Eli Lilly 2010 Annual Report Download

Download and view the complete annual report

Please find the complete 2010 Eli Lilly annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 164

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164

Getting There
Eli Lilly and Company
2010 Annual Report
Notice of 2011 Annual Meeting
Proxy Statement

Table of contents

  • Page 1
    Getting There Eli Lilly and Company 2010 Annual Report Notice of 2011 Annual Meeting Proxy Statement

  • Page 2
    ...2011 Annual Meeting and Proxy Statement General Information Board of Directors Highlights of the Company's Corporate Governance Guidelines Committees of the Board of Directors Membership and Meetings of the Board and Its Committees Directors' Compensation Directors and Corporate Governance Committee...

  • Page 3
    2010 Financial Highlights ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2010 2009 Change % Revenue...Research and development ...Research and development as a percent of revenue ...Net income (loss) ...Earnings (loss) per share-diluted ...

  • Page 4
    ... for individual patients. Near Term: Operating effectively and accelerating our growth engines In 2010, Eli Lilly and Company posted strong financial performance, highlighted by volume-driven revenue growth of 6 percent. Eight pharmaceutical products-plus our animal health business-each exceeded...

  • Page 5
    ... from left), meets with scientists at ImClone Systems' new state-of-the-art cancer research facility at the Alexandria Center for Life Science-New York City. ImClone, a Lilly swbsidiary, carries owt preclinical discovery efforts at the site for potential new biotechnology medicines for patients with...

  • Page 6
    ... number of clinical trials, and a new diabetes research center in Shanghai. A third important source of countercyclical growth is our Elanco animal health business. Elanco revenues grew 10 percent in 2009 and 15 percent in 2010, significantly 4 In March, we entered into a licensing agreement...

  • Page 7
    ... III clinical testing. assets, if approved, could generate long revenue streams, with intellectual property protection into the mid- to late-2020s. Long Term: Reenergizing the pipeline and reinventing R&D Ultimately, the future of our company depends on bringing to patients innovative medicines...

  • Page 8
    ... long term to meet those challenges and to achieve sustained growth. Lilly's fundamental strategy is predicated on innovation. We must maintain our focus on what made this company great: the discovery and development, the manufacturing and marketing of new medicines that help address unmet medical...

  • Page 9
    ... Pipeline currently includes 68 molecules in clinical development. Since our 2009 annual report, 17 new molecules advanced into Phase I testing (including one currently in Phase II and one that failed), nine molecules into Phase II testing, and two molecules into Phase III testing. We also acquired...

  • Page 10

  • Page 11
    Form 10-K

  • Page 12

  • Page 13
    ... 31, 2010 Commission file number 001-06351 Eli Lilly and Company An Indiana corporation I.R.S. employer identification no. 35-0470950 Lilly Corporate Center, Indianapolis, Indiana 46285 (317) 276-2000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each...

  • Page 14
    ...™ (Zypadhera® in the European Union), a long-acting intramuscular injection formulation of Zyprexa • Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the United States for the management of fibromyalgia and of...

  • Page 15
    ..., diabetes, and oncology. We supplement our employee sales force with contract sales organizations as appropriate to leverage our own resources and the strengths of our partners in various markets. Large purchasers of pharmaceuticals, such as managed-care groups, government agencies, and long-term...

  • Page 16
    ...other companies that operate animal health divisions or subsidiaries. Important competitive factors include safety, effectiveness, and ease of use of our products; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products and processes. Most new...

  • Page 17
    ... regulatory laws. Some of our current products, including Erbitux, Forteo, ReoPro, and Xigris, and many of the potential products in our research pipeline, are biological products ("biologics"). Based on the Biologics Price Competition and Innovation Act (enacted in the U.S. in 2010), the...

  • Page 18
    ... In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as "Hatch-Waxman," made a complex set of changes to both patent and new-drug-approval laws. Before HatchWaxman, no drug could be approved without providing the FDA complete safety and efficacy...

  • Page 19
    ..., state, and local government entities that provide or pay for health care. In most international markets, we operate in an environment of government-mandated cost containment programs, which may include price controls, reference pricing, discounts and rebates, restrictions on physician prescription...

  • Page 20
    ... companies. We use the services of physicians, hospitals, medical schools, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of our pharmaceutical products. We actively seek out investments in external research and technologies...

  • Page 21
    ... that we could experience an interruption in supply until we established new sources or, in some cases, implemented alternative processes. Our primary bulk manufacturing occurs at four owned sites in the United States as well as owned sites in Ireland, Puerto Rico, and the United Kingdom. Finishing...

  • Page 22
    ... Management (since April 2009) and Chief Ethics and Compliance Officer (since June 2007) Senior Vice President, Corporate Affairs and Communications (since June 2009). Mr. Peterson served as mayor of Indianapolis, Indiana from 2000 to 2007. From 2008 to 2009, he was managing director at Strategic...

  • Page 23
    ... in research and development and capital as well as other expenditures required to bring new drugs to the market. Intellectual property protection varies throughout the world and is subject to change over time. In the U.S., the Hatch-Waxman Act provides generic companies powerful incentives...

