e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED JUNE 30, 2010
COMMISSION FILE NUMBER 001-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
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INDIANA
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35-0470950 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrants telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of a large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes þ No o
The number of shares of common stock outstanding as of July 20, 2010:
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Class |
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Number of Shares Outstanding |
Common
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1,153,140,311 |
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Eli Lilly and Company and Subsidiaries
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(Dollars in millions, except |
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per-share data) |
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Revenue |
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$ |
5,748.7 |
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$ |
5,292.8 |
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$ |
11,234.2 |
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$ |
10,339.8 |
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Cost of sales |
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1,023.9 |
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947.4 |
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2,146.4 |
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1,763.8 |
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Research and development |
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1,187.2 |
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1,040.4 |
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2,226.3 |
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1,987.7 |
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Marketing, selling, and administrative |
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1,755.4 |
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1,708.2 |
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3,369.8 |
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3,237.4 |
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Acquired in-process research and development (Note 3) |
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50.0 |
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Asset impairments, restructuring, and other special charges
(Note 5) |
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27.3 |
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105.0 |
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53.5 |
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105.0 |
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Other - net, expense (income) (Note 13) |
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18.4 |
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24.1 |
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(56.1 |
) |
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94.8 |
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4,012.2 |
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3,825.1 |
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7,789.9 |
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7,188.7 |
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Income before income taxes |
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1,736.5 |
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1,467.7 |
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3,444.3 |
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3,151.1 |
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Income taxes (Note 10) |
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387.6 |
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309.2 |
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847.3 |
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679.5 |
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Net income |
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$ |
1,348.9 |
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$ |
1,158.5 |
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$ |
2,597.0 |
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$ |
2,471.6 |
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Earnings per
share - basic and diluted (Note 9) |
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$ |
1.22 |
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$ |
1.06 |
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$ |
2.35 |
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$ |
2.25 |
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Dividends paid per share |
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$ |
.49 |
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$ |
.49 |
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$ |
.98 |
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$ |
.98 |
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See Notes to Consolidated Condensed Financial Statements.
2
CONSOLIDATED CONDENSED BALANCE SHEETS
Eli Lilly and Company and Subsidiaries
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June 30, 2010 |
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December 31, 2009 |
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(Dollars in millions) |
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(Unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
5,163.5 |
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$ |
4,462.9 |
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Short-term investments (Note 6) |
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33.1 |
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34.7 |
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Accounts receivable, net of allowances
of $105.6 (2010) and $109.9 (2009) |
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3,065.2 |
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3,343.3 |
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Other receivables |
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587.8 |
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488.5 |
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Inventories |
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2,174.4 |
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2,849.9 |
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Deferred income taxes |
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314.4 |
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271.0 |
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Prepaid expenses |
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1,128.0 |
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1,036.2 |
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TOTAL CURRENT ASSETS |
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12,466.4 |
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12,486.5 |
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OTHER ASSETS |
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Investments (Note 6) |
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1,064.7 |
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1,155.8 |
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Goodwill and other intangibles - net (Note 4) |
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4,036.0 |
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3,699.8 |
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Sundry |
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2,371.6 |
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1,921.4 |
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7,472.3 |
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6,777.0 |
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PROPERTY AND EQUIPMENT |
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Land, buildings, equipment, and construction-in-progress |
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14,044.2 |
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15,100.0 |
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Less accumulated depreciation |
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(6,259.8 |
) |
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(6,902.6 |
) |
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7,784.4 |
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8,197.4 |
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$ |
27,723.1 |
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$ |
27,460.9 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Short-term borrowings |
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$ |
26.7 |
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$ |
27.4 |
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Accounts payable |
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950.3 |
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968.1 |
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Employee compensation |
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585.5 |
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894.2 |
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Sales rebates and discounts |
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1,288.3 |
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1,109.8 |
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Dividends payable |
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545.7 |
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538.0 |
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Income taxes payable |
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435.3 |
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346.7 |
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Other current liabilities |
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2,492.8 |
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2,683.9 |
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TOTAL CURRENT LIABILITIES |
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6,324.6 |
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6,568.1 |
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Long-term debt |
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6,862.2 |
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6,634.7 |
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Accrued retirement benefit (Note 11) |
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1,882.4 |
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2,334.7 |
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Long-term income taxes payable (Note 10) |
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1,227.3 |
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1,088.4 |
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Deferred income taxes |
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80.7 |
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84.8 |
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Other noncurrent liabilities |
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1,110.6 |
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1,224.9 |
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11,163.2 |
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11,367.5 |
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SHAREHOLDERS EQUITY (Notes 7 and 8) |
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Common stock |
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721.3 |
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718.7 |
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Additional paid-in capital |
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4,668.0 |
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4,635.6 |
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Retained earnings |
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11,343.7 |
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9,830.4 |
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Employee benefit trust |
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(3,013.2 |
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(3,013.2 |
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Deferred costs-ESOP |
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(73.3 |
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(77.4 |
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Accumulated other comprehensive loss |
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(3,307.6 |
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(2,471.9 |
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Noncontrolling interests |
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(6.2 |
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1.6 |
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10,332.7 |
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9,623.8 |
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Less cost of common stock in treasury |
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97.4 |
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98.5 |
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10,235.3 |
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9,525.3 |
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$ |
27,723.1 |
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$ |
27,460.9 |
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See Notes to Consolidated Condensed Financial Statements.
3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Eli Lilly and Company and Subsidiaries
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Six Months Ended |
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June 30, |
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2010 |
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2009 |
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(Dollars in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
2,597.0 |
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$ |
2,471.6 |
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Adjustments to reconcile net income to cash
flows from operating activities: |
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Net marketing investigation charges paid |
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(80.5 |
) |
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(1,392.8 |
) |
Other changes in operating assets and liabilities |
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(703.5 |
) |
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(1,194.9 |
) |
Depreciation and amortization |
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645.0 |
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612.3 |
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Change in deferred income taxes |
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317.2 |
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340.1 |
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Stock-based compensation expense |
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128.2 |
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160.4 |
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Acquired in-process research and development, net of tax |
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32.5 |
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Other, net |
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(66.3 |
) |
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14.5 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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2,869.6 |
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1,011.2 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Net purchases of property and equipment |
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(279.3 |
) |
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(333.9 |
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Net change in short-term investments |
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(2.6 |
) |
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457.8 |
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Proceeds from sales and maturities of noncurrent investments |
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383.0 |
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367.4 |
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Purchases of noncurrent investments |
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(252.2 |
) |
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(122.8 |
) |
Purchase of product rights |
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(400.0 |
) |
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Cash paid for acquisition |
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(148.4 |
) |
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Purchase of in-process research and development |
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(50.0 |
) |
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Other, net |
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(57.3 |
) |
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(39.1 |
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
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(806.8 |
) |
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329.4 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Dividends paid |
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(1,075.9 |
) |
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(1,075.8 |
) |
Net change in short-term borrowings |
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(1.3 |
) |
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(4,812.8 |
) |
Proceeds from issuance of long-term debt |
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0.7 |
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2,400.0 |
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Other, net |
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(2.0 |
) |
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(3.4 |
) |
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NET CASH USED IN FINANCING ACTIVITIES |
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(1,078.5 |
) |
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(3,492.0 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(283.7 |
) |
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(23.0 |
) |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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700.6 |
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(2,174.4 |
) |
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Cash and cash equivalents at January 1 |
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4,462.9 |
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5,496.7 |
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CASH AND CASH EQUIVALENTS AT June 30 |
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$ |
5,163.5 |
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$ |
3,322.3 |
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See Notes to Consolidated Condensed Financial Statements.
4
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Eli Lilly and Company and Subsidiaries
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
|
2009 |
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(Dollars in millions) |
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Net income |
|
$ |
1,348.9 |
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|
$ |
1,158.5 |
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$ |
2,597.0 |
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$ |
2,471.6 |
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Other comprehensive (loss) income, net of tax1 |
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(530.7 |
) |
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|
663.5 |
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(835.7 |
) |
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320.0 |
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Comprehensive income |
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$ |
818.2 |
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$ |
1,822.0 |
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$ |
1,761.3 |
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$ |
2,791.6 |
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1 |
|
The significant components of other comprehensive loss were losses from
foreign currency translation adjustments of $543.5 million and $920.5 million for the three months
and six months ended June 30, 2010, respectively. The significant components of other
comprehensive income for the three months and six months ended June 30, 2009 were gains from
foreign currency translation adjustments of $596.4 million and $192.7 million, respectively. In
addition, net unrealized gains on investment securities of $94.2 million and $97.0 million were
included in other comprehensive income for the three months and six months ended June 30,
2009, respectively. |
See Notes to Consolidated Condensed Financial Statements.
5
SEGMENT INFORMATION
We operate in one significant business segment - human pharmaceutical products. Operations of the
animal health business segment are not material and share many of the same economic and operating
characteristics as human pharmaceutical products. Therefore, they are included with pharmaceutical
products for purposes of segment reporting. Our business segments are distinguished by the
ultimate end user of the product: humans or animals. Performance is evaluated based on profit or
loss from operations before income taxes. Income before income taxes for the animal health
business for the second quarters of 2010 and 2009 was $66.4 million and $47.6 million,
respectively, and $103.1 million and $83.3 million for the six months ended June 30, 2010 and 2009,
respectively.
REVENUE BY CATEGORY
Worldwide revenue by category was as follows:
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Three Months Ended |
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Six Months Ended |
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|
June 30, |
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June 30, |
|
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2010 |
|
2009 |
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2010 |
|
2009 |
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(Dollars in millions) |
Revenue to unaffiliated customers: |
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Neuroscience |
|
$ |
2,363.7 |
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$ |
2,185.7 |
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|
$ |
4,607.8 |
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|
$ |
4,263.4 |
|
Endocrinology |
|
|
1,518.7 |
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|
1,481.4 |
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|
|
2,996.5 |
|
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|
2,890.1 |
|
Oncology |
|
|
949.0 |
|
|
|
838.2 |
|
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|
1,856.8 |
|
|
|
1,635.5 |
|
Cardiovascular |
|
|
532.0 |
|
|
|
454.1 |
|
|
|
1,051.7 |
|
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|
909.2 |
|
Animal health |
|
|
324.2 |
|
|
|
275.4 |
|
|
|
613.8 |
|
|
|
539.5 |
|
Other pharmaceuticals |
|
|
61.1 |
|
|
|
58.0 |
|
|
|
107.6 |
|
|
|
102.1 |
|
|
|
|
Total revenue |
|
$ |
5,748.7 |
|
|
$ |
5,292.8 |
|
|
$ |
11,234.2 |
|
|
$ |
10,339.8 |
|
|
|
|
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
We have prepared the accompanying unaudited consolidated condensed financial statements in
accordance with the requirements of Form 10-Q and, therefore, they do not include all information
and footnotes necessary for a fair presentation of financial position, results of operations, and
cash flows in conformity with accounting principles generally accepted in the United States (GAAP).
In our opinion, the financial statements reflect all adjustments (including those that are normal
and recurring) that are necessary for a fair presentation of the results of operations for the
periods shown. In preparing financial statements in conformity with GAAP, we must make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosures at the date of the financial statements and during the reporting period.
Actual results could differ from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with
our consolidated financial statements and accompanying notes included in our Annual Report on Form
10-K for the year ended December 31, 2009. 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.
Note 2: Implementation of New Financial Accounting Pronouncements
In March 2010, the Financial Accounting Standards Board (FASB) issued an Accounting Standard
Update (ASU) related to Revenue Recognition that applies to arrangements with milestones
relating to research or development deliverables. This guidance provides criteria that must be
met to recognize consideration that is contingent upon achievement of a substantive milestone
in its entirety in the period in which the milestone is achieved. This guidance is effective
for us January 1, 2011 and is not expected to have a material impact to our consolidated
financial position or results of operations.
In 2009, the FASB issued an ASU related to Revenue Recognition that amends the previous
guidance on arrangements with multiple deliverables. This guidance provides principles and
application guidance on whether multiple deliverables exist, how the arrangements should be
separated, and how the consideration should be allocated. It also clarifies the method to
allocate revenue in an arrangement using the estimated selling price. This guidance is
effective for us January 1, 2011, and is not expected to be material to our consolidated
financial position or results of operations.
We adopted the FASB Statement on Transfers and Servicing, an amendment of previous
authoritative guidance. The most significant amendments resulting from this Statement consist
of the removal of the concept of a qualifying special-purpose entity (SPE) from previous
authoritative guidance, and the elimination of the exception for qualifying SPEs from the
Consolidation guidance regarding variable interest entities. This Statement was effective for
us January 1, 2010, and had no effect on our consolidated financial position or results of
operations.
We adopted the FASB Statement that amended the previous Consolidations guidance regarding
variable interest entities and addressed the effects of eliminating the qualifying SPE concept
from the guidance on Transfers and Servicing. This Statement responded to concerns about the
application of certain key provisions of the previous guidance on Consolidations regarding
variable interest entities, including concerns over the transparency of enterprises
involvement with variable interest entities. This Statement was effective for us January 1,
2010, and had no effect on our consolidated financial position or results of operations.
7
Note 3: Acquisitions
In the second quarter of 2010, we acquired the European marketing rights to several animal
health product lines divested by Pfizer Inc. as part of its acquisition of Wyeth, Inc. These
products, including vaccines, parasiticides and feed additives, serve both the production
animal and companion animal markets. We also acquired a manufacturing facility in Sligo,
Ireland, currently used in the production of animal vaccines. This acquisition has been
accounted for as a business combination with the purchase price being allocated primarily to
product-related intangibles and property and equipment. This acquisition is not material to our
consolidated financial statements.
Acquisitions of Marketed Products and Products in Development
In March 2010, we entered into a license agreement with Acrux Limited to acquire the exclusive
rights to commercialize its proprietary testosterone solution with the proposed tradename
Axiron. The product is currently under regulatory review by the U.S. Food and Drug
Administration (FDA) for the treatment of testosterone deficiency in men and has no alternative
future use. The charge of $50.0 million for acquired in-process research and development
(IPR&D) related to this arrangement was included as expense in the first quarter of 2010 and is
deductible for tax purposes. In connection with this arrangement, our partner is entitled to
future milestones and royalties based on sales if this product is approved for
commercialization.
Note 4: Collaborations
We often enter into collaborative arrangements to develop and commercialize drug candidates.
Collaborative activities might include research and development, marketing and selling (including
promotional activities and physician detailing), manufacturing, and distribution. These
collaborations often require milestone and royalty or profit share payments, contingent upon the
occurrence of certain future events linked to the success of the asset in development, as well as
expense reimbursements or payments to the third party. Revenues related to products sold by us
pursuant to these arrangements are included in net product sales, while other sources of revenue
(e.g., royalties and profit share payments) are included in collaboration and other revenue.
