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******FIND 2010 ANNUAL REPORT FOR ELI LILLY ATTACHED******

Getting There Eli Lilly and Company 2010 Annual Report Notice of 2011 Annual Meeting Proxy Statement Getting There The Lilly Promise The path to Lilly's future is a pipeline, and a bridge. The future of our company depends on bringing to patients innovative medicines that address unmet medical needs. We have a robust pipeline of promising molecules. To reach its future potential, Lilly must rst bridge a period we call \"Years YZ\" when we face a series of major patent expirationsincluding expiration of the U.S. patent for Zyprexa in late 2011. We have been preparing for YZ in a number of ways: Achieving volume-driven revenue growth, along with cost savings, to deliver consistently solid earnings based on our currently marketed products. Building growth enginesin Japan, in key emerging markets, and in our animal health businessthat can deliver new revenues through the YZ period. And aggressively pursuing business-development opportunities that strengthen our nancial and commercial position. We believe these efforts will allow us to generate operating cash ow sufcient to carry out our innovationbased strategy, reward shareholders, and reach the future successfully and independentlywith bright prospects for continued growth. Our Mission Lilly makes medicines that help people live longer, healthier, more active lives. Year in Review 1 2 7 Financial Highlights Letter to Shareholders Pipeline of Molecules in Clinical Development Form 10-K 2 17 34 35 36 37 38 39 40 42 73 74 Products Results of Operations Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Comprehensive Income (Loss) Segment Information Selected Quarterly Data Selected Financial Data Notes to Consolidated Financial Statements Management's Reports Reports of Independent Registered Public Accounting Firm For more information on Lilly's commitment to corporate responsibility, please see the inside back cover of this report. Our Values Integrity | Excellence | Respect for People We promise to operate our business with absolute integrity and earn the trust of all, set the highest standards for our performance and for the performance of our products, and demonstrate caring and respect for all those who share in our mission and are touched by our work. Our Vision We will make a signicant contribution to humanity by improving global health in the 21st century. Starting with the work of our scientists, we will place improved outcomes for individual patients at the center of what we do. We will listen carefully to understand patient needs and work with health care partners to provide meaningful benets for the people who depend on us. Our Strategy We will create value for all our stakeholders by accelerating the ow of innovative medicines that provide improved outcomes for individual patients. Proxy Statement 1 2 6 10 15 16 17 19 21 23 25 38 49 51 56 57 60 64 66 67 Notice of 2011 Annual Meeting and Proxy Statement General Information Board of Directors Highlights of the Company's Corporate Governance Guidelines Committees of the Board of Directors Membership and Meetings of the Board and Its Committees Directors' Compensation Directors and Corporate Governance Committee Matters Audit Committee Matters Compensation Committee Matters Compensation Discussion and Analysis Executive Compensation Ownership of Company Stock Items of Business To Be Acted Upon at the Meeting Other Matters Appendix A Appendix B Executive Committee and Senior Leadership Corporate Information Annual Meeting Admission Ticket 2010 Financial Highlights ELI LILLY AND COMPANY AND SUBSIDIARIES (Dollars in millions, except per-share data) Year Ended December 31 2010 2009 Change % Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,076.0 $21,836.0 6 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,884.2 4,326.5 13 Research and development as a percent of revenue . . . . . . . . . . . . . . 21.2% 19.8% Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,069.5 $ 4,328.8 Earnings (loss) per sharediluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciling items1: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired in-process research and development (IPR&D) . . . . . . Asset impairments, restructuring, and other special charges. . . Non-GAAP earnings per sharediluted . . . . . . . . . . . . . . . . . . . . . . . . 4.58 3.94 .03 .13 4.74 .05 .42 4.422 7 Dividends paid per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.96 1.96 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694.3 765.0 (9) Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,350 40,360 (5) 1 For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 17 of the Form 10-K. 2 Numbers in the 2009 column do not add due to rounding. 46.1% 51.0% 24.8% 17.7% 15.8% 11.1% $2,171.3 +10% 24.3% $602 +7% $540 +21% $504 +10% +11% ROA increased from 2009 primarily due to strong net income growth in 2010. ROE also showed strong results for the second year in a row also due to strong net income growth. 12.1% $3,744.5 +8% In 2010, we continued our progress on productivity. Revenue per employee increased 11 percent to $602,000. $459 $6,135.4 +2% Return on Assets and Shareholders' Equity $378 Neuroscience Endocrinology Oncology Cardiovascular Other Pharmaceutical Animal Health -7.5% $1,391.4 $214.4 +4% +15% -16.3% Revenue in Neuroscience, led by Zyprexa and Cymbalta, increased 5 percent compared to 2009 and represents 41 percent of our 2010 total revenue. $9,419.0 Endocrinology, led +5% by Humalog, Humulin, and Evista, increased 2 percent and represents 27 percent of total revenue. Despite a 16 percent drop in Gemzar sales due to patent losses, Oncology grew by 8 percent and represents 16 percent of total revenue. Cardiovascular increased by 10 percent and represents 9 percent of total revenue. Revenue Per Employee Continues to Increase ($ thousands, percent growth) +10% Revenue Grows Across Therapeutic Areas ($ millions, percent growth) 06 07 08 09 10 Return on Assets (ROA) Return on Shareholders' Equity (ROE) 06 07 08 09 10 To Our Shareholders This year marks the 135th anniversary of the founding of Eli Lilly and Company. It also formally marks the beginning of a period of major patent expirations we call \"Years YZ,\" when Zyprexa goes off patent in late 2011 in the United States. For all intents and purposes, we're already managing through the impact of YZ in many of our marketsincluding the United States, where generic versions of our anti-cancer medicine Gemzar entered the market last November. Near Term: Operating effectively and accelerating our growth engines In 2010, Eli Lilly and Company posted strong nancial performance, highlighted by volume-driven revenue growth of 6 percent. Eight pharmaceutical productsplus our animal health businesseach exceeded $1 billion in annual revenues. In the 12 months ending September 2010the most recent period for which we have comparable data from IMS HealthLilly's worldwide revenue growth rate was the second-highest among the top 10 global pharmaceutical companies. The loss of Zyprexa and other patented products will hurt our top-line and bottom-line performance. Yet, we've seen this coming and we're prepared, with a strategy we believe will create the greatest value for our shareholders, employees, and society: accelerating the ow of innovative medicines that provide improved outcomes for individual patients. $5,026.4 We were able to leverage this revenue growth into even higher net income growth as we made