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transforming challenges
into advances
That’s
the history,
and
the future,
of
Eli Lilly
and Company.
2011 Annual Report
Notice of 2012 Annual Meeting
Proxy Statement

Table of contents

  • Page 1
    into advances That's the history, and the future, of Eli Lilly and Company. transforming challenges 2011 Annual Report Notice of 2012 Annual Meeting Proxy Statement

  • Page 2
    ... Financial Statements Management's Reports Reports of Independent Registered Public Accounting Firm Corporate Information 1 2 5 Executive Committee and Senior Leadership Corporate Information Annual Meeting Admission Ticket For more information on Lilly's commitment to corporate responsibility...

  • Page 3
    2011 Financial Highlights Eli Lilly and Company and Subsidiaries (Dollars in millions, except per-share data)...Year Ended December 31 2011 2010 Change % Revenue...Research and development ...Research and development as a percent of revenue...Net income ...Earnings per share-diluted...Reconciling ...

  • Page 4
    ... in cost-effective health care; and of rising global living standards that are the direct result of our our counter-cyclical growth engines, and supplement work and serve to increase the demand for our medicines. our internal growth with business development-while improving productivity. This will...

  • Page 5
    ... C. Lechleiter, Ph.D., chairman, president, and chief executive officer (center), meets with employees at Lilly's biotechnology manufacturing facility in Sesto Fiorentino, Italy. The state-of-the art operations at Sesto include formulating, filling, and packaging Humalog and Humulin cartridges and...

  • Page 6
    ... research. number of molecules we've ever had in Phase III development, and through the year we sustained These molecules exemplify the progress we've made a strong ï¬,ow of new molecules into the pipeline. Overall, in building a robust, high-quality, mid- to late-stage since our 2010 annual report...

  • Page 7
    ...our history, many of them addressing significant unmet medical needs. As we develop our pipeline, we must continue to transform the Revenue Per Employee Continues to Increase way we do research to sustain the ($ thousands, percent growth) ï¬,ow of innovation. For 135 years, the people of Lilly have...

  • Page 8
    ...the program in 2011 under the banner of Open Innovation Drug Discovery. Through this program, Lilly carries out screening tests-free of charge-on compounds submitted by outside researchers. In return, we retain first rights to negotiate an agreement with them. If no such agreement results, external...

  • Page 9
    ... trial enrollment ADVANCED IT: Empowering global sales representatives Jannell Franklin, consultant, critical chain project management, is helping cut the time for clinical trial sites to be ready to enroll patients. We're meeting ever-increasing clinical trial requirements for a growing pipeline...

  • Page 10
    ... ratings and sales in those states-we began restructuring and training our entire U.S. sales force in 2009. Today the sales force is onethird smaller than when we started-a recipe for shrinking market share under the old sales model-yet we have achieved continued growth in important Lilly brands...

  • Page 11
    ... GP75 MAb cancer Evacetrapib atherosclerosis VEGFR1 MAb cancer Empagliï¬,ozin* diabetes The Lilly Pipeline currently includes 67 molecules in clinical development. Since our 2010 annual report, 13 new molecules advanced into Phase I testing (including one currently in Phase III and one that has...

  • Page 12
    10

  • Page 13
    Form 10-K transforming challenges 11 into advances

  • Page 14

  • Page 15
    ...Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011 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...

  • Page 16
    ... in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and sell products in one significant business segment-pharmaceutical products. We also have an animal health business segment, whose operations are not material to our financial statements. Our mission is...

  • Page 17
    ... employee sales force with contract sales organizations as appropriate to leverage our own resources and the strengths of our partners in various markets. We maintain special business groups to service wholesalers, pharmacy benefit managers, managed-care organizations, government and long-term care...

  • Page 18
    ... other companies that operate animal health businesses. 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 products that...

  • Page 19
    ... results in the loss of effective market exclusivity for the product, which can result in severe and rapid decline in sales of the product. However, in some cases the innovator company may be protected from approval of generic or other follow-on versions of a new medicine beyond the expiry of the...

  • Page 20
    ... other manufacturers from employing alternative processes or marketing alternative products or formulations that compete with our patented products. In addition, competitors or other third parties sometimes may assert claims that our activities infringe patents or other intellectual property rights...

