Eli Lilly 10-Q 2024-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended September 30, 2024

COMMISSION FILE NUMBER 001-6351

ELI LILLY AND COMPANY

(Exact name of Registrant as specified in its charter)

Lilly Corporate Center, Indianapolis, Indiana 46285

(Address and zip code of principal executive offices)

Registrant's telephone number, including area code (317) 276-2000

Securities registered pursuant to Section 12(b) of the Exchange Act:

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 (or for such shorter period that the Registrant was required to file such reports) 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of common stock outstanding as of October 25, 2024:

Eli Lilly and Company

Form 10-Q

For the Quarter Ended September 30, 2024

Table of Contents

Forward-Looking Statements

This Quarterly Report on Form 10-Q and our other publicly available documents include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act), and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and generally can be identified by the use of words such as "may," "could," "aim," "seek," "believe," "will," "expect," "project," "estimate," "intend," "target," "anticipate," "plan," "continue," or similar expressions or future or conditional verbs.

Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ from those expressed in forward-looking statements. Forward-looking statements are based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any expectation or belief will result or will be achieved or accomplished. Investors therefore should not place undue reliance on forward-looking statements. The following include some but not all of the factors that could cause actual results or events to differ from those anticipated:

• the significant costs and uncertainties in the pharmaceutical research and development process, including with respect to the timing and process of obtaining regulatory approvals;

• the impact and uncertain outcome of acquisitions and business development transactions and related costs;

• intense competition affecting our products, pipeline, or industry;

• market uptake of launched products and indications;

• continued pricing pressures and the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and patient access to pharmaceuticals, or reporting obligations related thereto;

• safety or efficacy concerns associated with our products;

• dependence on relatively few products or product classes for a significant percentage of our total revenue and an increasingly consolidated supply chain;

• the expiration of intellectual property protection for certain of our products and competition from generic and biosimilar products, and risks from the proliferation of counterfeit or illegally compounded products;

• our ability to protect and enforce patents and other intellectual property and changes in patent law or regulations related to data package exclusivity;

• information technology system inadequacies, inadequate controls or procedures, security breaches, or operating failures;

• unauthorized access, disclosure, misappropriation, or compromise of confidential information or other data stored in our information technology systems, networks, and facilities, or those of third parties with whom we share our data and violations of data protection laws or regulations;

• issues with product supply and regulatory approvals stemming from manufacturing difficulties, disruptions, or shortages, including as a result of unpredictability and variability in demand, labor shortages, third-party performance, quality, cyber-attacks, or regulatory actions related to our and third-party facilities;

• reliance on third-party relationships and outsourcing arrangements;

• the use of artificial intelligence or other emerging technologies in various facets of our operations which may exacerbate competitive, regulatory, litigation, cybersecurity, and other risks;

• the impact of global macroeconomic conditions, including uneven economic growth or downturns or uncertainty, trade disruptions, international tension, conflicts, regional dependencies, or other costs, uncertainties, and risks related to engaging in business globally;

• fluctuations in foreign currency exchange rates or changes in interest rates and inflation;

• litigation, investigations, or other similar proceedings involving past, current, or future products or activities;

• changes in tax law and regulation, tax rates, or events that differ from our assumptions related to tax positions;

• regulatory changes and developments;

• regulatory actions regarding our operations and products;

• regulatory compliance problems or government investigations;

• actual or perceived deviation from environmental-, social-, or governance-related requirements or expectations;

• asset impairments and restructuring charges; and

• changes in accounting and reporting standards.

More information on factors that could cause our actual results or events to differ from those expressed in forward looking statements is included from time to time in our reports filed with the Securities and Exchange Commission, including in our Annual Report on Form 10-K for the year ended December 31, 2023, particularly under Part I, Item 1A, "Risk Factors." Investors should understand that it is not possible to predict or identify all such factors and should not consider the risks described above and under Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K to be a complete statement of all potential risks and uncertainties.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this Quarterly Report on Form 10-Q. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this Quarterly Report on Form 10-Q.