continued progress containing costs, even as we sustained our substantial investment in R&D. Reported net income and earnings per share increased to $5.070 billion and $4.58, We have a robust and exciting pipeline, and we advanced respectively, compared with full-year 2009 net income a number of promising molecules in 2010. of $4.329 billion and earnings per share of $3.94. On a non-GAAP basis, which excludes We see strong growth ahead for many items totaling $0.16 and $0.48 for Eight Products Exceed $1 Billion in Revenue of our current products, and we're 2010 and 2009, respectively, net ($ millions) among the fastest-growing compaincome and earnings per share Eight products nies in three important areas that increased 8 percent and 7 percent, to and one product lineZyprexa, will provide countercyclical growth $5.241 billion and $4.74, respectively. Cymbalta, Alimta, opportunities through the YZ period: Humalog, Cialis, Our strong operating performance, Japan, key emerging markets, and our Gemzar, Humulin, along with prudent management and Evista, along Elanco animal health business. of working capital, generated some with animal healthexceeded $6.9 billion of operating cash ow. $1 billion in 2010. Our nancial strength and strong Alimta grew 29 percent primarily due current performance enable us to We generated solid volume growth to continued sales continue to pursue business developin our current products in 2010. We growth in the U.S. and Japan. ment, to make capital investments, fended off a patent challenge to our and to maintain the dividend to our fastest-growing medicine, Alimta, shareholders. In short, Lilly is well and secured a six-month pediatric positioned to bridge YZ and emerge extension of U.S. market exclusivity. even stronger. We received FDA approval for another important pain indication for In this letter, I want to provide a broad Cymbaltachronic musculoskeletal look at how we're approaching this painwhich will have launched in challenge with a focus on sustained growth: the U.S. by the time you read this. We also have important First, I'll review how we're preparing for YZ in the near new indications in development for Alimta, Byetta, term, by continuing to generate strong performance Cialis, and Erbitux. and taking full advantage of key growth engines. Second, I'll discuss how we're using business develop- In addition to maximizing opportunities to drive top-line ment to bolster revenue and cash ow in the medium revenue growth, we continue to improve productivity. termand, in particular, the investment we're makThrough deliberate and determined actions, we are on ing to reclaim leadership in diabetes. track to achieve the headcount and cost-containment And lastly, I'll highlight important molecules in our goals we laid out in September 2009. As of December 31, pipelinethe key to our long-term futureand 2010, we had reduced headcount by 3,450excluding discuss how we continue to reenergize our innovastrategic additions in key emerging markets and Japan tion engine to resume growth. along with business developmentor nearly two-thirds $3,459.2 $5,000 $4,000 $1,024.4 Evista $1,149.4 $1,088.9 Humulin $1,699.4 $2,000 $1,391.4 $2,208.6 $2,054.2 $3,000 $1,000 Gemzar Cialis Total Animal Health Alimta Humalog Zyprexa 2 Cymbalta 0 John C. Lechleiter, Ph.D., chairman, president, and chief executive officer (second from left), meets with scientists at ImClone Systems' new state-of-the-art cancer research facility at the Alexandria Center for Life ScienceNew York City. ImClone, a Lilly subsidiary, carries out preclinical discovery efforts at the site for potential new biotechnology medicines for patients with cancer. Today, Lilly has 30 potential new cancer medicines under evaluation in a broad spectrum of tumor types. Seen here with John are Yang Shen, Ph.D., a senior scientist in antibody technology; Dale Ludwig, Ph.D., vice president of researchbiologics technology; Kyla Driscoll Carroll, Ph.D., a senior scientist in immunology; and Nick Loizos, Ph.D., a principal scientist in cell biology. 3 of our goal of 5,500, and we will also meet or exceed our goal of reducing our projected 2011 costs by $1 billion. We're accelerating sales growth in three critical areas that made signicant contributions to our results in 2010: Japan, key emerging markets, and Elanco. As reported by IMS Health, Lilly is far and away the fastest-growing major pharmaceutical company in Japanthe world's second-largest pharmaceutical market. Our revenue growth in Japan has been fueled in part by the launch of products and indications that were introduced much earlier in the U.S. and Europe. After growing 30 percent in 2009, total revenues in Japan grew 32 percent in 2010. We're seeing strong growth from Zyprexa (which maintains exclusivity in Japan until December 2015), Alimta, and Humalogand we expect signicant new contributions from Cymbalta, Forteo, and Byetta, all launched in Japan in 2010. Medium Term: Pursuing business development, rebuilding in diabetes A third important source of countercyclical growth is our Elanco animal health business. Elanco revenues grew 10 percent in 2009 and 15 percent in 2010, signicantly $66.9 +7% Humulin $95.2 +5% $184.2 +15% $110.7 +2% Zyprexa Humalog Cialis Total Animal Health $140.3 +9% $384.5 +13% Alimta Six products and a product lineAlimta, Cymbalta, Cialis, Zyprexa, Humalog, Humulin, and animal healthgenerated an increase of $1.5 billion in revenue over 2009. This growth was driven primarily by volume increases. $502.6 +29% Our strategy for the medium term includes continued use of business development to help bolster revenues through the trough of Key Contributors to 2010 Revenue Growth the YZ period and return to growth in ($ in millions represent growth in revenue, percent growth) the years beyond. China is a great example of our strategy in emerging markets. Lilly is now the No. 10 multinational pharma company in China. Just in the last two years, we've doubled our sales force in China. We're increasing our presence in other important ways, as well, through a growing network of alliances and external partnerships, venture capital investments, an increasing number of clinical trials, and a new diabetes research center in Shanghai. 4 In addition, Elanco has built a robust pipeline and is poised to maintain double-digit growth in the coming years with launches expected for multiple products targeting high-value markets such as livestock immune enhancement, control of parasites in companion animals, and pain control. We've also built a development capability in animal health vaccines. And we intend to drive the growth of the Elanco business via business development, exemplied by our acquisition of the animal health assets that Pzer divested in Europe in 2010. Cymbalta Lilly also ranks rst in the most recent comparable IMS gures for pharmaceutical revenue growth among the top 10 multinational companies across ve key emerging markets: China, Turkey, Korea, Brazil, and Mexico. Total Lilly revenues in these ve key countries grew 13 percent in 2010. We remain focused on driving protable growth in our emerging markets business, which will provide an increasing share of our growth during the YZ period and beyond. While we will concentrate on realizing the signicant opportunities we see for our core assetsincluding Cymbalta, Cialis, Humalog, and Alimtawe will look to supplement this organic growth with targeted business development. outpacing overall industry growth. Elanco's growth was driven both by our food animal business