ELI LILLY AND COMPANY 2016 FINANCIAL REPORT NOTICE OF 2017 ANNUAL MEETING PROXY STATEMENT 2016 Financial Highlights

Year Ended December 31

ELI LILLY AND COMPANY AND SUBSIDIARIES 2016 2015 Change % (Dollars in millions, except per-share data)

REVENUE $ 21,222.1 $ 19,958.7 6 RESEARCH AND DEVELOPMENT 5,243.9 4,796.4 9

RESEARCH AND DEVELOPMENT AS A PERCENT OF REVENUE 24.7% 24.0%

NET INCOME $ 2,737.6 $ 2,408.4 14

EARNINGS PER SHARE—DILUTED 2.58 2.26 14

RECONCILING ITEMS1:

Venezuela devaluation charge 0.19 —

Novartis Animal Health inventory step-up — 0.10

Amortization of intangible assets 0.44 0.39

Acquired in-process research and development 0.02 0.33

Asset impairment, restructuring, and other special charges 0.29 0.25

Net charge related to repurchase of debt ­— 0.09

NON-GAAP EARNINGS PER SHARE—DILUTED2 3.52 3.43 3

DIVIDENDS PAID PER SHARE 2.04 2.00

CAPITAL EXPENDITURES 1,037.0 1,066.2 (3)

EMPLOYEES 41,975 41,275 2

1. For more information on these reconciling items, see the Financial Results section of the Executive Overview on page F23 of the Financial Report. 2. Numbers may not add due to rounding.

Revenue Growth Across Return on Assets and Total Shareholder Therapeutic Areas Shareholders’ Equity Return ($ MILLIONS, PERCENT GROWTH) ROE increased in 2016 as a result of an increase of net income mainly Over the past five years, Lilly’s annualized total shareholder return has Revenue in Endocrinology increased 15 percent primarily driven due to higher sales for Trulicity and other new pharmaceutical products averaged 17 percent, compared to 15 percent for the S&P benchmark, by growth of Trulicity, Forteo, Jardiance, Trajenta, and Basaglar. and lower acquired in-process research and development charges. due to the increase in the stock price and steady dividend stream. Oncology grew 6 percent primarily due to higher volumes for Cyramza and Erbitux, partially offset by lower volumes for Alimta, and Cardiovascular grew 5 percent mostly due to higher realized price

for Cialis. Revenue in Neuroscience decreased 7 percent driven by lower 29.5% 27.8% volumes for Zyprexa and Cymbalta due to loss of patent protection. 39.8% 18.5% 32.4%

$313.6 16.1% $3,158.2 14.1% 25.4% 13.7%

+38% 24.0% -1% 12.5%

$8,082.8 16.3% 7.5% 13.7% 6.8% 6.8% $3,225.4 +15% 12.0%

Endocrinology 7.2% +5% Neuroscience 1.4% Oncology $3,721.8 $2,720.3 Cardiovascular 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 +6% -7% Other Animal Health Return on Assets (ROA) Return on Shareholders’ Equity (ROE) Lilly S&P 500 -10.4% Table of Contents

YEAR IN REVIEW 2016 Financial Highlights...... Inside front cover Corporate Information...... Inside back cover

FINANCIAL REPORT Forward-Looking Statements...... F1 Business...... F2 Risk Factors...... F16 Management’s Discussion and Analysis of Results of Operations and Financial Condition...... F22 Consolidated Statements of Operations...... F44 Consolidated Statements of Comprehensive Income...... F45 Consolidated Balance Sheets...... F46 Consolidated Statements of Shareholders’ Equity...... F47 Consolidated Statements of Cash Flows...... F48 Notes to Consolidated Financial Statements...... F49 Management’s Reports...... F98 Reports of Independent Registered Public Accounting Firm...... F100 Selected Financial Data...... F102 Trademarks Used in this Report...... F104

PROXY Notice of Annual Meeting of Shareholders...... P1 Proxy Statement Summary...... P2 Governance...... P9 Ownership of Company Stock...... P32 Compensation...... P33 Audit Matters...... P59 Directors’ Deferral Plan...... P62 Shareholder Proposals...... P64 Other Information...... P66 Appendix A...... P70 Appendix B...... P72 Annual Meeting Admission Ticket...... P88 Forward-Looking Statements This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities FINANCIAL REPORT 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: • the timing of anticipated regulatory approvals and launches of new products; • market uptake of recently launched products; • competitive developments affecting current products; • the expiration of intellectual property protection for certain of our products; • our ability to protect and enforce patents and other intellectual property; • the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and access to pharmaceuticals; • regulatory compliance problems or government investigations; • regulatory actions regarding currently marketed products; • unexpected safety or efficacy concerns associated with our products; • issues with product supply stemming from manufacturing difficulties or disruptions; • regulatory changes or other developments; • changes in patent law or regulations related to data-package exclusivity; • litigation involving past, current, or future products as we are largely self-insured; • unauthorized disclosure or misappropriation of trade secrets or other confidential data stored in our information systems, networks, and facilities, or those of third parties with whom we share our data; • changes in tax law; • changes in foreign currency exchange rates, interest rates, and inflation; • asset impairments and restructuring charges; • changes in accounting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission; • acquisitions and business development transactions and related integration costs; • information technology system inadequacies or operating failures; • reliance on third-party relationships and outsourcing arrangements; and • the impact of global macroeconomic conditions.

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. 1 F1 FINANCIAL REPORT F2 , ) ™ , e discover . W Abasaglar , develop, and bring , develop, and bring , insulin analogs for the treatment of , insulin analogs for the treatment of ™ rajenta) and metformin hydrochloride for use in the rajenta) and metformin hydrochloride origin for the treatment of diabetes fordable food. Elanco companion animal products help companion animal products help fordable food. Elanco Humalog Mix 50/50 and , ® , including: . Most of the products we sell today were discovered or developed by our own we sell today were discovered . Most of the products , happier lives. a combination tablet of linagliptin (T for the treatment of human growth hormone deficiency and certain pediatric growth for the treatment of human growth hormone deficiency and certain pediatric , , Humalog Mix 75/25 ® ® , for the treatment of type 2 diabetes (approved in the U.S., Europe, and Japan in 2014, , for the treatment of type 2 diabetes human insulin of recombinant DNA , a combination tablet of linagliptin and empagliflozin (Jardiance) for the treatment of type 2 , a combination tablet of linagliptin and empagliflozin (Jardiance) for the , (insulin glargine injection), a long-acting human insulin analog for the treatment of diabetes (insulin glargine injection), a long-acting human insulin analog for the , a combination tablet of empagliflozin and metformin hydrochloride for the treatment of type , a combination tablet of empagliflozin and metformin hydrochloride for ® ® , , for the treatment of type 2 diabetes ® ® ® , for the treatment of type 2 diabetes (approved in the U.S. and Europe in 2014 and Japan in , for the treatment of type 2 diabetes ® ® ® for the treatment of osteoporosis in postmenopausal women and men at high risk for fracture , for the treatment of osteoporosis in postmenopausal women and men for the prevention and treatment of osteoporosis in postmenopausal women and for the , for the prevention and treatment of osteoporosis in postmenopausal women , healthier ® ® rajenta rulicity , more active lives. Our vision is to make a significant contribution to humanity by improving global contribution to humanity by improving Our vision is to make a significant , more active lives. Humalog treatment of type 2 diabetes Jardiance Forteo conditions reduction of the risk of invasive breast cancer in postmenopausal women with osteoporosis and reduction of the risk of invasive breast cancer in postmenopausal women postmenopausal women at high risk for invasive breast cancer Humatrope 2 diabetes (approved in the U.S. and Europe in 2015), extended release formulation approved in the 2 diabetes (approved in the U.S. and Europe in 2015), extended release U.S. in 2016 Basaglar women and for glucocorticoid-induced osteoporosis in men and postmenopausal Evista (launched in the U.S. in 2016 and in Japan and Europe in 2015 under the trade name (launched in the U.S. in 2016 and in Japan and Europe in 2015 under diabetes Humulin 2015) T European label in 2016) and to reduce the risk of cardiovascular cardiovascular data included in the disease (approved in the death in adult patients with type 2 diabetes and established cardiovascular U.S. in 2016) Glyxambi diabetes (approved in the U.S. in 2015 and Europe in 2016) Synjardy Jentadueto T • • • • • • • • • • • • e manufacture and distribute our products through facilities in the United States (U.S.), Puerto Rico, and 14 through facilities in the United States (U.S.), Puerto Rico, and 14 e manufacture and distribute our products Human Pharmaceutical Products include: Our human pharmaceutical products Endocrinology products other countries. Our products are sold in approximately 125 countries. other countries. Our products are sold W pets live longer develop, manufacture, and market products in two business segments—human pharmaceutical products and segments—human pharmaceutical and market products in two business develop, manufacture, animal health products. live longer to make medicines that help people human pharmaceutical business is The mission of our healthier century health in the 21st on our ability to continue to discover success depends to a great extent scientists, and our new medicines. to market innovative and markets division, develops, manufactures, business, operating through our Elanco Our animal health the food industry Elanco food animal products help food animals and companion animals. products for both supply of safe, nutritious and af produce an abundant Business to succeed in 1901 in Indiana was incorporated or "Lilly") “company” or “registrant” Company (the Eli Lilly and Colonel Eli Lilly in 1876 by in Indianapolis, Indiana, business founded manufacturing to the drug 2 FINANCIAL REPORT F3 Oncology products Immunology products Neuroscience products,including: • • • • • • • • • • • • • • Erbitux pleural mesothelioma chemotherapy treatment;andincombinationwithanotheragent,forthetreatmentofmalignant squamous NSCLCinpatientswhosediseasehasnotprogressedimmediatelyfollowing advanced non-squamousNSCLC;asmonotherapyforthemaintenancetreatmentofnon- lung cancer(NSCLC)forpatientswithnon-squamouscellhistology;thesecond-linetreatmentof Alimta evaluated for amyloid neuriticplaquesinthebrainsofadultpatientswithcognitiveimpairmentwhoarebeing Amyvid nervosa, andpanicdisorder and psoriatic arthritis (approvedinJapan in2016) T rheumatoid arthritis(RA) Olumiant with anotheragentforthetreatmentofsofttissuecarcinoma Lartruvo NSCLC with otheragentsasafirst-linetreatmentforepidermal growthfactorreceptorexpressingsquamous treatment ofmetastaticsquamousNSCLC,andapproved in2016theEUforusecombination Portrazza treatment ofbladdercancer of metastaticbreastcancer Gemzar Cyramza combination withradiationtherapyforthetreatmentofcertaintypesheadandneckcancers certain typesofcolorectalcancers;andasasingleagent,incombinationwithchemotherapy Prozac Strattera disorder Zyprexa pain orchronicduetoosteoarthritis generalized anxietydisorder Cymbalta men forcertainconditionsassociatedwithadeficiencyorabsenceoftestosterone Axiron altz ® , forthetreatmentofmoderate-to-severe plaquepsoriasis(approvedtheU.S.and EUin2016) ® ® ® ® , forthefirst-linetreatment,incombinationwithanotheragent,ofadvancednon-smallcell ® , atopicalsolutionoftestosterone,appliedbyunderarmapplicator ® , andbipolarmaintenance , indicatedbothasasingleagentandwithanotherchemotherapyforthetreatmentof , forthetreatmentofmajordepressivedisorder colorectal cancer approved in2015theU.S.,andEU2016,asasecond-linetreatmentofmetastatic second-line treatmentofmetastaticNSCLC approved in2014theU.S.,andEU2016,combinationwithanotheragentasa or metastaticgastriccancer single agentandincombinationwithanotherasasecond-linetreatmentofadvanced approved in2014theU.S.andEuropeanUnion(EU),Japan2015,bothasa ® ™ , aradioactivediagnosticagentforpositronemissiontomography(PET)imagingofbeta- ® ® ® , forthetreatmentofpancreaticcancer;incombination withotheragents,forthetreatment , forthetreatmentofschizophrenia,acutemixedormanicepisodesassociatedwithbipolarI ® ® , forthetreatmentofattention-deficithyperactivitydisorder , approvedintheU.S.,andconditionally the EU,in2016forusecombination , forthetreatmentofvariouscancers,withapprovalsasfollows: , approvedintheEU2017 forthetreatmentofadultswithmoderately-to-severely active , forthetreatmentofmajordepressivedisorder , approvedin2015theU.S.forusecombination withotheragentsasafirst-line , including: Alzheimer's diseaseandothercausesofcognitivedecline , including: , NSCLC,andadvancedorrecurrentovariancancer; andintheEUfor , fibromyalgia,andchronicmusculoskeletalpainduetolowback , obsessive-compulsivedisorder , diabeticperipheralneuropathicpain, , forreplacementtherapyin , bulimia , orin 3 FINANCIAL REPORT F4 , or , atherectomy etmedica, Inc.'s U.S. feline, The acquisition diversifies Elanco's The acquisition diversifies Elanco's ficiency and growth and also controls and ficiency and growth , vaccines to prevent a variety of infectious ® yme disease in dogs dogs, cats, and horses anticoccidial agents for use in poultry , anticoccidial agents , vaccines to prevent a variety of infectious diseases in dogs, , vaccines to prevent a variety of infectious e adapt our marketing methods and product emphasis in various ® ™ , and Fel-O-Guard ® Acquired products include: 17 percent of our consolidated total revenue. No other distributor ax Ultra ® AmerisourceBergen Corporation, and Cardinal Health, Inc.—each leanness and performance enhancers for cattle and swine, respectively , leanness and performance enhancers Monteban

® Fel-O-V ™ , and , a vaccine to prevent L ® ® , a vaccine to prevent certain bronchial infections in dogs 8 percent and TRA ® yme and Duramune , UL a cattle feed additive that improves feed ef , a cattle feed additive and Paylean an antibiotic for the control and treatment of respiratory and enteric diseases in swine , an antibiotic for the control and treatment , a chewable tablet that kills fleas and prevents flea infestations on dogs , a chewable tablet that kills fleas and ® ® ® ® ® ® , a vaccine to prevent rabies in , a protein supplement to improve milk productivity in dairy cows , a protein supplement to improve milk a monthly chewable tablet for dogs that kills fleas, prevents flea infestations, prevents , a monthly chewable tablet for dogs ax , Maxiban ® , for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients stent thrombosis) events (including cardiovascular of thrombotic , for the reduction ® ® ® for the treatment of erectile dysfunction and benign prostatic hyperplasia benign prostatic dysfunction and of erectile , for the treatment an antibiotic used to control certain diseases in cattle, swine, and poultry , an antibiotic used to control certain ® ® ® ylan rifexis Bronchi-Shield Rumensin stent placement including canine distemper Duramune L Fel-O-V diseases in cats, including feline leukemia Rabvac heartworm disease, and controls intestinal parasite infections heartworm disease, and controls intestinal Comfortis Posilac T Denagard and poultry T Optaflexx Effient prevents coccidiosis Coban Cialis known as procedure with an artery-opening who are managed coronary syndrome with acute undergoing angioplasty intervention (PCI), including patients percutaneous coronary Duramune • • • • • • • • • • • • • • • e sell most of our products worldwide. W yme disease, rabies, and parvovirus. yme disease, rabies, and parvovirus. Animal Health Products animals include: Our products for food Marketing W Our products for companion animals include: Our products for companion animals the acquisition of Boehringer Ingelheim V On January 3, 2017 we completed of those years. accounted for more than 10 percent of consolidated total revenue in any canine, and rabies vaccines portfolio—as well as a fully integrated manufacturing and research and canine, and rabies vaccines portfolio—as assets—in an all-cash transaction for approximately $885 million, development site and several pipeline purchased and other adjustments. subject to final inventory quantities adding vaccines for a range of common concerns such as bordetella, U.S. companion animal portfolio by L countries to meet local customer needs. Human Pharmaceuticals—United States independent wholesale In the U.S., we distribute human pharmaceutical products principally through 2014, three wholesale distributors in distributors, with some sales directly to pharmacies. In 2016, 2015, and the U.S.—McKesson Corporation, accounted for between , including: products Cardiovascular 4 FINANCIAL REPORT F5 where itisconsistentwithallowablepromotionalpractices. animal products.Elancoalsoadvertisescertaincompanion animalproductsdirectlytopetownersinmarkets products primarilytoproducersandveterinariansfor food animalproductsandtoveterinariansforcompanion sales forceoutsidetheU.S.Elancosellsitsproducts primarilytowholesaledistributors.Elancopromotesits Our Elancoanimalhealthbusinessunitemploysfield salespeoplethroughouttheU.S.andhasanextensive Animal HealthProducts companies, includingthefollowing: Certain ofourhumanpharmaceuticalproductsaremarketedinarrangementswithother Human PharmaceuticalMarketingCollaborations products throughindependentdistributors. which weoperate,maintainourownsalesorganizations,butinsomesmallercountriesmarket single groupinconsolidatedrevenue.Distributionpatternsvaryfromcountryto While theproductsmarketedvaryfromcountryto Outside theU.S,wepromoteourhumanpharmaceuticalproductsprimarilythroughsalesrepresentatives. Human Pharmaceuticals—OutsidetheUnitedStates into arrangementswiththeseorganizationsprovidingfordiscountsorrebatesonourproducts. organizations, governmentandlong-termcareinstitutions,hospitals,certainretailpharmacies.W W leverage ourownresourcesandthestrengthsofpartnersinvariousmarkets. products. W certain productsdirectlytoconsumersintheU.S.,andwemaintainwebsiteswithinformationaboutourmajor and samplesofcertainproductstophysicians,exhibitatmedicalmeetings.Inaddition,weadvertise upon physiciansandotherhealthcareprofessionals.W W Other For additionalinformation,see"FinancialStatementsandSupplementaryData—Note4,Collaborations e maintainspecialbusinessgroupstoservicewholesalers,pharmacybenefitmanagers,managedcare e promoteourmajorhumanpharmaceuticalproductsintheU.S.throughsalesrepresentativeswhocall • • • • Arrangements." marketing rightsinJapanandcertainothercountries. marketing rightsinCanada, continue tobesharedinthesameproportionasunderpreviousarrangement.W promoting Ef Sankyo inmajorEuropeanmarkets.Ef and certainothercountries. Ef commercialized byMerckKGaA,andwereceiveroyaltiesfromKGaA. commercialization rightsforErbituxinthosetwocountries.OutsidetheU.S.andCanada,is Company andE.R.Squibb(collectively Through September30,2015,ErbituxwasmarketedintheU.S.andCanadabyBristol-MyersSquibb W commercialize W e co-promoteCymbaltainJapanwithShionogi&Co.Ltd. e andBoehringerIngelheimhaveadiabetesallianceunderwhichwejointlydevelop fient isco-promotedwithusbyDaiichiSankyoCo.,Ltd.(DaiichiSankyo)intheU.S.,Brazil,Mexico, e supplementouremployeesalesforcewithcontractorganizationsasappropriateto fient inmajorEuropeanmarkets;however T rajenta, Jentadueto,Jardiance,Glyxambi,Synjardy Through theendof2015,wealsoco-promotedEf Australia, Russia,andcertainothercountries.DaiichiSankyoretainssole fective January2016,DaiichiSankyohasbeenexclusively , BMS).Ef e advertiseinmedicaljournals,distributeliterature , endocrinologyproductsconstitutethelargest fective October1,2015,BMStransferredtousall , theeconomicresultsforthesecountrieswill , andBasaglarinmajormarkets. fient withDaiichi . Inmostcountriesin e retainsole e enter 5 FINANCIAL REPORT F6 forts , ficacy fectiveness; Therefore, generic s biologics may be , once approved, will altz, and many of the T biosimilar is a subsequent version A fectiveness; marketing ef fectiveness; marketing , Portrazza, and There can be no assurance that our ef There can be no assurance rulicity This product has launched as a follow-on T . ficacy of the innovator product. fective human pharmaceutical and animal health fective human pharmaceutical The extent to which a biosimilar , and in many cases require, pharmacists to substitute , and in many cases require, pharmacists , when a branded non-biologic human pharmaceutical , when a branded non-biologic human , a new insulin glargine product which has the same amino acid , it must be made unless the prescribing physician expressly , it must be made unless the prescribing , and will depend on a number of regulatory and marketplace factors Accordingly , it normally faces intense price competition from generic forms of the product. , it normally faces intense price competition , and ease of use; price and demonstrated cost-ef , and ease of use; , governments have or are developing regulatory pathways to approve biosimilars as , governments have or are developing regulatory pathways to approve e believe our long-term competitive success depends upon discovering and developing (either alone or in upon discovering and developing competitive success depends e believe our long-term fectiveness, safety fected by the approval of follow-on biologics, also known as biosimilars. fected by the approval of follow-on biologics, also known as biosimilars. collaboration with others) or acquiring innovative, cost-ef collaboration with and research and development of new products, processes, and uses. Most new products that we introduce and uses. Most new products development of new products, processes, and research and that are later already on the market or products other branded or generic products must compete with therapeutic or cost products or delivery systems with If competitors introduce new developed by competitors. or both. sales, progressive price reductions, can be subject to decreased advantages, our products W improving the value to payers, and continuously improved outcomes and deliver products that provide environment. operations in a highly competitive productivity of our products, and it is possible that our products will be or become will result in commercially successful a result of products developed by our competitors. uncompetitive from time to time as Generic Pharmaceuticals we face is from generic pharmaceuticals. In the U.S. and the EU, One of the biggest competitive challenges human pharmaceuticals (other than biological products (biologics)) the regulatory approval process for clinical trials to demonstrate their safety and ef exempts generics from costly and time-consuming on the safety and ef allowing generic manufacturers to rely Competition highly companies in of many other globally with products products compete pharmaceutical Our human care of animal health with products compete globally health products markets. Our animal competitive businesses. animal health that operate and other companies chemical, as well as pharmaceutical, companies include and animal health products factors for both human pharmaceutical Important competitive ef sequence as the product currently marketed by a competitor manufacturers generally invest far less than we do in research and development and can price their products than we do in research and development and can price their products manufacturers generally invest far less much lower than our branded products. loses its market exclusivity the U.S., intellectual property protection is weak, and we must compete forbids it. In many countries outside of our products. Many of our animal health products also compete with with generic or counterfeit versions generics. Biosimilars Cyramza, Erbitux, Several of our current products, including for Lilly’ new molecular entities (NMEs) in our research pipeline are biologics. Competition af generic substitution for non- be substituted for the innovator biologic in a way that is similar to traditional biologic products, is not yet entirely clear that are still developing. For example, with our partner Biosimilars may present both competitive challenges and opportunities. Boehringer Ingelheim, we developed Basaglar biologic in the U.S., and as a biosimilar in the EU, and Japan. Public and private payers typically encourage the use of generics as alternatives to brand-name drugs in their the use of generics as alternatives to brand-name drugs in their Public and private payers typically encourage generally allow healthcare programs. Laws in the U.S. generic drugs that have been rated under government procedures to be essentially equivalent to a brand- generic drugs that have been rated name drug. Where substitution is mandatory alternatives to innovator-developed biologics, but the patent for the existing, branded product must expire in a alternatives to innovator-developed biologics, but the patent for the existing, given market before biosimilars may enter that market. of an an approved innovator biologic that, due to its physical/structural similarity to the original product, is of an an approved innovator biologic that, due to its physical/structural the full testing required of the originator approved based on an abbreviated data package that relies in part on product. Globally 6 FINANCIAL REPORT F7 may extendtheoriginalpatentterm: is oftenyearspriortothelaunchofacommercialproduct.Furtherpatenttermadjustmentsandrestorations each relevantcountryareavailableforaperiodof20yearsfromthefilingdatePCT process, whichisdescribedinthe“ResearchandDevelopment”sectionbelow covering thecompoundsaregenerallyfiledduringDiscoveryResearchPhaseofdrugdiscovery international patentapplications,usuallyfiledunderthePatentCooperation U.S., variousEuropeancountries,andJapan. patents claimingtheactiveingredient(thecompoundpatent),particularlythoseinmajormarketssuchas the The patentprotectionanticipatedtobeofmostrelevancehumanpharmaceuticalsisprovidedbynational intellectual propertyprotectionintheformofdataunderpharmaceuticalregulatorylaws. and manufacturingprocesses.Inaddition,asdiscussedbelow large numberofpatentsintheU.S.andmanyothercountriesrelatingtoproducts,productuses,formulations, innovations andinvestinthesearchfornewmedicines.W Intellectual propertyprotectioniscriticaltoourabilitysuccessfullycommercializelifesciences Overview Patents, T operations. comparable. areas inwhichthepayerhastakenpositionthatmultiplebrandedproductsaretherapeutically providing rebates.Priceisanincreasinglyimportantfactorinformularydecisions,particularlytreatment not onlyonthebasisofproductattributessuchasef levels, andhigherdeductibles.Consequently result inhigherconsumerout-of-pocketcost,suchasnon-preferredco-paytiers,increasedco-insurance restrictions, suchaspriorauthorizationsandformularyexclusions,orduetoreimbursementlimitationswhich placement canleadtoreducedusageofadrugfortherelevantpatientpopulationduecoverage on aplan'sformulary)andreimbursement(theassociatedout-of-pocketcosttotheconsumer).Formulary Payers typicallymaintainformularieswhichspecifycoverage(theconditionsunderdrugsareincluded have beenconsolidatingintofewer the competitivemarketplaceforhumanpharmaceuticals.Healthplansandpharmaceuticalbenefitmanagers In theU.S.privatesector U.S. PrivateSectorPayerConsolidation • • of regulatoryreviewandotherfactors. Japan, Korea,and sometimes availabletoextendthelifeofaEuropean patentuptoanadditionalfiveyears.Similarly of may beextendedformorethan14yearsbeyondFDA it takestheFDA be calculateduntilproductapprovalduetouncertainty aboutthedurationofclinicaltrialsandtime clinical trialsandtheFDA product maybeeligibleforpatenttermrestorationto make upforaportionofthetimeinvestedin review bytheU.S.FoodandDrug Patent termrestorationisastatutoryrightprovidedto U.S.patentsthatclaiminventionssubjectto Of the eventthatapatentisdelayedduringexaminationbyUnitedStatesPatentand Patent termadjustmentisastatutoryrightavailabletoallU.S.patentapplicantsprovidereliefin fer formsofpatenttermrestoration.Forexample,Supplementary ProtectionCertificatesare fice (USPT rademarks, andOtherIntellectualPropertyRights These downwardpricingpressurescouldnegativelyaf O). toreviewanapplication. , consolidationandintegrationamonghealthcareprovidersisalsoamajorfactorin Australia, patenttermscanbeextendeduptofiveyears, dependingonthelength reviewprocess.Patenttermrestorationislimitedby a formulaandcannot , largerentities,thusenhancingtheirpurchasingstrengthandimportance. Administration (FDA). , pharmaceuticalcompaniescompeteforformularyplacement These patentsmaybeissuedbaseduponthefilingof There isafive-yearcaponanyrestoration,andnopatent ficacy , safetyprofile,orpatienteaseofuse,butalsoby e own,haveappliedfor approval.SomecountriesoutsidetheU.S.also , forsomeproductswehaveadditionalef A singlepatentforahumanpharmaceutical fect ourfutureconsolidatedresultsof T reaty (PCT).Patentapplications . Ingeneral,nationalpatentsin , orarelicensedunder application,which T rademark fective , a , in 7 FINANCIAL REPORT F8 , which is fective market fective market fective data package fers between developed has the authority to cannot (with limited , a bar to generic approval, not a . For example, the period is five . For example, the Aspects of Intellectual Property Thus, certain types of patents, such as , the orphan exclusivity period is s regulatory submission data for the drug. s regulatory submission Act of 2010, the FDA rade-Related , meaning that the FDA T fecting fewer than 200,000 people in the U.S., or fecting fewer than 200,000 people in fectiveness of intellectual property protection for human rade Organization, more than 140 countries have agreed to T Among other benefits, orphan designation entitles the particular Among other benefits, orphan designation orld will determine on a case-by-case basis. Under the data protection will determine on a case-by-case basis. , a specific use of a drug or biologic can receive "orphan" designation , a specific use of a drug or biologic TRIPs. The primary forms of data protection are as follows: The primary forms cannot approve a biosimilar application until 12 years after initial cannot approve a biosimilar application fective market exclusivity for our animal health products, we have not competitor seeking approval of a biosimilar must file an application to show its competitor seeking approval of a biosimilar , and in a number of these markets we are unable to patent our products or to , and in a number of these markets we are unable to patent our products , the FDA A has the authority to grant additional data protection for approved drugs where has the authority to grant additional , upon loss of ef The period begins on the date of product approval and runs concurrently with the patent runs concurrently with the patent on the date of product approval and The period begins ficacy data which the FDA fecting more than 200,000 people but not reasonably expected to recover its development and fecting more than 200,000 people but fective patent protection for human pharmaceuticals typically results in the loss of ef in the loss typically results human pharmaceuticals protection for fective patent , in some cases the innovator company may be protected from approval of generic or other follow-on or other follow-on approval of generic be protected from company may cases the innovator , in some Regulatory authorities in major markets generally grant data package protection for a period of years data package protection for a period in major markets generally grant Regulatory authorities clinical investment required to complete approvals in recognition of the substantial following new drug applications from submitting regulatory protection prohibits other manufacturers trials. Data package based on the innovator company’ for marketing approval The base period of data package protection depends on the country data package protection depends The base period of term for any relevant patent. term for any relevant and Innovation Under the Biologics Price Competition years in the U.S. (12 years for new biologics as described below), 10 years in the EU, and eight years below), 10 years in the EU, and years for new biologics as described years in the U.S. (12 in Japan. approve biosimilars. innovator biologic and include a certain amount of safety molecule is highly similar to an approved and ef provisions of this law as well as to the term of any relevant patents, to the extent these added to the term of data protection While the term of the pediatric exclusivity attaches to the term protections have not already expired. is a regulatory exclusivity of any relevant patent, pediatric exclusivity patent right. Under the U.S. orphan drug law condition af if it is intended to treat a disease or af marketing costs through U.S. sales. marketing approval of the innovator biologic, subject to certain conditions. marketing approval of the innovator In the U.S., the FDA in pediatric or adolescent populations within a specified time the sponsor conducts specified testing provides an additional six months of exclusivity period. If granted, this “pediatric exclusivity” exclusivity use of the drug to seven years of market exceptions) approve another marketing application for the same drug for the same indication until exceptions) approve another marketing Unlike pediatric exclusivity expiration of the seven-year period. with any applicable patents. independent of and runs in parallel , many developing countries, and some developed countries, do not provide ef , many developing countries, and some developed countries, do not provide • • • • fective rights are available to patent owners. Implementation of this agreement dif fective rights are available to patent owners. Implementation of this agreement exclusivity for the product, which often results in severe and rapid decline in revenues for the product. for the product. decline in revenues in severe and rapid which often results for the product, exclusivity However trade manufacturing patent through of the compound beyond the expiration of a new medicine versions available that may be or data protection use or formulations, on methods of patents secrets, later-expiring regulatory laws. under pharmaceutical Loss of ef Outside the major markets, the adequacy and ef pharmaceuticals varies widely enforce the patents we receive for our products. Under the generally experienced the rapid and severe declines in revenues that are common in the human generally experienced the rapid and severe declines in revenues that are pharmaceutical segment. Agreement (TRIPs) administered by the W and to assure that adequate and provide non-discriminatory protection for most pharmaceutical inventions ef for biopharmaceutical products and developing countries, with many developing countries limiting protection under their interpretation of “flexibilities” allowed under the agreement. in many developing countries. those on new uses of compounds or new forms of molecules, are not available Further protection even though it is specified in other forms of intellectual property Certain of our Elanco animal health products are covered by patents or protection. Historically 8 FINANCIAL REPORT F9 protected marketedproductsisasfollows: The mostrelevantU.S.patentprotectionordataforourtop-sellingrecentlylaunchedpatent- formulations, orusesthatmayextendexclusivitybeyondtheexpirationofcompoundpatent. our products,inadditiontothecompoundpatent,weholdotherpatentsonmanufacturingprocesses, particularly withrespecttothoseproductsdiscussedbelow—tobeimportantouroperations.Formanyof W Our IntellectualPropertyPortfolio property rightsheldbythem,orallegeathird-partyrightofownershipinourexistingintellectual competitors orotherthirdpartiesmayassertclaimsthatouractivitiesinfringepatentsintellectual marketing alternativeproductsorformulationsthatcompetewithourpatentedproducts.Inaddition, formulations, orprocessesdonotprecludeothermanufacturersfromemployingalternative found validandenforceableifchallenged.Moreover There isnoassurancethatthepatentsweareseekingwillbegrantedorhold e considerintellectualpropertyprotectionforcertainproducts,processes,uses,andformulations— • • • • • • • • • • • • biologics datapackageprotection(2026). T applied forapatentextensionto2025underthe restorationlaws. T biologic datapackageprotection(2028). T (2016) pluspediatricexclusivity(May2017). Strattera isprotectedbyapatentcoveringitsuseintreatingattentiondeficit-hyperactivitydisorder biologics datapackageprotection(2027). Portrazza isprotectedbyacompoundpatent(2025notincludingpossibleextension),and biologics datapackageprotection(2028). Lartruvo isprotectedbyacompoundpatent(2027,notincludingpossibleextension)and compound patent(2025notincludingpossibleextension). Jardiance, andtherelatedcombinationproductsGlyxambiSynjardy 2018) andusepatents(August2019). Forteo isprotectedbypatentsprimarilycoveringitsformulationandrelatedprocesses(December see "FinancialStatementsandSupplementaryData—Note15,Contingencies"). unpatentable inan patents coveringmethodsofusingEf Ef Cyramza isprotectedbybiologicsdatapackageprotection(2026). Cialis isprotectedbycompoundandusepatents(November2017). Alimta isprotectedbyavitaminregimenpatent(2021)pluspediatricexclusivity(2022). altz isprotectedbyacompoundpatent(2026notincludingpossibleextension)and rulicity isprotectedbyacompoundpatent(2024not including possiblepatentextension)andby rajenta andJentaduetoareprotectedbyacompound patent(2023),andBoehringerIngelheimhas fient isprotectedbyacompoundpatent(April2017)pluspediatricexclusivity(Octoberand inter partes reviewandweareappealingthosedecisions(forfurtherinformation fient withaspirin(2023),althoughthemethodpatentswereheld , patentsrelatingtoparticularproducts,uses, , areprotectedby---a . 9 FINANCIAL REPORT F10 s . This Application fient, among The agreement is , see “Financial s patents expire. ’ e are currently in litigation with Alimta, and Ef The compound patent for Cialis are invalid or not infringed. Act of 1984, commonly known as the Act of 1984, commonly known as the s NDA ’ ANDA, the generic manufacturer must The innovator must then file suit against the until after the innovator ficacy studies, i.e., a complete New Drug ANDA is then prohibited from approving the generic company’ erm Restoration T Additional information about this molecule is provided in Additional information about this molecule axman litigation involving the company . axman litigation involving Forteo, The FDA Application (ANDA). In an to approve generic versions of innovative human pharmaceuticals to approve generic versions of innovative cannot approve an Analysis—Executive Overview—Late-Stage Pipeline.” Analysis—Executive Overview—Late-Stage rademark protection varies throughout the world, with protection continuing in rademark protection varies throughout T in major European countries (compound patent 2029, not including possible patent countries (compound patent 2029, in major European Abbreviated New Drug The agreement calls for royalties of a single-digit percentage of net sales. The agreement calls for royalties of ® August 2019). Act, authorizes the FDA approval but before final resolution of their patent challenge. W s Discussion and ANDA altz in major European countries (compound patent and data package protection 2026, not including data package protection 2026, not countries (compound patent and altz in major European , after the innovator has marketed its product for four years, a generic manufacturer may file an , after the innovator has marketed its product for four years, a generic axman extension) T possible patent extension) Alimta in major European countries (vitamin regimen patent 2021) and Japan (patents covering use covering use and Japan (patents regimen patent 2021) (vitamin major European countries Alimta in with vitamins 2021) concomitantly to treat cancer 2017) patent November (compound European countries Cialis in major 2018) (data package protection January Cymbalta in Japan related patent covering its formulation and package protection July 2018; Forteo in Japan (data process Lartruvo in major European countries (compound patent and data package protection 2026, not and data package protection 2026, European countries (compound patent Lartruvo in major patent extension) including possible Olumiant . Establishing bioequivalence is generally straightforward and inexpensive for the generic company . Establishing bioequivalence is generally straightforward and inexpensive alleging that one or more of the patents listed in the innovator • • • • • • • orldwide, we sell all of our major products under trademarks that we consider in the aggregate to be orldwide, we sell all of our major products ficacy (NDA) by filing an allegation is commonly known as a “Paragraph IV certification.” generic manufacturer to protect its patents. by the trial court judge hearing the application for a 30-month period (which can be shortened or extended the first filer(s) of a Paragraph IV patent challenge). If one or more of the NDA-listed patents are challenged, all other generic manufacturers. certification may be entitled to a 180-day period of market exclusivity over patents on innovative human Generic manufacturers use Paragraph IV certifications extensively to challenge to launch “at risk,” i.e., after pharmaceuticals. In addition, generic companies have shown willingness receiving is the subject of a license agreement with GlaxoSmithKline (Glaxo), which assigns to us exclusively all rights with GlaxoSmithKline (Glaxo), which assigns to us exclusively all rights is the subject of a license agreement in the compound. for any reason other than a material breach by Lilly of the royalty not subject to termination by Glaxo obligation, after a substantial cure period. Patent Challenges and Patent In the U.S., the Drug Price Competition Hatch-W (other than biologics) without completion of safety and ef NDA-approved drug—not safety and demonstrate only “bioequivalence” between the generic version and the ef However ANDA numerous generic manufacturers in Hatch-W some countries as long as the mark is used, and in other countries as long as it is registered. Registrations is used, and in other countries as long as it is registered. Registrations some countries as long as the mark terms. are normally for fixed but renewable Patent Licenses subject to significant license agreements. Most of our major products are not important to our operations. Baricitinib (Olumiant), has been submitted for regulatory review in the U.S. and Japan and is protected by a for regulatory review in the U.S. and Japan and is protected by Baricitinib (Olumiant), has been submitted until 2030 (not including possible patent extension) and 2029 (not compound patent in the U.S. and Japan respectively including possible patent extension), "Management’ W Absent a patent challenge, the FDA other products. For more information on Hatch-W Outside the U.S., important patent protection or data protection includes: or data protection patent protection U.S., important Outside the Statements and Supplementary Data—Note 15, Contingencies.” 10 FINANCIAL REPORT F11 those products. distribution, labeling,marketing,advertising,disseminationofinformation,andpost-marketingsurveillance of U.S. andadministersrequirementscoveringthetesting,safety FDA Of particularimportanceistheFDA ef products andthediscovery at theproductionsite.Compliancewithlawsandregulationsaf food animalproducts,theimpactonhumanswhoconsumeaswellenvironment health productregulationsaddresstheadministrationofinoronanimal,andcase foreign lawsandregulationsconcerningtheenvironment,occupationalhealthsafety safety oftheproductswesell.Inaddition,ouroperationsaresubjecttocomplexfederal,state,local,and are extensivelyregulatedinallmajorworldmarkets.W Promotion, marketing,manufacturing,anddistributionofhumanpharmaceuticalanimalhealthproducts necessary forgovernmentalapprovalsisextremelycostlyandcansignificantlydelayproductintroductions. process oflaboratoryandclinicaltesting,dataanalysis,manufacturingdevelopment,regulatoryreview Our operationsareregulatedextensivelybynumerousnational,state,andlocalagencies. Government Regulation Supplementary Data—Note15,Contingencies.” challenges andlitigationinvolvingour many countriesoutsidetheU.S.,andweexpectthistrendtocontinue.Formoreinformationonadministrative widely Outside theU.S.,legaldoctrinesandprocessesbywhichpharmaceuticalpatentscanbechallengedvary information, see“FinancialStatementsandSupplementaryData—Note15,Contingencies.” investment fundsareattemptingtoinvalidateourpatentsbyfilingIPRchallengesintheUSPT are inFederalDistrictCourt.W federal districtcourt.Inaddition,thechallengedpatentsarenotaccordedpresumptionofvalidityasthey conducted before member ofthepublictofileapetitionwithUSPT In addition,thereisaprocedureinU.S.patentlawknownas and verysubstantial civilsettlements. against Lillyand othercompaniesunder theseandotherlawshave resultedincorporatecriminal sanctions increased theinter-agency coordinationofenforcementactivities.Severalclaims broughtbytheseagencies other agencieshaveincreased theirenforcementactivitieswithrespecttopharmaceutical companiesand Management, andstateattorneys general.Overthepastseveralyears,FDA, theDOJ,andmanyofthese Department ofHealthand Human Services,theFederal administered by governing kickbacks,falseclaims,unfairtradepractices, andconsumerprotection. federal andstatelaws,includingtheanti-kickback statuteandtheFalseClaims manner inwhichmanufacturersinteractwithpurchasers andprescribers,aresubjecttovariousotherU.S. The marketing,promotional,andpricingpracticesof human pharmaceuticalmanufacturers,aswellthe new productapprovals. comply withtheseregulationscouldadverselyaf delays innewproductapprovals.Certainofourproducts aremanufacturedbythirdparties,andtheirfailureto these requirementsinthefuture,wecouldbesubject tointerruptionsinproduction,finesandpenalties, ensure sustainedcompliancewithcGMP wide qualitysystemsinourmanufacturing,productdevelopment, andprocessdevelopmentoperationsto W Ministry ofHealth,LaborandW subject tosimilarregulatoryrequirements,notablybytheEuropeanMedicines current GoodManufacturingPractices(cGMP)regulations.OutsidetheU.S.,ourproductsandoperations are The FDA regulate someanimalhealthproducts. fort, expense,andcapitalinvestment. e makesubstantialinvestmentsofcapitalandoperatingexpensestoimplementcomprehensive,company- hasjurisdictionoverallofourhumanpharmaceuticalproductsandcertainanimalhealthinthe . Inrecentyears,wehaveexperiencedanincreaseinpatentchallengesfromgenericmanufacturers extensivelyregulatesallaspectsofmanufacturingqualityforhumanpharmaceuticalsunderits , amongothers,theDepartment ofJustice(DOJ),theOf The U.S.Departmentof Administrative PatentJudgesintheUSPT of OurOperations , development,andintroductionofnewproductswillcontinuetorequiresubstantial e arenowseeinginstanceswheregenericdrugcompaniesandsome elfare inJapan.Specificregulatoryrequirementsvaryfromcountryto intheU.S.PursuanttoFederalFood,Drug,andCosmetic Alimta patentsinEuropeandJapan,see“FinancialStatements Agriculture andtheU.S.EnvironmentalProtection andsimilarregulations.However fect usthroughfailuretosupplyproductordelays in O seekingthereviewofanyissuedU.S.patent.IPRsare e conductextensivepost-marketingsurveillanceofthe T rade Commission,theOf O usingalowerstandardofproofthanusedin inter partesreview(IPR),whichallowsany , ef fectiveness, manufacturing,qualitycontrol, fecting themanufactureandsaleofcurrent fice ofInspectorGeneral the , intheeventwefailtoadhere Agency intheEUand fice ofPersonnel These lawsare Act andstatelaws , andprivacy The lengthy Agency also O. Formore Act, the . Animal . 1 1 FINANCIAL REPORT F12 ficials with ficials with Act), criminal , in many prices), A. Additionally fects on pricing and ficials. A, the various jurisdictions in which we operate A, the various jurisdictions fected by these or other potential future , often generic, pharmaceutical choices), As noted above, outside the U.S., our business is U.S., our business above, outside the As noted , in general we expect that state, federal, and A) prohibits certain individuals and entities, including and entities, including certain individuals A) prohibits also imposes specific recordkeeping and internal and internal specific recordkeeping also imposes e give rebates to private payers who provide prescription e give rebates to private payers who A fering, or giving anything of value to foreign of value to foreign giving anything of fering, or , an annual fee is imposed on pharmaceutical , an annual fee is imposed on pharmaceutical . W ficial for the purpose of helping the company obtain or retain the company purpose of helping ficial for the The FCP , and financial position. Affecting Human Pharmaceutical Pricing, Reimbursement, and Affecting Human Pharmaceutical Additionally fected by the introduction of competitive products and generics in the fected by the introduction of competitive Act of 1977 (FCP Act of 1977 Actions fectiveness and value, including through the establishment of formal health fectiveness and value, including through the establishment of formal health . In recent years, several jurisdictions, including China, Brazil, and the United jurisdictions, including China, . In recent years, several , or payer developments. However These rebates are af fectiveness and cost/benefit analyses on medicines, the impact of which are uncertain at this fectiveness and cost/benefit analyses on medicines, the impact of which , public and private payers are increasingly restricting access to human pharmaceuticals based on , public and private payers are increasingly restricting access to human e cannot predict the extent to which our business may be af U.S. publicly traded companies, from promising, of from promising, traded companies, U.S. publicly controls requirements on U.S. publicly traded companies. publicly traded on U.S. controls requirements with foreign of and therefore involves significant interaction heavily regulated are employed by who prescribe human pharmaceuticals the U.S., the health care providers countries outside therefore, our are government entities; the purchasers of human pharmaceuticals the government and subject to regulation under the FCP prescribers and purchasers are interactions with these the FCP application and enforcement of In addition to the U.S. and at preventing and penalizing corrupt have laws and regulations aimed and supply our products anticompetitive behavior activities, in this area, increased their enforcement enhanced their laws and regulations Kingdom (U.K.), have and information sharing. level of cross-border coordination and/or increased the subject to additional administrative and legal proceedings and actions, It is possible that we could become (including treble damages under the False Claims which could include claims for civil penalties including exclusion from U.S. federal and other health care programs. sanctions, and administrative remedies, in future actions could have a material adverse impact on our It is possible that an adverse outcome consolidated results of operations, liquidity Regulations and Private Payer same class. cost-containment In most international markets, we operate in an environment of government-mandated (to other countries’ programs, which may include price controls, international reference pricing discounts and rebates, therapeutic reference pricing (to other restrictions on physician prescription levels, and mandatory generic substitution. Globally assessments of comparative ef including professional associations, technology assessment processes. In addition, third party organizations, conducting and publishing academic institutions, and non-profit entities associated with payers, are comparative ef time. W The U.S. Foreign Corrupt Practices Foreign Corrupt Practices The U.S. Access rebates to the federal government and respective state governments In the U.S., we are required to provide under state Medicaid and Medicaid Managed Care on their purchases of our human pharmaceuticals plus adjustments for price increases over time) and rebates to private programs (minimum of 23.1 percent types of health care facilities that serve low-income and uninsured payers who cover patients in certain and No rebates are required at this time in the Medicare Part B (physician patients (known as 340B facilities). reimbursement is set on an "average selling price plus 4.3 percent" hospital outpatient) program where to provide a discount of 50 percent of the cost of branded formula. Drug manufacturers are required D participants who are in the “doughnut hole” (the coverage gap in prescription drugs for Medicare Part Medicare prescription drug coverage). branded prescription drugs to specified government programs. manufacturers and importers that sell private sector Rebates are also negotiated in the the corrupt intent of influencing the foreign of intent of influencing the corrupt advantage. or gain any improper business to Medicare and to private payers who provide prescription drug benefits drug benefits to seniors covered by their customers. legislative, regulatory negative ef international legislative and regulatory developments could have further reimbursement for our human pharmaceutical products. 12 FINANCIAL REPORT F13 development processforhumanpharmaceuticalproducts: risks ofmedicinesastheyareusedtherapeutics. marketing surveillanceandadditionalclinicalstudiestocollectdataunderstandthebenefitspotential commercial success. of theprocess,andevenlate-stagedrugcandidatessometimesfailtoreceiveregulatoryapprovalorachieve process fromdiscoverytoregulatoryapprovalcantakeoveradecade.Drugcandidatesfailatanystage many thousandsofmoleculesdiscoveredbyresearchersultimatelybecomesanapprovedmedicine. Human pharmaceuticaldevelopmentistime-consuming,expensive,andrisky health andwellbeingoffarmanimalspets. scientists alsoleveragediscoveriesfromourhumanhealthlaboratoriestodevelopproductsenhancethe and potentialproductsfrominternalexternalsourcestomeetunmetveterinaryneeds.Ouranimalhealth Our Elancoanimalhealthinnovationstrategyisfocusedonidentifyinganddevelopingpromisingtechnologies promotion arrangements,jointventures,andacquisitions. take manyforms,includinglicensingarrangements,co-developmentandco-marketingagreements,co- technologies thatholdthepromisetocomplementandstrengthenourownef ef schools, andotherresearchorganizationsworldwidetoconductclinicaltrialsestablishthesafety based pharmaceuticalandbiotechnologycompanies.W T therapeutic approachesthatprovideadditionalvaluetopatients. developing NMEs,weseektoexpandthevalueofexistingproductsthroughnewuses,formulations,and than halfofourclinical-stagepipelinecurrentlyconsistingbiologics.Inadditiontodiscoveringand neurodegeneration, immunology Our internalhumanpharmaceuticalresearchfocusesprimarilyontheareasofcancer $5.24 billion postgraduate degrees,andhighlyskilledtechnicalpersonnel.Ourresearchdevelopmentexpenseswere development activities,includingasubstantialnumberofphysicians,scientistsholdinggraduateor 2016 research anddevelopmentbecausewebelieveitiscriticaltoourlong-termcompetitiveness. Our commitmenttoresearchanddevelopmentdatesbackmorethan140years.W Research andDevelopment o supplementourinternalef fectiveness ofourhumanpharmaceuticalproducts.W , weemployedapproximately9,300peopleinhumanpharmaceuticalandanimalhealthresearch in2016 , $4.80billion After approvalandlaunchofaproduct,weexpendconsiderableresourcesonpost- forts, wecollaboratewithothers,includingacademicinstitutionsandresearch- , andpain.W in2015 , and$4.73billion e haveastrongbiotechnologyresearchprogram,withmore The followingdescribesinmoredetailtheresearchand e activelyinvestinexternalresearchand e usetheservicesofphysicians,hospitals,medical in2014 . forts. . Onaverage,onlyoneoutof These investmentscan e investheavilyin , diabetes, At theendof The 13 FINANCIAL REPORT F14 After The Analysis— fective, and , shown initial ficient clinical benefit. ficient clinical benefit. ficacy to a predetermined level These trials are generally global in , or gene; or foreign, such as a , or gene; or foreign, . Safety testing is done first in ficacy The probability of any one candidate molecule The probability of fect disease processes, but often the target is fect disease processes, . Among our new investigational molecules currently in 45 drug candidates across all stages of human testing and a , to identify toxicity and other potential safety issues that would , to identify toxicity and other potential . In parallel, scientists work to identify safe, ef . In parallel, scientists work to identify , such as a protein, receptor , such as a protein, There is no guarantee that a potential medicine will receive ficacy in treating the targeted disease, or biomarkers of the ficacy in treating the targeted disease, fect on the target and meet other design criteria become candidate and meet other design criteria become fect on the target The resulting data is compiled and may be submitted to regulatory agencies The resulting data is compiled and The potential new drug is generally compared with existing competitive The potential new drug is generally fect on biological targets that appear to play an important role in one or more that appear to play an important fect on biological targets As a result, these molecules generally have a higher likelihood of success. As a result, these molecules generally . The early development phase can take several years to complete. The early development phase can take e are also developing new uses, formulations, or delivery methods for many of these e are also developing new uses, formulations, or delivery methods for , design, and synthesize promising molecules, screening tens of thousands of screening tens molecules, and synthesize promising , design, , and completing initial testing for safety and ef , and completing initial testing for safety s disease, pain, migraine, rheumatoid arthritis, psoriatic arthritis, and severe s disease, pain, migraine, rheumatoid arthritis, psoriatic arthritis, and severe ’ ficacy e are studying many other drug candidates in the earlier stages of development in our e are studying many other drug candidates in the earlier stages of development argets can be part of the body argets can be part e currently have approximately T ficiently Alzheimer molecules for their ef molecules for their diseases. af targets have been proven to virus or bacteria. Some disease or to yield insuf later prove to be irrelevant to the unproven and may the desired ef Molecules that have to the next phase of development. molecules and move product is extremely low becoming a commercial Phase Early Development to manufacture molecules, understanding how phase involves refining candidate The early development them ef laboratory tests and animals as necessary drug is typically administered to small populations of patients a safe dose has been established, the ef (Phase II) to look for initial signs of safety disease, and to continue to assess Discovery Research Phase Discovery years. can take many discovery phase, development, the drug research and phase of new The earliest identify Scientists preclude use in humans. In general, the first human tests (often referred to as Phase I) are conducted in preclude use in humans. In general, patients to assess safety and find the potential dosing range. small groups of healthy volunteers or Product Phase have already demonstrated safety and, typically Product phase (Phase III) molecules economical manufacturing processes. Long-term animal studies continue to test for potential safety economical manufacturing processes. the early development phase, approximately 10 percent move on to issues. Of the molecules that enter the product phase. evidence of ef molecules are tested in much larger patient populations to demonstrate ef molecules are tested in much larger to develop the safety profile. of statistical significance and to continue the data necessary to submit the molecule to regulatory agencies nature and are designed to generate for marketing approval. therapies, placebo, or both. by disease state, but can often last from three to four years. around the world. Phase III testing varies Submission Phase approval can vary from Once a molecule is submitted to regulatory agencies, the time to final marketing state, the strength and several months to several years, depending on variables such as the disease and the time required for the complexity of the data presented, the novelty of the target or compound, agency(ies) to evaluate the submission. will be consistent across marketing approval, or that decisions on marketing approvals or indications geographic areas. e believe our investments in research, both internally and in collaboration with others, have been rewarded e believe our investments in research, both internally and in collaboration • • Phases of New Drug Development Phases of • by the large number of new molecules and new indications for existing molecules that we have in all stages of by the large number of new molecules and new indications for existing development. W • W larger number of projects in preclinical development. are potential therapies for various the product phase of development or awaiting regulatory approval or launch cancers, hypoglycemia. W chosen priority areas. W Discussion and molecules as well as several currently marketed products. See "Management's Executive Overview—Late-Stage Pipeline," for more information on certain of our product candidates. Executive Overview—Late-Stage Pipeline," for more information on certain 14 FINANCIAL REPORT F15 procedures andsystemsincompanyoperationsatthird-partysuppliers. that auditandmonitorallaspectsofqualityrelatedtohumanpharmaceuticalanimalhealthmanufacturing or acombinationthereof. These testsmayinvolvechemicalandphysicalanalyses,microbiologicaltesting,testinginanimals, on thefinalproducttoassurethatmeetsallregulatoryrequirementsandLillyinternalstandards. methods, packagingmaterials,andlabeling.W Quality ofproductionprocessesinvolvesstrictcontrolingredients,equipment,facilities,manufacturing manufacturing, distribution,anddisseminationofinformationaboutourmedicines. to qualityinallpartsofouroperations,includingresearchanddevelopment,purchasing,facilitiesplanning, integrity ofthedatathatsupporttheirsafetyandef Our successdependsingreatmeasureuponcustomerconfidencethequalityofourproductsand Quality certain productsorproductshortagesuntilproductioncouldberesumedexpanded. supplier were toexperienceextendedplantshutdownsatoneofourownfacilities,failureacontract requiring significantcapitalexpenditures,processmodifications,andregulatoryapprovals. vary widelyfromproducttoproduct.Shiftingoraddingmanufacturingcapacitycanbeaverylengthyprocess However inventory management,andback-upsites. stable supplyofourproducts,weuseavarietytechniquesincludingcomprehensivequalitysystems, manufacturing capacitytoimproveef that shouldallowustomeetallexpectedproductdemandwhilemaintainingflexibilityreallocate W manufacturing andfinishingoperations. place atanumberofsitesthroughouttheworld.W operations, includingformulation,filling,assembling,deliverydevicemanufacturing,andpackaging,take ingredient manufacturingoccursatsitesweownintheU.S.,Ireland,PuertoRico,andU.K.Finishing The majorityofourrevenuecomesfromproductsproducedinownfacilities.Ourprincipalactive established newsourcesor extended failureofasupplier supply themarketuntilanalternativesourceofcanbeimplemented.However suppliers wasunabletoprovidethematerialsorproduct,wegenerallyseekmaintainsuf source. However Most oftheprincipalmaterialsweuseinourmanufacturingoperationsareavailablefrommorethanone Raw MaterialsandProductSupply e manageoursupplychain(includingownfacilities,contractedarrangements,andinventory)inaway , orextraordinaryunplannedincreasesindemand,wecouldexperienceaninterruptionsupplyof Assurance , humanpharmaceuticalandanimalhealthproductionprocessesarecomplex,highlyregulated, , weobtaincertainrawmaterialsprimarilyfromonlyonesource.Intheeventofthese Additional assuranceofqualityisprovidedbycorporatequality-assurancegroups , insomecases,implementedalternativeprocesses. , itispossiblethatwecouldexperienceaninterruptioninsupplyuntil ficiency andrespondtochangesinsupplydemand. e performtestsatvariousstagesofproductionprocessesand fectiveness. Productqualityarisesfromatotalcommitment e utilizethirdpartiesforcertainactiveingredient , intheeventofan Accordingly ficient inventoryto T o maintaina , ifwe 15 FINANCIAL REPORT F16 , or As a Analysis— ficient both to cover 2016;47:20-33.). ficulty or excessive Innovation in the s Discussion and fect on our business, results of ficacy and safety of new products; delays ficacy and safety of new products; delays Journal of Health Economics

There is a high rate of failure inherent in new drug There is a high rate e must maintain a continuous flow of successful new e must maintain a continuous flow of fected by any of these risks. Certain of these risks could risks. Certain of these risks could fected by any of these Annual Report, the following risk factors should be risk factors should the following Annual Report, . It is possible that our business, financial condition, liquidity financial condition, that our business, . It is possible ficult to predict revenue growth rates of new products. ficult to predict revenue growth rates ficacy or safety concerns, inability to obtain necessary regulatory ficacy or safety concerns, inability to o bring a drug from the discovery phase to market can take over a decade the discovery phase to market can o bring a drug from T ficulties and uncertainties inherent in human pharmaceutical research and inherent in human pharmaceutical ficulties and uncertainties , if initially granted, such approval will be maintained; whether we will be able to , if initially granted, such approval will fect the company's reputation. fect the company's . In addition, it can be very dif e cannot state with certainty when or whether our products now under development will be approved or e cannot state with certainty when or Pharmaceutical research and development is very costly and highly uncertain; we may not costly and highly uncertain; we and development is very Pharmaceutical research number or successful products sufficient in or acquiring commercially succeed in developing or will soon lose intellectual property revenues of products that have lost value to replace protection. There are many dif development and the introduction of new products. development and discovery and development. HG, Hansen RA. excess of $2 billion (DiMasi JA, Grabowski and often costs in of R&D costs, pharmaceutical industry: new estimates W launched; whether additional product candidates or products; or whether our products, develop, license, or otherwise acquire successful. W once launched, will be commercially or brand extensions for existing products suf products and successful new indications costs and to replace revenues that are lost as profitable our substantial research and development or are displaced by competing products or therapies. Failure products lose intellectual property exclusivity would have a material adverse ef to do so in the short-term or long-term and prospects. See “Management’ operations, cash flows, financial position, for more details. Executive Overview—Late-Stage Pipeline,” Failure can occur at any point in the process, including in later stages after substantial investment. Failure can occur at any point in the programs will not generate financial returns. New product result, most funds invested in research development may fail to reach the market or may have only limited candidates that appear promising in commercial success because of ef or coverage, limited scope of approved uses, dif approvals or payer reimbursement of the patents or intellectual property rights of others. Regulatory costs to manufacture, or infringement high hurdles for the ef agencies are establishing increasingly can result in delays in product launches and lost market and uncertainties in drug approval processes opportunity also adversely af • results of operations could be materially adversely af results of operations Risk Factors Risk in this contained to the other information In addition considered carefully in evaluating our company carefully in evaluating considered 16 FINANCIAL REPORT F17 • for moredetails. Overview—Other Matters,”and"Business—Patents, for approvalofthecompetitorversions.See“Management’ due todevelopmenttimelines,manufacturingchallenges, and/oruncertaintiesintheregulatorypathways loss ofexclusivitymayornotresultinthenear-term entryofcompetitorversions(i.e.,biosimilars) in theemergingmarkets.Forbiologic(suchasHumalog, Humulin,Erbitux,Cyramza, penetration isincreasinginmanymarketsoutsidethe U.S.,includingJapan,Europe,andmanycountries following lossofexclusivityhasnotbeenasrapidor pervasive asintheU.S.;however decline inrevenues,especiallytheU.S.Historically litigation) typicallyresultsintheentryofoneormoregenericcompetitors,leadingtoarapidandsevere protection. Fornon-biologicproducts,lossofexclusivity(whetherbyexpirationorasaconsequence Certain othersignificantproductsnolongerhaveef outside theU.S.,asillustratedintablesbelow: several years,significantpatentprotectionand/ordataintheU.S.aswellkeycountries A and severedeclinesinrevenues. products inthenextseveralyears,whichhasresultedandislikelytocontinueresultrapid and earnings;wehavelostorwillloseeffectiveintellectualpropertyprotectionformanyofthose W Zyprexa Cymbalta Forteo Cialis Alimta Effient Strattera Forteo Alimta Cialis numberofourtop-sellinghumanpharmaceuticalproductshaverecentlylost,orwillloseinthenext e dependonproductswithintellectualpropertyprotectionformostofourrevenues,cashflows, Product Product $ $ ($ inmillions) ($ inmillions) Outside U.S. Revenues Revenues (2016) (2016) U.S. 1,101.0 1,469.5 1,002.1 1,182.3 465.6 534.9 770.5 655.5 661.2 729.4 W Percent of W Revenues Percent of Revenues orldwide orldwide (2016) (2016) 2% 3% 4% 5% 7% 3% 3% 3% 5% 6% use patents2023 Compound patentpluspediatricexclusivityOctober2017; Use patentpluspediatricexclusivityMay2017 use patentsAugust2019 Formulation andrelatedprocesspatentsDecember2018; Vitamin regimenpatentpluspediatricexclusivity2022 Compound andusepatentsNovember2017 No remainingpatentprotection Japan: datapackageprotectionJanuary2018 related processpatentAugust2019 Japan: datapackageprotectionJuly2018;formulationand Major Europeancountries:compoundpatentNovember2017 vitamins 2021 Japan: usepatentstotreatcancerconcomitantlywith Major Europeancountries:vitaminregimenpatent2021 fective exclusivitythroughpatentprotectionordata Patent /DataProtection-MajorEuropeJapan T , outsidetheU.S.marketpenetrationofgenerics rademarks, andOtherIntellectualPropertyRights," s Discussionand Patent /DataProtection-U.S. Analysis—Executive T , genericmarket rulicity , and T altz), 17 FINANCIAL REPORT F18 rademarks, and Access” and e face many generic T , and patient access to, our , develop, and commercialize and commercialize , develop, , we must continue to deliver to the The entry of generic competitors typically The entry of generic competitors typically As a result, our patents may be invalided via As a result, our patents Act. fect our future revenues and net income. axman o compete successfully T fected by treatment innovations that eliminate or minimize the need for fected by treatment innovations that eliminate or minimize the need for Analysis—Executive Overview—Other Matters.” Analysis—Executive Overview—Other IPR process allows competitors to request review of issued patents by the competitors to request review of IPR process allows fective products that meet important medical needs. Our product revenues can fective products that meet important medical needs. Our product revenues fecting Human Pharmaceutical Pricing, Reimbursement, and fecting Human Pharmaceutical Pricing, Af Although such a decision can be appealed to the courts, in certain circumstances a can be appealed to the courts, Although such a decision Act provides generic companies powerful incentives to seek to invalidate our human companies powerful incentives Act provides generic fected by the introduction by competitors of branded products that are perceived as fected by the introduction by competitors of branded products that are s Discussion and Actions These pressures could negatively af axman O without the protections of the Hatch-W O without the protections e expect pricing, reimbursement, and access pressures from both governments and private payers e expect pricing, reimbursement, and e face intense competition from multinational pharmaceutical companies, biotechnology e face intense competition from multinational biotechnology companies, e compete with a large number of multinational pharmaceutical companies, W more severe. For more details, see “Business—Regulations and inside and outside the U.S. to become Private Payer this review process. this review process. no entering the market, while a win provides could result in a competitor loss in such a proceeding can still be challenged by other competitors. W precedential value -- the same patent outside the U.S. as well. manufacturer challenges to our patents in revenues. In addition, competitors or other third parties may claim results in rapid and severe declines other intellectual property rights held by them. If successful, such that our activities infringe patents or to market a product in a particular territory or being required to pay claims could result in our being unable on future sales. See “Business—Patents, damages for past infringement or royalties "Financial Statements and Supplementary Data—Note 15, Other Intellectual Property Rights” and Contingencies," for more details. is subject to increasing government price controls and other Our human pharmaceutical business pricing, reimbursement, and access for our drugs, which could public and private restrictions on our business. have a material adverse effect on increasingly aggressive steps to control their expenditures for human Public and private payers are taking on pricing and reimbursement for pharmaceuticals by placing restrictions medications. “Management’ W and biosimilar manufacturers, and such competition could companies, and lower-cost generic have a material adverse effect on our business. W and generic pharmaceutical companies. market innovative, cost-ef be adversely af treatment with our drugs. See “Business—Competition,” for more details. superior by the marketplace, by generic or biosimilar versions of our branded products, and by generic or superior by the marketplace, by generic or biosimilar versions of our branded branded products. Our biosimilar versions of other products in the same therapeutic class as our revenues can also be adversely af innovative new pharmaceutical products. Without strong intellectual property protection, we would be we would property protection, strong intellectual products. Without new pharmaceutical innovative and the enormous investments in research the returns necessary to support unable to generate market. required to bring new drugs to the capital as well as other expenditures development and time. In the U.S., world and is subject to change over protection varies throughout the Intellectual property the Hatch-W products U.S. patents on major pharmaceutical as a result, we expect that our pharmaceutical patents; may not be administrative proceedings, and routinely challenged in litigation and will continue to be a new upheld. In addition, USPT Our long-term success depends on intellectual property protection; if our intellectual property intellectual property if our property protection; on intellectual success depends Our long-term affected. will be adversely our business or weakened, invalidated, circumvented, rights are to continually discover on our ability success depends Our long-term • • • 18 FINANCIAL REPORT F19 • • • legal, business, orreputationalharmto our businessandreputation. may notbesuccessful.Ifthey arenotsuccessful,anyoftheseeventscouldresult inmaterialfinancial, have implementedmeasures toprevent,respondto,andminimizetheserisks confidential informationhave nothadamaterialimpactonourconsolidatedresults ofoperations.W malicious intrusions,cyber-attacks, andtheloss,theft,destruction,orunauthorized disclosureoruseof T company us tosanctionsforviolationsofdataprivacylawsand regulationsandcoulddamagepublictrustinour other competitiveadvantages.Unauthorizeddisclosure ofpersonallyidentifiableinformationcouldexpose damage ouroperations,customerrelationships,and reputation, andcauseustolosetradesecretsor use ofconfidentialinformationcouldimpairourability tosecureandmaintainintellectualpropertyrights, The failureorinadequacyofourIT partners facesimilarrisks hackers, competitors,certaingovernments,orothercurrent orformercompanypersonnel.Ourthirdparty employees orotherswithpermittedaccesstooursystems andinformation,orwrongfulconductby information canoccurinavarietyofways,includingbut notlimitedto,negligentorwrongfulconductby Breaches resultingintheloss,theft,destruction,orunauthorizeddisclosureuseofconfidential confidentiality malware, denial-of-serviceattacks,theuseofsocialengineering detect, mitigate,orprevent.Cyber-attackscomeinmanyforms,includingthedeploymentofharmful are growingintheirfrequency failures, securitybreaches,maliciousintrusions,orcyber-attacksfromavarietyofsources.Cyber-attacks IT and availabilityofourIT transmit largeamountsofconfidentialinformationandotherdata.Maintainingtheconfidentiality control andsomeofwhicharewithinthethirdparties,toaccumulate,process,store, technology systemsandinfrastructure(together“IT W identifiable information,suchasemployeeandpatientinformation(collectively intellectual property systems, networks,andfacilitiesorthoseofthirdparties. A business informationcouldresultinmaterialharmtoourandreputation. Failure, inadequacy Supplementary Data—Note13,Income Discussion and material adverseef changes inthisregard.ChangestokeyelementsoftheU.S.orinternationaltaxframeworkcouldhavea future ef tax laws,regulations,administrativepractices,principles,andinterpretationscouldadverselyaf W income taxesanddecreaseournetincome. Unanticipated changesinourtaxratesorexposuretoadditionalliabilitiescouldincrease details. in therelevantmarket.See“Management’ event ofanextremedevaluationlocalcurrency material impact,eitherpositiveornegative,onourrevenue,costofsales,andoperatingexpenses.Inthe hedging andotherriskmanagementtechniques,significantfluctuationsincurrencyratescanhavea from fluctuatingcurrencyexchangerates.Whilewemanageaportionoftheseexposuresthrough As aglobalcompanywithsubstantialoperationsoutsidetheU.S.,wefaceforeigncurrencyriskexposure revenue, costofsales,andoperatingexpenses. Changes inforeigncurrencyratesordevaluationofacanmateriallyaffectour o date,systeminadequacies, operatingfailures,serviceinterruptionsor securitybreaches, greatdealofconfidentialinformationownedbybothusandouralliancesisstoredin systemsarepotentiallyvulnerabletosysteminadequacies,operatingfailures,serviceinterruptionsor e alsorelytoalargeextentontheef e aresubjecttoincometaxesintheU.S.andnumerousforeignjurisdictions.Changesrelevant fective taxrates. . , integrityandavailabilityofourIT Analysis—Executive Overview—OtherMatters”and"FinancialStatements fect onourconsolidatedoperatingresultsandcashflows.See“Management’ , corporatestrategicplans,marketingcustomerinformation,andpersonally , orbreachofourinformationtechnologysystems,infrastructure,and systemsandconfidentialinformationisvitaltoourbusiness. The U.S.andanumberofothercountriesareactivelyconsideringorenacting . , sophisticationandintensity systemsortheloss,theft,destruction,unauthorized disclosureor ficient anduninterruptedoperationofcomplexinformation T axes," formoredetails. s Discussionand systems,confidentialinformation,andotherdata. , thepriceofourproductscouldbecomeunsustainable systems”),someofwhicharewithinthecompany’ This includesvaluabletradesecretsand , andarebecomingincreasinglydif Analysis—Financial Condition”formore , andothermeanstocompromisethe . However , “confidentialinformation”). , thesemeasures ficult to fect our , integrity s e s 19 FINANCIAL REPORT F20 Also, ficulty , Cialis, ® Axiron, Byetta , ® ficulties, we could experience ficulties, we could

