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Item 7. Management’s Discussion and Analysis

2025-02-19 compared with 2024-02-21 · 211 added, 228 removed, 293 unchanged (60% of the section changed)

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EXECUTIVE OVERVIEW

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

This section provides an overview of our financial results, our clinical development pipeline, and other matters affecting our company and industry.

Financial Results

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Earnings per share - diluted 11.71 5.80 102

Revenue increased in 2023 driven by increased volume and higher realized prices.

The increase in revenue in 2023 was primarily driven by sales of Mounjaro ® , Verzenio ® , and Jardiance ® , as well as the sales of the rights for the olanzapine portfolio, including Zyprexa ® , and for Baqsimi ® , partially offset by the absence of revenue from COVID-19 antibodies and lower sales of Alimta ® following the entry of multiple generics in the first half of 2022.

Net income and earnings per share decreased in 2023, driven primarily by higher acquired in-process research and development (IPR&D) charges and increased research and development expenses, marketing, selling, and administrative expenses, and income taxes, partially offset by increased revenue.

Revenue increased in 2024 driven by increased volume and, to a lesser extent, higher realized prices.

The increase in revenue in 2024 was primarily driven by Mounjaro, Zepbound, and Verzenio, partially offset by Trulicity.

Net income and earnings per share increased in 2024, primarily due to higher gross margin, partially offset by increased research and development expenses, marketing, selling, and administrative expenses, and asset impairment, restructuring, and other special charges.

See "Results of Operations" for additional information.

Late-Stage Pipeline

Clinical Development Pipeline

Our long-term success depends on our ability to continually discover or acquire, develop, and commercialize innovative medicines.

We currently have approximately 55 new medicine candidates in clinical development or under regulatory review, and a larger number of projects in the discovery phase.

The following select new molecular entities (NMEs) and new indication line extension (NILEX) products are currently in Phase II or Phase III clinical trials or have been submitted for regulatory review or have recently received regulatory approval in the United States (U.S.), European Union (EU), or Japan.

The following select new molecular entities (NMEs) and new indication line extension (NILEX) products are currently in Phase 2 or Phase 3 clinical trials or have been submitted for regulatory review or have recently received regulatory approval in the United States (U.S.), European Union (EU), or Japan.

The table reflects the status of these NMEs and NILEX products, including certain other developments, up to the time of the filing of this Annual Report on Form 10-K:

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Status Developments

Diabetes, Obesity, and Other Cardiometabolic Diseases

Empagliflozin (Jardiance) (1)

Chronic kidney disease Approved Approved in the U.S.

and the EU in 2023.

Submitted in Japan in 2022.

Cardiometabolic Health

Tirzepatide (Mounjaro, Zepbound)

Obesity Approved Approved in the U.S.

and the EU in 2023 and in Japan in 2024.

Phase 3 trials are ongoing.

Obstructive sleep apnea (OSA)

Approved Approved in the U.S.

and the EU in 2024.

Phase III trials are ongoing.

Heart failure with preserved ejection fraction Submitted Submitted in the U.S.

and the EU in 2024.

Cardiovascular outcomes in type 2 diabetes

Phase III trial is ongoing.

Heart failure with preserved ejection fraction Phase III Phase III trial is ongoing.

Phase 3 Phase 3 trial is ongoing.

Morbidity and mortality in obesity

Phase III trial is ongoing.

Obstructive sleep apnea (OSA)

Phase III Granted U.S.

Food and Drug Administration (FDA) Fast Track designation (2) .

Phase III trial is ongoing.

Phase II trial initiated in 2023.

Nonalcoholic steatohepatitis Phase II Announced in 2024 that a Phase II trial met its primary endpoint.

Insulin Efsitora Alfa Type 1 and type 2 diabetes Phase III Phase III trials are ongoing.

Orforglipron Obesity Phase III Phase III trials initiated in 2023.

Type 2 diabetes Phase III Phase III trials initiated in 2023.

Retatrutide Obesity, osteoarthritis, OSA

Phase III Phase III trials initiated in 2023.

Type 2 diabetes Phase II Phase II trial was completed.

Bimagrumab Obesity Phase II Acquired in the acquisition of Versanis Bio, Inc.

(Versanis) in 2023.

Phase II trial is ongoing.

Lepodisiran Cardiovascular disease Phase II Phase II trial is ongoing.

Mazdutide Obesity Phase II Phase II trial initiated in 2023.

Muvalaplin Cardiovascular disease Phase II Phase II trial is ongoing.

Solbinsiran Cardiovascular disease Phase II Phase II trial is ongoing.

Volenrelaxin Heart failure Phase II Phase II trial initiated in 2023.

Phase 3 Phase 3 trial is ongoing.

Phase 2 Phase 2 trial is ongoing.

Metabolic dysfunction-associated steatohepatitis

Phase 2 Announced in 2024 that a Phase 2 trial met the primary endpoint.

Insulin Efsitora Alfa Type 1 and type 2 diabetes Phase 3 Announced in 2024 that five Phase 3 trials met the primary endpoints.

Lepodisiran Atherosclerotic cardiovascular disease

Phase 3 Phase 3 trial initiated in 2024.

Orforglipron Obesity Phase 3 Phase 3 trials are ongoing.

OSA Phase 3 Phase 3 trials initiated in 2024.

Type 2 diabetes Phase 3 Phase 3 trials are ongoing.

Retatrutide Cardiovascular / renal outcomes

Phase 3 Phase 3 trials initiated in 2024.

Obesity, osteoarthritis, OSA

Phase 3 Phase 3 trials are ongoing.

Type 2 diabetes Phase 3 Phase 3 trials initiated in 2024.

Bimagrumab Obesity Phase 2 Phase 2 trial is ongoing.

Eloralintide Obesity Phase 2 Phase 2 trial initiated in 2024.

GLP-1R NPA II Obesity Phase 2 Phase 2 trial initiated in 2024.

Mazdutide Obesity Phase 2 Phase 2 trial is ongoing.

Muvalaplin Cardiovascular disease Phase 2 Announced in 2024 that a Phase 2 trial met the primary and secondary endpoints.

Solbinsiran Cardiovascular disease Phase 2 Phase 2 trial is ongoing.

Volenrelaxin Heart failure Discontinued In 2025, Phase 2 trial was discontinued based on clinical data readout.