and by Comfortis, our oral ea-control product for companion animals, which has had a strong uptake here in the United States. Our recently completed acquisition of Avid Radiopharmaceuticals, Inc., could yield benets as early as this year. Avid's lead candidate, Amyvid (orbetapir) is a molecular imaging agent designed to image beta-amyloid in the brain, the hallmark pathology of Alzheimer's disease. Amyvid was assigned a priority review by the FDA, and in January 2011 an FDA advisory committee recommended approval of the beta-amyloid imaging agent, if certain conditions are met related to physician training and re-reading of existing brain scans. In March, we entered into a licensing agreement with Acrux Limited for the commercialization of Axiron, a testosterone solution. The FDA approved Axiron in November, and U.S. launch is planned for the rst half of this year. In Junealong with our partner, Kowa Pharmaceuticals America, Inc.we launched the cholesterollowering medicine Livalo in the United States. In July we acquired Alnara Pharmaceuticals, Inc. Alnara's lead product in development is liprotamase, an oral nonporcine pancreatic enzyme replacement therapy currently under review by the FDA for the treatment of exocrine pancreatic insufciency. These steps and others are designed to bolster near- and mid-term revenues and cash ow, and they contribute to our strategy for YZ. assets, if approved, could generate long revenue streams, with intellectual property protection into the mid- to late-2020s. In a major deal announced in early 2011, Lilly and Boehringer Ingelheim have entered into a broad worldwide co-development and co-commercialization agreement in diabetes. This initiative not only promises to bolster our YZ performance but also plays a key role in our strategy for re-establishing leadership in diabetes. Long Term: Reenergizing the pipeline and reinventing R&D Our agreement with Boehringer Ingelheim covers two late-stage, oral anti-diabetes compounds from Boehringer Ingelheim: linagliptin, a DPP-4 inhibitor currently under regulatory review in the U.S., Europe, and Japan; and an SGLT-2 inhibitor, BI 10773, currently in Phase III clinical testing. Ultimately, the future of our company depends on bringing to patients innovative medicinesboth from our own labs and from outside our wallsand thus driving long-term growth. Indeed, we're bullish about the growth potential represented by the molecules in our development pipeline. As shown in the pipeline on page 7 of this report, we currently have 68 molecules in clinical-stage development, and we have seen signicant movement in the pipeline since our last annual report. Specically, we advanced: 17 new molecules into Phase I clinical testing (includThe agreement also includes two mid-stage basal analog ing one currently in Phase II and one that failed), insulin compounds from Lilly: a novel basal insulin analog and our new insulin glargine nine molecules into Phase II testproduct. In addition, the agreement ing, and includes an option for the two com two molecules into Phase III Lilly's fundamental panies to collaborate on a third Lilly testing. compound being studied for treatstrategy is predicated ment of complications of diabetes We also acquired ve late-stage a TGF beta monoclonal antibody, molecules. We terminated development on innovation. We must currently in Phase II for chronic of 15 molecules and sold one molecule kidney disease. to a third party. maintain our focus on We believe that the overall value of what made this company In addition to the molecules in our these assets will be greater when mandiabetes pipeline, which I described great. The science has aged together as a portfolio. We'll be earlier, we advanced new molecules able to take advantage of a larger comand indications to Phase III in other never been more promis- important therapeutic areas: mercial infrastructure, particularly in primary care, than we could have done ing, and the need for new In neuroscience, we recently began each on our own. This should benet Boehringer Ingelheim's oral products Phase III trials of NERI as adjunctive medicines never greater. therapy to SSRIs in patients with major as well as Lilly's basal analog insulins, and may also provide us opportunidepressive disorder, based on encouragties to more effectively promote our ing results from our Phase II studies, existing injectable diabetes products such as Humalog which were presented at medical conferences in late 2010. and Byetta. In addition, based on an interim review of long-term safety data and after consultation with the FDA, we made Importantly, this agreement also creates an innovative, the decision to begin Phase III trials later this year of our balanced portfolio that may allow us to offer treatment mGlu2/3 receptor agonist as monotherapy treatment for options to patients and physicians across the progression schizophrenia. of the disease. In oncology, we have had Phase III trials ongoing for some Finally, our agreement with Boehringer Ingelheim time for ramucirumab in breast and gastric cancers, and we provides Lilly with two potential launches during critical recently started trials in liver, colon, and lung cancers. Lilly years in our YZ periodlinagliptin could come this year and Bristol-Myers Squibb Company have stopped enrolland the SGLT-2 inhibitor in 2014. In both cases, these ment in a Phase III trial of necitumumab for advanced 5 nonsquamous non-small cell lung cancer; however, necitumumab continues to be studied in a separate Phase III trial for a different type of lung cancer. In our emerging autoimmune portfolio, we began Phase III trials of our BAFF antibody for both rheumatoid arthritis and lupus, and our IL-17 antibody in rheumatoid arthritis could potentially enter Phase III this year. In addition, along with our partner, Incyte Pharmaceuticals, we disclosed promising Phase IIa data in rheumatoid arthritis for our oral JAK-1/JAK-2 inhibitor. In 2011, we'll complete the Phase III DURATION-6 trial comparing Bydureon to liraglutide. We also expect to present initial results from the Phase III trial in advanced nonsquamous non-small cell lung cancer of Alimta induction therapy followed by Alimta maintenance therapy. We completed enrollment in late 2010 for both Phase III trials of solanezumab, our antibody being studied for the treatment of Alzheimer's disease. The treatment duration in each trial is 18 months, so we will complete each study 18 months after the last patient was enrolled. During the year, we experienced pipeline disappointments, including three potential medicines in Phase III trials. These setbacks underscore the risks of pharmaceutical innovation, but also the need to nd solutions to what has become an industrywide productivity problem. That's why Lilly is determined to adapt our innovation engine to meet the ever more exacting challenges of pharmaceutical research. We're working to build an in-depth understanding of patients' needs into the earliest stages of research. We're assessing the potential of new molecules in terms of what's truly valued by patients, physicians, and payers. We're better assessing and managing risk in the face of ever-increasing expectations. We're striving to anticipate the concerns of regulators so that we can answer their questions in our clinical testing. And we're focusing all our energy and creativity on speeding up the progression of promising molecules and reducing the cost to bring a new medicine to patients. In past years, I've reported on our efforts on many fronts