PART I. Financial Information

Consolidated Condensed Statements of Operations

(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars and shares in millions, except per-share data)

See notes to consolidated condensed financial statements.

Consolidated Condensed Statements of Comprehensive Income (Loss)

(Unaudited)

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)

See notes to consolidated condensed financial statements.

Consolidated Condensed Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)

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(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 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, 2023, may cause our actual results, financial position, and cash generated from operations to differ 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 industry.

Financial Results

The following table summarizes certain financial information:

NM - not meaningful

Revenue increased for the three and nine months ended September 30, 2024 driven by increased volume and higher realized prices. The increase in revenue during the three and nine months ended September 30, 2024 was primarily driven by increased sales of Mounjaro®, Zepbound®, and Verzenio®, partially offset by declines in Trulicity® and the 2023 sale of rights for the olanzapine portfolio, including Zyprexa®.

Net income and earnings per share for the three and nine months ended September 30, 2024 increased primarily due to higher gross margin, partially offset by increased research and development expenses, marketing, selling, and administrative expenses, and asset impairment, restructuring, and other special charges.

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 50 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 2 or Phase 3 clinical trials or have been submitted for regulatory review or have recently received regulatory approval in the United States (U.S.), European Union (EU), or Japan. The table reflects the status of these NMEs and NILEX products, including certain other developments since our Annual Report on Form 10-K for the year ended December 31, 2023.

(1) 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.

(2) 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.

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

(4) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase 3 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 10 to the consolidated condensed financial statements for a description of legal proceedings currently pending regarding certain of our patents and "Business—Patents, Trademarks, and Other Intellectual Property Rights" in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of the impacts of trends involving intellectual property on our business and results.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access and Certain Other Regulatory Developments

Reforms, including those that may stem from political initiatives, periods of uneven economic growth or downturns, or as a result of inflation or deflation, the emergence or escalation of, and responses to, international tension and conflicts, or government budgeting priorities, are expected to 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 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 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (IRA). Among other measures, the IRA requires the U.S. Department of Health and Human Services (HHS) 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 years (for medicines approved under a New Drug Application) or thirteen years (for medicines approved under a Biologics License Application) following initial FDA approval and are set at a price that generally represents a significant discount from existing prices to wholesalers and direct purchasers. While the law specifies a ceiling price, it does not set a minimum or floor price. In August 2023, HHS selected Jardiance®, which is part of our collaboration with Boehringer Ingelheim, as one of the first ten medicines subject to government-set prices effective in 2026. In August 2024, HHS announced the government-set prices for these medicines with Jardiance subject to a 66% discount compared to 2023 U.S. calendar year list pricing for a 30-day supply and discounts for the other nine medicines selected by HHS ranging from approximately 38% to 79%. Given our product portfolio, we expect additional significant products will be selected in future years, which would have the effect of accelerating revenue erosion prior to expiry of exclusivities. The effect of reducing prices and reimbursement for certain of our products could significantly impact our business and consolidated results of operations.

Other IRA provisions require drug manufacturers to provide rebates for Medicare Part B and Part D medicines under certain circumstances. Also, on January 1, 2025, the Part D benefit redesign will replace the Part D Coverage Gap Discount Program with a new manufacturer discount 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 has, and will continue to, 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 IRA can cause changes to development approach and timing and investments at-risk. 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 or pursued by the U.S. Congress, the U.S. executive branch, and regulatory authorities worldwide, could adversely impact our business and consolidated results of operations. For example, the U.S. House of Representatives recently passed the BIOSECURE Act, which is under consideration in the U.S. Senate. This legislation, if passed, could affect elements of the pharmaceutical supply chain; although as currently drafted we do not anticipate the bill would have a material impact on our business.

