Notes to Consolidated Condensed Financial Statements
(Tables present dollars in millions, except per-share data)
Note 1: Basis of Presentation and Change in Accounting Principle
Basis of Presentation
We have prepared the accompanying unaudited consolidated condensed financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). In our opinion, the consolidated condensed financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2019. We issue our financial statements by filing them with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing of our Form 10-Q.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, based on the weighted-average number of outstanding common shares plus the effect of incremental shares from our stock-based compensation programs.
We operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Regional commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.
Change in Accounting Principle for Retirement Benefit Plan Assets
Effective during the third quarter of 2020, we adopted a voluntary change in our method of applying an accounting principle for certain of our retirement benefit plans. Refer to Note 9 for additional information.
Note 2: Revenue
The following table summarizes our revenue recognized in our consolidated condensed statements of operations:
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Three Months Ended September 30,
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|
Nine Months Ended September 30,
|
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2020
|
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2019
|
|
2020
|
|
2019
|
Net product revenue
|
$
|
5,281.1
|
|
|
$
|
4,982.0
|
|
|
$
|
15,762.3
|
|
|
$
|
14,843.0
|
|
Collaboration and other revenue (1)
|
459.5
|
|
|
494.6
|
|
|
1,337.5
|
|
|
1,362.5
|
|
Revenue
|
$
|
5,740.6
|
|
|
$
|
5,476.6
|
|
|
$
|
17,099.8
|
|
|
$
|
16,205.5
|
|
(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $31.5 million and $101.5 million during the three and nine months ended September 30, 2020, respectively, and $67.9 million and $163.0 million during the three and nine months ended September 30, 2019, respectively.
We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements includes our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts. See Note 4 for additional information related to certain of our collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue from the Trajenta® and Jardiance® families of products resulting from our collaboration with Boehringer Ingelheim discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.
Adjustments to Revenue
Adjustments to increase (decrease) revenue recognized as a result of changes in estimates for our most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous periods were approximately (1 percent) and 1 percent of U.S. revenue during the three and nine months ended September 30, 2020, respectively, and approximately 2 percent and 3 percent of U.S. revenue during the three and nine months ended September 30, 2019, respectively.
Contract Liabilities
Our contract liabilities result from arrangements where we have received payment in advance of performance under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract.
The following table summarizes contract liability balances:
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|
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September 30, 2020
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December 31, 2019
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Contract liabilities
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$
|
289.5
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$
|
264.6
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During the three and nine months ended September 30, 2020 and 2019, revenue recognized from contract liabilities as of the beginning of the respective year was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.
Disaggregation of Revenue
The following table summarizes revenue by product for the three months ended September 30, 2020 and 2019:
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Three Months Ended September 30,
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2020
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2019
|
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United States (U.S.)(1)
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Outside U.S.
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Total
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U.S.(1)
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Outside U.S.
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Total
|
Revenue—to unaffiliated customers:
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Diabetes:
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Trulicity®
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$
|
791.2
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$
|
315.4
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$
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1,106.6
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|
$
|
755.5
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$
|
256.0
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$
|
1,011.5
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Humalog® (2)
|
390.1
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266.9
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656.9
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356.2
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292.6
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|
648.9
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Jardiance (3)
|
163.3
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147.5
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310.8
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|
140.6
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100.1
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|
240.7
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Humulin®
|
214.0
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|
91.9
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|
305.9
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|
218.2
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|
103.6
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|
321.8
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Basaglar®
|
178.5
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69.7
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|
248.2
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|
202.4
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|
60.8
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|
263.2
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Trajenta (4)
|
19.4
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72.3
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|
91.7
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|
60.1
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|
95.4
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|
155.5
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Other Diabetes
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42.0
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20.8
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62.9
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51.4
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19.3
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70.7
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Total Diabetes
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1,798.5
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|
984.5
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|
2,783.0
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|
1,784.4
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|
927.8
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2,712.3
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Oncology:
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Alimta®
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291.9
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286.1
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578.0
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|
282.4
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225.9
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|
508.2
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Cyramza®
|
94.5
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|
158.2
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|
252.7
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|
82.5
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|
157.5
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|
240.0
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Verzenio®
|
158.9
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|
75.5
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|
234.4
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|
124.8
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32.4
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|
157.2
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Erbitux®
|
122.5
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|
14.0
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|
136.4
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|
113.8
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|
14.8
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|
128.6
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Other Oncology
|
14.7
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|
117.1
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|
131.9
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36.7
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|
76.6
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|
113.4
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Total Oncology
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682.5
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650.9
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1,333.4
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|
640.2
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|
507.2
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1,147.4
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Immunology:
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Taltz®
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326.2
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128.3
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454.5
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250.6
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89.4
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340.0
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Olumiant®
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14.5
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147.5
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162.0
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12.1
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|
102.5
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|
114.6
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Other Immunology
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6.1
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4.5
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|
10.6
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—
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—
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—
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Total Immunology
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346.8
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280.3
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627.1
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262.8
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191.8
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454.6
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Neuroscience:
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Cymbalta®
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11.1
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175.5
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186.6
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10.3
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168.3
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178.6
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Zyprexa®
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21.2
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91.5
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112.7
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11.2
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94.2
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105.4
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Emgality®
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81.4
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10.1
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|
91.5
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45.8
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1.9
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|
47.7
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Other Neuroscience
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26.7
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53.2
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|
79.9
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|
27.3
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|
67.7
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|
95.0
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Total Neuroscience
|
140.4
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|
330.3
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|
470.7
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|
94.6
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|
332.1
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|
426.7
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Other:
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Forteo®
|
144.6
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|
122.3
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|
266.9
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|
175.1
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|
195.7
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370.7
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Cialis®
|
15.1
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|
147.3
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|
162.5
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|
30.9
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|
153.4
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|
184.3
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Other
|
33.5
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|
63.6
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|
97.0
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|
72.2
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|
108.4
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|
180.6
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Total Other
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193.2
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|
333.2
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|
526.4
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|
278.2
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|
457.5
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|
735.6
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Revenue
|
$
|
3,161.4
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$
|
2,579.3
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|
$
|
5,740.6
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|
$
|
3,060.2
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|
$
|
2,416.4
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$
|
5,476.6
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Numbers may not add due to rounding.
(1) U.S. revenue includes revenue in Puerto Rico.
(2) Humalog revenue includes insulin lispro.
(3) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.
(4) Trajenta revenue includes Jentadueto®.
The following table summarizes revenue by product for the nine months ended September 30, 2020 and 2019:
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|
Nine Months Ended September 30,
|
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2020
|
|
2019
|
|
U.S. (1)
|
Outside U.S.
|
Total
|
|
U.S. (1)
|
Outside U.S.
