Attached files

file filename
EX-10.3 - AMENDMENT TO EQUITY INCENTIVE PLAN - AMGEN INCamgn-ex103_2016331xq1.htm
EX-31 - RULE 13A-14(A) CERTIFICATIONS - AMGEN INCamgn-ex31_2016331xq1.htm
EX-32 - SECTION 1350 CERTIFICATIONS - AMGEN INCamgn-ex32_2016331xq1.htm
EX-10.4 - FORM OF STOCK OPTION AGREEMENT - AMGEN INCamgn-ex104_2016331xq1.htm
EX-10.6 - AMGEN INC. 2009 PERFORMANCE AWARD PROGRAM - AMGEN INCamgn-ex106_2016331xq1.htm
EX-10.7 - FORM OF PERFORMANCE UNIT AGREEMENT - AMGEN INCamgn-ex107_2016331xq1.htm
EX-10.5 - FORM OF GLOBAL RSU AGREEMENT - AMGEN INCamgn-ex105_2016331xq1.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 March 31, 2016
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-37702
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 April 25, 2016, the registrant had 751,217,078 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
 
 
March 31,
 
 
2016
 
2015
Revenues:
 
 
 
 
Product sales
 
$
5,239

 
$
4,874

Other revenues
 
288

 
159

Total revenues
 
5,527

 
5,033

 
 
 
 
 
Operating expenses:
 
 
 
 
Cost of sales
 
1,018

 
1,033

Research and development
 
872

 
894

Selling, general and administrative
 
1,203

 
1,026

Other
 
32

 
58

Total operating expenses
 
3,125

 
3,011

 
 
 
 
 
Operating income
 
2,402

 
2,022

 
 
 
 
 
Interest expense, net
 
294

 
252

Interest and other income, net
 
150

 
106

 
 
 
 
 
Income before income taxes
 
2,258

 
1,876

 
 
 
 
 
Provision for income taxes
 
358

 
253

 
 
 
 
 
Net income
 
$
1,900

 
$
1,623

 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
2.52

 
$
2.13

Diluted
 
$
2.50

 
$
2.11

 
 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
 
Basic
 
753

 
761

Diluted
 
760

 
770

 
 
 
 
 
Dividends paid per share
 
$
1.00

 
$
0.79


See accompanying notes.

1


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
 
Three months ended
 
 
March 31,
 
 
2016
 
2015
Net income
 
$
1,900

 
$
1,623

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
 
Foreign currency translation gains (losses)
 
33

 
(173
)
Effective portion of cash flow hedges
 
(179
)
 
178

Net unrealized gains on available-for-sale securities
 
358

 
140

Other comprehensive income, net of tax
 
212

 
145

Comprehensive income
 
$
2,112

 
$
1,768


See accompanying notes.

2


AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
March 31,
2016
 
December 31,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,896

 
$
4,144

Marketable securities
31,844

 
27,238

Trade receivables, net
3,078

 
2,995

Inventories
2,572

 
2,435

Other current assets
1,816

 
1,703

Total current assets
42,206

 
38,515

 
 
 
 
Property, plant and equipment, net
4,885

 
4,907

Intangible assets, net
11,448

 
11,641

Goodwill
14,804

 
14,787

Other assets
1,773

 
1,599

Total assets
$
75,116

 
$
71,449

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
818

 
$
965

Accrued liabilities
5,458

 
5,452

Current portion of long-term debt
2,247

 
2,247

Total current liabilities
8,523

 
8,664

 
 
 
 
Long-term debt
32,060

 
29,182

Long-term deferred tax liability
2,202

 
2,239

Other noncurrent liabilities
3,649

 
3,281

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding—751.3 shares in 2016 and 754.0 shares in 2015
30,588

 
30,649

Accumulated deficit
(1,638
)
 
(2,086
)
Accumulated other comprehensive loss
(268
)
 
(480
)
Total stockholders’ equity
28,682

 
28,083

Total liabilities and stockholders’ equity
$
75,116

 
$
71,449


See accompanying notes.

3


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended
 
March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
1,900

 
$
1,623

Depreciation and amortization
521

 
524

Stock-based compensation expense
52

 
70

Deferred income taxes
(68
)
 
(45
)
Other items, net
135

 
(43
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables, net
(98
)
 
(9
)
Inventories
(133
)
 
51

Other assets
(249
)
 
(139
)
Accounts payable
(150
)
 
(217
)
Accrued income taxes
(6
)
 
85

Other liabilities
11

 
(418
)
Net cash provided by operating activities
1,915

 
1,482

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(156
)
 
(118
)
Purchases of marketable securities
(8,595
)
 
(6,931
)
Proceeds from sales of marketable securities
3,898

 
4,999

Proceeds from maturities of marketable securities
458

 
1,201

Other
5

 
(103
)
Net cash used in investing activities
(4,390
)
 
(952
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of debt
2,909

 

Repayment of debt
(125
)
 
(125
)
Repurchases of common stock
(676
)
 
(464
)
Dividends paid
(752
)
 
(599
)
Settlement of contingent consideration obligation

 
(225
)
Other
(129
)
 
16

Net cash provided by (used in) financing activities
1,227

 
(1,397
)
Decrease in cash and cash equivalents
(1,248
)
 
(867
)
Cash and cash equivalents at beginning of period
4,144

 
3,731

Cash and cash equivalents at end of period
$
2,896

 
$
2,864


See accompanying notes.

