Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Tables present dollars in millions, except per-share data)
Note 1: Summary of Significant Accounting Policies and Implementation of New Financial Accounting Standards
Basis of Presentation
The accompanying consolidated financial statements include Eli Lilly and Company and all subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). We consider majority voting interests, as well as effective economic or other control over an entity when deciding whether or not to consolidate an entity. We generally do not have control by means other than voting interests. Where our ownership of consolidated subsidiaries is less than 100 percent, the noncontrolling shareholders’ interests are reflected as a separate component of equity. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. We issued our financial statements by filing with the Securities and Exchange Commission (SEC) and have evaluated subsequent events up to the time of the filing of this Annual Report on Form 10-K.
Certain reclassifications have been made to prior periods in the consolidated financial statements and accompanying notes to conform with the current presentation.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis.
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health Incorporated (Elanco) common stock through a tax-free exchange offer. As a result, Elanco has been presented as discontinued operations in our consolidated financial statements for all periods presented.
Following the completion of the disposition of Elanco, we now 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.
Research and Development Expenses and Acquired In-Process Research and Development (IPR&D)
Research and development expenses include the following:
•Research and development costs, which are expensed as incurred.
•Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued when the event requiring payment of the milestone occurs.
Acquired IPR&D expense includes the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.
Earnings Per Share (EPS)
We calculate basic EPS based on the weighted-average number of common shares outstanding and incremental shares from potential participating securities. We calculate diluted EPS based on the weighted-average number of common shares outstanding, including incremental shares from our stock-based compensation programs.
Foreign Currency Translation
Operations in our subsidiaries outside the United States (U.S.) are recorded in the functional currency of each subsidiary which is determined by a review of the environment where each subsidiary primarily generates and expends cash. The results of operations for our subsidiaries outside the U.S. are translated from functional currencies into U.S. dollars using the weighted average currency rate for the period. Assets and liabilities are translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries are recorded in other comprehensive income (loss).
Advertising Expenses
Costs associated with advertising are expensed as incurred and are included in marketing, selling, and administrative expenses. Advertising expenses, comprised primarily of television, radio, print media, and Internet advertising, totaled approximately $1.1 billion, $1.1 billion, and $900 million in 2020, 2019, and 2018, respectively, which was less than 5 percent of revenue each year.
Other Significant Accounting Policies
Our other significant accounting policies are described in the remaining appropriate notes to the consolidated financial statements.
Implementation of New Financial Accounting Standards
Effective January 1, 2019, we adopted Accounting Standards Update 2016-02, Leases, using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transitional practical expedients. The adoption of this standard resulted in recording of operating lease assets of approximately $530 million, which included reclassifying approximately $65 million of deferred rent and lease incentives, net of prepaid rent, as a component of the operating lease assets as of January 1, 2019. The adoption also resulted in recording operating lease liabilities of approximately $595 million as of January 1, 2019. Our accounting for finance leases remained substantially unchanged. Adoption of this standard did not result in a material change in net income in the year of adoption.
Effective January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, and other related updates. This standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We applied this standard to contracts for which performance was not substantially complete as of the date of adoption. For those contracts that were modified prior to the date of adoption, we reflected the aggregate effect of those modifications when determining the appropriate accounting under the new standard. We don’t believe the effect of applying this practical expedient resulted in material differences. We applied this standard through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Upon adoption, the cumulative effect of applying this standard resulted in an increase of approximately $5 million to retained earnings as of January 1, 2018. Adoption of this standard did not result in a material change in revenue or net income in the year of adoption.
Effective January 1, 2018, we adopted Accounting Standards Update 2016-01 (ASU 2016-01), Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires entities to recognize changes in the fair value of equity investments with readily determinable fair values in net income (except for investments accounted for under the equity method of accounting or those that result in consolidation of the investee). We applied the new standard through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Upon adoption, we reclassified from accumulated other comprehensive loss the after-tax amount of net unrealized gains resulting in an increase to retained earnings of approximately $105 million as of January 1, 2018. Adoption of this standard did not result in a material change in net income in the year of adoption.
Effective January 1, 2018, we adopted Accounting Standards Update 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This standard requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of transfer. We adopted this standard using a modified retrospective approach. Upon adoption, the cumulative effect of applying this standard resulted in an increase of approximately $700 million to retained earnings, $2.5 billion to deferred tax assets, and $1.8 billion to deferred tax liabilities as of January 1, 2018. Adoption of this standard did not result in a material change in net income in the year of adoption.
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 15 for additional information.
Note 2: Revenue
The following table summarizes our revenue recognized in our consolidated statements of operations:
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2020
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|
2019
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2018
|
Net product revenue
|
$
|
22,694.8
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|
|
$
|
20,377.3
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|
$
|
19,866.4
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|
Collaboration and other revenue(1)
|
1,845.0
|
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|
1,942.2
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|
|
1,626.9
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Revenue
|
$
|
24,539.8
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|
|
$
|
22,319.5
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|
$
|
21,493.3
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(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $135.6 million, $301.5 million, and $303.2 million during the years ended December 31, 2020, 2019, and 2018, 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 will include 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 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.
Net Product Revenue
Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which generally is at the time we ship the product to the customer. Payment terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from 30 to 70 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a financing component as we expect, at contract inception, that the period between when we transfer control of the product and when we receive payment will be one year or less. Any exceptions are either not material or we collect interest for payments made after the due date. Provisions for rebates, discounts, and returns are established in the same period the related sales are recognized. We generally ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.
Most of our products are sold to wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. For the years ended December 31, 2020, 2019, and 2018, our three largest wholesalers each accounted for between 15 percent and 20 percent of consolidated revenue. Further, they each accounted for between 19 percent and 27 percent of accounts receivable as of December 31, 2020 and 2019.
Significant judgments must be made in determining the transaction price for our sales of products related to anticipated rebates, discounts and returns. The following describe the most significant of these judgments:
Sales Rebates and Discounts - Background and Uncertainties
•We initially invoice our customers at contractual list prices. Contracts with direct and indirect customers may provide for various rebates and discounts that may differ in each contract. As a consequence, to determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we must estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates.
•The rebate and discount amounts are recorded as a deduction to arrive at our net product revenue. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include managed care, Medicare, Medicaid, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We estimate these accruals using an expected value approach.
•The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, chargeback, and patient assistance programs in the U.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing. Although we accrue a liability for rebates related to these programs at the time we record the sale, the rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.
•Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. An estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale.
Sales Returns - Background and Uncertainties
•When product sales occur, to determine the appropriate transaction price for our sales, we estimate a reserve for future product returns related to those sales using an expected value approach. This estimate is based on several factors, including: historical return rates, expiration date by product (on average, approximately 24 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows most U.S. customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. In the U.S. we allow bamlanivimab to be returned if the Emergency Use Authorization (EUA) is revoked. If the EUA were to be revoked, we could experience an elevated level of product returns of bamlanivimab, dependent on the amount of product remaining in the distribution channel. Adjustments to the returns reserve have been and may in the future be required based on revised estimates to our assumptions. We record the return amounts as a deduction to arrive at our net product revenue. Once the product is returned, it is destroyed; we do not record a right of return asset. Our returns policies outside the U.S. are generally more restrictive than in the U.S. as returns are not allowed for reasons other than failure to meet product specifications in many countries. Our reserve for future product returns for product sales outside the U.S. is not material.
•As a part of our process to estimate a reserve for product returns, we regularly review the supply levels of our significant products at the major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements provides us with data on inventory levels at our wholesalers; however, our data on inventory levels in the retail channel is more limited. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
•Actual U.S. product returns have been less than 2 percent of our U.S. revenue over each of the past three years and have not fluctuated significantly as a percentage of revenue, although fluctuations are more likely in periods following loss of patent exclusivity for major products in the U.S. market.
Adjustments to Revenue
Adjustments to increase revenue recognized as a result of changes in estimates for the judgments described above for our most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous periods were approximately 1 percent, 2 percent and 1 percent of U.S revenue during 2020, 2019, and 2018, respectively.
Collaboration and Other Arrangements
We recognize several types of revenue from our collaborations and other arrangements, which we discuss in general terms immediately below and more specifically in Note 4 for each of our material collaborations and other arrangements. Our collaborations and other arrangements are not contracts with customers but are evaluated to determine whether any aspects of the arrangements are contracts with customers.
•Revenue related to products we sell pursuant to these arrangements is included in net product revenue, while other sources of revenue (e.g., royalties and profit sharing from our partner) are included in collaboration and other revenue.
•Initial fees and developmental milestones we receive in collaborative and other similar arrangements from the partnering of our compounds under development are generally deferred and amortized into income through the expected product approval date.
•Profit-sharing due from our collaboration partners, which is based upon gross margins reported to us by our partners, is recognized as collaboration and other revenue as earned.
•Royalty revenue from licensees and certain of our collaboration partners, which is based on sales to third-parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). This royalty revenue is included in collaboration and other revenue.
•For arrangements involving multiple goods or services (e.g., research and development, marketing and selling, manufacturing, and distribution), each required good or service is evaluated to determine whether it is distinct. If a good or service does not qualify as distinct, it is combined with the other non-distinct goods or services within the arrangement and these combined goods or services are treated as a single performance obligation for accounting purposes. The arrangement's transaction price is then allocated to each performance obligation based on the relative standalone selling price of each performance obligation. For arrangements that involve variable consideration where we have sold intellectual property, we recognize revenue based on estimates of the amount of consideration we believe we will be entitled to receive from the other party, subject to a constraint. These estimates are adjusted to reflect the actual amounts to be collected when those facts and circumstances become known.
•Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development will not receive regulatory approval, we generally do not recognize any contingent payments that would be due to us upon or after regulatory approval.
•We have entered into arrangements whereby we transferred rights to products and committed to supply for a period of time. For those arrangements for which we concluded that the obligations were not distinct, any amounts received upfront are being amortized to revenue as net product revenue over the period of the supply arrangement as the performance obligation is satisfied.
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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2020
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2019
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Contract liabilities
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$
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276.8
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$
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264.6
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The contract liabilities balances disclosed above as of December 31, 2020 and 2019 were primarily related to the remaining license period of symbolic intellectual property and obligations to perform research and development activities or supply product for a defined period of time.
During the years ended December 31, 2020, 2019, and 2018, 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:
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U.S.
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Outside U.S.
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2020
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2019
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2018
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2020
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2019
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2018
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Revenue—to unaffiliated customers:
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Diabetes:
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Trulicity®
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$
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3,835.9
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|
$
|
3,155.2
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|
|
$
|
2,515.8
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|
$
|
1,232.2
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|
$
|
972.7
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|
$
|
683.3
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Humalog® (1)
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1,485.6
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|
|
1,669.7
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|
|
1,787.8
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|
1,140.3
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|
1,151.0
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|
1,208.7
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Humulin®
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866.4
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879.7
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910.2
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393.2
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410.4
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|
421.2
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Jardiance (2)
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620.8
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565.9
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400.2
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533.0
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|
378.3
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|
|
258.1
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Basaglar®
|
842.3
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|
876.2
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|
|
622.8
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|
282.1
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|
236.3
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|
|
178.5
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Trajenta (3)
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95.6
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|
|
224.8
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|
224.2
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|
263.0
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|
|
365.8
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|
|
350.5
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Other Diabetes
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162.5
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|
|
158.0
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|
146.0
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|
81.5
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|
|
88.1
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|
|
112.2
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Total Diabetes
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7,909.1
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|
|
7,529.5
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|
|
6,607.0
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|
|
3,925.3
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|
|
3,602.6
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|
|
3,212.5
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Oncology:
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Alimta®
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1,265.3
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|
1,219.5
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|
|
1,131.0
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|
|
1,064.7
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|
|
896.4
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|
|
1,001.9
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|
Cyramza®
|
381.9
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|
|
335.3
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|
|
291.5
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|
|
650.8
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|
|
589.9
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|
|
529.9
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Verzenio®
|
618.2
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|
|
454.8
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|
|
248.5
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|
|
294.4
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|
|
124.9
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|
|
6.6
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Erbitux®
|
480.1
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|
|
487.9
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|
|
531.6
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|
|
56.3
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|
|
55.4
|
|
|
103.8
|
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Other Oncology
|
46.6
|
|
|
111.0
|
|
|
200.6
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|
|
461.0
|
|
|
339.3
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|
|
215.1
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Total Oncology
|
2,792.1
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|
|
2,608.5
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|
|
2,403.2
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|
|
2,527.2
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|
|
2,005.9
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|
|
1,857.3
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|
Immunology:
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|
|
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Taltz®
|
1,288.5
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|
|
1,016.8
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|
|
738.7
|
|
|
500.0
|
|
|
349.6
|
|
|
198.7
|
|
Olumiant®
|
63.8
|
|
|
42.2
|
|
|
6.7
|
|
|
575.0
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|
|
384.7
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|
|
195.9
|
|
Other Immunology
|
20.0
|
|
|
—
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|
|
—
|
|
|
14.6
|
|
|
—
|
|
|
—
|
|
Total Immunology
|
1,372.3
|
|
|
1,059.0
|
|
|
745.4
|
|
|
1,089.6
|
|
|
734.3
|
|
|
394.6
|
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|
|
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Neuroscience:
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Cymbalta®
|
42.1
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|
49.6
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|
|
54.3
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|
|
725.6
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|
|
675.8
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|
|
653.7
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Zyprexa®
|
46.1
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|
|
41.0
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|
|
36.2
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|
|
360.5
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|
|
377.6
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|
|
435.1
|
|
|
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Emgality®
|
325.9
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|
|
154.9
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|
4.9
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|
|
37.0
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|
|
7.7
|
|
|
—
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Other Neuroscience
|
73.2
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|
|
111.0
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|
|
182.0
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|
|
220.9
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|
|
305.3
|
|
|
454.5
|
|
Total Neuroscience
|
487.3
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|
|
356.5
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|
|
277.4
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|
|
1,344.0
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|
|
1,366.4
|
|
|
1,543.3
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Other:
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Forteo®
|
510.3
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|
|
645.5
|
|
|
757.9
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|
|
536.0
|
|
|
759.1
|
|
|
817.7
|
|
Bamlanivimab (4)
|
850.0
|
|
|
—
|
|
|
—
|
|
|
21.2
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|
|
—
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|
|
—
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|
Cialis®
|
61.8
|
|
|
231.7
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|
|
1,129.2
|
|
|
545.4
|
|
|
658.8
|
|
|
722.7
|
|
Other
|
246.4
|
|
|
291.9
|
|
|
471.8
|
|
|
321.8
|
|
|
469.7
|
|
|
553.3
|
|
Total Other
|
1,668.4
|
|
|
1,169.1
|
|
|
2,358.8
|
|
|
1,424.4
|
|
|
1,887.7
|
|
|
2,093.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
14,229.3
|
|
|
$
|
12,722.6
|
|
|
$
|
12,391.9
|
|
|
$
|
10,310.5
|
|
|
$
|
9,596.8
|
|
|
$
|
9,101.4
|
|
Numbers may not add due to rounding.