|
Total
|
Revenue—to unaffiliated customers:
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|
|
|
|
|
|
Diabetes:
|
|
|
|
|
|
|
|
Trulicity
|
$
|
2,673.2
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|
$
|
892.5
|
|
$
|
3,565.7
|
|
|
$
|
2,213.2
|
|
$
|
706.5
|
|
$
|
2,919.7
|
|
Humalog (2)
|
1,070.4
|
|
837.4
|
|
1,907.8
|
|
|
1,201.0
|
|
856.3
|
|
2,057.3
|
|
Humulin
|
642.5
|
|
292.7
|
|
935.2
|
|
|
639.6
|
|
302.5
|
|
942.1
|
|
Basaglar
|
638.7
|
|
203.7
|
|
842.3
|
|
|
632.8
|
|
172.6
|
|
805.4
|
|
Jardiance (3)
|
453.0
|
|
387.3
|
|
840.3
|
|
|
408.4
|
|
267.9
|
|
676.2
|
|
Trajenta (4)
|
64.5
|
|
197.2
|
|
261.7
|
|
|
171.9
|
|
269.5
|
|
441.4
|
|
Other Diabetes
|
120.7
|
|
57.2
|
|
177.9
|
|
|
119.7
|
|
65.6
|
|
185.4
|
|
Total Diabetes
|
5,663.0
|
|
2,868.0
|
|
8,530.9
|
|
|
5,386.6
|
|
2,640.9
|
|
8,027.5
|
|
|
|
|
|
|
|
|
|
Oncology:
|
|
|
|
|
|
|
|
Alimta
|
933.4
|
|
743.8
|
|
1,677.2
|
|
|
905.8
|
|
679.3
|
|
1,585.1
|
|
Cyramza
|
277.6
|
|
470.8
|
|
748.4
|
|
|
247.4
|
|
432.7
|
|
680.1
|
|
Verzenio
|
430.0
|
|
201.1
|
|
631.1
|
|
|
323.5
|
|
77.0
|
|
400.6
|
|
Erbitux
|
356.1
|
|
40.6
|
|
396.7
|
|
|
364.1
|
|
42.3
|
|
406.4
|
|
Other Oncology
|
26.0
|
|
324.1
|
|
350.1
|
|
|
83.1
|
|
202.2
|
|
285.1
|
|
Total Oncology
|
2,023.1
|
|
1,780.4
|
|
3,803.5
|
|
|
1,923.9
|
|
1,433.5
|
|
3,357.3
|
|
|
|
|
|
|
|
|
|
Immunology:
|
|
|
|
|
|
|
|
Taltz
|
942.9
|
|
350.3
|
|
1,293.2
|
|
|
699.6
|
|
246.7
|
|
946.3
|
|
Olumiant
|
39.0
|
|
407.7
|
|
446.7
|
|
|
29.2
|
|
269.9
|
|
299.1
|
|
Other Immunology
|
13.2
|
|
8.1
|
|
21.3
|
|
|
—
|
|
—
|
|
—
|
|
Total Immunology
|
995.1
|
|
766.1
|
|
1,761.2
|
|
|
728.8
|
|
516.6
|
|
1,245.4
|
|
|
|
|
|
|
|
|
|
Neuroscience:
|
|
|
|
|
|
|
|
Cymbalta
|
30.5
|
|
546.5
|
|
576.9
|
|
|
38.7
|
|
491.2
|
|
529.9
|
|
Zyprexa
|
41.5
|
|
266.2
|
|
307.7
|
|
|
29.8
|
|
287.2
|
|
317.0
|
|
Emgality
|
229.3
|
|
23.6
|
|
252.9
|
|
|
91.8
|
|
4.5
|
|
96.3
|
|
|
|
|
|
|
|
|
|
Other Neuroscience
|
53.4
|
|
165.7
|
|
219.2
|
|
|
89.9
|
|
239.5
|
|
329.4
|
|
Total Neuroscience
|
354.7
|
|
1,002.0
|
|
1,356.7
|
|
|
250.2
|
|
1,022.4
|
|
1,272.6
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
Forteo
|
386.7
|
|
405.2
|
|
791.9
|
|
|
473.8
|
|
570.6
|
|
1,044.4
|
|
Cialis
|
64.6
|
|
421.6
|
|
486.2
|
|
|
209.3
|
|
483.4
|
|
692.7
|
|
Other
|
144.2
|
|
225.2
|
|
369.4
|
|
|
230.9
|
|
334.6
|
|
565.6
|
|
Total Other
|
595.5
|
|
1,052.0
|
|
1,647.5
|
|
|
914.0
|
|
1,388.6
|
|
2,302.7
|
|
Revenue
|
$
|
9,631.4
|
|
$
|
7,468.5
|
|
$
|
17,099.8
|
|
|
$
|
9,203.5
|
|
$
|
7,002.1
|
|
$
|
16,205.5
|
|
Numbers may not add due to rounding.
(1) U.S. revenue includes revenue in Puerto Rico.
(2) Humalog revenue includes insulin lispro.
(3) Jardiance revenue includes Glyxambi, Synjardy, and Trijardy XR.
(4) Trajenta revenue includes Jentadueto.
.
The following table summarizes revenue by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenue—to unaffiliated customers (1):
|
|
|
|
|
|
|
|
U.S. (2)
|
$
|
3,161.4
|
|
|
$
|
3,060.2
|
|
|
$
|
9,631.4
|
|
|
$
|
9,203.5
|
|
Europe
|
1,046.7
|
|
|
923.4
|
|
|
2,984.4
|
|
|
2,752.0
|
|
Japan
|
660.1
|
|
|
641.5
|
|
|
1,919.1
|
|
|
1,838.4
|
|
China
|
289.1
|
|
|
264.1
|
|
|
796.2
|
|
|
706.2
|
|
Other foreign countries
|
583.2
|
|
|
587.3
|
|
|
1,768.7
|
|
|
1,705.5
|
|
Revenue
|
$
|
5,740.6
|
|
|
$
|
5,476.6
|
|
|
$
|
17,099.8
|
|
|
$
|
16,205.5
|
|
Numbers may not add due to rounding.
(1) Revenue is attributed to the countries based on the location of the customer.
(2) U.S. revenue includes revenue in Puerto Rico.
Note 3: Acquisitions
In February 2020 and 2019, we completed the acquisitions of Dermira, Inc. (Dermira) and Loxo Oncology, Inc. (Loxo), respectively. These transactions, as further discussed in this note below in Acquisitions of Businesses, were accounted for as business combinations under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated condensed financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of these acquisitions are included in our consolidated condensed financial statements from the date of acquisition.
We also acquired assets in development which are further discussed in this note below in Asset Acquisitions. Upon acquisition, the acquired in-process research and development (IPR&D) charges related to these compounds were immediately expensed because the compounds had no alternative future use. There were no acquired IPR&D charges recognized in the three months ended September 30, 2020. We recognized $294.1 million of acquired IPR&D charges for the nine months ended September 30, 2020. We recognized $77.7 million and $239.6 million of acquired IPR&D charges for the three and nine months ended September 30, 2019, respectively.
Acquisitions of Businesses
Dermira Acquisition
Overview of Transaction
In February 2020, we acquired all shares of Dermira for a purchase price of approximately $849.3 million, net of cash acquired. Under terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the U.S. Food and Drug Administration (FDA). We also acquired Qbrexza® (glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating).
Assets Acquired and Liabilities Assumed
Our access to Dermira information was limited prior to the acquisition. As a consequence, we are in the process of determining fair values and tax bases of a significant portion of the assets acquired and liabilities assumed, including the identification and valuation of intangible assets, long-term debt, and tax exposures. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date. The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized. Preliminary fair values related to this acquisition included goodwill of $46.8 million, other intangibles of $1.24 billion primarily related to lebrikizumab, deferred income tax liabilities of $55.0 million, and long-term debt of $375.5 million. After the acquisition, we repaid $276.2 million of long-term debt assumed as part of our acquisition of Dermira.
Loxo Acquisition
Overview of Transaction
In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. The accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset impairment, restructuring, and other special charges during the nine months ended September 30, 2019 (see Note 6).
Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib (LOXO-292), an oral RET inhibitor, and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the FDA approved selpercatinib (Retevmo®) under its Accelerated Approval regulations and continued approval may be
contingent upon verification and description of clinical benefit in confirmatory trials. At the time of approval, we reclassified our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived intangible assets to finite-lived intangible assets and began amortizing straight line over its estimated useful life.
Assets Acquired and Liabilities Assumed
The following table summarizes the amounts recognized for assets acquired and liabilities assumed in the acquisition of Loxo as of the acquisition date:
|
|
|
|
|
|
Estimated Fair Value at February 15, 2019
|
Acquired IPR&D (1)
|
$
|
4,670.0
|
|
Finite-lived intangibles (2)
|
980.0
|
|
Deferred income taxes
|
(1,032.8)
|
|
Other assets and liabilities - net
|
(26.4)
|
|
Total identifiable net assets
|
4,590.8
|
|
Goodwill(3)
|
2,326.9
|
|
Total consideration transferred - net of cash acquired
|
$
|
6,917.7
|
|
(1) $4.60 billion of the acquired IPR&D relates to selpercatinib (LOXO-292).
(2) Contract-based intangibles (primarily related to Vitrakvi®) which are being amortized to cost of sales on a straight-line basis over their estimated useful lives, were expected to have a weighted average useful life of approximately 12 years from the acquisition date.
(3) The goodwill recognized from this acquisition is attributable primarily to future unidentified projects and products and the assembled workforce for Loxo and is not deductible for tax purposes.
Asset Acquisitions
The following table and narrative summarize our asset acquisitions during the nine months ended September 30, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
Compound(s) or Therapy
|
Acquisition Month
|
|
Phase of Development (1)
|
|
Acquired IPR&D Expense
|
Sitryx Therapeutics Limited
|
Pre-clinical targets that could lead to potential new medicines for autoimmune diseases
|
March 2020
|
|
Pre-clinical
|
|
$
|
52.3
|
|
AbCellera Biologics Inc.(2)
|
Neutralizing antibodies for the treatment and prevention of COVID-19
|
March 2020
|
|
Pre-clinical
|
|
25.0
|
|
Junshi Biosciences Co., Ltd.
|
Neutralizing antibodies for the treatment and prevention of COVID-19
|
May 2020
|
|
Pre-clinical
|
|
20.0
|
|
Undisclosed
|
Pre-clinical target that could lead to potential new medicine
|
May 2020
|
|
Pre-clinical
|
|
174.8
|
|
Evox Therapeutics Ltd.
|
Pre-clinical research collaboration for the potential treatment of neurological disorders
|
June 2020
|
|
Pre-clinical
|
|
22.0
|
|
|
|
|
|
|
|
|
AC Immune SA
|
Tau aggregation inhibitor small molecules for the potential treatment of Alzheimer's disease and other neurodegenerative diseases
|
January 2019 & September 2019(3)
|
|
Pre-clinical
|
|
$
|
127.1
|
|
ImmuNext, Inc.
|
Novel immunometabolism target
|
March 2019
|
|
Pre-clinical
|
|
40.0
|
|
Avidity Biosciences, Inc.
|
Potential new medicines in immunology and other select indications
|
April 2019
|
|
Pre-clinical
|
|
25.0
|
|
Centrexion Therapeutics Corporation
|
CNTX-0290, a novel, small molecule somatostain receptor type 4 agonist
|
July 2019
|
|
Phase I
|
|
47.5
|
|
|
|
|
|
|
|
|
(1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.
