10-K 1 lly-20121231x10k.htm 10-K LLY-2012.12.31-10K



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, 2012
Commission file number 001-06351
Eli Lilly and Company
An Indiana corporation
 
I.R.S. employer identification no. 35-0470950
Lilly Corporate Center, Indianapolis, Indiana 46285
(317) 276-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange On Which Registered
Common Stock (no par value)
 
New York Stock Exchange
6.57% Notes Due January 1, 2016
 
New York Stock Exchange
7 1/8% Notes Due June 1, 2025
 
New York Stock Exchange
6.77% Notes Due January 1, 2036
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
  
Accelerated filer  ¨
  
Non-accelerated filer   ¨
  
Smaller reporting company  ¨
Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Act: Yes ¨ No þ
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 (Common Stock): approximately $42,793,000,000
Number of shares of common stock outstanding as of February 15, 2013: 1,134,411,762
Portions of the Registrant’s Proxy Statement to be filed on or about March 25, 2013 have been incorporated by reference into Part III of this report.

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Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions.
In particular, information appearing under “Business,” “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
the many risks and uncertainties associated with pharmaceutical research and development;
the possibility that pipeline products may not receive the necessary clinical and manufacturing regulatory approvals or be commercially successful;
unexpected safety or efficacy concerns associated with our products;
competitive developments affecting current products;
market uptake of recently launched products;
the timing of anticipated regulatory approvals and launches of new products;
regulatory actions regarding currently marketed products;
issues with product supply;
regulatory changes or other developments;
regulatory compliance problems or government investigations;
our ability to protect and enforce patents and other intellectual property;
changes in patent law or regulations related to data-package exclusivity;
litigation involving current or future products;
the impact of governmental actions regarding pricing, importation, and reimbursement for pharmaceuticals, including U.S. health care reform;
changes in tax law;
changes in inflation, interest rates, and foreign currency exchange rates;
asset impairments and restructuring charges;
changes in accounting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC);
acquisitions and business development transactions; and
the impact of exchange rates and global macroeconomic conditions.
Investors should not place undue reliance on forward-looking statements. You should carefully read the factors described in the “Risk Factors” section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.

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Part I
Item 1.
Business
Eli Lilly and Company (the “company” or “registrant” or "Lilly") was incorporated in 1901 in Indiana to succeed to the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and market products in two business segments—human pharmaceutical products and animal health products.
The mission of our human pharmaceutical business is to make medicines that help people live longer, healthier, more active lives. Our strategy is to create value for all our stakeholders by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. Most of the products we sell today were discovered or developed by our own scientists, and our success depends to a great extent on our ability to continue to discover, develop, and bring to market innovative new medicines.
Our animal health business, operating through the Elanco Animal Health division, develops, manufactures, and markets products for both food and companion animals.
We manufacture and distribute our products through facilities in the United States, Puerto Rico, and 11 other countries. Our products are sold in approximately 130 countries.
Human Pharmaceutical Products
Our human pharmaceutical products include:
Neuroscience products, our largest-selling product group, including:
Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the U.S. for the management of fibromyalgia and of chronic musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis
Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance
Strattera®, for the treatment of attention-deficit hyperactivity disorder in children, adolescents, and in the U.S., in adults
Prozac®, for the treatment of major depressive disorder, obsessive-compulsive disorder, bulimia nervosa, and panic disorder
Symbyax®, for the treatment of bipolar depression and treatment-resistant depression
Amyvid, a radioactive diagnostic agent approved in 2012 in the U.S. and 2013 in the European Union (EU) for positron emission tomography (PET) imaging of beta-amyloid neuritic plaques in the brains of adult patients with cognitive impairment who are being evaluated for Alzheimer's disease and other causes of cognitive decline.
Endocrinology products, including:
Humalog®, Humalog Mix 75/25, and Humalog Mix 50/50, for the treatment of diabetes
Humulin®, for the treatment of diabetes
Byetta®, for the treatment of type 2 diabetes
Bydureon®, for the treatment of type 2 diabetes (see “Human Pharmaceutical Marketing Collaborations” below for information about the termination of our collaboration with Amylin Pharmaceuticals for Byetta and Bydureon)
Tradjenta®, for the treatment of type 2 diabetes
Jentadueto®, a combination tablet of Tradjenta and metformin hydrochloride for use in the treatment of type 2 diabetes

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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
Evista®, for the prevention and treatment of osteoporosis in postmenopausal women and for the reduction of the risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer
Humatrope®, for the treatment of human growth hormone deficiency and certain pediatric growth conditions
Axiron®, a topical solution of testosterone, applied by underarm applicator, for replacement therapy in men for certain conditions associated with a deficiency or absence of testosterone.
Oncology products, including:
Alimta®, for the first-line treatment, in combination with another agent, of advanced non-small cell lung cancer for patients with non-squamous cell histology; for the second-line treatment of advanced non-squamous non-small cell lung cancer; as monotherapy for the maintenance treatment of advanced non-squamous non-small cell lung cancer in patients whose disease has not progressed immediately following chemotherapy treatment; and in combination with another agent, for the treatment of malignant pleural mesothelioma
Gemzar®, for the treatment of pancreatic cancer; in combination with other agents, for the treatment of metastatic breast cancer, non-small cell lung cancer, and advanced or recurrent ovarian cancer; and in the EU for the treatment of bladder cancer
Erbitux®, indicated both as a single agent and with another chemotherapy agent for the treatment of certain types of colorectal cancers; and as a single agent or in combination with radiation therapy for the treatment of certain types of head and neck cancers.
Cardiovascular products, including:
Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia
Effient®, for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary intervention (PCI), including patients undergoing angioplasty, atherectomy, or stent placement
ReoPro®, for use as an adjunct to PCI for the prevention of cardiac ischemic complications
Adcirca®, for the treatment of pulmonary arterial hypertension
Livalo®, for use as an adjunct to diet in the treatment of high cholesterol (primary hyperlipidemia or mixed dyslipidemia).
Other pharmaceuticals, including:
Vancocin® HCl, used primarily to treat staphylococcal infections
Ceclor, for the treatment of a wide range of bacterial infections.
Animal Health Products
Our products for food animals include:
Rumensin®, a cattle feed additive that improves feed efficiency and growth and also controls and prevents coccidiosis
Tylan®, an antibiotic used to control certain diseases in cattle, swine, and poultry
Micotil®, Pulmotil®, and Pulmotil AC, antibiotics used to treat respiratory disease in cattle, swine, and poultry, respectively
Paylean® and Optaflexx, leanness and performance enhancers for swine and cattle, respectively
Posilac®, a protein supplement to improve milk productivity in dairy cows

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Coban®, Monteban®, and Maxiban®, anticoccidial agents for use in poultry
Apralan, an antibiotic used to control enteric infections in calves and swine
Surmax (sold as Maxus in some countries), a performance enhancer for swine and poultry.
Our products for companion animals include:
Trifexis®, a monthly chewable tablet for dogs that kills fleas, prevents flea infestations, prevents heartworm disease, and controls intestinal parasite infections
Comfortis®, a chewable tablet that kills fleas and prevents flea infestations on dogs
Reconcile®, for treatment of canine separation anxiety in conjunction with behavior modification training.
Marketing
We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various countries to meet local needs.
Human Pharmaceuticals—United States
In the U.S., we distribute human pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies. In 2012, 2011, and 2010, three wholesale distributors in the U.S.—AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health, Inc.—each accounted for between 10 percent and 16 percent of our consolidated total revenue. No other distributor accounted for more than 10 percent of consolidated total revenue in any of those years.
We promote our major pharmaceutical products in the U.S. through sales representatives who call upon physicians and other health care professionals. We advertise in medical journals, distribute literature and samples of certain products to physicians, and exhibit at medical meetings. In addition, we advertise certain products directly to consumers in the U.S., and we maintain websites with information about our major products. We supplement our employee sales force with contract sales organizations as appropriate to leverage our own resources and the strengths of our partners in various markets.
We maintain special business groups to service wholesalers, pharmacy benefit managers, managed-care organizations, government and long-term care institutions, hospitals, and certain retail pharmacies. We have entered into arrangements with many of these organizations providing for discounts or rebates on Lilly products.
Human Pharmaceuticals—Outside the United States
Outside the U.S, we promote our human pharmaceutical products primarily through sales representatives. While the products marketed vary from country to country, endocrinology products constitute the largest single group in total revenue. Distribution patterns vary from country to country. In most countries, we maintain our own sales organizations, but in some countries we market our products through independent distributors.
Human Pharmaceutical Marketing Collaborations
Certain of our human pharmaceutical products are marketed in arrangements with other pharmaceutical companies, including the following:
We co-market Cymbalta in Japan with Shionogi & Co. Ltd.
Evista is marketed in major European markets by Daiichi Sankyo Europe GmbH, a subsidiary of Daiichi Sankyo Co., Ltd. (Daiichi Sankyo). In a collaboration that ended in December 2012, we co-marketed Evista in Japan with Chugai Pharmaceutical Co., Ltd. We now market Evista in Japan without a collaboration partner.
Byetta and Bydureon have been the subject of a collaboration with Amylin Pharmaceuticals, Inc., under which we co-promoted Byetta in the U.S. and Puerto Rico and have exclusive marketing rights to both products in other territories. In November 2011, we entered into agreement with Amylin to

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terminate the collaboration. Commercial operations were transferred to Amylin in the U.S. at the end of November 2011. Outside the U.S., we anticipate transferring responsibility for commercialization of exenatide to Amylin in substantially all markets by the end of the first quarter of 2013. See Item 8, “Financial Statements and Supplementary Data—Note 4, Collaborations,” for more information on the November 2011 agreement.
Erbitux is marketed in North America by Bristol-Myers Squibb. We have the option to co-promote Erbitux in North America. Outside North America, Erbitux is commercialized by Merck KGaA. We receive royalties from Bristol-Myers Squibb and Merck KGaA.
Effient is co-promoted with us by Daiichi Sankyo in the U.S., major European markets, Brazil, Mexico, China, and certain other countries. We retain sole marketing rights in Canada, Australia, Russia, and certain other countries. Daiichi Sankyo retains sole marketing rights in Japan and certain other countries.
Tradjenta and Jentadueto are being jointly developed and commercialized with us by Boehringer Ingelheim pursuant to a collaboration agreement reached in 2011 under which both parties contributed certain mid- and late-stage development potential diabetes treatments to be jointly developed and commercialized by the parties.
Animal Health Products
Our Elanco animal health business unit employs field salespeople throughout the U.S. and has an extensive sales force outside the U.S. Elanco sells its products primarily to wholesale distributors. Elanco promotes its products primarily to producers and veterinarians for food animal products and to veterinarians for companion animal products. Elanco also advertises certain companion animal products directly to pet owners.
Competition
Our human pharmaceutical products compete globally with products of many other companies in highly competitive markets. Our animal health products compete globally with products of animal health care companies as well as pharmaceutical, chemical, and other companies that operate animal health businesses.
Important competitive factors include safety, effectiveness, and ease of use of our products; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products and processes. Most new products that we introduce must compete with other products already on the market or products that are later developed by competitors. If competitors introduce new products or delivery systems with therapeutic or cost advantages, our products can be subject to progressive price reductions, decreased sales volume, or both. Increasingly, to obtain favorable reimbursement and formulary positioning with government payers, managed care organizations, and pharmacy benefits managers, we must demonstrate that our human pharmaceuticals offer not only medical benefits but also more value as compared with other forms of care.
Manufacturers of generic pharmaceuticals invest far less than we do in research and development and typically have lower manufacturing cost structures; therefore, they can price their products much lower than our branded products. Accordingly, when our branded pharmaceutical loses its market exclusivity, it normally faces intense price competition from generic forms of the product. In many countries outside the U.S., intellectual property protection is weak and we must compete with generic or counterfeit versions of our products. Many of our animal health products also compete with generics.
We believe our long-term competitive success depends upon discovering and developing (either alone or in collaboration with others) or acquiring innovative, cost-effective human pharmaceuticals and animal health products that provide improved outcomes and deliver value to payers, together with our ability to continuously improve the productivity of our operations in a highly competitive environment. There can be no assurance that our research and development efforts will result in commercially successful products, and it is possible that our products will become uncompetitive from time to time as a result of products developed by our competitors.

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Patents, Trademarks, and Other Intellectual Property Rights
Overview
Intellectual property protection is critical to our ability to successfully commercialize our life sciences innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a large number of patents in the U.S. and many other countries relating to products, product uses, formulations, and manufacturing processes.
The patent protection anticipated to be of most relevance to human pharmaceuticals is provided by national patents claiming the active ingredient (the compound patent), particularly those in major markets such as the U.S., various European countries, and Japan. These patents may be issued based upon the filing of international patent applications, usually filed under the Patent Cooperation Treaty (PCT). Patent applications covering the compounds are generally filed during the Discovery Research Phase of the drug discovery process, which is described in the “Research and Development” section of Item 1, “Business.” In general, national patents in each relevant country are available for a period of 20 years from the filing date of the PCT application, which is often years prior to the launch of a commercial product. Further patent term adjustments and restorations may extend the original patent term:
Patent term adjustment is a statutory right available to all U.S. patent applicants to provide relief in the event that a patent is delayed during examination by the U.S. Patent and Trademark Office.
Patent term restoration is a statutory right provided to U.S. patents that claim inventions subject to review by the U.S. Food and Drug Administration (FDA). A single patent for a human pharmaceutical product may be eligible for patent term restoration, to make up for a portion of the time invested in clinical trials and the FDA review process. Patent term restoration is limited by a formula and cannot be calculated until product approval due to uncertainty about the duration of clinical trials and the time it takes the FDA to review an application. There is a five-year cap on any restoration, and no patent may be extended for more than 14 years beyond FDA approval. Some countries outside the U.S. also offer forms of patent term restoration. For example, Supplementary Protection Certificates are sometimes available to extend the life of a European patent an additional five years.
Loss of patent protection for human pharmaceuticals typically results in the loss of effective market exclusivity for the product, which can result in severe and rapid decline in sales of the product. However, in some cases the innovator company may be protected from approval of generic or other follow-on versions of a new medicine beyond the expiry of the product patent through manufacturing trade secrets, later-expiring patents on methods of use or formulations, or data protection that may be available under pharmaceutical regulatory laws. The primary forms of data protection are as follows:
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 based on the innovator company’s regulatory submission data for the drug. For small molecule new molecular entities, the base period of data package protection is five years in the U.S., ten years in the EU, and eight years in Japan. The period begins on the date of product approval and runs concurrently with the patent term for any relevant patent.
Some of our current products, including Erbitux and ReoPro, and many of the new molecular entities in our research pipeline are biological products (biologics). Based on the Biologics Price Competition and Innovation Act (enacted in the U.S. in 2010), the FDA has the authority to approve similar versions (biosimilars) of innovative biologic products. A competitor seeking approval of a biosimilar must file an application to show its molecule is highly similar to an approved innovator biologic, address the challenges of biologics manufacturing, and include a certain amount of safety and efficacy data which the FDA will determine on a case-by-case basis. Under the data protection provisions of this law, the FDA cannot approve a biosimilar application until 12 years after initial marketing approval of the innovator biologic, subject to certain conditions. Regulators in the EU and other countries also have been given the authority to approve biosimilars. The specific requirements of these new approval processes, and 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, are not

