Eli Lilly 2009 Annual Report Download

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Reinventing Invention
Eli Lilly and Company
2009 Annual Report
Notice of 2010 Annual Meeting
Proxy Statement

Table of contents

  • Page 1
    Reinventing Invention Eli Lilly and Company 2009 Annual Report Notice of 2010 Annual Meeting Proxy Statement

  • Page 2
    ...Compensation Directors and Corporate Governance Committee Matters Audit Committee Matters Compensation Committee Matters Executive Compensation Ownership of Company Stock Items of Business To Be Acted Upon at the Meeting Other Matters Appendix A Senior Leadership Corporate Information Annual Meeting...

  • Page 3
    2009 Financial Highlights ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2009 2008 Change % Revenue...Revenue-Pro forma as if ImClone acquisition was completed on January 1, 2008 ...Research and development ...Research and development as a...

  • Page 4
    ...with sales worldwide among the top 10 ï¬,ow of innovative new medicines Animal Health- global pharmaceutical companies. that provide improved outcomes for exceeded $1 billion in 2009. Cymbalta In 2009, we sustained the individual patients. became the second volume-driven revenue growth we've product...

  • Page 5
    ..., Ph.D. Chairman, President, and Chief Executive Officer In October 2009, John Lechleiter helped dedicate the Lilly Biotechnology Center in San Diego. He was joined by Lilly colleagues, academic researchers, and community leaders, including David Hale (at left in photo), chairman and CEO of Hale...

  • Page 6
    ... represent growth in revenue; percentages represent changes from 2008) Five products and a product line-Alimta, Cymbalta, Humalog, Zyprexa, Cialis, and Animal Health-generated $14.4 billion in revenue during 2009, an increase of $1.6 billion over 2008, and, along with the inclusion of Erbitux sales...

  • Page 7
    ...We acquired ImClone, a company with a leading oncology product and a strong pipeline. We completed work on a $1 billion biotech development center in Indianapolis and, in October, we opened the Lilly Biotechnology Center in San Diego. What's more, our new biotech manufacturing facility in Ireland is...

  • Page 8
    ... head of global discovery research at AstraZeneca, where he was instrumental in delivering more than 150 drug candidates to the company's pipeline over the past decade. John C. Lechleiter Chairman, President, and Chief Executive Officer *IMS Health, Market Prognosis 2009-2013, September 2009 6

  • Page 9
    ... cancer diabetes schizophrenia GLP-1 PEG diabetes Survivin ASO prostate cancer cancer diabetes uterine fibroids IL-1 ß antibody diabetes Phase 1 Phase 2 Phase 3 Regulatory Review/ Prelaunch Q New Chemical Entity Q New Biotech Entity Information is current as of January 21, 2010. The...

  • Page 10

  • Page 11
    Form 10-K

  • Page 12

  • Page 13
    ... 31, 2009 Commission file number 001-06351 Eli Lilly and Company An Indiana corporation I.R.S. employer identification no. 35-0470950 Lilly Corporate Center, Indianapolis, Indiana 46285 (317) 276-2000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each...

  • Page 14
    ... in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and sell products in one significant business segment-pharmaceutical products. We also have an animal health business segment, whose operations are not material to our financial statements. Our mission is...

  • Page 15
    ... directly to consumers in the United States and we maintain web sites with information about all our major products. Divisions of our sales force are assigned to therapeutic areas, such as neuroscience, diabetes, osteoporosis, and oncology. We supplement our employee sales force with contract sales...

  • Page 16
    ... well as pharmaceutical, chemical, and other companies that operate animal health divisions or subsidiaries. Important competitive factors include safety, effectiveness, and ease of use of our products; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development...

  • Page 17
    ... in a severe and rapid decline in sales of the formerly patented product, particularly in the United States. However, in some cases the innovator company may achieve exclusivity beyond the expiry of the product patent through manufacturing trade secrets, later-expiring patents on methods of use or...

  • Page 18
    ... of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals is extremely costly and can significantly delay product introductions. Promotion, marketing, manufacturing, and distribution of pharmaceutical and animal health...

  • Page 19
    ...and Human Services, the Federal Trade Commission, the Office of Personnel Management and state attorneys general. Over the past several years, the FDA, the Department of Justice, and many of these other agencies have increased their enforcement activities with respect to pharmaceutical companies and...

  • Page 20
    ... arthritis. We are also developing new uses, formulations, or delivery methods for many of these compounds as well as our currently marketed products, such as Alimta, Byetta, Cialis, Cymbalta, Effient, Erbitux, Forteo, Gemzar, and Humalog. Raw Materials and Product Supply Most of the principal...

  • Page 21
    ... 60 Offices and Business Experience Chairman (since January 2009), President (since October 2005), Chief Executive Officer (since April 2008) and a Director (since October 2005) Senior Vice President and General Counsel (since January 2003) Executive Vice President and President, Lilly Bio-Medicines...

  • Page 22
    ... Risk Management (since April 2009) and Chief Ethics and Compliance Officer (since June 2007) Executive Vice President, Science and Technology and President, Lilly Research Laboratories (since July 2003; retiring February 28, 2010) Senior Vice President, Corporate Affairs and Communications (since...

