Eli Lilly 2010 Annual Report Download - page 42

FORM 10-K
The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to
build a successful portfolio of approved products. As such, it is likely that some IPR&D assets will become impaired
at some time in the future.
The estimated future cash flows, based on what we believe to be reasonable and supportable assumptions and
projections, require management’s judgment. Actual results could vary from these estimates.
Income Taxes
We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based
on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination
by various taxing authorities, which may result in future tax, interest, and penalty assessments by these authorities.
Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation,
regulation, and/or as concluded through the various jurisdictions’ tax court systems. We recognize the tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than 50 percent
likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for
changes in facts and circumstances. For example, adjustments could result from significant amendments to existing
tax law and the issuance of regulations or interpretations by the taxing authorities, new information obtained during
a tax examination, or resolution of an examination. We believe that our estimates for uncertain tax positions are
appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize
both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been
generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In evaluating
whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable
income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not
support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or
future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a
reduction of income tax expense.
A 5 percent change in the amount of the uncertain tax positions and the valuation allowance would result in a change
in net income of $53.5 million and $23.7 million, respectively.
FINANCIAL EXPECTATIONS FOR 2011
For the full year of 2011, we expect earnings per share to be in the range of $3.92 to $4.07, which includes the
dilutive impact of the upfront fee and other anticipated expenses related to the collaboration with Boehringer
Ingelheim, but excludes potential restructuring charges primarily related to severance and other related costs from
previously announced strategic actions that we are taking to reduce our cost structure and global workforce. We
expect that total revenue growth will be flat to slightly increasing, which assumes we maintain our patent exclusivity
for U.S. Strattera sales, and also assumes rapid and severe erosion of global Zyprexa sales after patent expirations
in major markets, including the U.S. starting in October 2011, and the continued severe erosion of U.S. Gemzar sales.
We anticipate that the impact of U.S. health care reform will lower 2011 revenue by $400 million to $500 million. We
expect these reductions in revenue to be offset by sales growth of Alimta, Cialis, Cymbalta, Effient, Humalog, and
animal health products.
We anticipate that gross margin as a percent of revenue will decline approximately two percentage points.
Marketing, selling, and administrative expenses are projected to grow in the low- to mid-single digits and include an
estimated $150 million to $200 million in non-tax deductible expense for the mandatory pharmaceutical
manufacturers fee associated with U.S. health care reform, while research and development expense growth is
expected to be relatively flat. Other—net, expense is expected to be a net expense of between $50 million and $150
million. Cash flows are expected to be sufficient to fund capital expenditures of between $800 and $900 million, as
well as anticipated business development activity and our dividend.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995—
A CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we caution investors that
any forward-looking statements or projections made by us, including those above, are based on management’s
belief at the time they are made. However, they are subject to risks and uncertainties. Actual results could differ
materially and will depend on, among other things, the continuing growth of our currently marketed products;
developments with competitive products; the implementation of U.S. health care reform; 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; wholesaler inventory changes; other regulatory
developments, litigation, patent disputes, and government investigations; the impact of governmental actions
regarding pricing, importation, and reimbursement for pharmaceuticals; and other factors that may affect our
operations and prospects are discussed earlier in this section and in Item 1A, “Risk Factors.” We undertake no duty
to update these forward-looking statements.
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