Operating expenses for costs incurred pursuant to these arrangements are reported in their
respective expense line item, net of any payments made to or reimbursements received from our
collaboration partners. Each collaboration is unique in nature, and our more significant
arrangements are discussed below. The following table summarizes the composition of our total
revenue recognized from all transactions, including collaboration activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Net product
sales |
|
$ |
5,589.3 |
|
|
$ |
5,113.3 |
|
|
$ |
10,921.8 |
|
|
$ |
10,005.1 |
|
Collaboration and other
revenue |
|
|
159.4 |
|
|
|
179.5 |
|
|
|
312.4 |
|
|
|
334.7 |
|
|
|
|
Total
revenue |
|
$ |
5,748.7 |
|
|
$ |
5,292.8 |
|
|
$ |
11,234.2 |
|
|
$ |
10,339.8 |
|
|
|
|
Erbitux®
Prior to our acquisition in November 2008, ImClone Systems Inc. (ImClone) entered into several
collaborations with respect to Erbitux, a product approved to fight cancer, while still in its
development phase. The most significant collaborations operate in these geographic territories: the
U.S., Japan, and Canada (Bristol-Myers Squibb Company); and worldwide except the U.S. and Canada
(Merck KGaA). The agreements are expected to expire in 2018, upon which all
8
of the rights with respect to Erbitux in the U.S. and Canada return to us. The following table
summarizes the revenue recognized with respect to Erbitux:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Net product
sales |
|
$ |
21.5 |
|
|
$ |
23.9 |
|
|
$ |
38.4 |
|
|
$ |
50.0 |
|
Collaboration and other
revenue |
|
|
82.3 |
|
|
|
75.8 |
|
|
|
157.8 |
|
|
|
143.9 |
|
|
|
|
Total
revenue |
|
$ |
103.8 |
|
|
$ |
99.7 |
|
|
$ |
196.2 |
|
|
$ |
193.9 |
|
|
|
|
Bristol-Myers Squibb Company
Pursuant to a commercial agreement with Bristol-Myers Squibb Company and E.R. Squibb (collectively,
BMS), relating to Erbitux, ImClone is co-developing and co-promoting Erbitux in the U.S. and Canada
with BMS, exclusively, and in Japan with BMS and Merck KGaA. The companies have jointly agreed to
expand the investment in the ongoing clinical development plan for Erbitux to further explore its
use in additional tumor types. Under this arrangement, Erbitux research and development and other
costs, up to threshold amounts, are the sole responsibility of BMS, with costs in excess of the
thresholds shared by both companies according to a predetermined ratio.
Responsibilities associated with clinical and other ongoing studies are apportioned between the
parties under the agreement. Collaborative reimbursements received by ImClone for supply of
clinical trial materials; for research and development; and for a portion of marketing, selling,
and administrative expenses are recorded as a reduction to the respective expense line items on the
consolidated condensed statement of operations. We receive a distribution fee in the form of a
royalty from BMS, based on a percentage of net sales in the U.S. and Canada, which is recorded in
collaboration and other revenue. Royalty expense paid to third parties, net of any reimbursements
received, is recorded as a reduction of collaboration and other revenue.
We are responsible for the manufacture and supply of all requirements of Erbitux in bulk-form
active pharmaceutical ingredient (API) for clinical and commercial use in the territory, and BMS
will purchase all of its requirements of API for commercial use from us, subject to certain
stipulations per the agreement. Sales of Erbitux to BMS for commercial use are reported in net
product sales.
Merck KGaA
A development and license agreement between ImClone and Merck KGaA (Merck) with respect to Erbitux
granted Merck exclusive rights to market Erbitux outside of the U.S. and Canada, and co-exclusive
rights with BMS and ImClone in Japan. Merck also has rights to manufacture Erbitux for supply in
its territory. We manufacture and provide a portion of Mercks requirements for API, which is
included in net product sales. We also receive a royalty on the sales of Erbitux outside of the
U.S. and Canada, which is included in collaboration and other revenue as earned. Collaborative
reimbursements received for supply of product; for research and development; and marketing,
selling, and administrative expenses are recorded as a reduction to the respective expense line
items on the consolidated condensed statement of
9
operations. Royalty expense paid to third parties, net of any royalty reimbursements received, is
recorded as a reduction of collaboration and other revenue.
Necitumumab
In January 2010, we restructured the commercial agreement with BMS described above to allow for the
co-development and co-commercialization of necitumumab, which is currently in Phase III clinical
testing for non-small cell lung cancer. Within this restructured arrangement, we and BMS have
agreed to share in the cost of developing and potentially commercializing necitumumab in the U.S.,
Canada, and Japan. We maintain exclusive rights to necitumumab in all other markets. We will
fund 45 percent of the development costs for studies that will be used only in the U.S., and 72.5
percent for global studies. We will be responsible for the manufacturing of API, and BMS will be
responsible for manufacturing the finished product. We could receive a payment of $250.0 million
upon approval in the U.S. In the U.S. and Canada, BMS will record sales and we will receive 45
percent of the profits for necitumumab, while we will provide 50 percent of the selling effort. In
Japan, we and BMS will share costs and profits evenly.
Exenatide
We are in a collaborative arrangement with Amylin Pharmaceuticals (Amylin) for the joint
development, marketing, and selling of Byetta® (exenatide injection) and other forms of exenatide
such as exenatide once weekly. Byetta is presently approved as an adjunctive therapy to improve
glycemic control in patients with type 2 diabetes who have not achieved adequate glycemic control
using metformin, a sulfonylurea, or a combination of metformin and sulfonylurea; and in the U.S.
only, as an adjunctive therapy in patients using a thiazolidinedione (with or without metformin)
and as a monotherapy. Lilly and Amylin are co-promoting exenatide in the U.S. Amylin is responsible
for manufacturing and primarily utilizes third-party contract manufacturers to supply Byetta.
However, we are manufacturing Byetta pen delivery devices for Amylin. We are responsible for
development and commercialization costs outside the U.S.
Under the terms of our arrangement, we report as collaboration and other revenue our 50 percent
share of gross margin on Amylins net product sales in the U.S. We report as net product sales
100 percent of sales outside the U.S. and our sales of Byetta pen delivery devices to Amylin. The
following table summarizes the revenue recognized with respect to Byetta:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Net product
sales |
|
$ |
43.7 |
|
|
$ |
34.7 |
|
|
$ |
87.0 |
|
|
$ |
62.1 |
|
Collaboration and other
revenue |
|
|
63.2 |
|
|
|
79.9 |
|
|
|
135.7 |
|
|
|
150.2 |
|
|
|
|
Total
revenue |
|
$ |
106.9 |
|
|
$ |
114.6 |
|
|
$ |
222.7 |
|
|
$ |
212.3 |
|
|
|
|
We pay Amylin a percentage of the gross margin of exenatide sales outside of the U.S., and these
costs are recorded in cost of sales. Under the 50/50 profit-sharing arrangement for the U.S., in
addition to recording as revenue our 50 percent share of exenatides gross margin, we also record
50 percent of U.S. research and development costs and marketing and selling costs in the respective
line items on the consolidated condensed statements of operations.
A New Drug Application has been submitted to the FDA for Bydureon, the proposed brand name for
exenatide once weekly, with the current Prescription Drug User Fee Act action date of October 22,
2010. Amylin is constructing and will operate a manufacturing facility for exenatide once weekly,
and we have entered into a supply agreement in which Amylin will supply
10
exenatide once weekly product to us for sales outside the U.S. The estimated total cost of the
facility is approximately $550 million. In 2008, we paid $125.0 million to Amylin, which we will
amortize to cost of sales over the estimated life of the supply agreement beginning with product
launch. We would be required to reimburse Amylin for a portion of any future impairment of this
facility, recognized in accordance with GAAP. A portion of the $125.0 million payment we made to
Amylin would be creditable against any amount we would owe as a result of impairment. We have also
agreed to loan up to $165.0 million to Amylin at an indexed rate, no
amounts have been loaned pursuant to this arrangement and any borrowings have to be repaid by
June 30, 2014. We have also agreed to cooperate with Amylin in the development, manufacturing, and
marketing of exenatide once weekly in a dual-chamber cartridge pen configuration. We will
contribute 60 percent of the total initial capital costs of the project, our portion of which will
be approximately $130 million, of which we have contributed approximately $70 million as of June
30, 2010.
Cymbalta®
Boehringer Ingelheim
Beginning in 2002,we were in a collaborative arrangement with Boehringer Ingelheim (BI) to jointly
develop, market and promote Cymbalta (duloxetine), a product for the treatment of major depressive
disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and fibromyalgia,
outside the U.S. and Japan. Pursuant to the terms of the agreement, we generally shared equally in
development, marketing, and selling expenses, and paid BI a commission on sales in the co-promotion
territories. We manufacture the product for all territories. Reimbursements or payments for the
cost sharing of marketing, selling, and administrative expenses were recorded in the respective
expense line items in the consolidated condensed statements of operations. The commission paid to
BI was recorded in marketing, selling, and administrative expenses. In March 2010, the parties
agreed to terminate this agreement, and the exclusive rights to develop and market duloxetine for
all indications in countries outside the U.S. and Japan were re-acquired by us. In connection with
the arrangement, we paid BI approximately $400 million and will also pay to BI a percentage of our
sales of duloxetine in these countries through 2012 as consideration for the rights acquired. We record these costs as intangible assets and will
amortize to marketing, selling and administrative expenses over the life of the original agreement,
which is through 2015.
Quintiles
We were in a collaborative arrangement with Quintiles Transnational Corp. (Quintiles) to jointly
market and promote Cymbalta in the U.S. since Cymbaltas launch in 2004. Pursuant to the terms of
the agreement, Quintiles shared in the costs to co-promote Cymbalta with us and receives a
commission based upon net product sales. According to that agreement, Quintiles obligation to
promote Cymbalta expired during 2009, and we pay a lower rate on net product sales for three years
after completion of the promotion efforts specified in that agreement. The commissions paid to
Quintiles are recorded in marketing, selling, and administrative expenses.
Effient®
We are in a collaborative arrangement with Daiichi Sankyo Company, Limited (D-S) to develop,
market, and promote Effient, an antiplatelet agent for the treatment of patients with acute
coronary syndrome (ACS) who are being managed with an artery-opening procedure known as
percutaneous coronary intervention (PCI). The product was approved for marketing by the European
Commission under the trade name Efient® in February 2009, and the initial sales were recorded in
the first quarter of 2009. The product was also approved for marketing by the FDA under the
tradename Effient in July 2009, and the initial sales in the U.S. were recorded in the third
quarter of 2009. Within this arrangement, we and D-S have agreed to co-promote under the same
trademark in certain territories (including the U.S. and five major European markets), while we
have exclusive marketing rights in certain other territories. D-S has exclusive marketing rights in
Japan. Under the agreement, we paid D-S an upfront license fee and milestones related to
11
successful development and product launch. The parties share approximately 50/50 in the profits, as
well as in the costs of development and marketing in the co-promotion territories. A third party
manufactures bulk product, and we produce the finished product for our exclusive and co-promotion
territories. We record product sales in our exclusive and co-promotion territories. In our
exclusive territories, we pay D-S a royalty specific to these territories. Profit share payments
made to D-S are recorded as marketing, selling, and administrative expenses. All royalties paid to
D-S and the third-party manufacturer are recorded in cost of sales. Worldwide Effient sales were
$22.9 million and $31.6 million in the second quarter and first six months of 2010, respectively.
TPG-Axon Capital
In 2008, we entered into an agreement with an affiliate of TPG-Axon Capital (TPG) for the Phase III
development of semagacestat and solanezumab, our two lead molecules for the treatment of mild to
moderate Alzheimers disease. Under the agreement, both we and TPG will provide funding for the
Alzheimers clinical trials. Funding from TPG will not exceed $325.0 million and could extend into
2014. In exchange for their funding, TPG may receive success-based milestones totaling
$330.0 million and mid- to high-single digit royalties that are contingent upon the successful
development of the Alzheimers treatments. The royalties will be paid for approximately eight years
after launch of a product. Reimbursements received from TPG for its portion of research and
development costs incurred related to the Alzheimers treatments are recorded as a reduction to the
research and development expense line item on the consolidated condensed statements of operations.
The reimbursement from TPG has not been and is not expected to be material in any period.
Summary of Collaboration Related Commission and Profit Share Payments
The aggregate amount of commission and profit share payments included in marketing, selling, and
administrative expense pursuant to the collaborations described above was $31.6 million and
$84.6 million in the quarters ended June 30, 2010 and 2009, respectively, and $96.7 million and
$162.2 million in the six months ended June 30, 2010 and 2009, respectively.
Note 5: Asset Impairments, Restructuring, and Other Special Charges
We recognized asset impairments, restructuring and other special charges of $27.3 million and
$53.5 million in the second quarter and first six months of 2010, respectively, as a result of our
previously announced initiatives to reduce our cost structure and global workforce as well as
previously announced strategic decisions. These charges primarily related to severance costs, which
are expected to be paid by the end of the third quarter of 2010.
In the second quarter of 2009, we incurred other special charges of $105.0 million, related to
advanced discussions with the attorneys general for several states that were not part of the
Eastern District of Pennsylvania settlement, seeking to resolve their Zyprexa®-related claims. The
charge represented the then-current probable and estimable exposures in connection with the states
claims. Refer to Note 12 for additional information.
Note 6: Financial Instruments
Financial instruments that potentially subject us to credit risk consist principally of trade
receivables and interest-bearing investments. Wholesale distributors of life-sciences products
account for a substantial portion of trade receivables; collateral is generally not required. The
risk associated with this concentration is mitigated by our ongoing credit review procedures and
insurance. Major financial institutions represent the largest component of our investments in
corporate debt securities. In accordance with documented corporate policies, we limit 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
12
instruments but do not expect any counterparties to fail to meet their obligations given their high
credit ratings.
Accounting Policy for Risk-Management Instruments
Our derivative activities are initiated within the guidelines of documented corporate
risk-management policies and do not create additional risk because gains and losses on derivative
contracts offset losses and gains on the assets, liabilities, and transactions being hedged. As
derivative contracts are initiated, we designate the instruments individually as either a fair
value hedge or a cash flow hedge. Management reviews the correlation and effectiveness of our
derivatives on a quarterly basis.
For derivative contracts 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 contracts that
are designated and qualify as cash flow hedges, the effective portion of gains and losses on these
contracts is reported as a component of other comprehensive loss and reclassified into earnings in
the same period the hedged transaction affects earnings. Hedge ineffectiveness is immediately
recognized in earnings. Derivative contracts that are not designated as hedging instruments are
recorded at fair value with the gain or loss recognized currently in earnings during the period of
change.
We may enter into foreign currency forward and purchase option contracts to reduce the effect of
fluctuating currency exchange rates (principally the euro, the 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 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, expense (income). The purchased option contracts are used to hedge anticipated foreign
currency transactions, primarily intercompany inventory activities expected to occur within the
next year. These contracts are designated as cash flow hedges of those future transactions, and the
impact on earnings is included in cost of sales. We may enter into foreign currency forward
contracts and currency swaps as fair value hedges of firm commitments. Forward and purchase option
contracts generally have maturities not exceeding 12 months. At June 30, 2010, we did not hold any
foreign currency option contracts. At June 30, 2010, we had outstanding foreign currency forward
commitments to purchase 541 million British pounds and sell 652 million euro, commitments to
purchase 781 million U.S. dollars and sell 596 million euro, and commitments to buy 933 million
euro and sell 1.20 billion U.S. dollars, which will settle within 2 months.
In the normal course of business, our operations are exposed to fluctuations in interest rates.
These fluctuations can vary the costs of financing, investing, and operating. We address a portion
of these risks through a controlled program of risk management that includes the use of derivative
financial instruments. The objective of controlling these risks is to limit the impact 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 or investments to a floating rate
are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars
that convert floating rate debt or investments 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. At June 30, 2010, approximately 94 percent of our total debt is at a fixed rate. We
have converted approximately 70 percent of our fixed-rate debt to floating rates through the use of
interest rate swaps.
13
The Effect of Risk-Management Instruments on the Statement of Operations
The following effects of risk-management instruments were recognized in other-net, expense
(income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Fair value hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect from hedged fixed-rate debt |
|
$ |
205.1 |
|
|
$ |
(179.8 |
) |
|
$ |
236.7 |
|
|
$ |
(319.4 |
) |
Effect from interest rate contracts |
|
|
(205.1 |
) |
|
|
179.8 |
|
|
|
(236.7 |
) |
|
|
319.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective portion of losses on
interest rate contracts
reclassified from accumulated
other comprehensive loss |
|
|
2.3 |
|
|
|
2.6 |
|
|
|
4.5 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gains) losses on foreign
currency exchange contracts not
designated as hedging instruments |
|
|
(49.4 |
) |
|
|
6.8 |
|
|
|
(46.4 |
) |
|
|
5.8 |
|
The effective portion of net gains on interest rate contracts in designated cash flow hedging
relationships recorded in other comprehensive income (loss) was $0.0 and $37.8 million for the
three months ended June 30, 2010 and June 30, 2009, respectively, and was $0.0 and $37.8 million
for the six months ended June 30, 2010 and June 30, 2009, respectively.