(2) We recognized the acquired IPR&D expense of $25.0 million in May 2020 upon closing of the transaction.
(3) We recognized acquired IPR&D expense of $96.9 million in January 2019 upon entering into a license agreement and $30.2 million in September 2019 upon entering into an amendment to the license agreement.
In connection with these arrangements, our partners may be entitled to future royalties and/or commercial milestones based on sales should products be approved for commercialization and/or milestones based on the successful progress of compounds through the development process.
Subsequent Events
In October 2020, we completed the global expansion of our strategic alliance for Tyvyt® (sintilimab injection) with Innovent Biologics, Inc. (Innovent). We and Innovent currently co-commercialize Tyvyt in China. Under the terms of the expanded license agreement, we obtained an exclusive license for Tyvyt for geographies outside of China and plan to pursue registration of Tyvyt in the U.S. and other markets. As a result of the transaction, we will record an acquired IPR&D charge of $200.0 million in the fourth quarter of 2020 associated with the upfront payment due to Innovent. Innovent will be eligible to receive up to $825.0 million in success-based regulatory and sales-based milestones, as well as tiered double digit royalties on net sales for geographies outside of China. Both companies will also retain the right to study Tyvyt in combination with other medicines as part of their own clinical programs.
In October 2020, we acquired Disarm Therapeutics, Inc. (Disarm), a privately-held biotechnology company creating a new class of disease-modifying therapeutics for patients with axonal degeneration. Under the terms of the agreement, we acquired Disarm for an upfront payment of $135.0 million and up to $1.23 billion in additional future payments for potential development, success-based regulatory and sales-based milestones. The accounting impact of this acquisition and the results of the operations of Disarm will be included in our consolidated financial statements beginning in the fourth quarter of 2020.
Note 4: Collaborations and Other Arrangements
We often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone and royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. See Note 2 for amounts of collaboration and other revenue recognized from these types of arrangements.
Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant arrangements are discussed below.
Boehringer Ingelheim Diabetes Collaboration
We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of diabetes compounds. Currently included in the collaboration are Boehringer Ingelheim’s oral diabetes products: Trajenta, Jentadueto, Jardiance, Glyxambi, Synjardy, and Trijardy XR as well as our basal insulin, Basaglar. Jentadueto is included in the Trajenta product family. Glyxambi, Synjardy, and Trijardy XR are included in the Jardiance product family.
The table below summarizes significant milestones (deferred) capitalized for the compounds included in this collaboration:
|
|
|
|
|
|
|
|
|
Product Family
|
|
Milestones
(Deferred) Capitalized (1)
|
Trajenta (2)
|
|
$
|
446.4
|
|
Jardiance (3)
|
|
289.0
|
|
Basaglar
|
|
(250.0)
|
|
(1) In connection with the regulatory approvals of Basaglar in the U.S., Europe, and Japan, milestone payments received were recorded as contract liabilities and are being amortized through the term of the collaboration (2029) to collaboration and other revenue. In connection with the regulatory approvals of Trajenta and Jardiance, milestone payments made were capitalized as intangible assets and are being amortized to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been (deferred) or capitalized from the start of this collaboration through the end of the reporting period.
(2) The collaboration agreement with Boehringer Ingelheim for Trajenta ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
(3) The collaboration agreement with Boehringer Ingelheim for Jardiance ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
Through December 31, 2019, in the most significant markets, we and Boehringer Ingelheim shared equally the ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from the collaboration. We recorded our portion of the gross margin associated with Boehringer Ingelheim's products as collaboration and other revenue. We recorded our sales of Basaglar to third parties as net product revenue with the payments made to Boehringer Ingelheim for their portion of the gross margin recorded as cost of sales. For all compounds under this collaboration, we recorded our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company was entitled to potential performance payments depending on the sales of the molecules it contributes to the collaboration. These performance payments may have resulted in the owner of the molecule retaining a greater share of the agreed upon gross margin of that product. Subject to achieving these thresholds, in a given period, our reported revenue for Trajenta and Jardiance may have been reduced by any performance payments we made
related to these products. Similarly, performance payments we may have received related to Basaglar effectively reduced Boehringer Ingelheim's share of the gross margin, which reduced our cost of sales.
Effective January 1, 2020, we and Boehringer Ingelheim modernized the alliance. In the most significant markets, we and Boehringer Ingelheim share equally the ongoing development costs and commercialization costs for the Jardiance product family. We receive a royalty on net sales of Boehringer Ingelheim's products in the most significant markets and recognize the royalty as collaboration and other revenue. We pay to Boehringer Ingelheim a royalty on net sales for Basaglar in the U.S. We record our sales of Basaglar to third parties as net product revenue with the royalty payments made to Boehringer Ingelheim recorded as cost of sales. For the Jardiance product family, we record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Boehringer Ingelheim is entitled to potential performance payments depending on the net sales of the Jardiance product family; therefore, our reported revenue for Jardiance may be reduced by any potential performance payments we make related to this product. Beginning January 1, 2021, the royalty received by us related to the Jardiance product family may also be increased or decreased depending on whether net sales for this product family exceed or fall below certain thresholds.
The following table summarizes our net product revenue recognized with respect to Basaglar and collaboration and other revenue recognized with respect to the Jardiance and Trajenta families of products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Basaglar
|
$
|
248.2
|
|
|
$
|
263.2
|
|
|
$
|
842.3
|
|
|
$
|
805.4
|
|
Jardiance
|
310.8
|
|
|
240.7
|
|
|
840.3
|
|
|
676.2
|
|
Trajenta
|
91.7
|
|
|
155.5
|
|
|
261.7
|
|
|
441.4
|
|
Olumiant
We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte), which provides us the development and commercialization rights to its Janus tyrosine kinase (JAK) inhibitor compound, now known as Olumiant, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. In the first half of 2020, the agreement was amended to include the potential treatment of COVID-19. Incyte has the right to receive tiered, double digit royalty payments on future global sales with rates ranging up to 20 percent. The agreement calls for payments by us to Incyte associated with certain development, success-based regulatory, and sales-based milestones.
In connection with the regulatory approvals of Olumiant in the U.S., Europe, and Japan, milestone payments of $180.0 million were capitalized as intangible assets and are being amortized to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been capitalized from the start of this collaboration through the end of the reporting period.
As of September 30, 2020, Incyte is eligible to receive up to $130.0 million of additional payments from us contingent upon certain development and success-based regulatory milestones. Incyte is also eligible to receive up to $150.0 million of potential sales-based milestones.
We record our sales of Olumiant to third parties as net product revenue with the royalty payments made to Incyte recorded as cost of sales. The following table summarizes our net product revenue recognized with respect to Olumiant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Olumiant
|
$
|
162.0
|
|
|
$
|
114.6
|
|
|
$
|
446.7
|
|
|
$
|
299.1
|
|
Tanezumab
We have a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and globally commercialize tanezumab for the treatment of osteoarthritis pain and cancer pain. The companies equally share the ongoing development costs and, if successful, in the U.S. will co-commercialize and equally share in gross margin and certain commercialization expenses. As a result of an amendment to the agreement in the third quarter of 2020, Pfizer will be responsible for commercialization activities and costs outside the U.S., and Lilly has the right to receive tiered royalties in percentages from the high teens to mid-twenties for net sales in Japan as well as low double digit
royalties on annual net sales greater than $150.0 million in all other territories outside of the U.S. and Japan. As of September 30, 2020, Pfizer is eligible to receive up to $147.5 million in success-based regulatory milestones based on current development plans and up to $1.23 billion in a series of sales-based milestones, contingent upon the commercial success of tanezumab.
Lebrikizumab
As a result of our acquisition of Dermira, we have a worldwide licensing agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively Roche), which provides us the global development and commercialization rights to lebrikizumab. Roche has the right to receive tiered royalty payments on future global net sales ranging in percentages from high single digits to high teens if the product is successfully commercialized. As of September 30, 2020, Roche is eligible to receive up to $180.0 million of payments from us contingent upon the achievement of success-based regulatory milestones, and up to $1.03 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab.
As a result of our acquisition of Dermira, we have a license agreement with Almirall, S.A. (Almirall), under which Almirall licensed the rights to develop and commercialize lebrikizumab for the treatment or prevention of dermatology indications, including, but not limited to, atopic dermatitis in Europe. We have the right to receive tiered royalty payments on future net sales in Europe ranging in percentages from low double digits to low twenties if the product is successfully commercialized. As of September 30, 2020, we are eligible to receive additional payments of $85.0 million from Almirall contingent upon the achievement of success-based regulatory milestones and up to $1.25 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab.