Compound Indication/Study

Status Developments

Mirikizumab (Omvoh) Crohn's disease Approved Approved in the U.S.

and the EU in 2025.

Submitted in Japan in 2024.

Lebrikizumab (1)

Atopic dermatitis Approved Approved in the EU in 2023 and in Japan in 2024.

Submitted in the U.S.

We received a complete response letter from the FDA in 2023.

We anticipate regulatory action by the end of 2024.

Phase III trials are ongoing.

Mirikizumab Crohn's Disease Phase III Announced in 2023 that a Phase III trial met the co-primary and all major secondary endpoints compared to placebo.

Phase III trials are ongoing.

DC-806 Psoriasis Phase II Acquired in the acquisition of DICE Therapeutics, Inc.

(DICE) in 2023.

Phase II trial is ongoing.

Eltrekibart Hidradenitis suppurativa Phase II Phase II trial is ongoing.

AR (perennial allergens)

Phase 3 Phase 3 trial initiated in 2024.

CD19 Antibody

Multiple sclerosis

Phase 2 Phase 2 trial initiated in 2024.

Eltrekibart Hidradenitis suppurativa Phase 2 Phase 2 trial is ongoing.

Ulcerative colitis Phase 2 Phase 2 trial initiated in 2024.

KV1.3 Antagonist

Psoriasis Phase II Phase II trial initiated in 2024.

(RIPK1 inhibitor) Rheumatoid arthritis Phase II Phase II trial initiated in 2023.

Peresolimab Rheumatoid arthritis Phase II Phase II trial is ongoing.

Ucenprubart Atopic dermatitis Phase II Phase II trial initiated in 2023.

Donanemab Early Alzheimer's disease Submitted Submitted for approval in the U.S., the EU, and Japan in 2023.

Granted FDA Breakthrough Therapy designation (4) .

Phase III trials are ongoing.

Preclinical Alzheimer's disease Phase III Phase III trial is ongoing.

Remternetug Early Alzheimer's disease Phase III Phase III trial is ongoing.

GBA1 Gene Therapy Gaucher disease Type 1 Phase II Phase II trial initiated in 2023.

Parkinson's disease Phase II Granted FDA Fast Track designation (2) .

Phase II trial is ongoing.

GRN Gene Therapy Frontotemporal dementia Phase II Granted FDA Fast Track designation (2) .

Phase II trial is ongoing.

O-GlcNAcase Inh Alzheimer's disease Phase II Phase II trial is ongoing.

Psoriasis Phase 2 Phase 2 trial initiated in 2024.

MORF-057 Crohn's disease Phase 2 Acquired in the acquisition of Morphic Holding, Inc.

(Morphic) in 2024.

Phase 2 trials are ongoing.

Ulcerative colitis Phase 2

Ocadusertib Rheumatoid arthritis Phase 2 Phase 2 trial is ongoing.

Simepdekinra (DC-853) Psoriasis

Phase 2 trial initiated in 2024.

Ucenprubart Atopic dermatitis Discontinued In 2024, Phase 2 trial was discontinued based on clinical data readout.

Donanemab (Kisunla) Early Alzheimer's disease Approved Approved in the U.S.

and Japan in 2024.

Submitted in the EU in 2023.

Phase 3 trials are ongoing.

Pre-clinical Alzheimer's disease

Phase 3 Phase 3 trial is ongoing.

Remternetug Early Alzheimer's disease Phase 3 Phase 3 trials are ongoing.

Epiregulin Ab Pain Phase 2 Phase 2 trial initiated in 2024.

GBA1 Gene Therapy Gaucher disease Type 1 Phase 2 Phase 2 trial is ongoing.

Parkinson's disease Phase 2 Granted U.S.

Food and Drug Administration (FDA) Fast Track designation (2) .

Phase 2 trial is ongoing.

GRN Gene Therapy Frontotemporal dementia Phase 2 Granted FDA Fast Track designation (2) .

Phase 2 trial is ongoing.

Mazisotine Pain Phase 2 Phase 2 trials are ongoing.

OTOF Gene Therapy

Phase II Phase II trial initiated in 2024.

P2X7 Inhibitor Pain Phase II Phase II trials were completed.

SSTR4 Agonist Pain Phase II Phase II trials are ongoing.

Phase 2 Phase 2 trial initiated in 2024.

P2X7 Inhibitor Pain Phase 2 Phase 2 trials were completed in 2023.

O-GlcNAcase Inh

Alzheimer's disease Discontinued In 2024, Phase 2 trial was discontinued based on clinical data readout.

Compound Indication/Study

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Pirtobrutinib

(Jaypirca ® )

Chronic lymphocytic leukemia Approved (3)

FDA granted accelerated approval (3) in the U.S.

Phase III trials are ongoing.

Submitted in the EU and Japan in 2024.

Phase 3 trials are ongoing.

Mantle cell lymphoma Approved (3)

FDA granted accelerated approval (3) in the U.S.

Approved in the EU in 2023.

Submitted in Japan in 2023.

Phase III trial is ongoing.

Imlunestrant Adjuvant breast cancer Phase III Phase III trial is ongoing.

ER+HER2- metastatic breast cancer Phase III Phase III trial is ongoing.

Olomorasib KRAS G12C-mutant NSCLC Phase II Phase II trial initiated in 2023.

Prostate cancer

In 2024, Phase III trials did not meet primary endpoints or were terminated for futility.

(1) In collaboration with Boehringer Ingelheim.

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

Approved in the EU in 2023 and in Japan in 2024.

Phase 3 trial is ongoing.

Imlunestrant ER+HER2- metastatic breast cancer Submitted Submitted in the U.S., the EU, and Japan in 2024.

Adjuvant breast cancer Phase 3 Phase 3 trial is ongoing.

Olomorasib 1L KRAS G12C+ NSCLC

Phase 3 Phase 3 trial initiated in 2024.

(1) In collaboration with Almirall, S.A.

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

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

There are many difficulties and uncertainties inherent in pharmaceutical research and development, the introduction of new products and indications, business development activities to enhance or refine or product pipeline, and commercialization of our products.

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

(3) Continued approval may be contingent on verification and description of clinical benefit in confirmatory Phase 3 trials.

