Eli Lilly and Company Annual Report 2020

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FY2020 Annual Report · Eli Lilly and Company

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2020 Eli Lilly
and Company
Annual Report

2020 ANNUAL REPORT ON FORM 10-K
NOTICE OF 2021 ANNUAL MEETING
PROXY STATEMENT

2020 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 2 0

2 0 1 9

C H A N G E %

Year ended December 31

REVENUE

RESEARCH AND DEVELOPMENT

RESEARCH AND DEVELOPMENT AS A PERCENT OF REVENUE

NET INCOME

EARNINGS PER SHARE—DILUTED

RECONCILING ITEMS:

Acquired in-process research and development1

Amoritization of intangible assets

Asset impairment, restructuring, and other special charges1

Discontinued Operations from disposition of Elanco¹

Gain on sale of China antibiotics business¹

Charge related to repurchase of debt¹

Charges related to withdrawal of Lartruvo

Impact of reduced shares outstanding for non-GAAP reporting²

Income taxes³

NON-GAAP EARNINGS PER SHARE—DILUTED4

DIVIDENDS PAID PER SHARE

CAPITAL EXPENDITURES

TOTAL EMPLOYEES AS OF DECEMBER 31

$ 24,539.8

$ 22,319.5

6,085.7

24.8%

5,595.0

25.1%

$ 6,193.7

$ 8,318.4

6.79

0.64

0.36

0.14

7.93

2.96

1,387.9

34,960

8.89

0.21

0.18

0.58

(3.93)

(0.26)

0.22

0.14

0.07

(0.05)

6.04

2.58

1,033.9

33,755

10%

(26%)

(24%)

31%

15%

34%

1 For more information on these reconciling items, see the Executive Overview in Management’s Discussion and Analysis in the 2020 Annual Report on Form 10-K. 2 Non-GAAP earnings
per share assume that the disposition of Elanco occurred at the beginning of 2019 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. 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

$24,539.8

$19,973.8

$18,312.8

Revenue in Diabetes increased 6 percent primarily driven
by growth of Trulicity and Jardiance. Oncology revenue
increased 15 percent driven by Verzenio, Alimta, Tyvyt, and
Cyramza. Taltz and Olumiant drove the 37 percent revenue
increase in Immunology. Neuroscience experienced a
6 percent increase driven by Emgality and Cymbalta, offset
in part by the decrease in Strattera due to previous patent
losses. Other Pharmaceutical revenue increased 1 percent
driven by revenue from bamlanivimab*, offset by lower
volumes for Cialis and Forteo, due to patent losses.

Revenue

R&D

Marketing, Selling & Administrative

Over the past five years, Lilly continued
to invest in research and development
while reducing marketing, selling, and
administrative expenses, which resulted in
continued improvement in operating expenses
as a percent of revenue.

31.9%

27.5%

30.0%

25.5%

27.8%

23.5%

25.1%

24.9%

24.8%

2016

2017

2018

2019

2020

$11,834.4
+6%

$3,092.8
+1%

$2,461.9
+37%

$1,831.3
+6%

$5,319.3
+15%

Diabetes

Neuroscience

Oncology

Immunology

Other

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
17.7 percent, compared to 15.2 percent for the
S&P benchmark, and 7.2 percent compared to
Peer Group, due to the increase in the stock
price and increasing dividend stream.

$250

$200

$150

$100

$50

2015

2016

2017

2018

2019

2020

*Bamlanivimab sales are pursuant to Emergency Use Authorization.

*The graph measures total shareholder return, which takes into account both stock price and dividends.
It assumes that dividends paid by a company are immediately reinvested in that company’s stock. See Item 5 of
the 2020 Annual Report on Form 10-K for those companies included in our peer group.

Table of Contents

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

2020 Financial Highlights ....................................................................................................................Inside front cover

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

2 0 2 0 A N N U A L R E P O R T O N F O R M 1 0 - K

Forward-Looking Statements ..................................................................................................................................... F3

Business ...................................................................................................................................................................... F5

Risk Factors ............................................................................................................................................................... F23

Unresolved Staff Comments ...................................................................................................................................... F31

Properties .................................................................................................................................................................. F31

Legal Proceedings ..................................................................................................................................................... F31

Mine Safety Disclosures ............................................................................................................................................ F31

Market for the Registrant’s Common Equity, Related Stockholer Matters, and Issuer Purchases of Equity

Securities................................................................................................................................................................... F32

Management’s Discussion and Analysis of Results of Operations and Financial Condition .................................... F34

Quantitative and Qualitative Disclosures About Market Risk ................................................................................... F56

Financial Statements and Supplementary Data ....................................................................................................... F57

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................ F120

Controls and Procedures ......................................................................................................................................... F120

Other Information .................................................................................................................................................... F120

Directors, Executive Officers, and Corporate Governance ...................................................................................... F121

Executive Compensation ......................................................................................................................................... F121

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters................F122

Certain Relationships and Related Transactions, and Director Independence ...................................................... F122

Principal Accountant Fees and Services ................................................................................................................. F122

Exhibits and Financial Statement Schedules .......................................................................................................... F123

Form 10-K Summary ............................................................................................................................................... F125

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

Notice of 2021 Annual Meeting of Shareholders ......................................................................................................... P1

Proxy Statement Summary .......................................................................................................................................... P3

Governance ................................................................................................................................................................ P13

Shareholder Engagement on Governance Issues ..................................................................................................... P39

Ownership of Company Stock .................................................................................................................................... P41

Compensation ............................................................................................................................................................ P42

Audit Matters ............................................................................................................................................................. P74

Management Proposals ............................................................................................................................................. P76

Shareholder Proposals .............................................................................................................................................. P78

Other Information ...................................................................................................................................................... P85

Appendix A ................................................................................................................................................................. P89

Appendix B ................................................................................................................................................................. P92

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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2020

Commission file number 001-06351

ELI LILLY AND COMPANY

(Exact name of Registrant as specified in its charter)

Indiana
(State or other jurisdiction of
incorporation or organization)

35-0470950

(I.R.S. Employer
Identification No.)

Lilly Corporate Center, Indianapolis, Indiana 46285
(Address and zip code of principal executive offices)

Registrant’s telephone number, including area code (317) 276-2000

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of Each Class

Common Stock (no par value)
1.000% Notes due 2022

7 1/8% Notes due 2025

1.625% Notes due 2026

2.125% Notes due 2030

0.625% Notes due 2031

6.77% Notes due 2036

1.700% Notes due 2049

Trading Symbol(s)
LLY

Name of Each Exchange On Which Registered
New York Stock Exchange

LLY22

LLY25

LLY26

LLY30

LLY31

LLY36

LLY49A

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant
was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒
Non-accelerated filer ☐

Accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management's assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No ☒
Aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter: approximately $138,907,000,000.

Number of shares of common stock outstanding as of February 12, 2021: 958,425,693

Portions of the Registrant’s Proxy Statement for the 2021 Annual Meeting of Shareholders have been incorporated by reference into Part
III of this report.

Eli Lilly and Company

Form 10-K
For the Year Ended December 31, 2020

Table of Contents

Part I

Item 1.

Business

Item 1A.

Risk Factors

Item 1B.

Unresolved Staff Comments

Item 2.

Item 3.

Item 4.

Part II

Item 5.

Item 6.

Item 7.

Properties

Legal Proceedings

Mine Safety Disclosures

Market for the Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities

[Reserved]
Management's Discussion and Analysis of Results of Operations and Financial
Condition

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

Item 8.
Item 9.

Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

Item 9A.

Controls and Procedures

Item 9B.

Other Information

Part III

Item 10.

Directors, Executive Officers, and Corporate Governance

Item 11.
Item 12.

Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accountant Fees and Services

Item 15.

Exhibits and Financial Statement Schedules

Item 16.

Form 10-K Summary

Page

F23

F31

F32

F34

F56

F57
F120

F120

F121

F121
F122

F122

F123

F125

ANNUAL REPORT ON FORM 10-KForward-Looking Statements
This Annual Report on Form 10-K and our other publicly available documents include forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 (Exchange Act), and are subject to the safe harbor created thereby under the Private
Securities Litigation Reform Act of 1995. 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 include all statements that do not relate solely to
historical or current facts, and generally can be identified by the use of words such as “may,” “believe,” “will,”
“expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue,” or similar expressions or future or
conditional verbs.

Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to
differ materially from those expressed in forward-looking 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.
Investors therefore should not place undue reliance on forward-looking statements. The following include
some but not all of the factors that could cause actual results or events to differ materially from those
anticipated:

•

the impact of the evolving COVID-19 pandemic and the global response thereto;

uncertainties related to our efforts to develop potential treatments for COVID-19;

the significant costs and uncertainties in the pharmaceutical research and development process, including
with respect to the timing and process of obtaining regulatory approvals;

the impact of acquisitions and business development transactions and related integration costs;

the expiration of intellectual property protection for certain of our products and competition from generic
and/or biosimilar products;

our ability to protect and enforce patents and other intellectual property;

changes in patent law or regulations related to data package exclusivity;

competitive developments affecting current products and our pipeline;

• market uptake of recently launched products;

•

information technology system inadequacies, breaches, or operating failures;

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

unexpected safety or efficacy concerns associated with our products;

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

issues with product supply stemming from manufacturing difficulties or disruptions;

reliance on third-party relationships and outsourcing arrangements;

regulatory changes or other developments;

regulatory actions regarding currently marketed products;

continued pricing pressures and the impact of actions of governmental and private payers affecting
pricing of, reimbursement for, and access to pharmaceuticals;

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

changes in tax law, tax rates, or events that differ from our assumptions related to tax positions;

asset impairments and restructuring charges;

the impact of global macroeconomic conditions and trade disruptions or disputes;

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

regulatory compliance problems or government investigations.

ANNUAL REPORT ON FORM 10-K Investors should also carefully read the factors described under Item 1A, “Risk Factors” in this Annual Report
on Form 10-K for a description of certain risks that could, among other things, cause our actual results to
differ from those expressed in forward-looking statements. Investors should understand that it is not possible
to predict or identify all such factors and should not consider the risks described above and under Item 1A,
“Risk Factors” to be a complete statement of all potential risks and uncertainties.

All forward-looking statements speak only as of the date of this Annual Report and are expressly qualified in
their entirety by the risk factors and cautionary statements included in this Annual 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 Annual Report.

ANNUAL REPORT ON FORM 10-KPart I
Item 1. Business
Eli Lilly and Company (referred to as the company, Lilly, we, or us) 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. In March 2019, we completed the disposition of our ownership in Elanco Animal Health Incorporated
(Elanco), an animal health business.

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 long-term
success depends on our ability to continually discover or acquire, develop, and commercialize innovative new
medicines.

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

Products

Our products include:

Diabetes products, including:

•

Baqsimi®, a nasal powder formulation for the treatment of severe hypoglycemia in patients with diabetes
Basaglar®, a long-acting human insulin analog for the treatment of diabetes
Humalog®, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, insulin lispro,
insulin lispro protamine, and insulin lispro mix 75/25, human insulin analogs for the treatment of diabetes
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
Lyumjev®, a rapid-acting human insulin analog for the treatment of diabetes
Trajenta®, for the treatment of type 2 diabetes
Trulicity®, for the treatment of type 2 diabetes and to reduce the risk of major adverse cardiovascular
events in adult patients with type 2 diabetes and established cardiovascular disease or multiple
cardiovascular risk factors

Oncology products, including:

•

Alimta®, for the first-line treatment, in combination with two other agents, of advanced non-small cell lung
cancer (NSCLC) for patients with non-squamous cell histology and no EGFR or ALK genomic tumor
aberrations; for the first-line treatment, in combination with another agent, of advanced non-squamous
NSCLC; 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 monotherapy 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 monotherapy as a second-line treatment
of hepatocellular carcinoma; and in combination with another agent as a first-line treatment of adult
patients with metastatic NSCLC with activating epidermal growth factor receptor mutations
Erbitux®, indicated both as monotherapy and in combination with another agent for the treatment of
certain types of colorectal cancers; and as monotherapy, in combination with chemotherapy, or in
combination with radiation therapy for the treatment of certain types of head and neck cancers

ANNUAL REPORT ON FORM 10-K •

•

Retevmo®, for the treatment of metastatic NSCLC in adult patients; for the treatment of advanced
metastatic medullary thyroid cancer who require systemic therapy in adult and pediatric patients; and for
the treatment of advanced metastatic thyroid cancer in adult and pediatric patients who require systemic
therapy and are radioactive iodin-refractory
Tyvyt®, for the treatment of relapsed or refractory classic Hodgkin’s lymphoma and for the first-line
treatment of non-squamous NSCLC in combination with Alimta and another agent in China
Verzenio®, for use as monotherapy or in combination with endocrine therapy for the treatment of HR+,
HER2- metastatic breast cancer

Immunology products, including:

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

◦

Baricitinib was granted Emergency Use Authorization (EUA) in 2020 for the treatment of
suspected or laboratory confirmed COVID-19, in combination with remdesivir, in hospitalized
adults and pediatric patients

•

Taltz®, for the treatment of adults and pediatric patients aged 6 years or older with moderate-to-severe
plaque psoriasis, adults with active psoriatic arthritis, adults with ankylosing spondylitis, and adults with
active non-radiographic axial spondyloarthritis

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®, for migraine prevention and the treatment of episodic cluster headache in adults
Reyvow®, for the acute treatment of migraine, with or without aura, in adults
Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I
disorder, and bipolar maintenance

Other therapies, including:

•

Bamlanivimab, for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients with
positive results of direct SARS-CoV-2 viral testing (EUA granted in 2020)

Bamlanivimab and etesevimab, administered together, for the treatment of mild-to-moderate COVID-19
in adults and pediatric patients with positive results of direct SARS-CoV-2 viral testing (EUA granted in
2021)

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

•

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

Marketing and Distribution

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

U.S.

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 online 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 resources and reach additional patients in need.

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.

ANNUAL REPORT ON FORM 10-KIn the U.S., most of our products are distributed through wholesalers that serve pharmacies, physicians and
other health care professionals, and hospitals. In 2020, 2019, and 2018, three wholesale distributors in the U.S.
—McKesson Corporation, AmerisourceBergen Corporation, and Cardinal Health, Inc.—each accounted for
between 15 percent and 20 percent of our consolidated revenue. No other customer accounted for more than
10 percent of our consolidated revenue in any of these years.

Outside the U.S.

Outside the U.S., we promote our products to healthcare providers primarily through sales representatives and
online health care channels. While the products we market vary from country to country, diabetes products
constitute the largest single group of our consolidated revenue. Distribution patterns for our products also 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.

Marketing Collaborations

Certain of our products are marketed in arrangements with other pharmaceutical companies. For example, 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 Item 8, "Financial Statements and Supplementary Data - Note 4, Collaborations
and Other Arrangements."

Competition

Our products compete globally with many other pharmaceutical products in highly competitive markets.

Important competitive factors include effectiveness, safety, and ease of use; formulary placement, price, and
demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products,
processes, modalities, 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. When competitors
introduce new products or delivery systems with therapeutic or cost advantages, including by developing new
modalities, our products become subject to decreased sales, progressive price reductions, or both.

We believe our long-term competitive success depends on discovering and developing (either alone or in
collaboration with others) or acquiring innovative, cost-effective products that provide improved outcomes for
patients 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 will become, uncompetitive from time to time as a result
of products developed by our competitors.

Generic Pharmaceuticals

One of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and 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. As a result, generic manufacturers
generally invest far fewer resources than we do in research and development and can price their products
significantly 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, which can cause
us to lose a significant portion of the product’s revenue in a very short period of time.

Further, 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.

ANNUAL REPORT ON FORM 10-K Biosimilars

Several of our products and approximately half of the potential new medicines in our clinical-stage pipeline are
biologics. In the U.S., the U.S. Food and Drug Administration (FDA) regulates biologics under the Federal Food,
Drug and Cosmetic Act, the Public Health Service Act, and implementing regulations. 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 analytical and clinical similarity to the
innovator biologic, may be approved based on an abbreviated data package that relies in part on the full testing
required of the innovator biologic. Approval by the FDA ultimately depends on many factors, including a showing
that the biosimilar is “highly similar” to the original product and has no clinically meaningful differences from the
original product in terms of safety, purity, and potency.

Globally, most governments have developed abbreviated regulatory pathways to approve biosimilars as follow-
ons to innovator-developed biologics, including the Biologics Price Competition and Innovation Act of 2009 (the
BPCIA) in the U.S., and a number of biosimilars have been licensed under the BPCIA and in Europe. The patent
and regulatory exclusivity for the existing innovator biologic generally must expire in a given market before
biosimilars may enter that market. However, in the U.S., the product exclusivity period under the BPCIA could be
affected by recent government proposals and litigation. See “- Patents, Trademarks, and Other Intellectual
Property Rights.” In addition, 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. In the U.S., currently
only a biosimilar product that is determined to be “interchangeable” will be considered substitutable for the
original biologic product without the intervention of the health care provider who prescribed the original biologic
product. To prove that a biosimilar product is interchangeable, the applicant must demonstrate that the product
can be expected to produce the same clinical results as the original biologic product in any given patient, and if
the product is administered more than once in a patient, that safety risks and potential for diminished efficacy of
alternating or switching between the use of the interchangeable biosimilar biologic product and the original
biologic product is no greater than the risk of using the original biologic product without switching.

Biosimilars may present both competitive challenges and opportunities. For example, a competitor company has
developed a version of insulin lispro that competes with our product Humalog. On the other hand, in collaboration
with 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. However, in March 2020, the FDA began regulating all of our
insulin products as “biologics” rather than “drugs.” Based on FDA draft guidance, this change may lower the
requirements for competitor biosimilar products to enter the market, some of which could be designated as
interchangeable and therefore substituted for our insulin products at U.S. pharmacies. As such, in June 2020,
Mylan N.V. announced that the FDA approved its New Drug Application (NDA) for Semglee, a new insulin
glargine product, which it launched as a follow-on biologic in the U.S. that competes with Basaglar. The laws
regulating biosimilars continue to be interpreted and implemented by the FDA and remain subject to substantial
uncertainty, including with respect to their impact on our business.

U.S. Private Sector Dynamics

In the U.S. private sector, consolidation and integration among healthcare providers significantly affects the
competitive marketplace for pharmaceuticals. Health plans, pharmacy benefit managers, wholesalers, and other
supply chain stakeholders have been consolidating into fewer, larger entities, thus enhancing their purchasing
strength and importance. Private third-party insurers, as well as governments, typically maintain formularies that
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) to control costs by negotiating discounted prices in exchange for
formulary inclusion.

ANNUAL REPORT ON FORM 10-KFormulary 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 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
that 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. We expect
these downward pricing pressures will continue to negatively affect our 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 higher co-insurance or co-pays. For additional information on pricing and
reimbursement for our pharmaceutical products, see “- Regulations and Private Payer Actions Affecting
Pharmaceutical Pricing, Reimbursement, and Access - U.S.”

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 retain exclusivity despite approval of the
generic, biosimilar, or other follow-on versions of a new medicine beyond the expiration of the compound patent
through manufacturing trade 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:

ANNUAL REPORT ON FORM 10-K •

•

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 BPCIA, 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
BPCIA 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—i.e., 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). See Item 8,
“Financial Statements and Supplementary Data - Note 16, Contingencies,” for information regarding our
settlement agreement with Eagle Pharmaceuticals, Inc. (Eagle) and its impact on our exclusivity for
Alimta.

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) and biologics data protection (2030).

Jardiance, and the related combination product Glyxambi, is protected by a compound patent (2028).

F10

ANNUAL REPORT ON FORM 10-K• Olumiant is protected by a compound patent (2032).

•

Retevmo is protected by a compound patent (2037) and by data protection (2025).

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

Taltz is protected by a compound patent (2030) and by biologics data protection (2028).

Trulicity is protected by a compound patent (2027) and by biologics data protection (2026).

Verzenio is protected by a compound patent (2031) and by data protection (2022).

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

•

Alimta is protected by patents covering its use to treat cancer in major European countries and in Japan
(June 2021).

Baqsimi is protected by data protection in Japan (2026).

Cyramza is protected by a compound patent (2028) and by data protection (2024) in major European
countries. Additionally, Cyramza is protected by a compound patent (2026) and by data protection
(2023) in Japan.

Emgality is protected by a compound patent (2033) and by data protection (2028) in major European
countries, and by a compound patent (2031, not including possible patent extension) and by data
protection (2029) in Japan.

Jardiance is protected by a compound patent in major European countries (2029) and Japan (2030).

• Olumiant is protected by a compound patent (2032) and by data protection (2027) in major European

countries, and by a compound patent (2033) and by data protection (2025) in Japan.

•

Reyvow is protected by a compound patent (2023, not including possible patent extension) in major
European countries. Reyvow is also protected by a compound patent (2023, not including possible
patent extension) in Japan.
Retsevmo® is protected by a compound patent (2037) and by data protection (2031) in major European
countries. Retevmo is protected by a compound patent in Japan (2037, not including possible patent
extension).

Taltz is protected by a compound patent (2031) and data protection (2027) in major European countries
and a compound patent (2030) and data protection (2024) in Japan.

Trulicity is protected by a compound patent (2029) and by data protection (2024) in major European
countries and by a compound patent (2029) and by data protection (2023) in Japan.

Verzenio is protected by a compound patent (2033) and data protection (2028) in major European
countries and by a compound patent (2034) and data protection (2026) in Japan.

Reyvow has been submitted for regulatory review in certain major European countries for the acute treatment of
migraine, where it is expected to be protected by data protection upon approval (10 years). Additionally, Reyvow
has been submitted for regulatory review in Japan for the acute treatment of migraine, where it is expected to be
protected by data protection upon approval (8 years).

Retevmo has been submitted for regulatory review in Japan for the treatment of lung cancer, where it is expected
to be protected by data protection upon approval (8 years).

Tanezumab is protected by a compound patent (2023, not including possible patent extension) in the U.S.
Additionally, tanezumab has been submitted for regulatory review in the U.S. for the treatment of osteoarthritis
pain, where it is expected to be protected by data protection upon approval (12 years).

Worldwide, we sell all of our major products under trademarks consisting of our product names, logos, and
unique product appearances (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.

F11

ANNUAL REPORT ON FORM 10-K Patent Licenses and Collaborations

Most of our major products are not subject to significant license and collaboration agreements. For information
on our license and collaboration agreements, including our agreement with Incyte Corporation related to
Olumiant, see Item 8, "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, which are discussed below in more detail) 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 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
allegation 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 a single generic manufacturer. For more information on Hatch-Waxman litigation involving
the company, see Item 8, “Financial Statements and Supplementary Data - Note 16, Contingencies.”

Under the BPCIA, the FDA cannot approve an application for a biosimilar product until data protection expires,
12 years after initial marketing approval of the innovator biologic, and an application may not be submitted until
four years following the date the innovator biologic was first approved. However, the BPCIA 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 BPCIA, and the BPCIA itself, is complex and continues to be interpreted
and implemented by the FDA as well as courts. Courts have held that biosimilar applicants are not required to
engage in the BPCIA patent litigation scheme and patent holders retain the right to bring suit under normal patent
law procedures if a biosimilar applicant attempts to commercialize a product prior to patent expiration. Further, in
the U.S., the increased likelihood of generic and biosimilar challenges to innovators’ intellectual property has
increased the risk of loss of innovators’ market exclusivity. See also “- Competition - Biosimilars.”

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 intellectual property rights, see
Item 8, “Financial Statements and Supplementary Data - Note 16, Contingencies.”

F12

ANNUAL REPORT ON FORM 10-KGovernment Regulation of Our Operations

Our operations are regulated extensively by numerous national, state, and local agencies.

Regulation of Products

The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory
review necessary for governmental approvals of our products is extremely costly and can significantly delay
product introductions and revenue generation. In addition, our operations are subject to complex federal, state,
local, and foreign laws and regulations concerning relationships with healthcare providers and suppliers, the
environment, occupational health and safety, and data 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 regulation by the FDA in the U.S. Pursuant to laws and regulations
that include 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, promotion, advertising, dissemination of information, and post-
marketing surveillance of those products.

Following approval, our products remain subject to regulation by various agencies in connection with labeling,
import, export, storage, recordkeeping, advertising, promotion, and safety reporting. We conduct extensive post-
marketing surveillance of the safety of the products we sell. The FDA may withdraw approval if compliance with
regulatory requirements and standards is not maintained or if problems occur after a product reaches the market.
The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the
market. Pharmaceutical products may be promoted only for the approved indications and in accordance with the
provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations
prohibiting the promotion of off-label uses.

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. Regulatory requirements and approval processes
outside the U.S. may differ from those in the U.S. and may involve additional costs and uncertainties.

We make substantial investments of capital and operating expenses to implement comprehensive, company-
wide quality systems and controls 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, we become subject to potential government investigations, interruptions
in production, fines and penalties, delays in new product approvals, and reputational harm. 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. Any determination by the
FDA or other regulatory authorities of manufacturing or other deficiencies could adversely affect our business.

We are also subject to a variety of federal, state, and local environmental, health and safety, and other laws and
regulations that may affect our research, development or production efforts.

F13

ANNUAL REPORT ON FORM 10-K Emergency Use Authorizations

The Secretary of Health and Human Services may authorize unapproved medical products to be manufactured,
marketed, and sold in the context of an actual or potential emergency that has been designated by the
government. After an emergency has been announced, the Secretary of Health and Human Services may
authorize EUAs for the use of specific products based on criteria established by statute, including that the
product at issue may be effective in diagnosing, treating, or preventing serious or life-threatening diseases when
there are no adequate, approved, and available alternatives. An EUA is subject to additional conditions and
restrictions, such as the obligation to provide facts sheets for healthcare providers administering the product and
those to whom it is administered, adverse event monitoring and reporting, and recordkeeping and reporting
requirements by product manufacturers. The FDA may also establish additional discretionary conditions of
authorization that the FDA deems necessary or appropriate to protect the public health, including conditions
related to product distribution, product administration and data collection and analysis concerning the safety and
effectiveness of the product. In issuing an EUA, the FDA considers the totality of available scientific evidence
regarding quality, safety and efficacy, including the known and potential risks of such products and the adequacy
and availability of approved alternatives, among other factors. An EUA is not a substitute for obtaining FDA
approval, licensure, or clearance for use of a product. An EUA terminates when the emergency determination
underlying the EUA terminates, and EUAs can be revoked under other circumstances, the timing of which may
occur unexpectedly or be difficult to predict.

Outside the U.S., the emergency use of medical products is subject to regulatory processes and requirements
that differ from those in the U.S.

The COVID-19 pandemic has been designated as a national emergency in the U.S. On the basis of such
determination, the Secretary of Health and Human Services declared that circumstances exist justifying the
authorization of emergency use of drugs and biologics during the COVID-19 pandemic. The FDA has granted
EUAs for bamlanivimab, bamlanivimab and etesevimab administered together, and baricitinib in combination with
remdesivir, and similar actions have been taken by other regulators in certain jurisdictions outside the U.S. We
intend to submit bamlanivimab and etesevimab administered together to the FDA for approval in the second half
of 2021.

Other Laws and Regulations

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, as well as analogous foreign laws and regulations, including the federal anti-kickback statute, the
False Claims Act, and state laws governing kickbacks, false claims, unfair trade practices, and consumer
protection. These laws are administered by, among others, the Department of Justice, the Office of Inspector
General of the Department of Health and Human Services, the Federal Trade Commission, the Office of
Personnel Management, and state attorneys general. Over the past several years, state and federal
governments have increased their oversight, enforcement activities, and intra-agency coordination with respect
to pharmaceutical companies. Further, 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.

In December 2020, the Office of Inspector General of the U.S. Department of Health and Human Services and
the Centers for Medicare & Medicaid Services issued final rules expanding and modifying existing, and adding
new, regulatory “safe harbors” and exceptions, respectively, under the anti-kickback statute and the Ethics in
Patient Referrals Act. We are currently evaluating the impact, if any, these regulatory amendments will have
upon becoming effective on our consolidated results of operations, liquidity, and financial position, which is
uncertain at this time.

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.,
healthcare providers who prescribe pharmaceuticals are employed by the government and purchasers of
pharmaceuticals are government entities; therefore, our interactions with these prescribers and purchasers are
subject to regulation under the FCPA.

F14

ANNUAL REPORT ON FORM 10-KIn 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 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.

We are also subject to a variety of federal, state, and local environmental, health and safety, and other laws and
regulations that may affect our research, development or production efforts.

Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access

U.S.

There continues to be considerable public and government scrutiny of pharmaceutical pricing, and measures to
address the perceived high cost of pharmaceuticals are being considered at various levels of state and federal
government. In addition, U.S. government action to reduce federal spending on entitlement programs, including
Medicare and Medicaid, may affect payment for our products or services associated with the provision of our
products. Additionally, there has been heightened governmental scrutiny recently over the manner in which drug
manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and
proposed and enacted federal and state legislation designed to, among other things, bring more transparency to
product pricing, review the relationship between pricing and manufacturer patient programs and reform
government program reimbursement methodologies for drug products. The regulatory priorities of the current
U.S. presidential administration could further intensify these efforts, which could have a material adverse impact
on our business.

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 various federal and state healthcare programs, including state
Medicaid and Medicaid Managed Care programs (minimum of 23.1 percent plus adjustments for price increases
over time) and discounts to private entities who treat patients in certain types of health care facilities intended to
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 sales
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), an increase from the previous 50 percent
discount.

Rebates are also negotiated in the private sector. We pay 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. Our approach to the rebates we offer to private payers who provide prescription drug benefits to seniors
covered by Medicare may be impacted by recent regulatory amendments included in the anti-kickback statute
final rule that will become effective on January 1, 2023.

F15

ANNUAL REPORT ON FORM 10-K Outside the U.S.

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.

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. We may experience additional pricing
pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare
systems around the world.

We 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 to see continued focus on regulating pricing
resulting in additional state, federal, and international legislative and regulatory developments that could have
further negative effects on pricing and reimbursement for our products.

See Item 7, “Management's Discussion and Analysis - Results of Operations - Executive Overview - Other
Matters - Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access” for additional information
regarding recent legislative, administrative, and other pricing initiatives and their impact on our results.

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 2020, we
employed approximately 7,600 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 diabetes, oncology, immunology,
neurodegeneration, and pain. During 2020, we also focused on researching and developing potential treatments
for COVID-19. In addition to discovering and developing new medicines, 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 medicines. We actively invest in external research and technologies that we believe
complement and strengthen our own efforts. These investments can take many forms, including, among others,
licensing arrangements, co-development agreements, co-promotion arrangements, joint ventures, acquisitions,
and equity investments.

Pharmaceutical development is time-consuming, expensive, and risky. Very few of the candidates discovered by
researchers ultimately become approved medicines. The process from discovery to regulatory approval can take
over a decade. Candidates can fail at any stage of the process, and even late-stage candidates sometimes fail to
receive regulatory approval or achieve commercial success. The following describes in more detail the research
and development process for pharmaceutical products:

Phases of New Drug Development

• Discovery Phase

In the discovery phase, scientists identify, design, and synthesize promising candidates by analyzing their
effect on biological targets thought to play a role in disease. Targets are often unproven and only candidates
that have the desired effect on the target and meet other design criteria move to the next phase of
development, which includes the initiation of studies in animals to support regulatory and safety
requirements for clinical research in humans. The discovery phase can take years and the probability of any
one candidate becoming a medicine is extremely low.

F16

ANNUAL REPORT ON FORM 10-K•

Early Development Phase

Early development includes initial testing for safety and efficacy and early analyses of manufacturing
requirements. Safety testing is initially performed in laboratory tests and animals, as necessary. In general,
the first human tests (often referred to as Phase I) are conducted in small groups of subjects to assess
safety and evaluate the potential dosing range. Subsequently, larger populations of patients are studied
(Phase II) to identify initial signs of efficacy while continuing 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 candidates that enter the early development phase, approximately 10
percent move to the late development phase. The early development phase varies but can take several
years to complete.

•

Late Development Phase

Late phase development projects (typically Phase III) have met initial safety requirements and shown initial
evidence of efficacy in earlier studies. As a result, these candidates generally have a higher likelihood of
success and trials include larger patient populations to demonstrate safety and efficacy in the disease.
These studies are designed to demonstrate the benefit and risk of the potential new medicine and may be
compared to competitive therapies, placebo, or both. Phase III studies are generally conducted globally
and are designed to support regulatory filings for marketing approval. The duration of Phase III testing
varies by disease and may take two to four years.

•

Submission Phase

Once a potential new medicine is submitted to regulatory agencies, the time to final marketing approval can
vary from several months to several years, depending on the disease state, the strength and complexity of
available data, the degree of unmet need, and the time required for the regulatory agency(ies) to evaluate
the submission, which can depend on prioritization by regulators and other factors. 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 resulted in a robust
pipeline of potential new medicines and new treatment indications in all stages of development. We currently
have approximately 45 candidates in clinical development or under regulatory review, and a larger number of
projects in the discovery phase. See Item 7, “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 or significant unanticipated increases in demand on 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., including Puerto Rico, and Ireland. 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.

F17

ANNUAL REPORT ON FORM 10-K 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.

In addition, COVID-19 could also have an adverse impact on our manufacturing operations, global supply chain,
and distribution systems, which could impact our ability to produce and distribute our products and affect the
ability of third parties on which we rely to fulfill their obligations to us, and could increase our expenses. For more
information, see Item 1A, "Risk Factors - Risks Related to Our Business - The COVID-19 pandemic and efforts to
reduce its spread have impacted, and may in future periods negatively impact, our business and operations.” and
Item 7, “Management's Discussion and Analysis - Results of Operations - Executive Overview - COVID-19
Pandemic.”

Quality Assurance

Our success depends in great measure on 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 ensure that the product meets all applicable regulatory requirements and our
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 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.

F18

ANNUAL REPORT ON FORM 10-KExecutive Officers of the Company

The following table sets forth certain information regarding our current executive officers.

The term of office for each executive officer expires on the date of the annual meeting of the board of directors,
to be held on May 3, 2021 in connection with the company's annual meeting of shareholders, or on the date his
or her successor is chosen and qualified. No director or executive officer has a “family relationship” with any
other director or executive officer of the company, as that term is defined for purposes of this disclosure
requirement. There is no understanding between any executive officer or director and any other person pursuant
to which the executive officer was selected.

Name

Age

Titles and Business Experience

David A. Ricks

Anat Ashkenazi

Melissa S. Barnes

Stephen F. Fry

Anat Hakim

Chairman, President, and Chief Executive Officer (CEO) (since 2017). Previously, Mr. Ricks held various
leadership roles with Lilly, including senior vice president and president, Lilly Bio-Medicines. Mr. Ricks has
24 years of service with Lilly.

Senior Vice President and Chief Financial Officer (since 2021). Previously, Ms. Ashkenazi held various
leadership roles with Lilly, including senior vice president, controller and chief financial officer, Lilly
Research Laboratories, and vice president, finance and chief financial officer, Lilly Diabetes and Lilly
global manufacturing and quality. Ms. Ashkenazi has 19 years of service with Lilly.

Senior Vice President, Enterprise Risk Management, and Chief Ethics and Compliance Officer (since
2013). Previously, Ms. Barnes held various leadership roles with Lilly, including vice president, deputy
general counsel. Ms. Barnes has 26 years of service with Lilly.

Senior Vice President, Human Resources and Diversity (since 2011). Previously, Mr. Fry held various
leadership roles with Lilly, including vice president, human resources. Mr. Fry has 33 years of service with
Lilly.

Senior Vice President, General Counsel and Secretary (since 2020). Prior to joining Lilly, Ms. Hakim was
senior vice president, general counsel and secretary of WellCare Health Plans, Inc. (WellCare) from 2016
to 2018, and executive vice president, general counsel and secretary of WellCare from 2018 to 2020. Prior
to joining WellCare, she served as divisional vice president and associate general counsel of intellectual
property litigation at Abbott Laboratories from 2010 to 2013 and divisional vice president and associate
general counsel of litigation from 2013 to 2016. Ms. Hakim has one year of service with Lilly.

Patrik Jonsson

Senior Vice President, President, Lilly USA, and Chief Customer Officer (since 2020). Previously, Mr.
Jonsson held various leadership roles with Lilly, including senior vice president and president, Lilly Bio-
Medicines and president and general manager, Lilly Japan. Mr. Jonsson has 30 years of service with Lilly.

Michael B. Mason

Senior Vice President and President, Lilly Diabetes (since 2020). Previously, Mr. Mason held various
leadership roles with Lilly, including senior vice president, connected care and insulins and vice president
of U.S. Diabetes. Mr. Mason has 31 years of service with Lilly.

Johna L. Norton

Myles O'Neill

Leigh Ann Pusey

Aarti Shah, Ph.D.

Daniel M.
Skovronsky, M.D.,
Ph.D.

Anne E. White

Ilya Yuffa

Alfonso Zulueta

Senior Vice President, Global Quality (since 2017). Previously, Ms. Norton held various leadership roles
with Lilly, including vice president, global quality assurance API manufacturing and product research and
development. Ms. Norton has 30 years of service with Lilly.

Senior Vice President and President, Manufacturing Operations (since 2018). Previously, Mr. O’Neill held
various leadership roles with Lilly, including senior vice president of global parenteral drug product,
delivery devices, and regional manufacturing. Mr. O’Neill has 18 years of service with Lilly.

Senior Vice President, Corporate Affairs and Communications (since 2017). Prior to joining Lilly, Ms.
Pusey was president and chief executive officer of the American Insurance Association from 2009 to 2017.
Ms. Pusey has three years of service with Lilly.

Senior Vice President and Chief Information and Digital Officer (since 2018). Previously, Dr. Shah held
various leadership roles with Lilly, including senior vice president information technology and chief
information officer and global brand development leader. Dr. Shah has 27 years of service with Lilly.

Senior Vice President, Chief Scientific Officer, and President, Lilly Research Laboratories (since 2018).
Previously, Dr. Skovronsky held various leadership roles with Lilly, including senior vice president, clinical
and product development. Dr. Skovronsky has 10 years of service with Lilly.

Senior Vice President and President, Lilly Oncology (since 2018). Previously, Ms. White held various
leadership roles with Lilly, including vice president of Portfolio Management, Chorus and Next Generation
Research and Development. Ms. White has 25 years of service with Lilly.

Senior Vice President and President, Lilly Bio-Medicines (since 2020). Previously, Mr. Yuffa held various
leadership roles with Lilly, including vice president of U.S. Diabetes general manager of Italy Hub, and vice
president, global ethics and compliance officer since 2014. Mr. Yuffa has 24 years of service with Lilly.

Senior Vice President and President, Lilly International (since 2014). Previously, Mr. Zulueta held various
leadership roles with Lilly, including president of emerging markets and of Lilly Japan. Mr. Zulueta has 32
years of service with Lilly.

F19

ANNUAL REPORT ON FORM 10-K Human Capital Management

Our core values—integrity, excellence, and respect for people—shape our approach to attracting, retaining,
engaging, and developing a highly skilled and ethical workforce, which is critical to executing our strategy. We
believe the strength of our workforce significantly contributes to our financial performance and enables us to
make life better for people around the world. For instance, most of the products we sell today were discovered or
developed by our own scientists, and our long-term success depends on our ability to continually discover or
acquire, develop, and commercialize innovative new medicines. We believe that fostering a positive culture that
values the contributions of our talented colleagues helps drive our success.

We are committed to creating a safe, supportive, ethical, and rewarding work environment through strategic
focus on our human capital management process, fairness and nondiscrimination in our employment practices,
robust training and development opportunities, and competitive pay and benefits. We believe our dedication to
promoting diversity and inclusion (D&I) within our company reflects our values and is a key driver of business
success and growth.

We regularly conduct anonymous employee surveys to seek feedback from our workforce on a variety of topics.
These results are reviewed and analyzed by our leaders in order to implement changes to our policies and
benefits designed to improve our employees' well-being. As a result of our efforts, we believe that we have a
highly performing, cohesive workforce and that our employee relations are good.

At the end of 2020, we employed approximately 35,000 people, including approximately 19,500 employees
outside the U.S. Our employees include approximately 7,600 people engaged in research and development
activities.

Strategy and Oversight

In order to build diverse and inclusive teams, our CEO and executive committee set expectations for inclusive
leadership and hold leaders accountable for achieving results. Because dedication to human capital
management is also a core component of our corporate governance, our board of directors regularly engages
with management and facilitates a system of reporting designed to monitor human capital management initiatives
and progress as part of the overarching framework that guides how we attract, retain, engage, and develop a
workforce that aligns with our values and mission.

Diversity and Inclusion

We are committed to fairness and nondiscrimination in our employment practices, and we deeply value diverse
backgrounds, skills, and global perspectives. To fulfill our purpose, we believe we must look at challenges from
multiple viewpoints and understand the diverse experiences of the patients who depend on us.

We believe that fostering D&I begins with understanding. For example, our Employee Journeys research has
yielded important insights about the experiences of women, Black/African American, Latinx, Asian, and lesbian,
gay, bisexual, transgender, or queer (LGBTQ) employees at Lilly. The results of this research are reviewed by
our senior leadership, and we deploy actions and activities in response to these insights to improve our
workplace and corporate culture.

Since 2017, we have committed to increasing the number of women, Black/African American, Latinx, and Asian
populations in leadership roles, and we actively monitor our progress. From the end of 2017 through the end of
2020, we increased the number of women in management globally from 41 percent to 46 percent. For minority
group members (MGM) in the U.S. over the same period, we increased management representation from 16
percent to 22 percent. Across all levels of our workforce, from the end of 2017 through the end of 2020, we have
seen increased representation for MGMs in the U.S. and women globally. Our focus on D&I is also evident at our
executive committee and board of directors. Seven of 15 members (approximately 47 percent) of our executive
committee (which includes our CEO) are women and two are MGM, including one MGM woman. In addition, the
company’s 15-member board of directors includes six women and seven members of underrepresented groups
(including MGM as well as LGBTQ individuals).

F20

ANNUAL REPORT ON FORM 10-KOur efforts in D&I and workplace benefits have garnered numerous recognitions, including, in 2020 and early
2021, Top 50 Companies for Diversity by DiversityInc., America’s Best Employers for Diversity by Forbes,
America’s Most JUST Companies and Forbes JUST 100 by Forbes and JUST Capital, Perfect Score on the
Human Rights Campaign Foundation Corporate Equality Index (2020 and 2021), World’s Most Ethical
Companies by Ethisphere, Leading Disability Employer by the National Organization on Disability, Top
Employers by Science Magazine, America’s Most Responsible Companies by Newsweek, and 100 Best
Companies, Top 75 Companies for Executive Women, Best Companies for Dads, and Best Companies for
Multicultural Women by Working Mother Magazine.

Employee Development

We believe talent begins with the hiring process. We therefore require hiring managers to consider a diverse pool
of candidates and we strive to provide a diverse panel of interviewers for open positions. We believe that hiring in
this way helps ensure that people from all backgrounds have equal opportunity to advance their careers.

We offer training to enable our employees to perform their duties in our highly regulated industry. We also strive
to cultivate a culture that promotes ongoing learning by encouraging employees to seek further education and
growth experiences, helping them build rewarding careers. We have introduced online programming to facilitate
access to our learning and development offerings. Many training courses are designed to improve accessibility
for people with disabilities and other unique needs. Across Lilly, we are working to design learning experiences to
be more inclusive and effective.

To further improve our talent programs and processes, in 2019, we introduced Explore Your Career, a global
framework of tools and resources for our employees. We believe Explore Your Career provides broader access
and transparency about career development and advancement at Lilly. In 2018, we introduced Emerge, a three-
day program led by our CEO that is designed to develop MGM talent at Lilly, and three cohorts comprising Black/
African American women, Latinx and Asian women, and MGM men have participated in this enterprise-level
program since its inception. Lilly also offers established leadership development programs for women and
earlier career multi-cultural talent, as well as leaders at all levels.

Employee resource groups (ERGs) are another important component of developing talent at Lilly. We currently
have 10 ERGs representing groups including women, MGMs, LGBTQ individuals, and people with disabilities.
ERGs offer our diverse workforce opportunities to build relationships, engage with senior leaders, advance our
caring community, and offer unique insights and perspectives to improve our business. Membership in our ERGs
continues to grow, with an estimated 11,430 people participating worldwide at the end of 2020.

In furtherance of our efforts to create an inclusive workplace, in 2020 we expanded Make it Safe to Thrive, an
education and awareness program to help employees and leaders understand how individual psychological
safety can be created and enhanced, with the goal of ensuring that all employees feel safe to speak up and to
share their ideas at work. The program includes live and online training and a monthly video series.

Employee Health and Safety

While we have consistently focused on protecting the health and safety of our employees, the COVID-19
pandemic has emphasized the importance of this critical priority. In response to the pandemic, we have taken
measures to protect our workforce, maximize social distancing, and inform employees about our policies. For
example, we instituted travel restrictions and remote working arrangements for employees whose roles do not
require on-site presence. To support employee well-being in the U.S., we enhanced local benefits related to
health care, childcare, and time off, and expanded reimbursement for home office ergonomic support
expenditures. In the U.S., we provide full coverage for COVID-19 diagnostic testing and treatment, and at our
corporate headquarters in Indianapolis, we provide free on-site testing for employees and members of their
household. In addition, as part of our Make it Safe to Thrive program, we partnered with our ERGs to offer a
series of programs highlighting and addressing challenges faced by ERG members during the COVID-19
pandemic, aiming to build understanding of different experiences and to offer ways to be inclusive.

F21

ANNUAL REPORT ON FORM 10-K Information Available on Our Website

Our company website is www.lilly.com. None of the information accessible on or through our website is
incorporated into this Annual Report on Form 10-K. We make available through the website, free of charge, our
company filings with the SEC as soon as reasonably practicable after we electronically file them with, or furnish
them to, the SEC. These include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents. The
link to our SEC filings is investor.lilly.com/financial-information/sec-filings.

In addition, the Governance portion of our website includes our corporate governance guidelines, board of
directors and committee information (including committee charters), and our articles of incorporation and bylaws.
The link to our corporate governance information is lilly.com/leadership/governance.