to improve the speed and power of R&D at Lilly: building a network of research capabilities inside and outside our own walls, creating a Development Center of Excellence, strengthening our biotech infrastructure, applying tailoring strategies to virtually every molecule in clinical 6 development, and redesigning our company to create a clear line of sight from innovation to the customer. We continue to pursue these goals with a great sense of urgency, and we remain on track to have at least 10 molecules in Phase III by the end of 2011with more coming behind. Looking to a promising future To sum up, Lilly enters 2011 with a keen awareness of the challenges of the YZ period ahead, but also with strategies in the near, middle, and long term to meet those challenges and to achieve sustained growth. Lilly's fundamental strategy is predicated on innovation. We must maintain our focus on what made this company great: the discovery and development, the manufacturing and marketing of new medicines that help address unmet medical needs and provide value not only for patients, but for health care professionals and for payers, as well. We must be as tenacious as the diseases we're ghting. The science has never been more promising, and the need for new medicines never greater. I recently visited our ImClone labs in New York City, which opened in September 2010 (see page 3), where I met with some of our outstanding scientists and toured the impressive facilities. Visits like this around the company reafrm my conviction that Lilly has the intellectual capital, the tools, and the determinationalong with the nancial strengthto meet this moment and seize the many opportunities before us. I remain deeply appreciative of the level of commitment, the level of professionalism, and the combined and individual expertise that all Lilly employees bring to this enterprise. Our commitment to scientic excellence and a strong focus on research have indeed propelled this company to greatness over nearly 135 years. These same qualities underpin our hope for future success. We are acting with urgency, not simply to survive YZ, but to emerge with even greater strength and the capacity to drive future growth for the benet of patients and shareholders. For the Board of Directors, John C. Lechleiter Chairman, President, and Chief Executive Ofcer Pipeline of Molecules in Clinical Development Phase I Phase II Phase III Regulatory Review cancer cancer cancer erectile dysfunction IMC-3G3 cancer BI 10773 diabetes orbetapir -amyloid imaging depression cancer cancer TGF antibody chronic renal disease cixutumumab cancer BAFF antibody rheumatoid arthritis/ lupus linagliptin diabetes bipolar disorder cancer cancer cancer diabetes enzastaurin diffuse large -cell lymphoma Arxxant diabetic retinopathy cancer cancer depression elF-4E ASO cancer basal insulin diabetes GLP-1 Fc diabetes liprotamase exocrine pancreatic insufciency cancer cancer diabetes IMC-18F1 cancer mGlu2/3 pro II schizophrenia necitumumab non-small cell lung cancer nephropathy cancer diabetes osteoporosis OpRA alcohol dependency NERI depression alcohol dependency gemcitabine prodrug cancer diabetes agitation in Alzheimer's JAK-1/JAK-2 rheumatoid arthritis ramucirumab solid tumors alcohol dependency TGF inhibitor cancer migraine prevention CETP inhibitor atherosclerosis IL-17 antibody rheumatoid arthritis solanezumab Alzheimer's BACE inhibitor Alzheimer's cancer obesity benign prostatic hyperplasia survivin ASO cancer anemia cancer obesity Chk-1 inhibitor cancer tasisulam cancer bone healing cancer osteoarthritis Eg5 inhibitor cancer cancer IL-1 antibody cardiovascular disease FDA Approved Phase I Phase II Phase III pain diabetes iGluR5 pain LY2599506 diabetes semagacestat Alzheimer's atherosclerosis pain IL-23 antibody psoriasis GLP-1 PEG diabetes teplizumab diabetes Axiron testosterone deciency The Lilly Pipeline currently includes 68 molecules in clinical development. Since our 2009 annual report, 17 new molecules advanced into Phase I testing (including one currently in Phase II and one that failed), nine molecules into Phase II testing, and two molecules into Phase III testing. We also acquired ve late-stage molecules. We terminated development of 15 molecules and sold one molecule to a third party. And we ceased development of later-stage indications for two molecules for which work continues on other indications. We remain on track to have at least 10 molecules in Phase III by the end of 2011. In addition to our human pharmaceutical pipeline, shown here, our animal health pipeline includes potential products for highvalue animal health markets such as livestock immune enhancement, control of parasites in companion animals, and pain control. We are also building a substantial development capability for animal health vaccines. Q Q New Chemical Entity New Biotech Entity Movement since 2009 Annual Report: schizophrenia uterine broids IMC-EB10 cancer obesity LY2624803 insomnia CD20 antibody non-Hodgkins lymphoma Achieved Milestone Previously in Later Phase New Molecule Attrition Sold to Third Party Information is current as of February 15, 2011. The search for new medicines is risky and uncertain, and there are no guarantees. Remaining scientic and regulatory hurdles may cause pipeline compounds to be delayed or to fail to reach the market. 7 Form 10-K FORM 10-K United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2010 Commission file number 001-06351 Eli Lilly and Company An Indiana corporation I.R.S. employer identification no. 35-0470950 Lilly Corporate Center, Indianapolis, Indiana 46285 (317) 276-2000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange On Which Registered Common Stock (no par value) 6.57% Notes Due January 1, 2016 7 1 8% Notes Due June 1, 2025 6.77% Notes Due January 1, 2036 New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No ' Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ' No Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 No ' 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 during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files. Yes No ' Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ' 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 \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer ' Non-accelerated filer ' Smaller reporting company ' Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Act: Yes ' No Aggregate market value of the common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the Registrant's most recently completed second fiscal quarter (Common Stock): approximately $34,205,000,000 Number of shares of common stock outstanding as of February 15, 2011: 1,157,664,779 Portions of the Registrant's Proxy Statement to be filed on or about March 7, 2011 have been incorporated by reference into Part III of this report. 1 FORM 10-K Part I Item 1. Business Eli Lilly and Company (the \"Company\" or \"Registrant\") 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 sell products in one significant business segmentpharmaceutical products. We also have an animal health business segment, whose operations are not material to our financial statements. Our mission is to make medicines that help people live longer, healthier, more active lives. Our strategy is to create value for all our stakeholders by accelerating the flow of innovative new medicines that provide improved outcomes for individual patients. 