Consolidation and integration of private payers and pharmacy benefit managers in the U.S. has also significantly impacted the market for pharmaceuticals by increasing payer 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 the 340B program, access to insulin, pricing, product safety, 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 in some cases 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, 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, or other negative impacts, any of which 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, 2023. See also Note 10 to the consolidated condensed financial statements.

Incretin Medicines

In prior periods, demand for our incretin medicines exceeded production. Supply and channel dynamics have also contributed to variability in quarter-over-quarter revenue growth rates for tirzepatide. Based on our forecast, we project that tirzepatide supply will meet near-term demand in the U.S. Supply considerations will continue to influence the timing of tirzepatide launches in new markets, and in the near-term, we expect overall worldwide sales growth for tirzepatide to generally be a function of the quantity we can produce and ship. Demand remains dynamic, and increases or changes in demand, by dose or overall, as well as the complex supply chain, may result in periodic unavailability of certain presentations and dose levels at certain locations even when total tirzepatide supply can meet demand. We continue to expand manufacturing capacity and progress efforts to bring tirzepatide to patients via different delivery presentations, such as single-use vials and multi-use pens. Production increases will continue, and additional capacity is expected to be operational over the next several years.

We have seen an increase in the production, marketing, and sale of counterfeit, fake, and compounded incretins. These practices threaten patient safety and undermine regulatory drug approval processes. Lilly will continue to consider all options, including filing lawsuits where appropriate, to address unlawful practices and the patient safety risks of unapproved, untested, and manipulated drugs.

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 (OECD) 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 expected to increase their scrutiny of cross-border tax issues. 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.

In response to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Framework), which set forth a two-pillar solution to reform the international tax framework, and the EU's adoption of Directive 2022/2523 (known as "Pillar Two") (Directive) within the EU to implement the Framework, multiple countries, both within and outside of the EU, have enacted legislation that provides for a minimum level of taxation of multinational companies. The Directive required EU member states to enact legislation effective for years beginning on or after December 31, 2023. For certain provisions within the Framework, the OECD published guidance during 2023 that extends the effective dates for enactment. While we expect an increase in future years’ tax expense as a result of the global minimum tax, we do not anticipate a material impact to our 2024 consolidated results of operations. Our assessment of the impact for 2024 and subsequent years could be affected by legislative guidance, future enactment of additional provisions within the Pillar Two framework, and U.S. tax changes scheduled to occur in 2026 as part of the Tax Cuts and Jobs Act (2017 Tax Act).

A bipartisan tax bill, the Tax Relief for American Families and Workers Act, was passed by the U.S. House of Representatives in January 2024. The bill contains certain business tax provisions including the retroactive repeal for 2022 and 2023 and deferral of the requirement to capitalize U.S. research and development expenses for tax purposes that was a provision enacted in the 2017 Tax Act. Uncertainty exists as to whether the bill will be enacted into law as the bill did not receive enough votes to pass the U.S. Senate in August 2024; however, if the bill is enacted as currently drafted, we would expect our effective tax rate for 2024 to be moderately higher, and a net discrete tax detriment in the quarter of enactment related to 2022 and 2023. In addition, we would expect a decrease in cash tax payments.

Acquisitions

We invest in external research and technologies and manufacturing capabilities 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 or refine our pipeline and strengthen our business.

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

Foreign Currency Exchange Rates

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. There is uncertainty in the future movements in foreign currency exchange rates, and fluctuations in these rates have and could adversely impact our consolidated results of operations and cash flows.

Other Factors

Other factors have had, and may continue to have, an impact on our consolidated results of operations. These factors include cost and wage inflation, supply chain and labor market complexities, international tension and conflicts, uneven economic growth or downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials.

See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023 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:

Numbers may not add due to rounding.

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

Numbers may not add due to rounding.

