Eli Lilly and : & CO Management's Discussion and Analysis of Results of Operations and Financial Condition (form 10-K)

February 17, 2021 at 11:02 am EST

RESULTS OF OPERATIONS
(Tables present dollars in millions, except per-share data)
General
Management's discussion and analysis of results of operations and financial
condition is intended to assist the reader in understanding and assessing
significant changes and trends related to the results of operations and
financial position of our consolidated company. This discussion and analysis
should be read in conjunction with the consolidated financial statements and
accompanying footnotes in Item 8 of Part II of this Annual Report on Form 10-K.
Certain statements in this Item 7 of Part II of this Annual Report on Form 10-K
constitute forward-looking statements. Various risks and uncertainties,
including those discussed in "Forward-Looking Statements" and Item 1A, "Risk
Factors," may cause our actual results, financial position, and cash generated
from operations to differ materially from these forward-looking statements.
Executive Overview
This section provides an overview of our financial results, recent product and
late-stage pipeline developments, and other matters affecting our company and
the pharmaceutical industry. Earnings per share (EPS) data are presented on a
diluted basis.
COVID-19 Pandemic
In response to the COVID-19 pandemic, we have been focused on maintaining a
reliable supply of our medicines; reducing the strain on the medical system;
developing treatments for COVID-19; protecting the health, safety, and
well-being of our employees; supporting our communities; and ensuring
affordability of and access to our medicines, particularly insulin.
We have experienced negative impacts to our underlying business due to the
COVID-19 pandemic, including decreases in new prescriptions as a result of fewer
patient visits to physician's offices to begin or change treatment, changes in
payer segment mix, and the use of patient affordability programs in the United
States (U.S.) due to rising unemployment. Additionally, we have experienced, and
may continue to experience, decreased demand as a result of lack of normal
access and fewer in-person interactions by patients and our employees with the
healthcare system. In certain locations in the U.S. and around the world with
COVID-19 outbreaks, we temporarily halted in-person interactions by our
employees with healthcare providers and increased virtual interactions. While
in-person interactions have resumed in many locations, we may decide to halt
such activity in the future and, in those cases, expect to resume such
interactions as it is safe to do so and in compliance with applicable guidance
and requirements. We may experience additional pricing pressures resulting from
the financial strain of the COVID-19 pandemic on government-funded healthcare
systems around the world.
We remain committed to discovering and developing new treatments for the
patients we serve. At the beginning of the COVID-19 pandemic, we paused new
clinical trial starts and enrollment in new trials in order to reduce the strain
on the medical system, and we have resumed this activity in our clinical trials.
However, significant delays or unexpected issues, such as higher discontinuation
rates or delays accumulating data, affecting the timing, conduct, or regulatory
review of our clinical trials, could adversely affect our ability to
commercialize some assets in our product pipeline if the COVID-19 pandemic
continues for a protracted period.
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In regards to COVID-19 therapies, the U.S. Food and Drug Administration (FDA)
granted Emergency Use Authorizations (EUA) for bamlanivimab and bamlanivimab and
etesevimab administered together for higher-risk patients who have been recently
diagnosed with mild-to-moderate COVID-19 and for baricitinib in combination with
remdesivir in hospitalized COVID-19 patients. We are actively working with a
variety of organizations, including governmental agencies, to facilitate access
to our COVID-19 treatments in various countries. However, we face unique risks
and uncertainties in our development, manufacture, and uptake of potential
treatments for COVID-19, including vulnerability to supply chain disruptions,
higher manufacturing costs, difficulties in manufacturing sufficient quantities
of our therapies, restrictions on administration that limit widespread and
timely access to our therapies, and risks related to handling, return, and/or
refund of product after delivery by us. Expedited authorization processes,
including our EUAs for bamlanivimab and bamlanivimab and etesevimab administered
together, have allowed restricted distribution of products with less than
typical safety and efficacy data, and additional data that become available may
call into question the safety or effectiveness of our COVID-19 therapies.
Additionally, the availability of superior or competitive therapies, or
preventative measures, such as vaccines, coupled with the transient nature of
pandemics, could negatively impact or eliminate demand for our COVID-19
therapies. In addition, we may be required to accept returns of certain product
previously shipped pursuant to EUAs if the relevant EUA is revoked or
terminated. Mutations or the spread of other variants of the coronavirus could
also render our therapies ineffective. Any of these risks could prevent us from
recouping our substantial investments in the research, development, and
manufacture of our COVID-19 therapies.
Our ability to continue to operate without significant negative impacts will in
part depend on our ability to protect our employees and our supply chain. We
have taken steps to protect our employees worldwide, with particular measures in
place for those working in our manufacturing sites and distribution facilities.
For 2020, we were able to largely maintain our normal operations. However,
uncertainty resulting from the COVID-19 pandemic could have an adverse impact on
our manufacturing operations, global supply chain, and distribution systems,
which could impact our ability to produce and distribute our products and the
ability of third parties on which we rely to fulfill their obligations to us,
and could increase our expenses.
Although the COVID-19 pandemic has affected our operations and demand for our
products, it has not negatively impacted our liquidity position. We expect to
continue to generate cash flows to meet our short-term liquidity needs and to
have access to liquidity via the short-term and long-term debt markets. We also
have not observed any material impairments of our assets or significant changes
in the fair value of assets due to the COVID-19 pandemic.
The degree to which the COVID-19 pandemic will continue to impact our business
operations, financial results, and liquidity will depend on future developments,
is highly uncertain, and cannot be predicted due to, among other things, the
duration and severity of the pandemic, the actions taken to reduce its
transmission, including widespread availability of vaccines, and the speed with
which, and extent to which, more stable economic and operating conditions
resume. Should the COVID-19 pandemic and any associated recession or depression
continue for a prolonged period, our results of operations, financial condition,
liquidity, and cash flows could be materially impacted by lower revenues and
profitability and a lower likelihood of effectively and efficiently developing
and launching new medicines. See "Risk Factors" in Part I, Item 1A of this
Annual Report on Form 10-K for additional information on risk factors that could
impact our results.
Elanco Animal Health (Elanco) Disposition
On March 11, 2019, we completed the disposition of our remaining 80.2 percent
ownership of Elanco common stock through a tax-free exchange offer. As a result,
we recognized a gain on the disposition of approximately $3.7 billion in the
first quarter of 2019 and now operate as a single segment. See Note 19 to the
consolidated financial statements for further discussion.

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Financial Results
The following table summarizes our key operating results:
                                                           Year Ended

December 31


                                                         2020                 2019               Percent Change
Revenue                                             $  24,539.8          $   22,319.5                  10
Gross margin                                           19,056.5              17,598.3                  8
Gross margin as a percent of revenue                       77.7  %               78.8  %
Operating expense                                   $  12,206.9          $   11,808.8                  3
Acquired in-process research and development              660.4                 239.6                  NM

Asset impairment, restructuring, and other special charges

131.2 575.6 (77)
Income before income taxes 7,229.9 5,265.9 37
Income taxes 1,036.2 628.0 65
Net income from continuing operations 6,193.7 4,637.9 34

Net income 6,193.7 8,318.4 (26)
EPS from continuing operations 6.79 4.96 37

EPS 6.79 8.89 (24)