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, develop, and bring to market innovative new medicines. We manufacture and distribute our products through facilities in the United States, Puerto Rico, and 17 other countries. Our products are sold in approximately 125 countries. Products Our products include: Neuroscience products, our largest-selling product group, including: Zyprexa, for the treatment of schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance Zyprexa Relprevv (Zypadhera in the European Union), a long-acting intramuscular injection formulation of Zyprexa Cymbalta, for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the United States for the management of fibromyalgia and of chronic musculoskeletal pain due to chronic low back pain or chronic pain due to osteoarthritis Strattera, for the treatment of attention-deficit hyperactivity disorder in children, adolescents, and in the United States in adults Prozac, for the treatment of major depressive disorder, obsessive-compulsive disorder, bulimia nervosa, and panic disorder Symbyax, for the treatment of bipolar depression and treatment-resistant depression. Endocrinology products, including: Humalog, Humalog Mix 75/25, and Humalog Mix 50/50, for the treatment of diabetes Humulin, for the treatment of diabetes Byetta, for the treatment of type 2 diabetes Actos, for the treatment of type 2 diabetes 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 postmenopausal women and men Humatrope, for the treatment of human growth hormone deficiency and certain pediatric growth conditions Axiron, a topical solution of testosterone, applied by underam applicator, for replacement therapy in men for certain conditions associated with a deficiency or absence of testosterone (approved in the U.S. in 2010; to be launched in 2011). Oncology products, including: Alimta, for the first-line treatment, in combination with another agent, of non-small cell lung cancer for patients with non-squamous histology; for the second-line treatment of non-small cell lung cancer; and in combination with another agent, for the treatment of malignant pleural mesothelioma Gemzar, for the treatment of pancreatic cancer; in combination with other agents, for the treatment of metastatic breast cancer, non-small cell lung cancer, and advanced or recurrent ovarian cancer; and in the European Union for the treatment of bladder cancer Erbitux, indicated both as a single agent and with another chemotherapy agent for the treatment of certain types of colorectal cancers; and as a single agent or in combination with radiation therapy for the treatment of certain types of head and neck cancers. 2 Marketing We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various countries to meet local needs. PharmaceuticalsUnited States In the United States, we distribute pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies. In 2010, 2009, and 2008, three wholesale distributors in the United States AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health, Inc.each accounted for between 12 percent and 17 percent of our worldwide consolidated net sales. No other distributor accounted for more than 10 percent of consolidated net sales in any of those years. We also sell pharmaceutical products directly to the United States government, but those sales are not material. We promote our major pharmaceutical products in the United States through sales representatives who call upon physicians and other health care professionals. We advertise in medical journals, 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 United States and we maintain web sites with information about all our major products. Divisions of our sales force are assigned to therapeutic areas, such as neuroscience, diabetes, and oncology. We supplement our employee sales force with contract sales organizations as appropriate to leverage our own resources and the strengths of our partners in various markets. Large purchasers of pharmaceuticals, such as managed-care groups, government agencies, and long-term care institutions, account for a significant portion of total pharmaceutical purchases in the United States. We maintain special business groups to service wholesalers, managed-care organizations, government and long-term care institutions, hospitals, and certain retail pharmacies. In response to competitive pressures, we have entered into arrangements with these organizations which provide for discounts or rebates on one or more Lilly products. PharmaceuticalsOutside the United States Outside the United States, we promote our pharmaceutical products primarily through sales representatives. While the products marketed vary from country to country, neuroscience products constitute the largest single group in total sales. Distribution patterns vary from country to country. In most countries, we maintain our own sales organizations, but in some countries we market our products through independent distributors. 3 FORM 10-K Cardiovascular products, including: Cialis, for the treatment of erectile dysfunction 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 (PCI), including patients undergoing angioplasty, atherectomy, or stent placement ReoPro, for use as an adjunct to PCI for the prevention of cardiac ischemic complications Xigris, for the treatment of adults with severe sepsis at high risk of death Adcirca, for the treatment of pulmonary arterial hypertension Livalo, a statin medication for use as an adjunct to diet in the treatment of high cholesterol (primary hyperlipidemia or mixed dyslipidemia), launched in 2010. Animal health products, including: 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 Micotil, Pulmotil, and Pulmotil AC, antibiotics used to treat respiratory disease in cattle, swine, and poultry, respectively Paylean and Optaflexx, leanness and performance enhancers for swine and cattle, respectively Posilac, a protein supplement to improve milk productivity in dairy cows Coban, Monteban, and Maxiban, anticoccidial agents for use in poultry Apralan, an antibiotic used to control enteric infections in calves and swine Surmax (sold as Maxus in some countries), a performance enhancer for swine and poultry Elector, a parasiticide for use on cattle and premises Comfortis, the first FDA-approved, chewable tablet that kills fleas and prevents flea infestations on dogs Reconcile, for treatment of canine separation anxiety in conjunction with behavior modification training. Other pharmaceuticals, including: Vancocin HCl, used primarily to treat staphylococcal infections CeclorTM, for the treatment of a wide range of bacterial infections. FORM 10-K Pharmaceutical Marketing Collaborations We market certain of our significant products in collaboration with other pharmaceutical companies: Cymbalta is co-marketed in Japan by Shionogi & Co. Ltd. and, under an arrangement that ended in 2010, was co-promoted or co-marketed in most other major countries outside the U.S. by Boehringer Ingelheim GmbH. Evista is marketed in major European markets by Daiichi Sankyo Europe GmbH, a subsidiary of Daiichi Sankyo Co., Ltd. of Japan. We co-promote Byetta with Amylin Pharmaceuticals, Inc. in the United States and Puerto Rico, and we have exclusive marketing rights in other territories. Erbitux is marketed in North America by Bristol-Myers Squibb. We co-promote Erbitux in North America. Outside North America, Erbitux is commercialized by Merck KGaA. We receive royalties from Bristol-Myers Squibb and Merck KGaA. Effient is co-promoted with us by Daiichi Sankyo in the United States, major European markets, Brazil, Mexico, China and several other Asian countries. Daiichi Sankyo retains sole