There are many difficulties and uncertainties inherent in pharmaceutical research and development, the introduction of new products and indications, business development activities to enhance or refine our product pipeline, and commercialization of our products.

There is a high rate of failure inherent in drug discovery and development.

To bring a product from the discovery phase to market takes considerable time and entails significant cost.

Failure can occur at any point in the process, including in later stages after substantial investment.

As a result, most funds invested in research and development programs will not generate financial returns.

New product candidates that appear promising in development or prior to being acquired may fail to reach the market or may have only limited commercial success because of efficacy or safety concerns, inability to obtain or maintain necessary regulatory approvals or payer reimbursement or coverage, failure to obtain placement on guidelines or recommendations published by third-party organizations that are commensurate with clinical data, the application of pricing controls, limited scope of approved uses, label changes, changes in the relevant treatment standards or the availability of newer, better, or more cost-effective competitive products, difficulty or excessive costs to manufacture, insufficient infrastructure to support detection, diagnostic or other requisites for treatment, ineffectiveness in reaching healthcare professionals, including digitally given the increase in virtual engagements, or infringement of the patents or intellectual property rights of others.

We may also fail to allocate research and development resources efficiently, fail to pursue or invest sufficiently in product candidates or indications that may have been successful, or fail to optimally balance trial design, conduct, and speed to accomplish desired outcomes.

Regulatory agencies establish high hurdles for the efficacy and safety of new products and indications.

Delay, uncertainty, unpredictability, and inconsistency in drug approval processes across markets and agencies can result in delays in product launches, lost market opportunities, impairment of inventories, and other negative impacts.

In addition, it can be very difficult to predict revenue growth rates of, or variability in demand for, new products and indications which in some cases leads to difficulty meeting product demand or, on the other hand, excess inventory and related financial charges.

See Item 1A, "Risk Factors—Risks Related to Our Business and Industry—Pharmaceutical research and development is very costly and highly uncertain;

we may not succeed in developing, licensing, or acquiring commercially successful products sufficient in number or value to replace revenues of products that have lost or will lose intellectual property protection or are displaced by competing products or therapies," for additional information.

We manage research and development spending across our portfolio of potential new medicines and indications.

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While we do accumulate certain research and development costs on a project level for internal reporting purposes, we must make significant cost estimations and allocations, some of which rely on data that are neither reproducible nor validated through accepted control mechanisms.

Therefore, we do not have sufficiently reliable data to report on total research and development costs by project, by preclinical versus clinical spend, or by therapeutic category.

Therefore, we do not have sufficiently reliable data to report on total research and development costs by project, by pre-clinical versus clinical spend, or by therapeutic category.

Other Matters

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See Note 16 to the consolidated financial statements for a description of legal proceedings currently pending regarding certain of our patents.

See Item 1, "Business—Patents, Trademarks, and Other Intellectual Property Rights" for additional discussion of the impacts of trends involving intellectual property on our business and results.

Trends Affecting Pharmaceutical Pricing, Reimbursement, and Access

Reforms, including those that may stem from political initiatives, periods of uneven economic growth or downturns, or as a result of high inflation, the emergence or escalation of, and responses to, international tension and conflicts, or government budgeting priorities, are expected to continue to result in added pressure on pricing and reimbursement for our products.

Global concern over access to and affordability of pharmaceutical products continues to drive regulatory and legislative debate and action, as well as worldwide cost containment efforts by governmental authorities.

See Item 1, "Business—Patents, Trademarks, and Other Intellectual Property Rights," for a discussion of the impacts of trends involving intellectual property on our business and results.

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

Reforms, including those that may stem from political initiatives, periods of uneven economic growth or downturns, or as a result of inflation or deflation, the emergence or escalation of, and responses to, international tension and conflicts, or government budgeting priorities, are expected to continue to result in added pressure on pricing and reimbursement for our products.

Global concern over access to, and affordability of, pharmaceutical products continues to drive regulatory and legislative debate and action, as well as cost containment efforts by governmental authorities.

Such measures include the use of mandated discounts, price reporting requirements, mandated reference prices, restrictive formularies, changes to available intellectual property protections, as well as other efforts.

In August 2022, the U.S.

In 2022, the U.S.

government enacted the Inflation Reduction Act of 2022 (IRA).

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Department of Health and Human Services (HHS) to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D.

Generally, these government prices apply nine years (for medicines approved under a New Drug Application) or thirteen years (for medicines approved under a Biologics License Application) following initial FDA approval and will be set at a price that is likely to represent a significant discount from existing average prices to wholesalers and direct purchasers.

While the law specifies a ceiling price, it does not set a minimum or floor price.

In August 2023, the HHS selected Jardiance, which is part of our collaboration with Boehringer Ingelheim, as one of the first ten medicines subject to government-set prices effective in 2026.

Generally, these government prices apply beginning at nine years (for medicines approved under a New Drug Application) or thirteen years (for medicines approved under a Biologics License Application) following FDA approval or licensure for the molecule and are set at a price that generally represents a significant discount from existing prices to wholesalers and direct purchasers.

While the law specifies a maximum price that HHS can set, it does not set a minimum price.

The Medicare price HHS determines may impact the product's best price determination under the Medicaid Drug Rebate Program and the 340B Drug Pricing Program, potentially leading to a negative impact on both Medicaid and 340B prices.

In August 2023, HHS selected Jardiance, which is part of our collaboration with Boehringer Ingelheim, as one of the first ten medicines subject to government-set prices effective in 2026.

In August 2024, HHS announced the government-set prices for these medicines with Jardiance subject to a 66% discount compared to the 2023 U.S.

calendar year list price for a 30-day supply and discounts for the other nine medicines ranging from approximately 38% to 79% below list price.

Given our product portfolio, we expect additional significant products will be selected in future years, which would have the effect of accelerating revenue erosion prior to expiry of exclusivities.

The effect of reducing prices and reimbursement for certain of our products would significantly impact our business and consolidated results of operations.

The effect of reducing prices and reimbursement for certain of our products could significantly impact our business and consolidated results of operations.

Other IRA provisions require drug manufacturers to provide rebates for Medicare Part B and Part D medicines under certain circumstances.

Also, the Part D benefit redesign will replace the Part D Coverage Gap Discount Program with a new manufacturer discount program.

Also, on January 1, 2025, the Part D benefit redesign replaced the Part D Coverage Gap Discount Program with a new manufacturer discount program.

