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It begins with
a promise…
Monica Kumado
Lilly Global
Manufacturing
ELI LILLY AND COMPANY 2014 ANNUAL REPORT • NOTICE OF 2015 ANNUAL MEETING • PROXY STATEMENT

Table of contents

  • Page 1
    E L I L I L LY A N D CO M PANY 2 0 1 4 ANNU AL R E PORT • N OTI CE OF 2015 AN N UAL MEETI N G • PROXY STAT EM EN T Monica Kumado Lilly Global Manufacturing It begins with a promise...

  • Page 2
    ... quality medicines. Lilly unites caring with discovery to make life better for people around the world. YEAR IN REVIEW 1 2 6 12 Financial Highlights Letter to Shareholders It begins with a promise...Pipeline of Molecules in Clinical Development PROXY STATEMENT 1 2 8 28 53 55 59 61 Notice of Annual...

  • Page 3
    ... 2013. Animal Health grew 9 percent, reflecting the acquisition of Lohmann Animal Health in the second quarter of 2014 and growth in our food animal products. 2010 2011 2012 2013 2014 2010 2011 2.1% 2012 Lilly 7.2% 2013 S&P 500 2014 Return on Assets (ROA) Return on Shareholders' Equity...

  • Page 4
    .... Seven of our products and our Elanco animal health business exceeded $1 billion in annual sales in 2014. Total reported operating expenses decreased 10 percent, driven by lower late-stage clinical development costs, reduced U.S. sales and marketing activities for Cymbalta and Evista, and ongoing...

  • Page 5
    ... some have termed "biotech-like Cyramza as a treatment for second-line upside" later in the decade. non-small cell lung cancer, and in September Revenue Per Employee ($ thousands, percent growth) we reported positive top-line results for All of this is good news for the company ramucirumab in second...

  • Page 6
    ... growth agenda. In terms of geography, the U.S. market will continue to be of preeminent importance to our company. Yet our attention will increasingly shift to Asia, particularly China and Japan. R&D Focus. Going forward, we'll focus our research in human health on three core areas-diabetes...

  • Page 7
    ... and internally driven growth. With the acquisition of Novartis Animal Health in January 2015, Elanco today is a top-three animal health company-up from No. 8 just ten years ago-with an expanded product portfolio, an enhanced global footprint, and a robust pipeline. At Elanco headquarters in...

  • Page 8
    ... against some of humanity's most stubborn and devastating diseases. In 2014 Eli Lilly and Company delivered on the promise of discovery with new medicines for people with diabetes and cancer. These medicines-in their discovery, development, and manufacture-reflect the promise of quality that goes...

  • Page 9
    ...own health. With 18 years of experience in sterile injectable product manufacturing, Jeff was hired to lead a process team in our Cyramza vial filling operation in Indianapolis. As he began his new job, Jeff underwent a physical exam and learned that he had type 2 diabetes. Jeff Pettet Lilly Global...

  • Page 10
    ... lung cancer (NSCLC). In early 2015, Lilly submitted a marketing application in the EU for Cyramza in NSCLC. NSCLC accounts for 85 percent of all cases of lung cancer-the leading cause of cancer death in most countries. In September, Lilly announced positive top-line results for the Phase III study...

  • Page 11
    ... part of glycemic control. This basal insulin helps fill a longstanding gap in Lilly's modern insulin portfolio. In 2014, the European Commission granted marketing authorization for Abasaglarâ„¢-the name of our insulin glargine product in Europe-to treat diabetes in adults, adolescents, and children...

  • Page 12
    ..., our colleagues in Indianapolis and Puerto Rico are working to streamline our insulin manufacturing processes to prepare for the production of our basal insulins and to meet growing global demand. The plan includes technical initiatives to improve production processes, expand capacity, and...

  • Page 13
    ... PROGRAM Financial Benefits: 2010 2011 2012 2013 2014 $ 770m 1. Includes both human pharmaceutical and animal health manufacturing; time period unless otherwise noted. 2. Product supply to first-paying-customer remained above 95%, the Operation Standards for Supply Chain Excellence standard...

  • Page 14
    ... lupus. Additional information and updates are available on the Lilly Interactive Pipeline at www.lilly.com. In 2014, Elanco delivered 102 country-level approvals. These products provided comprehensive solutions for customers and veterinarians to help improve the lives and health of animals. Many of...

  • Page 15
    ... (SEC); • acquisitions and business development transactions; and • the impact of global macroeconomic conditions. Investors should not place undue reliance on forward-looking statements. You should carefully read the factors described in the "Risk Factors" section of this Annual Report for...

  • Page 16
    ..., Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and market products in two business segments-human pharmaceutical products and animal health products. The mission of our human pharmaceutical business is to make medicines that help people live longer, healthier, more...

  • Page 17
    ... human growth hormone deficiency and certain pediatric growth conditions Axiron®, a topical solution of testosterone, applied by underarm applicator, for replacement therapy in men for certain conditions associated with a deficiency or absence of testosterone Cymbalta®, for the treatment of major...

  • Page 18
    ...exhibit at medical meetings. In addition, we advertise certain products directly to consumers in the U.S., and we maintain websites with information about our major products. We supplement our employee sales force with contract sales organizations as appropriate to leverage our own resources and the...

  • Page 19
    ... the market or products that are later developed by competitors. If competitors introduce new products or delivery systems with therapeutic or cost advantages, our products can be subject to decreased sales, progressive price reductions, or both. We believe our long-term competitive success depends...

