Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition

**(**Tables present dollars in millions, except per-share data)

General

Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to our company's results of operations and financial position. This discussion and analysis should be read in conjunction with the consolidated condensed financial statements and accompanying footnotes in Part I, Item 1 of this Quarterly Report on Form 10-Q. Certain statements in this Part I, Item 2 of this Quarterly Report on Form 10-Q constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" in this Quarterly Report on Form 10-Q and "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, may cause our actual results, financial position, and cash generated from operations to differ materially from these forward-looking statements.

EXECUTIVE OVERVIEW

This section provides an overview of our financial results, late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry.

Financial Results

The following table summarizes certain financial information:

			Three Months Ended June 30,												Percent Change						Six Months Ended June 30,												Percent Change
			2023						2022									2023						2022
Revenue			$	8,312.1					$	6,488.0					28						$	15,272.1					$	14,298.0					7
Net income			1,763.2						952.5						85						3,108.1						2,855.4						9
Earnings per share - diluted			1.95						1.05						86						3.44						3.16						9

Revenue increased for the three and six months ended June 30, 2023 driven by increased volume, partially offset by lower realized prices and the unfavorable impact of foreign exchange rates. The increase in revenue during the three and six months ended June 30, 2023 was primarily driven by sales of Mounjaro®, Verzenio®, and Jardiance® as well as from the sale of rights for Baqsimi®, partially offset by the complete reduction of sales of COVID-19 antibodies and lower sales of Alimta® following the entry of multiple generics in the first half of 2022.

Net income and earnings per share for the three and six months ended June 30, 2023 increased primarily due to increased revenue and lower acquired in-process research and development (IPR&D) charges, partially offset by increased research and development and marketing, selling, and administrative expenses. The increase in net income and earnings per share for the six months ended June 30, 2023 was also due to the lower net investment losses on equity securities.

See "Results of Operations" for additional information.

Late-Stage Pipeline

Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative new medicines. We currently have approximately 40 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.

The following select new molecular entities (NMEs) and new indication line extension (NILEX) products are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have received regulatory approval in the United States (U.S.), Europe, or Japan. The table reflects the status of these NMEs and NILEX products, including relevant developments since our Annual Report on Form 10-K for the year ended December 31, 2022.

Compound			Indication			Status			Developments
Diabetes and Obesity
Empagliflozin (Jardiance)(1)			Chronic kidney disease			Approved			Approved in Europe in July 2023. Submitted in Japan in 2022 and in the U.S. in the first quarter of 2023. Granted U.S. Food and Drug Administration (FDA) Fast Track designation(2).
Tirzepatide (Mounjaro)			Obesity			Submitted			Submitted in Europe in the first quarter of 2023 and in the U.S. in the second quarter of 2023. Received Priority Review designation from the FDA. Announced in the second quarter of 2023 and in July 2023 that Phase III trials met all primary and key secondary endpoints. Phase III trials are ongoing.
Heart failure with preserved ejection fraction			Phase III			Phase III trials are ongoing.
Obstructive sleep apnea			Phase III			Granted FDA Fast Track designation(2). Phase III trial is ongoing.
Nonalcoholic steatohepatitis			Phase II			Phase II trial is ongoing.
Insulin Efsitora Alfa			Type 1 and 2 diabetes			Phase III			Phase III trials are ongoing.
Orforglipron			Obesity			Phase III			Phase III trials initiated in the second quarter of 2023.
Type 2 diabetes			Phase III			Phase III trial initiated in the second quarter of 2023.
Retatrutide			Obesity			Phase III			Phase III trials initiated in the second quarter of 2023.
Type 2 diabetes			Phase II			Phase II trial was completed.
Lepodisiran (LP(a) siRNA)			Cardiovascular disease			Phase II			Phase II trial is ongoing.
Muvalaplin			Cardiovascular disease			Phase II			Phase II trial is ongoing.
Relaxin-LA			Heart failure			Phase II			Phase II trial initiated in the first quarter of 2023.
Solbinsiran			Cardiovascular disease			Phase II			Phase II trial is ongoing.

