RESULTS OF OPERATIONS
(Tables present dollars in millions, except per-share data)
General
Management’s discussion and analysis of results of operations and financial condition, is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated company. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Annual Report on Form 10-K. Certain statements in this Item 7 of Part II of this Annual Report on Form 10-K constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, “Risk Factors,” may cause our actual results and cash generated from operations to differ materially from these forward-looking statements.
Executive Overview
David A. Ricks assumed the role of president and chief executive officer effective January 1, 2017, replacing John C. Lechleiter, who retired at the end of 2016. Lechleiter will remain chairman of our board of directors through May 31, 2017, and Ricks will assume the role of chairman effective June 1, 2017. Ricks joined the board of directors on January 1, 2017.
The remainder of this section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data is presented on a diluted basis.
Financial Results
The following table summarizes our key operating results:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Percent Change
|
|
2016
|
|
2015
|
|
Revenue
|
$
|
21,222.1
|
|
|
$
|
19,958.7
|
|
|
6
|
Gross margin
|
15,567.2
|
|
|
14,921.5
|
|
|
4
|
Gross margin as a percent of revenue
|
73.4
|
%
|
|
74.8
|
%
|
|
|
Operating expense
(1)
|
$
|
11,695.9
|
|
|
$
|
11,329.4
|
|
|
3
|
Acquired in-process research and development
|
30.0
|
|
|
535.0
|
|
|
NM
|
Asset impairment, restructuring, and other special charges
|
382.5
|
|
|
367.7
|
|
|
4
|
Effective tax rate
|
18.9
|
%
|
|
13.7
|
%
|
|
|
Net income
|
2,737.6
|
|
|
2,408.4
|
|
|
14
|
Earnings per share
|
2.58
|
|
|
2.26
|
|
|
14
|
(1)
Operating expense consists of research and development and marketing, selling, and administrative expenses.
NM - not meaningful
Revenue and gross margin increased in
2016
. The increase in operating expense in
2016
was due to an increase in research and development expense, partially offset by a decrease in marketing, selling, and administrative expense. Net income and EPS increased in
2016
as a higher gross margin and lower acquired in-process research and development (IPR&D) charges, were partially offset by higher operating expense, a higher effective tax rate, and lower other income.
The following highlighted items affect comparisons of our
2016
and
2015
financial results:
2016
Acquired IPR&D (Note 3 to the consolidated financial statements)
|
|
•
|
We recognized acquired IPR&D charges of
$30.0 million
(pretax), or $0.02 per share, related to upfront fees paid in connection with a collaboration agreement with AstraZeneca.
|
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
|
|
•
|
We recognized charges of
$382.5 million
(pretax), or $0.29 per share, related to integration and severance costs related to the acquisition of Novartis Animal Health (Novartis AH), other global severance costs, and asset impairments primarily related to the closure of an animal health manufacturing facility in Ireland.
|
Other–Net, (Income) Expense (Note 17 to the consolidated financial statements)
|
|
•
|
We recognized charges of $203.9 million (pretax), or $0.19 per share, related to the impact of the Venezuelan financial crisis, including the significant deterioration of the bolívar.
|
2015
Acquisitions (Note 3 to the consolidated financial statements)
|
|
•
|
We recognized expense of $153.0 million (pretax), or $0.10 per share, related to the fair value adjustments to Novartis AH acquisition date inventory that was sold.
|
Acquired IPR&D (Notes 3 and 4 to the consolidated financial statements)
|
|
•
|
We recognized acquired IPR&D charges of
$535.0 million
(pretax), or $0.33 per share, related to upfront fees paid in connection with various collaboration agreements primarily with Pfizer Inc. (Pfizer), as well as the consideration paid to acquire the worldwide rights to Locemia Solutions' (Locemia) intranasal glucagon.
|
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
|
|
•
|
We recognized charges of
$367.7 million
(pretax), or $0.25 per share, related to severance costs, integration costs, and intangible asset impairments.
|
Debt Repurchase (Notes 7 and 10 to the consolidated financial statements)
|
|
•
|
We recognized net charges of $152.7 million (pretax), or $0.09 per share, attributable to the debt extinguishment loss of $166.7 million from the purchase and redemption of certain fixed-rate notes, partially offset by net gains from non-hedging interest rate swaps and foreign currency transactions associated with the related issuance of lower interest rate euro-denominated notes.
|
Late-Stage Pipeline
Our long-term success depends to a great extent on our ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on molecules currently in development by other biotechnology or pharmaceutical companies. We currently have approximately
45
potential new drugs in human testing or under regulatory review, and a larger number of projects in preclinical research.
The following new molecular entities (NMEs) were approved by regulatory authorities in at least one of the major geographies for use in the diseases described. The quarter in which each NME initially was approved in any major geography for any indication is shown in parentheses:
Baricitinib (Olumiant
®
) (Q1 2017)
—a Janus tyrosine kinase inhibitor for the treatment of moderate-to-severe active rheumatoid arthritis (in collaboration with Incyte Corporation).
Ixekizumab* (Taltz
®
) (Q1 2016)
—a neutralizing monoclonal antibody to interleukin-17A for the treatment of moderate-to-severe plaque psoriasis and psoriatic arthritis.
Necitumumab* (Portrazza
®
) (Q4 2015)
—an anti-epidermal growth factor receptor monoclonal antibody for the treatment of metastatic squamous non-small cell lung cancer (NSCLC).
Olaratumab* (Lartruvo
™
) (Q4 2016)
—a human lgG1 monoclonal antibody for the treatment of advanced soft tissue sarcoma.
The following NMEs and diagnostic agent are currently in Phase III clinical trial testing for potential use in the diseases described. The quarter in which each NME and diagnostic agent initially entered Phase III for any indication is shown in parentheses:
Abemaciclib (Q3 2014)
—a small molecule cell-cycle inhibitor, selective for cyclin-dependent kinases 4 and 6 for the treatment of metastatic breast cancer and NSCLC.
BACE inhibitor (Q2 2016)
—an oral beta-secretase cleaving enzyme (BACE) inhibitor for the treatment of early and mild Alzheimer's disease (in collaboration with AstraZeneca).
Flortaucipir** (Q3 2015)
—a positron emission tomography (PET) tracer intended to image tau (or neurofibrillary) tangles in the brain, which are an indicator of Alzheimer's disease.
Galcanezumab* (Q2 2015)
—a once-monthly subcutaneously injected calcitonin gene-related peptide (CGRP) antibody for the treatment of cluster headache and migraine prevention.
Nasal glucagon* (Q3 2013)
—a glucagon nasal powder formulation for the treatment of severe hypoglycemia in patients with diabetes treated with insulin.
Solanezumab* (Q2 2009)
—an anti-amyloid beta monoclonal antibody for the treatment of preclinical Alzheimer’s disease. Based upon the results of our Phase III study of patients with mild dementia due to Alzheimer's disease, we will not pursue regulatory submissions for solanezumab for the treatment of mild dementia due to Alzheimer's disease and we will not pursue development of solanezumab for the treatment of prodromal Alzheimer's disease.
