Eli Lilly and Company 2007 Annual Report Notice of 2008 Annual Meeting Proxy Statement Eli Lilly and Company Lilly Corporate Center Indianapolis, Indiana 46285 USA www.lilly.com Trademarks Actos® (pioglitazone hydrochloride) Alimta® (pemetrexed disodium) Arxxant® (ruboxistaurin mesylate) Axid® (nizatidine) Byetta® (exenatide injection) Ceclor® (cefaclor) Cialis® (tadalafi l) Coban® (monensin sodium), Elanco Cymbalta® (duloxetine hydrochloride) Effi ent™ (prasugrel) Evista® (raloxifene hydrochloride) Forteo® (teriparatide of recombinant DNA origin) Gemzar® (gemcitabine hydrochloride) Humalog® (insulin lispro of recombinant DNA origin) Humatrope® (somatropin of recombinant DNA origin) Humulin® (human insulin of recombinant DNA origin) On the Cover Year in Review Permax® (pergolide mesylate) Prozac® (fl uoxetine hydrochloride) Candy Edwards is a wife, mother, grandmother and self-taught artist 1 Financial Highlights Prozac® Weekly™ (fl uoxetine hydrochloride) with a passion for helping others. She also is a Cymbalta® patient. 2 Letter to Shareholders ReoPro® (abciximab), Centocor 6 Innovation at Lilly: The Portfolio and the Pipeline Rumensin® (monensin sodium), Elanco Just two years ago, Candy developed a staph infection that kept her 9 Beyond Medicine: Providing Answers That Matter Strattera® (atomoxetine hydrochloride) hospitalized and bedridden for several months. The infection was so Surmax® (avilamycin), Elanco severe that it nearly killed her. Although Candy survived, she found Financials Symbyax® (olanzapine/fl uoxetine hydrochloride) herself in a world of intense pain, fear, anger and despair. The spirited Tylan® (tylosin), Elanco woman her family, friends and community knew so well soon became 10 Review of Operations Vancocin® (vancomycin hydrochloride) someone they hardly recognized. Candy lost interest in everything she 14 Consolidated Statements of Income Xigris® (drotrecogin alfa [activated]) cared about—even her family and her art. 19 Consolidated Balance Sheets Yentreve® (duloxetine hydrochloride) “I cried all the time and I had terrible mood swings,” said Candy. “I felt 20 Consolidated Statements of Cash Flows Zyprexa® (olanzapine) like I was in this deep hole—it was like I was pinned down. Suicide 21 Consolidated Statements of Comprehensive Income Zyprexa® Zydis® (olanzapine) seemed to be the only way out.” 30 Segment Information 31 Selected Quarterly Data Actos® is a trademark of Takeda Chemical Industries, Ltd. Fortunately, Candy’s husband of 30 years, Freddie, recognized that 32 Selected Financial Data AIR® is trademark of Alkermes, Inc. something was seriously wrong with the woman he loved, and he 33 Notes to Consolidated Financial Statements Axid® is a trademark of Reliant Pharmaceuticals, LLC. pleaded with her to talk to her doctor. Although she was reluctant 57 Management’s Reports Byetta® is a trademark of Amylin Pharmaceuticals, Inc. at fi rst to accept her diagnosis of depression and initially refused to 58 Report of Independent Registered Public Accounting Firm Cialis® is a trademark of Lilly ICOS LLC. take the medicine her doctor gave her, Candy eventually decided to EVA® is a trademark of Stern Stewart & Co. give it a try. Sarafem® is a trademark of Galen (Chemicals) Limited Proxy Statement Vancocin® is a trademark of ViroPharma Incorporated Candy’s doctor had prescribed Cymbalta, and she recalls that within a Zydis® is a trademark of Cardinal Health. week, she could tell a difference. 60 Notice of 2008 Annual Meeting and Proxy Statement 61 General Information “Cymbalta works for me,” she said. The turning point was the day she All trademarks listed above are trademarks of Eli Lilly and Company unless otherwise noted. 65 Board of Directors woke up and decided to put on her make-up—something she hadn’t 69 Highlights of the Company’s Corporate Governance Guidelines done for nearly 6 months. “I fi nally started to feel like I was back.” 77 Directors and Corporate Governance Committee Matters Today, Candy is using her love of art to help raise awareness about 78 Audit Committee Matters For More Information highway safety in her home state of Georgia. She has created 80 Compensation Committee Matters characters such as “Boostie,” who promotes the importance of booster 81 Executive Compensation seats for young children, and “Buckley,” a character who encourages 101 Ownership of Company Stock Lilly corporate responsibility and report of political fi nancial support . . www.lilly.com/about/citizenship/index.html motorists to wear seatbelts. 