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yet entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing.
In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing in pediatric or adolescent populations. If granted, this “pediatric exclusivity” provides an additional six months, which are added to the term of data protection as well as to the term of any relevant patents, to the extent these protections have not already expired.
The FDA also has authority to grant "orphan" status to a specific use of a drug. Under the U.S. orphan drug law, a drug or biological product can receive "orphan" designation if it is intended to treat a disease or condition affecting fewer than 200,000 people in the U.S., or affecting more than 200,000 people but not reasonably expected to recover its development and marketing costs through U.S. sales. Among other benefits, orphan designation entitles the drug to seven years of market exclusivity, meaning that the FDA cannot (with limited exceptions) approve another marketing application for the same drug for the same indication until expiration of the seven-year period. Unlike pediatric exclusivity, the orphan exclusivity period is independent of and runs in parallel with any applicable patents.
Outside the major markets, the adequacy and effectiveness of intellectual property protection for human pharmaceuticals varies widely. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization (WTO), more than 140 countries have now agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to patent owners. Because of TRIPs transition provisions, dispute resolution mechanisms, and substantive limitations, it is difficult to assess when and how much we will benefit commercially from this protection.
Certain of our Elanco animal health products are covered by patents or other forms of intellectual property protection. In general, upon loss of effective market exclusivity for our animal health products, we have not experienced the rapid and severe declines in revenues that are common in the human pharmaceutical segment.
There is no assurance that the patents we are seeking will be granted or that the patents we hold would be found valid and enforceable if challenged. Moreover, patents relating to particular products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or marketing alternative products or formulations that compete with our patented products. In addition, competitors or other third parties sometimes may assert claims that our activities infringe patents or other intellectual property rights held by them, or allege a third-party right of ownership in our existing intellectual property.
Our Intellectual Property Portfolio
We consider intellectual property protection for certain products, processes, and uses—particularly those products discussed below—to be important to our operations. For many of our products, in addition to the compound patent, we hold other patents on manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the product patent.
The most relevant U.S. patent protection or data package protection for our larger or recently launched patent-protected marketed products is as follows:
Alimta is protected by a compound patent (2016), as extended by pediatric exclusivity (2017), and a vitamin dosage regimen patent (2021), as extended by pediatric exclusivity (2022).
Cialis is protected by compound and use patents (2017).
Cymbalta is protected by a compound patent, as extended by pediatric exclusivity (December 2013).
Effient is protected by a compound patent (2017).
Evista is protected by patents on the treatment and prevention of osteoporosis (March 2014).
Humalog is protected by a compound patent (May 2013).

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Strattera is protected by a patent covering its use in treating attention deficit-hyperactivity disorder (2016), as extended by pediatric exclusivity (2017).
Tradjenta and Jentadueto are protected by a compound patent (2023), and Boehringer Ingelheim has applied for a patent extension to 2025 under the patent restoration laws.
Outside the U.S., important patent or data package protection includes:
Alimta in most major European countries (compound patent 2015, vitamin dosage regimen patent 2021)
Cialis in major European countries (compound patent 2017)
Cymbalta in major European countries (data package protection August 2014)
Zyprexa in Japan (compound patent 2015).
U.S. patent protection or data package protection for our new molecular entity that has been submitted for regulatory review is as follows (Additional information about this molecule is provided in Item 7, "Management’s Discussion and Analysis—Late-Stage Pipeline”):
Liprotamase, if approved, would be protected for at least the five-year data package protection period following U.S. regulatory approval.
Worldwide, we sell all of our major products under trademarks that we consider in the aggregate to be important to our operations. Trademark protection varies throughout the world, with protection continuing in some countries as long as the mark is used, and in other countries as long as it is registered. Registrations are normally for fixed but renewable terms.
Patent Licenses
Most of our major products were discovered in our own laboratories and are not subject to significant license agreements. Two of our larger products, Cialis and Alimta, are subject to patent assignments or licenses granted to us by others.
The compound patent for Cialis is the subject of a license agreement with GlaxoSmithKline (Glaxo), which assigns to us exclusively all rights in the compound. The agreement calls for royalties of a single-digit percentage of net sales. The agreement is not subject to termination by Glaxo for any reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period.
The compound patent for Alimta is the subject of a license agreement with Princeton University, granting us an irrevocable exclusive worldwide license to the compound patents for the lives of the patents in the respective territories. The agreement calls for royalties of a single-digit percentage of net sales. The agreement is not subject to termination by Princeton for any reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period. Alimta is also the subject of a worldwide, nonexclusive license to certain compound and process patents owned by Takeda Pharmaceutical Company Limited. The agreement calls for royalties of a single-digit percentage of net sales in countries covered by a relevant patent. The agreement is subject to termination for material default and failure to cure by Lilly and in the event that Lilly becomes bankrupt or insolvent.
Patent Challenges
In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, made a complex set of changes to both patent and new-drug-approval laws for human pharmaceuticals. Before the Hatch-Waxman Act, no drug could be approved without providing the FDA complete safety and efficacy studies, i.e., a complete New Drug Application (NDA). The Hatch-Waxman Act authorizes the FDA to approve generic versions of innovative human pharmaceuticals (other than biologics) without such information by filing an Abbreviated New Drug Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only “bioequivalence” between the generic version and the NDA-approved drug—not safety and efficacy.

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Absent a patent challenge, the FDA cannot approve an ANDA until after the innovator’s patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA alleging that one or more of the patents listed in the innovator’s NDA are invalid or not infringed. This allegation is commonly known as a “Paragraph IV certification.” The innovator must then file suit against the generic manufacturer to protect its patents. The FDA is then prohibited from approving the generic company’s application for a 30- to 42-month period (which can be shortened or extended by the trial court judge hearing the patent challenge). If one or more of the NDA-listed patents are challenged, the first filer(s) of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers.
Generic manufacturers use Paragraph IV certifications extensively to challenge patents on a wide array of innovative human pharmaceuticals. In addition, generic companies have shown an increasing willingness to launch “at risk,” i.e., after receiving ANDA approval but before final resolution of their patent challenge. We are currently in litigation with numerous generic manufacturers arising from their Paragraph IV certifications on Alimta. For more information on this litigation, see Item 8, “Financial Statements and Supplementary Data —Note 15, Contingencies.”
Outside the United States, the legal doctrines and processes by which pharmaceutical patents can be challenged vary widely. In recent years, we have experienced an increase in patent challenges from generic manufacturers in many countries outside the U.S., and we expect this trend to continue. For more information on challenges to our Alimta patent protection in Europe, see Item 8, “Financial Statements and Supplementary Data—Note 15, Contingencies.”
Government Regulation
Regulation of Our Operations
Our operations are regulated extensively by numerous national, state, and local agencies. The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals is extremely costly and can significantly delay product introductions. Promotion, marketing, manufacturing, and distribution of human pharmaceutical and animal health products are extensively regulated in all major world markets. We are required to conduct extensive post-marketing surveillance of the safety of the products we sell. In addition, our operations are subject to complex federal, state, local, and foreign laws and regulations concerning the environment, occupational health and safety, and privacy. Animal health product regulations address the administration of the product in or on the animal, and in the case of food animal products, the impact on humans who consume the food as well as the impact on the environment at the production site. The laws and regulations affecting the manufacture and sale of current products and the discovery, development, and introduction of new products will continue to require substantial effort, expense, and capital investment.
Of particular importance is the FDA in the United States. Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over all of our human pharmaceutical products and certain animal health products in the U.S. and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, advertising, dissemination of information, and post-marketing surveillance of those products. The U.S. Department of Agriculture (USDA) and the U.S. Environmental Protection Agency also regulate some animal health products.
The FDA extensively regulates all aspects of manufacturing quality for human pharmaceuticals under its current Good Manufacturing Practices (cGMP) regulations. We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems in our manufacturing, product development, and process development operations to ensure sustained cGMP compliance. However, in the event we fail to adhere to cGMP requirements in the future, we could be subject to interruptions in production, fines and penalties, and delays in new product approvals.
Outside the U.S., our products and operations are subject to similar regulatory requirements, notably by the European Medicines Agency (EMA) in the EU and the Ministry of Health, Labor and Welfare (MHLW) in Japan. Specific regulatory requirements vary from country to country.
The marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers and prescribers, are subject to various other U.S. federal and state laws, including the federal anti-kickback statute and the False Claims Act and state laws governing

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kickbacks, false claims, unfair trade practices, and consumer protection. These laws are administered by, among others, the Department of Justice (DOJ), the Office of Inspector General of the Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel Management, and state attorneys general. Over the past several years, the FDA, the DOJ, and many of these other agencies have increased their enforcement activities with respect to pharmaceutical companies and increased the inter-agency coordination of enforcement activities. Over this period, several claims brought by these agencies against Lilly and other companies under these and other laws have resulted in corporate criminal sanctions and very substantial civil settlements. See Item 3, “Legal Proceedings,” for information regarding a Corporate Integrity Agreement entered into by Lilly in connection with the resolution of a U.S. federal marketing practices investigation and certain related state investigations involving Zyprexa.
The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits certain individuals and entities, including U.S. publicly traded companies, from promising, offering, or giving anything of value to foreign officials with the corrupt intent of influencing the foreign official for the purpose of helping the company obtain or retain business or gain any improper advantage. The FCPA also imposes specific recordkeeping and internal controls requirements on U.S. publicly traded companies. As noted above, outside the U.S., our business is heavily regulated and therefore involves significant interaction with foreign officials. Additionally, in many countries outside the U.S., the health care providers who prescribe human pharmaceuticals are employed by the government and the purchasers of human pharmaceuticals are government entities; therefore, our interactions with these prescribers and purchasers are subject to regulation under the FCPA. Recently the SEC and the DOJ have increased their FCPA enforcement activities with respect to pharmaceutical companies. See Item 3, “Legal Proceedings,” for information about a SEC/DOJ investigation involving our operations in several countries.
In addition to the U.S. application and enforcement of the FCPA, the various jurisdictions in which we operate and supply our products have laws and regulations aimed at preventing and penalizing corrupt and anticompetitive behavior. In recent years, several jurisdictions have enhanced their laws and regulations in this area, increased their enforcement activities, and increased the level of cross-border coordination and information sharing.
It is possible that we could become subject to additional administrative and legal proceedings and actions, which could include claims for civil penalties (including treble damages under the False Claims Act), criminal sanctions, and administrative remedies, including exclusion from U.S. federal health care programs. It is possible that an adverse outcome in future actions could have a material adverse impact on our consolidated results of operations, liquidity, and financial position.
Regulations Affecting Human Pharmaceutical Pricing, Reimbursement, and Access
In the United States, we are required to provide rebates to state governments on their purchases of our human pharmaceuticals under state Medicaid programs and to private payers who cover patients in certain types of health care facilities that serve low-income and uninsured patients (known as 340B facilities). We also give rebates to private payers who provide prescription drug benefits to seniors covered by Medicare. Additional cost-containment measures have been adopted or proposed by federal, state, and local government entities that provide or pay for health care. In most international markets, we operate in an environment of government-mandated cost-containment programs, which may include price controls, reference pricing, discounts and rebates, restrictions on physician prescription levels, restrictions on reimbursement, compulsory licenses, health economic assessments, and generic substitution.
The 2010 enactment of the Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act brought significant changes to U.S. health care. The minimum statutory rebate for branded prescription drugs sold to Medicaid beneficiaries increased from 15.1 percent to 23.1 percent. This rebate has been expanded to managed-Medicaid, a program that provides for the delivery of Medicaid benefits via managed care organizations, under arrangements between those organizations and state Medicaid agencies. Additionally, a prescription drug discount program for outpatient drugs in 340B facilities has been expanded. Drug manufacturers are required to provide a discount of 50 percent of the cost of branded prescription drugs for Medicare Part D participants who are in the “doughnut hole” (the coverage gap in Medicare prescription drug coverage). Additionally, an annual fee is imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs. See Item 7, “Management’s Discussion and Analysis—Executive Overview—Legal, Regulatory, and Other Matters,” for more discussion of U.S. health

11



care reform. At the state level, budget pressures are causing various states to impose cost-control measures such as higher rebates and more restrictive formularies.
International operations are also generally subject to extensive price and market regulations, and there are many proposals for additional cost-containment measures, including proposals that would directly or indirectly impose additional price controls, limit access to or reimbursement for our products, or reduce the value of our intellectual property protection. Recently, several governments have implemented across-the-board price cuts of branded human pharmaceuticals as part of austerity measures in the face of the global financial crisis and severe national budget deficits.
We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, in general we expect that state, federal, and international legislative and regulatory developments could negatively affect our pricing and rebates.
Research and Development
Our commitment to research and development dates back more than 100 years. Our research and development activities are responsible for the discovery and development of most of the products we offer today. We invest heavily in research and development because we believe it is critical to our long-term competitiveness. At the end of 2012, we employed approximately 7,700 people in pharmaceutical and animal health research and development activities, including a substantial number of physicians, scientists holding graduate or postgraduate degrees, and highly skilled technical personnel. Our research and development expenses were $5.28 billion in 2012, $5.02 billion in 2011, and $4.88 billion in 2010.
Our human pharmaceutical research and development focuses on five therapeutic categories: cancer; endocrine diseases, including diabetes and musculoskeletal disorders; central nervous system and related diseases; autoimmune diseases; and cardiovascular diseases. However, we remain opportunistic, selectively pursuing promising leads in other therapeutic areas. We are also investing in molecules with multi-pathway pharmacological efficacy to expand the potential of our therapeutic portfolio. We have a strong biotechnology research program, with approximately half of our clinical-stage pipeline, and more than half of our late-stage pipeline, currently consisting of biotechnology molecules. In addition to discovering and developing new molecular entities, we seek to expand the value of existing products through new uses, formulations, and therapeutic approaches that provide additional value to patients. Across all our therapeutic areas, we are increasingly focusing our efforts on tailored therapeutics, seeking to identify and use advanced diagnostic tools and other information to identify specific subgroups of patients for whom our medicines—or those of other companies—will be the best treatment option.
To supplement our internal efforts, we collaborate with others, including educational institutions and research-based pharmaceutical and biotechnology companies. We use the services of physicians, hospitals, medical schools, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of our human pharmaceutical products. We actively seek out investments in external research and technologies that hold the promise to complement and strengthen our own research efforts. These investments can take many forms, including licensing arrangements, co-development and co-marketing agreements, co-promotion arrangements, joint ventures, and acquisitions.
Our Elanco animal health innovation strategy is focused on identifying and developing promising technologies and potential products from internal and external sources to meet unmet veterinary needs. Our animal health scientists leverage discoveries from our human health laboratories to develop products to enhance the health and wellbeing of livestock and pets.

