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EX-12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES - LILLY ELI & COlly-9302016x10qxexhibit12.htm
EX-32 - SECTION 1350 CERTIFICATION - LILLY ELI & COlly-9302016x10qxexhibit32.htm
EX-31.2 - RULE 13A-14(A) CERTIFICATION OF DERICA W. RICE, EXECUTIVE VICE PRESIDENT, GLOBAL - LILLY ELI & COlly-9302016x10qxexhibit312.htm
EX-31.1 - RULE 13A-14(A) CERTIFICATION OF JOHN C. LECHLEITER, PH.D., CHAIRMAN OF THE BOARD - LILLY ELI & COlly-9302016x10qxexhibit311.htm


 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
COMMISSION FILE NUMBER 001-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA
 
35-0470950
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant’s telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ý
  
Accelerated filer  o
 
Non-accelerated filer o
  
Smaller reporting Company o
 
  
 
 
 
  
 
 
  
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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 and post such files).
Yes ý No o
The number of shares of common stock outstanding as of October 17, 2016:
 
Class
 
Number of Shares Outstanding
Common
 
1,103,948,230

 





Eli Lilly and Company
Form 10-Q
For the Quarter Ended September 30, 2016
Table of Contents
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Forward-Looking Statements
This Quarterly Report on Form 10-Q includes 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). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions.
In particular, information appearing under “Management's Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we ("Lilly" or the "company") 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.
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2015, particularly under the captions “Forward-Looking Statements” and “Risk Factors.”
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this 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 report.

3



PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars and shares in millions, except per-share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
5,191.7

 
$
4,959.7

 
$
15,461.6

 
$
14,583.1

Costs, expenses, and other:
 
 
 
 
 
 
 
Cost of sales
1,400.9

 
1,236.9

 
4,188.9

 
3,648.0

Research and development
1,236.4

 
1,143.4

 
3,793.3

 
3,352.2

Marketing, selling, and administrative
1,565.4

 
1,575.7

 
4,661.9

 
4,734.6

Acquired in-process research and development (Note 3)

 

 

 
336.0

Asset impairment, restructuring, and other special charges (Note 5)
45.5

 
42.4

 
234.9

 
222.8

Other–net, (income) expense (Note 12)
(27.2
)
 
(86.5
)
 
100.6

 
(55.9
)
 
4,221.0


3,911.9


12,979.6


12,237.7

Income before income taxes
970.7


1,047.8


2,482.0


2,345.4

Income taxes (Note 8)
192.7

 
248.1

 
516.2

 
415.4

Net income
$
778.0


$
799.7


$
1,965.8


$
1,930.0

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.74

 
$
0.75

 
$
1.86

 
$
1.82

Diluted
$
0.73

 
$
0.75

 
$
1.85

 
$
1.81

Shares used in calculation of earnings per share:
 
 
 
 
 
 
 
Basic
1,057.7

 
1,061.4

 
1,058.4

 
1,062.4

Diluted
1,060.8

 
1,065.2

 
1,061.1

 
1,066.0

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.51

 
$
0.50

 
$
1.53

 
$
1.50

See notes to consolidated condensed financial statements.

4



Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
778.0

 
$
799.7

 
$
1,965.8

 
$
1,930.0

Other comprehensive income (loss), net of tax (Note 11)
113.5

 
(263.8
)
 
323.0

 
(675.2
)
Comprehensive income
$
891.5


$
535.9


$
2,288.8


$
1,254.8

See notes to consolidated condensed financial statements.


5



Consolidated Condensed Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

 
September 30, 2016
 
December 31, 2015
Assets
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents (Note 6)
$
3,489.0

 
$
3,666.4

Short-term investments (Note 6)
737.8

 
785.4

Accounts receivable, net of allowances of $44.7 (2016) and $44.3 (2015)
3,848.5

 
3,513.0

Other receivables
672.9

 
558.6

Inventories
3,881.2

 
3,445.8

Prepaid expenses and other
756.5

 
604.4

Total current assets
13,385.9

 
12,573.6

Other Assets
 
 
 
Investments (Note 6)
5,027.0

 
3,646.6

Goodwill
4,007.7

 
4,039.9

Other intangibles, net
4,638.5

 
5,034.8

Sundry
2,279.3

 
2,220.5

Total other assets
15,952.5

 
14,941.8

Property and Equipment
 
 
 
Land, buildings, equipment, and construction in progress
17,237.8

 
16,660.9

Accumulated depreciation
(8,985.9
)
 
(8,607.4
)
Property and equipment, net
8,251.9

 
8,053.5

Total assets
$
37,590.3

 
$
35,568.9

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term borrowings and current maturities of long-term debt
$
641.5

 
$
6.1

Accounts payable
1,161.2

 
1,338.2

Employee compensation
738.5

 
967.0

Sales rebates and discounts
3,547.5

 
2,560.1

Dividends payable

 
539.0

Income taxes payable
183.0

 
358.9

Other current liabilities
2,001.1

 
2,460.3

Total current liabilities
8,272.8

 
8,229.6

Other Liabilities
 
 
 
Long-term debt
8,707.3

 
7,972.4

Accrued retirement benefits (Note 9)
2,077.8

 
2,160.3

Long-term income taxes payable
805.6

 
868.9

Other noncurrent liabilities
2,111.0

 
1,747.4

Total other liabilities
13,701.7

 
12,749.0

Commitments and Contingencies (Note 10)
 
 
 
Eli Lilly and Company Shareholders’ Equity (Note 7)
 
 
 
Common stock
690.4

 
691.3

Additional paid-in capital
5,648.6

 
5,552.1

Retained earnings
16,601.6

 
16,011.8

Employee benefit trust
(3,013.2
)
 
(3,013.2
)
Accumulated other comprehensive loss (Note 11)
(4,257.7
)
 
(4,580.7
)
Cost of common stock in treasury
(80.5
)
 
(90.0
)
Total Eli Lilly and Company shareholders’ equity
15,589.2

 
14,571.3

Noncontrolling interests
26.6

 
19.0

Total equity
15,615.8

 
14,590.3

Total liabilities and equity
$
37,590.3

 
$
35,568.9

See notes to consolidated condensed financial statements.

6



Consolidated Condensed Statements of Cash Flows
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
 
Nine Months Ended
September 30,
 
2016
 
2015
Cash Flows from Operating Activities
 
Net income
$
1,965.8

 
$
1,930.0

Adjustments to Reconcile Net Income to Cash Flows from Operating Activities:
 
 
 
Depreciation and amortization
1,152.0

 
1,084.3

Change in deferred income taxes
350.8

 
(671.0
)
Stock-based compensation expense
188.5

 
159.4

Net payments for terminations of interest rate swaps
(3.4
)
 
(186.1
)
Acquired in-process research and development

 
336.0

Other changes in operating assets and liabilities, net of acquisitions and divestitures
(1,215.8
)
 
(963.6
)
Other non-cash operating activities, net
296.2

 
279.5

Net Cash Provided by Operating Activities
2,734.1

 
1,968.5

Cash Flows from Investing Activities
 
 
 
Net purchases of property and equipment
(627.2
)
 
(686.0
)
Proceeds from sales and maturities of short-term investments
1,245.9

 
1,585.8

Purchases of short-term investments
(425.7
)
 
(764.2
)
Proceeds from sales of noncurrent investments
1,606.8

 
2,271.8

Purchases of noncurrent investments
(3,640.7
)
 
(2,673.4
)
Restricted cash released for acquisition (Note 3)

 
5,405.6

Cash paid for acquisitions, net of cash acquired
(45.0
)
 
(5,287.8
)
Proceeds from sale of product rights

 
410.0

Purchase of in-process research and development

 
(386.0
)
Other investing activities, net
(75.1
)
 
(102.7
)
Net Cash Used for Investing Activities
(1,961.0
)
 
(226.9
)
Cash Flows from Financing Activities
 
 
 
Dividends paid
(1,617.4
)
 
(1,594.0
)
Net change in short-term borrowings
(1.7
)
 
(2,680.7
)
Proceeds from issuance of long-term debt
1,206.6

 
4,454.6

Repayment of long-term debt
(0.2
)
 
(1,950.6
)
Purchases of common stock
(300.1
)
 
(496.6
)
Other financing activities, net
(121.8
)
 
27.7

Net Cash Used for Financing Activities
(834.6
)
 
(2,239.6
)
Effect of exchange rate changes on cash and cash equivalents
(115.9
)
 
(134.8
)
 
 
 
 
Net decrease in cash and cash equivalents
(177.4
)
 
(632.8
)
Cash and cash equivalents at January 1
3,666.4

 
3,871.6

Cash and Cash Equivalents at September 30
$
3,489.0

 
$
3,238.8

See notes to consolidated condensed financial statements.