Actos . fected by depressed prices for depressed prices fected by ficacy issues that arise after product ficacy issues that arise after product ficacy data from both market surveillance ficacy data from both market surveillance , some customers, including governments or other , some customers, Additionally fect sales of the product. Due to a very restrictive market for fect sales of the product. Due to a very , in the event of a significant economic downturn, we could have dif significant economic downturn, we , in the event of a After approval, the products are used for longer periods of time by much larger After approval, the products are used ficacy and safety of our marketed products by continuously monitoring the use of our ficacy and safety of our marketed products end products. Declining tax revenues attributable to economic downturns increase the tax revenues attributable to end products. Declining These claims have resulted in substantial expense and other significant consequences to us. These claims have resulted in substantial expense and other significant fecting our sales volume. Our food animal business may be af food animal business sales volume. Our fecting our regulations (and comparable foreign regulations) for pharmaceutical products can lead to regulations (and comparable foreign regulations) for pharmaceutical products e face many product liability claims and are self-insured; we could face large numbers of claims e face many product liability claims of product liability claims involving e are subject to a substantial number ficacy and safety of our marketed products. New safety or ef ficacy and safety of our marketed products. forts to control drug prices and utilization. forts to control drug accessing credit markets. accessing credit markets. could have a safety or efficacy concerns, which can develop unexpected Pharmaceutical products effect on revenues and income. material adverse regulatory approval based on data obtained in controlled clinical Human pharmaceutical products receive trials of limited duration. we or others may conduct post-marketing clinical studies on products in the marketplace. In addition, ef may result in product label changes that could reduce the product's and post-marketing clinical studies sales. Serious safety or ef market acceptance and result in declining mandatory product recalls or withdrawals from the market. Safety approval could result in voluntary or liability claims. issues could also result in costly product W affect our business. in the future, which could adversely W products. See “Financial Statements and Supplementary Data—Note Cymbalta, and Prozac among other on our current product liability litigation. Because of the nature of 15, Contingencies” for more information become subject to large numbers of product liability claims for these pharmaceutical products, we could could require substantial expenditures to resolve and, if involving or other products in the future, which af marketed products, could adversely for product liability losses for all our currently marketed product liability insurance, we are self-insured products. Regulatory compliance problems could be damaging to the company numbers of patients; we and others (including regulatory agencies and private payers) collect extensive numbers of patients; we and others information on the ef our customers’ experience financial dif or collaboration partners if our customers, suppliers, or and performance defaults by suppliers greater bad debt expense, slower customer collections, Similarly collaboration partners. manufacturers, as well as the The marketing, promotional, and pricing practices of human pharmaceutical patients, are subject to manner in which manufacturers interact with purchasers, prescribers, and to claims related to these extensive regulation. Many companies, including us, have been subject private payers, and practices asserted by federal, state, and foreign governmental authorities, consumers. that the outcome could include It is possible that we could become subject to such investigations and remedies, including exclusion criminal charges and fines, penalties, or other monetary or non-monetary issues concerning compliance from U.S. federal and other health care programs. In addition, regulatory with cGMP leading to product shortages, product recalls and seizures, fines and penalties, interruption of production issues. See “Business— and delays in the approvals of new products pending resolution of the Government Regulation of Our Operations” for more details. Significant economic downturns could adversely affect our business and operating results. operating results. business and affect our could adversely economic downturns Significant generally been sensitive have not animal health products and companion pharmaceuticals While human our utilization of lead to decreased slowdowns could prolonged economic economic cycles, to overall af products, government spending, leading to increasing to reduce human health care pressure on governments ef entities reliant upon government funding, may be unable to pay in a timely manner for our products. to pay in a timely manner for our government funding, may be unable entities reliant upon • • • • 20 FINANCIAL REPORT F21 • • • manage theseriskscouldhaveamaterialadverseef research anddevelopment,acquisition,licensingef natural resources;adverseglobaleconomicconditionsaf outbreak ofinfectiousdiseasecarriedbyanimals;adverseweatherconditionsandtheavailability governmental supportrelatingtotheraising,processing,orconsumptionoffood-producinganimals;an consumption offoodderivedfromanimalsthatutilizeourproducts;increasedregulationordecreased of antibacterialsinfood-producinganimals;perceivedadverseef companion animalproductsbynon-veterinarianretailoutlets;emergingrestrictionsandbansontheuse The animalhealthoperatingsegmentmaybeimpactedby safety concerns,factorsaffectingglobalagriculturalmarkets,andotherrisks. Our animalhealthsegmentfacesrisksrelatedtoincreasedgenericcompetition,foodand confidentiality information, ormayfailtoperformatall.Failureofthesethirdpartiesmeettheircontractual,regulatory reliable results,maynotperforminatimelymanner risk thatthethirdpartiesmaynotperformtoourstandardsorlegalrequirements,produce oversight ofourclinicaltrialstocontractresearchorganizations.Outsourcingthesefunctionsinvolvesthe certain financialtransactionalprocesses.Forexample,weoutsourcetheday-to-daymanagementand manufacture, commercialization,supportforinformationtechnologysystems,productdistribution,and biotechnology companies,andthird-partyserviceproviders,forselectedaspectsofproductdevelopment, W business. Reliance onthird-partyrelationshipsandoutsourcingarrangementscouldadverselyaffectour Supply” formoredetails. we couldhavedif for theexpansionandregulatoryqualificationofpharmaceuticalmanufacturingcapacity addition, giventhedif information technologysystemfailures,orinabilitytoobtainsole-sourcerawintermediatematerials.In disruptions couldresultfromqualityorregulatorycomplianceproblems,naturaldisasters,mechanical supply contractedquantities,couldresultinproductshortages,leadingtolostrevenue.Suchdif dif Pharmaceutical andanimalhealthmanufacturingiscomplexhighlyregulated.Manufacturing Manufacturing difficultiesordisruptionscouldleadtoproductsupplyproblems. e utilizethirdparties,includingsuppliers,distributors,allianceswithotherpharmaceuticaland ficulties atourfacilitiesorcontractedfacilities,thefailurerefusalofacontractmanufacturerto , orotherobligationstouscouldhaveamaterialadverseef ficulty meetingdemandfornewproducts.See“Business—RawMaterialsandProduct ficulties inpredictingsalesofnewproductsandtheverylongleadtimesnecessary , maynotmaintaintheconfidentialityofourproprietary fect onourrevenuesandincome. forts togeneratenewproducts. fecting agriculturalmarkets;andfailureofour , amongotherthings,increasedsalesof fects onhumanhealthlinkedtothe fect onourbusiness. , itispossiblethat The failureto ficulties or , 21 FINANCIAL REPORT F22 6 4 3 4 14 14 NM Percent Change . Earnings arious risks % % Annual Report. 2.26 74.8 13.7 was due to an 535.0 367.7 2015 2,408.4 19,958.7 11,329.4 14,921.5 2016 $ $ % % Year Ended December 31, 2.58 73.4 30.0 18.9 382.5 2016 fective January 1, 2017, replacing 2,737.6 fset by higher operating expense, a 21,222.1 11,695.9 15,567.2 $ $ fective June 1, 2017. Ricks joined the fective June 1, 2017. Ricks joined the ficer ef Analysis of Results of of Results Analysis ...... fer materially from these forward-looking fer materially from these forward-looking fset by a decrease in marketing, selling, and 2016 as a higher gross margin and lower acquired This discussion and analysis should be read in This discussion and ...... The increase in operating expense in fecting our company and the pharmaceutical industry fecting our company and the pharmaceutical 2016. Annual Report constitute forward-looking statements. V forward-looking statements. Annual Report constitute ...... s Discussion and s Discussion ...... TIONS ...... (1) ...... , who retired at the end of 2016. Lechleiter will remain chairman of our board of directors , who retired at the end of 2016. Lechleiter ...... s discussion and analysis of results of operations and financial condition, is intended to assist financial condition, is intended to assist of results of operations and s discussion and analysis ...... fective tax rate, and lower other income. TS OF OPERA A. Ricks assumed the role of president and chief executive of A. Ricks assumed the role of president ables present dollars in millions, except per-share data) ables present dollars Operating expense consists of research and development and marketing, selling, and administrative expenses. Operating expense consists of research and development and marketing, selling, and administrative Operating expense Earnings per share Revenue Gross margin Gross margin as a percent of revenue Acquired in-process research and development Asset impairment, restructuring, and other special charges Effective tax rate Net income NM - not meaningful Revenue and gross margin increased in (1) increase in research and development expense, partially of administrative expense. Net income and EPS increased in of in-process research and development (IPR&D) charges, were partially higher ef David Executive Overview Operations and Financial Condition Financial and Operations (T General Management’ and accompanying footnotes in this consolidated financial statements conjunction with the in this section of the Certain statements Factors,” may cause Statements" and “Risk including those discussed in "Forward-Looking and uncertainties, from operations to dif our actual results and cash generated statements. John C. Lechleiter assume the role of chairman ef through May 31, 2017, and Ricks will board of directors on January 1, 2017. an overview of our financial results, recent product and late-stage The remainder of this section provides af pipeline developments, and other matters a diluted basis. per share (EPS) data is presented on Financial Results key operating results: The following table summarizes our RESUL results of operations changes and trends related to the and assessing significant the reader in understanding of our consolidated company and financial position Management’ 22 FINANCIAL REPORT F23 2015 2016 The followinghighlighteditemsaf • Debt Repurchase • Asset • Acquired • Acquisitions • Other–Net, (Income)Expense • • Acquired Asset

associated partially integration extinguishment W W glucagon. and costs as fees W to Novartis W V W W fees paidin W enezuelan Impairment, Impairment, e e e e e e e the recognized recognized recognized recognized asset recognized recognized recognized paid IPR&D (Notes3and4totheconsolidated IPR&D (Note3totheconsolidated related consideration (Note 3totheconsolidated of in impairments fset costs, AH acquisition with therelatedissuance connection connection withacollaboration financial to (Notes 7and10 Restructuring, Restructuring, by charges expense acquired acquired loss the charges charges net and net acquisition charges of crisis, including paid intangible gains primarily of with $166.7 of IPR&D IPR&D of fect comparisonsofour2016 of $382.5 $153.0 date inventorythatwassold. to (Note 17totheconsolidated $203.9 $367.7 various from and and acquire of to of million related charges charges $152.7 asset impairments. Other Other million the consolidated million Novartis non-hedging million million collaboration financial of lowerinterestrateeuro-denominated the significantdeterioration the Special Special from to

(pretax), (pretax), million of financial statements) of the worldwide

Animal $535.0 (pretax), $30.0 (pretax), agreement with the closure statements) Charges Charges interest (pretax), purchase financial or or million agreements million Health financial $0.29 $0.10 of rights or or an and2015 (Note (Note $0.19 financial statements) rate $0.25

(pretax),

per (pretax), statements) or per animal (Novartis and to statements) AstraZeneca. $0.09 share, swaps share, 5 5 Locemia primarily per per to to redemption health financialresults: the the of thebolívar or or share, share, per related AH), related and $0.02 consolidated consolidated $0.33 Solutions' manufacturing share, with other foreign related related to per per to of Pfizer integration the notes. certain . share, global attributable share, currency fair (Locemia) financial financial to to Inc. value the severance severance related related fixed-rate facility (Pfizer), and impact transactions adjustments statements) statements) to severance intranasal in to to the Ireland. upfront upfront as notes, of costs, costs, debt well the 23 FINANCIAL REPORT F24 Act for the potential new drugs in 45 potential AstraZeneca). 2016: , selective for cyclin-dependent kinases , selective for cyclin-dependent kinases Developments Development of commercial manufacturing process is ongoing. Alzheimer's disease. Japan The quarter in which each NME initially was approved in each NME initially was approved The quarter in which e currently have approximately have approximately e currently Phase III Europe , and a larger number of projects in preclinical research. , and a larger number —an anti-epidermal growth factor receptor monoclonal growth factor receptor monoclonal ) (Q4 2015)—an anti-epidermal —a once-monthly subcutaneously injected calcitonin gene-related peptide —a once-monthly subcutaneously injected ® Alzheimer's disease (in collaboration with Alzheimer's disease (in collaboration Alzheimer's disease. —a human lgG1 monoclonal antibody for the treatment of ) (Q4 2016)—a human lgG1 monoclonal antibody U.S. Alzheimer's disease and we will not pursue development of solanezumab for Alzheimer's disease and we will not pursue development of solanezumab ™ —a Janus tyrosine kinase inhibitor for the treatment of moderate- kinase inhibitor for the treatment of ) (Q1 2017)—a Janus tyrosine ® —a neutralizing monoclonal antibody to interleukin-17A ) (Q1 2016)—a neutralizing monoclonal ® altz The quarter in which each NME and diagnostic agent initially entered Phase III for any The quarter in which each NME and s disease. Based upon the results of our Phase III study of patients with mild dementia due s disease. Based upon the results of our Phase III study of patients with ’ Severe hypoglycemia Indication Alzheimer's disease, we will not pursue regulatory submissions for solanezumab for the treatment Alzheimer's disease, we will not pursue regulatory submissions for solanezumab —an anti-nerve growth factor monoclonal antibody for the treatment of anezumab* (Q3 2008)—an anti-nerve growth factor monoclonal antibody for the treatment of antibody for the treatment of metastatic squamous non-small cell lung cancer (NSCLC). antibody for the treatment of metastatic Olaratumab* (Lartruvo advanced soft tissue sarcoma. Abemaciclib (Q3 2014)—a small molecule cell-cycle inhibitor treatment of moderate-to-severe plaque psoriasis and psoriatic arthritis. plaque psoriasis and treatment of moderate-to-severe Necitumumab* (Portrazza breast cancer and NSCLC. 4 and 6 for the treatment of metastatic (BACE) inhibitor for the BACE inhibitor (Q2 2016)—an oral beta-secretase cleaving enzyme treatment of early and mild tracer intended to image tau (or Flortaucipir** (Q3 2015)—a positron emission tomography (PET) which are an indicator of neurofibrillary) tangles in the brain, Galcanezumab* (Q2 2015) of cluster headache and migraine prevention. (CGRP) antibody for the treatment for the treatment of severe Nasal glucagon* (Q3 2013)—a glucagon nasal powder formulation treated with insulin. hypoglycemia in patients with diabetes antibody for the treatment of preclinical Solanezumab* (Q2 2009)—an anti-amyloid beta monoclonal Alzheimer Diagnostic agent to-severe active rheumatoid arthritis (in collaboration with Incyte Corporation). arthritis (in collaboration to-severe active rheumatoid Ixekizumab* (T to of mild dementia due to the treatment of prodromal T with Pfizer). osteoarthritis pain, chronic low back pain, and cancer pain (in collaboration and Innovation Biologic molecule subject to the United States (U.S.) Biologics Price Competition Baricitinib (Olumiant ** * Endocrinology Nasal glucagon Compound The following NMEs and diagnostic agent are currently in Phase III clinical trial testing for potential use in the agent are currently in Phase III clinical trial testing for potential use in The following NMEs and diagnostic diseases described. indication is shown in parentheses: The following table reflects the status of each NME and diagnostic agent within our late-stage pipeline and The following table reflects the status of each NME and diagnostic agent recently approved products, including developments since January 1, Late-Stage Pipeline Late-Stage innovative and develop to continue to discover on our ability to a great extent success depends Our long-term by other currently in development on molecules acquire or collaborate products and pharmaceutical W companies. or pharmaceutical biotechnology human testing or under regulatory review human testing or under at least one of the by regulatory authorities in molecular entities (NMEs) were approved The following new for use in the diseases described. major geographies for any indication is shown in parentheses: any major geography 24 FINANCIAL REPORT F25 Tanezumab Solanezumab Galcanezumab Flortaucipir BACE inhibitor Neuroscience Taltz Olumiant Immunology Compound Cancer pain back pain Chronic low pain Osteoarthritis disease Alzheimer's Prodromal disease Alzheimer's Preclinical disease Alzheimer's Mild prevention Migraine headache Cluster disease Alzheimer's disease Alzheimer's Early andmild arthritis Psoriatic Psoriasis arthritis spondylo- Axial arthritis Rheumatoid Indication U.S. Submitted Phase III Terminated Terminated Europe Launched Approved Phase III Phase III Phase III Phase III Phase III Phase III Phase III Phase III Phase III Japan Submitted Launched Phase IIIstudiesareongoing. discontinued. Further developmenthasbeen Phase IIIstudytocontinue. development hasbeendiscontinued. meet primaryendpoints.Further results ofPhaseIIItrialthatdidnot Announced inNovember2016top-line 2016. Initiated firstPhaseIIIstudyinJanuary Phase IIIstudiesareongoing. Phase IIIstudyisongoing. 2016. Designation 2016. GrantedFast mild 2016 andinitiatedPhaseIIIstudyin Phase II/IIIseamlessstudyin Moved intothePhaseIIIportionof 2017. Administration (FDA)inthefirsthalfof to theU.S.FoodandDrug that metprimaryendpoints.Submission 2016 top-lineresultsofPhaseIIItrial respectively. AnnouncedinOctober third andfourthquartersof2016, Approved andlaunchedinJapan quarters of2016,respectively. launched inJapanthirdandfourth 2016, respectively.Approvedand Europe insecondandthirdquartersof respectively. Approvedandlaunchedin first andsecondquartersof2016, Approved andlaunchedintheU.S. Initiated PhaseIIIstudyinMay2016. Developments quarter of2017. 2016. ApprovedinEuropefirst the U.S.andJapaninfirstquarterof Submitted toregulatoryauthoritiesin Alzheimer's diseasein (1) fromtheFDA T rack August in April August 25 FINANCIAL REPORT F26 The by the (2) This study is fully and launched in (3) Therefore, we do not in fourth quarter of 2016 based on in fourth quarter of Developments ongoing. Phase III studies are approval Granted accelerated FDA in the U.S. in phase II data. Launched of 2016. Granted the fourth quarter conditional approval of 2016. Phase Europe in fourth quarter III study is ongoing. in Europe in Approved and launched first and second quarters of 2016, respectively. As a result, most research programs will As a result, most research programs forts necessary to complete the Innovation in the pharmaceutical industry: new Innovation in the pharmaceutical industry: Phase III Phase Ib/II Japan 2016;47:20-33.). Failure can occur at any point in the 2016;47:20-33.). Failure can occur . Phase III Phase III Europe ficult to predict which products will ultimately be approved. ficult to predict which products will ultimately Launched Launched U.S. high rate of failure is inherent in new drug discovery and development. high rate of failure is inherent in new A , it is very dif Journal of Health Economics ficulties and uncertainties inherent in pharmaceutical research and development and the ficulties and uncertainties inherent in Indication Metastatic breast cancer NSCLC Soft tissue sarcoma Metastatic squamous NSCLC (first-line) ficiently reliable data to report on total research and development costs by project, by preclinical ficiently reliable data to report on total research and development costs As part of a conditional marketing authorization, results from an ongoing Phase III study will need to be provided. As part of a conditional marketing authorization, e manage research and development spending across our portfolio of molecules, and a delay in, or e manage research and development The FDA's fast track program is designed to expedite the development and review of new therapies to treat serious conditions and The FDA's fast track program is designed to contingent on verification and description of clinical benefit in a confirmatory Phase III Continued approval for this indication may be address unmet medical needs. trial. enrolled. Until availability of the full data, the Committee for Medicinal Products for Human Use will review the benefits and risks of enrolled. Until availability of the full data, the marketing authorization can be maintained. Lartruvo annually to determine whether the conditional

Lartruvo Portrazza Compound Oncology Abemaciclib termination of, any one project will not necessarily cause a significant change in our total research and termination of, any one project will not necessarily cause a significant change research and development process, development spending. Due to the risks and uncertainties involved in the we cannot reliably estimate the nature, timing, and costs of the ef versus clinical spend, or by therapeutic category process to bring a drug from the discovery phase to regulatory approval can take over a decade and cost process to bring a drug from the discovery HG, Hansen RA. more than $2 billion (DiMasi JA, Grabowski estimates of R&D costs, after substantial investment. process, including late in the process product candidates that appear promising in development may fail to not generate financial returns. New limited commercial success. Delays and uncertainties in the regulatory reach the market or may have only in other countries can result in delays in product launches and lost market approval processes in the U.S. and opportunities. Consequently W estimate the future potential development of our research and development projects, nor can we reliably project. Each project represents revenue that will be generated from a successful research and development our consolidated research and only a portion of the overall pipeline, and none is individually material to costs on a project level for development expense. While we do accumulate certain research and development and allocations, some of which rely on internal reporting purposes, we must make significant cost estimations mechanisms. data that are neither reproducible nor validated through accepted control have suf There are many dif (2) (3) introduction of new products. (1) 26 FINANCIAL REPORT F27 entering themarket. regulatory reviewbytheEuropeanMedicines version ofinsulinlisproandweareawarethatacompetitor's insulinlisproproducthasbeenacceptedfor been approvedintheU.S.orEurope.Othermanufacturershaveef regulators havedif compound patentprotectionforHumaloghasnotresultedinarapidandseveredeclinerevenue.Global impact ourfutureconsolidated resultsofoperations. there isuncertaintyinthefuture movementsinforeignexchangerates,thesefluctuations couldnegatively U.S. dollarandseveralother foreigncurrencies,includingtheeuro,Britishpound, andJapaneseyen.While expenses. Overthepasttwoyears,wehaveseensignificant foreigncurrencyratefluctuationsbetweenthe can haveasubstantialimpact,eitherpositiveornegative, onourrevenue,costofsales,andoperating exposures throughhedgingandotherriskmanagement techniques,significantfluctuationsincurrencyrates pound; andtheBritishpoundSwissfrancagainst theeuro.Whilewemanageaportionofthese from fluctuatingcurrencyexchangerates,primarilythe U.S.dollaragainsttheeuro,Japaneseyen,andBritish As aglobalcompanywithsubstantialoperationsoutside theU.S.,wefaceforeigncurrencyriskexposure Foreign CurrencyExchangeRates The compoundpatentforHumalog adverse ef rapid andseveredeclineinrevenuefortheaf expect thattheentryofgenericcompetitionintothesemarketsfollowinglossexclusivitywillcausea and wehaveauthorizedonegenericmanufacturertoenterthemarketasearlymid-August2017.W European marketsinNovember2017.W W manufacturer ofthegenericversion approved inJapanFebruary2016. launched inamajorEuropeanmarket.Notwithstandingourpatents,genericversionsof consolidated financialstatements.W patent remainsthesubjectof Appeals recentlyruledinourfavorregardingthevalidityandinfringementofvitaminregimenpatent,that a materialadverseef protection willcausearapidandseveredeclineinrevenuefortheproduct,whichwill,aggregate,have 2015. W Alimta expiredintheU.S.January2017,andmajorEuropeancountriesJapanDecember regimen patentshavealsobeenchallengedinothersmallerEuropeanjurisdictions.Ourcompoundpatentfor countries, andthroughMay2022intheU.S.,havebeenchallengedeachofthesejurisdictions.Ourvitamin patents, whichprovideuswithpatentprotectionfor Additionally caused arapidandseveredeclineinrevenuefortheproduct. versions ofZyprexawerelaunchedinJapanJune2016. bipolar maniaindicationsinDecember2015and consolidated resultsofoperationsandcashflows.W for theaf Evista intheU.S.andCymbaltaEuropeanmarketshascausedarapidseveredeclinerevenue In 2015,wesawtheentryofgenericcompetitioninallmajorEuropeanmarkets. generic competitors.W and earnings. W Patent Matters Other Matters e willloseourpatentprotectionforStrattera e dependonpatentsorotherformsofintellectual-propertyprotectionformostourrevenues,cashflows, e expectthattheentryofgenericcompetitionfor fected products,whichovertimehas,intheaggregate,hadamaterialadverseef fect onourconsolidatedresultsofoperationsandcashflows. , asdescribedinNote15totheconsolidatedfinancialstatements, The lossofU.S.patentexclusivityforEvista ferent legalpathwaystoapprovesimilarversionsofinsulinlisproanddatenonehave fect onourconsolidatedresultsofoperationsandcashflows.WhiletheU.S.Court e lostourdatapackageprotectionforCymbalta inter partesreviewchallengesasfurtherdescribedinNote15tothe ® (insulinlispro)hasexpiredinmajormarkets. e areawarethatatleasttwogenericpemetrexedproductshave As describedinNote15totheconsolidatedfinancialstatements,each Alimta hasagreednottoproceedpricingapproval. e willalsoloseexclusivityforEf fected products,whichwill,intheaggregate,haveamaterial Agency ® intheU.S.May2017,andCialis April 2016,respectively Alimta throughJune2021inJapanandmajorEuropean e alsolostpatentexclusivityfortheschizophreniaand . Itisdif Alimta followingthelossofef ® The lossofexclusivityforZyprexainJapanhas inMarch2014resultedtheimmediateentryof ficult topredicttheimpactoftheseproducts forts underwaytobringmarketasimilar ® inmajorEuropeancountries2014. , forZyprexa fient ® in theU.S.October2017, The lossofexclusivityfor Thus far Alimta ® intheU.S.andmajor ® inJapan.Generic fective patent Alimta werealso ® vitaminregimen , thelossof fect onour e 27 FINANCIAL REPORT F28 de The . rump, T and any , resulted in a , resulted , fect on our ACA fect through both changes such as the as a top priority , larger entities, thus fecting Any additional charges are charges are Any additional ACA ACA These downward pricing enezuelan subsidiaries represented a subsidiaries represented enezuelan , modifications to Medicare Parts B and D, , modifications to Act (ACA) are currently in ef Access e continue to monitor other deteriorating to monitor other e continue An emerging trend has been the prevalence of benefit An emerging trend has been the prevalence At the same time, the broader paradigm shift towards fordable Care fordability of pharmaceuticals continues to drive the fordability of pharmaceuticals Af fer products with proven real-world outcomes data and a , provisions included in legislation repealing the fect on our future consolidated results of operations. fect on our future . Further These policy and political issues increase the risk that taxes, fees, rebates, political issues increase the risk that These policy and As of December 31, 2016, our V 31, 2016, As of December fects, or greater patient ease of use, but also by providing rebates. Price is an fects, or greater patient ease of use, fect future consolidated results of operations. , consolidation and integration among healthcare providers is also a major factor in the , consolidation and integration among enezuelan financial crisis, including the significant deterioration of the bolívar deterioration including the significant financial crisis, enezuelan , fewer side ef ficacy portion of our consolidated assets and liabilities. W assets and liabilities. our consolidated portion of Affecting Pharmaceutical Pricing, Reimbursement, and Pricing, Reimbursement, and Affecting Pharmaceutical rends the new administration, and Congress have identified repealing and replacing the the new administration, and Congress have identified repealing and replacing proposed timeframe remains unclear performance-based reimbursement and the launch of several value-based purchasing initiatives have placed performance-based reimbursement and the launch of several value-based demands on the pharmaceutical industry to of 2020 implementation of the excise tax on employer-sponsored health care coverage for which there is an 2020 implementation of the excise tax on employer-sponsored health care such as private exchanges and excess benefit (the so-called "Cadillac tax"), continue to evaluate strategies over time. President wider use of consumer-driven health plans to reduce their healthcare liabilities a material adverse ef potential replacement program have yet to be determined and could have consolidated results of operations and cash flows. favorable economic profile. designs containing high out-of-pocket costs for patients, particularly for pharmaceuticals. In addition to the costs for patients, particularly for pharmaceuticals. In addition to the designs containing high out-of-pocket in part by coverage expansions, many employers in the commercial market, driven state-based exchanges and the expansion of Medicaid. state-based exchanges and the expansion United States concern over access to and af In the U.S., public debate. regulatory and legislative Key health policy proposals af state measures may be enacted. or other federal and exclusivity include a reduction in biologic data biopharmaceuticals for biologics and and Human Services to negotiate prices allow the Department of Health language that would proprietary drug manufacturers to disclose proposals that would require biopharmaceutical drugs in Medicare, proposals to reduce the cost of pharmaceuticals purchased by government pricing information, and state-level under these proposals are targeted as a means to fund both health health care programs. Savings projected initiatives, or to manage federal and state budgets. care expenditures and non-health care In the private sector pharmaceuticals. Health plans, pharmaceutical benefit managers, competitive marketplace for human stakeholders have been consolidating into fewer wholesalers, and other supply chain and importance. Payers typically maintain formularies which specify enhancing their purchasing strength drugs are included on a plan's formulary) and reimbursement (the coverage (the conditions under which for consumer). Formulary placement can lead to reduced usage of a drug associated out-of-pocket cost to the to coverage restrictions, such as prior authorizations and formulary the relevant patient population due limitations which result in higher consumer out-of-pocket cost, such as exclusions, or due to reimbursement co-insurance levels and higher deductibles. Consequently non-preferred co-pay tiers, increased for formulary placement not only on the basis of product attributes such pharmaceutical companies compete as greater ef decisions, particularly in treatment areas in which the payer has increasingly important factor in formulary products are therapeutically comparable. taken the position that multiple branded pressures could negatively af of the The main coverage expansion provisions charge of $203.9 million in 2016. See Note 17 to the consolidated financial statements for additional for additional financial statements to the consolidated 2016. See Note 17 $203.9 million in charge of related to the charge. information minimis in the future. may be recorded that additional charges and it is possible economies a material adverse ef not expected to have T The impact of the V The impact 28 FINANCIAL REPORT F29 (1) Numbers maynotaddduetorounding. See Note3totheconsolidatedfinancialstatementsfordiscussionregardingfollowingacquisitions: Acquisitions and cashflows. or internationaltaxframeworkcouldhaveamaterialadverseef outcomes oftheseinitiativescontinuetodevelopandremainuncertain,changeskeyelementstheU.S. the EuropeanCommission,UnitedNations,Groupof in whichweoperate.Otherinstitutionshavealsobecomemoreactiveregardingtax-relatedmatters,including recommendations ofinternationaltaxreformproposalstoinfluencepolicyinmajorcountries cash flows. potential taxreformandcouldhaveamaterialadverseef tax reform. this regard.Forexample,the ef laws, regulations,administrativepractices,principles,andinterpretationscouldadverselyaf W T reduce currentandfutureaccesstobrandedhumanpharmaceuticalproducts. health carecoverageforcitizens,policiesmaybeproposedthatpromotegenericsandbiosimilarsonly increasingly activeinexpandinghealthcaresystemof ongoing economicchallenges.Inaddition,governmentsinmanyemergingmarketsarebecoming pressures onnationalandregionalhealthcarebudgetsthatcomefromagrowingagingpopulation limit reimbursementforourproducts.Suchpoliciesareexpectedtoincreaseinimpactandreach,giventhe containment measuresexistinanumberofcountries,includingadditionalpricecontrolsandmechanismsto International operationsalsoaregenerallysubjecttoextensivepriceandmarketregulations.Cost- International The followingtablesummarizesourrevenueactivity by region: Revenue Operating Results—2016 Revenue Outside U.S. U.S. ax Matters fective taxrates. U.S. revenueincludesin PuertoRico. e aresubjecttoincometaxesintheU.S.andnumerousforeignjurisdictions.Changesrelevanttax • • • (1) Our portfolio, completedonJanuary3,2017,inanall-cashtransactionforapproximately Our acquisitionofBoehringerIngelheimV approximately $960million,whichweexpecttocompleteinthefirstquarterof2017. Our agreementtopurchaseCoLucidPharmaceuticals,Inc.(CoLucid)for$46.50pershareor . . The taxratesandthemannerinwhichU.S.companiesaretaxedcouldbealteredbyanysuch Additionally acquisition . The U.S.andanumberofothercountriesareactivelyconsideringorenactingchangesin , theOrganisationforEconomicCo-operationandDevelopmentissueditsfinal of Novartis T rump administrationhasstatedthatoneofitstopprioritiesiscomprehensive AH, completed on etmedica, Inc.'sU.S.feline,canine,andrabiesvaccine January ferings. Giventhebudgetchallengesofincreasing fect onourconsolidatedresultsofoperationsand $ $ T 1, wenty fect onourconsolidatedresultsofoperations 2015, 2016 21,222.1 11,506.2 9,715.9 , andtheEuropeanParliament.While December 31, in Year Ended an all-cash $ $ 2015 19,958.7 10,097.4 transaction 9,861.3 fect ourfuture $885 million for Percent Change $5.28 (1) 14 6 billion . . 29 FINANCIAL REPORT F30 % % 6 7 fset —% —% ) ) ) ) ) 2 9 7 4 6 (3 (8 (9 (1 42 60 11 22 14 (23 NM Percent Change 5 percent Consolidated % )% )% )% 2 (1 (3 (1 485.0 383.8 523.0 940.3 248.7 784.0 356.8 decreased 2,310.7 2,493.1 1,027.6 2,841.9 1,307.4 1,348.3 1,727.1 3,181.0 2015 Total 19,958.7 Outside U.S. 2016 vs. 2015 $ $ % % % 2 —% 14 12 2015: 687.0 614.1 535.2 725.3 930.5 925.5 854.7 436.6 U.S. 2,471.6 2,283.3 2,768.8 1,365.9 1,500.0 1,965.4 3,158.2 Total 21,222.1 $ $ Year Ended 69.6 December 31, 105.9 344.0 655.5 661.2 187.9 319.8 504.1 729.4 270.7 fset by decreased volume for Zyprexa. U.S. fset by decreased 1,002.1 1,182.3 1,083.6 1,006.1 1,593.7 9,715.9 2016 Outside U.S. 2016 compared with $ $ fset by increased demand. Revenue outside the U.S. , partially of 69.8 (1) ® 581.1 270.1 465.6 269.3 737.6 534.9 861.8 770.5 165.9 959.4 1,469.5 1,101.0 1,685.2 1,564.5 U.S. 11,506.2 fset by the losses of exclusivity for Cymbalta in Europe and fset by the losses of exclusivity for Cymbalta was driven by sales of several new pharmaceutical products, 2016 was driven by sales of several new $ $ was driven by sales of several pharmaceutical products, including of several pharmaceutical products, was driven by sales Alimta in several countries. . fecting both volume and price. ® , partially of (due to the transfer of commercialization rights to us in the U.S. and Canada of commercialization rights to us (due to the transfer altz, and Jardiance ® T ...... rulicity T ...... , driven by increased volume and, to a lesser extent, higher realized prices, partially of 1 percent, driven by increased volume and, to a lesser extent, higher realized prices, ® ® (2) ...... , Humalog, Erbitux ...... ® ...... ® ...... Revenue rajenta revenue includes Jentadueto U.S. revenue includes revenue in Puerto Rico. T rajenta fective October 1, 2015), fective October 1,

rulicity T Zyprexa Erbitux Cyramza Effient Foreign exchange rates Foreign exchange Percent change Cialis Alimta Forteo Cymbalta Trulicity Strattera Price Product Humalog Humulin Other human pharmaceutical products Animal health products Volume in the U.S., driven by lower realized prices, partially of increased by the unfavorable impact of foreign exchange rates. Revenue of Humalog, our injectable human insulin analog for the treatment of diabetes, Revenue of Humalog, our injectable human insulin analog for the treatment Numbers may not add due to rounding. (1) (2) NM - not meaningful Numbers may not add due to rounding. Numbers may not add increase in 2016 In the U.S., the volume T ef of approximately reserve for expected product returns from reductions to the Cymbalta revenue also benefited $175 million in 2016, favorably af in Outside the U.S., the volume increase including Cyramza and The following are components of the change in revenue compared to the prior year: in revenue compared of the change are components The following Canada, Zyprexa in Japan, as well as Canada, Zyprexa in Japan, as well revenue activity in The following table summarizes our 30 FINANCIAL REPORT F31 payments. late-stage clinicaldevelopment costsand,toalesserextent,higherchargesrelated todevelopmentmilestone Research anddevelopment expense sold. compared with Gross marginasapercent oftotalrevenuewas Gross Margin,Costs,andExpenses revenue outsidetheU.S. animal products,partiallyof Revenue ofanimalhealthproductsintheU.S. the U.S.andCanadawhichoccurredonOctober1,2015. compared to$386.7million Revenue ofErbitux,atreatmentforvariouscancers, increased to Zyprexa revenueinJapanwas$332.3million2016, comparedwith$415.9millionin2015. volumes inJapanduetotheentryofgenericcompetitionJune2016followinglosspatentexclusivity disorder Revenue ofZyprexa,atreatmentforschizophrenia,acutemixedormanicepisodesassociatedwithbipolar I exchange rates,partiallyof increased ef Strattera intheU.S.May2017.W driven byhigherrealizedprices,partiallyof Revenue ofStrattera,atreatmentforattention-deficithyperactivitydisorder GLP-1 marketandincreasedshareoffor Revenue of in 2016.RevenueoutsidetheU.S.decreased benefited fromreductionstotheCymbaltareserveforexpectedproductreturnsofapproximately$175million fibromyalgia, was neuropathic pain,generalizedanxietydisorder Revenue ofCymbalta,aproductforthetreatmentmajordepressivedisorder lesser extent,decreasedvolumeandlowerrealizedprices. outside theU.S.decreased prices resultedfromachangeinestimateofgovernmentrebatethefirstquarter2016.Revenue U.S., drivenbyincreaseddemandand,toalesserextent,higherrealizedprices. Revenue ofHumulin,aninjectablehumaninsulinforthetreatmentdiabetes, rates. by lowerrealizedprices,largelyof percent intheU.S.,drivenbyhigherrealizedprices.RevenueoutsideU.S. for fractureandglucocorticoid-inducedosteoporosisinmenpostmenopausalwomen, Revenue ofForteo,aninjectabletreatmentforosteoporosisinpostmenopausalwomenandmenathighrisk countries thathaserodedrevenueandislikelytocontinueerodefromcurrentlevels. loss ofexclusivityinseveralcountries.W demand duetocompetitivepressure.RevenueoutsidetheU.S. Revenue of unfavorable impactofforeignexchangeratesanddecreasedvolume,partially rapid andseveredeclineinrevenue.RevenueoutsidetheU.S. November 2017.W in theU.S.,drivenbyhigherrealizedprices.W Revenue ofCialis,atreatmentforerectiledysfunctionandbenignprostatichyperplasia, fective patentprotectionwillcausearapidandseveredeclineinrevenue.RevenueoutsidetheU.S. , andbipolarmaintenance, 13percent,drivenbyincreasedvolumeand,toalesserextent,thefavorableimpactofforeign Alimta, atreatmentforvariouscancers, T rulicity 2015 primarilyduetoalowerbenefit fromforeignexchangeratesoninternationalinventories $269.3 million e expectthattheentryofgenericcompetitionfollowinglossexclusivitywillcausea , atreatmentfortype2diabetes,was decreased fset bylowerrealizedprices. in2015. 7percent,drivenbytheunfavorableimpactofforeignexchangeratesand,toa fset bydecreasedrevenueforfoodanimalproducts. intheU.S.2016,comparedto fset byincreasedvolumeandthefavorableimpactofforeignexchange decreased

e expectthattheentryofgenericcompetitionfollowingloss The increasewasduetothetransferofcommercialization rightstousin 3 percent increased e havefacedandremainexposedtogenericentryinmultiple fset bydecreasedvolume.W 16percentoutsidetheU.S.,drivenprimarilybydecreased drivenbytheunfavorableimpactofforeignexchange rates. , chronicmusculoskeletalpain,andthemanagementof 25 percent,drivenbythelossofexclusivity e willloseourpatentprotectionforCialisintheU.S. increased 9percent 73.4 percent T rulicity decreased

. RevenueoutsidetheU.S.was 1 percent to $737.6 million $5.24 billion in2016,adecreaseof1.4 percentagepoints

5 percent decreased decreased $144.6 million $581.1 million , primarilyduetouptakeofnewcompanion intheU.S.,drivenbygrowth e willloseourpatentprotectionfor in2016,drivenprimarilybyhigher intheU.S.,drivenbydecreased 5percent,drivenbythe , 1 increased 1 percent,drivenprimarilybythe , diabeticperipheral decreased increased 13percent in2015.U.S.revenue intheU.S.2016, Animal healthproduct fset byhigherrealizedprices. The increaseinrealized 7percentintheU.S., increased $187.9 million .

1 percent increased 17percent , driven inthe . 26 . 31 FINANCIAL REPORT F32

fset , we 2 2 1 1 — NM

(22) Percent Change The . 2015 The 2015 $100.6 million % enezuelan fect of the in 2016 74.9 2.23 468.7 200.2 2014 2,390.5 19,615.6 14,683.1 11,354.4 The increase in the $ $ , as reduced in 2016, as reduced % Year Ended December 31, fset by net gains of $101.6 $382.5 million 74.8 2.26 in 2015. 367.7 535.0 fset by increased research and 2015 2,408.4 19,958.7 14,921.5 11,329.4 $ $ $6.45 billion to associated with the agreement with with the agreement associated of acquired IPR&D charges in IPR&D charges of acquired , partially of in 2016, compared with income of in 2016 fset by a net discrete tax benefit. $535.0 million fset by expenses related to new products. related to fset by expenses $84.8 million 1 percent decreased , compared with 13.7 percent $30.0 million included net gains of $236.7 million on investments, partially included net gains of $236.7 million , primarily a collaboration with Pfizer and the acquisition of with Pfizer and the acquisition , primarily a collaboration was partially of 2015 There were There were enezuelan financial crisis and certain asset impairment, restructuring, enezuelan financial crisis and certain 2016 AH, and asset impairments. See Note 5 to the consolidated financial See Note 5 to the consolidated AH, and asset impairments. included a $203.9 million charge related to the impact of the V included a $203.9 million charge related of asset impairment, restructuring, and other special charges related to severance restructuring, and other special of asset impairment, (1) fective tax rate for $367.7 million . Other expense in 2016 2016 fective tax rate was 18.9 percent in e recognized asset impairment, restructuring, and other special charges of impairment, restructuring, and other e recognized asset e recognized an acquired IPR&D charge of an acquired IPR&D e recognized fset by a net charge of $152.7 million related to the repurchase of $1.65 billion of debt. See Note 17 to the related to the repurchase of $1.65 billion of debt. See Note 17 to the fset by a net charge of $152.7 million fective tax rate for 2016 reflects several factors in both years: in 2016, the unfavorable tax ef fective tax rate for 2016 reflects several Operating expense consists of research and development and marketing, selling, and administrative expense. Operating expense consists of research and development and marketing, selling, and administrative Operating expense Revenue Gross margin Gross margin as percent of revenue Asset impairment, restructuring, and other special charges Acquired in-process research and development Net income Earnings per share development expense. Net income and EPS increased slightly in 2015 as a higher gross margin, lower development expense. Net income and EPS increased slightly in 2015 special charges were largely of income taxes, and decreased asset impairment, restructuring, and other by increased acquired IPR&D charges and lower other income. Revenue and gross margin increased slightly in 2015. Operating expense in 2015 remained essentially flat as Revenue and gross margin increased slightly in 2015. Operating expense of a decrease in marketing, selling, and administrative expense was largely (1) NM - not meaningful AstraZeneca to co-develop MEDI1814. to co-develop AstraZeneca development activity resulting from business financial Notes 3 and 4 to the consolidated Locemia's intranasal glucagon. See worldwide rights to information. statements for additional W Marketing, selling, and administrative expense expense selling, and administrative Marketing, spending on late-life-cycle products was largely of products was largely on late-life-cycle spending W of Novartis severance costs related to the acquisition associated with integration and charges are primarily and asset taken to reduce cost structure, costs associated with actions AH, other global severance Ireland. In health manufacturing facility in related to the closure of an animal impairments primarily recognized costs for Novartis costs, integration information. statements for additional expense of Other—net, (income) expense was in million on investments. Other income in 2015 deterioration of the bolívar financial crisis, including the significant of additional information. consolidated financial statements for Our ef Financial Results key operating results: The following table summarizes our ef Operating Results—2015 charge related to the impact of the V the favorable tax impact of the acquired IPR&D charges, net charges and other special charges; and in 2015, asset impairment, restructuring, and other special charges. related to the repurchase of debt, and increase in the ef 32 FINANCIAL REPORT F33 volume in2015 wouldhaveincreasedby 2percentcomparedwith 2014. revenue ofNovartis increased volumesforseveral pharmaceuticalproducts.Onaproformabasis, which reflectsthe2014 Outside theU.S.,volume increasein2015wasdrivenbytheinclusionofrevenue fromNovartis exclusivity forCymbaltaand Evista. increased volumesforseveral pharmaceuticalproducts,partiallyof In theU.S.,volumeincreasein2015wasdrivenby theinclusionofrevenuefromNovartis Numbers maynotaddduetorounding. The followingarecomponentsofthechangeinrevenuecomparedtoprioryear: (1) Numbers maynotaddduetorounding. The followingtablesummarizesourrevenueactivitybyregion: Revenue summarized asfollows: summarized inthe"ResultsofOperations—ExecutiveOverview"section. Certain itemsaf Percent change Foreign exchangerates Price Volume Revenue Outside U.S. U.S. U.S. revenueincludesinPuertoRico. • Other • Asset • Collaborations (Note4totheconsolidatedfinancialstatements) • Acquired IPR&D(Notes3and4totheconsolidatedfinancialstatements) (1) accelerate into2014therecordingofanexpensefor2015fee. Drug Fee)duetofinalregulationsissuedbytheInternalRevenueServicewhichrequiredus deductible), or$0.1 W Puerto Rico. workforce, andassetimpairmentsprimarilyassociatedwiththeclosureofamanufacturingsitein associated withourongoingcostcontainmentef W linagliptin andempagliflozincommercialrightsincertaincountriestoBoehringerIngelheim. W acquired IPR&Dfromvariouscollaborationagreements. W Impairment, e recognizedamarketing,selling,andadministrativeexpenseof$1 e recognizedchargesof$468.7million(pretax),or$0.38pershare,relatedtoseverancecosts e recognizedincomeof$92.0million(pretax),or$0.06pershare,relatedtothetransferour e recognizedacquiredIPR&Dchargesof$200.2million(pretax),or$0.12pershare,relatedto fect thecomparisonsofour AH asdescribedinNote3 totheconsolidatedfinancialstatements,our Restructuring, 1 pershare,foranextrayearoftheU.S.BrandedPrescriptionDrugFee(U.S. and Other 2015 and2014 Special Charges forts toreduceourcoststructureandglobal $ $ results. (Note 2015 19,958.7 10,097.4 9,861.3 fset bytheresidualimpact oftheloss The 2015highlighteditemsare December 31, 5 Year Ended to the The 2014 U.S. $ $ consolidated 19.0 million(non-tax 11 —% 5 6 % % % 2014 19,615.6 10,481.5 highlighteditemsare 9,134.1 2015 vs.2014 Outside U.S. financial (13 (2 (6 9 )% )% )% AH and % Percent Change Consolidated statements) AH and (6) 11 2 (7 1 8 2 )% % % % 33 FINANCIAL REPORT F34 ) ) ) ) ) ) 6 2 2 1 2 (2 (7 (9 — 36 30 (43 (11 (36 NM NM Percent Change fset by 75.6 10.2 522.2 373.3 419.8 738.5 1,887.1 2,346.6 2,785.2 2,792.0 2,291.0 1,322.0 1,400.1 1,614.7 1,037.3 2014 Total 19,615.6 $ $ fset by increased volume. 2014: 523.0 485.0 383.8 248.7 237.3 940.3 784.0 1,846.6 3,181.0 2,841.9 2,493.1 2,310.7 1,348.3 1,307.4 1,027.6 Total 19,958.7 $ $ Year Ended 98.3 41.0 December 31, December 105.4 106.1 175.6 735.9 543.0 883.0 783.6 281.9 1,013.5 1,639.8 9,861.3 1,069.6 1,330.7 1,053.9 2015 Outside U.S. compared with 2015 compared $ $ 61.7 (1) 417.6 386.7 277.7 207.7 833.1 612.4 764.4 144.6 156.7 502.1 1,541.2 1,772.3 1,162.4 1,256.8 U.S. 10,097.4 $ $ fset by decreased demand. Revenue outside the U.S. decreased 21 fset by higher volume. fset by increased volume...... Alimta decreased 5 percent in the U.S., driven by decreased demand and, to a lesser extent, Alimta decreased 5 percent in the U.S., ...... Revenue U.S. revenue includes revenue in Puerto Rico. Erbitux Trulicity Evista Effient Cyramza Other human pharmaceutical products Animal health products Product Humalog Alimta Cialis Forteo Humulin Cymbalta Zyprexa Strattera lower realized prices. Revenue outside the U.S. decreased 15 percent, driven by the unfavorable impact of the U.S. decreased 15 percent, driven by the unfavorable impact of lower realized prices. Revenue outside extent, lower realized prices, partially of foreign exchange rates and, to a lesser Revenue of prices. Revenue outside the Revenue of Cialis increased 21 percent in the U.S., driven by higher realized exchange rates. U.S. decreased 16 percent, driven by the unfavorable impact of foreign prices, partially of Revenue of Forteo increased 14 percent in the U.S., driven by higher realized by the unfavorable impact of decreased volume. Revenue outside the U.S. decreased 6 percent, driven foreign exchange rates, partially of realized prices and, to a lesser extent, Revenue of Humulin increased 7 percent in the U.S., driven by higher wholesaler buying patterns, partially of contract in Brazil, and the percent, driven by decreased volume, primarily due to the loss of a government unfavorable impact of foreign exchange rates. of U.S. patent exclusivity in December Revenue of Cymbalta decreased 66 percent in the U.S. due to the loss impact of foreign exchange 2013. Revenue outside the U.S. decreased 26 percent, driven by the unfavorable rates and the loss of exclusivity in Europe in 2014. Revenue of Humalog increased 9 percent in the U.S., driven by higher realized prices and, to a lesser extent, in the U.S., driven by higher realized prices and, to a lesser extent, Revenue of Humalog increased 9 percent the U.S. decreased 8 percent, driven by the unfavorable impact of increased volume. Revenue outside foreign exchange rates, partially of Numbers may not add due to rounding. (1) NM - not meaningful The following table summarizes our revenue activity in our revenue table summarizes The following 34 FINANCIAL REPORT F35 approved. SeeNotes3and 4totheconsolidatedfinancialstatementsforadditional information. from BoehringerIngelheim,ofthenewinsulinglargine productincertaincountrieswhereitwasnotyet various collaborationagreements,includingcharges associated withthetransferofcommercialrightstous, Locemia's intranasalglucagon. agreements, primarilywithPfizer W of favorable impactofforeignexchangeratesanda2014 chargeassociatedwiththeU.S.DrugFee,partially Marketing, selling,andadministrativeexpensedecreased 1percentto$6.53billionin2015,duethe approximately $135million,partiallyof with theterminationoflate-stagemolecules,primarily evacetrapibandbasalinsulinpeglispro,of late-stage clinicaldevelopmentcosts,theinclusionofNovartis Research anddevelopmentexpenseincreased1percentto$4.80billionin2015,drivenprimarilybyhigher of the unfavorableimpactsofinclusionNovartis Gross marginasapercentoftotalrevenuewas74.8in2015,essentiallyflatcomparedwith2014 as Gross Margin,Costs,andExpenses companion animalproducts,partiallyof decreased 13percent,drivenbytheunfavorableimpactofforeignexchangeratesandvolume in percent, drivenprimarilybydecreasedvolumeinfoodanimalproducts.RevenueoutsidetheU.S.wouldhave consolidated financialstatements,revenueofanimalhealthproductsintheU.S.wouldhavedecreased1 On aproformabasis,whichreflectsthe2014revenueofNovartis AH. outside theU.S.increased53percent. Revenue ofanimalhealthproductsintheU.S.increased21percentandproductrevenue the unfavorableimpactofforeignexchangerates. loss ofpatentexclusivityinMarch2014.RevenueoutsidetheU.S.decreased17percent,drivenprimarily by postmenopausal womenathighriskforinvasivebreastcancer for reductionofriskinvasivebreastcancerinpostmenopausalwomenwithosteoporosisand Revenue ofEvista,aproductforthepreventionandtreatmentosteoporosisinpostmenopausalwomen impact offoreignexchangerates. decreased demand.RevenueoutsidetheU.S.17percent,drivenprimarilybyunfavorable stent placement,increased6percentintheU.S.,drivenbyhigherrealizedprices,partiallyof known aspercutaneouscoronaryintervention,includingpatientsundergoingangioplasty thrombosis) inpatientswithacutecoronarysyndromewhoaremanagedanartery-openingprocedure Revenue ofEf foreign exchangerates,largelyof increased demand.RevenueoutsidetheU.S.decreased1percent,drivenbyunfavorableimpactof Revenue ofStratteraincreased1 exchange rates. $466.2 millionin2014. Zyprexa inJapanDecember2015.revenuewas$415.9million2015,comparedwith percent, drivenprimarilybytheunfavorableimpactofforeignexchangerates.W from theexpirationofperiodtoreturnexpiredproductforcredit.RevenueoutsideU.S.decreased15 Revenue ofZyprexaincreased31percentintheU.S.,drivenbyadjustmentstoreturnreserveresulting fset bytheinclusionofNovartis fset bythefavorableimpactofforeignexchangeratesoninternationalinventoriessold. e recognizedacquiredIPR&Dchargesof$535.0million in2015resultingfromvariouscollaboration fient, aproductforthereductionofthromboticcardiovascularevents(includingstent The revenuedecreaseinJapanwasduetotheunfavorableimpactofforeign There were$200.2millionofacquiredIPR&Dcharges in2014relatedto , aswelltheconsiderationpaidtoacquireworldwide rightsto 1 percentintheU.S.,drivenbyhigherrealizedpricesand,toalesserextent, fset byincreasedvolume. AH andexpensesrelatedtonewproductlaunches. fset bythefavorableimpactofforeignexchangerates. The increasesweredrivenbytheinclusionofrevenuefromNovartis fset byhigherrealizedpricesandvolumeforfoodanimalproducts. AH andinventorystep-upamortizationcostswere , decreased70percentintheU.S.,dueto AH, andanincreaseinchargesassociated AH asdescribedinNote3tothe e lostpatentexclusivityfor , atherectomy fset by , or 35 FINANCIAL REPORT F36 as of and The , The The e AH. See . W fective for the fset by a net fective tax rate for fective tax rate for , ef of which is December 31, e expect 2017 capital At and $4.43 billion The ef . W $960 million , including the estimated compared with December 31, 2016 $2.70 billion . In January 2017, we Alimta (U.S., Europe, and Japan), $6.66 billion etmedica, Inc.'s U.S. feline, canine, share repurchase program $885 million $2.33 billion , an increase of $915.7 million less than in 2015 AH, and asset impairments. In 2014, we asset impairments. AH, and . In the fourth quarter of 2016 $4.58 billion . See Note 7 to the consolidated financial . See Note 7 to the consolidated financial issuance of Swiss Franc debt. , an increase of . Refer to the Consolidated Statements of Cash Flows for . Refer to the Consolidated Statements $46.50 per share or approximately were $29.2 million , the quarterly dividend was increased to $0.52 per share, , respectively of $2.08 per share. $1.21 billion 2017 2017 of shares under the $5.00 billion and 2015, respectively This increase is primarily due to the net issuance of $1.30 billion of short- This increase is primarily due to the fient (U.S.), and Cialis (U.S. and Europe). during 2016 of unused committed bank credit facilities, of unused committed bank credit facilities, . 2016 19.0 million nondeductible charge associated with the U.S. Drug Fee. charge associated with the 19.0 million nondeductible , we distributed dividends to our shareholders. Dividends of $2.04 per share , we distributed dividends to our shareholders. Dividends of $2.04 per at December 31, 2015 , total debt was $10.31 billion , cash and cash equivalents was $540.1 million $1.04 billion $2.87 billion e believe that amounts accessible through existing commercial paper markets should be e believe that amounts accessible through . and December 31, 2015 , which was funded through the issuance of commercial paper $3.67 billion CONDITION at December 31, 2015 fective tax rate was 13.7 percent in 2015, compared with 20.3 percent in 2014. 13.7 percent in 2015, compared fective tax rate was , we had a total of e recognized asset impairment, restructuring, and other special charges of $367.7 million in 2015. million in 2015. charges of $367.7 and other special restructuring, asset impairment, e recognized anticipate issuing debt to fund the transaction, which is expected to close by the end of the first quarter of anticipate issuing debt to fund the transaction, which is expected to close information. 2017. See Note 3 to the consolidated financial statements for additional For the 131st consecutive year and $2.00 per share were paid in announced an agreement to acquire CoLucid for dividend to be paid in the first quarter of resulting in an indicated annual rate for Capital expenditures of financial statements for additional previously announced in October 2013. See Note 12 to the consolidated details. information regarding recent and See "Results of Operations—Executive Overview—Other Matters" for upcoming losses of patent protection for Evista (U.S.), Cymbalta (Europe), Zyprexa (Japan), Strattera (U.S.), Ef adequate to fund short-term borrowing needs. adequate to fund short-term borrowing V In January 2017, we completed our acquisition of Boehringer Ingelheim 2016 for paper program. See Note 10 to the consolidated financial statements available to support our commercial additional details. W and rabies vaccine portfolio in an all-cash transaction for approximately cost of inventory expenditures to be approximately $1.2 billion. In 2016, we repurchased term commercial paper borrowings and the term commercial paper borrowings December 31, 2015 December 31, 2016 statements for additional details. As of December 31, 2016 $7.98 billion In addition to our cash and cash equivalents, we held total investments of In addition to our cash and cash equivalents, additional details on the significant sources and uses of cash for the years ended additional details on the significant compared with As of December 31, 2016 FINANCIAL 2014 reflects the impact of a $1 2014 reflects the impact with 2014 is primarily due to a favorable tax impact of the net decrease in the tax rate for 2015 compared debt, acquired IPR&D, and asset impairment, restructuring, and other charges related to the repurchase of consolidated financial statements for additional information. special charges. See Note 13 to the charges relate to severance costs, integration costs for Novartis costs for Novartis costs, integration to severance charges relate special charges. and other impairment, restructuring, million for asset charges of $468.7 recognized the closure of a associated with primarily costs, asset impairments severance charges included of Novartis then-pending acquisition costs for the Rico, and integration site in Puerto manufacturing information. financial statements for additional Note 5 to the consolidated of $340.5 million million in 2015, compared with income expense was income of $100.6 Other—net, (income) of million on investments, partially in 2015 included net gains of $236.7 in 2014. Other income in 2014 included net $1.65 billion of debt. Other income million related to the repurchase of charge of $152.7 of commercial of income associated with the transfer on investments and $92.0 million gains of $216.4 million See Notes 4 and from us to Boehringer Ingelheim. and empagliflozin in certain countries rights to linagliptin information. financial statements for additional 17 to the consolidated Our ef W 36 FINANCIAL REPORT F37 of contractualobligationsbelow marketing isobtained.Because ofthecontingentnaturethesepayments,they arenotincludedinthetable upon apercentageofthesales ofthepharmaceuticalproductineventthat regulatory approvalfor achievement ofcertainsales levels).Ifrequiredbythearrangement,wemaymake royaltypaymentsbased pharmaceutical product(e.g., approvalformarketingbytheappropriateregulatory agencyoruponthe contingent uponthesuccessfulachievementofanimportant pointinthedevelopmentlifecycleof certain futureeventslinkedtothesuccessofasset indevelopment.Milestonepaymentsmayberequired parties thatoftenrequiremilestoneandroyaltypayments tothethirdpartycontingentuponoccurrenceof potential productsstillindevelopmentandenterinto research anddevelopmentarrangementswiththird results ofoperations,liquidity have amaterialfutureef W Off-Balance Sheet underlying foreigncurrencydenominatedtransactions. analysis doesnotconsidertheimpactthathypotheticalchangesinexchangerateswouldhaveon have amaterialimpactonearnings,cashflows,orfinancialpositionoverone-yearperiod. values ofouroutstandingforeigncurrencyderivativecontractsas rates. outstanding foreigncurrencyderivativecontractstodeterminetheirsensitivitychangesinexchange currency fluctuationsontheexistingassetsandliabilities.W coverage ofsuchexposures.Gainsandlossesonthesederivativecontracts and theBritishpound).Ourcorporaterisk-managementpolicyoutlinesminimummaximumhedge contracts toreducetheef fluctuated fromthebeginningofperiod.W arises fromtranslatingtheresultsofourglobaloperationstoU.S.dollaratexchangeratesthathave and loanpayablesreceivablesdenominatedinforeigncurrencies.W W against theeuro,Japaneseyen,andBritishpound;poundSwissfranceuro. Our foreigncurrencyriskexposureresultsfromfluctuatingexchangerates,primarilytheU.S.dollar earnings, cashflows,orfairvaluesofinterestraterisk-sensitiveinstrumentsoveraone-yearperiod. the instrumentsasofDecember31,2016 rate risk-sensitiveinstruments,ahypothetical10percentchangeininterestratesappliedtothefairvalue of on ouroverallinterestrateexposureat floating ratedebtpositionsandmayenterintointerestderivativestohelpmaintainthatbalance.Based ef Our primaryinterestrateriskexposureresultsfromchangesinshort-termU.S.dollarrates.Inan and currencyexchangerates. instruments. these risksthroughacontrolledprogramofriskmanagementthatincludestheusederivativefinancial values. In thenormalcourseofbusiness,ouroperationsareexposedtofluctuationsininterestratesandcurrency suppliers; theuncertainimpactofhealthcarelegislation;andvariousinternationalgovernmentfundinglevels. creditworthiness ofourwholesalersandothercustomers,includingforeigngovernment-backedagencies Both domesticallyandabroad,wecontinuetomonitorthepotentialimpactsofeconomicenvironment; operating needs,dividendspaidtoshareholders,sharerepurchases,andcapitalexpenditures. repatriations offoreignearningsforwhichtaxhasbeenprovidedshouldbesuf U.S. incometaxesisprovided.W earnings, butwhenforeignearningsareexpectedtobeindefinitelyreinvestedoutsidetheU.S.,noaccrualfor investments wererepatriatedtotheU.S.W subsidiaries. At December31,2016 fort tomanageinterestrateexposures,westriveachieveanacceptablebalancebetweenfixedand e havenoof e faceforeigncurrencyexchangeexposureswhenweenterintotransactionsarisingfromsubsidiarytrade A hypothetical10percentchangeinexchangerates(primarilyagainsttheU.S.dollar)appliedtofair These fluctuationscanvarythecostsoffinancing,investing,andoperating.W The objectiveofcontrollingtheserisksistolimittheimpactonearningsfluctuationsininterest A significantportionofthisamountwouldbesubjecttotaxpaymentsifsuchcashand f-balance sheetarrangementsthathaveamaterialcurrent ef Arrangements andContractualObligations , wehadanaggregateof fect onourfinancialcondition,changesin revenuesorexpenses, fect offluctuatingcurrencyexchangerates(principallytheeuro,Japaneseyen, , capitalexpenditures,orresources.W All derivativeactivitiesareforpurposesotherthantrading. . e believecashprovidedbyoperatingactivitiesintheU.S.andplanned December 31,2016 and2015 e recordU.S.deferredtaxliabilitiesforcertainunremitted e mayenterintoforeigncurrencyforwardoroptionderivative $9.77 billion , respectively and2015,includingderivativesotherinterest e periodicallyanalyzethefairvaluesof ofcashandinvestmentsatourforeign , wouldnothaveamaterialimpacton December 31,2016 e alsofacecurrencyexposurethat e acquireandcollaborateon fect orthatarereasonablylikelyto ficient tofundourdomestic fset, inpart,theimpactof e addressaportionof and This sensitivity 2015, wouldnot 37 FINANCIAL REPORT F38 — 3.1 338.6 ears Y 8,727.0 1,858.2 5 10,926.9 More Than $ $ e used the 2.1 10.0 , if milestones , if milestones . 169.5 392.6 794.5 220.3 3-5 ears Y $ $ . Some of these purchase 6.9 fect on our consolidated 230.7 490.4 362.7 1-3 ears 1,993.3 3,084.0 Y $ $ e expect the amount of these December 31, 2016 — Payments Due by Period 5.4 These arrangements often give us the often These arrangements . W Accruals ear 134.8 832.4 Y 1 14,800.0 15,772.6 Less Than $ $ fect the reported amounts of assets, liabilities, TES 14.4 873.6 2,441.2 Total 11,945.3 15,303.5 30,578.0 December 31, 2016 $ $ . (1) , to compute the amount of the contractual obligation for interest on the variable rate , to compute the amount of the contractual obligation , for purposes of this disclosure, we have not distinguished between cancelable and , for purposes of this disclosure, we have not e believe that, given current facts and circumstances, it is unlikely that fer from those estimates. For any given individual estimate or assumption fer from those estimates. For any given individual estimate or assumption ACCOUNTING ESTIMA , we are unlikely to cease development if the compound successfully achieves cease development if the compound , we are unlikely to

...... e also note that, from a business perspective, we view these payments as positive a business perspective, we view e also note that, from e excluded long-term income taxes payable of $688.9 million, because we cannot reasonably estimate the e excluded long-term income taxes payable (2) ...... ferent estimates. W ...... (3) , these arrangements are not material in any one annual reporting period. However one annual reporting material in any are not , these arrangements Purchase obligations consisting primarily of all open purchase orders as of Purchase obligations consisting primarily of noncancelable purchase obligations. our significant vendors, which are noncancelable and are not contingent. Contractual payment obligations with each of orders may be cancelable; however TION OF CRITICAL ...... • • e have included long-term liabilities consisting primarily of our nonqualified supplemental pension funding requirements and deferred e have included long-term liabilities consisting e have included the following: e recognize revenue from sales of products at the time title of goods passes to the buyer and the buyer e recognize revenue from sales of products at the time title of goods passes interest rate forward curve at December 31, 2016 debt instruments and swaps. compensation liabilities. W those liabilities. timing of future cash outflows associated with W W Our long-term debt obligations include both our expected principal and interest obligations and our interest rate swaps. W Our long-term debt obligations include both Purchase obligations Operating leases Other long-term liabilities reflected on our Other long-term liabilities reflected on balance sheet interest payment Long-term debt, including (Dollars in millions) Capital lease obligations Total applying any such other reasonable judgment would cause a material adverse ef applying any such other reasonable judgment would cause a material APPLICA and discounts are established in assumes the risks and rewards of ownership. Provisions for returns, rebates, the same period the related sales are recorded. The contractual obligations table is current as of The contractual obligations table is time as new contracts are initiated and existing contracts are completed, obligations to change materially over terminated, or modified. can be subjective and complex, and revenues, expenses, and related disclosures. Some of those judgments consequently actual results could dif to the same facts and circumstances we make, it is possible that other people applying reasonable judgment could develop dif in this report. Our most critical results of operations, financial position, or liquidity for the periods presented are described below accounting estimates have been discussed with our audit committee and Revenue Recognition and Sales Return, Rebate, and Discount W (3) (2) (1) generally accepted in the U.S., In preparing our financial statements in accordance with accounting principles we must often make estimates and assumptions that af for multiple products covered by these arrangements were reached in the same reporting period, the reporting period, in the same were reached by these arrangements products covered for multiple See flows in that period. of operations or cash to the results could be material charge to expense aggregate for additional details. financial statements the consolidated Note 4 to the us to avoid making which would allow of the product, development to unilaterally terminate discretion however contingent payments; W milestone objectives. now generating or is moving through development and is that the product is successfully because they signify cash flows from sales of products. more likely to generate are as follows: will require future cash payments contractual obligations that Our current noncancelable Individually 38 FINANCIAL REPORT F39 government, weadjustour rebatereserves. the relatedsale.Ifourestimates arenotreflectiveoftheactualpharmaceutical costs incurredbythe rebates, updatedasgovernmental authoritiesrevisebudgeteddeficits,isrecognized inthesameperiodas are basedontheanticipated budgetforpharmaceuticalpaymentsinthecountry recognized inthesameperiod astherelatedsales.InsomelargeEuropeancountries, governmentrebates Most ofourrebatesoutside theU.S.arecontractualorlegislativelymandatedand areestimatedand revisions ofaccrualsforseveralperiods. months later product isshipped),themanagedcare,Medicare,and Medicaidrebaterelatedtothatsaleispaidupsix accrue aliabilityformanagedcare,Medicare,andMedicaid rebatesatthetimewerecordsale(when that aresoldviamanagedcare,Medicare,andMedicaid contracts,andourproductpricing. an evaluationofthecurrentmanagedcare,Medicare, andMedicaidcontracts,thepercentageofourproducts historical salesaswellanysignificantchangesin sales trends(e.g.,patentexpiriesandproductlaunches), historical managedcare,Medicare,andMedicaidrebate paymentsbyproductasapercentageofour care, Medicare,andMedicaidcontracts.Indetermining theappropriateaccrualamount,weconsiderour The largestofoursalesrebateanddiscountamounts arerebatesassociatedwithsalescoveredbymanaged customer segmentgroupsandtheprovisionsofcurrentrebatediscountcontracts. programs. W Medicare, Medicaid,chargebacks,long-termcare,hospital,patientassistanceprograms,andvariousother discounts thatrequiretheuseofjudgmentinestablishmentaccrualincludemanagedcare, discount amountsarerecordedasadeductiontoarriveatournetproductrevenue.Salesrebatesand W Sales RebatesandDiscounts-BackgroundUncertainties not fluctuatedsignificantlyasapercentageofrevenue. Actual productreturnshavebeenlessthan2percentofournetrevenueoverthepastthreeyearsand return amountsasadeductiontoarriveatournetproductsales.Oncetheisreturned,itdestroyed. to ourassumptions,whichwouldhaveanimpactonconsolidatedresultsofoperations.W Adjustments tothereturnsreservehavebeenandmayinfutureberequiredbasedonrevisedestimates level ofproductreturnsasinventoryremaininginthewholesaleandretailchannelsexpires. date. Followingthelossofexclusivityforapatent-dependentproduct,weexpecttoexperienceanelevated to returnproductfordatingissueswithinaspecifiedperiodpriorandsubsequenttheproduct'sexpiration changing competitiveenvironment.W due toknownfactorssuchasthelossofpatentexclusivity wholesale andretailchannels,amongothers,aswellanyotherspecifically-identifiedanticipatedreturns 36 monthsaftertheinitialsaleofaproducttoourcustomer),andestimatedlevelsinventoryin based onseveralfactors,including:historicalreturnrates,expirationdatebyproduct(generally When salesoccur in therateofactualproductreturns. retail channel.Wholesalerstockinganddestockingactivityhistoricallyhasnotcausedanymaterialchanges trend; however disclose thisinourproductrevenuediscussionifwebelievetheamountismaterialto unusual increaseordecreaseintherevenueofamajorproductcomparedwithunderlyingdemand,we data oninventorylevelsatourwholesalers.Whenwebelievewholesalerpurchasingpatternshavecausedan of ourarrangementsdoesnotprovideanincentiveforspeculativewholesalerbuyingandprovidesuswith redundant holidaystocking,andchangesinwholesalerbusinessoperations.IntheU.S.,currentstructure anticipated product-supplyissues,weatherpatterns,changesinthetransportationnetwork, consistent basisacrossourproductportfolio.Causesofunusualwholesalerbuyingpatternsincludeactualor attempt tomaintainU.S.wholesalerinventorylevelsatanaverageofapproximatelyonemonthorlessona wholesalers andavailableprescriptionvolumeinformationforourproducts,oralternativeapproaches.W major marketsoutsidetheU.S.,primarilybyreviewingperiodicinventoryreportssuppliedour W Sales Returns-BackgroundandUncertainties e establishsalesrebateanddiscountaccrualsinthesameperiodasrelatedsales. e regularlyreviewthesupplylevelsofoursignificantproductssoldtomajorwholesalersinU.S.and . Becauseofthistimelag,inanyparticularperiodour rebateadjustmentsmayincorporate e basetheseaccrualsprimarilyuponourhistoricalrebateanddiscountpaymentsmadeto , wearenotalwaysabletoaccuratelyquantifytheamountofstockingordestockingin , weestimateareserveforfutureproductreturnsrelatedtothosesales. e maintainareturnspolicythatallowsU.S.pharmaceuticalcustomers , productrecallsanddiscontinuances,ora . A bestestimateofthese The rebateand This estimateis Although we e recordthe , 24to e 39 FINANCIAL REPORT F40 ) 2015 2,558.6 2,241.4 6,245.1 , a 5 (5,927.9 $ $ ) of consolidated net 2016 3,601.8 2,558.6 8,732.8 (7,689.6 . $ $ 1.0 percent As of December 31, 2016 ...... , respectively (1) , on our consolidated balance sheets...... and 2015 ...... Assets e accrue legal defense costs expected to be incurred in e accrue legal defense costs expected , and the possibility of and length of time for collection. , the financial condition of the insurers, and the possibility of and ...... s net book value over its fair value, and the cost basis is adjusted. December 31, 2016 e identify impairment by comparing the projected undiscounted cash The factors we consider in developing our product litigation liability The factors we consider in developing . In addition, we accrue for certain product liability claims incurred, but not filed, . In addition, we accrue for certain product fect on our income before income taxes. fect on our income ef Reduction of net sales due to sales returns, discounts, and rebates Reduction of net sales due to sales Cash payments of discounts and rebates e also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. we have to diminish the exposure for periods covered by insurance. e also consider the insurance coverage e believe that our accruals for sales returns, rebates, and discounts are reasonable and appropriate based and appropriate are reasonable rebates, and discounts for sales returns, that our accruals e believe e review the carrying value of long-lived assets (both intangible and tangible) for potential impairment on a e review the carrying value of long-lived assets (both intangible and tangible) sales for each of the years presented. Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than Adjustments of the estimates for these returns,