Manufacturers that fail to comply with the IRA may be subject to various penalties, including civil monetary penalties, which could be significant.

The IRA has and will meaningfully influence our business strategies and those of our competitors.

The IRA has, and will continue to, meaningfully influence our business strategies and those of our competitors.

In particular, the nine-year timeline to set prices for medicines approved under a New Drug Application reduces the attractiveness of investment in small molecule innovation.

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The full impact of the IRA on our business and the pharmaceutical industry, including the implications to us of a competitor's product being selected for price setting, remains uncertain.

Additional policies, regulations, legislation, or enforcement, including those proposed or pursued by the U.S.

Congress, the U.S.

executive branch, and regulatory authorities worldwide, could adversely impact our business and consolidated results of operations.

Consolidation and integration of private payors and pharmacy benefit managers in the U.S.

has also significantly impacted the market for pharmaceuticals by increasing payor leverage in negotiating manufacturer price or rebate concessions and pharmacy reimbursement rates.

Additional policies, regulations, legislation, or enforcement, including those proposed or pursued by lawmakers, regulators, and other authorities in the U.S.

and worldwide, could adversely impact our business and consolidated results of operations.

For example, the U.S.

House of Representatives recently passed the BIOSECURE Act, which is under consideration in the U.S.

This legislation, if passed, could affect elements of the pharmaceutical supply chain;

although as currently drafted we do not anticipate the bill would have a material impact on our business.

Consolidation and integration of private payers and pharmacy benefit managers in the U.S.

has also significantly impacted the market for pharmaceuticals by increasing payer leverage in negotiating manufacturer price or rebate concessions and pharmacy reimbursement rates.

Furthermore, restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, courts, or private payers may adversely impact our business and consolidated results of operations.

We expect that these actions may intensify and could particularly affect certain products, which could adversely affect our business.

In addition, we are engaged in litigation and investigations related to our 340B program, access to insulin, pricing, product safety, and other matters that, if resolved adversely to us, could negatively impact our business and consolidated results of operations.

In addition, we are engaged in litigation and investigations related to the 340B program, access to insulin, pricing, product safety, and other matters that, if resolved adversely to us, could negatively impact our business and consolidated results of operations.

It is not currently possible to predict the overall potential adverse impact to us or the general pharmaceutical industry of continued cost containment efforts worldwide.

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

Moreover, increased focus on business combinations across industries and jurisdictions can lead to impediments to the completion of business combinations.

See Item 1, "Business—Regulations and Private Payer Actions Affecting Pharmaceutical Pricing, Reimbursement, and Access," Item 1A, "Risk Factors," and Note 16 to the consolidated financial statements for additional information.

Product Supply

We have faced challenges, and expect to continue to face challenges, meeting strong demand for our incretin products.

In the U.S., given the strong uptake of Mounjaro, the recent launch of Zepbound, and continuing demand for Trulicity ® , we have experienced intermittent delays in fulfilling certain orders for incretin products.

Outside the U.S., we have implemented actions to manage demand amid tight supply, including measures to minimize impact to existing Trulicity patients.

We have also progressed efforts to bring tirzepatide to patients via different delivery presentations outside the U.S., such as single-use vials and multi-use pens.

We expect to continue to experience disruptions in our supply of incretin products and for demand and supply considerations to influence the timing of tirzepatide launches in new markets, if approved.

We anticipate tight supplies of our incretin products will persist while additional manufacturing capacity is operationalized.

We expect additional internal and contracted manufacturing capacity will become fully operational around the world in the next several years as part of our ongoing efforts to meet the significant demand for our incretin medicines.

For example, in 2023 we began production at our Research Triangle Park site in North Carolina and expect to continue significant capacity expansion over time as we increase production at this site and others.

Incretin Medicines

At various times during 2024, demand for our incretin medicines exceeded production.

Supply and channel dynamics have also contributed to variability in quarter-over-quarter revenue growth rates for tirzepatide.

Tirzepatide supply currently exceeds demand in the U.S.

Demand in launched markets remains dynamic, and increases or changes in demand, by dose or overall, as well as the complex supply chain, may result in periodic unavailability of certain presentations and dose levels at certain locations even when total tirzepatide supply can meet demand.

Supply considerations will continue to influence the timing and approach (including available presentations) of tirzepatide launches in new markets.

We continue to expand manufacturing capacity and progress efforts to bring tirzepatide to patients via different delivery presentations, such as single-use vials and multi-use pens.

Production increases will continue, and additional capacity is expected to be operational over the next several years.

We have seen an increase in the production, marketing, and sale of counterfeit, misbranded, adulterated, and compounded incretins.

These practices may impact patient safety and undermine regulatory drug approval processes.

Lilly will continue to consider all options, including filing lawsuits where appropriate, to address unlawful practices and the patient safety risks of unapproved, untested, and manipulated drugs.

See Item 1, "Business—Government Regulation of Our Operations and Products” and Item 1A, "Risk —Risks Related to Our Business and Industry—We and our products face intense competition, including from multinational pharmaceutical companies, biotechnology companies, and lower-cost generic and biosimilar manufacturers, and such competition could have a material adverse effect on our business," for additional information.

We are subject to income taxes and various other taxes in the U.S.

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and foreign tax laws and increased scrutiny by tax authorities in the U.S.

and other jurisdictions could adversely impact our future consolidated results of operations and cash flows.

In response to the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Framework), which set forth a two-pillar solution to reform the international tax framework, and the EU's adoption of Directive 2022/2523 (known as "Pillar Two") (Directive) within the EU to implement the Framework, multiple countries, both within and outside of the EU, have enacted legislation that provides for a minimum level of taxation of multinational companies.

The Directive required EU member states to enact legislation effective for years beginning on or after December 31, 2023.

For certain provisions within the Framework, the OECD published guidance during 2023 that extends the effective dates for enactment.

While we expect an increase in future years’ tax expense as a result of the global minimum tax, we do not anticipate a material impact to our 2024 consolidated results of operations.

Our assessment of the impact for 2024 and subsequent years could be affected by legislative guidance, future enactment of additional provisions within the Pillar Two framework, and U.S.

tax changes scheduled to occur in 2026 as part of the Tax Cuts and Jobs Act (2017 Tax Act).