  • Page 21
    ...FDA in the United States. Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over all of our products and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, advertising, dissemination of...

  • Page 22
    ... price controls, limit access to or reimbursement for our products, or reduce the value of our intellectual property protection. Recently, several governments have implemented across-the-board price cuts of branded pharmaceuticals as part of austerity measures in the face of the global financial...

  • Page 23
    ... resources on post-marketing surveillance and clinical studies to collect and understand the benefits and potential risks of medicines as they are used as therapeutics. The following describes the new drug research and development process in more detail: Phases of New Drug Development Discovery...

  • Page 24
    ... January 2012) President, Manufacturing Operations (since June 2007) (retired December 2011) Senior Vice President, Human Resources and Diversity (since February 2011) Executive Vice President, Science and Technology and President, Lilly Research Laboratories (since January 2010). From 2002 until...

  • Page 25
    ... of Indianapolis, Indiana, from 2000 to 2007. From 2008 to 2009, he was managing director at Strategic Capital Partners, LLC, and distinguished visiting professor of public policy at Ball State University. Executive Vice President, Global Services (since January 2010) and Chief Financial Officer...

  • Page 26
    ... 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 27
    ...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 28
    ...-looking statements. Item 1B. Unresolved Staff Comments None. Item 2. Properties Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2011, we owned 12 production and distribution sites in the U.S. and Puerto Rico. Together with the corporate...

  • Page 29
    ... with respect to Zyprexa, we entered into a corporate integrity agreement with the Office of the Inspector General of the U.S. Department of Health and Human Services which requires us to maintain our compliance program and to undertake a set of defined corporate integrity obligations for five...

  • Page 30
    ... Financial Data (unaudited)." That information is incorporated here by reference. The following table summarizes the activity related to repurchases of our equity securities during the fourth quarter ended December 31, 2011: Total Number of Shares Purchased as Part of Publicly Announced Plans...

  • Page 31
    ...total revenue in 2010 was reduced by $229.0 million (pretax), or $.16 per share. We also recorded a one-time non-cash deferred income tax charge in the first quarter of $85.1 million, or $.08 per share, associated with the imposition of tax on the prescription drug subsidy of our U.S. retiree health...

  • Page 32
    ... substantial investment. As a result, most research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary...

  • Page 33
    ...-calendar-year market share for branded prescription drug sales into these government programs. In 2011, we recorded $178.0 million related to this fee, which is included in marketing, selling, and administrative expense in our consolidated statement of operations. Also, there are changes to the...

  • Page 34
    ...actions in Japan. There are proposals for cost-containment measures pending in a number of additional countries, including proposals that would directly or indirectly impose additional price controls, limit access to or reimbursement for our products, or reduce the value of our intellectual property...

  • Page 35
    ... sales. In Japan, our second-largest market with approximately $540 million in sales in 2011, our patent expires in December 2015. We anticipate worldwide sales of Zyprexa to decline by at least $3 billion in 2012. Sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic...

  • Page 36
    ...2008-2009. Additionally, the tax rate for 2010 was increased by a one-time charge of $85.1 million associated with the imposition of tax on the prescription drug subsidy of our retiree health plan as part of U.S. health care reform. OPERATING RESULTS-2010 Financial Results We achieved revenue growth...

  • Page 37
    ... Ended December 31, 2010 December 31, 2009 2 Outside U.S. Total Total (Dollars in millions) Percent Change from 2010 Product U.S.1 Zyprexa ...$ 2,495.5 Cymbalta ...2,772.0 Alimta ...957.1 Humalog ...1,222.4 Cialis ...658.1 Animal health products ...775.1 Gemzar ...723.3 Humulin ...470.8 Evista...

  • Page 38
    ... 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. FINANCIAL CONDITION As of December 31, 2011, cash, cash equivalents...

  • Page 39
    ...Our goal is to mitigate the effect of these exclusivity losses on our operations, liquidity, and financial position through growth in our patentprotected products that do not lose exclusivity during this period, in emerging markets, in Japan, and in our animal health business. Our expected growth in...

  • Page 40
    ...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 41
    ...consolidated balance sheets. Pension and Retiree Medical Plan Assumptions Pension benefit costs include assumptions for the discount rate, retirement age, and expected return on plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age, expected return on plan...

  • Page 42
    ... 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 43
    ... 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...

