Eli Lilly 2003 Annual Report Download - page 33

FINANCIALS
31
to jointly develop and commercialize Amylin’s synthetic exendin-4 compound, a potential new treatment for type
2 diabetes. In 2001, we entered into collaboration arrangements with three companies. In August, we licensed
from Isis Pharmaceuticals, Inc. (Isis), Affi nitak™, a non-small-cell lung cancer drug candidate and entered into
an agreement regarding an ongoing research collaboration. In September, we entered into a collaboration with
Bioprojet, Société Civile de Recherche, to jointly develop and commercialize a vasopeptidase inhibitor (fasidotril)
for hypertension and chronic heart failure. In October, we entered into a collaboration with 3M Company to jointly
develop and commercialize an immune response modifi er (resiquimod) for various forms of herpes. The ongoing
activity with respect to each of these agreements is not material to our research and development expenses.
At the inception of these collaborations, these compounds were in the development phase and no alternative
future uses were identifi ed. As with many development phase compounds, launch of the products, if approved, was
not expected in the near term. Our charge for acquired in-process research and development expense related to
these arrangements totaled $84.0 million and $190.5 million in 2002 and 2001, respectively. See Note 4 for further
discussion of 2003 developments regarding the Isis agreements. In 2003, based upon recent clinical results of
resiquimod and fasidotril and other opportunities we have in our product pipeline, the collaboration agreements
between the parties were terminated.
In conjunction with the collaboration arrangement with Amylin, we also entered into a loan agreement. Fol-
lowing the successful completion of the ongoing clinical trials and contingent upon certain other events, we have
agreed to loan Amylin up to $110 million during the development period of the product, repayable in cash or Amylin
stock at our option. As of December 31, 2003, no loans to Amylin were outstanding.
Note 4: Asset Impairments, Restructuring, and Other Special Charges
In December 2002, we initiated a plan of eliminating approximately 700 positions worldwide in order to streamline
our infrastructure. While a substantial majority of affected employees were successfully placed in other positions
in the company, severance expenses were incurred in the fi rst quarter of 2003 for those employees who elected a
severance package. The restructuring and other special charges incurred in the fi rst quarter were $52.5 million,
consisting primarily of voluntary severance expenses, which have been included in asset impairments, restructur-
ing, and other special charges in our consolidated statement of income. Approximately $40.0 million of this charge
was expended during 2003 with substantially all the remainder to be expended during the fi rst quarter of 2004.
In addition, as part of our previously disclosed ongoing strategic review, management approved global manu-
facturing strategies across our product portfolio during 2003 to improve plant performance and effi ciency, includ-
ing the outsourcing of production of certain anti-infective products. These decisions resulted in the impairment of
certain assets, primarily manufacturing assets in the U.S. This review did not result in any closure of facilities, but
certain assets located at various manufacturing sites were affected. We have ceased using these assets and sub-
stantially all these assets have been disposed of or destruction commenced in 2003. The impairment charges were
necessary to adjust the carrying value of these assets to zero. These asset impairment charges totaled $142.9 mil-
lion, of which $114.6 million was incurred in the fi rst quarter of 2003 with the remaining $28.3 million incurred in
the fourth quarter of 2003, and are included in asset impairments, restructuring, and other special charges in our
consolidated statement of income.
In conjunction with the Isis agreement discussed in Note 3, we purchased approximately 4.2 million shares of
Isis common stock with a cost basis of approximately $68.0 million and we committed to loan Isis $100 million over
the four-year term of the research agreement. The Isis loan is repayable at the end of the research agreement
term in cash or Isis stock, at Isis’s option, using a conversion price of $40 per share. In addition, we committed to
loan Isis $21.2 million for the building of a manufacturing suite for Affi nitak. On March 17, 2003, we announced,
along with Isis, the results of the Phase III trial that evaluated Affi nitak when combined with chemotherapy in
patients with advanced non-small-cell lung cancer. No difference was observed in the overall survival of the two
groups. Due to this announcement and the decline in Isis’s stock price that occurred in the previous 12 months, we
concluded that our investment in Isis common stock was other-than-temporarily impaired as defi ned by gener-
ally accepted accounting principles. For the same reasons, it was probable that the value of the consideration that
we will be eligible to receive from Isis pursuant to the terms of the loan agreements will be less than the carry-
ing amount of the loans. Therefore, in the fi rst quarter of 2003, we recognized an impairment in our investment in
Isis common stock of $55.0 million and a reserve related to the loans of $92.9 million. In addition, we recognized a
charge of $38.9 million for contractual obligations related to Affi nitak. The primary portion of this charge resulted
from our supply agreement with Isis. The supply agreement obligated us to pay certain costs associated with work-
in-process and raw materials and other costs that were triggered when we canceled our order of Affi nitak. The re-
maining portion of the charge resulted from our contractual obligations related to the conduct of Affi nitak clinical