Tanezumab* (Q3 2008)
—an anti-nerve growth factor monoclonal antibody for the treatment of osteoarthritis pain, chronic low back pain, and cancer pain (in collaboration with Pfizer).
|
|
*
|
Biologic molecule subject to the United States (U.S.) Biologics Price Competition and Innovation Act
|
The following table reflects the status of each NME and diagnostic agent within our late-stage pipeline and recently approved products, including developments since January 1,
2016
:
|
|
|
|
|
|
|
Compound
|
Indication
|
U.S.
|
Europe
|
Japan
|
Developments
|
Endocrinology
|
Nasal glucagon
|
Severe hypoglycemia
|
Phase III
|
Development of commercial manufacturing process is ongoing.
|
|
|
|
|
|
|
|
Compound
|
Indication
|
U.S.
|
Europe
|
Japan
|
Developments
|
Immunology
|
Olumiant
|
Rheumatoid arthritis
|
Submitted
|
Approved
|
Submitted
|
Submitted to regulatory authorities in the U.S. and Japan in first quarter of 2016. Approved in Europe in first quarter of 2017.
|
Taltz
|
Axial spondylo-arthritis
|
Phase III
|
Initiated Phase III study in May 2016.
|
Psoriasis
|
Launched
|
Approved and launched in the U.S. in first and second quarters of 2016, respectively. Approved and launched in Europe in second and third quarters of 2016, respectively. Approved and launched in Japan in third and fourth quarters of 2016, respectively.
|
Psoriatic arthritis
|
Phase III
|
Launched
|
Approved and launched in Japan in third and fourth quarters of 2016, respectively. Announced in October 2016 top-line results of Phase III trial that met primary endpoints. Submission to the U.S. Food and Drug Administration (FDA) in the first half of 2017.
|
Neuroscience
|
BACE inhibitor
|
Early and mild Alzheimer's disease
|
Phase III
|
Moved into the Phase III portion of the
Phase II/III seamless study in April 2016 and initiated Phase III study in mild Alzheimer's disease in August 2016. Granted Fast Track
Designation
(1)
from the FDA in August 2016.
|
Flortaucipir
|
Alzheimer's disease
|
Phase III
|
Phase III study is ongoing.
|
Galcanezumab
|
Cluster headache
|
Phase III
|
Phase III studies are ongoing.
|
Migraine prevention
|
Phase III
|
Initiated first Phase III study in January 2016.
|
Solanezumab
|
Mild Alzheimer's disease
|
Terminated
|
Announced in November 2016 top-line results of Phase III trial that did not meet primary endpoints. Further development has been discontinued.
|
Preclinical Alzheimer's disease
|
Phase III
|
Phase III study to continue.
|
Prodromal Alzheimer's disease
|
Terminated
|
Further development has been discontinued.
|
Tanezumab
|
Osteoarthritis pain
|
Phase III
|
Phase III studies are ongoing.
|
Chronic low back pain
|
Phase III
|
Cancer pain
|
Phase III
|
|
|
|
|
|
|
|
Compound
|
Indication
|
U.S.
|
Europe
|
Japan
|
Developments
|
Oncology
|
Abemaciclib
|
Metastatic breast cancer
|
Phase III
|
Phase III studies are ongoing.
|
NSCLC
|
Phase III
|
Lartruvo
|
Soft tissue sarcoma
|
Launched
|
Phase III
|
Granted accelerated approval
(2)
by the FDA in fourth quarter of 2016 based on phase II data. Launched in the U.S. in the fourth quarter of 2016. Granted conditional approval
(3)
and launched in Europe in fourth quarter of 2016. Phase III study is ongoing.
|
Portrazza
|
Metastatic squamous NSCLC
(first-line)
|
Launched
|
Phase Ib/II
|
Approved and launched in Europe in first and second quarters of 2016, respectively.
|
(1)
The FDA's fast track program is designed to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.
(2)
Continued approval for this indication may be contingent on verification and description of clinical benefit in a confirmatory Phase III trial.
(3)
As part of a conditional marketing authorization, results from an ongoing Phase III study will need to be provided. This study is fully enrolled. Until availability of the full data, the Committee for Medicinal Products for Human Use will review the benefits and risks of Lartruvo annually to determine whether the conditional marketing authorization can be maintained.
There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products. A high rate of failure is inherent in new drug discovery and development. The process to bring a drug from the discovery phase to regulatory approval can take over a decade and cost more than $2 billion (DiMasi JA, Grabowski HG, Hansen RA.
Innovation in the pharmaceutical industry: new estimates of R&D costs,
Journal of Health Economics
2016;47:20-33.). Failure can occur at any point in the process, including late in the process after substantial investment. As a result, most research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success. Delays and uncertainties in the regulatory approval processes in the U.S. and in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be approved.
We manage research and development spending across our portfolio of molecules, and a delay in, or termination of, any one project will not necessarily cause a significant change in our total research and development spending. Due to the risks and uncertainties involved in the research and development process, we cannot reliably estimate the nature, timing, and costs of the efforts necessary to complete the development of our research and development projects, nor can we reliably estimate the future potential revenue that will be generated from a successful research and development project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated research and development expense. While we do accumulate certain research and development costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total research and development costs by project, by preclinical versus clinical spend, or by therapeutic category.
Other Matters
Patent Matters
We depend on patents or other forms of intellectual-property protection for most of our revenues, cash flows, and earnings. The loss of U.S. patent exclusivity for Evista
®
in March 2014 resulted in the immediate entry of generic competitors. We lost our data package protection for Cymbalta
®
in major European countries in 2014. In 2015, we saw the entry of generic competition in all major European markets. The loss of exclusivity for Evista in the U.S. and Cymbalta in the European markets has caused a rapid and severe decline in revenue for the affected products, which over time has, in the aggregate, had a material adverse effect on our consolidated results of operations and cash flows. We also lost patent exclusivity for the schizophrenia and bipolar mania indications in December 2015 and April 2016, respectively, for Zyprexa
®
in Japan. Generic versions of Zyprexa were launched in Japan in June 2016. The loss of exclusivity for Zyprexa in Japan has caused a rapid and severe decline in revenue for the product.
Additionally, as described in Note 15 to the consolidated financial statements, the Alimta
®
vitamin regimen patents, which provide us with patent protection for Alimta through June 2021 in Japan and major European countries, and through May 2022 in the U.S., have been challenged in each of these jurisdictions. Our vitamin regimen patents have also been challenged in other smaller European jurisdictions. Our compound patent for Alimta expired 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 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. While the U.S. Court of Appeals recently ruled in our favor regarding the validity and infringement of the vitamin regimen patent, that patent remains the subject of
inter partes
review challenges as further described in Note 15 to the consolidated financial statements. We are aware that at least two generic pemetrexed products have launched in a major European market. Notwithstanding our patents, generic versions of Alimta were also approved in Japan in February 2016. As described in Note 15 to the consolidated financial statements, each manufacturer of the generic version of Alimta has agreed not to proceed to pricing approval.
