E L I L I L L Y A N D C O M P A N Y
`2 0 1 8 F I N A N C I A L R E P O R T
`N O T I C E O F 2 0 1 9 A N N U A L M E E T I N G
`P R O X Y S T A T E M E N T
`
`Novo Nordisk Exhibit 2525
`Mylan Pharms. Inc. v. Novo Nordisk A/S
`IPR2023-00724
`Page 00001
`
`

`

`2018 Financial Highlights
`
`E L I L I L L Y A N D C O M P A N Y A N D S U B S I D I A R I E S
`(Dollars in millions, except per-share data)
`
`2 0 1 8
`Year ended December 31
`
`2 0 1 7
`
`C H A N G E %
`
`REVENUE
`RESEARCH AND DEVELOPMENT
`
`RESEARCH AND DEVELOPMENT AS A PERCENT OF REVENUE
`
`NET INCOME (LOSS)
`
`EARNINGS (LOSS) PER SHARE—DILUTED
`
`RECONCILING ITEMS:
` Acquired in-process research and development1
` Amortization of intangible assets
` Asset impairment, restructuring, and other special charges1
` Other, net
` Income Taxes2
`NON-GAAP EARNINGS PER SHARE—DILUTED3
`
`DIVIDENDS PAID PER SHARE
`
`CAPITAL EXPENDITURES
`
`EMPLOYEES
`
`$ 24,555.7
`5,307.1
`21.6%
`$ 3,232.0
`3.13
`
`$ 22,871.3
`5,357.3
`23.4%
`$ (204.1)
`(0.19)
`
`1.83
`0.43
`0.41
`0.01
`(0.25)
`5.55
`2.25
`1,210.6
`38,680
`
`0.97
`0.44
`1.23
`0.03
`1.81
`4.28
`2.08
`1,076.8
`40,655
`
`7%
`-1%
`
`NM
`NM
`
`
`
`30%
`
`12%
`(5%)
`
`1. For more information on these reconciling items, see the Financial Results section of the Executive Overview in Management’s Discussion and Analysis. 2. Relates to adjustments for
`U.S. tax reform (2018 and 2017) and tax expense associated with the separation of the Elanco animal health business (2018). 3. Numbers may not add due to rounding.
`
`REVENUE GROWTH ACROSS THERAPEUTIC AREAS
`($ millions, percent growth)
`
`OPERATING EXPENSES
`($ millions, percent of revenue)
`
`Revenue in Endocrinology increased 16 percent primarily
`driven by growth of Trulicity, Basaglar, and Jardiance.
`Taltz drove the 88 percent revenue increase in Immunology.
`Oncology revenue increased 12 percent due to Verzenio
`launch in the US. Neuroscience experienced a 16 percent
`decrease due to lower volumes for Strattera, Cymbalta,
`and Zyprexa, and Cardiovascular decreased 21 percent
`driven by lower volumes for Cialis and Effient, all due to
`patent losses.
`
`Revenue
`
`R&D
`
`Marketing, Selling & Administrative
`
`Over the past five years, Lilly has
`maintained relatively flat operating
`expenses while growing revenue,
`resulting in consistent improvement
`in operating expense as a percent
`of revenue.
`
`$235.3
`-2%
`
`$3,142.5
`+2%
`
`$1,140.0
`+88%
`
`$2,254.3
`-21%
`
`$11,702.1
`+16%
`
`$4,260.5
`+12%
`
`$1,820.7
`-16%
`
`Endocrinology
`Neuroscience
`Oncology
`Cardiovascular
`Immunology
`Other
`Animal Health
`
`TOTAL SHAREHOLDER RETURN
`
`Lilly
`
`S&P 500
`
`Over the past five years, Lilly’s
`annualized total shareholder return has
`averaged 21 percent, compared to 8.5
`percent for the S&P benchmark, due
`to the increase in the stock price and
`steady dividend stream.
`
`$19,615.6
`
`$19,958.7
`
`$21,222.1
`
`$24,555.7
`
`$22,871.3
`
`33.9%
`
`32.8%
`
`24.3%
`
`24.1%
`
`30.8%
`
`25.0%
`
`29.2%
`
`23.4%
`
`2014
`
`2015
`
`2016
`
`2017
`
`39.8%
`
`13.7%
`
`21.8%
`
`17.8%
`
`12.0%
`
`25.4%
`
`1.4%
`
`27.0%
`
`21.6%
`
`2018
`
`40.4%
`
`2014
`
`2015
`
`-10.4%
`2016
`
`2017
`
`-4.4%
`2018
`
`Novo Nordisk Exhibit 2525
`Mylan Pharms. Inc. v. Novo Nordisk A/S
`IPR2023-00724
`Page 00002
`
`