NM - not meaningful
Revenue increased in 2020 driven by increased volume, partially offset by lower
realized prices. Operating expenses, defined as the sum of research and
development and marketing, selling, and administrative expenses, increased in
2020, driven primarily by approximately $450 million of development expenses for
COVID-19 therapies. The decreases in net income and EPS in 2020 were driven
primarily by the approximately $3.7 billion gain recognized on the disposition
of Elanco in 2019, partially offset by higher gross margin and higher other
income in 2020.
The following highlighted items affect comparisons of our 2020 and 2019
financial results:
2020
Acquired in-process research and development (IPR&D) (Note 3 to the consolidated
financial statements)
•We recognized acquired IPR&D charges of $660.4 million resulting from the
acquisitions of Disarm Therapeutics, Inc. (Disarm) and a pre-clinical stage
company as well as collaborations with Innovent Biologics, Inc. (Innovent),
Sitryx Therapeutics Limited (Sitryx), Fochon Pharmaceuticals, Ltd. (Fochon),
AbCellera Biologics Inc. (AbCellera), Evox Therapeutics Ltd (Evox), and Shanghai
Junshi Biosciences Co., Ltd. (Junshi Biosciences).
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the
consolidated financial statements)
•We recognized charges of $131.2 million primarily related to severance costs
incurred as a result of actions taken worldwide to reduce our cost structure, as
well as acquisition and integration costs incurred as part of the acquisition of
Dermira, Inc. (Dermira).
Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)
•We recognized $1.44 billion of net investment gains on equity securities.
2019
Acquired IPR&D (Note 3 to the consolidated financial statements)
•We recognized acquired IPR&D charges of $239.6 million resulting from
collaborations with AC Immune SA (AC Immune), Centrexion Therapeutics
Corporation (Centrexion), ImmuNext, Inc. (ImmuNext), and Avidity Biosciences,
Inc. (Avidity).
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the
consolidated financial statements)
•We recognized charges of $575.6 million primarily associated with the
accelerated vesting of Loxo Oncology, Inc. (Loxo) employee equity awards as part
of the acquisition of Loxo.
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Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)
•We recognized $401.2 million of net investment gains on equity securities.
•We recognized a gain of $309.8 million on the sale of our antibiotics business
in China.
•We recognized a debt extinguishment loss of $252.5 million related to the
repurchase of debt.
Net Income from Discontinued Operations (Note 19 to the consolidated financial
statements)
•We recognized a gain related to the disposition of Elanco of approximately $3.7
billion.
Late-Stage Pipeline
Our long-term success depends on our ability to continually discover or acquire,
develop, and commercialize innovative new medicines. We currently have
approximately 45 candidates in clinical development or under regulatory review,
and a larger number of projects in the discovery phase.
The following new molecular entities (NMEs) and diagnostic agent are currently
in Phase III clinical trials or have been submitted for regulatory review or
have received first regulatory approval in the U.S., Europe, or Japan in 2020.
In addition, the following table includes certain NMEs currently in Phase II
clinical trials. The following table reflects the status of these NMEs and
diagnostic agent, including certain other developments since January 1, 2020.
Compound Indication Status Developments

COVID-19 Therapies


                                                                                               The FDA granted EUA for higher-risk patients
                                                                                               recently diagnosed with mild-to-moderate
Bamlanivimab                COVID-19                             Emergency

Use Authorization COVID-19 in the fourth quarter of 2020.


                                                                                               Announced in January 2021 that a Phase III trial
                                                                                               met the primary and all key secondary endpoints.
                                                                                               Additional Phase III trials are ongoing.
                                                                                               Announced in January 2021 that a Phase III trial
                                                                                               met the primary and all key secondary endpoints.
Bamlanivimab and etesevimab                                                                    The FDA granted EUA for higher-risk patients
administered together       COVID-19                             Emergency

Use Authorization recently diagnosed with mild-to-moderate

COVID-19 in January 2021. Additional Phase III
trials are ongoing. We intend to submit to the
FDA for approval in the second half of 2021.
Endocrinology
Ultra-rapid Lispro Launched in Japan in the second quarter of 2020
(Lyumjev®) Type 1 and 2 diabetes Launched and in the U.S. and Europe in the third quarter
of 2020.
Announced in the fourth quarter of 2020 and in
Type 2 diabetes February 2021 that Phase III trials met the
Tirzepatide Phase III primary and all key secondary endpoints.
Additional Phase III trials are ongoing.
Obesity Phase III trials are ongoing.
Nonalcoholic steatohepatitis Phase II Phase II trial is ongoing.
Basal Insulin-Fc Type 1 and 2 diabetes Phase II Phase II trials are ongoing.

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Compound                  Indication                     Status

Developments

Immunology


                                                                            Acquired in Dermira acquisition in February 2020.
Lebrikizumab(1)           Atopic dermatitis              Phase III

The FDA granted Fast Track designation(2). Phase

III trials are ongoing.


                          Crohn's Disease

Phase III trials are ongoing.


                                                                            Announced in the third quarter of 2020 that Phase
Mirikizumab               Psoriasis                      Phase III

III trials met the primary and all key secondary

endpoints. Additional Phase III trials are

ongoing.


                          Ulcerative colitis                                Phase III trials are ongoing.
CXCR1/2 Ligands           Hidradenitis Suppurativa       Phase II           Phase II trial initiated in the third quarter of
Monoclonal Antibody

2020.


IL-2 Conjugate            Systemic Lupus Erythematosus   Phase II           Phase II trial is ongoing.
Neuroscience
                                                                            Received Schedule V classification from the Drug
Lasmiditan (Reyvow®)      Acute treatment of migraine    Launched

Enforcement Agency and launched in the U.S. in

the first quarter of 2020. Submitted in Europe

and Japan in the fourth quarter of 2020. Flortaucipir (TauvidTM) Alzheimer's disease diagnostic Launched Launched in the U.S. in the fourth quarter of

2020.


                                                                            Submitted to the FDA in 2019. The FDA intends to
Tanezumab(3)              Osteoarthritis pain            Submitted

hold an Advisory Committee meeting, expected to

occur in March 2021, to discuss the submission.


                          Cancer pain                    Phase III

Phase III trial is ongoing.

Announced in the first quarter of 2020 that a

Phase III trial for people with dominantly


                          Preclinical Alzheimer's                           inherited Alzheimer's disease (DIAD) did not meet
Solanezumab               disease                        Phase III

the primary endpoint. We do not plan to pursue

submission for DIAD. Phase III trial is ongoing

for Anti-Amyloid Treatment in Asymptomatic

Alzheimer's.


                                                                            Announced in January 2021 that a Phase II trial
Donanemab                 Alzheimer's disease            Phase II

met the primary endpoint. Additional Phase II


                                                                            trials are ongoing.
Epiregulin/TGFa mAb       Chronic pain                   Phase II

Phase II trials initiated in the third quarter of

2020.


PACAP38 Antibody          Chronic pain                   Phase II

Phase II trial initiated in the fourth quarter of

2020.


SSTR4 Agonist             Chronic pain                   Phase II

Phase II trials initiated in the fourth quarter


                                                                            of 2020.
Zagotenemab               Alzheimer's disease            Phase II           Phase II trial is ongoing.
Oncology

Granted accelerated approval(4) by the FDA based


                          Thyroid cancer                                    on Phase II data and launched in the U.S. in the
Selpercatinib (Retevmo®)                                 Launched

second quarter of 2020. Submitted in Japan in the

fourth quarter of 2020. Granted conditional


                          Lung cancer

marketing authorisation(4) in Europe in February

2021. Phase III trials are ongoing.


                                                                            Phase II trial initiated in the second quarter of
LOXO-305                  Hematological cancers          Phase II

2020. Presented positive data at the American

Society of Hematology Annual Meeting in the

fourth quarter of 2020.




(1) In collaboration with Almirall, S.A. (Almirall) in Europe.
(2) Fast Track designation is designated to expedite the development and review
of new therapies to treat serious conditions and address unmet medical needs.
(3) In collaboration with Pfizer, Inc.
(4) Continued approval may be contingent on verification and description of
clinical benefit in confirmatory Phase III trials.
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As part of our collaboration with Innovent, we plan to pursue registration of
sintilimab injection (Tyvyt®) in the U.S. and other markets.
Our pipeline also contains several new indication line extension (NILEX)
products. The following certain NILEX products are currently in Phase II or
Phase III clinical testing, have been submitted for regulatory review, or have
received first regulatory approval in the U.S., Europe, or Japan for use in the
indication described in 2020. The following table reflects the status of certain
NILEX products, including certain other developments since January 1, 2020:
Compound                             Indication                 Status                    Developments

Endocrinology


                                     Heart failure with reduced Submitted                 Submitted in the U.S., Europe and Japan in
                                     ejection fraction                                    the fourth quarter of 2020.