F22

ANNUAL REPORT ON FORM 10-KItem 1A. Risk Factors

In addition to the other information contained in this Annual Report on Form 10-K, 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. Additional risks and uncertainties
not presently known to us or that we currently believe to be immaterial could also adversely affect our
business and reputation.

Risks Related to Our Business

•

The COVID-19 pandemic and efforts to reduce its spread have impacted, and may in future periods
negatively impact, our business and operations.

The COVID-19 pandemic has substantially burdened healthcare systems worldwide. The focus of
resources on COVID-19 and widespread protective measures implemented to control the spread of the
pandemic have impacted discovery, research, development, manufacturing, and sales of our medicines
as well as those of the broader pharmaceutical industry. Significant delays or unexpected issues, such as
higher discontinuation rates or delays accumulating data, affecting the timing, conduct, or regulatory
review of our clinical trials, could adversely affect our ability to commercialize some assets in our product
pipeline.

Lack of normal access and fewer in-person interactions by patients and our employees with the
healthcare system, along with concern about the continued supply of medications, has resulted, and may
continue to result, in changes in buying patterns throughout the supply chain, impacting demand for our
products and negatively impacting the consolidated operating results of our underlying business. In
certain locations in the U.S and around the world with COVID-19 outbreaks, we temporarily halted in-
person interactions by our employees with healthcare providers and increased virtual interactions. While
in-person interactions have resumed in many locations, we may decide to halt such activity in the future
and, in those cases, expect to resume such interactions as it is safe to do so and in compliance with
applicable guidance and requirements. The COVID-19 pandemic could also have an adverse impact on
our manufacturing operations, global supply chain, and distribution systems, which could impact our
ability to produce and distribute our products and affect the ability of third parties on which we rely to fulfill
their obligations to us, and could increase our expenses.

We also face unique risks and uncertainties related to our development, manufacture, and uptake of
potential treatments for COVID-19, including vulnerability to supply chain disruptions, higher
manufacturing costs, difficulties in manufacturing sufficient quantities of our therapies, restrictions on
administration that limit widespread and timely access to our therapies, and risks related to handling,
return, and/or refund of product after delivery by us. Expedited authorization processes, including our
EUAs for bamlanivimab and bamlanivimab and etesevimab administered together, have allowed
restricted distribution of products with less than typical safety and efficacy data, and additional data that
become available may call into question the safety or effectiveness of our COVID-19 therapies.
Additionally, the availability of superior or competitive therapies, or preventative measures such as
vaccines, coupled with the transient nature of pandemics, could negatively impact or eliminate demand
for our COVID-19 therapies. In addition, we may be required to accept returns of certain product
previously shipped pursuant to EUAs if the relevant EUA is revoked or terminated. Mutations or the
spread of other variants of the coronavirus could also render our therapies ineffective. Any of these risks
could prevent us from recouping our substantial investments in the research, development, and
manufacture of our COVID-19 therapies.

In addition, the conditions created by the COVID-19 pandemic intensify other risks inherent in our
business, including, among other things, risks related to drug pricing and access, the conduct of clinical
trials, workplace safety and productivity, intellectual property protection, product liability and other
litigation, and the impact of adverse global and local economic conditions.

F23

ANNUAL REPORT ON FORM 10-K We have experienced negative impacts to our underlying business, including demand for our products,
due to the COVID-19 pandemic but the pandemic has not negatively impacted our liquidity position. Given
the evolving nature of the virus, the financial impact of the COVID-19 pandemic on our results of
operations, financial condition, liquidity, and cash flows in future periods could change, perhaps materially.
The degree to which the COVID-19 pandemic affects us will depend on developments that are highly
uncertain and beyond our knowledge or control, including, but not limited to, the duration and severity of
the pandemic, the actions taken to reduce its transmission, including widespread availability of vaccines,
and the speed with which, and extent to which, more stable economic and operating conditions resume.
Should the COVID-19 pandemic and any associated recession or depression continue for a prolonged
period, our results of operations, financial condition, liquidity, and cash flows could be materially impacted
by lower revenues and profitability and a lower likelihood of effectively and efficiently developing and
launching new medicines.

•

Pharmaceutical research and development is very costly and highly uncertain; we may not
succeed in developing, licensing, 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, the
introduction of new products, and business development activities to expand our product pipeline.

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 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, both through our internal efforts and our business development activities,
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. Our business development activities to
enhance our product pipeline may include acquisitions, strategic alliances, collaborations, investments,
and licensing arrangements. There are substantial risks associated with identifying business development
targets and consummating related transactions, which may not be completed in a timely manner, if at all,
may not result in successful commercialization of any product, and may give rise to legal proceedings or
regulatory scrutiny.

See Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive Overview - Late-
Stage Pipeline,” for more details about our current product pipeline.

F24

ANNUAL REPORT ON FORM 10-K• 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 few 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, including Alimta and Forteo, have recently lost, or will lose in the
next few years, significant patent protection and/or data protection in the U.S. as well as key countries
outside the U.S. We have faced and remain exposed to generic competition following the loss of such
intellectual property protection. In particular, we expect that the entry of generic competition for Alimta in
the U.S. following the loss of patent exclusivity will cause a rapid and severe decline in revenue for the
product and have a material adverse effect on our consolidated results of operations and cash flows.

Certain 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 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 regarding the regulatory pathways for approval
of the competitor versions. Generic pharmaceutical companies could also introduce a generic product
before resolution of any related patent litigation.

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 Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive Overview -
Other Matters - Patent Matters,” and Item 1, "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 medicines. Without strong intellectual property protection, we would be
unable to generate the returns necessary to support our significant investments in research and
development, as well as the 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 BPCIA,
which applies to 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 through
this expedited 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, meaning the same patent can 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 Item 1,
“Business - Patents, Trademarks, and Other Intellectual Property Rights,” and Item 8, "Financial
Statements and Supplementary Data - Note 16, Contingencies," for more details.

F25

ANNUAL REPORT ON FORM 10-K • We and our products face intense competition from multinational pharmaceutical companies,
biotechnology companies, and lower-cost generic and biosimilar manufacturers, and such
competition could have a material adverse effect on our business.

We compete with a large number of multinational pharmaceutical companies, biotechnology companies,
and generic pharmaceutical companies. To compete successfully, we must continue to deliver to the
market innovative, cost-effective products that meet important medical needs. Our product revenues can
be adversely affected by the introduction by competitors of branded products that are perceived as
superior by the marketplace, by generic or biosimilar versions of our branded products, and by generic or
biosimilar versions of other products in the same therapeutic class as our branded products. Our
revenues can also be adversely affected by treatment innovations that eliminate or minimize the need for
treatment with our drugs.

Regulation of generic and biosimilar products varies around the world and such regulation is complex and
subject to ongoing interpretation and implementation by regulatory agencies and courts. Particularly for
biosimilars, recent government proposals 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 by
pharmacies. Given the importance of biologic products to our clinical-stage pipeline, such regulation could
have a material adverse effect on our business. See Item 1, “Business - Competition” and "Business -
Research and Development," for more details.

•

Failure, inadequacy, or breach of our IT systems or our business processes regarding confidential
information and other data, unauthorized access to our confidential 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 us or our business partners or other third parties 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 our 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.

IT 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 (including those third-party software or systems), 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 nation-states, or other current or former company
personnel. Our third-party partners, including third-party providers of data hosting or cloud services, as
well as suppliers, distributors, alliances, and other third-party service providers, face similar risks, which
could affect us directly or indirectly. The healthcare industry has been and continues to be a target for
cyber-attacks, and the number of threats has only increased during the COVID-19 pandemic. Numerous
federal agencies that monitor and regulate internet and cyber-crime have issued guidance, alerts and
directives warning of software vulnerabilities that require immediate patching, malicious actors targeting
healthcare related systems and nation-state sponsored hacking designed to steal valuable information,
including related to potential COVID-19 treatments.

F26

ANNUAL REPORT ON FORM 10-KThe failure or inadequacy of our IT systems or business processes, the compromise, disruption,
degradation, manipulation, loss, theft, destruction, or unauthorized access to 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 or business processes, 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 or business processes; 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 and we may fail to detect or
remediate security breaches, malicious intrusions, cyber-attacks, or other compromises of our systems.
Any of these events could result in material financial, legal, commercial, 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, including as a result of COVID-19, 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 for our products in a timely manner. 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 United Kingdom, Asia, and
other international geographies. Trade disputes and interruptions in international relationships, including
pandemic diseases, such as COVID-19, 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 our 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. Accordingly, 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. See also “ -
The COVID-19 pandemic and efforts to reduce its spread have impacted, and may in future periods
negatively impact, our business and operations.”

F27

ANNUAL REPORT ON FORM 10-K • 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 various products, as well as
litigation and investigations related to the pricing of our products. See Item 8, “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, including related to
pricing or other commercial practices. Such matters could affect our results of operations or require us to
recognize substantial charges 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.

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

Pharmaceutical manufacturing is complex and highly regulated. Manufacturing or quality assurance
difficulties at our facilities or contracted facilities, or the failure or refusal of a supplier or contract
manufacturer to supply contracted quantities, could result in product shortages, leading to lost revenue.
Such difficulties or disruptions could result from quality, oversight, or regulatory compliance problems;
natural disasters or pandemic disease; equipment, mechanical, data, or information technology system
vulnerabilities, such as system inadequacies, inadequate controls or procedures, operating failures,
service interruptions or failures, security breaches, malicious intrusions, or cyber-attacks from a variety of
sources; or inability to obtain single-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 Item 1, “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, and collaborations with other
pharmaceutical and biotechnology companies, and third-party service providers, for selected aspects of
product development, manufacturing, 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 confidential and proprietary information relating to us, our
clinical trial subjects, or patients; may experience disruption or fail to perform due to information
technology system vulnerabilities, breaches, cyber-attacks, or inadequate controls or procedures; 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, our clinical trial subjects, and our patients could have a
material adverse effect on our business.

Risks Related to Government Regulation

• 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 continue to take 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.

F28

ANNUAL REPORT ON FORM 10-KWe expect governments and private payers worldwide to intensify their scrutiny of, and actions intended
to address, pricing, reimbursement, and access to pharmaceutical products. Additional regulations,
legislation, or enforcement, including as a result of the current U.S. presidential administration, could
adversely impact our revenue. However, we cannot predict the likelihood, nature, or extent of current and
future health care reform efforts. We also may experience potential additional pricing pressures resulting
from the financial strain of the COVID-19 pandemic on government-funded healthcare systems around
the world.

For more details, see Item 1, “Business - Regulations and Private Payer Actions Affecting Pharmaceutical
Pricing, Reimbursement, and Access,” and Item 7, “Management’s Discussion and Analysis - Results of
Operations - Executive Overview - Other Matters - Trends Affecting Pharmaceutical Pricing,
Reimbursement, and Access.”

•

Changes in foreign currency rates or interest rate risks could 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 Item 7, “Management’s Discussion and Analysis - Financial Condition and
Liquidity” 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.
Changes in 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. In
addition, global tax authorities routinely examine our tax returns and are expected to become more
aggressive in their examinations of profit allocations among jurisdictions which could affect our anticipated
tax liabilities. In December 2017, the U.S. enacted tax reform legislation significantly revising U.S. tax
laws, and a number of other countries are also actively considering or enacting tax changes. Significant
uncertainty currently exists regarding proposed tax policies of the current U.S. presidential administration
including repeal of certain aspects of the 2017 tax law. 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 Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive
Overview - Other Matters - Tax Matters” and Item 8, "Financial Statements and Supplementary Data -
Note 14, Income Taxes," for more details.

We have taken the position, based on an opinion of tax counsel, that our divestiture of Elanco common
stock in connection with the 2019 separation of Elanco 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 us and our shareholders who exchanged their
stock for Elanco stock.

F29

ANNUAL REPORT ON FORM 10-K •

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. Such investigations may intensify as a result of the regulatory
priorities of the current U.S. presidential administration. In addition, regulatory issues concerning
compliance with cGMP, quality assurance, and similar regulations (and comparable foreign regulations)
for our products can lead to regulatory and legal actions, product recalls and seizures, fines and
penalties, interruption of production leading to product shortages, import bans or denials of import
certifications, delays or denials in the approvals of new products pending resolution of the issues, and
reputational harm, any of which would adversely affect our business. See Item 1, “Business - Government
Regulation of Our Operations,” for more details.

F30

ANNUAL REPORT ON FORM 10-KItem 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2020,
we owned 9 production and distribution sites in the U.S., including Puerto Rico. Together with the corporate
administrative offices, these facilities contain an aggregate of approximately 8.2 million square feet of floor
area dedicated to production, distribution, and administration. Major production sites include Indianapolis,
Indiana; Carolina, Puerto Rico; and Branchburg, New Jersey.

We own production and distribution sites in 8 countries outside the U.S., containing an aggregate of
approximately 4.4 million square feet of floor area. Major production sites include facilities in Ireland, France,
Spain, Italy, and China.

In the U.S., our research and development facilities contain an aggregate of approximately 4.2 million square
feet of floor area, primarily consisting of owned facilities located in Indianapolis. We also lease smaller sites in
San Diego, California; San Francisco, California; and New York, New York. Outside the U.S., we own a small
research and development facility in Spain and lease a small site in Singapore.

We believe that none of our properties is subject to any encumbrance, easement, or other restriction that
would detract materially from its value or impair its use in the operation of the business. The buildings we own
are of varying ages and in good condition.

Item 3. Legal Proceedings
We are a party to various currently pending legal actions, government investigations, and environmental
proceedings. Information pertaining to legal proceedings is described in Item 8, "Financial Statements and
Supplementary Data - Note 16, Contingencies," and incorporated by reference herein.

Item 4. Mine Safety Disclosures

Not applicable.

F31

ANNUAL REPORT ON FORM 10-K Part II
Item 5. Market for the Registrant’s Common Equity,

Related Stockholder Matters, and Issuer
Purchases of Equity Securities

Information relating to the principal market for our common stock and related stockholder matters is described
in Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item
12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
This information is incorporated herein by reference.

As of February 12, 2021, there were approximately 21,650 holders of record of our common stock based on
information provided by our transfer agent. Our common stock is listed under the ticker symbol LLY on the
New York Stock Exchange (NYSE).

The following table summarizes the activity related to repurchases of our equity securities during the fourth
quarter ended December 31, 2020:

Total Number of
Shares Purchased
(in thousands)

Average Price Paid
per Share

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
(in thousands)

Period
October 2020 . . . . .
November 2020 . . .
December 2020 . . .
Total . . . . . . . . . . . .

— $
—
—
—

—
—
—
—

Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs
(dollars in millions)
1,000.0
1,000.0
1,000.0

— $
—
—
—

During the three months ended December 31, 2020, we did not repurchase any shares under the $8.00 billion
share repurchase program authorized in June 2018.

F32

ANNUAL REPORT ON FORM 10-K

PERFORMANCE GRAPH

The following graph compares the return on Lilly stock with that of the Standard & Poor’s (S&P) 500 Stock
Index and our peer group for the years 2016 through 2020. The graph assumes that, on December 31, 2015,
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 immediately reinvested in that company’s stock.

Value of $100 Invested on Last Business Day of 2015 Comparison of Five-Year Cumulative Total
Shareholder Return Among Lilly, S&P 500 Stock Index, and Peer Group(1)

Lilly

Peer Group

S&P 500

$250

$225

$200

$175

$150

$125

$100

$75

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20

Lilly
$ 100.00
$ 89.63
$ 105.61
$ 148.33
$ 172.29
$ 225.80

Peer Group
$ 100.00
$ 94.96
$ 111.86
$ 117.57
$ 138.80
$ 141.88

S&P 500
$ 100.00
$ 111.96
$ 136.40
$ 130.42
$ 171.49
$ 203.04

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

biotechnology 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 S.A.; and Takeda Pharmaceutical Company Limited. The peer group used for performance benchmarking aligns with the peer group
used for executive compensation purposes for 2020 other than our peer group for performance benchmarking excludes Celgene Corporation
and Shire plc as they were acquired in 2019.

F33

ANNUAL REPORT ON FORM 10-K Item 6. [Reserved]

Item 7. Management’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 Item 8 of Part II of this Annual
Report on Form 10-K. Certain statements in this Item 7 of Part II of this Annual Report on Form 10-K
constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-
Looking Statements" and Item 1A, “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.

COVID-19 Pandemic

In response to the COVID-19 pandemic, we have been focused on maintaining a reliable supply of our
medicines; reducing the strain on the medical system; developing treatments for COVID-19; protecting the
health, safety, and well-being of our employees; supporting our communities; and ensuring affordability of and
access to our medicines, particularly insulin.

We have experienced negative impacts to our underlying business due to the COVID-19 pandemic, including
decreases in new prescriptions as a result of fewer patient visits to physician’s offices to begin or change
treatment, changes in payer segment mix, and the use of patient affordability programs in the United States
(U.S.) due to rising unemployment. Additionally, we have experienced, and may continue to experience,
decreased demand as a result of lack of normal access and fewer in-person interactions by patients and our
employees with the healthcare system. In certain locations in the U.S. and around the world with COVID-19
outbreaks, we temporarily halted in-person interactions by our employees with healthcare providers and
increased virtual interactions. While in-person interactions have resumed in many locations, we may decide to
halt such activity in the future and, in those cases, expect to resume such interactions as it is safe to do so
and in compliance with applicable guidance and requirements. We may experience additional pricing
pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare
systems around the world.

We remain committed to discovering and developing new treatments for the patients we serve. At the
beginning of the COVID-19 pandemic, we paused new clinical trial starts and enrollment in new trials in order
to reduce the strain on the medical system, and we have resumed this activity in our clinical trials. However,
significant delays or unexpected issues, such as higher discontinuation rates or delays accumulating data,
affecting the timing, conduct, or regulatory review of our clinical trials, could adversely affect our ability to
commercialize some assets in our product pipeline if the COVID-19 pandemic continues for a protracted
period.

F34

ANNUAL REPORT ON FORM 10-KIn regards to COVID-19 therapies, the U.S. Food and Drug Administration (FDA) granted Emergency Use
Authorizations (EUA) for bamlanivimab and bamlanivimab and etesevimab administered together for higher-
risk patients who have been recently diagnosed with mild-to-moderate COVID-19 and for baricitinib in
combination with remdesivir in hospitalized COVID-19 patients. We are actively working with a variety of
organizations, including governmental agencies, to facilitate access to our COVID-19 treatments in various
countries. However, we face unique risks and uncertainties in our development, manufacture, and uptake of
potential treatments for COVID-19, including vulnerability to supply chain disruptions, higher manufacturing
costs, difficulties in manufacturing sufficient quantities of our therapies, restrictions on administration that limit
widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product
after delivery by us. Expedited authorization processes, including our EUAs for bamlanivimab and
bamlanivimab and etesevimab administered together, have allowed restricted distribution of products with
less than typical safety and efficacy data, and additional data that become available may call into question the
safety or effectiveness of our COVID-19 therapies. Additionally, the availability of superior or competitive
therapies, or preventative measures, such as vaccines, coupled with the transient nature of pandemics, could
negatively impact or eliminate demand for our COVID-19 therapies. In addition, we may be required to accept
returns of certain product previously shipped pursuant to EUAs if the relevant EUA is revoked or terminated.
Mutations or the spread of other variants of the coronavirus could also render our therapies ineffective. Any of
these risks could prevent us from recouping our substantial investments in the research, development, and
manufacture of our COVID-19 therapies.

Our ability to continue to operate without significant negative impacts will in part depend on our ability to
protect our employees and our supply chain. We have taken steps to protect our employees worldwide, with
particular measures in place for those working in our manufacturing sites and distribution facilities. For 2020,
we were able to largely maintain our normal operations. However, uncertainty resulting from the COVID-19
pandemic could have an adverse impact on our manufacturing operations, global supply chain, and
distribution systems, which could impact our ability to produce and distribute our products and the ability of
third parties on which we rely to fulfill their obligations to us, and could increase our expenses.

Although the COVID-19 pandemic has affected our operations and demand for our products, it has not
negatively impacted our liquidity position. We expect to continue to generate cash flows to meet our short-
term liquidity needs and to have access to liquidity via the short-term and long-term debt markets. We also
have not observed any material impairments of our assets or significant changes in the fair value of assets
due to the COVID-19 pandemic.

The degree to which the COVID-19 pandemic will continue to impact our business operations, financial
results, and liquidity will depend on future developments, is highly uncertain, and cannot be predicted due to,
among other things, the duration and severity of the pandemic, the actions taken to reduce its transmission,
including widespread availability of vaccines, and the speed with which, and extent to which, more stable
economic and operating conditions resume. Should the COVID-19 pandemic and any associated recession or
depression continue for a prolonged period, our results of operations, financial condition, liquidity, and cash
flows could be materially impacted by lower revenues and profitability and a lower likelihood of effectively and
efficiently developing and launching new medicines. See “Risk Factors” in Part I, Item 1A of this Annual
Report on Form 10-K for additional information on risk factors that could impact our results.

Elanco Animal Health (Elanco) Disposition

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. 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.

F35

ANNUAL REPORT ON FORM 10-K Financial Results

The following table summarizes our key operating results:

Year Ended December 31

2020

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,539.8
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,056.5
Gross margin as a percent of revenue . . . . . . . . . . . . . . . .
Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,206.9
Acquired in-process research and development . . . . . . . .
660.4
Asset impairment, restructuring, and other special charges
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . .

131.2

7,229.9

77.7 %

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net income from continuing operations . . . . . . . . . . . . . . .

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EPS from continuing operations . . . . . . . . . . . . . . . . . . . . .

EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,036.2

6,193.7

6.79

NM - not meaningful

2019
22,319.5

17,598.3

78.8 %

11,808.8

239.6

575.6

5,265.9

628.0

4,637.9

8,318.4

4.96

8.89

Percent
Change
10

(77)

(26)

(24)

Revenue increased in 2020 driven by increased volume, partially offset by lower realized prices. Operating
expenses, defined as the sum of research and development and marketing, selling, and administrative
expenses, increased in 2020, driven primarily by approximately $450 million of development expenses for
COVID-19 therapies. The decreases in net income and EPS in 2020 were driven primarily by the
approximately $3.7 billion gain recognized on the disposition of Elanco in 2019, partially offset by higher gross
margin and higher other income in 2020.

The following highlighted items affect comparisons of our 2020 and 2019 financial results:

2020

Acquired in-process research and development (IPR&D) (Note 3 to the consolidated financial statements)

• We recognized acquired IPR&D charges of $660.4 million resulting from the acquisitions of Disarm

Therapeutics, Inc. (Disarm) and a pre-clinical stage company as well as collaborations with Innovent
Biologics, Inc. (Innovent), Sitryx Therapeutics Limited (Sitryx), Fochon Pharmaceuticals, Ltd.
(Fochon), AbCellera Biologics Inc. (AbCellera), Evox Therapeutics Ltd (Evox), and Shanghai Junshi
Biosciences Co., Ltd. (Junshi Biosciences).

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

• We recognized charges of $131.2 million primarily related to severance costs incurred as a result of
actions taken worldwide to reduce our cost structure, as well as acquisition and integration costs
incurred as part of the acquisition of Dermira, Inc. (Dermira).

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

• We recognized $1.44 billion of net investment gains on equity securities.

2019

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

• We recognized acquired IPR&D charges of $239.6 million resulting from 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 part of the acquisition of Loxo.

F36

ANNUAL REPORT ON FORM 10-K

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

• We recognized $401.2 million of net investment gains on equity securities.

• We recognized a gain of $309.8 million on the sale of our 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.

Late-Stage Pipeline

Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize
innovative new medicines. We currently have approximately 45 candidates in clinical development or under
regulatory review, and a larger number of projects in the discovery phase.

The following new molecular entities (NMEs) and diagnostic agent are currently in Phase III clinical trials or
have been submitted for regulatory review or have received first regulatory approval in the U.S., Europe, or
Japan in 2020. In addition, the following table includes certain NMEs currently in Phase II clinical trials. The
following table reflects the status of these NMEs and diagnostic agent, including certain other developments
since January 1, 2020.

Compound
COVID-19 Therapies

Indication

Status

Developments

Bamlanivimab

COVID-19

Bamlanivimab and
etesevimab
administered
together

COVID-19

Endocrinology

Emergency
Use
Authorization

The FDA granted EUA for higher-risk patients
recently diagnosed with mild-to-moderate
COVID-19 in the fourth quarter of 2020.
Announced in January 2021 that a Phase III trial
met the primary and all key secondary endpoints.
Additional Phase III trials are ongoing.
Announced in January 2021 that a Phase III trial
met the primary and all key secondary endpoints.
The FDA granted EUA for higher-risk patients
recently diagnosed with mild-to-moderate
COVID-19 in January 2021. Additional Phase III
trials are ongoing. We intend to submit to the FDA
for approval in the second half of 2021.

Ultra-rapid Lispro
(Lyumjev®)

Type 1 and 2
diabetes

Launched

Type 2 diabetes

Phase III

Tirzepatide

Basal Insulin-Fc

Obesity

Nonalcoholic
steatohepatitis

Type 1 and 2
diabetes

Phase II

Phase II trial is ongoing.

Phase II

Phase II trials are ongoing.

Launched in Japan in the second quarter of 2020
and in the U.S. and Europe in the third quarter of
2020.

Announced in the fourth quarter of 2020 and in
February 2021 that Phase III trials met the primary
and all key secondary endpoints. Additional Phase
III trials are ongoing.

Phase III trials are ongoing.

F37

ANNUAL REPORT ON FORM 10-K Compound
Immunology

Indication

Status

Developments

Lebrikizumab(1)

Atopic dermatitis

Phase III

Crohn's Disease

Mirikizumab

Psoriasis

Phase III

Ulcerative colitis

CXCR1/2 Ligands
Monoclonal
Antibody

Hidradenitis
Suppurativa

Acquired in Dermira acquisition in February 2020.
The FDA granted Fast Track designation(2). Phase
III trials are ongoing.
Phase III trials are ongoing.
Announced in the third quarter of 2020 that Phase
III trials met the primary and all key secondary
endpoints. Additional Phase III trials are ongoing.
Phase III trials are ongoing.

Phase II

Phase II trial initiated in the third quarter of 2020.

Systemic Lupus
Erythematosus

Phase II

Phase II trial is ongoing.

Acute treatment of
migraine

Launched

Received Schedule V classification from the Drug
Enforcement Agency and launched in the U.S. in
the first quarter of 2020. Submitted in Europe and
Japan in the fourth quarter of 2020.

Alzheimer's disease
diagnostic

Launched

Launched in the U.S. in the fourth quarter of 2020.

IL-2 Conjugate

Neuroscience

Lasmiditan
(Reyvow®)

Flortaucipir
(TauvidTM)

Tanezumab(3)

Osteoarthritis pain

Submitted

Cancer pain

Phase III

Solanezumab

Preclinical
Alzheimer's disease

Phase III

Donanemab

Alzheimer’s disease Phase II

Submitted to the FDA in 2019. The FDA intends to
hold an Advisory Committee meeting, expected to
occur in March 2021, to discuss the submission.
Phase III trial is ongoing.

Announced in the first quarter of 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.

Announced in January 2021 that a Phase II trial
met the primary endpoint. Additional Phase II trials
are ongoing.

Epiregulin/TGFa
mAb

Chronic pain

Phase II

Phase II trials initiated in the third quarter of 2020.

PACAP38 Antibody Chronic pain

SSTR4 Agonist

Chronic pain

Phase II

Zagotenemab

Alzheimer’s disease Phase II

Phase II trial initiated in the fourth quarter of 2020.
Phase II trials initiated in the fourth quarter of
2020.
Phase II trial is ongoing.

Oncology

Selpercatinib
(Retevmo®)

Thyroid cancer

Lung cancer

Launched

LOXO-305

Hematological
cancers

Phase II

Granted accelerated approval(4) by the FDA based
on Phase II data and launched in the U.S. in the
second quarter of 2020. Submitted in Japan in the
fourth quarter of 2020. Granted conditional
marketing authorisation(4) in Europe in February
2021. Phase III trials are ongoing.

Phase II trial initiated in the second quarter of
2020. Presented positive data at the American
Society of Hematology Annual Meeting in the
fourth quarter of 2020.

(1) In collaboration with Almirall, S.A. (Almirall) in Europe.
(2) Fast Track designation is designated to expedite the development and review of new therapies to treat serious conditions and address

unmet medical needs.

(3) In collaboration with Pfizer, Inc.
(4) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.

F38

ANNUAL REPORT ON FORM 10-KAs part of our collaboration with Innovent, we plan to pursue registration of sintilimab injection (Tyvyt®) in the
U.S. and other markets.

Our pipeline also contains several new indication line extension (NILEX) products. The following certain
NILEX products are currently in Phase II or Phase III clinical testing, have been submitted for regulatory
review, or have received first regulatory approval in the U.S., Europe, or Japan for use in the indication
described in 2020. The following table reflects the status of certain NILEX products, including certain other
developments since January 1, 2020:

Compound
Endocrinology

Empagliflozin
(Jardiance®)(1)

Immunology

Baricitinib
(Olumiant®)

Oncology

Abemaciclib
(Verzenio®)

Indication

Status

Developments

Heart failure with
reduced ejection
fraction
Chronic kidney
disease
Heart failure with
preserved ejection
fraction

Submitted

Submitted in the U.S., Europe and Japan in
the fourth quarter of 2020.

Phase III

Granted FDA Fast Track designation(2). Phase
III trials are ongoing.

Atopic dermatitis

Approved

COVID-19

Alopecia areata

Systemic lupus
erythematosus

Emergency
Use
Authorization

Phase III

Announced in the first quarter of 2020 that a
Phase III trial met the primary and all key
secondary endpoints. Submitted in the U.S. in
the second quarter of 2020. Approved in
Europe in the third quarter of 2020 and in
Japan in the fourth quarter of 2020.

The FDA granted EUA in combination with
remdesivir in hospitalized COVID-19 patients
in the fourth quarter of 2020.
The FDA granted Breakthrough Therapy
designation(3). Phase III trials are ongoing.

Phase III trials are ongoing.

Adjuvant breast
cancer

Submitted

Prostate cancer

Phase II

Announced in the second quarter of 2020 that
a Phase III trial met the primary endpoint.
Submitted in the U.S. and Europe in the fourth
quarter of 2020.
Phase II trials are ongoing.

(1) In collaboration with Boehringer Ingelheim.
(2) Fast Track designation is designated to expedite the development and review of new therapies to treat serious conditions and address

unmet medical needs.

(3) 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.

F39

ANNUAL REPORT ON FORM 10-K There are many difficulties and uncertainties inherent in pharmaceutical research and development and the
introduction of new products, as well as 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 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 potential new medicines. 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 any 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.
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 anticipated 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., most challenges have been finally resolved in our favor, and one
remains in active litigation. 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.
We expect that the entry of generic competition in the U.S. either from an unfavorable outcome to the patent
challenge or following the loss of patent exclusivity, will cause a rapid and severe decline in revenue and have
a material adverse effect on our consolidated results of operations and cash flows.

F40

ANNUAL REPORT ON FORM 10-KWe are aware that several companies have received approval to market generic versions of pemetrexed in
major European markets and that generic competitors may choose to attempt a launch at risk. Following a
final decision in the Supreme Court of Germany in July 2020 overturning the lower court and upholding the
validity of our Alimta patent, several generics that were on the market at risk in Germany left. We have
removed the remaining generics from the market in Germany by obtaining preliminary injunctions in our favor.
In September 2020, the Paris Court of First Instance in France issued a final decision upholding the validity of
our Alimta patent and found infringement by Fresenius Kabi France and Fresenius Kabi Groupe France’s
(collectively, Kabi) pemetrexed product. The court issued an injunction against Kabi and provisionally awarded
us damages. In January 2021, that same court issued a preliminary injunction against Zentiva France S.A.S.
(Zentiva), the last remaining company with a generic pemetrexed product on the French market, and
provisionally awarded us damages. In October 2020, the Court of Appeal of the Netherlands overturned a
lower court decision and ruled that our Alimta patent is valid and infringed and reinstated an injunction against
Kabi, thereby removing Kabi's pemetrexed product from the Netherlands market. Kabi has appealed this
decision to the Netherlands Supreme Court. Kabi's generic pemetrexed product was the only at risk generic
on the market in the Netherlands. Our vitamin regimen patents have also been challenged in other smaller
European jurisdictions.

We expect that further entry of generic competition for Alimta in major European markets following either the
loss of effective patent protection or of patent exclusivity will cause a rapid and severe decline in revenue.
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, among others, 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 severity 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.
Our compound patent protection for Cymbalta® expired in Japan in January 2020. We expect generics to
enter the market in mid-2021. We expect that the entry of generic competition will cause a rapid and severe
decline in revenue and will have a material adverse effect on our consolidated results of operations and cash
flows.

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 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. 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:

•

the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent stimulus bills that
focus on ensuring availability and access to lifesaving drugs during a public health crisis,

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 (HHS) to negotiate prices
for biologics and drugs in Medicare,

a reduction in biologic data exclusivity,

•

F41

ANNUAL REPORT ON FORM 10-K •

•

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.

On July 24, 2020 and September 13, 2020, former U.S. President Donald Trump signed Executive Orders
related to the 340B Prescription Drug Program, rebate reform in Medicare Part D, drug importation including
insulin, and foreign reference pricing in Medicare Part B and Part D. Although their current status is unclear
given the change in presidential administration, these Executive Orders, if implemented, could have a
material adverse impact on our future consolidated results of operations, liquidity, and financial position. On
September 1, 2020, Lilly announced it would distribute all 340B ceiling priced products directly to covered
entities and their child sites only. Lilly provides 340B discounts to a contract pharmacy only if it is a wholly
owned subsidiary of a covered entity, if a covered entity does not have an in-house pharmacy or, in the case
of insulin, if the subject covered entity and its contract pharmacies agree to pass along the discount to
patients without any markup for dispensing fees and without billing insurance or collecting duplicate
discounts. Lilly has been transparent with regulators on its distribution activity and continues to comply with all
340B program requirements. Certain covered entities and their trade associations have threatened litigation,
questioning whether Lilly’s program, and similar actions by other manufacturers, violate 340B program
requirements. On October 9, 2020, three covered entities sued HHS and the Health Resources and Services
Administration (HRSA) in the U.S. District Court for the District of Columbia seeking to compel the agencies to
take enforcement action against Lilly and three other companies, among other requested relief. On October
21, 2020, a trade association representing certain covered entities sued HHS in the same court seeking to
compel the agency to promulgate administrative dispute resolution regulations. On December 11, 2020, a
number of associations and entities filed suit against HHS in the U.S. District Court for the Northern District of
California requesting immediate enforcement of the contract pharmacy guidance. On December 31, 2020, the
General Counsel of HHS issued an advisory opinion alleging that honoring contract pharmacy agreements is
mandatory. In January 2021, Lilly filed suit against HHS, the Secretary of HHS, the HRSA, and the
Administrator of the HRSA in the U.S. District Court for the Southern District of Indiana seeking a declaratory
judgment that HHS's attempt to require manufacturers to permit contract pharmacy distribution is unlawful and
a preliminary injunction enjoining implementation of the alternative dispute resolution process created by
defendants and, with it, their application of the advisory opinion, and other related relief. The cases are
pending and the impact of these cases and any subsequent litigation is uncertain. See Note 16 to the
consolidated financial statements for additional information.

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. Several states have also passed
importation legislation, including Colorado, Florida, Maine, New Hampshire, New Mexico, and Vermont. As of
late 2020 several of these states were actively working with the former presidential administration to
implement an importation program from Canada. On November 22, 2020, Florida announced it submitted a
proposed importation plan to the U.S. In 2020, HHS and the FDA also took several actions to advance state
importation initiatives, including issuing requests for proposals for personal importation and reimportation of
insulin and a final rule on the Importation of Prescription Drugs. Additionally, on November 27, 2020, the
Canadian Minister of Health issued an interim order to ensure that participation in bulk importation
frameworks, such as the one recently established by the U.S., does not cause or exacerbate a drug shortage
in Canada. We continue to review these state proposals and legislation, as well as federal rules and guidance
published by HHS and the FDA, the impact of which is uncertain at this time. Currently, it is unclear if the
current presidential administration will adopt any of the importation initiatives put forth by the former
presidential administration. We will continue to monitor and assess these developments.

F42

ANNUAL REPORT ON FORM 10-KIn the private sector, consolidation and integration among healthcare providers significantly affects the
competitive marketplace for pharmaceuticals. Health plans, pharmacy benefit managers, wholesalers, and
other supply chain stakeholders have been consolidating into fewer, larger entities, thus enhancing their
purchasing strength and importance. Private third-party insurers, as well as governments, typically maintain
formularies that 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) to control costs by negotiating discounted
prices in exchange for formulary inclusion. 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 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 that 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. We expect these downward
pricing pressures will continue to negatively affect our 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 higher co-insurance or co-pays. 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 pharmaceutical products. The COVID-19 pandemic is also creating additional pressure on health
systems worldwide. As a result, cost containment and other measures may intensify as governments manage
and emerge from the pandemic.

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 affect our effective tax
rate, results of operations, and cash flows. Countries around the world, including the U.S., are actively
considering and enacting tax law changes. The current presidential administration's tax proposal contains
significant changes, including the rate at which income of U.S. companies would be taxed. 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.
In addition, global tax authorities routinely examine our tax returns and are expected to become more
aggressive in their examinations of profit allocations among jurisdictions, which could affect our anticipated
tax liabilities.

F43

ANNUAL REPORT ON FORM 10-K Acquisitions

We strategically invest in external research and technologies that we believe complement and strengthen our
own efforts. These investments can take many forms, including acquisitions, strategic alliances,
collaborations, investments, and licensing arrangements. 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 continuously evaluate business development transactions that have the potential to strengthen our
business.

In 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, an oral
RET inhibitor, and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the FDA approved
selpercatinib (Retevmo) under its Accelerated Approval regulations and continued approval may be
contingent upon verification and description of clinical benefit in confirmatory trials.

In 2020, we acquired all shares of Dermira for a purchase price of $849.3 million, net of cash acquired. Under
terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being
evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track
designation from the FDA. We also acquired Qbrexza® cloth, a medicated cloth for the topical treatment of
primary axillary hyperhidrosis (uncontrolled excessive underarm sweating).

In January 2021, we acquired all shares of Prevail Therapeutics Inc. (Prevail) for a purchase price of
approximately $880 million in cash plus one non-tradable contingent value right (CVR). The CVR entitles
Prevail stockholders to up to an additional approximately $160 million payable, subject to certain terms and
conditions, upon the first regulatory approval of a Prevail product in one of the following countries: U.S.,
Japan, United Kingdom, Germany, France, Italy, or Spain. Under the terms of the agreement, we acquired a
biotechnology company developing potentially disease-modifying AAV9-based gene therapies for patients
with neurodegenerative diseases.

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

F44

ANNUAL REPORT ON FORM 10-KOperating Results—2020

Revenue

The following table summarizes our revenue activity by region:

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Outside U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Numbers may not add due to rounding.

Year Ended
December 31,

2020
14,229.3 $
10,310.5
24,539.8 $

2019
12,722.6

9,596.8

22,319.5

Percent Change
12

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

Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Foreign exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Percent change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020 vs. 2019

Outside U.S. Consolidated
15 %

13 %

(6) %

— %

7 %

(5) %

— %

10 %

U.S.

17 %

(5) %

— %

12 %

Numbers may not add due to rounding.
In the U.S., the revenue increase in 2020 was driven by increased volume primarily for Trulicity®,
bamlanivimab, and Taltz®. Excluding bamlanivimab revenue, U.S. revenue grew 5 percent. The increase in
revenue due to volume was partially offset by a decrease in realized prices. The decrease in realized prices in
the U.S. was primarily driven by increased rebates to gain and maintain broad commercial access across the
portfolio and, to a lesser extent, unfavorable segment mix and changes to estimates for rebates and
discounts, most notably impacting Humalog. The decrease in realized prices in the U.S. was partially offset by
modest list price increases and lower utilization in the 340B segment.

Outside the U.S., the revenue increase in 2020 was driven by increased volume primarily for Tyvyt, Trulicity,
Alimta, and Olumiant. The increase in revenue due to volume was partially offset by lower realized prices
primarily for Tyvyt and Alimta. The increase in volume and decrease in realized prices for Tyvyt and Alimta
was driven primarily by their inclusion in government reimbursement programs in China.

F45

ANNUAL REPORT ON FORM 10-K

The following table summarizes our revenue activity in 2020 compared with 2019:

Year Ended
December 31,

2020

2019

U.S.

Total

Outside U.S.

Product
Trulicity . . . . . . . . . . . . . . . . . . . . . . . . $ 3,835.9 $ 1,232.2 $ 5,068.1 $ 4,127.8
Humalog(1) . . . . . . . . . . . . . . . . . . . . . .
2,820.7
1,485.6
2,115.8
Alimta . . . . . . . . . . . . . . . . . . . . . . . . .
1,265.3
1,366.4
Taltz . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,288.5
Humulin® . . . . . . . . . . . . . . . . . . . . . . .
1,290.1
866.4
Jardiance(2) . . . . . . . . . . . . . . . . . . . . .
944.2
620.8
Basaglar® . . . . . . . . . . . . . . . . . . . . . . .
1,112.6
842.3
1,404.7
Forteo . . . . . . . . . . . . . . . . . . . . . . . . .
510.3
Cyramza® . . . . . . . . . . . . . . . . . . . . . .
925.1
381.9
579.7
Verzenio . . . . . . . . . . . . . . . . . . . . . . .
618.2
Bamlanivimab(3)
—
850.0
. . . . . . . . . . . . . . . . . . . . . .
725.4
Cymbalta . . . . . . . . . . . . . . . . . . . . . . .
42.1
426.9
Olumiant . . . . . . . . . . . . . . . . . . . . . . .
63.8
Cialis® . . . . . . . . . . . . . . . . . . . . . . . . .
890.5
61.8
Erbitux® . . . . . . . . . . . . . . . . . . . . . . . .
543.4
480.1
Zyprexa® . . . . . . . . . . . . . . . . . . . . . . .
418.7
46.1
Emgality® . . . . . . . . . . . . . . . . . . . . . . .
162.5
325.9
Trajenta®(4) . . . . . . . . . . . . . . . . . . . . . .
590.6
95.6
Other products . . . . . . . . . . . . . . . . . . .

2,625.9
2,329.9
1,788.5
1,259.6
1,153.8
1,124.4
1,046.3
1,032.6
912.7
871.2
767.7
638.9
607.1
536.4
406.5
362.9
358.5

1,140.3
1,064.7
500.0
393.2
533.0
282.1
536.0
650.8
294.4
21.2
725.6
575.0
545.4
56.3
360.5
37.0
263.0

1,874.4
548.7
Revenue . . . . . . . . . . . . . . . . . . . . . $ 14,229.3 $ 10,310.5 $ 24,539.8 $ 22,319.5

1,648.8

1,099.8

Percent
Change
23
(7)
10
31
(2)
22
1
(26)
12
57
NM
6
50
(32)
(1)
(3)
NM
(39)

(12)
10

Numbers may not add due to rounding.
NM - Not meaningful
(1) Humalog revenue includes insulin lispro.
(2) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.
(3) Bamlanivimab sales are pursuant to EUA.
(4) Trajenta revenue includes Jentadueto®.

Revenue of Trulicity, a treatment for type 2 diabetes and to reduce the risk of major adverse cardiovascular
events in adult patients with type 2 diabetes and established cardiovascular disease or multiple
cardiovascular risk factors, increased 22 percent in the U.S., driven by increased volume, partially offset by
lower realized prices primarily due to higher contracted rebates. Revenue outside the U.S. increased 27
percent, primarily driven by increased volume.

Revenue of Humalog, an injectable human insulin analog for the treatment of diabetes, decreased 11 percent
in the U.S., driven by lower realized prices, partially offset by higher demand. Revenue outside the U.S.
decreased 1 percent, primarily driven by the unfavorable impact of foreign exchange rates. Included in the
revenue of Humalog in the U.S. are our own insulin lispro authorized generics, which began launching in the
second quarter of 2019 in order to lower out-of-pocket costs for patients. 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 4 percent in the U.S., primarily driven by higher
realized prices. Revenue outside the U.S. increased 19 percent, primarily driven by increased volume in
China and Germany, partially offset by lower realized prices. We will lose our patent protection for Alimta in
Japan and major European countries in June 2021. We expect the limited entry of generic competition in the
U.S. starting February 2022 and subsequent unlimited entry starting April 2022. We expect that the entry of
generic competition following the loss of exclusivity will cause a rapid and severe decline in revenue. See
"Results of Operations - Executive Overview - Other Matters" for more information.

F46

ANNUAL REPORT ON FORM 10-K

Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active psoriatic arthritis, ankylosing
spondylitis, and active non-radiographic axial spondyloarthritis, increased 27 percent in the U.S., primarily
driven by increased demand. Revenue outside the U.S. increased 43 percent, primarily driven by increased
volume.

Revenue of Humulin, an injectable human insulin for the treatment of diabetes, decreased 2 percent in the
U.S., driven by lower realized prices, partially offset by higher volume. Revenue outside the U.S. decreased 4
percent, driven by decreased volume and the unfavorable impact of foreign exchange rates, partially offset by
higher 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 10 percent in the U.S., driven
by increased volume. Revenue outside the U.S. increased 41 percent, driven primarily by increased volume.
See Note 4 to the consolidated financial statements for information regarding our collaboration with
Boehringer Ingelheim involving Jardiance.

Revenue of Basaglar, a long-acting human insulin analog for the treatment of diabetes, decreased 4 percent
in the U.S., driven by lower realized prices. Revenue outside the U.S. increased 19 percent, driven primarily
by increased volume. See Note 4 to the consolidated financial statements for information regarding our
collaboration with Boehringer Ingelheim involving Basaglar. A competitor launched a similar version of
glargine in the U.S. in 2020. Due to the impact of competitive pressures, we expect some price decline and
loss of market share over time.

