ELI LILLY AND COMPANY RESULTS OF OPERATIONS (Tables present dollars in millions, except per-share data)
General
Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated company. This discussion and analysis should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." Certain statements in this Item 7 constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, "Risk Factors," may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements.
Executive Overview
This section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented on a diluted basis. COVID-19 Pandemic In response to the COVID-19 pandemic, we have focused on maintaining a supply of our medicines; reducing the strain on the medical system; developing treatments for COVID-19; protecting the health, safety, and well-being of our employees; supporting our communities; and ensuring affordability of and access to our medicines, particularly insulin. As part of our response to the COVID-19 pandemic, and at the request ofthe United States (U.S. ) and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world. TheU.S. Food and Drug Administration (FDA) granted Emergency Use Authorizations (EUA) for bamlanivimab and etesevimab administered together for higher-risk patients who have been recently diagnosed with mild-to-moderate COVID-19 and for baricitinib for treatment with or without remdesivir in hospitalized COVID-19 patients. In the third quarter of 2021, the FDA expanded the EUA for bamlanivimab and etesevimab administered together to include post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection. We expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited. InFebruary 2022 , the FDA granted an EUA for bebtelovimab for certain high-risk patients who have been recently diagnosed with mild-to-moderate COVID-19. We have agreed with theU.S. government to supply up to 600,000 doses of bebtelovimab no later thanMarch 31, 2022 for at least$720 million with an option of 500,000 additional doses no later thanJuly 31, 2022 . The FDA has revised, and may in the future revise, any EUA for our COVID-19 therapies in response to the prevalence of variants against which our therapies have varying degrees of efficacy. The COVID-19 pandemic has, and may continue to, adversely impact our business and operations. The focus of resources on COVID-19, widespread protective measures implemented to control the spread of COVID-19, and the resulting strain on global transportation, manufacturing, and labor markets have negatively impacted development, manufacturing, supply, distribution, and sales of our medicines. In addition to decreases in new prescriptions, changes in payer segment mix, and the increased use of patient affordability programs in theU.S. , we have experienced, and may continue to experience if the COVID-19 pandemic undergoes resurgent or more severe waves, decreased demand as a result of lack of "normal" access and fewer in-person interactions by patients and our employees with healthcare professionals. 34 -------------------------------------------------------------------------------- We also face risks and uncertainties related to our COVID-19 therapies, including heightened regulatory scrutiny of our manufacturing practices, quality assurance, and similar regulations, restrictions on administration that limit widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product after delivery by us. The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for our COVID-19 therapies. Mutations or the spread of other variants of the coronavirus have in some cases impacted the effectiveness of our COVID-19 therapies, and may further render our therapies more or less effective or ineffective. The strain on global transportation, logistics, and labor markets caused by the COVID-19 pandemic and an increase in overall demand in our industry for certain materials resulting in changed buying patterns and constrained supply have had, and may continue to have, a number of impacts on our business, including increased costs to provide a consistent supply of our medicines where they are needed and potential disruptions in the supply of our medications. These factors may negatively affect our results of operations. It remains difficult to reasonably assess or predict the full extent of the ongoing impact of the COVID-19 pandemic on us. The degree to which the COVID-19 pandemic continues to affect us will depend on developments that are highly uncertain and beyond our knowledge or control. We are currently unable to predict the full extent to which the COVID-19 pandemic or any future pandemic, epidemic or similar public health threat will adversely impact our business and operations in the future.
See Item 1A, "Risk Factors" for additional information on risk factors that could impact our business and operations.
Financial Results
The following table summarizes our key operating results:
Year Ended
2021 2020 Percent Change
Revenue $ 28,318.4 $ 24,539.8 15
Gross margin 21,005.6 19,056.5 10
Gross margin as a percent of revenue 74.2 % 77.7 %
Operating expenses $ 13,457.5 $ 12,206.9 10
Acquired in-process research and development 874.9 660.4 32
Asset impairment, restructuring, and other special charges
316.1 131.2 NM
Other-net, (income) expense 201.6 (1,171.9) NM
Income before income taxes 6,155.5 7,229.9 (15)
Income taxes 573.8 1,036.2 (45)
Net income 5,581.7 6,193.7 (10)
EPS 6.12 6.79 (10)
NM - not meaningful
Revenue increased in 2021 driven by increased volume and, to a lesser extent,
the favorable impact of foreign exchange rates, partially offset by lower
realized prices. Operating expenses, defined as the sum of research and
development and marketing, selling, and administrative expenses, increased in
2021, driven primarily by higher development expenses for late-stage assets. The
decreases in net income and EPS in 2021 were driven primarily by reduction in
other-net, (income) expense and higher operating expenses, partially offset by
higher gross margin.
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The following highlighted items affect comparisons of our 2021 and 2020 financial results:
2021
Cost of Sales (See Note 6 to the consolidated financial statements)
•We recognized a net inventory impairment charge related to our COVID-19 antibodies of$339.7 million . As part of our response to the COVID-19 pandemic, and at the request of theU.S. and international governments, we invested in large-scale manufacturing of COVID-19 antibodies at risk, in order to ensure rapid access to patients around the world. As the COVID-19 pandemic evolved during 2021, we incurred a net inventory impairment charge primarily due to the combination of changes to current and forecasted demand fromU.S. and international governments, including changes to our agreement with theU.S. government, and near-term expiry dates of COVID-19 antibodies.