  • Page 23
    ... companies, biotechnology companies and generic pharmaceutical companies. To compete successfully, we must continue to deliver to the market innovative, cost-effective products that meet important medical needs. Our product sales can be adversely affected by the introduction by competitors...

  • Page 24
    ... long-term success depends on our ability to continually discover, develop, and commercialize innovative new pharmaceutical products. Without strong intellectual property protection, we would be unable to generate the returns necessary to support the enormous investments in research and development...

  • Page 25
    ... now operating under a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services that requires us to maintain comprehensive compliance programs governing our research, manufacturing, and sales and marketing of pharmaceuticals. A material...

  • Page 26
    ...10-K Item 2. Properties Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2009, we owned 12 production and distribution sites in the United States and Puerto Rico. Together with the corporate administrative offices, these facilities contain an...

  • Page 27
    ... 2008, we received a subpoena from the U.S. Department of Health and Human Services Office of Inspector General in coordination with the U.S. Attorney for the Western District of New York seeking production of a wide range of documents and information relating to reimbursement of Alimta. We are...

  • Page 28
    ... of New York (Schaefer-LaRose, et al. v. Eli Lilly and Company, filed November 14, 2006) claiming that our pharmaceutical sales representatives should have been categorized as "non-exempt" rather than "exempt" employees, and claiming that the company owes them back wages for overtime worked, as well...

  • Page 29
    ... we received a request from the Civil Division of the United States Department of Justice requesting the production of documents related to nominal pricing. In June 2009, we received a Civil Investigative Demand from the office of the Attorney General of Texas requesting documents related to nominal...

  • Page 30
    ..., significant business development, and legal, regulatory, and other matters affecting our company and the pharmaceutical industry. Financial Results We achieved revenue growth of 7 percent in 2009, which was primarily driven by the collective growth of Alimta, Cymbalta, Humalog, and Zyprexa and the...

  • Page 31
    ... biotechnology or pharmaceutical companies. We currently have over 60 potential new drugs in human testing. A number of late-stage pipeline developments and business development transactions occurred within the past year, including: Pipeline • The United States Food and Drug Administration (FDA...

  • Page 32
    ...diabetes or high blood-glucose levels, and that we improperly promoted the drug and seeking to recover the costs paid for Zyprexa through Medicaid and other drug-benefit programs, as well as the costs alleged to have been incurred and that will be incurred to treat Zyprexa-related illnesses. In 2009...

  • Page 33
    ... frequency and impact, given the effect of the downturn in the global economy on local governments. OPERATING RESULTS-2009 Revenue Our worldwide revenue for 2009 increased 7 percent, to $21.84 billion, driven primarily by growth of Alimta, Cymbalta, Humalog, and Zyprexa, and the inclusion of Erbitux...

  • Page 34
    ...Worldwide sales of Byetta, an injectable product for the treatment of type 2 diabetes, increased 6 percent to $796.5 million during 2009. We report as revenue our 50 percent share of Byetta's gross margin in the U.S., 100 percent of Byetta sales outside the U.S., and our sales of Byetta pen delivery...

  • Page 35
    ...acquisition, as well as a discrete income tax benefit of $210.3 million for the resolution of a substantial portion of the 2001-2004 IRS audit. See Note 12 to the consolidated financial statements for additional information. OPERATING RESULTS-2008 Financial Results We achieved worldwide sales growth...

  • Page 36
    ...2007, the Cialis revenue shown does not include net product sales in the joint-venture territories of Lilly ICOS LLC (North America, excluding Puerto Rico, and Europe). Our share of the joint-venture territory net product sales for January 2007, net of expenses and income taxes, is reported in other...

  • Page 37
    ...for Effient and marketing costs associated with Cymbalta and Evista; the impact of foreign exchange rates; and increased litigation-related expenses. Investment in research and development increased 10 percent, to $3.84 billion, due to increased late-stage clinical trial and discovery research costs...

  • Page 38
    ... depend on patents or other forms of intellectual property protection for most of our revenues, cash flows, and earnings. In the next three years we will lose effective exclusivity for Zyprexa in major European countries (September 2011) and the U.S. (October 2011); and for Humalog in major European...

  • Page 39
    ...successfully achieves clinical testing 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...

  • Page 40
    ... are recorded as a deduction to arrive at our net product sales. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include Medicaid, managed care, Medicare, chargebacks, long-term-care, hospital, patient assistance programs, and various other government...

  • Page 41
    ...reported. In addition to the analysis below, see Note 13 to the consolidated financial statements for additional information regarding our retirement benefits. Periodically, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit...

  • Page 42
    ... the potential impact of health care reform in the U.S. and restructuring charges resulting from previously announced strategic headcount reductions. We expect volume-driven revenue growth in the high-single digits, driven primarily by Alimta, Cymbalta, Humalog, Cialis, Effient and the exenatide...

  • Page 43
    ...; changes in effective tax rates; wholesaler inventory changes; other regulatory developments, litigation, patent disputes, and government investigations; and the impact of governmental actions regarding pricing, importation, and reimbursement for pharmaceuticals, as well as proposed health care...

  • Page 44
    ... unfavorable outcome in any of these cases could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position. We have received challenges to Zyprexa patents in a number of countries outside the U.S.: • In Canada, several generic pharmaceutical...

