Eli Lilly 2004 Annual Report Download - page 38

FINANCIALS
36
$68.5 million, including $35.1 million of severance charges related to restructuring activities in our overseas affi li-
ates. The severance charges consisted primarily of voluntary severance expenses. Substantially all of this charge
has been expended.
The other signifi cant component of our fourth-quarter 2004 special charges was a provision for $36.0 million
for the anticipated resolution of the previously reported Evista marketing and promotional practices investigation.
See Note 13 for additional discussion.
In addition, in the second quarter of 2004, as part of our ongoing review of our manufacturing and research
and development strategies to maximize performance and effi ciencies, including the streamlining of manufactur-
ing operations and research and development activities, we also made decisions that resulted in the impairment of
certain assets. This review did not result in any closure of facilities or layoffs, but certain assets located at various
sites were affected. We have ceased using these assets, written down their carrying value to zero, and are in the
process of disposing of or destroying all of the assets. The asset impairment charges incurred in the second quar-
ter of 2004 aggregated $108.9 million.
Similar to 2004, during 2003, management approved global manufacturing strategies across our product
portfolio to improve plant performance and effi ciency, including the outsourcing of production of certain anti-infec-
tive 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 all these assets have been disposed of or their destruction
commenced. The impairment charges were necessary to adjust the carrying value of these assets to zero. These
asset impairment charges incurred totaled $142.9 million, 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.
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 of 2003
were $52.5 million, consisting primarily of voluntary severance expenses. All of this charge has been expended.
In August 2001, 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 conjunction with this
agreement, we purchased approximately 4.2 million shares of Isis common stock with a cost basis of approximate-
ly $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 manu-
facturing 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 in the fi rst quarter of 2003 that our
investment in Isis common stock was other-than-temporarily impaired as defi ned by generally accepted account-
ing 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 carrying 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 mil-
lion 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 remaining portion
of the charge resulted from our contractual obligations related to the conduct of Affi nitak clinical trials. Substan-
tially all our contractual obligations have been fulfi lled. The stock and loan impairments and other special charges
incurred in the fi rst quarter of 2003 related to this relationship totaled $186.8 million.
Note 5: Financial Instruments and Investments
Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-
bearing investments. Wholesale distributors of life-sciences products and managed care organizations account
for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this
concentration is mitigated by our ongoing credit review procedures. We place substantially all our interest-bearing
investments with major fi nancial institutions, in U.S. government securities, or with top-rated corporate issuers.