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
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 (loss) per share (EPS) data are presented on a diluted basis.
Financial Results
The following table summarizes our key operating results:
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|
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|
|
|
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Year Ended
December 31,
|
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Percent Change
|
|
2017
|
|
2016
|
|
Revenue
|
$
|
22,871.3
|
|
|
$
|
21,222.1
|
|
|
8
|
Gross margin
|
16,801.1
|
|
|
15,567.2
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|
|
8
|
Gross margin as a percent of revenue
|
73.5
|
%
|
|
73.4
|
%
|
|
|
Operating expense
(1)
|
$
|
11,869.9
|
|
|
$
|
11,695.9
|
|
|
1
|
Acquired in-process research and development
|
1,112.6
|
|
|
30.0
|
|
|
NM
|
Asset impairment, restructuring, and other special charges
|
1,673.6
|
|
|
382.5
|
|
|
NM
|
Income before income taxes
|
2,197.4
|
|
|
3,374.0
|
|
|
(35)
|
Income Taxes
|
2,401.5
|
|
|
636.4
|
|
|
NM
|
Net income (loss)
|
(204.1
|
)
|
|
2,737.6
|
|
|
NM
|
Earnings (loss) per share
|
(0.19
|
)
|
|
2.58
|
|
|
NM
|
(1)
Operating expense consists of research and development and marketing, selling, and administrative expenses.
NM - not meaningful
Revenue and gross margin increased in
2017
. The increase in operating expense in
2017
was primarily due to an increase in marketing, selling, and administrative expense. Income before income taxes decreased in
2017
as higher asset impairment, restructuring, and other special charges, acquired in-process research and development (IPR&D) charges and, to a lesser extent, higher operating expense were partially offset by a higher gross margin. Tax expense exceeded income before income taxes in
2017
as a result of the 2017 Tax Act, resulting in a net loss for the year.
Re
fer to “Results of Operations - Executive Overview - Other Matters - Tax Matters” for further discussion of the 2017 Tax Act.
The following highlighted items affect comparisons of our
2017
and
2016
financial results:
2017
Acquired IPR&D (Note 3 to the consolidated financial statements)
|
|
•
|
We recognized acquired IPR&D charges of
$1.11 billion
(pretax), or $0.97 per share, primarily related to the acquisition of CoLucid Pharmaceuticals, Inc. (CoLucid).
|
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
|
|
•
|
We recognized charges of
$1.67 billion
(pretax), or $1.23 per share, primarily associated with efforts to reduce our cost structure, including the U.S. voluntary early retirement program.
|
Income Tax Expense (Note 13 to the consolidated financial statements)
|
|
•
|
We recognized a provisional tax expense of $1.91 billion, or $1.81 per share, due to the 2017 Tax Act.
Re
fer to “Results of Operations - Executive Overview - Other Matters - Tax Matters” for further discussion of the 2017 Tax Act.
|
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 to co-develop MEDI1814, a potential disease-modifying treatment for Alzheimer's disease.
|
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.
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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
40
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) have been approved by regulatory authorities in at least one of the major geographies for use in the diseases described. The first quarter in which each NME initially was approved in any major geography for any indication is shown in parentheses:
Abemaciclib (Verzenio
™
) (Q3 2017)
—a small molecule cell-cycle inhibitor, selective for cyclin-dependent kinases 4 and 6 for the treatment of metastatic breast cancer.
Baricitinib (Olumiant
®
) (Q1 2017)
—a Janus tyrosine kinase inhibitor for the treatment of moderate-to-severe active rheumatoid arthritis (in collaboration with Incyte Corporation).
Olaratumab* (Lartruvo
™
) (Q4 2016)
—a human lgG1 monoclonal antibody for the treatment of advanced soft tissue sarcoma.
The following NME has been submitted for regulatory review in at least one of the major geographies for potential use in the disease described. The first quarter in which the NME initially was submitted in any major geography for any indication is shown in parentheses:
Galcanezumab* (Q3 2017)
—a once-monthly subcutaneously injected calcitonin gene-related peptide (CGRP) antibody for the treatment of migraine prevention. Refer to Item 3, "Legal Proceedings—Other Patent Litigation" for discussion of the lawsuit filed by Teva Pharmaceuticals International GMBH.