7



Notes to Consolidated Condensed Financial Statements
(Tables present dollars in millions, except per-share data)
Note 1: Basis of Presentation
We have prepared the accompanying unaudited consolidated condensed financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015. We issue our financial statements by filing with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing.
Certain reclassifications have been made to prior periods in the consolidated condensed 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, that is, based on the weighted-average number of outstanding common shares plus the effect of incremental shares from our stock-based compensation programs.
Note 2: Implementation of New Financial Accounting Pronouncements
The following table provides a brief description of accounting standards that have not yet been adopted and could have a material effect on our financial statements:
Standard
 
Description
 
Effective Date
 
Effect on the financial statements or other significant matters
Accounting Standards Update 2014-09, Revenue from Contracts with Customers
 
This standard will replace existing revenue recognition standards and will require entities to recognize revenues 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. An entity can apply the new revenue standard retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings.
 
This standard is effective January 1, 2018, but we are permitted to adopt this standard one year earlier if we choose. We intend to adopt this standard on January 1, 2018.
 
We are in the process of evaluating the impact of the adoption of the standard, but do not yet have enough information to estimate the anticipated impact on our consolidated financial statements.

8



Standard
 
Description
 
Effective Date
 
Effect on the financial statements or other significant matters
Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
 
This standard will require 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). An entity should apply the new standard through a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.
 
This standard is effective January 1, 2018. Early adoption of the majority of the amendments in this standard is not permitted, however, early application of certain amendments is permitted. We intend to fully adopt this standard on January 1, 2018.
 
We are unable to estimate the impact of adopting this standard as the significance of the impact will depend upon our equity investments as of the date of adoption.
Accounting Standards Update 2016-02, Leases
 
This standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under current GAAP, on the balance sheet and requiring additional disclosures about leasing arrangements. This standard requires a modified retrospective approach to adoption.
 
This standard is effective January 1, 2019, with early adoption permitted. We intend to adopt this standard on January 1, 2019.
 
We are in the process of determining our approach to adopting the standard, as well as the anticipated impact on our consolidated financial statements.
Accounting Standards Update 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
 
This standard will require entities to recognize all excess tax benefits and tax deficiencies in the statement of operations as a discrete item in the reporting period in which they occur. The standard also allows an employer to withhold up to the maximum statutory tax rate and still qualify for equity classification. Classification of excess tax benefits on the statement of cash flows should be classified as an operating activity, and employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity. The provisions that affect the statement of operations will be effective prospectively in the year of adoption and the provisions that affect the statement of cash flows will be effective retrospectively.
 
This standard is effective January 1, 2017. Early adoption is permitted. We are evaluating our anticipated date of adoption.
 
We do not believe the impact of adopting this standard will have a material impact on our consolidated financial statements. We cannot predict the impact on our consolidated financial statements in future reporting periods following adoption as this will be dependent upon various factors including the number of shares issued and changes in the price of our stock between the grant date and settlement date.

Accounting Standards Update 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
 
This standard will require entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of transfer. This standard requires a modified retrospective approach to adoption.
 
This standard is effective January 1, 2018, with early adoption permitted. We are evaluating our anticipated date of adoption.
 
We are in the process of determining the anticipated impact on our consolidated financial statements.

9



Note 3: Acquisitions
On January 1, 2015, we completed the acquisition of Novartis Animal Health (Novartis AH). Additionally, on October 1, 2015, Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS) transferred to us their commercialization rights with respect to Erbitux® in the United States (U.S.) and Canada (collectively, North America) through a modification of our existing arrangement. See Note 4 for additional information related to the Erbitux arrangement. We also had an immaterial acquisition of a business in April 2016. These transactions 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 dates 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 are included in our consolidated condensed financial statements from the dates of acquisition.
In October 2016, we announced an agreement to acquire Boehringer Ingelheim Vetmedica, Inc.'s U.S. feline, canine, and rabies vaccine portfolio in an all-cash transaction for approximately $885 million, including the estimated cost of acquired inventory. Under the terms of the agreement, we will acquire a manufacturing and research and development site, a U.S. vaccine portfolio including vaccines used for the treatment of bordetella, Lyme disease, rabies, and parvovirus, among others, as well as several pipeline assets. This transaction will be accounted for as a business combination under the acquisition method of accounting and is expected to close by early 2017, subject to approval by the U.S. Federal Trade Commission. The closing is also subject to antitrust approval and the closing of a previously announced asset swap transaction between Boehringer Ingelheim and Sanofi SA.
In addition to the acquisitions of businesses, we also acquired assets in development in the nine months ended September 30, 2015, which are further discussed in this note below in Asset Acquisitions. Upon acquisition, the acquired in-process research and development (IPR&D) related to these products was immediately written off as an expense because the products had no alternative future use. For the three and nine months ended September 30, 2016, as well as for the three months ended September 30, 2015, we recorded no acquired IPR&D charges. There were acquired IPR&D charges of $336.0 million for the nine months ended September 30, 2015, which included the transactions discussed below in Asset Acquisitions and the upfront fee of $200.0 million related to tanezumab. See Note 4 for additional information related to the tanezumab arrangement.
Acquisition of a Business
Novartis AH Acquisition
Overview of Transaction
On January 1, 2015, we acquired from Novartis AG all of the shares of certain Novartis subsidiaries and the assets and liabilities of other Novartis subsidiaries that were exclusively related to the Novartis AH business in an all-cash transaction for a total purchase price of $5.28 billion, $5.41 billion of which was funded by cash held in escrow at December 31, 2014.
As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvements Act, following the closing of the acquisition of Novartis AH, we divested certain animal health assets in the U.S. related to the Sentinel® canine parasiticide franchise to Virbac Corporation for approximately $410 million.
The acquired Novartis AH business consisted of the research and development, manufacture, marketing, sale and distribution of veterinary products to prevent and treat diseases in pets, farm animals, and farmed fish. Under the terms of the agreement, we acquired manufacturing sites, research and development facilities, a global commercial infrastructure and portfolio of products, a pipeline of projects in development, and employees.

10



Assets Acquired and Liabilities Assumed
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
Estimated Fair Value at January 1, 2015
Inventories
$
380.2

Acquired in-process research and development
298.0

Marketed products (1)
1,953.0

Property and equipment
199.9

Assets held for sale (primarily the U.S. Sentinel rights)
422.7

Accrued retirement benefits
(108.7
)
Deferred income taxes
(60.1
)
Other assets and liabilities - net
(73.0
)
Total identifiable net assets
3,012.0

Goodwill (2)
2,271.1

Total consideration transferred - net of cash acquired
$
5,283.1

(1) These intangible assets, 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 19 years.
(2) The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of Novartis AH with our legacy animal health business, future unidentified projects and products, and the assembled workforce of Novartis AH. Approximately $1.0 billion of the goodwill associated with this acquisition is deductible for tax purposes.
Asset Acquisitions
The following table and narrative summarize our asset acquisitions during the nine months ended September 30, 2015. There were no asset acquisitions during the nine months ended September 30, 2016.
Counterparty
Compound(s) or Therapy
Acquisition Month
 
Phase of Development (1)
 
Acquired IPR&D Expense
Innovent Biologics, Inc. (Innovent)
Monoclonal antibody targeting protein CD-20

Immuno-oncology molecules

cMet monoclonal antibody
March 2015
 
Pre-clinical (2)
 
$
56.0

Hanmi Pharmaceutical Co., Ltd. (Hanmi)
BTK Inhibitor - HM71224
April 2015
 
Phase I
 
50.0

BioNTech AG (BioNTech)
Cancer immunotherapies
May 2015
 
Pre-clinical
 
30.0

(1) The phase of development presented is as of the date of the arrangement.
(2) Prior to acquisition, Innovent's monoclonal antibody targeting protein CD-20 had received investigational new drug approval in China to begin Phase I development.
In connection with the arrangements described herein, our partners may be entitled to future royalties based on sales should these products be approved for commercialization and/or milestones based on the successful progress of the compounds through the development process.