(1) Humalog revenue includes insulin lispro.
(2) Jardiance revenue includes Glyxambi® and Synjardy®, and Trijardy® XR.
(3) Trajenta revenue includes Jentadueto®.
(4) Bamlanivimab sales are pursuant to EUA.
The following table summarizes revenue by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Revenue—to unaffiliated customers(1):
|
|
|
|
|
|
|
U.S.
|
|
$
|
14,229.3
|
|
|
$
|
12,722.6
|
|
|
$
|
12,391.9
|
|
Europe
|
|
4,187.7
|
|
|
3,765.0
|
|
|
3,663.1
|
|
Japan
|
|
2,583.1
|
|
|
2,547.6
|
|
|
2,407.4
|
|
China
|
|
1,116.9
|
|
|
939.4
|
|
|
750.8
|
|
Other foreign countries
|
|
2,422.7
|
|
|
2,344.9
|
|
|
2,280.1
|
|
Revenue
|
|
$
|
24,539.8
|
|
|
$
|
22,319.5
|
|
|
$
|
21,493.3
|
|
Numbers may not add due to rounding.
(1) Revenue is attributed to the countries based on the location of the customer.
Note 3: Acquisitions and Divestiture
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 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 have been included in our consolidated financial statements from the date of acquisition.
We also acquired assets in development in 2020, 2019, and 2018, which are further discussed in this note below in Asset Acquisitions. Upon each acquisition, the cost allocated to acquired IPR&D was immediately expensed because the compound acquired had no alternative future use. For the years ended December 31, 2020, 2019, and 2018, we recorded acquired IPR&D charges of $660.4 million, $239.6 million, and $1.98 billion, 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
The fair values recognized related to the assets acquired and liabilities assumed in this acquisition included goodwill of $86.8 million, other intangibles of $1.20 billion primarily related to lebrikizumab, deferred income tax liabilities of $49.5 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.
Revenue attributable to assets acquired in the Dermira acquisition did not have a material impact on our consolidated statement of operations for the year ended December 31, 2020. We are unable to provide the results of operations for the year ended December 31, 2020 attributable to Dermira as those operations were substantially integrated into our legacy business.
Pro forma information has not been included because this acquisition did not have a material impact on our results of operations for the years ended December 31, 2020 and 2019.
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 year ended December 31, 2019 (see Note 5).
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.
Our consolidated statement of operations for the year ended December 31, 2019 includes revenue attributable to assets acquired in the Loxo acquisition of $136.7 million, primarily due to regulatory approval and sales milestones received. We are unable to provide the results of operations for the year ended December 31, 2019 attributable to Loxo as those operations were substantially integrated into our legacy business.
Pro forma information has not been included because this acquisition did not have a material impact on our results of operations for the years ended December 31, 2019 and 2018.
Asset Acquisitions
The following table and narrative summarize our asset acquisitions during 2020, 2019, and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
Compound(s),Therapy, or Asset
|
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. (AbCellera)(2)
|
Neutralizing antibodies for the treatement and prevention of COVID-19
|
March 2020
|
|
Pre-clinical
|
|
25.0
|
|
Shanghai Junshi Biosciences Co., Ltd. (Junshi Biosciences)
|
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
|
|
Innovent Biologics, Inc. (Innovent)
|
Sintilimab injection, an anti-PD-1 monoclonal antibody immuno-oncology medicine, for geographies outside of China
|
October 2020
|
|
Phase III
|
|
200.0
|
|
Disarm Therapeutics, Inc. (Disarm)
|
Disease-modifying therapeutics program for patients with axonal degeneration
|
October 2020
|
|
Pre-clinical
|
|
126.3
|
|
Fochon Pharmaceuticals, Ltd.
|
Pre-clinical molecule targeting hematological malignancies
|
November 2020
|
|
Pre-clinical
|
|
40.0
|
|
|
|
|
|
|
|
|
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 somatostatin receptor type 4 agonist
|
July 2019
|
|
Phase I
|
|
47.5
|
|
|
|
|
|
|
|
|
Sigilon Therapeutics, Inc.
|
Encapsulated cell therapies for the potential treatment of type 1 diabetes
|
April 2018
|
|
Pre-clinical
|
|
66.9
|
|
AurKa Pharma Inc.
|
AK-01, an Aurora kinase A inhibitor
|
June 2018
|
|
Phase I
|
|
81.8
|
|
ARMO BioSciences, Inc. (ARMO)
|
Cancer therapy - pegilodecakin
|
June 2018
|
|
Phase III
|
|
1,475.8
|
|
Anima Biotech Inc.
|
Translation inhibitors for selected neuroscience targets
|
July 2018
|
|
Pre-clinical
|
|
30.0
|
|
SIGA Technologies, Inc.
|
Priority Review Voucher
|
October 2018
|
|
Not applicable
|
|
80.0
|
|
Chugai Pharmaceutical Co., Ltd.
|
OWL833, an oral non-peptidic GLP-1 receptor agonist
|
October 2018
|
|
Pre-clinical
|
|
50.0
|
|
NextCure, Inc.
|
Immuno-oncology cancer therapies
|
November 2018
|
|
Pre-clinical(4)
|
|
28.1
|
|
Dicerna Pharmaceuticals Inc.
|
Cardio-metabolic disease, neurodegeneration, and pain
|
December 2018
|
|
Pre-clinical
|
|
148.7
|
|
Hydra Biosciences
|
TRPA1 antagonists program for the potential treatment of chronic pain syndromes
|
December 2018
|
|
Pre-clinical
|
|
22.6
|
|
|
|
|
|
|
|
|
(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 expenses 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.
(4) This research and development collaboration agreement terminated effective March 2020.
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.
Divestiture
In October 2019, we completed a transaction in which we sold the rights in China for two legacy antibiotic medicines, as well as a manufacturing facility in Suzhou, China to Eddingpharm, a China-based specialty pharmaceutical company. In connection with the sale, we received net cash proceeds of $354.8 million and $40.3 million from Eddingpharm in 2019 and 2020, respectively. We accounted for the transaction as the sale of a business. We recorded a gain of $309.8 million in Other—net, (income) expense upon closing the transaction in 2019.
Subsequent Events
Precision BioSciences, Inc. (Precision)
In January 2021, we entered into a research collaboration and exclusive license agreement with Precision to utilize Precision's proprietary ARCUS genome editing platform for the research and development of potential in vivo therapies for genetic disorders. Under terms of the agreement, we paid an upfront cash payment of $100.0 million and invested $35.0 million in Precision's common stock at a premium. As a result of the transaction, we will record an acquired IPR&D charge of $107.8 million in the first quarter of 2021.
Merus N.V. (Merus)
In January 2021, we entered into a research collaboration and exclusive license agreement with Merus to research and develop up to three CD3-engaging T-cell re-directing bispecific antibody therapies. Under the terms of the agreement, we paid Merus an upfront cash payment of $40.0 million and invested $20.0 million in Merus common shares at a premium. As a result of the transaction, we will record an acquired IPR&D charge of $46.5 million in the first quarter of 2021.
Prevail Therapeutics Inc. (Prevail)
In January 2021, we completed our acquisition of Prevail. Prevail is a biotechnology company developing potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases. The acquisition establishes a new modality for drug discovery and development, extending our research efforts through the creation of a gene therapy program that will be anchored by Prevail’s portfolio of clinical-stage and preclinical neuroscience assets.
We acquired all shares of Prevail for $22.50 per share (approximately $880 million) in cash plus one non-tradable contingent value right (CVR). The CVR entitles Prevail stockholders to up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries: U.S., Japan, United Kingdom (U.K.), Germany, France, Italy or Spain. To achieve the full value of the CVR, such regulatory approval must occur by December 31, 2024. If such regulatory approval occurs after December 31, 2024, the value of the CVR will be reduced by approximately 8.3 cents per month until December 1, 2028, at which point the CVR will expire.
The accounting impact of this acquisition and the results of the operations for Prevail will be included in our consolidated financial statements beginning in the first quarter of 2021.The initial accounting for this acquisition is incomplete. Significant, relevant information needed to complete the initial accounting is not available because the valuation of assets acquired and liabilities assumed is not complete. As a result, determining these values is not practicable, and we are unable to disclose these values or provide other related disclosures at this time.
Asahi Kasei Pharma Corporation (Asahi)
In January 2021, we entered into a license agreement with Asahi to acquire the exclusive rights for AK1780, an orally bioavailable P2X7 receptor antagonist that recently completed Phase 1 single and multiple ascending dose and clinical pharmacology studies for the potential treatment of chronic pain conditions. As a result of the transaction, we will pay Asahi an upfront cash payment and record an acquired IPR&D charge of $20.0 million in the first quarter of 2021.
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 as well as 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Basaglar
|
$
|
1,124.4
|
|
|
$
|
1,112.6
|
|
|
$
|
801.2
|
|
Jardiance
|
1,153.8
|
|
|
944.2
|
|
|
658.3
|
|
Trajenta
|
358.5
|
|
|
590.6
|
|
|
574.7
|
|
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 (baricitinib), and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte has the right to receive tiered, double digit royalty payments on global net 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 the first half of 2020, the agreement was amended to include the treatment of COVID-19, with Incyte obtaining the right to receive an additional royalty ranging up to the low teens on global net sales for the treatment of COVID-19 that exceed a specified aggregate global net sales threshold.
In connection with the regulatory approvals of Olumiant in the U.S., Europe, and Japan, milestone payments of $210.0 million and $180.0 million were capitalized as intangible assets as of December 31, 2020 and 2019, respectively, 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 each reporting period.
As of December 31, 2020, Incyte is eligible to receive up to $100.0 million of additional payments from us contingent upon certain 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Olumiant
|
$
|
638.9
|
|
|
$
|
426.9
|
|
|
$
|
202.5
|
|
COVID-19 antibody therapies
In 2020, we entered into a worldwide license and collaboration agreement with AbCellera to co-develop therapeutic antibodies for the potential prevention and treatment of COVID-19, including bamlanivimab, for which we hold development and commercialization rights. In connection with this transaction, we recognized an acquired IPR&D expense of $25.0 million in 2020. AbCellera has the right to receive tiered royalty payments on global net sales of bamlanivimab with percentages ranging in the mid-teens to mid-twenties. Royalty payments made to AbCellera are recorded as cost of sales. Pursuant to an EUA, we recognized $871.2 million of net product revenue associated with our sales of bamlanivimab to third parties during the year ended December 31, 2020.
In 2020, we entered into a license and collaboration agreement with Junshi Biosciences to co-develop therapeutic antibodies for the potential prevention and treatment of COVID-19, including etesevimab, for which we hold development and commercialization rights outside of Greater China (which includes mainland China, Hong Kong and Macau Special Administrative Regions and Taiwan) and Junshi Biosciences maintains all rights in Greater China. In connection with this transaction, we recognized an acquired IPR&D expense of $20.0 million in 2020. Junshi Biosciences has the right to receive royalty payments in the mid-teens on our future net sales of etesevimab. Junshi Biosciences also has the right to receive certain development, success-based regulatory and sales-based milestones. As of December 31, 2020, Junshi Biosciences is eligible to receive up to $75.0 million of additional payments contingent upon certain success-based regulatory milestones and up to $120.0 million of potential sales-based milestones, contingent upon the commercial success of etesevimab. During the year ended December 31, 2020, we recognized $50.0 million of research and development expenses related to development milestones.
Tyvyt®
We have a collaboration agreement with Innovent to jointly develop and commercialize Tyvyt (sintilimab injection) in China. In 2019, we and Innovent began co-commercializing Tyvyt in China. We record our sales of Tyvyt to third parties as revenue, with payments made to Innovent for its portion of the gross margin reported as cost of sales. We also report as revenue our portion of the gross margin for Tyvyt sales made by Innovent to third parties. Our Tyvyt revenue in China, which is primarily recorded as net product revenue, was $308.7 million and $134.0 million in 2020 and 2019, respectively.
In October 2020, we obtained an exclusive license for Tyvyt from Innovent for geographies outside of China and plan to pursue registration of Tyvyt in the U.S. and other markets. We recorded an acquired IPR&D charge of $200.0 million in 2020 associated with the upfront payment to Innovent.
As of December 31, 2020, Innovent is eligible to receive up to $825.0 million for geographies outside of China and up to $75.0 million in China in success-based regulatory and sales-based milestones. Innovent is also eligible to receive tiered double digit royalties on net sales for geographies outside of China.