During the three months and six months ended June 30, 2010 and 2009, net losses related to
ineffectiveness and net losses related to the portion of our risk-management hedging instruments,
fair value and cash flow hedges excluded from the assessment of effectiveness were not material.
We expect to reclassify $11.9 million of pretax net losses on cash flow hedges of the variability
in expected future interest payments on floating rate debt from accumulated other comprehensive
loss to earnings during the next 12 months.
Fair Value of Financial Instruments
The following tables summarize certain fair value information at June 30, 2010 and December 31,
2009 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:
14
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for |
|
Significant |
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
Identical |
|
Other |
|
Unobservable |
|
|
|
|
Carrying |
|
Amortized |
|
Assets |
|
Observable Inputs |
|
Inputs |
|
Fair |
Description |
|
Amount |
|
Cost |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
|
|
(Dollars in millions) |
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
12.2 |
|
|
$ |
12.4 |
|
|
$ |
|
|
|
$ |
12.2 |
|
|
$ |
|
|
|
$ |
12.2 |
|
U.S. government and agencies |
|
|
19.9 |
|
|
|
19.9 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
19.9 |
|
Other securities |
|
|
1.0 |
|
|
|
1.0 |
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33.1 |
|
|
$ |
33.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
185.3 |
|
|
$ |
191.1 |
|
|
$ |
|
|
|
$ |
185.3 |
|
|
$ |
|
|
|
$ |
185.3 |
|
Mortgage-backed |
|
|
228.6 |
|
|
|
277.5 |
|
|
|
|
|
|
|
228.6 |
|
|
|
|
|
|
|
228.6 |
|
Asset-backed |
|
|
57.0 |
|
|
|
69.7 |
|
|
|
|
|
|
|
57.0 |
|
|
|
|
|
|
|
57.0 |
|
U.S. government and agencies |
|
|
76.1 |
|
|
|
75.2 |
|
|
|
76.1 |
|
|
|
|
|
|
|
|
|
|
|
76.1 |
|
Other debt securities |
|
|
6.6 |
|
|
|
10.4 |
|
|
|
|
|
|
|
3.1 |
|
|
|
3.5 |
|
|
|
6.6 |
|
Marketable equity |
|
|
351.5 |
|
|
|
185.1 |
|
|
|
351.5 |
|
|
|
|
|
|
|
|
|
|
|
351.5 |
|
Equity method and other
investments |
|
|
159.6 |
|
|
|
159.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,064.7 |
|
|
$ |
968.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
15.8 |
|
|
$ |
16.1 |
|
|
$ |
|
|
|
$ |
15.8 |
|
|
$ |
|
|
|
$ |
15.8 |
|
U.S. government and agencies |
|
|
18.5 |
|
|
|
18.8 |
|
|
|
18.5 |
|
|
|
|
|
|
|
|
|
|
|
18.5 |
|
Other securities |
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34.7 |
|
|
$ |
35.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
185.9 |
|
|
$ |
195.4 |
|
|
$ |
|
|
|
$ |
185.9 |
|
|
$ |
|
|
|
$ |
185.9 |
|
Mortgage-backed |
|
|
240.3 |
|
|
|
310.0 |
|
|
|
|
|
|
|
240.3 |
|
|
|
|
|
|
|
240.3 |
|
Asset-backed |
|
|
78.7 |
|
|
|
94.1 |
|
|
|
|
|
|
|
78.7 |
|
|
|
|
|
|
|
78.7 |
|
U.S. government and agencies |
|
|
81.3 |
|
|
|
81.7 |
|
|
|
81.3 |
|
|
|
|
|
|
|
|
|
|
|
81.3 |
|
Other debt securities |
|
|
34.4 |
|
|
|
12.8 |
|
|
|
|
|
|
|
3.6 |
|
|
|
30.8 |
|
|
|
34.4 |
|
Marketable equity |
|
|
378.7 |
|
|
|
184.0 |
|
|
|
378.7 |
|
|
|
|
|
|
|
|
|
|
|
378.7 |
|
Equity methods and other
investments |
|
|
156.5 |
|
|
|
156.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,155.8 |
|
|
$ |
1,034.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
|
|
|
|
|
|
|
|
|
|
for |
|
Significant |
|
Significant |
|
|
|
|
|
|
|
|
Identical |
|
Other |
|
Unobservable |
|
|
|
|
Carrying |
|
Assets |
|
Observable Inputs |
|
Inputs |
|
Fair |
Description |
|
Amount |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
|
|
(Dollars in millions) |
Long-term debt, including
current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
$ |
(6,880.3 |
) |
|
$ |
|
|
|
$ |
(7,193.0 |
) |
|
$ |
|
|
|
$ |
(7,193.0 |
) |
December 31, 2009 |
|
|
(6,655.0 |
) |
|
|
|
|
|
|
(6,827.8 |
) |
|
|
|
|
|
|
(6,827.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
|
|
|
|
|
|
|
|
|
|
Markets |
|
|
|
|
|
|
|
|
|
|
|
|
for |
|
Significant |
|
Significant |
|
|
|
|
|
|
|
|
Identical |
|
Other |
|
Unobservable |
|
|
|
|
Carrying |
|
Assets |
|
Observable Inputs |
|
Inputs |
|
Fair |
Description |
|
Amount |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
|
|
|
|
|
|
(Dollars in millions) |
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-management instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundry |
|
$ |
365.4 |
|
|
$ |
|
|
|
$ |
365.4 |
|
|
$ |
|
|
|
$ |
365.4 |
|
Foreign exchange contracts
not designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables |
|
|
81.3 |
|
|
|
|
|
|
|
81.3 |
|
|
|
|
|
|
|
81.3 |
|
Other current liabilities |
|
|
(63.0 |
) |
|
|
|
|
|
|
(63.0 |
) |
|
|
|
|
|
|
(63.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-management instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sundry |
|
$ |
134.9 |
|
|
$ |
|
|
|
$ |
134.9 |
|
|
$ |
|
|
|
$ |
134.9 |
|
Other noncurrent liabilities |
|
|
(6.2 |
) |
|
|
|
|
|
|
(6.2 |
) |
|
|
|
|
|
|
(6.2 |
) |
Foreign exchange contracts
not designated as hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables |
|
|
8.8 |
|
|
|
|
|
|
|
8.8 |
|
|
|
|
|
|
|
8.8 |
|
Other current liabilities |
|
|
(10.7 |
) |
|
|
|
|
|
|
(10.7 |
) |
|
|
|
|
|
|
(10.7 |
) |
16
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 value of equity method investments and other
investments is not readily available.
Approximately $235 million of our investments in debt securities, measured at fair value, will
mature within five years.
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 (pretax) in other comprehensive income
(loss) follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
|
(Dollars in millions) |
Unrealized gross gains |
|
$ |
177.2 |
|
|
$ |
222.4 |
|
Unrealized gross losses |
|
|
81.3 |
|
|
|
101.7 |
|
Fair value of securities in an unrealized gain position |
|
|
633.9 |
|
|
|
579.8 |
|
Fair value of securities in an unrealized loss position |
|
|
292.4 |
|
|
|
449.4 |
|
Other-than-temporary impairment losses on fixed income securities of $5.7 million and $6.7
million were recognized in the statement of operations for the three months and six months
ended June 30, 2010, respectively, compared with $2.3 million and $7.6 million for the same
periods in 2009. These losses primarily relate to credit losses on certain mortgage-backed
securities. The amount of credit losses represents the difference between the present value of
cash flows expected to be collected on these securities and the amortized cost. Factors
considered in assessing the credit loss were the position in the capital structure, vintage and
amount of collateral, delinquency rates, current credit support, and geographic concentration.
The securities in an unrealized loss position are composed of fixed-rate debt securities of
varying maturities. The value of fixed income securities is sensitive to changes in the yield
curve and other market conditions, which led to the decline in value in 2008. Approximately 60
percent of the securities in a loss position are investment-grade debt securities. The majority
of these securities first moved into an unrealized loss position during 2008. At this time,
there is no indication of default on interest or principal payments for debt securities other
than those for which an other-than-temporary impairment charge has been recorded. We do not
intend to sell and it is not more likely than not 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 we have concluded that no additional other-than-temporary loss is required to be
charged to earnings as of June 30, 2010.
Activity related to our available-for-sale investment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Proceeds from sales |
|
$ |
189.0 |
|
|
$ |
313.0 |
|
|
$ |
367.7 |
|
|
$ |
600.6 |
|
Realized gross gains on sales |
|
|
11.4 |
|
|
|
12.4 |
|
|
|
74.6 |
|
|
|
17.3 |
|
Realized gross losses on sales |
|
|
0.5 |
|
|
|
0.3 |
|
|
|
2.3 |
|
|
|
1.0 |
|
Realized gains and losses on sales of available-for-sale securities 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.
17
Note 7: Stock-Based Compensation
Our stock-based compensation expense consists primarily of performance awards (PAs) and shareholder
value awards (SVAs). We recognized pretax stock-based compensation cost of $54.4 million and $94.3
million in the second quarter of 2010 and 2009, respectively. In the first six months of 2010 and
2009, we recognized pretax stock-based compensation expense of $128.2 million and $160.4 million,
respectively.
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
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
periods. As of June 30, 2010, the total remaining unrecognized compensation cost related to
nonvested PAs amounted to $122.8 million, which will be amortized over the weighted-average
remaining requisite service period of approximately 13 months.
SVAs are granted to officers and management and are payable in shares of common stock at the end of
a three-year period. The number of shares actually issued varies depending on our stock price at
the end of the three-year vesting period compared to pre-established target prices. We measure the
fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The Monte Carlo
simulation 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. As of
June 30, 2010, the total remaining unrecognized compensation cost related to nonvested SVAs
amounted to $68.3 million, which will be amortized over the weighted-average remaining requisite
service period of approximately 24 months.
Note 8: Shareholders Equity
As of June 30, 2010, we have purchased $2.58 billion of our previously announced $3.0 billion share
repurchase program. During the first half of 2010, we did not acquire any shares pursuant to this
program, nor do we expect any share repurchases under this program for the remainder of 2010.
Note 9: Earnings Per Share
Unless otherwise noted in the footnotes, all per-share amounts are presented on a diluted basis,
that is, based on the weighted-average number of outstanding common shares plus the effect of all
potentially dilutive common shares (primarily contingently issuable shares and unexercised stock
options).
Note 10: Income Taxes
We file income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S.
jurisdictions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations in major taxing jurisdictions for years before 2005. The IRS began its examination of
tax years 2005-2007 during the third quarter of 2008. In the third quarter of 2009, we settled an
IRS administrative appeals matter from the 2001-2004 IRS audit. Considering the status of the
2005-2007 IRS examination at that time and the settlement of the IRS administrative appeals matter
from the 2001-2004 audit, gross unrecognized tax benefits were reduced approximately $190 million
in the third quarter of 2009. Additionally, in the third quarter of 2009, our income tax expense
was reduced by $54.4 million, and a cash payment of $52.8 million was paid, after utilization of
applicable tax credit carryovers.
The IRS continues its examination of tax years 2005-2007. In the first quarter of 2010, we began
the process of advancing the examination procedures to tax years 2008-2009 for certain matters
currently being examined in the 2005-2007 audit cycle. Management believes it is reasonably
18
possible that both the 2005-2007 audit and the examination of certain matters for tax years
2008-2009 could conclude within the next 12 months, both of which could cause a significant change
in the total amount of unrecognized tax benefits. However, the ultimate resolution of these tax
matters is dependent upon a number of factors, including the potential for formal administrative
and legal proceedings. As a result, it is not possible to estimate the range of the reasonably
possible changes in unrecognized tax benefits that could occur within the next 12 months, nor is it
possible to estimate reliably total future cash flows related to these unrecognized tax benefits.
The new U.S. health care legislation (both the primary Patient Protection and Affordable Care Act
and the Health Care and Education Reconciliation Act) eliminated the tax-free nature of the
subsidy we receive for sponsoring retiree drug coverage that is actuarially equivalent to
Medicare Part D. This provision is effective January 1, 2013. While this change has a future impact
on our net tax deductions related to retiree health benefits, we are required to record a one-time
charge to adjust our deferred tax asset for this change in the law in the quarter of enactment.
Accordingly, we recorded a non-cash charge of $85.1 million in the first quarter of 2010.
19
Note 11: Retirement Benefits
Net pension and retiree health benefit expense included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
53.0 |
|
|
$ |
59.0 |
|
|
$ |
110.8 |
|
|
$ |
119.7 |
|
Interest cost |
|
|
107.7 |
|
|
|
104.1 |
|
|
|
215.8 |
|
|
|
207.5 |
|
Expected return on plan assets |
|
|
(160.0 |
) |
|
|
(143.1 |
) |
|
|
(317.6 |
) |
|
|
(285.4 |
) |
Amortization of prior service cost |
|
|
1.6 |
|
|
|
1.8 |
|
|
|
3.4 |
|
|
|
3.6 |
|
Recognized actuarial loss |
|
|
41.6 |
|
|
|
20.1 |
|
|
|
82.3 |
|
|
|
41.7 |
|
|
|
|
Net periodic benefit cost |
|
$ |
43.9 |
|
|
$ |
41.9 |
|
|
$ |
94.7 |
|
|
$ |
87.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Health Benefit Plans |
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
12.3 |
|
|
$ |
10.4 |
|
|
$ |
28.0 |
|
|
$ |
26.7 |
|
Interest cost |
|
|
30.2 |
|
|
|
29.8 |
|
|
|
59.9 |
|
|
|
58.5 |
|
Expected return on plan assets |
|
|
(30.6 |
) |
|
|
(29.5 |
) |
|
|
(61.3 |
) |
|
|
(58.9 |
) |
Amortization of prior service cost |
|
|
(9.3 |
) |
|
|
(9.0 |
) |
|
|
(18.6 |
) |
|
|
(18.0 |
) |
Recognized actuarial loss |
|
|
20.9 |
|
|
|
17.2 |
|
|
|
42.5 |
|
|
|
34.3 |
|
|
|
|
Net periodic benefit cost |
|
$ |
23.5 |
|
|
$ |
18.9 |
|
|
$ |
50.5 |
|
|
$ |
42.6 |
|
|
|
|
On a global basis, as of June 30, 2010, we have contributed substantially all of the $100 million
required to satisfy minimum funding requirements to our defined benefit pension plans. In addition,
we have contributed $300 million of discretionary funding to our global post-retirement benefit
plans. We do not anticipate making any substantial contributions throughout the remainder of the
year.
Note 12: Contingencies
We are a party to various legal actions, government investigations, and environmental proceedings.
The most significant of these are described below. While it is not possible to determine the
outcome of these matters, we believe that, except as specifically noted below, the resolution of
all such matters will not have a material adverse effect on our consolidated financial position or
liquidity, but could possibly be material to our consolidated results of operations in any one
accounting period.