We will lose our patent protection for Strattera
®
in the U.S. in May 2017, and Cialis
®
in the U.S. and major European markets in November 2017. We will also lose exclusivity for Effient
®
in the U.S. in October 2017, and we have authorized one generic manufacturer to enter the market as early as mid-August 2017. We expect that the entry of generic competition into these markets following the loss of exclusivity will cause a rapid and severe decline in revenue for the affected products, which will, in the aggregate, have a material adverse effect on our consolidated results of operations and cash flows.
The compound patent for Humalog
®
(insulin lispro) has expired in major markets. 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 insulin lispro and to date none have been approved in the U.S. or Europe. Other manufacturers have efforts underway to bring to market a similar version of insulin lispro and we are aware that a competitor's insulin lispro product has been accepted for regulatory review by the European Medicines Agency. It is difficult to predict the 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 and Swiss franc 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 between the U.S. dollar and 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.
The impact of the Venezuelan financial crisis, including the significant deterioration of the bolívar, resulted in a charge of $203.9 million in 2016. See Note 17 to the consolidated financial statements for additional information related to the charge. As of December 31, 2016, our Venezuelan subsidiaries represented a
de minimis
portion of our consolidated assets and liabilities. We continue to monitor other deteriorating economies and it is possible that additional charges may be recorded in the future. Any additional charges are not expected to have a material adverse effect on our future consolidated results of operations.
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
United States
In the U.S., public concern over access to and affordability of pharmaceuticals continues to drive the regulatory and 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, language that would allow the Department of Health and Human Services to negotiate prices for biologics and drugs in Medicare, proposals that would require biopharmaceutical manufacturers to disclose proprietary drug pricing information, 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 private sector, consolidation and integration among healthcare providers is also a major factor in the competitive marketplace for human pharmaceuticals. Health plans, pharmaceutical benefit managers, wholesalers, and other supply chain stakeholders 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 formulary 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.
The main coverage expansion provisions of the Affordable Care Act (ACA) are currently in effect through both state-based exchanges and the expansion of Medicaid. An emerging trend has been the prevalence of benefit designs containing high out-of-pocket costs for patients, particularly for pharmaceuticals. In addition to the coverage expansions, many employers in the commercial market, driven in part by ACA changes such as the 2020 implementation of the excise tax on employer-sponsored health care coverage for which there is an excess benefit (the so-called "Cadillac tax"), continue to evaluate strategies such as private exchanges and wider use of consumer-driven health plans to reduce their healthcare liabilities over time. President Trump, the new administration, and Congress have identified repealing and replacing the ACA as a top priority. The proposed timeframe remains unclear. Further, provisions included in legislation repealing the ACA and any potential replacement program have yet to be determined and could have a material adverse effect on our consolidated results of operations and cash flows. At the same time, the broader paradigm shift towards performance-based reimbursement and the launch of several value-based purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-world outcomes data and a favorable economic profile.
International
International operations also are generally subject to extensive price and market regulations. Cost-containment measures exist in a number of countries, including additional price controls and mechanisms to limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the pressures on national and regional health care budgets that come from a growing aging population and ongoing economic challenges. In addition, governments in many emerging markets are becoming increasingly active in expanding health care system offerings. Given the budget challenges of increasing health care coverage for citizens, policies may be proposed that promote generics and biosimilars only and reduce current and future access to branded human pharmaceutical products.
Tax Matters
We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Changes in the relevant tax laws, regulations, administrative practices, principles, and interpretations could adversely affect our future effective tax rates. The U.S. and a number of other countries are actively considering or enacting changes in this regard. For example, the Trump administration has stated that one of its top priorities is comprehensive tax reform. The tax rates and the manner in which U.S. companies are taxed could be altered by any such potential tax reform and could have a material adverse effect on our consolidated results of operations and cash flows. Additionally, the Organisation for Economic Co-operation and Development issued its final recommendations of international tax reform proposals to influence international tax policy in major countries in which we operate. Other institutions have also become more active regarding tax-related matters, including the European Commission, the United Nations, the Group of Twenty, and the European Parliament. While outcomes of these initiatives continue to develop and remain uncertain, changes to key elements of the U.S. or international tax framework could have a material adverse effect on our consolidated results of operations and cash flows.
Acquisitions
See Note 3 to the consolidated financial statements for discussion regarding the following acquisitions:
|
|
•
|
Our agreement to purchase CoLucid Pharmaceuticals, Inc. (CoLucid) for $46.50 per share or approximately $960 million, which we expect to complete in the first quarter of 2017.
|
|
|
•
|
Our acquisition of Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine, and rabies vaccine portfolio, completed on January 3, 2017, in an all-cash transaction for approximately
$885 million
.
|
|
|
•
|
Our acquisition of Novartis AH, completed on January 1, 2015, in an all-cash transaction for
$5.28 billion
.
|
Operating Results—
2016
Revenue
The following table summarizes our revenue activity by region:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
2015
|
|
Percent Change
|
U.S.
(1)
|
$
|
11,506.2
|
|
|
$
|
10,097.4
|
|
|
14
|
Outside U.S.
|
9,715.9
|
|
|
9,861.3
|
|
|
(1)
|
Revenue
|
$
|
21,222.1
|
|
|
$
|
19,958.7
|
|
|
6
|
Numbers may not add due to rounding.
(1)
U.S. revenue includes revenue in Puerto Rico.
The following are components of the change in revenue compared to the prior year:
|
|
|
|
|
|
|
|
|
2016 vs. 2015
|
|
U.S.
|
Outside U.S.
|
Consolidated
|
Volume
|
12
|
%
|
2
|
%
|
7
|
%
|
Price
|
2
|
%
|
(3
|
)%
|
—
|
%
|
Foreign exchange rates
|
—
|
%
|
(1
|
)%
|
—
|
%
|
Percent change
|
14
|
%
|
(1
|
)%
|
6
|
%
|
Numbers may not add due to rounding.
In the U.S., the volume increase in
2016
was driven by sales of several pharmaceutical products, including Trulicity
®
, Humalog, Erbitux
®
(due to the transfer of commercialization rights to us in the U.S. and Canada effective October 1, 2015), Taltz, and Jardiance
®
, partially offset by decreased volume for Zyprexa. U.S. revenue also benefited from reductions to the Cymbalta reserve for expected product returns of approximately $175 million in 2016, favorably affecting both volume and price.
Outside the U.S., the volume increase in
2016
was driven by sales of several new pharmaceutical products, including Cyramza and Trulicity, partially offset by the losses of exclusivity for Cymbalta in Europe and Canada, Zyprexa in Japan, as well as Alimta in several countries.
The following table summarizes our revenue activity in
2016
compared with
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2016
|
|
2015
|
|
|
Product
|
U.S.
