United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31 , 2020
Commission file number 001-06351
(Exact name of Registrant as specified in its charter)
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| incorporation or organization) | Identification No.) | |||||||||||||||||||
(Address and zip code of principal executive offices)
Registrant’s telephone number, including area code (317 ) 276-2000
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered | ||||||
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||
| Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No ☒
Aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter: approximately $138,907,000,000 .
Number of shares of common stock outstanding as of February 12, 2021: 958,425,693
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Eli Lilly and Company
Form 10-K
For the Year Ended December 31, 2020
Table of Contents
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Forward-Looking Statements
This Annual Report on Form 10-K and our other publicly available documents include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. In particular, information appearing under “Business,” “Risk Factors,” and “Management's Discussion and Analysis of Results of Operations and Financial Condition” includes forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and generally can be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue,” or similar expressions or future or conditional verbs.
Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those expressed in forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. Investors therefore should not place undue reliance on forward-looking statements. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
•the impact of the evolving COVID-19 pandemic and the global response thereto;
•uncertainties related to our efforts to develop potential treatments for COVID-19;
•the significant costs and uncertainties in the pharmaceutical research and development process, including with respect to the timing and process of obtaining regulatory approvals;
•the impact of acquisitions and business development transactions and related integration costs;
•the expiration of intellectual property protection for certain of our products and competition from generic and/or biosimilar products;
•our ability to protect and enforce patents and other intellectual property;
•changes in patent law or regulations related to data package exclusivity;
•competitive developments affecting current products and our pipeline;
•market uptake of recently launched products;
•information technology system inadequacies, breaches, or operating failures;
•unauthorized access, disclosure, misappropriation, or compromise of confidential information or other data stored in our IT systems, networks, and facilities, or those of third parties with whom we share our data;
•unexpected safety or efficacy concerns associated with our products;
•litigation, investigations, or other similar proceedings involving past, current, or future products or commercial activities as we are largely self-insured;
•issues with product supply stemming from manufacturing difficulties or disruptions;
•reliance on third-party relationships and outsourcing arrangements;
•regulatory changes or other developments;
•regulatory actions regarding currently marketed products;
•continued pricing pressures and the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and access to pharmaceuticals;
•devaluations in foreign currency exchange rates or changes in interest rates, and inflation;
•changes in tax law, tax rates, or events that differ from our assumptions related to tax positions;
•asset impairments and restructuring charges;
•the impact of global macroeconomic conditions and trade disruptions or disputes;
•changes in accounting and reporting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC); and
•regulatory compliance problems or government investigations.
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Investors should also carefully read the factors described under Item 1A, “Risk Factors” in this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from those expressed in forward-looking statements. Investors should understand that it is not possible to predict or identify all such factors and should not consider the risks described above and under Item 1A, “Risk Factors” to be a complete statement of all potential risks and uncertainties.
All forward-looking statements speak only as of the date of this Annual Report and are expressly qualified in their entirety by the risk factors and cautionary statements included in this Annual Report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this Annual Report.
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Part I
Item 1.Business
Eli Lilly and Company (referred to as the company, Lilly, we, or us) was incorporated in 1901 in Indiana to succeed to the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and market products in a single business segment—human pharmaceutical products. In March 2019, we completed the disposition of our ownership in Elanco Animal Health Incorporated (Elanco), an animal health business.
Our purpose is to unite caring with discovery to create medicines that make life better for people around the world. Most of the products we sell today were discovered or developed by our own scientists, and our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines.
We manufacture and distribute our products through facilities in the United States (U.S.), including Puerto Rico, and 8 other countries. Our products are sold in approximately 120 countries.
Products
Our products include:
Diabetes products, including:
•Baqsimi®, a nasal powder formulation for the treatment of severe hypoglycemia in patients with diabetes
•Basaglar®, a long-acting human insulin analog for the treatment of diabetes
•Humalog®, Humalog Mix 75/25, Humalog U-100, Humalog U-200, Humalog Mix 50/50, insulin lispro, insulin lispro protamine, and insulin lispro mix 75/25, human insulin analogs for the treatment of diabetes
•Humulin®, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500, human insulins of recombinant DNA origin for the treatment of diabetes
•Jardiance®, for the treatment of type 2 diabetes and to reduce the risk of cardiovascular death in adult patients with type 2 diabetes and established cardiovascular disease
•Lyumjev®, a rapid-acting human insulin analog for the treatment of diabetes
•Trajenta®, for the treatment of type 2 diabetes
•Trulicity®, for the treatment of type 2 diabetes and to reduce the risk of major adverse cardiovascular events in adult patients with type 2 diabetes and established cardiovascular disease or multiple cardiovascular risk factors
Oncology products, including:
•Alimta®, for the first-line treatment, in combination with two other agents, of advanced non-small cell lung cancer (NSCLC) for patients with non-squamous cell histology and no EGFR or ALK genomic tumor aberrations; for the first-line treatment, in combination with another agent, of advanced non-squamous NSCLC; for the second-line treatment of advanced non-squamous NSCLC; as monotherapy for the maintenance treatment of advanced non-squamous NSCLC in patients whose disease has not progressed immediately following chemotherapy treatment; and in combination with another agent for the treatment of malignant pleural mesothelioma
•Cyramza®, for use as monotherapy or in combination with another agent as a second-line treatment of advanced or metastatic gastric cancer or gastro-esophageal junction adenocarcinoma; in combination with another agent as a second-line treatment of metastatic NSCLC; in combination with another agent as a second-line treatment of metastatic colorectal cancer; as a monotherapy as a second-line treatment of hepatocellular carcinoma; and in combination with another agent as a first-line treatment of adult patients with metastatic NSCLC with activating epidermal growth factor receptor mutations
•Erbitux®, indicated both as monotherapy and in combination with another agent for the treatment of certain types of colorectal cancers; and as monotherapy, in combination with chemotherapy, or in combination with radiation therapy for the treatment of certain types of head and neck cancers
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•Retevmo®, for the treatment of metastatic NSCLC in adult patients; for the treatment of advanced metastatic medullary thyroid cancer who require systemic therapy in adult and pediatric patients; and for the treatment of advanced metastatic thyroid cancer in adult and pediatric patients who require systemic therapy and are radioactive iodin-refractory
•Tyvyt®, for the treatment of relapsed or refractory classic Hodgkin’s lymphoma and for the first-line treatment of non-squamous NSCLC in combination with Alimta and another agent in China
•Verzenio®, for use as monotherapy or in combination with endocrine therapy for the treatment of HR+, HER2- metastatic breast cancer
Immunology products, including:
•Olumiant®, for the treatment of adults with moderately-to-severely active rheumatoid arthritis
◦Baricitinib was granted Emergency Use Authorization (EUA) in 2020 for the treatment of suspected or laboratory confirmed COVID-19, in combination with remdesivir, in hospitalized adults and pediatric patients
•Taltz®, for the treatment of adults and pediatric patients aged 6 years or older with moderate-to-severe plaque psoriasis, adults with active psoriatic arthritis, adults with ankylosing spondylitis, and adults with active non-radiographic axial spondyloarthritis
Neuroscience products, including:
•Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, fibromyalgia, and chronic musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis
•Emgality®, for migraine prevention and the treatment of episodic cluster headache in adults
•Reyvow®, for the acute treatment of migraine, with or without aura, in adults
•Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance
Other therapies, including:
•Bamlanivimab, for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients with positive results of direct SARS-CoV-2 viral testing (EUA granted in 2020)
•Bamlanivimab and etesevimab, administered together, for the treatment of mild-to-moderate COVID-19 in adults and pediatric patients with positive results of direct SARS-CoV-2 viral testing (EUA granted in 2021)
•Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia
•Forteo®, for the treatment of osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women
Marketing and Distribution
We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various countries to meet local customer needs and comply with local regulations.
U.S.
We promote our major products in the U.S. through sales representatives who call upon physicians and other health care professionals. We also promote to healthcare providers in medical journals and online health care channels, distribute literature and samples of certain products to physicians, and exhibit at medical meetings. In addition, we advertise certain products directly to consumers in the U.S. and we maintain websites with information about our major products. We supplement our employee sales force with contract sales organizations to leverage our resources and reach additional patients in need.
We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care organizations, group purchasing organizations, government and long-term care institutions, hospitals, and certain retail pharmacies. We enter into arrangements with these organizations providing for discounts or rebates on our products.
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In the U.S., most of our products are distributed through wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. In 2020, 2019, and 2018, three wholesale distributors in the U.S.—McKesson Corporation, AmerisourceBergen Corporation, and Cardinal Health, Inc.—each accounted for between 15 percent and 20 percent of our consolidated revenue. No other customer accounted for more than 10 percent of our consolidated revenue in any of these years.
Outside the U.S.
Outside the U.S., we promote our products to healthcare providers primarily through sales representatives and online health care channels. While the products we market vary from country to country, diabetes products constitute the largest single group of our consolidated revenue. Distribution patterns for our products also vary from country to country. In most countries in which we operate, we maintain our own sales organizations, but in some smaller countries we market our products through independent distributors.
Marketing Collaborations
Certain of our products are marketed in arrangements with other pharmaceutical companies. For example, we and Boehringer Ingelheim have a global agreement to develop and commercialize a portfolio of diabetes products, including Trajenta, Jentadueto®, Jardiance, Glyxambi®, Synjardy®, Trijardy® XR, and Basaglar.
For additional information, see Item 8, "Financial Statements and Supplementary Data - Note 4, Collaborations and Other Arrangements."
Competition
Our products compete globally with many other pharmaceutical products in highly competitive markets.
Important competitive factors include effectiveness, safety, and ease of use; formulary placement, price, and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products, processes, modalities, and uses. Most new products that we introduce must compete with other branded or generic products already on the market or products that are later developed by competitors. When competitors introduce new products or delivery systems with therapeutic or cost advantages, including by developing new modalities, our products become subject to decreased sales, progressive price reductions, or both.
We believe our long-term competitive success depends on discovering and developing (either alone or in collaboration with others) or acquiring innovative, cost-effective products that provide improved outcomes for patients and deliver value to payers, and continuously improving the productivity of our operations in a highly competitive environment. There can be no assurance that our efforts will result in commercially successful products, and it is possible that our products will be, or will become, uncompetitive from time to time as a result of products developed by our competitors.
Generic Pharmaceuticals
One of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and Europe, the regulatory approval process for pharmaceuticals (other than biological products (biologics)) exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy of the innovator product. As a result, generic manufacturers generally invest far fewer resources than we do in research and development and can price their products significantly lower than our branded products. Accordingly, when a branded non-biologic pharmaceutical loses its market exclusivity, it normally faces intense price competition from generic forms of the product, which can cause us to lose a significant portion of the product’s revenue in a very short period of time.
Further, public and private payers typically encourage the use of generics as alternatives to brand-name drugs in their healthcare programs. Laws in the U.S. generally allow, and in many cases require, pharmacists to substitute generic drugs that have been rated under government procedures to be essentially equivalent to a brand-name drug. Where substitution is mandatory, it must be made unless the prescribing physician expressly forbids it. In many countries outside the U.S., intellectual property protection is weak, and we must compete with generic or counterfeit versions of our products.
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Biosimilars
Several of our products and approximately half of the potential new medicines in our clinical-stage pipeline are biologics. In the U.S., the U.S. Food and Drug Administration (FDA) regulates biologics under the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, and implementing regulations. Competition for Lilly’s biologics may be affected by the approval of follow-on biologics, also known as biosimilars. A biosimilar is a subsequent version of an approved innovator biologic that, due to its analytical and clinical similarity to the innovator biologic, may be approved based on an abbreviated data package that relies in part on the full testing required of the innovator biologic. Approval by the FDA ultimately depends on many factors, including a showing that the biosimilar is “highly similar” to the original product and has no clinically meaningful differences from the original product in terms of safety, purity, and potency.
Globally, most governments have developed abbreviated regulatory pathways to approve biosimilars as follow-ons to innovator-developed biologics, including the Biologics Price Competition and Innovation Act of 2009 (the BPCIA) in the U.S., and a number of biosimilars have been licensed under the BPCIA and in Europe. The patent and regulatory exclusivity for the existing innovator biologic generally must expire in a given market before biosimilars may enter that market. However, in the U.S., the product exclusivity period under the BPCIA could be affected by recent government proposals and litigation. See “- Patents, Trademarks, and Other Intellectual Property Rights.” In addition, the extent to which a biosimilar, once approved, will be substituted for the innovator biologic in a way that is similar to traditional generic substitution for non-biologic products is not yet entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing. In the U.S., currently only a biosimilar product that is determined to be “interchangeable” will be considered substitutable for the original biologic product without the intervention of the health care provider who prescribed the original biologic product. To prove that a biosimilar product is interchangeable, the applicant must demonstrate that the product can be expected to produce the same clinical results as the original biologic product in any given patient, and if the product is administered more than once in a patient, that safety risks and potential for diminished efficacy of alternating or switching between the use of the interchangeable biosimilar biologic product and the original biologic product is no greater than the risk of using the original biologic product without switching.
Biosimilars may present both competitive challenges and opportunities. For example, a competitor company has developed a version of insulin lispro that competes with our product Humalog. On the other hand, in collaboration with Boehringer Ingelheim, we developed Basaglar, a new insulin glargine product, which has the same amino acid sequence as a product currently marketed by a competitor and has launched as a follow-on biologic in the U.S., and as a biosimilar in Europe and Japan. However, in March 2020, the FDA began regulating all of our insulin products as “biologics” rather than “drugs.” Based on FDA draft guidance, this change may lower the requirements for competitor biosimilar products to enter the market, some of which could be designated as interchangeable and therefore substituted for our insulin products at U.S. pharmacies. As such, in June 2020, Mylan N.V. announced that the FDA approved its New Drug Application (NDA) for Semglee, a new insulin glargine product, which it launched as a follow-on biologic in the U.S. that competes with Basaglar. The laws regulating biosimilars continue to be interpreted and implemented by the FDA and remain subject to substantial uncertainty, including with respect to their impact on our business.
U.S. Private Sector Dynamics
In the U.S. private sector, consolidation and integration among healthcare providers significantly affects the competitive marketplace for pharmaceuticals. Health plans, pharmacy benefit managers, wholesalers, and other supply chain stakeholders have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, typically maintain formularies that specify coverage (the conditions under which drugs are included on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer) to control costs by negotiating discounted prices in exchange for formulary inclusion.
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Formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations that result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance levels, and higher deductibles. Consequently, pharmaceutical companies compete for formulary placement not only on the basis of product attributes such as efficacy, safety profile, or patient ease of use, but also by providing rebates. Value-based agreements, where pricing is based on achievement (or not) of specified outcomes, are another tool that may be utilized between payers and pharmaceutical companies as formulary placement and pricing are negotiated. Price is an increasingly important factor in formulary decisions, particularly in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. We expect these downward pricing pressures will continue to negatively affect our consolidated results of operations. In addition to formulary placement, changes in insurance designs continue to drive greater consumer cost-sharing through high deductible plans and higher co-insurance or co-pays. For additional information on pricing and reimbursement for our pharmaceutical products, see “- Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access - U.S.”
Patents, Trademarks, and Other Intellectual Property Rights
Overview
Intellectual property protection is critical to our ability to successfully commercialize our life sciences innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a large number of patents in the U.S. and many other countries relating to products, product uses, formulations, and manufacturing processes. In addition, as discussed below, for some products we have effective intellectual property protection in the form of data protection under pharmaceutical regulatory laws.
The patent protection anticipated to be of most relevance to pharmaceuticals is provided by national patents claiming the active ingredient (the compound patent), particularly those in major markets such as the U.S., various European countries, and Japan. These patents may be issued based upon the filing of international patent applications, usually filed under the Patent Cooperation Treaty (PCT). Patent applications covering compounds are generally filed during the Discovery Phase of the drug discovery process, which is described in the “Research and Development” section below. In general, national patents in each relevant country are available for a period of 20 years from the filing date of the PCT application, which is often years prior to the launch of a commercial product. Further patent term adjustments and restorations may extend the original patent term:
•Patent term adjustment is a statutory right available to all U.S. patent applicants to provide relief in the event that a patent grant is delayed during examination by the United States Patent and Trademark Office (USPTO).
•Patent term restoration is a statutory right provided to U.S. patent holders that claim inventions subject to review by the FDA. To make up for a portion of the time invested in clinical trials and the FDA review process, a single patent for a pharmaceutical product may be eligible for patent term restoration. Patent term restoration is limited by a formula and cannot be calculated until product approval due to uncertainty about the duration of clinical trials and the time it takes the FDA to review an application. There is a five-year cap on any restoration, and no patent's expiration date may be extended beyond 14 years from FDA approval. Some countries outside the U.S. also offer forms of patent term restoration. For example, Supplementary Protection Certificates are available to extend the life of a European patent up to an additional five years (subject to a 15-year cap from European Medicines Agency (EMA) approval). Similarly, in Japan, South Korea, and Australia, patent terms can be extended up to five years, depending on the length of regulatory review and other factors.
Loss of effective patent protection for pharmaceuticals, especially for non-biologic products, typically results in the loss of effective market exclusivity for the product, which often results in severe and rapid decline in revenues for the product. However, in some cases the innovator company may retain exclusivity despite approval of the generic, biosimilar, or other follow-on versions of a new medicine beyond the expiration of the compound patent through manufacturing trade secrets, later-expiring patents on manufacturing processes, methods of use or formulations, or data protection that may be available under pharmaceutical regulatory laws. Changes to the laws and regulations governing these protections could result in earlier loss of effective market exclusivity. The primary forms of data protection are as follows:
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•Regulatory authorities in major markets generally grant data package protection for a period of years following new drug approvals in recognition of the substantial investment required to complete clinical trials. Data package protection prohibits other manufacturers from submitting regulatory applications for marketing approval based on the innovator company’s regulatory submission data for the drug. The base period of data package protection depends on the country. For example, the period is generally five years in the U.S. (12 years for new biologics as described below), effectively 10 years in Europe, and eight years in Japan. The period begins on the date of product approval and runs concurrently with the patent term for any relevant patent.
•Under the BPCIA, the FDA has the authority to approve biosimilars. A competitor seeking approval of a biosimilar must file an application to show its molecule is highly similar to an approved innovator biologic and include a certain amount of safety and efficacy data that the FDA will consider on a case-by-case basis. Under the data protection provisions of this law, the FDA cannot approve a biosimilar application until 12 years after initial marketing approval of the innovator biologic, subject to certain conditions. The BPCIA is part of the Affordable Care Act, the constitutionality of which is currently being litigated.
•In the U.S., the FDA has the authority to grant additional data protection for approved drugs where the sponsor conducts specified testing in pediatric or adolescent populations within a specified time period. If granted, this “pediatric exclusivity” provides an additional six months of exclusivity, which is added to the term of data protection as well as to the term of any relevant patents, to the extent these protections have not already expired. While the term of the pediatric exclusivity attaches to the term of any relevant patent, pediatric exclusivity is a regulatory exclusivity—i.e., a bar to generic approval, not a patent right.
•Under the U.S. orphan drug law, a specific use of a drug or biologic can receive "orphan" designation if it is intended to treat a disease or condition affecting fewer than 200,000 people in the U.S., or affecting more than 200,000 people but not reasonably expected to recover its development and marketing costs through U.S. sales. Among other benefits, orphan designation entitles the particular use of the drug to seven years of market exclusivity, meaning that the FDA cannot (with limited exceptions) approve another marketing application for the same drug for the same indication until expiration of the seven-year period. Unlike pediatric exclusivity, the orphan exclusivity period is independent of and runs in parallel with any applicable patents.
Outside the major markets, the adequacy and effectiveness of intellectual property protection for pharmaceuticals varies widely, and in a number of these markets we are unable to patent our products or to enforce the patents we receive for our products. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization, more than 140 countries have agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to patent owners. Certain developing countries limit protection for biopharmaceutical products under their interpretation of “flexibilities” allowed under the agreement. Thus, some types of patents, such as those on new uses of compounds or new forms of molecules, are not available in certain developing countries. Further, many developing countries, and some developed countries, do not provide effective data package protection even though it is specified in TRIPs.
Our Intellectual Property Portfolio
We consider intellectual property protection for certain products, processes, uses, and formulations—particularly with respect to those products discussed below—to be important to our operations. In addition to the data protection and patents identified below, we may hold patents on manufacturing processes, formulations, devices, or uses that extend exclusivity beyond the dates shown below.
The most relevant U.S. patent protection or data protection and associated expiry dates for our top-selling or recently launched patent-protected marketed products are as follows:
•Alimta is protected by a vitamin regimen patent (2021) plus pediatric exclusivity (May 2022). See Item 8, “Financial Statements and Supplementary Data - Note 16, Contingencies,” for information regarding our settlement agreement with Eagle Pharmaceuticals, Inc. (Eagle) and its impact on our exclusivity for Alimta.
•Baqsimi is protected by data protection (July 2022).
•Cyramza is protected by a compound patent and biologics data protection (2026).
•Emgality is protected by a compound patent (2033) and biologics data protection (2030).
•Jardiance, and the related combination product Glyxambi, is protected by a compound patent (2028).
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•Olumiant is protected by a compound patent (2032).
•Retevmo is protected by a compound patent (2037) and by data protection (2025).
•Reyvow is protected by a compound patent (2025, not including possible patent extension).
•Taltz is protected by a compound patent (2030) and by biologics data protection (2028).
•Trulicity is protected by a compound patent (2027) and by biologics data protection (2026).
•Verzenio is protected by a compound patent (2031) and by data protection (2022).
Outside the U.S., important patent protection or data protection includes:
•Alimta is protected by patents covering its use to treat cancer in major European countries and in Japan (June 2021).
•Baqsimi is protected by data protection in Japan (2026).
•Cyramza is protected by a compound patent (2028) and by data protection (2024) in major European countries. Additionally, Cyramza is protected by a compound patent (2026) and by data protection (2023) in Japan.
•Emgality is protected by a compound patent (2033) and by data protection (2028) in major European countries, and by a compound patent (2031, not including possible patent extension) and by data protection (2029) in Japan.
•Jardiance is protected by a compound patent in major European countries (2029) and Japan (2030).
•Olumiant is protected by a compound patent (2032) and by data protection (2027) in major European countries, and by a compound patent (2033) and by data protection (2025) in Japan.
•Reyvow is protected by a compound patent (2023, not including possible patent extension) in major European countries. Reyvow is also protected by a compound patent (2023, not including possible patent extension) in Japan.
•Retsevmo® is protected by a compound patent (2037) and by data protection (2031) in major European countries. Retevmo is protected by a compound patent in Japan (2037, not including possible patent extension).
•Taltz is protected by a compound patent (2031) and data protection (2027) in major European countries and a compound patent (2030) and data protection (2024) in Japan.
•Trulicity is protected by a compound patent (2029) and by data protection (2024) in major European countries and by a compound patent (2029) and by data protection (2023) in Japan.
•Verzenio is protected by a compound patent (2033) and data protection (2028) in major European countries and by a compound patent (2034) and data protection (2026) in Japan.
Reyvow has been submitted for regulatory review in certain major European countries for the acute treatment of migraine, where it is expected to be protected by data protection upon approval (10 years). Additionally, Reyvow has been submitted for regulatory review in Japan for the acute treatment of migraine, where it is expected to be protected by data protection upon approval (8 years).
Retevmo has been submitted for regulatory review in Japan for the treatment of lung cancer, where it is expected to be protected by data protection upon approval (8 years).
Tanezumab is protected by a compound patent (2023, not including possible patent extension) in the U.S. Additionally, tanezumab has been submitted for regulatory review in the U.S. for the treatment of osteoarthritis pain, where it is expected to be protected by data protection upon approval (12 years).
Worldwide, we sell all of our major products under trademarks consisting of our product names, logos, and unique product appearances (e.g., the appearance of our Trulicity autoinjector) which we consider in the aggregate to be important to our operations. Trademark protection varies throughout the world, with protection continuing in some countries as long as the mark is used, and in other countries as long as it is registered. Registrations are normally for fixed but renewable terms. Trademark protection often extends beyond the patent and data protection for a product.
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Patent Licenses and Collaborations
Most of our major products are not subject to significant license and collaboration agreements. For information on our license and collaboration agreements, including our agreement with Incyte Corporation related to Olumiant, see Item 8, "Financial Statements and Supplementary Data - Note 4, Collaborations and Other Arrangements."
Patent Challenges
In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, authorizes the FDA to approve generic versions of innovative pharmaceuticals (other than biologics, which are discussed below in more detail) when the generic manufacturer has not conducted safety and efficacy studies but files an Abbreviated New Drug Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only “bioequivalence” between the generic version and the NDA-approved drug—not safety and efficacy. Establishing bioequivalence is generally straightforward and inexpensive for the generic company.
Absent a patent challenge, the FDA cannot approve an ANDA until after certain of the innovator’s patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA alleging that one or more or all of the patents listed in the innovator’s NDA are invalid or not infringed. This allegation is commonly known as a “Paragraph IV certification.” If the innovator responds by filing suit against the generic manufacturer, the FDA is then prohibited from approving the generic company’s application for a 30-month period (which can be shortened or extended by the trial court judge hearing the patent challenge). If one or more of the NDA-listed patents are challenged, the first filer(s) of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers.
Generic manufacturers use Paragraph IV certifications extensively to challenge patents on innovative pharmaceuticals. In addition, generic companies have shown willingness to launch “at risk,” i.e., after receiving ANDA approval but before final resolution of their patent challenge. We are currently in Hatch-Waxman litigation involving Alimta with a single generic manufacturer. For more information on Hatch-Waxman litigation involving the company, see Item 8, “Financial Statements and Supplementary Data - Note 16, Contingencies.”
Under the BPCIA, the FDA cannot approve an application for a biosimilar product until data protection expires, 12 years after initial marketing approval of the innovator biologic, and an application may not be submitted until four years following the date the innovator biologic was first approved. However, the BPCIA does provide a mechanism for a competitor to challenge the validity of an innovator’s patents as early as four years after initial marketing approval of the innovator biologic.
The patent litigation scheme under the BPCIA, and the BPCIA itself, is complex and continues to be interpreted and implemented by the FDA as well as courts. Courts have held that biosimilar applicants are not required to engage in the BPCIA patent litigation scheme and patent holders retain the right to bring suit under normal patent law procedures if a biosimilar applicant attempts to commercialize a product prior to patent expiration. Further, in the U.S., the increased likelihood of generic and biosimilar challenges to innovators’ intellectual property has increased the risk of loss of innovators’ market exclusivity. See also “- Competition - Biosimilars.”
In addition, there is a procedure in U.S. patent law, known as inter partes review (IPR), which allows any member of the public to file a petition with the USPTO seeking the review of any issued U.S. patent for validity. IPRs are conducted before Administrative Patent Judges in the USPTO using a lower standard of proof than used in federal district court. In addition, the challenged patents are not accorded the presumption of validity as they are in federal district court. Generic drug companies and even some investment firms have engaged in the IPR process in attempts to invalidate our patents.
Outside the U.S., the legal doctrines and processes by which pharmaceutical patents can be challenged vary widely. In recent years, we have experienced an increase in patent challenges from generic manufacturers in many countries outside the U.S.
For more information on administrative challenges and litigation involving our intellectual property rights, see Item 8, “Financial Statements and Supplementary Data - Note 16, Contingencies.”
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Government Regulation of Our Operations
Our operations are regulated extensively by numerous national, state, and local agencies.
Regulation of Products
The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals of our products is extremely costly and can significantly delay product introductions and revenue generation. In addition, our operations are subject to complex federal, state, local, and foreign laws and regulations concerning relationships with healthcare providers and suppliers, the environment, occupational health and safety, and data privacy. Compliance with the laws and regulations affecting the manufacture and sale of current products and the discovery, development, and introduction of new products will continue to require substantial effort, expense, and capital investment.
Of particular importance to our business is regulation by the FDA in the U.S. Pursuant to laws and regulations that include the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over all of our products and devices in the U.S. and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, promotion, advertising, dissemination of information, and post-marketing surveillance of those products.
Following approval, our products remain subject to regulation by various agencies in connection with labeling, import, export, storage, recordkeeping, advertising, promotion, and safety reporting. We conduct extensive post-marketing surveillance of the safety of the products we sell. The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after a product reaches the market. The FDA strictly regulates marketing, labeling, advertising, and promotion of products that are placed on the market. Pharmaceutical products may be promoted only for the approved indications and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.
The FDA extensively regulates all aspects of manufacturing quality for pharmaceuticals under its current Good Manufacturing Practices (cGMP) regulations. Outside the U.S., our products and operations are subject to similar regulatory requirements, notably by the EMA in Europe and the Ministry of Health, Labor and Welfare in Japan. Specific regulatory requirements vary from country to country. Regulatory requirements and approval processes outside the U.S. may differ from those in the U.S. and may involve additional costs and uncertainties.
We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems and controls in our manufacturing, product development, and process development operations in an effort to ensure sustained compliance with cGMP and similar regulations. However, in the event we fail to adhere to these requirements, we become subject to potential government investigations, interruptions in production, fines and penalties, delays in new product approvals, and reputational harm. Certain of our products are manufactured by third parties, and their failure to comply with these regulations could adversely affect us through failure to supply product to us or delays in new product approvals. Any determination by the FDA or other regulatory authorities of manufacturing or other deficiencies could adversely affect our business.
We are also subject to a variety of federal, state, and local environmental, health and safety, and other laws and regulations that may affect our research, development or production efforts.
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Emergency Use Authorizations
The Secretary of Health and Human Services may authorize unapproved medical products to be manufactured, marketed, and sold in the context of an actual or potential emergency that has been designated by the government. After an emergency has been announced, the Secretary of Health and Human Services may authorize EUAs for the use of specific products based on criteria established by statute, including that the product at issue may be effective in diagnosing, treating, or preventing serious or life-threatening diseases when there are no adequate, approved, and available alternatives. An EUA is subject to additional conditions and restrictions, such as the obligation to provide facts sheets for healthcare providers administering the product and those to whom it is administered, adverse event monitoring and reporting, and recordkeeping and reporting requirements by product manufacturers. The FDA may also establish additional discretionary conditions of authorization that the FDA deems necessary or appropriate to protect the public health, including conditions related to product distribution, product administration and data collection and analysis concerning the safety and effectiveness of the product. In issuing an EUA, the FDA considers the totality of available scientific evidence regarding quality, safety and efficacy, including the known and potential risks of such products and the adequacy and availability of approved alternatives, among other factors. An EUA is not a substitute for obtaining FDA approval, licensure, or clearance for use of a product. An EUA terminates when the emergency determination underlying the EUA terminates, and EUAs can be revoked under other circumstances, the timing of which may occur unexpectedly or be difficult to predict.
Outside the U.S., the emergency use of medical products is subject to regulatory processes and requirements that differ from those in the U.S.
The COVID-19 pandemic has been designated as a national emergency in the U.S. On the basis of such determination, the Secretary of Health and Human Services declared that circumstances exist justifying the authorization of emergency use of drugs and biologics during the COVID-19 pandemic. The FDA has granted EUAs for bamlanivimab, bamlanivimab and etesevimab administered together, and baricitinib in combination with remdesivir, and similar actions have been taken by other regulators in certain jurisdictions outside the U.S. We intend to submit bamlanivimab and etesevimab administered together to the FDA for approval in the second half of 2021.
Other Laws and Regulations
The marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to various other U.S. federal and state laws, as well as analogous foreign laws and regulations, including the federal anti-kickback statute, the False Claims Act, and state laws governing kickbacks, false claims, unfair trade practices, and consumer protection. These laws are administered by, among others, the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel Management, and state attorneys general. Over the past several years, state and federal governments have increased their oversight, enforcement activities, and intra-agency coordination with respect to pharmaceutical companies. Further, several claims brought by these agencies against us and other companies under these and other laws have resulted in corporate criminal sanctions and very substantial civil settlements.
In December 2020, the Office of Inspector General of the U.S. Department of Health and Human Services and the Centers for Medicare & Medicaid Services issued final rules expanding and modifying existing, and adding new, regulatory “safe harbors” and exceptions, respectively, under the anti-kickback statute and the Ethics in Patient Referrals Act. We are currently evaluating the impact, if any, these regulatory amendments will have upon becoming effective on our consolidated results of operations, liquidity, and financial position, which is uncertain at this time.
The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits certain individuals and entities, including U.S. publicly traded companies, from promising, offering, or giving anything of value to foreign officials with the corrupt intent of influencing the foreign official for the purpose of helping the company obtain or retain business or gain any improper advantage. The FCPA also imposes specific recordkeeping and internal controls requirements on U.S. publicly traded companies. As noted above, outside the U.S., our business is heavily regulated and therefore involves significant interaction with foreign officials. Additionally, in many countries outside the U.S., healthcare providers who prescribe pharmaceuticals are employed by the government and purchasers of pharmaceuticals are government entities; therefore, our interactions with these prescribers and purchasers are subject to regulation under the FCPA.
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In addition to the U.S. application and enforcement of the FCPA, the various jurisdictions in which we operate and supply our products have laws and regulations aimed at preventing and penalizing corrupt and anticompetitive behavior. In recent years, several jurisdictions have enhanced their laws and regulations in this area, increased their enforcement activities, and/or increased the level of cross-border coordination and information sharing.
We are and could in the future become subject to administrative and legal proceedings and actions, which could include claims for civil penalties (including treble damages under the False Claims Act), criminal sanctions, and administrative remedies, including exclusion from U.S. federal and other health care programs. It is possible that an adverse outcome in future actions could have a material adverse impact on our consolidated results of operations, liquidity, and financial position.
We are also subject to a variety of federal, state, and local environmental, health and safety, and other laws and regulations that may affect our research, development or production efforts.
Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access
U.S.
There continues to be considerable public and government scrutiny of pharmaceutical pricing, and measures to address the perceived high cost of pharmaceuticals are being considered at various levels of state and federal government. In addition, U.S. government action to reduce federal spending on entitlement programs, including Medicare and Medicaid, may affect payment for our products or services associated with the provision of our products. Additionally, there has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs and reform government program reimbursement methodologies for drug products. The regulatory priorities of the current U.S. presidential administration could further intensify these efforts, which could have a material adverse impact on our business.
In the U.S., we are required to provide rebates to the federal government and respective state governments on their purchases of our pharmaceuticals under various federal and state healthcare programs, including state Medicaid and Medicaid Managed Care programs (minimum of 23.1 percent plus adjustments for price increases over time) and discounts to private entities who treat patients in certain types of health care facilities intended to serve low-income and uninsured patients (known as 340B facilities). No rebates are required at this time in the Medicare Part B (physician and hospital outpatient) program where reimbursement is set on an “average sales price plus 4.3 percent” formula. Additionally, an annual fee is imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs. Since 2019, the Bipartisan Budget Act has required manufacturers of brand-name drugs, biologics, and biosimilars to provide a discount of 70 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), an increase from the previous 50 percent discount.
Rebates are also negotiated in the private sector. We pay rebates to private payers who provide prescription drug benefits to seniors covered by Medicare and to private payers who provide prescription drug benefits to their customers. These rebates are affected by the introduction of competitive products and generics in the same class. Our approach to the rebates we offer to private payers who provide prescription drug benefits to seniors covered by Medicare may be impacted by recent regulatory amendments included in the anti-kickback statute final rule that will become effective on January 1, 2023.
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Outside the U.S.
Globally, public and private payers are increasingly restricting access to pharmaceuticals based on assessments of comparative effectiveness and value, including through the establishment of formal health technology assessment processes. In addition, third-party organizations, including professional associations, academic institutions, and non-profit entities associated with payers, are conducting and publishing comparative effectiveness and cost/benefit analyses on medicines, the impact of which are uncertain at this time.
In most international markets, we operate in an environment of government-mandated cost-containment programs, which may include price controls, international reference pricing (to other countries’ prices), discounts and rebates, therapeutic reference pricing (to other, often generic, pharmaceutical choices), restrictions on physician prescription levels, and mandatory generic substitution. We may experience additional pricing pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems around the world.
We cannot predict the extent to which our business may be affected by these or other potential future legislative, regulatory, or payer developments. However, in general we expect to see continued focus on regulating pricing resulting in additional state, federal, and international legislative and regulatory developments that could have further negative effects on pricing and reimbursement for our products.
See Item 7, “Management's Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access” for additional information regarding recent legislative, administrative, and other pricing initiatives and their impact on our results.
Research and Development
Our commitment to research and development dates back more than 140 years. We invest heavily in research and development because we believe it is critical to our long-term competitiveness. At the end of 2020, we employed approximately 7,600 people in pharmaceutical research and development activities, including a substantial number of physicians, scientists holding graduate or postgraduate degrees, and highly skilled technical personnel.
Our internal pharmaceutical research focuses primarily on the areas of diabetes, oncology, immunology, neurodegeneration, and pain. During 2020, we also focused on researching and developing potential treatments for COVID-19. In addition to discovering and developing new medicines, we seek to expand the value of existing products through new uses, formulations, and therapeutic approaches that provide additional value to patients.
To supplement our internal efforts, we collaborate with others, including academic institutions and research-based pharmaceutical and biotechnology companies. We use the services of physicians, hospitals, medical schools, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of our medicines. We actively invest in external research and technologies that we believe complement and strengthen our own efforts. These investments can take many forms, including, among others, licensing arrangements, co-development agreements, co-promotion arrangements, joint ventures, acquisitions, and equity investments.
Pharmaceutical development is time-consuming, expensive, and risky. Very few of the candidates discovered by researchers ultimately become approved medicines. The process from discovery to regulatory approval can take over a decade. Candidates can fail at any stage of the process, and even late-stage candidates sometimes fail to receive regulatory approval or achieve commercial success. The following describes in more detail the research and development process for pharmaceutical products:
Phases of New Drug Development
•Discovery Phase
In the discovery phase, scientists identify, design, and synthesize promising candidates by analyzing their effect on biological targets thought to play a role in disease. Targets are often unproven and only candidates that have the desired effect on the target and meet other design criteria move to the next phase of development, which includes the initiation of studies in animals to support regulatory and safety requirements for clinical research in humans. The discovery phase can take years and the probability of any one candidate becoming a medicine is extremely low.
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•Early Development Phase
Early development includes initial testing for safety and efficacy and early analyses of manufacturing requirements. Safety testing is initially performed in laboratory tests and animals, as necessary. In general, the first human tests (often referred to as Phase I) are conducted in small groups of subjects to assess safety and evaluate the potential dosing range. Subsequently, larger populations of patients are studied (Phase II) to identify initial signs of efficacy while continuing to assess safety. In parallel, scientists work to identify safe, effective, and economical manufacturing processes. Long-term animal studies continue to test for potential safety issues. Of the candidates that enter the early development phase, approximately 10 percent move to the late development phase. The early development phase varies but can take several years to complete.
•Late Development Phase
Late phase development projects (typically Phase III) have met initial safety requirements and shown initial evidence of efficacy in earlier studies. As a result, these candidates generally have a higher likelihood of success and trials include larger patient populations to demonstrate safety and efficacy in the disease. These studies are designed to demonstrate the benefit and risk of the potential new medicine and may be compared to competitive therapies, placebo, or both. Phase III studies are generally conducted globally and are designed to support regulatory filings for marketing approval. The duration of Phase III testing varies by disease and may take two to four years.
•Submission Phase
Once a potential new medicine is submitted to regulatory agencies, the time to final marketing approval can vary from several months to several years, depending on the disease state, the strength and complexity of available data, the degree of unmet need, and the time required for the regulatory agency(ies) to evaluate the submission, which can depend on prioritization by regulators and other factors. There is no guarantee that a potential medicine will receive marketing approval, or that decisions on marketing approvals or indications will be consistent across geographic areas.
We believe our investments in research, both internally and in collaboration with others, have resulted in a robust pipeline of potential new medicines and new treatment indications in all stages of development. We currently have approximately 45 candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase. See Item 7, “Management's Discussion and Analysis - Results of Operations - Executive Overview - Late-Stage Pipeline,” for more information on certain of our product candidates.
Raw Materials and Product Supply
Most of the principal materials we use in our manufacturing operations are available from more than one source. However, we obtain certain raw or intermediate materials primarily from only one source. We generally seek to maintain sufficient inventory to supply the market until an alternative source of supply could be implemented, in the event one of these suppliers was unable to provide the materials or product. However, in the event of an extended failure of a supplier or significant unanticipated increases in demand on a supplier, it is possible that we could experience an interruption in supply until we established new sources or, in some cases, implemented alternative processes.
The majority of our revenue comes from products produced in our own facilities. Our principal active ingredient manufacturing occurs at sites we own in the U.S., including Puerto Rico, and Ireland. Finishing operations, including formulation, filling, assembling, delivery device manufacturing, and packaging, take place at a number of sites throughout the world. We utilize third parties for certain active ingredient manufacturing and finishing operations.
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We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way that is intended to allow us to meet all expected product demand while maintaining flexibility to reallocate manufacturing capacity to improve efficiency and respond to changes in supply and demand. To maintain a stable supply of our products, we use a variety of techniques including comprehensive quality systems, inventory management, and back-up sites.
However, pharmaceutical production processes are complex, highly regulated, and vary widely from product to product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital expenditures, process modifications, and regulatory approvals. Accordingly, if we were to experience unplanned plant shutdowns at one of our own facilities, significant failure of a contract supplier, or significant unanticipated increases in demand, we could experience an interruption in supply of certain products or product shortages until production could be resumed or expanded.
In addition, COVID-19 could also have an adverse impact on our manufacturing operations, global supply chain, and distribution systems, which could impact our ability to produce and distribute our products and affect the ability of third parties on which we rely to fulfill their obligations to us, and could increase our expenses. For more information, see Item 1A, "Risk Factors - Risks Related to Our Business - The COVID-19 pandemic and efforts to reduce its spread have impacted, and may in future periods negatively impact, our business and operations.” and Item 7, “Management's Discussion and Analysis - Results of Operations - Executive Overview - COVID-19 Pandemic.”
Quality Assurance
Our success depends in great measure on customer confidence in the quality of our products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of our operations, including research and development, purchasing, facilities planning, manufacturing, distribution, and dissemination of information about our medicines.
Quality of production processes involves strict control of ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. We perform tests at various stages of production processes and on the final product in an effort to ensure that the product meets all applicable regulatory requirements and our internal standards. These tests may involve chemical and physical chemical analyses, microbiological testing, testing in animals, or a combination thereof. Additional assurance of quality is provided by quality assurance groups that audit and monitor all aspects of quality related to pharmaceutical manufacturing procedures and systems in company operations and at third-party suppliers.
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Executive Officers of the Company
The following table sets forth certain information regarding our current executive officers.
The term of office for each executive officer expires on the date of the annual meeting of the board of directors, to be held on May 3, 2021 in connection with the company's annual meeting of shareholders, or on the date his or her successor is chosen and qualified. No director or executive officer has a “family relationship” with any other director or executive officer of the company, as that term is defined for purposes of this disclosure requirement. There is no understanding between any executive officer or director and any other person pursuant to which the executive officer was selected.
| Name | Age | Titles and Business Experience | ||||||
| David A. Ricks | 53 | Chairman, President, and Chief Executive Officer (CEO) (since 2017). Previously, Mr. Ricks held various leadership roles with Lilly, including senior vice president and president, Lilly Bio-Medicines. Mr. Ricks has 24 years of service with Lilly. | ||||||
| Anat Ashkenazi | 48 | Senior Vice President and Chief Financial Officer (since 2021). Previously, Ms. Ashkenazi held various leadership roles with Lilly, including senior vice president, controller and chief financial officer, Lilly Research Laboratories, and vice president, finance and chief financial officer, Lilly Diabetes and Lilly global manufacturing and quality. Ms. Ashkenazi has 19 years of service with Lilly. | ||||||
| Melissa S. Barnes | 52 | Senior Vice President, Enterprise Risk Management, and Chief Ethics and Compliance Officer (since 2013). Previously, Ms. Barnes held various leadership roles with Lilly, including vice president, deputy general counsel. Ms. Barnes has 26 years of service with Lilly. | ||||||
| Stephen F. Fry | 55 | Senior Vice President, Human Resources and Diversity (since 2011). Previously, Mr. Fry held various leadership roles with Lilly, including vice president, human resources. Mr. Fry has 33 years of service with Lilly. | ||||||
| Anat Hakim | 51 | Senior Vice President, General Counsel and Secretary (since 2020). Prior to joining Lilly, Ms. Hakim was senior vice president, general counsel and secretary of WellCare Health Plans, Inc. (WellCare) from 2016 to 2018, and executive vice president, general counsel and secretary of WellCare from 2018 to 2020. Prior to joining WellCare, she served as divisional vice president and associate general counsel of intellectual property litigation at Abbott Laboratories from 2010 to 2013 and divisional vice president and associate general counsel of litigation from 2013 to 2016. Ms. Hakim has one year of service with Lilly. | ||||||
| Patrik Jonsson | 54 | Senior Vice President, President, Lilly USA, and Chief Customer Officer (since 2020). Previously, Mr. Jonsson held various leadership roles with Lilly, including senior vice president and president, Lilly Bio-Medicines and president and general manager, Lilly Japan. Mr. Jonsson has 30 years of service with Lilly. | ||||||
| Michael B. Mason | 54 | Senior Vice President and President, Lilly Diabetes (since 2020). Previously, Mr. Mason held various leadership roles with Lilly, including senior vice president, connected care and insulins and vice president of U.S. Diabetes. Mr. Mason has 31 years of service with Lilly. | ||||||
| Johna L. Norton | 54 | Senior Vice President, Global Quality (since 2017). Previously, Ms. Norton held various leadership roles with Lilly, including vice president, global quality assurance API manufacturing and product research and development. Ms. Norton has 30 years of service with Lilly. | ||||||
| Myles O'Neill | 62 | Senior Vice President and President, Manufacturing Operations (since 2018). Previously, Mr. O’Neill held various leadership roles with Lilly, including senior vice president of global parenteral drug product, delivery devices, and regional manufacturing. Mr. O’Neill has 18 years of service with Lilly. | ||||||
| Leigh Ann Pusey | 58 | Senior Vice President, Corporate Affairs and Communications (since 2017). Prior to joining Lilly, Ms. Pusey was president and chief executive officer of the American Insurance Association from 2009 to 2017. Ms. Pusey has three years of service with Lilly. | ||||||
| Aarti Shah, Ph.D. | 56 | Senior Vice President and Chief Information and Digital Officer (since 2018). Previously, Dr. Shah held various leadership roles with Lilly, including senior vice president information technology and chief information officer and global brand development leader. Dr. Shah has 27 years of service with Lilly. | ||||||
| Daniel M. Skovronsky, M.D., Ph.D. | 47 | Senior Vice President, Chief Scientific Officer, and President, Lilly Research Laboratories (since 2018). Previously, Dr. Skovronsky held various leadership roles with Lilly, including senior vice president, clinical and product development. Dr. Skovronsky has 10 years of service with Lilly. | ||||||
| Anne E. White | 52 | Senior Vice President and President, Lilly Oncology (since 2018). Previously, Ms. White held various leadership roles with Lilly, including vice president of Portfolio Management, Chorus and Next Generation Research and Development. Ms. White has 25 years of service with Lilly. | ||||||
| Ilya Yuffa | 46 | Senior Vice President and President, Lilly Bio-Medicines (since 2020). Previously, Mr. Yuffa held various leadership roles with Lilly, including vice president of U.S. Diabetes general manager of Italy Hub, and vice president, global ethics and compliance officer since 2014. Mr. Yuffa has 24 years of service with Lilly. | ||||||
| Alfonso Zulueta | 58 | Senior Vice President and President, Lilly International (since 2014). Previously, Mr. Zulueta held various leadership roles with Lilly, including president of emerging markets and of Lilly Japan. Mr. Zulueta has 32 years of service with Lilly. | ||||||
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Human Capital Management
Our core values—integrity, excellence, and respect for people—shape our approach to attracting, retaining, engaging, and developing a highly skilled and ethical workforce, which is critical to executing our strategy. We believe the strength of our workforce significantly contributes to our financial performance and enables us to make life better for people around the world. For instance, most of the products we sell today were discovered or developed by our own scientists, and our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. We believe that fostering a positive culture that values the contributions of our talented colleagues helps drive our success.
We are committed to creating a safe, supportive, ethical, and rewarding work environment through strategic focus on our human capital management process, fairness and nondiscrimination in our employment practices, robust training and development opportunities, and competitive pay and benefits. We believe our dedication to promoting diversity and inclusion (D&I) within our company reflects our values and is a key driver of business success and growth.
We regularly conduct anonymous employee surveys to seek feedback from our workforce on a variety of topics. These results are reviewed and analyzed by our leaders in order to implement changes to our policies and benefits designed to improve our employees' well-being. As a result of our efforts, we believe that we have a highly performing, cohesive workforce and that our employee relations are good.
At the end of 2020, we employed approximately 35,000 people, including approximately 19,500 employees outside the U.S. Our employees include approximately 7,600 people engaged in research and development activities.
Strategy and Oversight
In order to build diverse and inclusive teams, our CEO and executive committee set expectations for inclusive leadership and hold leaders accountable for achieving results. Because dedication to human capital management is also a core component of our corporate governance, our board of directors regularly engages with management and facilitates a system of reporting designed to monitor human capital management initiatives and progress as part of the overarching framework that guides how we attract, retain, engage, and develop a workforce that aligns with our values and mission.
Diversity and Inclusion
We are committed to fairness and nondiscrimination in our employment practices, and we deeply value diverse backgrounds, skills, and global perspectives. To fulfill our purpose, we believe we must look at challenges from multiple viewpoints and understand the diverse experiences of the patients who depend on us.
We believe that fostering D&I begins with understanding. For example, our Employee Journeys research has yielded important insights about the experiences of women, Black/African American, Latinx, Asian, and lesbian, gay, bisexual, transgender, or queer (LGBTQ) employees at Lilly. The results of this research are reviewed by our senior leadership, and we deploy actions and activities in response to these insights to improve our workplace and corporate culture.
Since 2017, we have committed to increasing the number of women, Black/African American, Latinx, and Asian populations in leadership roles, and we actively monitor our progress. From the end of 2017 through the end of 2020, we increased the number of women in management globally from 41 percent to 46 percent. For minority group members (MGM) in the U.S. over the same period, we increased management representation from 16 percent to 22 percent. Across all levels of our workforce, from the end of 2017 through the end of 2020, we have seen increased representation for MGMs in the U.S. and women globally. Our focus on D&I is also evident at our executive committee and board of directors. Seven of 15 members (approximately 47 percent) of our executive committee (which includes our CEO) are women and two are MGM, including one MGM woman. In addition, the company’s 15-member board of directors includes six women and seven members of underrepresented groups (including MGM as well as LGBTQ individuals).
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Our efforts in D&I and workplace benefits have garnered numerous recognitions, including, in 2020 and early 2021, Top 50 Companies for Diversity by DiversityInc., America’s Best Employers for Diversity by Forbes, America’s Most JUST Companies and Forbes JUST 100 by Forbes and JUST Capital, Perfect Score on the Human Rights Campaign Foundation Corporate Equality Index (2020 and 2021), World’s Most Ethical Companies by Ethisphere, Leading Disability Employer by the National Organization on Disability, Top Employers by Science Magazine, America’s Most Responsible Companies by Newsweek, and 100 Best Companies, Top 75 Companies for Executive Women, Best Companies for Dads, and Best Companies for Multicultural Women by Working Mother Magazine.
Employee Development
We believe talent begins with the hiring process. We therefore require hiring managers to consider a diverse pool of candidates and we strive to provide a diverse panel of interviewers for open positions. We believe that hiring in this way helps ensure that people from all backgrounds have equal opportunity to advance their careers.
We offer training to enable our employees to perform their duties in our highly regulated industry. We also strive to cultivate a culture that promotes ongoing learning by encouraging employees to seek further education and growth experiences, helping them build rewarding careers. We have introduced online programming to facilitate access to our learning and development offerings. Many training courses are designed to improve accessibility for people with disabilities and other unique needs. Across Lilly, we are working to design learning experiences to be more inclusive and effective.
To further improve our talent programs and processes, in 2019, we introduced Explore Your Career, a global framework of tools and resources for our employees. We believe Explore Your Career provides broader access and transparency about career development and advancement at Lilly. In 2018, we introduced Emerge, a three-day program led by our CEO that is designed to develop MGM talent at Lilly, and three cohorts comprising Black/African American women, Latinx and Asian women, and MGM men have participated in this enterprise-level program since its inception. Lilly also offers established leadership development programs for women and earlier career multi-cultural talent, as well as leaders at all levels.
Employee resource groups (ERGs) are another important component of developing talent at Lilly. We currently have 10 ERGs representing groups including women, MGMs, LGBTQ individuals, and people with disabilities. ERGs offer our diverse workforce opportunities to build relationships, engage with senior leaders, advance our caring community, and offer unique insights and perspectives to improve our business. Membership in our ERGs continues to grow, with an estimated 11,430 people participating worldwide at the end of 2020.
In furtherance of our efforts to create an inclusive workplace, in 2020 we expanded Make it Safe to Thrive, an education and awareness program to help employees and leaders understand how individual psychological safety can be created and enhanced, with the goal of ensuring that all employees feel safe to speak up and to share their ideas at work. The program includes live and online training and a monthly video series.
Employee Health and Safety
While we have consistently focused on protecting the health and safety of our employees, the COVID-19 pandemic has emphasized the importance of this critical priority. In response to the pandemic, we have taken measures to protect our workforce, maximize social distancing, and inform employees about our policies. For example, we instituted travel restrictions and remote working arrangements for employees whose roles do not require on-site presence. To support employee well-being in the U.S., we enhanced local benefits related to health care, childcare, and time off, and expanded reimbursement for home office ergonomic support expenditures. In the U.S., we provide full coverage for COVID-19 diagnostic testing and treatment, and at our corporate headquarters in Indianapolis, we provide free on-site testing for employees and members of their household. In addition, as part of our Make it Safe to Thrive program, we partnered with our ERGs to offer a series of programs highlighting and addressing challenges faced by ERG members during the COVID-19 pandemic, aiming to build understanding of different experiences and to offer ways to be inclusive.
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Information Available on Our Website
Our company website is www.lilly.com. None of the information accessible on or through our website is incorporated into this Annual Report on Form 10-K. We make available through the website, free of charge, our company filings with the SEC as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. These include our 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 link to our SEC filings is investor.lilly.com/financial-information/sec-filings.
In addition, the Governance portion of our website includes our corporate governance guidelines, board of directors and committee information (including committee charters), and our articles of incorporation and bylaws. The link to our corporate governance information is lilly.com/leadership/governance.
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Item 1A.Risk Factors
In addition to the other information contained in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our company. It is possible that our business, financial condition, liquidity, cash flows, or results of operations could be materially adversely affected by any of these risks. Certain of these risks could also adversely affect the company's reputation. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could also adversely affect our business and reputation.
Risks Related to Our Business
•The COVID-19 pandemic and efforts to reduce its spread have impacted, and may in future periods negatively impact, our business and operations.
The COVID-19 pandemic has substantially burdened healthcare systems worldwide. The focus of resources on COVID-19 and widespread protective measures implemented to control the spread of the pandemic have impacted discovery, research, development, manufacturing, and sales of our medicines as well as those of the broader pharmaceutical industry. Significant delays or unexpected issues, such as higher discontinuation rates or delays accumulating data, affecting the timing, conduct, or regulatory review of our clinical trials, could adversely affect our ability to commercialize some assets in our product pipeline.
Lack of normal access and fewer in-person interactions by patients and our employees with the healthcare system, along with concern about the continued supply of medications, has resulted, and may continue to result, in changes in buying patterns throughout the supply chain, impacting demand for our products and negatively impacting the consolidated operating results of our underlying business. In certain locations in the U.S and around the world with COVID-19 outbreaks, we temporarily halted in-person interactions by our employees with healthcare providers and increased virtual interactions. While in-person interactions have resumed in many locations, we may decide to halt such activity in the future and, in those cases, expect to resume such interactions as it is safe to do so and in compliance with applicable guidance and requirements. The COVID-19 pandemic could also have an adverse impact on our manufacturing operations, global supply chain, and distribution systems, which could impact our ability to produce and distribute our products and affect the ability of third parties on which we rely to fulfill their obligations to us, and could increase our expenses.
We also face unique risks and uncertainties related to our development, manufacture, and uptake of potential treatments for COVID-19, including vulnerability to supply chain disruptions, higher manufacturing costs, difficulties in manufacturing sufficient quantities of our therapies, restrictions on administration that limit widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product after delivery by us. Expedited authorization processes, including our EUAs for bamlanivimab and bamlanivimab and etesevimab administered together, have allowed restricted distribution of products with less than typical safety and efficacy data, and additional data that become available may call into question the safety or effectiveness of our COVID-19 therapies. Additionally, the availability of superior or competitive therapies, or preventative measures such as vaccines, coupled with the transient nature of pandemics, could negatively impact or eliminate demand for our COVID-19 therapies. In addition, we may be required to accept returns of certain product previously shipped pursuant to EUAs if the relevant EUA is revoked or terminated. Mutations or the spread of other variants of the coronavirus could also render our therapies ineffective. Any of these risks could prevent us from recouping our substantial investments in the research, development, and manufacture of our COVID-19 therapies.
In addition, the conditions created by the COVID-19 pandemic intensify other risks inherent in our business, including, among other things, risks related to drug pricing and access, the conduct of clinical trials, workplace safety and productivity, intellectual property protection, product liability and other litigation, and the impact of adverse global and local economic conditions.
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We have experienced negative impacts to our underlying business, including demand for our products, due to the COVID-19 pandemic but the pandemic has not negatively impacted our liquidity position. Given the evolving nature of the virus, the financial impact of the COVID-19 pandemic on our results of operations, financial condition, liquidity, and cash flows in future periods could change, perhaps materially. The degree to which the COVID-19 pandemic affects us will depend on developments that are highly uncertain and beyond our knowledge or control, including, but not limited to, the duration and severity of the pandemic, the actions taken to reduce its transmission, including widespread availability of vaccines, and the speed with which, and extent to which, more stable economic and operating conditions resume. Should the COVID-19 pandemic and any associated recession or depression continue for a prolonged period, our results of operations, financial condition, liquidity, and cash flows could be materially impacted by lower revenues and profitability and a lower likelihood of effectively and efficiently developing and launching new medicines.
•Pharmaceutical research and development is very costly and highly uncertain; we may not succeed in developing, licensing, or acquiring commercially successful products sufficient in number or value to replace revenues of products that have lost or will soon lose intellectual property protection or are displaced by competing products or therapies.
There are many difficulties and uncertainties inherent in pharmaceutical research and development, the introduction of new products, and business development activities to expand our product pipeline.
There is a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market can take over a decade and often costs in excess of $2 billion. Failure can occur at any point in the process, including in later stages after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies continue to establish high hurdles for the efficacy and safety of new products. Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict revenue growth rates of new products.
We cannot state with certainty when or whether our products now under development will be approved or launched; whether, if initially granted, such approval will be maintained; whether we will be able to develop, license, or otherwise acquire additional product candidates or products; or whether our products, once launched, will be commercially successful.