The following NMEs and diagnostic agent are currently in Phase III clinical trial testing for potential use in the diseases described. The first quarter in which each NME and diagnostic agent initially entered Phase III for any indication is shown in parentheses:
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.
Lanabecestat (Q2 2016)
—an oral beta-secretase cleaving enzyme (BACE) inhibitor for the treatment of early and mild Alzheimer's disease (in collaboration with AstraZeneca).
Lasmiditan (Q2 2015)
—an oral 5-HT
1F
agonist for the acute treatment of migraine.
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.
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 Inc. (Pfizer)).
Ultra-rapid Lispro* (Q3 2017)
—an ultra-rapid insulin for the treatment of type 1 and type 2 diabetes.
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*
|
Biologic molecule subject to the 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,
2017
:
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|
|
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Compound
|
Indication
|
U.S.
|
Europe
|
Japan
|
Developments
|
Endocrinology
|
Nasal glucagon
|
Severe hypoglycemia
|
Phase III
|
Development of commercial manufacturing process is ongoing.
|
Ultra-rapid Lispro
|
Type 1 and 2 diabetes
|
Phase III
|
Initiated Phase III studies in third quarter of 2017.
|
Immunology
|
Olumiant
|
Rheumatoid arthritis
|
Submitted
|
Launched
|
Approved and launched in Europe in first quarter of 2017. Received complete response letter from the U.S. Food and Drug Administration (FDA) in second quarter of 2017. Approved and launched in Japan in third quarter of 2017. Resubmitted in the U.S. in fourth quarter of 2017.
|
Atopic dermatitis
|
Phase III
|
Initiated Phase III studies in fourth quarter of 2017.
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Compound
|
Indication
|
U.S.
|
Europe
|
Japan
|
Developments
|
Neuroscience
|
Flortaucipir
|
Alzheimer's disease
|
Phase III
|
Phase III trial is ongoing.
|
Galcanezumab
|
Cluster headache
|
Phase III
|
Phase III trials are ongoing.
|
Migraine prevention
|
Submitted
|
Phase III
|
Three Phase III trials met primary endpoints. Submitted to regulatory authorities in the U.S. and Europe in third and fourth quarters of 2017, respectively.
|
Lanabecestat
|
Early and mild Alzheimer's disease
|
Phase III
|
Phase III trials are ongoing.
|
Lasmiditan
|
Migraine
|
Phase III
|
Acquired from CoLucid in first quarter of 2017. In third quarter of 2017, announced Phase III trial met primary endpoint. Submission to FDA expected in second half of 2018. See Note 3 to the consolidated financial statements for information on the acquisition.
|
Solanezumab
|
Preclinical Alzheimer's disease
|
Phase III
|
Phase III trial is ongoing.
|
Tanezumab
|
Osteoarthritis pain
|
Phase III
|
Granted Fast Track designation
(1)
from the FDA in second quarter of 2017.
|
Chronic low back pain
|
Phase III
|
Cancer pain
|
Phase III
|
Phase III trial is ongoing.
|
Oncology
|
Verzenio
|
Adjuvant breast cancer
|
Phase III
|
Initiated Phase III study in third quarter of 2017.
|
Metastatic breast cancer
|
Launched
|
Submitted
|
Two Phase III trials met primary endpoints. Approved and launched in the U.S. in the third and fourth quarter of 2017, respectively. Submitted to regulatory authorities in Europe and Japan in third quarter of 2017.
|
KRAS-mutant non-small cell lung cancer
|
Terminated
|
In fourth quarter of 2017, announced Phase III trial did not meet primary endpoint and further development of monotherapy in this indication has been discontinued.
|
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 trial is ongoing.
|
(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 human pharmaceutical research and development and the introduction of new products. There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market can take over a decade and often costs in excess of $2 billion. Failure can occur at any point in the process, including in later stages after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies continue to establish increasingly high hurdles for the efficacy and safety of new products. Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict revenue growth rates of new products.
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
Elanco Animal Health
We are reviewing strategic alternatives for Elanco Animal Health (our animal health segment), including an initial public offering, merger, sale, or retention of the business, and will provide an update no later than the middle of 2018.
Patent Matters
We depend on patents or other forms of intellectual-property protection for most of our revenue, cash flows, and earnings. We lost patent exclusivity for the schizophrenia and bipolar mania indications for Zyprexa
®
in Japan in December 2015 and April 2016, respectively. Generic versions of Zyprexa 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.