11



Our collaboration agreement with Innovent is to develop and commercialize a portfolio of cancer treatments. In China, we will be responsible for the commercialization efforts, while Innovent will lead the development and manufacturing efforts. Innovent also has co-promotion rights in China. We will be responsible for development, manufacturing, and commercialization efforts of Innovent's pre-clinical immuno-oncology molecules outside of China. Separate from the collaboration, we will continue the development of our cMet monoclonal antibody gene outside of China.
Our collaboration agreement with Hanmi is to develop and commercialize Hanmi's compound being investigated for the treatment of autoimmune and other diseases. We have rights to the molecule for all indications on a worldwide basis excluding Korea. We will be responsible for leading development, regulatory, manufacturing, and commercial efforts in our territories.
Our research collaboration with BioNTech is to discover novel cancer immunotherapies.
Note 4: Collaborations and Other Arrangements
We often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone and royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the collaboration partner. Elements within a collaboration are separated into individual units of accounting if they have standalone value from other elements within the arrangement. In these situations, the arrangement consideration is allocated to the elements on a relative selling price basis. Revenues related to products we sell pursuant to these arrangements are included in net product revenues, while other sources of revenue (e.g., royalties and profit-sharing due from our partner) are included in collaboration and other revenue.
The following table summarizes our collaboration and other revenue, which is included in revenue in the consolidated condensed statements of operations:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Collaboration and other revenue
$
216.5

 
$
215.2

 
$
607.3

 
$
644.7

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.

12



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®, and Synjardy®, as well as our basal insulin: Basaglar®.
The table below summarizes significant regulatory and commercialization events and milestones (received) paid for the compounds included in this collaboration:
 
 
Product Status
 
Milestones
(Deferred) Capitalized (1)
Product Family
 
U.S.
 
Europe
 
Japan
 
Year
Amount
Trajenta (2)
 
Launched 2011
 
Launched 2011
 
Launched 2011
 
2016
$

 
 
 
 
2015

 
 
 
 
Cumulative (5)
446.4

Jardiance (3)
 
Launched 2014
 
Launched 2014
 
Launched 2015
 
2016

 
 
 
 
2015

 
 
 
 
Cumulative (5)
299.5

Basaglar
 
Approved (4)
 
Launched 2015
 
Launched 2015
 
2016
(187.5
)
 
 
 
 
2015

 
 
 
 
Cumulative (5)
(250.0
)
(1) In connection with the regulatory approvals of Basaglar in Europe and Japan, milestone payments received were recorded as deferred revenue 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.
(2) Jentadueto is included in the Trajenta family of product results.
(3) Glyxambi and Synjardy are included in the Jardiance family of product results.
(4) In September 2015, we entered into a settlement agreement to resolve patent infringement litigation filed by Sanofi-Aventis U.S. LLC, which markets Lantus® (insulin glargine). As part of the settlement agreement, the parties agreed that Basaglar can be launched in the U.S. beginning on December 15, 2016. Basaglar received U.S. Food and Drug Administration (FDA) approval in December 2015. As a result of receiving FDA approval, we received a $187.5 million milestone payment from Boehringer Ingelheim in the first quarter of 2016, which was recorded as deferred revenue and, upon product launch, will be amortized through the term of the collaboration to collaboration and other revenue.
(5) The cumulative amount represents the total amounts as of the end of the reporting period that have been (deferred) or capitalized since the start of this collaboration.
In the most significant markets, we and Boehringer Ingelheim share equally the ongoing development costs, commercialization costs and agreed upon gross margin for any product resulting from the collaboration. We record our portion of the gross margin associated with Boehringer Ingelheim's compounds as collaboration and other revenue. We record our sales of Basaglar to third parties as net product revenues 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 record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company is entitled to potential performance payments depending on the sales of the compounds it contributes to the collaboration. These performance payments result in the owner of the compound retaining a greater share of the agreed upon gross margin of that product.
The following table summarizes our collaboration and other revenue recognized with respect to the Trajenta and Jardiance families of products:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Trajenta
$
115.4

 
$
92.7

 
$
330.8

 
$
255.0

Jardiance
47.5

 
15.4

 
125.8

 
45.7

Our revenue related to Basaglar was not significant for the three and nine months ended September 30, 2016 and 2015.

13



Erbitux
We have several collaborations with respect to Erbitux. The most significant collaborations are or, where applicable, were in Japan, and prior to the transfer of commercialization rights in the fourth quarter of 2015, the U.S. and Canada (Bristol-Myers Squibb Company); and worldwide except North America (Merck KGaA). Certain rights to Erbitux outside North America will remain with Merck KGaA (Merck) upon expiration of that agreement.
The following table summarizes our revenue recognized with respect to Erbitux:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net product revenues - BMS
$

 
$
(2.3
)
 
$

 
$
22.6

Net product revenues - third party
155.9

 

 
455.8

 

Collaboration and other revenue
28.7

 
88.2

 
77.5

 
286.2

Revenue
$
184.6


$
85.9


$
533.3


$
308.8

Bristol-Myers Squibb Company
Pursuant to commercial agreements with BMS, we had been co-developing Erbitux in North America with BMS exclusively. A separate agreement grants co-exclusive rights among Merck, BMS, and us in Japan and expires in 2032. On October 1, 2015, BMS transferred their commercialization rights to us with respect to Erbitux in North America pursuant to a modification of our existing arrangement, and we began selling Erbitux at that time. This modification did not affect our rights with respect to Erbitux in other jurisdictions. In connection with the modification of terms, we provide consideration to BMS based upon a tiered percentage of net sales of Erbitux in North America estimated to average 38 percent through September 2018. The transfer of the commercialization rights was accounted for as an acquisition of a business.
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
Estimated Fair Value at October 1, 2015
Marketed products (1)
$
602.1

Deferred tax asset
232.2

Deferred tax liability
(228.2
)
Other assets and liabilities - net
57.2

Total identifiable net assets
$
663.3

Total consideration - contingent consideration liability (2)
$
(663.3
)
(1) These intangible assets are being amortized to cost of sales using the straight-line method through the co-development period in North America as set forth in the original agreement, which was scheduled to expire in September 2018.
(2) See Note 6 for discussion on the estimation of the contingent consideration liability.
Including the Erbitux business as if we had acquired it on January 1, 2015, our combined consolidated unaudited pro forma revenue and total Erbitux revenue would have been approximately $5.0 billion and $150 million, respectively, for the three months ended September 30, 2015, and $14.8 billion and $560 million, respectively, for the nine months ended September 30, 2015. This unaudited pro forma financial information adjusts the historical consolidated revenue to give effect to pro forma events that are directly attributable to the acquisition. There would have been no material change to our historical consolidated net income. The unaudited pro forma financial information is not necessarily indicative of what our consolidated revenues would have been had we completed the acquisition on January 1, 2015. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of our combined company.
Until the effective date of the transfer of the business, the arrangements between us and BMS were as set forth in this paragraph. Erbitux research and development and other costs were shared by both companies according to a predetermined ratio. Responsibilities associated with clinical and other ongoing studies were apportioned between the parties under the agreements. Collaborative reimbursements due to us for supply of clinical trial materials; for research and development; and for a portion of marketing, selling, and administrative expenses were recorded as a reduction to the respective expense line items on the consolidated statement of operations. We received a distribution fee in the form of a royalty from BMS, based on a percentage of net sales in North America, which was

14



recorded in collaboration and other revenue. Royalties due to third parties were recorded as a reduction of collaboration and other revenue, net of any royalty reimbursements due from third parties. We were responsible for the manufacture and supply of all requirements of Erbitux in bulk-form active pharmaceutical ingredient (API) for clinical and commercial use in North America, and BMS purchased all of its requirements of API from us, subject to certain stipulations per the agreement. Sales of Erbitux API to BMS were reported in net product revenues.
Merck KGaA
A development and license agreement grants Merck exclusive rights to market Erbitux outside of North America until December 2018. A separate agreement grants co-exclusive rights among Merck, BMS, and us in Japan and expires in 2032. This agreement was amended in 2015 to grant Merck exclusive commercialization rights in Japan but did not result in any changes to our rights.
Merck manufactures Erbitux for supply in its territory as well as for Japan. We receive a royalty on the sales of Erbitux outside of North America, which is included in collaboration and other revenue as earned. Royalties due to third parties are recorded as a reduction of collaboration and other revenue, net of any royalty reimbursements due from third parties.
Effient® 
We are in a collaborative arrangement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) to develop, market, and promote Effient. Marketing rights for major territories are shown below. We and Daiichi Sankyo each have exclusive marketing rights in certain other territories.
Territory
 
Marketing Rights
 
Selling Party
U.S.
 