We must maintain a continuous flow of successful new products and successful new indications or brand extensions for existing products, both through our internal efforts and our business development activities, sufficient both to cover our substantial research and development costs and to replace revenues that are lost as profitable products lose intellectual property exclusivity or are displaced by competing products or therapies. Failure to do so in the short-term or long-term would have a material adverse effect on our business, results of operations, cash flows, and financial position. Our business development activities to enhance our product pipeline may include acquisitions, strategic alliances, collaborations, investments, and licensing arrangements. There are substantial risks associated with identifying business development targets and consummating related transactions, which may not be completed in a timely manner, if at all, may not result in successful commercialization of any product, and may give rise to legal proceedings or regulatory scrutiny.
See Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive Overview - Late-Stage Pipeline,” for more details about our current product pipeline.
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•We depend on products with intellectual property protection for most of our revenues, cash flows, and earnings; we have lost or will lose effective intellectual property protection for many of those products in the next few years, which has resulted and is likely to continue to result in rapid and severe declines in revenues.
A number of our top-selling products, including Alimta and Forteo, have recently lost, or will lose in the next few years, significant patent protection and/or data protection in the U.S. as well as key countries outside the U.S. We have faced and remain exposed to generic competition following the loss of such intellectual property protection. In particular, we expect that the entry of generic competition for Alimta in the U.S. following the loss of patent exclusivity will cause a rapid and severe decline in revenue for the product and have a material adverse effect on our consolidated results of operations and cash flows.
Certain other significant products no longer have effective exclusivity through patent protection or data protection. For non-biologic products, loss of exclusivity (whether by expiration of legal rights or by termination thereof as a consequence of litigation) typically results in the entry of one or more generic competitors, leading to a rapid and severe decline in revenues, especially in the U.S. Historically, outside the U.S., the market penetration of generics following loss of exclusivity has not been as rapid or pervasive as in the U.S.; however, generic market penetration is increasing in many markets outside the U.S., including Japan, Europe, and many countries in emerging markets. For biologics (such as Humalog, Humulin, Erbitux, Cyramza, Trulicity, Taltz, and Emgality), loss of exclusivity may or may not result in the near-term entry of competitor versions (i.e., biosimilars) due to many factors, including development timelines, manufacturing challenges, and/or uncertainties regarding the regulatory pathways for approval of the competitor versions. Generic pharmaceutical companies could also introduce a generic product before resolution of any related patent litigation.
There is no assurance that the patents we are seeking will be granted or that the patents we hold will be found valid and enforceable if challenged. Moreover, patents relating to particular products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or marketing alternative products or formulations that compete with our patented products. In addition, competitors or other third parties may assert claims that our activities infringe patents or other intellectual property rights held by them, or allege a third-party right of ownership in our existing intellectual property. See Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Patent Matters,” and Item 1, "Business - Patents, Trademarks, and Other Intellectual Property Rights," for more details.
•Our long-term success depends on intellectual property protection; if our intellectual property rights are invalidated, circumvented, or weakened, our business will be adversely affected.
Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. Without strong intellectual property protection, we would be unable to generate the returns necessary to support our significant investments in research and development, as well as the other expenditures required to bring new drugs to the market.
Intellectual property protection varies throughout the world and is subject to change over time, depending on local laws and regulations. Changes to such laws and regulations could reduce protections for our innovative products. In the U.S., in addition to the process for challenging patents set forth in the BPCIA, which applies to biologic products, the Hatch-Waxman Act provides generic companies powerful incentives to seek to invalidate our other pharmaceutical patents. As a result, we expect that our U.S. patents on major pharmaceutical products will continue to be routinely challenged in litigation and may not be upheld. In addition, a separate IPR process allows competitors to request review of issued patents by the USPTO without the protections of the Hatch-Waxman Act. Our patents may be invalidated through this expedited review process. Although such a decision can be appealed to the courts, in certain circumstances a loss in such a proceeding could result in a competitor entering the market, while a win provides no precedential value, meaning the same patent can be challenged by other competitors. We face many generic manufacturer challenges to our patents outside the U.S. as well. The entry of generic competitors typically results in rapid and severe declines in revenues. In addition, competitors or other third parties may claim that our activities infringe patents or other intellectual property rights held by them. If successful, such claims could result in our being unable to market a product in a particular territory or being required to pay significant damages for past infringement or royalties on future sales. See Item 1, “Business - Patents, Trademarks, and Other Intellectual Property Rights,” and Item 8, "Financial Statements and Supplementary Data - Note 16, Contingencies," for more details.
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•We and our products face intense competition from multinational pharmaceutical companies, biotechnology companies, and lower-cost generic and biosimilar manufacturers, and such competition could have a material adverse effect on our business.
We compete with a large number of multinational pharmaceutical companies, biotechnology companies, and generic pharmaceutical companies. To compete successfully, we must continue to deliver to the market innovative, cost-effective products that meet important medical needs. Our product revenues can be adversely affected by the introduction by competitors of branded products that are perceived as superior by the marketplace, by generic or biosimilar versions of our branded products, and by generic or biosimilar versions of other products in the same therapeutic class as our branded products. Our revenues can also be adversely affected by treatment innovations that eliminate or minimize the need for treatment with our drugs.
Regulation of generic and biosimilar products varies around the world and such regulation is complex and subject to ongoing interpretation and implementation by regulatory agencies and courts. Particularly for biosimilars, recent government proposals could make it easier, less expensive, and less time consuming for competitor products to enter the market, some of which could be substituted for our products by pharmacies. Given the importance of biologic products to our clinical-stage pipeline, such regulation could have a material adverse effect on our business. See Item 1, “Business - Competition” and "Business - Research and Development," for more details.
•Failure, inadequacy, or breach of our IT systems or our business processes regarding confidential information and other data, unauthorized access to our confidential information or violations of data protection laws could result in material harm to our business and reputation.
A great deal of confidential information owned by us or our business partners or other third parties is stored in our information systems, networks, and facilities or those of third parties. This includes valuable trade secrets and intellectual property, clinical trial information, corporate strategic plans, marketing plans, customer information, and personally identifiable information, such as employee and patient information (collectively, confidential information). We also rely, to a large extent, on the efficient and uninterrupted operation of complex information technology systems, infrastructure, and hardware (together, IT systems), some of which are within our control and some of which are within the control of third parties, to accumulate, process, store, and transmit large amounts of confidential information and other data. We are subject to a variety of continuously evolving and developing laws and regulations around the world related to privacy, data protection, and data security. Maintaining the confidentiality, integrity and availability of our IT systems and confidential information is vital to our business.
IT systems are vulnerable to system inadequacies, operating failures, service interruptions or failures, security breaches, malicious intrusions, or cyber-attacks from a variety of sources. Cyber-attacks are growing in their frequency, sophistication, and intensity, and are becoming increasingly difficult to detect, mitigate, or prevent. Cyber-attacks come in many forms, including the deployment of harmful malware, exploitation of vulnerabilities (including those third-party software or systems), denial-of-service attacks, the use of social engineering, and other means to compromise the confidentiality, integrity and availability of our IT systems, confidential information, and other data. Breaches resulting in the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with our products and services, can occur in a variety of ways, including but not limited to, negligent or wrongful conduct by employees or others with permitted access to our systems and information, or wrongful conduct by hackers, competitors, certain governments or nation-states, or other current or former company personnel. Our third-party partners, including third-party providers of data hosting or cloud services, as well as suppliers, distributors, alliances, and other third-party service providers, face similar risks, which could affect us directly or indirectly. The healthcare industry has been and continues to be a target for cyber-attacks, and the number of threats has only increased during the COVID-19 pandemic. Numerous federal agencies that monitor and regulate internet and cyber-crime have issued guidance, alerts and directives warning of software vulnerabilities that require immediate patching, malicious actors targeting healthcare related systems and nation-state sponsored hacking designed to steal valuable information, including related to potential COVID-19 treatments.
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The failure or inadequacy of our IT systems or business processes, the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized access to disclosure or use of confidential information, or the unauthorized access to, disruption of, or interference with our products and services that rely on IT systems or business processes, could impair our ability to secure and maintain intellectual property rights; result in a product manufacturing interruption or failure, or in the interruption or failure of products or services that rely on IT systems or business processes; damage our operations, customer relationships, or reputation; and cause us to lose trade secrets or other competitive advantages. Unauthorized disclosure of personally identifiable information could expose us to significant sanctions for violations of data privacy laws and regulations around the world and could damage public trust in our company.
To date, system inadequacies, operating failures, unauthorized access, service interruptions or failures, security breaches, malicious intrusions, cyber-attacks, and the compromise, disruption, degradation, manipulation, loss, theft, destruction, or unauthorized disclosure or use of confidential information have not had a material impact on our consolidated results of operations. We maintain cyber liability insurance; however, this insurance may not be sufficient to cover the financial, legal, business, or reputational losses that may result from an interruption or breach of our IT systems. We continue to implement measures in an effort to protect, detect, respond to, and minimize or prevent these risks and to enhance the resiliency of our IT systems; however, these measures may not be successful and we may fail to detect or remediate security breaches, malicious intrusions, cyber-attacks, or other compromises of our systems. Any of these events could result in material financial, legal, commercial, or reputational harm to our business.
•Significant economic downturns or international trade disruptions or disputes could adversely affect our business and operating results.
While pharmaceuticals have not generally been sensitive to overall economic cycles, prolonged economic slowdowns, including as a result of COVID-19, could lead to decreased utilization of our products, affecting our sales volume. Declining tax revenues attributable to economic downturns increase the pressure on governments to reduce health care spending, leading to increasing government efforts to control drug prices and utilization. Additionally, some customers, including governments or other entities reliant upon government funding, may be unable to pay for our products in a timely manner. Also, if our customers, suppliers, or collaboration partners experience financial difficulties, we could experience slower customer collections, greater bad debt expense, and performance defaults by suppliers or collaboration partners. Similarly, in the event of a significant economic downturn, we could have difficulty accessing credit markets.
Significant portions of our business are conducted in Europe, including the United Kingdom, Asia, and other international geographies. Trade disputes and interruptions in international relationships, including pandemic diseases, such as COVID-19, could result in changes to regulations governing our products and our intellectual property, or otherwise affect our ability to do business. While we do not expect either circumstance to materially affect our business in a direct manner, these and similar events could adversely affect us, or our business partners or customers.
•Pharmaceutical products can develop unexpected safety or efficacy concerns, which could have a material adverse effect on our revenues, income, and reputation.
Pharmaceutical products receive regulatory approval based on data obtained in controlled clinical trials of limited duration. After approval, the products are used for longer periods of time by much larger numbers of patients. Accordingly, we and others (including regulatory agencies and private payers) collect extensive information on the efficacy and safety of our marketed products by continuously monitoring the use of our products in the marketplace. In addition, we or others may conduct post-marketing clinical studies on efficacy and safety of our marketed products. New safety or efficacy data from both market surveillance and post-marketing clinical studies may result in product label changes or other measures that could reduce the product's market acceptance and result in declining sales. Serious safety or efficacy issues that arise after product approval could result in voluntary or mandatory product recalls or withdrawals from the market. Safety issues could also result in costly product liability claims. See also “ - The COVID-19 pandemic and efforts to reduce its spread have impacted, and may in future periods negatively impact, our business and operations.”
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•We face litigation and investigations related to our products and our pricing practices and are self-insured; we could face large numbers of claims in the future, which could adversely affect our business.
We are subject to a substantial number of product liability claims involving various products, as well as litigation and investigations related to the pricing of our products. See Item 8, “Financial Statements and Supplementary Data - Note 16, Contingencies” for more information on our current product liability litigation, as well as pricing litigation, investigations, and inquiries. Because of the nature of pharmaceutical products, we are and could in the future become subject to large numbers of product liability claims for these or other products, or to further litigation or investigations, including related to pricing or other commercial practices. Such matters could affect our results of operations or require us to recognize substantial charges to resolve and, if involving marketed products, could adversely affect sales of the product. Due to a very restrictive market for liability insurance, we are self-insured for product liability losses for all our currently marketed products, as well as for litigation or investigations related to our pricing practices or other similar matters.
•Manufacturing difficulties or disruptions could lead to product supply problems.
Pharmaceutical manufacturing is complex and highly regulated. Manufacturing or quality assurance difficulties at our facilities or contracted facilities, or the failure or refusal of a supplier or contract manufacturer to supply contracted quantities, could result in product shortages, leading to lost revenue. Such difficulties or disruptions could result from quality, oversight, or regulatory compliance problems; natural disasters or pandemic disease; equipment, mechanical, data, or information technology system vulnerabilities, such as system inadequacies, inadequate controls or procedures, operating failures, service interruptions or failures, security breaches, malicious intrusions, or cyber-attacks from a variety of sources; or inability to obtain single-source raw or intermediate materials. In addition, given the difficulties in predicting sales of new products and the very long lead times necessary for the expansion and regulatory qualification of pharmaceutical manufacturing capacity, it is possible that we could have difficulty meeting unanticipated demand for new products. See Item 1, “Business - Raw Materials and Product Supply,” for more details.
•Reliance on third-party relationships and outsourcing arrangements could adversely affect our business.
We rely on third parties, including suppliers, distributors, alliances, and collaborations with other pharmaceutical and biotechnology companies, and third-party service providers, for selected aspects of product development, manufacturing, commercialization, support for information technology systems, product distribution, and certain financial transactional processes. For example, we outsource the day-to-day management and oversight of our clinical trials to contract research organizations. Outsourcing these functions involves the risk that the third parties may not perform to our standards or legal requirements; may not produce reliable results; may not perform in a timely manner; may not maintain the confidentiality, integrity, and availability of confidential and proprietary information relating to us, our clinical trial subjects, or patients; may experience disruption or fail to perform due to information technology system vulnerabilities, breaches, cyber-attacks, or inadequate controls or procedures; or may fail to perform at all. Failure of these third parties to meet their contractual, regulatory, confidentiality, privacy, security, or other obligations to us, our clinical trial subjects, and our patients could have a material adverse effect on our business.
Risks Related to Government Regulation
•Our business is subject to increasing government price controls and other public and private restrictions on pricing, reimbursement, and access for our drugs, which could have a material adverse effect on our reputation or business.
Public and private payers continue to take aggressive steps to control their expenditures for pharmaceuticals by placing restrictions on pricing and reimbursement for, and patient access to, our medications. These pressures could continue to negatively affect our future revenues and net income.
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We expect governments and private payers worldwide to intensify their scrutiny of, and actions intended to address, pricing, reimbursement, and access to pharmaceutical products. Additional regulations, legislation, or enforcement, including as a result of the current U.S. presidential administration, could adversely impact our revenue. However, we cannot predict the likelihood, nature, or extent of current and future health care reform efforts. We also may experience potential additional pricing pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems around the world.
For more details, see Item 1, “Business - Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access,” and Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access.”
•Changes in foreign currency rates or interest rate risks could materially affect our revenue, cost of sales, and operating expenses.
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from fluctuating currency exchange rates. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on our revenue, cost of sales, and operating expenses. In the event of an extreme devaluation of local currency, the price of our products could become unsustainable in the relevant market. See Item 7, “Management’s Discussion and Analysis - Financial Condition and Liquidity” for more details.
•Unanticipated changes in our tax rates or exposure to additional tax liabilities could increase our income taxes and decrease our net income.
We are subject to income taxes in the U.S. and numerous foreign jurisdictions, and in the course of our business, we make judgments about the expected tax treatment of various transactions and events. Changes in relevant tax laws, regulations, administrative practices, principles, and interpretations, as well as events that differ from our expectations, could adversely affect our future effective tax rates. In addition, global tax authorities routinely examine our tax returns and are expected to become more aggressive in their examinations of profit allocations among jurisdictions which could affect our anticipated tax liabilities. In December 2017, the U.S. enacted tax reform legislation significantly revising U.S. tax laws, and a number of other countries are also actively considering or enacting tax changes. Significant uncertainty currently exists regarding proposed tax policies of the current U.S. presidential administration including repeal of certain aspects of the 2017 tax law. Modifications to key elements of the U.S. or international tax framework could have a material adverse effect on our consolidated operating results and cash flows. See Item 7, “Management’s Discussion and Analysis - Results of Operations - Executive Overview - Other Matters - Tax Matters” and Item 8, "Financial Statements and Supplementary Data - Note 14, Income Taxes," for more details.
We have taken the position, based on an opinion of tax counsel, that our divestiture of Elanco common stock in connection with the 2019 separation of Elanco qualifies as a transaction that is tax-free for U.S. federal income tax purposes. If any facts, assumptions, representations, and undertakings from Lilly and Elanco regarding the past and future conduct of their respective businesses and other matters are incorrect or not otherwise satisfied, the divestiture may not qualify for tax-free treatment, which could result in significant U.S. federal income tax liabilities for us and our shareholders who exchanged their stock for Elanco stock.
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•Regulatory compliance problems could be damaging to the company.
The marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers, prescribers, and patients, are subject to extensive regulation. Many companies, including us, have been subject to claims related to these practices asserted by federal, state, and foreign governmental authorities, private payers, and consumers. These claims have resulted in substantial expense and other significant consequences to us. We are and could in the future become subject to such investigations, the outcomes of which could include criminal charges and fines, penalties, or other monetary or non-monetary remedies, including exclusion from U.S. federal and other health care programs. Such investigations may intensify as a result of the regulatory priorities of the current U.S. presidential administration. In addition, regulatory issues concerning compliance with cGMP, quality assurance, and similar regulations (and comparable foreign regulations) for our products can lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, delays or denials in the approvals of new products pending resolution of the issues, and reputational harm, any of which would adversely affect our business. See Item 1, “Business - Government Regulation of Our Operations,” for more details.
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Item 1B.Unresolved Staff Comments
None.
Item 2.Properties
Our principal domestic and international executive offices are located in Indianapolis. At December 31, 2020, we owned 9 production and distribution sites in the U.S., including Puerto Rico. Together with the corporate administrative offices, these facilities contain an aggregate of approximately 8.2 million square feet of floor area dedicated to production, distribution, and administration. Major production sites include Indianapolis, Indiana; Carolina, Puerto Rico; and Branchburg, New Jersey.
We own production and distribution sites in 8 countries outside the U.S., containing an aggregate of approximately 4.4 million square feet of floor area. Major production sites include facilities in Ireland, France, Spain, Italy, and China.
In the U.S., our research and development facilities contain an aggregate of approximately 4.2 million square feet of floor area, primarily consisting of owned facilities located in Indianapolis. We also lease smaller sites in San Diego, California; San Francisco, California; and New York, New York. Outside the U.S., we own a small research and development facility in Spain and lease a small site in Singapore.
We believe that none of our properties is subject to any encumbrance, easement, or other restriction that would detract materially from its value or impair its use in the operation of the business. The buildings we own are of varying ages and in good condition.
Item 3.Legal Proceedings
We are a party to various currently pending legal actions, government investigations, and environmental proceedings. Information pertaining to legal proceedings is described in Item 8, "Financial Statements and Supplementary Data - Note 16, Contingencies," and incorporated by reference herein.
Item 4.Mine Safety Disclosures
Not applicable.
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Part II
Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Information relating to the principal market for our common stock and related stockholder matters is described in Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." This information is incorporated herein by reference.
As of February 12, 2021, there were approximately 21,650 holders of record of our common stock based on information provided by our transfer agent. Our common stock is listed under the ticker symbol LLY on the New York Stock Exchange (NYSE).
The following table summarizes the activity related to repurchases of our equity securities during the fourth quarter ended December 31, 2020:
| Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (in thousands) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (dollars in millions) | ||||||||||
| October 2020 | — | $ | — | — | $ | 1,000.0 | ||||||||
| November 2020 | — | — | — | 1,000.0 | ||||||||||
| December 2020 | — | — | — | 1,000.0 | ||||||||||
| Total | — | — | — | |||||||||||
During the three months ended December 31, 2020, we did not repurchase any shares under the $8.00 billion share repurchase program authorized in June 2018.
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PERFORMANCE GRAPH
The following graph compares the return on Lilly stock with that of the Standard & Poor’s (S&P) 500 Stock Index and our peer group for the years 2016 through 2020. The graph assumes that, on December 31, 2015, a person invested $100 each in Lilly stock, the S&P 500 Stock Index, and the peer group's collective common stock. The graph measures total shareholder return, which takes into account both stock price and dividends. It assumes that dividends paid by a company are immediately reinvested in that company’s stock.
Value of $100 Invested on Last Business Day of 2015 Comparison of Five-Year Cumulative Total Shareholder Return Among Lilly, S&P 500 Stock Index, and Peer Group(1)
| Lilly | Peer Group | S&P 500 | ||||||||||||||||||
| Dec-15 | $ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||||||||||
| Dec-16 | $ | 89.63 | $ | 94.96 | $ | 111.96 | ||||||||||||||
| Dec-17 | $ | 105.61 | $ | 111.86 | $ | 136.40 | ||||||||||||||
| Dec-18 | $ | 148.33 | $ | 117.57 | $ | 130.42 | ||||||||||||||
| Dec-19 | $ | 172.29 | $ | 138.80 | $ | 171.49 | ||||||||||||||
| Dec-20 | $ | 225.80 | $ | 141.88 | $ | 203.04 | ||||||||||||||
(1) We constructed the peer group as the industry index for this graph. It is comprised of the following companies in the pharmaceutical and biotechnology industries: AbbVie Inc.; Allergan plc; Amgen Inc.; AstraZeneca PLC; Biogen Inc.; Bristol-Myers Squibb Company; Gilead Sciences Inc.; GlaxoSmithKline plc; Johnson & Johnson; Merck & Co., Inc.; Novartis AG.; Novo Nordisk A/S; Pfizer Inc.; Roche Holding AG; Sanofi S.A.; and Takeda Pharmaceutical Company Limited. The peer group used for performance benchmarking aligns with the peer group used for executive compensation purposes for 2020 other than our peer group for performance benchmarking excludes Celgene Corporation and Shire plc as they were acquired in 2019.
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Item 6. [Reserved]
Item 7.Management’s Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
(Tables present dollars in millions, except per-share data)
General
Management’s discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial position of our consolidated company. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in Item 8 of Part II of this Annual Report on Form 10-K. Certain statements in this Item 7 of Part II of this Annual Report on Form 10-K constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, “Risk Factors,” may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements.
Executive Overview
This section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented on a diluted basis.
COVID-19 Pandemic
In response to the COVID-19 pandemic, we have been focused on maintaining a reliable supply of our medicines; reducing the strain on the medical system; developing treatments for COVID-19; protecting the health, safety, and well-being of our employees; supporting our communities; and ensuring affordability of and access to our medicines, particularly insulin.
We have experienced negative impacts to our underlying business due to the COVID-19 pandemic, including decreases in new prescriptions as a result of fewer patient visits to physician’s offices to begin or change treatment, changes in payer segment mix, and the use of patient affordability programs in the United States (U.S.) due to rising unemployment. Additionally, we have experienced, and may continue to experience, decreased demand as a result of lack of normal access and fewer in-person interactions by patients and our employees with the healthcare system. In certain locations in the U.S. and around the world with COVID-19 outbreaks, we temporarily halted in-person interactions by our employees with healthcare providers and increased virtual interactions. While in-person interactions have resumed in many locations, we may decide to halt such activity in the future and, in those cases, expect to resume such interactions as it is safe to do so and in compliance with applicable guidance and requirements. We may experience additional pricing pressures resulting from the financial strain of the COVID-19 pandemic on government-funded healthcare systems around the world.
We remain committed to discovering and developing new treatments for the patients we serve. At the beginning of the COVID-19 pandemic, we paused new clinical trial starts and enrollment in new trials in order to reduce the strain on the medical system, and we have resumed this activity in our clinical trials. However, significant delays or unexpected issues, such as higher discontinuation rates or delays accumulating data, affecting the timing, conduct, or regulatory review of our clinical trials, could adversely affect our ability to commercialize some assets in our product pipeline if the COVID-19 pandemic continues for a protracted period.
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In regards to COVID-19 therapies, the U.S. Food and Drug Administration (FDA) granted Emergency Use Authorizations (EUA) for bamlanivimab and bamlanivimab and etesevimab administered together for higher-risk patients who have been recently diagnosed with mild-to-moderate COVID-19 and for baricitinib in combination with remdesivir in hospitalized COVID-19 patients. We are actively working with a variety of organizations, including governmental agencies, to facilitate access to our COVID-19 treatments in various countries. However, we face unique risks and uncertainties in our development, manufacture, and uptake of potential treatments for COVID-19, including vulnerability to supply chain disruptions, higher manufacturing costs, difficulties in manufacturing sufficient quantities of our therapies, restrictions on administration that limit widespread and timely access to our therapies, and risks related to handling, return, and/or refund of product after delivery by us. Expedited authorization processes, including our EUAs for bamlanivimab and bamlanivimab and etesevimab administered together, have allowed restricted distribution of products with less than typical safety and efficacy data, and additional data that become available may call into question the safety or effectiveness of our COVID-19 therapies. Additionally, the availability of superior or competitive therapies, or preventative measures, such as vaccines, coupled with the transient nature of pandemics, could negatively impact or eliminate demand for our COVID-19 therapies. In addition, we may be required to accept returns of certain product previously shipped pursuant to EUAs if the relevant EUA is revoked or terminated. Mutations or the spread of other variants of the coronavirus could also render our therapies ineffective. Any of these risks could prevent us from recouping our substantial investments in the research, development, and manufacture of our COVID-19 therapies.
Our ability to continue to operate without significant negative impacts will in part depend on our ability to protect our employees and our supply chain. We have taken steps to protect our employees worldwide, with particular measures in place for those working in our manufacturing sites and distribution facilities. For 2020, we were able to largely maintain our normal operations. However, uncertainty resulting from the COVID-19 pandemic could have an adverse impact on our manufacturing operations, global supply chain, and distribution systems, which could impact our ability to produce and distribute our products and the ability of third parties on which we rely to fulfill their obligations to us, and could increase our expenses.
Although the COVID-19 pandemic has affected our operations and demand for our products, it has not negatively impacted our liquidity position. We expect to continue to generate cash flows to meet our short-term liquidity needs and to have access to liquidity via the short-term and long-term debt markets. We also have not observed any material impairments of our assets or significant changes in the fair value of assets due to the COVID-19 pandemic.
The degree to which the COVID-19 pandemic will continue to impact our business operations, financial results, and liquidity will depend on future developments, is highly uncertain, and cannot be predicted due to, among other things, the duration and severity of the pandemic, the actions taken to reduce its transmission, including widespread availability of vaccines, and the speed with which, and extent to which, more stable economic and operating conditions resume. Should the COVID-19 pandemic and any associated recession or depression continue for a prolonged period, our results of operations, financial condition, liquidity, and cash flows could be materially impacted by lower revenues and profitability and a lower likelihood of effectively and efficiently developing and launching new medicines. See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for additional information on risk factors that could impact our results.
Elanco Animal Health (Elanco) Disposition
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer. As a result, we recognized a gain on the disposition of approximately $3.7 billion in the first quarter of 2019 and now operate as a single segment. See Note 19 to the consolidated financial statements for further discussion.
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Financial Results
The following table summarizes our key operating results:
| Year Ended December 31 | Percent Change | ||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Revenue | $ | 24,539.8 | $ | 22,319.5 | 10 | ||||||||||||
| Gross margin | 19,056.5 | 17,598.3 | 8 | ||||||||||||||
| Gross margin as a percent of revenue | 77.7 | % | 78.8 | % | |||||||||||||
| Operating expense | $ | 12,206.9 | $ | 11,808.8 | 3 | ||||||||||||
| Acquired in-process research and development | 660.4 | 239.6 | NM | ||||||||||||||
| Asset impairment, restructuring, and other special charges | 131.2 | 575.6 | (77) | ||||||||||||||
| Income before income taxes | 7,229.9 | 5,265.9 | 37 | ||||||||||||||
| Income taxes | 1,036.2 | 628.0 | 65 | ||||||||||||||
| Net income from continuing operations | 6,193.7 | 4,637.9 | 34 | ||||||||||||||
| Net income | 6,193.7 | 8,318.4 | (26) | ||||||||||||||
| EPS from continuing operations | 6.79 | 4.96 | 37 | ||||||||||||||
| EPS | 6.79 | 8.89 | (24) | ||||||||||||||
NM - not meaningful
Revenue increased in 2020 driven by increased volume, partially offset by lower realized prices. Operating expenses, defined as the sum of research and development and marketing, selling, and administrative expenses, increased in 2020, driven primarily by approximately $450 million of development expenses for COVID-19 therapies. The decreases in net income and EPS in 2020 were driven primarily by the approximately $3.7 billion gain recognized on the disposition of Elanco in 2019, partially offset by higher gross margin and higher other income in 2020.
The following highlighted items affect comparisons of our 2020 and 2019 financial results:
2020
Acquired in-process research and development (IPR&D) (Note 3 to the consolidated financial statements)
•We recognized acquired IPR&D charges of $660.4 million resulting from the acquisitions of Disarm Therapeutics, Inc. (Disarm) and a pre-clinical stage company as well as collaborations with Innovent Biologics, Inc. (Innovent), Sitryx Therapeutics Limited (Sitryx), Fochon Pharmaceuticals, Ltd. (Fochon), AbCellera Biologics Inc. (AbCellera), Evox Therapeutics Ltd (Evox), and Shanghai Junshi Biosciences Co., Ltd. (Junshi Biosciences).
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•We recognized charges of $131.2 million primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure, as well as acquisition and integration costs incurred as part of the acquisition of Dermira, Inc. (Dermira).
Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)
•We recognized $1.44 billion of net investment gains on equity securities.
2019
Acquired IPR&D (Note 3 to the consolidated financial statements)
•We recognized acquired IPR&D charges of $239.6 million resulting from collaborations with AC Immune SA (AC Immune), Centrexion Therapeutics Corporation (Centrexion), ImmuNext, Inc. (ImmuNext), and Avidity Biosciences, Inc. (Avidity).
Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)
•We recognized charges of $575.6 million primarily associated with the accelerated vesting of Loxo Oncology, Inc. (Loxo) employee equity awards as part of the acquisition of Loxo.
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Other-Net, (Income) Expense (Note 18 to the consolidated financial statements)
•We recognized $401.2 million of net investment gains on equity securities.
•We recognized a gain of $309.8 million on the sale of our antibiotics business in China.
•We recognized a debt extinguishment loss of $252.5 million related to the repurchase of debt.
Net Income from Discontinued Operations (Note 19 to the consolidated financial statements)
•We recognized a gain related to the disposition of Elanco of approximately $3.7 billion.
Late-Stage Pipeline
Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. We currently have approximately 45 candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.
The following new molecular entities (NMEs) and diagnostic agent are currently in Phase III clinical trials or have been submitted for regulatory review or have received first regulatory approval in the U.S., Europe, or Japan in 2020. In addition, the following table includes certain NMEs currently in Phase II clinical trials. The following table reflects the status of these NMEs and diagnostic agent, including certain other developments since January 1, 2020.
| Compound | Indication | Status | Developments | ||||||||
| COVID-19 Therapies | |||||||||||
| Bamlanivimab | COVID-19 | Emergency Use Authorization | The FDA granted EUA for higher-risk patients recently diagnosed with mild-to-moderate COVID-19 in the fourth quarter of 2020. Announced in January 2021 that a Phase III trial met the primary and all key secondary endpoints. Additional Phase III trials are ongoing. | ||||||||
| Bamlanivimab and etesevimab administered together | COVID-19 | Emergency Use Authorization | Announced in January 2021 that a Phase III trial met the primary and all key secondary endpoints. The FDA granted EUA for higher-risk patients recently diagnosed with mild-to-moderate COVID-19 in January 2021. Additional Phase III trials are ongoing. We intend to submit to the FDA for approval in the second half of 2021. | ||||||||
| Endocrinology | |||||||||||
Ultra-rapid Lispro (Lyumjev®) | Type 1 and 2 diabetes | Launched | Launched in Japan in the second quarter of 2020 and in the U.S. and Europe in the third quarter of 2020. | ||||||||
| Tirzepatide | Type 2 diabetes | Phase III | Announced in the fourth quarter of 2020 and in February 2021 that Phase III trials met the primary and all key secondary endpoints. Additional Phase III trials are ongoing. | ||||||||
| Obesity | Phase III trials are ongoing. | ||||||||||
| Nonalcoholic steatohepatitis | Phase II | Phase II trial is ongoing. | |||||||||
| Basal Insulin-Fc | Type 1 and 2 diabetes | Phase II | Phase II trials are ongoing. | ||||||||
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| Compound | Indication | Status | Developments | ||||||||
| Immunology | |||||||||||
Lebrikizumab(1) | Atopic dermatitis | Phase III | Acquired in Dermira acquisition in February 2020. The FDA granted Fast Track designation(2). Phase III trials are ongoing. | ||||||||
| Mirikizumab | Crohn's Disease | Phase III | Phase III trials are ongoing. | ||||||||
| Psoriasis | Announced in the third quarter of 2020 that Phase III trials met the primary and all key secondary endpoints. Additional Phase III trials are ongoing. | ||||||||||
| Ulcerative colitis | Phase III trials are ongoing. | ||||||||||
| CXCR1/2 Ligands Monoclonal Antibody | Hidradenitis Suppurativa | Phase II | Phase II trial initiated in the third quarter of 2020. | ||||||||
| IL-2 Conjugate | Systemic Lupus Erythematosus | Phase II | Phase II trial is ongoing. | ||||||||
| Neuroscience | |||||||||||
Lasmiditan (Reyvow®) | Acute treatment of migraine | Launched | Received Schedule V classification from the Drug Enforcement Agency and launched in the U.S. in the first quarter of 2020. Submitted in Europe and Japan in the fourth quarter of 2020. | ||||||||
Flortaucipir (TauvidTM) | Alzheimer's disease diagnostic | Launched | Launched in the U.S. in the fourth quarter of 2020. | ||||||||
Tanezumab(3) | Osteoarthritis pain | Submitted | Submitted to the FDA in 2019. The FDA intends to hold an Advisory Committee meeting, expected to occur in March 2021, to discuss the submission. | ||||||||
| Cancer pain | Phase III | Phase III trial is ongoing. | |||||||||
| Solanezumab | Preclinical Alzheimer's disease | Phase III | Announced in the first quarter of 2020 that a Phase III trial for people with dominantly inherited Alzheimer's disease (DIAD) did not meet the primary endpoint. We do not plan to pursue submission for DIAD. Phase III trial is ongoing for Anti-Amyloid Treatment in Asymptomatic Alzheimer's. | ||||||||
| Donanemab | Alzheimer’s disease | Phase II | Announced in January 2021 that a Phase II trial met the primary endpoint. Additional Phase II trials are ongoing. | ||||||||
| Epiregulin/TGFa mAb | Chronic pain | Phase II | Phase II trials initiated in the third quarter of 2020. | ||||||||
| PACAP38 Antibody | Chronic pain | Phase II | Phase II trial initiated in the fourth quarter of 2020. | ||||||||
| SSTR4 Agonist | Chronic pain | Phase II | Phase II trials initiated in the fourth quarter of 2020. | ||||||||
| Zagotenemab | Alzheimer’s disease | Phase II | Phase II trial is ongoing. | ||||||||
| Oncology | |||||||||||
Selpercatinib (Retevmo®) | Thyroid cancer | Launched | Granted accelerated approval(4) by the FDA based on Phase II data and launched in the U.S. in the second quarter of 2020. Submitted in Japan in the fourth quarter of 2020. Granted conditional marketing authorisation(4) in Europe in February 2021. Phase III trials are ongoing. | ||||||||
| Lung cancer | |||||||||||
| LOXO-305 | Hematological cancers | Phase II | Phase II trial initiated in the second quarter of 2020. Presented positive data at the American Society of Hematology Annual Meeting in the fourth quarter of 2020. | ||||||||
(1) In collaboration with Almirall, S.A. (Almirall) in Europe.
(2) Fast Track designation is designated to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.
(3) In collaboration with Pfizer, Inc.
(4) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.
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As part of our collaboration with Innovent, we plan to pursue registration of sintilimab injection (Tyvyt®) in the U.S. and other markets.
Our pipeline also contains several new indication line extension (NILEX) products. The following certain NILEX products are currently in Phase II or Phase III clinical testing, have been submitted for regulatory review, or have received first regulatory approval in the U.S., Europe, or Japan for use in the indication described in 2020. The following table reflects the status of certain NILEX products, including certain other developments since January 1, 2020:
| Compound | Indication | Status | Developments | ||||||||
| Endocrinology | |||||||||||
Empagliflozin (Jardiance®)(1) | Heart failure with reduced ejection fraction | Submitted | Submitted in the U.S., Europe and Japan in the fourth quarter of 2020. | ||||||||
| Chronic kidney disease | Phase III | Granted FDA Fast Track designation(2). Phase III trials are ongoing. | |||||||||
| Heart failure with preserved ejection fraction | |||||||||||
| Immunology | |||||||||||
Baricitinib (Olumiant®) | Atopic dermatitis | Approved | Announced in the first quarter of 2020 that a Phase III trial met the primary and all key secondary endpoints. Submitted in the U.S. in the second quarter of 2020. Approved in Europe in the third quarter of 2020 and in Japan in the fourth quarter of 2020. | ||||||||
| COVID-19 | Emergency Use Authorization | The FDA granted EUA in combination with remdesivir in hospitalized COVID-19 patients in the fourth quarter of 2020. | |||||||||
| Alopecia areata | Phase III | The FDA granted Breakthrough Therapy designation(3). Phase III trials are ongoing. | |||||||||
| Systemic lupus erythematosus | Phase III trials are ongoing. | ||||||||||
| Oncology | |||||||||||
Abemaciclib (Verzenio®) | Adjuvant breast cancer | Submitted | Announced in the second quarter of 2020 that a Phase III trial met the primary endpoint. Submitted in the U.S. and Europe in the fourth quarter of 2020. | ||||||||
| Prostate cancer | Phase II | Phase II trials are ongoing. | |||||||||
(1) In collaboration with Boehringer Ingelheim.
(2) Fast Track designation is designated to expedite the development and review of new therapies to treat serious conditions and address unmet medical needs.
(3) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint.
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There are many difficulties and uncertainties inherent in pharmaceutical research and development and the introduction of new products, as well as a high rate of failure inherent in new drug discovery and development. To bring a drug from the discovery phase to market can take over a decade and often costs in excess of $2 billion. Failure can occur at any point in the process, including in later stages after substantial investment. As a result, most funds invested in research programs will not generate financial returns. New product candidates that appear promising in development may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, limited scope of approved uses, changes in the relevant treatment standards or the availability of new or better competitive products, difficulty or excessive costs to manufacture, or infringement of the patents or intellectual property rights of others. Regulatory agencies continue to establish high hurdles for the efficacy and safety of new products. Delays and uncertainties in drug approval processes can result in delays in product launches and lost market opportunity. In addition, it can be very difficult to predict revenue growth rates of new products.
We manage research and development spending across our portfolio of potential new medicines. A delay in, or termination of, any one project will not necessarily cause a significant change in our total research and development spending. Due to the risks and uncertainties involved in the research and development process, we cannot reliably estimate the nature, timing, and costs of the efforts necessary to complete the development of our research and development projects, nor can we reliably estimate the future potential revenue that will be generated from any successful research and development project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated research and development expense. While we do accumulate certain research and development costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total research and development costs by project, by preclinical versus clinical spend, or by therapeutic category.
Other Matters
Patent Matters
We depend on patents or other forms of intellectual property protection for most of our revenue, cash flows, and earnings.
Our formulation patents for Forteo® expired in December 2018, and our use patents expired in August 2019 in major European markets and the U.S. Both the formulation patent and the use patent expired in August 2019 in Japan. We expect further volume decline as a result of the anticipated entry of generic and biosimilar competition following the loss of patent exclusivity in these markets. In the aggregate, we expect that the decline in revenue will have a material adverse effect on our consolidated results of operations and cash flows.
The Alimta® vitamin regimen patents, which we expect to provide us with patent protection for Alimta through June 2021 in Japan and major European countries, and through May 2022 in the U.S., have been challenged in each of these jurisdictions. In the U.S., most challenges have been finally resolved in our favor, and one remains in active litigation. We and Eagle Pharmaceuticals, Inc. (Eagle) reached an agreement in December 2019 to settle all pending litigation, allowing Eagle a limited initial entry into the market with its product starting February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022. We expect that the entry of generic competition in the U.S. either from an unfavorable outcome to the patent challenge or following the loss of patent exclusivity, will cause a rapid and severe decline in revenue and have a material adverse effect on our consolidated results of operations and cash flows.
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We are aware that several companies have received approval to market generic versions of pemetrexed in major European markets and that generic competitors may choose to attempt a launch at risk. Following a final decision in the Supreme Court of Germany in July 2020 overturning the lower court and upholding the validity of our Alimta patent, several generics that were on the market at risk in Germany left. We have removed the remaining generics from the market in Germany by obtaining preliminary injunctions in our favor. In September 2020, the Paris Court of First Instance in France issued a final decision upholding the validity of our Alimta patent and found infringement by Fresenius Kabi France and Fresenius Kabi Groupe France’s (collectively, Kabi) pemetrexed product. The court issued an injunction against Kabi and provisionally awarded us damages. In January 2021, that same court issued a preliminary injunction against Zentiva France S.A.S. (Zentiva), the last remaining company with a generic pemetrexed product on the French market, and provisionally awarded us damages. In October 2020, the Court of Appeal of the Netherlands overturned a lower court decision and ruled that our Alimta patent is valid and infringed and reinstated an injunction against Kabi, thereby removing Kabi's pemetrexed product from the Netherlands market. Kabi has appealed this decision to the Netherlands Supreme Court. Kabi's generic pemetrexed product was the only at risk generic on the market in the Netherlands. Our vitamin regimen patents have also been challenged in other smaller European jurisdictions.
We expect that further entry of generic competition for Alimta in major European markets following either the loss of effective patent protection or of patent exclusivity will cause a rapid and severe decline in revenue. See Note 16 to the consolidated financial statements for a more detailed account of the legal proceedings currently pending in the U.S., Europe, and Japan regarding, among others, our Alimta patents.
The compound patent for Humalog® (insulin lispro) has expired in major markets. Global regulators have different legal pathways to approve similar versions of insulin lispro. A competitor launched a similar version of insulin lispro in certain European markets in 2017 and in the U.S. in the second quarter of 2018. While it is difficult to estimate the severity of the impact of insulin lispro products entering the market, we do not expect and have not experienced a rapid and severe decline in revenue; however, we expect additional pricing pressure and some loss of market share that would continue over time.
Our compound patent protection for Cymbalta® expired in Japan in January 2020. We expect generics to enter the market in mid-2021. We expect that the entry of generic competition will cause a rapid and severe decline in revenue and will have a material adverse effect on our consolidated results of operations and cash flows.
Foreign Currency Exchange Rates
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and Japanese yen. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on our revenue, cost of sales, and operating expenses. While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these rates could negatively impact our future consolidated results of operations and cash flows.
Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access
U.S.
In the U.S., public concern over access to and affordability of pharmaceuticals continues to drive the regulatory and legislative debate. These policy and political issues increase the risk that taxes, fees, rebates, or other cost control measures may be enacted to manage federal and state budgets. Key health policy initiatives affecting biopharmaceuticals include:
•the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent stimulus bills that focus on ensuring availability and access to lifesaving drugs during a public health crisis,
•foreign reference pricing in Medicare and private insurance,
•modifications to Medicare Parts B and D,
•provisions that would allow the Department of Health and Human Services (HHS) to negotiate prices for biologics and drugs in Medicare,
•a reduction in biologic data exclusivity,
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•proposals related to Medicaid prescription drug coverage and manufacturer drug rebates,
•proposals that would require biopharmaceutical manufacturers to disclose proprietary drug pricing information, and
•state-level proposals related to prescription drug prices and reducing the cost of pharmaceuticals purchased by government health care programs.
On July 24, 2020 and September 13, 2020, former U.S. President Donald Trump signed Executive Orders related to the 340B Prescription Drug Program, rebate reform in Medicare Part D, drug importation including insulin, and foreign reference pricing in Medicare Part B and Part D. Although their current status is unclear given the change in presidential administration, these Executive Orders, if implemented, could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position. On September 1, 2020, Lilly announced it would distribute all 340B ceiling priced products directly to covered entities and their child sites only. Lilly provides 340B discounts to a contract pharmacy only if it is a wholly owned subsidiary of a covered entity, if a covered entity does not have an in-house pharmacy or, in the case of insulin, if the subject covered entity and its contract pharmacies agree to pass along the discount to patients without any markup for dispensing fees and without billing insurance or collecting duplicate discounts. Lilly has been transparent with regulators on its distribution activity and continues to comply with all 340B program requirements. Certain covered entities and their trade associations have threatened litigation, questioning whether Lilly’s program, and similar actions by other manufacturers, violate 340B program requirements. On October 9, 2020, three covered entities sued HHS and the Health Resources and Services Administration (HRSA) in the U.S. District Court for the District of Columbia seeking to compel the agencies to take enforcement action against Lilly and three other companies, among other requested relief. On October 21, 2020, a trade association representing certain covered entities sued HHS in the same court seeking to compel the agency to promulgate administrative dispute resolution regulations. On December 11, 2020, a number of associations and entities filed suit against HHS in the U.S. District Court for the Northern District of California requesting immediate enforcement of the contract pharmacy guidance. On December 31, 2020, the General Counsel of HHS issued an advisory opinion alleging that honoring contract pharmacy agreements is mandatory. In January 2021, Lilly filed suit against HHS, the Secretary of HHS, the HRSA, and the Administrator of the HRSA in the U.S. District Court for the Southern District of Indiana seeking a declaratory judgment that HHS's attempt to require manufacturers to permit contract pharmacy distribution is unlawful and a preliminary injunction enjoining implementation of the alternative dispute resolution process created by defendants and, with it, their application of the advisory opinion, and other related relief. The cases are pending and the impact of these cases and any subsequent litigation is uncertain. See Note 16 to the consolidated financial statements for additional information.
California and several other states have enacted legislation related to prescription drug pricing transparency and it is unclear the effect this legislation will have on our business. Several states have also passed importation legislation, including Colorado, Florida, Maine, New Hampshire, New Mexico, and Vermont. As of late 2020 several of these states were actively working with the former presidential administration to implement an importation program from Canada. On November 22, 2020, Florida announced it submitted a proposed importation plan to the U.S. In 2020, HHS and the FDA also took several actions to advance state importation initiatives, including issuing requests for proposals for personal importation and reimportation of insulin and a final rule on the Importation of Prescription Drugs. Additionally, on November 27, 2020, the Canadian Minister of Health issued an interim order to ensure that participation in bulk importation frameworks, such as the one recently established by the U.S., does not cause or exacerbate a drug shortage in Canada. We continue to review these state proposals and legislation, as well as federal rules and guidance published by HHS and the FDA, the impact of which is uncertain at this time. Currently, it is unclear if the current presidential administration will adopt any of the importation initiatives put forth by the former presidential administration. We will continue to monitor and assess these developments.
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In the private sector, consolidation and integration among healthcare providers significantly affects the competitive marketplace for pharmaceuticals. Health plans, pharmacy benefit managers, wholesalers, and other supply chain stakeholders have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. Private third-party insurers, as well as governments, typically maintain formularies that specify coverage (the conditions under which drugs are included on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer) to control costs by negotiating discounted prices in exchange for formulary inclusion. Formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations that result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance levels, and higher deductibles. Consequently, pharmaceutical companies compete for formulary placement not only on the basis of product attributes such as efficacy, safety profile, or patient ease of use, but also by providing rebates. Value-based agreements, where pricing is based on achievement (or not) of specified outcomes, are another tool that may be utilized between payers and pharmaceutical companies as formulary placement and pricing are negotiated. Price is an increasingly important factor in formulary decisions, particularly in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. We expect these downward pricing pressures will continue to negatively affect our consolidated results of operations. In addition to formulary placement, changes in insurance designs continue to drive greater consumer cost-sharing through high deductible plans and higher co-insurance or co-pays. We continue to invest in patient affordability solutions (resulting in lower revenue) in an effort to assist patients in affording their medicines.
The main coverage expansion provisions of the Affordable Care Act (ACA) are currently in effect through both state-based exchanges and the expansion of Medicaid. A trend has been the prevalence of benefit designs containing high out-of-pocket costs for patients, particularly for pharmaceuticals. In addition to the coverage expansions, many employers in the commercial market continue to evaluate strategies such as private exchanges and wider use of consumer-driven health plans to reduce their healthcare liabilities over time. Federal legislation, litigation, or administrative actions to repeal or modify some or all of the provisions of the ACA could have a material adverse effect on our consolidated results of operations and cash flows. At the same time, the broader paradigm shift towards performance-based reimbursement and the launch of several value-based purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-world outcomes data and a favorable economic profile.
International
International operations also are generally subject to extensive price and market regulations. Cost-containment measures exist in a number of countries, including additional price controls and mechanisms to limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the pressures on national and regional health care budgets that come from a growing, aging population and ongoing economic challenges. As additional reforms are finalized, we will assess their impact on future revenues. In addition, governments in many emerging markets are becoming increasingly active in expanding health care system offerings. Given the budget challenges of increasing health care coverage for citizens, policies may be proposed that promote generics and biosimilars only and reduce current and future access to branded pharmaceutical products. The COVID-19 pandemic is also creating additional pressure on health systems worldwide. As a result, cost containment and other measures may intensify as governments manage and emerge from the pandemic.
Tax Matters
We are subject to income taxes and various other taxes in the U.S. and in many foreign jurisdictions; therefore, changes in both domestic and international tax laws or regulations could affect our effective tax rate, results of operations, and cash flows. Countries around the world, including the U.S., are actively considering and enacting tax law changes. The current presidential administration's tax proposal contains significant changes, including the rate at which income of U.S. companies would be taxed. Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Co-operation and Development and the European Commission could influence tax policy in countries in which we operate. In addition, global tax authorities routinely examine our tax returns and are expected to become more aggressive in their examinations of profit allocations among jurisdictions, which could affect our anticipated tax liabilities.
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Acquisitions
We strategically invest in external research and technologies that we believe complement and strengthen our own efforts. These investments can take many forms, including acquisitions, strategic alliances, collaborations, investments, and licensing arrangements. We view our business development activity as an important way to achieve our strategies, as we seek to bolster our pipeline and enhance shareholder value. We continuously evaluate business development transactions that have the potential to strengthen our business.
In 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib, an oral RET inhibitor, and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the FDA approved selpercatinib (Retevmo) under its Accelerated Approval regulations and continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials.
In 2020, we acquired all shares of Dermira for a purchase price of $849.3 million, net of cash acquired. Under terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the FDA. We also acquired Qbrexza® cloth, a medicated cloth for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating).
In January 2021, we acquired all shares of Prevail Therapeutics Inc. (Prevail) for a purchase price of approximately $880 million in cash plus one non-tradable contingent value right (CVR). The CVR entitles Prevail stockholders to up to an additional approximately $160 million payable, subject to certain terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries: U.S., Japan, United Kingdom, Germany, France, Italy, or Spain. Under the terms of the agreement, we acquired a biotechnology company developing potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases.
See Note 3 to the consolidated financial statements for further discussion regarding our recent acquisitions.
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Operating Results—2020
Revenue
The following table summarizes our revenue activity by region:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Percent Change | |||||||||||||||
| U.S. | $ | 14,229.3 | $ | 12,722.6 | 12 | ||||||||||||
| Outside U.S. | 10,310.5 | 9,596.8 | 7 | ||||||||||||||
| Revenue | $ | 24,539.8 | $ | 22,319.5 | 10 | ||||||||||||
Numbers may not add due to rounding.
The following are components of the change in revenue compared with the prior year:
| 2020 vs. 2019 | |||||||||||
| U.S. | Outside U.S. | Consolidated | |||||||||
| Volume | 17 | % | 13 | % | 15 | % | |||||
| Price | (5) | % | (6) | % | (5) | % | |||||
| Foreign exchange rates | — | % | — | % | — | % | |||||
| Percent change | 12 | % | 7 | % | 10 | % | |||||
Numbers may not add due to rounding.
In the U.S., the revenue increase in 2020 was driven by increased volume primarily for Trulicity®, bamlanivimab, and Taltz®. Excluding bamlanivimab revenue, U.S. revenue grew 5 percent. The increase in revenue due to volume was partially offset by a decrease in realized prices. The decrease in realized prices in the U.S. was primarily driven by increased rebates to gain and maintain broad commercial access across the portfolio and, to a lesser extent, unfavorable segment mix and changes to estimates for rebates and discounts, most notably impacting Humalog. The decrease in realized prices in the U.S. was partially offset by modest list price increases and lower utilization in the 340B segment.
Outside the U.S., the revenue increase in 2020 was driven by increased volume primarily for Tyvyt, Trulicity, Alimta, and Olumiant. The increase in revenue due to volume was partially offset by lower realized prices primarily for Tyvyt and Alimta. The increase in volume and decrease in realized prices for Tyvyt and Alimta was driven primarily by their inclusion in government reimbursement programs in China.
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The following table summarizes our revenue activity in 2020 compared with 2019:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||||||||
| Product | U.S. | Outside U.S. | Total | Total | Percent Change | ||||||||||||||||||||||||
| Trulicity | $ | 3,835.9 | $ | 1,232.2 | $ | 5,068.1 | $ | 4,127.8 | 23 | ||||||||||||||||||||
Humalog(1) | 1,485.6 | 1,140.3 | 2,625.9 | 2,820.7 | (7) | ||||||||||||||||||||||||
| Alimta | 1,265.3 | 1,064.7 | 2,329.9 | 2,115.8 | 10 | ||||||||||||||||||||||||
| Taltz | 1,288.5 | 500.0 | 1,788.5 | 1,366.4 | 31 | ||||||||||||||||||||||||
Humulin® | 866.4 | 393.2 | 1,259.6 | 1,290.1 | (2) | ||||||||||||||||||||||||
Jardiance(2) | 620.8 | 533.0 | 1,153.8 | 944.2 | 22 | ||||||||||||||||||||||||
Basaglar® | 842.3 | 282.1 | 1,124.4 | 1,112.6 | 1 | ||||||||||||||||||||||||
| Forteo | 510.3 | 536.0 | 1,046.3 | 1,404.7 | (26) | ||||||||||||||||||||||||
Cyramza® | 381.9 | 650.8 | 1,032.6 | 925.1 | 12 | ||||||||||||||||||||||||
| Verzenio | 618.2 | 294.4 | 912.7 | 579.7 | 57 | ||||||||||||||||||||||||
Bamlanivimab(3) | 850.0 | 21.2 | 871.2 | — | NM | ||||||||||||||||||||||||
| Cymbalta | 42.1 | 725.6 | 767.7 | 725.4 | 6 | ||||||||||||||||||||||||
| Olumiant | 63.8 | 575.0 | 638.9 | 426.9 | 50 | ||||||||||||||||||||||||
Cialis® | 61.8 | 545.4 | 607.1 | 890.5 | (32) | ||||||||||||||||||||||||
Erbitux® | 480.1 | 56.3 | 536.4 | 543.4 | (1) | ||||||||||||||||||||||||
Zyprexa® | 46.1 | 360.5 | 406.5 | 418.7 | (3) | ||||||||||||||||||||||||
Emgality® | 325.9 | 37.0 | 362.9 | 162.5 | NM | ||||||||||||||||||||||||
Trajenta®(4) | 95.6 | 263.0 | 358.5 | 590.6 | (39) | ||||||||||||||||||||||||
| Other products | 548.7 | 1,099.8 | 1,648.8 | 1,874.4 | (12) | ||||||||||||||||||||||||
| Revenue | $ | 14,229.3 | $ | 10,310.5 | $ | 24,539.8 | $ | 22,319.5 | 10 | ||||||||||||||||||||
Numbers may not add due to rounding.
NM - Not meaningful
(1) Humalog revenue includes insulin lispro.
(2) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.
(3) Bamlanivimab sales are pursuant to EUA.
(4) Trajenta revenue includes Jentadueto®.
Revenue of Trulicity, a treatment for type 2 diabetes and to reduce the risk of major adverse cardiovascular events in adult patients with type 2 diabetes and established cardiovascular disease or multiple cardiovascular risk factors, increased 22 percent in the U.S., driven by increased volume, partially offset by lower realized prices primarily due to higher contracted rebates. Revenue outside the U.S. increased 27 percent, primarily driven by increased volume.
Revenue of Humalog, an injectable human insulin analog for the treatment of diabetes, decreased 11 percent in the U.S., driven by lower realized prices, partially offset by higher demand. Revenue outside the U.S. decreased 1 percent, primarily driven by the unfavorable impact of foreign exchange rates. Included in the revenue of Humalog in the U.S. are our own insulin lispro authorized generics, which began launching in the second quarter of 2019 in order to lower out-of-pocket costs for patients. While it is difficult to estimate the severity of the impact of similar insulin lispro products entering the market, we do not expect and have not experienced a rapid severe decline in revenue. However, due to the impact of competition and due to pricing pressure in the U.S. and some international markets, we expect some price decline and loss of market share to continue over time.
Revenue of Alimta, a treatment for various cancers, increased 4 percent in the U.S., primarily driven by higher realized prices. Revenue outside the U.S. increased 19 percent, primarily driven by increased volume in China and Germany, partially offset by lower realized prices. We will lose our patent protection for Alimta in Japan and major European countries in June 2021. We expect the limited entry of generic competition in the U.S. starting February 2022 and subsequent unlimited entry starting April 2022. We expect that the entry of generic competition following the loss of exclusivity will cause a rapid and severe decline in revenue. See "Results of Operations - Executive Overview - Other Matters" for more information.
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Revenue of Taltz, a treatment for moderate-to-severe plaque psoriasis, active psoriatic arthritis, ankylosing spondylitis, and active non-radiographic axial spondyloarthritis, increased 27 percent in the U.S., primarily driven by increased demand. Revenue outside the U.S. increased 43 percent, primarily driven by increased volume.
Revenue of Humulin, an injectable human insulin for the treatment of diabetes, decreased 2 percent in the U.S., driven by lower realized prices, partially offset by higher volume. Revenue outside the U.S. decreased 4 percent, driven by decreased volume and the unfavorable impact of foreign exchange rates, partially offset by higher realized prices.
Revenue of Jardiance, a treatment for type 2 diabetes and to reduce the risk of cardiovascular death in adult patients with type 2 diabetes and established cardiovascular disease, increased 10 percent in the U.S., driven by increased volume. Revenue outside the U.S. increased 41 percent, driven primarily by increased volume. See Note 4 to the consolidated financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.
Revenue of Basaglar, a long-acting human insulin analog for the treatment of diabetes, decreased 4 percent in the U.S., driven by lower realized prices. Revenue outside the U.S. increased 19 percent, driven primarily by increased volume. See Note 4 to the consolidated financial statements for information regarding our collaboration with Boehringer Ingelheim involving Basaglar. A competitor launched a similar version of glargine in the U.S. in 2020. Due to the impact of competitive pressures, we expect some price decline and loss of market share over time.
