Eli Lilly 2012 Annual Report Download - page 65

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Earnings per share
We calculate basic earnings per share based on the weighted-average number of common shares outstanding
and incremental shares. We calculate diluted earnings per share based on the weighted-average number of
common shares outstanding, including incremental shares and stock options. See Note 12 for further
discussion.
Stock-based compensation
We recognize the fair value of stock-based compensation as expense over the requisite service period of the
individual grantees, which generally equals the 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 grant date scheduled in advance.
Reclassifications
Certain reclassifications have been made to prior periods in the consolidated financial statements and
accompanying notes to conform with the current presentation.
Note 2: Implementation of New Financial Accounting Pronouncements
In 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that
applies to the annual fee imposed on pharmaceutical manufacturers and importers that sell branded
prescription drugs to specified government programs as part of U.S. health care reform. This fee is allocated
to companies based on their prior-calendar-year market share for branded prescription drug sales into these
government programs. In accordance with the ASU, we record this fee as marketing, selling, and
administrative expense in our consolidated results of operations and amortize it on a straight-line basis for
the year. This guidance was effective for us January 1, 2011. For the years ended December 31, 2012 and 2011,
we recorded $170.7 million and $178.0 million, respectively, related to this fee, which is not deductible for tax
purposes.
Note 3: Acquisitions
From 2010 to 2012, we completed the acquisitions of ChemGen Corporation (ChemGen), the animal health
business of Janssen Pharmaceuticia NV (Janssen), Avid Radiopharmaceuticals, Inc. (Avid), Alnara
Pharmaceuticals, Inc. (Alnara), and a group of animal health product lines. These acquisitions were accounted
for as business combinations under the acquisition 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. None of these acquisitions were material to
our consolidated financial statements.
These acquisitions included IPR&D, which represented compounds, new indications, or line extensions under
development that had not yet achieved regulatory approval for marketing. As discussed in Note 1, the fair
values of IPR&D assets acquired as part of the acquisition of a business are capitalized as intangible assets.
We capitalized $1.6 million, $29.6 million, and $598.0 million of IPR&D assets that were acquired in business
combinations during the years ended December 31, 2012, 2011, and 2010, respectively. The ongoing expenses
with respect to each of these assets 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.
Some of these acquisitions included contingent consideration, which is recorded at fair value in other
liabilities as of the acquisition date. The fair value of the contingent consideration was determined by utilizing
a probability weighted estimated cash flow stream discounted for the expected timing of each payment.
In addition to the acquisitions of businesses, we also acquired several assets in development during 2011 and
2010, which are discussed below in Product Acquisitions and in Note 4. The acquired IPR&D related to these