NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(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 months ended March 31, 2022 and 2021, 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, 2021.
Principles of consolidation
The condensed consolidated financial statements include the accounts of Amgen as well as its majority-owned subsidiaries. In determining whether we are the primary beneficiary of a variable interest entity, we consider whether we have both the power to direct activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses of or the right to receive benefits from the entity that could potentially be significant to that entity. We do not have any significant interests in any variable interest entities of which we are the primary beneficiary. All material intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with 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 $8.9 billion and $8.8 billion as of March 31, 2022 and December 31, 2021, respectively.
Recent accounting pronouncements
In March 2020, the FASB issued a new accounting standard to ease the financial reporting burdens caused by the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, commonly referred to as reference rate reform. The new standard provides temporary optional expedients and exceptions to current GAAP guidance on contract modifications and hedge accounting. Specifically, a modification to transition to an alternative reference rate is treated as an event that does not require contract remeasurement or reassessment of a previous accounting treatment. Moreover, for all types of hedging relationships, an entity is permitted to change the reference rate without having to dedesignate the hedging relationship. The standard is generally effective for all contract modifications made and hedging relationships evaluated through December 31, 2022. In January 2021, the FASB issued a new accounting standard that expanded the scope of the original March 2020 standard to include derivative instruments on discounting transactions. We do not expect the two standards to have a material impact on our condensed consolidated financial statements.
In November 2021, the FASB issued a new accounting standard around the recognition and measurement of contract assets and contract liabilities from revenue contracts with customers acquired in a business combination. The new standard clarifies that contract assets and contract liabilities acquired in a business combination from an acquiree should initially be recognized by applying revenue recognition principles and not at fair value. The standard is effective for interim and annual periods beginning on January 1, 2023, and early adoption is permitted. The impact of this standard will depend on the facts and circumstances of future transactions.
2. Acquisitions
Teneobio, Inc.
On October 19, 2021, we acquired all of the outstanding stock of Teneobio, a privately held, clinical-stage biotechnology company developing a new class of biologics called human heavy-chain antibodies, which are single-chain antibodies composed of the human heavy-chain domain. The transaction, which was accounted for as a business combination, includes Teneobio’s proprietary bispecific and multispecific antibody technologies, which complement Amgen’s existing antibody capabilities and BiTE® platform and will enable significant acceleration and efficiency in the discovery and development of new molecules to treat diseases across Amgen’s core therapeutic areas. Upon its acquisition, Teneobio became a wholly owned subsidiary of Amgen, and its operations have been included in our condensed consolidated financial statements commencing on the acquisition date.
Measurement period adjustments for the three months ended March 31, 2022, included changes to the purchase price allocation and total consideration, resulting in a net increase of $22 million to goodwill. The measurement period adjustments resulted primarily from valuation inputs pertaining to certain acquired assets based on facts and circumstances that existed as of the acquisition date and did not result from events subsequent to the acquisition date. These adjustments did not have a significant impact on Amgen’s results of operations for the three months ended March 31, 2022, and would not have had a significant impact on prior-period results if these adjustments had been made as of the acquisition date. The following table summarizes the total consideration and allocated acquisition date fair values of assets acquired and liabilities assumed, inclusive of measurement period adjustments (in millions):
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| | Amounts |
Cash purchase price | | $ | 993 | |
Contingent consideration | | 299 | |
Total consideration | | $ | 1,292 | |
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Cash and cash equivalents | | $ | 100 | |
IPR&D | | 991 | |
Finite-lived intangible asset – R&D technology rights | | 115 | |
Finite-lived intangible assets – licensing rights | | 41 | |
Goodwill | | 273 | |
Other assets, net | | 16 | |
Deferred tax liability | | (244) | |
Total assets acquired, net | | $ | 1,292 | |
The consideration for this transaction comprised (i) an upfront cash payment of $993 million, which included a working-capital adjustment, and (ii) future contingent milestone payments to Teneobio’s former equity holders of up to $1.6 billion in cash, based on the achievement of various development and regulatory milestones with regard to the leading asset (AMG 340, formerly TNB-585) and to various development milestones for other drug candidates. The estimated fair values of the contingent consideration obligations aggregated $299 million as of the acquisition date and were determined using a probability-weighted expected return methodology. The assumptions in this method include the probability of achieving the milestones and the expected payment dates, with such amounts discounted to present value based on our pre-tax cost of debt. See Note 11, Fair value measurement, for information regarding the estimated fair value of these obligations as of March 31, 2022.
The estimated fair values of acquired IPR&D assets totaled $991 million, of which $784 million relates to AMG 340, that is in a phase 1 clinical trial for the treatment of mCRPC, and the balance relates to four separate preclinical oncology programs. The R&D technology rights of $115 million relate to Teneobio’s proprietary bispecific and multispecific antibody technologies and will be amortized over 10 years using the straight-line method. Teneobio has also licensed its technology and certain identified targets to various third parties, representing contractual agreements valued at $41 million. The estimated fair values for these intangible assets were determined using a multi-period excess earnings income approach that discounts expected future cash flows to present value by applying a discount rate that represents the estimated rate that market participants would use to value the intangible assets. The projected cash flows were based on certain assumptions attributable to the respective intangible asset, including estimates of future revenues and expenses, the time and resources needed to complete development and the probabilities of obtaining marketing approval from the FDA and other regulatory agencies.