102 Items of Business To Be Acted Upon at the Meeting 115 Other Matters Lilly clinical trials registry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillytrials.com Candy isn’t shy about telling her story to others, and by doing so she Lilly Grant Offi ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillygrantoffi ce.com has become a source of hope and inspiration for others suffering from Corporate Information depression in her community. Multi-drug resistant tuberculosis initiative . . . . . . . . . . . . . . . . . . . . . . . . . www.lillymdr-tb.com “I always tell them to talk to their physician,” Candy said. “If I hadn’t 124 Senior Management and Board of Directors Medicare prescription drug coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillymedicareanswers.com sought help, I might have lost everything. I have my family and my life 126 Corporate Information Pharmaceutical industry patient assistance programs . . . . . . . . . . . . . . . www.pparx.org back. It was a blessing.” 127 Annual Meeting Admission Ticket Lilly Cares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.lillycares.com or call toll-free 1-800-545-6962 © 2008 Eli Lilly and Company 2007AR 2007 Financial Highlights ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2007 2006 Change % Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,633.5 $15,691.0 19 Net sales—pro forma1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,706.2 16,446.2 14 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,486.7 3,129.3 11 Research and development as a percent of net sales. . . . . . . . . . . . . 18.7% 19.9% Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,953.0 $ 2,662.7 11 Earnings per share—diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.71 2.45 Reconciling items2: Acquired in-process research and development . . . . . . . . . . . . . . .63 — Asset impairments, restructuring, and other special charges. . . .15 .73 Reduction in expected insurance recoveries for product liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .06 — Pro forma adjustment as if the ICOS acquisition was completed on January 1, 20061 . . . . . . . . . . . . . . . . . . . . . . . . . . (.01) (.15) Adjusted earnings per share—diluted. . . . . . . . . . . . . . . . . . . . . . . . . . 3.54 3.03 17 Dividends paid per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.70 1.60 6 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082.4 1,077.8 — Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,600 41,500 (2) 1Pro forma sales and earnings per share assume that the ICOS acquisition was completed January 1, 2006. The pro forma results are presented in order to provide additional insights into the underlying trends in the business. 2For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 10. 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(cid:44)(cid:33)(cid:14)(cid:202)(cid:156)(cid:115)(cid:202)(cid:223)(cid:174)(cid:117)(cid:202)(cid:168)(cid:103)(cid:192)(cid:83)(cid:103)(cid:151)(cid:205)(cid:58)(cid:122)(cid:103)(cid:202)(cid:168)(cid:156)(cid:134)(cid:151)(cid:205)(cid:196)(cid:91)(cid:202)(cid:205)(cid:156)(cid:202)(cid:58)(cid:202)(cid:192)(cid:103)(cid:205)(cid:210)(cid:192)(cid:151)(cid:202)(cid:156)(cid:115)(cid:202) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103)(cid:21)(cid:58)(cid:104)(cid:105)(cid:86)(cid:87)(cid:97)(cid:94)(cid:104)(cid:93)(cid:90)(cid:89)(cid:21)(cid:69)(cid:103)(cid:100)(cid:89)(cid:106)(cid:88)(cid:105)(cid:104)(cid:202)(cid:20)(cid:103)(cid:148)(cid:222)(cid:58)(cid:192)(cid:91)(cid:202)(cid:21)(cid:210)(cid:148)(cid:58)(cid:143)(cid:156)(cid:122)(cid:91)(cid:202)(cid:14)(cid:216)(cid:134)(cid:196)(cid:205)(cid:58)(cid:91)(cid:202)(cid:58)(cid:151)(cid:94)(cid:202)(cid:1)(cid:83)(cid:205)(cid:156)(cid:196) (cid:209)(cid:120)(cid:174)(cid:223)(cid:202)(cid:168)(cid:103)(cid:192)(cid:83)(cid:103)(cid:151)(cid:205)(cid:174)(cid:202) (cid:79)(cid:110)(cid:101)(cid:103)(cid:90)(cid:109)(cid:86) (cid:37) (cid:21)(cid:37)(cid:40)(cid:21) (cid:37)(cid:41)(cid:21) (cid:37)(cid:42)(cid:21) (cid:37)(cid:43)(cid:21) (cid:37)(cid:44) (cid:68)(cid:105)(cid:93)(cid:90)(cid:103) (cid:21)(cid:37)(cid:40)(cid:21)(cid:37)(cid:41)(cid:21)(cid:37)(cid:42)(cid:21)(cid:37)(cid:43)(cid:21)(cid:37)(cid:44) 1 S R E D L To Our Shareholders O H E Eli Lilly and Company delivered outstanding results in increased 14 percent, to $18.706 billion. Our sales growth R A 2007, highlighted by 14 percent pro forma sales growth, outpaced the overall pharmaceutical sector in each of the H 17 percent growth in pro forma adjusted net income, and world’s largest markets—the U.S., Europe, and Japan— S the movement of no fewer than 16 new molecules into and we achieved a 7 percent increase in sales volume O T clinical testing. Measured more broadly by the growth worldwide on a pro forma basis. R of our recently launched products in diverse markets, Demonstrating our continued commitment to grow E the success of our business development efforts, and the sales faster than operating expenses, pro forma adjusted T T progress of discoveries through our development pipe- net income and earnings per share (EPS) both grew by E line, 2007 was one of the most thoroughly successful 17 percent in 2007, to $3.863 billion and $3.54, respec- L years