4


AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(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, 2016 and 2015, 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, 2015.
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 $7.3 billion as of March 31, 2016, and December 31, 2015, respectively.
Recent accounting pronouncements and reclassifications
During the three months ended March 31, 2016, we adopted a new accounting standard that amends the presentation for debt issuance costs. See Note 9, Financing arrangements.
During the three months ended March 31, 2016, we adopted a new accounting standard that amends certain aspects of the accounting for employee share-based payments. One aspect of the standard requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized as an income tax benefit and expense in the income statement. See Note 4, Income taxes. Previously, such amounts were recognized as an increase and decrease in common stock and additional paid-in capital. This aspect of the standard was adopted prospectively, and accordingly, the Provision for income taxes for the three months ended March 31, 2016, includes $77 million of excess tax benefits arising from share-based payments. The new standard also amends the presentation of employee share-based payment-related items in the statement of cash flows by requiring that: (i) excess income tax benefits and deficiencies be classified in cash flows from operating activities (such amounts were previously included in cash flows from financing activities), and (ii) cash paid to taxing authorities arising from the withholding of shares from employees be classified in cash flows from financing activities (such amounts were previously included in cash flows from operating activities). We adopted the aspects of the standard affecting the cash flow presentation retrospectively, and accordingly, we reclassified $153 million of excess tax benefits from cash flows provided by financing activities to cash flows provided by operating activities in the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2015, to conform to the current year presentation. Cash flows paid to taxing authorities arising from withholding of shares from employees were not material in the prior year period.
In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB subsequently issued additional clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new

5


revenue recognition standard and clarifying standards are effective for interim and annual periods beginning January 1, 2018, and may be adopted earlier, but not before January 1, 2017. The revenue standards are required to be adopted using either a full retrospective or a modified retrospective approach. We are currently evaluating the impact that the revenue standards will have on our consolidated financial statements and determining the transition method that we will apply.
In January 2016, the FASB issued a new accounting standard that amends the accounting and disclosures of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in current earnings. The new standard is effective for interim and annual periods beginning on January 1, 2018. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
In February 2016, the FASB issued a new accounting standard that amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about their leasing arrangements. The new standard is effective for interim and annual periods beginning on January 1, 2019. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
Prior-period amounts for changes in Accounts payable have been reclassified to changes in Other liabilities on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2015, to conform to the current year presentation.
2. Restructuring
We continue to execute on the transformation and process improvement efforts announced in 2014. As part of these efforts, we committed to a more focused operating model. Our transformation and process improvement efforts across the Company are enabling us to reallocate resources to fund many of our innovative pipeline and growth opportunities to deliver value to patients and stockholders. The transformation and process improvement efforts include a restructuring, which is delivering cost savings and funding investments. As part of the restructuring, we are closing our facilities in Washington state and Colorado and reducing the number of buildings we occupy at our headquarters in Thousand Oaks, California, as well as at other locations.
We continue to estimate that we will incur $800 million to $900 million of pre-tax charges in connection with our restructuring, including: (i) separation and other headcount-related costs of $535 million to $585 million with respect to staff reductions, and (ii) asset-related charges of $265 million to $315 million consisting primarily of asset impairments, accelerated depreciation and other related costs resulting from the consolidation of our worldwide facilities. Through March 31, 2016, we have incurred $463 million of separation and other headcount-related costs and $205 million of asset-related charges. We expect that we will incur most of the remaining estimated costs during the remainder of 2016 and 2017 in order to support our ongoing transformation and process improvement efforts.
The amounts related to the restructuring recorded during the three months ended March 31, 2016, were not significant. As of March 31, 2016, the total restructuring liability decreased to $38 million, due primarily to payments related to separation costs.
3. Business combinations
Dezima Pharma B.V.
On October 14, 2015, we acquired all of the outstanding stock of Dezima Pharma B.V. (Dezima), a privately-held, Netherlands-based biotechnology company focused on developing innovative treatments for dyslipidemia. Dezima’s lead molecule is AMG 899 (formerly TA-8995), an oral, once-daily cholesteryl ester transfer protein inhibitor that has completed certain phase 2 trials. This transaction was accounted for as a business combination. Upon its acquisition, Dezima became a wholly owned subsidiary of Amgen, and its operations have been included in our consolidated financial statements commencing on the acquisition date.
The aggregate acquisition date consideration to acquire Dezima consisted of (in millions):
Total cash paid to former shareholders of Dezima
$
300

Fair value of contingent consideration obligations
110

Total consideration
$
410

In connection with this acquisition, we are obligated to make additional payments to the former shareholders of Dezima of up to $1.25 billion contingent upon the achievement of certain development and sales-related milestones. In addition, low-single-digit royalties will be paid on net product sales above a certain threshold. The estimated fair values of the contingent consideration obligations aggregated to $110 million as of the acquisition date. See Note 11, Fair value measurement.

6


The fair values of assets acquired and liabilities assumed included primarily in-process research and development (IPR&D) of $400 million, goodwill of $108 million and deferred tax liabilities of $100 million. This valuation reflects delayed development pending competitor clinical trials in this class. The fair value estimates for the assets acquired and liabilities assumed were based on preliminary calculations and valuations, and our estimates and assumptions are subject to change as we obtain additional information during the measurement period (up to one year from the acquisition date). The primary areas of those preliminary estimates that are not yet finalized relate to IPR&D and tax related items.
Pro forma results of operations for this acquisition have not been presented because the acquisition is not material to our consolidated results of operations.
4. Income taxes
The effective tax rate for the three months ended March 31, 2016, was 15.9%, compared with 13.5% for the corresponding period of the prior year. The effective rates differ 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 the United States.
The increase in our effective tax rate for the three months ended March 31, 2016, was due primarily to the unfavorable tax impact of changes in the jurisdictional mix of income and expenses, and a benefit from a state tax audit settlement during the three months ended March 31, 2015. This increase was offset partially by the adoption of a new accounting standard that amends certain aspects of the accounting for employee share-based compensation payments. One aspect of the standard requires that excess tax benefits and deficiencies that arise upon vesting or exercise of share-based payments be recognized as an income tax benefit and expense in the income statement.
Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate is 4.0% effective 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 the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred.
One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely audited by the tax authorities in those jurisdictions. Significant disputes may arise with these tax authorities involving issues of the timing and amount of 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 ended on or before December 31, 2009, or to California state income tax examinations for years ended on or before December 31, 2008.
During the three months ended March 31, 2016, the gross amount of our unrecognized tax benefits (UTBs) increased by approximately $110 million, as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2016, if recognized, would affect our effective tax rate.