Sales return, rebate, and discount liabilities, end of year Sales return, rebate, and discount liabilities, (Dollars in millions) of year and discount liabilities, beginning Sales return, rebate, The following represents a roll-forward of our most significant U.S. pharmaceutical sales return, rebate, and U.S. pharmaceutical sales a roll-forward of our most significant The following represents and Medicaid: including managed care, Medicare, discount liability balances, Product Litigation Liabilities and Other Contingencies Product Litigation Liabilities and Background and Uncertainties contingencies are, by their nature, uncertain and are based upon Product litigation liabilities and other complex judgments and probabilities. amounts include the merits and jurisdiction of the litigation, the nature reserves and other contingent liability and past litigation cases, the nature of the product and the current and the number of other similar current to the litigation, and the likelihood of settlement and current state of assessment of the science subject settlement discussions, if any estimate of their costs based primarily on historical claims to the extent we can formulate a reasonable usage. W experience and data regarding product (1) In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for we consider the policy coverage limits and exclusions, the potential In assessing our insurance coverage, denial of coverage by the insurance company percent change in our global sales return, rebate, and discount liability would have led to an approximate discount liability would have led to our global sales return, rebate, and percent change in $214 million our products in the liability resulting from sales of global sales return, rebate, and discount The portion of our and 87 percent as of U.S. was 85 percent liability contingencies when both probable and reasonably estimable. connection with significant product W liability insurance, we are self-insured length of time for collection. Due to a very restrictive market for product to insurance coverage, we also for product liability losses for all our currently marketed products. In addition the nature of the indemnification, consider any third-party indemnification to which we are entitled, including the financial condition of the indemnifying party Financial Statement Impact insurance recoverables have The litigation accruals and environmental liabilities and the related estimated been reflected on a gross basis as liabilities and assets, respectively Impairment of Indefinite-Lived and Long-Lived on current facts and circumstances. Our global rebate and discount liabilities are included in sales rebates included in sales liabilities are rebate and discount Our global facts and circumstances. on current current is included in other sales return liability Our global balance sheet. on our consolidated and discounts balance sheet. noncurrent liabilities on our consolidated liabilities and other Financial Statement Impact Financial W periodic basis and whenever events or changes in circumstances indicate the carrying value of an asset (or periodic basis and whenever events or changes in circumstances indicate asset group) may not be recoverable. W Background and Uncertainties W If an impairment is identified, a loss flows to be generated by the asset (or asset group) to its carrying value. is recorded equal to the excess of the asset’ 40 FINANCIAL REPORT F41 percent ofthetotalprojectedbenefit obligationandtotalplanassets,respectively af age offutureretireesforU.S. planswereadjustedbyoneyear income beforetaxes wouldchangeby If the prospectively beginningin2016. recorded inaccumulatedothercomprehensiveloss.W benefit obligationsasthechangeinserviceandinterest costsisrecordedintheactuarialgainsandlosses cash flowsandthespecificspotyieldcurverates. more precisemeasureofinterestandservicecostsby improvingthecorrelationbetweenprojectedbenefit spot ratesalongtheyieldcurvetoprojectedcash outflowsofourobligations. method usesthespotyieldcurveapproachtoestimate theserviceandinterestcostsbyapplyingspecific income debtinstrumentsusedtomeasurethebenefit obligationatthebeginningofperiod. were determinedusingasingleweighted-averagediscount ratebasedonyieldcurvesofhighquality net periodicpensionandretireehealthbenefitplancosts.Priortothischange,theserviceinterestcosts of January1,2016,wechangedthemethodusedtoestimateserviceandinterestcostcomponents the were tochangebyaquarterpercentagepoint,incomebeforetaxeswould If the Financial StatementImpact ages. past employeeseligibleforpensionandmedicalbenefitstogetherwithourexpectationsoffutureretirement applicable. Inevaluatingourexpectedretirementageassumption,weconsidertheagesof actual results,aswellthediscountratesandexpectedreturnonplanassetsofothercompanies,where leading financialadvisersandeconomists.W returns andassetallocations(approximately assets, weconsidermanyfactors,withaprimaryanalysisofcurrentandprojectedmarketconditions,asset fixed incomedebtinstrumentstodeterminethediscountrates.Inevaluatingexpectedreturnonplan and retireehealthbenefitplans.W Annually additional informationregardingourretirementbenefits. amounts reported.Inadditiontotheanalysisbelow expected returnonplanassets,andretirementage. Defined benefitpensionplanandretireehealthcostsincludeassumptionsforthediscountrate, Background andUncertainties Retirement Benefits projections, requiremanagement’ Estimates offuturecashflows,basedonwhatwebelievetobereasonableandsupportableassumptions products. risk andrequiresthatweinvestinalargenumberofprojectstomaintainsuccessfulportfolioapproved Operations—Executive Overview—Late-StagePipeline." no certaintythattheseassetsultimatelywillyieldasuccessfulproduct,asdiscussedpreviouslyin“Resultsof For acquiredIPR&Dassets,theriskoffailurehasbeenfactoredintofairvaluemeasureandtherecanbe statements. multiple assumptions.W Several methodsmaybeusedtodeterminetheestimatedfairvalueofacquiredIPR&D,allwhichrequire is performedtodeterminetheamountofanyimpairment. impairment indicatorsarepresent.Whenrequired,acomparisonoffairvaluetothecarryingamountassets Goodwill andindefinite-livedintangibleassetsarereviewedforimpairmentatleastannuallywhencertain fected by$43.8million 2016 2016 , weevaluatethediscountrateandexpectedreturnonplanassetsinourdefinedbenefitpension As such,itislikelythatsomeacquiredIPR&Dassetswillbecomeimpairedinthefuture. expectedreturnonplanassetsforU.S.planswereto changebyaquarterpercentagepoint, discountratefortheU.S.definedbenefitpensionandretireehealthplans(U.S.plans) Assumptions . e utilizethe“incomemethod,”asdescribedinNote8toconsolidatedfinancial The U.S.plans,includingPuerto Rico,representapproximately s judgment. e useanactuariallydetermined,plan-specificyieldcurveofhighquality 80 percent e mayalsoreviewourhistoricalassumptionscomparedwith Actual resultscouldvarymateriallyfromtheseestimates. $23.4 million The changedoesnotaf , seeNote14totheconsolidatedfinancialstatementsfor These assumptionshaveasignificantef e accountedforthisasachangeinestimate ofwhicharegrowthinvestments);andtheviews The natureofthepharmaceuticalbusinessishigh- . Ifourassumptionregarding the2016 , ourincomebefore taxeswouldbe fect themeasurementoftotal , atDecember31,2016 The newmethodprovidesa 75 percent fect onthe $34.6 million This new expected and80 , fixed . , . As 41 FINANCIAL REPORT F42 The . The excess of ficient to pay tax court systems. tax court systems. , respectively fect our consolidated results of , the issuance of regulations or , the issuance of regulations e recognize both accrued interest and e recognize both accrued interest and and $32.4 million $19.1 million , a 5 percent change in the amount of the uncertain tax positions and the valuation , a 5 percent change in the amount e believe our estimates for uncertain tax positions are appropriate and suf e believe our estimates for uncertain fective for our acquisitions subsequent to October 1, 2016. The fair values of intangible assets, including acquired IPR&D, are determined using information The fair values of intangible assets, including acquired IPR&D, are determined axes The tax benefits recognized in the financial statements from such a position are measured based on from such a position are measured in the financial statements The tax benefits recognized As discussed further in Note 2 to the consolidated financial statements, a modified definition of a As discussed further in Note 2 to the consolidated financial statements, e recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax only if it is more likely than not benefit from an uncertain tax position e recognize the tax e prepare and file tax returns based on our interpretation of tax laws and regulations and record estimates and record estimates laws and regulations of tax based on our interpretation and file tax returns e prepare e have recorded valuation allowances against certain of our deferred tax assets, primarily those that have against certain of our deferred tax assets, primarily those that have e have recorded valuation allowances o determine whether acquisitions or licensing transactions should be accounted for as a business o determine whether acquisitions or position will be sustained on examination by the taxing authorities, based on the technical merits of the authorities, based on the technical on examination by the taxing position will be sustained position. W resolution. likelihood of being realized upon ultimate that has a greater than 50 percent the largest benefit For example, in facts and circumstances. tax benefits is adjusted for changes amount of unrecognized to existing tax law result from significant amendments adjustments could or resolution of obtained during a tax examination, the taxing authorities, new information interpretations by an examination. W based on these judgments and interpretations. In the normal course of business, our tax returns are subject to our tax returns of business, In the normal course and interpretations. these judgments based on assessments by result in future tax, interest, and penalty taxing authorities, which may examination by various in tax law of many tax positions due to changes Inherent uncertainties exist in estimates these authorities. through the various jurisdictions’ regulation, and/or as concluded resulting from legislation, Income T and Uncertainties Background W If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities If the acquired set of activities and assets meets the definition of a business, of the acquisition date. assumed are required to be recorded at their respective fair values as business is ef been generated from net operating losses and tax credit carryforwards in certain taxing jurisdictions. In been generated from net operating likely than not recover these deferred tax assets, we have not assumed evaluating whether we would more strategies in the jurisdictions associated with these carryforwards any future taxable income or tax planning an assumption. Implementation of tax planning strategies to recover where history does not support such income generation in these jurisdictions could lead to the reversal of these these deferred tax assets or future of income tax expense. valuation allowances and a reduction Financial Statement Impact As of December 31, 2016 assessments that may result from examinations of our tax returns. W assessments that may result from examinations benefits in income tax expense. penalties related to unrecognized tax W in net income of allowance would result in a change Acquisitions Background and Uncertainties T we make certain judgments, which include assessing whether the combination or as an asset acquisition, would meet the definition of a business under the relevant accounting acquired set of activities and assets rules. applicable, is recorded as goodwill. If the purchase price over the fair value of the acquired net assets, where a business, the transaction is recorded the acquired set of activities and assets does not meet the definition of not have an alternative future use is as an acquisition of assets and, therefore, any acquired IPR&D that does Refer to Note 3 to the consolidated charged to expense at the acquisition date, and goodwill is not recorded. financial statements for additional information. assets acquired and liabilities assumed The judgments made in determining estimated fair values assigned to af in a business combination, as well as estimated asset lives, can materially operations. that are deemed reasonable by available near the acquisition date based on expectations and assumptions it necessary to engage an management. Depending on the facts and circumstances, we may deem liabilities. independent valuation expert to assist in valuing significant assets and using an "income method," as The fair values of identifiable intangible assets are primarily determined described in Note 8 to the consolidated financial statements. 42 FINANCIAL REPORT F43 FINANCIAL statements andisincorporatedherebyreference. Information relatingtocertainlegalproceedingscanbefoundinNote15theconsolidatedfinancial LEGAL in income accounting uponcompletionoftheacquisition. related totheplannedacquisitionofCoLucidincludedinour final inventoryquantitiespurchasedandacquisitionaccountingadjustments. Inc.'s U.S.feline,canine,andrabiesvaccinesportfolioincludedinour Amortization andinventorystep-upcostsassociatedwiththeacquisitionofBoehringerIngelheimV Capital expendituresareexpectedtobeapproximately$1.2billion. purposes oftheestimatedacquiredIPR&DchargerelatedtoplannedacquisitionCoLucid. The 2017 (income) expenseisexpectedtobeincomeofup$100million. selling, andadministrativeexpensesareexpectedtobeintherangeof$6.4billion$6.6billion.Other—net, Research anddevelopmentexpensesareexpectedtobeintherangeof$4.9billion$5.1billion.Marketing, W Cyramza, Jardiance,andLartruvo. Forteo, andHumalog,aswellhigherrevenuefromnewproductsincluding growth fromanimalhealthproductsandanumberofestablishedpharmaceuticalincluding between $21.8billionand$22.3billion.Excludingtheimpactofforeignexchangerates,weexpectrevenue acquired IPR&DchargerelatedtotheplannedacquisitionofCoLucid.W For thefullyearof2017 As Financial StatementImpact the discountrate. consideration comparable using The e anticipatethatgrossmarginasapercentofrevenuewillbeapproximately73.5in of fair December 31, a

AND REGULA market value taxrateisexpectedtobeapproximately24.5percentwhichreflectsthenon-deductibilityfor before incometaxesof$22.9million EXPECT assets requires of approach any or 2016 contingent A the T TIONS FOR liabilities, , weexpectEPStobeintherangeof$2.69$2.79,whichreflectsestimated OR , based use a Y 5 MA of percent consideration significant on TTERS or 2017 a quoted discounted change estimates market . in liability the cash values, contingent and that flow judgments, results significant 2017 analysis. consideration financialguidanceissubjecttofinal from including, 2017 financialguidancearesubjectto Estimating other a e anticipatethattotalrevenuewillbe business observable The acquiredIPR&Dcharge T liability rulicity but the combination not , would fair T limited altz, Basaglar inputs value result 2017. to, for is of revenue in determined etmedica, identical contingent T a ® rajenta, , change and or 43 FINANCIAL REPORT F44 ) 2.23 2.23 200.2 468.7 609.8 (340.5 4,932.5 4,733.6 6,620.8 3,000.3 2,390.5 2014 19,615.6 16,615.3 1,069,932 1,074,286 $ $ $ $ ) 2.27 2.26 535.0 367.7 381.6 (100.6 5,037.2 4,796.4 6,533.0 2,790.0 2,408.4 2015 19,958.7 17,168.7 1,061,913 1,065,720 $ $ $ $ 30.0 84.8 2.59 2.58 382.5 636.4 5,654.9 5,243.9 6,452.0 3,374.0 2,737.6 2016 21,222.1 17,848.1 1,058,324 1,061,825 $ $ $ $ ...... Year Ended December 31 Year Ended December ...... See notes to consolidated financial statements. See notes to consolidated financial ...... AND SUBSIDIARIES

...... ANY ...... AND COMP

...... Y Cost of sales Research and development and administrative Marketing, selling, 3 and 4) research and development (Notes Acquired in-process other special charges Asset impairment, restructuring, and (Note 5) 17) Other—net, (income) expense (Note Diluted Basic Diluted Basic (Dollars in millions and shares in thousands, (Dollars in millions and except per-share data) ELI LILL Revenue and other: Costs, expenses, Income before income taxes Income taxes (Note 13) Net income Earnings per share: per share: Shares used in calculation of earnings Consolidated Statements of Operations Statements Consolidated Financial Statements and Supplementary Data Supplementary and Statements Financial 44 FINANCIAL REPORT F45 (1) Consolidated StatementsofComprehensiveIncome Other comprehensiveincome(loss)(Note16) Comprehensive income Other comprehensiveincome(loss): Net income ELI LILL (Dollars inmillions) Provision forincometaxesrelatedtoothercomprehensive Other comprehensiveincome(loss)beforetaxes Change ineffectiveportionofcashflowhedges (Note 14) Change indefinedbenefitpensionandretireehealthplans Change innetunrealizedgainsandlossesonsecurities million Change inforeigncurrencytranslationgains(losses) Other comprehensivelossin2016consistsof (loss) items ofothercomprehensiveincomeattributabletonon-controllinginterest. Y

AND COMP . . . ANY

AND SUBSIDIARIES . See notestoconsolidatedfinancialstatements. $693.3 million (1) Year EndedDecember31 . . ofothercomprehensivelossattributabletocontrollinginterestand . . . $ $ 2,092.5 2,737.6 2016 (634.5 (512.8 (645.1 (436.4 303.0 (10.6 11.7 ) ) ) ) ) $ $ 1,819.5 2,408.4 2015 (121.9 (467.0 (138.1 (588.9 (859.8 572.9 (42.0 ) ) ) ) ) ) $ $ (2,465.7 (1,327.6 (1,989.1 2,390.5 2014 (162.2 (961.4 476.6 401.4 (14.5 $48.2 ) ) ) ) ) ) 45 FINANCIAL REPORT F46 ) ) ) 6.1 19.0 (90.0 868.9 967.0 539.0 358.9 691.3 604.4 785.4 558.6 2,460.3 8,229.6 7,972.4 2,160.3 1,747.4 5,552.1 8,053.5 1,338.2 2,560.1 3,445.8 3,646.6 4,039.9 5,034.8 2,220.5 3,666.4 3,513.0 2015 (3,013.2 (4,580.7 14,571.3 14,590.3 35,568.9 16,011.8 12,749.0 35,568.9 14,941.8 12,573.6 $ $ $ $ ) ) ) 72.8 (80.5 688.9 548.1 119.1 688.5 896.9 734.6 736.9 2,228.2 8,367.8 2,453.9 2,220.9 5,640.6 8,252.6 1,937.4 1,349.3 3,914.9 3,972.7 4,357.9 1,913.8 3,561.9 5,207.5 4,582.1 1,456.5 4,029.4 2016 (3,013.2 (5,274.0 14,007.7 14,080.5 38,805.9 16,046.3 10,986.6 13,738.8 38,805.9 15,451.9 15,101.4 $ $ $ $ ...... December 31 December ...... $40.3 (2016) and $44.3 (2015) ...... and 1,106,063 (2015) ...... See notes to consolidated financial statements...... AND SUBSIDIARIES ......

...... ANY ...... AND COMP

Y Authorized shares: 3,200,000 Accumulated other comprehensive loss (Note 16) Cost of common stock in treasury Other noncurrent liabilities Employee benefit trust Long-term debt (Note 10) Accrued retirement benefits (Note 14) 13) Long-term income taxes payable (Note Retained earnings Accounts payable Sales rebates and discounts Income taxes payable (Note 13) Other current liabilities Common stock—no par value Issued shares: 1,101,586 (2016) Additional paid-in capital Short-term borrowings and current maturities of long-term debt (Note 10) Short-term borrowings and current Employee compensation Dividends payable Prepaid expenses and other Prepaid expenses Goodwill (Note 8) Other intangibles, net (Note 8) Sundry Accounts receivable, net of allowances of Accounts receivable, 6) Inventories (Note 7) Investments (Note Short-term investments (Note 7) Short-term investments Other receivables Cash and cash equivalents (Note 7) Cash and cash equivalents (Dollars in millions, shares in thousands) (Dollars in Noncontrolling interests Total equity Total liabilities and equity Total Eli Lilly and Company shareholders' equity Total current liabilities Other Liabilities Total other liabilities Commitments and Contingencies (Note 15) Eli Lilly and Company Shareholders' Equity (Notes 11 and 12) Total assets Liabilities and Equity Current Liabilities Property and equipment, net (Note 9) Property and equipment, net (Note Total current assets Total other assets Other Assets ELI LILL Assets Current Assets Consolidated Balance Sheets Balance Consolidated 46 FINANCIAL REPORT F47 Consolidated StatementsofShareholders'Equity Balance atJanuary1,2014 thousands) (Dollars inmillions,shares SUBSIDIARIES ELI LILL Retirement oftreasuryshares Net income share: $1.97 Cash dividendsdeclaredper (loss), netoftax Other comprehensiveincome Net income Stock-based compensation Purchase oftreasuryshares Retirement oftreasuryshares (loss), netoftax Other comprehensiveincome Balance atDecember31,2014 employee stockplans,net Issuance ofstockunder share: $2.01 Cash dividendsdeclaredper Purchase oftreasuryshares Stock-based compensation Issuance ofstockunder Net income Retirement oftreasuryshares (loss), netoftax Other comprehensiveincome Balance atDecember31,2015 share: $2.05 Cash dividendsdeclaredper Purchase oftreasuryshares Issuance ofstockunder Stock-based compensation Balance atDecember31,2016 employee stockplans,net employee stockplans,net Y

AND COMP ...... ANY

AND ...... 1,117,628 1,111,437 1,106,063 1,101,586 Shares (12,579 Common Stock (9,877 (7,306 6,388 4,503 2,829 See notestoconsolidatedfinancialstatements. ) ) ) $ $ Amount 698.5 694.6 691.3 688.5 (7.9 (6.2 (4.6 4.0 2.9 1.8 ) ) ) $ $ Additional Capital Paid-in 5,050.0 5,292.3 5,552.1 5,640.6 (106.8 156.0 217.8 255.3 (60.0 86.3 42.0 ) ) $ $ Earnings Retained 16,992.4 16,482.7 16,011.8 16,046.3 (2,108.1 (2,136.0 (2,167.6 2,390.5 2,408.4 2,737.6 (792.1 (743.3 (535.5 ) ) ) ) ) ) $ $ Comprehensive Accumulated Other Loss (2,002.7 (1,989.1 (3,991.8 (4,580.7 (5,274.0 (588.9 (693.3 ) ) ) ) ) ) ) (12,579 Shares 12,579 (9,877 (7,306 Common Stockin 9,877 7,306 833 810 796 711 (23 (14 (85 Treasury ) ) ) ) ) ) $ $ Amount (800.0 (749.5 (540.1 800.0 749.5 540.1 (93.6 (91.4 (90.0 (80.5 2.2 1.4 9.5 ) ) ) ) ) ) )

$ $ Employee Benefit (3,013.2 (3,013.2 (3,013.2 (3,013.2 Trust ) ) ) ) $ Shareholders' $ Equity 17,631.4 15,373.2 14,571.3 14,007.7 (2,108.1 (1,989.1 (2,136.0 (2,167.6 2,390.5 2,408.4 2,737.6 (800.0 (588.9 (749.5 (693.3 (600.1 156.0 217.8 255.3 (95.5 92.5 46.3 — — — ) ) ) ) ) ) ) ) ) ) 47 FINANCIAL REPORT F48 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) — 96.1 41.4 15.3 36.8 (95.0 (24.5 992.9 340.7 280.7 117.4 673.2 200.2 156.0 (800.0 (166.4 (341.5 (308.3 (551.4 (307.1 (809.0 2014 3,830.2 3,871.6 2,680.6 4,054.1 4,458.4 2,390.5 1,379.0 (1,034.8 (9,802.7 (3,909.1 (2,101.2 (1,637.8 (1,162.6 (5,405.6 11,009.4 $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) — 26.8 92.6 (52.6 (85.6 410.0 449.4 190.1 535.0 217.8 (749.5 (205.2 (560.0 (133.6 (842.2 (186.1 (304.5 (736.3 (288.5 (748.4 2015 3,871.6 3,666.4 4,454.7 3,068.4 2,161.8 5,405.6 2,964.6 2,408.4 1,427.7 (1,955.7 (3,111.0 (5,283.1 (2,680.6 (3,226.5 (2,127.3 (1,066.2 $ $ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) — — — (0.2 (3.4 73.4 30.0 (55.0 (45.0 915.7 379.5 819.0 439.5 255.3 (600.1 (300.8 (559.8 (236.4 (130.1 (709.4 (328.2 (265.5 2016 3,666.4 4,582.1 1,293.2 1,206.6 2,086.0 1,642.0 4,851.0 2,737.6 1,496.6 (4,346.0 (3,139.1 (2,158.5 (1,327.4 (1,037.0 $ $ ...... Year Ended December 31 Year Ended ...... Activities: ...... See notes to consolidated financial statements. AND SUBSIDIARIES

...... ANY ...... AND COMP

Y Receivables—(increase) decrease Inventories—(increase) decrease Other assets—(increase) decrease (decrease) Accounts payable and other liabilities—increase Purchases of common stock Other financing activities, net Repayments of long-term debt Proceeds from sale of product rights Purchase of product rights development Purchases of in-process research and acquired (Note 3) Cash paid for acquisitions, net of cash Other investing activities, net Net change in short-term borrowings Proceeds from issuance of long-term debt Dividends paid Disposals of property and equipment of short-term investments Proceeds from sales and maturities Purchases of short-term investments investments Proceeds from sales of noncurrent Purchases of noncurrent investments Other non-cash operating activities, net Other non-cash operating and liabilities, net of Other changes in operating assets acquisitions and divestitures: acquisition (Note 3) Cash released (restricted) for pending Purchases of property and equipment Net proceeds from (payments for) terminations of interest rate (payments for) terminations of interest Net proceeds from swaps Depreciation and amortization Depreciation and income taxes Change in deferred Stock-based compensation expense Stock-based compensation research and development Acquired in-process Adjustments to Reconcile Net Income Adjustments to Reconcile Operating to Cash Flows from (Dollars in millions) (Dollars in Net Cash Used for Financing Activities Cash and cash equivalents at beginning of year Cash and Cash Equivalents at End of Year Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Net Cash Provided by (Used for) Investing Activities Net Cash Provided by (Used for) Cash Flows from Financing Activities Cash Flows from Investing Activities Net Cash Provided by Operating Activities Net Cash Provided by Operating ELI LILL Activities from Operating Cash Flows Net income Consolidated Statements of Cash Flows of Cash Statements Consolidated 48 FINANCIAL REPORT F49 partners, isrecognizedas collaboration andotherrevenueasearned. Profit-sharing duefromour collaborationpartners,whichisbasedupongrossmargins reportedtousbyour and otherrevenue. measured andcollectionofthefundsisreasonablyassured. recorded asearnedinaccordancewiththecontractterms whenthird-partysalescanbereasonably Royalty revenuefromlicensees,whichisbasedonthird-party salesoflicensedproductsandtechnology deferred andamortizedtoincomeasnetproductsales overthetermofsupplyagreement. have determinedthatthemarketingrightsdonot standalonevalue,theinitialfeesreceivedaregenerally marketing rightstocommercializedproductsandarelated commitmenttosupplytheproducts.Whenwe date. Initialfeesmayalsobereceivedforout-licensing agreementsthatincludebothanout-licenseofour under developmentaregenerallydeferredandamortized intoincomethroughtheexpectedproductapproval Initial feeswereceiveincollaborativeandothersimilar arrangementsfromthepartneringofourcompounds deliverable. determinable isthenallocatedtoeachseparateunitofaccountingbasedontherelativesellingprice deliverables aretreatedasasingleunitofaccounting. combined withtheotherapplicableundelivereditem(s)withinarrangementandthese "standalone value"tothecustomer qualifies asaseparateunitofaccounting.Ourdeterminationisbasedonwhetherthedeliverablehas and selling,manufacturing,distribution),eachrequireddeliverableisevaluatedtodeterminewhether it In arrangementsinvolvingthedeliveryofmorethanoneelement(e.g.,researchanddevelopment,marketing the sameperiodrelatedsalesarerecognized. assumes therisksandrewardsofownership.Provisionsforreturns,discounts,rebatesareestablished in W Revenue recognition from ourstock-basedcompensationprograms. based ontheweighted-averagenumberofoutstandingcommonsharesplusef All per-shareamounts,unlessotherwisenotedinthefootnotes,arepresentedonadilutedbasis,thatis, accompanying notestoconformwiththecurrentpresentation. Certain reclassificationshavebeenmadetopriorperiodsintheconsolidatedfinancialstatementsand Commission andhaveevaluatedsubsequenteventsuptothetimeoffiling. from thoseestimates.W disclosures atthedateoffinancialstatementsandduringreportingperiod. and assumptionsthataf The preparationoffinancialstatementsinconformitywithGAAP a separatecomponentofequity consolidated subsidiariesislessthan100percent,thenoncontrollingshareholders’ owned subsidiariesareincludedintheconsolidatedfinancialstatements.Whereourownershipof principles generallyacceptedintheUnitedStates(GAAP). The accompanyingconsolidatedfinancialstatementshavebeenpreparedinaccordancewithaccounting Basis ofpresentation Note 1:SummaryofSignificant (T ELI LILL Notes toConsolidatedFinancialStatements ables presentdollarsinmillions,exceptper-sharedata) e recognizerevenuefromsalesofproductsatthetimetitlegoodspassestobuyerand Y

AND COMP ANY fect thereportedamountsofassets,liabilities,revenues,expenses,andrelated e issuedourfinancialstatementsbyfilingwiththeSecuritiesandExchange

AND SUBSIDIARIES . All intercompanybalancesandtransactionshavebeeneliminated. Accounting Policies . Ifadeliverabledoesnotqualifyasseparateunitofaccounting,itis The arrangement'sconsiderationthatisfixedor The accountsofallwholly-ownedandmajority- This royaltyrevenueisincludedincollaboration requiresmanagementtomakeestimates Actual resultscoulddif fect ofincrementalshares interestsarereflectedas , is fer 49 FINANCIAL REPORT F50

A e . Assets and liabilities are e calculate diluted EPS based on fects that arise from translating the net fects that arise from translating the The U.S. dollar ef ranslation The results of operations for our subsidiaries outside the U.S. are translated from functional The results of operations for our subsidiaries Research and development costs, which are expensed as incurred. Research and development costs, which prior to regulatory approval of the product, which are accrued Milestone payment obligations incurred the milestone occurs. when the event requiring payment of • • e calculate basic earnings per share (EPS) based on the weighted-average number of common shares e calculate basic earnings per share Earnings per share W from potential participating securities. W outstanding and incremental shares Acquired in-process research and development (IPR&D) expense includes the initial costs of IPR&D projects, (IPR&D) expense includes the initial costs of IPR&D projects, Acquired in-process research and development than a business combination, that do not have an alternative future acquired directly in a transaction other use. the United States (U.S.) are recorded in the functional currency of each Operations in our subsidiaries outside and review of the environment where each subsidiary primarily generates subsidiary which is determined by a expends cash. weighted average currency rate for the period. currencies into U.S. dollars using the Research and development expenses and acquired in-process research and development expenses and acquired Research and development expenses include the following: Research and development Foreign Currency T Other significant accounting policies appropriate notes to the consolidated Our other significant accounting policies are described in the remaining financial statements. milestone is considered substantive if the consideration earned 1) relates solely to past performance, 2) is to past performance, 1) relates solely earned if the consideration is considered substantive milestone with value associated animal health product's pharmaceutical or in the with the enhancement commensurate relative to all of the life cycle, and 3) is reasonable the important event in its development the achievement of part of a multiple- If a milestone payment to us is terms within the arrangement. deliverables and payment period (e.g., by the initiation of the commercialization arrangement and is triggered element commercialization threshold, we or the achievement of a sales-based for marketing or launch of the product) regulatory approval Note 4 for specific the terms of the arrangement. See to income as we perform under amortize the payment agreement details. shares outstanding, including incremental shares from our stock- the weighted-average number of common based compensation programs. rates. translated using the period end exchange in other comprehensive income (loss). assets of these subsidiaries are recorded immediately recognize the full amount of developmental milestone payments due to us upon the achievement to us upon the payments due milestone full amount of developmental recognize the immediately its entirety is substantive in and the milestone determinable event is objectively event if the of the milestone Developmental milestone payments earned by us are generally recorded in other–net, (income) expense. W (income) expense. recorded in other–net, by us are generally earned milestone payments Developmental 50 FINANCIAL REPORT F51 whether anydisposalsrepresentthedisposalofabusiness. subject totheapplicationofmodifieddefinition. evaluate thesettodeterminewhetheritisabusiness. OuracquisitionssubsequenttoOctober1,2016,are other modificationstoclarifywhatmustbeincludedin anacquiredsetforittobeabusinessandhow identifiable assetoragroupofsimilarassets, thesetisnotabusiness. requires thatwhensubstantiallyallofthefairvalue thegrossassetsacquiredisconcentratedinasingle providing ascreentodeterminewhenanacquiredset ofassetsandactivitiesisnotabusiness. combinations orastheacquisitionofassets. Business As ofOctober1,2016,weadopted only impactedthedisclosureofourbenefitplaninvestmentsinNote14. the netassetvalue(NA requirement tocategorizewithinthefairvaluehierarchyallinvestmentsforwhichismeasuredusing Certain EntitiesthatCalculateNet As ofDecember31,2016,weadopted the changestopresentationoffinancialstatementsandimpactadoption: annual periodthatincludestheinterimofadoption. any adjustmentsrelatingtoshare-basedpaymentsemployeesasofJanuary1,2016,thebeginning and reportingforcertainaspectsofshare-basedpaymentstoemployees. Compensation: ImprovementstoEmployeeShare-BasedPayment During Note 2:ImplementationofNewFinancial are classifiedasafinancingactivity purposes onthestatementofcashflows withholds sharesfortax-withholding Employee taxespaidwhenanemployer as anoperatingactivity. the statementofcashflowsareclassified Excess taxbenefitsanddeficiencieson in thereportingperiodwhichtheyoccur. statement ofoperationsasadiscreteitem deficiencies arerecognizedinthe All excesstaxbenefitsand Description ofchanges 2016, weelectedtoearlyadopt . This definitionisusedindeterminingwhetheracquisitionsareaccountedforasbusiness V) pershareasapracticalexpedient. Asset V Accounting StandardsUpdate2017-01, . Accounting StandardsUpdate2015-07, Accounting StandardsUpdate2016-09, alue perShare(orItsEquivalent). Accounting Pronouncements This standardmodifiesthedefinitionofabusiness,including Retrospective Retrospective Prospective Method ofadoption The newdefinitionwouldalsobeusedtoevaluate The followingtableprovidesabriefdescriptionof This standardwasadoptedretrospectivelyand statements ofcashflows. financing activitiesontheconsolidated operating activitiestocashflowsfrom employee taxespaidfromcashflows million in2015and2014,respectively,of We reclassified$119.3millionand$93.4 statements ofcashflows. operating activitiesontheconsolidated from financingactivitiestocashflows tax deficienciesin2014fromcashflows benefits in2015and$2.1millionofexcess We reclassified$72.5millionofexcesstax settlement date. stock betweenthegrantdateand issued andchangesinthepriceofour factors includingthenumberofshares this willbedependentuponvarious reporting periodsfollowingadoptionas consolidated financialstatementsinfuture cannot predicttheimpactonour benefits inincometaxes2016.We We recognized$39.5millionofexcesstax significant matters Effect onthefinancialstatementsorother Accounting This standardrequiresustoreflect Clarifying theDefinitionofa This standardremovedthe which changestheaccounting Disclosures forInvestmentsin Compensation -Stock The standardalsomakes The screen 51 FINANCIAL REPORT F52 e have e are in the process of e are in the process e are in the process of While our evaluation of While our evaluation our contracts for product sales is not yet complete, based upon the results of our work to date we currently do not expect the application of the new standard to these contracts to have a material impact to our consolidated financial statements either at initial implementation or on an ongoing basis. Effect on the financial Effect on the or other statements matters significant W of evaluating the impact the adoption of the standard. W identified two revenue streams from our contracts with customers: 2) 1) product sales and licensing arrangements. W reviewing arrangements in which we have licensed or sold intellectual property and are not yet able to estimate the anticipated impact to our consolidated financial statements from the application of the new standard to our arrangements as we continue to interpret and apply the principles in the new standard to our arrangements. We are unable to estimate the impact of adopting this standard as the significance of the impact will depend upon our equity investments as of the date of adoption. Effective Date This standard is effective January 1, 2018, but we are permitted to adopt this standard one year earlier if we choose. We intend to adopt this standard on January 1, 2018. This standard is effective January 1, 2018. Early adoption of the majority of the amendments in this standard is not permitted, however, early application of certain amendments is permitted. We intend to fully adopt this standard on January 1, 2018. Description replace existing This standard will standards and revenue recognition to recognize will require entities the transfer of revenues to depict services to promised goods or that customers in an amount to which reflects the consideration to be entitled in the entity expects goods or exchange for those can apply the services. An entity new revenue standard each prior retrospectively to reporting period presented or with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings. We currently plan to use the latter approach. This standard will require entities to recognize changes in the fair value of equity investments with readily determinable fair values in net income (except for investments accounted for under the equity method of accounting or those that result in consolidation of the investee). An entity should apply the new standard through a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. fect on our financial statements: fect on our Assets and Revenue Financial Accounting Standards Update 2014-09, from Contracts with Customers Accounting Standards Update 2016-01, Instruments - Overall: Recognition and Measurement of Financial Financial Liabilities Standard The following table provides a brief description of accounting standards that have not yet been adopted and not yet been adopted that have of accounting standards a brief description table provides The following a material ef could have 52 FINANCIAL REPORT F53 transaction arediscussed below in canine, andrabiesvaccine portfoliowhichwassubsequentlycompletedinJanuary 2017.Detailsofthis During 2016,weannounced anagreementtoacquireBoehringerIngelheimV of acquisition. results ofoperationstheseacquisitionsareincluded inourconsolidatedfinancialstatementsfromthedates price overthefairvalueofacquirednetassets,where applicable,hasbeenrecordedasgoodwill. value requiredmanagementtomakesignificantestimates andassumptions. values asoftheacquisitiondateinourconsolidatedfinancial statements. Erbitux arrangement. combinations undertheacquisitionmethodofaccounting. SeeNote4foradditionalinformationrelatedtothe immaterial acquisitionofabusinessin and Canada(collectively Squibb (collectively SE (Lohmann During 2015and2014,wecompletedtheacquisitions ofNovartis Note 3: Other ThanInventory T T 2016-16, Standards Update Accounting 2016-02, Standards Update Accounting Standard axes: Intra-Entity ransfers of Acquisitions Income Leases Assets AH), respectively , BMS)transferredtoustheircommercializationrights withrespecttoErbitux The assetsacquiredandliabilitiesassumedwererecorded attheirrespectivefair , North adoption. retrospective approachto This standardrequiresamodified inventory atthetimeoftransfer transfers ofassetsotherthan consequences ofintra-entity to recognizetheincometax This standardwillrequireentities adoption. retrospective approachto standard requiresamodified about leasingarrangements.This requiring additionaldisclosures GAAP, onthebalancesheetand operating leasesundercurrent including leasesclassifiedas assets andleaseliabilities, organizations byrecognizinglease comparability among increase transparencyand This standardwasissuedto Description . America) throughamodificationofourexistingarrangement. W Additionally Acquisitions ofBusinesses. April 2016. , onOctober1,2015,Bristol-MyersSquibbCompany andE.R. These transactionswereaccountedforasbusiness . January 1,2018. this standardon intend toadopt permitted. W adoption 1, 2018,withearly ef This standardis January 1,2019. this standardon intend toadopt permitted. We adoption 1, 2019,withearly effective January This standardis Effective Date fective January Animal Health(Novartis The determinationofestimatedfair e The excessofthepurchase etmedica, Inc.'sU.S.feline, implementation. would resultfrom deferred taxassetsthat realizability ofthe deductibility and assessments ofthefuture inventory andongoing assets otherthan intra-entity transfersof change basedupon2017 estimate issubjectto on January1,2018.This approximately $2billion retained earningsof opening balanceof an increasetothe standard wouldresultin initially applyingthe cumulative effectof estimate thatthe statements andcurrently our consolidatedfinancial impact ofthisstandardon assess thepotential We arecontinuingto statements. consolidated financial impact onour determining thepotential We areintheprocessof significant matters statements orother Effect onthefinancial AH) andLohmann e alsohadan ® intheU.S. The 53 FINANCIAL REPORT F54 . Act, The , and (no tax AH business in 2015 , $410 million 2016 $850 million Antitrust Improvements The 2015 charges were charge was charge was The 2016 The transaction is expected . . Antitrust Improvements of which was funded by cash Acquisition , subject to final inventory quantities , subject to final inventory quantities Acquisitions and the upfront fee of Acquisitions and the , we recorded acquired , we recorded , and 2014 Acquisitions. $960 million , respectively Asset , $5.41 billion , 2015 Asset $885 million Acquisitions. Upon acquisition, the acquired the acquired Upon acquisition, Acquisitions. accine Portfolio f as an expense because the products had no products had no because the f as an expense etmedica, Inc.'s U.S. feline, canine, and rabies etmedica, Inc.'s U.S. feline, canine, irbac Corporation for approximately Asset $5.28 billion AH, we divested certain animal health assets in the U.S. AG all of the shares of certain Novartis subsidiaries and the charge related to the transfer to us of Boehringer Ingelheim's the transfer to us of Boehringer Ingelheim's charge related to , and $200.2 million etmedica, Inc. V December 31, 2016 December per share or approximately charges were associated with the transactions discussed with the transactions discussed The 2014 charges were associated The amount will not be finalized until after the completion of the The amount will not be finalized until $55.2 million $535.0 million e expect an acquired IPR&D charge of approximately e expect an acquired IPR&D charge $46.50 , Assumed canine parasiticide franchise to V ® Acquisitions and a Acquisitions and a related to tanezumab. related to tanezumab. ransaction ransaction Acquisition yme disease, rabies, and parvovirus, among others, as well as several pipeline assets. yme disease, rabies, and parvovirus, As a result, determining these values is not practicable and we are unable to disclose these values As a result, determining these values is not practicable and we are unable AH Asset Acquired and Liabilities which are further discussed in this note below in in this note below further discussed which are following the closing of the acquisition of Novartis related to the Sentinel held in escrow at December 31, 2014. As a condition to the clearance of the transaction under the Hart-Scott-Rodino Novartis Acquisitions of Businesses Overview of T On January 1, 2015, we acquired from Novartis IPR&D related to these products was immediately written of was immediately to these products IPR&D related the years ended future use. For alternative of $30.0 million IPR&D charges benefit) in the first quarter of 2017. acquisition. related to the Novartis assets and liabilities of other Novartis subsidiaries that were exclusively an all-cash transaction for a total purchase price of Subsequent Event - Boehringer Ingelheim V Subsequent Event - Boehringer Ingelheim rights to co-promote our new insulin glargine product in countries where it was not yet approved. See Note 4 in countries where it was not yet approved. our new insulin glargine product rights to co-promote Boehringer Ingelheim arrangements. related to the tanezumab and for additional information (CoLucid), including CoLucid Pharmaceuticals, Inc. announced an agreement to acquire In January 2017, we all of the the acute treatment of migraine. Substantially lasmiditan, an oral therapy for its Phase III molecule, for the asset, and we expect to account related to lasmiditan, its only significant value of CoLucid is all of shares of terms of the agreement, we will acquire acquisition of an asset. Under the transaction as the CoLucid for a purchase price of 2014 below in transaction discussed in this note associated with the below in transactions discussed in this note associated with the $200.0 million below in subject to clearance under the Hart-Scott-Rodino to close in the first quarter of 2017, In addition, a shareholder lawsuit has been filed seeking to enjoin Act and other customary closing conditions. the closing of the transaction. W Overview of T for approximately vaccine portfolio in an all-cash transaction the terms of the agreement, we acquired a manufacturing and purchased and other adjustments. Under vaccine portfolio including vaccines used for the treatment of research and development site, a U.S. bordetella, L On January 3, 2017, we acquired Boehringer Ingelheim V On January 3, 2017, we acquired Boehringer In addition to the acquisitions of businesses, we also acquired assets in development in assets in development we also acquired of businesses, to the acquisitions In addition The initial accounting for this acquisition is incomplete. Significant, relevant information needed to complete is incomplete. Significant, relevant information needed to complete The initial accounting for this acquisition and liabilities assumed is not the initial accounting is not available because the valuation of assets acquired complete. or provide other related disclosures at this time. accounting impact of this acquisition and the results of the operations will be included in our financial accounting impact of this acquisition 2017. statements beginning on January 3, Assets 54 FINANCIAL REPORT F55 business. basis, andwecouldnotdistinguishtheoperationsbetweenNovartis a resultoftheseintegrationef revenue of$1.02billion Our consolidatedstatementofoperationsfortheyearendedDecember31,2015includesNovartis Actual andSupplementalProFormaInformation (2) (1) acquisition date: The followingtablesummarizestheamountsrecognizedforassetsacquiredandliabilitiesassumedasof Assets employees. global commercialinfrastructureandportfolioofproducts,apipelineprojectsindevelopment, Under thetermsofagreement,weacquiredmanufacturingsites,researchanddevelopmentfacilities,a and distributionofveterinaryproductstopreventtreatdiseasesinpets,farmanimals,farmedfish. The acquiredNovartis Goodwill Total identifiablenetassets Total considerationtransferred-netofcashacquired Other assetsandliabilities-net Deferred incometaxes Accrued retirementbenefits Assets heldforsale(primarilytheU.S.Sentinelrights) Property andequipment Marketed products Acquired in-processresearchanddevelopment Inventories Estimated FairValueatJanuary1,2015 Approximately AH withourlegacyanimalhealthbusiness,futureunidentifiedprojectsandproducts,theassembledworkforceofNovartis expected tohaveaweightedaverageusefullifeof The goodwillrecognizedfromthisacquisitionisattributableprimarilytoexpectedsynergiescombiningtheoperationsofNovartis These intangibleassets,whicharebeingamortizedtocostofsalesonastraight-linebasisovertheirestimatedusefullives,were Acquired andLiabilities (2) . . $1.0 billion (1) AH businessconsistedoftheresearchanddevelopment,manufacture,marketing,sale ofthegoodwillassociatedwiththisacquisitionisdeductiblefortaxpurposes. . . For2015,Novartis . . . . forts, certainpartsoftheanimalhealthbusinesswereoperatingonacombined Assumed . 19 years. AH waspartiallyintegratedintoouranimalhealthsegmentandas . . . AH andourlegacyanimalhealth $ $ AH 3,012.0 1,953.0 5,283.1 2,271.1 (108.7 AH. 422.7 298.0 380.2 199.9 (73.0 (60.1 ) ) ) 55 FINANCIAL REPORT F56 ) of 23.9 81.9 51.1 1.98 (92.7 275.4 339.6 251.6 591.2 2,127.9 20,696.7 As part of 2014 $ $ . irbac had been irbac had $ The taxes associated 2.36 2,518.1 19,958.7 , comprised of $551.4 million 2015 in the year ended December 31, The unaudited pro forma financial pro forma financial The unaudited Unaudited Pro Forma Consolidated Results Unaudited Pro Forma $ for the year ended December 31, $591.2 million 12 million $1 $104 million AH that we retained after the sale to V retained after the AH that we AH was a global leader in poultry vaccines. AH was a global leader in poultry vaccines...... AH, a privately-held company headquartered in Cuxhaven, AH, a privately-held company headquartered related to the fair value adjustments to acquisition date inventory that was related to the fair value adjustments e have adjusted the historical consolidated financial information to give information consolidated financial the historical e have adjusted ...... The acquisition was not material to our consolidated financial statements. The acquisition was not material to our consolidated financial statements...... of assumed debt. Lohmann ...... AH as if the portion of Novartis portion of Novartis AH as if the $153 million ...... Acquisition ...... AH decrease to pro forma net income of approximately decrease to pro forma net income (1) , through a stock purchase for a total purchase price of , through a stock purchase for a total Additional amortization expense of approximately Additional amortization expense of intangible assets acquired. 2014, related to the fair value of identifiable a corresponding reduction in cost of sales in 2015, of Additional cost of sales in 2014, and approximately sold in the year ended December 31, 2015. sold in the year ended December 31, A 2014, associated with an increase to interest expense related to the incremental debt that we issued 2014, associated with an increase to a reduction of interest income associated with investments to partially finance the acquisition and fund the acquisition. which would have been used to partially • • • April 30, 2014, we acquired Lohmann April 30, 2014, we acquired Lohmann Goodwill associated with this acquisition is not deductible for tax purposes. fect to pro forma events that are directly attributable to the acquisition. to the acquisition. are directly attributable forma events that fect to pro

Estimated Fair Value at April 30, 2014 Marketed products Other intangible assets Property and equipment Deferred income taxes Total identifiable net assets Goodwill Total consideration transferred - net of cash acquired Other assets and liabilities - net Revenue Net income share Diluted earnings per (1) Lohmann On Germany acquired as of January 1, 2014. W as of January 1, 2014. acquired ef net cash plus $39.8 million The following unaudited pro forma financial information presents the combined consolidated results of our consolidated results the combined information presents forma financial unaudited pro The following with Novartis operations information is not necessarily indicative of what our consolidated results of operations would have been had would have results of operations our consolidated indicative of what is not necessarily information financial In addition, the unaudited pro forma acquisition at the beginning of 2014. we completed the of operations of our combined company attempt to project the future results information does not above reflects primarily the following pro forma pretax The unaudited pro forma financial information adjustments: to a range of vaccines, commercial capabilities, and manufacturing this transaction, we acquired the rights sites in Germany and the U.S. and liabilities assumed as of the The following table summarizes the amounts recognized for assets acquired acquisition date: In addition, all of the above adjustments were adjusted for the applicable tax impact. In addition, all of the above adjustments statutory tax rates in the various jurisdictions where the fair value with the adjustments above reflect the adjustments occurred. 56 FINANCIAL REPORT F57 manufacturing, andcommercialef indications on aworldwidebasisexcluding Korea.W investigated forthetreatment ofautoimmuneandotherdiseases.W Our collaborationagreement withHanmiistodevelopandcommercializeHanmi's compoundbeing monoclonal antibodygene outsideofChina. molecules outsideofChina. Separatefromthecollaboration,wewillcontinue developmentofourcMet development, manufacturing, andcommercializationef and manufacturingef In China,wewillberesponsibleforthecommercialization ef Our collaborationagreementwithInnoventistodevelop andcommercializeaportfolioofcancertreatments. being investigatedforthetreatmentof Our globalcollaborationagreementwith milestones basedonthesuccessfulprogressofcompounds throughthedevelopmentprocess. commercial milestonesbasedonsalesshouldthese products beapprovedforcommercializationand/or In connectionwiththearrangementsdescribedherein, ourpartnersmaybeentitledtofutureroyaltiesand/or (3) (2) (1) detail below The followingtablesummarizesourassetacquisitionsduring Asset Adocia AstraZeneca (Immunocore) Immunocore Limited (Halozyme) Halozyme Therapeutics,Inc. Undisclosed Locemia Solutions BioNTech AG(BioNTech) (Hanmi) Hanmi PharmaceuticalCo.,Ltd. (Innovent) Innovent Biologics,Inc. AstraZeneca SeeNote4foradditionalinformationonourcollaborationwith Priortoacquisition,Innovent'smonoclonalantibodytargetingproteinCD-20hadreceivedinvestigationalnewdrugapprovalinChina

to beginPhaseIdevelopment. (BACE) inhibitor The phaseofdevelopmentpresentedisasthedatearrangement. Acquisitions Counterparty . (3) . forts. Innoventalsohasco-promotionrightsinChina. W forts inourterritories. BioChaperone Lispro enzyme inhibitor-AZD3293 Oral beta-secretasecleaving T cell-basedcancertherapies rHuPH20 hyaluronidase enzyme- Recombinant human Technology collaboration Intranasal glucagon Cancer immunotherapies BTK Inhibitor-HM71224 cMet monoclonalantibody Immuno-oncology molecule protein CD-20 Monoclonal antibodytargeting MEDI1814 Antibody selectivefor Alzheimer's disease. Compound(s) orTherapy AstraZeneca istoco-develop AstraZeneca relatedtothisoralbeta-secretasecleavingenzyme e willberesponsible forleadingdevelopment, regulatory forts ofInnovent'spre-clinical immuno-oncology forts, whileInnoventwillleadthedevelopment 2016 September December December December December April 2015 May 2015 Acquisition July 2014 , 2015and2014 October e haverightstothemolecule forall March Month 2014 2015 2015 2016 2014 2015 2015 AstraZeneca's MEDI1814compound e willberesponsiblefor Pre-clinical Development Pre-clinical Pre-clinical Phase III Phase I Phase I Phase I Phase I Phase of , whicharediscussedin N/A N/A (2) (1) $ Acquired IPR&D Expense 149.0 50.0 25.0 25.0 56.0 30.0 50.0 45.0 30.0 50.0 , 57 FINANCIAL REPORT F58 788.4 2014 $ 808.1 . Each collaboration is 2015 $ These arrangements often . 833.7 2016 platform to aid in the dispersion and to aid in the dispersion platform ™ $ ech is to discover novel cancer immunotherapies. discover novel cancer ech is to Arrangements ...... Adocia was for the worldwide development and commercialization of worldwide development and commercialization Adocia was for the Adocia. . Elements within a collaboration are separated into individual units of accounting if . Elements within a collaboration are cell-based cancer therapies. cell-based cancer T e often enter into collaborative and other similar arrangements to develop and commercialize drug to develop and commercialize collaborative and other similar arrangements e often enter into Collaboration and other revenue Operating expenses for costs incurred pursuant to these arrangements are reported in their respective Operating expenses for costs incurred due to or reimbursements due from our collaboration partners, with expense line item, net of any payments at the time the party becomes obligated to pay such reimbursements being recognized arrangements are discussed below unique in nature, and our more significant absorption of other injected therapeutic drugs. of other injected absorption potentially develop Immunocore is to research and and co-development collaboration with Our co-discovery pre-clinical novel payments, contingent upon the occurrence of certain future require milestone and royalty or profit-share to asset in development, as well as expense reimbursements or payments events linked to the success of the the collaboration partner elements within the arrangement. In these situations, the arrangement they have standalone value from other on a relative selling price basis. Revenues related to products we consideration is allocated to the elements are included in net product revenues, while other sources of revenue sell pursuant to these arrangements from our partner) are included in collaboration and other revenue. (e.g., royalties and profit sharing due collaboration and other revenue, which is included in revenue in the The following table summarizes our consolidated statements of operations: Our research collaboration with BioNT collaboration Our research candidates. Collaborative activities may include research and development, marketing and selling (including may include research and development, marketing and selling (including candidates. Collaborative activities detailing), manufacturing, and distribution. promotional activities and physician Our global collaboration and license agreement with Halozyme is to develop and commercialize products commercialize products is to develop and with Halozyme license agreement collaboration and Our global ENHANZE compounds with Halozyme's our proprietary combining agreement with Our collaboration type 1 and type 2 for the treatment of patients with insulin, a molecule being developed Adocia's ultra-rapid under the and as a result, all rights we received this collaboration was terminated, diabetes. In 2017, back to agreement have reverted and Other Note 4: Collaborations W 58 FINANCIAL REPORT F59 approved, whichwasrecordedasacquiredIPR&Dexpense. transfer tousofBoehringerIngelheim'srightsco-promote Basaglarincountrieswhereitwasnotyet recorded asincomeinother–net,(income)expense. W rights toco-promotelinagliptin(T we recordedagainof agreement inthesecountrieshasnotbeenandis anticipatedtobematerial. terms relatedtothemodifiedcountries;however brought tothecollaboration. opportunity promotion workin17countries,representingover90percentofthecollaboration’ structure ofourdiabetescollaboration.Undertherevisedagreementcompanieshavecontinuedtheir co- In October2014,weandBoehringerIngelheimagreeduponcertainchangestotheoperationalfinancial (4) (3) (2) (1) paid forthecompoundsincludedinthiscollaboration: The tablebelowsummarizessignificantregulatoryandcommercializationeventsmilestones(received) Basaglar products: diabetes compounds.Currently W Boehringer IngelheimDiabetesCollaboration Basaglar Jardiance T InconnectionwiththeregulatoryapprovalsofBasaglarinU.S.,Europe,andJapan,milestonepaymentsreceivedwererecorded GlyxambiandSynjardy Jentaduetoisincludedinthe rajenta and arebeingamortizedtocostofsales. connection withtheregulatoryapprovalsof as deferredrevenueandarebeingamortizedthroughthetermofcollaboration(2029)tootherrevenue.In through theendofreportingperiod. e andBoehringerIngelheimhaveaglobalagreementtojointlydevelopcommercializeportfolioof The cumulativeamountrepresentsthetotalinitialamountsthatwere(deferred)orcapitalizedfromstartofthiscollaboration Product Family (2) ® T . (3) . Intheothercountries,companiesexclusivelycommercialize therespectivemoleculesthey rajenta ® , Jentadueto

are includedintheJardiancefamilyofproductresults. $92.0 million T rajenta familyofproductresults. The modificationsbecameef Launched 2016 Launched 2014 Launched 2011 , includedinthecollaborationareBoehringerIngelheim’ ® , Jardiance rajenta) andempagliflozin(Jardiance)inthesecountries, whichwas in2014relatedtothetransferBoehringerIngelheim ofourlicense U.S. T rajenta andJardiance,milestonepaymentsmadewerecapitalizedasintangibleassets ® , Glyxambi Launched 2015 Launched 2014 Launched 2011 , thefinancialimpactresultingfromrevisedterms ofthe Product Status Europe e alsoincurredachargeof ® , andSynjardy fective attheendof2014andchangedfinancial Launched 2015 Launched 2015 Launched 2011 Japan ® , aswellourbasalinsulin: As aresultofthesechanges, s anticipatedmarket $55.2 million Cumulative Cumulative Cumulative (Deferred) Capitalized s oraldiabetes 2014 2015 2016 2014 2015 2016 2014 2015 2016 Year Milestones (4) (4) (4) relatedtothe $ Amount (250.0 (187.5 299.5 299.5 446.4 (62.5 (1) — — — — — — ) ) ) 59 FINANCIAL REPORT F60 — — — 328.8 46.1 2014 2014 327.2 373.3 rajenta T The $ $ $ , where America with 60.2 11.1 356.8 23.3 2015 2015 152.3 309.4 485.0 America (Merck KGaA). $ $ $ 86.1 (Merck) upon expiration of that — 436.6 201.9 2016 2016 through September 2018. 587.0 100.0 687.0 $ $ $ These performance payments result in the These performance e record our sales of Basaglar to third parties to third parties our sales of Basaglar e record 38 percent The most significant collaborations are or The most significant collaborations fect our rights with respect to Erbitux in other jurisdictions. In America will remain with Merck KGaA fected by the amendment to the collaboration agreement, the companies agreement, the the collaboration the amendment to fected by . Each company is entitled to potential performance payments depending entitled to potential performance payments . Each company is ...... e record our portion of the gross margin associated with Boehringer with Boehringer gross margin associated our portion of the e record ...... America estimated to average ...... separate agreement grants co-exclusive rights among Merck, BMS, and us in Japan and separate agreement grants co-exclusive rights among Merck, BMS, and A . America pursuant to a modification of our existing arrangement, and we began selling Erbitux America pursuant to a modification of our existing arrangement, and we This modification did not af ...... e have several collaborations with respect to Erbitux. e have several collaborations with respect Revenue Net product revenues - third party Collaboration and other revenue Net product revenues - BMS Trajenta Jardiance Basaglar expires in 2032. On October 1, 2015, BMS transferred their commercialization rights to us with respect to expires in 2032. On October 1, 2015, BMS transferred their commercialization Erbitux in North at that time. and Jardiance families of products and revenue recognized with respect to Basaglar: of products and revenue recognized and Jardiance families Bristol-Myers Squibb Company with BMS, we had been co-developing Erbitux in North Pursuant to commercial agreements BMS exclusively BMS based upon a tiered percentage connection with the modification of terms, we provide consideration to of net sales of Erbitux in North of a business. transfer of the commercialization rights was accounted for as an acquisition share equally the ongoing development costs, commercialization costs and gross margin for any product margin for any costs and gross commercialization development costs, the ongoing share equally W from the collaboration. resulting other revenue. W collaboration and compounds as Ingelheim's margin portion of the gross Ingelheim for their to Boehringer the payments made revenue with as net product of the collaboration, we record our portion sales. For all compounds under this recorded as cost of selling, and and development expense and marketing, commercialization costs as research development and respectively administrative expense, molecules it contributes to the collaboration. on the sales of the product. agreed upon gross margin of that retaining a greater share of the owner of the molecule to the other revenue recognized with respect summarizes our collaboration and The following table Erbitux W to the transfer of commercialization rights in the fourth quarter of 2015, applicable, were in Japan, and prior Squibb Company); and worldwide except North the U.S. and Canada (Bristol-Myers Certain rights to Erbitux outside North With the exception of the countries af exception of the countries With the agreement. revenue recognized with respect to Erbitux: The following table summarizes our 60 FINANCIAL REPORT F61 reimbursements duefromthirdparties. due tothirdpartiesarerecordedasareductionofcollaboration andotherrevenue,netofanyroyalty Erbitux outsideofNorth Merck manufacturesErbituxforsupplyinitsterritory as wellforJapan.W commercialization rightsinJapanbutdidnotresult anychangestoourrights. in Japanandexpires2032. America untilDecember2018. A Merck KGaA the agreement.SalesofErbitux North requirements ofErbituxinbulk-formactivepharmaceuticalingredient(API)forclinicalandcommercialuse in royalty reimbursementsduefromthirdparties.W Royalties duetothirdpartieswererecordedasareductionofcollaborationandotherrevenue,netany on apercentageofnetsalesinNorth consolidated statementofoperations.W administrative expenseswererecordedasareductiontotherespectiveexpenselineitemson clinical trialmaterials;forresearchanddevelopment;aportionofmarketing,selling, apportioned betweenthepartiesunderagreements.Collaborativereimbursementsduetousforsupply of according toapredeterminedratio.Responsibilitiesassociatedwithclinicalandotherongoingstudieswere forth inthisparagraph.Erbituxresearchanddevelopmentothercostsweresharedbybothcompanies Until theef company pro formafinancialinformationdoesnotattempttoprojectthefutureresultsofoperationsourcombined revenues wouldhavebeenhadwecompletedtheacquisitiononJanuary1,2015.Inaddition,unaudited income. attributable totheacquisition. information adjuststhehistoricalconsolidatedrevenuetogiveef $735 million unaudited proformarevenueandtotalErbituxwouldhavebeenapproximately Including theErbituxbusinessasifwehadacquireditonJanuary1,2015,ourcombinedconsolidated (2) (1) acquisition date: The followingtablesummarizestheamountsrecognizedforassetsacquiredandliabilitiesassumedasof T Total identifiablenetassets Other assetsandliabilities-net Deferred taxliability Deferred taxasset Marketed products Estimated FairValueatOctober1,2015 developmentandlicenseagreementgrantsMerckexclusive rightstomarketErbituxoutsideofNorth otal consideration-contingentliability America assetforthintheoriginalagreement,whichwasscheduledtoexpireSeptember2018. See Note7fordiscussionontheestimationofcontingentconsiderationliability These intangibleassetsarebeingamortizedtocostofsalesusingthestraight-linemethodthroughco-developmentperiodinNorth America, andBMSpurchasedallofitsrequirements The unauditedproformafinancialinformationisnotnecessarilyindicativeofwhatourconsolidated . fective dateofthetransferbusiness,arrangementsbetweenusandBMSwereasset , respectively (1) . . . America, whichisincludedincollaborationandother revenueasearned.Royalties , fortheyearendedDecember31,2015. . There wouldhavebeennomaterialchangetoourhistoricalconsolidatednet This agreementwasamendedin2015tograntMerck exclusive A API toBMSwerereportedinnetproductrevenues. separateagreementgrantsco-exclusiverightsamong Merck,BMS,andus . America, whichwasrecordedincollaborationandotherrevenue. e receivedadistributionfeeintheformofroyaltyfromBMS,based e wereresponsibleforthemanufactureandsupplyofall (2) . API fromus,subjecttocertainstipulationsper fect toproformaeventsthataredirectly This unauditedproformafinancial . e receivearoyaltyonthesalesof $20.2 billion $ $ $ and (228.2 (663.3 663.3 232.2 602.1 57.2 ) ) 61 FINANCIAL REPORT F62 . of . 522.2 2014 $55.0 $ $295.0 million milestone in 523.0 The economic The agreement 2015 Lilly $ Selling Party Daiichi Sankyo $65.0 million 535.2 fient: e and Daiichi Sankyo each have Sankyo each e and Daiichi Pre-January 1, 2016, Lilly Pre-January 1, 2016, 2016 . W $ Post-January 1, 2016, Daiichi Sankyo Post-January 1, 2016, fient in these markets. fient in these markets. if the product is successfully commercialized. Exclusive Co-promotion Co-promotion Marketing Rights /50 in the profits, as well as in the costs of development and marketing in 50/50 in the profits, as well as in the costs , and certain follow-on compounds, for the treatment of inflammatory and ), and certain follow-on compounds, for the treatment of inflammatory and 20 percent third party manufactures bulk product, and we continue to produce the finished third party manufactures bulk product, A relates to regulatory decisions for a first indication. Incyte is also eligible to receive up relates to regulatory decisions for a first indication. Incyte is also eligible e also record our share of the expenses in these co-promotion territories as marketing, e also record our share of the expenses All royalties due to Daiichi Sankyo and the third-party manufacturer are recorded in cost of All royalties due to Daiichi Sankyo and , and sales-based milestones. In 2016, we incurred milestone-related expenses of , and sales-based milestones. In 2016, we incurred milestone-related expenses of potential sales-based milestones. After receipt of this milestone payment, Incyte will be eligible to receive up to After receipt of this milestone payment, Incyte will be eligible to receive The agreement calls for payments by us to Incyte associated with certain development, success- The agreement calls for payments by us to Incyte associated with certain U.S. . Japan 15.0 million fient. Marketing rights for major territories are shown below territories are rights for major fient. Marketing Territory ...... of the associated development costs from the initiation of a Phase IIb trial through regulatory of the associated development costs from the initiation of a Phase IIb ® ® in connection with regulatory submissions in the U.S. and Europe which were recorded as research in connection with regulatory submissions in the U.S. and Europe which e have a worldwide license and collaboration agreement with Incyte Corporation (Incyte) which provides us agreement with Incyte Corporation (Incyte) which provides us e have a worldwide license and collaboration e record net product revenue in our exclusive and co-promotion territories where we are the selling party e record net product revenue in our e are in a collaborative arrangement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) to develop, market, and to develop, market, Ltd. (Daiichi Sankyo) Sankyo Co., with Daiichi collaborative arrangement e are in a Major European markets Revenue to $150.0 million Profit-share payments due to Daiichi Sankyo for co-promotion countries where we are the selling party are Sankyo for co-promotion countries where we are the selling party are Profit-share payments due to Daiichi administrative expenses. Beginning January 1, 2016, any profit-share recorded as marketing, selling, and for the major European markets are recorded as collaboration and payments due to us from Daiichi Sankyo other revenue. W success-based regulatory milestones, additional payments from us contingent upon certain development and of which $1 selling, and administrative expenses. In our exclusive territories, we pay Daiichi Sankyo a royalty specific to In our exclusive territories, we pay Daiichi Sankyo a royalty specific selling, and administrative expenses. these territories. sales. revenue recognized with respect to Ef The following table summarizes our the development and commercialization rights to its Janus tyrosine kinase inhibitor compound, now known as rights to its Janus tyrosine kinase inhibitor compound, now known the development and commercialization baricitinib (trade name Olumiant a and development expenses. In 2017, we capitalized as an intangible asset Beginning January 1, 2016, while major European markets continue to be a co-promotion territory under the continue to be a co-promotion 1, 2016, while major European markets Beginning January promotes Ef Daiichi Sankyo exclusively terms of our arrangement, they were previously shared in the same proportion as European markets continue to be results for the major Olumiant W royalty payments on future global autoimmune diseases. Incyte has the right to receive tiered, double-digit sales with rates ranging up to basis by funding provides Incyte with options to co-develop these compounds on an indication-by-indication 30 percent based regulatory million to cost of sales beginning upon connection with the regulatory approval in Europe, which will be amortized product launch. approval in exchange for increased tiered royalties ranging up to percentages in the high twenties. Incyte approval in exchange for increased tiered royalties ranging up to percentages psoriatic arthritis in 2010 and 2017, exercised its option to co-develop Oluminant in rheumatoid arthritis and respectively The parties share approximately the co-promotion territories. territories, including the major European markets. product for our exclusive and co-promotion W promote Ef promote Effient W exclusive marketing rights in certain other territories. marketing rights exclusive 62 FINANCIAL REPORT F63 described above: associated withourcommissionandprofit-sharingobligationsforthecollaborationsotherarrangements The followingtablesummarizesouraggregateamountofmarketing,selling,andadministrativeexpense Summary ofCommissionandProfit-SharePayments contingent upontheachievementofcertaindevelopmentandsuccess-basedregulatorymilestones. December 31,2016 developmental milestone,whichwasrecordedasresearchanddevelopmentexpensein2016. arrangement. commercialization ofthemolecule.W development costsand,ifsuccessful,ingrossmarginsandcertainotherassociatedwith responsibility forcommercialization.Undertheagreement,bothpartiesshareequallyinongoing AstraZeneca willberesponsibleformanufacturingef the potentialtreatmentof development andco-commercializationof In September2014,weenteredintoacollaborationagreementwith BACE Inhibitor series ofsales-basedmilestones,contingentuponthecommercialsuccesstanezumab. eligible toreceiveup an upfrontfeeof$200.0million the FDA'sliftingofpartialclinicalholdanddecisiontocontinuecollaborationwithPfizer in March2015toliftthepartialclinicalholdontanezumab,certainPhaseIIItrialsresumedJuly2015.Upon and certaincommercializationexpenses.FollowingtheU.S.FoodDrug agreement, thecompaniesshareequallyongoingdevelopmentcostsand,ifsuccessful,ingrossmargins tanezumab forthetreatmentofosteoarthritispain,chroniclowbackpainandcancerpain.Under W T Marketing, selling,andadministrative anezumab e haveacollaborationagreementwithPfizerInc.(Pfizer)tojointlydevelopandgloballycommercialize As aresultofthemoleculemovingintoPhaseIIItesting,weincurred , AstraZeneca iseligibletoreceiveup $350.0 million Alzheimer whichwasexpensedasacquiredIPR&D. ’ s disease.W e expensed insuccess-basedregulatorymilestonesandupto . AstraZeneca’ e areresponsibleforleadingdevelopmentef $50.0 million forts. Ifsuccessful,bothpartieswilltakejoint s AZD3293, aBACEinhibitorbeinginvestigatedfor $350.0 million asacquiredIPR&Dattheinceptionofthis AstraZeneca fortheworldwideco- $ 2016 As ofDecember31,2016 ofadditionalpaymentsfromus 194.9 Administration's (FDA's)decision $ $100.0 million 2015 $1.23 billion 213.2 forts, while As of $ , wepaid

, Pfizeris ina 2014 211.2 63 FINANCIAL REPORT F64 ) — . 38.8 225.5 225.5 204.4 243.2 468.7 (68.7 403.0 2015 2014 2015 3,445.8 1,053.4 3,514.5 2,058.1 resulted $ $ $ $ and are expected to 2016 and 2015 81.5 59.5 24.6 141.0 202.1 226.7 367.7 resulted primarily 22.1 987.3 435.3 2015 2016 3,561.9 3,539.8 2,117.2 AH in of total inventories at $ $ $ $ ) December 31, 2014 December 31, 2016 85.9 40.8 (13.0 126.7 268.8 255.8 382.5 , 2015 and 2014 2016 December 31, 2016 $ $ and $1.30 billion AH, including the closure of a manufacturing AH, including the closure of a manufacturing ...... e use the last-in, first-out (LIFO) method for the e use the last-in, first-out (LIFO) method $1.43 billion December 31, 2016 ...... The manufacturing plant was written down to its estimated fair The manufacturing plant was written ...... asset impairment charge related to our decision to close and sell a asset impairment charge related to , respectively have been paid...... , and substantially all of the severance costs incurred during the years ended 2017, and substantially all of the severance ...... and 2015 and 2014 ...... Asset Impairment, Restructuring, and Other Special Charges and Other Restructuring, Asset Impairment, e state all inventories at the lower of cost or market. W e state all inventories at the lower of Inventories Finished products Work in process Total (approximates replacement cost) Increase (reduction) to LIFO cost Severance: products Human pharmaceutical Animal health Raw materials and supplies Total severance Asset impairment (gains from facility sales) and other special (gains from facility sales) and other Asset impairment charges: products Human pharmaceutical Animal health and other special charges Total asset impairment restructuring, and other special charges Asset impairment, Inventories valued under the LIFO method comprised December 31, 2016 The components of the charges included in asset impairment, restructuring, and other special charges in our other special charges restructuring, and asset impairment, included in of the charges The components below operations are described statements of consolidated Note 5: Severance costs recognized during the years ended Severance costs recognized during from actions taken to reduce our cost structure, as well as the integration of Novartis from actions taken to reduce our cost incurred during the year ended Substantially all of the severance costs be paid by the end of December 31, 2015 charges recognized during years ended Asset impairment and other special resulted primarily from integration costs and asset impairments due to product rationalization and site resulted primarily from integration costs and integration of Novartis closures resulting from our acquisition facility in Ireland in 2016. charges recognized during the year ended Asset impairment and other special W Note 6: Inventories value, which was based primarily on recent sales of similar assets. value, which was based primarily on the continental U.S. Other inventories are valued by the first-in, first-out majority of our inventories located in current replacement cost. (FIFO) method. FIFO cost approximates Inventories at December 31 consisted of the following: primarily from a $180.8 million Rico. manufacturing plant located in Puerto 64 FINANCIAL REPORT F65 which willallsettle within Japanese yen,andcommitments topurchase 172.8 million million commitments topurchase foreign currencyforwardcommitments topurchase contracts generallyhavematurities notexceeding forward andoptioncontractscurrencyswapsas fair valuehedgesoffirmcommitments.Forward fair valuewiththegainorlossrecognizedinother–net, (income)expense.W trade andloanpayablesreceivablesdenominated inforeigncurrencies. exposures. Forwardandoptioncontractsareprincipally usedtomanageexposuresarisingfromsubsidiary derivatives usedforhedgingareputinplaceusingthe sameorlikecurrenciesanddurationastheunderlying exchange rates(principallytheeuro,Britishpound,Japanese yen,andtheSwissfranc).Foreigncurrency W fair valuewiththegainorlossrecognizedincurrentearnings duringtheperiodofchange. recognized inearnings.Derivativecontractsthatare not designatedashedginginstrumentsarerecordedat reported asacomponentofaccumulatedothercomprehensive loss.Hedgeinef hedges, theef earnings. Forderivativeandnon-derivativeinstrumentsthataredesignatedqualifyasnetinvestment comprehensive lossandreclassifiedintoearningsinthesameperiodhedgedtransactionaf cash flowhedges,theef gains recognizedontheunderlyingexposure.Forderivativeinstrumentsthataredesignatedandqualifyas marked tomarketwithgainsandlossesrecognizedcurrentlyinincomeof For derivativeinstrumentsthataredesignatedandqualifyasfairvaluehedges,theinstrumentis the correlationandef and of Our derivativeactivitiesareinitiatedwithintheguidelinesofdocumentedcorporaterisk-managementpolicies expense. W accounted forusingtheequitymethodwithourshareofearningsorlossesreportedinother–net,(income) Investments incompaniesoverwhichwehavesignificantinfluencebutnotacontrollinginterestare indicator ofimpairment.W is recognizedinearnings.W comprehensive income(loss). the other-than-temporaryimpairmentonourdebtsecuritiesisthenrecorded,netoftax,inother our debtsecuritiesconsideredtobeother-than-temporaryisrecognizedinearnings. losses, netoftax,reportedinothercomprehensiveincome(loss). classified asshort-term. sale. Investmentsecuritieswithmaturitydatesoflessthanoneyearfromthedatebalancesheetare Substantially allofourinvestmentsindebtandmarketableequitysecuritiesareclassifiedasavailable-for- be cashequivalents. W instruments butdonotexpectanycounterpartiestofailmeettheirobligationsgivenhighcreditratings. exposed tocredit-relatedlossesintheeventofnonperformancebycounterpartiesrisk-management policies, wemonitortheamountofcreditexposuretoanyonefinancialinstitutionorcorporateissuer investments incorporatedebtsecurities.Inaccordancewithdocumentedrisk-management institutions tofailmeettheirobligations.Majorfinancialrepresentthelargestcomponentofour major financialinstitutions.W mitigated byourongoingcredit-reviewproceduresandinsurance. of ourtradereceivables;collateralisgenerallynotrequired. interest-bearing investments.Wholesaledistributorsoflife-scienceproductsaccountforasubstantialportion Financial instrumentsthatpotentiallysubjectustocreditriskconsistprincipallyoftradereceivablesand Note 7:FinancialInstruments e mayenterintoforeigncurrencyforwardoroptioncontracts toreducetheef e considerallhighlyliquidinvestmentswithamaturityofthreemonthsorlessfromthedatepurchaseto fset lossesandgainsontheassets,liabilities,transactionsbeinghedged.Managementreviews Britishpoundsandsell e ownnoinvestmentsthatareconsideredtobetradingsecurities. Britishpounds,commitments topurchase fective portionofforeigncurrencytranslationgainsorlossesduetospotratefluctuationsare fectiveness ofourderivativesonaquarterlybasis. The costoftheseinvestmentsapproximatesfairvalue. fective portionofgainsandlossesisreportedasacomponentaccumulatedother A 30 days. vailable-for-sale securitiesarecarriedatfairvaluewiththeunrealizedgainsand e reviewtheseinvestmentsforindicatorsofimpairmentonaregularbasis. 2.13 billion e donotevaluatecost-methodinvestmentsforimpairmentunlessthereisan e monitorourexposureswiththeseinstitutionsanddonotexpectanyof 292.8 million The entireamountofother-than-temporaryimpairmentonourequitysecurities euroandsell euro;commitmentstopurchase 185.9 million 12 1.24 billion 2.24 billion months. 609.8 million Swissfrancsandsell183.3million The riskassociatedwiththisconcentrationis At December31,2016 U.S.dollarsandsell U.S.dollars;commitments topurchase246.0 The creditportionofunrealizedlosseson A largeportionofourcashisheldbyafew U.S.dollarsandsell fset therespectivelossesand 219.2 million These contractsarerecordedat e mayenterintoforeigncurrency fect offluctuatingcurrency fectiveness isimmediately 1.17 billion The remainingportionof , wehadoutstanding U.S.dollarsandsell 70.44 billion U.S.dollars, euro; fects . W

e are 65 FINANCIAL REPORT F66

) ) 9.0 (20.4 2014 129.0 156.9 (156.9 e have $ ) ) — 11.9 13.7 (28.2 (11.9 fectiveness, as well as 2015 fort to manage The objective of December 31, 2016 as of December $ ) — 30.8 15.0 78.8 fective as, economic hedges of net fective as, economic (30.8 2016 $ and $2.27 billion fective as, economic hedges of net investments of net investments economic hedges fective as, fectiveness, were not material. $3.34 billion , and 2014, net losses related to inef e address a portion of these risks through a controlled of these risks through a controlled e address a portion ...... 2015 ...... , ...... , substantially all of our total long-term debt is at a fixed rate. W , substantially all of our total long-term of our long-term fixed-rate notes to floating rates through the use of of our long-term fixed-rate notes to ...... 35 percent December 31, 2016 , have been designated as, and are ef designated as, , have been December 31, 2016 fects of risk-management instruments were recognized in other–net, (income) expense: fects of risk-management instruments At , respectively accumulated other comprehensive loss from accumulated other comprehensive loss designated as hedging instruments e may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of designate them as cash flow hedges to limit the potential volatility e may enter into forward contracts and interest rate swaps, which we designate as cash flow hedges, as part e also may enter into forward-starting Effective portion of losses on equity contracts reclassified from Effective portion of losses on interest rate contracts reclassified Effect from interest rate contracts Effect from hedged fixed-rate debt Cash flow hedges: Net (gains) losses on foreign currency exchange contracts not Fair value hedges: net losses related to the portion of our risk-management hedging instruments, fair value hedges, and cash net losses related to the portion of our risk-management hedging instruments, flow hedges that were excluded from the assessment of ef During the years ended in certain of our euro-denominated and Swiss franc-denominated foreign operations. Our cross-currency Our cross-currency foreign operations. franc-denominated and Swiss of our euro-denominated in certain to euro- dollar-denominated floating rate debt that convert a portion of our U.S. interest rate swaps as, and are ef rate debt have also been designated denominated floating operations. of our euro-denominated foreign investments in certain which can vary exposed to fluctuations in interest rates of business, our operations are In the normal course investing, and operating. W the costs of financing, derivative financial instruments. that includes the use of program of risk management primary interest- in interest rates on earnings. Our is to limit the impact of fluctuations controlling these risks U.S. dollar interest rates. In an ef results from changes in short-term rate risk exposure floating-rate debt and balance between fixed- and we strive to achieve an acceptable interest-rate exposures, balance. swaps or collars to help maintain that and may enter into interest rate investment positions our fixed-rate debt to a floating rate are designated as fair value Interest rate swaps or collars that convert Interest rate swaps or collars that convert floating-rate debt to a fixed hedges of the underlying instruments. Interest expense on the debt is adjusted to include the payments rate are designated as cash flow hedges. Cash proceeds from or payments to counterparties resulting made or received under the swap agreements. swaps are classified as operating activities in our consolidated statement from the termination of interest rate of cash flows. Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency debt and cross-currency use of foreign currency through the risk is also managed exchange Foreign currency and and June 2015 issued in May 2016 notes currency-denominated swaps. Our foreign interest rate of had carrying amounts in Note 10, which discussed The Effect of Risk Management Instruments on the Consolidated Statement of Operations The Effect of Risk Management Instruments The following ef earnings and cash flow associated with forecasted sales of available-for-sale securities. earnings and cash flow associated W in order to reduce the risk of cash flow volatility from future changes of any anticipated future debt issuances of a debt issuance and termination of the swap, the change in fair value in interest rates. Upon completion of of other comprehensive income (loss) and is amortized to interest these instruments is recorded as part debt. expense over the life of the underlying and 2015 converted approximately interest rate swaps. W 66 FINANCIAL REPORT F67 on ourfloatingratedebt. $15.1 million During thenext12months,weexpecttoreclassifyfrom accumulatedothercomprehensivelosstoearnings on theunderlyingequitysecurities. accumulated othercomprehensivelossrelatedtothecashflowhedgesandpreviouslyunrealizedgains designated cashflowhedgingrelationships. During theyearended the timeofterminationandwasrecordedinothercomprehensiveincome(loss). settlement. aggregate notionalamountof terminated forward-startinginterestratecontractsindesignatedcashflowhedginginstrumentswithan Upon issuanceoftheunderlyingfixed-ratenotesinMarch2015,whicharediscussedNote10,we Cash FlowHedges over theremaininglifeofunderlyingdebt. carrying valueoftheunderlyingnotesandisbeingamortizedintoearningsasareductioninterestexpense component ofthedebtextinguishmentloss.In2014,relatedfairvaluewasrecordedasanincreaseto the adjustment wasrecordedasanincreasetothecarryingvalueofunderlyingnotesandincluded a represented thefairvalueofinterestrateswapsattimetermination.In terminations, wereceivedcashof in 2015 notional amountof 2015 There werenomaterialterminationsofinterestrateswapsin Fair V (loss) isasfollows: The ef The EffectofRisk-ManagementInstrumentsonOtherComprehensiveIncome(Loss) Foreigncurrencyexchangecontracts Cross-currencyinterestrateswaps Foreigncurrency-denominatednotes Net investmenthedges: Forward-startinginterestrateswaps Equitycontracts Cash flowhedges: and2014,weterminatedcertaininterestrateswapsdesignatedasfairvaluehedgeswithanaggregate alue Hedges fective portionofrisk-managementinstrumentsthatwasrecognizedinothercomprehensiveincome wasinconnectionwiththenotepurchaseandredemptiondiscussedNote10. The settlementamountrepresentedthefairvalueofforward-startinginterestratecontractsat ofpretaxnetlossesoncashflowhedgesthevariability inexpectedfutureinterestpayments $876.0 million December 31,2014 $1.35 billion and$1.30billion $20.2 million andpaid , wesoldalloftheunderlyingequitysecuritiesthathadbeenin At thetimeofsales,wereclassifiedtoearnings and , respectively $340.7 million $206.3 million 2016 . The terminationofcertaininterestrateswaps in2015 incashtothecounterpartiesfor . Duringtheyearsended $ 2016 and2014,respectively 137.5 31.9 32.5 (3.4 — ) 2015 $ , therelatedfairvalue 2015 As aresultofthe (56.7 December 31, — — — — ) , which $ 2014 (164.7 149.6 — — — ) 67 FINANCIAL REPORT F68 3.3 3.1 4.3 0.5 318.9 183.1 502.7 153.2 625.8 284.5 153.3 441.9 137.1 128.9 232.5 153.7 418.2 alue Fair V 3,062.2 1,644.4 1,962.6 2,986.8 1,219.2