We lost our patent exclusivity for Strattera
®
in the U.S. in May 2017, and generic versions of Strattera were approved in the same month. As described in Note 15 to the consolidated financial statements, following the settlement related to the compound patent challenge for Effient
®
, generic products launched in the U.S. in the third quarter of 2017. The entry of generic competition for these products has caused a rapid and severe decline in revenue, which will, in the aggregate, have a material adverse effect on our consolidated results of operations and cash flows.
Our compound patent protection for Cialis
®
(tadalafil) and Adcirca
®
(tadalafil) expired in major European markets and the U.S. in November 2017. However, Cialis is protected by a unit dose patent in the U.S., where we expect exclusivity to end in late September 2018 at the earliest. 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.
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. Patent and Trademark Office recently ruled in our favor regarding the validity of the vitamin regimen patent, the generic companies which filed petitions seeking
inter partes
review of our vitamin regimen patent have appealed these rulings as further described in Note 15 to the consolidated financial statements. We are aware that generic competitors have received approval to market generic versions of pemetrexed in major European markets, and that a generic product is currently on the market in at least one major European market. In light of the United Kingdom (U.K.) Supreme Court's judgment finding infringement in the U.K., Italy, France, and Spain, Actavis has withdrawn its previously launched-at-risk generic products from these markets. We will continue to seek to remove any generic pemetrexed products launched at risk in other European markets. Notwithstanding our patents, generic versions of Alimta were also approved in Japan starting in February 2016. As described in Note 15 to the consolidated financial statements, we do not currently anticipate that generic versions of Alimta will proceed to pricing approval.
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. A similar version of insulin lispro has received approval in the U.S. and could launch soon. We are also aware that a competitor's insulin lispro product has launched in certain European markets. Other manufacturers have efforts underway to bring to market a similar version of insulin lispro in the U.S. and Europe. While it is difficult to estimate the severity of the impact of similar insulin lispro products entering the market, we do not expect a rapid and severe decline in revenue; however, we expect competitive pressure and some loss of market share initially that would continue over time.
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. 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 and cash flows.
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, 2017, 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 related to prescription drug prices and reducing the cost of pharmaceuticals purchased by government health care programs. Several states enacted legislation in 2017 related to prescription drug pricing transparency. 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. The Bipartisan Budget Act, enacted on February 9, 2018, will require manufacturers of brand-name drugs, biologics, and biosimilars to pay a 70 percent discount in the Medicare Part D Coverage Gap, up from the current 50 percent discount. This increase in Coverage Gap discounts will be effective beginning in 2019.
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 and cash flows.
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. A 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 2022 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. Repealing and replacing the ACA remains a priority for President Trump and Congress. Provisions included in final legislation 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. recently enacted tax reform legislation significantly revising U.S. tax law, and a number of other countries are actively considering or enacting tax changes. Other organizations, such as the Organisation for Economic Co-operation and Development and the European Commission, are active regarding tax-related matters which could influence international tax policy in countries in which we operate. While outcomes of these initiatives continue to develop and remain uncertain, modifications 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.
In December 2017, the President of the U.S. signed into law the Tax Cuts and Jobs Act (2017 Tax Act). The 2017 Tax Act includes significant changes to the U.S. corporate income tax system, such as the reduction in the corporate income tax rate, transition to a territorial tax system, changes to business related exclusions, deductions, and credits, and modifications to international tax provisions, including a one-time repatriation transition tax (also known as the ‘Toll Tax’) on unremitted foreign earnings. U.S. Generally Accepted Accounting Principles (GAAP) requires that the income tax accounting effects from a change in tax laws or tax rates be recognized in continuing operations in the reporting period that includes the enactment date of the change. These effects include, among other things, re-measuring deferred tax assets and liabilities, evaluating deferred tax assets for valuation allowances, and assessing the impact of the Toll Tax and certain other provisions of the 2017 Tax Act. We were not able to completely gather, analyze, and compute all impacts of the 2017 Tax Act; therefore, the estimated income tax expense of $1.91 billion that we recorded in December 2017 related to the 2017 Tax Act is a provisional amount based upon reasonable estimates and may change upon completion of our calculations (see Note 13 to the consolidated financial statements). In addition, changes in our interpretations of the new tax laws, along with subsequent regulations, interpretations, and guidance that have been and may be issued, may materially affect the estimates and assumptions used in recording the changes to our 2017 U.S. federal and state income tax expense that resulted from the 2017 Tax Act. Refer to “Results of Operations - Financial Condition” for discussion of the impact of the 2017 Tax Act on our liquidity.