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 we have 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 December 31, 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 December 31, 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 December 31, 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 December 31, 2020, $29.7 million was recorded as a contract liability on the consolidated balance sheet and is expected to be recognized as collaboration and other revenue over the remaining Phase III development period. During the twelve months ended December 31, 2020, milestones received and collaboration and other revenue recognized were not material.
Note 5: Asset Impairment, Restructuring, and Other Special Charges
The components of the charges included in asset impairment, restructuring, and other special charges in our consolidated statements of operations are described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Severance
|
$
|
151.2
|
|
|
$
|
77.8
|
|
|
$
|
127.8
|
|
|
|
|
|
|
|
Asset impairment (gain) and other special charges
|
(20.0)
|
|
|
497.8
|
|
|
139.1
|
|
Total asset impairment, restructuring, and other special charges
|
$
|
131.2
|
|
|
$
|
575.6
|
|
|
$
|
266.9
|
|
Severance costs recognized during the years ended December 31, 2020, 2019 and 2018 were incurred as a result of actions taken worldwide to reduce our cost structure. Substantially all of the severance costs incurred during the year ended December 31, 2020 are expected to be paid in the next 12 months.
Asset impairment and other special charges recognized during the year ended December 31, 2019 resulted primarily from $400.7 million of other special charges related to the acquisition of Loxo, substantially all of which is associated with the accelerated vesting of Loxo employee equity awards.
Asset impairment and other special charges recognized during the year ended December 31, 2018 resulted primarily from asset impairment and other special charges related to the sale of the Posilac® (rbST) brand and the associated Augusta, Georgia manufacturing site.
Note 6: Inventories
We use the last-in, first-out (LIFO) method for the majority of our inventories located in the continental U.S. Other inventories are valued by the first-in, first-out (FIFO) method. FIFO cost approximates current replacement cost. Inventories measured using LIFO must be valued at the lower of cost or market. Inventories measured using FIFO must be valued at the lower of cost or net realizable value.
Inventories at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Finished products
|
$
|
758.9
|
|
|
$
|
647.3
|
|
Work in process
|
2,535.4
|
|
|
2,067.6
|
|
Raw materials and supplies
|
651.2
|
|
|
424.6
|
|
Total (approximates replacement cost)
|
3,945.5
|
|
|
3,139.5
|
|
Increase to LIFO cost
|
34.8
|
|
|
51.2
|
|
Inventories
|
$
|
3,980.3
|
|
|
$
|
3,190.7
|
|
Inventories valued under the LIFO method comprised $1.21 billion and $1.20 billion of total inventories at December 31, 2020 and 2019, respectively.
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 the 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 December 31, 2020, we had outstanding foreign currency forward commitments to purchase 647.9 million U.S. dollars and sell 530.7 million euro; commitments to purchase 2.97 billion euro and sell 3.62 billion U.S. dollars; commitments to purchase 180.7 million U.S. dollars and sell 18.64 billion Japanese yen, and commitments to purchase 272.2 million British pounds and sell 363.9 million U.S. dollars which all settled 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 $6.02 billion and $5.49 billion as of December 31, 2020 and 2019, respectively, of which $4.50 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 December 31, 2020 and 2019, respectively. At December 31, 2020, we had outstanding cross currency swaps with notional amounts of $3.76 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 fixed rate debt to foreign-denominated fixed 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 the 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 statements of cash flows. At December 31, 2020, substantially all of our total long-term debt is at a 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 any 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 December 31, 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.
The Effect of Risk Management Instruments on the Consolidated Statements of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Fair value hedges:
|
|
|
|
|
|
Effect from hedged fixed-rate debt
|
$
|
86.9
|
|
|
$
|
112.1
|
|
|
$
|
(40.9)
|
|
Effect from interest rate contracts
|
(86.9)
|
|
|
(112.1)
|
|
|
40.9
|
|
Cash flow hedges:
|
|
|
|
|
|
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss
|
16.4
|
|
|
15.9
|
|
|
14.8
|
|
Cross-currency interest rate swaps
|
(102.4)
|
|
|
(17.1)
|
|
|
—
|
|
Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments
|
(123.7)
|
|
|
61.9
|
|
|
100.0
|
|
Total
|
$
|
(209.7)
|
|
|
$
|
60.7
|
|
|
$
|
114.8
|
|
|
|
|
|
|
|
During the years ended December 31, 2020, 2019 and 2018, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Net investment hedges:
|
|
|
|
|
|
Foreign currency-denominated notes
|
$
|
(404.0)
|
|
|
$
|
40.1
|
|
|
$
|
110.4
|
|
Cross-currency interest rate swaps
|
(207.9)
|
|
|
47.4
|
|
|
96.8
|
|
Foreign currency exchange contracts
|
—
|
|
|
—
|
|
|
5.7
|
|
Cash flow hedges:
|
|
|
|
|
|
Forward-starting interest rate swaps
|
(110.9)
|
|
|
31.6
|
|
|
—
|
|
Cross-currency interest rate swaps
|
(53.7)
|
|
|
(8.3)
|
|
|
—
|
|
During the next 12 months, we expect to reclassify $16.8 million of net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense. During the years ended December 31, 2020, 2019 and 2018, 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 December 31 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
|
|
|
Description
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
2,097.9
|
|
|
$
|
2,097.9
|
|
|
$
|
2,097.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,097.9
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
9.9
|
|
|
$
|
9.9
|
|
|
$
|
9.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9.9
|
|
Corporate debt securities
|
2.8
|
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
Asset-backed securities
|
1.2
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
|
—
|
|
|
1.2
|
|
Other securities
|
10.3
|
|
|
10.3
|
|
|
—
|
|
|
—
|
|
|
10.3
|
|
|
10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
24.2
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments:
|
U.S. government and agency securities
|
$
|
78.7
|
|
|
$
|
74.3
|
|
|
$
|
78.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78.7
|
|
Corporate debt securities
|
137.0
|
|
|
126.8
|
|
|
—
|
|
|
137.0
|
|
|
—
|
|
|
137.0
|
|
Mortgage-backed securities
|
106.4
|
|
|
101.4
|
|
|
—
|
|
|
106.4
|
|
|
—
|
|
|
106.4
|
|
Asset-backed securities
|
24.3
|
|
|
23.7
|
|
|
—
|
|
|
24.3
|
|
|
—
|
|
|
24.3
|
|
Other securities
|
110.5
|
|
|
31.8
|
|
|
—
|
|
|
—
|
|
|
110.5
|
|
|
110.5
|
|
Marketable equity securities
|
1,664.2
|
|
|
311.6
|
|
|
1,664.2
|
|
|
—
|
|
|
—
|
|
|
1,664.2
|
|
Equity investments without readily determinable fair values(2)
|
373.9
|
|
|
|
|
|
|
|
|
|
|
|
Equity method investments(2)
|
471.8
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments
|
$
|
2,966.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Description
|
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
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2019
|
(1,494.2)
|
|
|
—
|
|
|
(1,491.6)
|
|
|
—
|
|
|
(1,491.6)
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
$
|
(16,595.3)
|
|
|
$
|
—
|
|
|
$
|
(19,038.9)
|
|
|
$
|
—
|
|
|
$
|
(19,038.9)
|
|
December 31, 2019
|
(13,823.0)
|
|
|
—
|
|
|
(15,150.0)
|
|
|
—
|
|
|
(15,150.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Description
|
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
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Risk-management instruments
|
|
|
|
|
|
|
|
|
|
Interest rate contracts designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
$
|
158.9
|
|
|
$
|
—
|
|
|
$
|
158.9
|
|
|
$
|
—
|
|
|
$
|
158.9
|
|
Interest rate contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
38.1
|
|
|
—
|
|
|
38.1
|
|
|
—
|
|
|
38.1
|
|
Other noncurrent liabilities
|
(97.8)
|
|
|
—
|
|
|
(97.8)
|
|
|
—
|
|
|
(97.8)
|
|
Cross-currency interest rate contracts designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
(92.6)
|
|
|
—
|
|
|
(92.6)
|
|
|
—
|
|
|
(92.6)
|
|
Other noncurrent liabilities
|
(97.2)
|
|
|
—
|
|
|
(97.2)
|
|
|
—
|
|
|
(97.2)
|
|
Cross-currency interest rate contracts designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent assets
|
34.4
|
|
|
—
|
|
|
34.4
|
|
|
—
|
|
|
34.4
|
|
Other noncurrent liabilities
|
(2.9)
|
|
|
—
|
|
|
(2.9)
|
|
|
—
|
|
|
(2.9)
|
|
Foreign exchange contracts not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Other receivables
|
41.1
|
|
|
—
|
|
|
41.1
|
|
|
—
|
|
|
41.1
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities
|
(15.2)
|
|
|
—
|
|
|
(15.2)
|
|
|
—
|
|
|
(15.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2020, we had approximately $687 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 December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities by Period
|
|
Total
|
|
Less Than
1 Year
|
|
1-5 Years
|
|
6-10 Years
|
|
More Than 10 Years
|
Fair value of debt securities
|
$
|
360.3
|
|
|
$
|
13.9
|
|
|
$
|
135.6
|
|
|
$
|
82.7
|
|
|
$
|
128.1
|
|
The net gains recognized in our consolidated statements of operations for equity securities were $1,442.2 million, $401.2 million and $72.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The net gains/losses recognized for the years ended December 31, 2020, 2019 and 2018 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 for the years ended December 31, 2020, 2019 and 2018 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Unrealized gross gains
|
$
|
20.9
|
|
|
$
|
10.3
|
|
Unrealized gross losses
|
0.5
|
|
|
4.0
|
|
Fair value of securities in an unrealized gain position
|
348.9
|
|
|
429.5
|
|
Fair value of securities in an unrealized loss position
|
11.4
|
|
|
141.1
|
|
We periodically assess our investment in available-for-sale securities for impairment and credit losses. 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. Impairment and credit losses related to available-for-sale securities were not material for the years ended December 31, 2020, 2019 and 2018.
As of December 31, 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 86 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Proceeds from sales
|
$
|
264.8
|
|
|
$
|
431.6
|
|
|
$
|
5,529.0
|
|
Realized gross gains on sales
|
4.5
|
|
|
4.9
|
|
|
3.6
|
|
Realized gross losses on sales
|
8.2
|
|
|
3.0
|
|
|
49.2
|
|
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 $754.9 million and $678.8 million of accounts receivable as of December 31, 2020 and 2019, respectively, under these factoring arrangements. The costs of factoring such accounts receivable on our consolidated results of operations for the years ended December 31, 2020, 2019, and 2018 were not material.
Note 8: Goodwill and Other Intangibles
Goodwill
Goodwill results from excess consideration in a business combination over the fair value of identifiable net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value to its carrying value is performed to determine the amount of any impairment. The changes in goodwill during 2020 and 2019 were primarily related to our acquisitions of Dermira and Loxo, respectively. See Note 3 for further discussion.
No impairments occurred with respect to the carrying value of goodwill for the years ended December 31, 2020, 2019, and 2018.
Other Intangibles
The components of intangible assets other than goodwill at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Description
|
Carrying
Amount,
Gross
|
|
Accumulated
Amortization
|
|
Carrying
Amount,
Net
|
|
Carrying
Amount,
Gross
|
|
Accumulated
Amortization
|
|
Carrying
Amount,
Net
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Marketed products
|
$
|
7,984.0
|
|
|
$
|
(1,659.5)
|
|
|
$
|
6,324.5
|
|
|
$
|
3,150.2
|
|
|
$
|
(1,244.6)
|
|
|
$
|
1,905.6
|
|
Other
|
92.8
|
|
|
(68.3)
|
|
|
24.5
|
|
|
94.2
|
|
|
(51.8)
|
|
|
42.4
|
|
Total finite-lived intangible assets
|
8,076.8
|
|
|
(1,727.8)
|
|
|
6,349.0
|
|
|
3,244.4
|
|
|
(1,296.4)
|
|
|
1,948.0
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D
|
1,101.0
|
|
|
—
|
|
|
1,101.0
|
|
|
4,670.0
|
|
|
—
|
|
|
4,670.0
|
|
Other intangibles
|
$
|
9,177.8
|
|
|
$
|
(1,727.8)
|
|
|
$
|
7,450.0
|
|
|
$
|
7,914.4
|
|
|
$
|
(1,296.4)
|
|
|
$
|
6,618.0
|
|
Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone payments. For transactions other than a business combination, we capitalize milestone payments incurred at or after the product has obtained regulatory approval for marketing.
Other finite-lived intangible assets consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies, and customer relationships from business combinations.
Acquired IPR&D consists of the fair values of acquired IPR&D projects acquired in business combination, adjusted for subsequent impairments, if any. The costs of acquired IPR&D projects acquired directly in a transaction other than a business combination are capitalized as other intangible assets if the projects have an alternative future use; otherwise, they are expensed immediately. See Note 3 for acquired IPR&D projects that had no alternative future use.
Several methods may be used to determine the estimated fair value of other intangibles acquired in a business combination. We utilize the “income method,” which is a Level 3 fair value measurement and applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, analyst expectations, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each asset independently. The acquired IPR&D assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are tested for impairment and amortized over the remaining useful life or written off, as appropriate.
The increase in marketed products and the decrease in acquired IPR&D in 2020 primarily relates to the reclassification of our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived to finite-lived as it was approved by the FDA in the second quarter of 2020. This decrease in acquired IPR&D in 2020 was partially offset by the addition of acquired IPR&D for lebrikizumab as a result of the Dermira acquisition. The increases in marketed products and acquired IPR&D intangible assets in 2019 were primarily related to our acquisition of Loxo. See Note 3 for further discussion of intangible assets acquired in recent business combinations and Note 4 for additional discussion of recent capitalized milestone payments.
Indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived acquired IPR&D as well as the fair value of finite-lived intangible assets for impairment testing purposes, we utilize the "income method" discussed above.
Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging from three to 20 years. As of December 31, 2020, the remaining weighted-average amortization period for finite-lived intangible assets was approximately 15 years.
Amortization expense related to finite-lived intangible assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Amortization expense
|
$
|
428.2
|
|
|
$
|
225.8
|
|
|
$
|
361.3
|
|
The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets as of December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
Estimated amortization expense
|
$
|
517.7
|
|
|
$
|
513.0
|
|
|
$
|
501.2
|
|
|
$
|
449.1
|
|
|
$
|
432.5
|
|
Amortization expense is included in either cost of sales, marketing, selling, and administrative or research and development depending on the nature of the intangible asset being amortized.
Note 9: Property and Equipment
Property and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful lives (12 to 50 years for buildings and three to 25 years for equipment). We review the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted.
At December 31, property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Land
|
$
|
226.8
|
|
|
$
|
169.5
|
|
Buildings
|
7,326.1
|
|
|
7,067.3
|
|
Equipment
|
8,560.9
|
|
|
7,913.3
|
|
|
|
|
|
Construction in progress
|
2,138.8
|
|
|
1,884.4
|
|
|
18,252.6
|
|
|
17,034.5
|
|
Less accumulated depreciation
|
(9,570.7)
|
|
|
(9,161.6)
|
|
Property and equipment, net
|
$
|
8,681.9
|
|
|
$
|
7,872.9
|
|
Depreciation expense related to property and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Depreciation expense
|
$
|
765.2
|
|
|
$
|
814.7
|
|
|
$
|
797.1
|
|
Capitalized interest costs were not material for the years ended December 31, 2020, 2019, and 2018.
The following table summarizes long-lived assets by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Long-lived assets(1):
|
|
|
|
|
U.S. and Puerto Rico
|
|
$
|
6,113.6
|
|
|
$
|
5,595.4
|
|
Ireland
|
|
1,786.9
|
|
|
1,454.8
|
|
Other foreign countries
|
|
1,747.7
|
|
|
1,758.3
|
|
Long-lived assets
|
|
$
|
9,648.2
|
|
|
$
|
8,808.5
|
|
(1) Long-lived assets consist of property and equipment, net, operating lease assets, and certain other noncurrent assets.
Note 10: Leases
We determine if an arrangement is a lease at inception. We have leases with terms up to 12 years primarily for corporate offices, research and development facilities, vehicles, and equipment, including some of which have options to extend and/or early-terminate the leases. We determine the lease term by assuming the exercise of any renewal and/or early-termination options that are reasonably assured.
Operating lease right-of-use assets are presented as other noncurrent assets in our consolidated balance sheets, and the current and long-term portions of operating lease liabilities are included in other current liabilities and other noncurrent liabilities, respectively, in our consolidated balance sheets. Short-term leases, which are deemed at inception to have a lease term of 12 months or less, are not recorded on the consolidated balance sheets.
Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Lease expense for operating lease assets, which is recognized on a straight-line basis over the lease term, was $154.6 million and $172.8 million during the years ended December 31, 2020 and 2019, respectively. Variable lease payments, which represent non-lease components such as maintenance, insurance and taxes, and which vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the payment obligation is incurred and were not material during the years ended December 31, 2020 and 2019. Short-term lease expense was not material during the years ended December 31, 2020 and 2019.
Supplemental balance sheet information related to operating leases as of December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Weighted-average remaining lease term
|
|
7 years
|
8 years
|
Weighted-average discount rate
|
|
3.3
|
%
|
3.6
|
%
|
Supplemental cash flow information related to operating leases during the years ended December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
2019
|
Operating cash flows from operating leases
|
|
$
|
160.9
|
|
$
|
153.6
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
136.7
|
|
81.2
|
The annual minimum lease payments of our operating lease liabilities as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
Year 1
|
$
|
150.9
|
|
Year 2
|
120.7
|
|
Year 3
|
94.1
|
|
Year 4
|
73.3
|
|
Year 5
|
63.4
|
|
After Year 5
|
258.7
|
|
Total lease payments
|
761.1
|
|
Less imputed interest
|
97.4
|
|
Total
|
$
|
663.7
|
|
Rental expense for all leases, including contingent rentals (not material), was $175.7 million for the year ended December 31, 2018.
Finance leases are included in property and equipment, short-term borrowings and current maturities of long-term debt, and long-term debt in our consolidated balance sheets. Finance leases are not material to our consolidated financial statements.
Note 11: Borrowings
Debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Short-term commercial paper borrowings
|
$
|
—
|
|
|
$
|
1,494.2
|
|
Long-term notes
|
16,348.7
|
|
|
13,638.5
|
|
Other long-term debt
|
14.8
|
|
|
12.9
|
|
Unamortized debt issuance costs
|
(89.1)
|
|
|
(73.6)
|
|
Fair value adjustment on hedged long-term notes
|
320.9
|
|
|
245.2
|
|
Total debt
|
16,595.3
|
|
|
15,317.2
|
|
Less current portion
|
(8.7)
|
|
|
(1,499.3)
|
|
Long-term debt
|
$
|
16,586.6
|
|
|
$
|
13,817.9
|
|
The following table summarizes long-term notes at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2.35% notes due 2022
|
$
|
750.0
|
|
|
$
|
750.0
|
|
|
3.00% notes due 2022
|
99.2
|
|
|
—
|
|
|
1.00% Euro denominated notes due 2022
|
737.9
|
|
|
671.8
|
|
|
0.15% Swiss Franc denominated notes due 2024
|
679.7
|
|
|
618.3
|
|
|
7.125% notes due 2025
|
229.7
|
|
|
229.7
|
|
|
2.75% notes due 2025
|
560.6
|
|
|
560.6
|
|
|
1.625% Euro denominated notes due 2026
|
922.4
|
|
|
839.7
|
|
|
5.5% notes due 2027
|
377.5
|
|
|
377.5
|
|
|
3.1% notes due 2027
|
401.5
|
|
|
401.5
|
|
|
0.45% Swiss Franc denominated notes due 2028
|
453.2
|
|
|
412.2
|
|
|
3.375% notes due 2029
|
1,150.0
|
|
|
1,150.0
|
|
|
0.42% Japanese Yen denominated notes due 2029
|
222.4
|
|
|
209.9
|
|
|
2.125% Euro denominated notes due 2030
|
922.4
|
|
|
839.7
|
|
|
0.625% Euro denominated notes due 2031
|
737.9
|
|
|
671.8
|
|
|
0.56% Japanese Yen denominated notes due 2034
|
90.0
|
|
|
85.0
|
|
|
6.77% notes due 2036
|
174.4
|
|
|
174.4
|
|
|
5.55% notes due 2037
|
476.2
|
|
|
476.2
|
|
|
5.95% notes due 2037
|
284.1
|
|
|
284.1
|
|
|
3.875% notes due 2039
|
360.7
|
|
|
360.7
|
|
|
4.65% notes due 2044
|
43.0
|
|
|
43.0
|
|
|
3.7% notes due 2045
|
412.5
|
|
|
412.5
|
|
|
3.95% notes due 2047
|
436.1
|
|
|
436.1
|
|
|
3.95% notes due 2049
|
1,500.0
|
|
|
1,500.0
|
|
|
1.7% Euro denominated notes due 2049
|
1,229.9
|
|
|
1,119.6
|
|
|
0.97% Japanese Yen denominated notes due 2049
|
74.1
|
|
|
70.0
|
|
|
2.25% notes due 2050
|
1,250.0
|
|
|
—
|
|
|
|
|
|
|
|
4.15% notes due 2059
|
1,000.0
|
|
|
1,000.0
|
|
|
2.5% notes due 2060
|
850.0
|
|
|
—
|
|
|
Unamortized note discounts
|
(76.7)
|
|
|
(55.8)
|
|
|
Total long-term notes
|
$
|
16,348.7
|
|
|
$
|
13,638.5
|
|
|
The weighted-average effective borrowing rate on outstanding commercial paper at December 31, 2019 was 1.65 percent. The weighted-average effective borrowing rate for each issuance of the long term-notes approximates the stated interest rate.
At December 31, 2020, we had a total of $5.24 billion of unused committed bank credit facilities, which consisted primarily of a $3.00 billion credit facility that expires in December 2024 and a $2.00 billion 364-day facility that expires in December 2021, both of which are available to support our commercial paper program. We have not drawn against the $3.00 billion and $2.00 billion facilities as of December 31, 2020. Of the remaining committed bank credit facilities, the outstanding balances as of December 31, 2020 and 2019 were not material. Compensating balances and commitment fees are not material, and there are no conditions that are probable of occurring under which the lines may be withdrawn.
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 cash proceeds from the offering of $988.6 million 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 cash proceeds from the offering of $1.07 billion for general corporate purposes, including the repayment of outstanding commercial paper.
In February 2019, we issued $1.15 billion of 3.375 percent fixed-rate notes due in March 2029, $850.0 million of 3.875 percent fixed-rate notes due in March 2039, $1.50 billion of 3.95 percent fixed-rate notes due in March 2049, and $1.00 billion of 4.15 percent fixed-rate notes due in March 2059, with interest to be paid semi-annually. We used the net cash proceeds of $4.45 billion from the offering to repay commercial paper that was issued in connection with the acquisition of Loxo and for general corporate purposes.
In November 2019, we issued euro-denominated notes consisting of €600.0 million of 0.625 percent fixed-notes due November 2031 and €1.00 billion of 1.70 percent fixed-rate notes due in November 2049 with interest to be paid annually. We paid $2.27 billion, comprised of $1.75 billion of net cash proceeds from the offering and proceeds from commercial paper, to purchase and redeem certain higher interest rate U.S. dollar denominated notes with an aggregate principal amount of $2.00 billion and a net carrying value of $2.01 billion, resulting in a debt extinguishment loss of $252.5 million. This loss was included in other-net, (income) expense in our consolidated statement of operations during the year ended December 31, 2019.
In November 2019, we issued Japanese Yen-denominated notes consisting of ¥22.92 billion of 0.42 percent fixed-rate notes due in November 2029, ¥9.28 billion of 0.56 percent fixed-rate notes due in November 2034, and ¥7.64 billion of 0.97 percent fixed-rate notes due in November 2049, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $356.6 million for general corporate purposes, including the repayment of outstanding commercial paper.
The aggregate amounts of maturities on long-term debt for the next five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
Maturities on long-term debt
|
$
|
6.0
|
|
|
$
|
1,590.2
|
|
|
$
|
2.3
|
|
|
$
|
681.1
|
|
|
$
|
790.3
|
|
We have converted approximately 9 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. The weighted-average effective borrowing rates based on long-term debt obligations and interest rates at December 31, 2020 and 2019, including the effects of interest rate swaps for hedged debt obligations, were 2.61 percent and 2.88 percent, respectively.
The aggregate amount of cash payments for interest on borrowings, net of capitalized interest, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cash payments for interest on borrowings
|
$
|
345.8
|
|
|
$
|
305.5
|
|
|
$
|
223.8
|
|
In accordance with the requirements of derivatives and hedging guidance, the portion of our fixed-rate debt obligations that is hedged as a fair value hedge is reflected in the consolidated balance sheets as an amount equal to the sum of the debt’s carrying value plus the fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market interest rates subsequent to the inception of the hedge.
Note 12: Stock-Based Compensation
Our stock-based compensation expense consists of performance awards (PAs), shareholder value awards (SVAs), relative value awards (RVAs), and restricted stock units (RSUs). We recognize the fair value of stock-based compensation as expense over the requisite service period of the individual grantees, which generally equals the vesting period. We provide newly issued shares of our common stock and treasury stock to satisfy the issuance of PA, SVA, RVA, and RSU shares.
Stock-based compensation expense and the related tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Stock-based compensation expense
|
$
|
308.1
|
|
|
$
|
306.8
|
|
|
$
|
253.5
|
|
Tax benefit
|
64.7
|
|
|
64.4
|
|
|
53.2
|
|
At December 31, 2020, stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 53.9 million additional shares.
Performance Award Program
PAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement period. The fair values of PAs granted for the years ended December 31, 2020, 2019, and 2018 were $137.33, $112.09, and $71.63, respectively. The number of shares ultimately issued for the PA program is dependent upon the EPS achieved during the vesting period. Pursuant to this program, approximately 1.1 million shares, 1.2 million shares, and 0.9 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 0.8 million shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested PAs was $77.3 million, which will be amortized over the weighted-average remaining requisite service period of 12 months.
Shareholder Value Award Program
SVAs are granted to officers and management and are payable in shares of our common stock. The number of shares actually issued, if any, varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2020, 2019, and 2018 were $139.14, $95.01, and $48.51, respectively, determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Percents)
|
2020
|
|
2019
|
|
2018
|
Expected dividend yield
|
2.50
|
%
|
|
2.50
|
%
|
|
2.50
|
%
|
Risk-free interest rate
|
1.38
|
|
|
2.46
|
|
|
2.31
|
|
Volatility
|
20.90
|
|
|
21.00
|
|
|
22.26
|
|
Pursuant to this program, approximately 0.8 million shares, 1.0 million shares, and 0.7 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 1.0 million shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested SVAs was $48.8 million, which will be amortized over the weighted-average remaining requisite service period of 20 months.
Relative Value Award Program
Beginning in 2020, we granted RVAs to officers and management and are payable in shares of our common stock. The number of shares actually issued, if any, varies depending on the growth of our stock price at the end of the three-year vesting period compared to our peers. We measure the fair value of the RVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price and our peers' stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair value of the RVA units granted during the year ended December 31, 2020 was $179.90, determined using the following assumptions:
|
|
|
|
|
|
(Percents)
|
2020
|
Expected dividend yield
|
2.50
|
%
|
Risk-free interest rate
|
1.38
|
|
Volatility
|
19.89
|
|
As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested RVAs was $13.7 million, which will be amortized over the weighted-average remaining requisite service period of 24 months.