Compound			Indication			Status			Developments
Immunology
Mirikizumab (Omvoh®)			Ulcerative colitis			Approved			Approved in Japan in the first quarter of 2023 and in Europe in the second quarter of 2023. Following the receipt of a complete response letter from the FDA, re-submitted in the U.S. in the second quarter of 2023.
Crohn's Disease			Phase III			Phase III trials are ongoing.
Lebrikizumab(3)			Atopic dermatitis			Submitted			Submitted in the U.S. and Europe in 2022 and in Japan in the first quarter of 2023. Phase III trials are ongoing.
BTLA MAB Agonist			Systemic lupus erythematosus			Phase II			Phase II trial is ongoing.
Eltrekibart			Hidradenitis suppurativa			Phase II			Phase II trial is ongoing.
Peresolimab			Rheumatoid arthritis			Phase II			Phase II trial is ongoing.
Neuroscience
Donanemab			Early Alzheimer's disease			Submitted			Submitted for traditional approval in the U.S. in the second quarter of 2023 and in Europe in July 2023. Granted FDA Breakthrough Therapy designation(4). Announced in the second quarter of 2023 that a Phase III trial met primary and all secondary endpoints. Phase III trials are ongoing.
Preclinical Alzheimer's disease			Phase III			Phase III trial is ongoing.
Remternetug			Early Alzheimer's disease			Phase III			Phase III trial is ongoing.
GBA1 Gene Therapy (PR001)			Gaucher disease Type 1			Phase II			Phase II trial initiated in the second quarter of 2023.
Parkinson's disease			Phase II			Granted FDA Fast Track designation(2). Phase II trial is ongoing.
GRN Gene Therapy (PR006)			Frontotemporal dementia			Phase II			Granted FDA Fast Track designation(2). Phase II trial is ongoing.
O-GlcNAcase Inh			Alzheimer's disease			Phase II			Phase II trial is ongoing.
P2X7 Inhibitor			Pain			Phase II			Phase II trials are ongoing.
SSTR4 Agonist			Pain			Phase II			Phase II trials are ongoing.

Compound			Indication			Status			Developments
Oncology
Pirtobrutinib (Jaypirca®)			Mantle cell lymphoma			Approved(5)			FDA granted accelerated approval(5) in the U.S. in the first quarter of 2023. Submitted in Europe in 2022 and in Japan in the second quarter of 2023. Received a positive opinion from the Committee for Medicinal Products for Human Use in Europe in the second quarter of 2023. Phase III trial is ongoing.
Chronic lymphocytic leukemia			Submitted			Submitted in the U.S. in August 2023 under the accelerated approval pathway. Phase III trials are ongoing.
B-cell malignancies			Phase II			Phase II trial is ongoing.
Selpercatinib (Retevmo®)			Lung cancer			Approved(5)			Phase III trials are ongoing.
Thyroid cancer			Approved(5)			Phase III trial is ongoing.
Abemaciclib (Verzenio)			Prostate cancer			Phase III			Phase III trials are ongoing.
Imlunestrant			Adjuvant breast cancer			Phase III			Phase III trial is ongoing.
ER+HER2- metastatic breast cancer			Phase III			Phase III trial is ongoing.

(1) In collaboration with Boehringer Ingelheim.

(2) Fast Track designation is designed to facilitate the development and expedite the review of medicines to treat serious conditions and fill an unmet medical need.

(3) In collaboration with Almirall, S.A. in Europe.

(4) Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition where preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement over available therapy on a clinically significant endpoint.

(5) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase III trials.

Other Matters

Patent Matters

We depend on patents or other forms of intellectual property protection for most of our revenue, cash flows, and earnings.

See Note 8 to the consolidated condensed financial statements for a description of legal proceedings currently pending regarding certain of our patents.