`

`Table of Contents
`
`Y E A R I N R E V I E W
`2018 Financial Highlights ....................................................................................................................Inside front cover
`Corporate Information .........................................................................................................................Inside back cover
`
`F I N A N C I A L R E P O R T
`Forward-Looking Statements ..................................................................................................................................... F1
`Business....................................................................................................................................................................... F2
`Risk Factors ............................................................................................................................................................... F15
`Management’s Discussion and Analysis of Results of Operations and Financial Condition .................................... F21
`Consolidated Statements of Operations ................................................................................................................... F43
`Consolidated Statements of Comprehensive Income ............................................................................................... F44
`Consolidated Balance Sheets .................................................................................................................................... F45
`Consolidated Statements of Shareholders’ Equity.................................................................................................... F46
`Consolidated Statements of Cash Flows ................................................................................................................... F47
`Notes to Consolidated Financial Statements ............................................................................................................ F48
`Management’s Reports .............................................................................................................................................. F91
`Reports of Independent Registered Public Accounting Firm .................................................................................... F93
`Selected Financial Data ............................................................................................................................................. F95
`Trademarks Used in this Report ................................................................................................................................ F97
`
`P R O X Y
`Notice of Annual Meeting of Shareholders .................................................................................................................P1
`Proxy Statement Summary ..........................................................................................................................................P2
`Governance ..................................................................................................................................................................P8
`Shareholder Engagement on Governance Issues .....................................................................................................P28
`Ownership of Company Stock ....................................................................................................................................P30
`Compensation ............................................................................................................................................................P31
`Audit Matters .............................................................................................................................................................P64
`Management Proposals .............................................................................................................................................P66
`Shareholder Proposal ................................................................................................................................................P69
`Other Information ......................................................................................................................................................P70
`Appendix A .................................................................................................................................................................P74
`Appendix B .................................................................................................................................................................P76
`Directions and Parking ..............................................................................................................................................P80
`
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`IPR2023-00724
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`

`

`Forward-Looking Statements
`This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of
`1933, Section 21E of the Securities Exchange Act of 1934 (Exchange Act), and the Private Securities Litigation
`Reform Act of 1995. 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 “Business,” “Risk Factors,” and “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 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. The following include some but not all of the factors that could cause
`actual results or events to differ materially from those anticipated:
`
`FINANCIAL REPORT
`
`• uncertainties in the pharmaceutical research and development process, including with respect to the
`timing of anticipated regulatory approvals and launches of new products;
`• market uptake of recently launched products;
`•
`competitive developments affecting current products and our pipeline;
`•
`the expiration of intellectual property protection for certain of our products;
`•
`our ability to protect and enforce patents and other intellectual property;
`•
`the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and
`access to pharmaceuticals;
`regulatory compliance problems or government investigations;
`•
`regulatory actions regarding currently marketed products;
`•
`• unexpected safety or efficacy concerns associated with our products;
`•
`issues with product supply stemming from manufacturing difficulties or disruptions;
`•
`regulatory changes or other developments;
`•
`changes in patent law or regulations related to data-package exclusivity;
`•
`litigation involving past, current, or future products as we are largely self-insured;
`• unauthorized disclosure, misappropriation, or compromise of trade secrets or other confidential data
`stored in our information systems, networks, and facilities, or those of third parties with whom we share
`our data;
`changes in tax law, including the impact of tax reform legislation enacted in December 2017 and related
`guidance;
`changes in foreign currency exchange rates, interest rates, and inflation;
`asset impairments and restructuring charges;
`changes in accounting standards promulgated by the Financial Accounting Standards Board and the
`Securities and Exchange Commission;
`acquisitions and business development transactions and related integration costs;
`•
`information technology system inadequacies or operating failures;
`•
`reliance on third-party relationships and outsourcing arrangements;
`•
`the impact of global macroeconomic conditions; and
`•
`• uncertainties and risks related to timing and potential value to both Elanco and Lilly of the planned
`separation of the Elanco animal health business, including business, industry, and market risks, as well as
`risks involving the anticipated tax-free nature of the separation.
`
`•
`•
`•
`
`•
`
`Investors should not place undue reliance on forward-looking statements. You should carefully read the factors
`described in the “Risk Factors” section of this Annual Report for a description of certain risks that could, among
`other things, cause our actual results to differ from these forward-looking statements.
`
`All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety
`by the cautionary statements included in 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.
`
`F1
`
`1
`
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`IPR2023-00724
`Page 00004
`
`