7


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, restricted stock and performance unit awards, determined using the treasury stock method (collectively, dilutive securities).
The computations for basic and diluted EPS were as follows (in millions, except per share data):
 
 
Three months ended
 
 
March 31,
 
 
2016
 
2015
Income (Numerator):
 
 
 
 
Net income for basic and diluted EPS
 
$
1,900

 
$
1,623

 
 
 
 
 
Shares (Denominator):
 
 
 
 
Weighted-average shares for basic EPS
 
753

 
761

Effect of dilutive securities
 
7

 
9

Weighted-average shares for diluted EPS
 
760

 
770

 
 
 
 
 
Basic EPS
 
$
2.52

 
$
2.13

Diluted EPS
 
$
2.50

 
$
2.11

For the three months ended March 31, 2016 and 2015, the number of anti-dilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.
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 March 31, 2016
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
7,201

 
$
48

 
$
(1
)
 
$
7,248

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
483

 
1

 

 
484

Foreign and other
 
1,795

 
30

 
(9
)
 
1,816

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
8,220

 
63

 
(11
)
 
8,272

Industrial
 
8,416

 
96

 
(55
)
 
8,457

Other
 
947

 
7

 
(6
)
 
948

Residential mortgage-backed securities
 
1,681

 
10

 
(6
)
 
1,685

Other mortgage- and asset-backed securities
 
2,411

 
4

 
(40
)
 
2,375

Money market mutual funds
 
2,073

 

 

 
2,073

Other short-term interest-bearing securities
 
981

 

 

 
981

Total interest-bearing securities
 
34,208

 
259

 
(128
)
 
34,339

Equity securities
 
88

 
24

 

 
112

Total available-for-sale investments
 
$
34,296

 
$
283

 
$
(128
)
 
$
34,451



8


Type of security as of December 31, 2015

Amortized
cost

Gross
unrealized
gains

Gross
unrealized
losses

Estimated
fair
value
U.S. Treasury securities

$
4,298


$


$
(24
)

$
4,274

Other government-related debt securities:








U.S.

536




(2
)

534

Foreign and other

1,768


7


(36
)

1,739

Corporate debt securities:








Financial

7,904


7


(40
)

7,871

Industrial

7,961


11


(136
)

7,836

Other

905


1


(21
)

885

Residential mortgage-backed securities

1,484


1


(15
)

1,470

Other mortgage- and asset-backed securities

2,524




(55
)

2,469

Money market mutual funds

3,370






3,370

Other short-term interest-bearing securities

528






528

Total interest-bearing securities

31,278


27


(329
)

30,976

Equity securities

88


48




136

Total available-for-sale investments

$
31,366


$
75


$
(329
)

$
31,112

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
 
March 31,
2016
 
December 31,
2015
Cash and cash equivalents
 
$
2,495

 
$
3,738

Marketable securities
 
31,844

 
27,238

Other assets — noncurrent
 
112

 
136

Total available-for-sale investments
 
$
34,451

 
$
31,112

Cash and cash equivalents in the above table excludes cash of $401 million and $406 million as of March 31, 2016, and December 31, 2015, respectively.
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
 
March 31,
2016
 
December 31,
2015
Maturing in one year or less
 
$
4,184

 
$
4,578

Maturing after one year through three years
 
11,547

 
9,370

Maturing after three years through five years
 
11,481

 
9,932

Maturing after five years through ten years
 
3,016

 
3,087

Maturing after ten years
 
51

 
70

Mortgage- and asset-backed securities
 
4,060

 
3,939

Total interest-bearing securities
 
$
34,339

 
$
30,976

For the three months ended March 31, 2016 and 2015, realized gains totaled $37 million and $36 million, respectively, and realized losses totaled $67 million and $71 million, respectively. The cost of securities sold is based on the specific identification method.

9


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 March 31, 2016
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
454

 
$
(1
)
 
$

 
$

Other government-related debt securities:
 

 

 

 

U.S.
 
82

 

 
20

 

Foreign and other
 
360

 
(6
)
 
78

 
(3
)
Corporate debt securities:
 

 

 

 

Financial
 
1,490

 
(8
)
 
329

 
(3
)
Industrial
 
1,795

 
(35
)
 
667

 
(20
)
Other
 
351

 
(4
)
 
50

 
(2
)
Residential mortgage-backed securities
 
195

 
(1
)
 
294

 
(5
)
Other mortgage- and asset-backed securities
 
788

 
(8
)
 
487

 
(32
)
Total
 
$
5,515

 
$
(63
)
 
$
1,925

 
$
(65
)
 
 
Less than 12 months
 
12 months or greater
Type of security as of December 31, 2015
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
4,196

 
$
(24
)
 
$

 
$

Other government-related debt securities:
 

 

 

 

U.S.
 
494

 
(2
)
 
20

 

Foreign and other
 
1,306

 
(32
)
 
56

 
(4
)
Corporate debt securities:
 

 

 

 

Financial
 
5,988

 
(38
)
 
228

 
(2
)
Industrial
 
5,427

 
(108
)
 
679

 
(28
)
Other
 
807

 
(19
)
 
39

 
(2
)
Residential mortgage-backed securities
 
804

 
(8
)
 
304

 
(7
)
Other mortgage- and asset-backed securities
 
1,834

 
(19
)
 
561

 
(36
)
Total
 
$
20,856

 
$
(250
)
 
$
1,887

 
$
(79
)
The primary objective of our investment portfolio is to enhance overall returns in an efficient manner while maintaining safety of principal, prudent levels of liquidity and acceptable levels of risk. Our investment policy limits interest-bearing security investments to certain types of debt and money market instruments issued by institutions with primarily investment-grade credit ratings and it places restrictions on maturities and concentration by asset class and issuer.
We review our available-for-sale investments for other-than-temporary declines in fair value below our cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. 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, and the intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. As of March 31, 2016, and December 31, 2015, we believe the cost bases for our available-for-sale investments were recoverable in all material respects.