$ $ $ $ $ $ — — — — — — — — — — — — — — — — — — — — 133.0 153.7 Inputs (Level 3) Significant Unobservable $ $ $ $ $ $ — — — — — — 3.3 3.1 1.0 4.1 4.3 0.5 7.4 183.1 502.7 625.8 153.3 441.9 287.4 3,062.2 1,962.6 1,219.2 Other Inputs (Level 2) Significant Observable $ $ $ $ $ $ — — — — — — — — — — — — — — Fair Value Measurements Using Fair Value Measurements 283.5 153.2 318.9 128.9 232.5 418.2 Active 1,637.0 2,699.4 Assets Identical (Level 1) in Markets for Quoted Prices $ $ $ $ $ $ 3.3 3.1 4.3 0.5 (1) 77.6 97.3 74.8 91.9 286.0 185.4 503.5 153.4 626.9 154.7 443.1 323.8 232.6 Cost 3,074.3 1,995.8 1,644.4 2,986.8 1,219.1

$ $ $ $ $ $ 3.1 3.3 0.5 4.3 785.4 284.5 183.1 502.7 153.7 153.2 625.8 153.3 441.9 137.1 128.9 538.3 318.9 568.7 232.5 418.2 3,062.2 1,962.6 3,646.6 1,456.5 5,207.5 1,644.4 2,986.8 1,219.2 Amount Carrying

$ $ $ $ $ $ $ $ $ $ (2) (2) alue of Financial Instruments alue of Financial securities securities investments securities securities investments Other securities Short-term investments U.S. government and agency Corporate debt securities Mortgage-backed securities Asset-backed securities Other securities U.S. government and agency Corporate debt securities Asset-backed securities Corporate debt securities Mortgage-backed securities Asset-backed securities Other securities Marketable equity securities Cost and equity method Noncurrent investments Other securities Short-term investments U.S. government and agency Noncurrent investments U.S. government and agency U.S. government Corporate debt securities Asset-backed securities Marketable equity securities Cost and equity method For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost. For available-for-sale debt securities, amounts disclosed represent the securities' amortized Fair value disclosures are not applicable for cost method and equity method investments. Noncurrent investments: Short-term investments: Noncurrent investments: December 31, 2015 Cash equivalents December 31, 2016 Cash equivalents Short-term investments: Description (2) (1) Fair V assets and liabilities at December 31 for information certain fair value tables summarize The following certain amortized cost of amount and as well as the carrying recurring basis, at fair value on a measured other investments: 68 FINANCIAL REPORT F69 (1) December 31,2015 December 31,2016 Long-term debt,includingcurrentportion December 31,2015 December 31,2016 Short-term commercialpaperborrowings Description Contingent considerationliabilities Risk-management instruments December 31,2015 Contingent considerationliabilities Risk-management instruments December 31,2016 Description Contingentconsideration liabilitiesprimarilyrelate totheErbituxarrangementwith BMSdiscussedinNote4. Foreign exchangecontractsnotdesignated Interest ratecontractsdesignatedasfair Foreign exchangecontractsnotdesignated Cross-currency interestratecontracts Interest ratecontractsdesignatedasfair as hedginginstruments: value hedges: as hedginginstruments: designated asnetinvestmenthedges: value hedges: Other noncurrentliabilities Other currentliabilities Other currentliabilities Other receivables Other noncurrentliabilities Sundry Other noncurrentliabilities Other currentliabilities Other currentliabilities Other receivables Sundry Other noncurrentliabilities Sundry Other receivables ...... (1) (1) : : $ $ $ $ Carrying Carrying (9,005.9 (1,299.3 (7,978.5 Amount Amount (427.2 (243.7 (242.6 (215.9 (17.3 (21.7 13.1 70.1 31.8 31.4 37.0 (0.4 (0.5 2.4 — ) ) ) ) ) ) ) ) ) ) ) $ $ $ $ Markets for Markets for Prices in (Level 1) Identical Prices in (Level 1) Identical Quoted Quoted Assets Assets Active Active Fair ValueMeasurementsUsing Fair ValueMeasurementsUsing — — — — — — — — — — — — — — — — — — $ $ $ $ Observable Observable Significant Significant (Level 2) (Level 2) (9,419.1 (1,299.3 (8,172.0 Inputs Inputs Other Other (17.3 (21.7 13.1 31.8 31.4 37.0 70.1 (0.4 (0.5 2.4 — — — — — ) ) ) ) ) ) ) $ $ Unobservable $ $ Unobservable Significant Significant (Level 3) (Level 3) Inputs Inputs (427.2 (243.7 (242.6 (215.9 — — — — — — — — — — — — — — ) ) ) )

$ $

$ $ (9,419.1 (1,299.3 (8,172.0 V V Fair Fair alue (427.2 (243.7 (242.6 (215.9 alue (17.3 (21.7 13.1 31.8 31.4 37.0 70.1 (0.4 (0.5 2.4 — ) ) ) ) ) ) ) ) ) ) ) 69 FINANCIAL REPORT F70 ,

ears 215.7 Y There 68.0 52.5 After f 2015 764.5 10 2,933.4 $ $ ficient to allow America. ference between 89.0 $231.0 million ears ears . Other-than- Y Y After 5 34.1 2016 Through 10 352.6 $ 3,262.3 1,869.7 , December 31, 2015 $ ear Y ears , respectively Y 3,762.2 f and master netting arrangements netting arrangements f and master Through 5 After 1 $ The decreases in the fair value of the The decreases in the fair value of the Maturities by Period There are various rights of setof various rights of There are ear ithin Y America through September 2018 and an America through September December 31, 2016 1,456.0 1 W $ was due to cash payments of and $12.5 million due to changes in time value of money were 2015 due to changes in time value of money ...... and Total 5,522.9 $ , $42.6 million Although various rights of setof Although December 31, 2016 The fair value of cost and equity method investments is not readily and equity method investments The fair value of cost December 31, 2016 $53.0 million : ...... , our intent and ability to retain the securities for a period of time suf ...... The amount to be paid is calculated as a tiered percentage of net sales (see Note 4) The amount to be paid is calculated 2014 totaled The change in the fair value of the contingent consideration liabilities recognized in The change in the fair value of the contingent , these financial rights are not material. rights are , these financial e periodically assess our investment securities for other-than-temporary impairment losses. Other-than- e periodically assess our investment securities for other-than-temporary e determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted based on a market approach 1 and Level 2 fair value measurements e determine our Level summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the summary of the fair value of available-for-sale Unrealized gross gains Fair value of debt securities Fair value of securities in an unrealized loss position Unrealized gross losses Fair value of securities in an unrealized gain position amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows: amount of unrealized gains and losses A to our cost and equity method temporary impairment losses recognized during these years related primarily investments. by comparing the dif For fixed-income securities, the amount of credit losses are determined securities and the amortized cost. the present value of future cash flows expected to be collected on these the capital structure, vintage and Factors considered in assessing the credit losses include the position in concentration. amount of collateral, delinquency rates, current credit support, and geographic impairment losses include the For equity securities, factors considered in assessing other-than-temporary cost, the financial condition and near length of time and the extent to which the fair value has been less than term prospects of the issuer factors. for recovery in fair value, and general market conditions and industry specific temporary impairment losses recognized during the year ended related to Erbitux. earnings during the years ended not material. fair maturities of our investments in debt securities measured at The table below summarizes the contractual value as of December 31, 2016 W and December 31, Risk-management instruments above are disclosed on a gross basis. on a gross above are disclosed instruments Risk-management market values, significant other observable inputs for identical or comparable assets or liabilities, or identical or comparable assets or liabilities, other observable inputs for market values, significant are for other investment securities analyses. Level 3 fair value measurements discounted cash flow and price investments' cost adjusted for impairments unobservable inputs, including the determined using transactions. changes from orderly associated with certain of the risk-management instruments above that are subject to an enforceable master to an enforceable that are subject instruments above risk-management with certain of the associated agreements. or similar netting arrangement above, instruments to the risk-management counterparties exist with the individual agreements may or similar individually W available. for which the consideration related to Erbitux liabilities primarily include contingent Contingent consideration projections analysis and Level 3 inputs, including using a discounted cash flow fair value was estimated in North market participant view for net sales representative of a estimated discount rate. increases and decreases in net sales of Erbitux in North and will, therefore, vary directly with paid pursuant to this arrangement. is no cap on the amount that may be contingent consideration liability during 70 FINANCIAL REPORT F71 2016 No impairmentsoccurredwithrespecttothecarryingvalue ofgoodwillfortheyearsended health segmentisprimarilytheresultofforeignexchange translationadjustments. of goodwillisperformedtodeterminetheamountany impairment. impairment indicatorsarepresent.Whenrequired,a comparison ofimpliedfairvaluetothecarryingamount assets acquired.Goodwillisnotamortizedbutreviewed forimpairmentatleastannuallyandwhen Goodwill resultsfromexcessconsiderationinabusinesscombinationoverthefairvalueofidentifiablenet Goodwill bysegmentatDecember31wasasfollows: Goodwill Note 8:GoodwillandOtherIntangibles the yearsended arrangements. $670.6 million not retainanyinterestintheunderlyingaccountsreceivableoncesold.W to thebuyers.Ourfactoringagreementsdonotallowforrecourseineventofuncollectibility accounts receivablebecausetheagreementstransferef non-U.S. accountsreceivable. W Accounts ReceivableFactoring initial costadjustedforanyother-than-temporarydeclinesinfairvaluethatwererecordedearnings. Realized gainsandlossesonsalesofinvestmentsarecomputedbaseduponspecificidentificationthe was asfollows: Activity relatedtoourinvestmentportfolio,substantiallyallofwhichavailable-for-salesecurities, of ourdebtsecurities. cash flowshavebeenreceived,andthereisnoindicationofdefaultoninterestorprincipalpaymentsforany we willberequiredtosell,thesecuritiesinalosspositionbeforemarketvaluesrecoverorunderlying grade debtsecurities. and othermarketconditions. securities ofvaryingmaturities. As ofDecember31,2016 Total goodwill Animal health Human pharmaceuticalproducts Realized grosslossesonsales Realized grossgainsonsales Proceeds fromsales e haveenteredintoaccountsreceivablefactoringagreementswithfinancialinstitutionstosellcertainofour , 2015 , and2014. ofaccountsreceivableas The costoffactoringsuchaccountsreceivableonourconsolidatedresultsoperationsfor . . December 31,2016 . As of , thesecuritiesinanunrealizedlosspositionincludeprimarilyfixed-ratedebt December 31,2016 Approximately These transactionsareaccountedforassalesandresultinareduction The valueoffixed-incomesecuritiesissensitivetochangesintheyieldcurve Arrangements . . . , 2015and2014 December 31,2016 95 percentofthesecuritiesinalosspositionareinvestment- , wedonotintendtosell,anditismorelikelythanthat wasnotmaterial. fective controloverandriskrelatedtothereceivables and2015 $ The decreaseingoodwillfortheanimal 3,240.5 2016 , respectively e derecognized 14.6 30.7 $ $ $ 4,733.3 , underthesefactoring 2015 2016 3,972.7 2,606.3 1,366.4 255.1 10.3 $661.6 million December 31, , andwedo $ $ $ 14,609.5 2014 2015 4,039.9 2,673.4 1,366.5 353.5 and 29.4 71 FINANCIAL REPORT F72 85.8 f, as 177.6 The Net 5,034.8 4,771.4 4,857.2 . Amount, Carrying The fair . $ $ ) ) ) ) — (65.3 2015 (2,821.9 (2,756.6 (2,821.9 Amortization Accumulated $ $ The acquired IPR&D . These projections are based on 151.1 177.6 7,856.7 7,528.0 7,679.1 Gross Amount, Carrying $ $ 78.9 180.2 Net 4,357.9 4,098.8 4,177.7 Amount, Carrying $ $ ) ) ) ) — (71.8 . 2016 (3,373.2 (3,301.4 (3,373.2 , the remaining weighted-average amortization period for finite- . Amortization Accumulated $ $ 12 years 180.2 150.7 and 2014 7,731.1 7,400.2 7,550.9 Gross Amount, Carrying $ $ 2015 , This analysis is performed for each asset independently December 31, 2016 e utilize the “income method,” which is a Level 3 fair value measurement and applies e utilize the “income method,” which ...... As of ...... The estimated future net cash flows are then discounted to the present value using an The estimated future net cash flows are then discounted to the present ...... December 31, 2016 intangible assets research and development Other intangibles Total finite-lived assets: Marketed products Other Acquired in-process Finite-lived intangible assets: Indefinite-lived intangible

Description Intangible assets with finite lives are capitalized and are amortized over their estimated useful lives, ranging Intangible assets with finite lives are capitalized and are amortized over from 3 to 20 years. a probability weighting that considers the risk of development and commercialization to the estimated future the risk of development and commercialization to the estimated future a probability weighting that considers projected revenues and estimated costs. net cash flows that are derived from Marketed products consist of the amortized cost of the rights to assets acquired in business combinations and cost of the rights to assets acquired in business combinations Marketed products consist of the amortized global jurisdiction (U.S., Europe, and Japan) and capitalized milestone approved for marketing in a significant at a business combination, we capitalize milestone payments incurred payments. For transactions other than approval for marketing. or after the product has obtained regulatory primarily of the amortized cost of licensed platform technologies that have Other finite-lived intangibles consist development, manufacturing technologies, and customer relationships alternative future uses in research and from business combinations. costs capitalized, adjusted for subsequent impairments, if any Acquired IPR&D consists of the related acquired in business combinations are capitalized as other intangible values of acquired IPR&D projects assets. the estimated fair value of other intangibles acquired in a Several methods may be used to determine business combination. W of similar products, and expected factors such as relevant market size, patent protection, historical pricing industry trends. appropriate discount rate. or abandonment of the projects, at assets are treated as indefinite-lived intangible assets until completion remaining useful life or written of which time the assets are tested for impairment and amortized over the appropriate. business combinations and Note 4 See Note 3 for further discussion of intangible assets acquired in recent for additional discussion of recent capitalized milestone payments. least annually and when impairment Other indefinite-lived intangible assets are reviewed for impairment at carrying amount of assets is indicators are present. When required, a comparison of fair value to the the fair value of indefinite-lived performed to determine the amount of any impairment. When determining "income method" discussed above. acquired IPR&D assets for impairment testing purposes, we utilize the of impairment is present. No Finite-lived intangible assets are reviewed for impairment when an indicator intangible assets for the years material impairments occurred with respect to the carrying value of other ended lived intangible assets is approximately costs of acquired IPR&D projects acquired directly in a transaction other than a business combination are directly in a transaction other than a business combination are costs of acquired IPR&D projects acquired future use; otherwise, they are expensed immediately capitalized if the projects have an alternative Other Intangibles as follows: 31 were goodwill at December assets other than of intangible The components 72 FINANCIAL REPORT F73 capital leaseobligationsentered into,andfutureminimumrentalcommitments are notmaterial. Assets undercapitalleasesincludedinpropertyand equipment, netontheconsolidatedbalancesheets, Capitalized interestcostswerenotmaterialfortheyears ended The futureminimumrentalcommitmentsundernon-cancelable operatingleasesareasfollows: contingent rentals(notmaterial),wasasfollows: Depreciation expenserelatedtopropertyandequipmentrentalforallleases,including At December31,propertyandequipmentconsistedofthefollowing: adjusted. loss isrecordedequaltotheexcessofasset’ undiscounted cashflowstobegeneratedbytheassetitscarryingvalue.Ifanimpairmentisidentified,a carrying valueofanassetmaynotberecoverable.Impairmentisdeterminedbycomparingprojected potential impairmentonaperiodicbasisandwhenevereventsorchangesincircumstancesindicatethe 50 yearsforbuildingsand are computedgenerallybythestraight-linemethodatratesbasedontheirestimatedusefullives( Property andequipmentisstatedonthebasisofcost.Provisionsfordepreciationbuildings Note 9:PropertyandEquipment development dependingonthenatureofintangibleassetbeingamortized. Amortization expenseisincludedineithercostofsales,marketing,selling,andadministrativeorresearch assets asofDecember31,2016 The estimatedamortizationexpenseforeachofthenextfiveyearsassociatedwithourfinite-livedintangible Amortization expenserelatedtofinite-livedintangibleassetswasasfollows: Lease commitments Rental expense Depreciation expense Property andequipment,net Less accumulateddepreciation Construction inprogress Equipment Buildings Land Estimated amortizationexpense Amortization expense ...... 3 to . 25 isasfollows: . yearsforequipment).W . $ s netbookvalueoveritsfairvalue,andthecostbasisis 2017 134.8 $ $ e reviewthecarryingvalueoflong-livedassetsfor 2017 649.6 2018 120.9 December 31,2016 $ $ $ $ 2018 491.7 2019 109.9 2016 2016 221.0 716.2 687.9 $ $ 2019 2020 314.1 $ $ $ $ 93.3 , 16,777.6 (8,525.0 2015 8,252.6 1,797.5 7,864.7 6,917.8 2016 2015 2015 197.6 225.7 717.6 631.8 $ $ , and2014. 2020 2021 312.8 ) 75.3 $ $ $ $ 12 to 16,660.9 (8,607.4 8,053.5 1,665.3 7,988.5 6,786.5 $ $ 2015 2014 2014 220.6 After 2021 2021 339.4 227.3 759.1 535.9 311.0 ) 73 FINANCIAL REPORT F74 ) ) — 0.5 2.13 (6.1 . in 23.1 (37.1 was 292.4 2021 of 7,700.1 7,978.5 7,972.4 .400.0 2015 fixed- . Current $ Fr $ $ 364-day December 31, 1.6 ) ) fixed-rate notes $800.0 $1.78 billion e are using the 2020 14.4 $ (37.5 252.5 . W €750.0 million 1,299.3 8,776.5 8,367.8 2016 (1,937.4 10,305.2 to purchase and December 31, 2015 of 0.00 percent December 31, 2016 $1.50 billion $ $ 603.0 2019 fects of interest rate swaps for $ of 4.65 percent fixed-rate notes of 1.00 percent of 3.70 percent fixed-rate notes The net cash proceeds of the , which was included in other–net, . . .200.0 million 999.2 Fr 2018 $ e paid $1.95 billion and a net carrying value of August 2021 and a €600.0 million . W $800.0 million $166.7 million fixed-rate notes due in May 2024, and fixed-rate notes due in May 2024, and 635.3 and $400.0 million 2017 The proceeds from the issuance of the notes were 2015, including the ef . $ ...... of unused committed bank credit facilities, which of unused committed bank credit facilities, $1.65 billion fective borrowing rates based on long-term debt and ...... fixed-rate notes due in June 2026, and fixed-rate notes due in June 2026, for general corporate purposes, which may include the for general corporate purposes, which 0.15 percent of our long-term fixed-rate notes to floating rates through the of were repaid in March 2014. and 2.67 percent, respectively of 1.95 percent ...... of 1.25 percent fixed-rate notes due in March 2018, $1.21 billion credit facility that expires in ...... 35 percent of 1.63 percent December 31, 2016 $1.00 billion 2.51 percent .600.0 million ...... $600.0 million Fr fering of The weighted-average ef $600.0 million fective borrowing rate on outstanding commercial paper at rate on outstanding commercial paper fective borrowing $1.20 billion were used primarily to purchase and redeem certain higher interest rate U.S. dollar- were used primarily to purchase and , we had a total of $2.87 billion ...... €750.0 million ...... amounts outstanding under the revolving credit facilities during the years ended amounts outstanding under the revolving . AH...... fixed-rate notes due in May 2028, with interest to be paid annually of 0.45 percent fixed-rate notes due in May 2028, with of 2.75 percent fixed-rate notes due in June 2025, and . Compensating balances and commitment fees are not material, and there are no conditions and 2015. Compensating balances and commitment e have converted approximately fering of $2.27 billion Maturities on long-term debt Unamortized debt issuance costs Unamortized debt Total debt Short-term commercial paper borrowings Short-term commercial 0.00 to 7.13 percent long-term notes (due 2017-2045) 0.00 to 7.13 percent including capitalized leases Other long-term debt, on hedged long-term notes Fair value adjustment Less current portion Long-term debt hedged debt obligations, were use of interest rate swaps. obligations and interest rates at W Debt at December 31 consisted of the following: 31 consisted Debt at December Note 10: Borrowings Note 10: rate notes due in May 2018, million The weighted-average ef The weighted-average both of which are available to support our commercial paper program. facility that expires in December 2017, There were no 2016 which the lines may be withdrawn. that are probable of occurring under notes consisting of In May 2016, we issued Swiss franc-denominated interest to be paid annually percent fixed-rate notes due in June 2030 with and June 2044, respectively with interest to be paid semi-annually and maturity dates in March 2019, maturities of long-term notes of years are as follows: The aggregate amounts of maturities on long-term debt for the next five consisted primarily of a 0.59 percent At December 31, 2016 net cash proceeds of the of of certain of our U.S. dollar denominated fixed-rate notes due repayment or redemption prior to maturity March 2017. notes consisting of In June 2015, we issued euro-denominated due in June 2022, of commercial paper denominated notes and to repay outstanding amount of redeem notes with an aggregate principal due in March 2045 with interest to be paid semi-annually with our January 2015 acquisition used primarily to repay outstanding commercial paper issued in connection of Novartis In February 2014, we issued June 2015, resulting in a pretax debt extinguishment loss of June 2015, resulting in a pretax debt million (income) expense in our consolidated statement of operations during the year ended (income) expense in our consolidated In March 2015, we issued 74 FINANCIAL REPORT F75 shares, and0.7million achieved duringthevestingperiod.Pursuanttothisprogram,approximately respectively granted fortheyearsended stock priceonthedateofgrantandfullyvestatendmeasurementperiod. per-share targetsovera P P Performance Stock Planfornotmorethan99.6million At December31,2016 Stock-based compensationexpenseandtherelatedtaxbenefitswereasfollows: P period. W expense overtherequisiteserviceperiodofindividualgrantees,whichgenerallyequalsvesting (SV Our stock-basedcompensationexpenseconsistsofperformanceawards(P Note 1 hedge. of thehedgeddebtattributabletomovementsinmarketinterestratessubsequentinception equal tothesumofdebt’ obligations thatishedgedasafairvaluehedge,reflectedintheconsolidatedbalancesheetsanamount In accordancewiththerequirementsofderivativesandhedgingguidance,portionourfixed-ratedebt The aggregateamountofcashpaymentsforinterestonborrowings,netcapitalizedinterest,areasfollows: be amortizedovertheweighted-averageremainingrequisite serviceperiodof the totalremainingunrecognizedcompensationcostrelatedtononvestedP respectively Tax benefit Stock-based compensationexpense Cash paymentsforinterestonborrowings A As aregrantedtoof A, SV sharesactuallyissued,ifany As), andrestrictedstockunits(RSUs).W 1: Stock-BasedCompensation A, andRSUshares. e providenewlyissuedsharesofourcommonstockandtreasurytosatisfytheissuance . . . Approximately The numberofsharesultimatelyissuedfortheP A ward Program ficers andmanagementarepayableinsharesofourcommonstock. shareswereissuedduringtheyearsended , additionalstock-basedcompensationawardsmaybegrantedunderthe2002Lilly two-year period.P 1.3 million December 31,2016 s carryingvalueplusthefairadjustmentrepresentingchangesin , variesdependingontheachievementofcertainpre-establishedearnings- sharesareexpectedtobeissuedin . shares. A . sharesareaccountedforatfairvaluebasedupontheclosing e recognizethefairvalueofstock-basedcompensationas , 2015and2014 A programisdependentupontheearnings were$72.00 December 31,2016 $ $ 2016 2016 255.3 146.4 2017 As was$43.7million As), shareholdervalueawards 89.4 0.5 million 12 months. , $70.34 . As ofDecember31,2016 $ $ The fairvaluesofP , and$48.81 shares,0.5million 2015 2015 , 2015 217.8 129.6 76.2 , and2014 The numberof , whichwill $ $ , 2014 2014 156.0 140.4 As , 54.6

, 75 FINANCIAL REPORT F76 , % .

and 3.50 .08-.71 2014 units A 18.87-21.56 The assets of The number The number , respectively , respectively As of December unit on the unit on the shares were % A -year vesting -year vesting As of , and $41.97, 2015, no preferred 2.50 0.79 20.37 three 2015 and $54.81 The corresponding , Approximately 1.2 million . % and $800.0 million at both December 31, 2016 shares were granted and , the dividend yield is based on , the dividend yield 2.00 0.92 21.68 shares, and 1.4 million 2016 were $48.68 , the total remaining unrecognized , respectively The fair values of RSU awards granted The fair values of RSU awards granted $71.46, $71.69, and $52.72 0.7 million shares are expected to be , which will be amortized over the weighted- The risk-free interest rate is derived from the The risk-free interest $3.01 billion December 31, 2016 , $749.5 million years. , and 1.2 million Any dividend transactions between us and the trust e measure the fair value of the SV the fair value of e measure As of . shares of our common stock at both December 31, three The weighted-average fair values of the SV The weighted-average shares were issued during the years ended shares were issued during the years , 2015, and 2014 Approximately equity shares, 1.4 million , 2015, and 2014 , and 2014 were . The model utilizes multiple input variables that determine multiple input variables that determine The model utilizes December 31, 2016 , 0.9 million $540.1 million 20 months. 2015 50.0 million of shares remaining in that program. Our share repurchases are . , As was $65.1 million As of share repurchase program announced in 2013. 0.9 million . cost related to , the total remaining unrecognized compensation 1.0 million , respectively 2017 , and , which will be amortized over the weighted-average remaining requisite , which will be amortized over the weighted-average to a financial institution for shares that were subsequently repurchased in to a financial institution for shares that were subsequently repurchased , and 2014 December 31, 2016 , varies depending on our stock price at the end of the price at the on our stock , varies depending December 31, 2016 fect at the time of grant. fect at the time of $5.00 billion , we repurchased 2015 , ...... , 0.9 million 2014 December 31, 2016 ...... $60.0 million ficers and management and are payable in shares of our common stock. of our common are payable in shares management and ficers and $103.3 million ward Program December 31, 2016 A , 2015, and 2014 , there were $2.41 billion authorized shares of preferred stock. , and 22 months. As of alue 0.6 million The cost basis of the shares held in the trust was , determined using the following assumptions: , determined using ...... 2017. 2016, 2015 December 31, 2016 reasury yield curve in ef reasury yield curve , to provide a source of funds to assist us in meeting our obligations under various employee and 2015, to provide a source of funds to assist us in meeting our obligations under , and is shown as a reduction of shareholders’ T As are granted to of As are granted e have an employee benefit trust that held e have 5.0 million Risk-free interest rate Volatility (Percents) yield Expected dividend Pursuant to this program, approximately Pursuant to this program, approximately of shares actually issued, if any actually issued, if of shares prices. W target stock to pre-established period compared Monte Carlo simulation model. grant date using a the fair value of in the award grant and calculates the market condition stipulated the probability of satisfying traded options on based on implied volatilities from volatilities utilized in the model are the award. Expected factors. Similarly volatility of our stock price, and other our stock, historical yields. and our estimate of future dividend historical experience U.S. years ended granted during the respectively issued during the years ended Shareholder V Shareholder SV approximately service period of Note 12: Shareholders' Equity During Restricted Stock Units and are payable in shares of our common stock. RSU shares are RSUs are granted to certain employees the closing stock price on the date of grant. accounted for at fair value based upon December 31, 2016 nonvested RSUs was shares are expected to be issued in shares are expected to be issued in SV compensation cost related to nonvested period of average remaining requisite service period, typically expense is amortized over the vesting during the years ended for the RSU program remains constant with the exception of The number of shares ultimately issued 1.3 million forfeitures. Pursuant to this program, issued in of shares associated with our December 31, 2016 31, 2016, we had paid stock was issued. W facilitated through payments to a financial institution that purchases the shares on our behalf. facilitated through payments to a financial institution that purchases the the first quarter of 2017. W 2016 benefit plans. 2015 are eliminated. Stock held by the trust is not considered outstanding in the computation of EPS. are eliminated. Stock held by the trust is not considered outstanding in benefit plans during the years the trust were not used to fund any of our obligations under these employee ended 76 FINANCIAL REPORT F77 return filings. losses andtaxcreditsshown abovehavebeenreducedfordif The deferredtaxassetand relatedvaluationallowanceamountsforU.S.federal andstatenetoperating Following isthecompositionofincometaxexpense: the largestbenefitthathasagreaterthan50percentlikelihoodofbeingrealizeduponultimateresolution. position. position willbesustainedonexaminationbythetaxingauthorities,basedtechnicalmeritsof W provided. earnings areexpectedtobeindefinitelyreinvestedoutsidetheU.S.,noaccrualforU.S.incometaxesis of theincomeforeignsubsidiariesthatisexpectedtoberemittedU.S.andtaxable.When income taxreportingbasedonenactedlawsandrates.Federaltaxesareprovidedtheportion Deferred taxesarerecognizedforthefuturetaxef Note 13:IncomeT Significant componentsofourdeferredtaxassetsandliabilitiesasDecember31arefollows: Deferred taxassets(liabilities) -net Deferred taxliabilities: Deferred taxassets: Deferred: Current: Income taxes Prepaid employeebenefits Financial instruments Property andequipment Intangibles Unremitted earnings Inventories Valuation allowances Other Debt Other comprehensivelossonhedgingtransactions Product returnreserves Contingent consideration Tax losscarryforwardsandcarrybacks Tax creditcarryforwardsandcarrybacks Purchases ofintangibleassets Compensation andbenefits State Foreign Federal State Foreign Federal e recognizethetaxbenefitfromanuncertainpositiononlyifitismorelikelythannotthat Total deferredtaxliabilities Total deferredtaxassets Total grossdeferredtaxassets Total currenttaxexpense Total deferredtax(benefit)expense . . . . The taxbenefitsrecognizedinthefinancialstatementsfromsuchapositionaremeasuredbasedon ...... axes ...... fects oftemporarydif . ferences betweenfinancial reportingandtax $ $ ferences betweenfinancialand 2016 (125.0 517.0 196.9 378.9 439.5 636.4 (83.3 (57.0 5.8 ) ) ) $ $ $ $ (3,176.5 2016 2015 2,960.9 1,126.0 3,609.2 1,130.0 (604.2 (955.5 (215.6 (265.3 (279.3 (398.6 (673.6 (648.3 (689.6 (748.4 587.3 142.7 123.3 327.3 458.9 128.1 620.3 660.5 422.0 381.6 (66.0 95.3 47.5 7.2 ) ) ) ) ) ) ) ) ) ) ) ) $ $ $ $ (2,655.8 2015 2014 2,947.2 1,034.6 3,537.5 (792.3 (771.3 (317.8 (144.0 (411.6 (218.8 (590.3 679.4 111.3 214.6 291.4 129.7 247.8 294.2 212.1 613.8 168.9 120.2 406.2 573.0 609.8 (83.3 36.8 (2.1 (0.1 ) ) ) ) ) ) ) ) ) ) ) 77 FINANCIAL REPORT F78 ) ) ) , if for (44.3 (51.2 729.7 609.8 (344.8 , all of ; 1,050.1 $738.4 2014 2014 of $ $ $ ) ) and other state 39.5 (69.2 976.5 969.0 381.6 (565.2 2026; $53.6 million 2015 2015 . $28.0 billion will expire by 2021 fective through the end of fective through the $ $ $ ) ) ) $102.0 million 15 years 20 percent , 35 percent, and (58.3 700.6 636.4 (313.7 (172.5 1,180.9 2016 2016 fect for $142.6 million of the carryforwards will never expire. of the carryforwards $ $ $ : , to consolidated income before income , to consolidated income 70 percent , and state tax credits of $303.8 million , and state , if unused, will expire by , if unused, $856.0 million , respectively Additional tax provisions will be required if these Additional tax provisions will be required $106.2 million 2017 and will be in ef ...... $178.7 million 2036; and $250.9 million , 2015, and 2014 2022 and ...... The remaining portion of the tax credit carryforwards is related to federal tax is related tax credit carryforwards portion of the The remaining ...... are fully reserved. . , based on filed tax returns we have tax credit carryforwards and carrybacks of carryforwards and we have tax credit filed tax returns , based on , U.S. income taxes have not been provided on approximately , U.S. income taxes have not been , based on filed tax returns we had net operating losses and other carryforwards for returns we had net operating losses , based on filed tax , international tax credits of tax credits of , international 2036 . December 31, 2016 , new tax incentive grant began in ...... will expire between will expire between e have a subsidiary operating in Puerto Rico under a tax incentive grant ef operating in Puerto Rico under a e have a subsidiary ...... similar available to reduce future income taxes; to reduce future available A . International operations, including Puerto Rico International operations, including Puerto General business credits Other Add (deduct): Income tax at the U.S. federal statutory tax rate Income tax at the U.S. federal statutory Cash payments of income taxes Income taxes Following is a reconciliation of the income tax expense applying the U.S. federal statutory rate to income Following is a reconciliation of the income tax expense: before income taxes to reported income Cash payments of income taxes were as follows: Cash payments of income taxes were earnings are repatriated in the future to the U.S. Due to complexities in the tax laws and assumptions that we to the U.S. Due to complexities in the tax laws and assumptions that earnings are repatriated in the future to determine the amount of the related unrecognized deferred would have to make, it is not practicable income tax liability million as we consider these unremitted earnings to be indefinitely unremitted earnings of foreign subsidiaries operations. invested for continued use in our foreign December 31, 2016 At December $462.5 million At December 31, 2016 unused, will expire by unused, will substantially reserved. which are At December 31, 2016 federal income tax purposes of international and U.S. purposes are and U.S. federal income tax and other carryforwards for international Net operating losses net operating losses of Deferred tax assets related to state partially reserved. the years ended taxes. W credits of $96.1 million credits of carryforwards of $5.0 million Rican companies contributed approximately Domestic and Puerto 2016 78 FINANCIAL REPORT F79 W W stages, theresolutionofmattersinthisauditperiodwilllikelyextendbeyondnext12months. and $216.3million At December31,2016 of taxyears2013-2015 years 2010 in incometaxexpense.During2016,wemadecashpaymentsofapproximately approximately 2010 $320 million matters fortaxyears2010-2012 2015, weexecutedaclosingagreementwiththeInternalRevenueServicewhichef The U.S.examinationoftaxyears2010 taxing jurisdictionsforyearsbefore2009. W W $382.8 million The totalamountofunrecognizedtaxbenefitsthat,ifrecognized,wouldaf A Income tax(benefit)expense Ending balanceatDecember31 Changes relatedtotheimpactofforeigncurrencytranslation Lapses ofstatuteslimitation Settlements Reductions fortaxpositionsofprioryears Additions fortaxpositionsofprioryears Additions basedontaxpositionsrelatedtothecurrentyear Beginning balanceatJanuary1 reconciliationofthebeginningandendingamountgrossunrecognizedtaxbenefitsisasfollows: e recognizedincometax(benefit)expenserelatedtointerestandpenaltiesasfollows: e recognizebothaccruedinterestandpenaltiesrelatedtounrecognizedtaxbenefitsinincomeexpense. e arenolongersubjecttoU.S.federal,stateandlocal,ornon-U.S.incometaxexaminationsinmostmajor e fileincometaxreturnsintheU.S.federaljurisdictionandvariousstate,local,non-U.S.jurisdictions. -2012. -2012 afterapplicationofavailabletaxcreditcarryforwardsandcarrybacks. As aresultofthisresolution,ourgrossuncertaintaxpositionswerefurtherreducedby in2015.During2016,weef . and $140 million , respectively $404.1 million and2015 beganin2016.Becausetheexaminationoftaxyears , andourconsolidatedresultsofoperationsbenefitedfromanimmaterialreduction . . . . , ouraccrualsforthepaymentofinterestandpenaltiestotaled atDecember31,2016 Accordingly . . -2012 fectively settledtheremainingmattersrelatedtotaxyears . . , wereducedourgrossuncertaintaxpositionsbyapproximately commencedduringthefourthquarterof2013.InDecember and2015 . . , respectively $ $ $ 2016 2016 1,066.6 (110.0 (171.9 fect ouref 853.4 (52.5 (15.2 73.4 14.8 (4.3 2013 . $150 million ) ) ) ) ) $ $ $ -2015 isstillintheearly fectively settledcertain fective taxratewas 2015 2015 The U.S.examination 1,066.6 1,338.8 (446.2 131.3 116.6 (24.7 (45.2 13.2 (4.0 relatedtotax ) ) ) ) $134.9 million $ $ $ 2014 2014 1,338.8 1,136.4 126.4 132.6 (16.8 (32.1 35.9 (3.5 (4.2 ) ) ) )

79 FINANCIAL REPORT F80 ) ) ) ) ) ) ) ) — — — 9.9 (6.9 17.4 85.1 45.1 62.6 (77.5 (77.5 (12.7 476.3 347.9 722.1 249.4 249.4 (113.5 (574.8 (238.9 (226.9 2015 1,918.7 1,943.7 1,553.5 1,467.4 $ $ $ $ ) ) ) ) ) ) ) ) — — — 8.4 (6.7 68.9 39.1 53.2 50.9 Benefit Plans Retiree Health (59.8 (59.8 (66.3 (35.8 (20.4 689.3 466.6 458.8 400.3 400.3 (525.1 (216.0 2016 1,943.7 1,961.2 1,467.4 1,494.6 $ $ $ $ ) ) ) ) ) ) ) ) ) (0.4 90.4 32.5 (63.8 404.1 235.9 261.6 334.7 315.7 476.8 (437.8 (132.7 (812.4 (437.8 (169.8 2015 9,835.7 9,995.6 4,552.7 2,861.6 4,585.2 2,861.6 (1,723.6 (1,921.4 12,012.4 11,719.2 $ $ $ $ ) ) ) ) ) ) ) — — — 29.7 21.7 Pension Plans (68.0 Defined Benefit 110.2 853.4 277.7 420.8 806.5 (454.5 (325.0 (454.5 (313.8 2016 9,995.6 4,915.7 2,661.2 4,937.4 2,661.2 (2,276.2 (2,237.9 10,179.7 11,719.2 12,455.9 $ $ $ $ ...... adjustments acquisition adjustments before income taxes consisted of: e use a measurement date of December 31 to develop the change in benefit obligation, change in plan change in in benefit obligation, to develop the change of December 31 date e use a measurement Benefits paid Foreign currency exchange rate changes and other Foreign currency exchange rate changes Fair value of plan assets assumed in Novartis AH Fair value of plan assets assumed in Employer contribution Service cost Actual return on plan assets Fair value of plan assets at end of year Sundry Fair value of plan assets at beginning of year Fair value of plan assets at beginning Benefit obligation at beginning of year Benefit obligation assumed in Novartis AH acquisition Benefit obligation Interest cost Actuarial (gain) loss Other current liabilities Benefits paid Accrued retirement benefits Plan amendments and other Foreign currency exchange rate changes Accumulated other comprehensive (income) loss Net amount recognized Benefit obligation at end of year Funded status balance sheet Amounts recognized in the consolidated Change in plan assets: obligation: Change in benefit Unrecognized net actuarial loss cost Unrecognized prior service (benefit) Net amount recognized W 31 for our at December balance sheets in the consolidated amounts recognized status, and assets, funded were as follows: plans, which retiree health benefit pension and defined benefit Note 14: Retirement Benefits Note 14: The unrecognized net actuarial loss and unrecognized prior service cost (benefit) have not yet been The unrecognized net actuarial loss and unrecognized prior service cost other comprehensive loss at recognized in net periodic pension costs and are included in accumulated December 31, 2016 80 FINANCIAL REPORT F81 The followingrepresentsourweighted-averageassumptionsasofDecember31: W $10.75 billion The totalaccumulatedbenefit obligationforourdefinedbenefitpensionplanswas obligations inexcessofplanassetswereasfollowsat December31: Amounts relatingtodefinedbenefitpensionplansand retireehealthbenefitplanswithaccumulated were asfollowsatDecember31: Amounts relatingtodefinedbenefitpensionplanswithprojectedobligationsinexcessofplanassets as follows: The followingbenefitpayments,whichreflectexpectedfutureservice,asappropriate,aretobe paid on ourfinancialconditionorresultsofoperations. Given thedesignofourretireehealthbenefitplans,healthcare-costtrendratesdonothaveamaterialimpact results, aswelltheassumptionsandtrendratesutilizedbysimilarplans,whereapplicable. financial advisersandeconomists.W current andprojectedmarketconditions;assetreturnsallocations;theviewsofleading benefit plans.Inevaluatingtheexpectedrateofreturn,weconsidermanyfactors,withaprimaryanalysis of W as componentsofnetperiodicbenefitcost: During Total Fair valueofplanassets Accumulated benefitobligation Fair valueofplanassets Projected benefitobligation Retiree healthbenefitplans Defined benefitpensionplans (Percents) Unrecognized priorservice(benefit)cost Unrecognized netactuarialloss

Expected returnonplanassetsfornetbenefitcosts Rate ofcompensationincreasefornetbenefitcosts Rate ofcompensationincreaseforbenefitobligation Discount ratefornetbenefitcosts Discount rateforbenefitobligation e donotexpectanyplanassetstobereturnedusin e annuallyevaluatetheexpectedreturnonplanassetsinourdefinedbenefitpensionandretireehealth . 2017, weexpectthefollowingcomponentsofaccumulatedothercomprehensivelosstoberecognized at December 31,2016 ...... $ and . . e mayalsoreviewourhistoricalassumptionscomparedwithactual 2017 464.5 72.8 2015, respectively . $ 2018 471.3 75.5 . . . 2017 . $ $ . 8,285.2 9,805.4 2019 2016 486.1 Defined Benefit Pension Plans 78.1 2016 4.3 3.9 7.4 3.4 3.4 Defined Benefit % Pension Plans $ $ $ $ Defined Benefit 2015 4.0 4.3 7.4 3.4 3.4 Pension Plans 2,028.1 2020 2015 844.9 505.3 % 80.8 2014 4.9 4.0 8.1 3.4 3.4 $1 294.9 289.5 1.49 billion % $ $ $ 5.4 10,597.0 8,291.2 2021 2016 2016 2016 4.5 4.3 8.0 222.7 526.9 Retiree Health Benefit Plans 83.9 $ $ % Retiree Health Benefit Plans — Retiree Health Benefit Plans and 2015 4.5 4.1 8.0 $ $ $ 2022-2026 10,054.1 % 8,069.7 3,016.3 2015 2015 465.6 245.8 (73.9 (90.0 2014 4.1 5.0 8.5 16.1 — % ) ) 81 FINANCIAL REPORT F82 ) ) ) ) ) — 33.0 85.6 20.7 20.7 (37.6 (37.6 (44.7 533.6 233.8 (282.9 (146.4 2014 2014 $ $ $ $ ) ) ) ) ) — 4.2 62.6 45.1 38.0 (0.3 (91.1 (95.4 48.6 38.0 (91.1 (150.0 2015 for the years 2015 The purpose of $ $ Benefit Plans Retiree Health $ $ ) ) ) Benefit Plans Retiree Health ) ) ) 53.2 39.1 19.1 2.5 (85.8 35.8 19.1 (150.2 (124.6 2016 (85.8 . (132.2 (160.6 2016 $ $ ) $ $ ) ) 3.6 , and $153.3 million 240.9 472.6 282.3 242.8 2.4 3.6 (756.6 2014 89.6 282.3 $ $ 2014 (1,939.3 (1,561.4 ) $ $ This new method uses the spot yield curve This new method uses the spot yield 10.4 315.7 476.8 383.2 403.8 (782.3 2015 0.4 $162.4 million . , those costs were determined using a single , those costs were determined using 10.4 58.8 , $ $ 120.4 573.2 383.2 2015 Pension Plans Defined Benefit ) $ $ Pension Plans Defined Benefit 11.8 ) ) 277.7 420.8 285.6 243.8 (752.1 2016 — , respectively were not material. 11.8 75.6 $ $ 285.6 (725.2 (352.2 $175.0 million 2016 $ $ ...... , and 2014 , and 2014 The new method provides a more precise measure of interest and service The new method provides a more precise ...... fect the measurement of the total benefit obligations as the change in service and fect the measurement of the total benefit 2015 2015 , , , and 2014: ...... , 2015 ...... e have accounted for this change as a change in estimate prospectively e have accounted for this change as ...... December 31, 2016 December 31, 2016 The change did not af cost e have defined contribution savings plans that cover our eligible employees worldwide. e have defined contribution savings plans that cover our eligible employees e provide certain other postemployment benefits primarily related to disability benefits and accrue for the e provide certain other postemployment benefits primarily related to disability Interest cost plan assets Expected return on Service cost Amortization of prior service (benefit) Amortization of prior Recognized actuarial loss Recognized actuarial Net periodic (benefit) cost Net periodic (benefit) Actuarial gain (loss) arising during period Plan amendments during period Amortization of prior service (benefit) cost included in net income Foreign currency exchange rate changes and other periodic (benefit) Components of net cost: Amortization of net actuarial loss included in net income Total other comprehensive income (loss) during period Net pension and retiree health benefit expense included the following components: included the following benefit expense and retiree health Net pension W these plans is generally to provide additional financial security during retirement by providing employees with these plans is generally to provide additional financial security during retirement contributions and the level of our an incentive to save. Our contributions to the plans are based on employee match. Expenses under the plans totaled related cost over the service lives of employees. Expenses associated with these benefit plans for the years related cost over the service lives of employees. Expenses associated ended W ended interest costs is recorded in the actuarial gains and losses recorded in accumulated other comprehensive gains and losses recorded in accumulated other comprehensive interest costs is recorded in the actuarial loss. W As of January 1, 2016, we changed the method used to estimate the service and interest cost components of the method used to estimate the service and interest cost components As of January 1, 2016, we changed health benefit plan costs. the net periodic pension and retiree to interest costs by applying the specific spot rates along the yield curve approach to estimate the service and Previously the projected cash outflows of our obligations. weighted-average discount rate. the projected benefit cash flows and the specific spot yield curve costs by improving the correlation between rates. recognized in other comprehensive income (loss) for the years ended The following represents the amounts December 31, 2016 82 FINANCIAL REPORT F83 redeem theseinvestmentsatNA valued basedonNA diversification acrossmanystrategiesandindividual managers.Planholdingsinhedgefundsare investments aremadethroughlimitedpartnershipinterests primarilyinfund-of-fundsstructurestoensure and acquisitions,typicallyhavelittlecorrelationto overallmarketdirectionalmovements.Ourhedgefund opportunity take longandshortpositionstoreduceoreliminateoverall marketriskswhileseekingaparticularinvestment simultaneously beboughtandsoldatdif tactical, andeventdriven.Relativevaluestrategiesinclude arbitrage,whenthesameassetcan neutral withrespecttomarketmoves.Commongroupings ofhedgefundstrategiesincluderelativevalue, activities tomanageportfoliorisks.Hedgefundstrategiesfocusprimarilyonsecurityselectionandseek be instruments (stocks,bonds,commodities,currencies,derivatives,etc.)usingaverybroadrangeoftrading correlations topublicequityanddebtmarkets.Hedgefundsofteninvestsubstantiallyinfinancialmarket funds seekspecifiedlevelsofabsolutereturnregardlessoverallmarketconditions,andgenerallyhave low Hedge fundsareprivatelyownedinstitutionalinvestmentthatgenerallyhavemoderateliquidity backed obligations,andanyrelatedrepurchaseagreements. emerging marketdebtobligations,corporatebonds,mortgage-backedsecurities,commercialmortgage- Fixed-income investmentsprimarilyconsistoffixed-incomesecuritiesinU.S.treasuriesandagencies, alternative investments. across variousassetmanagersandstyles. Public equitysecuritiesarewelldiversifiedandinvestedinU.S.internationalsmall-to-largecompanies by providingdiversification,whileseekingmoderatetohighreturnsoverthelongterm. private equity-likeinvestments,andrealestate. growth investmentallocationencompassesU.S.andinternationalpublicequitysecurities,hedgefunds, comprises approximately The definedbenefitpensionandretireehealthplanallocationfortheU.S.PuertoRicocurrently the tablesbelow receivables andpayablesarenotmaterialtotheglobalassetportfolio,theirvaluesreflectedwithin limits. W counterparty creditlossislimitedtothecarryingvalueofreceivable,andmanagedwithincontractual exchange-traded andover-the-counterinstruments. expensively thancouldbeaccomplishedthroughtheuseofcashmarkets. exposure toaparticularpublicequity investment policyormanageparticularportfoliorisks.Derivativesareprincipallyusedtoincreasedecrease Our globalbenefitplansmayenterintocontractualarrangements(derivatives)toimplementthelocal significant concentrationofrisk. addition, withinacategoryweusedif W are contractuallysettoalignwithourinvestmentobjectives,ensureriskcontrol,andlimitconcentrations. prohibited investments.However above-average degreeofriskintheassetportfolios. global investments.Giventhelong-termnatureofourliabilities,theseplanshaveflexibilitytomanagean relationship totherespectiveliabilities.U.S.andPuertoRicoplansrepresentapproximately Our benefitplaninvestmentpoliciesaresetwithspecificconsiderationofreturnandriskrequirementsin Benefit PlanInvestments e manageourportfoliotominimizeconcentrationofriskbyallocatingfundswithinassetcategories.In e expectallofourcounterpartiestomeettheirobligations. . Eventstrategyopportunitiescanevolvefromspecific companyannouncementssuchasmergers . Vs calculatedbyeachfundorgeneralpartner 80 percent V , withinindividualinvestmentmanagermandates,restrictionsandlimitations . growthinvestmentsand , fixedincome,commodity ferent managerswithvariousmanagementobjectivestoeliminateany ferent prices,achievinganimmediateprofit. The remainingportionofthegrowthportfolioisinvestedinprivate These portfolioallocationsareintendedtoreduceoverallrisk The maximumexposuretoeitheramarketor At theinvestment-policylevel,therearenospecifically 20 percentfixed-incomeinvestments. , orcurrencymarketmorerapidlyless , asapplicable,andwehavetheabilityto The grossvaluesofthesederivative The plansutilizeboth T actical strategiesoften 80 percentofour The . Hedge 83 FINANCIAL REPORT F84 . Real estate , independent appraisal, and , credit, liquidity and other risks , credit, liquidity and V provided by the fund manager are classified V provided by the fund manager are Vs, discounted cash flow valuations, Vs, discounted cash Vs are developed with inputs including discounted cash flow Vs are developed with inputs including The vast majority of these private partnerships provide us with annual audited financial of these private partnerships provide The vast majority These NA alues provided by the partnerships are primarily based on analysis of and judgments about the underlying on analysis of and judgments about the partnerships are primarily based alues provided by market comparable analyses. equivalents and mark-to-market value of derivatives. Other assets include cash and cash contract is invested in investment-grade publicly traded equity The cash value of the trust-owned insurance and fixed-income securities. investments, and real estate, which are discussed above, we Other than hedge funds, private equity-like approach using quoted market values, significant other observable determine fair values based on a market or liabilities, or discounted cash flow analyses. inputs for identical or comparable assets comparable market valuations, and may also include adjustments for currency valuations, and may also include comparable market as applicable. accounting procedures consistent with applicable their compliance with fair valuation statements including standards. and private holdings. Real estate investments in registered investment Real estate is composed of both public are classified as Level 1 on the fair value hierarchy companies that trade on an exchange value on the basis of NA investments in funds measured at fair as such. Private equity-like investment funds typically have low liquidity and are made through long-term partnerships long-term partnerships and are made through have low liquidity funds typically investment Private equity-like traded entities. Underlying non-publicly invested in primarily in pools of capital that invest or joint ventures Private situation investing. and special investing), buyout, capital (early stage include venture investments long to create increased private companies then reorganize acquire and firms typically equity management require a 10-15 years, and of approximately have a limited life funds usually Private equity-like term value. made both directly Our private investments are commitment from their limited partners. minimum investment styles and broad diversification of management fund-of-funds structures to ensure into funds and through the value investments are valued using portfolio. Plan holdings in private equity-like assets across the our reporting date. flows and significant events through adjusted for known cash reported by the partnership, V investments. Inputs to these valuations include underlying NA to these valuations include underlying investments. Inputs 84 FINANCIAL REPORT F85 2016 No materialtransfersbetweenLevel1,2,or 3occurredduringtheyearended (1) asset categoryareasfollows: The fairvaluesofourdefinedbenefitpensionplanandretireehealthassetsas Real estate Private alternativeinvestments: Fixed income: Public equitysecurities: Defined BenefitPensionPlans Private alternativeinvestments: Other Total Other Real estate Cash valueoftrustowned Fixed income: Public equitysecurities: Retiree HealthBenefitPlans Total Asset Class Equity-like funds Hedge funds Emerging markets repurchase agreements Developed markets- Developed markets International U.S. Equity-like funds Hedge funds Emerging markets Developed markets International U.S. classified inthefairvaluehierarchy Certain investmentsthataremeasuredatfairvalueusingtheNA insurance contract . . . The activityintheLevel3investmentsduringyear ended ...... $ $ $ $ 10,179.7 (1,024.4 1,355.0 2,904.6 2,631.3 2,285.6 1,208.3 1,961.2 450.0 504.1 402.4 261.0 116.0 671.1 146.3 Total 42.6 45.5 34.8 68.0 38.7 ) $ $ $ $ Quoted Pricesin Identical Assets Markets for 1,672.7 V pershare(oritsequivalent)asapracticalexpedienthavenotbeen (Level 1) Active 344.5 770.5 165.5 365.0 131.6 27.2 28.1 34.8 16.7 52.0 — — — — — — — — — Fair ValueMeasurementsUsing $ $ $ $ December 31,2016 (1,024.4 Observable Significant 1,983.0 1,208.3 1,247.0 1,288.6 (Level 2) Inputs 180.1 108.1 18.2 58.4 0.2 3.7 — — — — — — — — — ) $ $ $ $ Unobservable Significant (Level 3) Inputs December 31,2016 16.8 17.1 wasnotmaterial. 0.3 1.7 1.7 — — — — — — — — — — — — — — — December 31, $ $ $ $ Asset V V Investments alued atNet 1,338.0 2,904.6 1,515.1 7,242.9 269.6 621.1 236.9 159.6 261.0 198.0 114.3 539.3 24.4 13.7 22.0 94.3 9.6 alue — — — by (1) 85 FINANCIAL REPORT F86 (1) by — — 8.3 alue 21.9 93.2 21.6 17.1 102.8 234.2 564.0 320.5 211.5 351.5 272.3 537.2 1,510.2 3,070.8 1,204.5 7,467.2 fect on alued at Net Investments V Asset V $ $ $ $ patent litigation ® December 31, — — — — — — — — — — — — — — 1.7 0.3 1.7 16.8 17.1 was not material. December 31, 2015 December Alimta Inputs (Level 3) Significant Unobservable $ $ $ $ — — — — — — — — — 0.5 0.3 94.4 52.9 15.3 745.9 151.5 992.1 The most significant of these are Inputs 1,208.2 1,276.9 (Level 2) Significant Observable December 31, 2015 $ $ $ $ Fair Value Measurements Using Fair Value Measurements — — — — — — — — 2.4 to our defined benefit pension plans to satisfy 33.2 25.0 18.2 51.5 180.1 751.5 329.6 255.6 127.9 Active 1,519.2 (Level 1) V per share (or its equivalent) as a practical expedient have not been Markets for Identical Assets Quoted Prices in Quoted Prices $ $ $ $ $35 million , but could possibly be material to our consolidated results of Additional discretionary contributions are not expected to be . 33.2 42.6 40.1 61.2 36.9 104.5 472.3 272.3 414.3 541.1 701.5 144.7 Total 1,208.2 2,261.7 1,309.9 3,073.2 1,221.6 9,995.6 1,943.7 $ $ $ $ . , we believe that, except as noted below with respect to the ...... It is not possible to determine the outcome of these matters, and we cannot reasonably . It is not possible to determine the outcome of these matters, and we cannot ...... The activity in the Level 3 investments during the year ended ...... e are a party to various legal actions and government investigations. Certain investments that are measured at fair value using the NA classified in the fair value hierarchy International Developed markets Emerging markets Equity-like funds U.S. Hedge funds Equity-like funds U.S. International Developed markets Hedge funds Emerging markets Asset Class Cash value of trust owned insurance contract Fixed income: Real estate Other Defined Benefit Pension Plans Defined Benefit Pension Public equity securities: investments: Private alternative Real estate Other Total Retiree Health Benefit Plans Public equity securities: Fixed income: Private alternative investments: Total

operations in any one accounting period. and administrative proceedings, the resolution of all such matters will not have a material adverse ef and administrative proceedings, the resolution of all such matters will not our consolidated financial position or liquidity No material transfers between Level 1, Level 2, or Level 3 occurred during the year ended No material transfers between Level 1, Level 2, or Level 3 occurred during (1) 2015 In 2017, we expect to contribute approximately minimum funding requirements for the year described below in excess of amounts accrued for any estimate the maximum potential exposure or the range of possible loss of these matters; however W Note 15: Contingencies significant. asset category are as follows: asset category The fair values of our defined benefit pension plan and retiree health plan assets as of health plan assets plan and retiree benefit pension of our defined The fair values 86 FINANCIAL REPORT F87 decisions areexpectedinmid-2017. additional genericcompanieshavefiledpetitionsand joinedtheseproceedings. Generics, LLCandSandozInc.seeking In June2016,theUnitedStatesPatentand their alternativesaltformsofpemetrexedproduct. In 2016wefiledlawsuitsalleginginfringementagainst Dr remaining caseshavebeenadministrativelyclosed. litigation, andseveralpartieshaveagreedtobebound bytheoutcomeof EPO decisionupholdingthe patentisnowfinal. lodged anappeal.InOctober 2015thegenericmanufacturerswithdrewappeal. vitamin regimenpatent. Generic manufacturersfiled anoppositiontotheEuropeanPatentOf European PatentLitigationand patents arevalidandinfringed.Someofthesecaseshavebeenstayedpendingtheoutcome From 2012through2016,wefiledsimilarlawsuitsagainstother court’ substantive decisions.InJanuary2017,theU.S.Courtof be infringedbythegenericchallengers'proposedproducts. infringement inMay2015.InSeptember2015,thedistrictcourtruledthatvitaminregimenpatentwould patent arevalid. determine patentvalidity T APP In October2010,wefiledalawsuitintheU.S.DistrictCourtforSouthernofIndianaagainst Pharmaceuticals, LLC(APP). 2022) havebeenfiledbyanumberofcompanies,including prior totheexpirationofourvitaminregimenpatent(expiringin2021pluspediatricexclusivityexpiring than ten out intheDrugPriceCompetitionandPatent W U.S. PatentLitigationand product intherelevantmarket. that alossofexclusivityfor adverse impactonourfutureconsolidatedresultsofoperations,liquidity accordingly generic manufacturers.However infringed, orboth.W Alimta priortotheexpirationofourvitaminregimenpatents,allegingthatthosepatentsareinvalid,not A Alimta PatentLitigationand liability losscontingenciesareaccruedwhenbothprobableandreasonablyestimable. regarding productusage.Legaldefensecostsexpectedtobeincurredinconnectionwithsignificant of theircosts.W for certainproductliabilityclaimsincurredbutnotfiledtotheextentwecanformulateareasonableestimate extent theyarebothprobableandreasonablyestimablebasedontheinformationavailabletous.W product liabilityclaimscurrentlyassertedagainstus,wehaveaccruedforourestimatedexposurestothe a grossbasisasliabilitiesandassets,respectively Litigation accruals,environmentalliabilities,andtherelatedestimatedinsurancerecoverablesarereflectedon eva/APP numberofgenericmanufacturersareseekingapprovalsinvariouscountriestomarketforms e areengagedinvariousU.S.patentlitigationmattersinvolving andtwootherdefendantsseekingrulingsthattheU.S.vitaminregimenpatentisvalidinfringed(the s decisionsconcerningvalidityandinfringement. Abbreviated NewDrug litigation). , wecanprovidenoassurancethatwillprevail. e estimatetheseexpensesbasedprimarilyonhistoricalclaimsexperienceanddata The U.S.DistrictCourtfortheSouthernofIndianaheldahearingonissue e believeour A trialoccurredin The OppositionDivisionof theEPOupheldpatentandgenericmanufacturers . InMarch2014,thecourtruledthatassertedclaimsofvitaminregimen Administrative Proceedings Alimta wouldresultinarapidandseveredeclinefuturerevenuesforthe These companieshavealsoallegedthepatentisinvalid. Administrative Proceedings Administrative Proceedings Applications (ANDAs)seekingapprovaltomarketgenericversionsof , itisnotpossibletodeterminetheultimateoutcomeofproceedings,and Alimta vitaminregimenpatentsarevalidandenforceableagainstthese August 2013;thesoleissuebeforedistrictcourtatthattimewasto inter partes T rademark Of T erm Restoration , onourconsolidatedbalancesheets.Withrespecttothe

review (IPR)ofourvitaminregimenpatent.Several . Reddy'sLaboratoriesandHospirainresponseto Appeals fortheFederalCircuitaf fice (USPT T T eva ParenteralMedicines,Inc.(T eva and An unfavorableoutcomecouldhaveamaterial Act of1984(theHatch-W ANDA Alimta broughtpursuanttoproceduresset O) grantedpetitionsbyNeptune fice's (EPO)decisiontogrant usa APP defendantsseekingarulingthatour , andfinancialposition.W appealedallofthedistrictcourt’ T eva/APP The finalwrittenIPR As aresult,theoriginal litigation;the axman firmed thedistrict eva) and Act). More e expect e accrue T eva/APP Alimta T APP eva, s