`

`Business
`Eli Lilly and Company (the “company” or “registrant” or "Lilly") was incorporated in 1901 in Indiana to succeed to
`the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop,
`manufacture, and market products in two business segments—human pharmaceutical products and animal health
`products.
`
`The mission of our human pharmaceutical business is to make medicines that help people live longer, healthier,
`more active lives. Our vision is to make a significant contribution to humanity by improving global health in the 21st
`century. Most of the products we sell today were discovered or developed by our own scientists, and our success
`depends to a great extent on our ability to continue to discover or acquire, develop, and bring to market innovative
`new medicines.
`
`Our animal health business, Elanco Animal Health Incorporated (Elanco), develops, manufactures, and markets
`products for both food animals and companion animals. Elanco food animal products help the food industry produce
`an abundant supply of safe, nutritious, and affordable food. Elanco companion animal products help pets live longer,
`healthier, happier lives.
`
`In September 2018 Elanco completed an initial public offering of its common stock, which trades on the New York
`Stock Exchange under the symbol "ELAN." In February 2019, Elanco filed a registration statement to launch an
`exchange offer in which shareholders can exchange shares of Lilly common stock for Elanco common stock. For
`more information on the exchange offer, see “Management’s Discussion and Analysis - Results of Operations -
`Executive Overview - Other Matters - Elanco Animal Health.”
`
`We manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 13 other
`countries. Our products are sold in approximately 125 countries.
`
`Human Pharmaceutical Products
`Our human pharmaceutical products include:
`Cardiovascular products, including:
`• Cialis®, for the treatment of erectile dysfunction and benign prostatic hyperplasia
`
`• Effient®, for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with
`acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous
`coronary intervention, including patients undergoing angioplasty, atherectomy, or stent placement
`Endocrinology products, including:
`• Basaglar® (insulin glargine injection), a long-acting human insulin analog for the treatment of diabetes
`(launched in Japan and Europe under the trade name Abasaglar™)
`
`• Evista®, for the prevention and treatment of osteoporosis in postmenopausal women and for the reduction
`of the risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal
`women at high risk for invasive breast cancer
`
`•
`
`Forteo®, for the treatment of osteoporosis in postmenopausal women and men at high risk for fracture and
`for glucocorticoid-induced osteoporosis in men and postmenopausal women
`
`• Glyxambi®, a combination tablet of linagliptin (Trajenta®) and empagliflozin (Jardiance®) for the treatment of
`type 2 diabetes
`
`• Humalog®, Humalog Mix 75/25, Humalog U-100, Humalog U-200 and Humalog Mix 50/50, insulin analogs for
`the treatment of diabetes
`
`• Humatrope®, for the treatment of human growth hormone deficiency and certain pediatric growth
`conditions
`
`• Humulin®, Humulin 70/30, Humulin N, Humulin R, and Humulin U-500, human insulins of recombinant DNA
`origin for the treatment of diabetes
`
`•
`
`Jardiance, for the treatment of type 2 diabetes and to reduce the risk of cardiovascular death in adult
`patients with type 2 diabetes and established cardiovascular disease
`
`2
`
`F2
`
`F I N A N C I A L R E P O R T
`
`Novo Nordisk Exhibit 2525
`Mylan Pharms. Inc. v. Novo Nordisk A/S
`IPR2023-00724
`Page 00005
`
`

