Lilly Pharma Holding GmbHLiquidiert

Lilly Pharma Holding GmbH

Bad Homburg v. d. Höhe

Jahresabschluss zum Geschäftsjahr vom 01.01.2014 bis zum 31.12.2014

Bilanz zum 31. Dezember 2014

AKTIVA

Gewinn- und Verlustrechnung für 2014

Anhang für 2014

Allgemeine Hinweise

Der vorliegende Jahresabschluss wurde gemäß §§ 242 ff. und §§ 264 ff. HGB in Verbindung mit § 326 HGB sowie nach den einschlägigen Vorschriften des GmbHG aufgestellt. Es gelten die Vorschriften für kleine Kapitalgesellschaften.

Bilanzierungs- und Bewertungsmethoden

Für die Aufstellung des Jahresabschlusses waren im Wesentlichen unverändert die nachfolgenden Bilanzierungs- und Bewertungsmethoden maßgebend.

Bei den Finanzanlagen werden die Anteilsrechte zu Anschaffungskosten und sofern erforderlich zu niedrigen beizulegenden Werten angesetzt.

Forderungen und sonstige Vermögensgegenstände sind zum Nennwert angesetzt. Forderungen mit einer Laufzeit von mehr als einem Jahr bestehen nicht.

Für die Ermittlung latenter Steuern aufgrund von temporären oder quasi-permanenten Differenzen zwischen den handelsrechtlichen Wertansätzen von Vermögensgegenständen, Schulden und Rechnungsabgrenzungsposten und ihren steuerlichen Wertansätzen oder aufgrund steuerlicher Verlustvorträge werden diese mit den unternehmensindividuellen Steuersätzen im Zeitpunkt des Abbaus der Differenzen bewertet und die Beträge der sich ergebenden Steuerbe- und -entlastungen nicht abgezinst. Aktive und passive Steuerlatenzen werden sofern vorhanden verrechnet ausgewiesen. Die latenten Steuern werden aufgrund der am Bilanzstichtag 31. Dezember 2014 bestehenden ertragsteuerlichen Organschaft sowohl für die Lilly Pharma Holding GmbH, Bad Homburg (Organträgerin) als auch für die Lilly Deutschland GmbH, Bad Homburg (Organgesellschaft) bei der Organträgerin ausgewiesen.

Die Rückstellungen für Pensionen und ähnliche Verpflichtungen werden nach dem Anwartschaftsbarwertverfahren (Projected Unit Credit Methode oder PUC-Methode genannt) unter Verwendung der "Richttafeln 2005 G" ermittelt. Für die Abzinsung wurde gemäß Rückstellungsverordnung vom 18. November 2009 pauschal der durchschnittliche Marktzinssatz in Höhe von 4,54% bei einer restlichen Laufzeit von 15 Jahren verwendet. Erwartete Rentensteigerungen wurden mit 1,75% berücksichtigt.

Unter Inanspruchnahme des Wahlrechts nach Art. 67 Abs. 1 Satz 1 EGHGB wird der sich aus der Änderung der Rückstellungsbilanzierung nach §§ 249 Abs. 1 Satz 1, 253 Abs. 1 Satz 2, Abs. 2 HGB durch das BiIMoG ergebende Zuführungsbetrag über den Höchstzeitraum von 15 Jahren gleichmäßig verteilt.

Die Verbindlichkeiten sind zum Erfüllungsbetrag angesetzt.

Auf fremde Währung lautende Vermögensgegenstände und Verbindlichkeiten werden, sofern vorhanden, mit dem Devisenkassamittelkurs zum Abschlussstichtag umgerechnet. Sofern Posten mit einer Restlaufzeit von mehr als einem Jahr vorhanden waren, wurde das Realisationsprinzip (§ 252 Abs. 1 Nr. 4 Halbsatz 2 HGB) und das Anschaffungskostenprinzip (§ 253 Abs. 1 Satz 1 HGB) beachtet.

Erläuterungen zur Bilanz

Angaben zum Anteilsbesitz

⁽¹⁾ gehalten über die Lilly Deutschland GmbH
⁽²⁾ gehalten über die Lilly Pharma Fertigung und Distribution GmbH & Co. KG
⁽³⁾ vor Ergebnisabführung

Im April 2013 wurde die Entscheidung bekannt gegeben, dass die Geschäftstätigkeit der Lilly Pharma Fertigung und Distribution GmbH & Co.KG, Gießen, im Laufe des Geschäftsjahres 2014 eingestellt wird. Nach Aufgabe des operativen Geschäftsbetriebes zum 30. September 2014, konnte für handelsrechtliche Zwecke nicht mehr vom Grundsatz der Unternehmensfortführung bei der Lilly Pharma Fertigung und Distribution GmbH & Co. KG ausgegangen werden. Zum Zwecke der Abwendung einer Überschuldung im Sinne von § 19 Ins0 sprach die Lilly Deutschland GmbH mit Datum vom 13. Mai 2015 eine Rangrücktrittserklärung gegenüber der Lilly Pharma Fertigung und Distribution GmbH & Co. KG im Wert von TEUR 31.000 aus und trat damit mit ihren Forderungen in Höhe dieses Teilbetrages im Rang hinter sämtliche bestehenden und künftigen Forderungen anderer Gläubiger der Lilly Pharma Fertigung und Distribution GmbH & Co. KG zurück. Eine entsprechende Wertberichtigung der Forderungen wurde im Abschluss der Lilly Deutschland GmbH zum 31. Dezember 2014 berücksichtigt. Im Übrigen wurden direkte, im Zusammenhang mit der Schließung angefallene Aufwendungen bei der Lilly Pharma Fertigung und Distribution GmbH & Co. KG in voller Höhe unmittelbar oder mittelbar durch die Eli Lilly and Company, Indianapolis, Indiana, USA, erstattet. Insgesamt ergibt sich im Abschluss der Lilly Pharma Fertigung und Distribution GmbH & Co. KG ein nicht durch Vermögenseinlage gedeckter Verlustanteil der Kommanditistin in Höhe von TEUR 6.387. Die mittelbar durch die Lilly Deutschland GmbH gehaltene Beteiligung an der Lilly Pharma Fertigung und Distribution GmbH & Co. KG, Gießen, wurde bereits zum 31. Dezember 2012 vollständig abgewertet.

Die sich bereits im Vorjahr abzeichnende rückläufige Änderung des Absatzmarktes der Lilly Pharma Produktion GmbH & Co. KG, Bad Homburg v.d.Höhe setzte sich auch im laufenden Geschäftsjahr fort und wird weiterhin eine wesentliche Auswirkung auf die Ertragslage der Tochtergesellschaft haben. In den Jahren 2015 bis 2017 führt die Gesellschaft noch Restaktivitäten durch und danach soll die derzeitige Geschäftstätigkeit des verbundenen Unternehmens eingestellt werden.

Die Beteiligung an der Lilly Pharma Produktion GmbH & Co. KG, die mittelbar über die Lilly Pharma Fertigung und Distribution GmbH & Co. KG gehalten wird, wurde nach wissenschaftlich anerkannten Bewertungsmethoden bewertet. Aufgrund der am Bilanzstichtag 31. Dezember 2014 gegebenen Datenlage hat die Lilly Pharma Fertigung und Distribution GmbH & Co. KG neben den bereits in Vorjahren erfassten Wertberichtigungen eine weitere außerplanmäßige Abschreibung in Höhe von TEUR 3.600 auf den niedrigeren beizulegenden Wert in Höhe von TEUR 3.800 (Vorjahr TEUR 7.400) vorgenommen.

Forderungen und sonstige Vermögensgegenstände

Die Forderungen und sonstigen Vermögensgegenstände enthalten wie im Vorjahr keine Forderungen gegenüber Gesellschafter.

Die Forderungen und sonstigen Vermögensgegenstände sind wie im Vorjahr innerhalb eines Jahres fällig.

Latente Steuern

Die aktiven latenten Steuern resultieren aus folgenden Sachverhalten:

Bei der Berechnung wurde der Steuersatz des Organträgers in Höhe von 29,3% zugrunde gelegt. Dieser ergibt sich aus der bei der Gesellschaft zu berücksichtigenden Gewerbe- und Körperschaftssteuer.

Rückstellungen für Pensionen und ähnliche Verpflichtungen

Der noch in künftigen Perioden anzusammelnde Fehlbetrag gemäß Art. 67 Abs. 2 EGHGB beträgt TEUR 275.

Angaben zur Verrechnung nach § 246 Abs. 2 Satz 2 HGB:

Verbindlichkeiten

Die Verbindlichkeiten sind wie im Vorjahr innerhalb eines Jahres fällig.

Die Verbindlichkeiten sind nicht besichert.

Die Verbindlichkeiten enthalten wie im Vorjahr keine Verbindlichkeiten gegenüber Gesellschafter.

Die sonstigen Verbindlichkeiten enthalten TEUR 1.685 (Vorjahr: TEUR 3.414) Verbindlichkeiten aus umsatzsteuerlicher Organschaft.

Haftungsverhältnisse

Am Bilanzstichtag bestehen keine Haftungsverhältnisse.

Sonstige finanzielle Verpflichtungen

Am Bilanzstichtag bestehen keine sonstigen finanziellen Verpflichtungen.

Sonstige Angaben

Geschäftsführung

Die Geschäftsführer sind einzelvertretungsberechtigt und von den Beschränkungen des § 181 BGB befreit.

Gesamtbezüge der Geschäftsführung

Auf die Angabe der Bezüge der Geschäftsführung wird gemäß § 286 Abs. 4 HGB verzichtet.

Mitarbeiter

Die Gesellschaft beschäftigte im Geschäftsjahr wie auch im Vorjahr keine Arbeitnehmer.

Konzernverhältnisse

Der Konzernabschluss für den größten und den kleinsten Kreis von Unternehmen wird von der Eli Lilly and Company, Indianapolis, Indiana, USA, aufgestellt und ist auf der Internet Homepage dieser Gesellschaft erhältlich.

Gewinnabführungsvertrag

Die Gesellschaft, als Organträger, und die Lilly Deutschland GmbH, Bad Homburg v.d. Höhe, als Organgesellschaft, haben am 5. November 1999 und mit Änderung vom 5. Dezember 2000 einen Beherrschungs- und Gewinnabführungsvertrag geschlossen. Mit Beschluss der Gesellschafterversammlung vom 19. Dezember 2014 wurde beschlossen, diesen Beherrschungs- und Gewinnabführungsvertrag mit Ablauf zum 31. Dezember 2014 aufzuheben.

ELI LILLY AND COMPANY

Indianapolis, Indiana, USA

Konzernabschluss zum 31.12.2014

ELI LILLY AND COMPANY 2014 ANNUAL REPORT

NOTICE OF 2015 ANNUAL MEETING

PROXY STATEMENT

It begins with a promise...

In 1876, Colonel Eli Lilly founded the company that bears his name to make trusted medicines of the highest possible quality, based on the best science of the day.

In 2014, the people of Eli Lilly and Company launched three new medicines to treat diabetes and cancer and gained approval for a fourth - medicines that represent the ongoing fulfillment of the promise made more than 138 years ago by our founder.

These new medicines, and more to come, are the fruit of the commitment we made late in the last decade, to sustain our investment in Innovation as we entered a challenging period of patent expirations on many of our key products.

These medicines also reflect Colonel Lilly's promise of quality, brought to life every day by thousands of Lilly people in our manufacturing and quality organizations.

Today, Eli Lilly and Company continues to pursue the promise of innovation - guided by our core values of integrity, excellence, and respect for people - as we prepare to launch more new medicines to bring healing and hope to people around the world.

On the cover: Monica Kumado works on a packaging line for Humalog® vials in Lilly's manufacturing operations in Indianapolis. Generations of Lilly manufacturing employees have sustained Lilly's commitment to producing quality medicines.

Lilly unites caring with discovery to make life better for people around the world.

YEAR IN REVIEW

FINANCIALS

PROXY STATEMENT

For more information on Lilly's commitment to corporate responsibility please see the inside back cover of this report.

2014 Financial Highlights

¹ For more information on these reconciling items, see the Financial Results section of the Executive Overview on page 21 of the Financials.
² Numbers in the 2013 column do not add due to rounding.

To Our Shareholders

This is an exciting moment for Eli Lilly and Company! We're transitioning from a challenging period of patent expirations to a period of growth, driven by the launch of new products that promise to provide new solutions to some of the most vexing medical problems we face today. In my letter, I will discuss our efforts to realize that promise for people around the world, and to deliver on the promise of growth for shareholders.

PERFORMANCE AS PROMISED

To understand our future prospects, it's important to consider what Lilly was facing back in 2008. Over the period that lay ahead - a period we dubbed "YZ" - expiring patents would cause us to lose one-third of our revenue, and a significantly greater percentage of our profits.

In late 2009, we laid out a plan to overcome this challenge and rebuild our company. The results speak for themselves:

In 2014 - the trough of this patent expiration period - we fell just shy in revenue and net income, while exceeding our cash flow goal. Revenue decreased 15 percent to $19.62 billion, due primarily to lower demand for Cymbalta ^® and Evista ^® following U.S. patent expirations, as well as the unfavorable impact of foreign exchange rates. On a non-GAAP basis, which excludes significant items totaling $0.55 per share, net income was $2.99 billion, a decrease of 34 percent. Reported net income was $2.39 billion.

Seven of our products and our Elanco animal health business exceeded $1 billion in annual sales in 2014. Total reported operating expenses decreased 10 percent, driven by lower late-stage dinical development costs, reduced U.S. sales and marketing activities for Cymbalta and Evista, and ongoing cost-containment efforts.

Over the Aast five years, our stock price has doubled - from $35 per share on the day in December 2009 when we first shared our strategy with investors, to over $70 as I write this letter in early 2015.

THE PROMISE OF DISCOVERY

Throughout the YZ period we stayed true to our commitment to innovation. And now, as our pipeline continues to advance, our company is positioned to resume growth.

In 2014, we launched three new medicines: Cyramza ^® for advanced gastric cancer and metastatic non-small cell lung cancer, Jardiance ^® for type 2 diabetes - with Boehringer Ingelheim, and Trulicity ^® also for type 2 diabetes. We also received approval for our insulin glargine product in Europe and Japan and tentative approval in the U.S. (See pages 8-9.) We filed for regulatory approval of necitumumab for first-line squamous non-small cell lung cancer, and we anticipate submissions in coming months for ixekizumab for psoriasis, along with new indications for Cyramza.

Here's a closer look at key therapeutic areas:

Diabetes. We're well on our way to launching - over a couple of year - sup to three new medicines that treat diabetes. This will enable Lilly to offer a more complete range of medicines than any of our competitors, from oral medicines to insulins.

Notably, our insulin glargine product has the potential to fill a significant and longstanding gap in our insulin portfolio.

And we're not stopping there. We're committed to continued advances in diabetes treatment by maintaining a strong internal research effort, as well as searching for the best external opportunities. In December, for example, we announced a worldwide licensing collaboration with Adocia focused on developing an ultra-rapid insulin.

Oncology. In oncology, our acquisition of ImClone in 2008 is paying off, with one medicine - Cyramza (ramucirumab) - on the market, another molecule - necitumumab - in regulatory review, and a third - olaratumab - expected to enter Phase III this year for soft tissue sarcoma.

In addition to approvals of Cyramza in the U.S. and Europe for second-line advanced gastric cancer, we've been granted a priority review in Japan, and we anticipate regulatory action in the first half of 2015. The FDA also approved

Cyramza as a treatment for second-line non-small cell lung cancer, and in September we reported positive top-line results for ramucirumab in second-line metastatic colorectal cancer. We expect to submit ramucirumab in that indication this year.

In addition, last year we initiated Phase III studies for abemaciclib, our CDK 4/6 inhibitor, in metastatic breast cancer and non-small cell lung cancer.

In the area of immuno-oncology, we announced early-stage collaborations in 2014 with Immunocore and Zymeworks. And in January of this year we announced two additional dinical collaborations - one with Bristol-Myers Squibb and the other with Merck - exploring combinations of their PD-1 therapies, Opdivo ^® and Keytruda ^®, with a number of our marketed and pipeline medicines in a range of cancers.

Immunology. We also saw significant progress in our emerging immunology platform, with positive data on two late-stage development candidates.

In the treatment of pain, our CGRP monoclonal antibody is currently in Phase II. And should the FDA partial clinical hold be removed, we'll reinitiate Phase III trials for tanezumab in collaboration with Pfizer.

In 2016, we expect readouts from our ongoing Phase III trials for evacetrapib in high-risk vascular disease and for solanezumab in Alzheimer's disease, offering the potential for what some have termed "biotech-like upside" later in the decade.

All of this is good news for the company and for patients. And it validates the decision we made many years ago, as we entered a perilous period of patent expirations, to sustain a robust investment in research and development. We made a big bet then, and it's paying off!

KEEPING OUR PROMISES

I'm extremely proud of what my Lilly colleagues have accomplished over the past several years. But, as we all know, the world did not stand still as we navigated through a difficult period. So we must continue to change and adapt in order to realize a promising future.

Back in 2008, as we began to prepare for YZ, the Great Recession was gathering force, and the impact is still being felt today. The Affordable Care Act in 2010 was the most significant U.S. legislation of its kind since Medicare 45 years earlier, and it is reshaping health care.

In countries around the world - including the U.S. - pressure on health care budgets continues to constrain reimbursement, as well as access, for many branded medicines. Our customers are demanding ever-greater value for their money. Likewise over this period, competition has stiffened, as numerous Big Pharma and biotech companies have been attracted to the therapeutic areas in which we compete. And we'll continue to face patent expirations, which are a fact of life in our business.

All of this is to say: even as we begin to mm the corner on YZ with multiple product launches, we must operate effectively in an external environment that has never been more challenging.

In response, we're sharpening our focus on the areas where we're best positioned to compete and win. We believe this will lead to a more sustainable flow of innovative medicines and stronger, more consistent growth.

Commercial Focus. First of all, we aim to compete effectively and to win in diabetes, oncology, and animal health. In the near term and in the long term, these represent significant pillars of growth for our company.

At the same time, our Bio-Medicines business is transitioning from its longtime focus on psychiatric illness, bone health, and men's health to new areas that include immunologic disorders, neurodegeneration (especially Alzheimer's disease), pain, and cardiovascular disease - all dependent, of course, on the outcome of ongoing Phase III studies. Bio-Medicines remains critically important, accounting for more than half of our Phase III pipeline, and providing revenue from current products to fuel our ambitious growth agenda.

