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EXCEL - IDEA: XBRL DOCUMENT - AMGEN INCFinancial_Report.xls
EX-10.18 - AGREEMENT BETWEEN AMGEN INC. AND MR. DAVID W. MELINE - AMGEN INCamgn-ex1018_2014930xq3.htm
EX-32 - SECTION 1350 CERTIFICATIONS - AMGEN INCamgn-ex32_2014930xq3.htm
EX-31 - RULE 13A-14(A) CERTIFICATIONS - AMGEN INCamgn-ex31_2014930xq3.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-12477
Amgen Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-3540776
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Amgen Center Drive,
Thousand Oaks, California
 
91320-1799
(Address of principal executive offices)
 
(Zip Code)
(805) 447-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ 
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No þ
As of October 21, 2014, the registrant had 760,670,000 shares of common stock, $0.0001 par value, outstanding.



AMGEN INC.
INDEX
 

i


PART I — FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Product sales
$
4,848

 
$
4,647

 
$
14,153

 
$
13,393

Other revenues
183

 
101

 
579

 
272

Total revenues
5,031

 
4,748

 
14,732

 
13,665

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of sales
1,068

 
788

 
3,239

 
2,317

Research and development
1,018

 
989

 
3,063

 
2,834

Selling, general and administrative
1,213

 
1,249

 
3,372

 
3,663

Other
266

 
34

 
326

 
171

Total operating expenses
3,565

 
3,060

 
10,000

 
8,985

 
 
 
 
 
 
 
 
Operating income
1,466

 
1,688

 
4,732

 
4,680

 
 
 
 
 
 
 
 
Interest expense, net
269

 
257

 
810

 
761

Interest and other income, net
140

 
72

 
377

 
332

 
 
 
 
 
 
 
 
Income before income taxes
1,337

 
1,503

 
4,299

 
4,251

 
 
 
 
 
 
 
 
Provision for income taxes
93

 
135

 
435

 
191

 
 
 
 
 
 
 
 
Net income
$
1,244

 
$
1,368

 
$
3,864

 
$
4,060

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.63

 
$
1.81

 
$
5.10

 
$
5.40

Diluted
$
1.61

 
$
1.79

 
$
5.02

 
$
5.31

 
 
 
 
 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
 
 
 
 
Basic
761

 
754

 
758

 
752

Diluted
771

 
766

 
769

 
764

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.61

 
$
0.47

 
$
1.83

 
$
1.41


See accompanying notes.

1


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
1,244

 
$
1,368

 
$
3,864

 
$
4,060

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
 
 
 
 
Foreign currency translation (losses) gains
(124
)
 
12

 
(125
)
 
(36
)
Effective portion of cash flow hedges
228

 
(84
)
 
205

 
13

Net unrealized (losses) gains on available-for-sale securities
(94
)
 
48

 
(33
)
 
(219
)
Other
9

 
(2
)
 
10

 
(1
)
Other comprehensive income (loss), net of tax
19

 
(26
)
 
57

 
(243
)
Comprehensive income
$
1,263

 
$
1,342

 
$
3,921

 
$
3,817


See accompanying notes.

2


AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
September 30,
2014
 
December 31,
2013
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,677

 
$
3,805

Marketable securities
24,398

 
15,596

Trade receivables, net
2,355

 
2,697

Inventories
2,885

 
3,019

Other current assets
2,733

 
2,250

Total current assets
36,048

 
27,367

 
 
 
 
Property, plant and equipment, net
5,267

 
5,349

Intangible assets, net
13,100

 
13,262

Goodwill
14,815

 
14,968

Restricted investments

 
3,412

Other assets
1,545

 
1,767

Total assets
$
70,775

 
$
66,125

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
955

 
$
787

Accrued liabilities
5,096

 
4,655

Current portion of long-term debt
2,500

 
2,505

Total current liabilities
8,551

 
7,947

 
 
 
 
Long-term debt
30,480

 
29,623

Other noncurrent liabilities
6,419

 
6,459

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding - 760.6 shares in 2014 and 754.6 shares in 2013
30,127

 
29,891

Accumulated deficit
(4,698
)
 
(7,634
)
Accumulated other comprehensive loss
(104
)
 
(161
)
Total stockholders’ equity
25,325

 
22,096

Total liabilities and stockholders’ equity
$
70,775

 
$
66,125


See accompanying notes.

3


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine months ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
3,864

 
$
4,060

Depreciation and amortization
1,567

 
842

Stock-based compensation expense
302

 
304

Deferred income taxes
296

 
46

Other items, net
(260
)
 
73

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables, net
345

 
(132
)
Inventories
99

 
(71
)
Other assets
(120
)
 
(174
)
Accounts payable
104

 
6

Accrued income taxes
(324
)
 
(483
)
Other liabilities
237

 
(15
)
Net cash provided by operating activities
6,110

 
4,456

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(515
)
 
(492
)
Cash paid for acquisitions, net of cash acquired
(115
)
 

Purchase of intangible assets
(150
)
 

Purchases of marketable securities
(20,831
)
 
(17,878
)
Proceeds from sales of marketable securities
11,060

 
15,743

Proceeds from maturities of marketable securities
3,962

 
4,846

Change in restricted investments
533

 
(526
)
Other
(70
)
 
(44
)
Net cash (used in) provided by investing activities
(6,126
)
 
1,649

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of debt
4,476

 
3,074

Repayment of debt
(3,480
)
 
(2,500
)
Repurchases of common stock

 
(832
)
Dividends paid
(1,387
)
 
(1,061
)
Net proceeds from issuance of common stock in connection with the Company’s equity award programs
153

 
268

Other
126

 
(30
)
Net cash used in financing activities
(112
)
 
(1,081
)
(Decrease) increase in cash and cash equivalents
(128
)
 
5,024

Cash and cash equivalents at beginning of period
3,805

 
3,257

Cash and cash equivalents at end of period
$
3,677

 
$
8,281

See accompanying notes.

