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Item 7.Management's Discussion and Analysis of Results of Operations and Financial Condition

(Tables present dollars in millions, except per-share data, and numbers may not add due to rounding)

General

Management's discussion and analysis of results of operations and financial condition is intended to assist the reader in understanding and assessing significant changes and trends related to our results of operations and financial position. This discussion and analysis should be read in conjunction with Item 8, "Financial Statements and Supplementary Data." Certain statements in this Item 7 constitute forward-looking statements. Various risks and uncertainties, including those discussed in "Forward-Looking Statements" and Item 1A, "Risk Factors," may cause our actual results, financial position, and cash generated from operations to differ from these forward-looking statements.

EXECUTIVE OVERVIEW

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

Financial Results

The following table summarizes certain financial information:

Year Ended December 31, Percent Change

Revenue increased in 2025 driven primarily by increased volume, partially offset by lower realized prices. The increased volume and lower realized prices in 2025 were primarily driven by Mounjaro and Zepbound.

Net income and earnings per share increased in 2025, primarily due to higher gross margin, partially offset by increased marketing, selling, and administrative expenses and research and development expenses.

See "Results of Operations" for additional information.

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Clinical Development Pipeline

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

The following select new molecular entities (NMEs) and new indication line extension (NILEX) products are currently in clinical trials or have been submitted for regulatory review or have recently received regulatory approval in the U.S., European Union (EU), or Japan. The table reflects the status of these NMEs and NILEX products, up to the time of the filing of this Annual Report on Form 10-K:

Compound Indication/Study Status Developments

Cardiometabolic Health

Cardiovascular outcomes in type 2 diabetes Submitted Submitted in the U.S.

Morbidity and mortality in obesity Phase 3 Phase 3 trial is ongoing.

Type 1 diabetes Phase 3 Phase 3 trials were initiated.

Orforglipron Obesity(1) Submitted Submitted in the U.S., the EU, and Japan.

Type 2 diabetes Submitted Submitted in the EU. Phase 3 trials are ongoing.

Cardiovascular outcomes Phase 3 Phase 3 trial was initiated.

Hypertension Phase 3 Phase 3 trial was initiated.

Obstructive Sleep Apnea (OSA) Phase 3 Phase 3 trials are ongoing.

Osteoarthritis pain Phase 3 Phase 3 trial was initiated.

Peripheral artery disease Phase 3 Phase 3 trial was initiated.

Stress urinary incontinence Phase 3 Phase 3 trial was initiated.

Eloralintide Obesity Phase 3 Phase 3 trial was initiated.

Retatrutide Cardiovascular / renal outcomes Phase 3 Phase 3 trials are ongoing.

Chronic low back pain Phase 3 Phase 3 trial was initiated.

Type 2 diabetes Phase 3 Phase 3 trials are ongoing.

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Compound Indication/Study Status Developments

Immunology

Lebrikizumab(2) AR (perennial allergens) Phase 3 Phase 3 trial is ongoing.

CRSwNP Phase 3 Phase 3 trial is ongoing.

Neuroscience

Pre-clinical Alzheimer's disease Phase 3 Phase 3 trial is ongoing.

Brenipatide Alcohol use disorder Phase 3 Phase 3 trial was initiated.

Oncology

Adjuvant breast cancer Phase 3 Phase 3 trial is ongoing.

Olomorasib(3) 1L KRAS G12C+ NSCLC Phase 3 Phase 3 trial is ongoing.

Resected adjuvant NSCLC Phase 3 Phase 3 trial was initiated.

Unresected adjuvant NSCLC Phase 3 Phase 3 trial was initiated.

(1) Granted a Commissioner's National Priority Voucher from the FDA.

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

(3) The FDA granted Breakthrough Therapy designation for olomorasib for the treatment of certain newly diagnosed metastatic KRAS G12C-mutant lung cancers and for sofetabart mipitecan for the treatment of certain patients with platinum-resistant ovarian cancer. Breakthrough Therapy designation is designed to expedite the development and review of potential medicines that are intended to treat a serious condition when preliminary clinical evidence indicates that the treatment may demonstrate substantial improvement on a clinically significant endpoint(s) over already available therapies.

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. 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.

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We manage research and development spending across our portfolio of potential new medicines and indications. A delay in, or termination of, any one project will not necessarily cause a significant change in our total research and development spending. Due to the risks and uncertainties involved in the research and development process, we cannot reliably estimate the nature, timing, and costs of the efforts necessary to complete the development of our research and development projects, nor can we reliably estimate the future potential revenue that will be generated from any successful research and development project. Each project represents only a portion of the overall pipeline, and none is individually material to our consolidated research and development expense. 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 pre-clinical versus clinical spend, or by therapeutic category.

Other Matters

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

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

Reforms, initiatives, and other actions, including those that may stem from political initiatives, periods of uneven economic growth or downturns, or as a result of inflation or deflation, trade and other global disputes and interruptions including related to tariffs, trade protection measures, and similar restrictions, 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 cost, pricing, reimbursement, and access for our products.

In November 2025, we announced preliminary voluntary agreements with the U.S. government in which, among other arrangements, we agreed to lower Medicaid and certain other drug prices for U.S. patients and to launch new medicines with a more balanced pricing approach across developed nations. We face risks and uncertainty associated with these arrangements and negotiating the definitive agreements, including potential delays and the possibility of unfavorable terms related to pricing, access, and other key objectives. Among other risks, we may fail to adequately capitalize on the additional U.S. access to our obesity medicines resulting from these agreements, particularly if the revenues generated from such expanded access are insufficient to offset pricing concessions. Moreover, the outcome of these arrangements and broader U.S. policy efforts to align domestic pharmaceutical pricing with international benchmarks from countries with competing healthcare cost containment priorities is uncertain and could negatively impact our pricing strategies, product demand or access, or competitive positioning across global markets, and may result in reduced revenue in certain markets.

Other policies, regulations, legislation, or enforcement, including those proposed or pursued by lawmakers, regulators, and other authorities in the U.S. and worldwide, have and may continue to adversely impact our business and consolidated results of operations.

The IRA requires HHS to effectively set prices for certain single-source drugs and biologics reimbursed under Medicare Part B and Part D. Currently, these government prices generally 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. 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 January 2026, HHS selected Trulicity and Verzenio as additional medicines subject to government-set prices to be effective in 2028. Given our product portfolio, we expect other significant products will be selected in future years. The IRA has, and will continue to, meaningfully influence our business strategies and those of our competitors and could significantly impact our business and consolidated results of operations.

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The U.S. and other countries have recently imposed or reached alignment on new tariffs. In some cases, imposed tariffs have been paused but may come into effect quickly and unpredictably. While pharmaceuticals are exempt from certain of these tariffs, such exemptions may be terminated or may not apply to any future tariffs. The precise impact of tariffs, trade protection measures, and other restrictions depend on their ultimate scope, timing, and other factors. If enacted, additional restrictions could result in supply disruptions or delays, further increase costs, or otherwise have a negative impact on our business. Given the nature of pharmaceutical regulation and commercialization, we may not be able to share the burden of increased costs from tariffs and related impacts to any meaningful degree.

Private payers and pharmacy benefit managers in the U.S. continue to significantly impact the market for pharmaceuticals through negotiation of access, manufacturer price or rebate concessions and pharmacy reimbursement rates. Restrictive or unfavorable pricing, coverage, or reimbursement determinations for our medicines or product candidates by governments, regulatory agencies, courts, or private actors have and may continue to adversely 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.

Incretin Medicines

Mounjaro and Zepbound accounted for 56 percent of our total revenues in 2025 and we expect cardiometabolic health products will continue to represent a significant and growing portion of our business, revenues, and prospects. In 2025, we reached preliminary drug pricing agreements with the U.S. government. As part of these agreements, Medicare beneficiaries will have access to discounted Lilly obesity medicines by July 1, 2026 and individual state Medicaid programs will have the option to expand access to these medicines. Also in 2025, we received a U.S. Commissioner’s National Priority Voucher for our product candidate orforglipron for the treatment of obesity, and we submitted to the FDA under that expedited review pathway. Internationally, we launched Mounjaro in all major markets. To support anticipated demand for our current and prospective products, we have undertaken significant manufacturing expansion initiatives. Additional capacity is expected to become operational over the next several years.

We expect our near-term financial performance will be impacted by, among other factors, the timing of potential regulatory approvals for orforglipron and U.S. Medicare access for Zepbound (and, if approved, orforglipron), as well as the demand and pace of uptake in new incretin channels and markets. More generally, incretin volume fluctuations due to channel dynamics or demand can have a disproportionate impact on our results of operations in any given period. Longer term, the durability of our cardiometabolic health product offerings and sustainability of our growth and prospects will depend on our ability to maintain or strengthen our competitive position as the therapeutic landscape evolves and to deliver further innovations that provide sufficient value to sustain our growth momentum.

We continue to see the production, marketing, and sale of counterfeit, misbranded, adulterated, and mass-compounded incretins. These practices may impact patient safety and undermine regulatory drug approval processes. While the FDA confirmed in late 2024 that the previous shortage of tirzepatide had ended and that compounding pharmacies are required to cease mass production, we cannot guarantee adequate regulation or compliance. 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.

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Tax Matters

We are subject to income taxes and various other taxes in the U.S. and in many foreign jurisdictions; therefore, changes in both domestic and international tax laws or regulations have affected and may affect our effective tax rate, results of operations, and cash flows. The U.S. and countries around the world are actively proposing and enacting tax law changes. Further, actions taken with respect to tax-related matters by associations such as the OECD and the European Commission could influence tax laws in countries in which we operate. Tax authorities in the U.S. and other jurisdictions in which we do business routinely examine our tax returns and are expected to increase their scrutiny of cross-border tax issues. Changes to existing U.S. and foreign tax laws and increased scrutiny by tax authorities in the U.S. and other jurisdictions could have a material adverse impact on our future consolidated results of operations and cash flows.

In July 2025, the One Big Beautiful Bill Act (OBBBA), which implemented certain U.S. tax law changes, was enacted into law. The OBBBA modified and made permanent several provisions of the Tax Cuts and Jobs Act, including reductions in scheduled increases for the rate of taxation of foreign income, immediate deductibility of U.S. research and development expenses, and reinstatement of 100 percent bonus depreciation for capital assets.

Acquisitions

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

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.

Foreign Currency Exchange Rates

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, Chinese yuan, and British pound sterling. While we seek to manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a material impact, either positive or negative, on our consolidated results of operations in any given period. There is uncertainty in the future movements in foreign currency exchange rates, and fluctuations in these rates have and could adversely impact our consolidated results of operations and cash flows.

Other Factors

Other factors have had, and may continue to have, an impact on our consolidated results of operations. These factors include cost and wage inflation, supply chain and labor market complexities, international tension and conflicts, uneven economic growth, downturns or uncertainty, risks related to engaging in business globally, including legislation and regulatory action in or regarding foreign jurisdictions, and fluctuations due to channel dynamics or demand for certain products.

See Item 1, "Business" and Item 1A, "Risk Factors," and Notes 4, 14, and 16 to the consolidated financial statements for additional information and risks and uncertainties that could impact our business and operations, including the matters described within this Executive Overview.

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RESULTS OF OPERATIONS

Operating Results—2025

Revenue

The following table summarizes our revenue activity by region:

Year Ended December 31,

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

U.S. Outside U.S. Consolidated

Price (10) % — % (6) %

Foreign exchange rates — % 2 % 1 %

In the U.S., the volume increase and the lower realized prices in 2025 were primarily driven by Mounjaro and Zepbound.

Outside the U.S., the volume increase in 2025 was primarily driven by Mounjaro.

The following table summarizes our revenue, including net product revenue and collaboration and other revenue, by product in 2025 compared with 2024:

Year Ended December 31,

U.S. Outside U.S. Total Total

(1) Tirzepatide is marketed for obesity under the brand name Zepbound in Canada, Japan, and the U.S.

Revenue of Mounjaro increased 53 percent in the U.S., driven by strong demand, partially offset by lower realized prices. Revenue outside of the U.S. was $9.3 billion in 2025 compared to $2.6 billion in 2024, primarily driven by volume growth.

Revenue of Zepbound increased 174 percentin the U.S., driven by increased demand, partially offset by lower realized prices.

Revenue of Verzenio increased 1 percent in the U.S. Revenue outside the U.S. increased 20 percent, driven by volume growth.

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Gross Margin, Costs, and Expenses

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

Year Ended December 31, Percent Change

Gross margin as a percent of revenue 83.0 % 81.3 %

Acquired in-process research and development 2,910 3,280 (11)

Effective tax rate 19.8 % 16.5 %

Gross margin as a percent of revenue in 2025 increased 1.7 percentage points compared with 2024, primarily driven by favorable product mix and improved cost of production, partially offset by lower realized prices.

Research and development expenses increased 21 percent in 2025, primarily driven by continued investments in our early and late-stage portfolio.

Marketing, selling, and administrative expenses increased 29 percent in 2025, primarily driven by promotional efforts supporting ongoing and planned launches.

Acquired in-process research and development (IPR&D) charges recognized in 2025 were primarily related to the acquisitions of Scorpion Therapeutics, Inc.'s (Scorpion) PI3Kα inhibitor program STX-478 and of SiteOne Therapeutics, Inc. (SiteOne). Acquired IPR&D charges recognized in 2024 were primarily related to the acquisition of Morphic Holding, Inc. (Morphic). See Note 4 to the consolidated financial statements for additional information.

Our effective tax rate was 19.8 percent in 2025 compared with an effective tax rate of 16.5 percent in 2024, primarily driven by unfavorable impacts related to the jurisdictional mix of earnings and U.S. tax law changes in 2025 relative to 2024. The effective tax rates for both periods were unfavorably impacted by non-deductible acquired IPR&D charges, with a larger impact occurring in 2024. See Note 14 to the consolidated financial statements for additional information.

Operating Results—2024

For a discussion of our results of operations pertaining to 2024 and 2023 see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition" in our Annual Report on Form 10-K for the year ended December 31, 2024.

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FINANCIAL CONDITION AND LIQUIDITY

We believe our available cash and cash equivalents, together with our ability to generate operating cash flow and our access to short-term and long-term borrowings, are sufficient to fund our existing and planned capital requirements, which include:

•working capital requirements, including related to employee payroll and benefits, clinical trials, manufacturing materials, and taxes;

•capital expenditures;

•share repurchases and dividends;

•repayment of outstanding short-term and long-term borrowings;

•milestone and royalty payments; and

•potential business development activities, including acquisitions, collaborations, investments, and licensing arrangements.

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, 2025, 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, 3, 4, 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 $7.8 billion during 2025, compared to $5.1 billion in 2024. 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 in the near term.

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. Executed agreements related to our medicines in development 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 are generally up to 8 years.

Cash and cash equivalents increased to $7.3 billion as of December 31, 2025, compared with $3.3 billion at December 31, 2024. Net cash provided by operating activities increased to $16.8 billion in 2025, compared with $8.8 billion in 2024. 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, 2025 and 2024.

In addition to our cash and cash equivalents, we held total investments of $2.9 billion and $3.4 billion as of December 31, 2025 and 2024, respectively. As of December 31, 2025, we had approximately $902 million of unfunded commitments to invest in venture capital funds, which we anticipate will be paid over a period of up to 10 years. See Note 7 to the consolidated financial statements for additional information.

We paid $3.0 billion in 2025 for acquired IPR&D primarily related to the acquisitions of Scorpion's PI3Kα inhibitor program STX-478 and of SiteOne. We paid $3.3 billion in 2024 for acquired IPR&D primarily related to the acquisition of Morphic. See Note 4 to the consolidated financial statements for additional information.

As part of our business development activities in 2026, we have entered into acquisition agreements, subject to closing conditions. Potential amounts payable at closing for these pending acquisitions would be less than $3 billion.

As of December 31, 2025, total debt was $42.5 billion, an increase of $8.9 billion compared with $33.6 billion at December 31, 2024. See Note 11 to the consolidated financial statements for additional information.

As of December 31, 2025, we had a total of $10.1 billion of unused committed bank credit facilities, $10.0 billion of which is available to support our commercial paper program. See Note 11 to the consolidated financial statements for additional information. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowing needs.

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Dividends of $6.00 per share and $5.20 per share were paid in 2025 and 2024, respectively. The quarterly dividend was increased to $1.73 per share effective for the dividend to be paid in the first quarter of 2026, resulting in an indicated annual rate for 2026 of $6.92 per share.

In 2025, we repurchased $4.1 billion of shares under our $15.0 billion share repurchase program that our board authorized in December 2024. As of December 31, 2025, we had $10.9 billion remaining under this program. See Note 13 to the consolidated financial statements for additional information.

Both domestically and abroad, we monitor the potential impacts of the economic environment and international tension and conflicts; the creditworthiness of our wholesalers and other customers, including foreign government-backed agencies and suppliers; the uncertain impact of healthcare legislation; and various international government funding levels.

In the normal course of business, our operations are exposed to fluctuations in interest rates, currency values, and fair values of equity securities. These fluctuations impact the costs of financing, investing, and operating our business. We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of this risk management program is to limit the impact on earnings of fluctuations in interest and currency exchange rates. All derivative activities are for purposes other than trading.

Our primary interest rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we may enter into derivative contracts to achieve an acceptable balance between fixed- and floating-rate debt or to reduce cash flow variability from changes in interest rates as part of anticipated debt issuances. Based on our overall interest rate exposure at December 31, 2025 and 2024, including derivatives and other interest rate risk-sensitive instruments, a hypothetical 10 percent change in interest rates applied to the fair value of the instruments as of December 31, 2025 and 2024, respectively, would not have a material impact on earnings, cash flows, or fair values of interest rate risk-sensitive instruments over a one-year period.

Our foreign currency risk exposure results from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, Chinese yuan, and British pound sterling. We face foreign currency exchange exposures when we enter into transactions arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. We also face currency exposure that arises from translating the results of our global operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We in some cases enter into foreign currency forward or option derivative contracts to reduce the effect of fluctuating currency exchange rates. Our corporate risk-management policy outlines the minimum and maximum hedge coverage of such exposures. Gains and losses on these derivative contracts offset, in part, the impact of currency fluctuations on the existing assets and liabilities. We periodically analyze the fair values of the outstanding foreign currency derivative contracts to determine their sensitivity to changes in foreign exchange rates. As of December 31, 2025 and 2024, a hypothetical 10 percent change in currency exchange rates (primarily against the U.S. dollar) applied to the fair values of our outstanding foreign currency derivative contracts and the underlying assets and liabilities would not have a material impact on earnings, cash flows, or financial position over a one-year period.

Our fair value risk exposure relates primarily to our public equity investments and to our equity investments that do not have readily determinable fair values. As of December 31, 2025 and 2024, a hypothetical 10 percent change in fair value of the equity instruments would not have a material impact on earnings, cash flows, or financial position over a one-year period.

We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. We acquire and collaborate on potential products still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required contingent upon the successful achievement of an important point in the development life cycle of the pharmaceutical product (e.g., approval for marketing by the appropriate regulatory agency or upon the achievement of certain sales levels). If required by the arrangement, we may make royalty payments based upon a percentage of the sales of the product in the event that regulatory approval for marketing is obtained.

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Individually, these arrangements are generally not material in any one annual reporting period. However, if milestones for multiple products covered by these arrangements were reached in the same reporting period, the aggregate expense or aggregate milestone payments made could be material to our results of operations or cash flows, respectively, in that period. See Note 3 to the consolidated financial statements for additional information. These arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments; however, we are unlikely to cease development if the compound successfully achieves milestone objectives. We 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.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

In preparing our financial statements in accordance with accounting principles generally accepted in the U.S., we must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Some of those judgments can be subjective and complex, and consequently actual results could differ from those estimates. For any given individual estimate or assumption we make, it is possible that other people applying reasonable judgment to the same facts and circumstances could develop different estimates. We believe that, given current facts and circumstances, it is unlikely that applying any such other reasonable judgment would cause a material adverse effect on our consolidated results of operations, financial position, or liquidity for the periods presented in this Annual Report on Form 10-K. Our most critical accounting estimates have been discussed with our audit committee and are described below.

Revenue Recognition and Sales Rebate, Discount, and Return Accruals

Background and Uncertainties

We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. For product sales to customers, provisions for rebates, discounts, and returns are established in the same period the related product sales are recognized. Contracts with direct and indirect customers may provide for various rebates and discounts, which we estimate as a reduction of net product revenue at the time we recognize a sale to a direct customer. Significant judgments are required in making these estimates. The largest of our sales rebate and discount amounts include rebates associated with sales covered by managed care, Medicare, Medicaid, and chargeback programs, as well as reductions in revenue related to our patient assistance programs, in the U.S. In determining the appropriate accrual amount, we consider our historical payments for these programs by product as a percentage of our historical sales, any significant changes in sales trends, an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing. Since there is a timing lag between the product sale and the settlement of accruals related to these programs, our net product revenue may incorporate revisions of accruals for several periods.

Refer to Note 2 to the consolidated financial statements for further information on revenue recognition and sales return, rebate, and discount accruals.

Revenue recognized from collaborations and other arrangements includes our share of profits from the collaborations, as well as royalties, upfront and milestone payments we receive under these types of contracts.

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Financial Statement Impact

We believe that our accruals for sales rebates, discounts, and returns are reasonable and appropriate based on current facts and circumstances. Our rebate and discount liabilities are included in sales rebates and discounts on our consolidated balance sheet. Our sales return liability is included in other current liabilities and other noncurrent liabilities on our consolidated balance sheet. As of December 31, 2025, a 5 percent change in our consolidated sales return, rebate, and discount liability would result in a change in revenue of approximately $897 million.

The portion of our consolidated sales rebate, discount, and return liability balances resulting from sales of our products in the U.S. was approximately 87 percent and 90 percent as of December 31, 2025 and 2024, respectively.

The following represents a roll-forward of our most significant U.S. sales rebate, discount, and return liability balances, including managed care, Medicare, Medicaid, chargeback, and patient assistance programs:

Sales rebate, discount, and return liabilities, end of year $ 15,148 $ 10,313

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

Litigation Liabilities and Other Contingencies

Background and Uncertainties

Litigation liabilities and other contingencies are, by their nature, uncertain and based upon complex judgments and probabilities. The factors we consider in developing our litigation liability reserves and other contingent liability amounts include the merits and jurisdiction of the litigation, the nature and the number of other similar current and past matters, the nature of the product and the current assessment of the science subject to the litigation, as applicable, and the likelihood of settlement and current state of settlement discussions, if any. In addition, we accrue for certain product liability claims incurred but not filed to the extent we can formulate a reasonable estimate of their costs based primarily on historical claims experience and data regarding product usage.

We also consider the insurance coverage we have to diminish the exposure for periods covered by insurance. In assessing our insurance coverage, we consider the policy coverage limits and exclusions, the potential for denial of coverage by the insurance company, the financial condition of the insurers, and the possibility of and length of time for collection. The ability to insure against such exposures is limited, and due to a very restrictive market for liability insurance we are predominantly self-insured for liability losses for all our currently and previously marketed products. In addition to insurance coverage, we consider any third-party indemnification to which we are entitled or under which we are obligated. With respect to our third-party indemnification rights, these considerations include the nature of the indemnification, the financial condition of the indemnifying party, and the possibility of and length of time for collection.

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

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Acquisitions

Background and Uncertainties

To determine whether acquisitions or licensing transactions should be accounted for as a business combination or as an asset acquisition, we make certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules.

If the acquired set of activities and assets meets the definition of a business, assets acquired and liabilities assumed are required to be recorded at their respective fair values on our consolidated balance sheet as of the acquisition date. The excess of the purchase price over the fair value of the acquired net assets, where applicable, is recorded as goodwill. If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to acquired IPR&D on our consolidated statement of operations at the acquisition date, and goodwill is not recorded. See Note 4 to the consolidated financial statements for additional information.

The judgments made in determining estimated fair values assigned to assets acquired and liabilities assumed in a business combination, as well as estimated asset lives, can materially affect our consolidated results of operations. The fair values of intangible assets, including acquired IPR&D, are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by management. Significant estimates and assumptions include, but are not limited to, probability of technical success, revenue projections, and discount rate. 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 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. Estimating the fair value of contingent consideration requires the use of significant estimates and judgments, including, but not limited to, probability of technical success, timing of the potential milestone event, and the discount rate.

Financial Statement Impact

As of December 31, 2025, a 5 percent change in the contingent consideration liabilities would not result in a material impact on earnings or financial position.

Impairment of Indefinite-Lived and Long-Lived Assets

Background and Uncertainties

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

Goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. 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 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.

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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.

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

Income Taxes

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, 2025, a 5 percent change in the amount of uncertain tax positions and the valuation allowance would result in a change in net income of $160 million and $61 million, respectively.

LEGAL AND REGULATORY MATTERS

Information relating to certain legal proceedings can be found in Note 16 to the consolidated financial statements and is incorporated here by reference.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

You can find quantitative and qualitative disclosures about market risk (e.g., interest rate risk) at Item 7, "Management's Discussion and Analysis - Financial Condition and Liquidity." That information is incorporated by reference herein.

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Item 8.Financial Statements and Supplementary Data

Consolidated Statements of Operations

ELI LILLY AND COMPANY AND SUBSIDIARIES

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

Year Ended December 31,

Costs, expenses, and other:

Acquired in-process research and development 2,910 3,280 3,800

Asset impairment, restructuring, and other special charges 484 861 68

Earnings per share:

Shares used in calculation of earnings per share:

See notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)

Year Ended December 31,

Other comprehensive income (loss), net of taxes:

Total other comprehensive income (loss) 1,442 5 (482)

See notes to consolidated financial statements.

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Consolidated Balance Sheets

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars and shares in millions)

December 31,

Assets

Current Assets

Cash and cash equivalents $ 7,268 $ 3,268

Noncurrent Assets

Liabilities and Equity

Current Liabilities

Short-term borrowings and current maturities of long-term debt $ 1,635 $ 5,117

Noncurrent Liabilities

Long-term income taxes payable 5,875 4,061

Commitments and Contingencies

Equity

Accumulated other comprehensive loss (2,880) (4,322)

See notes to consolidated financial statements.

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Consolidated Statements of Shareholders' Equity

ELI LILLY AND COMPANY AND SUBSIDIARIES

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

Shares Amount

Other comprehensive loss, net of tax (482)

Cash dividends declared per share: $4.69 (4,221)

Purchases of common stock (2.3) (1) (749)

Issuance of stock under employee stock plans, net 1.5 1 (300)

Stock-based compensation 629

Other (1)

Other comprehensive income, net of tax 5

Cash dividends declared per share: $5.40 (4,857)

Purchases of common stock (3.0) (2) (2,498)

Issuance of stock under employee stock plans, net 1.1 — (457)

Stock-based compensation 646

Other (2)

Other comprehensive income, net of tax 1,442

Cash dividends declared per share: $6.23 (5,586)

Purchases of common stock (4.8) (3) (4,105)

Issuance of stock under employee stock plans, net 1.7 1 (719)

Stock-based compensation 626

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Dollars in millions)

Year Ended December 31,

Cash Flows from Operating Activities

Adjustments to Reconcile Net Income to Cash Flows from Operating Activities:

Gains on sale of product rights (180) (224) (1,879)

Acquired in-process research and development 2,910 3,280 3,800

Prepaid expenses and other assets—(increase) decrease (6,609) (3,331) (3,453)

Accounts payable and other liabilities—increase (decrease) 10,187 2,609 4,274

Cash Flows from Investing Activities

Proceeds from sales of and distributions from noncurrent investments 964 374 508

Purchases of noncurrent investments (645) (677) (731)

Purchases of in-process research and development (3,008) (3,346) (3,944)

Cash paid for acquisitions, net of cash acquired (661) (948) (1,044)

Other investing activities, net 1 (248) (98)

Cash Flows from Financing Activities

Repayments of long-term debt (778) (664) —

Other financing activities, net (772) (491) (335)

Net Cash Provided by (Used for) Financing Activities (2,213) 1,230 3,496

Effect of exchange rate changes on cash and cash equivalents 372 (297) 169

Net increase in cash and cash equivalents 4,000 449 752

Cash and cash equivalents at beginning of year 3,268 2,819 2,067

Cash and Cash Equivalents at End of Year $ 7,268 $ 3,268 $ 2,819

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

ELI LILLY AND COMPANY AND SUBSIDIARIES

(Tables present dollars in millions, except per-share data, and numbers may not add due to rounding)

Note 1: Summary of Significant Accounting Policies and Implementation of New Financial Accounting Standards

Basis of Presentation

The accompanying consolidated financial statements include Eli Lilly and Company and all subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). We consider majority voting interests, as well as effective economic or other control over an entity when deciding whether or not to consolidate an entity. We generally do not have control by means other than voting interests. All intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates. We issued our financial statements by filing them with the Securities and Exchange Commission (SEC) and have evaluated subsequent events up to the time of the filing of this Annual Report on Form 10-K.

We operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Our commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. See Note 17 for additional information.

Research and Development Expenses and Acquired IPR&D

Research and development costs are expensed as incurred. Research and development costs consist of expenses incurred in performing research and development activities, including but not limited to, compensation and benefits, facilities and overhead expense, clinical trial expense and fees paid to contract research organizations.

Acquired IPR&D includes the initial costs and development milestones incurred related to externally developed IPR&D projects, acquired directly in a transaction other than a business combination, that do not have an alternative future use. Development milestones are milestone payment obligations that are incurred prior to regulatory approval of the compound and are expensed when the event triggering an obligation to pay the milestone occurs.

Earnings Per Share (EPS)

All per-share amounts, unless otherwise stated in the notes to the consolidated financial statements, are presented on a diluted basis. We calculate basic EPS based on the weighted-average number of common shares outstanding plus the effect of incremental shares from potential participating securities. We calculate diluted EPS based on the weighted-average number of common shares outstanding plus the effect of incremental shares from our stock-based compensation programs.

Foreign Currency Translation

Operations in our subsidiaries outside the U.S. are recorded in the functional currency of each subsidiary which is determined by a review of the environment where each subsidiary primarily generates and expends cash. The results of operations for our subsidiaries outside the U.S. are translated from functional currencies into U.S. dollars using the weighted-average currency rate for the period. Assets and liabilities are translated using the period end exchange rates. The U.S. dollar effects that arise from translating the net assets of these subsidiaries are recorded in other comprehensive income (loss).

Advertising Expenses

Costs associated with advertising are expensed as incurred and are generally included in marketing, selling, and administrative expenses. Global advertising expenses, comprised primarily of online marketing and television advertising, totaled $2.9 billion, $1.4 billion, and $1.1 billion in 2025, 2024, and 2023, respectively, which were less than 5 percent of revenue each year.

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Other Significant Accounting Policies

Our other significant accounting policies are described in the remaining appropriate notes to the consolidated financial statements.

Reclassifications

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

Implementation of New Financial Accounting Standards

Effective January 1, 2025, we prospectively adopted Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires incremental disaggregation pertaining to the effective tax rate reconciliation and income taxes paid. See Note 14 for the income tax disclosures as required by Topic 740, as amended by ASU 2023-09.

ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, requires disaggregation of specific expense categories in the notes to the financial statements and a qualitative description of the remaining expense amounts not separately disaggregated. This standard is effective for annual reporting periods beginning after December 15, 2026, and requires prospective application with the option to apply it retrospectively. We intend to adopt this standard in our Annual Report on Form 10-K for the year ending December 31, 2027. We are currently evaluating the potential impact of adopting this standard on our disclosures.

Note 2: Revenue

The following table summarizes our revenue recognized in our consolidated statements of operations:

We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements includes our share of profits from the collaborations, as well as royalties, upfront and milestone payments we receive under these types of contracts. See Note 3 for additional information related to our collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue resulting from our collaboration with Boehringer Ingelheim, as well as the sale of product rights. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.

Net Product Revenue

Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which generally is at the time we ship the product to the customer. Payment terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from 30 to 70 days from date of shipment. Provisions for rebates, discounts, and returns are established in the same period the related product sales are recognized. We generally ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.

Most of our products are sold to wholesalers that serve pharmacies, physicians and other healthcare professionals, and hospitals. For the years ended December 31, 2025, 2024, and 2023, our three largest wholesalers each accounted for between 16 percent and 24 percent of consolidated revenue. Further, they each accounted for between 20 percent and 29 percent of accounts receivable as of December 31, 2025 and 2024. As of December 31, 2025 and 2024, our allowance for doubtful accounts was not material.

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Significant judgments must be made in determining the transaction price for our sales of products related to anticipated rebates, discounts, and returns. The following describe the most significant of these judgments:

Sales Rebates and Discounts - Background and Uncertainties

•We initially invoice our customers at contractual list prices. Contracts with direct and indirect customers may provide for various rebates and discounts, which we estimate as a reduction of product revenue at the time we recognize a sale to a direct customer. We estimate these accruals using an expected value approach. Since there is often a timing lag between the product sale and the settlement of accruals relating to these programs, our net product revenue may incorporate revisions of accruals for several periods.

•In the U.S., the largest of our sales rebate and discount amounts include rebates associated with sales covered by managed care, Medicare, Medicaid, and chargeback programs, as well as reductions in revenue related to our patient assistance programs. In determining the appropriate accrual amount, we consider our historical payments for these programs by product as a percentage of our historical sales, any significant changes in sales trends, an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing.

•Most of our rebates outside the U.S. are contractual or legislatively mandated. Contractual rebates are generally provided as part of reimbursement programs for products. Government rebates are generally based on the anticipated budget for pharmaceutical payments in the country.

Sales Returns - Background and Uncertainties

•When product sales occur, to determine the appropriate transaction price for our sales, we estimate a reserve for future product returns related to those sales using an expected value approach. This estimate is based on several factors, including: historical return rates, expiration date by product, estimated levels of inventory in the wholesale and retail channels, patent exclusivity, product recalls and discontinuations, or a changing competitive environment. We record the return amounts as a deduction to arrive at our net product revenue. Actual U.S. product returns have been less than 1 percent of our U.S. revenue during each of the past three years.

Adjustments to Revenue

Adjustments to revenue recognized as a result of changes in estimates for our most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous periods were less than 1 percent, 3 percent, and 1 percent of U.S. revenue during the years ended December 31, 2025, 2024, and 2023, respectively.

Collaboration and Other Arrangements

We recognize several types of revenue from our collaborations and other arrangements, which we discuss in general terms immediately below and more specifically in Note 3 for each of our significant collaborations and other arrangements. Our collaborations and other arrangements are evaluated to determine if the arrangements in their entirety, or contain aspects that, are contracts with customers.

Royalty revenue from licensees and certain of our collaboration partners, which is based on sales to third parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). This royalty revenue is included in collaboration and other revenue.

The net gain or loss related to the sale of rights of a product is included in collaboration and other revenue when control of the asset transfers to the other party. For arrangements that involve variable consideration where we have sold intellectual property, we recognize revenue based on estimates of the amount of consideration we believe we will be entitled to receive from the other party, but only to the extent a significant reversal in the amount of revenue recognized is not probable of occurring when the uncertainties associated with the variable consideration are subsequently resolved. Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development will not receive regulatory approval, we generally do not recognize any contingent payments that would be due to us upon or after regulatory approval.

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Disaggregation of Revenue

The following table summarizes revenue, including net product revenue and collaboration and other revenue, by product:

U.S. Outside U.S.

Cardiometabolic Health:

Oncology:

Immunology:

(1) Tirzepatide is marketed for obesity under the brand name Zepbound in Canada, Japan, and the U.S.

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

The following table summarizes revenue by geographical area:

Revenue(1):

(1) Revenue is attributed to the countries based on the location of the customer or other party.

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Note 3: Collaborations and Other Arrangements

We often enter into collaborative and other arrangements to develop and commercialize drug candidates or to sell the rights of a product. See Note 2 for a discussion of our recognition of revenue from our collaborations and other arrangements.

Collaborative activities may include research and development, marketing and selling, manufacturing, and distribution for which we may receive from or pay to the collaboration partner expense reimbursements. Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each arrangement is unique in nature, and our more significant arrangements are discussed below.

Boehringer Ingelheim Collaboration

We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of compounds. Boehringer Ingelheim's Jardiance product family, which includes Glyxambi, Synjardy, and Trijardy XR, is the significant product family included in the collaboration.

For the Jardiance product family in the most significant markets, which remains in the collaboration through December 31, 2028, we receive a share of net sales depending on performance of the product, which we recognize as collaboration and other revenue. The following table summarizes our revenue recognized:

In 2025 and 2024, we and Boehringer Ingelheim entered into amendments to our collaboration to adjust commercialization responsibilities for the Jardiance product family in certain markets, resulting in our recognition of one-time benefits of $370 million and $300 million as Jardiance revenue during the years ended December 31, 2025 and 2024, respectively.

During the year ended December 31, 2025, we recognized a $200 million sales-based milestone for Jardiance. As of December 31, 2025, we have the right to receive up to $910 million in potential sales-based milestones related to the Jardiance product family in certain markets in 2026.

Ebglyss

We have a license agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively, Roche), which provides us the worldwide development and commercialization rights to lebrikizumab, which is branded and trademarked as Ebglyss. Roche receives tiered royalty payments on worldwide net sales ranging in percentages from high single digits to high teens, which we recognize as cost of sales. As of December 31, 2025, Roche is eligible to receive additional payments from us, including up to $975 million in potential sales-based milestones.

We have a license agreement with Almirall, S.A. (Almirall), under which Almirall licensed the rights to develop and commercialize Ebglyss, for the treatment or prevention of dermatology indications, including, but not limited to, atopic dermatitis in Europe. We receive tiered royalty payments on net sales in Europe ranging in percentages from low double digits to low twenties, which we recognize as collaboration and other revenue. As of December 31, 2025, we are eligible to receive additional payments up to $1.2 billion in a series of sales-based milestones.

Orforglipron

We have a license agreement with Chugai Pharmaceutical Co., Ltd (Chugai), which provides us with the worldwide development and commercialization rights to orforglipron. In addition to milestone payment rights which are not material, Chugai has the right to receive tiered royalty payments on future worldwide net sales from mid single digits to low teens if the product is successfully commercialized.

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Divestitures

In 2023, we sold the rights for the olanzapine portfolio, including Zyprexa, a neuroscience product, to Cheplapharm Arzneimittel GmbH, a European company. During the year ended December 31, 2023, we recognized $1.4 billion in revenue primarily related to the net gain on the sale of rights for the olanzapine portfolio.

In 2023, we sold the rights for Baqsimi, a cardiometabolic health product,to Amphastar Pharmaceuticals, Inc. During the year ended December 31, 2023, we recognized $579 million in revenue primarily related to the net gain on the sale of rights for Baqsimi. As of December 31, 2025, we are eligible to receive payments of up to $450 million in a series of sales-based milestones.

Note 4: Acquisitions

We engage in various forms of business development activities to enhance or refine our product pipeline, including acquisitions, collaborations, investments, and licensing arrangements. In connection with these arrangements, our partners may be entitled to future royalties and/or commercial milestones based on sales if the products are approved for commercialization and/or milestones based on the successful progress of compounds through the development process. We account for each arrangement as either a business combination or an asset acquisition in accordance with GAAP.

Business Combinations

When an acquisition met the definition of a business under GAAP, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets was recorded as goodwill. The results of operations of the acquisition are included in our consolidated financial statements from the date of acquisition.

Verve Acquisition

Overview of Transaction

In July 2025, we acquired all shares of Verve Therapeutics, Inc. (Verve) for a purchase price of $10.50 per share in cash (or an aggregate of $549 million, net of cash acquired), plus one non-tradeable contingent value right (CVR) per share that entitles the holder to receive up to an additional $3.00 per share (or an aggregate of up to approximately $300 million) payable, subject to certain terms and conditions, upon the achievement of a certain specified milestone. Verve is developing genetic medicines for cardiovascular disease.

Assets Acquired and Liabilities Assumed

Our access to information was limited prior to this acquisition. As a consequence, we are in the process of determining fair values and tax bases of the assets acquired and liabilities assumed, including the identification and valuation of intangible assets and tax exposures. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date. The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized.

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The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed as of the acquisition date:

Estimated Fair Value at July 25, 2025

Acquired IPR&D(1) 608

Other assets and liabilities, net 39

Acquisition date fair value of consideration transferred 1,163

Less:

Cash acquired (389)

Fair value of CVR liability (177)

Fair value of equity interest in Verve held before the business combination (48)

Cash paid, net of cash acquired $ 549

(1) Acquired IPR&D intangibles primarily relate to VERVE-102 (PCSK9 Editor).

(2) The goodwill recognized from this acquisition is primarily attributable to future unidentified projects and products and the assembled workforce for Verve, which is not deductible for tax purposes.

Manufacturing Facility Acquisition

Overview of Transaction

In May 2024, we acquired NexPharm Parent HoldCo, LLC and Isopro Holdings, LLC, which together own the assets of a manufacturing site in Wisconsin, for a purchase price of $925 million, net of cash acquired. The facility expands our global parenteral (injectable) product manufacturing network.

Assets Acquired and Liabilities Assumed

In connection with this acquisition, we recognized $817 million of goodwill, which is primarily attributable to the synergies between the manufacturing capabilities of the site and our products as well as the assembled workforce of the site and is deductible for tax purposes, as well as $109 million of property and equipment.

POINT Acquisition

Overview of Transaction

In December 2023, we acquired all shares of POINT Biopharma Global Inc. (POINT) for a purchase price of $12.50 per share in cash (or an aggregate of $1.0 billion, net of cash acquired). POINT has capabilities in radiopharmaceutical discovery, development, and manufacturing efforts, as well as clinical and pre-clinical radioligand therapies in development for the treatment of cancer.

Assets Acquired and Liabilities Assumed

The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:

Estimated Fair Value at December 27, 2023

Acquired IPR&D 196

Other assets and liabilities, net (14)

Acquisition date fair value of consideration transferred 1,339

Less:

Cash acquired (303)

Cash paid, net of cash acquired $ 1,036

(1) The goodwill recognized from this acquisition is primarily attributable to the radiopharmaceutical discovery, development, and manufacturing capabilities and the assembled workforce for POINT, which is not deductible for tax purposes.

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Asset Acquisitions

Upon each asset acquisition, the cost allocated to acquired IPR&D was immediately expensed as acquired IPR&D if the compound had no alternative future use. Milestone payment obligations incurred prior to regulatory approval of the compound were expensed as acquired IPR&D when the event triggering an obligation to pay the milestone occurred. We recognized acquired IPR&D charges of $2.9 billion, $3.3 billion, and $3.8 billion for the years ended December 31, 2025, 2024, and 2023, respectively. The following table summarizes our significant acquired IPR&D charges during 2025, 2024, and 2023.

(1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.

(2) In 2024, we discontinued development of this molecule in favor of another molecule in development.

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

Asset impairment, restructuring, and other special charges were $484 million, $861 million, and $68 million for the years ended December 31, 2025, 2024, and 2023, respectively.

Asset impairment, restructuring, and other special charges recognized during the year ended December 31, 2025 were primarily related to a litigation charge and acquisition and integration costs associated with the acquisition of Verve. Asset impairment, restructuring, and other special charges recognized during the year ended December 31, 2024 were primarily related to a litigation charge and an intangible asset impairment for Vitrakvi, driven by expected commercial projections.

See Note 4 for additional information related to our acquisition of Verve and Note 16 for additional information related to litigation charges.

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Note 6: Inventories

We use the last-in, first-out (LIFO) method for the majority of our inventories located in the continental U.S., which results in a better matching of costs and revenues. Other inventories are valued by the first-in, first-out (FIFO) method. FIFO cost approximates current replacement cost. Inventories measured using LIFO must be valued at the lower of cost or market. Inventories measured using FIFO must be valued at the lower of cost or net realizable value.

Inventories at December 31 consisted of the following:

Total (approximates replacement cost) 13,701 7,526

Increase to LIFO cost 43 63

Inventories valued under the LIFO method comprised $5.8 billion and $2.7 billion of total inventories at December 31, 2025 and 2024, respectively.

When we believe that future commercialization is probable and the future economic benefit is expected to be realized, we capitalize pre-launch inventory prior to regulatory approval. A number of factors are considered, including the current status in the regulatory approval process, potential impediments to the approval process such as safety or efficacy, viability of commercialization, and marketplace trends. Pre-launch inventories capitalized as of December 31, 2025 were $1.5 billion, primarily related to orforglipron.

Note 7: Financial Instruments

Investments in Equity and Debt Securities

Our equity investments are accounted for using three different methods depending on the type of equity investment:

•Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other-net, (income) expense.

•For equity investments that do not have readily determinable fair values, we measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any change in recorded value is recorded in other-net, (income) expense.

•Our public equity investments are measured and carried at fair value. Any change in fair value is recognized in other-net, (income) expense.

We record our available-for-sale debt securities at fair value, with changes in fair value reported as a component of accumulated other comprehensive income (loss).

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Fair Value of Investments

The following table summarizes certain fair value information at December 31, 2025 and 2024 for investment assets measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments:

Fair Value Measurements Using

Short-term investments:

Available-for-sale debt securities(2) $ 16 $ 16 $ 9 $ 7 $ — $ 16

Short-term investments $ 105

Noncurrent investments:

Equity investments without readily determinable fair values(3) 846

Equity method investments(3) 1,288

Noncurrent investments $ 2,802

Short-term investments:

Available-for-sale debt securities(2) $ 95 $ 95 $ 29 $ 66 $ — $ 95

Short-term investments $ 155

Noncurrent investments:

Equity investments without readily determinable fair values(3) 864

Equity method investments(3) 1,143

Noncurrent investments $ 3,216

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

(2) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.

(3) Fair value disclosures are not applicable for equity method investments and investments accounted for under the measurement alternative for equity investments.

We determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. Level 3 fair value measurements for other investment securities are determined using unobservable inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. Fair values are not readily available for certain equity investments measured under the measurement alternative.

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Debt

Fair Value of Debt

The following table summarizes the carrying amount and fair value using Level 2 inputs for our short-term and long-term debt as of December 31:

CarryingAmount Fair Value CarryingAmount Fair Value

Short-term commercial paper borrowings $ — $ — $ 4,338 $ 4,319

Risk Management and Related Financial Instruments

To manage foreign currency and interest rate risk, we may enter into derivative instruments intended to offset losses and gains on the assets, liabilities, and transactions being hedged. Such instruments are entered into in accordance with documented corporate risk-management policies. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis. Derivative instruments are recorded at fair value, with gains and losses recognized as follows:

•For derivative instruments designated as fair value hedges, gains and losses are recognized in earnings to offset the respective losses and gains recognized on the underlying exposure.

•For derivative instruments designated as cash flow hedges, gains and losses are reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings as an offset in the same period the hedged transaction affects earnings.

•For derivative and non-derivative instruments designated as net investment hedges, gains and losses are reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings upon the sale or substantial liquidation of our net investments.

•For derivative contracts not designated as hedging instruments, gains and losses are recognized in earnings to offset the respective losses and gains recognized on the underlying exposure.

Cash settlements of our derivative instruments are classified as operating activities in our consolidated statements of cash flows.

Foreign Currency Risk

As a global company, we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro, Japanese yen, Chinese yuan, and British pound sterling. We manage foreign currency risk primarily through the use of foreign currency debt and foreign currency forward contracts. Our foreign currency-denominated notes designated as accounting hedges had carrying amounts of $6.0 billion and $5.3 billion as of December 31, 2025 and 2024, respectively. Below summarizes the aggregate outstanding notional amounts of our foreign currency forward contracts in U.S. dollar equivalent as of December 31:

Purchase Sell Purchase Sell

Designated as accounting hedges $ 67 $ — $ 8,909 $ —

Forward contracts generally have maturities not exceeding 12 months.

Interest Rate Risk

In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we may enter into derivative contracts to achieve an acceptable balance between fixed- and floating-rate debt or to reduce cash flow variability from changes in interest rates as part of anticipated debt issuances. For 2025, 2024, and 2023, the impact of our interest rate contracts on our consolidated financial statements was not material.

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Credit Risk

Financial instruments that potentially subject us to credit risk include the following:

•Trade receivables: Wholesale distributors of our products account for a substantial portion of our trade receivables; collateral is generally not required. We seek to mitigate the risk through our ongoing credit-review procedures and insurance.

•Interest-bearing investments: In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one issuer based on credit rating of our counterparty.

•Derivatives: In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one counterparty based on the credit rating of our counterparty.

The majority of our cash is held by a few major financial institutions that have been identified as Global Systemically Important Banks (G-SIBs) by the Financial Stability Board. G-SIBs are subject to rigorous regulatory testing and oversight and must meet certain capital requirements. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations.

Impact of Significant Risk Management Programs on the Financial Statements

The following table summarizes the effects of significant risk-management programs:

Recognized in other–net, (income) expense:

Recognized in other comprehensive income (loss):

Foreign currency-denominated notes:

Designated as accounting hedges (690) 338 (220)

Foreign currency forward contracts:

Designated as accounting hedges (643) 343 (107)

The following table summarizes the fair value of assets and liabilities on a gross basis for significant risk-management programs using Level 2 inputs as of December 31:

Foreign currency forward contracts:

Designated as accounting hedges:

Other receivables $ — $ 297

Not designated as accounting hedges:

Other receivables 39 40

Other current liabilities (329) (93)

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Note 8: Goodwill and Other Intangibles

Goodwill

Goodwill results from excess consideration in a business combination over the fair value of identifiable net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. 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 to its carrying value is performed to determine the amount of any impairment. The change in goodwill during 2025 was primarily related to our acquisition of Verve. See Note 4 for additional information.

No impairments occurred with respect to the carrying value of goodwill for the years ended December 31, 2025, 2024, and 2023.

Other Intangibles

The components of intangible assets other than goodwill at December 31 were as follows:

Finite-lived intangible assets:

Indefinite-lived intangible assets:

Marketed products consist primarily of the amortized cost of the rights to assets acquired in business combinations and approved for marketing in a significant global jurisdiction (U.S., Europe, and Japan) and capitalized milestone payments. For transactions other than a business combination, we capitalize milestone payments incurred at or after the product has obtained regulatory approval for marketing.

Acquired IPR&D consists of the fair values of acquired IPR&D projects acquired in business combinations, adjusted for subsequent impairments, if any. The costs of acquired IPR&D projects acquired directly in a transaction other than a business combination are capitalized as other intangible assets if the projects have an alternative future use; otherwise, they are expensed immediately. See Note 4 for significant acquired IPR&D projects that had no alternative future use.

Several methods may be used to determine the estimated fair value of other intangibles acquired in a business combination. We utilize the "income method," which is a Level 3 fair value measurement and applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products, analyst expectations, and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each asset independently. The acquired IPR&D assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are tested for impairment and amortized over the remaining useful life or written off, as appropriate.

Indefinite-lived intangible assets are reviewed for impairment at least annually, or more frequently if impairment indicators are present, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. 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. Finite-lived intangible assets are reviewed for impairment when an indicator of impairment is present. When required, a comparison of fair value to the carrying amount of assets is performed to determine the amount of any impairment. When determining the fair value of indefinite-lived acquired IPR&D as well as the fair value of finite-lived intangible assets for impairment testing purposes, we utilize the "income method" discussed above.

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Intangible assets with finite lives are capitalized and are amortized primarily to cost of sales over their estimated useful lives, ranging from one to 20 years. As of December 31, 2025, the remaining weighted-average amortization period for finite-lived intangible assets was approximately 11 years.

Amortization expense related to finite-lived intangible assets was as follows:

The estimated amortization expense for each of the next five years associated with our finite-lived intangible assets as of December 31, 2025 is as follows:

Note 9: Property and Equipment

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

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

Depreciation expense related to property and equipment was as follows:

The following table summarizes long-lived assets by geographical area:

Long-lived assets(1):

(1) Long-lived assets consist of property and equipment, net, operating lease assets, and unamortized computer software costs.

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Note 10: Leases

We primarily have leases for corporate offices, research and development facilities, vehicles, and equipment. Information related to operating leases as of December 31 was as follows:

Operating lease right-of-use assets $ 1,260 $ 1,050 Other noncurrent assets

Operating lease liabilities, current portion 222 176 Other current liabilities

Weighted-average remaining lease term 8 years 9 years

Weighted-average discount rate 4.7 % 4.6 %

We determine the lease term by assuming the exercise of any renewal and/or early-termination options that are reasonably assured. We generally use our incremental borrowing rate in determining the present value of lease payments.

Note 11: Borrowings

Debt at December 31 consisted of the following:

Long-term notes:

Other long term debt and adjustments (339) (298)

Short-term commercial paper borrowings — 4,338

(1) Included in the 2028 tranche is $750 million of floating-rate notes issued in August 2025, with interest reset and paid quarterly using the Secured Overnight Financing Rate (SOFR) plus .530 percent.

The weighted-average effective borrowing rate on short-term commercial paper borrowings was 4.61 percent at December 31, 2024.

At December 31, 2025, we had $10.1 billion of unused committed bank credit facilities, which consisted primarily of a $4.0 billion credit facility that expires in December 2029 and a $6.0 billion 364-day facility that expires in August 2026, both of which are available to support our commercial paper program.

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Below are the details of our issuances of long-term debt for the periods presented, from which the cash proceeds were used for business development activities and general business purposes, including the repayment of commercial paper:

Date of Issuance Amount Maturity Stated Interest Rate

(1) Included in the 2028 tranche is $750 million of floating-rate notes, with interest reset and paid quarterly using SOFR plus .530 percent.

The following table summarizes information related to interest on borrowings, net of capitalized interest:

Interest expense on borrowings $ 895 $ 781 $ 486

Cash payments for interest on borrowings 633 578 404

Note 12: Stock-Based Compensation

Our stock-based compensation expense includes restricted stock units (RSUs), relative value awards (RVAs), shareholder value awards (SVAs), and performance awards (PAs). We recognize the fair value of stock-based compensation as expense over the requisite service period of the individual grantees, which generally equals the vesting period.Stock-based compensation expense was as follows:

Stock-based compensation expense $ 626 $ 646 $ 629

As of December 31, 2025, the total estimated remaining unrecognized compensation cost of $554 million was primarily related to 2.3 million of nonvested RSUs and will be amortized over the weighted-average remaining requisite service period of 21 months. We provide newly issued shares of our common stock to satisfy the issuance of shares under our stock-based compensation awards. At December 31, 2025, stock-based compensation awards may be granted under the 2002 Lilly Stock Plan for not more than 42.4 million additional shares.

RSUs are granted to certain employees with a vesting period of typically three years. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant.

RVAs are granted to officers and management. The number of shares actually issued, if any, varies depending on the growth of our stock price at the end of the three-year vesting period compared to our peers. We measure the fair value of the RVA unit on the grant date using a Monte Carlo simulation model.

SVAs have been granted to officers and management. The number of shares actually issued, if any, varies depending on our stock price at the end of the three-year vesting period compared to pre-established target stock prices. We measure the fair value of the SVA unit on the grant date using a Monte Carlo simulation model.

PAs were granted to officers and management prior to 2024, as we discontinued the program. The number of PA shares actually issued varied depending on the achievement of certain pre-established earnings-per-share targets over a two-year period. PA shares were accounted for at fair value based upon the closing stock price on the date of grant.

The following table summarizes the weighted-average grant date fair value per share:

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For RVAs and SVAs, the Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award grant and calculates the fair value of the award. Expected volatilities utilized in the model are based on implied volatilities from traded options on our stock, historical volatility of our stock price, historical volatility of our peers' stock price for RVAs, and other factors. Similarly, the dividend yield is based on historical experience and our estimate of future dividend yields. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant.

The following table summarizes the assumptions used in determining the weighted-average grant date fair value for the RVAs and SVAs:

RVAs SVAs

Note 13: Shareholders' Equity

In 2025, 2024, and 2023, we repurchased $4.1 billion, $2.5 billion, and $750 million, respectively, of shares associated with our share repurchase programs. As of December 31, 2025, we had $10.9 billion remaining under our $15.0 billion share repurchase program authorized in December 2024. We retire shares once we repurchase them.

We have 5 million authorized shares of preferred stock. As of December 31, 2025 and 2024, no preferred stock was issued.

We have an employee benefit trust that held 50 million shares of our common stock at both December 31, 2025 and 2024, to provide a source of funds to assist us in meeting our obligations under various employee benefit plans. The cost basis of the shares held in the trust was $3.0 billion at both December 31, 2025 and 2024, and is shown as a reduction of shareholders' equity. Any dividend transactions between us and the trust are eliminated. Stock held by the trust is not considered outstanding in the computation of EPS. The assets of the trust were not used to fund any of our obligations under these employee benefit plans during the years ended December 31, 2025, 2024, and 2023.

The following table summarizes the activity related to each component of accumulated other comprehensive income (loss):

Other comprehensive income (loss) 55 (635) 98 (482)

Other comprehensive income (loss) (571) 519 57 5

(1) Includes the impact of foreign currency transactions designated as net investment hedges. See Note 7 for additional information.

Where our ownership of consolidated subsidiaries is less than 100 percent, the noncontrolling shareholders' interests are reflected in other equity as of December 31, 2025 and 2024 and are not material to our consolidated financial statements.

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Note 14: Income Taxes

Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting based on enacted tax laws and rates. Deferred taxes related to global intangible low-taxed income (GILTI) are also recognized for the future tax effects of temporary differences.

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

Following is the composition of income tax expense:

Current:

Deferred:

Cash payments of U.S. federal, state, and foreign income taxes, net of refunds, were as follows:

(1) 2025 included U.S. federal cash payments of $3.3 billion and cash payments to Ireland of $6.6 billion.

Cash payments of income taxes increased $4.3 billion in 2025 compared with 2024, driven primarily by a $4.2 billion increase in Ireland resulting from higher production activity to meet growing global demand for our medicines and a prior year tax payment. U.S. federal cash payments decreased from $3.8 billion in 2024 to $3.3 billion in 2025, driven primarily by immediate deductibility of U.S. research and development expenses, a prior year tax refund, and accelerated depreciation on U.S. capital investments, partially offset by higher U.S. income. Refer to the composition of income tax expense above regarding current income tax expense on current-year income.

At December 31, 2025 and 2024, prepaid expenses included prepaid taxes of $12.9 billion and $7.1 billion, respectively. Prepaid taxes largely reflect taxes paid on intercompany profit not yet recognized, primarily related to Ireland.

As of December 31, 2025, we have long-term income taxes payables of $1.1 billion that we expect to pay in 2027 and $4.8 billion that we cannot reasonably estimate the timing of future cash outflows.

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Following is a reconciliation of the consolidated income tax expense applying the U.S. federal statutory rate to income before income taxes to the reported consolidated income tax expense for 2025:

Amount(1) Percent

U.S. federal statutory tax rate $ 5,404 21.0 %

Foreign tax effects:

Ireland

Statutory tax rate difference between Ireland and the U.S. (346) (1.3) %

Other foreign jurisdictions (53) (0.2) %

Effect of cross-border tax laws(2)

Foreign-derived intangible income (334) (1.3) %

Nontaxable or nondeductible items:

Non-deductible acquired IPR&D(3) 442 1.7 %

(1) Unrecognized tax benefits related to the current year are presented on a net basis in the category where the tax position is presented.

(2) The effect of cross-border tax laws includes the tax effects of both the cross-border tax and the related foreign tax credit allowed.

(3)Non-deductible acquired IPR&D was primarily related to the acquisitions of Scorpion and SiteOne in 2025. See Note 4 for additional information related to acquisitions.

(4)Other adjustments include individually immaterial amounts for effects of changes in tax laws or rates enacted in the current period, changes in unrecognized tax benefits related to prior years, state and local income tax, and changes in valuation allowances.

Our effective tax rate was 19.8 percent in 2025 compared with an effective tax rate of 16.5 percent in 2024, primarily driven by unfavorable impacts related to the jurisdictional mix of earnings and U.S. tax law changes (OBBBA) in 2025. The effective tax rates for both periods were unfavorably impacted by non-deductible acquired IPR&D charges, with a larger impact occurring in 2024.

In July 2025, the OBBBA, which implemented certain U.S. tax law changes, was enacted into law. The OBBBA modified and made permanent several provisions of the Tax Cuts and Jobs Act, including reductions in scheduled increases for the rate of taxation of foreign income, immediate deductibility of U.S. research and development expenses, and reinstatement of 100 percent bonus depreciation for capital assets.

Following is a reconciliation of the consolidated income tax expense applying the U.S. federal statutory rate to income before income taxes to the reported consolidated income tax expense for 2024 and 2023:

Income tax at the U.S. federal statutory tax rate $ 2,663 $ 1,377

Non-deductible acquired IPR&D(1) 566 677

Foreign-derived intangible income (307) (237)

International operations, including Puerto Rico(2) (302) (187)

General business credits (291) (258)

(1) Non-deductible acquired IPR&D was primarily related to the acquisitions of Morphic in 2024, and DICE, Versanis, and Emergence in 2023. See Note 4 for additional information related to acquisitions.

(2) Includes the impact of GILTI tax and other U.S. taxation of foreign income.

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Domestic and Puerto Rican companies contributed approximately 54 percent, 20 percent, and 14 percent for the years ended December 31, 2025, 2024, and 2023, respectively, to consolidated income before income taxes.

Significant components of our deferred tax assets and liabilities as of December 31 were as follows:

Deferred tax assets:

Capitalized research and development $ 4,518 $ 4,599

Purchases of intangible assets 1,721 1,781

Tax loss and other tax carryforwards 911 587

Inventories 711 —

Tax credit carryforwards 649 577

Compensation and benefits 556 565

Foreign tax redeterminations 367 335

Deferred tax liabilities:

Earnings of foreign subsidiaries (1,291) (773)

Property and equipment (907) (558)