in Lilly’s history. tively. On a reported basis, the growth was 11 percent, to Just as importantly in 2007, we asserted a new vision $2.953 billion and $2.71. The pro forma adjusted results of the company—dedicated to improving outcomes for in- assume we owned ICOS for both years and also adjust for dividual patients—and we accelerated the transformation product liability expenses, asset impairments, and restruc- of Lilly to realize this aspiration. turing in both years as well as for charges related to the In this letter, we look forward to reporting on all of acquisition of compounds in development in 2007 (for a these accomplishments in more detail. reconciliation, see page 1). Leadership Transition Product Performance Near the end of 2007, we announced a leadership Lilly’s top-selling product, Zyprexa, is beginning transition between us that had been carefully planned to face competition from generic formulations in some for some time. Sidney Taurel will retire as chief executive countries—notably Canada and Germany—but overall offi cer at the end of March 2008, turning over that role to demand for this neuroscience therapy grew in markets John Lechleiter. Taurel will remain chairman of the board outside the United States during 2007, helping to drive until the end of 2008. worldwide sales up 9 percent to $4.761 billion. In the Lechleiter assumes his new role as well prepared as any U.S., a longstanding downward trend in Zyprexa’s share of his nine predecessors at the helm of Eli Lilly and Com- of new retail prescriptions continued to slow in 2007, pany. A Ph.D. chemist who joined Lilly in 1979 in process in spite of new competitive products, label changes, and research and development (R&D), Lechleiter will redouble negative advertising by trial lawyers. Lilly’s commitment to develop fi rst-in-class and best-in-class Wider loss of patent protection on Zyprexa and other products. He also brings extensive experience in product products early in the next decade heightens the impor- development, regulatory affairs, and global operations. tance of strong sales growth among our newer products— Already, he has held the reins as operational leader of Lilly and they have risen to the challenge. Pro forma sales of for more than two years, a period of solid sales growth and Lilly products launched in this decade collectively grew steady performance in R&D, manufacturing, and marketing. by 33 percent in 2007 and represented 32 percent of our Our partnership in leading Lilly during the past two total sales, up from 28 percent in 2006. years has been close and fruitful, and the nature of our Cymbalta remains of particular importance to Lilly’s transition demonstrates a broader unity of purpose inside overall performance in the years ahead, and we are the company. Lilly’s vision of delivering optimal outcomes pleased that its success in 2007 is essentially unquali- for individual patients is not “Sidney’s” or “John’s.” It is a vision that we share and one that embodies the promise (cid:69)(cid:103)(cid:100)(cid:89)(cid:106)(cid:88)(cid:105)(cid:104)(cid:21)(cid:65)(cid:86)(cid:106)(cid:99)(cid:88)(cid:93)(cid:90)(cid:89)(cid:21)(cid:73)(cid:93)(cid:94)(cid:104)(cid:21)(cid:57)(cid:90)(cid:88)(cid:86)(cid:89)(cid:90)(cid:21)(cid:56)(cid:100)(cid:99)(cid:105)(cid:103)(cid:94)(cid:87)(cid:106)(cid:105)(cid:90)(cid:89)(cid:21) of new science, the realities of the external environment, (cid:25)(cid:43)(cid:35)(cid:37)(cid:21)(cid:55)(cid:94)(cid:97)(cid:97)(cid:94)(cid:100)(cid:99)(cid:21)(cid:94)(cid:99)(cid:21)(cid:72)(cid:86)(cid:97)(cid:90)(cid:104)(cid:21)(cid:57)(cid:106)(cid:103)(cid:94)(cid:99)(cid:92)(cid:21)(cid:39)(cid:37)(cid:37)(cid:44) and the aspirations of our Lilly colleagues worldwide. (cid:42)(cid:192)(cid:156)(cid:94)(cid:210)(cid:83)(cid:205)(cid:196)(cid:202)(cid:143)(cid:58)(cid:210)(cid:151)(cid:83)(cid:131)(cid:103)(cid:94)(cid:202)(cid:205)(cid:131)(cid:134)(cid:196)(cid:202)(cid:94)(cid:103)(cid:83)(cid:58)(cid:94)(cid:103)(cid:202)(cid:134)(cid:151)(cid:83)(cid:143)(cid:210)(cid:94)(cid:103)(cid:202)(cid:10)(cid:219)(cid:148)(cid:74)(cid:58)(cid:143)(cid:205)(cid:58)(cid:91)(cid:202) (cid:39)(cid:43)(cid:26) We also share a belief that the Lilly CEO’s most im- (cid:45)(cid:205)(cid:192)(cid:58)(cid:205)(cid:205)(cid:103)(cid:192)(cid:58)(cid:91)(cid:202)(cid:1)(cid:143)(cid:134)(cid:148)(cid:205)(cid:58)(cid:91)(cid:202)(cid:19)(cid:156)(cid:192)(cid:205)(cid:103)(cid:156)(cid:91)(cid:202)(cid:54)(cid:134)(cid:122)(cid:192)(cid:134)(cid:196)(cid:91)(cid:202)(cid:10)(cid:134)(cid:58)(cid:143)(cid:134)(cid:196)(cid:91)(cid:202) (cid:41)(cid:39)(cid:26) portant role is to continuously strengthen the company’s (cid:45)(cid:219)(cid:148)(cid:74)(cid:219)(cid:58)(cid:218)(cid:91)(cid:202)(cid:9)(cid:219)(cid:103)(cid:205)(cid:205)(cid:58)(cid:91)(cid:202)(cid:58)(cid:151)(cid:94)(cid:202)(cid:55)(cid:103)(cid:151)(cid:205)(cid:192)(cid:103)(cid:216)(cid:103)(cid:174)(cid:202)(cid:46)(cid:131)(cid:103)(cid:196)(cid:103)(cid:202)(cid:168)(cid:192)(cid:156)(cid:94)(cid:210)(cid:83)(cid:205)(cid:196)(cid:202) (cid:83)(cid:156)(cid:151)(cid:205)(cid:192)(cid:134)(cid:74)(cid:210)(cid:205)(cid:103)(cid:94)(cid:202)(cid:100)(cid:200)(cid:174)(cid:223)(cid:202)(cid:74)(cid:134)(cid:143)(cid:143)(cid:134)(cid:156)(cid:151)(cid:202)(cid:205)(cid:156)(cid:202)(cid:151)(cid:103)(cid:205)(cid:202)(cid:196)(cid:58)(cid:143)(cid:103)(cid:196)(cid:202)(cid:58)(cid:151)(cid:94)(cid:202) founding values of excellence, integrity, and respect for (cid:40)(cid:39)(cid:26) (cid:83)(cid:156)(cid:151)(cid:205)(cid:134)(cid:151)(cid:210)(cid:103)(cid:94)(cid:202)(cid:205)(cid:156)(cid:202)(cid:94)(cid:134)(cid:216)(cid:103)(cid:192)(cid:196)(cid:134)(cid:115)(cid:219)(cid:202)(cid:156)(cid:210)(cid:192)(cid:202)(cid:168)(cid:156)(cid:192)(cid:205)(cid:115)(cid:156)(cid:143)(cid:134)(cid:156)(cid:174)(cid:202)(cid:46)(cid:156)(cid:205)(cid:58)(cid:143)(cid:202) (cid:39)(cid:37)(cid:37)(cid:44) people. In view of the expectations and scrutiny directed at (cid:217)(cid:156)(cid:192)(cid:143)(cid:94)(cid:217)(cid:134)(cid:94)(cid:103)(cid:202)(cid:10)(cid:134)(cid:58)(cid:143)(cid:134)(cid:196)(cid:202)(cid:168)(cid:192)(cid:156)(cid:94)(cid:210)(cid:83)(cid:205)(cid:202)(cid:196)(cid:58)(cid:143)(cid:103)(cid:196)(cid:202)(cid:58)(cid:192)(cid:103)(cid:202)(cid:134)(cid:151)(cid:83)(cid:143)(cid:210)(cid:94)(cid:103)(cid:94)(cid:202) our industry today, it has never been more important for ev- (cid:196)(cid:134)(cid:151)(cid:83)(cid:103)(cid:202)(cid:156)(cid:210)(cid:192)(cid:202)(cid:27)(cid:58)(cid:151)(cid:210)(cid:58)(cid:192)(cid:219)(cid:202)(cid:209)(cid:152)(cid:91)(cid:202)(cid:209)(cid:223)(cid:223)(cid:199)(cid:202)(cid:58)(cid:83)(cid:181)(cid:210)(cid:134)(cid:196)(cid:134)(cid:205)(cid:134)(cid:156)(cid:151)(cid:202)(cid:156)(cid:115)(cid:202)(cid:22)(cid:10)(cid:33)(cid:45)(cid:174) eryone at Lilly to live up to these standards, demonstrating their best performance as well as conduct beyond reproach. (cid:39)(cid:45)(cid:26) (cid:41)(cid:45)(cid:26) Financial Results (cid:69)(cid:103)(cid:100)(cid:89)(cid:106)(cid:88)(cid:105)(cid:104)(cid:21)(cid:65)(cid:86)(cid:106)(cid:99)(cid:88)(cid:93)(cid:90)(cid:89)(cid:21)(cid:73)(cid:93)(cid:94)(cid:104)(cid:21)(cid:57)(cid:90)(cid:88)(cid:86)(cid:89)(cid:90) (cid:39)(cid:41)(cid:26) In 2007, Lilly sales increased 19 percent on a reported (cid:79)(cid:110)(cid:101)(cid:103)(cid:90)(cid:109)(cid:86) (cid:54)(cid:97)(cid:97)(cid:21)(cid:68)(cid:105)(cid:93)(cid:90)(cid:103) basis, to $18.634 billion. On a pro forma basis, which as- (cid:39)(cid:37)(cid:37)(cid:43) sumes we owned ICOS in both 2006 and 2007, our sales 2 L E T T E R T O S H A R E H O L D E R S John C. Lechleiter, Ph.D. Sidney Taurel President and Chairman of the Board and Chief Operating Offi cer Chief Executive Offi cer fi ed. Worldwide sales of Cymbalta grew by 60 percent Our osteoporosis treatment Forteo, sold as Forsteo in 2007, pushing it above the $2 billion mark in annual in some countries, had a good year as well, growing 19 sales for the fi rst time. We believe that the quality of our percent in its fi fth year on the market. Demonstrating our sales force interactions, our investment in advertising commitment to individual patient outcomes, we devel- directly to consumers, and the product’s strong access to oped programs to improve adherence to treatment with formularies all play a role in its success—but no factor Forteo—a major factor in determining its success—and is more important than Cymbalta’s ability to address saw signifi cant improvements in the percentage of pa- important medical needs. The patient on the cover of this tients who continued to use the product for the optimal annual report is one of the many people whose health has 18 to 24 months. improved with the help of Cymbalta. Byetta, the diabetes product Lilly co-developed with Cymbalta also benefi ted in 2007 from the approval of Amylin, achieved sales growth of 51 percent in 2007, new indications. The U.S. Food and Drug Administration mainly in the U.S. Sales outside the U.S. will begin to (FDA) approved Cymbalta for generalized anxiety disorder contribute on a larger scale, as we launched Byetta in and for maintenance treatment of major depressive disor- 22 countries during 2007 and plan to launch in up to 45 der (MDD) in adults. In 2007, we also submitted Cymbalta more in 2008. We are pleased with Byetta’s track record for consideration as a treatment for fi bromyalgia. of market access and reimbursement—based on its favor- Lilly’s cancer-fi ghting therapy Alimta was another able evaluation as a true breakthrough in the treatment very strong performer in 2007, growing by 40 percent of type 2 diabetes. Clinical research shows that Byetta worldwide to $854 million. Alimta is now approved