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MAKE IT BETTER AND BETTER
ELI LILLY AND COMPANY 2015 ANNUAL REPORT AND PROXY STATEMENT

Table of contents

  • Page 1
    MAKE IT BETTER AND BETTER ELI LILLY AND COMPANY 2015 ANNUAL REPORT AND PROXY STATEMENT

  • Page 2
    YEARS OF SERVICE Lilly is introducing an integrated report for 1015, combining two traditional publications: our annual report, covering our business and financial results, and our corporate responsibility report, focused on our broad-based social and environmental goals, activities, and impacts. ...

  • Page 3
    ... global economy, a significant slowdown in China, and continued pricing pressures in the United States and other established markets. In 2015, Lilly achieved significant advances in our pipeline of molecules in clinical development. Highlights include: in diabetes, positive cardiovascular outcomes...

  • Page 4
    ... Europe, and Latin America. In addition, our employees worldwide have volunteered 825,000 hours since 2008 through our annual Global Day of Service. And in 2015, we built on our legacy of support for United Way by initiating a partnership approach that includes pairing Lilly teams with United Way...

  • Page 5
    ... promoting ethics and transparency throughout the company, instilling responsible supply chain management, tackling the problem of counterfeit medicines, ensuring the ethical care and use of animals in research, and fostering environmental stewardship. Improving Global Health At Lilly, we share the...

  • Page 6
    ... 1982 1996 ILETIN® Lillyfintroducesf animal-sourcef insulin,fthef world'sffirstf commerciallyf availablefinsulinf product,fforfthef treatmentfoff diabetes. VANCOCIN® Lillyfintroducesfvancomycinfhydrochloride,f anfantibioticfforfinfectionsfassociatedf f withfcertainftypesfoffresistantfbacteria...

  • Page 7
    ELI LILLY AND COMPANY 2015 FINANCIAL REPORT NOTICE OF 2016 ANNUAL MEETING PROXY STATEMENT

  • Page 8
    ... financial statements. 2 Numbers may not add due to rounding. 3 The 2015 employment total reflects additions from the acquisition of Novartis Animal Health on January 1, 2015. Revenue Growth Across Therapeutic Areas ($ millions, percent growth) Return on Assets and Shareholders' Equity Total...

  • Page 9
    ... Statements...Management's Reports ...Reports of Independent Registered Public Accounting Firm ...Selected Financial Data ...Trademarks Used in this Report ...PROXY Notice of Annual Meeting of Shareholders . . Governance ...Compensation...Audit Matters ...Shareholder Proposal ...Other Information...

  • Page 10

  • Page 11
    FINANCIAL REPORT 2015 Financial Report

  • Page 12
    ... Income Consolidated Balance Sheets Consolidated Statements of Shareholder's Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Management's Reports Reports of Independent Registered Public Accounting Firm Selected Financial Data Trademarks Used in this Report F1...

  • Page 13
    ... and restructuring charges; • changes in accounting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission; • acquisitions and business development transactions and related integration costs; • information technology system inadequacies or...

  • Page 14
    ... drug manufacturing business founded in Indianapolis, 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...

  • Page 15
    ..., and approved in 2016 in the EU for use in combination with other agents as a first-line treatment for epidermal growth factor receptor expressing squamous NSCLC Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia • Cardiovascular products, including: • F3

  • Page 16
    ... animal health manufacturing and research and development. In particular, it has provided Elanco with a greater commercial presence in the companion animal and swine markets, expanded Elanco's presence in equine and vaccines areas, and created an entry into the aquaculture market. Acquired Novartis...

  • 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
    ... companies that operate animal health businesses. Important competitive factors for both human pharmaceutical and animal health products include effectiveness, safety, and ease of use; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products...

  • Page 19
    ... Ingelheim we have developed Basaglar, a new insulin glargine product which has the same amino acid sequence as the product currently marketed by a competitor. Our product has launched in the EU and Japan, and can be launched in the U.S. on December 15, 2016. U.S. Private Sector Payer Consolidation...

  • Page 20
    ... the Biologics Price Competition and Innovation Act of 2010, the FDA has the authority to approve biosimilars. A competitor seeking approval of a biosimilar must file an application to show its molecule is highly similar to an approved innovator biologic and include a certain amount of safety and...

  • Page 21
    ... 2021) Cialis in major European countries (compound patent November 2017) Cymbalta in Japan (data package protection 2018). In major European countries, our Cymbalta data package protection expired in 2014, and we experienced the entry of generic competitors in 2015 in these markets. Forteo in Japan...

  • Page 22
    ... 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 providing the FDA complete safety...

  • Page 23
    ...animal, and in the case of food animal products, the impact on humans who consume the food as well as the impact on the environment at the production site. The laws and regulations affecting the manufacture and sale of current products and the discovery, development, and introduction of new products...

  • Page 24
    ...provide prescription drug benefits to their customers. These rebates are affected by the introduction 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...

  • Page 25
    ... 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 scientists also leverage discoveries from our human health laboratories to develop products...