(1)
|
|
Outside U.S.
|
|
Total
|
|
Total
|
Percent Change
|
Humalog
|
$
|
1,685.2
|
|
|
$
|
1,083.6
|
|
|
$
|
2,768.8
|
|
|
$
|
2,841.9
|
|
|
(3
|
)
|
Cialis
|
1,469.5
|
|
|
1,002.1
|
|
|
2,471.6
|
|
|
2,310.7
|
|
|
7
|
|
Alimta
|
1,101.0
|
|
|
1,182.3
|
|
|
2,283.3
|
|
|
2,493.1
|
|
|
(8
|
)
|
Forteo
®
|
770.5
|
|
|
729.4
|
|
|
1,500.0
|
|
|
1,348.3
|
|
|
11
|
|
Humulin
®
|
861.8
|
|
|
504.1
|
|
|
1,365.9
|
|
|
1,307.4
|
|
|
4
|
|
Cymbalta
|
269.3
|
|
|
661.2
|
|
|
930.5
|
|
|
1,027.6
|
|
|
(9
|
)
|
Trulicity
|
737.6
|
|
|
187.9
|
|
|
925.5
|
|
|
248.7
|
|
|
NM
|
|
Strattera
|
534.9
|
|
|
319.8
|
|
|
854.7
|
|
|
784.0
|
|
|
9
|
|
Zyprexa
|
69.8
|
|
|
655.5
|
|
|
725.3
|
|
|
940.3
|
|
|
(23
|
)
|
Erbitux
|
581.1
|
|
|
105.9
|
|
|
687.0
|
|
|
485.0
|
|
|
42
|
|
Cyramza
|
270.1
|
|
|
344.0
|
|
|
614.1
|
|
|
383.8
|
|
|
60
|
|
Effient
|
465.6
|
|
|
69.6
|
|
|
535.2
|
|
|
523.0
|
|
|
2
|
|
Trajenta
® (2)
|
165.9
|
|
|
270.7
|
|
|
436.6
|
|
|
356.8
|
|
|
22
|
|
Other human pharmaceutical products
|
959.4
|
|
|
1,006.1
|
|
|
1,965.4
|
|
|
1,727.1
|
|
|
14
|
|
Animal health products
|
1,564.5
|
|
|
1,593.7
|
|
|
3,158.2
|
|
|
3,181.0
|
|
|
(1
|
)
|
Revenue
|
$
|
11,506.2
|
|
|
$
|
9,715.9
|
|
|
$
|
21,222.1
|
|
|
$
|
19,958.7
|
|
|
6
|
|
Numbers may not add due to rounding.
|
|
(1)
|
U.S. revenue includes revenue in Puerto Rico.
|
|
|
(2)
|
Trajenta revenue includes Jentadueto
®
.
|
NM - not meaningful
Revenue of Humalog, our injectable human insulin analog for the treatment of diabetes,
decreased
5 percent
in the U.S., driven by lower realized prices, partially offset by increased demand. Revenue outside the U.S.
increased
1 percent
, driven by increased volume and, to a lesser extent, higher realized prices, partially offset by the unfavorable impact of foreign exchange rates.
Revenue of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia,
increased
17 percent
in the U.S., driven by higher realized prices. We will lose our patent protection for Cialis in the U.S. in November 2017. We expect that the entry of generic competition following the loss of exclusivity will cause a rapid and severe decline in revenue. Revenue outside the U.S.
decreased
5 percent
, driven by the unfavorable impact of foreign exchange rates and decreased volume, partially offset by higher realized prices.
Revenue of Alimta, a treatment for various cancers,
decreased
5 percent
in the U.S., driven by decreased demand due to competitive pressure. Revenue outside the U.S.
decreased
11 percent
, driven primarily by the loss of exclusivity in several countries. We have faced and remain exposed to generic entry in multiple countries that has eroded revenue and is likely to continue to erode revenue from current levels.
Revenue of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women,
increased
26 percent
in the U.S., driven by higher realized prices. Revenue outside the U.S.
decreased
1 percent
, driven by lower realized prices, largely offset by increased volume and the favorable impact of foreign exchange rates.
Revenue of Humulin, an injectable human insulin for the treatment of diabetes,
increased
13 percent
in the U.S., driven by increased demand and, to a lesser extent, higher realized prices. The increase in realized prices resulted from a change in estimate of a government rebate in the first quarter of 2016. Revenue outside the U.S.
decreased
7 percent
, driven by the unfavorable impact of foreign exchange rates and, to a lesser extent, decreased volume and lower realized prices.
Revenue of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, chronic musculoskeletal pain, and the management of fibromyalgia, was
$269.3 million
in the U.S. in 2016, compared to
$144.6 million
in 2015. U.S. revenue benefited from reductions to the Cymbalta reserve for expected product returns of approximately $175 million in 2016. Revenue outside the U.S. decreased
25
percent, driven by the loss of exclusivity.
Revenue of Trulicity, a treatment for type 2 diabetes, was
$737.6 million
in the U.S., driven by growth in the GLP-1 market and increased share of market for Trulicity. Revenue outside the U.S. was
$187.9 million
.
Revenue of Strattera, a treatment for attention-deficit hyperactivity disorder,
increased
7 percent
in the U.S., driven by higher realized prices, partially offset by decreased volume. We will lose our patent protection for Strattera in the U.S. in May 2017. We expect that the entry of generic competition following the loss of effective patent protection will cause a rapid and severe decline in revenue. Revenue outside the U.S.
increased
13 percent
, driven by increased volume and, to a lesser extent, the favorable impact of foreign exchange rates, partially offset by lower realized prices.
Revenue of Zyprexa, a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance,
decreased
16 percent
outside the U.S., driven primarily by decreased volumes in Japan due to the entry of generic competition in June 2016 following the loss of patent exclusivity. Zyprexa revenue in Japan was $332.3 million in 2016, compared with $415.9 million in 2015.
Revenue of Erbitux, a treatment for various cancers, increased to
$581.1 million
in the U.S. in 2016, compared to
$386.7 million
in 2015. The increase was due to the transfer of commercialization rights to us in the U.S. and Canada which occurred on October 1, 2015.
Revenue of animal health products in the U.S.
increased
1 percent
, primarily due to uptake of new companion animal products, partially offset by decreased revenue for food animal products. Animal health product revenue outside the U.S.
decreased
3 percent
driven by the unfavorable impact of foreign exchange rates.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue was
73.4 percent
in
2016
, a decrease of
1.4
percentage points compared with
2015
primarily due to a lower benefit from foreign exchange rates on international inventories sold.
Research and development expense
increased
9 percent
to
$5.24 billion
in
2016
, driven primarily by higher late-stage clinical development costs and, to a lesser extent, higher charges related to development milestone payments.
Marketing, selling, and administrative expense
decreased
1 percent
to
$6.45 billion
in
2016
, as reduced spending on late-life-cycle products was largely offset by expenses related to new products.
We recognized an acquired IPR&D charge of
$30.0 million
in
2016
associated with the agreement with AstraZeneca to co-develop MEDI1814. There were
$535.0 million
of acquired IPR&D charges in
2015
resulting from business development activity, primarily a collaboration with Pfizer and the acquisition of worldwide rights to Locemia's intranasal glucagon. See Notes 3 and 4 to the consolidated financial statements for additional information.