Restricted Stock Units
RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, typically three years. The fair values of RSU awards granted during the years ended December 31, 2020, 2019, and 2018 were $135.42, $108.43, and $70.95, respectively. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this program, 1.1 million, 1.5 million, and 1.3 million shares were granted and approximately 0.6 million, 0.8 million, and 1.0 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 0.6 million shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested RSUs was $179.2 million, which will be amortized over the weighted-average remaining requisite service period of 31 months.
Note 13: Shareholders' Equity
During 2020, 2019, and 2018, we repurchased $500.0 million, $4.40 billion and $4.15 billion, respectively, of shares associated with our share repurchase programs. As of December 31, 2020, we had $1.00 billion remaining under our $8.00 billion share repurchase program that our board authorized in June 2018.
We have 5.0 million authorized shares of preferred stock. As of December 31, 2020 and 2019, no preferred stock was issued.
We have an employee benefit trust that held 50.0 million shares of our common stock at both December 31, 2020 and 2019, to provide a source of funds to assist us in meeting our obligations under various employee benefit plans. The cost basis of the shares held in the trust was $3.01 billion at both December 31, 2020 and 2019, and is shown as a reduction of shareholders’ equity. Any dividend transactions between us and the trust are eliminated. Stock held by the trust is not considered outstanding in the computation of EPS. The assets of the trust were not used to fund any of our obligations under these employee benefit plans during the years ended December 31, 2020, 2019, and 2018.
Note 14: Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Deferred taxes related to GILTI, global intangible low-taxed income, are also recognized for the future tax effects of temporary differences.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position, based on its technical merits, will be sustained upon examination by the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
In December 2017, the Tax Cuts and Job Act (the 2017 Tax Act) was signed into law. The 2017 Tax Act included significant changes to the U.S. corporate income tax system, such as the reduction in the corporate income tax rate from 35 percent to 21 percent, transition to a territorial tax system, changes to business related exclusions, deductions and credits, and modifications to international tax provisions, including a one-time repatriation transition tax (also known as the ‘Toll Tax’) on unremitted foreign earnings and GILTI, a new U.S. minimum tax on the earnings of our foreign subsidiaries. In 2018, we recorded $313.3 million of income tax benefit, mainly attributable to measurement period adjustments to the Toll Tax and GILTI.
Following is the composition of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal(1)
|
$
|
567.6
|
|
|
$
|
280.2
|
|
|
$
|
169.6
|
|
Foreign
|
650.4
|
|
|
299.8
|
|
|
106.8
|
|
State
|
(47.3)
|
|
|
(14.4)
|
|
|
4.7
|
|
Total current tax expense
|
1,170.7
|
|
|
565.6
|
|
|
281.1
|
|
Deferred:
|
|
|
|
|
|
Federal(2)
|
(97.4)
|
|
|
141.3
|
|
|
(3.7)
|
|
Foreign
|
(16.6)
|
|
|
(24.1)
|
|
|
248.7
|
|
State
|
(20.5)
|
|
|
(54.8)
|
|
|
3.4
|
|
Total deferred tax (benefit) expense
|
(134.5)
|
|
|
62.4
|
|
|
248.4
|
|
Income taxes
|
$
|
1,036.2
|
|
|
$
|
628.0
|
|
|
$
|
529.5
|
|
(1) The 2020 and 2019 current tax expense includes $144.4 million and $153.1 million of tax benefit, respectively, from utilization of net operating loss and tax credit carryforwards. The 2018 current tax expense includes $201.5 million of tax expense related to effects of the 2017 Tax Act.
(2) The 2018 deferred tax benefit includes $26.2 million of tax benefit related to effects of the 2017 Tax Act.
Significant components of our deferred tax assets and liabilities as of December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Purchases of intangible assets
|
$
|
2,560.6
|
|
|
$
|
2,512.4
|
|
Compensation and benefits
|
1,045.6
|
|
|
934.3
|
|
Tax credit carryforwards and carrybacks
|
523.5
|
|
|
455.8
|
|
Tax loss carryforwards and carrybacks
|
488.3
|
|
|
318.8
|
|
Sales rebates and discounts
|
461.3
|
|
|
197.3
|
|
Correlative tax adjustments
|
404.2
|
|
|
219.1
|
|
Foreign tax redeterminations
|
242.8
|
|
|
156.8
|
|
Operating lease liabilities
|
150.7
|
|
|
140.6
|
|
Capitalized research and development
|
135.2
|
|
|
75.7
|
|
Other
|
605.8
|
|
|
595.7
|
|
Total gross deferred tax assets
|
6,618.0
|
|
|
5,606.5
|
|
Valuation allowances
|
(816.3)
|
|
|
(616.5)
|
|
Total deferred tax assets
|
5,801.7
|
|
|
4,990.0
|
|
Deferred tax liabilities:
|
|
|
|
Earnings of foreign subsidiaries
|
(1,905.3)
|
|
|
(1,776.4)
|
|
Intangibles
|
(1,465.7)
|
|
|
(1,298.0)
|
|
Inventories
|
(623.7)
|
|
|
(686.4)
|
|
Prepaid employee benefits
|
(410.1)
|
|
|
(305.9)
|
|
Property and equipment
|
(315.2)
|
|
|
(274.1)
|
|
Financial instruments
|
(216.9)
|
|
|
(139.4)
|
|
Operating lease assets
|
(134.3)
|
|
|
(124.7)
|
|
Total deferred tax liabilities
|
(5,071.2)
|
|
|
(4,604.9)
|
|
Deferred tax assets - net
|
$
|
730.5
|
|
|
$
|
385.1
|
|
The deferred tax asset and related valuation allowance amounts for U.S. federal, international, and state net operating losses and tax credits shown above have been reduced for differences between financial reporting and tax return filings.
At December 31, 2020, based on filed tax returns we have tax credit carryforwards and carrybacks of $887.3 million available to reduce future income taxes; $148.8 million, if unused, will expire by 2026, and $16.1 million, if unused, will expire between 2029 and 2039. The remaining portion of the tax credit carryforwards is related to federal tax credits of $84.8 million, international tax credits of $121.9 million, and state tax credits of $515.7 million, all of which are fully reserved.
At December 31, 2020, based on filed tax returns we had net operating losses and other carryforwards for international and U.S. federal income tax purposes of $1.52 billion: $162.6 million will expire by 2025; $781.7 million will expire between 2026 and 2040; and $576.3 million of the carryforwards will never expire. Net operating losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved. Deferred tax assets related to state net operating losses and other carryforwards of $175.6 million are fully reserved as of December 31, 2020.
Domestic and Puerto Rican companies contributed approximately 39 percent, 44 percent, and 15 percent for the years ended December 31, 2020, 2019, and 2018, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of 2031.
Substantially all of the unremitted earnings of our foreign subsidiaries are considered not to be indefinitely reinvested for continued use in our foreign operations. At December 31, 2020 and December 31, 2019, we accrued an immaterial amount of foreign withholding taxes and state income taxes that would be owed upon future distributions of unremitted earnings of our foreign subsidiaries that are not indefinitely reinvested. For the amount considered to be indefinitely reinvested, it is not practicable to determine the amount of the related deferred income tax liability due to the complexities in the tax laws and assumptions we would have to make.
Cash payments of U.S. federal, state, and foreign income taxes, net of refunds, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cash payments of income taxes
|
$
|
954.6
|
|
|
$
|
1,180.5
|
|
|
$
|
1,076.7
|
|
The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight year period beginning in 2018 through 2025. Having made this election, our future cash payments relating to the Toll Tax as of December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
Less than 1 Year
|
1-3 Years
|
3-5 Years
|
2017 Tax Act Toll Tax
|
$2,403.1
|
$253.7
|
$729.3
|
$1,420.1
|
We have additional noncurrent income tax payables of $1.69 billion unrelated to the Toll Tax; we cannot reasonably estimate the timing of future cash outflows associated with these liabilities.
Following is a reconciliation of the consolidated income tax expense applying the U.S. federal statutory rate to income before income taxes to reported consolidated income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Income tax at the U.S. federal statutory tax rate
|
$
|
1,518.3
|
|
|
$
|
1,105.8
|
|
|
$
|
772.8
|
|
Add (deduct):
|
|
|
|
|
|
International operations, including Puerto Rico
|
(297.1)
|
|
|
(242.0)
|
|
|
(627.1)
|
|
General business credits
|
(97.9)
|
|
|
(108.8)
|
|
|
(87.4)
|
|
Non-deductible acquired IPR&D(1)
|
63.2
|
|
|
—
|
|
|
309.9
|
|
2017 Tax Act
|
—
|
|
|
—
|
|
|
175.3
|
|
Other
|
(150.3)
|
|
|
(127.0)
|
|
|
(14.0)
|
|
Income taxes
|
$
|
1,036.2
|
|
|
$
|
628.0
|
|
|
$
|
529.5
|
|
(1) Non-deductible acquired IPR&D was related to the acquisitions of Disarm and a pre-clinical stage company in 2020 and ARMO in 2018. See Note 3 for additional information related to acquisitions.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Beginning balance at January 1
|
$
|
2,108.6
|
|
|
$
|
2,034.6
|
|
|
$
|
1,000.8
|
|
Additions based on tax positions related to the current year
|
225.6
|
|
|
187.2
|
|
|
798.2
|
|
Additions for tax positions of prior years
|
310.8
|
|
|
425.3
|
|
|
410.9
|
|
Reductions for tax positions of prior years
|
(52.4)
|
|
|
(100.3)
|
|
|
(115.4)
|
|
Settlements
|
(72.0)
|
|
|
(260.5)
|
|
|
(33.2)
|
|
Lapses of statutes of limitation
|
(41.7)
|
|
|
(161.5)
|
|
|
(20.5)
|
|
Changes related to the impact of foreign currency translation
|
73.0
|
|
|
(16.2)
|
|
|
(6.2)
|
|
Ending balance at December 31
|
$
|
2,551.9
|
|
|
$
|
2,108.6
|
|
|
$
|
2,034.6
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $1.67 billion and $1.53 billion at December 31, 2020 and 2019, respectively.
We file U.S. federal, foreign, and various state and local income tax returns. We are no longer subject to U.S. federal income tax examination for years before 2016. In most major foreign and state jurisdictions, we are no longer subject to income tax examination for years before 2012.
The U.S. examination of tax years 2016-2018 began in the fourth quarter of 2019 and remains ongoing; therefore, the resolution of this audit period will likely extend beyond the next 12 months. For tax years 2013-2015, all matters were effectively settled in 2019. As a result, our gross uncertain tax positions were reduced by approximately $200 million, we made a cash payment of approximately $125 million, and our consolidated results were benefited by an immaterial reduction in tax expense.
We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized income tax (benefit) expense related to interest and penalties as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Income tax (benefit) expense
|
$
|
34.0
|
|
|
$
|
(26.4)
|
|
|
$
|
25.1
|
|
At December 31, 2020 and 2019, our accruals for the payment of interest and penalties totaled $196.7 million and $150.8 million, respectively.
Note 15: Retirement Benefits
We use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets, funded status, and amounts recognized in the consolidated balance sheets at December 31 for our defined benefit pension and retiree health benefit plans, which were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plans
|
|
Retiree Health
Benefit Plans
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
16,251.0
|
|
|
$
|
13,427.1
|
|
|
$
|
1,601.4
|
|
|
$
|
1,540.0
|
|
Service cost
|
325.5
|
|
|
250.4
|
|
|
40.8
|
|
|
36.3
|
|
Interest cost
|
425.8
|
|
|
486.0
|
|
|
43.7
|
|
|
58.0
|
|
Actuarial loss
|
1,563.1
|
|
|
2,631.7
|
|
|
142.1
|
|
|
54.3
|
|
Benefits paid
|
(587.2)
|
|
|
(584.2)
|
|
|
(75.1)
|
|
|
(87.3)
|
|
|
|
|
|
|
|
|
|
Curtailment (gain) loss
|
2.2
|
|
|
(16.8)
|
|
|
—
|
|
|
(0.5)
|
|
Foreign currency exchange rate changes and other adjustments
|
245.1
|
|
|
56.8
|
|
|
0.8
|
|
|
0.6
|
|
Benefit obligation at end of year
|
18,225.5
|
|
|
16,251.0
|
|
|
1,753.7
|
|
|
1,601.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
12,858.0
|
|
|
10,932.6
|
|
|
2,768.2
|
|
|
2,398.1
|
|
Actual return on plan assets
|
1,802.4
|
|
|
2,012.0
|
|
|
539.0
|
|
|
444.1
|
|
Employer contribution
|
318.8
|
|
|
429.9
|
|
|
(5.1)
|
|
|
13.2
|
|
Benefits paid
|
(587.2)
|
|
|
(584.2)
|
|
|
(75.1)
|
|
|
(87.3)
|
|
Foreign currency exchange rate changes and other adjustments
|
187.0
|
|
|
67.7
|
|
|
—
|
|
|
0.1
|
|
Fair value of plan assets at end of year
|
14,579.0
|
|
|
12,858.0
|
|
|
3,227.0
|
|
|
2,768.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
(3,646.5)
|
|
|
(3,393.0)
|
|
|
1,473.3
|
|
|
1,166.8
|
|
Unrecognized net actuarial (gain) loss
|
6,515.5
|
|
|
6,177.6
|
|
|
(349.1)
|
|
|
(111.6)
|
|
Unrecognized prior service (benefit) cost
|
15.4
|
|
|
17.4
|
|
|
(177.6)
|
|
|
(236.4)
|
|
Net amount recognized
|
$
|
2,884.4
|
|
|
$
|
2,802.0
|
|
|
$
|
946.6
|
|
|
$
|
818.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet consisted of:
|
|
|
|
|
|
|
|
Other noncurrent assets
|
$
|
299.6
|
|
|
$
|
163.3
|
|
|
$
|
1,697.0
|
|
|
$
|
1,381.3
|
|
Other current liabilities
|
(67.9)
|
|
|
(65.3)
|
|
|
(7.4)
|
|
|
(7.3)
|
|
Accrued retirement benefits
|
(3,878.2)
|
|
|
(3,491.0)
|
|
|
(216.3)
|
|
|
(207.2)
|
|
Accumulated other comprehensive (income) loss before income taxes
|
6,530.9
|
|
|
6,195.0
|
|
|
(526.7)
|
|
|
(348.0)
|
|
Net amount recognized
|
$
|
2,884.4
|
|
|
$
|
2,802.0
|
|
|
$
|
946.6
|
|
|
$
|
818.8
|
|
The unrecognized net actuarial loss (gain) and unrecognized prior service cost (benefit) have not yet been recognized in net periodic pension costs and were included in accumulated other comprehensive loss at December 31, 2020 and 2019.