Acquisitions
See Note 3 to the consolidated financial statements for discussion regarding our recent acquisitions of businesses and assets, including:
|
|
•
|
Our acquisition of Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine, and rabies vaccine portfolio and other related assets (BIVIVP), completed on January 3, 2017, in an all-cash transaction for
$882.1 million
.
|
|
|
•
|
Our acquisition of CoLucid, completed on March 1, 2017, for a cash purchase price of
$831.8 million
, net of cash acquired.
|
Operating Results—
2017
Revenue
The following table summarizes our revenue activity by region:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
2016
|
|
Percent Change
|
U.S.
(1)
|
$
|
12,785.1
|
|
|
$
|
11,506.2
|
|
|
11
|
Outside U.S.
|
10,086.3
|
|
|
9,715.9
|
|
|
4
|
Revenue
|
$
|
22,871.3
|
|
|
$
|
21,222.1
|
|
|
8
|
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 with the prior year:
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
U.S.
|
Outside U.S.
|
Consolidated
|
Volume
|
6
|
%
|
5
|
%
|
6
|
%
|
Price
|
5
|
%
|
(1
|
)%
|
2
|
%
|
Foreign exchange rates
|
—
|
%
|
—
|
%
|
—
|
%
|
Percent change
|
11
|
%
|
4
|
%
|
8
|
%
|
Numbers may not add due to rounding.
In the U.S., the revenue increase in
2017
was driven by increased volume for new pharmaceutical products, including Trulicity
®
, Taltz
®
, Basaglar
®
, Lartruvo, and Jardiance
®
, and higher realized prices for several pharmaceutical products, primarily Forteo
®
and Cialis, as well as increased volume for companion animal products from the acquisition of BIVIP. The increase in revenue was partially offset by decreased volume due to loss of exclusivity for Strattera and Effient, as well as decreased demand for Cialis and food animal products. Cymbalta
®
revenue declined, as 2016 revenue benefited from reductions to the reserve for expected product returns of approximately $175 million.
Outside the U.S., the revenue increase in
2017
was due to increased volume for several new pharmaceutical products, primarily driven by Trulicity and Cyramza
®
. The increase in revenue was partially offset by competitive pressure and the loss of exclusivity for Alimta in several countries and lower volume from the loss of exclusivity for Zyprexa in Japan.
The following table summarizes our revenue activity in
2017
compared with
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
Product
|
U.S.
(1)
|
|
Outside U.S.
|
|
Total
|
|
Total
|
Percent Change
|
Humalog
|
$
|
1,717.8
|
|
|
$
|
1,147.4
|
|
|
$
|
2,865.2
|
|
|
$
|
2,768.8
|
|
|
3
|
Cialis
|
1,358.6
|
|
|
964.5
|
|
|
2,323.1
|
|
|
2,471.6
|
|
|
(6)
|
Alimta
|
1,034.3
|
|
|
1,028.2
|
|
|
2,062.5
|
|
|
2,283.3
|
|
|
(10)
|
Trulicity
|
1,609.8
|
|
|
419.9
|
|
|
2,029.8
|
|
|
925.5
|
|
|
119
|
Forteo
|
965.2
|
|
|
783.8
|
|
|
1,749.0
|
|
|
1,500.0
|
|
|
17
|
Humulin
®
|
884.6
|
|
|
450.7
|
|
|
1,335.4
|
|
|
1,365.9
|
|
|
(2)
|
Cyramza
|
278.8
|
|
|
479.6
|
|
|
758.3
|
|
|
614.1
|
|
|
23
|
Cymbalta
|
114.9
|
|
|
642.2
|
|
|
757.2
|
|
|
930.5
|
|
|
(19)
|
Erbitux
®
|
541.7
|
|
|
104.2
|
|
|
645.9
|
|
|
687.0
|
|
|
(6)
|
Strattera
|
284.9
|
|
|
333.3
|
|
|
618.2
|
|
|
854.7
|
|
|
(28)
|
Zyprexa
|
75.5
|
|
|
505.7
|
|
|
581.2
|
|
|
725.3
|
|
|
(20)
|
Taltz
|
486.0
|
|
|
73.2
|
|
|
559.2
|
|
|
113.1
|
|
|
NM
|
Trajenta
®(2)
|
213.2
|
|
|
324.7
|
|
|
537.9
|
|
|
436.6
|
|
|
23
|
Jardiance
(3)
|
290.4
|
|
|
157.0
|
|
|
447.5
|
|
|
201.9
|
|
|
122
|
Basaglar
|
311.1
|
|
|
121.0
|
|
|
432.1
|
|
|
86.1
|
|
|
NM
|
Effient
|
340.1
|
|
|
48.8
|
|
|
388.9
|
|
|
535.2
|
|
|
(27)
|
Other human pharmaceutical products
|
767.0
|
|
|
927.5
|
|
|
1,694.3
|
|
|
1,564.3
|
|
|
8
|
Animal health products
|
1,511.1
|
|
|
1,574.5
|
|