In terms of geography, the U.S. market will continue to be of preeminent importance to our company. Yet our attention will increasingly sthift to Asia, particularly China and Japan.

R&D Focus. Going forward, we'll focus our research in human health on three core areas - diabetes, oncology, and neurodegeneration - and two emerging areas based on research opportunities and clinical dat - immunology and pain. In each of these areas, we have compelling assets and growing or already deep expertise.

Within these areas, pursue fewer research projects, so that we can apply sufficient resources to deliver top-quality candidates and maintain competitiveness for those we choose to move forward. At Lilly's size, we know we cant participate meaningfully in every therapeutic area. But where we choose to play, we will play to win!

We've also embarked on an ambitious effort to reduce the time to bring new medicines from our laboratory to the patient, and we're making good progress. Several important development programs have already benefited in a substantial way, with years having been trimmed off earlier planned timelines.

To complement our internal efforts, we're also increasing our business development activity - through partnerships, licensing, and acquisitions - and pursuing deals and collaborations at ever-earlier stages.

A PROMISING FUTURE

As we stand today, following our toughest year, this much is dear: We are emerging from YZ as an independent company charting our own destiny, launching new products and competing more effectively, and in possession of one of the strongest pipelines in our history. As I write this letter, new Lilly medicines are helping more and more patients suffering from the ravages of cancer and diabetes - and be touching even more in the months and years ahead.

I want to offer my heartfelt thanks to our leadership team and to Lilly people around the world for their outstanding performance throughout the YZ period, and particularly in 2014. I also want to acknowledge and thank Doug Oberhelman, who is concluding his service on the board, for his wisdom and expert guidance through this challenging period.

A key lesson - one that has been repeated throughout our 138-year history - is to never underestimate what Lilly people are capable of when we put our minds to a shared goal and work together to achieve it.

Yes, we face new challenges, but now we have the wind at our back, and the arrow is in the "up" direction. Ours increasingly is a position of strength, which we intend to neither yield nor squander. We have yet new chapters to write in medical history, as we strive to deliver the promise of innovation to millions of people whose lives will be made better when we succeed.

I remain very confident that we can and will succeed, and I am grateful for your support.

We are emerging from YZ as an independent company charting our own destiny, launching new products and competing more effectively, and in possession of one of the strongest pipelines in our history.

Elanco - Enriching Lives, Driving Growth

The vision of Elanco, our animal health business, is "food and companionship enriching life." Elanco helps make food safe, affordable, and abundant, with products and services to improve animal protein production. Its companion animal products help pets live longer, healthier, higher-quality lives.

Animal health was a key growth driver during the YZ period of patent expirations, and represents one of our important areas of focus going forward.

Elanco's success in recent years has resulted from a mix of acquisitions and internally driven growth. With the acquisition of Novartis Animal Health in January 2015, Elanco today is a top-three animal health company - up from No. 8 just ten years ago - with an expanded product portfolio, an enhanced global footprint, and a robust pipeline.

At Elanco headquarters in Greenfield Indiana, John C Lechleiter, Ph.D., Lilly chairman, president, and chief executive officer (third from left), talks with Elanco's Tracey Warch director, global regulatory brand assurance/pharmacovigilance; Scott Holmstrom, senior director, regulatory affairs, North America, and global capabilities; Tony Ezell vice president and chief marketing officer; lose Simas, senior director, regulatory, market access, and knowledge solutions; and Ericka Wheeler, operations manager, global market access.

It begins with a promise

Since our founding, the people of Lilly have worked to fulfill our promise to discover and develop medicines that make life better. From the production of insulin and the polio vaccine, to the launch of the biotechnology era with Humulin ^®, to the discovery of new medicines to treat psychiatric illness, we have pioneered breakthroughs against some of humanity's most stubborn and devastating diseases.

In 2014 Eli Lilly and Company delivered on the promise of discovery with new medicines for people with diabetes and cancer. These medicines - in their discovery, development, and manufacture - reflect the promise of quality that goes back to Colonel Eli Lilly.

The following pages highlight the new Lilly medicines approved in 2014, with a particular focus on the outstanding work of our manufacturing team to bring them to patients.

"Take what you find here and make it better and better."

Colonel Eli Lilly to his son J.K Sr. when he joined the company.

J.K. Lilly Sr. in his lab circa 1886

Bringing the Promise of Science to People with Diabetes

When people with diabetes filled their first prescriptions for Trulicity (dulaglutide) in November 2014, it marked the culmination of well over a decade of work by hundreds if not thousands of Lilly employees. Tom Hardy was one of them.

Tom earned an M.D. and a Ph.D. in biochemistry, and was drawn to both patient care and academic medical research. After several years as an endocrinologist in private practice, Tom joined Lilly where, he says, "my work applies all my training more than anything else I've done."

Tom became involved with dulaglutide as clinical team leader during Phase I development. The dulaglutide molecule had been invented by Lilly scientists - notably Wolfgang Glaesner, Ph.D., and Rohn Millican - who had an idea for a once-weekly GLP-1 receptor agonist for diabetes and applied Lilly's capabilities in protein engineering to create it.

Tom recalls the excitement when data came back from Phase I testing and the molecule showed potential efficacy with once-weekly dosing. Subsequent testing confirmed that the Lilly scientists had "engineered a protein that did exactly what it was intended to do."

Tom's colleagues applied some innovative ideas to advance dulaglutide. The early- and Tate-phase clinical teams worked together to design a seamless Phase II/III trial that embeds dose finding - typically done during Phase II - in a large Phase III study of safety and efficacy, eliminating the usual time gap between such trials.

Drawing on Lilly's capabilities in pharmacokinetics and advanced analytics, the team used sophisticated modeling and trial simulation to predict what they were likely to learn from studies and adapt as the trials proceeded.

Today, such approaches are being applied across Lilly to reduce the time to advance new medicines from the lab to the patient.

In his current role at Lilly, Tom says his work reaches from "rubbing shoulders" with discovery scientists to working with the medical and commercial teams engaged with patients and physicians - just what he was looking for when he joined Lilly. And, along with many Lilly colleagues, he can take pride in helping bring a new treatment option to people with diabetes.

Seeing Lilly's Promise from Both Sides

Jeff Peilet joined Lilly in 2014 as the company expanded its capacity to manufacture new biologics for diabetes, cancer, and other diseases, and he soon found himself facing a serious threat to his own health.

With 18 years of experience in sterile injectable product manufacturing, Jeff was hired to lead a process team in our Cyramza vial filling operation in Indianapolis. As he began his new job, Jeff underwent a physical exam and learned that he had type 2 diabetes.

"The results from the physical were so shocking because I have kids in high school and college, and I don't want to die prematurely with kids still dependent on me," Jeff says. In addition to taking medication, he started working out, running, and watching his diet.

Jeff enrolled in a 12-week course as part of Lilly's wellness programs. Each class began with topics on managing diabetes - such as nutrition, exercise, and foot care - followed by an exercise session. Most important, Jeff says, was that class members began to bond, share stories, and encourage each other in their common struggles.

"As scared as I was, I wouldn't have come this far if it weren't for the course and the relationships that began there," Jeff says. He's significantly lowered his hemoglobin A1 c, from 10.7 to 7.7 so far, and he's training to run the "500" Mini-Marathon with his daughter.

In his work, Jeff leads a process team that maintains the highest standards of quality and safety in filling vials of Cyramza that will treat people with cancer. The facility where he works also produces Trulicity pre-filled syringes for type 2 diabetes.

Jeff's team adheres to strict procedures in order to maintain the sterility of the facility and the process. The manufacturing process itself has been thoroughly validated to ensure consistent identity, strength, and purity in every Cyramza vial.

Jeff Peilet is part of Lilly's promise of quality in the medicines we make. And he's learned about the challenges facing the people who depend on them.

The Promise of Discovery

LILLY MEDICINES APPROVED in 2014

Cyramza (ramucirumab)

Cyramza has been approved for the treatment of stomach and lung cancers and is being studied in other tumors. It is a vascular endothelial growth factor (VEGF) receptor 2 antagonist designed to inhibit angiogenesis, the process of making new blood vessels. In the case of cancer, angiogenesis provides a tumor its own blood supply, allowing it to grow and spread.

In 2014, Cyramza received approvals in the U.S. and the European Union, both as a single agent and in combination with chemotherapy, to treat advanced or metastatic gastric (stomach) cancer - the third leading cause of cancer death worldwide.

We launched Cyramza in the U.S. with strong results to date and positive customer feedback. In Japan, we've been granted a priority review of ramucirumab for the treatment of second-line gastric cancer, and we anticipate regulatory action in the first half of 2015.

In December, Cyramza became the first treatment approved in the U.S. for use in combination with docetaxel in second-line metastatic non-small cell lung cancer (NSCLC). In early 2015, Lilly submitted a marketing application in the EU for Cyramza in NSCLC. NSCLC accounts for 85 percent of all cases of lung cancer - the leading cause of cancer death in most countries.

In September, Lilly announced positive top-line results for the Phase III study of Cyramza as a treatment for second-line metastatic colorectal cancer. Several other studies are under way or planned to investigate Cyramza in additional tumor types.

Trulicity (dulaglutide)

Trulicity is a once-weekly, injectable solution designed to improve glycemic control in adults with type 2 diabetes and should be used along with diet and exercise. Trulicity is a glucagon-like peptide-1 (GLP-1) receptor agonist that acts like GLP-1, a natural hormone that helps the Body release its own insulin following a meal.

Discovered in Lilly Research Laboratories, Trulicity was designed for the individual with diabetes who's making the transition to injectable therapy. Trulicity comes in a ready-to-use single-dose pen with a pre-attached, hidden needle. It does not require any mixing, measuring, or needle preparation and can be taken any time of day, with or without meals.

The approval of Trulicity was based an five Phase III dinical trials. In all five, Trulicity met its primary endpoint - lowering of hemoglobin Al c, a measure of average blood glucose - and was superior to other, conventional treatments. In a sixth trial, dulaglutide became the only GLP-1 agent in a Phase III study to show non-inferiority to the highest dose of Victoza ^®.

Trulicity is now approved for adults in the United States, Europe, Australia, and the United Arab Emirates as an adjunct to diet and exercise for the treatment of type 2 diabetes. It is currently in regulatory review in Japan as well as other regions.

Jardiance (empagliflozin)

Jardiance, co-developed by Lilly and Boehringer Ingelheim, offen people with type 2 diabetes a new option to reduce blood sugar levels. This once-daily oral tablet is a sodium glucose co-transporter-2 (SGLT2) inhibitor. Today, the SGLT2 dass is the fastest-growing segment among diabetes therapies.

Jardiance acts by removing excess glucose through the urine by blocking glucose reabsorption in the kidneys. Results of 10 multinational Phase III trials of more than 13,000 adults with type 2 diabetes showed that alter 24 weeks, empagliflozin significantly reduced patients' hemoglobin Al c. Although Jardiance is not approved for lowering weight or blood pressure, modest reductions in both were observed in clinical trials.

Jardiance has been approved in the U.S., the European Union, Japan, and five other countries as an adjunct to diet and exercise to improve blood-glucose levels in adults with type 2 diabetes. In addition, the FDA recently approved Glyxambi®, a combination tablet of empagliflozin and linagliptinthe DPP-4 inhibitor developed by our alliance with Boehringer Ingelheim and marketed as Tradjenta ^® - for adults with type 2 diabetes. And we have submitted the fixed-dose combination of empagliflozin and metformin in the U.S. and Europe.

Abasaglar (insulin glargine injection)

Our insulin glargine product, developed by Lilly and Boehringer Ingelheim, is a basal insulin treatment intended to provide long-lasting blood-glucose control between meals and at night, an integral part of glycemic control. This basal insulin helps fill a longstanding gap in Lilly's modern insulin portfolio.

In 2014, the European Commission granted marketing authorization for Abasaglar ^TM - the name of our insulin glargine product in Europe - to treat diabetes in adults, adolescents, and children aged two years and above.

In addition, we received tentative approval for the product in the U.S. - where its approved name is Basaglar ^TM - for improving glycemic control in adults with type 2 diabetes and in combination with mealtime insulin for adults and children with type 1 diabetes. Final U.S. approval is delayed as a result of patent infringement litigation filed by Sanofi, which makes the currently marketed insulin glargine. Our insulin glargine product has also been approved in Japan.

Keeping Our Quality Promise

LILLY GLOBAL MANUFACTURING

Colonel Eli Lilly founded our company with the singular purpose of producing trusted, high-quality medicines. In 2014, more than 9,000 Lilly employees in our Global Manufacturing and Quality organizations were working hard to keep our founder's promise.

Over the past decade, we've achieved a genuine transformation in manufacturing as we prepare for a series of product launches; adapt to changes in Lilly's product portfolio and deliver a growing array of biological products; and respond to new demands for delivery devices, dosing, and packaging aimed at meeting the needs of individual patients.

We've also strengthened our Quality organization, along with the systems, processes, and mindset necessary to ensure consistent performance in manufacturing and across the company.

Even in the midst of transformation, over the past five years the people of Lilly manufacturing have improved safety and quality, driven productivity gains, and maintained reliable supply, all the while delivering a growing and increasingly complex product portfolio. (See graphic on page 11.)

In particular, our colleagues in Indianapolis and Puerto Rico are working to streamline our insulin manufacturing processes to prepare for the production of our basal insulins and to meet growing global demand. The plan includes technical initiatives to improve production processes, expand capacity, and prepare for the launches of a series of new medicines.

More broadly, we're expanding our capacity in active pharmaceutical ingredient (API) production, sterile injectable product operations, and device manufacturing to deliver new biological products - including Trulicity and Cyramza and others in late-stage development, such as necitumumab and ixekizumab. At the same time, small molecules remain an important part of our pipeline, product portfolio, and manufacturing focus.

In 2014, our Global Manufacturing operations comprised 27 internal sites in 13 countries and a large network of partners. We continue to make major investments around the world. In Kinsale, Ireland, we've expanded and transformed a small-molecule site to a state-of-the-art facility that produces both small molecules and biologics. In Suzhou, China, we're constructing a new insulin formulation and filling facility to respond to significant demand in that country for our insulin products. We're also expanding sterile injectable product manufacturing capacity in Sesto, Italy, and Fegersheim, France, as well as in Indianapolis.

Most importantly, we've built a solid culture rooted in technical excellence and continuous improvement. A skilled and engaged workforce has delivered year-on-year progress in quality and safety and has achieved a strong record of compliance. We maintained this record through 2014, a year when pre-approval inspections in preparation for new product launches drove a 30 percent increase in regulatory inspections at our sites.

"We make medicine, and people's lives depend on it every day, so it has to be right every time. That's why our commitment to safety and quality is critical and is at the center of everything we do." - Maria Crowe, President, Manufacturing Operations

^1. Includes both human pharmaceutical and animal health manufacturing; time period unless otherwise noted. 2. Product supply to first-paying-customer remained above 95%, the Operation Standards for Supply Chain Excellence standard for "A Class," through this period.

Pipeline of Molecules in Clinical Development

Information is current as of February 14, 2015. The search for new medicines is risky and uncertain, and there are no guarantees. Remaining scientific, regulatory, or commercial hurdles may cause pipeline compounds to be delayed or to fail to reach the market

Forward-Looking Statements

This Annual Report includes 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). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "intend," "anticipate," "plan," "continue," or similar expressions.

In particular, information appearing under "Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

Investors should not place undue reliance on forward-looking statements. You should carefully read the factors described in the "Risk Factors" section of this Annual Report for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.

Business

Eli Lilly and Company (the "company" or "registrant" or "Lilly") was incorporated in 1901 in Indiana to succeed to the drug manufacturing business founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. We discover, develop, manufacture, and market products in two business segments - human pharmaceutical products and animal health products.

The mission of our human pharmaceutical business is to make medicines that help people live longer, healthier, more active lives. Our vision is to make a significant contribution to humanity by improving global health in the 21st century. Most of the products we sell today were discovered or developed by our own scientists, and our success depends to a great extent an our ability to continue to discover, develop, and bring to market innovative new medicines.

Our animal health business, operating through our Elanco division, develops, manufactures, and markets products for both food animals and companion animals.

We manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 11 other countries. Our products are sold in approximately 120 countries.

Subsequent Event - Novartis Animal Health Acquisition

On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash transaction for approximately $5.4 billion. Novartis AH operates in approximately 40 countries. We acquired Novartis AH's nine manufacturing sites, six dedicated research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, a pipeline with more than 40 projects in development, and more than 3,000 employees. The combined organization is expected to increase our animal health product portfolio, expand our global commercial presence, and augment our animal health manufacturing and research and development. In particular, it is expected to provide Elanco with a greater commercial presence in the companion animal and swine markets, expand Elanco's presence in equine and vaccines areas, and create an entry into the aquaculture market. As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of Novartis AH, we divested certain companion animal assets in the U.S. related to the Sentinel ^® canine parasiticide franchise to Virbac Corporation for approximately $410 million.

Human Pharmaceutical Products

Our human pharmaceutical products include:

Endocrinology products, including:

Neuroscience products, including:

Oncology products, including:

Cardiovascular products, including:

Animal Health Products

Our products for food animals include:

Our products for companion animals include:

Recently acquired Novartis AH products include:

Marketing

We sell most of our products worldwide. We adapt our marketing methods and product emphasis in various countries to meet local needs.

Human Pharmaceuticals - United States

In the U.S., we distribute human pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies. In 2014, 2013, and 2012, three wholesale distributors in the U.S. - AmerisourceBergen Corporation, McKesson Corporation, and Cardinal Health, Inc. - each accounted for between 8 percent and 19 percent of our consolidated total revenue. No other distributor accounted for more than 10 percent of consolidated total revenue in any of those years.

We promote our major human pharmaceutical products in the U.S. through sales representatives who call upon physicians and other health care professionals. We 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 U.S., and we maintain websites with information about our major products. 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.

We maintain special business groups to service wholesalers, pharmacy benefit managers, managed care organizations (MCOs), government and long-term care institutions, hospitals, and certain retail pharmacies. We enter into arrangements with these organizations providing for discounts or rebates on our products.

Human Pharmaceuticals - Outside the United States

Outside the U.S., we promote our human pharmaceutical products primarily through sales representatives. While the products marketed vary from country to country, endocrinology products constitute the largest single group in total revenue. Distribution patterns vary from country to country. In most countries in which we operate, we maintain our own sales organizations, but in some smaller countries we market our products through independent distributors.