  • Page 26
    ...place at a number of sites throughout the world. We utilize third parties for certain active ingredient manufacturing and finishing operations. We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way that should allow us to meet all expected product...

  • Page 27
    ... safety and effectiveness. Product quality arises from a total commitment to quality in all parts of our operations, including research and development, purchasing, facilities planning, manufacturing, distribution, and dissemination of information about our medicines. Quality of production processes...

  • Page 28
    ... Japan, Europe, and many countries in the emerging markets. For biological products (such as Humalog, Humulin, Erbitux, and Cyramza), loss of exclusivity may or may not result in the near-term entry of competitor versions (i.e., biosimilars) due to development timelines, manufacturing challenges...

  • Page 29
    ... details. FINANCIAL REPORT • Our human pharmaceutical business is subject to increasing government price controls and other public and private restrictions on pricing, reimbursement, and access for our drugs, which could have a material adverse effect on our business. Public and private payers...

  • Page 30
    ... companies, and generic pharmaceutical companies. To compete successfully, we must continue to deliver to the market innovative, cost-effective products that meet important medical needs. Our product revenues can be adversely affected by the introduction by competitors of branded products...

  • Page 31
    ... wrongful conduct by employees or others with permitted access to our systems and data, or wrongful conduct by certain governments, hackers, unethical competitors, or former workforce members. The rapid growth of factors such as mobile computing capacity, high-speed Internet access, and social media...

  • Page 32
    ...quality or regulatory compliance problems, natural disasters, mechanical or information technology system failures, or inability to obtain sole-source raw or intermediate materials. In addition, given the difficulties in predicting sales of new products and the very long lead times necessary for the...

  • Page 33
    ... companies, and third-party service providers, for selected aspects 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...

  • Page 34
    ... on a diluted basis. Financial Results The following table summarizes our key operating results: Year Ended, December 31, 2015 2014 Percent Change from 2014 Revenue Gross margin Gross margin as a percent of revenue Operating expense (1) Acquired in-process research and development Asset impairment...

  • Page 35
    ....0 million (non-tax deductible), or $0.11 per share, for an extra year of the United States Branded Prescription Drug Fee (U.S. Drug Fee) due to final regulations issued by the Internal Revenue Service (IRS) which required us to accelerate into 2014 the recording of an expense for the 2015 fee. 23...

  • Page 36
    ... severe hypoglycemia in patients with diabetes treated with insulin. Olaratumab* (Q3 2015)-a human lgG1 monoclonal antibody for the treatment of advanced soft tissue sarcoma. Solanezumab* (Q2 2009)-an anti-amyloid beta monoclonal antibody for the treatment of preclinical and mild Alzheimer's disease...

  • Page 37
    ... financial statements for information on the acquisition. Initiated Phase III study in July 2015. Launched in first quarter of 2015 in Japan. In first quarter of 2016, the U.S. Food and Drug Administration (FDA) accepted data from long-term clinical trial investigating cardiovascular (CV) outcomes...

  • Page 38
    FINANCIAL REPORT Compound Indication Immunology U.S. Europe Japan Developments Baricitinib Rheumatoid arthritis Psoriasis Ixekizumab Psoriatic arthritis Neuroscience CGRP monoclonal antibody Cluster headache Migraine prevention Preclinical Alzheimer's disease Announced in February, ...

  • Page 39
    ... in II Europe in first quarter of 2016. Launched Phase III Olaratumab Soft tissue sarcoma Phase III Portrazza Metastatic squamous NSCLC (first-line) Launched Approved (1) The FDA Fast Track designation is designed to facilitate the development, and expedite the review, of drugs which treat...

  • Page 40
    ... countries in 2014. In 2015, we saw the entry of generic competition in all major European markets. The loss of exclusivity for Cymbalta in the European markets has caused a rapid and severe decline in revenue for the product, which over time will, in the aggregate, have a material adverse effect on...

  • Page 41
    ... in January 2017, and expired in major European countries and Japan in December 2015. We expect that the entry of generic competition for Alimta into these markets following the loss of effective patent protection will cause a rapid and severe decline in revenue for the product, which will, in the...

  • Page 42
    ...or international tax framework could have a material adverse effect on our consolidated operating results and cash flows. Operating Results-2015 Revenue The following table summarizes our revenue activity by jurisdiction: Year Ended, December 31, 2015 2014 Dollars Change in Percent FINANCIAL REPORT...

  • Page 43
    ...: 2015 vs. 2014 U.S. Outside U.S. Consolidated FINANCIAL REPORT Volume Price Foreign exchange rates Percent change Numbers may not add due to rounding. 6% 5% -% 11% 9% (2)% (13)% (6)% 8% 1% (7)% 2% In the U.S., the volume increase in 2015 was driven by the inclusion of revenue from Novartis AH...

  • Page 44
    ... of foreign exchange rates, largely offset by increased volume. Revenues of Effient, a product for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary...

  • Page 45
    On a pro forma basis, which reflects the 2014 revenues of Novartis AH as described in Note 3 to the consolidated financial statements, revenues of animal health products in the U.S. would have decreased 1 percent, driven primarily by decreased volume in food animal products. Revenues outside the ...