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 21
percent in the U.S., primarily driven by decreased demand. Revenue outside the U.S. decreased 29 percent,
driven by decreased volume and, to a lesser extent, lower realized prices. We expect further volume declines
as a result of the anticipated entry of generic and biosimilar competition due to the loss of patent exclusivity in
the U.S., Japan, and major European markets. See "Executive Overview - Other Matters - Patent Matters" for
more information.

Revenue of Cyramza, a treatment for various cancers, increased 14 percent in the U.S., driven primarily by
increased demand and, to a lesser extent, higher realized prices. Revenue outside the U.S. increased 10
percent, driven primarily by increased volume.

Revenue of Verzenio, a treatment for HR+, HER2- metastatic breast cancer, increased 36 percent in the U.S.,
driven by increased demand and, to a lesser extent, higher realized prices. Revenue outside the U.S.
increased $169.5 million driven by higher volume.

Gross Margin, Costs, and Expenses

Gross margin as a percent of revenue was 77.7 percent in 2020, a decrease of 1.1 percentage points
compared with 2019, primarily due to the impact of lower realized prices on revenue, the unfavorable effect of
foreign exchange rates on international inventories sold, and higher intangibles amortization expense related
to Retevmo, partially offset by charges in 2019 resulting from the withdrawal of Lartruvo® and greater
manufacturing efficiencies. Gross margin percent for 2020 was also negatively impacted as a result of
bamlanivimab sales in the fourth quarter of 2020.

Research and development expenses increased 9 percent to $6.09 billion in 2020, driven primarily by
approximately $450 million of development expenses for COVID-19 therapies. Excluding these expenses
related to COVID-19 therapies, research and development expenses were relatively flat.

Marketing, selling, and administrative expenses decreased 1 percent to $6.12 billion in 2020 primarily due to
lower marketing activity.

We recognized acquired IPR&D charges of $660.4 million in 2020 resulting from the acquisitions of Disarm
and a pre-clinical stage company as well as collaborations with Innovent, Sitryx, Fochon, AbCellera, Evox,
and Junshi Biosciences. In 2019, we recognized acquired IPR&D charges of $239.6 million resulting from
collaborations with AC Immune, Centrexion, ImmuNext, and Avidity.

F47

ANNUAL REPORT ON FORM 10-K We recognized asset impairment, restructuring, and other special charges of $131.2 million in 2020. The
charges were primarily related to severance costs incurred as a result of actions taken worldwide to reduce
our cost structure, as well as acquisition and integration costs incurred as part of the acquisition of Dermira. In
2019, we recognized $575.6 million of asset impairment, restructuring, and other special charges primarily
associated with the accelerated vesting of Loxo employee equity awards as part of the acquisition of Loxo.

Other—net, (income) expense was income of $1.17 billion in 2020 compared to income of $291.6 million in
2019 primarily driven by higher net gains on investment securities.

Our effective tax rate was 14.3 percent in 2020, compared with an effective tax rate of 11.9 percent in 2019
driven by net discrete tax benefits in 2019.

Operating Results—2019

For a discussion of our results of operations pertaining to 2019 and 2018 see Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in our Annual Report on Form 10-
K for the year ended December 31, 2019.

F48

ANNUAL REPORT ON FORM 10-KFINANCIAL CONDITION AND LIQUIDITY

We believe our available cash and cash equivalents, together with our ability to generate operating cash flow and
our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital
requirements, which include:

•

working capital requirements, including related to employee payroll, clinical trials, manufacturing
materials, and taxes;

capital expenditures;

share repurchases and dividends;

repayment of outstanding short-term and long-term borrowings;

contributions to our defined benefit pension and retiree health benefit plans;

• milestone and royalty payments; and

•

potential business development activities, including acquisitions, strategic alliances, collaborations,
investments, and licensing arrangements.

Our management continuously evaluates our liquidity and capital resources, including our access to external
capital, to ensure we can adequately and efficiently finance our capital requirements. As of December 31, 2020,
our material cash requirements primarily related to purchases of goods and services to produce our products and
conduct our operations, capital equipment expenditures, dividends, repayment of outstanding borrowings, the
remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the Tax Cuts
and Jobs Act (2017 Tax Act), leases, unfunded commitments to invest in venture capital funds, and retirement
benefits (see Notes 11, 14, 10, 7, and 15 to the consolidated financial statements). We anticipate our cash
requirements related to ordinary course purchases of goods and services and capital equipment expenditures
will be consistent with our past levels relative to revenues.

Cash and cash equivalents increased to $3.66 billion as of December 31, 2020, compared with $2.34 billion at
December 31, 2019. Net cash provided by operating activities was $6.50 billion in 2020, compared with $4.84
billion in 2019. 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). 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, 2020 and 2019.

In addition to our cash and cash equivalents, we held total investments of $2.99 billion and $2.06 billion as of
December 31, 2020 and 2019, respectively. See Note 7 to the consolidated financial statements for additional
details.

In February 2020, we completed our acquisition of Dermira for $18.75 per share, or approximately $1.1 billion,
which was funded through cash on hand and the issuance of commercial paper. 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, 2020, total debt was $16.60 billion, an increase of $1.28 billion compared with $15.32 billion
at December 31, 2019. The increase primarily related to the net proceeds from the issuance of $1.00 billion of
2.25 percent fixed-rate notes in May 2020, as well as the net proceeds from the issuance of an additional $250.0
million of 2.25 percent fixed-rate notes and the issuance of $850.0 million of 2.50 percent fixed-rate notes in
August 2020. We used the net proceeds from the sale of these notes for general corporate purposes, which
included the repayment of outstanding commercial paper used to fund a portion of the purchase price for our
acquisition of Dermira. See Note 11 to the consolidated financial statements for additional information.

As of December 31, 2020, we had a total of $5.24 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 135th consecutive year, we distributed dividends to our shareholders. Dividends of $2.96 per share and
$2.58 per share were paid in 2020 and 2019, respectively. In the fourth quarter of 2020, effective for the dividend
to be paid in the first quarter of 2021, the quarterly dividend was increased to $0.85 per share, resulting in an
indicated annual rate for 2021 of $3.40 per share.

Capital expenditures of $1.39 billion during 2020, compared to $1.03 billion in 2019.

F49

ANNUAL REPORT ON FORM 10-K In 2020, we repurchased $500.0 million of shares under our $8.00 billion share repurchase program authorized
in June 2018. As of December 31, 2020, we had $1.00 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 2021, we completed our acquisition of Prevail for $22.50 per share, or approximately $880 million in
cash, plus one non-tradable CVR that entitles Prevail stockholders to up to an additional $4.00 per share in cash
(or an aggregate of approximately $160 million) payable, subject to certain terms and conditions. This acquisition
was funded primarily 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.

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, currency values,
and fair values of equity securities. 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
positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest
rate exposure at December 31, 2020 and 2019, 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, 2020 and 2019, 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, 2020 and 2019, 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.

Our fair value risk exposure relates primarily to our public equity investments and to equity investments that do
not have readily determinable fair values. As of December 31, 2020 and 2019, our carrying values of these
investments were $2.04 billion and $1.12 billion, respectively. A hypothetical 20 percent change in fair value of
the equity instruments would have impacted other-net, (income) expense by $407.6 million and $224.7 million as
of December 31, 2020 and 2019, respectively.

F50

ANNUAL REPORT ON FORM 10-KWe 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.

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 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.

F51

ANNUAL REPORT ON FORM 10-K 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

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,
rebates 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.

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, 2020, a 5
percent change in our global sales return, rebate, and discount liability would have led to an approximate
$313 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, 2020 and 2019.

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

(Dollars in millions)
Sales return, rebate, and discount liabilities, beginning of year . . . . . . . . . . . . . . . . $ 4,635.5 $ 4,670.9
15,490.2
18,668.4
(17,903.9) (15,525.6)
Sales return, rebate, and discount liabilities, end of year . . . . . . . . . . . . . . . . . . . . . $ 5,400.0 $ 4,635.5
(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 2 percent of consolidated net

Reduction of net sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2019

2020

sales for each of the years presented.

F52

ANNUAL REPORT ON FORM 10-KProduct 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 purchase 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.

F53

ANNUAL REPORT ON FORM 10-K 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 65 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.

Annually, we determine the fair value of the plan assets in our defined benefit pension and retiree health
benefit plans. Approximately 35 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.

F54

ANNUAL REPORT ON FORM 10-KFinancial Statement Impact

If the 2020 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 $21.6 million. If
the 2020 expected return on plan assets for U.S. plans were to change by a quarter percentage point, income
before income taxes would change by $28.8 million. If our assumption regarding the 2020 expected age of
future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected
by $52.0 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, 2020.

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 we record
estimates based upon these interpretations. Our tax returns are routinely subject to examination by various
taxing authorities, which could 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
future taxable income 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 to
generate future taxable income in these jurisdictions could lead to the reversal of all or a portion of these
valuation allowances and a reduction of income tax expense.

Financial Statement Impact

As of December 31, 2020, a 5 percent change in the amount of uncertain tax positions and the valuation
allowance would result in a change in net income of $83.4 million and $40.8 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.

FINANCIAL EXPECTATIONS FOR 2021

For the full year of 2021, we expect EPS to be in the range of $7.10 to $7.75, which excludes estimated
acquisition and integration costs related to the acquisition of Prevail. We anticipate total revenue between
$26.5 billion and $28.0 billion, including an estimated $1 billion to $2 billion of revenue from COVID-19
therapies. Revenue growth is expected to be driven by volume from Trulicity, Taltz, Verzenio, Jardiance,
Olumiant, Cyramza, Emgality, Tyvyt, and Retevmo, as well as by COVID-19 therapies. Revenue growth is
expected to be partially offset by lower revenue for products that have lost patent exclusivity. We expect mid-
single digit net price declines globally in 2021. In the U.S., we expect low-to-mid-single digit net price
declines, driven primarily by increased rebates to maintain broad commercial access and segment mix,
partially offset by lower utilization in the 340B segment. Outside the U.S., we expect net price declines in
China, Japan, and Europe.

F55

ANNUAL REPORT ON FORM 10-K We anticipate that gross margin as a percent of revenue will be approximately 77 percent in 2021. Research
and development expenses are expected to be in the range of $6.5 billion to $6.7 billion, including
approximately $300 million to $400 million of continued investment in COVID-19 therapies. 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 $200 million to $300 million. The 2021 effective
tax rate is expected to be approximately 15 percent.

Item 7A. Quantitative and Qualitative Disclosures About

Market Risk

You can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) at Item 7,
“Management’s Discussion and Analysis - Financial Condition and Liquidity.” That information is incorporated
by reference herein.

F56

ANNUAL REPORT ON FORM 10-KItem 8. Financial Statements and Supplementary Data
Consolidated Statements of Operations

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions and shares in thousands,
except per-share data)
Year Ended December 31
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 from continuing operations . . . . . . . . . . . . . . . . . . . . .
Net income from discontinued operations (Note 19) . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020

2019
$ 24,539.8 $ 22,319.5 $ 21,493.3

2018

5,483.3
6,085.7
6,121.2

660.4

4,721.2
5,595.0
6,213.8

239.6

4,681.7
5,051.2
5,975.1

1,983.9

131.2
(1,171.9)
17,309.9
7,229.9
1,036.2
6,193.7
—
6,193.7 $

575.6
(291.6)

17,053.6
5,265.9
628.0
4,637.9
3,680.5
8,318.4 $

266.9
(145.6)
17,813.2
3,680.1
529.5
3,150.6
81.4
3,232.0

Earnings per share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Earnings from continuing operations - basic . . . . . . . . . . . . . . . . $
Earnings from discontinued operations - basic . . . . . . . . . . . . . .
Earnings per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

Earnings from continuing operations - diluted . . . . . . . . . . . . . . . $
Earnings from discontinued operations - diluted . . . . . . . . . . . . .
Earnings per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

6.82 $
—
6.82 $

6.79 $
—
6.79 $

4.98 $
3.95
8.93 $

4.96 $
3.93
8.89 $

3.07
0.07
3.14

3.05
0.08
3.13

Shares used in calculation of earnings per share: . . . . . . . . . . . . .
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

907,634

912,505

931,059

1,027,721

935,684

1,033,667

See notes to consolidated financial statements.

F57

ANNUAL REPORT ON FORM 10-K

Consolidated Statements of Comprehensive Income (Loss)

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Year Ended December 31
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020

2019
$ 6,193.7 $ 8,318.4 $ 3,232.0

2018

122.1

14.2

(89.9)

(429.6)

34.4

(8.8)

(157.1)
(152.9)

(970.0)

544.0

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 from discontinued operations, net of
tax (Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax (Note 17) . . . . . . . . . .
83.6
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,220.9 $ 7,535.0 $ 3,315.6

(173.7)

(840.2)

(991.2)

(783.4)

200.9

151.0

27.2

56.8

34.3

99.6

69.3

14.3

—

(30.3)

(6.0)

See notes to consolidated financial statements.

F58

ANNUAL REPORT ON FORM 10-K

Consolidated Balance Sheets

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

December 31

2020

2019

2,337.5
Cash and cash equivalents (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101.0
Short-term investments (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,547.3
Accounts receivable, net of allowances of $25.9 (2020) and $22.4 (2019) . . .
994.2
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,190.7
Inventories (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,538.9
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,709.6
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,962.4
Investments (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,679.4
Goodwill (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,618.0
Other intangibles, net (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,572.6
Deferred tax assets (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,872.9
Property and equipment, net (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,871.2
Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,633.1 $ 39,286.1
Liabilities and Equity
Current Liabilities

3,657.1 $
24.2
5,875.3
1,053.7
3,980.3
2,871.5
17,462.1
2,966.8
3,766.5
7,450.0
2,830.4
8,681.9
3,475.4

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Liabilities

Long-term debt (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued retirement benefits (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term income taxes payable (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies (Note 16)
Eli Lilly and Company Shareholders' Equity (Notes 12 and 13)

8.7 $

1,606.7
997.2
5,853.0

770.6

495.1
2,750.3
12,481.6

16,586.6
4,094.5
3,837.8
1,707.5
2,099.9
28,326.3

1,499.3
1,405.3
915.5
4,933.6

671.5

160.6
2,189.4
11,775.2

13,817.9
3,698.2
3,607.2
1,501.0
2,187.5
24,811.8

Common stock—no par value
Authorized shares: 3,200,000
598.8
Issued shares: 957,077 (2020) and 958,056 (2019) . . . . . . . . . . . . . . . . . . .
6,685.3
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,920.4
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,013.2)
Employee benefit trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,523.6)
Accumulated other comprehensive loss (Note 17) . . . . . . . . . . . . . . . . . . . . . .
(60.8)
Cost of common stock in treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,606.9
Total Eli Lilly and Company shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . .
92.2
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,699.1
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,633.1 $ 39,286.1

598.2
6,778.5
7,830.2
(3,013.2)
(6,496.4)
(55.7)

5,641.6
183.6
5,825.2

See notes to consolidated financial statements.

F59

ANNUAL REPORT ON FORM 10-K

Consolidated Statements of Shareholders' Equity

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

Common Stock

Amount

Additional
Paid-in
Capital

Retained
Earnings

Employee
Benefit
Trust

Accumulated
Other
Comprehensive
Loss

Common Stock in
Treasury

Amount

Noncontrollin
g Interest

Equity of Eli Lilly and Company Shareholders

Balance at January 1, 2018

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)

3,232.0

(2,372.0)

(4,122.0)

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)

763.8

(105.2)

9.0

85.6

(45,882)

4,150.7

45,882

(4,150.7)

(60)

6.4

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)

1,080.4

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)

37.7

11.0

(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)

Net income

Other comprehensive income,
net of tax

Cash dividends declared per
share: $3.07

Retirement of treasury shares

(3,627)

(2.3)

Purchase of treasury shares

Issuance of stock under
employee stock plans, net

Stock-based compensation

Other

2,648

1.7

(212.7)

308.1

(2.2)

6,193.7

(2,786.2)

(497.7)

27.2

(3,627)

500.0

3,627

(500.0)

(43)

5.1

75.7

3.7

(2.0)

1,017.2

(14.2)

(1,028.9)

(8.0)

92.2

126.6

(35.2)

Balance at December 31, 2020

957,077 $ 598.2 $

6,778.5 $ 7,830.2 $ (3,013.2) $

(6,496.4)

487 $

(55.7) $

183.6

See notes to consolidated financial statements.

F60

ANNUAL REPORT ON FORM 10-K

Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
Cash Flows from Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,193.7 $ 8,318.4 $ 3,232.0

Year Ended December 31

2018

2020

2019

Adjustments to Reconcile Net Income 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 . . . . . . . . . . . . . . . . . . . . . .
Net investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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) . . . . . .
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 Used for Financing Activities . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . .
Cash and cash equivalents at beginning of year (includes $677.5
(2019) and $324.4 (2018) of discontinued operations) . . . . . . . . . . . .

—
—
1,323.9
(134.5)
308.1
(1,438.5)
660.4
333.9

(3,680.5)
(309.8)
1,232.6
62.4
312.4
(403.1)
239.6
751.8

—
—
1,609.0
326.8
279.5
(27.0)
1,983.9
499.0

(1,350.2)
(533.4)
(457.1)
322.0
1,271.3
6,499.6

(1,387.9)
129.7
(11.4)
757.1
(358.7)
(641.2)
(849.3)
—
—
102.8
(2,258.9)

(2,687.1)
(1,494.2)
2,062.3
(276.5)
(500.0)
—
(241.6)
(3,137.1)
216.0
1,319.6

(127.2)
(258.7)
(602.3)
(221.3)
(477.7)
4,836.6

(996.7)
7.8
(980.0)
(125.3)
(284.5)
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

2,337.5

7,998.2

6,536.2

Cash and Cash Equivalents at End of Year (includes $677.5
(2018) of discontinued operations) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,657.1 $ 2,337.5 $ 7,998.2

See notes to consolidated financial statements.

F61

ANNUAL REPORT ON FORM 10-K

Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Tables present dollars in millions, except per-share data)

Note 1: Summary of Significant Accounting Policies and Implementation of New Financial Accounting
Standards

Basis of Presentation

The accompanying consolidated financial statements include Eli Lilly and Company and all subsidiaries and
have been prepared in accordance with accounting principles generally accepted in the United States
(GAAP). We consider majority voting interests, as well as effective economic or other control over an entity
when deciding whether or not to consolidate an entity. We generally do not have control by means other than
voting interests. 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 this Annual Report on
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.

F62

ANNUAL REPORT ON FORM 10-KForeign Currency Translation

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

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, $1.1 billion, and $900 million in 2020, 2019, and 2018,
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. 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 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. Adoption of this standard did not result in a material change in revenue or net income in the
year of adoption.

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 as of January 1, 2018. 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.

F63

ANNUAL REPORT ON FORM 10-K Change in Accounting Principle for Retirement Benefit Plan Assets

Effective during the third quarter of 2020, we adopted a voluntary change in our method of applying an
accounting principle for certain of our retirement benefit plans. Refer to Note 15 for additional information.

Note 2: Revenue

The following table summarizes our revenue recognized in our consolidated statements of operations:

2020

2019

2018

Net product revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Collaboration and other revenue(1) . . . . . . . . . . . . . . . . . .
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $135.6 million, $301.5 million, and

22,694.8 $
1,845.0
24,539.8 $

22,319.5 $

20,377.3 $

1,942.2

19,866.4

21,493.3

1,626.9

$303.2 million during the years ended December 31, 2020, 2019, and 2018, 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, 2020, 2019, and 2018, our three largest
wholesalers each accounted for between 15 percent and 20 percent of consolidated revenue. Further, they
each accounted for between 19 percent and 27 percent of accounts receivable as of December 31, 2020 and
2019.

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.

F64

ANNUAL REPORT ON FORM 10-K

•

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 rebate related to that sale is typically paid up to six months later. Because of this time lag, in
any particular period our rebate adjustments may incorporate revisions of accruals for several
periods.

• Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and

recognized in the same period as the related sales. In some large European countries, government
rebates are based on the anticipated budget for pharmaceutical payments in the country. 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
most 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. In the U.S. we allow bamlanivimab to be returned if the
Emergency Use Authorization (EUA) is revoked. If the EUA were to be revoked, we could experience
an elevated level of product returns of bamlanivimab, dependent on the amount of product remaining
in the distribution channel. 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 at the 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.

F65

ANNUAL REPORT ON FORM 10-K •

Actual U.S. product returns have been less than 2 percent of our U.S. 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 increase 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 1 percent, 2 percent and 1 percent of U.S revenue during
2020, 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.

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 and certain of our collaboration partners, 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.

F66

ANNUAL REPORT ON FORM 10-KContract 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:

2020

2019

Contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

276.8 $

264.6

The contract liabilities balances disclosed above as of December 31, 2020 and 2019 were primarily related to
the remaining license period of symbolic intellectual property and obligations to perform research and
development activities or supply product for a defined period of time.

During the years ended December 31, 2020, 2019, and 2018, revenue recognized from contract liabilities as
of the beginning of the respective 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.

F67

ANNUAL REPORT ON FORM 10-K
Disaggregation of Revenue

The following table summarizes revenue by product:

Revenue—to unaffiliated customers:

Diabetes:

2020

U.S.
2019

2018

2020

Outside U.S.
2019

2018

Trulicity® . . . . . . . . . . . . . . $ 3,835.9 $ 3,155.2 $ 2,515.8 $ 1,232.2 $ 972.7 $ 683.3
Humalog® (1) . . . . . . . . . . .
1,208.7
Humulin® . . . . . . . . . . . . . .
421.2
Jardiance (2) . . . . . . . . . . . .
258.1
Basaglar® . . . . . . . . . . . . .
178.5
Trajenta (3) . . . . . . . . . . . . .
350.5
112.2
Other Diabetes . . . . . . . . .
3,212.5
Total Diabetes . . . . . . . . . . .

1,669.7
879.7
565.9
876.2
224.8
158.0
7,529.5

1,787.8
910.2
400.2
622.8
224.2
146.0
6,607.0

1,140.3
393.2
533.0
282.1
263.0
81.5
3,925.3

1,485.6
866.4
620.8
842.3
95.6
162.5
7,909.1

1,151.0
410.4
378.3
236.3
365.8
88.1
3,602.6

Oncology:

Alimta® . . . . . . . . . . . . . . .
Cyramza® . . . . . . . . . . . . .
Verzenio® . . . . . . . . . . . . .
Erbitux® . . . . . . . . . . . . . . .
Other Oncology . . . . . . . . .
Total Oncology . . . . . . . . . . .

1,265.3
381.9
618.2
480.1
46.6
2,792.1

1,219.5
335.3
454.8
487.9
111.0
2,608.5

1,131.0
291.5
248.5
531.6
200.6
2,403.2

1,064.7
650.8
294.4
56.3
461.0
2,527.2

896.4
589.9
124.9
55.4
339.3
2,005.9

1,001.9
529.9
6.6
103.8
215.1
1,857.3

Immunology:

Taltz® . . . . . . . . . . . . . . . . . 1,288.5
Olumiant® . . . . . . . . . . . . .
63.8
Other Immunology . . . . . .
20.0
Total Immunology . . . . . . . .
1,372.3

1,016.8
42.2
—
1,059.0

738.7
6.7
—
745.4

500.0
575.0
14.6
1,089.6

349.6
384.7
—
734.3

198.7
195.9
—
394.6

Neuroscience:

Cymbalta® . . . . . . . . . . . . .
Zyprexa® . . . . . . . . . . . . . .
Emgality® . . . . . . . . . . . . . .
Other Neuroscience . . . . .
Total Neuroscience . . . . . . .

Other:

Forteo® . . . . . . . . . . . . . . .
Bamlanivimab (4) . . . . . . . .
Cialis® . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . .
Total Other . . . . . . . . . . . . . .

42.1
46.1
325.9
73.2
487.3

510.3
850.0
61.8
246.4

49.6
41.0
154.9
111.0
356.5

54.3
36.2
4.9
182.0
277.4

725.6
360.5
37.0
220.9
1,344.0

675.8
377.6
7.7
305.3
1,366.4

653.7
435.1
—
454.5
1,543.3

645.5
—
231.7
291.9

757.9
—
1,129.2
471.8

536.0
21.2
545.4
321.8

759.1
—
658.8
469.7

817.7
—
722.7
553.3

1,668.4

2,093.7
Revenue . . . . . . . . . . . . . . . . . . . . . . $ 14,229.3 $ 12,722.6 $ 12,391.9 $ 10,310.5 $ 9,596.8 $ 9,101.4
Numbers may not add due to rounding.
(1) Humalog revenue includes insulin lispro.
(2) Jardiance revenue includes Glyxambi® and Synjardy®, and Trijardy® XR.
(3) Trajenta revenue includes Jentadueto®.
(4) Bamlanivimab sales are pursuant to EUA.

1,169.1

1,424.4

2,358.8

1,887.7

F68

ANNUAL REPORT ON FORM 10-K

The following table summarizes revenue by geographical area:

Revenue—to unaffiliated customers(1):

2020

2019

2018

U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,229.3 $ 12,722.6 $ 12,391.9
3,663.1
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,407.4
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750.8
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,280.1
Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 24,539.8 $ 22,319.5 $ 21,493.3
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,765.0
2,547.6
939.4
2,344.9

4,187.7
2,583.1
1,116.9
2,422.7

Numbers may not add due to rounding.

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

Note 3: Acquisitions and Divestiture

In February 2020 and 2019, we completed the acquisitions of Dermira, Inc. (Dermira) and Loxo Oncology, Inc.
(Loxo), respectively. These transactions, as further discussed in this note below in Acquisitions of Businesses,
were accounted for as business combinations 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 these
acquisitions have been included in our consolidated financial statements from the date of acquisition.

We also acquired assets in development in 2020, 2019, and 2018, which are further discussed in this note
below in Asset Acquisitions. Upon each acquisition, the cost allocated to acquired IPR&D was immediately
expensed because the compound acquired had no alternative future use. For the years ended December 31,
2020, 2019, and 2018, we recorded acquired IPR&D charges of $660.4 million, $239.6 million, and $1.98
billion, respectively.

Acquisitions of Businesses

Dermira Acquisition

Overview of Transaction

In February 2020, we acquired all shares of Dermira for a purchase price of approximately $849.3 million, net
of cash acquired. Under terms of the agreement, we acquired lebrikizumab, a novel, investigational,
monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab
was granted Fast Track designation from the U.S. Food and Drug Administration (FDA). We also acquired
Qbrexza® (glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical treatment of primary
axillary hyperhidrosis (uncontrolled excessive underarm sweating).

Assets Acquired and Liabilities Assumed

The fair values recognized related to the assets acquired and liabilities assumed in this acquisition included
goodwill of $86.8 million, other intangibles of $1.20 billion primarily related to lebrikizumab, deferred income
tax liabilities of $49.5 million, and long-term debt of $375.5 million. After the acquisition, we repaid $276.2
million of long-term debt assumed as part of our acquisition of Dermira.

Revenue attributable to assets acquired in the Dermira acquisition did not have a material impact on our
consolidated statement of operations for the year ended December 31, 2020. We are unable to provide the
results of operations for the year ended December 31, 2020 attributable to Dermira 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, 2020 and 2019.

F69

ANNUAL REPORT ON FORM 10-K

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, and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the
FDA approved selpercatinib (Retevmo®) under its Accelerated Approval regulations and continued approval
may be contingent upon verification and description of clinical benefit in confirmatory trials. At the time of
approval, we reclassified our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived
intangible assets to finite-lived intangible assets and began amortizing straight line over its estimated useful
life.

Assets Acquired and Liabilities Assumed

The following table summarizes the amounts recognized for assets acquired and liabilities assumed in the
acquisition of Loxo 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 revenue
attributable to assets acquired in the Loxo acquisition 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.

Asset Acquisitions

The following table and narrative summarize our asset acquisitions during 2020, 2019, and 2018.

Counterparty

Compound(s),Therapy, or Asset

Acquisition
Month

Phase of
Development(1)

Acquired IPR&D
Expense

Sitryx Therapeutics Limited

AbCellera Biologics Inc.
(AbCellera)(2)

Shanghai Junshi Biosciences
Co., Ltd. (Junshi Biosciences)

Pre-clinical targets that could
lead to potential new
medicines for autoimmune
diseases

Neutralizing antibodies for the
treatement and prevention of
COVID-19

Neutralizing antibodies for the
treatment and prevention of
COVID-19

Pre-clinical

52.3

March
2020

Pre-clinical

May 2020

Pre-clinical

25.0

20.0

F70

ANNUAL REPORT ON FORM 10-K

Undisclosed

Evox Therapeutics Ltd

Innovent Biologics, Inc.
(Innovent)

Disarm Therapeutics, Inc.
(Disarm)

Pre-clinical target that could
lead to potential new medicine
Pre-clinical research
collaboration for the potential
treatment of neurological
disorders
Sintilimab injection, an anti-
PD-1 monoclonal antibody
immuno-oncology medicine,
for geographies outside of
China
Disease-modifying
therapeutics program for
patients with axonal
degeneration

May 2020

Pre-clinical

174.8

June 2020

Pre-clinical

22.0

October
2020

Phase III

200.0

Pre-clinical

126.3

Fochon Pharmaceuticals, Ltd.

Pre-clinical molecule targeting
hematological malignancies

November
2020

Pre-clinical

40.0

AC Immune SA

ImmuNext, Inc.

Avidity Biosciences, Inc.

Centrexion Therapeutics
Corporation

Sigilon Therapeutics, Inc.

AurKa Pharma Inc.

ARMO BioSciences, Inc.
(ARMO)

Anima Biotech Inc.

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

Potential new medicines in
immunology and other select
indications

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

Encapsulated cell therapies
for the potential treatment of
type 1 diabetes

AK-01, an Aurora kinase A
inhibitor
Cancer therapy -
pegilodecakin
Translation inhibitors for
selected neuroscience targets

January
2019 &
September
2019(3)

Pre-clinical

127.1

March
2019

Pre-clinical

April 2019

Pre-clinical

July 2019

Phase I

April 2018

Pre-clinical

June 2018

Phase I

40.0

25.0

47.5

66.9

81.8

June 2018

Phase III

1,475.8

July 2018

Pre-clinical

SIGA Technologies, Inc.

Priority Review Voucher

Chugai Pharmaceutical Co.,
Ltd.

NextCure, Inc.

Dicerna Pharmaceuticals Inc.

Hydra Biosciences

OWL833, an oral non-peptidic
GLP-1 receptor agonist
Immuno-oncology cancer
therapies
Cardio-metabolic disease,
neurodegeneration, and pain

TRPA1 antagonists program
for the potential treatment of
chronic pain syndromes

October
2018
October
2018
November
2018
December
2018

December
2018

Not
applicable

Pre-clinical

Pre-clinical(4)

Pre-clinical

148.7

Pre-clinical

22.6

30.0

80.0

50.0

28.1

(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.
We recognized the acquired IPR&D expense of $25.0 million in May 2020 upon closing of the transaction.

(2)

(3) 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.

(4) This research and development collaboration agreement terminated effective March 2020.

F71

ANNUAL REPORT ON FORM 10-K

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 and
$40.3 million from Eddingpharm in 2019 and 2020, respectively. 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 Events

Precision BioSciences, Inc. (Precision)

In January 2021, we entered into a research collaboration and exclusive license agreement with Precision to
utilize Precision's proprietary ARCUS genome editing platform for the research and development of potential
in vivo therapies for genetic disorders. Under terms of the agreement, we paid an upfront cash payment of
$100.0 million and invested $35.0 million in Precision's common stock at a premium. As a result of the
transaction, we will record an acquired IPR&D charge of $107.8 million in the first quarter of 2021.

Merus N.V. (Merus)

In January 2021, we entered into a research collaboration and exclusive license agreement with Merus to
research and develop up to three CD3-engaging T-cell re-directing bispecific antibody therapies. Under the
terms of the agreement, we paid Merus an upfront cash payment of $40.0 million and invested $20.0 million in
Merus common shares at a premium. As a result of the transaction, we will record an acquired IPR&D charge
of $46.5 million in the first quarter of 2021.

Prevail Therapeutics Inc. (Prevail)

In January 2021, we completed our acquisition of Prevail. Prevail is a biotechnology company developing
potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases. The
acquisition establishes a new modality for drug discovery and development, extending our research efforts
through the creation of a gene therapy program that will be anchored by Prevail’s portfolio of clinical-stage
and preclinical neuroscience assets.

We acquired all shares of Prevail for $22.50 per share (approximately $880 million) in cash plus one non-
tradable contingent value right (CVR). The CVR entitles Prevail stockholders to up to an additional $4.00 per
share in cash (or an aggregate of approximately $160 million) payable, subject to terms and conditions, upon
the first regulatory approval of a Prevail product in one of the following countries: U.S., Japan, United
Kingdom (U.K.), Germany, France, Italy or Spain. To achieve the full value of the CVR, such regulatory
approval must occur by December 31, 2024. If such regulatory approval occurs after December 31, 2024, the
value of the CVR will be reduced by approximately 8.3 cents per month until December 1, 2028, at which
point the CVR will expire.

The accounting impact of this acquisition and the results of the operations for Prevail will be included in our
consolidated financial statements beginning in the first quarter of 2021.The initial accounting for this
acquisition is incomplete. Significant, relevant information needed to complete the initial accounting is not
available because the valuation of assets acquired and liabilities assumed is not complete. As a result,
determining these values is not practicable, and we are unable to disclose these values or provide other
related disclosures at this time.

Asahi Kasei Pharma Corporation (Asahi)

In January 2021, we entered into a license agreement with Asahi to acquire the exclusive rights for AK1780,
an orally bioavailable P2X7 receptor antagonist that recently completed Phase 1 single and multiple
ascending dose and clinical pharmacology studies for the potential treatment of chronic pain conditions. As a
result of the transaction, we will pay Asahi an upfront cash payment and record an acquired IPR&D charge of
$20.0 million in the first quarter of 2021.

F72

ANNUAL REPORT ON FORM 10-KNote 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 as well as 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

Milestones
(Deferred) Capitalized(1)

Trajenta(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Jardiance(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basaglar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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 made 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.

F73

ANNUAL REPORT ON FORM 10-K

Effective 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 Jardiance and Trajenta families of products:

Basaglar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Jardiance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trajenta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020
1,124.4 $
1,153.8

358.5

2019
1,112.6 $

944.2

590.6

2018

801.2

658.3

574.7

Olumiant

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 (baricitinib), and certain follow-on compounds, for the treatment of inflammatory and
autoimmune diseases. Incyte has the right to receive tiered, double digit royalty payments on global net 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. In the first half of 2020, the agreement
was amended to include the treatment of COVID-19, with Incyte obtaining the right to receive an additional
royalty ranging up to the low teens on global net sales for the treatment of COVID-19 that exceed a specified
aggregate global net sales threshold.

In connection with the regulatory approvals of Olumiant in the U.S., Europe, and Japan, milestone payments
of $210.0 million and $180.0 million were capitalized as intangible assets as of December 31, 2020 and 2019,
respectively, and are being amortized to cost of sales through the term of the collaboration. This represents
the cumulative amounts that have been capitalized from the start of this collaboration through the end of each
reporting period.

As of December 31, 2020, Incyte is eligible to receive up to $100.0 million of additional payments from us
contingent upon certain success-based regulatory milestones. Incyte is also eligible to receive up to $150.0
million of potential sales-based milestones.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

638.9 $

426.9 $

202.5

2020

2019

2018

F74

ANNUAL REPORT ON FORM 10-K

COVID-19 antibody therapies

In 2020, we entered into a worldwide license and collaboration agreement with AbCellera to co-develop
therapeutic antibodies for the potential prevention and treatment of COVID-19, including bamlanivimab, for
which we hold development and commercialization rights. In connection with this transaction, we recognized
an acquired IPR&D expense of $25.0 million in 2020. AbCellera has the right to receive tiered royalty
payments on global net sales of bamlanivimab with percentages ranging in the mid-teens to mid-twenties.
Royalty payments made to AbCellera are recorded as cost of sales. Pursuant to an EUA, we recognized
$871.2 million of net product revenue associated with our sales of bamlanivimab to third parties during the
year ended December 31, 2020.

In 2020, we entered into a license and collaboration agreement with Junshi Biosciences to co-develop
therapeutic antibodies for the potential prevention and treatment of COVID-19, including etesevimab, for
which we hold development and commercialization rights outside of Greater China (which includes mainland
China, Hong Kong and Macau Special Administrative Regions and Taiwan) and Junshi Biosciences maintains
all rights in Greater China. In connection with this transaction, we recognized an acquired IPR&D expense of
$20.0 million in 2020. Junshi Biosciences has the right to receive royalty payments in the mid-teens on our
future net sales of etesevimab. Junshi Biosciences also has the right to receive certain development,
success-based regulatory and sales-based milestones. As of December 31, 2020, Junshi Biosciences is
eligible to receive up to $75.0 million of additional payments contingent upon certain success-based
regulatory milestones and up to $120.0 million of potential sales-based milestones, contingent upon the
commercial success of etesevimab. During the year ended December 31, 2020, we recognized $50.0 million
of research and development expenses related to development milestones.
Tyvyt®

We have a collaboration agreement with Innovent to jointly develop and commercialize Tyvyt (sintilimab
injection) in China. In 2019, we and Innovent began co-commercializing Tyvyt in China. We record our sales
of Tyvyt to third parties as revenue, with payments made to Innovent for its portion of the gross margin
reported as cost of sales. We also report as revenue our portion of the gross margin for Tyvyt sales made by
Innovent to third parties. Our Tyvyt revenue in China, which is primarily recorded as net product revenue, was
$308.7 million and $134.0 million in 2020 and 2019, respectively.

In October 2020, we obtained an exclusive license for Tyvyt from Innovent for geographies outside of China
and plan to pursue registration of Tyvyt in the U.S. and other markets. We recorded an acquired IPR&D
charge of $200.0 million in 2020 associated with the upfront payment to Innovent.

As of December 31, 2020, Innovent is eligible to receive up to $825.0 million for geographies outside of China
and up to $75.0 million in China in success-based regulatory and sales-based milestones. Innovent is also
eligible to receive tiered double digit royalties on net sales for geographies outside of China.

Tanezumab

We have a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and globally commercialize
tanezumab for the treatment of osteoarthritis pain and cancer pain. The companies equally share the ongoing
development costs and, if successful, in the U.S. will co-commercialize and equally share in gross margin and
certain commercialization expenses. As a result of an amendment to the agreement in the third quarter of
2020, Pfizer will be responsible for commercialization activities and costs outside the U.S., and we have the
right to receive tiered royalties in percentages from the high teens to mid-twenties for net sales in Japan as
well as low double digit royalties on annual net sales greater than $150.0 million in all other territories outside
of the U.S. and Japan. As of December 31, 2020, Pfizer is eligible to receive up to $147.5 million in success-
based regulatory milestones based on current development plans and up to $1.23 billion in a series of sales-
based milestones, contingent upon the commercial success of tanezumab.

Lebrikizumab

As a result of our acquisition of Dermira, we have a worldwide licensing agreement with F. Hoffmann-La
Roche Ltd and Genentech, Inc. (collectively Roche), which provides us the global development and
commercialization rights to lebrikizumab. Roche has the right to receive tiered royalty payments on future
global net sales ranging in percentages from high single digits to high teens if the product is successfully
commercialized. As of December 31, 2020, Roche is eligible to receive up to $180.0 million of payments from
us contingent upon the achievement of success-based regulatory milestones, and up to $1.03 billion in a
series of sales-based milestones, contingent upon the commercial success of lebrikizumab.

F75

ANNUAL REPORT ON FORM 10-K As a result of our acquisition of Dermira, we have a license agreement with Almirall, S.A. (Almirall), under
which Almirall licensed the rights to develop and commercialize lebrikizumab for the treatment or prevention
of dermatology indications, including, but not limited to, atopic dermatitis in Europe. We have the right to
receive tiered royalty payments on future net sales in Europe ranging in percentages from low double digits to
low twenties if the product is successfully commercialized. As of December 31, 2020, we are eligible to
receive additional payments of $85.0 million from Almirall contingent upon the achievement of success-based
regulatory milestones and up to $1.25 billion in a series of sales-based milestones, contingent upon the
commercial success of lebrikizumab.

As of December 31, 2020, $29.7 million was recorded as a contract liability on the consolidated balance sheet
and is expected to be recognized as collaboration and other revenue over the remaining Phase III
development period. During the twelve months ended December 31, 2020, milestones received and
collaboration and other revenue recognized were not material.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Asset impairment (gain) and other special charges . . . . . . . . . . . .
Total asset impairment, restructuring, and other special charges . . $

151.2 $
(20.0)
131.2 $

77.8 $

497.8
575.6 $

127.8
139.1
266.9

2020

2019

2018

Severance costs recognized during the years ended December 31, 2020, 2019 and 2018 were incurred as a
result of actions taken worldwide to reduce our cost structure. Substantially all of the severance costs incurred
during the year ended December 31, 2020 are expected to be paid in the next 12 months.

Asset impairment and other special charges recognized during the year ended December 31, 2019 resulted
primarily from $400.7 million of other special charges related to the acquisition of Loxo, substantially all of
which is associated with the accelerated vesting of Loxo employee equity awards.

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.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2020

2019

758.9 $

2,535.4
651.2
3,945.5
34.8
3,980.3 $

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

Inventories valued under the LIFO method comprised $1.21 billion and $1.20 billion of total inventories at
December 31, 2020 and 2019, respectively.

F76

ANNUAL REPORT ON FORM 10-K

Note 7: Financial Instruments

Financial instruments that potentially subject us to credit risk consist principally of trade receivables and
interest-bearing investments. Wholesale distributors of life-science products account for a substantial portion
of 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. 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, 2020, we had outstanding foreign
currency forward commitments to purchase 647.9 million U.S. dollars and sell 530.7 million euro;
commitments to purchase 2.97 billion euro and sell 3.62 billion U.S. dollars; commitments to purchase 180.7
million U.S. dollars and sell 18.64 billion Japanese yen, and commitments to purchase 272.2 million British
pounds and sell 363.9 million U.S. dollars which all settled within 30 days.

F77

ANNUAL REPORT ON FORM 10-K Foreign 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 $6.02 billion and $5.49
billion as of December 31, 2020 and 2019, respectively, of which $4.50 billion and $4.10 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, 2020 and 2019, respectively. At December 31, 2020, we had
outstanding cross currency swaps with notional amounts of $3.76 billion swapping U.S. dollars to euro and
$1.00 billion swapping swiss francs to U.S. dollars 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 fixed
rate debt to foreign-denominated fixed 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, 2020, substantially all of our total long-term debt is at a fixed rate. We have
converted approximately 9 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, 2020, the total notional amounts of forward-
starting interest rate contracts in designated cash flow hedging instruments were $1.75 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 . . . . . . . . . . . . . . . . . . . . . . . . .

86.9 $
(86.9)

112.1 $
(112.1)

(40.9)
40.9

2020

2019

2018

Cash flow hedges:

Effective portion of losses on interest rate contracts reclassified

from accumulated other comprehensive loss . . . . . . . . . . . . . .

Cross-currency interest rate swaps . . . . . . . . . . . . . . . . . . . . . . .
Net (gains) losses on foreign currency exchange contracts not

designated as hedging instruments . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

16.4
(102.4)

15.9
(17.1)

14.8
—

(123.7)
(209.7) $

61.9
60.7 $

100.0
114.8

During the years ended December 31, 2020, 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.

F78

ANNUAL REPORT ON FORM 10-K

The 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:

2020

2019

2018

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 . . . . . . . . . . . . . . . . . . . . . .

40.1 $

110.4

(404.0) $
(207.9)
—

47.4

—

(110.9)
(53.7)

31.6

(8.3)

96.8

5.7

—

During the next 12 months, we expect to reclassify $16.8 million of net losses on cash flow hedges from
accumulated other comprehensive loss to other–net, (income) expense. During the years ended
December 31, 2020, 2019 and 2018, the amounts excluded from the assessment of hedge effectiveness
recognized in other comprehensive income (loss) were not material.

F79

ANNUAL REPORT ON FORM 10-K

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:

Description

Carrying
Amount

Cost (1)

Fair Value Measurements Using

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

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Fair
Value

December 31, 2020
Cash equivalents . . . . . . . . . . . . . . $ 2,097.9 $ 2,097.9 $
Short-term investments:

2,097.9 $

— $

— $ 2,097.9

U.S. government and agency
securities . . . . . . . . . . . . . . . . . $

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

Noncurrent investments:

U.S. government and agency
securities . . . . . . . . . . . . . . . . . $

Corporate debt securities . . . . . .

137.0
106.4
24.3
110.5
1,664.2

Mortgage-backed securities . . . .
Asset-backed securities . . . . . . .
Other securities . . . . . . . . . . . . . .
Marketable equity securities . . . .
Equity investments without
readily determinable fair
values(2) . . . . . . . . . . . . . . . . . .
373.9
Equity method investments(2) . . .
471.8
Noncurrent investments . . . . . . . $ 2,966.8

9.9 $
2.8
1.2
10.3
24.2

9.9 $
2.8
1.2
10.3

9.9 $
—
—
—

— $
2.8
1.2
—

— $
—
—
10.3

9.9
2.8
1.2
10.3

78.7 $

74.3 $

78.7 $

— $

78.7

126.8
101.4
23.7
31.8
311.6

—
—
—
—
1,664.2

137.0
106.4
24.3
—
—

—
—
—
110.5
—

137.0
106.4
24.3
110.5
1,664.2

December 31, 2019
Cash equivalents . . . . . . . . . . . . . . $ 1,025.4 $ 1,025.4 $
Short-term investments:

1,025.4 $

— $

— $ 1,025.4

U.S. government and agency
securities . . . . . . . . . . . . . . . . . $

7.2 $

— $

Corporate debt securities . . . . . .

Asset-backed securities . . . . . . .
Other securities . . . . . . . . . . . . . .
Short-term investments . . . . . . . . $

81.4
2.6
9.8
101.0

Noncurrent investments:

81.1
2.6
9.8

—
—
—

81.4
2.6
—

—
—
9.8

7.2

81.4
2.6
9.8

U.S. government and agency
securities . . . . . . . . . . . . . . . . . $

Corporate debt securities . . . . . .