|
3,085.6
|
|
|
3,158.2
|
|
|
(2)
|
Revenue
|
$
|
12,785.1
|
|
|
$
|
10,086.3
|
|
|
$
|
22,871.3
|
|
|
$
|
21,222.1
|
|
|
8
|
Numbers may not add due to rounding.
|
|
(1)
|
U.S. revenue includes revenue in Puerto Rico.
|
|
|
(2)
|
Trajenta revenue includes Jentadueto
®
.
|
|
|
(3)
|
Jardiance revenue includes Glyxambi
®
and Synjardy
®
.
|
NM - not meaningful
Revenue of Humalog, our injectable human insulin analog for the treatment of diabetes,
increased
2 percent
in the U.S., primarily driven by higher realized prices due to changes in estimates for rebates and discounts, which decreased revenue in 2016 and increased revenue in 2017. Revenue outside the U.S.
increased
6 percent
, driven by increased volume and, to a lesser extent, higher realized prices, partially offset by the unfavorable impact of foreign exchange rates. A similar version of insulin lispro has received tentative approval in the U.S. and could launch soon. We are also aware that a competitor's insulin lispro product has launched in certain European markets. While it is difficult to estimate the severity of the impact of similar insulin lispro products entering the market, we do not expect a rapid and severe decline in revenue; however, we expect competitive pressure and some loss of market share initially that would continue over time. See "Results of Operations - Executive Overview - Other Matters" for more information.
Revenue of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia,
decreased
8 percent
in the U.S., driven by decreased demand partially offset by higher realized prices. Revenue outside the U.S.
decreased
4 percent
, driven by the decreased volume, partially offset by higher realized prices. We lost our compound patent protection for Cialis in major European markets in November 2017 and now expect U.S. exclusivity for Cialis to end in late September 2018 at the earliest. See "Results of Operations - Executive Overview - Other Matters" for more information regarding our U.S. exclusivity. In addition to potential competition from generic tadalafil, we also currently face competition from generic sildenafil, which we expect to accelerate during 2018. We expect that the entry of generic competition following the loss of exclusivity will cause a rapid and severe decline in revenue.
Revenue of Alimta, a treatment for various cancers,
decreased
6 percent
in the U.S., driven by decreased demand due to competitive pressure. Revenue outside the U.S.
decreased
13 percent
, driven by competitive pressure and 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 Trulicity, a treatment for type 2 diabetes,
increased
118 percent
in the U.S., driven by increased share of market for Trulicity and growth in the GLP-1 class. Revenue outside the U.S.
increased
123 percent
.
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
25 percent
in the U.S., driven by higher realized prices and increased volume, primarily due to wholesaler buying patterns. Revenue outside the U.S.
increased
7 percent
, driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates and lower realized prices.
Revenue of Humulin, an injectable human insulin for the treatment of diabetes,
increased
3 percent
in the U.S., driven by higher realized prices. Revenue outside the U.S.
decreased
11 percent
, driven primarily by decreased volume and lower realized prices.
Revenue of Cyramza, a treatment for various cancers,
increased
3 percent
in the U.S., driven by increased volume. Revenue outside the U.S.
increased
39 percent
, primarily due to strong volume growth in Japan, partially offset by lower realized prices and, to a lesser extent, the unfavorable impact of foreign exchange rates.