Our compound patents for Humalog® (insulin lispro) have expired in the U.S. and major international markets, and we have also introduced lower-priced versions of Humalog as part of our insulin access and affordability solutions. On March 1, 2023, we announced price reductions for Humalog and an expansion of our Insulin Value Program that caps patient out-of-pocket costs at $35 or less per month. A competitor has a similar version of insulin lispro in the U.S. and in certain European markets. Due to the expansion of our insulin access and affordability solutions in the U.S. and the impact of competition and pricing pressure in the U.S. and certain international markets, we expect that lower revenue for Humalog due to realized price decline will continue over time.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access

Reforms, including those that may stem from periods of economic downturn or uncertainty, or as a result of high inflation, emergence or escalation of, and responses to, war or unrest (including the Russia-Ukraine war), or government budgeting priorities, may continue to result in added pressure on pricing and reimbursement for our products.

Global concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate and action, as well as worldwide cost containment efforts by governmental authorities. Such measures include the use of mandated discounts, price reporting requirements, mandated reference prices, restrictive formularies, changes to available intellectual property protections, as well as other efforts. In August 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (IRA). Among other measures, the IRA will require the U.S. Department of Health and Human Services to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D. Generally, these government prices apply nine (medicines approved under a New Drug Application) or thirteen (medicines approved under a Biologics License Application) years following initial FDA approval and will be capped at a statutory ceiling price that is likely to represent a significant discount from average prices to wholesalers and direct purchasers. While the law specifies a ceiling price, it does not set a minimum or floor price. Given our product portfolio, we expect some of our significant products, including those commercialized under collaboration agreements, will be selected, which would have the effect of accelerating revenue erosion prior to patent expiry. The effect of reducing prices and reimbursement for certain of our products would significantly impact our business and consolidated results of operations. The establishment of payment limits or other restrictions by drug affordability review boards and other state level actors would similarly impact us.

Other IRA provisions provide for rebate obligations on drug manufacturers that increase prices of Medicare Part B and Part D medicines at a rate greater than the rate of inflation and Part D benefit redesign that includes replacing the Part D coverage gap discount program with a new manufacturer discounting program. Manufacturers that fail to comply with the IRA may be subject to various penalties, including civil monetary penalties, which could be significant.

The IRA takes effect progressively with the first government-set prices effective in 2026. The IRA has and will meaningfully influence our business strategies and those of our competitors. In particular, the nine-year timeline to set prices for medicines approved under a new drug application reduces the attractiveness of investment in small molecule innovation. The full impact of the IRA on our business and the pharmaceutical industry, including the implications to us of a competitor's product being selected for price setting, remains uncertain.

Additional policies, regulations, legislation, or enforcement, including those proposed and/or pursued by the U.S. Congress, the current U.S. presidential administration, and regulatory authorities worldwide, could adversely impact our business and consolidated results of operations.

Consolidation and integration of private payors and pharmacy benefit managers in the U.S. has also significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price or rebate concessions and pharmacy reimbursement rates. Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, courts, or private payers may adversely impact our business and consolidated results of operations. We expect that these actions may intensify and could particularly affect certain products which could adversely affect our business. In addition, we are engaged in litigation and investigations related to our 340B limited distribution program, access to insulin, and other matters that, if resolved adversely to us, could negatively impact our business and consolidated results of operations. It is not currently possible to predict the overall potential adverse impact to us or the general pharmaceutical industry of continued cost containment efforts worldwide.

In addition, regulatory issues concerning compliance with current Good Manufacturing Practices, quality assurance, safety signals, evolving standards, and increased scrutiny around excipients and potential impurities such as nitrosamines, and similar regulations and standards (and comparable foreign regulations and standards) for our products can lead to regulatory and legal actions, product recalls and seizures, fines and penalties, interruption of production leading to product shortages, import bans or denials of import certifications, contractual and manufacturing costs or penalties, inability to realize the benefit of capital expenditures, or delays or denials in new product approvals, line extensions or supplemental approvals of current products pending resolution of the issues, any of which could result in reputational harm or adversely affect our business. Moreover, increased focus on business combinations across industries and jurisdictions can lead to impediments to the completion of business combinations.

See "Business—Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access" in Part I, Item 1 and "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. See also Note 8 to the consolidated condensed financial statements.

