Eli Lilly 2005 Annual Report Download - page 55

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civil RICO statute, and common law theories, seeking a refund of the cost of Zyprexa, treble damages, punitive
damages, and attorneys’ fees. In addition, in 2006 a similar lawsuit was filed in the Eastern District of New York
on similar grounds. As with the product liability suits, these lawsuits allege that we inadequately tested for and
warned about side effects of Zyprexa and improperly promoted the drug.
In December 2004, we were served with two lawsuits brought in state court in Louisiana on behalf of the Loui-
siana Department of Health and Hospitals, alleging that Zyprexa caused or contributed to diabetes or high blood-
glucose levels, and that we improperly promoted the drug. These cases have been removed to federal court and are
now part of the MDL proceedings in the Eastern District of New York. In these actions, the Department of Health and
Hospitals seeks to recover the costs it paid for Zyprexa through Medicaid and other drug-benefit programs, as well
as the costs the department alleges it has incurred and will incur to treat Zyprexa-related illnesses.
In connection with the Zyprexa product liability claims, certain of our insurance carriers have raised defenses
to their liability under the policies and to date have failed to reimburse us for claim-related costs despite demand
from the first-layer carriers for payment. However, in our opinion, the defenses identified to date appear to lack
substance. In March 2005, we filed suit against several of the carriers in state court in Indiana to obtain reimburse-
ment of costs related to the Zyprexa product liability litigation. The matter has been removed to the federal court in
Indianapolis. Several carriers have asserted defenses to their liability, and some carriers are seeking rescission of
the coverage. While we believe our position is meritorious, there can be no assurance that we will prevail.
In addition, we have been named as a defendant in numerous other product liability lawsuits involving primar-
ily diethylstilbestrol (DES) and thimerosal.
With respect to the product liability claims currently asserted against us, we have accrued for our estimated
exposures to the extent they are both probable and estimable based on the information available to us. In addition,
we have accrued for certain product liability claims incurred but not filed to the extent we can formulate a rea-
sonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and
data regarding product usage. Legal defense costs expected to be incurred in connection with significant product
liability loss contingencies are accrued when probable and reasonably estimable. A portion of the costs associated
with defending and disposing of these suits is covered by insurance. We record receivables for insurance-related
recoveries when it is probable they will be realized. These receivables are classified as a reduction of the litigation
charges on the statement of income. We estimate insurance recoverables based on existing deductibles, cover-
age limits, our assessment of any defenses to coverage that might be raised by the carriers, and the existing and
projected future level of insolvencies among the insurance carriers.
In the second quarter of 2005, we recorded a net pre-tax charge of $1.07 billion for product liability matters,
which includes the following:
• The $700 million Zyprexa settlement and administration fee;
• Reserves for product liability exposures and defense costs regarding currently known and expected claims to
the extent we can formulate a reasonable estimate of the probable number and cost of the claims. A substantial
majority of these exposures and costs relate to current and expected Zyprexa claims not included in the
settlement. We have estimated these charges based primarily on historical claims experience, data regarding
product usage, and our historical product liability defense cost experience.
The $1.07 billion net charge took into account our estimated recoveries from our insurance coverage related to
these matters. The after-tax impact of this net charge was $.90 per share. The $700 million for the Zyprexa settle-
ment was paid during 2005, while the cash related to the other reserves for product liability exposures and defense
costs is expected to be paid out over the next several years. The timing of our insurance recoveries is uncertain.
We cannot predict with certainty the additional number of lawsuits and claims that may be asserted. In addi-
tion, although we believe it is probable, there can be no assurance that the Zyprexa settlement described above
will be concluded. The ultimate resolution of Zyprexa product liability and related litigation could have a material
adverse impact on our consolidated results of operations, liquidity, and financial position.
We are subject to a substantial number of product liability claims, and because of the nature of pharmaceutical
products, it is possible that we could become subject to large numbers of product liability claims for other prod-
ucts in the future. We have experienced difficulties in obtaining product liability insurance due to a very restrictive
insurance market, and therefore will be largely self-insured for future product liability losses. In addition, there is
no assurance that we will be able to fully collect from our insurance carriers on past claims.
Also, under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known
as Superfund, we have been designated as one of several potentially responsible parties with respect to fewer
than 10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of
the cleanup. We also continue remediation of certain of our own sites. We have accrued for estimated Superfund
cleanup costs, remediation, and certain other environmental matters. This takes into account, as applicable, avail-