10


7. Inventories
Inventories consisted of the following (in millions):
 
March 31,
2016
 
December 31,
2015
Raw materials
$
206

 
$
201

Work in process
1,583

 
1,529

Finished goods
783

 
705

Total inventories
$
2,572

 
$
2,435

8. Goodwill and other intangible assets
Goodwill
Changes in the carrying amounts of goodwill were as follows (in millions):
 
Three months ended March 31,
 
2016
 
2015
Beginning balance
$
14,787

 
$
14,788

Goodwill related to acquisitions of businesses(1)
2

 

Currency translation adjustments
15

 
(67
)
Ending balance
$
14,804

 
$
14,721

(1) 
Consists of goodwill recognized on the acquisition dates of business combinations and subsequent adjustments to these amounts resulting from changes to the acquisition date fair values of net assets acquired in the business combinations recorded during their respective measurement periods.
Identifiable intangible assets
Identifiable intangible assets consisted of the following (in millions):
 
March 31, 2016
 
December 31, 2015
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Developed product technology rights
$
12,320

 
$
(5,235
)
 
$
7,085

 
$
12,310

 
$
(4,996
)
 
$
7,314

Licensing rights
3,275

 
(1,073
)
 
2,202

 
3,275

 
(998
)
 
2,277

Research and development technology rights
1,142

 
(658
)
 
484

 
1,134

 
(635
)
 
499

Marketing-related rights
1,350

 
(689
)
 
661

 
1,186

 
(650
)
 
536

Total finite-lived intangible assets
18,087

 
(7,655
)
 
10,432

 
17,905

 
(7,279
)
 
10,626

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
IPR&D
1,016

 

 
1,016

 
1,015

 

 
1,015

Total identifiable intangible assets
$
19,103

 
$
(7,655
)
 
$
11,448

 
$
18,920

 
$
(7,279
)
 
$
11,641

Developed product technology rights consist of rights related to marketed products acquired in business combinations. Licensing rights consist primarily of contractual rights acquired in business combinations to receive future milestones, royalties and profit sharing payments, capitalized payments to third parties for milestones related to regulatory approvals to commercialize products and up-front payments associated with royalty obligations for marketed products. Research and development (R&D) technology rights consist of technology used in R&D with alternative future uses. Marketing-related intangible assets consist primarily of rights related to the sale and distribution of marketed products.

11


IPR&D consists of R&D projects acquired in a business combination which are not complete at the time of acquisition due to remaining technological risks and/or lack of receipt of required regulatory approvals. As of March 31, 2016, such projects include AMG 899, acquired in the acquisition of Dezima (see Note 3, Business combinations); oprozomib, acquired in the acquisition of Onyx Pharmaceuticals, Inc. (Onyx); and Parsabiv (etelcalcetide), acquired in the acquisition of KAI Pharmaceuticals.
All IPR&D projects have 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 permitted 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. We review IPR&D projects for impairment annually, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and upon establishment of technological feasibility or regulatory approval.
During the three months ended March 31, 2016 and 2015, we recognized amortization charges associated with our finite-lived intangible assets of $369 million and $341 million, respectively. The total estimated amortization charges for our finite-lived intangible assets for the remaining nine months ending December 31, 2016, and the years ending December 31, 2017, 2018, 2019, 2020 and 2021, are $1.1 billion, $1.3 billion, $1.2 billion, $1.1 billion, $1.0 billion and $0.9 billion, respectively.

12


9. Financing arrangements
The principal amounts, fixed contractual coupon rates and aggregate carrying value of our long-term borrowings were as follows (in millions):
 
March 31,
2016
 
December 31,
2015
2.30% notes due 2016 (2.30% 2016 Notes)
$
750

 
$
750

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

 
1,000

2.125% notes due 2017 (2.125% 2017 Notes)
1,250

 
1,250

Floating Rate Notes due 2017
600

 
600

1.25% notes due 2017 (1.25% 2017 Notes)
850

 
850

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

 
1,100

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

 
500

Term Loan due 2018
1,850

 
1,975

4.375% euro-denominated notes due 2018 (4.375% 2018 euro Notes)
616

 
599

5.70% notes due 2019 (5.70% 2019 Notes)
1,000

 
1,000

Floating Rate Notes due 2019
250

 
250

2.20% notes due 2019 (2.20% 2019 Notes)
1,400

 
1,400

2.125% euro-denominated notes due 2019 (2.125% 2019 euro Notes)
768

 
733

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

 
300

2.125% notes due 2020 (2.125% 2020 Notes)
750

 
750

3.45% notes due 2020 (3.45% 2020 Notes)
900

 
900

4.10% notes due 2021 (4.10% 2021 Notes)
1,000

 
1,000

3.875% notes due 2021 (3.875% 2021 Notes)
1,750

 
1,750

1.25% euro-denominated notes due 2022 (1.25% 2022 euro Notes)
1,423

 

2.70% notes due 2022 (2.70% 2022 Notes)
500

 
500

3.625% notes due 2022 (3.625% 2022 Notes)
750

 
750

0.41% Swiss-franc-denominated bonds due 2023 (0.41% 2023 Swiss franc Bonds)
728

 

3.625% notes due 2024 (3.625% 2024 Notes)
1,400

 
1,400

3.125% notes due 2025 (3.125% 2025 Notes)
1,000

 
1,000

2.00% euro-denominated notes due 2026 (2.00% 2026 euro Notes)
854

 

5.50% pound-sterling denominated notes due 2026 (5.50% 2026 pound sterling Notes)
682

 
700

4.00% pound-sterling denominated notes due 2029 (4.00% 2029 pound sterling Notes)
1,005

 
1,032

6.375% notes due 2037 (6.375% 2037 Notes)
900

 
900

6.90% notes due 2038 (6.90% 2038 Notes)
500

 
500

6.40% notes due 2039 (6.40% 2039 Notes)
1,000

 
1,000

5.75% notes due 2040 (5.75% 2040 Notes)
700

 
700

4.95% notes due 2041 (4.95% 2041 Notes)
600

 
600

5.15% notes due 2041 (5.15% 2041 Notes)
2,250

 
2,250

5.65% notes due 2042 (5.65% 2042 Notes)
1,250

 
1,250

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

 
1,000

4.40% notes due 2045 (4.40% 2045 Notes)
1,250

 
1,250

Other notes
100

 
100

Unamortized bond discounts and issuance costs
(219
)
 