As of September 30, 2020, $36.2 million was recorded as a contract liability on the consolidated condensed balance sheet and is expected to be recognized as collaboration and other revenue over the remaining Phase III development period. During the three and nine months ended September 30, 2020, milestones received and collaboration and other revenue recognized were not material.
Note 5: Discontinued Operations
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health (Elanco) common stock through a tax-free exchange offer. As a result, we have presented Elanco as discontinued operations in our consolidated condensed financial statements for all periods presented.
Revenue and net income from discontinued operations for the nine months ended September 30, 2019 were $580.0 million and $3.68 billion, respectively. Net income from discontinued operations for the nine months ended September 30, 2019 included an approximate $3.7 billion gain related to the disposition of Elanco.
The gain related to the disposition of Elanco in the consolidated condensed statement of cash flows included the operating results of Elanco through the disposition date, which were not material. Net cash flows of our discontinued operations for operating and investing activities for the nine months ended September 30, 2019 were not material.
We entered into a transitional services agreement (TSA) with Elanco in order to facilitate the orderly transfer of various services to Elanco. The TSA relates primarily to administrative services, which are generally to be provided over 24 months from March 11, 2019, the disposition date. This agreement is not material and does not confer upon us the ability to influence the operating and/or financial policies of Elanco subsequent to the disposition date.
Note 6: Asset Impairment, Restructuring, and Other Special Charges
The components of the charges included in asset impairment, restructuring, and other special charges in our consolidated condensed statements of operations are described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Severance
|
$
|
144.4
|
|
|
$
|
—
|
|
|
$
|
154.2
|
|
|
$
|
(3.6)
|
|
Asset impairment (recovery) and other special charges
|
(43.0)
|
|
|
—
|
|
|
7.1
|
|
|
427.5
|
|
Total asset impairment, restructuring, and other special charges
|
$
|
101.4
|
|
|
$
|
—
|
|
|
$
|
161.3
|
|
|
$
|
423.9
|
|
Severance costs recognized during the three and nine months ended September 30, 2020 were incurred as a result of actions taken worldwide to reduce our cost structure. Substantially all of the severance costs incurred during the three months ended September 30, 2020 are expected to be paid in the next 12 months.
Asset impairment and other special charges recognized during the nine months ended September 30, 2019 consisted of $400.7 million related to the acquisition of Loxo, substantially all of which was associated with the accelerated vesting of Loxo employee equity awards.
Note 7: Financial Instruments
Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life science products account for a substantial portion of our trade receivables; collateral is generally not required. We seek to mitigate the risk associated with this concentration through our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations. In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.
We consider all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The cost of these investments approximates fair value.
Our equity investments are accounted for using three different methods depending on the type of equity investment:
•Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other-net, (income) expense.
•For equity investments that do not have readily determinable fair values, we measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any change in recorded value is recorded in other-net, (income) expense.
•Our public equity investments are measured and carried at fair value. Any change in fair value is recognized in other-net, (income) expense.
We review equity investments other than public equity investments for indications of impairment and observable price changes on a regular basis.
Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and are intended to offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative instruments that are designated and qualify as fair value hedges, the derivative instrument is marked to market, with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative instruments that are designated and qualify as cash flow hedges, gains and losses are reported as a component of accumulated other comprehensive loss and reclassified into earnings in
the same period the hedged transaction affects earnings. For derivative and non-derivative instruments that are designated and qualify as net investment hedges, the foreign currency translation gains or losses due to spot rate fluctuations are reported as a component of accumulated other comprehensive loss. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in earnings during the period of change.
We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, British pound, and Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward and option contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At September 30, 2020, we had outstanding foreign currency forward commitments to purchase 367.5 million U.S. dollars and sell 312.3 million euro, commitments to purchase 2.56 billion euro and sell 3.01 billion U.S. dollars, commitments to purchase 302.3 million U.S. dollars and sell 31.81 billion Japanese yen, and commitments to purchase 226.2 million British pounds and sell 290.7 million U.S. dollars, which will all settle within 30 days.
Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency interest rate swaps. Our foreign currency-denominated notes had carrying amounts of $5.74 billion and $5.49 billion as of September 30, 2020 and December 31, 2019, respectively, of which $4.29 billion and $4.10 billion have been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations as of September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, we had outstanding cross currency swaps with notional amounts of $3.16 billion swapping U.S. dollars to euro and $1.00 billion swapping Swiss francs to U.S. dollars which have settlement dates ranging through 2028. Our cross-currency interest rate swaps, for which a majority convert a portion of our U.S. dollar-denominated floating rate debt to foreign-denominated floating rate debt, have also been designated as, and are effective as, economic hedges of net investments.
In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary our costs of financing, investing, and operating. We seek to 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 of fluctuations in interest rates on earnings. 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 and investment positions and may enter into interest rate swaps or collars to help maintain that balance.
Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting from the termination of interest rate swaps are classified as operating activities in our consolidated condensed statements of cash flows. At September 30, 2020, substantially all of our total long-term debt is fixed rate. We have converted approximately 9 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.
We also may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in interest rates. The change in fair value of these instruments is recorded as part of other comprehensive income (loss), and upon completion of a debt issuance and termination of the swap, is amortized to interest expense over the life of the underlying debt. As of September 30, 2020, the total notional amounts of forward-starting interest rate contracts in designated cash flow hedging instruments were $1.75 billion, which have settlement dates ranging between 2023 and 2025.
In May 2020, we issued $1.00 billion of 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-annually. We used the net proceeds from the sale of these notes for general corporate purposes, including the repayment of outstanding commercial paper.
In August 2020, we issued $850.0 million of 2.50 percent fixed-rate notes due in September 2060 and an additional $250.0 million of our 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-annually. We used the net proceeds from the sale of these notes for general corporate purposes, including the repayment of outstanding commercial paper.
The Effect of Risk-Management Instruments on the Consolidated Condensed Statements of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Fair value hedges:
|
|
|
|
|
|
|
|
Effect from hedged fixed-rate debt
|
$
|
(14.0)
|
|
|
$
|
49.5
|
|
|
$
|
110.4
|
|
|
$
|
148.1
|
|
Effect from interest rate contracts
|
14.0
|
|
|
(49.5)
|
|
|
(110.4)
|
|
|
(148.1)
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss
|
4.1
|
|
|
2.8
|
|
|
12.3
|
|
|
10.6
|
|
Cross-currency interest rate swaps
|
(30.2)
|
|
|
47.4
|
|
|
(54.6)
|
|
|
2.9
|
|
Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments
|
(54.2)
|
|
|
52.6
|
|
|
(82.8)
|
|
|
93.0
|
|
Total
|
$
|
(80.3)
|
|
|
$
|
102.8
|
|
|
$
|
(125.1)
|
|
|
$
|
106.5
|
|
During the three and nine months ended September 30, 2020 and 2019, the amortization of losses related to the portion of our risk management hedging instruments, fair value hedges, and cash flow hedges that was excluded from the assessment of effectiveness was not material.
The Effect of Risk-Management Instruments on Other Comprehensive Income (Loss)
The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net investment hedges:
|
|
|
|
|
|
|
|
Foreign currency-denominated notes
|
$
|
(181.1)
|
|
|
$
|
89.3
|
|
|
$
|
(186.0)
|
|
|
$
|
112.6
|
|
Cross-currency interest rate swaps
|
(110.4)
|
|
|
89.0
|
|
|
(55.4)
|
|
|
123.1
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Forward-starting interest rate swaps
|
99.6
|
|
|
(32.7)
|
|
|
(231.9)
|
|
|
(44.4)
|
|
Cross-currency interest rate swaps
|
6.6
|
|
|
16.6
|
|
|
(58.3)
|
|
|
(20.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the next 12 months, we expect to reclassify $16.7 million of pretax net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense. During the three and nine months ended September 30, 2020 and 2019, the amounts excluded from the assessment of hedge effectiveness recognized in other comprehensive income (loss) were not material.