4


AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(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, 2014 and 2013, 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, 2013 and in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2014, and June 30, 2014.
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 accounting principles generally accepted in the United States (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 $7.4 billion and $6.9 billion as of September 30, 2014, and December 31, 2013, respectively.
Restricted investments
As of December 31, 2013, we had restricted investments on our Condensed Consolidated Balance Sheet that were owned by ATL Holdings Limited (ATL Holdings), a wholly-owned subsidiary. ATL Holdings was an entity distinct from the Company and its other subsidiaries, with separate assets and liabilities. Because certain third parties owned Class A preferred shares of ATL Holdings, this entity was required to hold restricted investments, which were composed of interest-bearing securities, cash and related interest receivable as of December 31, 2013. On May 22, 2014, the Company repurchased all of the outstanding Class A preferred shares, and therefore, there were no remaining restricted investments on our Condensed Consolidated Balance Sheet as of September 30, 2014. See Note 9, Financing arrangements.
Branded prescription drug fee
During the three months ended September 30, 2014, the Internal Revenue Service (IRS) issued final regulations for the branded prescription drug (BPD) fee, an annual non-tax deductible fee imposed on certain companies engaged in the business of manufacturing or importing branded prescription drugs enacted under the Patient Protection and Affordable Care Act. The final regulations accelerated the expense recognition criteria for the fee obligation by one year, from the year in which the fee is paid to the year in which the sales used to calculate the fee occur. As a result, our Consolidated Statement of Income for the year ended December 31, 2014, will include both the estimated BPD fee imposed and paid in 2014 and an estimated BPD fee to be imposed and paid in 2015. Pursuant to the issuance of these final regulations, we recognized an additional $145 million in Selling, general and administrative (SG&A) expense during the three months ended September 30, 2014, for: (i) the accrual of the estimated fee to be imposed and paid in 2015 related to sales which will be used to calculate the fee that occurred during the nine months ended

5


September 30, 2014, and (ii) the derecognition of the remaining deferred charge related to the fee imposed and paid in 2014 recorded under the method of accounting previously used for recognition of the BPD fee under the IRS temporary regulations.
Recent accounting pronouncements
In May 2014, a new accounting standard was issued that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. This new standard will be effective for interim and annual periods beginning January 1, 2017, is required to be adopted retrospectively and early adoption is not permitted. We are currently evaluating the impact that this new standard will have on our financial statements.
2. Restructuring
On July 29, 2014, we announced a restructuring plan to invest in continuing innovation and the launch of our new pipeline molecules, while improving our cost structure. As part of the plan, we stated that we would reduce our staff by 2,400 to 2,900 by the end of 2015, close our facilities in Washington state and Colorado and reduce the number of buildings occupied at our headquarters in Thousand Oaks, California. After evaluating additional efficiency initiatives, particularly in the area of shared services, outsourcing and other external expense categories, we are expanding the total planned reduction of our staff to 3,500 to 4,000 by the end of 2015.
We currently estimate that $935 million to $1,035 million of restructuring charges will be incurred in connection with the implementation of our restructuring plan. Included in these amounts are: (i) separation costs of $535 million to $585 million with respect to the staff reductions, and (ii) asset related charges of $400 million to $450 million consisting primarily of asset impairments, accelerated depreciation and other related costs resulting from the consolidation of our worldwide facilities. Approximately 55% of the total charges will result in cash outlays, associated primarily with staff separation costs.
During the three months ended September 30, 2014, we initiated the above-noted actions and incurred $376 million of restructuring costs. We expect that substantially all remaining restructuring actions and related estimated costs to be incurred will occur during the fourth quarter of 2014 and in 2015.
The following table summarizes the charges recorded during the three months ended September 30, 2014, related to the restructuring plan by type of activity (in millions):
 
 
Separation Costs
 
Asset Impairments
 
Accelerated Depreciation
 
Other
 
Total
Cost of sales
 
$

 
$
17

 
$
11

 
$

 
$
28

Research and development
 

 

 
15

 

 
15

Selling, general and administrative
 

 

 
3

 

 
3

Other
 
323

 

 

 
7

 
330

Total
 
$
323

 
$
17

 
$
29

 
$
7

 
$
376

Asset impairment and accelerated depreciation charges were recognized in connection with our decision to exit Boulder and Longmont, Colorado and Bothell and Seattle, Washington as well as the consolidation of facilities in Thousand Oaks, California. The decision to accelerate the closure of these manufacturing and research and development (R&D) facilities was based principally on optimizing the utilization of our sites in the United States, which includes an expansion of our presence in the key U.S. biotechnology hubs of South San Francisco, California and Cambridge, Massachusetts.
The following table summarizes the expense and payments regarding liabilities related to the restructuring plan (in millions):
 