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Human pharmaceutical development is time-consuming, expensive, and risky. On average, only one out of many thousands of molecules discovered by researchers ultimately becomes an approved medicine. The process from discovery to regulatory approval can take 12 to 15 years or longer. Drug candidates can fail at any stage of the process, and even late-stage drug candidates sometimes fail to receive regulatory approval or achieve commercial success. After approval and launch of a product, we expend considerable resources on post-marketing surveillance and clinical studies to collect and understand the benefits and potential risks of medicines as they are used as therapeutics. The following describes the new drug research and development process in more detail:
Phases of New Drug Development
Discovery Research Phase
The earliest phase of new drug research and development, the discovery phase, can take many years. Scientists identify, design, and synthesize promising molecules, screening tens of thousands of molecules for their effect on biological “targets” that appear to play an important role in one or more diseases. Targets can be part of the body, such as a protein, receptor, or gene; or foreign, such as a virus or bacteria. Some targets have been proven to affect disease processes, but often the target is unproven and may later prove to be irrelevant to the disease. Molecules that have the desired effect on the target and meet other design criteria become “lead” molecules and go on to the next phase of development. The probability of any one such lead molecule completing the rest of the drug development process and becoming a product is extremely low.
Early Development Phase
The early development phase involves refining lead molecules, understanding how to manufacture them efficiently, and completing initial testing for safety and efficacy. Safety testing is done first in laboratory tests and animals, to identify toxicity and other potential safety issues that would preclude use in humans. The first human tests (often referred to as Phase I) are normally conducted in small groups of healthy volunteers to assess safety and find the potential dosing range. After a safe dose has been established, the drug is administered to small populations of patients (Phase II) to look for initial signs of efficacy in treating the targeted disease and to continue to assess safety. In parallel, scientists work to identify safe, effective, and economical manufacturing processes. Long-term animal studies continue to test for potential safety issues. Of the molecules that enter the early development phase, typically less than 10 percent move on to the product phase. The early development phase normally takes several years to complete.
Product Phase
Product phase (Phase III) molecules have already demonstrated safety and, typically, shown initial evidence of efficacy. As a result, these molecules generally have a higher likelihood of success. The molecules are tested in much larger patient populations to demonstrate efficacy to a predetermined level of statistical significance and to continue to develop the safety profile. These trials are generally global in nature and are designed to generate the data necessary to submit the molecule to regulatory agencies for marketing approval. The potential new drug is generally compared with existing competitive therapies, placebo, or both. The resulting data is compiled and submitted to regulatory agencies around the world. Phase III testing varies by disease state, but can often last from three to four years.
Submission Phase
Once a molecule is submitted, the time to final marketing approval can vary from six months to several years, depending on variables such as the disease state, the strength and complexity of the data presented, the novelty of the target or compound, and the time required for the agency(ies) to evaluate the submission. There is no guarantee that a potential medicine will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.
We believe our investments in research, both internally and in collaboration with others, have been rewarded by the large number of new molecules and new indications for existing molecules that we have in all stages of development. We currently have approximately 60 drug candidates across all stages of human testing and a larger number of projects in preclinical development. Among our new investigational molecules in the product

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phase of development or awaiting regulatory approval are potential therapies for diabetes, various cancers, Alzheimer’s disease, high-risk vascular disease, rheumatoid arthritis, lupus, psoriasis, depression, and exocrine pancreatic insufficiency. We are studying many other drug candidates in the earlier stages of development, including molecules targeting various cancers, diabetes, Alzheimer’s disease, depression, migraine, anemia, cardiovascular disease, musculoskeletal disorders, renal diseases, osteoarthritis pain, and bipolar disorder. We are also developing new uses, formulations, or delivery methods for many of these molecules as well as several currently marketed products, including Alimta, Axiron, Cialis, Effient, Erbitux, and Humalog.
Raw Materials and Product Supply
Most of the principal materials we use in our manufacturing operations are available from more than one source. However, we obtain certain raw materials principally from only one source. In the event one of these suppliers was unable to provide the materials or product, we generally have sufficient inventory to supply the market until an alternative source of supply can be implemented. However, in the event of an extended failure of a supplier, it is possible that we could experience an interruption in supply until we established new sources or, in some cases, implemented alternative processes.
Our active ingredient manufacturing occurs at four owned sites in the U.S. as well as owned sites in Ireland, Puerto Rico, and the United Kingdom. Finishing operations, including formulation, filling, assembling, and packaging, take place at a number of sites throughout the world. In 2010, we sold our Tippecanoe Laboratories manufacturing site in West Lafayette, Indiana, to an affiliate of Evonik Industries AG, and entered into a nine-year supply and services agreement whereby Evonik manufactures final and intermediate-step active pharmaceutical ingredients for certain Lilly human pharmaceutical and animal health products.
We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way that should allow us to meet all expected product demand while maintaining flexibility to reallocate manufacturing capacity to improve efficiency and respond to changes in supply and demand. 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 extended plant shutdowns at one of our own facilities, extended failure of a contract supplier, or extraordinary unplanned increases in demand, we could experience an interruption in supply of certain products or product shortages until production could be resumed or expanded.
Quality Assurance
Our success depends in great measure upon customer confidence in the quality of our products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of our operations, including research and development, purchasing, facilities planning, manufacturing, distribution, and dissemination of information about our medicines.
Quality of production processes involves strict control of ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. We perform tests at various stages of production processes and on the final product to assure that the product meets all regulatory requirements and Lilly standards. These tests may involve chemical and physical chemical analyses, microbiological testing, testing in animals, or a combination. Additional assurance of quality is provided by a corporate quality-assurance group that audits and monitors all aspects of quality related to human pharmaceutical and animal health manufacturing procedures and systems in the parent company, subsidiaries and affiliates, and third-party suppliers.
Executive Officers of the Company
The following table sets forth certain information regarding our executive officers. Except as otherwise noted, all executive officers have been employed by the company in management or executive positions during the last five years.
The term of office for each executive officer expires on the date of the annual meeting of the Board of Directors, to be held on May 6, 2013, 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

14



that term is defined for purposes of this disclosure requirement. There is no understanding between any executive officer and any other person pursuant to which the executive officer was selected.
 
Name
Age
Offices and Business Experience
John C. Lechleiter, Ph.D.
59
Chairman (since January 2009), President (since October 2005), Chief Executive Officer (since April 2008), and a Director (since October 2005)
Robert A. Armitage
64
Senior Vice President and General Counsel (since January 2003) (retired December 2012)
Melissa S. Barnes
44
Senior Vice President, Enterprise Risk Management and Chief Ethics and Compliance Officer (since January 2013)
Enrique A. Conterno
46
Senior Vice President and President, Lilly Diabetes (since November 2009)
Maria A. Crowe
53
President, Manufacturing Operations (since January 2012)
Stephen F. Fry
47
Senior Vice President, Human Resources and Diversity (since February 2011)
Michael J. Harrington
50
Senior Vice President and General Counsel (since January 2013)
Jan M. Lundberg, Ph.D.
59
Executive Vice President, Science and Technology, and President, Lilly Research Laboratories (since January 2010). From 2002 until he joined Lilly in January 2010, Dr. Lundberg was executive vice president and head of discovery research at AstraZeneca.
Susan Mahony, Ph.D.
48
Senior Vice President and President, Lilly Oncology (since February 2011)
Anne Nobles
56
Senior Vice President, Enterprise Risk Management (since April 2009) and Chief Ethics and Compliance Officer (since June 2007) (retired December 2012)
Barton R. Peterson
54
Senior Vice President, Corporate Affairs and Communications (since June 2009). Mr. Peterson served as mayor of Indianapolis, Indiana from 2000 to 2007. From 2008 to 2009, he was managing director at Strategic Capital Partners, LLC, and distinguished visiting professor of public policy at Ball State University.
Derica W. Rice
48
Executive Vice President, Global Services (since January 2010) and Chief Financial Officer (since May 2006)
David A. Ricks
45
Senior Vice President and President, Lilly Bio-Medicines (since January 2012)
Jeffrey N. Simmons
45
Senior Vice President and President, Elanco Animal Health (since January 2008)
Jacques Tapiero
54
Senior Vice President and President, Emerging Markets (since January 2010)
Fionnuala M. Walsh
53
Senior Vice President, Global Quality (since July 2007)
Employees
At the end of 2012, we employed approximately 38,350 people, including approximately 21,200 employees outside the United States. A substantial number of our employees have long records of continuous service.
Financial Information Relating to Business Segments and Classes of Products
You can find financial information relating to our business segments and classes of products in Item 8, "Financial Statements and Supplementary Data—Segment Information." That information is incorporated here by reference.
The relative contribution of any particular product to our consolidated revenue changes from year to year. This is due to several factors, including the introduction of new products by us and by other manufacturers and the introduction of generic pharmaceuticals upon patent expirations. Our major product revenues are generally not seasonal.
Financial Information Relating to Foreign and Domestic Operations
You can find financial information relating to foreign and domestic operations in Item 8, “Financial Statements and Supplementary Data—Segment Information.” That information is incorporated here by reference. To date, our overall operations abroad have not been significantly deterred by local restrictions on the transfer of funds from branches and subsidiaries located abroad, including the availability of U.S. dollar exchange. We cannot predict what effect these restrictions or the other risks inherent in foreign operations, including possible nationalization, might have on our future operations or what other restrictions may be imposed in the

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future. In addition, changing currency values can either favorably or unfavorably affect our financial position, liquidity, and results of operations. We mitigate foreign exchange risk through various hedging techniques including the use of foreign currency contracts.
Available Information on Our Website
We make available through our company 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 company website link to our SEC filings is http://investor.lilly.com/sec.cfm.
In addition, the Corporate Governance portion of our website includes our corporate governance guidelines, board and committee information (including committee charters), and our articles of incorporation and by-laws. The link to our corporate governance information is http://investor.lilly.com/governance.cfm.
We will provide paper copies of our SEC filings free of charge upon request to the company’s secretary at the address listed on the front of this Form 10-K.
Item 1A.
Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our company. It is possible that our business, financial condition, liquidity, or results of operations could be materially adversely affected by any of these risks.
Pharmaceutical research and development is very costly and highly uncertain; we may not succeed in developing or acquiring commercially successful products to replace revenues of products losing patent protection. There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market typically takes a decade or more and often costs well in excess of $1 billion. Failure can occur at any point in the process, including late in the process after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals and payer reimbursement, limited scope of approved uses, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies are establishing increasingly high hurdles of efficacy and safety for new product approvals; delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict sales growth rates of new products.
We face intense competition from multinational pharmaceutical companies, biotechnology companies, and lower-cost generic manufacturers.  We compete with a large number of multinational pharmaceutical companies, biotechnology companies, and generic pharmaceutical companies. To compete successfully, we must continue to deliver to the market innovative, cost-effective products that meet important medical needs. Our product revenues can be adversely affected by the introduction by competitors of branded products that are perceived as superior by the marketplace, by generic versions of our branded products, and by generic versions of other products in the same therapeutic class as our branded products. See Item 1, “Business—Competition,” for more details.
Our long-term success depends on intellectual property protection; if our intellectual property rights are invalidated or circumvented, our business will be adversely affected. Our long-term success depends on our ability to continually discover, develop, and commercialize innovative new pharmaceutical products. Without strong intellectual property protection, we would be unable to generate the returns necessary to support the enormous investments in research and development and capital as well as other expenditures required to bring new drugs to the market.
Intellectual property protection varies throughout the world and is subject to change over time. In the U.S., the Hatch-Waxman Act provides generic companies powerful incentives to seek to invalidate our

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human pharmaceutical patents; as a result, we expect that our U.S. patents on major pharmaceutical products will be routinely challenged, and there can be no assurance that our patents will be upheld. See Item 1, “Business—Patents, Trademarks, and Other Intellectual Property Rights,” for more details. We face generic manufacturer challenges to our patents outside the U.S. as well. In addition, competitors or other third parties may claim that our activities infringe patents or other intellectual property rights held by them. If successful, such claims could result in our being unable to market a product in a particular territory or being required to pay damages for past infringement or royalties on future sales. See Item 1, “Business—Patents, Trademarks, and Other Intellectual Property Rights,” for more details.
We depend on patent-protected products for most of our revenues, cash flows, and earnings, and we will lose effective intellectual property protection for many of them in the next several years. Seven significant patent-protected products, which together composed 68 percent of our worldwide revenue in 2012, recently have lost, or will lose in the next several years, their most significant remaining U.S. patent protection and data-based protection, as well as their intellectual property-based exclusivity in most countries outside the United States:
Product
Worldwide Revenues
(2012)
Percent of Total 2012
Revenues
Loss of Relevant U.S. Exclusivity
Cymbalta
$4.99 billion
22
December 2013 (compound patent plus pediatric exclusivity)
Alimta
$2.59 billion
11
2017 (compound patent plus pediatric exclusivity); 2022 (vitamin dosage regimen patent plus pediatric exclusivity)
Humalog
$2.40 billion
11
May 2013
Cialis
$1.93 billion
9
2017
Zyprexa
$1.70 billion
8
2011
Evista
$1.01 billion
4
March 2014
Strattera
$621.4 million
3
2017
Outside the U.S., important patent or data package protection includes Cymbalta in major European countries (data package protection until August 2014); Alimta in major European countries (compound patent 2015; vitamin dosage regimen patent 2021); Cialis in major European countries (compound patent 2017); and Zyprexa in Japan (compound patent 2015).
Loss of exclusivity, whether by expiration or as a consequence of litigation, typically results in a rapid and severe decline in sales. See Item 7, “Management’s Discussion and Analysis—Financial Condition,” and Item 1, “Business—Patents, Trademarks, and Other Intellectual Property Rights,” for more details.
Our human pharmaceutical business is subject to increasing government price controls and other restrictions on pricing, reimbursement, and access for our drugs. Globally, governments are becoming increasingly aggressive in imposing health care cost-containment measures in response to budget deficit challenges. These measures can significantly affect our revenue and profitability. In many countries outside the U.S., government agencies strictly control, directly or indirectly, pricing, reimbursement, and patient access to our human pharmaceuticals. In the U.S., we are subject to substantial pricing, reimbursement, and access pressures from state Medicaid programs and private insurance programs and pharmacy benefit managers, including those operating under the Medicare Part D pharmaceutical benefit, and implementation of U.S. health care reform legislation is increasing these pricing pressures. In addition, many state legislative proposals would further negatively affect our pricing and reimbursement for, or access to, our products. Globally, public and private payers are increasingly restricting access to human pharmaceuticals based on the payers' assessments of comparative effectiveness and value. We expect pricing, reimbursement, and access pressures from both governments and private payers inside and outside the U.S. to become more severe. See Item I, “Business—Regulations Affecting Pharmaceutical Pricing, Reimbursement, and Access,” for more details.