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,
decreased
57 percent
in the U.S., driven by reductions to the reserve for expected product returns, which increased revenue by approximately $175 million in 2016. Revenue outside the U.S. decreased
3
percent driven by the loss of exclusivity in Canada and Europe, partially offset by increased volume in Japan.
Revenue of Erbitux, a treatment for various cancers,
decreased
7 percent
in the U.S. in
2017
. The decrease was due to increased competition from immuno-oncology products.
Revenue of Strattera, a treatment for attention-deficit hyperactivity disorder,
decreased
47 percent
in the U.S., driven by the loss of exclusivity in the second quarter of 2017, partially offset by higher realized prices. The entry of generic competition following the loss of effective patent protection has caused a rapid and severe decline in revenue. Revenue outside the U.S.
increased
4 percent
, driven by increased volume in Japan, partially offset by lower realized prices and the unfavorable impact of foreign exchange rates, primarily the Japanese yen.
Worldwide food animal revenue
decreased
8 percent
, primarily driven by market access and competitive pressure in the U.S. for Posilac
®
and Optaflexx
®
, respectively. Worldwide companion animal revenue
increased
10 percent
, driven by the inclusion of
$216.7 million
in revenue from the acquisition of BIVIVP, partially offset by competitive pressure. We expect these pressures for both companion animal and food animal to continue, offset in part by new product launches.
Gross Margin, Costs, and Expenses
Gross margin as a percent of total revenue was
73.5 percent
in
2017
, an increase of
0.1
percentage points compared with
2016
primarily due to manufacturing efficiencies and higher realized prices, offset by the impact of foreign exchange rates on international inventories sold and product mix.
Research and development expenses
increased
1 percent
to
$5.28 billion
in
2017
.
Marketing, selling, and administrative expenses
increased
2 percent
to
$6.59 billion
in
2017
, driven by increased marketing expenses for new products that were partially offset by decreased expenses related to late life-cycle products.
We recognized acquired IPR&D charges of
$1.11 billion
in
2017
resulting from business development activity, primarily related to the acquisition of CoLucid. In
2016
, we recognized acquired IPR&D charges of
$30.0 million
associated with the agreement with AstraZeneca to co-develop MEDI1814. See Note 3 to the consolidated financial statements for additional information.
We recognized asset impairment, restructuring, and other special charges of
$1.67 billion
in
2017
. The charges are primarily associated with efforts to reduce our cost structure, including the U.S. voluntary early retirement program, asset impairments related to lower projected revenue for Posilac, and asset impairments and other special charges related to product rationalizations and site closures resulting from our acquisition and integration of Novartis AH. In
2016
, we recognized
$382.5 million
of asset impairment, restructuring, and other special charges 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. See Note 5 to the consolidated financial statements for additional information.
Other—net, (income) expense was income of
$52.4 million
in
2017
, compared with expense of
$84.8 million
in
2016
. Other—net, (income) 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. See Note 17 to the consolidated financial statements for additional information.
During
2017
, we recorded income tax expense of
$2.40 billion
which included a provisional tax charge of $1.91 billion, despite earning
$2.20 billion
of income before income taxes. The provisional tax charge is a result of the 2017 Tax Act, including the Toll Tax. Re
fer to “Results of Operations - Executive Overview - Other Matters - Tax Matters” for further discussion on the 2017 Tax Act.
The effective tax rate in
2016
was
18.9 percent
.
Operating Results—
2016
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
|
Income before income taxes
|
3,374.0
|
|
|
2,790.0
|
|
|
21
|
Income Taxes
|
636.4
|
|
|
381.6
|
|
|
67
|
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 expense.
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 IPR&D charges, were partially offset by higher operating expense, a higher effective tax rate, and lower other income.
Certain items affect the comparisons of our
2016
and
2015
results. The
2016
highlighted items are summarized in the "Results of Operations - Executive Overview" section. The
2015
highlighted items are summarized as follows:
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, 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.
|
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 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 increased 17 percent in the U.S., driven by higher realized prices. 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 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 faced exposure to generic entry in multiple countries that eroded revenue.
Revenue of Forteo 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 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 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 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 increased 7 percent in the U.S., driven by higher realized prices, partially offset by decreased volume. 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, 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 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.