  • Page 45
    ..., New Mexico, Pennsylvania, South Carolina, Utah, and West Virginia alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels, and that we improperly promoted the drug. These suits seek to recover the costs paid for Zyprexa through Medicaid and other drug-benefit programs...

  • Page 46
    ... tested for and warned about side effects of Zyprexa and improperly promoted the drug. In December 2009, the court granted our summary judgment motion, dismissing the case. Plaintiffs have appealed this decision. In early 2005, we were served with four lawsuits seeking class action status in Canada...

  • Page 47
    Item 8. Financial Statements and Supplementary Data Consolidated Statements of Operations ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2009 2008 2007 FORM 10-K Revenue ...Cost of sales ...Research and development ...Marketing, selling, ...

  • Page 48
    ...Note 9) ...Property and Equipment, net ...Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings and current maturities of long-term debt (Note 7) ...Accounts payable ...Employee compensation ...Sales rebates and discounts ...Dividends payable ...Income taxes payable (Note 12...

  • Page 49
    ... Purchases of property and equipment ...Disposals of property and equipment ...Net change in short-term investments ...Proceeds from sales and maturities of noncurrent investments Purchases of noncurrent investments ...Purchases of in-process research and development ...Cash paid for acquisitions...

  • Page 50
    ...LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2009 2008 2007 Net income (loss) ...Other comprehensive income (loss) Foreign currency translation gains (losses)...Net unrealized gains (losses) on securities ...Defined benefit pension and retiree health benefit plans...

  • Page 51
    ... of the animal health business segment are not material and share many of the same economic and operating characteristics as human pharmaceutical products. Therefore, they are included with pharmaceutical products for purposes of segment reporting. ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in...

  • Page 52
    ...Quarterly Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) 2009 Fourth Third Second First Revenue ...Cost of sales ...Operating expenses ...Acquired in-process research and development ...Asset impairments, restructuring, and other special charges...

  • Page 53
    Selected Financial Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except total revenue per employee and per-share data) 2009 2008 2007 2006 2005 FORM 10-K Operations Revenue...Cost of sales ...Research and development ...Marketing, selling, and administrative...Other...

  • Page 54
    ...into account both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company's stock. Value of $100 Invested on Last Business Day of 2004 Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, Peer Group1, and Peer Group (Previous...

  • Page 55
    ... Financial Statements ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Note 1: Summary of Significant Accounting Policies Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally...

  • Page 56
    ... value hedges of firm commitments. Forward and option contracts generally have maturities not exceeding 12 months. In the normal course of business, our operations are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing, investing, and operating. We address...

  • Page 57
    ...ownership. For more than 85 percent of our sales, this is at the time products are shipped to the customer, typically a wholesale distributor or a major retail chain. The remaining sales are recorded at the point of delivery. Provisions for returns, discounts, and rebates are established in the same...

  • Page 58
    ... vesting period. Under our policy all stock-based awards are approved prior to the date of grant. The Compensation Committee of the Board of Directors approves the value of the award and date of grant. Stock-based compensation that is awarded as part of our annual equity grant is made on a specific...

  • Page 59
    ... had no effect on our consolidated financial position or results of operations. We adopted the provisions of a FSP on Compensation-Retirement Benefits, as of December 31, 2009. This FSP required disclosures about plan assets of a defined benefit pension or other postretirement plan. The applicable...

  • Page 60
    .... This strategic combination offered both targeted therapies and oncolytic agents along with a pipeline spanning all phases of clinical development. The combination also expanded our biotechnology capabilities. The acquisition was accounted for as a business combination under the purchase method of...

  • Page 61
    ... in Phase II clinical testing. The discount rate we used in valuing the acquired IPR&D projects was 13.5 percent, and the charge for acquired IPR&D of $4.69 billion recorded in the fourth quarter of 2008 was not deductible for tax purposes. Pro Forma Financial Information (unaudited) The following...

  • Page 62
    ... drug discovery technology, and to a portfolio of preclinical oncology compounds focused on a number of kinase targets. Under the terms of the agreement, the outstanding shares of SGX common stock were redeemed for an aggregate purchase price of $66.8 million. The acquisition has been accounted...

  • Page 63
    ... inflammatory and autoimmune diseases. The lead compound was in the development stage (Phase II clinical trials for rheumatoid arthritis) and had no alternative future use. As with many development-phase compounds, launch of the product, if approved, was not expected in the near term. The charge of...

  • Page 64
    ... of net sales in the U.S. and Canada, which is recorded in collaboration and other revenue. Royalty expense paid to third parties, net of any reimbursements received, is recorded as a reduction of collaboration and other revenue. We are responsible for the manufacture and supply of all requirements...

  • Page 65
    ..., we are manufacturing Byetta pen delivery devices for Amylin. We are responsible for development and commercialization costs outside the U.S. Under the terms of our arrangement, we report as collaboration and other revenue our 50 percent share of gross margin on Amylin's net product sales in the...

  • Page 66
    ...Under the agreement, we paid D-S an upfront license fee and agreed to pay future success milestones. The parties share approximately 50/50 in the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party manufactures bulk product, and we produce the...