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Pharmaceutical products can develop unexpected safety or efficacy concerns. Unexpected safety or efficacy concerns can arise with respect to marketed products, leading to product recalls, withdrawals, or declining revenue, as well as costly product liability claims.
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 Lilly, have been subject to claims related to these practices asserted by federal, state and foreign governmental authorities, private payers, and consumers. These claims have resulted in substantial expense and other significant consequences to us. It is possible that we could become subject to such investigations and that the outcome could include criminal charges and fines, penalties, or other monetary or nonmonetary remedies, including exclusion from U.S. federal health care programs. In addition, regulatory issues concerning compliance with current Good Manufacturing Practice (cGMP) regulations for pharmaceutical products can lead to product recalls and seizures, interruption of production leading to product shortages, and delays in the approvals of new products pending resolution of the cGMP issues. We are now operating under a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services that requires us to maintain comprehensive compliance programs governing our research, manufacturing, and sales and marketing of pharmaceuticals. A material failure to comply with the agreement could result in severe sanctions to the company. See Item 1, “Business—Regulation of our Operations,” for more details.
We face many product liability claims and are largely self-insured; we could face large numbers of claims in the future, which could adversely affect our business. We are subject to a substantial number of product liability claims involving primarily Byetta, Zyprexa, diethylstilbestrol (DES), Darvon®, and Prozac. See Item 8, “Financial Statements and Supplementary Data—Note 15, Contingencies,” and Item 3, “Legal Proceedings,” for more information on our current product liability litigation. Because of the nature of pharmaceutical products, it is possible that we could become subject to large numbers of product liability claims for these or other products in the future, which could require substantial expenditures to resolve and, if involving marketed products, could adversely affect sales of the product. Due to a very restrictive market for product liability insurance, we have been and will continue to be largely self-insured for product liability losses for substantially all our currently marketed products. In addition, there is no assurance that we will be able to fully collect from our insurance carriers on past claims.
Manufacturing difficulties or disruptions could lead to product supply problems. Pharmaceutical manufacturing is complex and highly regulated. Manufacturing difficulties at our facilities or contracted facilities, or the failure or refusal of a contract manufacturer to supply contracted quantities, could result in product shortages, leading to lost revenue. Such difficulties or disruptions could result from quality or regulatory compliance problems, natural disasters, or inability to obtain sole-source raw or intermediate materials. See Item 1, “Business—Raw Materials and Product Supply,” for more details.
Worsening economic conditions could adversely affect our business and operating results. While pharmaceuticals have not generally been sensitive to overall economic cycles, prolonged economic slowdowns could lead to decreased utilization of drugs, affecting our sales volume. Declining tax revenues attributable to economic downturns increase the pressure on governments to reduce health care spending, leading to increasing government efforts to control drug prices and utilization. Additionally, some customers, including governments or other entities reliant upon government funding, may be unable to pay in a timely manner for our products. We have experienced delays in repayment from national health care systems in certain countries, including but not limited to Greece and regions within Spain and Italy. The ongoing euro area financial crisis has heightened our sensitivity to such trends, and we continue to monitor the countries’ and regions’ creditworthiness. A prolonged economic downturn could also adversely affect our investment portfolio, which could lead to the recognition of losses on our corporate investments and increased benefit expense related to our pension obligations. 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.
We are increasingly dependent on information technology systems and infrastructure; system inadequacies, operating failures, or security breaches could harm our business. We rely to a large

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extent on sophisticated information technology systems and infrastructure. The size and complexity of these systems make them potentially vulnerable to breakdown, malicious intrusion, and random attack. Likewise, confidentiality or data privacy breaches by employees or others with permitted access to our systems may pose a risk that valuable trade secrets, personal information, or other sensitive data may be exposed to unauthorized persons or to the public. Such information security breaches may be very difficult to detect. To date, system breakdowns and, to the extent we have been made aware of them, security breaches, have been infrequent in occurrence and their aggregate impact on our operations and expenses has not been material. While we have invested heavily in the protection of data and information technology, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely and materially affect our business.
Reliance on third-party relationships and outsourcing arrangements could adversely affect our business. We utilize third parties, including suppliers, alliances with other pharmaceutical and biotechnology companies, and third-party service providers, for selected aspects of product development, the manufacture and commercialization of certain products, support for information technology systems, and certain financial transactional processes. Failure of these third parties to meet their contractual, regulatory, or other obligations to us could adversely affect our business.
Unanticipated changes in our tax rates or exposure to additional tax liabilities could increase our income taxes and decrease our net income. Changes in tax laws, including laws related to the remittance of foreign earnings or investments in foreign countries with favorable tax rates, and settlements of federal, state, and foreign tax audits, can affect our results of operations. The Obama administration has proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies. There have also been tax proposals under discussion or introduced in the U.S. Congress that could change the manner in and rate at which income of U.S. companies would be taxed. While it is uncertain how the U.S. Congress may address U.S. tax policy matters in the future, reform of U.S. taxation, including taxation of international income, will continue to be a topic of discussion for the U.S. Congress and the Obama administration. A significant change to the U.S. tax system, including changes to the taxation of international income, could have a material adverse effect on our results of operations.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2012, we owned 13 production and distribution sites in the U.S. and Puerto Rico. Together with the corporate administrative offices, these facilities contain an aggregate of approximately 10.0 million square feet of floor area dedicated to production, distribution, and administration. Major production sites include Indianapolis and Clinton, Indiana; Carolina, Puerto Rico; and Branchburg, New Jersey.
We own production and distribution sites in 11 countries outside the U.S. and Puerto Rico, containing an aggregate of approximately 3.4 million square feet of floor area. Major production sites include facilities in France, the United Kingdom, Spain, Ireland, Italy, Mexico, and Brazil.
In the U.S., our research and development facilities contain an aggregate of approximately 3.8 million square feet of floor area, primarily consisting of owned facilities located in Indianapolis. We also lease smaller sites in San Diego and New York City. Outside the U.S., we own smaller research and development facilities in the United Kingdom, Canada, and Spain, and lease smaller sites in China.
We believe that none of our properties is subject to any encumbrance, easement, or other restriction that would detract materially from its value or impair its use in the operation of the business. The buildings we own are of varying ages and in good condition.

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Item 3.
Legal Proceedings
We are a party to various currently pending legal actions, government investigations, and environmental proceedings, and we anticipate that such actions could be brought against us in the future. The most significant of these matters are described below or, as noted, in Item 8, "Financial Statements and Supplementary Data—Note 15, Contingencies." While it is not possible to determine the outcome of the legal actions, investigations and proceedings brought against us, we believe that, except as otherwise specifically noted in Item 8—Note 15, the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could be material to our consolidated results of operations in any one accounting period.
Legal Proceedings Described in Note 15 to the Consolidated Financial Statements
See Item 8, "Financial Statements and Supplementary Data—Note 15, Contingencies," for information on various legal proceedings, including but not limited to:
The U.S. patent litigation involving Alimta
The U.S. product liability litigation involving Byetta, DES, and Zyprexa.
That information is incorporated into this Item by reference.
Other Product Liability Litigation
We are currently a defendant in a variety of other product liability lawsuits in the U.S. involving primarily Prozac, Darvon, Actos®, and Cymbalta.
We have been named as a defendant in seven U.S. lawsuits involving claimants alleging that the antidepressant Prozac caused or contributed to birth defects in the children of women who ingested the drug during pregnancy. We are aware of approximately 340 additional claims related to birth defects, which have not yet been filed. We believe these claims are without merit and are prepared to defend against them vigorously.
Along with several other manufacturers, we have been named as a defendant in approximately 125 cases in the U.S. involving approximately 1,890 claimants related to the analgesic Darvon and related formulations of propoxyphene. These cases generally allege various cardiac injuries. Almost all of these cases have been consolidated in a federal multi-district litigation in the Eastern District of Kentucky or are pending in state and federal courts in California. Two lawsuits have been filed as putative class actions in the U.S. District Court for the Eastern District of Louisiana (Ballard, et al. v. Eli Lilly and Company et al. and Lewis v. Eli Lilly and Company and Xanodyne Pharmaceuticals, Inc.) against Lilly and other manufacturers seeking to assert product liability claims on behalf of U.S. residents who ingested propoxyphene pain products and allegedly sustained personal injuries. In Lewis, Lilly was voluntarily dismissed with prejudice and the dismissal cannot be appealed. In Ballard, Lilly was dismissed with prejudice following a dispositive motion; however, the case remains open as other defendants have not been dismissed and there is currently no final appealable order. We transferred the U.S. regulatory approvals and all marketing rights to our propoxyphene products in 2002 to AAi Pharma, which subsequently transferred all such approvals and marketing rights to Xanodyne Pharmaceuticals, Inc. We believe these claims are without merit and are prepared to defend against them vigorously.
We have been named along with Takeda Chemical Industries, Ltd., and Takeda affiliates as a defendant in product liability cases in the U.S. related to the diabetes medication Actos, which we co-promoted with Takeda in the U.S. from 1999 until September 2006. In addition, we have been named along with Takeda as a defendant in four purported product liability class actions in Canada related to Actos, including two in Ontario (Casseres et al. v. Takeda Pharmaceutical North America, Inc., et al. and Brewer et al. v. Takeda Canada et al.), one in Quebec (Whyte et al. v. Eli Lilly et al.), and one in Alberta (Epp v. Takeda Canada et al.). We have also been named along with Takeda in an individual action for damages in Ontario, Canada (Antonacci v. Takeda Pharmaceutical Company Ltd, et al.). We promoted Actos in Canada until 2009. In general, plaintiffs in these actions allege that Actos caused or contributed to their bladder cancer. Under our agreement with Takeda, we will be indemnified by Takeda for our losses and expenses with respect to the U.S. litigation and

20



we will indemnify Takeda for their losses and expenses with respect to the Canadian litigation. We believe these claims are without merit and are prepared to defend against them vigorously.
In October 2012, we were named as a defendant in a purported class-action lawsuit in the U.S. District Court for the Central District of California (Saavedra et al v. Eli Lilly and Company) involving Cymbalta. The plaintiffs assert claims under the consumer protection statutes of four states and seek declaratory, injunctive, and monetary relief for various alleged injuries arising from discontinuing treatment with Cymbalta. The plaintiffs purport to represent a class of all persons within the U.S. who purchased and/or paid for Cymbalta. We believe these claims are without merit and are prepared to defend against them vigorously.
Marketing Practices Investigations
In August 2003, we received notice that the staff of the SEC was conducting an investigation into the compliance by Lilly's Polish subsidiary with the FCPA. Subsequently, we were notified that the SEC had expanded its investigation to other countries and that the DOJ was conducting a parallel investigation. In December 2012, we announced that we had reached an agreement with the SEC to settle its investigation. The settlement relates to certain activities of Lilly subsidiaries in Brazil, China, Poland, and Russia from 1994 through 2009. Without admitting or denying the allegations, we consented to pay a civil settlement amount of $29.4 million and agreed to have an independent compliance consultant conduct a 60-day review of our internal controls and compliance program related to the FCPA. Our understanding is that the DOJ investigation remains open.
In November 2008, we received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General in coordination with the U.S. Attorney for the Western District of New York seeking production of a wide range of documents and information relating to reimbursement of Alimta. We are cooperating in this investigation.
In January 2009, as part of the resolution of a government investigation related to our U.S. marketing and promotional practices with respect to Zyprexa, we entered into a Corporate Integrity Agreement with the U.S. Department of Health and Human Services Office of Inspector General which requires us to maintain our compliance program and to undertake a set of defined corporate integrity obligations for five years. The agreement also provides for an independent third-party review organization to assess and report on the company’s systems, processes, procedures, and practices related to compliance with health care laws.
In December 2010, we received a civil investigative demand from the Attorney General of Texas seeking production of a wide range of documents and information related to Actos. We are cooperating in this investigation.
Employee Litigation
We have been named as a defendant in a lawsuit filed in the U.S. District Court for the Northern District of New York (Schaefer-LaRose, et al. v. Eli Lilly and Company, filed November 14, 2006) claiming that our pharmaceutical sales representatives should have been categorized as “non-exempt” rather than “exempt” employees, and claiming that the company owes them back wages for overtime worked, as well as penalties, interest, and attorneys’ fees. The case was transferred to the U.S. District Court for the Southern District of Indiana and involves approximately 400 plaintiffs. In September 2009, the District Court granted our motion for summary judgment with regard to Ms. Schaefer-LaRose’s claims and ordered the plaintiffs to demonstrate why the entire collective action should not be decertified within 30 days. Plaintiffs filed a motion for reconsideration of the summary judgment decision and also opposed decertification, and in October 2010, the court denied plaintiffs' motion for reconsideration but decided not to decertify the collective action at that time. In May 2012, the U.S. Court of Appeals for the Seventh Circuit affirmed the District Court's summary judgment ruling. In June 2012, the Supreme Court of the United States ruled, in a case against another pharmaceutical company, that sales representatives employed by that company were exempt from the overtime requirements of the Fair Labor Standards Act. We are waiting for the district court to rule on the status of the remaining plaintiffs in the Schaefer-LaRose case. We believe this lawsuit is without merit and are prepared to defend against it vigorously.
We have been named in a lawsuit brought by the Labor Attorney for 15th Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm to employees and former employees caused by

21



exposure to heavy metals. We have also been named in approximately 50 lawsuits filed in the same court by individual former employees making similar claims. We believe these lawsuits are without merit and are prepared to defend against them vigorously.
Other Matters
In Canada, several generic companies challenged the validity of our Zyprexa patent. In September 2012, the Canadian Court of Appeals affirmed the lower court's decision that the patent was invalid for lack of utility. We are seeking leave to file a petition for review of the Court of Appeal's decision before the Supreme Court of Canada. Absent a reversal by the Supreme Court of Canada, we will be exposed to damages to the defendant generic companies arising from our market exclusivity for Zyprexa. The total amount of damages cannot be determined until after a separate damages trial, which has not yet been scheduled.
In 2004 we, along with several other pharmaceutical companies, were named in a lawsuit in California state court brought by approximately 20 California pharmacies alleging that pharmaceutical companies prevented commercial importation of prescription drugs from outside the U.S. and used Canadian pharmaceutical prices as an agreed floor for prices in the U.S. in violation of antitrust laws. The case sought restitution for alleged overpayments for human pharmaceuticals and an injunction against the allegedly violative conduct. In March 2011, the trial court granted summary judgment for us and the other defendants. In August 2012, the California Court of Appeal affirmed the trial court, and in November 2012, the Supreme Court of California denied plaintiffs' petition for review, bringing this matter to a close.
In June 2009, we received a civil investigative demand from the office of the Attorney General of Texas requesting documents related to nominal pricing of Axid®; we divested the marketing rights for Axid in 2000. We are cooperating in this matter.
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as "Superfund," we have been designated as one of several potentially responsible parties with respect to the cleanup of fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup.
We are also a defendant in other litigation and investigations, including product liability, patent, employment, and premises liability litigation, of a character we regard as normal to our business.
Item 4.
Mine Safety Disclosures
Not applicable.

22



Part II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
You can find information relating to the principal market for our common stock and related stockholder matters at Item 8, "Financial Statements and Supplementary Information—Selected Quarterly Data (unaudited)” and “Selected Financial Data (unaudited).” That information is incorporated here by reference.
The following table summarizes the activity related to repurchases of our equity securities during the fourth quarter ended December 31, 2012:
Period
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)
Approximate Dollar Value
of Shares that May Yet Be
Purchased Under the
Plans or Programs
(dollars in millions)
October 2012

$


$
419.2

November 2012
8,772

47.77

8,772


December 2012
8,146

49.09

8,146

1,100.0

Total
16,918

48.40

16,918

 
In March 2000, we announced a $3.00 billion share repurchase program. During November 2012, we completed the $3.00 billion share repurchase program with the share purchase of $419.2 million. In December 2012, we announced a $1.50 billion share repurchase program. During December 2012, we repurchased $400.0 million of shares, and, as a result, $1.10 billion remains to be purchased under this program.
Item 6.
Selected Financial Data
You can find selected financial data for each of our five most recent fiscal years in Item 8 under “Selected Financial Data (unaudited).” That information is incorporated here by reference.
Item 7.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
Executive Overview
This section provides an overview of our financial results, recent product and late-stage pipeline developments, and legal, regulatory, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data is presented on a diluted basis.