  • Page 44
    ... Circuit Court of Appeals denied the generic manufacturers' petition for rehearing en banc in October 2011, and the deadline for any further appeal has passed. Zydus Pharmaceuticals (Zydus) filed an action in the New Jersey district court in October 2010 seeking a declaratory judgment that it has...

  • Page 45
    ...That information is incorporated in this report by reference. 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 2011 2010 2009 Revenue ...Cost of sales...

  • Page 46
    ... ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2011 2010 2009 Net income ...Other comprehensive income (loss) Foreign currency translation gains (losses) ...Net unrealized gains (losses) on securities ...Defined benefit pension and retiree health benefit plans...

  • Page 47
    ...,651.3 Property and Equipment, net ...7,760.3 Total assets ...$33,659.8 Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings and current maturities of long-term debt (Note 8) ...$ 1,522.3 Accounts payable ...1,125.2 Employee compensation ...804.7 Sales rebates and discounts...

  • Page 48
    ... property and equipment ...Disposals of property and equipment ...Net change in short-term investments ...Proceeds from sales and maturities of noncurrent investments ...Purchases of noncurrent investments ...Purchase of product rights ...Purchases of in-process research and development ...Cash paid...

  • Page 49
    ... segment reporting. ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) Year Ended December 31 2011 2010 2009 Revenue-to unaffiliated customers Neuroscience ...Endocrinology ...Oncology ...Cardiovascular ...Animal health ...Other pharmaceuticals ...Revenue ...Geographic Information Revenue...

  • Page 50
    ...Quarterly Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) 2011 Fourth Third Second First Revenue ...$6,046.6 Cost of sales ...1,321.7 Operating expenses ...3,488.7 Acquired in-process research and development ...- Asset impairments, restructuring...

  • Page 51
    FORM 10-K Selected Financial Data (unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except revenue per employee and per-share data) 2011 2010 2009 2008 2007 Operations Revenue ...$ 24,286.5 Cost of sales ...5,067.9 Research and development ...5,020.8 Marketing, selling, and ...

  • Page 52
    ..., 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 53
    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 54
    ... the risk of development and commercialization, to the estimated future net cash flows 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...

  • Page 55
    ...products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. 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...

  • Page 56
    ... of New Financial Accounting Pronouncements In 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU) that applies to the annual fee imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs...

  • Page 57
    ...Note 7. We submitted our response to the complete response letter in 2011. Alnara On July 20, 2010, we acquired all of the outstanding stock of Alnara, a privately-held company developing protein therapeutics for the treatment of metabolic diseases, for total purchase consideration of $291.7 million...

  • Page 58
    ... shared by both companies according to a predetermined ratio. Responsibilities associated with clinical and other ongoing studies are apportioned between the parties under the agreement. Collaborative reimbursements received by us for supply of clinical trial materials; for research and development...

  • Page 59
    ... develop, market, and promote Cymbalta (duloxetine), outside the U.S. and Japan. Pursuant to the terms of the agreement, we generally shared equally in development, marketing, and selling expenses, and paid Boehringer a commission on sales in the co-promotion territories. We manufactured the product...

  • Page 60
    ...manufacturer are recorded in cost of sales. Worldwide Effient sales were $302.5 million, $115.0 million, and $27.0 million for the years ended December 31, 2011, 2010, and 2009, respectively. Diabetes Collaboration In January 2011, we and Boehringer entered into a global agreement to jointly develop...

  • Page 61
    ... the sale of the site, we entered into a nine-year supply and services agreement, whereby Evonik will manufacture final and intermediate step API for certain of our human and animal health products. The fair value of assets used in determining impairment charges was based on contracted sales prices...

  • Page 62
    ...Other securities ...10.0 Marketable equity ...180.8 160.1 Equity method and other investments(1) ...Investments ...$4,029.8 December 31, 2010 Cash and cash equivalents ...$5,993.2 Short-term investments Commercial paper ...$ 540.8 U.S. government and agencies ...128.9 Corporate debt securities ...63...

  • Page 63
    ... 2) (Level 3) Fair Value Long-term debt, including current portion December 31, 2011 ...$(6,981.5) December 31, 2010 ...(6,788.7) $ $(7,451.5) (7,030.0) $ $(7,451.5) (7,030.0) Description Carrying Amount Fair Value Measurements Using Quoted Prices in Active Markets Significant for Other...