  • Page 67
    .... We sold our Greenfield, Indiana site to Covance, a global drug development services firm, and entered into a 10-year service agreement under which Covance will provide preclinical toxicology work and perform additional clinical trials for us as well as operate the site to meet our needs and those...

  • Page 68
    ... 2007. These charges primarily related to a voluntary severance program at one of our U.S. plants and other costs related to this action as well as management actions taken in the fourth quarter of 2006 to close two research and development facilities and one production facility outside the U.S. The...

  • Page 69
    ... not designated as hedging instruments recognized in income of $43.4 million. The effective portions of net gains on interest rate contracts in designated cash flow hedging relationships recorded in other comprehensive income (loss) for 2009 was $38.0 million. During the years ended December 31...

  • Page 70
    ... Cost Fair Value December 31, 2009 Short-term investments Corporate debt securities ...U.S. government and agencies ...Other securities ...Noncurrent investments Corporate debt securities ...Mortgage-backed ...Asset-backed ...U.S. government and agencies Other debt securities...Marketable equity...

  • Page 71
    ....9 239.0 767.5 1,046.1 As discussed further in Note 2, a new accounting pronouncement effective in 2009 changed the accounting for other-than-temporary impairment losses for debt securities, providing that the amount of the other-than-temporary losses recorded in earnings is limited to the portion...

  • Page 72
    ... payable to banks and commercial paper. Commercial paper was issued in late 2008 for the acquisition of ImClone. At December 31, 2009, we have $1.24 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program and matures in May, 2011. Compensating...

  • Page 73
    ... requisite service period of 12.0 months. Shareholder Value Award Program In 2007, we implemented a SVA program, which replaced our stock option program. SVAs are granted to officers and management and are payable in shares of common stock at the end of a three-year period. The number of shares...

  • Page 74
    ... cost related to nonvested SVAs amounted to $48.1 million, which will be amortized over the weighted-average remaining requisite service period of 20.7 months. Stock Option Program Stock options were granted prior to 2007 to officers and management at exercise prices equal to the fair market value...

  • Page 75
    ... a decrease in product litigation reserves. FORM 10-K Note 10: Shareholders' Equity Changes in certain components of shareholders' equity were as follows: Additional Paid-in Capital Deferred Costs ESOP Common Stock in Treasury Shares (in thousands) Amount Retained Earnings Balance at January...

  • Page 76
    ...funds to assist us in meeting our obligations under various employee benefit plans. In February 2009, we contributed an additional 10 million shares to the employee benefit trust, which resulted in a reclassification within equity from additional paid-in capital of $371.9 million and common stock of...

  • Page 77
    ... follows: 2009 2008 Deferred tax assets Compensation and benefits ...Tax credit carryforwards and carrybacks . Tax loss carryforwards and carrybacks . . Intercompany profit in inventories ...Asset purchases ...Asset disposals...Contingencies ...Sale of intangibles ...Product return reserves ...Debt...

  • Page 78
    ...expense: 2009 2008 2007 Income tax (benefit) at the U.S. federal statutory tax rate ...Add (deduct) International operations, including Puerto Rico...General business credits ...Government investigation charges ...Acquisitions and non-deductible acquired in-process research development ...IRS audit...

  • Page 79
    ... benefit pension and retiree health benefit plans, which were as follows: Defined Benefit Pension Plans 2009 2008 Retiree Health Benefit Plans 2009 2008 Change in benefit obligation Benefit obligation at beginning of year ...Service cost ...Interest cost ...Actuarial (gain) loss...Benefits paid...

  • Page 80
    ... asset allocations, and the views of leading financial advisers and economists for future asset class returns. Our plan assets in our U.S. defined benefit pension and retiree health plans comprise approximately 83 percent of our worldwide benefit plan assets. Including the investment losses due to...

  • Page 81
    .... The U.S. defined benefit pension and retiree health benefit plan allocation strategy is currently comprised of approximately 88 percent growth investments and 12 percent fixed income investments. The growth investment allocation encompasses U.S. and international public equity securities, hedge...

  • Page 82
    ... invested in investment grade publicly traded equity and fixed income securities. The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2009 by asset category are as follows: Fair Value Measurements Using Quoted Prices in Significant Significant Active...

  • Page 83
    ... approximately $300 million of additional discretionary funding in 2010 to our global defined benefit pension and post retirement health benefit plans. Note 14: Contingencies We are a party to various legal actions, government investigations, and environmental proceedings. The most significant of...

  • Page 84
    ... unfavorable outcome in any of these cases could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position. We have received challenges to Zyprexa patents in a number of countries outside the U.S.: • In Canada, several generic pharmaceutical...

  • Page 85
    ... of the Food, Drug, and Cosmetic Act for the off-label promotion of Zyprexa in elderly populations as treatment for dementia, including Alzheimer's dementia, between September 1999 and March 2001. We recorded a charge of $1.42 billion for this matter in the third quarter of 2008. In 2009, we paid...

  • Page 86
    ..., New Mexico, Pennsylvania, South Carolina, Utah, and West Virginia alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels, and that we improperly promoted the drug. These suits seek to recover the costs paid for Zyprexa through Medicaid and other drug-benefit programs...