23



Financial Results
Worldwide total revenue decreased 7 percent to $22.60 billion in 2012, driven by steep sales declines for Zyprexa due to the loss of patent exclusivity in most major markets, partially offset by growth in certain other products. Net income and EPS decreased 6 percent to $4.09 billion and $3.66, respectively, in 2012 compared with net income of $4.35 billion and EPS of $3.90 in 2011. The decreases in net income and EPS were due to the loss of patent exclusivity for Zyprexa, partially offset by growth in certain other products and higher other income from the early payment of the exenatide revenue-sharing obligation from Amylin Pharmaceuticals, Inc. (Amylin). The following highlighted items affect comparisons of our 2012 and 2011 financial results:
2012
Collaborations (Note 4 to the consolidated financial statements)
We recognized income of $787.8 million (pretax), or $0.43 per share, related to the early payment of the exenatide revenue-sharing obligation following the completion of Amylin's acquisition by Bristol-Myers Squibb (BMS).
Asset Impairments, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
We recognized asset impairments, restructuring, and other special charges of $281.1 million (pretax), or $0.16 per share, consisting of an intangible asset impairment related to liprotamase, restructuring charges related to initiatives to reduce our cost structure and global workforce, charges associated with the decision to stop development of a delivery device platform, and charges related to changes in returns reserve estimates for the withdrawal of Xigris™.
2011
Collaborations (Note 4 to the consolidated financial statements)
We incurred acquired in-process research and development (IPR&D) charges associated with the diabetes collaboration with Boehringer Ingelheim of $388.0 million (pretax), or $0.23 per share.
Asset Impairments, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
We recognized charges of $316.4 million (pretax), or $0.24 per share, primarily related to severance costs from strategic actions to reduce our cost structure and global workforce.
We incurred a charge of $85.0 million (pretax), or $0.05 per share, primarily for returned product and contractual commitments related to the withdrawal of Xigris.
Late-Stage Pipeline
Our long-term success depends to a great extent on our ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development by other biotechnology or pharmaceutical companies. We currently have approximately 60 potential new drugs in human testing or under regulatory review, and a larger number of projects in preclinical research.
The following new molecular entities (NMEs) are currently in Phase III clinical trial testing for potential use in the diseases described. The quarter in which the NME initially entered Phase III for any indication is shown in parentheses:
Baricitinib (Q4 2012)—a Janus tyrosine kinase (JAK 1 and JAK 2) inhibitor for the treatment of inflammatory and autoimmune diseases (in collaboration with Incyte Corporation)
Dulaglutide* (Q4 2008)—a long-acting analog of glucagon-like peptide 1 for the treatment of type 2 diabetes
Edivoxetine (Q4 2010)—a norepinepherine reuptake inhibitor for the treatment of major depression
Empagliflozin (Q3 2010)—a sodium glucose co-transporter-2 (SGLT-2) inhibitor for the treatment of type 2 diabetes (in collaboration with Boehringer Ingelheim)

24



Enzastaurin (Q1 2006)—a serine-threonine kinase inhibitor that inhibits signaling within the protein kinase C beta (PKCß) and PI3K/AKT pathways for the treatment of diffuse large B-cell lymphoma (DLBCL)
Evacetrapib (Q4 2012)—a cholesteryl ester transfer protein (CETP) inhibitor for the treatment of high-risk vascular disease
Ixekizumab* (Q4 2011)—a neutralizing monoclonal antibody to interleukin-17A (IL-17) for the treatment of psoriasis and psoriatic arthritis
Necitumumab* (Q4 2009)—an anti-epidermal growth factor receptor (EGFR) monoclonal antibody for the treatment of squamous non-small cell lung cancer (NSCLC)
New insulin glargine product (Q3 2011)—a new insulin glargine product for the treatment of type 1 and type 2 diabetes (in collaboration with Boehringer Ingelheim)
Novel basal insulin analog* (Q4 2011)—a novel basal insulin for the treatment of type 1 and type 2 diabetes
Ramucirumab* (Q4 2009)—an anti-vascular endothelial growth factor receptor-2 (VEGFR-2) monoclonal antibody for the treatment of metastatic breast, gastric, liver, NSCLC, and colorectal cancers
Solanezumab* (Q2 2009)—an anti-amyloid beta (Aß) monoclonal antibody for the treatment of Alzheimer’s disease
Tabalumab* (Q4 2010)—an anti-B-cell activating factor (BAFF) monoclonal antibody for the treatment of systemic lupus erythematosus (lupus).
* Biologic molecule subject to the U.S. Biologics Price Competition and Innovation Act
The following NME has been submitted for regulatory review for potential use in the disease described. The quarter the NME initially was submitted for any indication is shown in parenthesis:
Liprotamase (Q1 2010)—a non-porcine pancreatic enzyme replacement therapy for the treatment of exocrine pancreatic insufficiency.
The following late-stage pipeline developments have occurred since January 1, 2012:
Baricitinib—In November 2012, we initiated Phase III clinical trial testing.
Dulaglutide—In October 2012, we announced positive top-line results of three completed Phase III AWARD trials (AWARD-1, AWARD-3, and AWARD-5) studying dulaglutide as a once-weekly treatment for type 2 diabetes. The primary efficacy endpoints, as measured by reduction in hemoglobin A1c (HbA1c) at the 1.5 mg dose, were met in all three studies. Having met the primary endpoints, superiority for HbA1c lowering was examined, and both doses of dulaglutide (0.75 mg and 1.5 mg) demonstrated statistically superior reduction in HbA1c from baseline compared to exenatide twice-daily injection at 26 weeks (AWARD-1); metformin at 26 weeks (AWARD-3); and sitagliptin at 52 weeks (AWARD-5). We anticipate filing for regulatory review in the U.S. and Europe in 2013.
Empagliflozin—In January 2013, we announced positive top-line results for four completed Phase III clinical trials studying empagliflozin for treatment of patients with type 2 diabetes. In all four studies, the primary efficacy endpoint, defined as significant change in HbA1c from baseline compared to placebo, was met with empagliflozin (10 and 25 mg) taken once daily. The pivotal studies for empagliflozin completed in 2012, and we and Boehringer Ingelheim anticipate filing for regulatory review in the U.S., Europe, and Japan in 2013.
Evacetrapib—In October 2012, we initiated Phase III clinical trial testing.
Florbetapir—On April 6, 2012, the FDA approved Amyvid (florbetapir), a radioactive diagnostic agent indicated for brain imaging of beta-amyloid plaques in patients with cognitive impairment who are being evaluated for Alzheimer's disease and other causes of cognitive decline. In June 2012, Amyvid became available to a limited number of imaging centers. In January 2013, Amyvid was also approved by the European Commission, which has the authority to approve medicines for the European Union.

25



Ixekizumab—In January 2013, we initiated Phase III clinical trial testing for ixekizumab as a potential treatment for psoriatic arthritis.
Liprotamase—We continue to engage in discussions with the FDA regarding future clinical trial requirements for liprotamase. See Note 7 to the consolidated financial statements for additional information.
Necitumumab—We will assume sole worldwide development and commercialization rights to necitumumab following notice in the fourth quarter of 2012 from BMS to terminate the collaboration for necitumumab in North America and Japan.
Novel basal insulin analog—In January 2013, we announced that we and Boehringer Ingelheim adjusted the scope of our collaboration, resulting in our reassuming the sole worldwide development and commercialization rights for the novel basal insulin analog. We also announced plans for the 2013 and 2014 initiation of the remainder of the pre-planned clinical trials for the molecule. These studies will be conducted to support regulatory submissions and evaluate safety, efficacy, and differentiation of the molecule. These studies are in addition to the five ongoing IMAGINE clinical trials.
Pomaglumetad Methionil—In August 2012, we announced the decision to stop ongoing Phase III clinical studies investigating pomaglumetad methionil for the treatment of patients suffering from schizophrenia. The decision was based on a lack of efficacy in two registration trials. The decision was not based on any safety signals.
Ramucirumab—In October 2012, we announced that the REGARD trial, a Phase III study of ramucirumab as a second-line treatment in patients with metastatic gastric cancer, met its primary endpoint of improved overall survival and its secondary endpoint of increased progression-free survival. We anticipate filing for regulatory review in the U.S. and Europe in 2013.
Solanezumab—In August 2012, we announced that the primary endpoints, both cognitive and functional, were not met in either of the two Phase III, double-blind, placebo-controlled EXPEDITION trials in patients with mild-to-moderate Alzheimer's disease. However, a pre-specified secondary analysis of pooled data across both trials showed a 34 percent reduction of cognitive decline in patients with mild Alzheimer's disease. We plan to conduct an additional Phase III study of solanezumab in patients with mild Alzheimer's disease. Enrollment is expected to begin no later than the third quarter of 2013.
Tabalumab—In February 2013, we announced our decision to discontinue the Phase III rheumatoid arthritis program for tabalumab due to lack of efficacy. The decision was not based on safety concerns. The tabalumab Phase III program for lupus is ongoing and will continue as planned.
There are many difficulties and uncertainties inherent in pharmaceutical research and development (R&D) and the introduction of new products. A high rate of failure is inherent in new drug discovery and development. The process to bring a drug from the discovery phase to regulatory approval can take 12 to 15 years or longer and cost more than $1 billion. Failure can occur at any point in the process, including late in the process after substantial investment. As a result, most research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success. Delays and uncertainties in the FDA approval process and the approval processes in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be approved and the sales growth of those products.
We manage R&D spending across our portfolio of molecules, and a delay in, or termination of, any one project will not necessarily cause a significant change in our total R&D spending. Due to the risks and uncertainties involved in the R&D process, we cannot reliably estimate the nature, timing, completion dates, and costs of the efforts necessary to complete the development of our R&D projects, nor can we reliably estimate the future potential revenue that will be generated from a successful R&D project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated R&D expense. While we do accumulate certain R&D costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total R&D costs by project, by preclinical versus clinical spend, or by therapeutic category.

26



Legal, Regulatory, and Other Matters
We will lose U.S. patent protection for Cymbalta in December 2013 and for Evista in March 2014. See "Financial Condition" for additional information.
The enactment of the Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010 brought significant changes to U.S. health care. These changes began to affect our financial results in 2010 and will continue to have significant impact on our results in the future. Beginning in 2011, pharmaceutical drug manufacturers provided a discount of 50 percent of the cost of branded prescription drugs for Medicare Part D participants who are in the "doughnut hole" (the coverage gap in Medicare prescription drug coverage). Additionally, beginning in 2011, a non-tax-deductible annual fee is imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs. This fee is allocated to companies based on their prior-calendar-year market share for branded prescription drug sales into these government programs. We recognized $170.7 million and $178.0 million as marketing, selling, and administrative expense related to this fee, for the years ended December 31, 2012 and 2011, respectively.
The continuing prominence of U.S. budget deficits as both a policy and political issue increases the risk that taxes, fees, rebates, or other federal measures that would further reduce pharmaceutical companies’ revenue or increase expenses may be enacted. Certain other federal and state health care proposals, including state price controls, continue to be debated, and could place downward pressure on pharmaceutical industry sales or prices. These federal and state proposals, or state price pressures, could have a material adverse effect on our consolidated results of operations.
International operations also are generally subject to extensive price and market regulations. Proposals for cost-containment measures are pending in a number of countries, including proposals that would directly or indirectly impose additional price controls, limit access to or reimbursement for our products, or reduce the value of our intellectual-property protection. Such proposals are expected to increase in both frequency and impact, given the pressures on national and regional health care budgets as a result of austerity measures being pursued in a number of countries.
The Obama administration has proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies. There also have been tax proposals under discussion or introduced in the U.S. Congress that could change the manner in which, and the rate at which, income of U.S. companies would be taxed. While it is uncertain how the U.S. Congress may address U.S. tax policy matters in the future, reform of U.S. taxation, including taxation of international income, will continue to be a topic of discussion for Congress and the Obama administration. A significant change to the U.S. tax system, including changes to the taxation of international income, could have a material adverse effect on our consolidated results of operations.
Operating Results—2012
Revenue
Our worldwide revenue for 2012 decreased 7 percent, to $22.60 billion, driven by the loss of patent exclusivity for Zyprexa in most major markets, partially offset by growth in Cymbalta, Forteo, Effient, Alimta, and our animal health portfolio. Worldwide sales volume decreased 7 percent and the unfavorable impact of foreign exchange rates contributed 2 percent of revenue decline, partially offset by an increase of 2 percent due to higher prices. The decrease in volume was driven by the loss of patent exclusivity for Zyprexa in most major markets, partially offset by volume gains for certain other products. Total revenue in the U.S. decreased 5 percent, to $12.31 billion, due to the loss of patent exclusivity for Zyprexa, partially offset by higher prices and increased demand for certain other products. Revenue outside the U.S. decreased 9 percent, to $10.29 billion, driven by the loss of patent exclusivity for Zyprexa in markets outside of Japan, the unfavorable effect of foreign exchange rates, and lower prices, partially offset by increased demand for certain other products.

27



The following table summarizes our revenue activity in 2012 compared with 2011:
 
Year Ended
 
Year Ended
 
 
 
December 31, 2012
 
December 31, 2011
 
Percent
Change from 
Product
U.S.(1)
 
Outside U.S.
 
Total
 
Total
2011
  
(Dollars in millions)
 
  
Cymbalta
$
3,917.8

 
$
1,076.3

 
$
4,994.1

 
$
4,161.8

 
20

Alimta
1,122.4

 
1,471.9

 
2,594.3

 
2,461.1

 
5

Humalog
1,370.9

 
1,024.6

 
2,395.5

 
2,367.6

 
1

Cialis
782.2

 
1,144.6

 
1,926.8

 
1,875.6

 
3

Zyprexa
360.4

 
1,341.0

 
1,701.4

 
4,622.0

 
(63
)
Humulin
592.1

 
647.0

 
1,239.1

 
1,248.8

 
(1
)
Forteo
488.2

 
662.8

 
1,151.0

 
949.8

 
21

Evista
699.5

 
310.6

 
1,010.1

 
1,066.9

 
(5
)
Strattera
384.1

 
237.3

 
621.4

 
620.1

 

Effient
339.0

 
118.2

 
457.2

 
302.5

 
51

Other pharmaceutical products
593.4

 
1,249.6

 
1,843.0

 
2,250.0

 
(18
)
Animal health products
1,161.8

 
874.7

 
2,036.5

 
1,678.6

 
21

Total net product sales
11,811.8

 
10,158.6

 
21,970.4

 
23,604.8

 
(7
)
Collaboration and other revenue(2)
501.3

 
131.7

 
633.0

 
681.7

 
(7
)
Total revenue
$
12,313.1

 
$
10,290.3

 
$
22,603.4

 
$
24,286.5

 
(7
)
1 
U.S. revenue includes revenue in Puerto Rico.
2 
Collaboration and other revenue consists primarily of royalties for Erbitux and revenue associated with exenatide in the United States.
Sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the U.S. for the treatment of chronic musculoskeletal pain and the management of fibromyalgia, increased 23 percent in the U.S., due to higher prices and, to a lesser extent, increased demand. Sales outside the U.S. increased 9 percent, driven by increased demand, partially offset by the unfavorable impact of foreign exchange rates. We will lose effective exclusivity for Cymbalta in the U.S. in December 2013. Several manufacturers have received tentative approvals to market generic duloxetine, and we expect generic duloxetine to be introduced in the market immediately following the loss of exclusivity. While it is difficult to predict the precise impact on Cymbalta sales, we expect the introduction of generics to result in a rapid and severe decline in our Cymbalta sales, which will have a material adverse effect on results of operations and cash flows.
Sales of Alimta, a treatment for various cancers, increased 13 percent in the U.S., driven by increased demand and higher prices. Sales outside the U.S. remained flat, as increased demand was offset by lower prices in Japan and the unfavorable impact of foreign exchange rates.
Sales of Humalog, our injectable human insulin analog for the treatment of diabetes, decreased 2 percent in the U.S., due to increased government and commercial rebates as well as the product's removal from a large formulary in 2012. Sales outside the U.S. increased 6 percent, due to increased demand, partially offset by the unfavorable impact of foreign exchange rates.
Sales of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia (BPH), increased 11 percent in the U.S., driven by increased demand and higher prices. Sales outside the U.S. decreased 2 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by increased demand and higher prices.
Sales of Zyprexa, a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance, decreased 83 percent in the United States. Sales outside the U.S. decreased 45 percent. The decreases were due to the loss of patent exclusivity in the U.S. and most major international markets outside of Japan, partially offset by growth in Japan. Zyprexa sales in Japan were approximately $585 million in 2012, compared to approximately $540 million in 2011.