(210
)
Total carrying value of debt
$
34,307

 
$
31,429

Less current portion
(2,247
)
 
(2,247
)
Total noncurrent debt
$
32,060

 
$
29,182


13


The principal amounts of notes denominated in foreign currencies included in the above table include €550 million of 4.375% 2018 euro Notes, €675 million of 2.125% 2019 euro Notes, €1,250 million of 1.25% 2022 euro Notes, CHF700 million of 0.41% 2023 Swiss franc Bonds, €750 million of 2.00% 2026 euro Notes, £475 million of 5.50% 2026 pound sterling Notes and £700 million of 4.00% 2029 pound sterling Notes. There are no material differences between the effective interest rates and coupon rates of any of our borrowings.
During the three months ended March 31, 2016, we retrospectively adopted a new accounting standard that amends the presentation of debt issuance costs. Such costs are now presented as a direct deduction from the carrying amount of the debt liability and not as a deferred charge presented as assets on our Condensed Consolidated Balance Sheets. As a result of adopting this new accounting standard, our Condensed Consolidated Balance Sheet at December 31, 2015, was restated to reflect this impact, which reduced both Other current assets and the Current portion of long-term debt by $3 million and both Other assets and Long-term debt by $124 million.
Debt repayments
During the three months ended March 31, 2016, we repaid $125 million of principal on our Term Loan Credit Facility (Term Loan).
Debt issuances
During the three months ended March 31, 2016, we issued debt securities in the following offerings:
In March 2016, we issued $704 million principal amount of bonds, consisting of the 0.41% 2023 Swiss franc Bonds (CHF700 million principal amount).
In February 2016, we issued $2.2 billion aggregate principal amount of notes, consisting of the 1.25% 2022 euro Notes (€1,250 million principal amount) and the 2.00% 2026 euro Notes (€750 million principal amount).
Debt issuance costs incurred in connection with both issuances of debt totaling approximately $13 million are being amortized over the respective lives of the debt securities and the related charges are included in Interest expense, net in the Condensed Consolidated Statements of Income.
In the event of a change-in-control triggering event, as defined, we may be required to purchase all or a portion of these debt securities at a price equal to 101% of the principal amount of the notes plus accrued and unpaid interest. In addition, all of the euro-denominated notes issued during 2016 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, as defined. These euro-denominated notes may be redeemed without payment of a make-whole amount if they are redeemed on or after three months prior to their maturity date.
10. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program was as follows (in millions):
 
2016
 
2015
 
Shares
 
Dollars 
 
Shares
 
Dollars
First quarter
4.7

 
$
690

 
2.9

 
$
451

As of March 31, 2016, $4.2 billion remained available under our stock repurchase program.
Dividends
In March 2016, the Board of Directors declared a quarterly cash dividend of $1.00 per share of common stock which will be paid in June 2016.
In December 2015, the Board of Directors declared a quarterly cash dividend of $1.00 per share of common stock which was paid in March 2016.

14


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, 2015
$
(511
)
 
$
297

 
$
(260
)
 
$
(6
)
 
$
(480
)
Foreign currency translation adjustments
36

 

 

 

 
36

Unrealized (losses) gains

 
(117
)
 
379

 

 
262

Reclassification adjustments to income

 
(166
)
 
30

 

 
(136
)
Income taxes
(3
)
 
104

 
(51
)
 

 
50

Balance as of March 31, 2016
$
(478
)
 
$
118

 
$
98

 
$
(6
)
 
$
(268
)
The reclassifications out of AOCI and into earnings were as follows (in millions):
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Three months ended March 31, 2016
 
Three months ended March 31, 2015
 
Line item affected in the
 Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
96

 
$
69

 
Product sales
     Cross-currency swap contract gains (losses)
 
70

 
(183
)
 
Interest and other income, net
 
 
166

 
(114
)
 
Total before income tax
 
 
(61
)
 
41

 
Tax (expense) benefit
 
 
$
105

 
$
(73
)
 
Net of taxes
Available-for-sale securities:
 
 
 

 

     Net realized losses
 
$
(30
)
 
$
(35
)
 
Interest and other income, net
 
 

 
13

 
Tax benefit
 
 
$
(30
)
 
$
(22
)
 
Net of taxes
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.

15


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 March 31, 2016, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
7,248

 
$

 
$

 
$
7,248

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
484

 

 
484

Foreign and other
 

 
1,816

 

 
1,816

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
8,272

 

 
8,272

Industrial
 

 
8,457

 

 
8,457

Other
 

 
948

 

 
948

Residential mortgage-backed securities
 

 
1,685

 

 
1,685

Other mortgage- and asset-backed securities
 

 
2,375

 

 
2,375

Money market mutual funds
 
2,073

 

 

 
2,073

Other short-term interest-bearing securities
 

 
981

 

 
981

Equity securities
 
112

 

 

 
112

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
23

 

 
23

Cross-currency swap contracts
 

 
109

 

 
109

Interest rate swap contracts
 

 
220

 

 
220

Total assets
 
$
9,433

 
$
25,370

 
$

 
$
34,803

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
63

 
$

 
$
63

Cross-currency swap contracts
 

 
328

 

 
328

Interest rate swap contracts
 

 
3

 

 
3

Contingent consideration obligations in connection with business combinations
 

 

 
194

 
194

Total liabilities
 
$

 
$
394

 
$
194

 
$
588


16


 
 
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, 2015, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,274

 
$

 
$

 
$
4,274

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
534

 

 
534

Foreign and other
 

 
1,739

 

 
1,739

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
7,871

 

 
7,871

Industrial
 

 
7,836

 

 
7,836

Other
 

 
885

 

 
885

Residential mortgage-backed securities
 

 
1,470

 

 
1,470

Other mortgage- and asset-backed securities
 

 
2,469

 

 
2,469

Money market mutual funds
 
3,370

 

 

 
3,370

Other short-term interest-bearing securities
 

 
528

 

 
528

Equity securities
 
136

 

 

 
136

Derivatives:
 
 
 
 
 
 
 


Foreign currency contracts
 

 
142

 

 
142

Interest rate swap contracts
 

 
71

 

 
71

Total assets
 
$
7,780

 
$
23,545

 
$

 
$
31,325

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
8

 
$

 
$
8

Cross-currency swap contracts
 

 
250

 

 
250

Interest rate swap contracts
 

 
3

 

 
3

Contingent consideration obligations in connection with business combinations
 

 

 
188

 
188

Total liabilities
 
$

 
$
261

 
$
188

 
$
449

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 or equivalent by Standard & Poor’s Financial Services LLC (S&P) or Moody’s Investors Service, Inc. (Moody’s) and A- by Fitch, Inc. (Fitch); and our corporate debt securities portfolio has a weighted-average credit rating of BBB + or equivalent 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.