Human Pharmaceutical Marketing Collaborations

Certain of our human pharmaceutical products are marketed in arrangements with other pharmaceutical companies, including the following:

Animal Health Products

Our Elanco animal health business unit employs field salespeople throughout the U.S. and has an extensive sales force outside the U.S. Elanco sells its products primarily to wholesale distributors. Elanco promotes its products primarily to producers and veterinarians for food animal products and to veterinarians for companion animal products. Elanco also advertises certain companion animal products directly to pet owners.

Competition

Our human pharmaceutical products compete globally with products of many other companies in highly competitive markets. Our animal health products compete globally with products of animal health care companies as well as pharmaceutical, chemical, and other companies that operate animal health businesses.

Important competitive factors for both human pharmaceutical and animal health products include effectiveness, safety, and ease of use; price and demonstrated cost-effectiveness; marketing effectiveness; and research and development of new products, processes, and uses. Most new products that we introduce must compete with other branded or generic products already on the market or products that are later developed by competitors. If competitors introduce new products or delivery systems with therapeutic or cost advantages, our products can be subject to decreased sales, progressive price reductions, or both.

We believe our long-term competitive success depends upon discovering and developing (either alone or in collaboration with others) or acquiring innovative, cost-effective human pharmaceutical and animal health products that provide improved outcomes and deliver value to payers, 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.

Generic Pharmaceuticals

One of the biggest competitive challenges we face is from generic pharmaceuticals. In the U.S. and the EU, the regulatory approval process for human pharmaceuticals (other than biological products (biologics)) exempts generics from costly and time-consuming clinical trials to demonstrate their safety and efficacy, allowing generic manufacturers to rely on the safety and efficacy of the innovator product. Therefore, generic manufacturers generally Invest far less than we do in research and development and can price their products much lower than our branded products. Accordingly, when a branded non-biologic human pharmaceutical loses its market exclusivity, it normally faces intense price competition from generic forms of the product. Public and private payers typically encourage the use of generics as alternatives to brand-name drugs in their healthcare programs. Laws in the U.S. generally allow, and in many cases require, pharmacists to substitute generic drugs that have been rated under government procedures to be essentially equivalent to a brand-name drug. Where substitution is mandatory, it must be made unless the prescribing physician expressly forbids it. In many countries outside the U.S., intellectual property protection is weak and we must compete with generic or counterfeit versions of our products. Many of our animal health products also compete with generics.

Biosimilars

Several of our current products, including Cyramza, Erbitux, and ReoPro, and many of the new molecular entities (NMEs) in our research pipeline are biologics. Competition for Lilly's biologics may be affected by the approval of follow-on biologics, also known as biosimilars. A biosimilar is a biologic for which marketing approval is granted based on less than a full safety and efficacy package due to the physical/structural similarity of the biosimilar to an already-approved biologic as well as reliance on the finding of safety and efficacy of the already-approved product. Globally, governments have or are developing regulatory pathways to approve biosimilars as alternatives to innovator-developed biologics, but the patent for the existing, branded product must expire in a given market before biosimilars may enter that market. The extent to which a biosimilar, once approved, will be substituted for the innovator biologic in a way that is similar to traditional generic substitution for non-biologic products, is not yet entirely clear, and will depend on a number of regulatory and marketplace factors that are still developing.

Biosimilars may present both competitive challenges and opportunities. For example, with our partner Boehringer Ingelheim we have developed a new Insulin glargine product which has the same amino acid sequence as the currently marketed product. Our product has received marketing approval in the EU and tentative approval in the U.S. We intend to begin European launches later in 2015 following expiration of the compound patent for Insulin glargine.

Managed Care Organizations

The growth of MCOs in the U.S. is also a major factor in the competitive marketplace for human pharmaceuticals. lt is estimated that approximately two-thirds of the U.S. population now participates in some version of managed care. MCOs can include medical insurance companies, medical plan administrators, health-maintenance organizations, Medicare Part D prescription drug plans, alliances of hospitals and physicians, and other physician organizations. MCOs have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance.

MCOs typically maintain formularies specifying which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their branded products included. Where possible, companies compete for inclusion based upon unique features of their products, such as greater efficacy, fewer side effects, or greater patient ease of use. A lower overall cost of therapy is also an important factor. Price is becoming an increasingly important factor in MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that multiple branded products are therapeutically comparable. As noted above, generic drugs typically have lower costs than brand-name drugs. MCOs often favor generics for this reason.

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 U.S. and many other countries relating to products, product uses, formulations, and manufacturing processes. In addition, as discussed below, for some products we have additional effective intellectual property protection in the form of data protection under pharmaceutical regulatory laws.

The patent protection anticipated to be of most relevance to human pharmaceuticals is provided by national patents claiming the active ingredient (the compound patent), particularly those in major markets such as the U.S., various European countries, and Japan. These patents may be issued based upon the filing of international patent applications, usually filed under the Patent Cooperation Treaty (PCT). Patent applications covering the compounds are generally filed during the Discovery Research Phase of the drug discovery process, which is described in the "Research and Development" section of "Business." In general, national patents in each relevant country are available for a period of 20 years from the filing date of the PCT application, which is often years prior to the launch of a commercial product. Further patent term adjustments and restorations may extend the original patent term:

Loss of effective patent protection for human pharmaceuticals typically results in the loss of effective market exclusivity for the product, which can result in severe and rapid decline in sales of the product. However, in some cases the innovator company may be protected from approval of generic or other follow-on versions of a new medicine beyond the expiration of the compound patent through manufacturing trade secrets, later-expiring patents on methods of use or formulations, or data protection that may be available under pharmaceutical regulatory laws. The primary forms of data protection are as follows:

Outside the major markets, the adequacy and effectiveness of intellectual property protection for human pharmaceuticals varies widely. Under the Trade-Related Aspects of Intellectual Property Agreement (TRIPs) administered by the World Trade Organization, more than 140 countries have agreed to provide non-discriminatory protection for most pharmaceutical inventions and to assure that adequate and effective rights are available to patent owners. Because of TRIPs transition provisions, dispute resolution mechanisms, substantive limitations, and ineffectual Implementation, it is difficult to assess when and how much we will benefit commercially from this protection.

Certain of our Elanco animal health products are covered by patents or other forms of intellectual property protection. Historically, upon loss of effective market exclusivity for our animal health products, we have not generally experienced the rapid and severe declines in revenues that are common in the human pharmaceutical segment.

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.

Our Intellectual Property Portfolio

We consider intellectual property protection for certain products, processes, and uses - particularly those products discussed below - to be important to our operations. For many of our products, in addition to the compound patent, we hold other patents an manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the compound patent.

The most relevant U.S. patent protection or data protection for our larger or recently launched patent-protected marketed products is as follows:

Outside the U.S., important patent protection or data protection includes:

Necitumumab, our NME that has been submitted for regulatory review, is protected by a compound patent (2025 not including possible patent extension), and upon U.S. approval, would be protected for 12 years by biologics data package protection. See "Management's Discussion and Analysis - Late-Stage Pipeline", for more information about this molecule.

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 major products were discovered in our own laboratories and are not subject to significant license agreements. Two of our largest products, Cialis and Alimta, are subject to patent assignments or licenses granted to us by others.

Patent Challenges

In the U.S., the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, made a complex set of changes to both patent and new-drug-approval laws for human pharmaceuticals. Before the Hatch-Waxman Act, no drug could be approved without providing the FDA complete safety and efficacy studies, i.e., a complete New Drug Application (NDA). The Hatch-Waxman Act authorizes the FDA to approve generic versions of innovative human 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 drug - not 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(s) of a Paragraph IV certification may be entitled to a 180-day period of market exclusivity over all other generic manufacturers.

Generic manufacturers use Paragraph IV certifications extensively to challenge patents on innovative human pharmaceuticals. 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. For example, we are currently in litigation with numerous generic manufacturers arising from their Paragraph IV certifications challenging the vitamin dosage regimen patent for Alimta. For more information on Hatch-Waxman litigation involving the company, see "Financial Statements and Supplementary Data - Note 15, Contingencies."

Outside the U.S., 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 U.S., and we expect this trend to continue. For more information on administrative challenges and litigation involving our Alimta vitamin dosage regimen patents in Europe and Japan, see "Financial Statements and Supplementary Data - Note 15, Contingencies."

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 human pharmaceutical and animal health products are extensively regulated in all major world markets. We 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. Animal health product regulations address the administration of the product in or on the animal, and in the case of food animal products, the Impact on humans who consume the food as well as the Impact on the environment at the production site. 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 effort, expense, and 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 human pharmaceutical products and certain animal health products in the U.S. and administers requirements covering the testing, safety, effectiveness, manufacturing, quality control, distribution, labeling, marketing, advertising, dissemination of information, and post-marketing surveillance of those products. The U.S. Department of Agriculture and the U.S. Environmental Protection Agency also regulate some animal health products.

The FDA extensively regulates all aspects of manufacturing quality for human pharmaceuticals under its current Good Manufacturing Practices (cGMP) regulations. Outside the U.S., our products and operations are subject to similar regulatory requirements, notably by the European Medicines Agency in the EU and the Ministry of Health, Labor and Welfare in Japan. Specific regulatory requirements vary from country to country. 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 compliance with cGMP and similar regulations. However, in the event we fall to adhere to these requirements in the future, we could be subject to interruptions in production, fines and penalties, and delays in new product approvals. Certain of our products are manufactured by third parties, and their failure to comply with these regulations could adversely affect us through failure to supply product to us or delays in new product approvals.

The marketing, promotional, and pricing practices of human pharmaceutical manufacturers, as well as the manner in which manufacturers interact with purchasers and prescribers, are subject to various other U.S. 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 (DOJ), 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 DOJ, 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. 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.

The U.S. Foreign Corrupt Practices Act of 1977 (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 human pharmaceuticals are employed by the government and the purchasers of human pharmaceuticals are government entities; therefore, our interactions with these prescribers and purchasers are subject to regulation under the FCPA.

In addition to the U.S. application and enforcement of the FCPA, the various jurisdictions in which we operate and supply our products have laws and regulations aimed at preventing and penalizing corrupt and anticompetitive behavior. In recent years, several jurisdictions, including China, Brazil, and the United Kingdom, have enhanced their laws and regulations in this area, increased their enforcement activities, and/or increased the level of cross-border coordination and information sharing.

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 U.S. federal and other health care programs. lt is possible that an adverse outcome in future actions could have a material adverse Impact on our consolidated results of operations, liquidity, and financial position.

Regulations Affecting Human Pharmaceutical Pricing, Reimbursement, and Access

In the U.S., we are required to provide rebates to the federal government and respective state governments on their purchases of our human pharmaceuticals under state Medicaid and Medicaid Managed Care programs (minimum of 23.1 percent plus adjustments for price increases over time) and rebates to private payers who cover patients in certain types of health care facilities that serve low-income and uninsured patients (known as 340B facilities). No rebates are required at this time in the Medicare Part B (physician and hospital outpatient) program where reimbursement is set on an "average selling price plus 4.3 percent" formula. Drug manufacturers are required to 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). Additionally, an annual fee is imposed on pharmaceutical manufacturers and importers that sell branded prescription drugs to specified government programs.

Rebates are also negotiated in the private sector. We give rebates to private payers who provide prescription drug benefits to seniors covered by Medicare and to private payers who provide prescription drug benefits to their customers. These rebates are affected by the introduction of competitive products and generics in the same class.

In most international markets, we operate in an environment of government-mandated cost-containment programs, which may include price controls, international reference pricing (to other countries' prices), discounts and rebates, therapeutic reference pricing (to other, often generic, pharmaceutical choices), restrictions on physician prescription levels, and mandatory generic substitution.

Globally, public and private payers are increasingly restricting access to human pharmaceuticals based on the payers' assessments of comparative effectiveness and value. The U.S. has established the Patient Centered Outcomes Research Institute (PCORI), a federally-funded, private, non-profit corporation empowered to fund and disseminate comparative effectiveness research (CER) and build infrastructure for improved outcomes analysis. While PCORI has no authority to impose formulary changes directly in government-funded health programs, they are expected to drive an increase in CER studies which payers can use for formulary decisions and/or medical societies can use to inform medical guidelines development. Many countries outside of the U.S. use formal health technology assessment processes to determine formulary placement and purchase price.

We cannot predict the extent to which our business may be affected by these or other potential future legislative or regulatory developments. However, in general we expect that state, federal, and international legislative and regulatory developments could have further negative effects on pricing and reimbursement for our human pharmaceutical products.

Research and Development

Our commitment to research and development dates back more than 100 years. We Invest heavily in research and development because we believe it is critical to our long-term competitiveness. At the end of 2014, we employed approximately 8,145 people in human 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 $4.73 billion in 2014, $5.53 billion in 2013, and $5.28 billion in 2012.

Our internal human pharmaceutical research focuses primarily on our core areas of cancer, diabetes, and neurodegeneration, and two emerging areas, immunology and pain. We are investing in molecules with multi-pathway pharmacological efficacy (e.g., dual-action bi-specific antibodies and antibody-drug conjugates) to expand the potential of our therapeutic portfolio. We have a strong biotechnology research program, with approximately half of our clinical-stage pipeline currently consisting of biologics. In addition to discovering and developing NMEs, 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 medicines - or potentially those of other companies - will be the best treatment option.

To supplement our internal efforts, we collaborate with others, including academic institutions and research-based 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 human pharmaceutical products. We actively seek out external Investments in research and technologies that hold the promise to complement and strengthen our own efforts. These Investments can take many forms, including licensing arrangements, co-development and co-marketing agreements, co-promotion arrangements, joint ventures, and acquisitions.

Our Elanco animal health innovation strategy is focused on identifying and developing promising technologies and potential products from internal and external sources to meet unmet veterinary needs. Our animal health scientists also leverage discoveries from our human health laboratories to develop products to enhance the health and wellbeing of livestock and pets.

Human pharmaceutical development is time-consuming, expensive, and risky. On average, only one out of many thousands of molecules discovered by researchers ultimately becomes an approved medicine. The process from discovery to regulatory approval can take 12 to 15 years or longer. Drug candidates can fall at any stage of the process, and even late-stage drug candidates sometimes fall to receive regulatory approval or achieve commercial success. After approval and launch of a product, we expend considerable resources on post-marketing surveillance and additional clinical studies to collect and understand the benefits and potential risks of medicines as they are used as therapeutics. The following describes in more detail the research and development process for human pharmaceutical products:

Phases of New Drug Development

We believe our Investments in research, both internally and in collaboration with others, have been rewarded by the large number of new molecules and new indications for existing molecules that we have in all stages of development. We currently have approximately 55 drug candidates across all stages of human testing and a larger number of projects in preclinical development. Among our new investigational molecules currently in the product phase of development or awaiting regulatory approval or launch are potential therapies for diabetes, various cancers, Alzheimer's disease, pain, high-risk vascular disease, rheumatoid arthritis, psoriasis, and psoriatic arthritis. We are studying many other drug candidates in the earlier stages of development, including molecules targeting various cancers, diabetes, neurodegeneration, pain, immunologic diseases, anemia, cardiovascular disease, musculoskeletal disorders, and renal diseases. We are also developing new uses, formulations, or delivery methods for many of these molecules as well as several currently marketed products. See "Management's Discussion and Analysis - Late-Stage Pipeline," for more information on certain of our product candidates.

Raw Materials and Product Supply

Most of the principal materials we use in our manufacturing operations are available from more than one source. However, we obtain certain raw materials principally from only one source. In the event one of these suppliers was unable to provide the materials or product, we generally seek to maintain sufficient inventory to supply the market until an alternative source of supply can be implemented. However, in the event of an extended failure of a supplier, it is possible that we could experience an Interruption in supply until we established new sources or, in some cases, implemented alternative processes.

The majority of our revenue comes from products produced in our own facilities. Our principal active ingredient manufacturing occurs at four owned sites in the U.S. as well as owned sites in Ireland, Puerto Rico, and the United Kingdom. Finishing operations, including formulation, filling, assembling, delivery device manufacturing, and packaging, take place at a number of sites throughout the world. We utilize third parties for certain active ingredient manufacturing and finishing operations.

We manage our supply chain (including our own facilities, contracted arrangements, and inventory) in a way that should allow us to meet all expected product demand while maintaining flexibility to reallocate manufacturing capacity to improve efficiency and respond to changes in supply and demand. To maintain a stable supply of our products, we take a variety of actions including a company-wide, comprehensive quality system, inventory management, and back-up sites.

However, human pharmaceutical and animal health production processes are complex, highly regulated, and vary widely from product to product. Shifting or adding manufacturing capacity can be a very lengthy process requiring significant capital expenditures, process modifications, and regulatory approvals. Accordingly, if we were to experience extended plant shutdowns at one of our own facilities, extended failure of a contract supplier, or extraordinary unplanned increases in demand, we could experience an Interruption in supply of certain products or product shortages until production could be resumed or expanded.

Quality Assurance

Our success depends in great measure upon customer confidence in the quality of our products and in the integrity of the data that support their safety and effectiveness. Product quality arises from a total commitment to quality in all parts of our operations, including research and development, purchasing, facilities planning, manufacturing, distribution, and dissemination of information about our medicines.

Quality of production processes involves strict control of ingredients, equipment, facilities, manufacturing methods, packaging materials, and labeling. We perform tests at various stages of production processes and on the final product to assure that the product meets all regulatory requirements and Lilly standards. These tests may involve chemical and physical chemical analyses, microbiological testing, testing in animals, or a combination. Additional assurance of quality is provided by a corporate quality-assurance group that audits and monitors all aspects of quality related to human pharmaceutical and animal health manufacturing procedures and systems in the parent company, subsidiaries and affiliates, and third-party suppliers.

Risk Factors

In addition to the other information contained in this Annual Report, the following risk factors should be considered carefully in evaluating our company. lt is possible that our business, financial condition, liquidity, or results of operations could be materially adversely affected by any of these risks.

Management's Discussion and Analysis of Results of Operations and Financial Condition

RESULTS OF OPERATIONS

Executive Overview

This section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented an a diluted basis.

Financial Results

Worldwide total revenue decreased 15 percent to $19.62 billion in 2014, primarily as a result of the loss of United States (U.S.) patent exclusivity for Cymbalta® in December 2013 and to a lesser extent Evista ^® in March 2014, partially offset by volume growth in several other products. In 2014, net income decreased 49 percent to $2.39 billion and EPS decreased 48 percent to $2.23, compared to 2013 net income and EPS of $4.68 billion and $4.32, respectively. The decreases were due to lower gross margin, higher asset impairment, restructuring, and other special charges and decreased other income, partially offset by lower marketing, selling, and administrative expenses, research and development expenses, and income tax expense.

