Eli Lilly 2007 Annual Report Download - page 27

FINANCIALS
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tion only if it is more likely than not that the tax position
will be sustained on examination by the taxing authori-
ties, based on the technical merits of the position. The
tax benefi ts recognized in the fi nancial statements from
such a position are measured based on the largest
benefi t that has a greater than 50 percent likelihood of
being realized upon ultimate resolution. The amount
of unrecognized tax benefi ts is adjusted for changes in
facts and circumstances. For example, adjustments
could result from signifi cant amendments to existing tax
law and the issuance of regulations or interpretations by
the taxing authorities, new information obtained during
a tax examination, or resolution of an examination. We
believe that our estimates for uncertain tax positions
are appropriate and suffi cient to pay assessments that
may result from examinations of our tax returns. We
recognize both accrued interest and penalties related
to unrecognized tax benefi ts 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 in
certain taxing jurisdictions. In evaluating whether we
would more likely than not recover these deferred tax
assets, we have not assumed any future taxable income
or tax planning strategies in the jurisdictions associ-
ated with these carryforwards where history does not
support such an assumption. Implementation of tax
planning strategies to recover these deferred tax assets
or future income generation in these jurisdictions could
lead to the reversal of these valuation allowances and a
reduction of income tax expense.
We believe that our estimates for the uncertain tax
positions and valuation allowances against the deferred
tax assets are appropriate based on current facts and
circumstances. A 5 percent change in the amount of
the uncertain tax positions and the valuation allowance
would result in a change in net income of approximately
$78 million and $26 million, respectively.
FINANCIAL EXPECTATIONS FOR 2008
For the full year of 2008, we expect earnings per share to
be in the range of $3.80 to $3.95. This guidance includes
the anticipated acquired in-process research and devel-
opment charges of $.05 related to the BioMS in-licens-
ing agreement. We expect sales to grow in the mid-to
high-single digits, driven primarily by increased volume
and strong sales growth for Cymbalta, Cialis, Byetta,
Alimta, and Humalog. We expect modest improvement
in gross margin as a percent of net sales, driven primar-
ily by manufacturing expenses growing more slowly
than sales. In addition, we expect operating expenses to
grow more slowly than sales in 2008, with growth in the
mid-single digits. Marketing, selling, and administrative
expenses are expected to grow in the low-single digits,
driven by investments in prasugrel, Cymbalta, Evista
for invasive breast cancer risk reduction, Humalog, and
Byetta, offset by decreases in other areas. Research and
development expenses are expected to grow in the high-
single to low-double digits. Other income—net is expected
to contribute less than $100 million. The effective tax
rate is expected to be approximately 23 percent. We ex-
pect capital expenditures of approximately $1.1 billion.
Actual results could differ materially and will
depend on, among other things, the continuing growth
of our currently marketed products; developments with
competitive products; the timing and scope of regula-
tory approvals and the success of our new product
launches; asset impairments, restructurings, and
acquisitions of compounds under development result-
ing in acquired in-process research and development
charges; foreign exchange rates; changes in effec-
tive tax rates; wholesaler inventory changes; other
regulatory developments, litigation, and government
investigations; and the impact of governmental actions
regarding pricing, importation, and reimbursement for
pharmaceuticals. We undertake no duty to update these
forward-looking statements.
LEGAL AND REGULATORY MATTERS
We are a party to various legal actions and govern-
ment investigations. The most signifi cant of these are
described below. While it is not possible to determine
the outcome of these matters, we believe that, except
as specifi cally noted below, the resolution of all such
matters will not have a material adverse effect on our
consolidated fi nancial position or liquidity, but could
possibly be material to our consolidated results of
operations in any one accounting period.
Patent Litigation
We are engaged in the following patent litigation mat-
ters brought pursuant to procedures set out in the
Hatch-Waxman Act (the Drug Price Competition and
Patent Term Restoration Act of 1984):
•
Barr Laboratories, Inc. (Barr), submitted an Abbreviated
New Drug Application (ANDA) in 2002
seeking
permission to market a generic version of Evista prior
to the expiration of our relevant U.S. patents (expiring
in 2012-2017) and alleging that these patents are
invalid, not enforceable, or not infringed. In November
2002, we fi led a lawsuit against Barr in the U.S. District
Court for the Southern District of Indiana, seeking a
ruling that these patents are valid, enforceable, and
being infringed by Barr. Teva has also submitted an
ANDA seeking permission to market a generic version
of Evista. In June 2006, we fi led a similar lawsuit
against Teva in the U.S. District Court for the Southern
District of Indiana. The lawsuit against Teva is currently
scheduled for trial beginning March 9, 2009, while no
trial date has been set in the lawsuit against Barr.