In the U.S. for the three and nine months ended September 30, 2024, the increase in volume was primarily driven by Zepbound and Mounjaro, partially offset by declines in Trulicity. Following higher wholesaler inventory levels at the end of the second quarter of 2024, Mounjaro and Zepbound sales in the U.S. for the three months ended September 30, 2024 were negatively impacted by inventory decreases in the wholesaler channel. We estimate this impacted sales of Mounjaro and Zepbound in the U.S. for the third quarter of 2024 by mid-single digits as a percent of aggregate U.S. sales of these products.

In the U.S. for the three months ended September 30, 2024, the higher realized prices were primarily driven by Humalog®, Verzenio and Trulicity. In the U.S. for the nine months ended September 30, 2024, the higher realized prices were also positively impacted by the access and savings card dynamics related to Mounjaro, as the $25 non-covered benefit expired on June 30, 2023.

Outside the U.S. for the three months ended September 30, 2024, the decrease in volume was driven by the sale of rights for the olanzapine portfolio, including Zyprexa, in the third quarter of 2023, partially offset by the increase in volume by Mounjaro and Verzenio. Outside the U.S. for the nine months ended September 30, 2024, the increase in volume was primarily driven by Mounjaro and Verzenio, partially offset by the 2023 sale of rights for the olanzapine portfolio.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product for the three months ended September 30, 2024 and 2023:

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) Basaglar revenue includes Rezvoglar®.

(4) Zyprexa revenue includes sale of rights for the olanzapine portfolio in July 2023.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product for the nine months ended September 30, 2024 and 2023:

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) Basaglar revenue includes Rezvoglar.

(4) Zyprexa revenue includes sale of rights for the olanzapine portfolio in July 2023.

Revenue of Mounjaro in the U.S. during the three months ended September 30, 2024 was $2.38 billion compared to $1.28 billion for the three months ended September 30, 2023, reflecting continued strong demand, increased supply and, to a lesser extent, favorable changes to estimates for rebates and discounts. Following higher wholesaler inventory levels at the end of the second quarter of 2024, sales in the U.S. for the three months ended September 30, 2024 were negatively impacted by inventory decreases in the wholesaler channel. Revenue of Mounjaro in the U.S. during the nine months ended September 30, 2024 was $6.32 billion compared to $2.73 billion for the nine months ended September 30, 2023, reflecting continued strong demand, increased supply and higher realized prices due to access and savings card dynamics, as the $25 non-covered benefit expired on June 30, 2023. Revenue outside the U.S. during the three and nine months ended September 30, 2024 was $728.0 million and $1.69 billion, respectively, compared to $132.4 million and $228.4 million during the three and nine months ended September 30, 2023, respectively, primarily driven by increased volume associated with the launch of Mounjaro Kwikpen® in various markets.

Revenue of Trulicity decreased 26 percent and 31 percent in the U.S. during the three and nine months ended September 30, 2024, respectively, driven by decreased volume primarily due to competitive dynamics, partially offset by higher realized prices primarily due to changes to estimates for rebates and discounts. The decrease in volume in the U.S. during the nine months ended September 30, 2024 was also driven by supply constrains during the first half of 2024. Revenue outside the U.S. decreased 12 percent and 14 percent during the three and nine months ended September 30, 2024, respectively, primarily driven by decreased volume due to competitive dynamics. The decrease in volume outside the U.S. during the nine months ended September 30, 2024 was also driven by actions we have taken to manage demand.

Revenue of Verzenio increased 28 percent and 37 percent in the U.S. during the three and nine months ended September 30, 2024, respectively, primarily driven by increased demand and higher realized prices, partially offset by wholesaler buying patterns. Revenue outside of the U.S. increased 38 percent and 40 percent during the three and nine months ended September 30, 2024, respectively, primarily driven by increased demand.

Revenue of Zepbound in the U.S. during the three and nine months ended September 30, 2024 was $1.26 billion and $3.02 billion, respectively. Following higher wholesaler inventory levels at the end of the second quarter, sales in the U.S. for the three months ended September 30, 2024 were negatively impacted by inventory decreases in the wholesaler channel.