in 86 is helping many patients achieve better glucose control countries; it is the worldwide market leader in second-line while losing weight. treatment of non-small cell lung cancer, and we are pursu- In our letter to you last year, we said that reacceler- ing additional indications for other tumor types. ating Lilly’s larger diabetes business—based heavily on 3 s R E d L the Humalog insulin family—was a key goal. Lilly made 2007 to strengthen our sales performance and our R&D o h progress against that goal in 2007, though we are not yet pipeline. Most prominently, our successful integration E satisfied. Humalog is gaining share again in some mar- of ICOS’s operations allowed us to realize considerable R a kets, driving 20 percent growth outside the U.S. for 2007 efficiencies in the selling and marketing of Cialis—which h as a whole and 32 percent in the fourth quarter. In the posted a 25 percent increase in worldwide sales in 2007, s U.S., our total Humalog prescription volume grew in 2007 to $1.216 billion. o for the first time in four years, and we aim to sustain that Lilly’s acquisition of Hypnion in 2007 gave us access T R trend along with gaining new-prescription market share. to a promising new compound for sleep disorders as well E Our summary of Lilly’s progress in 2007 would not as a broader presence in this area of research. In addition, T T be complete without attention to the remarkable contribu- we entered into licensing agreements with OSI Phar- E tions of our Elanco Animal Health business unit. Elanco’s maceuticals and MacroGenics to gain access to exciting L worldwide sales reached nearly $1 billion in 2007, an in- compounds and research platforms focused on diabetes crease of 14 percent. The acquisition in 2007 of Ivy Animal and various autoimmune diseases, with Glenmark Phar- Health and the ongoing launches of products for compan- maceuticals to obtain the rights to a portfolio of potential ion animals—six are planned within four years—position pain-fighting compounds, and with BioMS Medical on a Elanco for continued significant growth in the years ahead. potential therapy for multiple sclerosis. Growing cash flow also allowed us to increase our Pipeline Progress quarterly dividend in the fourth quarter of 2007 by The long-term health of any pharmaceutical company almost 11 percent, and it will give us continued freedom is determined by its R&D pipeline—the promise of future to seek growth opportunities and improved pipeline value breakthroughs. By that measure, we believe that the through acquisitions and licensing in the years ahead. outlook for Lilly is robust. In 2007, Lilly brought 16 new molecular entities (NMEs) into human trials—a record Transformation unparalleled in our history. We increased our portfolio Earlier, we referred to Lilly’s vision of becoming a of new molecules being tested on patients by nearly 50 truly patient-centered enterprise, focused on optimiz- percent, to 44, and in 2008 we are poised to add another ing individual patient outcomes. While we realize that 15 clinical candidates. the achievement of this vision will take many years, we A highlight of our late-stage development in 2007 were pleased that 2007 brought early, tangible evidence was the submission of prasugrel to the FDA for approval of Lilly’s transformation into a company that offers an at year’s end, after an all-out effort by Lilly’s medical and unmistakable value proposition to the people who depend regulatory affairs teams. Prasugrel (the proposed trade- on its products. mark is Effient™) is a potential new treatment for patients For example, the effort to “tailor” our medicines to with acute coronary syndrome (ACS) who are undergoing individual patients’ needs—delivering the right drug at angioplasty. the right dose at the right time—is bearing fruit. This will In addition to prasugrel, Lilly has seven other NMEs lead to a clearer benefit/risk understanding for patients, or NME-like therapies in Phase III trials or pending doctors, and payers alike—based on a higher degree of regulatory approval, including potential new treatments confidence that a medicine will work effectively and with for osteoporosis, diabetes, multiple sclerosis, and non- manageable side effects. Hodgkin’s lymphoma, an inhaled version of insulin, a Lilly’s large clinical trial of prasugrel is a great ex- weekly formulation of Byetta, and a long-acting injectable ample. Completed in 2007, the so-called TRITON study form of Zyprexa. Lilly also has more than a dozen new yielded robust data on patients for whom the benefits of indications, line extensions, and delivery devices in Phase prasugrel clearly outweigh the risks; patients who ben- III trials or under regulatory review. efited from the drug but who also had increased risk of If successful, most of those therapies will be approved bleeding (and might therefore be best served by a lower between 