The following highlighted items affect comparisons of our 2014 and 2013 financial results:

2014

Acquired In-Process Research & Development (IPR&D) (Notes 3 and 4 to the consolidated financial statements)

Collaborations (Note 4 to the consolidated financial statements)

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

Other

2013

Acquired IPR&D (Note 3 to the consolidated financial statements)

Collaborations (Note 4 to the consolidated financial statements)

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

Late-Stage Pipeline

Our long-term success depends to a great extent on our ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on molecules currently in development by other biotechnology or pharmaceutical companies. We currently have approximately 55 potential new drugs in human testing or under regulatory review, and a larger number of projects in preclinical research.

The following new molecular entities (NMEs) have been approved by regulatory authorities in the U.S., Europe, or Japan for use in the disease described. The quarter the NME initially was approved in the U.S., Europe, or Japan for any indication is shown in parentheses:

The following NME has been submitted for regulatory review for potential use in the disease described. The quarter the NME initially was submitted for any indication is shown in parentheses:

The following NMEs are currently in Phase III clinical trial testing for potential use in the diseases described. The quarter in which each NME initially entered Phase III for any indication is shown in parentheses:

^* Biologic molecule subject to the U.S. Biologics Price Competition and Innovation Act

The following table reflects the status of each NME within our late-stage pipeline including developments since January 1, 2014:

There are many difficulties and uncertainties inherent in pharmaceutical research and development (R&D) and the introduction of new products. A high rate of failure is inherent in new drug discovery and development. The process to bring a drug from the discovery phase to regulatory approval can take 12 to 15 years or longer and cost more than $1 billion. Failure can occur at any point in the process, including late in the process after substantial Investment. As a result, most research programs will not generate financial returns. New product candidates that appear promising in development may fall to reach the market or may have only limited commercial success. Delays and uncertainties in the regulatory approval processes in the U.S. and in other countries can result in delays in product launches and lost market opportunities. Consequently, it is very difficult to predict which products will ultimately be approved.

We manage R&D spending across our portfolio of molecules, and a delay in, or termination of, any one project will not necessarily cause a significant change in our total R&D spending. Due to the risks and uncertainties involved in the R&D process, we cannot reliably estimate the nature, timing, completion dates, and costs of the efforts necessary to complete the development of our R&D projects, nor can we reliably estimate the future potential revenue that will be generated from a successful R&D project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated R&D expense. While we do accumulate certain R&D costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms. Therefore, we do not have sufficiently reliable data to report on total R&D costs by project, by preclinical versus clinical spend, or by therapeutic category.

Other Matters

Subsequent Event - Novartis Animal Health Acquisition

On January 1, 2015, we completed our acquisition of Novartis Animal Health (Novartis AH) in an all-cash transaction for approximately $5.4 billion. Novartis AH operates in approximately 40 countries. We acquired Novartis AH's nine manufacturing sites, six dedicated research and development facilities, a global commercial infrastructure with a portfolio of approximately 600 products, a pipeline with more than 40 projects in development, and more than 3,000 employees. The combined organization is expected to increase our animal health product portfolio, expand our global commercial presence, and augment our animal health manufacturing and research and development. In particular, it is expected to provide Elanco with a greater commercial presence in the companion animal and swine markets, expand Elanco's presence in equine and vaccines areas, and create an entry into the aquaculture market. As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of Novartis AH, we divested certain companion animal assets in the U.S. related to the Sentinel ^® canine parasiticide franchise to Virbac Corporation for approximately $410 million. The Novartis AH business we retained generated revenue of approximately $1.1 billion in 2014.

Patent Matters

We depend on patents or other forms of intellectual-property protection for most of our revenues, cash flows, and earnings. The loss of U.S. patent exclusivity for Cymbalta in December 2013 and Evista in March 2014, resulted in the immediate entry of generic competitors and a rapid and severe decline in revenue from the affected products, having a material adverse effect on our consolidated results of operations and cash flows.

We lost our data package protection for Cymbalta in major European countries in 2014 and we anticipate the entry of generic competition in these countries in 2015. We expect that the entry of generic competition for Cymbalta into the markets where it has lost patent protection would cause a rapid and severe decline in revenue, which would have a material adverse effect on our consolidated results of operations and cash flows. We will also lose patent exclusivity in December 2015 for Zyprexa® in Japan.

Additionally, as described in Note 15 to the consolidated financial statements, the Alimta ^® vitamin dosage regimen patent, which provides us with patent protection for Alimta through June 2021 in Japan and major European countries, and through May 2022 in the U.S., has been challenged in each of these jurisdictions. Our compound patent for Alimta will expire in the U.S. in January 2017, and in major European countries and Japan in December 2015. We expect that the entry of generic competition for Alimta into the markets where it has lost patent protection would cause a rapid and severe decline in revenue, which would have a material adverse effect on our consolidated results of operations and cash flows.

The U.S. compound patent for Humalog ^® expired in May 2013. Thus far, the loss of compound patent protection for Humalog has not resulted in a rapid and severe decline in revenue. To date, no biosimilar version of Humalog has been approved in the U.S. or Europe; however, we are aware that other manufacturers have efforts underway to develop biosimilar forms of Humalog, and it is difficult to predict the likelihood, timing, and Impact of biosimilars entering the market.

Foreign Currency Exchange Rates

As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the Japanese yen, and the British pound against the euro. While we manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a substantial Impact, either positive or negative, on our revenue, cost of sales, and operating expenses. In 2014, we saw significant foreign currency rate fluctuations as the U.S. dollar strengthened compared to other foreign currencies, including the euro and the Japanese yen. While there is uncertainty in the future movements in foreign exchange rates, these fluctuations could negatively Impact our future consolidated results of operations.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access

United States

Prices for specialty and brand name pharmaceuticals, congressional investigations into manufacturer's pricing policies, and the federal budget process continue to drive legislative debate. These policy and political issues increase the risk that taxes, fees, rebates or other federal measures may be enacted. As a result, pharmaceutical companies may see either a reduction in revenue or increase in expenses. President Obama's fiscal year 2016 budget includes a number of key health legislative proposals affecting biopharmaceuticals, including a reduction in biologic data exclusivity, modifications to Medicare Parts B and D, and new language that would allow the Department of Health and Human Services to negotiate prices for biologics and drugs on the specialty tier in Part D. Savings projected under these proposals are targeted as a means to fund health care expenditures, such as the Medicare Sustainable Growth Rate, and non-health care expenditures. State and federal health care proposals, including price controls, continue to be debated, and if implemented could negatively affect future consolidated results of operations.

In the U.S. private sector, the growth of Managed Care Organizations (MC0s) is also a major factor in the competitive marketplace for human pharmaceuticals. lt is estimated that approximately two-thirds of the U.S. now participates in some form of managed care. MCO's have been consolidating into fewer, larger entities, thus enhancing their purchasing strength and importance. MCO's typically maintain formularies specifying which drugs are covered under their plans. Exclusion of a drug from a formulary can lead to its sharply reduced usage in the MCO patient population. Consequently, pharmaceutical companies compete aggressively to have their branded products included. Price is becoming an increasingly important factor in MCO formulary decisions, particularly in treatment areas in which the MCO has taken the position that multiple branded products are therapeutically comparable. These downward pricing pressures could negatively Impact future consolidated results of operations.

In 2014, the main coverage expansion provisions of the Affordable Care Act (ACA) took effect through both the launch of state-based exchanges and the expansion of Medicaid. An emerging trend has been the prevalence of benefit designs containing high out-of-pocket costs for patients, particularly for pharmaceuticals. In addition to the coverage expansions, many employers in the commercial market, driven in part by changes resulting from the ACA, continue to evaluate strategies such as private exchanges and wider use of consumer-driven health plans to reduce their healthcare liabilities over time. At the same time, the broader paradigm shift towards quality-based reimbursement and the launch of several value-based purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-world outcomes data and a favorable economic profile.

International

International operations also are generally subject to extensive price and market regulations. Cost-containment measures exist in a number of countries, including additional price controls and mechanisms to limit reimbursement for our products. Such policies are expected to increase in Impact and reach, given the pressures on national and regional health care budgets that come from a growing aging population and ongoing economic challenges. In addition, governments in many emerging markets are becoming increasingly active in expanding health care system offerings. Given the budget challenges of increasing health care coverage for citizens, policies may be proposed that promote generics only and reduce current and future access to human pharmaceutical products.

Tax Matters

We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Changes in the relevant tax laws, regulations, administrative practices, principles, and interpretations could adversely affect our future effective tax rates. The U.S. and a number of other countries are actively considering changes in this regard. For example, the Obama administration proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies, including unremitted earnings of foreign subsidiaries, and other tax proposals under discussion or introduced in the U.S. Congress could change the tax rate and manner in which U.S. companies would be taxed. Additionally, the Organisation for Economic Co-operation and Development launched and continues to advance an initiative to analyze and potentially influence international tax policy in major countries in which we operate. While outcomes of these initiatives are uncertain, changes to key elements of the U.S. or international tax framework could have a material effect an our consolidated operating results and cash flows.

Legal Matters

Information regarding contingencies relating to certain legal proceedings can be found in Note 15 to the consolidated financial statements and is incorporated here by reference.

Operating Results - 2014

Revenue

Our worldwide revenue for 2014 was $19.62 billion, a decline of 15 percent compared with 2013. This decrease was comprised of 13 percent due to volume, 2 percent due to the unfavorable Impact of foreign exchange rates and 1 percent due to lower prices (numbers do not add due to rounding). Total revenue in the U.S. decreased 29 percent, to $9.13 billion, due to lower demand for Cymbalta and Evista following patent expirations, and to a lesser extent, to wholesaler buying patterns. Revenue outside the U.S. increased 3 percent, to $10.48 billion, due to increased volume, partially offset by the unfavorable Impact of foreign exchange rates.

The following table summarizes our revenue activity in 2014 compared with 2013:

¹ U.S. revenue includes revenue in Puerto Rico.
² Collaboration and other revenue consists primarily of royalties for Erbitux ^® and revenue associated with Trajenta ^®.

Sales of Alimta, a treatment for various cancers, increased 2 percent in the U.S., driven by increased volume. Sales outside the U.S. increased 5 percent, driven by increased volume, partially offset by the unfavorable Impact of foreign exchange rates and lower prices.

Sales of Humalog, our injectable human Insulin analog for the treatment of diabetes, increased 7 percent in the U.S., driven by increased demand, partially offset by lower net effective selling prices as a result of payer contracts and greater Medicaid and Medicare utilization, as well as wholesaler buying patterns. Sales outside the U.S. increased 6 percent, driven by increased volume and, to a lesser extent, higher prices, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Cialis, a treatment for erectile dysfunction and benign prostatic hyperplasia, increased 10 percent in the U.S., driven by higher prices, partially offset by wholesaler buying patterns. Sales outside the U.S. increased 3 percent, driven by higher prices and increased volume, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and in the U.S. for the treatment of chronic musculoskeletal pain and the management of fibromyalgia, decreased 89 percent in the U.S. due to the loss of U.S. patent exclusivity in December 2013. Sales outside the U.S. increased 6 percent, driven by increased volume, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Humulin, an injectable human Insulin for the treatment of diabetes, increased 5 percent in the U.S., primarily driven by increased demand, partially offset by wholesaler buying patterns. Sales outside the U.S. increased 8 percent, driven by increased volume, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women, increased 5 percent in the U.S., driven by higher prices, partially offset by decreased volume. Sales outside the U.S. increased 7 percent, driven by increased volume, primarily in Japan, partially offset by the unfavorable Impact of foreign exchange rates, primarily the Japanese yen.

Sales of Zyprexa, a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance, decreased 3 percent in the U.S. Sales outside the U.S. decreased 14 percent, driven by decreased volume, the unfavorable Impact of foreign exchange rates, primarily the Japanese yen, and lower prices. We will lose patent exclusivity for Zyprexa in Japan in December 2015. Zyprexa sales in Japan were approximately $465 million in 2014, compared to approximately $510 million in 2013.

Sales of Strattera, a treatment for attention-deficit hyperactivity disorder, increased 1 percent in the U.S., driven by higher prices, partially offset by decreased volume. Sales outside the U.S. increased 9 percent, driven by increased volume, primarily in Japan, partially offset by the unfavorable Impact of foreign exchange rates, primarily the Japanese yen.

Sales of Effient, a product for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary Intervention, including patients undergoing angioplasty, atherectomy, or stent placement, increased 5 percent in the U.S., driven by higher prices, partially offset by wholesaler buying patterns. Sales outside the U.S. decreased 3 percent, driven by lower volume.

Sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal women and for reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer, decreased 73 percent in the U.S., due to the loss of U.S. patent exclusivity in March 2014. Sales outside the U.S. decreased 24 percent, driven primarily by the expiration of a supply agreement in 2013, and to a lesser extent the unfavorable Impact of foreign exchange rates.

Animal health product sales in the U.S. increased 4 percent, driven by increased volume in food animal products and higher prices, partially offset by decreased volume in companion animal products due to competitive pressure. Sales outside the U.S. increased 16 percent, driven by increased volume in food animal products, due in part to the acquisition of Lohmann SE (Lohmann AH) and, to a lesser extent, higher prices, partially offset by the unfavorable Impact of foreign exchange rates.

Gross Margin, Costs, and Expenses

Gross margin as a percent of total revenue was 74.9 percent in 2014, a decrease of 3.9 percentage points compared with 2013, driven primarily by lower sales of Cymbalta and Evista following U.S. patent expirations.

Research and development expenses decreased 14 percent to $4.73 billion in 2014, driven primarily by lower late-stage clinical development costs. Research and development expenses in 2013 included $97.2 million of milestone payments made to Boehringer Ingelheim following regulatory submissions for empagliflozin.

Marketing, selling, and administrative expenses decreased 7 percent to $6.62 billion in 2014, driven primarily by the reduction in U.S. sales and marketing activities for Cymbalta and Evista, as well as ongoing cost containment efforts, partially offset by an additional $119.0 million charge in 2014 associated with the U.S. Drug Fee, an annual non-tax deductible fee enacted by the Patient Protection and Affordable Care Act that is imposed on us and others engaged in the business of manufacturing or importing branded prescription drugs. The final regulations issued by the IRS in 2014, accelerated the expense recognition criteria for the fee obligation by one year, from the year in which the fee is paid to the year in which the sales used to calculate the fee occur. This change affected all entities conducting covered activities in 2014 and resulted in the need to expense two years of the U.S. Drug Fee in 2014 to account for the fee imposed and paid in 2014 and the fee that will be imposed and paid in 2015.

We recognized acquired IPR&D charges of $200.2 million in 2014 resulting from our collaboration agreements with Adocia, AstraZeneca, and Immunocore Limited in addition to charges associated with the transfer of commercial rights to us, from Boehringer Ingelheim, of the new Insulin glargine product in certain countries where it is not yet approved. There were $57.1 million of acquired IPR&D charges in 2013 related to the acquisition of rights for the CGRP antibody. See Notes 3 and 4 to the consolidated financial statements for additional information.

We recognized asset impairment, restructuring, and other special charges of $468.7 million in 2014. These charges included $225.5 million of severance costs related to ongoing efforts to reduce our cost structure and global workforce and $243.2 million of asset impairment and other special charges consisting primarily of a $180.8 million asset impairment charge related to our decision to close and sell a manufacturing plant located in Puerto Rico. In 2013, we recognized asset impairment, restructuring, and other special charges of $120.6 million. These charges included $30.0 million of asset impairments primarily associated with the closure of a packaging and distribution facility in Germany, and $90.6 million of severance costs to reduce our cost structure and global workforce. See Note 5 to the consolidated financial statements for additional information.

Other - net, (income) expense was income of $340.5 million in 2014, compared with income of $518.9 million in 2013. Other income in 2014 included net gains of $216.4 million on Investments and $92.0 million of income related to the transfer of commercial rights to linagliptin and empagliflozin in certain countries from us to Boehringer Ingelheim. Other income in 2013 was primarily comprised of $495.4 million related to the termination of the exenatide collaboration with Amylin. See Notes 4 and 17 to the consolidated financial statements for additional information.

Our effective tax rate was 20.3 percent in 2014, compared with 20.5 percent in 2013. See Note 13 to the consolidated financial statements for additional information.

Operating Results - 2013

Financial Results

Worldwide total revenue increased 2 percent to $23.11 billion in 2013, driven by growth in several products, including Cialis, Humalog, Trajenta, Alimta, Forteo, and animal health products, partially offset by the continued erosion of Zyprexa sales following the loss of patent exclusivity in the U.S. and most major markets outside Japan. In 2013, net income increased 15 percent to $4.68 billion and EPS increased 18 percent to $4.32, compared to 2012 net income and EPS of $4.09 billion and $3.66, respectively. The increases were due to higher gross margin, lower marketing, selling, and administrative expenses, and, to a lesser extent, a lower effective tax rate, partially offset by higher research and development expenses and lower other income. EPS in 2013 also benefited from a lower number of shares outstanding as a result of our share repurchase programs.

The 2013 highlighted items are summarized in the "Executive Overview" section. The 2012 highlighted items are summarized as follows:

Collaborations (Note 4 to the consolidated financial statements)

Asset Impairment, Restructuring, and Other Special Charges (Note 5 to the consolidated financial statements)

Revenue

Our worldwide revenue for 2013 was $23.11 billion, a 2 percent increase compared with 2012 as an increase of 5 percent due to higher prices was partially offset by a decrease of 2 percent due to the unfavorable Impact of foreign exchange rates and a 1 percent decrease due to lower volume. Total revenue in the U.S. increased 5 percent, to $12.89 billion, due to higher prices, partially offset by volume declines for Cymbalta and Zyprexa due to the loss of patent exclusivity. Revenue outside the U.S. decreased 1 percent, to $10.22 billion, due primarily to the unfavorable Impact of the continued weakness of the Japanese yen and, to a lesser extent, lower prices, partially offset by increased volume.

The following table summarizes our revenue activity in 2013 compared with 2012:

¹ U.S. revenue includes revenue in Puerto Rico.
² Collaboration and other revenue in 2013 consists primarily of royalties for Erbitux and revenue associated with Trajenta. Collaboration and other revenue in 2012 also includes revenue associated with exenatide in the United States.