  • Page 24
    ...new products pending resolution of the cGMP issues. We are now operating under a Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services that requires us to maintain comprehensive compliance programs governing our research, manufacturing...

  • Page 25
    ... statements. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2010, we owned 12 production and distribution sites in the United States and Puerto Rico. Together with the corporate...

  • Page 26
    ... U.S. involving Zyprexa • The various federal and state investigations relating to our sales, marketing, and promotional practices • The Zyprexa product liability and related litigation, including claims brought on behalf of state Medicaid agencies and private healthcare payers That information...

  • Page 27
    ... advised that it is conducting an inquiry regarding certain rebate agreements we entered into with a pharmacy benefit manager covering Axid®, Evista, Humalog, Humulin, Prozac, and Zyprexa. The inquiry includes a review of our Medicaid best price reporting related to the product sales covered by the...

  • Page 28
    ... Average Price Paid per Share (b) October 2010 ...November 2010 ...December 2010 ...Total ... 11 4 0 15 $37.14 35.22 0.00 0.0 0.0 0.0 0.0 $419.2 419.2 419.2 The amounts presented in columns (a) and (b) above represent purchases of common stock related to our stock-based compensation programs...

  • Page 29
    ... related to the sale of our Tippecanoe Laboratories manufacturing site. • We incurred pretax charges of $230.0 million in connection with the claims of several states related to Zyprexa, which decreased earnings per share by $.13. Late-Stage Pipeline Our long-term success depends to a great...

  • Page 30
    ...co-develop and co-commercialize Lilly's anti-TGF-beta monoclonal antibody. • Bydureon™-U.S. In October 2010, the FDA issued a complete response letter regarding the New Drug Application (NDA) for Bydureon. In the complete response letter, the FDA requested a safety study to measure the potential...

  • Page 31
    ... safety issues were identified in the DMC's review. The companies have decided to suspend further enrollment and dosing of patients in two other ongoing clinical trials of teplizumab in type 1 diabetes. In October 2010, we notified MacroGenics of our decision to terminate our collaboration agreement...

  • Page 32
    ... for the delivery of Medicaid benefits via managed care organizations, under arrangements between those organizations and state Medicaid agencies. Additionally, a prescription drug discount program for outpatient drugs in certain types of health care facilities that serve low-income and uninsured...

  • Page 33
    ... Japan, our second-largest market for Zyprexa, with more than $400 million of sales in 2010, our patent expires in December 2015. Sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the United States...

  • Page 34
    ... due to $85.1 million in additional tax expense in the first quarter related to U.S. health care reform. The 2009 effective tax rate was reduced due to the tax benefit of asset impairment and restructuring charges associated with the sale of the Tippecanoe Laboratories manufacturing site. 22

  • Page 35
    ... primarily associated with the sale of our Greenfield, Indiana site; the termination of the AIR® Insulin program; and strategic exit activities related to manufacturing operations. • We recorded charges of $1.48 billion (pretax) related to the federal and state Zyprexa investigations led by the...

  • Page 36
    ... revenue includes revenue in Puerto Rico. may not add due to rounding. 3 Collaboration and other revenue is primarily composed of Erbitux royalties and 50 percent of Byetta's gross margin in the U.S. 2 Numbers Zyprexa sales in the U.S. increased 6 percent in 2009, due to higher prices, partially...

  • Page 37
    ...less than in 2009. We expect 2011 capital expenditures to be between $800 million and $900 million as we invest in the long-term growth of our diabetes care products, continue to upgrade our manufacturing and research facilities to enhance productivity and quality systems, and invest in our oncology...

  • Page 38
    ... forms of intellectual property protection for most of our revenues, cash flows, and earnings. Through 2014, we expect to lose effective exclusivity for the following key products: • Zyprexa-October 2011 (U.S.), various dates in 2011 (major Europe) • Cymbalta-June 2013 (U.S.) • Humalog-May...

  • Page 39
    ...periods presented in this report. Our most critical accounting policies have been discussed with our audit committee and are described below. Revenue Recognition and Sales Return, Rebate, and Discount Accruals We recognize revenue from sales of products at the time title of goods passes to the buyer...

  • Page 40
    ... million effect on our income before income taxes. As of December 31, 2010, our sales returns, Medicaid, and Medicare rebate liability was $858.3 million. Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our global sales return...

  • Page 41
    ... reported. In addition to the analysis below, see Note 14 to the consolidated financial statements for additional information regarding our retirement benefits. Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit...

  • Page 42
    ...the timing and scope of regulatory approvals and the success of our new product launches; asset impairments, restructurings, and acquisitions of compounds under development resulting in acquired IPR&D charges; foreign exchange rates and global macroeconomic conditions; changes in effective tax rates...

  • Page 43
    ... set out in the Hatch-Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984): • Cymbalta: Sixteen generic drug manufacturers have submitted Abbreviated New Drug Applications (ANDAs) seeking permission to market generic versions of Cymbalta prior to the expiration of our...