87 FINANCIAL REPORT F88

e have , . Following e are Actavis’ Actavis' requests o date, each T Appeal proceedings April 2017. , France, and Spain. W , France, and Spain. e appealed, and in June 2015, e appealed, and in Actavis companies (collectively Actavis companies eva, which had stated its intention to eva, which had stated its intention to Actavis companies in Germany T Alimta vitamin regimen patent would be Alimta vitamin regimen These patents provide intellectual property The defendants appealed, and after a hearing in The defendants appealed, and after hearing is scheduled for hearing is scheduled . A Alimta were approved in Japan in 2016. fice (JPO). In November 2015, the JPO issued written decisions s decisions are final. Actavis Group ehf and other ehf and other Actavis Group Alimta has agreed not to proceed to pricing approval. The remaining invalidation trials initiated by the other parties are Alimta) diluted in saline solution would not infringe the vitamin regimen the vitamin would not infringe in saline solution Alimta) diluted Appeal overturned the trial court and ruled that our vitamin regimen patent Appeal overturned the trial court and , France, and Spain. In May 2014, the trial court ruled that the vitamin ruled that the 2014, the trial court and Spain. In May , France, Actavis' products as proposed to be diluted in saline solution prior to the as proposed to be diluted in saline Actavis' products ferent aspects of the judgment. ferent aspects of the , and ratiopharm GmbH, a subsidiary of , and ratiopharm GmbH, a subsidiary Appeal to reconsider infringement based on its judgment. Appeal to reconsider infringement based Actavis returned to the lower court seeking a declaration of non-infringement for a the lower court seeking a declaration Actavis returned to Alimta would not be infringed by commercialization of alternative salt forms of of alternative by commercialization not be infringed Alimta would Appeal reversed the trial court's decision granting declarations of non-infringement over the of non-infringement over trial court's decision granting declarations Appeal reversed the AG (Hexal), which had stated its intention to launch a generic disodium salt product diluted in AG (Hexal), which had stated its intention Alimta until June 2021. Alimta in the U.K., Italy Alimta in Administrative Proceedings April 2014, the German trial court ruled in our favor April 2014, the German trial court ruled Actavis considers the issues remanded by the German Federal Supreme Court or the injunctions are Actavis considers the issues remanded ferent proposed product diluted in dextrose solution. In February 2016, the trial court ruled that In February 2016, the trial court ruled diluted in dextrose solution. ferent proposed product e do not anticipate any generic entry into the German market at least until the Court of e do not anticipate any generic entry e commenced separate infringement proceedings against certain e commenced separate infringement against lifted. in various national courts of other European countries. W Additional legal proceedings are ongoing products have launched in a major European market. aware that at least two generic pemetrexed a trial, in March 2015, the German Court of by a dipotassium salt form of pemetrexed. In June 2016, the German in Germany would not be infringed appeal, vacating the prior decision denying infringement, and returned Federal Supreme Court granted our the case to the Court of and June 2016, the German courts confirmed preliminary injunctions In separate proceedings, in May 2016 against Hexal of pemetrexed product diluted in dextrose solution. Hexal has launch a proposed alternative salt form of our vitamin regimen patent before the German Federal Patent separately filed a challenge to the validity court. preliminary injunctions against two other companies that had stated In late 2016, the German courts issued alternative salt form of pemetrexed product diluted in dextrose solution. their intentions to launch a proposed W saline solution in Germany Actavis) filed litigation asking for a declaratory judgment that commercialization of certain salt forms of of certain salt forms judgment that commercialization for a declaratory litigation asking Actavis) filed in (the active ingredient pemetrexed patents for patents for regimen in December 2015. W expiration of the compound patents pemetrexed, after the U.K. Court of of infringed by commercialization and U.K. Supreme Court granted our in June 2021. In February 2016, the patent's expiration dif for permission to appeal In parallel proceedings, patent in the U.K., Italy of this product would not infringe the commercialization ruling. sought to appeal this W Alimta vitamin regimen patents in those countries, ruling that the patents in those countries, ruling Alimta vitamin regimen dif Japanese Three separate demands for invalidation of our two vitamin regimen patents, involving several companies, Three separate demands for invalidation of our two vitamin regimen patents, have been filed with the Japanese Patent Of which had been joined by three in the invalidation trial initiated by Sawai Pharmaceutical Co., Ltd. (Sawai), 2017, the Japan Intellectual Property other companies, upholding both vitamin regimen patents. In February the invalidation trials initiated by High Court confirmed the decisions of the JPO and ruled in our favor in accepted to the Japan Supreme Court, Sawai. If generic challengers do not petition or if their petitions are not the Japan Intellectual Property High Court’ protection for becomes final. currently suspended and are likely to remain so until the High Court decision Notwithstanding our patents, generic versions of manufacturer of the generic version of In addition, in the United Kingdom (U.K.), in the United Kingdom In addition, 88 FINANCIAL REPORT F89 vigorously W (Epp v Inc., etal.andCarrierv Canada relatedto W cases; however agreement. W manufacture, use,orsaleof and indemnifyusagainstourlossesexpenseswithrespecttotheU.S.litigationarisingoutof and usfollowingcompletionoftheresolutionprogram.Ouragreementwith involving U.S. productliabilitylawsuitsinvolving In coordinated statecourtproceedinginCaliforniaoraIllinois. been consolidatedinfederalmultidistrictlitigationtheW actions allegethat Actos, whichweco-promotedwith as adefendantinapproximately W Actos revenues fortheproductinrelevantmarket. we willprevail.W not possibletodeterminetheoutcomeofproceedings,andaccordingly W pending theoutcomeofthisappeal. W Daiichi SankyoandUbehaveappealedthesedecisionstotheU.S.Courtof method patents.InSeptember2016,theUSPT In 2015,severalgenericpharmaceuticalcompaniesfiledpetitionswiththeUSPT consolidated. against thesecompanies,seekingarulingthatthepatentsarevalidandinfringed. Beginning inMarch2014,wefiledlawsuitstheU.S.DistrictCourtforSouthernofIndiana litigation andanticipatethatagenericversioncouldlaunchasearlymid-August2017. Ef aspirin, andallegingthepatentsareinvalid.Oneofthese expiration ofDaiichiSankyo’ dif litigation involvingEf W Effient PatentLitigationand e believetheselawsuitsarewithoutmerit,andwe e arealsonamedalongwith e havebeennamedalongwith e believetheEf e expectafinaldecisioninlate2017. e, alongwithDaiichiSankyo,Inc.,andUbeIndustries(Ube)areengagedinU.S.patent fient (expiringin ferent companieshavesubmitted April 2015, ® . T ProductLiabilityLitigation akeda Canadaetal. Actos areincludedintheresolutionprogram,theremaybeadditionalcasespendingagainst . T e believeweareentitledtofullindemnificationofourlossesandexpensesintheU.S. akeda announcedtheywillpayapproximately , therecanbenoguaranteewewillultimatelysuccessfulinobtainingfullindemnification. e expectalossofexclusivityforEf fient patentsarevalidandenforceableagainstthesegenericmanufacturers.However Actos, including April 2017)wasinvalid.W Actos causedorcontributedtotheirbladdercancer fient broughtpursuanttoproceduressetoutintheHatch-W s andUbe’ Actos andotherrelatedexpensesinaccordancewiththetermsof . EliLillyetal.),oneinQuebec(Whytev ). W Administrative Proceedings T akeda asadefendantin 6,500 productliabilitycasesintheU.S.relatedtodiabetesmedication e promoted T akeda ChemicalIndustries,Ltd.,and T two inOntario(Casseresetal.v akeda intheU.S.from1999until2006.Ingeneral,plaintif ANDAs seekingapprovaltomarketgenericversionsofEf Actos. s patents(expiringin2023)coveringmethodsofusingEf The consolidatedlawsuitiscurrentlystayedwithrespecttoallparties e haveenteredintoasettlementrelatingtothecompoundpatent Actos inCanadauntil2009. Although thevastmajorityofU.S.productliabilitylawsuits O determinedthatthemethod-of-usepatentsareinvalid. fient wouldresultinarapidandseveredeclinefuture T four ANDAs alsoallegedthatthecompoundpatentfor akeda arepreparedtodefendagainstthem estern DistrictofLouisianaorarependingina purportedproductliabilityclassactionsin $2.4 billion . T akeda PharmaceuticalNorth . Almost alloftheactivecaseshave T toresolvethevastmajorityof akeda af . EliLillyetal.),andonein , wecanprovidenoassurancethat T Appeals fortheFederalCircuit. akeda callsfor axman O, requestingIPRofthe filiates (collectively These caseshavebeen Act. Morethan10 T akeda todefend fs inthese fient priortothe fient with America, , Alberta T T akeda) akeda , itis 89 FINANCIAL REPORT F90 ) plus ork and There can Y The . These include The district court fs allege that some Appeals for the Ninth Appeals for the Ninth fs filed in various federal fs filed in various federal , Lilly Brasil maintains that as of December 31, 2016 fs. ) involving Cymbalta. ) involving plaintif The plaintif 1,470 The first individual product liability cases The first individual product liability cases Appeals for the Ninth Circuit. Oral Appeals for the Ninth $305 million Angeles. . In May 2014, the labor court judge ruled against . In May 2014, the labor court judge . Eli Lilly and Company . Eli Lilly , injunctive, and monetary relief for various alleged economic relief for various alleged economic , injunctive, and monetary fs filed a petition with the U.S. Court of fs filed a petition with f cases filed in California state court, centralized in a California f cases filed in California state court, fected years and their children born during and after this period. fected years and their children born 30 lawsuits filed in the same court by individual former employees Saavedra et al v Saavedra lawsuits involving approximately lawsuits involving Brazilian real (approximately 140 fs are appealing to the U.S. Court of fs are appealing to , that a final settlement will be reached. 1.0 billion ork, and sought declaratory Y The district court denied that motion for class certification in July 2015. that motion for class certification The district court denied fs filed a second motion for certification under the consumer protection acts of New for certification under the consumer fs filed a second motion 40 individual and multi-plaintif August 2015 and resulted in defense verdicts against four plaintif August 2015 and resulted in defense The judge's ruling orders Lilly Brasil to undertake several actions of unspecified financial impact, The judge's ruling orders Lilly Brasil Product Liability Litigation Product e strongly disagree with the decision and filed an appeal in May 2014. ® . fs, purporting to represent a class of all persons within the U.S. who purchased and/or paid for who purchased within the U.S. a class of all persons to represent fs, purporting fs' motion for class certification. Plaintif fs' motion for class e believe all these Cymbalta lawsuits and claims are without merit and are prepared to defend against them and claims are without merit and are prepared to defend against them e believe all these Cymbalta lawsuits named in approximately e are named in approximately which provides for a comprehensive resolution of nearly all of these e have reached a settlement framework e are also named in approximately them vigorously e believe these lawsuits are without merit and are prepared to defend against Massachusetts. to benzene and heavy metals; however employees at the facility were exposed used in the facility these alleged contaminants were never Lilly Brasil. for the employees and contractors who worked at the Cosmopolis including paying lifetime medical insurance the af facility more than six months during losses that could arise in the While we cannot currently estimate the range of reasonably possible financial the total financial impact of the event we do not ultimately prevail in the litigation, the judge has estimated ruling to be approximately Brazil–Employee Litigation Brasil Limitada (Lilly Brasil), is named in a lawsuit brought by the Labor Our subsidiary in Brazil, Eli Lilly do to Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm Attorney for 15th Region in the Labor by exposure to heavy metals at a former Lilly manufacturing facility employees and former employees caused company between 1977 and 2003. in Cosmopolis, Brazil, operated by the vigorously W personal injury claims, filed or unfiled, alleging injuries from discontinuing treatment with Cymbalta. personal injury claims, filed or unfiled, plaintif Massachusetts, statutes of four states, California, claims under the consumer protection Cymbalta, asserted Missouri, and New which was of the denial of class certification, permission to file an interlocutory appeal Circuit requesting denied. Plaintif and plaintif dismissed the suit in late 2017. argument is expected W were tried in W be no assurances, however Cymbalta In October 2012, we were named as a defendant in a purported class-action lawsuit in the U.S. District Court in the U.S. District class-action lawsuit in a purported named as a defendant 2012, we were In October ( District of California for the Central injuries arising from discontinuing treatment with Cymbalta. In December 2014, the district court denied the In December 2014, the district discontinuing treatment with Cymbalta. injuries arising from plaintif pending in Los Judicial Counsel Coordination Proceeding and state courts alleging injuries arising from discontinuation of treatment with Cymbalta. and state courts alleging injuries arising approximately interest. W W making similar claims. W Product Liability Insurance could become subject to large Because of the nature of pharmaceutical products, it is possible that we restrictive market for product liability numbers of product liability and related claims in the future. Due to a very marketed products. insurance, we are self-insured for product liability losses for all our currently 90 FINANCIAL REPORT F91 years endedDecember31,wereasfollows: The taxef (1) The followingtablesummarizestheactivityrelatedtoeachcomponentofothercomprehensiveincome(loss): Note 16:OtherComprehensiveIncome(Loss) (loss) items Provision forincometaxes relatedtoothercomprehensiveincome Effective portionofcashflowhedges Defined benefitpensionandretireehealthplans Unrealized netgains(losses)onsecurities Foreign currencytranslationgains(losses) Tax (expense)benefit 2016 Ending balanceatDecember31, Balance atDecember31,2015 Balance atDecember31,2014 Beginning balanceatJanuary1,2014 (Amounts presentednetoftaxes)

loss attributabletocontrollinginterestand (loss) Net othercomprehensiveincome loss accumulated othercomprehensive Net amountreclassifiedfrom before reclassifications Other comprehensiveincome(loss) (loss) Net othercomprehensiveincome loss accumulated othercomprehensive Net amountreclassifiedfrom before reclassifications Other comprehensiveincome(loss) (loss) Net othercomprehensiveincome loss accumulated othercomprehensive Net amountreclassifiedfrom before reclassifications Other comprehensiveincome(loss) interest. Accumulated othercomprehensivelossasofDecember31,2016consists (1) ...... fects onthenetactivityrelatedtoeachcomponentof othercomprehensiveincome(loss)forthe ...... $48.2 million . $ $ Gains (Losses) Translation (1,867.3 (1,360.2 Currency Foreign . . (507.1 (581.6 (861.8 (861.8 (498.4 (961.4 (961.4 463.0 ofaccumulatedothercomprehensiveincomeattributabletonon-controlling 74.5 — — ) ) ) ) ) ) ) ) ) $ $ Gains (Losses) Unrealized Net on Securities . (128.2 (105.5 (210.7 213.9 206.7 105.2 224.0 205.2 (89.6 10.1 38.6 99.7 7.2 $5,274.0 million ) ) ) ) $ $ $ $ Defined Benefit Retiree Health Benefit Plans Pension and (1,098.5 (3,012.1 (3,402.0 (3,371.6 (2,489.1 2016 (359.5 (518.7 (912.9 389.9 234.9 155.0 185.6 159.2 153.3 (10.6 (89.2 (70.6 (4.1 ofaccumulatedothercomprehensive ) ) ) ) ) ) ) ) ) ) ) ) $ $ $ $ Cash Flow Portion of Effective Hedges 2015 (121.9 (218.5 (191.1 (183.0 (210.9 (181.8 (27.4 (36.9 (15.2 14.6 48.5 (2.0 (2.2 (9.3 9.5 5.9 7.6 9.8 ) ) ) ) ) ) ) ) ) ) ) ) $ $ $ $ Comprehensive Accumulated (4,580.7 (3,991.8 (1,989.1 (1,969.9 (5,225.8 (2,002.7 Other 2014 (895.8 (588.9 (705.1 (645.1 Loss 476.6 116.2 250.7 414.7 (19.2 56.7 5.2 — ) ) ) ) ) ) ) ) ) ) ) 91 FINANCIAL REPORT F92 ) ) ) — — 2014 148.8 (368.3 (340.5 (121.0 $ $ , we changed ) ) ) fect cash flows; fect cash — After considering (87.0 2015 166.7 161.2 (341.5 (100.6 enezuela which resulted $ $ Statements of Operations Other—net, (income) expense Income taxes Other—net, (income) expense Other—net, (income) expense Income taxes ) ) Affected Line Item in the Consolidated Affected Line Item in (1) (1) — , published exchange rates, and ) ) ) ) ) ) 84.8 2016 203.9 185.2 — (195.6 (108.7 5.9 (34.0 (19.2 (83.4 $ $ 303.0 269.0 185.6 113.4 2014 (324.1 (324.1 (210.7 $ $ of foreign currency translation losses. ) ) ) ) ) , other income is primarily related to net gains on 9.5 12.0 69.1 enezuelan economy (80.7 116.2 421.2 340.5 234.9 2015 (197.3 (105.6 (209.3 (128.2 ficial rate was discontinued in 2016. $74.5 million $ $ ) ) ) ) , this of Year Ended December 31, Year Ended December 7.2 (4.0 84.3 11.2 27.3 , 2015, and 2014 (16.1 (71.5 (74.0 250.7 304.7 230.7 159.2 2016 2014 also related to the transfer to Boehringer Ingelheim of our license enezuela and the significant deterioration of the bolívar ...... $ $ ...... Prior to this change, we used the Supplementary Foreign Currency Net of tax Net of tax Tax benefit , the assets and liabilities of foreign operations are translated into U.S. dollars using the into U.S. dollars using are translated foreign operations and liabilities of , the assets December 31, 2016 included primarily December 31, 2016 Tax expense fects of foreign currency translation gains and losses related to our foreign currency- losses related to gains and currency translation fects of foreign ...... (2) ...... Total before tax Total before tax ...... Accumulated Other , net of tax Realized gains, net Prior service benefits, net Prior service benefits, Actuarial losses Impairment losses Details about Comprehensive Loss Components Comprehensive Loss ). components are included in the computation of net periodic pension cost (see Note 14 These accumulated other comprehensive loss Amount for year ended Unrealized gains/losses on available-for-sale securities: Total reclassifications for the period, net of tax Amortization of retirement benefit items: Other Venezuela charge Debt extinguishment loss (Note 10) Other income Other–net, (income) expense Interest income Interest expense In 2016, due to the financial crisis in V in V the exchange rate used to translate the assets and liabilities of our subsidiaries in a charge of $203.9 million Administration System (SICAD) rate; however the limited amount of foreign currency exchanged, we changed to the Divisa Complementaria (DICOM) rate. the limited amount of foreign currency exchanged, we changed to the Divisa For the years ended investments (Note 7). Other income in 4). rights to co-promote linagliptin and empagliflozin in certain countries (Note several factors, including the future uncertainty of the V Other–net, (income) expense consisted of the following: Note 17: Other–Net, (Income) Expense (1) (2) denominated notes, cross-currency interest rate swaps, and other foreign currency exchange contracts exchange contracts foreign currency rate swaps, and other interest notes, cross-currency denominated for foreign currency were not provided 7), income taxes hedges (see Note as net investment designated Generally translation. do not af rates generally changes in exchange those operations, rate. For current exchange in the consolidated in shareholders' equity rather than translation adjustments are made therefore, resulting statements of operations. loss were as follows: of accumulated other comprehensive Reclassifications out Except for the tax ef Except for 92 FINANCIAL REPORT F93 foreign currencyexchangerates. operations, andourresultsofoperationsthevalueforeignassetsareaf W do notreportassetinformationbyoperatingsegment. operating decisionmakerdoesnotreviewanyassetinformationbysegmentand,accordingly health businessareintermixedwiththoseofthepharmaceuticalproductsbusiness. W December 31,2016 revenue. Further our threelargestwholesalerseachaccountedforbetween and otherhealthcareprofessionals,hospitals.Fortheyearsended Most ofourpharmaceuticalproductsaredistributedthroughwholesalersthatservepharmacies,physicians results ofoperationsfromNovartis animals. other productsforlivestockandpoultry animals. manufacturing, marketing,andsalesofanimalhealthproductsworldwideforbothfoodcompanion Our animalhealthsegment,operatingthroughourElancodivision,includesthedevelopment, 2017. October 2017,andwehaveauthorizedonegenericmanufacturertoenterthemarketasearlymid-August the U.S.andmajorEuropeanmarketsinNovember2017.W revenue fortheproduct.W Japan inJune2016. 2015 and revenue. W 2014, bothofwhichresultedintheimmediateentrygenericcompetitorsandarapidseveredecline Cymbalta inmajorEuropeancountries2014andlostpatentexclusivitytheU.S.forEvista endocrinology marketing, andsalesofhumanpharmaceuticalproductsworldwideinthefollowingtherapeuticareas: Our humanpharmaceuticalproductssegmentincludesthediscovery financial statements. policies oftheindividualsegmentsaresameasthosedescribedthroughoutnotestoconsolidated Performance isevaluatedbasedonprofitorlossfromoperationsbeforeincometaxes. operating segmentsaredistinguishedbytheultimateenduserofproduct—humansoranimals. W Note 18:SegmentInformation e areexposedtotheriskofchangesinsocial,political,andeconomicconditionsinherentforeign e manageourassetsonatotalcompanybasis,notbyoperatingsegment,astheofanimal e havetwooperatingsegments—humanpharmaceuticalproductsandanimalhealthproducts.Our Animal healthproductsincludeRumensin The animalhealthsegmentamountsfortheyearsended April 2016,respectively e alsolostpatentexclusivityfortheschizophreniaandbipolarmaniaindicationsinDecember , neuroscience,oncology , theyeachaccountedforbetween and2015 The lossofexclusivityforZyprexainJapanhascausedarapidandseveredecline e willloseourpatentprotectionforStrattera . Animal healthproductsaresoldprimarilytowholesaledistributors. , forZyprexa AH, whichwasacquiredonJanuary1,2015(Note3). , aswell , cardiovascular ® inJapan.GenericversionsofZyprexawerelaunched T ® , Posilac rifexis 12 percent , andother ® 8 percentand , Comfortis ® e willalsoloseexclusivityforEf , Maxiban and21percent . W December 31,2016 e lostourdatapackageprotectionfor , development,manufacturing, ® ® , andotherproductsforcompanion ® intheU.S.May2017andCialis December 31,2016 ,

17 percentofconsolidatedtotal T ylan ofaccountsreceivableas ® , Denagard fected byfluctuationsin Therefore, ourchief and2015includethe The accounting ® , 2015 fient intheU.S. , Optaflexx ® inMarch , and ® , we , and 2014 ® in , 93 FINANCIAL REPORT F94 10.2 75.6 328.8 419.8 672.9 373.3 152.1 522.2 240.3 738.5 206.0 287.0 2,785.2 1,322.0 1,400.1 6,939.0 2,792.0 3,393.0 2,291.0 3,053.5 1,614.7 1,037.3 3,596.5 2,346.6 2014 17,269.0 19,615.6 $ $ 237.3 248.7 356.8 696.4 485.0 383.8 147.9 523.0 234.3 784.0 940.3 183.5 227.7 2,841.9 1,348.3 1,307.4 7,036.8 2,493.1 3,509.8 2,310.7 3,068.0 1,027.6 2,935.4 3,181.0 2015 16,777.7 19,958.7 $ $ 172.4 925.5 436.6 913.6 687.0 614.1 137.4 535.2 218.6 930.5 854.7 725.3 209.8 313.6 2,768.8 1,500.0 1,365.9 8,082.8 2,283.3 3,721.8 2,471.6 3,225.4 2,720.3 3,158.2 2016 18,063.9 21,222.1 $ $ ...... (1) ...... ® ® ® ...... ® ...... ® rulicity ...... Evista Other Endocrinology Cyramza Other Cardiovascular Zyprexa Forteo Humulin T Trajenta Alimta Erbitux Other Oncology Cialis Effient Cymbalta Strattera Other Neuroscience Humalog Total Endocrinology Total Oncology Total Cardiovascular Total Neuroscience Other human pharmaceutical products Neuroscience: Endocrinology: Oncology: Cardiovascular: Total human pharmaceutical products Animal health products Human pharmaceutical products: Human pharmaceutical Revenue Segment revenue—to unaffiliated customers: Segment revenue—to The following table summarizes our revenue activity: our revenue table summarizes The following 94 FINANCIAL REPORT F95 Depreciation andsoftwareamortizationexpenseincludedinoursegmentprofitswasasfollows: (2) (1) Numbers maynotaddduetorounding. segment profits Total depreciationexpenseandsoftwareamortization includedin Animal healthproducts Human pharmaceuticalproducts Consolidated incomebeforetaxes before taxes: Reconciliation oftotalsegmentprofitstoconsolidatedincome Total segmentprofits Segment profits: W Cymbaltarevenuesbenefitedfromreductionstothereserveforexpectedproductreturnsofapproximately interest rateswapsandforeigncurrencytransactionsassociatedwiththerelatedissuanceofeuro-denominatednotes. loss of year endedDecember31,2016 Other profits(losses): Segment profits Animal healthproducts Human pharmaceuticalproducts e recognizedpretaxnetchargesof rights incertaincountriestoBoehringerIngelheim(Note4) Income relatedtotransferoflinagliptinandempagliflozin U.S. BrandedPrescriptionDrugFee Debt repurchasecharges,net 3) Inventory fairvalueadjustmentrelatedtoNovartisAH(Note 4) Acquired in-processresearchanddevelopment(Notes3 Venezuela charge(Note17) (Note 5) Asset impairment,restructuring,andotherspecialcharges Amortization ofintangibleassets(Note8) $166.7 million . . . . fromthepurchaseandredemptionofcertainfixed-ratenotes,partially ...... $152.7 million . . . (2) . (Note10) . fortheyearendedDecember31,2015,attributabletodebtextinguishment . . . $ $ $ $ $ $ 2016 2016 3,374.0 4,673.7 4,673.7 4,010.0 (203.9 (382.5 (683.3 723.4 813.3 663.7 (30.0 89.9 fset bynetgainsfromnon-hedging — — — — ) ) ) ) $ $ $ $ $ $ 2015 2015 $175 million 2,790.0 4,624.6 4,624.6 4,026.7 (152.7 (367.7 (153.0 (535.0 (626.2 720.7 801.5 597.9 80.8 — — — ) ) ) ) ) duringthe $ $ $ $ $ $ 2014 2014 3,000.3 4,226.4 4,226.4 3,604.6 (119.0 (468.7 (200.2 (530.2 790.0 848.8 621.8 58.8 92.0 — — — ) ) ) ) 95 FINANCIAL REPORT F96 80.4 9,134.1 4,506.7 2,027.1 3,947.7 4,566.2 2,401.5 1,499.1 8,547.2 2014 19,615.6 $ $ $ $ 89.2 3,943.6 2,033.1 3,884.6 4,576.8 2,306.4 1,724.2 8,696.6 2015 10,097.4 19,958.7 $ $ $ $ , certain costs are fully , certain costs 92.4 3,768.1 2,330.9 3,616.9 4,984.6 2,140.7 1,776.8 8,994.5 2016 11,506.2 21,222.1 $ $ $ $ . : (1) ...... : ...... filiated customers (2) ...... Revenue is attributed to the countries based on the location of the customer Revenue is attributed to the countries based net, and certain sundry assets. Long-lived assets consist of property and equipment, (2) (1) United States United States Europe Japan Other foreign countries Europe Japan Other foreign countries Geographic Information Revenue—to unaf Revenue Long-lived assets Long-lived assets allocated to our human pharmaceutical products segment and therefore are not reflected in the animal health reflected in the animal therefore are not segment and products to our human pharmaceutical allocated global administrative financing, with treasury-related include costs associated profit. Such items segment's costs. manufacturing costs, and certain transaction certain acquisition-related services, For internal management reporting presented to the chief operating decision maker to the chief operating presented management reporting For internal 96 FINANCIAL REPORT F97 Exchange. Our commonstockislistedontheNew (1) Note 19:SelectedQuarterlyData(unaudited) Earnings pershare—basic Net income Income beforeincometaxes Common stockclosingprices: Dividends paidpershare Earnings pershare—diluted Other—net, (income)expense Asset impairment,restructuring,andotherspecialcharges Acquired in-processresearchanddevelopment Operating expenses Cost ofsales Revenue 2015 Common stockclosingprices: Dividends paidpershare Earnings pershare—diluted Earnings pershare—basic Net income Income beforeincometaxes Other—net, (income)expense Asset impairment,restructuring,andotherspecialcharges Acquired in-processresearchanddevelopment Operating expenses Cost ofsales Revenue 2016

Low High Low High Includes researchanddevelopmentmarketing,selling,administrative expenses...... (1) (1) ...... Y ork StockExchange(NYSE),NYSEEuronext,andSIX Swiss . . . . $ $ Fourth Fourth 3,242.6 1,389.2 5,375.6 3,240.7 1,466.0 5,760.5 478.4 444.6 76.98 65.97 144.9 147.6 87.52 83.06 771.8 892.0 199.0 (44.7 (15.8 0.45 0.50 0.51 0.45 0.73 0.73 30.0 ) ) $ $ 1,047.8 2,719.1 1,236.9 4,959.7 2,801.8 1,400.9 5,191.7 Third Third 799.7 78.26 76.85 89.98 83.40 778.0 970.7 (86.5 (27.2 0.75 0.50 42.4 0.51 45.5 0.75 0.73 0.74 — — ) ) $ $ Second Second 2,804.9 1,218.4 4,978.7 2,958.5 1,465.0 5,404.8 600.8 679.7 70.89 123.3 72.57 86.59 78.75 747.7 944.5 (21.2 0.57 0.50 72.4 0.51 58.0 0.56 80.0 0.71 0.71 — ) $ $ 2,562.8 1,192.7 4,644.7 2,694.9 1,323.0 4,865.1 First First 529.5 617.9 68.41 108.0 69.06 149.0 131.4 76.36 256.0 84.11 440.1 566.8 (92.7 0.50 0.50 0.51 0.50 0.41 0.42 — ) 97 FINANCIAL REPORT F98 The Red , complete, , and fair , and fair . Employees who . In addition to The hotline number is hotline number is A All employees must All employees must , integrity s authorization and are , an independent registered , and safeguarding of corporate oung LLP Y The audit committee meets several times The audit committee meets several Accounting Oversight Board oung reports directly to the audit committee of oung reports directly to the audit committee Y , which is available on our website, outlines the , which is available on our website, The general auditor reports directly to the audit committee of the The statements have been prepared in accordance with generally been prepared in accordance with The statements have e have global financial policies that govern critical areas, including s opinion, the consolidated financial statements present fairly our financial financial statements present s opinion, the consolidated ficer and all financial management must sign a financial code of ethics, which ficer and all financial management must The committee charter . s opinion with respect to the fairness of the presentation of the statements is s opinion with respect to the fairness , we have the highest confidence in our financial reporting, our underlying , we have the highest confidence in our financial reporting, our underlying to enable employees to report suspected violations anonymously to enable employees f of internal auditors regularly monitors, on a worldwide basis, the adequacy and f of internal auditors regularly monitors, on a worldwide basis, the adequacy oung’ and are required to report suspected violations. The Red Book and are required s Reports Y e are committed to providing financial information that is transparent, timely e are committed to providing financial Their responsibility is to examine our consolidated financial statements in accordance Their responsibility is to examine our staf A Act of 1934. W s responsibility to appoint an independent registered public accounting firm subject to s responsibility to appoint an independent The internal auditors and the independent registered public accounting firm have full and free The internal auditors and the independent s Report for Financial Statements—Eli Lilly and Company and Subsidiaries and Company Lilly for Financial Statements—Eli s Report s Report on Internal Control Over Financial Reporting—Eli Lilly and Company and s Report on Internal Control Over Financial Reporting—Eli Lilly and The Red Book , the chief executive of roles and responsibilities and is consistent with enacted corporate reform laws and regulations. It is roles and responsibilities and is consistent e are dedicated to ensuring that we maintain the high standards of financial accounting and reporting that maintain the high standards of financial accounting and reporting that e are dedicated to ensuring that we fectiveness of internal accounting controls. presentation of the financial statements. presentation of the and estimates include amounts based on judgments principles in the United States and accepted accounting management’ by management. In operations, and cash flows. position, results of (known as " we maintain a code of conduct of internal accounting controls, In addition to the system of overall business conduct, avoidance employees worldwide, requiring proper Book") that applies to all of proprietary information. compliance with laws, and confidentiality conflicts of interest, on take training annually published in report suspected violations are protected from discrimination or retaliation by the company are protected from discrimination report suspected violations Red Book responsibilities. further reinforces their ethical and fiduciary have been audited by Ernst & The consolidated financial statements Management’ Management’ for the accuracy is responsible Company and subsidiaries of Eli Lilly and Management members’ the audit committee’ we have established. W shareholder ratification, approve both audit and non-audit services performed by the independent registered audit and non-audit services performed by the independent registered shareholder ratification, approve both reports submitted by the firm. public accounting firm, and review the access to the committee. W Management’ public accounting firm. of the Public Company with generally accepted auditing standards (United States). Ernst & the board of directors. members of the board of directors, all of whom are Our audit committee includes five nonemployee independent from our company internal auditors, and the independent public accounting firm to discuss during the year with management, the financial reporting matters, including reviews of our externally published audit activities, internal controls, and financial results. commitment to strong internal relevant, and accurate. Our culture demands integrity and an unyielding practices and policies. Finally and operate under a system of internal controls, and our people, who are objective in their responsibilities code of conduct and the highest level of ethical standards. Subsidiaries for establishing and maintaining Management of Eli Lilly and Company and subsidiaries is responsible and 15d-15(f) under the adequate internal control over financial reporting as defined in Rules 13a-15(f) Securities Exchange internal controls, financial accounting and reporting, fiduciary accountability reasonable assurance that assets assets. Our internal accounting control systems are designed to provide are safeguarded, that transactions are executed in accordance with management’ of financial statements and other properly recorded, and that accounting records are adequate for preparation financial information. ef board of directors. included in Item 8 of our annual report on Form 10-K. Ernst & included in Item 8 of our annual report 98 FINANCIAL REPORT F99 February 21,2017 operating ef 2016 The internalcontroloverfinancialreportinghasbeenassessedbyErnst& changes inconditions,orthatthedegreeofcompliancewithpoliciesproceduresmaydeteriorate. ef financial reportingmaynotpreventordetectmisstatements. was ef Based onourevaluationunderthisframework,weconcludedthatinternalcontroloverfinancialreporting Organizations ofthe framework in"2013 W President andChiefExecutiveOfficer David A.Ricks fectiveness tofutureperiodsaresubjecttheriskthatcontrolsmaybecomeinadequatebecauseof e conductedanevaluationoftheef . Their responsibilityistoevaluatewhetherinternalcontroloverfinancialreportingwasdesignedand fective asofDecember31,2016 fectively

. Internal Control—IntegratedFramework" T readway Commission. fectiveness ofourinternalcontroloverfinancialreportingbasedonthe . However , becauseofitsinherentlimitations,internalcontrolover

Financial Officer Executive VicePresident,GlobalServicesandChief Derica W.Rice Also, projectionsofanyevaluation issuedbytheCommitteeofSponsoring Y oung LLP asofDecember31, 99 FINANCIAL REPORT F100 of an 31, 21, test a Board Board These income, opinion. includes on Payment 2016-09, evaluating December assurance express our 2016. consolidated consolidated classification February of amendments as also No. Committee to December for subsidiaries as subsidiaries of as is 31, the Oversight the Oversight the the well audit dated of and examining, basis and as by ended Update reasonable An method Share-Based comprehensive reporting its report respects, 2015, December issued Accounting period Accounting adoption includes obtain Company Company our responsibility and reasonable to the the Standards a and ended financial audit and Our changed material in of management, Employee statements. operations, Accounting Firm Accounting 2016 An all audit of by Company to Lilly Company over 31, in Framework result , period years provide the Eli a made of financial Company the Public Accounting fairly Public as control framework), three in audits the the the management. statements the perform December from the of in our sheets misstatement. of at years (2013 of present awards estimates Improvements internal and

that audits. three Control-Integrated each plan resulting balance statements, above material accounting principles. 718): Company's standards consolidated for the to standards payment of believe we disclosures significant e the of subsidiaries the Commission opic the W Internal free subsidiaries’ of that and flows (T and financial and related in with thereon. each accepted are referred with and Codification the for cash used readway require share-based T and amounts opinion of their Company flows presentation. generally the responsibility the Company consolidated established accordance statements statements of and 2015, and on our statements based fects accordance Standards principles Compensation in cash the the ef and standards in to and Lilly consolidated consolidated accompanying are and 2 tax criteria with U.S. statement Lilly Eli audits

financial financial Stock the an unqualified on of the supporting 2016 Those Eli - Note operations our the the audited, accounting equity for Accounting in 31, Organizations . financial the based their audited statements have position ASB States). on these financial flows States), of F evidence opinion, whether also have conducted 2016, overall discussed the cash our December e e e of As shareholders' 2016, in conformity Accounting W (United Report of Independent Registered Public Registered of Independent Report of Eli Lilly and Company Shareholders of Directors and The Board W Compensation 31, Sponsoring financial opinion W In financial results of to 2017, expressed Indianapolis, Indiana February 21, 2017 about the (United basis, assessing 100 FINANCIAL REPORT F101 misstatements. Because February 21,2017 Indianapolis, Indiana report datedFebruary (United W control overfinancial In policies disposition provide controls are accordance express anopinion accompanying reporting, Company Sponsoring 31, W The BoardofDirectorsandShareholdersEliLillyCompany Report ofIndependentRegisteredPublic assurance accurately believe assessed weakness includes in regarding A included about (United W

e e e accordance company’ our have 2016, being conducted also whether opinion, that ourauditprovides States), States). or procedures reasonable may those obtaining have audited made of and the risk, based and exists, and of thecompany’ that s Organizations with its become internal reliability with for ef audited, subsidiaries’ fairly policies our and Management’ Eli Also, the fective only Those transactions generally inherent Eli on testing its

an generally Lilly audit on performing reflect Lilly 2016 assurance criteria assessment in reporting projections understanding control inadequate 21, 2017expressed may deteriorate. the and in internal of standards and accordance and in and consolidated accordance financial Company’ the limitations, accepted accordance of

s assetsthatcouldhave procedures management established accepted Company Company evaluating s over the are transactions a reasonable as ofDecember31,2016,based such Report control regarding of of T because require recorded financial readway reporting any the with of accounting s internal other accounting with over internal and internal and on with financial that evaluation ef the in authorizations fectiveness is that prevention Internal procedures and Internal an unqualified subsidiaries’ the of subsidiaries financial (1) reporting design the responsible basis forouropinion. Commission as and changes control overfinancial we control dispositions pertain standards control standards principles, statements necessary principles. the plan of Control-Integrated and Control a materialef reporting preparation ef is of or over to as in fectiveness and operating

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the financial company’ considered was Eli permit that detection control control Public on theCOSOcriteria. framework) fect onthefinancial Public assets Financial of ef thereon. Lilly maintained designed to fectiveness reporting, financial reporting receipts the in or future Framework and preparation s reporting over Company all Company that over of ef and audit internal necessary of fective the of material Accounting Firm Company Reporting. periods the financial and unauthorized directors to (the records financial statements based onouraudit. company; in assessing to of provide degree all control obtain expenditures internal may COSO Accounting internal Accounting issued material of respects, are in statements. that, reporting and reporting of financial Our the not of reasonable over reasonable (2) subject the the for criteria). control by control subsidiaries in compliance acquisition, circumstances. provide respects. responsibility prevent risk external reasonable company; financial the ef Oversight Oversight as of fective included to statements that Committee over based the of Eli the reasonable assurance December assurance a or purposes company Our reporting Lilly financial material risk with and internal and use, on detect Board detail, Board in audit is that and W our the the the (3) or to of in e 101 FINANCIAL REPORT F102 ) % % % % 18.1 3.66 1.96 27.8 12.5 24.4 905.4 (392.9 38,350 33,600 2012 5,408.2 1,319.6 4,088.6 1,462.2 4,796.5 5,278.1 7,513.5 7,341.5 7,760.2 5,519.4 590,000 22,603.4 12,790.3 33,316.1 14,773.9 1,117,294 $ $ $ $ $ % ) % % % 4.32 20.5 20.3 1.96 14.1 29.5 (341.2 37,925 31,900 2013 5,889.3 1,204.5 4,684.8 1,012.1 1,445.6 4,908.1 5,531.3 7,125.6 8,123.8 7,975.5 4,200.3 609,000 23,113.1 12,820.4 35,210.8 17,640.7 1,084,766 $ $ $ $ $ % % % % 6.8 2.23 20.3 12.2 1.97 13.7 609.8 328.4 39,135 29,300 2014 3,000.3 2,390.5 1,162.6 1,379.0 4,932.5 4,733.6 6,620.8 9,741.0 7,963.9 5,332.8 501,000 19,615.6 11,928.3 36,307.6 15,388.1 1,074,286 $ $ $ $ $ % % % % 6.8 2.26 13.7 12.1 2.01 16.1 381.6 802.1 41,275 28,000 2015 2,790.0 2,408.4 1,066.2 1,427.7 5,037.2 4,796.4 6,533.0 8,229.6 8,053.5 7,972.4 484,000 19,958.7 12,573.6 35,568.9 14,590.3 1,065,720 $ $ $ $ $ % % % % 7.5 18.9 2.58 12.9 2.05 18.5 636.4 497.3 41,975 26,800 2016 3,374.0 2,737.6 1,037.0 1,496.6 5,654.9 5,243.9 6,452.0 8,252.6 8,367.8 506,000 21,222.1 15,101.4 10,986.6 38,805.9 14,080.5 1,061,825 $ $ $ $ $ ...... AND

...... ANY ...... AND COMP

...... Y (1) revenue administrative shares outstanding—diluted (thousands) record —net, (income) expense Other includes acquired in-process research and development, asset impairment, restructuring, and other special charges, and other Other includes acquired in-process research and development, asset impairment, restructuring, SUBSIDIARIES revenue per (Dollars in millions, except data) employee and per-share Income before income taxes Income before income Income taxes Net income Net income as a percent of Net income per share—diluted Return on assets Capital expenditures Depreciation and amortization Effective tax rate Revenue per employee Operations Revenue Cost of sales Research and development and Marketing, selling, Other Dividends declared per share Weighted-average number of Financial Position Current assets Current liabilities Property and equipment—net Total assets Long-term debt Total equity Supplementary Data Return on total equity Number of employees Number of shareholders of ELI LILL (1) Selected Financial Data (unaudited) Data Financial Selected 102 FINANCIAL REPORT F103 Peer Group(Previous) (2) (1) V group fortheyears2012 This graphcomparesthereturnonLillystockwiththatofStandard&Poor PERFORMANCE GRAPH paid byacompanyarereinvestedinthatcompany’ total shareholderreturn,whichtakesintoaccountbothstockpriceanddividends.Itassumesthatdividends $100 eachinLillystock,theS&P Comparison ofFive-Y alue of$100InvestedonLastBusinessDay

graph aboveasthe graphsubstantiallyoverlapped thepeergrouptotalshareholder return. above excludes Laboratories and (previous) isthesameaspeer groupexceptthatRocheHolding peer groupforperformancebenchmarking asisusedforourexecutivecompensationbenchmarking in2016.Ourpeergroup In ordertobetteralignourpeergroup withthatusedforexecutivecompensationbenchmarkingpurposes, weadoptedthesame industries thatweusedtobenchmarkthecompensationofexecutive of W and Shireplc. GlaxoSmithKline plc;Johnson& Johnson; Medtronicplc;Merck&Co.,Inc.;Novartis Baxter InternationalInc.;BiogenIdecBristol-MyersSquibbCompany; CelgeneCorporation;GileadSciencesInc.; e constructedthepeergroupasindustryindexforthisgraph.It comprisesthecompaniesinpharmaceuticalandbiotech Allergan Inc.asitwasacquiredin 2015. Allergan Inc.wereremovedfrom the peergroup.Ourgroup(previous)totalshareholderreturn reflected ear CumulativeT (2) Dec-16 Dec-15 Dec-14 Dec-13 Dec-12 Dec-1 through2016 1 500StockIndex,andthepeergroups'commonstock. $ $ $ $ $ $ 209.26 233.48 186.24 133.26 124.27 100.00 Lilly . otal Return The graphassumesthat,on $ $ $ $ $ $ Peer Group 201 The peergroup(previous)totalshareholder returnisnotpresentedinthe s stock. Among Lilly 185.20 190.08 186.63 162.88 117.58 100.00 1 AG andShireplcwereaddedtothe peergroupand ficers for2016 $ $ $ $ $ $ Peer Group (Previous) , S&P 184.93 188.62 185.68 161.80 117.92 100.00 December 31,201 500StockIndex,PeerGroup AG.; PfizerInc.;RocheHoldings : AbbV $ $ $ $ $ $ S&P 500 ie Inc.; ’ 198.18 177.01 174.60 153.57 116.00 100.00 s 500StockIndexandourpeer Amgen Inc.; 1, apersoninvested The graphmeasures AstraZeneca PLC; AG; Sanofi; (1) , and Abbott 103 FINANCIAL REPORT F104 104 filiates, when first used filiates, when , as applicable. In subsequent In subsequent , as applicable. ™ or ® are trademarks of Boehringer Ingelheim GmbH. are trademarks of ® rajenta T and ® Therapeutics, Inc. Synjardy

, ® irbac Corporation. akeda Pharmaceutical Company Limited. akeda Pharmaceutical Amylin Pharmaceuticals, Inc. Amylin Pharmaceuticals, T Jentadueto

, ® is a trademark of Halozyme is a trademark of Jardiance

™ , is a trademark of V ® ® is a trademark of Pfizer Inc. is a trademark of is a trademark of is a trademark of ® ® ® iagra rademarks or service marks owned by Eli Lilly and Company or its subsidiaries or af its subsidiaries and Company or owned by Eli Lilly or service marks rademarks rademarks Used In This Report rademarks V in this report, appear with an initial capital and are followed by the symbol are followed by initial capital and appear with an in this report, ENHANZE Byetta Glyxambi Sentinel T T uses of the marks in the report, the symbols may be omitted. the symbols marks in the report, uses of the Actos PROXY STATEMENT mail. Please votebyusingtheInternet, telephone,orbysigning,dating,andreturning theenclosedproxycardby Y Statement of ShareholdersandProxy Notice of2017 our voteisimportant Annual Meeting PROXY STATEMENT P1 P2 P9 P9 P10 P19 P20 P22 P23 P25 P26 P26 P30 P30 P31 P32 P33 P33 P34 P49 P58 P59 P59 P59 P62 P62 P64 P64 P66 P66 P68 P70 P72 P88 ...... ficers Auditor ficer ...... Annual Cash Bonus and ......

...... otes on Named Executive Of ...... Analysis Appointment of Principal Independent ...... Advisory V icket ...... Adjustments Related to the ...... Amend the Lilly Directors' Deferral Plan ...... ote on Compensation Paid to Named Executive Of ote on Compensation Paid to ...... oting Logistics ...... Admission T ...... ward ...... A ...... - Summary of Advisory V A Annual Meeting of Shareholders Annual Item 6 - Shareholder Proposal on Direct and Indirect Political Contributions Item 6 - Shareholder Proposal on Direct and Indirect Political Meeting and V Item 1 - Election of Directors Item 1 - Election Board Operations and Governance Board Operations and Nomination Process Director Qualifications Item 5 - Proposal to Director Compensation Director Independence the Board of Directors Committees of and Risk Management Board Oversight of Compliance Governance Highlights of the Company's Corporate Governance Issues Shareholder Engagement on to Eliminate Classified Board Prior Management Proposals Shareholder Proposals and Nominations Item 2 - Membership and Meetings of the Board and Its Committees Membership and Meetings of Other Matters Item 4 - Proposal to Ratify the Compensation Compensation Discussion and Compensation Discussion and Item 3 - Frequency of Future Executive Compensation Compensation Committee Matters able of Contents Contents able of Notice of Notice Proxy Statement Summary Proxy Statement Governance Shareholder Proposals Other Information Directors' Deferral Plan Ownership of Company Stock Compensation Appendix Performance Audit Matters Annual Meeting Appendix B - The Lilly Directors' Deferral Plan T Notice of 2017 Annual Meeting of Shareholders

To the holders of Common Stock of Eli Lilly and Company:

The 2017 Annual Meeting of Shareholders of Eli Lilly and Company will be held as shown below:

TIME AND DATE: 11:00 a.m. EDT, Monday, May 1, 2017 LOCATION: The Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285 ITEMS OF BUSINESS: Election of the five directors listed in the proxy statement to serve three-year terms Approval, by non-binding vote, of the compensation paid to the company's named executive officers Advisory vote regarding the frequency of future advisory votes on named executive officer compensation Ratification of Ernst & Young LLP as the principal independent auditors for 2017 Proposal to amend the Lilly Directors' Deferral Plan Shareholder proposal seeking report regarding direct and indirect political contributions WHO CAN VOTE: Shareholders of record at the close of business on February 24, 2017

This proxy statement is dated March 20, 2017, and is first being sent or given to our shareholders on or about the date.

See the back page of this report for information regarding how to attend the meeting. Every shareholder vote is important. If you are unable to attend the meeting in person, please sign, date, and return your proxy and/or voting instructions by mail, telephone or through the Internet promptly so that a quorum may be represented at the meeting.

By order of the Board of Directors,

Bronwen L. Mantlo Secretary

March 20, 2017 Indianapolis, Indiana

Important notice regarding the availability of proxy materials for the shareholder meeting to be held May 1, 2017: The annual report and proxy statement are available at https://www.lilly.com/annualreport2016.

P1

PROXY STATEMENT PROXY P1 PROXY STATEMENT P2 P2 is which . and T Anne TSR deviates directors, . Lechleiter will serve as A. Ricks became non-employee . Bertozzi is the May 1, 2017 The Lilly Center Auditorium Lilly Corporate Center 46285 Indianapolis, Indiana for This change rewards our executive This change rewards our executive (see Item 5). . Ricks will succeed him as Chairman. as the principal independent auditor as the principal independent auditor . Jackson is CFO of Nielsen Holdings plc. $800,000 The number of shares to be awarded under the The number of shares to be awarded ficers. . of Date: Location: As (from 50 percent to 60 percent) to incentivize As (from 50 percent to 60 percent) cap oung LLP Y ficer compensation. A), one of the equity compensation programs for our executive A), one of the equity compensation Directors' Deferral Plan TSR (capped at +/-20 percent). compensation , Ph.D., retired as President and CEO. David ward (SV A annual ear's Proxy Statement ear's Proxy Statement , and you should read the entire proxy statement carefully before voting. the entire proxy statement carefully , and you should read Approval, by non-binding vote, of the compensation paid to the Approval, by non-binding vote, of the three-year terms. company's named executive of named executive of for 2017. political contributions. Y an alue of the amended Annual Meeting of Shareholders Annual Meeting of 11:00 a.m. EDT February 24, 2017 to serve directors listed in this proxy statement Item 1: Election of the five Item 2: of future advisory votes on Item 3: Advisory vote regarding the frequency Deferral Plan. Item 5: Proposal to amend the Lilly Directors' regarding direct and indirect Item 6: Shareholder proposal seeking report Item 4: Ratification of Ernst & otal Shareholder Return (TSR) modifier T approved . She is an investigator for the Howard Hughes Medical Institute. board

the

will increase or decrease by 1 percent for every percentage point that Lilly's three-year will increase or decrease by 1 percent A 2017, e refined the Shareholder V ficers for delivering top performance within the industry and increasing shareholder return. Executive ficers for delivering top performance total equity as SV ficers received a larger portion of their ficers, to include a Meeting: Time: Record Date: Items of Business: President and CEO, and a member of the Board of Directors, on January 1, 2017. Dr President and CEO, and a member of the Board of Directors, on January non-executive chairman until May 31, 2017. On June 1, 2017, Mr In October 2016, we welcomed Jamere Jackson to the board. Mr Dr In February 2017, we welcomed Carolyn R. Bertozzi, Ph.D., to the board. In December 2016, John C. Lechleiter from our peer group's median three-year from our peer group's median three-year of of growth. behavior that is aligned with long-term Systems Biology and Radiology at Robert M. Bass Professor of Chemistry and Professor of Chemical and Stanford University In reflected in the provisions SV What Is New In This W of

General Information not contain all the in this proxy statement. It does information contained elsewhere This summary highlights consider information you should Proxy Statement Summary Statement Proxy PROXY STATEMENT P3 2016: S&P five-year periodsthroughyear-end2016.Ourreturnsexceededboththecompensationpeergroupand W Shareholder Return W Innovation Progress *A Performance highlights: Operating Performance innovation progress,andshareholderreturn.Seeour2016annualreportonForm10-Kformoredetails. The followingprovidesabrieflookatour2016performanceinthreedimensions:operatingperformance, Highlights of2016CompanyPerformance e generatedstrong e madesignificantadvanceswithourpipelinein2016,including: reconciliationofGAAP • • • • • • 500inthethree-andfive-yearperiods,butlaggedforone-yearperiodthatendedonDecember31, Multiple newindicationsintheEUandJapanforCyramza. U.S., EU,andJapanapprovalfor U.S. approvalandconditionalEUforLartruvo death inadultswithtype2diabetesandestablishedCVdisease. EU labelupdatetoincludeachangetheindicationstatementregardingreductionofriskCV U.S. approvalofanewcardiovascular(CV)indicationforJardiance® 3 percentonanon-GAAP 2016 earningspershare(EPS)increased14percentonareportedbasisto$2.58,and 2016 revenueincreased6percenttoapproximately$21.2billion. TSR (sharepriceappreciationplusdividends,reinvestedquarterly)forthethree-and andexternallyreportednon-GAAP basisto$3.52. T altz® (ixekizumab)formoderate-to-severeplaquepsoriasis. measuresisincludedin TM (olaratumab)forsofttissuesarcoma.

(empagliflozin) tabletsandan Appendix A. P3 PROXY STATEMENT P4 P4 to pass See page 9 votes cast votes cast votes cast votes cast votes cast Majority of Majority of Majority of Majority of Majority of Vote required Vote to pass ote required Majority of Majority of Majority of Majority of Majority of votes cast votes cast votes cast votes cast votes cast V Further Information Vote FOR Vote FOR Vote FOR Vote FOR Vote Vote FOR Vote Management recommendation Vote FOR Vote FOR Vote FOR Vote FOR Vote FOR Management

recommendation Ford Motor Company; Nike, Inc. Public boards 3M Corporation; IBM Corporation; Allstate Insurance Company

Ford Motor Company; Nike, Inc. Public boards 3M Corporation; IBM Corporation; Allstate Insurance Company

M.D., Ph.D., 62

Directors Marschall S. Runge, Affairs, President for Medical Executive Vice University of Michigan Director since 2013 Chairman of the Board, Eli Lilly and Company Director since 2005 Retirement on May 31, 2017 A. Ricks, 49 David President and Chief Executive Officer, Eli LIlly and Company Director since 2017 William G. Kaelin, Jr., M.D., 59 Kaelin, Jr., G. William Dana-Farber Cancer Institute; Professor, Dana-Farber/Harvard Associate Director, Cancer Center Director since 2012 Ph.D., 63 John C. Lechleiter, June 1, 2017 Chairman, effective Name and principal occupation 67 Michael L. Eskew, Chief Executive Officer, Former Chariman and Inc. United Parcel Service, Director since 2008 David A. Ricks, 49 President and Chief Executive Officer, Eli Lilly and Company Director since 2017 Chairman, effective June 1, 2017 Marshall S.Runge, M.D., Ph.D., 62 Executive Vice President for Medical Affairs, University of Michigan Director since 2013 William G. Kaelin, Jr., M.D., 59 Professor, Dana-Farber Cancer Institute; Associate Director, Dana-Farber/Harvard Cancer Center Director since 2012 John C. Lechleiter, Ph.D., 63 Chairman of the Board, Eli Lilly and Company Director since 2005 Retirement on May 31, 2017 Name and principal occupation 67 Michael L. Eskew, Chief Executive Former Chairman and Service, Inc. Officer, United Parcel Director since 2008 Governance of Item 1: Election PROXY STATEMENT P5 performance; progresswithourinnovation pipeline;andshareholder return. pay programstoabalanced mixofmeasuresonthreedimensionscompany performance: operating As describedmorefullyin the CompensationDisclosuresand Pay forPerformance consistent withthecompany'sstrongperformancein 2016,asoutlinedbelowunder"PayforPerformance." middle rangeofthecompany'speergroup.Incentive compensationprogramspaidoutabovetarget, executive of At thetimetotaltargetcompensationwasestablished attheendof2015,compensationforournamed Executive CompensationSummaryfor2016 Our ExecutiveCompensationProgramsReflectBestPractices Our CorporateGovernancePolicies Item 2 Executive Officers Item 2: Compensation most recentlywithrespecttoournew W Our severanceplansrelatedtochange-in-controlgenerally requireadoubletrigger W assignments). W limited torestoringbenefitslostdueIRSlimitsonqualifiedplans. W hedging orpledgingtheircompanystock. Our executiveof range ofmisconduct. W or otheradversebehaviors. incentives todeliverlong-term,sustainablebusinessresultswhilediscouragingexcessiverisk-taking Our CompensationCommitteeannuallyreviewscompensationprogramstoensuretheyprovide performance throughablendofshort-andlong-termmeasures. Our compensationprogramsaredesignedtoalignwithshareholderinterestsandlinkpay shares castvotedinfavorofourexecutivecompensation. W W W Our boardoversees Our W of Dr All Our boardmembership e donothaveemploymentagreementswithanyofour EOs. e haveaveryrestrictivepolicyonperquisites. e donotprovidetaxgross-upstoEOs(exceptforlimitedrelatedinternational e donothave"tophat"retirementplans—supplementalplansareopentoallemployeesand e haveabroadcompensationrecoverypolicythatappliestoallexecutivesandcoverswide e havehadstrongshareholdersupportofcompensationpractices:in2016,over98percent e haveamajorityvoting e haveinplace e haveastrong,independent of Advisory V ficers (thefiveof board company's namedexecutiveof Approve, bynon-bindingvote,compensationpaidtothe . our John non-employee actively Lechleiter ficers (EOs)aresubjecttorobuststockownershipguidelinesandprohibitedfrom meaningful participates ote onCompensationPaidtoNamed ficers whosecompensationisdisclosedinthisproxy statement) wasinthe compliance , our formerPresident directors, is markedbyleadership, standard andresignation stock in lead and enterprise and company ownership ficers director role. all President andCEO. Reflect BestPractices board and CEO.Dr strategy committee requirements. risk managementpractices. experience, policy and Analysis (CD&A)section,we linkourincentive members, . CEO/senior Lechleiter for theelectionofdirectors. and diversity are will retire executive recommendation independent, Management Vote FOR . in May2017. succession Further Information . with V Majority of votes cast the ote required See page33 topass exception planning, P5 PROXY STATEMENT P6 P6 for adjustments that were made to revenue and EPS for incentive compensation compensation and EPS for incentive made to revenue that were for adjustments A Appendix Appendix Annual Cash Bonus Multiple Annual Cash *Performance goal multiples are capped at 2.0. *Performance goal multiples are capped The company exceeded its annual cash bonus targets for revenue and pipeline progress, but narrowly missed for revenue and pipeline progress, its annual cash bonus targets The company exceeded its EPS target. 2016 programs. The summary information below highlights how our incentive pay programs align with company performance. with company performance. programs align our incentive pay below highlights how information The summary see Please also PROXY STATEMENT P7 resulted inaShareholderV has targetsbasedonexpectedlarge-capcompanyreturnsoverathree-yearperiod. W 2016 ShareholderV A expected EPSgrowthofpeercompaniesoveratwo-yearperiod. W 2016 Performance ward multipleinexcessofthetarget. e significantlyexceededourstockpricegrowthtargetsunderShareholderV e exceededourEPSgrowthtargetsunderPerformance Award Multiple alue Award Multiple alue A ward multipleinexcessofthetarget. A ward program,whichhastargetsbasedon This performanceresultedinaPerformance alue This performance A ward program,which P7 PROXY STATEMENT P8 P8 to pass Option to pass to pass See page 62 See page 59 See page See page 59 highest ote required ote required ote required votes cast Majority of number of votes cast votes cast Majority of V V V receiving the Further Information Further Information Further Information Votes Annual Vote FOR Advisory Vote FOR Management Management Management recommendation recommendation recommendation as the oung LLP Y Appointment of Principal Appointment of Principal ote Regarding Frequency of Named of Named Frequency ote Regarding Auditor Deferral Plan (the “plan”) provides an ownership position in the company that aligns Deferral Plan (the “plan”) provides an ownership position in the company Ratify the appointment of Ernst & for 2017 company's principal independent auditor Advisory vote regarding the frequency of future advisory votes the frequency of future advisory Advisory vote regarding on executive compensation Approve the amendment of Lilly's Directors' Deferral Plan Approve the amendment of Lilly's Directors' Amendment of the Lilly Directors' Deferral Plan Amendment of the Lilly Advisory V Advisory authorizing an additional 750,000 shares (the same amount approved in 2003) authorizing an additional 750,000 shares (the same amount approved an annual compensation cap of $800,000 for non-employee directors. all shares must be held until the second January following the director's departure from board service all shares must be held until the second January following the director's no stock options can be issued under the plan. Item 4 Item 3 Item 5 Lilly Directors' Deferral Plan Lilly Directors' Deferral Item 5: Audit Matters Item 4: Ratification of Executive Officer Compensation Officer Executive Independent : Item 3 Under the plan, a portion of directors' annual compensation is awarded in deferred shares: Under the plan, a portion of directors' annual compensation is awarded directors with shareholder interests. The Lilly Directors’ Changes to the plan include: PROXY STATEMENT P9 including theirqualifications, thedirectornominationprocess,andcompensation. time, theboardexpectstoreduceitssize. that term,withtheexceptionofJohnC.Lechleiter at theannualmeetingofshareholdersheldin2020. Each ofthenomineeslistedbelowhasagreedtoserve third ofthedirectorsstandingforelectioneachyear Under thecompany’ Item 1.ElectionofDirectors Governance and V at theLillyCorporateCenter Y V Logistics." Further informationonhowtovoteisprovidedattheendofproxystatementunder"MeetingandV via oneofthemethodsdescribedbelow Even ifyouplantoattendthe2017 How toV Other Information direct andindirectpoliticalcontributions Item 6:Shareholderproposalseekingreportregarding Shareholder Proposals Item 6 ou mayalsoopttovoteinpersonatthe2017 oting atour2017 oting Logistics"formoreinformation. Sign, date,andreturnyourproxycard/votinginstructionformtovote Call thetelephonenumberonyourproxycard/votinginstructionformtovote V isit thewebsitelistedonyourproxycard/votinginstructionformtovote ote in contributions Proposal seekingreportregardingdirectandindirectpolitical Advance oftheMeeting s articlesofincorporation,theboardisdividedintothree classeswithapproximatelyone- Annual Meeting , Indianapolis,IN46285,at1 Annual Meetinginperson,weencourageyoutovotepriorthemeeting . The followingsectionsprovideinformationaboutour directors, Annual Meeting,whichwillbeheldonMonday , whowillretirefromtheboardonMay31,2017. . The termfordirectorstobeelectedthisyearwillexpire 1:00 a.m.,localtime.Seethesectiontitled"Meeting BY recommendation Management MAIL AGAINST VIA Vote THEINTERNET BY TELEPHONE Further Information Further Information , May1,2017, V Majority of votes cast ote required See page66 See page64 topass At that oting P9 PROXY STATEMENT P10 P10 , o the best of our T . Lechleiter will retire from the filiates, or has a material interest e have provided the most significant e have provided the most significant .com/about/board-of-directors/Pages/board-of- .lilly , to the best of our knowledge, there have been no events , to the best of our knowledge, there Additionally A. Ricks is seeking election for the first time. Dr filiates. ., M.D. At that time, the board expects to reduce its size. See “Item 1. Election of Directors” At that time, the board expects to reduce its size. See “Item 1. Election , Ph.D. There is no arrangement between any director or director nominee and any other person pursuant There is no arrangement between any A. Ricks . , or any of their associates, is a party adverse to us or any of our af , or any of their associates, is a party illiam G. Kaelin, Jr John C. Lechleiter David M.D., Ph.D. Marschall S. Runge, Michael L. Eskew Michael W • • • • • to which he or she was or is to be selected as a director or director nominee. under any bankruptcy act, no criminal proceedings and no judgments, sanctions, or injunctions during the proceedings and no judgments, sanctions, or injunctions during the under any bankruptcy act, no criminal evaluation of the ability or integrity of any of our directors or nominees past 10 years that are material to the for director adverse to us or any of our af above for more information. No family relationship exists among any of our directors, director nominees, or EOs. No family relationship exists among directors.aspx. legal proceedings in which any of our directors or nominees for knowledge, there are no pending material director board on May 31, 2017. Class of 2017 meeting. Four of these directors are The following five directors will be seeking election at this year's annual standing for reelection; David experiences, qualifications, attributes, or skills that led to the conclusion that each director or director nominee or skills that led to the conclusion that each director or director nominee experiences, qualifications, attributes, in light of our business and structure. Full biographies for each of our should serve as one of our directors at http://www directors are available on our website Set forth below is information as of March 8, 2017, regarding the nominees for election, which has been Set forth below is information as of in this proxy statement. W confirmed by each of them for inclusion Director Biographies Each of our directors is elected to serve until his or her successor is duly elected and qualified. If a nominee is until his or her successor is duly elected and qualified. If a nominee Each of our directors is elected to serve may vote for another nominee proposed by the Board of Directors or unavailable for election, proxy holders Board Operations and Governance Board Operations Board of Directors as an alternative, the Board of Directors may reduce the number of directors to be elected at the annual as an alternative, the Board of Directors meeting. Board Recommendation on Item 1 Board Recommendation nominees: each of the following that you vote FOR recommends The Board PROXY STATEMENT P11 Career Highlights Career Highlights experience withpharmaceuticaldiscoveryresearch. of Lilly'sbusiness.Healsohasdeepexpertiseinbasicscience, includingmechanismsofdrugaction,and Harvard MedicalSchool,amajormedicalinstitution,aswell asspecialexpertiseinoncology—akeycomponent Qualifications companies. committees. Hehasextensivecorporategovernanceexperiencethroughhisserviceontheboardsofother an auditcommitteefinancialexpert,basedonhisCEOexperienceandserviceotherU.S.company managing complexworldwideoperations,strategicplanning,andbuildingastrongconsumer-brandfocus.Heis Qualifications : Dr : Mr . Kaelinisaprominentmedicalresearcherandacademician. Hehasextensiveexperienceat . EskewhasCEOexperiencewithUPS,whereheestablishedarecordofsuccessin Public Boards Board Committees Age: 67,Directorsince2008 Michael L.Eskew Howard HughesMedicalInstitute Brigham andWomen'sHospital Dana-Farber/Harvard CancerCenter Institute ofFrance; Honors: CanadaGairdnerInternational Association of Industry Memberships:InstituteofMedicine;National Board Committees Age: 59,Directorsince2012 W United ParcelService,Inc., Foundation Nonprofit Boards: • AssistantInvestigator(1998-2002) • Investigator(2002-present) • Professor(2002-present) • ProfessorofMedicine(2002-present) • UPSBoardofDirectors(1998-2014) • ViceChairman(2000-2002) • ChairmanandChiefExecutiveOfficer(2002-2007) illiam G.Kaelin,Jr American Physicians; : 3MCorporation;IBM Albert B.LaskerPrize Chairmanoftheboardtrustees : : Finance,Scienceand Audit (chair);DirectorsandCorporateGovernance;Finance ., M.D. a globalshippingandlogisticscompany American SocietyofClinicalInvestigation A ward; Lefoulon-DelalandePrize- T echnology (chair) Allstate InsuranceCompany Academy ofSciences; The Annie E.Casey P1 1 PROXY STATEMENT P12 P12 America , Franklin College, and Purdue University , Franklin College, and , University of Indianapolis, the National , University of Indianapolis, orldwide, chairman; Chemical Heritage orldwide, chairman; ay W American Chemical Society American Chemical April 1, 2008 until his retirement on December 31, 2016. April 1, 2008 until his retirement on December . Ricks joined Lilly in 1996 and most recently served as , Ph.D. : none : none : Marian University : Board of Governors for Riley Children's Foundation : Board of Governors for Riley Children's : United W : Ford Motor Company; Nike, Inc. : Ford Motor Company; A. Ricks • President and CEO (2017 - present) • Senior Vice President and President, Lilly Bio-Medicines (2012 - 2016) • Chairman of the Board (2009 - present) • Past President and CEO (2008 - 2016) David Age: 49, Director since 2017 Board Committees Industries and Industry Memberships: European Federation of Pharmaceutical and Manufacturers of Associations (EFPIA); Pharmaceutical Research (PhRMA) Non-profit Boards Eli Lilly and Company : Industry Memberships Honorary Degrees John C. Lechleiter John C. since 2009 Age: 63, Director Board Committees University of Ireland, Indiana University University of Ireland, Public Boards Non-profit Boards (member emeritus) Central Indiana Corporate Partnership Foundation; and the Eli Lilly and Company . Lechleiter had over 37 years of experience with the company in a variety of roles of . Lechleiter had over 37 years of experience . He has significant global experience in the company's commercial operations. . Lechleiter serves as Lilly's non-executive chairman. He will retire from the board on May 31, . Lechleiter serves as Lilly's non-executive . Ricks was named President and CEO on January 1, 2017, and became a director at that . Ricks was named President and CEO on January 1, 2017, and became a director : Mr : Dr . Lechleiter served as President and CEO from . Lechleiter served as President and CEO Qualifications time. He will be named Chairman on June 1, 2017. Mr global sales and marketing, as president of Lilly Bio-Medicines. He has deep expertise in product development, well as public policy Qualifications Career Highlights Career Highlights Prior to his retirement, Dr development, pharmaceutical operations, and corporate administration. increasing responsibility in research and of pharmaceutical research and development, sales and marketing, As a result, he has a sound understanding corporate governance experience through his service on other public and manufacturing. He also has significant company boards. 2017. Dr PROXY STATEMENT P13 The followingfourdirectorswillcontinueinof Class of2018 Career Highlights health carepolicyand care deliveryisrecognizedinbothacademiaandgovernment. economics. Qualifications understanding ofhealthcarefacilitysystems,anddeepexpertiseinbiomedicalresearchclinicaltrialdesign. health care,clinicalresearch,andacademia.Hehasextensiveexperienceasapracticingcardiologist,strong Qualifications Career Highlights As avaluedadvisertonumerous healthcare-relatedcommissionsandcommittees,her expertise in : Dr : Dr

. Baickerisaleadingresearcher inthefieldsofhealtheconomics,publicand labor . Rungebringstheuniqueperspectiveofapracticingphysicianwhohasbroadbackgroundin the NationalInstitutesofHealth Industry Memberships:ExperimentalCardiovascularSciencesStudySectionof Board Committees:PublicPolicyandCompliance;Science Age: 62,Directorsince:2013 Marschall S.Runge,M.D.,Ph.D. of Health Commission; ChairoftheGroupInsuranceCommissionMassachusetts;Panel Industry Memberships:CommissioneroftheMedicarePayment Board Committees:Audit;PublicPolicyandCompliance Age: 45,Directorsince:201 Katherine Baicker University ofNorthCarolina,SchoolMedicine University ofMichigan Council ofEconomic Management Harvard T Academy ofMedicine Af fairs andtheJournalofHealthEconomics;MemberNational • PrincipalInvestigatorandDirectoroftheNorthCarolinaTranslational • ExecutiveDean(2010-2015);ChairoftheDepartmentMedicine(2000 • Dean,MedicalSchool(2015-present) • ExecutiveVicePresidentforMedicalAffairs(2015-present) • CEO,MichiganMedicine(2015-present) • SeniorEconomist(2001-2002) • Member(2005-2007) • C.BoydenGrayProfessorandActingChair,Department ofHealthPolicyand • Professorofhealtheconomics(2007-present) Clinical SciencesInstitute 2015) Management (2014-present) Advisers totheCongressionalBudgetOf .H. ChanSchoolofPublicHealth,DepartmentHealth Policyand fice untilMay2018. , Ph.D. Advisers, ExecutiveOf 1 fice ofthePresident fice; EditorialboardsofHealth T Advisory echnology P13 PROXY STATEMENT P14 P14 Science and Science and ; . Jackson brings to the board significant , a global chemical company orld Food Program Farm to Market Initiative; Crop Life orld Food Program a global Swiss-based agriculture technology AG, a global Swiss-based American Chamber of Commerce American Chamber a global information, data, and measurement company Audit; Finance : : Future 5 : UN W , and Nalco. 2014) a leading distributor of industrial and specialty chemicals and of industrial and specialty chemicals and , Inc., a leading distributor ice President and CFO, GE Oil & Gas, drilling and surface division (2013 • Chief Financial Officer (2014 - present) • V • Chief Executive Officer (2016 - present) • Chief Executive Officer (2012 - 2016) • President and Chief Executive Officer (2008 - 2011) • Chairman and Chief Executive Officer • President (2012) nutrition (2003 - 2008) • Group Vice President, agriculture and • Senior Executive, Finance, GE Aviation (2007 - 2013) • Finance Executive, GE Corporate (2004 - 2007) echnology Jamere Jackson Age: 47, Director since 2016 Board Committees Non-profit Boards Nielsen Holdings plc, GE International; and Swiss International; and Swiss J. Erik Fyrwald since: 2005 Age: 57, Director (chair) and Compliance Public Policy Board Committees: T Non-profit Boards Syngenta International company that produces agrochemicals and seeds company that produces Univar provider of related services and services Nalco Company, a leading provider of water treatment products and water treatment products Ecolab, a leading provider of cleaning, sanitization, and services E.I. duPont de Nemours and Company . Fyrwald has a strong record of operational and strategic leadership in three complex . Fyrwald has a strong record of operational Through his senior financial roles at Nielsen and GE, Mr : : Mr global financial expertise and strong background in strategic planning, having spent his professional career in a global financial expertise and strong background in strategic planning, having financial expert, based on his CFO broad range of financial and strategic planning roles. He is an audit committee experience and his training as a certified public accountant. Qualifications Qualifications worldwide businesses with a focus on technology and innovation. He is an engineer by training and has worldwide businesses with a focus on technology Univar significant CEO experience with Syngenta, Career Highlights Career Highlights PROXY STATEMENT P15 boards inavarietyofindustries. health. Ms.Marramhasextensivecorporategovernanceexperiencethroughserviceonotherpubliccompany her nonprofitandprivatecompanyactivities,shehasaspecialfocusexpertiseinwellnessconsumer Career Highlights Europe, and Lilly an auditcommitteefinancialexpert.Hehasdeepexpertise inthe Qualifications Qualifications Career Highlights . Healsohasbroadcorporate governanceexperiencefromhisserviceonpubliccompany boardsintheU.S., Asia. : Mr : Ms.MarramisaformerCEOwithstrongmarketingandconsumer-brandbackground. . T ai isaformerCEOwithextensiveexperienceininternational businessandfinance,is Public Boards Board Committees Age: 70,Directorsince2002,leaddirector2012 Ellen R.Marram Other (nonpubliclylisted)Boards: ING GroepNV Prior Boards:TheBankofChinaLimited;Singapore Public Boards:MasterCardIncorporated,RoyalPhilipsNV Board Committees Age: 66,Directorsince2013 Jackson P Nabisco BiscuitCompany Tropicana BeverageGroup North CastlePartners,LLC, The BarnegatGroupLLC Center Non-profit Boards Private Boards Prior PublicBoards J.P Singapore) DBS GroupHoldingsandBank(formerlytheDevelopment Bankof Institute Pension PlanInvestmentBoard;MetropolitanOpera;RensselaerPolytechnic • PresidentandChiefExecutiveOfficer(1988-1993) • PresidentandChiefExecutiveOfficer(1993-1998) • ManagingDirector(2000-2006) • President(2006-present) • PresidentandChiefOperatingOfficer(2001-2002) • ViceChairmanandChiefExecutiveOfficer(2002-2007) • 25-yearcareerininvestmentbanking,includingseniormanagement . Morgan&Co.Incorporated responsibilities inNewYork,Tokyo,andSanFrancisco Theater; andNewman'sOwnFoundation , oneofthelargestfinancialservicesgroupsin . T ; CapitaLand(Singapore);DBSGroupHoldingsandBank ai : FordMotorCompany : Newman'sOwn,Inc. : W : Compensation,DirectorsandCorporateGovernance(chair) : : Cadburyplc Audit; Finance ellesley College;New , providerofbusinessadvisoryservices , aunitofNabisco,Inc. private equityfirm , a leadingglobalfinancialinstitution Asia-Pacific region,akeygrowthmarketfor RussellReynolds , The New Y ork-Presbyterian Hospital;Lincoln Y ork T Airlines; NYSEEuronext; imes Company Associates; Canada Asia , HSBCHoldingsplc Through P15 PROXY STATEMENT P16 P16 echnology T s Corporation, as well American Chemical echnology T Arts and Sciences American Chemical Society;

. Prendergast will retire from the will retire from . Prendergast Prize; Heinrich Wieland Prize, Academy of ACS Central Science; Institute of Medicine; ACS Central Science; Institute of Medicine; ward in the Chemical Sciences American A ward; Lemelson MIT Administration Board of Overseers; International Administration Board A McDonald's Corporation; KeyCorp : McDonald's Corporation; : Public Policy and Compliance; Science and : Public Policy and Compliance; Science : Compensation (chair); Science and : Compensation (chair); , California, two major research institutions. Her deep expertise , a leading restaurant operator in Japan Alvarez has extensive experience in consumer marketing, global Alvarez has extensive experience in consumer . Skylark Co., Ltd.; Lowe's Companies, Inc.; Dunkin' Brands Group, Companies, Inc.; Dunkin' Brands : Skylark Co., Ltd.; Lowe's , with an emphasis on studies of cell surface glycosylation Academy of Sciences Academy of Sciences; Alvarez .Z. and Irmgard Chu Professor of Chemistry and Professor of Molecular and and Systems Biology and Radiology by courtesy (2015 - present) Cell Biology T • Anne T. and Robert M. Bass Professor of Chemistry, Professor of Chemical • Investigator (2000 - present) • • Chairman of the Board (2013 - present) (2006 - 2009) • President and Chief Operating Officer Stanford University Howard Hughes Medical Institute University of California, Berkeley Carolyn R. Bertozzi, Ph.D. Age: 50, Director since 2017 Board Committees Honors: MacArthur Genius National Ralph 2009 Age: 61, Director since Board Committees Skylark Co., Ltd. McDonald's Corporation Industry Memberships and Other Organizations: Molecular Biology; American Society for Biochemistry and Society Publications, Editor-in-Chief of National University of Miami: President's Other Organizations: University of Miami: Memberships and Council; School of Business Advisory Board Public Boards Corp. Inc.; Realogy Holdings Prior Public Boards , inflammation and bacterial infection, and exploiting this knowledge for development of , inflammation and bacterial infection, and exploiting this knowledge for development At that time, the board expects to reduce its size. to reduce its the board expects At that time, . Bertozzi is a prominent researcher and academician. She has extensive experience at . Bertozzi is a prominent researcher and academician. She has extensive experience Through his senior executive positions at Skylark Co., Ltd. and McDonald’ Through his senior executive positions : Dr : Career Highlights Qualifications Stanford University and the University of Berkeley spans the disciplines of chemistry and biology associated with cancer diagnostic and therapeutic approaches. Qualifications as with other global restaurant businesses, Mr as with other global restaurant businesses, strategic planning. His international experience includes a special focus operations, international business, and has extensive corporate governance experience through his service on on Japan and emerging markets. He also other public company boards. Career Highlights board on May 1, 2017. board on Class of 2019 Class of May 2019. Dr that will expire in are serving terms five directors The following PROXY STATEMENT P17 Lilly anditsElancobusiness. operations background,along withexpertiseinthefoodandagriculturesectors,anexpanding areaoffocusfor company boards. CFO ofBall.Healsohasextensivecorporategovernanceexperiencethroughhisserviceonotherpublic leadership inoperationsandstrategy Career Highlights Career Highlights of globalleadershipexperience at where hehasestablishedareputation forstrongresult-orientedandstrategicleadership, aswellmanyyears Qualifications Qualifications : Mr : Mr . LucianohasCEOandglobal businessexperiencewith . HooverhasextensiveCEOexperienceatBallCorporation,withastrongrecordof technologies andservicestocommercialgovernmentalcustomers Ball Corporation Non-profit Boards Prior PublicBoards Public Boards Business, Dean'sCouncil Memberships andOtherOrganizations Board Committees Age: 71,Directorsince2009 R. DavidHoover The DowChemicalCompany trading company Archer DanielsMidlandCompany, Non-profit Boards Public Boards Board Committees Age: 55,Directorsince2016 Juan R.Luciano • ChiefFinancialOfficer(1998-2000) • ChiefOperatingOfficer(2000-2001) • PresidentandChiefExecutiveOfficer(2001-2010) • ChairmanandCEO(2010-2011) • Chairman(2002-2013) • ExecutiveVicePresidentandPresident,PerformanceDivision (2010-2011) • ExecutiveVicePresidentandChiefOperatingOfficer(2011 -2014) • President(2014-2015) • ChiefExecutiveOfficerandPresident(2015-present) • Chairman(January2016-present) The DowChemicalCompany . HehasdeepfinancialexpertiseasaresultofhisexperienceCEOand : BallCorporation;EdgewellPersonalCareCo. : Archer DanielsMidlandCompany;Wilmar , aproviderofpackagingproducts,aerospaceandother : Children'sHospitalColorado;DePauwUniversity : BoysandGirlsClubsof : Finance(Chair);DirectorsandCorporateGovernance : Finance;PublicPolicyandCompliance : QwestInternational,Inc.;Steelcase,Inc. , amultinationalchemicalcompany . Hebringstotheboardastrong technologyand a globalfood-processingandcommodities- : IndianaUniversityKelleySchoolof Archer DanielsMidlandCompany America , P17 PROXY STATEMENT P18 P18 echnology T Therapeutics alley Region; Fox Cities , and academician. He has extensive , he brings an important practicing-physician , he brings an important practicing-physician Audit; Compensation Albertsons; Revlon Consumer Products Co.; Supervalue : Albertsons; Revlon Consumer Products : : Public Policy and Compliance; Science and and Compliance; : Public Policy Appvion, Inc.