Sales of Cymbalta increased 1 percent in the U.S., driven by higher prices, largely offset by lower demand due to the loss of U.S. patent exclusivity in December 2013. Sales outside the U.S. increased 4 percent, driven primarily by increased volume, partially offset by lower prices and the unfavorable Impact of foreign exchange rates.

Sales of Alimta increased 8 percent in the U.S., due to higher prices and increased demand. Sales outside the U.S. increased 1 percent, driven by increased volume, partially offset by the unfavorable Impact of foreign exchange rates and lower prices.

Sales of Humalog increased 11 percent in the U.S., driven by higher prices, wholesaler buying patterns, and increased demand. Sales outside the U.S. increased 6 percent, driven by increased volume, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Cialis increased 21 percent in the U.S., driven by higher prices. Sales outside the U.S. increased 6 percent, driven by higher prices and increased volume, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Humulin increased 14 percent in the U.S., driven by higher prices, partially offset by decreased demand. Sales outside the U.S. decreased 1 percent, driven by the unfavorable Impact of foreign exchange rates, partially offset by increased volume.

Sales of Forteo increased 5 percent in the U.S., driven primarily by higher prices. Sales outside the U.S. increased 11 percent, due to increased volume, primarily in Japan, partially offset by the unfavorable Impact of foreign exchange rates.

Sales of Zyprexa decreased 66 percent in the U.S. due to continued erosion following patent expiration in late 2011. Sales outside the U.S. decreased 20 percent, driven by the unfavorable effect of foreign exchange rates, lower volume in markets outside of Japan, and lower prices.

Sales of Evista increased 10 percent in the U.S., driven by higher prices, partially offset by decreased demand. Sales outside the U.S. decreased 10 percent, driven by the unfavorable Impact of foreign exchange rates and lower prices, partially offset by increased volume in Japan.

Sales of Strattera increased 16 percent in the U.S., driven primarily by higher prices. Sales outside the U.S. increased 11 percent, driven primarily by increased volume in Japan, partially offset by lower prices and the unfavorable Impact of foreign exchange rates.

Sales of Effient increased 11 percent in the U.S., driven primarily by higher prices. Sales outside the U.S. increased 12 percent, driven primarily by increased volume.

Animal health product sales in the U.S. increased 6 percent driven primarily by increased volume for Trifexis® and, to a lesser extent, higher prices. Sales outside the U.S. increased 6 percent, driven by increased volume and, to a lesser extent, higher prices, partially offset by the unfavorable Impact of foreign exchange rates.

Gross Margin, Costs, and Expenses

Gross margin as a percent of total revenue remained at 78.8 percent in 2013 as higher prices were offset by the adverse Impact of foreign exchange rates an international inventories sold, which significantly decreased the cost of sales in 2012.

Marketing, selling, and administrative expenses decreased 5 percent to $7.13 billion in 2013, driven primarily by lower selling and marketing expenses resulting from ongoing cost-containment efforts, including a reduction in U.S. sales and marketing activities in anticipation of the loss of patent exclusivity for Cymbalta and Evista, as well as the Impact of foreign exchange rates.

Research and development expenses increased 5 percent to $5.53 billion in 2013, due to higher research and clinical development expenses, including $97.2 million of milestone payments made to Boehringer Ingelheim following regulatory submissions for empagliflozin.

We recognized an acquired IPR&D charge of $57.1 million in 2013 resulting from our acquisition of a CGRP antibody. There were no acquired IPR&D charges in 2012. See Note 3 to the consolidated financial statements for additional information.

We recognized asset impairment, restructuring, and other special charges of $120.6 million in 2013. These charges included $30.0 million of asset impairments primarily associated with the anticipated closure of a packaging and distribution facility in Germany, and $90.6 million of severance costs to reduce our cost structure and global workforce. In 2012, we recognized asset impairment, restructuring, and other special charges of $281.1 million. These charges included $122.6 million related to an intangible asset impairment for liprotamase, $74.5 million related to restructuring to reduce our cost structure and global workforce, $64.0 million related to the asset impairment of a delivery device platform, and $20.0 million related to the withdrawal of Xigris. See Note 5 to the consolidated financial statements for additional information.

Other - net, (income) expense was income of $518.9 million in 2013, compared with income of $674.0 million in 2012. The decrease was driven primarily by lower income related to the termination of the exenatide collaboration with Amylin of $495.4 million in 2013 compared with $787.8 million in 2012, partially offset by milestone payments received from Boehringer Ingelheim for regulatory submissions in the U.S., Europe, and Japan. See Notes 4 and 17 to the consolidated financial statements for additional information.

Our effective tax rate was 20.5 percent in 2013, compared with 24.4 percent in 2012. The 2012 effective tax rate reflected the expiration of the R&D tax credit at the end of 2011 and the tax Impact of the payment received from Amylin, partially offset by the tax benefit related to the intangible asset impairment for liprotamase. The decrease in the 2013 effective tax rate reflects the reinstatement of the R&D tax credit in the U.S. effective January 1, 2013 as well as the one-time Impact of the reinstatement of the R&D tax credit for 2012 that was recorded in the first quarter of 2013. See Note 13 to the consolidated financial statements for additional information.

FINANCIAL CONDITION

As of December 31, 2014, cash and cash equivalents remained essentially unchanged at $3.87 billion compared with $3.83 billion at December 31, 2013. Significant sources of cash included cash flows from operations of $4.37 billion, net proceeds from Investment transactions of $3.62 billion, and net proceeds from the issuance of short- and long-term debt of $2.64 billion. Significant uses of cash included dividends paid of $2.10 billion, purchases of property and equipment of $1.16 billion, share repurchases of $800.0 million, and the acquisition of Lohmann AH which amounted to $551.4 million. We also held $5.41 billion of cash in escrow associated with the pending close of the Novartis AH acquisition which was reflected as restricted cash as of December 31, 2014. In January 2015, we completed our acquisition of Novartis AH for approximately $5.4 billion in an all-cash transaction. See "Executive Overview - Other Matters" for additional details.

In addition to our cash and cash equivalents, we held total Investments of $5.52 billion and $9.19 billion as of December 31, 2014 and December 31, 2013, respectively. See Note 7 to the consolidated financial statements for additional details.

As of December 31, 2014, total debt was $8.06 billion, an increase of $2.84 billion compared with $5.21 billion at December 31, 2013. The increase is due primarily to the increase in short-term commercial paper borrowings of $2.68 billion used primarily to finance the acquisition of Novartis AH. At December 31, 2014, we had a total of $3.31 billion of unused committed bank credit facilities, $3.20 billion of which is available to support our commercial paper program. Subject to market conditions, we intend to replace the majority of our commercial paper borrowings with fixed-rate long term notes in the first half of 2015. See Note 10 to the consolidated financial statements for additional details. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowing needs.

For the 130th consecutive year, we distributed dividends to our shareholders. Dividends of $1.96 per share were paid in both 2014 and 2013. In the fourth quarter of 2014, effective for the dividend to be paid in the first quarter of 2015, the quarterly dividend was increased to $0.50 per share, resulting in an indicated annual rate for 2015 of $2.00 per share.

Capital expenditures of $1.16 billion during 2014 were $150.5 million more than in 2013. We expect 2015 capital expenditures to be approximately $1.3 billion.

In 2014, we repurchased $800.0 million of shares under the $5.00 billion share repurchase program previously announced in October 2013.

See "Executive Overview - Other Matters" for information regarding recent and upcoming losses of patent protection for Cymbalta (U.S. and Europe), Evista (U.S.), Alimta (U.S., Europe, and Japan), and Zyprexa (Japan).

At December 31, 2014, we had an aggregate of $8.54 billion of cash and Investments at our foreign subsidiaries. A significant portion of this amount would be subject to tax payments if such cash and Investments were repatriated to the United States. We record U.S. deferred tax liabilities for certain unremitted earnings, but when foreign earnings are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. income taxes is provided. We believe cash provided by operating activities in the U.S. and planned repatriations of foreign earnings for which tax has been provided should be sufficient to fund our domestic operating needs, dividends paid to shareholders, share repurchases, and capital expenditures. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and "Risk Factors," may affect our operating results and cash generated from operations.

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 health care legislation; and various international government funding levels.

In the normal course of business, our operations are exposed to fluctuations in interest rates and currency values. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial Instruments. The objective of controlling these risks is to limit the Impact an earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt positions and may enter into interest rate derivatives to help maintain that balance. Based on our overall interest rate exposure at December 31, 2014 and 2013, including derivatives and other interest rate risk-sensitive Instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the Instruments as of December 31, 2014 and 2013, respectively, would not have a material Impact on earnings, cash flows, or fair values of interest rate risk-sensitive Instruments over a one-year period.

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Chinese yuan, and the Japanese yen, and the British pound against the euro. We face foreign currency exchange exposures primarily when we enter into transactions, generally on an intercompany basis, denominated in currencies other than the functional currency of the entity. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We may enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). Our policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the Impact of currency fluctuations on the existing assets and liabilities. We analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. A hypothetical 10 percent change in exchange rates (primarily against the U.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts as of December 31, 2014 and 2013, would not have a material Impact on earnings, cash flows, or financial position over a one-year period. This sensitivity analysis does not consider the Impact that hypothetical changes in exchange rates would have on the underlying foreign currency denominated transactions.

Off-Balance Sheet Arrangements and Contractual Obligations

We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not included in the table of contractual obligations below.

Individually, these arrangements are not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements would happen to be reached in the same reporting period, the aggregate charge to expense could be material to the results of operations in that period. See Note 4 to the consolidated financial statements for additional details. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound successfully achieves milestone objectives. We also note that, from a business perspective, we view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.

Our current noncancelable contractual obligations that will require future cash payments are as follows (in millions):

¹ Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. We used the interest rate forward curve at December 31, 2014, to compute the amount of the contractual Obligation for interest on the variable rate debt instruments and swaps.
² We have included the following:

³ We have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and deferred compensation liabilities. We excluded long-term income taxes payable of $998.5 million, because we cannot reasonably estimate the timing of future cash outflows associated with those liabilities.

The contractual obligations table is current as of December 31, 2014. We expect the amount of these obligations to change materially over time as new contracts are initiated and existing contracts are completed, terminated, or modified.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

In preparing our financial statements in accordance with accounting principles generally accepted in the U.S., we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this report. Our most critical accounting estimates have been discussed with our audit committee and are described below.

Revenue Recognition and Sales Return, Rebate, and Discount Accruals

We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. Provisions for returns, rebates, and discounts are established in the same period the related sales are recorded.

We regularly review the supply levels of our significant products sold to major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements does not provide an incentive for speculative wholesaler buying and provides us with data on inventory levels at our wholesalers. When we believe wholesaler purchasing patterns have caused an unusual increase or decrease in the sales of a major product compared with underlying demand, we disclose this in our product sales discussion if we believe the amount is material to the product sales trend; however, we are not always able to accurately quantify the amount of stocking or destocking in the retail channel. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.

When sales occur, we estimate a reserve for future product returns related to those sales. This estimate is based on several factors, including: historical return rates, expiration date by product (generally, 24 to 36 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, among others, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows U.S. pharmaceutical customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. Adjustments to the returns reserve may be required in the future based on revised estimates to our assumptions, which would have an Impact on our consolidated results of operations. We record the return amounts as a deduction to arrive at our net product sales. Once the product is returned, it is destroyed. Actual product returns have been less than 2 percent of our net sales over the past three years and have not fluctuated significantly as a percentage of sales. We expect the ratio of actual product returns as a percentage of net sales to increase in future periods as we begin to experience elevated return levels for Cymbalta following the recent loss of patent exclusivity in the U.S. market.

We establish sales rebate and discount accruals in the same period as the related sales. The rebate and discount amounts are recorded as a deduction to arrive at our net product sales. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include Medicaid, managed care, Medicare, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We base these accruals primarily upon our historical rebate and discount payments made to our customer segment groups and the provisions of current rebate and discount contracts.

The largest of our sales rebate and discount amounts are rebates associated with sales covered by Medicaid and managed care contracts. In determining the appropriate accrual amount, we consider our historical Medicaid and managed care rebate payments by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries), an evaluation of the current Medicaid and managed care contracts, the percentage of our products that are sold via Medicaid and managed care contracts, and our product pricing. Although we accrue a liability for Medicaid and managed care rebates at the time we record the sale (when the product is shipped), the Medicaid and managed care rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.

Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. A best estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale. If our estimates are not reflective of the actual pharmaceutical costs incurred by the government, we adjust our rebate reserves.

We believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our global sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As of December 31, 2014, a 5 percent change in our global sales return, rebate, and discount liability would lead to an approximate $137 million effect on our income before income taxes.

The portion of our global sales return, rebate, and discount liability resulting from sales of our products in the U.S. was 88 percent as of December 31, 2014 and 2013.

The following represents a roll-forward of our most significant U.S. sales return, rebate, and discount liability balances, including Medicaid and managed care (in millions):

¹ Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 1.5 percent of consolidated net sales for each of the years presented.

Product Litigation Liabilities and Other Contingencies

Product litigation liabilities and other contingencies are, by their nature, uncertain and are based upon complex judgments and probabilities. The factors we consider in developing our product litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past litigation cases, the nature of the product and the current assessment of the science subject to the litigation, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred, but not filed, to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. We accrue legal defense costs expected to be incurred in connection with significant product liability contingencies when both probable and reasonably estimable.

We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products. In addition to insurance coverage, we also consider any third-party indemnification we have, including the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.

The litigation accruals and environmental liabilities and the related estimated insurance recoverables have been reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets.

Pension and Retiree Medical Plan Assumptions

Pension benefit costs include assumptions for the discount rate, retirement age, and expected return on plan assets. Retiree medical plan costs include assumptions for the discount rate, retirement age, expected return on plan assets, and health-care-cost trend rates. These assumptions have a significant effect on the amounts reported. In addition to the analysis below, see Note 14 to the consolidated financial statements for additional information regarding our retirement benefits.

Annually, we evaluate the discount rate and the expected return on plan assets in our defined benefit pension and retiree health benefit plans. We use an actuarially determined, plan-specific yield curve of high quality, fixed income debt Instruments to determine the discount rates. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions, asset returns and asset allocations (approximately 85 percent of which are growth Investments); and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the discount rates, expected return on plan assets, and health-care-cost trend rates of other companies, where applicable. In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages.

If the health-care-cost trend rates were to increase by one percentage point, the aggregate of the service cost and interest cost components of the 2014 annual expense would increase by $7.8 million. A one-percentage-point decrease would decrease the aggregate of the 2014 service cost and interest cost by $6.6 million. If the 2014 discount rate for the U.S. defined benefit pension and retiree health benefit plans (U.S. plans) were to change by a quarter percentage point, income before income taxes would change by $35.4 million. If the 2014 expected return on plan assets for U.S. plans were to change by a quarter percentage point, income before income taxes would change by $21.7 million. If our assumption regarding the 2014 expected age of future retirees for U.S. plans were adjusted by one year, our income before income taxes would be affected by $49.9 million. The U.S. plans, including Puerto Rico, represent approximately 80 percent of both the total projected benefit obligation and total plan assets at December 31, 2014.

Impairment of Indefinite-Lived and Long-Lived Assets

We review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We determine impairment by comparing the projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted.

Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually and when certain impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment.

Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions. We utilize the "income method," which applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently.

For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in the "Late-Stage Pipeline" section. The nature of the pharmaceutical business is high-risk and requires that we Invest in a large number of projects to build a successful portfolio of approved products. As such, it is likely that some acquired IPR&D assets will become impaired in the future.

Estimates of future cash flows, based on what we believe to be reasonable and supportable assumptions and projections, require management's judgment. Actual results could vary from these estimates.

Income Taxes

We prepare and file tax returns based on our Interpretation of tax laws and regulations and record estimates based on these judgments and interpretations. In the normal course of business, our tax returns are subject to examination by various taxing authorities, which may result in future tax, interest, and penalty assessments by these authorities. Inherent uncertainties exist in estimates of many tax positions due to changes in tax law resulting from legislation, regulation, and/or as concluded through the various jurisdictions' tax court systems. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution. The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances. For example, adjustments could result from significant amendments to existing tax law, the issuance of regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient to pay assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Implementation of tax planning strategies to recover these deferred tax assets or future income generation in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense.

As of December 31, 2014, a 5 percent change in the amount of the uncertain tax positions and the valuation allowance would result in a change in net income of $31.9 million and $30.1 million, respectively.

LEGAL AND REGULATORY MATTERS

Information relating to certain legal proceedings can be found in Note 15 to the consolidated financial statements and is incorporated here by reference.

FINANCIAL EXPECTATIONS FOR 2015

For the full year of 2015, we expect EPS to be in the range of $2.40 to $2.50. We anticipate that total revenue will be between $19.5 billion and $20.0 billion. The acquisition of Novartis AH is expected to add significant revenue.

We anticipate that gross margin as a percent of revenue will be approximately 75.0 percent in 2015. Marketing, selling, and administrative expenses are expected to be in the range of $6.5 billion to $6.8 billion. Research and development expenses are expected to be in the range of $4.7 billion to $4.9 billion, reflecting an expected increase in Phase III trial expenses and the inclusion of Novartis AH. Other - net, (income) expense is expected to be in a range between $75 million and $125 million of income.

The 2015 tax rate is expected to be approximately 18.5 percent, assuming a full-year 2015 benefit of the research and development tax credit and other tax provisions up for extension. If these items are not extended, the 2015 tax rate would be approximately 1.5 percentage points higher. The 2015 expected tax rate includes the tax Impact of costs associated with the Novartis AH and Lohmann AH acquisitions and amortization of intangibles.

Capital expenditures are expected to be approximately $1.3 billion.

Our 2015 financial guidance does not include a potential charge related to the collaboration with Pfizer to develop and commercialize tanezumab. If the partial clinical hold for the molecule is removed and we and Pfizer move forward with development, we will pay a $200 million upfront fee to Pfizer. This charge would reduce EPS by approximately $0.12 and would cause our tax rate to be approximately 1.0 percentage point lower.

Financial Statements and Supplementary Data

Consolidated Statements of Operations

See notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income

See notes to consolidated financial statements.

Consolidated Balance Sheets

See notes to consolidated financial statements.