Revenue of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women, decreased 21 percent in the U.S., primarily driven by decreased demand. Revenue outside the U.S. decreased 29 percent, driven by decreased volume and, to a lesser extent, lower realized prices. We expect further volume declines as a result of the anticipated entry of generic and biosimilar competition due to the loss of patent exclusivity in the U.S., Japan, and major European markets. See "Executive Overview - Other Matters - Patent Matters" for more information.
Revenue of Cyramza, a treatment for various cancers, increased 14 percent in the U.S., driven primarily by increased demand and, to a lesser extent, higher realized prices. Revenue outside the U.S. increased 10 percent, driven primarily by increased volume.
Revenue of Verzenio, a treatment for HR+, HER2- metastatic breast cancer, increased 36 percent in the U.S., driven by increased demand and, to a lesser extent, higher realized prices. Revenue outside the U.S. increased $169.5 million driven by higher volume.
Gross Margin, Costs, and Expenses
Gross margin as a percent of revenue was 77.7 percent in 2020, a decrease of 1.1 percentage points compared with 2019, primarily due to the impact of lower realized prices on revenue, the unfavorable effect of foreign exchange rates on international inventories sold, and higher intangibles amortization expense related to Retevmo, partially offset by charges in 2019 resulting from the withdrawal of Lartruvo® and greater manufacturing efficiencies. Gross margin percent for 2020 was also negatively impacted as a result of bamlanivimab sales in the fourth quarter of 2020.
Research and development expenses increased 9 percent to $6.09 billion in 2020, driven primarily by approximately $450 million of development expenses for COVID-19 therapies. Excluding these expenses related to COVID-19 therapies, research and development expenses were relatively flat.
Marketing, selling, and administrative expenses decreased 1 percent to $6.12 billion in 2020 primarily due to lower marketing activity.
We recognized acquired IPR&D charges of $660.4 million in 2020 resulting from the acquisitions of Disarm and a pre-clinical stage company as well as collaborations with Innovent, Sitryx, Fochon, AbCellera, Evox, and Junshi Biosciences. In 2019, we recognized acquired IPR&D charges of $239.6 million resulting from collaborations with AC Immune, Centrexion, ImmuNext, and Avidity.
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We recognized asset impairment, restructuring, and other special charges of $131.2 million in 2020. The charges were primarily related to severance costs incurred as a result of actions taken worldwide to reduce our cost structure, as well as acquisition and integration costs incurred as part of the acquisition of Dermira. In 2019, we recognized $575.6 million of asset impairment, restructuring, and other special charges primarily associated with the accelerated vesting of Loxo employee equity awards as part of the acquisition of Loxo.
Other—net, (income) expense was income of $1.17 billion in 2020 compared to income of $291.6 million in 2019 primarily driven by higher net gains on investment securities.
Our effective tax rate was 14.3 percent in 2020, compared with an effective tax rate of 11.9 percent in 2019 driven by net discrete tax benefits in 2019.
Operating Results—2019
For a discussion of our results of operations pertaining to 2019 and 2018 see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" in our Annual Report on Form 10-K for the year ended December 31, 2019.
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FINANCIAL CONDITION AND LIQUIDITY
We believe our available cash and cash equivalents, together with our ability to generate operating cash flow and our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital requirements, which include:
•working capital requirements, including related to employee payroll, clinical trials, manufacturing materials, and taxes;
•capital expenditures;
•share repurchases and dividends;
•repayment of outstanding short-term and long-term borrowings;
•contributions to our defined benefit pension and retiree health benefit plans;
•milestone and royalty payments; and
•potential business development activities, including acquisitions, strategic alliances, collaborations, investments, and licensing arrangements.
Our management continuously evaluates our liquidity and capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements. As of December 31, 2020, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital equipment expenditures, dividends, repayment of outstanding borrowings, the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the Tax Cuts and Jobs Act (2017 Tax Act), leases, unfunded commitments to invest in venture capital funds, and retirement benefits (see Notes 11, 14, 10, 7, and 15 to the consolidated financial statements). We anticipate our cash requirements related to ordinary course purchases of goods and services and capital equipment expenditures will be consistent with our past levels relative to revenues.
Cash and cash equivalents increased to $3.66 billion as of December 31, 2020, compared with $2.34 billion at December 31, 2019. Net cash provided by operating activities was $6.50 billion in 2020, compared with $4.84 billion in 2019. Net cash provided by operating activities in 2019 included approximately $360 million of cash paid to settle the accelerated vesting of Loxo employee equity awards (see Note 5 to the consolidated financial statements). Refer to the consolidated statements of cash flows for additional details on the significant sources and uses of cash for the years ended December 31, 2020 and 2019.
In addition to our cash and cash equivalents, we held total investments of $2.99 billion and $2.06 billion as of December 31, 2020 and 2019, respectively. See Note 7 to the consolidated financial statements for additional details.
In February 2020, we completed our acquisition of Dermira for $18.75 per share, or approximately $1.1 billion, which was funded through cash on hand and the issuance of commercial paper. In February 2019, we completed our acquisition of Loxo for $235 per share or approximately $6.9 billion, which was funded through a mixture of cash and debt. See Note 3 to the consolidated financial statements for additional information.
As of December 31, 2020, total debt was $16.60 billion, an increase of $1.28 billion compared with $15.32 billion at December 31, 2019. The increase primarily related to the net proceeds from the issuance of $1.00 billion of 2.25 percent fixed-rate notes in May 2020, as well as the net proceeds from the issuance of an additional $250.0 million of 2.25 percent fixed-rate notes and the issuance of $850.0 million of 2.50 percent fixed-rate notes in August 2020. We used the net proceeds from the sale of these notes for general corporate purposes, which included the repayment of outstanding commercial paper used to fund a portion of the purchase price for our acquisition of Dermira. See Note 11 to the consolidated financial statements for additional information.
As of December 31, 2020, we had a total of $5.24 billion of unused committed bank credit facilities, $5.00 billion of which is available to support our commercial paper program. See Note 11 to the consolidated financial statements for additional details. We believe that amounts accessible through existing commercial paper markets should be adequate to fund any short-term borrowing needs.
For the 135th consecutive year, we distributed dividends to our shareholders. Dividends of $2.96 per share and $2.58 per share were paid in 2020 and 2019, respectively. In the fourth quarter of 2020, effective for the dividend to be paid in the first quarter of 2021, the quarterly dividend was increased to $0.85 per share, resulting in an indicated annual rate for 2021 of $3.40 per share.
Capital expenditures of $1.39 billion during 2020, compared to $1.03 billion in 2019.
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In 2020, we repurchased $500.0 million of shares under our $8.00 billion share repurchase program authorized in June 2018. As of December 31, 2020, we had $1.00 billion remaining under this program. See Note 13 to the consolidated financial statements for additional details.
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer, which resulted in a reduction in shares of our common stock outstanding by approximately 65 million as of that date.
In January 2021, we completed our acquisition of Prevail for $22.50 per share, or approximately $880 million in cash, plus one non-tradable CVR that entitles Prevail stockholders to up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to certain terms and conditions. This acquisition was funded primarily through cash on hand and the issuance of commercial paper. See Note 3 to the consolidated financial statements for additional information.
See "Results of Operations - Executive Overview - Other Matters - Patent Matters" for information regarding recent and upcoming losses of patent protection.
Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of health care legislation; and various international government funding levels.
In the normal course of business, our operations are exposed to fluctuations in interest rates, currency values, and fair values of equity securities. These fluctuations can vary the costs of financing, investing, and operating. We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of this risk management program is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.
Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2020 and 2019, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2020 and 2019, respectively, would not have a material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.
Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and Japanese yen. We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (principally the euro and the Japanese yen). Our corporate risk-management policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of currency fluctuations on the existing assets and liabilities. We periodically analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts as of December 31, 2020 and 2019, would not have a material impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis does not consider the impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions.
Our fair value risk exposure relates primarily to our public equity investments and to equity investments that do not have readily determinable fair values. As of December 31, 2020 and 2019, our carrying values of these investments were $2.04 billion and $1.12 billion, respectively. A hypothetical 20 percent change in fair value of the equity instruments would have impacted other-net, (income) expense by $407.6 million and $224.7 million as of December 31, 2020 and 2019, respectively.
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We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the product in the event that regulatory approval for marketing is obtained.
Individually, these arrangements are generally not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements were reached in the same reporting period, the aggregate expense or aggregate milestone payments made could be material to our results of operations or cash flows, respectively, in that period. See Note 4 to the consolidated financial statements for additional details. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound successfully achieves milestone objectives. We also note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.
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APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
In preparing our financial statements in accordance with accounting principles generally accepted in the U.S. (GAAP), we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this report. Our most critical accounting estimates have been discussed with our audit committee and are described below.
Revenue Recognition and Sales Return, Rebate, and Discount Accruals
We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. For product sales to customers, provisions for returns, rebates and discounts are established in the same period the related product sales are recognized. To determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates. The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, and chargeback contracts in the U.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.
Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales return, rebate, and discount accruals.
Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts.
Financial Statement Impact
We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our global sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As of December 31, 2020, a 5 percent change in our global sales return, rebate, and discount liability would have led to an approximate $313 million effect on our income before income taxes.
The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the U.S. was approximately 90 percent as of December 31, 2020 and 2019.
The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability balances, including managed care, Medicare, Medicaid, chargebacks, and patient assistance programs:
| (Dollars in millions) | 2020 | 2019 | |||||||||
| Sales return, rebate, and discount liabilities, beginning of year | $ | 4,635.5 | $ | 4,670.9 | |||||||
Reduction of net sales(1) | 18,668.4 | 15,490.2 | |||||||||
| Cash payments | (17,903.9) | (15,525.6) | |||||||||
| Sales return, rebate, and discount liabilities, end of year | $ | 5,400.0 | $ | 4,635.5 | |||||||
(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 2 percent of consolidated net sales for each of the years presented.
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Product Litigation Liabilities and Other Contingencies
Background and Uncertainties
Product litigation liabilities and other contingencies are, by their nature, uncertain and based upon complex judgments and probabilities. The factors we consider in developing our product litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past matters, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant product liability contingencies when both probable and reasonably estimable.
We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products. In addition to insurance coverage, we consider any third-party indemnification to which we are entitled or under which we are obligated. With respect to our third-party indemnification rights, these considerations include the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.
The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.
Acquisitions
Background and Uncertainties
To determine whether acquisitions or licensing transactions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules.
If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense at the acquisition date, and goodwill is not recorded. Refer to Note 3 to the consolidated financial statements for additional information.
The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets, including acquired IPR&D, are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue growth and discount rate. Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.
The fair values of identifiable intangible assets are primarily determined using an "income method," as described in Note 8 to the consolidated financial statements.
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Impairment of Indefinite-Lived and Long-Lived Assets
Background and Uncertainties
We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or asset group) may not be recoverable. We identify impairment by comparing the projected undiscounted cash flows to be generated by the asset (or asset group) to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset’s net book value over its fair value, and the cost basis is adjusted.
Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the intangible asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment.
Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions. We utilize the “income method,” as described in Note 8 to the consolidated financial statements.
For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in “Results of Operations - Executive Overview - Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products. As such, it is likely that some acquired IPR&D assets will become impaired in the future.
Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management’s judgment. Actual results could vary materially from these estimates.
Retirement Benefits Assumptions
Background and Uncertainties
Defined benefit pension plan and retiree health benefit plan costs include assumptions for the discount rate, expected return on plan assets, and retirement age. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 15 to the consolidated financial statements for additional information regarding our retirement benefits.
Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt instruments to determine the discount rates. In evaluating the expected return on plan assets, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately 65 percent of which are growth investments); and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates and expected return on plan assets of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages.
Annually, we determine the fair value of the plan assets in our defined benefit pension and retiree health benefit plans. Approximately 35 percent of our plan assets are in hedge funds and private equity-like investment funds (collectively, alternative assets). We value these alternative investments using significant unobservable inputs or using the net asset value reported by the counterparty, adjusted as necessary. Inputs include underlying net asset values, discounted cash flows valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks.
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Financial Statement Impact
If the 2020 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to change by a quarter percentage point, income before income taxes would change by $21.6 million. If the 2020 expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income taxes would change by $28.8 million. If our assumption regarding the 2020 expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by $52.0 million. The U.S. plans, including Puerto Rico, represent approximately 75 percent and 80 percent of the total projected benefit obligation and total plan assets, respectively, at December 31, 2020.
Adjustments to the fair value of plan assets are not recognized in pension and retiree health benefit expense in the year that the adjustments occur. Such changes are deferred, along with other actuarial gains and losses, and are amortized into expense over the expected remaining service life of employees.
Income Taxes
Background and Uncertainties
We prepare and file tax returns based upon our interpretation of tax laws and regulations, and we record estimates based upon these interpretations. Our tax returns are routinely subject to examination by various taxing authorities, which could result in future tax, interest, and penalty assessments. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation and regulation as concluded through the various jurisdictions’ tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from changes to existing tax law, the issuance of regulations by the taxing authorities, new information obtained during a tax examination, or resolution of a tax examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.
We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed future taxable income in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or to generate future taxable income in these jurisdictions could lead to the reversal of all or a portion of these valuation allowances and a reduction of income tax expense.
Financial Statement Impact
As of December 31, 2020, a 5 percent change in the amount of uncertain tax positions and the valuation allowance would result in a change in net income of $83.4 million and $40.8 million, respectively.
LEGAL AND REGULATORY MATTERS
Information relating to certain legal proceedings can be found in Note 16 to the consolidated financial statements and is incorporated here by reference.
FINANCIAL EXPECTATIONS FOR 2021
For the full year of 2021, we expect EPS to be in the range of $7.10 to $7.75, which excludes estimated acquisition and integration costs related to the acquisition of Prevail. We anticipate total revenue between $26.5 billion and $28.0 billion, including an estimated $1 billion to $2 billion of revenue from COVID-19 therapies. Revenue growth is expected to be driven by volume from Trulicity, Taltz, Verzenio, Jardiance, Olumiant, Cyramza, Emgality, Tyvyt, and Retevmo, as well as by COVID-19 therapies. Revenue growth is expected to be partially offset by lower revenue for products that have lost patent exclusivity. We expect mid-single digit net price declines globally in 2021. In the U.S., we expect low-to-mid-single digit net price declines, driven primarily by increased rebates to maintain broad commercial access and segment mix, partially offset by lower utilization in the 340B segment. Outside the U.S., we expect net price declines in China, Japan, and Europe.
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We anticipate that gross margin as a percent of revenue will be approximately 77 percent in 2021. Research and development expenses are expected to be in the range of $6.5 billion to $6.7 billion, including approximately $300 million to $400 million of continued investment in COVID-19 therapies. Marketing, selling, and administrative expenses are expected to be in the range of $6.2 billion to $6.4 billion. Other—net, (income) expense is expected to be expense in the range of $200 million to $300 million. The 2021 effective tax rate is expected to be approximately 15 percent.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
You can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) at Item 7, “Management’s Discussion and Analysis - Financial Condition and Liquidity.” That information is incorporated by reference herein.
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Item 8.Financial Statements and Supplementary Data
Consolidated Statements of Operations
| ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions and shares in thousands, except per-share data) | Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||||||||||||||||
| Revenue | $ | $ | $ | |||||||||||||||||||||||
| Costs, expenses, and other: | ||||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| Marketing, selling, and administrative | ||||||||||||||||||||||||||
| Acquired in-process research and development (Note 3) | ||||||||||||||||||||||||||
| Asset impairment, restructuring, and other special charges (Note 5) | ||||||||||||||||||||||||||
| Other—net, (income) expense (Note 18) | ( | ( | ( | |||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income taxes (Note 14) | ||||||||||||||||||||||||||
| Net income from continuing operations | ||||||||||||||||||||||||||
| Net income from discontinued operations (Note 19) | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | |||||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||
| Earnings from continuing operations - basic | $ | $ | $ | |||||||||||||||||||||||
| Earnings from discontinued operations - basic | ||||||||||||||||||||||||||
| Earnings per share - basic | $ | $ | $ | |||||||||||||||||||||||
| Earnings from continuing operations - diluted | $ | $ | $ | |||||||||||||||||||||||
| Earnings from discontinued operations - diluted | ||||||||||||||||||||||||||
| Earnings per share - diluted | $ | $ | $ | |||||||||||||||||||||||
| Shares used in calculation of earnings per share: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See notes to consolidated financial statements.
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Consolidated Statements of Comprehensive Income (Loss)
| ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) | Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||||||||||||||||
| Net income | $ | $ | $ | |||||||||||||||||||||||
| Other comprehensive income (loss) from continuing operations: | ||||||||||||||||||||||||||
| Change in foreign currency translation gains (losses) | ( | ( | ||||||||||||||||||||||||
| Change in net unrealized gains (losses) on securities | ( | |||||||||||||||||||||||||
| Change in defined benefit pension and retiree health benefit plans (Note 15) | ( | ( | ||||||||||||||||||||||||
| Change in effective portion of cash flow hedges | ( | ( | ||||||||||||||||||||||||
| Other comprehensive income (loss) from continuing operations before income taxes | ( | ( | ||||||||||||||||||||||||
Benefit (provision) for income taxes related to other comprehensive income (loss) from continuing operations | ( | |||||||||||||||||||||||||
| Other comprehensive income (loss) from continuing operations, net of tax (Note 17) | ( | |||||||||||||||||||||||||
| Other comprehensive income from discontinued operations, net of tax (Note 17) | ||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax (Note 17) | ( | |||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | |||||||||||||||||||||||
See notes to consolidated financial statements.
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Consolidated Balance Sheets
| ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, shares in thousands) | December 31 | 2020 | 2019 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Current Assets | ||||||||||||||||||||
| Cash and cash equivalents (Note 7) | $ | $ | ||||||||||||||||||
| Short-term investments (Note 7) | ||||||||||||||||||||
Accounts receivable, net of allowances of $ | ||||||||||||||||||||
| Other receivables | ||||||||||||||||||||
| Inventories (Note 6) | ||||||||||||||||||||
| Prepaid expenses and other | ||||||||||||||||||||
| Total current assets | ||||||||||||||||||||
| Investments (Note 7) | ||||||||||||||||||||
| Goodwill (Note 8) | ||||||||||||||||||||
| Other intangibles, net (Note 8) | ||||||||||||||||||||
| Deferred tax assets (Note 14) | ||||||||||||||||||||
| Property and equipment, net (Note 9) | ||||||||||||||||||||
| Other noncurrent assets | ||||||||||||||||||||
| Total assets | $ | $ | ||||||||||||||||||
| Liabilities and Equity | ||||||||||||||||||||
| Current Liabilities | ||||||||||||||||||||
| Short-term borrowings and current maturities of long-term debt (Note 11) | $ | $ | ||||||||||||||||||
| Accounts payable | ||||||||||||||||||||
| Employee compensation | ||||||||||||||||||||
| Sales rebates and discounts | ||||||||||||||||||||
| Dividends payable | ||||||||||||||||||||
| Income taxes payable (Note 14) | ||||||||||||||||||||
| Other current liabilities | ||||||||||||||||||||
| Total current liabilities | ||||||||||||||||||||
| Other Liabilities | ||||||||||||||||||||
| Long-term debt (Note 11) | ||||||||||||||||||||
| Accrued retirement benefits (Note 15) | ||||||||||||||||||||
| Long-term income taxes payable (Note 14) | ||||||||||||||||||||
| Other noncurrent liabilities | ||||||||||||||||||||
| Deferred tax liabilities (Note 14) | ||||||||||||||||||||
| Total other liabilities | ||||||||||||||||||||
| Commitments and Contingencies (Note 16) | ||||||||||||||||||||
| Eli Lilly and Company Shareholders' Equity (Notes 12 and 13) | ||||||||||||||||||||
Common stock—no par value Authorized shares: Issued shares: | ||||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||
| Retained earnings | ||||||||||||||||||||
| Employee benefit trust | ( | ( | ||||||||||||||||||
| Accumulated other comprehensive loss (Note 17) | ( | ( | ||||||||||||||||||
Cost of common stock in treasury | ( | ( | ||||||||||||||||||
| Total Eli Lilly and Company shareholders' equity | ||||||||||||||||||||
| Noncontrolling interests | ||||||||||||||||||||
| Total equity | ||||||||||||||||||||
| Total liabilities and equity | $ | $ | ||||||||||||||||||
See notes to consolidated financial statements.
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Consolidated Statements of Shareholders' Equity
| Equity of Eli Lilly and Company Shareholders | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, shares in thousands) | Common Stock | Additional Paid-in Capital | Retained Earnings | Employee Benefit Trust | Accumulated Other Comprehensive Loss | Common Stock in Treasury | Noncontrolling Interest | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2018 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared per share: $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury shares | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock under employee stock plans, net | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of new accounting standards (Note 1) | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Elanco Stock (Note 19) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared per share: $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of treasury shares | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock under employee stock plans, net | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock in exchange offer | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of Elanco | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends declared per share: $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury shares | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury shares | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock under employee stock plans, net | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
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Consolidated Statements of Cash Flows
| ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions) | Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||||||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | |||||||||||||||||||||||
| Adjustments to Reconcile Net Income to Cash Flows from Operating Activities: | ||||||||||||||||||||||||||
| Gain related to disposition of Elanco (Note 19) | ( | |||||||||||||||||||||||||
| Gain on sale of antibiotic business in China (Note 3) | ( | |||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Change in deferred income taxes | ( | |||||||||||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||||
| Net investment gains | ( | ( | ( | |||||||||||||||||||||||
| Acquired in-process research and development (Note 3) | ||||||||||||||||||||||||||
| Other non-cash operating activities, net | ||||||||||||||||||||||||||
| Other changes in operating assets and liabilities, net of acquisitions and divestitures: | ||||||||||||||||||||||||||
| Receivables—(increase) decrease | ( | ( | ( | |||||||||||||||||||||||
| Inventories—(increase) decrease | ( | ( | ||||||||||||||||||||||||
| Other assets—(increase) decrease | ( | ( | ( | |||||||||||||||||||||||
| Income taxes payable—increase (decrease) | ( | ( | ||||||||||||||||||||||||
| Accounts payable and other liabilities—increase (decrease) | ( | ( | ||||||||||||||||||||||||
| Net Cash Provided by Operating Activities | ||||||||||||||||||||||||||
| Cash Flows from Investing Activities | ||||||||||||||||||||||||||
| Purchases of property and equipment | ( | ( | ( | |||||||||||||||||||||||
| Proceeds from sales and maturities of short-term investments | ||||||||||||||||||||||||||
| Purchases of short-term investments | ( | ( | ( | |||||||||||||||||||||||
| Proceeds from sales of noncurrent investments | ||||||||||||||||||||||||||
| Purchases of noncurrent investments | ( | ( | ( | |||||||||||||||||||||||
| Purchases of in-process research and development | ( | ( | ( | |||||||||||||||||||||||
| Cash paid for acquisitions, net of cash acquired (Note 3) | ( | ( | ||||||||||||||||||||||||
| Cash distributed to Elanco upon disposition | ( | |||||||||||||||||||||||||
| Cash received for sale of antibiotic business in China | ||||||||||||||||||||||||||
| Other investing activities, net | ( | ( | ||||||||||||||||||||||||
| Net Cash Provided by (Used for) Investing Activities | ( | ( | ||||||||||||||||||||||||
| Cash Flows from Financing Activities | ||||||||||||||||||||||||||
| Dividends paid | ( | ( | ( | |||||||||||||||||||||||
| Net change in short-term borrowings | ( | ( | ||||||||||||||||||||||||
| Proceeds from issuance of long-term debt | ||||||||||||||||||||||||||
| Repayments of long-term debt | ( | ( | ( | |||||||||||||||||||||||
| Purchases of common stock | ( | ( | ( | |||||||||||||||||||||||
| Net proceeds from Elanco initial public offering (Note 19) | ||||||||||||||||||||||||||
| Other financing activities, net | ( | ( | ( | |||||||||||||||||||||||
| Net Cash Used for Financing Activities | ( | ( | ( | |||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | ||||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | |||||||||||||||||||||||||
Cash and cash equivalents at beginning of year (includes $ | ||||||||||||||||||||||||||
Cash and Cash Equivalents at End of Year (includes $ | $ | $ | $ | |||||||||||||||||||||||
See notes to consolidated financial statements.
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Notes to Consolidated Financial Statements
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Tables present dollars in millions, except per-share data)
Note 1: Summary of Significant Accounting Policies and Implementation of New Financial Accounting Standards
Basis of Presentation
The accompanying consolidated financial statements include Eli Lilly and Company and all subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). We consider majority voting interests, as well as effective economic or other control over an entity when deciding whether or not to consolidate an entity. We generally do not have control by means other than voting interests. Where our ownership of consolidated subsidiaries is less than 100 percent, the noncontrolling shareholders’ interests are reflected as a separate component of equity. All intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. We issued our financial statements by filing with the Securities and Exchange Commission (SEC) and have evaluated subsequent events up to the time of the filing of this Annual Report on Form 10-K.
Certain reclassifications have been made to prior periods in the consolidated financial statements and accompanying notes to conform with the current presentation.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis.
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health Incorporated (Elanco) common stock through a tax-free exchange offer. As a result, Elanco has been presented as discontinued operations in our consolidated financial statements for all periods presented.
Following the completion of the disposition of Elanco, we now operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Regional commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.
Research and Development Expenses and Acquired In-Process Research and Development (IPR&D)
Research and development expenses include the following:
•Research and development costs, which are expensed as incurred.
•Milestone payment obligations incurred prior to regulatory approval of the product, which are accrued when the event requiring payment of the milestone occurs.
Acquired IPR&D expense includes the initial costs of externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.
62
Foreign Currency Translation
Operations in our subsidiaries outside the United States (U.S.) are recorded in the functional currency of each subsidiary which is determined by a review of the environment where each subsidiary primarily generates and expends cash. The results of operations for our subsidiaries outside the U.S. are translated from functional currencies into U.S. dollars using the weighted average currency rate for the period. Assets and liabilities are translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries are recorded in other comprehensive income (loss).
Other Significant Accounting Policies
Our other significant accounting policies are described in the remaining appropriate notes to the consolidated financial statements.
Implementation of New Financial Accounting Standards
Effective January 1, 2019, we adopted Accounting Standards Update 2016-02, Leases, using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transitional practical expedients. The adoption of this standard resulted in recording of operating lease assets of approximately $530 million, which included reclassifying approximately $65 million of deferred rent and lease incentives, net of prepaid rent, as a component of the operating lease assets as of January 1, 2019. The adoption also resulted in recording operating lease liabilities of approximately $595 million as of January 1, 2019. Our accounting for finance leases remained substantially unchanged. Adoption of this standard did not result in a material change in net income in the year of adoption.
Effective January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers, and other related updates. This standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We applied this standard to contracts for which performance was not substantially complete as of the date of adoption. For those contracts that were modified prior to the date of adoption, we reflected the aggregate effect of those modifications when determining the appropriate accounting under the new standard. We don’t believe the effect of applying this practical expedient resulted in material differences. We applied this standard through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Upon adoption, the cumulative effect of applying this standard resulted in an increase of approximately $5 million to retained earnings as of January 1, 2018. Adoption of this standard did not result in a material change in revenue or net income in the year of adoption.
Effective January 1, 2018, we adopted Accounting Standards Update 2016-01 (ASU 2016-01), Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. This standard requires entities to recognize changes in the fair value of equity investments with readily determinable fair values in net income (except for investments accounted for under the equity method of accounting or those that result in consolidation of the investee). We applied the new standard through a cumulative effect adjustment to retained earnings as of the beginning of the year of adoption. Upon adoption, we reclassified from accumulated other comprehensive loss the after-tax amount of net unrealized gains resulting in an increase to retained earnings of approximately $105
Effective January 1, 2018, we adopted Accounting Standards Update 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This standard requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of transfer. We adopted this standard using a modified retrospective approach. Upon adoption, the cumulative effect of applying this standard resulted in an increase of approximately $700 million to retained earnings, $2.5 billion to deferred tax assets, and $1.8 billion to deferred tax liabilities as of January 1, 2018. Adoption of this standard did not result in a material change in net income in the year of adoption.
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Change in Accounting Principle for Retirement Benefit Plan Assets
Effective during the third quarter of 2020, we adopted a voluntary change in our method of applying an accounting principle for certain of our retirement benefit plans. Refer to Note 15 for additional information.
Note 2: Revenue
The following table summarizes our revenue recognized in our consolidated statements of operations:
| 2020 | 2019 | 2018 | |||||||||||||||
| Net product revenue | $ | $ | $ | ||||||||||||||
Collaboration and other revenue(1) | |||||||||||||||||
| Revenue | $ | $ | $ | ||||||||||||||
(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $135.6 million, $301.5 million, and $303.2 million during the years ended December 31, 2020, 2019, and 2018, respectively.
We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements will include our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts. See Note 4 for additional information related to our collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue from the Trajenta® and Jardiance® families of products resulting from our collaboration with Boehringer Ingelheim discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.
Net Product Revenue
Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which generally is at the time we ship the product to the customer. Payment terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from 30 to 70 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a financing component as we expect, at contract inception, that the period between when we transfer control of the product and when we receive payment will be one year or less. Any exceptions are either not material or we collect interest for payments made after the due date. Provisions for rebates, discounts, and returns are established in the same period the related sales are recognized. We generally ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.
Most of our products are sold to wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. For the years ended December 31, 2020, 2019, and 2018, our three largest wholesalers each accounted for between 15 20 19 27
Significant judgments must be made in determining the transaction price for our sales of products related to anticipated rebates, discounts and returns. The following describe the most significant of these judgments:
Sales Rebates and Discounts - Background and Uncertainties
•We initially invoice our customers at contractual list prices. Contracts with direct and indirect customers may provide for various rebates and discounts that may differ in each contract. As a consequence, to determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we must estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates.
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•The rebate and discount amounts are recorded as a deduction to arrive at our net product revenue. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include managed care, Medicare, Medicaid, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We estimate these accruals using an expected value approach.
•The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, chargeback, and patient assistance programs in the U.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing. Although we accrue a liability for rebates related to these programs at the time we record the sale, the rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.
•Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. An estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale.
Sales Returns - Background and Uncertainties
•When product sales occur, to determine the appropriate transaction price for our sales, we estimate a reserve for future product returns related to those sales using an expected value approach. This estimate is based on several factors, including: historical return rates, expiration date by product (on average, approximately 24 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows most U.S. customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. In the U.S. we allow bamlanivimab to be returned if the Emergency Use Authorization (EUA) is revoked. If the EUA were to be revoked, we could experience an elevated level of product returns of bamlanivimab, dependent on the amount of product remaining in the distribution channel. Adjustments to the returns reserve have been and may in the future be required based on revised estimates to our assumptions. We record the return amounts as a deduction to arrive at our net product revenue. Once the product is returned, it is destroyed; we do not record a right of return asset. Our returns policies outside the U.S. are generally more restrictive than in the U.S. as returns are not allowed for reasons other than failure to meet product specifications in many countries. Our reserve for future product returns for product sales outside the U.S. is not material.
•As a part of our process to estimate a reserve for product returns, we regularly review the supply levels of our significant products at the major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements provides us with data on inventory levels at our wholesalers; however, our data on inventory levels in the retail channel is more limited. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
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•Actual U.S. product returns have been less than 2
Adjustments to Revenue
Adjustments to increase revenue recognized as a result of changes in estimates for the judgments described above for our most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous periods were approximately 1 percent, 2 percent and 1 percent of U.S revenue during 2020, 2019, and 2018, respectively.
Collaboration and Other Arrangements
We recognize several types of revenue from our collaborations and other arrangements, which we discuss in general terms immediately below and more specifically in Note 4 for each of our material collaborations and other arrangements. Our collaborations and other arrangements are not contracts with customers but are evaluated to determine whether any aspects of the arrangements are contracts with customers.
•Revenue related to products we sell pursuant to these arrangements is included in net product revenue, while other sources of revenue (e.g., royalties and profit sharing from our partner) are included in collaboration and other revenue.
•Initial fees and developmental milestones we receive in collaborative and other similar arrangements from the partnering of our compounds under development are generally deferred and amortized into income through the expected product approval date.
•Profit-sharing due from our collaboration partners, which is based upon gross margins reported to us by our partners, is recognized as collaboration and other revenue as earned.
•Royalty revenue from licensees and certain of our collaboration partners, which is based on sales to third-parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). This royalty revenue is included in collaboration and other revenue.
•For arrangements involving multiple goods or services (e.g., research and development, marketing and selling, manufacturing, and distribution), each required good or service is evaluated to determine whether it is distinct. If a good or service does not qualify as distinct, it is combined with the other non-distinct goods or services within the arrangement and these combined goods or services are treated as a single performance obligation for accounting purposes. The arrangement's transaction price is then allocated to each performance obligation based on the relative standalone selling price of each performance obligation. For arrangements that involve variable consideration where we have sold intellectual property, we recognize revenue based on estimates of the amount of consideration we believe we will be entitled to receive from the other party, subject to a constraint. These estimates are adjusted to reflect the actual amounts to be collected when those facts and circumstances become known.
•Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development will not receive regulatory approval, we generally do not recognize any contingent payments that would be due to us upon or after regulatory approval.
•We have entered into arrangements whereby we transferred rights to products and committed to supply for a period of time. For those arrangements for which we concluded that the obligations were not distinct, any amounts received upfront are being amortized to revenue as net product revenue over the period of the supply arrangement as the performance obligation is satisfied.
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Contract Liabilities
Our contract liabilities result from arrangements where we have received payment in advance of performance under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract.
The following table summarizes contract liability balances:
| 2020 | 2019 | ||||||||||
| Contract liabilities | $ | $ | |||||||||
The contract liabilities balances disclosed above as of December 31, 2020 and 2019 were primarily related to the remaining license period of symbolic intellectual property and obligations to perform research and development activities or supply product for a defined period of time.
During the years ended December 31, 2020, 2019, and 2018, revenue recognized from contract liabilities as of the beginning of the respective year was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.
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Disaggregation of Revenue
The following table summarizes revenue by product:
| U.S. | Outside U.S. | ||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| Revenue—to unaffiliated customers: | |||||||||||||||||||||||||||||||||||||||||
| Diabetes: | |||||||||||||||||||||||||||||||||||||||||
Trulicity® | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
Humalog® (1) | |||||||||||||||||||||||||||||||||||||||||
Humulin® | |||||||||||||||||||||||||||||||||||||||||
Jardiance (2) | |||||||||||||||||||||||||||||||||||||||||
Basaglar® | |||||||||||||||||||||||||||||||||||||||||
Trajenta (3) | |||||||||||||||||||||||||||||||||||||||||
| Other Diabetes | |||||||||||||||||||||||||||||||||||||||||
| Total Diabetes | |||||||||||||||||||||||||||||||||||||||||
| Oncology: | |||||||||||||||||||||||||||||||||||||||||
Alimta® | |||||||||||||||||||||||||||||||||||||||||
Cyramza® | |||||||||||||||||||||||||||||||||||||||||
Verzenio® | |||||||||||||||||||||||||||||||||||||||||
Erbitux® | |||||||||||||||||||||||||||||||||||||||||
| Other Oncology | |||||||||||||||||||||||||||||||||||||||||
| Total Oncology | |||||||||||||||||||||||||||||||||||||||||
| Immunology: | |||||||||||||||||||||||||||||||||||||||||
Taltz® | |||||||||||||||||||||||||||||||||||||||||
Olumiant® | |||||||||||||||||||||||||||||||||||||||||
| Other Immunology | |||||||||||||||||||||||||||||||||||||||||
| Total Immunology | |||||||||||||||||||||||||||||||||||||||||
| Neuroscience: | |||||||||||||||||||||||||||||||||||||||||
Cymbalta® | |||||||||||||||||||||||||||||||||||||||||
Zyprexa® | |||||||||||||||||||||||||||||||||||||||||
Emgality® | |||||||||||||||||||||||||||||||||||||||||
| Other Neuroscience | |||||||||||||||||||||||||||||||||||||||||
| Total Neuroscience | |||||||||||||||||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||||||||
Forteo® | |||||||||||||||||||||||||||||||||||||||||
Bamlanivimab (4) | |||||||||||||||||||||||||||||||||||||||||
Cialis® | |||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||
| Total Other | |||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
Numbers may not add due to rounding.
(1) Humalog revenue includes insulin lispro.
(2) Jardiance revenue includes Glyxambi® and Synjardy®, and Trijardy® XR.
(3) Trajenta revenue includes Jentadueto®.
(4) Bamlanivimab sales are pursuant to EUA.
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The following table summarizes revenue by geographical area:
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
Revenue—to unaffiliated customers(1): | ||||||||||||||||||||||||||
| U.S. | $ | $ | $ | |||||||||||||||||||||||
| Europe | ||||||||||||||||||||||||||
| Japan | ||||||||||||||||||||||||||
| China | ||||||||||||||||||||||||||
| Other foreign countries | ||||||||||||||||||||||||||
| Revenue | $ | $ | $ | |||||||||||||||||||||||
Numbers may not add due to rounding.
(1) Revenue is attributed to the countries based on the location of the customer.
Note 3: Acquisitions and Divestiture
In February 2020 and 2019, we completed the acquisitions of Dermira, Inc. (Dermira) and Loxo Oncology, Inc. (Loxo), respectively. These transactions, as further discussed in this note below in Acquisitions of Businesses, were accounted for as business combinations under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of these acquisitions have been included in our consolidated financial statements from the date of acquisition.
We also acquired assets in development in 2020, 2019, and 2018, which are further discussed in this note below in Asset Acquisitions. Upon each acquisition, the cost allocated to acquired IPR&D was immediately expensed because the compound acquired had no alternative future use. For the years ended December 31, 2020, 2019, and 2018, we recorded acquired IPR&D charges of $660.4 million, $239.6 million, and $1.98 billion, respectively.
Acquisitions of Businesses
Dermira Acquisition
Overview of Transaction
In February 2020, we acquired all shares of Dermira for a purchase price of approximately $849.3 million, net of cash acquired. Under terms of the agreement, we acquired lebrikizumab, a novel, investigational, monoclonal antibody being evaluated for the treatment of moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the U.S. Food and Drug Administration (FDA). We also acquired Qbrexza® (glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating).
Assets Acquired and Liabilities Assumed
The fair values recognized related to the assets acquired and liabilities assumed in this acquisition included goodwill of $86.8 million, other intangibles of $1.20 billion primarily related to lebrikizumab, deferred income tax liabilities of $49.5 million, and long-term debt of $375.5 million. After the acquisition, we repaid $276.2 million of long-term debt assumed as part of our acquisition of Dermira.
Revenue attributable to assets acquired in the Dermira acquisition did not have a material impact on our consolidated statement of operations for the year ended December 31, 2020. We are unable to provide the results of operations for the year ended December 31, 2020 attributable to Dermira as those operations were substantially integrated into our legacy business.
Pro forma information has not been included because this acquisition did not have a material impact on our results of operations for the years ended December 31, 2020 and 2019.
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Loxo Acquisition
Overview of Transaction
In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. The accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset impairment, restructuring, and other special charges during the year ended December 31, 2019 (see Note 5).
Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib (LOXO-292), an oral RET inhibitor, and LOXO-305, an oral BTK inhibitor. In the second quarter of 2020, the FDA approved selpercatinib (Retevmo®) under its Accelerated Approval regulations and continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials. At the time of approval, we reclassified our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived intangible assets to finite-lived intangible assets and began amortizing straight line over its estimated useful life.
Assets Acquired and Liabilities Assumed
The following table summarizes the amounts recognized for assets acquired and liabilities assumed in the acquisition of Loxo as of the acquisition date:
| Estimated Fair Value at February 15, 2019 | |||||
Acquired IPR&D(1) | $ | ||||
Finite-lived intangibles(2) | |||||
| Deferred income taxes | ( | ||||
| Other assets and liabilities - net | ( | ||||
| Total identifiable net assets | |||||
Goodwill(3) | |||||
| Total consideration transferred - net of cash acquired | $ | ||||
(1) $4.60 billion of the acquired IPR&D relates to selpercatinib (LOXO-292).
(2) Contract-based intangibles (primarily related to Vitrakvi) which are being amortized to cost of sales on a straight-line basis over their estimated useful lives, were expected to have a weighted average useful life of approximately 12 years from the acquisition date.
(3) The goodwill recognized from this acquisition is attributable primarily to future unidentified projects and products and the assembled workforce for Loxo and is not deductible for tax purposes.
Our consolidated statement of operations for the year ended December 31, 2019 includes revenue attributable to assets acquired in the Loxo acquisition of $136.7 million, primarily due to regulatory approval and sales milestones received. We are unable to provide the results of operations for the year ended December 31, 2019 attributable to Loxo as those operations were substantially integrated into our legacy business.
Pro forma information has not been included because this acquisition did not have a material impact on our results of operations for the years ended December 31, 2019 and 2018.
Asset Acquisitions
The following table and narrative summarize our asset acquisitions during 2020, 2019, and 2018.
| Counterparty | Compound(s),Therapy, or Asset | Acquisition Month | Phase of Development(1) | Acquired IPR&D Expense | ||||||||||||||||
| Sitryx Therapeutics Limited | Pre-clinical targets that could lead to potential new medicines for autoimmune diseases | March 2020 | Pre-clinical | $ | ||||||||||||||||
AbCellera Biologics Inc. (AbCellera)(2) | Neutralizing antibodies for the treatement and prevention of COVID-19 | March 2020 | Pre-clinical | |||||||||||||||||
| Shanghai Junshi Biosciences Co., Ltd. (Junshi Biosciences) | Neutralizing antibodies for the treatment and prevention of COVID-19 | May 2020 | Pre-clinical | |||||||||||||||||
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| Undisclosed | Pre-clinical target that could lead to potential new medicine | May 2020 | Pre-clinical | |||||||||||||||||
| Evox Therapeutics Ltd | Pre-clinical research collaboration for the potential treatment of neurological disorders | June 2020 | Pre-clinical | |||||||||||||||||
| Innovent Biologics, Inc. (Innovent) | Sintilimab injection, an anti-PD-1 monoclonal antibody immuno-oncology medicine, for geographies outside of China | October 2020 | Phase III | |||||||||||||||||
| Disarm Therapeutics, Inc. (Disarm) | Disease-modifying therapeutics program for patients with axonal degeneration | October 2020 | Pre-clinical | |||||||||||||||||
| Fochon Pharmaceuticals, Ltd. | Pre-clinical molecule targeting hematological malignancies | November 2020 | Pre-clinical | |||||||||||||||||
| AC Immune SA | Tau aggregation inhibitor small molecules for the potential treatment of Alzheimer's disease and other neurodegenerative diseases | January 2019 & September 2019(3) | Pre-clinical | |||||||||||||||||
| ImmuNext, Inc. | Novel immunometabolism target | March 2019 | Pre-clinical | |||||||||||||||||
| Avidity Biosciences, Inc. | Potential new medicines in immunology and other select indications | April 2019 | Pre-clinical | |||||||||||||||||
| Centrexion Therapeutics Corporation | CNTX-0290, a novel, small molecule somatostatin receptor type 4 agonist | July 2019 | Phase I | |||||||||||||||||
| Sigilon Therapeutics, Inc. | Encapsulated cell therapies for the potential treatment of type 1 diabetes | April 2018 | Pre-clinical | |||||||||||||||||
| AurKa Pharma Inc. | AK-01, an Aurora kinase A inhibitor | June 2018 | Phase I | |||||||||||||||||
| ARMO BioSciences, Inc. (ARMO) | Cancer therapy - pegilodecakin | June 2018 | Phase III | |||||||||||||||||
| Anima Biotech Inc. | Translation inhibitors for selected neuroscience targets | July 2018 | Pre-clinical | |||||||||||||||||
| SIGA Technologies, Inc. | Priority Review Voucher | October 2018 | Not applicable | |||||||||||||||||
| Chugai Pharmaceutical Co., Ltd. | OWL833, an oral non-peptidic GLP-1 receptor agonist | October 2018 | Pre-clinical | |||||||||||||||||
| NextCure, Inc. | Immuno-oncology cancer therapies | November 2018 | Pre-clinical(4) | |||||||||||||||||
| Dicerna Pharmaceuticals Inc. | Cardio-metabolic disease, neurodegeneration, and pain | December 2018 | Pre-clinical | |||||||||||||||||
| Hydra Biosciences | TRPA1 antagonists program for the potential treatment of chronic pain syndromes | December 2018 | Pre-clinical | |||||||||||||||||
(1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.
(2) We recognized the acquired IPR&D expense of $25.0 million in May 2020 upon closing of the transaction.
(3) We recognized acquired IPR&D expenses of $96.9 million in January 2019 upon entering into a license agreement and $30.2 million in September 2019 upon entering into an amendment to the license agreement.
(4) This research and development collaboration agreement terminated effective March 2020.
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In connection with these arrangements, our partners may be entitled to future royalties and/or commercial milestones based on sales should products be approved for commercialization and/or milestones based on the successful progress of compounds through the development process.
Divestiture
In October 2019, we completed a transaction in which we sold the rights in China for two legacy antibiotic medicines, as well as a manufacturing facility in Suzhou, China to Eddingpharm, a China-based specialty pharmaceutical company. In connection with the sale, we received net cash proceeds of $354.8 million and $40.3 million from Eddingpharm in 2019 and 2020, respectively. We accounted for the transaction as the sale of a business. We recorded a gain of $309.8 million in Other—net, (income) expense upon closing the transaction in 2019.
Subsequent Events
Precision BioSciences, Inc. (Precision)
In January 2021, we entered into a research collaboration and exclusive license agreement with Precision to utilize Precision's proprietary ARCUS genome editing platform for the research and development of potential in vivo therapies for genetic disorders. Under terms of the agreement, we paid an upfront cash payment of $100.0 million and invested $35.0 million in Precision's common stock at a premium. As a result of the transaction, we will record an acquired IPR&D charge of $107.8 million in the first quarter of 2021.
Merus N.V. (Merus)
In January 2021, we entered into a research collaboration and exclusive license agreement with Merus to research and develop up to three CD3-engaging T-cell re-directing bispecific antibody therapies. Under the terms of the agreement, we paid Merus an upfront cash payment of $40.0 million and invested $20.0 million in Merus common shares at a premium. As a result of the transaction, we will record an acquired IPR&D charge of $46.5 million in the first quarter of 2021.
Prevail Therapeutics Inc. (Prevail)
In January 2021, we completed our acquisition of Prevail. Prevail is a biotechnology company developing potentially disease-modifying AAV9-based gene therapies for patients with neurodegenerative diseases. The acquisition establishes a new modality for drug discovery and development, extending our research efforts through the creation of a gene therapy program that will be anchored by Prevail’s portfolio of clinical-stage and preclinical neuroscience assets.
We acquired all shares of Prevail for $22.50 per share (approximately $880 million) in cash plus one non-tradable contingent value right (CVR). The CVR entitles Prevail stockholders to up to an additional $4.00 per share in cash (or an aggregate of approximately $160 million) payable, subject to terms and conditions, upon the first regulatory approval of a Prevail product in one of the following countries: U.S., Japan, United Kingdom (U.K.), Germany, France, Italy or Spain. To achieve the full value of the CVR, such regulatory approval must occur by December 31, 2024. If such regulatory approval occurs after December 31, 2024, the value of the CVR will be reduced by approximately 8.3 cents per month until December 1, 2028, at which point the CVR will expire.
The accounting impact of this acquisition and the results of the operations for Prevail will be included in our consolidated financial statements beginning in the first quarter of 2021.The initial accounting for this acquisition is incomplete. Significant, relevant information needed to complete the initial accounting is not available because the valuation of assets acquired and liabilities assumed is not complete. As a result, determining these values is not practicable, and we are unable to disclose these values or provide other related disclosures at this time.
Asahi Kasei Pharma Corporation (Asahi)
In January 2021, we entered into a license agreement with Asahi to acquire the exclusive rights for AK1780, an orally bioavailable P2X7 receptor antagonist that recently completed Phase 1 single and multiple ascending dose and clinical pharmacology studies for the potential treatment of chronic pain conditions. As a result of the transaction, we will pay Asahi an upfront cash payment and record an acquired IPR&D charge of $20.0 million in the first quarter of 2021.
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Note 4: Collaborations and Other Arrangements
We often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone as well as royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. See Note 2 for amounts of collaboration and other revenue recognized from these types of arrangements.
Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant arrangements are discussed below.
Boehringer Ingelheim Diabetes Collaboration
We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of diabetes compounds. Currently included in the collaboration are Boehringer Ingelheim’s oral diabetes products: Trajenta, Jentadueto, Jardiance, Glyxambi, Synjardy, and Trijardy XR as well as our basal insulin, Basaglar. Jentadueto is included in the Trajenta product family. Glyxambi, Synjardy, and Trijardy XR are included in the Jardiance product family.
The table below summarizes significant milestones (deferred) capitalized for the compounds included in this collaboration:
| Product Family | Milestones (Deferred) Capitalized(1) | |||||||
Trajenta(2) | $ | |||||||
Jardiance(3) | ||||||||
| Basaglar | ( | |||||||
(1) In connection with the regulatory approvals of Basaglar in the U.S., Europe, and Japan, milestone payments received were recorded as contract liabilities and are being amortized through the term of the collaboration (2029) to collaboration and other revenue. In connection with the regulatory approvals of Trajenta and Jardiance, milestone payments made were capitalized as intangible assets and are being amortized to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been (deferred) or capitalized from the start of this collaboration through the end of the reporting period.
(2) The collaboration agreement with Boehringer Ingelheim for Trajenta ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
(3) The collaboration agreement with Boehringer Ingelheim for Jardiance ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
Through December 31, 2019, in the most significant markets, we and Boehringer Ingelheim shared equally the ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from the collaboration. We recorded our portion of the gross margin associated with Boehringer Ingelheim's products as collaboration and other revenue. We recorded our sales of Basaglar to third parties as net product revenue with the payments made to Boehringer Ingelheim for their portion of the gross margin recorded as cost of sales. For all compounds under this collaboration, we recorded our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company was entitled to potential performance payments depending on the sales of the molecules it contributes to the collaboration. These performance payments may have resulted in the owner of the molecule retaining a greater share of the agreed upon gross margin of that product. Subject to achieving these thresholds, in a given period, our reported revenue for Trajenta and Jardiance may have been reduced by any performance payments we made related to these products. Similarly, performance payments we may have received related to Basaglar effectively reduced Boehringer Ingelheim's share of the gross margin, which reduced our cost of sales.
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Effective January 1, 2020, we and Boehringer Ingelheim modernized the alliance. In the most significant markets, we and Boehringer Ingelheim share equally the ongoing development costs and commercialization costs for the Jardiance product family. We receive a royalty on net sales of Boehringer Ingelheim's products in the most significant markets and recognize the royalty as collaboration and other revenue. We pay to Boehringer Ingelheim a royalty on net sales for Basaglar in the U.S. We record our sales of Basaglar to third parties as net product revenue with the royalty payments made to Boehringer Ingelheim recorded as cost of sales. For the Jardiance product family, we record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Boehringer Ingelheim is entitled to potential performance payments depending on the net sales of the Jardiance product family; therefore, our reported revenue for Jardiance may be reduced by any potential performance payments we make related to this product. Beginning January 1, 2021, the royalty received by us related to the Jardiance product family may also be increased or decreased depending on whether net sales for this product family exceed or fall below certain thresholds.
The following table summarizes our net product revenue recognized with respect to Basaglar and collaboration and other revenue recognized with respect to the Jardiance and Trajenta families of products:
| 2020 | 2019 | 2018 | |||||||||||||||
| Basaglar | $ | $ | $ | ||||||||||||||
| Jardiance | |||||||||||||||||
| Trajenta | |||||||||||||||||
Olumiant
We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte), which provides us the development and commercialization rights to its Janus tyrosine kinase (JAK) inhibitor compound, now known as Olumiant (baricitinib), and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte has the right to receive tiered, double digit royalty payments on global net sales with rates ranging up to 20 percent. The agreement calls for payments by us to Incyte associated with certain development, success-based regulatory, and sales-based milestones. In the first half of 2020, the agreement was amended to include the treatment of COVID-19, with Incyte obtaining the right to receive an additional royalty ranging up to the low teens on global net sales for the treatment of COVID-19 that exceed a specified aggregate global net sales threshold.
In connection with the regulatory approvals of Olumiant in the U.S., Europe, and Japan, milestone payments of $210.0 million and $180.0 million were capitalized as intangible assets as of December 31, 2020 and 2019, respectively, and are being amortized to cost of sales through the term of the collaboration. This represents the cumulative amounts that have been capitalized from the start of this collaboration through the end of each reporting period.
As of December 31, 2020, Incyte is eligible to receive up to $100.0 million of additional payments from us contingent upon certain success-based regulatory milestones. Incyte is also eligible to receive up to $150.0 million of potential sales-based milestones.
We record our sales of Olumiant to third parties as net product revenue with the royalty payments made to Incyte recorded as cost of sales. The following table summarizes our net product revenue recognized with respect to Olumiant:
| 2020 | 2019 | 2018 | |||||||||||||||
| Olumiant | $ | $ | $ | ||||||||||||||
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COVID-19 antibody therapies
In 2020, we entered into a worldwide license and collaboration agreement with AbCellera to co-develop therapeutic antibodies for the potential prevention and treatment of COVID-19, including bamlanivimab, for which we hold development and commercialization rights. In connection with this transaction, we recognized an acquired IPR&D expense of $25.0 million in 2020. AbCellera has the right to receive tiered royalty payments on global net sales of bamlanivimab with percentages ranging in the mid-teens to mid-twenties. Royalty payments made to AbCellera are recorded as cost of sales. Pursuant to an EUA, we recognized $871.2 million of net product revenue associated with our sales of bamlanivimab to third parties during the year ended December 31, 2020.
In 2020, we entered into a license and collaboration agreement with Junshi Biosciences to co-develop therapeutic antibodies for the potential prevention and treatment of COVID-19, including etesevimab, for which we hold development and commercialization rights outside of Greater China (which includes mainland China, Hong Kong and Macau Special Administrative Regions and Taiwan) and Junshi Biosciences maintains all rights in Greater China. In connection with this transaction, we recognized an acquired IPR&D expense of $20.0 million in 2020. Junshi Biosciences has the right to receive royalty payments in the mid-teens on our future net sales of etesevimab. Junshi Biosciences also has the right to receive certain development, success-based regulatory and sales-based milestones. As of December 31, 2020, Junshi Biosciences is eligible to receive up to $75.0 million of additional payments contingent upon certain success-based regulatory milestones and up to $120.0 million of potential sales-based milestones, contingent upon the commercial success of etesevimab. During the year ended December 31, 2020, we recognized $50.0 million of research and development expenses related to development milestones.
Tyvyt®
We have a collaboration agreement with Innovent to jointly develop and commercialize Tyvyt (sintilimab injection) in China. In 2019, we and Innovent began co-commercializing Tyvyt in China. We record our sales of Tyvyt to third parties as revenue, with payments made to Innovent for its portion of the gross margin reported as cost of sales. We also report as revenue our portion of the gross margin for Tyvyt sales made by Innovent to third parties. Our Tyvyt revenue in China, which is primarily recorded as net product revenue, was $308.7 million and $134.0 million in 2020 and 2019, respectively.
In October 2020, we obtained an exclusive license for Tyvyt from Innovent for geographies outside of China and plan to pursue registration of Tyvyt in the U.S. and other markets. We recorded an acquired IPR&D charge of $200.0 million in 2020 associated with the upfront payment to Innovent.
As of December 31, 2020, Innovent is eligible to receive up to $825.0 million for geographies outside of China and up to $75.0 million in China in success-based regulatory and sales-based milestones. Innovent is also eligible to receive tiered double digit royalties on net sales for geographies outside of China.
Tanezumab
We have a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and globally commercialize tanezumab for the treatment of osteoarthritis pain and cancer pain. The companies equally share the ongoing development costs and, if successful, in the U.S. will co-commercialize and equally share in gross margin and certain commercialization expenses. As a result of an amendment to the agreement in the third quarter of 2020, Pfizer will be responsible for commercialization activities and costs outside the U.S., and we have the right to receive tiered royalties in percentages from the high teens to mid-twenties for net sales in Japan as well as low double digit royalties on annual net sales greater than $150.0 million in all other territories outside of the U.S. and Japan. As of December 31, 2020, Pfizer is eligible to receive up to $147.5 million in success-based regulatory milestones based on current development plans and up to $1.23 billion in a series of sales-based milestones, contingent upon the commercial success of tanezumab.
Lebrikizumab
As a result of our acquisition of Dermira, we have a worldwide licensing agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively Roche), which provides us the global development and commercialization rights to lebrikizumab. Roche has the right to receive tiered royalty payments on future global net sales ranging in percentages from high single digits to high teens if the product is successfully commercialized. As of December 31, 2020, Roche is eligible to receive up to $180.0 million of payments from us contingent upon the achievement of success-based regulatory milestones, and up to $1.03 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab.
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Note 5: Asset Impairment, Restructuring, and Other Special Charges
The components of the charges included in asset impairment, restructuring, and other special charges in our consolidated statements of operations are described below:
| 2020 | 2019 | 2018 | |||||||||||||||
| Severance | $ | $ | $ | ||||||||||||||
| Asset impairment (gain) and other special charges | ( | ||||||||||||||||
| Total asset impairment, restructuring, and other special charges | $ | $ | $ | ||||||||||||||
Severance costs recognized during the years ended December 31, 2020, 2019 and 2018 were incurred as a result of actions taken worldwide to reduce our cost structure. Substantially all of the severance costs incurred during the year ended December 31, 2020 are expected to be paid in the next 12 months.
Asset impairment and other special charges recognized during the year ended December 31, 2019 resulted primarily from $400.7 million of other special charges related to the acquisition of Loxo, substantially all of which is associated with the accelerated vesting of Loxo employee equity awards.
Asset impairment and other special charges recognized during the year ended December 31, 2018 resulted primarily from asset impairment and other special charges related to the sale of the Posilac® (rbST) brand and the associated Augusta, Georgia manufacturing site.
Note 6: Inventories
Inventories at December 31 consisted of the following:
| 2020 | 2019 | ||||||||||
| Finished products | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials and supplies | |||||||||||
| Total (approximates replacement cost) | |||||||||||
| Increase to LIFO cost | |||||||||||
| Inventories | $ | $ | |||||||||
Inventories valued under the LIFO method comprised $1.21 billion and $1.20 billion of total inventories at December 31, 2020 and 2019, respectively.
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Note 7: Financial Instruments
We consider all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The cost of these investments approximates fair value.
Our equity investments are accounted for using three different methods depending on the type of equity investment:
•Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other-net, (income) expense.
•For equity investments that do not have readily determinable fair values, we measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any change in recorded value is recorded in other-net, (income) expense.