28



Sales of Humulin, an injectable human insulin for the treatment of diabetes, increased 1 percent in the U.S., driven by higher prices, largely offset by decreased demand. U.S. sales of Humulin were negatively affected by the product's removal from a large formulary in 2012, as well as the continued decline in the market for human insulin and the termination of the Humulin ReliOn agreement with Walmart. Sales outside the U.S. decreased 2 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by increased volume.
Sales of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in postmenopausal women and men, increased 8 percent in the U.S., driven by higher prices, partially offset by decreased volume. Sales outside the U.S. increased 33 percent, primarily due to the increased demand in Japan.
Sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal women and for reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer, decreased 1 percent in the U.S., driven by decreased demand, largely offset by higher prices. Sales outside the U.S. decreased 14 percent, driven by decreased volume and, to a lesser extent, the unfavorable impact of foreign exchange rates.
Sales of Strattera, a treatment for attention-deficit hyperactivity disorder in children, adolescents, and in the U.S. in adults, decreased 2 percent in the U.S., due to decreased demand, partially offset by higher prices. Sales outside the U.S. increased 4 percent, driven by increased demand in Japan, partially offset by lower prices and the unfavorable impact of foreign exchange rates.
Sales of Effient, a product for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary intervention, including patients undergoing angioplasty, atherectomy, or stent placement, increased 52 percent in the U.S., driven by increased demand and, to a lesser extent, higher prices. Sales outside the U.S. increased 47 percent, due to increased demand, partially offset by the unfavorable impact of foreign exchange rates.
Animal health product sales in the U.S. increased 30 percent, primarily due to increased demand for companion animal products. Sales outside the U.S. increased 12 percent, driven primarily by the impact of the acquisition of certain Janssen animal health assets in Europe (see Note 3 to the consolidated financial statements), and the growth of other products, partially offset by the unfavorable impact of foreign exchange rates.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue decreased by 0.3 percentage points in 2012 to 78.8 percent. This decrease was primarily due to lower sales of Zyprexa and, to a lesser extent, higher miscellaneous manufacturing costs, partially offset by the impact of foreign exchange rates on international inventories sold, which decreased cost of sales in 2012 and increased cost of sales in 2011.
Marketing, selling, and administrative expenses decreased 5 percent in 2012 to $7.51 billion, driven by lower marketing expense resulting from our cost-containment efforts. Research and development expenses increased 5 percent to $5.28 billion, due to higher late-stage clinical trial costs.
No acquired IPR&D charges were incurred in 2012, compared with $388.0 million in 2011, all of which was associated with the diabetes collaboration with Boehringer Ingelheim. We recognized asset impairments, restructuring, and other special charges of $281.1 million in 2012. These charges comprised $122.6 million related to an intangible asset impairment for liprotamase, $74.5 million related to restructuring to reduce our cost structure and global workforce, $64.0 million related to the asset impairment of a product delivery device platform, and $20.0 million related to the withdrawal of Xigris. In 2011, we recognized asset impairments, restructuring, and other special charges of $401.4 million, of which $316.4 million primarily related to severance costs from strategic actions and $85.0 million related to the withdrawal of Xigris. See Notes 4 and 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of $674.0 million in 2012, compared with expense of $179.0 million in 2011. The increase was driven by income of $787.8 million recognized from the early payment of the exenatide revenue-sharing obligation by Amylin. See Note 17 to the consolidated financial statements for additional information.

29



Our effective tax rate was 24.4 percent in 2012, compared with 18.7 percent in 2011. The increase in 2012 reflects the tax impact of the payment received from Amylin and the expiration of the research and development tax credit at the end of 2011, partially offset by the tax benefit related to the intangible asset impairment for liprotamase. The effective tax rate for 2011 was lower due to a tax benefit on the IPR&D charge associated with the diabetes collaboration with Boehringer Ingelheim, as well as a benefit from the resolution in 2011 of the IRS audits of tax years 2005-2007, along with certain matters related to 2008-2009. See Note 13 to the consolidated financial statements for additional information.
Operating Results—2011
Financial Results
We achieved revenue growth of 5 percent to $24.29 billion in 2011, primarily driven by the collective growth of Cymbalta, insulin products, animal health products, Alimta, Effient, and Cialis, partially offset by the decline in Gemzar and Zyprexa revenue due to the loss of patent exclusivity. This revenue growth, as well as a lower effective tax rate, was more than offset by lower gross margin percentage; increased marketing, selling, and administrative costs; higher other expense; and the increased impact in 2011 of the items noted below. As a result, net income decreased 14 percent to $4.35 billion, and EPS decreased 15 percent to $3.90 per share, in 2011 as compared to $5.07 billion, or $4.58 per share, in 2010. In addition to the highlighted items summarized in the "Executive Overview," 2011 results also included the following items that affect comparisons:
U.S. Health Care Reform
As a result of higher rebates and subsidies included in health care reform enacted in the U.S. during 2010, total revenue in 2011 was reduced by $408.8 million (pretax), or $0.29 per share. Also, marketing, selling, and administrative expenses increased by $178.0 million (pretax), or $0.16 per share, as a result of the mandatory pharmaceutical manufacturers’ fee.
The 2010 highlighted items are summarized as follows:
U.S. Health Care Reform
As a result of higher rebates included in health care reform enacted in the U.S. during 2010, total revenue in 2010 was reduced by $229.0 million (pretax), or $0.16 per share. We also recorded a one-time non-cash deferred income tax charge of $85.1 million, or $0.08 per share, associated with the imposition of tax on the prescription drug subsidy of our U.S. retiree health plan.
Acquisitions (Note 3 to the consolidated financial statements)
We incurred acquired IPR&D charges associated with the in-licensing arrangement with Acrux Limited (Acrux) of $50.0 million (pretax), which decreased EPS by $0.03.
Asset Impairments, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
We recognized asset impairments, restructuring, and other special charges of $192.0 million (pretax), or $0.13 per share, primarily related to severance costs.
Revenue
Our worldwide revenue for 2011 increased 5 percent, to $24.29 billion, driven by the collective growth of Cymbalta, insulin products, animal health products, Alimta, Effient, and Cialis, partially offset by the decline in Gemzar and Zyprexa revenue due to the loss of patent exclusivity. Worldwide sales volume increased 6 percent, and the favorable impact of foreign exchange rates contributed 2 percent of revenue growth, partially offset by a 3 percent decrease due to lower prices. The increase in volume and reduction in price were partially driven by the loss of U.S. patent exclusivity for Zyprexa and Gemzar and the agreements to supply authorized versions of olanzapine and gemcitabine. Revenue in the U.S. increased 1 percent, to $12.98 billion, due to higher volume, partially offset by lower prices. Revenue outside the U.S. increased 11 percent, to $11.31 billion, due to increased demand and the positive impact of foreign exchange rates, partially offset by lower prices. Total revenue was reduced by $408.8 million in 2011 due to the impact of U.S. health care reform, compared to a reduction of $229.0 million in 2010.

30




The following table summarizes our revenue activity in 2011 compared with 2010:
 
Year Ended
 
Year Ended
 
 
 
December 31, 2011
 
December 31, 2010
 
Percent
Change from 
Product
U.S.(1)
 
Outside U.S.
 
Total
 
Total
2010
  
(Dollars in millions)
 
  
Zyprexa
$
2,165.3

 
$
2,456.7

 
$
4,622.0

 
$
5,026.4

 
(8
)
Cymbalta
3,173.4

 
988.4

 
4,161.8

 
3,459.2

 
20

Alimta
994.6

 
1,466.5

 
2,461.1

 
2,208.6

 
11

Humalog
1,398.9

 
968.7

 
2,367.6

 
2,054.2

 
15

Cialis
704.5

 
1,171.1

 
1,875.6

 
1,699.4

 
10

Humulin
588.1

 
660.7

 
1,248.8

 
1,088.9

 
15

Evista
707.5

 
359.4

 
1,066.9

 
1,024.4

 
4

Forteo
453.1

 
496.7

 
949.8

 
830.1

 
14

Strattera
392.2

 
227.9

 
620.1

 
576.7

 
8

Gemzar
70.6

 
381.5

 
452.1

 
1,149.4

 
(61
)
Other pharmaceutical products
879.4

 
1,221.0

 
2,100.4

 
1,933.5

 
9

Animal health products
896.8

 
781.8

 
1,678.6

 
1,391.4

 
21

Total net product sales
12,424.4

 
11,180.4

 
23,604.8

 
22,442.2

 
5

Collaboration and other revenue(2)
552.8

 
128.9

 
681.7

 
633.8

 
8

Total revenue
$
12,977.2

 
$
11,309.3

 
$
24,286.5

 
$
23,076.0

 
5

1 
U.S. revenue includes revenue in Puerto Rico.
2 
Collaboration and other revenue consists primarily of royalties for Erbitux and revenue associated with exenatide in the United States.
Sales of Zyprexa decreased 13 percent in the U.S., due to the loss of patent exclusivity in the U.S. on October 23, 2011. Despite a decline in demand for branded Zyprexa, U.S. volume increased in 2011 primarily as a result of sales of authorized olanzapine in connection with our six-month agreement with Prasco Laboratories. This volume increase was more than offset by significant price reductions attributable both to branded Zyprexa and authorized olanzapine. Sales outside the U.S. decreased 3 percent, driven primarily by the loss of patent exclusivity throughout most major markets outside of Japan during 2011, partially offset by the favorable impact of foreign exchange rates and increased demand in Japan.
Sales of Cymbalta increased 14 percent in the U.S., driven primarily by increased demand and higher prices. Sales outside the U.S. increased 44 percent, driven primarily by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates.
Sales of Alimta increased 4 percent in the U.S., due primarily to higher prices and increased demand. Sales outside the U.S. increased 17 percent, due to increased demand and, to a lesser extent, the favorable impact of foreign exchange rates.
Sales of Humalog increased 14 percent in the U.S., due to increased demand and, to a lesser extent, higher prices. Sales outside the U.S. increased 16 percent, driven by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates.
Sales of Cialis increased 7 percent in the U.S., primarily due to higher prices. Sales outside the U.S. increased 12 percent, driven by increased demand, the favorable impact of foreign exchange rates, and higher prices.
Sales of Humulin increased 25 percent in the U.S., driven primarily by higher prices for Humulin and increased demand attributable to Humulin ReliOn. Sales outside the U.S. increased 7 percent, due to increased demand and the favorable impact of foreign exchange rates, partially offset by lower prices.

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Sales of Evista increased 4 percent in the U.S., due to higher prices, partially offset by decreased demand. Sales outside the U.S. increased 5 percent, driven by the favorable impact of foreign exchange rates and, to a lesser extent, increased demand, partially offset by lower prices.
Sales of Forteo decreased 9 percent in the U.S., driven by lower demand, partially offset by higher prices. Sales outside the U.S. increased 50 percent, primarily due to increased demand in Japan.
Sales of Strattera increased 1 percent in the U.S., due primarily to higher prices, partially offset by lower demand. Sales outside the U.S. increased 22 percent, driven primarily by increased demand and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower prices.
Sales of Gemzar, a product approved to treat various cancers, decreased 90 percent in the U.S., due to a rapid and severe decline in sales as a result of generic competition, which began in November 2010, following the expiration of the compound patent. Sales outside the U.S. decreased 10 percent, due to generic competition in most major markets.
Prior to the termination of our exenatide collaboration with Amylin in November 2011, we recognized in revenue our 50 percent share of Byetta's gross margin in the United States. In December 2011, we recognized a pro rata portion of revenue resulting from the termination agreement. In 2011, we recognized total exenatide revenue of $422.7 million, a decrease of 2 percent.
Animal health product sales in the U.S. increased 16 percent, due primarily to increased demand. Sales outside the U.S. increased 27 percent, driven primarily by the impact of the acquisition of certain Janssen and Pfizer animal health assets in Europe and, to a lesser extent, increased demand for other products and the favorable impact of foreign exchange rates.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue decreased by 2.0 percentage points in 2011 to 79.1 percent. This decrease was due primarily to the effect of foreign exchange rates on international inventories sold, which significantly increased cost of sales in 2011, but led to a modest reduction to cost of sales in 2010. Patent expirations for Zyprexa and Gemzar also drove the reduction in gross margin percent.
Marketing, selling, and administrative expenses increased 12 percent in 2011 to $7.88 billion. The increase was driven by the diabetes collaboration with Boehringer Ingelheim, as well as the effect of foreign exchange rates. In addition, higher administrative expenses in the U.S. included $178.0 million related to the mandatory pharmaceutical manufacturers' fee associated with U.S. health care reform. Investment in research and development increased 3 percent, to $5.02 billion, due primarily to increased late-stage clinical trial costs, including costs related to the diabetes collaboration with Boehringer Ingelheim.
We incurred an IPR&D charge of $388.0 million in 2011, associated with our diabetes collaboration with Boehringer Ingelheim, compared with $50.0 million in 2010 associated with the in-licensing agreement with Acrux. We recognized asset impairments, restructuring, and other special charges of $401.4 million in 2011, including charges of $316.4 million primarily related to severance costs from strategic actions to reduce our cost structure and global workforce, and a special charge of $85.0 million related to the withdrawal of Xigris. In 2010, we recognized charges totaling $192.0 million for asset impairments, restructuring, and other special charges. See Notes 3 and 5 to the consolidated financial statements for additional information.
Other—net, expense increased $174.0 million to an expense of $179.0 million in 2011, due primarily to impairments of acquired IPR&D assets in 2011 and damages recovered in 2010 from generic pharmaceutical companies related to Zyprexa patent litigation in Germany. See Note 17 to the consolidated financial statements for additional information.
Our effective tax rate was 18.7 percent in 2011, compared with 22.3 percent in 2010. The decrease was due to the tax benefit on the IPR&D charge associated with the Boehringer Ingelheim diabetes collaboration, as well as a benefit from the resolution in 2011 of the IRS audits of tax years 2005-2007, along with certain matters related to 2008-2009. Additionally, the tax rate for 2010 was increased by a one-time charge associated with the imposition of tax on the prescription drug subsidy of our retiree health plan as part of U.S. health care reform. See Note 13 to the consolidated financial statements for additional information.