`

`•
`
`Jentadueto® and Jentadueto XR, a combination of linagliptin and metformin hydrochloride for use in the
`treatment of type 2 diabetes
`
`• Synjardy® and Synjardy XR, a combination tablet of empagliflozin and metformin hydrochloride for the
`treatment of type 2 diabetes
`
`•
`
`Trajenta, for the treatment of type 2 diabetes
`
`Trulicity®, for the treatment of type 2 diabetes
`•
`Immunology products, including:
`• Olumiant®, for the treatment of adults with moderately-to-severely active rheumatoid arthritis (approved in
`the European Union (EU) and Japan in 2017, and in the U.S. in 2018)
`
`•
`
`Taltz®, for the treatment of moderate-to-severe plaque psoriasis (approved in the U.S. and EU in 2016) and
`active psoriatic arthritis (approved in Japan in 2016, in the U.S. in 2017, and in the EU in 2018)
`Neuroscience products, including:
`• Amyvid®, a radioactive diagnostic agent for positron emission tomography (PET) imaging of beta-amyloid
`neuritic plaques in the brains of adult patients with cognitive impairment who are being evaluated for
`Alzheimer's disease and other causes of cognitive decline
`
`• Cymbalta®, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain,
`generalized anxiety disorder, fibromyalgia, and chronic musculoskeletal pain due to chronic low back pain
`or chronic pain due to osteoarthritis
`
`• Emgality®, a once-monthly subcutaneously injected calcitonin gene-related peptide (CGRP) antibody for the
`treatment of migraine prevention (approved in the U.S. and EU in 2018).
`
`• Prozac®, for the treatment of major depressive disorder, obsessive-compulsive disorder, bulimia nervosa,
`and panic disorder
`
`• Strattera®, for the treatment of attention-deficit hyperactivity disorder
`
`•
`
`Zyprexa®, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I
`disorder, and bipolar maintenance
`Oncology products, including:
`• Alimta®, for the first-line treatment, in combination with another agent, of advanced non-small cell lung
`cancer (NSCLC) for patients with non-squamous cell histology; for the second-line treatment of advanced
`non-squamous NSCLC; as monotherapy for the maintenance treatment of advanced non-squamous NSCLC
`in patients whose disease has not progressed immediately following chemotherapy treatment; and in
`combination with another agent, for the treatment of malignant pleural mesothelioma
`
`• Cyramza®, for the treatment of various cancers, with approvals as follows:
`
`
`
`
`
`
`
`as a single agent and in combination with another agent as a second-line treatment of advanced or
`metastatic gastric cancer
`
`in combination with another agent as a second-line treatment of metastatic NSCLC
`
`as a second-line treatment of metastatic colorectal cancer
`
`• Erbitux®, indicated both as a single agent and in combination with another chemotherapy agent for the
`treatment of certain types of colorectal cancers; and as a single agent, in combination with chemotherapy,
`or in combination with radiation therapy for the treatment of certain types of head and neck cancers
`
`• Gemzar®, for the treatment of pancreatic cancer; in combination with other agents, for the treatment of
`metastatic breast cancer, NSCLC, and advanced or recurrent ovarian cancer; and in the EU for the
`treatment of bladder cancer
`
`•
`
`Lartruvo®, approved in the U.S., and conditionally approved in the EU, in 2016 for use in combination with
`another agent for the treatment of soft tissue carcinoma. Following a negative result in a recent clinical
`trial, we are suspending promotion of Lartruvo and are working with global regulators to determine the
`appropriate next steps.
`
`F3
`
`3
`
`FINANCIAL REPORT
`
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`IPR2023-00724
`Page 00006
`
`