  • Page 20
    .... In the U.S. and the EU, the regulatory approval process for human pharmaceuticals (other than biological products (biologics)) exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy...

  • Page 21
    ... to successfully commercialize our life sciences innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a large number of patents in the U.S. and many other countries relating to products, product uses, formulations, and manufacturing processes. In...

  • Page 22
    ... when and how much we will benefit commercially from this protection. Certain of our Elanco animal health products are covered by patents or other forms of intellectual property protection. Historically, upon loss of effective market exclusivity for our animal health products, we have not generally...

  • Page 23
    ...Patent Challenges In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, made a complex set of changes to both patent and new-drug-approval laws for human pharmaceuticals. Before the Hatch-Waxman Act, no drug could be approved without...

  • Page 24
    ...laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals is extremely costly and can significantly delay product introductions. Promotion, marketing, manufacturing, and distribution of human pharmaceutical and animal health...

  • Page 25
    ... of competitive products and generics in the same class. In most international markets, we operate in an environment of government-mandated cost-containment programs, which may include price controls, international reference pricing (to other countries' prices), discounts and rebates, therapeutic...

  • Page 26
    ...-marketing agreements, copromotion arrangements, joint ventures, and acquisitions. Our Elanco animal health innovation strategy is focused on identifying and developing promising technologies and potential products from internal and external sources to meet unmet veterinary needs. Our animal health...

  • Page 27
    ... on post-marketing surveillance and additional clinical studies to collect and understand the benefits and potential risks of medicines as they are used as therapeutics. The following describes in more detail the research and development process for human pharmaceutical products: Phases of New Drug...

  • Page 28
    ...respond to changes in supply and demand. To maintain a stable supply of our products, we take a variety of actions including a company-wide, comprehensive quality system, inventory management, and back-up sites. However, human pharmaceutical and animal health production processes are complex, highly...

  • Page 29
    ... late in the process after substantial investment. As a result, most funds invested in 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...

  • Page 30
    ... innovative new pharmaceutical products. Without strong intellectual property protection, we would be unable to generate the returns necessary to support the enormous investments in research and development and capital as well as other expenditures required to bring new drugs to the market. 16

  • Page 31
    ... Human Services to negotiate prices for biologics and drugs on the specialty tier in Part D. Savings projected under these proposals are targeted as a means to fund health care expenditures, such as the Medicare Sustainable Growth Rate, and non-health care expenditures. State and federal health care...

  • Page 32
    ..., on our revenue, cost of sales, and operating expenses. • Regulatory compliance problems could be damaging to the company. The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers...

  • Page 33
    ... and regulatory qualification of pharmaceutical manufacturing capacity, it is possible that we could have difficulty meeting demand for new products. See "Business-Raw Materials and Product Supply," for more details. • We depend on information technology systems and infrastructure to operate our...

  • Page 34
    ... of product development, the manufacture and commercialization of certain products, support for information technology systems, and certain financial transactional processes. For example, we outsource the day-to-day management and oversight of our clinical trials to contract research organizations...

  • Page 35
    ... site in Puerto Rico. Other • We recognized a marketing, selling, and administrative expense of $119.0 million (non-tax deductible), or $0.11 per share, for an extra year of the U.S. Branded Prescription Drug Fee (U.S. Drug Fee) due to final regulations issued by the Internal Revenue Service...

  • Page 36
    ...products and acquire or collaborate on molecules currently in development by other biotechnology or pharmaceutical companies. We currently have approximately 55 potential new drugs in human testing or under regulatory review, and a larger number of projects in preclinical research. The following new...

  • Page 37
    ... of 2015. Submitted to regulatory authorities in Japan in third quarter of 2014. U.S. Europe Japan Developments Phase III Phase III Phase III Studies are ongoing. Jardiance Type 2 diabetes Approved Approved Approved Type 1 diabetes Tentatively approved Approved New insulin glargine product...

  • Page 38
    ... topline results of RA-BEACON trial which met primary endpoint. Announced in August 2014 top-line results of three trials which met all primary and secondary endpoints. Intend to submit the first application to regulatory authorities in the first half of 2015. Studies are ongoing. Phase III Phase...

  • Page 39
    ... 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. Delays and uncertainties in the regulatory approval processes in the U.S. and in...

  • Page 40
    ...our animal health product portfolio, expand our global commercial presence, and augment our animal health manufacturing and research and development. In particular, it is expected to provide Elanco with a greater commercial presence in the companion animal and swine markets, expand Elanco's presence...

  • Page 41
    ... Human Services to negotiate prices for biologics and drugs on the specialty tier in Part D. Savings projected under these proposals are targeted as a means to fund health care expenditures, such as the Medicare Sustainable Growth Rate, and non-health care expenditures. State and federal health care...

  • Page 42
    ... 31, 2013 Total Percent Change from 2013 Alimta ...$ Humalog ...Cialis® ...Cymbalta ...Humulin® ...Forteo® ...Zyprexa ...Strattera® ...Effient® ...Evista ...Other pharmaceutical products ...Animal health products ...Total net product sales ...Collaboration and other revenue(2) ...Total revenue...

  • Page 43
    ... primarily by the expiration of a supply agreement in 2013, and to a lesser extent the unfavorable impact of foreign exchange rates. Animal health product sales in the U.S. increased 4 percent, driven by increased volume in food animal products and higher prices, partially offset by decreased volume...