  • Page 44
    ...of 2008 and paid substantially all of this amount in 2009. As part of the settlement, we have entered into a corporate integrity agreement with the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS), which requires us to maintain our compliance program and to...

  • Page 45
    ...will make payments for their members or insured patients being prescribed Zyprexa. These actions were consolidated into a single lawsuit, brought under certain state consumer protection statutes, the federal civil RICO statute, and common law theories, seeking a refund of the cost of Zyprexa, treble...

  • Page 46
    ...10-K Item 8. Financial Statements and Supplementary Data Consolidated Statements of Operations ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2010 2009 2008 Revenue ...Cost of sales ...Research and development ...Marketing, selling, and...

  • Page 47
    ...072.2 Employee compensation ...851.8 Sales rebates and discounts ...1,372.6 Dividends payable ...540.0 Income taxes payable (Note 13) ...457.5 Other current liabilities (Note 10) ...2,651.3 Total current liabilities ...7,101.4 Other Liabilities Long-term debt (Note 8) ...Accrued retirement benefits...

  • Page 48
    ... 2010 2009 2008 Cash Flows from Operating Activities Net income (loss) ...Adjustments to Reconcile Net Income To Cash Flows from Operating Activities Depreciation and amortization ...Change in deferred income taxes ...Stock-based compensation expense ...Acquired in-process research and development...

  • Page 49
    ... ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2010 2009 2008 Net income (loss) ...Other comprehensive income (loss) Foreign currency translation gains (losses) ...Net unrealized gains (losses) on securities ...Defined benefit pension and retiree health benefit...

  • Page 50
    ... of the animal health business segment are not material and share many of the same economic and operating characteristics as human pharmaceutical products. Therefore, they are included with pharmaceutical products for purposes of segment reporting. ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in...

  • Page 51
    ... charges ...37.9 Other-net, expense ...67.8 Income before income taxes ...1,137.2 Net income ...915.4 Earnings per share-basic and diluted ...83 Dividends paid per share ...49 Common stock closing prices High ...37.51 Low ...32.47 Our common stock is listed on the New York, London, and Swiss stock...

  • Page 52
    FORM 10-K Selected Financial Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except revenue per employee and per-share data) 2010 2009 2008 2007 2006 Operations Revenue ...$ 23,076.0 Cost of sales ...4,366.2 Research and development ...4,884.2 Marketing, selling, and ...

  • Page 53
    ..., a person invested $100 each in Lilly stock, the S&P 500 Stock Index, and the peer group's common stock. The graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends paid by a company are reinvested in that company's stock. Value...

  • Page 54
    FORM 10-K Notes to Consolidated Financial Statements ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Note 1: Summary of Significant Accounting Policies Basis of presentation: The accompanying consolidated financial statements have been prepared in accordance with...

  • Page 55
    ... that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present...

  • Page 56
    ...or a major retail chain. The remaining sales are recorded at the point of delivery. Provisions for returns, discounts, and rebates are established in the same period the related sales are recorded. We also generate income as a result of collaboration agreements. Revenue from co-promotion services is...

  • Page 57
    ...calendar year market share for branded prescription drug sales into these government programs. This guidance clarifies how pharmaceutical manufacturers should recognize and classify in their income statements fees mandated by U.S. Health Care Reform. This fee will be recorded as selling, general and...

  • Page 58
    ...and a group of animal health product lines, all of which have been accounted for as business combinations, and none of which were material to our consolidated financial statements. Avid On December 20, 2010, we acquired all of the outstanding stock of Avid, a company focusing on developing molecular...

  • Page 59
    ... for tax purposes. 2008 Acquisitions of Businesses ImClone On November 24, 2008, we acquired all of the outstanding shares of ImClone Systems Inc. (ImClone), a biopharmaceutical company focused on advancing oncology care, for a total purchase price of approximately $6.5 billion, which was financed...

  • Page 60
    ... and the option to co-promote in the United States. In June 2008, we entered into a licensing and development agreement with TransPharma Medical Ltd. (TransPharma) to acquire rights to its product and related drug delivery system for the treatment of osteoporosis. The charge of $35.0 million for...

  • Page 61
    ...net product sales. Merck KGaA A development and license agreement with Merck KGaA (Merck) with respect to Erbitux granted Merck exclusive rights to market Erbitux outside of the U.S. and Canada, and co-exclusive rights with BMS and us in Japan. Merck also has rights to manufacture Erbitux for supply...

  • Page 62
    ... jointly develop, market and promote Cymbalta (duloxetine), a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and fibromyalgia, outside the U.S. and Japan. Pursuant to the terms of the agreement, we generally shared equally...

  • Page 63
    ...agent for the treatment of patients with acute coronary syndrome who are being managed with an artery-opening procedure known as percutaneous coronary intervention. The product was approved for marketing by the European Commission under the trade name Efient® in February 2009, and the initial sales...

  • Page 64
    ... functions of the business, and reduce total employees, as well as other previously announced strategic actions to reduce our cost structure and global workforce. Included in the 2009 severance charges is $61.1 million related to the sale of our Tippecanoe Laboratories manufacturing site which is...