  • Page 64
    ... for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone payments. Other intangibles consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies, and...

  • Page 65
    ... as a financing cash flow in the consolidated statements of cash flows. At December 31, 2011, additional stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 93.0 million shares. Performance Award Program PAs are granted to officers and management and are...

  • Page 66
    ...-average remaining requisite service period of 12 months. Shareholder Value Award Program SVAs are granted to officers and management and are payable in shares of common stock at the end of a three-year period. The number of shares actually issued varies depending on our stock price at the end...

  • Page 67
    ...officers, management, and board members at exercise prices equal to the fair market value of our stock price at the date of grant. Options fully vest three years from the grant date and have a term of 10 years. Stock option activity during the year ended December 31, 2011 is summarized below: Shares...

  • Page 68
    ... of stock under employee stock plans-net ...Stock-based compensation ...ESOP transactions ...Balance at December 31, 2010 ...Net income ...Cash dividends declared per share: $1.96 ...Retirement of treasury shares ...Issuance of stock under employee stock plans-net ...Stock-based compensation ...ESOP...

  • Page 69
    ... share: 2011 2010 2009 (Shares in thousands) Income available to common shareholders ...$ Basic earnings per share Weighted-average number of common shares outstanding, including incremental shares ...Basic earnings per share ...$ Diluted earnings per share Weighted-average number of common shares...

  • Page 70
    ... fully reserved. Domestic and Puerto Rican companies contributed approximately 24 percent, 45 percent, and 39 percent for the years ended December 31, 2011, 2010, and 2009, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive...

  • Page 71
    ...income before income taxes to reported income tax expense: 2011 2010 2009 Income tax at the U.S. federal statutory tax rate ...$1,872.3 $2,283.8 $1,875.2 Add (deduct) International operations, including Puerto Rico ...(796.7) (823.3) (741.1) U.S. health care reform ...62.9 85.1 0.0 General business...

  • Page 72
    ... returned to us in 2012. The following represents our weighted-average assumptions as of December 31: Defined Benefit Pension Plans 2011 2010 2009 Retiree Health Benefit Plans 2011 2010 2009 (Percents) Weighted-average assumptions as of December 31 Discount rate for benefit obligation ...Discount...

  • Page 73
    ... rate of 5.0 percent by 2020. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows: 2012 2013 2014 2015 2016 2017-2021 Defined benefit pension plans ...$416.1 $424.2 $437.2 $449.9 $464.2 $2,609.2 Retiree health benefit plans...

  • Page 74
    .... The defined benefit pension and retiree health benefit plan allocation strategy for the U.S. and Puerto Rico currently comprises approximately 81 percent growth investments and 19 percent fixed income investments. The growth investment allocation encompasses U.S. and international public equity...

  • Page 75
    ... (Level 1) (Level 2) (Level 3) Asset Class Total Defined Benefit Pension Plans Public equity securities U.S...$ 454.5 International ...1,462.4 Fixed income Developed markets ...929.1 Emerging markets ...341.5 Private alternative investments Hedge funds ...2,312.6 Equity-like funds ...870.2 Real...

  • Page 76
    ... (Level 1) (Level 2) (Level 3) Asset Class Total Defined Benefit Pension Plans Public equity securities U.S...$ 589.4 International ...1,868.3 Fixed income Developed markets ...791.6 Emerging markets ...336.2 Private alternative investments Hedge funds ...2,020.3 Equity-like funds ...812.9 Real...

  • Page 77
    ...IncomeDeveloped Markets Hedge Funds Equity-like Funds Inter-national Equity Real Estate Total Defined Benefit Pension Plans Beginning balance at January 1, 2010 ...$1,381.5 Actual return on plan assets, including changes in foreign exchange rates: Relating to assets still held at the reporting...

  • Page 78
    ... Circuit Court of Appeals denied the generic manufacturers' petition for rehearing en banc in October 2011, and the deadline for any further appeal has passed. Zydus Pharmaceuticals (Zydus) filed an action in the New Jersey district court in October 2010 seeking a declaratory judgment that it has...