Patent Litigation
We are engaged in the following U.S. patent litigation matters brought pursuant to procedures set
out in the Hatch-Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
20
|
|
|
Cymbalta: Sixteen generic drug manufacturers have submitted Abbreviated New Drug
Applications (ANDAs) seeking permission to market generic versions of Cymbalta prior to the
expiration of our relevant U.S. patents (the earliest of which expires in 2013). Of these
challengers, all allege non-infringement of the patent claims directed to the commercial
formulation, and nine allege invalidity of the patent claims directed to the active
ingredient duloxetine. Of the nine challengers to the compound patent claims, one further
alleges invalidity of the claims directed to the use of Cymbalta for treating fibromyalgia,
and one alleges the patent having claims directed to the active ingredient is
unenforceable. In November 2008 we filed lawsuits in U.S. District Court for the Southern
District of Indiana against Actavis Elizabeth LLC; Aurobindo Pharma Ltd.; Cobalt
Laboratories, Inc.; Impax Laboratories, Inc.; Lupin Limited; Sandoz Inc.; and Wockhardt
Limited, seeking rulings that the patents are valid, infringed, and enforceable. We filed
similar lawsuits in the same court against Sun Pharma Global, Inc. in December 2008 and
against Anchen Pharmaceuticals, Inc. in August 2009. The cases have been consolidated and
actions against all but Wockhardt Limited have been stayed pursuant to stipulations by the
defendants to be bound by the outcome of the litigation through appeal. |
|
|
|
Gemzar®: Mayne Pharma (USA) Inc., now Hospira, Inc. (Hospira); Fresenius Kabi Oncology
Plc (Fresenius); Sicor Pharmaceuticals, Inc., now Teva Parenteral Medicines, Inc. (Teva);
Actavis Elizabeth LLC and Actavis Totowa LLC (Actavis); and Sun Pharmaceutical Industries
Inc. (Sun) each submitted one or more abbreviated marketing applications seeking permission
to market generic versions of Gemzar prior to the expiration of our relevant U.S. patents
(compound patent expiring in 2010 and method-of-use patent expiring in 2013), and alleging
that these patents are invalid. Sandoz Inc. (Sandoz) and APP Pharmaceuticals, LLC (APP)
have similarly challenged our method-of-use patent. We filed lawsuits in the U.S. District
Court for the Southern District of Indiana against Teva (February 2006), Hospira (October
2006, January 2008, and March 2010), APP (December 2009), Fresenius (February 2010), and
Actavis (June 2010), seeking rulings that our patents are valid and are being infringed. In
November 2007, Sun filed a declaratory judgment action in the U.S. District Court for the
Eastern District of Michigan, seeking rulings that our method-of-use and compound patents
are invalid or unenforceable, or would not be infringed by the sale of Suns generic
product. The status of these cases is as follows: |
|
|
|
In August 2009, the district court in Michigan granted a motion by Sun for partial summary judgment, invalidating our
method-of-use patent. We appealed this decision, and on July 28, 2010, a panel of the Court of Appeals for the Federal Circuit
affirmed the district courts ruling. We disagree with the decision and will consider other legal options, including seeking
reconsideration by the full Federal Circuit. Nevertheless, some of the generic companies, including Sun and Teva, have tentative
or final marketing approval for generic gemcitabine, and therefore we expect generic gemcitabine to be introduced to the U.S. market
as soon as mid-November 2010, following the expiration of the compound patent on November 15, 2010. |
|
|
|
The trial against Teva was held in September 2009. In March 2010, the district court
in Indiana upheld the validity of our compound patent. The court also ruled in our favor
on all invalidity theories brought forward by Teva on our method-of-use patent, except
for obviousness-type double patenting. The court applied collateral estoppel with regard
to this theory, given the ruling in the Sun case. Tevas ANDAs have been approved by the
FDA. |
|
|
|
Two suits against Hospira have been administratively closed, and the parties have
agreed to be bound by the results of the Teva suit. The remaining suit is in the early
stages. |
|
|
|
APP filed a motion to dismiss our suit, based on the decision in the Sun case. APPs
ANDA has received tentative approval from the FDA, but APP is prohibited from entering
the market by a 30-month stay, which expires in May 2012. |
|
|
|
The Fresenius and Actavis cases are in the early stages. |
21
|
|
|
Alimta®: Teva Parenteral Medicines, Inc. (Teva), APP, and Barr Laboratories, Inc.
(Barr) each submitted ANDAs seeking approval to market generic versions of Alimta prior to
the expiration of the relevant U.S. patent (licensed from the Trustees of Princeton
University and expiring in 2016), and alleging the patent is invalid. We, along with
Princeton, filed lawsuits in the U.S. District Court for the District of Delaware against
Teva, APP, and Barr seeking rulings that the compound patent is valid and infringed. Trial
is scheduled for November 2010 against Teva and APP. |
|
|
|
Evista®: In 2006, Teva Pharmaceuticals USA, Inc. (Teva) submitted an ANDA seeking
permission to market a generic version of Evista prior to the expiration of our relevant
U.S. patents (expiring in 2012-2017) and alleging that these patents are invalid, not
enforceable, or not infringed. In June 2006, we filed a lawsuit against Teva in the
U.S. District Court for the Southern District of Indiana, seeking a ruling that these
patents are valid, enforceable, and being infringed by Teva. The trial against Teva was
completed in March 2009. In September 2009, the court upheld our method-of-use patents (the
last expires in 2014) and Teva has appealed that ruling. In addition, the court held that
our particle-size patents (expiring 2017) are invalid, and we have appealed that ruling.
InvaGen Pharmaceuticals, Inc. (InvaGen) submitted an ANDA in 2008 seeking approval to
market a generic version of Evista prior to the expiration of the particle-size patents at
issue in the Teva matter. We filed suit against InvaGen in January 2009 in the U.S.
District Court for the Southern District of Indiana. That action has been stayed pending
the outcome of the Teva appeal. Watson Laboratories Inc. (Watson) also submitted an ANDA
in March of 2010 seeking approval to market a generic version of Evista prior to the
expiration of the particle-size patents at issue in the Teva matter. We filed suit against
Watson in May 2010 in the U.S. District Court for the Southern District of Indiana. |
|
|
|
Strattera®: Actavis Elizabeth LLC (Actavis), Apotex Inc. (Apotex), Aurobindo Pharma
Ltd. (Aurobindo), Mylan Pharmaceuticals Inc. (Mylan), Sandoz Inc. (Sandoz), Sun
Pharmaceutical Industries Limited (Sun), and Teva Pharmaceuticals USA, Inc. (Teva) each
submitted an ANDA seeking permission to market generic versions of Strattera prior to the
expiration of our relevant U.S. patent (expiring in 2017), and alleging that this patent is
invalid. In 2007, we brought a lawsuit against Actavis, Apotex, Aurobindo, Mylan, Sandoz,
Sun, and Teva in the United States District Court for the District of New Jersey. The court
has ruled on all pending summary judgment motions, and granted our infringement motion. The
remaining invalidity defenses were heard at trial in May 2010. We are waiting for a
decision. Several companies have received tentative approval to market generic atomoxetine,
but are prohibited from entering the market by a 30-month stay that expires in November
2010. An adverse court decision prior to November 2010 would terminate the stay
and enable one or more companies to launch generic atomoxetine. |
We believe each of these Hatch-Waxman challenges is without merit and expect to prevail in this
litigation. However, it is not possible to determine the outcome of this litigation, and
accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in any of
these cases could have a material adverse impact on our future consolidated results of operations,
liquidity, and financial position.
We have received challenges to Zyprexa patents in a number of countries outside the U.S.:
|
|
|
In Canada, several generic pharmaceutical manufacturers have challenged the validity of
our Zyprexa patent (expiring in 2011). In April 2007, the Canadian Federal Court ruled
against the first challenger, Apotex Inc. (Apotex), and that ruling was affirmed on appeal
in February 2008. In June 2007, the Canadian Federal Court held that an invalidity
allegation of a second challenger, Novopharm Ltd. (Novopharm), was justified and denied our
request that Novopharm be prohibited from receiving marketing approval for generic
olanzapine in Canada. Novopharm began selling generic olanzapine in Canada in the third
quarter of 2007. In September 2009, the Canadian Federal Court ruled against us in
|
22
|
|
|
the Novapharm suit, finding our patent invalid. We appealed this decision, and in July 2010
the appeals court set aside the decision and remitted it to the trial court. |
|
|
|
In Germany, the German Federal Supreme Court upheld the validity of our Zyprexa patent
(expiring in 2011) in December 2008, reversing an earlier decision of the Federal Patent
Court. Following the decision of the Supreme Court, the generic companies who launched
generic olanzapine based on the earlier decision either agreed to withdraw from the market
or were subject to injunction. We have negotiated settlements of the damages arising from
infringement with most of the generic companies. |
|
|
|
We have received challenges in a number of other countries, including Spain, Austria,
Australia, Portugal, and several smaller European countries. In Spain, we have been
successful at both the trial and appellate court levels in defeating the generic
manufacturers challenges, but additional actions against multiple generic companies are
now pending. In March 2010, the District Court of Hague ruled against us and revoked our
compound patent in the Netherlands. We have appealed this decision. We have also
successfully defended Zyprexa patents in Austria and Portugal. |
We are vigorously contesting the various legal challenges to our Zyprexa patents on a
country-by-country basis. We cannot determine the outcome of this litigation. The availability of
generic olanzapine in additional markets could have a material adverse impact on our consolidated
results of operations.
Xigris® and Evista: In June 2002, Ariad Pharmaceuticals, Inc. (Ariad), the Massachusetts Institute
of Technology, the Whitehead Institute for Biomedical Research, and the President and Fellows of
Harvard College in the U.S. District Court for the District of Massachusetts sued us, alleging that
sales of two of our products, Xigris and Evista, were inducing the infringement of a patent related
to the discovery of a natural cell signaling phenomenon in the human body, and seeking royalties on
past and future sales of these products. Following jury and bench trials on separate issues, the
U.S. District Court of Massachusetts entered final judgment in September 2007 that Ariads claims
were valid, infringed, and enforceable, and finding damages in the amount of $65 million plus a
2.3 percent royalty on net U.S. sales of Xigris and Evista since the time of the jury decision.
However, the court deferred the requirement to pay any damages until after all rights to appeal are
exhausted. In April 2009, the Court of Appeals for the Federal Circuit overturned the District
Court judgment, concluding that Ariads asserted patent claims are invalid. The Court of Appeals
reheard the case en banc in December 2009 and affirmed the panel decision in March 2010. No further
appeals are possible.
Zyprexa Litigation
We have been named as a defendant in a large number of Zyprexa product liability lawsuits in the
U.S. and have been notified of many other claims of individuals who have not filed suit. The
lawsuits and unfiled claims (together the claims) allege a variety of injuries from the use of
Zyprexa, with the majority alleging that the product caused or contributed to diabetes or high
blood-glucose levels. The claims seek substantial compensatory and punitive damages and typically
accuse us of inadequately testing for and warning about side effects of Zyprexa. Many of the claims
also allege that we improperly promoted the drug. Almost all of the federal lawsuits are part of a
Multi-District Litigation (MDL) proceeding before The Honorable Jack Weinstein in the Federal
District Court for the Eastern District of New York (EDNY) (MDL No. 1596).
Since June 2005, we have entered into agreements with various claimants attorneys involved in
U.S. Zyprexa product liability litigation to settle a substantial majority of the claims. The
agreements cover a total of approximately 32,670 claimants, including a large number of previously
filed lawsuits and other asserted claims. The two primary settlements were as follows:
|
|
|
In 2005, we settled and paid more than 8,000 claims for $690.0 million, plus
$10.0 million to cover administration of the settlement. |
23
|
|
|
In 2007, we settled and paid more than 18,000 claims for approximately $500 million. |
We are prepared to continue our vigorous defense of Zyprexa in all remaining claims. The
U.S. Zyprexa product liability claims not subject to these agreements include approximately 145
lawsuits in the U.S. covering approximately 235 plaintiffs, of which about 120 cases covering about
130 plaintiffs are part of the MDL. The MDL cases have been scheduled for trial in groups, the
earliest trial groups have been tentatively scheduled for October and December 2010. We also have
trials scheduled in Texas state court in October and December 2010.
In January 2009, we reached resolution with the Office of the U.S. Attorney for the Eastern
District of Pennsylvania (EDPA), and the State Medicaid Fraud Control Units of 36 states and the
District of Columbia, of an investigation related to our U.S. marketing and promotional practices
with respect to Zyprexa. As part of the resolution, we pled guilty to one misdemeanor violation of
the Food, Drug, and Cosmetic Act for the off-label promotion of Zyprexa in elderly populations as
treatment for dementia, including Alzheimers dementia, between September 1999 and March 2001. We
recorded a charge of $1.42 billion for this matter in the third quarter of 2008. In 2009, we paid
substantially all of this amount, as required by the settlement agreements. As part of the
settlement, we have entered into a corporate integrity agreement with the Office of Inspector
General (OIG) of the U.S. Department of Health and Human Services (HHS), which requires us to
maintain our compliance program and to undertake a set of defined corporate integrity obligations
for five years. The agreement also provides for an independent third-party review organization to
assess and report on the companys systems, processes, policies, procedures, and practices.
In October 2008, we reached a settlement with 32 states and the District of Columbia related to a
multistate investigation brought under various state consumer protection laws. While there is no
finding that we have violated any provision of the state laws under which the investigations were
conducted, we accrued and paid $62.0 million and agreed to undertake certain commitments regarding
Zyprexa for a period of six years, through consent decrees filed with the settling states.
We have been served with lawsuits filed by the states of Alaska, Arkansas, Connecticut, Idaho,
Louisiana, Minnesota, Mississippi, Montana, New Mexico, Pennsylvania, South Carolina, Utah, and
West Virginia alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels,
and that we improperly promoted the drug. These suits seek to recover the costs paid for Zyprexa
through Medicaid and other drug-benefit programs, as well as the costs alleged to have been
incurred and that will be incurred by the states to treat Zyprexa-related illnesses. The
Connecticut, Idaho, Louisiana, Minnesota, Mississippi, Montana, New Mexico, and West Virginia cases
are part of the MDL proceedings in the EDNY. The Alaska case was settled in March 2008 for a
payment of $15.0 million, plus terms designed to ensure, subject to certain limitations and
conditions, that Alaska is treated as favorably as certain other states that may settle with us in
the future over similar claims. We have reached agreements to settle the Zyprexa-related claims of
all of these states except Minnesota, with which we are in advanced discussions. In the second and
third quarters of 2009, we incurred pretax charges of $105.0 million and $125.0 million,
respectively, reflecting the then-current probable and estimable exposures in connection with these
claims.
In 2005, two lawsuits were filed in the EDNY purporting to be nationwide class actions on behalf of
all consumers and third-party payors, excluding governmental entities, which have made or will make
payments for their members or insured patients being prescribed Zyprexa. These actions have now
been consolidated into a single lawsuit, which is brought under certain state consumer protection
statutes, the federal civil RICO statute, and common law theories, seeking a refund of the cost of
Zyprexa, treble damages, punitive damages, and attorneys fees. Two additional lawsuits were filed
in the EDNY in 2006 on similar grounds. As with the product liability suits, these lawsuits allege
that we inadequately tested for and warned about side effects of Zyprexa and improperly promoted
the drug. In September 2008, Judge Weinstein certified a class consisting of third-party payors,
excluding governmental entities and individual consumers. We appealed the
24
certification order, and Judge Weinsteins order denying our motion for summary judgment, in
September 2008. While the Second Circuit Court of Appeals heard oral arguments on the appeal in
December 2009, no opinions have been rendered. In 2007, The Pennsylvania Employees Trust Fund
brought claims in state court in Pennsylvania as insurer of Pennsylvania state employees who were
prescribed Zyprexa on similar grounds as described in the New York cases. In December 2009, the
court granted our summary judgment motion dismissing the case. The Pennsylvania Employees Trust
Fund has agreed to dismiss its appeal.
In early 2005, we were served with four lawsuits seeking class action status in Canada on behalf of
patients who took Zyprexa. One of these four lawsuits was certified for residents of Quebec, and a
second was certified in Ontario and includes all Canadian residents except for residents of Quebec
and British Columbia. The allegations in the Canadian actions were similar to those in the product
liability litigation pending in the U.S. We have reached agreement to resolve all Zyprexa
class-action litigation in Canada. No additional charges were recorded as a result of this
agreement.
We cannot determine with certainty the additional number of lawsuits and claims that may be
asserted. The ultimate resolution of Zyprexa product liability and related litigation could have a
material adverse impact on our consolidated results of operations, liquidity, and financial
position.