FINANCIAL CONDITION
As of
December 31, 2017
, cash and cash equivalents was
$6.54 billion
, an increase of
$1.95 billion
, compared with
$4.58 billion
at
December 31, 2016
. 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, 2017
and
December 31, 2016
.
In addition to our cash and cash equivalents, we held total investments of
$7.18 billion
and
$6.66 billion
as of
December 31, 2017
and
December 31, 2016
, respectively. See Note 7 to the consolidated financial statements for additional details.
As of
December 31, 2017
, total debt was
$13.65 billion
, an increase of
$3.34 billion
compared with
$10.31 billion
at
December 31, 2016
. The increase was primarily due to the cash proceeds of
$2.23 billion
from the issuance of fixed-rate notes and, to a lesser extent, the net increase in the balance of commercial paper outstanding of
$1.40 billion
, partially offset by the repayment of
$630.6 million
of long term debt. At
December 31, 2017
, we had a total of
$5.57 billion
of unused committed bank credit facilities,
$5.00 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.
For the 132
nd
consecutive year, we distributed dividends to our shareholders. Dividends of $2.08 per share and $2.04 per share were paid in
2017
and
2016
, respectively. In the fourth quarter of
2017
, effective for the dividend to be paid in the first quarter of
2018
, the quarterly dividend was increased to $0.5625 per share, resulting in an indicated annual rate for
2018
of $2.25 per share.
Capital expenditures of
$1.08 billion
during
2017
were
$39.8 million
more than in
2016
. We expect
2018
capital expenditures to be approximately $1.2 billion.
In
2017
, we repurchased
$359.8 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 - Patent Matters" for information regarding recent and upcoming losses of patent protection.
Pursuant to the 2017 Tax Act, the U.S. will transition to a territorial tax system effective January 1, 2018; therefore, we expect that future repatriations of cash from our foreign subsidiaries to the U.S. will result in immaterial or no tax payments. This change in tax law provides us with additional liquidity in the U.S. without the requirement to pay U.S. taxes as existed prior to the enactment of the new tax law. We believe cash provided by operating activities, along with available cash and cash equivalents, should be sufficient to fund our normal operating needs, including installment payments of the Toll Tax, dividends paid to shareholders, share repurchases, and capital expenditures. Over the course of 2018 and 2019, we plan to deploy the additional liquidity created from the tax law across our capital allocation priorities, including; funding our existing marketed products and pipeline, including capital investments, in line with our current strategy; investing in business development to bolster our future growth prospects; returning cash to shareholders via increases to the dividend and share buybacks; and reducing our gross debt.
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, 2017
and
2016
, 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, 2017
and
2016
, 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 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, 2017
and
2016
, 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 generally 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)
|
$
|
14,890.4
|
|
|
$
|
1,264.0
|
|
|
$
|
1,131.9
|
|
|
$
|
1,993.9
|
|
|
$
|
10,500.6
|
|
Capital lease obligations
|
13.4
|
|
|
4.7
|
|
|
6.8
|
|
|
1.9
|
|
|
—
|
|
Operating leases
|
773.2
|
|
|
130.8
|
|
|
224.9
|
|
|
171.8
|
|
|
245.7
|
|
Purchase obligations
(2)
|
16,510.4
|
|
|
16,285.9
|
|
|
224.5
|
|
|
—
|
|
|
—
|
|
2017 Tax Act one-time Toll Tax - provisional
(3)
|
3,245.7
|
|
|
259.7
|
|
|
519.3
|
|
|
519.3
|
|
|
1,947.4
|
|
Other long-term liabilities reflected on our balance sheet
(4)
|
2,026.0
|
|
|
—
|
|
|
442.9
|
|
|
260.3
|
|
|
1,322.8
|
|
Total
|
$
|
37,459.1
|
|
|
$
|
17,945.1
|
|
|
$
|
2,550.3
|
|
|
$
|
2,947.2
|
|
|
$
|
14,016.5
|
|
(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, 2017
, 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, 2017
. 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)
The 2017 Tax Act provides an election to taxpayers subject to the Toll Tax to make payments over an eight-year period. We intend to make this election; therefore, we have included future Toll Tax payments accordingly. The amounts shown reflect the provisional amount of Toll Tax recorded at December 31, 2017; these amounts are subject to change (see Note 13 to the consolidated financial statements).