A bipartisan tax bill, the Tax Relief for American Families and Workers Act, was passed by the U.S.

House of Representatives in January 2024.

The bill contains certain business tax provisions including the retroactive repeal for 2022 and 2023 and deferral of the requirement to capitalize U.S.

research and development expenses for tax purposes that was a provision enacted in the 2017 Tax Act.

Uncertainty exists as to whether the bill will be enacted into law;

however, if the bill is enacted as currently drafted, we would expect our effective tax rate for 2024 to be moderately higher, and a net discrete tax detriment in the quarter of enactment related to 2022 and 2023.

In addition, we would expect a decrease in cash tax payments.

We invest in external research and technologies that we believe complement and strengthen our own efforts.

and other jurisdictions could have a material adverse impact our future consolidated results of operations and cash flows.

Effective January 1, 2024, several EU and non-EU countries enacted legislation (known as "Pillar Two") that provided for a minimum level of taxation of multinational companies.

The increase to income tax expense as a result of the global minimum tax was not material in 2024 and is not expected to be material in current and future years.

Our assessment of the impact for 2025 and subsequent years could be affected by legislative guidance and future enactment of additional provisions.

We invest in external research and technologies and manufacturing capabilities that we believe complement and strengthen our own efforts.

These investments can take many forms, including acquisitions, collaborations, investments, and licensing arrangements.

We view our business development activity as a way to enhance or refine our pipeline and strengthen our business.

For investments that were accounted for as asset acquisitions, we paid $3.94 billion in 2023 for acquired IPR&D primarily related to acquisitions of DICE, Versanis, Emergence Therapeutics AG (Emergence), and Mablink Biosciences SAS (Mablink).

For investments that were accounted for as business combinations, we paid $1.04 billion in 2023 primarily related to the acquisition of POINT Biopharma Global Inc.

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

For discussion of risks related to business development activities, see Item 1A, "Risk Factors—Pharmaceutical research and development is very costly and highly uncertain;

Continued regulatory focus on business combinations in our industry, including by the Federal Trade Commission and competition authorities in Europe and other jurisdictions, could continue to delay, jeopardize, or increase the costs of our business development activities and may negatively impact our consolidated financial position or results of operations.

For discussion of risks related to business development activities, see Item 1A, "Risk Factors—Risks Related to Our Business and Industry—Pharmaceutical research and development is very costly and highly uncertain;

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While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on our consolidated results of operations in any given period.

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

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

Other Factors

Other factors have had, and may continue to have, an impact on our consolidated results of operations.

These factors include cost and wage inflation, availability of adequate capacity in global transportation, supply chain and labor market complexities, international tension and conflicts, uneven economic growth or downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials.

These factors include cost and wage inflation, supply chain and labor market complexities, international tension and conflicts, uneven economic growth or downturns or uncertainty, and an increase in overall demand in our industry for certain products and materials.

See Item 1A, "Risk Factors," for additional information on risk factors that could impact our business and operations.

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Numbers may not add due to rounding.

the increase in volume in 2023 was primarily driven by Mounjaro, Verzenio, Jardiance, Trulicity, Taltz ® , and Zepbound and $579.0 million from the sale of the rights for Baqsimi, partially offset by the absence of revenue from COVID-19 antibodies and decreased volume from Alimta following the entry of multiple generics in the first half of 2022.

the higher realized prices in 2023 were primarily driven by Mounjaro, due to decreased utilization of savings card programs as access continued to expand, partially offset by Trulicity, due to higher contracted rebates and unfavorable segment mix, as well as changes to estimates for rebates and discounts, and Humalog ® , primarily due to a one-time impact related to the implementation of list price decreases and unfavorable segment mix.

the increase in volume in 2024 was primarily driven by Zepbound and Mounjaro, partially offset by Trulicity.

the higher realized prices in 2024 were primarily driven by Humalog, Mounjaro, Verzenio, and Zepbound.

Outside the U.S.

the increase in volume in 2023 was primarily driven by $1.45 billion from the sale of the rights for the olanzapine portfolio, including Zyprexa, as well as increased volume for Verzenio and Jardiance.

the increase in volume in 2024 was primarily driven by Mounjaro and, to a lesser extent, Verzenio, as well as a one-time payment received of $300.0 million related to Jardiance associated with an amendment to our collaboration with Boehringer Ingelheim.

Outside the U.S.

the lower realized prices in 2023 were primarily driven by a new supply arrangement associated with the sale of the rights for the olanzapine portfolio and lower realized prices from Trulicity, Verzenio, and Humalog.

the increase in volume in 2024 was partially offset by the 2023 sale of rights for the olanzapine portfolio.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product in 2024 compared with 2023:

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2024 2023 Percent Change

Trulicity $ 5,433.3 $ 1,699.2 $ 7,132.6 $ 7,439.7 (4)

Mounjaro 4,834.2 328.9 5,163.1 482.5 NM

Mounjaro $ 8,949.9 $ 2,590.2 $ 11,540.1 $ 5,163.1 124

Verzenio 3,420.6 1,886.0 5,306.6 3,863.4 37

Taltz 1,831.6 928.0 2,759.6 2,482.0 11

Trulicity 3,693.8 1,559.7 5,253.5 7,132.6 (26)

Zepbound 4,925.7 — 4,925.7 175.8 NM

Jardiance (1)

1,597.5 1,743.4 3,340.9 2,744.7 22

79.4 1,615.4 1,694.8 336.9 NM

863.2 800.2 1,663.3 2,060.6 (19)

402.3 572.4 974.7 971.4 —

Olumiant ® (4)

225.5 697.2 922.6 830.5 11

610.1 242.0 852.1 1,019.4 (16)

Basaglar ® (5)

443.1 285.2 728.3 760.4 (4)

Taltz 2,152.3 1,108.1 3,260.4 2,759.6 18

1,502.6 822.2 2,324.8 1,663.3 40

Baqsimi 645.7 31.9 677.6 139.3 NM

Cyramza 442.2 531.0 973.3 974.7 —

228.7 728.7 957.4 922.6 4

Humulin 643.4 273.7 917.1 852.1 8

Emgality 559.7 310.7 870.4 678.3 28

375.4 301.5 676.9 728.3 (7)

Erbitux 562.1 65.3 627.4 596.5 5

Tyvyt — 526.0 526.0 393.4 34

2.0 114.3 116.3 1,694.8 (93)

Alimta 72.9 144.6 217.5 927.7 (77)

Zepbound 175.8 — 175.8 — NM

COVID-19 antibodies (6)

— — — 2,023.5 NM

Baqsimi 2.5 26.7 29.1 677.6 (96)

Other products 1,316.8 2,080.0 3,396.8 3,103.3 9

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

(2) Zyprexa revenue includes sale of the rights for the olanzapine portfolio.