  • Page 44
    ... $119.0 million charge in 2014 associated with the U.S. Drug Fee, an annual non-tax deductible fee enacted by the Patient Protection and Affordable Care Act that is imposed on us and others engaged in the business of manufacturing or importing branded prescription drugs. The final regulations issued...

  • Page 45
    ... offset by higher research and development expenses and lower other income. EPS in 2013 also benefited from a lower number of shares outstanding as a result of our share repurchase programs. The 2013 highlighted items are summarized in the "Executive Overview" section. The 2012 highlighted items are...

  • Page 46
    ... 2 U.S. revenue includes revenue in Puerto Rico. Collaboration and other revenue in 2013 consists primarily of royalties for Erbitux and revenue associated with Trajenta. Collaboration and other revenue in 2012 also includes revenue associated with exenatide in the United States. Sales of Cymbalta...

  • Page 47
    ...reduction in U.S. sales and marketing activities in anticipation of the loss of patent exclusivity for Cymbalta and Evista, as well as the impact of foreign exchange rates. Research and development expenses increased 5 percent to $5.53 billion in 2013, due to higher research and clinical development...

  • Page 48
    ... the majority of our commercial paper borrowings with fixed-rate long term notes in the first half of 2015. See Note 10 to the consolidated financial statements for additional details. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term...

  • Page 49
    ...effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third...

  • Page 50
    ... presented in this report. Our most critical accounting estimates 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 51
    ...of the accrual include Medicaid, managed care, Medicare, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We base these accruals primarily upon our historical rebate and discount payments made to our customer segment groups and the provisions of current...

  • Page 52
    ..., as well as the discount rates, expected return on plan assets, and health-care-cost trend rates of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with...

  • Page 53
    ... 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 54
    ...the consolidated financial statements and is incorporated here by reference. FINANCIAL EXPECTATIONS FOR 2015 For the full year of 2015, we expect EPS to be in the range of $2.40 to $2.50. We anticipate that total revenue will be between $19.5 billion and $20.0 billion. The acquisition of Novartis AH...

  • Page 55
    ... Statements of Operations ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2014 2013 2012 Revenue ...$ 19,615.6 $ 23,113.1 $ 22,603.4 Cost of sales ...4,932.5 4,908.1 4,796.5 Research and development ...4,733.6 5,531.3 5,278.1 Marketing...

  • Page 56
    ...Year Ended December 31 2014 2013 2012 Net income ...$ 2,390.5 Other comprehensive income (loss): Change in foreign currency translation gains (losses) ...Change in net unrealized gains and losses on securities ...Change in defined benefit pension and retiree health benefit plans (Note 14) ...Change...

  • Page 57
    ... loss (Note 16) ...Cost of common stock in treasury, 810 shares (2014) and 833 shares (2013) ...Total Eli Lilly and Company shareholders' equity ...Noncontrolling interests ...Total equity ...Total liabilities and equity ...$ See notes to consolidated financial statements. $ 3,830.2 1,567.1 3,434...

  • Page 58
    ... Statements of Shareholders' Equity ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, shares in thousands) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Common Stock in Treasury Employee Benefit Trust Shareholders' Equity Shares...

  • Page 59
    ...802.7) (14,041.9) (7,618.6) Purchase of product rights ...(308.3) (24.1) (138.8) Purchases of in-process research and development ...(95.0) (57.1) - Cash paid for acquisitions, net of cash acquired ...(551.4) (43.7) (199.3) Proceeds from prepayment of revenue-sharing obligation (Note 4) ...- - 1,212...

  • Page 60
    Notes to Consolidated Financial Statements ELI LILLY AND COMPANY AND SUBSIDIARIES (Tables present 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 ...

  • Page 61
    ... normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The...

  • Page 62
    ... the risk of development and commercialization to the estimated future net cash flows that are derived from projected 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...

  • Page 63
    ... regulatory approval for marketing or launch of the product) or the achievement of a sales-based threshold, we amortize the payment to income as we perform under the terms of the arrangement. See Note 4 for specific agreement details. Research and development expenses and acquired IPR&D Research...

  • Page 64
    ... basis beginning in 2014 for annual and interim reporting periods. Adoption of this standard in the first quarter of 2014 resulted in an immaterial impact to our consolidated balance sheet and did not affect our consolidated statements of operations. Note 3: Acquisitions During 2014 and 2012...

  • Page 65
    ... of the research and development, manufacture, marketing, sale and distribution of veterinary products to prevent and treat diseases in pets, farm animals, and farmed fish. Under the terms of the agreement, we acquired manufacturing sites, research and development facilities, a global commercial...

  • Page 66
    ... successful progress of the drug candidate through the development process. In July 2014, we entered into a co-discovery and co-development collaboration with Immunocore Limited to research and potentially develop pre-clinical novel T cell-based cancer therapies. Upon entering the agreement, we paid...

  • Page 67
    ... submissions for Jardiance in Europe, the U.S., and Japan during 2013. These regulatory submission milestones were recorded as research and development expenses. Upon the approval of our new insulin glargine product in Europe and Japan during 2014, we recorded, as deferred revenue, $62.5 million in...

  • Page 68
    .... The parties share approximately 50/50 in the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party manufactures bulk product, and we produce the finished product for our exclusive and co-promotion territories. We record product sales in our...