•Our public equity investments are measured and carried at fair value. Any change in fair value is recognized in other-net, (income) expense.
We review equity investments other than public equity investments for indications of impairment and observable price changes on a regular basis.
Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and are intended to offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative instruments that are designated and qualify as fair value hedges, the derivative instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative instruments that are designated and qualify as cash flow hedges, gains and losses are reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. For derivative and non-derivative instruments that are designated and qualify as net investment hedges, the foreign currency translation gains or losses due to spot rate fluctuations are reported as a component of accumulated other comprehensive loss. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in earnings during the period of change.
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Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency interest rate swaps. Our foreign currency-denominated notes had carrying amounts of $6.02 billion and $5.49 billion as of December 31, 2020 and 2019, respectively, of which $4.50 billion and $4.10 billion have been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations as of December 31, 2020 and 2019, respectively. At December 31, 2020, we had outstanding cross currency swaps with notional amounts of $3.76 billion swapping U.S. dollars to euro and $1.00 billion swapping swiss francs to U.S. dollars which have settlement dates ranging through 2028. Our cross-currency interest rate swaps, for which a majority convert a portion of our U.S. dollar-denominated fixed rate debt to foreign-denominated fixed rate debt, have also been designated as, and are effective as, economic hedges of net investments.
The Effect of Risk Management Instruments on the Consolidated Statements of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense:
| 2020 | 2019 | 2018 | |||||||||||||||
| Fair value hedges: | |||||||||||||||||
| Effect from hedged fixed-rate debt | $ | $ | $ | ( | |||||||||||||
| Effect from interest rate contracts | ( | ( | |||||||||||||||
| Cash flow hedges: | |||||||||||||||||
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss | |||||||||||||||||
| Cross-currency interest rate swaps | ( | ( | |||||||||||||||
| Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments | ( | ||||||||||||||||
Total | $ | ( | $ | $ | |||||||||||||
During the years ended December 31, 2020, 2019 and 2018, the amortization of losses related to the portion of our risk management hedging instruments, fair value hedges, and cash flow hedges that was excluded from the assessment of effectiveness was not material.
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The Effect of Risk-Management Instruments on Other Comprehensive Income (Loss)
The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Net investment hedges: | |||||||||||||||||
| Foreign currency-denominated notes | $ | ( | $ | $ | |||||||||||||
| Cross-currency interest rate swaps | ( | ||||||||||||||||
| Foreign currency exchange contracts | |||||||||||||||||
Cash flow hedges: | |||||||||||||||||
Forward-starting interest rate swaps | ( | ||||||||||||||||
| Cross-currency interest rate swaps | ( | ( | |||||||||||||||
During the next 12 months, we expect to reclassify $16.8 million of net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense. During the years ended December 31, 2020, 2019 and 2018, the amounts excluded from the assessment of hedge effectiveness recognized in other comprehensive income (loss) were not material.
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Fair Value of Financial Instruments
The following tables summarize certain fair value information at December 31 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments:
| Fair Value Measurements Using | |||||||||||||||||||||||||||||||||||
| Description | Carrying Amount | Cost (1) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | |||||||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||||||||||||||
| Other securities | |||||||||||||||||||||||||||||||||||
| Short-term investments | $ | ||||||||||||||||||||||||||||||||||
| Noncurrent investments: | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||||||||||||||
| Other securities | |||||||||||||||||||||||||||||||||||
| Marketable equity securities | |||||||||||||||||||||||||||||||||||
Equity investments without readily determinable fair values(2) | |||||||||||||||||||||||||||||||||||
Equity method investments(2) | |||||||||||||||||||||||||||||||||||
| Noncurrent investments | $ | ||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Cash equivalents | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||||||||||||||
| Other securities | |||||||||||||||||||||||||||||||||||
| Short-term investments | $ | ||||||||||||||||||||||||||||||||||
| Noncurrent investments: | |||||||||||||||||||||||||||||||||||
| U.S. government and agency securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Corporate debt securities | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||||||||||||||
| Asset-backed securities | |||||||||||||||||||||||||||||||||||
| Other securities | |||||||||||||||||||||||||||||||||||
| Marketable equity securities | |||||||||||||||||||||||||||||||||||
Equity investments without readily determinable fair values(2) | |||||||||||||||||||||||||||||||||||
Equity method investments(2) | |||||||||||||||||||||||||||||||||||
| Noncurrent investments | $ | ||||||||||||||||||||||||||||||||||
(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.
(2) Fair value disclosures are not applicable for equity method investments and investments accounted for under the measurement alternative for equity investments.
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| Fair Value Measurements Using | |||||||||||||||||||||||||||||
| Description | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | ||||||||||||||||||||||||
Short-term commercial paper borrowings | |||||||||||||||||||||||||||||
| December 31, 2020 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| December 31, 2019 | ( | ( | ( | ||||||||||||||||||||||||||
Long-term debt, including current portion | |||||||||||||||||||||||||||||
| December 31, 2020 | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| December 31, 2019 | ( | ( | ( | ||||||||||||||||||||||||||
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| Fair Value Measurements Using | |||||||||||||||||||||||||||||
| Description | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | ||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Risk-management instruments | |||||||||||||||||||||||||||||
Interest rate contracts designated as fair value hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Interest rate contracts designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||
Other noncurrent liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Cross-currency interest rate contracts designated as net investment hedges: | |||||||||||||||||||||||||||||
Other current liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Other noncurrent liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Cross-currency interest rate contracts designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||
Other noncurrent liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Foreign exchange contracts not designated as hedging instruments: | |||||||||||||||||||||||||||||
| Other receivables | |||||||||||||||||||||||||||||
| Other current liabilities | ( | ( | ( | ||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Risk-management instruments | |||||||||||||||||||||||||||||
Interest rate contracts designated as fair value hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||
Interest rate contracts designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||
Cross-currency interest rate contracts designated as net investment hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||
Other current liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Other noncurrent liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Cross-currency interest rate contracts designated as cash flow hedges: | |||||||||||||||||||||||||||||
| Other noncurrent assets | |||||||||||||||||||||||||||||
Other noncurrent liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Foreign exchange contracts not designated as hedging instruments: | |||||||||||||||||||||||||||||
| Other receivables | |||||||||||||||||||||||||||||
| Other current liabilities | ( | ( | ( | ||||||||||||||||||||||||||
Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff associated with certain of the risk-management instruments above that are subject to enforceable master netting arrangements or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management instruments above, individually, these financial rights are not material.
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We determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. Level 3 fair value measurements for other investment securities are determined using unobservable inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. The fair values of equity method investments and investments measured under the measurement alternative for equity investments that do not have readily determinable fair values are not readily available. As of December 31, 2020, we had approximately $687 million of unfunded commitments to invest in venture capital funds, which we anticipate will be paid over a period of
up to 10 years.
The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of December 31, 2020:
| Maturities by Period | |||||||||||||||||||||||||||||
| Total | Less Than 1 Year | 1-5 Years | 6-10 Years | More Than 10 Years | |||||||||||||||||||||||||
| Fair value of debt securities | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The net gains recognized in our consolidated statements of operations for equity securities were $1,442.2 million, $401.2 million and $72.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The net gains/losses recognized for the years ended December 31, 2020, 2019 and 2018 on equity securities sold during the respective periods were not material.
We adjust our equity investments without readily determinable fair values based upon changes in the equity instruments' values resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Downward adjustments resulting from an impairment are recorded based upon impairment considerations, including the financial condition and near term prospects of the issuer, general market conditions, and industry specific factors. Adjustments recorded for the years ended December 31, 2020, 2019 and 2018 were not material.
A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses in accumulated other comprehensive loss follows:
| 2020 | 2019 | ||||||||||
| Unrealized gross gains | $ | $ | |||||||||
| Unrealized gross losses | |||||||||||
| Fair value of securities in an unrealized gain position | |||||||||||
| Fair value of securities in an unrealized loss position | |||||||||||
We periodically assess our investment in available-for-sale securities for impairment and credit losses. The amount of credit losses are determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing credit losses include the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration. Impairment and credit losses related to available-for-sale securities were not material for the years ended December 31, 2020, 2019 and 2018.
As of December 31, 2020, the available-for-sale securities in an unrealized loss position include primarily fixed-rate debt securities of varying maturities, which are sensitive to changes in the yield curve and other market conditions. Approximately 86 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of December 31, 2020, we do not intend to sell, and it is not more likely than not that we will be required to sell, the securities in a loss position before the market values recover or the underlying cash flows have been received, and there is no indication of default on interest or principal payments for any of our debt securities.
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Activity related to our available-for-sale securities was as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Proceeds from sales | $ | $ | $ | ||||||||||||||
| Realized gross gains on sales | |||||||||||||||||
| Realized gross losses on sales | |||||||||||||||||
Realized gains and losses on sales of available-for-sale investments are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.
Accounts Receivable Factoring Arrangements
We have entered into accounts receivable factoring agreements with financial institutions to sell certain of our non-U.S. accounts receivable. These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. Our factoring agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. We derecognized $754.9 million and $678.8 million of accounts receivable as of December 31, 2020 and 2019, respectively, under these factoring arrangements. The costs of factoring such accounts receivable on our consolidated results of operations for the years ended December 31, 2020, 2019, and 2018 were not material.
Note 8: Goodwill and Other Intangibles
Goodwill
Other Intangibles
The components of intangible assets other than goodwill at December 31 were as follows:
| 2020 | 2019 | ||||||||||||||||||||||||||||||||||
| Description | Carrying Amount, Gross | Accumulated Amortization | Carrying Amount, Net | Carrying Amount, Gross | Accumulated Amortization | Carrying Amount, Net | |||||||||||||||||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Marketed products | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||
Total finite-lived intangible assets | ( | ( | |||||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Acquired IPR&D | — | — | |||||||||||||||||||||||||||||||||
| Other intangibles | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone payments. For transactions other than a business combination, we capitalize milestone payments incurred at or after the product has obtained regulatory approval for marketing.
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Other finite-lived intangible assets consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies, and customer relationships from business combinations.
Acquired IPR&D consists of the fair values of acquired IPR&D projects acquired in business combination, adjusted for subsequent impairments, if any. The costs of acquired IPR&D projects acquired directly in a transaction other than a business combination are capitalized as other intangible assets if the projects have an alternative future use; otherwise, they are expensed immediately. See Note 3 for acquired IPR&D projects that had no alternative future use.
The increase in marketed products and the decrease in acquired IPR&D in 2020 primarily relates to the reclassification of our $4.60 billion intangible asset for selpercatinib (Retevmo) from indefinite-lived to finite-lived as it was approved by the FDA in the second quarter of 2020. This decrease in acquired IPR&D in 2020 was partially offset by the addition of acquired IPR&D for lebrikizumab as a result of the Dermira acquisition. The increases in marketed products and acquired IPR&D intangible assets in 2019 were primarily related to our acquisition of Loxo. See Note 3 for further discussion of intangible assets acquired in recent business combinations and Note 4 for additional discussion of recent capitalized milestone payments.
Indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived acquired IPR&D as well as the fair value of finite-lived intangible assets for impairment testing purposes, we utilize the "income method" discussed above.
Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging from to 20 years. As of December 31, 2020, the remaining weighted-average amortization period for finite-lived intangible assets was approximately 15 years.
Amortization expense related to finite-lived intangible assets was as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Amortization expense | $ | $ | $ | ||||||||||||||
The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets as of December 31, 2020 is as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||||||||||||||
| Estimated amortization expense | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Amortization expense is included in either cost of sales, marketing, selling, and administrative or research and development depending on the nature of the intangible asset being amortized.
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Note 9: Property and Equipment
At December 31, property and equipment consisted of the following:
| 2020 | 2019 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Equipment | |||||||||||
| Construction in progress | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Property and equipment, net | $ | $ | |||||||||
Depreciation expense related to property and equipment was as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Depreciation expense | $ | $ | $ | ||||||||||||||
Capitalized interest costs were not material for the years ended December 31, 2020, 2019, and 2018.
The following table summarizes long-lived assets by geographical area:
| 2020 | 2019 | |||||||||||||||||||
Long-lived assets(1): | ||||||||||||||||||||
| U.S. and Puerto Rico | $ | $ | ||||||||||||||||||
| Ireland | ||||||||||||||||||||
| Other foreign countries | ||||||||||||||||||||
| Long-lived assets | $ | $ | ||||||||||||||||||
(1) Long-lived assets consist of property and equipment, net, operating lease assets, and certain other noncurrent assets.
Note 10: Leases
We determine if an arrangement is a lease at inception. We have leases with terms up to 12 years primarily for corporate offices, research and development facilities, vehicles, and equipment, including some of which have options to extend and/or early-terminate the leases. We determine the lease term by assuming the exercise of any renewal and/or early-termination options that are reasonably assured.
Operating lease right-of-use assets are presented as other noncurrent assets in our consolidated balance sheets, and the current and long-term portions of operating lease liabilities are included in other current liabilities and other noncurrent liabilities, respectively, in our consolidated balance sheets. Short-term leases, which are deemed at inception to have a lease term of 12 months or less, are not recorded on the consolidated balance sheets.
Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
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Lease expense for operating lease assets, which is recognized on a straight-line basis over the lease term, was $154.6 million and $172.8 million during the years ended December 31, 2020 and 2019, respectively. Variable lease payments, which represent non-lease components such as maintenance, insurance and taxes, and which vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the payment obligation is incurred and were not material during the years ended December 31, 2020 and 2019. Short-term lease expense was not material during the years ended December 31, 2020 and 2019.
Supplemental balance sheet information related to operating leases as of December 31, 2020 and 2019 was as follows:
| 2020 | 2019 | |||||||
| Weighted-average remaining lease term | ||||||||
| Weighted-average discount rate | % | % | ||||||
Supplemental cash flow information related to operating leases during the years ended December 31, 2020 and 2019 was as follows:
| 2020 | 2019 | |||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | ||||||||
The annual minimum lease payments of our operating lease liabilities as of December 31, 2020 were as follows:
| Year 1 | $ | ||||
| Year 2 | |||||
| Year 3 | |||||
| Year 4 | |||||
| Year 5 | |||||
| After Year 5 | |||||
| Total lease payments | |||||
| Less imputed interest | |||||
| Total | $ | ||||
Rental expense for all leases, including contingent rentals (not material), was $175.7 million for the year ended December 31, 2018.
Finance leases are included in property and equipment, short-term borrowings and current maturities of long-term debt, and long-term debt in our consolidated balance sheets. Finance leases are not material to our consolidated financial statements.
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Note 11: Borrowings
Debt at December 31 consisted of the following:
| 2020 | 2019 | ||||||||||
| Short-term commercial paper borrowings | $ | $ | |||||||||
| Long-term notes | |||||||||||
| Other long-term debt | |||||||||||
| Unamortized debt issuance costs | ( | ( | |||||||||
| Fair value adjustment on hedged long-term notes | |||||||||||
| Total debt | |||||||||||
| Less current portion | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
The following table summarizes long-term notes at December 31:
| 2020 | 2019 | |||||||
| $ | $ | |||||||
| Unamortized note discounts | ( | ( | ||||||
| Total long-term notes | $ | $ | ||||||
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The weighted-average effective borrowing rate on outstanding commercial paper at December 31, 2019 was 1.65 percent. The weighted-average effective borrowing rate for each issuance of the long term-notes approximates the stated interest rate.
At December 31, 2020, we had a total of $5.24 billion of unused committed bank credit facilities, which consisted primarily of a $3.00 billion credit facility that expires in December 2024 and a $2.00 billion 364 -day facility that expires in December 2021, both of which are available to support our commercial paper program. We have not drawn against the $3.00 billion and $2.00 billion facilities as of December 31, 2020. Of the remaining committed bank credit facilities, the outstanding balances as of December 31, 2020 and 2019 were not material. Compensating balances and commitment fees are not material, and there are no conditions that are probable of occurring under which the lines may be withdrawn.
In May 2020, we issued $1.00 billion of 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $988.6 million for general corporate purposes, including the repayment of outstanding commercial paper.
In August 2020, we issued $850.0 million of 2.50 percent fixed-rate notes due in September 2060 and an additional $250.0 million of our 2.25 percent fixed-rate notes due in May 2050, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $1.07 billion for general corporate purposes, including the repayment of outstanding commercial paper.
In February 2019, we issued $1.15 billion of 3.375 percent fixed-rate notes due in March 2029, $850.0 million of 3.875 percent fixed-rate notes due in March 2039, $1.50 billion of 3.95 percent fixed-rate notes due in March 2049, and $1.00 billion of 4.15 percent fixed-rate notes due in March 2059, with interest to be paid semi-annually. We used the net cash proceeds of $4.45 billion from the offering to repay commercial paper that was issued in connection with the acquisition of Loxo and for general corporate purposes.
In November 2019, we issued euro-denominated notes consisting of €600.0 million of 0.625 percent fixed-notes due November 2031 and €1.00 billion of 1.70 percent fixed-rate notes due in November 2049 with interest to be paid annually. We paid $2.27 billion, comprised of $1.75 billion of net cash proceeds from the offering and proceeds from commercial paper, to purchase and redeem certain higher interest rate U.S. dollar denominated notes with an aggregate principal amount of $2.00 billion and a net carrying value of $2.01 billion, resulting in a debt extinguishment loss of $252.5 million. This loss was included in other-net, (income) expense in our consolidated statement of operations during the year ended December 31, 2019.
In November 2019, we issued Japanese Yen-denominated notes consisting of ¥22.92 billion of 0.42 percent fixed-rate notes due in November 2029, ¥9.28 billion of 0.56 percent fixed-rate notes due in November 2034, and ¥7.64 billion of 0.97 percent fixed-rate notes due in November 2049, with interest to be paid semi-annually. We used the net cash proceeds from the offering of $356.6 million for general corporate purposes, including the repayment of outstanding commercial paper.
The aggregate amounts of maturities on long-term debt for the next five years are as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||||||||||||||
| Maturities on long-term debt | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
We have converted approximately 9 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. The weighted-average effective borrowing rates based on long-term debt obligations and interest rates at December 31, 2020 and 2019, including the effects of interest rate swaps for hedged debt obligations, were 2.61 percent and 2.88 percent, respectively.
The aggregate amount of cash payments for interest on borrowings, net of capitalized interest, are as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash payments for interest on borrowings | $ | $ | $ | ||||||||||||||
In accordance with the requirements of derivatives and hedging guidance, the portion of our fixed-rate debt obligations that is hedged as a fair value hedge is reflected in the consolidated balance sheets as an amount equal to the sum of the debt’s carrying value plus the fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market interest rates subsequent to the inception of the hedge.
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Note 12: Stock-Based Compensation
Our stock-based compensation expense consists of performance awards (PAs), shareholder value awards (SVAs), relative value awards (RVAs), and restricted stock units (RSUs). We recognize the fair value of stock-based compensation as expense over the requisite service period of the individual grantees, which generally equals the vesting period. We provide newly issued shares of our common stock and treasury stock to satisfy the issuance of PA, SVA, RVA, and RSU shares.
Stock-based compensation expense and the related tax benefits were as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Stock-based compensation expense | $ | $ | $ | ||||||||||||||
| Tax benefit | |||||||||||||||||
At December 31, 2020, stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 53.9 million additional shares.
Performance Award Program
PAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement period. The fair values of PAs granted for the years ended December 31, 2020, 2019, and 2018 were $137.33 , $112.09 , and $71.63 , respectively. The number of shares ultimately issued for the PA program is dependent upon the EPS achieved during the vesting period. Pursuant to this program, approximately 1.1 million shares, 1.2 million shares, and 0.9 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 0.8 million shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested PAs was $77.3 million, which will be amortized over the weighted-average remaining requisite service period of 12 months.
Shareholder Value Award Program
SVAs are granted to officers and management and are payable in shares of our common stock. The number of shares actually issued, if any, varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2020, 2019, and 2018 were $139.14 , $95.01 , and $48.51 , respectively, determined using the following assumptions:
| (Percents) | 2020 | 2019 | 2018 | ||||||||||||||
| Expected dividend yield | % | % | % | ||||||||||||||
| Risk-free interest rate | |||||||||||||||||
| Volatility | |||||||||||||||||
Pursuant to this program, approximately 0.8 million shares, 1.0 million shares, and 0.7 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 1.0 million shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested SVAs was $48.8 million, which will be amortized over the weighted-average remaining requisite service period of 20 months.
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Relative Value Award Program
Beginning in 2020, we granted RVAs to officers and management and are payable in shares of our common stock. The number of shares actually issued, if any, varies depending on the growth of our stock price at the end of the three-year vesting period compared to our peers. We measure the fair value of the RVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price and our peers' stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair value of the RVA units granted during the year ended December 31, 2020 was $179.90 , determined using the following assumptions:
| (Percents) | 2020 | ||||
| Expected dividend yield | % | ||||
| Risk-free interest rate | |||||
| Volatility | |||||
As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested RVAs was $13.7 million, which will be amortized over the weighted-average remaining requisite service period of 24 months.
Restricted Stock Units
RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, typically three years . The fair values of RSU awards granted during the years ended December 31, 2020, 2019, and 2018 were $135.42 , $108.43 , and $70.95 , respectively. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this program, 1.1 million, 1.5 million, and 1.3 million shares were granted and approximately 0.6 million, 0.8 million, and 1.0 million shares were issued during the years ended December 31, 2020, 2019, and 2018, respectively. Approximately 0.6 million shares are expected to be issued in 2021. As of December 31, 2020, the total remaining unrecognized compensation cost related to nonvested RSUs was $179.2 million, which will be amortized over the weighted-average remaining requisite service period of 31 months.
Note 13: Shareholders' Equity
During 2020, 2019, and 2018, we repurchased $500.0 million, $4.40 billion and $4.15 billion, respectively, of shares associated with our share repurchase programs. As of December 31, 2020, we had $1.00 billion remaining under our $8.00 billion share repurchase program that our board authorized in June 2018.
We have 5.0 million authorized shares of preferred stock. As of December 31, 2020 and 2019, no
We have an employee benefit trust that held 50.0 3.01
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Note 14: Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Deferred taxes related to GILTI, global intangible low-taxed income, are also recognized for the future tax effects of temporary differences.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position, based on its technical merits, will be sustained upon examination by the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.
In December 2017, the Tax Cuts and Job Act (the 2017 Tax Act) was signed into law. The 2017 Tax Act included significant changes to the U.S. corporate income tax system, such as the reduction in the corporate income tax rate from 35 percent to 21 percent, transition to a territorial tax system, changes to business related exclusions, deductions and credits, and modifications to international tax provisions, including a one-time repatriation transition tax (also known as the ‘Toll Tax’) on unremitted foreign earnings and GILTI, a new U.S. minimum tax on the earnings of our foreign subsidiaries. In 2018, we recorded $313.3 million of income tax benefit, mainly attributable to measurement period adjustments to the Toll Tax and GILTI.
Following is the composition of income tax expense:
| 2020 | 2019 | 2018 | |||||||||||||||
| Current: | |||||||||||||||||
Federal(1) | $ | $ | $ | ||||||||||||||
| Foreign | |||||||||||||||||
| State | ( | ( | |||||||||||||||
| Total current tax expense | |||||||||||||||||
| Deferred: | |||||||||||||||||
Federal(2) | ( | ( | |||||||||||||||
| Foreign | ( | ( | |||||||||||||||
| State | ( | ( | |||||||||||||||
| Total deferred tax (benefit) expense | ( | ||||||||||||||||
| Income taxes | $ | $ | $ | ||||||||||||||
(1) The 2020 and 2019 current tax expense includes $144.4 million and $153.1 million of tax benefit, respectively, from utilization of net operating loss and tax credit carryforwards. The 2018 current tax expense includes $201.5 million of tax expense related to effects of the 2017 Tax Act.
(2) The 2018 deferred tax benefit includes $26.2 million of tax benefit related to effects of the 2017 Tax Act.
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Significant components of our deferred tax assets and liabilities as of December 31 were as follows:
| 2020 | 2019 | ||||||||||
| Deferred tax assets: | |||||||||||
| Purchases of intangible assets | $ | $ | |||||||||
| Compensation and benefits | |||||||||||
| Tax credit carryforwards and carrybacks | |||||||||||
| Tax loss carryforwards and carrybacks | |||||||||||
| Sales rebates and discounts | |||||||||||
| Correlative tax adjustments | |||||||||||
| Foreign tax redeterminations | |||||||||||
| Operating lease liabilities | |||||||||||
| Capitalized research and development | |||||||||||
| Other | |||||||||||
| Total gross deferred tax assets | |||||||||||
| Valuation allowances | ( | ( | |||||||||
| Total deferred tax assets | |||||||||||
| Deferred tax liabilities: | |||||||||||
| Earnings of foreign subsidiaries | ( | ( | |||||||||
| Intangibles | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid employee benefits | ( | ( | |||||||||
| Property and equipment | ( | ( | |||||||||
| Financial instruments | ( | ( | |||||||||
| Operating lease assets | ( | ( | |||||||||
| Total deferred tax liabilities | ( | ( | |||||||||
| Deferred tax assets - net | $ | $ | |||||||||
The deferred tax asset and related valuation allowance amounts for U.S. federal, international, and state net operating losses and tax credits shown above have been reduced for differences between financial reporting and tax return filings.
At December 31, 2020, based on filed tax returns we have tax credit carryforwards and carrybacks of $887.3 million available to reduce future income taxes; $148.8 million, if unused, will expire by 2026, and $16.1 million, if unused, will expire between 2029 and 2039. The remaining portion of the tax credit carryforwards is related to federal tax credits of $84.8 million, international tax credits of $121.9 million, and state tax credits of $515.7 million, all of which are fully reserved.
At December 31, 2020, based on filed tax returns we had net operating losses and other carryforwards for international and U.S. federal income tax purposes of $1.52 billion: $162.6 million will expire by 2025; $781.7 million will expire between 2026 and 2040; and $576.3 million of the carryforwards will never expire. Net operating losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved. Deferred tax assets related to state net operating losses and other carryforwards of $175.6 million are fully reserved as of December 31, 2020.
Domestic and Puerto Rican companies contributed approximately 39 percent, 44 percent, and 15 percent for the years ended December 31, 2020, 2019, and 2018, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of 2031.
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Substantially all of the unremitted earnings of our foreign subsidiaries are considered not to be indefinitely reinvested for continued use in our foreign operations. At December 31, 2020 and December 31, 2019, we accrued an immaterial amount of foreign withholding taxes and state income taxes that would be owed upon future distributions of unremitted earnings of our foreign subsidiaries that are not indefinitely reinvested. For the amount considered to be indefinitely reinvested, it is not practicable to determine the amount of the related deferred income tax liability due to the complexities in the tax laws and assumptions we would have to make.
Cash payments of U.S. federal, state, and foreign income taxes, net of refunds, were as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash payments of income taxes | $ | $ | $ | ||||||||||||||
The 2017 Tax Act provided an election to taxpayers subject to the Toll Tax to make payments over an eight year period beginning in 2018 through 2025. Having made this election, our future cash payments relating to the Toll Tax as of December 31, 2020 are as follows:
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | |||||||||||
| 2017 Tax Act Toll Tax | $ | $ | $ | $ | ||||||||||
We have additional noncurrent income tax payables of $1.69 billion unrelated to the Toll Tax; we cannot reasonably estimate the timing of future cash outflows associated with these liabilities.
Following is a reconciliation of the consolidated income tax expense applying the U.S. federal statutory rate to income before income taxes to reported consolidated income tax expense:
| 2020 | 2019 | 2018 | |||||||||||||||
| Income tax at the U.S. federal statutory tax rate | $ | $ | $ | ||||||||||||||
| Add (deduct): | |||||||||||||||||
| International operations, including Puerto Rico | ( | ( | ( | ||||||||||||||
| General business credits | ( | ( | ( | ||||||||||||||
Non-deductible acquired IPR&D(1) | |||||||||||||||||
| 2017 Tax Act | |||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||
| Income taxes | $ | $ | $ | ||||||||||||||
(1) Non-deductible acquired IPR&D was related to the acquisitions of Disarm and a pre-clinical stage company in 2020 and ARMO in 2018. See Note 3 for additional information related to acquisitions.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Beginning balance at January 1 | $ | $ | $ | ||||||||||||||
| Additions based on tax positions related to the current year | |||||||||||||||||
| Additions for tax positions of prior years | |||||||||||||||||
| Reductions for tax positions of prior years | ( | ( | ( | ||||||||||||||
| Settlements | ( | ( | ( | ||||||||||||||
| Lapses of statutes of limitation | ( | ( | ( | ||||||||||||||
| Changes related to the impact of foreign currency translation | ( | ( | |||||||||||||||
| Ending balance at December 31 | $ | $ | $ | ||||||||||||||
The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $1.67 billion and $1.53 billion at December 31, 2020 and 2019, respectively.
We file U.S. federal, foreign, and various state and local income tax returns. We are no longer subject to U.S. federal income tax examination for years before 2016. In most major foreign and state jurisdictions, we are no longer subject to income tax examination for years before 2012.
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The U.S. examination of tax years 2016-2018 began in the fourth quarter of 2019 and remains ongoing; therefore, the resolution of this audit period will likely extend beyond the next 12 months. For tax years 2013-2015, all matters were effectively settled in 2019. As a result, our gross uncertain tax positions were reduced by approximately $200 million, we made a cash payment of approximately $125 million, and our consolidated results were benefited by an immaterial reduction in tax expense.
We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized income tax (benefit) expense related to interest and penalties as follows:
| 2020 | 2019 | 2018 | |||||||||||||||
| Income tax (benefit) expense | $ | $ | ( | $ | |||||||||||||
At December 31, 2020 and 2019, our accruals for the payment of interest and penalties totaled $196.7 million and $150.8 million, respectively.
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Note 15: Retirement Benefits
We use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets, funded status, and amounts recognized in the consolidated balance sheets at December 31 for our defined benefit pension and retiree health benefit plans, which were as follows:
| Defined Benefit Pension Plans | Retiree Health Benefit Plans | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Change in benefit obligation: | |||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | $ | $ | $ | |||||||||||||||||||
| Service cost | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Actuarial loss | |||||||||||||||||||||||
| Benefits paid | ( | ( | ( | ( | |||||||||||||||||||
Curtailment (gain) loss | ( | ( | |||||||||||||||||||||
Foreign currency exchange rate changes and other adjustments | |||||||||||||||||||||||
| Benefit obligation at end of year | |||||||||||||||||||||||
| Change in plan assets: | |||||||||||||||||||||||
| Fair value of plan assets at beginning of year | |||||||||||||||||||||||
| Actual return on plan assets | |||||||||||||||||||||||
| Employer contribution | ( | ||||||||||||||||||||||
| Benefits paid | ( | ( | ( | ( | |||||||||||||||||||
Foreign currency exchange rate changes and other adjustments | |||||||||||||||||||||||
| Fair value of plan assets at end of year | |||||||||||||||||||||||
| Funded status | ( | ( | |||||||||||||||||||||
| Unrecognized net actuarial (gain) loss | ( | ( | |||||||||||||||||||||
| Unrecognized prior service (benefit) cost | ( | ( | |||||||||||||||||||||
| Net amount recognized | $ | $ | $ | $ | |||||||||||||||||||
Amounts recognized in the consolidated balance sheet consisted of: | |||||||||||||||||||||||
| Other noncurrent assets | $ | $ | $ | $ | |||||||||||||||||||
| Other current liabilities | ( | ( | ( | ( | |||||||||||||||||||
| Accrued retirement benefits | ( | ( | ( | ( | |||||||||||||||||||
| Accumulated other comprehensive (income) loss before income taxes | ( | ( | |||||||||||||||||||||
| Net amount recognized | $ | $ | $ | $ | |||||||||||||||||||
The unrecognized net actuarial loss (gain) and unrecognized prior service cost (benefit) have not yet been recognized in net periodic pension costs and were included in accumulated other comprehensive loss at December 31, 2020 and 2019.
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Effective during the third quarter of 2020, we adopted a voluntary change in our method of applying an accounting principle for certain of our retirement benefit plans. The new accounting method changes the computation of expected returns on U.S. dollar denominated investment grade debt securities and derivatives in such plans from a calculated value that includes changes in the fair values over a period of five years to actual fair value. This change in accounting principle is preferable because changes in the fair value of this class of assets will be amortized into net periodic pension and retiree health cost sooner. No change is being made to the accounting principle for the other classes of pension assets. The impact of the adoption of this change in accounting method was not material to our historical and current consolidated financial statements.
A decrease in the discount rate was the primary driver for the $2.13 billion and $2.89 billion increase in the benefit obligation in 2020 and 2019, respectively.
In July 2018, we announced that we would amend our defined benefit pension and retiree health benefit plans to freeze or reduce benefits for certain employees effective January 1, 2019. We remeasured the impacted pension and retiree health plans’ benefit obligations as of July 31, 2018, which resulted in a net curtailment gain of $28.0 million, which was recorded in asset impairment, restructuring, and other special charges.
The following represents our weighted-average assumptions as of December 31:
| Defined Benefit Pension Plans | Retiree Health Benefit Plans | ||||||||||||||||||||||||||||||||||
| (Percents) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Discount rate for benefit obligation | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Discount rate for net benefit costs | |||||||||||||||||||||||||||||||||||
Rate of compensation increase for benefit obligation | |||||||||||||||||||||||||||||||||||
| Rate of compensation increase for net benefit costs | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets for net benefit costs | |||||||||||||||||||||||||||||||||||
We annually evaluate the expected return on plan assets in our defined benefit pension and retiree health benefit plans. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions; asset returns and asset allocations; and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the assumptions and trend rates utilized by similar plans, where applicable.
Given the design of our retiree health benefit plans, healthcare-cost trend rates do not have a material impact on our financial condition or results of operations.
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The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | 2026-2030 | ||||||||||||||||||||||||||||||
| Defined benefit pension plans | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Retiree health benefit plans | |||||||||||||||||||||||||||||||||||
Amounts relating to defined benefit pension plans with projected benefit obligations in excess of plan assets were as follows at December 31:
| 2020 | 2019 | ||||||||||
| Projected benefit obligation | $ | $ | |||||||||
| Fair value of plan assets | |||||||||||
Amounts relating to defined benefit pension plans and retiree health benefit plans with accumulated benefit obligations in excess of plan assets were as follows at December 31:
| Defined Benefit Pension Plans | Retiree Health Benefit Plans | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Accumulated benefit obligation | $ | $ | $ | $ | |||||||||||||||||||
| Fair value of plan assets | |||||||||||||||||||||||
The total accumulated benefit obligation for our defined benefit pension plans was $17.03 billion and $15.17 billion at December 31, 2020 and 2019, respectively.
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Net pension and retiree health benefit expense included the following components:
| Defined Benefit Pension Plans | Retiree Health Benefit Plans | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Components of net periodic (benefit) cost: | |||||||||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
Amortization of prior service (benefit) cost | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Recognized actuarial loss (gain) | ( | ||||||||||||||||||||||||||||||||||
| Curtailment (gain) loss | ( | ||||||||||||||||||||||||||||||||||
| Net periodic (benefit) cost | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||
The following represents the amounts recognized in other comprehensive income (loss) for the years ended December 31, 2020, 2019, and 2018:
| Defined Benefit Pension Plans | Retiree Health Benefit Plans | ||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Actuarial gain (loss) arising during period | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Plan amendments during period | ( | ( | |||||||||||||||||||||||||||||||||
| Curtailment gain (loss) | ( | ||||||||||||||||||||||||||||||||||
| Amortization of prior service (benefit) cost included in net income | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Amortization of net actuarial loss included in net income | ( | ||||||||||||||||||||||||||||||||||
| Foreign currency exchange rate changes and other | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss) during period | $ | ( | $ | ( | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||
We have defined contribution savings plans that cover our eligible employees worldwide. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save. Our contributions to the plans are based on employee contributions and the level of our match. Expenses under the plans totaled $164.3 million, $145.2 million, and $132.6 million for the years ended December 31, 2020, 2019, and 2018, respectively.
We provide certain other postemployment benefits primarily related to disability benefits and accrue for the related cost over the service lives of employees. Expenses associated with these benefit plans for the years ended December 31, 2020, 2019, and 2018 were not material.
Benefit Plan Investments
Our benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. U.S. and Puerto Rico plans represent approximately 80 percent of our global investments. Given the long-term nature of our liabilities, these plans have the flexibility to manage an above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically prohibited investments. However, within individual investment manager mandates, restrictions and limitations are contractually set to align with our investment objectives, ensure risk control, and limit concentrations.
We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition, within a category we use different managers with various management objectives to eliminate any significant concentration of risk.
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Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local investment policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease exposure to a particular public equity, fixed income, commodity, or currency market more rapidly or less expensively than could be accomplished through the use of the cash markets. The plans utilize both exchange-traded and over-the-counter instruments. The maximum exposure to either a market or counterparty credit loss is limited to the carrying value of the receivable, and is managed within contractual limits. We expect all of our counterparties to meet their obligations. The gross values of these derivative receivables and payables are not material to the global asset portfolio, and their values are reflected within the tables below.
The defined benefit pension and retiree health benefit plan allocation for the U.S. and Puerto Rico currently comprises approximately 65 percent growth investments and 35 percent fixed-income investments. The growth investment allocation encompasses U.S. and international public equity securities, hedge funds, private equity-like investments, and real estate. These portfolio allocations are intended to reduce overall risk by providing diversification, while seeking moderate to high returns over the long term.
Public equity securities are well diversified and invested in U.S. and international small-to-large companies across various asset managers and styles. The remaining portion of the growth portfolio is invested in private alternative investments.
Fixed-income investments primarily consist of fixed-income securities in U.S. treasuries and agencies, emerging market debt obligations, corporate bonds, bank loans, mortgage-backed securities, commercial mortgage-backed obligations, and any related repurchase agreements.
Hedge funds are privately owned institutional investment funds that generally have moderate liquidity. Hedge funds seek specified levels of absolute return regardless of overall market conditions, and generally have low correlations to public equity and debt markets. Hedge funds often invest substantially in financial market instruments (stocks, bonds, commodities, currencies, derivatives, etc.) using a very broad range of trading activities to manage portfolio risks. Hedge fund strategies focus primarily on security selection and seek to be neutral with respect to market moves. Common groupings of hedge fund strategies include relative value, tactical, and event driven. Relative value strategies include arbitrage, when the same asset can simultaneously be bought and sold at different prices, achieving an immediate profit. Tactical strategies often take long and short positions to reduce or eliminate overall market risks while seeking a particular investment opportunity. Event strategy opportunities can evolve from specific company announcements such as mergers and acquisitions, and typically have little correlation to overall market directional movements. Our hedge fund investments are made through limited partnership interests in fund-of-funds structures and directly into hedge funds. Plan holdings in hedge funds are valued based on net asset values (NAVs) calculated by each fund or general partner, as applicable, and we have the ability to redeem these investments at NAV.
Private equity-like investment funds typically have low liquidity and are made through long-term partnerships or joint ventures that invest in pools of capital invested in primarily non-publicly traded entities. Underlying investments include venture capital (early stage investing), buyout, special situations, private debt, and private real estate investments. Private equity management firms typically acquire and then reorganize private companies to create increased long term value. Private equity-like funds usually have a limited life of approximately 10-15 years, and require a minimum investment commitment from their limited partners. Our private equity-like investments are made both directly into funds and through fund-of-funds structures to ensure broad diversification of management styles and assets across the portfolio. Plan holdings in private equity-like investments are valued using the value reported by the partnership, adjusted for known cash flows and significant events through our reporting date. Values provided by the partnerships are primarily based on analysis of and judgments about the underlying investments. Inputs to these valuations include underlying NAVs, discounted cash flow valuations, comparable market valuations, and may also include adjustments for currency, credit, liquidity and other risks as applicable. The vast majority of these private partnerships provide us with annual audited financial statements including their compliance with fair valuation procedures consistent with applicable accounting standards.
Real estate is composed of public holdings. Real estate investments in registered investment companies that trade on an exchange are classified as Level 1 on the fair value hierarchy. Real estate investments in funds measured at fair value on the basis of NAV provided by the fund manager are classified as such. These NAVs are developed with inputs including discounted cash flow, independent appraisal, and market comparable analyses.
Other assets include cash and cash equivalents and mark-to-market value of derivatives.
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The cash value of the trust-owned insurance contract is primarily invested in investment-grade publicly traded equity and fixed-income securities.
Other than hedge funds, private equity-like investments, and a portion of the real estate holdings, which are discussed above, we determine fair values based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses.
The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2020 by asset category were as follows:
| Fair Value Measurements Using | |||||||||||||||||||||||||||||
| Asset Class | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Investments Valued at Net Asset Value(1) | ||||||||||||||||||||||||
| Defined Benefit Pension Plans | |||||||||||||||||||||||||||||
| Public equity securities: | |||||||||||||||||||||||||||||
| U.S. | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Fixed income: | |||||||||||||||||||||||||||||
| Developed markets | |||||||||||||||||||||||||||||
| Developed markets - repurchase agreements | ( | ( | |||||||||||||||||||||||||||
| Emerging markets | |||||||||||||||||||||||||||||
| Private alternative investments: | |||||||||||||||||||||||||||||
| Hedge funds | |||||||||||||||||||||||||||||
| Equity-like funds | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Retiree Health Benefit Plans | |||||||||||||||||||||||||||||
| Public equity securities: | |||||||||||||||||||||||||||||
| U.S. | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Fixed income: | |||||||||||||||||||||||||||||
| Developed markets | |||||||||||||||||||||||||||||
| Emerging markets | |||||||||||||||||||||||||||||
| Private alternative investments: | |||||||||||||||||||||||||||||
| Hedge funds | |||||||||||||||||||||||||||||
| Equity-like funds | |||||||||||||||||||||||||||||
Cash value of trust owned insurance contract | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2020. The activity in the Level 3 investments during the year ended December 31, 2020 was not material.
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The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2019 by asset category were as follows:
| Fair Value Measurements Using | |||||||||||||||||||||||||||||
| Asset Class | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Investments Valued at Net Asset Value(1) | ||||||||||||||||||||||||
| Defined Benefit Pension Plans | |||||||||||||||||||||||||||||
| Public equity securities: | |||||||||||||||||||||||||||||
| U.S. | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Fixed income: | |||||||||||||||||||||||||||||
| Developed markets | |||||||||||||||||||||||||||||
| Developed markets - repurchase agreements | ( | ( | |||||||||||||||||||||||||||
| Emerging markets | |||||||||||||||||||||||||||||
| Private alternative investments: | |||||||||||||||||||||||||||||
| Hedge funds | |||||||||||||||||||||||||||||
| Equity-like funds | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Retiree Health Benefit Plans | |||||||||||||||||||||||||||||
| Public equity securities: | |||||||||||||||||||||||||||||
| U.S. | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| International | |||||||||||||||||||||||||||||
| Fixed income: | |||||||||||||||||||||||||||||
| Developed markets | |||||||||||||||||||||||||||||
| Emerging markets | |||||||||||||||||||||||||||||
| Private alternative investments: | |||||||||||||||||||||||||||||
| Hedge funds | |||||||||||||||||||||||||||||
| Equity-like funds | |||||||||||||||||||||||||||||
| Cash value of trust owned insurance contract | |||||||||||||||||||||||||||||
| Real estate | |||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1) Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy.
No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2019. The activity in the Level 3 investments during the year ended December 31, 2019 was not material.
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Note 16: Contingencies
We are involved in various lawsuits, claims, government investigations and other legal proceedings that arise in the ordinary course of business. These claims or proceedings can involve various types of parties, including governments, competitors, customers, suppliers, service providers, licensees, employees, or shareholders, among others. These matters may involve patent infringement, antitrust, securities, pricing, sales and marketing practices, environmental, commercial, contractual rights, licensing obligations, health and safety matters, consumer fraud, employment matters, product liability and insurance coverage, among others. The resolution of these matters often develops over a long period of time and expectations can change as a result of new findings, rulings, appeals or settlement arrangements. Legal proceedings that are significant or that we believe could become significant or material are described below.
We believe the legal proceedings in which we are named as defendants are without merit and we are defending against them vigorously. It is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters; however, we believe that the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations in any one accounting period.
Patent Litigation
Alimta Patent Litigation
A number of manufacturers are seeking approvals in the U.S., a number of countries in Europe, and Japan to market generic forms of Alimta prior to the expiration of our vitamin regimen patents, alleging that those patents are invalid, not infringed, or both. We believe our Alimta vitamin regimen patents are valid and enforceable against these generic manufacturers. However, it is not possible to determine the ultimate outcome of the proceedings, and accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in the U.S. could have a material adverse impact on our future consolidated results of operations and cash flows. We expect that a loss of exclusivity for Alimta in any of the below jurisdictions would result in a rapid and severe decline in future revenue for the product in the relevant market.
U.S. Patent Litigation
Alimta (pemetrexed) is protected by a vitamin regimen patent until 2021, plus pediatric exclusivity through May 2022.
In August 2017, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Apotex Inc. (Apotex) alleging infringement of Alimta's vitamin regimen patent for its application to market a pemetrexed product. In December 2019, the U.S. District Court for the Southern District of Indiana granted our motion for summary judgment of infringement, and in December 2020, the U.S. Court of Appeals for the Federal Circuit affirmed that ruling. Apotex did not request reconsideration or a rehearing of that ruling. However, Apotex could petition the U.S. Supreme Court to review the case.
In December 2019, we settled a lawsuit we filed against Eagle Pharmaceuticals, Inc. (Eagle) in response to its application to market a product using an alternative form of pemetrexed. Per the settlement agreement, Eagle has a limited initial entry into the market with its product starting February 2022 (up to an approximate three-week supply) and subsequent unlimited entry starting April 2022.
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European Patent Litigation
Legal proceedings are ongoing regarding our Alimta patents in various national courts throughout Europe. We are aware that several companies have received approval to market generic versions of pemetrexed in major European markets and that generic competitors may choose to launch at risk. Following a final decision in the Supreme Court of Germany in July 2020 overturning the lower court and upholding the validity of our Alimta patent, several generics that were on the market at risk left. We have removed the remaining generics from the market by obtaining preliminary injunctions in our favor. In September 2020, the Paris Court of First Instance in France issued a final decision upholding the validity of our Alimta patent and found infringement by Fresenius Kabi France and Fresenius Kabi Groupe France’s (collectively, Kabi) pemetrexed product. The court issued an injunction against Kabi and provisionally awarded us damages. In January 2021, that same court issued a preliminary injunction against Zentiva France S.A.S. (Zentiva), the last remaining company with a generic pemetrexed product on the French market, and provisionally awarded us damages. In October 2020, the Court of Appeal of the Netherlands overturned a lower court decision and ruled that our Alimta patent is valid and infringed and reinstated an injunction against Kabi, thereby removing Kabi's pemetrexed product from the Netherlands market. Kabi has appealed this decision to the Netherlands Supreme Court. Kabi's generic pemetrexed product was the only at risk generic on the market in the Netherlands.
Our vitamin regimen patents have also been challenged in other smaller European jurisdictions. We will continue to seek to remove any generic pemetrexed products launched at risk in other European markets, seek damages with respect to such launches, and defend our patents against validity challenges.
Japanese Administrative Proceedings
In October 2020, the Japanese Patent Office (JPO) issued notices closing Hopira Inc.'s (Hospira) invalidation against our Japanese Alimta patents. As a result, Hospira filed a withdrawal notice with the JPO and the JPO accepted the withdrawal in November. This matter is now closed.
Emgality Patent Litigation
In September 2018, we were named as a defendant in litigation filed by Teva Pharmaceuticals International GMBH and Teva Pharmaceuticals USA, Inc. (collectively, Teva) in the U.S. District Court for the District of Massachusetts seeking a ruling that various claims in nine different Teva patents would be infringed by our launch and continued sales of Emgality for the prevention of migraine in adults. Trial is expected in December 2021. Separately, the U.S. Patent and Trademark Office (USPTO) granted our request to initiate an inter partes review (IPR) to reexamine the validity of the nine Teva patents asserted against us in the litigation. In February 2020, the USPTO ruled in our favor and found that the claims asserted against us in six of Teva's nine patents were invalid. In March 2020, the USPTO ruled against us on the remaining three Teva patents, finding that we failed to show that the remaining three patents were unpatentable based on the subset of invalidity arguments available in an IPR proceeding. In April 2020, we appealed the USPTO’s March 2020 ruling, and Teva appealed the USPTO’s February 2020 ruling to the U.S. Court of Appeals for the Federal Circuit. The district court litigation will proceed in parallel with the IPR appeals.
Jardiance Patent Litigation
In November 2018, Boehringer Ingelheim (BI), our partner in marketing and development of Jardiance, initiated U.S. patent litigation in the U.S. District Court of Delaware alleging infringement arising from Alkem Laboratories Ltd.'s (Alkem) and Ascend Laboratories, LLC's (Ascend) submissions of Abbreviated New Drug Applications (ANDA) seeking approval to market generic versions of Jardiance, Glyxambi, and Synjardy in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). Particularly with respect to Jardiance, Alkem's and Ascend's ANDAs seek approval to market generic versions of Jardiance prior to the expiration of the relevant patents, and allege that certain patents, including in some allegations the compound patent, are invalid or would not be infringed. We are not a party to this litigation. Trial was scheduled for April 2021 but has been postponed.
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Taltz Patent Litigation
In July 2018, we were named as a defendant in litigation filed by Genentech, Inc. (Genentech) in Germany seeking a ruling that Genentech’s patent would be infringed by our continued sales of Taltz in Germany. After it sold its patent rights to Novartis Pharma AG (Novartis) in June 2020, Genentech withdrew its infringement litigation and Novartis subsequently filed litigation against us in Germany asserting infringement based on sales of Taltz. In January 2021, we entered into a settlement agreement with Novartis whereby all pending litigation in Germany related to the Taltz patent has been withdrawn and this matter has concluded. We were also named in litigation in the U.K. in which Genentech asserted similar claims regarding its corresponding U.K. patent. Novartis purchased Genentech's U.K. patent rights for Taltz, sought substitution for Genentech in the U.K. litigation and then sought dismissal of all appeals. Orders to this effect were issued by the Patents Court and Court of Appeal in November 2020 and these matters have concluded.
Zyprexa Canada Patent Litigation
Beginning in the mid-2000’s, several generic companies in Canada challenged the validity of our Zyprexa compound patent. In 2012, the Canadian Federal Court of Appeals denied our appeal of a lower court's decision that certain patent claims were invalid for lack of utility. In 2013, Apotex Inc. and Apotex Pharmachem Inc. (collectively, Apotex) brought claims against us in the Ontario Superior Court of Justice at Toronto for damages related to our enforcement of the Zyprexa compound patent under Canadian regulations governing patented drugs. Apotex seeks compensation based on novel legal theories under the Statute of Monopolies, Trade-Mark Act, and common law. Trial is expected in 2021 or 2022.
Product Liability Litigation
Actos® Product Liability
We are named along with Takeda Chemical Industries, Ltd. and Takeda affiliates (collectively, Takeda) as a defendant in four purported product liability class actions in Canada related to Actos, which we commercialized with Takeda in Canada until 2009, including one in Ontario filed December 2011 (Casseres et al. v. Takeda Pharmaceutical North America, Inc., et al.), one in Quebec filed July 2012 (Whyte et al. v. Eli Lilly et al.), one in Saskatchewan filed November 2017 (Weiler v. Takeda Canada Inc. et al.), and one in Alberta filed January 2013 (Epp v. Takeda Canada Inc. et al.). In general, plaintiffs in these actions alleged that Actos caused or contributed to their bladder cancer.
Byetta® Product Liability
First initiated in March 2009, we are named as a defendant in approximately 570 Byetta product liability lawsuits in the U.S. involving approximately 810 plaintiffs. Approximately 55 of these lawsuits, covering about 285 plaintiffs, are filed in California state court and coordinated in a Los Angeles Superior Court. Approximately 515 of the lawsuits, covering about 515 plaintiffs, are filed in federal court, the majority of which are coordinated in a multi-district litigation (MDL) in the U.S. District Court for the Southern District of California. Three lawsuits, representing approximately four plaintiffs, have also been filed in various state courts. Approximately 565 of the lawsuits, involving approximately 800 plaintiffs, contain allegations that Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic cancer or thyroid cancer); while six plaintiffs allege Byetta caused or contributed to pancreatitis. In addition, one case alleges that Byetta caused or contributed to ampullary cancer. The federal and state trial courts granted summary judgment in favor of us and our co-defendants on the claims alleging pancreatic cancer. The plaintiffs appealed those rulings. In November 2017, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court's grant of summary judgment based on that court's discovery rulings and remanded the cases for further proceedings. In November 2018, the California Court of Appeal reversed the state court's grant of summary judgment based on that court's discovery rulings and remanded for further proceedings. We are aware of approximately 20 additional claimants who have not yet filed suit. These additional claims allege damages for pancreatic cancer or thyroid cancer.
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Cialis Product Liability
First initiated in August 2015, we are named as a defendant in approximately 350 Cialis product liability lawsuits in the U.S. These cases, many of which were originally filed in various federal courts, contain allegations that Cialis caused or contributed to the plaintiffs' cancer (melanoma). In December 2016, the Judicial Panel on Multidistrict Litigation (JPML) granted the plaintiffs' petition to have filed cases and an unspecified number of future cases coordinated into a federal multidistrict litigation (MDL) in the U.S. District Court for the Northern District of California, alongside an existing coordinated proceeding involving Viagra®. The JPML ordered the transfer of the existing cases to the now-renamed MDL In re: Viagra (Sildenafil Citrate) and Cialis (Tadalafil) Products Liability Litigation. In April 2020, the MDL court granted summary judgment to the defendants on all of the claims brought against them by the plaintiffs. In May 2020, plaintiffs filed an appeal in the U.S. Court of Appeals for the Ninth Circuit.
Jardiance Product Liability
First initiated in January 2019, we and Boehringer Ingelheim Pharmaceuticals, Inc., a subsidiary of BI, have been named as a defendant in approximately 95 product liability lawsuits in the U.S., mostly in Stamford Superior Court in Connecticut, alleging that Jardiance caused or contributed to plaintiffs’ Fournier’s gangrene. Our agreement with BI calls for BI to defend and indemnify us against any damages, costs, expenses, and certain other losses with respect to product liability claims in accordance with the terms of the agreement.
Environmental Proceedings
Under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly known as "Superfund," we have been designated as one of several potentially responsible parties with respect to the cleanup of fewer than 10 sites. Under Superfund, each responsible party may be jointly and severally liable for the entire amount of the cleanup.
Other Matters
340B Litigation
We are the plaintiff in a lawsuit filed in January 2021 in the U.S. District Court for the Southern District of Indiana against the U.S. Department of Health and Human Services (HHS), the Secretary of HHS, the Health Resources and Services Administration (HRSA), and the Administrator of HRSA. The lawsuit challenges the HHS's December 30, 2020 advisory opinion stating that drug manufacturers are required to deliver discounts under the 340B program to all contract pharmacies. We seek a declaratory judgment that the defendants violated the Administrative Procedures Act and the U.S. Constitution, a preliminary injunction enjoining implementation of the alternative dispute resolution process created by defendants and, with it, their application of the advisory opinion, and other related relief. A hearing on our motion for preliminary injunction has been scheduled for February 26, 2021.
In January 2021, we, along with other pharmaceutical manufacturers, were named as a defendant in a petition currently pending before the HHS Administration Dispute Resolution Panel. Petitioner seeks declaratory and other injunctive relief related to the 340B program.
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Brazil Litigation – Cosmopolis Facility
Labor Attorney Litigation
First initiated in 2008, our subsidiary in Brazil, Eli Lilly do Brasil Limitada (Lilly Brasil), is named in a lawsuit brought by the Labor Attorney for the 15th Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm to employees and former employees caused by exposure to heavy metals at a former Lilly Brasil manufacturing facility in Cosmopolis, Brazil, operated by the company between 1977 and 2003. In May 2014, the labor court judge ruled against Lilly Brasil, ordering it to undertake several actions of unspecified financial impact, including paying lifetime health coverage for the employees and contractors who worked at the Cosmopolis facility more than six months during the affected years and their children born during and after this period. We appealed this decision. In July 2018, the appeals court affirmed the labor court's ruling with a liquidated award of 300 million Brazilian real (for moral damages, donation of equipment, and creation of a foundation) which, adjusted for inflation and interest using the current Central Bank of Brazil's special system of clearance and custody rate (SELIC), is approximately 950 million Brazilian real (approximately $180 million as of December 31, 2020). The appeals court restricted the broad health coverage awarded by the labor court to health problems that claimants could show arose from exposure to the alleged contamination. In August 2019, Lilly Brasil filed an appeal to the superior labor court. In September 2019, the appeals court stayed a number of elements of its prior decision, including the obligation to provide health coverage for contractors, their children, and children of employees who worked at the Cosmopolis facility, pending the determination of Lilly Brasil’s appeal to the superior labor court. The cost of any such health coverage has not been determined.
In June 2019, the Labor Attorney filed an application in the labor court for enforcement of the healthcare coverage granted by the appeals court in its July 2018 ruling and requested restrictions on Lilly Brasil’s assets in Brazil. In July 2019, the labor court issued a ruling requiring either a freeze of Lilly Brasil’s immovable property or, alternatively, a security deposit of 500 million Brazilian real. Lilly Brasil filed a writ of mandamus challenging this ruling, but the court has stayed its decision on this writ and instead directed the parties to attend conciliation hearings, a process that concluded unsuccessfully in September 2020. Consequently, the partial stay of the proceedings relating to Lilly Brasil's application to appeal in the main proceedings has been lifted. In addition, the Labor Attorney's application for preliminary enforcement of the July 2018 healthcare coverage ruling was granted. As the conciliation hearings have been unsuccessful, we have filed a brief to strike the Labor Attorney’s application to enforce the previous healthcare coverage. Lilly Brasil is currently awaiting a determination as to whether its application seeking leave to appeal to the superior labor court has been successful.
Individual Former Employee Litigation
First initiated in 2003, we have also been named in approximately 30 lawsuits filed in the same labor court by individual former employees making similar claims. These lawsuits are each at various stages in the litigation process, with judgments being handed down in approximately half of the lawsuits, nearly all of which are on appeal in the labor courts.
China NDRC Antitrust Matter
The competition authority in China has investigated our distributor pricing practices in China in connection with a broader inquiry into pharmaceutical industry pricing. We have cooperated with this investigation.
Eastern District of Pennsylvania Pricing (Average Manufacturer Price) Inquiry
In November 2014, we, along with another pharmaceutical manufacturer, are named as co-defendants in United States et al. ex rel. Streck v. Takeda Pharm. Am., Inc., et al., which was filed in November 2014 and unsealed in the U.S. District Court for the Northern District of Illinois. The complaint alleges that the defendants should have treated certain credits from distributors as retroactive price increases and included such increases in calculating average manufacturer prices. Trial is scheduled for February 2022.