`

`• Portrazza®, approved in the U.S. for use in combination with other agents as a first-line treatment of
`metastatic squamous NSCLC, and approved in the EU for use in combination with other agents as a first-
`line treatment for epidermal growth factor receptor expressing squamous NSCLC
`
`•
`
`Verzenio®, approved in 2017 in the U.S. for use as a single agent and in combination with endocrine therapy
`for the treatment of a certain type of metastatic breast cancer
`
`Animal Health Products
`Our products for food animals include:
`
`• Clynav™, a vaccine to control pancreas disease in salmon
`
`• Coban®, Maxiban®, and Monteban®, anticoccidial agents for use in poultry
`
`• Denagard®, an antibiotic for the control and treatment of respiratory and enteric diseases in swine and
`poultry
`
`•
`
`Imvixa™, to prevent and control infestation caused by sea lice in salmon
`
`• Optaflexx® and Paylean®, leanness and performance enhancers for cattle and swine, respectively
`
`• Rumensin®, a cattle feed additive that improves feed efficiency and growth and also controls and prevents
`coccidiosis
`
`•
`
`Tylan®, an antibiotic used to control certain diseases in cattle, swine, and poultry
`
`Our products for companion animals include:
`
`• Comfortis®, a chewable tablet that kills fleas and prevents flea infestations on dogs
`
`• Credelio®, a monthly chewable tablet for dogs that kills fleas, treats flea infestations, and treats and
`controls tick infestations
`
`• Feline, canine, and rabies vaccines including: Duramune® and Ultra Duramune®, Duramune Lyme®, Bronchi-
`Shield®, Fel-O-Vax®, ULTRA™ Fel-O-Vax®, and Fel-O-Guard®, and Rabvac®
`
`• Galliprant®, an anti-inflammatory tablet that targets the key receptor associated with canine osteoarthritis
`pain
`
`•
`
`Interceptor® Plus, a monthly chewable tablet that prevents heartworm disease and treats and controls adult
`hookworm, roundworm, whipworm, and tapeworm in dogs
`
`• Osurnia®, to treat otitis externa in dogs caused by certain strains of bacteria and yeast
`
`•
`
`Trifexis®, a monthly chewable tablet for dogs that kills fleas, prevents flea infestations, prevents heartworm
`disease, and controls intestinal parasite infections
`
`Marketing
`We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various
`countries to meet local customer needs.
`Human Pharmaceuticals—U.S.
`In the U.S., most of our pharmaceutical products are distributed through wholesalers that serve pharmacies,
`physicians and other health care professionals, and hospitals. In 2018, 2017, and 2016, three wholesale distributors
`in the U.S. - McKesson Corporation, AmerisourceBergen Corporation, and Cardinal Health, Inc. - each accounted
`for between 11 percent and 18 percent of our consolidated total revenue. No other distributor accounted for more
`than 10 percent of our consolidated total revenue in any of those years.
`
`We promote our major human pharmaceutical products in the U.S. through sales representatives who call upon
`physicians and other health care professionals. We also promote to healthcare providers in medical journals and
`on-line health care channels, distribute literature and samples of certain products to physicians, and exhibit at
`medical meetings. In addition, we advertise certain products directly to consumers in the U.S., and we maintain
`websites with information about our major products. We supplement our employee sales force with contract sales
`organizations to leverage our own resources.
`
`4
`
`F4
`
`F I N A N C I A L R E P O R T
`
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`Mylan Pharms. Inc. v. Novo Nordisk A/S
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`Page 00007
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`

`

`We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care
`organizations, group purchasing organizations, government and long-term care institutions, hospitals, and certain
`retail pharmacies. We enter into arrangements with these organizations providing for discounts or rebates on our
`products.
`Human Pharmaceuticals—Outside the U.S.
`Outside the U.S, we promote our human pharmaceutical products to healthcare providers primarily through sales
`representatives and on-line health care channels. While the products marketed vary from country to country,
`endocrinology products constitute the largest single group in consolidated revenue. Distribution patterns vary from
`country to country. In most countries in which we operate, we maintain our own sales organizations, but in some
`smaller countries we market our products through independent distributors.
`Human Pharmaceutical Marketing Collaborations
`Certain of our human pharmaceutical products are marketed in arrangements with other pharmaceutical
`companies, including the following:
`
`• We and Boehringer Ingelheim have a diabetes alliance under which we jointly develop and commercialize
`Trajenta, Jentadueto, Jardiance, Glyxambi, Synjardy, and Basaglar in major markets.
`
`• Outside the U.S. and Canada, Erbitux is commercialized by Merck KGaA.
`
`• We and Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) co-promote Effient in the U.S., Brazil, Mexico, and certain
`other countries. Effective January 2016, Daiichi Sankyo has been exclusively promoting Effient in major
`European markets; however, the economic results for these countries continue to be shared. We retain sole
`marketing rights in Canada, Australia, Russia, and certain other countries. Daiichi Sankyo retains sole
`marketing rights in Japan and certain other countries.
`
`For additional information, see "Financial Statements and Supplementary Data - Note 4, Collaborations and Other
`Arrangements."
`Animal Health Products
`Our Elanco animal health business unit employs field salespeople throughout the U.S. and has an extensive sales
`force outside the U.S. Elanco sells its products primarily to wholesale distributors, and promotes its products
`primarily to producers and veterinarians for food animal products and to veterinarians for companion animal
`products. Elanco also advertises certain companion animal products directly to pet owners in markets where it is
`consistent with allowable promotional practices.
`
`Competition
`Our human pharmaceutical products compete globally with products of many other companies in highly competitive
`markets. Our animal health products compete globally with products of animal health care companies as well as
`pharmaceutical, chemical, and other companies that operate animal health businesses.
`
`Important competitive factors for both human pharmaceutical and animal health products include effectiveness,
`safety, and ease of use; price and demonstrated cost-effectiveness; marketing effectiveness; and research and
`development of new products, processes, and uses. Most new products that we introduce must compete with other
`branded or generic products already on the market or products that are later developed by competitors. If
`competitors introduce new products or delivery systems with therapeutic or cost advantages, our products can be
`subject to decreased sales, progressive price reductions, or both.
`
`We believe our long-term competitive success depends upon discovering and developing (either alone or in
`collaboration with others) or acquiring innovative, cost-effective human pharmaceutical and animal health products
`that provide improved outcomes and deliver value to payers, and continuously improving the productivity of our
`operations in a highly competitive environment. There can be no assurance that our efforts will result in
`commercially successful products, and it is possible that our products will be, or become, uncompetitive from time
`to time as a result of products developed by our competitors.
`Generic Pharmaceuticals
`One of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and the EU, the
`regulatory approval process for human pharmaceuticals (other than biological products (biologics)) exempts
`
`F5
`
`5
`
`FINANCIAL REPORT
`
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`IPR2023-00724
`Page 00008
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`