  • Page 69
    ... rights and control in all markets during the first quarter of 2013. We were responsible for certain development costs related to certain clinical trials outside the U.S. that we were conducting as of the date of the termination agreement as well as commercialization costs outside the U.S. until the...

  • Page 70
    ... on future global sales with rates ranging up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated development costs from the initiation...

  • Page 71
    ..., 2013 and 2012 have been paid. For the year ended December 31, 2014, we incurred $243.2 million of asset impairment and other special charges consisting primarily of a $180.8 million asset impairment charge related to our decision to close and sell a manufacturing plant located in Puerto Rico. The...

  • Page 72
    ... Inventories at December 31 consisted of the following: 2014 2013 Finished products ...$ 838.0 Work in process ...1,715.4 Raw materials and supplies ...315.0 Total (approximates replacement cost) ...2,868.4 Reduction to LIFO cost ...(128.4) Inventories ...$ 2,740.0 $ 968.1 1,868.3 259.0 3,095...

  • Page 73
    ... gains on the sale of underlying equity securities during the years ended December 31, 2013 and 2012. During the years ended December 31, 2014, 2013, and 2012, net losses related to ineffectiveness, as well as net losses related to the portion of our risk-management hedging instruments, fair...

  • Page 74
    ...31, 2013 Cash equivalents ...$ 2,574.7 Short-term investments: U.S. government and agencies ...$ 276.4 Corporate debt securities ...931.7 Other securities ...2.7 Marketable equity ...356.3 Short-term investments ...$ 1,567.1 Noncurrent investments: U.S. government and agencies ...$ 1,115.6 Corporate...

  • Page 75
    ... Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Description Carrying Amount Significant Unobservable Inputs (Level 3) Fair Value Short-term commercial paper borrowings December 31, 2014 ...$ (2,680.6) $ December 31, 2013 ...- Long-term...

  • Page 76
    ... and other indefinite-lived intangible assets at December 31 were as follows: 2014 2013 Goodwill (by segment): Human pharmaceutical products ...$ Animal health ...Total goodwill ...In-process research and development ...Total indefinite-lived intangible assets...$ 1,354.3 403.8 1,758.1 11.4 1,769...

  • Page 77
    ... 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 78
    ...consolidated balance sheets, capital lease obligations entered into, and future minimum rental commitments are not material. Note 10: Borrowings Debt at December 31 consisted of the following: 2014 2013 Short-term commercial paper borrowings ...$ 1.95 to 7.13 percent long-term notes (due 2016-2044...

  • Page 79
    ... 31, 2014, additional stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 101.0 million shares. Performance Award Program PAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued...

  • Page 80
    ...common stock at both December 31, 2014 and 2013, to provide a source of funds to assist us in meeting our obligations under various employee benefit plans. The cost basis of the shares held in the trust was $3.01 billion at both December 31, 2014 and 2013, and is shown as a reduction in shareholders...

  • Page 81
    ...follows: 2014 2013 Deferred tax assets: Compensation and benefits ...$ Purchases of intangible assets ...Tax credit carryforwards and carrybacks ...Tax loss carryforwards and carrybacks ...Product return reserves ...Debt ...Contingencies ...Intercompany profit in inventories ...Other ...Total gross...

  • Page 82
    ... year 2012, was enacted in early 2013. Therefore, the research tax credits for the years 2012 and 2013 are both included in 2013 with general business credits. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows: 2014 2013 2012 Beginning balance at...

  • Page 83
    .... We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2014, 2013, and 2012, we recognized income tax expense (benefit) of $35.9 million, $(10.9) million, and $42.3 million, respectively, related to interest...

  • Page 84
    ... to develop the change in benefit obligation, change in plan assets, funded status, and amounts 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 2014 2013 Retiree Health...

  • Page 85
    ... prior service (benefit) cost ...Total ...$ We do not expect any plan assets to be returned to us in 2015. The following represents our weighted-average assumptions as of December 31: 387.4 10.3 397.7 $ $ 37.9 (92.1) (54.2) (Percents) Defined Benefit Pension Plans 2014 2013 2012 Retiree Health...

  • Page 86
    ... components: Defined Benefit Pension Plans 2013 Retiree Health Benefit Plans 2013 2014 2012 2014 2012 Components of net periodic benefit cost: Service cost ...$ 240.9 $ 287.1 $ 253.1 $ 33.0 $ 49.9 $ 63.3 Interest cost ...472.6 437.2 455.1 85.6 98.1 114.9 Expected return on plan assets ...(756...

  • Page 87
    ... non-publicly traded entities. Underlying investments include venture capital (early stage investing), buyout, and special situation investing. Private equity management firms typically acquire and then reorganize private companies to create increased long term value. Private equity-like funds...

  • Page 88
    ... Class Total Defined Benefit Pension Plans Public equity securities: U.S...$ International ...Fixed income: Developed markets ...Emerging markets ...Private alternative investments: Hedge funds ...Equity-like funds ...Real estate ...Other ...Total ...$ Retiree Health Benefit Plans Public equity...

  • Page 89
    ... to assets sold during the period ...Purchases, sales, and settlements, net . . Transfers into (out of) Level 3...Ending balance at December 31, 2014 . . $ Retiree Health Benefit Plans Beginning balance at January 1, 2014 ...$ Actual return on plan assets, including changes in foreign exchange...