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Health Choice Alliance
We are named as a defendant in a lawsuit filed in June 2017 in the U.S. District Court for the Eastern District of Texas seeking damages under the federal anti-kickback statute and state and federal false claims acts for certain patient support programs related to our products Humalog, Humulin, and Forteo. In September 2019, the U.S. District Court granted the U.S. Department of Justice’s motion to dismiss the relator’s second amended complaint. In January 2020, the relator appealed the District Court’s dismissal to the U.S. Court of Appeals for the Fifth Circuit. We are also named as a defendant in two similar lawsuits filed in Texas and New Jersey state courts in October 2019 seeking damages under the Texas Medicaid Fraud Prevention Act and New Jersey Medicaid False Claims Act, respectively. In November 2020, the Texas state court action was stayed pending a decision by the U.S. Court of Appeals for the Fifth Circuit on the aforementioned District Court appeal.
Pricing Litigation, Investigations, and Inquires
Litigation
In December 2017, we, along with Sanofi-Aventis U.S. LLC (Sanofi) and Novo Nordisk, Inc. (Novo Nordisk) were named as defendants in a consolidated purported class action lawsuit, In re. Insulin Pricing Litigation, in the U.S. District Court for the District of New Jersey relating to insulin pricing seeking damages under various state consumer protection laws and the Federal Racketeer Influenced and Corrupt Organization Act (federal RICO Act). Separately, in February 2018, we, along with Sanofi and Novo Nordisk, were named as defendants in MSP Recovery Claims, Series, LLC et al. v. Sanofi Aventis U.S. LLC et al., in the same court, seeking damages under various state consumer protection laws, common law fraud, unjust enrichment, and the federal RICO Act. In both In re. Insulin Pricing Litigation and the MSP Recovery Claims litigation, the court dismissed claims under the federal RICO Act and certain state laws. Also, filed in the same court in November 2020, we, along with Sanofi, Novo Nordisk, CVS, Express Scripts, and Optum, have been sued in a purported class action, FWK Holdings, LLC v. Novo Nordisk Inc., et al., for alleged violations of the federal RICO Act as well as the New Jersey RICO Act and anti-trust law. That same group of defendants, along with Medco Health and United Health Group, also have been sued in other purported class actions in the same court, Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al. and Value Drug Co. v. Eli Lilly & Co. et al. both initiated in March 2020, for alleged violations of the federal RICO Act. In September 2020, the U.S. District Court for the District of New Jersey granted plaintiffs’ motion to consolidate FWK Holdings, LLC v. Novo Nordisk Inc., et al., Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al., and Value Drug Co. v. Eli Lilly & Co. et al.
In October 2018, the Minnesota Attorney General’s Office initiated litigation against us, Sanofi, and Novo Nordisk, State of Minnesota v. Sanofi-Aventis U.S. LLC et al., in the U.S. District Court for the District of New Jersey, alleging unjust enrichment, violations of various Minnesota state consumer protection laws, and the federal RICO Act. Additionally, in May 2019, the Kentucky Attorney General’s Office filed a complaint against us, Sanofi, and Novo Nordisk, Commonwealth of Kentucky v. Novo Nordisk, Inc. et al., in Kentucky state court, alleging violations of the Kentucky consumer protection law, false advertising, and unjust enrichment. In November 2019, Harris County in Texas initiated litigation against us, Sanofi, Novo Nordisk, Express Scripts, CVS, Optum, and Aetna, County of Harris Texas v. Eli Lilly & Co., et al., in federal court in the Southern District of Texas alleging violations of the federal RICO Act, federal and state anti-trust law, and the state deceptive trade practices-consumer protection act. Harris County also alleges common law claims such as fraud, unjust enrichment, and civil conspiracy. This lawsuit relates to our insulin products as well as Trulicity.
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Investigations, Subpoenas, and Inquiries
We received a subpoena from the New York and Vermont Attorney General Offices and civil investigative demands from the Washington, New Mexico, and Colorado Attorney General Offices relating to the pricing and sale of our insulin products. The Offices of the Attorney General in Mississippi, Washington D.C., California, Florida, Hawaii, and Nevada have requested information relating to the pricing and sale of our insulin products. We also received interrogatories and a subpoena from the California Attorney General's Office regarding our competition in the long-acting insulin market. We received two requests from the House of Representatives’ Committee on Energy and Commerce and a request from the Senate’s Committee on Health, Education, Labor, and Pensions seeking certain information related to the pricing of insulin products, among other issues. We also received requests from the House of Representatives’ Committee on Oversight and Reform and the Senate’s Committee on Finance, which seek detailed commercial information and business records. In January 2021, the Senate’s Committee on Finance released a report summarizing the findings of its investigation. We are cooperating with all of these aforementioned investigations, subpoenas, and inquiries.
Research Corporation Technologies, Inc.
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Note 17: Other Comprehensive Income (Loss)
The following table summarizes the activity related to each component of other comprehensive income (loss):
| Continuing Operations | |||||||||||||||||||||||||||||||||||
| (Amounts presented net of taxes) | Foreign Currency Translation Gains (Losses) | Unrealized Net Gains (Losses) on Securities | Defined Benefit Pension and Retiree Health Benefit Plans | Effective Portion of Cash Flow Hedges | Discontinued Operations | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||||
Beginning balance at January 1, 2018 (1) | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
Reclassification due to adoption of new accounting standard(2) | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Net amount reclassified from accumulated other comprehensive loss | ( | ||||||||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||
Balance at December 31, 2018(3) | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Net amount reclassified from accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Net amount reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Ending balance at December 31, 2020 | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||
(1) Accumulated other comprehensive loss as of January 1, 2018 consists of $5.72 billion of accumulated other comprehensive loss attributable to controlling interest and $23.7 million of accumulated other comprehensive income attributable to noncontrolling interest.
(2) This reclassification consists of $105.2 million of accumulated other comprehensive income attributable to controlling interest and $23.7 million of accumulated other comprehensive income attributable to noncontrolling interest. Refer to Note 1 for further details regarding the reclassification due to the adoption of ASU 2016-01.
(3) Accumulated other comprehensive loss as of December 31, 2018 consists of $5.73 billion of accumulated other comprehensive loss attributable to controlling interest and $11.0 million of accumulated other comprehensive loss attributable to noncontrolling interest.
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The tax effects on the net activity related to each component of other comprehensive income (loss) for the years ended December 31, were as follows:
| Tax benefit (expense) | 2020 | 2019 | 2018 | ||||||||||||||
| Foreign currency translation gains/losses | $ | $ | ( | $ | |||||||||||||
| Unrealized net gains/losses on securities | ( | ( | |||||||||||||||
| Defined benefit pension and retiree health benefit plans | ( | ||||||||||||||||
| Effective portion of cash flow hedges | ( | ||||||||||||||||
| Benefit/(provision) for income taxes allocated to other comprehensive income (loss) items | $ | $ | $ | ( | |||||||||||||
Except for the tax effects of foreign currency translation gains and losses related to our foreign currency-denominated notes, cross-currency interest rate swaps, and other foreign currency exchange contracts designated as net investment hedges (see Note 7), income taxes were not provided for foreign currency translation. Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For those operations, changes in exchange rates generally do not affect cash flows; therefore, resulting translation adjustments are made in shareholders' equity rather than in the consolidated statements of operations.
Reclassifications out of accumulated other comprehensive loss were as follows:
| Details about Accumulated Other Comprehensive Loss Components | Year Ended December 31, | Affected Line Item in the Consolidated Statements of Operations | ||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Amortization of retirement benefit items: | ||||||||||||||||||||
| Prior service benefits, net | $ | ( | $ | ( | $ | ( | Other—net, (income) expense | |||||||||||||
| Actuarial losses | Other—net, (income) expense | |||||||||||||||||||
| Total before tax | ||||||||||||||||||||
| Tax benefit | ( | ( | ( | Income taxes | ||||||||||||||||
| Net of tax | ||||||||||||||||||||
| Other, net of tax | ( | ( | Other—net, (income) expense | |||||||||||||||||
| Reclassifications from continuing operations (net of tax) | ||||||||||||||||||||
| Reclassifications from discontinued operations (net of tax) | Net income from discontinued operations | |||||||||||||||||||
| Total reclassifications for the period, net of tax | $ | $ | $ | |||||||||||||||||
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Note 18: Other–Net, (Income) Expense
Other–net, (income) expense consisted of the following:
| 2020 | 2019 | 2018 | |||||||||||||||
| Interest expense | $ | $ | $ | ||||||||||||||
| Interest income | ( | ( | ( | ||||||||||||||
| Debt extinguishment loss (Note 11) | |||||||||||||||||
| Gain on sale of antibiotic business in China (Note 3) | ( | ||||||||||||||||
| Retirement benefit plans | ( | ( | ( | ||||||||||||||
| Other (income) expense | ( | ( | |||||||||||||||
| Other–net, (income) expense | $ | ( | $ | ( | $ | ( | |||||||||||
Note 19: Discontinued Operations
On September 24, 2018, Elanco completed its initial public offering (IPO) resulting in the issuance of 72.3 million shares of its common stock, which represented 19.8 percent of Elanco's outstanding shares, at $24 per share.
In connection with the completion of the IPO, through a series of equity and other transactions, we transferred to Elanco the animal health businesses that formed its business. In exchange, Elanco transferred to us consideration of approximately $4.2 billion, which consisted primarily of the net proceeds from the IPO and the net proceeds from a $2.00 billion debt offering and a $500.0 million three-year term loan facility entered into by Elanco in August 2018. The consideration that we received was used for debt repayment, dividends, and share repurchases. The excess of the net proceeds from the IPO over the net book value of our divested interest was $629.2 million and was recorded in additional paid-in capital.
Through March 11, 2019, we continued to consolidate Elanco, as we retained control over Elanco. We completed the disposition of our remaining 80.2 percent ownership of Elanco common stock through a tax-free exchange offer that closed on March 11, 2019 (the disposition date). The earnings attributable to the divested, noncontrolling interest for the period from the IPO until disposition were not material.
As a result of the disposition, in the first quarter of 2019, we recognized a gain related to the disposition of approximately $3.7 billion, and we presented Elanco, including the gain related to the disposition, as discontinued operations in our consolidated financial statements for all periods presented.
The following table sets summarizes revenue and net income from discontinued operations:
| 2019 | 2018 | |||||||||||||
| Revenue from discontinued operations | $ | $ | ||||||||||||
| Net income from discontinued operations | ||||||||||||||
The gain related to the disposition of Elanco in the consolidated statement of cash flows includes the operating results of Elanco through the disposition date, which were not material. Net cash flows of our discontinued operations for operating activities were not material for the year ended December 31, 2019. Net cash provided by operating activities related to our discontinued operations was approximately $500 million for the year ended December 31, 2018. The net cash flows of our discontinued operations for investing activities were not material for any period presented.
We entered into a transitional services agreement (TSA) with Elanco that is designed to facilitate the orderly transfer of various services to Elanco. The TSA relates primarily to administrative services, which are generally to be provided over 24 months from the disposition date. This agreement is not material and does not confer upon us the ability to influence the operating and/or financial policies of Elanco subsequent to the disposition date.
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Management’s Reports
Management’s Report for Financial Statements—Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for the accuracy, integrity, and fair presentation of the financial statements. The statements have been prepared in accordance with generally accepted accounting principles in the United States and include amounts based on judgments and estimates by management. In management’s opinion, the consolidated financial statements present fairly our financial position, results of operations, and cash flows.
In addition to the system of internal accounting controls, we maintain a code of conduct (known as "The Red Book") that applies to all employees worldwide, requiring proper overall business conduct, avoidance of conflicts of interest, compliance with laws, and confidentiality of proprietary information. All employees must take training annually on The Red Book and are required to report suspected violations. A hotline number is available on our lilly.com website and on the internal LillyNow website to enable reporting of suspected violations anonymously. Employees who report suspected violations are protected from discrimination or retaliation by the company. In addition to The Red Book, the chief executive officer and all financial management must sign a financial code of ethics, which further reinforces their ethical and fiduciary responsibilities.
The consolidated financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. Their responsibility is to examine our consolidated financial statements in accordance with generally accepted auditing standards of the Public Company Accounting Oversight Board (United States). Ernst & Young’s opinion with respect to the fairness of the presentation of the statements is included in Item 8 of our annual report on Form 10-K. Ernst & Young reports directly to the audit committee of the board of directors.
Our audit committee includes six nonemployee members of the board of directors, all of whom are independent from our company. The committee charter, which is available on our website, outlines the members’ roles and responsibilities. It is the audit committee’s responsibility to appoint an independent registered public accounting firm subject to shareholder ratification, pre-approve both audit and non-audit services performed by the independent registered public accounting firm, and review the reports submitted by the firm. The audit committee meets several times during the year with management, the internal auditors, and the independent public accounting firm to discuss audit activities, internal controls, and financial reporting matters, including reviews of our externally published financial results. The internal auditors and the independent registered public accounting firm have full and free access to the committee.
We are dedicated to ensuring that we maintain the high standards of financial accounting and reporting that we have established. We are committed to providing financial information that is transparent, timely, complete, relevant, and accurate. Our culture demands integrity and an unyielding commitment to strong internal practices and policies. Finally, we have the highest confidence in our financial reporting, our underlying system of internal controls, and our people, who are objective in their responsibilities, operate under a code of conduct and are subject to the highest level of ethical standards.
Management’s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and Subsidiaries
Management of Eli Lilly and Company and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. We have global financial policies that govern critical areas, including internal controls, financial accounting and reporting, fiduciary accountability, and safeguarding of corporate assets. Our internal accounting control systems are designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management’s authorization and are properly recorded, and that accounting records are adequate for preparation of financial statements and other financial information. A staff of internal auditors regularly monitors, on a worldwide basis, the adequacy and effectiveness of internal accounting controls. The general auditor reports directly to the audit committee of the board of directors.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control—Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
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Based on our evaluation under this framework, we concluded that our internal control over financial reporting was effective as of December 31, 2020. However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of internal control over financial reporting as of December 31, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report, which appears herein. Their responsibility is to evaluate whether internal control over financial reporting was designed and operating effectively.
| David A. Ricks | Anat Ashkenazi | |||||||
| Chairman, President, and Chief Executive Officer | Senior Vice President and Chief Financial Officer | |||||||
February 17, 2021
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Eli Lilly and Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eli Lilly and Company and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), shareholders‘ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 17, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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| Medicaid, Managed Care, and Medicare sales rebate accruals | ||||||||
| Description of the Matter | As described in Note 2 to the consolidated financial statements under the caption “Net Product Revenue,” the Company establishes provisions for sales rebate and discounts in the same period as the related sales occur. At December 31, 2020 the Company had $5,853.0 million in sales rebate and discount accruals. A large portion of these accruals are rebates associated with sales in the United States for which payment for purchase of the product is covered by Medicaid, Managed Care, and Medicare. Auditing the Medicaid, Managed Care, and Medicare sales rebate and discount liabilities is challenging because of the subjectivity of certain assumptions required to estimate the rebate liabilities. In calculating the appropriate accrual amount, the Company considers historical Medicaid, Managed Care, and Medicare rebate payments by product as a percentage of their historical sales as well as any significant changes in sales trends, the lag in payment timing, an evaluation of the current Medicaid and Medicare laws and interpretations, the percentage of products that are sold via Medicaid, Managed Care, and Medicare, and product pricing. For Medicaid, there is significant complexity associated with calculating the legislated Medicaid rebates. Management utilizes employees with legislative experience and knowledge in developing assumptions used to calculate Medicaid rebates. Similarly, for Managed Care and Medicare, given variability in prescription drug costs, continued historical year over year increases in enrollees and variability in prescription data, historical rebate information may not be predictive for management to estimate the rebate accrual and thus, management supplements its historical data analysis with qualitative adjustments based upon current utilization. | |||||||
| How We Addressed the Matter in Our Audit | We tested the Company’s controls addressing the identified risks of material misstatement related to the valuation of the sales rebate and discount liabilities. This included testing controls over management’s review of the significant assumptions used to calculate the Medicaid, Managed Care, and Medicare rebate liabilities, including the significant assumptions discussed above. This testing also included management’s control to compare actual activity to forecasted activity and controls to ensure the data used to evaluate the significant assumptions was complete and accurate. Our audit procedures included, among others, evaluating for reasonableness the significant assumptions in light of economic trends, product profiles, and other regulatory factors. Our testing involved assessing the historical accuracy of management’s estimates by comparing actual activity to previous estimates and performing analytical procedures, based on internal and external data sources, to evaluate the completeness of the reserves. Additionally, our procedures included reviewing a sample of contracts, testing a sample of rebate payments and testing the underlying data used in management’s evaluation. For Medicaid, we involved our professional with an understanding of the statutory reimbursement requirements to assess the consistency of the Company’s calculation methodologies with the applicable government regulations and policy. For Medicare we evaluated the reasonableness of assumptions made by management in estimating the Medicare coverage gap liability. | |||||||
| Retirement Benefits - Valuation of Alternative Investments | ||||||||
| Description of the Matter | As described in Note 15 to the consolidated financial statements under the caption “Benefit Plan Investments,” the Company’s benefit plan investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. At December 31, 2020 the Company had $17,806.0 million in plan assets related to the defined benefit pension plans and retiree health benefit plans. Approximately 33% of the total pension and retiree health assets are in hedge funds and private equity-like investment funds (“alternative investments”). These alternative investments are valued using significant unobservable inputs or are valued at net asset value (NAV) reported by the counterparty, adjusted as necessary. Auditing the fair value of these alternative investments is challenging because of the higher estimation uncertainty of the inputs to the fair value calculations, including the underlying net asset values (“NAVs”), discounted cash flow valuations, comparable market valuations, and adjustments for currency, credit, liquidity and other risks. Additionally, certain information regarding the fair value of these alternative investments is based on unaudited information available to management at the time of valuation. | |||||||
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| How We Addressed the Matter in Our Audit | We tested the Company’s controls addressing the risks of material misstatement relating to valuation of alternative investments. This included testing management’s review controls over alternative investment valuation, which included a comparison of returns to benchmarks and in-person or telephonic meetings with investment firms to discuss valuation policies and procedures, as well as portfolio performance. Our audit procedures included, among others, comparing fund returns to selected relevant benchmarks and understanding variations, obtaining the latest audited financial statements and comparing to the Company’s estimated fair values and reconciling any differences. We also inquired of management about changes to the investment portfolio and/or related investment strategies and considerations. We assessed the historical accuracy of management’s estimates by comparing actual activity to previous estimates. We evaluated for contrary evidence by confirming the fair value of the investments and ownership interest directly with the trustees and a sample of managers at year end. | |||||||
| /s/ Ernst & Young LLP | |||||
We have served as the Company‘s auditor since 1940.
Indianapolis, Indiana
February 17, 2021
117
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Eli Lilly and Company
Opinion on Internal Control Over Financial Reporting
We have audited Eli Lilly and Company and subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Eli Lilly and Company and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), shareholders‘ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 17, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ Ernst & Young LLP | |||||
Indianapolis, Indiana
February 17, 2021
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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under applicable Securities and Exchange Commission (SEC) regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company’s “disclosure controls and procedures,” which are defined generally as controls and other procedures designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC (such as this Form 10-K) is recorded, processed, summarized, and reported on a timely basis.
Our management, with the participation of David A. Ricks, president and chief executive officer, and Anat Ashkenazi, senior vice president and chief financial officer, evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020, and concluded that they were effective.
Management's Report on Internal Control over Financial Reporting
Mr. Ricks and Ms. Ashkenazi provided a report on behalf of management on our internal control over financial reporting, in which management concluded that the company’s internal control over financial reporting is effective at December 31, 2020 based on the framework in "Internal Control—Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. Due to the inherent limitations, no evaluation over internal control can provide absolute assurance that no material misstatements or fraud exist.
In addition, Ernst & Young LLP, the company’s independent registered public accounting firm, issued an attestation report on the company’s internal control over financial reporting as of December 31, 2020.
You can find the full text of management’s report and Ernst & Young’s attestation report in Item 8.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2020, 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.
Item 9B.Other Information
None.
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Part III
Item 10.Directors, Executive Officers, and Corporate Governance
Directors and Executive Officers
Information relating to our board of directors is found in our Definitive Proxy Statement, to be dated on or about March 19, 2021 (Proxy Statement), under “Governance - Board Operations and Governance” and is incorporated in this Annual Report on Form 10-K by reference.
Information relating to our executive officers is found at Item 1, “Business - Executive Officers of the Company” and is incorporated by reference herein.
Code of Ethics
Information relating to our code of ethics is found in our Proxy Statement under “Governance - Board Oversight of Strategy, Compliance, and Risk Management - Code of Ethics” and is incorporated in this Annual Report on Form 10-K by reference.
Corporate Governance
Information about the procedures by which shareholders can recommend nominees to our board of directors is found in our Proxy Statement under “Shareholder Engagement on Governance Issues - Shareholder Recommendations and Nominations for Director Candidates" is incorporated in this Annual Report on Form 10-K by reference.
The board of directors has appointed an audit committee consisting entirely of independent directors in accordance with applicable SEC and New York Stock Exchange requirements for audit committees. Information about our audit committee is found in our Proxy Statement under “Governance - Membership and Meetings of the Board and Its Committees - Audit Committee” and is incorporated in this Annual Report on Form 10-K by reference.
Item 11.Executive Compensation
Information on director compensation, executive compensation, and compensation committee matters can be found in the Proxy Statement under “Governance - Director Compensation,” “- Membership and Meetings of the Board and Its Committees - Compensation Committee,” “Compensation - Compensation Discussion and Analysis,” and “- Executive Compensation.” Such information is incorporated in this Annual Report on Form 10-K by reference.
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Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
Information relating to ownership of the company’s common stock by management and by persons known by the company to be the beneficial owners of more than five percent of the outstanding shares of common stock is found in the Proxy Statement under “Ownership of Company Stock” and incorporated in this Annual Report on Form 10-K by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2020 regarding the company's compensation plans under which shares of the company's common stock have been authorized for issuance.
| Plan category | (a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights (1) | (b) Weighted-average exercise price of outstanding options, warrants, and rights | (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||||||
| Equity compensation plans approved by security holders | — | $ | — | 49,510,908 | |||||||
| Equity compensation plan not approved by security holders | — | — | — | ||||||||
| Total | — | — | 49,510,908 | ||||||||
(1) 9,192,921 shares are underlying outstanding equity awards other than options.
Item 13.Certain Relationships and Related Transactions, and Director Independence
Related Person Transactions
Information relating to the policies and procedures for approval of related person transactions by our board of directors can be found in the Proxy Statement under “Governance - Highlights of the Company’s Corporate Governance - Conflicts of Interest and Transactions with Related Persons.” Such information is incorporated in this Annual Report on Form 10-K by reference.
Director Independence
Information relating to director independence can be found in the Proxy Statement under “Governance - Director Independence” and is incorporated in this Annual Report on Form 10-K by reference.
Item 14.Principal Accountant Fees and Services
Information related to the fees and services of our principal independent accountants, Ernst & Young LLP, can be found in the Proxy Statement under “Audit Matters - Item 3. Ratification of the Appointment of the Independent Auditor - Audit Committee Report - Services Performed by the Independent Auditor” and “- Independent Auditor Fees.” Such information is incorporated in this Annual Report on Form 10-K by reference.
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Item 15.Exhibits and Financial Statement Schedules
(a)1. Financial Statements
The following consolidated financial statements of the company and its subsidiaries are found at Item 8:
•Consolidated Statements of Operations—Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Comprehensive Income (Loss)—Years Ended December 31, 2020, 2019, and 2018
•Consolidated Balance Sheets—December 31, 2020 and 2019
•Consolidated Statements of Shareholders' Equity—Years Ended December 31, 2020, 2019, and 2018
•Consolidated Statements of Cash Flows—Years Ended December 31, 2020, 2019, and 2018
•Notes to Consolidated Financial Statements
(a)2. Financial Statement Schedules
The consolidated financial statement schedules of the company and its subsidiaries have been omitted because they are not required, are inapplicable, or are adequately explained in the financial statements.
Financial statements of interests of 50 percent or less, which are accounted for by the equity method, have been omitted because they do not, considered in the aggregate as a single subsidiary, constitute a significant subsidiary.
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(a)3. Exhibits
| 2.1 | Agreement and Plan of Merger, dated January 5, 2019, among the Company, Bowfin Acquisition Corporation and Loxo Oncology, Inc. | |||||||
| 3.1 | Amended Articles of Incorporation | |||||||
| 3.2 | Bylaws, as amended | |||||||
| 4.1 | Indenture, dated February 1, 1991, between the Company and Deutsche Bank Trust Company Americas, as successor trustee to Citibank, N.A., as Trustee | |||||||
| 4.2 | Tripartite Agreement dated September 13, 2007, appointing Deutsche Bank Trust Company Americas as Successor Trustee under the Indenture listed in Exhibit 4.1 | |||||||
| 4.3 | Description of the Company's Common Stock | |||||||
| 4.4 | Description of the Company's 1.000% Notes due 2022, 1.625% Notes due 2026, and 2.125% Notes due 2030 | |||||||
| 4.5 | Description of the Company's 6.77% Notes due 2036 | |||||||
| 4.6 | Description of the Company's 7 1/8% Notes due 2025 | |||||||
| 4.7 | Description of the Company's 0.625% Notes due 2031 and 1.700% Notes due 2049 | |||||||
| 10.1 | Amended and Restated 2002 Lilly Stock Plan(1) | |||||||
| 10.2 | Form of Performance Award under the 2002 Lilly Stock Plan(1) | |||||||
| 10.3 | Form of Performance Award under the 2002 Lilly Stock Plan (with non-compete)(1) | |||||||
| 10.4 | Form of Performance Award under the 2002 Lilly Stock Plan (non-executive officer)(1) | |||||||
| 10.5 | Form of Shareholder Value Award under the 2002 Lilly Stock Plan(1) | |||||||
| 10.6 | Form of Shareholder Value Award under the 2002 Lilly Stock Plan (with non-compete)(1) | |||||||
| 10.7 | Form of Shareholder Value Award under the 2002 Lilly Stock Plan (non-executive officer)(1) | |||||||
| 10.8 | Form of Relative Value Award under the 2002 Lilly Stock Plan(1) | |||||||
| 10.9 | Form of Relative Value Award under the 2002 Lilly Stock Plan (with non-compete)(1) | |||||||
| 10.10 | Form of Restricted Stock Unit Award under the 2002 Lilly Stock Plan(1) | |||||||
| 10.11 | Restricted Stock Unit Award to Michael Harrington under the 2002 Lilly Stock Plan(1) | |||||||
| 10.12 | The Lilly Deferred Compensation Plan, as amended(1) | |||||||
| 10.13 | The Lilly Directors' Deferral Plan, as amended(1) | |||||||
| 10.14 | The Eli Lilly and Company Bonus Plan, as amended(1) | |||||||
| 10.15 | 2007 Change in Control Severance Pay Plan for Select Employees, as amended(1) | |||||||
| 21 | List of Subsidiaries | |||||||
| 23 | Consent of Independent Registered Public Accounting Firm | |||||||
| 31.1 | Rule 13a-14(a) Certification of David A. Ricks, Chairman, President, and Chief Executive Officer | |||||||
| 31.2 | Rule 13a-14(a) Certification of Anat Ashkenazi, Senior Vice President and Chief Financial Officer | |||||||
| 32 | Section 1350 Certification | |||||||
| 101 | Interactive Data File | |||||||
| 104 | Cover Page Interactive Data File (formatted Inline XBRL and contained in Exhibit 101) | |||||||
(1) Indicates management contract or compensatory plan.
124
Item 16.Form 10-K Summary
Not applicable.
Index to Exhibits
The following documents are filed as part of this report:
| Exhibit | Location | |||||||||||||
125
| 101 | Interactive Data File | Attached | ||||||||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) | Attached | ||||||||||||
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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
| By | /s/ David A. Ricks | |||||||
| David A. Ricks | ||||||||
| Chairman, President, and Chief Executive Officer | ||||||||
February 17, 2021
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 17, 2021 by the following persons on behalf of the Registrant and in the capacities indicated.
| Signature | Title | |||||||
| /s/ David A. Ricks | Chairman, President, and Chief Executive Officer (principal executive officer) | |||||||
| DAVID A. RICKS | ||||||||
| /s/ Anat Ashkenazi | Senior Vice President and Chief Financial Officer (principal financial officer) | |||||||
| ANAT ASHKENAZI | ||||||||
| /s/ Donald A. Zakrowski | Vice President, Finance, and Chief Accounting Officer (principal accounting officer) | |||||||
| DONALD A. ZAKROWSKI | ||||||||
| /s/ Ralph Alvarez | Director | |||||||
| RALPH ALVAREZ | ||||||||
| /s/ Katherine Baicker, Ph.D. | Director | |||||||
| KATHERINE BAICKER, Ph.D. | ||||||||
| /s/ Carolyn R. Bertozzi, Ph.D. | Director | |||||||
| CAROLYN R. BERTOZZI, Ph.D. | ||||||||
| /s/ Michael L. Eskew | Director | |||||||
| MICHAEL L. ESKEW | ||||||||
| /s/ J. Erik Fyrwald | Director | |||||||
| J. ERIK FYRWALD | ||||||||
| /s/ Jamere Jackson | Director | |||||||
| JAMERE JACKSON | ||||||||
| Director | ||||||||
| KIMBERLY H. JOHNSON | ||||||||
| /s/ William G. Kaelin, Jr., M.D. | Director | |||||||
| WILLIAM G. KAELIN, JR., M.D. | ||||||||
| /s/ Juan R. Luciano | Director | |||||||
| JUAN R. LUCIANO | ||||||||
| /s/ Marschall S. Runge, M.D., Ph.D. | Director | |||||||
| MARSCHALL S. RUNGE, M.D., Ph.D. | ||||||||
| /s/ Kathi P. Seifert | Director | |||||||
| KATHI P. SEIFERT | ||||||||
| /s/ Gabrielle Sulzberger | Director | |||||||
| GABRIELLE SULZBERGER | ||||||||
| /s/ Jackson P. Tai | Director | |||||||
| JACKSON P. TAI | ||||||||
| /s/ Karen Walker | Director | |||||||
| KAREN WALKER | ||||||||
128
Trademarks Used In This Report
Trademarks or service marks owned by Eli Lilly and Company or its affiliates, when first used in each item of this report, appear with an initial capital and are followed by the symbol ® or ™, as applicable. In subsequent uses of the marks in the item, the symbols may be omitted.
Actos® is a trademark of Takeda Pharmaceutical Company Limited.
Byetta® is a trademark of Amylin Pharmaceuticals, Inc.
Glyxambi®, Jardiance®, Jentadueto®, Synjardy®, Trajenta®, and Trijardy® are trademarks of Boehringer Ingelheim GmbH.
Posilac® is a trademark of Union Agener and Elanco US Inc.
Tyvyt® is a trademark of Innovent Biologics (Suzhou) Co., Ltd.
Viagra® is a trademark of Pfizer Inc.
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Exhibit 10.2 Form of Performance Award under the 2002 Lilly Stock Plan
Eli Lilly and Company
Performance Award Agreement
(for Executive Officers)
This Performance Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Performance Award Agreement (the “Grantee”).
Performance Levels:
Performance Period: January 1, 2021 – December 31, 2022
Service Vesting Date: February 1, 2024
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Table of Contents
Section 1. Grant of Performance Award | 3 | ||||
Section 2. Vesting | 3 | ||||
Section 3. Impact of Certain Employment Status Changes | 4 | ||||
Section 4. Change in Control | 5 | ||||
Section 5. Settlement | 6 | ||||
Section 6. Rights of the Grantee | 7 | ||||
Section 7. Prohibition Against Transfer | 7 | ||||
Section 8. Responsibility for Taxes | 7 | ||||
Section 9. Section 409A Compliance | 9 | ||||
Section 10. Grantee’s Acknowledgments | 9 | ||||
Section 11. Data Privacy | 10 | ||||
Section 12. Additional Terms and Conditions | 11 | ||||
Section 13. Governing Law and Choice of Venue | 11 | ||||
Section 14. Miscellaneous Provisions | 11 | ||||
Section 15. Compensation Recovery | 12 | ||||
Section 16. Award Subject to Acknowledgement of Acceptance | 13 | ||||
2
Section 1.Grant of Performance Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Performance Award Agreement (the “Grantee”) a Performance-Based Award (the “Performance Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com (the "Target Number of Shares").
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Performance Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern.
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of units eligible to vest (“Performance Units”) based on the actual cumulative Earnings Per Share ("EPS") for the Performance Period and using the Non-GAAP EPS (as adjusted to the extent determined by the Committee) for the year immediately prior to the commencement of the Performance Period as a reference point (as shown on page 1 of this document) (“EPS Growth”), the corresponding payout multiple and the Target Number of Shares.
a.The actual cumulative EPS for the Performance Period shall be computed using the following procedures:
i.A determination of adjusted consolidated net income ascertained from the Company's audited consolidated financial statements shall be made for each fiscal year in the Performance Period in accordance with accounting principles currently applicable in the United States ("US GAAP"), adjusted to the extent deemed appropriate by the Committee for any unusual items deemed significant by the Committee.
ii.The number of shares of outstanding Lilly Common Stock used to compute consolidated EPS shall be determined as of the end of each fiscal year in the Performance Period on a diluted basis or its equivalent in accordance with US GAAP.
iii.To calculate consolidated EPS for each fiscal year in the Performance Period, the adjusted consolidated net income shall be divided by the number of shares of outstanding Lilly Common Stock as computed in accordance with subsection (ii) above and the quotient rounded to the nearest cent.
iv.To determine the cumulative EPS for the Performance Period, the EPS amounts for each fiscal year as determined above shall be added.
b.The payout multiple corresponding to the EPS Growth (as shown on page 1 of this document) shall then be applied to the Target Number of Shares.
c.The number of Performance Units under this Performance Award will be the number resulting from the calculation described in subsection (b) above.
d.In the event the Grantee’s Service is terminated prior to the Service Vesting Date for any reason or in any circumstance other than as described in Section 3 below, the Award, including any accrued Dividend Equivalent Rights, shall be forfeited.
3
Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Death; Disability. In the event the Grantee’s Service is terminated (i) due to the Grantee’s death, or (ii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the Performance Units shall vest, provided that if the Qualifying Termination occurs prior to the last day of the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee's Service under any one of the following circumstances:
i.retirement as a “retiree,” which is a person who is (A) a retired employee under the Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements or (E) otherwise determined to be a retired employee in the sole discretion of the Company;
ii.due to a plant closing or reduction in workforce (as defined below);
iii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Retirement. Notwithstanding Section 3(c)(i), in the event the Grantee's Service is terminated due to retirement as a “retiree” (as defined in Section 3(c)) subsequent to the last day of the Performance Period but prior to the Service Vesting Date, the Performance Units, if any, shall continue to accrue Dividend Equivalent Rights and the Performance Units and Dividend Equivalent Rights shall vest on the Service Vesting Date.
4
A Grantee who has not received a year-end individual performance rating and (i) is on final written warning (or equivalent as determined by the Committee) for unsatisfactory performance and elects to retire in lieu of a termination of employment; or (ii) elects to retire in lieu of termination of employment because of an immediately terminable offense (e.g., absence of three days without notice, insubordination, violation of substance abuse policy, possession of firearms, misconduct) will not be considered to have terminated due to retirement as described herein.
e.Demotions, Disciplinary Actions and Misconduct. The Company may, in its sole discretion, cancel this Performance Award or reduce the number of Performance Units, prorated according to time or other measure as determined appropriate by the Company, if during any period prior to the Service Vesting Date the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
f.Final Written Warning. If the Grantee is placed on final written warning (or its equivalent as determined by the Committee) at any time subsequent to the last day of the Performance Period but prior to the Service Vesting Date, the Grantee shall forfeit the Performance Units and Dividend Equivalent Rights scheduled to vest on the Service Vesting Date to the extent the Award is the next subsequent Award (when compared to other Awards held by the Grantee) that is scheduled to vest following the date that the Grantee is placed on final written warning (it being understood that all other Awards, if any, that are scheduled to vest on the Service Vesting Date shall also be forfeited).
The Committee’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or retirement, (3) the Grantee’s Service has been terminated as a direct result of either a plant closing or a reduction in force, and (4) the Grantee's service has been terminated as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the last day of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Performance Units, to be calculated in a manner consistent with Section 2, but the cumulative EPS shall equal the Company’s cumulative EPS expected results (as determined by the Company’s last approved forecast prior to the consummation of the Transaction, not considering the impact of the Transaction) (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a
5
Covered Termination (as defined below) prior to the last day of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (as amended from time to time) or any successor plan or arrangement thereto.
c.The following shall apply in the event of a Transaction that occurs subsequent to the last day of the Performance Period but prior to the Service Vesting Date:
i.In the event that the Performance Units are not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Performance Units shall vest automatically in full.
ii.In the event that the Performance Units are converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination prior to the Service Vesting Date, then immediately as of the date of the Covered Termination, the Performance Units shall vest automatically in full.
Section 5.Settlement
a.Except as provided below, a vested Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days following the Service Vesting Date, including if the Award vests pursuant to Sections 3(b) or 3(c).
b.If the Award vests pursuant to Section 3(b) subsequent to the last day of the Performance Period, the Award shall be paid to the Grantee no later than sixty (60) days following the date of the Grantee’s termination of Service under Section 3(b), provided that if the Award is considered an item of nonqualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”), the Award shall be paid within sixty (60) days following the date the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “409A Separation”), provided that if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (i) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (ii) the date of the Grantee’s death, as applicable.
c.If the Award vests pursuant to Section 4(b)(i) or Section 4(c)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered NQ Deferred Compensation and the Transaction does not constitute a “change in control event” under Section 409A of the Code (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the Service Vesting Date.
d.If the Award vests pursuant to Section 4(b)(ii) or Section 4(c)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a 409A Separation, and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (1) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (2) the date of the Grantee’s death.
6
e.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(f) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
f.At any time prior to the Service Vesting Date or until the Performance Units are paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Performance Units in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Restriction Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(d).
g.Dividend Equivalent Rights, if any, that accrue hereunder shall be settled in cash.
h.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6.Rights of the Grantee
a.No Shareholder Rights. The Performance Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Performance Award is settled and Shares are issued or transferred to the Grantee.
b.Dividend Equivalent Rights. On each date that the Company pays a cash dividend to holders of Shares during the period commencing on the date the number of Performance Units are determined continuing through the date the Performance Units are settled, the Grantee shall be credited with Dividend Equivalent Rights in an amount equal to the total number of Performance Units, multiplied by the dollar amount of the cash dividend paid per Share by the Company on such date. Dividend Equivalent Rights shall accrue in an account denominated in U.S. dollars and shall not accrue interest or other credits prior to being paid. The Dividend Equivalent Rights shall be subject to the same vesting conditions and restrictions as the Performance Units to which the Dividend Equivalent Rights relate, and the Dividend Equivalent Rights shall be forfeited in the event that the Performance Units with respect to which such Dividend Equivalent Rights were credited are forfeited.
c.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award,
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including the grant of the Performance Award, the vesting of the Performance Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the accrual and payment of Dividend Equivalent Rights, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
i.If the Performance Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Performance Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Performance Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
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Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgments
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
h.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
i.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
j.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award and any Dividend Equivalent Rights after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing
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services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
k.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
l.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
m.the Company has communicated share ownership guidelines that apply to the Grantee, and the Grantee understands and agrees that those guidelines may impact any shares of Lilly Stock that may be issued pursuant to this Award.
Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Performance Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would
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not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on Applicable Laws and that, depending on where the Grantee is based and subject to the conditions set out in such Applicable Laws, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Additional Terms and Conditions
The Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Performance Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13.Governing Law and Choice of Venue
The validity and construction of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Indiana, and agree that such litigation shall be conducted in the courts of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14.Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at
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any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different from the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
Section 15.Compensation Recovery
At any time during the three years following the date on which the number of Performance Units subject to the Award has been determined under Section 2 above, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any Shares that have been issued or cash that has been paid pursuant to this Award if:
a.(i) the number of Shares or the amount of the cash payment was calculated based, directly or indirectly, upon the achievement of financial results that were subsequently the subject of a restatement of all or a portion of the Company’s financial statements; and
(ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and
(iii) the number of Shares or the amount of cash payment that would have been issued or paid to the Grantee had the financial results been properly reported would have been lower than the number of Shares actually issued or the amount of cash actually paid; or
b.the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such misconduct causes significant harm to the company.
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Furthermore, in the event the number of Shares issued or cash paid pursuant to this Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will (A) seek restitution of the Shares or cash paid pursuant to this Award to the extent that the number of Shares issued or the amount paid exceeded the number of Shares that would have been issued or the amount that would have been paid had the inaccuracy or error not occurred, or (B) issue additional Shares or make additional payment to the extent that the number of Shares issued or the amount paid was less than the correct amount.
This Section 15 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 16.Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.3 Form of Performance Award under the 2002 Lilly Stock Plan (with non-compete)
Eli Lilly and Company
Performance Award Agreement
(for Executive Officers)
This Performance Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Performance Award Agreement (the “Grantee”).
Performance Levels:
Performance Period: January 1, 2021 – December 31, 2022
Service Vesting Date: February 1, 2024
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Table of Contents
Section 1. Grant of Performance Award | 3 | ||||
Section 2. Vesting | 3 | ||||
Section 3. Impact of Certain Employment Status Changes | 4 | ||||
Section 4. Change in Control | 5 | ||||
Section 5. Settlement | 6 | ||||
Section 6. Rights of the Grantee | 7 | ||||
Section 7. Prohibition Against Transfer | 7 | ||||
Section 8. Responsibility for Taxes | 7 | ||||
Section 9. Section 409A Compliance | 9 | ||||
Section 10. Grantee’s Acknowledgments | 9 | ||||
Section 11. Data Privacy | 10 | ||||
Section 12. Restrictive Covenants, Remedies, and Additional Terms and Conditions | 11 | ||||
Section 13. Governing Law and Choice of Venue | 13 | ||||
Section 14. Miscellaneous Provisions | 13 | ||||
Section 15. Compensation Recovery | 14 | ||||
Section 16. Award Subject to Acknowledgement of Acceptance | 15 | ||||
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Section 1.Grant of Performance Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Performance Award Agreement (the “Grantee”) a Performance-Based Award (the “Performance Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com (the "Target Number of Shares").
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Performance Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern except with respect to the provisions described in Section 12 below (in which case, the terms of the Award Agreement shall govern).
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of units eligible to vest (“Performance Units”) based on the actual cumulative Earnings Per Share ("EPS") for the Performance Period and using the Non-GAAP EPS (as adjusted to the extent determined by the Committee) for the year immediately prior to the commencement of the Performance Period as a reference point (as shown on page 1 of this document) (“EPS Growth”), the corresponding payout multiple and the Target Number of Shares.
a.The actual cumulative EPS for the Performance Period shall be computed using the following procedures:
i.A determination of adjusted consolidated net income ascertained from the Company's audited consolidated financial statements shall be made for each fiscal year in the Performance Period in accordance with accounting principles currently applicable in the United States ("US GAAP"), adjusted to the extent deemed appropriate by the Committee for any unusual items deemed significant by the Committee.
ii.The number of shares of outstanding Lilly Common Stock used to compute consolidated EPS shall be determined as of the end of each fiscal year in the Performance Period on a diluted basis or its equivalent in accordance with US GAAP.
iii.To calculate consolidated EPS for each fiscal year in the Performance Period, the adjusted consolidated net income shall be divided by the number of shares of outstanding Lilly Common Stock as computed in accordance with subsection (ii) above and the quotient rounded to the nearest cent.
iv.To determine the cumulative EPS for the Performance Period, the EPS amounts for each fiscal year as determined above shall be added.
b.The payout multiple corresponding to the EPS Growth (as shown on page 1 of this document) shall then be applied to the Target Number of Shares.
c.The number of Performance Units under this Performance Award will be the number resulting from the calculation described in subsection (b) above.
d.In the event the Grantee’s Service is terminated prior to the Service Vesting Date for any reason or in any circumstance other than as described in Section 3 below, the Award, including any accrued Dividend Equivalent Rights, shall be forfeited.
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Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Retirement; Death; Disability. Except as otherwise provided below (including Section 12), in the event the Grantee’s Service is terminated (i) following the Retirement Vesting Date due to the Grantee’s Retirement; (ii) due to the Grantee’s death, or (iii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above. For the avoidance of any doubt, the Award shall be forfeited in the event the Grantee’s Service is terminated prior to the Retirement Vesting Date due to the Grantee’s Retirement.
“Retirement” means retirement as a “retiree,” which is a person who is (A) a retired employee under The Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements or (E) otherwise determined to be a retired employee in the sole discretion of the Company.
“Retirement Vesting Date” means the date that is on or following December 31 immediately following the commencement of the Performance Period.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the Performance Units shall vest, provided that if the Qualifying Termination occurs prior to the last day of the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee's Service under any one of the following circumstances:
i.due to a plant closing or reduction in workforce (as defined below);
ii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
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d.Post-Performance Period Retirement. Notwithstanding Section 3(b), in the event the Grantee's Service is terminated due to Retirement subsequent to the last day of the Performance Period but prior to the Service Vesting Date, the Performance Units, if any, shall continue to accrue Dividend Equivalent Rights and the Performance Units and Dividend Equivalent Rights shall vest on the Service Vesting Date.
A Grantee who has not received a year-end individual performance rating and (i) is on final written warning (or equivalent as determined by the Committee) for unsatisfactory performance and elects to retire in lieu of a termination of employment; or (ii) elects to retire in lieu of termination of employment because of an immediately terminable offense (e.g., absence of three days without notice, insubordination, violation of substance abuse policy, possession of firearms, misconduct) will not be considered to have terminated due to retirement as described herein.
e.Demotions, Disciplinary Actions and Misconduct. The Company may, in its sole discretion, cancel this Performance Award or reduce the number of Performance Units, prorated according to time or other measure as determined appropriate by the Company, if during any period prior to the Service Vesting Date the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
f.Final Written Warning. If the Grantee is placed on final written warning (or its equivalent as determined by the Committee) at any time subsequent to the last day of the Performance Period but prior to the Service Vesting Date, the Grantee shall forfeit the Performance Units and Dividend Equivalent Rights scheduled to vest on the Service Vesting Date to the extent the Award is the next subsequent Award (when compared to other Awards held by the Grantee) that is scheduled to vest following the date that the Grantee is placed on final written warning (it being understood that all other Awards, if any, that are scheduled to vest on the Service Vesting Date shall also be forfeited).
The Committee’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or Retirement, (3) the Grantee’s Service has been terminated as a direct result of either a plant closing or a reduction in force, and (4) the Grantee's service has been terminated as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the last day of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Performance Units, to be calculated in a manner consistent with Section 2, but the cumulative EPS shall equal the Company’s cumulative EPS expected results (as determined by the Company’s last approved forecast prior to the consummation of the Transaction, not considering the impact of the Transaction) (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or
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subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the last day of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (as amended from time to time) or any successor plan or arrangement thereto.
c.The following shall apply in the event of a Transaction that occurs subsequent to the last day of the Performance Period but prior to the Service Vesting Date:
i.In the event that the Performance Units are not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Performance Units shall vest automatically in full.
ii.In the event that the Performance Units are converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination prior to the Service Vesting Date, then immediately as of the date of the Covered Termination, the Performance Units shall vest automatically in full.
Section 5.Settlement
a.Except as provided below, a vested Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days following the Service Vesting Date, including if the Award vests pursuant to Sections 3(b) or 3(c).
b.If the Award vests pursuant to Section 3(b)(ii) or (iii) subsequent to the last day of the Performance Period, the Award shall be paid to the Grantee no later than sixty (60) days following the date of the Grantee’s termination of Service under Section 3(b)(ii) or (iii), provided that if the Award is considered an item of nonqualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”), the Award shall be paid within sixty (60) days following the date the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “409A Separation”), provided that if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (i) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (ii) the date of the Grantee’s death, as applicable.
c.If the Award vests pursuant to Section 4(b)(i) or Section 4(c)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered NQ Deferred Compensation and the Transaction does not constitute a “change in control event” under Section 409A of the Code (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the Service Vesting Date.
d.If the Award vests pursuant to Section 4(b)(ii) or Section 4(c)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee
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experiences a 409A Separation, and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (1) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (2) the date of the Grantee’s death.
e.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(f) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
f.At any time prior to the Service Vesting Date or until the Performance Units are paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Performance Units in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Restriction Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(d).
g.Dividend Equivalent Rights, if any, that accrue hereunder shall be settled in cash.
h.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6.Rights of the Grantee
a.No Shareholder Rights. The Performance Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Performance Award is settled and Shares are issued or transferred to the Grantee.
b.Dividend Equivalent Rights. On each date that the Company pays a cash dividend to holders of Shares during the period commencing on the date the number of Performance Units are determined continuing through the date the Performance Units are settled, the Grantee shall be credited with Dividend Equivalent Rights in an amount equal to the total number of Performance Units, multiplied by the dollar amount of the cash dividend paid per Share by the Company on such date. Dividend Equivalent Rights shall accrue in an account denominated in U.S. dollars and shall not accrue interest or other credits prior to being paid. The Dividend Equivalent Rights shall be subject to the same vesting conditions and restrictions as the Performance Units to which the Dividend Equivalent Rights relate, and the Dividend Equivalent Rights shall be forfeited in the event that the Performance Units with respect to which such Dividend Equivalent Rights were credited are forfeited.
c.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges
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that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Performance Award, the vesting of the Performance Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the accrual and payment of Dividend Equivalent Rights, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
i.If the Performance Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Performance Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Performance Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
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Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgments
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
h.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
i.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
j.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award and any Dividend Equivalent Rights after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing
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services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
k.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
l.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
m.the Company has communicated share ownership guidelines that apply to the Grantee, and the Grantee understands and agrees that those guidelines may impact any shares of Lilly Stock that may be issued pursuant to this Award.
Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Performance Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would
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not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on Applicable Laws and that, depending on where the Grantee is based and subject to the conditions set out in such Applicable Laws, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Restrictive Covenants, Remedies, and Additional Terms and Conditions
a.Restrictive Covenants. In consideration of the Grantee’s receipt of the Award from Lilly, the Grantee agrees that during the Grantee’s employment with Lilly or an Affiliate that the Grantee provided services to or had access to confidential information concerning (“Covered Affiliate”) and for twelve (12) months immediately following the end of the Grantee’s employment (regardless of reason), the Grantee will not directly or indirectly, on a worldwide basis, engage in any of the following activities:
1) Work for, advise, manage, act as an agent, employee or consultant for, or otherwise provide any services, in a Competitively-Sensitive Capacity, to: (a) any person or entity engaged in research, development, production, sale, or distribution of a product or service competitive with or substantially similar to any product or service in research, development or design, or manufactured, produced, sold, or distributed by Lilly or a Covered Affiliate; or (b) any person or entity that otherwise competes or intends to compete with Lilly or a Covered Affiliate.
2) Directly or indirectly solicit, urge, divert, induce, or seek to induce any of Lilly’s (or Covered Affiliate’s) independent contractors, subcontractors, business partners, distributors, brokers, consultants, sales representatives, customers, vendors, suppliers or any other person with whom Lilly or Covered Affiliate has a business relationship and with whom the Grantee interacted during the Grantee’s employment with Lilly or Covered Affiliate to terminate their relationship with, or representation of, Lilly or Covered Affiliate or to cancel, withdraw, reduce, limit or in any manner modify any such person's business with, or representation of, Lilly or a Covered Affiliate.
The Grantee acknowledges and agrees that any Lilly Affiliate is an intended third-party beneficiary of this Award Agreement, which may be enforced by Lilly or any such Affiliate, either singularly or jointly.
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For purposes of this Award Agreement, “Competitively-Sensitive Capacity” means: (i) the same or similar capacity or function in which the Grantee worked for Lilly or a Covered Affiliate at any time during the two (2) years immediately preceding the end of the Grantee’s employment; (ii) any officer, director, executive or senior management capacity or function; (iii) any research and development capacity or function; (iv) any sales management or business development management capacity or function; (v) any ownership capacity (except the Grantee may own as a passive investment up to 2% of any publicly traded securities); and/or (vi) any other capacity or function in which there is a material risk that the Grantee likely would inevitably use or disclose trade secrets and/or confidential information Lilly or a Covered Affiliate. For purposes of clarity, if a competing business has multiple divisions, lines or segments, some of which are not competitive with the business of Lilly, including its Covered Affiliates, nothing in this Award Agreement will prohibit the Grantee from being employed by, working for or assisting only that division, line or segment of such competing business that is not competitive with the business of Lilly or a Covered Affiliate, provided the Grantee is not involved in a Competitively-Sensitive Capacity in the research, development, manufacture, provision or sale of any products that compete with any products of Lilly or a Covered Affiliate.
The Grantee and Lilly acknowledge and agree that the worldwide geographic scope of the foregoing covenants is reasonable and necessary given, among other things, that: (a) absent the restrictions, the Grantee could utilize Lilly’s (or its Affiliates) trade secrets and/or confidential information and compete with Lilly or Affiliate from virtually anywhere; and (b) such scope is the only way for Lilly and its Affiliates to protect their trade secrets and confidential information. In the event the Grantee violates any of the restrictive covenants contained herein, their duration will automatically be extended by the length of time during which the Grantee was in violation of any of the restrictive covenants.
The Grantee acknowledges and agrees that during the course of the Grantee’s employment with Lilly or a Covered Affiliate, the Grantee will become intimately familiar with confidential information and trade secrets key to its unique competitive advantage. The Grantee also acknowledges and agrees that Lilly’s (and Covered Affiliate’s) confidential information and trade secrets will retain continuing vitality throughout and beyond the one-year restricted period. And the Grantee acknowledges and agrees that, should the Grantee leave Lilly or Covered Affiliate and, near the Grantee’s departure from Lilly or Covered Affiliate, work with another person or entity that engages in business activities similar to those of Lilly and/or Covered Affiliate, it would be highly likely, if not inevitable, that the Grantee would rely on confidential information of Lilly and/or Covered Affiliate in the course of the Grantee’s work, either consciously or subconsciously, harming Lilly and any Covered Affiliates. For these and other reasons, the Grantee agrees that the restrictions above are reasonably necessary to protect Lilly’s and its Covered Affiliate’s legitimate business interests, and do so by creating a specific amount of time after the Grantee’s employment ends during which the Grantee will not be able to engage or prepare to engage in the activities above.
The Grantee and Lilly further acknowledge and agree that if any particular covenant or provision is determined to be unreasonable or unenforceable for any reason, including, without limitation, the time period, geographic area, and/or scope of activity covered by any restrictive covenant, such covenant or provision will automatically be deemed reformed so that the contested covenant or provision will have the closest effect permitted by applicable law to the original form and will be given effect and enforced as so reformed to whatever extent would be reasonable and enforceable under applicable law. Any court interpreting any restrictive covenant provision of this Award Agreement will, if necessary, reform any such provision to make it enforceable under applicable law.
This Award Agreement is intended, among other things, to supplement (and not supersede) all applicable statutes protecting trade secrets and the duties the Grantee owes to Lilly and/or Covered Affiliates under the common law, as well as any other non-competition, non-solicitation, or confidentiality provisions that the Grantee agreed to in the past, including those
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in the Grantee’s Employee Confidentiality and Invention Agreement, each of which remains in full force and effect, or that the Grantee agrees to in the future.
The Grantee acknowledges that a breach by the Grantee of this Award Agreement will give rise to irreparable injury to Lilly and Covered Affiliates and money damages will not be adequate relief for such injury. As a result, the Grantee agrees that Lilly (including any third-party beneficiary) will be entitled to obtain equitable or injunctive relief without having to post any bond or other security to restrain or prohibit any such breach or threatened breach, in addition to any other remedies which may be available, including the recovery of monetary damages from the Grantee.
b.Remedies. If the Company determines that the Grantee has violated any applicable provisions of this Section 12, in addition to injunctive relief and damages, the Grantee agrees and covenants that: (i) the Award shall be immediately rescinded; (ii) the Grantee shall automatically forfeit any rights the Grantee may have with respect to the Award as of the date of such determination, including the rights to continue to be eligible to vest or receive a payment under the Award; and (iii) the foregoing remedies set forth in this Section 12 shall not be Lilly’s exclusive remedies. Lilly reserves all other rights and remedies available to it at law or in equity.
In addition, the Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Performance Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13. Governing Law and Choice of Venue
The validity, construction, and enforcement of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws or cause the application of substantive law of any jurisdiction other than Indiana. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction and venue of the State of Indiana, and agree that such litigation shall be conducted exclusively in the courts having appropriate subject matter jurisdiction in Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14. Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
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b.Language. The Grantee acknowledges that he or she is proficient in the English language or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different from the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
Section 15. Compensation Recovery
At any time during the three years following the date on which the number of Performance Units subject to the Award has been determined under Section 2 above, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any Shares that have been issued or cash that has been paid pursuant to this Award if:
a.(i) the number of Shares or the amount of the cash payment was calculated based, directly or indirectly, upon the achievement of financial results that were subsequently the subject of a restatement of all or a portion of the Company’s financial statements; and
(ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and
(iii) the number of Shares or the amount of cash payment that would have been issued or paid to the Grantee had the financial results been properly reported would have been lower than the number of Shares actually issued or the amount of cash actually paid; or
b.the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such misconduct causes significant harm to the company.
Furthermore, in the event the number of Shares issued or cash paid pursuant to this Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will (A) seek restitution of the Shares or cash paid pursuant to this Award to the extent that the number of Shares issued or the amount paid exceeded the number of Shares that would have been issued or the amount that would have been paid had the inaccuracy or error not occurred, or (B) issue additional Shares or make additional payment to the extent that the number of Shares issued or the amount paid was less than the correct amount.
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This Section 15 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 16. Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.4 Form of Performance Award under the 2002 Lilly Stock Plan (non-executive officer)
Eli Lilly and Company
Performance Award Agreement
This Performance Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Performance Award Agreement (the “Grantee”).
Performance Levels:
Performance Period: January 1, 2021 – December 31, 2022
Page 1
Table of Contents
Section 1. Grant of Performance Award ........................................................................................................... 3
Section 2. Vesting ............................................................................................................................................ 3
Section 3. Impact of Certain Employment Status Changes ............................................................................. 4
Section 4. Change in Control ........................................................................................................................... 5
Section 5. Settlement ....................................................................................................................................... 5
Section 6. Rights of the Grantee ...................................................................................................................... 6
Section 7. Prohibition Against Transfer ............................................................................................................ 6
Section 8. Responsibility for Taxes ..............................................................................................................… 6
Section 9. Section 409A Compliance ............................................................................................................... 8
Section 10. Grantee’s Acknowledgement ........................................................................................................... 8
Section 11. Data Privacy ..................................................................................................................................... 9
Section 12. Additional Terms and Conditions ................................................................................................… 10
Section 13. Governing Law and Choice of Venue ............................................................................................. 11
Section 14. Miscellaneous Provisions ............................................................................................................... 11
Section 15. Award Subject to Acknowledgement of Acceptance ...................................................................... 12
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Section 1. Grant of Performance Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Performance Award Agreement (the “Grantee”) a Performance-Based Award (the “Performance Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com (the “Target Number of Shares”).
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Performance Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern.