marketing rights in Japan, and we retain sole marketing rights in Canada, Australia, Russia, and certain other countries. Animal Health Products Our Elanco animal health business unit employs field salespeople throughout the United States. Elanco also has an extensive sales force outside the United States. Elanco sells its products primarily to wholesale distributors. Competition Our pharmaceutical products compete with products manufactured by many other companies in highly competitive markets throughout the world. Our animal health products compete on a worldwide basis with products of animal health care companies as well as pharmaceutical, chemical, and other companies that operate animal health divisions or subsidiaries. Important competitive factors include safety, effectiveness, and ease of use of our products; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products and processes. Most new products that we introduce must compete with other 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 progressive price reductions, decreased volume of sales, or both. Increasingly, to obtain favorable reimbursement and formulary positioning with government payers, managed care organizations, and pharmacy benefits managers, we must demonstrate that our products offer not only medical benefits but also more value as compared with other forms of care. Manufacturers of generic pharmaceuticals invest far less than we do in research and development and therefore can price their products much lower than our branded products. Accordingly, when our branded pharmaceutical loses its market exclusivity, it normally faces intense price competition from generic forms of the product. In many countries outside the United States, intellectual property protection is weak or nonexistent and we must compete with generic or counterfeit versions of our products. We believe our long-term competitive success depends upon discovering and developing (either alone or in collaboration with others) or acquiring innovative, cost-effective medicines that provide improved outcomes to individual patients and deliver value to payers, together with our ability to continuously improve the productivity of our operations in a highly competitive environment. There can be no assurance that our research and development efforts will result in commercially successful products, and it is possible that our products will become uncompetitive from time to time as a result of products developed by our competitors. Patents, Trademarks, and Other Intellectual Property Rights Overview Intellectual property protection is critical to our ability to successfully commercialize our life sciences innovations and invest in the search for new medicines. We own, have applied for, or are licensed under, a large number of patents in the United States and many other countries relating to products, product uses, formulations, and manufacturing processes. There is no assurance that the patents we are seeking will be granted or that the patents we hold would be found valid and enforceable if challenged. Moreover, patents relating to particular products, uses, formulations, or processes do not preclude other manufacturers from employing alternative processes or marketing alternative products or formulations that compete with our patented products. In addition, competitors or other third parties sometimes may assert claims that our activities infringe patents or other intellectual property rights held by them, or allege a third-party right of ownership in our existing intellectual property. Outside the United States, the adequacy and effectiveness of intellectual property protection for pharmaceuticals varies widely. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization (WTO), over 140 countries have now agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to all patent owners. Because of TRIPs transition provisions, dispute resolution mechanisms, and substantive limitations, it is difficult to assess when and how much, if at all, we will benefit commercially from this protection. 4 Some of our current products, including Erbitux, Forteo, ReoPro, and Xigris, and many of the potential products in our research pipeline, are biological products (\"biologics\"). Based on the Biologics Price Competition and Innovation Act (enacted in the U.S. in 2010), the FDA now has the authority to approve similar versions (\"biosimilars\") of innovative biologic products. A competitor seeking approval of a biosimilar must file an application to show its molecule is highly similar to an approved innovator biologic, address the challenges of biologics manufacturing, and include a certain amount of safety and efficacy data which FDA will determine on a case-by-case basis. Under the data protection provisions of this law, FDA cannot approve a biosimilar application until 12 years after initial marketing approval of the innovator biologic. Regulators in the EU and other countries also have been given the authority to approve biosimilars. 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 clear, and will depend on a number of marketplace and regulatory factors that are still developing. Our Intellectual Property Portfolio We consider intellectual property protection for certain products, processes, and usesparticularly those products discussed belowto be important to our operations. For many of our products, in addition to the compound patent we hold other patents on manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the product patent. The most relevant U.S. patent protection or data-based exclusivity for our major patent-protected marketed products is as follows: Alimta is protected by a compound patent (2016), data-based exclusivity for pediatric studies (2017), and a concomitant nutritional supplement use patent (2022). Byetta is protected by a patent covering its use in treating type 2 diabetes (2017). Cialis is protected by compound and use patents (2017). Cymbalta is protected by a compound patent (2013). Effient is protected by a compound patent (2017). Evista is protected by patents on the treatment and prevention of osteoporosis (2012 and 2014). Evista for use in breast cancer risk reduction is protected by orphan drug exclusivity (2014). Humalog is protected by a compound patent (2013). Strattera is protected by a patent covering its use in treating attention deficit-hyperactivity disorder (2016). The validity of this patent is currently under appeal at the Court of Appeals for the Federal Circuit. Zyprexa is protected by a compound patent (October 2011). Worldwide, we sell all of our major products under trademarks that we consider in the aggregate to be important to our operations. Trademark protection varies throughout the world, with protection continuing in some countries as long as the mark is used, and in other countries as long as it is registered. Registrations are normally for fixed but renewable terms. Patent Licenses Most of our important products were discovered in our own laboratories and are not subject to significant license agreements. Two of our larger products, Cialis and Alimta, are subject to patent assignments or licenses granted to us by others. The compound patent for Cialis is the subject of a license agreement with Glaxo SmithKline which assigns to us exclusively all rights in the compound. The agreement calls for royalties of a single-digit percentage of net sales. The agreement is not subject to termination by Glaxo for any reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period. The compound patent for Alimta is the subject of a license agreement with Princeton University, granting us an irrevocable exclusive worldwide license to the compound patents for the lives of the patents in the respective territories. The agreement calls for royalties of a single-digit percentage of net sales. The agreement is not subject to termination by Princeton for any reason other than a material breach by Lilly of the royalty obligation, after a substantial cure period. Alimta is also the subject of a worldwide, nonexclusive license to certain compound and process patents owned by Takeda Pharmaceutical Company Limited. The agreement calls for royalties of a single-digit percentage of net sales in countries covered by a relevant patent. The agreement is subject to termination for material default and failure to cure by Lilly and in the event that Lilly becomes bankrupt or insolvent. 