(4)
We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and other post-employment benefit liabilities. We excluded long-term income taxes payable of $830.9 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, 2017
. 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. As discussed in Income Taxes later in this section, we were unable to completely assess all impacts of the 2017 Tax Act. Therefore, the estimate that we recorded is a provisional amount based upon reasonable estimates and may change upon completion of our calculations. 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 (on average, approximately 24 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, 2017
, a 5 percent change in our global sales return, rebate, and discount liability would have led to an approximate
$240 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 87 percent and 85 percent as of
December 31, 2017
and
2016
, 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)
|
2017
|
|
2016
|
Sales return, rebate, and discount liabilities, beginning of year
|
$
|
3,601.8
|
|
|
$
|
2,558.6
|
|
Reduction of net sales due to sales returns, discounts, and rebates
(1)
|
10,603.4
|
|
|
8,732.8
|
|
Cash payments of discounts and rebates
|
(10,033.2
|
)
|
|
(7,689.6
|
)
|
Sales return, rebate, and discount liabilities, end of year
|
$
|
4,172.0
|
|
|
$
|
3,601.8
|
|
(1)
Adjustments of the estimates for these returns, rebates, and discounts to actual results were approximately
1 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 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.
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
2017
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
$30.0 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
2017
expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income taxes would change by
$23.7 million
. If our assumption regarding the
2017
expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by
$34.8 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, 2017
.
Income Taxes
Background and Uncertainties
We prepare and file tax returns based upon 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 a tax 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.
The 2017 Tax Act was enacted in December 2017 and introduced numerous significant changes to the U.S. corporate income tax system. In accordance with GAAP, we recorded an estimate of the changes to our U.S. federal and state income tax expense that resulted from the 2017 Tax Act, which included re-measuring deferred tax assets and liabilities, evaluating deferred tax assets for valuation allowances, and assessing the impact of the Toll Tax and certain other provisions of the 2017 Tax Act. Since we were unable to completely assess all impacts of the 2017 Tax Act, the estimate that we recorded is a provisional amount based upon reasonable estimates and may change upon completion of our calculations (refer to "Results of Operations - Executive Overview - Other Matters - Tax Matters" and Note 13 to the consolidated financial statements for further discussion on the 2017 Tax Act). Assimilation of the 2017 Tax Act will be ongoing as we continue to analyze the new law and as future directives are issued, including regulations, interpretations, and guidance, which may materially affect the estimates and assumptions used in recording the changes to 2017 U.S. federal and state income tax expense.
Financial Statement Impact
As of
December 31, 2017
, a 5 percent change in the amount of the provisional charge related to the 2017 Tax Act, uncertain tax positions, and the valuation allowance would result in a change in net income of
$95.7 million
,
$33.5 million
, and
$35.5 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.
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, 2017
, a 5 percent change in the contingent consideration liability would result in a change in income before income taxes of
$12.7 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
2018
For the full year of
2018
, we expect EPS to be in the range of $4.39 to $4.49, which reflects the estimated impact of the 2017 Tax Act. We anticipate that total revenue will be between $23.0 billion and $23.5 billion. Revenue growth is expected to be driven by new products including Trulicity, Taltz, Basaglar, Jardiance, Verzenio, Cyramza, Olumiant and Lartruvo.
We anticipate that gross margin as a percent of revenue will be approximately 73 percent in
2018
. Research and development expenses are expected to be in the range of $5.0 billion to $5.2 billion. Marketing, selling, and administrative expenses are expected to be in the range of $6.1 billion to $6.4 billion. Other—net, (income) expense is expected to be income in the range of $75 million to $175 million.
The
2018
tax rate is expected to be approximately 18.0 percent and reflects the estimated impact of the 2017 Tax Act. Refer to “Results of Operations - Executive Overview - Other Matters - Tax Matters” for further discussion of the 2017 Tax Act. The 2018 tax rate benefits from a lower corporate income tax rate, partially offset by the changes to certain business exclusions, deductions, credits, and international tax provisions and is subject to change based upon changes in our interpretations of the new tax law, along with subsequent regulations, interpretations, and guidance that have been and may be issued.
Capital expenditures are expected to be approximately $1.2 billion.
|
|
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.