Eli Lilly 2015 Annual Report Download - page 41

F29
FINANCIAL REPORT
Additionally, as described in Note 15 to the consolidated financial statements, the Alimta® vitamin regimen
patent, which provides us with patent protection for Alimta through June 2021 in Japan and major European
countries, and through May 2022 in the U.S., has been challenged in each of these jurisdictions. Our
compound patent for Alimta will expire in the U.S. 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 aggregate, have a material adverse effect on our consolidated results of operations
and cash flows. We are aware that a generic competitor has received approval to market a generic version of
Alimta in a major European country, although we are not aware of whether this competitor's product has
entered the market. Notwithstanding our patents, generic versions 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, as described in Note
15 to the consolidated financial statements.
The U.S. compound patent for Humalog® expired in 2013. Thus far, the loss of compound patent protection
for Humalog has not resulted in a rapid and severe decline in revenue. Global regulators have different legal
pathways to approve similar versions of Humalog and to date none have been approved in the U.S. or
Europe. We are aware that other manufacturers have efforts underway to develop a similar version of
Humalog, and it is difficult to predict the likelihood, timing, and impact of these products entering the market.
Foreign Currency Exchange Rates
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure
from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, and British
pound, and the British pound against the euro. While we manage a portion of these exposures through
hedging and other risk management techniques, significant fluctuations in currency rates can have a
substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses. Over
the past two years, we have seen significant foreign currency rate fluctuations as the U.S. dollar strengthened
compared to several other foreign currencies, including the euro, British pound, and Japanese yen. While
there is uncertainty in the future movements in foreign exchange rates, these fluctuations could negatively
impact our future consolidated results of operations.
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
United States
In the U.S., public concern over prices for specialty and brand name pharmaceuticals continues to drive the
legislative debate. These policy and political issues increase the risk that taxes, fees, rebates or other federal
and state measures may be enacted. Key health policy proposals affecting biopharmaceuticals include a
reduction in biologic data exclusivity, modifications to Medicare Parts B and D, new language that would allow
the Department of Health and Human Services to negotiate prices for biologics and drugs on the specialty tier
in Part D, and state-level proposals to reduce the cost of pharmaceuticals purchased by government health
care programs. Savings projected under these proposals are targeted as a means to fund both health care
expenditures and non-health care initiatives, or to manage federal and state budgets.
In the U.S. private sector, consolidation and integration among U.S. healthcare providers is also a major
factor in the competitive marketplace for human pharmaceuticals. Health plans and pharmaceutical benefit
managers have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and
importance. Payers typically maintain formularies which specify coverage (the conditions under which drugs
are included on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer).
Formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage
restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations which
result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance
levels and higher deductibles. Consequently, pharmaceutical companies compete for formula placement not
only on the basis of product attributes such as greater efficacy, fewer side effects, or greater patient ease of
use, but also by providing rebates. Price is an increasingly important factor in formulary decisions, particularly
in treatment areas in which the payer has taken the position that multiple branded products are therapeutically
comparable. These downward pricing pressures could negatively affect future consolidated results of
operations.