Empagliflozin (Jardiance®)(1) Chronic kidney disease


                                     Heart failure with         Phase III                 Granted FDA Fast Track designation(2). Phase
                                     preserved ejection                                   III trials are ongoing.
                                     fraction

Immunology

Announced in the first quarter of 2020 that a
Phase III trial met the primary and all key
Atopic dermatitis Approved secondary endpoints. Submitted in the U.S. in
the second quarter of 2020. Approved in
Europe in the third quarter of 2020 and in
Japan in the fourth quarter of 2020.
Baricitinib (Olumiant®) Emergency Use The FDA granted EUA in combination with
COVID-19 Authorization remdesivir in hospitalized COVID-19 patients
in the fourth quarter of 2020.
Alopecia areata The FDA granted Breakthrough Therapy
Phase III designation(3). Phase III trials are ongoing.
Systemic lupus Phase III trials are ongoing.
erythematosus
Oncology
Announced in the second quarter of 2020 that
Adjuvant breast cancer Submitted a Phase III trial met the primary endpoint.
Abemaciclib (Verzenio®) Submitted in the U.S. and Europe in the
fourth quarter of 2020.
Prostate cancer Phase II Phase II trials are ongoing.

(1) In collaboration with Boehringer Ingelheim.
(2) Fast Track designation is designated to expedite the development and review
of new therapies to treat serious conditions and address unmet medical needs.
(3) Breakthrough Therapy designation is designed to expedite the development and
review of potential medicines that are intended to treat a serious condition
where preliminary clinical evidence indicates that the treatment may demonstrate
substantial improvement over available therapy on a clinically significant
endpoint.

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There are many difficulties and uncertainties inherent in pharmaceutical
research and development and the introduction of new products, as well as a high
rate of failure inherent in new drug discovery and development. To bring a drug
from the discovery phase to market can take over a decade and often costs in
excess of $2 billion. Failure can occur at any point in the process, including
in later stages after substantial investment. As a result, most funds invested
in research programs will not generate financial returns. New product candidates
that appear promising in development may fail to reach the market or may have
only limited commercial success because of efficacy or safety concerns,
inability to obtain or maintain necessary regulatory approvals or payer
reimbursement or coverage, limited scope of approved uses, changes in the
relevant treatment standards or the availability of new or better competitive
products, difficulty or excessive costs to manufacture, or infringement of the
patents or intellectual property rights of others. Regulatory agencies continue
to establish high hurdles for the efficacy and safety of new products. Delays
and uncertainties in drug approval processes can result in delays in product
launches and lost market opportunity. In addition, it can be very difficult to
predict revenue growth rates of new products.
We manage research and development spending across our portfolio of potential
new medicines. A delay in, or termination of, any one project will not
necessarily cause a significant change in our total research and development
spending. Due to the risks and uncertainties involved in the research and
development process, we cannot reliably estimate the nature, timing, and costs
of the efforts necessary to complete the development of our research and
development projects, nor can we reliably estimate the future potential revenue
that will be generated from any successful research and development project.
Each project represents only a portion of the overall pipeline, and none is
individually material to our consolidated research and development expense.
While we do accumulate certain research and development costs on a project level
for internal reporting purposes, we must make significant cost estimations and
allocations, some of which rely on data that are neither reproducible nor
validated through accepted control mechanisms. Therefore, we do not have
sufficiently reliable data to report on total research and development costs by
project, by preclinical versus clinical spend, or by therapeutic category.
Other Matters
Patent Matters
We depend on patents or other forms of intellectual property protection for most
of our revenue, cash flows, and earnings.
Our formulation patents for Forteo® expired in December 2018, and our use
patents expired in August 2019 in major European markets and the U.S. Both the
formulation patent and the use patent expired in August 2019 in Japan. We expect
further volume decline as a result of the anticipated entry of generic and
biosimilar competition following the loss of patent exclusivity in these
markets. In the aggregate, we expect that the decline in revenue will have a
material adverse effect on our consolidated results of operations and cash
flows.
The Alimta® vitamin regimen patents, which we expect to provide us with patent
protection for Alimta through June 2021 in Japan and major European countries,
and through May 2022 in the U.S., have been challenged in each of these
jurisdictions. In the U.S., most challenges have been finally resolved in our
favor, and one remains in active litigation. We and Eagle Pharmaceuticals, Inc.
(Eagle) reached an agreement in December 2019 to settle all pending litigation,
allowing Eagle a limited initial entry into the market with its product starting
February 2022 (up to an approximate three-week supply) and subsequent unlimited
entry starting April 2022. We expect that the entry of generic competition in
the U.S. either from an unfavorable outcome to the patent challenge or following
the loss of patent exclusivity, will cause a rapid and severe decline in revenue
and have a material adverse effect on our consolidated results of operations and
cash flows.
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We are aware that several companies have received approval to market generic
versions of pemetrexed in major European markets and that generic competitors
may choose to attempt a launch at risk. Following a final decision in the
Supreme Court of Germany in July 2020 overturning the lower court and upholding
the validity of our Alimta patent, several generics that were on the market at
risk in Germany left. We have removed the remaining generics from the market in
Germany by obtaining preliminary injunctions in our favor. In September 2020,
the Paris Court of First Instance in France issued a final decision upholding
the validity of our Alimta patent and found infringement by Fresenius Kabi
France and Fresenius Kabi Groupe France's (collectively, Kabi) pemetrexed
product. The court issued an injunction against Kabi and provisionally awarded
us damages. In January 2021, that same court issued a preliminary injunction
against Zentiva France S.A.S. (Zentiva), the last remaining company with a
generic pemetrexed product on the French market, and provisionally awarded us
damages. In October 2020, the Court of Appeal of the Netherlands overturned a
lower court decision and ruled that our Alimta patent is valid and infringed and
reinstated an injunction against Kabi, thereby removing Kabi's pemetrexed
product from the Netherlands market. Kabi has appealed this decision to the
Netherlands Supreme Court. Kabi's generic pemetrexed product was the only at
risk generic on the market in the Netherlands. Our vitamin regimen patents have
also been challenged in other smaller European jurisdictions.
We expect that further entry of generic competition for Alimta in major European
markets following either the loss of effective patent protection or of patent
exclusivity will cause a rapid and severe decline in revenue. See Note 16 to the
consolidated financial statements for a more detailed account of the legal
proceedings currently pending in the U.S., Europe, and Japan regarding, among
others, our Alimta patents.
The compound patent for Humalog® (insulin lispro) has expired in major markets.
Global regulators have different legal pathways to approve similar versions of
insulin lispro. A competitor launched a similar version of insulin lispro in
certain European markets in 2017 and in the U.S. in the second quarter of 2018.
While it is difficult to estimate the severity of the impact of insulin lispro
products entering the market, we do not expect and have not experienced a rapid
and severe decline in revenue; however, we expect additional pricing pressure
and some loss of market share that would continue over time.
Our compound patent protection for Cymbalta® expired in Japan in January 2020.
We expect generics to enter the market in mid-2021. We expect that the entry of
generic competition will cause a rapid and severe decline in revenue and will
have a material adverse effect on our consolidated results of operations and
cash flows.
Foreign Currency Exchange Rates
As a global company with substantial operations outside the U.S., we face
foreign currency risk exposure from fluctuating currency exchange rates,
primarily the U.S. dollar against the euro and Japanese yen. While we seek to
manage a portion of these exposures through hedging and other risk management
techniques, significant fluctuations in currency rates can have a material
impact, either positive or negative, on our revenue, cost of sales, and
operating expenses. While there is uncertainty in the future movements in
foreign exchange rates, fluctuations in these rates could negatively impact our
future consolidated results of operations and cash flows.
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
U.S.
In the U.S., public concern over access to and affordability of pharmaceuticals
continues to drive the regulatory and legislative debate. These policy and
political issues increase the risk that taxes, fees, rebates, or other cost
control measures may be enacted to manage federal and state budgets. Key health
policy initiatives affecting biopharmaceuticals include:
•the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent
stimulus bills that focus on ensuring availability and access to lifesaving
drugs during a public health crisis,
•foreign reference pricing in Medicare and private insurance,
•modifications to Medicare Parts B and D,
•provisions that would allow the Department of Health and Human Services (HHS)
to negotiate prices for biologics and drugs in Medicare,
•a reduction in biologic data exclusivity,

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•proposals related to Medicaid prescription drug coverage and manufacturer drug
rebates,
•proposals that would require biopharmaceutical manufacturers to disclose
proprietary drug pricing information, and
•state-level proposals related to prescription drug prices and reducing the cost
of pharmaceuticals purchased by government health care programs.

