Eli Lilly 2010 Annual Report Download - page 56

FORM 10-K
amounted to $339.3 million, $337.8 million, and $327.4 million for 2010, 2009, and 2008, respectively. Assets under
capital leases included in property and equipment in the consolidated balance sheets, capital lease obligations
entered into, and future minimum rental commitments are not material.
Litigation and environmental liabilities: Litigation accruals and environmental liabilities and the related estimated
insurance recoverables are reflected on a gross basis as liabilities and assets, respectively, on our consolidated
balance sheets. 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. We
accrue for certain product liability claims incurred but not filed to the extent we can formulate a reasonable 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 operations. We estimate insurance recoverables based on existing deductibles,
coverage 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. However, for substantially all of our
currently marketed products, we are completely self-insured for future product liability losses.
Revenue recognition: We recognize revenue from sales of products at the time title of goods passes to the buyer
and the buyer assumes the risks and rewards of ownership. For approximately 85 percent of our sales, this is at the
time products are shipped to the customer, typically a wholesale distributor 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 based
upon net sales reported by our co-promotion partners and, if applicable, the number of sales calls we perform.
Initial fees we receive from the partnering of our compounds under development are amortized through the
expected product approval date. Initial fees received from out-licensing agreements that include both the sale of
marketing rights to our commercialized products and a related commitment to supply the products are generally
recognized in net product sales over the term of the supply agreement. We immediately recognize the full amount of
developmental milestone payments due to us upon the achievement of the milestone event if the event is
substantive, objectively determinable, and represents an important point in the development life cycle of the
pharmaceutical product. Milestone payments earned by us are generally recorded in other—net, expense. If the
payment to us is a commercialization payment that is part of a multiple-element collaborative commercialization
arrangement and is a result of the initiation of the commercialization period (e.g., payments triggered by regulatory
approval for marketing or launch of the product), we amortize the payment to income as we perform under the
terms of the arrangement.
Royalty revenue from licensees, which are based on third-party sales of licensed products and technology, are
recorded as earned in accordance with the contract terms when third-party sales can be reasonably measured and
collection of the funds is reasonably assured. This royalty revenue is included in collaboration and other revenue.
Following is the composition of revenue:
2010 2009 2008
Net product sales ....................................................... $22,442.2 $21,171.5 $19,925.8
Collaboration and other revenue (Note 4) ................................... 633.8 664.5 446.1
Total revenue .......................................................... $23,076.0 $21,836.0 $20,371.9
Research and development expenses and acquired research and development: Research and development
expenses include the following:
• Research and development costs, which are expensed as incurred.
• Milestone payments incurred prior to regulatory approval of the product, which are accrued when the event
requiring payment of the milestone occurs.
Acquired IPR&D expense includes the following:
• The initial costs of IPR&D projects acquired directly in asset acquisitions, unless they have an alternative future
use.
• The fair values of IPR&D projects acquired in business combinations that closed prior to 2009. Beginning in
2009, the fair values of IPR&D projects acquired in business combinations are capitalized as other intangible
assets.
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