 
Separation Costs
 
Other
 
Total
Restructuring liabilities as of June 30, 2014
 
$

 
$

 
$

Expense
 
309

 
3

 
312

Payments
 

 
(1
)
 
(1
)
Restructuring liabilities as of September 30, 2014
 
$
309

 
$
2

 
$
311



6


3. Business combinations
Onyx Pharmaceuticals
On October 1, 2013, we acquired all of the outstanding stock of Onyx Pharmaceuticals, Inc. (Onyx), a global biopharmaceutical company engaged in the development and commercialization of innovative therapies for improving the lives of people afflicted with cancer. Onyx has a multiple myeloma franchise, with Kyprolis® (carfilzomib) for Injection already approved in the United States, and with oprozomib being evaluated in clinical trials for patients with hematologic malignancies. In addition, Onyx has three partnered oncology assets: Nexavar® (sorafenib) tablets (an Onyx and Bayer compound), Stivarga® (regorafenib) tablets (a Bayer compound), and palbociclib (a Pfizer, Inc. compound). This transaction, which was accounted for as a business combination, provides us with an opportunity to expand our oncology franchise. Onyx’s operations have been included in our condensed consolidated financial statements commencing on the acquisition date.
The aggregate consideration to acquire Onyx was paid in cash and consisted of (in millions):
Total consideration transferred
$
9,517

Compensation expense
197

Total cash paid
$
9,714


The $9,517 million cash payment consisted of a $9,186 million cash payment to the outstanding common stockholders and a $331 million cash payment to the Onyx equity award holders for services rendered prior to October 1, 2013 under the Onyx equity award plans. The remaining $197 million of cash, which related to the accelerated vesting of the remaining Onyx equity awards, was recognized as compensation expense during the three months ended December 31, 2013. This amount was included primarily in SG&A expense in the Consolidated Statement of Income.
The consideration to acquire Onyx was allocated to the acquisition date fair values of assets acquired and liabilities assumed as follows (in millions):
Cash and cash equivalents
$
319

Marketable securities
337

Inventories
170

Indefinite-lived intangible assets - In-process research and development (IPR&D)
1,180

Finite-lived intangible assets - Developed product technology rights
6,190

Finite-lived intangible assets - Licensing rights
2,792

Goodwill
2,402

Convertible debt
(742
)
Assumed contingent consideration
(261
)
Deferred income taxes, net
(3,011
)
Other assets (liabilities), net
141

Total consideration
$
9,517


Onyx’s preliminary goodwill at December 31, 2013 has been revised. Goodwill was reduced by $124 million due primarily to revisions which increased the acquisition date fair values of developed product technology rights by $280 million and deferred income taxes by $93 million, and decreased inventory by $80 million. The adjustments did not have a material effect on our current or prior period financial statements.
The developed product technology rights acquired relate to Kyprolis® which is approved in the United States. This product technology is being amortized on a straight-line basis over the estimated useful life of 12 years.
Licensing rights acquired represent the aggregate estimated fair values of receiving future milestone, royalty and/or profit sharing payments associated with various contract agreements that were entered into by Onyx prior to the acquisition. The weighted-average useful life of these finite-lived intangible assets is ten years, and they are being amortized on a straight-line basis.
Filgrastim and pegfilgrastim rights acquisition
In October 2013, we entered into an agreement to acquire the licenses to filgrastim and pegfilgrastim effective January 1, 2014 (acquisition date), that were held by F. Hoffmann-La Roche Ltd. (Roche) in approximately 100 markets in Eastern Europe,

7


Latin America, Asia, the Middle East and Africa (Product Rights), and to settle our preexisting relationship related to the Product Rights for total consideration of $497 million. The acquisition of the Product Rights was accounted for as a business combination as the acquired rights and processes are capable of producing an immediate return to us, and the settlement of the preexisting relationship was accounted for separately from the business combination.
This transaction provides us with an opportunity to expand our geographic presence and reach more patients in more countries that could benefit from our therapies. The operations of the acquired set of activities have been included in our financial statements commencing on the acquisition date. Pro forma results of operations for this acquisition have not been presented because this acquisition is not material to our consolidated results of operations.
The aggregate consideration transferred consisted of (in millions):
Total consideration transferred or to be transferred
$
497

Settlement of preexisting relationship at fair value
(99
)
Total consideration transferred to acquire the Product Rights
$
398

The settlement of the preexisting relationship relates to a supply contract between Amgen and Roche that was terminated as a result of the acquisition of the Product Rights. The fair value of the contract of $99 million was recognized in Cost of sales in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2014.
The consideration to acquire the Product Rights was allocated to the acquisition date fair values of assets acquired as follows (in millions):
Finite-lived intangible assets - Marketing-related rights
$
363