  • Page 87
    ... net of income taxes. The income taxes associated with the unrecognized net actuarial losses and prior service costs on our defined benefit pension and retiree health benefit plans (Note 13) were a benefit of $92.4 million for 2009. The income taxes associated with the unrealized gains (losses) on...

  • Page 88
    ... of financial statements and other financial information. A staff of internal auditors regularly monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports directly to the audit committee of the board of directors. We conducted an...

  • Page 89
    ... ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eli Lilly and Company and subsidiaries' internal control over financial reporting as of...

  • Page 90
    ... with the standards of the Public Company Accounting Oversight Board (United States), the 2009 consolidated financial statements of Eli Lilly and Company and subsidiaries and our report dated February 22, 2010 expressed an unqualified opinion thereon. Indianapolis, Indiana February 22, 2010 78

  • Page 91
    ... business conduct applicable to all employees worldwide and to our Board of Directors; and • Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive officer and all members of financial management that focuses on accounting, financial reporting, internal...

  • Page 92
    ...,959 02 84,578,959 Represents shares in the Lilly GlobalShares Stock Plan, which permitted the company to grant stock options to nonmanagement employees worldwide. The plan was administered by the senior vice president responsible for human resources. The stock options are nonqualified for U.S. tax...

  • Page 93
    .... Director Independence Information relating to director independence can be found in the Proxy Statement under "Highlights of the Company's Corporate Governance Guidelines-Independence Determinations" and is incorporated in this report by reference. Item 14. Principal Accountant Fees and Services...

  • Page 94
    ... States Office of Personnel Management, and certain individual relators Corporate Integrity Agreement between the company and the Office of Inspector General of the Department of Health and Human Services Statement re: Computation of Ratio of Earnings (Loss) to Fixed Charges List of Subsidiaries...

  • Page 95
    ...Chairman of the Board, President, and Chief Executive Officer, and a Director (principal executive officer) Executive Vice President, Global Services and Chief Financial Officer (principal financial officer) Vice President, Finance and Chief Accounting Officer (principal accounting officer) Director...

  • Page 96
    ... Used In This Report Trademarks or service marks owned by Eli Lilly and Company or its subsidiaries or affiliates, when first used in this report, appear with an initial capital and are followed by the symbol » or TM, as applicable. In subsequent uses of the marks in the report, the symbols are...

  • Page 97
    Notice of 2010 Annual Meeting Proxy Statement

  • Page 98

  • Page 99
    ... requesting that the compensation committee of the board of directors establish a policy requiring senior executives to retain equity awards until two years after leaving the company. Shareholders of record at the close of business on February 12, 2010, will be entitled to vote at the meeting and at...

  • Page 100
    ...to your account in The Eli Lilly and Company Employee 401(k) Plan (the 401(k) plan). What constitutes a quorum? A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meeting. As of the record date, 1,153,145,432 shares of company common stock were...

  • Page 101
    ... of these materials, please provide the control number from the e-mail, along with your name and mailing address. By telephone. Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the instructions on your proxy card or, if you received these materials...

  • Page 102
    ...do I contact the board of directors? You may send written communications to one or more members of the board, addressed to: Lead Director, Board of Directors Eli Lilly and Company c/o Corporate Secretary Lilly Corporate Center Indianapolis, Indiana 46285 All such communications (from shareholders or...

  • Page 103
    ... mailings. Beneficial shareholders can request information about householding from their banks, brokers, or other holders of record. What if I want to receive a paper copy of the annual report and proxy statement? If you wish to receive a paper copy of the 2009 annual report and 2010 proxy statement...

  • Page 104
    ... annual meeting. Each of these directors has been nominated and is standing for election to serve a term that will expire in 2013. See page 55 of this proxy statement for more information. Ralph Alvarez Age 54 Director since 2009 Retired President and Chief Operating Officer, McDonald's Corporation...

  • Page 105
    ... and the Fox Cities Performing Arts Center. Board Committees: audit and public policy and compliance Class of 2011 The following four directors will continue in office until 2011. Michael L. Eskew Age 60 Director since 2008 Former Chairman and Chief Executive Officer, United Parcel Service, Inc. Mr...

  • Page 106
    ... and chief executive officer of Eli Lilly and Company. He served as president and chief operating officer from 2005 to 2008. He joined Lilly in 1979 as a senior organic chemist and has held management positions in England and the U.S. He was named vice president of pharmaceutical product development...

  • Page 107
    ... for the Future, New York-Presbyterian Hospital, Lincoln Center Theater, and Families and Work Institute. Board Committees: compensation and directors and corporate governance (chair) Douglas R. Oberhelman Age 57 Director since 2008 Vice Chairman and Chief Executive Officer-Elect, Caterpillar Inc...

  • Page 108
    ...the company other than for service as a nonexecutive employee. • a director who is employed (or whose immediate family member is employed as an executive officer) by another company where any Lilly executive officer serves on the compensation committee of that company's board. PROXY STATEMENT 10

  • Page 109
    ... gross revenue in a single fiscal year. Members of board committees must meet all applicable independence tests of the NYSE, Securities and Exchange Commission (SEC), and Internal Revenue Service (IRS). In February 2010, the directors and corporate governance committee reviewed directors' responses...