Fair Value of Financial Instruments
The following tables summarize certain fair value information at September 30, 2020 and December 31, 2019 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
Amount
|
|
Cost (1)
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair
Value
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
2,374.2
|
|
|
$
|
2,374.2
|
|
|
$
|
2,374.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,374.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
11.8
|
|
|
$
|
11.7
|
|
|
$
|
11.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
5.5
|
|
|
5.5
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
|
5.5
|
|
Asset-backed securities
|
3.6
|
|
|
3.6
|
|
|
—
|
|
|
3.6
|
|
|
—
|
|
|
3.6
|
|
Other securities
|
14.1
|
|
|
14.1
|
|
|
—
|
|
|
—
|
|
|
14.1
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
35.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
73.2
|
|
|
$
|
68.5
|
|
|
$
|
73.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
137.5
|
|
|
128.0
|
|
|
—
|
|
|
137.5
|
|
|
—
|
|
|
137.5
|
|
Mortgage-backed securities
|
104.3
|
|
|
99.2
|
|
|
—
|
|
|
104.3
|
|
|
—
|
|
|
104.3
|
|
Asset-backed securities
|
25.4
|
|
|
24.8
|
|
|
—
|
|
|
25.4
|
|
|
—
|
|
|
25.4
|
|
Other securities
|
97.8
|
|
|
31.4
|
|
|
—
|
|
|
—
|
|
|
97.8
|
|
|
97.8
|
|
Marketable equity securities
|
1,258.4
|
|
|
275.2
|
|
|
1,258.4
|
|
|
—
|
|
|
—
|
|
|
1,258.4
|
|
Equity investments without readily determinable fair values (2)
|
339.5
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments (2)
|
440.1
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments
|
$
|
2,476.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1,025.4
|
|
|
$
|
1,025.4
|
|
|
$
|
1,025.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,025.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
7.2
|
|
|
$
|
7.2
|
|
|
$
|
7.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.2
|
|
Corporate debt securities
|
81.4
|
|
|
81.1
|
|
|
—
|
|
|
81.4
|
|
|
—
|
|
|
81.4
|
|
Asset-backed securities
|
2.6
|
|
|
2.6
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
|
2.6
|
|
Other securities
|
9.8
|
|
|
9.8
|
|
|
—
|
|
|
—
|
|
|
9.8
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
101.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
77.2
|
|
|
$
|
76.3
|
|
|
$
|
77.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77.2
|
|
Corporate debt securities
|
271.1
|
|
|
267.8
|
|
|
—
|
|
|
271.1
|
|
|
—
|
|
|
271.1
|
|
Mortgage-backed securities
|
101.1
|
|
|
99.6
|
|
|
—
|
|
|
101.1
|
|
|
—
|
|
|
101.1
|
|
Asset-backed securities
|
30.0
|
|
|
29.6
|
|
|
—
|
|
|
30.0
|
|
|
—
|
|
|
30.0
|
|
Other securities
|
60.0
|
|
|
27.4
|
|
|
—
|
|
|
—
|
|
|
60.0
|
|
|
60.0
|
|
Marketable equity securities
|
718.6
|
|
|
254.4
|
|
|
718.6
|
|
|
—
|
|
|
—
|
|
|
718.6
|
|
Equity investments without readily determinable fair values (2)
|
405.0
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments (2)
|
299.4
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments
|
$
|
1,962.4
|
|
|
|
|
|
|
|
|
|
|
|
(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.
(2) Fair value disclosures are not applicable for equity method investments and investments accounted for under the measurement alternative for equity investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Carrying
Amount
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair
Value
|
Short-term commercial paper borrowings
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
$
|
(579.9)
|
|
|
$
|
—
|
|
|
$
|
(578.8)
|
|
|
$
|
—
|
|
|
$
|
(578.8)
|
|
December 31, 2019
|
(1,494.2)
|
|
|
—
|
|
|
(1,491.6)
|
|
|
—
|
|
|
(1,491.6)
|
|
Long-term debt, including current portion
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
$
|
(16,342.2)
|
|
|
$
|
—
|
|
|
$
|
(16,148.2)
|
|
|
$
|
—
|
|
|
$
|
(16,148.2)
|
|
December 31, 2019
|
(13,823.0)
|
|
|
—
|
|
|
(15,150.0)
|
|
|
—
|
|
|
(15,150.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
Carrying
Amount
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant
Other Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair
Value
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Risk-management instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
$
|
182.4
|
|
|
$
|
—
|
|
|
$
|
182.4
|
|
|
$
|
—
|
|
|
$
|
182.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
21.1
|
|
|
—
|
|
|
21.1
|
|
|
—
|
|
|
21.1
|
|
|
|
Other noncurrent liabilities
|
(201.8)
|
|
|
—
|
|
|
(201.8)
|
|
|
—
|
|
|
(201.8)
|
|
|
|
Cross-currency interest rate contracts designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
2.2
|
|
|
—
|
|
|
2.2
|
|
|
—
|
|
|
2.2
|
|
|
|
Other noncurrent assets
|
34.1
|
|
|
—
|
|
|
34.1
|
|
|
—
|
|
|
34.1
|
|
|
|
Other current liabilities
|
(30.3)
|
|
|
—
|
|
|
(30.3)
|
|
|
—
|
|
|
(30.3)
|
|
|
|
Other noncurrent liabilities
|
(43.6)
|
|
|
—
|
|
|
(43.6)
|
|
|
—
|
|
|
(43.6)
|
|
|
|
Cross-currency interest rate contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
5.5
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
|
5.5
|
|
|
|
Other noncurrent liabilities
|
(26.4)
|
|
|
—
|
|
|
(26.4)
|
|
|
—
|
|
|
(26.4)
|
|
|
|
Foreign exchange contracts not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
8.5
|
|
|
—
|
|
|
8.5
|
|
|
—
|
|
|
8.5
|
|
|
|
Other current liabilities
|
(16.4)
|
|
|
—
|
|
|
(16.4)
|
|
|
—
|
|
|
(16.4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Risk-management instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
72.0
|
|
|
—
|
|
|
72.0
|
|
|
—
|
|
|
72.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
43.3
|
|
|
—
|
|
|
43.3
|
|
|
—
|
|
|
43.3
|
|
|
|
Cross-currency interest rate contracts designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
45.1
|
|
|
—
|
|
|
45.1
|
|
|
—
|
|
|
45.1
|
|
|
|
Other current liabilities
|
(21.4)
|
|
|
—
|
|
|
(21.4)
|
|
|
—
|
|
|
(21.4)
|
|
|
|
Other noncurrent liabilities
|
(5.7)
|
|
|
—
|
|
|
(5.7)
|
|
|
—
|
|
|
(5.7)
|
|
|
|
Cross-currency interest rate contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
|
Other noncurrent liabilities
|
(20.1)
|
|
|
—
|
|
|
(20.1)
|
|
|
—
|
|
|
(20.1)
|
|
|
|
Foreign exchange contracts not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
18.4
|
|
|
—
|
|
|
18.4
|
|
|
—
|
|
|
18.4
|
|
|
|
Other current liabilities
|
(11.9)
|
|
|
—
|
|
|
(11.9)
|
|
|
—
|
|
|
(11.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff associated with certain of the risk-management instruments above that are subject to enforceable master netting arrangements or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management instruments above, individually, these financial rights are not material.
We determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. Level 3 fair value measurements for other investment securities are determined using unobservable inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. The fair values of equity method investments and investments measured under the measurement alternative for equity investments that do not have readily determinable fair values are not readily available. As of September 30, 2020, we had approximately $615 million of unfunded commitments to invest in venture capital funds, which we anticipate will be paid over a period of up to 10 years.
The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
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|
|
Maturities by Period
|
|
Total
|
|
Less Than
1 Year
|
|
1-5
Years
|
|
6-10
Years
|
|
More Than
10 Years
|
Fair value of debt securities
|
$
|
361.2
|
|
|
$
|
20.9
|
|
|
$
|
110.2
|
|
|
$
|
94.0
|
|
|
$
|
136.1
|
|
The net gains recognized in our consolidated condensed statements of operations for equity securities were $142.5 million and $884.7 million for the three and nine months ended September 30, 2020, respectively, and $26.4 million and $182.4 million for the three and nine months ended September 30, 2019, respectively. The net gains/losses recognized during the three and nine months ended September 30, 2020 and 2019 on equity securities sold during the respective periods were not material.
We adjust our equity investments without readily determinable fair values based upon changes in the equity instruments' values resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Downward adjustments resulting from an impairment are recorded based upon impairment considerations, including the financial condition and near term prospects of the issuer, general market conditions, and industry specific factors. Adjustments recorded during the three and nine months ended September 30, 2020 and 2019 were not material.
A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses in accumulated other comprehensive loss follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Unrealized gross gains
|
$
|
20.8
|
|
|
$
|
10.3
|
|
Unrealized gross losses
|
0.8
|
|
|
4.0
|
|
Fair value of securities in an unrealized gain position
|
335.4
|
|
|
429.5
|
|
Fair value of securities in an unrealized loss position
|
25.7
|
|
|
141.1
|
|
We periodically assess our investment in available-for-sale securities for other-than-temporary impairment losses. Other-than-temporary impairment losses were not material in the three and nine months ended September 30, 2020 and 2019.
For debt securities, the amount of credit losses are determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing credit losses include the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration. Credit losses related to debt securities were not material in the three and nine months ended September 30, 2020.
As of September 30, 2020, the available-for-sale securities in an unrealized loss position include primarily fixed-rate debt securities of varying maturities, which are sensitive to changes in the yield curve and other market conditions. Approximately 94 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of September 30, 2020, we do not intend to sell, and it is not more likely than not that we will be required to sell, the
securities in a loss position before the market values recover or the underlying cash flows have been received, and there is no indication of default on interest or principal payments for any of our debt securities.