•We recognized acquired IPR&D charges of
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•We recognized charges of$316.1 million primarily related to an impairment of a contract-based intangible asset from our acquisition ofLoxo Oncology, Inc. (Loxo), an intangible asset impairment resulting from the sale of the rights to Qbrexza®, as well as acquisition and integration costs associated with the acquisition ofPrevail Therapeutics Inc. (Prevail).
Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)
•We recognized a debt extinguishment loss of
•We recognized
2020
Acquired IPR&D (Note 3 to the consolidated financial statements)
•We recognized acquired IPR&D charges of
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•We recognized charges of
Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)
•We recognized$1.44 billion of net investment gains on equity securities. 36 --------------------------------------------------------------------------------
Late-Stage Pipeline
Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. We currently have approximately 45 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.
The following certain new molecular entities (NMEs) are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review in theU.S. ,Europe , orJapan . The following table reflects the status of certain NMEs, including certain other developments since our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2021 . Compound Indication Status Developments
COVID-19 Antibodies
The FDA granted EUA for certain high-risk
Bebtelovimab (LY-CoV1404) COVID-19 Emergency Use Authorization patients recently diagnosed with
mild-to-moderate COVID-19 in February 2022.
Diabetes
Type 2 diabetes Submitted Submitted in the U.S. using a priority review
voucher and in Europe and Japan in 2021.
Tirzepatide Heart failure with preserved
ejection fraction Phase III Phase III trials are ongoing.
Obesity
Nonalcoholic steatohepatitis Phase II Phase II trial is ongoing.
Basal Insulin-Fc Type 1 and 2 diabetes Phase II Phase II trials are ongoing.
GGG Tri-Agonist Obesity Phase II Phase II trials are ongoing.
Type 2 diabetes
GLP-1R NPA Obesity Phase II Phase II trials are ongoing.
Type 2 diabetes
Immunology
Granted FDA Fast Track designation(2).
Lebrikizumab(1) Atopic dermatitis Phase III Announced in 2021 that Phase III trials met
primary and all key secondary endpoints.
Phase III trials are ongoing.
Crohn's Disease Phase III trials are ongoing.
Mirikizumab Ulcerative colitis Phase III Announced in 2021 that Phase III trials met
primary and all key secondary endpoints.
CXCR1/2 Ligands Monoclonal Hidradenitis suppurativa Phase II Phase II trial is ongoing.
Antibody
IL-2 Conjugate Systemic lupus erythematosus Phase II Phase II trials are ongoing.
Ulcerative colitis
PD-1 MAB Agonist Rheumatoid arthritis Phase II Phase II trial is ongoing.
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Compound Indication Status Developments
Neuroscience
Granted FDA Breakthrough Therapy
designation(3). Initiated a rolling
Early Alzheimer's disease Submission initiated submission in the U.S. for accelerated
Donanemab approval in 2021. Phase III trials are
ongoing.
Preclinical Alzheimer's Phase III Phase III trial is ongoing.
disease
Solanezumab Preclinical Alzheimer's Phase III Phase III trial is ongoing.
disease
Epiregulin/TGF? MAB Chronic pain Phase II Phase II trials are ongoing.
GBA1 Gene Therapy (PR001) Parkinson's disease Phase II Acquired in the Prevail acquisition in 2021.
Granted FDA Fast Track designation(2). Phase
GRN Gene Therapy (PR006) Frontotemporal dementia Phase II
II trials are ongoing.
O-glc-NAcase Alzheimer's disease Phase II Phase II trial initiated in the fourth
quarter of 2021.
PACAP38 Antibody Chronic pain Phase II Phase II trial is ongoing.
SSTR4 Agonist Chronic pain Phase II Phase II trials are ongoing.
TRPA1 Antagonist Pain Phase II Phase II trials are ongoing.
Oncology
Selpercatinib (Retevmo®) Lung cancer Approved(4) Phase III trials are ongoing.
Thyroid cancer
In February 2022, the Oncologic Drugs
Sintilimab injection(5) Lung cancer Submitted Advisory Committee recommended that the FDA
require additional clinical trials prior to a
final regulatory decision.
Initiated a rolling submission in the U.S.
Mantle cell lymphoma Submissioninitiated for accelerated approval in the fourth Pirtobrutinib (LOXO-305)
quarter of 2021. Phase II and Phase III
trials are ongoing.
Chronic lymphocytic leukemia Phase III Phase III trials are ongoing.
B-cell malignancies Phase II Phase II trial is ongoing.
Imlunestrant ER+HER2- metastatic breast Phase III Phase III trial is ongoing.
cancer
(1) In collaboration with Almirall, S.A. in Europe .
(2) Fast Track designation is designed to expedite the development and review of
new therapies to treat serious conditions and address unmet medical needs.
(3) Breakthrough Therapy designation is designed to expedite the development and
review of potential medicines that are intended to treat a serious condition
where preliminary clinical evidence indicates that the treatment may demonstrate
substantial improvement over available therapy on a clinically significant
endpoint.