  • Page 90
    ... Class Total Defined Benefit Pension Plans Public equity securities: U.S...$ International ...Fixed income: Developed markets ...Emerging markets ...Private alternative investments: Hedge funds ...Equity-like funds ...Real estate ...Other ...Total ...$ Retiree Health Benefit Plans Public equity...

  • Page 91
    ...Relating to assets sold during the period ...Purchases, sales, and settlements, net...Transfers into (out of) Level 3 ...Ending balance at December 31, 2013 ...$ Retiree Health Benefit Plans Beginning balance at January 1, 2013 ...$ Actual return on plan assets, including changes in foreign exchange...

  • Page 92
    ... Division of the European Patent Office upheld the patent and the generic manufacturers lodged an appeal. In addition, in the United Kingdom (U.K.), Actavis Group ehf and other Actavis companies filed litigation asking for a declaratory judgment that commercialization of certain salt forms of...

  • Page 93
    ... Unit V (Hetero); Mylan Pharmaceuticals Inc. (Mylan); Panacea Biotec, Ltd. (Panacea); Sun Global; Teva Pharmaceuticals USA, Inc. (Teva USA); Watson Laboratories, Inc. (Watson); and Zydus Pharmaceuticals USA, Inc. (Zydus) each submitted ANDAs seeking approval to market generic versions of Effient...

  • Page 94
    ... Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm to employees and former employees caused by exposure to heavy metals at a former Lilly manufacturing facility in Cosmopolis, Brazil, operated by the company between 1977 and 2003. The plaintiffs allege that...

  • Page 95
    ...Benefit Pension and Retiree Health Benefit Plans Effective Portion of Cash Flow Hedges Accumulated Other Comprehensive Loss Beginning balance at January 1, 2012...) benefit 2014 2013 2012 Unrealized net gains (losses) on securities ...$ Defined benefit pension and retiree health benefit plans ......

  • Page 96
    ... of the exenatide collaboration with Amylin, including income recognized from the transfer to Amylin of exenatide commercial rights in all markets outside the U.S. in 2013 and income recognized from the early payment of the exenatide revenue-sharing obligation by Amylin in 2012 (Note 4). 82 82

  • Page 97
    ...in March 2014, which resulted in the immediate entry of generic competitors and a rapid and severe decline in revenue. Our animal health segment, operating through our Elanco animal health division, includes the development, manufacturing, marketing, and sales of animal health products worldwide for...

  • Page 98
    ... ended December 31, 2014, 2013, and 2012, respectively. For internal management reporting presented to the chief operating decision maker, certain costs are fully allocated to our human pharmaceutical products segment and therefore are not reflected in the animal health segment's profit. Such items...

  • Page 99
    2014 2013 2012 Geographic Information Revenue-to unaffiliated customers(1): United States ...$ 9,134.1 Europe ...4,506.7 Japan ...2,027.1 Other foreign countries ...3,947.7 Revenue ...$ 19,615.6 Long-lived assets(2): United States ...$ Europe ...Japan ...Other foreign countries ...Long-lived ...

  • Page 100
    ... 0.68 Dividends paid per share ...0.49 0.49 0.49 0.49 Common stock closing prices: High ...72.83 66.59 63.10 59.85 Low ...61.90 60.35 58.21 50.73 2013 Fourth Third Second First Revenue ...$ 5,808.8 $ 5,772.6 Cost of sales ...1,386.5 1,198.1 Operating expenses(1) ...3,429.0 3,029.8 Acquired IPR...

  • Page 101
    ... Public Company Accounting Oversight Board (United States). Ernst & Young's opinion with respect to the fairness of the presentation of the statements is included in Item 8 of our annual report on Form 10-K. Ernst & Young reports directly to the audit committee of the board of directors. Our audit...

  • Page 102
    ... 31, 2014. Their responsibility is to evaluate whether internal control over financial reporting was designed and operating effectively. John C. Lechleiter, Ph.D. Chairman, President, and Chief Executive Officer February 19, 2015 Derica W. Rice Executive Vice President, Global Services and Chief...

  • Page 103
    .... We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eli Lilly and Company and subsidiaries' internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework...

  • Page 104
    ..., effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2014 consolidated financial statements of Eli Lilly and Company and...

  • Page 105
    ...) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except revenue per employee and per-share data) 2014 2013 2012 2011 2010 Operations Revenue ...$ 19,615.6 $ 23,113.1 $ 22,603.4 $ 24,286.5 $ 23,076.0 Cost of sales ...4,932.5 4,908.1 4,796.5 5,067.9 4,366.2 Research and development...

  • Page 106
    ... Lilly stock, the S&P 500 Stock Index, and the peer groups' 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 of $100 Invested on Last Business...

  • Page 107
    ... 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 may...

  • Page 108

  • Page 109
    Notice of 2015 Annual Meeting of Shareholders and Proxy Statement Your vote is important Please vote by using the Internet, telephone, or by signing, dating, and returning the enclosed proxy card.

  • Page 110
    ... Notice of Annual Meeting of Shareholders Proxy Statement Overview Governance Item 1 - Election of Directors Board Operations and Governance Director Compensation Director Independence Committees of the Board of Directors Membership and Meetings of the Board and Its Committees Board Oversight of...