Consolidated Statements of Shareholders' Equity

Consolidated Statements of Cash Flows

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements

ELI LILLY AND COMPANY AND SUBSIDIARIES

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

Note 1: Summary of Significant Accounting Policies

Basis of presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The accounts of all wholly-owned and majority-owned subsidiaries are included in the consolidated financial statements. Where our ownership of consolidated subsidiaries is less than 100 percent, the noncontrolling shareholders' interests are reflected as a separate component of equity. All intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. We issued our financial statements by filing with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing.

Certain reclassifications have been made to prior periods in the consolidated financial statements and accompanying notes to conform with the current presentation.

All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, based on the weighted-average number of outstanding common shares plus the effect of dilutive stock options and other incremental shares.

Cash equivalents

We consider all highly liquid Investments with a maturity of three months or less from the date of purchase to be cash equivalents. The cost of these Investments approximates fair value.

Inventories

We state all inventories at the lower of cost or market. We use the last-in, first-out (LIFO) method for the majority of our inventories located in the continental United States (U.S.). Other inventories are valued by the first-in, first-out (FIFO) method. FIFO cost approximates current replacement cost.

Investments

Substantially all of our Investments in debt and marketable equity securities are classified as available-for-sale. Investment securities with maturity dates of less than one year from the date of the balance sheet are classified as short-term. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss). The credit portion of unrealized losses on our debt securities considered to be other-than-temporary is recognized in earnings. The remaining portion of the other-than-temporary impairment on our debt securities is then recorded, net of tax, in other comprehensive income (loss). The entire amount of other-than-temporary impairment on our equity securities is recognized in earnings. We do not evaluate cost-method Investments for impairment unless there is an indicator of impairment. We review these Investments for indicators of impairment on a regular basis. Realized gains and losses on sales of available-for-sale securities are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings. Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method with our share of earnings or losses reported in othernet, (income) expense. We own no Investments that are considered to be trading securities.

Risk-management Instruments

Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.

For derivative contracts that are designated and qualify as fair value hedges, the derivative Instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges, the effective portion of gains and losses on these contracts is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. Hedge ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging Instruments are recorded at fair value with the gain or loss recognized in current earnings during the period of change.

We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward and option contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other - net, (income) expense. We may enter into foreign currency forward and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months.

In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial Instruments. The objective of controlling these risks is to limit the Impact of fluctuations in interest rates on earnings. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and Investment positions and may enter into interest rate swaps or collars to help maintain that balance.

Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying Instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting from the termination of interest rate swaps are classified as operating activities in our consolidated statement of cash flows.

We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of earnings and cash flow associated with forecasted sales of available-for-sale securities.

Investments in debt securities are subject to different interest rate risks based on their maturities. We may manage the average maturity of our Investments in debt securities to achieve economic returns using interest rate contracts, none of which are designated as hedging Instruments.

We may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of any anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in interest rates. Upon completion of a debt issuance and termination of the swap, the change in fair value of these Instruments is recorded as part of other comprehensive income (loss) and is amortized to interest expense over the life of the debt agreement.

Goodwill and other intangibles

Goodwill results from excess consideration in a business combination over the fair value of identifiable net assets acquired. Goodwill is not amortized.

Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging from 3 to 20 years.

The costs of in-process research and development (IPR&D) projects acquired directly in a transaction other than a business combination are capitalized if the projects have an alternative future use; otherwise, they are expensed immediately. The fair values of IPR&D projects acquired in business combinations are capitalized as other intangible assets. Several methods may be used to determine the estimated fair value of the IPR&D acquired in a business combination. We utilize the "income method," which applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are tested for impairment and amortized over the remaining useful life or written off, as appropriate. For transactions other than a business combination, we also capitalize milestone payments incurred at or after the product has obtained regulatory approval for marketing and generally amortize those amounts over the remaining estimated useful life of the underlying asset.

Goodwill and other indefinite-lived intangible assets are reviewed for impairment at least annually and when impairment indicators are present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived IPR&D assets for impairment testing purposes, we utilize the "income method" discussed in the previous paragraph. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is present.

Property and equipment

Property and equipment is stated on the basis of cost. Provisions for depreciation of buildings and equipment are computed generally by the straight-line method at rates based on their estimated useful lives (12 to 50 years for buildings and 3 to 25 years for equipment). We review the carrying value of long-lived assets for potential impairment on a periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Impairment is determined by comparing projected undiscounted cash flows to be generated by the asset to its carrying value. If an impairment is identified, a loss is recorded equal to the excess of the asset's net book value over its fair value, and the cost basis is adjusted.

Litigation and environmental liabilities

Litigation accruals, environmental liabilities, and the related estimated insurance recoverables are reflected on a gross basis as liabilities and assets, respectively, on our consolidated balance sheets. With respect to the product liability claims currently asserted against us, we have accrued for our estimated exposures to the extent they are both probable and reasonably estimable based on the information available to us. We accrue for certain product liability claims incurred but not filed to the extent we can formulate a reasonable estimate of their costs. We estimate these expenses based primarily on historical claims experience and data regarding product usage. Legal defense costs expected to be incurred in connection with significant product liability loss contingencies are accrued when both probable and reasonably estimable. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently marketed products.

Revenue recognition

We recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer assumes the risks and rewards of ownership. Provisions for returns, discounts, and rebates are established in the same period the related sales are recognized.

In arrangements involving the delivery of more than one element (e.g., research and development, marketing and selling, manufacturing, and distribution), each required deliverable is evaluated to determine whether it qualifies as a separate unit of accounting. Our determination is based on whether the deliverable has "standalone value" to the customer. If a deliverable does not qualify as a separate unit of accounting, it is combined with the other applicable undelivered item(s) within the arrangement and these combined deliverables are treated as a single unit of accounting. The arrangement's consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable.

Initial fees we receive in collaborative and other similar arrangements from the partnering of our compounds under development are generally deferred and amortized into income through the expected product approval date. Initial fees may also be received for out-licensing agreements that include both an out-license of our marketing rights to commercialized products and a related commitment to supply the products. When we have determined that the marketing rights do not have standalone value, the initial fees received are generally deferred and amortized to income as net product sales over the term of the supply agreement.

Royalty revenue from licensees, which is based on third-party sales of licensed products and technology, is recorded as earned in accordance with the contract terms when third-party sales can be reasonably measured and collection of the funds is reasonably assured. This royalty revenue is included in collaboration and other revenue.

Profit-sharing due from our collaboration partners, which is based upon gross margins reported to us by our partners, is recognized as collaboration and other revenue as earned.

Developmental milestone payments earned by us are generally recorded in other - net, (income) expense. We immediately recognize the full amount of developmental milestone payments due to us upon the achievement of the milestone event if the event is objectively determinable and the milestone is substantive in its entirety. A milestone is considered substantive if the consideration earned 1) relates solely to past performance, 2) is commensurate with the enhancement in the pharmaceutical product's value associated with the achievement of the important event in its development life cycle, and 3) is reasonable relative to all of the deliverables and payment terms within the arrangement. If a milestone payment to us is part of a multiple-element commercialization arrangement and is triggered by the initiation of the commercialization period (e.g., regulatory approval for marketing or launch of the product) or the achievement of a sales-based threshold, we amortize the payment to income as we perform under the terms of the arrangement. See Note 4 for specific agreement details.

Research and development expenses and acquired IPR&D

Research and development expenses include the following:

Acquired IPR&D expense includes the initial costs of I PR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use.

Income taxes

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the U.S. and be taxable. When foreign earnings are expected to be indefinitely reinvested outside the U.S., no accrual for U.S. income taxes is provided.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

Earnings per share

We calculate basic earnings per share (EPS) based on the weighted-average number of common shares outstanding and incremental shares. We calculate diluted EPS based on the weighted-average number of common shares outstanding, including incremental shares and dilutive stock options.

Stock-based compensation

We recognize the fair value of stock-based compensation as expense over the requisite service period of the individual grantees, which generally equals the vesting period. Under our policy, all stock-based awards are approved prior to the date of grant. The compensation committee of the board of directors approves the value of the award and date of grant. Stock-based compensation that is awarded as part of our annual equity grant is made on a specific grant date scheduled in advance.

Note 2: Implementation of New Financial Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued a final standard on revenue recognition. Under the new standard, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In order to do so, an entity would follow the five-step process for in-scope transactions: 1) identify the contract with a customer, 2) identify the separate performance obligations in the contract, 3) determine the transaction price, 4) allocate the transaction price to the separate performance obligations in the contract, and 5) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the provisions of the new standard are expected to become effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. An entity can apply the new revenue standard retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings. We are in the process of determining our approach to the adoption of this new revenue recognition standard, as well as the anticipated Impact to our consolidated financial statements.

In July 2013, the FASB issued a clarification regarding the presentation of an unrecognized tax benefit related to a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. Under this new standard, the liability related to an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset if available under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position. Otherwise, the unrecognized tax benefit should be presented in the financial statements as a separate liability. The assessment is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date. The provisions of the new standard are effective on a prospective basis beginning in 2014 for annual and Interim reporting periods. Adoption of this standard in the first quarter of 2014 resulted in an immaterial Impact to our consolidated balance sheet and did not affect our consolidated statements of operations.

Note 3: Acquisitions

During 2014 and 2012, we completed the acquisitions of Lohmann SE (Lohmann AH) and ChemGen Corporation (ChemGen), respectively. These acquisitions were accounted for as business combinations under the acquisition method of accounting. The assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of these acquisitions are included in our consolidated financial statements from the date of acquisition. Neither acquisition was material to our consolidated financial statements.

During 2014, we announced an agreement to acquire Novartis Animal Health (Novartis AH), which was subsequently completed in January 2015. Details of our acquisitions of businesses are further discussed below.

In addition to the acquisitions of businesses, we also acquired assets in development in 2014 and 2013 which are further discussed below in Product and Other Acquisitions and in Note 4. Upon acquisition, the acquired IPR&D related to these products was immediately written off as an expense because the products had no alternative future use. For the years ended December 31, 2014 and 2013, we recorded acquired IPR&D charges of $200.2 million and $57.1 million, respectively, associated with these transactions. There were no acquired IPR&D charges in 2012.

Acquisitions of Businesses

Subsequent Event - Novartis AH Acquisition

Overview of Transaction

On January 1, 2015, we acquired from Novartis AG all of the shares of certain Novartis subsidiaries and all of the assets of other Novartis subsidiaries that are exclusively related to the Novartis AH business in an all-cash transaction for a total purchase price of approximately $5.4 billion, subject to working capital and other adjustments. As of December 31, 2014, there was $5.41 billion of cash held in escrow for the pending acquisition of Novartis AH. This cash was classified as restricted cash, a noncurrent asset, on our consolidated balance sheet. The accounting for the acquisition and the results of the Novartis AH operations will be included in our financial statements for the period beginning on January 1, 2015.

As a condition to the clearance of the transaction under the Hart-Scott-Rodino Antitrust Improvement Act, following the closing of the acquisition of Novartis AH, we divested certain animal health assets in the U.S. related to the Sentinel ^® canine parasiticide franchise to Virbac Corporation for approximately $410 million.

The acquired Novartis AH business consists of the research and development, manufacture, marketing, sale and distribution of veterinary products to prevent and treat diseases in pets, farm animals, and farmed fish. Under the terms of the agreement, we acquired manufacturing sites, research and development facilities, a global commercial infrastructure and portfolio of products, a pipeline of projects in development, and employees.

Assets Acquired and Liabilities Assumed

The initial accounting for this acquisition is incomplete. Significant, relevant information needed to complete the initial accounting is not available because the valuation of the assets acquired and liabilities assumed is not complete. As a result, determining these values is not practicable and we are unable to disclose these values or provide other related disclosures at this time.

Supplemental Pro Forma Information

Our unaudited pro forma consolidated revenue for 2014 is approximately $20.7 billion. This amount was determined as if the portion of Novartis AH that we retained after the sale to Virbac had been acquired as of January 1, 2014. This unaudited pro forma consolidated revenue is not necessarily indicative of what our consolidated revenues actually would have been had we completed the acquisition on January 1, 2014.

Lohmann AH Acquisition

On April 30, 2014, we acquired Lohmann AH, a privately-held company headquartered in Cuxhaven, Germany, through a stock purchase for a total purchase price of $591.2 million, comprised of $551.4 million of net cash plus $39.8 million of assumed debt. Lohmann AH is a global leader in poultry vaccines. As part of this transaction, we acquired the rights to a range of vaccines, commercial capabilities, and manufacturing sites in Germany and the United States. Preliminary amounts currently recorded in connection with this acquisition include $275.4 million of marketed product assets, $23.9 million of other intangible assets, $89.8 million of property and equipment, $243.7 million of goodwill, and $92.7 million of deferred tax liability, with $51.1 million of other net assets. The final determination may result in asset and liability fair values that differ from the preliminary estimates, but it is not expected that these differences will be material to our consolidated financial statements. Goodwill associated with this acquisition is not deductible for tax purposes.

ChemGen

On February 17, 2012, we acquired all of the outstanding stock of ChemGen, a privately-held bioscience company specializing in the development and commercialization of innovative feed-enzyme products that improve the efficiency of poultry, egg, and meat production, for total purchase consideration of $206.9 million in cash. In connection with this acquisition, we recorded $151.5 million of marketed product assets and $55.4 million of other net assets.

Product and Other Acquisitions

In connection with the arrangements described below, our partners may be entitled to future royalties based on sales should these products be approved for commercialization and/or milestones based on the successful progress of the drug candidate through the development process.

In July 2014, we entered into a co-discovery and co-development collaboration with Immunocore Limited to research and potentially develop pre-clinical novel T cell-based cancer therapies. Upon entering the agreement, we paid an upfront fee of $45.0 million in cash and a related charge was recorded for acquired IPR&D

In September 2014, we entered into a collaboration agreement with AstraZeneca UK Limited (AstraZeneca) for the worldwide co-development and co-commercialization of AstraZeneca's oral beta-secretase cleaving enzyme inhibitor known as AZD3293, a compound being investigated for the potential treatment of Alzheimer's disease. At the time of the agreement, AZD3293 had completed Phase 1 testing in patients with early Alzheimer's disease. We will be responsible for leading development efforts, while AstraZeneca will be responsible for manufacturing efforts. If successful, both parties will take joint responsibility for commercialization of AZD3293. Under the agreement, both parties will share equally in the ongoing development costs, gross margins and certain other costs associated with the commercialization of the compound. Upon execution of the agreement, we immediately recorded, as an acquired IPR&D charge, our obligation associated with a payment of $50.0 million which we will pay to AstraZeneca in 2015.

In December 2014, we entered into a collaboration agreement with Adocia for the worldwide development and commercialization of Adocia's ultra-rapid Insulin, known as BioChaperone Lispro, a compound being developed for the treatment of patients with type 1 and type 2 diabetes. BioChaperone Lispro is currently in Phase 1 studies. We will be responsible for leading development, manufacturing, and commercialization efforts. Upon entering the agreement, we paid an upfront fee of $50.0 million in cash and a related charge was recorded for acquired IPR&D

In December 2013, we acquired for $57.1 million in cash, all development and commercial rights for a calcitonin gene-related peptide antibody being studied as a potential treatment for the prevention of frequent, recurrent migraine headaches. At the time of the purchase, the product had completed a successful Phase II proof-of-concept study and a related charge was recorded for acquired IPR&D

Note 4: Collaborations and Other Arrangements

We often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone and royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements or payments to the collaboration partner. Elements within a collaboration are separated into individual units of accounting if they have standalone value from other elements within the arrangement. In these situations, the arrangement consideration is allocated to the elements on a relative selling price basis. Revenues related to products we seil pursuant to these arrangements are included in net product sales, while other sources of revenue (e.g., royalties and profit sharing due from our partner) are included in collaboration and other revenue. For the years ended December 31, 2014, 2013, and 2012, we recognized collaboration and other revenue of $788.4 million, $707.5 million, and $633.0 million, respectively. Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant arrangements are discussed below.

Diabetes Collaboration

We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of diabetes compounds. Currently, the compounds included in the collaboration are Boehringer Ingelheim's two oral diabetes agents, linagliptin (trade name Trajenta®) and empagliflozin (trade name Jardiance ^®), and our new Insulin glargine product (trade name Basaglar ^® in the U.S.).

Trajenta was approved in 2011 and launched in the U.S., Japan, certain countries in Europe, and other countries. Jardiance was approved in Europe, the U.S., and Japan in May, August, and December 2014, respectively. The product was launched in certain European countries and the U.S. in the third quarter of 2014. Our new Insulin glargine product was approved by the European Commission in Europe in September 2014 and regulatory authorities in Japan in December 2014. Basaglar received tentative approval in the U.S. in August 2014. The U.S. Food and Drug Administration (FDA) has determined that Basaglar meets all regulatory requirements for approval, but final approval is subject to a delay of up to 30 months as a result of patent infringement litigation filed by Sanofi, which makes Lantus ^®, the only currently marketed Insulin glargine. Under the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act), the initiation of the lawsuit automatically invoked a stay of final FDA approval for a period of 30 months (until July 2016), which may be shortened in the event of an earlier court decision in our favor.

In connection with the approval of Trajenta in the U.S., Japan, and Europe, we paid $478.7 million in success-based regulatory milestones, all of which were capitalized as intangible assets and are being amortized to cost of sales.

In connection with the approval of Jardiance in Europe, the U.S., and Japan, we incurred success-based regulatory milestones of $300.5 million, which were capitalized as intangible assets and will be amortized to cost of sales. We incurred milestone-related expenses of $97.2 million in connection with regulatory submissions for Jardiance in Europe, the U.S., and Japan during 2013. These regulatory submission milestones were recorded as research and development expenses.

Upon the approval of our new Insulin glargine product in Europe and Japan during 2014, we recorded, as deferred revenue, $62.5 million in milestones which will be amortized to collaboration and other revenue upon product launch in Europe and Japan through the term of the collaboration (2029). During 2013, we earned $50.0 million in milestones for the regulatory submissions of our new Insulin glargine product in the U.S., Europe, and Japan. These submission milestones were recorded as income in other - net, (income) expense. In the future, we will be eligible to receive up to $187.5 million in success-based regulatory milestones on our new Insulin glargine product.