Product Supply

We have faced challenges, and expect to continue to face challenges, meeting strong demand for our incretin products. In the U.S., given very strong uptake of Mounjaro following its launch in the U.S. for type 2 diabetes in the second quarter of 2022, and as demand for Trulicity® has remained strong, we have experienced intermittent delays in fulfilling certain U.S. orders for these products. Outside the U.S., we have implemented actions to manage strong demand amid tight supply, including measures to minimize existing patient impact. We expect to continue to experience disruptions in our supply of Trulicity in international markets.

We anticipate tight supplies of our incretin products will persist while additional manufacturing capacity is operationalized. We expect additional internal and contracted manufacturing capacity will become fully operational around the world in the next several years as part of our ongoing efforts to meet the significant demand for our incretin medicines. For example, we recently began production at our Research Triangle Park site in North Carolina and expect to continue significant capacity expansion over time as we increase production at this site and others.

Tax Matters

We are subject to income taxes and various other taxes in the U.S. and in many foreign jurisdictions; therefore, changes in both domestic and international tax laws or regulations have affected and may affect our effective tax rate, results of operations, and cash flows. The U.S. and countries around the world are actively proposing and enacting tax law changes. Further, actions taken with respect to tax-related matters by associations such as the Organisation for Economic Co-operation and Development and the European Commission could influence tax laws in countries in which we operate. Tax authorities in the U.S. and other jurisdictions in which we do business routinely examine our tax returns and are intensifying their scrutiny and examinations of profit allocations among jurisdictions. Changes to existing U.S. and foreign tax laws and increased scrutiny by tax authorities in the U.S. and other jurisdictions could adversely impact our future consolidated results of operations and cash flows.

The European Commission published its Pillar Two Directive (Directive), a legislative proposal that would provide a global minimum level of taxation for multinational companies with operations in the European Union (EU), in 2021. In 2022, the EU Member States adopted the Directive which requires them to enact initial legislation effective for years beginning on or after December 31, 2023. Currently, both EU and non-EU countries are drafting or have enacted legislation in order to implement the Pillar Two rules by the effective date. We are continuing to follow Pillar Two legislative developments in order to evaluate the potential future impact it could have on our consolidated results of operations, financial position, and cash flows.

Foreign Currency Exchange Rates and Other Impacts

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, and Chinese yuan. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on our consolidated results of operations in any given period. During the three and six months ended June 30, 2023, revenue was unfavorably impacted by 1 percent and 2 percent, respectively, due to foreign exchange rates compared to the prior year periods. There is uncertainty in the future movements in foreign exchange rates, and fluctuations in these rates could adversely impact our consolidated results of operations and cash flows.

Other factors have had, and may continue to have, an impact on our consolidated results of operations. These factors include cost and wage inflation, availability of adequate capacity in global transportation, supply chain and labor market complexities, international tension and conflicts (including the Russia-Ukraine war), global economic downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials.

Acquisitions

We invest in external research and technologies that we believe complement and strengthen our own efforts. These investments can take many forms, including acquisitions, collaborations, investments, and licensing arrangements. We view our business development activity as a way to enhance our pipeline and strengthen our business.

In June 2023, we announced an agreement to acquire DICE Therapeutics, Inc. (DICE) for a purchase price of $48 per share in cash (an aggregate of approximately $2.4 billion) payable at closing. The proposed acquisition is expected to close in the third quarter of 2023, subject to customary closing conditions, including the receipt of required antitrust clearance and the tender of at least a majority of the outstanding shares of DICE's common stock as of the expiration of the tender offer.

As of June 30, 2023, potential amounts payable for other pending business development acquisitions were approximately $1 billion in aggregate, subject to closing conditions and/or regulatory approvals.

See Note 3 to the consolidated condensed financial statements for further discussion regarding our recent acquisitions.

See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information on risk factors that could impact our business and operations.

RESULTS OF OPERATIONS

Revenue

The following table summarizes our revenue activity by region:

			Three Months Ended June 30,												Percent Change			Six Months Ended June 30,												Percent Change
			2023						2022						2023						2022
U.S.			$	5,531.4					$	3,934.8					41			$	9,967.6					$	9,109.4					9
Outside U.S.			2,780.7						2,553.3						9			5,304.6						5,188.7						2
Revenue			$	8,312.1					$	6,488.0					28			$	15,272.1					$	14,298.0					7

Numbers may not add due to rounding.

