Eli Lilly 2007 Annual Report Download - page 17

FINANCIALS
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treatment of type 2 diabetes, a portion of which rep-
resent revenues from a copromotion agreement in
the U.S. with Takeda Pharmaceuticals North America
(Takeda), decreased 46 percent in the U.S. Actos is
manufactured by Takeda Chemical Industries, Ltd.,
and sold in the U.S. by Takeda. Our U.S. marketing
rights with respect to Actos expired in September 2006;
however, we continue to receive royalties from Takeda
through September 2009 at rates that decline each year.
Our arrangement outside the U.S. continues. Sales out-
side the U.S. increased 30 percent, driven primarily by
increased demand and to a lesser extent, the favorable
impact of foreign exchange rates.
Worldwide sales of Byetta, an injectable product for
the treatment of type 2 diabetes, which we market with
Amylin Pharmaceuticals (Amylin), increased 51 percent
to $650.2 million during 2007. We report as revenue
our 50 percent share of Byetta’s gross margin in the
U.S., 100 percent of Byetta sales outside the U.S., and
our sales of Byetta pen delivery devices to Amylin. Our
revenues increased 51 percent to $330.7 million in 2007.
Animal health product sales in the U.S. increased
18 percent, driven by increased demand, the acquisi-
tion of Ivy Animal Health, and new companion-animal
product launches. Sales outside the U.S. increased
10 percent, driven by the favorable impact of foreign
exchange rates and increased demand.
Gross Margin, Costs, and Expenses
The 2007 gross margin decreased to 77.2 percent of
sales compared with 77.4 percent for 2006. This de-
crease was primarily due to the expense resulting from
the amortization of the intangible assets acquired in
the ICOS acquisition, the unfavorable impact of foreign
exchange rates, and production volumes growing at a
slower rate than sales, offset partially by manufactur-
ing expenses growing at a slower rate than sales.
Operating expenses (the aggregate of research and
development and marketing, selling, and administra-
tive expenses) increased 19 percent in 2007. Investment
in research and development increased 11 percent, to
$3.49 billion. In addition to the acquisition of ICOS, this
increase was due to increases in discovery research
and late-stage clinical trial costs. We continued to be a
leader in our industry peer group by investing approxi-
mately 19 percent of our sales into research and devel-
opment during 2007. Marketing, selling, and adminis-
trative expenses increased 25 percent in 2007, to $6.10
billion. This increase was largely due to the impact
of the ICOS acquisition, as well as increased market-
ing and selling expenses in support of key products,
primarily Cymbalta and the diabetes care products, and
the unfavorable impact of foreign exchange rates.
Acquired IPR&D charges were $745.6 million in
2007 and related to the acquisitions of ICOS, Hypnion,
and Ivy, as well as our licensing arrangements with OSI,
MacroGenics, and Glenmark. We incurred asset impair-
ments, restructuring, and other special charges of
$302.5 million in 2007 as compared to $945.2 million in
2006. See Notes 3, 4 and 13 to the consolidated fi nancial
statements for additional information.
Other income—net decreased $115.8 million, to
$122.0 million. This line item consists of interest ex-
pense, interest income, the after-tax operating results
of the Lilly ICOS joint venture, and all other miscella-
neous income and expense items.
• Interest expense for 2007 decreased $9.8 million,
to $228.3 million. This decrease is a result of lower
average debt balances in 2007 compared to 2006.
• Interest income for 2007 decreased $46.6 million, to
$215.3 million, due to lower cash balances in 2007
compared to 2006.
• The Lilly ICOS joint-venture income was $11.0 million
in 2007 as compared to $96.3 million in 2006, due to
the acquisition of ICOS on January 29, 2007.
• Net other miscellaneous income items increased
$6.3 million to $124.0 million.
We incurred tax expense of $923.8 million in
2007, resulting in an effective tax rate of 23.8 percent,
compared with 22.1 percent for 2006. The effective tax
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