and Corporate Governance Committee performs periodic assessments of the overall composition and
skills of the board to ensure that the board and management are actively engaged in succession planning for
directors, and that our board reflects the viewpoints, diversity, and expertise necessary to support our complex and
evolving business. The Directors and Corporate Governance Committee, with input from all board members, also
considers the contributions of the individual directors.

The results of these assessments 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 Directors and Corporate
Governance Committee has recommended that the directors in the 2020 class be elected at the 2020 annual
meeting.

P20

PROXY STATEMENTThe board delegates the director screening process to the Directors and Corporate Governance Committee, which
receives input from other board members. Director candidates are identified from several sources, including
executive search firms retained by the committee, incumbent directors, management, and shareholders.

The Directors and Corporate Governance 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 a 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 independent director, for direct discussions to determine the mutual level of interest in
pursuing the candidacy. If these discussions are favorable, the committee recommends that the board nominate the
candidate for election by the shareholders (or elects the candidate to fill a vacancy, as applicable).

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
The following table shows the retainers and meeting fees in effect in 2019 for all non-employee directors.

Board and Committee Membership Retainers
(annual, paid in monthly installments)

Leadership Retainers
(annual, paid in monthly installments)

Annual Board Retainer

$110,000

Lead Independent Director

Audit Committee, Science and Technology Committee
members (including the chairs)

$6,000

Audit Committee chair

$35,000

$18,000

Compensation Committee, Directors and Corporate
Governance Committee, Finance Committee, Public
Policy and Compliance Committee members
(including the chairs)

$3,000

Science and Technology Committee chair

$15,000

All other committee chairs

$12,000

Directors are reimbursed for customary and usual travel expenses in connection with their travel to and from board
meetings and other company events. Directors may also receive additional cash compensation for serving on ad hoc
committees that may be formed by the board from time to time.

Stock Compensation
Directors are required to hold meaningful equity ownership positions in the company and may not sell the equity
compensation they earn as a director until after leaving the board. A significant portion of director compensation is
in the form of deferred Lilly stock payable after they leave the board. 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 serving at least five years have satisfied these
guidelines, and all other directors are making progress toward these requirements.

In 2019, non-employee directors received an annual grant of $175,000 of equity compensation (but no more than
7,500 shares), deposited in a deferred stock account in the Lilly Directors’ Deferral Plan (as described below). This
award is prorated for time served and payable beginning the second January following the director's departure from
board service.

Annual Compensation Cap for Directors
In 2018, the board approved a cap to the total annual compensation (cash and equity compensation) for non-
employee directors of $800,000. The cap is intended to avoid excessive director compensation and is included in

P21

PROXY STATEMENTboth our Directors' Deferral Plan and in the Amended and Restated 2002 Lilly Stock Plan approved by shareholders
at the 2018 annual shareholders' meeting.

Lilly Directors’ Deferral Plan: The Lilly Directors' Deferral Plan allows non-employee 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 amounts deferred 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. Funds in this account are credited as hypothetical shares of company stock based on the closing
stock price on pre-set monthly dates. In addition, the annual stock compensation award as described above is also
credited to this account. The number of shares credited is calculated by dividing the $175,000 annual compensation
figure by the closing stock price on a pre-set annual date. 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 on the
second January following the director's departure from board service.

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 (the Internal Revenue Code). The
aggregate amount of interest that accrued in 2019 for the participating directors was $164,734, at a rate of
3.9 percent. The rate for 2020 is 2.5 percent.

Both accounts may generally only be paid out 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.

2019 Compensation for Non-Employee Directors

Name

Mr. Alvarez

Dr. Baicker

Dr. Bertozzi

Mr. Eskew

Mr. Fyrwald

Mr. Jackson

Dr. Kaelin

Mr. Luciano

Dr. Runge

Ms. Seifert

Mr. Tai

Ms. Walker

Retired
Ms. Marram

Fees Earned
or Paid in Cash ($)

Stock Awards ($)1

All Other
Compensation
and Payments ($)2

$131,000

$119,000

$136,000

$119,000

$131,000

$134,000

$151,333

$119,000

$117,000

$122,000

$144,000

$175,000

$31,000

$3,000

$10,667

$60,000

Total ($)3

$306,000

$294,000

$311,000

$325,000

$306,000

$312,000

$326,333

$294,000

$302,667

$357,000

$319,000

$67,917

$72,917

$38,000

$178,834

1 Each non-employee director received an award of stock valued at $175,000 (approximately 1,534 shares), except

Ms. Marram, who retired from the board in May 2019 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 second
January following the director's departure from board service, as described above under “Lilly Directors’ Deferral
Plan.” The column shows the grant date fair value for each director’s stock award computed in accordance with
FASB ASC Topic 718, based on the closing stock price on the grant date. See Note 12 of the consolidated financial
statements in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, for
additional detail regarding assumptions underlying the valuation of equity awards. 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.

P22

PROXY STATEMENT
2 This column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. (Foundation) under its

matching gift program, which is generally available to U.S. employees as well as 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 amounts for Mr. Fyrwald, Dr. Kaelin, Ms. Marram, and Mr. Tai include
matching contributions for donations made at the end of 2018 (Mr. Fyrwald - $1,000; Dr. Kaelin - $3,000;
Ms. Marram - $8,000; and Mr. Tai - $30,000), for which the matching contribution was not paid until 2019.

3 Directors do not participate in a company pension plan or non-equity incentive plan.

2020 Director Compensation
In 2019, the Directors and Corporate Governance Committee reviewed the company’s compensation for independent
directors, including a peer group analysis which showed total director compensation slightly above the median of
the general industry peer group (though below pharmaceutical industry peers). As a result of this analysis, the
committee recommended no changes to independent director compensation for 2020.

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 lilly.com/who-we-are/governance, along with our Corporate
Governance Guidelines.

On the recommendation of the Directors and Corporate Governance Committee, the board determined that each
current non-employee director is independent. Prior to her retirement in 2019, the board reached the same
conclusions regarding Ms. Marram, and determined that the members of each committee also meet our and the
NYSE's independence standards. The board determined that none of the non-employee directors has had during the
last four years (i) any of the relationships identified in the company’s categorical independence standards 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.

P23

PROXY STATEMENTType of
Organization

Director
Relationship to
Organization

Primary Type of
Transaction/
Relationship/
Arrangement
between Lilly and
Organization

2019 Aggregate
Percentage of
Organization's
Revenue

Director

Organization

Dr. Baicker

University of Chicago

Dr. Bertozzi

Stanford University

Educational
Institution

For-profit
Corporation

Syngenta
International AG

Hertz Global Holdings
Inc

For-profit
Corporation

Harvard University

Brigham and
Women's Hospital

Educational
Institution

Health Care
Institution

Dana-Farber Cancer
Institute

Health Care
Institution

Mr. Fyrwald

Mr. Jackson

Dr. Kaelin

Employee

Clinical Research

Less than 0.1 percent

Employee

Clinical Research

Less than 0.1 percent

Executive Officer

Purchase of products

Less than 0.1 percent

Executive Officer

Purchase of products

Less than 0.1 percent

Employee

Research grants

Less than 0.1 percent

Employee

Clinical Research

Less than 0.1 percent

Employee

Clinical Research

Approximately 0.2
percent

Mr. Luciano

Archer Daniels
Midland

For-profit
Corporation

Executive Officer

Purchase of products

Less than 0.1 percent

Sale of products

Less than 0.1 percent
of Lilly's revenue

Dr. Runge

University of Michigan
Medical School

Educational
Institution

Ms. Walker

Cisco Systems Inc

For-profit
Corporation

Executive Officer

Clinical Research

Less than 0.1 percent

Former Employee

Purchase of products

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
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. 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.

P24

PROXY STATEMENTMembership and Meetings of the Board and Its Committees

In 2019, each director attended at least 80 percent of the total number of meetings of the board and the committees
on which he or she served during his or her tenure as a board or committee member. In addition, all board
members are expected to attend the 2020 annual meeting, and all directors then serving attended the annual
meeting in 2019. Current committee membership and the number of meetings of the board and each committee in
2019 are shown in the table below.

Board

Audit

Compensation

Directors and
Corporate
Governance

Finance

Public Policy
and
Compliance

Science and
Technology

Name

Mr. Alvarez

Dr. Baicker

Dr. Bertozzi

Mr. Eskew

Mr. Fyrwald

Mr. Jackson

Dr. Kaelin

Mr. Luciano

Mr. Ricks

Dr. Runge

Ms. Seifert

Mr. Tai

Ms. Walker

Number of 2019
Meetings

C
LD

Committee Chair
Lead Independent Director

All six committee charters are available online at lilly.com/who-we-are/governance, or upon request to the
company's corporate secretary. Key responsibilities of each committee are set forth below.

Audit Committee
The Audit Committee assists the board in fulfilling its oversight responsibilities by monitoring:
the integrity of financial information provided to the shareholders and others

•
• management's systems of internal controls and disclosure controls
•
•

the performance of internal and independent audit functions
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 has determined that Mr. Eskew, Mr. Jackson, and Mr. Tai are audit committee financial experts, as
defined in the SEC rules.

Compensation Committee
The Compensation Committee:

•
•
•

•

oversees the company’s global compensation philosophy and policies
establishes the compensation of our CEO and other executive officers
acts as the oversight committee with respect to the company’s deferred compensation plans, management
stock plans, and other management incentive compensation programs
reviews succession plans for the CEO and other key senior leadership positions as well as the company’s
diversity and inclusion efforts
reviews, monitors, and oversees stock ownership guidelines for executive officers.

P25

PROXY STATEMENT
Compensation Committee Interlocks and Insider Participation
None of the Compensation Committee members:

• has ever been an officer or employee of the company
•

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)

• has any other interlocking relationships requiring disclosure under applicable SEC rules.

Directors and Corporate Governance Committee
The Directors and Corporate Governance Committee:

•
•

•

leads the process for director recruitment, together with the lead independent director
recommends to the board candidates for membership on the board and its committees, as well as for the
role of lead independent director
oversees matters of corporate governance, including board performance, director independence and
compensation, corporate governance guidelines, and shareholder engagement on governance matters.

Finance Committee
The Finance Committee reviews and makes recommendations to the board regarding financial matters, including:

•
•
•
•
•
•
•
•

capital structure and strategies
dividends
stock repurchases
capital expenditures
investments, financing, and borrowings
benefit plan funding and investments
financial risk management
significant business development opportunities.

Public Policy and Compliance Committee
The Public Policy and Compliance Committee:

•

reviews, identifies, and when appropriate, brings to the attention of the board ethical, social,
environmental, political, and legal trends and issues, and compliance and quality matters that may have an
impact on the business operations, financial performance, or public image of the company
reviews, monitors, and makes recommendations to the board on corporate policies and practices that
relate to public policy and compliance, including those related to employee health and safety.

Science and Technology Committee
The Science and Technology Committee:

•
•
•
•
•

reviews and makes recommendations regarding the company’s strategic research goals and objectives
reviews new developments, technologies, and trends in pharmaceutical research and development
reviews the progress of the company's product pipeline
reviews the scientific aspects of significant business development opportunities
oversees matters of scientific and medical integrity and risk management.

P26

PROXY STATEMENTBoard Oversight of Strategy, Compliance, and Risk Management

The board takes an active approach to its role in overseeing the development and execution of the company’s
business strategies. On an annual basis, the board and executive management conducts an extended review and
discussion of the company’s strategy, reviewing goals, the external environment, key questions, and key risks. Board
meetings include discussions of company performance relative to the strategy. The board also reviews strategic
focus areas for the company, such as innovation, information security, and human capital management.

The board, together with its 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. On an annual basis, the full board reviews the company's overall state of compliance and the
Public Policy and Compliance Committee receives an update on compliance at each meeting.

The chief ethics and compliance officer reports directly to the CEO.

The company also has an enterprise risk management program directed by its chief ethics and compliance officer.
Enterprise risks are identified and prioritized by management through both top-down and bottom-up processes.
The risk management program is overseen by the full board, and certain prioritized risks are reviewed by a board
committee or the full board. 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 full board
meeting, and enterprise risks are also addressed in periodic business function 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. 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 lilly.com/who-we-are/governance/ethics-and-compliance-program and
lilly.com/ethical-conduct-for-financial-management, or upon request to the company's corporate secretary. In the
event of any amendments to, or waivers from, a provision of the code affecting the CEO, chief financial officer, chief
accounting officer, controller, or persons performing similar functions, we intend to post on the above website
within four business days after the event a description of the amendment or waiver as required under applicable
SEC rules, and we will maintain that information on our website for at least 12 months.

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 accountability by 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 corporate governance guidelines, which are
available online at lilly.com/who-we-are/governance 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 the following
(certain of which are carried out through the board's committees):

•
•
•

providing general oversight of the business
approving corporate strategy
approving major management initiatives

P27

PROXY STATEMENT•

•

selecting, compensating, evaluating, and, when necessary, replacing the CEO, and compensating other key
senior leadership positions
ensuring that an effective succession plan is in place for all key senior leadership positions and reviewing the
broader talent management process, including diversity and inclusion
overseeing the company’s ethics and compliance program and management of significant business risks

•
• nominating, compensating, and evaluating directors
•

overseeing the company's enterprise risk management program.

The board takes an active role in its oversight of our corporate strategy. Each year, the board and executive
management closely examine the company's strategy, including key risks and decisions facing the company. Decisions
reached in this session are updated throughout the year, including as the board discusses the company's financial
performance, the performance of our business units, and progress in our pipeline.

Board Composition and Requirements
Mix of Independent Directors and Officer-Directors
We believe there should always be a substantial majority (75 percent or more) of independent directors. The CEO
should be a member of the board.

Voting for Directors
In an uncontested election, directors are elected by a majority of votes cast. An incumbent nominee who fails to
receive a greater number of votes “for” than “against” his or her election will tender his or her resignation from the
board (following the certification of the shareholder vote). 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 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, although the Directors and Corporate Governance Committee has authority to recommend exceptions to this
policy. The Directors and Corporate Governance Committee, with input from all board members, also considers the
contributions of the individual directors annually, with a more robust assessment at least every three years when
considering whether to nominate directors to new three-year terms. The company has not adopted term limits
because the board believes that the company benefits from having a mix of longer- and shorter-tenured members of
the board.

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.

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 a director with any outside
party except under limited circumstances where the director is seeking legal advice or is required by law to disclose
information. The Confidentiality Policy can be viewed on the company's website: 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 CEO, coupled with a strong lead
independent director position (see the description of the role below), 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 to
ensure that this approach continues to strike the appropriate balance for the company and our stakeholders and
enables it to promote the long-term interests of shareholders. Such a review was conducted during the succession-
management process relating to the appointment of Mr. Ricks as chairman, effective June 2017, and more recently in
considering the shareholder proposal that has been put forward as Item 8 below. The board believes that Mr. Ricks

P28

PROXY STATEMENThas served the company well as the chairman and CEO, and that the combined role provides unified leadership and
focus on the company’s strategy, business plans, and efficiency efforts.

Mr. Luciano serves as the current lead independent director. Mr. Luciano is a strong, lead independent director who
fulfilled each of the duties below during the past year. As the CEO and president of Archer Daniels Midland Company,
he brings diverse experience and outside perspective to his lead independent director role, which permits him to
serve as a trusted adviser to Mr. Ricks and ensure effective board management.

In 2019, the independent directors, led by Mr. Luciano, met at every board meeting in executive session to discuss
various matters related to the oversight of the company, the management of the board’s affairs, and the CEO’s
performance. We believe Mr. Luciano fosters an open and constructive dialogue during these sessions as well as
during individual discussions with the independent directors. Mr Luciano advised Mr. Ricks on the independent
directors’ discussions, including performance feedback.

Board Independence
The board has put in place a number of governance practices to ensure effective independent oversight, including:

•

Executive sessions of the independent directors: held after every regular board meeting.

• Annual performance evaluation of the chairman and CEO: conducted by the independent directors, the

results of which are reviewed with the CEO and considered by the Compensation Committee in establishing
the CEO’s compensation for the next year.

• A strong, independent, clearly defined lead independent director role: The lead independent 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, ensuring that he or 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

together with the board chair and the chair of the Directors and Corporate Governance Committee,
conducting the annual board assessment process
together with the Directors and Corporate Governance Committee, leading the director recruitment
process.

•

The lead independent director also has authority to call meetings of the independent directors and to retain
advisors for the independent directors.

The lead independent director is appointed annually by the board, which conducts an assessment of his or
her performance as part of the annual board assessment process. Currently Mr. Luciano is the lead
independent director.

• 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 the company's 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. The independent directors also meet without the CEO to discuss CEO succession
planning.

P29

PROXY STATEMENT

During these reviews, the CEO and directors discuss:

•
•
•

future candidates for the CEO and other senior leadership positions
succession timing
development plans for the highest-potential candidates.

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.

The company ensures that the directors have multiple opportunities to interact with the company's top leadership
talent in both formal and informal settings to allow them to most effectively assess the candidates' qualifications and
capabilities.

Board Education and Annual Performance Assessment
The company engages in a comprehensive orientation process for incoming new directors. Directors also attend
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.

Every year the Directors and Corporate Governance Committee, together with the chair and the lead independent
director, conducts a robust assessment of the board's performance, board committee performance, and all board
processes, based on input from all directors. We also conduct an annual assessment of each individual director's
performance, and every three years we conduct a detailed review of individual director performance when considering
whether to nominate the director to a new three-year term.

Conflicts of Interest and Transactions with Related Persons
Conflicts of Interest
Occasionally a director's business or personal relationships may give rise to an interest that conflicts, or appears to
conflict, with the interests of the company. As outlined in the company's corporate governance guidelines, directors
must disclose to the company all relationships that could 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 with respect to that issue. A director may be excused from board
discussions and decisions on an issue related to an actual or apparent conflict, as appropriate.

In addition, a director’s relationship with Lilly may give rise to an interest that conflicts, or appears to conflict, with the
interests of another company, institution, or other stakeholder. A director must disclose his or her relationship with
Lilly in connection with any scientific publication, using the International Committee of Medical Journal Editors
(ICMJE) conflict of interest form for this purpose when possible. Each director must disclose his or her service on the
board to his or her employer and any other organization with which the director has a relationship of trust and where
the relationship with the company is relevant. In addition, directors must follow the internal conflict of interest
policies and procedures of each such organization.

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
more than 5 percent 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 the board or committee determines that it is in the best
interests of the company. In considering the transaction, the board or committee will consider all relevant factors,
including:

P30

PROXY STATEMENTthe company’s business rationale for entering into the transaction
the alternatives to entering into a related-person transaction

•
•
• whether the transaction is on terms comparable to those available to third parties, or in the case of

employment relationships, to employees generally
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
the overall fairness of the transaction to the company.

•

Procedures:

• Management or the affected director or executive officer will bring the matter to the attention of the

chairman, the lead independent director, the chair of the Directors and Corporate Governance Committee, or
the corporate secretary.
The chairman and the lead independent director shall jointly determine (or, if either is involved in the
transaction, the other shall determine) whether the matter should be considered by the board or by one of its
existing committees.
If a director is involved in the transaction, he or she will be recused from all discussions and decisions about
the transaction.
The transaction must be approved in advance whenever practicable, and if not practicable, must be ratified, if
appropriate, as promptly as practicable.
The board or relevant committee will review the transaction annually to determine whether it continues to be
in the company’s best interests.

•

In 2019, there were no related party transactions to report pursuant to the relevant SEC rules and no required proxy
statement disclosure.

Communication with the Board of Directors

You may send written communications to members of the board, including independent directors, 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 areas of interest or
concern related to corporate governance, as well as any specific issues for the coming proxy season. In 2019, we
spoke with a number of investors, both large and small, on topics such as eliminating the company's classified
board and supermajority voting requirements; environmental, social, and governance topics including drug pricing,
product quality and safety, and our board and corporate culture; litigation and key enterprise risks; the company's
executive compensation; and proxy access, among other topics. The overall tone of these conversations was
productive and positive, and the investors with whom we spoke were generally supportive of our performance and
overall compensation and governance policies, although a few shareholders communicated differing views on some
of our governance practices. This feedback has been discussed with our chairman and CEO, the lead independent
director, our Compensation Committee, and our Directors and Corporate Governance Committee, and it was a key
input into board discussions on corporate governance topics. As a result of these discussions and its own
deliberations, the board decided to amend the company's bylaws to implement proxy access and recommend in
favor of the two management proposals described below. We are committed to continuing to engage with our
investors to ensure their diverse perspectives on corporate governance and other issues are thoughtfully
considered.

P31

PROXY STATEMENTManagement Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Each year between 2007 and 2012, and again in 2018 and 2019, our management put forward 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 of our common stock, as required in the company's articles of
incorporation. In addition, in 2010, 2011, 2012, 2018, and 2019, 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 in support of these proposals was approximately 63 percent of the outstanding shares, driven in part by a
2012 NYSE rule revision prohibiting brokers from voting their clients' shares on corporate governance matters
absent specific instructions from such clients. In 2018, the vote in support was approximately 62 percent of the
outstanding shares and in 2019, the vote in support was approximately 66 percent of the outstanding shares.

After considering the interests of the company and our shareholders, we have resubmitted management proposals
to eliminate the classified board and supermajority voting requirements for consideration at the 2020 annual
meeting (see Items 4 and 5). We will continue to 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 20, 2020. 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 2021 annual meeting must give
the company written notice by November 20, 2020, and no earlier than September 21, 2020. That notice must
provide certain other information as described in the bylaws. Copies of the bylaws are available online at lilly.com/
who-we-are/governance 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 under "Director Qualifications and Nomination
Process - Director Qualifications" 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 2021 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
20, 2020, and no earlier than September 21, 2020. 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 lilly.com/who-we-are/governance. 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 2020 shareholders' meeting.