  • Page 79
    ... Net Gains (Losses) on Securities Defined Benefit Pension and Retiree Health Benefit Plans Effective Portion of Cash Flow Hedges Accumulated Other Comprehensive Loss Beginning balance at January 1, 2011 ...Other comprehensive income (loss) ...Balance at December 31, 2011 ... $ 510.7 (244.8) $ 265...

  • Page 80
    ... of financial statements and other financial information. A staff of internal auditors regularly monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports directly to the audit committee of the board of directors. We conducted an...

  • Page 81
    ... 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, 2011 and 2010, and the related consolidated statements...

  • Page 82
    ... audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2011 consolidated financial statements of Eli Lilly and Company and subsidiaries and our report dated February 24, 2012 expressed an unqualified opinion thereon. Indianapolis, Indiana...

  • Page 83
    ... 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 controls...

  • Page 84
    ...been no changes in those procedures since they were last published in our proxy statement of March 7, 2011. 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 85
    ... 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 The Eli Lilly and Company Executive Officer Incentive Plan2 2007 Change in Control Severance Pay Plan for Select Employees...

  • Page 86
    ... States Office of Personnel Management, and certain individual relators 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...

  • Page 87
    ...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 88

  • Page 89
    into advances Notice of 2012 Annual Meeting Proxy Statement transforming challenges

  • Page 90

  • Page 91
    ... annual report and proxy statement are available at http://www.lilly.com/pdf/lillyar2011.pdf Notice of Annual Meeting of Shareholders April 16, 2012 The annual meeting of shareholders of Eli Lilly and Company will be held at the Lilly Center Auditorium, Lilly Corporate Center, Indianapolis, Indiana...

  • Page 92
    Proxy Statement Overview Annual Meeting of Shareholders The annual meeting of shareholders will be held at 11:00 a.m. EDT on Monday, April 16, 2012 at: The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285 The board of directors of Eli Lilly and Company is soliciting proxies...

  • Page 93
    Contacting the board of directors You may send written communications to one or more members of the board, addressed to: Board of Directors Eli Lilly and Company c/o Corporate Secretary Lilly Corporate Center Indianapolis, Indiana 46285 All such communications (from shareholders or other interested ...

  • Page 94
    ... Therapeutics, Mayo Medical School; and Director, Mayo Clinic Center for Individualized Medicine Director since 1995 Board committees: public policy and compliance; science and technology J. Erik Fyrwald Former Chairman Chairman, and Chief Lloyds Banking Executive Officer, Group plc United...

  • Page 95
    ...since 2002 Board committees: compensation; directors and corporate governance (chair) Director since 2002 Board committees: audit; finance; public policy and compliance (chair) Director since 1995 Board committees: audit; compensation Director since 2009 Board committees: finance; public policy...

  • Page 96
    ..., and a global perspective. His background as an academic brings a diversity of experience and perspective to the board's deliberations. He has also served on the boards of several major public companies. Board committees: audit; finance; public policy and compliance (chair) PROXY STATEMENT 6

  • Page 97
    .... He served for three years as chairman of the board and CEO of Nalco, a global technology-based water products and services company. Board committees: public policy and compliance; science and technology Ellen R. Marram Age 65 Director since 2002 President, The Barnegat Group LLC Ms. Marram will...

  • Page 98
    ...a strong record of leadership in operations and strategy. He is an audit committee financial expert as a result of his experience as CEO and CFO of Ball. He also has extensive corporate governance experience through his service on other public company boards. Board committees: audit; compensation 8

  • Page 99
    ... corporate governance experience through her other board positions. Board committees: audit; compensation Class of 2014 The following four directors will continue in office until 2014. Michael L. Eskew Age 62 Director since 2008 Former Chairman and Chief Executive Officer, United Parcel Service...

  • Page 100
    ...has extensive corporate governance experience through service on other public company boards in a variety of industries. Board committees: compensation (chair); directors and corporate governance John C. Lechleiter, Ph.D. Age 58 Director since 2005 Chairman, President, and Chief Executive Officer Dr...

  • Page 101
    ... a director who receives any direct compensation from the company other than the director's normal director compensation, or whose immediate family member receives more than $120,000 per year in direct compensation from the company other than for service as a nonexecutive employee. PROXY STATEMENT...

  • Page 102
    ...compensation committee of that company's board. • a director who is currently employed by, who is a 10 percent shareholder of, or whose immediate family member is currently employed as an executive officer of a company that makes payments to or receives payments from Lilly for property or services...