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 consolidated financial statements.
A decrease in the discount rate was the primary driver for the $2.13 billion and $2.89 billion increase in the benefit obligation in 2020 and 2019, respectively.
In July 2018, we announced that we would amend our defined benefit pension and retiree health benefit plans to freeze or reduce benefits for certain employees effective January 1, 2019. We remeasured the impacted pension and retiree health plans’ benefit obligations as of July 31, 2018, which resulted in a net curtailment gain of $28.0 million, which was recorded in asset impairment, restructuring, and other special charges.
The following represents our weighted-average assumptions as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plans
|
|
Retiree Health
Benefit Plans
|
(Percents)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Discount rate for benefit obligation
|
2.4
|
%
|
|
3.0
|
%
|
|
4.0
|
%
|
|
2.6
|
%
|
|
3.3
|
%
|
|
4.4
|
%
|
Discount rate for net benefit costs
|
3.0
|
|
|
4.0
|
|
|
3.4
|
|
|
3.3
|
|
|
4.4
|
|
|
3.7
|
|
Rate of compensation increase for benefit obligation
|
3.3
|
|
|
3.3
|
|
|
3.4
|
|
|
|
|
|
|
|
Rate of compensation increase for net benefit costs
|
3.3
|
|
|
3.4
|
|
|
3.4
|
|
|
|
|
|
|
|
Expected return on plan assets for net benefit costs
|
7.3
|
|
|
7.4
|
|
|
7.4
|
|
|
6.0
|
|
|
6.0
|
|
|
8.0
|
|
We annually evaluate the expected return on plan assets in our defined benefit pension and retiree health benefit plans. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions; asset returns and asset allocations; and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the assumptions and trend rates utilized by similar plans, where applicable.
Given the design of our retiree health benefit plans, healthcare-cost trend rates do not have a material impact on our financial condition or results of operations.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
2026-2030
|
Defined benefit pension plans
|
$
|
639.2
|
|
|
$
|
635.3
|
|
|
$
|
645.8
|
|
|
$
|
673.1
|
|
|
$
|
689.6
|
|
|
$
|
3,800.8
|
|
Retiree health benefit plans
|
91.2
|
|
|
91.2
|
|
|
91.2
|
|
|
94.9
|
|
|
95.7
|
|
|
481.8
|
|
Amounts relating to defined benefit pension plans with projected benefit obligations in excess of plan assets were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
15,770.7
|
|
|
$
|
14,039.7
|
|
Fair value of plan assets
|
11,824.4
|
|
|
10,483.4
|
|
Amounts relating to defined benefit pension plans and retiree health benefit plans with accumulated benefit obligations in excess of plan assets were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plans
|
|
Retiree Health
Benefit Plans
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Accumulated benefit obligation
|
$
|
14,682.3
|
|
|
$
|
13,063.7
|
|
|
$
|
223.8
|
|
|
$
|
214.4
|
|
Fair value of plan assets
|
11,824.4
|
|
|
10,483.4
|
|
|
—
|
|
|
—
|
|
The total accumulated benefit obligation for our defined benefit pension plans was $17.03 billion and $15.17 billion at December 31, 2020 and 2019, respectively.
Net pension and retiree health benefit expense included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plans
|
|
Retiree Health
Benefit Plans
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Components of net periodic (benefit) cost:
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
325.5
|
|
|
$
|
250.4
|
|
|
$
|
292.7
|
|
|
$
|
40.8
|
|
|
$
|
36.3
|
|
|
$
|
41.5
|
|
Interest cost
|
425.8
|
|
|
486.0
|
|
|
458.5
|
|
|
43.7
|
|
|
58.0
|
|
|
57.3
|
|
Expected return on plan assets
|
(901.5)
|
|
|
(839.6)
|
|
|
(842.1)
|
|
|
(158.1)
|
|
|
(144.3)
|
|
|
(177.9)
|
|
Amortization of prior service (benefit) cost
|
4.5
|
|
|
6.1
|
|
|
4.6
|
|
|
(59.5)
|
|
|
(62.9)
|
|
|
(79.5)
|
|
Recognized actuarial loss (gain)
|
396.3
|
|
|
284.9
|
|
|
332.5
|
|
|
(3.0)
|
|
|
1.9
|
|
|
6.1
|
|
Curtailment (gain) loss
|
—
|
|
|
2.2
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
(29.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic (benefit) cost
|
$
|
250.6
|
|
|
$
|
190.0
|
|
|
$
|
247.5
|
|
|
$
|
(136.1)
|
|
|
$
|
(111.0)
|
|
|
$
|
(181.8)
|
|
The following represents the amounts recognized in other comprehensive income (loss) for the years ended December 31, 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plans
|
|
Retiree Health
Benefit Plans
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Actuarial gain (loss) arising during period
|
$
|
(663.0)
|
|
|
$
|
(1,461.0)
|
|
|
$
|
182.8
|
|
|
$
|
238.8
|
|
|
$
|
246.1
|
|
|
$
|
37.5
|
|
Plan amendments during period
|
(2.2)
|
|
|
—
|
|
|
(17.6)
|
|
|
—
|
|
|
—
|
|
|
14.1
|
|
Curtailment gain (loss)
|
—
|
|
|
19.0
|
|
|
45.2
|
|
|
—
|
|
|
—
|
|
|
(31.8)
|
|
Amortization of prior service (benefit) cost included in net income
|
4.5
|
|
|
6.1
|
|
|
4.6
|
|
|
(59.5)
|
|
|
(62.9)
|
|
|
(79.5)
|
|
Amortization of net actuarial loss included in net income
|
396.3
|
|
|
284.9
|
|
|
332.5
|
|
|
(3.0)
|
|
|
1.9
|
|
|
6.1
|
|
Foreign currency exchange rate changes and other
|
(71.5)
|
|
|
(7.7)
|
|
|
47.1
|
|
|
2.4
|
|
|
3.6
|
|
|
(0.1)
|
|
Total other comprehensive income (loss) during period
|
$
|
(335.9)
|
|
|
$
|
(1,158.7)
|
|
|
$
|
594.6
|
|
|
$
|
178.7
|
|
|
$
|
188.7
|
|
|
$
|
(53.7)
|
|
We have defined contribution savings plans that cover our eligible employees worldwide. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save. Our contributions to the plans are based on employee contributions and the level of our match. Expenses under the plans totaled $164.3 million, $145.2 million, and $132.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
We provide certain other postemployment benefits primarily related to disability benefits and accrue for the related cost over the service lives of employees. Expenses associated with these benefit plans for the years ended December 31, 2020, 2019, and 2018 were not material.
Benefit Plan Investments
Our benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. U.S. and Puerto Rico plans represent approximately 80 percent of our global investments. Given the long-term nature of our liabilities, these plans have the flexibility to manage an above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically prohibited investments. However, within individual investment manager mandates, restrictions and limitations are contractually set to align with our investment objectives, ensure risk control, and limit concentrations.
We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition, within a category we use different managers with various management objectives to eliminate any significant concentration of risk.
Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local investment policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease exposure to a particular public equity, fixed income, commodity, or currency market more rapidly or less expensively than could be accomplished through the use of the cash markets. The plans utilize both exchange-traded and over-the-counter instruments. The maximum exposure to either a market or counterparty credit loss is limited to the carrying value of the receivable, and is managed within contractual limits. We expect all of our counterparties to meet their obligations. The gross values of these derivative receivables and payables are not material to the global asset portfolio, and their values are reflected within the tables below.
The defined benefit pension and retiree health benefit plan allocation for the U.S. and Puerto Rico currently comprises approximately 65 percent growth investments and 35 percent fixed-income investments. The growth investment allocation encompasses U.S. and international public equity securities, hedge funds, private equity-like investments, and real estate. These portfolio allocations are intended to reduce overall risk by providing diversification, while seeking moderate to high returns over the long term.
Public equity securities are well diversified and invested in U.S. and international small-to-large companies across various asset managers and styles. The remaining portion of the growth portfolio is invested in private alternative investments.
Fixed-income investments primarily consist of fixed-income securities in U.S. treasuries and agencies, emerging market debt obligations, corporate bonds, bank loans, mortgage-backed securities, commercial mortgage-backed obligations, and any related repurchase agreements.
Hedge funds are privately owned institutional investment funds that generally have moderate liquidity. Hedge funds seek specified levels of absolute return regardless of overall market conditions, and generally have low correlations to public equity and debt markets. Hedge funds often invest substantially in financial market instruments (stocks, bonds, commodities, currencies, derivatives, etc.) using a very broad range of trading activities to manage portfolio risks. Hedge fund strategies focus primarily on security selection and seek to be neutral with respect to market moves. Common groupings of hedge fund strategies include relative value, tactical, and event driven. Relative value strategies include arbitrage, when the same asset can simultaneously be bought and sold at different prices, achieving an immediate profit. Tactical strategies often take long and short positions to reduce or eliminate overall market risks while seeking a particular investment opportunity. Event strategy opportunities can evolve from specific company announcements such as mergers and acquisitions, and typically have little correlation to overall market directional movements. Our hedge fund investments are made through limited partnership interests in fund-of-funds structures and directly into hedge funds. Plan holdings in hedge funds are valued based on net asset values (NAVs) calculated by each fund or general partner, as applicable, and we have the ability to redeem these investments at NAV.
Private equity-like investment funds typically have low liquidity and are made through long-term partnerships or joint ventures that invest in pools of capital invested in primarily non-publicly traded entities. Underlying investments include venture capital (early stage investing), buyout, special situations, private debt, and private real estate investments. Private equity management firms typically acquire and then reorganize private companies to create increased long term value. Private equity-like funds usually have a limited life of approximately 10-15 years, and require a minimum investment commitment from their limited partners. Our private equity-like investments are made both directly into funds and through fund-of-funds structures to ensure broad diversification of management styles and assets across the portfolio. Plan holdings in private equity-like investments are valued using the value reported by the partnership, adjusted for known cash flows and significant events through our reporting date. Values provided by the partnerships are primarily based on analysis of and judgments about the underlying investments. Inputs to these valuations include underlying NAVs, discounted cash flow valuations, comparable market valuations, and may also include adjustments for currency, credit, liquidity and other risks as applicable. The vast majority of these private partnerships provide us with annual audited financial statements including their compliance with fair valuation procedures consistent with applicable accounting standards.
Real estate is composed of public holdings. Real estate investments in registered investment companies that trade on an exchange are classified as Level 1 on the fair value hierarchy. Real estate investments in funds measured at fair value on the basis of NAV provided by the fund manager are classified as such. These NAVs are developed with inputs including discounted cash flow, independent appraisal, and market comparable analyses.
Other assets include cash and cash equivalents and mark-to-market value of derivatives.
The cash value of the trust-owned insurance contract is primarily invested in investment-grade publicly traded equity and fixed-income securities.
Other than hedge funds, private equity-like investments, and a portion of the real estate holdings, which are discussed above, we determine fair values 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.
The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2020 by asset category were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Asset Class
|
Total
|
|
Quoted Prices in Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Investments Valued at Net Asset Value(1)
|
Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
Public equity securities:
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
737.6
|
|
|
$
|
476.1
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
260.5
|
|
International
|
2,635.8
|
|
|
1,102.3
|
|
|
—
|
|
|
—
|
|
|
1,533.5
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
Developed markets
|
4,301.3
|
|
|
2.9
|
|
|
3,179.2
|
|
|
—
|
|
|
1,119.2
|
|
Developed markets - repurchase agreements
|
(1,670.8)
|
|
|
—
|
|
|
(1,670.8)
|
|
|
—
|
|
|
—
|
|
Emerging markets
|
631.0
|
|
|
14.2
|
|
|
262.7
|
|
|
0.1
|
|
|
354.0
|
|
Private alternative investments:
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
2,661.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,661.3
|
|
Equity-like funds
|
2,844.7
|
|
|
—
|
|
|
—
|
|
|
16.9
|
|
|
2,827.8
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|
Real estate
|
558.9
|
|
|
259.6
|
|
|
6.9
|
|
|
5.8
|
|
|
286.6
|
|
Other
|
1,879.2
|
|
|
60.4
|
|
|
301.2
|
|
|
18.0
|
|
|
1,499.6
|
|
Total
|
$
|
14,579.0
|
|
|
$
|
1,915.5
|
|
|
$
|
2,079.2
|
|
|
$
|
41.8
|
|
|
$
|
10,542.5
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health Benefit Plans
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|
|
|
|
|
|
|
|
|
Public equity securities:
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
68.3
|
|
|
$
|
45.0
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
23.2
|
|
International
|
162.3
|
|
|
58.1
|
|
|
—
|
|
|
—
|
|
|
104.2
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
Developed markets
|
101.5
|
|
|
—
|
|
|
80.3
|
|
|
—
|
|
|
21.2
|
|
Emerging markets
|
53.5
|
|
|
—
|
|
|
24.7
|
|
|
—
|
|
|
28.8
|
|
Private alternative investments:
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
229.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
229.7
|
|
Equity-like funds
|
223.4
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
221.8
|
|
Cash value of trust owned insurance contract
|
2,204.6
|
|
|
—
|
|
|
2,204.6
|
|
|
—
|
|
|
—
|
|
Real estate
|
25.8
|
|
|
24.5
|
|
|
0.7
|
|
|
0.6
|
|
|
—
|
|
Other
|
157.9
|
|
|
14.1
|
|
|
21.1
|
|
|
1.7
|
|
|
121.0
|
|
Total
|
$
|
3,227.0
|
|
|
$
|
141.7
|
|
|
$
|
2,331.4
|
|
|
$
|
4.0
|
|
|
$
|
749.9
|
|
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2020. The activity in the Level 3 investments during the year ended December 31, 2020 was not material.