(2) Humalog revenue includes insulin lispro.

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

(3) Basaglar revenue includes Rezvoglar.

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

Revenue of Trulicity decreased 4 percent in the U.S., driven by lower realized prices due to higher contracted rebates and unfavorable segment mix, as well as changes to estimates for rebates and discounts, partially offset by increased demand.

We have experienced and continue to expect intermittent delays fulfilling orders of Trulicity.

These delays have impacted and are expected to continue to impact volume.

Revenue outside the U.S.

decreased 3 percent, primarily driven by lower realized prices, partially offset by increased volume.

Volumes in international markets continue to be affected by actions we have taken to manage demand amid tight supply, including measures to minimize impact to existing patients.

Revenue of Mounjaro in the U.S.

in 2023 was $4.83 billion, compared to $366.6 million in 2022 , reflecting higher realized prices due to decreased utilization of savings card programs as access continued to expand and increased demand.

We have experienced and continue to expect intermittent delays fulfilling orders of certain Mounjaro doses given significant demand, which has affected and is expected to continue to affect volume.

Revenue of Verzenio increased 52 percent in the U.S., driven by increased demand, and, to a lesser extent, higher realized prices.

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

Revenue of Mounjaro increased 85 percent in the U.S., primarily driven by strong demand and increased supply.

Revenue outside of the U.S.

was $2.59 billion in 2024 compared to $328.9 million in 2023, primarily driven by volume growth in launched markets.

Revenue of Verzenio increased 36 percent in the U.S., driven by increased demand, wholesaler buying patterns and, to a lesser extent, higher realized prices.

Revenue outside the U.S.

increased 63 percent, driven by increased demand, partially offset by lower realized prices and the unfavorable impact of foreign exchange rates.

Revenue of Taltz increased 6 percent in the U.S., driven by increased demand, partially offset by lower realized prices.

increased 39 percent, driven by increased demand.

Revenue of Trulicity decreased 32 percent in the U.S., driven by decreased volume primarily due to competitive dynamics and supply constraints during the first half of 2024.

Revenue outside the U.S.

increased 23 percent, driven by increased volume, partially offset by lower realized prices.

Revenue of Jardiance increased 34 percent in the U.S., primarily driven by increased demand.

decreased 8 percent, driven by decreased volume primarily due to competitive dynamics and actions we have taken to manage demand.

Revenue of Zepbound in the U.S.

in 2024 was $4.93 billion, compared to $175.8 million in 2023.

Zepbound launched in the U.S.

for the treatment of adult patients with obesity or overweight with weight-related comorbidities in November 2023.

Revenue of Jardiance remained relatively flat in the U.S.

as increased demand was offset by lower realized prices.

Revenue outside the U.S.

increased 31 percent, primarily driven by increased volume.

increased 52 percent, driven by increased volume and a one-time payment received of $300.0 million associated with an amendment to our collaboration with Boehringer Ingelheim.

Pursuant to the amendment, we and Boehringer Ingelheim adjusted commercialization responsibilities for Jardiance within certain smaller markets.

See Note 4 to the consolidated financial statements for information regarding our collaboration with Boehringer Ingelheim involving Jardiance.

There was no worldwide revenue from COVID-19 antibodies in 2023, and we do not anticipate any future revenue from COVID-19 antibodies.

Revenue of Taltz increased 18 percent in the U.S., driven by higher realized prices due to changes in estimates for rebates and discounts, as well as increased demand.

Revenue outside the U.S.

increased 19 percent, primarily driven by increased demand.

Gross Margin, Costs, and Expenses

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Marketing, selling, and administrative 8,593.8 7,403.1 16

Acquired IPR&D

3,799.8 908.5 NM

Asset impairment, restructuring, and other special charges 67.7 244.6 (72)

Acquired in-process research and development

3,280.4 3,799.8 (14)

Asset impairment, restructuring, and other special charges 860.6 67.7 NM

Other—net, (income) expense 218.6 (96.7) NM

Income taxes 1,314.2 561.6 NM

Income taxes 2,090.4 1,314.2 59

Effective tax rate 16.5 % 20.1 %

NM - not meaningful

Gross margin as a percent of revenue in 2023 increased 2.4 percentage points compared with 2022, primarily driven by the absence of COVID-19 antibodies sales in 2023, higher realized prices, and the sales of the rights for the olanzapine portfolio and Baqsimi, partially offset by increased manufacturing expenses related to labor costs and investments in capacity expansion.

Research and development expenses increased 30 percent in 2023, primarily driven by development expenses for late-stage assets and additional investments in early-stage research.

Marketing, selling, and administrative expenses increased 15 percent in 2023, primarily driven by costs associated with launches of new products and indications, as well as compensation and benefits costs.

Acquired IPR&D charges recognized in 2023 primarily related to acquisitions of DICE, Versanis, Emergence, and Mablink and from a business development transaction with Beam Therapeutics Inc.

Acquired IPR&D charges recognized in 2022 included the buy-out of substantially all future obligations that were contingent upon the occurrence of certain events linked to the success of our mutant-selective PI3kα inhibitor and a purchase of a Priority Review Voucher.

See Note 3 to the consolidated financial statements for additional information.

Asset impairment, restructuring, and other special charges recognized in 2022 primarily related to an intangible asset impairment for GBA1 Gene Therapy due to changes in estimated launch timing.

See Note 5 to the consolidated financial statements for additional information.

Other—net, (income) expense included net investment losses on equity securities of $20.2 million and $410.7 million for the years ended 2023 and 2022, respectively.

Gross margin as a percent of revenue in 2024 increased 2.1 percentage points compared with 2023, primarily driven by favorable product mix and higher realized prices.

Research and development expenses increased 18 percent in 2024, primarily driven by continued investments in our early and late-stage portfolio.