(4) Continued approval may be contingent on verification and description of
clinical benefit in confirmatory Phase III trials.
(5) In collaboration with Innovent Biologics, Inc.
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Our pipeline also contains several new indication line extension (NILEX) products. The following certainNILEX products for use in the indication described are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review in theU.S. ,Europe , orJapan . The following table reflects the status of certainNILEX products, including certain other developments since our Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2021 : Compound Indication Status Developments Diabetes Granted FDA Breakthrough Therapy designation(2) and FDA Fast Track Heart failure with designation(3). Submitted in the U.S. and preserved ejection fraction Submitted Europe in 2021 and in Japan in January 2022. Empagliflozin (Jardiance®)(1) The FDA granted priority review for adults with heart failure independent of left ventricular ejection fraction. Chronic kidney disease Phase III Granted FDA Fast Track designation(3). Phase III trials are ongoing. Immunology COVID-19 Emergency Use Authorization(4) Submitted in the U.S. and the FDA granted priority review in January 2022. Granted FDA Breakthrough Therapy Baricitinib (Olumiant®) Alopecia areata Submitted designation(2). Submitted in U.S., Europe and Japan in 2021. Systemic lupus Announced in January 2022 that, based on erythematosus Discontinued top-line efficacy results from Phase III trials, we discontinued development. Oncology HR+, HER2- Adjuvant breast Approved Approved in the U.S. and Japan in the fourth cancer quarter of 2021. Prostate cancer Phase III Phase III trial is ongoing. Abemaciclib (Verzenio®) Announced in January 2022 that we will HR+, HER2+ Adjuvant breast Discontinued discontinue the Phase III trial in response cancer to the changing treatment landscape and global enrollment challenges. (1) In collaboration withBoehringer Ingelheim . (2) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint. (3) Fast Track designation is designed to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs. (4) The FDA granted EUA for treatment with or without remdesivir in hospitalized COVID-19 patients. There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products, as well as a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market can take over a decade and often costs in excess of$2 billion . Failure can occur at any point in the process, including in later stages after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies establish high hurdles for the efficacy and safety of new products and indications. Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict revenue growth rates of new products and indications.
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We manage research and development spending across our portfolio of potential new medicines. A delay in, or termination of, any one project will not necessarily cause a significant change in our total research and development spending. Due to the risks and uncertainties involved in the research and development process, we cannot reliably estimate the nature, timing, and costs of the efforts necessary to complete the development of our research and development projects, nor can we reliably estimate the future potential revenue that will be generated from any successful research and development project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated research and development expense. While we do accumulate certain research and development costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total research and development costs by project, by preclinical versus clinical spend, or by therapeutic category.
Other Matters
Patent Matters
We depend on patents or other forms of intellectual property protection for most of our revenue, cash flows, and earnings.
In 2021, our vitamin regimen patents for Alimta® expired worldwide. Following the loss of patent exclusivity in major European countries andJapan , we faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels. In theU.S. , we expect pediatric data exclusivity to provide us with protection throughMay 2022 . However, we and Eagle Pharmaceuticals, Inc. (Eagle) reached an agreement inDecember 2019 to settle all pendingU.S. patent litigation, allowing Eagle a limited initial entry into the market with its product startingFebruary 2022 (up to an approximate three-week supply) and subsequent unlimited entry startingApril 2022 . We expect that the entry of generic competition in theU.S. following the loss of exclusivity will cause a rapid and severe decline in revenue and will have a material adverse effect on our consolidated results of operations and cash flows. See Note 16 to the consolidated financial statements for a more detailed account of the legal proceedings currently pending regarding, among others, our Alimta patents. Our compound patent for Humalog® (insulin lispro) has expired in major markets. Global regulators have different legal pathways to approve similar versions of insulin lispro. A competitor has similar version of insulin lispro in theU.S. and in certain European markets. While it is difficult to estimate the severity of the impact of insulin lispro products entering the market, we do not expect and have not experienced a rapid and severe decline in revenue; however, we expect additional pricing pressure and some loss of market share that may continue over time.
Our formulation and use patents for Forteo® have expired in major markets. We expect further decline in revenue as a result of the entry of generic and biosimilar competition due to the loss of patent exclusivity in major markets.
Our regulatory data and patent exclusivity for Cymbalta® expired inJapan . Beginning in mid-2021, we have faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels.