As a medical doctor : Arts; Fox Cities Chamber of Commerce; New North : Investors Community Bank : Cancer Genetics Incorporated . Seifert Biology (1986 - 2014) • Edmond and Marion Guggenheim Professor of Biochemistry and Molecular Guggenheim Professor of Biochemistry • Edmond and Marion and Experimental • Professor of Molecular Pharmacology (1987 - 2014) Medicine, Director Emeritus • Mayo Clinic Center for Individualized (2006 - 2012) • Director Emeritus (1995 - 2006) • Executive Vice President (1999 - 2004) • Chairman (2004 - present) Kathi P Age: 67, Director since 1995 Board Committees Public Boards Private Boards Prior Public Boards Inc.; Lexmark International, Inc. Non-profit Boards: Community Foundation for the Fox V Building for the Mayo Medical School Public Boards Mayo Clinic Cancer Center Kimberly-Clark Corporation, a global consumer products company Katapult, LLC, a provider of pro bono mentoring and consulting services to non- profit organizations Franklyn G. Prendergast, M.D., Ph.D. G. Prendergast, Franklyn since 1995 Age: 72, Director Board Committees s deliberations. . He retired from Mayo at the end of 2014. He has special expertise in two critical areas . He retired from Mayo at the end of 2014. . Prendergast is a prominent medical clinician, researcher . Prendergast is a prominent medical clinician, : Ms. Seifert is a retired senior executive of Kimberly-Clark. She has strong expertise in consumer : Ms. Seifert is a retired senior executive of Kimberly-Clark. She has strong expertise : Dr perspective to the Board’ Qualifications worldwide brands, with a special marketing and brand management, having led sales and marketing for several through her other board focus on consumer health. She has extensive corporate governance experience positions. Qualifications for Lilly—oncology and personalized medicine. for Lilly—oncology and personalized medicine. experience in senior-most administration at Mayo Clinic, a major medical institution, and as director of its experience in senior-most administration renowned cancer center Career Highlights Career Highlights PROXY STATEMENT P19 with freshperspectivesandinsights. provides anef As thefollowingchartdemonstrates,ourdirectorcompositionalsoreflectsamixoftenureonboard,which shareholders. including executivesearch firmsretainedbythecommittee,incumbentdirectors, management,and which receivesinputfromother boardmembers.Potentialdirectorsareidentified fromseveralsources, The boarddelegatesthedirector screeningprocesstotheDirectorsandCorporate GovernanceCommittee, Director NominationProcess shareholders, andotherconstituencies. including unquestionedintegrity Character: five ethnicallydiversemembers. director searches. ef selection andnominationprocess. or haveastand-alonediversitypolicy geography Diversity: retired orwillretirefromtheboard:Ms.KarenHorn,Dr In 2016and2017,theboardaddedthreenewnon-employeemembers:Mr Board T and experience,asillustratedinthefollowingcharts: attributes, andprofessionalexperience. fiduciary duties. Experience: Ourdirectorsareresponsibleforoverseeingthecompany'sbusinessconsistentwiththeir The boardassessescandidatesbyconsideringthefollowing: Director Qualifications Director QualificationsandNominationProcess Jackson, andDr fectiveness ofboarddiversityef enure andRefreshment:

, gender The boardstrivestoachievediversityinthebroadest sense,includingpersonsdiversein Boardmembersshouldpossessthepersonalattributes necessarytobeanef fective balanceofhistoricalperspectiveandanunderstandingtheevolutionourbusiness . This significantresponsibilityrequireshighlyskilledindividualswithvariousqualities, Carolyn R.Bertozzi,aswellMr The company'ssixteendirectorsrangeinagefrom45 to72,andincludefourwomen , ethnicity Relevant Scientific/AcademicExpertise: Operational/Strategic Expertise: , andexperiences. Marketing andSalesExpertise: , soundjudgment,acollaborativespirit,andcommitment tothecompany forts inconnectionwiththeannualnominationprocess aswellinnew International Experience: The DirectorsandCorporateGovernanceCommittee assessesthe Healthcare Experience: , theboard'soveralldiversityisanimportantconsideration inthedirector Financial Expertise: The boardiswell-rounded,withabalanceofrelevantperspectives 2 YearsTenureorLess: CEO Experience: More than10Years: Although theboarddoesnotestablishspecificdiversity goals . David 6-10 Years: 3-5 Years: . JohnLechleiter A. Ricks. Also in2016and2017,threemembers , andDr 3 . JuanLuciano,Mr 4 4 6 . FrankPrendergast. 5 7 7 7 8 8 10 fective director . Jamere , our , P19 PROXY STATEMENT P20 P20 $6,000 $3,000 , as , probable , a significant fect in 2016. s qualifications, availability s subsequent evaluation continues to s subsequent evaluation Committee Retainers (annual, paid in monthly Committee Retainers (annual, paid in installments) Audit Committee; Science and Technology Committee members (including the chairs) Compensation Committee; Directors and Corporate Governance; Finance Committee; Public Policy and Compliance Committee members (including the chairs) , and expertise necessary to support our complex and , and expertise necessary to support All directors serving at least five years have satisfied $30,000 $18,000 $15,000 $12,000 $110,000 s initial evaluation is favorable, the committee, assisted by the committee, is favorable, s initial evaluation , for direct discussions to determine the mutual level of interest in pursuing to determine the mutual level , for direct discussions The committee, with input from all board members, also considers the contributions of the The committee, with input from all board The results of these assessments inform the board's recommendations on nominations for The results of these assessments inform The committee initially evaluates a candidate based on publicly available information and any available information based on publicly a candidate initially evaluates The committee . If these discussions are favorable, the committee makes a final recommendation to the board a final recommendation to the are favorable, the committee makes . If these discussions Lead Director Audit Committee Chair Science and Technology Committee Chair Compensation Committee Chair; Directors and Corporate Governance Committee Chair; Finance Committee Chair; Public Policy and Compliance Committee Chair Board Retainers (annual, paid in monthly installments) Annual Board Retainer Annual Retainers (in addition to annual board retainer): portion of director compensation is in the form of deferred Lilly stock. Directors are required to hold Lilly stock, portion of director compensation is in the form of deferred Lilly stock. Directors annual board retainer; new directors directly or through company plans, valued at not less than five times their are allowed five years to reach this ownership level. requirements. these guidelines, and all other directors are making progress toward these Stock Compensation the company; accordingly Directors are required to hold meaningful equity ownership positions in Directors are reimbursed for customary and usual travel expenses. Directors may also receive additional cash Directors are reimbursed for customary and usual travel expenses. Directors from time-to-time. compensation for serving on ad hoc committees that may be assembled Cash Compensation and meeting fees for all non-employee directors in ef The following table shows the retainers Director Compensation Director Compensation and approved annually by the board, on the recommendation of the Director compensation is reviewed Committee. Directors who are employees receive no additional Directors and Corporate Governance compensation for serving on the board. evolving business. individual directors at least every three years when considering whether to nominate the director to a new years when considering whether to nominate the director to a new individual directors at least every three three-year term. year and help provide us with insight on the types of experiences, skills, directors at the annual meeting each the be seeking for future director candidates. Based on this assessment, and other characteristics we should directors in the 2017 class be elected at the 2017 annual meeting. committee has recommended that the The committee performs periodic assessments of the overall composition and skills of the board in order to overall composition and skills of the periodic assessments of the The committee performs directors, and that in succession planning for and management are actively engaged ensure that the board diversity our board reflects the appropriate viewpoints, level of interest, and any potential conflicts of interest. If the committee’ any potential conflicts of interest. level of interest, and of the independent of the Board and one or more is contacted by the Chairman be favorable, the candidate the lead director directors, including the candidacy applicable). to nominate the candidate for election by the shareholders (or to select the candidate to fill a vacancy (or to select the candidate to for election by the shareholders to nominate the candidate The committee employs the same process for evaluating all candidates, including those submitted by those submitted including evaluating all candidates, same process for employs the The committee shareholders. to satisfy candidate appears candidate. If the the by the party recommending information supplied additional committee’ criteria and the the selection management or a search firm, gathers additional data on the candidate’ search firm, gathers additional data management or a PROXY STATEMENT P21 2 1 2016 CompensationforNon-employeeDirectors See Item5, stock accountarepaidinsharesofcompanystock. beginning thesecondJanuaryfollowingdirector Both accountsmaygenerallyonlybepaidinalumpsumorannualinstallmentsforupto10years, was $124,379 Internal RevenueCode). U.S. the applicablefederallong-termrate,compoundedmonthly Deferred Compensation service. are paid. dividends are“reinvested”inadditionalsharesbasedonthemarketpriceofstockdate the $160,000annualcompensationfigurebyclosingstockpriceonapre-setdate.Hypothetical as describedaboveisalsocreditedtothisaccount. based ontheclosingstockpricepre-setmonthlydates.Inaddition,annualcompensationaward compensation incompanystock.Fundsthisaccountarecreditedashypotheticalsharesofstock Deferred Stock accounts: board hasended.Eachdirectorcanchoosetoinvesttheamountsdeferredinoneorbothoffollowingtwo non-employee directorstodeferreceiptofallorparttheircashcompensationuntilafterserviceonthe Lilly Directors’ beginning thesecondJanuaryfollowingdirector'sdeparturefromboardservice. annually inadeferredstockaccounttheLillyDirectors’ Non-employee directorsreceived$160,000ofcompensation(butnomorethan7,500shares),deposited Mr. Tai Ms. Seifert Dr. Runge Dr. Prendergast Ms. Marram Mr. Luciano Dr. Kaelin Mr. Jackson Ms. Horn Mr. Hoover Mr. Fyrwald Mr. Eskew Dr. Baicker Mr. Alvarez Name Each non-employee directorreceivedan awardofstockvaluedat $160,000(approximately2,088 shares), Carolyn R.Bertozzi,Ph.D., isnotincludedinthischartasshebecameaboard member ef except Ms.Horn, whoretiredfromtheboard inMay2016;Mr February 2017. T 1 reasury DepartmentunderSection1274(d)oftheInternalRevenueCode1986,asamended(the Actual sharesareissuedonthesecondJanuaryfollowingdirector'sdeparturefromboard Amendment oftheLillyDirectors'DeferralPlan,formoreinformationregardingthisplan. , atarateof DeferralPlan:Inadditiontostockcompensation,theLillyDirectors'allows Account. The aggregateamountofinterestthataccruedin2016fortheparticipatingdirectors Account. Fundsinthisaccountearninteresteachyearatarateof120percent or PaidinCash($) 3.1 percent. This accountallowsthedirector Fees Earned $123,500 $119,000 $123,500 $119,000 $158,000 $106,333 $134,000 $128,000 $131,000 $140,000 $119,000 $124,250 $29,750 $53,333 The ratefor2017is Stock $160,000 $160,000 $160,000 $160,000 $160,000 $146,667 $160,000 $160,000 $160,000 $160,000 $160,000 $160,000 $40,000 $66,667 ’ The numberofsharescreditediscalculatedbydividing

A

s departurefromboardservice. wards ($) DeferralPlan(asdescribedbelow),payable , inef , asestablishedtheprecedingDecemberby 2.7 percent. 2 . Luciano,who joinedtheboardin fect, toinvesthisorherdeferredcash and Payments($) Compensation All Other $10,800 $30,000 $20,500 $14,050 $30,000 $17,434 $0 $0 $0 $0 $0 $0 $0 $0 3 Amounts inthedeferred T $289,800 $348,000 $314,500 $134,050 $318,000 $308,434 $283,500 $283,500 $279,000 $253,000 $300,000 $279,000 $284,250 otal ($) $69,750 fective 4 P21 PROXY STATEMENT P22 P22 s ’ , the shares are , the shares , significant . Material . Fyrwald, Ms. Horn, . Fyrwald, Ms. Horn, The Foundation matched The Foundation matched All received a pro-rated award for a a pro-rated award All received The amounts for Mr .com/who-we-are/governance, along s prior relationship(s) with the company ’ . .lilly ork Stock Exchange (NYSE) listing standards, Y , is independent. Prior to expiration of her board , either directly or as a partner The board determined that none of the non- . Kaelin - $19,500; Ms. Marram - $8,000; and Ms. Seifert Ms. Marram - $8,000; and Ms. Seifert . Kaelin - $19,500; . Lechleiter The column shows the grant date fair value for each director date fair value shows the grant The column , has had during the last four years (i) any of the relationships , other than Dr . Lechleiter o evaluate the materiality of any such relationship, the board has adopted o evaluate the materiality of any such Deferral Plan.” Deferral T . Jackson, who joined the board in October 2016. in October 2016. who joined the board . Jackson, This stock award and all prior stock awards are fully vested; however stock awards award and all prior This stock ficers” table in the “Stock Units Not Distributable Within 60 Days” column. “Stock Units Not Distributable Within ficers” table in the ficer of an organization that has a material relationship with the company ficer of an organization that has a material The table that follows includes a description of categories or types of transactions, The table that follows includes a description of categories or types of transactions, Aggregate outstanding stock awards are shown in the “Common Stock Ownership by Directors Stock Ownership in the “Common awards are shown outstanding stock Aggregate , or of . Fyrwald - $17,434; Ms. Horn - $7,150; Mr . Fyrwald - $17,434; . Kaelin, Ms. Marram, and Ms. Seifert include matching contributions for donations made at the end of contributions for donations made and Ms. Seifert include matching . Kaelin, Ms. Marram, . Lechleiter will continue serving as non-executive chairman until May 31, 2017, at which time he will leave non-executive chairman until May 31, 2017, at which time he will leave . Lechleiter will continue serving as Directors do not participate in a company pension plan or non-equity incentive plan. Directors do not participate in a company partial year of service. partial year ("Foundation") and Company Foundation, Inc. of amounts donated by the Eli Lilly This column consists the non-employee to U.S. employees as well as gift program, which is generally available under its matching over $25 made 100 percent of charitable donations program, the Foundation matched directors. Under this year for each individual. up to a maximum of $30,000 per to eligible charities, charity payments made directly to the recipient these donations via Mr 2015 (Mr paid until 2016. the matching contribution was not - $2,550), for which February 2016; and Mr February not issued until the second January following the director's departure from board service, as described service, as described from board the director's departure January following until the second not issued “Lilly Directors’ above under stock award. and Executive Of The board annually determines the independence of directors based on a review by the Directors and The board annually determines the No director is considered independent unless the board has determined Corporate Governance Committee. with the company that he or she has no material relationship Director Independence Director Independence Dr director compensation described above, as well as an additional retainer the board. He will be eligible for the of the board. His total compensation will be prorated for his partial of $200,000 for his service as chairman period of service on the board. 2017 Director Compensation is compensation cap of $800,000 for non-employee directors, which In 2017, the board approved an annual Directors' Deferral Plan (see Item 5). Directors' compensation reflected in the provisions of the amended remains unchanged from 2016. 4 The company's process for determining director independence is set forth in our Standards for Director The company's process for determining director independence is set forth Independence, which can be found on our website at https://www the board determined that On the recommendation of the Directors and Corporate Governance Committee, each current non-employee director 3 shareholder except that the “look-back period” for determining whether a director impairs independence is extended from three to four years. with our Corporate Governance Guidelines. and determined that the members term in 2016, the board reached the same conclusion regarding Ms. Horn, of each committee also meet our independence standards. employee directors, other than Dr relationships, or arrangements the board considered in reaching its determinations. relationships, or arrangements the board considered in reaching its determinations. referenced above or (ii) any other material relationship with the company that would compromise his or her referenced above or (ii) any other material relationship with the company independence. relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial industrial, banking, consulting, legal, accounting, charitable, and familial relationships can include commercial, relationships, among others. categorical independence standards consistent with the New PROXY STATEMENT P23 basis; allother committeesmeetinexecutive sessionasneeded. Compensation, andPublic PolicyandComplianceCommitteesmeetaloneinexecutive sessiononaregular The chairofeachcommittee determinesthefrequencyandagendaofcommittee meetings. continuity andfreshperspectives. members orchairsbutannually reviewscommitteemembershipsandchairpositions, seekingthebestblendof committee membershipandselectionofchairs. The DirectorsandCorporateGovernanceCommittee makesrecommendationstotheboardregardingdirector requirements applicabletothemasmembersofthose committees. standards, andthemembersof in 2016andcurrentlyareindependentasdefinedthe NYSElistingrequirements,andLilly'sindependence The dutiesandmembershipofthesixboard-appointed committeesaredescribedbelow Committees oftheBoardDirectors direct personalbenefitfromanyofthesetransactions,relationships,orarrangements. relevant four-yearperiod.Nodirectorhadanydirectbusinessrelationshipswiththecompanyorreceived any $1 millionor2percentofthatorganization'sconsolidatedgrossrevenuesinasinglefiscalyearforthe to eachoftherelevantorganizations,inlastfourfiscalyears,didnotexceedgreater and, totheextenttheyarecommercialrelationships,havestandardterms. All ofthetransactionsdescribedabovewereenteredintoatarm’ Dr. Runge Dr. Prendergast Mr. Luciano Dr. Kaelin Mr. Jackson Mr. Fyrwald Dr. Bertozzi Dr. Baicker Director Carolina MedicalSchool University ofNorth Medical School University ofMichigan Mayo Foundation Medical School Mayo Clinicand Archer DanielsMidland Institute Dana-Farber Cancer Hospital Brigham andWomen's Harvard University Nielsen Holdingsplc Univar, Inc. Syngenta InternationalAG Stanford University Harvard University Organization Audit andCompensationCommitteeseachmeetthe additional independence Institution Educational Institution Educational Organization Charitable Institution Educational Health Careand Corporation For-profit Institution Health Care Institution Health Care Institution Educational Corporation For-profit Corporation For-profit Corporation For-profit Institution Educational Institution Educational Organization Type of Executive Officer Executive Officer Medical School Clinic andMayo of affiliatedMayo Retired employee Retired Employee Executive Officer Employee Employee Employee Executive Officer Officer Former Executive Executive Officer Employee Employee Relationship to Organization The boardhasnosetpolicyforrotationofcommittee Director s lengthinthenormalcourseofbusiness Research grants Research grants Contributions Research grants Sales ofproducts Purchases ofproducts Research grants Research grants Research grants Purchase ofproducts Purchases ofproducts Purchases ofproducts Research grants Research grants between Lillyand Primary Typeof Relationship/ Arrangement Organization Transaction/ Aggregate payments . All committeemembers Less than0.1percent Less than0.1percent Less than0.1percent Less than0.1percent of Lilly'srevenue Less than0.1percent Less than0.1percent Less than1percent Less than0.1percent Less than0.1percent Less than0.1percent Less than0.1percent Less than0.1percent Less than0.1percent Less than0.1percent The 2016 Aggregate Organization's Percentage of Audit, Revenue P23 PROXY STATEMENT P24 P24 Approval , or upon request to , or upon , subject to shareholder ratification. , subject to shareholder ai are audit committee financial ai are audit committee T . s deferred compensation plans, .com/who-we-are/governance ficer (CEO) and other EOs; .lilly . Jackson, and Mr , Mr https://www . Eskew , leads the process for director recruitment; . s global compensation philosophy and policies; s global compensation philosophy and ficer or employee of the company; ransactions with Related Persons” for a description of our policy on related-person transactions); or ransactions with Related Persons” for T ogether with the lead director capital structure and strategies; dividends; stock repurchases; capital expenditures; investments, financing, and borrowings; benefit plan funding and investments; financial risk management; and significant business development opportunities. Acts as the oversight committee with respect to the company’ Acts as the oversight committee with management incentive compensation programs; and management stock plans, and other and other senior leadership positions. Reviews succession plans for the CEO has ever been an of transaction with the company (see “Review and is or has been a participant in a related-person T its committees, as well as for the Recommends to the board candidates for membership on the board and role of lead director; and director independence and Oversees matters of corporate governance, including board performance, engagement on governance compensation, the corporate governance guidelines, and shareholder matters. Oversees the company’ chief executive of Establishes the compensation of our The integrity of financial information provided to the shareholders and others; information provided to the shareholders The integrity of financial controls; of internal controls and disclosure Management's systems and of internal and independent audit functions; The performance requirements. with legal and regulatory The company's compliance of requiring disclosure under applicable SEC rules. has any other interlocking relationships • • • • • • • • • • • • • • • • • • • • • • Reviews and makes recommendations to the board regarding financial matters, including: Reviews and makes recommendations to the board regarding financial Finance Committee Directors and Corporate Governance Committee Directors and Corporate None of the Compensation Committee members: None of the Compensation Committee Compensation Committee Interlocks and Insider Participation Compensation Committee Interlocks Compensation Committee The committee has sole authority to appoint or replace the independent auditor sole authority to appoint or replace The committee has The Board of Directors has determined that Mr The Board of Directors experts, as defined in the SEC rules. Audit Committee Audit by monitoring: in fulfilling its oversight responsibilities Assists the board All six committee charters are available online at are available online charters All six committee the company's corporate secretary the company's PROXY STATEMENT P25 LD C each committeein2016areshownthetablebelow attended themeetingin2016.Currentcommitteemembershipandnumberofmeetingsboard all boardmembersareexpectedtoattendtheannualmeetingofshareholders,anddirectorsthenserving committees onwhichheorsheservedduringhishertenureasaboardcommitteemember In 2016,eachdirectorattendedatleast80percentofthetotalnumbermeetingsboardand Membership andMeetingsoftheBoardItsCommittees Science andT Public PolicyandComplianceCommittee Meetings Number of2016 Mr Ms. Seifert Dr Mr Dr Ms. Marram Mr Dr Dr Mr Mr Mr Mr Dr Dr. Baicker Mr Name . Runge . Prendergast . Lechleiter . Kaelin . Bertozzi . . Ricks . Luciano . Jackson . Hoover . Fyrwald . Eskew . Lead Director Committee Chair • • • • • • • Alvarez T ai Oversees mattersofscientificandmedicalintegrityriskmanagement. Reviews thescientificaspectsofsignificantbusinessdevelopmentopportunities;and Reviews theprogressofcompany'sproductpipeline; Reviews newdevelopments,technologies,andtrendsinpharmaceuticalresearchdevelopment; Reviews andmakesrecommendationsregardingthecompany’ relate topublicpolicyandsocial,political,economicissues. Reviews andmakesrecommendationsregardingpolicies,practices,proceduresofthecompanythat manner thatcomplieswithlawsandregulationsreflectsthehigheststandardsofintegrity; Oversees theprocessesbywhichcompanyconductsitsbusinesssothatwilldoina echnology Committee Board LD C 7 Audit 10 C Compensation C 7 . Governance Corporate Directors and C 6 s strategicresearchgoalsandobjectives; Finance C 4 Compliance and Public Policy C 4 . Inaddition, T Science and echnology C 5 P25 PROXY STATEMENT

P26 P26 , and ficer s , or persons , controller .com/who-we-are/governance ficer The section that follows .lilly , replacing the chief executive of . , chief accounting of : a supplemental code for our CEO and all : a supplemental code for our CEO ficer .com/who-we-are/governance/ethics-and- The board has adopted corporate governance . .lilly s Corporate Governance s Corporate Governance The top priorities are assigned to a board committee or full board for assigned to a board committee The top priorities are The Red Book is reviewed and approved annually by the board. The Red Book is reviewed and approved .com/ethical-conduct-for-financial-management, or upon request to .com/ethical-conduct-for-financial-management, , chief financial of .lilly ficer . In the event of any amendments to, or waivers from, a provision of the . In the event of any amendments to, s corporate secretary Audit and Public Policy and Compliance Committees, oversees the processes by the processes by oversees Compliance Committees, Public Policy and Audit and and https://www The board exercises oversight over a broad range of areas, but the board's key responsibilities The board exercises oversight over a broad range of areas, but the board's The enterprise risk management program as a whole is reviewed annually at a full board meeting, is reviewed annually at a full board management program as a whole The enterprise risk e will maintain that information on our website for at least 12 months. e will maintain that information on our providing general oversight of the business; approving corporate strategy; approving major management initiatives; selecting, compensating, evaluating, and, when necessary fecting the chief executive of , who reports directly to the CEO. Enterprise risks are identified and prioritized by management through identified and prioritized by management to the CEO. Enterprise risks are , who reports directly • • • • ficer management. include: The directors are elected by the shareholders to oversee the actions and results of the company’ The directors are elected by the shareholders to oversee the actions and guidelines that set forth the company's basic principles of corporate governance. guidelines that set forth the company's basic principles of corporate governance. Role of the Board These documents are available online at: https://www These documents are available online Highlights of the Company’ the long-term interests of The company is committed to good corporate governance, which promotes company leadership, and strengthens shareholders and other company stakeholders, builds confidence in our accountability for the board and company management. members of financial management, in recognition of their unique responsibilities to ensure proper accounting, in recognition of their unique responsibilities to ensure proper accounting, members of financial management, and financial stewardship. financial reporting, internal controls, compliance-program the company's corporate secretary code af to post on the above website within four business days after the event performing similar functions, we intend as required under applicable Securities and Exchange Commission a description of the amendment or waiver rules. W Investors can learn more by reviewing outlines key elements of the guidelines and other governance matters. the corporate governance guidelines, which are available online at https://www or upon request to the company’ Code of Ethical Conduct for Lilly Financial Management Code of Ethical Conduct for Lilly : a comprehensive code of ethical and legal business conduct applicable to all employees The Red Book: a comprehensive code of ethical and worldwide and to our Board of Directors. Code of Ethics code of ethics, which is set out in: The board approves the company's which the company conducts its business to ensure the company operates in a manner that complies with company operates in a manner conducts its business to ensure the which the company of integrity and reflects the highest standards laws and regulations and compliance program overseen by its chief ethics has an enterprise risk management The company also of bottom-up processes. both top-down and processes and risk through robust internal management is charged with managing oversight. Company controls. annual board and function reviews and at the are also addressed in periodic business and enterprise risks strategy session. senior management The board, together with the together with the The board, Board Oversight of Compliance and Risk Management Risk Management and of Compliance Oversight Board PROXY STATEMENT P27 approach continues tostriketheappropriate balanceforthecompany andourstakeholders, mostrecently its leadershipstructureand developmentsintheareaofcorporategovernance in ordertoensurethatthis accountability strong leaddirectorposition, isthemostef The boardcurrentlybelieves thatcombiningtheroleofChairmanBoardand theCEO,coupledwitha Leadership Structure Management Leadership Structure;Oversightof Chairman, CEO,andSenior http://www disclose informationbyorderoflaw outside partyexceptunderlimitedcircumstanceswhere thedirectorisseekinglegaladviceorrequiredto policy prohibitsadirectorfromsharingconfidentialinformation obtainedinhisorherroleasadirectorwithany The boardhasadoptedaConfidentialityPolicy Board ConfidentialityPolicy board. could ef attendance recordandcontinuedengagementinboardmatters.Uponreview reviewed anexceptionrequestforMr impair thedirector'sef Corporate GovernanceCommitteemayapproveexceptionsifitdeterminesthattheadditionalservicewill not In general,nodirectormayserveonmorethanthreeotherpubliccompanyboards. Other BoardService year term. individual directorsatleasteverythreeyearswhenconsideringwhethertonominatethedirectoranew three- to thispolicy second birthday Non-employee directorsmustretirenolaterthanthedateofannualmeetingthatfollowstheirseventy- Director T resignation. will promptlydisclosetheboard'sdecision,including,ifapplicable,reasonswhyboardrejected Directors andCorporateGovernanceCommittee,willdecidewhethertoaccepttheresignation. receive amajorityofthevotescastwilltenderhisorherresignation. In anuncontestedelection,directorsareelectedbyamajorityofvotescast. V be aboardmember There shouldalwaysbeasubstantialmajority(75percentormore)ofindependentdirectors. Mix ofIndependentDirectorsandOfficer-Directors Board CompositionandRequirements oting forDirectors • • • • fectively balancehisotherboardresponsibilitiesandcontinuetobeastrongcontributortheLilly overseeing thecompany'senterpriseriskmanagementprogram. nominating, compensating,andevaluatingdirectors; risks; overseeing thecompany’ talent managementprocess,includingdiversityandinclusion; ensuring thatanef compensating otherseniorexecutives; .lilly enure andRetirementPolicy . , ef .com/about/corporate-governance/Pages/corporate-governance.aspx. The committee,withinputfromallboardmembers,alsoconsidersthecontributionsof . fective decision-making,and alignmentoncorporatestrategy The DirectorsandCorporateGovernanceCommitteehasauthoritytorecommendexceptions . fectiveness ontheLillyboard. fective successionplanisinplaceforallexecutiveof s ethicsandcomplianceprogrammanagementofsignificantbusiness . The ConfidentialityPolicycanbeviewedonthecompany's websitehere: . Alvarez (whoservesonfourothercompanyboards),consideringhis ficient andef , applicabletoallcurrentandfuturemembersoftheboard. The DirectorsandCorporateGovernanceCommittee fective leadershipmodelfor thecompany The board,onrecommendationofthe An incumbentnomineewhofailsto , thecommitteedeterminedthathe . The boardperiodicallyreviews ficers andreviewingthebroader The Directorsand The CEOshould The company , fosteringclear The P27 PROXY STATEMENT P28 P28 . ficient transfer of the . fectively assess the . Lechleiter as president and , and the company's EOs attend . Lechleiter fective independent oversight, oversight, fective independent : conducted by the independent directors, : conducted by the The lead director's responsibilities include: The lead director's : . . Ricks to succeed Dr : held after every regular board meeting. : held after every regular The independent directors and all committees are also The independent directors and all committees The independent directors also meet without the CEO to discuss s compensation for the next year s compensation for s processes for selecting and evaluating the CEO; s processes for selecting fective January 1, 2017. , ef future candidates for the CEO and other senior leadership positions; succession timing; and development plans for the highest-potential candidates. approving meeting agendas and schedules and generally approving information sent to the board; approving meeting agendas and schedules independent directors; conducting executive sessions of the annual performance evaluation of the chairman and CEO; and overseeing the independent directors' Governance Committee, leading the director recruitment together with the Directors and Corporate process. leading the board’ is not present; of the board at which the chairman presiding at all meetings and the independent directors; serving as a liaison between the chairman ensures that she is available for consultation and direct if requested by major shareholders, communication; During these reviews, the CEO and directors discuss: strong, independent, clearly defined lead director role clearly defined lead director strong, independent, The lead director also has authority to call meetings of the independent directors and to retain advisers The lead director also has authority for the independent directors. by the board. Currently Ms. Marram is the lead director The lead director is appointed annually Executive sessions of the independent directors Executive sessions CEO evaluation of the chairman and Annual performance in by the Compensation Committee are reviewed with the CEO and considered the results of which establishing the CEO’ A independent advisors: Independent directors have direct Director access to management and whenever they deem it necessary access to members of management meeting. part of each regularly scheduled board advisors, at company expense, whenever they feel it would be free to retain their own independent desirable to do so. • • • • The company ensures that the directors have multiple opportunities to interact with the company's top The company ensures that the directors have multiple opportunities to to most ef leadership talent in both formal and informal settings in order to allow them CEO Succession Planning succession plans for the CEO The Compensation Committee, board, and CEO annually review the company's and other key senior leadership positions. CEO succession planning. this process, and the independent candidates' qualifications and capabilities. In 2016, the board followed directors also met without the CEO present when selecting Mr including: CEO of the company incapacitation, or death. CEO's responsibilities in the event of an emergency or his sudden departure, during the succession-management process relating to the retirement of Dr relating to the retirement process succession-management during the Board Independence to ensure ef practices a number of governance has put in place The board the timely and ef The independent directors and the CEO maintain a confidential plan for PROXY STATEMENT P29 are considered related-partytransactions undertheSECrules. The DirectorsandCorporate GovernanceCommitteehasapprovedthefollowing employmentrelationshipsthat Procedures: factors, including: interests ofthecompany solely ofindependentdirectors,whowillapprovethetransactiononlyiftheydeterminethatitisinbest Policy: interest). transactions involvingamountsexceeding$120,000inwhicharelatedpersonhasdirectorindirectmaterial meets theminimumthresholdfordisclosureinproxystatementunderrelevantSECrules(generally than 5percentofthecompany’ the companyandrelatedpersons(directorsEOs,theirimmediatefamilymembers,orshareholdersof more The boardhasadoptedapolicyandproceduresforreview Review and issue, asappropriate. ensure thatalldirectorsvotingonanissuearedisinterested. The board,afterconsultationwithcounsel,takesappropriatestepstoidentifyactualorapparentconflictsand Directors mustdisclosetothecompanyallrelationshipsthatcreateaconflictoranappearanceofconflict. Conflicts ofInterest Conflicts ofInterestandT board's performance,boardcommitteeandallprocessesbasedoninputfromdirectors. Additionally company receive ongoingcontinuingeducationalsessionsonareasofparticularrelevanceorimportancetoour The companyengagesinacomprehensiveorientationprocessforincomingnewdirectors.Directorsalso Board Educationand • • • • • • • • • • Related-person transactionsmustbeapprovedbytheboardoracommitteeofconsisting to beinthecompany’ The boardorrelevantcommittee willreviewthetransactionannuallytodetermine whetheritcontinues ratified, ifappropriate,aspromptly aspracticable. The transactionmustbeapprovedinadvancewhenever practicable,andifnotmustbe about thetransaction. If adirectorisinvolvedinthetransaction,heorshewill berecusedfromalldiscussionsanddecisions committees. other shalldetermine)whetherthemattershouldbeconsidered bytheboardoroneofitsexisting The chairmanandtheleaddirectorshalljointlydetermine (or secretary lead director Management ortheaf the overallfairnessoftransactiontocompany imposed topreventsuchactualorapparentconflicts;and the potentialfortransactiontoleadanactualorapparentconflictofinterestandanysafeguards employment relationships,toemployeesgenerally; whether thetransactionisontermscomparabletothoseavailablethirdparties,orincaseof the alternativestoenteringintoarelated-persontransaction; the company’ , andweholdperiodicmandatorytrainingsessionsforthe , theDirectorsandCorporateGovernanceCommitteeconductsanannualassessmentof Approval ofT . , thechairofDirectorsandCorporateGovernance Committee,orthecorporate s businessrationaleforenteringintothetransaction; . Inconsideringthetransaction,boardorcommitteewillconsiderallrelevant ransactions withRelatedPersons s bestinterests. fected directororEOwillbringthemattertoattention ofthechairman, s outstandingstock). Annual Performance ransactions withRelatedPersons The policycoversanyrelated-persontransactionthat , approval,andmonitoringoftransactionsinvolving A . directormaybeexcusedfromdiscussionsonthe Assessment Audit Committee. , ifeitherisinvolvedinthetransaction, , P29 PROXY STATEMENT P30 P30 Their Andrew , , an EO. Myles O’Neill, , an EO. oting Requirements . John Bamforth, vice . John Bamforth, alsh, an EO. Finally alsh, an EO. , Lilly's former CEO. For 2016, these CEO. For 2016, , Lilly's former . Susan Mahony e are committed to continuing to engage e are committed to continuing to engage . Fionnuala W . Fionnuala . John Lechleiter e have decided not to resubmit those proposals in 2016 s benefit programs generally available to U.S. employees. generally available to U.S. employees. s benefit programs The overall tone from these conversations was positive and the The overall tone from these conversations , global marketing, is the spouse of Dr is the spouse , global marketing, , approximately 63 percent of the outstanding shares, driven in part by a 2012 , approximately 63 percent of the outstanding shares, driven in part by ficer , Hong Kong, is the son of Dr is the son of , Hong Kong, e will continue to monitor this situation and engage with our shareholders on these e will continue to monitor this situation and engage with our shareholders The proposals did not pass because they failed to receive a “supermajority vote” of The proposals did not pass because they failed to receive a “supermajority . Those proposals also fell short of the required 80 percent vote. e have shared the feedback we received from these conversations with our Compensation e have shared the feedback we received , the company engages large shareholders and other key constituents to discuss key areas of , the company engages large shareholders 1, 2012, we submitted management proposals to eliminate the supermajority voting requirements 1, 2012, we submitted management proposals to eliminate the supermajority , general manager , general Board of Directors Eli Lilly and Company c/o Corporate Secretary Lilly Corporate Center Indianapolis, IN 46285 e have three current employees who are relatives of current or former EOs. Dr of current or who are relatives current employees e have three ou may send written communications to one or more members of the board, addressed to: members of the board, addressed communications to one or more ou may send written compensation is consistent with the compensation paid to other employees at their levels and with the to other employees at their levels with the compensation paid compensation is consistent and positions their years of experience, performance, compensation principles based on Company's overall within the company president, chief marketing of chief marketing president, Classified Board and Supermajority V Prior Management Proposals to Eliminate to eliminate the company's Between 2007 and 2012, each year we submitted management proposals classified board structure. of incorporation. In addition, in 80 percent of the outstanding shares, as required in the company's articles 2010, 201 themselves. percent of the outstanding shares. In Prior to 2012, these proposals received support ranging from 72 to 77 2012, the vote was even lower on corporate governance matters NYSE rule revision prohibiting brokers from voting their clients' shares absent specific instructions from such clients. W and our assessment that the proposals based on our discussions with large shareholders as described above would not be successful. W governance and accountability to and other topics to ensure that we continue to demonstrate strong corporate shareholders. Each year Shareholder Engagement on Governance Issues Shareholder Engagement governance, as well as any specific issues for the coming proxy interest or concern related to corporate of our largest investors. Issues discussed included shareholders' season. In 2016, we spoke with a number proposal to eliminate the company's classified board and perspectives regarding a potential management proxy access, board composition and recruitment, and the company's supermajority voting requirements, topics. executive compensation, among other generally supportive of our overall compensation and governance investors with whom we spoke were policies. W Governance Committee. W Committee and Directors and Corporate Y All three individuals participate in the company’ All three individuals with the Board of Directors Communication senior vice president, global drug products, is the spouse of Dr drug products, president, global senior vice Lechleiter $1,480,000. grants between $195,000 and cash compensation, and equity three employees received perspectives are thoughtfully considered. with our investors to ensure their diverse W PROXY STATEMENT P31 shareholder businesstobepresentedatthemeeting. W are/governance. detail inSection1.9ofthebylaws. information aboutthecandidateandshareholderproposingasdescribedinmore addressed tothecorporatesecretaryataddressprovidedabove. written noticebyNovember20,2017,andnoearlierthanSeptember21,2017. nominated bytheboardthroughrecommendationprocessdescribedabove)mustgivecompany candidate atthe2018annualmeeting(i.e.,toproposeaforelectionwhoisnototherwise Under Section1.9ofthecompany’ in servingontheboard. The candidatemustmeettheselectioncriteriadescribedaboveandbewillingexpresslyinterested name andinformationaboutthecandidate'squalificationsto: A Shareholder RecommendationsandNominationsforDirectorCandidates company’ the bylawsareavailableonlineathttps://www September 21,2017. annual meetingmustgivethecompanywrittennoticebyNovember20,2017,andnoearlierthan addition, thecompany’ addressed tothecompany’ must submittheproposalinwritingsothatwereceiveitbyNovember20,2017.Proposalsshouldbe If ashareholderwishestohaveproposalconsideredforinclusioninnextyear Shareholder proposals shareholderwhowishestorecommendadirectorcandidateforevaluationshouldforwardthecandidate's e havenotreceivedanynoticeregardingshareholdernominationsforboardcandidatesorother Indianapolis, IN46285 Lilly CorporateCenter c/o CorporateSecretary Chair oftheDirectorsandCorporateGovernanceCommittee s corporatesecretary The bylawswillalsobeprovidedbymailuponrequesttothecorporatesecretary That noticemustprovidecertainotherinformationasdescribedinthebylaws.Copiesof s bylawsprovidethatanyshareholderwishingtoproposeotherbusinessatthe s corporatesecretary . s bylaws,ashareholderwhowishestodirectlynominatedirector A copyofthebylawsisavailableonlineathttps://www .lilly , LillyCorporateCenter .com/who-we-are/governance oruponrequesttothe The noticemustcontainprescribed , Indianapolis,Indiana46285.In ’ The noticeshouldbe s proxystatement,heorshe .lilly .com/who-we- . P31 PROXY STATEMENT P32 P32

522 ithin 7,222 6,707 2,039 4 54,701 24,524 33,724 34,239 12,758 41,326 11,309 67,355 61,594 35,224 40,518 36,252 49,215 26,822 816,332 106,625 60 Days Stock Units Not Distributable W — — — — — — — — — — — — — — — — — — — — 3 . ithin 60 Days 1 W Stock Units Distributable Stock Units Distributable All directors and EOs as a group own 5 6 . — — — — — — — — 100 Common Stock 1,500 3,533 1,000 2 85,314 42,141 144,173 424,905 156,219 109,620 1,068,402 2,762,123 Shares Owned ficers, and all directors and EOs as a group, as of February 17, 2017. None and EOs as a group, as of February ficers, and all directors Also included are 6,468 shares held in family trusts. Pursuant to the terms of Also included are 6,468 shares held in family trusts. Pursuant to the terms . Lechleiter include 62,582 shares that are owned by a family foundation for which . Lechleiter include 62,582 shares that are owned by a family foundation . Lechleiter has shared voting power and shared investment power with respect to the . Lechleiter has shared voting power and shared investment power with . Dr . Lechleiter has shared investment power and no voting power over the shares held in the . Lechleiter has shared investment power and no voting power over the : 7 Michael J. Harrington R. David Hoover Jamere Jackson J. Erik Fyrwald Enrique A. Conterno Michael L. Eskew John C. Lechleiter, Ph.D. Derica W. Rice Kathi P. Seifert Jackson P. Tai All directors and EOs as a group (28 people) Katherine Baicker, Ph.D. Jan M. Lundberg, Ph.D. David A. Ricks William G. Kaelin, Jr., M.D. Ellen R. Marram Franklyn G. Prendergast, M.D., Ph.D. Marschall S. Runge, M.D., Ph.D. Ralph Alvarez Beneficial Owners Juan R. Luciano The shares shown for Dr approximately 0.2 percent of the outstanding common stock of the company percent of the outstanding common stock of the company he is a director shares held by the foundation. This column sets forth RSUs that vest within 60 days. in the Lilly Directors' Deferral column includes the number of stock units credited to the directors' accounts Plan. the trusts, Dr trusts. The sum of the "Shares Owned" and "Options Exercisable/Stock Units Distributable Within 60 Days" The sum of the "Shares Owned" and "Options Exercisable/Stock Units of disclosure in the proxy columns represents the shares considered "beneficially owned" for purposes in the table possesses sole voting statement. Unless otherwise indicated in a footnote, each person listed in the table owns more than 0.1 and sole investment power with respect to their shares. No person listed 401(k) Plan. 401(k) Plan shares held by the beneficial owners indirectly through the This column includes the number of shares of common stock held individually as well as the number of This column includes the number of shares of common stock held individually For the EOs, this column reflects RSUs that will not vest within 60 days. For the independent directors, this For the EOs, this column reflects RSUs that will not vest within 60 days. 5 4 2 3 1 of the stock or stock units owned by any of the listed individuals has been pledged as collateral for a loan or individuals has been pledged as collateral units owned by any of the listed of the stock or stock other obligation. Ownership of Company Stock Stock of Company Ownership Executive Officers by Directors and Stock Ownership Common by the beneficially owned common stock shares of company the number of table sets forth The following executive of directors, the named PROXY STATEMENT P33 individuals and motivatethemtocreate long-term shareholdervalue byachievingtop-tiercorporate in theproxystatement.Our compensationphilosophyisdesignedtoattractand retainhighlytalented to approve,onanadvisory basis,thecompensationofcompany'snamedexecutive of Section 14A Executive Officers Item 2. Compensation shares. shared votingpowerwithrespectto1 W with respectto12,675,302sharesandsoledispositivepowerallofitsshares. PRIMECAP respect to54,096,413ofitssharesandsoledispositivepowerwith62,729,638shares. BlackRock, Inc.providesinvestmentmanagementservicesforvariousclients.Ithassolevotingpowerwith with respectto1,522,948ofitssharesandsoledispositivepower64,71 The V Dykstra; andJennettM.Hill. Mary K.Lisher;WilliamG.Enright;DanielP Directors oftheEndowmentiscomposedN.ClayRobbins,chairman,president&chiefexecutive The Endowmenthassolevotinganddispositivepowerwithrespecttoallofitsshares. shares ofthecompany’ T Principal HoldersofStock 7 6 New 55 East52ndStreet BlackRock, Inc. Malvern, P 100 V The V Indianapolis, Indiana46208 2801 NorthMeridianStreet Lilly EndowmentInc.(theEndowment) Boston, MA 280 CongressStreet W Pasadena, CA 177 E.ColoradoBoulevard,1 PRIMECAP

o thebestofcompany’ shares. the foundation. director The sharesshownforMr Carolyn R.Bertozzi,Ph.D.,joinedtheboardinFebruary2017,andcurrentlydoesnotbeneficiallyownany ellington ManagementCompany ellington ManagementCompany Y anguard Blvd. anguard Group anguard Groupprovidesinvestmentmanagementservicesforvariousclients.Ithassolevotingpower ork, New . Mr A 02210 ManagementCompany 19355 ManagementCompanyactsasinvestmentadvisortovariousclients.Ithassolevotingpower oftheSecuritiesExchange Advisory V 91 . Ricehassharedvotingpowerandinvestmentwithrespecttothesharesheldby Y Name and ork 10055 105 s commonstock,asofDecember31,2016,aretheshareholderslistedbelow: Address 1th Floor . Riceinclude1 s knowledge,theonlybeneficialownersofmorethan5percentoutstanding , LLP ote onCompensationPaidtoNamed , LLP 1,484,836 sharesandshareddispositivepowerwith respect toallofits providesinvestmentmanagementservicesforvarious clients.Ithas Act of1934providesthecompany's shareholderswiththeopportunity 1,596 sharesthatareownedbyafamilyfoundationforwhichheis . Carmichael;CharlesE.Golden;EliLillyII;DavidN.Shane;Craig Beneficially Owned Number ofShares 125,575,804 66,415,305 56,814,140 57,501,098 62,755,539 Percent ofClass 11.4% 6.0% 5.2% 5.2% 5.7% 1,235 ofitsshares. ficers asdisclosed The Boardof ficer; P33 PROXY STATEMENT P34 P34 s named fected incentive , more active lives. In order to , healthier As employees assume greater , excellence, and respect for people. and respect for , excellence, , the Compensation Committee's process for , the Compensation Committee's process Analysis (CD&A) e reinforce a high-performance culture by linking W As an advisory vote, this proposal is not binding on the this proposal is not binding on the As an advisory vote, s values of integrity s values e perform an annual review to ensure the programs provide , excellence, and respect for people. Our compensation programs are , the Compensation Committee values input from shareholders and will consider the Committee values input from shareholders , the Compensation e routinely review our compensation practices and engage in ongoing dialog with our ongoing dialog with and engage in practices review our compensation e routinely ficers as disclosed in this proxy statement. ficers as disclosed describes our executive compensation philosophy describes our executive compensation . However Reflect individual and company performance. pay with individual performance and company performance. performance and responsibilities, the proportion of total compensation based on company shareholder returns increases. W excessive risk-taking incentives to deliver long-term, sustainable business results while discouraging or other adverse behaviors. Attract and retain talented employees. Compensation opportunities should be competitive with our of talent is an important peer group and reflect the level of job impact and responsibilities. Retention factor in the design of our compensation and benefit programs. , our mission is to make medicines that help people live longer , our mission is to make medicines • • e request shareholder approval, on an advisory basis, of the compensation of the company’ approval, on an advisory basis, e request shareholder executive of company Objectives Our compensation and benefits programs are based on the following objectives: outcome of the vote when making future executive compensation decisions. when making future executive compensation outcome of the vote W At Lilly The Compensation Committee and the Board of Directors believe that our executive compensation aligns well compensation that our executive of Directors believe and the Board Committee The Compensation for our an important matter compensation is Executive corporate performance. and with with our philosophy W shareholders. reflect best practices. with stakeholder interests and to ensure our practices are aligned shareholders in order Our Philosophy on Compensation individuals who are committed to accomplish our mission, we must attract, engage, and retain highly talented the company's core values of integrity interests of our shareholders and designed to help us achieve these goals while balancing the long-term customers. At last year's annual meeting, more than 98 percent of the shares cast voted in favor of the company's Say- At last year's annual meeting, more Management and the Compensation Committee view this vote on-Pay proposal on executive compensation. approach toward executive compensation. as supportive of the company's overall Say-on-Pay Results for 2016 Say-on-Pay Results for Compensation Discussion and Compensation Discussion This CD&A The Board of Directors recommends that you vote FOR the approval, on an advisory basis, of the FOR the approval, on an advisory recommends that you vote The Board of Directors executive officers, as disclosed pursuant to Item 402 of Regulation compensation paid to the named tables, and related narratives provided below in this S-K, including the CD&A, the compensation proxy statement. Board Recommendation on Item 2 Board Recommendation setting executive compensation, the elements of our compensation program, the factors the committee setting executive compensation, the compensation in 2016, and how the company's results af considered when setting executive payouts for 2016 performance. performance while embracing the company’ while embracing performance PROXY STATEMENT P35 Celgene, Gilead, GlaxoSmithKline,Hof assessing competitivepay included: the peergroupmedianrevenues andmarketcap. 2015. committee reviewsthepeer groupatleasteverythreeyears. committee selectsapeergroup whosemedianmarketcapandrevenuesarebroadly similartoLilly and employpeoplewiththe uniqueskillsrequiredtooperateanestablishedbiopharmaceutical company Our peergroupiscomprisedofcompaniesthatdirectly competewithus,operateinasimilarbusinessmodel, Competitive payassessment The CompensationCommitteeconsidersthefollowingindeterminingexecutivecompensation: Process forsettingcompensation Compensation Committee'sProcessesand • • • • • • The committeeremoved Committee Matters"sectionthatfollowstheCD&A. independent compensationconsultantisdescribedin moredetailunderthe"Compensation Input fromanindependentcompensationconsultant concerningexecutivepay does nottargetaspecificpositionwithinthatrangeof marketdata. decisions, butdoesnotusethisdataasthesolebasis foritscompensationtargets. Peer-group analysis. • • performance intwoways: Assessment ofcompanyperformance • • Assessment oftheexecutive'sindividualperformanceandcontribution compensation andbenefitprograms. our annualSay-on-Payvoteandothersourcesofshareholderfeedbackwhendesigning Consider shareholderinput. organization toencourageandrewardallemployeeswhocontributeoursuccess. the overallstructureofourcompensationandbenefitprogramsisbroadlysimilaracross Implement broad-basedprograms.Whiletheamountofcompensationpaidtoemployeesvaries, companies. our pipelineportfolio,stockpricegrowth,and specific companyperformancegoalsrelatedtorevenue,earningspershare(EPS),progressof T overall companyperformanceduringtheprioryearacrossavarietyofmetrics. As afactorinestablishingpotentialcompensationforthecomingyear new EOs,compensationissetattimeofpromotionor as wellotherfactors,includingthedemonstrationofLillyvaluesandleadershipbehaviors.For on achievementofobjectivesestablishedbetweensuchEOandtheCEOatstartyear board's knowledgeandinteractionswiththeEOs.EachEO'sperformanceassessmentisbased and compensationrecommendationsfromtheCEOexercisesitsjudgmentbasedon Other ExecutiveOfficers(EOs): 2017. HiscompensationfortheroleofPresidentandCEOwassetattimehisappointment. next year ethics andintegrity objectives alongwithotherfactors,includingcontributiontothecompany'sperformanceand At theendofyear CEO atthebeginningofeachyeartoagreeuponCEO'sperformanceobjectivesfor CEO: Generally o determinepayoutsunderthecashandequityincentiveprograms,committeeestablishes . InJune2016,David , theindependentdirectors,underdirectionofleaddirector . The committeeusespeer-groupdataasamarketcheck forcompensation Allergan (acquiredby The year-endevaluationisusedinsettingtheCEO'scompensationfor , theindependentdirectorsmeettoassessCEO'sachievementofthose Abbvie, ManagementandtheCompensationCommitteeconsiderresultsof fman-La Roche, Johnson&Johnson,Medtronic, Merck,Novartis, A. RickswasappointedtoserveasCEO,ef The committeereceivesindividualperformanceassessments Amgen, . The peergroupreferenced inDecember2015when The CompensationCommitteeconsiderscompany AstraZeneca, Baxter Actavis Plc)andreplaced T otal ShareholderReturn(TSR)relativetoourpeer The committeereviewedthe peergroupin Analyses fer. , Biogen,Bristol-MyersSquibb, Abbott withShirePlc,lowering , thecommitteeconsiders . fective January1, The company . , meetwiththe The roleofthe . The . The , . P35 PROXY STATEMENT P36 P36 ward." , peer A performance , and actual The committee included The committee to understand the A , have similar business , have similar , the committee reviews the fect of unusual income or expense Appendix Audit Committee for reporting non- . Each year The bonus is based on company performance As)—performance-based equity awards that As)—performance-based Annual Cash Bonus and Performance Annual Cash Bonus and Performance . , expected company performance for the following approved by the committee prior to the approved by the committee prior to ferent forms of equity incentives: (i) Performance ferent forms of equity fordability within the company's business plan. ficers, when reviewed at the end of 2015, was in the end of 2015, was reviewed at the ficers, when , and may also be adjusted upon promotion, following a , and may also be adjusted upon promotion, wards (SV A annual operating plan alue and the other compensation disclosures we refer simply to and the other compensation disclosures , relative to internal targets: (1) revenue; (2) EPS; and (3) pipeline The 2016 weightings remained unchanged from the prior year: , and expertise, along with peer group data. Adjustments Related to the revenue and EPS that were approved. A, "Summary of ventis, and Shire Plc. With the exception of Johnson & Johnson, Novartis, and Pfizer & Johnson, the exception of Johnson Shire Plc. With ventis, and The committee considers the adjustments approved by the The committee considers the adjustments As)—equity awards vesting over three years, with a performance component measuring the component measuring vesting over three years, with a performance As)—equity awards s total compensation to named executive of to named s total compensation Annual Cash Bonus Base Salary Appendix These items may impact year-over-year growth percentages or improve comparability with peer These items may impact year-over-year EPS and other adjustments, based on guidelines EPS and other adjustments, based , Sanofi-A , and general external trends. In setting salaries, the Compensation Committee seeks to retain, motivate, , and general external trends. In setting salaries, the Compensation Committee 2. 1. wards (P GAAP bonuses can range from 0 to 200 percent of an individual's bonus target. In establishing performance goals, bonuses can range from 0 to 200 percent of an individual's bonus target. the Compensation Committee references the relative weighting for each of the factors. in three areas over the course of the year progress. beginning of each year Company performance goals and individual bonus targets are set at the middle range of the peer group. middle range of the successful achievement of the The Eli Lilly and Company Bonus Plan (Bonus Plan) is designed to reward company's financial plans and pipeline objectives for the year and reward successful performers while maintaining af Annual base salary increases are established based upon a corporate budget for salary increases, which is Annual base salary increases are established based upon a corporate set considering company performance over the prior year year change in job responsibilities, or to maintain market competitiveness. Salaries are based on each person's change in job responsibilities, or to maintain market competitiveness. Salaries level of contribution, responsibility companies were no greater than three times our size with regard to both measures. to both measures. our size with regard than three times were no greater companies directly with Lilly they compete their size because companies despite these three the In the aggregate, and scientific talent. of management the same pool seek to hire from models, and company’ items. companies. for 2016 and the rationale for making these adjustments are set period. Further details on the adjustments forth in CD&A For ease of reference, throughout the you to review the information in "revenue" and "EPS" but we encourage adjustments from GAAP annually Base salaries are reviewed and established Adjustments to reported financial results Adjustments to reported financial authority to adjust the reported revenue and EPS on which incentive The Compensation Committee has in order to eliminate the distorting ef compensation payouts are determined Components of Our Compensation of Our Compensation Components which is (1) base salary; (2) annual cash bonus, has three components: Our executive compensation per share to internal targets for revenue, earnings on company's performance relative calculated based of the pipeline; and (3) two dif (EPS), and the progress A stock price growth and total shareholder return (TSR) relative to peers, pay out based on absolute company followed by a one-year holding period. Executives also receive a both measured over a three-year period, below under "Other Compensation Practices and Information - company benefits package, described Employee Benefits." company's two-year growth in EPS relative to the expected peer group growth followed by a 13-month peer group growth followed growth in EPS relative to the expected company's two-year and (ii) Shareholder V service-vesting period; Pfizer PROXY STATEMENT P37 program intwo ways.First,thetargetEPS goalinthebonusprogram issetwithreferenceto internalgoals The measureofEPSused intheP over theperformanceperiod. below-target payouts. above-target payouts,while companyperformancelaggingtheexpectedpeergroup medianwillresultin compensation objectives,companyperformanceexceeding theexpectedpeergroupmedianwillresultin by employees,andallowsforobjectivecomparisons to peergroupperformance.Consistentwithour because itiscloselylinkedtoshareholdervalue,broadly communicatedtothepublic,iseasilyunderstood The CompensationCommitteebelievesEPSgrowth is anef accumulate dividendsduringtheservice-vestingperiod. group. stock units("RSUs"). year performanceperiod,followedbyanadditional13-month service-vestingperiodintheformofrestricted P Performance payout fromtheamountyieldedbyapplicableformula. Compensation Committeehasthediscretiontoadjustdownward(butnotupward)anyEO'sequityaward compensation withlong-termgrowthinshareholdervalueandrelativeperformancewithinourindustry company leadersonmultiyearoperationalperformancerelativetopeercompanies. The companygrantstwotypesofequityincentivestoEOs—P or (ii)theEOIP committee intendstoawardEOsthelesserof(i)bonusestheywouldhavereceivedunderBonus Plan reduce (butnotincrease)theamountofannualcashbonustobepaid.Inexercisingthisdiscretion, Once themaximumpayoutforanEOisdetermined,CompensationCommitteehasdiscretionto net incomefortheyear income. EOswillnotreceiveanyannualcashbonuspaymentsunlessthecompanyhasapositivenon-GAAP 0.3 percentofnon-GAAP Results" in allowable iscalculatedbasedonnon-GAAP (EOIP), whichsetslimitsonallowablebonusamounts.UndertheEOIP T The annualcashbonuspayoutiscalculatedasfollows: Multiples foreachperformancegoalcanrangefrom0—2.0. Based onthisweighting,thecompanybonusmultipleiscalculatedasfollows: o preservetaxdeductibilityofbonuspayouts,EOsaresubjecttotheExecutiveOf As vestoverthreeyears.Potentialsharesareearned basedonachievingEPSgrowthtargetsoveratwo- 3. company bonusmultiplexindividualtargetbasesalaryearnings=payout These awardsdonotaccumulatedividendsduringthe two-yearperformanceperiod,butdo Equity Incentives (0.25 xrevenuemultiple)+(0.50EPSpipeline Appendix A maximumbonuses. wards A The growth-ratetargetsaresetrelativetothemedian expectedEPSgrowthforthepeer Possible payoutsrangefrom 0to150percentofthetargetdependingonEPSgrowth tothisproxystatement)fortheyear . netincome.ForotherEOs,themaximumamountis0.15percentofnon-GAAP Pipeline progress EPS performance Revenue performance Goal A programdif = companybonusmultiple netincome(generallydescribedin"AdjustmentstoReported fers fromthemeasureused inourannualcashbonus 25% 50% 25% Weighting . FortheCEO,maximumbonusawardis fective measureofoperationalperformance As andSV , themaximumannualcashbonus As. The P As aredesignedtofocus ficer IncentivePlan The SV As alignearned . The net P37

PROXY STATEMENT P38 P38

A As have SV TSR for the TSR relative to TSR exceeds the TSR is above the substantial portion of program is set relative program TSR that a reasonable TSR that a reasonable A , a , as seen in prior years, , as seen TSR modifier to the SV TSR performance). TSR performance). ficers (NEO) reflects our desire to link ficers (NEO) reflects our desire to link TSR is below our peers' median, the payout will TSR is below our peers' median, the pays at threshold (or vice versa). (or vice pays at threshold As pay out above target if Lilly stock outperforms an As pay out above A As reflected in the charts below

, while the target EPS goal in the P target EPS goal , while the The committee added the relative and beginning in 2016, relative and beginning in 2016, ficers is performance-based. Both the annual cash bonus and equity ficers is performance-based. Both the . award, a modifier based on Lilly's three-year cumulative award, a modifier based on Lilly's three-year A The target share price is based on this expected rate of return less the is based on this expected rate The target share price TSR performance will be applied to payouts for EOs. If Lilly's TSR performance will be applied to wards A program measurers EPS over a two-year period. In a given year a two-year period. measurers EPS over program A alue s dividend yield, applied to the starting share price. EOs receive no payout if Lilly's to the starting share price. EOs s dividend yield, applied The expected rate of return includes dividends and is based on the three-year of return includes dividends and is The expected rate As are earned based on Lilly's share price ( As are earned based the bonus program may pay out above target while the P out above target program may pay the bonus performance, with the bonus factoring in performance over a one-year payouts are contingent upon company in performance over a longer term (as described above under period, and equity compensation factoring - 3. Equity Incentives"). "Components of Our Compensation The mix of compensation for the CEO and other named executive of The mix of compensation for the CEO performance. executive compensation with company of the target pay for all named executive Pay for Performance Beginning with the 2016-2018 SV Possible payouts based on share price growth goals (prior to applying the applicable modifier described Possible payouts based on share price of the target amount, depending on stock performance over the period. below) range from 0 to 150 percent return. to expected growth rates among our peer group. Second, the bonus program measures EPS over a one-year EPS over bonus program measures Second, the our peer group. growth rates among to expected the P period, while SV requirement. No out are subject to a one-year holding period, and any shares paid a three-year performance SV during the performance period. dividends are accrued that rate of target if company stock underperforms annual rate of return and below expected compounded our peer companies' median by 1 percent for every percentage point Lilly's median of our peers, the payout is increased Likewise, if Lilly's median (up to a maximum of 20 percent). 20 percent. be reduced by up to a maximum of leaders' rewards align with shareholder experience while encouraging program because it ensures senior strong performance within the industry Shareholder V that align to our annual operating plan for the year plan for the to our annual operating that align investor would consider appropriate for investing in a basket of large-cap U.S. companies, as determined by basket of large-cap U.S. companies, appropriate for investing in a investor would consider Committee. the Compensation company’ is zero or negative. three-year period PROXY STATEMENT P39 our researchcapabilitiesin SanDiegoandBostonprogressedournext-generation developmentstrategy Dr were achieved. and Europe.Inaddition,regulatory submissionswerecompletedfor U.S., approvals forCyramzain2nd-linegastriccancerJapan and2nd-linemetastaticcolorectalcancerinthe Jan Lundberg function metverydif Dr Derica Rice set apositivetoneofintegrity ef company achievedthesuccessfulintegrationofNovartis Portrazza®, followingthesuccessfullaunchofthreenewmolecularentities(NMEs)in2014.Inaddition, to newproductsincludingCyramza, increased itsgrowthprospectsinthemediumandlongterm Compensation Committeeduringaprivatesession.UnderDr directors conductedareviewofDr Dr A 2015 IndividualNEOPerformance company performanceduring2015. In settingpotentialEOcompensationfor2016,theCompensationCommitteeconsideredbothindividualand Performance ReviewProcess 2016 T summaryofthecommittee'sreviewindividualNEOsisprovidedbelow: ficiency andsustainabilityofthecompany’ . Lundbergplayedakeyleadership roleinreorganizingexternalresearch.Hesponsored theexpansionof . Lundberg. . JohnLechleiter T rulicity inJapan,Humalog®U-200Kwikpen,andGlyxambi® intheU.S.,andSynjardy®U.S. arget T : Mr : Dr The committeenotedtheportfolioreviewprocessisfar morerobustthaninpastyears.His . Ricedemonstratedstrongleadershipofourportfolio managementinpartnershipwith . LundbergledLillyResearchLaboratoriespositivepipeline progression,includingregulatory : Inaccordancewiththecompany’ otal Compensation ficult financialtargetswhilecontinuingtoprovideoutstanding supporttothebusiness. , inclusiveness,safety . Lechleiter T rulicity®, andJardiance.In2015,thecompanylaunchedBasaglar s researchanddevelopmentprocess.Dr ’ s performanceduring2015,whichwasprovidedtothe , andcomplianceinhisinternalexternalinteractions. s CorporateGovernanceGuidelines,theindependent Animal Healthandledaninitiativetoimprovethe

and drovenear-termvolumegrowth,attributable . Lechleiter T altz andallplannedPhase 3trialstarts ’ s leadership,thecompany . Lechleitercontinuedto P39 . PROXY STATEMENT P40 P40 , , . rulicity s success. The actual payouts The actual payouts — — 6% 3% 2% 80% 80% . 150% 100% 100% Increase (effective March 1, 2016) 2016 Bonus Target , based on the rationale described above. The committee determined that an increase to Dr The committee determined that an . Conterno drove improvements in manufacturing our in manufacturing our . Conterno drove improvements . Lechleiter $731,511 $835,280 $1,500,000 $1,071,306 $1,007,855 90% 90% 75% 75% 150% , for each named executive approved by the committee in , for each named executive approved 2016 Annual Base Salary 2015 Bonus Target , and several other areas. He was instrumental in several He was instrumental other areas. , and several . Conterno also received an increase in his equity award. . Conterno also received an increase , peer data, and individual performance, the committee decided to , and peer-group data. arget Compensation ficers in the form of the 2016 annual cash bonus and equity awards granted the 2016 annual cash bonus and ficers in the form of $710,205 $788,000 The business successfully launched several new products in the U.S. (T launched several new products The business successfully $1,500,000 $1,050,300 $1,007,855 . Conterno's leadership, the Diabetes business had a very strong year beating the Diabetes business had a . Conterno's leadership, 2015 Annual Base Salary . Harrington provided thoughtful counsel on a variety of issues including commercial including commercial a variety of issues counsel on provided thoughtful . Harrington targets. argets Mr. Rice Dr. Lundberg Mr. Harrington Mr. Conterno Dr. Lechleiter Name T : Mr : Under Mr able" in the "Executive Compensation" section of this proxy able" in the "Executive Compensation" T The committee decided his increase should be delivered entirely in performance-based equity The committee decided his increase . Lundberg, the committee believed his base salary was appropriate but increased his bonus . Lundberg, the committee believed earnings Name Dr. Lechleiter Mr. Conterno Mr. Rice Dr. Lundberg Mr. Harrington s total compensation was appropriate given overall company results and his strong leadership over s total compensation was appropriate ’ . For Dr arget Compensation Humalog U-200 Kwikpen, Glyxambi, and Synjardy). Mr Humalog U-200 Kwikpen, functions. forged strong partnerships with other insulin products and Based on a review of internal relativity increase bonus targets for all NEOs in 2016, except Dr Annual Cash Bonus several years. Lechleiter base salary earned during 2016 is reflected in the "Summary December 2015. Each executive's actual Compensation earnings: Bonus targets are shown in the table below as a percentage of base salary Base Salary if any The following table outlines salary increases, The committee established 2016 target total compensation opportunities for each NEO based on the NEO's total compensation opportunities for each NEO based on the NEO's The committee established 2016 target 2015 performance, internal relativity Rationale for Changes to NEO T practices, pricing, intellectual property policy pricing, intellectual practices, Enrique Conterno T compensation for NEOs for 2016. the section below reflects target total The information in successful negotiations with external parties, and the company prevailed in several patent lawsuits including patent lawsuits prevailed in several and the company external parties, negotiations with successful the U.S. and Europe. Alimta® in revenue and executive of made to the named Payouts." the next section, under "2016 Compensation vesting in 2016 are summarized in in prior years and unchanged from prior years and increasing the target value of his leaving his base salary and bonus target equity strategic importance and impact of the R&D organization’ target and equity award reflecting the Rice received salary increases, aligned with the company's annual Messrs. Conterno, Harrington, and the to their bonus targets, reflecting their contributions over time. In light of increase guidelines, and increases Mr Diabetes business's strong performance, Michael Harrington PROXY STATEMENT P41 performance period.Possible payoutsbasedonsharepricerangesareillustrated inthegridbelow growth of5.6percentperyear iscomparabletoacompoundedannual EOs iftheshareholderreturn (includingprojecteddividends)iszeroornegative. stock foralltradingdaysin NovemberandDecember2018. nearest $0.05. return forlarge-capcompanies(8percent),lessanassumed dividendyieldof2.4percent,roundedtothe December 2015. representing theaverageofclosingpricescompany stockforalltradingdaysinNovemberand For purposesofestablishingthestockpricetargetfor theSV Shareholder V below: Possible payoutsforthe2016-2018P percent peryearbasedoninvestmentanalysts’ In January2016,thecommitteeestablishedacumulative,compoundedtwo-yearEPSgrowthtargetof7 Performance These targetsaredescribedin2016CompensationPayoutsundertheBonus in thecompany's2016corporateoperatingplanapprovedbyBoardofDirectors2015. The CompensationCommitteeestablishedthecompanyperformancetargetsfor2016atspecified 2016 Performance Goalsfor2016IncentivePrograms for the2015and2016equitygrantstoNEOswereasfollows: shareholder return,giventheoperationalfocusofbothP allocated totheSV individual performance,andpeer-groupdata. For 2016equitygrants,thecommitteesettotaltargetvaluesforNEOsbasedoninternalrelativity T otal EquityProgram- EPS AnnualGrowth Cumulative 2-Year Annual CashBonusGoals Payout Multiple A alue wards –2016-2018P Mr. Conterno Mr. Harrington Dr. Lundberg Mr. Rice Dr. Lechleiter Name The endingpricetodeterminepayoutswillbetheaverage oftheclosingpricescompany Rate EPS The targetendingsharepricerangewasestablished basedontheexpectedannualrateof A A forallNEOsfrom50percentto60percent,asthecommitteewantedmorefocuson wards –2016-2018SV T $3.52 0.00 arget GrantV 50% payout

A alues A rangefrom0to150percentofthetarget,asillustratedinchart A 2015 TotalEquity $6.93 (1)% 0.50 The committeeincreasedtheportionoftotalequityvalue $10,000,000 $2,000,000 $2,300,000 $3,400,000 $3,800,000 peergroupestimatesatthattime. A $7.36 The awardisdesignedtodeliver nopayoutto As, thestartingpricewas$83.74pershare, 0.75 3% andtheannualcashbonus. TSR of8percentoverthe three-year 2016 TotalEquity Target $7.80 1.00 7% $11,000,000 $2,200,000 $2,300,000 $3,600,000 $3,800,000 A wards for2016subsection. The targetshareprice $8.24 11% 1.25 T otal targetvalues . , $8.70+ 15% 1.50 P41 PROXY STATEMENT P42 P42 . 150% 12.6% $119.58 Greater than Greater than The company fell 1.33 0.91 1.54 1.17 Multiple¹ 125% $119.58 $109.07- 9.2%-12.6% 100% $98.55- TSR, capped at 20 percent. TSR, capped at 20 $109.06 5.6%-9.2% 4.08 $3.52 $21.2 billion Adjusted Results 75% $98.54 $88.03- 1.7-5.6% , which is applied to the payout indicated by the grid below , which is applied . 3 50% The company also made significant progress on its pipeline, The company also made significant $3.55 Target (2.5%)-1.7% $77.51-$88.02 $77.51-$88.02 $20.6 billion TSR modifier 2016 Corporate 0% (2.5%) $77.51 Less than Less than Revenue EPS Pipeline score Resulting Bonus Multiple TSR deviates from our peer group's median three-year our peer group's median three-year TSR deviates from Award for 2016 Percent of Target Compounded Annual Compounded Growth Share Price Rate (excluding dividends) Ending Stock Price Ending Stock altz, along with 19 other new approvals, indications, or line extensions during 2016. altz, along with 19 other new approvals, ¹Performance goal multiples are capped at 2.0. the resulting bonus multiple, is illustrated below the resulting bonus multiple, is illustrated Bonus to targets for revenue, EPS, and pipeline progress, as well as The company's 2016 performance compared 2016 Company Performance - Compensation revenue target with annual revenues of $21.2 billion. For 2016, the company exceeded its The information in this section reflects the amounts paid to NEOs for the 2016 annual cash bonus and to NEOs for the 2016 annual cash this section reflects the amounts paid The information in in prior years for which the relevant performance period ended in 2016. payouts from equity awards granted 2016 Compensation Payouts 2016 Compensation EO awards are subject to a relative EO awards are subject $3.52. short of its EPS target, with EPS of for pipeline progress, highlighted by regulatory approval for Lartruvo and meeting or exceeding most targets T The number of shares to be paid will increase or decrease by 1 percent for every percentage point Lilly's by 1 percent for every percentage to be paid will increase or decrease The number of shares three-year PROXY STATEMENT P43 in thechartsbelow The company'sperformance comparedtotarget(andtheresultingmultiple)for the2015-2017P products aswereturntoaperiodofgrowth. annual EPSgrowthforthetwo-yearperiodwas7.9percent, reflectingthepositivecontributionofournewer industry growthof1.0percenteachyearoverthetwo-year performanceperiodof2015-2016. The targetcumulativeEPSforthe2015-2017P 2015-2017 Performance Equity The cashbonusamountspaidtoNEOsfor2016are reflected inthe"SummaryCompensation Combined, therevenue,EPS,andpipelineprogressmultiplesyieldedabonusmultipleof1.17. certified apipelinescoreof4.08,resultinginmultiple1.54. Based ontherecommendationofScienceand goals at4.08(onascaleof1to5)including: The Scienceand • • • • • • Award PerformancePeriodsEndingin2016 of 5,recognizingastrongyearforinnovation. subjective assessmentofthequalitypipeline,consideringmanyfactors—awardedascore4 planned timelinesscoringa5of5. launch thanindustrybenchmarksscoringa4of5;progressedprojectsintheportfoliofaster exceeded targetsforSpeedtoLaunch:projectplansacrosstheportfolioreflectedfastertime 4 newindicationsorlineextensions(NILEX)enteringintoPhase3versusagoalof4-5entrants. 12 NMEsenteringintoPhase1versusagoalof9-1 1 NMEenteringintoPhase3versusagoalof2entrants. approvals versusagoalof12. 2 newmolecularentity(NME)productapprovalsversusagoalof2,and19othersignificant T echnology Committeeassessedthecompany'sprogresstowardachievingproductpipeline . (0.25 x1.33)+(0.500.91)1.54)=1.17bonusmultiple A ward A wassetinthefirstquarterof2015reflectingexpected T echnology Committee,theCompensationCommittee 1 entrants. The company's T able" below A isreflected . P43 PROXY STATEMENT P44 P44 40,518 36,252 24,524 21,326 106,625 RSUs Earned 13-month service-vesting period under the 13-month service-vesting period under was set in January 2014 based on a beginning stock was set in January 2014 based on A 71,083 27,012 24,168 16,349 14,217 Target Shares . an additional The company's performance compared to target (and the resulting payout The company's performance compared ward is shown below A A alue Dr. Lundberg Mr. Harrington Mr. Conterno Name Dr. Lechleiter Mr. Rice The ending stock price of $72.15 represents stock price growth of approximately 43 percent The ending stock price of $72.15 represents is reflected in the table below (this information is also included in footnote 5 to the "Outstanding is reflected in the table below (this A wards" table in the "Executive Compensation" section below): wards" table in the "Executive Compensation" A Equity 2015-2017 P 2014-2016 Shareholder V For the NEOs, the number of shares subject to For the NEOs, the number of shares the 2014-2016 SV The target stock price of $56.95 for closing price for Lilly stock for all trading days in November and price of $50.42, which was the average December 2013. over the relevant three-year period. multiple) for the 2014-2016 SV PROXY STATEMENT P45 its aircraftin2016 byDr benefits tothe companyoutweightheexpense. to hisretirement,andforMr of thecorporateaircraft;however theaircraftwasmadeavailableforpersonal useofDr The companyprovidesvery limitedperquisitestoEOs. Perquisites cost ofemployeebenefitsispartiallybornebytheemployee, includingeachEO. between thecalculatedbenefitsandIRSlimits, theformulaissameforallU.S.employees. of Internal RevenueService(IRS)limitsforamountsthat canbepaidthroughaqualifiedplan,thecompanyalso reflecting employees’ Retirement Plan(thePlan)provideU.S.employees areasonablelevelofretirementincome disability insurance,andlifeinsurance.Inaddition, The benefitsavailablearethesameforallU.S.employees andincludemedicaldentalcoverage, The companyof Employee Benefits Other CompensationPracticesandInformation The sharespaidtoNEOsduring2016forthe2014-2016SV fers anonqualifiedpensionplanandsavings plan. • • • enhance productivityandjobsatisfactionthroughbenefitprogramsthatfocusonoverallwell-being. provide post-retirementincome;and provide ourworkforcewithareasonableleveloffinancialsupportintheeventillnessorinjury;