  • Page 110
    ... compensation committee in establishing the chief executive officer's compensation for the next year. Succession Management and Election of Officers The independent directors are responsible for overseeing the succession and management development program for senior leadership. The chief executive...

  • Page 111
    ... and the SEC. This code is set out in: • The Red Book, a comprehensive code of ethical and legal business conduct applicable to all employees worldwide and to our board of directors • Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive officer and...

  • Page 112
    ... (directors and executive officers, their immediate family members, or shareholders owning five percent or greater of the company's outstanding stock). The policy covers any related-person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules...

  • Page 113
    ... directors and corporate governance committee reviews and approves all committee charters annually. The chair of each committee determines the frequency and agenda of committee meetings. In addition, the audit, compensation, and public policy and compliance committees meet alone in executive session...

  • Page 114
    ... structure and strategies, including dividends, stock repurchases, capital expenditures, financings and borrowings, and significant business development projects. Public Policy and Compliance Committee • oversees the processes by which the company conducts its business so that the company will do...

  • Page 115
    ... and all attended in 2009. Current committee membership and the number of meetings of the board and each committee in 2009 are shown in the table below. Directors and Corporate Governance Public Policy and Compliance Science and Technology Name Board Audit Compensation Finance Mr. Alvarez1 Sir...

  • Page 116
    ... price of the stock on the date dividends are paid. Actual shares are issued or transferred after the director ends his or her service on the board. • Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the applicable federal long-term rate...

  • Page 117
    ... Plan Shares" column. Aggregate stock options are shown in the table below under "Directors' Outstanding Stock Options". 3 This column includes amounts donated by the Eli Lilly and Company Foundation, Inc. under its matching gift program, which is generally available to U.S. employees as well...

  • Page 118
    ...18/2013 2/17/2014 - - 2/17/2012 2/18/2013 2/17/2014 - 4/19/2010 2/18/2011 2/17/2012 2/18/2013 2/17/2014 - 4/19/2010 2/18/2011 2/17/2012 2/18/2013 2/17/2014 2/18/2013 2/17/2014 - 4/19/2010 2/18/2011 2/17/2012 2/18/2013 2/17/2014 4/19/2010 2/18/2011 2/17/2012 2/18/2013 2/17/2014 Exercise Price - $73...

  • Page 119
    ...retired chief executive officers and senior executives, particularly those with experience in operations, finance, accounting, banking, marketing, and sales • international business • science and medicine • government and public policy • health care system (public or private). Finally, board...

  • Page 120
    ...Ball Corporation, with a strong record of leadership in operations and strategy. He is an audit committee financial expert as a result of his experience as CEO and formerly as CFO of Ball. He also has extensive corporate governance experience through his service on other public company boards. Karen...

  • Page 121
    ... by November 8, 2010. The notice should be addressed to the corporate secretary at Lilly Corporate Center, Indianapolis, Indiana 46285. The notice must contain prescribed information about the candidate and about the shareholder proposing the candidate as described in more detail in Section 1.9 of...

  • Page 122
    ...members of senior management (such as the chief financial officer and the chief accounting officer) to discuss the results of their examinations, their evaluations of the company's internal controls, and the overall quality of the company's financial reporting. We also periodically meet in executive...

  • Page 123
    ...the audit or reviews of the financial statements -2009 and 2008: primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential acquisitions Tax Fees • 2009 and 2008: primarily related to consulting and compliance services All Other Fees • 2009 and...

  • Page 124
    ...members of company management only on matters under the committee's oversight and with the knowledge and permission of the committee chair. • Role of Executive Officers and Management. With the oversight of the CEO and the senior vice president of human resources, the company's global compensation...

  • Page 125
    ...as follows: -Key risks to the business strategy are reviewed by the board as part of the company's annual long-range planning process. These risks will be an input into an annual review by the compensation committee to assess the potential for compensation programs to encourage excessive risk-taking...

  • Page 126
    ... stock price resulted in no payout of shareholder value awards (SVAs). Total shareholder return for 2007-2009 failed to meet the threshold for the SVA; as a result, awards granted to executive officers did not pay out. • Cost-effective equity design maintained for 2009, with more emphasis on long...

  • Page 127
    ... superior long-term shareholder returns and to share value created with employees in a cost-effective manner. While compensation will always reflect differences in job responsibilities, geographies, and marketplace considerations, the overall structure of compensation and benefits programs should...

  • Page 128
    .... The company generally maintained the same pay ranges and mix of pay elements as in 2008. The committee believes this overall program continues to provide cost-effective delivery of total compensation that: -encourages retention and employee engagement by delivering competitive cash and equity...

  • Page 129
    ... all named executive officers except Mr. Carmine, who was not an officer when the award was granted. Mr. Carmine's payout is shown in the Options Exercised and Stock Vested in 2009 table. Base Salary In setting base salaries for 2009, the committee considered the following: • The corporate budget...

  • Page 130
    ... on job responsibilities, internal relativity, and peer group data. Consistent with our compensation objectives, as executives assume greater responsibilities, more of their pay is linked to company performance. For three named executive officers, the committee maintained the same bonus targets as...

  • Page 131
    ... 2009 reported and pro forma sales and adjusted EPS. Equity Incentives-Total Equity Program We employ two forms of equity incentives granted under the 2002 Lilly Stock Plan: performance awards (PAs) and shareholder value awards (SVAs). These incentives are designed to focus our leaders on long-term...