Finite-lived intangible assets - Developed product technology rights
11

Goodwill
3

Other assets
21

Total consideration
$
398

The marketing-related and developed product technology rights acquired relate to the Product Rights and are being amortized on a straight-line basis over their estimated useful lives of five years and three and one-half years, respectively.
4. Income taxes
The effective tax rates for the three and nine months ended September 30, 2014 were 7.0% and 10.1%, respectively, compared with 9.0% and 4.5% for the corresponding periods of the prior year. The effective rates are different from the federal statutory rates primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside of the United States. In addition, the effective tax rates for both periods were reduced by foreign tax credits associated with the Puerto Rico excise tax described below.
The decrease in our effective tax rate for the three months ended September 30, 2014, is due primarily to the favorable tax impact of changes in the jurisdictional mix of income and expenses, including higher domestic acquisition-related expenses and restructuring costs. The decrease was offset partially by the exclusion of the benefit of the R&D tax credit, which expired as of December 31, 2013, and was not reinstated as of September 30, 2014.
The increase in our effective tax rate for the nine months ended September 30, 2014, is due primarily to two significant events that occurred during the three months ended March 31, 2013. First, we settled our examination with the IRS for the years ended December 31, 2007, 2008 and 2009 in which we agreed to certain adjustments proposed by the IRS and remeasured our unrecognized tax benefits (UTBs) accordingly. Second, the American Taxpayer Relief Act of 2012, enacted during the first quarter of 2013, reinstated the federal R&D tax credit for 2012 and 2013. Therefore, our effective tax rate for the nine months ended September 30, 2013, included a benefit for the full-year 2012 R&D tax credit, recorded as a discrete item in the first quarter of 2013. The increase was offset partially by the favorable tax impact of changes in the jurisdictional mix of income and expenses due primarily to higher domestic acquisition-related expenses and restructuring costs in the nine months ended September 30, 2014.
Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturing subsidiary in Puerto Rico. The rate was 2.75% in the first half of 2013 and 4.0% effective July 1, 2013 through December 31, 2017. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when

8


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. Excluding the impact of the Puerto Rico excise tax, our effective tax rates for the three and nine months ended September 30, 2014, would have been 12.5% and 15.0%, respectively, compared with 13.8% and 9.8% for the corresponding periods of the prior year.
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 audited by the tax authorities in those jurisdictions. Significant disputes may arise with these tax authorities involving issues of the timing and amount of income and deductions, the use of tax credits and allocations of income among various tax jurisdictions because of differing interpretations of tax laws and regulations. We are no longer subject to U.S. federal income tax examinations for years ending on or before December 31, 2009, or to California state income tax examinations for years ending on or before December 31, 2005.
During the three and nine months ended September 30, 2014, the gross amount of our UTBs increased by approximately $90 million and $255 million, respectively, as a result of tax positions taken during the current year. Substantially all of the UTBs as of September 30, 2014, if recognized, would affect our effective tax rate. As of September 30, 2014, we believe it is reasonably possible that our gross liabilities for UTBs may decrease by approximately $70 million within the succeeding 12 months due to the resolution of state audits.
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 principally shares that may be issued under our stock option awards and restricted stock and performance unit awards, determined using the treasury stock method (collectively “dilutive securities”).
The computation for basic and diluted EPS was as follows (in millions, except per share data):
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Income (Numerator):
 
 
 
 
 
 
 
Net income for basic and diluted EPS
$
1,244

 
$
1,368

 
$
3,864

 
$
4,060

 
 
 
 
 
 
 
 
Shares (Denominator):
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
761

 
754

 
758

 
752

Effect of dilutive securities
10

 
12

 
11

 
12

Weighted-average shares for diluted EPS
771

 
766

 
769

 
764

 
 
 
 
 
 
 
 
Basic EPS
$
1.63

 
$
1.81

 
$
5.10

 
$
5.40

Diluted EPS
$
1.61

 
$
1.79

 
$
5.02

 
$
5.31

For the three and nine months ended September 30, 2014 and 2013, the number of anti-dilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.

9


6. Available-for-sale investments
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of available-for-sale investments by type of security were as follows (in millions):
Type of security as of September 30, 2014
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
3,577

 
$
4

 
$
(9
)
 
$
3,572

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
996

 
1

 
(5
)
 
992

Foreign and other
 
1,553

 
18

 
(15
)
 
1,556

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
5,918

 
18

 
(26
)
 
5,910

Industrial
 
6,043

 
22

 
(56
)
 
6,009

Other
 
631

 
3

 
(4
)
 
630

Residential mortgage-backed securities
 
1,838

 
3

 
(14
)
 
1,827

Other mortgage- and asset-backed securities
 
2,101

 

 
(62
)
 
2,039

Money market mutual funds
 
2,386

 

 

 
2,386

Other short-term interest-bearing securities
 
2,661

 

 

 
2,661

Total interest-bearing securities
 
27,704

 
69

 
(191
)
 
27,582

Equity securities
 
88

 
8

 
(8
)
 
88

Total available-for-sale investments
 
$
27,792

 
$
77

 
$
(199
)
 
$
27,670


Type of security as of December 31, 2013

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair
value
U.S. Treasury securities

$
4,737


$
2


$
(9
)

$
4,730

Other government-related debt securities:








U.S.