The following are components of the change in revenue compared with the prior year:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023 vs. 2022												2023 vs. 2022
			U.S.			Outside U.S.			Consolidated						U.S.			Outside U.S.			Consolidated
Volume			39		%	14		%	29		%				11		%	10		%	11		%
Price			2			(3)			—						(2)			(4)			(3)
Foreign exchange rates			—			(3)			(1)						—			(4)			(2)
Percent change			41		%	9		%	28		%				9		%	2		%	7		%

Numbers may not add due to rounding.

In the U.S. for the three and six months ended June 30, 2023, the increase in volume was primarily driven by Mounjaro, Trulicity, Verzenio, Jardiance, and Taltz®, as well as the sale of rights for Baqsimi, partially offset by the complete reduction of COVID-19 antibodies revenue and decreased volume from Alimta following the entry of multiple generics in the first half of 2022. In the U.S. for the three months ended June 30, 2023, the higher realized prices were primarily driven by Mounjaro, partially offset by Trulicity. In the U.S. for the six months ended June 30, 2023, the lower realized prices were primarily driven by Trulicity and Humalog, partially offset by Mounjaro. For the three and six months ended June 30, 2023, the higher realized prices for Mounjaro were due to decreased utilization of savings card programs as access continues to expand, and the lower realized prices for Trulicity were due to unfavorable segment mix and higher contracted rebates. For the six months ended June 30, 2023, the lower realized prices for Humalog were due to unfavorable segment mix.

Outside the U.S. for the three and six months ended June 30, 2023, the increase in volume was primarily driven by Verzenio, Jardiance, Taltz, and Mounjaro. The increase in volume for the six months ended June 30, 2023 was partially offset by the decrease in volume due to the sales of the rights for Cialis® in Taiwan and Saudi Arabia in 2022. Outside the U.S. for the three and six months ended June 30, 2023, the lower realized prices were primarily driven by Verzenio, Trulicity, and Olumiant®. Outside the U.S. for the six months ended June 30, 2023, the lower realized prices were also driven by the impact of government pricing in China from volume-base procurement for Humalog.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product for the three months ended June 30, 2023 and 2022:

			Three Months Ended June 30,																								Percent Change
			2023																		2022
Product			U.S.						Outside U.S.						Total						Total
Trulicity			$	1,371.3					$	441.2					$	1,812.5					$	1,911.9					(5)
Mounjaro			915.7						64.0						979.7						16.0						NM
Verzenio			588.6						338.2						926.8						588.5						57
Taltz			472.3						231.6						703.9						606.2						16
Jardiance(1)			386.1						282.2						668.3						461.0						45
Baqsimi			606.2						7.7						613.9						29.0						NM
Humalog(2)			229.8						210.6						440.4						447.1						(1)
Cyramza®			115.0						145.3						260.3						231.3						13
Olumiant(3)			50.8						168.1						218.9						186.2						18
Humulin®			144.3						61.0						205.3						274.0						(25)
Emgality®			118.8						50.5						169.3						157.5						8
Erbitux®			145.5						17.0						162.5						140.8						15
Basaglar® (4)			83.0						71.2						154.2						174.2						(11)
Forteo®			97.4						50.6						148.0						138.5						7
Cialis			9.2						106.4						115.6						147.0						(21)
Alimta			17.9						43.1						60.9						227.7						(73)
COVID-19 antibodies(5)			—						—						—						129.1						(100)
Other products			179.5						492.0						671.6						622.0						8
Revenue			$	5,531.4					$	2,780.7					$	8,312.1					$	6,488.0					28

Numbers may not add due to rounding.

NM - not meaningful

(1) Jardiance revenue includes Glyxambi®, Synjardy®, and Trijardy® XR.

(2) Humalog revenue includes insulin lispro.

(3) Olumiant revenue includes sales for baricitinib that were made pursuant to Emergency Use Authorization (EUA) or similar regulatory authorizations.

(4) Basaglar revenue includes Rezvoglar®.