  • Page 46
    FINANCIAL REPORT Operating Results-2014 Financial Results The following table summarizes our key operating results: Year Ended, December 31, 2014 2013 Percent Change from 2013 Revenue Gross margin Gross margin as percent of revenue Operating expense (1) Acquired in-process research and development...

  • Page 47
    ... Product U.S.(1) Outside U.S. Total Year Ended December 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 revenue Collaboration and other revenue(2) Revenue...

  • Page 48
    ... $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 49
    ... shareholders. Dividends of $2.00 per share and $1.96 per share were paid in 2015 and 2014, respectively. In the fourth quarter of 2015, effective for the dividend to be paid in the first quarter of 2016, the quarterly dividend was increased to $0.51 per share, resulting in an indicated annual rate...

  • Page 50
    ... future 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...

  • Page 51
    ... 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 52
    ..., 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 rebate and discount contracts...

  • Page 53
    ... basis as liabilities and assets, respectively, on our consolidated balance sheets. Retirement Benefits Assumptions Background and Uncertainties Defined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate, retirement age, and expected return on plan...

  • Page 54
    ... our past employees eligible for pension and medical benefits together with our expectations of future retirement ages. Financial Statement Impact If the 2015 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to change by a quarter percentage point...

  • Page 55
    ...' tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements...

  • Page 56
    ... not limited to, revenue and the discount rate. Financial Statement Impact As of December 31, 2015, a 5 percent change in the contingent consideration liability would result in a change in income before income taxes of $33.5 million. LEGAL AND REGULATORY MATTERS Information relating to certain legal...

  • Page 57
    ... Consolidated Statements of Operations ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions and shares in thousands, except per-share data) Year Ended December 31 2015 2014 2013 FINANCIAL REPORT Revenue Costs, expenses, and other: Cost of sales Research and development Marketing, selling...

  • Page 58
    ... 31 2015 2014 2013 Net income 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 in effective portion of cash flow hedges...

  • Page 59
    ... benefits (Note 14) Long-term income taxes payable (Note 13) Other noncurrent liabilities Total other liabilities Commitments and Contingencies (Note 15) Eli Lilly and Company Shareholders' Equity (Notes 11 and 12) Common stock-no par value Authorized shares: 3,200,000 Issued shares: 1,106,063 (2015...

  • Page 60
    ... Shareholders' Equity Shares Amount Balance at January 1, 2013 Net income Other comprehensive income (loss), net of tax Cash dividends declared per share: $1.96 Retirement of treasury shares Purchase for treasury Issuance of stock under employee stock plans, net Stock-based compensation Balance...

  • Page 61
    ... 2015 2014 2013 FINANCIAL REPORT Cash Flows from Operating Activities Net income Adjustments to Reconcile Net Income to Cash Flows from Operating Activities: Depreciation and amortization Change in deferred income taxes Stock-based compensation expense Acquired in-process research and development...

  • Page 62
    ... plus the effect of incremental shares from our stock-based compensation programs. Revenue recognition We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. Provisions for returns, discounts, and rebates...

  • Page 63
    ...research and development (IPR&D) expense includes the initial costs of IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use. Earnings per share We calculate basic earnings per share (EPS) based on the weighted-average number...

  • Page 64
    ...Standard Description Effective Date Accounting Standards Update 2014-09, Revenue from Contracts with Customers This standard will replace existing revenue recognition standards and will require entities to recognize revenues to depict the transfer of promised goods or services to customers in an...

  • Page 65
    ... standard that has been adopted: Effect on the financial statements or other significant matters FINANCIAL REPORT Standard Description Effective Date Accounting Standards Update 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes This standard simplifies the presentation of...

  • Page 66
    ... the acquisition of Novartis AH, we divested certain animal health assets in the U.S. related to the Sentinel® canine parasiticide franchise to Virbac Corporation for approximately $410 million. The acquired Novartis AH business consists of the research and development, manufacture, marketing, sale...

  • Page 67
    ...reflect the statutory tax rates in the various jurisdictions where the fair value adjustments occurred. Lohmann AH Acquisition On April 30, 2014, we acquired Lohmann AH, a privately-held company headquartered in Cuxhaven, Germany, through a stock purchase for a total purchase price of $591.2 million...

  • Page 68
    ...to acquisition, Innovent's monoclonal antibody targeting protein CD-20 had received investigational new drug approval in China to begin Phase I development. In connection with the arrangements described herein, our partners may be entitled to future royalties based on sales should these products be...

  • Page 69
    ... in net product revenues, while other sources of revenue (e.g., royalties and profit sharing due from our partner) are included in collaboration and other revenue. The following table summarizes our collaboration and other revenue recognized: 2015 2014 2013 FINANCIAL REPORT Collaboration and...

  • Page 70
    ...U.S. Food and Drug Administration (FDA) approval in December 2015. As a result of receiving FDA approval, we received $187.5 million in 2016, which was recorded as deferred revenue and will be amortized through the term of the collaboration to collaboration and other revenue upon product launch. The...