Mr. Rice Dr. Lechleiter Name Dr. Lundberg Mr. Harrington fers coreemployeebenefitscoverageto: Mr. Conterno careerswiththecompany . Lechleiter . Ricksbeginningin2017, in veryrarecaseswhenthesecurityandef , andhereceived nootherperquisites.Depending onseatavailability . The company didnotincuranyexpenses forpersonaluseof T o theextentthatanyemployee’ Target Shares The LillyEmployee401(k)plan(401(k)Plan)and 122,984 51,927 40,995 25,963 27,330 The companydoesnotgenerally allowpersonaluse A wereasfollows: These plansprovideonlythedif Shares PaidOut 172,178 72,698 57,393 36,348 38,262 s retirementbenefitexceeds . Lechleiter ficiency ference The Lilly , prior The , P45 PROXY STATEMENT P46 P46 The Lilly s EPS. , the basic elements of As, a portion of which ermination or Change in T As would be paid out on a pro-rated s job level and seniority own employment. , the company is not obligated to pay severance to , the company is not . Under this unfunded plan, amounts deferred by the . Under this unfunded This partial payment is appropriate because it is not , a portion of outstanding SV partial exception is made for outstanding P A This is consistent with the plan's intent to provide employees with financial This is consistent with the plan's intent to provide employees with financial fer depending on the employee’ . Highlights of our change-in-control severance plans Highlights of our change-in-control These provisions assure employees a reasonable period of protection of their These provisions assure employees a reasonable period of protection fer a covered termination receive up to two years of pay and 18 months of fer a covered termination receive up to two years of pay and 18 months . There is no incremental cost to the company for these trips. to the company no incremental cost There is . Unlike “single trigger” plans that pay out immediately upon a change in control, our plans . Unlike “single trigger” plans that pay out immediately upon a change 18-month benefit continuation all regular employees are covered double trigger generally required no tax gross-ups up to two-year pay protection fective way at minimal cost to the company fective way at minimal The plans are intended to preserve employee morale and productivity and encourage retention in the The plans are intended to preserve protection upon loss of employment. Double trigger worked based on the forecasted would be paid out upon a change in control on a pro-rated basis for time payout level at the time of the change in control. generally require a “double trigger”—a change in control followed by an involuntary loss of employment generally require a “double trigger”—a change in control followed by an within two years thereafter possible to convert the company EPS targets into an award based on the surviving company’ possible to convert the company EPS targets into an award based on the benefits protection Likewise, if Lilly is not the surviving entity price for company stock. basis for time worked up to the change in control based on the merger in control, Covered terminations. Employees are eligible for payments if, within two years of the change for good reason by the employee, their employment is terminated (i) without cause by the company or (ii) Upon each as is defined in the plan. See “Executive Compensation - Payments constitutes a change in control. Control” for a more detailed discussion, including a discussion of what Employees who suf income and core employee benefits. • • • Although benefit levels may dif the plans are comparable for all eligible employees: the plans are comparable for all eligible Except in the case of a change in control of the company Except in the case to or rumored change in control. In addition, the plans are intended face of the disruptive impact of an actual by enabling executives to evaluate corporate transactions that may align executive and shareholder interests and other constituents of the company without undue concern be in the best interests of the shareholders jeopardize the executives’ over whether the transactions may Severance Benefits Severance Benefits severance pay plans for nearly all employees, including the The company has adopted change-in-control EOs. Deferred Compensation Plan (Deferred Compensation Plan), which allows executives to save for retirement Plan), which allows executives to Plan (Deferred Compensation Deferred Compensation in a tax-ef rate, as described of the applicable federal long-term at an interest rate of 120 percent executive are credited in 2016” table. the “Nonqualified Deferred Compensation in more detail following Compensation payments are at the discretion of the of their employment; any such EOs upon termination Committee. The Lilly Deferred Compensation Plan Plan Deferred Compensation The Lilly under part or all of their cash compensation management may defer receipt of Members of senior family members and personal guests of EOs may travel on the company aircraft to accompany EOs who are to accompany EOs company aircraft may travel on the guests of EOs and personal family members on business. traveling PROXY STATEMENT P47 employees) whose misconductresultsin amaterialviolationoflaw orcompanypolicythatcauses significant discretion toclaw backincentivepayouts fromanymemberofsenior management(approximately 160 adopted anexecutivecompensation recoverypolicy performance orvestingperiod orfordisciplinaryreasons.Inaddition,theCompensation Committeehas All incentiveawardsaresubject toforfeitureuponterminationofemploymentprior totheendof Executive Compensation RecoveryPolicy loan ortradingsharesonmargin). management areprohibitedfrompledginganycompany stock(i.e.,usingcompanyascollateralfora stock throughshortsalesorderivativetransactions.Non-employee directorsandallmembersofsenior Non-employee directorsandemployeesarenotpermitted tohedgetheireconomicexposurescompany period. requirement ismetbythe13-monthservice-vestingperiod thatappliesaftertheendofperformance taxes, foratleastoneyear EOs arealsorequiredtoholdallsharesreceivedfrom equityprogrampayouts,netofacquisitioncostsand 2016, Dr Our executiveshavealonghistoryofmaintainingsignificantlevelscompanystock. shares isreached,theEOmustretain50percentofnettaxesreceivedfromnewequitypayouts. ranges fromtwotothreetimesannualbasesalarydependingontheposition.Untilrequirednumberof own companystockvaluedatleastsixtimesannualbasesalary Share ownershipandretentionguidelineshelptofosterafocusonlong-termgrowth. Pledging Shares Share OwnershipandRetentionGuidelines;ProhibitiononHedging following tableshowsthesharerequirementsforeachNEO: least 50percentofnetsharesreceivedfromfutureequitypayoutsuntilhesatisfiestheseguidelines. • • tax. Revenue Code. connection withachangeincontrolcouldexceedlimitsestablishedunderSection280GoftheInternal Excise tax termination. Accelerated vestingofequityawards. benefit thantheemployeewouldreceivewithanunreducedbenefit. control-related benefitswillbereducedtothe280Glimitifef The companydoesnotreimburseemployeesforthesetaxes.However . Lechleiterheldsharesvaluedatapproximately59timeshisannualsalary • • dental benefits. both ageandyears-of-servicecreditforpurposesofdeterminingeligibilityretireemedical eligible forcoveragewithanewemployer continued for18monthsfollowingterminationofemployment,unlesstheindividualbecomes Benefit continuation. plus twotimesthethen-currentyear from sixmonths’ Severance payment. . Insomecircumstances,thepaymentsorotherbenefitsreceivedbyemployeein The employeewouldthenbesubjecttoanexcisetaxontopofnormalfederalincome Name Mr. Conterno Mr. Harrington Dr. Lundberg Mr. Rice Dr. Lechleiter , evenonceshareownershiprequirementshavebeen met.ForP totwoyears’ Basicemployeebenefitssuchashealthandlifeinsurancewouldbe Eligibleterminatedemployeeswouldreceiveaseverancepaymentranging basesalary Any unvestedequityawardswouldvestatthetimeofacovered three timesbasesalary three timesbasesalary three timesbasesalary three timesbasesalary six timesbasesalary Share Requirement ’ s targetbonus. , thatgivestheCompensation Committeebroad . . Executivesarealleligiblefortwoyears’ All employeeswouldreceiveanadditionaltwoyearsof . The holdingrequirementforotherEOs Owns RequiredShares fect wouldbetodeliveragreaterafter-tax Yes Y Yes Yes Yes es , theamountofchangein . Mr The CEOisrequiredto As ofDecember31, . Rickswillretainat As, thisholding basesalary The P47 PROXY STATEMENT P48 P48 wards and A . Recoveries under . Recoveries under . Ricks will receive a base , Mr ficer As. He does not receive any , and a director on January 1, 2017, and will , and a director on January 1, 2017, . ficer A. Ricks to assume the role of president and chief A. Ricks to assume the role of president Accrued performance will be used to determine the number of Accrued performance will be used to As and 40 percent in P . s rights to recover compensation under the policy s rights to recover The awards will convert to restricted stock units that continue to vest with the The awards will convert to restricted fect the company’ wards) in the event of a change-in-control require a “double trigger” (a change-in-control wards) in the event of a change-in-control A . He became president, chief executive of . He became president, chief executive They will payout upon the earlier of the completion of the original award period or upon a They will payout upon the earlier of alue . Ahead to 2017 Compensation Ahead to 2017 ficer , the company can recover all or a portion of any EO incentive compensation in the case of compensation in any EO incentive all or a portion of can recover , the company . Ricks received an equity award in February 2017 as part of the company's annual equity incentive . Ricks received an equity award in . Mr covered termination. shares earned under the award. new company Beginning with 2017 grants, the treatment of performance-based equity awards (Performance Beginning with 2017 grants, the treatment Shareholder V to pay occurs plus termination of employment) of performance based equity: 60 percent in SV of performance based equity: 60 percent of the company compensation for his service as a director salary of $1.4 million and will be eligible for an annual cash bonus with a target value of 150 percent of base for an annual cash bonus with a target value of 150 percent of base salary of $1.4 million and will be eligible salary One hundred percent of this grant value was delivered in the form program with a grant value of $8.5 million. become chairman of the board on June 1, 2017. become chairman of the board on June as president and chief executive of In connection with his appointment Looking elected David Lilly's board of directors unanimously executive of The recovery policy covers any incentive compensation awarded or paid to an employee at a time when he or awarded or paid to an employee covers any incentive compensation The recovery policy or termination of changes in status, including retirement senior management. Subsequent she is a member of af employment, do not back as far as three years. the plan can extend Additionally or not calculation, whether the performance material errors in statements or inaccurate financial materially has engaged in wrongful conduct. and whether or not the EO they result in a restatement harm to the company or who fails in his or her supervisory responsibility to prevent such misconduct by such misconduct to prevent supervisory responsibility fails in his or her company or who harm to the others. PROXY STATEMENT P49 1 2016-2018 P The tablebelowshowstheminimum,target,andmaximum payouts(usingthegrantdatefairvalue)for approved bythecommittee: and 2015.Forpurposesofcomparison,thesupplementaltablebelowshowstotaltargetgrantvalues on theprobablepayoutoutcomeanticipatedattimeofgrant,whichwasdif performance conditionasofthegrantdate. V Summary CompensationT Executive Compensation This columnshowsthegrantdatefairvalueofP Conterno Enrique A. Ph.D. Jan M.Lundberg, Ph.D. John C.Lechleiter, Harrington Michael J. Derica W.Rice Diabetes President, Lilly and Senior V General Counsel and Senior V Research Laboratories President, Lilly T Science and President, Executive V Chief FinancialOf Global Services,and President, Executive V Of Chief Executive and Chairman, President, Position Name andPrincipal echnology alues forawardssubjecttoperformanceconditions(P ficer ice President ice President , and ice ice A ficer grantincludedinthiscolumnofthe"SummaryCompensation Mr Mr Dr Mr Dr Name . Lundberg . Lechleiter . Conterno . Harrington . Rice 2016 2016 2016 2014 2014 2014 2014 2014 2016 2016 2015 2015 2015 2015 2015 Year $1,007,855 $1,500,000 $1,007,855 $1,019,700 $1,500,000 $1,067,805 $1,007,855 $1,045,200 $1,500,000 Name Mr Mr Dr Mr Dr $727,960 $682,890 $765,000 $827,400 $705,653 $784,167 Salary . Lundberg . Lechleiter . Conterno . Harrington . Rice ($) able Bonus ($) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 February 2019 February 2019 February 2019 February 2019 February 2019 Payout Date 2014 T $11,000,000 $11,350,000 $2,200,000 $3,600,000 $1,500,000 $1,425,000 $2,250,000 $2,850,000 $6,750,000 $2,300,000 $3,800,000 $2,270,000 $2,610,500 $3,859,000 $4,313,000 The P $2,000,000 $1,900,000 $3,000,000 $3,800,000 $9,000,000 A Stock wards ($) otal Equity 1 As andSV A grantvaluesincludedinthe"Stock A Option Minimum Payout wards As) arecomputedbasedupontheprobableoutcomeof ($) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 2015 T As computedinaccordancewithF $10,000,000 $2,000,000 $2,300,000 $3,400,000 $3,800,000 $0 $0 $0 $0 $0 Compensation Incentive Plan Non-Equity otal Equity $1,179,190 $2,632,500 $1,785,000 $1,249,332 $1,460,382 $1,514,495 $3,622,500 ($) $681,371 $435,342 $487,688 $771,009 $780,071 $774,446 $852,075 $946,881 2 Target Payout $1,440,000 $1,520,000 $4,400,000 $880,000 $920,000 2016 T Pension V Change in $11,000,000 $2,200,000 $2,300,000 $3,600,000 $3,800,000 $1,235,839 $1,330,586 $2,023,458 $1,441,954 $3,144,633 $4,356,142 $1,739,429 T able." $935,408 $627,381 $517,761 $391,899 $390,645 ferent fromthetargetvaluein2014 ($) otal Equity 3 alue $0 $0 $0 Maximum Payout $1,320,000 $1,380,000 $2,160,000 $2,280,000 $6,600,000 A 5 5 5 5 5 wards" columnarebased Compensation All Other ASB ($) $40,973 $45,900 $61,182 $43,678 $60,471 $49,644 $90,000 $60,471 $62,712 $90,000 $90,000 $42,339 $47,050 $60,471 $64,068 4 ASC Compensation T $18,367,133 $16,562,500 $14,481,142 opic 718. $3,895,044 $4,054,174 $6,734,411 $4,588,417 $6,474,897 $5,393,444 $6,778,353 $6,935,407 $3,870,067 $4,780,497 $4,607,096 $7,920,634 T ($) otal P49 PROXY STATEMENT P50 P50 , and and Awards of Equity Fair Value $920,000 $880,000 Grant Date $4,400,000 $6,600,000 $1,520,000 $2,280,000 $1,440,000 $2,160,000 $1,380,000 $1,320,000 As, The changes The changes All bonuses All bonuses 0 0 0 0 0 of Stock, Option or Units Number Awards: Stock or Options, All Other Shares of There were no 17 percent of . Rice reflect no 91,667 31,667 99,830 30,000 94,576 19,167 60,422 18,333 57,797 288,982 Maximum (# shares) . For the other NEOs, . For the other NEOs, , and Mr fset the impact of the Target 61,111 21,111 55,461 20,000 52,542 12,778 33,568 12,222 32,109 160,545 (# shares) Estimated Future Payouts Under Equity Incentive Plan Awards 6,389 6,111 . Lechleiter 30,556 64,218 10,556 22,185 10,000 21,017 13,427 12,844 (# shares) Threshold ($) 1 Maximum $1,323,840 $1,164,736 $4,500,000 $2,135,610 $2,015,710 wards A . Conterno, Dr ($) able” in the column titled “Non-Equity Incentive Plan Target T $661,920 $582,368 $2,250,000 $1,067,805 $1,007,855 Under Non-Equity Incentive Plan Estimated Future Payouts ($) The bonus payment for 2016 performance was 1 $16,548 $14,559 $56,250 $26,695 $25,196 Threshold The company does not reimburse executives for taxes outside of the not reimburse executives for taxes The company does ______Committee Action Date 12/14/2015 12/14/2015 12/14/2015 12/14/2015 12/14/2015 12/14/2015 12/14/2015 12/14/2015 12/14/2015 12/14/2015 Compensation 3 4 3 4 3 4 3 4 3 4 2 ______wards During 2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 2/3/2016 Grant Date A A A A A A A A A A A The design of the pension benefit did not change. See the Pension Benefits in 2016 table below the Pension Benefits in 2016 table pension benefit did not change. See The design of the Award 2016-2018 P 2016-2018 P 2016-2018 P 2016-2018 P 2016-2018 P 2016-2018 SV 2016-2018 SV 2016-2018 SV 2016-2018 SV 2016-2018 SV fected by additional service accruals and pay earned, as well as actuarial assumption changes. as actuarial assumption earned, as well accruals and pay additional service fected by Name As, and RSUs). . Conterno . Harrington . Rice . Lundberg . Lechleiter Mr Mr Dr Mr Dr In 2015, the net present value of the pension benefits for Mr value of the pension benefits In 2015, the net present The amounts in this column are solely company matching contributions for each individual's 401(k) plan and contributions for each individual's column are solely company matching The amounts in this The amounts in this column reflect the change in pension value for each individual, calculated by our actuary calculated by for each individual, in pension value reflect the change in this column The amounts This column shows payments under the bonus plan for performance in each of the respective years. of the respective in each for performance bonus plan the under payments column shows This target, and is included in the “Summary Compensation Compensation.” These columns show the threshold, target, and maximum payouts for performance under the bonus plan. Bonus These columns show the threshold, target, and maximum payouts for performance payouts range from 0 to 200 percent of target. paid to NEOs were part of a non-equity incentive plan. a non-equity incentive were part of paid to NEOs Grants of Plan-Based nonqualified savings plan contributions. nonqualified savings limited circumstance of taxes related to employee relocation or a prior international assignment. or a prior international assignment. of taxes related to employee relocation limited circumstance or personal benefits. reportable perquisites the discount rate over the prior year year due to an increase in change from the previous with an additional year of service partially of increases in pensionable earnings along increased discount rate. the grants in the following table were made are described in the CD&A The compensation plans under which are af incentive plan) and the 2002 Lilly Stock Plan (which provides for P consist of the bonus plan (a non-equity SV in pension values in 2016 were driven to a large extent by a lower discount rate that increased the net present that increased the discount rate extent by a lower driven to a large values in 2016 were in pension value of pensions. for information about the standard actuarial assumptions used. No NEO received preferential or above-market used. No NEO received preferential the standard actuarial assumptions for information about compensation. earnings on deferred

5 4 3 2

1 PROXY STATEMENT P51 2 1 4 3 2 The chartnolongerincludes stockoptionawardsbecausethecompanyhasnot awardedstockoptionsto This rowshowsthepossiblepayoutsfor2016-2018P reflects themaximum payout,whichwill bemadeiftheaverageclosing stockpriceinNovember andDecember SV employees since2006and therearenooutstandingstockoptionawards. The 2016closingstockpriceappliedtothevaluesintablebelowwas Outstanding Equity the 13-monthservice-vestingperiod(followingtwo-yearperformanceperiod)andarepaiduponvesting. accrue oneitherP end oftherelevantawardperiod(exceptincasedeath,disability T Monte Carlosimulationmodel. payouts rangingfrom0to180percentoftarget.W This rowshowstherangeofpayoutsfor2016-2018SV outcome anticipatedatthetimeofgrant,whichwastargetvalue. shares rangingfrom0to150percentoftarget. trading dayofthefollowingmonth. the CompensationCommittee.Equityawardstonewhiresandotherof T o receiveapayoutundertheP o assuregranttimingisnotmanipulatedforemployeegain,theannualdateestablishedinadvanceby As grantedfor the2016-2018performance periodwillvestDecember 31,2018. As orSV Dr. Lechleiter Mr. Harrington Dr. Lundberg Mr. Rice Name Mr. Conterno A wards atDecember31,2016 As duringtheperformanceperiod.ForP A 2016-2018 SVA 2016-2018 SVA 2016-2018 SVA 2016-2018 SVA 2015-2017 SVA 2016-2018 SVA 2015-2017 SV 2015-2017 SV 2015-2017 SV 2015-2017 SV 2015-2017 P 2016-2018 P 2015-2017 P 2016-2018 P 2015-2017 P 2016-2018 P 2015-2017 P 2016-2018 P 2015-2017 P 2016-2018 P 2014-2016 P 2014-2016 P 2014-2016 P 2014-2016 P 2014-2016 P ortheSV Award RSU A A A A A A A A A A A A A A A A A A A A, aparticipantmustremainemployedwiththecompanythrough That HaveNot Units ofStock The grant-datefairvalueoftheP Vested (#) Number of Shares or 106,625 20,000 21,326 24,524 36,252 40,518 10,244 15,366 19,463 46,097 e measurethefairvalueofSV 9,732 A grants. A 7 5 6 5 6 5 6 5 6 5 6 grants. Stock Stock That $1,471,000 $1,568,527 $1,803,740 $1,130,169 $2,666,335 $1,431,504 $2,980,099 $3,390,434 $7,842,269 Vested ($) Shares or Have Not $753,446 $715,789 Value of Units of Market This P A wards This SV 1 A or OtherRights That HaveNot Incentive Plan vestsinFebruary2019,withthenumberof Shares, Units, , retirement,orredundancy).Nodividends f-cycle grantsareef A, non-preferentialdividendsaccrueduring Number of Vested (#) Unearned A Awards: $73.55. Equity 105,081 willpayoutinJanuary2019,with 96,502 60,422 94,576 99,830 31,510 57,796 36,236 53,567 59,870 18,333 19,167 30,000 31,667 45,896 A 4 3 2 4 3 2 4 3 2 4 3 2 4 3 2 reflectstheprobablepayout The numberof sharesreported or OtherRights That HaveNot Shares, Units, Plan Awards: Payout Value of Unearned A $1,348,392 $2,317,561 $4,250,896 $1,409,733 $2,665,158 $4,444,038 $2,206,500 $3,939,853 $6,956,065 $2,329,108 $4,403,439 $7,342,497 $3,375,651 $7,728,708 $7,097,722 Vested ($) Market or Incentive onthegrantdateusinga Equity fective onthefirst P51 PROXY STATEMENT P52 P52 The 2 esting ($) $717,121 $819,476 $3,687,879 $1,557,084 $5,479,975 $1,229,293 $4,326,284 $2,739,912 $2,884,190 $12,978,778 alue Realized V on V The number of shares recorded The number of shares The number of shares reported of shares reported The number 3 4 3 4 3 4 3 4 3 4 Stock Awards 9,066 46,623 19,685 72,698 15,541 57,393 10,360 36,348 38,262 172,178 Number of Shares Acquired on Vesting (#) resulted in a RSU for 150 percent of target shares. resulted in a RSU A $0 $0 $0 $0 $0 contributions up to 6 percent of base salary up to IRS limits. A. shares that could pay out for 2016-2017 performance period, pay out for 2016-2017 performance shares that could 1 A Value Realized on Exercise ($) wards A . Had the performance period ended December 31, 2016, there would there would 2016, 31, December period ended the performance . Had . Had the performance period ended December 31, 2016, the payout would period ended December 31, 2016, . Had the performance vested in February 2016. A Option ested in 2016 0 0 0 0 0 (#) at 140 percent of target. A Actual payouts may vary from 0 to 150 percent of target. vary from 0 to 150 percent of target. Actual payouts may Number of Shares Acquired on Exercise Actual payouts may vary from 0 to 180 percent of target. Net shares from any payout must payout from any Net shares target. of to 180 percent from 0 may vary payouts Actual

Actual payouts may vary from 0 to 140 percent of target. Net shares from any payout must be from any payout of target. Net shares 0 to 140 percent may vary from Actual payouts 19.58. 19.58. Name The employee contributions, company contributions, and earnings thereon are paid out in accordance with The employee contributions, company contributions, and earnings thereon in the “Summary Compensation elections made by the participant. See the "All Other Compensation" column The 401(k) Plan, a defined contribution plan qualified under Sections 401(a) and 401(k) of the Internal The 401(k) Plan, a defined contribution plan qualified under Sections 401(a) salary to the plan, and the company Revenue Code. Participants may elect to contribute a portion of their base provides matching contributions on employees’ As granted for the 2015-2017 performance period will vest December 31, 2017. 31, 2017. will vest December performance period for the 2015-2017 As granted e provide retirement income to eligible U.S. employees, including EOs, through the following plans: e provide retirement income to eligible U.S. employees, including EOs, Dr. Lechleiter Mr. Rice Dr. Lundberg Mr. Harrington Mr. Conterno The chart no longer includes stock option awards because the company has not awarded stock options to The chart no longer includes stock option awards because the company Retirement Benefits Payout of the 2014-2016 SV W • RSUs resulting from the 2013-2015 P employees since 2006 and there are no outstanding stock option awards. Options Exercised and Stock V RSUs vested February 2017 from the 2014-2016 P RSUs vested February 2017 from the The performance period ending 2016 for the 2015-2017 P period ending 2016 for the 2015-2017 The performance be held by EOs for a minimum of one year for a minimum by EOs be held been a payout. not have and December in November closing stock price if the average which will be made maximum payout, reflects the $92.04. 2017 is over minimum of one year held by EOs for a of target. have been 60 percent the threshold value of P This number represents 2018 is over $1 2018 provided performance goals are met. Once the combined cumulative EPS result and associated payout level is cumulative EPS result and associated goals are met. Once the combined provided performance stock units associated number of shares are restricted end of the performance period, the determined at the 2019. vesting in February in the table reflects the payout if the combined cumulative EPS for 2016 and 2017 is $8.70. EPS for 2016 and 2017 is $8.70. the payout if the combined cumulative in the table reflects 2018. RSU will vest in February Amounts reflect the market value of the stock on the day the stock vested. Amounts reflect the market value of the stock on the day the stock vested. This grant was made in 2008 outside of the normal annual cycle and will vest on May 1, 2018. This grant was made in 2008 outside SV

4 2 3 1 6 7 5 4 3 PROXY STATEMENT P53 2 1 early retirementunderthe new planformula(post-2009benefits)asdescribedbelow Dr accumulated pensionbenefit: The followingstandardactuarialassumptionswereused tocalculatethepresentvalueofeachindividual’ Pension Benefitsin2016 the nonqualifiedpensionplan. The followingtableshowsbenefitsthatthenamedexecutiveof Nonqualified DeferredCompensationin2016table. company matchesthesecontributionsasdescribedforthe401(k)Plan.Formoreinformation,seefootnote3to savings planthatallowsparticipantstocontributeup6percentofbasesalaryexceedingtheIRSlimit. unfunded andsubjecttoforfeitureintheeventofbankruptcy amount theywouldhavereceivedwithouttheInternalRevenueCodelimits. pension planthatpaysretireesthedif can beusedtocalculateapensionbenefit.However from atax-qualifiedplan($265,000in2016and$270,0002017)aswelltheamountofannualearningsthat Sections 401and415oftheInternalRevenueCodegenerallylimitamountannualpensionthatcanbepaid • Name Dr. Lechleiter Mr. Rice Dr. Lundberg Mr. Harrington Mr. Conterno Post-2009 benefitpaymentform: Pre-2010 jointandsurvivorbenefit (%ofpension): Mortality (post-retirementdecrementonly): Discount rate: . Lechleiterretiredwithfull retirementbenefitsundertheoldplanformula(pre-2010 benefits)andqualifiedfor “Pension Benefitsin2016”tablebelowforadditionalinformationaboutthevalueofthesepensionbenefits. The RetirementPlan,atax-qualifieddefinedbenefitplanthatprovidesmonthlybenefitstoretirees.Seethe T able” forinformationaboutcompanycontributionsunderthe401(k)Plannamedexecutiveof 2 nonqualified plan(post-2009) nonqualified plan(post-2009) nonqualified plan(post-2009) nonqualified plan(post-2009) nonqualified plan(post-2009) nonqualified plan(pre-2010) nonqualified plan(pre-2010) nonqualified plan(pre-2010) nonqualified plan(pre-2010) retirement plan(post-2009) retirement plan(post-2009) retirement plan(post-2009) retirement plan(post-2009) retirement plan(post-2009) retirement plan(pre-2010) retirement plan(pre-2010) retirement plan(pre-2010) retirement plan(pre-2010) Plan ference betweentheamountpayableunderRetirementPlanand total total total total total Number ofYears Credited Service 30 20 30 20 18 17 18 17 life annuity 50% untilage62;25%thereafter RP2006 withgenerationalprojectionusingScaleMP2016 non-qualified plan 4.50 percentforthequalifiedplanand4.19 7 7 , since1975thecompanyhasmaintainedanonqualified 7 7 7 7 7 7 7 7 . Likewisethecompanymaintainsanonqualified ficers haveaccruedundertheRetirementPlanand Accumulated Benefit($) Present V $35,620,661 $29,302,586 $1,511,207 $4,550,732 $9,804,435 $1,332,456 $7,474,950 $2,386,280 $2,118,618 $5,149,121 $3,454,679 $5,101,877 $3,520,850 $256,136 $839,198 $157,831 $267,662 $797,055 $172,355 $714,937 $725,032 $151,035 $715,055 The nonqualifiedpensionplanis alue of . 1 Payments During Last FiscalYear ($) $0 $0 $0 $0 $0 ficers. The s P53 PROXY STATEMENT P54 . P54 $0 $0 3 ear End Y ($) $174,973 $558,092 $710,313 $770,282 $770,282 $383,119 $3,644,437 $1,496,604 $1,496,604 $1,861,087 $1,150,774 Aggregate $15,103,882 $18,748,319 Balance at Last Fiscal $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 ($) Aggregate The benefit amount is Withdrawals/ Distributions in Last Fiscal Year able,” in the “Salary” column T ) ) ) ) $0 $0 $5,196 $6,444 The benefits are not payable as a lump as not payable benefits are The ($) $29,286 $34,512 $40,956 $24,596 $19,400 ($37,232 ($37,232 ($16,968 ($16,968 $455,090 $484,376 All eligible employees, including those hired All eligible employees, Aggregate Earnings in Last Fiscal Year . Lundberg are in this transition group. . Lundberg are in ear Y 2 ($) $74,100 $74,100 $48,168 $48,168 $27,778 $44,571 $44,571 $33,744 $27,778 $33,744 Registrant Last Fiscal Contributions in ficers except Dr ear $0 $0 , based on final average earnings at termination compared to final , based on final average earnings at Y 1 $74,100 $48,168 $48,168 $44,571 $25,000 $44,571 $58,744 $27,778 $33,744 ($) $979,725 $905,625 $127,778 $100,000 Executive Last Fiscal Contributions in forded to employees with 50 points (age plus service) or more as of December with 50 points (age plus service) forded to employees total total total total total Following amendment of our Retirement Plan formulae, employees hired on or after hired on or formulae, employees Retirement Plan amendment of our Following All named executive of All named executive Plan nonqualified savings nonqualified savings nonqualified savings nonqualified savings nonqualified savings deferred compensation deferred compensation deferred compensation deferred compensation deferred compensation These benefits were intended to ease the transition to the new retirement formula for those employees the new retirement formula for those intended to ease the transition to These benefits were ransition benefits were af ransition benefits The amount of the benefit is calculated using actual years of service through December 31, 2009, while The amount of the benefit is calculated T The annual benefit under the new plan formula is equal to 1.2 percent of final average earnings multiplied to 1.2 percent of final average earnings under the new plan formula is equal The annual benefit Name The benefit for employees with between 80 and 90 points is reduced by 3 percent for each year under The benefit for employees with between 90 points or age 62. less than 80 points, but who reached age 55 and have at least 10 years The benefit for employees who have or above and is further reduced by 6 percent for each year under 80 points of service, is reduced as described age 65. Dr. Lechleiter Mr. Rice Dr. Lundberg Mr. Conterno Mr. Harrington (nonqualified savings) or the “Non-Equity Incentive Plan Compensation” column (deferred compensation). (nonqualified savings) or the “Non-Equity Incentive Plan Compensation” The amounts in this column are also included in the “Summary Compensation The amounts in this column are also included in the “Summary Compensation Nonqualified Deferred Compensation in 2016 Nonqualified Deferred Compensation Employees hired prior to February 1, 2008, accrued benefits under both plan Pre-2010 Plan Information: Employees hired prior to February 1, old plan that accrued before January 1, 2010, were calculated under the formulae. For these employees, benefits formula. eligibility and early retirement reductions. total years of service is used to determine by years of service. Early retirement benefits under this plan formula are reduced 6 percent for each year under plan formula are reduced 6 percent Early retirement benefits under this by years of service. age 65. sum; they are generally paid as a monthly annuity for the life of the retiree and, if elected, any qualifying survivor qualifying any if elected, retiree and, life of the for the annuity a monthly paid as generally they are sum; of the annual and the average years of service is calculated using retirement plan benefit under the The annual average of service (final 10 calendar years five out of the last for the highest (salary plus bonus) earnings earnings). hired before that under the new plan formula. Employees have accrued retirement benefits only February 1, 2008 plan formulae. benefits under both the old and new date have accrued an unreduced at least five years of service and receive 1, 2008, can retire at age 65 with on or after February benefit. 31, 2009. was changed. For the longer at the time the plan retirement or had been with the company who were closer to 65 to age 60 and 6 percent 3 percent for each year from age retirement benefits are reduced transition group, early age 60. for each year under increased (but not decreased) proportionately points 2009. Full retirement benefits are earned by employees with 90 or more average earnings at December 31, as of service). Employees electing early retirement receive reduced benefits (the sum of his or her age plus years described below: • • : Plan Information Post-2009 The Retirement Plan benefits shown in the table are net present values. values. are net present the table in shown Plan benefits Retirement The

1 PROXY STATEMENT P55 3 2 Committee. terminating EO(otherthanfollowingachangeincontrol)wouldbeatthediscretionofCompensation enhanced benefitsuponterminationoftheiremployment. agreements, arrangements,orplansthatentitlenamedexecutiveof Except forcertainterminationsfollowingachangeincontrolofthecompany plans andarrangementstowhichthenamedexecutiveof The followingtabledescribesthepotentialpaymentsandbenefitsundercompany’ Payments UponT irrevocable. Bothplansareunfundedandsubjecttoforfeitureintheeventofbankruptcy approved bytheCompensationCommittee. employment, butmaynotmakewithdrawalswhileemployedbythecompany Participants mayelecttoreceivethefundsinalumpsumorup10annualinstallmentsfollowingtermination of Internal RevenueCodewithmonthlycompounding,whichwas3.1percentfor2016andis2.7 2017. rate asestablishedtheprecedingDecemberbyU.S. deferred byexecutivesunderthisplanarecreditedwithinterestat120percentoftheapplicablefederallong-term may alsodeferreceiptofallorparttheircashcompensationundertheDeferredCompensationPlan. manner asthe401(k)Plan,withsameparticipationandinvestmentelections.EOsotherU.S.executives the contributionlimitsprescribedbyIRSwithregardto401(k)plans. allow eachemployeetocontributeup6percentofhisorherbasesalary the nonqualifiedsavingsplanandDeferredCompensationPlan. The "NonqualifiedDeferredCompensationin2016"tableaboveshowsinformationabouttwocompanyprograms: T Of thetotalsinthiscolumn,followingamountshavepreviouslybeenreported“SummaryCompensation Compensation” columnasaportionofthesavingsplanmatch. The amountsinthiscolumnarealsoincludedthe“SummaryCompensation Mr. Conterno Mr. Harrington Dr. Lundberg Mr. Rice Dr. Lechleiter Name able” forthisyearandpreviousyears: ermination orChangeinControl(asofDecember31,2016) $1,053,825 2016 ($) $155,556 $92,488 $89,142 $96,336 Previous Years($) $12,029,531 All deferralelectionsandassociateddistributionschedulesare $605,044 $184,100 $527,677 $798,962 T ficers wouldbeentitleduponterminationofemployment. Any agreementtoprovidesuchpaymentsorbenefitsa reasury DepartmentunderSection1274(d)ofthe $13,083,356 Total ($) $760,600 $276,588 $616,819 $895,298 ficers toseverance,perquisites,orother The nonqualifiedsavingsplanisdesignedto This planisadministeredinthesame , andreceiveacompanymatch,beyond , asdescribedbelow , exceptintheeventofhardshipas T able,” inthe“AllOther

s compensationandbenefit . , thereareno Amounts P55 PROXY STATEMENT P56 P56 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 . The amounts . Total Benefits $6,974,098 $6,279,604 $4,722,751 $4,226,682 $14,028,451 Termination $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 . Awards $6,509,535 $2,403,739 $2,186,665 $1,453,266 $1,555,410 Value of of Equity Acceleration $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 2 $18,916 $61,519 $37,832 $285,135 $262,477 elfare value) W Benefits (present of Medical / of Medical Continuation elfare Benefits” are explained below 1 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Cash $7,500,000 $4,285,224 $4,031,420 $3,007,008 $2,633,440 Payment Severance Severance The amounts shown in the table above do not include certain The amounts shown in the table above

These include: . . Those balances are shown in the “Nonqualified Deferred Compensation in 2016” Those balances are shown in the “Nonqualified Deferred Compensation The amounts shown in the table do not include distributions of plan balances under the The amounts shown in the table do not include distributions of plan balances termination of employment due to death or disability does not entitle named executive termination of employment due to death or disability does not entitle named A

. Voluntary retirement Involuntary retirement or termination Involuntary retirement Involuntary or good reason termination Involuntary or good reason after change in control Voluntary termination Involuntary retirement or termination Involuntary retirement Involuntary or good reason termination Involuntary or good reason after change in control Voluntary retirement Involuntary retirement or termination Involuntary or good reason termination after change in control Voluntary retirement Involuntary retirement or termination Involuntary or good reason termination after change in control Voluntary termination Involuntary retirement or termination Involuntary or good reason termination after change in control • • • • • • • • • • • • • • • Dr. Lechleiter Mr. Rice Dr. Lundberg Mr. Harrington Mr. Conterno accrued salary and vacation pay pension plan. See “Retirement regular pension benefits under the Retirement Plan and the nonqualified Benefits” above. and dental insurance. welfare benefits provided to all U.S. retirees, including retiree medical shown in the table above as “Continuation of Medical / W plan, and the Deferred distributions of plan balances under the 401(k) Plan, the nonqualified savings Compensation in 2016” table for Compensation Plan. See the narrative following the “Nonqualified Deferred information about these plans. ficers to any payments or benefits that are not available to U.S. salaried employees generally ficers to any payments or benefits that are not available to U.S. salaried Executives terminated for cause receive no severance or enhanced benefits and forfeit ermination for Cause. Executives terminated for cause receive no severance or enhanced benefits of Death and Disability Accrued Pay and Regular Retirement Benefits. Accrued Pay and Regular Retirement they are provided on a non-discriminatory basis to salaried employees payments and benefits to the extent generally upon termination of employment. • • • • Deferred Compensation. deferred compensation plan. table. See “Change-in-Control Severance Pay Plan—Cash Severance Payment” below See “Change-in-Control Severance Benefits” and “Change-in-Control Severance Pay Plan—Continuation See “Accrued Pay and Regular Retirement of medical and welfare benefits” below any unvested equity grants. T 1 2 PROXY STATEMENT P57 • • • • • provisions: “involuntary orgood-reasonterminationafterchangeincontrol”arebasedonthefollowingassumptionsandplan company orsaledispositionofallsubstantiallyitsassets. continuing toholdmorethan60percentofthevotingstockcombinedentity);or(iv)liquidation consolidation ofthecompany(otherthanatransactionthatresultsinLillyshareholderspriorto the shareholdersofonehalformoreBoardDirectors;(iii)consummationamerger occurrence ofonethefollowing:(i)acquisition20percentormorecompany’ The change-in-controlplandefinesachangeincontrolveryspecifically maintains achange-in-controlseverancepayplanfornearlyallemployees,includingthenamedexecutiveof Change-in-Control SeverancePayPlan. employee’ or anyincometaxespayable bytheemployee. of theInternalRevenueCode. Excise taxes.Uponachangeincontrol,employeesmaybesubject tocertainexcisetaxesunderSection280G December 31,2016. acceleration ofunvestedequitygrants,proratedforP of thethree-yearperformanceperiodelapsed. surviving entity worked priortothechangeincontrol.Likewise, caseofachangeincontrolwhichLillyisnotthe partial paymentofoutstandingP Acceleration ofequityawards medical andwelfarebenefits,withtheadditionofactual COBRA assumptions tothoseusedcalculateincrementalpensionbenefitsapplythecalculationforcontinuation of company’ control plan’ Continuation ofmedicalandwelfarebenefits plus twotimestheEO’ Cash severancepayment or avoluntaryterminationbytheexecutiveforgoodreason,withintwoyearsfollowingchangeincontrol. December 31,2016.Eligibleterminationsincludeaninvoluntaryterminationforreasonsotherthancause terms oftheplan,basedonnamedexecutive Covered terminations • • immediately priortothechangeincontrol;or(vi)relocationofexecutivebymorethan50miles. executive asthoserightsgrantedtohimorheronanannualizedaveragebasisforthethree-yearperiod on thebasisofanumbersharesorunitsandallothermaterialtermsatleastasfavorableto performance shares,orsimilarincentiverightsduringeach12-monthperiodfollowingthechangeincontrol prior tothechangeincontrol;(v)failuregrantexecutivestockoptions,units, (iv) amaterialreductionintheexecutive’ opportunities toearnincentivebonusesbelowthoseinef reduction intheexecutive’ assignment tohimorherofadditionalresponsibilitiesthatmateriallyincreasehisworkload;(ii)any of theexecutive’ A the company;or(iii)convictionofenteringapleaguilty misconduct resultinginsignificanteconomicharmorothertothebusinessreputationof resulting indemonstrableeconomicharmtothecompany;(ii)anyactoffraud,dishonesty employee’ A terminationbytheEOisforgoodreasonifitresultsfrom:(i)amaterialdiminutioninnatureorstatus terminationofanEObythecompanyisforcauseifitanyfollowingreasons:(i) s currentactiveemployeemedical,dental,life,andlong-termdisabilityinsurance.Similaractuarial s change-in-controlbenefit maybedecreasedtomaximizetheafter-taxbenefit to theindividual. s provision,followingacoveredtermination,of18monthscontinuedcoverageequivalenttothe s willfulandcontinuedrefusaltoperform,withoutlegalcause,hisorhermaterialduties, , SV As wouldpayoutbasedonthechange-in-controlstock priceandbeproratedfortheportion s position,title,reportingrelationship,duties,responsibilities,orauthority . s bonustargetforthatyearundertheplan. The tableassumesaterminationofemploymentthatiseligibleforseveranceunderthe . The cashseverancepaymentamountstotwotimestheEO'sannualbasesalary . Uponacoveredtermination,anyunvestedequityawards wouldvestanda s then-currentbasesalary;(iii)amaterialreductionintheexecutive’ The companydoesnotreimburse theaf As wouldbemade,reducedtoreflecttheportionof performanceperiod As describedintheCD&A . s employeebenefitsfromthebenefitlevelsinef This amountrepresentsthepresentvalueofchange-in- The amountinthiscolumnrepresentsthevalueof T o reducetheemployee'sexposure toexcisetaxes,the ficer As andSV ’ s compensation,benefits,age,andservicecreditat fect fortheyearpriortochangeincontrol; As thatwouldhavebeenapplicableat ratesbasedoncurrentbenefitelections. The amountsshowninthetablefor under“SeveranceBenefits,”thecompany , butgenerallythetermsinclude fected employeesforthose excisetaxes nolo contendere s stock;(ii)replacementby , shareexchange,or toafelony fect immediately , orthe , orgross s . ficers. P57 PROXY STATEMENT P58 P58 s s s global . The consultant’ As, based on As, based , the company’ s pay; As and SV , plan design, and compensation for , plan design, and compensation for . Cook & Co., Inc., as its independent . Cook & Co., Inc., . fect compensation calculations. . . The committee considers those recommendations with The committee considers those recommendations , peer group, and target competitive positioning for , peer group, and The committee noted numerous policy and design features . fers a covered termination of employment within two years two years within of employment termination a covered fers In general, the change-in-control plan is a “double trigger” plan, trigger” a “double plan is change-in-control the In general, fs" that might encourage sub-optimal or improper behavior The CEO provides the committee with a performance assessment and The CEO provides the committee with s consultant attend executive sessions. s consultant attend executive sessions. Alone. fect on the company The CEO and the senior vice president of human resources and diversity attend The CEO and the senior vice president There are limited exceptions for pro-rata portions of P for pro-rata portions limited exceptions There are s total compensation philosophy s total compensation s executive compensation program and advise the committee of evolving best practices; s executive compensation program and related tables for the proxy statement; , and short-term/long-term incentives. s compensation programs and governance structure that reduce the likelihood of inappropriate risk- s compensation programs and governance structure that reduce the likelihood s compensation policies and practices and concluded that the programs and practices are not reasonably s compensation policies and practices and concluded that the programs ferent measures and metrics are used across multiple incentive plans that appropriately balance cash/stock, ferent measures and metrics are used across multiple incentive plans compensation recovery policy is in place for all members of senior management; negative compensation compensation recovery policy is in place for all members of senior management; Assessment Process review the company’ The committee is comprised of independent directors only The committee engages its own independent compensation consultant. The committee has downward discretion to lower compensation plan payouts. The committee approves all adjustments to financial results that af Dif fixed/variable pay Incentive plans have predetermined maximum payouts. Performance objectives are challenging but achievable. based upon achievement of Programs with operational metrics have a continuum of payout multiples performance milestones, rather than "clif reasonableness and appropriateness; reasonableness and review the company’ recommendations to the committee on the CEO’ provide independent analyses and review draft CD&A A consequences can be applied in cases of serious compliance violations. proactively advise the committee on best practices for board governance of executive compensation; and proactively advise the committee on of the committee chair undertake special projects at the request • • • • • • • • • • • • • • • oversight and with the knowledge and permission of the committee chair oversight and with the knowledge and assessing Executive Compensation Role of EOs and Management in senior vice president of human resources and diversity With the oversight of the CEO and the Risk likely to have a material adverse ef responsibilities are to: responsibilities are members of company management only on matters under the committee’ Ms. Silverberg interacts directly with on compensation philosophy compensation group formulates recommendations below). EOs (other than the CEO, as noted each of the other EOs. compensation recommendation for the assistance of its consultant. Only for executive sessions or any discussion of their own compensation. committee meetings; they are not present non-employee directors and the committee’ formulation or discussion of his pay recommendations. He has no prior The CEO does not participate in the that the consultant makes to the committee. knowledge of the recommendations in 2016 the committee reviewed the As a part of the company's overall enterprise risk management program, company’ of the company’ taking, including, but not limited to: meaning payments are made only if the employee suf employee if the made only are payments meaning of equity awards." under "Acceleration as noted above the change in control, to the date of performance Executive Compensation Consultant in assessing Role of the Independent of Frederic W Committee has retained Cimi B. Silverberg The Compensation her firm is permitted to to the committee. Neither she nor Ms. Silverberg reports directly compensation consultant. or the members of the committee. or personal relationship with management have any business Compensation Committee Matters Committee Compensation Background Payments Upon Change in Control in Control Change Upon Payments following the change in control. the change in control. following PROXY STATEMENT P59 company's corporate secretary Committee charter Further informationregarding thecommittee'soversightofindependentauditor canbefoundinthe independent auditor The Audit CommitteeOversight ofIndependent Auditor Item 4.Ratificationofthe Audit Matters Kathi P Ellen R.Marram Ralph Compensation Committee Directors thattheCD&A reviewed anddiscussedwithmanagementtheCD&A process, includingthedisclosureofexecutivecompensation.Withthisinmind,CompensationCommitteehas programs. Managementhastheprimaryresponsibilityforcompany’ compensation plan,thecompany’ The CompensationCommitteeevaluatesandestablishescompensationforEOsoverseesthedeferred Compensation CommitteeReport the company'snamedexecutiveofficersasdisclosed initsproxystatements. The BoardofDirectorsrecommendsthatyouvote FORan Board RecommendationonItem3 advisory namedexecutiveof compensation, wearerequiredthisyeartoaskshareholders,onanadvisorybasis,whethertheywouldprefer In accordancewithfederallegislationenactedin2010requiringadvisoryshareholdervotesonexecutive Named ExecutiveOfficerCompensation Item 3. preferences onthismatter The boardisnotboundbythisadvisoryshareholdervote;however compensation provideameaningfulwaytocontinuedialoguewithshareholdersregardingthisissue. burden ofpreparingannualproposals.W occurring annually On balance,wesupportadvisoryvotesonnamedexecutiveof as theothermeansavailabletoshareholdersprovideinputonexecutivecompensation. burden andexpensetothecompanyshareholdersofpreparingrespondingproposalsannually company’ Shareholders shouldconsiderthevalueofhavingopportunityeveryyeartovoicetheiropinionon or votinginstructioncardallowsyoutochoosethefrequencyprefer • Meaningful shareownershiprequirementsareinplaceforallmembersofseniormanagementandtheboard. Audit Committeeisresponsible fortheappointment,compensation,retention,and oversightofthe Alvarez, Chair . Seifert s namedexecutiveof Advisory V . W , availableonline athttps://www , andoverseestheprocess forselecting,reviewing,andevaluatingtheleadaudit partner e welcomeshareholderinputandbelievethatthevalueofanannualvoteoutweighs beincludedinthisproxystatementforfilingwiththeSEC. . ficer compensationvoteseveryyear . ficer compensationthroughanadvisoryvote,weighingthatagainsttheadditional ote onFrequencyofFuture s managementstockplans,andotherincentivebenefit e alsobelieveannualadvisoryvotesonnamedexecutiveof Appointment ofPrincipalIndependent Auditor .lilly above. .com/who-we-are/governance, oruponrequest tothe The committeerecommendedtotheBoardof ficer compensationeveryyear ANNUAL , everytwoyears,orthreeyears. , itwillgivesignificantweighttoshareholder s financialstatementsandreporting . advisoryvoteonthecompensationof Advisory V , andtheyarecurrently otes on ficer Audit Y , aswell our proxy . P59 PROXY STATEMENT P60

P60 , and The Audit to serve as the Act. as principal s internal controls, s consolidated financial ficer and the chief This assessment This assessment oung LLP The committee also The committee Y The committee also periodically meets in executive Accounting Oversight Board (PCAOB) and the NYSE, , of the accounting principles, the reasonableness of significant s internal and independent auditors the overall scope and plans for Audit Committee concerning independence, and has discussed with s financial reporting process on behalf of the Board. Management has s financial reporting process on behalf Act), the committee has adopted policies to ensure the independence of Act), the committee has adopted policies to ensure the independence Audit Committee, which has sole authority to appoint and to replace the Audit Committee, which has sole authority s financial reporting. Audit Committee believes that the continued retention of EY that the continued retention Audit Committee believes as principal independent auditor for the company for 2017. In accordance with auditor for the company for as principal independent s independence from the company and its management. In concluding that the s independence from the company and its management. In concluding ’ . Management represented to the committee that the company’ . Management represented to the committee management judgments underlying the financial , including a review of the significant These criteria are assessed against an internal and an external scorecard, and are scorecard, and and an external against an internal are assessed These criteria , such as prior committee approval of nonaudit services and required audit partner rotation. , such as prior committee approval of nonaudit services and required audit are expected to be present at the annual meeting and will be available to respond to present at the annual meeting and are expected to be , not just the acceptability (EY) served as the principal independent auditor for the company in 2016. Based on this year's the company in 2016. Based on this principal independent auditor for (EY) served as the ficer) to discuss the results of their examinations, their evaluations of the company’ ficer) to discuss the results of their examinations, their evaluations of the Those representatives will have the opportunity to make a statement if they wish to do so. will have the opportunity to make Those representatives oung LLP Y Act of 2002 (the Sarbanes-Oxley Audit Committee reviews the company’ independent auditor for 2017. The Audit Committee Report Board Recommendation on Item 4 Board Recommendation on vote FOR ratifying the appointment of Ernst & The Board recommends that you Ernst & the The independent auditor reports to the independent auditor matters required to be discussed with the The committee has discussed with examines three primary criteria: (1) the independent auditor's qualifications and experience; (2) the communication communication experience; (2) the qualifications and auditor's (1) the independent three primary criteria: examines objectivity independence, (3) the auditor's of the year; and over the course with the auditor and interactions skepticism. professional as in executive session. session, as well during a private with management discussed independent auditor is advisable. whether a rotation of the company's periodically considers performance, the assessment of EY's statements and the reporting process, including the systems of internal the primary responsibility for the financial this context, the committee has met and held discussions with management controls and disclosure controls. In and the independent auditor with generally accepted accounting principles (GAAP), and the statements were prepared in accordance the audited financial statements and related disclosures with management committee has reviewed and discussed and the independent auditor statements and disclosures. ratification). independent auditor (subject to shareholder Committee by the standards of the Public Company including the quality with and without management present, committee periodically meets with the internal and independent auditors, the chief financial of and in private sessions with members of senior management (such as accounting of and the overall quality of the company’ session. In connection with the decision regarding whether to reappoint the independent auditor each year (subject to auditor each year the independent to reappoint regarding whether with the decision In connection auditor's performance. the independent committee assesses ratification), the shareholder judgments, and the clarity of the disclosures in the financial statements. In addition, the committee has received judgments, and the clarity of the disclosures in the financial statements. by applicable requirements of the the written disclosures and the letter from the independent auditor required PCAOB regarding communications with the the independent auditor the auditor that the nonaudit services provided by EY auditor is independent, the committee determined, among other things, 404 of the Sarbanes-Oxley their respective audits, including internal control testing under Section questions. The committee discussed with the company’ Representatives of EY Representatives of company's principal independent auditor is in the best interests of the company and its shareholders, and has interests of the company and its shareholders, independent auditor is in the best company's principal the firm of EY therefore reappointed shareholders for ratification. is being submitted to the the bylaws, this appointment with the requirements of the Sarbanes- (as described below) were compatible with its independence. Consistent Oxley the independent auditor PROXY STATEMENT P61 the completedaudityear After theendofaudityear services andthepotentialfortoimpairindependenceofauditor suf For eachengagement,managementprovidesthecommitteewithinformationaboutservicesandfees, follows: provision ofsuchservicesmightimpairtheauditor The Services PerformedbytheIndependent Jackson P Kathi P Jamere Jackson Katherine Baicker Michael L.Eskew Audit Committee committee hasalsoappointedthecompany’ company’ Board subsequentlyapprovedtherecommendation)thatauditedfinancialstatementsbeincludedin In relianceonthereviewsanddiscussionsreferredtoabove,committeerecommendedBoard(and • • • • • ficiently detailedtoallowthecommitteemakeaninformedjudgmentaboutnatureandscopeof is delegatedtothecommitteechair T year known atthattime.Managementwillalsopresenttimeanestimateofallfeesfortheupcomingaudit annual audit,statutoryaudits,andquarterlyreviewsfortheupcomingaudityearaswellanyotherservices Approval process:Atthebeginningofeachaudityear best choicetoprovidetheservices. services wouldnotimpairtheindependenceofauditor (i) theservicesarepermissibleunderSECandPCAOBrules,(ii)committeebelievesprovisionof Other services: compliance services,taxplanning,andadvicewithoutimpairingtheauditor T independence oftheauditor the independentauditor to theperformanceofauditorreviewsfinancialstatements,andthataretraditionallyperformed by Audit-related services: auditor reasonablycanprovide. The committeemayalsopreapproveotherauditservices,whicharethoseservicesthatonlytheindependent matters. changes interms,conditions,andfeesresultingfromauditscope,companystructure,orother Audit services:Thecommitteeapprovestheannualauditservicesengagementand,ifnecessary Audit Committeepreapprovesallservicesperformedbytheindependentauditor o theextentapprovalsarerequiredbetweenregularlyscheduledcommitteemeetings,preapprovalauthority ax services: . Seifert . As specificengagementsareidentifiedthereafter s annualreportonForm10-KfortheyearendedDecember31,2016,filingwithSEC. . T ai Audit servicesincludeinternalcontrolsattestationworkunderSection404oftheSarbanes-Oxley , Chair , Ph.D. The committeebelievesthat,inappropriatecases,theindependentauditorcanprovidetax The committeemayapproveotherservicestobeprovidedbytheindependentauditorif . . The committeebelievesthattheprovisionoftheseservicesdoesnotimpair Audit-related servicesareassuranceandrelatedthatreasonably , managementprovidesthecommitteewithasummary oftheactualfeesincurredfor . . Auditor s independentauditor ’ s independence. , theyarebroughtforwardtothecommitteeforapproval. , managementrequestspriorcommitteeapprovalofthe , and(iii)managementbelievesthattheauditoris , subjecttoshareholderratification,for2017. The committee’ ’ s independence. . s policyandproceduresareas , inparttoassesswhetherthe , any The Act. P61 PROXY STATEMENT P62 P62 $0.7 $5.6 $0.1 2015 $13.1 $19.5 ($ millions) . $— $0.6 $6.7 2016 $12.8 $20.2 in 2016 and 2015. in 2016 and ($ millions) compensation. Amend the Lilly Directors' Deferral Plan Amend the Lilly Directors' The plan was last approved by shareholders in 2003. The plan was last approved by shareholders Deferral Plan provides an ownership position in the company that aligns directors with Deferral Plan provides an ownership Annual audit of consolidated and subsidiary financial statements, including Sarbanes-Oxley and subsidiary financial statements, including Annual audit of consolidated 404 attestation statements Reviews of quarterly financial statutory and regulatory provided by the auditor in connection with Other services normally filings to the performance of and related services reasonably related Primarily related to assurance employee benefit plan the financial statements primarily related to the audit or reviews of acquisitions and due diligence services on potential and other ancillary audits, and compliance services Primarily related to consulting 2015: primarily related to consulting and compliance services 2015: primarily related to consulting and compliance Fees Auditor authorizing an additional 750,000 shares (the same amount approved in 2003) authorizing an additional 750,000 shares (the same amount approved a cap on non-employee directors’ all shares must be held until the second January following the director's departure from board service all shares must be held until the second the plan. no stock options can be issued under • Audit Fees Audit-Related Fees Tax Fees All Other Fees Total *Numbers may not add due to rounding Changes to the plan include: The Lilly Directors’ Item 5. Proposal to shareholder interests. Directors' Deferral Plan Directors' Deferral annual compensation is awarded in deferred shares: Under the plan, a portion of directors' All such services were pre-approved by the committee in accordance with the pre-approval policy with the pre-approval committee in accordance by the were pre-approved All such services Independent Independent The following table shows the fees incurred for services rendered on a worldwide basis by EY on a worldwide for services rendered the fees incurred table shows The following PROXY STATEMENT P63 proxy statementas W Information Other Plan Amendment of Termination and Capital Changes Adjustments for Payment Options Limits Compensation Deferrals Elective Price Recent Stock Authorized Shares Administration Plan Participants Eligible e summarizetheprincipalfeaturesofplanbelow Appendix B. are currently17eligibledirectors,13activeand4retired. The planisavailableonlytonon-salarieddirectors,asfurtherdefinedinthedocument.There the 17participantsreceivedinaggregatefollowing amounts intheiraccounts: The amountoffuturebenefitstobepaidundertheplancannot bedeterminedatthistime.In2016, any materialamendmentstotheextentrequiredbyapplicable NYSElistingstandards. plan initsdiscretion,subjecttocertainlimitations,including thatshareholderapprovalisrequiredfor The planremainseffectiveuntilterminatedbytheboard. boardmayamendorterminatethe total numberofsharesavailableundertheplanandmaximum annualawardamount. committee willadjustexistingaccountbalancesinthedeferred stockaccountandwillalsoadjustthe In theeventofstocksplit,dividend,spinofforotherrelevantchangeaffectingLillystock, At thetimeofelectiontodefer year. prorated formonthsofserviceandmaynotbeadjustedbytheboardmorethanonceeverycalendar each independentdirectorwascreditedwith2,088shares.Theamountofstockcompensationis compensation (includingdeferredintotheplan)forrelevantplanyear.In2016, the lesserof7,500sharesoranamountequalto$800,000minusdirector’stotalcash other numberastheboardmayestablishbyresolution).Theannualshareawardnotexceed hypothetical sharesofLillystockequalto$160,000onavaluationdatespecifiedintheplan(orsuch Each eligibledirectorreceivesanannualcredittohisorherdeferredstockaccountofthenumber either oftwoaccounts: her retainerandmeetingfeesfortheyear Prior tothebeginningofeachyear The closingpriceofLillystockontheNew shares wouldbecountedagainstthesharelimit. 457,071 shareswerecreditedtoparticipants’accounts(includingretireddirectors),andthose was 750,000.AsofFebruary17,2017,300,685shareshavebeenpaidoutundertheplanand the periodApril29,2003,throughDecember31,2016,aggregatenumberofauthorizedshares A totalof1,500,000sharesLillystockmaybeissuedortransferredundertherestatedplan.For The planisadministeredbythedirectorsandcorporategovernancecommitteeofboard. cannot berelievedthroughotheravailablefunds(asdeterminedbythecommittee). death oftheparticipantoranunexpectedemergencycausingaseverefinancialhardshipthat The planincludesalternatepaymentprovisionsthatcallforacceleratedinthecaseof • 97,815sharespaidouttoretiredparticipants. • Deferredstockaccounts:41,779sharescredited • Deferredcompensationaccounts:$124,379ofinterestcredited • lumpsum • DeferredCompensation • fromtwototenannualinstallmentsbeginningonthesecondJanuaryfollowingdirector's • DeferredStock or thedirectordies. the InternalRevenueServiceannually 120 percentoftheapplicablelong-termfederalratewithmonthlycompounding,aspostedby departure fromboardservice. Payments fromthisaccountaremadeincash. or transferreduntil are paid.PaymentsfromthisaccountmadeinsharesofLillystock.Noissued share unitsbasedonthemarketpriceofstockdatethatcommondividends the stockonamonthlyvaluationdate.Hypotheticaldividendsarereinvestedinadditional below iscreditedannually of boardservice.Deferredfundsarecreditedmonthly compensation inLillystock,withreceiptdeferreduntilthesecondJanuaryfollowingend on the secondJanuaryfollowingdirector'sdeparturefromboardservice Account. Thisaccountallowsthedirector the secondJanuaryfollowingthedirector'sdeparturefromboardservice , ashypotheticalsharesofLillystock,basedonthemarketprice Account. Fundsarecreditedmonthlyandearninterestequalto , thedirectorchoosesoneoftwopaymentoptions: , adirectormayirrevocablyelecttodeferallorportionofhis , subjecttothefulltextofplan,whichisattachedthis . Y The directorcanchoosetohavethefundscredited ork StockExchangeonFebruary17,2017,was$80.39. . The interestrateisadjustedeachDecember , andtheannualshareawarddescribed , inef fect, toinvestcash . P63

PROXY STATEMENT P64 P64 — 99,568,453 99,568,453 ork State Common Retirement Y (c) Number of (c) Number remaining available securities plans compensation for future reflected (excluding securities in column (a)) — — — $ (b) Weighted- issuance (b) Weighted- average under equity price of exercise outstanding, options, warrants, and rights . DiNapoli, trustee of the New ork State and Local Retirement System, beneficial owner of ork State and Local Retirement System, — — — Y Thomas P ork, Y (a) Number of (a) Number to be issued securities of upon exercise outstanding options, warrants, and rights , disclosing: s membership in and payments to any tax-exempt organization that writes and endorses model s membership in and payments to any tax-exempt organization that writes . For purposes of this proposal, a "grassroots lobbying communication" is a communication directed to the For purposes of this proposal, a "grassroots lobbying communication" the shareholders of Eli Lilly and Company ("Eli Lilly") request the preparation of a report, Resolved, the shareholders of Eli Lilly and Company ("Eli Lilly") request the preparation and grassroots lobbying Company policy and procedures governing lobbying, both direct and indirect, communications. lobbying communications, in Payments by Eli Lilly used for (a) direct or indirect lobbying or (b) grassroots each case including the amount of the payment and the recipient. Eli Lilly’ legislation. and the Board for making Description of the decision making process and oversight by management payments described in section 2 and 3 above. we believe in full disclosure of Eli Lilly's direct and indirect lobbying activities and expenditures to Whereas, we believe in full disclosure of Eli Lilly's

1. 2. 3. 4.

Equity compensation by plan not approved security holders Total Plan category Equity compensation Equity compensation plans approved by security holders general public that (a) refers to specific legislation or regulation, (b) reflects a view on the legislation or regulation general public that (a) refers to specific legislation or regulation, (b) reflects respect to the legislation or regulation. and (c) encourages the recipient of the communication to take action with organization of which Ely Lilly is a "Indirect lobbying" is lobbying engaged in by a trade association or other member updated annually

consistent with Eli Lilly's expressed goals and in the best interests of assess whether Eli Lilly's lobbying is shareholders. Shareholder Proposal Fund and the administrative head of the New Fund and the administrative head of following proposal: 2,954,390 shares, has submitted the The Comptroller of the State of New The Comptroller of the State of New Item 6. Shareholder Proposal: Report Regarding Direct and Indirect Report Regarding Direct and Indirect Item 6. Shareholder Proposal: Political Contributions Shareholder Proposals The Board of Directors recommends a vote FOR the proposal. The Board of Directors recommends Board Recommendation on Item 5 Board Recommendation on Equity Compensation Plan Information Compensation Equity under plans compensation other about our 31, 2016, as of December information table presents following The have been authorized. of Lilly stock which shares PROXY STATEMENT P65 a boardseatarealsonoted. activity totheU.S.government andtowhichwecontribute$50,000peryearor more. OrganizationswhereLillyhas The “LillyReportofPolitical FinancialSupport”notesourmembershipsintrade associationsthatreportlobbying contribute topharmaceutical innovation,healthypatients,andabusiness climate. and theNational Research andManufacturers organizations specifictobusinessandpharmaceutical industryinterests,suchasPhRMA lobbying activitytotheU.S.government.W In additiontodirectpoliticalcontributions,Lillymaintains membershipsincertaintradeassociationsthatreport Federal ElectionCommitteewebsite(http://www contributions, P This informationisupdatedannually political of direct companycontributionsandemployeepoliticalactioncommittee(P Beginning in2005,thecompanyhaspublishedfollowinginformationonourwebsite( undue administrativeburdenonthecompany requirements areunnecessary against it,aswecurrentlypublishmostoftheinformationrequestedbyshareholder The publicpolicyandcompliancecommitteeoftheboardhasreviewedthisproposalrecommendsa vote Indirect PoliticalContributions Statement inoppositiontotheShareholderProposalRegardingReportonCompany’ Medtronic andMerk. companies havepubliclyleft Council (ALEC). legislation, suchasitsservingontheHealthandHumanServices recognizes therisksposedbyclimatechange,yetChamberhassuedEP (“U.S. ChamberW interests. Forexample,Lillysupportssmokingcessation,yettheChamberworkstoblockgloballaws reporting wouldrevealwhethercompanyassetsarebeingusedforobjectivescontrarytoEliLilly’ Eli Lillydoesnotdiscloseitspaymentstotradeassociations,ortheamountsusedforlobbying. but disclosureisunevenorabsent. 48 states("AmidFederalGridlock,LobbyingRisesintheStates," This figuredoesnotincludelobbyingexpenditurestoinfluencelegislationinstates,whereEliLillyalsolobbies directly andindirectly Supporting Statement state andfederallevels. on EliLilly'swebsite. • • • contributions topoliticalorganizationsandSection527 organizationsreportedbystate. federal; HouseorSenate),partyaf contributions tocandidates,includinginformationaboutthecandidate'sof policies andproceduresforcompanyP And EliLillydoesnotdiscloseitscontributionstotax-exemptorganizationsthatwriteandendorsemodel Eli LillybelongstotheChamberofCommerce,whichhasspentover$1.2billiononlobbyingsince1998. W Both "directandindirectlobbying”"grassrootslobbyingcommunications"includeef The reportshallbepresentedtothe fice, politicalparties,of e encouragetransparencyintheuseofcorporatefundstoinfluencelegislationandregulation,both AC contributiondata,andthecompany’ Association ofManufacturers.W ALEC promoteslegislationagainststateregulationsaddressingclimatechange.Over100 orks GloballytoFight . EliLillyspentover$15.3millionin2014and2015onfederallobbying(opensecrets.org). ALEC, including Association), BIO(Biotechnology , astheinformationrequestedispubliclyavailableandthisreportingwouldplacean ficials, orcommitteesintheUnitedStates: . Inadditiontotheinformationavailableonourwebsite, detailedcorporate Antismoking Measures,” filiation, state,anddistrict e maintainmembershipsintradeassociationsandother tax-exempt . Audit Committeeorotherrelevantoversightcommitteesandposted Allergan, .fec.gov/disclosure.shtml) andthroughindividualstate agencies. e supportorganizationsthatchampionpublicpolicies that AC contributions Amgen, s directlobbyingexpensesareavailabletothepublic onthe AstraZeneca, GlaxoSmithKline,Johnson&Johnson, Association), HealthcareLeadershipConference, New Center forPublicIntegrity T ask Forceofthe Y ork T AC) contributionstosupportcandidatesfor imes A fice (forexample,state,local,or , June30,2015). toblocktheCleanPowerPlan. American LegislativeExchange . www The additionalreporting (Pharmaceutical , February1 .lilly s Directand forts atthelocal, T s long-term .com) forboth ransparent And EliLilly 1, 2016), P65 PROXY STATEMENT P66 P66 Act of Act of Those s total lobbying expenditure, that expenditure, s total lobbying , constitutes a quorum for the annual meeting. ficer compensation, with the option receiving , we encourage you to vote by mail, by telephone, or , we encourage you to vote by mail, , the accompanying proxy gives discretionary authority to , the accompanying proxy gives discretionary s budget spent on lobbying, it is the fact of company it is the fact of company spent on lobbying, s budget AGAINST the proposal. , bank, or other nominee oting Logistics oting Logistics Abstentions will not count as votes cast either for or against a nominee. Abstentions will not count as votes the highest number of votes to be given due consideration by the board when determining frequency of the highest number of votes to be given due consideration by the board such votes; ratification of the appointment of principal independent auditor; amend the directors' deferral plan; and one shareholder proposal. advisory approval of executive compensation; advisory vote on frequency of vote on named executive of • • • • •

The five nominees for director will be elected if the votes cast for the nominee exceed the votes cast against the elected if the votes cast for the nominee exceed the votes cast against The five nominees for director will be nominee. proposal exceed those cast against the The following items of business will be approved if the votes cast for the proposal: held directly in your name as the shareholder of record held directly in your name as the shareholder held for you in an account with a broker plan. attributed to your account in the 401(k) e do not expect any items of business other than those above because the deadline for shareholder proposals other than those above because the deadline for shareholder proposals e do not expect any items of business • • • • • majority of the outstanding shares, present or represented by proxy oting ou have one vote for each share of common stock you held on the record date, including shares: ou have one vote for each share of at the meeting. However ou may vote your shares in person The Board of Directors recommends a vote The Board of Directors Board Recommendation on Item 6 Board Recommendation These tax exempt organizations are also required to disclose their lobbying expenditures under the Lobbying the Lobbying under expenditures lobbying their to disclose required are also organizations tax exempt These As we do not control the portion of the organization’ not control the portion As we do 1995: they report their lobbying expenditures to the United States Senate. States United to the expenditures lobbying their they report 1995: association’ and the trade the trade association, and support for membership political activities. most about Lilly's reveals the As of the record date, 1,103,354,357 shares of company common stock were issued and outstanding. As of the record date, 1,103,354,357 shares of company common stock Abstentions will not be counted either for or against these proposals. Quorum A Required vote the various proposals: Below are the vote requirements for V on February 24, 2017 (the record date) may vote at the annual meeting. Shareholders as of the close of business Y Y Meeting and V Meeting and Additional items of business W if necessary and nominations has passed. Nonetheless, Other Information respect to any other matters that might be brought before the meeting. the persons named on the proxy with accordance with their best judgment. persons intend to vote that proxy in on the Internet even if you plan to attend the meeting. on the Internet even if you plan to attend PROXY STATEMENT P67 Otherwise, the trusteewillautomatically applyyourvotingpreferences totheundirectedshares proportionallywith If youdonotwanttohave your voteappliedtotheundirectedshares,youmust soindicatewhenyouvote. voting decisions. undirected sharestowhich theirvoteapplies.UnderERISA,fiduciariesarerequired toactprudentlyinmaking Income Security All participantsarenamed fiduciaries underthetermsof401(k)planand theEmployeeRetirement credited). ownership plan,whichcanbevotedonlyonthedirections oftheparticipantstowhoseaccountssharesare the 401(k)planforwhichvotingdirectionsarenotreceived (exceptforasmallnumberofsharesfrompriorstock In addition,unlessyoudecline,yourvotewillapplyto aproportionatenumberofothersharesheldbyparticipantsin rather thanaproxycard. telephone asdescribedabove,exceptthat,ifyouvote bymail,thecardthatyouusewillbeavotinginstructionform Y V broker mayvoteyoursharesinitsdiscretion.Forallotherproposals,thenot atall. things canhappen,dependingonthetypeofproposal.Forratificationprincipalindependentauditor If yougivethebrokerinstructions,yourshareswillbevotedasdirect.donotone oftwo you. Mostbrokersof your brokerorothernomineetovotesharesbyfollowinginstructionsthattheprovides to If yoursharesareheldbyabroker V record, youmayalsorevokeyourproxybyvotinginpersonatthemeeting. writing, or(ii)deliveringalater-datedproxyviatheInternet,bymail,telephone.Ifyouareshareholder of Y If youareashareholderofrecord,mayvoteyourproxybyanyonethefollowingmethods: V ou mayinstructtheplantrusteeonhowtovoteyour shares inthe401(k)planviaInternet,bymail,or ou havetherighttorevokeyourproxyatanytimebeforemeetingby(i)notifyingcompany’ oting sharesheldinthe401(k)plan oting sharesheldbyabroker oting byproxy along withyournameandmailingaddress. message notifyingyouoftheelectronicavailabilitythesematerials,pleaseprovidecontrolnumber proxy cardbycalling855-731-6026(tollfree)or317-433-51 mail ratherthanbytelephoneorontheInternet,youmayrequestapapercopyofthesematerialsand If youdidnotreceiveaproxycardinthematerialsreceivedfromcompanyandwishtovoteby but donotindicateyourvotingpreferences,wewillvoteonbehalfwiththeboard’ stock isheldinjointownership,oneownermaysignonbehalfofallowners.Ifyoureturnyoursignedproxy (for example,undertheUniform partnership), pleaseindicateyournameandtitleorcapacity attorney-in-fact, executor exactly asitappearsontheproxy By mail.Signanddateeachproxycardyoureceivereturnitintheprepaidenvelope.yourname ef instructions inthee-mailmessagethatnotifiedyouoftheiravailability instructions onyourproxycardornotice.Ifyoureceivedthesematerialselectronically By telephone.ShareholdersintheU.S.,PuertoRico,andCanadamayvotebyfollowing the Internet,donotreturnyourproxycard. notified youoftheiravailability notice. Ifyoureceivedthesematerialselectronically On theInternet fect asvotingbymail.Ifyouvotetelephone,donotreturnyourproxycard. Act (ERISA)forthelimited purposeofvotingsharescreditedtotheiraccountsand theportionof fer votingbymail,telephone,andontheInternet. . Y ou mayvoteonlineatwww

, administrator , thebrokerwillaskyouhowwantyoursharestobevoted. . V

T oting ontheInternethassameef . Ifyouaresigninginarepresentativecapacity(forexample,asan ransfers toMinors , guardian,trustee,ortheof .proxyvote.com. Followtheinstructionsonyourproxycardor , followtheinstructionsine-mailmessagethat Act), thecustodianshouldsign,notminor 12. Ifyoureceivedanoticeorane-mail . Ifthestockisheldincustodyforaminor ficer oragentofacorporation . V fect asvotingbymail.Ifyouvoteon oting bytelephonehasthesame , followthe s recommendations. Y ou mayinstruct s secretaryin . Ifthe , the P67 , PROXY STATEMENT P68 e P68 . W 12 , if you vote by , in which case you , in which case you ou will need to pass , telephone, fax, mail, Y Alternatively Auditorium. Please use the Lilly Center Auditorium. Please use the Lilly Center . e will pay all expenses in connection with All shareholders of record as of the record date All shareholders of record as of the ficers, and other employees of the company .

Associates, Inc. e have retained Georgeson LLC to assist in the s proxy solicitation . Present your ticket to an usher at the meeting. . Present your ticket to an usher at The meeting will be held at the Lilly Center The meeting will be held at the Lilly

e will pay brokers, nominees, fiduciaries, or other custodians their reasonable expenses e will pay brokers, nominees, fiduciaries, or other custodians their reasonable

, including a metal detector o ensure that all your shares are voted, sign and return each card. shares are voted, sign and return o ensure that all your s 2018 annual meeting is currently scheduled for May 7, 2018. s 2018 annual meeting is currently T e expect that the fee for those services will not exceed $17,500 plus reimbursement of customary out- e expect that the fee for those services will not exceed $17,500 plus reimbursement 12. e have adopted a procedure approved by the SEC called "householding." Under the householding procedure, by the SEC called "householding." Under the householding procedure, e have adopted a procedure approved otes are tabulated by an independent inspector of election, IVS by an independent inspector of election, otes are tabulated ote tabulation Other information regarding the company’ telephone or on the Internet, you will need to vote once for each proxy card, notice, or e-mail you receive. If you do for each proxy card, notice, or e-mail Internet, you will need to vote once telephone or on the your proxy statement electronically card, you may have elected to receive not receive a proxy how to vote your shares. to access the proxy statement and an e-mail with directions on how should have received (toll free) or and a proxy card, please call 855-731-6026 a paper copy of these materials If you wish to request 317-433-51 Householding W street name, who have the same address will certain shareholders, whether they own registered shares or shares in at that address has previously receive only one set of proxy materials, unless one or more of the shareholders participant will continue to receive a copy of notified us that they want to receive separate copies. Each 401(k) Plan received a single set of proxy materials all of the proxy materials. Regardless of how you own your shares, if you would like to have separate copies of as a result of householding, and one or more shareholders at your address please contact Broadridge Financial these materials with respect to the 2017 annual meeting or in the future, Solutions, Inc. at 1-866-540-7095. W The board of directors is soliciting proxies for the 2017 annual meeting. our solicitation of proxies. W whom they hold stock of the company for sending proxy material to and obtaining instructions from persons for Other Matters The 2018 annual meeting The company’ V Attending the annual meeting V If you do not vote, your shares will be voted by other plan participants who have elected to have their voting elected to have who have by other plan participants will be voted not vote, your shares If you do not otherwise received. instructions are for which voting to all shares applied proportionally preferences of to shareholders of record, those holding proxies from shareholders Attendance at the meeting will be limited media and financial community record, and invited guests from the through security this first-served basis in the garage indicated on the map at the end of Parking will be available on a first-come, admittance or parking, you may call 855-731-6026 (toll free) or 317-433-51 report. If you have questions about (prior to the annual meeting). expect to solicit proxies primarily by mail and email, but directors, of may also solicit in person or by telephone, fax, or email. W personal interview distribution and solicitation of proxies. Georgeson may solicit proxies by and email. W of-pocket expenses. Proxy cards and notices Proxy cards in more than you hold shares to proxy materials, or e-mail related proxy card, notice, more than one If you received one account. all other participants who elected to have their votes applied in this manner in this applied their votes to have elected who participants all other may attend by presenting the admission ticket that appears at the end of this proxy statement. Please fill it out and ticket that appears at the end of this proxy statement. Please fill it may attend by presenting the admission bring it with you to the meeting. at the intersection of Delaware and McCarty streets. entrance to the south of the fountain PROXY STATEMENT P69 March 20,2017 Secretary Bronwen L.Mantlo By orderoftheBoardDirectors, reporting astocksale.Eachfilingwasmadepromptlyaftertheissuediscovered. due toadministrativeerrors,Jackson other recordsandinformation.Basedonthatreview beneficial ownershipofcompanystock.W Under SECrules,ourdirectorsandEOsarerequiredtofilewiththereportsofholdingschangesin Section 16(a)beneficialownershipreportingcompliance T ai waslateinreportingtwostockpurchasesandFionnualaW e havereviewedcopiesofreportsprovidedtothecompany , weconcludedthatallreportsweretimelyfiled,exceptthat, alsh waslatein , aswell P69 PROXY STATEMENT P70 P70 $2.58 $0.19 $0.02 $0.29 $0.44 $3.52 2016 , and, where Annual Annual The adjustments , which are reviewed by the The Compensation . wards were determined to eliminate the wards were determined

A enezuelan financial crisis, including the significant enezuelan financial crisis, including financial measures: financial measures: ward A Adjustments Related to the to the Related Adjustments enezuelan financial crisis. . These guidelines are generally consistent with the company These guidelines are generally consistent financial measure to the investment community financial measure to the investment . A payout calculations, the Compensation Committee made the following adjustments to payout calculations, the Compensation Committee made the following A - Summary of - Summary The adjustments apply equally to income and expense items. The adjustments apply equally to income A fect of certain unusual items on incentive compensation performance measures. items on incentive compensation fect of certain unusual 2015: Eliminated the impact of the debt extinguishment loss. 2016, 2015 and 2014: Eliminated the impact of the charges recognized for acquired in-process 2016, 2015 and 2014: Eliminated the impact of the charges recognized research and development. and other special 2016, 2015 and 2014: Eliminated the impact of asset impairments, restructuring, charges. assets. 2016 and 2015: Eliminated the impact of amortization of certain intangible 2016: Eliminated the impact of the V Eliminated the impact of the charge related to the V Eliminated the impact of the charge deterioration of the bolivar recognized for acquired in-process research and development. Eliminated the impact of the charge restructuring and other special charges. Eliminated the impact of asset impairments, of certain intangible assets. Eliminated the impact of amortization eliminate certain counterproductive short-term incentives—for example, incentives to refrain from example, incentives to refrain short-term incentives—for eliminate certain counterproductive legacy legal assets, or to defer settling to defer disposing of underutilized acquiring new technologies, current bonus payments. proceedings to protect with peer companies. facilitate comparisons align award payments with the underlying performance of the core business. with the underlying performance align award payments year due to unusual items in the award inflation or deflation of awards avoid volatile, artificial (comparator) year relevant, the previous • • • • • • • • • Eliminate impact of the Venezuelan financial crisis Eliminate acquired in process research and development charge Eliminate asset impairments, restructuring and other special charges Eliminate amortization of certain intangible assets • • • • o assure the integrity of the adjustments, the Compensation Committee establishes adjustment guidelines in the Compensation Committee establishes adjustment guidelines o assure the integrity of the adjustments, EPS as reported Non-GAAP EPS guidelines for reporting non-GAAP and retains downward discretion, i.e., discretion to reduce compensation Committee reviews all adjustments by the adjustment guidelines. below the amounts that are yielded T period. the first 90 days of the performance Adjustments for 2015-2017 P For the 2015-2017 P reported EPS consistent with our reporting of non-GAAP are intended to: Audit Committee. Adjustments for 2016 Bonus Plan Compensation Committee made the following adjustments to reported For the 2016 bonus calculations, the of non-GAAP EPS consistent with our external reporting Reconciliations of these adjustments to our reported EPS are below Reconciliations of these adjustments distorting ef Consistent with past practice, the Compensation Committee adjusted the reported financial results on which adjusted the reported financial practice, the Compensation Committee Consistent with past bonus and the 2015-2017 Performance the 2016 annual cash Appendix Appendix Cash Bonus and Performance Performance Bonus and Cash PROXY STATEMENT P71 Reconciliations oftheseadjustmentstoourreportedEPSarebelow Compensation Committeemadethefollowingotheradjustments: In additiontotheadjustmentsconsistentwithourreportingofnon-GAAP Adjusted Non-GAAPEPS *Numbers maynotaddduetorounding Amortization ofcertainintangibleassets Novartis AnimalHealthacquisitionadjustment adjustment Transfer ofErbituxcommercializationrights Non-GAAP EPS rights toBoehringerIngelheim Eliminate gainrelatedtotransferofcommercial Eliminate additionalU.S.DrugFee Health Eliminate inventorystep-upforNovartisAnimal Eliminate debtextinguishmentloss Eliminate amortizationofcertainintangibleassets other specialcharges Eliminate assetimpairments,restructuringand development charges Eliminate acquiredinprocessresearchand Eliminate impactoftheVenezuelanfinancialcrisis EPS asreported • • • • • • amortization ofcertainintangibleassets. ef amortization ofcertainintangibleassetsfromnon-GAAP When theCompensationCommitteeset2015-2017P acquisition andfinancinghadoccurredasofJanuary1,2014. adjusted thebaseyear2014resultstoincludeofNovartis acquisition ofNovartis When theCompensationCommitteeset2015-2017P impact ofthetransfercommercializationrights. Accordingly rights forErbitux®inNorth When theCompensationCommitteeset2015-2017P rights incertaincountriestoBoehringerIngelheim. 2014: Eliminatedtheimpactofgainrelatedtotransferourlinagliptinandempagliflozincommercial Fee. 2014: EliminatedtheimpactofchargeforanextrayearU.S.BrandedPrescriptionDrug 2015: Eliminatedtheimpactofinventorystep-upforNovartis fective comparisons,thecommitteeadjusted2014non-GAAP , thecommitteeadjusted2016and2015resultstoneutralizeexpectedEPS Animal Health(whichoccurredinJanuary2015). America toLilly(whichoccurredinOctober2015)wasnotcontemplated. $(0.14) $3.38 $3.52 $0.44 $0.29 $0.02 $0.19 $2.58 2016 — — — — — — $(0.01) $3.42 $3.43 $0.10 $0.09 $0.39 $0.25 $0.33 $2.26 2015 — — — — — A A A targets,thecompanybeganexcluding targets,theEPSgoalsweresetassuming targets,thetransferofcommercialization financialmeasuresin2015. . Animal Health. 2016 vs.2015 % Growth financialmeasures,the (1.2)% 14.2% 2.6% resultstoexcludetheimpactof Animal Healthasifthe Accordingly $(0.07) $(0.06) $3.03 $0.32 $2.78 $0.38 $0.12 $2.23 $0.11 2014 — — — — — , thecommittee T o make 2015 vs.2014 % Growth 12.9% 23.4% 1.3% P71 PROXY STATEMENT , P72 P72 . the ear Y , on each ear Y to may be fective January Administrator as Account and the Amended and and Amended s death, as provided in Section 6 . Subject to adjustment as s shareholders, ef and ending December 31, 2016, is . PLAN , established by the Plan Shares issued under the Plan

Effective January 1, 2017) Effective January 29, 2003, ANY fective January 1, 2017, contingent upon fective January 1, 2017, contingent described in Section 5(c) is credited

28 aluation Date in November of each Plan

April last Business Day in November of each calendar year

The shares s 2017 annual meeting. ORS' DEFERRAL AND COMP which shall be as soon as administratively feasible after the

, Y are allocated 750,000. ” means the on October 19, 2009 DIRECT A. Y ELI LILL Shares Account shall consist of a Deferred Compensation s ” means the person or persons who are designated by the Participant or are ” means the person or persons who are designated by the Participant or THE LILL Appendix Deferral Plan has been established by the Company for the purpose of been established by the Company Deferral Plan has aluation Date” means the V Allocation Date erms Participant’ A of T s shareholders at the Company’ Board” means the Board of Directors of the Company Annual Annual V Beneficiary ” means one or more deferred compensation accounts maintained for each Account” means one or more deferred compensation accounts maintained for and contingent upon receiving approval of the Company’ and contingent upon receiving approval “ “ “ “ “ in accordance with Section 5 Amended and Restated Amended and Restated is 1,500,000. For the period beginning the annual allocation of (as (e) (d) Definition (b) (c) This amendment and restatement of the Plan is ef This amendment and restatement of shall have the meanings set forth below: The following terms used in the Plan (a) The Lilly Directors’ The Plan constitutes a plan of unfunded deferred compensation and is intended to comply with the The Plan constitutes a plan of unfunded of amounts that were earned and vested (within the For the rules that apply to the distribution after Account Account as described in Section 5 hereof. aluation Date, but in no event later than the last Business Day in November of the applicable Plan aluation Date, but in no event later than the last Business Day in November

Deferred Stock Participant’ otherwise entitled to receive benefits under the Plan in the event of the (d) hereof. which the annual allocation of Shares referenced in Section 5(c) is valued. Participant under the Plan. Annual V or such other annual date, not earlier than the third Monday in February the date as of which Section 1. Deferred Stock approval of the Company’ , the aggregate number of shares of Eli Lilly and Company common stock that may be issued or transferred Eli Lilly and Company common stock that may be issued or transferred 1, 2017, the aggregate number of shares of under this Plan shares was the aggregate number of authorized Preamble Restated Effective January 1, 2017) January Effective Restated the Company to who are not salaried employees of for Directors of the Company providing an opportunity the long-term growth of the fees and retainer and to share in of some or all of their meeting voluntarily defer receipt basis, an ownership interest in the Company Company by acquiring, on a deferred provided in Section 5(f), Appendix B - The Lilly Directors' Deferral Plan (As (As Plan Deferral Lilly Directors' The B - Appendix authorized and unissued shares or treasury shares. authorized and unissued shares or any other provision of this Plan, this Plan shall be interpreted, requirements of Section 409A. Notwithstanding consistent with these intentions. operated and administered in a manner Plan prior to 2005 (and earnings thereon) and are exempt from the meaning of Section 409A) under the requirements of Section 409A, see PROXY STATEMENT P73 which compensation eligiblefordeferral underthePlanisearned. accordance withapplicable laws. may atitsdiscretiondelegate anyofitsresponsibilitiestooneormoreindividuals providedthatsuchdelegationisin compensation ofnon-employee directors.ExceptwithrespecttoSection5(f)of thisPlan,thePlan Board ofDirectors,orany successor committeeoftheBoardDirectorsthatis chargedwithmattersrelatingtothe Compensation pursuanttothePlaninaccordancewith Section4hereof. months hasnotbeen, stock optionsgrantedtoDirectorsortheSharesallocatedpursuantSection5ofthisPlan. to timebyresolutionoftheBoardDirectors.Foravoidancedoubt,MonthlyCompensationdoesnotinclude Director isentitledforservicesrenderedtotheCompanyasaduringmonth,establishedfrom time and retainers,including,butnotlimitedto Participant’ pursuant toSection4andsettingforththeParticipant’ Administrator andcompletedbytheParticipantspecifyingParticipant’ record datefordeterminingshareholdersentitledtothedividendwithrespectanyDividendPaymentDate. on Shares. has notbeen, receives allocationsofSharesunderSection5,toholdtheallocatedduringsuchPlan Participant electstodefercompensationintotheDeferredStock sub-account shallbeestablishedwithintheDeferredStock with Section4(a). Deferred StockParticipantelectstodefercompensationintotheCompensation (a)(i). elected byaParticipantfordeferralunderthePlan. for regularbusiness. the Plan. A sub-accountshallbeestablishedwithintheDeferredCompensation s DeferredCompensation asalariedemployeeoftheCompany (q) (h) (f) (v) (s) (r) (p) (o) (n) (m) (l) (k) (j) (i) (g) (u) (t) asalariedemployeeoftheCompanyandwhoelects todeferallorpartofhisherMonthly “ “ “ “ “ “ “ “ “ “ “Deferred StockParticipant “Deferred Stock “Deferred Compensation “ “ “ “ Monthly DeferralParticipant Election Form”meansthewrittenorelectronicformformsapprovedbyPlan Dividend RecordDate Director” meansamemberoftheBoardDirectorsCompany Plan Plan Plan” means Participant Code” meanstheInternalRevenueof1986,asamended. Business Day Monthly Compensation Dividend PaymentDate Deferral Company Administrator Y ear Amount” meanstheamountofaParticipant’ ” meansthecalendar yearfromJanuary 1throughDecember31with respectto ” meansEliLillyandCompany ” meansanycurrentorformerDirectorwithanoutstanding Account and/orDeferredStock The LillyDirectors’ ” meansadayonwhichtheCompany’ Account” meansthebookkeepingaccountdescribedinSection5(a)(ii). , meetingfees,committeefeesandchairpersontowhicha ” meanstheDirectorsandCorporateGovernanceCommittee ofthe ” meansthedateestablishedbyBoardofDirectorsas ” meansthemonthlyretainerandaggregateofall ” meansthedateasofwhichCompanypaysacashdividend Account” meansthebookkeepingaccountdescribedinSection5 . ” meansaDirectorwhoisnot ” meansaDirectorwhoisnot s Beneficiarydesignationandthetermsofdistribution DeferralPlan,asamendedandrestatedherein. Account foreachPlan Account inaccordancewithSection4(a)or , anIndianacorporation. Account pursuanttoSection6. s electiontodeferMonthlyCompensation Account foreachPlan s corporateheadquartersareopen s MonthlyCompensationthatis , andforthepreceding12months Y , andforthepreceding12 ear inwhichaDeferredStock Account inaccordance . Y Account balancein ear Administrator . Y ear inwhicha other fees P73 A

PROXY STATEMENT P74 s s P74

. The Plan annual Account, , or other The Election Amount of up to Administrator All elections to defer Amount shall be reasury regulations and other and regulations reasury . T , subject to a minimum s spouse or a dependent (as defined s spouse or a dependent s property due to casualty s property due to Amount Accounts under the terms of the Plan, and Accounts under the terms of the Plan, ficer(s) of the Company as designated by the ficer(s) of the Company as designated s Beneficiary designation. . One hundred percent (100%) of any annual , the next day on which Shares are traded on the , the next day on which Administrator for the day-to-day administration of the Administrator for the day-to-day administration ear of the Code and the Code and of the , such Participant’ Y . Expenses of the administration of the Plan may be borne by . Expenses of the administration of Account or in Shares to his or her Deferred Stock Accounts at the sole discretion of the Plan Accounts at the sole discretion of the

” means a severe financial hardship of a Participant resulting financial hardship of a Participant resulting ” means a severe ” means a “separation from service” within the meaning of Section meaning of Section service” within the a “separation from ” means ), for the deferral of Monthly Compensation, or such amounts as The appropriate of Monthly Deferral Participant may elect a Deferral . A Monthly Deferral Participant in the Plan may file an Election Form Administrator shall have full authority to administer the Plan in Administrator shall have full authority A . ficers of the Company shall have any liability for any action or ficers of the Company shall have any . . Administrator ” means for any month, the third Monday of the month, or if Shares are not the third Monday of the month, ” means for any month, ” means section 409A section ” means The Plan . The Election Form shall also set forth the terms of distribution of the Participant’ Administrator shall be final, binding and conclusive on all parties. No member of Administrator shall be final, binding

Administrator in its sole discretion, and whether such Deferral aluation Date Administrator may require a Participant to comply with such terms and conditions as the Administrator may require a Participant to comply with such terms and ” means a share of common stock of the Company a share of common Share” means Unforeseeable Emergency V Section 409A Section from Service Separation “ Deferral Elections Maximum Deferrals Delegation; Expenses “ Authority “ “ “ s Monthly Compensation for a Plan Administrator ork Stock Exchange on such third Monday ork Stock Exchange Administrator nor any of Y (b) (x) Elections to Participate (a) Participation The Plan (y) (a) Plan (aa) (w) (b) (z) Account. Administrator on or before the date specified in accordance with Section 4(c) hereof. Administrator on or before the date specified in accordance with Section Amount of five thousand dollars ($5,000

ork Stock Exchange. The decisions of the Plan Y Administrator may specify in order for the Participant to participate in the Plan. Administrator may specify in order for the Participant to participate in the Administrator are authorized to act on behalf of the Plan Administrator are authorized to act ficial guidance promulgated thereunder promulgated guidance ficial New Section 2. pursuant to Section 5(a) hereof. Account in accordance with Section 6 hereof and the Participant’ Form delivered to the Plan compensation under the Plan are irrevocable, and no changes to any Election the terms of the Plan. Administrator shall be permitted, except as specifically provided under Deferred Stock with the Plan Section 4. of Section 3. Plan Form shall permit the Monthly Deferral Participant to specify the Deferral Deferral may be specified by the Plan credited in cash to his or her Deferred Compensation credited to a Deferred Stock Participant’ allocation of Shares earned pursuant to Section 5(c) will be automatically 409A. accident of such Participant or Beneficiary from an illness or traded on the New the all responsibilities and authorities as provided herein, including accordance with its terms and to exercise to the terms and conditions of deferrals of compensation under the Plan, discretionary authorities to determine of crediting to and distributing from determine the terms and conditions in section 152(a) of the Code) of such Participant, loss of such Participant’ the Code) of such Participant, loss in section 152(a) of the control of such arising as a result of events beyond and unforeseeable circumstances similar extraordinary event or circumstance with Section 409A, and any other determined in the manner consistent Participant, each as under Section 409A. of the term “unforeseeable emergency” within the meaning for administering the Plan as it may deem necessary or appropriate. to adopt such rules and regulations possible authority to interpret and construe all provisions of the Plan, to remedy Administrator has the discretionary the under the Plan, and to resolve all questions of fact arising under ambiguities, inconsistencies, or omissions Plan. the Board, the Plan Plan Plan Plan, subject to the authority of the Participants’ the Company or may be deducted from 100% of the Participant’ determination taken under the Plan. PROXY STATEMENT P75 Administrator forthedeferralofMonthly Compensationwithrespect toaPlan statement ofsuchParticipant’ amounts creditedordebited foraParticipantunderthePlan. accounts astheCompany considers necessaryoradvisableforpurposesofmaintaining aproperaccountingof amount ofapplicabletaxwithholding, Participant. other assetheldintrustorassecurityfortheCompany’ A Section 5. the electionwithCompany forth thetermsofdistributionindividual's accordance withtheprecedingprovisionsofthisSection4,todeferreceiptMonthlyCompensation and set not laterthanthirty(30)daysafterthedateheorshebecomeseligibletoparticipateinPlan,elect newly electedorappointedtoserveasaDirectorbecomeseligibleparticipateinthePlan,suchindividualmay for suchPlan deferral electionsforaPlan an ElectionFormwiththePlan such timestobespecifiedbythePlan for whichtheelectionsaremade.ParticipantswillberequiredtomakedeferralfuturePlan Deferral electionsshallapplytoMonthlyCompensationandannualShareallocationswithrespectthePlan accordance withtherequirementsofSection409A,deferralelectionsonanElectionFormshallbemade: Participant’ The balanceofaParticipant’ s Y Account shallconsistofbookentriesonlyandnot constituteaseparatecashorSharefund ear (c) (b) issued ortransferredbytheCompanyuntilpayment is madepursuanttoSection6hereof. the Plan,Sharesallocatedto Y necessary credited totheapplicableDeferredStock annual allocationsofSharesforDeferredStockParticipants describedinsection(c)belowshallbe applicable month,butinnoeventlaterthan administratively feasiblefollowing allocated toaDeferredStock Deferral for eachDeferredStockParticipantandMonthlyDeferralwhoelectstohavea to theDeferredCompensation For eachmonth,Deferral Deferral Compensation (a) Accounts andInterestCredits compensation isearned. of Section409A,nolaterthanJune30ththeapplicablePlan Administrator hasdeterminedqualifiesas“performance-basedcompensation”withinthemeaning of thePlan as “performance-basedcompensation”withinthemeaningofSection409A,priortobeginning and maintainedinfractionsroundedtothree(3)decimalplaces.Deferral Compensation ork StockExchangeontheV , asapplicable.Notwithstandingtheforegoing,infirstyearwhichanindividualwhois T Crediting ofDeferral (ii) (i) Participant (ii) (i) Amount creditedinShares. Amount creditedincashpursuanttoSection4hereofforagivenPlan iming andEf , fractionalShares,shallbecreditedbaseduponthe closing priceofSharesontheNew Y Y ear withrespecttowhichthecompensationisearned;and ear s . Administrator onorbeforethedeadlineestablishedbyPlan Account nolessfrequently thanonceayearfollowingtheendofeachPlan Account shallbedenominatedinU.S.dollars,roundedtothenearestwholecent. Account inthenameofeachMonthlyDeferralParticipantwhoelectstohavea , aParticipantwillbedeemednottohaveelecteddeferMonthlyCompensation Deferred Stock Deferred Compensation In thecaseofMonthlyCompensationoranannualShareallocationwhichPlan In thecaseofMonthlyCompensationoranannualShareallocationnotqualifying Accounts distributionsandexpenses. fect ofElections.UnlessotherwisespecifiedbythePlan Administrator inaccordancewiththeforegoing.IfaParticipantdoesnotfile s Amounts allocatedtoaDeferredCompensation Account shallbeadjustedpursuanttothisSection5 and reducedbythe . Amount. each Share Account shallbecredited aluation Dateforthatmonth. Accounts shallbemaintainedforeachParticipantunderthePlan: Account withrespecttoservicesbeperformedafterthefilingof Account asofthelastBusinessDaymonth. Account – the The DeferredStock Deferred Stock A s obligationtopaytheamountof Participantwho hasfiledanElectionForm withthePlan Account

Account onthe a DeferredStock The CompanyshallmaintainaDeferredStock thelastBusinessDayof A Participantshallreceiveor haveon-lineaccesstoa – A Participant’ The CompanyshallmaintainaDeferred Account asof to Annual Account shallbedenominatedinShares on amonthlybasis,assoon Account shallbehypotheticalandnot Notwithstanding anyotherprovisionof Y ear shallhave theDeferral s Y Allocation Date. ear withrespecttowhichthe Account mayincludesub- V the month aluation Dateforthe Amounts Account shallbecredited Account tothe Administrator for Y Administrator in such month. ear Sharesand,if intended tobe . The Deferred Y ears at Account Amount Y ear The Y ear . P75 ,

PROXY STATEMENT P76 P76

A up to . ear in Y This aluation Account, the s Account , there ear (and ear Y balance Y Account upon the Amounts and prior Amounts and prior s Account

fect for the month of fect for the month , the amounts deferred Account under the Plan. the Plan. under Account ear Y entire ear following the Plan ear in which the Participant's Y Y s Deferred Compensation ork Stock Exchange on the V Y s appropriate s appropriate Account and the Deferred Stock Allocation Date of each Plan Date of each Plan Allocation Accounts of Participants shall be credited Accounts of Participants Participant shall specify on an Election Form Participant shall specify on an Election ear (including for this purpose, but not limited ear (including for this A Y Account shall be adjusted by the Plan Account shall be adjusted by the Plan . Annual Account, as applicable, for such Plan ear following the Plan Y Account as if the allocated Shares were actual Shares Account as if the allocated Shares were Administrator and set forth on the Election Form, that such On the s Separation from Service either in: An amount equal to the amount of such dividends shall be An amount equal to the amount of such

payments over a period of two (2) to ten (10) years . Such interest shall accrue on all Deferral . Such interest shall As of , except as specifically provided under the terms of the Plan. . ear Participant is fully vested in his or her Participant is fully vested in his or her All distributions of a Participant’ Y The number of Shares referred to in the Preamble and Section 5 The number of Shares referred to in A . Accounts and be credited daily to such accounts. Accounts and be credited or (ii) was a Deferred Stock Participant at any time subsequent to the time subsequent Participant at any a Deferred Stock or (ii) was . Account as of the last Business Day of each month in which a Dividend Account as of the last Business Day The Deferred Compensation The Deferred Compensation ear s Deferred Stock . Cash dividends paid on Shares shall be deemed to have been paid on . Cash dividends paid on Shares shall Y Account of each person who (i) is a Deferred Stock Participant on Stock Participant (i) is a Deferred of each person who Account f or other extraordinary distribution. f or other extraordinary distribution. All elections are irrevocable, and no changes shall be permitted to any All elections are irrevocable, and no changes shall be permitted to any Allocation Administrator ear or portion thereof at a rate equal to 120% of the long-term applicable federal at a rate equal to 120% of the long-term ear or portion thereof Plan Accounts. Y Lump Sum payment in January of the second Plan Annual Installment Accounts Adjustments Date, as part of his or her compensation for service on the Board of Directors, service on the Board for part of his or her compensation Date, as Account and the Deferred Stock ferent shares or other securities of the Company or any other issuer are distributed ferent shares or other securities of the date of s total cash compensation for the Plan s total cash compensation ’ specified from time to time by resolution of the Board of Directors. to time by resolution of the Board , as may be specified from time ear (and earnings thereon) shall be distributed from the Participant’ esting of that Y (ii) Form of Distributions V Distribution upon Separation from Service Cash Dividends Capital Interest Credits. (i) Annual Share Annual Share aluation V

Shares which the Participant's Separation from Service occurs; or to be made in each Separation from Service occurs, with subsequent installment payments January within the applicable period. commencing in January of the second Plan (b) (e) (g) Distribution (a) (c) (d) (f) Account be distributed upon a Participant’ , in the event of any subdivision or combination of Shares or any stock dividend, stock split, , in the event of any subdivision or combination Amount so credited shall be reduced by applicable tax withholding, distributions and expenses. and distributions tax withholding, applicable by be reduced shall so credited Amount Allocation s Separation from Service. aluation Date. aluation Date of aluation Date the number of Annual If a Participant fails to make a timely payment election on the Election Form for a Plan If a Participant fails to make a timely payment election on the Election in the Deferred Compensation earnings thereon) shall be distributed in a lump sum in accordance with Section 6(a)(i) hereof. earnings thereon) shall be distributed in a lump sum in accordance with under the Plan shall be made in cash. Except as provided in Section 6(f), all distributions of a Participant’ under the Plan shall be made in cash. Except as provided in Section 6(f), earnings thereon of Deferred Compensation earnings thereon Record Date. issued and outstanding on the Dividend Stock credited in Shares to each Deferred the closing price for Shares on the New Payment Date occurs, based upon Administrator with respect to Shares through a spin-of Section 6. in the Deferred Compensation the manner in which the amounts deferred reorganization, recapitalization, or consolidation or merger with the Company as the surviving corporation, or if or merger with the Company as the surviving corporation, reorganization, recapitalization, or consolidation additional shares or new or dif last the Shares allocated to each Participant’ to each Deferred Stock hereof and the number of Shares allocated The Deferral The Stock to the Deferred shall be allocated director $800,000 minus the 4(a) above), as of the to an election under Section deferred into this Plan pursuant to, any cash compensation Annual V each Plan with interest computed ef section 1274(d) of the Code), as in compounding (as prescribed under rate, with monthly immediately preceding Plan December for the Date for that month. as applicable, for a Plan Participant’ Election Form delivered to the Plan Participant may elect, to the extent permitted by the Plan portion of the 7,500 of Shares equal in value to (i) 7,500 Shares or (ii) the number no event be more than the lesser of allocation shall in Annual V deducted from the applicable compensation and credited to the Participant’ credited and compensation the applicable from deducted PROXY STATEMENT P77 receiving awritten noticeofdenial,submit awrittenrequestforreconsideration tothePlan documentation thatmightenabletheclaimant toperfecttheclaim. to theclaimantawrittennotice explainingthereasonfordenialandidentifying anyadditionalinformationor claim inwritingtothePlan Section 7. withholding isrequired. all taxesonamountspaidunderthePlantoextent thattaxesarenotwithheldthereon,irrespectiveofwhether satisfy taxwithholdingrequirements.Participantsor Beneficiaries receivingdistributionsunderthePlanshallbear Plan subject toincometaxandotherwithholdingsthatthe Plan Administrator shallpayalloraportionoftheParticipant’ such SharesbyParticipantorBeneficiarymayviolate orconflictwithanyapplicablelawregulation,thePlan payment ofSharestoaParticipant(orParticipant’ deferrals underthePlan. extent thattheliquidationofsuchassetswouldnotitselfcauseseverefinancialhardship,orbycessation of through reimbursementorcompensationbyinsuranceotherwise,liquidationoftheParticipant’ as aresultofthedistribution,aftertakingintoaccountextenttowhichsuchhardshipisormayberelieved necessary tosatisfysuchUnforeseeableEmergencyplusamountspaytaxesreasonablyanticipated case, theamountsdistributedwithrespecttoanUnforeseeableEmergencyshallnotexceed circumstances thatwillconstituteanUnforeseeableEmergencydependuponthefactsofeachcase,but inany enabling theParticipanttomeetimmediateneedscreatedbyanUnforeseeableEmergency Administrator maypermittheParticipanttowithdrawsomeorallofParticipant’ Participant’ selected, orintheeventnovalidBeneficiarydesignationhasbeenmade,Participant’ Administrator Beneficiaries, andtochangeaBeneficiarydesignation,fromtimebyfilingwrittennoticewiththe Plan Participant’ made toaParticipantunderthePlanthatcannotbedueParticipant’ valuation oftheParticipant's the dateofParticipant’ any remainingbalanceshallbedistributedtotheParticipant’ provision ofthisSection6tothecontrary sum shallbecalculatedusingthevaluationofapplicableportionParticipant’ under thisSection6.Ifthepaymentoptiondescribedin6(a)(i)hereofisapplicable,amountoflump Deferred Compensation the lasttradingdayofpriorPlan transferred. Account shallberoundeduptothenextwholeShareandthatnumberofSharesissuedor final paymentunderthePlanwithrespecttoaParticipant,anyfractionremaininginParticipant’ treasury shares.FractionalSharesshallnotbeissuedortransferredtoaParticipant,providedthatinthecaseof books oftheCompanytoParticipant. Deferred Stock of installmentpaymentsthathavenotyetbeenmade. Participant’ applicable, theamountofeachinstallmentshallbecalculatedusingvaluationapplicableportion December 31precedingthedateofpayment.IfpaymentoptiondescribedinSection6(a)(ii)hereofis Administrator mayreducetheamountcreditedtoany Participant’ s estate. s Beneficiary s The valueoftheDeferredStock Account asoftheDecember31precedingdateinstallmentpaymentdividedbynumber . IntheeventthataBeneficiarydoesnotsurviveParticipantandnosuccessoris Account shallbepaidinShares,atwhichtimetheSharesissuedortransferredfrom (e) (a) Administrative Matters (g) (f) (c) (d) , subjecttoapplicablelaw Claims Procedure Withholding Payment ofCashinLieuShares Unforeseeable Emergency Distribution uponDeath Distribution of Account andtheDeferredStock s death. Administrator Account asofthedateprecedingdistribution. The amountofsuchlumpsumdistributionshallbecalculatedusingthe Y T ear axes. Account . IfthePlan , ifaParticipantdiesbeforefulldistributionofhisorher . All Sharestobeissuedortransferredhereundermaynewly . Any personmakingaclaim forbenefitshereundershallsubmitthe All distributionsofaParticipant’ Account iscalculatedwithreferencetotheclosingpriceofShareson . . NotwithstandinganyelectionmadebyaParticipantorother The CompanyshalldistributeamountsfromtheParticipant’ . EachParticipantshallhavetherighttodesignateoneormore . UponthewrittenrequestofaParticipant,Plan s Beneficiary)ortheownershipsubsequentdisposition of Administrator deniestheclaim inwholeorpart,itshallissue s DeferredStock Account inthemannerandondate(s)applicable Administrator deemsnecessaryorappropriate,andthe . IfatanytimethePlan s Beneficiaryinalumpsumwithin90daysfollowing The claimant may s Account totheextentitdeemsnecessary Account incash. s Account underthePlanshallbe s deathshallbemadetothe s Administrator determinesthat Account forthepurposeof , withinsixty(60) daysof

s Any paymentrequiredtobe Account asofthe s Beneficiaryshallbethe Administrator . Account balance, The s DeferredStock s assets,tothe , together s P77 PROXY STATEMENT P78 , , P78 The Plan is a s successors, , whether of s status as a Plan , and shall be Administrator shall be , but shall not be s spouse, parent, brother s spouse, parent, fect the Plan’ , the Plan shall be subject in any All interpretations, determinations, determinations, All interpretations, , and Participants shall have the Administrator wholly or partially wholly or partially Administrator fective unless duly executed and filed with the fective unless duly executed and filed Administrator shall consider any such request and and such request any shall consider Administrator . No waiver signed by the Plan Administrator nor a member of the Board of Directors and no Administrator nor a member of the Board Administrator is unable to locate a person to whom a to locate a person to whom a Administrator is unable The Plan The Administrator in its sole discretion to ensure proper care for sole discretion to ensure proper care Administrator in its , except in circumstances involving bad faith, for anything done or , except in circumstances involving Administrator fect of the Plan, shall be absolutely discretionary fect of the Plan, shall be absolutely Administrator determines that any person entitled to benefits under to benefits under any person entitled determines that Administrator . . If the Plan fairs because of illness, accident or other physical and mental incapacity accident or other physical and fairs because of illness, . If the Plan . If the Plan No notice, election or communication in connection with the Plan made or No notice, election or communication No term, condition, or provision of the Plan shall be deemed waived unless the No term, condition, or provision of the Any decision made or action taken by the Board of Directors, the Plan or action taken by the Board of Directors, Any decision made . . aiver Administrator in respect of any claim shall be final, binding and conclusive. final, binding and any claim shall be in respect of Administrator W Liability Notices. Incapacity Inability to Locate , assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any , assignment, pledge, attachment, garnishment, or other alienation or encumbrance . Accounts and all rights of Participants to benefits under the Plan are unfunded obligations of the Accounts and all rights of Participants to benefits under the Plan are unfunded (c) The obligations of the Company under the Plan will be binding upon the Company’ The obligations of the Company under the Plan will be binding upon the Limitation of Rights Nontransferability; Successors No interest of any person in, or right to receive a distribution under (b) Unfunded Status All (f) (d) (e) , or any employee of the Company or any of its subsidiaries, arising out of or in connection with the , or any employee of the Company . Plan benefits shall be paid from the general assets of the Company Administrator , adult child or other party deemed by the Plan , adult child or other Administrator (including any of its representatives, agents, or delegates) in the form and manner required by agents, or delegates) in the form and manner required Administrator (including any of its representatives, sister such person. Section 9. Section 10. any payment due (unless a duly qualified guardian or other legal representative has been appointed) may be paid other legal representative has been (unless a duly qualified guardian or any payment due of such person to such person’ terms described herein for the benefit consistent with the all interests under the Plan. status of an unsecured general creditor of the Company with respect to the Company may plan of unfunded deferred compensation. Notwithstanding the foregoing, does not af required to, establish a trust or other funding vehicle under the Plan that of unfunded deferred compensation. manner to sale, transfer voluntarily or involuntarily for the kind; nor may such interest or right to receive a distribution be taken, either person. satisfaction of the debts of, or other obligations or claims against, such transferees and assigns. shall provide the claimant with a written decision together with a written explanation thereof. No legal action may be action may No legal thereof. explanation with a written together decision a written with the claimant provide shall after the Plan more than one year against the Plan or maintained commenced for Plan benefits. denied, a claim wholly or patially is deemed to have denies, or of the Plan and decisions waiver individual or individuals seeking the Section 8. Company purported waiver is in writing signed by the Plan purported waiver is in writing signed only for so specifically stated in the writing, and any such waiver shall operate deemed a continuing waiver unless specific term, condition, or provision waived, and shall apply only to the the stated period and only as to the Plan the Plan submitted by any Participant, claimant or other person shall be ef submitted by any Participant, claimant the Plan is unable to care for his or her af the Plan is unable Administrator construction, administration, interpretation, or ef construction, administration, interpretation, with a written explanation of the basis of the request. the request. basis of of the explanation a written with payment is due under the Plan for a period of twelve (12) months, commencing with the first day of the month as of (12) months, commencing with the the Plan for a period of twelve payment is due under forfeited. payable to such person shall be becomes payable, the total amount which the payment conclusive and binding on all parties. Neither the Plan conclusive and binding on all parties. its subsidiaries shall be liable for any act or action hereunder employee of the Company or any of with the member or employee or by any agent to whom duties in connection omission or commission, by any other delegated or administration of the Plan have been omitted to be done. PROXY STATEMENT P79 or portionthereofshallbe applicable principlesorprovisionsofchoiceconflictlawdoctrines. in accordancewiththelawsofStateIndiana,regardlesslawthatmightotherwisegovernunder For purposesofthePlan,unlesscontraryisclearly indicatedbythecontext: Section 14. the Plan Administrator deemsappropriateorhelpful. the intentofCompanyassettlorPlan,and taking intoaccountsuchevidence,writtenororal,asthePlan of thePlan The determinationwhetherascrivener'serrorhasoccurred shallbemadebythePlan Section 13. Plan orbylawtoexhaustadministrativeremediesbeforeinitiatinglitigation. days ofthefilinganaction. asserted inajurisdictionnotdescribedtherein. allegation hadoriginallybeenfiledorassertedinajurisdictiondescribedaboveatthesametimethatitwas filedor described above,withanyapplicabletimelimitsorstatutesoflimitationsappliedasifthesuitclassaction transfer theaction;or(ii)ajointmotiontodismissactionwithoutprejudiceitsre-filinginjurisdiction to orre-filedinajurisdictiondescribedabove.Suchstepsmayinclude,butarenotlimitedto,(i)jointmotion to alleged PlanParticipantsandBeneficiariesshalltakeallnecessarystepstohavetheactionremovedto,transferred parties tosuchactionthatarerelatedthePlan(suchasafiduciary members isreasonablybelievedtoreside). members resides(orifthatjurisdictioncannotbedetermined,theinwhichlargestnumber of class Indiana; or(ii)inthecaseofaputativeclassaction,jurisdictionwhichlargestnumber class the Planisprincipallyadministered,whichcurrentlyUnitedStatesDistrictCourtforSouthern of Plan’ lawfulness ofanyPlanprovision,theadministrationPlan,orperformancenon-performance Section 12. unaf if suchillegalorinvalidprovisionhadneverbeeninsertedherein.Inaddition,theremainderof considered deletedherefromandtheremainderofsuchprovision Section 1 issued ortransferredtotheParticipantonbooksofCompany Participant shallhavenorightsasashareholderoftheCompanywithrespecttoanySharesuntilare shall beinterpretedascreatingarightofParticipanttoreceiveanycompensationorbenefitfromtheCompany the CompanyortoserveincapacitywhichParticipantisemployedby fected andshallcontinueinfullforceef s administratorsandfiduciaries,shallbefiledinoneofthefollowingjurisdictions:(i)jurisdictionwhich (c) (b) (a) Administrator discoversinthisinstrument,retroactively orprospectively 1. Administrator T Enforceability andGoverningLaw Nothing inthePlanshallconferuponanyParticipantrighttocontinueserveasaDirectorof the word"include" shallmeantoinclude, butnottobelimitedto; the useofsingularshall alsoincludewithinitsmeaningthepluralandviceversa; gender andviceversa; the useofmasculinegender inthisPlanshallalsoincludewithinitsmeaning thefeminine Rules ofConstruction The Planshallbeappliedandinterpretedwithoutregard toanyscrivener'serrorinthisinstrument. Scrivener This forumselectionprovisioniswaived,withrespecttoanaction,ifnopartyinvokesitwithin120 If anyactionisfiledinajurisdictionotherthanoneofthosedescribedabove,thenthePlan,all T Forum Selection o theextentnotpreemptedbyfederallaw o thefullestextentpermittedbylaw ’ s bestjudgmentandsolediscretion,basedonthePlan found tobe ’ s Errors This provisiondoesnotrelieveanyclaimantfromobligationexistingunderthe invalidorunenforceable, The Plan fect. , anyactionbroughtinwholeorpartrelatingtothePlan Administrator isauthorizedtocorrectanyscrivener's errors , thePlanshallbeconstrued,administeredandenforced it such provisionorportionofthePlan . the Planshallbeconstruedandenforcedas T o theextentthatanyprovisionofPlan , administratororpartyininterest)andall . Administrator Administrator intheexercise . NothinginthePlan ’ thePlanshallbe s understandingof shall be P79 . A

PROXY STATEMENT , P80 P80 , employee, , employee, ficer The Board may

, contingent upon deferrals on and after ficer or employee of the Company ficer or employee the 2009 s elections under the provisions of , of s 2017 annual meeting. fective for thereafter until terminated by the Board , or other named fiduciary ermination ears Y Account at the time of any such amendment or termination, and no Account at the time of any such amendment s (except as to the share limit specified in Section 5(c), which shall become (except as to the share limit specified s shareholders at the Company’ Administrator ear , employee, or entity used in this Plan means the respective of in this Plan means or entity used , employee, Y Amendment and T Amendment and ficer Plan fective that shall cause the Plan to fail to meet the requirements of Section 409A. Upon fective that shall cause the Plan to fail Accounts will continue to receive interest credits (or be invested) as permitted under the Plan, Accounts will continue to receive interest for convenience and reference only and are not to be considered in interpreting the terms and considered in interpreting the terms reference only and are not to be for convenience and conditions of the Plan. Effective Date; references to the Plan references to the (if under the Plan shall include delegates entity with responsibility or authority or other person or or person's delegated responsibilities; or person, with respect to such entity's any) of such entity and Plan are and other provision of the of each article, section, paragraph, the captions and headings shall become ef The Plan, as amended and restated, amended statute or section, and any regulations or other guidance of general applicability issued issued applicability of general guidance or other any regulations and or section, statute amended thereunder; an of the title of as such title may to such position any successor title and means Eli Lilly and Company or entity of from time to time; be changed any reference to a statute or section of a statute shall further be a reference to any successor or to any successor reference be a shall further statute of a or section to a statute any reference Accounts will be distributed in accordance with the Participant’ Accounts will be distributed in accordance (e) (f) (g) (d) fective October 20, 2008) and for future Plan fective October 20, 2008) and for future receiving the approval of the Company’ January 1, 2017, and for each ef Section 15. amend or terminate the Plan at any time and in any manner; provided that no amendment or termination shall time and in any manner; provided that no amendment or termination shall amend or terminate the Plan at any reduce the amount credited to a Participant’ amendment shall be ef with the requirements of Section 409A, (i) all future deferrals of compensation termination of the Plan in accordance will cease, (ii) all Plan and (iii) all Plan the Plan, unless the Company determines in its sole discretion that all such amounts shall be distributed upon in its sole discretion that all such amounts shall be distributed upon the Plan, unless the Company determines of Section 409A. termination in accordance with the requirements PROXY STATEMENT P81 salaried employeeoftheCompany andwhobecomesaParticipantinthePlan in accordancewithSection3hereof. Participant electstodeferinaccordancewithSection 4hereof. Internal RevenueCode)thatwasinef (120%) oftheapplicablefederallong-termrate,with compounding (asprescribedunderSection1274(d)ofthe to aParticipant'sDeferredCompensation employee directors. successor committeeoftheBoardDirectorsthatischargedwithmattersrelatingtocompensation non- designated pursuanttosubsection8.3hereof. Shares areallocatedtoeachShare annual date,notearlierthanthethirdMondayinFebruary The followingtermsshallhavethedefinitionssetforthinthisSection2: Section 2.Definitions. 750,000. of EliLillyandCompanycommonstockthatmaybeissuedortransferredunderthisPlanafter ownership interestintheCompany fees andretainertoshareinthelong-termgrowthofCompanybyacquiring,onadeferredbasis,an Company whoarenotsalariedemployeesofthetovoluntarilydeferreceiptsomeoralltheirmeeting Section 1.EstablishmentofthePlanandShares accordance withthePlantermsasinef prior to2005(andearningsthereon)andareexemptfromtherequirementsofSection409A 2.1 2.10. Director 2.9. DeferredStockParticipant 2.8. Deferred 2.7. CompanyCredit 2.6. Company 2.5. Committee. 2.4. BoardofDirectors. 2.3 BusinessDay 2.2. Beneficiary 2.1. 1.2. Shares 1.1. EstablishmentofPlan. Distribution ofamountsthatwereearnedandvested(withinthemeaningSection409A)underPlan The sharesmaybeauthorizedandunissuedortreasuryshares. 1. DividendPayment Date Annual Allocation Date A . vailable. Amount. . EliLillyandCompany A . memberoftheBoardDirectors. The DirectorsandCorporateGovernanceCommitteeoftheBoardDirectors,orany The beneficiaryorbeneficiaries(includinganycontingentbeneficiaries) . A . Foranycalendaryearorpartthereof,anamountcomputed, andcreditedannually dayonwhichtheCompany’ SubjecttoadjustmentasprovidedinSection7.5,theaggregatenumberofshares (As amendedandrestatedthroughJanuary1,2004) The amountofaMonthlyDeferralParticipant's Compensationthatthe The BoardofDirectorstheCompany . THE LILL . Account inaccordancewithSection6. This Planwasestablishedef This amendedandrestatedPlanisef The lastBusinessDayinNovemberofeachcalendaryear fect forthemonthofDecemberimmediatelypreceding thecalendaryear . fect onJanuary1,2004,asattachedbelow . The dateasof whichtheCompanypays acashdividendonShares. A GRANDF Account atanannualratethatisequaltoonehundred twentypercent Directorwhoisnot,andfor thepreceding12monthshasnotbeen,a Y . DIRECT APPENDIX A A THERED vailable. ORS' DEFERRAL , establishedbytheCommitteeasdateofwhich s corporateheadquartersareopenforregularbusiness. AMOUNTS A fective January1,1996,topermitDirectorsofthe . PLAN fective January1,2004. . shallbemadein April 28,2003,is , orsuchother . P81 PROXY STATEMENT P82 P82 fect fective . , not later ork Stock Y Account and Account , and who is not, fect under this Plan, unless , shall become a Deferred , any Director who is not a fective date, and all elections in , the term shall refer to one of these shall refer to one , the term fective date, and all elections in ef fect under this Plan, unless and until Thousand Dollars ($1,000) or more) or fective, elect in accordance with the preceding . , each person who becomes a Director Thereafter , the next day on which Shares are traded on the New , the next day on which Shares are The separate accounts (the Deferred Compensation Deferred Compensation accounts (the The separate . Director who is not a salaried employee of the Company and who has a salaried employee of the Company Director who is not A . . For any month, the monthly retainer and the aggregate of all meeting fees, the monthly retainer and the aggregate . For any month, Accounts . With respect to any Dividend Payment Date, the date established by the date established Date, the Payment Dividend to any respect . With The Lilly Non-Employee Directors' Deferred Stock Plan immediately before the The Lilly Non-Employee Directors' Deferred ef The Lilly Directors' Deferred Compensation Plan immediately before the . For any month, the third Monday of the month, or if Shares are not traded on the . For any month, the third Monday Director who is a Deferred Stock Participant, a Monthly Deferral Participant, or both. Deferred Stock Participant, a Monthly Director who is a A Accounts or Accounts share of common stock of the Company Amount"); A The Lilly Directors' Deferral Plan, as set forth herein and as it may be amended from time to The Lilly Directors' Deferral Plan, as (i) defers payment of a designated amount (of one subsection 8.2 hereof for (ii) specifies the payment option selected by the Participant pursuant to 5 hereof for such Deferred (iii) specifies the option selected by the Participant pursuant to Section aluation Date Amount; and The Lilly Non-Employee Directors' Deferred Stock Plan shall remain in ef The Lilly Non-Employee Directors' Deferred Account) described in Section 7 hereof. When used in the singular 7 hereof. When described in Section Account)

2.18. Share. 2.19. V 2.16. Participant. 2.17. Plan. 2.15. Monthly Deferral Participant 2.15. Monthly Deferral 2.13. Individual 2.13. Individual 2.14. Monthly Compensation 2.12. Dividend Record Date Record Dividend 2.12. ork Stock Exchange on such third Monday The Lilly Directors' Deferred Compensation Plan shall remain in ef Y fective date of this Plan shall continue as a Deferred Stock Participant on such ef fective date of this Plan shall continue fect under Each Director who participated in Compensation for the calendar year The amount deferred may not exceed the Director's aggregate Monthly ef Section 4. Monthly Deferral Participants. calendar year amended in accordance with this Plan. Prior to the beginning of each to be earned by the Director salaried employee of the Company may defer the receipt of Monthly Compensation during such year by filing with the Company a written election that: to the following calendar year or portion percentage of his or her Monthly Compensation for services attributable thereof (the "Deferred such Deferred Amount. to serve as a Director may Notwithstanding the foregoing, any individual who is newly elected or appointed than thirty (30) days after his election or appointment becomes ef Each Director who participated in Section 3. Deferred Stock Participants. time. New Board of Directors as the record date for determining shareholders entitled to the dividend. entitled shareholders determining date for record as the of Directors Board rendered to the a Director is entitled for services committee chairperson fees to which committee fees and of the Board of Directors. from time to time by resolution during the month, as established Company as a Director Directors or the Shares not include stock options granted to Monthly Compensation does For avoidance of doubt, to Section 6 of this Plan. allocated pursuant with Section 4 hereof. pursuant to the Plan in accordance or part of his or her Compensation elected to defer all Exchange. ef this Plan. and until amended in accordance with ef date of the Plan shall continue as a Monthly Deferral Participant on such under and for the preceding 12 months has not been, a salaried employee of the Company and for the preceding 12 months has Stock Participant. the Share the Share requires. as the context two accounts, PROXY STATEMENT P83 Compensation month oftheParticipant'sdeath. during themonthforwhich theaccrualisdetermined,exceptwhereanamount is distributedtoaBeneficiaryinthe The CompanyCreditshall not accrueonanyamountdistributedtoaParticipant (ortotheParticipant'sBeneficiary) amounts creditedtoaParticipant's DeferredCompensation calendar year Company CreditonorbeforeDecember31ofeachcalendar year Exchange ontheV Shares, shallbecreditedbasedupontheaverageof the highandlowpriceofSharesonNew credited totheShare transferred bytheCompanyuntilpaymentismadepursuant toSection8hereof. three (3)decimalplaces.SharesallocatedtoeachShare subsection 5.2hereof. and foreachMonthlyDeferralParticipantwhoelectstohaveaDeferred as ofthelastBusinessDaymonth. Compensation in U.S.dollars,roundedtothenearestwholecent.Foreachmonth,Deferred credited inSharespursuanttosubsection5.2hereof. Section 4hereofforacalendaryearanddoesnotelecttohavetheDeferred the nameofeachMonthlyDeferralParticipantwhoelectstodeferreceiptCompensationpursuant to The CompanyshallmaintainIndividual Section 7.Individual resolution oftheBoardDirectors. Shares orsuchothernumberofShares,nottoexceed3,000shares,asmaybespecifiedfromtime by Director onthatdate,aspartofhisorhercompensationforservicetheBoardDirectors,sevenhundred (700) allocated totheShare Section 6. Participant's Share all orapercentageoftheDeferred subsection 7.1hereof. be denominatedinU.S.dollarsandcreditedtotheParticipant'sDeferredCompensation Participant electstohavecreditedinSharesaccordancewithsubsection5.2hereof,theDeferred Section 5.FormofDeferredCompensationCredits. amend hisorherelectionwithregardtoafuturecalendaryearatanytime. future calendaryear made. IfaParticipantfailstomakeanelectionundersection5withrespecthisorherDeferred 8.4 hereof,anyelectionsmadepursuanttothisSection4withrespectacalendaryearshallbeirrevocablewhen calendar yearthatfollowsthefilingofelectionwithCompany provisions ofthisSection4,todeferthereceiptMonthlyCompensationearnedduringportioncurrent 7.3. For eachmonth,Deferred 7.2. Share 7.1. DeferredCompensation 6.1. 5.2. Shares.Priortothebeginningofeachcalendaryear 5.1. DeferredCompensation Annual Accrual ofCompanyCredit Annual . Account asofDecember31 ofthatyearandshallbecompoundedmonthly Account pursuanttosubsection5.1hereofshallbecreditedtheDeferredCompensation The CompanyCreditshallaccruemonthly aluation Dateforthatmonth. Account pursuanttosubsection7.2hereof. Account. , theParticipant'spreviouselectionshallremaininef Allocations toShare Allocation ofShares Account asofthelastBusinessDaymonth.Shares and,ifnecessary Account (asdescribedinSection7.2below)ofeachDeferredStockParticipantwhoisa Accounts. The Share The CompanyshallmaintainaShare The CompanyCreditforeach yearshallbecreditedtoeachDeferred Account shallbedenominatedinSharesandmaintainedfractionsroundedto Amounts allocatedtoaShare Amount forthefollowingcalendaryearcreditedinSharesandallocatedto Account. Account. ExceptwithrespecttoDeferred Accounts forParticipantsasfollows: . . The As ofthe Accounts. T reasurer oftheCompanyshalldetermineannual rate of The CompanyshallmaintainaDeferredCompensation Annual The DeferredCompensation , atone-twelfthoftheapplicableannualrate,onall Account shallbehypotheticalandnotissuedor Allocation Dateofeachcalendaryear Account, includingtheCompany Creditsforprioryears. Account pursuanttosubsection5.2hereofshallbe . , aMonthlyDeferralParticipantmayelecttohave Account foreachDeferredStockParticipant This rateshallbeef . Exceptasprovidedinsubsections8.2and Amount creditedinSharespursuantto fect, providedthattheParticipantmay Amount forsuchcalendaryear Amounts allocatedtoaDeferred Amounts whichaMonthlyDeferral Account shallbedenominated fective forthefollowing Account pursuantto . , thereshallbe , fractional Y Amount fora ork Stock Amount shall Account in Account P83 PROXY STATEMENT P84 P84 , credited to ork Stock All Shares to Y . , the Company Account shall be aluation Date for that aluation Date , monthly) installments over , monthly) installments over Account shall be equal to the . Account only Account only Account shall be equal to the amount credited ork Stock Exchange. ork Stock Exchange on the V Exchange on the ork Stock Y Y Account shall be rounded up to the next whole Share Account shall be rounded up to the , or within 30 days after becoming a Participant, the , or within 30 days after becoming a The annual statement shall report the number of Shares shall report the number of Shares The annual statement Account shall be equal to the amount credited to the f or other extraordinary distribution. f or other extraordinary . Account as of the last day of the month immediately preceding the date Account as of the last day of the month immediately preceding the date Account as of December 31 of that year Account as of December Account as of the December 31 immediately preceding the date of Account shall be paid in cash. Except as provided in Section 8.5, all Account shall be paid in cash. Except Account as of the December 31 immediately preceding the date of the Account as of the December 31 immediately preceding the date of the Account as if the allocated Shares were actual Shares issued and outstanding outstanding and issued actual Shares were Shares the allocated as if Account The number of Shares referred to in Sections 1.2 and 6 hereof and the number referred to in Sections 1.2 and The number of Shares Account shall be adjusted by the Committee, as it deems appropriate in its by the Committee, as it deems Account shall be adjusted ferent shares or other securities of the Company or any other issuer are securities of the Company or any ferent shares or other Account as of December 31 of that year and the dollar amount, if any 31 of that year and the dollar Account as of December All payments to a Participant (or to a Participant's Beneficiary) with respect to the All payments to a Participant (or to . . Within a reasonable time following the end of each calendar year time following the end of each . Within a reasonable . An amount equal to the amount of such dividends shall be credited in Shares to each in Shares to shall be credited of such dividends equal to the amount An amount , in the case of the Deferred Compensation . Cash dividends paid on Shares shall be deemed to have been paid on the Shares Shares on the been paid to have deemed shall be on Shares paid dividends . Cash Adjustments (i) a lump sum in January of the calendar year immediately following the calendar year in which the (i) a lump sum in January of the calendar year in which the (ii) a lump sum in January of the second calendar year following the calendar (iii) annual (or (iv) annual (or in the case of the Deferred Compensation Account Statements 8.2. Payment Options. Prior to each calendar year 8.l. Method of Payment. 7.6. 7.5. Capital 7.4. Cash Dividends 7.4. Account as of the last Business Day of each month in which a Dividend Payment Date occurs, based upon Date occurs, based Dividend Payment month in which a Day of each as of the last Business Account Exchange on any day on which a payment of Shares is to be made under the Plan, then that payment shall be of Shares is to be made under the Plan, then that payment shall Exchange on any day on which a payment are traded on the New made on the next day on which Shares month. Participant's Deferred Compensation Beneficiary) with respect to the Participant's Share payments to a Participant (or to a Participant's shall be issued or transferred on the books of the Company paid in Shares, at which time the Shares issued may be newly issued or treasury shares. Fractional Shares shall not be be issued or transferred hereunder that in the case of a final payment under the Plan with respect to a or transferred to a Participant, provided the Participant's Share Participant, any fraction remaining in be issued or transferred. If Shares are not traded on the New and that number of whole Shares shall Participant's Deferred Compensation Share payment, and the amount of the lump sum with respect to the Participant's Section 8. Payment Provisions shall render an annual statement to each Participant. statement to each Participant. shall render an annual with respect to the payment of one or both of the Participant's Individual Participant shall select a payment election elections: Accounts from the following payment Participant ceases to be a Director; Participant ceases to be a Director; following the calendar year during which a period of two to ten years commencing in January of the calendar year the Participant ceases to be a Director; or year following the calendar year in a period of two to ten years commencing in January of the second calendar which the Participant ceases to be a director elected, the amount of the lump sum with If a payment option described in paragraphs (i) or (ii), above, has been respect to the Participant's Deferred Compensation number of Shares credited to the Share has been elected, the amount of each payment. If a payment option described in paragraphs (iii) or (iv), above, installment with respect to the Participant's Deferred Compensation to the Participant's Deferred Compensation the date of an annual installment of a monthly installment payment, or the December 31 immediately preceding allocated to each Participant's Share Share Participant's to each allocated Record Date. on the Dividend Share on the New low prices for Shares of the high and the average to each Share of Shares allocated stock split, of Shares or any stock dividend, of any subdivision or combination discretion, in the event the surviving corporation, with Eli Lilly and Company as or consolidation or merger reorganization, recapitalization, or new or dif or if additional shares to Shares through a spin-of distributed with respect Share credited to the Participant's the Participant's Deferred Compensation the Participant's Deferred PROXY STATEMENT P85 Participant's childtocollegeorthedesirepurchase ahome. itself causeseverefinancialhardship;or hardship is,ormaybe,relieved-- will dependuponthefactsofeachcase,but,inanypaymentmaynotbemadetoextentthatsuch events beyondthecontrolofParticipant. property duetocasualty unexpected illnessoraccidentoftheParticipantadependentParticipant,lossParticipant's "unforeseeable emergency"meansseverefinancialhardshiptotheParticipantresultingfromasuddenand and thenonlytotheextentreasonablynecessarymeetemergency under subsection8.2above,atanytimethatitdeterminessuchParticipanthasanunforeseeableemergency a ParticipantofalloranyportiontheParticipant'sIndividual issued ortransferred totheParticipanton thebooksofCompany A Section 9.Ownershipof Shares. next precedingthedateof payment, orifSharesarenottradedonthatday shall bedeterminedwithreference totheaverageofhighandlowtradingprice forSharesontheDecember31 in itsdiscretion,payalloraportionoftheParticipant’ by suchParticipantorBeneficiarymayviolateconflict withanyapplicablelaworregulation,theCommitteemay Shares toaParticipant(orParticipant’ estate inalumpsumaccordancewiththissubsection8.3. Participant, anyamountnotdistributedtotheParticipantduringParticipant'slifeshallbepaid Participant's death.IftheParticipantdoesnotdesignateaBeneficiary designation (ifany)areinwriting,aformacceptabletotheCommittee,andfiledwithCommitteebefore the Beneficiary withouttheconsentofpreviouslydesignated Participant's death. Business Dayofthemonthpriortoinwhichpaymentoccurs. credited totheParticipant'sShare subsection 8.3,theamountcreditedtoParticipant'sDeferredCompensation Share amount creditedtotheParticipant'sDeferredCompensation pay outthe Shares creditedtoaParticipant'sShare any scheduledpayment,iftheamountcreditedtoaParticipant'sDeferredCompensation distributed inalumpsumaccordancewiththepaymentoptiondescribedparagraph(i)above. the Participantfailstoelectapaymentoption,amountcreditedParticipant'sIndividual payment, dividedbythenumberofinstallmentpaymentsthathavenotyetbeenmade. Participant's Share installment withrespecttotheParticipant'sShare payment, dividedbythenumberofinstallmentpaymentsthathavenotyetbeenmade. Participantshall havenorightsasashareholder oftheCompany with respecttoanyShares untiltheSharesare Account shallbepaidbytheCompanyinalumpsumtoParticipant'sBeneficiary Examples ofwhatarenotconsideredtobeunforeseeable emergenciesincludetheneedtosenda 8.5. PaymentofCashinLieuShares 8.4. PaymentonUnforeseeableEmergency A 8.3. PaymentUponDeath A ParticipantmaydesignatetheBeneficiary Participantmayelectthathisorherfinalpaymentelectioncontroloverallpriorelections.If Account inalumpsum. (iii) bycessationofdeferralsunderthePlan. (ii) byliquidationoftheParticipant'sassets,toextentsuchassetswouldnot (i) throughreimbursementorcompensationbyinsuranceotherwise; Account asoftheDecember31immediatelyprecedingdateanannualinstallment A ParticipantmayrevokeapriordesignationofBeneficiaryandalsodesignatenew , orothersimilarextraordinaryandunforeseeablecircumstancesarisingasaresultof Account shallbedeterminedasofthelaterdatedeathorlast . WithinareasonableperiodoftimefollowingthedeathParticipant, s Beneficiary)ortheownershipsubsequentdisposition ofsuchShares Account islessthan$25,000,theCommittee,initssolediscretion,may The circumstancesthatwillconstituteanunforeseeableemergency . IfatanytimetheCommitteeshalldeterminethatpayment of Account shallbeequaltothenumberofSharescredited , inwriting,aformacceptabletotheCommitteebefore . s Share The Committeemay Account andtheSharescreditedtoParticipant's Account incash.Inthiscase,theamountofcash Account balance,notwithstandinganelection . , orifnodesignatedBeneficiarysurvivesthe , providedthatsuchrevocationandnew . Forpurposesofthissection, , initssolediscretion,directpaymentto , thenextprecedingtrading day Account andthenumberofShares The amountofeach Account orthevalueof . Forpurposesofthis Account shallbe At thetimeof . P85 , , PROXY STATEMENT , P86 P86 , Sunday , or legal , Sunday , and shall be conclusive and , whether of omission or The Board of Directors shall have the Account balances will continue to be s The right of any Participant to receive payments The right of any Participant ermination. The recipients of such payments shall bear all taxes on The recipients of such payments shall , the individual’ Participant may not assign, sell, pledge, or otherwise transfer otherwise transfer sell, pledge, or may not assign, Participant If a Participant becomes an employee of the Company but A , except in circumstances involving bad faith, for anything done or , except in circumstances involving The Plan is unfunded. The Plan is unfunded. . . 1.8 shall not permit any action that must be taken in one calendar year to be 1.8 shall not permit any action that must be taken in one calendar year . ransfer , and shall not be liable with respect to any action taken, or omitted, by it in good , and shall not be liable with respect fect of the Plan, shall be absolutely discretionary fect of the Plan, shall be absolutely The Committee may consult with legal counsel, who may be counsel for the The Committee may consult with legal . . If any day on which action under the Plan must be taken falls on a Saturday . If any day on which action under the . Except as otherwise provided in the Plan, the Plan shall be administered by the provided in the Plan, the Plan . Except as otherwise The Company shall have the right to deduct from all payments hereunder any taxes The Company shall have the right to fect until terminated by the Board of Directors. . Against T Against Any decision made or action taken by the Board of Directors, the Committee, or any Any decision made or action taken . Amendment, Suspension, and T , he or she will no longer be entitled to new deferrals under the Plan as a Deferred Stock , he or she will no longer be entitled to new deferrals under the Plan as (i) no amendment or termination shall reduce the number of Shares or the cash balance in an (i) no amendment or termination shall reduce the number of Shares or may not be changed (ii) the number of Shares allocated annually pursuant to Section 6 hereof , such action may be taken on the next succeeding day that is not a Saturday , such action may be taken on the next erm, Administration Account; 1. General Provisions. . 1.7. Participant Who Becomes Employee. 1.5. Withholding 1.6. Legal Holidays 1.2. 1.3. Legal Opinions 1.4. Liability 1.1. Director's Rights Unsecured 1.1. Director's Rights 1 1 1 1 1 1 1 or legal holiday holiday; provided, that this subsection 1 taken in any subsequent calendar year remains a Director Participant or Monthly Deferral Participant. However and Cash Dividends under Sections 7.3 administered under the Plan (including eligibility for the Company Credit and 7.4) until they are paid out in accordance with Section 8. The Plan shall remain in ef the Plan, subject to the following: right at any time, and from time to time, to amend, suspend, or terminate Individual more frequently than every calendar year; and amounts paid under the Plan to the extent that no taxes are withheld thereon, irrespective of whether withholding is extent that no taxes are withheld thereon, irrespective of whether withholding amounts paid under the Plan to the required. Section 12. T binding on all parties. Neither the Committee nor a member of the Board of Directors and no employee of the nor a member of the Board of Directors and no employee of binding on all parties. Neither the Committee shall be liable for any act or action hereunder Company or any of its subsidiaries or employee or by any agent to whom duties in connection with the commission, by any other member delegated or administration of the Plan have been omitted to be done. such payments. required by law to be withheld from Company or other counsel, with respect to its obligations and duties under the Plan, or with respect to any action, to its obligations and duties under the Plan, or with respect to any Company or other counsel, with respect proceeding, or any questions of law counsel. faith pursuant to the advice of such Committee, which shall have the final authority to adopt rules and regulations for carrying out the Plan, and to rules and regulations for carrying shall have the final authority to adopt Committee, which Plan. and implement the provisions of the interpret, construe, its subsidiaries, arising out of or in connection with the construction, employee of the Company or any of administration, interpretation, or ef Shares or cash to which he is entitled hereunder prior to transfer or payment thereof to the Participant, and any to the Participant, or payment thereof prior to transfer is entitled hereunder cash to which he Shares or transfer shall be void. sale, pledge or assignment, such attempted Section 1 Section 10. Prohibition Prohibition 10. Section The right of a Participant to receive payments of Shares and cash under the Plan may not be transferred except by except by may not be transferred under the Plan of Shares and cash receive payments of a Participant to The right and distribution. laws of descent will or applicable of cash or Shares under the provisions of the Plan shall be an unsecured claim against the general assets of the be an unsecured claim against the under the provisions of the Plan shall of cash or Shares Company PROXY STATEMENT P87 ef Compensation Planor election, designation,deferral,oraccrualinaccordancewiththetermsof The ef Section 14.EffectiveDate. extent thatsuchlawsarepreemptedbyFederallaw The Planshallbegovernedby Section 13. amendments shallbesubmittedtotheCompany’ fective dateofthisPlan. fective dateofthisPlanisJanuary1,1996.Nothinghereinshallinvalidateoradverselyaf Applicable Law (iii) totheextentrequiredbyNew The LillyNon-EmployeeDirectors'DeferredStockPlanthatwereinef . , andconstruedinaccordancewith,thelawsofStateIndiana,exceptto s shareholdersforapproval. Y ork StockExchangelistingrulesorapplicablelaw . The LillyDirectors'Deferred fect priortothe fect anyprevious , material P87 Annual Meeting Admission Ticket

Eli Lilly and Company 2017 Annual Meeting of Shareholders Monday, May 1, 2017 11:00 a.m. EDT

Lilly Center Auditorium Lilly Corporate Center Indianapolis, Indiana 46285

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Doors open at 10:15 a.m.

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Directions and Parking From I-70 take Exit 79B; follow signs to McCarty Street. Turn right (east) on McCarty Street; go straight into Lilly Corporate Center. You will be directed to parking. Be sure to take the admission ticket (the top portion of this page) with you to the meeting and leave this parking pass on your dashboard.

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Eli Lilly and Company Annual Meeting of Shareholders May 1, 2017

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ANNUAL MEETING TRANSFER AGENT AND REGISTRAR The annual meeting of shareholders will be held at WELLS FARGO SHAREOWNER SERVICES the Lilly Center Auditorium, Lilly Corporate Center, Mailing Address: Indianapolis, Indiana, on Monday, May 1, 2017, SHAREOWNER SERVICES at 11:00 a.m. EDT. For more information, see the P.O. Box 64854 proxy statement section of this report. St. Paul, Minnesota 55164-0854 Overnight Address: 10-K AND 10-Q REPORTS SHAREOWNER SERVICES 1110 Centre Pointe Curve, Suite 101 Paper copies of the company’s annual report to the Mendota Heights, Minnesota 55120-4100 Securities and Exchange Commission on Form 10-K and quarterly reports on Form 10-Q are available Telephone: 1-800-833-8699 upon written request to: E-mail: [email protected] ELI LILLY AND COMPANY Internet: www.shareowneronline.com c/o Corporate Secretary Lilly Corporate Center Indianapolis, Indiana 46285 DIVIDENT REINVESTMENT AND STOCK PURCHASE PLAN To access these reports more quickly, you can find all of Wells Fargo Shareowner Services administers the our SEC filings online at: https://investor.lilly.com/sec.cfm. Shareowner Service Plus Plan, which allows registered shareholders to purchase additional shares of Lilly STOCK LISTINGS common stock through the automatic investment of Eli Lilly and Company common stock is listed on the dividends. The plan also allows registered shareholders New York Stock Exchange, NYSE Euronext, and SIX Swiss and new investors to purchase shares with cash payments, Exchange. NYSE ticker symbol: LLY. Most newspapers either by check or by automatic deductions from checking list the stock as “Lilly (Eli) and Co.” or savings accounts. The minimum initial investment for new investors is $1,000. Subsequent investments must be at least $50. The maximum cash investment during CEO AND CFO CERTIFICATES any calendar year is $150,000. Please direct inquiries The company’s chief executive officer and chief financial concerning the Shareowner Service Plus Plan to: officer have provided all certifications required under WELLS FARGO SHAREOWNER SERVICES Securities and Exchange Commission regulations with P.O. Box 64856 respect to the financial information and disclosures in this St. Paul, Minnesota 55164-0856 report. The certifications are available as exhibits to the Telephone: 1-800-833-8699 company’s Form 10-K and 10-Q reports.

In addition, the company’s chief executive officer has ONLINE DELIVERY OF PROXY MATERIALS filed with the New York Stock Exchange a certification to Shareholders may elect to receive annual reports and the effect that, to the best of his knowledge, the company proxy materials online. This reduces paper mailed to the is in compliance with all corporate governance listing shareholder’s home and saves the company printing and standards of the Exchange. mailing costs. To enroll, go to https://investor.lilly.com/ services.cfm and follow the directions provided.

© 2017 Eli Lilly and Company YEAR2016AR ELI LILLY AND COMPANY LILLY CORPORATE CENTER INDIANAPOLIS, INDIANA 46285 USA 317-276-2000 | www.lilly.com

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