32



FINANCIAL CONDITION
As of December 31, 2012, cash and cash equivalents totaled $4.02 billion compared with $5.92 billion at December 31, 2011. The decrease was driven by net purchases of $3.26 billion in investment securities with maturities extending beyond one year, dividends paid of $2.19 billion, the maturity and repayment of long-term debt of $1.50 billion, purchases of property and equipment of $905.4 million, and common stock repurchases of $721.1 million, partially offset by cash from operations of $5.30 billion, and $1.38 billion in proceeds from the early payment of Amylin's revenue-sharing obligations and loan.
Capital expenditures of $905.4 million during 2012 were $233.4 million more than in 2011. We expect 2013 capital expenditures to be approximately $900 million as we invest in the long-term growth of our diabetes-care product portfolio and additional biotechnology capacity while continuing investments to improve the quality, productivity, and capability of our manufacturing, research, and development facilities.
As of December 31, 2012, total debt was $5.53 billion, a decrease of $1.46 billion compared with $6.99 billion at December 31, 2011. The decrease is due primarily to the previously mentioned long-term debt maturity and payment of $1.50 billion. Our current debt ratings from Standard & Poor’s and Moody’s remain AA- and A2, respectively. Our ratings outlook from both Moody’s and Standard & Poor’s is stable.
Dividends of $1.96 per share were paid in 2012 and 2011. 2012 was the 128th consecutive year in which we made dividend payments. In the fourth quarter of 2012, effective for the dividend to be paid in the first quarter of 2013, the quarterly dividend was maintained at $0.49 per share, resulting in an indicated annual rate for 2013 of $1.96 per share.
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 recent health care legislation; the federal government's involvement in the U.S. economy; and various international government funding levels. We continue to focus specifically on the economic health of the European economy, as heightened economic concerns persist. Currently, we believe economic conditions in Europe will not have a material impact on our liquidity.
We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including dividends, share repurchases, capital expenditures, and contractual maturities due on debt in 2013. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings. We currently have $1.36 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, “Risk Factors,” may affect our operating results and cash generated from operations.
We depend on patents or other forms of intellectual-property protection for most of our revenues, cash flows, and earnings. Through 2014, we expect to lose U.S. patent protection for Cymbalta (December 2013) and Evista (March 2014). The loss of exclusivity for Cymbalta and Evista will likely result in generic competition, generally causing a rapid and severe decline in revenue from the affected product, and having a material adverse effect on our results of operations. The U.S. patent for Humalog expires in May 2013. Humalog is currently protected in Europe only by formulation patents. We do not currently expect the loss of patent protection for Humalog to result in a rapid and severe decline in revenue. To date, no biosimilar version of Humalog has been approved in the U.S. or Europe; however, we are aware that other manufacturers have efforts underway to develop biosimilar forms of Humalog, and it is difficult to predict the likelihood, timing, and impact of biosimilars entering the market. Our goal is to mitigate the effect of these exclusivity losses on our operations, liquidity, and financial position through growth in our patent-protected products that do not lose exclusivity during this period, in the emerging markets, in Japan, and in our animal health business. Our expected growth in the emerging markets and Japan is attributable to both the growth of these markets and launches of patent-protected products.
In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

33



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, 2012 and 2011, 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, 2012 and 2011, 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 the Japanese yen, and the British pound against the euro. We face transactional currency exposures that arise when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the local currency. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). Our policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative positions offset, in part, the impact of currency fluctuations on the existing assets, liabilities, commitments, and anticipated revenues. Considering our derivative financial instruments outstanding at December 31, 2012 and 2011, a hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) as of December 31, 2012 and 2011, respectively, would not have a material impact on earnings, cash flows, or fair values of foreign currency rate risk-sensitive instruments over a one-year period. These calculations do not reflect the impact of the exchange gains or losses on the underlying positions that would be offset, in part, by the results of the derivative instruments.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on assets still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval of the product for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not included in the table of contractual obligations below.
Individually, these arrangements are not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements would happen to be reached in the same reporting period, the aggregate charge to expense could be material to the results of operations in that period. 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.

34



Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):
 
Payments Due by Period
  
Total
 
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
More Than
5 Years
Long-term debt, including interest payments(1)
$
7,425.6

 
$
156.5

 
$
1,277.5

 
$
1,474.0

 
$
4,517.6

Capital lease obligations
42.0

 
14.9

 
22.3

 
4.8

 

Operating leases
647.3

 
145.3

 
231.6

 
134.0

 
136.4

Purchase obligations(2)
13,629.5

 
12,158.5

 
674.9

 
460.0

 
336.1

Other long-term liabilities reflected on our balance sheet(3)
1,796.9

 

 
537.2

 
262.6

 
997.1

Other(4)
371.3

 
371.3

 

 

 

Total
$
23,912.6

 
$
12,846.5

 
$
2,743.5

 
$
2,335.4

 
$
5,987.2

1 
Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the interest rate forward curve at December 31, 2012, to compute the amount of the contractual obligation for interest on the variable rate debt instruments and swaps.
2 
We have included the following:
Purchase obligations consist primarily of all open purchase orders as of December 31, 2012. Some of these purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and noncancelable purchase obligations.
Contractual payment obligations with each of our significant vendors, which are noncancelable and are not contingent.
3 
We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and deferred compensation liabilities. We excluded long-term income taxes payable of $1.33 billion, because we cannot reasonably estimate the timing of future cash outflows associated with those liabilities.
4 
This category consists of various miscellaneous items expected to be paid in the next year, none of which are individually material. We excluded unfunded commitments of $75.4 million, because we cannot reasonably estimate the timing of future cash outflows associated with those commitments.
The contractual obligations table is current as of December 31, 2012. We expect the amount of these obligations to change materially over time as new contracts are initiated and existing contracts are completed, terminated, or modified.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the United States (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 from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. Provisions for returns, rebates, and discounts are established in the same period the related sales are recorded.
We regularly review the supply levels of our significant products sold to major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a

35



consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements does not provide an incentive for speculative wholesaler buying and provides us with data on inventory levels at our wholesalers. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the sales of a major product compared with underlying demand, we disclose this in our product sales discussion if we believe the amount is material to the product sales trend; however, we are not always able to accurately quantify the amount of stocking or destocking. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
When sales occur, we estimate a reserve for future product returns related to those sales. This estimate is primarily based on historical return rates as well as specifically identified anticipated returns due to known business conditions and product expiry dates. We record the return amounts as a deduction to arrive at our net product sales. Once the product is returned, it is destroyed. Actual product returns have been less than 1 percent of our net sales over the past three years and have not fluctuated significantly as a percent of sales.
We establish sales rebate and discount accruals in the same period as the related sales. The rebate and discount amounts are recorded as a deduction to arrive at our net product sales. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include Medicaid, managed care, Medicare, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We base these accruals primarily upon our historical rebate and discount payments made to our customer segment groups and the provisions of current rebate and discount contracts.
The largest of our sales rebate and discount amounts are rebates associated with sales covered by Medicaid. In determining the appropriate accrual amount, we consider our historical Medicaid rebate payments by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries), an evaluation of the current Medicaid rebate laws and interpretations, the percentage of our products that are sold to Medicaid recipients, and our product pricing and current rebate and discount contracts. Although we accrue a liability for Medicaid rebates at the time we record the sale (when the product is shipped), the Medicaid rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.
Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. A best estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale. If our estimates are not reflective of the actual pharmaceutical costs incurred by the government, we adjust our rebate reserves.
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our global sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. A 5 percent change in our global sales return, rebate, and discount liability at December 31, 2012 would lead to an approximate $108 million effect on our income before income taxes.

36



The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the U.S. was 83 percent and 82 percent as of December 31, 2012 and 2011, respectively.
The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability balances, including Medicaid (in millions):
 
2012
 
2011
Sales return, rebate, and discount liabilities, beginning of year
$
1,597.9

 
$
1,155.3

Reduction of net sales due to sales returns, discounts, and rebates(1)
3,563.5

 
4,016.9

Cash payments of discounts and rebates
(3,576.9
)
 
(3,574.3
)
Sales return, rebate, and discount liabilities, end of year
$
1,584.5

 
$
1,597.9

1 
Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1.0 percent of net sales for each of the years presented.
Product Litigation Liabilities and Other Contingencies
Product litigation liabilities and other contingencies are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors we consider in developing our product litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant product liability contingencies when 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 have been and will continue to be largely self-insured for product liability losses for substantially all our currently marketed products. In addition, there is no assurance that we will be able to fully collect from our insurance carriers on past claims.
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
Pension and Retiree Medical Plan Assumptions
Pension benefit costs include assumptions for the discount rate, retirement age, and expected return on plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age, expected return on plan assets, and health-care-cost trend rates. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 14 to the consolidated financial statements for additional information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt instruments to determine the discount rates. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately 80 percent of which are growth investments); and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates, expected return on plan assets, and health-care-cost trend rates of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages.
If the health-care-cost trend rates were to be increased by one percentage point, the aggregate of the service cost and interest cost components of the 2012 annual expense would increase by $15.6 million. A one-

37



percentage-point decrease would decrease the aggregate of the 2012 service cost and interest cost by $12.6 million. If the 2012 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to be changed by a quarter percentage point, income before income taxes would change by $35.2 million. If the 2012 expected return on plan assets for U.S. plans were to be changed by a quarter percentage point, income before income taxes would change by $19.7 million. If our assumption regarding the 2012 expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by $43.6 million. The U.S. plans, including Puerto Rico, represent approximately 80 percent of the total projected benefit obligation and approximately 81 percent of total plan assets at December 31, 2012.
Impairment of Indefinite-Lived and Long-Lived Assets
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We determine impairment by comparing the projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of the IPR&D acquired in a business combination, all of which require multiple assumptions. We utilize the “income method,” which applies a probability weighting that considers the risk of development and commercialization, to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently.
For IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in the “Late-Stage Pipeline” section. The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to build a successful portfolio of approved products. As such, it is likely that some IPR&D assets will become impaired in the future.
The estimated future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management’s judgment. Actual results could vary from these estimates.
Income Taxes
We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities, which may result in future tax, interest, and penalty assessments by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions’ tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law, the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
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

38



any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.
As of December 31, 2012, a 5 percent change in the amount of the uncertain tax positions and the valuation allowance would result in a change in net income of $46.4 million and $33.8 million, respectively.
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 15 to the consolidated financial statements and is incorporated here by reference.
FINANCIAL EXPECTATIONS FOR 2013
Our 2013 financial guidance includes an estimated one-time benefit of $0.07 per share associated with the research and development tax credit for 2012 that will be recorded in the first quarter of 2013, resulting from the delay in the enactment of the American Taxpayer Relief Act of 2012. For the full year of 2013, we expect EPS to be in the range of $4.10 to $4.25. We anticipate that total revenue will be between $22.6 billion and $23.4 billion. Despite the initial impact of the U.S. Cymbalta patent expiration in the fourth quarter of 2013 and the loss of the anticipated 15 percent revenue-sharing obligation on worldwide exenatide sales, we expect overall revenue growth, driven by a portfolio of products including Humalog, Humulin, Cialis, Strattera, Forteo, Alimta, Cymbalta outside the U.S., Effient, Tradjenta, and Axiron, as well as animal health products. In addition, significant revenue growth is expected in Japan and the emerging markets, particularly China.
We anticipate that gross margin as a percent of revenue will be approximately 78 percent. Marketing, selling, and administrative expenses are expected to be in the range of $7.1 billion to $7.4 billion. Research and development expense is expected to be in the range of $5.2 billion to $5.5 billion. Other—net, (income) expense is expected to be in a range between $340 million and $490 million of income. Operating cash flows are expected to be more than sufficient to pay our dividend, complete our previously announced $1.5 billion share repurchase program, allow for capital expenditures of approximately $900 million, and fund potential business development activity.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
You can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) in Item 7 at “Management’s Discussion and Analysis—Financial Condition.” That information is incorporated in this report by reference.


39



Item 8.
Financial Statements and Supplementary Data
Consolidated Statements of Operations
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
 
Year Ended December 31
 
2012
 
2011
 
2010
Revenue
 
$
22,603.4

 
$
24,286.5

 
$
23,076.0

Cost of sales
 
4,796.5

 
5,067.9

 
4,366.2

Research and development
 
5,278.1

 
5,020.8

 
4,884.2

Marketing, selling, and administrative
 
7,513.5

 
7,879.9

 
7,053.4

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

 
388.0

 
50.0

Asset impairments, restructuring, and other special charges (Note 5)
 
281.1

 
401.4

 
192.0

Other—net, (income) expense (Note 17)
 
(674.0
)
 
179.0

 
5.0

 
 
17,195.2

 
18,937.0

 
16,550.8

Income before income taxes
 
5,408.2

 
5,349.5

 
6,525.2

Income taxes (Note 13)
 
1,319.6

 
1,001.8

 
1,455.7

Net income
 
$
4,088.6

 
$
4,347.7

 
$
5,069.5

Earnings per share—basic (Note 12)
 
$
3.67

 
$
3.90

 
$
4.58

Earnings per share—diluted (Note 12)
 
$
3.66

 
$
3.90

 
$
4.58


See notes to consolidated financial statements.

40



Consolidated Statements of Comprehensive Income
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
Year Ended December 31
 
2012
 
2011
 
2010
Net income
 
$
4,088.6

 
$
4,347.7

 
$
5,069.5

Other comprehensive income (loss)
 
 
 
 
 
 
Foreign currency translation gains (losses)
 
160.9

 
(244.8
)
 
(325.1
)
Net unrealized gains (losses) on securities
 
88.5

 
(178.5
)
 
80.8

Defined benefit pension and retiree health benefit plans (Note 14)
 
(128.6
)
 
(1,240.2
)
 
148.9

Effective portion of cash flow hedges
 
8.7

 
44.8

 
(26.6
)
Other comprehensive income (loss) before income taxes
 
129.5

 
(1,618.7
)
 
(122.0
)
Provision for income taxes related to other comprehensive income (loss) items
 
(68.0
)
 
430.2

 
(76.2
)
Other comprehensive income (loss) (Note 16)
 
61.5

 
(1,188.5
)
 
(198.2
)
Comprehensive income
 
$
4,150.1

 
$
3,159.2

 
$
4,871.3


See notes to consolidated financial statements.