Mortgage-backed securities . . . .

Asset-backed securities . . . . . . .
Other securities . . . . . . . . . . . . . .
Marketable equity securities . . . .

77.2 $

76.3 $

77.2 $

— $

77.2

271.1

101.1
30.0
60.0

718.6

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

Equity investments without
readily determinable fair
values(2) . . . . . . . . . . . . . . . . . .
405.0
Equity method investments(2) . . .
299.4
Noncurrent investments . . . . . . . $ 1,962.4

(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.

F80

ANNUAL REPORT ON FORM 10-K

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

Description

Short-term commercial paper

borrowings

December 31, 2020 . . . . . . . . . . . . . . . . . . . $
December 31, 2019 . . . . . . . . . . . . . . . . . . .

— $ — $

— $

(1,494.2)

—

(1,491.6)

— $
—

—
(1,491.6)

Long-term debt, including current

portion

December 31, 2020 . . . . . . . . . . . . . . . . . . . $ (16,595.3) $ — $ (19,038.9) $
December 31, 2019 . . . . . . . . . . . . . . . . . . .

(13,823.0)

(15,150.0)

—

— $ (19,038.9)
(15,150.0)
—

F81

ANNUAL REPORT ON FORM 10-K

Description

December 31, 2020
Risk-management instruments

Interest rate contracts designated as fair

value hedges:
Other noncurrent assets . . . . . . . . . . . . . $

Interest rate contracts designated as cash

flow hedges:
Other noncurrent assets . . . . . . . . . . . . .
Other noncurrent liabilities . . . . . . . . . . .

Cross-currency interest rate contracts

designated as net investment hedges:
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, 2019
Risk-management instruments

Interest rate contracts designated as fair

value hedges:
Other noncurrent assets . . . . . . . . . . . . .
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 . . . . . . . . . . .

as hedging instruments:
Other receivables . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . .

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

158.9 $

— $

158.9 $

— $

158.9

38.1
(97.8)

(92.6)
(97.2)

34.4
(2.9)

41.1
(15.2)

—
—

38.1
(97.8)

(92.6)
(97.2)

34.4
(2.9)

41.1
(15.2)

—
—

38.1
(97.8)

(92.6)
(97.2)

34.4
(2.9)

41.1
(15.2)

72.0

—

72.0

—

72.0

43.3

—

43.3

—

43.3

45.1
(21.4)
(5.7)

3.0
(20.1)

18.4
(11.9)

—
—
—

—
—

45.1
(21.4)
(5.7)

3.0
(20.1)

18.4
(11.9)

—
—
—

—
—

45.1
(21.4)
(5.7)

3.0
(20.1)

18.4
(11.9)

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.

F82

ANNUAL REPORT ON FORM 10-K

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. As of December 31, 2020, we had approximately $687 million of unfunded
commitments to invest in venture capital funds, which we anticipate will be paid over a period of
up to 10 years.

The table below summarizes the contractual maturities of our investments in debt securities measured at fair
value as of December 31, 2020:

Maturities by Period

Total

Less Than
1 Year

1-5

Years

6-10
Years

More Than
10 Years

Fair value of debt securities . . . . . . . . . . . . . . $

360.3 $

13.9 $

135.6 $

82.7 $

128.1

The net gains recognized in our consolidated statements of operations for equity securities were $1,442.2
million, $401.2 million and $72.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The net gains/losses recognized for the years ended December 31, 2020, 2019 and 2018 on equity securities
sold during the respective periods were not material.

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,
2020, 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 . . . . . . . . . . . . . . . . . . . . . .

2020

2019

20.9 $
0.5

348.9

11.4

10.3

4.0

429.5

141.1

We periodically assess our investment in available-for-sale securities for impairment and credit losses. 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. Impairment and credit losses related to available-for-
sale securities were not material for the years ended December 31, 2020, 2019 and 2018.

As of December 31, 2020, 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 86 percent of the fixed-rate debt securities in a loss position are investment-
grade debt securities. As of December 31, 2020, 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.

F83

ANNUAL REPORT ON FORM 10-K

Activity related to our available-for-sale securities was as follows:

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

264.8 $
4.5
8.2

431.6 $
4.9
3.0

2020

2019

2018
5,529.0
3.6
49.2

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 $754.9 million and
$678.8 million of accounts receivable as of December 31, 2020 and 2019, respectively, under these factoring
arrangements. The costs of factoring such accounts receivable on our consolidated results of operations for
the years ended December 31, 2020, 2019, and 2018 were not material.

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 changes in goodwill during 2020 and 2019 were
primarily related to our acquisitions of Dermira and Loxo, respectively. See Note 3 for further discussion.

No impairments occurred with respect to the carrying value of goodwill for the years ended December 31,
2020, 2019, and 2018.

Other Intangibles

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

Description
Finite-lived intangible assets:

2020

2019

Carrying
Amount,
Gross

Accumulated
Amortization

Carrying
Amount,
Net

Carrying
Amount,
Gross

Accumulated
Amortization

Carrying
Amount,
Net

Marketed products . . . . $ 7,984.0 $ (1,659.5) $ 6,324.5 $ 3,150.2 $ (1,244.6) $ 1,905.6
42.4

(51.8)

94.2

(68.3)

92.8

24.5

Other . . . . . . . . . . . . . . . . .
Total finite-lived intangible

assets . . . . . . . . . . . . . .

8,076.8

(1,727.8)

6,349.0

3,244.4

(1,296.4)

1,948.0

Indefinite-lived intangible
assets:

Acquired IPR&D . . . . . .

4,670.0
—
Other intangibles . . . . . . . . $ 9,177.8 $ (1,727.8) $ 7,450.0 $ 7,914.4 $ (1,296.4) $ 6,618.0

4,670.0

1,101.0

—

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.

F84

ANNUAL REPORT ON FORM 10-K

Other finite-lived intangible assets 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 fair values of acquired IPR&D projects acquired in business combination,
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 as other intangible assets if the projects have
an alternative future use; otherwise, they are expensed immediately. See Note 3 for acquired IPR&D projects
that had no alternative future use.

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.

The increase in marketed products and the decrease in acquired IPR&D in 2020 primarily relates to the
reclassification of our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived to finite-
lived as it was approved by the FDA in the second quarter of 2020. This decrease in acquired IPR&D in 2020
was partially offset by the addition of acquired IPR&D for lebrikizumab as a result of the Dermira acquisition.
The increases in marketed products and acquired IPR&D intangible assets in 2019 were primarily related to
our acquisition of Loxo. 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.

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 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, 2020, the remaining weighted-average amortization period for
finite-lived intangible assets was approximately 15 years.

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

Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

428.2 $

225.8 $

361.3

The estimated amortization expense for each of the next five years associated with our finite-lived intangible
assets as of December 31, 2020 is as follows:

2020

2019

2018

Estimated amortization expense . . . . . . . . . . . . . . . . . $ 517.7 $ 513.0 $ 501.2 $ 449.1 $ 432.5

2021

2022

2023

2024

2025

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.

F85

ANNUAL REPORT ON FORM 10-K 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:

2020

2019

226.8 $

7,326.1
8,560.9
2,138.8
18,252.6
(9,570.7)
8,681.9 $

169.5
7,067.3
7,913.3
1,884.4
17,034.5
(9,161.6)
7,872.9

Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 765.2 $ 814.7 $ 797.1

Capitalized interest costs were not material for the years ended December 31, 2020, 2019, and 2018.

2020

2019

2018

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

Long-lived assets(1):

U.S. and Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,113.6 $ 5,595.4
1,454.8
Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,758.3
Other foreign countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,648.2 $ 8,808.5

1,786.9
1,747.7

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

2020

2019

Note 10: Leases

We determine if an arrangement is a lease at inception. We have leases with terms up to 12 years primarily
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.

Operating lease right-of-use assets are presented as other noncurrent assets in our consolidated balance
sheets, and the current and long-term portions of operating lease liabilities are included in other current
liabilities and other noncurrent liabilities, respectively, in our consolidated balance sheets. 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 sheets.

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.

F86

ANNUAL REPORT ON FORM 10-K

Lease expense for operating lease assets, which is recognized on a straight-line basis over the lease term,
was $154.6 million and $172.8 million during the years ended December 31, 2020 and 2019, respectively.
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 years ended December 31, 2020 and 2019. Short-term lease expense was not material
during the years ended December 31, 2020 and 2019.

Supplemental balance sheet information related to operating leases as of December 31, 2020 and 2019 was
as follows:

Weighted-average remaining lease term . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020

2019

7 years
3.3 %

8 years
3.6 %

Supplemental cash flow information related to operating leases during the years ended December 31, 2020
and 2019 was as follows:

Operating cash flows from operating leases . . . . . . . . . . . . . . . . . . . . . . . . $
Right-of-use assets obtained in exchange for new operating lease
liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2020

2019

160.9 $

153.6

136.7

81.2

The annual minimum lease payments of our operating lease liabilities as of December 31, 2020 were as
follows:

Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After Year 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

150.9
120.7
94.1
73.3
63.4
258.7
761.1
97.4
663.7

Rental expense for all leases, including contingent rentals (not material), was $175.7 million for the year
ended December 31, 2018.

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.

F87

ANNUAL REPORT ON FORM 10-K

Note 11: Borrowings

Debt at December 31 consisted of the following:

2019
1,494.2
Short-term commercial paper borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
13,638.5
Long-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.9
Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(73.6)
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
245.2
Fair value adjustment on hedged long-term notes . . . . . . . . . . . . . . . . . . . . . . . .
15,317.2
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,499.3)
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,586.6 $ 13,817.9

16,348.7
14.8
(89.1)
320.9
16,595.3

(8.7)

— $

2020

The following table summarizes long-term notes at December 31:

2.35% notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.00% notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.00% Euro denominated notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . .
0.15% Swiss Franc denominated notes due 2024 . . . . . . . . . . . . . . . . . . . .
7.125% notes due 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.75% notes due 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.625% Euro denominated notes due 2026 . . . . . . . . . . . . . . . . . . . . . . . . .
5.5% notes due 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1% notes due 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.45% Swiss Franc denominated notes due 2028 . . . . . . . . . . . . . . . . . . . .
3.375% notes due 2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.42% Japanese Yen denominated notes due 2029 . . . . . . . . . . . . . . . . . .
2.125% Euro denominated notes due 2030 . . . . . . . . . . . . . . . . . . . . . . . . .
0.625% Euro denominated notes due 2031 . . . . . . . . . . . . . . . . . . . . . . . . .
0.56% Japanese Yen denominated notes due 2034 . . . . . . . . . . . . . . . . . .
6.77% notes due 2036 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.55% notes due 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.95% notes due 2037 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.875% notes due 2039 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.65% notes due 2044 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.7% notes due 2045 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.95% notes due 2047 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.95% notes due 2049 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.7% Euro denominated notes due 2049 . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.97% Japanese Yen denominated notes due 2049 . . . . . . . . . . . . . . . . . .
2.25% notes due 2050 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.15% notes due 2059 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.5% notes due 2060 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized note discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2020

2019

750.0 $
99.2
737.9
679.7
229.7
560.6
922.4
377.5
401.5
453.2
1,150.0
222.4
922.4
737.9
90.0
174.4
476.2
284.1
360.7
43.0
412.5
436.1
1,500.0
1,229.9
74.1
1,250.0
1,000.0
850.0
(76.7)

16,348.7 $

750.0
—
671.8
618.3
229.7
560.6
839.7
377.5
401.5
412.2
1,150.0
209.9
839.7
671.8
85.0
174.4
476.2
284.1
360.7
43.0
412.5
436.1
1,500.0
1,119.6
70.0
—
1,000.0
—
(55.8)
13,638.5

F88

ANNUAL REPORT ON FORM 10-K

The weighted-average effective borrowing rate on outstanding commercial paper at December 31, 2019 was
1.65 percent. The weighted-average effective borrowing rate for each issuance of the long term-notes
approximates the stated interest rate.

At December 31, 2020, we had a total of $5.24 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 2021, 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 as of December 31, 2020. Of the
remaining committed bank credit facilities, the outstanding balances as of December 31, 2020 and 2019 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 May 2020, we issued $1.00 billion of 2.25 percent fixed-rate notes due in May 2050, with interest to be paid
semi-annually. We used the net cash proceeds from the offering of $988.6 million for general corporate
purposes, including the repayment of outstanding commercial paper.

In August 2020, we issued $850.0 million of 2.50 percent fixed-rate notes due in September 2060 and an
additional $250.0 million of our 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-
annually. We used the net cash proceeds from the offering of $1.07 billion for general corporate purposes,
including the repayment of outstanding commercial paper.

In February 2019, we issued $1.15 billion of 3.375 percent fixed-rate notes due in March 2029, $850.0 million
of 3.875 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 cash 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 the repayment of 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 . . . . . . . . . . . . . . . . . . . . $

2021

2022
6.0 $ 1,590.2 $

2023

2024

2025

2.3 $ 681.1 $ 790.3

We have converted approximately 9 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, 2020 and 2019, including the effects of interest rate swaps for hedged
debt obligations, were 2.61 percent and 2.88 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 . . . . . . . . . . . . . . . . . . . $

345.8 $

305.5 $

223.8

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.

2020

2019

2018

F89

ANNUAL REPORT ON FORM 10-K Note 12: Stock-Based Compensation

Our stock-based compensation expense consists of performance awards (PAs), shareholder value awards
(SVAs), relative value awards (RVAs), 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, RVA, and RSU shares.

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

Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . $
Tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

308.1 $
64.7

306.8 $

64.4

253.5

53.2

At December 31, 2020, stock-based compensation awards may be granted under the 2002 Lilly Stock Plan
for not more than 53.9 million additional shares.

2020

2019

2018

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, 2020, 2019, and 2018 were $137.33, $112.09, and $71.63,
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 1.1 million shares, 1.2 million shares, and
0.9 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively.
Approximately 0.8 million shares are expected to be issued in 2021. As of December 31, 2020, the total
remaining unrecognized compensation cost related to nonvested PAs was $77.3 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, 2020, 2019, and 2018 were $139.14, $95.01, and $48.51,
respectively, determined using the following assumptions:

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

2020

2019

2018

2.50 %
1.38
20.90

2.50 %
2.46
21.00

2.50 %
2.31
22.26

Pursuant to this program, approximately 0.8 million shares, 1.0 million shares, and 0.7 million shares were
issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 1.0 million
shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized
compensation cost related to nonvested SVAs was $48.8 million, which will be amortized over the weighted-
average remaining requisite service period of 20 months.

F90

ANNUAL REPORT ON FORM 10-K

Relative Value Award Program

Beginning in 2020, we granted RVAs to officers and management and are payable in shares of our common
stock. The number of shares actually issued, if any, varies depending on the growth of our stock price at the
end of the three-year vesting period compared to our peers. We measure the fair value of the RVA 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 our peers' 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 value of the RVA units granted during the year ended December 31, 2020 was $179.90, determined using
the following assumptions:

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

2020

2.50 %
1.38
19.89

As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested RVAs
was $13.7 million, which will be amortized over the weighted-average remaining requisite service period of 24
months.

Restricted Stock Units

RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are
accounted for at fair value based upon the closing stock price on the date of grant. The corresponding
expense is amortized over the vesting period, typically three years. The fair values of RSU awards granted
during the years ended December 31, 2020, 2019, and 2018 were $135.42, $108.43, and $70.95,
respectively. The number of shares ultimately issued for the RSU program remains constant with the
exception of forfeitures. Pursuant to this program, 1.1 million, 1.5 million, and 1.3 million shares were granted
and approximately 0.6 million, 0.8 million, and 1.0 million shares were issued during the years ended
December 31, 2020, 2019, and 2018, respectively. Approximately 0.6 million shares are expected to be
issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to
nonvested RSUs was $179.2 million, which will be amortized over the weighted-average remaining requisite
service period of 31 months.

Note 13: Shareholders' Equity

During 2020, 2019, and 2018, we repurchased $500.0 million, $4.40 billion and $4.15 billion, respectively, of
shares associated with our share repurchase programs. As of December 31, 2020, we had $1.00 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, 2020 and 2019, 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,
2020 and 2019, 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, 2020 and
2019, 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, 2020, 2019, and 2018.

F91

ANNUAL REPORT ON FORM 10-K Note 14: Income Taxes

Deferred taxes are recognized for the future tax effects of temporary differences between financial and
income tax reporting based on enacted tax laws and rates. Deferred taxes related to GILTI, global intangible
low-taxed income, 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.

In December 2017, the Tax Cuts and Job Act (the 2017 Tax Act) was signed into law. 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 GILTI, a new
U.S. minimum tax on the earnings of our foreign subsidiaries. In 2018, we recorded $313.3 million of income
tax benefit, mainly attributable to measurement period adjustments to the Toll Tax and GILTI.

Following is the composition of income tax expense:

2020

2019

2018

Current:

Federal(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

567.6 $
650.4
(47.3)

Total current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,170.7

Deferred:

Federal(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

280.2 $

299.8

(14.4)

565.6

141.3

(24.1)

(54.8)

169.6

106.8

4.7

281.1

(3.7)

248.7

3.4

Total deferred tax (benefit) expense . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(1) The 2020 and 2019 current tax expense includes $144.4 million and $153.1 million of tax benefit, respectively, from utilization of net
operating loss and tax credit carryforwards. The 2018 current tax expense includes $201.5 million of tax expense related to effects of
the 2017 Tax Act.

628.0 $

62.4

529.5

248.4

(97.4)
(16.6)
(20.5)
(134.5)
1,036.2 $

(2) The 2018 deferred tax benefit includes $26.2 million of tax benefit related to effects of the 2017 Tax Act.

F92

ANNUAL REPORT ON FORM 10-K

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

2020

2019

Deferred tax assets:

Purchases of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax loss carryforwards and carrybacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales rebates and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Correlative tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax redeterminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,560.6 $
1,045.6
523.5
488.3
461.3
404.2
242.8
150.7
135.2
605.8
6,618.0
(816.3)
5,801.7

2,512.4
934.3
455.8
318.8
197.3
219.1
156.8
140.6
75.7
595.7
5,606.5
(616.5)
4,990.0

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

(1,905.3)
(1,465.7)
(623.7)
(410.1)
(315.2)
(216.9)
(134.3)
(5,071.2)

730.5 $

(1,776.4)
(1,298.0)
(686.4)
(305.9)
(274.1)
(139.4)
(124.7)
(4,604.9)
385.1

The deferred tax asset and related valuation allowance amounts for U.S. federal, international, 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, 2020, based on filed tax returns we have tax credit carryforwards and carrybacks of $887.3
million available to reduce future income taxes; $148.8 million, if unused, will expire by 2026, and $16.1
million, if unused, will expire between 2029 and 2039. The remaining portion of the tax credit carryforwards is
related to federal tax credits of $84.8 million, international tax credits of $121.9 million, and state tax credits of
$515.7 million, all of which are fully reserved.

At December 31, 2020, based on filed tax returns we had net operating losses and other carryforwards for
international and U.S. federal income tax purposes of $1.52 billion: $162.6 million will expire by 2025;
$781.7 million will expire between 2026 and 2040; and $576.3 million of the carryforwards will never expire.
Net operating losses and other carryforwards for international and U.S. federal income tax purposes are
partially reserved. Deferred tax assets related to state net operating losses and other carryforwards of $175.6
million are fully reserved as of December 31, 2020.

Domestic and Puerto Rican companies contributed approximately 39 percent, 44 percent, and 15 percent for
the years ended December 31, 2020, 2019, and 2018, 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.

F93

ANNUAL REPORT ON FORM 10-K

Substantially all of the unremitted earnings of our foreign subsidiaries are considered not to be indefinitely
reinvested for continued use in our foreign operations. At December 31, 2020 and December 31, 2019, we
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $

954.6 $

2020

2019
1,180.5 $

2018
1,076.7

The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight
year period beginning in 2018 through 2025. Having made this election, our future cash payments relating to
the Toll Tax as of December 31, 2020 are as follows:

2017 Tax Act Toll Tax . . . . . . . . . . . . . . . . . .

$2,403.1

$253.7

$729.3

$1,420.1

Total

Less than 1 Year

1-3 Years

3-5 Years

We have additional noncurrent income tax payables of $1.69 billion unrelated to the Toll Tax; we cannot
reasonably estimate the timing of future cash outflows associated with these liabilities.

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

2020
1,518.3 $

2019
1,105.8 $

2018

772.8

(297.1)
(97.9)
63.2

—
(150.3)
1,036.2 $

(242.0)

(108.8)

—

(127.0)

(627.1)

(87.4)

309.9

175.3

(14.0)

628.0 $

529.5

(1) Non-deductible acquired IPR&D was related to the acquisitions of Disarm and a pre-clinical stage company in 2020 and ARMO in

2018. 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 . . . .
Ending balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2020
2,108.6 $
225.6
310.8
(52.4)
(72.0)
(41.7)
73.0
2,551.9 $

2019
2,034.6 $
187.2
425.3
(100.3)
(260.5)
(161.5)
(16.2)
2,108.6 $

2018
1,000.8
798.2
410.9
(115.4)
(33.2)
(20.5)
(6.2)
2,034.6

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was
$1.67 billion and $1.53 billion at December 31, 2020 and 2019, respectively.

We file U.S. federal, foreign, and various state and local income tax returns. We are no longer subject to U.S.
federal income tax examination for years before 2016. In most major foreign and state jurisdictions, we are no
longer subject to income tax examination for years before 2012.

F94

ANNUAL REPORT ON FORM 10-K

The U.S. examination of tax years 2016-2018 began in the fourth quarter of 2019 and remains ongoing;
therefore, the resolution of this audit period will likely extend beyond the next 12 months. For tax years
2013-2015, all matters were effectively settled in 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.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

34.0 $

(26.4) $

25.1

2020

2019

2018

At December 31, 2020 and 2019, our accruals for the payment of interest and penalties totaled $196.7 million
and $150.8 million, respectively.

F95

ANNUAL REPORT ON FORM 10-K 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:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2020

2019

2020

2019

Benefit obligation at beginning of year . . . . . . . . . . . . . $ 16,251.0 $ 13,427.1 $ 1,601.4 $ 1,540.0
36.3
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58.0
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54.3
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(87.3)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.5)
Curtailment (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes and other

250.4
486.0
2,631.7
(584.2)
(16.8)

325.5
425.8
1,563.1
(587.2)
2.2

40.8
43.7
142.1
(75.1)
—

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . .

245.1
18,225.5

56.8
16,251.0

0.8
1,753.7

0.6
1,601.4

Change in plan assets:

Fair value of plan assets at beginning of year . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange rate changes and other

adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . .

12,858.0
1,802.4
318.8
(587.2)

10,932.6
2,012.0
429.9
(584.2)

2,768.2
539.0

(5.1)
(75.1)

2,398.1
444.1
13.2
(87.3)

187.0
14,579.0

67.7
12,858.0

—
3,227.0

0.1
2,768.2

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial (gain) loss . . . . . . . . . . . . . .
Unrecognized prior service (benefit) cost . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,884.4 $ 2,802.0 $

(3,646.5)
6,515.5
15.4

(3,393.0)
6,177.6
17.4

1,473.3
(349.1)
(177.6)
946.6 $

1,166.8
(111.6)
(236.4)
818.8

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 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,884.4 $ 2,802.0 $

299.6 $
(67.9)
(3,878.2)

6,195.0

6,530.9

163.3 $ 1,697.0 $ 1,381.3
(7.3)
(65.3)
(207.2)
(3,491.0)

(7.4)
(216.3)

(526.7)
946.6 $

(348.0)
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, 2020 and 2019.

F96

ANNUAL REPORT ON FORM 10-K

Effective during the third quarter of 2020, we adopted a voluntary change in our method of applying an
accounting principle for certain of our retirement benefit plans. The new accounting method changes the
computation of expected returns on U.S. dollar denominated investment grade debt securities and derivatives
in such plans from a calculated value that includes changes in the fair values over a period of five years to
actual fair value. This change in accounting principle is preferable because changes in the fair value of this
class of assets will be amortized into net periodic pension and retiree health cost sooner. No change is being
made to the accounting principle for the other classes of pension assets. The impact of the adoption of this
change in accounting method was not material to our historical and current consolidated financial statements.

A decrease in the discount rate was the primary driver for the $2.13 billion and $2.89 billion increase in the
benefit obligation in 2020 and 2019, respectively.

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.

The following represents our weighted-average assumptions as of December 31:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

(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 . . . . . .

2019

2020

2018

2019

2018

2020
2.4 % 3.0 % 4.0 % 2.6 % 3.3 % 4.4 %
3.0
3.3
3.3
7.3

4.0
3.3
3.4
7.4

3.4
3.4
3.4
7.4

8.0

6.0

3.7

3.3

6.0

4.4

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.

F97

ANNUAL REPORT ON FORM 10-K
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 . . .

639.2 $

635.3 $

645.8 $

673.1 $

689.6 $ 3,800.8

91.2

94.9

95.7

481.8

2021

2022

2023

2024

2025

2026-2030

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,770.7 $ 14,039.7
10,483.4
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,824.4

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:

2020

2019

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2020

2019

2020

2019

Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . $ 14,682.3 $ 13,063.7 $
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .

10,483.4

11,824.4

223.8 $
—

214.4
—

The total accumulated benefit obligation for our defined benefit pension plans was $17.03 billion and
$15.17 billion at December 31, 2020 and 2019, respectively.

F98

ANNUAL REPORT ON FORM 10-K

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

Components of net periodic (benefit)
cost:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2020

2019

2018

2020

2019

2018

Service cost . . . . . . . . . . . . . . . . . . . . . . $ 325.5 $ 250.4 $ 292.7 $
Interest cost . . . . . . . . . . . . . . . . . . . . . .

486.0

425.8
(901.5)

(839.6)

458.5
(842.1)

Expected return on plan assets . . . . . . .

Amortization of prior service (benefit)

40.8 $
43.7
(158.1)

36.3 $

58.0

41.5

57.3

(144.3)

(177.9)

cost . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss (gain) . . . . . .
Curtailment (gain) loss . . . . . . . . . . . . . .
(29.3)
Net periodic (benefit) cost . . . . . . . . . . . $ 250.6 $ 190.0 $ 247.5 $ (136.1) $ (111.0) $ (181.8)

(59.5)
(3.0)
—

(62.9)

(79.5)

396.3

284.9

332.5

2.2

1.9

4.6

6.1

4.5

1.3

6.1

—

The following represents the amounts recognized in other comprehensive income (loss) for the years ended
December 31, 2020, 2019, and 2018:

Defined Benefit
Pension Plans

Retiree Health
Benefit Plans

2020

2019

2018

2020

2019

2018

Actuarial gain (loss) arising during
period . . . . . . . . . . . . . . . . . . . . . . . $
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 . . . . . . . . . . . . . $

(663.0) $ (1,461.0) $ 182.8 $ 238.8 $ 246.1 $
(17.6)
45.2

(2.2)
—

19.0

—

37.5

14.1

(31.8)

4.5

6.1

4.6

(59.5)

(62.9)

(79.5)

396.3

284.9

332.5

(3.0)

(71.5)

(7.7)

47.1

2.4

1.9

3.6

6.1

(0.1)

(335.9) $ (1,158.7) $ 594.6 $ 178.7 $ 188.7 $

(53.7)

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 $164.3 million, $145.2 million, and $132.6 million for the years
ended December 31, 2020, 2019, and 2018, 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, 2020, 2019, and 2018 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.

F99

ANNUAL REPORT ON FORM 10-K

Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local
investment policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease
exposure to a particular public equity, fixed income, commodity, or currency market more rapidly or less
expensively than could be accomplished through the use of the cash markets. The plans utilize both
exchange-traded and over-the-counter instruments. The maximum exposure to either a market or
counterparty credit loss is limited to the carrying value of the receivable, and is managed within contractual
limits. We expect all of our counterparties to meet their obligations. The gross values of these derivative
receivables and payables are not material to the global asset portfolio, and their values are reflected within
the tables below.

The defined benefit pension and retiree health benefit plan allocation for the U.S. and Puerto Rico currently
comprises approximately 65 percent growth investments and 35 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, bank loans, 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.

100

F100

ANNUAL REPORT ON FORM 10-KThe 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.

The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2020 by
asset category were as follows:

Asset Class

Total

Defined Benefit Pension Plans
Public equity securities:

Fair Value Measurements Using

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

Significant
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Investments
Valued at Net
Asset Value(1)

U.S. . . . . . . . . . . . . . . . . . . . . . . $
International . . . . . . . . . . . . . . .

737.6 $

476.1 $

2,635.8

1,102.3

— $
—

1.0 $
—

260.5
1,533.5

Fixed income:

Developed markets . . . . . . . . . .
Developed markets -
repurchase agreements . . . . . .
Emerging markets . . . . . . . . . . .

Private alternative investments:

4,301.3

2.9

3,179.2

(1,670.8)
631.0

—
14.2

(1,670.8)
262.7

Hedge funds . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $ 14,579.0 $

2,661.3
2,844.7
558.9
1,879.2

—
—
259.6
60.4
1,915.5 $

—
—
6.9
301.2
2,079.2 $

—

—
0.1

1,119.2

—
354.0

2,661.3
—
2,827.8
16.9
286.6
5.8
18.0
1,499.6
41.8 $ 10,542.5

Retiree Health Benefit Plans
Public equity securities:

U.S. . . . . . . . . . . . . . . . . . . . . . . $
International . . . . . . . . . . . . . . .

68.3 $

162.3

45.0 $
58.1

— $
—

0.1 $
—

23.2
104.2

Fixed income:

Developed markets . . . . . . . . . .
Emerging markets . . . . . . . . . . .

Private alternative investments:

Hedge funds . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . .

Cash value of trust owned

101.5
53.5

229.7
223.4

—
—

80.3
24.7

—
—

—
1.6

21.2
28.8

229.7
221.8

insurance contract . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been

2,204.6
25.8
157.9
3,227.0 $

2,204.6
0.7
21.1
2,331.4 $

—
0.6
1.7
4.0 $

—
—
121.0
749.9

—
24.5
14.1

141.7 $

classified in the fair value hierarchy.

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31,
2020. The activity in the Level 3 investments during the year ended December 31, 2020 was not material.

F101

101

ANNUAL REPORT ON FORM 10-K

The 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

Defined Benefit Pension Plans
Public equity securities:

Fair Value Measurements Using

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

Significant
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Investments
Valued at Net
Asset Value(1)

U.S. . . . . . . . . . . . . . . . . . . . . . . $
International . . . . . . . . . . . . . . .

794.2 $

532.4 $

2,439.2

1,046.8

— $
—

261.7
1,392.4

Fixed income:

Developed markets . . . . . . . . . .
Developed markets -
repurchase agreements . . . . . .
Emerging markets . . . . . . . . . . .

Private alternative investments:

3,661.4

4.8

2,658.9

(1,659.1)
648.0

—
18.5

(1,659.1)
277.4

Hedge funds . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $ 12,858.0 $

2,897.9
2,279.3
570.3
1,226.8

—
—
166.2
62.9
1,831.7 $

—
—
—
222.6
1,499.8 $

—

—
4.1

—
16.8
—
6.6

27.5 $

997.7

—
348.0

2,897.9
2,262.5
404.1
934.7
9,499.0

Retiree Health Benefit Plans
Public equity securities:

U.S. . . . . . . . . . . . . . . . . . . . . . . $
International . . . . . . . . . . . . . . .

Fixed income:

Developed markets . . . . . . . . . .
Emerging markets . . . . . . . . . . .

Private alternative investments:

Hedge funds . . . . . . . . . . . . . . .
Equity-like funds . . . . . . . . . . . .

76.5 $

152.6

52.1 $
60.8

— $
—

82.7
58.5

250.8

187.4

—
—

—

56.3
27.0

—

—
0.4

—

1.6

24.4
91.8

26.4
31.1

250.8

185.8

Cash value of trust owned
insurance contract . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . $
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been

1,832.2
31.3
96.2
2,768.2 $

1,832.2
—
7.9
1,923.4 $

—
—
0.7
2.7 $

—
15.1
76.2
701.6

—
16.2
11.4

140.5 $

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.

In 2021, we expect to contribute approximately $40 million to our defined benefit pension plans to satisfy
minimum funding requirements for the year. We expect to contribute approximately $10 million in additional
discretionary contributions in 2021.

102

F102

ANNUAL REPORT ON FORM 10-K

Note 16: Contingencies

We are involved in various lawsuits, claims, government investigations and other legal proceedings that arise
in the ordinary course of business. These claims or proceedings can involve various types of parties, including
governments, competitors, customers, suppliers, service providers, licensees, employees, or shareholders,
among others. These matters may involve patent infringement, antitrust, securities, pricing, sales and
marketing practices, environmental, commercial, contractual rights, licensing obligations, health and safety
matters, consumer fraud, employment matters, product liability and insurance coverage, among others. The
resolution of these matters often develops over a long period of time and expectations can change as a result
of new findings, rulings, appeals or settlement arrangements. Legal proceedings that are significant or that we
believe could become significant or material are described below.

We believe the legal proceedings in which we are named as defendants are without merit and we are
defending against them vigorously. 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 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.

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.

Patent Litigation

Alimta Patent Litigation

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 and cash flows. 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

Alimta (pemetrexed) is protected by a vitamin regimen patent until 2021, plus pediatric exclusivity through
May 2022.

In August 2017, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Apotex
Inc. (Apotex) alleging infringement of Alimta's vitamin regimen patent for its application to market a
pemetrexed product. In December 2019, the U.S. District Court for the Southern District of Indiana granted
our motion for summary judgment of infringement, and in December 2020, the U.S. Court of Appeals for the
Federal Circuit affirmed that ruling. Apotex did not request reconsideration or a rehearing of that ruling.
However, Apotex could petition the U.S. Supreme Court to review the case.

In December 2019, we settled a lawsuit we filed against Eagle Pharmaceuticals, Inc. (Eagle) in response to its
application to market a product using an alternative form of pemetrexed. Per the settlement agreement, Eagle
has 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.

F103

103

ANNUAL REPORT ON FORM 10-K European Patent Litigation

Legal proceedings are ongoing regarding our Alimta patents 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 and that generic competitors may choose to launch at risk. Following a final decision in the
Supreme Court of Germany in July 2020 overturning the lower court and upholding the validity of our Alimta
patent, several generics that were on the market at risk left. We have removed the remaining generics from
the market by obtaining preliminary injunctions in our favor. In September 2020, the Paris Court of First
Instance in France issued a final decision upholding the validity of our Alimta patent and found infringement
by Fresenius Kabi France and Fresenius Kabi Groupe France’s (collectively, Kabi) pemetrexed product. The
court issued an injunction against Kabi and provisionally awarded us damages. In January 2021, that same
court issued a preliminary injunction against Zentiva France S.A.S. (Zentiva), the last remaining company with
a generic pemetrexed product on the French market, and provisionally awarded us damages. In October
2020, the Court of Appeal of the Netherlands overturned a lower court decision and ruled that our Alimta
patent is valid and infringed and reinstated an injunction against Kabi, thereby removing Kabi's pemetrexed
product from the Netherlands market. Kabi has appealed this decision to the Netherlands Supreme Court.
Kabi's generic pemetrexed product was the only at risk generic on the market in the Netherlands.

Our vitamin regimen patents have also been challenged in other smaller European jurisdictions. We will
continue to seek to remove any generic pemetrexed products launched at risk in other European markets,
seek damages with respect to such launches, and defend our patents against validity challenges.

Japanese Administrative Proceedings

In October 2020, the Japanese Patent Office (JPO) issued notices closing Hopira Inc.'s (Hospira) invalidation
against our Japanese Alimta patents. As a result, Hospira filed a withdrawal notice with the JPO and the JPO
accepted the withdrawal in November. This matter is now closed.

Emgality Patent Litigation

In September 2018, we were 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. Trial is expected in December
2021. Separately, the U.S. Patent and Trademark Office (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 the claims asserted against us in six of Teva's
nine patents were invalid. In March 2020, the USPTO ruled against us on the remaining three Teva patents,
finding that we failed to show that the remaining three patents were unpatentable based on the subset of
invalidity arguments available in an IPR proceeding. In April 2020, we appealed the USPTO’s March 2020
ruling, and Teva appealed the USPTO’s February 2020 ruling to the U.S. Court of Appeals for the Federal
Circuit. The district court litigation will proceed in parallel with the IPR appeals.

Jardiance Patent Litigation

In November 2018, Boehringer Ingelheim (BI), our partner in marketing and development of Jardiance,
initiated U.S. patent litigation in the U.S. District Court of Delaware alleging infringement arising from Alkem
Laboratories Ltd.'s (Alkem) and Ascend Laboratories, LLC's (Ascend) submissions of Abbreviated New Drug
Applications (ANDA) seeking approval to market generic versions of 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). Particularly with respect to Jardiance, Alkem's and Ascend's ANDAs seek
approval to market generic versions of Jardiance prior to the expiration of the relevant patents, and allege that
certain patents, including in some allegations the compound patent, are invalid or would not be infringed. We
are not a party to this litigation. Trial was scheduled for April 2021 but has been postponed.

104

F104

ANNUAL REPORT ON FORM 10-KTaltz Patent Litigation

In July 2018, we were named as a defendant in litigation filed by Genentech, Inc. (Genentech) in Germany
seeking a ruling that Genentech’s patent would be infringed by our continued sales of Taltz in Germany. After
it sold its patent rights to Novartis Pharma AG (Novartis) in June 2020, Genentech withdrew its infringement
litigation and Novartis subsequently filed litigation against us in Germany asserting infringement based on
sales of Taltz. In January 2021, we entered into a settlement agreement with Novartis whereby all pending
litigation in Germany related to the Taltz patent has been withdrawn and this matter has concluded. We were
also named in litigation in the U.K. in which Genentech asserted similar claims regarding its corresponding
U.K. patent. Novartis purchased Genentech's U.K. patent rights for Taltz, sought substitution for Genentech in
the U.K. litigation and then sought dismissal of all appeals. Orders to this effect were issued by the Patents
Court and Court of Appeal in November 2020 and these matters have concluded.

Zyprexa Canada Patent Litigation

Beginning in the mid-2000’s, several generic companies in Canada challenged the validity of our Zyprexa
compound patent. In 2012, the Canadian Federal Court of Appeals denied our appeal of a lower court's
decision that certain patent claims were invalid for lack of utility. In 2013, Apotex Inc. and Apotex Pharmachem
Inc. (collectively, Apotex) brought claims against us in the Ontario Superior Court of Justice at Toronto for
damages related to our enforcement of the Zyprexa compound patent under Canadian regulations governing
patented drugs. Apotex seeks compensation based on novel legal theories under the Statute of Monopolies,
Trade-Mark Act, and common law. Trial is expected in 2021 or 2022.

Product Liability Litigation
Actos® Product Liability

We are named along with Takeda Chemical Industries, Ltd. and Takeda affiliates (collectively, Takeda) as a
defendant in four purported product liability class actions in Canada related to Actos, which we
commercialized with Takeda in Canada until 2009, including one in Ontario filed December 2011 (Casseres et
al. v. Takeda Pharmaceutical North America, Inc., et al.), one in Quebec filed July 2012 (Whyte et al. v. Eli
Lilly et al.), one in Saskatchewan filed November 2017 (Weiler v. Takeda Canada Inc. et al.), and one in
Alberta filed January 2013 (Epp v. Takeda Canada Inc. et al.). In general, plaintiffs in these actions alleged
that Actos caused or contributed to their bladder cancer.
Byetta® Product Liability

First initiated in March 2009, we are named as a defendant in approximately 570 Byetta product liability
lawsuits in the U.S. involving approximately 810 plaintiffs. Approximately 55 of these lawsuits, covering about
285 plaintiffs, are filed in California state court and coordinated in a Los Angeles Superior Court.
Approximately 515 of the lawsuits, covering about 515 plaintiffs, are filed in federal court, the majority of which
are coordinated in a multi-district litigation (MDL) in the U.S. District Court for the Southern District of
California. Three lawsuits, representing approximately four plaintiffs, have also been filed in various state
courts. Approximately 565 of the lawsuits, involving approximately 800 plaintiffs, contain allegations that
Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic cancer or thyroid cancer); while six
plaintiffs allege Byetta caused or contributed to pancreatitis. In addition, one case alleges that Byetta caused
or contributed to ampullary cancer. The federal and state trial courts granted summary judgment in favor of us
and our co-defendants on the claims alleging pancreatic cancer. The plaintiffs appealed those rulings. In
November 2017, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court's grant of
summary judgment based on that court's discovery rulings and remanded the cases for further proceedings.
In November 2018, the California Court of Appeal reversed the state court's grant of summary judgment
based on that court's discovery rulings and remanded for further proceedings. We are aware of approximately
20 additional claimants who have not yet filed suit. These additional claims allege damages for pancreatic
cancer or thyroid cancer.

F105

105

ANNUAL REPORT ON FORM 10-K Cialis Product Liability

First initiated in August 2015, we are named as a defendant in approximately 350 Cialis product liability
lawsuits in the U.S. These cases, many of which were originally filed in various federal courts, contain
allegations that Cialis caused or contributed to the plaintiffs' cancer (melanoma). In December 2016, the
Judicial Panel on Multidistrict Litigation (JPML) granted the plaintiffs' petition to have filed cases and an
unspecified number of future cases coordinated into a federal multidistrict litigation (MDL) in the U.S. District
Court for the Northern District of California, alongside an existing coordinated proceeding involving Viagra®.
The JPML ordered the transfer of the existing cases to the now-renamed MDL In re: Viagra (Sildenafil Citrate)
and Cialis (Tadalafil) Products Liability Litigation. In April 2020, the MDL court granted summary judgment to
the defendants on all of the claims brought against them by the plaintiffs. In May 2020, plaintiffs filed an
appeal in the U.S. Court of Appeals for the Ninth Circuit.

Jardiance Product Liability

First initiated in January 2019, we and Boehringer Ingelheim Pharmaceuticals, Inc., a subsidiary of BI, have
been named as a defendant in approximately 95 product liability lawsuits in the U.S., mostly in Stamford
Superior Court in Connecticut, alleging that Jardiance caused or contributed to plaintiffs’ Fournier’s gangrene.
Our agreement with BI calls for BI to defend and indemnify us against any damages, costs, expenses, and
certain other losses with respect to product liability claims in accordance with the terms of the agreement.

Environmental Proceedings

Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as
"Superfund," we have been designated as one of several potentially responsible parties with respect to the
cleanup of fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable
for the entire amount of the cleanup.

Other Matters

340B Litigation

We are the plaintiff in a lawsuit filed in January 2021 in the U.S. District Court for the Southern District of
Indiana against the U.S. Department of Health and Human Services (HHS), the Secretary of HHS, the Health
Resources and Services Administration (HRSA), and the Administrator of HRSA. The lawsuit challenges the
HHS's December 30, 2020 advisory opinion stating that drug manufacturers are required to deliver discounts
under the 340B program to all contract pharmacies. We seek a declaratory judgment that the defendants
violated the Administrative Procedures Act and the U.S. Constitution, a preliminary injunction enjoining
implementation of the alternative dispute resolution process created by defendants and, with it, their
application of the advisory opinion, and other related relief. A hearing on our motion for preliminary injunction
has been scheduled for February 26, 2021.

In January 2021, we, along with other pharmaceutical manufacturers, were named as a defendant in a
petition currently pending before the HHS Administration Dispute Resolution Panel. Petitioner seeks
declaratory and other injunctive relief related to the 340B program.

106

F106

ANNUAL REPORT ON FORM 10-KBrazil Litigation – Cosmopolis Facility

Labor Attorney Litigation

First initiated in 2008, 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 a liquidated award of 300 million Brazilian real (for moral damages, donation of equipment,
and creation of a foundation) which, adjusted for inflation and interest using the current Central Bank of
Brazil's special system of clearance and custody rate (SELIC), is approximately 950 million Brazilian real
(approximately $180 million as of December 31, 2020). 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. The cost of
any such health coverage has not been determined.

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. 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 that concluded unsuccessfully in September 2020. Consequently, the
partial stay of the proceedings relating to Lilly Brasil's application to appeal in the main proceedings has been
lifted. In addition, the Labor Attorney's application for preliminary enforcement of the July 2018 healthcare
coverage ruling was granted. As the conciliation hearings have been unsuccessful, we have filed a brief to
strike the Labor Attorney’s application to enforce the previous healthcare coverage. Lilly Brasil is currently
awaiting a determination as to whether its application seeking leave to appeal to the superior labor court has
been successful.

Individual Former Employee Litigation

First initiated in 2003, we have also been 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.

China NDRC Antitrust Matter

The competition authority in China has investigated our distributor pricing practices in China in connection
with a broader inquiry into pharmaceutical industry pricing. We have cooperated with this investigation.

Eastern District of Pennsylvania Pricing (Average Manufacturer Price) Inquiry

In November 2014, we, along with another pharmaceutical manufacturer, are named as co-defendants in
United States et al. ex rel. Streck v. Takeda Pharm. Am., Inc., et al., which was filed in November 2014 and
unsealed in the U.S. District Court for the Northern District of Illinois. The complaint alleges that the
defendants should have treated certain credits from distributors as retroactive price increases and included
such increases in calculating average manufacturer prices. Trial is scheduled for February 2022.

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ANNUAL REPORT ON FORM 10-K Health Choice Alliance

We are named as a defendant in a lawsuit filed in June 2017 in the U.S. District Court for the Eastern District
of Texas seeking damages under the federal anti-kickback statute and state and federal false claims acts for
certain patient support programs related to our products Humalog, Humulin, and Forteo. In September 2019,
the U.S. District Court granted the U.S. Department of Justice’s motion to dismiss the relator’s second
amended complaint. In January 2020, the relator appealed the District Court’s dismissal to the U.S. Court of
Appeals for the Fifth Circuit. We are also named as a defendant in two similar lawsuits filed in Texas and New
Jersey state courts in October 2019 seeking damages under the Texas Medicaid Fraud Prevention Act and
New Jersey Medicaid False Claims Act, respectively. In November 2020, the Texas state court action was
stayed pending a decision by the U.S. Court of Appeals for the Fifth Circuit on the aforementioned District
Court appeal.