1,087




(8
)

1,079

Foreign and other

1,574


13


(41
)

1,546

Corporate debt securities:








Financial

3,667


28


(19
)

3,676

Industrial

3,745


36


(21
)

3,760

Other

388


4


(2
)

390

Residential mortgage-backed securities

1,478


3


(21
)

1,460

Other mortgage- and asset-backed securities

1,555


1


(45
)

1,511

Money market mutual funds

3,366






3,366

Other short-term interest-bearing securities

750






750

Total interest-bearing securities

22,347


87


(166
)

22,268

Equity securities

85


10




95

Total available-for-sale investments

$
22,432


$
97


$
(166
)

$
22,363



10


The fair values of available-for-sale investments by classification in the Condensed Consolidated Balance Sheets were as follows (in millions):
Classification in the Condensed Consolidated Balance Sheets
 
September 30,
2014
 
December 31,
2013
Cash and cash equivalents
 
$
3,184

 
$
3,266

Marketable securities
 
24,398

 
15,596

Other assets — noncurrent
 
88

 
95

Restricted investments
 

 
3,406

Total available-for-sale investments
 
$
27,670

 
$
22,363

Cash and cash equivalents in the table above excludes cash of $493 million and $539 million as of September 30, 2014, and December 31, 2013, respectively. Restricted investments in the table above excludes $6 million of interest receivable as of December 31, 2013.
The fair values of available-for-sale interest-bearing security investments by contractual maturity, except for mortgage- and asset- backed securities that do not have a single maturity date, were as follows (in millions):
Contractual maturity
 
September 30,
2014
 
December 31,
2013
Maturing in one year or less
 
$
5,101

 
$
6,799

Maturing after one year through three years
 
2,569

 
4,785

Maturing after three years through five years
 
9,296

 
6,057

Maturing after five years through ten years
 
6,299

 
1,656

Maturing after ten years
 
451

 

Mortgage- and asset-backed securities
 
3,866

 
2,971

Total interest-bearing securities
 
$
27,582

 
$
22,268

For the three months ended September 30, 2014 and 2013, realized gains totaled $17 million and $24 million, respectively, and realized losses totaled $28 million and $26 million, respectively. For the nine months ended September 30, 2014 and 2013, realized gains totaled $102 million and $142 million, respectively, and realized losses totaled $71 million and $70 million, respectively. The cost of securities sold is based on the specific identification method.
The unrealized losses on available-for-sale investments and their related fair values were as follows (in millions):
 
 
Less than 12 months
 
12 months or greater
Type of security as of September 30, 2014
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
2,131

 
$
(7
)
 
$
310

 
$
(2
)
Other government-related debt securities:
 

 

 

 

U.S.
 
380

 
(1
)
 
296

 
(4
)
Foreign and other
 
429

 
(6
)
 
232

 
(9
)
Corporate debt securities:
 

 

 

 

Financial
 
3,555

 
(24
)
 
184

 
(2
)
Industrial
 
3,846

 
(53
)
 
240

 
(3
)
Other
 
358

 
(4
)
 
7

 

Residential mortgage-backed securities
 
739

 
(4
)
 
447

 
(10
)
Other mortgage- and asset-backed securities
 
883

 
(11
)
 
841

 
(51
)
Equity securities
 
24

 
(8
)
 

 

Total
 
$
12,345

 
$
(118
)
 
$
2,557

 
$
(81
)
    


11


 
 
Less than 12 months
 
12 months or greater
Type of security as of December 31, 2013
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
2,362

 
$
(9
)
 
$

 
$

Other government-related debt securities:
 

 

 

 

U.S.
 
789

 
(8
)
 

 

Foreign and other
 
986

 
(38
)
 
39

 
(3
)
Corporate debt securities:
 

 

 

 

Financial
 
1,781

 
(19
)
 

 

Industrial
 
1,543

 
(21
)
 
1

 

Other
 
182

 
(2
)
 

 

Residential mortgage-backed securities
 
794

 
(14
)
 
257

 
(7
)
Other mortgage- and asset-backed securities
 
982

 
(29
)
 
313

 
(16
)
Total
 
$
9,419

 
$
(140
)
 
$
610

 
$
(26
)
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 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. This 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 and adverse conditions related specifically to the security, including any changes to the credit rating of the security. As of September 30, 2014, and December 31, 2013, we believe the cost bases for our available-for-sale investments were recoverable in all material respects.
7. Inventories
Inventories consisted of the following (in millions):
 
September 30,
2014
 
December 31,
2013
Raw materials
$
207

 
$
217

Work in process
1,690

 
2,064

Finished goods
988

 
738

Total inventories
$
2,885

 
$
3,019

8. Goodwill and other intangible assets
Goodwill
The changes in the carrying amounts of goodwill were as follows (in millions):
 
Nine months ended September 30,
 
2014
 
2013
Beginning balance
$
14,968

 
$
12,662

Goodwill related to acquisitions of businesses(1)
(114
)
 
(48
)
Currency translation adjustments
(39
)
 
(42
)
Ending balance
$
14,815

 
$
12,572

(1) 
Composed primarily of adjustments to goodwill resulting from changes to the acquisition date fair values of net assets acquired in business combinations recorded during their respective measurement periods.

12


Identifiable intangible assets
Identifiable intangible assets consisted of the following (in millions):
 
September 30, 2014
 
December 31, 2013
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Developed product technology rights
$
10,421

 
$
(3,953
)
 
$
6,468

 
$
10,130

 
$
(3,347
)
 
$
6,783

Licensing rights
3,237

 
(618
)
 
2,619

 
3,241

 
(366
)
 
2,875

R&D technology rights
1,183

 
(552
)
 
631

 
1,207

 
(496
)
 
711

Marketing-related rights
1,241

 
(475
)
 
766

 
619

 
(366
)
 
253

Total finite-lived intangible assets
16,082

 
(5,598
)
 
10,484

 
15,197

 
(4,575
)
 
10,622

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
IPR&D
2,616

 

 
2,616

 
2,640

 

 
2,640

Total identifiable intangible assets
$
18,698

 
$
(5,598
)
 
$
13,100

 
$
17,837

 
$
(4,575
)
 
$
13,262

Developed product technology rights consist of rights related to marketed products acquired in business combinations. Licensing rights are composed primarily of intangible assets acquired as part of the acquisition of Onyx (see Note 3, Business combinations), 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. R&D technology rights consist of technology used in R&D with alternative future uses. Marketing-related intangible assets are composed primarily of rights related to the sale and distribution of marketed products, including assets purchased from the Glaxo Group Limited (Glaxo) discussed below and licenses to filgrastim and pegfilgrastim acquired from Roche (see Note 3, Business combinations).
On April 1, 2014, we entered into a Termination and Transition Agreement (the Transition Agreement) with Glaxo which terminated, in part, and amended, in part, our agreement with Glaxo (the Collaboration Agreement) for the commercialization of denosumab for osteoporosis indications in certain geographic territories, including the European Union (EU), Switzerland, Australia, Norway, Russia and Mexico. The Transition Agreement terminated the Collaboration Agreement for all countries and regions, except for Australia. All commercial activities assigned to Glaxo under the Collaboration Agreement other than those in Australia will be transitioned back to us no later than December 31, 2014. In exchange for the early termination (except Australia) of the Collaboration Agreement, we will make payments to Glaxo totaling $275 million, which represents the reacquisition of a previously shared economic interest in geographic territories where we were already marketing denosumab and accordingly, the transaction was accounted for as an acquisition of identifiable intangible assets.
The Transition Agreement does not change the terms of the related Expansion Agreement under which Glaxo will commercialize denosumab for all indications in certain other geographic territories.
IPR&D consists of R&D projects acquired in a business combination which are not complete due to remaining technological risks and/or lack of receipt of the required regulatory approvals. These projects include Kyprolis®, a treatment for multiple myeloma being developed for use outside the United States (excluding Japan) acquired in the Onyx transaction (see Note 3, Business combinations); AMG 416 (formerly known as velcalcetide), a treatment for secondary hyperparathyroidism in patients with chronic kidney disease who are on dialysis; blinatumomab, a treatment for acute lymphoblastic leukemia (ALL), and talimogene laherparepvec, a treatment for melanoma.
For all IPR&D projects, there are major risks and uncertainties associated with the timely and successful completion of development and commercialization of these product candidates, including our ability to confirm their safety and efficacy based on data from clinical trials, our ability to obtain necessary regulatory approvals and our ability to successfully complete these tasks within budgeted costs. We are not able to market a human therapeutic without obtaining regulatory approvals, and such approvals require completing clinical trials that demonstrate a product candidate is safe and effective. In addition, the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans, impact the revenues a product can generate. Consequently, the eventual realized value, if any, of these acquired IPR&D projects may vary from their estimated fair values.
During the three months ended September 30, 2014 and 2013, we recognized amortization charges associated with our finite-lived intangible assets of $339 million and $117 million, respectively. During the nine months ended September 30, 2014 and 2013, we recognized amortization charges associated with our finite-lived intangible assets of $1,037 million and $353 million, respectively. The total estimated amortization charges for our finite-lived intangible assets for the three months ending December 31,

13


2014, and the years ending December 31, 2015, 2016, 2017, 2018 and 2019, are $334 million, $1.3 billion, $1.3 billion, $1.2 billion, $996 million and $922 million, respectively.
9. Financing arrangements
The carrying values and the fixed contractual coupon rates, as applicable, of our long-term borrowings were as follows (in millions):
 
September 30,
2014
 
December 31,
2013
1.875% notes due 2014 (1.875% 2014 Notes)
$
1,000

 
$
1,000

4.85% notes due 2014 (4.85% 2014 Notes)
1,000

 
1,000

2.30% notes due 2016 (2.30% 2016 Notes)
749

 
749

2.50% notes due 2016 (2.50% 2016 Notes)
1,000

 
999

Floating Rate Notes due 2017
600

 

1.25% notes due 2017 (1.25% 2017 Notes)
849

 

2.125% notes due 2017 (2.125% 2017 Notes)
1,249

 
1,248

5.85% notes due 2017 (5.85% 2017 Notes)
1,100

 
1,099

6.15% notes due 2018 (6.15% 2018 Notes)
500

 
500

Master Repurchase Agreement obligation due 2018

 
3,100

Term Loan due 2018
4,500

 
4,875

4.375% euro-denominated notes due 2018 (4.375% 2018 euro Notes)
699

 
751

Floating Rate Notes due 2019
250

 

2.20% notes due 2019 (2.20% 2019 Notes)
1,397

 

5.70% notes due 2019 (5.70% 2019 Notes)
999

 
999

2.125% euro-denominated notes due 2019 (2.125% 2019 euro Notes)
850

 
925

4.50% notes due 2020 (4.50% 2020 Notes)
300

 
300

3.45% notes due 2020 (3.45% 2020 Notes)
898

 
898

4.10% notes due 2021 (4.10% 2021 Notes)
998

 
998

3.875% notes due 2021 (3.875% 2021 Notes)
1,747

 
1,746

3.625% notes due 2022 (3.625% 2022 Notes)
747

 
747

3.625% notes due 2024 (3.625% 2024 Notes)
1,398

 