  • Page 71
    ... rights was accounted for as an acquisition of a business. The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date: Estimated Fair Value at October 1, 2015 Marketed products(1) Deferred tax asset Deferred tax liability...

  • Page 72
    ... financial information does not attempt to project the future results of operations of our combined company. Until the effective date of the transfer of the business, the arrangements between us and BMS were as set forth in this paragraph. Erbitux research and development and other costs were shared...

  • Page 73
    ... manufacturer are recorded in cost of sales. The following table summarizes our revenue recognized with respect to Effient: 2015 2014 2013 FINANCIAL REPORT Revenue Baricitinib $ 523.0 $ 522.2 $ 508.7 We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte...

  • Page 74
    ...during the first quarter of 2013 was recognized as a gain on the disposition of a business in other-net, (income) expense, net of the goodwill allocated to the business transferred. Under the terms of our prior arrangement, we reported as net product revenues 100 percent of sales outside the U.S. We...

  • Page 75
    ... to close an animal health manufacturing plant located in Ireland. As a result of this action, we expect to record charges of approximately $100 million in our animal health business segment during the first quarter of 2016. Note 6: Inventories We state all inventories at the lower of cost or market...

  • Page 76
    ... activities in our consolidated statement of cash flows. At December 31, 2015, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 40 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. We may enter...

  • Page 77
    ... Consolidated Statement of Operations The following effects of risk-management instruments were recognized in other-net, (income) expense: 2015 2014 2013 FINANCIAL REPORT Fair value hedges: Effect from hedged fixed-rate debt Effect from interest rate contracts Cash flow hedges: Effective portion...

  • Page 78
    ... 2) Description Carrying Amount Cost (1) Significant Unobservable Inputs (Level 3) Fair Value December 31, 2015 Cash equivalents $ 1,644.4 $ 1,644.4 $ 1,637.0 $ 7.4 $ - $ 1,644.4 Short-term investments: U.S. government and agency securities $ Corporate debt securities Asset-backed...

  • Page 79
    ... Markets for Identical Assets (Level 1) FINANCIAL REPORT Description Carrying Amount Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Short-term commercial paper borrowings December 31, 2015 $ - $ December 31, 2014 (2,680.6) Long-term debt...

  • Page 80
    ...was estimated using a discounted cash flow analysis and Level 3 inputs, including projections representative of a market participant view for net sales in North America over the three-year period ending in September 2018 and an estimated discount rate. The amount to be paid is calculated as a tiered...

  • Page 81
    ... approval for marketing. Other finite-lived intangibles consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies, and customer relationships from business combinations. Acquired IPR&D consists...

  • Page 82
    ... 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 trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate...

  • Page 83
    ... If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted. At December 31, property and equipment consisted of the following: 2015 2014 FINANCIAL REPORT Land Buildings Equipment Construction in progress...

  • Page 84
    ... in excess of the compensation cost recognized for stock-based compensation as a financing cash flow in the consolidated statements of cash flows. Stock-based compensation expense and the related tax benefits were as follows: 2015 2014 2013 Stock-based compensation expense Tax benefit $ 217.8 76...

  • Page 85
    ... is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2015, 2014, and 2013...

  • Page 86
    ... 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, 2015 and 2014, and is shown as a reduction in shareholders' equity. Any dividend transactions between us and the trust are eliminated. Stock held...

  • Page 87
    ...of December 31 are as follows: 2015 2014 FINANCIAL REPORT Deferred tax assets: Compensation and benefits Purchases of intangible assets Tax credit carryforwards and carrybacks Tax loss carryforwards and carrybacks Contingent consideration Product return reserves Other comprehensive loss on hedging...

  • Page 88
    ... fourth quarter of 2013 and is expected to conclude in the first quarter of 2016. In December 2015, we executed a closing agreement with the Internal Revenue Service which effectively settled certain matters for tax years 2010-2012. Accordingly, we have reduced our gross uncertain tax positions by...

  • Page 89
    ... pension and retiree health benefit plans, which were as follows: Defined Benefit Pension Plans 2015 2014 Retiree Health Benefit Plans 2015 2014 FINANCIAL REPORT Change in benefit obligation: Benefit obligation at beginning of year Benefit obligation assumed in Novartis AH acquisition Service cost...

  • Page 90
    ...: Defined Benefit Pension Plans 2015 2014 2013 Retiree Health Benefit Plans 2015 2014 2013 (Percents) Discount rate for benefit obligation Discount rate for net benefit costs Rate of compensation increase for benefit obligation Rate of compensation increase for net benefit costs Expected return on...

  • Page 91
    Net pension and retiree health benefit expense included the following components: Defined Benefit Pension Plans 2014 Retiree Health Benefit Plans 2014 FINANCIAL REPORT 2015 2013 2015 2013 Components of net periodic (benefit) cost: Service cost Interest cost Expected return on plan assets ...