Pricing Litigation, Investigations, and Inquires

Litigation

In December 2017, we, along with Sanofi-Aventis U.S. LLC (Sanofi) and Novo Nordisk, Inc. (Novo Nordisk)
were named as defendants in a consolidated purported class action lawsuit, In re. Insulin Pricing Litigation, in
the U.S. District Court for the District of New Jersey relating to insulin pricing seeking damages under various
state consumer protection laws and the Federal Racketeer Influenced and Corrupt Organization Act (federal
RICO Act). Separately, in February 2018, we, along with Sanofi and Novo Nordisk, were 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. In both In re. Insulin Pricing Litigation and the MSP Recovery Claims litigation, the court
dismissed claims under the federal RICO Act and certain state laws. Also, filed in the same court in November
2020, we, along with Sanofi, Novo Nordisk, CVS, Express Scripts, and Optum, have been sued in a purported
class action, FWK Holdings, LLC v. Novo Nordisk Inc., et al., for alleged violations of the federal RICO Act as
well as the New Jersey RICO Act and anti-trust law. That same group of defendants, along with Medco Health
and United Health Group, also have been sued in other purported class actions in the same court, Rochester
Drug Co-Operative Inc. v. Eli Lilly & Co. et al. and Value Drug Co. v. Eli Lilly & Co. et al. both initiated in
March 2020, for alleged violations of the federal RICO Act. In September 2020, the U.S. District Court for the
District of New Jersey granted plaintiffs’ motion to consolidate FWK Holdings, LLC v. Novo Nordisk Inc., et al.,
Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al., and Value Drug Co. v. Eli Lilly & Co. et al.

In October 2018, the Minnesota Attorney General’s Office initiated litigation against us, Sanofi, and Novo
Nordisk, State of Minnesota v. Sanofi-Aventis U.S. LLC et al., in the U.S. District Court for the District of New
Jersey, alleging unjust enrichment, violations of various Minnesota state consumer protection laws, and the
federal RICO Act. Additionally, in May 2019, 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. In
November 2019, Harris County in Texas initiated litigation 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, 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 insulin products as well as Trulicity.

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F108

ANNUAL REPORT ON FORM 10-KInvestigations, Subpoenas, and Inquiries

We received a subpoena from the New York and Vermont Attorney General Offices 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 and a subpoena 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. In January 2021, the Senate’s Committee on Finance released a report summarizing the
findings of its investigation. We are cooperating with all of these aforementioned investigations, subpoenas,
and inquiries.

Research Corporation Technologies, Inc.

In April 2016, we were named as a defendant in litigation filed by Research Corporation Technologies, Inc.
(RCT) in the U.S. District Court for the District of Arizona. RCT is seeking damages for breach of contract,
unjust enrichment, and conversion related to processes used to manufacture certain products, including
Humalog and Humulin. A trial date has not been set.

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ANNUAL REPORT ON FORM 10-K Note 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)
Beginning balance at January
1, 2018 (1)

Continuing Operations

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

$ (1,191.7) $ 113.5 $

(4,311.3) $ (234.3) $

(71.1) $

(5,694.9)

Reclassification due to
adoption of new accounting
standard(2) . . . . . . . . . . . . . .
Other comprehensive
income (loss) before
reclassifications . . . . . . . . . .
Net amount reclassified
from accumulated other
comprehensive loss . . . . . .

Net other comprehensive
income (loss) . . . . . . . . . . . .

Balance at December 31,
2018(3) . . . . . . . . . . . . . . . . . .

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

Net other comprehensive
income (loss) . . . . . . . . . . . .

Balance at December 31,
2019 . . . . . . . . . . . . . . . . . . .

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

Net other comprehensive
income (loss) . . . . . . . . . . . .

—

(128.9)

—

(128.9)

(378.0)

24.5

250.7

(16.3)

12.2

(106.9)

—

(31.2)

207.9

11.7

2.1

190.5

(378.0)

(6.7)

458.6

(4.6)

14.3

83.6

(1,569.7)

(22.1)

(3,852.7)

(238.9)

(56.8)

(5,740.2)

(46.2)

28.9

(967.6)

14.5

(27.2)

(997.6)

(62.1)

(1.9)

181.7

12.5

84.0

214.2

(108.3)

27.0

(785.9)

27.0

56.8

(783.4)

(1,678.0)

4.9

(4,638.6)

(211.9)

—

(6,523.6)

250.5

6.8

(379.7)

(133.8)

—

(256.2)

—

250.5

3.1

9.9

267.3

13.0

(112.4)

(120.8)

—

283.4

27.2

Ending balance at December
31, 2020 . . . . . . . . . . . . . . . . $ (1,427.5) $
(1) Accumulated other comprehensive loss as of January 1, 2018 consists of $5.72 billion of accumulated other comprehensive loss

(4,751.0) $ (332.7) $

14.8 $

— $

(6,496.4)

attributable to controlling interest and $23.7 million of accumulated other comprehensive income attributable to noncontrolling interest.

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

(3) 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.

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ANNUAL REPORT ON FORM 10-K

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 . . . . . . . . . . . . . . . . . . . . . . .

2020

2019

2018

128.3 $
(4.3)
44.8

32.1

(18.4) $

(7.4)

184.1

(7.3)

51.6

2.1

(85.3)

1.3

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

200.9 $

151.0 $

(30.3)

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.

Reclassifications 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,

2020

2019

2018

Affected Line Item in the Consolidated
Statements of Operations

Prior service benefits, net . . . $
Actuarial losses . . . . . . . . . . .
Total before tax . . . . . . . . . . .
Tax benefit . . . . . . . . . . . . . . .

Net of tax . . . . . . . . . . . . . . . .

(55.0) $
393.3

338.3
(71.0)
267.3

(56.8) $

(74.9) Other—net, (income) expense

286.8

230.0

338.6 Other—net, (income) expense

263.7

(48.3)

(55.8)

Income taxes

181.7

207.9

Other, net of tax . . . . . . . . . . . . .
Reclassifications from
continuing operations (net of
tax) . . . . . . . . . . . . . . . . . . . . . . .
Reclassifications from
discontinued operations (net of
tax) . . . . . . . . . . . . . . . . . . . . . . .
Total reclassifications for the
period, net of tax . . . . . . . . . . . . $

16.1

(51.5)

(19.5) Other—net, (income) expense

283.4

130.2

188.4

—

84.0

Net income from discontinued
operations

2.1

283.4 $

214.2 $

190.5

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ANNUAL REPORT ON FORM 10-K

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 plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other–net, (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

2020

2019

2018

359.6 $
(33.0)
—

—
(251.8)
(1,246.7)
(1,171.9) $

400.6 $
(80.4)

242.5
(159.3)

252.5

(309.8)

(209.9)

(344.6)

—

(240.5)

11.7

(291.6) $

(145.6)

For the years ended December 31, 2020 and 2019, 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.

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 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.

As 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 from discontinued operations:

Revenue from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .

580.0 $

3,680.5

3,062.4
81.4

2019

2018

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 activities were not material for the year ended December 31, 2019. Net
cash provided by operating activities related to our discontinued operations was approximately $500 million
for the year ended December 31, 2018. The net cash flows of our discontinued operations for investing
activities were not material for any period presented.

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.

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F112

ANNUAL REPORT ON FORM 10-K

Management’s Reports

Management’s Report for Financial Statements—Eli Lilly and Company and Subsidiaries

Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair
presentation of the financial statements. The statements have been prepared in accordance with generally
accepted accounting principles in the United States and include amounts based on judgments and estimates
by management. In management’s opinion, the consolidated financial statements present fairly our financial
position, results of operations, and cash flows.

In addition to the system of internal accounting controls, we maintain a code of conduct (known as "The Red
Book") that applies to all employees worldwide, requiring proper overall business conduct, avoidance of
conflicts of interest, compliance with laws, and confidentiality of proprietary information. All employees must
take training annually on The Red Book and are required to report suspected violations. A hotline number is
available on our lilly.com website and on the internal LillyNow website to enable reporting of 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 Item 8 of our annual report on Form 10-K. Ernst & Young reports directly to the audit committee of
the board of directors.

Our audit committee includes six 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, pre-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, 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 "Internal Control—Integrated Framework" (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.

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ANNUAL REPORT ON FORM 10-K Based on our evaluation under this framework, we concluded that our internal control over financial reporting
was effective as of December 31, 2020. 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 effectiveness of internal control over financial reporting as of December 31, 2020 has been audited by
Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report,
which appears herein. Their responsibility is to evaluate whether internal control over financial reporting was
designed and operating effectively.

David A. Ricks
Chairman, President, and Chief Executive Officer

Anat Ashkenazi
Senior Vice President and Chief Financial Officer

February 17, 2021

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ANNUAL REPORT ON FORM 10-KReport 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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2020, 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, 2020,
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 17,
2021 expressed an unqualified opinion thereon.

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.

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ANNUAL REPORT ON FORM 10-K Description of the
Matter

How We
Addressed the
Matter in Our
Audit

Description of the
Matter

Medicaid, Managed Care, and Medicare sales rebate accruals
As described in Note 2 to the consolidated financial statements under the caption “Net
Product Revenue,” the Company establishes provisions for sales rebate and discounts
in the same period as the related sales occur. At December 31, 2020 the Company had
$5,853.0 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.

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.

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, 2020 the Company had $17,806.0 million in plan assets
related to the defined benefit pension plans and retiree health benefit plans.
Approximately 33% of the total pension and retiree health 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.

F116

116

ANNUAL REPORT ON FORM 10-KHow 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, as well as portfolio performance.

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.

/s/ Ernst & Young LLP

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

Indianapolis, Indiana

February 17, 2021

F117

117

ANNUAL REPORT ON FORM 10-K Report 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, 2020, 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, 2020, 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, 2020 and
2019, 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, 2020, and the related notes and
our report dated February 17, 2021 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.

F118

118

ANNUAL REPORT ON FORM 10-KBecause 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.

/s/ Ernst & Young LLP

Indianapolis, Indiana

February 17, 2021

F119

119

ANNUAL REPORT ON FORM 10-K Item 9. Changes in and Disagreements with

Accountants on Accounting and Financial
Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under applicable Securities and Exchange Commission (SEC) regulations, management of a reporting
company, with the participation of the principal executive officer and principal financial officer, must
periodically evaluate the company’s “disclosure controls and procedures,” which are defined generally as
controls and other procedures designed to ensure that information required to be disclosed by the reporting
company in its periodic reports filed with the SEC (such as this Form 10-K) is recorded, processed,
summarized, and reported on a timely basis.

Our management, with the participation of David A. Ricks, president and chief executive officer, and Anat
Ashkenazi, senior vice president and chief financial officer, evaluated our disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31,
2020, and concluded that they were effective.

Management's Report on Internal Control over Financial Reporting

Mr. Ricks and Ms. Ashkenazi provided a report on behalf of management on our internal control over financial
reporting, in which management concluded that the company’s internal control over financial reporting is
effective at December 31, 2020 based on the framework in "Internal Control—Integrated Framework" (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over
financial reporting is 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 in the United States. Due to the inherent limitations, no evaluation over internal control
can provide absolute assurance that no material misstatements or fraud exist.

In addition, Ernst & Young LLP, the company’s independent registered public accounting firm, issued an
attestation report on the company’s internal control over financial reporting as of December 31, 2020.

You can find the full text of management’s report and Ernst & Young’s attestation report in Item 8.

Changes in Internal Control over Financial Reporting

During the fourth quarter of 2020, there were no changes in our internal control over financial reporting that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information
None.

F120

120

ANNUAL REPORT ON FORM 10-KPart III
Item 10. Directors, Executive Officers, and Corporate

Governance

Directors and Executive Officers

Information relating to our board of directors is found in our Definitive Proxy Statement, to be dated on or
about March 19, 2021 (Proxy Statement), under “Governance - Board Operations and Governance” and is
incorporated in this Annual Report on Form 10-K by reference.

Information relating to our executive officers is found at Item 1, “Business - Executive Officers of the
Company” and is incorporated by reference herein.

Code of Ethics

Information relating to our code of ethics is found in our Proxy Statement under “Governance - Board
Oversight of Strategy, Compliance, and Risk Management - Code of Ethics” and is incorporated in this Annual
Report on Form 10-K by reference.

Corporate Governance

Information about the procedures by which shareholders can recommend nominees to our board of directors
is found in our Proxy Statement under “Shareholder Engagement on Governance Issues - Shareholder
Recommendations and Nominations for Director Candidates" is incorporated in this Annual Report on Form
10-K by reference.

The board of directors has appointed an audit committee consisting entirely of independent directors in
accordance with applicable SEC and New York Stock Exchange requirements for audit committees.
Information about our audit committee is found in our Proxy Statement under “Governance - Membership and
Meetings of the Board and Its Committees - Audit Committee” and is incorporated in this Annual Report on
Form 10-K by reference.

Item 11. Executive Compensation
Information on director compensation, executive compensation, and compensation committee matters can be
found in the Proxy Statement under “Governance - Director Compensation,” “- Membership and Meetings of
the Board and Its Committees - Compensation Committee,” “Compensation - Compensation Discussion and
Analysis,” and “- Executive Compensation.” Such information is incorporated in this Annual Report on Form
10-K by reference.

F121

121

ANNUAL REPORT ON FORM 10-K Item 12. Security Ownership of Certain Beneficial

Owners and Management and Related
Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management

Information relating to ownership of the company’s common stock by management and by persons known by
the company to be the beneficial owners of more than five percent of the outstanding shares of common stock
is found in the Proxy Statement under “Ownership of Company Stock” and incorporated in this Annual Report
on Form 10-K by reference.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table presents information as of December 31, 2020 regarding the company's compensation
plans under which shares of the company's common stock have been authorized for issuance.

Plan category
Equity compensation plans approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plan not approved by
security holders . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(a) Number of
securities to be
issued upon
exercise of
outstanding
options, warrants,
and rights (1)

(b) Weighted-
average exercise
price of
outstanding
options, warrants,
and rights

(c) Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))

— $

—

49,510,908

—

49,510,908

(1) 9,192,921 shares are underlying outstanding equity awards other than options.

Item 13. Certain Relationships and Related Transactions,

and Director Independence

Related Person Transactions

Information relating to the policies and procedures for approval of related person transactions by our board of
directors can be found in the Proxy Statement under “Governance - Highlights of the Company’s Corporate
Governance - Conflicts of Interest and Transactions with Related Persons.” Such information is incorporated
in this Annual Report on Form 10-K by reference.

Director Independence

Information relating to director independence can be found in the Proxy Statement under “Governance -
Director Independence” and is incorporated in this Annual Report on Form 10-K by reference.

Item 14. Principal Accountant Fees and Services
Information related to the fees and services of our principal independent accountants, Ernst & Young LLP, can
be found in the Proxy Statement under “Audit Matters - Item 3. Ratification of the Appointment of the
Independent Auditor - Audit Committee Report - Services Performed by the Independent Auditor” and “-
Independent Auditor Fees.” Such information is incorporated in this Annual Report on Form 10-K by
reference.

F122

122

ANNUAL REPORT ON FORM 10-K

Item 15. Exhibits and Financial Statement Schedules

(a)1. Financial Statements

The following consolidated financial statements of the company and its subsidiaries are found at Item 8:

•

Consolidated Statements of Operations—Years Ended December 31, 2020, 2019, and 2018

Consolidated Statements of Comprehensive Income (Loss)—Years Ended December 31, 2020, 2019,
and 2018

Consolidated Balance Sheets—December 31, 2020 and 2019

Consolidated Statements of Shareholders' Equity—Years Ended December 31, 2020, 2019, and 2018

Consolidated Statements of Cash Flows—Years Ended December 31, 2020, 2019, and 2018

Notes to Consolidated Financial Statements

(a)2. Financial Statement Schedules

The consolidated financial statement schedules of the company and its subsidiaries have been omitted
because they are not required, are inapplicable, or are adequately explained in the financial statements.

Financial statements of interests of 50 percent or less, which are accounted for by the equity method, have
been omitted because they do not, considered in the aggregate as a single subsidiary, constitute a significant
subsidiary.

F123

123

ANNUAL REPORT ON FORM 10-K (a)3. Exhibits

2.1

3.1

3.2

4.1

4.2

4.3

4.4

4.5

4.6

4.7

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

Agreement and Plan of Merger, dated January 5, 2019, among the Company, Bowfin Acquisition
Corporation and Loxo Oncology, Inc.

Amended Articles of Incorporation

Bylaws, as amended

Indenture, dated February 1, 1991, between the Company and Deutsche Bank Trust Company
Americas, as successor trustee to Citibank, N.A., as Trustee

Tripartite Agreement dated September 13, 2007, appointing Deutsche Bank Trust Company
Americas as Successor Trustee under the Indenture listed in Exhibit 4.1

Description of the Company's Common Stock

Description of the Company's 1.000% Notes due 2022, 1.625% Notes due 2026, and 2.125%
Notes due 2030

Description of the Company's 6.77% Notes due 2036

Description of the Company's 7 1/8% Notes due 2025

Description of the Company's 0.625% Notes due 2031 and 1.700% Notes due 2049

Amended and Restated 2002 Lilly Stock Plan(1)

Form of Performance Award under the 2002 Lilly Stock Plan(1)

Form of Performance Award under the 2002 Lilly Stock Plan (with non-compete)(1)

Form of Performance Award under the 2002 Lilly Stock Plan (non-executive officer)(1)

Form of Shareholder Value Award under the 2002 Lilly Stock Plan(1)

Form of Shareholder Value Award under the 2002 Lilly Stock Plan (with non-compete)(1)

Form of Shareholder Value Award under the 2002 Lilly Stock Plan (non-executive officer)(1)

Form of Relative Value Award under the 2002 Lilly Stock Plan(1)

Form of Relative Value Award under the 2002 Lilly Stock Plan (with non-compete)(1)

10.10

Form of Restricted Stock Unit Award under the 2002 Lilly Stock Plan(1)

10.11

Restricted Stock Unit Award to Michael Harrington under the 2002 Lilly Stock Plan(1)

10.12

The Lilly Deferred Compensation Plan, as amended(1)

10.13

10.14

10.15

31.1

31.2

101

104

The Lilly Directors' Deferral Plan, as amended(1)

The Eli Lilly and Company Bonus Plan, as amended(1)

2007 Change in Control Severance Pay Plan for Select Employees, as amended(1)

List of Subsidiaries

Consent of Independent Registered Public Accounting Firm

Rule 13a-14(a) Certification of David A. Ricks, Chairman, President, and Chief Executive Officer

Rule 13a-14(a) Certification of Anat Ashkenazi, Senior Vice President and Chief Financial Officer

Section 1350 Certification

Interactive Data File

Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibit 101)

(1) Indicates management contract or compensatory plan.

F124

124

ANNUAL REPORT ON FORM 10-K

Item 16. Form 10-K Summary

Not applicable.

Index to Exhibits

The following documents are filed as part of this report:

Exhibit

2.1

Agreement and Plan of Merger, dated January 5,
2019, among the Company, Bowfin Acquisition
Corporation and Loxo Oncology, Inc.

Incorporated by reference to Exhibit 2.1 to
the Current Report on Form 8-K filed by
Loxo Oncology, Inc. on January 7, 2019

Location

3.1

Amended Articles of Incorporation

3.2

Bylaws, as amended

Indenture, dated February 1, 1991, between the
Company and Deutsche Bank Trust Company
Americas, as successor trustee to Citibank, N.A.,
as Trustee

Incorporated by reference to Exhibit 3.1 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2013

Incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K
filed on February 9, 2021

Incorporated by reference to Exhibit 4.1 to
the Company’s Registration Statement on
Form S-3, Registration No. 333-186979

Tripartite Agreement, dated September 13, 2007,
appointing Deutsche Bank Trust Company
Americas as Successor Trustee under the
Indenture listed in Exhibit 4.1

Incorporated by reference to Exhibit 4.2 to
the Company’s Annual Report on Form 10-
K for the year ended December 31, 2008

4.3

Description of the Company's Common Stock

Incorporated by reference to Exhibit 4.3 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2019

Description of the Company's 1.000% Notes due
2022, 1.625% Notes due 2026, and 2.125% Notes
due 2030

Incorporated by reference to Exhibit 4.4 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2019

Description of the Company's 6.77% Notes due
2036

Description of the Company's 7 1/8% Notes due
2025

Description of the Company's 0.625% Notes due
2031 and 1.700% Notes due 2049

10.1

Amended and Restated 2002 Lilly Stock Plan

Incorporated by reference to Exhibit 4.5 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2019

Incorporated by reference to Exhibit 4.6 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2019

Incorporated by reference to Exhibit 4.7 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2019

Incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form
10-Q for the quarter ended June 30, 2018

4.1

4.2

4.4

4.5

4.6

4.7

10.2

10.3

10.4

10.5

Form of Performance Award under the 2002 Lilly
Stock Plan

Form of Performance Award under the 2002 Lilly
Stock Plan (with non-compete)

Form of Performance Award under the 2002 Lilly
Stock Plan (non-executive officer)

Form of Shareholder Value Award under the 2002
Lilly Stock Plan

Attached

F125

104

ANNUAL REPORT ON FORM 10-K

10.6

10.7

10.8

10.9

10.1

Form of Shareholder Value Award under the 2002
Lilly Stock Plan (with non-compete)

Form of Shareholder Value Award under the 2002
Lilly Stock Plan (non-executive officer)

Attached

Form of Relative Value Award under the 2002 Lilly
Stock Plan

Attached

Form of Relative Value Award under the 2002 Lilly
Stock Plan (with non-compete)

Attached

Form of Restricted Stock Unit Award under the
2002 Lilly Stock Plan

Attached

10.11

Restricted Stock Unit Award to Michael Harrington
under the 2002 Lilly Stock Plan

10.12

The Lilly Deferred Compensation Plan, as
amended

10.13

The Lilly Directors' Deferral Plan, as amended

Incorporated by reference to Exhibit 10.5 to
the Company's Annual Report on Form 10-
K for the year ended December 31, 2019

Incorporated by reference to Exhibit 10.5 to
the Company's annual report on Form 10-K
for the year ended December 31, 2013

Incorporated by reference to Exhibit 10 to
the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2017

10.14

10.15

31.1

31.2

101

104

The Eli Lilly and Company Bonus Plan, as
amended

2007 Change in Control Severance Pay Plan for
Select Employees, as amended

List of Subsidiaries

Consent of Independent Registered Public
Accounting Firm

Rule 13a-14(a) Certification of David A. Ricks,
Chairman, President, and Chief Executive Officer

Rule 13a-14(a) Certification of Anat Ashkenazi,
Senior Vice President and Chief Financial Officer

Section 1350 Certification

Interactive Data File

Cover Page Interactive Data File (formatted in
Inline XBRL and contained in Exhibit 101)

Attached

F126

105

ANNUAL REPORT ON FORM 10-K

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Eli Lilly and Company

By /s/ David A. Ricks
David A. Ricks
Chairman, President, and Chief Executive Officer

February 17, 2021

F127

127

ANNUAL REPORT ON FORM 10-K Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on
February 17, 2021 by the following persons on behalf of the Registrant and in the capacities indicated.

Signature

/s/ David A. Ricks
DAVID A. RICKS

/s/ Anat Ashkenazi
ANAT ASHKENAZI

/s/ Donald A. Zakrowski
DONALD A. ZAKROWSKI

/s/ Ralph Alvarez
RALPH ALVAREZ

/s/ Katherine Baicker, Ph.D.
KATHERINE BAICKER, Ph.D.

/s/ Carolyn R. Bertozzi, Ph.D.
CAROLYN R. BERTOZZI, Ph.D.

/s/ Michael L. Eskew
MICHAEL L. ESKEW

/s/ J. Erik Fyrwald
J. ERIK FYRWALD

/s/ Jamere Jackson
JAMERE JACKSON

KIMBERLY H. JOHNSON

/s/ William G. Kaelin, Jr., M.D.
WILLIAM G. KAELIN, JR., M.D.

/s/ Juan R. Luciano
JUAN R. LUCIANO

/s/ Marschall S. Runge, M.D., Ph.D.
MARSCHALL S. RUNGE, M.D., Ph.D.

/s/ Kathi P. Seifert
KATHI P. SEIFERT

/s/ Gabrielle Sulzberger
GABRIELLE SULZBERGER

/s/ Jackson P. Tai
JACKSON P. TAI

/s/ Karen Walker
KAREN WALKER

Title

Chairman, President, and Chief Executive Officer
(principal executive officer)

Senior Vice President and Chief Financial Officer
(principal financial officer)

Vice President, Finance, and Chief Accounting
Officer (principal accounting officer)

Director

128

F128

ANNUAL REPORT ON FORM 10-KTrademarks Used In This Report

Trademarks or service marks owned by Eli Lilly and Company or its affiliates, when first used in each item of
this report, appear with an initial capital and are followed by the symbol ® or ™, as applicable. In subsequent
uses of the marks in the item, 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.
Tyvyt® is a trademark of Innovent Biologics (Suzhou) Co., Ltd.
Viagra® is a trademark of Pfizer Inc.

F129

129

ANNUAL REPORT ON FORM 10-K Notice of 2021 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, if you received or requested paper copies of
your proxy materials, by signing, dating, and returning your proxy card by mail.

Important notice regarding the availability of proxy materials for the shareholder meeting to
be held May 3, 2021: The annual report to shareholders and proxy statement are available at
lilly.com/policies-reports/annual-report.

From Our Chairman and Lead Independent Director

Dear fellow Lilly shareholders,

As we turn the page on an extraordinary year, we would like to thank you for your continued support of Eli Lilly and Company. We
are proud of Lilly's achievements in 2020, which demonstrated our conviction to unite caring with discovery to create medicines
that make life better for people around the world. In addition to developing potential therapies for COVID-19 and partnering with
governments to make COVID-19 antibody treatments available regardless of income level or geography, we continued to advance
our pipeline to help people with diabetes, immune disorders, neurodegeneration, cancer, and pain.

Due to concerns regarding the ongoing COVID-19 pandemic and to support the health and well-being of our employees, board of
directors, shareholders, and other meeting participants, the 2021 Annual Meeting of Shareholders (the Annual Meeting) will be
held virtually via live webcast. Although you will not be able to attend the Annual Meeting at a physical location, we have designed
the Annual Meeting live webcast to provide shareholders the opportunity to participate virtually to facilitate shareholder
attendance and to provide a consistent experience to all shareholders, regardless of location.

As part of our mission to improve lives around the world, we are committed to creating a safe, supportive, ethical, and rewarding
work environment. Lilly’s core values of integrity, excellence, and respect for people and our dedication to diversity and
inclusion are critical components of how we do business. We take a holistic approach because we’re a stronger company when
we have a workforce of top talent from different backgrounds—people who are respected, valued, welcomed, and heard. To
fulfill our purpose, we must look at challenges from multiple viewpoints and understand the diverse experiences of the patients
who depend on us. In short, our differences make a difference—to patients and to our business.

Our board recognizes that one of its key responsibilities is to ensure that Lilly is governed in a manner that provides both
independent oversight and efficient and effective decision-making. Our chief executive officer brings to the role of chairman of
our board substantial strategic and operational perspectives and a unique understanding of Lilly's opportunities and challenges.
This familiarity with our business, as well as extensive experience and leadership in our industry, position our chief executive
officer to drive strategy and agenda-setting at the board level. Further, our lead independent director, currently chief executive
officer of a Fortune 100 company, drives an "outside in" analysis of company decisions and performance, maintains frequent
contact with our chairman to ensure a productive partnership between our independent directors and management, and leads
our independent directors in their important oversight function.

Our board continues to prioritize meaningful engagement with our shareholders and other key stakeholders. Since our 2020
annual meeting of shareholders, we have spoken with a number of investors on an array of subjects, including board leadership;
environmental, social, and governance topics; drug pricing transparency and global access to our products, including our
COVID-19 therapies; product quality and safety; key enterprise risks; executive compensation; and human capital management.
Given the significant challenges the world faced in 2020, we appreciate now more than ever the thoughtful and constructive
feedback that we receive from our stakeholders. As a result of this input, as in past years, the board is putting forward
management proposals at the Annual Meeting to eliminate the classified board structure and supermajority voting requirements
in our articles of incorporation.

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 welcoming you at the Annual Meeting.

Sincerely,

David A. Ricks
Chairman, President, and CEO

Juan Luciano
Lead Independent Director

PROXY STATEMENT

Table of Contents

Notice of 2021 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 Strategy, Compliance, and Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . .

Highlights of the Company's Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Communication with the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder Engagement on Governance Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management Proposals to Eliminate Classified Board and Supermajority Voting Provisions . . . . .

Shareholder Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shareholder Recommendations and Nominations for Director Candidates . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CEO Pay Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3 - Ratification of the Appointment of the 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 Amend the Bylaws to Require an Independent Board Chair . . . . . . . . . . . .

Item 8 - Proposal to Implement a Bonus Deferral Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9 - 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 . . . . . . . . .

P1
P3

P13
P13
P13
P25
P26
P28
P29
P30
P32
P32
P39
P39
P39
P40
P40
P41
P42
P42
P43
P45
P62
P73
P74
P74
P76

P76

P77

P78
P78
P80
P82

P84

P85

P85
P88

P89
P92

PROXY STATEMENTNotice of 2021 Annual Meeting of Shareholders

To the holders of common stock of Eli Lilly and Company:

The 2021 Annual Meeting of Shareholders (the Annual Meeting) of Eli Lilly and Company (referred to as Lilly, we, us, or the
company in this proxy statement) will be held as shown below:

TIME AND DATE

LOCATION

WHO CAN VOTE

11:00 a.m. EDT,
Monday, May 3, 2021

Virtually at virtualshareholdermeeting.com/
LLY2021

Shareholders of record at the close of business on February 22, 2021

Due to concerns regarding the ongoing COVID-19 pandemic and to support the health and well-being of our employees,
board of directors, shareholders, and other meeting participants, the Annual Meeting will be held virtually via live
webcast. Although you will not be able to attend the Annual Meeting at a physical location, we have designed the Annual
Meeting live webcast to provide shareholders the opportunity to participate virtually to facilitate shareholder attendance
and to provide a consistent experience to all shareholders, regardless of location.

This proxy statement is dated March 19, 2021, and we mailed our shareholders of record as of February 22, 2021 (other
than those who previously requested electronic or paper delivery of our proxy materials and certain participants in The
Lilly Employee 401(k) plan (401(k) Plan)) a notice of internet availability of proxy materials on or about that date.

ITEMS OF BUSINESS

Governance

Board Voting Recommendation

Page Reference

Item 1

Election of each of the five director nominees to serve three-year terms

FOR
each of the director nominees

Compensation

Item 2

Approval, on an advisory basis, of the compensation paid to the company's
named executive officers

Audit Matters

Item 3

Ratification of the appointment of Ernst & Young LLP as the independent
auditor for 2021

Management Proposals

Item 4

Item 5

Approval of amendments to the company’s Articles of Incorporation to
eliminate the classified board structure

Approval of amendments to the company’s 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, if properly presented at the meeting

Shareholder proposal to amend the bylaws to require an independent board
chair, if properly presented at the meeting

Shareholder proposal to implement a bonus deferral policy, if properly
presented at the meeting

Shareholder proposal to disclose clawbacks on executive incentive
compensation due to misconduct, if properly presented at the meeting

FOR

AGAINST

Admission Procedure for Attending the Annual Meeting
You will be able to attend the Annual Meeting, vote, and submit questions virtually via live webcast by visiting
virtualshareholdermeeting.com/LLY2021. To be admitted to the Annual Meeting webcast, you must enter the 16-digit
control number found on the proxy card, voting instruction form, or notice you received. You may vote during the Annual
Meeting by following the instructions available on virtualshareholdermeeting.com/LLY2021 during the Annual Meeting.

For further information on how to attend the Annual Meeting, see the section titled "Other Information—Meeting and
Voting Logistics."

PROXY STATEMENTEvery shareholder vote is important. Even if you plan to attend the Annual Meeting, we encourage you to vote promptly
online, by telephone, or, if you received or requested paper copies of your proxy materials, by signing, dating, and
returning your proxy card or voting instructions by mail, so that a quorum may be represented at the meeting.

By order of the Board of Directors,

Ms. Anat Hakim
Senior Vice President, General Counsel
and Secretary
March 19, 2021
Indianapolis, Indiana

PROXY STATEMENTProxy Statement Summary

New in This Year's Proxy Statement
In response to the COVID-19 pandemic, we focused in 2020 on maintaining a reliable supply of our medicines, reducing
the strain on the medical system, protecting the health, safety, and well-being of our employees, supporting our
communities, and ensuring affordability of and access to our medicines, particularly insulin. In addition, we have been
proud to mobilize our scientific and medical expertise to fight COVID-19. As of February 9, 2021, we have received three
emergency use authorizations for our COVID-19 therapies, and we are working diligently to support affected patients,
communities, and employees during these challenging times.

In addition, we have recently undertaken a comprehensive review of our human capital management initiatives,
resources, and progress. In this proxy statement, you will find enhanced disclosure about our approach to human capital
management, including diversity and inclusion (D&I), and our governance oversight of these topics. See "Governance—
Highlights of the Company’s Corporate Governance—Human Capital Management."

Effective January 25, 2021, Gabrielle Sulzberger was elected to the board as a member of the director class of 2021.
Ms. Sulzberger was appointed to the Audit Committee and the Ethics and Compliance Committee. Effective February 16,
2021, Kimberly H. Johnson was elected to the board as a member of the director class of 2022. Ms. Johnson was
appointed to the Compensation Committee and the Ethics and Compliance Committee. Kathi Seifert, who joined the board
in 1995, will retire from the board following the Annual Meeting.

Effective January 1, 2021, our board disbanded the Finance Committee and reorganized the Public Policy and Compliance
Committee as the Ethics and Compliance Committee. The former duties of the Finance Committee have been reallocated
to the full board, the Audit Committee, and the Compensation Committee. This restructuring reduced the number of board
committees to allow more time for meetings of the remaining committees, encouraging longer, more in-depth committee
discussions, and allowing the board to have more in-depth discussions on capital allocation matters.

Further, as in past years, our board has approved, and recommends that our shareholders approve, two important
management proposals at the Annual 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 concerns expressed by shareholders.

Highlights of 2020 Performance
The following provides a brief overview of our 2020 performance in four dimensions: operating performance, progress in
our innovation pipeline, business development, and shareholder return, both absolute and relative. See our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020 for more details.

We continued to progress our company's purpose and strategy in 2020 as we remained focused on:

•

Discovering, acquiring, and developing first- or best-in-class medicines to address significant unmet needs in
our core therapeutic areas—diabetes, oncology, immunology, neurodegeneration, and pain;
Reaching patients who can benefit from our innovative medicines around the world, directly and through
partnership with healthcare systems and collaborators, providing broad access to safe, life-changing medicines;
Focusing our time and resources on new medicines that our customers value most, delivering volume-driven
sustainable growth; and
Reinvesting in our business and our people to discover new medicines to address unmet medical needs, improve
cost productivity, reduce environmental impact and reliably supply quality medicines, while returning capital to
shareholders.

We believe our strategic choices, coupled with robust execution, delivered significant value for shareholders and patients
in 2020. We reached over 45 million patients globally with our medicines, expanded our patient support programs,
achieved significant pipeline advancements and key data readouts across our core therapeutic areas, leveraged external
innovation to expand our pipeline, and delivered high total shareholder returns relative to our peers and the S&P 500
index. The discussion below expands on our considerable success in 2020.

PROXY STATEMENTOperating Performance
Performance highlights:

•
•

•

2020 revenue increased 10 percent to approximately $24.5 billion;
2020 earnings per share (EPS) on a reported basis were $6.79, compared to 2019 EPS on a reported basis of
$8.89; and
On a non-GAAP basis, 2020 EPS increased 31 percent to $7.93.

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

2020 Innovation and Business Development Progress
We made significant pipeline advances in 2020, including:

•

U.S. approval of expanded label for Trulicity® (dulaglutide) to include 3.0 mg and 4.5 mg doses and an updated
indication statement to include results from the REWIND™ cardiovascular outcomes trial;
U.S. approval of Retevmo® (selpercatinib) for the treatment of metastatic non-small cell lung cancer in adult
patients; for the treatment of advanced metastatic medullary thyroid cancer who require systemic therapy in
adult and pediatric patients; and for the treatment of advanced metastatic thyroid cancer in adult and pediatric
patients who require systemic therapy and are radioactive iodin-refractory;
U.S. approval of Lyumjev® (insulin lispro-aabc), a rapid-acting human insulin analog for the treatment of
diabetes;
U.S. approval of new indications for Taltz® (ixekizumab) for the treatment of active non-radiographic axial
spondyloarthritis (nr-axSpA) and for the treatment of pediatric patients with moderate to severe plaque
psoriasis;
U.S. approval of Tauvid™ (flortaucipir F 18 injection), a radioactive diagnostic agent, for positron emission
tomography imaging of the brain to estimate the density and distribution of aggregated tau neurofibrillary
tangles in patients with cognitive impairment who are being evaluated for Alzheimer's disease;
U.S. approval of a new indication for Cyramza® (ramucirumab) in combination with erlotinib for the first-line
treatment of people with metastatic non-small cell lung cancer; and
European Union approval of a new indication for Olumiant® (baricitinib) for the treatment of moderate-to-severe
atopic dermatitis.

We announced several key data readouts in 2020, including:

•

positive top-line results from SURPASS-1, a Phase III monotherapy study evaluating the efficacy and safety of
tirzepatide compared to placebo. Tirzepatide led to superior A1C and body weight reductions from baseline in
adults with type 2 diabetes after 40 weeks of treatment. Tirzepatide is a novel, investigational, once-weekly, dual
glucose-dependent insulinotropic polypeptide (GIP) and glucagon-like peptide-1 (GLP-1) receptor agonist that
integrates the actions of both incretins into a single molecule, representing a new class of medicines being
studied for the treatment of type 2 diabetes;
in collaboration with Boehringer Ingelheim, positive top-line results from a Phase III study of Jardiance®
(empagliflozin) in adults with heart failure with reduced ejection fraction, with and without diabetes. The study
met its primary endpoint, demonstrating superiority with Jardiance compared to placebo in reducing the risk for
the composite of cardiovascular death or hospitalization due to heart failure, when added to standard of care;
positive results from a pre-planned interim analysis of monarchE, a Phase III study of Verzenio® (abemaciclib) in
combination with standard adjuvant endocrine therapy for early breast cancer. The study met the primary
endpoint of invasive disease-free survival, significantly decreasing the risk of breast cancer recurrence or death
compared to standard adjuvant ET alone; and
updated data from the LOXO-305 BRUIN Phase I/II clinical trial in mantle cell lymphoma and other non-Hodgkin
lymphomas, as well as in chronic lymphocytic leukemia and small lymphocytic lymphoma, at the 2020 American
Society of Hematology Annual Meeting.

We also completed multiple significant strategic acquisitions, license agreements, and research collaborations to
strengthen our pipeline in 2020, including:

•

acquisition of Dermira, Inc. to expand Lilly's immunology pipeline with the addition of lebrikizumab, which is
being evaluated in a Phase III clinical development program for the treatment of moderate to severe atopic
dermatitis;
acquisition of Disarm Therapeutics, Inc., a privately held biotechnology company creating a new class of disease-
modifying therapeutics for patients with axonal degeneration; and
participated in, and made a $100 million commitment to, the AMR Action Fund, a $1 billion initiative from more
than 20 biopharmaceutical companies to address the urgent need for new antibiotics to combat antimicrobial
resistance.

PROXY STATEMENTGiven the global COVID-19 pandemic, we also redirected our resources and made significant advancements in COVID-19
therapies in 2020, including:

•

in collaboration with AbCellera Biologics Inc. (AbCellera), received emergency use authorization from the FDA
for bamlanivimab in higher-risk patients who have been recently diagnosed with mild-to-moderate COVID-19;
in collaboration with Incyte Corporation, received emergency use authorization from the FDA for baricitinib in
combination with remdesivir for patients with COVID-19 infection;
entered into an agreement with Junshi Biosciences Co., Ltd. to co-develop therapeutic antibodies for the
potential prevention and treatment of COVID-19, including etesevimab, the lead antibody from the collaboration;
entered into a global antibody manufacturing collaboration with Amgen Inc. to significantly increase the supply
capacity available for Lilly's potential COVID-19 therapies; and
entered into an agreement with the Bill & Melinda Gates Foundation, as part of the COVID-19 Therapeutics
Accelerator, to facilitate access to future Lilly therapeutic antibodies under development for the potential
prevention and treatment of COVID-19 to benefit low- and middle-income countries.

Shareholder Returns
We generated strong total shareholder returns (TSR) through December 31, 2020. Our TSR takes into account both share
price appreciation and dividends. Any dividends paid by a given company are assumed to be reinvested in that company’s
stock on a quarterly basis. Our returns significantly exceeded our compensation peer group and the S&P 500 during the
three- and five-year periods presented below:

Our Response to COVID-19
As discussed in "Proxy Statement Summary—Highlights of 2020 Performance—2020 Innovation and Business
Development Progress," we have made significant advancements in developing potential therapies for COVID-19,
including making available the first therapy designed for COVID-19 under an emergency use authorization, and we
continue our research and development efforts and our partnership with regulators and governments to bring COVID-19
treatments to patients. In addition to dedicating substantial resources to these efforts, we have prioritized maintaining a
reliable supply of and access to our medicines, particularly insulin, reducing the strain on the medical system, protecting
the health, safety, and well-being of our employees, and supporting our workforce, affected communities, and patients
who need our medicines.

Maintaining Supplies of and Access to Lilly Medicines
Throughout 2020, we took important steps to protect our manufacturing processes and remained in close communication
with key suppliers regarding supplies of raw materials. As a result of our efforts, we were largely able to maintain our
normal operations in 2020 and we maintained a steady supply of medicines on which millions of patients rely. We also
initiated patient support programs to ensure patients maintained affordable access to their medications, and adjusted
how we operate to offer innovative solutions to our customers. We remain committed to working with stakeholders in
healthcare systems to help patients get the medicines they need. Specific examples include:

PROXY STATEMENT•

•

launched the Insulin Value Program, allowing anyone with commercial insurance and those without insurance to
fill their monthly prescription of Lilly insulin for $35; and
established partnerships with leading diabetes technology companies to integrate their technologies into the
solutions we are creating to improve diabetes management.

As a result of the pandemic, we have also accelerated changes to further utilize digital capabilities to run our business
efficiently and effectively in a virtual environment. These include decentralizing clinical trials with virtual and more
digitally-enabled studies, which could provide increased access to more diverse patient populations. We have also
changed our go-to-market strategies, including leveraging omnichannel capabilities and virtual healthcare provider
engagement. Although reduced in-person interactions by patients and our employees with the healthcare system has
resulted, and may continue to result, in decreased demand for our products, we believe our approach is the appropriate
posture as we support healthcare professionals navigating the ongoing COVID-19 pandemic and driving broad vaccination
efforts.

Keeping Our Employees Safe and Healthy
While we have consistently focused on protecting the health and safety of our employees, the COVID-19 pandemic has
emphasized the importance of this critical priority. In response to the pandemic, we have taken measures to protect our
workforce, maximize social distancing, and inform employees about our policies. For example, we instituted travel
restrictions and remote working arrangements for employees whose roles do not require on-site presence.

To support employee well-being in the U.S., we enhanced local benefits related to health care, childcare, and time off, and
expanded reimbursement for home office ergonomic support expenditures. In the U.S., we provide full coverage for
COVID-19 diagnostic testing and treatment, and at our corporate headquarters in Indianapolis, we provide free on-site
testing for employees. In addition, as part of our Make it Safe to Thrive program, we partnered with our employee resource
groups to offer a series of programs highlighting and addressing challenges faced by ERG members during the COVID-19
pandemic, aiming to build understanding of different experiences and to offer ways to be inclusive.

Supporting Our Communities
To support communities affected by the COVID-19 pandemic, we repurposed specialized labs to conduct free diagnostic
testing in our home community of Indianapolis, and we created a drive-through testing facility at our corporate
headquarters for essential workers, including healthcare workers and first responders, as well as employees. Lilly’s labs
tested samples from more than 90,000 people collected around the state and at the Lilly drive-through facility. Together
with the governor of Indiana, the mayor of Indianapolis and other community stakeholders, we launched the
#INThisTogether community awareness campaign to provide access to helpful information and to encourage a
community-wide commitment to reducing COVID-19 infections.

PROXY STATEMENTGovernance

Item 1: Election of Directors

For further information, see page 13

Name, age* and principal
occupation

Public boards

Management
recommendation

Vote required
to pass

Katherine Baicker, Ph.D., 49

Dean and Professor, Harris School of Public
Policy, University of Chicago

Director since 2011

J. Erik Fyrwald, 61

President and Chief Executive Officer,
Syngenta AG

Director since 2005

Jamere Jackson, 52

Executive Vice President and Chief Financial
Officer, AutoZone, Inc.

Director since 2016

Gabrielle Sulzberger, 60

Strategic Advisor, TwoSigma Impact

Director since 2021

Jackson P. Tai, 70

Former Vice Chairman and Chief Executive
Officer, DBS Group Holdings Ltd and DBS
Bank Ltd.

Director since 2013

HMS Holdings Corp.

Vote FOR

Majority of
votes cast

Bunge Limited

Vote FOR

Majority of
votes cast

Hibbett Sports, Inc.

Vote FOR

Majority of
votes cast

Mastercard Incorporated;
Brixmor Property Group Inc.;
Cerevel Therapeutics
Holdings, Inc.

Vote FOR

Majority of
votes cast

Mastercard Incorporated;
HSBC Holdings plc

Vote FOR

Majority of
votes cast

*Age is as of the date of this proxy statement.

Our Corporate Governance Policies Reflect Best Practices
Strategy and risk oversight
ü Our board actively oversees and approves our corporate strategy.
ü 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 challenges to management initiatives and programs.