  • Page 103
    ...the role of chairman of the board with the role of chief executive officer, coupled with a lead director position to further strengthen the governance structure. The board believes this provides an efficient and effective leadership model for the company. Combining the chairman and CEO roles fosters...

  • Page 104
    ... 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 of those individuals in assuring proper accounting, financial reporting, internal controls...

  • Page 105
    ... and related 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...

  • Page 106
    ... directors and corporate governance committee reviews and approves all committee charters annually. The chair of each committee determines the frequency and agenda of committee meetings. In addition, the audit, compensation, and public policy and compliance committees meet alone in executive session...

  • Page 107
    ...'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. Membership and Meetings of the Board and Its Committees In 2011, each director...

  • Page 108
    ...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 109
    ... Price - - $68.96 - $68.96 - $68.96 - $68.96 $65.48 - $68.96 $68.96 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 110
    ...retired chief executive officers and senior executives, particularly those with experience in operations, finance, accounting, banking, marketing, and sales • international business • medicine and science • government and public policy • health care system (public or private). Finally, board...

  • Page 111
    ...directors has determined that Mr. Eskew, Mr. Hoover, and Mr. Oberhelman are audit committee financial experts, as 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...

  • Page 112
    ...'s policy and procedures are as follows: • The committee approves the annual audit services engagement and, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope, company structure, or other matters. Audit services include internal controls attestation work...

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    ...members of company management only on matters under the committee's oversight and with the knowledge and permission of the committee chair. • Role of executive officers and management. With the oversight of the CEO and the senior vice president of human resources, the company's global compensation...

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    ... related-person transaction in 2011 (see "Review and Approval of Transactions with Related Persons" for a description of our policy on related-person transactions) • is an executive officer of another entity, at which one of our executive officers serves on the board of directors. PROXY STATEMENT...

  • Page 115
    ... and business challenges. The new bonus metrics measure our revenue, EPS, and pipeline performance against internal goals. At the same time, we retained the external metrics of EPS growth versus our peers and stock price performance versus expected large-cap returns for our equity program. Together...

  • Page 116
    ... superior long-term shareholder returns and to share value created with employees in a cost-effective manner. While the amount of compensation reflects differences in job responsibilities, geographies, and marketplace considerations, the overall structure of compensation and benefits programs should...

  • Page 117
    ... of 2010 when considering 2011 compensation opportunities. The peer companies are direct competitors for our products, operate in a similar business model, and employ people with the unique skills required to operate an established biopharmaceutical company. The committee also considers market cap...

  • Page 118
    ...-stage pipeline, with 8 potential medicines in Phase III testing by the end of the year. The committee also noted Dr. Lechleiter's continued leadership in the implementation of the company's Corporate Integrity Agreement with the Office of Inspector General of the U.S. Department of Health and Human...

  • Page 119
    ... that the proposed salaries were within the broad middle range of competitive pay. Cash Incentive Bonuses The company's annual cash bonus program aligns employees' goals with the company's financial plans and pipeline delivery objectives for the current year. For executive officers, cash incentive...

  • Page 120
    ...-line sales and bottom-line earnings objectives in a difficult period for the company while delivering a robust pipeline of medicines at all stages of development, which is critical to our long-term success. In establishing the 2011 goals, the committee used the company's 2011 annual operating plan...

  • Page 121
    ... Equity Incentives-Total Equity Program We employ two forms of equity incentives granted under the 2002 Lilly Stock Plan: performance awards (PAs) and shareholder value awards (SVAs). These incentives are designed to focus company leaders on long-term shareholder value. For executive officers...

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    ... of total compensation in the form of equity. The committee determined that for members of senior management, a 50/50 split between PAs and SVAs appropriately balances the company financial performance and shareholder equity return metrics of the two programs. Target values for 2010 and 2011 equity...

  • Page 123
    ... below in early 2014: • Three-year performance period • Target is determined by applying an expected three-year rate of return for large-cap companies • Shares earned by executive officers must be held one year 2011-2013 SVA Ending Stock Price Compounded Annual Growth Rate (excluding dividends...