A deferred tax liability of $244 million was recognized on the temporary differences related to the book bases and tax bases of the acquired identifiable assets and assumed liabilities, primarily driven by the intangible assets acquired.
The excess of the acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed of $273 million was recorded as goodwill, which is not deductible for tax purposes. The goodwill value represents expected synergies from both AMG 340 and the technologies acquired.
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, liabilities assumed and tax-related items as we obtain additional information during the measurement period of up to one year from the acquisition date.
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. The majority of ROW revenues relates to products sold in Europe.
Revenues were as follows (in millions):
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| | Three months ended March 31, |
| | 2022 | | 2021 |
| | U.S. | | ROW | | Total | | U.S. | | ROW | | Total |
Enbrel | | $ | 843 | | | $ | 19 | | | $ | 862 | | | $ | 894 | | | $ | 30 | | | $ | 924 | |
Prolia | | 582 | | | 270 | | | 852 | | | 501 | | | 257 | | | 758 | |
XGEVA | | 368 | | | 134 | | | 502 | | | 334 | | | 134 | | | 468 | |
Otezla | | 350 | | | 101 | | | 451 | | | 366 | | | 110 | | | 476 | |
Aranesp | | 137 | | | 221 | | | 358 | | | 125 | | | 230 | | | 355 | |
Neulasta | | 304 | | | 44 | | | 348 | | | 421 | | | 61 | | | 482 | |
Repatha | | 165 | | | 164 | | | 329 | | | 139 | | | 147 | | | 286 | |
KYPROLIS | | 196 | | | 91 | | | 287 | | | 159 | | | 92 | | | 251 | |
Nplate | | 156 | | | 110 | | | 266 | | | 112 | | | 115 | | | 227 | |
Other products | | 936 | | | 540 | | | 1,476 | | | 852 | | | 513 | | | 1,365 | |
Total product sales(1) | | $ | 4,037 | | | $ | 1,694 | | | 5,731 | | | $ | 3,903 | | | $ | 1,689 | | | 5,592 | |
Other revenues | | | | | | 507 | | | | | | | 309 | |
Total revenues | | | | | | $ | 6,238 | | | | | | | $ | 5,901 | |
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(1) Hedging gains and losses, which are included in product sales, were not material for the three months ended March 31, 2022 and 2021.
4. Income taxes
The effective tax rates for the three months ended March 31, 2022 and 2021, were 11.9% and 11.4%, respectively.
The increase in our effective tax rate for the three months ended March 31, 2022, was primarily due to current year net unfavorable items compared to last year, offset by changes in earnings mix. 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 treated as a foreign jurisdiction for U.S. tax purposes, that are subject to a tax incentive grant through 2035. In addition, the Company’s operations conducted in Singapore are subject to a tax incentive grant through 2034. These foreign earnings are also 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, in 2022 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 can and have arisen with tax authorities involving issues regarding 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. Tax authorities (including the IRS) are becoming more aggressive and are particularly focused on such matters.
In 2017, we received an RAR and a modified RAR from the IRS for the years 2010, 2011 and 2012 proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. We disagreed with the proposed adjustments and calculations and pursued resolution with the IRS appeals office but were unable to reach resolution. In July 2021, we filed a petition in the U.S. Tax Court to contest two duplicate Statutory Notices of Deficiency (Notices) for 2010, 2011 and 2012 that we received in May and July 2021, which seek to increase our U.S. taxable income for 2010-2012 by an amount that would result in additional federal tax of approximately $3.6 billion plus interest. Any additional tax that could be imposed for 2010-2012 would be reduced by up to approximately $900 million of repatriation tax previously accrued on our foreign earnings.
In 2020, we received an RAR and a modified RAR from the IRS for the years 2013, 2014 and 2015, also proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico similar to those proposed for the years 2010, 2011 and 2012. We disagreed with the proposed adjustments and calculations and pursued resolution with the IRS appeals office but were unable to reach resolution. In April 2022, we received a Notice that seeks to increase our U.S. taxable income for 2013-2015 by an amount that would result in additional federal tax of approximately $5.1 billion, plus interest. In addition, the Notice asserts penalties of approximately $2.0 billion. Any additional tax that could be imposed for 2013-2015 would be reduced by up to approximately $2.2 billion of repatriation tax previously accrued on our foreign earnings.
We firmly believe that the IRS positions set forth in the 2010-2012 and 2013-2015 Notices are without merit. We are contesting the 2010-2012 Notices through the judicial process, and we expect to file a Petition in the U.S. Tax Court to contest the 2013-2015 Notice through the judicial process. We will seek consolidation of the two periods into one case in Tax Court.
We are also currently under examination by the IRS for the years 2016, 2017 and 2018 and by a number of state and foreign tax jurisdictions.
Final resolution of these complex matters is not likely within the next 12 months. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, application of the tax law to our facts and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes and uncertain resolution of these matters, the ultimate outcome of any tax matters may result in payments substantially greater than amounts accrued and could have a material adverse impact on our condensed consolidated financial statements.
We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009.
See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Income Taxes for further discussion and Part II, Item 1A, Risk Factors—The adoption and interpretation of new tax legislation or exposure to additional tax liabilities could affect our profitability.
During the three months ended March 31, 2022, the gross amounts of our UTBs increased $45 million, as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2022, if recognized, would affect our effective tax rate.
5. Earnings per share
The computation of basic 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 primarily include 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 March 31, | | |
| 2022 | | 2021 | | | | |
Income (Numerator): | | | | | | | |
Net income for basic and diluted EPS | $ | 1,476 | | | $ | 1,646 | | | | | |
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Shares (Denominator): | | | | | | | |
Weighted-average shares for basic EPS | 548 | | | 577 | | | | | |
Effect of dilutive securities | 3 | | | 4 | | | | | |
Weighted-average shares for diluted EPS | 551 | | | 581 | | | | | |
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Basic EPS | $ | 2.69 | | | $ | 2.85 | | | | | |
Diluted EPS | $ | 2.68 | | | $ | 2.83 | | | | | |
For the three months ended March 31, 2022 and 2021, 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):
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Types of securities as of March 31, 2022 | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair values |
U.S. Treasury notes | | $ | 16 | | | $ | — | | | $ | — | | | $ | 16 | |
U.S. Treasury bills | | — | | | — | | | — | | | — | |
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Money market mutual funds | | 5,837 | | | — | | | — | | | 5,837 | |
Other short-term interest-bearing securities | | — | | | — | | | — | | | — | |
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Total interest-bearing securities | | $ | 5,853 | | | $ | — | | | $ | — | | | $ | 5,853 | |
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Types of securities as of December 31, 2021 | | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair values |
U.S. Treasury notes | | $ | 47 | | | $ | — | | | $ | — | | | $ | 47 | |
U.S. Treasury bills | | 1,400 | | | — | | | — | | | 1,400 | |
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Money market mutual funds | | 5,856 | | | — | | | — | | | 5,856 | |
Other short-term interest-bearing securities | | 1 | | | — | | | — | | | 1 | |
Total interest-bearing securities | | $ | 7,304 | | | $ | — | | | $ | — | | | $ | 7,304 | |
The fair values of interest-bearing securities by location in the Condensed Consolidated Balance Sheets were as follows (in millions):
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Condensed Consolidated Balance Sheets locations | | March 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | | $ | 5,837 | | | $ | 7,256 | |
Marketable securities | | 16 | | | 48 | |
Total interest-bearing securities | | $ | 5,853 | | | $ | 7,304 | |
Cash and cash equivalents in the above table excludes bank account cash of $691 million and $733 million as of March 31, 2022 and December 31, 2021, respectively.
The fair values of available-for-sale investments by contractual maturity were as follows (in millions):
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Contractual maturities | | March 31, 2022 | | December 31, 2021 |
Maturing in one year or less | | $ | 5,853 | | | $ | 7,304 | |
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Total available-for-sale investments | | $ | 5,853 | | | $ | 7,304 | |
For the three months ended March 31, 2022 and 2021, realized gains and losses on interest-bearing securities were not material. Realized gains and losses on interest-bearing securities are recorded in Other (expense) income, net, in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific-identification method.
The primary objective of our investment portfolio is to maintain 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 investment-grade credit ratings, and it places restrictions on maturities and concentration by asset class and issuer.
Equity securities
We held investments in equity securities with readily determinable fair values (publicly traded securities) of $473 million and $611 million as of March 31, 2022 and December 31, 2021, respectively, which are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. For the three months ended March 31, 2022 and 2021, net unrealized losses on publicly traded securities were $170 million and $56 million, respectively. Realized gains and losses on sales of publicly traded securities for the three months ended March 31, 2022 and 2021, were not material.
We held investments of $261 million and $262 million in equity securities without readily determinable fair values as of March 31, 2022 and December 31, 2021, respectively, which are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. For the three months ended March 31, 2022 and 2021, upward adjustments and downward adjustments on these securities were not material. Adjustments were based on observable price transactions.
Equity method investments
BeiGene, Ltd.
As of March 31, 2022 and December 31, 2021, we had an ownership interest of approximately 18.4% in BeiGene, which is included in Other noncurrent assets in the Condensed Consolidated Balance Sheets and accounted for under the equity method of accounting. We amortize the difference between the fair value of equity securities acquired and our proportionate share of the carrying value of the underlying net assets of BeiGene over the useful lives of the assets that gave rise to this basis difference. This amortization and our share of the results of operations of BeiGene are included in Other (expense) income, net, in the Condensed Consolidated Statements of Income one quarter in arrears.
During the three months ended March 31, 2022 and 2021, the carrying value of our equity investment was adjusted by our share of BeiGene’s net losses of $108 million and $97 million, respectively, and amortization of the basis difference of $47 million and $42 million, respectively. As of March 31, 2022 and December 31, 2021, the carrying values of our investment in BeiGene totaled $2.6 billion and $2.8 billion, respectively, and the fair values of the investment totaled $3.6 billion and $5.1 billion, respectively. As of March 31, 2022, we believe the carrying value of our equity investment in BeiGene is fully recoverable.
Neumora Therapeutics, Inc.
On September 30, 2021, we acquired approximately 25.9% ownership interest in Neumora, a privately held company, for $257 million, which is included in Other noncurrent assets in the Condensed Consolidated Balance Sheets, in exchange for a $100 million cash payment and $157 million in noncash consideration primarily related to future services. Although our equity investment provides us with the ability to exercise significant influence over Neumora, we have elected the fair value option to account for our equity investment. Under the fair value option, changes in the fair value of the investment are recognized through earnings each reporting period. We believe the fair value option best reflects the economics of the underlying transaction. As of March 31, 2022 and December 31, 2021, our ownership interest in Neumora was 25.8% and 25.9%, respectively, and the fair values of our investment were $170 million and $220 million, respectively. Accordingly, during the three months ended March 31, 2022, we recognized a loss of $50 million for the reduction in fair value of our investment in Other (expense) income, net, in the Condensed Consolidated Statements of Income. For information on determination of fair values, see Note 11, Fair value measurement.
Limited partnerships
We held limited partnership investments of $403 million and $573 million as of March 31, 2022 and December 31, 2021, respectively, which are included in Other noncurrent assets in the Condensed Consolidated Balance Sheets. These investments, primarily investment funds of early-stage biotechnology companies, are accounted for by using the equity method of accounting and are measured by using our proportionate share of the net asset values of the underlying investments held by the limited partnerships as a practical expedient. These investments are typically redeemable only through distributions upon liquidation of the underlying assets. As of March 31, 2022, unfunded additional commitments to be made for these investments during the next several years were $182 million. During the three months ended March 31, 2022 and 2021, we recognized net losses of $160 million and net gains of $208 million, respectively, in Other (expense) income, net in the Condensed Consolidated Statements of Income on these investments.
7. Inventories
Inventories consisted of the following (in millions):
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| March 31, 2022 | | December 31, 2021 |
Raw materials | $ | 750 | | | $ | 647 | |
Work in process | 2,582 | | | 2,367 | |
Finished goods | 1,079 | | | 1,072 | |
Total inventories | $ | 4,411 | | | $ | 4,086 | |
8. Goodwill and other intangible assets
Goodwill
The change in the carrying amount of goodwill was as follows (in millions):
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| Three months ended March 31, 2022 |
Beginning balance | $ | 14,890 | |
Goodwill resulting from acquisition of a business(1) | 22 | |
Currency translation adjustment | (15) | |
Ending balance | $ | 14,897 | |
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(1) Composed of adjustments to goodwill resulting from changes to the acquisition date fair values of net assets acquired in the acquisition of Teneobio (see Note 2, Acquisitions).
Other intangible assets
Other intangible assets consisted of the following (in millions):
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| March 31, 2022 | | December 31, 2021 |
| 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 | $ | 25,550 | | | $ | (13,316) | | | $ | 12,234 | | | $ | 25,561 | | | $ | (12,769) | | | $ | 12,792 | |
Licensing rights | 3,864 | | | (3,013) | | | 851 | | | 3,807 | | | (2,973) | | | 834 | |
Marketing-related rights | 1,350 | | | (1,129) | | | 221 | | | 1,354 | | | (1,112) | | | 242 | |
Research and development technology rights | 1,386 | | | (1,146) | | | 240 | | | 1,377 | | | (1,133) | | | 244 | |
Total finite-lived intangible assets | 32,150 | | | (18,604) | | | 13,546 | | | 32,099 | | | (17,987) | | | 14,112 | |
Indefinite-lived intangible assets: | | | | | | | | | | | |
In-process research and development | 1,021 | | | — | | | 1,021 | | | 1,070 | | | — | | | 1,070 | |
Total other intangible assets | $ | 33,171 | | | $ | (18,604) | | | $ | 14,567 | | | $ | 33,169 | | | $ | (17,987) | | | $ | 15,182 | |
Developed-product-technology rights consists of rights related to marketed products. Licensing rights primarily consists of contractual rights to receive future milestone, royalty and profit-sharing payments; capitalized payments to third parties for milestones related to regulatory approvals to commercialize products; and upfront payments associated with royalty obligations for marketed products. Marketing-related rights primarily consists of rights related to the sale and distribution of marketed products. R&D technology rights pertains to technologies used in R&D that have alternative future uses.
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 March 31, 2022 and 2021, we recognized amortization associated with our finite-lived intangible assets of $637 million and $654 million, respectively. Amortization of intangible assets is primarily included in Cost of sales in the Condensed Consolidated Statements of Income. The total estimated amortization for our finite-lived intangible assets for the remaining nine months ending December 31, 2022, and the years ending December 31, 2023, 2024, 2025, 2026 and 2027, are $1.9 billion, $2.5 billion, $2.5 billion, $2.4 billion, $1.7 billion and $1.8 billion, respectively.
9. Financing arrangements
Our borrowings consisted of the following (in millions):
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| March 31, 2022 | | December 31, 2021 |
0.41% CHF700 million bonds due 2023 (0.41% 2023 Swiss franc Bonds) | $ | 759 | | | $ | 767 | |
2.25% notes due 2023 (2.25% 2023 Notes) | 750 | | | 750 | |
3.625% notes due 2024 (3.625% 2024 Notes) | 1,400 | | | 1,400 | |
1.90% notes due 2025 (1.90% 2025 Notes) | 500 | | | 500 | |
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) | 830 | | | 853 | |
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) | 624 | | | 643 | |
2.20% notes due 2027 (2.20% 2027 Notes) | 1,750 | | | 1,750 | |
3.20% notes due 2027 (3.20% 2027 Notes) | 1,000 | | | 1,000 | |
1.65% notes due 2028 (1.65% 2028 Notes) | 1,250 | | | 1,250 | |
3.00% notes due 2029 (3.00% 2029 Notes) | 750 | | | — | |
4.00% £700 million notes due 2029 (4.00% 2029 pound sterling Notes) | 920 | | | 947 | |
2.45% notes due 2030 (2.45% 2030 Notes) | 1,250 | | | 1,250 | |
2.30% notes due 2031 (2.30% 2031 Notes) | 1,250 | | | 1,250 | |
2.00% notes due 2032 (2.00% 2032 Notes) | 1,250 | | | 1,250 | |
3.35% notes due 2032 (3.35% 2032 Notes) | 1,000 | | | — | |
6.375% notes due 2037 (6.375% 2037 Notes) | 478 | | | 478 | |
6.90% notes due 2038 (6.90% 2038 Notes) | 254 | | | 254 | |
6.40% notes due 2039 (6.40% 2039 Notes) | 333 | | | 333 | |
3.15% notes due 2040 (3.15% 2040 Notes) | 2,000 | | | 2,000 | |
5.75% notes due 2040 (5.75% 2040 Notes) | 373 | | | 373 | |
2.80% notes due 2041 (2.80% 2041 Notes) | 1,150 | | | 1,150 | |
4.95% notes due 2041 (4.95% 2041 Notes) | 600 | | | 600 | |
5.15% notes due 2041 (5.15% 2041 Notes) | 729 | | | 729 | |
5.65% notes due 2042 (5.65% 2042 Notes) | 415 | | | 415 | |
5.375% notes due 2043 (5.375% 2043 Notes) | 185 | | | 185 | |
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 | |
3.375% notes due 2050 (3.375% 2050 Notes) | 2,250 | | | 2,250 | |
4.663% notes due 2051 (4.663% 2051 Notes) | 3,541 | | | 3,541 | |
3.00% notes due 2052 (3.00% 2052 Notes) | 1,350 | | | 1,350 | |
4.20% notes due 2052 (4.20% 2052 Notes) | 1,000 | | | — | |
2.77% notes due 2053 (2.77% 2053 Notes) | 940 | | | 940 | |
4.40% notes due 2062 (4.40% 2062 Notes) | 1,250 | | | — | |
Other notes due 2097 | 100 | | | 100 | |
Unamortized bond discounts, premiums and issuance costs, net | (1,253) | | | (1,213) | |
Fair value adjustments | (53) | | | 284 | |
Other | 14 | | | 15 | |
Total carrying value of debt | 36,854 | | | 33,309 | |
Less current portion | (844) | | | (87) | |
Total long-term debt | $ | 36,010 | | | $ | 33,222 | |
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, the 4.663% 2051 Notes and the 2.77% 2053 Notes, which have effective interest rates of 6.3%, 5.6% and 5.2%, respectively.
During the three months ended March 31, 2022, we issued $4.0 billion of debt consisting of $750 million of the 3.00% 2029 Notes, $1.0 billion of the 3.35% 2032 Notes, $1.0 billion of the 4.20% 2052 Notes and $1.25 billion of the 4.40% 2062 Notes. The 3.00% 2029 Notes were issued to finance eligible projects that meet specified criteria to benefit the environment. In the event of a change-in-control triggering event, as defined in the terms of the notes, we may be required to purchase all or a portion of these notes at a price equal to 101% of the principal amount of the notes plus accrued and unpaid interest. In addition, these notes may be redeemed at any time at our option, in whole or in part, at the principal amount of the notes being redeemed plus accrued and unpaid interest and a make-whole amount, which are defined by the terms of the notes. The notes may be redeemed without payment of make-whole amounts if redemption occurs during a specified period of time immediately prior to the maturing of the notes. Such time periods range from two months to six months prior to maturity.
10. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
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| 2022 | | 2021 |
| Shares | | Dollars | | Shares | | Dollars |
First quarter | 24.6 | | | $ | 5,410 | | | 3.7 | | | $ | 865 | |
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On February 24, 2022, the Company entered into ASR agreements with three third-party financial institutions (Dealers). Under the ASR agreements, the Company made payments in an aggregate amount of $6.0 billion on February 25, 2022, to the Dealers and received and retired an initial 23.3 million shares of the Company’s common stock from the Dealers. The payments were recorded as reductions to shareholders’ equity, consisting of a $5.1 billion increase to accumulated deficit, which reflects the value of the initial shares received, and a $0.9 billion decrease in additional paid-in capital, which reflects the value of the stock that remains to be delivered by the Dealers pending final settlement. The final number of shares to be repurchased by the Company will be based on the daily volume-weighted average stock price of the Company’s common stock during the terms of the ASR agreements, less a discount and subject to adjustments pursuant to the terms and conditions of the ASR agreements. At settlement, under certain circumstances, one or more of the Dealers may be required to deliver additional shares of common stock to the Company, or under certain circumstances, the Company may be required to deliver shares of common stock or to make a cash payment, at its election, to a Dealer. The final settlement under the ASR agreements is scheduled to occur in the third quarter of 2022, subject to an earlier termination under certain limited circumstances, as set forth in the ASR agreements. In total, we repurchased 24.6 million shares of common stock in the first quarter of 2022, including shares received under the ASR agreements.
As of March 31, 2022, $4.6 billion of authorization remained available under our stock repurchase program.
Dividends
In March 2022, the Board of Directors declared a quarterly cash dividend of $1.94 per share, which will be paid in June 2022. In December 2021, the Board of Directors declared a quarterly cash dividend of $1.94 per share, which was paid in March 2022.
Accumulated other comprehensive income (loss)
The components of AOCI were as follows (in millions):
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| Foreign currency translation | | Cash flow hedges | | Available-for-sale securities | | Other | | AOCI |
Balance as of December 31, 2021 | $ | (844) | | | $ | 61 | | | $ | — | | | $ | (13) | | | $ | (796) | |
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Foreign currency translation adjustments | (51) | | | — | | | — | | | — | | | (51) | |
Unrealized gains | — | | | 56 | | | — | | | — | | | 56 | |
Reclassification adjustments to income | — | | | 51 | | | — | | | — | | | 51 | |
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Income taxes | — | | | (23) | | | — | | | — | | | (23) | |
Balance as of March 31, 2022 | $ | (895) | | | $ | 145 | | | $ | — | | | $ | (13) | | | $ | (763) | |
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Reclassifications out of AOCI and into earnings, including related income tax expenses, were as follows (in millions):
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| | Three months ended March 31, | | |
Components of AOCI | | 2022 | | 2021 | | Condensed Consolidated Statements of Income locations |
Cash flow hedges: | | | | | | |
Foreign currency contract gains (losses) | | $ | 27 | | | $ | (1) | | | Product sales |
Cross-currency swap contract losses | | (78) | | | (132) | | | Other (expense) income, net |
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| | (51) | | | (133) | | | Income before income taxes |
| | 11 | | | 28 | | | Provision for income taxes |
| | $ | (40) | | | $ | (105) | | | Net income |
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11. 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:
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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 different 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):
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| | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | |
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Fair value measurement as of March 31, 2022, using: | | | | | Total |
Assets: | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
U.S. Treasury notes | | $ | 16 | | | $ | — | | | $ | — | | | $ | 16 | |
U.S. Treasury bills | | — | | | — | | | — | | | — | |
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Money market mutual funds | | 5,837 | | | — | | | — | | | 5,837 | |
Other short-term interest-bearing securities | | — | | | — | | | — | | | — | |
Equity securities | | 473 | | | — | | | 170 | | | 643 | |
Derivatives: | | | | | | | | |
Foreign currency contracts | | — | | | 235 | | | — | | | 235 | |
Cross-currency swap contracts | | — | | | 65 | | | — | | | 65 | |
Interest rate swap contracts | | — | | | — | | | — | | | — | |
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Total assets | | $ | 6,326 | | | $ | 300 | | | $ | 170 | | | $ | 6,796 | |
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Liabilities: | | | | | | | | |
Derivatives: | | | | | | | | |
Foreign currency contracts | | $ | — | | | $ | 51 | | | $ | — | | | $ | 51 | |
Cross-currency swap contracts | | — | | | 358 | | | — | | | 358 | |
Interest rate swap contracts | | — | | | 456 | | | — | | | 456 | |
Contingent consideration obligations | | — | | | — | | | 330 | | | 330 | |
Total liabilities | | $ | — | | | $ | 865 | | | $ | 330 | | | $ | 1,195 | |
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| | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | |
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Fair value measurement as of December 31, 2021, using: | | | | | Total |
Assets: | | | | | | | | |
Available-for-sale securities: | | | | | | | | |
U.S. Treasury notes | | $ | 47 | | | $ | — | | | $ | — | | | $ | 47 | |
U.S. Treasury bills | | 1,400 | | | — | | | — | | | 1,400 | |
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Money market mutual funds | | 5,856 | | | — | | | — | | | 5,856 | |
Other short-term interest-bearing securities | | — | | | 1 | | | — | | | 1 | |
Equity securities | | 611 | | | — | | | 220 | | | 831 | |
Derivatives: | | | | | | | | |
Foreign currency contracts | | — | | | 183 | | | — | | | 183 | |
Cross-currency swap contracts | | — | | | 66 | | | — | | | 66 | |
Interest rate swap contracts | | — | | | 16 | | | — | | | 16 | |
Total assets | | $ | 7,914 | | | $ | 266 | | | $ | 220 | | | $ | 8,400 | |
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Liabilities: | | | | | | | | |
Derivatives: | | | | | | | | |
Foreign currency contracts | | $ | — | | | $ | 39 | | | $ | — | | | $ | 39 | |
Cross-currency swap contracts | | — | | | 339 | | | — | | | 339 | |
Interest rate swap contracts | | — | | | 156 | | | — | | | 156 | |
Contingent consideration obligations | | — | | | — | | | 342 | | | 342 | |
Total liabilities | | $ | — | | | $ | 534 | | | $ | 342 | | | $ | 876 | |
Interest-bearing and equity securities
The fair values of our U.S. Treasury securities, money market mutual funds and equity investments in publicly traded securities are based on quoted market prices in active markets, with no valuation adjustment. The fair value of equity securities without readily determinable fair values are initially valued at the transaction price and subsequently valued based upon a combination of market performance and publicly available market information for similar companies that have actively traded equity securities.
Derivatives
All of our foreign currency forward 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, 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 12, 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 12, 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 12, Derivative instruments.
Contingent consideration obligations
As a result of our business acquisitions, we have incurred contingent consideration obligations as discussed below. 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. The inputs include, as applicable, estimated probabilities and the timing of achieving specified development, regulatory and commercial milestones as well as estimated annual sales. Significant changes that increase or decrease the probabilities of achieving the related development, regulatory and commercial events or that shorten or lengthen the time required to achieve such events or that increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of the obligations, as applicable. 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 were as follows (in millions):
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| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Beginning balance | | $ | 342 | | | $ | 33 | |
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Payments | | (2) | | | (1) | |
Net changes in valuations | | (10) | | | 7 | |
Ending balance | | $ | 330 | | | $ | 39 | |
As of March 31, 2022 and December 31, 2021, our contingent consideration obligations are primarily the result of our acquisition of Teneobio in October 2021, which obligates us to pay the former shareholders up to $1.6 billion upon achieving separate development and regulatory milestones with regard to various R&D programs. See Note 2, Acquisitions.
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 March 31, 2022 and December 31, 2021, the aggregate fair values of our borrowings were $38.4 billion and $37.9 billion, respectively, and the carrying values were $36.9 billion and $33.3 billion, respectively.
During the three months ended March 31, 2022 and 2021, there were no material remeasurements to the fair values of assets and liabilities that are not measured at fair value on a recurring basis.
Investment in BeiGene
We estimated the fair value of our investment in BeiGene by using Level 1 inputs. As of March 31, 2022 and December 31, 2021, the fair values were $3.6 billion and $5.1 billion, and the carrying values were $2.6 billion and $2.8 billion, respectively.
During the three months ended March 31, 2022 and 2021, 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.
12. 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, 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 primarily associated 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 partially offset 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 contracts to hedge a portion of our projected international product sales up to a maximum of three years into the future; and at any given point in time, a higher percentage of nearer-term projected product sales are being hedged than in successive periods.
As of March 31, 2022 and December 31, 2021, we had outstanding foreign currency forward contracts with aggregate notional amounts of $5.6 billion and $5.7 billion, respectively. We have designated these foreign currency forward 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 Other (expense) 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 March 31, 2022, were as follows (notional amounts in millions):
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| | Foreign currency | | U.S. dollars |
Hedged notes | | Notional amounts | | Interest rates | | Notional amounts | | Interest rates |
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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 | % |
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 three months ended March 31, 2022, 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):
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| | Three months ended March 31, | | |
Derivatives in cash flow hedging relationships | | 2022 | | 2021 | | | | |
Foreign currency contracts | | $ | 78 | | | $ | 183 | | | | | |
Cross-currency swap contracts | | (22) | | | (75) | | | | | |
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Total unrealized gains | | $ | 56 | | | $ | 108 | | | | | |
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 both March 31, 2022 and December 31, 2021, we had interest rate swap contracts with aggregate notional amounts of $6.7 billion 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):
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| | 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 | | March 31, 2022 | | December 31, 2021 | | March 31, 2022 | | December 31, 2021 |
Current portion of long-term debt | | $ | 83 | | | $ | 85 | | | $ | 83 | | | $ | 85 | |
Long-term debt | | $ | 6,395 | | | $ | 6,729 | | | $ | (136) | | | $ | 199 | |
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(1) Current portion of long-term debt includes $83 million and $85 million of carrying value with discontinued hedging relationships as of March 31, 2022 and December 31, 2021, respectively. Long-term debt includes $419 million and $440 million of carrying value with discontinued hedging relationships as of March 31, 2022 and December 31, 2021, respectively.
(2) Current portion of long-term debt includes $83 million and $85 million of hedging adjustments on discontinued hedging relationships as of March 31, 2022 and December 31, 2021, respectively. Long-term debt includes $319 million and $340 million of hedging adjustments on discontinued hedging relationships as of March 31, 2022 and December 31, 2021, 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):
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| | Three months ended March 31, 2022 | | |
| | Product sales | | Other (expense) income, net | | Interest expense, net | | | | | | |
Total amounts recorded in income and (expense) line items presented in the Condensed Consolidated Statements of Income | | $ | 5,731 | | | $ | (530) | | | $ | (295) | | | | | | | |
The effects of cash flow and fair value hedging: | | | | | | | | | | | | |
Gains (losses) on cash flow hedging relationships reclassified out of AOCI: | | | | | | | | | | | | |
Foreign currency contracts | | $ | 27 | | | $ | — | | | $ | — | | | | | | | |
Cross-currency swap contracts | | $ | — | | | $ | (78) | | | $ | — | | | | | | | |
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Gains (losses) on fair value hedging relationships—interest rate swap agreements: | | | | | | | | | | | | |
Hedged items(1) | | $ | — | | | $ | — | | | $ | 337 | | | | | | | |
Derivatives designated as hedging instruments | | $ | — | | | $ | — | | | $ | (315) | | | | | | | |
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| | Three months ended March 31, 2021 | | |
| | Product sales | | Other (expense) income, net | | Interest expense, net | | | | | | |
Total amounts recorded in income and (expense) line items presented in the Condensed Consolidated Statements of Income | | $ | 5,592 | | | $ | 13 | | | $ | (285) | | | | | | | |
The effects of cash flow and fair value hedging: | | | | | | | | | | | | |
Losses on cash flow hedging relationships reclassified out of AOCI: | | | | | | | | | | | | |
Foreign currency contracts | | $ | (1) | | | $ | — | | | $ | — | | | | | | | |
Cross-currency swap contracts | | $ | — | | | $ | (132) | | | $ | — | | | | | | | |
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Gains (losses) on fair value hedging relationships—interest rate swap agreements: | | | | | | | | | | | | |
Hedged items(1) | | $ | — | | | $ | — | | | $ | 175 | | | | | | | |
Derivatives designated as hedging instruments | | $ | — | | | $ | — | | | $ | (152) | | | | | | | |
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(1) Gains on hedged items do not exactly offset losses 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 and the recognition of gains on terminated hedges when the corresponding hedged item was paid down in the period.