  • Page 111
    ..., May 4, 2015 The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285 ITEMS OF BUSINESS: Election of the four directors listed in the proxy statement to serve three-year terms Approval, by non-binding vote, of the compensation paid to the company's named executive officers...

  • Page 112
    ... the resources necessary to launch three major new products, aggressively advance our pipeline of potential new medicines, and provide appropriate capital returns to our shareholders: • • A freeze on salary increases for most employees, including executive officers; and A one-time reduction of...

  • Page 113
    ... cell non-small cell lung cancer Positive results in final-stage clinical trials for ixekizumab for psoriasis and baricitinib for rheumatoid arthritis. Returns to Shareholders We achieved strong total shareholder returns (share price appreciation plus dividends, reinvested quarterly) for the one...

  • Page 114
    ... is marked by leadership, experience, and diversity. All 13 of our nonemployee directors, and all Board committee members, are independent. We have a strong, independent lead director role. Our Board actively participates in company strategy and CEO/senior executive succession planning. Our Board...

  • Page 115
    ...for 2014 The total compensation paid to our named executive officers (the five officers whose compensation is disclosed in this proxy statement) for 2014 remained in the middle range of the company's peer group. Consistent with the pay freeze for most company employees for 2014, there were no salary...

  • Page 116
    ...Annual Growth Actual Annual Growth Target Multiple Actual Multiple 2014 Shareholder Value Award Multiple We significantly exceeded our stock price growth targets under our Shareholder Value Award program, which targets are based on expected large-cap company returns over a three-year period. 2012...

  • Page 117
    ... information on how to vote is provided at the end of the proxy statement under "Meeting and Voting Logistics". Voting at our 2015 Annual Meeting You may also opt to vote in person at the 2015 Annual Meeting, which will be held on Monday, May 4, 2015 at the Lilly Corporate Center, Indianapolis...

  • Page 118
    ... annual meeting of shareholders held in 2018. Each of the nominees listed below has agreed to serve that term. If any director is unable to stand for election, the Board may, by resolution, provide for a lesser number of directors or designate a substitute. The following sections provide information...

  • Page 119
    ... of Directors" below for more information. Katherine Baicker, Ph.D., age 43, director since 2011 Board Committees: Audit; Public Policy and Compliance Career Highlights Harvard University School of Public Health, Department of Health Policy and Management • • Professor of health economics...

  • Page 120
    ... 2012 Board Committees: Compensation; Directors and Corporate Governance (chair) Career Highlights The Barnegat Group LLC, provider of business advisory services • • President (2006 - present) Managing Director (2000 - 2006) Other Board Service Public boards: Ford Motor Company, The New York...

  • Page 121
    ...markets. R. David Hoover, age 69, director since 2009 Board Committees: Finance; Public Policy and Compliance Career Highlights Ball Corporation, a provider of packaging products and other technologies and services to commercial and governmental customers Chairman (2002 - 2013) President and Chief...

  • Page 122
    ... Committees: Audit (chair); Finance Career Highlights United Parcel Service, Inc Chairman and Chief Executive Officer (2002 - 2007) UPS Board of Directors (1998 - 2014) Vice Chairman (2000 - 2002) • Other Board Service • Public boards: 3M Corporation; IBM Corporation; Allstate Insurance Company...

  • Page 123
    ... corporate governance experience through service on other public company boards in a variety of industries. William G. Kaelin, Jr., M.D., age 57, director since 2012 Board Committees: Finance; Science and Technology Career Highlights Dana-Farber/Harvard Cancer Center • • Professor of Medicine...

  • Page 124
    ... Ph.D., age 60, director since 2013 Board Committees: Science and Technology; Public Policy and Compliance Career Highlights University of Michigan • Executive Vice President for Medical Affairs (since March 2015) Industry Memberships • Experimental Cardiovascular Sciences Study Section of the...

  • Page 125
    ... Directors and Corporate Governance Committee, which receives input from other Board members. Potential directors are identified from several sources, including executive search firms retained by the committee, incumbent directors, management, and shareholders. The committee employs the same process...

  • Page 126
    ... to this account. The number of shares credited is calculated by dividing the $145,000 annual compensation figure by the closing stock price on a pre-set annual date. Funds in this account are credited as hypothetical shares of company stock based on the market price of the stock at the time the...

  • Page 127
    ... by Directors and Executive Officers" table in the "Stock Units Not Distributable Within 60 Days" column. This column consists of amounts donated by the Eli Lilly and Company Foundation, Inc. ("Foundation") under its matching gift program, which is generally available to U.S. employees as well as...

  • Page 128
    .... Brigham and Women's Hospital Dana-Farber Cancer Institute Mayo Clinic and Mayo Medical School Employee Employee of affiliated Mayo Clinic and Mayo Medical School Executive Officer Research grants Less than 0.1 percent F. G. Prendergast Mayo Foundation M. S. Runge University of North Carolina...

  • Page 129
    ... the company's global compensation philosophy and policies; Establishes the compensation of our chief executive officer and other executive officers; Acts as the oversight committee with respect to the company's deferred compensation plans, management stock plans, and other management incentive...

  • Page 130
    ...Dividends; Stock repurchases; Capital expenditures; Investments, financings and borrowings; Financial risk management; and Significant business-development opportunities. Public Policy and Compliance Committee • Oversees the processes by which the company conducts its business so that the company...