ü Our board oversees the state of our compliance program and reviews our enterprise-level risks, including related to

cybersecurity; our Audit Committee oversees our enterprise risk management processes and policies.

ü We have a comprehensive code of ethical and legal business conduct that applies to our board and all employees

worldwide. This code is reviewed and approved annually by the board.

ü We 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.

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

Board skills and experience
ü Our board membership is characterized by leadership, experience, and diversity.
ü We conduct comprehensive orientation and continuing education programs for directors.
ü Our board conducts a robust annual assessment of board performance led by the lead independent director,

including an annual assessment of each individual director.

ü 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 seven directors have served on the board for five years or less.

Focus on independence
ü Each of our current board members other than the CEO is independent (14 of our 15 directors as of the date of this

proxy statement).

ü We have a strong lead independent director empowered with clearly defined responsibilities.
ü All standing board committees are composed solely of independent directors and led by independent committee

chairs.

ü Our board holds executive sessions of the independent directors at every regular board meeting that is presided over

by our lead independent director.

ü Our independent directors actively engage in board meetings, have direct access to management, and, along with our

board committees, have discretion to hire independent advisors at the company’s expense.

ü Our independent directors lead the board’s process for selecting the CEO.
ü Our Compensation Committee (and, in the case of our CEO, in consultation with other independent directors and our

external compensation consultant) establishes the compensation for our CEO and other executive officers.

ü 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
ü Our board values active shareholder engagement. In response to input from our shareholders, we have put forward
for consideration at the Annual Meeting management proposals to eliminate the classified board structure and
supermajority voting provisions in our articles of incorporation.

ü In 2019, the board amended our bylaws to add proxy access rights for shareholders holding at least three percent of
our common stock for at least three years to nominate to the board the greater of two directors or 20 percent of our
board seats.

ü We have a majority voting standard and resignation policy for the election of directors in uncontested elections.
ü We do not have a shareholder rights plan ("poison pill").
ü We have meaningful stock ownership and retention guidelines for our directors and executive officers to foster

alignment with shareholders.

Sustainability
ü Our board has a longstanding commitment to corporate responsibility.
ü We have strong governance and disclosure of corporate political spending.
ü We have transparent public policy engagement.
ü Our board oversees and maintains ongoing engagement with our Compensation Committee, Directors and Corporate

Governance Committee, and senior executives on key political, social, and governance matters, including
sustainability and human capital management.

ü We publish annual reports describing our sustainability efforts across key focus areas and we are engaged in a

project to enhance our environmental, social, and governance sustainability reporting in 2021.

Compensation

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

For further information, see page 42

Management
recommendation

Vote required to
pass

Vote FOR

Majority of votes
cast

PROXY STATEMENT
Our Executive Compensation Programs Reflect Best Practices
ü Shareholders strongly support our compensation practices: for the last five years, approximately 97 percent or more

of shares cast voted in favor of our executive compensation programs.

ü Our compensation programs are designed to align executive pay with shareholder interests and link pay to

performance through a blend of short- and long-term performance measures.

ü 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.

ü We have a broad compensation recovery or "clawback" policy that applies to all executives and covers a wide range of

misconduct.

ü Our executive officers are subject to robust stock ownership and retention guidelines and are prohibited from

hedging or pledging their company stock.

ü 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.

ü We do not provide tax gross-ups to executive officers (except for limited gross-ups related to international

assignments).

ü We have a very restrictive policy on perquisites.
ü Our severance plans related to change-in-control require a double trigger.
ü We do not have employment agreements with any of our executive officers.

Executive Compensation Summary for 2020
At the time total target compensation was established at the end of 2019, the target compensation in aggregate for our
named executive officers was slightly below median of the company's peer group. Incentive compensation payouts
exceeded target, consistent with strong company performance over the bonus and equity performance periods.

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 adjustments made to revenue and EPS for incentive compensation programs.

PROXY STATEMENT2020 Bonus Plan Multiple
In 2020, the company exceeded its annual cash bonus target for revenue, nearly achieved its target for EPS, and
significantly exceeded its targets for pipeline progression. For purposes of the bonus, the Compensation Committee
adjusted non-GAAP EPS by $0.98 to exclude net gains on investments in equity securities that significantly exceeded
business plan. The Compensation Committee also reduced revenue and EPS for the purposes of the bonus calculation to
exclude estimated savings from certain discrete and unplanned performance items from the bonus plan multiple. See the
CD&A for further discussion of the Eli Lilly and Company Bonus Plan (Bonus Plan).

2019-2021 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, the Compensation Committee
adjusted non-GAAP EPS by $0.98 to exclude net gains on investments in equity securities that significantly exceeded
business plan. This performance resulted in a performance award payout above target. See the CD&A for further
discussion on the performance award program.

P10

PROXY STATEMENT2018-2020 Shareholder Value Award Multiple
Our stock price growth exceeded the target range (16.9 percent to 29.7 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 TSR relative to peer companies. Our relative TSR was 68.7 percentage points above the
peer group median, resulting in a maximum award payout of 180 percent of target (SVA payout multiple of 150 percent
multiplied by the 1.2 modifier = 180 percent final payout). See the CD&A for further discussion on the shareholder value
award program and the TSR modifier.

Audit Matters
Item 3: Ratification of the Appointment of the
Independent Auditor

For further information, see page 74

Management Proposals

Management
recommendation

Vote required
to pass

Vote FOR

Majority of votes
cast

Item 4: Proposal to Amend the Company's Articles of
Incorporation to Eliminate the Classified Board Structure

Management
recommendation

Vote required
to pass

For further information, see page 76

Item 5: Proposal to Amend the Company's Articles of
Incorporation to Eliminate Supermajority Voting
Provisions

For further information, see page 77

Vote FOR

80% of
outstanding
shares

Management
recommendation

Vote required
to pass

Vote FOR

80% of
outstanding
shares

P11

PROXY STATEMENT

Shareholder Proposals

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

Management
recommendation

Vote required to
pass

For further information, see page 78

Vote AGAINST

Majority of
votes cast

Item 7: Proposal to Amend the Bylaws to Require an
Independent Board Chair

Management
recommendation

Vote required to
pass

For further information, see page 80

Item 8: Proposal to Implement a Bonus Deferral Policy

For further information, see page 82

Vote AGAINST

Majority of
votes cast

Management
recommendation

Vote required to
pass

Vote AGAINST

Majority of
votes cast

Item 9: Proposal to Disclose Clawbacks on Executive
Incentive Compensation Due to Misconduct

Management
recommendation

Vote required to
pass

For further information, see page 84

Voting

Vote AGAINST

Majority of
votes cast

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

ONLINE

BY TELEPHONE

BY MAIL

Visit the website listed on your
notice, proxy card, or voting
instruction form

Call 1-800-690-6903 using a touch-
tone phone and follow the
instructions provided

If you received or requested paper
copies of your proxy materials, sign,
date, and return your proxy card or
voting instruction form

Shareholders who hold their shares beneficially through an institutional holder of record, such as a broker or bank
(sometimes referred to as holding shares in street name), will receive voting instructions from that holder of record. If
you do not provide voting instructions to the holder of record, your shares will not be voted on any proposal on which the
broker does not have discretionary authority to vote. See "Other Information—Meeting and Voting Logistics—Voting
Shares Held by a Broker" for more information.

Further information on how to vote, including if you hold voting shares in the 401(k) Plan, is provided at the end of this
proxy statement under "Other Information—Meeting and Voting Logistics."

You may vote your shares prior to the Annual Meeting until 11:59 p.m. EDT on May 2, 2021 online or by telephone. If you
are voting by mail, your marked, signed, and dated proxy card must be received by May 2, 2021. Shareholders who hold
their shares in the 401(k) Plan must vote in advance of the Annual Meeting, by April 28, 2021, so the plan trustee can vote
their shares accordingly. See "Other Information—Meeting and Voting Logistics—Voting Shares Held in the Company
401(k) Plan" for more information.

P12

PROXY STATEMENT

Voting at Our 2021 Annual Meeting

You may also opt to vote by attending the Annual Meeting, which will be held online via live webcast at
virtualshareholdermeeting.com/LLY2021 on Monday, May 3, 2021, at 11:00 a.m. EDT. See the section titled "Other
Information—Meeting and Voting Logistics" for instructions.

Governance
Item 1. Election of Directors

Under our 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 2024. Each of the director nominees listed below has agreed to serve that term. The following
sections provide information about our director nominees, 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 director nominees:

• Katherine Baicker, Ph.D.
• J. Erik Fyrwald
• Jamere Jackson
• Gabrielle Sulzberger
• Jackson P. Tai

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 19, 2021, regarding our directors and director nominees, 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.

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 laws, no criminal
proceedings and no judgments, sanctions, or injunctions during the past 10 years that are material to the evaluation of the
ability or integrity of any of our directors or nominees for director. There is no arrangement or understanding 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.

P13

PROXY STATEMENTClass of 2021
The five directors listed below will seek reelection at the Annual Meeting. See "Item 1. Election of Directors" above for
more information.

Katherine Baicker, Ph.D.

Age: 49, Director since 2011, Board Committees: Ethics and Compliance (chair); Science and Technology

PUBLIC BOARDS

HMS Holdings Corp.

MEMBERSHIPS + OTHER ORGANIZATIONS

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, National Opinion Research
Center, and the Chicago Council on Global Affairs; Member of the National
Academy of Medicine, the National Academy of Social Insurance, the Council on
Foreign Relations, and the 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 and public economics. As a valued adviser to
numerous healthcare-related commissions and committees, her expertise in healthcare policy and healthcare delivery
is recognized in both academia and government.

P14

PROXY STATEMENTJ. Erik Fyrwald

Age: 61, Director since 2005, Board Committees: Compensation; Science and Technology

PUBLIC BOARDS

PRIVATE BOARDS

NON-PROFIT BOARDS

Bunge Limited

Syngenta AG

CAREER HIGHLIGHTS

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

• Syngenta AG, a global Swiss-based agriculture technology company that produces agrochemicals and seeds
- President and Chief Executive Officer (2016 - present)
• Univar, Inc., a leading distributor of chemicals and provider of related services
- President and Chief Executive Officer (2012 - 2016)
• Ecolab Inc., 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 complex worldwide businesses with a focus
on technology and innovation. He is an engineer by training and has significant chief executive officer experience with
Syngenta, Univar, and Nalco.

P15

PROXY STATEMENTJamere Jackson

Age: 52, Director since 2016, Board Committees: Audit (chair); Ethics and Compliance

PUBLIC BOARDS
Hibbett Sports, Inc.
CAREER HIGHLIGHTS

• Autozone, Inc., a leading retailer and distributor of automotive replacement parts and accessories in the United

States, Mexico, and Brazil

- Executive Vice President and Chief Financial Officer (2020 - present)
• Hertz Global Holdings Inc.*, a global vehicle rental, leasing, and fleet management business
- Chief Financial Officer (2018 - 2020)
• Nielsen Holdings plc, a global measurement and data analytics company
- Chief Financial Officer (2014 - 2018)
• General Electric Company
- Vice President and Chief Financial Officer, General Electric Oil & Gas, drilling and surface division (2013 - 2014)
- Senior Executive, Finance, General Electric Aviation (2007 - 2013)
- Finance Executive, General Electric Corporate (2004 - 2007)
QUALIFICATIONS

Through his senior financial roles at Autozone, Hertz, Nielsen, and General Electric, Mr. Jackson brings to the board
significant global financial expertise and a strong background in strategic planning. He has spent his professional career
in a broad range of financial and strategic planning roles. He is an audit committee financial expert, based on his chief
financial officer experience and his training as a certified public accountant.

* Hertz Global Holdings Inc., The Hertz Corporation, and certain of their subsidiaries filed voluntary petitions for relief
under chapter 11 of title 11 of the United States Code in May 2020. We do not believe this proceeding is material to an
evaluation of the ability or integrity of Mr. Jackson.

Gabrielle Sulzberger

Age: 60, Director since 2021, Board Committees: Audit; Ethics and Compliance

PUBLIC BOARDS

PRIOR PUBLIC BOARDS

NON-PROFIT BOARDS

Mastercard Incorporated;
Brixmor Property Group Inc.;
Cerevel Therapeutics Holdings, Inc.

Whole Foods Markets, Inc.; Teva
Pharmaceuticals Industries Limited;
Stage Stores, Inc.;
IndyMac Bancorp, Inc.;
Bright Horizons Family Solutions Inc.

Metropolitan Museum of Art;
Ford Foundation;
Trinity Wall Street;
Sesame Street Workshop;
TimesUp

CAREER HIGHLIGHTS

• TwoSigma Impact, a private equity fund based in New York, New York
- Strategic Advisor (2021 - present)
• Rustic Canyon/Fontis Partners L.P., a private equity fund based in Pasadena, California
- General Partner (2005 - 2018)
QUALIFICATIONS

Ms. Sulzberger brings 30 years of experience advising public and privately held companies in consumer products, retail,
financial services, and life sciences, and deep corporate governance experience through her work with corporate boards.
She is an audit committee financial expert based on her audit committee service at Cerevel and Whole Foods, her
experience in private equity, and her prior service as chief financial officer of several public and private companies.

P16

PROXY STATEMENTJackson P. Tai

Age: 70, Director since 2013, Board Committees: Audit; Directors and Corporate Governance

PUBLIC BOARDS

PRIOR PUBLIC BOARDS

NON-PROFIT BOARDS

Mastercard Incorporated;
HSBC Holdings plc

Metropolitan Opera;
Rensselaer Polytechnic
Institute

Canada Pension Plan;
Investment Board;
Koninklijke Philips N.V.;
The Bank of China Limited;
Singapore Airlines Limited;
NYSE Euronext;
ING Groep N.V.;
CapitaLand Limited
(Singapore);
DBS Group Holdings Ltd and
DBS Bank Ltd

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), including service as the senior officer for
Japan Capital Markets and chairman of the Asia Pacific Management Committee
QUALIFICATIONS

Mr. Tai is a former chief executive officer with extensive experience in international business and finance, and he is an
audit committee financial expert based on his public company experience, including as an audit committee member of
HSBC Holdings and Mastercard, and as chair of the risk committee of HSBC Holdings. 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.

P17

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

Ralph Alvarez

Age: 65, Director since 2009, Board Committees: Audit; Compensation (chair)

PUBLIC BOARDS

PRIOR PUBLIC BOARDS

MEMBERSHIPS + OTHER ORGANIZATIONS

University of Miami President's Council

Lowe's Companies, Inc.

Dunkin’ Brands Group, Inc.
McDonald's Corporation;
KeyCorp;
Skylark Co., Ltd.;
Realogy Holdings Corp.

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. Mr. Alvarez is an audit committee financial expert based on his public company experience, including
his prior audit committee service on the Lowe’s board of directors. 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 as well as several private company boards.

P18

PROXY STATEMENTCarolyn R. Bertozzi, Ph.D.

Age: 54, Director since 2017, Board Committees: Ethics and Compliance; Science and Technology

NON-PROFIT BOARDS

MEMBERSHIPS + OTHER ORGANIZATIONS

Glenn Foundation;
Grace Science Foundation
HONORS

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

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 Berkeley, California, 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.

P19

PROXY STATEMENTKimberly H. Johnson

Age: 48, Director since 2021, Board Committees: Compensation; Ethics and Compliance

NON-PROFIT BOARDS + OTHER ORGANIZATIONS
Princeton University, Trustee
Share Our Strength, Director
Planet Word, Director
CAREER HIGHLIGHTS

• Federal National Mortgage Association (Fannie Mae), provider of affordable mortgage financing in the United States

- Executive Vice President and Chief Operating Officer (2018-present)
- Executive Vice President and Chief Risk Officer (2017-2018)
- Senior Vice President and Chief Risk Officer (2015-2017)
- Senior Vice President and Deputy Chief Risk Officer (2013-2015)
• Credit Suisse AG, a global wealth manager, investment bank, and financial services firm founded and based in

Switzerland

- Director, Interest Rate Derivative Products (2005-2006)

- Vice President (2002-2004)
QUALIFICATIONS

Through her roles at Fannie Mae, where she also serves on the management committee, Ms. Johnson brings to the
board significant financial expertise and a strong background in technology, governance and strategy for global risk
management.

Juan R. Luciano

Age: 59, Director since 2016, Lead Independent Director since 2019. Board Committees: Compensation; Directors
and Corporate Governance

PUBLIC BOARDS

NON-PROFIT BOARDS

MEMBERSHIPS + OTHER ORGANIZATIONS

Archer-Daniels-Midland
Company;
Wilmar International
(alternate director)
CAREER HIGHLIGHTS

Intersect Illinois;
Kellogg School of Management,
Northwestern University

Economic Club of Chicago;
Commercial Club of Chicago;
The Business Roundtable

• Archer-Daniels-Midland Company, a global food-processing and commodities-trading company
- Chairman (2016 - present)
- Chief Executive Officer 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 chief executive officer 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 experience 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.

P20

PROXY STATEMENTKathi P. Seifert*

Age: 71, Director since 1995, Board Committees: Compensation; Directors and Corporate Governance

PUBLIC BOARDS

PRIOR PUBLIC BOARDS

NON-PROFIT BOARDS

County Bancorp, Inc.

Albertsons Companies, Inc.
(formerly Albertson’s, Inc.);
Revlon Consumer Products Co.;
Supervalu Inc.;
Lexmark International, Inc.

Community Foundation for the Fox Valley Region;
New North Economic Development Corporation;
Fox Cities Chamber of Commerce;
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 service on the boards of other companies.

*Ms. Seifert will retire from the board following the Annual Meeting.

Class of 2023
The following five directors are serving terms that will expire in May 2023.

Michael L. Eskew

Age: 71, Director since 2008, Board Committees: Audit; Directors and Corporate Governance (chair)

PUBLIC BOARDS

NON-PROFIT BOARDS

3M Corporation;
IBM Corporation;
The Allstate Corporation

CAREER HIGHLIGHTS

Chairman of the board of trustees of The Annie E. Casey Foundation

• United Parcel Service, Inc., a global shipping and logistics company
- UPS Board of Directors (1998 - 2014)

- Chairman and Chief Executive Officer (2002 - 2007)
- Vice Chairman (2000 - 2002)
QUALIFICATIONS

Mr. Eskew has chief executive officer 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 chief executive officer 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.

P21

PROXY STATEMENTWilliam G. Kaelin, Jr., M.D.

Age: 63, Director since 2012, Board Committees: Directors and Corporate Governance; Science and Technology
(chair)

INDUSTRY MEMBERSHIPS

HONORS

National Academy of Medicine;
National Academy of Sciences;
American College of Physicians;
Association of American Physicians;
American Society of Clinical Investigation (ASCI);
American Academy of Arts and Sciences

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
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.

P22

PROXY STATEMENTDavid A. Ricks

Age: 53, Director since 2017, Board Committees: none

PUBLIC BOARDS NON-PROFIT BOARDS

INDUSTRY MEMBERSHIPS

Adobe Inc.

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

International Federation of Pharmaceutical
Manufacturers & Associations (IFPMA) CEO
Steering Committee;
Pharmaceutical Research and Manufacturers
of America (PhRMA);
The Business Roundtable;
National Council for Expanding American
Innovation (NCEAI)

CAREER HIGHLIGHTS

• Eli Lilly and Company
- Chairman, President, and Chief Executive Officer (2017 - present)
- Senior Vice President and President, Lilly Bio-Medicines (2012 - 2016)
QUALIFICATIONS

Mr. Ricks was named President and Chief Executive Officer 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 expertise in the company's
commercial operations.

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

Age: 66, Director since 2013, Board Committees: Ethics and Compliance; Science and Technology

NON-PROFIT BOARDS

MEMBERSHIPS + OTHER ORGANIZATIONS

Michigan Medicine
CAREER HIGHLIGHTS

Experimental Cardiovascular Sciences Study Section of the National Institutes of Health

• 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 healthcare and
academia. He has extensive experience as a practicing cardiologist, a strong understanding of healthcare facility
systems, and deep expertise in biomedical research and clinical trial design.

P23

PROXY STATEMENTKaren Walker

Age: 59, Director since 2018, Board Committees: Audit; Compensation

NON-PROFIT BOARDS

MEMBERSHIPS + OTHER
ORGANIZATIONS

Salvation Army Advisory Board of
Silicon Valley

Association of National Advertisers
(board and executive committee)

PUBLIC BOARDS

Sprout Social, Inc.

CAREER HIGHLIGHTS

• Intel Corporation, a leader in the semiconductor industry
- Senior Vice President and Chief Marketing Officer (2019 - present)
• Cisco Systems, Inc., a provider of communications 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 business 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.

P24

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/Technology 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. Kathi Seifert, who joined the board in 1995, will retire from the board following the Annual
Meeting. Effective January 25, 2021, Gabrielle Sulzberger was elected to the board as a member of the director class of
2021. Ms. Sulzberger was appointed to the Audit Committee and the Ethics and Compliance Committee. Effective
February 16, 2021, Kimberly H. Johnson was elected to the board as a member of the director class of 2022. Ms. Johnson
was appointed to the Compensation Committee and the Ethics and Compliance Committee. The following graphic
highlights the tenure of our current board members:

Less than 3 Years:

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 15 directors range in
age from 48 to 71 and include six women and seven members of underrepresented groups (including minority group
members (MGM) as well as lesbian, gay, bisexual, transgender, or queer (LGBTQ) individuals).

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
Together with our lead independent director, the Directors and Corporate Governance Committee performs periodic
assessments of the overall composition and skills of the board to ensure that the board is 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 of shareholders each year and help provide us with insight on the types of experiences, skills, perspectives, and
other characteristics we should be seeking for future director candidates. Based on this assessment, the Directors and

P25

PROXY STATEMENT
Corporate Governance Committee has recommended that the directors in the class of 2021 be elected at the Annual
Meeting.

The 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 has retained Russell Reynolds Associates, an executive search and leadership
consulting firm, to assist with identifying potential director candidates.

The Directors and Corporate Governance committee employs the same process to evaluate 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

Directors who are employees receive no additional compensation for serving on the board. Non-employee director
compensation is reviewed and approved by the board, on the recommendation of the Directors and Corporate Governance
Committee.

Cash Compensation
The following table shows the retainers and meeting fees in effect in 2020 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 and 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, and
Public Policy and Compliance Committee (renamed
the Ethics and Compliance Committee effective
January 1, 2021) 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. Non-employee 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
A significant portion of non-employee director compensation is linked to the long-term performance of Lilly stock. In
2020, non-employee directors received an annual equity-based award valued at $175,000. The award was credited to each
non-employee director’s deferred stock account established under the Lilly Directors’ Deferral Plan as a number of units
calculated by dividing $175,000 by the closing stock price on a pre-set annual date (approximately 1,245 units). The units
track the economic value of shares of company stock with stock dividends being deemed "reinvested" in additional units
based on the market price of the stock on the date dividends are paid. The units become converted into and issuable to the
non-employee directors as shares of company stock commencing on the second January following a director's departure
from board service (either in lump sum or installments as described below). When applicable, the annual equity-based
award is prorated for time served.

P26

PROXY STATEMENTShare Ownership Guidelines
Directors are required to hold meaningful equity ownership positions in the company. Non-employee directors are
required to hold Lilly stock, directly or through units representing the right to receive shares of Lilly stock under the Lilly
Directors’ Deferral Plan, valued at not less than five times their annual board retainer; new non-employee directors are
allowed five years to reach this ownership level. All non-employee directors serving at least five years have satisfied these
guidelines. All other non-employee directors are, or in the case of newly elected directors, are expected to begin, making
progress toward these requirements.

Annual Compensation Cap for Directors
In 2018, the board approved an annual 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 both the
Lilly Directors' Deferral Plan and in the Amended and Restated 2002 Lilly Stock Plan approved by shareholders at the
2018 annual meeting of shareholders.

Lilly Directors’ Deferral Plan
In addition to the annual equity-based grants credited to each non-employee director’s deferred stock account as
described above, 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 any amounts
deferred in one or both of the following two accounts:

Deferred Stock Account. This account allows the non-employee director, in effect, to invest his or her deferred cash
compensation in company stock. Funds in this account are credited as units representing the right to receive shares of
company stock based on the closing stock price on pre-set monthly dates. Hypothetical dividends are deemed
"reinvested" in additional units based on the market price of the stock on the date dividends are paid. The units become
converted into and issuable to the non-employee director as shares of company stock commencing on the second January
following the director's departure from board service (either in a lump sum or installments as described below). The
deferral stock account is the same account where the annual equity-based awards are credited with the same conversion
timing and procedure applicable to the annual equity-based awards.

Deferred Compensation Account. Deferred cash compensation in this account earns 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 2020 for the participating directors was $109,753, at a rate of
2.5 percent. The rate for 2021 is 1.6 percent.

Both accounts may be paid out in a lump sum or in annual installments for up to 10 years based on individual director
annual elections. All payments begin the second January following the director’s departure from board service. Amounts
in the deferred stock account are paid in shares of company stock.

2020 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

Fees Earned
or Paid in Cash ($)

$131,000

$119,000

$134,000

$119,000

$137,000

$134,000

$163,000

$119,000

$116,000

$122,000

$119,000

Stock Awards ($)1
$175,000

$175,000

All Other
Compensation
and Payments ($)2

$55,600

$5,000

$20,841

$60,000

$20,000

Total ($)3
$306,000

$306,000

$294,000

$309,000

$349,600

$312,000

$314,000

$338,000

$294,000

$311,841

$357,000

$314,000

*Ms. Sulzberger and Ms. Johnson were elected to the board of directors in 2021 and are not included in the table above.
1 Each non-employee director received an equity-based award of units valued at $175,000 (approximately 1,245 units).
These units, and all prior awards of such units, are fully vested; however, the shares subject to such awards of units are
not issued until the second January following the director's departure from board service when, as described above

P27

PROXY STATEMENTunder "Lilly Directors’ Deferral Plan," the units are converted into shares of company stock and distributed to the
former director. The column shows the grant date fair value for each director’s equity-based 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,
2020, 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.

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, Ms. Seifert, and Mr. Tai include matching contributions for donations
made at the end of 2019 (Mr. Fyrwald - $28,000; Ms. Seifert - $4,000; and Mr. Tai - $30,000) for which the matching
contribution was not paid until 2020.

3 Directors do not participate in a company pension plan or non-equity incentive plan.

2021 Director Compensation
The Directors and Corporate Governance Committee performs regular reviews of non-employee director compensation.
In 2019, the Directors and Corporate Governance Committee performed an in depth review of non-employee director
compensation, including a pharmaceutical company peer group analysis and general industry peer group analysis
conducted with the assistance of an outside compensation consultant, discussions regarding the effectiveness of the non-
employee directors in their various duties, and other considerations, including the desire to have non-employee director
compensation positioned near the market median when compared against the general industry peer group. Although no
formal changes or review of the non-employee director compensation were made or conducted in 2020, the Directors and
Corporate Governance Committee intends to perform a non-employee director compensation review as part of its 2021
agenda.

Director Independence

The board annually determines the independence of directors based on a review and recommendation by the Directors
and Corporate Governance Committee. No director is considered independent unless the board has affirmatively
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 relationships 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/leadership/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. The board also determined that the members of our Audit and Compensation
Committees also meet the heightened independence standards applicable to those committees. 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.

In making its independence determinations, the board considered that some of the non-employee directors are affiliated
with companies or entities to which the company sold products or made payments, or from which the company purchased
products or services during the year. Drs. Baicker, Bertozzi, Kaelin, and Runge are employed at medical or academic
institutions with which the company engages in clinical research, provides research grants, and/or engages in
commercial transactions in the ordinary course of business. Mr. Luciano is employed by Archer-Daniels-Midland
Company and Mr. Fyrwald is employed by Syngenta AG. The company engages in routine business transactions with these
companies. Aggregate payments to or from 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. In reviewing these relationships, the board considers all relevant factors, including:

P28

PROXY STATEMENT•

•

whether any transactions 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; and
whether any 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 our board-appointed committees are described below. Effective January 1, 2021, our board
disbanded the Finance Committee and reallocated its duties to the full board, the Audit Committee, and the Compensation
Committee. This restructuring reduced the number of board committees to allow more time for meetings of the
remaining committees, encouraging longer, more in-depth committee discussions, and allowing the board to have more
in-depth discussions on capital allocation matters.

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 on the committees.

The chair of each committee determines the frequency and agenda of committee meetings, subject to any minimums
specified in the relevant committee charter, and the committees meet alone in executive session on a regular basis.

P29

PROXY STATEMENTMembership and Meetings of the Board and Its Committees

In 2020, each director attended at least 75 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 Annual Meeting, and all directors then serving attended the 2020 annual meeting of shareholders.
Current committee membership and the number of meetings of the board and each committee* held in 2020 are shown in
the table below.

Name

Mr. Alvarez

Dr. Baicker

Dr. Bertozzi

Mr. Eskew

Mr. Fyrwald

Mr. Jackson

Ms. Johnson**

Dr. Kaelin

Mr. Luciano

Mr. Ricks

Dr. Runge

Ms. Seifert

Ms. Sulzberger**

Mr. Tai

Ms. Walker

Number of 2020
Meetings

Board

Audit

Compensation

Directors and
Corporate
Governance

Ethics and
Compliance

Science and
Technology

ü
LD

* Effective January 1, 2021, the board disbanded the Finance Committee, which met eight times in 2020.
** Ms. Sulzberger and Ms. Johnson were elected in 2021.

C
LD

Committee Chair
Lead Independent Director

All committee charters are available online at lilly.com/leadership/governance. 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 our 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
processes and procedures related to identifying and mitigating enterprise level risks.

The committee has sole authority to appoint or replace the independent auditor, subject to shareholder ratification.

The board has determined that Mr. Alvarez, Mr. Eskew, Mr. Jackson, Ms. Sulzberger, and Mr. Tai are audit committee
financial experts, as defined in the rules of the U.S. Securities and Exchange Commission (SEC).

Compensation Committee
The Compensation Committee:

•
•

oversees the company’s global compensation philosophy and policies
establishes the compensation of our CEO, in consultation with other independent directors and our external
compensation consultant, and other executive officers

P30

PROXY STATEMENT•

•

•
•
•

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, including a broad review of our
succession management and diversity efforts
advises our management and the board regarding other human capital management and employee
compensation and benefits matters
reviews, monitors, and oversees stock ownership guidelines for executive officers
oversees the company’s executive compensation recovery policy
oversees the company’s engagement with shareholders regarding executive compensation matters, including
reviewing and evaluating the results of advisory votes on executive compensation.

Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2020, Mr. Alvarez, Mr. Eskew, Mr. Fyrwald, and Ms. Seifert served on the
Compensation Committee.

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 "Governance—Highlights of
the Company's Corporate Governance—Conflicts of Interest and Transactions with Related Persons—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
reviews recommendations for nominees for the board of directors
oversees matters of corporate governance, including board performance, non-employee director independence
and compensation, corporate governance guidelines, and shareholder engagement on governance matters
identifies and brings to the attention of the board as appropriate current and emerging environmental, social,
political, and governance trends and public policy issues that may affect the business operations
annually assesses the performance of the board, board committees and board processes, and reviews such
findings with the board.

Ethics and Compliance Committee
Effective January 1, 2021, the board reorganized the Public Policy and Compliance Committee into the Ethics and
Compliance Committee.

The Ethics and Compliance Committee:

•

reviews, identifies and, when appropriate, brings to the attention of the board legal and regulatory trends and
issues, and compliance and quality matters that may have an impact on the business operations, financial
performance, or reputation of the company
reviews, monitors, and makes recommendations to the board on corporate policies and practices related to
compliance, including those related to employee health and safety.

Science and Technology Committee
The Science and Technology Committee:

reviews and advises the board regarding the company’s strategic research and development goals and objectives

•
• monitors and evaluates developments, technologies, and trends in pharmaceutical research and development
•
•
•

regularly reviews the company's product pipeline
advises the board on the scientific aspects of significant business development opportunities
assists the board with its oversight responsibility for enterprise risk management in areas affecting the
company's research and development.

Finance Committee
Prior to its dissolution effective January 1, 2021, the Finance Committee reviewed and made recommendations to the
board regarding financial matters, including:

•
•
•
•

capital structure and strategies
dividends
stock repurchases
capital expenditures

P31

PROXY STATEMENT•
•
•
•

investments, financing, and borrowings
benefit plan funding and investments
financial risk management
significant business development opportunities.

Effective January 1, 2021, the board disbanded the Finance Committee and reallocated its responsibilities to the full
board, the Audit Committee, and the Compensation Committee.

Board 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 conduct 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, cybersecurity, and human capital management. See also "Governance
—Highlights of the Company’s Corporate Governance—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.
Effective January 1, 2021, the Public Policy and Compliance Committee was reorganized to become the Ethics and
Compliance Committee, with a refined focus on legal and regulatory trends and issues, and compliance and quality
matters that may have an impact on the business operations, financial performance, or reputation of the company. The
Ethics and Compliance Committee continues to meet at least four times per year, including semi-annual private sessions
to discuss compliance with the company’s chief ethics and compliance officer, the general auditor, and the senior vice
president, global quality. On an annual basis, the full board reviews the company's overall state of compliance and the
Ethics and Compliance Committee receives an update on compliance at each meeting.

The chief ethics and compliance officer and the senior vice president, global quality report 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. Key
enterprise level risks are overseen by the full board and our enterprise risk management process is overseen by the Audit
Committee. Company management is charged with managing risk through robust internal processes and controls. The
enterprise level risks are reviewed annually at a full board meeting, and relevant 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/operating-responsibly/ethics-compliance and lilly.com/operating-
responsibly/ethics-compliance/financial-management-ethical-conduct. 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

We are committed to good corporate governance, which promotes the long-term interests of shareholders and other
company stakeholders, builds confidence in our leadership, and strengthens accountability by the board and
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 important governance
matters. Investors can learn more by reviewing the corporate governance guidelines, which are available online at
lilly.com/leadership/governance.

P32

PROXY STATEMENTRole of the Board
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
selecting, compensating, evaluating, and, when necessary, replacing the CEO, and compensating other senior
executives
ensuring that an effective succession plan is in place for all key senior leadership positions and reviewing our
broader talent management process, including human capital management strategies, overall corporate culture,
and D&I programs
overseeing the company’s ethics and compliance program and management of significant business risks
selecting, compensating, and evaluating directors
overseeing the company's enterprise risk management program
overseeing the company’s approach to current and emerging political, social, environmental, and governance
trends and public policy issues that may affect the company.

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 product 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 from the board no later than the date of the annual meeting that follows their
seventy-second birthday, although the Directors and Corporate Governance Committee may 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
To ensure proper engagement from our directors and effective functioning of our board, we have instituted certain
limitations on service on the boards of other companies. 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 third 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/leadership/governance.

P33

PROXY STATEMENTLeadership Structure; Oversight of Chairman, CEO, and Senior Management
Leadership Structure
Our board believes that there is no "one-size-fits-all" approach to board leadership and recognizes that one of its key
responsibilities is to evaluate its optimal leadership structure to ensure both independent oversight of management and
an engaged board with complementary qualities, perspectives, and experiences. The board regularly reviews its
leadership structure and developments in the area of corporate governance to ensure that our chosen leadership
structure continues to strike the appropriate balance for the company and our stakeholders and enables us to promote
the long-term interests of our shareholders. Throughout 2020, the board continued its proactive assessment of board
succession and refreshment and, after thoughtful consideration of our business, long-term strategy, and related risks,
and the strong role of our lead independent director, the independent directors believe that combining the chairman and
CEO roles, coupled with a strong lead independent director position, continues to be in the best interest of the company
and our shareholders. The board believes that Mr. Ricks’ extensive knowledge of, and experience in, the pharmaceutical
industry enables him to effectively set the long-term strategic direction of the company and provide diligent, long-term
leadership and direction for management and our board.

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 valuable and 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 2020, the independent directors, led by Mr. Luciano, met at each regularly scheduled 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 advises 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 and presided over
by the lead independent director.

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 and independent
directors 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 the CEO
overseeing the independent directors’ annual performance evaluation of the chairman and CEO
serving as a liaison between the chairman and the independent directors
presiding at all meetings of the board at which the chairman is not present
presiding at executive sessions of the independent directors
calling meetings of the independent directors, as appropriate
approving meeting agendas and schedules and reviewing information to be provided to the board
being available for consultation and direct communication with shareholders, as appropriate
together with the chairman 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 succession
planning process
retaining advisors for the independent directors, as appropriate.

◦

The independent directors and all committees have the ability to retain their own independent advisors, at the
company’s expense, whenever they deem it desirable to do so.

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.

P34

PROXY STATEMENT•

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.

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.

During these reviews, the CEO and directors discuss:

•
•
•

future candidates for the CEO and other senior leadership positions
succession timing
development plans for the strongest 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.

Human Capital Management
Overview and Oversight
At Lilly, dedication to human capital management is a core component of our corporate governance and culture. Our
comprehensive approach to human capital management is grounded in our core values of integrity, excellence, and
respect for people, which reflect our commitment to creating a safe, supportive, ethical, and rewarding work
environment.

The board exercises active oversight over our overall talent management process, including human capital management
strategies, corporate culture, and D&I programs. The board also oversees the work of its committees in developing
corporate policies and frameworks designed to attract, retain, engage, and develop a workforce that aligns with our
values and mission. The Compensation Committee advises the board on human capital management and employee
compensation and benefit matters, and annually reviews our leadership development, succession planning practices, and
diversity efforts. The Directors and Corporate Governance Committee in turn identifies and brings to the attention of the
board, as appropriate, current and emerging social, environmental, political, and governance trends and public policy
issues that may affect our business operations, performance, or reputation.

The board also oversees human capital management by regularly engaging with management and facilitating a system of
reporting that highlights the importance of D&I to Lilly. For example, as part of our commitment to D&I, our board
considers the contributions related to D&I of our CEO and other executive committee members when determining their
compensation. Our board also oversees the activities of our CEO and executive committee in setting expectations for
inclusive leadership and holding leaders accountable for building diverse and inclusive teams. Our CEO receives regular
reports from Lilly’s senior vice president for human resources and diversity. In addition, our chief D&I officer is a vice
president who reports to the senior vice president for human resources and diversity, who is a member of our executive
committee. We believe this system of oversight and reporting by the board and our key executives is critical to our
success in fostering an inclusive, supportive, and rewarding workplace.

Measuring Progress on Diversity and Inclusion
We are committed to fairness and nondiscrimination in our employment practices, and we deeply value diverse
backgrounds, skills, and global perspectives. To fulfill our purpose, we believe we must look at challenges from multiple
viewpoints and understand the diverse experiences of the patients who depend on us. In short, our differences make a
difference—to patients and to our business.

We believe that fostering D&I begins with understanding, and we have approached D&I with the same rigor as our other
business-critical priorities. Our Employee Journeys research has yielded important insights about the experiences of
women, Black/African American, Latinx, Asian, and LGBTQ employees at Lilly. In response to insights from our Employee
Journeys research, we developed, among others, an education and awareness program to help build cultural literacy and
understanding about conditions needed for employees to feel psychologically safe at work. More than 3,000 leaders and
13,000 employees have participated in required training to gain greater awareness of how unconscious bias and
microaggressions can harm team cohesiveness and hurt employee engagement. Our Employee Journeys research has
also resulted in growing energy around D&I, with a company-wide network of D&I champions, initiatives, and teams
across business areas—and an expanding appreciation of the value of different perspectives. The results of this research

P35

PROXY STATEMENTare reviewed by our senior leadership, and we deploy actions and activities in response to these insights to improve our
workplace and corporate culture.

Our focus on D&I is also a critical component of our broader corporate governance. Seven of 15 members (approximately
47 percent) of our executive committee (which includes our CEO) are women and two are MGM, including one MGM
woman. In addition, the company's 15 directors range in age from 48 to 71 and include six women and seven members of
underrepresented groups (including MGM as well as LGBTQ individuals).

P36

PROXY STATEMENTRecognition
At Lilly, we strive to be leaders in D&I and workplace benefits, and we are honored when we receive recognition for our
dedicated efforts to improve the lives of our employees. Below are some of our accolades for 2020 and early 2021:

Employee Development
We believe talent begins with the hiring process. We therefore require hiring managers to consider a diverse pool of
candidates and we strive to provide a diverse panel of interviewers for open positions. We believe that hiring in this way
helps ensure that people from all backgrounds have equal opportunity to advance their careers.

We offer training to enable our employees to perform their duties in our highly regulated industry. We also strive to
cultivate a culture that promotes ongoing learning by encouraging employees to seek further education and growth
experiences, helping them build rewarding careers. We have introduced online programming to facilitate access to our
learning and development offerings. Many training courses are designed to improve accessibility for people with
disabilities and other unique needs. Across Lilly, we are working to design learning experiences to be more inclusive and
effective.

To further improve our talent programs and processes, in 2019, we introduced Explore Your Career, a global framework of
tools and resources for our employees. We believe Explore Your Career provides broader access and transparency about
career development and advancement at Lilly. In 2018, we introduced Emerge, a three-day program led by our CEO that is
designed to develop MGM talent at Lilly, and three cohorts comprising Black/African American women, Latinx and Asian
women, and MGM men have participated in this enterprise-level program since its inception. Lilly also offers established
leadership development programs for women and earlier career multi-cultural talent, as well as leaders at all levels.

Employee resource groups (ERGs) are another important component of developing talent at Lilly. We currently have 10
ERGs representing groups including women, MGMs, LGBTQ individuals, and people with disabilities. ERGs offer our
diverse workforce opportunities to build relationships, engage with senior leaders, advance our caring community, and
offer unique insights and perspectives to improve our business. Membership in our ERGs continues to grow, with an
estimated 11,430 people participating worldwide at the end of 2020.

In furtherance of our efforts to create an inclusive workplace, in 2020 we expanded Make it Safe to Thrive, an education and
awareness program to help employees and leaders understand how individual psychological safety can be created and
enhanced, with the goal of ensuring that all employees feel safe to speak up and to share their ideas at work. The
program includes live and online training and a monthly video series.

Compensation, Benefits, and Pay Equity
While our rewards programs vary around the world, we take a holistic approach to employee benefits. These may include
flexible work arrangements, on-site conveniences, such as cafes, fitness centers, child development centers, competitive
time-off programs, retirement benefits, and health and disability programs that are available to eligible employees when
they need support. We are committed to rewarding, supporting, and developing our employees who make it possible to
fulfill our mission to unite caring with discovery to create medicines that make life better for people around the world.

P37

PROXY STATEMENTWe are also committed to ensuring pay is administered equitably across our workforce. For more than 20 years, we have
regularly conducted pay equity studies of our workforce in the U.S. and have more recently started conducting studies of
our workforce outside of the U.S. While infrequent, we have made pay adjustments as warranted based on these analyses.
We believe that pay equity is critical to our success in supporting a global, diverse, and inclusive workforce.

Employee Health and Safety
Due to concerns regarding the ongoing COVID-19 pandemic, we have taken various measures to protect the health and
safety of our employees, including instituting travel restrictions and work-from-home arrangements. For further
information on the measures we have taken in response to COVID-19, see "Proxy Statement Summary—Our Response to
COVID-19—Keeping Our Employees Safe and Healthy."

Board Education and Annual Performance Assessment
The company engages in a comprehensive orientation process for incoming new directors. Directors also attend ongoing
continuing education 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 five
percent of the company’s outstanding stock). The policy covers any related person transaction that meets the minimum
threshold for disclosure in this proxy statement under 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:
•
•
•

the 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.

•

P38

PROXY STATEMENTProcedures:

•

• 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 General
Counsel and Secretary.
The chairman and the lead independent director shall jointly determine (or, if either is involved in the
transaction, the other shall determine in consultation with the chair of the Directors and the Corporate
Governance Committee) whether the matter should be considered by the board or by one of its existing
committees consisting only of independent directors.
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 2020, there were no related party transactions required to be reported pursuant to relevant SEC rules in this proxy
statement.

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 General Counsel and Secretary
Lilly Corporate Center
Indianapolis, IN 46285

Shareholder Engagement on Governance Issues

To ensure that a diversity of perspectives is thoughtfully considered on a number of 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. Since our 2020 annual meeting of shareholders,
we have spoken with a number of investors on an array of subjects, including board leadership; environmental, social, and
governance topics; drug pricing transparency and global access to our products, including our COVID-19 therapies;
product quality and safety; key enterprise risks; executive compensation; and human capital management. Given the
significant challenges the world faced in 2020, we appreciate now more than ever the thoughtful and constructive
feedback that we receive from our stakeholders. While a few shareholders communicated differing views on some of our
governance practices, the investors with whom we spoke were generally supportive of our performance and overall
compensation and governance policies. This feedback has been discussed with our chairman and CEO, the lead
independent director, our Compensation Committee, Ethics and Compliance 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 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.

Management Proposals to Eliminate Classified Board and Supermajority Voting Requirements
Each year between 2007 and 2012, and again in 2018, 2019, and 2020, 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, 2019, and 2020, we submitted management proposals to eliminate the supermajority
voting requirements themselves. Those proposals also did not receive the required 80 percent vote.

Prior to 2012, these proposals received support ranging from 72 to 77 percent of our outstanding shares. In 2012, the vote
in support of these proposals was approximately 63 percent of our 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, 2019, and 2020, the vote in support was approximately 62, 66, and 69 percent of
our outstanding shares, respectively.

P39

PROXY STATEMENTAfter 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 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 19, 2021. Proposals should be addressed to the General Counsel
and Secretary and mailed to Lilly Corporate Center, Indianapolis, IN 46285. For convenience, emailed copies may also be
sent to shareholderproposals@lilly.com. In addition, the company’s bylaws provide that any shareholder wishing to
propose any other business at the 2022 annual meeting of shareholders must give the company written notice by
November 19, 2021, and no earlier than September 20, 2021. That notice must provide certain other information as
described in the bylaws. A copy of the bylaws is available online at lilly.com/leadership/governance.

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 General Counsel and Secretary
Lilly Corporate Center
Indianapolis, IN 46285

The candidate must meet the selection criteria described above under "Governance—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
2022 annual meeting of shareholders (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
19, 2021, and no earlier than September 20, 2021. The notice should be addressed to the General Counsel and 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/leadership/governance.