Other Product Liability Litigation
We have been named as a defendant in numerous other product liability lawsuits involving primarily
diethylstilbestrol (DES), thimerosal, and Byetta. Approximately half of these claims are covered by
insurance, subject to deductibles and coverage limits.
Product Liability Insurance
Because of the nature of pharmaceutical products, it is possible that we could become subject to
large numbers of product liability and related claims for other products in the future. In the past
several years, we have been unable to attain product liability insurance due to a very restrictive
insurance market. Therefore, for substantially all of our currently marketed products, we have been
and expect that we will continue to be completely self-insured for future product liability losses.
In addition, there is no assurance that we will be able to fully collect from our insurance
carriers in the future.
Environmental Matters
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 fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable
for the entire amount of the cleanup. We also continue remediation of certain of our own sites. We
have accrued for estimated Superfund cleanup costs, remediation, and certain other environmental
matters. This takes into account, as applicable, available information regarding site conditions,
potential cleanup methods, estimated costs, and the extent to which other parties can be expected
to contribute to payment of those costs. We have limited liability insurance coverage for certain
environmental liabilities.
25
Note 13:
Other - Net, Expense (Income)
Other - net, expense (income) comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
(Dollars in millions) |
Interest expense |
|
$ |
47.5 |
|
|
$ |
64.3 |
|
|
$ |
95.1 |
|
|
$ |
151.9 |
|
Interest income |
|
|
(11.0 |
) |
|
|
(18.8 |
) |
|
|
(21.6 |
) |
|
|
(46.2 |
) |
Other |
|
|
(18.1 |
) |
|
|
(21.4 |
) |
|
|
(129.6 |
) |
|
|
(10.9 |
) |
|
|
|
Other - net, expense (income) |
|
$ |
18.4 |
|
|
$ |
24.1 |
|
|
$ |
(56.1 |
) |
|
$ |
94.8 |
|
|
|
|
Other Income for the first six months of 2010 is primarily related to damages recovered
from generic pharmaceutical companies following Zyprexa patent litigation in Germany and a gain
related to the disposition of investment securities acquired in the ImClone acquisition.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
OPERATING RESULTS
Executive Overview
I. Financial Results
Our worldwide revenue increased 9 percent to $5.75 billion and $11.23 billion for the second
quarter and first six months of 2010, respectively, driven primarily by the increase in revenue
related to the collective growth of Alimta, Cymbalta, Zyprexa, Cialis® and Humalog®. Net income
for the second-quarter and the first six months of 2010 increased 16 percent and 5 percent, to
$1.35 billion and $2.60 billion, respectively, compared with the same periods of 2009. Earnings
per share for the second-quarter and the first six months of 2010 increased 15 percent and 4
percent to $1.22 per share and $2.35 per share, respectively, compared with the same periods of
2009. Net income for the second quarter and first six months of 2010 and 2009 was affected by
the following highlighted items:
2010
|
|
|
Due to the enactment of health care reform in the U.S. in March 2010, total revenue
decreased by approximately $60 million (pretax), or $.04 per share, in the first
quarter and approximately $70 million (pretax), or $.05 per share, in the second
quarter, as a result of higher rebates. We also recorded a one-time non-cash charge in
the first quarter of $85.1 million, or $.08 per share, associated with the imposition
of tax on the prescription drug subsidy of our U.S. retiree health plan. |
|
|
|
We incurred acquired IPR&D charges associated with the in-licensing arrangement with
Acrux Limited of $50.0 million (pretax), which decreased earnings per share by $.03 in
the first quarter. |
|
|
|
We recognized asset impairments, restructuring, and other special charges of $26.2
million (pretax) and $27.3 million (pretax) in the first and the second quarter,
respectively, primarily related to severance and other related costs from
previously announced strategic actions that we are taking to reduce our cost structure
and global workforce, which decreased earnings per share by $.02 in each quarter. |
2009
|
|
|
We incurred a pretax charge of $105.0 million representing the currently probable
and estimable exposures in connection with the claims of several states that did not |
26
|
|
|
participate in the EDPA settlement related to Zyprexa. This charge decreased earnings
per share by $.06 in the second quarter. |
II. Late-Stage Pipeline
Our long-term success depends, to a great extent, on our ability to continue to discover and
develop innovative pharmaceutical products and acquire or collaborate on compounds currently in
development by other biotechnology or pharmaceutical companies. We currently have nearly 70
potential new drugs in human testing and a larger number of projects in earlier stages of
development.
Our new molecular entities currently in Phase III clinical trial testing include the following:
|
|
|
Enzastaurin A small molecule for the treatment of diffuse large B-cell lymphoma |
GLP-1 Fc a glucagon-like peptide 1 analog for the treatment of type 2 diabetes
|
|
|
Necitumumab a fully human monoclonal antibody being investigated as a treatment for
non-small cell lung cancer |
|
|
|
Ramucirumab a monoclonal antibody being investigated as a treatment for breast and
gastric cancer |
Semagacestat a gamma secretase inhibitor for the treatment of Alzheimers disease
Solanezumab an a-beta antibody for the treatment of Alzheimers disease
Tasisulam a small-molecule compound for the treatment of melanoma
|
|
|
Teplizumab a monoclonal antibody for the treatment of type 1 diabetes |
Our new molecular entities that have been submitted for regulatory review include the following:
Arxxant a potential treatment for diabetic retinopathy
|
|
|
Axiron testosterone solution to be applied via an underarm applicator, a potential
treatment for testosterone deficiency |
Liprotamase a non-porcine pancreatic enzyme replacement therapy
The following are presented to provide updates on our late-stage pipeline developments that have
occurred this year:
Second Quarter
|
|
|
We signed a definitive merger agreement to acquire Alnara Pharmaceuticals,
Inc., a privately-held company developing protein therapeutics for the treatment of
metabolic diseases, for an upfront payment of $180 million, subject to adjustment based on
existing cash on hand at closing, and up to $200 million in additional payments contingent
upon potential future regulatory and commercial milestones. Alnaras lead product in
development is liprotamase, a non-porcine pancreatic enzyme replacement therapy (PERT).
Liprotamase is under review by the U.S. Food and Drug Administration (FDA) for the
treatment of exocrine pancreatic insufficiency (EPI). We completed this acquisition in July
2010. |
|
|
|
We, along with our partners Amylin and Alkermes, Inc., received a complete response
letter from the FDA for Bydureon, the proposed brand name for exenatide once weekly, and
submitted our response to the FDAs letter in April. The FDA classified the Bydureon
complete response as a Class 2 resubmission and assigned a new Prescription Drug User Fee
Act (PDUFA) action date of October 22, 2010. |
|
|
|
We, along with our partner, Kowa Pharmaceuticals America Inc., announced the
U.S. launch of Livalo®. In addition to a proper diet, Livalo is used for the treatment of
high cholesterol (primary hyperlipidemia or mixed dyslipidemia) in
adults.. |
|
|
|
The FDA announced that it will hold an advisory committee meeting to discuss
the supplemental New Drug Application (sNDA) for Cymbalta in chronic pain on August 19,
2010. |
27
First Quarter
|
|
|
We entered into an exclusive worldwide license agreement for the potential
commercialization of Acruxs experimental testosterone solution (proposed tradename
Axiron). The New Drug Application for Axiron is currently under regulatory review by the
FDA for the treatment of testosterone deficiency (hypogonadism) in men. |
|
|
|
|
We, along with our partners Amylin and Alkermes, Inc., submitted Bydureon for review by
the European Medicines Agency. |
III. Legal, Regulatory, and Other Matters
In September 2009, we set a goal to reduce our expected cost structure by $1 billion by the end of
2011. This savings will come from a series of actions, including reducing a targeted 5,500
positions by the end of 2011 (excluding strategic sales force additions in high-growth emerging
markets and Japan), outsourcing activities, and consolidating certain activities to become more
efficient. We expect the majority of the savings to occur in the marketing, selling, and
administrative line item in the consolidated statement of operations, and to a lesser extent, cost
of sales and research and development.
The U.S. District Court for the Southern District of Indiana has upheld
our compound patent for Gemzar (exclusivity based on this patent expires on November 15, 2010). The U.S. District Court for the
Eastern District of Michigan granted a motion for partial summary judgment in August 2009, invalidating our U.S. method-of-use patent
for Gemzar (expiring in 2013) and on July 28, 2010, the Court of Appeals for the Federal Circuit affirmed that decision. We will
consider other legal options, including seeking reconsideration by the full Federal Circuit. Nevertheless, some of the generic companies
have tentative or final marketing approval for generic gemcitabine, and therefore we expect generic gemcitabine to be introduced to the
U.S. market as soon as mid-November 2010, following the expiration of the compound patent.
Trial was held May 2010 in the U.S. District Court for the District of New Jersey on the validity
of our Strattera method-of-use patent, which expires in 2017. We are waiting for a decision.
Several generic companies have tentative approval to market generic atomoxetine.
The enactment of the Patient Protection and Affordable Care Act and The Health Care and
Education Reconciliation Act of 2010 in March 2010 brings significant changes to U.S. health care.
These changes began to affect our financial results in the first quarter of 2010 and will continue
to have significant impact on our results in the future. Changes to the rebates that are currently
provided for prescription drugs sold to Medicaid beneficiaries, which increase the minimum
statutory rebate for branded drugs from 15.1 percent to 23.1 percent, are generally effective in
the first quarter. This rebate has been expanded to managed-Medicaid, a program which provides for
the delivery of Medicaid benefits via managed care organizations, under arrangements between these
organizations and state Medicaid agencies. Additionally, a prescription drug discount program for
outpatient drugs in certain types of health care facilities that serve low-income and uninsured
patients (known as 340B facilities) has been expanded. Also, there are changes to the subsidy paid
by the government to employers who provide their retirees with a drug benefit at least equivalent
to the Medicare Part D drug benefit. Beginning in 2013, the federal government will tax the subsidy
it provides to such employers. While this tax will not take effect for three more years, accounting
rules dictate that we record this future tax liability as a one-time non-cash charge upon enactment
of the tax law change. In addition, the federal government created an expedited regulatory approval
pathway for biosimilars or follow-on biologics (copies of biological compounds) in the U.S.
Biologics will have up to 12.5 years of data-package protection following launch.
Beginning in 2011, drug manufacturers will provide a discount of 50 percent of the cost of branded
prescription drugs for Medicare Part D participants who are in the doughnut hole (the coverage
gap in Medicare prescription drug coverage). The doughnut hole will be phased out between 2011 and
2020. Additionally, beginning in 2011, a nondeductible annual fee will be imposed on pharmaceutical
manufacturers and importers that sell branded prescription drugs to
28
specified government programs.
This fee is allocated to companies based on their prior calendar year market share for branded
prescription drug sales into these government programs. Regulations have not been drafted to
implement the various elements of this legislation.
In its budget submission to Congress in February 2010, the Obama administration proposed changes to
the manner in which the U.S. would tax the international income of U.S.-based companies. In
addition, the recently proposed American Jobs and Closing Tax Loopholes Act of 2010 also proposes
changes to the manner in which the U.S. would tax U.S.-based companies with foreign-source income.
While it is uncertain how the U.S. Congress may address these matters, reform of U.S. taxation,
including taxation of international income, continues to be a topic of discussion for the U.S.
Congress. A significant change to the U.S. tax system, including changes to the taxation of
international income, could have a material adverse effect on our consolidated results of
operations.
Certain other federal and state health care reform proposals may continue to be debated, and could
place downward pressure on pharmaceutical industry sales or prices. These proposals include
legalizing the importation of prescription drugs and other cost-control strategies. We expect
pricing pressures at state levels to become more severe, which could have a material adverse effect
on our consolidated results of operations.
International operations also are generally subject to extensive price and market regulations, and
several European countries have recently required either price decreases or rebate increases in
response to economic pressures. There are proposals for cost-containment measures pending in a
number of additional countries, including proposals that would directly or indirectly impose
additional price controls, limit access to or reimbursement for our products, or reduce the value
of our intellectual property protection. These proposals are expected to increase in both frequency
and impact, given the effect of the downturn in the global economy on local governments.
Revenue
Revenue for the second quarter and the first six months of 2010 increased 9 percent to $5.75
billion and $11.23 billion, respectively, driven primarily by the increase in revenue related
to the collective growth of Alimta, Cymbalta, Zyprexa, Cialis and Humalog. Revenue in the U.S.
increased by $246.7 million, or 8 percent, and $408.6 million, or 7 percent, for the second
quarter and first six months of 2010, respectively, compared with the same periods of 2009
due to higher prices offset in part by approximately $70 million and approximately $130
million in the second quarter and first six months of 2010, respectively, in higher rebates
resulting from U.S. health care reform and, to a lesser extent, increased volume. Revenue
outside the U.S. increased $209.1 million, or 9 percent, and $485.9 million, or 11 percent, for
the second quarter and first six months of 2010, respectively, compared with the same periods
of 2009 due to increased demand and, to a lesser extent, the positive impact of
foreign exchange rates, partially offset by lower prices. For the second quarter, worldwide
sales volume increased 5 percent; selling prices increased 2 percent; and the favorable impact
of foreign exchange rates contributed 1 percent of revenue growth; (numbers do not add due to
rounding). For the first six months of 2010, worldwide sales volume increased 5 percent; the
favorable impact of foreign exchange rates contributed 2 percent of revenue growth; and selling
prices increased 2 percent.