  • Page 124
    ...the Xigris product withdrawal • For 2010 and 2011: Eliminated the impact of U.S. health care reform • For 2009, 2010, and 2011: Eliminated the impact of (i) significant asset impairments and restructuring charges and (ii) one-time accounting charges for the acquisition of in-process research and...

  • Page 125
    ...productivity and job satisfaction through programs that focus on work/life balance. The benefits available are the same for all U.S. employees and include medical and dental coverage, disability insurance, and life insurance. In addition, the 401(k) plan and The Lilly Retirement Plan (the retirement...

  • Page 126
    ... long-term rate, as described in more detail following the "Nonqualified Deferred Compensation in 2011" table. Severance Benefits Except in the case of a change in control of the company, the company is not obligated to pay severance to named executive officers upon termination of their employment...

  • Page 127
    ... on long-term growth. The committee has adopted a guideline requiring the CEO to own company stock valued at least six 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 eliminates volatility...

  • Page 128
    ...the change-in-control severance pay plans to eliminate tax gross-ups are effective October 2012. • All members of senior management (approximately 150 employees) are subject to share ownership requirements, correlated to their level of responsibility. Compensation Committee Report The compensation...

  • Page 129
    ... President, Global Services and Chief Financial Officer Bryce D. Carmine Retired Executive Vice President and President, Lilly Bio-Medicines Jan M. Lundberg, Ph.D. Executive Vice President, Science and Technology and President, Lilly Research Laboratories 2011 $ 973,750 $ 0 $ 2,062,500 2010 $ 946...

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    ... in 2009. For Dr. Lundberg, these amounts include taxes on income imputed for relocation expenses. 2 Relocation expenses reimbursed under a company policy available to any employee asked to relocate by the company. We have no employment agreements with our named executive officers. PROXY STATEMENT...

  • Page 131
    ... or retirement). In addition, an employee who was an executive officer at the time of grant will receive payment in restricted stock units according to the chart titled "Performance and Holding Periods for PAs and SVAs" in the "Compensation Discussion and Analysis." SVAs granted in 2011 will pay out...

  • Page 132
    ...Name Dr. Lechleiter Number of Securities Underlying Unexercised Options (#) 1 Exercisable Option Exercise Price ($) Option Expiration Date Award 2011-2013 SVA 2010-2012 SVA 2011-2012 PA 2010-2011 PA 2009-2010 PA Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares...

  • Page 133
    ... named executive officers. • The retirement plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See the "Pension Benefits in 2011" table below for additional information about the value of these pension benefits. Sections 401 and 415 of the Internal Revenue Code...

  • Page 134
    ... named executive officers are entitled to under the retirement plan and the nonqualified pension plan. Pension Benefits in 2011 Name Dr. Lechleiter 2 Plan retirement plan (pre-2010) retirement plan (post-2009) nonqualified plan (pre-2010) nonqualified plan (post-2009) total Mr. Rice retirement plan...

  • Page 135
    ... did not change the timing or amount of his unreduced benefits (shown in the "Pension Benefits in 2011" 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 2011 Executive...

  • Page 136
    ... the deferred compensation plan. Amounts deferred by executives under this plan are credited with interest at 120 percent of the applicable federal long-term rate as established the preceding December by the U.S. Treasury Department under Section 1274(d) of the Internal Revenue Code with monthly...

  • Page 137
    ... in 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 PROXY STATEMENT 47

  • Page 138
    ... company's current active employee medical, dental, life, and long-term disability insurance. Similar actuarial assumptions to those used to calculate incremental pension benefits apply to the calculation for continuation of medical and welfare benefits, with the addition of actual COBRA rates based...

  • Page 139
    ... of the company. All directors and executive officers as a group own 0.28 percent of the outstanding common stock of the company. 3 Except for Mr. Carmine, this column shows, the 2010-2011 PAs paid out in January 2012 in restricted stock units. These shares will vest in February 2013, and have no...

  • Page 140
    ... stock are the shareholders listed below: Number of Shares Beneficially Owned 135,670,804 (as of 2/9/12) 62,397,499 (as of 12/31/11) Name and Address Lilly Endowment, Inc. (the "Endowment") 2801 North Meridian Street Indianapolis, Indiana 46208 BlackRock, Inc. 40 East 52nd Street New York, New York...

  • Page 141
    ...on 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 142
    ...years. The 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...