On July 24, 2020 and September 13, 2020, former U.S. President Donald Trump
signed Executive Orders related to the 340B Prescription Drug Program, rebate
reform in Medicare Part D, drug importation including insulin, and foreign
reference pricing in Medicare Part B and Part D. Although their current status
is unclear given the change in presidential administration, these Executive
Orders, if implemented, could have a material adverse impact on our future
consolidated results of operations, liquidity, and financial position. On
September 1, 2020, Lilly announced it would distribute all 340B ceiling priced
products directly to covered entities and their child sites only. Lilly provides
340B discounts to a contract pharmacy only if it is a wholly owned subsidiary of
a covered entity, if a covered entity does not have an in-house pharmacy or, in
the case of insulin, if the subject covered entity and its contract pharmacies
agree to pass along the discount to patients without any markup for dispensing
fees and without billing insurance or collecting duplicate discounts. Lilly has
been transparent with regulators on its distribution activity and continues to
comply with all 340B program requirements. Certain covered entities and their
trade associations have threatened litigation, questioning whether Lilly's
program, and similar actions by other manufacturers, violate 340B program
requirements. On October 9, 2020, three covered entities sued HHS and the Health
Resources and Services Administration (HRSA) in the U.S. District Court for the
District of Columbia seeking to compel the agencies to take enforcement action
against Lilly and three other companies, among other requested relief. On
October 21, 2020, a trade association representing certain covered entities sued
HHS in the same court seeking to compel the agency to promulgate administrative
dispute resolution regulations. On December 11, 2020, a number of associations
and entities filed suit against HHS in the U.S. District Court for the Northern
District of California requesting immediate enforcement of the contract pharmacy
guidance. On December 31, 2020, the General Counsel of HHS issued an advisory
opinion alleging that honoring contract pharmacy agreements is mandatory. In
January 2021, Lilly filed suit against HHS, the Secretary of HHS, the HRSA, and
the Administrator of the HRSA in the U.S. District Court for the Southern
District of Indiana seeking a declaratory judgment that HHS's attempt to require
manufacturers to permit contract pharmacy distribution is unlawful and a
preliminary injunction enjoining implementation of the alternative dispute
resolution process created by defendants and, with it, their application of the
advisory opinion, and other related relief. The cases are pending and the impact
of these cases and any subsequent litigation is uncertain. See Note 16 to the
consolidated financial statements for additional information.
California and several other states have enacted legislation related to
prescription drug pricing transparency and it is unclear the effect this
legislation will have on our business. Several states have also passed
importation legislation, including Colorado, Florida, Maine, New Hampshire, New
Mexico, and Vermont. As of late 2020 several of these states were actively
working with the former presidential administration to implement an importation
program from Canada. On November 22, 2020, Florida announced it submitted a
proposed importation plan to the U.S. In 2020, HHS and the FDA also took several
actions to advance state importation initiatives, including issuing requests for
proposals for personal importation and reimportation of insulin and a final rule
on the Importation of Prescription Drugs. Additionally, on November 27, 2020,
the Canadian Minister of Health issued an interim order to ensure that
participation in bulk importation frameworks, such as the one recently
established by the U.S., does not cause or exacerbate a drug shortage in Canada.
We continue to review these state proposals and legislation, as well as federal
rules and guidance published by HHS and the FDA, the impact of which is
uncertain at this time. Currently, it is unclear if the current presidential
administration will adopt any of the importation initiatives put forth by the
former presidential administration. We will continue to monitor and assess these
developments.
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In the private sector, consolidation and integration among healthcare providers
significantly affects the competitive marketplace for pharmaceuticals. Health
plans, pharmacy benefit managers, wholesalers, and other supply chain
stakeholders have been consolidating into fewer, larger entities, thus enhancing
their purchasing strength and importance. Private third-party insurers, as well
as governments, typically maintain formularies that specify coverage (the
conditions under which drugs are included on a plan's formulary) and
reimbursement (the associated out-of-pocket cost to the consumer) to control
costs by negotiating discounted prices in exchange for formulary inclusion.
Formulary placement can lead to reduced usage of a drug for the relevant patient
population due to coverage restrictions, such as prior authorizations and
formulary exclusions, or due to reimbursement limitations that result in higher
consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased
co-insurance levels, and higher deductibles. Consequently, pharmaceutical
companies compete for formulary placement not only on the basis of product
attributes such as efficacy, safety profile, or patient ease of use, but also by
providing rebates. Value-based agreements, where pricing is based on achievement
(or not) of specified outcomes, are another tool that may be utilized between
payers and pharmaceutical companies as formulary placement and pricing are
negotiated. Price is an increasingly important factor in formulary decisions,
particularly in treatment areas in which the payer has taken the position that
multiple branded products are therapeutically comparable. We expect these
downward pricing pressures will continue to negatively affect our consolidated
results of operations. In addition to formulary placement, changes in insurance
designs continue to drive greater consumer cost-sharing through high deductible
plans and higher co-insurance or co-pays. We continue to invest in patient
affordability solutions (resulting in lower revenue) in an effort to assist
patients in affording their medicines.
The main coverage expansion provisions of the Affordable Care Act (ACA) are
currently in effect through both state-based exchanges and the expansion of
Medicaid. A trend has been the prevalence of benefit designs containing high
out-of-pocket costs for patients, particularly for pharmaceuticals. In addition
to the coverage expansions, many employers in the commercial market continue to
evaluate strategies such as private exchanges and wider use of consumer-driven
health plans to reduce their healthcare liabilities over time. Federal
legislation, litigation, or administrative actions to repeal or modify some or
all of the provisions of the ACA could have a material adverse effect on our
consolidated results of operations and cash flows. At the same time, the broader
paradigm shift towards performance-based reimbursement and the launch of several
value-based purchasing initiatives have placed demands on the pharmaceutical
industry to offer products with proven real-world outcomes data and a favorable
economic profile.
International
International operations also are generally subject to extensive price and
market regulations. Cost-containment measures exist in a number of countries,
including additional price controls and mechanisms to limit reimbursement for
our products. Such policies are expected to increase in impact and reach, given
the pressures on national and regional health care budgets that come from a
growing, aging population and ongoing economic challenges. As additional reforms
are finalized, we will assess their impact on future revenues. In addition,
governments in many emerging markets are becoming increasingly active in
expanding health care system offerings. Given the budget challenges of
increasing health care coverage for citizens, policies may be proposed that
promote generics and biosimilars only and reduce current and future access to
branded pharmaceutical products. The COVID-19 pandemic is also creating
additional pressure on health systems worldwide. As a result, cost containment
and other measures may intensify as governments manage and emerge from the
pandemic.
Tax Matters
We are subject to income taxes and various other taxes in the U.S. and in many
foreign jurisdictions; therefore, changes in both domestic and international tax
laws or regulations could affect our effective tax rate, results of operations,
and cash flows. Countries around the world, including the U.S., are actively
considering and enacting tax law changes. The current presidential
administration's tax proposal contains significant changes, including the rate
at which income of U.S. companies would be taxed. Further, actions taken with
respect to tax-related matters by associations such as the Organisation for
Economic Co-operation and Development and the European Commission could
influence tax policy in countries in which we operate. In addition, global tax
authorities routinely examine our tax returns and are expected to become more
aggressive in their examinations of profit allocations among jurisdictions,
which could affect our anticipated tax liabilities.