Co-promotion
 
Lilly
Major European markets
 
Co-promotion
 
Pre-January 1, 2016, Lilly
Post-January 1, 2016, Daiichi Sankyo
Japan
 
Exclusive
 
Daiichi Sankyo
Beginning January 1, 2016, while major European markets continue to be a co-promotion territory under the terms of our arrangement, Daiichi Sankyo exclusively promotes Effient in these markets. The economic results for the major European markets continue to be shared in the same proportion as they were previously.
The parties share approximately 50/50 in the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party manufactures bulk product, and we continue to produce the finished product for our exclusive and co-promotion territories, including the major European markets.
We record net product revenue in our exclusive and co-promotion territories where we are the selling party. Profit-share payments due to Daiichi Sankyo for co-promotion countries where we are the selling party are recorded as marketing, selling, and administrative expenses. Beginning January 1, 2016, any profit-share payments due to us from Daiichi Sankyo for the major European markets are recorded as collaboration and other revenue. We also record our share of the expenses in these co-promotion territories as marketing, selling, and administrative expenses. In our exclusive territories, we pay Daiichi Sankyo a royalty specific to these territories. All royalties due to Daiichi Sankyo and the third-party manufacturer are recorded in cost of sales.
The following table summarizes our revenue recognized with respect to Effient:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Revenue
$
127.7

 
$
132.1

 
$
394.3

 
$
382.7


15



Baricitinib
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 inhibitor compound, now known as 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 future global sales with rates ranging up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for increased tiered royalties ranging up to percentages in the high twenties. In 2010, Incyte exercised its option to co-develop baricitinib in rheumatoid arthritis. The agreement calls for payments associated with certain development, success-based regulatory, and sales-based milestones. In the first quarter of 2016, we incurred milestone-related expenses of $55.0 million in connection with regulatory submissions in the U.S. and Europe which were recorded as research and development expense. As of September 30, 2016, Incyte is eligible to receive up to $360.0 million of additional payments from us contingent upon certain development and success-based regulatory milestones, of which $180.0 million relates to regulatory decisions for a first indication. Incyte is also eligible to receive up to $150.0 million of potential sales-based milestones.
Solanezumab
We have an agreement with an affiliate of TPG-Axon Capital (TPG) whereby TPG funded a portion of the Phase III development of solanezumab. Under the agreement, TPG’s obligation to fund solanezumab costs ended in 2011. In exchange for its funding, TPG is eligible to receive success-based sales milestones totaling $70.2 million and mid-single digit royalties contingent upon the successful development of solanezumab. The royalties would be paid for approximately 10 years after launch of a product.
Tanezumab
In October 2013, we entered into a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and globally commercialize tanezumab for the treatment of osteoarthritis pain, chronic low back pain and cancer pain. Under the agreement, the companies share equally the ongoing development costs and, if successful, in gross margins and certain commercialization expenses. Following the FDA's decision in March 2015 to lift the partial clinical hold on tanezumab, certain Phase III trials resumed in July 2015. Upon the FDA's lifting of the partial clinical hold and the decision to continue the collaboration with Pfizer, we paid an upfront fee of $200.0 million, which was expensed as acquired IPR&D in the first quarter of 2015. In addition to this fee, Pfizer is eligible to receive up to $350.0 million in success-based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent upon the commercial success of tanezumab.
BACE Inhibitor
In September 2014, we entered into a collaboration agreement with AstraZeneca UK Limited (AstraZeneca) for the worldwide co-development and co-commercialization of AstraZeneca’s AZD3293, an oral beta-secretase cleaving enzyme (BACE) inhibitor being investigated for the potential treatment of Alzheimer’s disease. We are responsible for leading development efforts, while AstraZeneca will be responsible for manufacturing efforts. If successful, both parties will take joint responsibility for commercialization. Under the agreement, both parties share equally in the ongoing development costs and, if successful, in gross margins and certain other costs associated with commercialization of the molecule. As a result of the molecule moving into Phase III testing in April 2016, we incurred a $100.0 million developmental milestone, which was recorded as research and development expense in the second quarter of 2016. AstraZeneca is eligible to receive up to an additional $350.0 million contingent upon the achievement of certain development and success-based regulatory milestones.
Summary of Commission and Profit-Share Payments
The following table summarizes our aggregate amount of marketing, selling, and administrative expense associated with our commission and profit-sharing obligations for the collaborations and other arrangements described above:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Marketing, selling, and administrative
$
47.4

 
$
53.6

 
$
143.7

 
$
156.5


16



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 condensed statements of operations are described below.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Severance:
 
 
 
 
 
 
 
Human pharmaceutical
$

 
$
9.6

 
$

 
$
26.5

Animal health
8.3

 
2.5

 
37.0

 
38.8

Total severance
8.3

 
12.1

 
37.0

 
65.3

Asset impairment and other special charges:
 
 
 
 
 
 
 
Human pharmaceutical

 
0.9

 

 
18.0

Animal health
37.2

 
29.4

 
197.9

 
139.5

Total asset impairment and other special charges
37.2

 
30.3

 
197.9

 
157.5

Total asset impairment, restructuring, and other special charges
$
45.5

 
$
42.4

 
$
234.9

 
$
222.8

Severance costs recognized during the three months ended September 30, 2016 related primarily to the integration of Novartis AH. Severance costs recognized during the nine months ended September 30, 2016 related primarily to the integration of Novartis AH, as well as our decision to close an animal health manufacturing plant in Ireland. Severance costs recognized during the three and nine months ended September 30, 2015 related primarily to the integration of Novartis AH, as well as actions taken to reduce our cost structure.
Asset impairment and other special charges recognized during the three months ended September 30, 2016 resulted primarily from integration costs related to our acquisition of Novartis AH. Asset impairment and other special charges recognized during the nine months ended September 30, 2016 resulted primarily from integration costs related to our acquisition of Novartis AH, as well as $87.2 million of asset impairment and other charges related to our decision to close an animal health manufacturing plant in Ireland. The manufacturing plant was written down to its estimated fair value, which was based primarily on recent sales of similar assets. Asset impairment and other special charges recognized during the three and nine months ended September 30, 2015 related primarily to integration costs related to our acquisition of Novartis AH. The asset impairment and other special charges recognized during the nine months ended September 30, 2015 also related to intangible asset impairments due to product rationalization resulting from our acquisition of Novartis AH.
Note 6: Financial Instruments
Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-science products account for a substantial portion of our trade receivables; collateral is generally not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations. Major financial institutions represent the largest component of our investments in corporate debt securities. In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.
Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and 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, the effective portion of gains and losses is 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 effective portion of foreign currency translation gains or losses due to spot rate fluctuations are reported as a component of accumulated other

17



comprehensive loss. Hedge ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in current earnings during the period of change.
We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, Japanese yen, and the Swiss franc). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward and option contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At September 30, 2016, we had outstanding foreign currency forward commitments to purchase 946.7 million U.S. dollars and sell 844.8 million euro, commitments to purchase 1.79 billion euro and sell 2.00 billion U.S. dollars, commitments to purchase 742.5 million U.S. dollars and sell 75.42 billion Japanese yen, commitments to purchase 192.7 million British pounds and sell 225.2 million euro, commitments to purchase 266.9 million U.S. dollars and sell 204.2 million British pounds, and commitments to purchase 192.8 million Swiss francs and sell 196.9 million U.S. dollars, which will all settle within 30 days.
Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency interest rate swaps. Our foreign currency-denominated notes, which had carrying amounts of $3.55 billion and $2.27 billion as of September 30, 2016 and December 31, 2015, respectively, have been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated and Swiss franc-denominated operations. Our cross-currency interest rate swaps that convert a portion of our U.S. dollar-denominated floating rate debt to euro-denominated floating rate debt have also been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations.
In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact of fluctuations in interest rates on earnings. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and investment positions and may enter into interest rate swaps or collars to help maintain that balance.
Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting from the termination of interest rate swaps are classified as operating activities in our consolidated condensed statement of cash flows. At September 30, 2016, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 30 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.
We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of earnings and cash flow associated with forecasted sales of available-for-sale securities.
In March 2015, we issued $600.0 million of 1.25 percent fixed-rate notes due March 1, 2018, $800.0 million of 2.75 percent fixed-rate notes due June 1, 2025, and $800.0 million of 3.70 percent fixed-rate notes due March 1, 2045, with interest to be paid semi-annually. The proceeds from the issuance of the notes were used primarily to repay outstanding commercial paper issued in connection with our January 2015 acquisition of Novartis AH.
In June 2015, we issued euro-denominated notes consisting of €600.0 million of 1.00 percent fixed-rate notes due June 2, 2022, €750.0 million of 1.63 percent fixed-rate notes due June 2, 2026, and €750.0 million of 2.13 percent fixed-rate notes due June 3, 2030, with interest to be paid annually. The net cash proceeds of the offering of $2.27 billion were used primarily to purchase and redeem certain higher interest rate U.S. dollar-denominated notes and to repay outstanding commercial paper. We paid $1.95 billion to purchase and redeem notes with an aggregate principal amount of $1.65 billion and a net carrying value of $1.78 billion in June 2015, resulting in a pretax debt extinguishment loss of $166.7 million, which was included in other–net, (income) expense in our consolidated condensed statement of operations during the nine months ended September 30, 2015.
In May 2016, we issued Swiss franc-denominated notes consisting of Fr.200.0 million of 0.00 percent fixed-rate notes due May 24, 2018, Fr.600.0 million of 0.15 percent fixed-rate notes due May 24, 2024, and Fr.400.0 million of 0.45 percent fixed-rate notes due May 24, 2028, with interest to be paid annually. We are using the net cash