Activity related to our available-for-sale securities, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Proceeds from sales
|
$
|
14.0
|
|
|
$
|
46.5
|
|
|
$
|
246.8
|
|
|
$
|
365.9
|
|
Realized gross gains on sales
|
0.4
|
|
|
0.9
|
|
|
4.0
|
|
|
4.7
|
|
Realized gross losses on sales
|
0.2
|
|
|
—
|
|
|
8.2
|
|
|
2.0
|
|
Realized gains and losses on sales of available-for-sale investments are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.
Accounts Receivable Factoring Arrangements
We have entered into accounts receivable factoring agreements with financial institutions to sell certain of our non-U.S. accounts receivable. These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreements transfer effective control over and, risk related to, the receivables to the buyers. Our factoring agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. We derecognized $708.1 million and $678.8 million of accounts receivable as of September 30, 2020 and December 31, 2019, respectively, under these factoring arrangements. The costs of factoring such accounts receivable on our consolidated condensed results of operations for the three and nine months ended September 30, 2020 and 2019 were not material.
Note 8: Income Taxes
The effective tax rate was 15.9 percent for the three months ended September 30, 2020, compared with 10.8 percent for the three months ended September 30, 2019. The effective tax rate was 14.4 percent for the nine months ended September 30, 2020, compared with 12.8 percent for the nine months ended September 30, 2019. The higher effective tax rates for the three and nine months ended September 30, 2020 were driven primarily by a mix of earnings in higher tax jurisdictions and a lower net discrete tax benefit compared to the same period in 2019.
During the fourth quarter of 2019, the Internal Revenue Service began its examination of tax years 2016-2018. Because this examination is still in the early stages of information gathering, the resolution of the audit will likely extend beyond the next 12 months.
Note 9: Retirement Benefits
Net pension and retiree health benefit (income) cost included the following components:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
Service cost
|
$
|
81.7
|
|
|
$
|
62.4
|
|
|
$
|
243.4
|
|
|
$
|
187.8
|
|
Interest cost
|
106.6
|
|
|
121.0
|
|
|
319.0
|
|
|
364.4
|
|
Expected return on plan assets
|
(229.5)
|
|
|
(208.9)
|
|
|
(671.4)
|
|
|
(630.2)
|
|
Amortization of prior service cost
|
1.1
|
|
|
1.5
|
|
|
3.2
|
|
|
4.5
|
|
Recognized actuarial loss
|
58.4
|
|
|
70.9
|
|
|
286.5
|
|
|
213.6
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
18.3
|
|
|
$
|
46.9
|
|
|
$
|
180.7
|
|
|
$
|
140.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health Benefit Plans
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Components of net periodic benefit income:
|
|
|
|
|
|
|
|
Service cost
|
$
|
10.2
|
|
|
$
|
9.1
|
|
|
$
|
30.6
|
|
|
$
|
27.2
|
|
Interest cost
|
10.9
|
|
|
14.5
|
|
|
32.8
|
|
|
43.5
|
|
Expected return on plan assets
|
(40.3)
|
|
|
(35.9)
|
|
|
(115.1)
|
|
|
(107.8)
|
|
Amortization of prior service benefit
|
(21.9)
|
|
|
(15.7)
|
|
|
(51.6)
|
|
|
(47.2)
|
|
Recognized actuarial loss
|
0.7
|
|
|
0.4
|
|
|
2.1
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Net periodic benefit income
|
$
|
(40.4)
|
|
|
$
|
(27.6)
|
|
|
$
|
(101.2)
|
|
|
$
|
(83.0)
|
|
We contributed approximately $20 million to satisfy minimum funding requirements to our defined benefit pension and retiree health benefit plans during the nine months ended September 30, 2020. We contributed $200 million in discretionary funding during the nine months ended September 30, 2020. During the remainder of 2020, we expect to make contributions of approximately $5 million to our defined benefit pension and retiree health plans to satisfy minimum funding requirements.
Effective during the third quarter of 2020, we adopted a voluntary change in our method of applying an accounting principle for certain of our retirement benefit plans. The new accounting method changes the computation of expected returns on U.S. Dollar denominated investment grade debt securities and derivatives in such plans from a calculated value that includes changes in the fair values over a period of five years to actual fair value. This change in accounting principle is preferable because changes in the fair value of this class of assets will be amortized into net periodic pension and retiree health cost sooner. No change is being made to the accounting principle for the other classes of pension assets. The impact of the adoption of this change in accounting method was not material to our historical and current financial statements.
Note 10: Contingencies
We are a party to various legal actions and government investigations. The most significant of these are described below. It is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters; however, we believe that, except as noted below with respect to the U.S. Alimta patent litigation, the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations in any one accounting period.
Patent Litigation
Alimta Patent Litigation and Administrative Proceedings
A number of manufacturers are seeking approvals in the U.S., a number of countries in Europe, and Japan to market generic forms of Alimta prior to the expiration of our vitamin regimen patents, alleging that those patents are invalid, not infringed, or both. We believe our Alimta vitamin regimen patents are valid and enforceable against these generic manufacturers. However, it is not possible to determine the ultimate outcome of the proceedings, and accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in the U.S. could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position. We expect that a loss of exclusivity for Alimta in any of the below jurisdictions would result in a rapid and severe decline in future revenue for the product in the relevant market.
U.S. Patent Litigation
Alimta is protected by a vitamin regimen patent until 2021, plus pediatric exclusivity through May 2022. In June 2018, the U.S. District Court for the Southern District of Indiana ruled in our favor in two cases, finding Dr. Reddy's Laboratories, Ltd. and Dr. Reddy's Laboratories, Inc.'s (collectively, Dr. Reddy) and Hospira, Inc.'s (Hospira) proposed products using an alternative form of pemetrexed (the active ingredient in Alimta) would infringe our method of use patent under the doctrine of equivalents. In August 2019, the U.S. Court of Appeals for the Federal Circuit affirmed that ruling, and in November 2019, the appeals court denied Dr. Reddy and Hospira’s petition for a rehearing. In June 2020, the U.S. Supreme Court denied Dr. Reddy and Hospira’s petitions to review the case and this litigation has ended.
We have one additional lawsuit pending in federal court in which we allege infringement against Apotex Inc. (Apotex) in response to its application to market products using alternative forms of pemetrexed. In December 2019, the U.S. District Court for the Southern District of Indiana granted our motion for summary judgment of infringement under the doctrine of equivalents against Apotex. Apotex has appealed that ruling to the U.S. Court of Appeals for the Federal Circuit, with argument scheduled in November 2020. We had filed a similar lawsuit against Actavis LLC in the U.S. District Court for the Southern District of Indiana, which has been administratively closed.
In December 2019, we settled a lawsuit we filed against Eagle Pharmaceuticals, Inc. (Eagle) in response to its application to market a product using an alternative form of pemetrexed. Per the settlement agreement, Eagle has a limited initial entry into the market with its product starting February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022.
European Patent Litigation
Legal proceedings are ongoing regarding our Alimta patents in various national courts throughout Europe. We are aware that several companies have received approval to market generic versions of pemetrexed in major European markets (including generics currently on the market at risk in France and the Netherlands) and that additional generic competitors may choose to launch at risk. Following a final decision in the Supreme Court of Germany in July 2020 overturning the lower court and upholding the validity of our Alimta patent, several generics that were on the market at risk left. We have removed the remaining generics from the market by obtaining preliminary injunctions in our favor. In September 2020, the Paris Court of First Instance in France issued a final decision upholding the validity of our Alimta patent and found infringement by Fresenius Kabi’s (Kabi) pemetrexed product. The court issued an injunction against Kabi and provisionally awarded us damages. We will continue to pursue injunctions to remove remaining generics from the market in France. In late October 2020, the Court of Appeal of the Netherlands ruled in Lilly's favor and reinstated an order against Kabi prohibiting it from continuing to market its generic pemetrexed product in the Netherlands. Kabi's generic pemetrexed product was the only at risk generic on the market in the Netherlands.
Our vitamin regimen patents have also been challenged in other smaller European jurisdictions. We will continue to seek to remove any generic pemetrexed products launched at risk in other European markets, seek damages with respect to such launches, and defend our patents against validity challenges.
Japanese Administrative Proceedings
Three separate sets of demands for invalidation of our two Japanese vitamin regimen patents, involving several companies, have been filed with the Japanese Patent Office (JPO). The JPO has rejected demands for invalidation by Sawai Pharmaceutical Co., Ltd. and Nipro Corporation, and both rejections have been affirmed on appeal. In October 2020, the JPO issued notices closing the last remaining set of demands brought by Hospira, and Hospira has requested withdrawal of its demands for invalidation. These patents provide intellectual property protection for Alimta until June 2021. Notwithstanding our patents, generic versions of Alimta received regulatory approval in Japan starting in February 2016. We do not currently anticipate that generic versions of Alimta will proceed to pricing approval prior to our patent’s expiration.