P32

PROXY STATEMENTOwnership 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 14, 2020. None of
the stock 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

Stock Units Distributable
Within 60 Days 3

Stock Units Not
Distributable
Within 60 Days 4

Ralph Alvarez

Katherine Baicker, Ph.D.

Carolyn R Bertozzi, Ph.D.

Enrique A. Conterno (retired)

Michael L. Eskew

J. Erik Fyrwald

Michael J. Harrington (retired)

Jamere Jackson

William G. Kaelin, Jr., M.D.

Juan R. Luciano

David A. Ricks

Marschall S. Runge, M.D., Ph.D.

Kathi P. Seifert

Daniel Skovronsky, M.D., Ph.D.

Joshua L. Smiley

Jackson P. Tai

Karen Walker

All directors and current
executive officers as a group
(26 people):

—

124,501

—

100

119,299

—

290,911

—

3,533

97,159

39,045

45,570

—

46,909

18,779

4,924

21,779

41,825

64,493

22,968

5,652

17,224

11,152

75,387

12,840

71,174

—

27,213

12,515

2,921

890,301

487,143

1 The sum of the "Shares Owned" and "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 0.03 percent of the outstanding common stock of the
company. The directors and executive officers as a group own approximately 0.09 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 sets forth restricted stock units that vest within 60 days of February 14, 2020.
4 For the executive officers, this column reflects restricted stock units that will not vest within 60 days of February
14, 2020. For the independent directors, this column reflects the number of stock units credited to the directors'
accounts in the Lilly Directors' Deferral Plan.

5 The shares shown for Mr. Conterno are as of his retirement, December 31, 2019, and are excluded from the

aggregate totals for all directors and current officers as a group.

6 The shares shown for Mr. Harrington are as of his retirement, January 31, 2020, and are excluded from the

aggregate totals for all directors and current officers as a group.

7 The shares shown for Mr. Ricks include 16,026 shares that are owned by a family foundation for which he is a

director. Mr. Ricks has shared voting power and shared investment power with respect to the shares held by the
foundation.

P33

PROXY STATEMENTPrincipal Holders of Stock
Based on reports filed with the SEC pursuant to Regulation 13D-G of the Securities Exchange Act of 1934 (the
Exchange Act), the only beneficial owners of more than 5 percent of the outstanding shares of the company’s
common stock, as of December 31, 2019, are the shareholders listed below:

Name and Address

Lilly Endowment Inc. (the Endowment)1
2801 North Meridian Street
Indianapolis, IN 46208

The Vanguard Group2
100 Vanguard Blvd.
Malvern, PA 19355

BlackRock, Inc.3
55 East 52nd Street
New York, NY 10055

The PNC Financial Services Group, Inc.4
101 W Washington St.
Indianapolis, IN 46255

Number of Shares
Beneficially Owned
114,560,599

Percent of Class

11.9%

70,920,050

60,879,212

52,130,652

7.3%

6.3%

5.4%

1 The Endowment has sole voting and sole dispositive power with respect to all of its shares. The board of directors
of the Endowment is composed of N. Clay Robbins, chairman, president & CEO; Mary K. Lisher; William G. Enright;
Daniel P. Carmichael; Charles E. Golden; Eli Lilly II; David N. Shane; Craig Dykstra; Jennett M. Hill; and John C.
Lechleiter.
2 The Vanguard Group provides investment management services for various clients. It has sole voting power with
respect to 1,317,587 of its shares and shared voting power with respect to 259,876 of its shares. It has sole
dispositive power with respect to 69,419,868 of its shares and shared dispositive power with respect to 1,500,182 of
its shares.
3 BlackRock, Inc. provides investment management services for various clients. It has sole voting power with
respect to 52,609,640 of its shares and sole dispositive power with respect to all of its shares.
4 The PNC Financial Services Group, Inc.; PNC Bancorp, Inc.; PNC Bank, National Association; PNC Capital
Advisors, LLC; PNC Delaware Trust Company; and PNC Investments LLC (collectively, “PNC”) beneficially owns
52,130,652 shares altogether. PNC has sole voting power with respect to 2,090,752 of its shares and shared voting
power with respect to 50,000,308 of its shares. PNC has sole dispositive power with respect to 1,700,429 of its
shares and shared dispositive power with respect to 50,358,773 of its shares. Of the total shares of common stock
reported for PNC above, 50,000,000 shares (5.21% of the class) are held in the Eli Lilly and Company Compensation
Trust account for which PNC Bank, National Association (“PNC Bank”) serves as directed trustee. As directed
trustee, PNC Bank is deemed to share both voting power and investment discretion with respect to those
50,000,000 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. Our compensation philosophy is designed to attract, engage, 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 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 dialogue with our shareholders 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.

P34

PROXY STATEMENTHowever, the Compensation Committee values input from shareholders and will consider the outcome of the vote
when making future executive compensation decisions.

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 Compensation
Discussion and Analysis (CD&A), the compensation tables, and related narratives provided below in this proxy
statement.

Compensation Committee Matters

Background
Role of the Independent Consultant in Assessing Executive Compensation
The Compensation Committee has retained Frederic W. Cook & Co., Inc., ("FW Cook") as its independent
compensation consultant. FW Cook reports directly to the Compensation Committee, and it is not permitted to have
any business or personal relationship with management or members of the Compensation Committee. The
consultant’s responsibilities are to:

• review the company’s total compensation philosophy, peer group, and target competitive positioning for

reasonableness and appropriateness

• review the company’s executive compensation program and advise the Compensation Committee of evolving

best practices

• provide independent analyses and recommendations to the Compensation Committee on the CEO’s pay
• review draft CD&A and related tables for the proxy statement
• proactively advise the Compensation Committee on best practices for board governance of executive

compensation

• undertake special projects at the request of the Compensation Committee chair.

FW Cook interacts directly with members of company management only on matters under the Compensation
Committee’s oversight and with the knowledge and permission of the Compensation Committee chair.

Role of Executive Officers and Management in Assessing Executive Compensation
With the oversight of the CEO and the senior vice president of human resources and diversity, the company’s global
compensation group formulates recommendations on compensation philosophy, plan design, and compensation for
executive officers (other than the CEO, as noted below). The CEO provides the Compensation Committee with a
performance assessment and compensation recommendation for each of the other executive officers. The
Compensation Committee considers those recommendations with the assistance of its compensation consultant.
The CEO and the senior vice president of human resources and diversity attend Compensation Committee
meetings; they are not present for executive sessions or any discussion of their own compensation. Only non-
employee directors and the Compensation Committee’s consultant attend executive sessions.

The CEO does not participate in the formulation or discussion of his pay recommendations. He has no prior
knowledge of the recommendations that the consultant makes to the Compensation Committee.

Risk Assessment Process
As part of the company's overall enterprise risk management program, in 2019 (consistent with prior years), the
Compensation Committee reviewed the company’s compensation policies and practices and concluded that the
programs and practices are not reasonably likely to have a material adverse effect on the company. The
Compensation Committee noted numerous policy and design features of the company’s compensation programs
and governance structure that reduce the likelihood of inappropriate risk-taking, including, but not limited to:

• Only independent directors serve on the Compensation Committee
• The Compensation Committee engages its own independent compensation consultant
• The Compensation Committee has downward discretion to lower compensation plan payouts
• The Compensation Committee approves all adjustments to financial results that affect compensation

calculations

• Different measures and metrics are used across multiple incentive plans that appropriately balance cash/stock,

fixed/variable pay, and short-term/long-term incentives

P35

PROXY STATEMENT• Incentive plans have predetermined maximum payouts
• Performance objectives are challenging but achievable
• Programs with operational metrics have a continuum of payout multiples based upon achievement of
performance milestones, rather than "cliffs" that might encourage suboptimal or improper behavior

• A compensation recovery policy is in place for all members of senior management; negative compensation

consequences can result in cases involving serious compliance violations

• Meaningful share ownership and retention requirements are in place for all members of senior management

and the board.

Compensation Committee Report
The Compensation Committee evaluates and establishes compensation for executive officers and oversees the
deferred compensation plan, management stock plans, and other management incentive and benefit programs.
Management has the primary responsibility for the company’s financial statements and reporting process, including
the disclosure of executive compensation. With this in mind, the Compensation Committee has reviewed and
discussed with management the CD&A above. The Compensation Committee recommended to the board that the
CD&A be included in this proxy statement for filing with the SEC.

Compensation Committee
Ralph Alvarez, Chair
Michael L. Eskew
J. Erik Fyrwald
Kathi P. Seifert

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 Compensation Committee
considered when setting executive compensation for 2019, and how the company’s results affected incentive
payouts. This CD&A provides compensation information for our CEO, David Ricks, our chief financial officer, Joshua
Smiley, and the three other most highly compensated executive officers who were serving as executive officers on
December 31, 2019, Daniel Skovronsky, Enrique Conterno (retired), and Michael Harrington (retired).

Our Philosophy on Compensation
At Lilly, our purpose is to unite caring with discovery to create medicines that make life better for people around the
world. To do this, we must attract, engage, and retain highly talented individuals who are committed to our 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 shareholders and customers.

Objectives
Our compensation and benefits programs are based on the following objectives:

• Reflect individual and company performance: We reinforce a high-performance culture by linking pay with
individual and company performance. As employees assume greater responsibilities, the proportion of total
compensation based on company performance and shareholder returns increases. We perform annual
reviews to ensure our programs provide an incentive to deliver long-term, sustainable business results
while discouraging excessive risk-taking or other adverse behaviors.

• Attract and retain talented employees: Compensation opportunity should be market competitive 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.

•

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.

• 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 executive
compensation and benefit programs.

P36

PROXY STATEMENTSay-on-Pay Results for 2019
At last year's annual meeting, more than 97 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.

Compensation Committee's Processes and Analyses
Setting Compensation
The Compensation Committee considers individual performance assessments, compensation recommendations
from the CEO (with respect to all other named executive officers), company performance, peer group data, input
from its compensation consultant, and its own judgment when determining compensation for the company's
executive officers.

•

Individual performance: Generally, the independent directors, under the direction of the lead independent
director, meet with the CEO at the beginning of each year to establish the CEO's performance objectives. 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, ethics, and integrity. This
evaluation is used in setting the CEO's compensation opportunity for the next year.

The Compensation Committee receives individual performance assessments and target compensation
recommendations from the CEO for each of the remaining executive officers. Each executive officer’s
performance assessment is based on the achievement of objectives established at the start of the year, as
well as other factors, including the demonstration of Lilly values and leadership behaviors. The
Compensation Committee considers these inputs, its knowledge of and interactions with each executive
officer, and its judgment to develop a final individual performance assessment. For new executive officers,
target compensation is set by the Compensation Committee at the time of promotion or offer.

• Company performance: Lilly performance is considered in two ways:

• Overall performance for the prior year based on a variety of metrics is a factor in establishing target

compensation for the coming year.

• Specific performance goals are established at the beginning of each performance year to determine

payouts under cash and equity incentive programs.

• Peer group analysis: The Compensation Committee uses data from the peer group described below as a

market check for compensation decisions but does not use this data as the sole basis for its compensation
targets and does not target a specific position within that range of market data.

•

Input from an independent compensation consultant concerning executive pay: The Compensation
Committee considers the advice of its independent compensation consultant, FW Cook, when setting
executive officer compensation.

Competitive Pay Assessment
Lilly’s peer group is composed of companies that directly compete with Lilly, use a similar business model, and
employ people with the unique skills required to operate an established biopharmaceutical company. The
Compensation Committee selects a peer group whose median market cap and revenue are broadly similar to Lilly's.
The Compensation Committee reviews the peer group at least every three years. The Compensation Committee
established the following peer group in May 2018 for purposes of assessing competitive pay:

AbbVie

Allergan

Amgen

AstraZeneca

Biogen

Bristol-Myers Squibb

Celgene

Gilead

GlaxoSmithKline

Johnson & Johnson

Merck

Novartis

P37

Novo Nordisk

Pfizer

Roche

Sanofi

Shire

Takeda

P37

PROXY STATEMENTAt the time of the review in May 2018, all peer companies were no greater than two times our revenue or market
cap except Johnson & Johnson, Novartis, Pfizer, and Roche. The Compensation Committee included these four
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.

When determining pay levels for target compensation, the Compensation Committee considers an analysis of peer
group pay for each executive officer position (except CEO), along with internal factors such as the performance and
experience of each executive officer. The independent compensation consultant for the Compensation Committee
provides a similar analysis when recommending pay levels for the CEO. The CEO analysis includes a comparison of
our CEO actual total direct compensation in the prior year to company performance on an absolute basis and on a
relative basis to the peer group. The analysis also includes a comparison of current target total direct compensation
for our CEO to the most recently available data on CEO target total direct compensation for our peer companies. On
average, the named executive officer's target total direct compensation for 2019 was below the median of the peer
group, which reflects several named executive officers being relatively new to their roles.

Components of Our Compensation
Our 2019 executive compensation was primarily composed of three components:

•
•

•

base salary
annual cash bonus, which is generally calculated based on company performance relative to internal
targets for revenue, EPS, and the progress of our pipeline
two different forms of equity incentives:

performance awards, which are performance-based equity awards that vest over three years and have
a performance component measuring the company's two-year change in EPS relative to the expected
peer group change followed by a 13-month service-vesting period
shareholder value awards, which are performance-based equity awards that pay out based on absolute
company stock price growth and TSR relative to peers, both measured over a three-year period,
followed by a one-year holding period.

Executives also receive a 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 company's reported revenue and EPS upon which
incentive compensation payouts are determined to eliminate the distorting effect of unusual income or expense
items. The adjustments are intended to:

•
•

•

align award payments with the underlying performance of the core business
avoid volatile, artificial inflation or deflation of awards due to unusual items in the award year, and, where
relevant, the previous (comparator) year
eliminate certain counterproductive short-term incentives—for example, incentives to refrain from
acquiring new technologies, to defer disposing of underutilized assets, or to defer settling legacy legal
proceedings to protect current bonus payments
facilitate comparisons with peer companies.

The Compensation Committee considers the adjustments approved by the Audit Committee for reporting non-GAAP
EPS and other adjustments, based on guidelines approved by the Compensation Committee prior to the
performance period. The Compensation Committee reviews and approves adjustments on a quarterly basis and may
adjust payouts for items, including but not limited to, the impact of significant acquisitions or divestitures, the
impact of share repurchases that differ significantly from business plan, and large swings in foreign exchange
rates. For the 2018-2020 performance award, the Compensation Committee adjusted for the expected impact of the
acquisition of Loxo Oncology, Inc., and the impact of the Elanco Animal Health, Inc., divestiture. Further details on
the adjustments for 2019 and the rationale for making these adjustments are set forth in Appendix A, "Summary of
Adjustments Related to the Annual Cash 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 reported EPS that were approved.

The Compensation Committee also has general authority to apply downward (but not upward) discretion to bonus,
performance award, and shareholder value award payouts for individual executive officers.

P38

PROXY STATEMENT

1. Base Salary

In setting salaries, Lilly seeks to retain, motivate, and reward successful performers while maintaining affordability
within the company's business plan. Base salaries are reviewed and established annually and may be adjusted upon
promotion, following a change in job responsibilities, or to maintain market competitiveness. Salaries are based on
each person's level of contribution, responsibility, expertise, and competitiveness and are compared annually with
peer group data.

Base salary increases for 2019 were 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.

2. Annual Cash Bonus

The Bonus Plan is designed to reward the achievement of the company’s annual financial and innovation objectives.
All the named executive officers participated in the Bonus Plan during 2019.

Bonus Plan
The Compensation Committee sets performance goals and individual bonus targets for the Bonus Plan at the
beginning of each year. The bonus is based on three areas of company performance measured relative to internal
targets: revenue, EPS, and innovation progress. The annual cash bonus payout is calculated as follows:

Actual payouts can range from 0 to 200 percent of an individual's bonus target. The Compensation Committee
references the annual operating plan and pipeline objectives to establish performance targets and to assess the
relative weighting for each objective. The 2019 weightings remain unchanged from the prior year:

Lilly Goals

Weighting

Revenue performance

EPS performance

Pipeline progress

25%

50%

25%

Based on this weighting, the company bonus multiple is calculated as follows:

Executive officer bonuses for 2019 were also subject to the terms of the Executive Officer Incentive Plan (EOIP).
Under the EOIP, the maximum annual cash bonus allowable was calculated based on non-GAAP net income
(generally described in "Adjustments for 2019 Bonus Plan" in Appendix A) for the year. For Mr. Ricks, the maximum
amount for 2019 was 0.3 percent of non-GAAP net income. For other executive officers, the maximum amount was
0.15 percent of non-GAAP net income. In addition, none of the executive officers were eligible to receive an annual
cash bonus payment unless the company had positive non-GAAP net income for the year.

Under the EOIP, the Compensation Committee had the discretion to reduce (but not to increase) the amount to be
paid. In exercising this discretion, the Compensation Committee awarded the lesser of (i) the bonus the executive
officer would have received under the Bonus Plan, or (ii) the EOIP maximum payout. As described further in
“Looking Ahead to 2020 Compensation” below, the EOIP was terminated effective January 1, 2020.

3. Equity Incentives

The company grants two types of equity incentives to executives and certain other employees: performance awards
that are designed to focus leaders on multi year operational performance relative to peer companies and
shareholder value awards that are intended to align earned compensation with long-term growth in shareholder
value and relative TSR performance within our industry. The Compensation Committee has the discretion to adjust

P39

PROXY STATEMENTany payout from an equity award granted to an executive officer downward (but not upward) from the amount
yielded by the applicable formula.

Performance Awards
Performance awards vest over three years. Payouts are based on achieving EPS growth targets over a two-year
performance period, followed by an additional 13-month service-vesting period for executive officers, during which
the award is held in the form of restricted stock units. The growth-rate targets are set relative to the median
expected EPS growth for our peer group over the same performance period. These awards do not accumulate
dividends during the two-year performance period, but they do accumulate dividend equivalent units 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 understood by Lilly employees, and
allows for objective comparisons to performance of Lilly's peer group. Consistent with the objectives established by
the Compensation Committee, Lilly company performance exceeding the expected peer group median results in
above target payouts, while Lilly company performance lagging the expected peer group median results in
below target payouts. Possible payouts range from 0 percent to 150 percent of the target number of shares,
depending on Lilly EPS growth over the performance period.

The measure of EPS used in the performance award program differs from the measure used in the Bonus Plan in
two ways. First, the EPS goal in the Bonus Plan is set with reference to internal goals that align to our annual
operating plan for the year, while the EPS goal in the performance award program is set based on the expected
growth rates of our peer group. Second, the Bonus Plan measures EPS over a one-year period, while the
performance award program measures EPS over a two-year period. In a given year, the Bonus Plan may pay above
target while the performance award pays below target (or vice versa).

Shareholder Value Awards
Shareholder value awards are earned based on Lilly's share price and relative TSR performance. Shareholder value
awards pay above target if Lilly's stock outperforms an expected rate of return and below target if Lilly's stock
underperforms that expected rate of return. The expected rate of return is based on the three-year TSR that a
reasonable investor would consider appropriate when investing in a basket of large-cap U.S. companies, as
determined by the Compensation Committee. The minimum price to achieve target is calculated by multiplying the
starting share price of Lilly's stock by the three-year compounded expected rate of return less Lilly's dividend yield.
Shareholder value awards have a three-year performance period, and any shares paid are subject to a one-year
holding requirement. No dividends are accrued during the performance period. Executive officers receive no payout
if Lilly's TSR for the three-year period is zero or negative. Possible payouts are based on share price growth and
range from 0 to 150 percent of the target number of shares.

A modifier based on Lilly's three-year cumulative TSR relative to our peer companies' median TSR performance is
applied to executive officer payouts. The committee added the relative TSR modifier to the shareholder value award
to align executive officers' rewards with strong relative performance within the industry. The payout is increased by
one percent for every percentage point that Lilly's TSR exceeds the median (up to a maximum of 20 percent).
Likewise, the payout is reduced by one percent for every percentage point that Lilly’s TSR is below the median
(maximum reduction of 20 percent).

Pay for Performance
The mix of compensation for our named executive officers reflects Lilly’s desire to link executive compensation with
individual and company performance. As reflected in the charts below, a substantial portion of the target pay for
executive officers is performance-based. The annual cash 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 two- and three-year periods (as described above). The charts below depict the annualized mix of
target compensation for Lilly’s CEO and the average for the other named executive officers.

P40

PROXY STATEMENT2019 Target Total Compensation
Performance Review Process
In setting 2019 target compensation for the named executive officers, the Compensation Committee considered
individual contributions, Lilly performance during 2018, internal relativity, peer group data, and input from the CEO
for named executive officers other than himself.

2018 Individual Named Executive Officer Performance
A summary of the Compensation Committee's review of individual named executive officer performance is provided
below:

David Ricks, Chairman, President, and CEO: In accordance with the company’s Corporate Governance Guidelines, the
independent directors conducted an assessment of Mr. Ricks’ performance led by the lead independent director.
The independent directors believe the company largely met or exceeded its combined financial and strategic goals
for 2018 under Mr. Ricks’ leadership. In 2018, Mr. Ricks and his team:

•
•

•

•
•

•

delivered on the company's financial commitments, including with relation to our mid-term guidance
launched new innovative medicines to patients around the world, including the approval of Emgality in the
U.S. and ten other product approvals in Europe, Japan, and the rest of world
progressed numerous potential medicines into Phase 1 and Phase 2 clinical development from both
internal research efforts and external sources
implemented a cross-company productivity agenda resulting in savings that funded increased investment
in research and development and allowed above-plan capital return to shareholders
completed the initial public offering of Elanco in anticipation of Elanco’s complete divestiture in early 2019
built on the company's program to improve diversity and inclusion across the company, increased the
representation of women and minorities in management, and conducted pay equity studies to ensure
equality in pay
drove the refinement of the strategy for Lilly 30x30, a program to improve access to quality health care in
resource-limited settings for 30 million people on an annual basis by 2030, and clarified tactics to ensure
forward progress
improved certain environmental performance areas, such as greenhouse gas emissions, energy efficiency,
waste efficiency, and wastewater.

In addition, the company was named one of the world’s most ethical companies by Ethisphere Institute.

Joshua Smiley, Senior Vice President and Chief Financial Officer: Mr. Smiley contributed to the strong financial
performance of the company in his first year as chief financial officer. Mr. Smiley’s 2018 accomplishments included:

P41

PROXY STATEMENT•
•
•

•
•

•
•
•

drove the company’s 2018 strategic planning and business planning process
led the strategic review of Lilly’s Elanco Animal Health business unit and its initial public offering
championed the company’s productivity agenda during the 2018 strategic and operations planning
processes
co-led the evaluation and due diligence for numerous business development deals
led the capital allocation process allowing for investment in several in-licensing deals and increased
funding for the advancement of new medicines
established excellent rapport with the investment community in his first year as CFO
partnered well with the business unit presidents and chief scientific officer to drive resource allocation
provided leadership and executive sponsorship of Lilly’s Indian Network, an employee resource group
focused on supporting and advancing people of Indian heritage in the company.

Daniel Skovronsky, M.D., Ph.D., Senior Vice President, Chief Scientific Officer, and President, Lilly Research
Laboratories: Dr. Skovronsky became senior vice president and chief scientific officer on June 1, 2018. Prior to this
promotion, Dr. Skovronsky was senior vice president for product development. In 2018, Dr. Skovronsky led efforts
including:

•

•
•

•

advanced innovative medicines through the product pipeline, including the first approval of Emgality in the
U.S., ten other product approvals around the world, and the entry of several new potential medicines into
Phase 1 and Phase 2 testing
co-led the evaluation and due diligence for numerous business development deals
increased the speed of research by expanding the number of internal teams with governance designed to
enable agile decision making
enhanced strategies to further reduce the time drug candidates spend in development, leading to earlier
potential product launch
sponsored an increase in Lilly’s external research efforts, including expansion of key research hubs in
Boston and San Francisco
led diversity and inclusion strategies in research and development to improve innovation and productivity;
acted as executive sponsor of Lilly’s Japanese Network, an employee resource group focused on
supporting and advancing people of Japanese heritage in the company.

Enrique Conterno (retired), Senior Vice President and President, Lilly Diabetes and President, Lilly USA: Mr. Conterno
demonstrated strong leadership of Lilly Diabetes and across the company prior to his retirement effective
December 31, 2019. In 2018, he:

•
•

•

•
•
•

drove volume growth within the diabetes business unit, primarily from newer products
championed the development of new insulin delivery devices incorporating digital technology to provide
patients with better diabetes control
led the company’s U.S. commercial business, which is the company's largest market, as well as the
company's human pharmaceutical commercial operations in China, Japan, and Canada
created the Lilly Diabetes Solutions Center to provide insulin affordability support
initiated late clinical testing for tirzepitide, a potential advancement for the treatment of type 2 diabetes
served as executive sponsor of WILL (Women’s Initiative for Leading at Lilly), the company’s employee
resource group focused on supporting and advancing the development of women across the company.

Michael Harrington (retired), Senior Vice President and General Counsel: Mr. Harrington was effective and influential
in his role as general counsel prior to his retirement effective January 31, 2020, and he was a productive partner
with the executive team. In 2018, he:

•
•

•

defended several key patents, including patents for Alimta in the U.S., Europe, and Japan
developed and implemented legal strategies in the areas of mergers and acquisitions, product liability,
regulatory reform, and pharmaceutical pricing
provided sound legal counsel throughout the Elanco Animal Health initial public offering in anticipation of
its complete divestiture in early 2019 as well as numerous business development deals
influenced the company’s ethics and compliance programs globally to ensure the company lives its long-
standing value of integrity
led a company initiative to increase protection of Lilly's intellectual property assets and partnered with the
chief technology officer to improve cybersecurity

P42

PROXY STATEMENT•

led and served as an executive sponsor of the company’s Pride organization, an employee resource group
focused on supporting and advancing lesbian, gay, bisexual, transgender, and queer/questioning
employees.

2019 Target Compensation
The information below reflects total compensation at target for named executive officers for 2019. The actual
compensation received in 2019 is summarized below in "2019 Compensation Results."

Rationale for Changes to Named Executive Officer Target Compensation
The Compensation Committee established 2019 target total compensation for each named executive officer based
on the named executive officer's 2018 performance, internal relativity, and peer group data.

Base Salary
The following table shows the approved annualized salary effective at the beginning of March for each named
executive officer. Each named executive officer's actual base salary earned during 2019 is reflected in the Summary
Compensation Table in the "Executive Compensation" section of this proxy.

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)

Mr. Harrington (retired)

2018 Annual Base Salary

2019 Annual Base Salary

Increase (effective March 1, 2019)

$1,400,000

$875,000

$900,000

$800,000

$860,300

$1,400,000

$900,000

$840,000

$900,000

—

Annual Cash Bonus Targets
Based on a review of internal relativity, peer group data, and individual performance, the Compensation Committee
decided to increase Mr. Conterno's bonus target and retain the same bonus targets for Mr. Ricks, Mr. Smiley,
Dr. Skovronsky, and Mr. Harrington as in 2018. Bonus targets are shown in the table below as a percentage of each
named executive officer’s earnings from base salary in 2019:

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)

Mr. Harrington (retired)

2018 Bonus Target

2019 Bonus Target

150%

95%

80%

150%

95%

80%

Equity Incentives - Target Grant Values
For 2019 equity grants, the Compensation Committee set the total target values for named executive officers based
on peer group data, individual performance, and internal relativity. Named executive officers have 60 percent of
their equity target allocated to shareholder value awards and 40 percent to performance awards. Total target values
for the 2018 and 2019 equity grants to the named executive officers were as follows:

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)

Mr. Harrington (retired)

2018 Annual Equity Grant

2019 Annual Equity Grant

$10,500,000

$2,700,000

$3,500,000

$2,600,000

$2,550,000

$9,000,000

$2,300,000

$2,600,000

$2,550,000

P43

PROXY STATEMENTPerformance Goals for 2019 Incentive Programs
Annual Cash Bonus Goals
The Compensation Committee established the company performance targets using the company's 2019 annual
operating plan, which was approved by the board in 2018. These targets are described below under "2019
Compensation Results."

2019-2021 Performance Award
In February 2019, the Compensation Committee established a compounded two-year EPS growth target of 5.8
percent per year based on investment analysts’ EPS growth estimates for our peer group companies at that time.
Payouts for the 2019-2021 performance award can range from 0 to 150 percent of the target number of shares, as
shown below:

50% payout

Target

Payout Multiple

0.00

0.50

0.75

1.00

1.25

1.50

Cumulative 2-Year
EPS

$5.10

EPS Growth

$9.87

(2.2)%

$10.48

1.8%

$11.10

$11.75

5.8%

9.8%

$12.41

13.8%

2019-2021 Shareholder Value Award
For purposes of establishing the stock price target for the shareholder value awards, the starting price was $112.38
per share, the average closing stock price for all trading days in November and December 2018. The target share
price was established using the expected annual rate of return for large-cap companies (8 percent), less an
assumed Lilly dividend yield of 2.30 percent. To determine payout, the ending price will be the average closing price
of company stock for all trading days in November and December 2021. The award is designed to deliver no payout
to executive officers if the shareholder return (including projected dividends) is zero or negative. Possible payouts
based on share price ranges are illustrated in the grid below.

Ending Stock Price

Compounded Annual
Share Price Growth
Rate (excluding
dividends)

Less than
$103.43

$103.43 -
$118.07

$118.08 -
$132.72

$132.73 -
$147.37

$147.38 -
$162.02

Greater than
$162.02

Less than
(2.7%)

(2.7%)-1.7%

1.7%-5.7%

5.7%-9.5% 9.5% -13.0%

Greater than
13.0%

Percent of Target

50%

75%

100%

125%

150%

Executive officer awards are subject to a relative TSR modifier, as shown in the grid below. The number of shares to
be paid will increase or decrease by one percent for every percentage point Lilly's three-year TSR deviates from our
peer group's median three-year TSR, capped at 20 percent.

P44

PROXY STATEMENT2019 Compensation Results
The information in this section reflects the amounts paid to named executive officers under the Bonus Plan and for
equity awards granted in prior years for which the relevant performance period ended in 2019.

Lilly Performance
In 2019 we exceeded our targets for EPS and stock price, and nearly achieved our target for revenue. We also
exceeded our target for pipeline progress. Key pipeline highlights include the first regulatory approval for Baqsimi
and Reyvow. The discussion below details the measures used in each program, what the performance goal was to
obtain target performance, how performance outcomes were assessed and what the compensation committee
approved as the final payout multiple.

Bonus Plan
The company utilized revenue change, EPS change, and pipeline progress to incent the achievement of 2019
company objectives. Each measure contributes to the final payout multiple on a weighted basis: Revenue change (25
percent), EPS change (50 percent), and pipeline progress (25 percent). Each performance measure is assessed a
payout multiple contribution of 0 to 200 percent.

The company exceeded its annual cash bonus target for EPS and nearly achieved its target for revenue. The Science
and Technology Committee's assessment of the company's product pipeline achievements is detailed below:

Activity

Objective

Approvals

2 new drug first approvals
11-12 other approvals

Achievement

2 new drug first approvals
15 other approvals

Potential new drug Phase 3 starts

Potential new drug Phase 1 starts

Potential new indication or line extension
Phase 3 starts

12-14

Plan Boldly

Meet industry benchmark for speed of
development

Exceeded industry benchmark for speed of
development

Deliver to Launch

Meet planned project timelines

Met planned project timelines

Qualitative Assessment

Assessment of the chief scientific officer's evaluation of performance against strategic
objectives

Based on the recommendation of the Science and Technology Committee, the Compensation Committee approved a
pipeline multiple of 1.30.

The company's performance compared to targets as well as the resulting bonus multiple, is illustrated below:

P45

PROXY STATEMENTFor additional information on financial results, see Appendix A, "Summary of Adjustments Related to the Annual
Cash Bonus and Performance Award."

When combined, the revenue, EPS, and pipeline multiples yielded a bonus multiple of 1.39.

The 2019 bonuses paid to the applicable named executive officers under the Bonus Plan were as follows:

Name
Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)

Mr. Harrington (retired)

2019 Bonus ($)
$2,919,000

$1,182,948

$1,188,450

$1,100,417

$993,442

2018-2020 Performance Awards
The target cumulative EPS for the 2018-2020 performance award was set in the first quarter of 2018, reflecting
expected industry growth of 8.1 percent each year over the two-year performance period of 2018-2019. The
company's adjusted EPS growth for the two-year period was 24.3 percent. The compensation committee adjusted
non-GAAP EPS by $0.35 for the expected impact of the acquisition of Loxo Oncology, Inc., and to neutralize the
impact of the Elanco divestiture.

P46

PROXY STATEMENTFor the named executive officers other than Dr. Skovronsky, shares earned for the 2018-2019 performance period
are subject to an additional 13-month service-vesting period and are shown in the table below as restricted stock
units. Dr. Skovronsky’s 2018-2019 performance award was paid in shares of Lilly common stock.

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)

Mr. Harrington (retired)

Target Shares

Shares Earned

RSUs Earned

50,258

12,844

16,055

14,519

14,240

N/A

24,083

N/A

75,387

19,266

N/A

21,779

21,360

2017-2019 Shareholder Value Award
The target stock price range of $83.80 to $92.79 (16.1 percent to 28.6 percent total stock price growth) for the
2017-2019 shareholder value award was set in 2017 based on a beginning stock price of $72.15, which was the
average closing price for Lilly stock for all trading days in November and December 2016. The ending stock price of
$119.76 represents stock price growth of approximately 66 percent over the relevant three-year period resulting in a
payout multiple of 1.50.

The TSR modifier applies to those individuals who were executive officers when the award was granted. The
cumulative TSR median for the company’s peer group was 46.6 percent, and Lilly’s TSR over the same period was
78.6 percent. Given this positive relative performance, the shareholder value award payout multiple was increased
by 20 percent, making the final performance multiple 1.80.

The number of shares paid to each of our named executive officers for the 2017-2019 performance period were as
follows:

P47

PROXY STATEMENT
Name
Mr. Ricks

Mr. Smiley*

Dr. Skovronsky*

Mr. Conterno (retired)

Mr. Harrington (retired)

Target Shares
78,089

Shares Paid Out
140,560

5,258

9,764

22,967

21,130

7,887

14,646

41,341

38,034

*The TSR modifier did not apply to Mr. Smiley’s and Dr. Skovronsky’s 2017-2019 shareholder value award payouts
since neither one was an executive officer at the time of grant.

Other Compensation Practices and Information
Employee Benefits
The company offers core employee benefits coverage to:

• provide our workforce with a reasonable level of financial support in the event of illness or injury
• provide post-retirement income
• enhance productivity and job satisfaction through benefit programs that focus on overall well-being.

The benefit programs available to executive officers are offered to all U.S. employees and include medical and
dental coverage, disability insurance, and life insurance. In addition, The Lilly Employee 401(k) plan (401(k) Plan)
and The Lilly Retirement Plan (the Retirement Plan) are intended to 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 Internal Revenue Service (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 generally does not allow personal
use of the corporate aircraft. In rare cases when the security and efficiency benefits outweigh the expense, the
corporate aircraft is made available to Mr. Ricks for personal use. The company did not incur any expenses for
personal use of its aircraft in 2019 by Mr. Ricks, and he did not receive any reportable perquisites. Depending on
seat availability, family members and personal guests may accompany executive officers who are traveling for
business on the company aircraft. There is no incremental cost to the company for these trips by family members
and personal guests.

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 (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 2019” table.

Severance Benefits
Except in the case of certain terminations following a change in control of the company, the company is generally
not obligated to pay severance to executive officers upon termination of their employment; any such payments are
at the discretion of the Compensation Committee.

The company has adopted change-in-control severance pay plans for nearly all employees, including 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.

P48

PROXY STATEMENTHighlights of Our Change-in-Control Severance Plans

all regular employees are covered
double trigger generally required

•
•
• no tax gross-ups
• up to two-year pay protection
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:

• Double trigger: Unlike “single trigger” plans that pay out immediately upon a change in control, our plans
require a “double trigger” — a change in control followed by an involuntary loss of employment within
two years. This is consistent with the plan's intent to provide employees with financial protection upon loss of
employment. With respect to unvested equity, performance to the date of the change in control will be used to
determine the number of shares earned under an award, but vesting does not accelerate immediately upon a
change in control. Rather, the performance-adjusted awards will convert to time-based restricted stock units
that continue to vest with the new company. Shares will pay out upon the earlier of the completion of the
original award period; upon a covered termination; or if the successor entity does not assume, substitute, or
otherwise replace the awards.

• 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
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.

• Employees who suffer a covered termination receive up to two years of pay and 18 months of benefits

protection: These provisions ensure employees a reasonable period of protection of their income and core
employee benefits.

• 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.

• Benefit continuation. Basic employee benefits such as health and life insurance would continue 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.

• Accelerated vesting of equity awards: Any unvested equity awards would vest at the time of a covered

termination.

• 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.

Share Ownership and Retention Guidelines
Share ownership and retention guidelines help create direct alignment of interests between senior management
and shareholders over the longer term. Lilly has established a formal share ownership policy under which the CEO
and other senior executives are required to acquire and hold Lilly shares in an amount representing a multiple of
base salary.

Until the required number of shares is reached, an executive officer must hold 50 percent of all shares, net of tax,
from all equity payouts. Executive officers are also required to hold all shares received from equity program
payouts, net of taxes, for at least one year, even once share ownership requirements have been met. For
performance awards granted to executive officers, this holding requirement is met by the 13-month service-vesting
period after the end of the performance period.

P49

PROXY STATEMENTAll of the named executive officers are compliant with the share ownership guidelines. The following graphic shows
each respective named executive officers' guideline and each named executive officers’ holdings as of December 31,
2019:

Prohibition on Hedging and Pledging Shares
Non-employee directors and employees, including executive officers, 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 (approximately 140 employees in 2019) 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
or vesting period or for disciplinary reasons. In addition, the Compensation Committee has adopted an executive
compensation recovery policy that gives the Compensation Committee broad discretion to claw back incentive
payouts from any member of senior management 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 from an executive officer in the
case of materially inaccurate financial statements or material errors in the performance calculation, whether or not
such inaccuracies or errors 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 a member of senior management during
the last three years. Subsequent changes in status, including retirement or termination of employment, do not
affect the company’s rights to recover compensation under the policy.

Looking Ahead to 2020 Compensation
The executive officer incentive plan (EOIP) was designed to maximize the deductibility of performance-based
compensation under Internal Revenue Code Section 162(m). The changes to the US tax code associated with the Tax
Cuts and Jobs Act of 2017 disallowed the deductibility of any compensation exceeding one million dollars. As a
result, the company is discontinuing the EOIP as of December 31, 2019, and all executive officers will participate in
the Bonus Plan starting January 1, 2020.

The Compensation Committee reviewed and approved an update to the annual equity program that encourages
company leadership to successfully and efficiently execute the company’s business plan, deliver value to Lilly
shareholders, and effectively compete against Lilly’s peers. For 2020, we continued rewarding strong financial
results (as measured by two-year cumulative EPS growth goals) through use of the performance award and

P50

PROXY STATEMENT
continued to encourage delivery of long-term shareholder value (as measured by our three-year absolute stock
price appreciation) through the shareholder value award. However, we discontinued use of the relative TSR modifier
in shareholder value awards granted beginning in 2020 and instead implemented a new award called the relative
value award. The relative value award is based on Lilly’s TSR versus the median TSR of our peer group. If Lilly
outperforms the peer group median TSR, payouts will be at target or higher. If Lilly underperforms the peer group
median TSR, payouts will fall below target or result in no pay out.

We have also aligned all three equity awards to have a maximum payout of 175 percent of target. This is an increase
from 150 percent of target for the performance award design, and a decrease from 180 percent of target for the
prior shareholder value award (including the relative TSR modifier). This adjustment is designed to reward
significant outperformance in each of three important areas: our business plan, total shareholder return, and
performance relative to our peers.

For 2020, Lilly's named executive officers' equity awards were allocated into three separate awards as shown below:

Award Type

Performance Awards

Shareholder Value Awards

Relative Value Awards

Percent

30%

35%

Additional details regarding each award will be provided in the 2021 proxy statement.

P51

PROXY STATEMENTExecutive Compensation

Summary Compensation Table

Name and Principal
Position

Year

Salary
($)

Bonus
($)

Stock
Awards
($) 1

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($) 2

Change in
Pension Value
($) 3

All Other
Compensation
($) 4

Total
Compensation
($)

David A. Ricks

2019

$1,400,000

$12,222,000

Chairman, President, and
Chief Executive Officer

2018

$1,400,000

2017

$1,400,000

Joshua L. Smiley

2019

$895,833

Senior Vice President and
Chief Financial Officer

2018

$875,000

$10,584,000

$10,200,000

$3,142,800

$2,704,800

Daniel M. Skovronsky,
M.D., Ph.D.

Senior Vice President,
Chief Scientific Officer,
and President, Lilly
Research Laboratories

Enrique A. Conterno
(retired)

Senior Vice President and
President, Lilly Diabetes
and President, Lilly USA

Michael J. Harrington
(retired)

Senior Vice President and
General Counsel

2017

N/A

2019

$900,000

2018

$837,500

$4,074,000

$2,806,000

2017

N/A

2019

$833,333

$3,026,400

2018

$794,683

2017

$762,002

2019

$893,383

2018

$860,300

2017

$856,130

$3,057,600

$6,000,000

$2,968,200

$2,998,800

$2,760,000

N/A

$2,919,000

$4,658,242

$84,000

$21,283,242

$3,633,000

$1,529,337

$2,814,000

$1,347,991

$84,000

$17,230,337

$15,845,991

$1,182,948

$2,073,070

$53,750

$7,348,401

$1,438,063

$174,980

$52,500

$5,245,343

N/A

$1,188,450

$446,521

$54,000

$6,662,971

$1,376,431

$75,717

$50,250

$5,145,898

N/A

$1,100,417

$2,165,228

$50,000

$7,175,378

$1,099,842

$816,866

$999,426

$47,681

$45,720

$4,999,806

$8,624,014

$993,442

$2,587,220

$53,603

$7,495,848

$1,190,655

$338,947

$917,771

$1,657,718

$51,618

$51,368

$5,440,320

$6,242,987

1 This column shows the grant date fair value of performance awards and shareholder value awards computed in
accordance with FASB ASC Topic 718. See Note 12 of the consolidated financial statements in the company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2019, for additional detail regarding assumptions underlying
the valuation of equity awards. All values in the “Stock Awards” column were based upon the probable outcome of
performance conditions as of the grant date, which vary year to year.

For purposes of comparison, the supplemental table below shows the total target grant values of stock awards approved
by the Compensation Committee:

2017 Total Equity

2018 Total Equity

2019 Total Equity

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

$8,500,000

N/A

Mr. Conterno (retired)*

$2,500,000

Mr. Harrington (retired)*

$2,300,000

$9,000,000

$2,300,000

$2,600,000

$2,550,000

$10,500,000

$2,700,000

$3,500,000

$2,600,000

$2,550,000

*Due to the retirement of Mr. Conterno on December 31, 2019, and Mr. Harrington on January 31, 2020, the stock awards
granted in 2018 and 2019 will be prorated for time worked in the performance period.

The table below shows the minimum, target, and maximum payouts (using the grant date fair value) for the 2019-2021
performance award included in the Summary Compensation Table, which will payout in January 2022.

P52

PROXY STATEMENTName

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)*

Mr. Harrington (retired)*

Minimum Payout

Target Payout

Maximum Payout

$4,200,000

$1,080,000

$1,400,000

$1,040,000

$1,020,000

$6,300,000

$1,620,000

$2,100,000

$1,560,000

$1,530,000

*Mr. Conterno’s and Mr. Harrington’s 2019-2021 performance award will be prorated for time worked in the performance
period due to retirement.

The table below shows the minimum, target, and maximum payouts (using the grant date fair value) for the 2019-2021
shareholder value award included in the Summary Compensation Table, which will payout in January 2022.

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)*

Mr. Harrington (retired)*

Minimum Payout

Target Payout

Maximum Payout

$6,300,000

$1,620,000

$2,100,000

$1,560,000

$1,530,000

$11,340,000

$2,916,000

$3,780,000

$2,808,000

$2,754,000

*Mr. Conterno’s and Mr. Harrington’s 2019-2021 shareholder value award will be prorated for time worked in the
performance period due to retirement.

2 Payments under the Bonus Plan for performance in the years represented.

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 2019 were driven primarily by the change in the discount rate and increases to pensionable earnings. The
design of the pension benefit plan did not change. See the Pension Benefits in 2019 table below 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 company matching contributions into each individual's 401(k) and nonqualified savings
plan contributions. The company does not reimburse executives for taxes outside of the limited circumstance of taxes
related to a domestic employee relocation or a prior international assignment. There were no reportable perquisites or
personal benefits.

Grants of Plan-Based Awards During 2019
The compensation plans under which the grants in the following table were made are described in the CD&A above and
consist of the Bonus Plan (a non-equity incentive plan) and the Amended and Restated 2002 Lilly Stock Plan (which
provides for performance awards, shareholder value awards, and restricted stock units, among others).

To receive a payout under the performance award or the shareholder value award, a participant must remain employed
with the company through the end of the relevant award period (except in the case of death, disability, retirement, or
plant closing or reduction in workforce). No dividends accrue on either performance awards or shareholder value awards
during the performance period. For performance awards, non-preferential dividends accrue during the 13-month
service-vesting period (following the two-year performance period) and are paid upon vesting.

P53

PROXY STATEMENT
Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards 1

Estimated Possible and Future
Payouts Under Equity
Incentive Plan Awards

Name

Award

Grant Date2

Compensation
Committee
Action Date

Threshold
($)

Target
($)

Maximum
($)

Threshold
(# shares)

Target
(# shares)

Maximum
(# shares)

Mr. Ricks

$525,000 $2,100,000 $4,200,000

All Other
Stock or
Option
Awards:
Number of
Shares of
Stock,
Options, or
Units

Grant Date
Fair Value
of Equity
Awards

2019-2021
PA

2019-2021
SVA

2019-2021
PA

2019-2021
SVA

2019-2021
PA

2019-2021
SVA

2019-2021
PA
2019-2021
SVA

2019-2021
PA

2019-2021
SVA

Mr. Smiley

Dr.
Skovronsky

Mr.
Conterno
(retired)

Mr.
Harrington
(retired)

2/7/2019

12/17/2018

2/7/2019

12/17/2018

18,735

37,470

56,205

$5,922,000

27,353

68,382

123,088

$6,300,000

$212,760

$851,042

$1,702,083

2/7/2019

12/17/2018

2/7/2019

12/17/2018

4,818

9,635

14,453

7,034

17,584

31,651

$213,750

$855,000

$1,710,000

2/7/2019

12/17/2018

2/7/2019

12/17/2018

6,245

12,490

18,735

9,118

22,794

41,029

$197,917

$791,667

$1,583,333

2/7/2019

12/17/2018

2/7/2019

12/17/2018

4,639

9,278

13,917

6,773

16,933

30,479

$178,677

$714,707

$1,429,413

2/7/2019

12/17/2018

2/7/2019

12/17/2018

4,550

9,100

13,650

6,643

16,607

29,893

$1,522,800

$1,620,000

$1,974,000

$2,100,000

$1,466,400

$1,560,000

$1,438,200

$1,530,000

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 Plan payment for 2019 performance was 139 percent of target. Actual
payouts are shown 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.

3 This row shows the possible payouts for the 2019-2021 performance awards ranging from 0 to 150 percent of target. This
performance award will pay out in January 2022. For Mr. Conterno and Mr. Harrington, payouts will be prorated for time
worked during the performance period.

4 This row shows the range of payouts for the 2019-2021 shareholder value awards. This shareholder value award will pay
out in January 2022, with payouts ranging from 0 to 180 percent of target. We measure the fair value of the shareholder
value award on the grant date using a Monte Carlo simulation model. For Mr. Conterno and Mr. Harrington, payouts will
be prorated for time worked during the performance period.

P54

PROXY STATEMENT
Outstanding Equity Awards at December 31, 2019
The 2019 closing stock price used to calculate the values in the table below was $131.43.

Stock Awards

Number of
Shares or
Units of Stock
That Have Not
Vested (#)

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)

75,387

69,350

$9,908,113

$9,114,671

19,266

7,947

$2,532,130

$1,044,474

21,779

20,397

34,615

21,360

18,765

$2,862,414

$2,680,778

$4,549,449

$2,807,345

$2,466,284

Name

Mr.
Ricks

Mr.
Smiley

Dr.
Skovronsky

Mr.
Conterno
(retired)

Mr.
Harrington
(retired)

Award

2019-2021 SVA

2018-2020 SVA

2019-2021 PA

2018-2020 PA

2017-2019 PA

2019-2021 SVA

2018-2020 SVA

2019-2021 PA

2018-2020 PA

2010 RSU Award

2019-2021 SVA

2018-2020 SVA

2019-2021 PA

2019-2021 SVA

2018-2020 SVA

2019-2021 PA

2018-2020 PA

2017-2019 PA

2017 RSU Award

2019-2021 SVA

2018-2020 SVA

2019-2021 PA

2018-2020 PA

2017-2019 PA

Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units,
or Other
Rights
That Have Not
Vested (#)

123,088

235,865

56,205

31,651

60,277

14,453

41,029

40,430

18,735

30,479

68,139

13,917

29,893

66,829

13,650

Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units,
or Other Rights
That Have Not
Vested ($)

$16,177,456

$30,999,737

$7,387,023

$4,159,891

$7,922,206

$1,899,558

$5,392,441

$5,313,715

$2,462,341

$4,005,855

$8,955,509

$1,829,111

$3,928,837

$8,783,335

$1,794,020

1 Shareholder value awards granted for the 2019-2021 performance period will vest on December 31, 2021. The number of
shares reported reflects the maximum payout, which will be made if the average closing stock price in November and
December 2021 is over $162.02. Actual payouts may vary from 0 to 180 percent of target; Mr. Conterno’s and Mr.
Harrington’s payouts will be further prorated for time worked in the performance period. Net shares from any payout
must be held by executive officers for a minimum of one year. Had the performance period ended December 31, 2019, the
payout would have been at 68 percent of target.

2 Shareholder value awards granted for the 2018-2020 performance period will vest on December 31, 2020. The number of
shares reported reflects the maximum payout, which will be made if the average closing stock price in November and
December 2020 is over $120.65. Actual payouts may vary from 0 to 180 percent of target; Mr. Conterno’s and Mr.
Harrington’s payouts will be further prorated for time worked in the performance period. Net shares from any payout
must be held by executive officers for a minimum of one year. Had the performance period ended December 31, 2019, the
payout would have been 180 percent of target. Dr. Skovronsky was not an executive officer at the time of grant, so he
received a 2018-2020 shareholder value award which is not subject to the TSR modifier. As a result, his payouts will
range from 0 to 150 percent of target. Had the performance period ended December 31, 2019, the payout of
Dr. Skovronsky’s awards would have been at 150 percent of target.

3 This number represents the maximum value of performance award shares that could pay out for the 2019-2020

performance period, provided performance goals are met. Once the combined cumulative EPS result and associated

P55

PROXY STATEMENTpayout level are determined at the end of the performance period, the associated number of shares will be granted as
restricted stock units, vesting in February 2022. Actual payouts may vary from 0 to 150 percent of target; Mr. Conterno’s
and Mr. Harrington’s payouts will be further prorated for time worked in the performance period. The number of shares
recorded in the table reflects the payout if the combined cumulative EPS for 2019 and 2020 is at least $12.41.

4 The performance period ended December 31, 2019, for the 2018-2020 performance award resulting in the issuance of

restricted stock units for 150 percent of target shares for Mr. Ricks, Mr. Smiley, Mr. Conterno, and Mr. Harrington. These
restricted stock units will vest in February 2021. Dr. Skovronsky was not an executive officer at the time of grant and was
not subject to the 13-month service-vesting holding period; his award paid out in Lilly stock in February 2020.

5 Restricted stock units vested from the 2017-2019 performance award in February 2020.

6 This grant was made outside of the normal annual cycle in 2010, before Mr. Smiley became an executive officer, and will

vest on October 1, 2020.

7 This grant was made in 2017 and was not scheduled to vest until December 11, 2021. Mr. Conterno forfeited this award

upon his retirement on December 31, 2019.

Options Exercised and Stock Vested in 2019

Option Awards

Stock Awards

Name

Number of Shares
Acquired on Exercise (#)

Value Realized
on Exercise ($)

Number of Shares
Acquired on Vesting (#)

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno
(retired)

Mr. Harrington
(retired)

12,222 2

140,560 3

7,887 3

14,646 3

24,083 4

12,222 2

41,341 3

12,778 2

38,034 3

Value Realized
on Vesting ($)1

$1,464,929

$20,275,780

$1,137,700

$2,112,686

$3,473,973

$1,464,929

$5,963,439

$1,531,571

$5,486,405

1 Amounts reflect the market value of Lilly stock on the day the stock vested.

2 Restricted stock units resulting from the 2016-2018 performance award that vested in February 2019.

3 Payout of the 2017-2019 shareholder value award at 150 percent of target, adjusted by Lilly’s three-year cumulative TSR

(78.4 percent) relative to its peer companies’ median cumulative TSR of 46.6 percent, resulting in a maximum TSR
modifier of 20 percent and a final payout of 180 percent of target. Since Mr. Smiley and Dr. Skovronsky and were not
executive officers when the 2017-2019 shareholder value award was granted, their awards were not subject to the TSR
modifier. As a result, their payout multiple was 150 percent of target.

4 Payout of the 2018-2019 performance award at target for Dr. Skovronsky. He was not an executive officer in 2018 at time

of grant; therefore, no additional 13-month service-vesting period applied.

Retirement Benefits
We provide retirement income to eligible U.S. employees, including executive officers, through the following plans:

•

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.

•

The Retirement Plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See the Pension
Benefits in 2019 table below for additional information about the value of these pension benefits.

P56

PROXY STATEMENTSections 401 and 415 of the Internal Revenue Code generally limit the amount of annual pension that can be paid from a
tax-qualified plan ($225,000 in 2019 and $230,000 in 2020) as well as the amount of annual earnings that can be used to
calculate a pension benefit ($280,000 in 2019 and $285,000 in 2020). However, since 1975 the company has maintained a
nonqualified pension plan that pays eligible 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. Likewise the company maintains a nonqualified savings
plan that allows participants to contribute up to 6 percent of base salary exceeding the IRS limit. The company matches
these contributions in the same manner as described in the 401(k) Plan. For more information, see footnote 2 to the
Nonqualified Deferred Compensation in 2019 table.

The following table shows benefits that the named executive officers have accrued under the Retirement Plan and the
nonqualified pension plan.

Pension Benefits in 2019

Name

Plan

Number of Years of
Credited Service

Present Value of
Accumulated Benefit ($) 1

Payments During
Last Fiscal Year ($)

Mr. Ricks

Mr. Smiley

retirement plan (pre-2010)

retirement plan (post-2009)

nonqualified plan (pre-2010)

nonqualified plan (post-2009)

total

retirement plan (pre-2010)

retirement plan (post-2009)

nonqualified plan (post-2009)

total

Dr. Skovronsky

retirement plan (post-2009)

nonqualified plan (post-2009)

total

Mr. Conterno (retired)

retirement plan (pre-2010)

retirement plan (post-2009)

nonqualified plan (pre-2010)

nonqualified plan (post-2009)

total

Mr. Harrington (retired)

retirement plan (pre-2010)

retirement plan (post-2009)

nonqualified plan (pre-2010)

nonqualified plan (post-2009)

total

$680,071

$306,468

$6,735,928

$3,036,168

$10,758,635

$731,787

$276,901

$2,537,626

$961,298

$4,507,612

$183,466

$693,700

$877,166

$1,001,089

$317,011

$5,206,991

$1,607,072

$8,132,163

$1,090,488

$350,868

$6,293,511

$1,998,139

$9,733,006

1 The following standard actuarial assumptions were used to calculate the present value of each individual’s accumulated

pension benefit:

Discount rate:

Mortality (post-retirement decrement only):

3.44 percent for the qualified plan and 3.25 percent for non-
qualified plan

Private 2012 base table with generational projection using
Scale MP-2019

Pre-2010 joint and survivor benefit (% of pension):

50% until age 62; 25% thereafter

Post-2009 benefit payment form:

Life annuity

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).

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Post-2009 Plan Information: Following amendment of our Retirement Plan formulas, 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 formulas. 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 six 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
three percent for each year from age 65 to age 60 and six percent for each year under age 60. All named executive
officers except Dr. Skovronsky are in this transition group.

Pre-2010 Plan Information: Employees hired prior to February 1, 2008, accrued benefits under both plan formulas. 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:

•

The benefit for employees with between 80 and 90 points is reduced by three percent for each year before the earlier
of 90 points or age 62.
The benefit for employees who have fewer 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 six percent for each year before the earlier of
80 points or age 65.

Nonqualified Deferred Compensation in 2019

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

Mr. Ricks

nonqualified savings

$67,200

$194,115

deferred compensation

total

$67,200

Mr. Smiley

nonqualified savings

$36,950

deferred compensation

total

$36,950

Dr. Skovronsky

nonqualified savings

$37,200

Mr. Conterno
(retired)

Mr. Harrington
(retired)

deferred compensation

total

$37,200

nonqualified savings

$33,200

deferred compensation

$100,000

total

$133,200

nonqualified savings

$36,803

deferred compensation

$35,000

$67,200

$36,950

$37,200

$33,200

$36,803

total

$71,803

$36,803

$194,115

$76,107

$97,803

$245,587

$59,263

$304,850

$117,800

$9,408

$127,208

$1,300,964

$428,836

$466,916

$1,330,031

$1,593,033

$2,923,064

$757,123

$256,359

$1,013,482

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.

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PROXY STATEMENT
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

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Mr. Conterno (retired)

Mr. Harrington (retired)

2019 ($)

Previous Years ($)

Total ($)

$134,400

$270,600

$73,900

$74,400

$166,400

$108,606

$72,000

$67,500

$1,082,002

$442,160

$405,000

$145,900

$141,900

$1,248,402

$550,766

The Nonqualified Deferred Compensation in 2019 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 regards to 401(k) plans. This plan is administered in the same manner as the 401(k)
Plan, with the same participation and investment elections. Executive officers and other U.S. executives may also defer
receipt of all or part of their cash compensation under the Deferred Compensation Plan. Amounts deferred by executives
under this plan are credited with interest at 120 percent of the applicable federal long-term rate as established the
preceding December by the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code with monthly
compounding, which was 3.9 percent for 2019 and is 2.5 percent for 2020. Participants may elect to receive the funds in a
lump sum or in up to 10 annual installments following termination of employment, but may not make withdrawals while
employed by the company, 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 company bankruptcy.

Payments Upon Termination or Change in Control (as of December 31, 2019)
The following table describes the potential payments and benefits under the company’s compensation and benefit plans
and arrangements to which Mr. Ricks, Mr. Smiley, and Dr. Skovronsky 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.

In connection with their retirements, Mr. Conterno and Mr. Harrington received compensation consistent with the
benefits described under “Accrued Pay and Regular Retirement Benefits.”

Continuation
of Medical /
Welfare
Benefits
(present
value) 2

Cash
Severance
Payment 1

Acceleration and
Continuation of
Equity Awards as of
12/31/2019

Total Termination
Benefits

Mr. Ricks

•

Involuntary retirement or termination

$19,022,784

Involuntary or good-reason termination
after change in control

$7,000,000

$185,217

$58,182,142

$65,367,359

Mr. Smiley

•

Involuntary retirement or termination

$3,576,605

Involuntary or good-reason termination
after change in control

$3,510,000

$40,703

$13,605,404

$17,156,107

Dr. Skovronsky

•

Involuntary retirement or termination

Involuntary or good-reason termination
after change in control

$3,510,000

$41,179

$8,189,557

$11,740,736

1 See “Change-in-Control Severance Pay Plan—Cash Severance Payment” below.

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PROXY STATEMENT2 See “Accrued Pay and Regular Retirement Benefits” and “Change-in-Control Severance Pay Plan—Continuation of

medical and welfare benefits” below.

Accrued Pay and Regular Retirement Benefits: The amounts shown in the table above do not include certain payments
and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon
termination of employment. These include:
•

accrued salary, vacation pay, and if applicable, equity payouts prorated for time worked in the performance period
and adjusted for company performance
regular pension benefits under the Retirement Plan and the nonqualified pension plan. See “Retirement Benefits”
above

•

• welfare benefits provided to all U.S. retirees, including retiree medical and dental insurance. The amounts shown in

•

the table above as “Continuation of Medical / Welfare Benefits” are explained below
distributions of plan balances under the 401(k) Plan, the nonqualified savings plan, and the Deferred Compensation
Plan. See the narrative following the Nonqualified Deferred Compensation in 2019 table for information about these
plans.

Death and Disability: A termination of employment due to death or disability does not entitle named executive officers to
any payments or benefits that are not available to U.S. salaried employees generally.

Termination for Cause: Executives terminated for cause receive no severance or enhanced benefits and forfeit any
unvested equity grants.

Change-in-Control Severance Pay Plan: As described in the CD&A under "Other Compensation Practices and
Information - Severance Benefits,” the company maintains a change-in-control severance pay plan for nearly all
employees, including the named executive officers. The change-in-control plan for executive officers defines a change in
control very specifically, but generally the terms include the occurrence of one of the following: (i) acquisition of
20 percent or more of the company’s stock; (ii) replacement by the shareholders of one half or more of the board;
(iii) consummation of a merger, share exchange, or consolidation of the company (other than a transaction that results in
the Lilly shareholders prior to the transaction continuing to hold more than 60 percent of the voting stock of the
combined entity); or (iv) liquidation of the company or sale or disposition of all or substantially all of its assets. The
amounts shown in the table for “involuntary or good-reason termination after change in control” are based on the
following assumptions and plan provisions:
• Covered terminations. The table assumes a termination of employment that is eligible for severance under the
terms of the plan, based on the named executive officer’s compensation, benefits, age, and service credit at
December 31, 2019. Eligible terminations include an involuntary termination for reasons other than for cause or a
voluntary termination by the executive for good reason, within two years following the change in control.

• A termination of an executive officer by the company is for cause if it is for any of the following reasons: (i) the

employee’s willful and continued refusal to perform, without legal cause, his or her material duties, resulting in
demonstrable economic harm to the company; (ii) any act of fraud, dishonesty, or gross misconduct resulting in
significant economic harm or other significant harm to the business reputation of the company; or (iii) conviction
of or the entering of a plea of guilty or nolo contendere to a felony.

• A termination by the executive officer is for good reason if it results from: (i) a material diminution in the nature
or status of the executive’s position, title, reporting relationship, duties, responsibilities, or authority, or the
assignment to him or her of additional responsibilities that materially increase his or her workload; (ii) any
reduction in the executive’s then-current base salary; (iii) a material reduction in the executive’s opportunities to
earn incentive bonuses below those in effect for the year prior to the change in control; (iv) a material reduction
in the executive’s employee benefits from the benefit levels in effect immediately prior to the change in control;
(v) the failure to grant to the executive stock options, stock units, performance shares, or similar incentive rights
during each 12-month period following the change in control on the basis of a number of shares or units and all
other material terms at least as favorable to the executive as those rights granted to him or her on an
annualized average basis for the three-year period immediately prior to the change in control; or (vi) relocation
of the executive by more than 50 miles.

Cash severance payment. The cash severance payment amounts to two times the executive officer's annual base
salary plus two times the executive officer’s bonus target for that year under the Bonus Plan.

Continuation of medical and welfare benefits. This amount represents the present value of the change-in-control
plan’s provision, following a covered termination, of 18 months of continued coverage equivalent to the company’s
current active employee medical, dental, life, and long-term disability insurance. Similar actuarial assumptions to
those used to calculate incremental pension benefits apply to the calculation for continuation of medical and welfare
benefits, with the addition of actual COBRA rates based on current benefit elections.

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•

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PROXY STATEMENT
• Acceleration of equity awards. Upon a covered termination, any unvested equity awards would convert into

restricted stock units of the new company, with the number of shares earned under the awards based on accrued
performance at the time of the transaction. The restricted stock units will continue to vest and pay out upon the
earlier of the completion of the original award period; upon a covered termination; or if the successor entity does not
assume, substitute, or otherwise replace the award. The amount in this column represents the value of the
acceleration of unvested equity grants had a qualifying termination occurred on December 31, 2019.

•

Excise taxes. Upon a change in control, employees may be subject to certain excise taxes under Section 280G of the
Internal Revenue Code. The company does not reimburse the affected employees for those excise taxes or any
income taxes payable by the employee. To reduce the employee's exposure to excise taxes, the employee’s change-
in-control benefit may be decreased to maximize the after-tax benefit to the individual.

Payments Upon Change in Control Alone. In general, the change-in-control plan is a “double trigger” plan, meaning
payments are made only if the employee suffers a covered termination of employment within two years following the
change in control, or in the case of equity awards, if the successor entity does not assume, substitute, or otherwise
replace the awards.

CEO Pay Ratio

Lilly’s compensation and benefits philosophy across the organization is to encourage and reward all employees who
contribute to our success. We strive to ensure the pay of every Lilly employee reflects the level of their job impact and
responsibilities and is competitive within our peer group. Compensation rates are benchmarked and set to be market-
competitive in the country in which the jobs are performed. Lilly’s ongoing commitment to pay equity is critical to our
success in supporting a diverse workforce with opportunities for all employees to grow, develop, and contribute.

The paragraphs that follow describe our calculation methodology and the resulting CEO pay ratio in accordance with the
Dodd-Frank Act of 2010.

Measurement Date
We identified the median employee using our employee population on November 1, 2019. On this date, Lilly employed
approximately 36,000 people, with approximately 15,000 members of our workforce located in the U.S. and approximately
21,000 members of our workforce located outside of the U.S.

Consistently Applied Compensation Measure (CACM)
Under the relevant rules, we identified the median employee by use of a “consistently applied compensation measure,” or
CACM. Specifically, we identified the median employee by looking at annual base pay, bonus opportunity at target, and the
grant date fair value for standard equity awards. We did not adjust the compensation paid to part-time employees to
calculate what they would have been paid on a full-time basis.

De Minimis Exception
Lilly has employees in 79 countries. In identifying the median employee, we excluded 370 workers in the following 8
countries, which represent approximately one percent of our workforce: Bahrain, Greece, Indonesia, Kuwait, Oman,
Pakistan, Qatar, and United Arab Emirates. We excluded these employees because they are affiliated with joint ventures or
third-party distributors, and Lilly does not set their compensation philosophy.

Methodology and Pay Ratio
After applying our CACM and excluding the employees listed above, we identified the median employee. Once the median
employee was identified, we calculated the median employee’s total annual compensation in accordance with the
requirements of the Summary Compensation Table.

Our median employee compensation as calculated using Summary Compensation Table requirements was $96,290. Our
CEO’s compensation as reported in the Summary Compensation Table was $21,283,242. Therefore, our CEO to median
employee pay ratio is 221:1.

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PROXY STATEMENT
Audit Matters

Item 3. Ratification of the Appointment of Independent Auditor

Audit Committee Oversight of Independent Auditor
The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent
auditor, and oversees the process for selecting, reviewing, and evaluating the lead audit partner. Further information
regarding the committee's oversight of the independent auditor can be found in the Audit Committee charter, available
online at lilly.com/who-we-are/governance or upon request to the company's corporate secretary.

In connection with the decision regarding whether to reappoint the independent auditor each year (subject to shareholder
ratification), the committee assesses the independent auditor's performance. This assessment examines three primary
criteria: (1) the independent auditor's qualifications and experience; (2) the communication and interactions with the
auditor over the course of the year; and (3) the auditor's independence, objectivity, and professional skepticism. These
criteria are assessed against an internal and an external scorecard, and are discussed with management during a private
session, as well as in executive session. The committee also periodically considers whether a rotation of the company's
independent auditor is advisable.

Ernst & Young LLP (EY) has served as the independent auditor for the company since 1940. Based on the Audit
Committee’s assessment of EY's performance during 2019, the Audit Committee believes that the continued retention of
EY to serve as the company's independent auditor is in the best interests of the company and its shareholders, and has
therefore reappointed EY as the company’s independent auditor for 2020. In addition to this year's favorable assessment
of EY's performance, we recognize that there are several benefits of retaining a longer-tenured independent auditor. EY
has gained institutional knowledge and expertise regarding the company's global operations, accounting policies and
practices, and internal controls over financial reporting. Audit and other fees are also competitive with peer companies
because of EY's familiarity with the company and its operations. In accordance with the bylaws, this appointment is being
submitted to the shareholders for ratification.

Representatives of EY are expected to be present at the 2020 annual meeting and will be available to respond to questions.
Those representatives will have the opportunity to make a statement if they wish to do so.

Board Recommendation on Item 3

The board recommends that you vote FOR ratifying the appointment of Ernst & Young LLP as independent auditor for
2020.

Audit Committee Report

The Audit Committee reviews the company’s financial reporting process on behalf of the board. Management has the
primary responsibility for the financial statements and the reporting process, including the systems of internal controls
and disclosure controls. In this context, the Audit Committee has met and held discussions with management and the
independent auditor. Management represented to the Audit Committee that the company’s consolidated financial
statements for the year ended December 31, 2019, were prepared in accordance with generally accepted accounting
principles (GAAP), and the committee has reviewed and discussed the audited financial statements and related
disclosures with management and the independent auditor, including a review of the significant management judgments
underlying the financial statements and disclosures.

The independent auditor reports to the Audit Committee, which has sole authority to appoint and to replace the
independent auditor (subject to shareholder ratification).

The Audit Committee has discussed with the independent auditor matters required to be discussed with the Audit
Committee by the standards of the Public Company Accounting Oversight Board (PCAOB) and the NYSE, including the
quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity
of the disclosures in the financial statements. In addition, the Audit Committee has received the written disclosures and
the letter from the independent auditor required by applicable PCAOB rules regarding communications with the Audit
Committee concerning independence, and has discussed with the independent auditor the auditor’s independence from
the company and its management. In concluding that the auditor is independent, the Audit Committee determined, among
other things, that the nonaudit services provided by EY (as described below) were compatible with its independence.
Consistent with the requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), the Audit Committee has

P62

PROXY STATEMENTadopted policies to ensure the independence of the independent auditor, such as prior committee approval of non-audit
services and required audit partner rotation.

The Audit Committee discussed with the company’s internal and independent auditors the overall scope and plans for
their respective audits, including internal control testing under Section 404 of the Sarbanes-Oxley Act. The Audit
Committee periodically meets with the internal and independent auditors, with and without management present, and in
private sessions with members of senior management (such as the chief financial officer and the chief accounting officer)
to discuss the results of their examinations, their evaluations of the company’s internal controls, and the overall quality of
the company’s financial reporting. The Audit Committee also periodically meets in executive session.

In reliance on the reviews and discussions referred to above, the committee recommended to the board (and the board
subsequently approved the recommendation) that the audited consolidated financial statements be included in the
company’s annual report on Form 10-K for the year ended December 31, 2019, for filing with the SEC. The Audit
Committee has also appointed EY as the company’s independent auditor, subject to shareholder ratification, for 2020.

Audit Committee
Jamere Jackson, Chair
Katherine Baicker, Ph.D.
Michael L. Eskew
Jackson P. Tai
Karen Walker

Services Performed by the Independent Auditor
The Audit Committee pre-approves all services performed by the independent auditor, in part to assess whether the
provision of such services might impair the auditor’s independence. The Audit Committee’s policy and procedures are as
follows:

• Audit services: The Audit Committee approves the annual audit services engagement and, if necessary, any changes
in terms, conditions, and fees resulting from changes in audit scope, company structure, or other matters. Audit
services include internal controls attestation work under Section 404 of the Sarbanes-Oxley Act. The Audit Committee
may also pre-approve other audit services, which are those services that only the independent auditor reasonably can
provide.

• Audit-related services: Audit-related services are assurance and related services that are reasonably related to the

performance of the audit or reviews of the financial statements, and that are traditionally performed by the
independent auditor. The Audit Committee believes that the provision of these services does not impair the
independence of the auditor.

• Tax services: The Audit Committee believes that, in appropriate cases, the independent auditor can provide tax

compliance services, tax planning, and tax advice without impairing the auditor’s independence.

• Other services: The Audit Committee may approve other services to be provided by the independent auditor if (i) the
services are permissible under SEC and PCAOB rules, (ii) the Audit Committee believes the provision of the services
would not impair the independence of the auditor, and (iii) management believes that the auditor is the best choice to
provide the services.

• Approval process: At the beginning of each audit year, management requests pre-approval from the Audit Committee
of the annual audit, statutory audits, and quarterly reviews for the upcoming audit year as well as any other services
known at that time. Management will also present at that time an estimate of all fees for the upcoming audit year and
known services. As specific engagements are identified thereafter that were not initially approved, they are brought
forward to the Audit Committee for approval. To the extent approvals are required between regularly scheduled Audit
Committee meetings, pre-approval authority is delegated to the committee chair.

For each engagement, management provides the Audit Committee with information about the services and fees,
sufficiently detailed to allow the committee to make an informed judgment about the nature and scope of the services and
the potential for the services to impair the independence of the auditor.

After the end of the audit year, management provides the committee with a summary of the actual fees incurred for the
completed audit year.

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PROXY STATEMENTIndependent Auditor Fees
The following table shows the fees incurred for services rendered on a worldwide basis by EY in 2019 and 2018. All such
services were pre-approved by the Audit Committee in accordance with the pre-approval policy.

Audit Fees

Annual audit of consolidated and subsidiary financial statements, including Sarbanes-
Oxley 404 attestation, as well as the 2018 audit of consolidated Elanco financial
statements for its initial public offering

Reviews of quarterly financial statements

2019
($ millions)

2018
($ millions)

$14.2

$28.7

Audit-Related Fees

$0.7

$0.9

Primarily related to assurance and related services reasonably related to the
performance of the audit or reviews of the financial statements primarily related to
employee benefit plan and other ancillary audits, and due diligence services on
potential acquisitions

Tax Fees

Total

Tax compliance services, tax planning, tax advice
Primarily related to consulting and compliance services

$2.7

$3.0

$17.6

$32.6

Numbers may not add due to rounding

Management Proposals

Item 4. Proposal to Amend the Company’s Articles of Incorporation to Eliminate
the Classified Board Structure

The company’s articles of incorporation provide that the board is divided into three classes, with each class elected every
three years. On the recommendation of the Directors and Corporate Governance Committee, the board has approved, and
recommends that the shareholders approve, amendments to eliminate the classified board structure in order to provide
for the annual election of all directors. This proposal was brought before shareholders at each of the company’s annual
meetings from 2007 through 2012 and in 2018 and 2019, receiving the vote of a strong majority of the outstanding shares
at each meeting; however, the proposal requires the vote of 80 percent of the outstanding shares to pass.

If approved, this proposal would become effective upon the filing of amended and restated articles of incorporation with
the Secretary of State of Indiana, which the company would do promptly after shareholder approval is obtained. Directors
elected prior to the effectiveness of the amendments would stand for election for one-year terms once their then-current
terms expire. This means that directors whose terms expire at the 2021 and 2022 annual meetings of shareholders would
be presented for election for one-year terms at each respective meeting, and beginning with the 2023 annual meeting, all
directors would be elected for one-year terms at each annual meeting. In the case of any vacancy on the board occurring
after the 2020 annual meeting created by an increase in the number of directors, the vacancy would be filled through an
interim appointment by the board, with the new director to serve a term ending at the next annual meeting. Vacancies
created by resignation, removal, or death would be filled by appointment by the board of a new director to serve until the
end of the term of the director being replaced. This proposal would not change the present number of directors or the
board’s authority to change that number and to fill any vacancies or newly created directorships.

Background of Proposal
As part of its ongoing review of corporate governance matters, the board, assisted by the Directors and Corporate
Governance Committee, considered the advantages and disadvantages of maintaining the classified board structure and
eliminating the supermajority voting provisions in the company’s articles of incorporation (see Item 5 below). The board
considered the view of certain shareholders who believe that classified boards have the effect of reducing the
accountability of directors to shareholders because shareholders are unable to evaluate and consider all directors for
election on an annual basis. The board gave considerable weight to the approval at the 2006 annual meeting of a
shareholder proposal requesting that the board take all necessary steps to elect the directors annually, and to the
favorable votes of a strong majority of the outstanding shares for management’s proposals in the following six years and
again in 2018 and 2019.

P64

PROXY STATEMENTThe board also considered benefits of retaining the classified board structure. A classified structure may provide
continuity and stability in the management of the business and affairs of the company because a majority of the board
always has prior experience as directors of the company. In some circumstances classified boards may enhance
shareholder value by forcing an entity seeking control of the company to initiate discussions at arm’s-length with the
board of the company, because the entity cannot replace the entire board in a single election. The board also considered
that even without a classified board (and without the supermajority voting requirements, which the board also
recommends eliminating), the company has appropriate safeguards to discourage a would-be acquirer from proceeding
with a proposal that undervalues the company and to assist the board in responding to such proposals. These include
other provisions of the company’s articles of incorporation and bylaws as well as certain provisions of Indiana corporation
law.

The board believes it is important to maintain appropriate defenses to inadequate takeover bids, but also important to
retain shareholder confidence by demonstrating that it is accountable and responsive to shareholders. After balancing
these interests, the board has decided to resubmit this proposal to eliminate the classified board structure.

Text of Amendments
Article 9(b) of the company’s articles of incorporation contains the provisions that will be affected if this proposal is
adopted. This article, set forth in Appendix B to this proxy statement, shows the proposed changes, with deletions
indicated by strike-outs and additions indicated by underlining. The board has also adopted conforming amendments to
the company’s bylaws, to be effective immediately upon the effectiveness of the amendments to the articles of
incorporation.

Vote Required
The affirmative vote of at least 80 percent of the outstanding shares of common stock is needed to pass this proposal.

Board Recommendation on Item 4

The board recommends that you vote FOR amending the company's articles of incorporation to eliminate the classified
board structure.

Item 5. Proposal to Amend the Company’s Articles of Incorporation to Eliminate
Supermajority Voting Provisions

Under the company’s articles of incorporation, nearly all matters submitted to a vote of shareholders can be adopted by a
majority of the votes cast. However, our articles require a few fundamental corporate actions to be approved by the
holders of 80 percent of the outstanding shares of common stock (a “supermajority vote”). Those actions are:

• amending certain provisions of the articles of incorporation that relate to the number and terms of office of directors:

the company’s classified board structure (as described under Item 4)
a provision that the number of directors shall be specified solely by resolution of the board

• removing directors prior to the end of their elected term
• entering into mergers, consolidations, recapitalizations, or certain other business combinations with a “related
person”—a party who has acquired at least five percent of the company’s stock (other than the Endowment or a
company benefit plan) without the prior approval of the board

• modifying or eliminating any of the above supermajority voting requirements.

Background of Proposal
This proposal is the result of the board’s ongoing review of corporate governance matters. From 2007 through 2009,
shareholder proposals requesting that the board take action to eliminate the supermajority voting provisions were
supported by a majority of votes cast. From 2010 through 2012 and in 2018 and 2019, the board submitted proposals
seeking shareholder approval to eliminate these supermajority provisions. In all four years, the proposal received a strong
majority of the outstanding shares, but fell short of the required 80 percent vote.

Assisted by the Directors and Corporate Governance Committee, the board considered the advantages and disadvantages
of maintaining the supermajority voting requirements. The board considered that under certain circumstances,
supermajority voting provisions can provide benefits to the company. The provisions can make it more difficult for one or a
few large shareholders to take over or restructure the company without negotiating with the board. In the event of an
unsolicited bid to take over or restructure the company, supermajority voting provisions may encourage bidders to

P65

PROXY STATEMENTnegotiate with the board and increase the board’s negotiating leverage on behalf of the shareholders. They can also give
the board time to consider alternatives that might provide greater value for all shareholders.

The board also considered the potential adverse consequences of opposing elimination of the supermajority voting
requirements. While it is important to the company’s long-term success for the board to maintain appropriate defenses
against inadequate takeover bids, it is also important for the board to maintain shareholder confidence by demonstrating
that it is responsive and accountable to shareholders and committed to strong corporate governance. This requires the
board to carefully balance sometimes competing interests. In this regard, the board gave considerable weight to the fact
that a substantial majority of shares voted have supported eliminating the supermajority voting provisions. Many
shareholders believe that supermajority voting provisions impede accountability to shareholders and contribute to board
and management entrenchment.

The board also considered that even without the supermajority vote (and without the classified board, which the board
also recommends eliminating), the company has appropriate safeguards to discourage a would-be acquirer from
proceeding with a proposal that undervalues the company and to assist the board in responding to such proposals. These
include other provisions of the company’s articles of incorporation and bylaws as well as certain provisions of Indiana
corporation law.

Therefore, the board believes the balance of interests is best served by recommending to shareholders that the articles of
incorporation be amended to eliminate the supermajority voting provisions. By recommending these amendments, the
board is reaffirming its accountability and willingness to take steps that address shareholder-expressed concerns.

Text of Amendments
Articles 9(c), 9(d), and 13 of the company’s articles of incorporation contain the provisions that will be affected if this
proposal is adopted. These articles, set forth in Appendix B to this proxy statement, show the proposed changes with
deletions indicated by strike-outs and additions indicated by underlining.

Vote Required
The affirmative vote of at least 80 percent of the outstanding shares of common stock is needed to pass this proposal.

Board Recommendation on Item 5

The board recommends that you vote FOR amending the company's articles of incorporation to eliminate supermajority
voting provisions.

P66

PROXY STATEMENTShareholder Proposals

Item 6. Proposal to Disclose Direct and Indirect Lobbying Activities and
Expenditures

Service Employees International Union Pension Plans Master Trust, 1800 Massachusetts Ave NW, Suite 301, Washington
DC 20036-1202, beneficial owner of 28,586 shares of our common stock, has submitted the following proposal:

WHEREAS, we believe in full disclosure of Lilly’s direct and indirect lobbying activities and expenditures to assess whether
Lilly’s lobbying is consistent with its expressed goals and in the best interests of shareholders.

RESOLVED, the shareholders of Lilly request the preparation of a report, updated annually, disclosing:

1. Company policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying

communications.

2. Payments by Lilly used for (a) direct or indirect lobbying or (b) grassroots lobbying communications, in each case

including the amount of the payment and the recipient.

3. Lilly’s membership in and payments to any tax-exempt organization that writes and endorses model legislation.

4. Description of management’s and the Board’s decision-making process and oversight for making payments

described in sections 2 and 3 above.

For purposes of this proposal, a “grassroots lobbying communication” is a communication directed to the general public
that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation and (c) encourages
the recipient of the communication to take action with respect to the legislation or regulation. “Indirect lobbying” is
lobbying engaged in by a trade association or other organization of which Lilly is a member.

Both “direct and indirect lobbying” and “grassroots lobbying communications” include efforts at the local, state and
federal levels.

The report shall be presented to the Public Policy and Compliance Committee and posted on Lilly’s website.

Supporting Statement

Lilly spent $75,472,000 from 2010 - 2018 on federal lobbying.1 This does not include state lobbying expenditures in the 48
states where Lilly lobbies2 but disclosure is uneven or absent. Lilly also lobbies abroad, spending between
€700,000-799,000 on lobbying in Europe for 2018.3

Lilly sits on the board of the Pharmaceutical Research and Manufacturers of America (PhRMA) and belongs to the
Chamber of Commerce, which together have spent over $1.9 billion on lobbying since 1998.4 Lilly does not disclose its
payments to trade associations, or the amounts used for lobbying. And Lilly does not disclose its contributions to tax-
exempt organizations that write and endorse model legislation, such as its membership in the American Legislative
Exchange Council (ALEC).

We believe the reputational damage stemming from this misalignment between general policy positions and actual direct
and indirect lobbying efforts harms long-term value creation by Lilly. Thus, we urge Lilly to expand its lobbying disclosure.

___________________________
1 https://www.opensecrets.org/lobby/clientsum.php?id=D000000166&year=2019
2 https://publicintegrity.org/federal-politics/state-politics/here-are-the-interests-lobbying-in-every-statehouse/
3 https://lobbyfacts.eu/representative/f98e6e3980944c0f9171355ef137d799
4 https://www.opensecrets.org/lobby/clientsum.php?id=D000019798; https://www.opensecrets.org/lobby/clientsum.php?
id=d000000504

P67

PROXY STATEMENTStatement in Opposition to the Shareholder Proposal to Disclose Direct and Indirect Lobbying Activities
and Expenditures

The board, through its Public Policy and Compliance Committee, has reviewed this proposal and recommends a vote
against it, as we currently publish a substantial amount of the information requested by the shareholder. Requiring us to
prepare a separate report with this information would place an undue administrative burden on the company and would
not add value, given our transparency with respect to lobbying activities and the governance and risk mitigation
procedures we have in place regarding such activities.

Since 2005, the company has published the following information on our website (lilly.com/LillyPAC) for both direct
company contributions and employee political action committee (PAC) contributions to support candidates for political
office, political parties, officials, or committees in the U.S.:

•
•

•

policies and procedures for company and PAC contributions
contributions to candidates, including information about the candidate's office (for example, state, local, or
federal; House or Senate) and party affiliation
contributions to political organizations and Section 527 organizations reported by state.

This information is updated annually. In addition to the information available on our website, detailed corporate
contributions, PAC contribution data, and the company’s direct lobbying expenses are available to the public on the
Federal Election Committee website (fec.gov/data/) and through individual state agencies. The company’s direct lobbying
expenses are also available to the public on the Lobbying Disclosure page of the U.S. House website
(disclosures.house.gov/ld/ldsearch.aspx) and through individual state agencies.

In addition to direct political contributions, Lilly maintains memberships in certain 501(c)(6)s-trade associations that
report lobbying activity to the U.S. government. We maintain memberships in trade associations and other tax-exempt
organizations specific to business and pharmaceutical industry interests, such as PhRMA (Pharmaceutical Research and
Manufacturers Association), BIO (Biotechnology Association), and the National Association of Manufacturers. We support
organizations that champion public policies that contribute to pharmaceutical innovation, healthy patients, and a healthy
business climate. Information relating to Lilly’s memberships in trade associations to which we contribute $50,000 per
year or more, and any such organizations where Lilly has a board seat can be found on our website. These tax-exempt
organizations are also required to disclose their lobbying expenditures under the Lobbying Act of 1995; they report their
lobbying expenditures to the U.S. Senate. Because the company does not direct the lobbying of trade associations or other
groups, attempting to quantify indirect lobbying would be difficult to estimate and potentially misleading to shareholders.

The board, through its Public Policy and Compliance Committee, also exercises oversight of Lilly’s political expenditures
and lobbying activities. We believe that engaging with policymakers is in the best interest of our shareholders and other
long-term stakeholders. We believe this approach reflects our commitment to stewardship of corporate funds and risk
minimization with respect to such activities.

As a result, the board does not believe any value provided by the requested additional disclosures merits the resources
required to produce the report requested by the proposal.

Board Recommendation on Item 6

The board recommends that you vote AGAINST this proposal.

Item 7. Proposal to Publish a Report on the Effectiveness of the Forced Swim
Test

People for the Ethical Treatment of Animals (PETA), 1536 16th Street N.W., Washington, D.C., beneficial owner of 41
shares of our common stock, has submitted the following proposal:

RESOLVED, given the cruelty inherent in the “Forced Swim Test” (FST), its questionable scientific validity, and the fact that
none of the compounds tested by our Company since 1993 using the FST are marketed as antidepressants, our Company
should assess its effectiveness, and report the findings to shareholders.

P68

PROXY STATEMENTSupporting Statement
In the FST, which the government does not require, animals are dropped into water. They swim trying to escape and avoid
drowning. Eventually they stop struggling.

Authors affiliated with our Company described the FST as a model or test of behavioral despair1 and published papers
between 1993 and 2018 describing FST experiments in which 3,201 mice and 234 rats were used. None of the compounds
tested are currently approved to treat depression. This represents a loss of time and resources to our Company, and
animal suffering.

Our Company uses the FST to purportedly test the antidepressant qualities of compounds2 on the assumption that the
sooner the animal stops swimming, the more depressed the animal is. However, there is evidence that floating is an
adaptive behavior that saves energy and benefits survival,3 and not a sign of depression.

The FST’s ability to accurately predict human antidepressants is further undermined since it yields positive results for
compounds that are not prescribed as human antidepressants,4 and negative results for compounds that are.5 Therefore,
antidepressant compounds may be abandoned if they do not produce desired results in the FST. The applicability of the
FST to human depression has been refuted by experts,6 who cite the use of animal experiments such as the FST as a
major reason for lack of effective treatments.7

Given the animal suffering inherent in the test and the 26 years of failure to produce human-relevant results, our
Company has the ethical, fiscal, and scientific obligation to assess the FST and report its findings to shareholders.

_________________________
1 Benvenga (1993) https://doi.org/10.1016/0014-2999(93)91005-8; O’Neill (2001)
https://doi.org/10.1177/026988110101500104; Li (2001) https://doi.org/10.1016/S0028-3908(00)00194-5; Skolnick (2003)
https://patents.google.com/patent/US7973043B2/ko; Li (2003)
https://link.springer.com/article/10.1023/A:1023648923447; Li (2006) https://doi.org/10.1124/jpet.106.103143;
Benito Collado (2010) https://patents.google.com/patent/WO2011060035A1
2 Bai (2001) https://doi.org/10.1016/S0091-3057(01)00599-8; Li (2003); Witkin (2014)
https://doi.org/10.1124/jpet.114.216804; Chappell (2016) https://pubs.acs.org/doi/10.1021/acs.jmedchem.6b01119;
Dressman (2016) https://doi.org/10.1016/j.bmcl.2016.10.067; Bruns (2018)
https://doi.org/10.1016/j.neuropharm.2017.10.032; Witkin (2018) https://doi.org/10.1016/j.bcp.2018.06.022
3 Molendijk (2015) Immobility in the forced swim test is adaptive and does not reflect depression.
https://doi.org/10.1016/j.psyneuen.2015.08.028
4 Schechter (1979) Non-specificity of “behavioral despair” as an animal model of depression.
https://doi.org/10.1016/0014-2999(79)90212-7
5 Suman (2018) Failure to detect the action of antidepressants in the forced swim test in Swiss mice.
https://doi.org/10.1017/neu.2017.33; Cryan (2002) https://doi.org/10.1016/S0165-6147(02)02017-5
6 Hendrie (2013) The failure of the antidepressant drug discovery process is systemic.
https://doi.org/10.1177%2F0269881112466185; Garner (2014) The significance of meaning: Why do over 90% of behavioral
neuroscience results fail to translate to humans, and what can we do to fix it?
https://doi.org/10.1093/ilar/ilu047; Molendijk (2015); Commons (2017) The rodent forced swim test measures stress-
coping strategy, not depression-like behavior. https://pubs.acs.org/doi/10.1021/acschemneuro.7b00042
7 Hendrie (2013); Garner (2014)

Statement in Opposition to the Shareholder Proposal Seeking a Report on the Effectiveness of the
Forced Swim Test

The board, through its Public Policy and Compliance Committee, has reviewed this shareholder proposal and shares the
concerns raised in it. We abhor mistreatment of animals, and we are committed to the humane treatment of animals in
research. However, as explained below, we do not believe the requested report would further this commitment in any
meaningful way or be a productive use of our resources. Accordingly, the board recommends a vote against the proposal.

For safe and effective medicines to be available to patients, U.S. and foreign regulatory agencies have mandated that a
defined amount of research be performed in animals. Where animals must be used, we strive to take every measure to
assure that the lowest number of animals is used and that discomfort and distress are either eliminated or minimized,
including through adherence to standards set forth in the U.S. Animal Welfare Act. We have been accredited by the
Association for Assessment and Accreditation of Laboratory Animal Care (AAALAC). AAALAC accreditation rules and
standards can be found on the AAALAC website. This accreditation is a voluntary process that includes a detailed,
comprehensive review of our research-animal program, including animal care and use policies and procedures, animal
environment, housing and management, veterinary medical care, and physical plant operations. We consider our policies

P69

PROXY STATEMENTand practices to be in line with leading industry standards as evidenced by our engagement in industry consortia and
professional societies focused on the use of animals in biomedical research (National Association of Biomedical
Research, IQ Consortium, Foundation of Biomedical Research). We currently publish information detailing our
commitment to responsible animal research as well as an overview of our policies and procedures on our website. With
respect to our contractual relationships with select laboratory-animal research and animal-supply companies, we seek to
do business only with organizations that share our commitment to animal welfare.

We do not condone, in any form, the mistreatment of research animals, and we recognize our fundamental ethical and
scientific obligation to ensure the appropriate treatment of animals used in research. We have processes and procedures
in place to ensure humane treatment of animals, including programs for oversight by an internal corporate Animal
Welfare Board, Institutional Animal Care and Use Committees, or an equivalent ethical review board, as well as veterinary
oversight at every site—both ours and contract laboratories. We are committed to quality research-animal care and use,
the responsible use of animals in medical research, and the use of alternative methods whenever possible and
appropriate.

As a result, the board does not believe any value provided by the requested report merits the resources required to
produce the report requested by the proposal.

Board Recommendation on Item 7

The board recommends that you vote AGAINST this proposal.

Item 8. Proposal to Amend the Bylaws to Require an Independent Board Chair

Daughters of Charity, Inc., 4330 Olive Street, St. Louis, Missouri 63108-2622, beneficial owner of 45 shares of our common
stock, has submitted the following proposal:

RESOLVED, Eli Lilly ("Lilly" or the "Company") shareholders request the Board of Directors adopt as policy (the "Policy"),
and amend the bylaws as necessary, to require henceforth that the Chair of the Board of Directors, whenever possible, be
an independent member of the board. The Policy shall apply prospectively so as not to violate any contractual obligations.
If the board determines that a Chair who was independent when selected is no longer independent, the board shall select
a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy
is waived if no independent director is available and willing to serve as Chair.

Supporting Statement
We believe:
•
•
•

The role of the CEO and management is to run the company.
The role of the Board is to provide independent oversight of management and the CEO.
There is a potential conflict of interest for a CEO to have a non-independent director act as Chair.

In 2018, the Minnesota Attorney General sued three makers of synthetic insulin, including Lilly, alleging that the
companies' publication of "deceptive and misleading" list prices for insulin violates federal and state law. According to the
complaint, substantial list price increases for insulin have imposed financial burdens on patients because list prices are
used to determine the amount some patients and institutional purchasers must pay. Congressional hearings have been
held on the rising cost of insulin, and candidates for the Democratic presidential nomination are campaigning on
promises to lower drug prices. Media attention continues to focus on the effects of high insulin prices, including patient
deaths.

Concerns about these risks have led to growing investor interest in the Company's governance practices. In our view,
shareholders are best served by an independent board Chair who can provide a balance of power between the CEO and
the board. The board is responsible for overseeing management, and conflicts of interest may arise when one person
holds both the Chair and CEO positions. We believe that Lilly's board should adopt best practice governance policies,
including having an independent board chair.

As of October 2018, 50% of companies in the S&P 500 have separated the CEO and Chair roles. Numerous institutional
investors recommend such a separation. For example, California's Retirement System CalPERS' Principles & Guidelines
encourage separation, even with a lead director in place. The Council of Institutional Investors' corporate governance
policies favor independent board chairs.

P70

PROXY STATEMENTIn order to ensure that our board can provide rigorous oversight for our Company and management with greater
independence and accountability, we urge a vote FOR this shareholder proposal.

Statement in Opposition to the Shareholder Proposal to Amend the Bylaws to Require an Independent
Board Chair

The board, through its Directors and Corporate Governance Committee and its Public Policy and Compliance Committee,
has reviewed this proposal and recommends a vote against it.

Lilly’s current board leadership structure and corporate governance practices provide effective, independent oversight
of management.

Lilly has a strong, independent board that operates under sound principles of corporate governance. (See pages P4-P5 for
a description of the board’s governance principles.) We believe that combining the roles of board chair and CEO generally
provides the most efficient and effective leadership model for Lilly. Although the chair and CEO roles are combined, we
ensure independent oversight of the company through a counterbalancing governance structure, including a lead
independent director. The board has appointed either a lead independent director or presiding director annually since
2006. Our principles require that at least 75 percent of the board be comprised of independent directors. Other than the
CEO, each of our board members is currently independent (12 out of 13 directors), and all standing board committees are
made up of independent directors and led by independent committee chairs.

Our board has instituted a number of governance best practices to ensure effective independent oversight, including:

•
•

•
•
•

executive sessions of the independent directors held after every regular board meeting
an annual performance evaluation of the chairman and CEO conducted by the independent directors, the
results of which are reviewed with the CEO and considered by the Compensation Committee in
establishing the CEO’s compensation for the next year
a strong, independent, clearly defined lead independent director role
independent director access to management whenever deemed necessary by the independent directors
ability of independent directors and all committees to retain their own independent advisors, at the
company’s expense, whenever they deem it desirable to do so.

Among other duties, the lead independent 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, ensuring that he or she is available for consultation and direct
communication
approving information sent to the board, including meeting agendas and schedules
conducting executive sessions of the independent directors
overseeing the independent directors' annual performance evaluation of the chairman and CEO
together with the board chair and the chair of the Directors and Corporate Governance Committee,
conducting the annual board assessment process
together with the Directors and Corporate Governance Committee, leading the director recruitment
process.

The lead independent director also has authority to call meetings of the independent directors and to retain advisors for
the independent directors. The lead independent director is appointed annually by the board, which conducts an
assessment of his or her performance as part of the annual board assessment process.

Lilly’s current governance structure and practices provide accountability to our stakeholders.

The board is deeply involved in overseeing and managing material risks facing Lilly, including drug pricing and access. The
Public Policy and Compliance Committee of the board, which is composed solely of independent directors, was
established to provide oversight of public policy issues, including access to medicines. Guided by the active oversight of
our independent directors and the Public Policy and Compliance committee, Lilly has taken numerous steps to address
drug pricing concerns, including by making lower-priced insulin available in May 2019 and working to introduce two
additional lower-priced versions of branded insulin by mid-April 2020. Our company plans to continue to be a strong
advocate for reforms that improve access to needed medicines, while balancing the ability to invest in innovation for the
next generation of groundbreaking medicines.

P71

PROXY STATEMENT

Our board of directors believes that our shareholders are best served by preserving the flexibility to determine the
appropriate leadership structure for the company in light of the circumstances at the time.

We believe the proposal would unnecessarily restrict the board’s ability to exercise its fiduciary duty to determine the
board leadership structure most appropriate for the company given the specific circumstances and leadership needs at
any particular point in time. The company's robust governance framework ensures that board leadership is balanced with
independent participation given the extensive involvement of the lead independent director and his oversight. Our
independent directors also collectively bring to the board vast leadership experience, industry expertise, and other critical
skills, and individually have demonstrated the willingness to think and act independently on behalf of shareholders.
Therefore, adopting a proposal that would limit the board's ability to exercise decision making on the appropriate
leadership is not in shareholders' best interests.

We believe independence is essential to strong corporate governance. The dual roles of an executive chair and a strong,
lead independent director are important in balancing inputs to the board. Having one individual serve as both chair and
CEO provides the board with deep insights to drive long-term strategy and execution and allows consistent
communication throughout the company. This is vital to our innovative research and development business with prolonged
product development cycles. Further, the lead independent director, currently a sitting CEO, drives an outside analysis of
company decisions and performance and leads our independent directors in their important oversight function.

Lilly’s independent directors have determined that Mr. Ricks remains eminently qualified to serve as both chair and CEO,
and the board believes that having him fill that combined role, complemented by Mr. Luciano, a strong lead independent
director, strikes an appropriate balance between consistent leadership and independent and effective oversight that is
optimal for the company and our shareholders. For additional information on the particular qualities of Mr. Ricks and why
he is best suited to serve as chair at this time, as well as information on the leadership provided by Mr. Luciano, the lead
independent director, please see “Leadership Structure; Oversight of Chairman, CEO, and Senior Management” on pages
P28-P31. Accordingly, the board believes that the safeguards described above ensure that the board provides independent
and effective oversight of management and the company.

Board Recommendation on Item 8

The board recommends that you vote AGAINST this proposal.

Item 9. Proposal on Board Diversity Requesting Disclosures of Specific
Minimum Qualifications and Board Nominee Skills, Experience, and Ideological
Perspective

The National Center for Public Policy Research, 20 F Street, NW Suite 700, Washington, DC., 20001, beneficial owner of 44
shares of our common stock, has submitted the following proposal:

RESOLVED, that the shareholders of the Eli Lilly & Company (the "Company") request the Board adopt a policy to disclose
to shareholders the following:

1. A description of the specific minimum qualifications that the Board's nominating committee believes must be

met by a nominee to be on the board of directors; and

2. Each nominee's skills, ideological perspectives, and experience presented in a chart or matrix form.

The disclosure shall be presented to the shareholders through the annual proxy statement and the Company's website
within six (6) months of the date of the annual meeting and updated on an annual basis.

Supporting Statement
We believe that boards that incorporate diverse perspectives can think more critically and oversee corporate managers
more effectively. By providing a meaningful disclosure about potential Board members, shareholders will be better able to
judge how well-suited individual board nominees are for the Company and whether their listed skills, experience and
attributes are appropriate in light of the Company's overall business strategy.

The Company's compliance with Item 407(c)(2)(v) of SEC Regulation S-K requires it to identify the minimum skills,
experience, and attributes that all board candidates are expected to possess.

P72

PROXY STATEMENTIdeological diversity contemplates differences in political/policy beliefs.

True diversity comes from diversity of thought. There is ample evidence that many companies operate in ideological
hegemony that eschews conservative people, thoughts, and values. This ideological echo chamber can result in
groupthink that is the antithesis of diversity. This can be a major risk factor for shareholders.

We believe a diverse board is a good indicator of sound corporate governance and a well- functioning board. Diversity in
board composition is best achieved through highly qualified candidates with a wide range of skills, experience, beliefs, and
board independence from management.

We are requesting comprehensive disclosures about board composition and what qualifications the Company seeks for its
Board, therefore we urge shareholders to vote FOR this proposal.

Statement in Opposition to the Shareholder Proposal on Board Diversity Requesting Disclosures of
Specific Minimum Qualifications and Board Nominee Skills, Experience, and Ideological Perspective

The board, through its Directors and Corporate Governance Committee and its Public Policy and Compliance Committee,
has reviewed this proposal and recommends a vote against it. 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. We believe the board is a well-rounded, highly qualified, diverse
group of leaders in various fields, and the caliber of our board members reflects the board’s rigorous process for
evaluating and recommending potential nominees for election to the Board. The “Board Operations and Governance”
section of this proxy statement includes a discussion of the specific skills, qualities, attributes, and experience that led the
board, based upon the recommendation of the Directors and Corporate Governance Committee, to nominate each director
for election to the board.

The board strives to achieve diversity in the broadest sense, including persons diverse in geography, gender, race,
ethnicity, age, and experiences. Although the board does not establish specific diversity goals or have a standalone
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 13 directors range in
age from 48 to 71 and include four women and five members of underrepresented groups.

The Directors and Corporate Governance Committee performs periodic assessments of the overall composition and skills
of the board to ensure that the board and management are actively engaged in succession planning for directors, and that
our board reflects the viewpoints, diversity, and expertise necessary to support our complex and evolving business. The
Directors and Corporate Governance Committee, with input from all board members, also considers the contributions of
the individual directors. The results of these assessments 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.

The skills, qualities, attributes, and experience that the board evaluates when considering a potential nominee do not
include “ideological perspectives.” The board considers a wide range of factors in assessing whether each nominee has
the background, experiences, and attributes necessary to effectively perform the board’s oversight function; however, the
board does not seek to determine any nominee’s ideological perspectives. The board believes that the additional
disclosure requested by this proposal would not be relevant to the board’s process for identifying director candidates or
useful to shareholders in assessing the diversity of backgrounds, experiences, and attributes that should be, and are,
represented on the board.

For these reasons, the board believes that the additional disclosures requested by the proposal would not provide
meaningful information to shareholders.

Board Recommendation on Item 9

The board recommends that you vote AGAINST this proposal.

P73

PROXY STATEMENTItem 10. Proposal to Publish Feasibility Report on Incorporating Public Concern
Over Drug Prices into Senior Executive Compensation Arrangements

Mercy Investment Services, Inc., 2039 North Geyer Road, St. Louis, Missouri 63131, beneficial owner of 73 shares of our
common stock, has submitted the following proposal:

RESOLVED, Eli Lilly and Company (“Lilly”) shareholders request that the Compensation Committee of the board of
directors (the “Committee”) publish a report (at reasonable expense, within a reasonable time, and omitting confidential
or proprietary information) assessing the feasibility of incorporating public concern over high drug prices into the senior
executive compensation arrangements described in Lilly’s annual proxy materials.

Supporting Statement
To reward the creation of long-term value, incentive compensation arrangements for senior executives of pharmaceutical
companies should promote responsible risk management. A key strategic risk now facing pharmaceutical firms is
backlash against the high price of medicines. The effects of high drug prices on patient access, government payer budgets
and the broader health care system have kept drug prices in the public spotlight, especially as campaigning for 2020
presidential and congressional elections intensifies. A 2019 Credit Suisse analyst report stated that US drug price rises
contributed 33% of industry net income growth in 2018 and noted “strong political pressure to reduce absolute drug
prices.” (Global Pharmaceuticals, “Future of US Drug Rebates Under Review,” Apr. 29, 2019, at 4)

Lilly has faced intense scrutiny over pricing of its insulin: The Senate Finance Committee launched an investigation in
early 2019, requesting extensive information on pricing, marketing costs and research and development,1 and Attorneys
General from eight states and the District of Columbia have formally or informally sought information from Lilly about
insulin pricing.2 Media reports regularly highlight increases in the cost of Lilly’s Humalog alongside stories of patients
rationing or going without insulin due to cost.3

We are concerned that Lilly’s senior executive incentive compensation arrangements may not encourage consideration of
risks created by high prices. For example, Lilly uses revenue and earnings per share (EPS) as metrics for the annual
bonus, and EPS growth as the metric for performance awards. (2019 Proxy Statement, at 43-46) Income/EPS and
especially revenue are sensitive to price increases: In 2016, price increases accounted for at least 100% of Lilly’s EPS
growth, according to Credit Suisse. (Global Pharma and Biotech Sector Review: Exploring Future US Pricing Pressure,
Apr. 18, 2017, at 1) Dependence on drug price increases create significant risks, which may be exacerbated when price
hikes drive large senior executive payouts.

Accordingly, we believe it is advisable for the Committee to explore incorporating measures that relate to the financial and
strategic risks created by high drug prices into senior executive compensation arrangements. This Proposal gives the
Committee total discretion in selecting potential measures and in analyzing the feasibility of incorporating them. By way of
illustration, though, such measures could reward executives for increasing access or limit the extent to which price
increases can be used to meet revenue and income targets.

We urge shareholders to vote FOR this proposal.