  • Page 65
    ... 10-K The Effect of Risk-Management Instruments on the Statement of Operations The following effects of risk-management instruments were recognized in other-net, expense: 2010 2009 Fair value hedges Effect from hedged fixed-rate debt ...$ 149.6 $(369.5) Effect from interest rate contracts ...(149...

  • Page 66
    ...of Financial Instruments The following tables summarize certain fair value information at December 31 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments: Fair Value Measurements Using Quoted Prices in...

  • Page 67
    ... 2) (Level 3) Fair Value Long-term debt, including current portion December 31, 2010 ...$(6,788.7) December 31, 2009 ...(6,655.0) $ $(7,030.0) (6,827.8) $ $(7,030.0) (6,827.8) Description Carrying Amount Fair Value Measurements Using Quoted Prices in Active Markets Significant for Other...

  • Page 68
    ... through business combinations and certain capitalized milestone payments. Marketing rights consists of acquired marketing rights to products in certain jurisdictions. Other intangibles consist primarily of licensed platform technologies that have alternative future uses in research and development...

  • Page 69
    ... statements of cash flows. At December 31, 2010, additional stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 82.0 million shares. Performance Award Program PAs are granted to officers and management and are payable in shares of our common stock...

  • Page 70
    ... weighted-average remaining requisite service period of 20 months. Restricted Stock Unit RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense...

  • Page 71
    ...from our collaboration and out-licensing arrangements, deferred tax liabilities (Note 13), the fair value of contingent consideration from business combinations (Note 3), the long-term portion of our estimated product return liabilities, product litigation, and a variety of other items. The increase...

  • Page 72
    ...funds to assist us in meeting our obligations under various employee benefit plans. In February 2009, we contributed an additional 10 million shares to the employee benefit trust, which resulted in a reclassification within equity from additional paid-in capital of $371.9 million and common stock of...

  • Page 73
    ...) per share Weighted-average number of common shares outstanding ...Stock options and other incremental shares ...Weighted-average number of common shares outstanding-diluted ...Diluted earnings (loss) per share ...$ Note 13: Income Taxes Following is the composition of income tax expense: 5,069...

  • Page 74
    ... and Puerto Rican companies contributed approximately 45 percent and 39 percent in 2010 and 2009, respectively, to consolidated income before income taxes and generated the entire consolidated loss before income taxes in 2008. We have a subsidiary operating in Puerto Rico under a tax incentive grant...

  • Page 75
    ... to reported income tax expense: 2010 2009 2008 Income tax (benefit) at the U.S. federal statutory tax rate ...$2,283.8 $1,875.2 $ (457.7) Add (deduct) International operations, including Puerto Rico ...(823.3) (741.1) (641.3) U.S. health care reform tax law change ...85.1 0.0 0.0 General business...

  • Page 76
    ... recognized in the consolidated balance sheets at December 31 for our defined benefit pension and retiree health benefit plans, which were as follows: Defined Benefit Pension Plans 2010 2009 Retiree Health Benefit Plans 2010 2009 Change in benefit obligation Benefit obligation at beginning of...

  • Page 77
    ...by 2018. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: 2011 2012 2013 2014 2015 2016-2020 Defined benefit pension plans ...$387.8 $398.1 $408.4 $423.8 $436.0 $2,466.5 Retiree health benefit plans-gross ...$119.1 $121...

  • Page 78
    .... The U.S. defined benefit pension and retiree health benefit plan allocation strategy is currently comprised of approximately 80 percent growth investments and 20 percent fixed income investments. The growth investment allocation encompasses U.S. and international public equity securities, hedge...

  • Page 79
    ... Total Defined Benefit Pension Plans Public equity securities U.S...$ 589.4 International ...1,868.3 Fixed income ...1,127.8 Private alternative investments Hedge funds ...2,020.3 Equity-like funds ...939.4 Other ...437.8 Total ...$6,983.0 Retiree Health Benefit Plans Public equity securities...

  • Page 80
    ... reporting date ...106.1 Relating to assets sold during the period ...0.0 Purchases, sales and settlements ...176.3 Transfers in and/or out of Level 3 ...(422.0) Ending balance at December 31, 2010 ...$1,241.9 Retiree Health Benefit Plans Beginning balance at January 1, 2010 ...$ 140.9 Actual return...

  • Page 81
    ... reporting date ...158.0 Relating to assets sold during the period ...0.0 Purchases, sales and settlements ...(163.6) Transfers in and/or out of Level 3 ...0.0 Ending balance at December 31, 2009 ...$1,381.5 Retiree Health Benefit Plans Beginning balance at January 1, 2009 ...$ 137.1 Actual return...

  • Page 82
    ..., Portugal, and several smaller European countries. In Spain, we have been successful at both the trial and appellate court levels in defeating the generic manufacturers' challenges, but additional actions against multiple generic companies are now pending. In March 2010, the District Court of Hague...

  • Page 83
    ...of 2008 and paid substantially all of this amount in 2009. As part of the settlement, we have entered into a corporate integrity agreement with the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS), which requires us to maintain our compliance program and to...