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Acquisitions


We strategically invest in external research and technologies that we believe
complement and strengthen our own efforts. These investments can take many
forms, including acquisitions, strategic alliances, collaborations, investments,
and licensing arrangements. We view our business development activity as an
important way to achieve our strategies, as we seek to bolster our pipeline and
enhance shareholder value. We continuously evaluate business development
transactions that have the potential to strengthen our business.
In 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion,
net of cash acquired. Under the terms of the agreement, we acquired a pipeline
of investigational medicines, including selpercatinib, an oral RET inhibitor,
and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the FDA
approved selpercatinib (Retevmo) under its Accelerated Approval regulations and
continued approval may be contingent upon verification and description of
clinical benefit in confirmatory trials.
In 2020, we acquired all shares of Dermira for a purchase price of $849.3
million, net of cash acquired. Under terms of the agreement, we acquired
lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for
the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted
Fast Track designation from the FDA. We also acquired Qbrexza® cloth, a
medicated cloth for the topical treatment of primary axillary hyperhidrosis
(uncontrolled excessive underarm sweating).
In January 2021, we acquired all shares of Prevail Therapeutics Inc. (Prevail)
for a purchase price of approximately $880 million in cash plus one non-tradable
contingent value right (CVR). The CVR entitles Prevail stockholders to up to an
additional approximately $160 million payable, subject to certain terms and
conditions, upon the first regulatory approval of a Prevail product in one of
the following countries: U.S., Japan, United Kingdom, Germany, France, Italy, or
Spain. Under the terms of the agreement, we acquired a biotechnology company
developing potentially disease-modifying AAV9-based gene therapies for patients
with neurodegenerative diseases.
See Note 3 to the consolidated financial statements for further discussion
regarding our recent acquisitions.

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Operating Results-2020
Revenue
The following table summarizes our revenue activity by region:
                        Year Ended
                       December 31,
                   2020            2019         Percent Change
U.S.           $ 14,229.3      $ 12,722.6             12
Outside U.S.     10,310.5         9,596.8              7
Revenue        $ 24,539.8      $ 22,319.5             10


Numbers may not add due to rounding.
The following are components of the change in revenue compared with the prior
year:
                                          2020 vs. 2019
                               U.S.       Outside U.S.   Consolidated
Volume                             17  %          13  %          15  %
Price                              (5) %          (6) %          (5) %
Foreign exchange rates              -  %           -  %           -  %
Percent change                     12  %           7  %          10  %


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

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The following table summarizes our revenue activity in 2020 compared with 2019:
                                            Year Ended
                                           December 31,
                                       2020                              2019
Product               U.S.         Outside U.S.         Total           Total         Percent Change
Trulicity         $  3,835.9      $     1,232.2      $  5,068.1      $  4,127.8             23
Humalog(1)           1,485.6            1,140.3         2,625.9         2,820.7             (7)
Alimta               1,265.3            1,064.7         2,329.9         2,115.8             10
Taltz                1,288.5              500.0         1,788.5         1,366.4             31
Humulin®               866.4              393.2         1,259.6         1,290.1             (2)
Jardiance(2)           620.8              533.0         1,153.8           944.2             22
Basaglar®              842.3              282.1         1,124.4         1,112.6              1
Forteo                 510.3              536.0         1,046.3         1,404.7            (26)
Cyramza®               381.9              650.8         1,032.6           925.1             12
Verzenio               618.2              294.4           912.7           579.7             57
Bamlanivimab(3)        850.0               21.2           871.2               -             NM
Cymbalta                42.1              725.6           767.7           725.4              6
Olumiant                63.8              575.0           638.9           426.9             50
Cialis®                 61.8              545.4           607.1           890.5            (32)
Erbitux®               480.1               56.3           536.4           543.4             (1)
Zyprexa®                46.1              360.5           406.5           418.7             (3)
Emgality®              325.9               37.0           362.9           162.5             NM
Trajenta®(4)            95.6              263.0           358.5           590.6            (39)
Other products         548.7            1,099.8         1,648.8

1,874.4 (12)
Revenue $ 14,229.3 $ 10,310.5 $ 24,539.8 $ 22,319.5 10

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

Revenue of Trulicity, a treatment for type 2 diabetes and to reduce the risk of
major adverse cardiovascular events in adult patients with type 2 diabetes and
established cardiovascular disease or multiple cardiovascular risk factors,
increased 22 percent in the U.S., driven by increased volume, partially offset
by lower realized prices primarily due to higher contracted rebates. Revenue
outside the U.S. increased 27 percent, primarily driven by increased volume.
Revenue of Humalog, an injectable human insulin analog for the treatment of
diabetes, decreased 11 percent in the U.S., driven by lower realized prices,
partially offset by higher demand. Revenue outside the U.S. decreased 1 percent,
primarily driven by the unfavorable impact of foreign exchange rates. Included
in the revenue of Humalog in the U.S. are our own insulin lispro authorized
generics, which began launching in the second quarter of 2019 in order to lower
out-of-pocket costs for patients. While it is difficult to estimate the severity
of the impact of similar insulin lispro products entering the market, we do not
expect and have not experienced a rapid severe decline in revenue. However, due
to the impact of competition and due to pricing pressure in the U.S. and some
international markets, we expect some price decline and loss of market share to
continue over time.
Revenue of Alimta, a treatment for various cancers, increased 4 percent in the
U.S., primarily driven by higher realized prices. Revenue outside the U.S.
increased 19 percent, primarily driven by increased volume in China and Germany,
partially offset by lower realized prices. We will lose our patent protection
for Alimta in Japan and major European countries in June 2021. We expect the
limited entry of generic competition in the U.S. starting February 2022 and
subsequent unlimited entry starting April 2022. We expect that the entry of
generic competition following the loss of exclusivity will cause a rapid and
severe decline in revenue. See "Results of Operations - Executive Overview -
Other Matters" for more information.
46
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Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active
psoriatic arthritis, ankylosing spondylitis, and active non-radiographic axial
spondyloarthritis, increased 27 percent in the U.S., primarily driven by
increased demand. Revenue outside the U.S. increased 43 percent, primarily
driven by increased volume.
Revenue of Humulin, an injectable human insulin for the treatment of diabetes,
decreased 2 percent in the U.S., driven by lower realized prices, partially
offset by higher volume. Revenue outside the U.S. decreased 4 percent, driven by
decreased volume and the unfavorable impact of foreign exchange rates, partially
offset by higher realized prices.
Revenue of Jardiance, a treatment for type 2 diabetes and to reduce the risk of
cardiovascular death in adult patients with type 2 diabetes and established
cardiovascular disease, increased 10 percent in the U.S., driven by increased
volume. Revenue outside the U.S. increased 41 percent, driven primarily by
increased volume. See Note 4 to the consolidated financial statements for
information regarding our collaboration with Boehringer Ingelheim involving
Jardiance.
Revenue of Basaglar, a long-acting human insulin analog for the treatment of
diabetes, decreased 4 percent in the U.S., driven by lower realized prices.
Revenue outside the U.S. increased 19 percent, driven primarily by increased
volume. See Note 4 to the consolidated financial statements for information
regarding our collaboration with Boehringer Ingelheim involving Basaglar. A
competitor launched a similar version of glargine in the U.S. in 2020. Due to
the impact of competitive pressures, we expect some price decline and loss of
market share over time.
Revenue of Forteo, an injectable treatment for osteoporosis in postmenopausal
women and men at high risk for fracture and for glucocorticoid-induced
osteoporosis in men and postmenopausal women, decreased 21 percent in the U.S.,
primarily driven by decreased demand. Revenue outside the U.S. decreased 29
percent, driven by decreased volume and, to a lesser extent, lower realized
prices. We expect further volume declines as a result of the anticipated entry
of generic and biosimilar competition due to the loss of patent exclusivity in
the U.S., Japan, and major European markets. See "Executive Overview - Other
Matters - Patent Matters" for more information.
Revenue of Cyramza, a treatment for various cancers, increased 14 percent in the
U.S., driven primarily by increased demand and, to a lesser extent, higher
realized prices. Revenue outside the U.S. increased 10 percent, driven primarily
by increased volume.
Revenue of Verzenio, a treatment for HR+, HER2- metastatic breast cancer,
increased 36 percent in the U.S., driven by increased demand and, to a lesser
extent, higher realized prices. Revenue outside the U.S. increased $169.5
million driven by higher volume.
Gross Margin, Costs, and Expenses
Gross margin as a percent of revenue was 77.7 percent in 2020, a decrease of 1.1
percentage points compared with 2019, primarily due to the impact of lower
realized prices on revenue, the unfavorable effect of foreign exchange rates on
international inventories sold, and higher intangibles amortization expense
related to Retevmo, partially offset by charges in 2019 resulting from the
withdrawal of Lartruvo® and greater manufacturing efficiencies. Gross margin
percent for 2020 was also negatively impacted as a result of bamlanivimab sales
in the fourth quarter of 2020.
Research and development expenses increased 9 percent to $6.09 billion in 2020,
driven primarily by approximately $450 million of development expenses for
COVID-19 therapies. Excluding these expenses related to COVID-19 therapies,
research and development expenses were relatively flat.
Marketing, selling, and administrative expenses decreased 1 percent to $6.12
billion in 2020 primarily due to lower marketing activity.
We recognized acquired IPR&D charges of $660.4 million in 2020 resulting from
the acquisitions of Disarm and a pre-clinical stage company as well as
collaborations with Innovent, Sitryx, Fochon, AbCellera, Evox, and Junshi
Biosciences. In 2019, we recognized acquired IPR&D charges of $239.6 million
resulting from collaborations with AC Immune, Centrexion, ImmuNext, and Avidity.