17


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 or Moody’s. 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, London Interbank Offered 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 or Moody’s. 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 or Moody’s. 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
As a result of our business acquisitions, we incurred contingent consideration obligations, as 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 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 that 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.
Changes in carrying amounts of contingent consideration obligations were as follows (in millions):
 
 
Three months ended March 31,
 
 
2016
 
2015
Beginning balance
 
$
188

 
$
215

Net changes in valuation
 
6

 

Ending balance
 
$
194

 
$
215

As a result of our acquisition of Dezima in October 2015, we are obligated to pay its former shareholders up to $1.25 billion of additional consideration contingent upon achieving certain development and sales-related milestones and low single-digit royalties on net product sales above a certain threshold. The estimated fair values of the contingent consideration obligations had an aggregate value of $110 million at acquisition. See Note 3, Business combinations.
As a result of our acquisition of BioVex Group, Inc. (BioVex) in March 2011, we are obligated to pay its former shareholders up to $325 million of additional consideration contingent if certain sales thresholds are achieved within specified periods of time.
We estimate the fair values of the obligations to the former shareholders of Dezima and BioVex by using probability-adjusted discounted cash flows, and we review underlying key assumptions on a quarterly basis. There were no significant changes in the fair values of contingent consideration obligations for the three months ended March 31, 2016 or 2015.
During the three months ended March 31, 2016 and 2015, 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.

18


Summary of the fair value of other financial instruments
Cash equivalents
The estimated fair values of cash equivalents approximate their carrying values due to the short-term nature of these financial instruments.
Borrowings
We estimated the fair value of our long-term debt (Level 2) by taking into consideration indicative prices obtained from a third-party financial institution that utilizes industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; credit spreads; benchmark yields; foreign currency exchange rates, as applicable; and other observable inputs. As of March 31, 2016, and December 31, 2015, the aggregate fair values of our long-term debt were $37.1 billion and $33.1 billion, respectively, and the carrying values were $34.3 billion and $31.4 billion, respectively.
12. Derivative instruments
The Company is exposed to foreign currency exchange rate risks and interest rate risks related to its business operations. To reduce our risks related to these exposures, we utilize or have utilized certain derivative instruments, including foreign currency forward, foreign currency option, cross-currency swap, forward interest rate and interest rate swap contracts. We do not use derivatives for speculative trading purposes.
Cash flow hedges
We are exposed to possible changes in the values of certain anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, associated primarily with our euro-denominated international product sales. Increases and decreases in the cash flows associated with our international product sales due to movements in foreign currency exchange rates are offset partially by corresponding increases and decreases in our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations on our international product sales, we enter into foreign currency forward and option contracts to hedge a portion of our projected international product sales primarily over a three-year time horizon, with, at any given point in time, a higher percentage of nearer-term projected product sales being hedged than in successive periods.
As of both March 31, 2016, and December 31, 2015, we had open foreign currency forward contracts with notional amounts of $3.3 billion and open foreign currency option contracts with notional amounts of $225 million. We have designated these foreign currency forward and foreign currency option contracts, which are primarily euro based, as cash flow hedges, and accordingly, we report the effective portions of the unrealized gains and losses on these contracts in AOCI on the Condensed Consolidated Balance Sheets, and we reclassify them to earnings 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, including long-term debt issued during the three months ended March 31, 2016, (see Note 9, Financing arrangements), we entered into cross-currency swap contracts. Under the terms of these 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 those 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, effectively converting the interest payments and principal repayment on this debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges, and accordingly, the effective portions of the unrealized gains and losses on these contracts are reported in AOCI on the Condensed Consolidated Balance Sheets and reclassified to earnings in the same periods during which the hedged debt affects earnings.

19


The notional amounts and interest rates of our cross-currency swaps are as follows (notional amounts in millions):
 
 
Foreign currency
 
U.S. dollars
Hedged notes
 
Notional amount
 
Interest rate
 
Notional amount
 
Interest rate
2.125% 2019 euro Notes
 
675

 
2.125
%
 
$
864

 
2.6
%
1.25% 2022 euro Notes
 
1,250

 
1.25
%
 
$
1,388

 
3.2
%
0.41% 2023 Swiss franc Bonds
 
CHF
700

 
0.41
%
 
$
704

 
3.4
%
2.00% 2026 euro Notes
 
750

 
2.00
%
 
$
833

 
3.9
%
5.50% 2026 pound sterling Notes
 
£
475

 
5.50
%
 
$
747

 
6.0
%
4.00% 2029 pound sterling Notes
 
£
700

 
4.00
%
 
$
1,111

 
4.5
%
The effective portions of the unrealized gain/(loss) recognized in other comprehensive income for our derivative instruments designated as cash flow hedges were as follows (in millions):
 
 
 
 
Three months ended
 
 
 
 
March 31,
Derivatives in cash flow hedging relationships
 
2016
 
2015
Foreign currency contracts
 
 
 
$
(148
)
 
$
392

Cross-currency swap contracts
 
 
 
31

 
(224
)
Total
 
 
 
$
(117
)
 
$
168

The locations in the Condensed Consolidated Statements of Income and the effective portions of the gain/(loss) reclassified out of AOCI and into earnings for our derivative instruments designated as cash flow hedges were as follows (in millions):
 