(5) COVID-19 antibodies include sales for bamlanivimab administered alone, for bamlanivimab and etesevimab administered together, and for bebtelovimab and were made pursuant to EUAs or similar regulatory authorizations.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product for the six months ended June 30, 2023 and 2022:

			Six Months Ended June 30,
			2023																		2022
Product			U.S.						Outside U.S.						Total						Total			Percent Change
Trulicity			$	2,918.7					$	871.0					$	3,789.6					$	3,653.2					4
Verzenio			1,049.6						628.0						1,677.7						1,057.9						59
Mounjaro			1,452.2						96.0						1,548.2						16.0						NM
Jardiance(1)			715.6						530.2						1,245.8						880.4						42
Taltz			784.5						446.3						1,230.8						1,094.3						12
Humalog(2)			501.4						400.0						901.4						1,065.3						(15)
Baqsimi			629.3						16.1						645.4						58.2						NM
Cyramza			215.6						281.4						497.0						461.5						8
Humulin			343.1						114.2						457.3						547.2						(16)
Olumiant(3)			93.1						354.6						447.8						441.8						1
Basaglar(4)			218.4						145.2						363.5						365.7						(1)
Emgality			227.5						96.1						323.6						306.7						6
Erbitux			264.2						28.1						292.4						263.4						11
Forteo			168.0						102.3						270.3						275.9						(2)
Cialis			16.8						199.1						215.9						364.7						(41)
Alimta			38.0						81.2						119.1						571.7						(79)
COVID-19 antibodies(5)			—						—						—						1,598.9						(100)
Other products			331.6						914.8						1,246.3						1,275.2						71
Revenue			$	9,967.6					$	5,304.6					$	15,272.1					$	14,298.0					7

Numbers may not add due to rounding.

NM - not meaningful

(1) Jardiance revenue includes Glyxambi, Synjardy, and Trijardy XR.

(2) Humalog revenue includes insulin lispro.

(3) Olumiant revenue includes sales for baricitinib that were made pursuant to EUA or similar regulatory authorizations.

(4) Basaglar revenue includes Rezvoglar.

(5) COVID-19 antibodies include sales for bamlanivimab administered alone, for bamlanivimab and etesevimab administered together, and for bebtelovimab and were made pursuant to EUAs or similar regulatory authorizations.

Revenue of Trulicity decreased 4 percent in the U.S. during the three months ended June 30, 2023, driven by lower realized prices, partially offset by increased demand. Revenue of Trulicity increased 6 percent in the U.S. during the six months ended June 30, 2023, driven by increased demand, partially offset by lower realized prices. During the three and six months ended June 30, 2023, the lower realized prices for Trulicity were due to unfavorable segment mix and higher contracted rebates. Revenue outside the U.S. decreased 8 percent during the three months ended June 30, 2023, driven by decreased volume, lower realized prices, and the unfavorable impact of foreign exchange rates. Volumes in international markets were affected by actions we have taken to manage strong demand amid tight supply, including measures to minimize existing patient impact. Revenue outside the U.S. decreased 4 percent during the six months ended June 30, 2023, driven by the unfavorable impact of foreign exchange rates and lower realized prices, partially offset by increased volume.

Revenue of Verzenio increased 53 percent in the U.S. during the three and six months ended June 30, 2023, driven by increased demand and, to a lesser extent, higher realized prices. Revenue outside the U.S. increased 66 percent and 69 percent during the three and six months ended June 30, 2023, respectively, driven by increased demand, partially offset by lower realized prices and the unfavorable impact of foreign exchange rates.

Revenue of Mounjaro in the U.S. during the three and six months ended June 30, 2023 was $915.7 million and $1.45 billion, respectively, reflecting increased volume and, to a lesser extent, higher realized prices due to decreased utilization of savings card programs as access continues to expand. We have experienced and continue to expect intermittent delays fulfilling orders of certain Mounjaro doses given significant demand. These delays have impacted, and may continue to impact, our volume. Mounjaro launched in the U.S. for the treatment of type 2 diabetes in June of 2022.