_________________________

1 See https://www.finance.senate.gov/imo/media/doc/2019-02-22%20CEG%20RW%20to%20Eli%20Lilly%20(Insulin
%20Prices).pdf
2 https://www.cnbc.com/2019/08/02/eli-lilly-subpoenaed-by-new-yorks-ag-over-insulin-prices.html
3 See, e.g., https://www.desmoinesregister.com/story/opinion/editorials/2019/01/31/high-price-insulin-killing-americans-
diabetes/2695313002/;
https://www.washingtonpost.com/news/magazine/wp/2019/01/07/feature/insulin-is-a-lifesaving-drug-but-it-has-
become-intolerably-expensive-and-the-consequences-can-be-tragic/

Statement in Opposition to the Shareholder Proposal to Publish Feasibility Report on Incorporating
Public Concern Over Drug Prices into Senior Executive Compensation Arrangements

The board, through its Public Policy and Compliance Committee and its Compensation Committee, has reviewed this
proposal and recommends against it. As explained below, Lilly has taken actions to demonstrate its commitment to
responsible drug pricing and executive compensation programs. The preparation of the proposed report would not provide
meaningful information to shareholders and would not be a good use of company resources.

P74

PROXY STATEMENTOur management, the Public Policy and Compliance Committee, and the full board regularly review and discuss the
company’s pricing strategy. As a result of these reviews, we have taken a number of measures to address concerns over
drug pricing, including the introduction of multiple cost-saving options to enhance insulin affordability for patients.

With respect to our executive compensation program, the Compensation Committee and the board evaluate executive
officers using a variety of factors, including individual and company performance objectives relating to company strategy,
implementation, and performance as described in the “Compensation Discussion and Analysis” section above. These
objectives are established at the beginning of each year and reviewed to ensure they are consistent with our company
values. By establishing and measuring performance through key short- and long-term objectives and approving any
adjustments to financial results that affect executive compensation payouts, we have sought to mitigate the risk of short-
term tactics being used to inappropriately satisfy performance goals at the expense of long-term value creation. In fact,
our compensation program is designed to encourage strategies that create long-term value aligned with shareholder
returns and provides the Compensation Committee with the discretion to lower incentive payments, where appropriate.

As part of the company’s overall enterprise risk management program, the Compensation Committee, which is composed
entirely of independent directors, also regularly evaluates our compensation policies and practices as part of a risk-
assessment process. During this process, which is described more fully in the “Compensation Committee Matters”
section of the proxy statement, the Compensation Committee considers features of our compensation programs to
determine the likelihood of inappropriate risk-taking.

In light of our drug pricing strategy reviews and compensation program design, including a risk-assessment process, the
feasibility report requested by the proposal is not a productive use of company resources, nor would it create or increase
shareholder value.

Board Recommendation on Item 10

The board recommends that you vote AGAINST this proposal.

Item 11. Proposal to Implement a Bonus Deferral Policy

UAW Retiree Medical Benefits Trust, 777 East Eisenhower Parkway, Suite 800, Ann Arbor, Michigan, 48108, beneficial
owner of 325,663 shares of our common stock, has submitted the following proposal:

RESOLVED, that shareholders of Eli Lilly and Company (“Lilly”) urge the Compensation Committee (the “Committee”) of
the board to change any annual cash incentive program (“Bonus Program”) to provide that an award (a “Bonus”) to a
senior executive that is based on one or more financial measurements (a “Financial Metric”) whose performance
measurement period (“PMP”) is one year or shorter shall not be paid in full for a period (the “Deferral Period”) following
the award, including developing a methodology for determining the length of the Deferral Period and adjusting the
remainder of the Bonus over the Deferral Period.

The methodology described above should allow accurate assessment of risks taken during the PMP that could have
affected performance on the Financial Metric(s) and allow Lilly to recoup Bonus compensation pursuant to its clawback
policy. The changes should be implemented in a way that does not violate any existing contractual obligation or the terms
of any compensation or benefit plan currently in effect.

Supporting Statement
As long-term shareholders, we support compensation policies that align senior executives’ incentives with the company’s
long-term success. We are concerned that short-term incentive plans can encourage senior executives to take on
excessive risk.

In our view, reliance on price increases and anticompetitive practices can create significant risks for pharmaceutical
firms. Lilly has come under fire for repeated increases in the price of its insulin products: Congress has held hearings on
insulin pricing, and media attention has focused on the impact on patient access. The Minnesota and Kentucky Attorneys
General have sued Lilly, claiming that it published “deceptive and misleading” list prices for insulin in order to pay larger
rebates to pharmacy benefit managers. Congressional committees and other states have opened investigations into Lilly’s
insulin pricing and sale.

To foster a longer-term orientation and sounder risk management, this proposal asks that the Committee develop a

P75

PROXY STATEMENTmethodology for withholding some portion of Bonuses to allow adjustment of the unpaid portion during the Deferral
Period. The Committee would have discretion to set the terms and mechanics of this process.

Bonus deferral is widely used in the banking industry, where overly risky behavior was widely viewed as contributing to the
financial crisis. In 2009, the Financial Stability Board, which coordinates national financial authorities in developing strong
financial sector policies, adopted Principles for Sound Compensation Practices and implementation standards for those
principles, including bonus deferral. Deferral is “particularly important” because it allows “late-arriving information about
risk-taking and outcomes” to alter payouts and reduces the need to claw back compensation already paid out, which may
“fac[e] legal barriers,” in the event of misconduct. Banking supervisors in 16 jurisdictions, including the US, have
requirements or expectations regarding bonus deferral. (https://www.fsb.org/wp-content/uploads/P170619-1.pdf)

We urge shareholders to vote FOR this proposal.

Statement in Opposition to the Shareholder Proposal to Implement a Bonus Deferral Policy

The board, through its Compensation Committee, has reviewed this shareholder proposal and understands and
appreciates shareholder and customer concerns regarding drug pricing. Lilly is committed to making medicines
accessible to patients. For some, drug prices can be an access barrier, and our company is proud to have taken steps to
reduce this barrier. While our efforts have been received positively, we believe there is additional opportunity for change
within the complicated medicine delivery model in the U.S.

Our Compensation Committee has structured Lilly’s executive officer compensation with a view toward appropriately
focusing its executive officers on making decisions that are in the best interest of the company. For this reason, a majority
of each executive officer’s compensation, which is reviewed annually by our Compensation Committee, is already aligned
with long-term shareholder growth to promote the delivery of sustainable business results and discourage excessive risk-
taking or other adverse behaviors. Notably, Lilly’s chief executive officer, Mr. Ricks, has a total target pay mix of 75 percent
equity, 15 percent bonus, and 10 percent base pay. Lilly’s remaining executive officers have a pay mix target of 62 percent
equity, 19 percent bonus, and 19 percent base pay. The annual equity awards for all executive officers have a three-year
restriction period.

Further, deferring annual bonus payments to our executive officers does not materially impact our ability to recoup for
clawback purposes. Under our current executive compensation recovery policy, Lilly can recoup payments for up to three
years, and the majority of executive officer pay is already deferred in the form of equity that could be withheld prior to
payment if there were a need to do so. Lastly, while the deferral of the annual bonus payment may mechanically make it
easier to recoup in the unlikely event it were to become necessary, our existing executive compensation recovery policy
provides an avenue for the company to recoup payments while also maintaining a competitive executive compensation
program that enables the company to recruit and retain talent.

For these reasons, we believe implementing a bonus deferral policy is not necessary and not in the best interests of the
company and its shareholders.

Board Recommendation on Item 11

The board recommends that you vote AGAINST this proposal.

Item 12. Proposal to Disclose Clawbacks on Executive Incentive Compensation
Due to Misconduct

Trinity Health, Sixteenth Floor, 766 Brady Avenue, Apt 635, Bronx, New York, 10462, beneficial owner of 50,264 shares of
our common stock, has submitted the following proposal:

RESOLVED, that shareholders of Eli Lilly and Company ("Lilly") urge the board of directors ("Board") to adopt a policy (the
"Policy") that Lilly will disclose annually whether it, in the previous fiscal year, recouped any incentive compensation from
any senior executive or caused a senior executive to forfeit all or part of an incentive compensation award (each, a
"clawback") as a result of applying Lilly's clawback provisions. "Senior executive" includes a former senior executive.
The Policy should provide that the general circumstances of the clawback will be described and that if no clawback of the
kind described above occurred in the previous fiscal year, a statement to that effect will be made. The disclosure
requested in this proposal is intended to supplement, not supplant, any disclosure required by law, regulation or
agreement and the Policy should not apply if disclosure would violate any law, regulation or agreement.

P76

PROXY STATEMENTSupporting Statement
As long-term shareholders, we believe compensation practices should promote sustainable value creation. Lilly has
mechanisms in place to claw back incentive compensation from senior executives in the event of misconduct causing
significant harm to Lilly, a supervisory failure to prevent such misconduct by others, and in the event of materially
inaccurate financial statements or performance calculations.

In 2018, the Minnesota Attorney General accused Lilly of publishing "deceptive and misleading" list prices for insulin. The
complaint urges that artificially high list prices were used to offer higher rebates to pharmacy benefit managers,
increasing costs for patients whose out-of-pocket costs are based on the list price. A similar complaint was filed in 2019
by the Kentucky Attorney General.

Lilly's most recent 10-K discloses that its insulin pricing and sale are the subject of civil investigative demands from the
Attorneys General of Washington and New Mexico and information requests from the Attorneys General of five states and
the District of Columbia. As well, Congressional committees have requested information about Lilly's insulin pricing.
Lilly has not made any proxy statement disclosure regarding the application of its clawback provisions. Such disclosure
would allow shareholders to evaluate the Compensation Committee's use of those provisions and reinforce behavioral
expectations. Disclosure of recoupment from senior executives below the named executive officer level, recoupment from
whom is already required to be disclosed under SEC rules, would be useful for shareholders because these executives
may have business unit responsibilities or otherwise be in a position to take substantial risk or affect company policies.

We are sensitive to privacy concerns and recommend that Policy provide for disclosure that does not violate privacy
expectations (subject to laws requiring fuller disclosure).

We urge shareholders to vote for this proposal.

Statement in Opposition to the Shareholder Proposal to Adopt Policy to Annually Disclose Clawback of
Executive Incentive Compensation

The board, through its Compensation Committee, has reviewed this shareholder proposal and recommends a vote against
it. The board believes our current executive compensation structure, including our executive compensation recovery
policy, strikes an appropriate balance in motivating our executive officers to deliver long-term results for our
shareholders, while simultaneously holding the senior leadership team accountable and discouraging unreasonable risk-
taking. In addition, the board believes the broad disclosure requested by the proposal extends beyond what is required
under existing legal requirements.

Our core values of integrity, excellence, and respect for people guided the creation and implementation of the company’s
existing executive compensation recovery policy, which was adopted in 2013. We hold all employees accountable to these
core values, but we strongly believe that our executive officers carry an even higher burden in ensuring our values are
upheld. To that end, all executives’ incentive compensation is subject to the terms of our clawback policy. Executives may
be subject to the forfeiture or clawback of cash or equity in the event of misconduct that results in disciplinary action, a
material violation of law or company policy, or financial restatements. The board believes that the company's current
ability to recoup employee compensation for up to three years discourages unreasonable risk-taking and reflects our
strong commitment to ethics and integrity.

The company is already subject to U.S. Securities and Exchange Commission's requirements to disclose in its annual
proxy statement when compensation has been recouped, and the amount recouped, from the chief executive officer, chief
financial officer, and other current and former named executive officers who served during the prior fiscal year. If
necessary to understand the company’s executive compensation structure, the company is required to disclose in its
annual proxy statement the reasons for recoupment and how the company determined the amount to be recovered. The
board does not believe that expanding the disclosure requirements to all current and former "senior executives" is
warranted.

Further, the recoupment of incentive compensation is not the only action that is available to address misconduct of our
senior executives. In response to senior executive misconduct or violation of company policy, the company may institute
reasonable and appropriate corrective actions to address misconduct, such as termination or change in job responsibility,
further training, disciplinary action, or material alterations to compensation plans in future years. None of these actions
would be disclosed in an annual report requested by the proposal. As a result, the board believes the annual report
contemplated by the proposal could present a misleading picture of how instances of misconduct are addressed by the
company.

P77

PROXY STATEMENTIn summary, the board believes that adopting a policy requiring an annual report of compensation clawbacks is
unnecessary given the company’s existing executive compensation recovery policy and the U.S. Securities and Exchange
Commission's disclosure requirements discussed above; as a result, the board believes the proposal is not in the best
interests of the company and its shareholders.

Board Recommendation on Item 12

The board recommends that you vote AGAINST this proposal.

Other Information

Meeting and Voting Logistics

Additional Items of Business
We do not expect any items of business other than those set forth above because the deadline for shareholder proposals
and nominations has passed. Nonetheless, if necessary, the accompanying proxy gives discretionary authority to the
persons named on the proxy with respect to any other matters that might be brought before the meeting. Those persons
intend to vote that proxy in accordance with their best judgment.

Voting
Shareholders as of the close of business on March 9, 2020 (the record date) may vote at the 2020 annual meeting. You have
one vote for each share of common stock you held on the record date, including shares:

• held directly in your name as the shareholder of record
• held for you in an account with a broker, bank, or other nominee
• attributed to your account in the company's 401(k) plan.

You may vote your shares in person at the meeting. However, we encourage you to vote by mail, by telephone, or online
even if you plan to attend the meeting.

Required Vote
Below are the vote requirements for the various proposals:

• The five nominees for director will be elected if the votes cast for the nominee exceed the votes cast against the

nominee. Abstentions will not count as votes cast either for or against a nominee.

• The following items of business will be approved if the votes cast for the proposal exceed those cast against the

proposal:

• advisory approval of executive compensation of the named executive officers presented in this proxy statement
• ratification of the appointment of independent auditor
• seven shareholder proposals.

Abstentions will not be counted either for or against these proposals.

• The proposals to amend the articles of incorporation to eliminate the classified board structure and to eliminate

supermajority voting provisions require the vote of 80 percent of the outstanding shares of our common stock. For
these items, abstentions and broker non-votes have the same effect as a vote against the proposals.

Quorum
A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meeting. As of
March 9, 2020, 957,038,447 shares of company common stock were issued and outstanding.

P78

PROXY STATEMENTVoting by Proxy
If you are a shareholder of record, you may vote your proxy by any one of the following methods:

Online. You may vote online at proxyvote.com. Follow the instructions on your proxy card or
notice. If you received these materials electronically, follow the instructions in the email
message that notified you of their availability. Voting online has the same effect as voting by
mail. If you vote online, do not return your proxy card.

By telephone. Shareholders in the U.S., Puerto Rico, and Canada may vote by telephone by
following the instructions on your proxy card or notice. If you received these materials
electronically, follow the instructions in the email message that notified you of their availability.
Voting by telephone has the same effect as voting by mail. If you vote by telephone, do not
return your proxy card.

By mail. Sign and date each proxy card you receive and return it in the prepaid envelope. Sign
your name exactly as it appears on the proxy. If you are signing in a representative capacity (for
example, as an attorney-in-fact, executor, administrator, guardian, trustee, or the officer or
agent of a corporation or partnership), please indicate your name and your title or capacity. If
the stock is held in custody for a minor (for example, under the Uniform Transfers to Minors
Act), the custodian should sign, not the minor. If the stock is held in joint ownership, one owner
may sign on behalf of all owners. If you return your signed proxy but do not indicate your voting
preferences, the proxy holder will vote on your behalf based upon the board’s
recommendations.

You have the right to revoke your proxy at any time before the meeting by (i) notifying the company’s secretary in writing, or
(ii) delivering a later-dated proxy online, by mail, or by telephone. If you are a shareholder of record, you may also revoke
your proxy by voting in person at the meeting.

Voting Shares Held by a Broker
If your shares are held by a broker, the broker will ask you how you want your shares to be voted. You may instruct your
broker or other nominee to vote your shares by following instructions that the broker or nominee provides to you. Most
brokers offer voting by mail, by telephone, and online.

If you give the broker instructions, your shares will be voted as you direct. If you do not give instructions, one of two things
can happen, depending on the type of proposal. For the ratification of the independent auditor, the broker may vote your
shares in its discretion. For all other proposals, the broker may not vote your shares at all.

Voting Shares Held in the Company 401(k) Plan
You may instruct the plan trustee on how to vote your shares in the 401(k) plan online, by mail, or by telephone as
described above, except that, if you vote by mail, the card that you use will be a voting instruction form rather than a proxy
card.

In addition, unless you decline, your vote will apply to a proportionate number of other shares held by participants in the
401(k) plan for which voting directions are not received (except for a small number of shares from a prior stock ownership
plan, which can be voted only on the directions of the participants to whose accounts the shares are credited).

All participants are named fiduciaries under the terms of the 401(k) plan and under the Employee Retirement Income
Security Act (ERISA) for the limited purpose of voting shares credited to their accounts and the portion of undirected
shares to which their vote applies. Under ERISA, fiduciaries are required to act prudently in making voting decisions.

If you do not want to have your vote applied to the undirected shares, you must so indicate when you vote. Otherwise, the
trustee will automatically apply your voting preferences to the undirected shares proportionally with all other participants
who elected to have their votes applied in this manner.

If you do not vote, your shares will be voted in accordance with instructions received from other plan participants who have
elected to have their voting preferences applied proportionally to all shares for which voting instructions are not otherwise
received.

Proxy Cards and Notices
If you received more than one proxy card, notice, or email related to proxy materials, you hold shares in more than one
account. To ensure that all your shares are voted, sign and return each card. Alternatively, if you vote by telephone or

P79

PROXY STATEMENTonline, you will need to cast a vote for each proxy card, notice, or email you receive. If you do not receive a proxy card, you
may have elected to receive your proxy statement electronically, in which case you should have received an email with
directions on how to access the proxy statement and how to vote your shares. If you wish to request a paper copy of these
materials and a proxy card, please call 800-579-1639.

Vote Tabulation
Votes are tabulated by an independent inspector of election, Broadridge Financial Solutions, Inc.

Attending the Annual Meeting - *Admission Procedure*
The meeting will be held at the Lilly Center Auditorium at Lilly Corporate Center.

All shareholders as of close of business on March 9, 2020, may attend the annual meeting. To gain admission, you must
request an admission ticket as described below and present it along with valid, government-issued photo identification,
such as a driver’s license or passport. Your request for an admission ticket must be received before 5:00 p.m. EDT on
April 28, 2020.

Admission tickets are available for registered and beneficial shareholders and for one guest accompanying each
shareholder. If you are attending the meeting as a proxy for or qualified representative of a shareholder, you will need your
legal proxy or authorization letter in addition to your admission ticket and photo identification.

To obtain an admission ticket for you and your guest online, please access “Register for Meeting” at proxyvote.com and
follow the instructions provided. You will need to enter your 16-digit voting control number found in your proxy materials.
You must print a ticket for you and your guest and bring each ticket to the meeting. Each person attending must provide
the admission ticket and photo identification. If you are unable to print the ticket, please call Shareholder Meeting
Support, Broadridge Financial Solutions, Inc. at 844-318-0137 for assistance. Failure to follow these admission procedures
may delay your entry into, or prevent you from being admitted to, our annual meeting.

You can also register to attend the meeting by calling Shareholder Meeting Support, Broadridge Financial Solutions, Inc.,
at 844-318-0137. When registering via phone, you will be placed on the attendee list but will not receive an admission
ticket. You will need to present photo identification to enter the meeting.

To ensure your safety, all attendees and their belongings will pass through a metal detector upon arrival at the annual
meeting. Attendees may also be subject to further security inspections. No photography, videography, or audio recording
is allowed inside Lilly buildings.

Parking will be available on a first-come, first-served basis in the garage indicated on the map at the end of this report. If
you have questions about admittance or parking, please call 855-731-6026 (toll free) or 317-433-5112 (prior to the annual
meeting).

As part of our precautions regarding the coronavirus or COVID-19, we are planning for the possibility that the annual
meeting may be held by means of remote communication. If we take this step, we will announce the decision to do so in
advance, and details on how to participate will be available at investor.lilly.com/proxy.

The 2021 Annual Meeting
The company’s 2021 annual meeting is currently scheduled for May 3, 2021.

Other Matters

Householding
We have adopted a procedure approved by the SEC called "householding." Under the householding procedure, certain
shareholders, whether they own registered shares or shares in street name, who have the same address will receive only
one set of proxy materials, unless one or more of the shareholders at that address has previously notified us that they
want to receive separate copies. Each 401(k) Plan participant will continue to receive a copy of all of the proxy materials.
Regardless of how you own your shares, if you received a single set of proxy materials as a result of householding, and one
or more shareholders at your address would like to have separate copies of these materials with respect to the 2020
annual meeting or in the future, or if you would like to request that only a single set of proxy materials be sent to the
household, please contact Broadridge Financial Solutions, Inc., at 866-540-7095 or 51 Mercedes Way, Edgewood, NY
11717.

P80

PROXY STATEMENTOther Information Regarding the Company’s Proxy Solicitation
The board is soliciting proxies for the 2020 annual meeting. We will pay all expenses in connection with our solicitation of
proxies. We will pay brokers, nominees, fiduciaries, or other custodians their reasonable expenses for sending proxy
material to and obtaining instructions from persons for whom they hold stock of the company. We expect to solicit proxies
primarily by mail and email, but directors, officers, and other employees of the company may also solicit in person or by
telephone, fax, or email. We have retained Georgeson LLC to assist in the distribution and solicitation of proxies.
Georgeson may solicit proxies by personal interview, telephone, fax, mail, and email. We expect that the fee for those
services will not exceed $17,500 plus reimbursement of customary out-of-pocket expenses.