5.50% pound-sterling-denominated notes due 2026 (5.50% 2026 pound sterling Notes)
765

 
781

4.00% pound-sterling-denominated notes due 2029 (4.00% 2029 pound sterling Notes)
1,120

 
1,144

6.375% notes due 2037 (6.375% 2037 Notes)
899

 
899

6.90% notes due 2038 (6.90% 2038 Notes)
499

 
499

6.40% notes due 2039 (6.40% 2039 Notes)
996

 
996

5.75% notes due 2040 (5.75% 2040 Notes)
697

 
697

4.95% notes due 2041 (4.95% 2041 Notes)
596

 
596

5.15% notes due 2041 (5.15% 2041 Notes)
2,233

 
2,233

5.65% notes due 2042 (5.65% 2042 Notes)
1,245

 
1,244

5.375% notes due 2043 (5.375% 2043 Notes)
1,000

 
1,000

Other notes
100

 
105

Total debt
32,980

 
32,128

Less current portion
(2,500
)
 
(2,505
)
Total noncurrent debt
$
30,480

 
$
29,623


14


Debt repayments
During the nine months ended September 30, 2014, we repurchased all of the Class A preferred shares of ATL Holdings that were subject to a Master Repurchase Agreement for $3.1 billion. We also repaid $375 million of principal on our Term Loan Credit Facility and $5 million of Other notes.
Debt issuances
In May 2014, we issued $4.5 billion aggregate principal amount of notes, comprised of the Floating Rate Notes due 2017, the 1.25% 2017 Notes, the Floating Rate Notes due 2019, the 2.20% 2019 Notes and the 3.625% 2024 Notes. The Floating Rate Notes due in 2017 and 2019 bear interest equal to three-month London Interbank Offered Rates (LIBOR) plus 0.38% and three-month LIBOR plus 0.60%, respectively, and are not subject to redemption at our option. The fixed rate notes that were issued 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, except as discussed below, a "make-whole" amount, as defined. The 2.20% 2019 Notes and 3.625% 2024 Notes may be redeemed without payment of a "make-whole" amount if they are redeemed on or after one month or three months, respectively, prior to their maturity dates. In the event of a change-in-control triggering event, as defined, we may be required to purchase all or a portion of the notes at a price equal to 101% of the principal amount of the notes plus accrued and unpaid interest. Debt issuance costs incurred in connection with the issuance of these notes totaling approximately $18 million are being amortized over the respective lives of the notes, and the related charge is included in Interest expense, net, in the Condensed Consolidated Statements of Income.
10. Stockholders’ equity
Stock repurchase program
We had no repurchases under our stock repurchase program during the nine months ended September 30, 2014. As of September 30, 2014, $1.6 billion remained available under our Board of Directors-approved stock repurchase program. In October 2014, our Board of Directors authorized an increase that resulted in a total of $4.0 billion available under the stock repurchase program.
Dividends
On each of December 13, 2013, March 5, 2014 and July 25, 2014, the Board of Directors declared a quarterly cash dividend of $0.61 per share of common stock, which were paid on March 7, June 6, and September 5, 2014, respectively. On October 17, 2014, the Board of Directors declared a quarterly cash dividend of $0.61 per share of common stock, which will be paid on December 5, 2014, to all stockholders of record as of the close of business on November 13, 2014.
Accumulated other comprehensive income
The components of accumulated other comprehensive income (AOCI) were as follows (in millions):
 
Foreign
currency
translation
 
Cash flow
hedges
 
Available-for-sale
securities
 
Other
 
AOCI
Balance as of December 31, 2013
$
(68
)
 
$
(33
)
 
$
(43
)
 
$
(17
)
 
$
(161
)
Foreign currency translation adjustments
(12
)
 

 

 

 
(12
)
Unrealized gains

 
17

 
66

 
1

 
84

Reclassification adjustments to income

 
(14
)
 
(2
)
 

 
(16
)
Income taxes
4

 
(1
)
 
(24
)
 

 
(21
)
Balance as of March 31, 2014
$
(76
)
 
$
(31
)
 
$
(3
)
 
$
(16
)
 
$
(126
)
Foreign currency translation adjustments
9

 

 

 

 
9

Unrealized gains

 
8

 
73

 

 
81

Reclassification adjustments to income

 
(48
)
 
(40
)
 

 
(88
)
Income taxes
(2
)
 
15

 
(12
)
 

 
1

Balance as of June 30, 2014
$
(69
)
 
$
(56
)
 
$
18

 
$
(16
)
 
$
(123
)
Foreign currency translation adjustments
(135
)
 

 

 

 
(135
)
Unrealized gains (losses)

 
187

 
(161
)
 
9

 
35

Reclassification adjustments to income

 
175

 
11

 

 
186

Income taxes
11

 
(134
)
 
56

 

 
(67
)
Balance as of September 30, 2014
$
(193
)
 
$
172

 
$
(76
)
 
$
(7
)
 
$
(104
)

15


The reclassifications out of AOCI to earnings were as follows (in millions):
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Three months ended September 30, 2014
 
Three months ended September 30, 2013
 
Line item affected in the Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
5

 
$
6

 
Product sales
     Cross-currency swap contract (losses) gains
 
(179
)
 