Foreign Currency Exchange Rates
As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily theU.S. dollar against the euro, Japanese yen, and Chinese yuan. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on operating expenses. While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these rates could adversely impact our future consolidated results of operations and cash flows. 40 --------------------------------------------------------------------------------
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
Global concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate, as well as worldwide cost containment efforts by governmental authorities. Such measures may include the use of mandated discounts, price reporting requirements, mandated reference prices, restrictive formularies, changes to available intellectual property protections, as well as other efforts. In addition, consolidation of private payors in theU.S. has significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price concessions and pharmacy reimbursement rates. Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, or private payers, such as the recently proposed Alzheimer's Monoclonal Antibody national coverage determination, may adversely impact our business and financial results. We expect that these actions may intensify and could particularly affect certain products, such as insulin, as governments manage and emerge from the COVID-19 pandemic, which could adversely affect our business. In addition, we are engaged in litigation and investigations related to our 340B program that, if resolved adversely to us, could negatively impact our business and consolidated results of operations. It is not currently possible to predict the overall potential adverse impact to us or the general pharmaceutical industry of continued cost containment efforts worldwide. In addition, evolving regulatory priorities have intensified governmental scrutiny of our operations and our industry, including with respect to current Good Manufacturing Practices, quality assurance, and similar regulations, and increased focus on business combinations in our industry. Any regulatory issues concerning these matters could lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in the approvals of new products or supplemental approvals of current products pending resolution of the issues, impediments to the completion of business combinations, and reputational harm, any of which would adversely affect our business.
See Item 1, "Business - Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access" and Note 16 to the consolidated financial statements for additional information.
Tax Matters
We are subject to income taxes and various other taxes in theU.S. and in many foreign jurisdictions; therefore, changes in both domestic and international tax laws or regulations have affected and may affect our effective tax rate, results of operations, and cash flows. In 2017, theU.S. enacted the Tax Cuts and Jobs Act (the 2017 Tax Act), which contains a provision that requires capitalization and amortization of research and development expenses for tax purposes starting in 2022. Previously, these expenses could be deducted in the year incurred. While this provision of the 2017 Tax Act is expected to have an immaterial impact on our consolidated results of operations, if it is not deferred or repealed byCongress , we expect that the implementation of this provision will increase our cash payments of income taxes by up to$1.50 billion in 2022 and subsequently decrease our cash payments of income taxes moderately over the five-year amortization period. TheU.S. and countries around the world are actively considering and enacting tax law changes. Tax proposals introduced byCongress and theU.S. presidential administration contain significant changes, including increases to the tax rates at which both domestic and foreign income ofU.S. companies would be taxed. In addition, tax authorities in theU.S. and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions, which could adversely impact our future consolidated results of operations and cash flows. Further, actions taken with respect to tax-related matters by associations such as theOrganisation for Economic Co-operation and Development and theEuropean Commission could influence tax laws in countries in which we operate.
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Acquisitions
We opportunistically invest in external research and technologies that we believe complement and strengthen our own efforts. These investments can take many forms, including acquisitions, collaborations, investments, and licensing arrangements. We view our business development activity as a way to enhance our pipeline and strengthen our business. InJanuary 2021 , we acquired all shares of Prevail for a purchase price that included$22.50 per share in cash (or an aggregate of$747.4 million , net of cash acquired) plus one non-tradable contingent value right (CVR) per share. The CVR entitles Prevail stockholders up to an additional$4.00 per share in cash (or an aggregate of approximately$160 million ) payable, subject to certain terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries:U.S. ,Japan ,United Kingdom ,Germany ,France ,Italy , orSpain . Under the terms of the agreement, we acquired potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases. The acquisition establishes a new modality for drug discovery and development, extending our research efforts through the creation of a gene therapy program that is being anchored by Prevail's portfolio of assets. InFebruary 2020 , we acquired all shares ofDermira, Inc. for a purchase price of$849.3 million , net of cash acquired. Under the terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the FDA. We also acquired Qbrexza cloth, a medicated cloth for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating). In 2021, we sold the rights to Qbrexza. See Note 5 to the consolidated financial statements for additional information regarding the sale of the rights to Qbrexza. InFebruary 2019 , we acquired all shares of Loxo for a purchase price of$6.92 billion , net of cash acquired. Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib, an oral RET inhibitor, and LOXO-305 (pirtobrutinib), an oral BTK inhibitor. In the second quarter of 2020, the FDA approved selpercatinib (Retevmo) under its Accelerated Approval regulations and continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials.
See Note 3 to the consolidated financial statements for additional information regarding our recent acquisitions.
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Operating Results-2021
Revenue
The following table summarizes our revenue activity by region:
Year Ended
December 31,
2021 2020 Percent Change
U.S. $ 16,811.0 $ 14,229.3 18
Outside U.S. 11,507.4 10,310.5 12
Revenue $ 28,318.4 $ 24,539.8 15
The following are components of the change in revenue compared with the prior
year:
2021 vs. 2020
U.S. Outside U.S. Consolidated
Volume 19 % 13 % 16 %
Price (1) % (4) % (2) %
Foreign exchange rates - % 3 % 1 %
Percent change 18 % 12 % 15 %
Numbers may not add due to rounding.
In the
Outside theU.S. the increase in volume in 2021 was primarily driven by Trulicity, Olumiant, COVID-19 antibodies, Verzenio, and Taltz. The decrease in realized prices outside theU.S. was primarily driven by the price impact of the updated National Reimbursement Drug List formulary for certain products, largely Tyvyt®, inChina .