Delinquent Section 16(a) Reports
Under SEC rules, our directors and executive officers are required to file with the SEC reports of holdings and changes in
beneficial ownership of company stock. We have reviewed copies of reports provided to the company, as well as other
records and information. Based on that review, we concluded that all reports were timely filed, except that, due to
administrative errors, Myles O’Neill was late in reporting an equity grant payout that was received by his spouse and then
vested. Each filing was made promptly after the issue was discovered.

By order of the Board of Directors,

Bronwen L. Mantlo
Secretary

March 20, 2020

P81

PROXY STATEMENTAppendix A - Summary of Adjustments Related to the
Annual Cash Bonus and Performance Award

Consistent with past practice, the Compensation Committee adjusted the reported financial results on which the
2019 annual cash bonus and the 2018-2020 performance awards were determined to eliminate the distorting effect
of certain unusual items on incentive compensation performance measures. The adjustments are intended to:

• align award payments with the underlying performance of the core business
• avoid volatile, artificial inflation or deflation of awards due to unusual items in the award year, and, where

relevant, the previous (comparator) year

• eliminate certain counterproductive short-term incentives—for example, incentives to refrain from acquiring
new technologies, to defer disposing of underutilized assets, or to defer settling legacy legal proceedings to
protect current bonus payments

• facilitate comparisons with peer companies.

To ensure the integrity of the adjustments, the Compensation Committee establishes adjustment guidelines in the
first 90 days of the performance period. These guidelines are generally consistent with the company guidelines for
reporting non-GAAP financial measures to the investment community, which are reviewed by the Audit Committee.
The adjustments apply equally to income and expense items. The Compensation Committee reviews all adjustments
and retains downward discretion, i.e., discretion to reduce compensation below the amounts that are yielded by the
adjustment guidelines.

Adjustments for 2019 Bonus Plan
For 2019 bonus calculations, the Compensation Committee made the following adjustments to reported EPS
consistent with our external reporting of non-GAAP financial measures:

• Eliminated the impact of the divestiture of Elanco Animal Health, Inc., (Elanco)
• Eliminated the impact of asset impairments, restructuring, and other special charges
• Eliminated the impact of the gain on sale of the China antibiotics business
• Eliminated the impact of the charge related to the repurchase of debt
• Eliminated the impact of the charges recognized for acquired in-process research development
• Eliminated the impact of amortization of intangible assets
• Eliminated the impact of the Lartruvo charges
• Eliminated the impact of certain income tax items

Reconciliations of these adjustments to our reported EPS are below:

EPS as reported

Eliminate Elanco discontinued operations

EPS as reported from continuing operations

Eliminate asset impairments, restructuring, and other special charges

Eliminate the gain on sale of the China antibiotics business

Eliminate the charge related to the repurchase of debt

Eliminate acquired in-process research and development charges

Eliminate amortization of intangible assets

Eliminate Lartruvo charges

Eliminate impact of reduced shares outstanding for non-GAAP reporting(a)

Eliminate the impact of certain tax items(b)

Non-GAAP EPS

2019

$8.89

(3.93)

$4.96

$0.58

(0.26)

$0.22

$0.21

$0.18

$0.14

$0.07

(0.05)

$6.04

*Numbers may not add due to rounding
(a) Non-GAAP earnings per share assume that the disposition of Elanco occurred at the beginning of all periods presented and, therefore,
exclude the approximately 65.0 million shares of Lilly common stock retired in the Elanco exchange offer.
(b) Amount relates to a tax benefit from a capital loss on the disposition of subsidiary stock.

P82

PROXY STATEMENTAdjustments for 2018-2020 Performance Award
For the 2018-2020 performance award payout calculations, the Compensation Committee made the following
adjustments to reported EPS consistent with our reporting of non-GAAP financial measures:

• 2019: Eliminated the impact of the divestiture of the Elanco
• 2019, 2018, and 2017: Eliminated the impact of asset impairments, restructuring, and other special charges
• 2019: Eliminated the impact of the gain on sale of the China antibiotics business
• 2019: Eliminated the charge related to the repurchase of debt
• 2019, 2018, and 2017: Eliminated the impact of the charges recognized for acquired in-process research and

development

• 2019, 2018, and 2017: Eliminated the impact of amortization of intangible assets
• 2019: Eliminated the impact of Lartruvo charges
• 2019, 2018, and 2017: Eliminated the impact of certain income tax items
• 2018 and 2017: Eliminated the impact of other specified items

In addition to the adjustments consistent with our reporting of non-GAAP financial measures, the Compensation
Committee made the following adjustments:

• When the Compensation Committee set 2018-2020 performance award targets, the divestiture of Elanco (which
occurred in March 2019) was not contemplated and targets were set based on the consolidated financial results
of Lilly and Elanco. Accordingly, the Compensation Committee adjusted the 2019 results to neutralize the EPS
impact of the divestiture reflecting our expected results as if the divestiture never occurred. Amounts presented
in the reconciliation table below for 2018 and 2017 (and related percent growth) include the consolidated results
of Lilly and Elanco as originally reported in our 2018 annual report, prior to the divestiture.

• When the Compensation Committee set 2018-2020 performance award targets, the acquisition of Loxo

Oncology, Inc. (Loxo) (which occurred in February 2019) was not contemplated. Accordingly, the Compensation
Committee adjusted the 2019 results to neutralize the expected EPS impact of the acquisition.

% Growth

2019 vs. 2018

2017

2018 vs. 2017

$(0.19)

Reconciliations of these adjustments to our reported EPS are below:

EPS as reported

Eliminate Elanco discontinued operations

EPS as reported from continuing operations

2019

$8.89

$(3.93)

$4.96

2018

$3.13

Eliminate asset impairments, restructuring, and other
special charges

$0.58

$0.41

Eliminate the gain on sale of the China antibiotics

$(0.26)

Eliminate the charge related to the repurchase of debt

$0.22

Eliminate acquired in-process research and
development charges

Eliminate amortization of intangible assets

Eliminate Lartruvo charges

Eliminate impact of reduced shares outstanding for
non-GAAP reporting(a)

Eliminate the impact of certain tax items(b)

Eliminate other specified items

Non-GAAP EPS

Loxo acquisition adjustment

Elanco divestiture adjustment

Adjusted Non-GAAP EPS

$0.21

$0.18

$0.14

$0.07

$(0.05)

—

$6.04

$0.36

$(0.01)

$6.39

—

$1.83

$0.43

—

$(0.25)

$0.01

$5.55

—

8.8%

$1.23

—

$0.97

$0.44

—

$1.81

$0.03

$4.28

—

29.7%

$5.55

15.1%

$4.28

29.7%

*Numbers may not add due to rounding
(a) For 2019, Non-GAAP earnings per share assume that the disposition of Elanco occurred at the beginning of all periods presented and,
therefore, exclude the approximately 65.0 million shares of Lilly common stock retired in the Elanco exchange offer.
(b) For 2019, amount relates to a tax benefit from a capital loss on the disposition of subsidiary stock. For 2018 and 2017, amounts relate to
U.S. tax reform and tax expenses associated with the separation of Elanco.

P83

PROXY STATEMENTAppendix B - Proposed Amendments to the Company's
Articles of Incorporation

Proposed changes to the company’s articles of incorporation are shown below related to Items 4 and 5, “Items of
Business To Be Acted Upon at the Meeting.” The changes shown to Article 9(b) will be effective if Item 4, "Proposal to
Amend the Company’s Articles of Incorporation to Eliminate the Classified Board Structure,” receives the vote of at least
80 percent of the outstanding shares. The changes to Articles 9(c), 9(d), and 13 will be effective if Item 5, "Proposal to
Amend the Company’s Articles of Incorporation to Eliminate Supermajority Voting Provisions,” receives the vote of at least
80 percent of the outstanding shares. Additions are indicated by underlining and deletions are indicated by strike-outs.
The full text of the company's Articles of Incorporation can be found on our website at: lilly.com/who-we-are/governance.

9. The following provisions are inserted for the management of the business and for the conduct of the affairs of the
Corporation, and it is expressly provided that the same are intended to be in furtherance and not in limitation or exclusion
of the powers conferred by statute:

(a) The number of directors of the Corporation, exclusive of directors who may be elected by the
holders of any one or more series of Preferred Stock pursuant to Article 7(b) (the "Preferred Stock
Directors"), shall not be less than nine, the exact number to be fixed from time to time solely by
resolution of the Board of Directors, acting by not less than a majority of the directors then in office.

(b) Prior to the 2021 annual meeting of directors, the Board of Directors (exclusive of Preferred
Stock Directors) shall be divided into three classes, with the term of office of one class expiring each
year. At the annual meeting of shareholders in 1985, five directors of the first class shall be elected to
hold office for a term expiring at the 1986 annual meeting, five directors of the second class shall be
elected to hold office for a term expiring at the 1987 annual meeting, and six directors of the third class
shall be elected to hold office for a term expiring at the 1988 annual meeting. Commencing with the
annual meeting of shareholders in 19862021, each class of directors whose term shall then expire shall
be elected to hold office for a threeone-year term expiring at the next annual meeting of shareholders. In
the case of any vacancy on the Board of Directors including a vacancy created by an increase in the
number of Directors, the vacancy shall be filled by election of the Board of Directors with the director so
elected to serve for the remainder of the term of the director being replaced or, in the case of an
additional director, for the remainder of the term of the class to which the director has been assigned.
until the next annual meeting of shareholders. All directors shall continue in office until the election and
qualification of their respective successors in office. When the number of directors is changed, any newly
created directorships or any decrease in directorships shall be so assigned among the classes by a
majority of the directors then in office, though less than a quorum, as to make all classes as nearly equal
in number as possible. No decrease in the number of directors shall have the effect of shortening the
term of any incumbent director. Election of directors need not be by written ballot unless the By-laws so
provide.

(c) Any director or directors (exclusive of Preferred Stock Directors) may be removed from office at
any time, but only for cause and only by the affirmative vote of at least 80%a majority of the votes entitled
to be cast by holders of all the outstanding shared of Voting Stock (as defined in Article 13 hereof),
voting together as a single class.

(d) Notwithstanding any other provision of these Amended Articles of Incorporation or of law which
might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of
any particular class of Voting Stock required by law or these Amended Articles of Incorporation, the
affirmative vote of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of
Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article 9.

***

13. In addition to all other requirements imposed by law and these Amended Articles and except as otherwise
expressly provided in paragraph (c) of this Article 13, none of the actions or transactions listed below shall be effected by
the Corporation, or approved by the Corporation as a shareholder of any majority-owned subsidiary of the Corporation if,
P84

P84

PROXY STATEMENTas of the record date for the determination of the shareholders entitled to vote thereon, any Related Person (as
hereinafter defined) exists, unless the applicable requirements of paragraphs (b), (c), (d), (e), and (f) of this Article 13 are
satisfied.

(a) The actions or transactions within the scope of this Article 13 are as follows:

(i) any merger or consolidation of the Corporation or any of itsthe Corporation’s subsidiaries into or with
such Related Person;

(ii) any sale, lease, exchange, or other disposition of all or any substantial part of the assets of
the Corporation or any of itsthe Corporation’smajority-owned subsidiaries to or with such Related
Person;

(iii) the issuance or delivery of any Voting Stock (as hereinafter defined) or of voting securities of
any of the Corporation's majority-owned subsidiaries to such Related Person in exchange for
cash, other assets or securities, or a combination thereof;

(iv) any voluntary dissolution or liquidation of the Corporation;

(iv) any reclassification of securities (including any reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the Corporation with any of its subsidiaries, or
any other transaction (whether or not with or otherwise involving a Related Person) that has the
effect, directly or indirectly, of increasing the proportionate share of any class or series of capital
stock of the Corporation, or any securities convertible into capital stock of the Corporation or
into equity securities of any subsidiary, that is beneficially owned by any Related Person; or

(v) any agreement, contract, or other arrangement providing for any one or more of the actions
specified in the foregoing clauses (i) through (v).

(b) The actions and transactions described in paragraph (a) of this Article 13 shall have been authorized by the
affirmative vote of at least 80% of alla majority of the votes entitled to be cast by holders of all the
outstanding shares of Voting Stock, voting together as a single class.

(c) Notwithstanding paragraph (b) of this Article 13, the 80% voting special shareholder approval requirement set
forth in paragraph (b) shall not be applicable if any action or transaction specified in paragraph (a) is approved by
the Corporation's Board of Directors and by a majority of the Continuing Directors (as hereinafter defined).

(d) Unless approved by a majority of the Continuing Directors, after becoming a Related Person and
prior to consummation of such action or transaction.:

(i) the Related Person shall not have acquired from the Corporation or any of its subsidiaries any newly
issued or treasury shares of capital stock or any newly issued securities convertible into capital stock of
the Corporation or any of its majority-owned subsidiaries, directly or indirectly (except upon conversion
of convertible securities acquired by it prior to becoming a Related Person or as a result of a pro rata
stock dividend or stock split or other distribution of stock to all shareholders pro rata);

(ii) such Related Person shall not have received the benefit directly or indirectly (except
proportionately as a shareholder) of any loans, advances, guarantees, pledges, or other financial
assistance or tax credits provided by the Corporation or any of its majority-owned subsidiaries, or
made any major changes in the Corporation's or any of its majority-owned subsidiaries' businesses
or Corporation's capital stock below the rate in effect immediately prior to the time such Related
Person became a Related Person; and

(iii) such Related Person shall have taken all required actions within its power to ensure that the
Corporation's Board of Directors included representation by Continuing Directors at least proportionate
to the voting power of the shareholdings of Voting Stock of the Corporation's Remaining Public
Shareholders (as hereinafter defined), with a Continuing Director to occupy an additional Board position
if a fractional right to a director results and, in any event, with at least one Continuing Director to serve
on the Board so long as there are any Remaining Public Shareholders.

P85

PROXY STATEMENT

(e) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, as amended,
whether or not the Corporation is then subject to such requirements, shall be mailed to the shareholders of the
Corporation for the purpose of soliciting shareholder approval of such action or transaction and shall contain at
the front thereof, in a prominent place, any recommendations as to the advisability or inadvisability of the action
or transaction which the Continuing Directors may choose to state and, if deemed advisable by a majority of the
Continuing Directors, the opinion of an investment banking firm selected by a majority of the Continuing Directors
as to the fairness (or not) of the terms of the action or transaction from a financial point of view to the Remaining
Public Shareholders, such investment banking firm to be paid a reasonable fee for its services by the
Corporation. The requirements of this paragraph (ed) shall not apply to any such action or transaction which is
approved by a majority of the Continuing Directors.

(f) For the purpose of this Article 13

(i) the term "Related Person" shall mean any other corporation, person, or entity which beneficially owns
or controls, directly or indirectly, 5% or more of the outstanding shares of Voting Stock, and any Affiliate
or Associate (as those terms are defined in the General Rules and Regulations under the Securities
Exchange Act of 1934) of a Related Person; provided, however, that the term Related Person shall not
include (a) the Corporation or any of its subsidiaries, (b) any profit-sharing, employee stock ownership or
other employee benefit plan of the Corporation or any subsidiary of the Corporation or any trustee of or
fiduciary with respect to any such plan when acting in such capacity, or (c) Lilly Endowment, Inc.; and
further provided, that no corporation, person, or entity shall be deemed to be a Related Person solely by
reason of being an Affiliate or Associate of Lilly Endowment, Inc.;

(ii) a Related Person shall be deemed to own or control, directly or indirectly, any outstanding shares of
Voting Stock owned by it or any Affiliate or Associate of record or beneficially, including without limitation
shares

a. which it has the right to acquire pursuant to any agreement, or upon exercise of conversion
rights, warrants, or options, or otherwise or

b. which are beneficially owned, directly or indirectly (including shares deemed owned through
application of clause a. above), by any other corporation, person, or other entity with which it or
its Affiliate or Associate has any agreement, arrangement, or understanding for the purpose of
acquiring, holding, voting, or disposing of Voting Stock, or which is its Affiliate (other than the
Corporation) or Associate (other than the Corporation);

(iii) the term "Voting Stock" shall mean all shares of any class of capital stock of the Corporation which
are entitled to vote generally in the election of directors;

(iv) the term "Continuing Director" shall mean a director who is not an Affiliate or Associate or
representative of a Related Person and who was a member of the Board of Directors of the Corporation
immediately prior to the time that any Related Person involved in the proposed action or transaction
became a Related Person or a director who is not an Affiliate or Associate or representative of a Related
Person and who was nominated by a majority of the remaining Continuing Directors; and

(v) the term "Remaining Public Shareholders" shall mean the holders of the Corporation's capital stock
other than the Related Person.

(g) A majority of the Continuing Directors of the Corporation shall have the power and duty to determine for the
purposes of this Article 13, on the basis of information then known to the Continuing Directors, whether (i) any
Related Person exists or is an Affiliate or an Associate of another and (ii) any proposed sale, lease, exchange, or
other disposition of part of the assets of the Corporation or any majority-owned subsidiary involves a substantial
part of the assets of the Corporation or any of its subsidiaries. Any such determination by the Continuing
Directors shall be conclusive and binding for all purposes.

(h) Nothing contained in this Article 13 shall be construed to relieve any Related Person or any Affiliate or
Associate of any Related Person from any fiduciary obligation imposed by law.

P86

PROXY STATEMENT(i) The fact that any action or transaction complies with the provisions of this Article 13 shall not be construed to
waive or satisfy any other requirement of law or these Amended Articles of Incorporation or to impose any
fiduciary duty, obligation, or responsibility on the Board of Directors or any member thereof, to approve such
action or transaction or recommend its adoption or approval to the shareholders of the Corporation, nor shall
such compliance limit, prohibit, or otherwise restrict in any manner the Board of Directors, or any member
thereof, with respect to evaluations of or actions and responses taken with respect to such action or transaction.
The Board of Directors of the Corporation, when evaluating any actions or transactions described in paragraph (a)
of this Article 13, shall, in connection with the exercise of its judgment in determining what is in the best interests
of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation
the social and economic effects on the employees, customers, suppliers, and other constituents of the
Corporation and its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or
are located.

(j) Notwithstanding any other provision of these Amended Articles of Incorporation or of law which might
otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular
class of Voting Stock required by law or these Amended Articles of Incorporation, the affirmative vote of the
holders of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock,
voting together as a single class, shall be required to alter, amend, or repeal this Article 13.

P87

PROXY STATEMENTDirections and Parking
From I-70 take Exit 79B; follow signs to McCarty Street. Turn right (east) on McCarty Street; go straight into Lilly
Corporate Center. You will be directed to parking. Parking will be available on a first-come, first-served basis in the
garage. Entrance to the Lilly Center Auditorium is adjacent to the parking garage.

P88

PROXY STATEMENTCorporate Information

A N N U A L M E E T I N G
The annual meeting of shareholders will be held at
the Lilly Center Auditorium, Lilly Corporate Center,
Indianapolis, Indiana, on Monday, May 4, 2020,
at 11:00 a.m. EDT. For more information, see the
proxy statement section of this report.

1 0 - K A N D 1 0 - Q R E P O R T S
Paper copies of the company’s annual report to the
Securities and Exchange Commission on Form 10-K
and quarterly reports on Form 10-Q are available
upon written request to:

ELI LILLY AND COMPANY
c/o Corporate Secretary
Lilly Corporate Center
Indianapolis, Indiana 46285

To access these reports more quickly, you can find all of
our SEC filings online at: investor.lilly.com/sec.cfm.

S T O C K L I S T I N G S
Eli Lilly and Company common stock is listed on the
New York Stock Exchange. NYSE ticker symbol: LLY.

C E O A N D C F O C E R T I F I C A T E S
The company’s chief executive officer and chief financial
officer have provided all certifications required under
Securities and Exchange Commission regulations with
respect to the financial information and disclosures in this
report. The certifications are available as exhibits to the
company’s Form 10-K and 10-Q reports.

In addition, the company’s chief executive officer has
filed with the New York Stock Exchange a certification to
the effect that, to the best of his knowledge, the company
is in compliance with all corporate governance listing
standards of the Exchange.

T R A N S F E R A G E N T A N D R E G I S T R A R
EQ SHAREOWNER SERVICES
Mailing Address:

EQ SHAREOWNER SERVICES
P.O. Box 64854
St. Paul, Minnesota 55164-0854

Overnight Address:

EQ SHAREOWNER SERVICES
1110 Centre Pointe Curve, Suite 101
Mendota Heights, Minnesota 55120-4100

Telephone: 1-800-833-8699
E-mail: stocktransfer@eq-us.com
Internet: www.shareowneronline.com

D I V I D E N D R E I N V E S T M E N T
A N D S T O C K P U R C H A S E P L A N
EQ Shareowner Services administers the Shareowner
Service Plus Plan, which allows registered shareholders
to purchase additional shares of Lilly common stock
through the automatic investment of dividends. The plan
also allows registered shareholders and new investors to
purchase shares with cash payments, either by check or by
automatic deductions from checking or savings accounts.
The minimum initial investment for new investors is
$1,000. Subsequent investments must be at least $50.
The maximum cash investment during any calendar
year is $150,000. Please direct inquiries concerning the
Shareowner Service Plus Plan to:
EQ SHAREOWNER SERVICES
P.O. Box 64856
St. Paul, Minnesota 55164-0856
Telephone: 1-800-833-8699

O N L I N E D E L I V E R Y O F P R O X Y M A T E R I A L S
Shareholders may elect to receive annual reports
and proxy materials online. This reduces paper mailed
to the shareholder’s home and saves the company
printing and mailing costs. To enroll, go to
investor.lilly.com/services.cfm and follow the
directions provided.

Eli Lilly and Company

LILLY C ORPORATE CENT ER, IND IA NA POLI S, I N 46285 U SA | 317.276.2000 | LI LLY.C O M