Eli Lilly 2012 Annual Report Download - page 30

18
• Pharmaceutical products can develop unexpected safety or efficacy concerns. Unexpected safety or
efficacy concerns can arise with respect to marketed products, leading to product recalls, withdrawals, or
declining revenue, as well as costly product liability claims.
• Regulatory compliance problems could be damaging to the company. The marketing, promotional, and
pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers
interact with purchasers, prescribers, and patients, are subject to extensive regulation. Many companies,
including Lilly, have been subject to claims related to these practices asserted by federal, state and
foreign governmental authorities, private payers, and consumers. These claims have resulted in
substantial expense and other significant consequences to us. It is possible that we could become subject
to such investigations and that the outcome could include criminal charges and fines, penalties, or other
monetary or nonmonetary remedies, including exclusion from U.S. federal health care programs. In
addition, regulatory issues concerning compliance with current Good Manufacturing Practice (cGMP)
regulations for pharmaceutical products can lead to product recalls and seizures, interruption of
production leading to product shortages, and delays in the approvals of new products pending resolution
of the cGMP issues. We are 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 failure to comply with the agreement could result in severe sanctions to the
company. See Item 1, “Business—Regulation of our Operations,” for more details.
• We face many product liability claims and are largely self-insured; we could face large numbers of
claims in the future, which could adversely affect our business. We are subject to a substantial number
of product liability claims involving primarily Byetta, Zyprexa, diethylstilbestrol (DES), Darvon®, and
Prozac. See Item 8, “Financial Statements and Supplementary Data—Note 15, Contingencies,” and Item 3,
“Legal Proceedings,” for more information on our current product liability litigation. Because of the
nature of pharmaceutical products, it is possible that we could become subject to large numbers of
product liability claims for these or other products in the future, which could require substantial
expenditures to resolve and, if involving marketed products, could adversely affect sales of the product.
Due to a very restrictive market for product liability insurance, we have been and will continue to be
largely self-insured for product liability losses for substantially all our currently marketed products. In
addition, there is no assurance that we will be able to fully collect from our insurance carriers on past
claims.
• Manufacturing difficulties or disruptions could lead to product supply problems. Pharmaceutical
manufacturing is complex and highly regulated. Manufacturing difficulties at our facilities or contracted
facilities, or the failure or refusal of a contract manufacturer to supply contracted quantities, could result
in product shortages, leading to lost revenue. Such difficulties or disruptions could result from quality or
regulatory compliance problems, natural disasters, or inability to obtain sole-source raw or intermediate
materials. See Item 1, “Business—Raw Materials and Product Supply,” for more details.
• Worsening economic conditions could adversely affect our business and operating results. While
pharmaceuticals have not generally been sensitive to overall economic cycles, prolonged economic
slowdowns could lead to decreased utilization of drugs, affecting our sales volume. Declining tax
revenues attributable to economic downturns increase the pressure on governments to reduce health
care spending, leading to increasing government efforts to control drug prices and utilization.
Additionally, some customers, including governments or other entities reliant upon government funding,
may be unable to pay in a timely manner for our products. We have experienced delays in repayment from
national health care systems in certain countries, including but not limited to Greece and regions within
Spain and Italy. The ongoing euro area financial crisis has heightened our sensitivity to such trends, and
we continue to monitor the countries’ and regions’ creditworthiness. A prolonged economic downturn
could also adversely affect our investment portfolio, which could lead to the recognition of losses on our
corporate investments and increased benefit expense related to our pension obligations. Also, if our
customers, suppliers or collaboration partners experience financial difficulties, we could experience
slower customer collections, greater bad debt expense, and performance defaults by suppliers or
collaboration partners.
• We are increasingly dependent on information technology systems and infrastructure; system
inadequacies, operating failures, or security breaches could harm our business. We rely to a large