Revenue of Taltz increased 18 percent and 15 percent in the U.S. during the three and nine months ended September 30, 2024, respectively, driven by increased demand and higher realized prices, partially offset by wholesaler buying patterns. Revenue outside the U.S. increased 19 percent and 21 percent during the three and nine months ended September 30, 2024, respectively, driven by increased demand.

Revenue of Jardiance decreased 19 percent and was flat in the U.S. during the three and nine months ended September 30, 2024, respectively. The decrease in revenue in the U.S. for the three months ended September 30, 2024 was driven by lower realized prices, partially offset by increased demand. Revenue outside the U.S. increased 23 percent and 24 percent during the three and nine months ended September 30, 2024, respectively, driven by increased volume. See Note 4 to the consolidated condensed financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.

Gross Margin, Costs, and Expenses

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

NM - not meaningful

Gross margin as a percent of revenue for the three and nine months ended September 30, 2024 increased 0.6 percentage points and 2.3 percentage points compared with the three and nine months ended September 30, 2023, respectively, primarily driven by favorable product mix and higher realized prices, partially offset by the sale of rights for the olanzapine portfolio in the third quarter of 2023 and higher manufacturing costs.

Research and development expenses increased 13 percent and 18 percent for the three and nine months ended September 30, 2024, respectively, driven by continued investments in our early and late-stage portfolio.

Marketing, selling, and administrative expenses increased 16 percent and 13 percent for the three and nine months ended September 30, 2024, respectively, primarily driven by promotional efforts supporting ongoing and future launches.

Acquired IPR&D charges for the three and nine months ended September 30, 2024 were primarily related to the acquisition of Morphic. Acquired IPR&D charges for the three and nine months ended September 30, 2023 were primarily related to the acquisitions of DICE Therapeutics, Inc., Versanis Bio, Inc., and Emergence Therapeutics AG. See Note 3 to the consolidated condensed financial statements.

Asset impairment, restructuring, and other special charges for the three months ended September 30, 2024 were primarily related to impairment of an intangible asset associated with a molecule in development. For the nine months ended September 30, 2024 asset impairment, restructuring, and other special charges also included charges related to litigation. See Note 5 to the consolidated condensed financial statements for additional information.

Other–net, (income) expense included net investment (gains) losses on equity securities of $(112.4) million and $29.5 million for three and nine months ended September 30, 2024, respectively, and $62.9 million and $141.5 million for three and nine months ended September 30, 2023, respectively. See Note 12 to the consolidated condensed financial statements for additional information.

The effective tax rates were 38.9 percent and 19.1 percent for the three and nine months ended September 30, 2024, respectively, and 113.4 percent and 24.6 percent for the three and nine months ended September 30, 2023, respectively, primarily driven by unfavorable tax impacts of non-deductible acquired IPR&D charges, with a larger impact occurring in 2023.

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, 2023.

We are making investments in global facilities to manufacture existing and future products. These investments, and other capital investments that support our operations, have increased our capital expenditures and will result in higher capital expenditures over the next several years.

As we expand our manufacturing capacity in order to meet existing and expected demand of our medicines, 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 $11.5 billion if we do not purchase specified amounts of goods or services primarily related to our incretin medicines over the durations of the agreements, which are generally up to 8 years.

In the third quarter of 2024, we acquired Morphic for approximately $2.67 billion, net of cash acquired. We funded this acquisition with proceeds from the issuance of debt. See Note 3 and Note 7 to the consolidated condensed financial statements for additional information.

Cash and cash equivalents increased to $3.37 billion as of September 30, 2024, compared with $2.82 billion as of December 31, 2023. Refer to the consolidated condensed statements of cash flows for additional information on the significant sources and uses of cash for the nine months ended September 30, 2024 and 2023.

In addition to our cash and cash equivalents, we held total investments of $3.35 billion and $3.16 billion as of September 30, 2024 and December 31, 2023, respectively. See Note 7 to the consolidated condensed financial statements for additional information.