The following tables summarize our revenue activity for the three- and six-month periods ended
June 30, 2010 and 2009:
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Three Months Ended |
|
|
Ended |
|
|
|
|
June 30, 2010 |
|
|
June 30, |
|
Percent |
|
|
|
|
|
|
Outside |
|
|
|
|
|
2009 |
|
Change |
Product |
|
U.S.1 |
|
U.S. |
|
Total2 |
|
Total |
|
from 2009 |
|
|
|
(Dollars in millions) |
Zyprexa |
|
$ |
638.2 |
|
|
$ |
624.7 |
|
|
$ |
1,262.9 |
|
|
$ |
1,203.2 |
|
|
|
5 |
|
Cymbalta |
|
|
707.9 |
|
|
|
159.8 |
|
|
|
867.7 |
|
|
|
744.4 |
|
|
|
17 |
|
Alimta |
|
|
253.6 |
|
|
|
298.3 |
|
|
|
551.8 |
|
|
|
385.3 |
|
|
|
43 |
|
Humalog |
|
|
299.7 |
|
|
|
205.0 |
|
|
|
504.6 |
|
|
|
477.5 |
|
|
|
6 |
|
Cialis |
|
|
165.2 |
|
|
|
253.5 |
|
|
|
418.7 |
|
|
|
363.6 |
|
|
|
15 |
|
Animal health products |
|
|
185.0 |
|
|
|
139.1 |
|
|
|
324.2 |
|
|
|
275.4 |
|
|
|
18 |
|
Gemzar |
|
|
189.8 |
|
|
|
103.6 |
|
|
|
293.4 |
|
|
|
353.2 |
|
|
|
(17 |
) |
Humulin® |
|
|
115.3 |
|
|
|
150.0 |
|
|
|
265.2 |
|
|
|
248.1 |
|
|
|
7 |
|
Evista |
|
|
175.6 |
|
|
|
83.9 |
|
|
|
259.5 |
|
|
|
251.3 |
|
|
|
3 |
|
Forteo® |
|
|
131.4 |
|
|
|
78.2 |
|
|
|
209.6 |
|
|
|
203.3 |
|
|
|
3 |
|
Strattera |
|
|
100.4 |
|
|
|
46.7 |
|
|
|
147.1 |
|
|
|
142.8 |
|
|
|
3 |
|
Other pharmaceutical
products |
|
|
179.7 |
|
|
|
304.5 |
|
|
|
484.6 |
|
|
|
465.2 |
|
|
|
4 |
|
|
|
|
|
|
|
Total net product sales |
|
|
3,141.8 |
|
|
|
2,447.3 |
|
|
|
5,589.3 |
|
|
|
5,113.3 |
|
|
|
9 |
|
Collaboration and other
revenue3 |
|
|
119.9 |
|
|
|
39.5 |
|
|
|
159.4 |
|
|
|
179.5 |
|
|
|
(11 |
) |
|
|
|
|
|
|
Total revenue |
|
$ |
3,261.7 |
|
|
$ |
2,486.8 |
|
|
$ |
5,748.7 |
|
|
$ |
5,292.8 |
|
|
|
9 |
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
Six Months Ended |
|
|
Ended |
|
|
|
|
June 30, 2010 |
|
|
June 30, |
|
Percent |
|
|
|
|
|
|
Outside |
|
|
|
|
|
2009 |
|
Change |
Product |
|
U.S.1 |
|
U.S. |
|
Total2 |
|
Total |
|
from 2009 |
|
|
|
(Dollars in millions) |
Zyprexa |
|
$ |
1,221.7 |
|
|
$ |
1,256.2 |
|
|
$ |
2,477.9 |
|
|
$ |
2,326.2 |
|
|
|
7 |
|
Cymbalta |
|
|
1,358.5 |
|
|
|
312.4 |
|
|
|
1,670.9 |
|
|
|
1,453.7 |
|
|
|
15 |
|
Alimta |
|
|
476.3 |
|
|
|
602.9 |
|
|
|
1,079.2 |
|
|
|
720.6 |
|
|
|
50 |
|
Humalog |
|
|
609.5 |
|
|
|
401.5 |
|
|
|
1,011.0 |
|
|
|
928.0 |
|
|
|
9 |
|
Cialis |
|
|
315.1 |
|
|
|
511.9 |
|
|
|
827.0 |
|
|
|
722.4 |
|
|
|
14 |
|
Animal health products |
|
|
342.8 |
|
|
|
271.0 |
|
|
|
613.8 |
|
|
|
539.5 |
|
|
|
14 |
|
Gemzar |
|
|
363.5 |
|
|
|
217.7 |
|
|
|
581.2 |
|
|
|
721.0 |
|
|
|
(19 |
) |
Humulin |
|
|
229.8 |
|
|
|
293.2 |
|
|
|
523.0 |
|
|
|
488.7 |
|
|
|
7 |
|
Evista |
|
|
333.9 |
|
|
|
167.2 |
|
|
|
501.1 |
|
|
|
508.2 |
|
|
|
(1 |
) |
Forteo |
|
|
248.3 |
|
|
|
155.8 |
|
|
|
404.1 |
|
|
|
390.7 |
|
|
|
3 |
|
Strattera |
|
|
203.3 |
|
|
|
90.2 |
|
|
|
293.5 |
|
|
|
301.7 |
|
|
|
(3 |
) |
Other pharmaceutical
products |
|
|
345.5 |
|
|
|
593.6 |
|
|
|
939.1 |
|
|
|
904.4 |
|
|
|
4 |
|
|
|
|
|
|
|
Total net product sales |
|
|
6,048.2 |
|
|
|
4,873.6 |
|
|
|
10,921.8 |
|
|
|
10,005.1 |
|
|
|
9 |
|
Collaboration and other
revenue3 |
|
|
247.3 |
|
|
|
65.1 |
|
|
|
312.4 |
|
|
|
334.7 |
|
|
|
(7 |
) |
|
|
|
|
|
|
Total revenue |
|
$ |
6,295.5 |
|
|
$ |
4,938.7 |
|
|
$ |
11,234.2 |
|
|
$ |
10,339.8 |
|
|
|
9 |
|
|
|
|
|
1 |
|
U.S. revenue includes revenue in Puerto Rico. |
|
2 |
|
Numbers may not add due to rounding. |
|
3 |
|
Collaboration and other revenue is primarily composed of Erbitux royalties and 50
percent of Byettas gross margin in the U.S. |
Product Highlights
Zyprexa, our top-selling product, is a treatment for schizophrenia, acute mixed or manic episodes
associated with bipolar I disorder, and bipolar maintenance. In the second quarter and first six
months of 2010, Zyprexa sales in the U.S. increased 10 percent and 9 percent, respectively,
compared with the same periods of 2009, driven by higher prices, partially offset by lower demand
in the second quarter. Sales outside the U.S. increased 1 percent and 4 percent for the second
quarter and first six months of 2010, respectively, with the changes driven by the favorable
impact of foreign exchange rates and increased demand, partially offset by lower prices. For the
first six months of 2010, demand outside the U.S. was favorably affected by the withdrawal of
generic competition in Germany in early 2009.
U.S. sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic
peripheral neuropathic pain, generalized anxiety disorder, and fibromyalgia, increased 14 percent
and 12 percent during the second quarter and first six months of 2010, respectively, driven by
higher prices and increased volume. Sales outside the U.S. increased 30 percent and 33 percent
during the second quarter and first six months of 2010, respectively, compared to the same periods
in 2009, driven primarily by increased demand, including the effect of recent launches in Japan and
Canada.
31
U.S. sales of Alimta, a treatment for various cancers, increased 28 percent during the second
quarter and first six months of 2010, respectively, due to increased demand. Sales outside the U.S.
increased 60 percent and 73 percent for the same periods, due to increased demand. Demand outside
the U.S. was favorably affected by the approval in the second quarter of 2009 of the non-small cell
lung cancer indication in Japan.
U.S. sales of Humalog, our injectable human insulin analog for the treatment of diabetes, increased
3 percent and 5 percent during the second quarter and first six months of 2010, respectively, with
the second quarter increase driven by increased volume, partially offset by lower net effective
selling prices. The increase for the first six months of 2010 was due to increased demand and, to a
lesser extent, higher prices. Sales outside the U.S. increased 10 percent and 15 percent for the
second quarter and first six months of 2010, respectively, driven by increased demand
and, to a lesser extent, the favorable impact of foreign exchange rates.
U.S. sales of Cialis, a treatment for erectile dysfunction, increased 11 percent and 6 percent
during the second quarter and first six months of 2010, respectively, with the second quarter
increase primarily driven by higher prices, and increased volume. The increase for the first six
months was due to higher prices. Sales outside the U.S. increased 18 percent and 21 percent for
the same periods, with the second quarter increase driven by increased demand. The increase for the
first six months was due to increased demand and, to a lesser extent, the favorable impact of
foreign exchange rates.
U.S. sales of Gemzar, a product approved to treat various cancers,
decreased 3 percent and remained essentially flat during the second quarter and first six months of 2010, respectively, with the
second quarter decrease due to due to lower net effective selling prices. The results in the first six months of 2010 were driven by
lower net effective selling prices offset by increased volume. Sales outside the U.S. decreased 34 percent and 39 percent for the second
quarter and first six months of 2010, respectively, due to lower demand and lower prices as a result of the entry of generic competition
in most major markets. The U.S. Gemzar method-of-use patent has been held invalid by the Court of Appeals for the Federal Circuit, and
various generic manufacturers have tentative or final FDA approval to market generic gemcitabine. Therefore, we expect generic gemcitabine
to be introduced to the U.S. market as soon as mid-November 2010, following the expiration of the compound patent on November 15, 2010.
While it is difficult to predict the precise impact on Gemzar sales, the introduction of generics would result in a rapid and severe
decline in our U.S. Gemzar sales.
U.S. sales of Humulin, an injectable human insulin for the treatment of diabetes, increased 21
percent and 18 percent during the second quarter and first six months of 2010, respectively, driven
by higher prices and, to a lesser extent, increased demand. Sales outside the U.S. decreased 2
percent and remained essentially flat for the second quarter and first six months of 2010,
respectively, with the second quarter decrease driven by lower prices, partially offset by the
favorable impact of foreign exchange rates. The favorable impact of foreign exchange rates for the
first six months of 2010 was offset by lower prices and lower demand.
U.S. sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal
women and for reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis
and postmenopausal women at high risk for invasive breast cancer, increased 4 percent and 1 percent
during the second quarter and first six months of 2010, respectively, due to higher prices,
partially offset by decreased demand. Sales outside the U.S. increased 1 percent for the second
quarter and decreased 5 percent for the first six months of 2010, respectively, with second quarter
increases driven by the favorable impact of foreign exchange rates, partially offset by decreased
demand. The decrease during the first six months of 2010 was due to decreased demand and, to a
lesser extent, lower prices, partially offset by the favorable impact of foreign exchange rates.
U.S. sales of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at
high risk for fracture, remained essentially flat and decreased 2 percent during the second quarter
and first six months of 2010, respectively, with higher net effective selling prices being offset
by decreased demand in the second quarter. The decrease in the first six months of 2010 is due to
decreased demand partially offset by higher prices. Sales outside the U.S. increased 10 percent and
14 percent for the second quarter and first six months of 2010, respectively, due to
32
increased
demand and, to a lesser extent for the first six months of 2010, the favorable impact of foreign
exchange rates.
U.S. sales of Strattera, a treatment of attention-deficit hyperactivity disorder in children,
adolescents, and adults, decreased 5 percent and 8 percent during the second quarter and first six
months of 2010, respectively, due primarily to decreased demand. Sales outside the U.S. increased
26 percent and 12 percent for the second quarter and first six months of 2010, respectively, with
the increase for the second quarter driven by increased demand. The increase in the first six
months of 2010 was due to increased demand and, to a lesser extent, the favorable impact of foreign
exchange rates, partially offset by lower prices.
Worldwide sales of Byetta, an injectable product for the treatment of type 2 diabetes, decreased
13 percent and 5 percent to $178.8 million and $366.8 million during the second quarter and first
six months of 2010, respectively. The decrease in the second quarter was due to competitive
pressures. We report as revenue our 50 percent share of Byettas gross margin in the U.S., 100
percent of Byetta sales outside the U.S., and our sales of Byetta pen delivery devices to Amylin.
Our revenues decreased 7 percent to $106.9 million for the second quarter and increased 5 percent
to $222.7 million during first six months of 2010, respectively.
We report as revenue for Erbitux, a product approved to treat various cancers, the net royalties
received from our collaboration partners and our product sales. Our revenues increased 4 percent
and 1 percent to $103.8 million and $196.2 million during the second quarter and first six months
of 2010, respectively.
Animal health product sales in the U.S. increased 20 percent and 11 percent during the second
quarter and first six months of 2010, respectively, primarily due to higher demand. Sales outside
the U.S. increased 15 percent and 17 percent during the second quarter and first six months of
2010, respectively, driven primarily by increased demand and, to a lesser extent, the favorable
impact of foreign exchange rates.
Gross Margin, Costs, and Expenses
For the second quarter of 2010, gross margins as a percent of total revenue were essentially flat
at 82.2 percent. For the first six months of 2010, gross margins as a percentage of total revenue
decreased by 2 percentage points, to 80.9 percent. This decrease was due to the impact of changes
in foreign currencies compared to the U.S. dollar on international inventories sold, which
increased cost of sales in the first six months of 2010, but substantially decreased cost of sales
in the first six months of 2009.
Marketing, selling, and administrative expenses increased 3 percent to $1.76 billion for the second
quarter, and 4 percent to $3.37 billion for the first six months of 2010. The increase for both
periods was driven by higher marketing and selling expenses outside the U.S. and the impact of
foreign exchange rates, partially offset by lower litigation and other administrative expenses.
Research and development expenses were $1.19 billion and $2.23 billion for the second quarter and
first six months of 2010, respectively. Compared with the same periods of 2009, research and
development expenses grew
14 percent and 12 percent for the second quarter and first six months of 2010, respectively, due
primarily to increased costs of late-stage clinical trials in both periods and associated
development milestones in the second quarter.
Acquired IPR&D charges were $50.0 million in the first six months of 2010, all of which was
associated with the in-license from Acrux in the first quarter. We did not have any acquired IPR&D
charges in either the second quarter or first six months of 2009. We incurred $27.3 million and
$53.5 of asset impairments, restructuring, and other special charges in the second quarter and
first six months of 2010, respectively, compared with $105.0 million for the same periods in 2009.
See Notes 3 and 5 to the consolidated condensed financial statements for additional information.
33
Other - net, expense (income) improved $5.7 million and $150.9 million, to a net expense of $18.4
million and a net income of $56.1 million for the second quarter and first six months of 2010,
respectively, primarily due to lower net interest expense in both periods, and damages recovered
from generic pharmaceutical companies following Zyprexa patent litigation in Germany and a gain
related to the disposition of investment securities acquired in the ImClone acquisition in the
first six months.
The effective tax rate was 22.3 percent and 24.6 percent in the second quarter and first six months
of 2010, respectively, compared with an effective tax rate of 21.1 percent and 21.6 percent in the
second quarter and first six months of 2009, respectively. The increase in the effective tax rate
was driven by a one-time charge of $85.1 million associated with the imposition of tax on the
prescription drug subsidy of our U.S. retiree health plan as part of U.S. health care reform in the
first six months, as well as the expiration of the research and development tax credit in the U.S.
at the end of 2009, which affected both periods.
Earnings per share growth of 15 percent for the second quarter was higher than revenue growth of 9
percent for the same period primarily due to lower asset impairments, restructuring, and other
special charges as well as lower administrative expenses. Earnings per share growth of 4 percent
for the first six months of 2010 was lower than revenue growth of 9 percent for the same period
due to cost of sales growing at a faster rate than revenue and the one-time charge of $85.1 million
associated with the imposition of tax on the prescription drug subsidy of our U.S. retiree health
plan as part of U.S. health care reform.
FINANCIAL CONDITION
As of June 30, 2010, cash, cash equivalents, and short-term investments totaled $5.20 billion
compared with $4.50 billion at December 31, 2009. The increase in cash is driven by cash flow
from operations of $2.87 billion, partially offset by dividends paid of $1.08 billion,
acquisitions of $598.4 million and net purchases of property and equipment of $279.3 million.
Total debt as of June 30, 2010 increased by $226.8 million compared with December 31, 2009, to
$6.89 billion. Our current debt ratings from Standard & Poors and Moodys remain at AA and A1,
respectively.
As of the second quarter of 2010, the U.S. and global economic recoveries continue but face
additional macroeconomic headwinds. U.S. consumer confidence remains fragile, though unemployment
is expected to continue to decline through 2010 and 2011. The U.S. Federal Reserve continues to
keep interest rates low to stimulate lending and economic growth. Although many economists
believe that the U.S. economy will see moderate growth with low inflation through 2011, recent
U.S. economic data has been below expectations, prompting renewed concern about the
sustainability and pace of the economic recovery. High sovereign debt levels and efforts at
fiscal austerity in the U.S. and other developed countries continue to be a concern for many
economists and are predicted to slow economic recovery globally. In addition, both private and
public health care payers are facing heightened fiscal challenges due to the economic slowdown
and are taking aggressive steps to reduce the costs of care, including pressures for increased
pharmaceutical discounts and rebates and efforts to drive greater use of generic drugs. We
continue to monitor the potential near-term impact of the economic slowdown on prescription
trends, the creditworthiness of our wholesalers and other customers and
suppliers, the uncertain impact of recent health care legislation, the federal governments
involvement in the economic crisis, and various international government funding levels.
We believe that cash generated from operations, along with available cash and cash equivalents,
will be sufficient to fund our normal operating needs, including debt service, capital
expenditures, acquisition activity, costs associated with litigation and government
investigations, and dividends in 2010. We believe that amounts accessible through existing
commercial paper markets should be adequate to fund short-term borrowings. Our access to
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credit
markets has not been adversely affected by the illiquidity in the markets because of the high
credit quality of our short- and long-term debt. We currently have $1.24 billion of unused
committed bank credit facilities, $1.20 billion of which backs our commercial paper program and
matures in May 2011. Various risks and uncertainties, including those discussed in the Financial
Expectations for 2010 section, may affect our operating results and cash generated from
operations.