We recognized asset impairment, restructuring, and other special charges of
$382.5 million
in
2016
. The charges are primarily associated with integration and severance costs related to the acquisition of Novartis AH, other global severance costs associated with actions taken to reduce cost structure, and asset impairments primarily related to the closure of an animal health manufacturing facility in Ireland. In
2015
, we recognized
$367.7 million
of asset impairment, restructuring, and other special charges related to severance costs, integration costs for Novartis AH, and asset impairments. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was expense of
$84.8 million
in
2016
, compared with income of
$100.6 million
in
2015
. Other expense in
2016
included a $203.9 million charge related to the impact of the Venezuelan financial crisis, including the significant deterioration of the bolívar, partially offset by net gains of $101.6 million on investments. Other income in
2015
included net gains of $236.7 million on investments, partially offset by a net charge of $152.7 million related to the repurchase of $1.65 billion of debt. See Note 17 to the consolidated financial statements for additional information.
Our effective tax rate was
18.9 percent
in
2016
, compared with
13.7 percent
in
2015
. The increase in the effective tax rate for 2016 reflects several factors in both years: in 2016, the unfavorable tax effect of the charge related to the impact of the Venezuelan financial crisis and certain asset impairment, restructuring, and other special charges; and in 2015, the favorable tax impact of the acquired IPR&D charges, net charges related to the repurchase of debt, and asset impairment, restructuring, and other special charges. The increase in the effective tax rate for
2016
was partially offset by a net discrete tax benefit.
Operating Results—
2015
Financial Results
The following table summarizes our key operating results:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Percent Change
|
|
2015
|
|
2014
|
|
Revenue
|
$
|
19,958.7
|
|
|
$
|
19,615.6
|
|
|
2
|
Gross margin
|
14,921.5
|
|
|
14,683.1
|
|
|
2
|
Gross margin as percent of revenue
|
74.8
|
%
|
|
74.9
|
%
|
|
|
Operating expense
(1)
|
$
|
11,329.4
|
|
|
$
|
11,354.4
|
|
|
—
|
Acquired in-process research and development
|
535.0
|
|
|
200.2
|
|
|
NM
|
Asset impairment, restructuring, and other special charges
|
367.7
|
|
|
468.7
|
|
|
(22)
|
Net income
|
2,408.4
|
|
|
2,390.5
|
|
|
1
|
Earnings per share
|
2.26
|
|
|
2.23
|
|
|
1
|
(1)
Operating expense consists of research and development and marketing, selling, and administrative expense.
NM - not meaningful
Revenue and gross margin increased slightly in 2015. Operating expense in 2015 remained essentially flat as a decrease in marketing, selling, and administrative expense was largely offset by increased research and development expense. Net income and EPS increased slightly in 2015 as a higher gross margin, lower income taxes, and decreased asset impairment, restructuring, and other special charges were largely offset by increased acquired IPR&D charges and lower other income.
Certain items affect the comparisons of our
2015
and
2014
results. The
2015
highlighted items are summarized in the "Results of Operations—Executive Overview" section. The
2014
highlighted items are summarized as follows:
Acquired IPR&D (Notes 3 and 4 to the consolidated financial statements)
|
|
•
|
We recognized acquired IPR&D charges of $200.2 million (pretax), or $0.12 per share, related to acquired IPR&D from various collaboration agreements.
|
Collaborations (Note 4 to the consolidated financial statements)
|
|
•
|
We recognized income of $92.0 million (pretax), or $0.06 per share, related to the transfer of our linagliptin and empagliflozin commercial rights in certain countries to Boehringer Ingelheim.
|
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
|
|
•
|
We recognized charges of $468.7 million (pretax), or $0.38 per share, related to severance costs associated with our ongoing cost containment efforts to reduce our cost structure and global workforce, and asset impairments primarily associated with the closure of a manufacturing 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 which required us to accelerate into 2014 the recording of an expense for the 2015 fee.
|
Revenue
The following table summarizes our revenue activity by region:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
Percent Change
|
U.S.
(1)
|
$
|
10,097.4
|
|
|
$
|
9,134.1
|
|
|
11
|
Outside U.S.
|
9,861.3
|
|
|
10,481.5
|
|
|
(6)
|
Revenue
|
$
|
19,958.7
|
|
|
$
|
19,615.6
|
|
|
2
|
Numbers may not add due to rounding.
(1)
U.S. revenue includes revenue in Puerto Rico.
The following are components of the change in revenue compared to the prior year:
|
|
|
|
|
|
|
|
|
2015 vs. 2014
|
|
U.S.
|
Outside U.S.
|
Consolidated
|
Volume
|
6
|
%
|
9
|
%
|
8
|
%
|
Price
|
5
|
%
|
(2
|
)%
|
1
|
%
|
Foreign exchange rates
|
—
|
%
|
(13
|
)%
|
(7
|
)%
|
Percent change
|
11
|
%
|
(6
|
)%
|
2
|
%
|
Numbers may not add due to rounding.
In the U.S., the volume increase in 2015 was driven by the inclusion of revenue from Novartis AH and increased volumes for several pharmaceutical products, partially offset by the residual impact of the loss of exclusivity for Cymbalta and Evista.
Outside the U.S., the volume increase in 2015 was driven by the inclusion of revenue from Novartis AH and increased volumes for several pharmaceutical products. On a pro forma basis, which reflects the 2014 revenue of Novartis AH as described in Note 3 to the consolidated financial statements, our consolidated volume in 2015 would have increased by 2 percent compared with 2014.
The following table summarizes our revenue activity in
2015
compared with
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2015
|
|
2014
|
|
|
Product
|
U.S.
(1)
|
|
Outside U.S.
|
|
Total
|
|
Total
|
Percent Change
|
Humalog
|
$
|
1,772.3
|
|
|
$
|
1,069.6
|
|
|
$
|
2,841.9
|
|
|
$
|
2,785.2
|
|
|
2
|
|
Alimta
|
1,162.4
|
|
|
1,330.7
|
|
|
2,493.1
|
|
|
2,792.0
|
|
|
(11
|
)
|
Cialis
|
1,256.8
|
|
|
1,053.9
|
|
|
2,310.7
|
|
|
2,291.0
|
|
|
1
|
|
Forteo
|
612.4
|
|
|
735.9
|
|
|
1,348.3
|
|
|
1,322.0
|
|
|
2
|
|
Humulin
|
764.4
|
|
|
543.0
|
|
|
1,307.4
|
|
|
1,400.1
|
|
|
(7
|
)
|
Cymbalta
|
144.6
|
|
|
883.0
|
|
|
1,027.6
|
|
|
1,614.7
|
|
|
(36
|
)
|
Zyprexa
|
156.7
|
|
|
783.6
|
|
|
940.3
|
|
|
1,037.3
|
|
|
(9
|
)
|
Strattera
|
502.1
|
|
|
281.9
|
|
|
784.0
|
|
|
738.5
|
|
|
6
|
|
Effient
|
417.6
|
|
|
105.4
|
|
|
523.0
|
|
|
522.2
|
|
|
—
|
|
Erbitux
|
386.7
|
|
|
98.3
|
|
|
485.0
|
|
|
373.3
|
|
|
30
|
Cyramza
|
277.7
|
|
|
106.1
|
|
|
383.8
|
|
|
75.6
|
|
|
NM
|
Trulicity
|
207.7
|
|
|
41.0
|
|
|
248.7
|
|
|
10.2
|
|
|
NM
|
Evista
|
61.7
|
|
|
175.6
|
|
|
237.3
|
|
|
419.8
|
|
|
(43
|
)
|
Other human pharmaceutical products
|
833.1
|
|
|
1,013.5
|
|
|
1,846.6
|
|
|
1,887.1
|
|
|
(2
|
)
|
Animal health products
|
1,541.2
|
|
|
1,639.8
|
|
|
3,181.0
|
|
|
2,346.6
|
|
|
36
|
|
Revenue
|
$
|
10,097.4
|
|
|
$
|
9,861.3
|
|
|
$
|
19,958.7
|
|
|
$
|
19,615.6
|
|
|
2
|
|
Numbers may not add due to rounding.