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We recognized asset impairment, restructuring, and other special charges of
$131.2 million in 2020. The charges were primarily related to severance costs
incurred as a result of actions taken worldwide to reduce our cost structure, as
well as acquisition and integration costs incurred as part of the acquisition of
Dermira. In 2019, we recognized $575.6 million of asset impairment,
restructuring, and other special charges primarily associated with the
accelerated vesting of Loxo employee equity awards as part of the acquisition of
Loxo.
Other-net, (income) expense was income of $1.17 billion in 2020 compared to
income of $291.6 million in 2019 primarily driven by higher net gains on
investment securities.
Our effective tax rate was 14.3 percent in 2020, compared with an effective tax
rate of 11.9 percent in 2019 driven by net discrete tax benefits in 2019.
Operating Results-2019
For a discussion of our results of operations pertaining to 2019 and 2018 see
Item 7, "Management's Discussion and Analysis of Results of Operations and
Financial Condition" in our Annual Report on   Form 10-K   for the year ended
December 31, 2019.

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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, strategic
alliances, collaborations, investments, and licensing arrangements.
Our management continuously evaluates our liquidity and capital resources,
including our access to external capital, to ensure we can adequately and
efficiently finance our capital requirements. As of December 31, 2020, our
material cash requirements primarily related to purchases of goods and services
to produce our products and conduct our operations, capital equipment
expenditures, dividends, repayment of outstanding borrowings, the remaining
obligations for the one-time repatriation transition tax (also known as the
'Toll Tax') from the Tax Cuts and Jobs Act (2017 Tax Act), leases, unfunded
commitments to invest in venture capital funds, and retirement benefits (see
Notes 11, 14, 10, 7, and 15 to the consolidated financial statements). We
anticipate our cash requirements related to ordinary course purchases of goods
and services and capital equipment expenditures will be consistent with our past
levels relative to revenues.
Cash and cash equivalents increased to $3.66 billion as of December 31, 2020,
compared with $2.34 billion at December 31, 2019. Net cash provided by operating
activities was $6.50 billion in 2020, compared with $4.84 billion in 2019. Net
cash provided by operating activities in 2019 included approximately $360
million of cash paid to settle the accelerated vesting of Loxo employee equity
awards (see Note 5 to the consolidated financial statements). Refer to the
consolidated statements of cash flows for additional details on the significant
sources and uses of cash for the years ended December 31, 2020 and 2019.
In addition to our cash and cash equivalents, we held total investments of $2.99
billion and $2.06 billion as of December 31, 2020 and 2019, respectively. See
Note 7 to the consolidated financial statements for additional details.
In February 2020, we completed our acquisition of Dermira for $18.75 per share,
or approximately $1.1 billion, which was funded through cash on hand and the
issuance of commercial paper. In February 2019, we completed our acquisition of
Loxo for $235 per share or approximately $6.9 billion, which was funded through
a mixture of cash and debt. See Note 3 to the consolidated financial statements
for additional information.
As of December 31, 2020, total debt was $16.60 billion, an increase of $1.28
billion compared with $15.32 billion at December 31, 2019. The increase
primarily related to the net proceeds from the issuance of $1.00 billion of 2.25
percent fixed-rate notes in May 2020, as well as the net proceeds from the
issuance of an additional $250.0 million of 2.25 percent fixed-rate notes and
the issuance of $850.0 million of 2.50 percent fixed-rate notes in August 2020.
We used the net proceeds from the sale of these notes for general corporate
purposes, which included the repayment of outstanding commercial paper used to
fund a portion of the purchase price for our acquisition of Dermira. See Note 11
to the consolidated financial statements for additional information.
As of December 31, 2020, we had a total of $5.24 billion of unused committed
bank credit facilities, $5.00 billion of which is available to support our
commercial paper program. See Note 11 to the consolidated financial statements
for additional details. We believe that amounts accessible through existing
commercial paper markets should be adequate to fund any short-term borrowing
needs.
For the 135th consecutive year, we distributed dividends to our shareholders.
Dividends of $2.96 per share and $2.58 per share were paid in 2020 and 2019,
respectively. In the fourth quarter of 2020, effective for the dividend to be
paid in the first quarter of 2021, the quarterly dividend was increased to $0.85
per share, resulting in an indicated annual rate for 2021 of $3.40 per share.
Capital expenditures of $1.39 billion during 2020, compared to $1.03 billion in
2019.

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In 2020, we repurchased $500.0 million of shares under our $8.00 billion share
repurchase program authorized in June 2018. As of December 31, 2020, we had
$1.00 billion remaining under this program. See Note 13 to the consolidated
financial statements for additional details.
On March 11, 2019, we completed the disposition of our remaining 80.2 percent
ownership of Elanco common stock through a tax-free exchange offer, which
resulted in a reduction in shares of our common stock outstanding by
approximately 65 million as of that date.
In January 2021, we completed our acquisition of Prevail for $22.50 per share,
or approximately $880 million in cash, plus one non-tradable CVR that entitles
Prevail stockholders to up to an additional $4.00 per share in cash (or an
aggregate of approximately $160 million) payable, subject to certain terms and
conditions. This acquisition was funded primarily through cash on hand and the
issuance of commercial paper. See Note 3 to the consolidated financial
statements for additional information.
See "Results of Operations - Executive Overview - Other Matters - Patent
Matters" for information regarding recent and upcoming losses of patent
protection.
Both domestically and abroad, we continue to monitor the potential impacts of
the economic environment; the creditworthiness of our wholesalers and other
customers, including foreign government-backed agencies and suppliers; the
uncertain impact of health care legislation; and various international
government funding levels.
In the normal course of business, our operations are exposed to fluctuations in
interest rates, currency values, and fair values of equity securities. These
fluctuations can vary the costs of financing, investing, and operating. We seek
to address a portion of these risks through a controlled program of risk
management that includes the use of derivative financial instruments. The
objective of this risk management program is to limit the impact on earnings of
fluctuations in interest and currency exchange rates. All derivative activities
are for purposes other than trading.
Our primary interest rate risk exposure results from changes in short-term U.S.
dollar interest rates. In an effort to manage interest rate exposures, we strive
to achieve an acceptable balance between fixed and floating rate debt positions
and may enter into interest rate derivatives to help maintain that balance.
Based on our overall interest rate exposure at December 31, 2020 and 2019,
including derivatives and other interest rate risk-sensitive instruments, a
hypothetical 10 percent change in interest rates applied to the fair value of
the instruments as of December 31, 2020 and 2019, respectively, would not have a
material impact on earnings, cash flows, or fair values of interest rate
risk-sensitive instruments over a one-year period.
Our foreign currency risk exposure results from fluctuating currency exchange
rates, primarily the U.S. dollar against the euro and Japanese yen. We face
foreign currency exchange exposures when we enter into transactions arising from
subsidiary trade and loan payables and receivables denominated in foreign
currencies. We also face currency exposure that arises from translating the
results of our global operations to the U.S. dollar at exchange rates that have
fluctuated from the beginning of the period. We may enter into foreign currency
forward or option derivative contracts to reduce the effect of fluctuating
currency exchange rates (principally the euro and the Japanese yen). Our
corporate risk-management policy outlines the minimum and maximum hedge coverage
of such exposures. Gains and losses on these derivative contracts offset, in
part, the impact of currency fluctuations on the existing assets and
liabilities. We periodically analyze the fair values of the outstanding foreign
currency derivative contracts to determine their sensitivity to changes in
foreign exchange rates. A hypothetical 10 percent change in exchange rates
(primarily against the U.S. dollar) applied to the fair values of our
outstanding foreign currency derivative contracts as of December 31, 2020 and
2019, would not have a material impact on earnings, cash flows, or financial
position over a one-year period. This sensitivity analysis does not consider the
impact that hypothetical changes in exchange rates would have on the underlying
foreign currency denominated transactions.
Our fair value risk exposure relates primarily to our public equity investments
and to equity investments that do not have readily determinable fair values. As
of December 31, 2020 and 2019, our carrying values of these investments were
$2.04 billion and $1.12 billion, respectively. A hypothetical 20 percent change
in fair value of the equity instruments would have impacted other-net, (income)
expense by $407.6 million and $224.7 million as of December 31, 2020 and 2019,
respectively.
50
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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 details. These arrangements often give us
the discretion to unilaterally terminate development of the product, which would
allow us to avoid making the contingent payments; however, we are unlikely to
cease development if the compound successfully achieves milestone objectives. We
also note that, from a business perspective, we view these payments as positive
because they signify that the product is successfully moving through development
and is now generating or is more likely to generate cash flows from sales of
products.