5 FORM 10-K When a product patent expires, the patent holder often loses effective market exclusivity for the product. This can result in a severe and rapid decline in sales of the product, particularly in the United States. However, in some cases the innovator company may achieve exclusivity beyond the expiry of the product patent through manufacturing trade secrets, later-expiring patents on methods of use or formulations, or data-based exclusivity that may be available under pharmaceutical regulatory laws. FORM 10-K Patent Challenges In the United States, the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as \"Hatch-Waxman,\" made a complex set of changes to both patent and new-drug-approval laws. Before HatchWaxman, no drug could be approved without providing the FDA complete safety and efficacy studies, i.e., a complete New Drug Application (NDA). Hatch-Waxman authorizes the FDA to approve generic versions of innovative pharmaceuticals (other than biologics) without such information by filing an Abbreviated New Drug Application (ANDA). In an ANDA, the generic manufacturer must demonstrate only \"bioequivalence\" between the generic version and the NDA-approved drugnot safety and efficacy. Absent a patent challenge, the FDA cannot approve an ANDA until after the innovator's patents expire. However, after the innovator has marketed its product for four years, a generic manufacturer may file an ANDA alleging that one or more of the patents listed in the innovator's NDA are invalid or not infringed. This allegation is commonly known as a \"Paragraph IV certification.\" The innovator must then file suit against the generic manufacturer to protect its patents. The FDA is then prohibited from approving the generic company's application for a 30- to 42-month period (which can be shortened or extended by the trial court judge hearing the patent challenge). If one or more of the NDA-listed patents are challenged, the first filer of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge patents on a wide array of innovative pharmaceuticals, and we expect this trend to continue. In addition, generic companies have shown an increasing willingness to launch \"at risk,\" i.e., after receiving ANDA approval but before final resolution of their patent challenge. We are currently in litigation with numerous generic manufacturers arising from their Paragraph IV certifications on Alimta, Cymbalta, Gemzar, and Strattera. For more information on this litigation, see Item 7, \"Management's Discussion and AnalysisLegal and Regulatory Matters.\" Outside the United States, the legal doctrines and processes by which pharmaceutical patents can be challenged vary widely. In recent years, we have experienced an increase in patent challenges from generic manufacturers in many countries outside the United States, and we expect this trend to continue. For more information on significant patent challenges outside the United States, see Item 7, \"Management's Discussion and AnalysisLegal and Regulatory Matters.\" Government Regulation Regulation of Our Operations Our operations are regulated extensively by numerous national, state, and local agencies. The lengthy process of laboratory and clinical testing, data analysis, manufacturing development, and regulatory review necessary for governmental approvals is extremely costly and can significantly delay product introductions. Promotion, marketing, manufacturing, and distribution of pharmaceutical and animal health products are extensively regulated in all major world markets. We are required to conduct extensive post-marketing surveillance of the safety of the products we sell. In addition, our operations are subject to complex federal, state, local, and foreign laws and regulations concerning the environment, occupational health and safety, and privacy. The laws and regulations affecting the manufacture and sale of current products and the discovery, development, and introduction of new products will continue to require substantial scientific and technical effort, time, and expense and significant capital investment. Of particular importance is the FDA in the United States. Pursuant to the Federal Food, Drug, and Cosmetic Act, the FDA has jurisdiction over all of our products and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, advertising, dissemination of information, and post-marketing surveillance of our pharmaceutical products. The FDA, along with the U.S. Department of Agriculture (USDA), also regulates our animal health products. The U.S. Environmental Protection Agency also regulates some animal health products. The FDA extensively regulates all aspects of manufacturing quality under its current Good Manufacturing Practices (cGMP) regulations. We make substantial investments of capital and operating expenses to implement comprehensive, company-wide quality systems in our manufacturing, product development, and process development operations to ensure sustained cGMP compliance. However, in the event we fail to adhere to cGMP requirements in the future, we could be subject to interruptions in production, fines and penalties, and delays in new product approvals. Outside the United States, our products and operations are subject to similar regulatory requirements, notably by the European Medicines Agency (EMA) in the European Union and the Ministry of Health, Labor and Welfare (MHLW) in Japan. Specific regulatory requirements vary from country to country. The marketing, promotional, and pricing practices of pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers and prescribers, are subject to various other federal and state laws, including the federal anti-kickback statute and the False Claims Act and state laws governing kickbacks, false claims, unfair trade practices, and consumer protection. These laws are administered by, among others, the Department of Justice, the Office of Inspector General of the Department of Health and Human Services, the Federal Trade Commission, the Office of Personnel Management and state attorneys general. Over the past several years, the FDA, the Department of Justice, and many of these other agencies have increased their enforcement activities with respect to pharmaceutical companies and increased the inter-agency coordination of enforcement activities. Over this period, several claims brought by these agencies against Lilly and other companies under these and other laws have resulted in corporate criminal sanctions and very substantial civil settlements. See Item 3, \"Legal 6 The U.S. Foreign Corrupt Practices Act (FCPA) prohibits certain individuals and entities, including