18



proceeds of the offering of $1.21 billion for general corporate purposes, which may include the repayment or redemption prior to maturity of certain of our U.S. dollar denominated fixed-rate notes due March 2017.
We may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of any anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in interest rates. Upon completion of a debt issuance and termination of the swap, the change in fair value of these instruments is recorded as part of other comprehensive income (loss) and is amortized to interest expense over the life of the underlying debt.
Upon issuance of our underlying U.S. dollar-denominated fixed-rate notes in March 2015, we terminated forward-starting interest rate contracts in designated cash flow hedging instruments with an aggregate notional amount of $1.35 billion and paid $206.3 million in cash to the counterparties for settlement. The settlement amount represented the fair value of the forward-starting interest rate contracts at the time of termination and was recorded in other comprehensive loss.
In connection with the June 2015 note purchase and redemption discussed above, we terminated certain interest rate swaps designated as fair value hedges with an aggregate notional amount of $876.0 million. As a result of the termination, we received cash of $20.2 million, which represented the fair value of the interest rate swaps at the time of termination. The related fair value adjustment was recorded as an increase to the carrying value of the underlying notes and was included as a component of the debt extinguishment loss.
The Effect of Risk-Management Instruments on the Consolidated Condensed Statement of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Fair value hedges:
 
 
 
 
 
 
 
Effect from hedged fixed-rate debt
$
(18.8
)
 
$
66.1

 
$
92.4

 
$
25.8

Effect from interest rate contracts
18.8

 
(66.1
)
 
(92.4
)
 
(25.8
)
Cash flow hedges:
 
 
 
 
 
 
 
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss
3.8

 
3.7

 
11.2

 
10.0

Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments
1.4

 
(14.9
)
 
105.6

 
7.2

The Effect of Risk-Management Instruments on Other Comprehensive Income (Loss)
The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Net investment hedges:
 
 
 
 
 
 
 
    Foreign currency-denominated notes
$
(37.0
)
 
$
(16.8
)
 
$
(80.0
)
 
$
(50.6
)
    Cross-currency interest rate swaps
(4.1
)
 

 
2.2

 

    Foreign currency exchange contracts

 

 
31.9

 

Cash flow hedges:
 
 
 
 
 
 
 
    Forward-starting interest rate swaps

 

 
(3.4
)
 
(56.7
)
During the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings $15.2 million of pretax net losses on cash flow hedges of the variability in expected future interest payments on our floating rate debt.
During the nine months ended September 30, 2016 and 2015, net losses related to ineffectiveness, as well as net losses related to the portion of our risk-management hedging instruments, fair value hedges, and cash flow hedges that were excluded from the assessment of effectiveness, were not material.

19



Fair Value of Financial Instruments
The following tables summarize certain fair value information at September 30, 2016 and December 31, 2015 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments: 
 
 
 
 
 
Fair Value Measurements Using
 
 
 
Carrying
Amount
 
Cost (1)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
1,615.9

 
$
1,615.9

 
$
1,614.8

 
$
1.1

 
$

 
$
1,615.9

 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
81.0

 
$
81.0

 
$
81.0

 
$

 
$

 
$
81.0

Corporate debt securities
648.8

 
648.3

 

 
648.8

 

 
648.8

Asset-backed securities
5.3

 
5.3

 

 
5.3

 

 
5.3

Other securities
2.7

 
2.7

 

 
2.7

 

 
2.7

Short-term investments
$
737.8

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
344.0

 
$
342.0

 
$
344.0

 
$

 
$

 
$
344.0

Corporate debt securities
3,104.7

 
3,084.7

 

 
3,104.7

 

 
3,104.7

Mortgage-backed securities
195.8

 
193.7

 

 
195.8

 

 
195.8

Asset-backed securities
474.8

 
473.3

 

 
474.8

 

 
474.8

Other securities
170.1

 
82.6

 

 
3.4

 
166.7

 
170.1

Marketable equity securities
178.5

 
80.5

 
178.5

 

 

 
178.5

Cost and equity method investments (2)
559.1

 


 
 
 
 
 
 
 
 
Noncurrent investments
$
5,027.0

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
1,644.4

 
$
1,644.4

 
$
1,637.0

 
$
7.4

 
$

 
$
1,644.4

 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
153.2

 
$
153.4

 
$
153.2

 
$

 
$

 
$
153.2

Corporate debt securities
625.8

 
626.9

 

 
625.8

 

 
625.8

Asset-backed securities
3.3

 
3.3

 

 
3.3

 

 
3.3

Other securities
3.1

 
3.1

 

 
3.1

 

 
3.1

Short-term investments
$
785.4

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
284.5

 
$
286.0

 
$
283.5

 
$
1.0

 
$

 
$
284.5

Corporate debt securities
1,962.6

 
1,995.8

 

 
1,962.6

 

 
1,962.6

Mortgage-backed securities
153.3

 
154.7

 

 
153.3

 

 
153.3

Asset-backed securities
441.9

 
443.1

 

 
441.9

 

 
441.9

Other securities
137.1

 
97.3

 

 
4.1

 
133.0

 
137.1

Marketable equity securities
128.9

 
74.8

 
128.9

 

 

 
128.9

Cost and equity method investments (2)
538.3

 


 
 
 
 
 
 
 
 
Noncurrent investments
$
3,646.6

 


 
 
 
 
 
 
 
 
(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.
(2) Fair value disclosures are not applicable for cost method and equity method investments.

20



 
 
 
Fair Value Measurements Using
 
 
 
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
Long-term debt, including current portion
 
 
 
 
 
 
 
 
 
September 30, 2016
$
(9,348.8
)
 
$

 
$
(10,064.6
)
 
$

 
$
(10,064.6
)
December 31, 2015
(7,978.5
)
 

 
(8,172.0
)
 

 
(8,172.0
)
 
 
 
Fair Value Measurements Using
 
 
 
Carrying
Amount
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant
Other Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair
Value
September 30, 2016
 
 
 
 
 
 
 
 
 
Risk-management instruments:
 
 
 
 
 
 
 
 
 
Interest rate contracts designated as fair value hedges:
 
 
 
 
 
 
 
 
 
Other receivables
$
5.8

 
$

 
$
5.8

 
$

 
$
5.8

Sundry
156.2

 

 
156.2

 

 
156.2

Cross-currency interest rate contracts designated as net investment hedges:
 
 
 
 
 
 
 
 
 
Sundry
1.6

 

 
1.6

 

 
1.6

Foreign exchange contracts not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Other receivables
8.4

 

 
8.4

 

 
8.4

Other current liabilities
(5.5
)
 

 
(5.5
)
 

 
(5.5
)
Contingent consideration liabilities (1):
 
 
 
 
 
 
 
 
 
Other current liabilities
(235.0
)
 

 

 
(235.0
)
 
(235.0
)
Other noncurrent liabilities
(296.2
)
 

 

 
(296.2
)
 
(296.2
)
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
Risk-management instruments:
 
 
 
 
 
 
 
 
 
Interest rate contracts designated as fair value hedges:
 
 
 
 
 
 
 
 
 
Sundry
$
70.1

 
$

 
$
70.1

 
$

 
$
70.1

Other noncurrent liabilities
(0.4
)
 

 
(0.4
)
 

 
(0.4
)
Foreign exchange contracts not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
Other receivables
13.1

 

 
13.1

 

 
13.1

Other current liabilities
(17.3
)
 

 
(17.3
)
 

 
(17.3
)
Contingent consideration liabilities (1):
 
 
 
 
 
 
 
 
 
Other current liabilities
(243.7
)
 

 

 
(243.7
)
 
(243.7
)
Other noncurrent liabilities
(427.2
)
 

 

 
(427.2
)
 
(427.2
)
(1) Contingent consideration liabilities primarily relate to the Erbitux arrangement with BMS discussed in Note 4.
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 an enforceable master netting arrangement 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.