(1)
U.S. revenue includes revenue in Puerto Rico.
NM - not meaningful
Revenue of Humalog increased 9 percent in the U.S., driven by higher realized prices and, to a lesser extent, increased volume. Revenue outside the U.S. decreased 8 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by higher volume.
Revenue of Alimta decreased 5 percent in the U.S., driven by decreased demand and, to a lesser extent, lower realized prices. Revenue outside the U.S. decreased 15 percent, driven by the unfavorable impact of foreign exchange rates and, to a lesser extent, lower realized prices, partially offset by increased volume.
Revenue of Cialis increased 21 percent in the U.S., driven by higher realized prices. Revenue outside the U.S. decreased 16 percent, driven by the unfavorable impact of foreign exchange rates.
Revenue of Forteo increased 14 percent in the U.S., driven by higher realized prices, partially offset by decreased volume. Revenue outside the U.S. decreased 6 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by increased volume.
Revenue of Humulin increased 7 percent in the U.S., driven by higher realized prices and, to a lesser extent, wholesaler buying patterns, partially offset by decreased demand. Revenue outside the U.S. decreased 21 percent, driven by decreased volume, primarily due to the loss of a government contract in Brazil, and the unfavorable impact of foreign exchange rates.
Revenue of Cymbalta decreased 66 percent in the U.S. due to the loss of U.S. patent exclusivity in December 2013. Revenue outside the U.S. decreased 26 percent, driven by the unfavorable impact of foreign exchange rates and the loss of exclusivity in Europe in 2014.
Revenue of Zyprexa increased 31 percent in the U.S., driven by adjustments to the return reserve resulting from the expiration of the period to return expired product for credit. Revenue outside the U.S. decreased 15 percent, driven primarily by the unfavorable impact of foreign exchange rates. We lost patent exclusivity for Zyprexa in Japan in December 2015. Zyprexa revenue in Japan was $415.9 million in 2015, compared with
$466.2 million in 2014. The revenue decrease in Japan was due to the unfavorable impact of foreign exchange rates.
Revenue of Strattera increased 11 percent in the U.S., driven by higher realized prices and, to a lesser extent, increased demand. Revenue outside the U.S. decreased 1 percent, driven by the unfavorable impact of foreign exchange rates, largely offset by increased volume.
Revenue 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 intervention, including patients undergoing angioplasty, atherectomy, or stent placement, increased 6 percent in the U.S., driven by higher realized prices, partially offset by decreased demand. Revenue outside the U.S. decreased 17 percent, driven primarily by the unfavorable impact of foreign exchange rates.
Revenue of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal women and for reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer, decreased 70 percent in the U.S., due to the loss of patent exclusivity in March 2014. Revenue outside the U.S. decreased 17 percent, driven primarily by the unfavorable impact of foreign exchange rates.
Revenue of animal health products in the U.S. increased 21 percent and animal health product revenue outside the U.S. increased 53 percent. The increases were driven by the inclusion of revenue from Novartis AH.
On a pro forma basis, which reflects the 2014 revenue of Novartis AH as described in Note 3 to the consolidated financial statements, revenue of animal health products in the U.S. would have decreased 1 percent, driven primarily by decreased volume in food animal products. Revenue outside the U.S. would have decreased 13 percent, driven by the unfavorable impact of foreign exchange rates and decreased volume in companion animal products, partially offset by higher realized prices and volume for food animal products.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue was 74.8 percent in 2015, essentially flat compared with 2014 as the unfavorable impacts of the inclusion of Novartis AH and inventory step-up and amortization costs were offset by the favorable impact of foreign exchange rates on international inventories sold.
Research and development expense increased 1 percent to $4.80 billion in 2015, driven primarily by higher late-stage clinical development costs, the inclusion of Novartis AH, and an increase in charges associated with the termination of late-stage molecules, primarily evacetrapib and basal insulin peglispro, of approximately $135 million, partially offset by the favorable impact of foreign exchange rates.
Marketing, selling, and administrative expense decreased 1 percent to $6.53 billion in 2015, due to the favorable impact of foreign exchange rates and a 2014 charge associated with the U.S. Drug Fee, partially offset by the inclusion of Novartis AH and expenses related to new product launches.
We recognized acquired IPR&D charges of $535.0 million in 2015 resulting from various collaboration agreements, primarily with Pfizer, as well as the consideration paid to acquire the worldwide rights to Locemia's intranasal glucagon. There were $200.2 million of acquired IPR&D charges in 2014 related to various collaboration agreements, including charges associated with the transfer of commercial rights to us, from Boehringer Ingelheim, of the new insulin glargine product in certain countries where it was not yet approved. See Notes 3 and 4 to the consolidated financial statements for additional information.
We recognized asset impairment, restructuring, and other special charges of $367.7 million in 2015. The charges relate to severance costs, integration costs for Novartis AH, and asset impairments. In 2014, we recognized charges of $468.7 million for asset impairment, restructuring, and other special charges. The charges included severance costs, asset impairments primarily associated with the closure of a manufacturing site in Puerto Rico, and integration costs for the then-pending acquisition of Novartis AH. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of $100.6 million in 2015, compared with income of $340.5 million in 2014. Other income in 2015 included net gains of $236.7 million on investments, partially offset by a net charge of $152.7 million related to the repurchase of $1.65 billion of debt. Other income in 2014 included net
gains of $216.4 million on investments and $92.0 million of income associated with the transfer of commercial rights to linagliptin and empagliflozin in certain countries from us to Boehringer Ingelheim. See Notes 4 and 17 to the consolidated financial statements for additional information.
Our effective tax rate was 13.7 percent in 2015, compared with 20.3 percent in 2014. The effective tax rate for 2014 reflects the impact of a $119.0 million nondeductible charge associated with the U.S. Drug Fee. The decrease in the tax rate for 2015 compared with 2014 is primarily due to a favorable tax impact of the net charges related to the repurchase of debt, acquired IPR&D, and asset impairment, restructuring, and other special charges. See Note 13 to the consolidated financial statements for additional information.