Jardiance Patent Litigation
Boehringer Ingelheim, our partner in marketing and development of Jardiance, initiated U.S. patent litigation in the U.S. District Court of Delaware involving Jardiance, Glyxambi, and Synjardy in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). Several companies submitted Abbreviated New Drug Applications seeking approval to market generic versions of Jardiance prior to the expiration of the relevant patents, alleging certain patents, including in some allegations the compound patent, are invalid or would not be infringed. Trial is scheduled for April 2021.
Taltz Patent Litigation
We were named as a defendant in litigation filed by Genentech, Inc. (Genentech) in Germany seeking a ruling that Genentech’s patent would be infringed by our continued sales of Taltz in Germany. After it sold its patent rights to Novartis Pharma AG (Novartis) in June 2020, Genentech withdrew its infringement litigation and Novartis subsequently filed litigation against us in Germany asserting infringement based on sales of Taltz. We expect a trial to assess Novartis’ German infringement claims to take place in May 2021. We are also named in litigation in the U.K. in which Genentech asserted similar claims regarding its corresponding U.K. patent. We believe these lawsuits are without merit and are defending against them vigorously.
Emgality Patent Litigation
We have been named as a defendant in litigation filed by Teva Pharmaceuticals International GMBH and Teva Pharmaceuticals USA, Inc. (collectively, Teva) in the U.S. District Court for the District of Massachusetts seeking a ruling that various claims in nine different Teva patents would be infringed by our launch and continued sales of Emgality for the prevention of migraine in adults. We believe this lawsuit is without merit and are defending against it vigorously. Separately, the U.S. Patent and Trademark Office (USPTO) granted our request to initiate an inter partes review (IPR) to reexamine the validity of the nine Teva patents asserted against us in the litigation. In February 2020, the USPTO ruled in our favor and found that the claims asserted against us in six of Teva's nine patents were invalid. In March 2020, the USPTO ruled against us on the remaining three Teva patents, finding that we failed to show that the remaining three patents were unpatentable based on the subset of invalidity arguments available in an IPR proceeding. We have appealed the USPTO’s March 2020 ruling, and Teva has appealed the USPTO’s February 2020 ruling. We believe these claims are without merit and are defending against them vigorously. The district court litigation will proceed in parallel with the IPR appeals.
Other Matters
Brazil Litigation – Cosmopolis Facility
Labor Attorney Litigation
Our subsidiary in Brazil, Eli Lilly do Brasil Limitada (Lilly Brasil), is named in a lawsuit brought by the Labor Attorney for the 15th Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm to employees and former employees caused by exposure to heavy metals at a former Lilly Brasil manufacturing facility in Cosmopolis, Brazil, operated by the company between 1977 and 2003. In May 2014, the labor court judge ruled against Lilly Brasil, ordering it to undertake several actions of unspecified financial impact, including paying lifetime health coverage for the employees and contractors who worked at the Cosmopolis facility more than six months during the affected years and their children born during and after this period. We appealed this decision. In July 2018, the appeals court affirmed the labor court's ruling with the total financial impact of the ruling estimated to be approximately 500 million Brazilian real (approximately $90 million as of September 30, 2020). The appeals court restricted the broad health coverage awarded by the labor court to health problems that claimants could show arose from exposure to the alleged contamination. In August 2019, Lilly Brasil filed an appeal to the superior labor court. In September 2019, the appeals court stayed a number of elements of its prior decision, including the obligation to
provide health coverage for contractors, their children, and children of employees who worked at the Cosmopolis facility, pending the determination of Lilly Brasil’s appeal to the superior labor court.
In June 2019, the Labor Attorney filed an application in the labor court for enforcement of the healthcare coverage granted by the appeals court in its July 2018 ruling and requested restrictions on Lilly Brasil’s assets in Brazil. In July 2019, the labor court issued a ruling requiring either a freeze of Lilly Brasil’s immovable property or, alternatively, a security deposit of 500 million Brazilian real. Lilly Brasil filed a writ of mandamus challenging this ruling, but the court stayed its decision on this writ and instead directed the parties to attend conciliation hearings, a process that concluded unsuccessfully in September 2020. The labor court also stayed the Labor Attorney’s application to enforce the previous healthcare coverage ruling until after the appeals court ruled on the various motions pending before it. As the conciliation hearings have been unsuccessful, we have filed a brief to strike the Labor Attorney’s application to enforce the previous healthcare coverage. Lilly Brasil is currently awaiting a determination as to whether its application seeking leave to appeal to the superior labor court has been successful.
We believe all of these lawsuits are without merit and are defending against them vigorously.
Individual Former Employee Litigation
We are also named in approximately 30 lawsuits filed in the same labor court by individual former employees making similar claims. These lawsuits are each at various stages in the litigation process, with judgments being handed down in approximately half of the lawsuits, nearly all of which are on appeal in the labor courts. We believe all of these lawsuits are without merit and are defending against them vigorously.
Pricing Litigation, Investigations, and Inquiries
Litigation
We, along with Sanofi-Aventis U.S. LLC (Sanofi) and Novo Nordisk, Inc. (Novo Nordisk) are named as defendants in a consolidated purported class action lawsuit, In re. Insulin Pricing Litigation, in the U.S. District Court for the District of New Jersey relating to insulin pricing seeking damages under various state consumer protection laws and the Federal Racketeer Influenced and Corrupt Organization Act (federal RICO Act). Separately, we, along with Sanofi and Novo Nordisk, are named as defendants in MSP Recovery Claims, Series, LLC et al. v. Sanofi Aventis U.S. LLC et al., in the same court, seeking damages under various state consumer protection laws, common law fraud, unjust enrichment, and the federal RICO Act. In both In re. Insulin Pricing Litigation and the MSP Recovery Claims litigation, the court dismissed claims under the federal RICO Act and certain state laws. Also in the same court, we, along with Sanofi, Novo Nordisk, CVS, Express Scripts, and Optum, have been sued in a purported class action, FWK Holdings, LLC v. Novo Nordisk Inc., et al., for alleged violations of the federal RICO Act as well as the New Jersey RICO Act and anti-trust law. That same group of defendants, along with Medco Health and United Health Group, also have been sued in other purported class actions in the same court, Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al. and Value Drug Co. v. Eli Lilly & Co. et al., for alleged violations of the federal RICO Act. In September 2020, the U.S. District Court for the District of New Jersey granted plaintiffs’ motion to consolidate FWK Holdings, LLC v. Novo Nordisk Inc., et al., Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al., and Value Drug Co. v. Eli Lilly & Co. et al.
The Minnesota Attorney General’s Office has initiated litigation against us, Sanofi, and Novo Nordisk, State of Minnesota v. Sanofi-Aventis U.S. LLC et al., in the U.S. District Court for the District of New Jersey, alleging unjust enrichment, violations of various Minnesota state consumer protection laws, and the federal RICO Act. Additionally, the Kentucky Attorney General’s Office filed a complaint against us, Sanofi, and Novo Nordisk, Commonwealth of Kentucky v. Novo Nordisk, Inc. et al., in Kentucky state court, alleging violations of the Kentucky consumer protection law, false advertising, and unjust enrichment. Harris County in Texas initiated litigation against us, Sanofi, Novo Nordisk, Express Scripts, CVS, Optum, and Aetna, County of Harris Texas v. Eli Lilly & Co., et al., in federal court in the Southern District of Texas alleging violations of the federal RICO Act, federal and state anti-trust law, and the state deceptive trade practices-consumer protection act. Harris County also alleges common law claims such as fraud, unjust enrichment, and civil conspiracy. This lawsuit relates to our insulin products as well as Trulicity.
We believe all of these claims are without merit and are defending against them vigorously.
Investigations, Subpoenas, and Inquiries
We have received a subpoena from the New York Attorney General’s Office and civil investigative demands from the Washington, New Mexico, and Colorado Attorney General Offices relating to the pricing and sale of our insulin products. The Offices of the Attorney General in Mississippi, Washington D.C., California, Florida, Hawaii, and Nevada have requested information relating to the pricing and sale of our insulin products. We also received interrogatories and a subpoena from the California Attorney General's Office regarding our competition in the long-
acting insulin market. We received two requests from the House of Representatives’ Committee on Energy and Commerce and a request from the Senate’s Committee on Health, Education, Labor, and Pensions, seeking certain information related to the pricing of insulin products, among other issues. We also received requests from the House of Representatives’ Committee on Oversight and Reform and the Senate’s Committee on Finance, which seek detailed commercial information and business records. We are cooperating with all of these aforementioned investigations, subpoenas, and inquiries.
Product Liability Insurance
Because of the nature of pharmaceutical products, it is possible that we could become subject to large numbers of additional product liability and related claims in the future. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently and previously marketed products.