We depend on patents or other forms of intellectual property protection for most of our revenues,
cash flows, and earnings. In the next three years we will lose effective exclusivity for Zyprexa
in major European countries (September 2011) and the U.S. (October 2011); and for Humalog in
major European countries (November 2010). Gemzar has already lost effective exclusivity in major
European countries and we expect to lose effective exclusivity in the U.S. in November 2010. In addition, we face U.S. patent litigation over several key patent-protected
products whose exclusivity extends beyond 2012, including Alimta, Cymbalta, Evista, and
Strattera, and it is possible we could face an unexpected loss of our effective exclusivity for
one or more of these products prior to the end of 2012. See the Hatch Waxman patent litigation
discussion in Note 12 and in the Legal and Regulatory Matters section below. Revenue from each
of these products contributes materially to our results of operations, liquidity, and financial
position, and the loss of exclusivity would result in a rapid and severe decline in revenue from
the affected product, which would have a material adverse effect on our results of operations.
However, our goal is to partially mitigate the effect on our operations, liquidity, and financial
position through growth in our patent-protected products that do not lose exclusivity during this period, the emerging markets, Japan, and our
animal health segment and the previously announced goal to reduce our expected cost structure by
$1 billion by the end of 2011.
LEGAL AND REGULATORY MATTERS
We are a party to various legal actions and government investigations.
The most significant of these are described below. While it is not possible to determine the
outcome of these matters, we believe that, except as specifically noted below, the resolution of
all such matters will not have a material adverse effect on our consolidated financial position or
liquidity, but could possibly be material to our consolidated results of operations in any one
accounting period.
Patent Litigation
We are engaged in the following U.S. patent litigation matters brought pursuant to procedures set
out in the Hatch-Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
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Cymbalta: Sixteen generic drug manufacturers have submitted Abbreviated New Drug
Applications (ANDAs) seeking permission to market generic versions of Cymbalta prior to the
expiration of our relevant U.S. patents (the earliest of which expires in 2013). Of these
challengers, all allege non-infringement of the patent claims directed to the commercial
formulation, and nine allege invalidity of the patent claims directed to the active
ingredient duloxetine. Of the nine challengers to the compound patent claims, one further
alleges invalidity of the claims directed to the use of Cymbalta for treating fibromyalgia,
and one alleges the patent having claims directed to the active ingredient is
unenforceable. In November 2008 we filed lawsuits in U.S. District Court for the Southern
District of Indiana against Actavis Elizabeth LLC; Aurobindo Pharma Ltd.; Cobalt
Laboratories, Inc.; Impax Laboratories, Inc.; Lupin Limited; Sandoz Inc.; and Wockhardt
Limited, seeking rulings that the patents are valid, infringed, and enforceable. We filed
similar lawsuits in the same court against Sun Pharma Global, Inc. in December 2008 and
against Anchen Pharmaceuticals, Inc. in August 2009. The cases have been consolidated and
actions against all but Wockhardt Limited have been stayed pursuant to stipulations by the
defendants to be bound by the outcome of the litigation through appeal. |
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Gemzar: Mayne Pharma (USA) Inc., now Hospira, Inc. (Hospira); Fresenius Kabi Oncology
Plc (Fresenius); Sicor Pharmaceuticals, Inc., now Teva Parenteral Medicines, Inc. (Teva);
Actavis Elizabeth LLC and Actavis Totowa LLC (Actavis); and Sun Pharmaceutical Industries
Inc. (Sun) each submitted one or more abbreviated marketing applications seeking permission
to market generic versions of Gemzar prior to the expiration of our relevant U.S. patents
(compound patent expiring in 2010 and method-of-use patent expiring in 2013), and alleging
that these patents are invalid. Sandoz Inc. (Sandoz) and APP Pharmaceuticals, LLC (APP)
have similarly challenged our method-of-use patent. We filed lawsuits in the U.S. District
Court for the Southern District of Indiana against Teva (February 2006), Hospira (October
2006, January 2008, and March 2010), APP (December 2009), Fresenius (February 2010), and
Actavis (June 2010), seeking rulings that our patents are valid and are being infringed. In
November 2007, Sun filed a declaratory judgment action in the U.S. District Court for the
Eastern District of Michigan, seeking rulings that our method-of-use and compound patents
are invalid or unenforceable, or would not be infringed by the sale of Suns generic
product. The status of these cases is as follows: |
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In August 2009, the district court in Michigan granted a motion by Sun for partial summary judgment,
invalidating our method-of-use patent. We appealed this decision, and on July 28, 2010, a panel of the Court of
Appeals for the Federal Circuit affirmed the district courts ruling. We disagree with the decision and will consider
other legal options, including seeking reconsideration by the full Federal Circuit. Nevertheless, some of the generic
companies, including Sun and Teva, have tentative or final marketing approval for generic gemcitabine, and therefore we
expect generic gemcitabine to be introduced to the U.S. market as soon as mid-November 2010, following the expiration of
the compound patent on November 15, 2010. |
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The trial against Teva was held in September 2009. In March 2010, the district court
in Indiana upheld the validity of our compound patent. The court also ruled in our favor
on all invalidity theories brought forward by Teva on our method-of-use patent, except
for obviousness-type double patenting. The court applied collateral estoppel with regard
to this theory, given the ruling in the Sun case. Tevas ANDAs have been approved by the
FDA. |
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Two suits against Hospira have been administratively closed, and the parties have
agreed to be bound by the results of the Teva suit. The remaining suit is in the early
stages. |
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APP filed a motion to dismiss our suit, based on the decision in the Sun case. APPs
ANDA has received tentative approval from the FDA, but APP is prohibited from entering
the market by a 30-month stay, which expires in May 2012. |
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The Fresenius and Actavis cases are in the early stages. |
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Alimta: Teva Parenteral Medicines, Inc. (Teva), APP, and Barr Laboratories, Inc. (Barr)
each submitted ANDAs seeking approval to market generic versions of Alimta prior to the
expiration of the relevant U.S. patent (licensed from the Trustees of Princeton University
and expiring in 2016), and alleging the patent is invalid. We, along with Princeton, filed
lawsuits in the U.S. District Court for the District of Delaware against Teva, APP, and
Barr seeking rulings that the compound patent is valid and infringed. Trial is scheduled
for November 2010 against Teva and APP. |
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Evista: In 2006, Teva Pharmaceuticals USA, Inc. (Teva) submitted an ANDA seeking
permission to market a generic version of Evista prior to the expiration of our relevant
U.S. patents (expiring in 2012-2017) and alleging that these patents are invalid, not
enforceable, or not infringed. In June 2006, we filed a lawsuit against Teva in the
U.S. District Court for the Southern District of Indiana, seeking a ruling that these
patents are valid, enforceable, and being infringed by Teva. The trial against Teva was
completed in March 2009. In September 2009, the court upheld our method-of-use patents (the
last expires in 2014) and Teva has appealed that ruling. In addition, the court held that
our particle-size |
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patents (expiring 2017) are invalid, and we have appealed that ruling.
InvaGen Pharmaceuticals, Inc. (InvaGen) submitted an ANDA in 2008 seeking approval to
market a generic version of Evista prior to the expiration of the particle-size patents at
issue in the Teva matter. We filed suit against InvaGen in January 2009 in the U.S.
District Court for the Southern District of Indiana. That action has been stayed pending
the outcome of the Teva appeal. Watson Laboratories Inc. (Watson) also submitted an ANDA
in March of 2010 seeking approval to market
a generic version of Evista prior to the expiration of the particle-size patents at issue in
the Teva matter. We filed suit against Watson in May 2010 in the U.S. District Court for the
Southern District of Indiana. |
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Strattera: Actavis Elizabeth LLC (Actavis), Apotex Inc. (Apotex), Aurobindo Pharma Ltd.
(Aurobindo), Mylan Pharmaceuticals Inc. (Mylan), Sandoz Inc. (Sandoz), Sun Pharmaceutical
Industries Limited (Sun), and Teva Pharmaceuticals USA, Inc. (Teva) each submitted an ANDA
seeking permission to market generic versions of Strattera prior to the expiration of our
relevant U.S. patent (expiring in 2017), and alleging that this patent is invalid. In 2007,
we brought a lawsuit against Actavis, Apotex, Aurobindo, Mylan, Sandoz, Sun, and Teva in
the United States District Court for the District of New Jersey. The court has ruled on all
pending summary judgment motions, and granted our infringement motion. The remaining
invalidity defenses were heard at trial in May 2010. We are waiting for a decision. Several
companies have received tentative approval to market generic atomoxetine, but are
prohibited from entering the market by a 30-month stay that expires in November 2010.
An adverse court decision prior to November 2010 would terminate the stay and enable
one or more companies to launch generic atomoxetine. |
We believe each of these Hatch-Waxman challenges is without merit and expect to prevail in this
litigation. However, it is not possible to determine the outcome of this litigation, and
accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in any of
these cases could have a material adverse impact on our future consolidated results of operations,
liquidity, and financial position.
We have received challenges to Zyprexa patents in a number of countries outside the U.S.:
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In Canada, several generic pharmaceutical manufacturers have challenged the validity of
our Zyprexa patent (expiring in 2011). In April 2007, the Canadian Federal Court ruled
against the first challenger, Apotex Inc. (Apotex), and that ruling was affirmed on appeal
in February 2008. In June 2007, the Canadian Federal Court held that an invalidity
allegation of a second challenger, Novopharm Ltd. (Novopharm), was justified and denied our
request that Novopharm be prohibited from receiving marketing approval for generic
olanzapine in Canada. Novopharm began selling generic olanzapine in Canada in the third
quarter of 2007. In September 2009, the Canadian Federal Court ruled against us in the
Novapharm suit, finding our patent invalid. We appealed this decision, and in July 2010 the
appeals court set aside the decision and remitted it to the trial court. |
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In Germany, the German Federal Supreme Court upheld the validity of our Zyprexa patent
(expiring in 2011) in December 2008, reversing an earlier decision of the Federal Patent
Court. Following the decision of the Supreme Court, the generic companies who launched
generic olanzapine based on the earlier decision either agreed to withdraw from the market
or were subject to injunction. We have negotiated settlements of the damages arising from
infringement with most of the generic companies. |
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We have received challenges in a number of other countries, including Spain, Austria,
Australia, Portugal, and several smaller European countries. In Spain, we have been
successful at both the trial and appellate court levels in defeating the generic
manufacturers challenges, but additional actions against multiple generic companies are
now pending. In March 2010, the District Court of Hague ruled against us and revoked our
compound patent in the Netherlands. We have appealed this decision. We have also
successfully defended Zyprexa patents in Austria and Portugal. |
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We are vigorously contesting the various legal challenges to our Zyprexa patents on a
country-by-country basis. We cannot determine the outcome of this litigation. The availability of
generic olanzapine in additional markets could have a material adverse impact on our consolidated
results of operations.
Xigris and Evista: In June 2002, Ariad Pharmaceuticals, Inc. (Ariad), the Massachusetts Institute
of Technology, the Whitehead Institute for Biomedical Research, and the President and Fellows of
Harvard College in the U.S. District Court for the District of Massachusetts sued us, alleging that
sales of two of our products, Xigris and Evista, were inducing the infringement of a patent related
to the discovery of a natural cell signaling phenomenon in the human body, and seeking royalties on
past and future sales of these products. Following jury and bench trials on separate issues, the
U.S. District Court of
Massachusetts entered final judgment in September 2007 that Ariads claims were valid, infringed,
and enforceable, and finding damages in the amount of $65 million plus a 2.3 percent royalty on net
U.S. sales of Xigris and Evista since the time of the jury decision. However, the court deferred
the requirement to pay any damages until after all rights to appeal are exhausted. In April 2009,
the Court of Appeals for the Federal Circuit overturned the District Court judgment, concluding
that Ariads asserted patent claims are invalid. The Court of Appeals reheard the case en banc in
December 2009 and affirmed the panel decision in March 2010. No further appeals are possible.
Zyprexa Litigation
We have been named as a defendant in a large number of Zyprexa product liability lawsuits in the
U.S. and have been notified of many other claims of individuals who have not filed suit. The
lawsuits and unfiled claims (together the claims) allege a variety of injuries from the use of
Zyprexa, with the majority alleging that the product caused or contributed to diabetes or high
blood-glucose levels. The claims seek substantial compensatory and punitive damages and typically
accuse us of inadequately testing for and warning about side effects of Zyprexa. Many of the claims
also allege that we improperly promoted the drug. Almost all of the federal lawsuits are part of a
Multi-District Litigation (MDL) proceeding before The Honorable Jack Weinstein in the Federal
District Court for the Eastern District of New York (EDNY) (MDL No. 1596).
Since June 2005, we have entered into agreements with various claimants attorneys involved in
U.S. Zyprexa product liability litigation to settle a substantial majority of the claims. The
agreements cover a total of approximately 32,670 claimants, including a large number of previously
filed lawsuits and other asserted claims. The two primary settlements were as follows:
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In 2005, we settled and paid more than 8,000 claims for $690.0 million, plus
$10.0 million to cover administration of the settlement. |
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In 2007, we settled and paid more than 18,000 claims for approximately $500 million. |
We are prepared to continue our vigorous defense of Zyprexa in all remaining claims. The
U.S. Zyprexa product liability claims not subject to these agreements include approximately 145
lawsuits in the U.S. covering approximately 235 plaintiffs, of which about 120 cases covering about
130 plaintiffs are part of the MDL. The MDL cases have been scheduled for trial in groups, the
earliest trial groups have been tentatively scheduled for October and December 2010. We also have
trials scheduled in Texas state court in October and December 2010.
In January 2009, we reached resolution with the Office of the U.S. Attorney for the Eastern
District of Pennsylvania (EDPA), and the State Medicaid Fraud Control Units of 36 states and the
District of Columbia, of an investigation related to our U.S. marketing and promotional practices
with respect to Zyprexa. As part of the resolution, we pled guilty to one misdemeanor violation of
the Food, Drug, and Cosmetic Act for the off-label promotion of Zyprexa in elderly populations as
treatment for dementia, including Alzheimers dementia, between September 1999 and March 2001. We
recorded a charge of $1.42 billion for this matter in the third quarter of 2008. In 2009, we
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substantially all of this amount, as required by the settlement agreements. As part of the
settlement, we have entered into a corporate integrity agreement with the Office of Inspector
General (OIG) of the U.S. Department of Health and Human Services (HHS), which requires us to
maintain our compliance program and to undertake a set of defined corporate integrity obligations
for five years. The agreement also provides for an independent third-party review organization to
assess and report on the companys systems, processes, policies, procedures, and practices.
In October 2008, we reached a settlement with 32 states and the District of Columbia related to a
multistate investigation brought under various state consumer protection laws. While there is no
finding that we have violated any provision of the state laws under which the investigations were
conducted, we accrued and paid $62.0 million and agreed to undertake certain commitments regarding
Zyprexa for a period of six years, through consent decrees filed with the settling states.
We have been served with lawsuits filed by the states of Alaska, Arkansas, Connecticut, Idaho,
Louisiana, Minnesota, Mississippi, Montana, New Mexico, Pennsylvania, South Carolina, Utah, and
West Virginia alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels,
and that we improperly promoted the drug. These suits seek to recover the costs paid for Zyprexa
through Medicaid and other drug-benefit programs, as well as the costs alleged to have been
incurred and that will be incurred by the states to treat Zyprexa-related illnesses. The
Connecticut, Idaho, Louisiana, Minnesota, Mississippi, Montana, New Mexico, and West Virginia cases
are part of the MDL proceedings in the EDNY. The Alaska case was settled in March 2008 for a
payment of $15.0 million, plus terms designed to ensure, subject to certain limitations and
conditions, that Alaska is treated as favorably as certain other states that may settle with us in
the future over similar claims. We have reached agreements to settle the Zyprexa-related claims of
all of these states except Minnesota, with which we are in advanced discussions. In the second and
third quarters of 2009, we incurred pretax charges of $105.0 million and $125.0 million,
respectively, reflecting the then-current probable and estimable exposures in connection with these
claims.