 
 
 
Three months ended
 
 
 
 
March 31,
Derivatives in cash flow hedging relationships
 
Statements of Income location
 
2016
 
2015
Foreign currency contracts
 
Product sales
 
$
96

 
$
69

Cross-currency swap contracts
 
Interest and other income, net
 
70

 
(183
)
Total
 
 
 
$
166

 
$
(114
)
No portions of our cash flow hedge contracts are excluded from the assessment of hedge effectiveness, and the gains and losses of the ineffective portions of these hedging instruments were not material for the three months ended March 31, 2016 and 2015. As of March 31, 2016, the amounts expected to be reclassified out of AOCI and into earnings over the next 12 months are approximately $120 million of net gains on our foreign currency and cross-currency swap contracts and approximately $1 million of losses on forward interest rate contracts.
Fair value hedges
To achieve a desired mix of fixed and floating interest rates on our long-term debt, we entered into interest rate swap contracts that qualified and are designated as fair value hedges. The terms of these interest rate swap contracts correspond to the related hedged debt instruments and effectively converted a fixed interest rate coupon to a floating LIBOR-based coupon over the lives of the respective notes. We had interest rate swap agreements as of March 31, 2016, and December 31, 2015, with aggregate notional amounts of $6.65 billion. The contracts have rates that range from three-month LIBOR plus 0.4% to three-month LIBOR plus 2.0%.
For derivative instruments that qualify for and are designated as fair value hedges, we recognize in current earnings 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. For the three months ended March 31, 2016 and 2015, we included the unrealized losses on hedged debt of $149 million and $89 million, respectively, in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized gains of $149 million and $89 million, respectively, on the related interest rate swap agreements.

20


Derivatives not designated as hedges
To reduce our exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. The exposures are hedged on a month-to-month basis. As of March 31, 2016, and December 31, 2015, the total notional amounts of these foreign currency forward contracts were $854 million and $911 million, respectively.
The location in the Condensed Consolidated Statements of Income and the amount of gain/(loss) recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
 
 
 
 
Three months ended
  
 
 
 
March 31,
Derivatives not designated as hedging instruments
 
Statements of Income location
 
2016
 
2015
Foreign currency contracts
 
Interest and other income, net
 
$
(10
)
 
$
(29
)
The fair values of derivatives included on the Condensed Consolidated Balance Sheets were as follows (in millions):
 
 
Derivative assets
 
Derivative liabilities
March 31, 2016
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Cross-currency swap contracts
 
Other current assets/ Other noncurrent assets
 
$
109

 
Accrued liabilities/ Other noncurrent liabilities
 
$
328

Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
23

 
Accrued liabilities/ Other noncurrent liabilities
 
63

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 
220

 
Accrued liabilities/ Other noncurrent liabilities
 
3

Total derivatives designated as hedging instruments
 
 
 
352

 
 
 
394

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other current assets
 

 
Accrued liabilities
 

Total derivatives not designated as hedging instruments
 
 
 

 
 
 

Total derivatives
 
 
 
$
352

 
 
 
$
394

 
 
Derivative assets
 
Derivative liabilities
December 31, 2015
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Cross-currency swap contracts
 
Other current assets/ Other noncurrent assets
 
$

 
Accrued liabilities/ Other noncurrent liabilities
 
$
250

Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
142

 
Accrued liabilities/ Other noncurrent liabilities
 
7

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 
71

 
Accrued liabilities/ Other noncurrent liabilities
 
3

Total derivatives designated as hedging instruments
 
 
 
213

 
 
 
260

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other current assets
 

 
Accrued liabilities
 
1

Total derivatives not designated as hedging instruments
 
 
 

 
 
 
1

Total derivatives
 
 
 
$
213

 
 
 
$
261


21


Our derivative contracts that were in liability positions as of March 31, 2016, 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 to or from a counterparty under these contracts may only be offset against other amounts due to or from the same counterparty if an event of default or termination, as defined, were to occur.
The cash flow effects of our derivative contracts for the three months ended March 31, 2016 and 2015, are included within Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
13. Contingencies and commitments
Contingencies
In the ordinary course of business, we are involved in various legal proceedings and other matters-including those discussed in this Note-that are complex in nature and have outcomes that are difficult to predict. See Note 18, Contingencies and commitments to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015, for further discussion of certain of our legal proceedings and other matters.
We record accruals for loss contingencies to the extent that we conclude that 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 range from cases brought by a single plaintiff to class actions with thousands of putative class members. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims-including but not limited to patent infringement, marketing, pricing and trade practices and securities law-some of which present novel factual allegations and/or unique legal theories. In each of the matters described in this filing or in Note 18, Contingencies and commitments, to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015, plaintiffs 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 faced by us often extend for several years). As a result, none of the matters pending against us described in this filing have progressed sufficiently through discovery and/or 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 items, an adverse determination in one or more of these items 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:
PCSK9 Antibody Patent Litigations
U.S. Patent LitigationSanofi/Regeneron
In this ongoing patent litigation, on February 22, 2016, the U.S. District Court of Delaware (the Delaware District Court) entered a stipulated order finding the antibody drug substance alirocumab and the drug product containing it, PRALUENT®, infringe certain of Amgen’s patents, including claims 2, 7, 9, 15, 19 and 29 of U.S. Patent No. 8,829,165 (the ‘165 Patent) and claim 7 of U.S. Patent No. 8,859,741 (the ‘741 Patent). On March 18, 2016, the Delaware District Court entered judgment in favor of Amgen following a five day jury trial and a unanimous jury verdict that these patent claims from the ‘165 Patent and the ‘741 Patent are all valid. An evidentiary hearing on Amgen’s request for a permanent injunction was held on March 23 and 24, 2016. For its consideration prior to rendering a decision on the request for injunction, the Delaware District Court has requested briefings by the parties to be completed by May 25, 2016. On April 15, 2016, Sanofi S.A., Sanofi-Aventis U.S. LLC, Aventisub LLC, formerly doing business as Aventis Pharmaceuticals Inc. (collectively Sanofi), and Regeneron Pharmaceuticals, Inc. (Regeneron) filed post-trial motions seeking a new trial and judgment as a matter of law.
Patent Disputes in the European Region
On February 24, 2016, the European Patent Office (EPO) granted European Patent No. 2,215,124 (EP 2,215,124) to Amgen. This patent describes and claims monoclonal antibodies to proprotein convertase subtilisin/kexin type 9 (PCSK9) and methods of treatment. On February 24, 2016, Sanofi filed an opposition to the patent in the EPO seeking to invalidate it.