U.S. publicly traded companies, from promising, offering, or giving anything of value to foreign officials with the corrupt intent of influencing the foreign official for the purpose of helping the company obtain or retain business or gain any improper advantage. The FCPA also imposes specific recordkeeping and internal controls requirements on U.S. publicly traded companies. As noted above, outside the U.S., our business is heavily regulated and therefore involves significant interaction with foreign officials. Additionally, in many countries outside the U.S., the health care providers who prescribe pharmaceuticals are employed by the government and the purchasers of pharmaceuticals are government entities; therefore, our payments to these prescribers and purchasers are subject to regulation under the FCPA. Recently the U.S. Securities and Exchange Commission (SEC) and the Department of Justice have increased their FCPA enforcement activities with respect to pharmaceutical companies. See Item 3, \"Legal Proceedings,\" for information about a currently pending investigation involving our operations in several countries. It is possible that we could become subject to additional administrative and legal proceedings and actions, which could include claims for civil penalties (including treble damages under the False Claims Act), criminal sanctions, and administrative remedies, including exclusion from federal health care programs. It is possible that an adverse outcome in pending or future actions could have a material adverse impact on our consolidated results of operations, liquidity, and financial position. Regulations Affecting Pharmaceutical Pricing, Reimbursement, and Access In the United States, we are required to provide rebates to state governments on their purchases of our products under state Medicaid programs and to private payers who provide prescription drug benefits to seniors covered by Medicare or cover patients in certain types of health care facilities that serve low-income and uninsured patients (known as 340B facilities). Additional cost containment measures have been adopted or proposed by federal, state, and local government entities that provide or pay for health care. In most international markets, we operate in an environment of government-mandated cost containment programs, which may include price controls, reference pricing, discounts and rebates, restrictions on physician prescription levels, restrictions on reimbursement, compulsory licenses, health economic assessments, and generic substitution. The enactment of the \"Patient Protection and Affordable Care Act\" and \"The Health Care and Education Reconciliation Act of 2010\" in March 2010 brings significant changes to U.S. health care. Changes to the rebates for prescription drugs sold to Medicaid beneficiaries, which increase the minimum statutory rebate for branded drugs from 15.1 percent to 23.1 percent, were generally effective in the first quarter of 2010. This rebate has been expanded to managed-Medicaid, a program that provides for the delivery of Medicaid benefits via managed care organizations, under arrangements between those organizations and state Medicaid agencies. Additionally, a prescription drug discount program for outpatient drugs in certain types of health care facilities that serve low-income and uninsured patients (known as 340B facilities) has been expanded. Beginning in 2011, drug manufacturers will provide a discount of 50 percent of the cost of branded prescription drugs for Medicare Part D participants who are in the \"doughnut hole\" (the coverage gap in Medicare prescription drug coverage). The doughnut hole will be phased out by the federal government between 2011 and 2020. Additionally, beginning in 2011, an annual fee will be imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs. See Item 7, \"Management's Discussion and AnalysisExecutive Overview Legal, Regulatory, and Other Matters,\" for more discussion of U.S. health care reform. At the state level, budget pressures are causing various states to impose cost-control measures such as higher rebates and more restrictive formularies. International operations are also generally subject to extensive price and market regulations, and there are many proposals for additional cost-containment measures, including proposals that would directly or indirectly impose additional price controls, limit access to or reimbursement for our products, or reduce the value of our intellectual property protection. Recently, several governments have implemented across the board price cuts of branded pharmaceuticals in response to national budget pressures. We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, we expect that pressures on pharmaceutical pricing will become more severe. Research and Development Our commitment to research and development dates back more than 100 years. Our research and development activities are responsible for the discovery and development of most of the products we offer today. We invest heavily in research and development because we believe it is critical to our long-term competitiveness. At the end of 2010, we employed approximately 7,400 people in pharmaceutical and animal health research and development activities, including a substantial number of physicians, scientists holding graduate or postgraduate degrees, and highly skilled technical personnel. Our research and development expenses were $4.88 billion in 2010, $4.33 billion in 2009, and $3.84 billion in 2008. 7 FORM 10-K Proceedings,\" and Item 7, \"Management's Discussion and AnalysisLegal and Regulatory Matters,\" for information about currently pending and certain prior marketing and promotional practices investigations involving Lilly, including information regarding a Corporate Integrity Agreement entered into by Lilly in connection with the resolution of a U.S. federal marketing practices investigation and certain related state investigations involving Zyprexa. FORM 10-K Our pharmaceutical research and development focuses on five therapeutic categories: central nervous system and related diseases; endocrine diseases, including diabetes, obesity, and musculoskeletal disorders; cancer; autoimmune diseases and cardiovascular diseases. However, we remain opportunistic, selectively pursuing promising leads in other therapeutic areas. We are actively engaged in a strong biotechnology research program, with more than one-third of our clinical stage pipeline currently consisting of biotechnology molecules. In addition to discovering and developing new molecular entities, we seek to expand the value of existing products through new uses, formulations and therapeutic approaches that provide additional value to patients. Across all our therapeutic areas, we are increasingly focusing our efforts on tailored therapeutics, seeking to identify and use advanced diagnostic tools and other information to identify specific subgroups of patients for whom our medicinesor those of other companieswill be the best treatment option. To supplement our internal efforts, we collaborate with others, including educational institutions and researchbased pharmaceutical and biotechnology companies. We use the services of physicians, hospitals, medical schools, and other research organizations worldwide to conduct clinical trials to establish the safety and effectiveness of our pharmaceutical products. We actively seek out investments in external research and technologies that hold the promise to complement and strengthen our own researc