FINANCIAL CONDITION
As of
December 31, 2016
, cash and cash equivalents was
$4.58 billion
, an increase of
$915.7 million
, compared with
$3.67 billion
at
December 31, 2015
. Refer to the Consolidated Statements of Cash Flows for additional details on the significant sources and uses of cash for the years ended
December 31, 2016
and
December 31, 2015
.
In addition to our cash and cash equivalents, we held total investments of
$6.66 billion
and
$4.43 billion
as of
December 31, 2016
and
December 31, 2015
, respectively. See Note 7 to the consolidated financial statements for additional details.
As of
December 31, 2016
, total debt was
$10.31 billion
, an increase of
$2.33 billion
compared with
$7.98 billion
at
December 31, 2015
. This increase is primarily due to the net issuance of $1.30 billion of short-term commercial paper borrowings and the
$1.21 billion
issuance of Swiss Franc debt. At
December 31, 2016
, we had a total of
$2.87 billion
of unused committed bank credit facilities,
$2.70 billion
of which is available to support our commercial paper program. 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 borrowing needs.
In January 2017, we completed our acquisition of Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine, and rabies vaccine portfolio in an all-cash transaction for approximately
$885 million
, including the estimated cost of inventory, which was funded through the issuance of commercial paper. In January 2017, we announced an agreement to acquire CoLucid for
$46.50
per share or approximately
$960 million
. We anticipate issuing debt to fund the transaction, which is expected to close by the end of the first quarter of 2017. See Note 3 to the consolidated financial statements for additional information.
For the 131st consecutive year, we distributed dividends to our shareholders. Dividends of $2.04 per share and $2.00 per share were paid in
2016
and
2015
, respectively. In the fourth quarter of
2016
, effective for the dividend to be paid in the first quarter of
2017
, the quarterly dividend was increased to $0.52 per share, resulting in an indicated annual rate for
2017
of $2.08 per share.
Capital expenditures of
$1.04 billion
during
2016
were
$29.2 million
less than in
2015
. We expect
2017
capital expenditures to be approximately $1.2 billion.
In
2016
, we repurchased
$540.1 million
of shares under the
$5.00 billion
share repurchase program previously announced in October 2013. See Note 12 to the consolidated financial statements for additional details.
See "Results of Operations—Executive Overview—Other Matters" for information regarding recent and upcoming losses of patent protection for Evista (U.S.), Cymbalta (Europe), Alimta (U.S., Europe, and Japan), Zyprexa (Japan), Strattera (U.S.), Effient (U.S.), and Cialis (U.S. and Europe).
At
December 31, 2016
, we had an aggregate of
$9.77 billion
of cash and investments at our foreign subsidiaries. A significant portion of this amount would be subject to tax payments if such cash and investments were repatriated to the U.S. We record U.S. deferred tax liabilities for certain unremitted earnings, but when foreign earnings are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. income taxes is provided. We believe cash provided by operating activities in the U.S. and planned repatriations of foreign earnings for which tax has been provided should be sufficient to fund our domestic operating needs, dividends paid to shareholders, share repurchases, and capital expenditures.
Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of health care legislation; and various international government funding levels.
In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations 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 objective of controlling these risks is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.
Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at
December 31, 2016
and
2015
, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of
December 31, 2016
and
2015
, respectively, would not have a material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.
Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, and British pound; and the British pound and Swiss franc against the euro. We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the Japanese yen, and the British pound). Our corporate risk-management policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of currency fluctuations on the existing assets and liabilities. We periodically analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts as of
December 31, 2016
and
2015
, would not have a material impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis does not consider the impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions.
Off-Balance Sheet Arrangements and Contractual Obligations
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material 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 with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not included in the table of contractual obligations below.
Individually, these arrangements are not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements were reached in the same reporting period, the aggregate charge to expense could be material to the results of operations or cash flows in that period. See Note 4 to the consolidated financial statements for additional details. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound successfully achieves milestone objectives. We also note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.
Our current noncancelable contractual obligations that will require future cash payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
(Dollars in millions)
|
Total
|
|
Less Than
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More Than
5 Years
|
Long-term debt, including interest payment
(1)
|
$
|
11,945.3
|
|
|
$
|
832.4
|
|
|
$
|
1,993.3
|
|
|
$
|
392.6
|
|
|
$
|
8,727.0
|
|
Capital lease obligations
|
14.4
|
|
|
5.4
|
|
|
6.9
|
|
|
2.1
|
|
|
—
|
|
Operating leases
|
873.6
|
|
|
134.8
|
|
|
230.7
|
|
|
169.5
|
|
|
338.6
|
|
Purchase obligations
(2)
|
15,303.5
|
|
|
14,800.0
|
|
|
490.4
|
|
|
10.0
|
|
|
3.1
|
|
Other long-term liabilities reflected on our balance sheet
(3)
|
2,441.2
|
|
|
—
|
|
|
362.7
|
|
|
220.3
|
|
|
1,858.2
|
|
Total
|
$
|
30,578.0
|
|
|
$
|
15,772.6
|
|
|
$
|
3,084.0
|
|
|
$
|
794.5
|
|
|
$
|
10,926.9
|
|
(1)
Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the interest rate forward curve at
December 31, 2016
, to compute the amount of the contractual obligation for interest on the variable rate debt instruments and swaps.
(2)
We have included the following:
|
|
•
|
Purchase obligations consisting primarily of all open purchase orders as of
December 31, 2016
. Some of these purchase orders may be cancelable; however, for purposes of this disclosure, we have not distinguished between cancelable and noncancelable purchase obligations.
|
|
|
•
|
Contractual payment obligations with each of our significant vendors, which are noncancelable and are not contingent.
|
(3)
We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and deferred compensation liabilities. We excluded long-term income taxes payable of $688.9 million, because we cannot reasonably estimate the timing of future cash outflows associated with those liabilities.
The contractual obligations table is current as of
December 31, 2016
. We expect the amount of these obligations to change materially over time as new contracts are initiated and existing contracts are completed, terminated, or modified.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the U.S., we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods 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 and the buyer assumes the risks and rewards of ownership. Provisions for returns, rebates, and discounts are established in the same period the related sales are recorded.
Sales Returns - Background and Uncertainties
We regularly review the supply levels of our significant products sold to major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements does not provide an incentive for speculative wholesaler buying and provides us with data on inventory levels at our wholesalers. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the revenue of a major product compared with underlying demand, we disclose this in our product revenue discussion if we believe the amount is material to the product revenue trend; however, we are not always able to accurately quantify the amount of stocking or destocking in the retail channel. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
When sales occur, we estimate a reserve for future product returns related to those sales. This estimate is based on several factors, including: historical return rates, expiration date by product (generally, 24 to 36 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, among others, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows U.S. pharmaceutical customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. Adjustments to the returns reserve have been and may in the future be required based on revised estimates to our assumptions, which would have an impact on our consolidated results of operations. We record the return amounts as a deduction to arrive at our net product sales. Once the product is returned, it is destroyed. Actual product returns have been less than 2 percent of our net revenue over the past three years and have not fluctuated significantly as a percentage of revenue.