41



Consolidated Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
 
December 31
 
2012
 
2011
Assets
 
 
 
 
Current Assets
 
 
 
 
Cash and cash equivalents (Note 6)
 
$
4,018.8

 
$
5,922.5

Short-term investments (Note 6)
 
1,665.5

 
974.6

Accounts receivable, net of allowances of $108.5 (2012) and $110.1 (2011)
 
3,336.3

 
3,597.7

Other receivables (Note 10)
 
552.0

 
640.2

Inventories
 
2,643.8

 
2,299.8

Prepaid expenses and other (Note 10)
 
822.3

 
813.4

Total current assets
 
13,038.7

 
14,248.2

Other Assets
 
 
 
 
Investments (Note 6)
 
6,313.3

 
4,029.8

Goodwill and other intangibles—net (Note 7)
 
4,752.7

 
5,128.1

Sundry (Note 10)
 
2,534.0

 
2,493.4

Total other assets
 
13,600.0

 
11,651.3

Property and equipment, net
 
7,760.2

 
7,760.3

Total assets
 
$
34,398.9

 
$
33,659.8

Liabilities and Shareholders’ Equity
 
 
 
 
Current Liabilities
 
 
 
 
Short-term borrowings and current maturities of long-term debt (Note 8)
 
$
11.9

 
$
1,522.3

Accounts payable
 
1,188.3

 
1,125.2

Employee compensation
 
940.3

 
804.7

Sales rebates and discounts
 
1,777.2

 
1,771.3

Dividends payable
 
541.4

 
542.3

Income taxes payable (Note 13)
 
143.5

 
261.6

Deferred income taxes (Note 13)
 
1,048.0

 
422.3

Other current liabilities (Note 10)
 
2,738.9

 
2,481.2

Total current liabilities
 
8,389.5

 
8,930.9

Other Liabilities
 
 
 
 
Long-term debt (Note 8)
 
5,519.4

 
5,464.7

Accrued retirement benefits (Note 14)
 
3,012.4

 
3,068.5

Long-term income taxes payable (Note 13)
 
1,334.3

 
1,086.3

Other noncurrent liabilities (Note 10)
 
1,369.4

 
1,573.8

Total other liabilities
 
11,235.5

 
11,193.3

Commitments and contingencies (Note 15)
 
 
 
 
Shareholders' Equity (Notes 9 and 11)
 
 
 
 
Common stock—no par value
   Authorized shares: 3,200,000
   Issued shares: 1,146,493 (2012) and 1,158,644 (2011)
 
716.6

 
724.1

Additional paid-in capital
 
4,963.1

 
4,886.8

Retained earnings
 
16,088.2

 
14,897.8

Employee benefit trust
 
(3,013.2
)
 
(3,013.1
)
Accumulated other comprehensive loss (Note 16)
 
(3,797.1
)
 
(3,858.6
)
Noncontrolling interests
 
8.7

 
(6.1
)
Cost of common stock in treasury, 2,850 shares (2012) and 853 shares (2011)
 
(192.4
)
 
(95.3
)
Total shareholders’ equity
 
14,773.9

 
13,535.6

Total liabilities and shareholders’ equity
 
$
34,398.9

 
$
33,659.8


See notes to consolidated financial statements.

42



Consolidated Statements of Cash Flows
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
Year Ended December 31
 
2012
 
2011
 
2010
Cash Flows from Operating Activities
 
 
 
 
 
 
Net income
 
$
4,088.6

 
$
4,347.7

 
$
5,069.5

Adjustments to Reconcile Net Income
to Cash Flows from Operating Activities
 
 
 
 
 
 
Depreciation and amortization
 
1,462.2

 
1,373.6

 
1,328.2

Change in deferred income taxes
 
126.0

 
(268.5
)
 
559.7

Stock-based compensation expense
 
141.5

 
147.4

 
231.0

Impairment charges, indefinite lived intangibles
 
205.0

 
151.5

 

Acquired in-process research and development, net of tax
 

 
252.2

 
32.5

Income related to prepayment of revenue-sharing obligation (Note 4)
 
(787.8
)
 

 

Other operating activities, net
 
120.5

 
(17.8
)
 
(178.6
)
Changes in operating assets and liabilities, net of acquisitions
 
 
 
 
 
 
Receivables—(increase) decrease
 
361.8

 
(188.8
)
 
(319.1
)
Inventories—(increase) decrease
 
(307.9
)
 
203.1

 
157.0

Other assets—(increase) decrease
 
231.0

 
642.7

 
340.5

Accounts payable and other liabilities—increase (decrease)
 
(336.1
)
 
591.4

 
(363.9
)
Net Cash Provided by Operating Activities
 
5,304.8

 
7,234.5

 
6,856.8

Cash Flows from Investing Activities
 
 
 
 
 
 
Purchases of property and equipment
 
(905.4
)
 
(672.0
)
 
(694.3
)
Disposals of property and equipment
 
22.0

 
25.3

 
24.6

Net change in short-term investments
 
375.1

 
(250.9
)
 
(686.5
)
Proceeds from sales and maturities of noncurrent investments
 
4,355.7

 
2,138.5

 
584.7

Purchases of noncurrent investments
 
(7,618.6
)
 
(4,459.4
)
 
(1,067.2
)
Purchase of product rights
 
(138.8
)
 
(632.9
)
 
(442.4
)
Purchases of in-process research and development
 

 
(388.0
)
 
(50.0
)
Cash paid for acquisitions, net of cash acquired
 
(199.3
)
 
(307.8
)
 
(609.4
)
Net change in loan to collaboration partner (Note 4)
 
165.0

 
(165.0
)
 

Proceeds from prepayment of revenue-sharing obligation (Note 4)
 
1,212.1

 

 

Other investing activities, net
 
(100.6
)
 
(112.2
)
 
(219.3
)
Net Cash Used for Investing Activities
 
(2,832.8
)
 
(4,824.4
)
 
(3,159.8
)
Cash Flows from Financing Activities
 
 
 
 
 
 
Dividends paid
 
(2,187.4
)
 
(2,180.1
)
 
(2,165.3
)
Net change in short-term borrowings
 
(10.5
)
 
(141.2
)
 
125.1

Repayments of long-term debt
 
(1,500.6
)
 
(54.6
)
 
(1.1
)
Purchases of common stock
 
(721.1
)
 

 

Other financing activities, net
 

 
6.0

 
19.4

Net Cash Used for Financing Activities
 
(4,419.6
)
 
(2,369.9
)
 
(2,021.9
)
Effect of exchange rate changes on cash and cash equivalents
 
43.9

 
(110.9
)
 
(144.8
)
 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
(1,903.7
)
 
(70.7
)
 
1,530.3

Cash and cash equivalents at beginning of year
 
5,922.5

 
5,993.2

 
4,462.9

Cash and Cash Equivalents at End of Year
 
$
4,018.8

 
$
5,922.5

 
$
5,993.2

See notes to consolidated financial statements.

43



Segment Information
We operate in two business segments—human pharmaceutical products and animal health. Our business segments are distinguished by the ultimate end user of the product—humans or animals. Performance is evaluated based on profit or loss from operations before income taxes. The accounting policies of the individual segments are the same as those described in the summary of significant accounting policies in Note 1 to the consolidated financial statements.
Our human pharmaceutical products segment includes the discovery, development, manufacturing, marketing, and sales of human pharmaceutical products worldwide in the following therapeutic areas: neuroscience, endocrinology, oncology, cardiovascular, and other. Our neuroscience group of products includes Cymbalta, Zyprexa, Strattera, and Prozac. Endocrinology products consist primarily of Humalog, Humulin, Forteo, Evista, Humatrope, Byetta, and Actos. Oncology products consist primarily of Alimta, Erbitux, and Gemzar. Cardiovascular products consist primarily of Cialis, Effient, and ReoPro. The other pharmaceuticals category includes anti-infectives, primarily Vancocin and Ceclor, and other miscellaneous pharmaceutical products and services.
Our animal health segment, operating through our Elanco animal health division, includes the development, manufacturing, marketing, and sales of animal health products worldwide for both food and companion animals. Animal health products include Rumensin, Tylan, Posilac, Paylean, and other products for livestock and poultry, as well as Trifexis, Comfortis, and other products for companion animals.
Most of our pharmaceutical products are distributed through wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. For the years ended December 31, 2012, 2011, and 2010, our three largest wholesalers each accounted for between 10 percent and 16 percent of consolidated total revenue. Further, they each accounted for between 9 percent and 14 percent of accounts receivable as of December 31, 2012 and 2011. Animal health products are sold primarily to wholesale distributors.
We manage our assets on a total company basis, not by operating segment, as the assets of the animal health business are intermixed with those of the pharmaceutical products business. Therefore, our chief operating decision maker does not review any asset information by operating segment and, accordingly, we do not report asset information by operating segment.
We are exposed to the risk of changes in social, political, and economic conditions inherent in foreign operations, and our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates.

44



ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
Year Ended December 31
 
2012
 
2011
 
2010
Segment revenue—to unaffiliated customers
 
 
 
 
 
 
Human pharmaceutical products
 
 
 
 
 
 
Neuroscience
 
$
7,575.1

 
$
9,723.8

 
$
9,419.0

Endocrinology
 
6,810.9

 
6,806.7

 
6,135.4

Oncology
 
3,281.6

 
3,322.2

 
3,744.5

Cardiovascular
 
2,632.5

 
2,486.4

 
2,171.3

Other pharmaceuticals
 
266.8

 
268.8

 
214.4

Total human pharmaceutical products
 
20,566.9

 
22,607.9

 
21,684.6

Animal health
 
2,036.5

 
1,678.6

 
1,391.4

Total segment revenue
 
$
22,603.4

 
$
24,286.5

 
$
23,076.0

 
 
 
 
 
 
 
Segment profits
 
 
 
 
 
 
Human pharmaceutical products
 
$
4,393.4

 
$
5,837.9

 
$
6,516.3

Animal health
 
508.1

 
301.0

 
250.9

Total segment profits
 
$
4,901.5

 
$
6,138.9

 
$
6,767.2


 
 
 
 
 
 
Reconciliation of total segment profits to consolidated income before taxes
 
 
 
 
 
 
Segment profits
 
$
4,901.5

 
$
6,138.9

 
$
6,767.2

Other profits (losses)
 
 
 
 
 
 
Income related to prepayment of Amylin's obligation (Note 4)
 
787.8

 

 

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

 
(388.0
)
 
(50.0
)
Asset impairments, restructuring, and other special charges (Note 5)
 
(281.1
)
 
(401.4
)
 
(192.0
)
Total consolidated income before taxes
 
$
5,408.2

 
$
5,349.5

 
$
6,525.2

For internal management reporting presented to the chief operating decision maker, certain costs are fully allocated to our human pharmaceutical products segment and therefore are not reflected in the animal health segment's profit. Such items include costs associated with treasury-related financing, global service centers, certain acquisition-related transaction costs, and inventory valuation adjustments.
(Dollars in millions)
 
Year Ended December 31
 
2012
 
2011
 
2010
Geographic Information
 
 
 
 
 
 
Revenue—to unaffiliated customers(1)
 
 
 
 
 
 
United States
 
$
12,313.1

 
$
12,977.2

 
$
12,865.6

Europe
 
4,259.7

 
5,290.9

 
5,106.4

Japan
 
2,246.2

 
2,104.1

 
1,616.6

Other foreign countries
 
3,784.4

 
3,914.3

 
3,487.4

Revenue
 
$
22,603.4

 
$
24,286.5

 
$
23,076.0

 
 
 
 
 
 
 
Long-lived assets(2)
 
 
 
 
 
 
United States
 
$
5,064.7

 
$
5,485.3

 
$
5,333.9

Europe
 
2,281.1

 
2,220.2

 
2,250.7

Japan
 
101.5

 
102.9

 
101.2

Other foreign countries
 
1,543.2

 
1,564.0

 
1,588.4

Long-lived assets
 
$
8,990.5

 
$
9,372.4

 
$
9,274.2

1 
Revenue is attributed to the countries based on the location of the customer.
2 
Long-lived assets consist of property and equipment and certain sundry assets.



45



Selected Quarterly Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except per-share data)
2012
 
Fourth
 
Third
 
Second
 
First
Revenue
 
$
5,957.3

 
$
5,443.3

 
$
5,600.7

 
$
5,602.0

Cost of sales
 
1,248.3

 
1,203.6

 
1,146.7

 
1,197.9

Operating expenses
 
3,440.6

 
3,100.2

 
3,251.8

 
2,999.0

Acquired in-process research and development
 

 

 

 

Asset impairments, restructuring, and other special charges
 
204.0

 
53.3

 

 
23.8

Other—net, (income) expense
 
52.0

 
(788.5
)
 
16.5

 
46.0

Income before income taxes
 
1,012.4

 
1,874.7

 
1,185.7

 
1,335.3

Net income
 
827.2

 
1,326.6

 
923.6

 
1,011.1

Earnings per share—basic
 
0.75

 
1.18

 
0.83

 
0.91

Earnings per share—diluted
 
0.74

 
1.18

 
0.83

 
0.91

Dividends paid per share
 
0.49

 
0.49

 
0.49

 
0.49

Common stock closing prices
 
 
 
 
 
 
 
 
High
 
53.81

 
47.64

 
42.91

 
41.80

Low
 
45.91

 
41.98

 
39.18

 
38.49

 
 
 
 
 
 
 
 
 
 
  
2011
 
Fourth
 
Third
 
Second
 
First
Revenue
 
$
6,046.6

 
$
6,147.9

 
$
6,252.8

 
$
5,839.2

Cost of sales
 
1,321.7

 
1,338.1

 
1,228.0

 
1,180.1

Operating expenses
 
3,488.7

 
3,198.7

 
3,303.6

 
2,909.7

Acquired in-process research and development
 

 

 

 
388.0

Asset impairments, restructuring, and other special charges
 
167.6

 
25.2

 
132.3

 
76.3

Other—net, expense
 
26.8

 
83.4

 
57.6

 
11.2

Income before income taxes
 
1,041.8

 
1,502.5

 
1,531.3

 
1,273.9

Net income
 
858.2

 
1,236.3

 
1,197.3

 
1,055.9

Earnings per share—basic and diluted
 
0.77

 
1.11

 
1.07

 
0.95

Dividends paid per share
 
0.49

 
0.49

 
0.49

 
0.49

Common stock closing prices
 
 
 
 
 
 
 
 
High
 
41.75

 
39.32

 
39.15

 
35.84

Low
 
35.58

 
34.49

 
34.99

 
33.63

Our common stock is listed on the New York, London, and Swiss stock exchanges.


46



Selected Financial Data (unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, except revenue per employee and per-share data)
2012
 
2011
 
2010
 
2009
 
2008
Operations
 
 
 
 
 
 
 
 
 
Revenue
$
22,603.4

 
$
24,286.5

 
$
23,076.0

 
$
21,836.0

 
$
20,371.9

Cost of sales
4,796.5

 
5,067.9

 
4,366.2

 
4,247.0

 
4,376.7

Research and development
5,278.1

 
5,020.8

 
4,884.2

 
4,326.5

 
3,840.9

Marketing, selling, and administrative
7,513.5

 
7,879.9

 
7,053.4

 
6,892.5

 
6,626.4

Other(1)
(392.9
)
 
968.4

 
247.0

 
1,012.2

 
6,835.5

Income (loss) before income taxes
5,408.2

 
5,349.5

 
6,525.2

 
5,357.8

 
(1,307.6
)
Income taxes (2)
1,319.6

 
1,001.8

 
1,455.7

 
1,029.0

 
764.3

Net income (loss)
4,088.6

 
4,347.7

 
5,069.5

 
4,328.8

 
(2,071.9
)
Net income (loss) as a percent of revenue
18.1
%
 
17.9
%
 
22.0
%
 
19.8
%
 
         NM
Net income (loss) per share— diluted
3.66

 
3.90

 
4.58

 
3.94

 
(1.89
)
Dividends declared per share
1.96

 
1.96

 
1.96

 
1.96

 
1.90

Weighted-average number of shares outstanding—diluted (thousands)
1,117,294

 
1,113,967

 
1,105,813

 
1,098,367

 
1,094,499

 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
Current assets
$
13,038.7

 
$
14,248.2