  • Page 84
    ... Gains (Losses) Defined Benefit Pension and Retiree Health Benefit Plans Effective Portion of Cash Flow Hedges Accumulated Other Comprehensive Loss Unrealized Net Gains on Securities Beginning balance at January 1, 2010 ...Other comprehensive income (loss) ...Balance at December 31, 2010 ... $ 835...

  • Page 85
    ... Subsidiaries Management of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. We have global financial policies that govern...

  • Page 86
    ... Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Eli Lilly and Company We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements...

  • Page 87
    ...internal control over financial reporting as of December 31, 2010, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2010 consolidated financial statements of Eli Lilly and Company and subsidiaries...

  • Page 88
    ... business conduct applicable to all employees worldwide and to our Board of Directors; and • Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive officer and all members of financial management that focuses on accounting, financial reporting, internal...

  • Page 89
    ...been no changes in those procedures since they were last published in our proxy statement of March 8, 2010. The board has appointed an audit committee consisting entirely of independent directors in accordance with applicable SEC and New York Stock Exchange rules for audit committees. The members of...

  • Page 90
    ... of Restricted Stock Unit under the 2002 Lilly Stock Plan2 The Lilly Deferred Compensation Plan, as amended2 The Lilly Directors' Deferral Plan, as amended2 The Eli Lilly and Company Bonus Plan, as amended2 2007 Change in Control Severance Pay Plan for Select Employees, as amended effective October...

  • Page 91
    ... 2 Indicates Corporate Integrity Agreement between the company and the Office of Inspector General of the Department of Health and Human Services Statement re: Computation of Ratio of Earnings (Loss) to Fixed Charges List of Subsidiaries Consent of Independent Registered Public Accounting Firm Rule...

  • Page 92
    ...Chairman of the Board, President, and Chief Executive Officer, and a Director (principal executive officer) Executive Vice President, Global Services and Chief Financial Officer (principal financial officer) Vice President, Finance and Chief Accounting Officer (principal accounting officer) Director...

  • Page 93
    Notice of 2011 Annual Meeting Proxy Statement

  • Page 94

  • Page 95
    ... annual report and proxy statement are available at http://www.lilly.com/pdf/lillyar2010.pdf Notice of Annual Meeting of Shareholders April 18, 2011 The annual meeting of shareholders of Eli Lilly and Company will be held at the Lilly Center Auditorium, Lilly Corporate Center, Indianapolis, Indiana...

  • Page 96
    ...to your account in The Eli Lilly and Company Employee 401(k) Plan (the 401(k) plan). What constitutes a quorum? A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meeting. As of the record date, 1,157,664,779 shares of company common stock were...

  • Page 97
    ... of these materials, please provide the control number from the e-mail, along with your name and mailing address. By telephone. Shareholders in the United States, Puerto Rico, and Canada may vote by telephone by following the instructions on your proxy card or, if you received these materials...

  • Page 98
    ... do I contact the board of directors? You may send written communications to one or more members of the board, addressed to: Lead Director, Board of Directors Eli Lilly and Company c/o Corporate Secretary Lilly Corporate Center Indianapolis, Indiana 46285 All such communications (from shareholders...

  • Page 99
    ...affect dividend check mailings. Beneficial shareholders can request information about householding from their banks, brokers, or other holders of record. What if I want to receive a paper copy of the annual report and proxy statement? If you wish to receive a paper copy of the 2010 annual report and...

  • Page 100
    ... president of private client services and managing director of Marsh, Inc. from 1999 until her retirement in 2003. Prior to joining Marsh, she was senior managing director and head of international private banking at Bankers Trust Company; chairman and chief executive officer of Bank One, Cleveland...

  • Page 101
    .... Board Committees: audit, finance, and public policy and compliance (chair) J. Erik Fyrwald Age 51 Director since 2005 Chairman, President, and Chief Executive Officer, Nalco Company Mr. Fyrwald joined Nalco Company (a leading integrated water treatment and process improvement company) as chairman...

  • Page 102
    ... Institute for the Future, New York-Presbyterian Hospital, Lincoln Center Theater, and Families and Work Institute. Board Committees: compensation and directors and corporate governance (chair) Douglas R. Oberhelman Age 58 Director since 2008 Chairman and Chief Executive Officer, Caterpillar Inc. Mr...

  • Page 103
    ... teaching positions at the Mayo Medical School since 1975. Board Committees: public policy and compliance and science and technology Kathi P. Seifert Age 61 Director since 1995 Retired Executive Vice President, Kimberly-Clark Corporation Ms. Seifert served as executive vice president for Kimberly...

  • Page 104
    ...the business • approving corporate strategy • approving major management initiatives • providing oversight of legal and ethical conduct • overseeing the company's management of significant business risks • selecting, compensating, and evaluating directors • evaluating board processes and...

  • Page 105
    ...executive officer serves on the compensation committee of that company's board. • a director who is employed by, who is a 10 percent shareholder of, or whose immediate family member is an executive officer of a company that makes payments to or receives payments from Lilly for property or services...