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2. Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of Shares eligible to vest based on the actual cumulative Earnings Per Share (“EPS”) for the Performance Period and using the Non-GAAP EPS (as adjusted to the extent determined by the Committee) for the year immediately prior to the commencement of the Performance Period as a reference point (as shown on page 1 of this document) (“EPS Growth”), the corresponding payout multiple and the Target Number of Shares.
a.The actual cumulative EPS for the Performance Period shall be computed using the following procedures:
(i)A determination of adjusted consolidated net income ascertained from the Company's audited consolidated financial statements shall be made for each fiscal year in the Performance Period in accordance with accounting principles currently applicable in the United States (“US GAAP”), adjusted to the extent deemed appropriate by the Committee for any unusual items deemed significant by the Committee.
(ii)The number of shares of outstanding Lilly Common Stock used to compute consolidated EPS shall be determined as of the end of each fiscal year in the Performance Period on a diluted basis or its equivalent in accordance with US GAAP.
(iii)To calculate consolidated EPS for each fiscal year in the Performance Period, the adjusted consolidated net income shall be divided by the number of shares of outstanding Lilly Common Stock as computed in accordance with subsection (ii) above and the quotient rounded to the nearest cent.
(iv)To determine the cumulative EPS for the Performance Period, the EPS amounts for each fiscal year as determined above shall be added.
b.The payout multiple corresponding to the EPS Growth (as shown on page 1 of this document) shall then be applied to the Target Number of Shares.
c.The number of Shares eligible to vest under this Performance Award will be the number of Shares resulting from the calculation described in subsection (b) above.
d.In the event the Grantee’s Service is terminated prior to the end of the Performance Period for any reason or in any circumstance other than as described in Section 3 below, the Award shall be forfeited.
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Section 3. Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such adjustments are not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Death; Disability. In the event the Grantee’s Service is terminated (i) due to the Grantee’s death, or (ii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee’s Service under any one of the following circumstances:
(i)retirement as a “retiree,” which is a person who is (A) a retired employee under the Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements; or (E) otherwise determined to be a retired employee in the sole discretion of the Company;
(ii)due to a plant closing or reduction in workforce (as defined below);
(iii)as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Demotions, Disciplinary Actions and Misconduct. The Committee may, in its sole discretion, cancel this Performance Award or reduce the number of Shares eligible to vest, prorated according to time or other measure as determined appropriate by the Committee, if during any portion of the Performance Period the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
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The Committee and/or the Company’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or retirement, (3) the Grantee’s Service has been terminated as a direct result of either a plant closing or a reduction in force, and (4) the Grantee’s Service has been terminated as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4. Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the last day of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Shares eligible to vest, to be calculated in a manner consistent with Section 2, but the cumulative EPS shall equal the Company’s cumulative EPS expected results (as determined by the Company’s last approved forecast prior to the consummation of the Transaction, not considering the impact of the Transaction) (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
(i)In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
(ii)In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the last day of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Employees or the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (both as amended from time to time) or any successor plan or arrangement thereto, as applicable.
c.If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 4, then references to Shares in this Award Agreement shall be read to mean stock of the successor or surviving corporation, or a parent or subsidiary thereof, as and when applicable.
Section 5. Settlement
a.Except as provided below, the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days following the last day of the Performance Period.
b.If the Award vests pursuant to Section 4(b)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered an item of non-qualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”) and the Transaction does not constitute a “change in control event,” within the meaning of the U.S. Treasury Regulations (a “409A CIC”), then the Award shall be paid in cash
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(calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the earliest of (i) the date that the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “Section 409A Separation”), provided that if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the date of the Section 409A Separation, the Award shall instead be paid on the first day following the six (6) month anniversary of the Grantee’s 409A Separation (the “409A Delayed Payment Date”), (ii) the date of the Grantee’s death and (iii) the date set forth in Section 5(a) above.
c.If the Award vests pursuant to Section 4(b)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a Section 409A Separation and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the date of the Section 409A Separation, the Award shall instead be paid on the earliest of (1) the 409A Delayed Payment Date and (2) the date of the Grantee’s death.
d.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(e) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
e.At any time prior to the end of the Performance Period or until the Award is paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Award in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Performance Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(c).
f.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6. Rights of the Grantee
a.No Shareholder Rights. The Performance Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Performance Award is settled and Shares are issued or transferred to the Grantee.
b.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7. Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8. Responsibility for Taxes
a.i. Regardless of any action Lilly and/or the Grantee’s Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s
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responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Performance Award, the vesting of the Performance Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
(i) If the Performance Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
(ii) If the Performance Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
(iii) If the Performance Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
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Section 9. Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10. Grantee’s Acknowledgement
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.unless otherwise agreed with Lilly, the Award and any Shares subject to the Award, and the income and value of same, are not granted as consideration for, or in connection with, the service the Grantee may provide as a director of an Affiliate;
h.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
i.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
j.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
k.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment
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agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
l.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares; and
m.neither the Company, the Employer nor any Affiliate shall be liable for any foreign exchange rate fluctuation between the Grantee’s local currency and the United States Dollar that may affect the value of the Award or any amounts due to the Grantee pursuant to the settlement of the Award or the subsequent sale of any Shares acquired upon settlement.
Section 11. Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Performance Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
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f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on applicable law and that, depending on where the Grantee is based and subject to the conditions set out in such applicable law, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12. Additional Terms and Conditions
a.Country-Specific Conditions. The Award shall be subject to any special terms and conditions set forth in any Appendix to this Award Agreement for the Grantee’s country. Moreover, if the Grantee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to the Grantee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Award Agreement.
b.Insider Trading / Market Abuse Laws. The Grantee may be subject to insider trading restrictions and/or market abuse laws in applicable jurisdictions, including but not limited to the United States and the Grantee’s country of residence, which may affect the Grantee’s ability to directly or indirectly, for the Grantee or for a third party, acquire or sell, or attempt to sell, or otherwise dispose of Shares, rights to acquire Shares (e.g., the Performance Award) under the Plan during such times as the Grantee is considered to have “inside information” regarding the Company (as determined under the laws or regulations in the applicable jurisdictions). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading policy. The Grantee acknowledges that it is his or her responsibility to comply with any applicable restrictions, and the Grantee should consult with his or her personal legal advisor on this matter.
c.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Performance Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
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Section 13. Governing Law and Choice of Venue
The validity and construction of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Indiana, and agree that such litigation shall be conducted in the courts of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14. Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language, or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different from the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
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Section 15. Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.5 — Form of Shareholder Value Award under the 2002 Lilly Stock Plan
Eli Lilly and Company
Shareholder Value Award Agreement
(for Executive Officers)
This Shareholder Value Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Shareholder Value Award Agreement (the “Grantee”).
Lilly Stock Price Performance Levels:
| No Payout | Level 1 | Level 2 | Level 3 | Level 4 | Level 5 | Level 6 | |||||||||||||||||
| Final Lilly Stock Price | < $140.70 | $140.70 - $160.36 | $160.37 - $180.02 | $180.03 - $199.69 | $199.70 - $219.36 | $219.37 - $239.03 | > $239.03 | ||||||||||||||||
| Percent of Target | 0% | 50% | 75% | 100% | 125% | 150% | 175% | ||||||||||||||||
Performance Period: January 1, 2021 – December 31, 2023
1
Table of Contents
Section 1. Grant of Shareholder Value Award | 3 | ||||
Section 2. Vesting | 3 | ||||
Section 3. Impact of Certain Employment Status Changes | 3 | ||||
Section 4. Change in Control | 4 | ||||
Section 5. Settlement | 5 | ||||
Section 6. Rights of the Grantee | 5 | ||||
Section 7. Prohibition Against Transfer | 6 | ||||
Section 8. Responsibility for Taxes | 6 | ||||
Section 9. Section 409A Compliance | 7 | ||||
Section 10. Grantee’s Acknowledgment | 7 | ||||
Section 11. Data Privacy | 8 | ||||
Section 12. Additional Terms and Conditions | 9 | ||||
Section 13. Governing Law and Choice of Venue | 9 | ||||
Section 14. Miscellaneous Provisions | 9 | ||||
Section 15. Compensation Recovery | 10 | ||||
Section 16. Award Subject to Acknowledgement of Acceptance | 10 | ||||
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Section 1.Grant of Shareholder Value Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Shareholder Value Award Agreement (the “Grantee”) a Performance-Based Award (the “Shareholder Value Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com (the "Target Number of Shares").
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Shareholder Value Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern.
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of Shares that are eligible to vest which shall be equal to the product of (i) the Target Number of Shares, multiplied by (ii) the Percent of Target, where:
i.“Percent of Target” shall mean the percentage set forth in the Lilly Stock Price Performance Levels table set forth on the first page of this document representing the attainment level of the Final Lilly Stock Price measured against the performance goal attainment levels set forth in the table.
ii.“Final Lilly Stock Price” shall mean the average of the closing price of a share of Lilly Common Stock on the New York Stock Exchange for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
In the event the Grantee’s Service is terminated prior to the end of the Performance Period for any reason or in any circumstance other than as described in Section 3 below, the Award shall be forfeited.
Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Death; Disability. In the event the Grantee’s Service is terminated (i) due to the Grantee’s death, or (ii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee's Service under any one of the following circumstances:
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i.retirement as a “retiree,” which is a person who is (A) a retired employee under the Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements or (E) otherwise determined to be a retired employee in the sole discretion of the Company;
ii.due to a plant closing or reduction in workforce (as defined below);
iii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Demotions, Disciplinary Actions and Misconduct. The Committee may, in its sole discretion, cancel this Shareholder Value Award or reduce the number of Shares eligible to vest, prorated according to time or other measure as determined appropriate by the Committee, if during any portion of the Performance Period the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
The Committee’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or retirement, (3) the Grantee’s Service has been terminated as a direct result of either a plant closing or a reduction in force, and (4) the Grantee's service has been terminated as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the end of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Shares eligible to vest, calculated in a manner consistent with Section 2, but the Final Lilly Stock Price shall be equal to the value of Shares established for the consideration to be paid to holders of Shares in the Transaction (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the end of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
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For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (as amended from time to time) or any successor plan or arrangement thereto.
c.If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 4, then references to Shares in this Award Agreement shall be read to mean stock of the successor or surviving corporation, or a parent or subsidiary thereof, as and when applicable.
Section 5.Settlement
a.Except as provided below, the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the last day of the Performance Period.
b.If the Award vests pursuant to Section 4(b)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered an item of non-qualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”) and the Transaction does not constitute a “change in control event,” within the meaning of the U.S. Treasury Regulations (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the earliest of the date that the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “Section 409A Separation”) (subject to the six (6) month delay described in Section 5(c) below if Grantee is a “specified employee”), the date of the Grantee’s death and the date set forth in Section 5(a) above.
c.If the Award vests pursuant to Section 4(b)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a Section 409A Separation, and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (1) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (2) the date of the Grantee’s death.
d.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(e) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
e.At any time prior to the end of the Performance Period or until the Award is paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Award in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Performance Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(c).
f.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6.Rights of the Grantee
a.No Shareholder Rights. The Shareholder Value Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Shareholder Value Award is settled and Shares are issued or transferred to the Grantee.
b.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
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Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Shareholder Value Award, the vesting of the Shareholder Value Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
i.If the Shareholder Value Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Shareholder Value Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Shareholder Value Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by
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withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgment
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
h.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
i.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
j.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award
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(including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
k.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
l.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
m.the Company has communicated share ownership guidelines that apply to the Grantee, and the Grantee understands and agrees that those guidelines may impact any Shares subject to, or issued pursuant to the Award.
Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Shareholder Value Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on Applicable Laws and that, depending on where the Grantee is based and subject to the conditions set out in such Applicable Laws, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or
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supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Additional Terms and Conditions
The Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Shareholder Value Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13.Governing Law and Choice of Venue
The validity and construction of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Indiana, and agree that such litigation shall be conducted in the courts of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14.Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language, or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.
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c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
Section 15.Compensation Recovery
At any time during the three years following the date on which the number of Shares eligible to vest under this Award has been determined under Section 2 above, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any Shares that have been issued or cash that has been paid pursuant to this Award if:
a.(i) the number of Shares or the amount of the cash payment was calculated based, directly or indirectly, upon the achievement of financial results that were subsequently the subject of a restatement of all or a portion of the Company’s financial statements, (ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and (iii) the number of Shares or the amount of cash payment that would have been issued or paid to the Grantee had the financial results been properly reported would have been lower than the number of Shares actually issued or the amount of cash actually paid; or
b.the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such misconduct causes significant harm to the company.
Furthermore, in the event the number of Shares issued or cash paid pursuant to this Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will (A) seek restitution of the Shares or cash paid pursuant to this Award to the extent that the number of Shares issued or the amount paid exceeded the number of Shares that would have been issued or the amount that would have been paid had the inaccuracy or error not occurred, or (B) issue additional Shares or make additional payment to the extent that the number of Shares issued or the amount paid was less than the correct amount.
This Section 15 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 16.Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
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IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.6 Form of Shareholder Value Award under the 2002 Lilly Stock Plan (with non-compete)
Eli Lilly and Company
Shareholder Value Award Agreement
(for Executive Officers)
This Shareholder Value Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Shareholder Value Award Agreement (the “Grantee”).
Lilly Stock Price Performance Levels:
| No Payout | Level 1 | Level 2 | Level 3 | Level 4 | Level 5 | Level 6 | |||||||||||||||||
| Final Lilly Stock Price | < $140.70 | $140.70 – $160.36 | $160.37 - $180.02 | $180.03 - $199.69 | $199.70 - $219.36 | $219.37 - $239.03 | >$239.03 | ||||||||||||||||
| Percent of Target | 0% | 50% | 75% | 100% | 125% | 150% | 175% | ||||||||||||||||
Performance Period: January 1, 2021 – December 31, 2023
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Table of Contents
Section 1. Grant of Shareholder Value Award | 3 | ||||
Section 2. Vesting | 3 | ||||
Section 3. Impact of Certain Employment Status Changes | 3 | ||||
Section 4. Change in Control | 4 | ||||
Section 5. Settlement | 5 | ||||
Section 6. Rights of the Grantee | 6 | ||||
Section 7. Prohibition Against Transfer | 6 | ||||
Section 8. Responsibility for Taxes | 6 | ||||
Section 9. Section 409A Compliance | 7 | ||||
Section 10. Grantee’s Acknowledgment | 7 | ||||
Section 11. Data Privacy | 8 | ||||
Section 12. Restrictive Covenants, Remedies, and Additional Terms and Conditions | 9 | ||||
Section 13. Governing Law and Choice of Venue | 11 | ||||
Section 14. Miscellaneous Provisions | 11 | ||||
Section 15. Compensation Recovery | 12 | ||||
Section 16. Award Subject to Acknowledgement of Acceptance | 12 | ||||
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Section 1.Grant of Shareholder Value Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Shareholder Value Award Agreement (the “Grantee”) a Performance-Based Award (the “Shareholder Value Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com (the "Target Number of Shares").
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Shareholder Value Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern except with respect to the provisions described in Section 12 below (in which case, the terms of the Award Agreement shall govern).
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of Shares that are eligible to vest which shall be equal to the product of (i) the Target Number of Shares, multiplied by (ii) the Percent of Target, where:
a.“Percent of Target” shall mean the percentage set forth in the Lilly Stock Price Performance Levels table set forth on the first page of this document representing the attainment level of the Final Lilly Stock Price measured against the performance goal attainment levels set forth in the table.
b.“Final Lilly Stock Price” shall mean the average of the closing price of a share of Lilly Common Stock on the New York Stock Exchange for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
In the event the Grantee’s Service is terminated prior to the end of the Performance Period for any reason or in any circumstance other than as described in Section 3 below, the Award shall be forfeited.
Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Retirement; Death; Disability. Except as otherwise provided below (including Section 12), in the event the Grantee’s Service is terminated (i) following the Retirement Vesting Date due to the Grantee’s Retirement; (ii) due to the Grantee’s death, or (iii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above. For the avoidance of any doubt, the Award shall be forfeited in the event the Grantee’s Service is terminated prior to the Retirement Vesting Date due to the Grantee’s Retirement.
“Retirement” means retirement as a “retiree,” which is a person who is (A) a retired employee under The Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements or (E) otherwise determined to be a retired employee in the sole discretion of the Company.
“Retirement Vesting Date” means the date that is on or following December 31 immediately following the commencement of the Performance Period.
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“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee's Service under any one of the following circumstances:
i.due to a plant closing or reduction in workforce (as defined below);
ii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Demotions, Disciplinary Actions and Misconduct. The Committee may, in its sole discretion, cancel this Shareholder Value Award or reduce the number of Shares eligible to vest, prorated according to time or other measure as determined appropriate by the Committee, if during any portion of the Performance Period the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
The Committee’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or Retirement, (3) the Grantee’s Service has been terminated as a direct result of either a plant closing or a reduction in force, and (4) the Grantee's service has been terminated as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the end of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Shares eligible to vest, calculated in a manner consistent with Section 2, but the Final Lilly Stock Price shall be equal to the value of Shares established for the consideration to be paid to holders of Shares in the Transaction (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
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i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the end of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (as amended from time to time) or any successor plan or arrangement thereto.
c.If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 4, then references to Shares in this Award Agreement shall be read to mean stock of the successor or surviving corporation, or a parent or subsidiary thereof, as and when applicable.
Section 5.Settlement
a.Except as provided below, the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the last day of the Performance Period.
b.If the Award vests pursuant to Section 4(b)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered an item of non-qualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”) and the Transaction does not constitute a “change in control event,” within the meaning of the U.S. Treasury Regulations (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the earliest of the date that the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “Section 409A Separation”) (subject to the six (6) month delay described in Section 5(c) below if Grantee is a “specified employee”), the date of the Grantee’s death and the date set forth in Section 5(a) above.
c.If the Award vests pursuant to Section 4(b)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a Section 409A Separation, and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (1) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (2) the date of the Grantee’s death.
d.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(e) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
e.At any time prior to the end of the Performance Period or until the Award is paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Award in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Performance Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(c).
f.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
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Section 6.Rights of the Grantee
a.No Shareholder Rights. The Shareholder Value Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Shareholder Value Award is settled and Shares are issued or transferred to the Grantee.
b.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Shareholder Value Award, the vesting of the Shareholder Value Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
i.If the Shareholder Value Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Shareholder Value Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Shareholder Value Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares
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otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgment
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
h.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
i.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
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j.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
k.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
l.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
m.the Company has communicated share ownership guidelines that apply to the Grantee, and the Grantee understands and agrees that those guidelines may impact any Shares subject to, or issued pursuant to the Award.
Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Shareholder Value Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
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e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on Applicable Laws and that, depending on where the Grantee is based and subject to the conditions set out in such Applicable Laws, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Restrictive Covenants, Remedies, and Additional Terms and Conditions
a.Restrictive Covenants. In consideration of the Grantee’s receipt of the Award from Lilly, the Grantee agrees that during the Grantee’s employment with Lilly or an Affiliate that the Grantee provided services to or had access to confidential information concerning (“Covered Affiliate”) and for twelve (12) months immediately following the end of the Grantee’s employment (regardless of reason), the Grantee will not directly or indirectly, on a worldwide basis, engage in any of the following activities:
i.Work for, advise, manage, act as an agent, employee or consultant for, or otherwise provide any services, in a Competitively-Sensitive Capacity, to: (a) any person or entity engaged in research, development, production, sale, or distribution of a product or service competitive with or substantially similar to any product or service in research, development or design, or manufactured, produced, sold, or distributed by Lilly or a Covered Affiliate; or (b) any person or entity that otherwise competes or intends to compete with Lilly or a Covered Affiliate.
ii.Directly or indirectly solicit, urge, divert, induce, or seek to induce any of Lilly’s (or Covered Affiliate’s) independent contractors, subcontractors, business partners, distributors, brokers, consultants, sales representatives, customers, vendors, suppliers or any other person with whom Lilly or Covered Affiliate has a business relationship and with whom the Grantee interacted during the Grantee’s employment with Lilly or Covered Affiliate to terminate their relationship with, or representation of, Lilly or Covered Affiliate or to cancel, withdraw, reduce, limit or in any manner modify any such person's business with, or representation of, Lilly or a Covered Affiliate.
The Grantee acknowledges and agrees that any Lilly Affiliate is an intended third-party beneficiary of this Award Agreement, which may be enforced by Lilly or any such Affiliate, either singularly or jointly.
For purposes of this Award Agreement, “Competitively-Sensitive Capacity” means: (i) the same or similar capacity or function in which the Grantee worked for Lilly or a Covered Affiliate at any time
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during the two (2) years immediately preceding the end of the Grantee’s employment; (ii) any officer, director, executive or senior management capacity or function; (iii) any research and development capacity or function; (iv) any sales management or business development management capacity or function; (v) any ownership capacity (except the Grantee may own as a passive investment up to 2% of any publicly traded securities); and/or (vi) any other capacity or function in which there is a material risk that the Grantee likely would inevitably use or disclose trade secrets and/or confidential information Lilly or a Covered Affiliate. For purposes of clarity, if a competing business has multiple divisions, lines or segments, some of which are not competitive with the business of Lilly, including its Covered Affiliates, nothing in this Award Agreement will prohibit the Grantee from being employed by, working for or assisting only that division, line or segment of such competing business that is not competitive with the business of Lilly or a Covered Affiliate, provided the Grantee is not involved in a Competitively-Sensitive Capacity in the research, development, manufacture, provision or sale of any products that compete with any products of Lilly or a Covered Affiliate.
The Grantee and Lilly acknowledge and agree that the worldwide geographic scope of the foregoing covenants is reasonable and necessary given, among other things, that: (a) absent the restrictions, the Grantee could utilize Lilly’s (or its Affiliates) trade secrets and/or confidential information and compete with Lilly or Affiliate from virtually anywhere; and (b) such scope is the only way for Lilly and its Affiliates to protect their trade secrets and confidential information. In the event the Grantee violates any of the restrictive covenants contained herein, their duration will automatically be extended by the length of time during which the Grantee was in violation of any of the restrictive covenants.
The Grantee acknowledges and agrees that during the course of Grantee’s employment with Lilly or a Covered Affiliate, the Grantee will become intimately familiar with confidential information and trade secrets key to its unique competitive advantage. The Grantee also acknowledges and agrees that Lilly’s (and Covered Affiliate’s) confidential information and trade secrets will retain continuing vitality throughout and beyond the one-year restricted period. And the Grantee acknowledges and agrees that, should the Grantee leave Lilly or Covered Affiliate and, near the Grantee’s departure from Lilly or Covered Affiliate, work with another person or entity that engages in business activities similar to those of Lilly and/or Covered Affiliate, it would be highly likely, if not inevitable, that the Grantee would rely on confidential information of Lilly and/or Covered Affiliate in the course of the Grantee’s work, either consciously or subconsciously, harming Lilly and any Covered Affiliates. For these and other reasons, the Grantee agrees that the restrictions above are reasonably necessary to protect Lilly’s and its Covered Affiliate’s legitimate business interests, and do so by creating a specific amount of time after the Grantee’s employment ends during which the Grantee will not be able to engage or prepare to engage in the activities above.
The Grantee and Lilly further acknowledge and agree that if any particular covenant or provision is determined to be unreasonable or unenforceable for any reason, including, without limitation, the time period, geographic area, and/or scope of activity covered by any restrictive covenant, such covenant or provision will automatically be deemed reformed so that the contested covenant or provision will have the closest effect permitted by applicable law to the original form and will be given effect and enforced as so reformed to whatever extent would be reasonable and enforceable under applicable law. Any court interpreting any restrictive covenant provision of this Award Agreement will, if necessary, reform any such provision to make it enforceable under applicable law.
This Award Agreement is intended, among other things, to supplement (and not supersede) all applicable statutes protecting trade secrets and the duties the Grantee owes to Lilly and/or Covered Affiliates under the common law, as well as any other non-competition, non-solicitation, or confidentiality provisions that the Grantee agreed to in the past, including those in the Grantee’s Employee Confidentiality and Invention Agreement, each of which remains in full force and effect, or that the Grantee agrees to in the future.
The Grantee acknowledges that a breach by the Grantee of this Award Agreement will give rise to irreparable injury to Lilly and Covered Affiliates and money damages will not be adequate relief for such injury. As a result, the Grantee agrees that Lilly (including any third party beneficiary) will be entitled to obtain equitable or injunctive relief without having to post any bond or other security to restrain or prohibit any such breach or threatened breach, in addition to any other remedies which may be available, including the recovery of monetary damages from the Grantee.
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b.Remedies. If the Company determines that the Grantee has violated any applicable provisions of this Section 12, in addition to injunctive relief and damages, the Grantee agrees and covenants that: (i) the Award settled shall be immediately rescinded; (ii) the Grantee shall automatically forfeit any rights the Grantee may have with respect to the Award as of the date of such determination, including the rights to continue to be eligible to vest or receive a payment under the Award; and (iii) the foregoing remedies set forth in this Section 12 shall not be Lilly’s exclusive remedies. Lilly reserves all other rights and remedies available to it at law or in equity.
In addition, the Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Shareholder Value Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13.Governing Law and Choice of Venue
The validity, construction, and enforcement of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws or cause the application of substantive law of any jurisdiction other than Indiana. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction and venue of the State of Indiana, and agree that such litigation shall be conducted exclusively in the courts having appropriate subject matter jurisdiction in of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14.Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language, or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
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The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
Section 15.Compensation Recovery
At any time during the three years following the date on which the number of Shares eligible to vest under this Award has been determined under Section 2 above, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any Shares that have been issued or cash that has been paid pursuant to this Award if:
a.(i) the number of Shares or the amount of the cash payment was calculated based, directly or indirectly, upon the achievement of financial results that were subsequently the subject of a restatement of all or a portion of the Company’s financial statements, (ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and (iii) the number of Shares or the amount of cash payment that would have been issued or paid to the Grantee had the financial results been properly reported would have been lower than the number of Shares actually issued or the amount of cash actually paid; or
b.the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such misconduct causes significant harm to the company.
Furthermore, in the event the number of Shares issued or cash paid pursuant to this Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will (A) seek restitution of the Shares or cash paid pursuant to this Award to the extent that the number of Shares issued or the amount paid exceeded the number of Shares that would have been issued or the amount that would have been paid had the inaccuracy or error not occurred, or (B) issue additional Shares or make additional payment to the extent that the number of Shares issued or the amount paid was less than the correct amount.
This Section 15 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 16.Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.7 — Form of Shareholder Value Award under the 2002 Lilly Stock Plan (non-executive officer)
Eli Lilly and Company
Shareholder Value Award Agreement
This Shareholder Value Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Shareholder Value Award Agreement (the “Grantee”).
Lilly Stock Price Performance Levels:
| No Payout | Level 1 | Level 2 | Level 3 | Level 4 | Level 5 | Level 6 | |||||||||||||||||
Final Lilly Stock Price | < $76.08 | $76.08 - $160.36 | $160.37 - $180.02 | $180.03 - $199.69 | $199.70 - $219.36 | $219.37 - $239.03 | >$239.03 | ||||||||||||||||
| Percent of Target | 0% | 50% | 75% | 100% | 125% | 150% | 175% | ||||||||||||||||
Performance Period: January 1, 2021 – December 31, 2023
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Table of Contents
Section 1. Grant of Shareholder Value Award | 3 | ||||
Section 2. Vesting | 3 | ||||
Section 3. Impact of Certain Employment Status Changes | 3 | ||||
Section 4. Change in Control | 4 | ||||
Section 5. Settlement | 5 | ||||
Section 6. Rights of the Grantee | 6 | ||||
Section 7. Prohibition Against Transfer | 6 | ||||
Section 8. Responsibility for Taxes | 6 | ||||
Section 9. Section 409A Compliance | 7 | ||||
Section 10. Grantee’s Acknowledgment | 7 | ||||
Section 11. Data Privacy | 9 | ||||
Section 12. Additional Terms and Conditions | 10 | ||||
Section 13. Governing Law and Choice of Venue | 10 | ||||
Section 14. Miscellaneous Provisions | 11 | ||||
Section 15. Award Subject to Acknowledgement of Acceptance | 11 | ||||
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Section 1.Grant of Shareholder Value Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Shareholder Value Award Agreement (the “Grantee”) a Performance-Based Award (the “Shareholder Value Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com (the “Target Number of Shares”).
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Shareholder Value Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern.
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of Shares that are eligible to vest which shall be equal to the product of (i) the Target Number of Shares, multiplied by (ii) the Percent of Target, where:
a.“Percent of Target” shall mean the percentage set forth in the Lilly Stock price Performance Levels table set forth on the first page of this document representing the attainment level of the Final Stock Price measured against the performance goal attainment levels set forth in the table, and
b.“Final Lilly Stock Price” shall mean the average of the closing price of a share of Lilly Common Stock on the New York Stock Exchange for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
In the event the Grantee’s Service is terminated prior to the end of the Performance Period for any reason or in any circumstance other than as described in Section 3 below, the Award shall be forfeited.
Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Death; Disability. In the event the Grantee’s Service is terminated (i) due to the Grantee’s death, or (ii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered
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to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee’s Service under any one of the following circumstances:
i.retirement as a “retiree,” which is a person who is (A) a retired employee under the Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements; or (E) otherwise determined to be a retired employee in the sole discretion of the Company;
ii.due to a plant closing or reduction in workforce (as defined below);
iii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Demotions, Disciplinary Actions and Misconduct. The Committee may, in its sole discretion, cancel this Shareholder Value Award or reduce the number of Shares eligible to vest, prorated according to time or other measure as determined appropriate by the Committee, if during any portion of the Performance Period the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
The Committee and/or the Company’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or retirement, (3) the Grantee’s Service has been terminated as a direct result of either a plant closing or a reduction in force, and (4) the Grantee’s Service has been terminated as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
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b.In the event of a Transaction that occurs prior to the last day of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Shares eligible to vest, calculated in a manner consistent with Section 2, but the Final Lilly Stock Price shall be equal to the value of Shares established for the consideration to be paid to holders of Shares in the Transaction (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the last day of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Employees or the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (both as amended from time to time) or any successor plan or arrangement thereto, as applicable.
c.If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 4, then references to Shares in this Award Agreement shall be read to mean stock of the successor or surviving corporation, or a parent or subsidiary thereof, as and when applicable.
Section 5.Settlement
a.Except as provided below, the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the last day of the Performance Period.
b.If the Award vests pursuant to Section 4(b)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered an item of non-qualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”) and the Transaction does not constitute a “change in control event,” within the meaning of the U.S. Treasury Regulations (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the earliest of (i) the date that the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “Section 409A Separation”), provided that if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the date of the Section 409A Separation, the Award shall instead be paid on the first day following the six (6) month anniversary of the Grantee’s 409A Separation (the “409A Delayed Payment Date”), (ii) the date of the Grantee’s death and (iii) the date set forth in Section 5(a) above.
c.If the Award vests pursuant to Section 4(b)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a Section 409A Separation and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of
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the date of the Section 409A Separation, the Award shall instead be paid on the earliest of (1) the 409A Delayed Payment Date and (2) the date of the Grantee’s death.
d.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(e) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
e.At any time prior to the end of the Performance Period or until the Award is paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Award in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Performance Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(c).
f.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6.Rights of the Grantee
a.No Shareholder Rights. The Shareholder Value Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Shareholder Value Award is settled and Shares are issued or transferred to the Grantee.
b.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Shareholder Value Award, the vesting of the Shareholder Value Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
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b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
i.If the Shareholder Value Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Shareholder Value Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Shareholder Value Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgment
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
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b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.unless otherwise agreed with Lilly, the Award and any Shares subject to the Award, and the income and value of same, are not granted as consideration for, or in connection with, the service the Grantee may provide as a director of an Affiliate;
h.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
i.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
j.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
k.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
l.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
m.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
n.neither the Company, the Employer nor any Affiliate shall be liable for any foreign exchange rate fluctuation between the Grantee’s local currency and the United States Dollar that may affect the
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value of the Award or any amounts due to the Grantee pursuant to the settlement of the Award or the subsequent sale of any Shares acquired upon settlement.
Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Shareholder Value Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on applicable law and that, depending on where the Grantee is based and subject to the conditions set out in such applicable law, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company
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or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Additional Terms and Conditions
a.Country-Specific Conditions. The Award shall be subject to any special terms and conditions set forth in any Appendix to this Award Agreement for the Grantee’s country. Moreover, if the Grantee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to the Grantee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Award Agreement.
b.Insider Trading / Market Abuse Laws. The Grantee may be subject to insider trading restrictions and/or market abuse laws in applicable jurisdictions, including but not limited to the United States and the Grantee’s country of residence, which may affect the Grantee’s ability to directly or indirectly, for the Grantee or for a third party, acquire or sell, or attempt to sell, or otherwise dispose of Shares, rights to acquire Shares (e.g., the Shareholder Value Award) under the Plan during such times as the Grantee is considered to have “inside information” regarding the Company (as determined under the laws or regulations in the applicable jurisdictions). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading policy. The Grantee acknowledges that it is his or her responsibility to comply with any applicable restrictions, and the Grantee should consult with his or her personal legal advisor on this matter.
c.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Shareholder Value Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13.Governing Law and Choice of Venue
The validity and construction of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Indiana, and agree that such litigation shall be conducted in the courts of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
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Section 14.Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language, or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different from the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
Section 15.Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
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IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.8 Form of Relative Value Award under the 2002 Lilly Stock Plan
Eli Lilly and Company
Relative Value Award Agreement
(for Executives)
This Relative Value Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Relative Value Award Agreement (the “Grantee”).
Lilly Relative Total Shareholder Return Performance Levels:
| Absolute Percentage Point (pp) Difference from Peer Median TSR | < -30pp | -24.0 pp to -29.9 pp | -18.0 pp to -23.9 pp | -12.0 pp to -17.9 pp | -6.0 pp to -11.9 pp | -0.01 pp to -5.9 pp | Peer Median to +5.9 pp | +6.0 pp to +11.9 pp | +12.0 pp to +17.9 pp | +18.0 pp to +23.9 pp | +24.0 pp to +29.9 pp | > +30 pp | ||||||||||||||||||||||||||
| Payout Multiple | 0.0 | 0.25 | 0.40 | 0.55 | 0.70 | 0.85 | 1.00 | 1.15 | 1.30 | 1.45 | 1.60 | 1.75 | ||||||||||||||||||||||||||
Performance Period: January 1, 2021 – December 31, 2023
Table of Contents
Section 1. Grant of Relative Value Award | 2 | ||||
Section 2. Vesting | 2 | ||||
Section 3. Impact of Certain Employment Status Changes | 3 | ||||
Section 4. Change in Control | 4 | ||||
Section 5. Settlement | 4 | ||||
Section 6. Rights of the Grantee | 5 | ||||
Section 7. Prohibition Against Transfer | 5 | ||||
Section 8. Responsibility for Taxes | 5 | ||||
Section 9. Section 409A Compliance | 6 | ||||
Section 10. Grantee’s Acknowledgment | 6 | ||||
Section 11. Data Privacy | 7 | ||||
Section 12. Additional Terms and Conditions | 8 | ||||
Section 13. Governing Law and Choice of Venue | 9 | ||||
Section 14. Miscellaneous Provisions | 9 | ||||
Section 15. Compensation Recovery | 10 | ||||
Section 16. Award Subject to Acknowledgement of Acceptance | 10 | ||||
Section 1.Grant of Relative Value Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Relative Value Award Agreement (the “Grantee”) a Performance-Based Award (the “Relative Value Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com. (the "Target Number of Shares").
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Relative Value Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern.
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of Shares that are eligible to vest which shall be equal to the product of (i) the Target Number of Shares, multiplied by (ii) the Payout Multiple, where:
a.“Payout Multiple” shall mean the payout multiple set forth in the Lilly Relative Total Shareholder Return Performance Levels table set forth on the first page of this document, representing the attainment level of Lilly’s rTSR, measured against the performance goal attainment levels set forth in the table.
b.“Final Lilly Stock Price” shall mean the average of the closing price of a share of Lilly Common Stock on the New York Stock Exchange for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
c.“Total Shareholder Return” or “TSR” shall mean the quotient of (i) the Final Lilly Stock Price or Final Peer Stock Price, as applicable, minus the corresponding Beginning Stock Price, including the impact of Dividend reinvestment on each ex-dividend date, if any, paid by the applicable issuer during the Performance Period, divided by (ii) the corresponding Beginning Stock Price.
The stock prices and cash dividend payments reflected in the calculation of TSR shall be adjusted to reflect stock splits during the Performance Period and dividends shall be assumed to be reinvested in the relevant issuer’s shares for purposes of the calculation of TSR.
d.“Relative Total Shareholder Return” or “rTSR” shall mean the comparison between Lilly’s TSR and the TSR of the Peer Group over the Performance Period, measured as the absolute percentage point difference in the performance of the Company’s TSR compared to the Peer Group’s median TSR.
e.“Beginning Stock Price” shall mean the average closing price of a share of Lilly Common Stock on the New York Stock Exchange or a share of each Peer Group company’s stock, as applicable, for each trading day in the two month period immediately preceding the Performance Period, rounded to the nearest cent.
f.“Final Peer Stock Price” shall mean the average of the closing price of a share of each Peer Group company’s stock, on Nasdaq, the New York Stock Exchange, or other market where an independent share price can be determined, for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
g.“Dividend” shall mean ordinary or extraordinary cash dividends paid by Lilly or a Peer Group company to its shareholders of record at any time during the Performance Period.
h.“Peer Group” shall mean all companies identified and most recently approved by the Committee as a member of the Company’s Peer Group in effect as of the Grant Date. Companies that are members of the Peer Group at the beginning of the Performance Period that subsequently cease to be traded on a market where an independent share price can be determined shall be excluded from the Peer Group.
In the event the Grantee’s Service is terminated prior to the end of the Performance Period for any reason or in any circumstance other than as described in Section 3 below, the Award shall be forfeited.
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Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Death; Disability. In the event the Grantee’s Service is terminated (i) due to the Grantee’s death, or (ii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee's Service under any one of the following circumstances:
i.retirement as a “retiree,” which is a person who is (A) a retired employee under the Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements or (E) otherwise determined to be a retired employee in the sole discretion of the Company;
ii.due to a plant closing or reduction in workforce (as defined below);
iii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Demotions, Disciplinary Actions and Misconduct. The Committee may, in its sole discretion, cancel this Relative Value Award or reduce the number of Shares eligible to vest, prorated according to time or other measure as determined appropriate by the Committee, if during any portion of the Performance Period the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
The Committee’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or retirement, (3) the Grantee’s Service has been terminated as a result a direct result of either a plant closing or a reduction in force and (4) the Grantee’s Service has been terminated of
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as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the end of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Shares eligible to vest, calculated in a manner consistent with Section 2, but the Final Lilly Stock Price shall be equal to the value of Shares established for the consideration to be paid to holders of Shares in the Transaction and the Final Peer Stock Price shall be equal to the closing price of a share of each Peer Group company’s stock, on Nasdaq, the New York Stock Exchange, or other market where an independent share price can be determined, on the date the Transaction closes (or if such day is not a trading date, the first trading date immediately preceding such date) (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the end of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (as amended from time to time) or any successor plan or arrangement thereto.
c.If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 4, then references to Shares in this Award Agreement shall be read to mean stock of the successor or surviving corporation, or a parent or subsidiary thereof, as and when applicable.
Section 5.Settlement
a.Except as provided below, the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the last day of the Performance Period.
b.If the Award vests pursuant to Section 4(b)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered an item of non-qualified deferred compensation subject to Section 409A of the Code (“NQ Deferred Compensation”) and the Transaction does not constitute a “change in control event,” within the meaning of the U.S. Treasury Regulations (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the earliest of the date that the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “Section 409A Separation”) (subject to the six (6) month delay described in Section 5(c) below if Grantee is a “specified employee”), the date of the Grantee’s death and the date set forth in Section 5(a) above.
c.If the Award vests pursuant to Section 4(b)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the date the Grantee is subject to a
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Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a Section 409A Separation, and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (1) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (2) the date of the Grantee’s death.
d.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(e) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
e.At any time prior to the end of the Performance Period or until the Award is paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Award in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Performance Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(c).
f.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6.Rights of the Grantee
a.No Shareholder Rights. The Relative Value Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Relative Value Award is settled and Shares are issued or transferred to the Grantee.
b.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Relative Value Award, the vesting of the Relative Value Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
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i.If the Relative Value Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Relative Value Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Relative Value Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above.
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgment
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
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f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.unless otherwise agreed with Lilly, the Award and any Shares subject to the Award, and the income and value of same, are not granted as consideration for, or in connection with, the service the Grantee may provide as a director of an Affiliate;
h.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
i.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
j.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
k.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
l.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
m.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
n.neither the Company, the Employer nor any Affiliate shall be liable for any foreign exchange rate fluctuation between the Grantee’s local currency and the United States Dollar that may affect the value of the Award or any amounts due to the Grantee pursuant to the settlement of the Award or the subsequent sale of any Shares acquired upon settlement.
Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Relative Value Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are
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listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on Applicable Laws and that, depending on where the Grantee is based and subject to the conditions set out in such Applicable Laws, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Additional Terms and Conditions
a.Country-Specific Conditions. The Award shall be subject to any special terms and conditions set forth in any Appendix to this Award Agreement for the Grantee’s country. Moreover, if the Grantee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to the Grantee, to the extent the Company determines that the application of such terms and
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conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Award Agreement.
b.Insider Trading / Market Abuse Laws. The Grantee may be subject to insider trading restrictions and/or market abuse laws in applicable jurisdictions, including but not limited to the United States and the Grantee’s country of residence, which may affect the Grantee’s ability to directly or indirectly, for the Grantee or for a third party, acquire or sell, or attempt to sell, or otherwise dispose of Shares, rights to acquire Shares (e.g., the Relative Value Award) under the Plan during such times as the Grantee is considered to have “inside information” regarding the Company (as determined under the laws or regulations in the applicable jurisdictions). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading policy. The Grantee acknowledges that it is his or her responsibility to comply with any applicable restrictions, and the Grantee should consult with his or her personal legal advisor on this matter.
c.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Relative Value Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13.Governing Law and Choice of Venue
The validity and construction of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction of the State of Indiana, and agree that such litigation shall be conducted in the courts of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14.Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language, or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or
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unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
Section 15.Compensation Recovery
At any time during the three years following the date on which the number of Shares eligible to vest under this Award has been determined under Section 2 above, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any Shares that have been issued or cash that has been paid pursuant to this Award if:
a.(i) the number of Shares or the amount of the cash payment was calculated based, directly or indirectly, upon the achievement of financial results that were subsequently the subject of a restatement of all or a portion of the Company’s financial statements, (ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and (iii) the number of Shares or the amount of cash payment that would have been issued or paid to the Grantee had the financial results been properly reported would have been lower than the number of Shares actually issued or the amount of cash actually paid; or
b.the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such misconduct causes significant harm to the company.
Furthermore, in the event the number of Shares issued or cash paid pursuant to this Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will (A) seek restitution of the Shares or cash paid pursuant to this Award to the extent that the number of Shares issued or the amount paid exceeded the number of Shares that would have been issued or the amount that would have been paid had the inaccuracy or error not occurred, or (B) issue additional Shares or make additional payment to the extent that the number of Shares issued or the amount paid was less than the correct amount.
This Section 15 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 16.Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.9 — Form of Relative Value Award under the 2002 Lilly Stock Plan (with non-compete)
Eli Lilly and Company
Relative Value Award Agreement
(for Executives)
This Relative Value Award has been granted on [•] (“Grant Date”) by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to the Eligible Individual who has received this Relative Value Award Agreement (the “Grantee”).
Lilly Relative Total Shareholder Return Performance Levels:
| Absolute Percentage Point (pp) Difference from Peer Median TSR | < -30pp | -24.0 pp to -29.9 pp | -18.0 pp to -23.9 pp | -12.0 pp to -17.9 pp | -6.0 pp to -11.9 pp | -0.01 pp to -5.9 pp | Peer Median to +5.9 pp | +6.0 pp to +11.9 pp | +12.0 pp to +17.9 pp | +18.0 pp to +23.9 pp | +24.0 pp to +29.9 pp | > +30 pp | ||||||||||||||||||||||||||
| Payout Multiple | 0.0 | 0.25 | 0.40 | 0.55 | 0.70 | 0.85 | 1.00 | 1.15 | 1.30 | 1.45 | 1.60 | 1.75 | ||||||||||||||||||||||||||
Performance Period: January 1, 2021 – December 31, 2023
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Table of Contents
Section 1. Grant of Relative Value Award | 3 | ||||
Section 2. Vesting | 3 | ||||
Section 3. Impact of Certain Employment Status Changes | 4 | ||||
Section 4. Change in Control | 5 | ||||
Section 5. Settlement | 5 | ||||
Section 6. Rights of the Grantee | 6 | ||||
Section 7. Prohibition Against Transfer | 6 | ||||
Section 8. Responsibility for Taxes | 6 | ||||
Section 9. Section 409A Compliance | 7 | ||||
Section 10. Grantee’s Acknowledgment | 7 | ||||
Section 11. Data Privacy | 9 | ||||
Section 12. Restrictive Covenants, Remedies, and Additional Terms and Conditions | 10 | ||||
Section 13. Governing Law and Choice of Venue | 12 | ||||
Section 14. Miscellaneous Provisions | 12 | ||||
Section 15. Compensation Recovery | 13 | ||||
Section 16. Award Subject to Acknowledgement of Acceptance | 13 | ||||
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Section 1.Grant of Relative Value Award
Eli Lilly and Company, an Indiana corporation (“Lilly” or the “Company”), has granted to the Eligible Individual who has received this Relative Value Award Agreement (the “Grantee”) a Performance-Based Award (the “Relative Value Award” or the “Award”) with respect to the target number of shares of Lilly Common Stock (the “Shares”) that the Grantee may view by logging on to the Merrill Lynch website at http://myequity.lilly.com. (the "Target Number of Shares").
The Award is made pursuant to and subject to the terms and conditions set forth in the Amended and Restated 2002 Lilly Stock Plan (the “Plan”) and to the terms and conditions set forth in this Relative Value Award Agreement, including all appendices, exhibits and addenda hereto (the “Award Agreement”). In the event of any conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern except with respect to the provisions described in Section 12 below (in which case, the terms of the Award Agreement shall govern).
Any capitalized terms used but not defined in this Award Agreement shall have the meanings set forth in the Plan.
Section 2.Vesting
As soon as reasonably practicable following the end of the Performance Period, the Committee shall determine the number of Shares that are eligible to vest which shall be equal to the product of (i) the Target Number of Shares, multiplied by (ii) the Payout Multiple, where:
a.“Payout Multiple” shall mean the payout multiple set forth in the Lilly Relative Total Shareholder Return Performance Levels table set forth on the first page of this document, representing the attainment level of Lilly’s rTSR, measured against the performance goal attainment levels set forth in the table.
b.“Final Lilly Stock Price” shall mean the average of the closing price of a share of Lilly Common Stock on the New York Stock Exchange for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
c.“Total Shareholder Return” or “TSR” shall mean the quotient of (i) the Final Lilly Stock Price or Final Peer Stock Price, as applicable, minus the corresponding Beginning Stock Price, including the impact of Dividend reinvestment on each ex-dividend date, if any, paid by the applicable issuer during the Performance Period, divided by (ii) the corresponding Beginning Stock Price.
The stock prices and cash dividend payments reflected in the calculation of TSR shall be
adjusted to reflect stock splits during the Performance Period and dividends shall be
assumed to be reinvested in the relevant issuer’s shares for purposes of the calculation of
TSR.
d.“Relative Total Shareholder Return” or “rTSR” shall mean the comparison between Lilly’s SR and the TSR of the Peer Group over the Performance Period, measured as the absolute percentage point difference in the performance of the Company’s TSR compared to the Peer Group’s median TSR.
e.“Beginning Stock Price” shall mean the average closing price of a share of Lilly Common Stock on the New York Stock Exchange or a share of each Peer Group company’s stock, as applicable, for each trading day in the two month period immediately preceding the Performance Period, rounded to the nearest cent.
f.“Final Peer Stock Price” shall mean the average of the closing price of a share of each Peer Group company’s stock, on Nasdaq, the New York Stock Exchange, or other market where an independent share price can be determined, for each trading day in the last two months of the Performance Period, rounded to the nearest cent.
g.“Dividend” shall mean ordinary or extraordinary cash dividends paid by Lilly or a Peer Group company to its shareholders of record at any time during the Performance Period.
h.“Peer Group” shall mean all companies identified and most recently approved by the Committee as a member of the Company’s Peer Group in effect as of the Grant Date. Companies that are members of the Peer Group at the beginning of the Performance Period
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that subsequently cease to be traded on a market where an independent share price can be determined shall be excluded from the Peer Group.
In the event the Grantee’s Service is terminated prior to the end of the Performance Period for any reason or in any circumstance other than as described in Section 3 below, the Award shall be forfeited.
Section 3.Impact of Certain Employment Status Changes
Unless the Committee determines, in its sole discretion, that such treatment is not advisable after consideration of Applicable Laws, the number of Shares that are eligible to vest upon a change in employment status of the Grantee during the Performance Period will be as follows:
a.Leaves of Absence. In the event the Grantee is on an approved leave of absence during the Performance Period, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above.
b.Retirement; Death; Disability. Except as otherwise provided below (including Section 12), in the event the Grantee’s Service is terminated (i) following the Retirement Vesting Date due to the Grantee’s Retirement; (ii) due to the Grantee’s death, or (iii) by reason of Grantee’s Disability, the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above. For the avoidance of any doubt, the Award shall be forfeited in the event the Grantee’s Service is terminated prior to the Retirement Vesting Date due to the Grantee’s Retirement.
“Retirement” means retirement as a “retiree,” which is a person who is (A) a retired employee under The Lilly Retirement Plan; (B) a retired employee under the retirement plan or program of an Affiliate; (C) a retired employee under a retirement program specifically approved by the Committee; (D) required to retire under local law, to the extent authorized by the Company to address such local requirements or (E) otherwise determined to be a retired employee in the sole discretion of the Company.
“Retirement Vesting Date” means the date that is on or following December 31 immediately following the commencement of the Performance Period.
“Disability” for purposes of this Award Agreement means that the Grantee would qualify to receive benefit payments under the long-term disability plan or policy, as it may be amended from time to time, of the Company or the Affiliate that employs the Grantee (the “Employer”). If the Company or the Employer does not have a long-term disability plan or policy, “Disability” means that the Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determined physical or mental impairment for a period of at least ninety (90) consecutive days as determined by the Company or Employer. The Grantee shall not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Company as it determines in its sole discretion.
c.Qualifying Termination. In the event the Grantee’s employment is subject to a Qualifying Termination (as defined below), the number of Shares eligible to vest shall be the number determined in accordance with Section 2 above, reduced proportionally for the portion of the total days during the Performance Period in which the Grantee was not in active Service.
For purposes of this Award Agreement, a “Qualifying Termination” means the termination of the Grantee's Service under any one of the following circumstances:
i.due to a plant closing or reduction in workforce (as defined below);
ii.as a result of the Grantee’s failure to locate a position within the Company or an Affiliate following the placement of the Grantee on reallocation or medical reassignment in the United States (or equivalent as determined by the Committee).
“Plant closing” means the closing of a plant site or other corporate location that directly results in termination of the Grantee’s Service.
“Reduction in workforce” means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of the Grantee’s Service.
d.Demotions, Disciplinary Actions and Misconduct. The Committee may, in its sole discretion, cancel this Relative Value Award or reduce the number of Shares eligible to vest, prorated according to time
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or other measure as determined appropriate by the Committee, if during any portion of the Performance Period the Grantee has been (i) subject to disciplinary action by the Company or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company, as determined in the sole discretion of the Company.
The Committee’s determination as to whether (1) a leave of absence or a transfer of employment between Lilly and an Affiliate or between Affiliates constitutes a termination of Service, (2) the Grantee’s Service has been terminated by reason of Disability or Retirement, (3) the Grantee’s Service has been terminated as a result a direct result of either a plant closing or a reduction in force and (4) the Grantee’s Service has been terminated of as a result of the failure to locate a position within the Company or an Affiliate following reallocation or medical reassignment shall be final and binding on the Grantee.
Section 4.Change in Control
The provisions of Section 13.2 of the Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 4 shall be the consummation of a merger, share exchange, or consolidation of the Company, as defined in Section 2.6(c) of the Plan (a “Transaction”).
b.In the event of a Transaction that occurs prior to the end of the Performance Period, the Grantee will be credited with an award of Restricted Stock Units equal to the number of Shares eligible to vest, calculated in a manner consistent with Section 2, but the Final Lilly Stock Price shall be equal to the value of Shares established for the consideration to be paid to holders of Shares in the Transaction and the Final Peer Stock Price shall be equal to the closing price of a share of each Peer Group company’s stock, on Nasdaq, the New York Stock Exchange, or other market where an independent share price can be determined, on the date the Transaction closes (or if such day is not a trading date, the first trading date immediately preceding such date) (the “Credited RSU Award”). The Credited RSU Award shall be eligible to vest on the last day of the Performance Period, subject to the Grantee’s continued Service through the last day of the Performance Period, except as provided below:
i.In the event that the Credited RSU Award is not converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with a Transaction, then immediately prior to the Transaction, the Credited RSU Award shall vest automatically in full.
ii.In the event that the Credited RSU Award is converted, assumed, substituted, continued or replaced by a successor or surviving corporation, or a parent or subsidiary thereof, in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the end of the Performance Period, then immediately as of the date of the Covered Termination, the Credited RSU Award shall vest automatically in full.
For purposes of this Award Agreement, “Covered Termination” shall mean a termination of Service as described in Sections 3(b) and (c), Grantee’s termination of Service without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (as amended from time to time) or any successor plan or arrangement thereto.
c.If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 4, then references to Shares in this Award Agreement shall be read to mean stock of the successor or surviving corporation, or a parent or subsidiary thereof, as and when applicable.
Section 5.Settlement
a.Except as provided below, the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the last day of the Performance Period.
b.If the Award vests pursuant to Section 4(b)(i), the Award shall be paid to the Grantee immediately prior to the Transaction, provided that if the Award is considered an item of non-qualified deferred
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compensation subject to Section 409A of the Code (“NQ Deferred Compensation”) and the Transaction does not constitute a “change in control event,” within the meaning of the U.S. Treasury Regulations (a “409A CIC”), then the Award shall be paid in cash (calculated based on the value of the Shares established for the consideration to be paid to holders of Shares in the Transaction) on the earliest of the date that the Grantee experiences a “separation from service” within the meaning of Section 409A of the Code (a “Section 409A Separation”) (subject to the six (6) month delay described in Section 5(c) below if Grantee is a “specified employee”), the date of the Grantee’s death and the date set forth in Section 5(a) above.
c.If the Award vests pursuant to Section 4(b)(ii), the Award shall be paid to the Grantee as soon as practicable, but in no event later than sixty (60) days, following the date the Grantee is subject to a Covered Termination, provided that if the Award is NQ Deferred Compensation, (i) the Award shall be paid within sixty (60) days following the date the Grantee experiences a Section 409A Separation, and (ii) if the Grantee is a “specified employee” within the meaning of Section 409A of the Code as of the payment date, the Award shall instead be paid on the earliest of (1) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation and (2) the date of the Grantee’s death.
d.At the time of settlement provided in this Section 5, Lilly shall issue or transfer Shares or the cash equivalent, as contemplated under Section 5(e) below, to the Grantee. In the event the Grantee is entitled to a fractional Share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
e.At any time prior to the end of the Performance Period or until the Award is paid in accordance with this Section 5, the Committee may, if it so elects, determine to pay part or all of the Award in cash in lieu of issuing or transferring Shares. The amount of cash shall be calculated based on the Fair Market Value of the Shares on the last day of the Performance Period in the case of payment pursuant to Section 5(a) and on the date of payment in the case of a payment pursuant to Section 5(c).
f.In the event of the death of the Grantee, the payments described above shall be made to the successor of the Grantee.
Section 6.Rights of the Grantee
a.No Shareholder Rights. The Relative Value Award does not entitle the Grantee to any rights of a shareholder of Lilly until such time as the Relative Value Award is settled and Shares are issued or transferred to the Grantee.
b.No Trust; Grantee’s Rights Unsecured. Neither this Award Agreement nor any action in accordance with this Award Agreement shall be construed to create a trust of any kind. The right of the Grantee to receive payments of cash or Shares pursuant to this Award Agreement shall be an unsecured claim against the general assets of the Company.
Section 7.Prohibition Against Transfer
The right of a Grantee to receive payments of Shares and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of the Grantee or to a successor of the Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award Agreement. A Grantee may not assign, sell, pledge, or otherwise transfer Shares or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 8.Responsibility for Taxes
a.Regardless of any action Lilly and/or the Employer takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax related items related to the Grantee’s participation in the Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Relative Value Award, the
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vesting of the Relative Value Award, the transfer and issuance of any Shares, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any Shares acquired pursuant to this Award; and (ii) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
b.Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
i.If the Relative Value Award is paid to the Grantee in cash in lieu of Shares, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
ii.If the Relative Value Award is paid to the Grantee in Shares and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the Exchange Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (A) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (B) arrange for the sale of Shares to be issued upon settlement of the Award (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, (C) withhold in Shares otherwise issuable to the Grantee pursuant to this Award, and/or (D) apply any other method of withholding determined by the Company and, to the extent required by Applicable Laws or the Plan, approved by the Committee.
iii.If the Relative Value Award is paid to the Grantee in Shares and the Grantee is subject to the short-swing profit rules of Section 16(b) of the Exchange Act, Lilly will withhold in Shares otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by Applicable Laws or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 8(b)(ii)(A) and (B) above
c.Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable statutory or other withholding rates, including minimum or maximum rates in the jurisdiction(s) applicable to the Grantee. In the event of over-withholding, the Grantee may receive a refund of any over-withheld amount in cash (without interest and without entitlement to the equivalent amount in Shares). If the obligation for Tax Related Items is satisfied by withholding Shares, for tax purposes, the Grantee will be deemed to have been issued the full number of Shares to which he or she is entitled pursuant to this Award, notwithstanding that a number of Shares are withheld to satisfy the obligation for Tax Related Items.
d.Lilly may refuse to deliver Shares or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 8.
Section 9.Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A.
Section 10.Grantee’s Acknowledgment
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the Plan;
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b.the Award is voluntary and occasional and does not create any contractual or other right to receive future Performance-Based Awards, or benefits in lieu thereof, even if Performance-Based Awards have been granted in the past;
c.all decisions with respect to future Performance-Based Awards or other awards, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the Plan is voluntary;
e.the Award and any Shares subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any Shares subject to the Award, and the income and value of same, are not part of normal or expected compensation for any purpose, including but not limited to, calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar mandatory payments;
g.unless otherwise agreed with Lilly, the Award and any Shares subject to the Award, and the income and value of same, are not granted as consideration for, or in connection with, the service the Grantee may provide as a director of an Affiliate;
h.neither the Award nor any provision of this Award Agreement, the Plan or the policies adopted pursuant to the Plan, confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any Affiliate;
i.the future value of the underlying Shares is unknown, indeterminable and cannot be predicted with certainty;
j.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
k.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or an Affiliate and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee’s employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence) in accordance with Section 409A;
l.unless otherwise provided in the Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award Agreement do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out or substituted for, in connection with any corporate transaction affecting the Shares;
m.the Grantee is solely responsible for investigating and complying with any laws applicable to him or her in connection with the Award; and
n.neither the Company, the Employer nor any Affiliate shall be liable for any foreign exchange rate fluctuation between the Grantee’s local currency and the United States Dollar that may affect the value of the Award or any amounts due to the Grantee pursuant to the settlement of the Award or the subsequent sale of any Shares acquired upon settlement.