Marketing, selling, and administrative expenses increased 16 percent in 2024, primarily driven by promotional efforts supporting ongoing and future launches.

Acquired in-process research and development (IPR&D) charges recognized in 2024 primarily related to the acquisition of Morphic.

Acquired IPR&D charges recognized in 2023 primarily related to acquisitions of DICE Therapeutics, Inc., Versanis Bio, Inc., Emergence Therapeutics AG, and Mablink Biosciences SAS and from a business development transaction with Beam Therapeutics Inc.

See Note 3 to the consolidated financial statements for additional information.

Asset impairment, restructuring, and other special charges recognized in 2024 primarily related to a $435.0 million litigation charge and an intangible asset impairment for Vitrakvi, driven by expected commercial projections.

See Notes 5 and 16 to the consolidated financial statements for additional information.

Our effective tax rate was 16.5 percent in 2024, compared with an effective tax rate of 20.1 percent in 2023.

The higher effective tax rate for 2023 was primarily driven by the tax impacts of non-deductible acquired IPR&D charges, the new Puerto Rico tax regime, and a lower net discrete tax benefit compared to 2022.

The effective tax rates for 2024 and 2023 were both unfavorably impacted by non-deductible acquired IPR&D charges, with a larger impact occurring in 2023.

See Note 14 to the consolidated financial statements for additional information.

For additional information for other–net, (income) expense, see Note 18 to the consolidated financial statements.

Operating Results—2023

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Our management continuously evaluates our liquidity and capital resources, including our access to external capital, to ensure we can adequately and efficiently finance our capital requirements.

As of December 31, 2023, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, capital expenditures, dividends, repayment of outstanding borrowings, milestone and royalty payments, business development activities, and the remaining obligations for the one-time repatriation transition tax (also known as the 'Toll Tax') from the 2017 Tax Act, (see Notes 11, 4, 3, and 14 to the consolidated financial statements).

As of December 31, 2024, our material cash requirements primarily related to purchases of goods and services to produce our products and conduct our operations, income tax payments, capital expenditures, dividends, milestone and royalty payments, business development activities, share repurchases and repayment of outstanding borrowings (see Notes 14, 4, 3, 13, and 11 to the consolidated financial statements).

We anticipate our cash requirements related to ordinary course purchases of goods and services will be consistent with our past levels relative to revenues.

Capital expenditures were $5.06 billion during 2024, compared to $3.45 billion in 2023.

We are making investments in new facilities in Indiana, North Carolina, Alzey, Rhineland-Palatinate, Germany, and Limerick, Ireland to manufacture existing and future products.

These investments, and other capital investments that support our operations, have increased our capital expenditures and will result in higher capital expenditures over the next several years.

We are making investments in global facilities to manufacture existing and future products.

These investments, and other capital investments that support our operations, have increased our capital expenditures and will result in meaningfully higher capital expenditures over the next several years.

As we expand our manufacturing capacity in order to meet existing and expected demand of our medicines, we have entered, and expect to continue to enter, into various agreements for contract manufacturing and for supply of materials.

The executed agreements could, under certain circumstances, require us to pay up to approximately $14 billion if we do not purchase specified amounts of goods or services primarily related to our incretin medicines, including medicines in development, over the durations of the agreements, which are generally up to 8 years.

Cash and cash equivalents increased to $3.27 billion as of December 31, 2024, compared with $2.82 billion at December 31, 2023.

Net cash provided by operating activities decreased to $4.24 billion in 2023, compared with $7.59 billion in 2022.

The decrease in net cash provided by operating activities was primarily driven by an increase in cash payments for income taxes.

See Note 14 to the consolidated financial statements for additional information.

Net cash provided by operating activities increased to $8.82 billion in 2024, compared with $4.24 billion in 2023.

Refer to the consolidated statements of cash flows for additional information on the significant sources and uses of cash for the years ended December 31, 2024 and 2023.

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See Note 7 to the consolidated financial statements for additional information.

In 2023, we received cash proceeds of $1.60 billion for the sale of product rights, primarily related to the sales of the rights for the olanzapine portfolio, including Zyprexa, and Baqsimi.

See Note 4 to the consolidated financial statements for additional information.

For investments that were accounted for as asset acquisitions, we paid $3.94 billion in 2023 for acquired IPR&D primarily related to acquisitions of DICE, Versanis, Emergence, and Mablink.

For investments that were accounted for as business combinations, we paid $1.04 billion in 2023 primarily related to the acquisition of POINT.

We paid $3.35 billion in 2024 for acquired IPR&D primarily related to the acquisition of Morphic.

We paid $947.7 million in 2024 primarily related to the acquisition of a manufacturing site in Wisconsin.

See Note 3 to the consolidated financial statements for additional information.

As of December 31, 2024, total debt was $33.64 billion, an increase of $8.42 billion compared with $25.23 billion at December 31, 2023.

In February 2025, we issued $6.5 billion of fixed-rate notes.

We expect to use the net cash proceeds from the offering to fund potential business development activities, as well as general business purposes, including the repayment of outstanding commercial paper.

See Note 11 to the consolidated financial statements for additional information.

In February 2024, we issued $1.00 billion of 4.500 percent fixed-rate notes due in 2027, $1.00 billion of 4.500 percent fixed-rate notes due in 2029, $1.50 billion of 4.700 percent fixed-rate notes due in 2034, $1.50 billion of 5.000 percent fixed-rate notes due in 2054, and $1.50 billion of 5.100 percent fixed-rate notes due in 2064, all with interest to be paid semi-annually.

We used, or will be using, the net cash proceeds from the offering of $6.45 billion for general business purposes, including the repayment of outstanding commercial paper, repayment of current maturities of long-term debt, and repayment of the $750.0 million of 5.000 percent fixed-rate notes due in 2026, which are callable at par beginning February 27, 2024.

As of December 31, 2024, we had a total of $8.45 billion of unused committed bank credit facilities, $8.00 billion of which is available to support our commercial paper program.

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The quarterly dividend was increased to $1.50 per share effective for the dividend to be paid in the first quarter of 2025, resulting in an indicated annual rate for 2025 of $6.00 per share.

In 2023, we repurchased $750.0 million of shares under our $5.00 billion share repurchase program that our board authorized in May 2021.