We know of no other matters to be submitted to shareholders at the Annual Meeting other than the proposals referred to
in this proxy statement.

P40

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 12, 2021. On February 12,
2021, there were 958,425,693 shares of the company’s common stock outstanding. 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

Ralph Alvarez

Katherine Baicker, Ph.D.

Carolyn R Bertozzi, Ph.D.

Michael L. Eskew

J. Erik Fyrwald

Anat Hakim

Jamere Jackson

Kimberly H. Johnson

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

Gabrielle Sulzberger

Jackson P. Tai

Karen Walker

Alfonso G. Zulueta
All directors and executive
officers as a group
(30 people):

Common Stock 1

Shares Owned 2

Stock Units Distributable
Within 60 Days 3

Percent of
Class

Stock Units Not
Distributable
Within 60 Days 4

—

100

—

462,924

—

3,533

115,680

79,819

—

45,570

—

61,634

—

7,928

—

49,145

20,398

6,267

43,904

67,025

7,929

7,009

—

18,813

12,619

56,205

14,341

73,838

18,735

—

14,170

4,224

10,706

1,229,181

7,928

480,586

* Less than 1.0 percent of the outstanding common stock of the company.
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 this 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.
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 12, 2021.
4 For the executive officers, this column reflects restricted stock units that will not vest within 60 days of February 12,
2021. For the non-employee directors, this column reflects the number of units representing the right to receive shares
of company stock credited to the directors' accounts in the Lilly Directors' Deferral Plan.
5 The shares shown for Mr. Ricks include 15,720 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.
6 Mr. Smiley resigned from his officer position on February 9, 2021. His shares are included in the total for all directors
and officers as a group based on Mr. Smiley’s Form 4 filed on February 10, 2021.

P41

PROXY STATEMENT

Common Stock Ownership of Certain Beneficial Holders
The following table sets forth the number of shares of company common stock beneficially owned as of December 31,
2020, unless otherwise indicated, by each person known to the company to beneficially own more than 5 percent of the
outstanding shares of the company’s common stock:

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

111,132,343

Percent of Class*
11.6%

68,661,494

58,811,768

52,012,151

7.2%

6.1%

5.4%

*Percent of class is calculated based on the shares of our common stock outstanding as of February 12, 2021.

1 Based on information provided to Lilly by the Endowment as of January 12, 2021 and a Schedule 13G/A filed by the
Endowment with the SEC on January 21, 2021, 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 Based solely on the Schedule 13G/A filed with the SEC on February 10, 2021 by The Vanguard Group, it beneficially owns
68,661,494 shares altogether. It does not have sole voting power with respect to any of its shares and it has shared voting
power with respect to 1,463,329 of its shares. It has sole dispositive power with respect to 64,975,145 of its shares and
shared dispositive power with respect to 3,686,349 of its shares.
3 Based solely on the Schedule 13G/A filed with the SEC on January 29, 2021 by BlackRock, Inc., it has sole voting power
with respect to 51,122,422 of its shares and sole dispositive power with respect to 58,811,768 shares.
4 Based solely on the Schedule 13G/A filed with the SEC on February 12, 2021 by The PNC Financial Services Group, Inc.;
PNC Bancorp, Inc.; PNC Bank, National Association (PNC Bank); PNC Capital Advisors, LLC; PNC Delaware Trust
Company; and PNC Investments LLC (collectively, PNC), PNC beneficially owns 52,012,151 shares altogether. PNC has
sole voting power with respect to 1,948,954 of its shares and shared voting power with respect to 50,001,182 of its
shares. PNC has sole dispositive power with respect to 1,596,522 of its shares and shared dispositive power with respect
to 50,374,248 of its shares. Of the total shares of common stock reported for PNC above, 50,000,000 shares are held in
the Eli Lilly and Company Compensation Trust account for which 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 from a variety of
backgrounds and motivate them to create long-term shareholder value by achieving top-tier corporate performance while
embracing the company’s core 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. However, the
Compensation Committee values input from shareholders and will consider the outcome of the vote when making future

P42

PROXY STATEMENTexecutive compensation decisions. At our 2017 annual meeting of shareholders, our shareholders expressed a preference
that advisory votes on executive compensation occur every year, as recommended by our board. Consistent with this
preference, the board determined that the company would hold advisory votes on executive compensation on an annual
basis until the next advisory vote on the frequency of advisory votes on executive compensation, which will occur no later
than our 2023 annual meeting of shareholders.

Board Recommendation on Item 2

The board recommends that you vote FOR the approval, on an advisory basis, of the compensation paid to the named
executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the CD&A, the compensation tables,
and related narratives provided below in this proxy statement.

Compensation 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 the 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 2020 (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
Incentive plans have predetermined maximum payouts
Performance objectives are challenging but achievable

•
•
•
•
•

•
•

P43

PROXY STATEMENT•

•

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 in the CD&A. With this in mind, the Compensation Committee has reviewed and discussed the
CD&A with management. Based on this discussion, the Compensation Committee recommended to the board that the
CD&A be included in this proxy statement and the company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2020, for filing with the SEC.

Compensation Committee
Ralph Alvarez, Chair
J. Erik Fyrwald
Juan R. Luciano
Kathi P. Seifert
Karen Walker

P44

PROXY STATEMENTCompensation 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 2020, and how the company’s results affected incentive payouts. This
CD&A provides compensation information for our CEO, David Ricks, our former chief financial officer, Joshua Smiley, who
resigned from his officer position on February 9, 2021, and the three other most highly compensated executive officers
who were serving as executive officers on December 31, 2020, Daniel Skovronsky, Anat Hakim, and Alfonso Zulueta.

Name, age* and principal occupation

David A. Ricks, 53

Chairman, President and CEO

Joshua L. Smiley, 51

Former Senior Vice President and Chief Financial Officer

Daniel Skovronsky, M.D., Ph.D., 47

Senior Vice President, Chief Scientific Officer, and President, Lilly
Research Laboratories

Anat Hakim, 52

Senior Vice President, General Counsel and Secretary

Alfonso G. Zulueta, 58

Senior Vice President and President, Lilly International

*Age is as of the date of this proxy statement.

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 from a variety of backgrounds and
motivate them to create long-term shareholder value by achieving top-tier corporate performance while embracing the
company's core values of integrity, excellence, and respect for people. Our compensation programs are designed to help
us achieve these goals while balancing the long-term interests of our shareholders and customers.

P45

PROXY STATEMENT

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 absolute company performance, relative 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 is market competitive and reflects 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.

Say-on-Pay Results for 2020
At our 2020 annual meeting of shareholders, approximately 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 each of the other 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, diversity, 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 contribution to the company's performance, diversity, ethics, and integrity. 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 multiple ways:
•

Overall performance for the prior year based on a variety of metrics is a factor in establishing target
compensation for the coming year.
At the beginning of each calendar year, annual performance goals are established and approved by the
committee. Performance against these annual goals is used to determine the short-term cash incentive
payout.
Prior to the annual grant, multi-year performance goals are established and approved by the committee.
Performance against these multi-year objectives is used to determine the long-term incentive equity payout.

•

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.

P46

PROXY STATEMENT•

Input from 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

Novo Nordisk

Pfizer

Roche

Sanofi

Shire*

Takeda

*Market data unavailable for assessing competitive 2020 pay due to business mergers.

At 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 2020 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 2020 executive compensation was primarily composed of three components:

•
•

•

base salary
annual cash bonus, which is generally based on company performance relative to internal targets for revenue,
EPS, and the progress of our pipeline
three 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 measured over a three-year period, followed by a one-year holding period
relative value awards, which are performance-based equity awards that pay out based on company TSR
results relative to peers 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

P47

PROXY STATEMENT
•

•

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, gains and losses on investments in equity securities that differ significantly from
business plan, and large swings in foreign exchange rates. Further details on the adjustments for 2020 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 revenue and EPS that were approved.

The Compensation Committee also has general authority to apply downward (but not upward) discretion to bonus,
performance award, shareholder value award, and relative value award payouts for individual executive officers.

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 2020 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 2020.

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 2020 weightings remain unchanged from the prior year:

Lilly Goals

Revenue performance

EPS performance

Pipeline progress

Weighting

25%

50%

25%

Based on this weighting, the company bonus multiple is calculated as follows:

P48

PROXY STATEMENT3. Equity Incentives

The company grants three 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, shareholder value
awards that are intended to align earned compensation with long-term growth in shareholder value, and relative value
awards which encourage TSR outperformance within our industry. These awards, when considered together, align with
shareholder interests by incenting long-term operational excellence, shareholder return and peer company
outperformance without encouraging excessive risk-taking behaviors. The Compensation Committee has the discretion to
adjust any 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 175 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 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 175 percent of the target number of
shares.

In prior years, shareholder value awards were subject to modification by +/– 20 percent based on Lilly’s relative TSR
versus peer companies over the performance period. Starting in 2020, this modifier was eliminated in favor of grants of a
separate award tied to relative TSR (see “Relative Value Awards” below).

Relative Value Awards
Relative value awards are earned based on Lilly's TSR performance relative to industry peers. The minimum performance
to achieve target is a TSR that is equal to the median TSR performance for the peer group. Relative 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 30
or more percentage points below the median TSR performance for the peer group over the same time period. Possible
payouts range from 0 to 175 percent of the target number of shares.

P49

PROXY STATEMENTPay 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
multi-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 (including Mr. Smiley).

2020 Target Total Compensation
Performance Review Process
In setting 2020 target compensation for the named executive officers, the Compensation Committee considered individual
contributions, Lilly performance during 2019, internal relativity, peer group data, and input from the CEO for named
executive officers other than himself.

2020 Evaluation of Individual Named Executive Officer Performance
A summary of the Compensation Committee's review of individual named executive officer performance in 2019 that
influenced decisions on 2020 target compensation for these executives 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 2019
under Mr. Ricks’ leadership. In 2019, Mr. Ricks and his team:

P50

PROXY STATEMENT•

•

•
•

•

delivered on the company's financial commitments despite the withdrawal of Lartruvo® (olaratumab) globally in
the first quarter of 2019
launched BAQSIMI® (glucagon), a new form of glucagon for diabetes, and received approval for Reyvow® in the
United States. Additionally, 15 new medicines were launched to patients in Europe, Japan, and the rest of world,
including three launches in China: Trulicity, Olumiant, and Taltz
progressed 16 potential new medicines into Phase I clinical development from both internal research efforts and
external sources
continued to drive a cross-company productivity agenda resulting in savings that funded increased investment in
research and development and achieved planned capital return to shareholders
completed the divestiture of Elanco
completed the acquisition of Loxo Oncology, Inc. (Loxo), the largest acquisition in the company’s history and
submitted selpercatinib (also known as Loxo 292) to the FDA for the treatment of metastatic rearranged during
transfection (RET) fusion-positive non-small cell lung cancer and thyroid cancer
implemented a strategy that improved D&I across the company, increased the representation of women and
minorities in management, and conducted pay equity studies to ensure equality in pay. The company was
recognized for its efforts by receiving the Catalyst award recognizing our initiatives for workplace gender equity
and was ranked #3 on the Diversity Inc. top 50 companies list
improved certain environmental performance areas, such as greenhouse gas emissions, energy efficiency, waste
efficiency, and wastewater
initiated work to refresh our long-term goals for environmental, safety, and governance to ensure the company
is fulfilling its objectives in these areas.

In addition, the company was named one of the world’s most ethical companies by the Ethisphere Institute.

Daniel Skovronsky, M.D., Ph.D., Senior Vice President, Chief Scientific Officer, and President, Lilly Research Laboratories:
Dr. Skovronsky advanced innovation for patients during his first full year as the company's chief scientific officer. His
contributions in 2019 include:

•

•
•

•

advanced innovative medicines through the product pipeline including the first approval Baqsimi, a new form of
glucagon for diabetes, and Reyvow for treatment of acute migraine in the United States. The company also
achieved approval for 15 new medicines for patients in Europe, Japan and the rest of world including three
launches in China: Trulicity, Olumiant, and Taltz
co-led the acquisition of Loxo, the largest acquisition in the company’s history
sped research resulting in 16 potential new medicines advancing to Phase I clinical development including both
internally discovered molecules and molecules sourced externally via business development, the most the
company has achieved in more than a decade
enhanced strategies to further reduce the time drug candidates spend in development, leading to earlier product
launch
led Lilly’s external research efforts, including expansion of key research hubs in New York, Boston and San
Francisco
led D&I 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.

Anat Hakim, Senior Vice President, General Counsel and Secretary: Ms. Hakim joined Lilly as senior vice president and
general counsel in February 2020. In October 2020, Ms. Hakim was elected secretary by the board, thereby changing her
title to senior vice president, general counsel and secretary. Prior to joining Lilly, Ms. Hakim served as executive vice
president, general counsel and secretary of WellCare Health Plans. Ms. Hakim began her career at Latham & Watkins
LLP after earning her law degree from Harvard University. She later moved to Foley & Lardner LLP. In 2010 she joined
Abbott Laboratories (Abbott) as divisional vice president and associate general counsel for intellectual property litigation
supporting Abbott's pharmaceutical business; in 2013, she was named associate general counsel for litigation. Ms. Hakim
was recognized as general counsel of the year in 2019 by Corporate Counsel for her work at WellCare Health Plans.

Alfonso Zulueta, Senior Vice President and President, Lilly International: Mr. Zulueta demonstrated strong leadership of
Lilly International and across the company. In 2019, he:

•

•
•

delivered strong financial results from volume driven growth across multiple therapeutic areas including
diabetes, immunology, and oncology
successfully launched numerous products in multiple countries and therapeutic areas, resulting in strong
product market shares
built new capabilities with digital technologies to meet customer needs
drove a productivity agenda across Lilly International

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PROXY STATEMENT•
•

championed and completed several business development arrangements to maximize the Lilly portfolio
served as executive sponsor of Organization of Latinx at Lilly (OLA), the company’s employee resource group
focused on supporting and advancing the development of Latinx employees across the company.

In addition to the performance evaluations of the named executive officers above, the Compensation Committee reviewed
Mr. Smiley’s performance, and determined that Mr. Smiley contributed to the strong financial performance of the
company in 2019, including the completion of the Elanco divestiture, the acquisition of Loxo, and partnerships with
business unit presidents and our chief scientific officer to drive resource allocation. In connection with Mr. Smiley's
resignation as an officer on February 9, 2021, and because the performance-based elements of Mr. Smiley’s total
compensation package had not yet been paid, the Compensation Committee took action to reduce his 2020 Bonus Plan
payout to zero, reduce his 2018-2020 shareholder value award, and cancel all of his other outstanding equity incentive
awards granted in 2019 and 2020. See “Compensation Recovery Policy” as well as the discussion of Mr. Smiley’s
Separation Agreement under “Agreement with Former Chief Financial Officer”.

2020 Target Compensation
The information below reflects total compensation at target for named executive officers for 2020. The actual
compensation received in 2020 is summarized below in "2020 Compensation Results."

Rationale for Changes to Named Executive Officer Target Compensation
The Compensation Committee established the 2020 target total compensation for each named executive officer, except
Ms. Hakim, based on the named executive officer's 2019 performance, internal relativity, and peer group data. The
Compensation Committee approved Ms. Hakim's target total compensation upon her hire in February 2020. In connection
with Mr. Smiley's resignation as an officer on February 9, 2021, and because the performance-based elements of
Mr. Smiley’s total compensation package had not yet been paid, the Compensation Committee took action to reduce his
2020 Bonus Plan payout to zero, reduce his 2018-2020 shareholder value award, and cancel his other outstanding equity
incentive awards.

The Compensation Committee used the terms of the applicable award agreements to take these actions, which give
authority to the Compensation Committee to reduce payouts in a manner consistent with the authority provided in our
Compensation Recovery Policy. See “Compensation Recovery Policy” as well as the discussion of Mr. Smiley’s Separation
Agreement under “Agreement with Former Chief Financial Officer”.

Base Salary
The following table shows the approved annualized salary effective at the beginning of March for each named executive
officer. Base pay increases are reflective of strong individual performance and a relatively low base pay market position
due to limited tenure in each executive officer's respective role. Each named executive officer's actual base salary earned
during 2020 is reflected in the Summary Compensation Table in the "Executive Compensation" section of this proxy.

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

2019 Annual Base Salary
Effective March 1, 2019

2020 Annual Base Salary
Effective March 1, 2020

Increase

$1,400,000

$900,000

$900,000
N/A1
N/A1

$1,500,000

$1,000,000

$775,000

$850,000

11%

N/A

1 Ms. Hakim and Mr. Zulueta were not named executive officers in 2019.

Annual Cash Bonus Targets
Based on a review of internal relativity, peer group data, and individual performance, the Compensation Committee
retained the same percent-of-salary bonus targets as in 2019 for Mr. Ricks, Mr. Smiley, and Dr. Skovronsky and set Ms.
Hakim's bonus target at 80 percent and Mr. Zulueta's bonus target at 95 percent. Bonus targets are shown in the table
below as a percentage of each named executive officer’s earnings from base salary in 2020:

P52

PROXY STATEMENTName

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

2019 Bonus Target

2020 Bonus Target

150%

95%

N/A

150%

95%

80%

95%

1 Ms. Hakim and Mr. Zulueta were not named executive officers in 2019.
2 As a result of Mr. Smiley's resignation as an officer on February 9, 2021 and
because the 2020 bonus had not yet been paid, his 2020 bonus payout was $0.
See the discussion of Mr. Smiley’s Separation Agreement under “Agreement with
Former Chief Financial Officer”.

Equity Incentives - Target Grant Values
For 2020 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 35 percent of their equity
target allocated to shareholder value awards and relative value awards, respectively, and 30 percent to performance
awards. Total target values for the 2019 and 2020 equity grants to the named executive officers were as follows:

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

2019 Annual Equity
Grant

2020 Annual Equity
Grant

$10,500,000

$2,700,000

$3,500,000

N/A

$12,500,000

$3,300,000

$4,100,000

$2,000,000

$2,250,000

1 Ms. Hakim and Mr. Zulueta were not named executive officers in 2019.
2 Ms. Hakim also received an equity grant of restricted stock units valued at
$2,000,043 upon her hire in February 2020.
3 As a result of Mr. Smiley's resignation as an officer on February 9, 2021, he
forfeited his 2019 and 2020 annual equity grants. The target amounts of $2,700,000
and $3,300,000 for his 2019 and 2020 annual equity grants have been reduced to
$0. See the discussion of Mr. Smiley’s Separation Agreement under “Agreement
with Former Chief Financial Officer”.

Performance Goals for 2020 Incentive Programs
Annual Cash Bonus Goals
The Compensation Committee established the company performance targets using the company's 2020 annual operating
plan, which was approved by the board in 2019. These targets are described below under "2020 Compensation Results."

2020-2022 Performance Award
In February 2020, the Compensation Committee established a compounded two-year EPS growth target of 5.7 percent per
year based on investment analysts’ consensus EPS growth estimates for our peer group companies at that time. To
translate the 5.7 percent per year growth goal into a 2-year cumulative EPS target, the Compensation Committee applied
the target growth to the 2019 non-GAAP EPS of $6.04 to obtain target 2020 results of $6.38 and then applied the goal
growth again to the target 2020 results to obtain target 2021 results of $6.75. The target 2020 and 2021 results were
added together to yield a 2-year cumulative EPS target of $13.13. Payouts for the 2020-2022 performance award can
range from 0 to 175 percent of the target number of shares, as shown below:

P53

PROXY STATEMENTIn December 2020, the Compensation Committee approved an updated 2020–2022 Performance Award to align with Lilly’s
decision to adjust EPS results to remove the impact of gains and losses on investments in equity securities from
compensation program outcomes. The updated award retained the Compensation Committee’s decision to establish a
compounded two-year EPS growth target of 5.7 percent per year, but the growth was applied to an adjusted 2019 non-
GAAP EPS of $5.73 that excluded gains and losses on investments in equity securities. The Compensation Committee
applied the target growth to the 2019 non-GAAP EPS of $5.73 to obtain target 2020 results of $6.06 and then applied the
goal growth again to the target 2020 results to obtain target 2021 results of $6.40. The target 2020 and 2021 results were
added together to yield an updated cumulative 2-Year EPS goal of $12.46. Payouts for the 2020-2022 Performance Award
can range from 0 to 175 percent of the target number of shares, as shown below:

2020-2022 Shareholder Value Award
For purposes of establishing the stock price target for the shareholder value awards, the starting price was $119.76 per
share, the average closing stock price for all trading days in November and December 2019. 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 2.47 percent. To determine payout, the ending price will be the average closing price of company stock for all
trading days in November and December 2022. 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.

2020-2022 Relative Value Award
The relative value award is based on the most recent three-year Lilly TSR performance compared to industry peers. To
determine payout, the TSR performance is calculated for Lilly and its peers. This calculation compares the average
closing price of each company’s stock for all trading days in November and December 2019 to the average closing price of
each company’s stock for all trading days in November and December 2022, assuming reinvestment of dividends, to
obtain the TSR for each company. The median TSR for the peer companies is then subtracted from Lilly’s TSR to
determine what payout has been earned. For example, if Lilly’s TSR was 55 percent over the three-year performance

P54

PROXY STATEMENTperiod and the median peer company performance was 41 percent, Lilly would have outperformed by 14 percentage
points (55 percent - 41 percent). This outperformance would have resulted in a 130 percent payout based on the payout
ranges depicted below.

2020 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 2020.

Lilly Performance
In 2020 we exceeded our revenue target and nearly achieved our EPS target. We also exceeded our target for pipeline
progress. Key pipeline highlights include the first regulatory approval for Retevmo and Lyumjev and two emergency use
authorizations for bamlanivimab monotherapy and for baricitinib in combination with remdesivir for patients diagnosed
with COVID-19. Lilly also received new indication approvals for Taltz and Cyramza in the United States and for Olumiant in
the European Union. By the end of 2020, Lilly had also exceeded its two-year EPS growth target for the performance
award and our three-year stock price growth target for the shareholder value award. 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, EPS, and pipeline progress to incent the achievement of 2020 company objectives. Each
measure contributes to the final payout multiple on a weighted basis: revenue (25 percent), EPS (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 revenue, nearly achieved its target for EPS and significantly
exceeded its targets for pipeline progression. The Compensation Committee adjusted non-GAAP EPS by $0.98 to exclude
net gains on investments in equity securities that significantly exceeded business plan. The Compensation Committee also
reduced revenue and EPS for the purposes of the bonus calculation to exclude estimated savings from certain discrete
and unplanned performance items from the bonus plan multiple. The Science and Technology Committee's assessment of
the company's product pipeline achievements is detailed below:

P55

PROXY STATEMENTActivity

Approvals

Potential new drug Phase III starts

Potential new drug Phase I starts

Potential new indication or line extension
Phase III starts

Objective

2 new drug first approvals
15-17 other approvals

Achievement

2 new drug first approvals
24 other approvals

14-15

Plan Boldly

Deliver to Launch

Meet industry benchmark for speed of
development

Exceeded industry benchmark for speed of
development

Meet planned project timelines

Accelerated 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 1.79.

The company's performance compared to targets as well as the resulting bonus multiple, is illustrated below:

For 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 1.18.

P56

PROXY STATEMENTThe 2020 bonuses paid to the applicable named executive officers under the Bonus Plan were as follows:

Name
Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

2020 Bonus ($)
$2,625,500

$0*

$1,102,317

$670,633

$952,850

* As a result of Mr. Smiley’s resignation as an officer on
February 9, 2021 and the fact his bonus had not yet
been paid, the Compensation Committee exercised its
discretion to reduce his payout under the Bonus Plan
for 2020 from $1,102,317 to $0. See the discussion of
Mr. Smiley’s Separation Agreement under “Agreement
with Former Chief Financial Officer”.

2019-2021 Performance Awards
The target cumulative EPS for the 2019-2021 performance award was set in the first quarter of 2019, reflecting expected
industry growth of 5.8 percent each year over the two-year performance period of 2019-2020. The company's adjusted
EPS growth for the two-year period was 17.2 percent. The Compensation Committee adjusted non-GAAP EPS by $0.98 to
exclude net gains on investments in equity securities that significantly exceeded business plan.

For the named executive officers, shares earned for the 2019-2020 performance period are subject to an additional 13-
month service-vesting period and are shown in the table below as restricted stock units.

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim*

Mr. Zulueta

Target Shares

RSUs Earned

37,470

9,635

12,490

N/A

7,137

56,205

0**

18,735

N/A

10,706

* Ms. Hakim joined Lilly in February 2020, so she did not receive a PA grant in 2019.

** As a result of Mr. Smiley's resignation as an officer on February 9, 2021 and the fact his
2019-2021 performance award had not yet been converted to a 13-month service
vesting RSU, the Compensation Committee exercised its discretion to cancel
Mr. Smiley's 2019-2021 performance award resulting in zero RSUs earned. See
discussion of Mr. Smiley's Separation Agreement under "Agreement with Former Chief
Financial Officer".

2018-2020 Shareholder Value Award
The target stock price range of $99.02 to $109.83 (16.9 percent to 29.7 percent total stock price growth) for the 2018-2020
shareholder value award was set in 2018 based on a beginning stock price of $84.70, which was the average closing price
for Lilly stock for all trading days in November and December 2017. The ending stock price of $152.16 represents stock
price growth of 79.6 percent over the relevant three-year period resulting in a payout multiple of 1.50.

The relative 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 23.5 percent, and Lilly’s TSR over the same period was 92.2

P57

PROXY STATEMENTpercent. Given this positive relative performance, our relative TSR was 68.7 percentage points above the peer group
median resulting in a maximum award payout of 180 percent of target (SVA payout multiple of 150 percent multiplied by
the 1.2 modifier = 180 percent final payout).

The number of shares paid to each of our named executive officers for the 2018-2020 performance period were as follows:

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky*

Ms. Hakim*

Mr. Zulueta

Target Shares

Shares Paid Out

131,036

33,487

22,461

N/A

29,119

235,865

45,207**

33,692

N/A

52,414

* The TSR modifier did not apply to Dr. Skovronsky’s 2018-2020 shareholder value award
payouts since he was not an executive officer at the time of grant. Ms. Hakim joined Lilly in
February 2020, so she did not receive a SVA grant in 2018.

** As a result of Mr. Smiley's resignation as an officer on February 9, 2021 and the fact his
2018-2020 shareholder value award had not yet been paid, the Compensation Committee
exercised its discretion to reduce Mr. Smiley’s 2018–2020 shareholder value award payout by
25 percent or $3,100,954. See the discussion of Mr. Smiley’s Separation Agreement under
“Agreement with Former Chief Financial Officer”.

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 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

P58

PROXY STATEMENT
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. In response to the COVID-19 pandemic, the company
considered various actions to promote the health and safety of its employees, including its named executive officers,
recognizing that the company’s important objectives during this critical time would be significantly disadvantaged without
the full services of its employees. As part of this process, the company has encouraged Mr. Ricks’ personal use of the
corporate aircraft (up to a maximum incremental cost of $60,000) as a means to (i) increase his time available for
business purposes and (ii) enhance his health and safety. The incremental cost of personal use of corporate aircraft is
included as a perquisite in the Summary Compensation Table under the heading "All Other Compensation."

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 2020" 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.

Highlights of Our Change-in-Control Severance Plans

•
•
•
•
•

all regular employees are covered
double trigger 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 "Compensation—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.

P59

PROXY STATEMENT• 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.

All 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, 2020:

P60

PROXY STATEMENTProhibition 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 150 employees in 2020) 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.

The principles of our robust recovery policy are also incorporated into the terms of our incentive plans and award
agreements, which, in the event of misconduct meeting the standards described above, allow the Compensation
Committee to reduce or cancel awards or payouts that would otherwise have been earned based on company
performance. Action by the Compensation Committee to reduce or cancel awards or payouts can occur during or
following the relevant performance period. In connection with Mr. Smiley’s resignation, the Compensation Committee
took action under these terms to reduce Mr. Smiley’s earned 2020 cash bonus and outstanding equity awards prior to
their payout. See the discussion of Mr. Smiley’s Separation Agreement under “Agreement with Former Chief Financial
Officer”.

Looking Ahead to 2021 Compensation
Starting in 2021, the majority of award agreements granting equity-based incentive awards to our executive officers will
include changes designed to protect the company’s interests and encourage focus on long-term performance. First, the
award agreements will contain a non-competition provision stating that the executive officer agrees to not perform
services for a competitor of the company for a period of one year following termination of service with the company. If an
executive officer violates the non-competition provision, the executive will forfeit any rights to the equity granted under
the award agreement. Second, the award agreements will provide that if the executive officer terminates employment due
to retirement a year or more into the relevant performance period, then the executive will continue to vest in the award
until the conclusion of the performance period, subject to adherence to the non-competition provision.

P61

PROXY STATEMENTExecutive Compensation

Summary Compensation Table

Name and Principal
Position

Year

Salary
($)

Bonus
($)

David A. Ricks

2020

$1,483,333

Chairman, President, and
Chief Executive Officer

2019

$1,400,000

2018

$1,400,000

Joshua L. Smiley

2020

$983,333

2019

$895,833

2018

$875,000

2020

$983,333

2019

$900,000

2018

$837,500

Former Senior Vice
President and Chief
Financial Officer

Daniel M. Skovronsky,
M.D., Ph.D.

Senior Vice President,
Chief Scientific Officer,
and President, Lilly
Research Laboratories

Anat Hakim5

Senior Vice President,
General Counsel and
Secretary

Alfonso G. Zulueta

Senior Vice President and
President, Lilly
International

Stock
Awards
($) 1

$13,587,500

$12,222,000

$10,584,000

$3,587,100

$3,142,800

$2,704,800

$4,456,700

$4,074,000

$2,806,000

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($) 2

Change in
Pension Value
($) 3

All Other
Compensation
($) 4

Total
Compensation
($)

$2,625,500

$5,883,924

$128,372

$23,708,629

$2,919,000

$4,658,242

$84,000

$21,283,242

$3,633,000

$1,529,337

$84,000

$17,230,337

$2,685,276

$58,539

$7,314,248*

$1,182,948

$2,073,070

$53,750

$7,348,401*

$1,438,063

$174,980

$52,500

$5,245,343

$1,102,317

$751,223

$58,539

$7,352,112

$1,188,450

$446,521

$54,000

$6,662,971

$1,376,431

$75,717

$50,250

$5,145,898

$670,633

$87,848

$124,958

$5,917,899

2020

$710,417

$150,000

$4,174,043

2019

N/A

2018

N/A

2020

$850,000

$2,445,750

$952,850

$2,268,269

$50,608

$6,567,477

2019

2018

N/A

* Supplemental table reflecting 2019 and 2020 compensation for services provided to Joshua L. Smiley, after giving effect to his
resignation.

Name and Principal
Position

Year

Salary
($)

Bonus
($)

Stock
Awards
($)

Option
Awards
($)

Non-Equity
Incentive Plan
Compensation
($)

Change in
Pension Value
($)

All Other
Compensation
($)

Total
Compensation
($)(a)

Joshua L. Smiley

2020

$983,333

Former Senior Vice
President and Chief
Financial Officer

2019

$895,833

$2,685,276

$58,539

$3,727,148

$1,182,948

$2,073,070

$53,750

$4,205,601

The table directly above sets forth the amounts received by Mr. Smiley with respect to services rendered in fiscal years 2019 and
2020, and excludes the following amounts required to be reported in the Summary Compensation Table in this proxy statement,
which were reduced or cancelled by the Compensation Committee in 2021 (and will not actually be received or retained by Mr.
Smiley):

•

$3,587,100 reported as Stock Awards for 2020, which represents the grant date fair value of the 2020-2022 SVA,
2020-2022 RVA, and 2020-2022 PA; and

$3,142,800 reported as Stock Awards for 2019, which represents the grant date fair value of the 2019-2021 SVA and
2019-2021 PA.

This table is not required by SEC rules and is not designed to replace the Summary Compensation Table. However, we believe it
is useful for shareholders to understand the compensation paid to Mr. Smiley in connection with his services to the company in
2019 and 2020 that he will retain after the actions taken by the Compensation Committee in connection with his resignation. See
“Agreement with Former Chief Financial Officer” below.

P62

PROXY STATEMENT

(a) The value in the Total Compensation column is the sum of Salary, Bonus, Stock Awards, Option Awards, Non-Equity

Incentive Plan Compensation, Change in Pension Value, and All Other Compensation reflected in this supplementary
table for Mr. Smiley for fiscal years 2019 and 2020. See footnotes to the Summary Compensation Table for more
information on the derivation of each of the figures included above.

1 This column shows the grant date fair value of performance awards, shareholder value awards and relative value awards for all
named executive officers and an additional restricted stock unit award for Ms. Hakim 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, 2020, 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. As described above under "2020-2022 Performance Awards," the Compensation Committee decided to
remove gains and losses from investments in equity securities when calculating non-GAAP EPS for 2021 and later years. The
adjustment to the 2020-2022 Performance Award resulted in no incremental fair value, thus no additional value was included
for this change.

For purposes of comparison, the supplemental table below shows the total target grant values of stock awards approved by the
Compensation Committee:

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim**

Mr. Zulueta**

2018 Total Equity

2019 Total Equity

2020 Total Equity

$9,000,000

$2,300,000

N/A

$10,500,000

$2,700,000*

$3,500,000

N/A

$12,500,000

$3,300,000*

$4,100,000

$4,000,043

$2,250,000

* As a result of Mr. Smiley's resignation as an officer on February 9, 2021, the Compensation
Committee cancelled his 2019 and 2020 equity awards. The target amount of $2,700,000 and
$3,300,000 for his 2019 and 2020 annual equity grants have been reduced to $0. See the
discussion of Mr. Smiley's Separation Agreement under "Agreement with Former Chief
Financial Officer".

** Ms. Hakim and Mr. Zulueta were not named executive officers in 2018 or 2019.

The table below shows the minimum, target, and maximum payouts (valuing the number of shares that would vest at each
payout level using the grant date fair value of a share of Lilly common stock on the date of grant) for the 2020-2022 performance
award included in the Summary Compensation Table, which will pay out in February 2023.

Name

Mr. Ricks

Mr. Smiley*

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

Minimum Payout

Target Payout

Maximum Payout

$3,750,000

$990,000

$1,230,000

$600,000

$675,000

$6,562,500

$1,732,500

$2,152,500

$1,050,000

$1,181,250

* As a result of Mr. Smiley's resignation as an officer on February 9, 2021, the Compensation
Committee cancelled his 2020-2022 performance award; therefore, Mr. Smiley will realize $0
from this award. See the discussion of Mr. Smiley's Separation Agreement under "Agreement
with Former Chief Financial Officer".

The table below shows the minimum, target, and maximum payouts (valuing the number of shares that would vest at each
payout level using the grant date fair value of a share of Lilly common stock on the date of grant) for the 2020-2022 shareholder
value award included in the Summary Compensation Table, which will pay out in February 2023.

Name

Mr. Ricks

Mr. Smiley*

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

Minimum Payout

Target Payout

Maximum Payout

$4,375,000

$1,155,000

$1,435,000

$700,000

$787,500

$7,656,250

$2,021,250

$2,511,250

$1,225,000

$1,378,125

* As a result of Mr. Smiley's resignation as an officer on February 9, 2021, the Compensation
Committee cancelled his 2020-2022 shareholder value award; therefore, Mr. Smiley will
realize $0 from this award. See the discussion of Mr. Smiley's Separation Agreement under
"Agreement with Former Chief Financial Officer".

P63

PROXY STATEMENT
The table below shows the minimum, target, and maximum payouts (valuing the number of shares that would vest at each
payout level using the grant date fair value of a share of Lilly common stock on the date of grant) for the 2020-2022 relative value
award included in the Summary Compensation Table, which will pay out in February 2023.

Name

Mr. Ricks

Mr. Smiley*

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

Minimum Payout

Target Payout

Maximum Payout

$4,375,000

$1,155,000

$1,435,000

$700,000

$787,500

$7,656,250

$2,021,250

$2,511,250

$1,225,000

$1,378,125

* As a result of Mr. Smiley's resignation as an officer on February 9, 2021, the Compensation
Committee cancelled his 2020-2022 relative value award; therefore, Mr. Smiley will realize $0
from this award. See the discussion of Mr. Smiley's Separation Agreement under "Agreement
with Former Chief Financial Officer".

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. The changes in
pension values in 2020 were driven by additional credited service, pay changes, and actuarial assumptions. The design of the
pension benefit plan did not change. See the Pension Benefits in 2020 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. For Mr. Ricks, the amounts in this column reflect $88,308 of
company matching contributions and nonqualified savings plan contributions and also reflect $40,064 of aggregate incremental
cost for his personal use of corporate aircraft. The aggregate incremental costs for personal use of our aircraft is calculated
based on our variable operating costs, which include crew travel expenses, on-board catering, landing fees, trip-related
hangar/parking costs, fuel, trip-related maintenance, and other smaller variable costs. Because the vast majority of the use of
corporate aircraft is for business purposes, fixed costs such as aircraft purchase costs, maintenance not related to personal
trips, and flight crew salaries are not included. For Ms. Hakim, the amounts in this column reflect $42,268 of company
matching contributions and nonqualified savings plan contributions and also reflect $82,690 of moving expense
reimbursements.

5 Ms. Hakim joined Lilly in February 2020, and the table reflects compensation paid for the portion of the year for which she was
employed.

6 As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, the Compensation Committee exercised its discretion
to reduce his payout under the Bonus Plan for 2020 from $1,102,317 to $0. See the discussion of Mr. Smiley’s Separation
Agreement under “Agreement with Former Chief Financial Officer”.

7 As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, the Compensation Committee cancelled his 2019 and
2020 equity awards. Therefore, Mr. Smiley will realize $0 from these awards. In addition, the Compensation Committee
exercised its discretion to reduce Mr. Smiley’s 2018–2020 shareholder value award payout by 25 percent or $3,100,954. See the
discussion of Mr. Smiley’s Separation Agreement under “Agreement with Former Chief Financial Officer”.

Grants of Plan-Based Awards During 2020
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, the shareholder value award, the relative value award, or the restricted stock
unit 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, shareholder value awards, or relative value awards during the performance period. During the performance award 13-
month service-vesting period and restricted stock unit award restriction period, non-preferential dividends accrue and are paid
upon vesting.

P64

PROXY STATEMENTName

Mr. Ricks

Mr. Smiley7

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards 1

Estimated Possible and Future
Payouts Under Equity
Incentive Plan Awards

Award

Grant Date2

Compensation
Committee
Action Date

Threshold
($)

Target
($)

Maximum
($)

Threshold
(# shares)

Target
(# shares)

Maximum
(# shares)

$556,250 $2,225,000 $4,450,000

All Other
Stock or
Option
Awards:
Number of
Shares of
Stock,
Options, or
Units

Grant Date
Fair Value
of Equity
Awards

2020-2022
PA

2020-2022
SVA

2020-2022
RVA

2020-2022
PA

2020-2022
SVA

2020-2022
RVA

2020-2022
PA

2020-2022
SVA

2020-2022
RVA

2020-2022
PA

2020-2022
SVA

2020-2022
RVA

RSU

2020-2022
PA

2020-2022
SVA

2020-2022
RVA

2/12/2020

12/16/2019

2/12/2020

12/16/2019

2/12/2020

12/16/2019

$233,542

$934,167

$1,868,333

2/12/2020

12/16/2019

2/12/2020

12/16/2019

2/12/2020

12/16/2019

$233,542

$934,167

$1,868,333

2/12/2020

12/16/2019

2/12/2020

12/16/2019

2/12/2020

12/16/2019

$142,083

$568,333

$1,136,667

2/12/2020

10/21/2019

2/12/2020

10/21/2019

2/12/2020

10/21/2019

3/1/2020

10/21/2019

2/12/2020

12/16/2019

2/12/2020

12/16/2019

2/12/2020

12/16/2019

$201,875

$807,500

$1,615,000

13,653

27,306

47,786

$4,837,500

16,875

33,750

59,063

$4,375,000

12,160

24,319

42,558

$4,375,000

—

3,605

7,209

12,616

$1,277,100

4,455

8,910

15,593

$1,155,000

3,210

6,420

11,235

$1,155,000

—

4,479

8,957

15,675

$1,586,700

5,535

11,070

19,373

$1,435,000

3,989

7,977

13,960

$1,435,000

—

2,185

4,369

7,646

2,700

5,400

9,450

1,946

3,891

6,809

$774,000

$700,000

2,458

4,915

8,601

3,038

6,075

10,631

2,189

4,377

7,660

15,857

$2,000,043

$870,750

$787,500

—

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 2020 performance was 118 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 2020-2022 performance awards ranging from 0 to 175 percent of target. This
performance award will pay out in February 2023.

4 This row shows the range of payouts for the 2020-2022 shareholder value awards. This shareholder value award will pay out in
February 2023, with payouts ranging from 0 to 175 percent of target. We measure the fair value of the shareholder value award
on the grant date using a Monte Carlo simulation model.

5 This row shows the range of payouts for the 2020-2022 relative value awards. This relative value award will pay out in
February 2023, with payouts ranging from 0 to 175 percent of target. We measure the fair value of the relative value award on the
grant date using a Monte Carlo simulation model.

P65

PROXY STATEMENT6 This grant was made outside of the normal annual cycle in 2020, and 7,928 units will vest on March 1, 2021 and 7,929 units will
vest on March 1, 2022.

7 As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, all of his 2020 plan-based awards were forfeited.
Mr. Smiley will realize $0 from all grants disclosed in the Non-Equity Incentive Plan Awards and Equity Incentive Plan Awards
columns. See the discussion of Mr. Smiley’s Separation Agreement under “Agreement with Former Chief Financial Officer”.

Outstanding Equity Awards at December 31, 2020
The 2020 closing stock price used to calculate the values in the table below was $168.84.

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

Number of
Shares or
Units of Stock
That Have Not
Vested (#)

56,205

75,387

14,453

19,266

18,735

Award

2020-2022 SVA

2019-2021 SVA

2020-2022 RVA

2020-2022 PA

2019-2021 PA

2018-2020 PA

2020-2022 SVA

2019-2021 SVA

2020-2022 RVA

2020-2022 PA

2019-2021 PA

2018-2020 PA

2020-2022 SVA

2019-2021 SVA

2020-2022 RVA

2020-2022 PA

2019-2021 PA

2020-2022 SVA

2020-2022 RVA

2020-2022 PA

RSU

15,857

2020-2022 SVA

2019-2021 SVA

2020-2022 RVA

2020-2022 PA

2019-2021 PA

2018-2020 PA

10,706

16,754

Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)

$9,489,652

$12,728,341

$2,440,245

$3,252,871

$3,163,217

$2,677,296

$1,807,601

$2,828,745

Stock Awards

Equity
Incentive Plan
Awards:
Number of
Unearned Shares,
Units,
or Other Rights
That Have Not
Vested (#)

59,063

123,088

24,319

47,786

15,593

31,651

6,420

12,616

19,373

41,029

7,977

15,675

9,450

3,891

7,646

10,631

23,445

7,660

8,601

Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units,
or Other Rights
That Have Not
Vested ($)

$9,972,197

$20,782,178

$4,106,020

$8,068,188

$2,632,722

$5,343,955

$1,083,953

$2,130,085

$3,270,937

$6,927,336

$1,346,837

$2,646,567

$1,595,538

$656,956

$1,290,951

$1,794,938

$3,958,454

$1,293,314

$1,452,193

1 Shareholder value awards granted for the 2020-2022 performance period will vest on December 31, 2022. The number of shares
reported reflects the maximum payout, which will be made if the average closing stock price in November and December 2022 is
over $187.17. Actual payouts may vary from 0 to 175 percent of target. Net shares from any payout must be held by executive
officers for a minimum of one year. Had the performance period ended December 31, 2020, the payout would have been at 100
percent of target.

2 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. Net shares from any payout must be held by executive
officers for a minimum of one year. Had the performance period ended December 31, 2020, the payout would have been
125 percent of target.

P66

PROXY STATEMENT3 Relative value awards granted for the 2020-2022 performance period will vest on December 31, 2022. The number of shares
reported reflects the target payout, which will be paid if Lilly's absolute TSR is at or up to 5.9 percentage points above the actual
peer median TSR. Net shares from any payout must be held by executive officers for a minimum of one year. Had the
performance period ended December 31, 2020, the payout would have been at 160 percent of target.

4 This number represents the maximum value of performance award shares that could pay out for the 2020-2022 performance
awards, provided performance goals are met. Once the combined cumulative EPS result and associated payout level are
determined at the end of the 2020-2021 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 175 percent of target. The number of shares recorded in the
table reflects the payout if the combined cumulative EPS for 2020 and 2021 is at least $14.68 under the revised 2020-2022
performance award grid (see "Compensation Discussion and Analysis—Performance Goals for 2020 Incentive Programs—
2020-2022 Performance Award").

5 The performance period ended December 31, 2020, for the 2019-2021 performance award, resulting in the issuance of restricted
stock units for 150 percent of target shares for Mr. Ricks, Dr. Skovronsky, and Mr. Zulueta. These restricted stock units will vest
in February 2022. As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, the Compensation Committee
cancelled his 2019-2021 performance award. See the discussion of Mr. Smiley’s Separation Agreement under “Agreement with
Former Chief Financial Officer”.

6 Restricted stock units vested from the 2018-2020 performance award on February 1, 2021.

7 This grant was made outside of the normal annual cycle in 2020. A total of 7,928 units will vest on March 1, 2021, and 7,929 units
will vest on March 1, 2022.

8 As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, the Compensation Committee cancelled his 2019 and
2020 equity awards; therefore, Mr. Smiley will realize $0 from his 2020-2022 shareholder value award, 2019-2021 shareholder
value award, 2020-2022 relative value award, 2020-2022 performance award, and 2019-2021 performance award. See the
discussion of Mr. Smiley’s Separation Agreement under “Agreement with Former Chief Financial Officer”.