The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2019 by asset category were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Asset Class
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Investments Valued at Net Asset Value(1)
|
Defined Benefit Pension Plans
|
|
|
|
|
|
|
|
|
|
Public equity securities:
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
794.2
|
|
|
$
|
532.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
261.7
|
|
International
|
2,439.2
|
|
|
1,046.8
|
|
|
—
|
|
|
—
|
|
|
1,392.4
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
Developed markets
|
3,661.4
|
|
|
4.8
|
|
|
2,658.9
|
|
|
—
|
|
|
997.7
|
|
Developed markets - repurchase agreements
|
(1,659.1)
|
|
|
—
|
|
|
(1,659.1)
|
|
|
—
|
|
|
—
|
|
Emerging markets
|
648.0
|
|
|
18.5
|
|
|
277.4
|
|
|
4.1
|
|
|
348.0
|
|
Private alternative investments:
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
2,897.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,897.9
|
|
Equity-like funds
|
2,279.3
|
|
|
—
|
|
|
—
|
|
|
16.8
|
|
|
2,262.5
|
|
Real estate
|
570.3
|
|
|
166.2
|
|
|
—
|
|
|
—
|
|
|
404.1
|
|
Other
|
1,226.8
|
|
|
62.9
|
|
|
222.6
|
|
|
6.6
|
|
|
934.7
|
|
Total
|
$
|
12,858.0
|
|
|
$
|
1,831.7
|
|
|
$
|
1,499.8
|
|
|
$
|
27.5
|
|
|
$
|
9,499.0
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health Benefit Plans
|
|
|
|
|
|
|
|
|
|
Public equity securities:
|
|
|
|
|
|
|
|
|
|
U.S.
|
$
|
76.5
|
|
|
$
|
52.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24.4
|
|
International
|
152.6
|
|
|
60.8
|
|
|
—
|
|
|
—
|
|
|
91.8
|
|
Fixed income:
|
|
|
|
|
|
|
|
|
|
Developed markets
|
82.7
|
|
|
—
|
|
|
56.3
|
|
|
—
|
|
|
26.4
|
|
Emerging markets
|
58.5
|
|
|
—
|
|
|
27.0
|
|
|
0.4
|
|
|
31.1
|
|
Private alternative investments:
|
|
|
|
|
|
|
|
|
|
Hedge funds
|
250.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
250.8
|
|
Equity-like funds
|
187.4
|
|
|
—
|
|
|
—
|
|
|
1.6
|
|
|
185.8
|
|
Cash value of trust owned insurance contract
|
1,832.2
|
|
|
—
|
|
|
1,832.2
|
|
|
—
|
|
|
—
|
|
Real estate
|
31.3
|
|
|
16.2
|
|
|
—
|
|
|
—
|
|
|
15.1
|
|
Other
|
96.2
|
|
|
11.4
|
|
|
7.9
|
|
|
0.7
|
|
|
76.2
|
|
Total
|
$
|
2,768.2
|
|
|
$
|
140.5
|
|
|
$
|
1,923.4
|
|
|
$
|
2.7
|
|
|
$
|
701.6
|
|
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2019. The activity in the Level 3 investments during the year ended December 31, 2019 was not material.
In 2021, we expect to contribute approximately $40 million to our defined benefit pension plans to satisfy minimum funding requirements for the year. We expect to contribute approximately $10 million in additional discretionary contributions in 2021.
Note 16: Contingencies
We are involved in various lawsuits, claims, government investigations and other legal proceedings that arise in the ordinary course of business. These claims or proceedings can involve various types of parties, including governments, competitors, customers, suppliers, service providers, licensees, employees, or shareholders, among others. These matters may involve patent infringement, antitrust, securities, pricing, sales and marketing practices, environmental, commercial, contractual rights, licensing obligations, health and safety matters, consumer fraud, employment matters, product liability and insurance coverage, among others. The resolution of these matters often develops over a long period of time and expectations can change as a result of new findings, rulings, appeals or settlement arrangements. Legal proceedings that are significant or that we believe could become significant or material are described below.
We believe the legal proceedings in which we are named as defendants are without merit and we are defending against them vigorously. 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 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.
Litigation accruals, environmental liabilities, and the related estimated insurance recoverables are reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets. With respect to the product liability claims currently asserted against us, we have accrued for our estimated exposures to the extent they are both probable and reasonably estimable based on the information available to us. We accrue for certain product liability claims incurred but not filed to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. Legal defense costs expected to be incurred in connection with significant product liability loss contingencies are accrued when both probable and reasonably estimable.
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.
Patent Litigation
Alimta Patent Litigation
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 and cash flows. 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 (pemetrexed) is protected by a vitamin regimen patent until 2021, plus pediatric exclusivity through May 2022.
In August 2017, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Apotex Inc. (Apotex) alleging infringement of Alimta's vitamin regimen patent for its application to market a pemetrexed product. In December 2019, the U.S. District Court for the Southern District of Indiana granted our motion for summary judgment of infringement, and in December 2020, the U.S. Court of Appeals for the Federal Circuit affirmed that ruling. Apotex did not request reconsideration or a rehearing of that ruling. However, Apotex could petition the U.S. Supreme Court to review the case.
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 and that 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 France and Fresenius Kabi Groupe France’s (collectively, Kabi) pemetrexed product. The court issued an injunction against Kabi and provisionally awarded us damages. In January 2021, that same court issued a preliminary injunction against Zentiva France S.A.S. (Zentiva), the last remaining company with a generic pemetrexed product on the French market, and provisionally awarded us damages. In October 2020, the Court of Appeal of the Netherlands overturned a lower court decision and ruled that our Alimta patent is valid and infringed and reinstated an injunction against Kabi, thereby removing Kabi's pemetrexed product from the Netherlands market. Kabi has appealed this decision to the Netherlands Supreme Court. 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
In October 2020, the Japanese Patent Office (JPO) issued notices closing Hopira Inc.'s (Hospira) invalidation against our Japanese Alimta patents. As a result, Hospira filed a withdrawal notice with the JPO and the JPO accepted the withdrawal in November. This matter is now closed.
Emgality Patent Litigation
In September 2018, we were 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. Trial is expected in December 2021. 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. In April 2020, we appealed the USPTO’s March 2020 ruling, and Teva appealed the USPTO’s February 2020 ruling to the U.S. Court of Appeals for the Federal Circuit. The district court litigation will proceed in parallel with the IPR appeals.
Jardiance Patent Litigation
In November 2018, Boehringer Ingelheim (BI), our partner in marketing and development of Jardiance, initiated U.S. patent litigation in the U.S. District Court of Delaware alleging infringement arising from Alkem Laboratories Ltd.'s (Alkem) and Ascend Laboratories, LLC's (Ascend) submissions of Abbreviated New Drug Applications (ANDA) seeking approval to market generic versions of 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). Particularly with respect to Jardiance, Alkem's and Ascend's ANDAs seek approval to market generic versions of Jardiance prior to the expiration of the relevant patents, and allege that certain patents, including in some allegations the compound patent, are invalid or would not be infringed. We are not a party to this litigation. Trial was scheduled for April 2021 but has been postponed.
Taltz Patent Litigation
In July 2018, 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. In January 2021, we entered into a settlement agreement with Novartis whereby all pending litigation in Germany related to the Taltz patent has been withdrawn and this matter has concluded. We were also named in litigation in the U.K. in which Genentech asserted similar claims regarding its corresponding U.K. patent. Novartis purchased Genentech's U.K. patent rights for Taltz, sought substitution for Genentech in the U.K. litigation and then sought dismissal of all appeals. Orders to this effect were issued by the Patents Court and Court of Appeal in November 2020 and these matters have concluded.
Zyprexa Canada Patent Litigation
Beginning in the mid-2000’s, several generic companies in Canada challenged the validity of our Zyprexa compound patent. In 2012, the Canadian Federal Court of Appeals denied our appeal of a lower court's decision that certain patent claims were invalid for lack of utility. In 2013, Apotex Inc. and Apotex Pharmachem Inc. (collectively, Apotex) brought claims against us in the Ontario Superior Court of Justice at Toronto for damages related to our enforcement of the Zyprexa compound patent under Canadian regulations governing patented drugs. Apotex seeks compensation based on novel legal theories under the Statute of Monopolies, Trade-Mark Act, and common law. Trial is expected in 2021 or 2022.
Product Liability Litigation
Actos® Product Liability
We are named along with Takeda Chemical Industries, Ltd. and Takeda affiliates (collectively, Takeda) as a defendant in four purported product liability class actions in Canada related to Actos, which we commercialized with Takeda in Canada until 2009, including one in Ontario filed December 2011 (Casseres et al. v. Takeda Pharmaceutical North America, Inc., et al.), one in Quebec filed July 2012 (Whyte et al. v. Eli Lilly et al.), one in Saskatchewan filed November 2017 (Weiler v. Takeda Canada Inc. et al.), and one in Alberta filed January 2013 (Epp v. Takeda Canada Inc. et al.). In general, plaintiffs in these actions alleged that Actos caused or contributed to their bladder cancer.
Byetta® Product Liability
First initiated in March 2009, we are named as a defendant in approximately 570 Byetta product liability lawsuits in the U.S. involving approximately 810 plaintiffs. Approximately 55 of these lawsuits, covering about 285 plaintiffs, are filed in California state court and coordinated in a Los Angeles Superior Court. Approximately 515 of the lawsuits, covering about 515 plaintiffs, are filed in federal court, the majority of which are coordinated in a multi-district litigation (MDL) in the U.S. District Court for the Southern District of California. Three lawsuits, representing approximately four plaintiffs, have also been filed in various state courts. Approximately 565 of the lawsuits, involving approximately 800 plaintiffs, contain allegations that Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic cancer or thyroid cancer); while six plaintiffs allege Byetta caused or contributed to pancreatitis. In addition, one case alleges that Byetta caused or contributed to ampullary cancer. The federal and state trial courts granted summary judgment in favor of us and our co-defendants on the claims alleging pancreatic cancer. The plaintiffs appealed those rulings. In November 2017, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court's grant of summary judgment based on that court's discovery rulings and remanded the cases for further proceedings. In November 2018, the California Court of Appeal reversed the state court's grant of summary judgment based on that court's discovery rulings and remanded for further proceedings. We are aware of approximately 20 additional claimants who have not yet filed suit. These additional claims allege damages for pancreatic cancer or thyroid cancer.
Cialis Product Liability
First initiated in August 2015, we are named as a defendant in approximately 350 Cialis product liability lawsuits in the U.S. These cases, many of which were originally filed in various federal courts, contain allegations that Cialis caused or contributed to the plaintiffs' cancer (melanoma). In December 2016, the Judicial Panel on Multidistrict Litigation (JPML) granted the plaintiffs' petition to have filed cases and an unspecified number of future cases coordinated into a federal multidistrict litigation (MDL) in the U.S. District Court for the Northern District of California, alongside an existing coordinated proceeding involving Viagra®. The JPML ordered the transfer of the existing cases to the now-renamed MDL In re: Viagra (Sildenafil Citrate) and Cialis (Tadalafil) Products Liability Litigation. In April 2020, the MDL court granted summary judgment to the defendants on all of the claims brought against them by the plaintiffs. In May 2020, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit.
Jardiance Product Liability
First initiated in January 2019, we and Boehringer Ingelheim Pharmaceuticals, Inc., a subsidiary of BI, have been named as a defendant in approximately 95 product liability lawsuits in the U.S., mostly in Stamford Superior Court in Connecticut, alleging that Jardiance caused or contributed to plaintiffs’ Fournier’s gangrene. Our agreement with BI calls for BI to defend and indemnify us against any damages, costs, expenses, and certain other losses with respect to product liability claims in accordance with the terms of the agreement.
Environmental Proceedings
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as "Superfund," we have been designated as one of several potentially responsible parties with respect to the cleanup of fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup.
Other Matters
340B Litigation
We are the plaintiff in a lawsuit filed in January 2021 in the U.S. District Court for the Southern District of Indiana against the U.S. Department of Health and Human Services (HHS), the Secretary of HHS, the Health Resources and Services Administration (HRSA), and the Administrator of HRSA. The lawsuit challenges the HHS's December 30, 2020 advisory opinion stating that drug manufacturers are required to deliver discounts under the 340B program to all contract pharmacies. We seek a declaratory judgment that the defendants violated the Administrative Procedures Act and the U.S. Constitution, a preliminary injunction enjoining implementation of the alternative dispute resolution process created by defendants and, with it, their application of the advisory opinion, and other related relief. A hearing on our motion for preliminary injunction has been scheduled for February 26, 2021.
In January 2021, we, along with other pharmaceutical manufacturers, were named as a defendant in a petition currently pending before the HHS Administration Dispute Resolution Panel. Petitioner seeks declaratory and other injunctive relief related to the 340B program.