In October 2014, we and Boehringer Ingelheim agreed upon certain changes to the operational and financial structure of our diabetes collaboration. Under the revised agreement the companies will continue their co-promotion work in 17 countries, representing over 90 percent of the collaboration's anticipated market opportunity. In the other countries, the companies will exclusively commercialize the respective molecules they brought to the collaboration. The modifications became effective at the end of 2014, and will change the financial terms related to the modified countries; however, the financial Impact resulting from the revised terms of the agreement in these countries is not anticipated to be material. As a result of these changes, in the fourth quarter of 2014, we recorded a gain of $92.0 million related to the transfer to Boehringer Ingelheim of our license rights to co-promote linagliptin and empagliflozin in these countries, which was recorded as income in other - net, (income) expense. We also incurred a charge of $55.2 million related to the transfer to us of Boehringer Ingelheim's rights to co-promote our new Insulin glargine product in countries where it is not yet approved, which was recorded as acquired IPR&D expense.

With the exception of the countries affected by the amendment to the collaboration agreement, the companies share equally the ongoing development costs and, if successful, commercialization costs and gross margin for any product resulting from the collaboration. We record our portion of the gross margin associated with Boehringer Ingelheim's compounds as collaboration and other revenue, and we record our portion of the commercialization costs as marketing, selling, and administrative expense. Each company will also be entitled to potential performance payments an sales of the molecules they contribute to the collaboration. Our revenue related to Trajenta was $328.8 million, $249.2 million, and $88.6 million for the years ended December 31, 2014, 2013, and 2012, respectively. Our revenue related to Jardiance was not material for the year ended December 31, 2014.

Effient ^®

We are in a collaborative arrangement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) to develop, market, and promote Effient. We and Daiichi Sankyo co-promote Effient in certain territories (including the U.S. and five major European markets), while we have exclusive marketing rights in certain other territories. Daiichi Sankyo has exclusive marketing rights in Japan and certain other territories. The parties share approximately 50/50 in the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party manufactures bulk product, and we produce the finished product for our exclusive and co-promotion territories. We record product sales in our exclusive and co-promotion territories. In our exclusive territories, we pay Daiichi Sankyo a royalty specific to these territories. Profit-share payments due to Daiichi Sankyo are recorded as marketing, selling, and administrative expenses. All royalties due to Daiichi Sankyo and the third-party manufacturer are recorded in cost of sales. Effient sales were $522.2 million, $508.7 million, and $457.2 million for the years ended December 31, 2014, 2013, and 2012, respectively.

Erbitux ^®

We have several collaborations with respect to Erbitux. The most significant collaborations are in the U.S., Canada, and Japan (Bristol-Myers Squibb Company); and worldwide except the U.S. and Canada (Merck KGaA). Upon expiration of the agreements, all of the rights to Erbitux in the U.S. and Canada return to us and certain rights to Erbitux outside the U.S. and Canada will remain with Merck KGaA (Merck).

The following table summarizes our revenue recognized with respect to Erbitux:

Bristol-Myers Squibb Company

Pursuant to commercial agreements with Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS), we are co-developing Erbitux in the U.S. and Canada with BMS through September 2018, exclusively, and in Japan with BMS and Merck through 2032. Under these arrangements, Erbitux research and development and other costs are shared by both companies according to a predetermined ratio.

Responsibilities associated with clinical and other ongoing studies are apportioned between the parties under the agreements. Collaborative reimbursements due to us for supply of clinical trial materials; for research and development; and for a portion of marketing, selling, and administrative expenses are recorded as a reduction to the respective expense line items on the consolidated statement of operations. We receive a distribution fee in the form of a royalty from BMS, based on a percentage of net sales in the U.S. and Canada, which is recorded in collaboration and other revenue. Royalties due to third parties are recorded as a reduction of collaboration and other revenue, net of any royalty reimbursements due from third parties.

We are responsible for the manufacture and supply of all requirements of Erbitux in bulk-form active pharmaceutical ingredient (API) for clinical and commercial use in the U.S. and Canada, and BMS will purchase all of its requirements of API for commercial use from us, subject to certain stipulations per the agreement. Sales of Erbitux to BMS for commercial use are reported in net product sales.

Merck KGaA

A development and license agreement grants Merck exclusive rights to market Erbitux outside of the U.S. and Canada, and expires in December 2018. A separate agreement grants co-exclusive rights among Merck, BMS, and us in Japan and expires in 2032.

Merck manufactures Erbitux for supply in its territory as well as for Japan. We receive a royalty on the sales of Erbitux outside of the U.S. and Canada, which is included in collaboration and other revenue as earned. Royalties due to third parties are recorded as a reduction of collaboration and other revenue, net of any royalty reimbursements due from third parties.

Exenatide

In November 2011, we agreed with Amylin Pharmaceuticals, Inc. (Amylin) to terminate our collaborative arrangement for the joint development, marketing, and selling of Byetta ^® (exenatide injection) and other forms of exenatide such as Bydureon ^® (exenatide extended-release for injectable suspension). Under the terms of the termination agreement, Amylin made a one-time, upfront payment to us of $250.0 million. Amylin also agreed to make future revenue-sharing payments to us in an amount equal to 15.0 percent of its global net sales of exenatide products until Amylin made aggregate payments to us of $1.20 billion plus interest, which would accrue at 9.5 percent. Upon completion of the acquisition of Amylin by Bristol-Myers Squibb Company in August 2012, Amylin's obligation of $1.26 billion, including accrued interest, was paid in full, with $1.21 billion representing a prepayment of the obligation. We will also receive a $150.0 million milestone payment contingent upon FDA approval of a once-monthly suspension version of exenatide.

Commercial operations were transferred to Amylin in the U.S. in late 2011. Outside the U.S., we transferred to Amylin exenatide commercial rights and control in all markets during the first quarter of 2013. We were responsible for certain development costs related to certain clinical trials outside the U.S. that we were conducting as of the date of the termination agreement as well as commercialization costs outside the U.S. until the commercial rights were transferred to Amylin.

Payments received from Amylin were allocated 65 percent to the U.S., which was treated as a contract termination, and 35 percent to the business outside the U.S., which was treated as the disposition of a business. The allocation was based upon relative fair values. The revenue-sharing income allocated to the U.S. was recognized as collaboration and other revenue, consistent with our policy for royalty revenue, while the income related to the prepayment of Amylin's obligation allocated to the U.S. was recognized in other-net, (income) expense. All income allocated to the business outside the U.S. that was transferred during the first quarter of 2013 was recognized as a gain on the disposition of a business in othernet, (income) expense, net of the goodwill allocated to the business transferred.

Under the terms of our prior arrangement, we reported as net product sales 100 percent of sales outside the U.S. and our sales of Byetta pen delivery devices to Amylin. We paid Amylin a percentage of the gross margin of exenatide sales outside of the U.S., and these costs were recorded in cost of sales. This arrangement for the commercial operations outside the U.S. continued until those rights were transferred to Amylin during the first quarter of 2013.

Total revenue related to exenatide was insignificant in 2014. The following table summarizes the revenue and other income recognized with respect to exenatide for the years ended December 31, 2013 and 2012:

¹ Presented in other-net, (income) expense

Solanezumab

We have an agreement with an affiliate of TPG-Axon Capital (TPG) whereby TPG funded a portion of the Phase III development of solanezumab. Under the agreement, TPG's obligation to fund solanezumab costs ended in 2011. In exchange for their funding, TPG may receive success-based sales milestones totaling approximately $70 million and mid-single digit royalties contingent upon the successful development of solanezumab. The royalties would be paid for approximately 10 years after launch of a product.

Baricitinib

We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte) which provides us the development and commercialization rights to its Janus tyrosine kinase inhibitor compound, now known as baricitinib, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for increased tiered royalties ranging up to percentages in the high twenties. In 2010, Incyte exercised its option to co-develop baricitinib in rheumatoid arthritis. The agreement also provides Incyte with an option to co-promote in the U.S. and calls for payments associated with certain development, success-based regulatory, and sales-based milestones. Upon initiation of Phase III trials for the treatment of rheumatoid arthritis in the fourth quarter of 2012, we incurred a milestone-related expense of $50.0 million which was recorded as research and development expense. As of December 31, 2014, Incyte is eligible to receive up to $415.0 million of additional payments from us contingent upon certain development and success-based regulatory milestones as well as an additional $150.0 million of potential sales-based milestones.

Tanezumab

In October 2013, we entered into a collaboration agreement with Pfizer Inc. to jointly develop and globally commercialize tanezumab for the potential treatment of osteoarthritis pain, chronic low back pain and cancer pain. Tanezumab is currently in Phase III development and is subject to a partial clinical hold by the FDA pending submission of nonclinical data to the FDA. Under the agreement, the companies share equally the ongoing development costs and, if successful, in gross margins and certain commercialization expenses. Contingent upon the parties continuing in the collaboration after receipt of the FDA's response to the submission of the nonclinical data, we will be obligated to pay an upfront fee of $200.0 million. This payment would be immediately expensed. In addition to this fee, we may pay up to $350.0 million in success-based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent upon the commercial success of tanezumab. Both parties have the right to terminate the agreement under certain circumstances.

Summary of Commission and Profit-Share Payments

The aggregate amount of marketing, selling, and administrative expense associated with our commission and profit-sharing obligations for the collaborations and other arrangements described above was $211.2 million, $203.7 million, and $188.5 million for the years ended December 31, 2014, 2013, and 2012, respectively.

Note 5: Asset Impairment, Restructuring, and Other Special Charges

The components of the charges included in asset impairment, restructuring, and other special charges in our consolidated statements of operations are described below. Substantially all of these expenses relate to our human pharmaceutical business segment.

Severance costs listed above for all years relate to ongoing cost containment efforts as we continue our initiatives to reduce our cost structure and global workforce. Substantially all of the severance costs incurred during the year ended December 31, 2014 are expected to be paid by the end of 2015, and substantially all of the severance costs incurred during the years ended December 31, 2013 and 2012 have been paid.

For the year ended December 31, 2014, we incurred $243.2 million of asset impairment and other special charges consisting primarily of a $180.8 million asset impairment charge related to our decision to dose and sell a manufacturing plant located in Puerto Rico. The manufacturing plant was written down to its estimated fair value, which was based primarily an recent sales of similar assets.

For the year ended December 31, 2013, we incurred $30.0 million of asset impairment and other special charges related primarily to costs associated with the closure of a packaging and distribution facility in Germany.

For the year ended December 31, 2012, we incurred $206.6 million of asset impairment and other special charges consisting of $122.6 million related to an intangible asset impairment for liprotamase (see Note 8) net of the reduction of the related contingent consideration liability, $64.0 million related to the recognition of an asset impairment associated with the decision to stop development of a delivery device platform, and $20.0 million resulting from a change in our estimates of returned product related to the withdrawal of Xigris ^TM from the market during the fourth quarter of 2011.

Note 6: Inventories

Inventories at December 31 consisted of the following:

Inventories valued under the LIFO method comprised $1.09 billion and $1.02 billion of total inventories at December 31, 2014 and 2013, respectively.

Note 7: Financial Instruments

Financial Instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing Investments. Wholesale distributors of life-science products account for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fall to meet their obligations. Major financial institutions represent the largest component of our Investments in corporate debt securities. In accordance with documented corporate policies, we monitor the amount of credit exposure to any one financial Institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management Instruments but do not expect any counterparties to fall to meet their obligations given their high credit ratings.

At December 31, 2014, we had outstanding foreign currency forward commitments to purchase 330.6 million U.S. dollars and sell 270.3 million euro; commitments to purchase 1.18 billion euro and sell 1.45 billion U.S. dollars; commitments to purchase 190.4 million British pounds and sell 242.4 million euro; and commitments to purchase 332.6 million U.S. dollars and sell 40.04 billion Japanese yen, which will all settle within 30 days.

At December 31, 2014, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 55 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.

At December 31, 2014, the total notional amounts of forward-starting interest rate contracts in designated cash flow hedging Instruments were $1.35 billion, which will all settle within three months.

The Effect of Risk Management Instruments on the Statement of Operations

The following effects of risk-management Instruments were recognized in other - net, (income) expense: 2014.2013.2012 Fair value hedges:

¹ Realized gains on the sale of underlying equity securities recognized in other-net, (income) expense were $260.8 million during the year ended December 31, 2014. There were no realized gains on the sale of underlying equity securities during the years ended December 31, 2013 and 2012.

During the years ended December 31, 2014, 2013, and 2012, net losses related to ineffectiveness, as well as net losses related to the portion of our risk-management hedging Instruments, fair value hedges, and cash flow hedges that were excluded from the assessment of effectiveness, were not material.

Fair Value Hedges

During the year ended December 31, 2014, we terminated certain interest rate swaps designated as fair value hedges with an aggregate notional amount of $1.30 billion. As a result of the termination, we received cash of $340.7 million, which represented the fair value of the interest rate swaps at the time of termination. The related fair value adjustment was recorded as an increase to the carrying value of the underlying fixed-rate debt and will be amortized into earnings as a reduction of interest expense over the remaining life of the underlying debt.

Cash Flow Hedges

The effective portion of equity contracts in designated cash flow hedging relationships recorded in other comprehensive income (loss) was $149.6 million and $(149.6) million during the years ended December 31, 2014 and 2013, respectively. There were no equity contracts in designated cash flow hedging relationships in 2012. During the year ended December 31, 2014, we sold all of the underlying equity securities that had been in designated cash flow hedging relationships. At the time of the sales, we reclassified to earnings the accumulated other comprehensive loss related to the cash flow hedges and the previously unrealized gains on the underlying equity securities.

For forward-starting interest rate swaps in designated cash flow hedging relationships associated with an anticipated debt issuance, the effective portion of net gains (losses) recorded in other comprehensive income (loss) was $(164.7) million and $16.7 million for the years ended December 31, 2014 and 2013. There were no forward-starting interest rate swaps in designated cash flow hedging relationships in 2012.

During the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings $9.0 million of pretax net losses on cash flow hedges of the variability in expected future interest payments on our floating rate debt.

Non-Hedging Instruments

During the year ended December 31, 2014, we settled fixed-rate interest contracts used to manage interest rate risks on our Investments in debt securities, which were not designed as hedging Instruments. The aggregate notional amount of the settled contracts was $876.0 million, and we paid $3.4 million of cash to the counterparties upon settlement.

Fair Value of Financial Instruments

The following tables summarize certain fair value information at December 31 for assets and liabilities measured at fair value an a recurring basis, as well as the carrying amount and amortized cost of certain other Investments:

¹ Fair value not applicable

Risk-management Instruments above are disclosed an a gross basis. There are various rights of setoff associated with certain of the risk-management Instruments above that are subject to an enforceable master netting arrangement or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management Instruments above, individually, these financial rights are not material.

We determine fair values based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. The fair value of equity method Investments and other Investments is not readily available.

The table below summarizes the contractual maturities of our Investments in debt securities measured at fair value as of December 31, 2014:

A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows:

Other-than-temporary impairment losses on Investment securities of $12.5 million, $11.3 million, and $22.6 million were recognized in the consolidated statements of operations for the years ended December 31, 2014, 2013, and 2012, respectively. For fixed-income securities, the amount of credit losses represents the difference between the present value of cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing the credit loss were the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.

The securities in an unrealized loss position include fixed-rate debt securities of varying maturities. The value of fixed-income securities is sensitive to changes in the yield curve and other market conditions. Approximately 90 percent of the securities in a loss position are investment-grade debt securities. At this time, there is no indication of default on interest or principal payments for debt securities other than those for which an other-than-temporary impairment charge has been recorded. We do not intend to seil, and it is not more likely than not we will be required to seil, the securities in a loss position before the market values recover or the underlying cash flows have been received, and we have concluded that no additional other-than-temporary loss is required to be charged to earnings as of December 31, 2014.

Activity related to our Investment portfolio, substantially all of which related to available-for-sale securities, was as follows:

Note 8: Goodwill and Other Intangibles

Goodwill and other indefinite-lived intangible assets at December 31 were as follows:

The increase in goodwill for the animal health segment in 2014 is a result of the acquisition of Lohmann AH (Note 3).

No impairments occurred with respect to the carrying value of goodwill for the years ended December 31, 2014, 2013, and 2012.

IPR&D consists of the acquisition date fair value of products under development acquired in business combinations that have not yet achieved regulatory approval for marketing, adjusted for subsequent impairments, if any. As discussed in Note 1, we use the "income method" to calculate the fair value of the IPR&D assets, which is a Level 3 fair value measurement.

No material impairments occurred with respect to the carrying value of IPR& for the years ended December 31, 2014 and 2013. In 2012, we recorded impairment charges of $205.0 million related to liprotamase as a result of changes in key assumptions used in the valuation, based upon additional communications with the FDA regarding the clinical trial that would be required for resubmission, and our expectations for the product.

The components of finite-lived intangible assets at December 31 were as follows:

Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone payments. Other intangibles consist primarily of the amortized cost of licensed platform technologies that have alternative future uses in research and development, manufacturing technologies, and customer relationships from business combinations. No material impairments occurred with respect to the carrying value of finite-lived intangible assets for the years ended December 31, 2014, 2013 and 2012.

See Note 3 for further discussion of intangible assets acquired in recent business combinations and Note 4 for additional discussion of recent capitalized milestone payments.

As of December 31, 2014, the remaining weighted-average amortization period for finite-lived intangible assets is approximately 10 years. Amortization expense was $535.9 million, $555.0 million, and $563.0 million for the years ended December 31, 2014, 2013, and 2012, respectively. The estimated amortization expense associated with our current finite-lived intangible assets for each of the next five years approximates $465 million in 2015, $360 million in 2016, $325 million in 2017, $215 million in 2018, and $185 million in 2019. These estimated amounts exclude the amortization related to the acquired intangible assets which will be recorded in association with the January 1, 2015 acquisition of Novartis AH. Amortization expense is included in either cost of sales, marketing, selling, and administrative or research and development depending an the nature of the intangible asset being amortized.

Note 9: Property and Equipment

At December 31, property and equipment consisted of the following:

Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was $759.1 million, $774.8 million, and $754.0 million, respectively. Capitalized interest costs were not material for the years ended December 31, 2014, 2013, and 2012, respectively. Total rental expense for all leases, including contingent rentals (not material), amounted to $227.3 million, $227.2 million, and $262.2 million for the years ended December 31, 2014, 2013, and 2012, respectively. Assets under capital leases included in property and equipment, net on the consolidated balance sheets, capital lease obligations entered into, and future minimum rental commitments are not material.

Note 10: Borrowings

Debt at December 31 consisted of the following:

At December 31, 2014, we had $2.68 billion outstanding borrowings under our commercial paper program. There were no amounts outstanding under our commercial paper program at December 31, 2013. The weighted-average effective borrowing rate on outstanding commercial paper at December 31, 2014 was 0.18 percent.

