Eli Lilly 2009 Annual Report Download - page 60

In 2009, the FASB issued a Statement on Transfers and Servicing, an amendment of previous authoritative
guidance. The most significant amendments resulting from this Statement consist of the removal of the
concept of a qualifying special-purpose entity (SPE) from previous authoritative guidance, and the
elimination of the exception for qualifying SPEs from the Consolidation guidance regarding variable
interest entities. This Statement is effective for us January 1, 2010 and is not expected to be material to
our consolidated financial position or results of operations.
In 2009, the FASB issued a Statement which amends the previous Consolidations guidance regarding
variable interest entities and addresses the effects of eliminating the qualifying SPE concept from the
guidance on Transfers and Servicing. This Statement responds to concerns about the application of certain
key provisions of the previous guidance on Consolidations regarding variable interest entities, including
concerns over the transparency of enterprises’ involvement with variable interest entities. This Statement
is effective for us January 1, 2010 and is not expected to be material to our consolidated financial position
or results of operations.
In 2009, the FASB ratified EITF guidance related to Revenue Recognition that amends the previous
guidance on arrangements with multiple deliverables. This guidance provides principles and application
guidance on whether multiple deliverables exist, how the arrangements should be separated, and how the
consideration should be allocated. It also clarifies the method to allocate revenue in an arrangement
using the estimated selling price. This guidance is effective for us January 1, 2011 and is not expected to
be material to our consolidated financial position or results of operations.
Note 3: Acquisitions
During 2008 and 2007 we acquired several businesses. These acquisitions were accounted for as business
combinations under the purchase method of accounting. Under the purchase method of accounting, the
assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition
date in our consolidated financial statements. The determination of estimated fair value required
management to make significant estimates and assumptions. The excess of the purchase price over the
fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of
operations of these acquisitions are included in our consolidated financial statements from the date of
acquisition.
Most of these acquisitions included IPR&D, which represented compounds, new indications, or line
extensions under development that had not yet achieved regulatory approval for marketing. There are
several methods that can be used to determine the estimated fair value of the IPR&D acquired in a
business combination. We utilized the “income method”, which applies a probability weighting to the
estimated future net cash flows that are derived from projected sales revenues and estimated costs.
These projections are based on factors such as relevant market size, patent protection, historical pricing
of similar products, and expected industry trends. The estimated future net cash flows are then discounted
to the present value using an appropriate discount rate. This analysis is performed for each project
independently. Pursuant to the existing rules, these acquired IPR&D intangible assets totaling $4.71 billion
and $340.5 million in 2008 and 2007, respectively, were expensed immediately subsequent to the
acquisition because the products had no alternative future use. The ongoing expenses with respect to
each of these products in development are not material to our total research and development expense
currently and are not expected to be material to our total research and development expense on an
annual basis in the future.
In addition to the acquisitions of businesses, we also acquired several products in development. The
acquired IPR&D related to these products of $90.0 million, $122.0 million, and $405.1 million in 2009,
2008, and 2007, respectively, was also written off by a charge to income immediately upon acquisition
because the products had no alternative future use.
ImClone Acquisition
On November 24, 2008, we acquired all of the outstanding shares of ImClone Systems Inc. (ImClone), a
biopharmaceutical company focused on advancing oncology care, for a total purchase price of approx-
imately $6.5 billion, which was financed through borrowings. 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 accounting,
resulting in goodwill of $425.9 million. No portion of this goodwill was or is expected to be deductible for
tax purposes.
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FORM 10-K