Sales Rebates and Discounts - Background and Uncertainties
We establish sales rebate and discount accruals in the same period as the related sales. The rebate and discount amounts are recorded as a deduction to arrive at our net product revenue. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include managed care, Medicare, Medicaid, 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.
The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, and Medicaid contracts. In determining the appropriate accrual amount, we consider our historical managed care, Medicare, and Medicaid rebate payments by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current managed care, Medicare, and Medicaid contracts, the percentage of our products that are sold via managed care, Medicare, and Medicaid contracts, and our product pricing. Although we accrue a liability for managed care, Medicare, and Medicaid rebates at the time we record the sale (when the product is shipped), the managed care, Medicare, and Medicaid rebate related to that sale is paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.
Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. A best estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale. If our estimates are not reflective of the actual pharmaceutical costs incurred by the government, we adjust our rebate reserves.
Financial Statement Impact
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our global sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As of
December 31, 2016
, a 5 percent change in our global sales return, rebate, and discount liability would have led to an approximate
$214 million
effect on our income before income taxes.
The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the U.S. was 85 percent and 87 percent as of
December 31, 2016
and
2015
, respectively.
The following represents a roll-forward of our most significant U.S. pharmaceutical sales return, rebate, and discount liability balances, including managed care, Medicare, and Medicaid:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
2016
|
|
2015
|
Sales return, rebate, and discount liabilities, beginning of year
|
$
|
2,558.6
|
|
|
$
|
2,241.4
|
|
Reduction of net sales due to sales returns, discounts, and rebates
(1)
|
8,732.8
|
|
|
6,245.1
|
|
Cash payments of discounts and rebates
|
(7,689.6
|
)
|
|
(5,927.9
|
)
|
Sales return, rebate, and discount liabilities, end of year
|
$
|
3,601.8
|
|
|
$
|
2,558.6
|
|
(1)
Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than
1.0 percent
of consolidated net sales for each of the years presented.
Product Litigation Liabilities and Other Contingencies
Background and Uncertainties
Product litigation liabilities and other contingencies are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors we consider in developing our product litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant product liability contingencies when both probable and reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products. In addition to insurance coverage, we also consider any third-party indemnification to which we are entitled, including the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.
Financial Statement Impact
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
Impairment of Indefinite-Lived and Long-Lived Assets
Background and Uncertainties
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. 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.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions. We utilize the “income method,” as described in Note 8 to the consolidated financial statements.
For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in “Results of Operations—Executive Overview—Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products. As such, it is likely that some acquired IPR&D assets will become impaired in the future.
Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management’s judgment. Actual results could vary materially from these estimates.
Retirement Benefits Assumptions
Background and Uncertainties
Defined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate, expected return on plan assets, and retirement age. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 14 to the consolidated financial statements for additional information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt instruments to determine the discount rates. In evaluating the expected return on plan assets, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately
80 percent
of which are growth investments); and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates and expected return on plan assets 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 our expectations of future retirement ages.
Financial Statement Impact
If the
2016
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, income before income taxes would change by
$34.6 million
. As of January 1, 2016, we changed the method used to estimate the service and interest cost components of the net periodic pension and retiree health benefit plan costs. Prior to this change, the service and interest costs were determined using a single weighted-average discount rate based on yield curves of high quality, fixed income debt instruments used to measure the benefit obligation at the beginning of the period. This new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve to the projected cash outflows of our obligations. The new method provides a more precise measure of interest and service costs by improving the correlation between the projected benefit cash flows and the specific spot yield curve rates. The change does not affect the measurement of the total benefit obligations as the change in service and interest costs is recorded in the actuarial gains and losses recorded in accumulated other comprehensive loss. We accounted for this as a change in estimate prospectively beginning in 2016.
If the
2016
expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income taxes would change by
$23.4 million
. If our assumption regarding the
2016
expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by
$43.8 million
. The U.S. plans, including Puerto Rico, represent approximately
75 percent
and
80 percent
of the total projected benefit obligation and total plan assets, respectively, at
December 31, 2016
.
Income Taxes
Background and Uncertainties
We prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities, which may result in future tax, interest, and penalty assessments by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions’ 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 from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law, the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.
Financial Statement Impact
As of
December 31, 2016
, a 5 percent change in the amount of the uncertain tax positions and the valuation allowance would result in a change in net income of
$19.1 million
and
$32.4 million
, respectively.
Acquisitions
Background and Uncertainties
To determine whether acquisitions or licensing transactions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules. As discussed further in Note 2 to the consolidated financial statements, a modified definition of a business is effective for our acquisitions subsequent to October 1, 2016.
If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense at the acquisition date, and goodwill is not recorded. Refer to Note 3 to the consolidated financial statements for additional information.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets, including acquired IPR&D, are determined using information available near the acquisition date based on expectations and assumptions that are deemed reasonable by management. Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.
The fair values of identifiable intangible assets are primarily determined using an "income method," as described in Note 8 to the consolidated financial statements.
The fair value of any contingent consideration liability that results from a business combination is determined using a market approach based on quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or a discounted cash flow analysis. Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, revenue and the discount rate.
Financial Statement Impact
As of
December 31, 2016
, a 5 percent change in the contingent consideration liability would result in a change in income before income taxes of
$22.9 million
.
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 15 to the consolidated financial statements and is incorporated here by reference.
FINANCIAL EXPECTATIONS FOR
2017
For the full year of
2017
, we expect EPS to be in the range of $2.69 to $2.79, which reflects the estimated acquired IPR&D charge related to the planned acquisition of CoLucid. We anticipate that total revenue will be between $21.8 billion and $22.3 billion. Excluding the impact of foreign exchange rates, we expect revenue growth from animal health products and a number of established pharmaceutical products including Trajenta, Forteo, and Humalog, as well as higher revenue from new products including Trulicity, Taltz, Basaglar
®
, Cyramza, Jardiance, and Lartruvo.
We anticipate that gross margin as a percent of revenue will be approximately 73.5 percent in
2017
. Research and development expenses are expected to be in the range of $4.9 billion to $5.1 billion. Marketing, selling, and administrative expenses are expected to be in the range of $6.4 billion to $6.6 billion. Other—net, (income) expense is expected to be income of up to $100 million.
The
2017
tax rate is expected to be approximately 24.5 percent which reflects the non-deductibility for tax purposes of the estimated acquired IPR&D charge related to the planned acquisition of CoLucid.
Capital expenditures are expected to be approximately $1.2 billion.
Amortization and inventory step-up costs associated with the acquisition of Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine, and rabies vaccines portfolio included in our
2017
financial guidance are subject to final inventory quantities purchased and acquisition accounting adjustments. The acquired IPR&D charge related to the planned acquisition of CoLucid included in our
2017
financial guidance is subject to final accounting upon completion of the acquisition.
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
You can find quantitative and qualitative disclosures about market risk (
e.g.,
interest rate risk) at Item 7, “Management’s Discussion and Analysis—Financial Condition.” That information is incorporated in this report by reference.