2008 and 2011, further strengthening Lilly’s prod- dose); and the small percentage of patients who did not uct portfolio as older patents expire. At the same time, Lilly appear to gain greater benefit from prasugrel compared to has the strongest mid-stage pipeline of molecules in its his- the potential risk. tory, and we are accelerating the development of some of Lilly also has made considerable progress in trans- them in a concerted strategy. As a result, Lilly should have forming itself from a fully-integrated pharmaceutical com- at least 10 NMEs in Phase III trials by 2011—with the goal pany—the old “FIPCO” model—into what we refer to as of launching two novel medicines per year starting at that a fully-integrated pharmaceutical network—or “FIPNET.” time, increasing to three per year in 2014. In the new model, we draw on a broad range of resources outside our company’s walls—to increase our effective Business Development capacity and access to external capabilities, to reduce our On the basis of increasing cash flow, Lilly invested level of risk and accelerate development, and ultimately to nearly $3 billion in acquisitions and licensing during help lower our average cost of R&D per molecule. 4 L E T T E explore them in an uninhibited way. The Jam left Lilly (cid:67)(cid:90)(cid:105)(cid:21)(cid:72)(cid:86)(cid:97)(cid:90)(cid:104)(cid:21)(cid:69)(cid:90)(cid:103)(cid:21)(cid:58)(cid:98)(cid:101)(cid:97)(cid:100)(cid:110)(cid:90)(cid:90)(cid:21)(cid:56)(cid:100)(cid:99)(cid:105)(cid:94)(cid:99)(cid:106)(cid:90)(cid:21)(cid:105)(cid:100)(cid:21)(cid:62)(cid:99)(cid:88)(cid:103)(cid:90)(cid:86)(cid:104)(cid:90) (cid:32)(cid:39)(cid:38)(cid:26) with literally thousands of fresh ideas, discussion threads, R (cid:29)(cid:25)(cid:21)(cid:105)(cid:93)(cid:100)(cid:106)(cid:104)(cid:86)(cid:99)(cid:89)(cid:104)(cid:30)(cid:21) T (cid:22)(cid:74)(cid:103)(cid:134)(cid:196)(cid:192)(cid:151)(cid:58)(cid:103)(cid:151)(cid:148)(cid:219)(cid:83)(cid:94)(cid:143)(cid:202)(cid:202)(cid:209)(cid:103)(cid:156)(cid:168)(cid:192)(cid:210)(cid:196)(cid:103)(cid:223)(cid:210)(cid:143)(cid:83)(cid:202)(cid:156)(cid:58)(cid:223)(cid:192)(cid:196)(cid:205)(cid:219)(cid:196)(cid:202)(cid:134)(cid:199)(cid:134)(cid:205)(cid:151)(cid:156)(cid:103)(cid:103)(cid:91)(cid:103)(cid:202)(cid:83)(cid:202)(cid:151)(cid:103)(cid:217)(cid:58)(cid:217)(cid:103)(cid:202)(cid:202)(cid:134)(cid:148)(cid:134)(cid:103)(cid:202)(cid:58)(cid:151)(cid:151)(cid:156)(cid:202)(cid:196)(cid:202)(cid:83)(cid:83)(cid:202)(cid:210)(cid:156)(cid:202)(cid:131)(cid:192)(cid:156)(cid:58)(cid:192)(cid:115)(cid:103)(cid:103)(cid:151)(cid:202)(cid:205)(cid:202)(cid:58)(cid:58)(cid:58)(cid:45)(cid:205)(cid:205)(cid:192)(cid:83)(cid:134)(cid:94)(cid:196)(cid:134)(cid:151)(cid:134)(cid:218)(cid:103)(cid:181)(cid:83)(cid:74)(cid:210)(cid:202)(cid:94)(cid:210)(cid:156)(cid:45)(cid:210)(cid:103)(cid:202)(cid:134)(cid:210)(cid:134)(cid:209)(cid:205)(cid:196)(cid:94)(cid:122)(cid:151)(cid:58)(cid:134)(cid:163)(cid:202)(cid:205)(cid:148)(cid:205)(cid:74)(cid:156)(cid:202)(cid:134)(cid:174)(cid:168)(cid:156)(cid:143)(cid:210)(cid:58)(cid:103)(cid:103)(cid:151)(cid:192)(cid:202)(cid:202)(cid:192)(cid:74)(cid:202)(cid:205)(cid:202)(cid:115)(cid:83)(cid:156)(cid:156)(cid:143)(cid:156)(cid:103)(cid:58)(cid:115)(cid:202)(cid:83)(cid:205)(cid:202)(cid:151)(cid:83)(cid:22)(cid:131)(cid:210)(cid:205)(cid:142)(cid:10)(cid:103)(cid:202)(cid:196)(cid:202)(cid:205)(cid:33)(cid:202)(cid:202)(cid:74)(cid:156)(cid:134)(cid:156)(cid:151)(cid:103)(cid:45)(cid:202)(cid:151)(cid:100)(cid:143)(cid:83)(cid:202)(cid:202)(cid:120)(cid:205)(cid:58)(cid:143)(cid:168)(cid:196)(cid:210)(cid:117)(cid:151)(cid:192)(cid:174)(cid:202)(cid:196)(cid:152)(cid:156)(cid:94)(cid:31)(cid:134)(cid:91)(cid:94)(cid:156)(cid:202)(cid:223)(cid:103)(cid:58)(cid:151)(cid:210)(cid:223)(cid:205)(cid:202)(cid:202)(cid:83)(cid:202)(cid:83)(cid:223)(cid:156)(cid:196)(cid:205)(cid:156)(cid:174)(cid:58)(cid:115)(cid:202)(cid:134)(cid:151)(cid:46)(cid:216)(cid:202)(cid:143)(cid:10)(cid:103)(cid:205)(cid:134)(cid:131)(cid:134)(cid:205)(cid:196)(cid:134)(cid:103)(cid:151)(cid:219)(cid:58)(cid:202)(cid:168)(cid:202)(cid:91)(cid:210)(cid:143)(cid:202)(cid:134)(cid:103)(cid:143)(cid:103)(cid:196)(cid:103)(cid:192)(cid:94)(cid:202)(cid:94)(cid:202)(cid:202)(cid:202) (cid:25)(cid:39)(cid:45)(cid:37)(cid:32)(cid:46)(cid:26) (cid:25)(cid:40)(cid:38)(cid:38)(cid:32)(cid:38)(cid:38)(cid:26) (cid:25)(cid:40)(cid:41)(cid:41)(cid:32)(cid:38)(cid:38)(cid:26) (cid:25)(cid:40)(cid:44)(cid:45)(cid:32)(cid:38)(cid:37)(cid:26) (cid:25)(cid:41)(cid:42)(cid:46) aMgLitnoislae dlpnys ewT ytho hoeoap elsfpll -eJrttaa hhertmsoeges u in—eadexeldecsaca oeendse sdle dsewb a fmtaitrhl tylauee nbscs e y ermfxe oimapmocteuroipcvesrt lieeacet dytomwi nooaievnlnnnlis d ntfo e oocucdlfeorl do ombtw uretmahfr oqn acirustnuemfi so cettekrhvomnleimystr.a eartterhimospa.noo t n.r tg O