  • Page 92
    ... both directly into funds and through fund-of-funds structures to ensure broad diversification of management styles and assets across the portfolio. Plan holdings in private equity-like investments are valued using the value reported by the partnership, adjusted for known cash flows and significant...

  • Page 93
    ... (Level 3) FINANCIAL REPORT Asset 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...

  • Page 94
    ...Funds Equity-like Funds Real Estate Total Defined Benefit Pension Plans Beginning balance at January 1, 2015 $ Actual return on plan assets, including changes in foreign exchange rates: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, sales...

  • Page 95
    ... (Level 3) FINANCIAL REPORT Asset 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...

  • Page 96
    ... Purchases, sales, and settlements, 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 rates: Relating to assets still held at the reporting...

  • Page 97
    ... cases have been stayed pending the outcome of the Teva/APP litigation, and these parties have agreed to be bound by the outcome of the Teva/ APP litigation. In 2015, Neptune Generics LLC and Sandoz International GmbH each submitted petitions to the United States Patent and Trademark Office (USPTO...

  • Page 98
    ... of Alimta were approved in Japan in February 2016. We filed preliminary injunctions against four generic competitors. We do not anticipate generic competitors to proceed to launch prior to the completion of the Sawai invalidation trial. Effient Patent Litigation and Administrative Proceedings...

  • Page 99
    ... to defend against them vigorously. Cymbalta® Product Liability Litigation In October 2012, we were named as a defendant in a purported class-action lawsuit in the U.S. District Court for the Central District of California (Saavedra et al v. Eli Lilly and Company) involving Cymbalta. The plaintiffs...

  • Page 100
    ... the facility. In May 2014, the labor court judge ruled against Lilly Brasil. The judge's ruling orders Lilly Brasil to undertake several actions of unspecified financial impact, including paying lifetime medical insurance for the employees and contractors who worked at the Cosmopolis facility more...

  • Page 101
    ... Gains (Losses) Defined Benefit Pension and Retiree Health Benefit Plans Effective Portion of Cash Flow Hedges Accumulated Other Comprehensive Loss FINANCIAL REPORT (Amounts presented net of taxes) Unrealized Net Gains (Losses) on Securities Beginning balance at January 1, 2013 $ Other...

  • Page 102
    ... Information We operate in two business segments-human pharmaceutical products and animal health. Our business segments are distinguished by the ultimate end user of the product-humans or animals. Performance is evaluated based on profit or loss from operations before income taxes. The accounting...

  • Page 103
    ...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 both food and companion animals. Animal health...

  • Page 104
    FINANCIAL REPORT 2015 2014 2013 Oncology: Alimta Erbitux Cyramza® Other Oncology Total Oncology Cardiovascular: Cialis® Effient Other Cardiovascular Total Cardiovascular Other pharmaceuticals Total human pharmaceutical products Animal health Revenue Segment profits: Human pharmaceutical ...

  • Page 105
    ... with treasury-related financing, global administrative services, certain acquisition-related transaction costs, and certain manufacturing costs. 2015 2014 2013 Geographic Information Revenue-to unaffiliated customers(1): United States Europe Japan Other foreign countries Revenue Long-lived assets...

  • Page 106
    ...Selected Quarterly Data (unaudited) 2015 Fourth Third Second First Revenue Cost of sales Operating expenses(1) Acquired in-process research and development Asset impairment, restructuring, and other special charges Other-net, (income) expense Income before income taxes Net income Earnings per share...

  • Page 107
    ...by management. In management's opinion, the consolidated financial statements present fairly our financial position, results of operations, and cash flows. In addition to the system of internal accounting controls, we maintain a code of conduct (known as "The Red Book") that applies to all employees...

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    ... over financial reporting based on the framework in "2013 Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our evaluation excluded the current year acquisition of Novartis Animal Health. The operations acquired from Novartis AG...

  • Page 109
    ... from Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes. 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...

  • Page 110
    ...Novartis Animal Health, which is included in the 2015 consolidated financial statements of Eli Lilly and Company and subsidiaries and constituted 3% of total assets as of December 31, 2015 and 5% of revenues for the year then ended. Our audit of internal control over financial reporting of Eli Lilly...

  • Page 111
    ..., effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2015 consolidated financial statements of Eli Lilly and Company and...

  • Page 112
    ...(unaudited) ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except revenue per employee and per-share data) 2015 2014 2013 2012 2011 Operations Revenue Cost of sales Research and development Marketing, selling, and administrative Other Income before income taxes Income taxes Net income...

  • Page 113
    ...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 Day of 2010 (1) Comparison of Five-Year Cumulative Total Return Among Lilly, S&P 500 Stock Index, and Peer Group FINANCIAL REPORT Lilly Peer Group...

  • Page 114
    ... Used in this Report FINANCIAL REPORT Trademarks 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...

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    PROXY Notice of 2016 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 116
    ... Management Proposals to Eliminate Classified Board Shareholder Proposals and Nominations Ownership of Company Stock Compensation Item 2 - Advisory Vote on Compensation Paid to Named Executive Officers Compensation Discussion and Analysis Executive Compensation Compensation Committee Matters Audit...