153

 
Interest and other income, net
     Forward interest rate contract losses
 
(1
)
 

 
Interest expense, net
 
 
(175
)
 
159

 
Total before income tax
 
 
64

 
(59
)
 
Tax benefit/(expense)
 
 
$
(111
)
 
$
100

 
Net of taxes
Available-for-sale securities:
 
 
 

 

     Net realized losses
 
$
(11
)
 
$
(2
)
 
Interest and other income, net
 
 
4

 
1

 
Tax benefit
 
 
$
(7
)
 
$
(1
)
 
Net of taxes
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Nine months ended September 30, 2014
 
Nine months ended September 30, 2013
 
Line item affected in the Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
5

 
$
9

 
Product sales
     Cross-currency swap contract (losses) gains
 
(117
)
 
25

 
Interest and other income, net
     Forward interest rate contract losses
 
(1
)
 
(1
)
 
Interest expense, net
 
 
(113
)
 
33

 
Total before income tax
 
 
41

 
(13
)
 
Tax benefit/(expense)
 
 
$
(72
)
 
$
20

 
Net of taxes
Available-for-sale securities:
 
 
 
 
 
 
     Net realized gains
 
$
31

 
$
72

 
Interest and other income, net
 
 
(12
)
 
(27
)
 
Tax expense
 
 
$
19

 
$
45

 
Net of taxes



16


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 the 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 the 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 value of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis was 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, 2014, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
3,572

 
$

 
$

 
$
3,572

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
992

 

 
992

Foreign and other
 

 
1,556

 

 
1,556

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
5,910

 

 
5,910

Industrial
 

 
6,009

 

 
6,009

Other
 

 
630

 

 
630

Residential mortgage-backed securities
 

 
1,827

 

 
1,827

Other mortgage- and asset-backed securities
 

 
2,039

 

 
2,039

Money market mutual funds
 
2,386

 

 

 
2,386

Other short-term interest-bearing securities
 

 
2,661

 

 
2,661

Equity securities
 
88

 

 

 
88

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
228

 

 
228

Cross-currency swap contracts
 

 
120

 

 
120

Interest rate swap contracts
 

 
18

 

 
18

Total assets
 
$
6,046

 
$
21,990

 
$

 
$
28,036

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
3

 
$

 
$
3

Cross-currency swap contracts
 

 
8

 

 
8

Interest rate swap contracts
 

 
90

 

 
90

Contingent consideration obligations in connection with business combinations
 

 

 
548

 
548

Total liabilities
 
$

 
$
101

 
$
548

 
$
649


17


 
 
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, 2013, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,730

 
$

 
$

 
$
4,730

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
1,079

 

 
1,079

Foreign and other
 

 
1,546

 

 
1,546

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
3,676

 

 
3,676

Industrial
 

 
3,760

 

 
3,760

Other
 

 
390

 

 
390

Residential mortgage-backed securities
 

 
1,460

 

 
1,460

Other mortgage- and asset-backed securities
 

 
1,511

 

 
1,511

Money market mutual funds
 
3,366

 

 

 
3,366

Other short-term interest-bearing securities
 

 
750

 

 
750

Equity securities
 
95

 

 

 
95

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
53

 

 
53

Cross-currency swap contracts
 

 
193

 

 
193

Total assets
 
$
8,191

 
$
14,418

 
$

 
$
22,609

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
107

 
$

 
$
107

Cross-currency swap contracts
 

 
4

 

 
4

Interest rate swap contracts
 

 
161

 

 
161

Contingent consideration obligations in connection with business combinations
 

 

 
595

 
595

Total liabilities
 
$

 
$
272

 
$
595

 
$
867

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 with 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 A by Standard & Poor's Financial Services LLC (S&P), A+ by Moody's Investor Service, Inc. (Moody's) or Fitch, Inc. (Fitch); and our corporate debt securities portfolio has a weighted-average credit rating of BBB+ by S&P or Moody's, and A- by Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize 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. These 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 utilize 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. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/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.

18


All of our foreign currency forward and option derivatives 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 estimated the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency rates, LIBOR cash and swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts also include implied volatility measures. These inputs, where 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 estimated the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes 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 estimated the fair values of these contracts by using an income-based industry standard valuation model for which all significant inputs were observable either directly or indirectly. These inputs included LIBOR, swap rates and obligor credit default swap rates.
Contingent consideration obligations
We have incurred contingent consideration obligations as a result of our acquisition of a business and upon the assumption of contingent consideration obligations incurred by an acquired company discussed below. These contingent consideration obligations are recorded at their estimated fair values, and we revalue these obligations each reporting period until the related contingencies are resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to product candidates acquired in the business combinations and are reviewed quarterly by management in our R&D and commercial sales organizations. These inputs include, as applicable, estimated probabilities and timing of achieving specified regulatory and commercial milestones and estimated annual sales. Significant changes which increase or decrease the probabilities of achieving the related regulatory and commercial events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these obligations, as applicable. Changes in fair values of contingent consideration obligations are recognized in Other operating expenses in the Condensed Consolidated Statements of Income.
The changes in carrying amounts of contingent consideration obligations were as follows (in millions):
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
610

 
$
332

 
$
595

 
$
221

Net changes in valuation
(62
)
 

 
(47
)
 
111

Ending balance
$
548

 
$
332

 
$
548