  • Page 106
    ...of company equity. Directors are required to hold company stock valued at not less than five times their annual cash retainer; new directors are allowed five years to reach this ownership level. IV. Key Board Responsibilities Selection of Chairman and Chief Executive Officer; Succession Planning The...

  • Page 107
    ... ethical and legal business conduct applicable to all employees worldwide and to our board of directors • Code of Ethical Conduct for Lilly Financial Management, a supplemental code for our chief executive officer and all members of financial management that recognizes the unique responsibilities...

  • Page 108
    ... persons (directors and executive officers, their immediate family members, or shareholders of 5 percent or greater of the company's outstanding stock). The policy covers any related-person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC...

  • Page 109
    ... Committee • reviews and makes recommendations regarding the company's strategic research goals and objectives • reviews new developments, technologies, and trends in pharmaceutical research and development • oversees matters of scientific and medical integrity and risk management. PROXY...

  • Page 110
    ... annual meeting of shareholders, and 11 directors attended in 2010. Current committee membership and the number of meetings of the board and each committee in 2010 are shown in the table below. Directors and Corporate Governance Public Policy and Compliance Member Science and Technology Member Name...

  • Page 111
    ...the market price of the stock on the date dividends are paid. Actual shares are issued or transferred after the director ends his or her service on the board. • Deferred Compensation Account. Funds in this account earn interest each year at a rate of 120 percent of the applicable federal long-term...

  • Page 112
    ... Price - $70.22 - $68.96 - $70.22 - $70.22 $65.48 - $70.22 $70.22 PROXY STATEMENT column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. under its matching gift program, which is generally available to U.S. employees as well as the outside directors. Under this program...

  • Page 113
    ..., finance, accounting, banking, marketing, and sales • international business • medicine and science • government and public policy • health care system (public or private). Finally, board members should display the personal attributes necessary to be an effective director: unquestioned...

  • Page 114
    ...of pharmaceutical research and development, sales and marketing, strategy, and operations. He also has significant corporate governance experience through service on other public company boards. Ellen R. Marram Ms. Marram is a former CEO with a strong marketing and consumer brand background. Through...

  • Page 115
    ... defined in the rules of the SEC. Audit Committee Report The audit committee ("we" or "the committee") reviews the company's financial reporting process on behalf of the board. Management has the primary responsibility for the financial statements and the reporting process, including the systems of...

  • Page 116
    ...members of senior management (such as the chief financial officer and the chief accounting officer) to discuss the results of their examinations, their evaluations of the company's internal controls, and the overall quality of the company's financial reporting. We also periodically meet in executive...

  • Page 117
    ... to the performance of the audit or reviews of the financial statements - 2010 and 2009: primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential acquisitions Tax Fees • 2010 and 2009: primarily related to consulting and compliance services All...

  • Page 118
    ..., in 2010 the committee reviewed the company's compensation policies and practices for all employees, including executive officers. The committee concluded that the company's compensation programs will not have a material adverse effect on the company, after reviewing the business risks disclosed...

  • Page 119
    .... The Committee's Processes and Analyses Executive Compensation Linking Business Strategy and Compensation Program Design Philosophy: At Lilly, we aim to discover, develop, and acquire innovative new therapies-medicines that • Individual and company make a real difference for patients and deliver...

  • Page 120
    ... pay. -We balance the objectives of pay-for-performance and employee retention. Even during downturns in company performance, the program should continue to motivate and engage successful, high-achieving employees. Foster a long-term focus. In our industry, long-term focus is critical to success...

  • Page 121
    .... Lechleiter's successful accomplishment of his objectives to implement the company's Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human Services and reinforce ethics and compliance across the company, engage with the new U.S. administration...

  • Page 122
    ... security of foundational benefits in a way that furthers the compensation objectives discussed above. • Targets. The company generally maintained pay ranges and a balance of pay elements similar to 2009. The committee believes this overall program continues to provide cost-effective delivery of...

  • Page 123
    ... annual cash bonus program aligns employees' goals with the company's revenue and earnings growth objectives for the current year. Cash incentive bonuses for all management employees worldwide, as well as a substantial number of nonmanagement employees in the U.S., are determined under The Eli Lilly...

  • Page 124
    ..., as employees assume greater responsibilities, more of their pay is linked to company performance. Bonus targets (expressed as a percentage of base salary) were based on job responsibilities, internal relativity, individual performance, and peer group data. For three named executive officers, the...

  • Page 125
    ...2010-2012 SVA 2011-2013 SVA 2009 2010 2011 2012 2013 2014 Performance Period Restricted Stock Units Performance Period Required Holding Period Target grant values. For 2010, the committee held aggregate grant values flat for the four continuing named executive officers unchanged, based on internal...

  • Page 126
    ... than the stock option program it replaced because the SVA program delivers, at a lower cost to the company, an equity incentive that is equally or more effective in aligning employee interests with long-term shareholder returns. Company performance measure. For the 2010 grants, the SVA pays above...