At December 31, 2014, we had a total of $3.31 billion of unused committed bank credit facilities. In August 2014, we refinanced our revolving bank credit facilities and entered into a $1.20 billion credit facility with a five-year term and a $2.00 billion credit facility with a 364-day term, both of which are available to support our commercial paper program. There were no amounts outstanding under the revolving credit facility during the year ended December 31, 2014. Compensating balances and commitment fees are not material, and there are no conditions that are probable of occurring under which the lines may be withdrawn.

In February 2014, we issued $600.0 million of 1.95 percent and $400.0 million of 4.65 percent fixed-rate notes with interest to be paid semi-annually and maturity dates of March 15, 2019, and June 15, 2044, respectively. Current maturities of long-term notes of $1.00 billion were repaid in March 2014.

The aggregate amounts of maturities on long-term debt for the next five years are $8.1 million in 2015, $208.5 million in 2016, $1.01 billion in 2017, $203.8 million in 2018, and $601.0 million in 2019.

We have converted approximately 55 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps. The weighted-average effective borrowing rates based on long-term debt obligations and interest rates at December 31, 2014 and 2013, including the effects of interest rate swaps for hedged debt obligations, were 3.69 percent and 3.10 percent, respectively.

For the years ended December 31, 2014, 2013, and 2012, cash payments for interest on borrowings totaled $140.4 million, $139.7 million, and $171.9 million, respectively, net of capitalized interest.

In accordance with the requirements of derivatives and hedging guidance, the portion of our fixed-rate debt obligations that is hedged, as a fair value hedge, is reflected in the consolidated balance sheets as an amount equal to the sum of the debt's carrying value plus the fair value adjustment representing changes in fair value of the hedged debt attributable to movements in market interest rates subsequent to the inception of the hedge.

Note 11: Stock-Based Compensation

Stock-based compensation expense of $156.0 million, $144.9 million, and $141.5 million was recognized for the years ended December 31, 2014, 2013, and 2012, respectively, as well as related tax benefits of $54.6 million, $50.7 million, and $49.5 million, respectively. Our stock-based compensation expense consists of performance awards (PAs), shareholder value awards (SVAs), and restricted stock units (RSUs). We recognize stock-based compensation expense over the requisite service period of the individual grantees, which equals the vesting period. We provide newly issued shares and treasury stock to satisfy stock option exercises and for the issuance of PA, SVA, and RSU shares. We classify tax benefits resulting from tax deductions in excess of the compensation cost recognized for exercised stock options as a financing cash flow in the consolidated statements of cash flows.

At December 31, 2014, additional stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 101.0 million shares.

Performance Award Program

PAs are granted to officers and management and are payable in shares of our common stock. The number of PA shares actually issued, if any, varies depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. PA shares are accounted for at fair value based upon the closing stock price on the date of grant and fully vest at the end of the measurement periods. The fair values of PAs granted for the years ended December 31, 2014, 2013, and 2012 were $48.81, $50.19, and $35.74, respectively. The number of shares ultimately issued for the PA program is dependent upon the earnings achieved during the vesting period. Pursuant to this plan, approximately 0.7 million shares, 0.7 million shares, and 1.6 million shares were issued during the years ended December 31, 2014, 2013, and 2012, respectively. Approximately 0.5 million shares are expected to be issued in 2015. As of December 31, 2014, the total remaining unrecognized compensation cost related to nonvested PAs was $19.8 million, which will be amortized over the weighted-average remaining requisite service period of 12 months.

Shareholder Value Award Program

SVAs are granted to officers and management and are payable in shares of our common stock at the end of a three-year period. The number of shares actually issued, if any, varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model. The model utilizes multiple Input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The weighted-average fair values of the SVA units granted during the years ended December 31, 2014, 2013, and 2012 were $41.97, $45.17, and $30.35, respectively, determined using the following assumptions:

A summary of the SVA activity is presented below:

Approximately 2.2 million shares are expected to be issued in 2015. As of December 31, 2014, the total remaining unrecognized compensation cost related to nonvested SVAs was $53.8 million, which will be amortized over the weighted-average remaining requisite service period of 20 months.

Restricted Stock Units

RSUs are granted to certain employees and are payable in shares of our common stock. RSU shares are accounted for at fair value based upon the closing stock price an the date of grant. The corresponding expense is amortized over the vesting period, typically 3 years. The fair values of RSU awards granted during the years ended December 31, 2014, 2013, and 2012 were $52.72, $54.10, and $39.65, respectively. The number of shares ultimately issued for the RSU program remains constant with the exception of forfeitures. Pursuant to this plan, 1.2 million, 1.1 million, and 1.4 million shares were granted during the years ended December 31, 2014, 2013, and 2012, respectively, and approximately 0.9 million, 0.8 million, and 0.3 million shares were issued during the years ended December 31, 2014, 2013, and 2012, respectively. Approximately 0.8 million shares are expected to be issued in 2015. As of December 31, 2014, the total remaining unrecognized compensation cost related to nonvested RSUs was $87.9 million, which will be amortized over the weighted-average remaining requisite service period of 27 months.

Stock Option Program

Stock options were granted prior to 2007 to officers, management, and board members at exercise prices equal to the fair market value of our stock at the date of grant. Options fully vested 3 years from the grant date and have a term of 10 years.

Stock option activity during the year ended December 31, 2014 is summarized below:

The intrinsic value of options exercised during 2014, 2013, and 2012 amounted to $31.2 million, $0.5 million, and $1.4 million, respectively. We received cash of $188.1 million, $11.3 million, and $1.0 million from exercises of stock options during 2014, 2013, and 2012, respectively, and recognized related tax benefits of $8.9 million, $0.2 million, and $0.5 million during those same years.

Note 12: Shareholders' Equity

During 2014 and 2013, we repurchased $800.0 million and $500.0 million, respectively, of shares associated with our $5.00 billion share repurchase program announced in 2013. As of December 31, 2014, there were $3.70 billion of shares remaining in that program. During 2013 and 2012, we repurchased $1.10 billion and $400.0 million, respectively, of shares, completing our $1.50 billion share repurchase program announced in 2012. During 2012, we also repurchased $419.2 million of shares to complete our $3.00 billion share repurchase program announced in 2000.

We have 5.0 million authorized shares of preferred stock. As of December 31, 2014 and 2013, no preferred stock has been issued.

We have an employee benefit trust that held 50.0 million shares of our common stock at both December 31, 2014 and 2013, to provide a source of funds to assist us in meeting our obligations under various employee benefit plans. The cost basis of the shares held in the trust was $3.01 billion at both December 31, 2014 and 2013, and is shown as a reduction in shareholders' equity. Any dividend transactions between us and the trust are eliminated. Stock held by the trust is not considered outstanding in the computation of EPS. The assets of the trust were not used to fund any of our obligations under these employee benefit plans during the years ended December 31, 2014, 2013, and 2012.

Note 13: Income Taxes

Following is the composition of income tax expense:

Significant components of our deferred tax assets and liabilities as of December 31 are as follows: 2014.2013 Deferred tax assets:

At December 31, 2014 and 2013, no individually significant items were classified as "Other" deferred tax assets.

The deferred tax asset and related valuation allowance amounts for U.S. federal and state net operating losses and tax credits shown above have been reduced for differences between financial reporting and tax return filings.

Based an filed tax returns, we have tax credit canyforwards and carrybacks of $459.9 million available to reduce future income taxes; $180.5 million, if unused, will expire by 2021. The remaining portion of the tax credit carryforwards is related to federal tax credits of $80.3 million, international tax credits of $104.4 million, and state tax credits of $94.7 million, all of which are substantially reserved.

At December 31, 2014, based on filed tax returns we had net operating losses and other carryforwards for international and U.S. income tax purposes of $493.9 million: $74.6 million will expire by 2019; $366.1 million will expire between 2019 and 2029; and $53.2 million of the carryforwards will never expire. Net operating losses and other carryforwards for international and U.S. federal income tax purposes are partially reserved. Deferred tax assets related to state net operating losses of $97.0 million and other state carryforwards of $8.9 million are fully reserved.

Domestic and Puerto Rican companies contributed approximately 20 percent, 60 percent, and 55 percent for the years ended December 31, 2014, 2013, and 2012, respectively, to consolidated income before income taxes. We have a subsidiary operating in Puerto Rico under a tax incentive grant effective through the end of 2016. A similar, new tax incentive grant will begin in 2017 and will be in effect for 15 years.

At December 31, 2014, U.S. income taxes have not been provided on approximately $25.7 billion of unremitted earnings of foreign subsidiaries as we consider these unremitted earnings to be indefinitely invested for continued use in our foreign operations. Additional tax provisions will be required if these earnings are repatriated in the future to the United States. Due to complexities in the tax laws and assumptions that we would have to make, it is not practicable to determine the amount of the related unrecognized deferred income tax liability.

Cash payments of income taxes totaled $729.7 million, $1.26 billion, and $992.0 million, for the years ended December 31, 2014, 2013, and 2012, respectively.

Following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income before income taxes to reported income tax expense:

The American Taxpayer Relief Act of 2012, which included the reinstatement of the research tax credit for the year 2012, was enacted in early 2013. Therefore, the research tax credits for the years 2012 and 2013 are both included in 2013 with general business credits.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows:

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate was $638.8 million and $523.3 million at December 31, 2014 and 2013, respectively.

We file income tax returns in the U.S. federal jurisdiction and various state, local, and non-U.S. jurisdictions. We are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations in most major taxing jurisdictions for years before 2007.

During 2013, we reached resolution on the remaining matters related to tax years 2008-2009 that were not settled as part of a previous U.S. examination. Considering the Impact of this resolution on periods that have not yet been examined, as well as its Impact on tax asset carryforwards, there was an immaterial benefit to our consolidated results of operations. We made cash payments of approximately $135 million related to tax years 2008-2009 after application of available tax credit carryforwards and carrybacks. The examination of tax years 2010-2012 commenced during the fourth quarter of 2013. While it is reasonably possible that the U.S. examination of 2010-2012 could conclude within the next 12 months, resolution of certain matters is dependent upon a number of factors, including the potential for formal administrative and legal proceedings. As a result, it is not possible to estimate the range of the reasonably possible changes in unrecognized tax benefits that could occur within the next 12 months related to these years, nor is it possible to reliably estimate the total future cash flows related to these unrecognized tax benefits.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2014, 2013, and 2012, we recognized income tax expense (benefit) of $35.9 million, $(10.9) million, and $42.3 million, respectively, related to interest and penalties. At December 31, 2014 and 2013, our accruals for the payment of interest and penalties totaled $207.2 million and $161.5 million, respectively.

Note 14: Retirement Benefits

We use a measurement date of December 31 to develop the change in benefit obligation, change in plan assets, funded status, and amounts recognized in the consolidated balance sheets at December 31 for our defined benefit pension and retiree health benefit plans, which were as follows:

The unrecognized net actuarial loss and unrecognized prior service cost (benefit) have not yet been recognized in net periodic pension costs and are included in accumulated other comprehensive loss at December 31, 2014.

A change to our U.S. retiree health benefit plan was approved in 2014 and communicated to retirees in January 2015. Beginning in 2016, Medicare-eligible retirees and Medicare-eligible dependents will choose health care coverage from insurance providers through a private Medicare supplement marketplace, while still receiving financial support from Lilly. This change decreased our retiree health benefit obligation and increased our unrecognized prior service benefit as of December 31, 2014 by $520.8 million.

During 2015, we expect the following components of accumulated other comprehensive loss to be recognized as components of net periodic benefit cost:

We do not expect any plan assets to be returned to us in 2015.

The following represents our weighted-average assumptions as of December 31:

We annually evaluate the expected return on plan assets in our defined benefit pension and retiree health benefit plans. In evaluating the expected rate of return, we consider many factors, with a primary analysis of current and projected market conditions; asset returns and asset allocations; and the views of leading financial advisers and economists. We may also review our historical assumptions compared with actual results, as well as the assumptions and trend rates utilized by similar plans, where applicable. Health-care-cost trend rates are assumed to increase at an annual rate of 6.4 percent for the year ended December 31, 2015, decreasing by approximately 0.2 percent per year to an ultimate rate of 5.0 percent by 2023.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:

Amounts relating to defined benefit plans with projected benefit obligations in excess of plan assets were as follows at December 31:

Amounts relating to defined benefit plans with accumulated benefit obligations in excess of plan assets were as follows at December 31:

The total accumulated benefit obligation for our defined benefit pension plans was $10.88 billion and $9.13 billion at December 31, 2014 and 2013, respectively.

Net pension and retiree health benefit expense included the following components:

If the healthcare-cost trend rates were to be increased by one percentage point, the December 31, 2014, accumulated postretirement benefit obligation would increase by $50.2 million and the aggregate of the service cost and interest cost components of the 2014 annual expense would increase by $7.8 million. A one percentage point decrease in these rates would decrease the December 31, 2014, accumulated postretirement benefit obligation by $52.7 million, and the aggregate of the 2014 service cost and interest cost by $6.6 million.

The following represents the amounts recognized in other comprehensive income (loss) for the year ended December 31, 2014:

We have defined contribution savings plans that cover our eligible employees worldwide. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save. Our contributions to the plans are based on employee contributions and the level of our match. Expenses under the plans totaled $153.3 million, $147.7 million, and $136.3 million for the years ended December 31, 2014, 2013, and 2012, respectively.

We provide certain other postemployment benefits primarily related to disability benefits and accrue for the related cost over the service lives of employees. Expenses associated with these benefit plans for the years ended December 31, 2014, 2013, and 2012 were not material.

Benefit Plan Investments

Our benefit plan Investment policies are set with specific consideration of return and risk requirements in relationship to the respective liabilities. U.S. and Puerto Rico plans represent approximately 80 percent of our global Investments. Given the long-term nature of our liabilities, these plans have the flexibility to manage an above-average degree of risk in the asset portfolios. At the investment-policy level, there are no specifically prohibited Investments. However, within individual Investment manager mandates, restrictions and limitations are contractually set to align with our Investment objectives, ensure risk control, and limit concentrations.

We manage our portfolio to minimize concentration of risk by allocating funds within asset categories. In addition, within a category we use different managers with various management objectives to eliminate any significant concentration of risk.

Our global benefit plans may enter into contractual arrangements (derivatives) to implement the local Investment policy or manage particular portfolio risks. Derivatives are principally used to increase or decrease exposure to a particular public equity, fixed income, commodity, or currency market more rapidly or less expensively than could be accomplished through the use of the cash markets. The plans utilize both exchange-traded and over-the-Counter Instruments. The maximum exposure to either a market or counterparty credit loss is limited to the carrying value of the receivable, and is managed within contractual limits. We expect all of our counterparties to meet their obligations. The gross values of these derivative receivables and payables are not material to the global asset portfolio, and their values are reflected within the tables below.

The defined benefit pension and retiree health benefit plan allocation for the U.S. and Puerto Rico currently comprises approximately 85 percent growth Investments and 15 percent fixed-income Investments. The growth Investment allocation encompasses U.S. and international public equity securities, hedge funds, private equity-like Investments, and real estate. These portfolio allocations are intended to reduce overall risk by providing diversification, while seeking moderate to high returns over the long term.

Public equity securities are well diversified and invested in U.S. and international small-to-large companies across various asset managers and styles. The remaining portion of the growth portfolio is invested in private alternative Investments.

Fixed-income Investments primarily consist of fixed-income securities in U.S. treasuries and agencies, emerging market debt obligations, corporate bonds, mortgage-backed securities, and commercial mortgage-backed obligations.

Hedge funds are privately owned institutional Investment funds that generally have moderate liquidity. Hedge funds seek specified levels of absolute return regardless of overall market conditions, and generally have low correlations to public equity and debt markets. Hedge funds often invest substantially in financial market Instruments (stocks, bonds, commodities, currencies, derivatives, etc.) using a very broad range of trading activities to manage portfolio risks. Hedge fund strategies focus primarily on security selection and seek to be neutral with respect to market moves. Common groupings of hedge fund strategies include relative value, tactical, and event driven. Relative value strategies include arbitrage, when the same asset can simultaneously be bought and sold at different prices, achieving an immediate profit. Tactical strategies often take long and short positions to reduce or eliminate overall market risks while seeking a particular Investment opportunity. Event strategy opportunities can evolve from specific company announcements such as mergers and acquisitions, and typically have little correlation to overall market directional movements. Our hedge fund Investments are made through limited partnership interests primarily in fund-of-funds structures to ensure diversification across many strategies and many individual managers. Plan holdings in hedge funds are valued based on net asset values (NAVs) calculated by each fund or general partner, as applicable, and we have the ability to redeem these Investments at NAV.

Private equity-like Investment funds typically have low liquidity and are made through long-term partnerships or joint ventures that invest in pools of capital invested in primarily non-publicly traded entities. Underlying Investments include venture capital (early stage investing), buyout, and special situation investing. Private equity management firms typically acquire and then reorganize private companies to create increased long term value. Private equity-like funds usually have a limited life of approximately 10-15 years, and require a minimum Investment commitment from their limited partners. Our private Investments are made both directly into funds and through fund-of-funds structures to ensure broad diversification of management styles and assets across the portfolio. Plan holdings in private equity-like Investments are valued using the value reported by the partnership, adjusted for known cash flows and significant events through our reporting date. Values provided by the partnerships are primarily based on analysis of and judgments about the underlying Investments. Inputs to these valuations include underlying NAVs, discounted cash flow valuations, comparable market valuations, and may also include adjustments for currency, credit, liquidity and other risks as applicable. The vast majority of these private partnerships provide us with annual audited financial statements including their compliance with fair valuation procedures consistent with applicable accounting standards.

Real estate is composed of both public and private holdings. Real estate Investments in registered Investment companies that trade on an exchange are classified as Level 1 on the fair value hierarchy. Real estate Investments in funds measured at fair value on the basis of NAV provided by the fund manager are classified as Level 3. These NAVs are developed with inputs including discounted cash flow, independent appraisal, and market comparable analyses.

Other assets include cash and cash equivalents and mark-to-market value of derivatives.

The cash value of the trust-owned insurance contract is invested in investment-grade publicly traded equity and fixed-income securities.

Other than hedge funds, private equity-like Investments, and real estate, which are discussed above, we determine fair values based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses.

The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2014 by asset category are as follows:

No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended December 31, 2014.

The activity in the Level 3 Investments during the year ended December 31, 2014 was as follows:

The fair values of our defined benefit pension plan and retiree health plan assets as of December 31, 2013 by asset category are as follows: