NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)
1. Summary of significant accounting policies
Business
Amgen Inc. (including its subsidiaries, referred to as “Amgen,” “the Company,” “we,” “our” or “us”) is a global biotechnology pioneer that discovers, develops, manufactures and delivers innovative human therapeutics. We operate in one business segment: human therapeutics.
Basis of presentation
The financial information for the three and nine months ended September 30, 2019 and 2018, is unaudited but includes all adjustments (consisting of only normal, recurring adjustments unless otherwise indicated), which Amgen considers necessary for a fair presentation of its condensed consolidated results of operations for those periods. Interim results are not necessarily indicative of results for the full fiscal year.
The condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2018, and with our condensed consolidated financial statements and the notes thereto contained in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2019 and June 30, 2019.
Principles of consolidation
The condensed consolidated financial statements include the accounts of Amgen as well as its majority-owned subsidiaries. We do not have any significant interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Property, plant and equipment, net
Property, plant and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $8.2 billion and $7.8 billion as of September 30, 2019 and December 31, 2018, respectively.
Leases
Adoption of new lease standard
In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize the assets and liabilities that arise from leases on the balance sheet, including leases classified as operating leases, and that they disclose qualitative and quantitative information about leasing arrangements. The FASB subsequently issued additional amendments to address issues arising from the implementation of the new lease standard. We adopted this standard as of January 1, 2019, using the modified-retrospective method. This approach provides a method for recording existing leases at adoption. We used the adoption date as our date of initial application, and thus, comparative-period financial information is not presented for periods prior to the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification.
Adoption of the new standard resulted in total lease liabilities of $510 million and right-of-use (ROU) assets of $439 million as of January 1, 2019. The difference between the initial lease liabilities and the ROU assets is related primarily to previously existing lease liabilities. The standard did not materially impact our Condensed Consolidated Statements of Income and had no impact on our Condensed Consolidated Statements of Cash Flows. Our accounting policies under the new standard are described below. See Note 9, Leases.
Lease recognition
At inception of a contract, we determine whether an arrangement is or contains a lease. For all leases, we determine the classification as either operating or financing. Operating leases are included in Other assets, Accrued liabilities and Other noncurrent liabilities in our Condensed Consolidated Balance Sheets.
ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments under the lease. Lease recognition occurs at the commencement date, and lease liability amounts are based on the present value of lease payments made during the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Because most of our leases do not provide information to determine an implicit interest rate, we use our incremental borrowing rate in determining the present value of lease payments. ROU assets also include any lease payments made prior to the commencement date and exclude lease incentives received. Operating lease expense is recognized on a straight-line basis over the lease term.
We have lease agreements with both lease and nonlease components, which are generally accounted for together as a single lease component. In addition, for certain vehicle and equipment leases, we apply a portfolio approach to determine the lease term and discount rate.
Other recent accounting pronouncements
In June 2016, the FASB issued a new accounting standard that amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than by reducing the carrying amount under the current, other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning on January 1, 2020. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption. We have substantially completed our impact assessment and do not currently anticipate a material impact on our condensed consolidated financial statements.
2. Business combinations
Nuevolution AB
On July 15, 2019, we acquired all of the outstanding stock of Nuevolution AB (Nuevolution), a publicly traded, Denmark-based biotechnology company with a leading small-molecule-drug discovery platform, for total consideration of $183 million in cash. The transaction, which was accounted for as a business combination, expands our ability to discover novel small molecules against difficult-to-drug targets and with greater speed and efficiency. Nuevolution’s operations, which are not material, have been included in our condensed consolidated financial statements commencing on the acquisition date.
We allocated the consideration to acquire Nuevolution to finite-lived intangible assets of $150 million, comprised primarily of technology rights for a drug discovery platform with an estimated useful life of 10 years; goodwill of $26 million, which is not tax deductible; deferred tax liabilities of $22 million; and other net assets of $29 million.
The estimated fair values of intangible assets were determined primarily using a probability-weighted income approach, which discounts expected future cash flows to present value by using a discount rate that represents the estimated rate that market participants would use to value the intangible assets.
Our accounting for this acquisition is preliminary and will be finalized upon completion of our analysis to determine the acquisition date fair values of certain assets acquired, tax-related items and the residual impact on goodwill.
Otezla®
On August 25, 2019, we entered into an agreement with Celgene Corporation (Celgene) in connection with Celgene’s previously announced merger with Bristol-Myers Squibb Company (BMS) to acquire worldwide rights to Otezla® (apremilast), the only oral, nonbiologic treatment for psoriasis and psoriatic arthritis, and certain related assets and liabilities for $13.4 billion. We expect to fund the purchase price with cash. The transaction is expected to close by the end of 2019.
3. Revenues
We operate in one business segment: human therapeutics. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Revenues by product and by geographic area, based on customers’ locations, are presented below. Rest-of-world (ROW) revenues relate to products that are sold primarily in Europe.
Revenues were as follows (in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
2019
|
|
2018
|
|
|
US
|
|
ROW
|
|
Total
|
|
US
|
|
ROW
|
|
Total
|
Enbrel® (etanercept)
|
|
$
|
1,323
|
|
|
$
|
43
|
|
|
$
|
1,366
|
|
|
$
|
1,242
|
|
|
$
|
50
|
|
|
$
|
1,292
|
|
Neulasta® (pegfilgrastim)
|
|
619
|
|
|
92
|
|
|
711
|
|
|
897
|
|
|
154
|
|
|
1,051
|
|
Prolia® (denosumab)
|
|
425
|
|
|
205
|
|
|
630
|
|
|
354
|
|
|
178
|
|
|
532
|
|
XGEVA® (denosumab)
|
|
356
|
|
|
120
|
|
|
476
|
|
|
323
|
|
|
110
|
|
|
433
|
|
Aranesp® (darbepoetin alfa)
|
|
204
|
|
|
248
|
|
|
452
|
|
|
248
|
|
|
229
|
|
|
477
|
|
KYPROLIS® (carfilzomib)
|
|
163
|
|
|
103
|
|
|
266
|
|
|
142
|
|
|
90
|
|
|
232
|
|
EPOGEN® (epoetin alfa)
|
|
215
|
|
|
—
|
|
|
215
|
|
|
252
|
|
|
—
|
|
|
252
|
|
Sensipar®/Mimpara® (cinacalcet)
|
|
38
|
|
|
71
|
|
|
109
|
|
|
330
|
|
|
79
|
|
|
409
|
|
Other products
|
|
686
|
|
|
552
|
|
|
1,238
|
|
|
472
|
|
|
360
|
|
|
832
|
|
Total product sales(1)
|
|
$
|
4,029
|
|
|
$
|
1,434
|
|
|
5,463
|
|
|
$
|
4,260
|
|
|
$
|
1,250
|
|
|
5,510
|
|
Other revenues
|
|
|
|
|
|
274
|
|
|
|
|
|
|
394
|
|
Total revenues
|
|
|
|
|
|
$
|
5,737
|
|
|
|
|
|
|
$
|
5,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
2019
|
|
2018
|
|
|
US
|
|
ROW
|
|
Total
|
|
US
|
|
ROW
|
|
Total
|
ENBREL
|
|
$
|
3,744
|
|
|
$
|
136
|
|
|
$
|
3,880
|
|
|
$
|
3,544
|
|
|
$
|
155
|
|
|
$
|
3,699
|
|
Neulasta®
|
|
2,231
|
|
|
325
|
|
|
2,556
|
|
|
2,854
|
|
|
452
|
|
|
3,306
|
|
Prolia®
|
|
1,273
|
|
|
647
|
|
|
1,920
|
|
|
1,070
|
|
|
566
|
|
|
1,636
|
|
XGEVA®
|
|
1,091
|
|
|
355
|
|
|
1,446
|
|
|
994
|
|
|
336
|
|
|
1,330
|
|
Aranesp®
|
|
578
|
|
|
724
|
|
|
1,302
|
|
|
714
|
|
|
689
|
|
|
1,403
|
|
KYPROLIS®
|
|
483
|
|
|
295
|
|
|
778
|
|
|
430
|
|
|
287
|
|
|
717
|
|
EPOGEN®
|
|
657
|
|
|
—
|
|
|
657
|
|
|
746
|
|
|
—
|
|
|
746
|
|
Sensipar®/Mimpara®
|
|
216
|
|
|
228
|
|
|
444
|
|
|
1,069
|
|
|
257
|
|
|
1,326
|
|
Other products
|
|
1,889
|
|
|
1,451
|
|
|
3,340
|
|
|
1,353
|
|
|
1,016
|
|
|
2,369
|
|
Total product sales(1)
|
|
$
|
12,162
|
|
|
$
|
4,161
|
|
|
16,323
|
|
|
$
|
12,774
|
|
|
$
|
3,758
|
|
|
16,532
|
|
Other revenues
|
|
|
|
|
|
842
|
|
|
|
|
|
|
985
|
|
Total revenues
|
|
|
|
|
|
$
|
17,165
|
|
|
|
|
|
|
$
|
17,517
|
|
____________
|
|
(1)
|
Hedging gains and losses, which are included in product sales, were not material for the three and nine months ended September 30, 2019 and 2018.
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4. Income taxes
Effective tax rates for the three and nine months ended September 30, 2019, were 13.6% and 14.2%, respectively, compared with 11.2% and 12.1%, respectively, for the corresponding periods of the prior year.
The increases in our effective tax rates for the three and nine months ended September 30, 2019, were due primarily to a prior-year tax benefit associated with intercompany sales under U.S. corporate tax reform. The effective tax rates differ from the federal statutory rate primarily as a result of foreign earnings from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and that is subject to tax incentive grants through 2035; these earnings are subject to U.S. tax at a reduced rate of 10.5%.
The U.S. territory of Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate of 4% is effective through December 31, 2027. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.
One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely examined by tax authorities in those jurisdictions. Significant disputes may arise with authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws, regulations and relevant facts. As previously disclosed, we received a Revenue Agent Report (RAR) from the Internal Revenue Service (IRS) for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. Final resolution of this complex matter is not likely within the next 12 months and could have a material impact on our condensed consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009. In addition, we are currently under examination by a number of other state and foreign tax jurisdictions.
During the three and nine months ended September 30, 2019, the gross amounts of our unrecognized tax benefits (UTBs) increased $50 million and $160 million, respectively, as a result of tax positions taken during the current year. Substantially all of the UTBs as of September 30, 2019, if recognized, would affect our effective tax rate.
5. Earnings per share
The computation of basic earnings per share (EPS) is based on the weighted-average number of our common shares outstanding. The computation of diluted EPS is based on the weighted-average number of our common shares outstanding and dilutive potential common shares, which include primarily shares that may be issued under our stock option, restricted stock and performance unit award programs (collectively, dilutive securities), as determined by using the treasury stock method.
The computations for basic and diluted EPS were as follows (in millions, except per-share data):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Income (Numerator):
|
|
|
|
|
|
|
|
Net income for basic and diluted EPS
|
$
|
1,968
|
|
|
$
|
1,859
|
|
|
$
|
6,139
|
|
|
$
|
6,466
|
|
|
|
|
|
|
|
|
|
Shares (Denominator):
|
|
|
|
|
|
|
|
Weighted-average shares for basic EPS
|
599
|
|
|
645
|
|
|
609
|
|
|
669
|
|
Effect of dilutive securities
|
3
|
|
|
4
|
|
|
4
|
|
|
4
|
|
Weighted-average shares for diluted EPS
|
602
|
|
|
649
|
|
|
613
|
|
|
673
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
3.29
|
|
|
$
|
2.88
|
|
|
$
|
10.08
|
|
|
$
|
9.67
|
|
Diluted EPS
|
$
|
3.27
|
|
|
$
|
2.86
|
|
|
$
|
10.01
|
|
|
$
|
9.61
|
|
For the three and nine months ended September 30, 2019 and 2018, the number of antidilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.
6. Investments
Available-for-sale investments
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of interest-bearing securities, which are considered available-for-sale, by type of security were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Types of securities as of September 30, 2019
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Fair
values
|
U.S. Treasury notes
|
|
$
|
1,164
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
1,167
|
|
U.S. Treasury bills
|
|
2,494
|
|
|
—
|
|
|
—
|
|
|
2,494
|
|
Other government-related debt securities:
|
|
|
|
|
|
|
|
|
U.S.
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign and other
|
|
896
|
|
|
29
|
|
|
—
|
|
|
925
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
Financial
|
|
2,116
|
|
|
24
|
|
|
—
|
|
|
2,140
|
|
Industrial
|
|
2,002
|
|
|
23
|
|
|
—
|
|
|
2,025
|
|
Other
|
|
531
|
|
|
6
|
|
|
—
|
|
|
537
|
|
Residential-mortgage-backed securities
|
|
512
|
|
|
4
|
|
|
—
|
|
|
516
|
|
Other mortgage- and asset-backed securities
|
|
43
|
|
|
—
|
|
|
—
|
|
|
43
|
|
Money market mutual funds
|
|
8,017
|
|
|
—
|
|
|
—
|
|
|
8,017
|
|
Other short-term interest-bearing securities
|
|
2,363
|
|
|
—
|
|
|
—
|
|
|
2,363
|
|
Total interest-bearing securities
|
|
$
|
20,138
|
|
|
$
|
89
|
|
|
$
|
—
|
|
|
$
|
20,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Types of securities as of December 31, 2018
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Fair
values
|
U.S. Treasury notes
|
|
$
|
2,710
|
|
|
$
|
—
|
|
|
$
|
(47
|
)
|
|
$
|
2,663
|
|
U.S. Treasury bills
|
|
8,191
|
|
|
—
|
|
|
—
|
|
|
8,191
|
|
Other government-related debt securities:
|
|
|
|
|
|
|
|
|
U.S.
|
|
112
|
|
|
—
|
|
|
(2
|
)
|
|
110
|
|
Foreign and other
|
|
972
|
|
|
1
|
|
|
(41
|
)
|
|
932
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
Financial
|
|
2,778
|
|
|
—
|
|
|
(81
|
)
|
|
2,697
|
|
Industrial
|
|
2,603
|
|
|
—
|
|
|
(99
|
)
|
|
2,504
|
|
Other
|
|
583
|
|
|
—
|
|
|
(21
|
)
|
|
562
|
|
Residential-mortgage-backed securities
|
|
1,458
|
|
|
—
|
|
|
(36
|
)
|
|
1,422
|
|
Other mortgage- and asset-backed securities
|
|
483
|
|
|
—
|
|
|
(14
|
)
|
|
469
|
|
Money market mutual funds
|
|
5,659
|
|
|
—
|
|
|
—
|
|
|
5,659
|
|
Other short-term interest-bearing securities
|
|
3,515
|
|
|
—
|
|
|
—
|
|
|
3,515
|
|
Total interest-bearing securities
|
|
$
|
29,064
|
|
|
$
|
1
|
|
|
$
|
(341
|
)
|
|
$
|
28,724
|
|
The fair values of interest-bearing securities by location in the Condensed Consolidated Balance Sheets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets locations
|
|
September 30,
2019
|
|
December 31,
2018
|
Cash and cash equivalents
|
|
$
|
10,789
|
|
|
$
|
6,365
|
|
Marketable securities
|
|
9,438
|
|
|
22,359
|
|
Total interest-bearing securities
|
|
$
|
20,227
|
|
|
$
|
28,724
|
|
Cash and cash equivalents in the above table excludes bank account cash of $626 million and $580 million as of September 30, 2019 and December 31, 2018, respectively.
The fair values of interest-bearing securities by contractual maturity, except for mortgage- and asset-backed securities that do not have a single maturity date, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Contractual maturities
|
|
September 30,
2019
|
|
December 31,
2018
|
Maturing in one year or less
|
|
$
|
12,941
|
|
|
$
|
17,424
|
|
Maturing after one year through three years
|
|
4,855
|
|
|
3,356
|
|
Maturing after three years through five years
|
|
1,226
|
|
|
5,168
|
|
Maturing after five years through ten years
|
|
646
|
|
|
885
|
|
Mortgage- and asset-backed securities
|
|
559
|
|
|
1,891
|
|
Total interest-bearing securities
|
|
$
|
20,227
|
|
|
$
|
28,724
|
|
For the three months ended September 30, 2019 and 2018, realized gains on interest-bearing securities were $21 million and $5 million, respectively, and realized losses on interest-bearing securities were $24 million and $108 million, respectively. For the nine months ended September 30, 2019 and 2018, realized gains on interest-bearing securities were $23 million and $27 million, respectively, and realized losses on interest-bearing securities were $32 million and $379 million, respectively. Realized gains and losses on interest-bearing securities are recorded in Interest and other income, net, in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific-identification method. As of September 30, 2019, we had $1.1 billion in receivables related to sales of securities, which were recorded in Other current assets in the Condensed Consolidated Balance Sheets. There were no receivables related to sales of securities as of December 31, 2018.
As of September 30, 2019, aggregate gross unrealized losses of interest-bearing securities were not material. As of December 31, 2018, the fair values and gross unrealized losses of interest-bearing securities in an unrealized loss position aggregated by type and length of time that the securities have been in a continuous loss position were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or more
|
Types of securities as of December 31, 2018
|
|
Fair values
|
|
Unrealized losses
|
|
Fair values
|
|
Unrealized losses
|
U.S. Treasury notes
|
|
$
|
1,219
|
|
|
$
|
(21
|
)
|
|
$
|
1,444
|
|
|
$
|
(26
|
)
|
Other government-related debt securities:
|
|
|
|
|
|
|
|
|
U.S.
|
|
—
|
|
|
—
|
|
|
110
|
|
|
(2
|
)
|
Foreign and other
|
|
631
|
|
|
(31
|
)
|
|
240
|
|
|
(10
|
)
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
Financial
|
|
1,968
|
|
|
(59
|
)
|
|
718
|
|
|
(22
|
)
|
Industrial
|
|
1,898
|
|
|
(81
|
)
|
|
529
|
|
|
(18
|
)
|
Other
|
|
529
|
|
|
(20
|
)
|
|
28
|
|
|
(1
|
)
|
Residential-mortgage-backed securities
|
|
576
|
|
|
(14
|
)
|
|
840
|
|
|
(22
|
)
|
Other mortgage- and asset-backed securities
|
|
17
|
|
|
—
|
|
|
451
|
|
|
(14
|
)
|
Total
|
|
$
|
6,838
|
|
|
$
|
(226
|
)
|
|
$
|
4,360
|
|
|
$
|
(115
|
)
|
The primary objective of our investment portfolio is to enhance overall returns in an efficient manner while maintaining safety of principal, prudent levels of liquidity and acceptable levels of risk. Our investment policy limits interest-bearing security investments to certain types of debt and money market instruments issued by institutions with primarily investment-grade credit ratings, and it places restrictions on maturities and concentration by asset class and issuer.
We review our available-for-sale investments for other-than-temporary declines in fair value below our cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. The evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below our cost basis as well as adverse conditions related specifically to the security, such as any changes to the credit rating of the security and the intent to sell or whether we will more likely than not be required to sell the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future based on new developments or changes in assumptions related to that particular security. As of September 30, 2019 and December 31, 2018, we believe the cost bases for our available-for-sale investments were recoverable in all material respects.
Equity securities
We held investments in equity securities with readily determinable fair values of $277 million and $176 million as of September 30, 2019 and December 31, 2018, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. Gains and losses recognized on equity securities with readily determinable fair values, including gains and losses recognized on sales, were not material for the three and nine months ended September 30, 2019 and 2018.
As of September 30, 2019 and December 31, 2018, respectively, we held investments of $170 million and $222 million in equity securities without readily determinable fair values, which are included in Other assets in the Condensed Consolidated Balance Sheets. Adjustments to the carrying values of these securities were not material for the three and nine months ended September 30, 2019 and 2018.
Limited partnership investments
We held limited partnership investments of $319 million and $285 million as of September 30, 2019 and December 31, 2018, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. These investments are measured by using the net asset values of the underlying investments as a practical expedient. These investments are typically redeemable only through distributions upon liquidation of the underlying assets. As of September 30, 2019, unfunded additional commitments to be made during the next several years for these investments were not material. Gains and losses recognized on our limited partnership investments were not material for the three and nine months ended September 30, 2019 and 2018.
7. Inventories
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Raw materials
|
$
|
324
|
|
|
$
|
257
|
|
Work in process
|
1,923
|
|
|
1,660
|
|
Finished goods
|
996
|
|
|
1,023
|
|
Total inventories
|
$
|
3,243
|
|
|
$
|
2,940
|
|
8. Goodwill and other intangible assets
Goodwill
The change in the carrying amount of goodwill was as follows (in millions):
|
|
|
|
|
|
Nine months ended
September 30, 2019
|
Beginning balance
|
$
|
14,699
|
|
Addition from Nuevolution acquisition
|
26
|
|
Currency translation adjustment
|
(20
|
)
|
Ending balance
|
$
|
14,705
|
|
Other intangible assets
Other intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Gross
carrying
amounts
|
|
Accumulated
amortization
|
|
Other intangible
assets, net
|
|
Gross
carrying
amounts
|
|
Accumulated
amortization
|
|
Other intangible
assets, net
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Developed-product-technology rights
|
$
|
12,548
|
|
|
$
|
(7,978
|
)
|
|
$
|
4,570
|
|
|
$
|
12,573
|
|
|
$
|
(7,479
|
)
|
|
$
|
5,094
|
|
Licensing rights
|
3,761
|
|
|
(2,286
|
)
|
|
1,475
|
|
|
3,772
|
|
|
(2,032
|
)
|
|
1,740
|
|
Marketing-related rights
|
1,209
|
|
|
(972
|
)
|
|
237
|
|
|
1,297
|
|
|
(1,019
|
)
|
|
278
|
|
Research and development technology rights
|
1,266
|
|
|
(922
|
)
|
|
344
|
|
|
1,148
|
|
|
(872
|
)
|
|
276
|
|
Total finite-lived intangible assets
|
18,784
|
|
|
(12,158
|
)
|
|
6,626
|
|
|
18,790
|
|
|
(11,402
|
)
|
|
7,388
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
76
|
|
|
—
|
|
|
76
|
|
|
55
|
|
|
—
|
|
|
55
|
|
Total other intangible assets
|
$
|
18,860
|
|
|
$
|
(12,158
|
)
|
|
$
|
6,702
|
|
|
$
|
18,845
|
|
|
$
|
(11,402
|
)
|
|
$
|
7,443
|
|
Developed-product-technology rights consists of rights related to marketed products acquired in business combinations. Licensing rights consists primarily of contractual rights acquired in business combinations to receive future milestone, royalty and profit-sharing payments; capitalized payments to third parties for milestones related to regulatory approvals to commercialize products; and up-front payments associated with royalty obligations for marketed products. Marketing-related rights consists primarily of rights related to the sale and distribution of marketed products. Research and development (R&D) technology rights pertains to technology used in R&D that have alternative future uses. R&D technology rights include assets acquired with the Nuevolution acquisition in 2019. See Note 2, Business combinations.
In-process research and development (IPR&D) consists of R&D projects acquired in a business combination that are not complete at the time of acquisition due to remaining technological risks and/or lack of receipt of required regulatory approvals. We review IPR&D projects for impairment annually, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable and upon the establishment of technological feasibility or regulatory approval.
During the three months ended September 30, 2019 and 2018, we recognized amortization associated with our finite-lived intangible assets of $318 million and $331 million, respectively. During the nine months ended September 30, 2019 and 2018, we recognized amortization associated with our finite-lived intangible assets of $948 million and $983 million, respectively. Amortization of intangible assets is included primarily in Cost of sales in the Condensed Consolidated Statements of Income. The total estimated amortization for our finite-lived intangible assets for the remaining three months ending December 31, 2019, and the years ending December 31, 2020, 2021, 2022, 2023 and 2024, are $0.3 billion, $1.2 billion, $1.0 billion, $0.9 billion, $0.9 billion and $0.9 billion, respectively.
9. Leases
On January 1, 2019, we adopted a new accounting standard that amends the guidance for the accounting and reporting of leases. Certain required disclosures have been made on a prospective basis in accordance with the guidance of the standard. See Note 1, Summary of significant accounting policies.
We lease certain facilities and equipment related primarily to administrative, R&D and sales and marketing activities. Leases with terms of 12 months or less are expensed on a straight-line basis over the term and are not recorded in the Condensed Consolidated Balance Sheets.
Most leases include one or more options to renew, with renewal terms that may extend the lease term up to seven years. The exercise of lease renewal options is at our sole discretion. In addition, some of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements neither contain residual value guarantees nor impose significant restrictions or covenants. We sublease certain real estate to third parties. Our sublease portfolio consists of operating leases from former R&D and administrative space.
The following table summarizes information related to our leases, all of which are classified as operating, included in our Condensed Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
Condensed Consolidated Balance Sheets locations
|
|
September 30, 2019
|
Assets:
|
|
|
Other assets
|
|
$
|
422
|
|
Liabilities:
|
|
|
Accrued liabilities
|
|
$
|
135
|
|
Other noncurrent liabilities
|
|
351
|
|
Total lease liabilities
|
|
$
|
486
|
|
The components of net lease costs were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
Lease costs
|
|
Three months ended September 30, 2019
|
|
Nine months ended
September 30, 2019
|
Operating(1)
|
|
$
|
50
|
|
|
$
|
149
|
|
Sublease income
|
|
(8
|
)
|
|
(25
|
)
|
Total net lease costs
|
|
$
|
42
|
|
|
$
|
124
|
|
____________
|
|
(1)
|
Includes short-term leases and variable lease costs, which were not material for the three and nine months ended September 30, 2019.
|
Maturities of lease liabilities as of September 30, 2019, were as follows (in millions):
|
|
|
|
|
|
Maturity dates
|
|
Operating leases
|
Remaining three months ending December 31, 2019
|
|
$
|
31
|
|
2020
|
|
157
|
|
2021
|
|
137
|
|
2022
|
|
77
|
|
2023
|
|
65
|
|
Thereafter
|
|
55
|
|
Total lease payments(1)
|
|
522
|
|
Less imputed interest
|
|
(36
|
)
|
Present value of lease liabilities
|
|
$
|
486
|
|
____________
|
|
(1)
|
Includes future rental commitments for abandoned leases of $189 million. We expect to receive total future rental income of $149 million related to noncancelable subleases for abandoned facilities.
|
The weighted-average remaining lease term and weighted-average discount rate of our leases were four years and 3.31%, respectively, as of September 30, 2019.
Cash and noncash information related to our leases was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
Nine months ended
September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
42
|
|
|
$
|
115
|
|
ROU assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
29
|
|
|
$
|
83
|
|
10. Financing arrangements
Our borrowings consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
5.70% notes due 2019 (5.70% 2019 Notes)
|
$
|
—
|
|
|
$
|
1,000
|
|
1.90% notes due 2019 (1.90% 2019 Notes)
|
—
|
|
|
700
|
|
Floating Rate Notes due 2019
|
—
|
|
|
550
|
|
2.20% notes due 2019 (2.20% 2019 Notes)
|
—
|
|
|
1,400
|
|
2.125% €675 million notes due 2019 (2.125% 2019 euro Notes)
|
—
|
|
|
774
|
|
4.50% notes due 2020 (4.50% 2020 Notes)
|
300
|
|
|
300
|
|
2.125% notes due 2020 (2.125% 2020 Notes)
|
750
|
|
|
750
|
|
Floating Rate Notes due 2020
|
300
|
|
|
300
|
|
2.20% notes due 2020 (2.20% 2020 Notes)
|
700
|
|
|
700
|
|
3.45% notes due 2020 (3.45% 2020 Notes)
|
900
|
|
|
900
|
|
4.10% notes due 2021 (4.10% 2021 Notes)
|
1,000
|
|
|
1,000
|
|
1.85% notes due 2021 (1.85% 2021 Notes)
|
750
|
|
|
750
|
|
3.875% notes due 2021 (3.875% 2021 Notes)
|
1,750
|
|
|
1,750
|
|
1.25% €1,250 million notes due 2022 (1.25% 2022 euro Notes)
|
1,362
|
|
|
1,433
|
|
2.70% notes due 2022 (2.70% 2022 Notes)
|
500
|
|
|
500
|
|
2.65% notes due 2022 (2.65% 2022 Notes)
|
1,500
|
|
|
1,500
|
|
3.625% notes due 2022 (3.625% 2022 Notes)
|
750
|
|
|
750
|
|
0.41% CHF700 million bonds due 2023 (0.41% 2023 Swiss franc Bonds)
|
702
|
|
|
713
|
|
2.25% notes due 2023 (2.25% 2023 Notes)
|
750
|
|
|
750
|
|
3.625% notes due 2024 (3.625% 2024 Notes)
|
1,400
|
|
|
1,400
|
|
3.125% notes due 2025 (3.125% 2025 Notes)
|
1,000
|
|
|
1,000
|
|
2.00% €750 million notes due 2026 (2.00% 2026 euro Notes)
|
817
|
|
|
860
|
|
2.60% notes due 2026 (2.60% 2026 Notes)
|
1,250
|
|
|
1,250
|
|
5.50% £475 million notes due 2026 (5.50% 2026 pound sterling Notes)
|
584
|
|
|
606
|
|
3.20% notes due 2027 (3.20% 2027 Notes)
|
1,000
|
|
|
1,000
|
|
4.00% £700 million notes due 2029 (4.00% 2029 pound sterling Notes)
|
860
|
|
|
893
|
|
6.375% notes due 2037 (6.375% 2037 Notes)
|
552
|
|
|
552
|
|
6.90% notes due 2038 (6.90% 2038 Notes)
|
291
|
|
|
291
|
|
6.40% notes due 2039 (6.40% 2039 Notes)
|
466
|
|
|
466
|
|
5.75% notes due 2040 (5.75% 2040 Notes)
|
412
|
|
|
412
|
|
4.95% notes due 2041 (4.95% 2041 Notes)
|
600
|
|
|
600
|
|
5.15% notes due 2041 (5.15% 2041 Notes)
|
974
|
|
|
974
|
|
5.65% notes due 2042 (5.65% 2042 Notes)
|
487
|
|
|
487
|
|
5.375% notes due 2043 (5.375% 2043 Notes)
|
261
|
|
|
261
|
|
4.40% notes due 2045 (4.40% 2045 Notes)
|
2,250
|
|
|
2,250
|
|
4.563% notes due 2048 (4.563% 2048 Notes)
|
1,415
|
|
|
1,415
|
|
4.663% notes due 2051 (4.663% 2051 Notes)
|
3,541
|
|
|
3,541
|
|
Other notes due 2097
|
100
|
|
|
100
|
|
Unamortized bond discounts, premiums and issuance costs, net
|
(874
|
)
|
|
(896
|
)
|
Fair value adjustments
|
391
|
|
|
(53
|
)
|
Total carrying value of debt
|
29,791
|
|
|
33,929
|
|
Less current portion
|
(2,049
|
)
|
|
(4,419
|
)
|
Total long-term debt
|
$
|
27,742
|
|
|
$
|
29,510
|
|
There are no material differences between the effective interest rates and coupon rates of any of our borrowings, except for the 4.563% 2048 Notes and the 4.663% 2051 Notes, which have effective interest rates of 6.3% and 5.6%, respectively.
11. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Shares
|
|
Dollars
|
|
Shares *
|
|
Dollars
|
First quarter
|
15.9
|
|
|
$
|
3,031
|
|
|
56.4
|
|
|
$
|
10,787
|
|
Second quarter
|
13.1
|
|
|
2,349
|
|
|
18.2
|
|
|
3,190
|
|
Third quarter
|
6.2
|
|
|
1,170
|
|
|
8.7
|
|
|
1,713
|
|
Total stock repurchases
|
35.2
|
|
|
$
|
6,550
|
|
|
83.4
|
|
|
$
|
15,690
|
|
* Total shares do not add due to rounding.
In May 2019, our Board of Directors increased the amount authorized under our stock repurchase program by an additional $5.0 billion. As of September 30, 2019, $3.6 billion of authorization remained available under our stock repurchase program.
Dividends
In August 2019, March 2019 and December 2018, the Board of Directors declared quarterly cash dividends of $1.45 per share, which were paid in September 2019, June 2019 and March 2019, respectively. In October 2019, the Board of Directors declared a quarterly cash dividend of $1.45 per share, which will be paid on December 6, 2019.
Accumulated other comprehensive income (loss)
The components of Accumulated other comprehensive income (loss) (AOCI) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
translation
|
|
Cash flow
hedges
|
|
Available-for-sale
securities
|
|
Other
|
|
AOCI
|
Balance as of December 31, 2018
|
$
|
(670
|
)
|
|
$
|
241
|
|
|
$
|
(338
|
)
|
|
$
|
(2
|
)
|
|
$
|
(769
|
)
|
Foreign currency translation adjustments
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
Unrealized gains
|
—
|
|
|
30
|
|
|
218
|
|
|
—
|
|
|
248
|
|
Reclassification adjustments to income
|
—
|
|
|
28
|
|
|
4
|
|
|
—
|
|
|
32
|
|
Income taxes
|
—
|
|
|
(13
|
)
|
|
(1
|
)
|
|
—
|
|
|
(14
|
)
|
Balance as of March 31, 2019
|
(683
|
)
|
|
286
|
|
|
(117
|
)
|
|
(2
|
)
|
|
(516
|
)
|
Foreign currency translation adjustments
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
Unrealized (losses) gains
|
—
|
|
|
(96
|
)
|
|
161
|
|
|
—
|
|
|
65
|
|
Reclassification adjustments to income
|
—
|
|
|
(36
|
)
|
|
2
|
|
|
—
|
|
|
(34
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
Income taxes
|
—
|
|
|
28
|
|
|
(10
|
)
|
|
—
|
|
|
18
|
|
Balance as of June 30, 2019
|
(687
|
)
|
|
182
|
|
|
36
|
|
|
4
|
|
|
(465
|
)
|
Foreign currency translation adjustments
|
(39
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
Unrealized gains
|
—
|
|
|
71
|
|
|
35
|
|
|
—
|
|
|
106
|
|
Reclassification adjustments to income
|
—
|
|
|
38
|
|
|
3
|
|
|
—
|
|
|
41
|
|
Income taxes
|
—
|
|
|
(23
|
)
|
|
(8
|
)
|
|
—
|
|
|
(31
|
)
|
Balance as of September 30, 2019
|
$
|
(726
|
)
|
|
$
|
268
|
|
|
$
|
66
|
|
|
$
|
4
|
|
|
$
|
(388
|
)
|
Reclassifications out of AOCI and into earnings were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Components of AOCI
|
|
2019
|
|
2018
|
|
Condensed Consolidated
Statements of Income locations
|
Cash flow hedges:
|
|
|
|
|
|
|
Foreign currency contract gains
|
|
$
|
26
|
|
|
$
|
3
|
|
|
Product sales
|
Cross-currency swap contract losses
|
|
(64
|
)
|
|
(36
|
)
|
|
Interest and other income, net
|
|
|
(38
|
)
|
|
(33
|
)
|
|
Income before income taxes
|
|
|
8
|
|
|
7
|
|
|
Provision for income taxes
|
|
|
$
|
(30
|
)
|
|
$
|
(26
|
)
|
|
Net income
|
Available-for-sale securities:
|
|
|
|
|
|
|
Net realized losses
|
|
$
|
(3
|
)
|
|
$
|
(103
|
)
|
|
Interest and other income, net
|
|
|
—
|
|
|
1
|
|
|
Provision for income taxes
|
|
|
$
|
(3
|
)
|
|
$
|
(102
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
Components of AOCI
|
|
2019
|
|
2018
|
|
Condensed Consolidated
Statements of Income locations
|
Cash flow hedges:
|
|
|
|
|
|
|
Foreign currency contract gains (losses)
|
|
$
|
62
|
|
|
$
|
(51
|
)
|
|
Product sales
|
Cross-currency swap contract losses
|
|
(92
|
)
|
|
(170
|
)
|
|
Interest and other income, net
|
|
|
(30
|
)
|
|
(221
|
)
|
|
Income before income taxes
|
|
|
6
|
|
|
47
|
|
|
Provision for income taxes
|
|
|
$
|
(24
|
)
|
|
$
|
(174
|
)
|
|
Net income
|
Available-for-sale securities:
|
|
|
|
|
|
|
Net realized losses
|
|
$
|
(9
|
)
|
|
$
|
(352
|
)
|
|
Interest and other income, net
|
|
|
—
|
|
|
3
|
|
|
Provision for income taxes
|
|
|
$
|
(9
|
)
|
|
$
|
(349
|
)
|
|
Net income
|
12. Fair value measurement
To estimate the fair value of our financial assets and liabilities, we use valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing an asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:
|
|
|
|
Level 1
|
—
|
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
|
Level 2
|
—
|
Valuations for which all significant inputs are observable either directly or indirectly—other than Level 1 inputs
|
Level 3
|
—
|
Valuations based on inputs that are unobservable and significant to the overall fair value measurement
|
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.
The fair values of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant
other observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
Fair value measurement as of September 30, 2019, using:
|
|
|
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Interest-bearing securities:
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
1,167
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,167
|
|
U.S. Treasury bills
|
|
2,494
|
|
|
—
|
|
|
—
|
|
|
2,494
|
|
Other government-related debt securities:
|
|
|
|
|
|
|
|
|
U.S.
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign and other
|
|
—
|
|
|
925
|
|
|
—
|
|
|
925
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
Financial
|
|
—
|
|
|
2,140
|
|
|
—
|
|
|
2,140
|
|
Industrial
|
|
—
|
|
|
2,025
|
|
|
—
|
|
|
2,025
|
|
Other
|
|
—
|
|
|
537
|
|
|
—
|
|
|
537
|
|
Residential-mortgage-backed securities
|
|
—
|
|
|
516
|
|
|
—
|
|
|
516
|
|
Other mortgage- and asset-backed securities
|
|
—
|
|
|
43
|
|
|
—
|
|
|
43
|
|
Money market mutual funds
|
|
8,017
|
|
|
—
|
|
|
—
|
|
|
8,017
|
|
Other short-term interest-bearing securities
|
|
—
|
|
|
2,363
|
|
|
—
|
|
|
2,363
|
|
Equity securities
|
|
277
|
|
|
—
|
|
|
—
|
|
|
277
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
—
|
|
|
339
|
|
|
—
|
|
|
339
|
|
Cross-currency swap contracts
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
Interest rate swap contracts
|
|
—
|
|
|
354
|
|
|
—
|
|
|
354
|
|
Total assets
|
|
$
|
11,955
|
|
|
$
|
9,254
|
|
|
$
|
—
|
|
|
$
|
21,209
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Cross-currency swap contracts
|
|
—
|
|
|
478
|
|
|
—
|
|
|
478
|
|
Contingent consideration obligations
|
|
—
|
|
|
—
|
|
|
62
|
|
|
62
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
484
|
|
|
$
|
62
|
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in
active markets for
identical assets
(Level 1)
|
|
Significant
other observable
inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
|
|
|
|
|
|
|
|
Fair value measurement as of December 31, 2018, using:
|
|
|
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
Interest-bearing securities:
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
2,663
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,663
|
|
U.S. Treasury bills
|
|
8,191
|
|
|
—
|
|
|
—
|
|
|
8,191
|
|
Other government-related debt securities:
|
|
|
|
|
|
|
|
|
U.S.
|
|
—
|
|
|
110
|
|
|
—
|
|
|
110
|
|
Foreign and other
|
|
—
|
|
|
932
|
|
|
—
|
|
|
932
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
Financial
|
|
—
|
|
|
2,697
|
|
|
—
|
|
|
2,697
|
|
Industrial
|
|
—
|
|
|
2,504
|
|
|
—
|
|
|
2,504
|
|
Other
|
|
—
|
|
|
562
|
|
|
—
|
|
|
562
|
|
Residential-mortgage-backed securities
|
|
—
|
|
|
1,422
|
|
|
—
|
|
|
1,422
|
|
Other mortgage- and asset-backed securities
|
|
—
|
|
|
469
|
|
|
—
|
|
|
469
|
|
Money market mutual funds
|
|
5,659
|
|
|
—
|
|
|
—
|
|
|
5,659
|
|
Other short-term interest-bearing securities
|
|
—
|
|
|
3,515
|
|
|
—
|
|
|
3,515
|
|
Equity securities
|
|
176
|
|
|
—
|
|
|
—
|
|
|
176
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
—
|
|
|
182
|
|
|
—
|
|
|
182
|
|
Cross-currency swap contracts
|
|
—
|
|
|
170
|
|
|
—
|
|
|
170
|
|
Interest rate swap contracts
|
|
—
|
|
|
56
|
|
|
—
|
|
|
56
|
|
Total assets
|
|
$
|
16,689
|
|
|
$
|
12,619
|
|
|
$
|
—
|
|
|
$
|
29,308
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
26
|
|
Cross-currency swap contracts
|
|
—
|
|
|
401
|
|
|
—
|
|
|
401
|
|
Interest rate swap contracts
|
|
—
|
|
|
149
|
|
|
—
|
|
|
149
|
|
Contingent consideration obligations
|
|
—
|
|
|
—
|
|
|
72
|
|
|
72
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
576
|
|
|
$
|
72
|
|
|
$
|
648
|
|
Interest-bearing and equity securities
The fair values of our U.S. Treasury securities, money market mutual funds and equity securities are based on quoted market prices in active markets, with no valuation adjustment.
Most of our other government-related and corporate debt securities are investment grade and have maturity dates of five years or less from the balance sheet date. Our other government-related debt securities portfolio is composed of securities with weighted-average credit ratings of BBB+ or equivalent by Standard & Poor’s Financial Services LLC (S&P), Moody’s Investors Service, Inc. (Moody’s), or Fitch Ratings, Inc. (Fitch); and our corporate debt securities portfolio has weighted-average credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry-standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly to estimate fair value. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.
Our residential-mortgage-, other-mortgage- and asset-backed-securities portfolio is composed entirely of senior tranches with credit ratings of AAA by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use industry-standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly to estimate fair value. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment or default projections based on historical data; and other observable inputs.
We value our other short-term interest-bearing securities at amortized cost, which approximates fair value given their near-term maturity dates.
Derivatives
All of our foreign currency forward and option derivative contracts have maturities of three years or less, and all are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, the London Interbank Offered Rate (LIBOR), swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. These inputs, when applicable, are at commonly quoted intervals. See Note 13, Derivative instruments.
Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency-basis swap spreads. See Note 13, Derivative instruments.
Our interest rate swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by using an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include LIBOR, swap rates and obligor credit default swap rates. See Note 13, Derivative instruments.
Contingent consideration obligations
As a result of our business combinations, we have incurred contingent consideration obligations. The contingent consideration obligations are recorded at their fair values by using probability-adjusted discounted cash flows, and we revalue these obligations each reporting period until the related contingencies have been resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to licensing rights and product candidates acquired in business combinations, and they are reviewed quarterly by management in our R&D and commercial sales organizations. Changes in the fair values of contingent consideration obligations are recognized in Other operating expenses in the Condensed Consolidated Statements of Income. Changes in the carrying amounts of contingent consideration obligations for the three and nine months ended September 30, 2019 and 2018, were not material.
During the three and nine months ended September 30, 2019 and 2018, there were no transfers of assets or liabilities between fair value measurement levels, and there were no material remeasurements to the fair values of assets and liabilities that are not measured at fair value on a recurring basis, except with respect to the 2018 discontinuance of the internal development of a nonkey program resulting in an impairment of an IPR&D asset of $330 million, which was recognized in Other operating expenses in the Condensed Consolidated Statements of Income and included in Other items, net, in the Condensed Consolidated Statements of Cash Flows.
Summary of the fair values of other financial instruments
Cash equivalents
The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.
Borrowings
We estimated the fair values of our borrowings by using Level 2 inputs. As of September 30, 2019 and December 31, 2018, the aggregate fair values of our borrowings were $33.3 billion and $35.0 billion, respectively, and the carrying values were $29.8 billion and $33.9 billion, respectively.
13. Derivative instruments
The Company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. To reduce our risks related to such exposures, we use or have used certain derivative instruments, including foreign currency forward, foreign currency option, cross-currency swap, forward interest rate and interest rate swap contracts. We do not use derivatives for speculative trading purposes.
Cash flow hedges
We are exposed to possible changes in the values of certain anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates associated primarily with our euro-denominated international product sales. Increases and decreases in the cash flows associated with our international product sales due to movements in foreign currency exchange rates are offset partially by corresponding increases and decreases in the cash flows from our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations with regard to our international product sales, we enter into foreign currency forward and option contracts to hedge a portion of our projected international product sales primarily over a three-year time horizon, with, at any given point in time, a higher percentage of nearer-term projected product sales being hedged than in successive periods.
As of September 30, 2019 and December 31, 2018, we had outstanding foreign currency forward contracts with aggregate notional amounts of $4.6 billion and $4.5 billion, respectively. As of December 31, 2018, we had outstanding foreign currency option contracts with an aggregate notional amount of $21 million and no such outstanding contracts as of September 30, 2019. We have designated these foreign currency forward and foreign currency option contracts, which are primarily euro based, as cash flow hedges. Accordingly, we report the unrealized gains and losses on these contracts in AOCI in the Condensed Consolidated Balance Sheets, and we reclassify them to Product sales in the Condensed Consolidated Statements of Income in the same periods during which the hedged transactions affect earnings.
To hedge our exposure to foreign currency exchange rate risk associated with certain of our long-term debt denominated in foreign currencies, we enter into cross-currency swap contracts. Under the terms of such contracts, we paid euros, pounds sterling and Swiss francs and received U.S. dollars for the notional amounts at the inception of the contracts; and based on these notional amounts, we exchange interest payments at fixed rates over the lives of the contracts by paying U.S. dollars and receiving euros, pounds sterling and Swiss francs. In addition, we will pay U.S. dollars to and receive euros, pounds sterling and Swiss francs from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged debt, thereby effectively converting the interest payments and principal repayment on the debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges. Accordingly, the unrealized gains and losses on these contracts are reported in AOCI in the Condensed Consolidated Balance Sheets and reclassified to Interest and other income, net, in the Condensed Consolidated Statements of Income in the same periods during which the hedged debt affects earnings.
The notional amounts and interest rates of our cross-currency swaps as of September 30, 2019, were as follows (notional amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
U.S. dollars
|
Hedged notes
|
|
Notional amounts
|
|
Interest rates
|
|
Notional amounts
|
|
Interest rates
|
1.25% 2022 euro Notes
|
|
€
|
1,250
|
|
|
1.3
|
%
|
|
$
|
1,388
|
|
|
3.2
|
%
|
0.41% 2023 Swiss franc Bonds
|
|
CHF
|
700
|
|
|
0.4
|
%
|
|
$
|
704
|
|
|
3.4
|
%
|
2.00% 2026 euro Notes
|
|
€
|
750
|
|
|
2.0
|
%
|
|
$
|
833
|
|
|
3.9
|
%
|
5.50% 2026 pound sterling Notes
|
|
£
|
475
|
|
|
5.5
|
%
|
|
$
|
747
|
|
|
6.0
|
%
|
4.00% 2029 pound sterling Notes
|
|
£
|
700
|
|
|
4.0
|
%
|
|
$
|
1,111
|
|
|
4.5
|
%
|
During the three months ended September 30, 2019, our 2.125% 2019 euro Notes matured, and the related cross-currency swaps were settled.
In connection with the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate contracts in order to hedge the variability in cash flows due to changes in the applicable U.S. Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, are recognized in AOCI in the Condensed Consolidated Balance Sheets and are amortized into Interest expense, net, in the Condensed Consolidated Statements of Income over the lives of the associated debt issuances. Amounts recognized in connection with forward interest rate swaps during the nine months ended September 30, 2019, and amounts expected to be recognized during the subsequent 12 months are not material.
The unrealized gains and losses recognized in AOCI for our derivative instruments designated as cash flow hedges were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
Derivatives in cash flow hedging relationships
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Foreign currency contracts
|
|
$
|
176
|
|
|
$
|
41
|
|
|
$
|
245
|
|
|
$
|
233
|
|
Cross-currency swap contracts
|
|
(105
|
)
|
|
(22
|
)
|
|
(240
|
)
|
|
(99
|
)
|
Total unrealized gains
|
|
$
|
71
|
|
|
$
|
19
|
|
|
$
|
5
|
|
|
$
|
134
|
|
Fair value hedges
To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that qualified for and were designated as fair value hedges. These interest rate swap contracts effectively convert fixed-rate coupons to floating-rate LIBOR-based coupons over the terms of the related hedge contracts. As of September 30, 2019 and December 31, 2018, we had interest rate swap contracts with aggregate notional amounts of $9.55 billion and $10.95 billion, respectively, that hedge certain portions of our long-term debt issuances.
For interest rate swap contracts that qualify for and are designated as fair value hedges, we recognize in Interest expense, net, in the Condensed Consolidated Statements of Income the unrealized gain or loss on the derivative resulting from the change in fair value during the period, as well as the offsetting unrealized loss or gain of the hedged item resulting from the change in fair value during the period attributable to the hedged risk. If a hedging relationship involving an interest rate swap contract is terminated, the gain or loss realized on contract termination is recorded as an adjustment to the carrying value of the debt and amortized into Interest expense, net, over the remaining life of the previously hedged debt.
The hedged liabilities and related cumulative-basis adjustments for fair value hedges of those liabilities were recorded in the Condensed Consolidated Balance Sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of hedged liabilities(1)
|
|
Cumulative amounts of fair value hedging adjustments related to the carrying amounts of the hedged liabilities(2)
|
Condensed Consolidated Balance Sheets locations
|
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2019
|
|
December 31, 2018
|
Current portion of long-term debt
|
|
$
|
—
|
|
|
$
|
2,396
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
Long-term debt
|
|
$
|
9,811
|
|
|
$
|
9,361
|
|
|
$
|
391
|
|
|
$
|
(50
|
)
|
____________
|
|
(1)
|
Current portion of long-term debt includes $1.0 billion of carrying value with discontinued hedging relationships as of December 31, 2018. Long-term debt includes $136 million and $137 million of carrying value with discontinued hedging relationships as of September 30, 2019 and December 31, 2018, respectively.
|
|
|
(2)
|
Current portion of long-term debt includes $3 million of hedging adjustments on discontinued hedging relationships as of December 31, 2018. Long-term debt includes $36 million and $37 million of hedging adjustments on discontinued hedging relationships as of September 30, 2019 and December 31, 2018, respectively.
|
Impact of hedging transactions
The following tables summarize the amounts recorded in income and expense line items and the effects thereon from fair value and cash flow hedging, including discontinued hedging relationships (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2019
|
|
Nine months ended September 30, 2019
|
|
|
Product sales
|
|
Interest and other income, net
|
|
Interest (expense), net
|
|
Product sales
|
|
Interest and other income, net
|
|
Interest (expense), net
|
Total amounts recorded in income and (expense) line items presented in the Condensed Consolidated Statements of Income
|
|
$
|
5,463
|
|
|
$
|
114
|
|
|
$
|
(313
|
)
|
|
$
|
16,323
|
|
|
$
|
517
|
|
|
$
|
(988
|
)
|
The effects of cash flow and fair value hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on cash flow hedging relationships reclassified out of AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cross-currency swap contracts
|
|
$
|
—
|
|
|
$
|
(64
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(92
|
)
|
|
$
|
—
|
|
(Losses) gains on fair value hedging relationships—interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(96
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(444
|
)
|
Derivatives designated as hedging instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
96
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
Nine months ended September 30, 2018
|
|
|
Product sales
|
|
Interest and other income, net
|
|
Interest (expense), net
|
|
Product sales
|
|
Interest and other income, net
|
|
Interest (expense), net
|
Total amounts recorded in income and (expense) line items presented in the Condensed Consolidated Statements of Income
|
|
$
|
5,510
|
|
|
$
|
126
|
|
|
$
|
(355
|
)
|
|
$
|
16,532
|
|
|
$
|
519
|
|
|
$
|
(1,040
|
)
|
The effects of cash flow and fair value hedging:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on cash flow hedging relationships reclassified out of AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(51
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Cross-currency swap contracts
|
|
$
|
—
|
|
|
$
|
(36
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(170
|
)
|
|
$
|
—
|
|
Gains (losses) on fair value hedging relationships—interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged items(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
278
|
|
Derivatives designated as hedging instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(259
|
)
|
__________
|
|
(1)
|
Gains (losses) on hedged items do not completely offset (losses) gains on the related designated hedging instruments due to amortization of the cumulative amounts of fair value hedging adjustments included in the carrying amount of the hedged debt for discontinued hedging relationships.
|
No portions of our cash flow hedge contracts were excluded from the assessment of hedge effectiveness. As of September 30, 2019, we expected to reclassify $97 million of net gains on our foreign currency and cross-currency swap contracts out of AOCI and into earnings during the next 12 months.
Derivatives not designated as hedges
To reduce our exposure to foreign currency fluctuations in certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. Most of these exposures are hedged on a month-to-month basis. As of September 30, 2019 and December 31, 2018, the total notional amounts of these foreign currency forward contracts were $857 million and $737 million, respectively. Gains and losses recognized in earnings for our derivative instruments not designated as hedging instruments were not material for the three and nine months ended September 30, 2019 and 2018.
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
Derivative liabilities
|
September 30, 2019
|
|
Condensed Consolidated Balance Sheets locations
|
|
Fair values
|
|
Condensed Consolidated Balance Sheets locations
|
|
Fair values
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets/ Other assets
|
|
$
|
339
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
$
|
6
|
|
Cross-currency swap contracts
|
|
Other current assets/ Other assets
|
|
12
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
478
|
|
Interest rate swap contracts
|
|
Other current assets/ Other assets
|
|
354
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
—
|
|
Total derivatives designated as hedging instruments
|
|
|
|
705
|
|
|
|
|
484
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
—
|
|
|
Accrued liabilities
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
—
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
|
$
|
705
|
|
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
Derivative liabilities
|
December 31, 2018
|
|
Condensed Consolidated Balance Sheets locations
|
|
Fair values
|
|
Condensed Consolidated Balance Sheets locations
|
|
Fair values
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets/ Other assets
|
|
$
|
181
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
$
|
26
|
|
Cross-currency swap contracts
|
|
Other current assets/ Other assets
|
|
170
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
401
|
|
Interest rate swap contracts
|
|
Other current assets/ Other assets
|
|
56
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
149
|
|
Total derivatives designated as hedging instruments
|
|
|
|
407
|
|
|
|
|
576
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
1
|
|
|
Accrued liabilities
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
1
|
|
|
|
|
—
|
|
Total derivatives
|
|
|
|
$
|
408
|
|
|
|
|
$
|
576
|
|
Our derivative contracts that were in liability positions as of September 30, 2019, contain certain credit-risk-related contingent provisions that would be triggered if (i) we were to undergo a change in control and (ii) our or the surviving entity’s creditworthiness deteriorates, which is generally defined as having either a credit rating that is below investment grade or a materially weaker creditworthiness after the change in control. If these events were to occur, the counterparties would have the right but not the obligation to close the contracts under early-termination provisions. In such circumstances, the counterparties could request immediate settlement of these contracts for amounts that approximate the then current fair values of the contracts. In addition, our derivative contracts are not subject to any type of master netting arrangement, and amounts due either to or from a counterparty under the contracts may be offset against other amounts due either to or from the same counterparty only if an event of default or termination, as defined, were to occur.
The cash flow effects of our derivative contracts in the Condensed Consolidated Statements of Cash Flows are included in Net cash provided by operating activities, except for the settlement of notional amounts of cross-currency swaps, which are included in Net cash used in financing activities.
14. Contingencies and commitments
Contingencies
In the ordinary course of business, we are involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. See our Annual Report on Form 10-K for the year ended December 31, 2018, Part I, Item 1A. Risk Factors—Our business may be affected by litigation and government investigations. We describe our legal proceedings and other matters that are significant or that we believe could become significant in this footnote; in Note 20, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018; or in Note 13, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2019 and June 30, 2019.
We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously.
Our legal proceedings involve various aspects of our business and a variety of claims, some of which present novel factual allegations and/or unique legal theories. In each of the matters described in this filing; in Note 20, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018; or in Note 13, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2019 and June 30, 2019, in which we could incur a liability, our opponents seek an award of a not-yet-quantified amount of damages or an amount that is not material. In addition, a number of the matters pending against us are at very early stages of the legal process, which, in complex proceedings of the sort we face often extend for several years. As a result, none of the matters described in this filing; in Note 20, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018; or in Note 13, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2019 and June 30, 2019, in which we could incur a liability, have progressed sufficiently through discovery and/or the development of important factual information and legal issues to enable us to estimate a range of possible loss, if any, or such amounts are not material. While it is not possible to accurately predict or determine the eventual outcomes of these matters, an adverse determination in one or more of these matters currently pending could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Certain recent developments concerning our legal proceedings and other matters are discussed below:
Novartis Breach of Contract Action
On September 17, 2019 and October 8, 2019, Novartis Pharma AG and Amgen, respectively, each filed its motion for judgment on the pleadings.
Sensipar® (cinacalcet) Litigation
Cipla Ltd. v. Amgen Inc.
On October 15, 2019, Amgen moved to dismiss Cipla Limited and Cipla USA, Inc.’s (collectively, Cipla) antitrust and fraud claims brought in the U.S. District Court for the District of Delaware (the Delaware District Court) for lack of standing and failure to state a claim.
Abbreviated New Drug Application (ANDA) Patent Litigation
Amgen Inc. v. Amneal Pharmaceuticals LLC, et al. Consolidated Case
As previously disclosed, (i) Amgen appealed the Delaware District Court’s judgment of noninfringement of Amgen’s U.S. Patent No. 9,375,405 (the ’405 Patent) in favor of Amneal Pharmaceuticals LLC and Amneal Pharmaceuticals of New York, LLC (collectively, Amneal), and Piramal Healthcare UK Limited (Piramal), and (ii) Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Ltd. (collectively, Zydus) appealed the Delaware District Court’s judgment of infringement by Zydus of Amgen’s ’405 Patent. On October 1, 2019, oral arguments for these appeals were held before the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court).
- v. Cipla, et al.
As previously disclosed, Amgen filed a motion requesting the Federal Circuit Court to vacate the Delaware District Court’s judgment of noninfringement of Amgen’s ’405 Patent with respect to Watson Laboratories, Inc. and Actavis Pharma, Inc. Cipla filed an opposition to this motion and moved to participate in the appeal as either an intervenor or as amicus curiae. On September 13, 2019, the Federal Circuit Court denied Amgen’s motion, lifted the stay of the briefing schedule which had been stayed pending disposition of Amgen’s motion to vacate, and granted Cipla permission to file a brief as amicus curiae.
- v. Sun Pharmaceutical Industries Ltd., et al.
On September 18, 2019, the Delaware District Court denied the motion filed by Sun Pharma Global FZE, Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively, Sun), rejecting Sun’s contention that its settlement agreement with Amgen permitted Sun’s generic cinacalcet to enter the market without liability.
Amgen Inc. v. The ACME Laboratories Ltd.
On September 11, 2019, Amgen filed a lawsuit in the Delaware District Court against The ACME Laboratories Ltd. for infringement of Amgen’s ’405 Patent.
Amgen Inc. v. Accord Healthcare, Inc.
On October 21, 2019, based on a joint request of the parties, the Delaware District Court entered judgment of infringement and validity of Amgen’s ’405 Patent and an injunction prohibiting the manufacture, use, sale, offer to sell, or importation into the United States of Accord Healthcare, Inc.’s cinacalcet product during the term of the ’405 Patent unless specifically authorized pursuant to the confidential settlement agreement.
Sensipar® Antitrust Class Actions
On July 31, 2019, the multidistrict litigation panel entered an order consolidating in the Delaware District Court the four class action lawsuits brought by plaintiffs on behalf of a putative class of direct or indirect purchasers of Sensipar® against Amgen and various entities affiliated with Teva Pharmaceutical Industries Ltd. On September 13, 2019, the plaintiffs filed amended complaints, and on October 15, 2019, Amgen filed its motion to dismiss both the direct purchaser plaintiffs’ consolidated class action complaint and the indirect purchaser end payor plaintiffs’ complaint.
Repatha® (evolocumab) Patent Litigation
Amgen Inc., et al. v. Sanofi, et al.
On August 28, 2019, the Delaware District Court ruled on the post-trial motions by Sanofi, Sanofi-Aventis U.S. LLC, Aventisub LLC (formerly doing business as Aventis Pharmaceuticals Inc.) and Regeneron Pharmaceuticals, Inc., denying their request for a new trial and their request to reverse the jury verdict that U.S. Patent Nos. 8,829,165 (the ’165 Patent) and 8,859,741 (the ’741 Patent) provide written description support for the claimed inventions. The Delaware District Court also ruled as a matter of law that claims 19 and 29 of the ’165 Patent and claim 7 of the ’741 Patent are invalid for failing to meet the enablement requirement, overturning the jury verdict. On October 23, 2019, Amgen filed a notice of appeal to the Federal Circuit Court.
Patent Disputes in the International Region
The European Patent Office’s decision on November 30, 2018 confirming the validity of Amgen’s European Patent No. 2,215,124 has been appealed to the Technical Board of Appeal and a two-day hearing is scheduled to begin on March 24, 2020.
We are also involved in and expect future involvement in additional disputes regarding our proprotein convertase subtilisin/kexin type 9 (PCSK9) patents in other jurisdictions and regions, including matters filed against us and that we have filed in the United Kingdom, Germany, France and Japan.
ENBREL (etanercept) Patent Litigation
Immunex Corporation, et al. v. Samsung Bioepis Co., Ltd.
On August 5, 2019, defendant Samsung Bioepis Co., Ltd. responded to the complaint by Immunex Corporation (Immunex, a wholly-owned subsidiary of Amgen Inc.), Amgen Manufacturing, Limited (AML) and Hoffmann-La Roche Inc., denying infringement and seeking judgment that the patents-in-suit are invalid, unenforceable, and/or not infringed.
Immunex Corporation, et al. v. Sandoz Inc., et al.
On August 9, 2019, the U.S. District Court for the District of New Jersey (the New Jersey District Court) issued its decision upholding the validity of U.S. Patent Nos. 8,063,182 and 8,163,522. On October 8, 2019, by stipulation of Immunex and AML, and Sandoz Inc., Sandoz International GmbH and Sandoz GmbH (collectively, Sandoz), the New Jersey District Court entered final judgment and a permanent injunction prohibiting Sandoz from making, using, importing, selling or offering for sale Sandoz’s etanercept product, and, on the same day, Sandoz appealed the final judgment to the Federal Circuit Court.
NEUPOGEN® (filgrastim) / Neulasta® (pegfilgrastim) Patent Litigation
Amgen Inc., et al. v. Apotex Inc., et al.
On August 27, 2019, the U.S. District Court for the Southern District of Florida granted an unopposed motion to substitute Accord BioPharma in place of defendants Apotex Inc. and Apotex Corp.
In a separate challenge at the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB), on October 4, 2019, the PTAB granted judgment adverse to Apotex Biologics, LLC, Apotex Inc., and Apotex Corp. in post-grant review proceeding on Amgen’s U.S. Patent No. 9,856,287 (the ’287 Patent). The review proceedings continue with Kashiv Biosciences, LLC (Kashiv) as the sole petitioner.
Amgen Inc., et al. v. Kashiv Biosciences, LLC, et al.
On September 16, 2019, the New Jersey District Court entered Amgen and Kashiv’s stipulation to dismiss without prejudice the causes of action directed solely to U.S. Patent No. 8,952,138 (the ’138 Patent), in light of the PTAB’s May 20, 2019 amended final written decision finding that claim 18 of the ’138 Patent was obvious.
In a separate challenge by Kashiv at the PTAB, on September 11, 2019, the PTAB instituted the inter partes review (IPR) of Amgen’s U.S. Patent Nos. 8,940,878 and 9,643,997 (the ‘997 Patent).
Amgen Inc., et al. v. Mylan Inc., et al.
The District Court for the Western District of Pennsylvania entered judgment of noninfringement of Amgen’s U.S. Patent No. 8,273,707 and the ’997 Patent on August 21, 2019, and September 17, 2019, respectively, based on a joint request of Amgen and Mylan Inc., Mylan Pharmaceuticals Inc., Mylan GmbH, and Mylan N.V., resolving the patent disputes that had been the subject of the lawsuit.
Amgen Inc., et al. v. Sandoz Inc., et al.
On September 3, 2019, the Federal Circuit Court denied Amgen’s petition for rehearing en banc in the consolidated appeal and reissued its opinion with amendment, but without disturbing its affirmance of grant of summary judgment of noninfringement in favor of Sandoz by the U.S. District Court for the Northern District of California.
Amgen Inc., et al. v. Tanvex BioPharma USA, Inc., et al.
On September 23, 2019, defendants Tanvex BioPharma USA, Inc., Tanvex BioPharma, Inc., and Tanvex Biologics Corporation responded to Amgen’s complaint, denying infringement and seeking judgment of noninfringement and invalidity of Amgen’s ’287 Patent.
Fresenius PTAB Challenge
On October 16, 2019, the PTAB denied the petition by Fresenius Kabi USA, LLC and Fresenius Kabi SwissBiosim GmbH to institute the IPR with respect to the patentability of Amgen’s ’287 Patent.
Hospira EPOGEN® (epoetin alfa) Patent Litigation
Amgen Inc., et al. v. Hospira, Inc.
On September 30, 2019, the Federal Circuit Court heard argument on the appeal by Hospira, Inc. (Hospira), a subsidiary of Pfizer, and the cross-appeal by Amgen and AML, of the Delaware District Court’s final judgment that Amgen’s U.S. Patent No. 5,856,298 is valid and infringed by Hospira, that Amgen’s U.S. Patent No. 5,756,349 is not infringed by Hospira, and awarding Amgen $70 million in damages for Hospira’s infringement.
Litigation relating to our Biosimilar Products
KANJINTITM* (trastuzumab-anns) Patent Litigation
Genentech, Inc. v. Amgen Inc.
As previously disclosed, Genentech, Inc. (Genentech) appealed the Delaware District Court’s denial of Genentech’s motion for a preliminary injunction and requested the Federal Circuit Court to enter an injunction prohibiting Amgen from continuing with its launch of KANJINTITM until final resolution of the appeal. On August 7, 2019, the Federal Circuit Court denied Genentech’s motion for an injunction pending appeal.
On September 4, 2019, Genentech filed its third amended complaint adding a demand for a jury trial and an award of damages for infringement. On September 23, 2019, the Delaware District Court ordered a stipulated dismissal with prejudice of all claims for infringement of certain asserted patents, leaving four patents asserted by Genentech in the litigation. On September 24, 2019, Amgen filed its answer to Genentech’s third amended complaint denying infringement of any valid patent claim. On September 26, 2019, the Delaware District Court ordered that a 5-day jury trial on the patent issues commence on December 9, 2019, and the trial on damages (and therefore willfulness) be tried separately at a later date, if necessary.
MVASITM (bevacizumab-awwb) Patent Litigation
Genentech, Inc. and City of Hope v. Immunex Rhode Island Corp. and Amgen Inc.
On August 16, 2019, the Federal Circuit Court denied Genentech’s motion requesting the Federal Circuit Court enter an injunction prohibiting Amgen from marketing MVASITM until final resolution of Genentech’s appeal.
Genentech, Inc. and City of Hope v. Amgen Inc.
On August 22, 2019 and October 29, 2019, by stipulation of the parties, the Delaware District Court entered judgment of noninfringement, in each instance, with respect to one of the patents asserted in the consolidated lawsuit, leaving a total of six remaining patents asserted by Genentech in the litigation.
Humira® Biosimilar Antitrust Class Actions
As previously disclosed, twelve purported class actions against Amgen, along with AbbVie Inc. and AbbVie Biotechnology Ltd. were filed in the U.S. District Court for the Northern District of Illinois (the Illinois Northern District Court). On August 9, 2019, the plaintiffs filed their consolidated complaint in the Illinois Northern District Court. On October 11, 2019, the defendants filed a joint motion to dismiss the consolidated complaint (as well as brief individual motions), challenging the legal sufficiency of the plaintiffs’ allegations to state any claim for relief under the law. No argument date has been set and plaintiffs’ response to the motions is due on November 19, 2019.
* Registered in the U.S.