  • Page 127
    ... of the company • For 2008: Eliminated the impact of (i) the ImClone Systems Incorporated acquisition, (ii) a one-time benefit to income resulting from the settlement of a tax audit. The adjustments were intended to align award payments more closely with underlying business growth trends and...

  • Page 128
    ...our reported revenue and earnings per share are below. The shaded numbers are the growth percentages used to calculate payouts under the compensation programs. 2010 Revenue as reported (millions) Pro forma ImClone adjustment Revenue-pro forma adjusted (sales and royalties) Impact of U.S. health care...

  • Page 129
    ...'s EPS. • Tax gross-up eliminated Likewise, if Lilly is not the surviving entity, a portion of outstanding SVAs is paid out on a effective October 2012 pro-rated basis for time worked up to the change in control based on the merger price for company stock. • Covered terminations. Employees are...

  • Page 130
    ...help to foster a focus on long-term growth. The committee has adopted a guideline requiring the CEO to own company stock valued at least five times his or her annual base salary. Other executive officers are required to own a fixed number of shares based on their position. The fixed number of shares...

  • Page 131
    ... establishes compensation for executive officers and oversees the deferred compensation plan, the company's management stock plans, and other management incentive, benefit, and perquisite programs. Management has the primary responsibility for the company's financial statements and reporting process...

  • Page 132
    ...$6,225,000 Jan M. Lundberg, Ph.D. 2 Executive Vice President, Science and Technology and President, Lilly Research Laboratories $946,401 $1,000,000 Derica W. Rice Executive Vice President, Global Services and Chief Financial Officer 2010 2009 2008 2010 2009 2008 2010 2009 2008 $955,000 $892,500...

  • Page 133
    ... change based on usage, such as pilots' salaries, the purchase costs of the company-owned aircraft, and the cost of maintenance not related to trips. Executive officers are no longer permitted to use corporate aircraft to attend outside board meetings. We have no employment agreements with our named...

  • Page 134
    ...except in the case of death, disability, or retirement). In addition, an employee who was an executive officer at the time of grant will receive payment in restricted share units according to the chart on page 32 of the "Compensation Discussion and Analysis." SVAs granted in 2010 will pay out at the...

  • Page 135
    ... (#) Market Value of Shares or Units of Stock That Have Not Vested ($) 140,964 127,811 200,000 120,000 120,000 8 60,000 Dr. Lundberg $56.18 $55.65 $73.11 $57.85 $75.92 $79.28 2/9/2016 2/10/2015 2/14/2014 2/15/2013 2/17/2012 10/4/2011 2010-2012 SVA 2010-2011 PA Grant upon hire 2010-2012 SVA 2009...

  • Page 136
    ...the named executive officers. • The retirement plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See the Summary Compensation Table for additional information about the value of these pension benefits. Sections 401 and 415 of the Internal Revenue Code generally...

  • Page 137
    ... used to calculate the present value of each individual's accumulated pension benefit: Discount rate: Mortality (post-retirement decrement only): Pre-2010 joint and survivor benefit (% of pension): Post-2009 benefit payment form: 5.75 percent RP 2000CH 50% until age 62; 25% thereafter life annuity...

  • Page 138
    ... did not change the timing or amount of his unreduced benefits (shown in the Pension Benefits in 2010 table). A grant of additional years of service credit to any employee must be approved by the compensation committee of the board of directors. Nonqualified Deferred Compensation in 2010 Executive...

  • Page 139
    ...of bankruptcy. Potential Payments Upon Termination or Change in Control The following table describes the potential payments and benefits under the company's compensation and benefit plans and arrangements to which the named executive officers would be entitled upon termination of employment. Except...

  • Page 140
    ... basis to salaried employees generally upon termination of employment. These include: • accrued salary and vacation pay. • regular pension benefits under the retirement plan and the nonqualified pension plan. See "Retirement Benefits." • welfare benefits provided to all U.S. retirees...

  • Page 141
    ...the "Compensation Discussion and Analysis" under "Severance Benefits," the company maintains a change-in-control severance pay plan (CIC plan) for nearly all employees, including the named executive officers. The CIC plan defines a change in control very specifically, but generally the terms include...

  • Page 142
    ... the company to grant stock options to nonmanagement employees worldwide. The plan was administered by the senior vice president responsible for human resources. The stock options are nonqualified for U.S. tax purposes. The option price cannot be less than the fair market value at the time of grant...

  • Page 143
    ...'s restricted stock unit award was granted February 1, 2010; one half of these shares will vest February 1, 2012 and the remaining shares will vest February 1, 2013. 4 The shares shown for Dr. Lechleiter include 11,558 shares that are owned by a family foundation for which he is a director. Dr...

  • Page 144
    ... 12/31/10) Name and Address Lilly Endowment, Inc. (the "Endowment") 2801 North Meridian Street Indianapolis, Indiana 46208 PRIMECAP Management Company 225 South Lake Ave., #400 Pasadena, California 91101 BlackRock, Inc. 40 East 52nd Street New York, New York 10022 Capital World Investors 333 South...

  • Page 145
    ... Compensation Paid to Named Executive Officers Our compensation philosophy is designed to attract and retain highly-talented individuals and motivate them to create long-term shareholder value by achieving top-tier corporate performance while embracing the company's values of integrity, excellence...