  • Page 132
    ... 2008 2009 2010 2011 2012 2013 Performance Period Restricted Stock Units Equity Compensation: Performance metrics of growth in adjusted EPS and share price are objective and align with shareholder interests Target grant values set based on internal relativity, performance, and peer data 2009 target...

  • Page 133
    ... has discretion to adjust an award payout downward (but not upward) from the amount yielded by the formula. The SVA program delivers equity compensation that is strongly linked to long-term total shareholder returns. It is more cost-effective than the stock option program it replaced because the SVA...

  • Page 134
    Stock Options The company stopped granting stock options in 2007. All outstanding stock options are currently "under water," meaning they have no realizable value. The stock option granted in 1999 expired in 2009, and all of the named executive officers forfeited the award having realized no value. ...

  • Page 135
    ...productivity and job satisfaction through programs that focus on work/life balance. The benefits available are the same for all U.S. employees and include medical and dental coverage, disability insurance, and life insurance. In addition, the 401(k) plan and The Lilly Retirement Plan (the retirement...

  • Page 136
    ... federal long-term rate, as described in more detail following the Nonqualified Deferred Compensation in 2009 table on page 48. Severance Benefits Except in the case of a change in control of the company, the company is not obligated to pay severance to named executive officers upon termination...

  • Page 137
    ... a focus on long-term growth. The committee has adopted a guideline requiring the CEO to own company stock valued at least five times his or her annual base salary. The committee revised the guidelines in 2009 for other executive officers to require ownership of a fixed number of shares based on...

  • Page 138
    ... 2010. • Changes to the retirement and retiree medical plans that reduce benefits for employees retiring prior to age 65 were effective January 2010. Compensation Committee Report The compensation committee ("we" or "the committee") evaluates and establishes compensation for executive officers...

  • Page 139
    ... Table Salary ($) Stock Awards ($)2 Option Awards ($)2 Non-Equity Incentive Plan Compensation ($)3 Change in Pension Value ($)4 All Other Compensation ($)5 Total Compensation ($) Name and Principal Position John C. Lechleiter, Ph.D.1 Chairman, President, and Chief Executive Officer Year 2009 2008...

  • Page 140
    ... that do not change based on usage, such as pilots' salaries, the purchase costs of the company-owned aircraft, and the cost of maintenance not related to trips. As of March 1, 2009, executive officers are no longer permitted to use corporate aircraft to attend outside board meetings. For Mr. Rice...

  • Page 141
    ..."Non-Equity Incentive Plan Compensation." These columns show the range of payouts targeted for 2009 performance under the 2002 Lilly Stock Plan as described in the sections titled: "Equity Incentives-Performance Awards" and "Equity Incentives-Shareholder Value Awards" in the "Compensation Discussion...

  • Page 142
    ... must have remained employed with the company through December 31, 2009 (except in the case of death, disability, or retirement). In addition, an employee who was an executive officer at the time of grant and an employee at the time of payout received payment in restricted share units. No dividends...

  • Page 143
    ..., 2009 Option Awards Stock Awards Name Dr. Lechleiter Number of Securities Underlying Unexercised Options (#)1 Exercisable Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Equity Incentive Plan Awards: Number of Unearned Market Value...

  • Page 144
    ... for the benefit of Dr. Lechleiter's children, and the remainder has been transferred back to Dr. Lechleiter. 3 4 5 6 7 8 Options Exercised and Stock Vested in 2009 Option Awards Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($)1 Stock Awards Number of Shares Acquired on...

  • Page 145
    ... monthly benefits to retirees. See the Summary Compensation Table for additional information about the value of these pension benefits. Sections 401 and 415 of the Internal Revenue Code generally limit the amount of annual pension that can be paid from a tax-qualified plan ($195,000 in 2009) as well...

  • Page 146
    ... calculate benefits accruing thereafter. Eligible employees who retire on or after January 1, 2010 can retire at 65 with at least five years of service and receive an unreduced benefit. Pension benefits under the amended retirement plan are reduced for employees retiring before age 65. For retirees...

  • Page 147
    ...(d) of the Internal Revenue Code with monthly compounding, which was 5.2 percent for 2009 and is 4.9 percent for 2010. Participants may elect to receive the funds in a lump sum or in up to 10 annual installments following retirement, but may not make withdrawals during their employment, except in...

  • Page 148
    ... to which the named executive officers would be entitled upon termination of employment. Except for (i) certain terminations following a change in control of the company, as described below, and (ii) certain pension arrangements as shown below and described under "Retirement Benefits" above, there...

  • Page 149
    ...the "Compensation Discussion and Analysis" under "Severance Benefits," the company maintains a change-in-control severance pay plan (CIC plan) for nearly all employees, including the named executive officers. The CIC plan defines a change in control very specifically, but generally the terms include...

  • Page 150
    ...and welfare benefits. Represents the present value of the CIC plan's guarantee, for two years following a covered termination, of continued coverage equivalent to the company's current active employee medical, dental, life, and long-term disability insurance. Effective October 20, 2010, the coverage...

  • Page 151
    ... the number of shares of company common stock beneficially owned by the directors, the named executive officers, and all directors and executive officers as a group, as of February 2, 2010. The table shows shares held by named executive officers in the 401(k) plan, shares credited to the accounts of...

  • Page 152
    ... of the company's knowledge, the only beneficial owners of more than five percent of the outstanding shares of the company's common stock are the shareholders listed below: Name and Address Lilly Endowment, Inc. (the "Endowment") 2801 North Meridian Street Indianapolis, Indiana 46208 Capital World...

  • Page 153
    ...the annual meeting of shareholders held in 2013. Each of the nominees listed below has agreed to serve that term. If any director is unable to stand for election, the board may, by resolution, provide for a lesser number of directors or designate a substitute. In the latter event, shares represented...

  • Page 154
    ... the classified board structure, which has a long history in corporate law. A classified structure may provide continuity and stability in the management of the business and affairs of the company because a majority of directors always have prior experience as directors of the company. In some...

  • Page 155
    ...to improve our company's corporate governance. In 2009 the following outstanding shareholder vote was achieved: A 2009 shareowner proposal on the Simple Majority Vote topic won more than 63% support at our annual meeting. This 63%-support also represented 51%-support from all shares outstanding. The...

  • Page 156
    ... resources from the business. We must pay to prepare, print, and distribute legal disclosure documents to over 300,000 shareholders; solicit proxies; and tabulate votes. The board and management must divert time from the business to prepare for and conduct the meeting. We believe these costs...

  • Page 157
    ... the major stock exchanges. We do not dispute that CEOs can be valuable members of other Board committees. Nonetheless, we believe that shareholder concerns about aligning CEO pay with performance argue strongly in favor of directors who can view senior executive compensation issues objectively. We...

  • Page 158
    ... the company's strategy and motivating long-term value creation without encouraging excessive risk-taking, and • delivering pay in a cost-effective way. By virtue of both temperament and depth of experience, business executives can be very effective serving the twin roles of counseling management...

  • Page 159
    ... views on executive-compensation best practices. These communications yield results. In recent years, the committee has made a number of changes to our executive compensation programs that were influenced at least in part by shareholder views expressed to us directly: • eliminated stock options in...

  • Page 160
    ... of senior executive compensation at Lilly. According to the Lilly 2009 proxy statement, our company pays a meaningful portion of named executive officers' total compensation in equity incentives through performance awards and shareholder value awards, aligning the interests of employees and...

  • Page 161
    ... personal wealth. Our compensation recovery policy allows the compensation committee to "claw back" compensation paid based upon misstated financial statements up to 2 years post retirement. Executive officers retain a financial stake in the company's performance after retirement because the company...

  • Page 162
    ...Ownership Reporting Compliance Under SEC rules, our directors and executive officers are required to file with the SEC reports of holdings and changes in beneficial ownership of company stock. We have reviewed copies of reports provided to the company, as well as other records and information. Based...

  • Page 163
    ...a majority of the directors then in office. (b) The Prior to the 2011 annual meeting of shareholders, the Board of Directors (exclusive of Preferred Stock Directors) shall be divided into three classes, with the term of office of one class expiring each year. At the annual meeting of shareholders in...

  • Page 164
    ... banking firm selected by a majority of the Continuing Directors as to the fairness (or not) of the terms of the action or transaction from a financial point of view to the Remaining Public Shareholders, such investment banking firm to be paid a reasonable fee for its services by the Corporation...

  • Page 165
    ... of any class of capital stock of the Corporation which are entitled to vote generally in the election of directors; (iv) the term "Continuing Director" shall mean a director who is not an Affiliate or Associate or representative of a Related Person and who was a member of the Board of Directors of...

  • Page 166

  • Page 167
    ... Product Research and Development, Lilly Research Laboratories Andreas F. Witzel, Pharm.D. Vice President, MS&T, Supply Chain, and Global Packaging Michael C. Heim Senior Vice President, Information Technology, and Chief Information Officer Alfonso G. Zulueta President and General Manager, Lilly...

  • Page 168
    ... Information Annual meeting Transfer agent and registrar The annual meeting of shareholders will be held at the Lilly Center Auditorium, Lilly Corporate Center, Indianapolis, Indiana, on Monday, April 19, 2010, at 11:00 a.m. EDT. For more information, see the proxy statement section of this report...

  • Page 169
    ... Admission Ticket Eli Lilly and Company 2010 Annual Meeting of Shareholders Monday, April 19, 2010 11 a.m. EDT Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285 The top portion of this page will be required for admission to the meeting. Please write your name and address in...

  • Page 170
    ... of this page with you to the meeting. Detach here Detach here Eli Lilly and Company Annual Meeting of Shareholders April 19, 2010 Complimentary Parking Lilly Corporate Center Please place this identifier on the dashboard of your car as you enter Lilly Corporate Center so it can be clearly seen...

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    ... Tuberculosis Partnership ...www.lillymdr-tb.com Medicare prescription-drug coverage ...www.lillymedicareanswers.com Pharmaceutical industry patient assistance programs ...www.pparx.org Lilly Cares...www.lillycares.com or call toll-free 1-800-545-6962 © 2010 Eli Lilly and Company YEAR2009AR

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