No portions of our cash flow hedge contracts were excluded from the assessment of hedge effectiveness. As of March 31, 2022, we expected to reclassify $120 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 March 31, 2022 and December 31, 2021, the total notional amounts of these foreign currency forward contracts were $655 million and $680 million, respectively. Gains and losses recognized in earnings for our derivative instruments not designated as hedging instruments were not material for the three months ended March 31, 2022 and 2021.
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
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| | Derivative assets | | Derivative liabilities |
March 31, 2022 | | 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 noncurrent assets | | $ | 235 | | | Accrued liabilities/ Other noncurrent liabilities | | $ | 51 | |
Cross-currency swap contracts | | Other current assets/ Other noncurrent assets | | 65 | | | Accrued liabilities/ Other noncurrent liabilities | | 358 | |
Interest rate swap contracts | | Other current assets/ Other noncurrent assets | | — | | | Accrued liabilities/ Other noncurrent liabilities | | 456 | |
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Total derivatives designated as hedging instruments | | | | $ | 300 | | | | | $ | 865 | |
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| | Derivative assets | | Derivative liabilities |
December 31, 2021 | | 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 noncurrent assets | | $ | 183 | | | Accrued liabilities/ Other noncurrent liabilities | | $ | 39 | |
Cross-currency swap contracts | | Other current assets/ Other noncurrent assets | | 66 | | | Accrued liabilities/ Other noncurrent liabilities | | 339 | |
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Interest rate swap contracts | | Other current assets/ Other noncurrent assets | | 16 | | | Accrued liabilities/ Other noncurrent liabilities | | 156 | |
Total derivatives designated as hedging instruments | | | | $ | 265 | | | | | $ | 534 | |
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Our derivative contracts that were in liability positions as of March 31, 2022, 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.
13. 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, 2021, 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; and in Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
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; and in Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021, 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; and in Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021, 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:
Repatha Patent Litigation
Amgen Inc., et al. v. Sanofi, et al.
On March 28, 2022, Amgen filed a reply brief in support of its petition for certiorari to the U.S. Supreme Court. On April 18, 2022, the Supreme Court requested that the Office of the Solicitor General of the United States submit a brief providing the government’s view on the issues raised by Amgen’s petition.
Patent Disputes in the International Region
On March 23, 2022, Amgen filed counterclaims alleging that PRALUENT® infringes Amgen’s European Patent 2,641,917 (the ‘917 Patent). A European Patent Office (EPO) opposition to the ‘917 Patent, filed by Sanofi on February 5, 2021, is pending, and the hearing before the EPO’s Opposition Division is scheduled for February 21, 2023.
NEUPOGEN (filgrastim)/Neulasta Patent Litigation
Amgen Inc., et al. v. Hospira Inc. et al.
On March 18, 2022, the parties filed a stipulation of dismissal, and the U.S. District Court for the District of Delaware (the Delaware District Court) dismissed the case on March 21, 2022.
Patent Trial and Appeal Board (PTAB) Challenge
Apotex PTAB Challenge
On April 4, 2022, Amgen’s appeal of the PTAB’s decision, holding all claims of Amgen’s U.S. Patent No. 8,952,138 (the ‘138 Patent) unpatentable, was submitted to the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court) for determination on the briefs without oral argument. On April 14, 2022, the Federal Circuit Court held that the PTAB misconstrued the patent claims and reversed the PTAB’s decision because Apotex failed to prove the invention of the ‘138 Patent unpatentable.
Pfizer PTAB Challenge
On March 18, 2022, the parties filed a joint motion to terminate the inter partes review proceeding at the U.S. Patent and Trademark Office of U.S. Patent No. 8,273,707. On April 20, 2022, the PTAB granted the motion and terminated the proceeding.
Antitrust Class Action
Sensipar Antitrust Class Actions
On March 11, 2022, the Delaware District Court granted defendants’ (including Amgen’s) motion to dismiss except as to the reverse payment claim and various state law claims from ten of the states in which plaintiffs reside.
U.S. Tax Litigation
Amgen Inc. & Subsidiaries v. Commissioner of Internal Revenue
See Note 4, Income taxes, for discussion of the IRS tax dispute and the Company’s petition in the U.S. Tax Court.