Revenue of Jardiance increased 54 percent and 49 percent in the U.S. during the three and six months ended June 30, 2023, respectively, primarily driven by increased demand. Revenue outside the U.S. increased 34 percent and 33 percent during the three and six months ended June 30, 2023, respectively, primarily driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates. See Note 4 to the consolidated condensed financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.

Revenue of Taltz increased 15 percent and 9 percent in the U.S. during the three and six months ended June 30, 2023, respectively, primarily driven by increased demand. Revenue outside the U.S. increased 19 percent during the three and six months ended June 30, 2023, primarily driven by increased volume, partially offset by the unfavorable impact of foreign exchange rates.

There was no worldwide revenue for COVID-19 antibodies during the three and six months ended June 30, 2023, and we do not anticipate any revenue from COVID-19 antibodies in 2023.

Gross Margin, Costs, and Expenses

The following table summarizes our gross margin, costs, and expenses:

			Three Months Ended June 30,												Percent Change						Six Months Ended June 30,												Percent Change
			2023						2022									2023						2022
Gross margin			$	6,504.7					$	5,057.5					29						$	11,838.0					$	10,795.4					10
Gross margin as a percent of revenue			78.3		%				78.0		%										77.5		%				75.5		%
Research and development			$	2,356.5					$	1,781.9					32						$	4,341.6					$	3,392.0					28
Marketing, selling, and administrative			1,925.4						1,625.1						18						3,674.6						3,183.0						15
Acquired IPR&D			97.1						440.4						(78)						202.1						606.0						(67)
Other–net, (income) expense			36.8						119.2						(69)						1.1						469.9						(100)
Income taxes			325.7						138.4						NM						510.5						289.1						77
Effective tax rate			15.6		%				12.7		%										14.1		%				9.2		%

NM - not meaningful

Gross margin as a percent of revenue for the three months ended June 30, 2023 increased 0.3 percentage points compared with the three months ended June 30, 2022, primarily driven by product mix, including the sale of rights for Baqsimi, largely offset by increased manufacturing expenses related to labor costs and investments in capacity expansion. Gross margin as a percent of revenue for the six months ended June 30, 2023 increased 2.0 percentage points compared with the six months ended June 30, 2022, primarily driven by sales of COVID-19 antibodies in 2022.

Research and development expenses increased 32 percent and 28 percent for the three and six months ended June 30, 2023, respectively, primarily driven by higher development expenses for late-stage assets and additional investments in early-stage research.

Marketing, selling, and administrative expenses increased 18 percent and 15 percent for the three and six months ended June 30, 2023, respectively, primarily driven by costs associated with launches of new products and indications.

We recognized $97.1 million and $202.1 million of acquired IPR&D charges for the three and six months ended June 30, 2023, respectively. We recognized $440.4 million and $606.0 million of acquired IPR&D charges for the three and six months ended June 30, 2022, respectively, primarily related to the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor. The charges for the six months ended June 30, 2022 also included the purchase of a Priority Review Voucher. See Note 3 to the consolidated condensed financial statements for additional information.

Other–net, (income) expense included net investment losses on equity securities of $64.9 million and $78.6 million for three and six months ended June 30, 2023, respectively. Other–net, (income) expense included net investment losses on equity securities of $118.9 million and $544.3 million for three and six months ended June 30, 2022, respectively. See Note 10 to the consolidated condensed financial statements for additional information.

The effective tax rates were 15.6 percent and 14.1 percent for the three and six months ended June 30, 2023, respectively, reflecting the tax impacts of the new Puerto Rico tax regime and the sale of rights for Baqsimi. The effective tax rates were 12.7 percent and 9.2 percent for the three and six months ended June 30, 2022, respectively, reflecting the favorable tax impact of net investment losses on equity securities, partially offset by the tax impact of non-deductible acquired IPR&D charges.

FINANCIAL CONDITION AND LIQUIDITY

We believe our available cash and cash equivalents, together with our ability to generate operating cash flow and our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital requirements. For a discussion of our capital requirements, see "Management's Discussion and Analysis of Results of Operations and Financial Condition" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022.