`

`generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic
`manufacturers to rely on the safety and efficacy of the innovator product. Therefore, generic manufacturers
`generally invest far less than we do in research and development and can price their products much lower than our
`branded products. Accordingly, when a branded non-biologic human pharmaceutical loses its market exclusivity, it
`normally faces intense price competition from generic forms of the product. Public and private payers typically
`encourage the use of generics as alternatives to brand-name drugs in their healthcare programs. Laws in the U.S.
`generally allow, and in many cases require, pharmacists to substitute generic drugs that have been rated under
`government procedures to be essentially equivalent to a brand-name drug. Where substitution is mandatory, it
`must be made unless the prescribing physician expressly forbids it. In many countries outside the U.S., intellectual
`property protection is weak, and we must compete with generic or counterfeit versions of our products. Many of our
`animal health products also compete with generics.
`Biosimilars
`Several of our current products, including Cyramza, Erbitux, Trulicity, Taltz, and Emgality and many of the new
`molecular entities (NMEs) in our research pipeline are biologics. Competition for Lilly’s biologics may be affected by
`the approval of follow-on biologics, also known as biosimilars. A biosimilar is a subsequent version of an approved
`innovator biologic that, due to its functional and structural similarity to the innovator biologic, is approved based on
`an abbreviated data package that relies in part on the full testing required of the innovator biologic. Globally, most
`governments have developed regulatory pathways to approve biosimilars as alternatives to innovator-developed
`biologics, but the patent and regulatory exclusivity for the existing innovator biologic must expire in a given market
`before biosimilars may enter that market. The extent to which a biosimilar, once approved, will be substituted for
`the innovator biologic in a way that is similar to traditional generic substitution for non-biologic products, is not yet
`entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing.
`
`Biosimilars may present both competitive challenges and opportunities. For example, a competitor company has
`developed a version of insulin lispro which competes with our product Humalog. On the other hand, with our
`partner Boehringer Ingelheim, we developed Basaglar, a new insulin glargine product, which has the same amino
`acid sequence as the product currently marketed by a competitor and has launched as a follow-on biologic in the
`U.S., and as a biosimilar in the EU and Japan.
`U.S. Private Sector Dynamics
`In the U.S. private sector, consolidation and integration among healthcare providers is also a major factor in the
`competitive marketplace for human pharmaceuticals. Health plans and pharmacy benefit managers have been
`consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. For example, in
`2018 CVS Health, a large pharmacy benefit manager and pharmacy chain, acquired Aetna, a large national insurer,
`and Cigna Corporation acquired Express Scripts in a similar transaction.
`
`Payers typically maintain formularies which specify coverage (the conditions under which drugs are included on a
`plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer). Formulary placement
`can lead to reduced usage of a drug for the relevant patient population due to coverage restrictions, such as prior
`authorizations and formulary exclusions, or due to reimbursement limitations which result in higher consumer out-
`of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance levels, and higher deductibles.
`Consequently, pharmaceutical companies compete for formulary placement not only on the basis of product
`attributes such as efficacy, safety profile, or patient ease of use, but also by providing rebates. Value-based
`agreements, where pricing is based on achievement, or not, of specified outcomes, are another tool which may be
`utilized between payers and pharmaceutical companies as formulary placement and pricing are negotiated. Price is
`an increasingly important factor in formulary decisions, particularly in treatment areas in which the payer has taken
`