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Section 11.Data Privacy
a.Data Collection and Usage. The Company and the Employer may collect, process and use certain personal information about the Grantee, and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance number, passport or other identification number (e.g., resident registration number), salary, nationality, job title, any shares of stock or directorships held in the Company, details of all Relative Value Awards or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in the Grantee’s favor (“Data”), for the purposes of implementing, administering and managing the Plan. The legal basis, where required, for the processing of Data is the Grantee’s consent. Where required under Applicable Laws, Data may also be disclosed to certain securities or other regulatory authorities where the Company’s securities are listed or traded or regulatory filings are made and the legal basis, where required, for such disclosure are the Applicable Laws.
b.Stock Plan Administration Service Providers. The Company transfers Data to Bank of America Merrill Lynch and/or its affiliated companies (“Merrill Lynch”), an independent service provider, which is assisting the Company with the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner. The Grantee may be asked to agree on separate terms and data processing practices with the service provider, with such agreement being a condition to the ability to participate in the Plan. The Company may also transfer Data to KPMG, an independent service provider, which is also assisting the Company with certain aspects of the implementation, administration and management of the Plan. In the future, the Company may select a different service provider and share Data with such other provider serving in a similar manner.
c.International Data Transfers. The Company and its service providers are based in the United States. The Grantee’s country or jurisdiction may have different data privacy laws and protections than the United States. The Company’s legal basis, where required, for the transfer of Data is Grantee’s consent.
d.Data Retention. The Company will hold and use the Data only as long as is necessary to implement, administer and manage the Grantee’s participation in the Plan, or as required to comply with legal or regulatory obligations, including under tax and security laws.
e.Voluntariness and Consequences of Consent Denial or Withdrawal. Participation in the Plan is voluntary and the Grantee is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke the Grantee’s consent, the Grantee’s salary from or employment and career with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant this Award or other awards to the Grantee or administer or maintain such awards.
f.Data Subject Rights. The Grantee understands that data subject rights regarding the processing of Data vary depending on Applicable Laws and that, depending on where the Grantee is based and subject to the conditions set out in such Applicable Laws, the Grantee may have, without limitation, the right to (i) inquire whether and what kind of Data the Company holds about the Grantee and how it is processed, and to access or request copies of such Data, (ii) request the correction or supplementation of Data about the Grantee that is inaccurate, incomplete or out-of-date in light of the purposes underlying the processing, (iii) obtain the erasure of Data no longer necessary for the purposes underlying the processing, (iv) request the Company to restrict the processing of the Grantee’s Data in certain situations where the Grantee feels its processing is inappropriate, (v) object, in certain circumstances, to the processing of Data for legitimate interests, and to (vi) request portability of the Grantee’s Data that the Grantee has actively or passively provided to the Company or the Employer (which does not include data derived or inferred from the collected data), where the processing of such Data is based on consent or the Grantee’s employment and is carried out by automated means. In case of concerns, the Grantee understands that he or she may also have the right to lodge a complaint with the competent local data protection authority. Further, to receive clarification of, or to exercise any of, the Grantee’s rights, the Grantee understands that he or she should contact his or her local human resources representative.
g.Declaration of Consent. By accepting the Award and indicating consent via the Company’s online acceptance procedure, the Grantee is declaring that he or she agrees with the data processing
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practices described herein and consents to the collection, processing and use of Data by the Company and the transfer of Data to the recipients mentioned above, including recipients located in countries which do not adduce an adequate level of protection from a European (or other non-U.S.) data protection law perspective, for the purposes described above.
Section 12.Restrictive Covenants, Remedies, and Additional Terms and Conditions
a.Restrictive Covenants. In consideration of the Grantee’s receipt of the Award from Lilly, the Grantee agrees that during the Grantee’s employment with Lilly or an Affiliate that the Grantee provided services to or had access to confidential information concerning (“Covered Affiliate”) and for twelve (12) months immediately following the end of the Grantee’s employment (regardless of reason), the Grantee will not directly or indirectly, on a worldwide basis, engage in any of the following activities:
i.Work for, advise, manage, act as an agent, employee or consultant for, or otherwise provide any services, in a Competitively-Sensitive Capacity, to: (a) any person or entity engaged in research, development, production, sale, or distribution of a product or service competitive with or substantially similar to any product or service in research, development or design, or manufactured, produced, sold, or distributed by Lilly or a Covered Affiliate; or (b) any person or entity that otherwise competes or intends to compete with Lilly or a Covered Affiliate.
ii.Directly or indirectly solicit, urge, divert, induce, or seek to induce any of Lilly’s (or Covered Affiliate’s) independent contractors, subcontractors, business partners, distributors, brokers, consultants, sales representatives, customers, vendors, suppliers or any other person with whom Lilly or Covered Affiliate has a business relationship and with whom the Grantee interacted during the Grantee’s employment with Lilly or Covered Affiliate to terminate their relationship with, or representation of, Lilly or Covered Affiliate or to cancel, withdraw, reduce, limit or in any manner modify any such person's business with, or representation of, Lilly or a Covered Affiliate.
The Grantee acknowledges and agrees that any Lilly Affiliate is an intended third-party beneficiary of this Award Agreement, which may be enforced by Lilly or any such Affiliate, either singularly or jointly.
For purposes of this Award Agreement, “Competively-Sensitive Capacity” means: (i) the same or similar capacity or function in which the Grantee worked for Lilly or a Covered Affiliate at any time during the two (2) years immediately preceding the end of the Grantee’s employment; (ii) any officer, director, executive or senior management capacity or function; (iii) any research and development capacity or function; (iv) any sales management or business development management capacity or function; (v) any ownership capacity (except the Grantee may own as a passive investment up to 2% of any publicly traded securities); and/or (vi) any other capacity or function in which there is a material risk that the Grantee likely would inevitably use or disclose trade secrets and/or confidential information Lilly or a Covered Affiliate. For purposes of clarity, if a competing business has multiple divisions, lines or segments, some of which are not competitive with the business of Lilly, including its Covered Affiliates, nothing in this Award Agreement will prohibit the Grantee from being employed by, working for or assisting only that division, line or segment of such competing business that is not competitive with the business of Lilly or a Covered Affiliate, provided the Grantee is not involved in a Competitively-Sensitive Capacity in the research, development, manufacture, provision or sale of any products that compete with any products of Lilly or a Covered Affiliate.
The Grantee and Lilly acknowledge and agree that the worldwide geographic scope of the foregoing covenants is reasonable and necessary given, among other things, that: (a) absent the restrictions, the Grantee could utilize Lilly’s (or its Affiliates) trade secrets and/or confidential information and compete with Lilly or Affiliate from virtually anywhere; and (b) such scope is the only way for Lilly and its Affiliates to protect their trade secrets and confidential information. In the event the Grantee violates any of the restrictive covenants contained herein, their duration will automatically be extended by the length of time during which the Grantee was in violation of any of the restrictive covenants.
The Grantee acknowledges and agrees that during the course of the Grantee’s employment with Lilly or a Covered Affiliate, the Grantee will become intimately familiar with confidential information and trade secrets key to its unique competitive advantage. The Grantee also acknowledges and agrees that Lilly’s (and Covered Affiliate’s) confidential information and trade secrets will retain continuing vitality throughout and beyond the one-year restricted period. And the Grantee acknowledges and
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agrees that, should the Grantee leave Lilly or Covered Affiliate and, near the Grantee’s departure from Lilly or Covered Affiliate, work with another person or entity that engages in business activities similar to those of Lilly and/or Covered Affiliate, it would be highly likely, if not inevitable, that the Grantee would rely on confidential information of Lilly and/or Covered Affiliate in the course of the Grantee’s work, either consciously or subconsciously, harming Lilly and any Covered Affiliates. For these and other reasons, the Grantee agrees that the restrictions above are reasonably necessary to protect Lilly’s and its Covered Affiliate’s legitimate business interests, and do so by creating a specific amount of time after the Grantee’s employment ends during which the Grantee will not be able to engage or prepare to engage in the activities above.
The Grantee and Lilly further acknowledge and agree that if any particular covenant or provision is determined to be unreasonable or unenforceable for any reason, including, without limitation, the time period, geographic area, and/or scope of activity covered by any restrictive covenant, such covenant or provision will automatically be deemed reformed so that the contested covenant or provision will have the closest effect permitted by applicable law to the original form and will be given effect and enforced as so reformed to whatever extent would be reasonable and enforceable under applicable law. Any court interpreting any restrictive covenant provision of this Award Agreement will, if necessary, reform any such provision to make it enforceable under applicable law.
This Award Agreement is intended, among other things, to supplement (and not supersede) all applicable statutes protecting trade secrets and the duties the Grantee owes to Lilly and/or Covered Affiliates under the common law, as well as any other non-competition, non-solicitation, or confidentiality provisions that the Grantee agreed to in the past, including those in the Grantee’s Employee Confidentiality and Invention Agreement, each of which remains in full force and effect, or that the Grantee agrees to in the future.
The Grantee acknowledges that a breach by the Grantee of this Award Agreement will give rise to irreparable injury to Lilly and Covered Affiliates and money damages will not be adequate relief for such injury. As a result, the Grantee agrees that Lilly (including any third party beneficiary) will be entitled to obtain equitable or injunctive relief without having to post any bond or other security to restrain or prohibit any such breach or threatened breach, in addition to any other remedies which may be available, including the recovery of monetary damages from the Grantee.
b.Remedies. If the Company determines that the Grantee has violated any applicable provisions of this Section 12, in addition to injunctive relief and damages, the Grantee agrees and covenants that: (i) the Award shall be immediately rescinded; (ii) the Grantee shall automatically forfeit any rights the Grantee may have with respect to the Award as of the date of such determination, including the rights to continue to be eligible to vest or receive a payment under the Award; and (iii) the foregoing remedies set forth in this Section 12 shall not be Lilly’s exclusive remedies. Lilly reserves all other rights and remedies available to it at law or in equity.
c.Country-Specific Conditions. In addition, the Award shall be subject to any special terms and conditions set forth in any Appendix to this Award Agreement for the Grantee’s country. Moreover, if the Grantee relocates to one of the countries included in the Appendix, the special terms and conditions for such country will apply to the Grantee, to the extent the Company determines that the application of such terms and conditions is necessary or advisable for legal or administrative reasons. The Appendix constitutes part of this Award Agreement.
d.Insider Trading / Market Abuse Laws. The Grantee may be subject to insider trading restrictions and/or market abuse laws in applicable jurisdictions, including but not limited to the United States and the Grantee’s country of residence, which may affect the Grantee’s ability to directly or indirectly, for the Grantee or for a third party, acquire or sell, or attempt to sell, or otherwise dispose of Shares, rights to acquire Shares (e.g., the Relative Value Award) under the Plan during such times as the Grantee is considered to have “inside information” regarding the Company (as determined under the laws or regulations in the applicable jurisdictions). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading policy. The Grantee acknowledges that it is his or her responsibility to comply with any applicable restrictions, and the Grantee should consult with his or her personal legal advisor on this matter.
e.Imposition of Other Requirements. The Company reserves the right to impose other requirements on the Award and any Shares acquired under the Plan, to the extent the Company determines it is
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necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Relative Value Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under Applicable Laws or any compensation recovery policy of the Company that reflects the provisions of Applicable Laws.
Section 13.Governing Law and Choice of Venue
The validity, construction, and enforcement of this Award Agreement shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws or cause the application of substantive law of any jurisdiction other than Indiana. For purposes of litigating any dispute that arises under this Award Agreement, the parties hereby submit to and consent to the jurisdiction and venue of the State of Indiana, and agree that such litigation shall be conducted exclusively in the courts having appropriate subject matter jurisdiction in Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 14.Miscellaneous Provisions
a.Notices and Electronic Delivery and Participation. Any notice to be given by the Grantee or successor Grantee shall be in writing, and any notice shall be deemed to have been given or made only upon receipt thereof by the Corporate Secretary of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any successor Grantee, at the address specified in writing to Lilly by the successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the Plan by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
b.Language. The Grantee acknowledges that he or she is proficient in the English language, or has consulted with an advisor who is sufficiently proficient in English, so as to allow the Grantee to understand the terms and conditions of this Award Agreement. If the Grantee has received this Award Agreement or any other document related to the Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.
c.Waiver. The waiver by Lilly of any provision of this Award Agreement at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this Award Agreement at any subsequent time or for any other purpose.
d.Severability and Section Headings. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.
The section headings in this Award Agreement are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
e.No Advice Regarding Grant. Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the Plan or the Grantee’s acquisition or sale of the underlying Shares. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the Plan before taking any action related to the Plan.
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Section 15.Compensation Recovery
At any time during the three years following the date on which the number of Shares eligible to vest under this Award has been determined under Section 2 above, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any Shares that have been issued or cash that has been paid pursuant to this Award if:
a.(i) the number of Shares or the amount of the cash payment was calculated based, directly or indirectly, upon the achievement of financial results that were subsequently the subject of a restatement of all or a portion of the Company’s financial statements, (ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and (iii) the number of Shares or the amount of cash payment that would have been issued or paid to the Grantee had the financial results been properly reported would have been lower than the number of Shares actually issued or the amount of cash actually paid; or
b.the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such misconduct causes significant harm to the company.
Furthermore, in the event the number of Shares issued or cash paid pursuant to this Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will (A) seek restitution of the Shares or cash paid pursuant to this Award to the extent that the number of Shares issued or the amount paid exceeded the number of Shares that would have been issued or the amount that would have been paid had the inaccuracy or error not occurred, or (B) issue additional Shares or make additional payment to the extent that the number of Shares issued or the amount paid was less than the correct amount.
This Section 15 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 16.Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this Award Agreement, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM (EDT) [•], through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM (EDT) [•], the Award will be cancelled, subject to the Committee’s discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award Agreement to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.10 — Form of Restricted Stock Unit Award under the 2002 Lilly Stock Plan
Eli Lilly and Company
Restricted Stock Unit
(for Executive Officer)
This Restricted Stock Unit Award has been granted on [•], by Eli Lilly and Company, an Indiana corporation, with its principal offices in Indianapolis, Indiana (“Lilly” or the “Company”), to Grantee.
Number of Shares: Log into Merrill Lynch recordkeeping information at http://myequity.lilly.com
Restriction Lapse: [•]
(except as otherwise provided in this instrument)
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Table of Contents
A. Recitals | 3 | ||||
B. Restricted Stock Unit | 3 | ||||
Section 1. Number of Restricted Stock Units | 3 | ||||
Section 2. Rights of the Grantee | 3 | ||||
Section 3. Restriction Period | 3 | ||||
Section 4. Retirement | 4 | ||||
Section 5. Record of the Award | 4 | ||||
Section 6. Conditions During Restriction Period | 4 | ||||
Section 7. Consequences of Breach of Conditions | 5 | ||||
Section 8. Committee Election to Pay Cash | 5 | ||||
Section 9. Lapse of Restrictions | 5 | ||||
Section 10. Revocation or Modification of Award | 6 | ||||
Section 11. Prohibition Against Transfer | 6 | ||||
Section 12. Notices, Payments and Electronic Delivery and Participation | 6 | ||||
Section 13. Waiver | 6 | ||||
Section 14. Responsibility for Taxes | 6 | ||||
Section 15. Section 409A Compliance | 7 | ||||
Section 16. Severability and Section Headings | 8 | ||||
Section 17. Determinations by Committee | 8 | ||||
Section 18. Change in Control | 8 | ||||
Section 19. Nature of 2002 Plan and Award | 9 | ||||
Section 20. No Advice Regarding Grant | 10 | ||||
Section 21. Insider Trading Restrictions/Market Abuse Laws | 10 | ||||
Section 22. Data Privacy | 10 | ||||
Section 23. Effective Date | 11 | ||||
Section 24. Governing Law and Choice of Venue | 11 | ||||
Section 25. Language | 11 | ||||
Section 26. Adjustments to Number of Shares | 11 | ||||
Section 27. Imposition of Other Requirements | 11 | ||||
Section 28. Compensation Recovery | 11 | ||||
Section 29. Award Subject to Acknowledgement of Acceptance | 12 | ||||
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A. Recitals
Under the AMENDED AND RESTATED 2002 LILLY STOCK PLAN (“2002 Plan”), the Compensation Committee (“Committee”) has determined the form of this Restricted Stock Unit Award (“Award”) and selected the Grantee, an Eligible Employee of the Company or one of its subsidiaries, to receive a Restricted Stock Unit Award. The applicable terms of the 2002 Plan are incorporated in this Restricted Stock Unit Award by reference, including the definitions of terms contained in the 2002 Plan.
B. Restricted Stock Unit
Lilly grants to the Grantee this Award of Restricted Stock Units, with each Restricted Stock Unit representing the right to receive one share of Eli Lilly and Company Common Stock (“Lilly Stock”), plus an amount of cash pursuant to Section 2 (b), subject to certain restrictions and on the terms and conditions contained in this Award and the 2002 Plan. In the event of any conflict between the terms of the 2002 Plan and this Award, the terms of the 2002 Plan shall govern, except as specifically provided in Sections 3, 7 and 9.
Section 1. Number of Restricted Stock Units
Subject to adjustment as provided in Section 26, the Grantee may receive the number of shares of Lilly Stock as outlined on the first page of this document.
Section 2. Rights of the Grantee
a.No Shareholder Rights. The Restricted Stock Units granted pursuant to this Award do not and shall not entitle Grantee to any rights of a shareholder of Lilly Stock until the Restricted Stock Units vest and shares of Lilly Stock are issued or transferred. No shares of Lilly Stock shall be issued or transferred to Grantee prior to the date on which the Restricted Stock Units vest and the restrictions with respect to the Restricted Stock Units lapse. The rights of Grantee with respect to the Restricted Stock Units shall remain forfeitable at all times prior to the date on which the Restricted Stock Units become vested and the restrictions with respect to the Restricted Stock Units lapse.
b.Dividend Equivalent Units. As long as the Grantee holds Restricted Stock Units granted pursuant to this Award, the Company shall accrue for the Grantee, on each date that the Company pays a cash dividend to holders of Lilly Stock, Dividend Equivalent Units equal to the total number of Restricted Stock Units credited to the Grantee under this Award multiplied by the dollar amount of the cash dividend paid per share of Lilly Stock by the Company on such date. Dividend Equivalent Units shall accrue in an account denominated in U.S. dollars and shall not accrue interest or other credits prior to being paid. The accrued Dividend Equivalent Units shall be subject to the same restrictions as the Restricted Stock Units to which the Dividend Equivalent Units relate, and the Dividend Equivalent Units shall be forfeited in the event that the Restricted Stock Units with respect to which such Dividend Equivalent Units were credited are forfeited.
c.No Trust; Grantee’s Rights Unsecured. Neither this Award nor any action pursuant to or in accordance with this Award shall be construed to create a trust of any kind. The right of Grantee to receive payments of cash or Lilly Stock under this Award shall be an unsecured claim against the general assets of the Company.
Section 3. Restriction Period
The period of restriction (“Restriction Period”) under this Award shall commence on the effective date of the Award and expire at the close of business on the earliest of the following dates:
a.[•], or
b.the date the Grantee’s employment is subject to a Qualifying Termination.
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A “Qualifying Termination” means any one of the following:
(i)the date of death of the Grantee while in the active service of the Company or any subsidiary;
(ii)the date the Grantee’s employment is terminated by reason of “disability,” within the meaning of Section 409A of the U.S. Internal Revenue Code (the “Code”);
(iii)the date the Grantee suffers a “separation from service” from Lilly or the Employer, within the meaning of Section 409A of the Code (a “Section 409A Separation”), and such separation from service is due to a plant closing or reduction in workforce as defined below, or, in the event that the Award constitutes an item of non-qualified deferred compensation subject to Section 409A of the Code, the date that the Grantee suffers a Section 409A Separation;
(iv)the date the Grantee’s employment is terminated as a result of the Grantee’s failure to locate a position within the Company or any of its subsidiaries or affiliates following the placement of the Grantee on reallocation or medical reassignment in the United States (or its equivalent outside the United States as determined by the Committee).
Plant closing means the closing of a plant site or other corporate location that directly results in termination of employment. Reduction in workforce means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of employment.
The Committee’s determination as to whether (i) the Grantee’s employment has been terminated by reason of disability, (ii) a leave of absence or a transfer of employment between Lilly and a subsidiary or between Lilly subsidiaries constitutes a termination of employment, (iii) a Grantee’s termination is a direct result of either a plant closing or a reduction in workforce, or (iv) the Grantee’s employment has been terminated as a result of the failure to locate a position within the Company or any of its subsidiaries or affiliates following reallocation or medical reassignment (or its equivalent outside the United States as determined by the Committee), shall be final and binding on the Grantee. Notwithstanding anything in Section 10(a) of the 2002 Plan to the contrary, the Committee shall not modify the expiration dates set forth in this Award so as to accelerate the termination of the Restriction Period.
Section 4. Retirement
In the event the Grantee’s employment is terminated due to retirement, the Award will continue pursuant to the established Restriction Period schedule. The Award will be paid in full to the retiree upon the lapse of all restrictions as noted in Section 9. A retiree is a person who is (i) a retired employee under the Lilly Retirement Plan; (ii) a retired employee under the retirement plan or program of a Lilly subsidiary; or (iii) a retired employee under a retirement program specifically approved by the Committee.
A Grantee who has not received a year-end individual performance rating and (i) is on employment probation (or its equivalent outside the United States, as determined by the Committee) for unsatisfactory performance and takes retirement in lieu of a termination of employment; or (ii) takes retirement in lieu of termination of employment because of an immediately terminable offense (e.g., absence of three days without notice, insubordination, violation of substance abuse policy, possession of firearms, misconduct) will not be considered to have terminated due to retirement as described herein.
Section 5. Record of the Award
During the Restriction Period, records of the Award and accumulated Dividend Equivalent Units will reside in an account at the Company or an Equity Administration Agent designated by the Company.
Section 6. Conditions During Restriction Period
a.During the entire Restriction Period, the employment of the Grantee with the Company (or a subsidiary of the Company) must not terminate except for reasons specified in Sections 3(b) or 4. “Termination of
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employment” shall mean the cessation for any reason of the relationship of employer and employee between the Grantee and the Company (or a subsidiary of the Company).
b.The Committee may, at its discretion, cancel this Restricted Stock Unit Award or reduce the number of Restricted Stock Units and any accrued Dividend Equivalent Units, prorated according to time or other measure as deemed appropriate by the Committee, if during any portion of the Award Period, including the Restriction Period, the Grantee has been (i) subject to disciplinary action by the Company, or (ii) determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the Company.
Section 7. Consequences of Breach of Conditions
If any of the conditions that must continue to be satisfied during the Restriction Period under Section 6(a) is breached during the Restriction Period, either by act of the Grantee or otherwise, the Grantee, by accepting this Award, agrees that upon such breach all interest of the Grantee in the Restricted Stock Units and associated Dividend Equivalent Units shall terminate and be forfeited.
The Committee’s determination regarding the conditions specified in Section 6 (and any breach thereof) shall be final and binding on the Grantee. The Company shall incur no liability to the Grantee under this Award by terminating the Grantee's status as an Eligible Employee, whether by action with respect to the Grantee individually, either with or without cause, or by dissolution or liquidation of Lilly or merger or consolidation of Lilly with a corporation in which Lilly is not the surviving corporation, or otherwise. Notwithstanding anything in Section 10(a) of the 2002 Plan to the contrary, the Committee shall not waive the breach of the conditions set forth in Section 6.
Section 8. Committee Election to Pay Cash
At any time during the Restriction Period or until paid in accordance with Section 9, the Committee may, if it so elects, determine to pay part or all of the Restricted Stock Units in cash in lieu of issuing or transferring shares of Lilly Stock. The amount of cash shall be based upon the fair market value of Lilly Stock at the end of the Restriction Period as outlined in Section 9.
Section 9. Lapse of Restrictions
At the end of the Restriction Period, if the conditions specified in Section 6 have not been breached during the Restriction Period, all restrictions shall terminate. The Award shall be paid to Grantee within a sixty-day period starting the day after the end of the Restriction Period and ending on the sixtieth day after the end of the Restriction Period, but no later than December 31 of the year in which the Restriction Period ends, as follows:
a.Lilly shall issue or transfer to the Grantee shares of Lilly Stock or the cash equivalent, as described in Section 8 above, equal to one share per Restricted Stock Unit subject to the withholding tax provisions in Section 14 below. In the event Grantee is entitled to a fractional share, the fraction may be paid in cash or rounded, in the Committee’s discretion.
b.Lilly shall pay to the Grantee in cash all accrued Dividend Equivalent Units following deduction for Tax-Related Items in accordance with Section 13 below.
In the event that the Restriction Period ends by reason of death of the Grantee, the payments as described above shall be made to the Successor Grantee. Notwithstanding anything in Section 10(a) of the 2002 Plan to the contrary, the Committee shall not direct that the restrictions on this Award will lapse other than as expressly set forth in this Award. Notwithstanding the foregoing, if the Grantee is treated as a “specified employee” within the meaning of Section 409A of the Code as of the date of any payment hereunder, the commencement of any payment shall be delayed in accordance with Section 15 below.
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Section 10. Revocation or Modification of Award
This Award shall be irrevocable except that Lilly shall have the right to revoke or modify this Award under Sections 13(e) and/or 13(k) of the 2002 Plan or pursuant to Section 7 above or Section 27 below.
Section 11. Prohibition Against Transfer
The right of a Grantee to receive payments of Lilly Stock and/or cash under this Award may not be transferred except to a duly appointed guardian of the estate of Grantee or to a Successor Grantee by will or the applicable laws of descent and distribution and then only subject to the provisions of this Award. A Grantee may not assign, sell, pledge, or otherwise transfer Lilly Stock or cash to which he or she may be entitled hereunder prior to transfer or payment thereof to the Grantee, and any such attempted assignment, sale, pledge or transfer shall be void.
Section 12. Notices, Payments and Electronic Delivery and Participation
Any notice to be given by the Grantee or Successor Grantee shall be in writing, and any notice or payment shall be deemed to have been given or made only upon receipt thereof by the Treasurer of Lilly at Lilly Corporate Center, Indianapolis, Indiana 46285, U.S.A. Any notice or communication by Lilly in writing shall be deemed to have been given in the case of the Grantee if mailed or delivered to the Grantee at any address specified in writing to Lilly by the Grantee and, in the case of any Successor Grantee, at the address specified in writing to Lilly by the Successor Grantee. In addition, Lilly may, in its sole discretion, decide to deliver any documents related to the Award and participation in the 2002 Plan by electronic means or request the Grantee’s consent to participate in the 2002 Plan by electronic means. By accepting this Award, the Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the 2002 Plan through an on-line or electronic system established and maintained by Lilly or a third party designated by Lilly.
Section 13. Waiver
The waiver by Lilly of any provision of this instrument at any time or for any purpose shall not operate as or be construed to be a waiver of the same or any other provision of this instrument at any subsequent time or for any other purpose.
Section 14. Responsibility for Taxes
Regardless of any action Lilly and/or the Grantee’s employer (the “Employer”) takes with respect to any or all income tax (including federal, state, local and non-U.S. tax), social insurance, payroll tax, fringe benefits tax, payment on account or other tax-related items related to the Grantee’s participation in the 2002 Plan and legally applicable to the Grantee (“Tax Related Items”), the Grantee acknowledges that the ultimate liability for all Tax Related Items is and remains the Grantee’s responsibility and may exceed the amount actually withheld by Lilly or the Employer. The Grantee further acknowledges that Lilly and the Employer (a) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Restricted Stock Units, the accrual of Dividend Equivalent Units, the vesting of the Restricted Stock Units and the lapse of restrictions, the transfer and issuance of any shares of Lilly Stock, the receipt of any cash payment pursuant to the Award, the receipt of any dividends and the sale of any shares of Lilly Stock acquired pursuant to this Award; and (b) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Grantee’s liability for Tax Related Items or achieve any particular tax result. Furthermore, if the Grantee becomes subject to Tax Related Items in more than one jurisdiction, the Grantee acknowledges that the Company and/or the Employer (or former employer, as applicable) may be required to withhold or account for Tax Related Items in more than one jurisdiction.
Prior to the applicable taxable or tax withholding event, as applicable, the Grantee shall pay or make adequate arrangements satisfactory to Lilly and/or the Employer to satisfy all Tax Related Items.
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a.In the case of Dividend Equivalent Units paid to the Grantee in cash and in the case of any Restricted Stock Units paid to the Grantee in cash in lieu of shares of Lilly Stock, the Grantee authorizes the Company and/or the Employer, or their respective agents, at their discretion, to satisfy any obligation for Tax Related Items by withholding from the cash amount paid to the Grantee pursuant to the Award or from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer.
b.If the Restricted Stock Units are paid in shares of Lilly Stock and the Grantee is not subject to the short-swing profit rules of Section 16(b) of the 1934 Act, the Grantee authorizes Lilly and/or the Employer, or their respective agents, at their discretion, to (i) withhold from the Grantee’s wages or other cash compensation paid to the Grantee by the Company and/or the Employer, (ii) arrange for the sale of shares of Lilly Stock to be issued upon the expiration of the Restriction Period (on the Grantee’s behalf and at the Grantee’s direction pursuant to this authorization or such other authorization as the Grantee may be required to provide to Lilly or its designated broker in order for such sale to be effectuated) and withhold from the proceeds of such sale, and/or (iii) withhold in shares of Lilly Stock otherwise issuable to the Grantee pursuant to this Award.
c.If the Restricted Stock Units are paid in shares of Lilly Stock and the Grantee is subject to the short-swing profit rules of Section 16(b) of the 1934 Act, Lilly will withhold in shares of Lilly Stock otherwise issuable to the Grantee pursuant to this Award, unless the use of such withholding method is prevented by applicable law or has materially adverse accounting or tax consequences, in which case the withholding obligation for Tax Related Items may be satisfied by one or a combination of the methods set forth in Section 14(b)(i) and (ii) above.
Depending on the withholding method, Lilly and/or the Employer may withhold or account for Tax Related Items by considering applicable minimum statutory withholding amounts or other applicable withholding rates, including maximum applicable rates, in which case the Grantee may receive a refund of any over-withheld amount in cash as soon as practicable and without interest and will not be entitled to the equivalent amount in shares of Lilly Stock. If the obligation for Tax Related Items is satisfied by withholding shares of Lilly Stock as described in Section 14(b)(iii) or Section 14(c) above, for tax purposes, the Grantee will be deemed to have been issued the full number of shares of Lilly Stock to which he or she is entitled pursuant to this Award, notwithstanding that a number of shares of Lilly Stock are withheld to satisfy the obligation for Tax Related Items. Lilly may require the Grantee to pay Lilly and/or the Employer any amount of Tax Related Items that Lilly and/or the Employer may be required to withhold or account for as a result of any aspect of this Award that cannot be satisfied by the means previously described. Lilly may refuse to deliver shares of Lilly Stock or any cash payment to the Grantee if the Grantee fails to comply with the Grantee’s obligation in connection with the Tax Related Items as described in this Section 14.
Section 15. Section 409A Compliance
To the extent applicable, it is intended that this Award comply with the requirements of Section 409A of the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations and other guidance issued thereunder (“Section 409A”) and this Award shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A. Notwithstanding anything elsewhere in this Award to the contrary, if the Award constitutes an item of non-qualified deferred compensation subject to Section 409A (“NQ Deferred Compensation”) and the Grantee is treated as a “specified employee” as of the date of any payment pursuant to the Award in connection with the Grantee’s Section 409A Separation, as determined by the Company in accordance with its procedures, then, to the extent required, the Award shall be paid on the earliest of (a) the date set forth in Section 3(a), (b) the first day following the six (6) month anniversary of the Grantee’s Section 409A Separation, (c) the date of a “change in control event” within the meaning of Section 409A (a “Section 409A CIC”), and (c) the date of the Grantee’s death. This Award is subject to Section 13(k) of the 2002 Plan concerning Section 409A.
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Section 16. Severability and Section Headings
If one or more of the provisions of this instrument shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this instrument to be construed so as to foster the intent of this Award and the 2002 Plan.
The section headings in this instrument are for convenience of reference only and shall not be deemed a part of, or germane to, the interpretation or construction of this instrument.
Section 17. Determinations by Committee
Determinations by the Committee pursuant to any provision of the 2002 Plan, pursuant to rules, regulations, and procedures adopted by the Committee, or pursuant to this instrument, including what constitutes “misconduct” for purposes of Section 28 below and any other determinations under Section 28, shall be final and binding on the Grantee and any Successor Grantee.
Section 18. Change in Control
The provisions of Section 12(a) of the 2002 Plan apply to this Award with the following modifications:
a.The only Change in Control event that shall result in a benefit under this Section 18 shall be the consummation of a change in ownership of the Company as defined in Section 12(b)(i) of the 2002 Plan (a “Transaction”).
b.In the event that the acquiring entity or successor to the Company does not assume, continue or substitute the Award in connection with the Transaction, then the Company shall issue or transfer to the Grantee shares of Lilly Stock, as noted in Section 9, immediately prior to the consummation of the Transaction in order to allow the shares of Lilly Stock to be outstanding and for the Grantee to be eligible to receive the consideration being paid to Lilly shareholders in connection with the Transaction; provided, however, that if (i) the Grantee is subject to U.S. taxation and (ii) the Award constitutes NQ Deferred Compensation and the Transaction is not a Section 409A CIC, then the Grantee shall receive an equivalent amount in cash (based on the fair market value of the Lilly Stock at the time of the consummation of the Transaction) at the time provided under Section 9.
c.In the event that the acquiring entity or successor to the Company assumes, continues or substitutes the Award in connection with the Transaction and the Grantee is subject to a Covered Termination (as defined below) prior to the end of the Restriction Period, the Award shall vest automatically in full and shall be settled in stock of the acquiring or successor corporation within sixty (60) days of the date of the Covered Termination; provided however, that in the event that the Award constitutes NQ Deferred Compensation, the Award shall instead be settled within sixty (60) days of a Covered Termination that also constitutes a Section 409A Separation, but in no event later than December 31 of the year in which the Section 409A Separation occurs.
“Covered Termination” for purposes of this Award shall mean a Qualifying Termination, Grantee’s termination due to retirement, Grantee’s termination without Cause or the Grantee’s resignation for Good Reason. “Cause” and “Good Reason” shall have the meanings ascribed to them in the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Employees or the Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees (both as amended from time to time) or any successor plan or arrangement thereto, as applicable.
If the Grantee is entitled to receive stock of the acquiring entity or successor to the Company as a result of the application of this Section 18, then references to shares of Lilly Stock in this instrument shall be read to mean stock of the acquiring entity or successor to the Company as and when applicable.
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Section 19. Nature of 2002 Plan and Award
In accepting this Award, the Grantee acknowledges, understands and agrees that:
a.the 2002 Plan is established voluntarily by Lilly, it is discretionary in nature and it may be modified, amended, suspended or terminated by Lilly at any time, as provided in the 2002 Plan;
b.the Award is voluntary and occasional and does not create any contractual or other right to receive future awards of Restricted Stock Units and/or Dividend Equivalent Units, or benefits in lieu thereof, even if Restricted Stock Units and/or Dividend Equivalent Units have been granted in the past;
c.all decisions with respect to future awards of Restricted Stock Units, Dividend Equivalent Units or other grants, if any, will be at the sole discretion of the Committee;
d.the Grantee’s participation in the 2002 Plan is voluntary;
e.the Award and any shares of Lilly Stock subject to the Award are not intended to replace any pension rights or compensation;
f.the Award and any shares of Lilly Stock subject to the Award, and the income and value of same, are not part of normal or expected compensation for purposes of calculating any severance, resignation, termination, redundancy, dismissal, end of service payments, bonuses, long-service awards, holiday pay, leave pay, pension or welfare or retirement benefits or similar payments;
g.unless otherwise agreed with Lilly, the Award and any shares of Lilly Stock subject to the Award, and the income and value of same, are not granted as consideration for, or in connection with, the service the Grantee may provide as a director of a subsidiary of Lilly;
h.neither the Award nor any provision of this instrument, the 2002 Plan or the policies adopted pursuant to the 2002 Plan confer upon the Grantee any right with respect to employment or continuation of current employment, and in the event that the Grantee is not an employee of Lilly or any subsidiary of Lilly, the Award shall not be interpreted to form an employment contract or relationship with Lilly or any subsidiary of Lilly;
i.the future value of the underlying shares of Lilly Stock is unknown, indeterminable and cannot be predicted with certainty;
j.the value of shares of Lilly Stock acquired upon lapse of the Restriction Period may increase or decrease, even below the tax valuation price;
k.no claim or entitlement to compensation or damages shall arise from forfeiture of the Award resulting from the Grantee ceasing to provide employment or other services to Lilly or the Employer (for any reason whatsoever, whether or not later found to be invalid or in breach of local labor laws in the jurisdiction where the Grantee is employed or the terms of Grantee’s employment agreement, if any);
l.for purposes of the Award, the Grantee’s employment will be considered terminated as of the date he or she is no longer actively providing services to the Company or a subsidiary of the Company and the Grantee’s right, if any, to earn and be paid any portion of the Award after such termination of employment or services (regardless of the reason for such termination and whether or not such termination is later found to be invalid or in breach of employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee's employment agreement, if any) will be measured by the date the Grantee ceases to actively provide services and will not be extended by any notice period (e.g., active service would not include any contractual notice period or any period of “garden leave” or similar period mandated under employment laws in the jurisdiction where the Grantee is employed or the terms of the Grantee's employment agreement, if any); the Committee shall have the exclusive discretion to determine when the Grantee is no longer actively providing services for purposes of the Award (including whether the Grantee may still be considered to be actively providing services while on a leave of absence); and
m.unless otherwise provided in the 2002 Plan or by the Committee in its discretion, the Award and the benefits evidenced by this Award do not create any entitlement to have the Award or any such benefits transferred to, or assumed by, another company nor to be exchanged, cashed out
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or substituted for, in connection with any corporate transaction affecting the shares of Lilly Stock.
Section 20. No Advice Regarding Grant
Lilly is not providing any tax, legal or financial advice, nor is Lilly making any recommendations regarding the Grantee’s participation in the 2002 Plan or the Grantee’s acquisition or sale of the underlying shares of Lilly Stock. The Grantee should consult with his or her own personal tax, legal and financial advisors regarding the Grantee’s participation in the 2002 Plan before taking any action related to the 2002 Plan.
Section 21. Insider Trading Restrictions/Market Abuse Laws
The Grantee acknowledges that he or she may be subject to insider trading restrictions and/or market abuse laws in applicable jurisdictions, including but not limited to the United States and the Grantee’s country of residence, which may affect the Grantee’s ability to directly or indirectly, for the Grantee or for a third party, acquire or sell, or attempt to sell, or otherwise dispose of shares of Lilly Stock or rights to acquire shares of Lilly Stock (e.g., Restricted Stock Units) under the 2002 Plan during such times as the Grantee is considered to have “inside information” regarding the Company (as determined under the laws or regulations in the applicable jurisdictions). Any restrictions under these laws or regulations are separate from and in addition to any restrictions that may be imposed under any applicable Company insider trading policy. The Grantee acknowledges that it is his or her responsibility to comply with any applicable restrictions, and the Grantee should consult with his or her personal legal advisor on this matter.
Section 22. Data Privacy
The Grantee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Grantee’s personal data as described in this Award and any other Award materials by and among, as applicable, the Employer, Lilly, its subsidiaries and its affiliates for the exclusive purpose of implementing, administering and managing the Grantee’s participation in the 2002 Plan.
The Grantee understands that Lilly and the Employer may hold certain personal information about the Grantee and persons closely associated with the Grantee, including, but not limited to, the Grantee’s name, home address and telephone number, email address, date of birth, social insurance, passport, or other identification number (e.g. resident registration number), salary, nationality, job title, any shares of stock or directorships held in Lilly, details of all Awards or any other entitlement to shares of stock awarded, canceled, vested, unvested or outstanding in the Grantee’s favor, for the purpose of implementing, administering and managing the 2002 Plan (“Data”).
The Grantee understands that Data will be transferred to Merrill Lynch, KPMG and/or any other stock plan service provider or tax or legal advisor as may be selected by the Company in the future, which is assisting in the implementation, administration and management of the 2002 Plan. Where required under applicable law, Data may also be disclosed to certain securities or other regulatory authorities where Lilly's securities are listed or traded or regulatory filings are made. The Grantee understands that these recipients may be located in the Grantee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Grantee’s country. The Grantee understands that he or she may request a list with the names and addresses of any potential recipients of Data by contacting the Grantee’s local human resources representative. The Grantee authorizes the Company, Merrill Lynch, KPMG and any other possible recipients which may assist the Company (presently or in the future) with implementing, administering, and managing the 2002 Plan to receive, possess, use, retain and transfer Data, in electronic or other form, for the sole purpose of implementing, administering and managing the Grantee’s participation in the 2002 Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom any shares or cash received pursuant to the Award may be deposited. The Grantee understands that Data will be held only as long as is necessary to implement, administer and manage the Grantee’s participation in the 2002 Plan. The Grantee understands that the Grantee may, at any time, request an equity award transaction statement, request any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Grantee’s local human
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resources representative. Further, the Grantee understands that he or she is providing the consents herein on a purely voluntary basis. If the Grantee does not consent, or if the Grantee later seeks to revoke his or her consent, the Grantee’s employment status or service with the Employer will not be affected; the only consequence of refusing or withdrawing the Grantee’s consent is that the Company would not be able to grant the Grantee the Award or other equity awards or administer or maintain such awards. Therefore, the Grantee understands that refusal or withdrawal of consent may affect the Grantee’s ability to participate in the 2002 Plan. For more information on the consequences of the Grantee’s refusal to consent or withdrawal of consent, the Grantee understands that the Grantee may contact the Grantee’s local human resources representative.
Finally, upon request of the Company or the Employer, the Grantee agrees to provide an executed data privacy consent form (or any other agreements or consents) that the Company and/or the Employer may deem necessary to obtain from the Grantee for the purpose of administering the Grantee’s participation in the 2002 Plan in compliance with the data privacy laws in the Grantee’s country, either now or in the future. The Grantee understands and agrees that he or she will not be able to participate in the 2002 Plan if he or she fails to provide any such consent or agreement requested by the Company and/or the Employer.
Section 23. Effective Date
The effective date of this instrument shall be the date of grant.
Section 24. Governing Law and Choice of Venue
The validity and construction of this Award shall be governed by the laws of the State of Indiana, U.S.A. without regard to laws that might cause other law to govern under applicable principles of conflict of laws. For purposes of litigating any dispute that arises under this Award, the parties hereby submit to and consent to the jurisdiction of the State of Indiana, and agree that such litigation shall be conducted in the courts of Marion County, Indiana, or the federal courts for the United States for the Southern District of Indiana, and no other courts, where this Award is granted and/or to be performed.
Section 25. Language
If the Grantee has received this instrument or any other document related to the 2002 Plan translated into a language other than English and if the meaning of the translated version is different than the English version, the English version will control.
Section 26. Adjustments to Number of Shares
The number of shares of Lilly Stock subject to this Award shall be subject to adjustment in accordance with the provisions of Section 4(b) of the 2002 Plan for certain corporate recapitalizations and other events.
Section 27. Imposition of Other Requirements
The Company reserves the right to impose other requirements on the Award and any shares of Lilly Stock acquired under the 2002 Plan, to the extent the Company determines it is necessary or advisable for legal or administrative reasons, and to require the Grantee to execute any additional agreements or undertakings that may be necessary to accomplish the foregoing. Without limitation to the foregoing, the Grantee agrees that the Restricted Stock Unit Award and any benefits or proceeds the Grantee may receive hereunder shall be subject to forfeiture and/or repayment to the Company to the extent required to comply with any requirements imposed under applicable laws or any compensation recovery policy of the Company that reflects the provisions of applicable laws.
Section 28. Compensation Recovery
At any time during the three years following the date on which the number of shares of Lilly Stock subject to this Award was determined, the Company reserves the right to and, in appropriate cases, will seek restitution of all or part of any shares of Lilly Stock subject to or issued (or cash paid) pursuant to this Award if:
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a. (i) the number of shares of Lilly Stock subject to the Award was calculated based, directly or indirectly, upon the achievement of financial results (e.g., earnings per share) that were subsequently the subject of restatement of all or a portion of the Company’s financial statements;
(ii) the Grantee engaged in intentional misconduct that caused or partially caused the need for such a restatement; and
(iii) the number of shares of Lilly Stock that would have been subject to the Award had the financial results been properly reported would have been lower than the number of shares of Lilly Stock actually subject to the Award.
b. the Grantee has been determined to have committed a material violation of law or Company policy or to have failed to properly manage or monitor the conduct of an employee who has committed a material violation of law or Company policy whereby, in either case, such conduct causes significant harm to the company.
In the event the number of shares of Lilly Stock subject to the Award is determined to have been based on materially inaccurate financial statements or other Company performance measures or on calculation errors (without any misconduct on the part of the Grantee), the Company reserves the right to and, in appropriate cases, will:
a.seek restitution of the shares of Lilly Stock subject to or issued (or cash paid) pursuant to this Award to the extent that the number of shares of Lilly Stock subject to the Award exceeded the number of shares of Lilly Stock that would have been subject to the Award had the inaccuracy or error not occurred, or
b.issue additional shares of Lilly Stock or make additional cash payment to the extent that the number of shares of Lilly Stock subject to the Award was less than the correct amount.
This Section 28 is not intended to limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its reoccurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner it deems appropriate.
Section 29. Award Subject to Acknowledgement of Acceptance
Notwithstanding any provisions of this instrument, the Award is subject to acknowledgement of acceptance by the Grantee prior to 4:00 PM. (EDT) [•] through the website of Merrill Lynch, the Company’s stock plan administrator. If the Grantee does not acknowledge acceptance of the Award prior to 4:00 PM. (EDT) [•], the Award will be cancelled, subject to the Committee's discretion for unforeseen circumstances.
IN WITNESS WHEREOF, Lilly has caused this Award to be executed in Indianapolis, Indiana, by its proper officer.
ELI LILLY AND COMPANY
By: _________________________
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Exhibit 10.14 — The Eli Lilly and Company Bonus Plan, as amended
The Eli Lilly and Company Bonus Plan
(as amended effective August 26, 2020)
TABLE OF CONTENTS
SECTION 1. PURPOSE | 1 | ||||
SECTION 2. DEFINITIONS | 1 | ||||
SECTION 3. ADMINISTRATION | 6 | ||||
SECTION 4. PARTICIPATION IN THE PLAN | 7 | ||||
SECTION 5. DEFINITION AND COMPUTATION OF COMPANY BONUS | 7 | ||||
SECTION 6. TIME OF PAYMENT | 11 | ||||
SECTION 7. ADMINISTRATIVE GUIDELINES | 12 | ||||
SECTION 8. MISCELLANEOUS | 12 | ||||
SECTION 9. AMENDMENT, SUSPENSION, OR TERMINATION | 13 | ||||
The Eli Lilly and Company Bonus Plan
(as amended effective August 26, 2020)
SECTION 1. PURPOSE
The purpose of The Eli Lilly and Company Bonus Plan is to encourage and promote eligible employees to create and deliver innovative pharmaceutical-based health care solutions that enable people to live longer, healthier and more active lives, to outgrow our competitors through a constant stream of pharmaceutical innovation, and to materially increase shareholder value. The Plan is designed to accomplish the following key objectives:
a.motivate superior employee performance through the implementation of a performance-based bonus system for all eligible management employees, United States employees (including those in Puerto Rico) and other employees as may be designated from time to time;
b.create a direct relationship between key company measurements and individual bonus payouts; and
c.enable the Company to attract and retain employees that will be instrumental in driving sustained growth and performance of Eli Lilly and Company by providing a competitive bonus program that rewards outstanding performance consistent with the Company’s mission, values and increased shareholder value.
SECTION 2. DEFINITIONS
The following words and phrases as used in this Plan will have the following meanings unless a different meaning is clearly required by the context. Masculine pronouns will refer both to males and to females:
2.1 Applicable Year means the calendar year immediately preceding the year in which payment of the Company Bonus is payable pursuant to Section 6. For example, the Applicable Year for 2020 payout is January 1, 2019 through December 31, 2019.
2.2 Bonus Target means the percentage of Participant Earnings for each Participant as described in Section 5.6(a) below.
2.3 Code means the Internal Revenue Code of 1986, as amended from time to time.
2.4 Committee means (i) with respect to the Executive Officers of Lilly, the Compensation Committee, the members of which will be selected by the Board of Directors of Lilly, from among its members; and (ii) with respect to all other Eligible Employees, the Compensation Committee of the Board of Directors or its designee.
2.5 Company means Eli Lilly and Company and its subsidiaries.
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2.6 Company Bonus means the amount of bonus compensation payable to a Participant as described in Section 5 below. Notwithstanding the foregoing, however, the Committee may determine, in its sole discretion, to reduce the amount of a Participant’s Company Bonus if such Participant becomes eligible to participate in such other bonus program of the Company as may be specifically designated by the Committee. Such reduction may be by a stated percentage up to and including 100% of the Company Bonus.
2.7 Company Performance Bonus Multiple means the amount as calculated in Sections 5.3 and 5.4 below.
2.8 Disabled means a Participant who (i) has become eligible for a payment under The Lilly Long-Term Disability Plan, assuming eligibility to participate in that plan, or (ii) for those employees ineligible to participate in The Lilly Long-Term Disability Plan, has become otherwise “disabled” under the applicable disability benefit plan or program for the Participant, or, in the event that there is no such disability benefit plan or program, has become disabled under applicable local law.
2.9 Earnings Per Share (EPS) means the diluted earnings per share of the Company as reported in the Company’s “Consolidated Statements of Income” in accordance with generally accepted accounting principles and Section 3.4 below.
2.10 Earnings Per Share Change (EPS Change) means the percentage increase or decrease in EPS in the Applicable Year compared to the prior year.
2.11 Effective Date means January 1, 2004, as amended from time to time.
2.12 Eligible Employee means:
a.with respect to employees of Lilly, Lilly USA, LLC., ImClone Systems LLC or Lilly’s subsidiaries with operations in Puerto Rico, a person (1) who is employed as an employee by the Company on a scheduled basis of twenty (20) or more hours per week and is scheduled to work at least five (5) months per year; and (2) who is receiving compensation, including short-term disability under The Lilly Short-Term Disability Program or similar short-term disability program, from the Company for services rendered as an employee. Notwithstanding anything herein to the contrary, the term “Eligible Employee” will not include:
(1)a person who has reached Retirement with the Company;
(2)a person who is Disabled;
(3)a person who is a “leased employee” within the meaning of Section 414(n) of the Internal Revenue Code of 1986, as amended, or whose basic compensation for services on behalf of the Company is not paid directly by the Company;
(4)a person who is classified as a “Fixed Duration Employee”, as that term is used by Lilly, except as otherwise designated by the Committee;
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(5)a person who is classified as a special status employee because his employment status is temporary, seasonal, or otherwise inconsistent with regular employment status;
(6)a person who is eligible to participate in the Eli Lilly and Company Prem1er Rewards Plan, a bonus or incentive plan for eligible employees of Loxo Oncology, Inc. or such other Company bonus or incentive program as may be specifically designated by the Committee or its designee; or
(7)a person who submits to the Committee in writing a request that he not be considered eligible for participation in the Plan or is a member of the Board of Directors of Lilly unless he or she is also an Eligible Employee.
(8)any other category of employees designated by the Committee in its discretion with respect to any Applicable Year.
b.with respect to those employees who are employed by the Company, but not by Lilly, Lilly USA, LLC., or a Puerto Rican subsidiary, an employee of the Company designated by the Committee as a Participant in the Plan with respect to any Applicable Year. In its discretion, the Committee may designate Participants either on an individual basis or by determining that all employees in specified job categories, classifications, levels, subsidiaries or other appropriate classification will be Participants.
c.Notwithstanding anything herein to the contrary, the term Eligible Employee will not include any person who is not so recorded on the payroll records of the Company, including any such person who is subsequently reclassified by a court of law or regulatory body as a common law employee of the Company. Consistent with the foregoing, and for purposes of clarification only, the term employee or Eligible Employee does not include any individual who performs services for the Company as an independent contractor or under any other non-employee classification.
2.13 Lilly means Eli Lilly and Company.
2.14 Lilly Executive Officer means a Participant who has been designated by the Board of Directors of Lilly as an executive officer pursuant to Rule 3b7 under the Securities Exchange Act of 1934, as amended, and who has remained in an executive officer position through the end of the Applicable Year
2.15 Participant means an Eligible Employee who is participating in the Plan.
2.16 Participant Earnings means (A) those amounts described below that are paid during the portion of the Applicable Year during which the employee is a Participant in the Plan:
(i)regular compensation (including applicable deferred compensation amounts), overtime, shift premiums and other forms of additional compensation determined by and paid currently pursuant to an established formula or procedure;
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(ii)salary reduction contributions to The Lilly Employee 401(k) Plan or elective contributions under any similar tax-qualified plan that is intended to meet the requirements of Section 401(k) of the Internal Revenue Code or similar Company savings program;
(iii)elective contributions to any cafeteria plan that is intended to meet the requirements of Section 125 of the Internal Revenue Code or other pre-tax contributions to a similar Company benefit plan;
(iv)payments made under the terms of The Lilly Short-Term
(v)Disability Program or other similar Company or government-required leave program during an Applicable Year to a Participant who is on approved leave of absence and is receiving one hundred percent (100%) of his base pay;
(vi)the July 2020 onetime amount designated by Lilly as a “special payment” for Eligible Employees in the United States in connection with the Company’s implementation of Workday; and
(vii)other legally-mandated or otherwise required pre-tax deductions from a Participant’s base salary.
(B) The term "Participant Earnings" does not include:
(i)compensation paid in lieu of earned vacation;
(ii)amounts contributed to the Retirement Plan or any other qualified plan, except as provided in clause (A)(ii), above;
(iii)payments made under the terms of The Lilly Short-Term Disability Program or other similar Company or government-required leave program during an Applicable Year to a Participant who is on approved leave of absence and is receiving less than the full amount of his base pay;
(iv)amounts paid under this Plan or other bonus or incentive program of the Company;
(v)payments made under The Lilly Severance Pay Plan, The Severance Pay Plan for Eli Lilly Affiliate Employees in Puerto Rico or any other severance-type benefit (whether company-sponsored or mandated by law) arising out of or relating to a Participant’s termination of employment;
(vi)payments based upon the discretion of the Company except as described above with respect to the July 2020 “special payment” in conjunction with the Company’s implementation of Workday;
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(vii)in the case of a person employed by a Lilly subsidiary, foreign service, cost of living, or other allowances that would not be paid were the person employed by Lilly;
(viii)amounts paid as commissions, sales bonuses, or Market Premiums (as defined under the Retirement Plan); or
(ix)earnings with respect to the exercise, vesting, or payment of any equity-based awards, including but not limited to stock options, restricted stock units, restricted stock, and performance share units.
2.17 Performance Benchmarks mean the amounts as calculated in Section 5.3 below. The Performance Benchmarks will be established based on Lilly’s internal business plan as reviewed and approved by the Board of Directors of the Company and based on performance measures as described in Section 5.2.
2.18 Pipeline Metrics mean the measurements of the Company’s research and development pipeline established and approved by the Compensation Committee in consultation with the Science and Technology Committee of the Board of Directors of Lilly to be used for purposes of bonus calculations as described below. Such measures may include, but are not limited to, the number and type of product approvals within an Applicable Year, the number of new molecular entities that enter Phase III clinical trials during an Applicable Year, the assessed progress of the Company’s portfolio against predicted outcomes (i.e., delivery reliability) and the assessed quality of the pipeline products, as determined by the Company.
2.19 Plan means The Eli Lilly and Company Bonus Plan as set forth herein and as hereafter modified or amended from time to time. The Plan is an incentive compensation program and is not subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), pursuant to Department of Labor Regulation Section 2510.3.
2.20 Plant Closing means the closing of a plant site or other Company location that directly results in termination of employment.
2.21 Reduction in Workforce means the elimination of a work group, functional or business unit or other broadly applicable reduction in job positions that directly results in termination of employment.
2.22 Retirement means the cessation of employment upon the attainment of age fifty-five with at least ten years of service (55 and 10), age sixty-five with at least five years of service (65 and 5) or at least eighty (80) points, as determined by the provisions of the Retirement Plan as amended from time to time, assuming eligibility to participate in that plan. For persons who are not participants in the Retirement Plan, Retirement means the cessation of employment as a retired employee under the applicable retirement benefit plan or program as provided by the Company or applicable law.
2.23 Retirement Plan means The Lilly Retirement Plan.
2.24 Revenue means, for any Applicable Year, the consolidated net revenue of the Company as set forth in the “Statements of Operations” as reported by the Company in accordance with generally accepted accounting principles and Section 3.4 below.
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2.25 Revenue Change means the percentage increase or decrease in Revenue in the Applicable Year compared to the prior year.
2.26 Service means the aggregate time of employment of an Eligible Employee by the Company.
SECTION 3. ADMINISTRATION
3.1 Committee. The Plan will be administered by the Compensation Committee of the Board of Directors of Eli Lilly and Company or, if the name of the Compensation Committee is changed, the Plan will be administered by such successor committee. For all Eligible Employees other than Lilly Executive Officers, the Compensation Committee may delegate all or a portion of its responsibilities within its sole discretion by resolution. Any reference in this Plan to the Committee or its authority will be deemed to include such designees (other than with respect to Lilly Executive Officers or a member of the Board of Directors or for purposes of Section 9).
3.2 Powers of the Committee. The Committee will have the full power and authority in its discretion to
a.interpret the terms and provisions of the Plan and to determine any and all questions arising under the Plan, including, without limitation, the right to remedy possible ambiguities, inconsistencies, or omissions by a general rule or particular decision;
b.adopt, amend and rescind rules consistent with the Plan;
c.make exceptions in particular cases to the rules of eligibility for participation in the Plan (except with respect to Lilly Executive Officers);
d.determine whether, to what extent, and under what circumstances payments made or to be made should be recovered or forfeited under the Company’s Executive Compensation Recovery Policy as in effect from time to time; and
e.delegate authority for administration of the Plan with respect to any Eligible Employee except for Lilly Executive Officers or a member of the Board of Directors. The Committee will take all necessary action to establish annual Performance Benchmarks and approve the timing of payments, as necessary.