  • Page 146
    ...board also considered benefits of retaining the classified board structure, which has a long history in corporate law. A classified structure may provide continuity and stability in the management of the business and affairs of the company because a majority of directors always have prior experience...

  • Page 147
    ... fundamental corporate actions to be approved by the holders of 80 percent of the outstanding shares of common stock (a "supermajority vote"). Those actions are: • amending certain provisions of the articles of incorporation that relate to the number and terms of office of directors: -the company...

  • Page 148
    ... full tax deductibility of the incentive payments. Summary of Plan The primary features of the EOIP are summarized below. This summary is qualified by reference to the full text of the EOIP which is set forth as Appendix B to this proxy statement. Eligibility Executive officers of the company (as...

  • Page 149
    ...in-process research and development costs, and (v) cumulative effect of changes to U.S. generally accepted accounting principles. Payments Payments will be made in cash after the end of the year and prior to March 15 of the following year. Prior to payment, the committee will certify the calculation...

  • Page 150
    ...Ownership Reporting Compliance Under SEC rules, our directors and executive officers are required to file with the SEC reports of holdings and changes in beneficial ownership of company stock. We have reviewed copies of reports provided to the company, as well as other records and information. Based...

  • Page 151
    ... of Business To Be Acted Upon at the Meeting." The changes shown to Article 9(b) will be effective if "Item 5. Proposal to Amend the Company's Articles of Incorporation to Provide for Annual Election of All Directors" (pages 52-53) receives the vote of at least 80 percent of the outstanding shares...

  • Page 152
    ... Director to serve on the Board so long as there are any Remaining Public Shareholders. PROXY STATEMENT (ed) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, as amended, whether or not the Corporation is then subject to such requirements, shall be mailed...

  • Page 153
    ...law or these Amended Articles of Incorporation or to impose any fiduciary duty, obligation, or responsibility on the Board of Directors or any member thereof, to approve such action or transaction or recommend its adoption or approval to the shareholders of the Corporation, nor shall such compliance...

  • Page 154
    ... as performance-based compensation under Section 162(m) of the Internal Revenue Code. Section 2. Effective Date and Term The Plan is effective as of January 1, 2011, subject to approval by the affirmative vote of a majority of shares of the Company's common stock voting at the annual meeting of...

  • Page 155
    ... time to time, and (ii) with respect to a Participant who is not eligible to participate in the Retirement Plan, cessation of employment with the Company as a retired employee under the applicable retirement benefit plan or program as provided by the Company or applicable law. (n) "Retirement Plan...

  • Page 156
    ...vested right to an Annual Incentive Bonus until payment is made to him under Section 7.1. 8.2 No Employment Rights. No provision of the Plan or any action taken by the Company, the Board, or the Committee will give any person any right to be retained in the employ of the Company. The right and power...

  • Page 157
    ... provisions of the Plan will be in writing and directed to Secretary, Eli Lilly and Company, Lilly Corporate Center, Indianapolis, IN 46285. Section 9. Amendment, Suspension, or Termination The Board or Committee may amend, suspend, or terminate the Plan, in whole or in part, at any time and without...

  • Page 158
    ... Project Management, Lilly Research Laboratories Alex M. Azar II Vice President, Managed Healthcare Services and Puerto Rico, Lilly USA Newton F. Crenshaw Vice President, Global Business to Payer, Bio-Medicines, and Corporate Ahhairs Timothy J. Garnett, M.D. Senior Vice President, Development...

  • Page 159
    ... Acute Care/Urology Product Development, Lilly Bio-Medicines Sharon L. Sullivan Vice President, Human Resources Peter J. Johnson Vice President, Corporate Strategy Thomas R. Verhoeven, Ph.D. Senior Vice President, Development Center oh Excellence, Lilly Research Laboratories Andreas...

  • Page 160
    ... Dividend reinvestment and stock purchase plan Eli Lilly and Company common stock is listed on the New York, London, and Swiss stock exchanges. NYSE ticker symbol: LLY. Most newspapers list the stock as "Lilly (Eli) and Co." CEO and CFO certifications The company's chief executive...

  • Page 161
    ... Center Indianapolis, Indiana 46285 The top portion of this page will be required for admission to the meeting. Please write your name and address in the space provided below and present this ticket when you enter the Lilly Center. Doors open at 10:15 a.m. Name Address City, State, and Zip Code...

  • Page 162
    ... of this page with you to the meeting. Detach here Detach here Eli Lilly and Company Annual Meeting of Shareholders April 18, 2011 Complimentary Parking Lilly Corporate Center Please place this identifier on the dashboard of your car as you enter Lilly Corporate Center so it can be clearly seen...

  • Page 163
    ...we can best carry out our corporate responsibility by achieving our vision as a company: We will make a significant contribution to humanity by improving global health in the 21st century. Building on the work we do each day to bring new medicines to patients, Lilly is committing not only money but...

  • Page 164
    Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA 317-276-2000 www.lilly.com