In 2005, two lawsuits were filed in the EDNY purporting to be nationwide class actions on behalf of
all consumers and third-party payors, excluding governmental entities, which have made or will make
payments for their members or insured patients being prescribed Zyprexa. These actions have now
been consolidated into a single lawsuit, which is brought under certain state consumer protection
statutes, the federal civil RICO statute, and common law theories, seeking a refund of the cost of
Zyprexa, treble damages, punitive damages, and attorneys fees. Two additional lawsuits were filed
in the EDNY in 2006 on similar grounds. As with the product liability suits, these lawsuits allege
that we inadequately tested for and warned about side effects of Zyprexa and improperly promoted
the drug. In September 2008, Judge Weinstein certified a class consisting of third-party payors,
excluding governmental entities and individual consumers. We appealed the certification order, and
Judge Weinsteins order denying our motion for summary judgment, in September 2008. While the
Second Circuit Court of Appeals heard oral arguments on the appeal in December 2009, no opinions
have been rendered. In 2007, The Pennsylvania Employees Trust Fund brought claims in state court in
Pennsylvania as insurer of Pennsylvania state employees who were prescribed Zyprexa on similar
grounds as described in the New York cases. In December 2009, the court granted our summary
judgment motion dismissing the case. The Pennsylvania Employees Trust Fund has agreed to dismiss
its appeal.
In early 2005, we were served with four lawsuits seeking class action status in Canada on behalf of
patients who took Zyprexa. One of these four lawsuits was certified for residents of Quebec, and a
second was certified in Ontario and includes all Canadian residents except for residents of Quebec
and British Columbia. The allegations in the Canadian actions were similar to those in the product
liability litigation pending in the U.S. We have reached agreement to resolve all Zyprexa
class-action litigation in Canada. No additional charges were recorded as a result of this
agreement.
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We cannot determine with certainty the additional number of lawsuits and claims that may be
asserted. The ultimate resolution of Zyprexa product liability and related litigation could have a
material adverse impact on our consolidated results of operations, liquidity, and financial
position.
Other Product Liability Litigation
We have been named as a defendant in numerous other product liability lawsuits involving primarily
diethylstilbestrol (DES), thimerosal, and Byetta. Approximately half of these claims are covered by
insurance, subject to deductibles and coverage limits.
Product Liability Insurance
Because of the nature of pharmaceutical products, it is possible that we could become subject to
large numbers of product liability and related claims for other products in the future. In the past
several years, we have been unable to attain product liability insurance due to a very restrictive
insurance market. Therefore, for substantially all of our currently marketed products, we have been
and expect that we will continue to be completely self-insured for future product liability losses.
In addition, there is no assurance that we will be able to fully collect from our insurance
carriers in the future.
FINANCIAL EXPECTATIONS FOR 2010
We have raised our 2010 earnings per share guidance to a range of $4.44 to $4.59, excluding
potential restructuring charges primarily related to severance and other related costs from
previously announced strategic actions that the company is taking to reduce its cost structure and
global workforce.
We also have revised certain other elements of our full-year 2010 financial guidance. We still
expect volume-driven revenue growth in the mid-single digits, driven primarily by Alimta, Cymbalta,
Humalog, Cialis and Effient. We now anticipate that gross margin as a percent of revenue will be
flat to increasing. Marketing, selling, and administrative expenses are now projected to grow in
the low- single digits while research and development expenses are still projected to grow in the
low-double digits. Other-net, expense (income) is still expected to be a net expense of between
$50.0 million and $100.0 million. Cash flows are still expected to be sufficient to fund capital
expenditures now estimated at less than $900 million, as well as anticipated business development
activity, and our dividend.
We caution investors that any forward-looking statements or projections made by us, including those
above, are based on managements belief at the time they are made. However, they are subject to
risks and uncertainties. Actual results could differ materially and will depend on, among other
things, the continuing growth of our currently marketed products; developments with competitive
products; the implementation of U.S. health care reform; the timing and scope of regulatory
approvals and the success of our new product launches; asset impairments, restructurings, and
acquisitions of compounds under development resulting in acquired IPR&D charges; foreign exchange
rates and global macroeconomic conditions; changes in effective tax rates; wholesaler inventory
changes; other regulatory developments, litigation, patent disputes, and government investigations;
and the impact of governmental actions regarding pricing, importation, and reimbursement for
pharmaceuticals. Other factors that may affect our operations and prospects are discussed in Item
1A of our 2009 Form 10-K, Risk Factors. We undertake no duty to update these forward-looking
statements.
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AVAILABLE INFORMATION ON OUR WEBSITE
We make available through our company website, free of charge, our company filings with the
Securities and Exchange Commission (SEC) as soon as reasonably practicable after we electronically
file them with, or furnish them to, the SEC. The reports we make available include annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements,
registration statements, and any amendments to those documents.
The website link to our SEC filings is http://investor.lilly.com/sec.cfm.
Item 4. Controls and Procedures
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Evaluation of Disclosure Controls and Procedures. Under applicable SEC regulations,
management of a reporting company, with the participation of the principal executive officer
and principal financial officer, must periodically evaluate the companys disclosure controls
and procedures, which are defined generally as controls and other procedures of a reporting
company designed to ensure that information required to be disclosed by the reporting company
in its periodic reports filed with the commission (such as this Form 10-Q) is recorded,
processed, summarized, and reported on a timely basis. |
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Our management, with the participation of John C. Lechleiter, chairman, president, and chief
executive officer, and Derica W. Rice, executive vice president, global services and chief
financial officer, evaluated our disclosure controls and procedures as of June 30, 2010, and
concluded that they are effective. |
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Changes in Internal Controls. During the second quarter of 2010, there were no changes in
our internal control over financial reporting that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. |
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Part I, Item 2, Managements Discussion and Analysis, Legal and Regulatory Matters, for
information on various legal proceedings, including but not limited to:
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The U.S. patent litigation involving Alimta, Cymbalta, Evista, Gemzar, Strattera, and
Xigris |
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The patent litigation outside the U.S. involving Zyprexa |
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The various federal and state investigations relating to our sales, marketing, and
promotional practices |
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The Zyprexa product liability and related litigation, including claims brought on
behalf of state Medicaid agencies and private healthcare payers. |
That information is incorporated into this Item by reference.
Other Product Liability Litigation
We refer to Part I, Item 3, of our Form 10-K annual report for 2009 for the discussion of product
liability litigation involving diethylstilbestrol (DES) and vaccines containing the preservative
thimerosal. In the DES litigation, we have been named as a defendant in approximately 40 suits
involving approximately 50 claimants seeking to recover damages on behalf of children and
grandchildren of women who were prescribed DES during pregnancy in the 1950s and 1960s. In December
2009, a lawsuit was filed in the U.S. District Court in Washington, D.C., against us and other
manufacturers (Michele Fecho, et al v. Eli Lilly and Company, et al) seeking to assert product
liability claims on behalf of a putative class of men and women allegedly exposed to the medicine
who claim to have later developed breast cancer. In the thimerosal litigation, we
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have been named
as a defendant in approximately 200 suits involving approximately 270 claimants. In addition, we
have been named a defendant in approximately 60 lawsuits involving approximately 285 plaintiffs,
primarily seeking to recover damages for pancreatitis experienced by patients prescribed Byetta. We
are aware of approximately 30 additional claimants who have not yet filed suit.
Other Patent Litigation
Cialis: In July 2005, Vanderbilt University filed a lawsuit in the United States District Court in
Delaware against ICOS Corporation seeking to add three of its scientists as co-inventors on the
Cialis compound and method-of-use patents. In January 2009, the district court judge ruled in our
favor, declining to add any of these scientists as an inventor on either patent. The plaintiff
appealed this ruling to the Court of Appeals for the Federal Circuit, which affirmed the lower
court ruling in April 2010, and, in June 2010, further denied a rehearing of the case. The
plaintiffs may seek a review of this decision by the U.S. Supreme Court. An unfavorable final
outcome could have a material adverse impact on our consolidated results of operations, liquidity,
and financial position.
Shareholder Derivative Litigation
In 2007, the company received two demands from shareholders that the board of
directors cause the company to take legal action against current and former directors and others for allegedly causing damage to the
company through improper marketing of Evista, Prozac, and Zyprexa. In accordance with procedures established under the Indiana Business
Corporation Law (Ind. Code § 23-1-32), the board appointed a committee of independent persons to consider the demands and determine what
action, if any, the company should take in response. Since January 2008, we have been served with seven shareholder derivative lawsuits:
Lambrecht, et al. v. Taurel, et al., filed January 17, 2008, in the U.S. District Court for the Southern District of Indiana; Staehr, et
al. v. Eli Lilly and Company, et al., filed March 27, 2008, in Marion County Superior Court in Indianapolis, Indiana; Waldman, et al., v.
Eli Lilly and Company, et al., filed February 11, 2008, in the U.S. District Court for the Eastern District of New York; Solomon v. Eli
Lilly and Company, et al., filed March 27, 2008, in Marion County
Superior Court in Indianapolis, Indiana; Robbins v. Taurel, et al.,
filed April 9, 2008, in the U.S. District Court for the Eastern District of New York; City of Taylor General Employees Retirement System v.
Taurel, et al., filed April 15, 2008, in the U.S. District Court for the Eastern District of New York; and Zemprelli v. Taurel, et al.,
filed June 24, 2008, in the U.S. District Court for the Southern District of Indiana. Two of these lawsuits were filed by the shareholders
who served the demands described above. All seven lawsuits are nominally filed on behalf of the company, against various current and former
directors and officers and allege that the named officers and directors harmed the company through the improper marketing of Zyprexa, and
in certain suits, Evista and Prozac. The Zemprelli suit also claims that certain defendants violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934.
We have reached an agreement with plaintiffs counsel to settle this litigation
subject to final approval by the relevant courts. Under the settlement, we have agreed to implement or maintain certain enhancements in our
corporate governance, compliance, and risk management systems. We also agreed not to oppose plaintiffs counsels request for fees and
expenses of $8.75 million. In light of the proposed settlement, in March 2010, Judge Weinstein dismissed the three derivative actions
pending in the Eastern District of New York (Waldman, Robbins, and Taylor). In July 2010, the U.S. District Court approved the settlement
and proposed fees in the Lambrecht and Zemprelli cases. No additional charges were recorded as a result of this settlement. The settlement
and fee award are also pending in the Marion County Superior Court in the Staehr and Solomon cases.
Other Matters
Merck KGaA (Merck) is disputing royalties under a development and license agreement between Merck
and ImClone with respect to sales of Erbitux outside the U.S. and Canada. In February 2010, this
matter was heard by a panel of arbitrators and in June 2010, the panel issued an interim award, the
contents of which are confidential. This interim award makes minor adjustments to Mercks
obligation to reimburse ImClone for third-party royalties and will not have a material effect on
our results of operations.
During 2004 we, along with several other pharmaceutical companies, were named in a consolidated
lawsuit in California state court brought on behalf of consumers alleging that the conduct of
pharmaceutical companies in preventing commercial importation of prescription drugs from outside
the United States violated antitrust laws. The case sought restitution for alleged overpayments for
pharmaceuticals and an injunction against the allegedly violative conduct. Summary judgment was
granted to us and the other defendants. In July 2008, the California Court of Appeals affirmed that
decision. In July 2010, the California Supreme Court overturned the lower court decision and
remanded the case to the state court.
While it is not possible to predict or determine the outcome of the patent, product liability, or
other legal actions brought against us or the ultimate cost of environmental matters, we believe
that, except as noted above, 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 the
consolidated results of operations in any one accounting period.
Item 1a. Risk Factors; Cautionary Statement Regarding Forward Looking Statements
Our business is subject to increasing government price controls and other health care cost
containment measures. Government health care cost-containment measures can significantly affect our
sales and profitability. In many countries outside the United States, government agencies strictly
control, directly or indirectly, the prices at which our products are sold. In the United States,
we are subject to substantial pricing pressures from state Medicaid programs and private insurance
programs and pharmacy benefit managers, including those operating under the Medicare Part D
pharmaceutical benefit, and we expect implementation of recently-enacted U.S. health care reform
legislation to increase these pricing pressures. In addition, many state legislative proposals
would further negatively affect our pricing and/or reimbursement for our products. We expect
pricing pressures from both governments and private payers inside and outside the United States to
become more severe. See Managements Discussion and AnalysisExecutive OverviewLegal, Regulatory,
and Other Matters.
42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the activity related to repurchases of our equity securities during
the three months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
|
|
|
|
|
|
|
|
|
|
of Shares |
|
Approximate |
|
|
|
|
|
|
|
|
|
|
Purchased as |
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
Part of |
|
Shares that |
|
|
Total |
|
|
|
|
|
Publicly |
|
May Yet Be |
|
|
Number of |
|
Average Price |
|
Announced |
|
Purchased |
|
|
Shares |
|
Paid per |
|
Plans or |
|
Under the Plans |
|
|
Purchased |
|
Share |
|
Programs |
|
or Programs |
Period |
|
(a) |
|
(b) |
|
(c) |
|
(d) |
|
|
|
(in thousands) |
|
|
|
|
|
(in thousands) |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
419.2 |
|
May 2010 |
|
|
10 |
|
|
|
34.89 |
|
|
|
|
|
|
|
419.2 |
|
June 2010 |
|
|
1 |
|
|
|
32.58 |
|
|
|
|
|
|
|
419.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts presented in columns (a) and (b) above represent purchases of common stock related to
our stock-based compensation programs. The amounts presented in columns (c) and (d) in the above
table represent activity related to our $3.0 billion share repurchase program announced in March
2000. As of June 30, 2010, we have purchased $2.58 billion related to this program. During the
first six months of 2010, no shares were repurchased pursuant to this program and we do not expect
to purchase any shares under this program during the remainder of 2010.
Item 6. Exhibits
The following documents are filed as exhibits to this Report:
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|
|
|
EXHIBIT 11.
|
|
Statement re: Computation of Earnings per Share |
|
|
|
EXHIBIT 12.
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges |
|
|
|
EXHIBIT 31.1
|
|
Rule 13a-14(a) Certification of John C. Lechleiter, Chairman, President, and
Chief Executive Officer |
|
|
|
EXHIBIT 31.2
|
|
Rule 13a-14(a) Certification of Derica W. Rice, Executive Vice President,
Global Services and Chief Financial Officer |
|
|
|
EXHIBIT 32.
|
|
Section 1350 Certification |
|
|
|
EXHIBIT 101.
|
|
Interactive Data File |
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
ELI LILLY AND COMPANY |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
Date: July 30, 2010
|
|
s/ James B. Lootens
|
|
|
|
|
|
|
|
|
|
James B. Lootens |
|
|
|
|
Corporate Secretary |
|
|
|
|
|
|
|
|
Date: July 30, 2010
|
|
s/ Arnold C. Hanish |
|
|
|
|
|
|
|
|
|
Arnold C. Hanish |
|
|
|
|
Vice President, Finance
and Chief Accounting Officer |
|
|
44
INDEX TO EXHIBITS
The following documents are filed as a part of this Report:
Exhibit
|
|
|
EXHIBIT 11.
|
|
Statement re: Computation of Earnings per Share |
|
|
|
EXHIBIT 12.
|
|
Statement re: Computation of Ratio of Earnings to Fixed Charges |
|
|
|
EXHIBIT 31.1
|
|
Rule 13a-14(a) Certification of John C. Lechleiter, Chairman,
President, and Chief Executive Officer |
|
|
|
EXHIBIT 31.2
|
|
Rule 13a-14(a) Certification of Derica W. Rice, Executive Vice
President, Global Services and Chief Financial Officer |
|
|
|
EXHIBIT 32.
|
|
Section 1350 Certification |
|
|
|
EXHIBIT 101.
|
|
Interactive Data File |
45