Eli Lilly 2011 Annual Report Download - page 36

FORM 10-K
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue decreased by 2.0 percentage points in 2011 to 79.1 percent. This decrease
was due primarily to the effect of foreign exchange rates on international inventories sold, which significantly
increased cost of sales in 2011, but led to a modest reduction to cost of sales in 2010. Patent expirations for Zyprexa
and Gemzar also drove the reduction in gross margin percent.
Marketing, selling, and administrative expenses increased 12 percent in 2011 to $7.88 billion. The increase was
driven by the diabetes collaboration with Boehringer Ingelheim, as well as the effect of foreign exchange rates. In
addition, higher administrative expenses in the U.S. included $178.0 million related to the mandatory pharmaceutical
manufacturers' fee associated with U.S. health care reform. Investment in research and development increased
3 percent, to $5.02 billion, due primarily to increased late-stage clinical trial costs, including costs related to the
diabetes collaboration with Boehringer Ingelheim.
We incurred an IPR&D charge of $388.0 million in 2011, associated with our diabetes collaboration with Boehringer
Ingelheim, compared with $50.0 million in 2010 associated with the in-licensing agreement with Acrux. We
recognized asset impairments, restructuring, and other special charges of $401.4 million in 2011, including charges
of $316.4 million primarily related to severance costs from previously announced strategic actions that we are taking
to reduce our cost structure and global workforce, and a special charge of $85.0 million related to the withdrawal of
Xigris. In 2010, we recognized charges totaling $192.0 million for asset impairments, restructuring, and other special
charges. See Notes 3 and 5 to the consolidated financial statements for additional information.
Other—net, expense increased $174.0 million to a net expense of $179.0 million in 2011, due primarily to the partial
impairment of the acquired IPR&D assets related to liprotamase and Amyvid in 2011 and damages recovered in 2010
from generic pharmaceutical companies related to Zyprexa patent litigation in Germany.
Our effective tax rate was 18.7 percent in 2011, compared with 22.3 percent in 2010. The decrease was due to the tax
benefit on the IPR&D charge associated with the Boehringer Ingelheim diabetes collaboration, as well as a benefit of
$85.3 million primarily from the resolution in 2011 of the IRS audits of tax years 2005-2007, along with certain
matters related to 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 of 6 percent to $23.08 billion in 2010, which was primarily driven by the collective
growth of Alimta, Cymbalta, animal health products, insulin products, Cialis, and Zyprexa, offset by a decline in
Gemzar revenue. Cost of sales and marketing, selling, and administrative expenses grew at a slower rate than
revenue, while our investment in research and development grew at a greater rate than revenue and our effective
tax rate increased. Net income increased 17 percent to $5.07 billion, and earnings per share increased 16 percent to
$4.58 per share, in 2010, as compared to $4.33 billion, or $3.94 per share, in 2009. Net income comparisons between
2010 and 2009 are affected by the impact of several highlighted items. The highlighted items for 2010 are
summarized in the Executive Overview. The 2009 highlighted items are summarized as follows:
Acquisitions (Note 3)
• We incurred acquired IPR&D charges associated with an in-licensing arrangement with Incyte Corporation
(Incyte) of $90.0 million (pretax), which decreased earnings per share by $.05.
Asset Impairments and Related Restructuring and Other Special Charges (Notes 5 and 15)
• We recognized asset impairments, restructuring, and other special charges of $462.7 million (pretax), which
decreased earnings per share by $.29, for asset impairments and restructuring primarily 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.
Revenue
Our worldwide revenue for 2010 increased 6 percent, to $23.08 billion, driven by the collective growth of Alimta,
Cymbalta, animal health products, insulin products, Cialis, and Zyprexa, offset by a decline in Gemzar revenue.
Worldwide sales volume increased 3 percent, while selling prices contributed 2 percent of revenue growth, and the
impact of foreign exchange rates was negligible. Revenue in the U.S. increased 5 percent, to $12.87 billion, due to
higher prices. Revenue outside the U.S. increased 7 percent, to $10.21 billion, due to increased demand, partially
offset by lower prices. In 2010, total revenue was reduced by $229.0 million due to the impact of U.S. health care
reform.
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