  • Page 131
    ...internal processes and controls. The enterprise risk management program as a whole is reviewed annually at a joint meeting of the Audit and Public Policy and Compliance Committees, and enterprise risks are also addressed in periodic business unit reviews and at the annual board and senior management...

  • Page 132
    ... least every three years when considering whether to nominate the director to a new three-year term. Other Board Service No director may serve on more than three other public company boards. The Directors and Corporate Governance Committee may approve exceptions if it determines that the additional...

  • Page 133
    ...Committee, Board and CEO annually review the company's succession plans for the CEO and other key senior leadership positions. During these reviews, the CEO and independent directors discuss future candidates for the CEO and other senior leadership positions, succession timing, and development plans...

  • Page 134
    ... 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 relatedperson transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant SEC rules...

  • Page 135
    ..., vice president, chief marketing officer, Lilly Bio-Medicines, is the spouse of Dr. Susan Mahony, an executive officer. Myles O'Neill, senior vice president, global drug products, is the spouse of Dr. Fionnuala Walsh, an executive officer. Finally, Andrew Lechleiter, associate brand manager, global...

  • Page 136
    ... proxy statement, he or she must submit the proposal in writing so that we receive it by November 24, 2015. Proposals 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...

  • Page 137
    ... sets forth the number of shares of company common stock beneficially owned by the directors, the named executive officers, and all directors and executive officers as a group, as of February 20, 2015. None of the stock, stock options, or stock units owned by any of the listed individuals has been...

  • Page 138
    ... shares of the company's common stock, as of December 31, 2014, are the shareholders listed below: Name and Address Lilly Endowment, Inc. (the Endowment) 2801 North Meridian Street Indianapolis, Indiana 46208 BlackRock, Inc. 55 East 52nd Street New York, New York 10022 Wellington Management Group...

  • Page 139
    ... and company performance. As employees assume greater responsibilities, the proportion of total compensation based on company performance and shareholder returns increases. We perform an annual review to ensure the programs provide incentive to deliver long-term, sustainable business results...

  • Page 140
    ... committee included these three companies despite their size because they compete directly with Lilly, have similar business models, and seek to hire from the same pool of management and scientific talent. In the aggregate, the company's total compensation to Named Executive Officers (NEOs) in 2014...

  • Page 141
    ... equity awards that pay out based on company stock price growth over a three-year period. Executives also receive the company benefits package, described below under "Employee Benefits". Adjustments to reported financial results The Compensation Committee has authority to adjust the reported revenue...

  • Page 142
    ... performance relative to peer companies and the SVAs align compensation with long-term growth in shareholder value. The Compensation Committee has the discretion to adjust downward (but not upward) any executive officer's equity award payout from the amount yielded by the applicable formula...

  • Page 143
    ... is based on this expected rate of return less the company's dividend yield, applied to the starting share price. Executive officers receive no payout if TSR for the three-year period is zero or negative. Performance and Holding Periods for SVAs 2012 2012-2014 SVA 2013-2015 SVA 2014-2016 SVA 2015...

  • Page 144
    ... the company has made excellent progress with the diabetes pipeline and insulin manufacturing technical agenda. The information in the section below reflects target total compensation for executive officers for 2014. The actual payouts made to the NEOs in the form of the 2014 annual bonus and equity...

  • Page 145
    ... role and a desire to position him more competitively in the market. The committee determined that for all NEOs a 50/50 split between PAs and SVAs appropriately balances company financial performance with shareholder return. Total target values for the 2014 equity grant to the NEOs were as follows...

  • Page 146
    ... or negative. The target share price growth of 4.1 percent per year is comparable to an annual total shareholder return of 7.8 percent. Possible payouts are illustrated in the grid below. Ending Stock Price Compounded Annual Share Price Growth Rate (excluding dividends) Percent of Target Less than...

  • Page 147
    ... Committee certified a pipeline score of 3.5, resulting in a pipeline multiple of 1.25. Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus multiple of 1.10. The company bonus multiple was reduced by 0.25 for 2014 in order to manage operating expenses to allow the company...

  • Page 148
    ...January 2012 based on a beginning stock price of $38.64, which was the average closing price for Lilly stock for all trading days in November and December 2011. The ending stock price of $69.13 represents stock price growth of approximately 79 percent over the relevant three-year period. The company...

  • Page 149
    ... medical and dental coverage, disability insurance, and life insurance. In addition, The Lilly Employee 401(k) plan (the 401(k) plan) and The Lilly Retirement Plan (the retirement plan) provide U.S. employees a reasonable level of retirement income reflecting employees' careers with the company...

  • Page 150
    ...-rated basis for time worked up to the change in control based on the merger price for company stock. • Covered terminations. Employees are eligible for payments if, within two years of the change in control, their employment is terminated (i) without cause by the company or (ii) for good reason...

  • Page 151
    ... fixed number of shares based on their position. Until the required number of shares is reached, the executive officer must retain 50 percent of net shares received from new equity payouts. Our executives have a long history of maintaining extensive holdings in company stock. As of February 20, 2015...

  • Page 152
    ... Rice Executive Vice President, Global Services and Chief Financial Officer Jan M. Lundberg, Ph.D. Executive Vice President, Science and Technology and President, Lilly Research Laboratories Michael J. Harrington Senior Vice President and General Counsel 2014 2013 2012 2014 2013 2012 2014 2013 2012...

  • Page 153
    ... the pension benefits for Dr. Lechleiter and Mr. Rice reflect no change from 2013 due to an increase in the discount rate over 2012. For the other named executive officers, increases in pensionable earnings offset the impact of the increased discount rate. Grants of Plan-Based Awards During 2014 The...

  • Page 154
    ... Unexercised Options (#) Exercisable 1 Option Exercise Price ($) Option Expiration Date Award 2014-2016 SVA 2013-2015 SVA 2014-2015 PA 2013-2014 PA 2012-2013 PA Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) $11,878...

  • Page 155
    ... period. The number of shares reported reflects the maximum payout, which will be made if the average closing stock price in November and December 2016 is over $65.44. Actual payouts may vary from 0 to 140 percent of target. Net shares from any payout must be held by executive officers for a minimum...

  • Page 156
    ... be paid from a tax-qualified plan ($260,000 in 2014) as well as the amount of annual earnings that can be used to calculate a pension benefit ($265,000 in 2015). However, since 1975 the company has maintained a nonqualified pension plan that pays retirees the difference between the amount payable...

  • Page 157
    ... the company longer. For the transition group, early retirement benefits are reduced 3 percent for each year from age 65 to age 60 and 6 percent for each year under age 60. All named executive officers except Dr. Lundberg are in this transition group. Pre-2010 Plan Information: Employees hired prior...

  • Page 158
    ...(d) of the Internal Revenue Code with monthly compounding, which was 3.9 percent for 2014 and is 3.2 percent for 2015. Participants may elect to receive the funds in a lump sum or in up to 10 annual installments following retirement, but may not make withdrawals during their employment, except in...

  • Page 159
    ...in Control (as of December 31, 2014) 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 for certain terminations following...

  • Page 160
    ... compensation plan. Those balances are shown in the "Nonqualified Deferred Compensation in 2014" table. Death and Disability. A termination of employment due to death or disability does not entitle named executive officers to any payments or benefits that are not available to U.S. salaried employees...

  • Page 161
    ... the committee chair. Role of Executive Officers and Management In Assessing Executive Compensation With the oversight of the CEO and the senior vice president of human resources and diversity, the company's global compensation group formulates recommendations on compensation philosophy, plan design...

  • Page 162
    ... compensation for executive officers and oversees the deferred compensation plan, the company's management stock plans, and other management incentive and benefit programs. Management has the primary responsibility for the company's financial statements and reporting process, including the...

  • Page 163
    ... independent auditor for 2015. Audit Committee Report The Audit 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 internal controls and...

  • Page 164
    ... 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. The committee also periodically meets in executive...

  • Page 165
    ... Shareholders as of the close of business on February 27, 2015 (the record date) may vote at the annual meeting. You have one vote for each share of common stock you held on the record date, including shares: • held directly in your name as the shareholder of record • held for you in an account...

  • Page 166
    ... these proposals. Quorum A majority of the outstanding shares, present or represented by proxy, constitutes a quorum for the annual meeting. As of the record date, 1,111,005,041 shares of company common stock were issued and outstanding. Voting by proxy If you are a shareholder of record, you may...

  • Page 167
    ...a small number of shares from a prior stock ownership plan, which can be voted only on the directions of the participants to whose accounts the shares are credited). All participants are named fiduciaries under the terms of the 401(k) plan and under the Employee Retirement Income Security Act (ERISA...

  • Page 168
    ... 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 on that review...

  • Page 169
    ... EPS consistent with our reporting of non-GAAP financial measures: • • Eliminated the impact of the charge for an extra year of the U.S. Branded Prescription Drug Fee. Eliminated the impact of the charges recognized for acquired in-process research and development related to collaboration...

  • Page 170
    ... reporting of non-GAAP financial measures 2014: Eliminated the impact of the charge for an extra year of the U.S. Branded Prescription Drug Fee. 2014 and 2013: Eliminated the impact of the charges recognized for acquired in-process research and development related to acquisitions and in-licensing...

  • Page 171
    ... Admission Ticket Eli Lilly and Company 2015 Annual Meeting of Shareholders Monday, May 4, 2015 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 172
    ... OF THIS PAGE WITH YOU TO THE MEETING. Detach here Detach here Eli Lilly and Company Annual Meeting of Shareholders May 4, 2015 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 by...

  • Page 173
    ..., Global Services, and Chief Financial Officer William F. Heath Jr., Ph.D. Senior Vice President, Product and Clinical: Design, Development, and Delivery David A. Ricks Senior Vice President, and President, Lilly Bio-Medicines Andrew Hotchkiss President, Europe/Australia/Canada Operations...

  • Page 174
    ..., Lilly Corporate Center, Indianapolis, Indiana, on Monday, May 4, 2015, at 11:00 a.m. EDT. For more information, see the proxy statement section of this report. 10-K and 10-Q reports Paper copies of the company's annual report to the Securities and Exchange Commission on Form 10-K and quarterly...

  • Page 175
    ... find new, sustainable global health solutions, and working to expand access to people who need our medicines. IMPROVING GLOBAL HEALTH Our signature global health programs-the Lilly NCD Partnership and the Lilly MDR-TB Partnership-are helping to improve health outcomes and expand access to medicines...

  • Page 176
    ...race interview on national television, Ryan-a Lilly Diabetes ambassador- reminded others with diabetes that they can accomplish their goals. For more on Ryan's story, visit www.drivetostopdiabetes.org. Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA 317-276-2000 • www...