We have announced additional investment commitments in new facilities in Indiana, North Carolina, and Limerick, Ireland to manufacture existing and future products. We expect that these investments will result in higher capital expenditures in excess of $8 billion over the next several years.

In June 2023, we announced an agreement to acquire DICE for a purchase price of $48 per share in cash (an aggregate of approximately $2.4 billion) payable at closing. As of June 30, 2023, potential amounts payable for other pending business development acquisitions were approximately $1 billion in aggregate, subject to closing conditions and/or regulatory approvals. We anticipate funding these acquisitions, including DICE, through cash on hand and the issuance of commercial paper.

Cash and cash equivalents increased to $2.69 billion as of June 30, 2023, compared with $2.07 billion as of December 31, 2022. Refer to the consolidated condensed statements of cash flows for additional information on the significant sources and uses of cash for the six months ended June 30, 2023 and 2022.

In addition to our cash and cash equivalents, we held total investments of $2.88 billion and $3.05 billion as of June 30, 2023 and December 31, 2022, respectively. See Note 5 to the consolidated condensed financial statements for additional information.

As of June 30, 2023, total debt was $18.82 billion, an increase of $2.58 billion compared with $16.24 billion as of December 31, 2022. In February 2023, we issued $750.0 million of 5.000 percent fixed-rate notes due in 2026, which are callable at par after one year, $1.00 billion of 4.700 percent fixed-rate notes due in 2033, $1.25 billion of 4.875 percent fixed-rate notes due in 2053, and $1.00 billion of 4.950 percent fixed-rate notes due in 2063, all with interest to be paid semi-annually. We used the net cash proceeds from the offering of $3.96 billion for general business purposes, including the repayment of outstanding commercial paper. See Note 5 to the consolidated condensed financial statements for additional information.

As of June 30, 2023, we had a total of $7.33 billion of unused committed bank credit facilities, $7.00 billion of which is available to support our commercial paper program. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowing needs.

During the six months ended June 30, 2023, we repurchased $750.0 million of shares under our $5.00 billion share repurchase program authorized in May 2021. As of June 30, 2023, we had $2.50 billion remaining under this program.

During the six months ended June 30, 2023, we paid dividends of $2.04 billion, or $2.26 per share, to our shareholders.

See "Executive Overview—Other Matters—Patent Matters" for information regarding losses of patent protection.

Both domestically and abroad, we continue to monitor the potential impacts of the economic environment; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of healthcare legislation; various international government funding levels; and fluctuations in interest rates, foreign currency exchange rates (see "Executive Overview—Other Matters—Foreign Currency Exchange Rates and Other Impacts"), and fair values of equity securities.

As we expand our manufacturing capacity in order to meet existing and expected demand of our incretin products, we have entered, and expect to continue to enter, into various agreements for contract manufacturing and for supply of materials. The executed agreements could, under certain circumstances, require us to pay up to approximately $6.5 billion if we do not purchase specified amounts of goods or services over the durations of the agreements, which generally range from 2 to 8 years.

CRITICAL ACCOUNTING ESTIMATES

For a discussion of our critical accounting estimates, refer to "Management's Discussion and Analysis of Results of Operations and Financial Condition" in Part II, Item 7 and the notes to our consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2022. See also Note 1 to the consolidated condensed financial statements. There have been no material changes to our critical accounting estimates since our Annual Report on Form 10-K for the year ended December 31, 2022.

AVAILABLE INFORMATION ON OUR WEBSITE

We make available through our company website, free of charge, our company filings with the Securities and Exchange Commission (SEC) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The reports we make available include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, registration statements, and any amendments to those documents.

The website link to our SEC filings is investor.lilly.com/financial-information/sec-filings.

We routinely post important information for investors in the “Investors” section of our website, www.lilly.com. We may use our website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the “Investors” section of our website, in addition to following our press releases, filings with the SEC, public conference calls, presentations, and webcasts. We may also use social media channels to communicate with investors and the public about our business, products and other matters, and those communications could be deemed to be material information. The information contained on, or that may be accessed through, our website or social media channels, is not incorporated by reference into, and is not a part of, this Quarterly Report on Form 10-Q.