Brazil Litigation – Cosmopolis Facility
Labor Attorney Litigation
First initiated in 2008, 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 a liquidated award of 300 million Brazilian real (for moral damages, donation of equipment, and creation of a foundation) which, adjusted for inflation and interest using the current Central Bank of Brazil's special system of clearance and custody rate (SELIC), is approximately 950 million Brazilian real (approximately $180 million as of December 31, 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. The cost of any such health coverage has not been determined.
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 has stayed its decision on this writ and instead directed the parties to attend conciliation hearings, a process that concluded unsuccessfully in September 2020. Consequently, the partial stay of the proceedings relating to Lilly Brasil's application to appeal in the main proceedings has been lifted. In addition, the Labor Attorney's application for preliminary enforcement of the July 2018 healthcare coverage ruling was granted. 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.
Individual Former Employee Litigation
First initiated in 2003, we have also been 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.
China NDRC Antitrust Matter
The competition authority in China has investigated our distributor pricing practices in China in connection with a broader inquiry into pharmaceutical industry pricing. We have cooperated with this investigation.
Eastern District of Pennsylvania Pricing (Average Manufacturer Price) Inquiry
In November 2014, we, along with another pharmaceutical manufacturer, are named as co-defendants in United States et al. ex rel. Streck v. Takeda Pharm. Am., Inc., et al., which was filed in November 2014 and unsealed in the U.S. District Court for the Northern District of Illinois. The complaint alleges that the defendants should have treated certain credits from distributors as retroactive price increases and included such increases in calculating average manufacturer prices. Trial is scheduled for February 2022.
Health Choice Alliance
We are named as a defendant in a lawsuit filed in June 2017 in the U.S. District Court for the Eastern District of Texas seeking damages under the federal anti-kickback statute and state and federal false claims acts for certain patient support programs related to our products Humalog, Humulin, and Forteo. In September 2019, the U.S. District Court granted the U.S. Department of Justice’s motion to dismiss the relator’s second amended complaint. In January 2020, the relator appealed the District Court’s dismissal to the U.S. Court of Appeals for the Fifth Circuit. We are also named as a defendant in two similar lawsuits filed in Texas and New Jersey state courts in October 2019 seeking damages under the Texas Medicaid Fraud Prevention Act and New Jersey Medicaid False Claims Act, respectively. In November 2020, the Texas state court action was stayed pending a decision by the U.S. Court of Appeals for the Fifth Circuit on the aforementioned District Court appeal.
Pricing Litigation, Investigations, and Inquires
Litigation
In December 2017, we, along with Sanofi-Aventis U.S. LLC (Sanofi) and Novo Nordisk, Inc. (Novo Nordisk) were 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, in February 2018, we, along with Sanofi and Novo Nordisk, were 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, filed in the same court in November 2020, 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. both initiated in March 2020, 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.
In October 2018, the Minnesota Attorney General’s Office 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, in May 2019, 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. In November 2019, 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.
Investigations, Subpoenas, and Inquiries
We received a subpoena from the New York and Vermont Attorney General Offices 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. In January 2021, the Senate’s Committee on Finance released a report summarizing the findings of its investigation. We are cooperating with all of these aforementioned investigations, subpoenas, and inquiries.
Research Corporation Technologies, Inc.
In April 2016, we were named as a defendant in litigation filed by Research Corporation Technologies, Inc. (RCT) in the U.S. District Court for the District of Arizona. RCT is seeking damages for breach of contract, unjust enrichment, and conversion related to processes used to manufacture certain products, including Humalog and Humulin. A trial date has not been set.
Note 17: Other Comprehensive Income (Loss)
The following table summarizes the activity related to each component of other comprehensive income (loss):
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Continuing Operations
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(Amounts presented net of taxes)
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Foreign Currency Translation Gains (Losses)
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Unrealized Net Gains (Losses) on Securities
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Defined Benefit Pension and Retiree Health Benefit Plans
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Effective Portion of Cash Flow Hedges
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Discontinued Operations
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Accumulated Other Comprehensive Loss
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Beginning balance at January 1, 2018 (1)
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$
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(1,191.7)
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$
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113.5
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$
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(4,311.3)
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$
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(234.3)
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$
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(71.1)
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$
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(5,694.9)
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Reclassification due to adoption of new accounting standard(2)
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—
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(128.9)
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—
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—
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—
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(128.9)
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Other comprehensive income (loss) before reclassifications
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(378.0)
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24.5
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250.7
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(16.3)
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12.2
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(106.9)
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Net amount reclassified from accumulated other comprehensive loss
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—
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(31.2)
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207.9
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11.7
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2.1
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190.5
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Net other comprehensive income (loss)
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(378.0)
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(6.7)
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458.6
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(4.6)
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14.3
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83.6
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Balance at December 31, 2018(3)
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(1,569.7)
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(22.1)
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(3,852.7)
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(238.9)
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(56.8)
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(5,740.2)
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Other comprehensive income (loss) before reclassifications
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(46.2)
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28.9
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(967.6)
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14.5
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(27.2)
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(997.6)
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Net amount reclassified from accumulated other comprehensive loss
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(62.1)
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(1.9)
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181.7
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12.5
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84.0
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214.2
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Net other comprehensive income (loss)
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(108.3)
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27.0
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(785.9)
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27.0
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56.8
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(783.4)
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Balance at December 31, 2019
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(1,678.0)
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4.9
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(4,638.6)
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(211.9)
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—
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(6,523.6)
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Other comprehensive income (loss) before reclassifications
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250.5
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6.8
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(379.7)
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(133.8)
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—
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(256.2)
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Net amount reclassified from accumulated other comprehensive loss
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—
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3.1
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267.3
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13.0
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—
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283.4
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Net other comprehensive income (loss)
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250.5
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9.9
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(112.4)
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(120.8)
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—
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27.2
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Ending balance at December 31, 2020
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$
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(1,427.5)
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$
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14.8
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$
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(4,751.0)
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$
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(332.7)
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$
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—
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$
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(6,496.4)
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(1) Accumulated other comprehensive loss as of January 1, 2018 consists of $5.72 billion of accumulated other comprehensive loss attributable to controlling interest and $23.7 million of accumulated other comprehensive income attributable to noncontrolling interest.
(2) This reclassification consists of $105.2 million of accumulated other comprehensive income attributable to controlling interest and $23.7 million of accumulated other comprehensive income attributable to noncontrolling interest. Refer to Note 1 for further details regarding the reclassification due to the adoption of ASU 2016-01.
(3) Accumulated other comprehensive loss as of December 31, 2018 consists of $5.73 billion of accumulated other comprehensive loss attributable to controlling interest and $11.0 million of accumulated other comprehensive loss attributable to noncontrolling interest.
The tax effects on the net activity related to each component of other comprehensive income (loss) for the years ended December 31, were as follows:
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Tax benefit (expense)
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2020
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2019
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2018
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Foreign currency translation gains/losses
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$
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128.3
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$
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(18.4)
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$
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51.6
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Unrealized net gains/losses on securities
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(4.3)
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(7.4)
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2.1
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Defined benefit pension and retiree health benefit plans
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44.8
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184.1
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(85.3)
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Effective portion of cash flow hedges
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32.1
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(7.3)
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1.3
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Benefit/(provision) for income taxes allocated to other comprehensive income (loss) items
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$
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200.9
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$
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151.0
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$
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(30.3)
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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 statements of operations.
Reclassifications out of accumulated other comprehensive loss were as follows:
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Details about Accumulated Other
Comprehensive Loss Components
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Year Ended December 31,
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Affected Line Item in the Consolidated Statements of Operations
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2020
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2019
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2018
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Amortization of retirement benefit items:
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Prior service benefits, net
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$
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(55.0)
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$
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(56.8)
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$
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(74.9)
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Other—net, (income) expense
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Actuarial losses
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393.3
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286.8
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338.6
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Other—net, (income) expense
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Total before tax
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338.3
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230.0
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263.7
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Tax benefit
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(71.0)
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(48.3)
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(55.8)
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Income taxes
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Net of tax
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267.3
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181.7
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207.9
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Other, net of tax
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16.1
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(51.5)
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(19.5)
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Other—net, (income) expense
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Reclassifications from continuing operations (net of tax)
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283.4
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130.2
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188.4
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Reclassifications from discontinued operations (net of tax)
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—
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84.0
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2.1
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Net income from discontinued operations
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Total reclassifications for the period, net of tax
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$
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283.4
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$
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214.2
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$
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190.5
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Note 18: Other–Net, (Income) Expense
Other–net, (income) expense consisted of the following:
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2020
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2019
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2018
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Interest expense
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$
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359.6
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$
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400.6
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$
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242.5
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Interest income
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(33.0)
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(80.4)
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(159.3)
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Debt extinguishment loss (Note 11)
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—
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252.5
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—
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Gain on sale of antibiotic business in China (Note 3)
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—
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(309.8)
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—
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Retirement benefit plans
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(251.8)
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(209.9)
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(240.5)
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Other (income) expense
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(1,246.7)
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(344.6)
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11.7
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Other–net, (income) expense
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$
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(1,171.9)
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$
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(291.6)
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$
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(145.6)
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For the years ended December 31, 2020 and 2019, other income was primarily related to net gains on investments (Note 7).
Note 19: Discontinued Operations
On September 24, 2018, Elanco completed its initial public offering (IPO) resulting in the issuance of 72.3 million shares of its common stock, which represented 19.8 percent of Elanco's outstanding shares, at $24 per share.
In connection with the completion of the IPO, through a series of equity and other transactions, we transferred to Elanco the animal health businesses that formed its business. In exchange, Elanco transferred to us consideration of approximately $4.2 billion, which consisted primarily of the net proceeds from the IPO and the net proceeds from a $2.00 billion debt offering and a $500.0 million three-year term loan facility entered into by Elanco in August 2018. The consideration that we received was used for debt repayment, dividends, and share repurchases. The excess of the net proceeds from the IPO over the net book value of our divested interest was $629.2 million and was recorded in additional paid-in capital.
Through March 11, 2019, we continued to consolidate Elanco, as we retained control over Elanco. We completed the disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer that closed on March 11, 2019 (the disposition date). The earnings attributable to the divested, noncontrolling interest for the period from the IPO until disposition were not material.
As a result of the disposition, in the first quarter of 2019, we recognized a gain related to the disposition of approximately $3.7 billion, and we presented Elanco, including the gain related to the disposition, as discontinued operations in our consolidated financial statements for all periods presented.
The following table sets summarizes revenue and net income from discontinued operations:
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2019
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2018
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Revenue from discontinued operations
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$
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580.0
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$
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3,062.4
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Net income from discontinued operations
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3,680.5
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81.4
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The gain related to the disposition of Elanco in the consolidated statement of cash flows includes the operating results of Elanco through the disposition date, which were not material. Net cash flows of our discontinued operations for operating activities were not material for the year ended December 31, 2019. Net cash provided by operating activities related to our discontinued operations was approximately $500 million for the year ended December 31, 2018. The net cash flows of our discontinued operations for investing activities were not material for any period presented.
We entered into a transitional services agreement (TSA) with Elanco that is designed 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 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.
Management’s Reports
Management’s Report for Financial Statements—Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presentation of the financial statements. The statements have been prepared in accordance with generally accepted accounting principles in the United States and include amounts based on judgments and estimates by management. In management’s opinion, the consolidated financial statements present fairly our financial position, results of operations, and cash flows.
In addition to the system of internal accounting controls, we maintain a code of conduct (known as "The Red Book") that applies to all employees worldwide, requiring proper overall business conduct, avoidance of conflicts of interest, compliance with laws, and confidentiality of proprietary information. All employees must take training annually on The Red Book and are required to report suspected violations. A hotline number is available on our lilly.com website and on the internal LillyNow website to enable reporting of suspected violations anonymously. Employees who report suspected violations are protected from discrimination or retaliation by the company. In addition to The Red Book, the chief executive officer and all financial management must sign a financial code of ethics, which further reinforces their ethical and fiduciary responsibilities.
The consolidated financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. Their responsibility is to examine our consolidated financial statements in accordance with generally accepted auditing standards of the Public Company Accounting Oversight Board (United States). Ernst & Young’s opinion with respect to the fairness of the presentation of the statements is included in Item 8 of our annual report on Form 10-K. Ernst & Young reports directly to the audit committee of the board of directors.
Our audit committee includes six nonemployee members of the board of directors, all of whom are independent from our company. The committee charter, which is available on our website, outlines the members’ roles and responsibilities. It is the audit committee’s responsibility to appoint an independent registered public accounting firm subject to shareholder ratification, pre-approve both audit and non-audit services performed by the independent registered public accounting firm, and review the reports submitted by the firm. The audit committee meets several times during the year with management, the internal auditors, and the independent public accounting firm to discuss audit activities, internal controls, and financial reporting matters, including reviews of our externally published financial results. The internal auditors and the independent registered public accounting firm have full and free access to the committee.
We are dedicated to ensuring that we maintain the high standards of financial accounting and reporting that we have established. We are committed to providing financial information that is transparent, timely, complete, relevant, and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices and policies. Finally, we have the highest confidence in our financial reporting, our underlying system of internal controls, and our people, who are objective in their responsibilities, operate under a code of conduct and are subject to the highest level of ethical standards.
Management’s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. We have global financial policies that govern critical areas, including internal controls, financial accounting and reporting, fiduciary accountability, and safeguarding of corporate assets. Our internal accounting control systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management’s authorization and are properly recorded, and that accounting records are adequate for preparation of financial statements and other financial information. A staff of internal auditors regularly monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports directly to the audit committee of the board of directors.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control—Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under this framework, we concluded that our internal control over financial reporting was effective as of December 31, 2020. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report, which appears herein. Their responsibility is to evaluate whether internal control over financial reporting was designed and operating effectively.
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David A. Ricks
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Anat Ashkenazi
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Chairman, President, and Chief Executive Officer
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Senior Vice President and Chief Financial Officer
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February 17, 2021