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The following table summarizes our revenue activity in 2021 compared with 2020:
Year Ended
December 31,
2021 2020
Product U.S. Outside U.S. Total Total Percent Change
Trulicity $ 4,914.4 $ 1,557.6 $ 6,471.9 $ 5,068.1 28
Humalog(1) 1,320.7 1,132.3 2,453.0 2,625.9 (7)
COVID-19 antibodies(2) 1,978.0 261.4 2,239.3 871.2 NM
Taltz 1,542.4 670.4 2,212.8 1,788.5 24
Alimta 1,233.9 827.5 2,061.4 2,329.9 (12)
Jardiance(3) 807.3 683.5 1,490.8 1,153.8 29
Verzenio 834.9 515.0 1,349.9 912.7 48
Humulin® 832.9 389.6 1,222.6 1,259.6 (3)
Olumiant(4) 324.1 791.0 1,115.1 638.9 75
Cyramza® 358.1 674.8 1,033.0 1,032.6 -
Basaglar® 588.3 304.2 892.5 1,124.4 (21)
Forteo 441.6 360.3 801.9 1,046.3 (23)
Cialis® 10.6 707.9 718.4 607.1 18
Cymbalta 38.7 542.8 581.5 767.7 (24)
Emgality® 434.5 142.7 577.2 362.9 59
Erbitux® 481.8 66.4 548.3 536.4 2
Zyprexa® 39.6 390.7 430.3 406.5 6
Tyvyt - 418.1 418.1 308.7 35
Trajenta®(5) 82.1 290.4 372.5 358.5 4
Other products 547.1 780.8 1,327.9 1,340.1 (1)
Revenue $ 16,811.0 $ 11,507.4 $ 28,318.4 $ 24,539.8 15
Numbers may not add due to rounding.
NM - Not meaningful
(1) Humalog revenue includes insulin lispro.
(2) COVID-19 antibodies include sales for bamlanivimab administered alone as
well as sales for bamlanivimab and etesevimab administered together and were
made pursuant to EUAs or similar regulatory authorizations.
(3) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.
(4) Olumiant revenue includes sales for baricitinib, for treatment in
hospitalized COVID-19 patients, that were made pursuant to EUA or similar
regulatory authorizations.
(5) Trajenta revenue includes Jentadueto®.
Revenue of Trulicity, a treatment for type 2 diabetes and to reduce the risk of
major adverse cardiovascular events in adult patients with type 2 diabetes and
established cardiovascular disease or multiple cardiovascular risk factors,
increased 28 percent in the U.S. , driven by increased demand. Revenue outside
the U.S. increased 26 percent, driven by increased volume and, to a lesser
extent, the favorable impact of foreign exchange rates, partially offset by
lower realized prices.
Revenue of Humalog, an injectable human insulin analog for the treatment of
diabetes, decreased 11 percent in the U.S. , primarily driven by lower realized
prices. Humalog's lower realized prices in the U.S. in 2021 were driven by
higher contracted rebates and discounts and increased utilization in more
highly-rebated government segments, partially offset by lower utilization in the
340B segment. Revenue outside the U.S. decreased 1 percent, driven by decreased
volume and, to a lesser extent, lower realized prices, largely offset by the
favorable impact of foreign exchange rates. Included in the revenue of Humalog
in the U.S. are our own insulin lispro authorized generics. While it is
difficult to estimate the severity of the impact of similar insulin lispro
products entering the market, we do not expect and have not experienced a rapid
and severe decline in revenue. However, due to the impact of competition and due
to pricing pressure in the U.S. and some international markets, we expect some
price decline and loss of market share to continue over time.
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Revenue of COVID-19 antibodies, treatments for mild to moderate COVID-19 for higher-risk patients and for post-exposure prophylaxis in certain individuals for the prevention of SARS-CoV-2 infection, was$1.98 billion in theU.S. during the year endedDecember 31, 2021 . Revenue outside theU.S. was$261.4 million during the year endedDecember 31, 2021 . The availability of superior or competitive therapies, including therapies that can be administered more easily, or preventative measures, such as vaccines, coupled with the unpredictable nature of pandemics, have and could further negatively impact or eliminate demand for these COVID-19 antibodies. The FDA has revised, and may in the future revise, any EUA for our COVID-19 antibodies in response to the prevalence of variants against which our antibodies have varying degrees of efficacy. We expect that additional revenue from the sale of bamlanivimab and etesevimab after the first quarter of 2022 will be limited. Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active psoriatic arthritis, ankylosing spondylitis, and active non-radiographic axial spondyloarthritis, increased 20 percent in theU.S. , driven by increased demand, partially offset by lower realized prices due to increased rebates to gain commercial access. Revenue outside theU.S. increased 34 percent, primarily driven by increased volume. Revenue of Alimta, a treatment for various cancers, decreased 2 percent in theU.S. , driven by decreased volume, partially offset by higher realized prices. Revenue outside theU.S. decreased 22 percent, primarily driven by decreased volume due to the entry of generic competition in certain markets and, to a lesser extent, lower realized prices, partially offset by the favorable impact of foreign exchange rates. Following the loss of exclusivity in major European countries andJapan inJune 2021 , we faced, and remain exposed to, generic competition which has eroded revenue and is likely to continue to rapidly and severely erode revenue from current levels. In theU.S. , we expect the limited entry of generic competition startingFebruary 2022 and subsequent unlimited entry startingApril 2022 . We expect that the entry of generic competition following the loss of exclusivity in theU.S. will cause a rapid and severe decline in revenue. See "Executive Overview - Other Matters- Patent Matters" for additional information. Revenue of Jardiance, a treatment for type 2 diabetes, to reduce the risk of cardiovascular death in adult patients with type 2 diabetes and established cardiovascular disease, and to reduce the risk of cardiovascular death and hospitalization for heart failure in adults with heart failure and reduced ejection fraction, increased 30 percent in theU.S. , primarily driven by increased demand. Revenue outside theU.S. increased 28 percent, primarily driven by increased volume. See Note 4 to the consolidated financial statements for information regarding our collaboration withBoehringer Ingelheim involving Jardiance.