Note 11: Other Comprehensive Income (Loss)
The following tables summarize the activity related to each component of other comprehensive income (loss) during the three months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts presented net of taxes)
|
Foreign Currency Translation Gains (Losses)
|
|
Unrealized Net Gains (Losses) on Securities
|
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
|
Effective Portion of Cash Flow Hedges
|
|
|
|
Accumulated Other Comprehensive Loss
|
Balance at July 1, 2020
|
$
|
(1,722.5)
|
|
|
$
|
15.1
|
|
|
$
|
(4,454.9)
|
|
|
$
|
(520.6)
|
|
|
|
|
$
|
(6,682.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
30.3
|
|
|
0.8
|
|
|
(19.6)
|
|
|
82.9
|
|
|
|
|
94.4
|
|
Net amount reclassified from accumulated other comprehensive loss
|
—
|
|
|
(0.2)
|
|
|
30.3
|
|
|
3.3
|
|
|
|
|
33.4
|
|
Net other comprehensive income (loss)
|
30.3
|
|
|
0.6
|
|
|
10.7
|
|
|
86.2
|
|
|
|
|
127.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
$
|
(1,692.2)
|
|
|
$
|
15.7
|
|
|
$
|
(4,444.2)
|
|
|
$
|
(434.4)
|
|
|
|
|
$
|
(6,555.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts presented net of taxes)
|
Foreign Currency Translation Gains (Losses)
|
|
Unrealized Net Gains (Losses) on Securities
|
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
|
Effective Portion of Cash Flow Hedges
|
|
|
|
Accumulated Other Comprehensive Loss
|
Balance at July 1, 2019
|
$
|
(1,570.0)
|
|
|
$
|
4.5
|
|
|
$
|
(3,763.3)
|
|
|
$
|
(271.7)
|
|
|
|
|
$
|
(5,600.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
(192.0)
|
|
|
1.5
|
|
|
21.3
|
|
|
(12.7)
|
|
|
|
|
(181.9)
|
|
Net amount reclassified from accumulated other comprehensive loss
|
—
|
|
|
0.6
|
|
|
45.1
|
|
|
2.2
|
|
|
|
|
47.9
|
|
Net other comprehensive income (loss)
|
(192.0)
|
|
|
2.1
|
|
|
66.4
|
|
|
(10.5)
|
|
|
|
|
(134.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
(1,762.0)
|
|
|
$
|
6.6
|
|
|
$
|
(3,696.9)
|
|
|
$
|
(282.2)
|
|
|
|
|
$
|
(5,734.5)
|
|
The following tables summarize the activity related to each component of other comprehensive income (loss) during the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
(Amounts presented net of taxes)
|
Foreign Currency Translation Gains (Losses)
|
|
Unrealized Net Gains (Losses) on Securities
|
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
|
Effective Portion of Cash Flow Hedges
|
|
Discontinued Operations
|
|
Accumulated Other Comprehensive Loss
|
Balance at January 1, 2020
|
$
|
(1,678.0)
|
|
|
$
|
4.9
|
|
|
$
|
(4,638.6)
|
|
|
$
|
(211.9)
|
|
|
$
|
—
|
|
|
$
|
(6,523.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
(14.2)
|
|
|
7.6
|
|
|
4.6
|
|
|
(232.3)
|
|
|
—
|
|
|
(234.3)
|
|
Net amount reclassified from accumulated other comprehensive loss
|
—
|
|
|
3.2
|
|
|
189.8
|
|
|
9.8
|
|
|
—
|
|
|
202.8
|
|
Net other comprehensive income (loss)
|
(14.2)
|
|
|
10.8
|
|
|
194.4
|
|
|
(222.5)
|
|
|
—
|
|
|
(31.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
$
|
(1,692.2)
|
|
|
$
|
15.7
|
|
|
$
|
(4,444.2)
|
|
|
$
|
(434.4)
|
|
|
$
|
—
|
|
|
$
|
(6,555.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations
|
|
|
|
|
(Amounts presented net of taxes)
|
Foreign Currency Translation Gains (Losses)
|
|
Unrealized Net Gains (Losses) on Securities
|
|
Defined Benefit Pension and Retiree Health Benefit Plans
|
|
Effective Portion of Cash Flow Hedges
|
|
Discontinued Operations
|
|
Accumulated Other Comprehensive Loss
|
Balance at January 1, 2019 (1)
|
$
|
(1,569.7)
|
|
|
$
|
(22.1)
|
|
|
$
|
(3,852.7)
|
|
|
$
|
(238.9)
|
|
|
$
|
(56.8)
|
|
|
$
|
(5,740.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications
|
(192.3)
|
|
|
26.7
|
|
|
19.0
|
|
|
(51.7)
|
|
|
(27.2)
|
|
|
(225.5)
|
|
Net amount reclassified from accumulated other comprehensive loss
|
—
|
|
|
2.0
|
|
|
136.8
|
|
|
8.4
|
|
|
84.0
|
|
|
231.2
|
|
Net other comprehensive income (loss)
|
(192.3)
|
|
|
28.7
|
|
|
155.8
|
|
|
(43.3)
|
|
|
56.8
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
$
|
(1,762.0)
|
|
|
$
|
6.6
|
|
|
$
|
(3,696.9)
|
|
|
$
|
(282.2)
|
|
|
$
|
—
|
|
|
$
|
(5,734.5)
|
|
(1) Accumulated other comprehensive loss as of January 1, 2019 consists of $5.73 billion of accumulated other comprehensive loss attributable to controlling interest and $11.0 million of accumulated other comprehensive loss attributable to noncontrolling interest.
The tax effects on the net activity related to each component of other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Tax benefit (expense)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Foreign currency translation gains/losses
|
$
|
46.0
|
|
|
$
|
(5.1)
|
|
|
$
|
34.9
|
|
|
$
|
(17.1)
|
|
Unrealized net gains/losses on securities
|
(0.2)
|
|
|
(0.5)
|
|
|
(3.0)
|
|
|
(7.4)
|
|
Defined benefit pension and retiree health benefit plans
|
11.8
|
|
|
(17.4)
|
|
|
(32.8)
|
|
|
(42.2)
|
|
Effective portion of cash flow hedges
|
(22.9)
|
|
|
2.7
|
|
|
59.1
|
|
|
11.4
|
|
Benefit (provision) for income taxes allocated to other comprehensive income (loss) items
|
$
|
34.7
|
|
|
$
|
(20.3)
|
|
|
$
|
58.2
|
|
|
$
|
(55.3)
|
|
Except for the tax effects of foreign currency translation gains and losses related to our foreign currency-denominated notes, cross-currency interest rate swaps, and other foreign currency exchange contracts designated as net investment hedges (see Note 7), income taxes were not provided for foreign currency translation. Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For those operations, changes in exchange rates generally do not affect cash flows; therefore, resulting translation adjustments are made in shareholders' equity rather than in the consolidated condensed statements of operations.
Reclassifications out of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Affected Line Item in the Consolidated Condensed Statements of Operations
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Amortization of retirement benefit items:
|
|
|
|
|
|
|
|
|
|
Prior service benefits, net
|
|
$
|
(20.8)
|
|
|
$
|
(14.2)
|
|
|
$
|
(48.4)
|
|
|
$
|
(42.7)
|
|
Other–net, (income) expense
|
Actuarial losses, net
|
|
59.1
|
|
|
71.3
|
|
|
288.6
|
|
|
214.9
|
|
Other–net, (income) expense
|
Total before tax
|
|
38.3
|
|
|
57.1
|
|
|
240.2
|
|
|
172.2
|
|
|
Tax benefit
|
|
(8.0)
|
|
|
(12.0)
|
|
|
(50.4)
|
|
|
(35.4)
|
|
Income taxes
|
Net of tax
|
|
30.3
|
|
|
45.1
|
|
|
189.8
|
|
|
136.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net of tax
|
|
3.1
|
|
|
2.8
|
|
|
13.0
|
|
|
10.4
|
|
Other–net, (income) expense
|
Reclassifications from continuing operations (net of tax)
|
|
33.4
|
|
|
47.9
|
|
|
202.8
|
|
|
147.2
|
|
|
Reclassifications from discontinued operations (net of tax)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84.0
|
|
Net income from discontinued operations
|
Total reclassifications for the period (net of tax)
|
|
$
|
33.4
|
|
|
$
|
47.9
|
|
|
$
|
202.8
|
|
|
$
|
231.2
|
|
|
Note 12: Other–Net, (Income) Expense
Other–net, (income) expense consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest expense
|
$
|
89.6
|
|
|
$
|
107.4
|
|
|
$
|
270.4
|
|
|
$
|
304.7
|
|
Interest income
|
(5.8)
|
|
|
(17.3)
|
|
|
(27.2)
|
|
|
(67.2)
|
|
Retirement benefit plans
|
(114.0)
|
|
|
(52.2)
|
|
|
(194.5)
|
|
|
(157.9)
|
|
Other income
|
(128.7)
|
|
|
(13.0)
|
|
|
(743.6)
|
|
|
(108.3)
|
|
Other–net, (income) expense
|
$
|
(158.9)
|
|
|
$
|
24.9
|
|
|
$
|
(694.9)
|
|
|
$
|
(28.7)
|
|
For the three and nine months ended September 30, 2020, other income is primarily related to net gains on investments (see Note 7).