3.3 Certification of Results. Before any amount is paid under the Plan, the Committee will certify in writing the calculation of EPS, EPS Change, Revenue, Revenue Change and Pipeline Metrics (or other applicable performance measures) for the Applicable Year and the satisfaction of all other material terms of the calculation of the Company Performance Bonus Multiple and Company Bonus.
3.4 Adjustments for Significant Events. Not later than 90 days after the beginning of an Applicable Year, the Committee may specify with respect to Company Bonuses for the Applicable Year that the performance measures described in Section 5.2 will be determined
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before the effects of acquisitions, divestitures, restructurings or special charges or gains, changes in corporate capitalization, accounting changes, and/or events that are treated as extraordinary items for accounting purposes.
3.5 Finality of Committee Determinations. Any determination by the Committee of Revenue, Revenue Change, EPS, EPS Change, Pipeline Metrics, any other performance measure, Performance Benchmarks and the level and entitlement to Company Bonus, and any interpretation, rule, or decision adopted by the Committee under the Plan or in carrying out or administering the Plan, will be final and binding for all purposes and upon all interested persons, their heirs, and personal representatives. The Committee may rely conclusively on determinations made by Lilly and its auditors to determine Revenue, Revenue Change, EPS, EPS Change and related information for administration of the Plan, whether such information is determined by the Company, auditors or a third-party vendor engaged specifically to provide such information to the Company. This subsection is not intended to limit the Committee’s power, to the extent it deems proper in its discretion, to take any action permitted under the Plan.
SECTION 4. PARTICIPATION IN THE PLAN
4.1 General Rule. Only Eligible Employees may participate in and receive payments under the Plan.
4.2 Commencement of Participation. An Eligible Employee will become a Participant in the Plan as follows: (i) in the case of Eligible Employees under Section 2.12(a), on the date on which the individual completes at least one hour of employment as an Eligible Employee within the United States or Puerto Rico, and (ii) in the case of Eligible Employees under Section 2.12(b), the later of the date on which the individual completes at least one hour of employment as an Eligible Employee or the date as of which the Committee has designated the individual to become a Participant in the Plan.
4.3 Termination of Participation. An Eligible Employee will cease to be a Participant upon termination of employment with the Company for any reason, or at the time he otherwise ceases to be an Eligible Employee under the Plan; provided, however, a terminated Participant shall be eligible for a Company Bonus to the extent provided in Section 5.8.
SECTION 5. DEFINITION AND COMPUTATION OF COMPANY BONUS
5.1 Computation for Eligible Employees. Company Bonus amounts will depend significantly on Company performance as well as whether Participants met their job expectations for certain Eligible Employees. As more specifically described below, a Participant’s Company Bonus is calculated by multiplying the Participant’s Bonus Target by his Participant Earnings and the Company Performance Bonus Multiple. For eligible management and Lilly employees and those Participants designated by the Committee, whether an individual met their job expectations will also impact the Company Bonus calculation, as described in Section 5.6(c) below. Company Bonuses are paid out to eligible Participants in the manner provided below.
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5.2 Establishment of Performance Measures. Not later than 90 days after the beginning of each Applicable Year, the Committee will, in its sole discretion, determine appropriate performance measures for use in calculating Company Bonus amounts. These performance measures may include, but are not limited to, Revenue Change, EPS Change, growth in net income, return on assets, return on equity, Pipeline Metrics, total shareholder return, EVA, MVA or any of the foregoing before the effect of acquisitions, divestitures, accounting changes, restructurings and special charges or gains. Unless otherwise specified pursuant to a written resolution adopted by the Committee for the Applicable Year, the Committee will use as performance measures EPS Change, Revenue Change and Pipeline Metrics, in each case before the effect of acquisitions, divestitures, accounting changes, restructurings and special charges or gains (determined as described above) as performance measures.
5.3 Establishment of Performance Benchmarks. Not later than 90 days after the beginning of each Applicable Year, the Committee will establish Performance Benchmarks for the Company based on the performance measures described in Section 5.2 above. Unless otherwise specified pursuant to a written resolution adopted by the Committee for the Applicable Year, the Performance Benchmarks will correspond with EPS Change and Revenue Change amounts for the Applicable Year, established with reference to Lilly’s internal business plan as reviewed and approved by the Board of Directors of the Company, and Pipeline Metrics as approved by the Committee in consultation with the Science and Technology Committee. The Performance Benchmarks will correspond to EPS Change, Revenue Change and Pipeline Metric multiples equal to 1.0. The Committee will also adopt a formula that will determine the extent to which the performance measure multiples will vary as the Company’s actual results relative to the internal plan approved by the Board of Directors of the Company vary from the Performance Benchmarks. Notwithstanding the foregoing, each performance measure multiple established above will be no less than 0.0 or greater than 2.0 in any Applicable Year, regardless of the Company’s actual results.
5.4 Company Performance Bonus Multiple. Unless otherwise specified pursuant to a written resolution adopted by the Committee not later than 90 days after the beginning of the Applicable Year, the Company Performance Bonus Multiple is equal to the product of the EPS Change multiple and 0.50 plus the product of the Revenue Change multiple and 0.25 plus the product of the Pipeline Metrics multiple and 0.25 (i.e., Company Performance Bonus Multiple = (EPS Change multiple * 0.50) + (Revenue Change multiple * 0.25) + (Pipeline Metrics multiple * 0.25)).
5.5 Company Performance Bonus Multiple Threshold and Ceiling; Committee’s Downward Discretion. Notwithstanding Sections 5.3 and 5.4, the Company Performance Bonus Multiple will not be less than 0.25 or greater than 2.0 in an Applicable Year. If the calculations described in Sections 5.3 and 5.4 above result in a number that is less than 0.25, the Company Performance Bonus Multiple will equal 0.25 for the Applicable Year. Notwithstanding the foregoing Sections 5.3, 5.4, and 5.5, at any time prior to certification as described in Section 3.3, the Committee in its discretion may
a.reduce the Company Performance Bonus Multiple (including but not limited to a reduction below 0.25) for some or all Eligible Employees, or
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b.increase one or more Performance Benchmarks.
5.6 Participant Company Bonus.
a.Bonus Target. Not later than 90 days after the beginning of the Applicable Year, the Bonus Target for each Participant, whether such Participant is designated on an individual basis or by specified job categories, classifications, levels, subsidiaries or other appropriate classification, will be determined by the Committee on a basis that takes into consideration a Participant's pay grade level and job responsibilities. The Bonus Target for each Participant for the Applicable Year will be expressed as a percentage of Participant Earnings as of December 31 of the Applicable Year. No later than early in the Applicable Year, each Participant will receive information regarding the Participant’s Bonus Target. In the event that a Participant’s pay grade level changes during the Applicable Year (e.g., because of promotion, demotion or otherwise), the Participant’s Bonus Target will be prorated based on the Bonus Target applicable to each pay grade level (with related job responsibilities) and the percentage of time that the Participant is employed at each pay grade level during the Applicable Year.
b.Company Bonus Calculation. Except as described in Section 5.6(c) below, a Participant’s Company Bonus will equal the product of the Company Performance Bonus Multiple and the Participant’s Bonus Target and the Participant’s Earnings.
c.Adjustment for Individual Performance Multiplier, if Applicable.
Notwithstanding anything herein to the contrary, all eligible management employees (except Lilly Executive Officers), United States employees and other employees as may be designated from time to time by the Committee are subject to individual performance multipliers. For all such Participants subject to an individual performance multiplier, the amount calculated in Section 5.6(b) above will be adjusted based on whether the Participant met job expectations as determined by the Company at the end of the Applicable Year. If a Participant does not meet such job expectations, the Participant will receive an individual performance multiplier equal to either 0.0 or 0.5, as determined by the Company. In that event, the individual performance multiplier will be multiplied by the amount described in Section 5.6(b) above to calculate the Participant’s Company Bonus. If a Participant meets job expectations, the Participant’s Company Bonus will equal the amount calculated in Section 5.6(b) above. In addition, if a Participant meets job expectations, the Company may increase the Participant’s Company Bonus by an additional amount based on its determination of the Participant’s individual performance and related factors. Not later than 90 days after the beginning of the Applicable Year, the Committee will determine applicable multipliers for meeting job expectations or ranges for the applicable rating system in effect for the Participant. For each such Participant, such rating will be determined by the Participant’s supervision.
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In the event that a Participant does not receive a year-end performance rating, but is otherwise eligible for a Company Bonus, the amount calculated in Section 5.6(b) will be multiplied by 1.0 so that the Participant’s actual Company Bonus will be the amount calculated in Section 5.6(b) above.
5.7 Conditions on Company Bonus. Payment of any Company Bonus is neither guaranteed nor automatic. A Participant’s Company Bonus is not considered to be any form of compensation, wages, or benefits, unless and until paid.
5.8 Required Employment. Except as provided below in this Section 5.8, required by applicable law or as otherwise designated by the Committee, if a Participant is not employed by the Company on the last day of the Applicable Year, or is otherwise not an Eligible Employee on that date, the Participant is not entitled to any Company Bonus payment under this Plan for that Applicable Year.
a.Leaves of Absence. A Participant who, on the last day of the Applicable Year, is on approved leave of absence under the Family and Medical Leave Act of 1993, military leave under the Uniformed Services Employment and Reemployment Rights Act, or such other approved leave of absence will be considered to be an Eligible Employee on that date for purposes of this Plan.
b.Transfer. An employee who is a Participant in this Plan for a portion of the Applicable Year and then transfers to a position within the Company in which he is ineligible to participate in this Plan, but who remains employed by the Company on the last day of the Applicable Year, will be treated as satisfying the last-day-of-Applicable Year requirement for purposes of this Plan. In that event, his Company Bonus will be based on his Participant Earnings for the portion of the Applicable Year in which the employee was a Participant in the Plan.
c.Retirement, Disability or Death. Except as described below, a Participant who was an Eligible Employee for some portion of the Applicable Year and then takes Retirement, becomes and remains Disabled through the end of the Applicable Year, or dies during the Applicable Year will be considered to satisfy the last-day-of-Applicable-Year requirement described in this Section 5.8 for purposes of this Plan. Notwithstanding the foregoing, an Eligible Employee in the United States who has not received a year-end performance rating and (1) is on employment probation (or its equivalent outside the United States) and takes Retirement in lieu of a termination of employment; or (2) takes Retirement in lieu of termination of employment because of an immediately terminable offense (e.g. absence of three days without notice, insubordination, violation of drug policy, possession of firearms, misconduct) will not be considered to satisfy the last day of Applicable Year requirement.
d.Reallocation, Medical Reassignment, Plant Closing or Reduction in Workforce. A Participant who was an Eligible Employee for some portion of the Applicable Year and whose employment is terminated as a result of his failure to locate a position following his reallocation or medical reassignment in the United States, or a Plant Closing or Reduction in Workforce will be considered to satisfy the last-day-of-Applicable Year requirement described in this Section 5.8 for
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purposes of this Plan. The Committee or its designee’s determination regarding whether a Participant’s termination is a direct result of either a Plant Closing or a Reduction in Workforce will be final and binding.
e.Expiration of Contract: A Participant who was an Eligible Employee for some portion of the Applicable Year and is subject to an agreement that describes a specific end date of employment and whose employment ends as a direct result of the expiration (not termination) of the agreement prior to the end of the Applicable Year will be considered to satisfy the last-day-of-Applicable Year requirement described in this Section 5.8 for purposes of this Plan. The Committee or its designee’s determination regarding whether a Participant’s end of employment is a direct result of the expiration of the individual’s agreement will be final and binding.
f.Notice of Resignation. In addition, a Participant who submits a notice of resignation from employment with the Company prior to the end of the Applicable Year and whose effective date of resignation is two (2) weeks or less from the date of notice of resignation (or as otherwise required by law) will be considered employed by the Company for purposes of this Plan until the end of his specified notice period.
5.9 New Participants. If an Eligible Employee began participation in the Plan during an Applicable Year and is eligible for a Company Bonus, his Company Bonus will be based on Participant Earnings paid after the employee became a Participant.
5.10 Minimum Amount. Notwithstanding any other provision of the Plan, the minimum total amount of Company Bonus payable to Participants in the aggregate as a group or applicable subgroup (the “Minimum Amount”) may be fixed through a resolution of the Board of Directors of Lilly or the Committee, made before the end of the Applicable Year. The Minimum Amount shall not be reduced or eliminated by the Company, including by either the Board of Directors of Lilly or the Committee, following the end of the Applicable Year, but shall be payable to Participants as determined by the Company and consistent with the terms of the Plan. In addition, the Minimum Amount shall not be reduced by any discretionary action to reduce a particular Participant’s Company Bonus and shall be payable to persons, as determined by the Company, who are Participants in the Plan during the Applicable Year and eligible to receive a Company Bonus.
SECTION 6. TIME OF PAYMENT
6.1 General Rule. Payment under the Plan will be made in the year following the Applicable Year on or prior to March 15 of such year.
6.2 Terminated Employee. Except as provided in Section 5.8 above, in the event an Eligible Employee’s employment with the Company ends for any reason prior to the last day of the Applicable Year, he will not receive any Company Bonus for the Applicable Year.
6.3 Deceased Eligible Employee. In the event an Eligible Employee dies before payment under the Plan is made, the Committee may, in its sole discretion, authorize the Company to pay to his
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personal representative or beneficiary an amount not to exceed the amount established by the Committee to reflect the payment accrued at the date of death. Any such payment would be paid consistent with the timing requirements described in subsection 6.1 above.
SECTION 7. ADMINISTRATIVE GUIDELINES
7.1 Establishment and Amendment by the Committee. The Committee may establish objective and nondiscriminatory written guidelines for administering those provisions of the Plan that expressly provide for the determination of eligibility, Company Bonus or benefits on the basis of rules established by the Committee. The Committee may, from time to time, amend or supplement the administrative guidelines established in accordance with this subsection 7.1. The administrative guidelines established or amended in accordance with this subsection 7.1 will not be effective to the extent that they materially increase the Plan's liability, or to the extent that they are inconsistent with, or purport to amend, any provision of the Plan set forth in a document other than such administrative guidelines.
7.2 Amendment by Board of Directors. Any administrative guidelines established by the Committee pursuant to subsection 7.1 may be amended or revoked by the Board of Directors, either prospectively or retroactively, in accordance with the general amendment procedures set forth in section 9 below.
SECTION 8. MISCELLANEOUS
8.1 No Vested Right. No employee, participant, beneficiary, or other individual will have a vested right to a Company Bonus or any part thereof until payment is made to him under Section 6.
8.2 No Employment Rights. No provision of the Plan or any action taken by the Company, the Board of Directors of the Company, or the Committee will give any person any right to be retained in the employ of the Company. The right and power of the Company to dismiss or discharge any Participant for any reason or no reason, with or without notice, is specifically reserved.
8.3 No Adjustments. After the certification of the calculation of EPS, EPS Change, Revenue, Revenue Change, Pipeline Metrics and any other material terms of the calculation of the Company Performance Bonus Multiple and Company Bonus for the Applicable Year as described in Section 3.3 above, no adjustments will be made to reflect any subsequent change in accounting, the effect of federal, state, or municipal taxes later assessed or determined, or otherwise.
8.4 Executive Compensation Recovery Policy. Notwithstanding any other provision of the Plan, including Section 8.3, all payments made or to be made pursuant to the Plan are subject to the Company's Executive Compensation Recovery Policy, as in effect from time to time. In addition, nothing herein shall limit the Company’s power to take such action as it deems necessary to remedy any misconduct, prevent its recurrence and, if appropriate, based on all relevant facts and circumstances, punish the wrongdoer in a manner that it deems appropriate.
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8.5 Other Representations. Nothing contained in this Plan, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any employee, participant, beneficiary, legal representative, or any other person. Although Participants generally have no right to any payment from this Plan, to the extent that any Participant acquires a right to receive payments from the Company under the Plan, such right will be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder will be paid from the general funds of the Company and no special or separate fund will be established, and no segregation of assets will be made, to assure payment of such amount.
8.6 Tax Withholding. The Company will make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all federal, state, local, and other taxes required by law to be withheld with respect to Company Bonus payments under the Plan, including, but not limited to, deducting the amount required to be withheld from the amount of cash otherwise payable under the Plan, or from salary or any other amount then or thereafter payable to an employee, Participant, beneficiary, or legal representative.
8.7 Currency. The Company Bonus will be based on the currency in which the highest portion of base pay is regularly paid. The Committee will determine the appropriate foreign exchange conversion methodology in its discretion.
8.8 Effect of Plan on other Company plans. Nothing contained in this Plan is intended to amend, modify, terminate, or rescind other benefit or compensation plans established or maintained by the Company. Whether and to what extent a Participant’s Company Bonus is taken into account under any other plan will be determined solely in accordance with the terms of such plan.
8.9 Construction. This Plan and all the rights thereunder will be governed by, and construed in accordance with, the laws of the state of Indiana, without reference to the principles of conflicts of law thereof.
8.10 Notice. Any notice to be given to the Company or Committee pursuant to the provisions of the Plan will be in writing and directed to Secretary, Eli Lilly and Company, Lilly Corporate Center, Indianapolis, IN 46285.
SECTION 9. AMENDMENT, SUSPENSION, OR TERMINATION
The Board of Directors of the Company will have the right to amend, modify, suspend, revoke, or terminate the Plan, in whole or in part, at any time and without notice, by written resolution of the Board of Directors. The Committee also will have the right to amend the Plan, except that the Committee may not amend this Section 9.
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Exhibit 10.15 2007 Change in Control Severance Pay Plan for Select Employees, as amended
ELI LILLY AND COMPANY
2007 CHANGE IN CONTROL SEVERANCE PAY PLAN
FOR SELECT EMPLOYEES
As Amended Effective January 1, 2018
1. PURPOSE
This Eli Lilly and Company 2007 Change in Control Severance Pay Plan For Select Employees has been established by the Company to provide for the payment of severance pay and benefits to Eligible Employees whose employment with a Participating Employer terminates due to certain conditions created by a Change in Control of the Company. The purpose of the Plan is to assure continuity in operations of the Company during a period of Change in Control by allowing employees to focus on their responsibilities to the Company knowing that they have certain financial security in the event of their termination of employment. The accomplishment of this purpose is in the best interests of the Company and its shareholders. The Plan replaces the Change in Control Severance Pay Plan for Select Employees that was originally adopted by the Board on March 1, 1995, and became operative immediately upon the expiration of such plan with respect to a Change in Control occurring on or after March 1, 2007. The Plan as amended by action of the Board of Directors of the Company on October 18, 2010 became effective on October 18, 2012. The Plan as amended by action of the Board of Directors of the Company on December 11, 2017 shall become effective on January 1, 2018.
2. DEFINITIONS
The terms defined in this Section 2 shall have the meanings given below:
(a) "Base Salary" means an Eligible Employee's gross annualized rate of base salary at the time of any determination hereunder, before any deductions, exclusions or any deferrals or contributions under any Participating Employer plan or program, but excluding bonuses, incentive awards or compensation, employee benefits or any other non-salary form of compensation.
(b) "Board" means the Board of Directors of the Company.
(c) "Change in Control" has the meaning given in Section 3.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Compensation Committee of the Board, or such other committee appointed by the Board to perform the functions of the Committee under the Plan, provided that at all times the Committee shall be constituted solely of directors who are Continuing Directors (as defined in Section 3) to the extent any such directors remain on the Board and are willing to serve in such capacity.
(f) "Company" means Eli Lilly and Company, an Indiana corporation.
(g) "Covered Termination" has the meaning given in Section 6.
(h) "Eligible Employee" has the meaning given in Section 5.
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(i) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "Participating Employer" has the meaning given in Section 4.
(l) "Plan" means this Eli Lilly and Company 2007 Change in Control Severance Pay Plan for Select Employees.
(m) “Retirement Age” means the date the Eligible Employee reaches age 65, unless the Company’s senior-most officer responsible for the Human Resources department has approved a later date as the Retirement Age for the Eligible Employee.
(n) “Section 409A” shall mean Section 409A of the Code and the applicable rulings and regulations promulgated thereunder.
(o) “Separation from Service” shall mean a “separation from service” from a Participating Employer within the meaning of Section 409A.
(p) "Severance Period" means the two (2) year period immediately following a Covered Termination.
3. CHANGE IN CONTROL
For purposes of the Plan, a "Change in Control" of the Company shall be deemed to have occurred upon:
(a) the acquisition by any "person," as that term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (i) the Company, (ii) any subsidiary of the Company, (iii) any employee benefit plan or employee stock plan of the Company or a subsidiary of the Company or any trustee or fiduciary with respect to any such plan when acting in that capacity, or (iv) Lilly Endowment, Inc.) of "beneficial ownership," as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 20% or more of the shares of the Company's capital stock the holders of which have general voting power under ordinary circumstances to elect at least a majority of the Board (or which would have such voting power but for the application of the Indiana Control Shares Statute) ("Voting Stock"); provided, however, that an acquisition of Voting Stock directly from the Company shall not constitute a Change in Control under this Section 3(a);
(b) the first day on which less than one-half of the total membership of the Board shall be Continuing Directors (as that term is defined in Article 13(f) of the Company's Articles of Incorporation);
(c) consummation of a merger, share exchange, or consolidation of the Company (a "Transaction"), other than a Transaction which would result in the Voting Stock of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 60% of the Voting Stock of the Company or such surviving entity immediately after such Transaction; or
(d) a complete liquidation of the Company or a sale or disposition of all or substantially all the assets of the Company, other than a sale or disposition of assets to any subsidiary of the Company.
For purposes of this Section 3 only, the term "subsidiary" means a corporation or limited liability company of which the Company owns directly or indirectly fifty (50) percent or more of the voting power.
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4. PARTICIPATING EMPLOYERS
A. Designation of Participating Employers. The Company and each subsidiary corporation of which the Company owns directly or indirectly one-hundred (100) percent of the voting power at the time of the Change in Control shall be Participating Employers under the Plan. In addition, the Committee may designate other affiliates of the Company as Participating Employers under the Plan, from time to time and under such terms and conditions, as shall be specified by an action in writing by the Committee. Such terms and conditions may impose limitations on the extent to which any such affiliate participates in the Plan (including but not limited to the duration of any such participation), but shall not provide rights or benefits to Eligible Employees that are broader than those set forth in the Plan. Any entity that is a Participating Employer at the time of a Change in Control shall continue to be a Participating Employer following a Change in Control, and any person, firm or business that is a successor to the business or interests of a Participating Employer following a Change in Control shall be treated as a Participating Employer under the Plan.
B. Limitations in Foreign Jurisdictions. Notwithstanding the foregoing or anything elsewhere in the Plan to the contrary, the Committee shall have the discretionary authority, as specified below, to exclude from participation or limit the participation of any Participating Employer with respect to individuals employed outside of the United States. The Committee shall exercise this authority only by an action in writing taken prior to a Change in Control on the basis of a good faith determination that, as a result of the specific effect of applicable local law or practice with respect to the Plan or severance benefits generally, it would be in the best interests of the Company to so exclude or limit such participation. In addition, unless otherwise specified by the Committee, the severance payments and benefits under the Plan shall offset or be offset by the benefits otherwise payable to any such Eligible Employee under severance arrangements that exist by reason of applicable local law, practice or policy, in accordance with applicable law.
5. ELIGIBLE EMPLOYEES
All employees of the Participating Employers, including executive officers (as defined in Rule 3b-7 under the Exchange Act), who are classified by the Company as R8 or M5-M8 global job level or other groups or individuals as designated by the Committee (or any successor classifications) immediately prior to the Change in Control shall be eligible to participate in the Plan and shall be considered an Eligible Employee for all purposes hereunder. Any person who is an Eligible Employee in accordance with the foregoing shall continue to be an Eligible Employee notwithstanding any change in his/her position or classification following a Change in Control, subject to Section 6 hereof relating to certain terminations of employment that are not treated as a Covered Termination. The Committee shall notify each Eligible Employee of his/her participation in the Plan prior to the Change in Control; provided that any failure to so notify shall not affect the Eligible Employee’s participation in the Plan.
6. COVERED TERMINATIONS
A. General. An Eligible Employee shall be treated as having suffered a "Covered Termination" hereunder if he/she incurs a Separation from Service within a period of two (2) years immediately following the date of a Change in Control, (i) by a Participating Employer other than for "Cause", or (ii) by the Eligible Employee for "Good Reason.". For purposes of the foregoing, the two (2) year time period specified above within which a Separation from Service may be treated as a Covered Termination shall commence on the date the Change in Control becomes effective. For purposes of the Plan, a Separation from Service shall be effective as of the last date of the Eligible Employee's employment with the Participating Employer.
An Eligible Employee shall not be treated as having suffered a Covered Termination in the event of (1) death, (2) total disability (within the meaning of the Company's Extended Disability Plan), (3) transfer of employment among Participating Employers (unless such transfer results in a Separation from Service for "Good Reason"),
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(4) involuntary termination by the Participating Employer for "Cause", (5) voluntary termination by the Eligible Employee other than for Good Reason, (6) a termination of employment for any reason by either the Participating Employer or the Eligible Employee that does not occur during the two (2) year time period specified above or (7) a termination of employment for any reason by either the Participating Employer or the Eligible Employee after the Eligible Employee reaches Retirement Age.
B. Termination For Cause. For purposes hereof, an Eligible Employee's Separation from Service by the Participating Employer shall be deemed to be for "Cause" if as a result of:
(i) the willful refusal of the Eligible Employee to perform, without legal cause, his/her material duties to the Participating Employer, resulting in demonstrable economic harm to any Participating Employer, which the Eligible Employee has failed to cure after thirty (30) calendar days' advance written notice from the Company;
(ii) any act of fraud, dishonesty or gross misconduct of the Eligible Employee resulting in significant economic harm to any Participating Employer or other significant harm to the business reputation of any Participating Employer; or
(iii) the conviction of the Eligible Employee by a court of competent jurisdiction of any crime (or the entering of a plea of guilty or nolo contendere to a charge of any crime) constituting a felony.
A termination for Cause shall be communicated to the Eligible Employee in writing by the
Participating Employer and shall specify the provisions of the Plan and factual matters relied upon in making the Cause determination.
C. Termination for Good Reason. For purposes hereof, an Eligible Employee’s Separation from Service by the Eligible Employee shall be deemed to be for "Good Reason" if as a result of:
(i) a material diminution in the nature or status of the Eligible Employee's position, title, reporting relationship, duties, responsibilities or authority, or the assignment to him/her of additional responsibilities that materially increase his/her workload;
(ii) any reduction in the Eligible Employee's then-current Base Salary;
(iii) a material reduction in the Eligible Employee's opportunities to earn incentive bonuses below those in effect for the year most recently completed before the date of the Change in Control, taking into account all material bonus factors such as targeted bonus amounts and corporate performance measures;
(iv) a material reduction in the Eligible Employee's employee benefits and coverages (including, without limitation, pension, profit sharing and all welfare, retiree welfare and fringe benefits) that are provided to the Eligible Employee from the benefit levels in effect immediately prior to the Change in Control;
(v) the failure to grant to the Eligible Employee stock options, stock units, performance shares or similar incentive rights during each twelve (12) month period following the Change in Control on the basis of a number of shares or units and all other material terms (including vesting requirements) at least as favorable to the Eligible Employee as those rights granted to him/her on an annualized average basis for the three (3) year period immediately prior to the Change in Control;
(vi) relocation of the Eligible Employee by more than fifty (50) miles from his/her regularly assigned workplace existing immediately prior to the date of the Change in Control; or
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(vii) any failure by a successor entity to the Company (including any entity that succeeds to the business or assets of the Company) in connection with a Change in Control to assume by operation of law or otherwise the obligations of the Company under the Plan, or any attempted amendment, termination or repudiation of the Plan by such successor entity, other than pursuant to the provisions of Section 15.
For purposes of the foregoing, but without limitation of the Eligible Employee’s right to otherwise terminate employment for Good Reason, if the Eligible Employee is in charge of a principal business unit, division or function of the Company immediately prior to a Change in Control, Good Reason shall not be deemed to exist based solely on the fact that the Eligible Employee is not in charge of such principal business unit, division or function of the combined entity following the Change in Control, unless as a result thereof, the Eligible Employee suffers a material diminution in the nature or status of the Eligible Employee's position, title, reporting relationship, duties, responsibilities or authority or suffers some other Good Reason event.
A termination for Good Reason shall be communicated to the Participating Employer in writing by the Eligible Employee within thirty (30) days following his/her knowledge of the circumstances constituting Good Reason, and shall specify the provisions of the Plan and the factual matters relied upon in making the Good Reason determination. The Participating Employer shall have the opportunity to cure the circumstances constituting Good Reason within 15 days following receipt of such written notice from the Eligible Employee, and if such circumstances are fully cured, such circumstances shall cease to constitute the basis for a Good Reason termination hereunder.
7. SEVERANCE PAYMENT
A. Amount of Severance Payment. The amount of the severance payment to be paid by the Company to an Eligible Employee who is treated as having suffered a Covered Termination hereunder shall equal two (2) times the sum of:
(i) the Eligible Employee's Base Salary at the time of Covered Termination (calculated without regard to any reduction in Base Salary that results in a Good Reason termination) or, if greater, at the time of the Change in Control, plus
(ii) the Eligible Employee's target annual cash incentive bonus for the year of Covered Termination or if there is no target-based annual cash incentive bonus, then the annual cash bonus paid or payable for the most recently completed calendar year prior to the Change in Control.
B. Payment of Severance. Subject to Section 18, the severance payment to be made hereunder shall be paid to the Eligible Employee in a single lump-sum cash payment, less any required tax withholding, on the date that is sixty (60) calendar days following the date of the Eligible Employee's Covered Termination, conditioned upon the Eligible Employee having complied, prior to that date with the requirements of Section 10 hereof regarding a release of claims.
8. OTHER SEVERANCE BENEFITS
In addition to the severance payment provided under Section 7, an Eligible Employee shall be entitled to the following benefits and other rights in the event of his/her Covered Termination:
A. Welfare Benefits. The Eligible Employee shall continue to participate, on the same basis as active employees of the Participating Employer, for eighteen (18) months immediately following a Covered Termination (“Continuation Period”) in the Participating Employer’s medical and dental plans (but not to include flexible spending plans), group life insurance plans, company-provided death benefit, supplemental life
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insurance and long-term disability plans for which he/she was eligible at the time of Covered Termination (or, if it would provide benefits or other terms more favorable to the Eligible Employee, at the time of the Change in Control), as though his/her Separation from Service had not occurred (the "Welfare Continuation Coverages"). All Welfare Continuation Coverages shall apply to the Eligible Employee and any of his/her dependents who would have been eligible for coverage if the Eligible Employee remained employed for the Continuation Period. The Company may provide the Eligible Employee with the Welfare Continuation Coverages under arrangements other than its generally applicable welfare benefit plans, provided that the benefit coverages so provided are at least as favorable to the Eligible Employee as coverage under the otherwise applicable Welfare Continuation Coverages, on a coverage by coverage basis, and taking into account all tax consequences to the Eligible Employee. At the expiration of the Continuation Period, the Eligible Employee shall be treated as a then terminating employee with respect to the right to elect continued medical and dental coverages in accordance with Section 4980B of the Code (or any successor provision thereto). Notwithstanding the foregoing, if the Eligible Employee becomes eligible to participate in welfare benefit coverages from a subsequent employer of the same type as provided under one or more of the Welfare Continuation Coverages, then the applicable Welfare Continuation Coverages provided by this Section 8.A, on a coverage by coverage basis, shall be terminated. If and to the extent that any benefit under this Section 8.A or under Section 8.B. is not eligible for exemption from Section 409A pursuant to Treasury Regulation § 1.409A-1(b)(9)(v) (or any successor regulation) or otherwise, the Company shall, pursuant to Section 18 hereof, take such actions as it deems necessary to comply with the requirements of Treasury Regulation § 1.409A-3(i)(1)(iv) (or any successor regulation), including, without limitation, by providing that (i) the amount of the benefit under this Section 8.A or under Section 8.B. in any calendar year shall not affect the amount of the benefit thereunder for any other calendar year, (ii) any reimbursement of expenses under this Section 8.A or under Section 8.B. be made not later than the last day of the calendar year following the year in which the Eligible Employee incurred such expenses, and (iii) in no event shall any right to reimbursement or receipt of in-kind benefits under this Section 8.A. or under Section 8.B. be subject to liquidation or exchange for another benefit.
B. Retiree Welfare Benefits. For purposes of determining eligibility, but not for the purpose of determining the amount of any benefit, for the retiree medical and dental plans applicable to Eligible Employee (the “Retiree Welfare Plans”), the Eligible Employee shall receive additional credit for two years for purposes of both age and service requirements under the Retiree Welfare Plans, but not beyond the Retirement Age of the Eligible Employee. If an Eligible Employee shall be eligible for participation in the Retiree Welfare Plans at the time of Covered Termination (including by reason of this Section 8.B.), then (i) for the Continuation Period, he/she shall be entitled to continue to participate in the Welfare Continuation Coverage pursuant to Section 8.A. hereof, and (ii) following the Continuation Period, he/she shall be entitled to continue to participate in the retiree welfare benefit program on the same basis and subject to the same terms and conditions as provided to retired employees of the Participating Employer generally, or if no such program is provided, the program of the successor entity following the Change in Control, if any.
C. Accrued Rights. The Eligible Employee shall be entitled to the following payments and benefits in respect of accrued compensation rights at the time of a Covered Termination, in addition to all other rights provided under the Plan: (i) immediate payment of any accrued but unpaid Base Salary through the date of Covered Termination; (ii) payment within thirty (30) calendar days of Covered Termination of any accrued but unpaid annual cash bonus for the most recently completed calendar year prior to the Covered Termination; (iii) payment within thirty (30) calendar days of Covered Termination of the accrued annual cash bonus for the year in effect on the date of the Covered Termination, determined on the basis of the bonus earned under terms of the applicable bonus plan through the date of termination or, if greater, the pro-rata amount of the target annual cash bonus for the period of such year through the date of termination; and (iv) all benefits and rights accrued under the employee benefit plans, fringe benefit programs and payroll practices of a Participating Employer in accordance with their terms (including, without limitation, employee pension, employee welfare, incentive bonus and stock incentive plans).
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D. Outplacement; Relocation. The Eligible Employee shall be provided, at the Company's sole expense, with professional outplacement services selected by the Eligible Employee consistent with his/her duties or profession and of a type and level customary for persons in his/her position; provided, however, that the Company shall not be required to pay fees in connection with the foregoing in an amount greater than fifteen (15) percent of the Eligible Employee's Base Salary as determined under clause (i) of Section 7.A. The Company shall honor any prior agreement or understanding with an Eligible Employee who has suffered a Covered Termination to reimburse his/her relocation expenses to the Indianapolis, Indiana metropolitan area or, if it does not result in a greater cost to the Company, to such other location selected by the Eligible Employee. Payment for any such outplacement service services or relocation expense shall be made on the business day that is six (6) months following the date of the Covered Termination.
E. Indemnification. With respect to any Eligible Employee who is, immediately prior to a Change in Control or a Covered Termination, indemnified by the Company for his/her service as a director, officer or employee of a Participating Employer, the Company shall indemnify such Eligible Employee to the fullest extent permitted by applicable law, and the Company shall maintain in full force and effect, for the duration of all applicable statute of limitation periods, insurance policies at least as favorable to the Eligible Employee as those maintained by the Company for the benefit of its directors and officers at the time of Change in Control, provided that such insurance policies are commercially available from carriers of recognized standing, with respect to all costs, charges and expenses whatsoever (including payment of expenses in advance of final disposition of a proceeding) incurred or sustained by the Eligible Employee in connection with any action, suit or proceeding to which he/she may be made a party by reason of being or having been a director, officer or employee of a Participating Employer or serving or having served any other enterprise as a director, officer or employee at the request of a Participating Employer.
9. REDUCTION OF TOTAL PAYMENTS
(a) In the event it shall be determined that any payment, right or distribution by the Company or any other person or entity to or for the benefit of an Eligible Employee pursuant to the terms of the Plan or otherwise, in connection with, or arising out of, his/her employment with a Participating Employer or a change in ownership or effective control of the Company or a substantial portion of its assets (a "Payment") would be a "parachute payment" within the meaning of Section 280G of the Code on account of the aggregate value of the Payments due to the Eligible Employee being equal to or greater than three times the “base amount,” as defined in Section 280G(b)(3) of the Code, (the “Parachute Threshold”) so that the Eligible Employee would be subject to the excise tax imposed by Section 4999 of the Code, and reducing the aggregate value of the Payments would result in an increase in the aggregate Payments to be received by the Eligible Employee (after taking into account the excise tax imposed pursuant to Section 4999 of the Code, any tax imposed by any comparable provision of state law, and any applicable federal, state, and local income and employment taxes), the Company shall reduce the total Payments by the amount necessary to maximize the aggregate value of Payments to such Eligible Employee determined on an after-tax basis, reducing first any taxable Payments, and thereafter any other non-taxable Payments. For purposes of determining the amount of an Eligible Employee’s aggregate value of Payments on an after-tax basis, the Eligible Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Payments are to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of such Eligible Employee’s residence on the effective date of the Covered Termination, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.
(b) In the event the Internal Revenue Service adjusts any item included in the Company’s computations under subsection 9(a) above so that such Eligible Employee did not receive the full net benefit intended under the provisions of this Section 9, the Company shall reimburse such Eligible Employee, by the
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end of the calendar year following the year of such adjustment, for all or a portion of the taxes imposed pursuant to such adjustment to the extent necessary to make such Eligible Employee whole.
(c) All determinations required to be made under this Section 9, including whether any Payment is a “parachute payment” and the assumptions to be utilized in arriving at such determination, shall be made by a nationally recognized accounting firm designated by the Company which is not the auditor of the Company or another party involved in the Change in Control (the "Accounting Firm") and shall be based upon "substantial authority" (within the meaning of Section 6662 of the Code). All fees and expenses of the Accounting Firm shall be borne by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Eligible Employee.
10. RELEASE OF CLAIMS
All payments and benefits that may be made to an Eligible Employee upon a Covered Termination under the Plan shall be contingent upon the Eligible Employee entering into and not revoking a general release of employment law claims against the Company and the Participating Employer in substantially the form attached hereto as Exhibit A, subject to such modifications as may be determined by the Committee in good faith to take into account changes in employment laws or differences in employment laws in other jurisdictions. The Company will provide the general release to the Eligible Employee within five (5) business days of the Covered Termination.
11. NO MITIGATION OR OFFSET
The Eligible Employee shall be under no obligation to minimize or mitigate damages by seeking other employment, and the obtaining of any such other employment shall in no event effect any reduction of the Company's obligation to make the payments and provide the benefits required under the Plan. Except as provided in Section 10, the Company's obligation to make the payments and provide the benefits required under the Plan shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other rights which a Participating Employer may have against the Eligible Employee.
12. UNFUNDED STATUS
The Plan is intended to constitute an employee pension benefit plan under ERISA which is unfunded and is maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, and shall be interpreted and administered accordingly. The payments and benefits provided hereunder shall be paid from the general assets of the Company. Nothing herein shall be construed to require the Company to maintain any fund or to segregate any amount for the benefit of any employee, and no employee or other person shall have any right against, right to, or security or other interest in any fund, account or asset of the Company from which the payment pursuant to the Plan may be made. Consistent with the foregoing, the Company may, in its sole discretion, deposit funds in a grantor trust or otherwise establish arrangements to pay amounts that become due under the Plan, and, notwithstanding anything elsewhere in the Plan to the contrary, the payments and benefits due under the Plan shall be reduced to reflect the amount of any payment made in respect of any Eligible Employee from a grantor trust or other arrangement established for this purpose.
13. ADMINISTRATION
The Committee shall be the named fiduciary of the Plan and the plan administrator for purposes of ERISA. The Committee shall be responsible for the overall operation of the Plan and shall have the fiduciary responsibility for the general operation of the Plan. The Committee may allocate to any one or more of the Company's employees any responsibility the Committee may have under the Plan and may designate any other person or
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persons to carry out any of the Committee's responsibilities under the Plan. As plan administrator, the Committee shall maintain records pursuant to the Plan's provisions and shall be responsible for the handling, processing and payment of any claims for benefits under the Plan.
14. CLAIMS AND DISPUTES
A. Filing a Claim. Within thirty (30) calendar days following a Covered Termination, the Company shall notify each Eligible Employee whom the Company determines is entitled to payments and benefits under the Plan of his/her entitlement to such payments and benefits. An Eligible Employee who is not so notified may submit a claim for payments and benefits under the Plan in writing to the Company within ninety (90) calendar days after becoming entitled to such benefits as described in Section 6. Claims filed after such ninety (90) calendar day period will be denied.
All claims must be in writing and contain the following information:
•The name of the Eligible Employee filing the claim;
•The name of the Plan; and
•A statement that the Eligible Employee is making a claim under the Plan and the basis for such claim.
All claims must be timely delivered to the Company at the address below:
Eli Lilly and Company
Attention: General Counsel
Lilly Corporate Center
Indianapolis, Indiana 46285
B. Process for Determining Claims. The Company will notify each claimant of its decision to approve or deny the claimant’s claim within a reasonable period of time, but not later than ninety (90) days after the date the claim was received by the Company. In special circumstances, the Company may have up to an additional ninety (90) days to provide the claimant with such written notice, provided that the Company must notify the claimant prior to the expiration of the initial ninety (90) day period, state the reason(s) for such extension and state the date by which the Company expects to make its determination.
C. Content of Initial Determination. If the claimant’s claim is denied in whole or in part, the Company will provide written or electronic notice of its adverse benefit determination that includes the following information:
•The specific reason(s) for the adverse benefit determination;
•Reference to the specific provision(s) of the Plan on which the determination is based;
•A description of any additional material or information necessary for the claimant to perfect his or her claim and an explanation of why such material or information is necessary;
•A description of the Plan’s appeals procedures and the time limits applicable to such procedures; and
•A statement of the claimant’s rights to bring a civil action under Section 502(a) of ERISA following an adverse benefit determination on appeal.
D. Filing an Appeal. A claimant may appeal a denied claim within sixty (60) days following receipt of written notice of the adverse benefit determination. Appeals may include any written comments, documents, records, or other information relating to the claim, and must include the following information:
•The name of the Eligible Employee filing the appeal;
•The name of the Plan;
•Information identifying the initial adverse benefit determination; and
•The basis for appeal of the initial adverse benefit determination.
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The claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim, as determined by the Company under applicable federal regulations.
All appeals must be timely delivered to the Company at the address below:
Eli Lilly and Company
Attention: General Counsel
Lilly Corporate Center
Indianapolis, Indiana 46285
E. Process for Determining Appeals. The Company’s review on appeal will take into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination. The Company will notify each claimant of its decision on appeal within a reasonable period of time, but not later than sixty (60) days after the date the request for appeal was received by the Company. In special circumstances, the Company may have up to an additional sixty (60) days to provide the claimant with such written notice, provided that the Company must notify the claimant prior to the expiration of the initial sixty (60) day period, state the reason for such extension and state the date by which the Company expects to make its determination on appeal.
F. Content of Appeal Determination. If the claimant’s appeal is denied in whole or in part, the Company will provide written or electronic notice of its adverse benefit determination that includes the following information:
•The specific reason(s) for the adverse benefit determination;
•Reference to the specific provision(s) of the Plan on which the determination is based;
•A statement of the claimant’s right to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim, as determined by the Company under applicable federal regulations; and
•A statement of the claimant’s rights to bring a civil action under Section 502(a) of ERISA.
G. Authorized Representative. Eligible Employees may authorize a representative to pursue any claim or appeal on their behalf. The Company will recognize a person as an Eligible Employee’s authorized representative if such person submits a writing that has been signed by such Eligible Employee and notarized stating that the authorized representative is authorized to act on your behalf. A court order stating that a person is authorized to submit claims on behalf of an Eligible Employee will also be recognized.
H. Tolling. If an extension of time is required, either during the initial review or on appeal, due to the claimant’s failure to submit additional information requested by the Company, the period for making the benefit determination may, in the sole discretion of the Company, be tolled from the date on which the notification of extension is sent to the claimant until the date on which the claimant responds to the request for additional information. If the claimant does not respond in a timely fashion, as determined by the Company in its sole discretion, the Company will decide the appeal without such additional information.
I. Exhaustion Requirement. No action at law or at equity to recover payments or benefits under the Plan may be brought by an Eligible Employee (or an authorized representative thereof) until such Eligible Employee or authorized representative has exhausted the claims and appeals procedures described in this Section 14.
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15. TERM AND AMENDMENT
The Plan became effective as on July 1, 2004, but only became operative with respect to a Change in Control occurring on or after March 1, 2007, the date as of which the Plan as previously in effect was terminated by action of the Board. The Plan as amended by action of the Board of Directors of the Company on October 18, 2010 became effective with respect to a Change in Control occurring on or after October 18, 2012. The Plan as amended by action of the Board of Directors of the Company on December 11, 2017 shall become effective on January 1, 2018. The Plan shall continue to be effective until terminated in accordance with this Section 15. The Board shall have the right, by resolution or other written action, to terminate or amend the Plan; provided, however, that the Plan may only be terminated or amended prior to a Change in Control, and then only (i) with respect to an amendment or termination that becomes effective upon the second (2nd) anniversary of the date of Board approval thereof, or (ii) to the extent any such amendment is of a technical or clarifying nature, or increases the rights or benefits of all affected Eligible Employees, and does not in any manner reduce the rights or benefits of any Eligible Employee, unless the Company has obtained the express written consent, in return for good and valuable consideration, of all affected Eligible Employees in respect of any such amendment. Notwithstanding the foregoing, in the event of a Change in Control, the Plan shall continue in effect, and no termination or amendment of the Plan shall occur, until the satisfaction of all severance payments and benefits to which Eligible Employees are or may become entitled to under the Plan. Upon the occurrence of a Change in Control during the term of the Plan, the Plan shall not be operative with respect to any subsequent Change in Control.
16. SUCCESSORS AND ASSIGNS
The Plan shall be binding upon any person, firm or business that is a successor to the business or interests of the Company, whether as a result of a Change in Control of the Company or otherwise. Any successor to the Company shall be required to assume the Plan in writing and honor the obligations of the Company and the Participating Employers hereunder. All payments and benefits that become due to an Eligible Employee under the Plan shall inure to the benefit of his/her heirs, assigns, designees or legal representatives.
17. ENFORCEABILITY
The Company intends the Plan to constitute a legally enforceable obligation between it and each Eligible Employee, and that the Plan confer vested rights on each Eligible Employee in accordance with the terms of the Plan, with each Eligible Employee being a third-party beneficiary thereof. Nothing in the Plan, however, shall be construed to confer on any Eligible Employee any right to continue in the employ of a Participating Employer or affect the right of a Participating Employer to terminate the employment or change the terms and conditions of employment of an Eligible Employee, with or without notice or cause, prior to a Change in Control, or to take any such action following a Change in Control, subject to the consequences specified by the Plan.
The Plan shall be construed and enforced in accordance with ERISA and the laws of the State of Indiana to the extent not preempted by ERISA, regardless of the law that might otherwise govern under applicable principles or provisions of choice or conflict of law doctrines. To the extent any provision of the Plan shall be invalid or unenforceable under any applicable law, it shall be considered deleted herefrom and all other provisions of the Plan shall be unaffected and shall continue in full force and effect.
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18. SECTION 409A COMPLIANCE
To the extent applicable, it is intended that the Plan and all payments hereunder comply with the requirements of Section 409A, and the Plan shall be interpreted and applied by the Committee in a manner consistent with this intent in order to avoid the imposition of any additional tax under Section 409A. In the event that any provision of the Plan is determined by the Committee to not comply with the applicable requirements of Section 409A, the Committee shall have the authority to take such actions and to make such changes to the Plan as the Committee deems necessary to comply with such requirements. In no event whatsoever shall the Company be liable for any tax, interest or penalties that may be imposed on the Eligible Employee by or any damages for failing to comply with Section 409A. Notwithstanding the foregoing or anything elsewhere in the Plan to the contrary, if an Eligible Employee is treated as a “specified employee” as of the date of any payment under the Plan, then, to the extent required, the commencement of any payment under the Plan shall be delayed until the date that is six (6) months following the date of the Eligible Employee’s Separation from Service.
12
EXHIBIT A
SEVERANCE AGREEMENT AND RELEASE OF CLAIMS
13
Exhibit 21 — List of Subsidiaries & Affiliates
The following are subsidiaries and affiliated corporations of the company at December 31, 2020.
Certain subsidiaries have been omitted as they are not significant in the aggregate.
| State or Jurisdiction of Incorporation or Organization | ||||||||
| 1096401 B.C. Unlimited Liability Company | Canada | |||||||
| Acanthas Pharma, Inc. | Canada | |||||||
| Alnara Pharmaceuticals, Inc. | Delaware | |||||||
| Andean Technical Operations Center | Peru | |||||||
| ARMO Biosciences, Inc. | Delaware | |||||||
| AurKa Pharma, Inc. | Canada | |||||||
| Avid Radiopharmaceuticals, Inc. | Delaware | |||||||
| CoLucid Pharmaceuticals, Inc. | Delaware | |||||||
| Compania Farmaceutica Eli Lilly de Centro America S.A. | Guatemala | |||||||
| Dermira, Inc. | Delaware | |||||||
| Dermira Canada | Canada | |||||||
| Disarm Therapeutics Inc. | Delaware | |||||||
| Dista Ilac Ticaret Ltd. Sti. | Turkey | |||||||
| Dista, S.A. | Spain | |||||||
| Dista-Produtos Quimicos & Farmaceuticos, LDA | Portugal | |||||||
| Elanco Animal Health Ireland Limited | Ireland | |||||||
| Elanco Switzerland Holding Sarl | Switzerland | |||||||
| ELCO Dominicana SRL | Dominican Republic | |||||||
| ELCO for Trade and Marketing, S.A.E. | Egypt | |||||||
| ELCO Insurance Company Limited | Bermuda | |||||||
| ELCO Management, Inc. | Delaware | |||||||
| ELGO Insurance Company Limited | Bermuda | |||||||
| Eli Lilly (Malaysia) Sdn. Bhd. | Malaysia | |||||||
| Eli Lilly (Philippines), Incorporated | Philippines | |||||||
| Eli Lilly (S.A.) (Proprietary) Limited | South Africa | |||||||
| Eli Lilly (Singapore) Pte. Ltd. | Singapore | |||||||
| Eli Lilly (Suisse) S.A. | Switzerland | |||||||
| ELI LILLY AND COMPANY | Indiana | |||||||
| Eli Lilly and Company (India) Pvt. Ltd. | India | |||||||
| Eli Lilly and Company (Ireland) Limited | Ireland | |||||||
| Eli Lilly and Company (N.Z.) Limited | New Zealand | |||||||
| Eli Lilly and Company (Taiwan), Inc. | Taiwan | |||||||
| Eli Lilly and Company Limited | United Kingdom | |||||||
| Eli Lilly Asia Pacific SSC Sdn Bhd | Malaysia | |||||||
| Eli Lilly Asia, Inc. | Delaware | |||||||
| Eli Lilly Australia Pty. Limited | Australia | |||||||
| Eli Lilly Benelux S.A. | Belgium | |||||||
| Eli Lilly B-H d.o.o. | Bosnia | |||||||
| Eli Lilly Bienes y Servicios S de RL de CV | Mexico | |||||||
| State or Jurisdiction of Incorporation or Organization | ||||||||
| Eli Lilly Canada Inc. | Canada | |||||||
| Eli Lilly Cork Limited | Ireland | |||||||
| Eli Lilly CR s.r.o. | Czech Republic | |||||||
| Eli Lilly Danmark A/S | Denmark | |||||||
| Eli Lilly do Brasil Limitada | Brazil | |||||||
| Eli Lilly Egypt, for Trading | Egypt | |||||||
| Eli Lilly European Clinical Trial Services SA | Belgium | |||||||
| Eli Lilly Export S.A. | Switzerland | |||||||
| Eli Lilly farmacevtska druzba, d.o.o. | Slovenia | |||||||
| Eli Lilly Finance, S.A. | Switzerland | |||||||
| Eli Lilly Ges.m.b.H. | Austria | |||||||
| Eli Lilly Group Limited | United Kingdom | |||||||
| Eli Lilly Holdings Ltd. | United Kingdom | |||||||
| Eli Lilly Hrvatska d.o.o. | Croatia | |||||||
| Eli Lilly Interamerica Inc., y Compania Limitada | Chile | |||||||
| Eli Lilly Interamerica, Inc. | Indiana | |||||||
| Eli Lilly International Corporation | Indiana | |||||||
| Eli Lilly Ireland Holdings Limited | Ireland | |||||||
| Eli Lilly Israel Ltd. | Israel | |||||||
| Eli Lilly Italia S.p.A. | Italy | |||||||
| Eli Lilly Japan K.K. | Japan | |||||||
| Eli Lilly Kinsale Limited | Ireland | |||||||
| Eli Lilly Nederland B.V. | Netherlands | |||||||
| Eli Lilly Nigeria Ltd. | Nigeria | |||||||
| Eli Lilly Norge A.S. | Norway | |||||||
| Eli Lilly Pakistan (Pvt.) Ltd. | Pakistan | |||||||
| Eli Lilly Polska Sp.z.o.o. (Ltd.) | Poland | |||||||
| Eli Lilly Regional Operations GmbH | Austria | |||||||
| Eli Lilly Romania SRL | Romania | |||||||
| Eli Lilly S.A. | Switzerland | |||||||
| Eli Lilly Saudi Arabia Limited | Saudi Arabia | |||||||
| Eli Lilly Services India Private Limited | India | |||||||
| Eli Lilly Slovakia s.r.o. | Slovakia | |||||||
| Eli Lilly Sweden AB | Sweden | |||||||
| Eli Lilly Vostok S.A., Geneva | Switzerland | |||||||
| Eli Lilly y Compania de Mexico, S.A. de C.V. | Mexico | |||||||
| Eli Lilly y Compania de Venezuela, S.A. | Venezuela | |||||||
| Glycostasis, Inc. | Delaware | |||||||
| Greenfield-Produtos Farmaceuticos, Lda. | Portugal | |||||||
| ICOS Corporation | Washington | |||||||
| ImClone GmbH | Switzerland | |||||||
| ImClone LLC | Delaware | |||||||
| ImClone Systems Holdings, Inc. | Delaware | |||||||
| ImClone Systems LLC | Delaware | |||||||
| State or Jurisdiction of Incorporation or Organization | ||||||||
| Irisfarma S.A. | Spain | |||||||
| LDH I Corporation | Delaware | |||||||
| Lilly (Shanghai) Management Co., Ltd. | China | |||||||
| Lilly Asia Ventures Fund I, L.P. | Cayman Islands | |||||||
| Lilly Asia Ventures Fund II, L.P. | Cayman Islands | |||||||
| Lilly Asian Ventures Fund III, L.P. | Cayman Islands | |||||||
| Lilly Cayman Holdings | Cayman Islands | |||||||
| Lilly Centre for Clinical Pharmacology PTE. LTD. | Singapore | |||||||
| Lilly China Research and Development Co., Ltd | China | |||||||
| Lilly del Caribe, Inc. | Cayman Islands | |||||||
| Lilly Deutschland GmbH | Germany | |||||||
| Lilly France S.A.S. | France | |||||||
| Lilly Global Nederland Holdings B.V. | Netherlands | |||||||
| Lilly Global Services, Inc. | Indiana | |||||||
| Lilly Holding GmbH | Germany | |||||||
| Lilly Holdings B.V. | Netherlands | |||||||
| Lilly Hungaria KFT | Hungary | |||||||
| Lilly ilaç ticaret limited şirketi | Turkey | |||||||
| Lilly Japan Financing G.K. | Japan | |||||||
| Lilly Korea Ltd. | Korea | |||||||
| Lilly Nederland Finance B.V. | Netherlands | |||||||
| Lilly Nederland Finance B.V. - GCC | Netherlands | |||||||
| Lilly Nederland Holding B.V. | Netherlands | |||||||
| Lilly Pharma Ltd. | Russia | |||||||
| Lilly Portugal - Produtos Farmaceuticos, Lda. | Portugal | |||||||
| Lilly S.A. | Spain | |||||||
| Lilly Suzhou Pharmaceutical Co. Ltd. | China | |||||||
| Lilly Trading Co. LTD | China | |||||||
| Lilly USA, LLC | Indiana | |||||||
| Lilly Ventures Fund I LLC | Delaware | |||||||
| Loxo Oncology, Inc. | Delaware | |||||||
| OY Eli Lilly Finland AB | Finland | |||||||
| Petra Pharma Corporation | Delaware | |||||||
| Pharmaserve-Lilly S.A.C.I. | Greece | |||||||
| PT. Eli Lilly Indonesia | Indonesia | |||||||
| SGX Pharmaceuticals, Inc. | Delaware | |||||||
| Spaly Bioquimica, S.A. | Spain | |||||||
| UAB Eli Lilly Lietuva | Lithuania | |||||||
| Valquifarma S.A. | Spain | |||||||
| Vital Pharma Productos Farmaceuticos | Portugal | |||||||
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements (Form S-3 ASR No. 333-229735; and Form S-8 Nos. 333-104057 and 333-172422) of Eli Lilly and Company and in the related Prospectus of our reports dated February 17, 2021, with respect to the consolidated financial statements of Eli Lilly and Company and subsidiaries, and the effectiveness of internal control over financial reporting of Eli Lilly and Company and subsidiaries, included in this Annual Report (10-K) for the year ended December 31, 2020.
/s/ Ernst and Young LLP
Indianapolis, Indiana
February 17, 2021
EXHIBIT 31.1 Rule 13a-14(a) Certification of David A. Ricks, Chairman, President, and Chief Executive Officer
CERTIFICATIONS
I, David A. Ricks, Chairman, President, and Chief Executive Officer, certify that:
1.I have reviewed this report on Form 10-K of Eli Lilly and Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 17, 2021
| By: | /s/ David A. Ricks | |||||||
| David A. Ricks | ||||||||
| Chairman, President, and Chief Executive Officer | ||||||||
EXHIBIT 31.2 Rule 13a-14(a) Certification of Anat Ashkenazi, Senior Vice President and Chief Financial Officer
CERTIFICATIONS
I, Anat Ashkenazi, Senior Vice President and Chief Financial Officer, certify that:
1.I have reviewed this report on Form 10-K of Eli Lilly and Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 17, 2021
| By: | /s/ Anat Ashkenazi | |||||||
| Anat Ashkenazi | ||||||||
Senior Vice President and Chief Financial Officer | ||||||||
EXHIBIT 32 Section 1350 Certification
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Eli Lilly and Company, an Indiana corporation (the “Company”), does hereby certify that, to the best of his knowledge:
The Annual Report on Form 10-K for the year ended December 31, 2020 (the “Form 10-K”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: | February 17, 2021 | /s/ David A. Ricks | |||||||||
| David A. Ricks | |||||||||||
| Chairman, President, and Chief Executive Officer | |||||||||||
| Date: | February 17, 2021 | /s/ Anat Ashkenazi | |||||||||
| Anat Ashkenazi | |||||||||||
| Senior Vice President and Chief Financial Officer | |||||||||||