  • Page 143
    ... result of the board's ongoing review of corporate governance matters. In 2007, 2008, and 2009, shareholder proposals requesting that the board take action to eliminate the supermajority voting provisions were supported by a majority of votes cast. In 2010 and 2011, the board responded by submitting...

  • Page 144
    ... by our company. Statement in Opposition to the Proposal The directors and corporate governance committee of the board has reviewed this proposal and recommends that you vote against it because it is not in the best long-term interests of shareholders. It is unnecessary, is overly prescriptive, and...

  • Page 145
    ...an annual report to shareholders disclosing procedures to ensure proper animal care, including measures to improve the living conditions of all animals used in-house and at contract laboratories, as well as plans to promote alternatives to animal use. Supporting Statement As shown below, our Company...

  • Page 146
    ...% of drugs deemed safe and effective when tested on animals fail in human clinical trials, there is a also a clear scientific imperative for improving testing methods. Shareholders cannot monitor what goes on behind the closed doors of animal testing laboratories, so the Company must. The Board must...

  • Page 147
    ... name as the shareholder of record • held for you in an account with a broker, bank, or other nominee • attributed to your account in The Eli Lilly and Company Employee 401(k) Plan (the 401(k) plan). If you are a shareholder of record, you may vote your shares in person at the meeting. However...

  • Page 148
    ...on the directions of the participants to whose accounts the shares are credited) • shares held in the plan that are not yet credited to individual participants' accounts. All participants are named fiduciaries under the terms of the 401(k) plan and under the Employee Retirement Income Security Act...

  • Page 149
    ... should be addressed to the company's corporate secretary, Lilly Corporate Center, Indianapolis, Indiana 46285. In addition, the company's bylaws provide that any shareholder wishing to propose any other business at the annual meeting must give the company written notice by November 5, 2012 and no...

  • 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
    ...time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office. (b) The Prior to the 2013 annual meeting of directors, the Board of Directors (exclusive of Preferred Stock Directors) shall be divided into three classes, with the term of office...

  • Page 152
    ... any major changes in the Corporation's or any of its majority-owned subsidiaries' businesses or capital structures or reduced the current rate of dividends payable on the Corporation's capital stock below the rate in effect immediately prior to the time such Related Person became a Related Person...

  • Page 153
    ... Exchange Act of 1934) of a Related Person; provided, however, that the term Related Person shall not include (a) the Corporation or any of its subsidiaries, (b) any profit-sharing, employee stock ownership or other employee benefit plan of the Corporation or any subsidiary of the Corporation or...

  • Page 154
    ... Amended Articles of Incorporation, the affirmative vote of the holders of at least 80% of the votes entitled to be cast by holders of all the outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend, or repeal this Article 13. PROXY STATEMENT 64

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    Corporate Information transforming challenges into advances

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  • Page 157
    ... Risk Management, and Chief Ethics and Compliance Officer Barton R. Peterson Senior Vice President, Corporate Affairs and Communications Derica W. Rice Executive Vice President, Global Services, and Chief Financial Officer David A. Ricks Senior Vice President, and President, Lilly Bio-Medicines...

  • Page 158
    ... reports. In addition, the company's chief executive officer has filed with the New York Stock Exchange a certification to the effect that, to the best of his knowledge, the company is in compliance with all corporate governance listing standards of the Exchange. Wells Fargo Shareowner Services...

  • Page 159
    ... Used In This Report Trademarks or service marks owned by Eli Lilly and Company or its subsidiaries or affiliates, when first used in this report, appear with an initial capital and are followed by the symbol® or™, as applicable. In subsequent uses of the marks in the report, the symbols are...

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    4

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    ... Ticket Eli Lilly and Company 2012 Annual Meeting of Shareholders Monday, April 16, 2012 11:00 a.m. EDT Lilly Center Auditorium Lilly Corporate 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...

  • Page 162
    ... of this page with you to the meeting. Detach here Detach here Eli Lilly and Company Annual Meeting of Shareholders April 16, 2012 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
    ... in our 2010/2011 Corporate Responsibility Report at www.lilly.com. Connecting Hearts Abroad: Giving service and gaining insights Re'Nita O'Bannon, senior executive assistant, U.S. oncology business unit, was a 2011 Connecting Hearts Abroad ambassador, working in an elderly day center in Lima...

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