Lilly Delivers Strong Third-Quart...(while exchange rates and selling pricesc...),Health

Gross margin as a percent of sales decreased by 0.7 percentage points, to 77.0 percent. This decrease was primarily due to planned third-quarter 2007 maintenance shutdowns of certain manufacturing facilities, the expense resulting from the amortization of the intangible assets acquired in the ICOS acquisition and the impact of foreign exchange rates, offset in part by manufacturing expenses growing at a slower rate than sales.

Overall, marketing and administrative expenses rose 23 percent, to $1.478 billion. This increase was largely due to the impact of the ICOS acquisition, as well as increased marketing and selling expenses in support of key products, primarily Cymbalta and the diabetes care products. Research and development expenses were $844.5 million, or 18 percent of sales. Compared with the third quarter of 2006, research and development expenses increased 12 percent. In addition to the acquisition of ICOS, this increase was due to increases in incentive compensation, discovery research and late-stage clinical trial costs.

In the third quarter of 2007, following a settlement with one of its insurance carriers over Zyprexa product liability claims, the company reduced its expected product liability insurance recoveries. This resulted in a recorded charge of $81.3 million.

Other income decreased by $6.2 million, to $49.8 million, primarily due to the acquisition of ICOS, offset in part by higher business development income resulting from out-licensing of legacy and development-stage products. Prior to the acquisition of ICOS, the results of the Lilly ICOS joint venture were presented in other income. Subsequent to the acquisition, all sales and expenses associated with Cialis are included in their respective lines on Lilly's income statement.

The reported effective tax rate was 21.4 percent, up from 21 percent in the third
'/>"/>