SHAREHO L The diffi cult nature of Lilly’s external environment D has not changed in the last year. Populations, on aver- E R age, are healthier and getting older throughout most of S the world, driving demand for health care and therefore its overall cost. Prescription medicines generally account for a small share of total health care spending by govern- ments and private insurers—and the use of our products (cid:21)(cid:37)(cid:40)(cid:21)(cid:37)(cid:41)(cid:21)(cid:37)(cid:42)(cid:21)(cid:37)(cid:43)(cid:21)(cid:37)(cid:44) often reduces spending on more expensive forms of treat- Some of this transformation involves fairly traditional ment. Nevertheless, the pharmaceutical industry regularly outsourcing—for example, the early-stage development experiences acute pressure on our reimbursement levels work of our ChemExplorer and PharmExplorer partner- and market access almost everywhere we do business to- ships in China; and our discovery efforts with Jubilant in day. Unfortunately, we are often viewed as an easy target India. At the same time, however, we are pioneering new in attempts to limit spending in the near term or to assign ways to share risks and rewards, such as our partnership blame for the inevitable shortcomings of health care sys- with Nicholas Piramal. In exchange for milestone pay- tems overall. At the same time, the growing expectations ments, and a royalty if a product reaches the market, this of industry regulators have only added to the expense and India-based company is developing selected molecules complexity of pharmaceutical R&D. from our pipeline up to the end of Phase II—during At Lilly, we have chosen to regard such environmen- which time we may opt to bring them back into our Lilly tal realities not as excuses for decline but as motivators portfolio. Lilly has a similar risk-sharing collaboration for our own performance and ongoing transformation. with Suven Pharmaceuticals in Hyderabad, which will be We cannot eliminate the underlying conditions that keep expanded in 2008. And we have entered into a partnership the pharmaceutical industry under pressure and scrutiny. in the preclinical arena with China’s Hutchison MediPhar- But we can control our own expenses and improve the ma, focused on targets in oncology and infl ammation. way we work. We can harness what we are learning about The emergence of Lilly as the hub of a “FIPNET” human biology to improve the effi cacy and the benefi t- should contribute as well to our productivity gains across risk profi les of products coming through our pipeline. We the business. Since 2003, Lilly has reduced its headcount can do many things to improve how patients are diag- by about 11 percent worldwide, increased its net sales nosed and therapies are used. We can help to improve pa- per employee by 64 percent, improved gross margin as a tients’ access to our products and to build understanding percent of sales, and reduced manufacturing, R&D, and ad- of our business practices through transparency. And we ministrative infrastructure while increasing overall output. can take on more responsibility for the health care chal- More than ever, Six Sigma is an invaluable disci- lenges facing society as a whole, as our corporate social pline at Lilly, as an important driver of productivity and responsibility report (see page 9) demonstrates. broader transformation. Since we started applying Six If we do these things—and do them well—then Lilly Sigma in 2005, Lilly has completed some 2,000 projects will realize its vision of improving outcomes for individu- that are having an impact not just on expenses but also al patients even as we secure our own bright future. on improving sales, cutting R&D cycle times, and indeed improving all aspects of the business. For the Board of Directors, Jamming Clearly, 2007 would have left us with very favorable memories in any case at Lilly—as a year of breakout per- Sidney Taurel formance and increased confi dence in our transformation. Chairman of the Board and Chief Executive Offi cer The year ended on a particularly hopeful note, however, with a global “Vision Jam” involving more than 22,000 Lilly employees and contractors. Facilitated by IBM, the four-day, round-the-clock event brought together Lilly John C. Lechleiter people in an online setting to brainstorm new ideas and President and Chief Operating Offi cer 5 E N LI Innovation at Lilly: The Portfolio and the Pipeline E P PI Major Marketed Products (Dates indicate the year of first global launch) D N 2005 Byetta® for type 2 diabetes A for use in combination with a thiazolidinedione (2007) O (in collaboration with Amylin Pharmaceuticals, Inc.) I L O 2004 Cymbalta® for major depressive disorder F T for diabetic peripheral neuropathic pain (2004) R for generalized anxiety disorder (2007) O for the maintenance treatment of major depressive disorder (2007) P (in collaboration with Quintiles