                                                                              51

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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles
generally accepted in the U.S. (GAAP), we must often make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures. Some of those judgments can be subjective and
complex, and consequently actual results could differ from those estimates. For
any given individual estimate or assumption we make, it is possible that other
people applying reasonable judgment to the same facts and circumstances could
develop different estimates. We believe that, given current facts and
circumstances, it is unlikely that applying any such other reasonable judgment
would cause a material adverse effect on our consolidated results of operations,
financial position, or liquidity for the periods presented in this report. Our
most critical accounting estimates have been discussed with our audit committee
and are described below.
Revenue Recognition and Sales Return, Rebate, and Discount Accruals
We recognize revenue primarily from two different types of contracts, product
sales to customers (net product revenue) and collaborations and other
arrangements. For product sales to customers, provisions for returns, rebates
and discounts are established in the same period the related product sales are
recognized. To determine the appropriate transaction price for our product sales
at the time we recognize a sale to a direct customer, we estimate any rebates or
discounts that ultimately will be due to the direct customer and other customers
in the distribution chain under the terms of our contracts. Significant
judgments are required in making these estimates. The largest of our sales
rebate and discount amounts are rebates associated with sales covered by managed
care, Medicare, Medicaid, and chargeback contracts in the U.S. In determining
the appropriate accrual amount, we consider our historical rebate payments for
these programs by product as a percentage of our historical sales as well as any
significant changes in sales trends (e.g., patent expiries and product
launches), an evaluation of the current contracts for these programs, the
percentage of our products that are sold via these programs, and our product
pricing.
Refer to Note 2 to the consolidated financial statements for further information
on revenue recognition and sales return, rebate, and discount accruals.
Revenue recognized from collaborations and other arrangements will include our
share of profits from the collaboration, as well as royalties, upfront and
milestone payments we receive under these types of contracts.
Financial Statement Impact
We believe that our accruals for sales returns, rebates, and discounts are
reasonable and appropriate based on current facts and circumstances. Our global
rebate and discount liabilities are included in sales rebates and discounts on
our consolidated balance sheet. Our global sales return liability is included in
other current liabilities and other noncurrent liabilities on our consolidated
balance sheet. As of December 31, 2020, a 5 percent change in our global sales
return, rebate, and discount liability would have led to an approximate $313
million effect on our income before income taxes.
The portion of our global sales return, rebate, and discount liability resulting
from sales of our products in the U.S. was approximately 90 percent as of
December 31, 2020 and 2019.
The following represents a roll-forward of our most significant U.S. sales
return, rebate, and discount liability balances, including managed care,
Medicare, Medicaid, chargebacks, and patient assistance programs:
(Dollars in millions) 2020 2019

Sales return, rebate, and discount liabilities, beginning of year $ 4,635.5 $ 4,670.9 Reduction of net sales(1)

                                            18,668.4            15,490.2
Cash payments

(17,903.9) (15,525.6) Sales return, rebate, and discount liabilities, end of year $ 5,400.0 $ 4,635.5




(1) Adjustments of the estimates for these returns, rebates, and discounts to
actual results were less than 2 percent of consolidated net sales for each of
the years presented.
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Product Litigation Liabilities and Other Contingencies
Background and Uncertainties
Product litigation liabilities and other contingencies are, by their nature,
uncertain and based upon complex judgments and probabilities. The factors we
consider in developing our product litigation liability reserves and other
contingent liability amounts include the merits and jurisdiction of the
litigation, the nature and the number of other similar current and past matters,
the nature of the product and the current assessment of the science subject to
the litigation, and the likelihood of settlement and current state of settlement
discussions, if any. In addition, we accrue for certain product liability claims
incurred, but not filed, to the extent we can formulate a reasonable estimate of
their costs based primarily on historical claims experience and data regarding
product usage. We accrue legal defense costs expected to be incurred in
connection with significant product liability contingencies when both probable
and reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for
periods covered by insurance. In assessing our insurance coverage, we consider
the policy coverage limits and exclusions, the potential for denial of coverage
by the insurance company, the financial condition of the insurers, and the
possibility of and length of time for collection. Due to a very restrictive
market for product liability insurance, we are self-insured for product
liability losses for all our currently marketed products. In addition to
insurance coverage, we consider any third-party indemnification to which we are
entitled or under which we are obligated. With respect to our third-party
indemnification rights, these considerations include the nature of the
indemnification, the financial condition of the indemnifying party, and the
possibility of and length of time for collection.
The litigation accruals and environmental liabilities and the related estimated
insurance recoverables have been reflected on a gross basis as liabilities and
assets, respectively, on our consolidated balance sheets.
Acquisitions
Background and Uncertainties
To determine whether acquisitions or licensing transactions should be accounted
for as a business combination or as an asset acquisition, we make certain
judgments, which include assessing whether the acquired set of activities and
assets would meet the definition of a business under the relevant accounting
rules.
If the acquired set of activities and assets meets the definition of a business,
assets acquired and liabilities assumed are required to be recorded at their
respective fair values as of the acquisition date. The excess of the purchase
price over the fair value of the acquired net assets, where applicable, is
recorded as goodwill. If the acquired set of activities and assets does not meet
the definition of a business, the transaction is recorded as an acquisition of
assets and, therefore, any acquired IPR&D that does not have an alternative
future use is charged to expense at the acquisition date, and goodwill is not
recorded. Refer to Note 3 to the consolidated financial statements for
additional information.
The judgments made in determining estimated fair values assigned to assets
acquired and liabilities assumed in a business combination, as well as estimated
asset lives, can materially affect our consolidated results of operations. The
fair values of intangible assets, including acquired IPR&D, are determined using
information available near the acquisition date based on estimates and
assumptions that are deemed reasonable by management. Significant estimates and
assumptions include, but are not limited to, probability of technical success,
revenue growth and discount rate. Depending on the facts and circumstances, we
may deem it necessary to engage an independent valuation expert to assist in
valuing significant assets and liabilities.
The fair values of identifiable intangible assets are primarily determined using
an "income method," as described in Note 8 to the consolidated financial
statements.