Options Exercised and Stock Vested in 2020

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim5

Mr. Zulueta

Option Awards

Stock Awards

Number of Shares
Acquired on Exercise (#)

Value Realized
on Exercise ($)

Number of Shares
Acquired on Vesting (#)

Value Realized
on Vesting ($)1

69,350 2

235,865 3

45,207 3

7,947 4

33,692 3

16,317 2

52,414 3

$9,684,034

$48,533,941

$9,302,244

$1,176,315

$6,932,803

$2,278,506

$10,785,229

1 Amounts reflect the market value of Lilly stock on the day value is realized.

2 Restricted stock units resulting from the 2017-2019 performance award that vested in February 2020.

3 Payout of the 2018-2020 shareholder value award at 150 percent of target, adjusted by Lilly’s three-year cumulative TSR (92.2
percent) relative to its peer companies’ median cumulative TSR of 23.5 percent, resulting in a maximum TSR modifier of 20
percent and a final payout of 180 percent of target. Since Dr. Skovronsky was not an executive officer when the 2018-2020
shareholder value award was granted, his award was not subject to the TSR modifier. As a result, his payout multiple was 150
percent of target. As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, the Compensation Committee
exercised its discretion to reduce his 2018–2020 shareholder value award payout by 25 percent. See the discussion of Mr.
Smiley’s Separation Agreement under “Agreement with Former Chief Financial Officer”.

4 This grant was made in 2010 before Mr. Smiley became an executive officer.

5 Ms. Hakim joined Lilly in 2020 and had no option exercise or stock awards vest during 2020.

P67

PROXY STATEMENTRetirement 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 2020 table below for additional information about the value of these pension benefits.

Sections 401 and 415 of the Internal Revenue Code generally limit the amount of annual pension that can be paid from a tax-
qualified plan ($230,000 in 2020 and 2021) as well as the amount of annual earnings that can be used to calculate a pension
benefit ($285,000 in 2020 and $290,000 in 2021). 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 2020 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 2020

Name

Mr. Ricks

Mr. Smiley

Plan

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

Ms. Hakim

retirement plan (post-2009)

Mr. Zulueta

nonqualified plan (post-2009)

total

retirement plan (pre-2010)

retirement plan (post-2009)

nonqualified plan (pre-2010)

nonqualified plan (post-2009)

Number of Years of
Credited Service

Present Value of
Accumulated Benefit ($) 1
$823,571

Payments During
Last Fiscal Year ($)

$418,590

$10,268,800

$5,131,598

$16,642,559

$893,634

$384,747

$4,150,530

$1,763,977

$7,192,888

$267,910

$1,360,479

$1,628,389

$34,177

$53,671

$87,848

$1,178,491

$481,737

$7,161,311

$2,060,636

total

$10,882,175

P68

PROXY STATEMENT1 The following standard actuarial assumptions were used to calculate the present value of each individual’s accumulated pension
benefit:

Discount rate:

2.85 percent for the qualified plan and 2.57 percent for nonqualified plan

Mortality (post-retirement decrement only):

Private 2012 white collar table with generational projection using Scale MP-2020

Pre-2010 joint and survivor benefit (% of pension):

50 percent until age 62; 25 percent 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).

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. Mr. Ricks, Mr. Smiley, and Mr. Zulueta 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 are 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 2020

Executive
Contributions in
Last Fiscal Year
($)1

Registrant
Contributions in
Last Fiscal Year
($)2

Aggregate
Earnings in
Last Fiscal Year
($)

Plan

nonqualified savings

$71,208

$402,166

Name

Mr. Ricks

deferred compensation

Mr. Smiley

nonqualified savings

total

$71,208

$41,439

deferred compensation

Dr. Skovronsky

nonqualified savings

total

$41,439

deferred compensation

total

$41,439

Ms. Hakim

nonqualified savings

$25,167

deferred compensation

total

$25,167

Mr. Zulueta

nonqualified savings

$33,508

deferred compensation

$729,417

total

$762,924

$402,166

$101,324

$110,789

$5,747

$210,910

$235,347

$446,257

$71,208

$41,439

$25,167

$33,508

P69

Aggregate
Withdrawals/
Distributions in
Last Fiscal Year
($)

Aggregate
Balance at Last
Fiscal Year End
($)3

$1,845,546

$613,038

$660,582

$56,082

$1,401,325

$9,815,851

$11,217,176

P69

PROXY STATEMENT
1 The amounts in this column are also included in the Summary Compensation Table in the "Salary" column (nonqualified savings)
or the "Non-Equity Incentive Plan Compensation" column (deferred compensation).

2 The amounts in this column are also included in the Summary Compensation Table in the "All Other Compensation" column as a
portion of the savings plan match.

3 Of the totals in this column, the following amounts have previously been reported in the Summary Compensation Table for this
year and for previous years:

Name

Mr. Ricks

Mr. Smiley

Dr. Skovronsky

Ms. Hakim

Mr. Zulueta

2020 ($)

Previous Years ($)

Total ($)

$142,415

$82,877

$50,335

$796,432

$405,000

$145,900

$141,900

N/A

$547,415

$228,777

$224,777

$50,335

$796,432

The Nonqualified Deferred Compensation in 2020 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 2.5 percent for 2020 and
is 1.6 percent for 2021. 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, 2020)
The following table describes the potential payments and benefits under the company’s compensation and benefit plans and
arrangements to which the named executive officers would be entitled upon termination of employment. Except for certain
terminations following a change in control of the company, as described below, there are no agreements, arrangements, or
plans that entitle named executive officers to severance, perquisites, or other enhanced benefits upon termination of their
employment. Any agreement to provide such payments or benefits to a terminating executive officer (other than following a
change in control) would be at the discretion of the Compensation Committee.

P70

PROXY STATEMENTName

Mr. Ricks

Continuation
of Medical /
Welfare
Benefits
(present
value) 2

Cash
Severance
Payment 1

Acceleration and
Continuation of
Equity Awards as
of 12/31/2020

Total Termination
Benefits

• Involuntary retirement or termination

$22,217,993

• Involuntary or good-reason termination after change in control

$7,500,000

$308,701

$59,872,504

$67,681,205

Mr. Smiley3

• Involuntary retirement or termination

$5,693,032

• Involuntary or good-reason termination after change in control

$3,900,000

$216,950

$15,515,087

$19,632,037

Dr. Skovronsky

• Involuntary retirement or termination

$3,163,217

• Involuntary or good-reason termination after change in control

$3,900,000

$42,860

$15,606,548

$19,549,408

Ms. Hakim

• Involuntary retirement or termination

$2,677,296

• Involuntary or good-reason termination after change in control

$2,790,000

$50,386

$5,931,071

$8,771,457

Mr. Zulueta

• Involuntary retirement or termination

$4,636,262

• Involuntary or good-reason termination after change in control

$3,315,000

$37,908

$11,595,332

$14,948,240

1 See "Change-in-Control Severance Pay Plan—Cash Severance Payment" below.

2 See "Accrued Pay and Regular Retirement Benefits" and "Change-in-Control Severance Pay Plan—Continuation of medical and
welfare benefits" below.

3 As a result of Mr. Smiley’s resignation as an officer on February 9, 2021, the Compensation Committee cancelled all of Mr.
Smiley’s unvested equity awards. See the discussion of Mr. Smiley’s Separation Agreement under “Agreement with Former Chief
Financial Officer”.

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 2020 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

P71

PROXY STATEMENTconsolidation 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, 2020. 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.

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, 2020.

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: 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.

Agreement with Former Chief Financial Officer
On February 9, 2021, Joshua L. Smiley resigned as senior vice president and chief financial officer of the Company. Shortly
before his resignation, the company was made aware of allegations of an inappropriate personal relationship between
Mr. Smiley and a Lilly employee. Lilly immediately engaged external counsel to conduct a thorough, independent investigation.
That investigation revealed consensual though inappropriate personal communications between Mr. Smiley and certain Lilly
employees and behavior that Lilly leadership concluded exhibited poor judgment by Mr. Smiley. Lilly holds all employees
accountable to its core values and strongly believes its executive officers carry an even higher burden in ensuring those values
are upheld. Mr. Smiley did not meet that standard. Mr. Smiley’s conduct in question was not related to financial controls,
financial statements or any other business matters or judgments.

In connection with Mr. Smiley’s resignation, he and the Company entered into a Separation Agreement (the “Separation
Agreement”), which provides that Mr. Smiley immediately resign from his position as senior vice president and chief financial
officer of the Company, as well as forego all of his earned 2020 cash bonus (which would have otherwise been $1,102,317 based
on company performance), 25 percent of his earned 2018-2020 shareholder value award (representing a forfeiture of $3,100,954

P72

PROXY STATEMENT
in value based on the closing price per share of Lilly common stock on the date of settlement), and all other outstanding and
previously approved but not yet granted equity incentive awards, totaling over $20 million at target value (calculated based on the
closing price of the company’s common stock on the day before Mr. Smiley's resignation). Mr. Smiley will be available to the
company’s chief executive officer and his successor as chief financial officer through July 2021 to facilitate the transition of his
responsibilities, at reduced cash compensation of $9,000 every two weeks. The Separation Agreement includes customary
provisions regarding confidentiality and a release of claims against the company, as well as a 24-month non-solicitation
agreement and an 18-month non-competition agreement.

The table below reflects the compensation forfeited by Mr. Smiley in connection with the Separation Agreement. The value of the
forgone equity awards were calculated using a price of $205.77, the closing price of the company's common stock on the day
before Mr. Smiley’s resignation, and assuming a payout at target (except for (i) the 2018-2020 SVA, which reflects the 25%
reduction in the earned payout implemented by the Compensation Committee and (ii) the 2019-2021 PA, which reflects actual
company performance through the performance period). The 2021 target bonus and equity award levels had been approved but
the awards had not yet been granted as of Mr. Smiley's resignation.

Name

Compensation Element

Mr. Smiley

2020 Bonus

2018-2020 SVA

2019-2021 SVA
2019-2021 PA

2020-2022 SVA

2020-2022 RVA

2020-2022 PA

2021-2023 Equity Awards
2021 Bonus
Total

Forfeited or
Reduced Shares

Forfeited or
Reduced Value

N/A

15,070

17,584
14,453

8,910

6,420

7,209

N/A
N/A

$1,102,317

$3,100,954

$3,618,260
$2,973,994

$1,833,411

$1,321,043

$1,483,396

$3,700,000
$1,000,000
$20,133,375

1 Reflects the actual amount forfeited by Mr. Smiley in connection with the Separation Agreement.

2 Represents the target amount forfeited by Mr. Smiley in connection with the Separation Agreement and the corresponding
number of shares based on the closing price of the company’s common stock on the day before Mr. Smiley’s resignation. The
actual amount and number of shares that will be awarded to participants who remain eligible for payout under these award
programs may be above or below target based on company performance. With respect to Mr. Smiley’s 2021-2023 equity
awards, the value listed represents the target value approved by Compensation Committee in December 2020; this amount was
cancelled by the Compensation Committee prior to any target shares being granted.

3 Reflects the number of restricted stock units earned by Mr. Smiley after adjusting for company performance during the
2019-2020 performance period. The value forfeited is based on the closing price of the company’s common stock on the day
before Mr. Smiley’s resignation. The Compensation Committee cancelled this award prior to its conversion to a 13-month
service vesting restricted stock unit.

4 Represents the 2021 target bonus amount forfeited by Mr. Smiley in connection with the Separation Agreement. The actual
amount that will be awarded to participants who remain eligible for payout under the 2021 Bonus may be above or below target
based on participant and company performance.

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. 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.

Below is the 2020 annual total compensation of our CEO and our median employee and the ratio of the annual total
compensation of our CEO to that of our median employee.

CEO Pay Ratio:

CEO Annual Total Compensation*

Median Employee Annual Total Compensation

CEO to Median Employee Pay Ratio

$23,708,629

$101,752

233:1

*This annual total compensation is the "Summary Compensation Table" amount.

P73

PROXY STATEMENTMethodology:
• Measurement Date: We identified the median employee using our employee population on October 31, 2020. On this date, Lilly

employed approximately 36,500 people, with approximately 16,000 members of our workforce located in the U.S. and
approximately 20,500 members of our workforce located outside of the U.S.

• Identification of Median Employee: In a manner consistent with SEC 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 76 countries. In identifying the median employee, we excluded 340 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.

• Calculated CEO 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.

Audit Matters

Item 3. Ratification of the Appointment of the Independent Auditor

Audit Committee Oversight of the Independent Auditor
The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor and
oversees the process for 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/leadership/
governance.

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 2020, 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 2021. 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 participate in the Annual Meeting and will be available to respond to questions. Those
representatives will have the opportunity to make a statement if they wish to do so.

Board Recommendation on Item 3

The board recommends that you vote FOR ratifying the appointment of EY as the independent auditor for 2021.

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

P74

PROXY STATEMENTDecember 31, 2020 were prepared in accordance with GAAP, and the Audit 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 directly 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 the matters required to be discussed with the Audit Committee
by the standards of the Public Company Accounting Oversight Board (PCAOB), the SEC, 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 non-
audit 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 adopted 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 Audit 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, 2020, for filing with the SEC. The Audit Committee has also
appointed EY as the company’s independent auditor, subject to shareholder ratification, for 2021.

Audit Committee
Jamere Jackson, Chair
Ralph Alvarez
Michael L. Eskew
Gabrielle Sulzberger
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

P75

PROXY STATEMENTCommittee 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.

Independent Auditor Fees
The following table shows the fees incurred for services rendered on a worldwide basis by EY in 2020 and 2019. 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

Reviews of quarterly financial statements

Audit-Related Fees

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

Management Proposals

2020
($ millions)

2019
($ millions)

$13.7

$14.2

$0.9

$0.7

$2.7

$17.3

$17.6

Numbers may not add due to rounding

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. The board, after review by its Directors and Corporate Governance Committee, 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 (the Declassification Amendments). From 2010 through 2012 and again from 2018 through 2020, the board submitted
this management proposal to shareholders seeking approval to eliminate the company’s classified board structure; however,
under the company’s articles of incorporation, the proposal requires the vote of 80 percent of the outstanding shares to be
approved and on each prior occasion failed to receive the required vote.

If approved, the company would promptly make the required filings of the Declassification Amendments with the Secretary of
State of Indiana, at which time the Declassification Amendments would become effective. Directors elected prior to the
effectiveness of the Declassification Amendments would serve out their remaining three-year term and each Director elected
after the Annual Meeting would serve a one-year term, ending at the next annual meeting of shareholders, and thereafter, the
company’s classified board structure would be fully eliminated starting with the 2024 annual meeting of shareholders. In the
case of any vacancy on the board occurring after the Annual Meeting created by an increase in the number of directors, the
vacancy would be filled through an appointment by the board, with the new director to serve a term ending at the next annual
meeting of shareholders. 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, taking into account the input of 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

P76

PROXY STATEMENTconsidered 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 favorable votes of a strong majority of the outstanding shares for
management’s proposals in the previous three years.

The board also considered benefits of retaining the classified board structure. A classified structure may promote shareholder
value by providing continuity and stability in the management of the business and affairs of the company, as a majority of the
board always has prior experience as directors of the company. In addition, under certain 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 majority of the 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 protect the interests of all shareholders and discourage a would-be
acquirer from proceeding with a proposal that undervalues the company or is opportunistic. These include other provisions of
the company’s articles of incorporation and bylaws, as well as certain provisions of Indiana corporation law.

After balancing these interests, the board has decided to resubmit this proposal to eliminate the classified board structure.

Text of the 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 strikeouts 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 approve this proposal. Unless
such vote is received, the present classification of the board will continue.

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

The company’s articles of incorporation provide nearly all matters submitted to a vote of shareholders can be adopted by a
majority of the votes cast. However, the company’s articles of incorporation require certain fundamental corporate actions to be
approved by the holders of 80 percent of the outstanding shares of common stock. 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 such action or transaction by the directors not affiliated with such
shareholder

modifying or eliminating any of the above supermajority voting requirements.

The board, after review by its Directors and Corporate Governance Committee, has approved, and recommends that the
shareholders approve, amendments to eliminate the supermajority voting requirements. From 2010 through 2012 and again
from 2018 through 2020, the board submitted this management proposal to shareholders seeking approval to eliminate these
supermajority voting requirements; however, under the company’s articles of incorporation the proposal requires the vote of 80
percent of the outstanding shares to be approved and on each prior occasion failed to receive the required vote.

P77

PROXY STATEMENT
Background of Proposal
As part of its ongoing review of corporate governance matters, the board, taking into account the input of the Directors and
Corporate Governance Committee, considered the advantages and disadvantages of maintaining the supermajority voting
requirements. The board considered that under certain circumstances, supermajority voting requirements can provide benefits
to the company and all its shareholders by making it more difficult for one or a few large shareholders to facilitate a takeover of
the company or implement certain significant changes to the company without more widespread shareholder support.

The board also considered the potential adverse consequences of maintaining the supermajority voting requirements. The board
believes it is important to maintain shareholder confidence by demonstrating that the board 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 favorable votes of a strong majority of the outstanding shares
for management’s proposal in the previous three years. Many shareholders believe that supermajority voting requirements
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 protect the interests of all shareholders and to discourage a would-be acquirer from
proceeding with a proposal that undervalues the company or is opportunistic 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.

After balancing these interests, the board has decided to resubmit this proposal to eliminate the supermajority voting
requirements.

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
strikeouts 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 approve this proposal. Unless
such vote is received, the supermajority voting requirements will continue to be in effect.

Board Recommendation on Item 5

The board recommends that you vote FOR amending the company's articles of incorporation to eliminate supermajority voting
requirements.

Shareholder 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 27,486 shares of our common stock as of November 13, 2020, 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.

Lilly’s membership in and payments to any tax-exempt organization that writes and endorses model legislation.

P78

PROXY STATEMENT
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 $82,532,000 from 2010 - 2019 on federal lobbying. This does not include state lobbying in the 48 states where Lilly
lobbies1 but disclosure is uneven or absent. Lilly also lobbies abroad, spending between €700,000-799,000 on lobbying in Europe
for 2019 and attracting scrutiny for "using shifty lobbying tactics to dodge regulations and get medicines approved" in Australia.2

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 $2.0 billion on lobbying since 1998. Lilly does not disclose its payments to trade
associations and social welfare organizations, or the amounts used for lobbying, including grassroots. Grassroots lobbying does
not get reported at the federal level under the Lobbying Disclosure Act, and disclosure is uneven or absent in states.

We are concerned Lilly’s payments to third party groups are potentially being used for undisclosed grassroots lobbying. For
example, PhRMA, which brought in $459 million in revenue for 2018, has given millions to "dark money" social welfare groups
which then "advocated policies favored by drugmakers.3

We are also concerned Lilly’s lack of disclosure presents reputational risk when its lobbying contradicts company public
positions. For example, Lilly states it works to makes medicine more affordable, yet funds PhRMA’s opposition to lower drug
price initiatives.4 Lilly publicly supported COVID-19 efforts, but the Chamber directly lobbied against using the Defense
Production Act for production of personal protective equipment for workers.5 And Lilly’s ALEC membership has drawn negative
scrutiny.6

Statement in Opposition to the Shareholder Proposal to Disclose Direct and Indirect Lobbying Activities
and Expenditures
The board, after review by its Directors and Corporate Governance Committee and Ethics and Compliance Committee,
recommends a vote against this proposal.

Lilly already publishes 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 provide meaningful
additional information to shareholders, given our transparency with respect to lobbying activities and the governance and risk
mitigation procedures we have in place regarding such activities. Moreover, Lilly’s shareholders have decidedly rejected the
substantially same proposal submitted at each of our last four annual meetings.

Since 2005, the company has published the following information, which is updated annually on our website (lilly.com/policies-
reports/public-policy/transparency) 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; and
contributions to political organizations and Section 527 organizations reported by state.

Moreover, 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) and through individual state agencies.

1 https://publicintegrity.org/state-politics/amid-federal-gridlock-lobbying-rises-in-the-states/
2 https://www.aap.com.au/hunt-calls-out-big-pharmas-dodgy-lobbying/.
3 https://www.opensecrets.org/news/2019/11/big-pharma-bankrolled-conservative-groups-tax-returns-show/.
4 https://www.cnn.com/2019/01/23/health/phrma-lobbying-costs-bn/index.html
5 https://www.nytimes.com/2020/03/22/us/politics/coronavirus-trump-defense-production-act.html.
6 https://www.commoncause.org/wp-content/uploads/2020/05/Eli-Lilly-ALEC-COVID-letter-FINAL.pdf.

P79

PROXY STATEMENTIn 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, 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 (lilly.com/policies-reports/public-policy/transparency). These tax-exempt organizations are also required to disclose
their lobbying expenditures under the Lobbying Act of 1995, under which 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 also exercises oversight of Lilly’s political expenditures and lobbying activities to ensure that we fulfill our
commitment to stewardship of corporate funds and risk minimization with respect to such activities.

We do not believe any potential value provided by the requested additional disclosures merits the resources required to provide
the report requested by the proposal; for these reasons, we believe that the proposal is not in the best interests of the company
and its shareholders.

Board Recommendation on Item 6

The board recommends that you vote AGAINST this proposal.

Item 7. Proposal to Amend the Bylaws to Require an Independent Board Chair

IBVM Foundation of Canada, Inc., 70 St. Mary Street Toronto, ON M5S 1J3 CANADA, beneficial owner of 400 shares of our
common stock as of November 2, 2020, 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. This policy would be phased in for the next CEO transition.

Supporting Statement
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 media attention continues to focus on the effects of high insulin prices, including patient deaths.

The risk of lawsuits, sustained public controversy and regulatory intervention, whether ultimately found to be justified or not, are
strong arguments for the need for continuous, effective and unconflicted board oversight of corporate management. The board is
responsible for this oversight, but conflicts of interest may arise when one person holds both the Chair and CEO positions. 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. We believe that Lilly’s board should adopt best practice governance policies, including having an independent board chair.

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 an inherent conflict of interest when the same person occupies both the role of CEO and Chair.

According to PWC’s 2019 survey of over 700 directors, 57% of directors surveyed who sit on a board with a combined Chair/CEO
say it is difficult to voice dissent—a 37% higher result than on boards with an independent Chair.

33% of companies in the S&P 500 have an independent Chair. Numerous institutional investors recommend such a move. 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.

In 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.

P80

PROXY STATEMENTStatement in Opposition to the Shareholder Proposal to Amend the Bylaws to Require an Independent
Board Chair
The board, after review by its Directors and Corporate Governance Committee and its Ethics and Compliance Committee,
recommends a vote against this proposal.

If implemented, the proposal would lock in a mandatory board leadership structure that eliminates our board’s flexibility to
evaluate and adopt what it believes to be the most effective leadership structure for Lilly under the relevant facts and
circumstances at any given point in time. Unlike the proponent, the board believes, whether in the present or after the next CEO
transition, that there is no "one-size-fits-all" approach to board leadership and recognizes that two of its key responsibilities are
to evaluate and implement the leadership structure best suited to achieve the company’s objectives and to promote the long-
term interests of its shareholders with due regard for all our stakeholders. In 2020, the board continued its ongoing assessment
of its leadership structure in the context of our business, long-term strategy, and industry environment and developments in
corporate governance, and believes that a combined chairman and CEO, coupled with a strong lead independent director
position, continues to be in the best interest of the company and our shareholders.

Lilly’s board leadership structure is consistent with market practice and our flexible approach was strongly endorsed by
Lilly’s shareholders last year.

There is no singular approach to independent board leadership across S&P 500 companies. As the proponent indicates, only 36
percent of the S&P 500 have independent chairs.1 Notably, like Lilly, as of December 31, 2020, 57 percent of S&P 500 companies
instead have lead independent directors,2 and as of December 2, 2020, 61 of the S&P 100 companies3 and seven of the eight U.S.-
incorporated companies from our peer group (see P47 for a list of our peer group companies)4 have a combined board chair and
CEO. In addition, Lilly’s shareholders decidedly rejected a similar proposal seeking to mandate an independent board chair at
our 2020 annual meeting of shareholders, with approximately two-thirds of the votes cast against the proposal, thus endorsing
our flexible approach.

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 P7–P8 and P32–P35 for
a description of the board’s governance principles.) Although the chairman and CEO roles are combined, we ensure independent
oversight of the company through a counterbalancing governance structure, which we have had since 2006 through either a lead
independent director or presiding director. Further bolstering independent oversight, each of our current board members other
than the CEO is independent (14 out of 15 directors), and all standing board committees are made up solely of independent
directors and led by independent committee chairs.

Lilly’s 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. Our strong lead independent director is empowered with clearly defined
responsibilities, including:

•
•
•
•
•
•
•
•
•

•

leading the board’s processes for selecting the CEO;
overseeing the independent directors’ annual performance evaluation of the chairman and CEO;
serving as a liaison between the chairman and the independent directors;
presiding at all meetings of the board at which the chairman is not present;
presiding at executive sessions of the independent directors;
calling meetings of the independent directors, as appropriate;
approving meeting agendas and schedules and reviewing information to be provided to the board;
being available for consultation and direct communication with shareholders, as appropriate;
together with the chairman 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 succession planning process;
and
retaining advisors for the independent directors, as appropriate.

Furthermore, the 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 that are presided over by our
lead independent director;
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 and independent directors in
establishing the CEO’s compensation for the next year;

1 Source: EY Center for Board Matters, Corporate Governance by the Numbers. December 31, 2020.
2 Id.
3 Source: ISS Corporate Solutions.
4
Biogen Inc. has an independent board chair.

P81

PROXY STATEMENT•
•

independent director access to management whenever deemed necessary by the independent directors; and
the 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.

Lilly’s current governance structure provides effective, independent oversight over key matters that are important to our
stakeholders, including drug pricing and access.

Our independent directors are deeply engaged in key matters important to Lilly and our stakeholders, including the oversight
over the company’s approach to drug pricing and access. Guided by this active oversight, Lilly already has taken numerous steps
to address drug pricing and access concerns. For example, Lilly introduced two additional lower-priced versions of branded
insulin in January 2020 and added the Lilly Insulin Value Program to Lilly’s comprehensive suite of insulin affordability solutions
in September 2020, which enables customers with commercial insurance or no insurance to purchase their monthly prescription
of most Lilly insulins for $35. These examples, among others, demonstrate Lilly’s commitment to providing effective oversight
over drug pricing and access.

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 relevant 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 combination of a chairman who is also the CEO and a
strong lead independent director achieves the delivery of multiple balanced inputs to the board. Having one individual serve as
both chairman 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. This leadership
structure has served our shareholders well.

Lilly’s independent directors have determined that Mr. Ricks is eminently qualified to serve as both chairman 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
chairman at this time, as well as information on the leadership provided by Mr. Luciano, the lead independent director, please
see "Governance—Highlights of the Company’s Corporate Governance—Leadership Structure; Oversight of Chairman, CEO, and
Senior Management" on P34–P35.

For these reasons, we believe a policy requiring an independent board chair is not necessary and not in the best interests of the
company and its shareholders.

Board Recommendation on Item 7

The board recommends that you vote AGAINST this proposal.

Item 8. 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
shares of our common stock having a market value in excess of $2000, has submitted the following proposal:

RESOLVED that shareholders of Eli Lilly and Company ("Lilly") urge the Compensation Committee (the "Committee") of the
board to take the steps necessary to provide that the Committee may decline to pay in full 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 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 referenced above should allow accurate assessment of risks taken during the PMP that could have affected
performance on the Financial Metric(s) and facilitate Lilly’s recoupment of Bonus compensation pursuant to its recoupment
policy.

P82

PROXY STATEMENTThe 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 are investigating Lilly’s insulin pricing and sale.

To foster a longer-term orientation, this proposal asks that the Committee take the steps necessary to authorize 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 ("FSB"), 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, after review by its Directors and Corporate Governance Committee, Ethics and Compliance Committee and
Compensation Committee, recommends a vote against this proposal.

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 long-term best interest of the company. A majority of each executive
officer’s compensation, which is reviewed annually by our Compensation Committee, is aligned to enhance shareholder value by
promoting the delivery of sustainable business results and discouraging excessive risk-taking or other adverse behaviors.
Notably, Lilly’s chief executive officer, Mr. Ricks, has a total target pay mix of 77 percent long-term equity, 14 percent annual
bonus, and 9 percent base pay and Lilly’s remaining named executive officers have an average pay mix target of 63 percent long-
term equity incentives, 18 percent annual bonus, and 19 percent base pay. All of Lilly’s equity awards to its executive officers are
subject to performance goals measured over multiple years and significant vesting periods of three years during which the
awards remain subject to forfeiture. Furthermore, any equity earned under the majority of executive officer long-term equity
incentives are subject to an additional one-year holding requirement, after the three-year performance period, during which
time the executives cannot realize any value from the awards and remain aligned with Lilly shareholders. Additional risk is
mitigated by the discretion afforded to our Compensation Committee to downward adjust award payouts on any basis it deems
appropriate. Our robust stock ownership and retention guidelines for executive officers further align management with the long-
term performance of the Company and discourage excessive risk-taking.

Further, the policy that the proposal requests is unnecessary as Lilly already has an effective and robust compensation recovery
policy (otherwise referred to as our clawback policy) in place. Under our current clawback policy, the Compensation Committee
is authorized to cancel any unpaid executive incentive compensation (including annual bonus payments and long-term equity
incentive awards) and claw back any incentive compensation for up to three years following payment in the event of certain
specified misconduct.

While the deferral of the annual bonus payment may appear to provide an easier mechanism to claw back bonus payments in the
unlikely event it were to become necessary, as a practical matter, our existing clawback policy already provides an effective
avenue for the company to claw back payments while at the same time maintaining a competitive executive compensation
program that enables the company to recruit and retain talent.

Contrary to the assertions in the proposal’s supporting statement, our board and management already effectively oversee the
Company’s approach to the pricing of and access to drugs. For example, Lilly is committed to making medicines accessible to
patients and our management has taken steps to reduce access barriers imposed by drug prices, including introducing two
additional lower-priced versions of branded insulin in January 2020 and adding the Lilly Insulin Value Program to Lilly’s
comprehensive suite of insulin affordability solutions in September 2020, which enables customers with commercial insurance
or no insurance to purchase their monthly prescription of most Lilly insulins for $35.

P83

PROXY STATEMENTFor 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 8

The board recommends that you vote AGAINST this proposal.

Item 9. Proposal to Disclose Clawbacks on Executive Incentive Compensation
Due to Misconduct

Trinity Health, 766 Brady Avenue, Apt 635, Bronx, NY 10462, beneficial owner of 46,389 shares of our common stock as of
November 16, 2020, 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.

Supporting 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.

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, Colorado 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.

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. Similar complaints have been filed by the Kentucky
Attorney General and Harris County, Texas. Two cases have also been filed against Lilly for violating state consumer protection
laws and the federal Racketeer Influenced and Corrupt Organizations Act.

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 Disclose Clawbacks on Executive Incentive
Compensation Due to Misconduct
The board, after review by its Directors and Corporate Governance Committee, Ethics and Compliance Committee and
Compensation Committee, recommends a vote against this proposal.

The board believes that our current executive compensation structure, including our compensation recovery policy (otherwise
referred to as our clawback 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.

P84

PROXY STATEMENT

Our core values of integrity, excellence and respect for people guided the creation and implementation of the company’s existing
clawback 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 causing significant harm to the company, disciplinary action, a material violation
of law or company policy or financial restatement. 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.

Lilly is already subject to SEC requirements to disclose in its annual proxy statement when compensation has been recouped,
and the amount recouped, from the chief executive officer, the chief financial officer, and other current and former named
executive officers who served during the prior fiscal year. If necessary to understanding 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. Thus, 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 any potential misconduct of
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 annual report contemplated by the proposal could
present a misleading picture of how instances of misconduct might be addressed by the company.

In summary, the board believes that adopting a policy requiring an annual report of compensation clawbacks is overly
prescriptive and unnecessary given the company’s existing clawback policy and the SEC’s disclosure requirements discussed
above; for these reasons, we believe the proposal is not necessary and not in the best interests of the company and its
shareholders.

Board Recommendation on Item 9

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 to be submitted to shareholders at the Annual Meeting other than the proposals referred
to in this proxy statement. Nonetheless, if necessary, the persons named on the proxy have discretionary authority to vote the
shares represented thereby with respect to any other matters that might be brought before the meeting. Those persons intend to
vote on any such matters in accordance with their best judgment.

Voting
Shareholders as of the close of business on February 22, 2021 (the record date) may vote or have their shares voted at the
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; and
• attributed to your account in the company's 401(k) Plan.

We encourage you to vote by mail, by telephone, or online even if you plan to attend the Annual Meeting. Shareholders who hold
their shares in the 401(k) Plan must vote by April 28, 2021 so the plan trustee can vote their shares accordingly. See "—Voting
Shares Held in the Company 401(k) Plan" for more information.

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 and broker non-votes 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 the votes cast against the

proposal:

• an advisory approval of compensation paid to the named executive officers presented in this proxy statement;

P85

PROXY STATEMENT• ratification of the appointment of the independent auditor; and
• four shareholder proposals.

Abstentions and broker non-votes will not be counted as votes cast either for or against these proposals. As discussed
below in "Meeting and Voting Logistics — Voting Shares Held by a Broker," broker non-votes are not expected in connection
with the ratification of the appointment of the independent auditor.

• 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 entitled to vote, present or represented by proxy, constitutes a quorum for the Annual
Meeting. As of February 22, 2021, 958,992,159 shares of company common stock were issued and outstanding.

Voting by Shareholders of Record
If you are a shareholder of record, you may vote 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.

By telephone. Call 1-800-690-6903 using a touch-tone phone and follow the instructions
provided.

By mail. If you received or requested paper copies of your proxy materials, sign, date, and
return each proxy card you receive in the prepaid envelope. Sign your name exactly as it
appears. 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 may vote your shares prior to the Annual Meeting until 11:59 p.m. EDT on May 2, 2021 online or by telephone. If you are
voting by mail, your marked, signed, and dated proxy card must be received by May 2, 2021. Shareholders of record may also opt
to vote at the Annual Meeting, which will be held online via live webcast at virtualshareholdermeeting.com/LLY2021. See "—
Attending the Annual Meeting" for more information on attending the meeting.

You have the right to change your vote or revoke your proxy before it is voted at the Annual Meeting by (i) timely notifying the
General Counsel and Secretary in writing, (ii) timely delivering a later-dated proxy by mail, or (iii) timely casting a new vote online
or by telephone. Shareholders of record may also revoke their proxies by voting at the Annual 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. You may submit new voting instructions by contacting your broker or other nominee or
by voting at the Annual Meeting.

If you give the broker instructions, your shares will be voted as you direct. If you do not provide voting instructions, your shares
will not be voted on any proposal on which the broker does not have discretionary authority to vote. This is called a "broker non-
vote." In these cases, the broker can register your shares as being present at the Annual Meeting for purposes of determining
the presence of a quorum but will not be able to vote on those matters for which specific authorization is required under NYSE
rules. If you are a beneficial owner whose shares are held of record by a broker, your broker has discretionary voting authority
under NYSE rules to vote your shares on the ratification of EY as the independent auditor for 2021, even if the broker does not
receive voting instructions from you. However, your broker does not have discretionary authority to vote on the election of
directors, the advisory approval of executive compensation, or the shareholder or management proposals without instructions
from you, in which case a broker non-vote will occur, and your shares will not be voted on these matters.

P86

PROXY STATEMENTVoting 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 in "Meeting and Voting Logistics — Voting by Shareholders of Record," except that if you vote by mail, the card 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 online or by telephone by 11:59 p.m. EDT on April 28, 2021, or if your mailed ballot is not received by April 28,
2021, 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. You will not
be able to vote your shares personally at the Annual Meeting.

Multiple Notices, Proxy Materials, or Emails
If you received more than one notice, full set of proxy materials, or email related to proxy materials, you hold shares in more
than one account. You will need to cast a vote for each notice, full set of proxy materials, 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 this 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 1-800-579-1639 on or before April 19, 2021 to facilitate timely
delivery.

Vote Tabulation
Votes are tabulated by an independent inspector of election, Broadridge Financial Solutions, Inc.

Attending the Annual Meeting
The Annual Meeting will be held on Monday, May 3, 2021, at 11:00 a.m. EDT, and all shareholders as of close of business on
February 22, 2021, are entitled to participate.

Although you will not be able to attend the Annual Meeting at a physical location, we have designed the Annual Meeting live
webcast to provide shareholders the opportunity to participate virtually to facilitate shareholder attendance and provide a
consistent experience to all shareholders, regardless of location.

The live webcast of the Annual Meeting can be accessed by shareholders on the day of the meeting at
virtualshareholdermeeting.com/LLY2021 and will begin promptly at 11:00 a.m. EDT. To attend the Annual Meeting, you will need
to log in to virtualshareholdermeeting.com/LLY2021 using the 16-digit control number found on the proxy card, voting
instruction form, or notice you previously received. This website can be accessed on a computer, tablet, or phone with internet
connection. Online access to the webcast will open 15 minutes prior to the start of the Annual Meeting to allow time to log in and
test your device’s audio system. We encourage you to access the meeting in advance of the designated start time.

To submit questions in advance of the Annual Meeting, visit proxyvote.com before May 3, 2021 and enter your 16-digit control
number. During the meeting, if you wish to submit a question, log into the virtual meeting website at
virtualshareholdermeeting.com/LLY2021, click on "Q&A", type your question into the "Submit a Question" field, and click
"Submit." In order to provide an opportunity to as many shareholders as possible who wish to ask a question, each shareholder
will be limited to one question. Shareholders may ask a second question if all other shareholders have had an opportunity to ask
a question and if time allows. The Annual Meeting is scheduled to begin at 11:00 a.m. EDT and end at 11:45 a.m. EDT, and time
remaining after agenda items are addressed will be available for shareholder questions. We will endeavor to answer as many
questions submitted by shareholders as time permits. We reserve the right to edit profanity or other inappropriate language and
to exclude questions regarding topics that are not pertinent to meeting matters or company business. If we receive substantially
similar questions, we may group such questions together and provide a single response to avoid repetition. Responses to
questions relevant to meeting matters that we do not have time to respond to during the meeting will be posted to our website
following the meeting. Questions regarding topics that are not pertinent to meeting matters or company business will not be
answered.

P87

PROXY STATEMENTSupport staff will be available should you experience any technical difficulties in accessing the virtual meeting. Instructions for
requesting technical assistance will be available at virtualshareholdermeeting.com/LLY2021.

List of Shareholders of Record
A list of the names of shareholders entitled to vote at the Annual Meeting will be available to shareholders for five business days
prior to the Annual Meeting for any purpose germane to the Annual Meeting. Please contact us at
shareholderproposals@lilly.com if you wish to examine the list prior to the Annual Meeting. The shareholder list will also be
available during the virtual Annual Meeting for examination by shareholders who access the Annual Meeting using their 16-digit
control number at virtualshareholdermeeting.com/LLY2021.

The 2022 Annual Meeting
The company’s 2022 annual meeting of shareholders is currently scheduled for May 2, 2022.

Other Matters

Notice and Access
We distribute proxy materials to many shareholders via the internet under the SEC’s "Notice and Access" rules to reduce
production and mailing costs and to help preserve environmental resources. Using this method of distribution, on or about
March 19, 2021, we mailed the Notice Regarding the Availability of Proxy Materials that contains basic information about the
Annual Meeting and instructions on how to view all proxy materials and vote. If you receive the notice and prefer to receive proxy
materials by regular mail or email, follow the instructions in the notice for making this request, and the materials will be sent
promptly to you via the preferred method. If you prefer to vote by phone rather than online, the website listed on the notice
(proxyvote.com) has instructions for voting by phone.

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 and who receive either
notices or paper copies of the proxy materials in the mail will receive only one copy of our proxy materials, or a single notice, for
all shareholders at that address, 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 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 1-866-540-7095 or 51 Mercedes Way, Edgewood, NY 11717.

Other Information Regarding the Company’s Proxy Solicitation
The board is soliciting proxies for the 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.

Corporate Governance Materials
The company’s main corporate website address is lilly.com. We also make available through our investor relations website, free
of charge, our company filings with the SEC as soon as reasonably practicable after we electronically file them with, or furnish
them to, the SEC. The reports we make available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents. The website link to
our SEC filings is investor.lilly.com/sec.cfm. This proxy statement and the annual report to shareholders are also available on
our website at lilly.com/policies-reports/annual-report, and the articles of incorporation, bylaws, and all committee charters are
available online at lilly.com/leadership/governance.

By order of the Board of Directors,

Ms. Anat Hakim
Senior Vice President, General Counsel and Secretary
March 19, 2021

P88

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 2020
annual cash bonus and the 2019-2021 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 2020 Bonus Plan
For 2020 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 charges recognized for acquired in-process research and development
• Eliminated the impact of amortization of intangible assets
• Eliminated the impact of asset impairments, restructuring, and other special charges

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 2020 bonus targets, the EPS goal was set assuming a lower amount of net

gains on investments in equity securities than were recognized during 2020. The Compensation Committee
neutralized the impact of the net gains on investments in equity securities on EPS results in an amount that
significantly exceeded the expected net gains on investments originally included in the EPS goal.

• When the Compensation Committee set 2020 bonus targets, the revenue and EPS goal did not contemplate estimated
savings from certain discrete and unplanned performance items. The Compensation Committee reduced revenue and
non-GAAP EPS for the purposes of the bonus calculation to exclude the savings from these items.

A reconciliation of adjustments to our reported revenue is below:

Revenue as reported

Adjustment for estimated savings from certain discrete and unplanned performance items

Adjusted revenue

2020

$24,539.8

$(286.0)

$24,253.8

P89

PROXY STATEMENTA reconciliation of adjustments to our reported EPS is below:

EPS as reported

Eliminate acquired in-process research and development charges

Eliminate amortization of intangible assets

Eliminate asset impairments, restructuring, and other special charges

Non-GAAP EPS

Net gains on investments in equity securities adjustment

Adjustment for estimated savings from certain discrete and unplanned performance items

Adjusted Non-GAAP EPS

*Numbers may not add due to rounding

2020

$6.79

$0.64

$0.36

$0.14

$7.93

$(0.98)

$(0.25)

$6.70

Adjustments for 2019-2021 Performance Award
For the 2019-2021 performance award payout calculations, the Compensation Committee made the following adjustments
to reported EPS consistent with our reporting of non-GAAP financial measures:

• 2019 and 2018: Eliminated Elanco discontinued operations
• 2020, 2019, and 2018: Eliminated the impact of charges recognized for acquired in-process research and

development

• 2020, 2019, and 2018: Eliminated the impact of amortization of intangible assets
• 2020, 2019, and 2018: 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: Eliminated the impact of Lartruvo charges
• 2019 and 2018: Eliminated the impact of reduced shares outstanding from the Elanco exchange offer
• 2019 and 2018: Eliminated the impact of certain income tax items
• 2018: 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 2019-2021 performance award targets, the goal was set assuming a lower

amount of net gains on investments in equity securities. The Compensation Committee neutralized the impact of the
net gains on investments in equity securities on EPS results in an amount that significantly exceeded the expected net
gains on investments originally included in the EPS goal during 2020.

• When the Compensation Committee set 2019-2021 performance award targets, the Compensation Committee

adjusted the 2018 base-year results, to which the expected industry growth rates are applied to derive the two-year
cumulative EPS goals, to neutralize the expected EPS impact of the acquisition of Loxo Oncology, Inc. (Loxo), which
occurred in February 2019.

P90

PROXY STATEMENTA reconciliation of adjustments to our reported EPS is below:

EPS as reported

Eliminate Elanco discontinued operations

EPS as reported from continuing operations

Eliminate acquired in-process research and
development charges

Eliminate amortization of intangible assets

Eliminate asset impairment, restructuring, and other
special charges

Eliminate gain on sale of China antibiotics business

Eliminate charge related to repurchase of debt

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

Net gains on investments in equity securities

Loxo acquisition adjustment

Adjusted Non-GAAP EPS

2020

$6.79

—

$6.79

$0.64

$0.36

$0.14

—

$7.93

$0.98

—

$6.95

% Growth

2020 vs. 2019

2018

2019 vs. 2018

(23.6%)

$3.13

2019

$8.89

$(3.93)

$4.96

$0.21

$0.18

$0.58

$(0.26)

$0.22

$0.14

$0.07

$(0.05)

—

$6.04

—

31.3%

$6.04

15.1%

$(0.08)

$3.05

$1.96

$0.28

$0.24

—

$0.20

$(0.27)

$(0.02)

$5.44

—

$(0.34)

$5.10

11.0%

18.4%

*Numbers may not add due to rounding
(a) Non-GAAP EPS assume that the disposition of Elanco occurred at the beginning of 2019 and 2018 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, amounts relate to U.S. tax
reform and tax expenses associated with the separation of Elanco.

P91

PROXY STATEMENT
Appendix 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." 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/leadership/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 2022 annual meeting of directors, Tthe 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 19862022, 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
Ddirectors, 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 shares 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, as 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 its the 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’s majority-owned subsidiaries to or with such Related Person;

P92

PROXY STATEMENT(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

(vi) any agreement, contract, or other arrangement providing for any one or more of the actions specified in the
foregoing clauses (i) through (iv).

(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 all a 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 capital structures or reduced the current rate of
dividends payable on the 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.

(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 (e)
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

P93

PROXY STATEMENTto 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.

(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.

P94

PROXY STATEMENTCorporate Information

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 who receive paper copies of our annual
reports and proxy materials by mail may elect to receive
these materials online via email. 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.

A N N U A L M E E T I N G
The 2021 annual meeting of shareholders will be
held virtually via live webcast at
virtualshareholdermeeting.com/LLY2021 on Monday,
May 3, 2021, 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 on Form 10-K
and quarterly reports on Form 10-Q that are filed with the
Securities and Exchange Commission are available without
charge upon written request to:
ELI LILLY AND COMPANY
c/o General Counsel and 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
Eli Lilly and Company common stock is listed on the
New York Stock Exchange under the ticker symbol: LLY.

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@equiniti.com
Internet: www.shareowneronline.com

To view our 2020 Integrated Summary Report,
visit lilly.com/2020report or scan the QR code.

LILLY CORPORATE CENTER, INDIANAPOLIS, IN 46285 USA | 317.276.2000 | LILLY.COM

Eli Lilly and Company