21



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 value of cost and equity method investments is not readily available.
Contingent consideration liabilities primarily include contingent consideration related to Erbitux for which the fair value was estimated using a discounted cash flow analysis and Level 3 inputs, including projections representative of a market participant view for net sales in North America through September 2018 and an estimated discount rate. The amount to be paid is calculated as a tiered percentage of net sales (see Note 4) and will, therefore, vary directly with increases and decreases in net sales of Erbitux in North America. There is no cap on the amount that may be paid pursuant to this arrangement. The decrease in the fair value of the contingent consideration liabilities during the nine months ended September 30, 2016 was due primarily to cash payments of $171.8 million related to Erbitux. The change in the fair value of the contingent consideration liabilities recognized in earnings during the three and nine months ended September 30, 2016 was not material.
The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of September 30, 2016:
 
Maturities by Period
  
Total
 
Less Than
1 Year
 
1-5
Years
 
6-10
Years
 
More Than
10 Years
Fair value of debt securities
$
4,860.5

 
$
737.8

 
$
3,716.5

 
$
171.8

 
$
234.4

A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows: 
 
September 30, 2016
 
December 31, 2015
Unrealized gross gains
$
138.8

 
$
68.0

Unrealized gross losses
7.6

 
52.5

Fair value of securities in an unrealized gain position
3,570.3

 
764.5

Fair value of securities in an unrealized loss position
1,266.2

 
2,933.4

We periodically assess our investment securities for other-than-temporary impairment losses. Other-than-temporary impairment losses recognized during the three and nine months ended September 30, 2016 totaled $11.4 million and $53.0 million, respectively. Impairment losses recognized during the three months ended September 30, 2016 related primarily to our marketable equity securities, while impairment losses recognized during the nine months ended September 30, 2016 related primarily to our cost and equity method investments. Other-than-temporary impairment losses recognized during the three and nine months ended September 30, 2015 totaled $31.5 million and $41.3 million, respectively.
For fixed-income securities, the amount of credit losses are determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing credit losses include the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.
For equity securities, factors considered in assessing other-than-temporary impairment losses include the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, our intent and ability to retain the securities for a period of time sufficient to allow for recovery in fair value, and general market conditions and industry specific factors.
As of September 30, 2016, the securities in an unrealized loss position include primarily our marketable equity securities as well as fixed-rate debt securities of varying maturities. Marketable equity securities are sensitive to market price adjustments for general market conditions and industry or sector specific factors, and fixed-rate debt securities are sensitive to changes in the yield curve and other market conditions. Approximately 90 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of September 30, 2016, 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.

22



Activity related to our investment portfolio, substantially all of which related to available-for-sale securities, was as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales
$
926.3

 
$
621.9

 
$
2,503.4

 
$
3,491.8

Realized gross gains on sales
12.8

 
151.0

 
18.0

 
253.3

Realized gross losses on sales
1.3

 
1.5

 
11.7

 
3.9

Realized gains and losses on sales of 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 interest in the underlying accounts receivable once sold. We derecognized $685.9 million and $670.6 million of accounts receivable as of September 30, 2016 and December 31, 2015, respectively, under these factoring arrangements. The cost of factoring such accounts receivable on our consolidated condensed results of operations for the nine months ended September 30, 2016 and 2015 was not material.
Note 7: Shareholders’ Equity
During the nine months ended September 30, 2016 and 2015, we repurchased $300.1 million and $496.6 million of shares, respectively, associated with our $5.00 billion share repurchase program announced in October 2013. As of September 30, 2016, there were $2.65 billion of shares remaining in that program.
Note 8: Income Taxes
The U.S. examination of tax years 2010-2012 commenced during the fourth quarter of 2013. In December 2015, we executed a closing agreement with the Internal Revenue Service which effectively settled certain matters for tax years 2010-2012. Accordingly, we reduced our gross uncertain tax positions by approximately $320 million in 2015. During the first quarter of 2016, we effectively settled the remaining matters related to tax years 2010-2012. As a result of this resolution, our gross uncertain tax positions were further reduced by approximately $140 million, and our consolidated condensed results of operations benefited from an immaterial reduction in income tax expense. During the nine months ended September 30, 2016, we made cash payments of approximately $150 million related to tax years 2010-2012 after application of available tax credit carryforwards and carrybacks. The U.S. examination of tax years 2013-2014 and tax year 2015 commenced during the first and third quarters of 2016, respectively.

23



Note 9: Retirement Benefits
Net pension and retiree health benefit (income) cost included the following components:
 
Defined Benefit Pension Plans
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Components of net periodic benefit cost:
 
 
 
 
 
 
 
Service cost
$
70.2

 
$
82.8

 
$
212.2

 
$
245.3

Interest cost
104.2

 
117.1

 
314.4

 
351.4

Expected return on plan assets
(187.6
)
 
(195.7
)
 
(566.7
)
 
(579.7
)
Amortization of prior service cost
2.9

 
2.5

 
8.6

 
7.6

Recognized actuarial loss
71.0

 
91.5

 
213.4

 
274.8

Net periodic benefit cost
$
60.7

 
$
98.2

 
$
181.9

 
$
299.4

 
Retiree Health Benefit Plans
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
Components of net periodic benefit income:
 
 
 
 
 
 
 
Service cost
$
9.7

 
$
10.5

 
$
29.3

 
$
31.5

Interest cost
13.0

 
15.3

 
39.0

 
46.0

Expected return on plan assets
(37.6
)
 
(37.1
)
 
(112.7
)
 
(111.3
)
Amortization of prior service benefit
(21.5
)
 
(21.6
)
 
(64.3
)
 
(64.8
)
Recognized actuarial loss
5.2

 
9.4

 
15.5

 
28.3

Net periodic benefit income
$
(31.2
)
 
$
(23.5
)
 
$
(93.2
)
 
$
(70.3
)
We have contributed approximately $35 million required to satisfy minimum funding requirements to our defined benefit pension and retiree health benefit plans during the nine months ended September 30, 2016. Additional discretionary funding in the aggregate was not material during the nine months ended September 30, 2016. During the remainder of 2016, we expect to make contributions to our defined benefit pension and retiree health benefit plans of approximately $15 million to satisfy minimum funding requirements. Additional discretionary funding for the remainder of 2016 is not expected to be material.
Note 10: Contingencies
We are a party to various legal actions and government investigations. The most significant of these are described below. It is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters; however, we believe that, except as noted below with respect to the Alimta® patent litigation and administrative proceedings, 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.
Alimta Patent Litigation and Administrative Proceedings
A number of generic manufacturers are seeking approvals in various countries 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 could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position. We expect that a loss of exclusivity for Alimta would result in a rapid and severe decline in future revenues for the product in the relevant market.