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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 65 percent of which are growth investments); and the views of
leading financial advisers and economists. We may also review our historical
assumptions compared with actual results, as well as the discount rates and
expected return on plan assets of other companies, where applicable. In
evaluating our expected retirement age assumption, we consider the retirement
ages of our past employees eligible for pension and medical benefits together
with our expectations of future retirement ages.
Annually, we determine the fair value of the plan assets in our defined benefit
pension and retiree health benefit plans. Approximately 35 percent of our plan
assets are in hedge funds and private equity-like investment funds
(collectively, alternative assets). We value these alternative investments using
significant unobservable inputs or using the net asset value reported by the
counterparty, adjusted as necessary. Inputs include underlying net asset values,
discounted cash flows valuations, comparable market valuations, and adjustments
for currency, credit, liquidity and other risks.
54
--------------------------------------------------------------------------------

Financial Statement Impact
If the 2020 discount rate for the U.S. defined benefit pension and retiree
health benefit plans (U.S. plans) were to change by a quarter percentage point,
income before income taxes would change by $21.6 million. If the 2020 expected
return on plan assets for U.S. plans were to change by a quarter percentage
point, income before income taxes would change by $28.8 million. If our
assumption regarding the 2020 expected age of future retirees for U.S. plans
were adjusted by one year, our income before income taxes would be affected by
$52.0 million. The U.S. plans, including Puerto Rico, represent approximately 75
percent and 80 percent of the total projected benefit obligation and total plan
assets, respectively, at December 31, 2020.
Adjustments to the fair value of plan assets are not recognized in pension and
retiree health benefit expense in the year that the adjustments occur. Such
changes are deferred, along with other actuarial gains and losses, and are
amortized into expense over the expected remaining service life of employees.
Income Taxes
Background and Uncertainties
We prepare and file tax returns based upon our interpretation of tax laws and
regulations, and we record estimates based upon these interpretations. Our tax
returns are routinely subject to examination by various taxing authorities,
which could result in future tax, interest, and penalty assessments. Inherent
uncertainties exist in estimates of many tax positions due to changes in tax law
resulting from legislation and regulation as concluded through the various
jurisdictions' tax court systems. We recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate resolution.
The amount of unrecognized tax benefits is adjusted for changes in facts and
circumstances. For example, adjustments could result from changes to existing
tax law, the issuance of regulations by the taxing authorities, new information
obtained during a tax examination, or resolution of a tax examination. We
believe our estimates for uncertain tax positions are appropriate and sufficient
to pay assessments that may result from examinations of our tax returns. We
recognize both accrued interest and penalties related to unrecognized tax
benefits in income tax expense.
We have recorded valuation allowances against certain of our deferred tax
assets, primarily those that have been generated from net operating losses and
tax credit carryforwards in certain taxing jurisdictions. In evaluating whether
we would more likely than not recover these deferred tax assets, we have not
assumed future taxable income in the jurisdictions associated with these
carryforwards where history does not support such an assumption. Implementation
of tax planning strategies to recover these deferred tax assets or to generate
future taxable income in these jurisdictions could lead to the reversal of all
or a portion of these valuation allowances and a reduction of income tax
expense.
Financial Statement Impact
As of December 31, 2020, a 5 percent change in the amount of uncertain tax
positions and the valuation allowance would result in a change in net income of
$83.4 million and $40.8 million, respectively.
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 16 to the
consolidated financial statements and is incorporated here by reference.
FINANCIAL EXPECTATIONS FOR 2021
For the full year of 2021, we expect EPS to be in the range of $7.10 to $7.75,
which excludes estimated acquisition and integration costs related to the
acquisition of Prevail. We anticipate total revenue between $26.5 billion and
$28.0 billion, including an estimated $1 billion to $2 billion of revenue from
COVID-19 therapies. Revenue growth is expected to be driven by volume from
Trulicity, Taltz, Verzenio, Jardiance, Olumiant, Cyramza, Emgality, Tyvyt, and
Retevmo, as well as by COVID-19 therapies. Revenue growth is expected to be
partially offset by lower revenue for products that have lost patent
exclusivity. We expect mid-single digit net price declines globally in 2021. In
the U.S., we expect low-to-mid-single digit net price declines, driven primarily
by increased rebates to maintain broad commercial access and segment mix,
partially offset by lower utilization in the 340B segment. Outside the U.S., we
expect net price declines in China, Japan, and Europe.

--------------------------------------------------------------------------------



We anticipate that gross margin as a percent of revenue will be approximately 77
percent in 2021. Research and development expenses are expected to be in the
range of $6.5 billion to $6.7 billion, including approximately $300 million to
$400 million of continued investment in COVID-19 therapies. Marketing, selling,
and administrative expenses are expected to be in the range of $6.2 billion to
$6.4 billion. Other-net, (income) expense is expected to be expense in the range
of $200 million to $300 million. The 2021 effective tax rate is expected to be
approximately 15 percent.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
You can find quantitative and qualitative disclosures about market risk (e.g.,
interest rate risk) at Item 7, "Management's Discussion and Analysis - Financial
Condition and Liquidity." That information is incorporated by reference herein.

--------------------------------------------------------------------------------

Market Closed - Nyse Other stock markets 04:00:02 2024-04-26 pm EDT			After market 06:03:57 pm
733.5 ^USD	+1.19%		734.1	+0.08%

Apr. 25	Scholz pledges further support for the pharmaceutical industry	DP
Apr. 25	Scholz promises support for pharma sector in Germany as Merck invests	RE

Scholz pledges further support for the pharmaceutical industry	Apr. 25	DP
Scholz promises support for pharma sector in Germany as Merck invests	Apr. 25	RE
Global markets live: Bayer, PepsiCo, Halliburton, Spotify, Apple...	Apr. 23
Alzheimer's drug adoption in US slowed by doctors' skepticism	Apr. 23	RE
Alexandria Real Estate's Q1 FFO rises on stronger occupancy rates	Apr. 22	RE
Eli Lilly Acquires Injectables Manufacturing Facility in Wisconsin from Nexus Pharmaceuticals	Apr. 22	MT
Eli Lilly to acquire manufacturing facility from Nexus Pharma	Apr. 22	RE
Eli Lilly: agreement to purchase a Nexus plant in the USA	Apr. 22	CF
Eli Lilly and Company entered into a definitive agreement to acquire New Injectable Medicine Manufacturing Facility of Nexus Pharmaceuticals, Inc.	Apr. 21	CI
India's Biocon developing its own version of Wegovy, clinical trial likely next year	Apr. 18	RE
Top Stories at Midday: U.S. Bancorp, Abbott, Citizens Financial, First Horizon, Prologis, ASML, Travelers Report Earnings; Tesla Asks Shareholders Vote on Musk's Compensation; Eli Lilly Sleep Apnea Drug Trials Hit Primary Endpoints	Apr. 17	MT
Jefferies Raises Eli Lilly's Price Target to $895 From $885, Buy Rating Kept	Apr. 17	MT
Trending : Eli Lilly Weight-Loss Drug Works on Sleep Apnea	Apr. 17	DJ
Swiss Stocks Jump as Earnings Bonanza Begins; Luxury Stocks Shine on LVMH Boost	Apr. 17	MT
Wall St slips as dour earnings, chip stocks weigh	Apr. 17	RE
Global markets live: LVMH, ASML, Rio Tinto, Eli Lilly, Tesla...	Apr. 17
Eli Lilly's Weight-loss Drug Improves Sleep Apnea Symptoms in Late-stage Studies	Apr. 17	MT
Sector Update: Health Care Stocks Advance Premarket Wednesday	Apr. 17	MT
Most doses of Lilly's Mounjaro and Zepbound in limited availability, US FDA says	Apr. 17	RE
The market is pinning its hopes on earnings reports	Apr. 17
Wall St set for higher open on megacaps boost; earnings, Fed comments on tap	Apr. 17	RE
Eli Lilly's Phase 3 Trials of Tirzepatide to Treat Sleep Apnea Meet Endpoints	Apr. 17	MT
Eli Lilly: positive data in sleep apnea	Apr. 17	CF
Studies Show Eli Lilly Weight-Loss Drug Helps With Sleep Apnea	Apr. 17	DJ
Eli Lilly's weight-loss drug succeeds in trials with sleep apnea patients	Apr. 17	RE

	1st Jan change	Capi.
ELI LILLY AND COMPANY	+25.83%	653B
NOVO NORDISK A/S	+27.00%	556B
JOHNSON & JOHNSON	-6.76%	354B
MERCK & CO., INC.	+20.34%	331B
ABBVIE INC.	+3.00%	296B
ASTRAZENECA PLC	+13.09%	233B
NOVARTIS AG	+5.46%	201B
ROCHE HOLDING AG	-9.61%	193B
AMGEN INC.	-6.26%	144B
PFIZER, INC.	-11.77%	143B

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