As of September 30, 2024, total debt was $31.12 billion, an increase of $5.89 billion compared with $25.23 billion as of December 31, 2023. In August 2024, we issued $5.00 billion of fixed-rate notes and used a portion of the net cash proceeds to fund the acquisition of Morphic and related fees and expenses, with any remaining funds used for general business purposes, including the repayment of outstanding commercial paper. In February 2024, we issued $6.50 billion of fixed-rate notes and used, or may be using, the net cash proceeds for general business purposes, including the repayment of outstanding commercial paper, repayment of current maturities of long-term debt, and repayment of the $750.0 million of fixed-rate notes due in 2026. See Note 7 to the consolidated condensed financial statements for additional information.

As of September 30, 2024, we had a total of $8.42 billion of unused committed bank credit facilities, $8.00 billion of which is available to support our commercial paper program. See Note 7 to the consolidated condensed financial statements for additional information. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowing needs.

During the nine months ended September 30, 2024, we repurchased $521.1 million of shares under our $5.00 billion share repurchase program authorized in May 2021. As of September 30, 2024, we had $1.98 billion remaining under this program.

During the nine months ended September 30, 2024, we paid dividends of $3.51 billion, or $3.90 per share, to our shareholders. In October 2024, we declared a dividend for the fourth quarter of 2024 of $1.30 per share of outstanding common stock. The dividend of approximately $1.17 billion is payable on December 10, 2024 to shareholders of record at the close of business on November 15, 2024.

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

Both domestically and abroad, we monitor the potential impacts of the economic environment and international tension and conflicts; 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 fair values of equity securities.

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, 2023. 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, 2023.

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 and our executive officers 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 our or our executive officers' social media channels, is not incorporated by reference into, and is not a part of, this Quarterly Report on Form 10-Q.

For a discussion of our market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023.

(a)Evaluation of Disclosure Controls and Procedures. Under applicable Securities and Exchange Commission (SEC) regulations, management of a reporting company, with the participation of the principal executive officer and principal financial officer, must periodically evaluate the company's "disclosure controls and procedures," which are defined generally as controls and other procedures of a reporting company designed to ensure that information required to be disclosed by the reporting company in its periodic reports filed with the SEC (such as this Quarterly Report on Form 10-Q) is recorded, processed, summarized, and reported on a timely basis.

Our management, with the participation of David Ricks, president and chief executive officer, and Lucas Montarce, executive vice president and chief financial officer, evaluated our disclosure controls and procedures (as such terms are defined in our Annual Report on Form 10-K for the year ended December 31, 2023) as of September 30, 2024, and concluded that they were effective.

(b)Changes in Internal Controls. During the third quarter of 2024, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

We are a party to various currently pending legal actions, government investigations, and environmental proceedings. See Note 10 to the consolidated condensed financial statements for information on various legal proceedings.

This Item should be read in conjunction with "Legal Proceedings" in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2023.

Our material risk factors are disclosed in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the activity related to repurchases of our equity securities during the three months ended September 30, 2024:

During the three months ended September 30, 2024, we repurchased $521.1 million of shares under our $5.00 billion share repurchase program authorized in May 2021.

On September 11, 2024, Daniel Skovronsky, M.D., Ph.D., executive vice president, chief scientific officer and president, Lilly research laboratories and Lilly immunology, adopted a sales plan (Plan). The Plan was entered into during an open trading window and is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act of 1934 and our policies regarding trading in our securities. The Plan calls for the sale of up to 5,000 shares of company common stock between February 10, 2025 and September 8, 2025 subject to the terms and conditions of the Plan.

The following documents are filed as a part of this Quarterly Report:

Long-term debt instruments under which the total amount of securities authorized does not exceed 10 percent of our consolidated assets are not filed as exhibits to this Quarterly Report. We will furnish a copy of these agreements to the Securities and Exchange Commission upon request.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.