As of December 31, 2023, we had $2.50 billion remaining under this program.

In 2024, we repurchased $2.50 billion of shares, which completed our $5.00 billion share repurchase program that our board authorized in May 2021.

Our board authorized a $15.00 billion share repurchase program in December 2024.

No shares were repurchased under this new program as of December 31, 2024.

See Note 13 to the consolidated financial statements for additional information.

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

Both domestically and abroad, we continue to monitor the potential impacts of the economic environment and international tension and conflicts;

Both domestically and abroad, we monitor the potential impacts of the economic environment and international tension and conflicts;

the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers;

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We view these payments as positive because they signify that the product is successfully moving through development and is now generating or is more likely to generate cash flows from sales of products.

As we expand our manufacturing capacity in order to meet existing and expected demand of our incretin products, we have entered, and expect to continue to enter, into various agreements for contract manufacturing and for supply of materials.

The executed agreements could, under certain circumstances, require us to pay up to approximately $10 billion if we do not purchase specified amounts of goods or services over the durations of the agreements, which generally range from 2 to 8 years.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

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(1) Adjustments of the estimates for these returns, rebates, and discounts to actual results were less than 2 percent of consolidated revenue for each of the years presented.

The increase in reduction of net sales in 2023 was primarily driven by our incretin products due to the increase in volume of rebates for managed care, Medicare, chargebacks, and Medicaid programs.

Litigation Liabilities and Other Contingencies

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Depending on the facts and circumstances, we may deem it necessary to engage an independent valuation expert to assist in valuing significant assets and liabilities.

The fair values of identifiable intangible assets are primarily determined using an "income method," as described in Note 8 to the consolidated financial statements.

The fair values of identifiable intangible assets are primarily determined using the "income method," as described in Note 8 to the consolidated financial statements.

The fair value of any contingent consideration liability that results from a business combination is primarily determined using a discounted cash flow analysis, as described in Note 7 to the consolidated financial statements.

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If we conclude it is more likely than not that the fair value is less than the carrying amount, a quantitative test that compares the fair value of the intangible asset to its carrying value is performed to determine the amount of any impairment.

Several methods may be used to determine the estimated fair value of acquired IPR&D, all of which require multiple assumptions.

We utilize the "income method," as described in Note 8 to the consolidated financial statements.

For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in "—Executive Overview—Late-Stage Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products.

Several methods may be used to determine the estimated fair value of long-lived assets, all of which require multiple assumptions.

When determining the fair value of indefinite-lived acquired IPR&D as well as the fair value of finite-lived intangible assets for impairment testing purposes, we utilize the "income method," as described in Note 8 to the consolidated financial statements.

For acquired IPR&D assets, the risk of failure has been factored into the fair value measure and there can be no certainty that these assets ultimately will yield a successful product, as discussed previously in "—Executive Overview—Clinical Development Pipeline." The nature of the pharmaceutical business is high-risk and requires that we invest in a large number of projects to maintain a successful portfolio of approved products.

As such, it is likely that some acquired IPR&D assets will become impaired in the future.

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Actual results could vary materially from these estimates.

Background and Uncertainties

We file tax returns based upon our interpretation of tax laws and regulations, and we record estimates in our financial statements based upon these interpretations at the applicable tax rates in the jurisdictions in which we operate.

Our tax returns are routinely subject to examination by taxing authorities, which could result in future tax, interest, and penalty assessments.

Inherent uncertainties also exist in estimates of many tax positions due to the complexity of tax laws.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.

The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate resolution.

The amount of unrecognized tax benefits is adjusted for changes in facts and circumstances such as changes to existing tax law, the issuance of regulations by taxing authorities, new information obtained during a tax examination, or resolution of a tax examination.

We believe our estimates for uncertain tax positions are both appropriate and sufficient to pay assessments that may result from examinations of our tax returns;

however, given the uncertainty of positions that could be taken by taxing authorities during the examinations of our tax returns, the ultimate outcome of any tax matters may result in liabilities that are greater than amounts accrued.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

We have recorded valuation allowances against certain of our deferred tax assets, primarily those that have been generated from net operating losses, tax credits, and other tax carryforwards in certain taxing jurisdictions, when the amount of future taxable income is unlikely to support their utilization.

Financial Statement Impact

As of December 31, 2024, a 5 percent change in the amount of uncertain tax positions and the valuation allowance would result in a change in net income of $131.3 million and $48.2 million, respectively.

Retirement Benefits Assumptions

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In evaluating our expected retirement age assumption, we consider the retirement ages of our past employees eligible for pension and medical benefits together with our expectations of future retirement ages.

Annually, we determine the fair value of the plan assets in our defined benefit pension and retiree health benefit plans.

Approximately 48 percent of our plan assets are in hedge funds and private equity-like investment funds (collectively, alternative investments).

We value these alternative investments primarily using net asset values (NAVs) reported by the counterparty and adjusted for known cash flows and significant events.

Financial Statement Impact

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plans, including Puerto Rico, represent approximately 80 percent for total projected benefit obligation and 85 percent for total plan assets at December 31, 2024.

Adjustments to the fair value of plan assets are not recognized in pension and retiree health benefit expense in the year that the adjustments occur.

Such changes are deferred, along with other actuarial gains and losses, and are amortized into expense over the expected remaining service life of employees.

Background and Uncertainties

Our tax returns are routinely subject to examination by taxing authorities, which could result in future tax, interest, and penalty assessments.

Inherent uncertainties also exist in estimates of many tax positions due to the complexity of tax laws.

We believe our estimates for uncertain tax positions are both appropriate and sufficient to pay assessments that may result from examinations of our tax returns.

We recognize both accrued interest and penalties related to unrecognized tax benefits in income tax expense.

In evaluating whether we would more likely than not recover these deferred tax assets, we have not assumed future taxable income in the jurisdictions associated with these carryforwards where history does not support such an assumption.

Implementation of tax planning strategies to recover these deferred tax assets or to generate future taxable income in these jurisdictions could lead to the reversal of all or a portion of these valuation allowances and a reduction of income tax expense.

Financial Statement Impact

As of December 31, 2023, a 5 percent change in the amount of uncertain tax positions and the valuation allowance would result in a change in net income of $88.7 million and $45.7 million, respectively.

LEGAL AND REGULATORY MATTERS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis