• We recognized a discrete income tax benefit of $210.3 million as a result of the resolution of a substantial portion of the IRS audit of our federal income tax returns for years 2001 through 2004, which increased earnings per share by $.19.

• We recognized asset impairments, restructuring (exit costs), and other special charges of $145.7 million (pre-tax), primarily associated with certain impairment, termination, and wind-down costs resulting from the termination of the AIR Insulin program, which decreased earnings per share by $.09.

• We incurred IPR&D charges associated with the licensing arrangement with BioMS Medical Corp. of $87.0 million (pretax), which decreased earnings per share by $.05.

II. Late-Stage Pipeline Developments
• The U.S. FDA Cardiovascular and Renal Drugs Advisory Committee voted 9 to 0 that prasugrel, an investigational antiplatelet agent, should be approved for the treatment of patients with acute coronary syndromes (ACS) managed with an artery-opening procedure known as percutaneous coronary intervention (PCI). We are awaiting final FDA action on prasugrel.

• The European Commission granted marketing authorization for Efient (prasugrel) for the prevention of atherothrombotic events in patients with ACS undergoing PCI. The product has now been launched in both Germany and the United Kingdom.

• The FDA approved a new indication for Symbyax® for the acute treatment of treatment-resistant depression (TRD) in adults.

• The FDA approved two new combination indications for Zyprexa (olanzapine) and fluoxetine for the acute treatment of bipolar depression and TRD in adults.

• We received a complete response letter from the FDA for the first-line squamous cell carcinoma of the head and neck (SCCHN) supplemental Biologics License Application (sBLA) for Erbitux.

• We submitted a reply to the FDA regarding the agency's complete response letter for Zyprexa long-acting injection. We also launched this product under the tradename ZypadheraTM in several countries within the European Union.

III. Legal, Regulatory, and Other Matters In March 2004, we were notified by the U.S. Attorney's office for the EDPA that it had commenced an investigation relating to our U.S. marketing and promotional practices for Zyprexa, Prozac, and Prozac Weekly. In October 2008, we announced that we were in advanced discussions to resolve the ongoing investigations led by the EDPA, and we recorded a charge of $1.42 billion. In January 2009, we announced that the discussions had been successfully concluded, and that we settled the Zyprexa-related federal claims, as well as similar Medicaid-related claims of states which decided to participate in the settlement. In addition, in October 2008, we reached a settlement with 32 states and the District of Columbia related to a multistate investigation brought under various state consumer protection laws, under which we paid $62.0 million. However, we have been served with lawsuits brought by Alaska, Arkansas, Connecticut, Idaho, Louisiana, Minnesota, Mississippi, Montana, New Mexico, Pennsylvania, South Carolina, Utah, and West Virginia, alleging that Zyprexa caused or contributed to diabetes or high blood-glucose levels, and that we improperly promoted the drug and seeking to recover the costs paid for Zyprexa through Medicaid and other drug-benefit programs, as well as the costs alleged to have been incurred and that will be incurred to treat Zyprexa-related illnesses. The Alaska case was settled in March 2008 for a payment of $15.0 million, plus terms designed to ensure, subject to certain limitations and conditions, that Alaska is treated as favorably as certain other states that may settle with us in the future over similar claims. The cases in Connecticut and South Carolina have been set for trial in 2009; the trial in Pennsylvania is scheduled for 2010. In the third quarter of 2008, we initiated a strategic review of our Tippecanoe manufacturing facility in Lafayette, Indiana. Options being considered for this site include continuing operations with a revised site mission, exploring opportunities to sell the facility, and ceasing operations altogether. The review is expected to last up to 12 months. No final decisions

have been made at this time; however, depending on the decision, we could record significant charges.
In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) continues to provide an effective prescription drug benefit under the Medicare program (known as Medicare Part D). Uncertainty exists surrounding the new administration and Congress and the impact any government decisions or programs will have on the pharmaceutical industry. Various measures have been discussed and/or passed in both the U.S. House of Representatives and U.S. Senate that would impose additional pricing pressures on our products, including proposals to legalize the importation of prescription drugs and either allow, or require, the Secretary of Health and Human Services to negotiate drug prices within Medicare Part D directly with pharmaceutical manufacturers. Additionally, various proposals have been introduced that would increase the rebates we pay on sales to Medicaid patients or impose additional rebates on sales to patients who receive their medicines through Medicare Part D or other government programs. Further, proposals to expand coverage to the uninsured could include some form of price rebates or tax on the pharmaceutical industry. In addition, many U.S. states are facing substantial budget difficulties due to the downturn in the economy and are expected to seek aggressive cuts or other offsets in healthcare spending. We expect pricing pressures at the federal and state levels to become more severe, which could have a material adverse effect on our consolidated results of operations. In its preliminary budget submission to Congress, the new administration proposed changes to the manner in which the U.S. would tax the international income of U.S.-based companies. While it is uncertain how the U.S. Congress may address this issue, reform of U.S. taxation of international income continues to be a topic of discussion for the U.S. legislature. A significant change to the U.S. tax system that would change the taxation of international income could have a material adverse effect on our consolidated results of operations. In addition, the federal government is considering creating a regulatory pathway for biosimilars (copies) for the majority of biologic products in the U.S.; the proposals vary as to which biologic products would be eligible, how quickly a biosimilar might reach the market, and the ability to interchange the biosimilar and the original biologic product at the pharmacy.
International operations also are generally subject to extensive price and market regulations, and there are many proposals for additional cost-containment measures, including proposals that would directly or indirectly impose additional price controls, limit access to reimbursement for our products, or reduce the value of our intellectual property protection. Revenue
Revenue increased 5 percent, to $5.05 billion, driven primarily by the increase in net product sales related to the collective growth of Cymbalta, Alimta, and Humulog, and the increase in collaboration and other revenue due to the inclusion of Erbitux revenue as a result of the ImClone acquisition. Revenue in the U.S. increased by $325.3 million, or 13 percent, for the first quarter of 2009 compared with the first quarter of 2008. Revenue outside the U.S. decreased $85.9 million, or 4 percent, for the first quarter of 2009 due to the negative impact of foreign exchange rates. Worldwide volume increased 7 percent, while selling prices contributed 3 percent of sales growth, partially offset by the unfavorable impact of foreign exchange rates of 6 percent (numbers do not add due to rounding).

The following table summarizes our revenue activity for the three months ended March 31, 2009 and 2008:

                                                                                          Three Months
                                                  Three Months Ended                         Ended
                                                    March 31, 2009                         March 31,            Percent
                                                        Outside                               2008               Change
Product                                 U.S.1            U.S.             Total              Total             from 2008
                                                                     (Dollars in millions)
Zyprexa                               $   535.4        $   587.6        $ 1,123.0        $      1,120.2                 0
Cymbalta                                  597.1            112.2            709.3                 605.1                17
Humalog®                                  286.2            164.4            450.6                 407.4                11
Gemzar                                    169.4            198.4            367.8                 426.2               (14 )
Cialis®                                   149.1            209.7            358.8                 336.9                 6
Alimta                                    172.8            162.5            335.3                 247.2                36
Animal health products                    153.6            110.5            264.1                 235.3                12
Evista                                    163.8             93.1            256.9                 261.1                (2 )
Humulin®                                   99.0            141.6            240.6                 257.7                (7 )
Forteo®                                   121.8             65.7            187.5                 185.0                 1
Strattera®                                115.6             43.3            158.9                 148.0                 7
Other pharmaceutical products             173.0            266.0            439.0                 479.3                (8 )

Total net product sales                 2,736.8          2,155.0          4,891.8               4,709.4                 4
Collaboration and other revenue2          135.1             20.1            155.2                  98.2                58

Total revenue                         $ 2,871.9        $ 2,175.1        $ 5,047.0        $      4,807.6                 5

1 U.S. revenue includes revenue in Puerto Rico.

2 Collaboration and other revenue is primarily comprised of Erbitux royalties and 50 percent of Byetta's gross margin in the U.S.

Product Highlights
Zyprexa, our top-selling product, is a treatment for schizophrenia, acute mixed or manic episodes associated with bipolar I disorder, and bipolar maintenance. In the first quarter of 2009, Zyprexa sales in the U.S. increased 7 percent compared with the first quarter of 2008, driven by higher prices and the favorable impact of wholesaler buying patterns, partially offset by decreased demand. Sales outside the U.S. decreased 5 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by increased demand. Demand outside the U.S. was favorably impacted by the withdrawal of generic competition in Germany.
U.S. sales of Cymbalta, a product for the treatment of major depressive disorder, diabetic peripheral neuropathic pain, generalized anxiety disorder, and fibromyalgia, increased 17 percent during the first quarter of 2009, driven by increased demand, higher prices, and the favorable impact of wholesaler buying patterns. Sales outside the U.S. increased 19 percent, driven primarily by increased demand, partially offset by the unfavorable impact of foreign exchange rates.
U.S. sales of Humalog, our injectable human insulin analog for the treatment of diabetes, increased 20 percent during the first quarter of 2009, driven by higher prices and increased

demand. Sales outside the U.S. decreased 3 percent during the first quarter driven by the unfavorable impact of foreign exchange rates, partially offset by increased demand.
U.S. sales of Gemzar, a product approved to fight various cancers, decreased 4 percent during the first quarter of 2009, due to the unfavorable impact of wholesaler buying patterns and lower net effective selling prices, partially offset by increased demand. Sales outside the U.S. decreased 21 percent as a result of the unfavorable impact of foreign exchange rates, lower prices and the entry of generic competition in most major markets.
U.S. sales of Cialis, a treatment for erectile dysfunction, increased 21 percent during the first quarter of 2009, driven by higher prices, increased demand, and the favorable impact of wholesaler buying patterns. Sales outside the U.S. decreased 2 percent, driven by the unfavorable impact of foreign exchange rates, partially offset by increased demand and higher prices.
U.S. sales of Alimta, a treatment for various cancers, increased 42 percent during the first quarter of 2009, due primarily to increased demand, and to a lesser extent, higher prices. Sales outside the U.S. increased 30 percent, due to increased demand, partially offset by the unfavorable impact of foreign exchange rates.
U.S. sales of Evista, a product for the prevention and treatment of osteoporosis in postmenopausal women and for risk reduction of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer, decreased 4 percent during the first quarter of 2009, as a result of decreased demand, partially offset by higher prices. Sales outside the U.S. increased 4 percent due to the favorable impact of buying patterns in Japan, partially offset by the unfavorable impact of foreign exchange rates. U.S. sales of Humulin, an injectable human insulin for the treatment of diabetes, increased 6 percent during the first quarter of 2009, due to higher net effective selling prices and increased demand. Sales outside the U.S. decreased 14 percent driven by the unfavorable impact of foreign exchange rates, and to a lesser extent, lower prices.
U.S. sales of Forteo, an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture, increased 3 percent during the first quarter of 2009, due to higher net effective selling prices, partially offset by decreased demand. Sales outside the U.S. decreased 1 percent, due to the unfavorable impact of foreign exchange rates, partially offset by increased demand.
U.S. sales of Strattera, a treatment of attention-deficit hyperactivity disorder in children, adolescents, and adults, were essentially flat during the first quarter of 2009, due to higher net effective selling prices offset by decreased demand. Sales outside the U.S. increased 33 percent, driven by a one-time benefit from the resolution of pricing discussions in Canada, and to a lesser extent, increased demand, partially offset by the unfavorable impact of foreign exchange rates.
We market Byetta, an injectable product for the treatment of type 2 diabetes, with Amylin . For the first quarter of 2009, we recognized total revenue of $97.5 million for Byetta, an increase of 18 percent, comprised of collaboration revenue of $70.2 million related to our 50 percent share of Byetta's gross margin in the U.S., and product sales of $27.3 million related to sales outside the U.S. and our sales of Byetta pen delivery devices to Amylin. Worldwide sales of Byetta increased 7 percent to $181.4 million during the first quarter of 2009, driven by growth in international markets. U.S. sales of Byetta of $157.7 million were essentially flat in the first quarter whiles sales of Byetta outside the U.S. were $23.7 million.
For the first quarter, we recognized total revenue of $94.1 million for Erbitux, a product approved to fight cancers, comprised of collaboration revenue of $68.0 million related to the net royalties

received from our collaboration partners, and product sales of $26.1 million related to revenue from manufactured product.
Animal health product sales in the U.S. increased 43 percent, primarily due to the inclusion of Posilac sales from the acquisition of the product in October 2008. Sales outside the U.S. decreased 13 percent, driven primarily by the unfavorable impact of foreign exchange rates, and to a lesser extent, decreased demand and lower prices.
Gross Margin, Costs, and Expenses
For the first quarter of 2009, gross margins as a percent of total revenue increased 6.9 percentage points, to 83.8 percent. This increase was due to the impact on international inventories from the decline in foreign currencies compared to the U.S. dollar, resulting in a benefit to cost of sales. Operating expenses (the aggregate of research and development and marketing, selling, and administrative expenses) increased 2 percent for the first quarter of 2009 compared with the first quarter of 2008. Marketing, selling, and administrative expenses declined 1 percent to $1.53 billion, due to the impact of foreign exchange rates and a reduction in expenses related to U.S. marketing programs, partially offset by the impact of the ImClone acquisition and increased prasugrel pre-launch activities. Research and development expenses increased 8 percent to $947.3 million, due primarily to the ImClone acquisition and increased late-stage clinical trial and discovery research costs, partially offset by the impact of foreign exchanges rates.
Acquired IPR&D charges were $87.0 million in the first quarter of 2008. We incurred asset impairments, restructuring (exit costs), and other special charges of $145.7 in the first quarter of 2008. See Notes 3 and 5 to the consolidated condensed financial statements for additional information. Other- net, expense (income) decreased $91.0 million, to a net expense of $70.7 million, primarily due to lower interest income and higher interest expense associated with the ImClone acquisition, as well as lower business development income.
We incurred tax expense of $370.3 million for the first quarter of 2009. The effective tax rate was 22.0 percent. In the first quarter of 2008, we reported an aggregate income tax benefit of $8.0 million due to the recognition of $210.3 million discrete benefit as a result of the resolution of a substantial portion of the IRS audit of our federal income tax returns for years 2001 through 2004.
FINANCIAL CONDITION
As of March 31, 2009, cash, cash equivalents, and short-term investments totaled $3.51 billion compared with $5.93 billion at December 31, 2008. The decrease in cash is driven by a net reduction in short-term borrowings of $4.24 billion and dividends paid of $536.8 million, partially offset by proceeds of long-term debt issuances of $2.40 billion. Cash flow from operations was $87.9 million, which included payments related to the EDPA settlement of $1.06 billion. Total debt as of March 31, 2009 decreased by $1.99 billion, to $8.47 billion, reflecting the pay down of our commercial paper that was issued to finance our acquisition of ImClone and to fund payments required in connection with the EDPA settlements, partially offset by $2.40 billion of long- term debt we issued in March 2009. Our current debt ratings from Standard & Poor's and Moody's remain at AA and A1, respectively.
In the past several months, global economic conditions have deteriorated, triggered by the liquidity crisis in the capital markets, resulting in higher unemployment and declines in real consumer spending. In addition, many financial institutions tightened lines of credit, reducing funding available for near-term economic growth. Pharmaceutical consumption has traditionally been relatively unaffected by economic downturns; however, an extended downturn could lead to a decline in overall prescriptions corresponding with the growth of the

uninsured and underinsured population in the U.S. In addition, both private and public health care payers are facing heightened fiscal challenges due to the economic slowdown and are taking aggressive steps to reduce the costs of care, including pressures for increased pharmaceutical discounts and rebates and efforts to drive greater use of generic drugs. We continue to monitor the potential near-term impact of prescription trends, the creditworthiness of our wholesalers and other customers and suppliers, the decline of health insurance coverage in the overall population, and the federal government's involvement in the economic crisis.
We believe that cash generated from operations, along with available cash and cash equivalents, will be sufficient to fund our normal operating needs, including debt service, capital expenditures, costs associated with litigation and government investigations, and dividends in 2009. We believe that amounts accessible through existing commercial paper markets should be adequate to fund short-term borrowings. Our access to credit markets has not been adversely affected by the illiquidity in the market because of the high credit quality of our short- and long-term debt. In the remainder of 2009, we intend to fund the remaining payments required in connection with the EDPA settlements, and to further reduce outstanding commercial paper with cash and cash equivalents on hand, and cash generated from operations. We currently have $1.24 billion of unused committed bank credit facilities, $1.20 billion of which backs our commercial paper program. Various risks and uncertainties, including those discussed in the Financial Expectations for 2009 section, may affect our operating results and cash generated from operations.
LEGAL AND REGULATORY MATTERS
We are a party to various legal actions and government investigations. The most significant of these are described below. While it is not possible to determine the outcome of these matters, we believe that, except as specifically noted below, the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations in any one accounting period.
Patent Litigation
We are engaged in the following patent litigation matters brought pursuant to procedures set out in the Hatch-Waxman Act (the Drug Price Competition and Patent Term Restoration Act of 1984):
• Cymbalta: Sixteen generic drug manufacturers have submitted ANDAs seeking permission to market generic versions of Cymbalta prior to the expiration of our relevant U.S. patents (the earliest of which expires in 2013). Of these challengers, all allege non-infringement of the patent claims directed to the commercial formulation, and eight allege invalidity of the patent claims directed to the active ingredient duloxetine. Of the eight challengers to the compound patent claims, one further alleges invalidity of the claims directed to the use of Cymbalta for treating fibromyalgia, and one alleges the patent having claims directed to the active ingredient is unenforceable. Lawsuits have been filed in U.S. District Court for the Southern District of Indiana against Activis Elizabeth LLC; Aurobindo Pharma Ltd.; Cobalt Laboratories, Inc.; Impax Laboratories, Inc.; Lupin Limited; Sandoz Inc.; Sun Pharma Global, Inc.; and Wockhardt Limited, seeking rulings that the patents are valid, infringed, and enforceable. The cases have been consolidated and are proceeding.

• Gemzar: Sicor Pharmaceuticals, Inc. (Sicor), Mayne Pharma (USA) Inc. (Mayne), and Sun Pharmaceutical Industries Inc. (Sun) each submitted an ANDA seeking permission to market generic versions of Gemzar prior to the expiration of our relevant U.S. patents (compound patent expiring in 2010 and method-of-use patent expiring in 2013), and alleging that these patents are invalid. We filed lawsuits in the U.S. District Court for the Southern District of Indiana against Sicor (February 2006) and Mayne (October 2006 and January 2008), seeking rulings that these patents are valid and are being infringed. The suit against Sicor has been scheduled for trial in September 2009. Sicor's ANDAs have been approved by the FDA; however, Sicor must provide 90 days notice prior to marketing generic Gemzar to allow time for us to seek a preliminary injunction. Both suits against Mayne have been administratively closed, and the parties have agreed to be bound by the results of the Sicor suit. In November 2007, Sun filed a declaratory judgment action in the United States District Court for the Eastern District of Michigan, seeking rulings that our method-of-use and compound patents are invalid or unenforceable, or would not be infringed by the sale of Sun's generic product. This trial is scheduled for December 2009.

• Alimta: Teva Parenteral Medicines, Inc. (Teva), APP Pharmaceuticals, LLC (APP), and Barr Laboratories, Inc. (Barr) each submitted ANDAs seeking approval to market generic versions of Alimta prior to the expiration of the relevant U.S. patent (licensed from the Trustees of Princeton University and expiring in 2016), and alleging the patent is invalid. We, along with Princeton, filed lawsuits in the U.S. District Court for the District of Delaware against Teva, APP, and Barr seeking rulings that the compound patent is valid and infringed. Trial is scheduled for November 2010 against Teva and APP.

• Evista: Barr submitted an ANDA in 2002 seeking permission to market a generic version of Evista prior to the expiration of our relevant U.S. patents (expiring in 2012-2017) and alleging that these patents are invalid, not enforceable, or not infringed. In November 2002, we filed a lawsuit against Barr in the U.S. District

Court for the Southern District of Indiana, seeking a ruling that these patents are valid, enforceable, and being infringed by Barr. The lawsuit against Barr was administratively closed and, as a result, no trial date has been set. In 2006, Teva Pharmaceuticals USA, Inc. (Teva) submitted an ANDA seeking permission to market a generic version of Evista. In June 2006, we filed a lawsuit, similar to the Barr lawsuit, against Teva in the U.S. District Court for the Southern District of Indiana. The trial against Teva was completed in March 2009. In April 2008, the FDA granted Teva tentative approval of its ANDA; however, Teva's ability to market a generic product is subject to a preliminary injunction that prevents Teva from launching its generic raloxifene product until the Court issues a final judgment. Teva has announced its intent to appeal the preliminary injunction.
We believe each of these Hatch-Waxman challenges is without merit and expect to prevail in this litigation. However, it is not possible to determine the outcome of this litigation, and accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in any of these cases could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position.
We have received challenges to Zyprexa patents in a number of countries outside the U.S.: . . .