  • Page 117
    ... of Common Stock of Eli Lilly and Company: The 2016 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below: WHEN: WHERE: 11:00 a.m. EDT, Monday, May 2, 2016 The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285 ITEMS OF BUSINESS: Election of...

  • Page 118
    ... proxy statement carefully before voting. Meeting: Time: Record Date: Items of Business: Annual Meeting of Shareholders 11:00 a.m. EDT Date: Location: May 2, 2016 The Lilly Center Auditorium Lilly Corporate Center February 26, 2016 Indianapolis, Indiana 46285 Item 1: Election of the five directors...

  • Page 119
    ... medicine for patients with moderately-toseverely active rheumatoid arthritis. • Positive results from a long-term clinical trial investigating cardiovascular outcomes for Jardiance®. Returns to Shareholders We generated strong total shareholder returns (share price appreciation plus dividends...

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    ... Former Executive Vice President - KimberlyClark Corporation Investors Community Bank 1995 66 Lexmark International, Inc. Vote FOR Majority of votes cast Our Corporate Governance Policies Reflect Best Practices Our Board membership is marked by leadership, experience, and diversity. All...

  • Page 121
    ...Summary for 2015 At the time the total target compensation was established at the end of 2014, compensation for our named executive officers (the five officers whose compensation is disclosed in this proxy statement) was in the middle range of the company's peer group. Incentive compensation program...

  • Page 122
    ... program, which has targets based on expected EPS growth of peer companies over a two-year period. 2015 Shareholder Value Award Multiple We significantly exceeded our stock price growth targets under our Shareholder Value Award program, which has targets based on expected large-cap company returns...

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    ... at our 2016 Annual Meeting You may also opt to vote in person at the 2016 Annual Meeting, which will be held on Monday, May 2, 2016 at the Lilly Corporate Center, Indianapolis, IN 46285, at 11:00 a.m., local time. See the section entitled "Meeting and Voting Logistics" for more information. P7

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    ...expire at the annual meeting of shareholders held in 2019. Each of the nominees listed below has agreed to serve that term. The following sections provide information regarding our directors including their qualifications, the director nomination process, and compensation, among other topics. Board...

  • Page 125
    ..., director since 2009 Board Committees: Finance (chair); Directors and Corporate Governance 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 Executive Officer...

  • Page 126
    ... 2016 Board Committees: Finance; Public Policy and Compliance Career Highlights Archer Daniels Midland Company, a global food-processing and commodities-trading company Chairman (January 2016 - present) Chief Executive Officer and President (2015 - present) President (2014 - 2015) Executive Vice...

  • Page 127
    ...: Audit (chair); Finance; Directors and Corporate Governance Career Highlights United Parcel Service, Inc., a global shipping and logistics company Chairman and Chief Executive Officer (2002 - 2007) Vice Chairman (2000 - 2002) UPS Board of Directors (1998 - 2014) • Other Board Service • Public...

  • Page 128
    ...development, sales and marketing, and manufacturing. He also has significant corporate governance experience through his service on other public company boards. Marschall S. Runge, M.D., Ph.D., age 61, director since 2013 Board Committees: Science and Technology; Public Policy and Compliance Career...

  • Page 129
    ... experience in international business and finance, and is an audit committee financial expert. He has deep expertise in the Asia-Pacific region, a key growth market for Lilly. He also has broad corporate governance experience from his service on public company boards in the U.S., Europe, and Asia...

  • Page 130
    ... Experience: Operational/Strategic Expertise: International Experience: Marketing and Sales Expertise: Gender/Ethnic Diversity: 5 8 4 7 7 6 7 8 As the following chart demonstrates, our director composition also reflects a mix of tenure on the Board, which provides an effective balance of historical...

  • Page 131
    ... of stock compensation (but no more than 7,500 shares), deposited annually in a deferred stock account in the Lilly Directors' Deferral Plan (as described below), payable after their service on the Board has ended. Lilly Directors' Deferral Plan: In addition to stock compensation, this plan allows...

  • Page 132
    ...The rate for 2016 is 3.1 percent. Both accounts may be paid in a lump sum or in annual installments for up to 10 years, beginning the second January following the director's departure from board service. Amounts in the deferred stock account are paid in shares of company stock. 2015 Compensation for...

  • Page 133
    ...Health Care Institution For-profit Corporation Director Relationship to Organization Employee Executive Officer Employee Employee Employee 2015 Aggregate Percentage of Organization's Revenue Less than 0.1 percent Purchases of products Less than 0.1 percent Research grants Research grants Research...

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    ...Tai are audit committee financial experts, as defined in the SEC rules. Compensation Committee Oversees 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...

  • Page 135
    ... and strategies; Dividends; Stock repurchases; Capital expenditures; Investments, financing, and borrowings; Benefit plan funding and investments; Financial risk management; and Significant business-development opportunities. Public Policy and Compliance Committee • • • Oversees the processes...

  • Page 136
    ... 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 strategy session. Code of Ethics The board approves the company's code of ethics, which is set out in: The Red...

  • Page 137
    ... the chief executive officer, and compensating other senior executives; Ensuring that an effective succession plan is in place for all senior executives; Overseeing the company's ethics and compliance program and management of significant business risks; and Recruiting, nominating, compensating, and...

  • Page 138
    ... strategy. The Board periodically reviews its leadership structure and developments in the area of corporate governance in order to ensure that this approach continues to strike the appropriate balance for the company and our stakeholders. Board Independence The Board has put in place a number...

  • Page 139
    ...the company 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 relatedperson transaction that meets the minimum threshold for disclosure in the proxy statement under...

  • Page 140
    ... under the SEC rules. We have three current employees who are relatives of executive officers. Dr. John Bamforth, 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...

  • Page 141
    ... November 21, 2016. 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 to propose any other business at the annual meeting must give the company written notice...

  • Page 142
    ... will not vest within 60 days. For the independent directors, this column includes the number of stock units credited to the directors' accounts in the Lilly Directors' Deferral Plan. 5 The shares shown for Dr. Lechleiter include 56,148 shares that are owned by a family foundation for which he is...

  • Page 143
    ... motivate them to create long-term shareholder value by achieving top-tier corporate performance while embracing the company's values of integrity, excellence, and respect for people. The Compensation Committee and the Board of Directors believe that our executive compensation aligns well with our...

  • Page 144
    ... 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 145
    ... and equity incentive programs, the committee establishes specific company performance goals related to revenue, earnings per share (EPS), progress of our pipeline portfolio, and stock price growth. Peer-group analysis. The committee uses peer-group data as a market check for compensation decisions...

  • Page 146
    ... affordability within the company's business plan. 2. Annual Bonus The Eli Lilly and Company Bonus Plan ("Bonus Plan") is designed to align employees' individual goals with the company's financial plans and pipeline objectives for the year. The bonus is based on company performance in three areas...

  • Page 147
    ...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. Performance Awards PAs vest over three years. Potential shares are earned based...

  • Page 148
    ... the total three-year shareholder return ("TSR") that a reasonable investor would consider appropriate for investing in a basket of large-cap U.S. companies, as determined by the Compensation Committee. The target share price is based on this expected rate of return less the company's dividend yield...

  • Page 149
    ... of our major products, while maintaining strong performance of the global services organization. He played key roles in numerous business development activities, including the Novartis Animal Health acquisition, and strongly influenced the company's external research and development strategy. Dr...

  • Page 150
    ... based on internal relativity, individual performance, and peer-group data. The committee determined that for all NEOs a 50/50 split between PAs and SVAs would continue to appropriately balance company financial performance with shareholder return. Total target values for the 2014 and 2015 equity...

  • Page 151
    ... the average of the closing prices of company stock for all trading days in November and December 2014. The target ending share price range was established based on the expected annual rate of return for large-cap companies (8 percent), less an assumed dividend yield of 2.89 percent, rounded...

  • Page 152
    ... another record-setting year for innovation. Based on the recommendation of the Science and Technology Committee, the Compensation Committee certified a pipeline score of 3.7, resulting in a pipeline multiple of 1.37. Combined, the revenue, EPS, and pipeline progress multiples yielded a bonus...

  • Page 153
    ... of $57.65 for the 2013-2015 SVA was set in January 2013 based on a beginning stock price of $48.43, which was the average closing price for Lilly stock for all trading days in November and December 2012. The ending stock price of $83.74 represents stock price growth of approximately 73 percent over...

  • Page 154
    ... Plan Members of senior management may defer receipt of part or all of their cash compensation under The Lilly Deferred Compensation Plan (the "Deferred Compensation Plan"), which allows executives to save for retirement in a tax-effective way at minimal cost to the company. Under this unfunded plan...

  • Page 155
    ... SVAs would be paid out on a pro-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...

  • Page 156
    ... a focus on long-term growth. The CEO is required to own company stock valued at least six times annual base salary. During 2015, the requirement for other executive officers changed from a fixed number of shares to a multiple of annual base salary (2 or 3 times annual base salary depending on the...

  • Page 157
    ... changes to our peer group, adding Shire Plc and removing Abbott and also Allergan, which was acquired by Actavis in 2015. Executive Compensation Summary Compensation Table Name and Principal Position John C. Lechleiter, Ph.D. Chairman, President, and Chief Executive Officer Year 2015 2014 2013...

  • Page 158
    ... of the increased discount rate. 3 4 5 Grants of Plan-Based Awards During 2015 The compensation plans under which the grants in the following table were made are described in the CD&A and consist of the bonus plan (a non-equity incentive plan) and the 2002 Lilly Stock Plan (which provides for...

  • Page 159
    ... Under Equity Incentive Plan Awards Name Award Grant Date2 __ Compensation Committee Action Date __ 3 4 Threshold ($) Target ($) Maximum ($) Threshold (# shares) Target (# shares) Maximum (# shares) All Other Stock or Option Awards: Number of Shares of Stock, Options, or Units Grant...

  • Page 160
    ... Awards at December 31, 2015 The 2015 closing stock price applied to the values in the table below was $84.26. Stock Awards1 Equity Equity Incentive Incentive Plan Plan Awards: Awards: Market or Number of Payout Value Unearned of Unearned Shares, Units, Shares, Units, or Other Rights or Other Rights...

  • Page 161
    ... column in the "Summary Compensation Table" for information about company contributions under the 401(k) Plan for the named executive officers. • The Retirement Plan, a tax-qualified defined benefit plan that provides monthly benefits to retirees. See the "Pension Benefits in 2015" table below for...

  • Page 162
    ... following table shows benefits that the named executive officers have accrued under the Retirement Plan and the nonqualified pension plan. Pension Benefits in 2015 Number of Years of Credited Service 30 6 30 6 20 6 20 6 6 6 18 6 18 6 17 6 17 6 Present Value of Accumulated Benefit ($) 1 $1,496,356...

  • Page 163
    ...who were closer to retirement or had been with the company longer at the time the plan was changed. 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...

  • Page 164
    ... 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 compounding, which was 3.2 percent for 2015 and is 3.1 percent for 2016...

  • Page 165
    ... compensation plan. Those balances are shown in the "Nonqualified Deferred Compensation in 2015" 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 166
    ... all employees, including the named executive officers. The change-in-control plan defines a change in control very specifically, but generally the terms include the occurrence of one of the following: (i) acquisition of 20 percent or more of the company's stock; (ii) replacement by the shareholders...

  • Page 167
    ...directly with 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 In Assessing Executive Compensation With the oversight of the CEO and the senior vice president of human...

  • Page 168
    ... establishes 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...

  • Page 169
    ... independent auditor for 2016. 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 170
    ...in private sessions with members of senior 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...

  • Page 171
    ... filings Audit-Related Fees • Assurance and related services reasonably related to the performance of the audit or reviews of the financial statements - 2015 and 2014: primarily related to employee benefit plan and other ancillary audits, and due diligence services on potential acquisitions Tax...

  • Page 172
    ... has been a signatory to the United Nations Global Compact (UNGC), a commitment to 10 universally accepted principles in the areas of human rights, labor, the environment, and anti-corruption. Lilly publicly issues an annual Corporate Responsibility report as a Communication on Progress for the UNGC...

  • Page 173
    ... employees and their well-being. This report also includes information on our diversity initiatives. As our 2012-2013 Corporate Responsibility report notes: "In mid-2012, Lilly, in conjunction with the other participating companies of PSCI [Pharmaceutical Supply Chain Initiative], began developing...

  • Page 174
    ...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 175
    ..., fax, mail, and email. We expect that the fee for those services will not exceed $17,500 plus reimbursement of customary out-of-pocket expenses. Section 16(a) beneficial ownership reporting compliance Under SEC rules, our directors and executive officers are required to file with the SEC reports of...

  • Page 176
    ... 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, we concluded that all reports were timely filed. By order of the Board of Directors, James B. Lootens Secretary March 21, 2016 P60

  • Page 177
    ... for 2015 Bonus Plan For the 2015 bonus calculations, the Compensation Committee made the following adjustments to reported EPS consistent with our external reporting of non-GAAP financial measures Eliminated the impact of the charges recognized for acquired in-process research and development...

  • Page 178
    ... impact of the debt extinguishment loss. 2015: Eliminated the impact of inventory step-up for Novartis Animal Health. 2015, 2014 and 2013: Eliminated the impact of the charges recognized for acquired in-process research and development. 2015, 2014 and 2013: Eliminated the impact of asset impairments...

  • Page 179
    ... are below. % Growth 2015 vs. 2014 (3.0)% % Growth 2014 vs. 2013 (46.1)% 2015 EPS as reported Eliminate certain amortization of intangible assets Eliminate debt extinguishment loss Eliminate inventory step-up for Novartis Animal Health Eliminate acquired in process research and development charges...

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    ... Admossoon Tocket Eli Lilly and Company 2016 Annual Meeting of Shareholders Monday, May 2, 2016 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 182
    ... OF THIS PAGE WITH YOU TO THE MEETING. Detach here Detach here Eli Lilly and Company Annual Meeting of Shareholders May 2, 2016 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 183
    ... Senior Vice President, Finance, and Treasurer Derica W. Rice Executive Vice President, Global Services, and Chief Financial Officer William F. Heath Jr., Ph.D. Senior Vice President, Product Research and Development David A. Ricks Senior Vice President, and President, Lilly Bio-Medicines Andrew...

  • Page 184
    ...and 10-Q 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. Transfer agent and registrar...

  • Page 185
    ... diabetes Emibetuzumab cancer PCSK9 MAb cardiovascular disease CXCR4 peptide inhibitor cancer The Lilly pipeline currently includes 48 new molecules in clinical development including nine molecules in Phase III or regulatory review, 19 in Phase II and 20 in Phase I. Since our last annual report...

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    Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA 317-276-2000 • www.lilly.com Printed on post-consumer recycled paper