Revenue of Verzenio, a treatment for HR+, HER2- metastatic breast cancer and
high risk early breast cancer, increased 35 percent in the
Revenue of Humulin, an injectable human insulin for the treatment of diabetes, decreased 4 percent in theU.S. , driven by decreased demand and, to a lesser extent, lower realized prices. Revenue outside theU.S. decreased 1 percent, driven by decreased volume, largely offset by higher realized prices and the favorable impact of foreign exchange rates. Revenue of Olumiant, a treatment for adults with moderately-to-severely active rheumatoid arthritis, moderate to severe atopic dermatitis, and of baricitinib, a treatment, with or without remdesivir, of hospitalized patients with COVID-19, increased$260.3 million in theU.S. , driven by increased volume and, to a lesser extent, higher realized prices. Revenue outside theU.S. increased 38 percent, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices. Increased volume worldwide was partially driven by utilization of Olumiant for the treatment of hospitalized patients with COVID-19. Revenue of Cyramza, a treatment for various cancers, decreased 6 percent in theU.S. , driven by decreased demand, partially offset by higher realized prices. Revenue outside theU.S. increased 4 percent, driven by increased volume, partially offset by lower realized prices.
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Gross Margin, Costs, and Expenses
Gross margin as a percent of revenue was 74.2 percent in 2021, a decrease of 3.5 percentage points compared with 2020, driven by higher sales of COVID-19 antibodies.
Research and development expenses increased 15 percent to
Marketing, selling, and administrative expenses increased 5 percent to$6.43 billion in 2021, primarily due to increased marketing costs to continue to drive growth for certain products, investment in preparation for new launches, and lower marketing activities in 2020 as a result of pandemic-related spending reductions. We recognized acquired IPR&D charges of$874.9 million and$660.4 million in 2021 and 2020, respectively, related to business development transactions. See Note 3 to the consolidated financial statements for additional information. We recognized asset impairment, restructuring, and other special charges of$316.1 million in 2021. The charges were primarily related to an impairment of a contract-based intangible asset from our acquisition of Loxo, an intangible asset impairment resulting from the sale of the rights to Qbrexza, as well as acquisition and integration costs associated with the acquisition of Prevail. In 2020, we recognized$131.2 million of asset impairment, restructuring, and other special charges primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure. Other-net, (income) expense was expense of$201.6 million in 2021 compared to income of$1.17 billion in 2020, primarily driven by lower net investment gains on equity securities and a debt extinguishment loss of$405.2 million related to the repurchase of debt. Our effective tax rate was 9.3 percent in 2021, compared with an effective tax rate of 14.3 percent in 2020, primarily driven by the tax impacts of acquired IPR&D charges, lower net investment gains on equity securities, as well as a net discrete tax benefit. Operating Results-2020 For a discussion of our results of operations pertaining to 2020 and 2019 see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 46
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FINANCIAL CONDITION AND LIQUIDITY
We believe our available cash and cash equivalents, together with our ability to generate operating cash flow and our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital requirements, which include:
•working capital requirements, including related to employee payroll, clinical trials, manufacturing materials, and taxes;
•capital expenditures;
•share repurchases and dividends;
•repayment of outstanding short-term and long-term borrowings;
•contributions to our defined benefit pension and retiree health benefit plans;
•milestone and royalty payments; and
•potential business development activities, including acquisitions, collaborations, investments, and licensing arrangements.
Our management continuously evaluates our liquidity and capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements. As ofDecember 31, 2021 , our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital equipment expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, leases, unfunded commitments to invest in venture capital funds, and retirement benefits (see Notes 11, 4, 14, 10, 7, and 15 to the consolidated financial statements). We anticipate our cash requirements related to ordinary course purchases of goods and services and capital equipment expenditures will be consistent with our past levels relative to revenues. Beginning in 2022, the 2017 Tax Act contains a provision that requires us to capitalize and amortize research and development expenses for tax purposes, whereas previously we could fully deduct these expenses in the year incurred. While this provision of the 2017 Tax Act is expected to have an immaterial impact on our consolidated results of operations, if it is not deferred or repealed byCongress , we expect that the implementation of this provision will increase our cash payments of income taxes by up to$1.50 billion in 2022 and subsequently decrease our cash payments of income taxes moderately over the five-year amortization period. See "Results of Operations - Executive Overview - Other Matters -Tax Matters" for additional information. We plan to invest more than$1 billion over several years in a new facility inConcord, North Carolina to manufacture parenteral (injectable) products and devices. We plan to invest more than400 million euros over several years in a new facility in Limerick,Ireland to expand our manufacturing network for biologic active ingredients. Cash and cash equivalents increased to$3.82 billion as ofDecember 31, 2021 , compared with$3.66 billion atDecember 31, 2020 . Net cash provided by operating activities was$7.26 billion in 2021, compared with$6.50 billion in 2020. Refer to the consolidated statements of cash flows for additional information on the significant sources and uses of cash for the years endedDecember 31, 2021 and 2020. In addition to our cash and cash equivalents, we held total investments of$3.30 billion and$2.99 billion as ofDecember 31, 2021 and 2020, respectively. See Note 7 to the consolidated financial statements for additional information. InJanuary 2021 , we acquired all shares of Prevail for a purchase price that included$22.50 per share in cash (or an aggregate of$747.4 million , net of cash acquired) plus one non-tradable CVR per share. The CVR entitles Prevail stockholders up to an additional$4.00 per share in cash (or an aggregate of approximately$160 million ) payable, subject to certain terms and conditions. This acquisition was funded primarily through cash on hand. See Note 3 to the consolidated financial statements for additional information.