Transnational Corp. in the U.S., Shionogi & Co. Ltd. in Japan, and with Boehringer Ingelheim elsewhere in the world) 2004 Alimta® for malignant pleural mesothelioma for second-line treatment of non-small cell lung cancer (2004) 2004 Symbyax® for bipolar depression 2004 Yentreve® for stress urinary incontinence (approved and launched outside the U.S.) 2003 Cialis® for erectile dysfunction for once-daily use (2007) 2003 Strattera® for attention-deficit hyperactivity disorder in children, adolescents, and adults 2002 Forteo® for treatment of men and postmenopausal women with osteoporosis who are at high risk for a fracture 2001 Xigris® for severe sepsis in adult patients at high risk of death 1999 Actos® for type 2 diabetes (in collaboration with Takeda outside the U.S.) 1998 Evista® for prevention of osteoporosis in postmenopausal women for treatment of osteoporosis in postmenopausal women (1999) for reduction in risk of invasive breast cancer in postmenopausal women with osteoporosis (2007) for reduction in risk of invasive breast cancer in postmenopausal women at high risk for invasive breast cancer (2007) 1996 Zyprexa® for schizophrenia for acute bipolar mania (2000) Zyprexa® Zydis® tablet (2000) for schizophrenia maintenance (2001) as combination therapy with lithium or valproate for acute bipolar mania (2002) for bipolar maintenance (2003) Rapid-acting IntraMuscular formulation (2004) Zyprexa® granules (2004; launched in Japan only) 1996 Humalog® Lyspro Rapid Acting Insulin for treatment of type 1 and type 2 diabetes Humalog® Mix 75/25 (1999) Humalog® Mix 50/50 (1999) 1995 Gemzar® for non-small-cell lung cancer for pancreatic cancer (1996) for bladder cancer (1999; approved and launched outside the U.S.) for metastatic breast cancer (2003) for recurrent ovarian cancer (2004) for biliary tract cancer (2006; Japan) 6 P O R T F O L I O 1995 ReoPro® for prevention of cardiac ischemic complications in patients undergoing A coronary intervention, such as angioplasty N for unstable angina associated with stent procedure (1997) D (in collaboration with Centocor, except in Japan) P I P 1987 Humatrope® for growth failure caused by pediatric growth hormone defi ciency E L for replacement therapy for adult growth hormone defi ciency (1995) I N for short stature caused by Turner syndrome (1997) E for idiopathic short stature (2003) 1983 Humulin® for type 1 and type 2 diabetes New Drug Applications Submitted For Review to the U.S. Food and Drug Administration Duloxetine for fi bromyalgia Olanzapine for adolescent schizophrenia and bipolar disorder Olanzapine LAI long-acting injection delivery for schizophrenia Olanzapine-Fluoxetine for treatment-resistant depression Pemetrexed disodium for fi rst-line treatment of non-small-cell lung cancer Prasugrel for prevention/reduction of atherothrombotic events in patients with acute coronary syndromes who undergo percutaneous coronary intervention (PCI) (in collaboration with Daiichi Sankyo Company, Ltd.) Ruboxistaurin mesylate for diabetic retinopathy Teriparatide (rDNA origin) for glucocorticoid-induced osteoporosis (GIOP) injection Select Drug Candidates in Late-Stage Investigation Arzoxifene for the prevention and treatment of osteoporosis and breast cancer risk reduction AIR® Inhaled insulin for type 1 and type 2 diabetes (in collaboration with Alkermes, Inc.) Duloxetine for chronic pain Enzastaurin for poor prognosis patients with diffuse large B-cell lymphoma Exenatide for once-weekly dosing MBP8208 for secondary progressive multiple sclerosis (SPMS) and relapsing-remitting multiple sclerosis (RRMS) (in collaboration with BioMS Medical Corp.) Teplizumab for type 1 diabetes (in collaboration with MacroGenics) (continued next page) 7 E N I L E P I Select Drug Candidates in Mid-Stage Investigation P d N A-beta antibody for Alzheimer’s disease a o A-beta lowering for Alzheimer’s disease LI (Gamma secretase inhibitor) o F T Anti-CD20 (AME133v) for non-Hodgkin’s lymphoma (NHL) R o ASAP for solid tumors P Factor Xa inhibitor for venous thromboembolism (VTE) prophylaxis, VTE treatment and atrial fibrillation stroke prophylaxis Gemcitabine prodrug for solid tumors GLP-Fc analog for type 2 diabetes Glucokinase activator for type 2 diabetes (in collaboration with OSI Pharmaceuticals, Inc.) HY10275 for insomnia IL-1 beta antibody for rheumatoid arthritis LP10152 (FGF-21) for diabetes mGlu2/3 prodrug for schizophrenia NERI IV for depression (phase II); for ADHD (phase I) OpRA II for alcohol dependence Survivin ASO for solid tumors TRPV1 antagonist for treatment for various pain conditions, including osteoarthritic pain (in collaboration with Glenmark Pharmaceuticals) Information is current as of January 31, 2008. The search for new drugs is risky and uncertain, and there are no guarantees. Remaining scientific and regulatory hurdles may cause pipeline compounds to be delayed or even to fail to reach the market. 8