24



U.S. Patent Litigation and Administrative Proceedings
We are engaged in various U.S. patent litigation matters involving Alimta brought pursuant to procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). More than 10 Abbreviated New Drug Applications (ANDAs) seeking approval to market generic versions of Alimta prior to the expiration of our vitamin regimen patent (expiring in 2021 plus pediatric exclusivity expiring in 2022) have been filed by a number of companies, including Teva Parenteral Medicines, Inc. (Teva) and APP Pharmaceuticals, LLC (APP). These companies have also alleged the patent is invalid.
In October 2010, we filed a lawsuit in the U.S. District Court for the Southern District of Indiana against Teva, APP and two other defendants seeking rulings that the U.S. vitamin regimen patent is valid and infringed (the Teva/APP litigation). A trial occurred in August 2013; the sole issue before the district court at that time was to determine patent validity. In March 2014, the court ruled that the asserted claims of the vitamin regimen patent are valid. The U.S. District Court for the Southern District of Indiana held a hearing on the issue of infringement in May 2015. In September 2015, the district court ruled that the vitamin regimen patent would be infringed by the generic challengers' proposed products. Teva and APP appealed all of the district court’s substantive decisions. A decision from the U.S. Court of Appeals for the Federal Circuit is expected in late 2016.
From 2012 through 2016, we filed similar lawsuits against other ANDA defendants seeking a ruling that our patents are valid and infringed. Some of these cases have been stayed pending the outcome of the Teva/APP litigation, and several parties have agreed to be bound by the outcome of the Teva/APP litigation; the remaining cases have been administratively closed.
In February 2016, we filed a lawsuit alleging infringement against Dr. Reddy's Laboratories in response to its NDA for a salt form of pemetrexed product diluted in dextrose solution.
In June 2016, the United States Patent and Trademark Office (USPTO) granted petitions by Neptune Generics, LLC and Sandoz Inc. seeking inter partes review (IPR) of our vitamin regimen patent. The final written IPR decisions are expected in mid-2017. Several additional generic companies have filed petitions, seeking to join in these proceedings.
European Patent Litigation and Administrative Proceedings
Generic manufacturers filed an opposition to the European Patent Office's (EPO) decision to grant us a vitamin regimen patent. The Opposition Division of the EPO upheld the patent and the generic manufacturers lodged an appeal. In October 2015 the generic manufacturers withdrew the appeal. As a result, the original EPO decision upholding the patent is now final.
In addition, in the United Kingdom (U.K.), Actavis Group ehf and other Actavis companies (collectively, Actavis) filed litigation asking for a declaratory judgment that commercialization of certain salt forms of pemetrexed (the active ingredient in Alimta) diluted in saline solution would not infringe the vitamin regimen patents for Alimta in the U.K., Italy, France, and Spain. In May 2014, the trial court ruled that the vitamin regimen patents for Alimta would not be infringed by commercialization of alternative salt forms of pemetrexed, after expiration of the compound patents in December 2015. We appealed, and in June 2015, the U.K. Court of Appeal reversed the trial court's decision granting declarations of non-infringement over the Alimta vitamin regimen patents in those countries, ruling that the Alimta vitamin regimen patent would be indirectly infringed by commercialization of Actavis' products as proposed prior to the patent's expiration in June 2021. In February 2016, the U.K. Supreme Court granted our and Actavis' requests for permission to appeal different aspects of the judgment. A hearing is scheduled for April 2017.
In parallel proceedings, Actavis returned to the lower court seeking a declaration of non-infringement for a different proposed product diluted in dextrose solution. In February 2016, the trial court ruled that Actavis’ commercialization of this product would not infringe the patent in the U.K., Italy, France, and Spain. We have sought to appeal this ruling.
We commenced separate infringement proceedings against certain Actavis companies in Germany. Following a trial, in April 2014, the German trial court ruled in our favor. The defendants appealed, and after a hearing in March 2015, the German Court of Appeal overturned the trial court and ruled that our vitamin regimen patent in Germany would not be infringed by a dipotassium salt form of pemetrexed. In June 2016, the German Federal Supreme Court granted our appeal, vacating the prior decision denying infringement, and returned the case to the Court of Appeal to reconsider infringement based on its judgment.
In separate proceedings, in May 2016 and June 2016, the German courts confirmed preliminary injunctions against Hexal AG (Hexal), which had stated its intention to launch a generic disodium salt product diluted in saline solution in Germany, and ratiopharm GmbH, a subsidiary of Teva, which had stated its intention to launch a proposed

25



alternative salt form of pemetrexed product diluted in dextrose solution. Hexal has separately filed a challenge to the validity of our vitamin regimen patent before the German Federal Patent court. We do not anticipate any generic entry into the German market at least until the Court of Appeal proceedings against Actavis considers the issues remanded by the German Federal Supreme Court or the injunctions are lifted.
We are aware that at least two generic pemetrexed products have launched in a major European market.
Japanese Patent Litigation and Administrative Proceedings
Three separate demands for invalidation of our two vitamin regimen patents, involving several companies, have been filed with the Japanese Patent Office (JPO). In November 2015, the JPO issued written decisions in the invalidation trial initiated by Sawai Pharmaceutical Co., Ltd. (Sawai), which had been joined by three other companies, upholding both vitamin regimen patents. These patents provide intellectual property protection for Alimta until June 2021. Sawai and the other companies have filed appeals. The invalidation trials related to the other demands by Sawai are currently suspended.
Notwithstanding our patents, generic versions of Alimta were approved in Japan in February 2016. To date, each manufacturer of the generic version of Alimta has agreed not to proceed to pricing approval.
We do not anticipate generic competitors to proceed to launch prior to the completion of the Sawai invalidation trial.
Effient Patent Litigation and Administrative Proceedings
We, along with Daiichi Sankyo, Daiichi Sankyo, Inc., and Ube Industries (Ube) are engaged in U.S. patent litigation involving Effient brought pursuant to procedures set out in the Hatch-Waxman Act. More than 10 different companies have submitted ANDAs seeking approval to market generic versions of Effient prior to the expiration of Daiichi Sankyo’s and Ube’s patents (expiring in 2023) covering methods of using Effient with aspirin, and alleging the patents are invalid. One of these ANDAs also alleged that the compound patent for Effient (expiring in April 2017) was invalid. We have entered into a settlement relating to the compound patent litigation and anticipate that a generic version could launch as early as mid-August 2017.
Beginning in March 2014, we filed lawsuits in the U.S. District Court for the Southern District of Indiana against these companies, seeking a ruling that the patents are valid and infringed. These cases have been consolidated.
In 2015, several generic pharmaceutical companies filed petitions with the USPTO, requesting IPR of the method patents. In September 2016, the USPTO determined that the method-of-use patents are invalid. Daiichi Sankyo and Ube have appealed these decisions to the U.S. Court of Appeals for the Federal Circuit. We expect a final decision in late 2017. The consolidated lawsuit is currently stayed with respect to all parties pending the outcome of this appeal.
We believe the Effient patents are valid and enforceable against these generic manufacturers. However, it is not possible to determine the outcome of the proceedings, and accordingly, we can provide no assurance that we will prevail. We expect a loss of exclusivity for Effient would result in a rapid and severe decline in future revenues for the product in the relevant market.
Actos® Product Liability Litigation
We have been named along with Takeda Chemical Industries, Ltd., and Takeda affiliates (collectively, Takeda) as a defendant in approximately 6,500 product liability cases in the U.S. related to the diabetes medication Actos, which we co-promoted with Takeda in the U.S. from 1999 until 2006. In general, plaintiffs in these actions allege that Actos caused or contributed to their bladder cancer. Almost all of the active cases have been consolidated in federal multi-district litigation (MDL) in the Western District of Louisiana or are pending in a coordinated state court proceeding in California or a coordinated state court proceeding in Illinois.
In April 2015, Takeda announced they would pay approximately $2.4 billion to resolve the vast majority of the U.S. product liability lawsuits involving Actos, including the case of Allen, et al. v. Takeda Pharmaceuticals, et al., no. 6:12-md-00064, in which a judgment of approximately $28 million was entered against Takeda and a judgment of approximately $9 million was entered against us. In September 2015, Takeda announced that more than 96 percent of eligible claimants had opted into the resolution program that was announced in April 2015. As a result of the resolution program, the Allen case has been fully resolved. Accordingly, the appeals filed by Allen, Takeda, and us in the U.S. Court of Appeals for the Fifth Circuit have been dismissed with prejudice.
Although most U.S. product liability lawsuits involving Actos are included in the resolution program, there may be additional cases pending against Takeda and us following its completion. Our agreement with Takeda calls for Takeda to defend and indemnify us against our losses and expenses with respect to the U.S. litigation arising out of