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As ofDecember 31, 2021 , total debt was$16.88 billion , an increase of$289.4 million compared with$16.60 billion atDecember 31, 2020 . InSeptember 2021 , we issued euro-denominated notes consisting of €500.0 million of 1.125 percent fixed-rate notes due inSeptember 2051 and €700.0 million of 1.375 percent fixed-rate notes due inSeptember 2061 , with interest to be paid annually, and British pound-denominated notes consisting of £250.0 million of 1.625 percent fixed-rate notes due inSeptember 2043 , with interest to be paid annually. We paid$1.91 billion of the net cash proceeds from the offering to purchase and redeem certain higher interest rateU.S. dollar-denominated notes with an aggregate principal amount of$1.50 billion . We used the remaining net proceeds from the offering to prefund certain 2022 debt maturities and for general corporate purposes. In addition, inSeptember 2021 , we issued euro-denominated notes consisting of €600.0 million of 0.50 percent fixed-rate notes due inSeptember 2033 , with interest to be paid annually. The net proceeds from the offering will be used to fund, in whole or in part, eligible projects designed to advance one or more of our environmental, social, and governance objectives. See Note 11 to the consolidated financial statements for additional information. As ofDecember 31, 2021 , we had a total of$5.26 billion of unused committed bank credit facilities,$5.00 billion of which is available to support our commercial paper program. See Note 11 to the consolidated financial statements for additional information. We believe that amounts accessible through existing commercial paper markets should be adequate to fund any short-term borrowing needs. For the 136th consecutive year, we distributed dividends to our shareholders. Dividends of$3.40 per share and$2.96 per share were paid in 2021 and 2020, respectively. In the fourth quarter of 2021, effective for the dividend to be paid in the first quarter of 2022, the quarterly dividend was increased to$0.98 per share, resulting in an indicated annual rate for 2022 of$3.92 per share.
Capital expenditures of
In 2021, we repurchased$1.00 billion of shares, which completed our$8.00 billion share repurchase program authorized inJune 2018 . Additionally, our board authorized a$5.00 billion share repurchase program inMay 2021 . In 2021, we repurchased$250.0 million of shares under the$5.00 billion share repurchase program. As ofDecember 31, 2021 , we had$4.75 billion remaining under the$5.00 billion share repurchase program. See Note 13 to the consolidated financial statements for additional information.
See "Results of Operations - Executive Overview - Other Matters - Patent Matters" for information regarding recent and upcoming losses of patent protection.
Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of health care legislation; and various international government funding levels.
In the normal course of business, our operations are exposed to fluctuations in interest rates, currency values, and fair values of equity securities. These fluctuations can vary the costs of financing, investing, and operating. We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of this risk management program is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading. Our primary interest rate risk exposure results from changes in short-termU.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. As ofDecember 31, 2021 , substantially all of our total long-term debt carries interest at a fixed rate. We have converted approximately 13 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. Based on our overall interest rate exposure atDecember 31, 2021 and 2020, 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 ofDecember 31, 2021 and 2020, 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. 48 -------------------------------------------------------------------------------- Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily theU.S. dollar against the euro, Japanese yen, and Chinese yuan. We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. We also face currency exposure that arises from translating the results of our global operations to theU.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (primarily the euro, the Japanese yen, and Chinese yuan). Our corporate risk-management policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of currency fluctuations on the existing assets and liabilities. We periodically analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A hypothetical 10 percent change in exchange rates (primarily against theU.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts as ofDecember 31, 2021 and 2020, would not have a material impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis does not consider the impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions. Our fair value risk exposure relates primarily to our public equity investments and to equity investments that do not have readily determinable fair values. As ofDecember 31, 2021 and 2020, our carrying values of these investments were$1.83 billion and$2.04 billion , respectively. A hypothetical 20 percent change in fair value of the equity instruments would have impacted other-net, (income) expense by$365.6 million and$407.6 million as ofDecember 31, 2021 and 2020, respectively. We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the product in the event that regulatory approval for marketing is obtained. Individually, these arrangements are generally not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements were reached in the same reporting period, the aggregate expense or aggregate milestone payments made could be material to our results of operations or cash flows, respectively, in that period. See Note 4 to the consolidated financial statements for additional information. 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. 49
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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in theU.S. , we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this report. Our most critical accounting estimates have been discussed with our audit committee and are described below.
Revenue Recognition and Sales Return, Rebate, and Discount Accruals
We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. For product sales to customers, provisions for returns, rebates and discounts are established in the same period the related product sales are recognized. To determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates. The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, chargeback, and patient assistance programs in theU.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.
Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales return, rebate, and discount accruals.
Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts.
Financial Statement Impact
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As ofDecember 31, 2021 , a 5 percent change in our consolidated sales return, rebate, and discount liability would have led to an approximate$366 million effect on our income before income taxes. The portion of our consolidated sales return, rebate, and discount liability resulting from sales of our products in theU.S. was approximately 90 percent as ofDecember 31, 2021 and 2020.
The following represents a roll-forward of our most significant
(Dollars in millions) 2021 2020
Sales return, rebate, and discount liabilities, beginning of year
20,106.3 18,668.4
Cash payments
(19,344.7) (17,903.9)
Sales return, rebate, and discount liabilities, end of year
(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1 percent of consolidated revenue for each of the years presented. 50 --------------------------------------------------------------------------------
Litigation Liabilities and Other Contingencies
Background and Uncertainties
Litigation liabilities and other contingencies are, by their nature, uncertain and based upon complex judgments and probabilities. The factors we consider in developing our litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past matters, the nature of the product and the current assessment of the science subject to the litigation, as applicable, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant liability contingencies when both probable and reasonably estimable. We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Due to a very restrictive market for litigation liability insurance, we are self-insured for litigation liability losses for all our currently marketed products. In addition to insurance coverage, we consider any third-party indemnification to which we are entitled or under which we are obligated. With respect to our third-party indemnification rights, these considerations include the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection. The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
Acquisitions
Background and Uncertainties
To determine whether acquisitions or licensing transactions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules. If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense at the acquisition date, and goodwill is not recorded. See Note 3 to the consolidated financial statements for additional information. The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets, including acquired IPR&D, are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue growth and discount rate. Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.
The fair values of identifiable intangible assets are primarily determined using an "income method," as described in Note 8 to the consolidated financial statements.
The fair value of any contingent consideration liability that results from a business combination is primarily determined using a discounted cash flow analysis, as described in Note 7 to the consolidated financial statements. Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, probability of technical success and the discount rate.
Financial Statement Impact
As of
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Impairment of Indefinite-Lived and Long-Lived Assets
Background and Uncertainties
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted.Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions. We utilize the "income method," as described in Note 8 to the consolidated financial statements.
For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in "Results of Operations - Executive Overview - Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products. As such, it is likely that some acquired IPR&D assets will become impaired in the future. Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management's judgment. Actual results could vary materially from these estimates.
Retirement Benefits Assumptions
Background and Uncertainties
Defined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate, expected return on plan assets, and retirement age. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 15 to the consolidated financial statements for additional information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt instruments to determine the discount rates. In evaluating the expected return on plan assets, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately 75 percent of which are growth investments), and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates and expected return on plan assets of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages. Annually, we determine the fair value of the plan assets in our defined benefit pension and retiree health benefit plans. Approximately 38 percent of our plan assets are in hedge funds and private equity-like investment funds (collectively, alternative assets). We value these alternative investments using significant unobservable inputs or using the net asset value reported by the counterparty, adjusted as necessary. Inputs include underlying net asset values, discounted cash flows valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks. 52 --------------------------------------------------------------------------------
Financial Statement Impact
If the 2021 discount rate for theU.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to change by a quarter percentage point, income before income taxes would change by$21.6 million . If the 2021 expected return on plan assets forU.S. plans were to change by a quarter percentage point, income before income taxes would change by$31.5 million . If our assumption regarding the 2021 expected age of future retirees forU.S. plans were adjusted by one year, our income before income taxes would be affected by$51.1 million . TheU.S. plans, includingPuerto Rico , represent approximately 80 percent of each of the total projected benefit obligation and total plan assets atDecember 31, 2021 .
Adjustments to the fair value of plan assets are not recognized in pension and retiree health benefit expense in the year that the adjustments occur. Such changes are deferred, along with other actuarial gains and losses, and are amortized into expense over the expected remaining service life of employees.
Income Taxes Background and Uncertainties We prepare and file tax returns based upon our interpretation of tax laws and regulations, and we record estimates based upon these interpretations. Our tax returns are routinely subject to examination by taxing authorities, which could result in future tax, interest, and penalty assessments. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation and regulation as concluded through the various jurisdictions' tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from changes to existing tax law, the issuance of regulations by taxing authorities, new information obtained during a tax examination, or resolution of a tax examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses, tax credits, and other tax carryforwards and carrybacks in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed future taxable income in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or to generate future taxable income in these jurisdictions could lead to the reversal of all or a portion of these valuation allowances and a reduction of income tax expense.
Financial Statement Impact
As of
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 16 to the consolidated financial statements and is incorporated here by reference.
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