26



the manufacture, use, or sale of Actos and other related expenses in accordance with the terms of the agreement. We believe we are entitled to full indemnification of our losses and expenses in these caseshowever, there can be no guarantee we will ultimately be successful in obtaining full indemnification.
We are also named along with Takeda as a defendant in four purported product liability class actions in Canada related to Actos, including two in Ontario (Casseres et al. v. Takeda Pharmaceutical North America, Inc., et al. and Carrier et al. v. Eli Lilly et al.), one in Quebec (Whyte et al. v. Eli Lilly et al.), and one in Alberta (Epp v. Takeda Canada et al.). We promoted Actos in Canada until 2009.
We believe these lawsuits are without merit, and we and Takeda are prepared to defend against them vigorously.
Byetta® Product Liability Litigation
We are named as a defendant in approximately 510 Byetta product liability lawsuits in the U.S. involving approximately 860 plaintiffs. Approximately 85 of these lawsuits, covering about 435 plaintiffs, are filed in California state court and coordinated in a Los Angeles Superior Court. Approximately 420 lawsuits, covering about 425 plaintiffs, are filed in federal court, the majority of which are coordinated in an MDL in the U.S. District Court for the Southern District of California. The remaining approximately five lawsuits, representing about five plaintiffs, are in various state courts. Approximately 470 of the lawsuits, involving approximately 710 plaintiffs, contain allegations that Byetta caused or contributed to the plaintiffs' cancer (primarily pancreatic cancer or thyroid cancer); most others allege Byetta caused or contributed to pancreatitis. The federal and state trial courts granted summary judgment in favor of us and co-defendants on the claims alleging pancreatic cancer; those rulings are being appealed by the plaintiffs. We are aware of approximately 10 additional claimants who have not yet filed suit. These additional claims allege damages for pancreatic cancer or thyroid cancer. We believe these lawsuits and claims are without merit and are prepared to defend against them vigorously.
Cymbalta® Product Liability Litigation
In October 2012, we were named as a defendant in a purported class-action lawsuit in the U.S. District Court for the Central District of California (Saavedra et al v. Eli Lilly and Company) involving Cymbalta. The plaintiffs, purporting to represent a class of all persons within the U.S. who purchased and/or paid for Cymbalta, asserted claims under the consumer protection statutes of four states, California, Massachusetts, Missouri, and New York, and sought declaratory, injunctive, and monetary relief for various alleged economic injuries arising from discontinuing treatment with Cymbalta. In December 2014, the district court denied the plaintiffs' motion for class certification. Plaintiffs filed a petition with the U.S. Court of Appeals for the Ninth Circuit requesting permission to file an interlocutory appeal of the denial of class certification, which was denied. Plaintiffs filed a second motion for certification under the consumer protection acts of New York and Massachusetts. The district court denied that motion for class certification in July 2015. The district court dismissed the suit and plaintiffs are appealing to the U.S. Court of Appeals for the Ninth Circuit. Oral argument is expected in late 2017.
We have been named in approximately 140 lawsuits involving approximately 1,470 plaintiffs filed in various federal and state courts alleging injuries arising from discontinuation of treatment with Cymbalta. Counsel for plaintiffs in the federal court proceedings filed a petition seeking to have then-filed cases and an unspecified number of future cases coordinated into a federal MDL in the U.S. District Court for the Central District of California. In December 2014, the Judicial Panel on Multidistrict Litigation (JPML) denied the plaintiffs' petition for creation of an MDL. Plaintiffs’ counsel subsequently filed a second petition seeking MDL consolidation, which petition was denied by the JPML in October 2015.
Additionally, there have been approximately 40 individual and multi-plaintiff cases filed in California state court.  Most of those cases have been centralized in a California Judicial Counsel Coordination Proceeding pending in Los Angeles. The first individual product liability cases were tried in August 2015 and resulted in defense verdicts against four plaintiffs.
We have reached a settlement framework which provides for a comprehensive resolution of nearly all of these personal injury claims, filed or unfiled, alleging injuries from discontinuing treatment with Cymbalta. There can be no assurances, however, that a final settlement will be reached.
We continue to believe these lawsuits and claims are without merit and are prepared to defend against them vigorously.

27



Prozac® Product Liability Litigation
We are aware of approximately 200 claims related to allegations that the antidepressant Prozac caused or contributed to birth defects in the children of women who ingested the drug during pregnancy. These claims have not yet been filed. We believe these claims are without merit and are prepared to defend against them vigorously.
Brazil–Employee Litigation
Our subsidiary in Brazil, Eli Lilly do Brasil Limitada (Lilly Brasil), is named in a lawsuit brought by the Labor Attorney for 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 manufacturing facility in Cosmopolis, Brazil, operated by the company between 1977 and 2003. The plaintiffs allege that some employees at the facility were exposed to benzene and heavy metals; however, Lilly Brasil maintains that these alleged contaminants were never used in the facility. In May 2014, the labor court judge ruled against Lilly Brasil. The judge's ruling orders Lilly Brasil to undertake several actions of unspecified financial impact, including paying lifetime medical insurance 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 cannot currently estimate the range of reasonably possible financial losses that could arise if we do not ultimately prevail in the litigation. The judge has estimated the total financial impact of the ruling to be approximately 1.0 billion Brazilian real (approximately $310 million as of September 30, 2016) plus interest. We strongly disagree with the decision and filed an appeal in May 2014.
We are also named in approximately 30 lawsuits filed in labor courts by individual former employees making similar claims.
We believe these lawsuits are without merit and are prepared to defend against them vigorously.
Product Liability Insurance
Because of the nature of pharmaceutical products, it is possible that we could become subject to large numbers of product liability and related claims in the future. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products.
Note 11:    Other Comprehensive Income (Loss)
The following tables summarize the activity related to each component of other comprehensive income (loss) during the three months ended September 30, 2016 and 2015:
(Amounts presented net of taxes)
Foreign Currency Translation Gains (Losses)
 
Unrealized Net Gains (Losses) on Securities
 
Defined Benefit Pension and Retiree Health Benefit Plans
 
Effective Portion of Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance at July 1, 2016
$
(1,273.0
)
 
$
36.8

 
$
(2,919.1
)
 
$
(215.9
)
 
$
(4,371.2
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassifications
5.8

 
48.9

 
18.7

 

 
73.4

Net amount reclassified from accumulated other comprehensive loss

 
(0.4
)
 
38.0

 
2.5

 
40.1

Net other comprehensive income
5.8

 
48.5

 
56.7

 
2.5

 
113.5

 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2016
$
(1,267.2
)
 
$
85.3

 
$
(2,862.4
)
 
$
(213.4
)
 
$
(4,257.7
)
(Amounts presented net of taxes)
Foreign Currency Translation Gains (Losses)
 
Unrealized Net Gains (Losses) on Securities
 
Defined Benefit Pension and Retiree Health Benefit Plans
 
Effective Portion of Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance at July 1, 2015
$
(1,037.6
)
 
$
121.0

 
$
(3,263.3
)
 
$
(223.3
)
 
$
(4,403.2
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(226.7
)
 
(16.2
)
 
16.2

 

 
(226.7
)
Net amount reclassified from accumulated other comprehensive loss

 
(94.3
)
 
54.8

 
2.4

 
(37.1
)
Net other comprehensive income (loss)
(226.7
)
 
(110.5
)
 
71.0

 
2.4

 
(263.8
)
 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2015
$
(1,264.3
)
 
$
10.5

 
$
(3,192.3
)
 
$
(220.9
)
 
$
(4,667.0
)

28



The following tables summarize the activity related to each component of other comprehensive income (loss) during the nine months ended September 30, 2016 and 2015:
(Amounts presented net of taxes)
Foreign Currency Translation Gains (Losses)
 
Unrealized Net Gains (Losses) on Securities
 
Defined Benefit Pension and Retiree Health Benefit Plans
 
Effective Portion of Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance at January 1, 2016
$
(1,360.2
)
 
$
10.1

 
$
(3,012.1
)
 
$
(218.5
)
 
$
(4,580.7
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
18.5

 
61.9

 
39.2

 
(2.2
)
 
117.4

Net amount reclassified from accumulated other comprehensive loss
74.5

 
13.3

 
110.5

 
7.3

 
205.6

Net other comprehensive income
93.0

 
75.2

 
149.7

 
5.1

 
323.0

 
 
 
 
 
 
 
 
 
 
Balance at September 30, 2016
$
(1,267.2
)
 
$
85.3

 
$
(2,862.4
)
 
$
(213.4
)
 
$
(4,257.7
)
(Amounts presented net of taxes)
Foreign Currency Translation Gains (Losses)
 
Unrealized Net Gains (Losses) on Securities
 
Defined Benefit Pension and Retiree Health Benefit Plans
 
Effective Portion of Cash Flow Hedges
 
Accumulated Other Comprehensive Loss
Balance at January 1, 2015
$
(498.4
)
 
$
99.7

 
$
(3,402.0
)
 
$
(191.1
)
 
$
(3,991.8
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(765.9
)
 
42.9

 
46.8

 
(36.9