22


On March 24, 2016, Amgen was served with a patent revocation action in the Patent Court of the Chancery Division of the High Court of Justice of England and Wales by Pfizer Inc. seeking to revoke European Patent (UK) No. 2,215,124, the patent issuing in the United Kingdom from EP 2,215,124.
We are also involved in and expect future involvement in additional disputes regarding our PCSK9 patents in other jurisdictions and regions.
Biosimilars Patent Litigations
We have filed a number of lawsuits against manufacturers of products that purport to be biosimilars of certain of our products. In each case, our complaint alleges that the manufacturer’s actions infringe certain patents we hold and/or that the manufacturer has failed to comply with certain provisions of the Biologics Price Competition and Innovation Act (BPCIA).
Sandoz Pegfilgrastim Litigation
On March 4, 2016, Amgen Inc. and Amgen Manufacturing, Limited (collectively Amgen), filed a lawsuit in the U.S. District Court for the District of New Jersey (the New Jersey District Court) against Sandoz Inc., Sandoz International GmbH and Sandoz GmbH (collectively Sandoz). This lawsuit stems from Sandoz filing an abbreviated Biologics License Application in which Sandoz is seeking authorization from the U.S. Food and Drug Administration (FDA) to market a biosimilar version of Amgen’s Neulasta® (pegfilgrastim) product. By its complaint, Amgen seeks a judgment from the New Jersey District Court declaring the respective rights and obligations of the parties under the patent-dispute-resolution provisions of the BPCIA in view of Sandoz’s repeated efforts to circumvent the BPCIA process.
Sandoz Filgrastim Litigation
On February 16, 2016, Sandoz filed a petition for certiorari with the U.S. Supreme Court seeking review of the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court) ruling concluding that a biosimilar applicant must give 180-day advance notice of first marketing and that notice may only be given after the FDA has licensed the biosimilar product. On March 21, 2016, Amgen filed a brief in opposition to Sandoz’s petition and a conditional cross-petition for certiorari requesting that the U.S. Supreme Court also review the Federal Circuit Court’s ruling that the only remedy available when a biosimilar applicant refuses to provide its Biologics License Application is to bring a patent infringement claim.
The U.S. District Court for the Northern District of California has rescheduled the claim construction hearing for July 1, 2016.
Sandoz Etanercept Litigation
On February 26, 2016, two affiliates of Amgen Inc. (Immunex Corporation and Amgen Manufacturing, Limited (collectively Amgen)), along with Hoffmann-La Roche Inc. (Roche), filed a lawsuit in the New Jersey District Court against Sandoz. This lawsuit stems from Sandoz’s submission of an application for FDA licensure of an etanercept product as biosimilar to Amgen’s Enbrel® (etanercept). Amgen and Roche have asserted infringement of five patents: U.S. Patent Nos. 8,063,182; 8,163,522; 7,915,225; 8,119,605; and 8,722,631. By its complaint, Amgen and Roche are seeking an injunction to prohibit Sandoz from commercializing its biosimilar etanercept product in the United States prior to the expiry of such patents. On March 21, 2016, Sandoz Inc. filed an answer to the complaint.
Apotex Pegfilgrastim/Filgrastim Litigation
A hearing was held on April 4, 2016, in the Federal Circuit Court on the appeal filed by Apotex, Inc. and Apotex Corp. (collectively Apotex) seeking to review the preliminary injunction granted by the U.S. District Court for the Southern District of Florida (the Florida Southern District Court) prohibiting Apotex from commercializing its biosimilar pegfilgrastim product until a date that is at least 180 days after Apotex provides legally effective commercial notice to Amgen. The Federal Circuit Court has not yet rendered a decision on the appeal. Following a claim construction hearing, the Florida Southern District Court issued a written decision on April 7, 2016, construing certain terms of the asserted patents.
Hospira Epoetin Alfa Litigation
A hearing was held on February 16, 2016, on Hospira, Inc.’s (Hospira) motion to dismiss the one count of Amgen’s complaint which seeks a declaration that Hospira has failed to comply with the notice requirements of the BPCIA. The Delaware District Court has not yet ruled on the motion. The Delaware District Court has set a claim construction hearing and trial date for September 21, 2016, and September 18, 2017, respectively.

23


Onyx Litigation
The plaintiffs and the Onyx director defendants in this class action lawsuit filed a notice of settlement with the Superior Court of the State of California for the County of San Mateo on March 2, 2016 for an immaterial amount, and the settlement remains subject to finalization and approval by the court.
Federal Securities LitigationIn re Amgen Inc. Securities Litigation
The defendants in this federal class action have filed motions for summary judgment which are set for hearing on May 23, 2016. The trial date has been set for July 19, 2016.

24


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding Amgen’s business. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended December 31, 2015. Our results of operations discussed in MD&A are presented in conformity with GAAP. Amgen operates in one business segment: human therapeutics. Therefore, our results of operations are discussed on a consolidated basis.
Forward-looking statements
This report and other documents we file with the U.S. Securities and Exchange Commission (SEC) contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Such words as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “assume,” and “continue,” as well as variations of such words and similar expressions, are intended to identify such forward-looking statements. These statements are not guarantees of future performance, and they involve certain risks, uncertainties and assumptions that are difficult to predict. We describe our respective risks, uncertainties and assumptions that could affect the outcome or results of operations in Item 1A. Risk Factors in Part II herein. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements regarding product sales, regulatory activities, clinical trial results, reimbursement, expenses, EPS, liquidity and capital resources, trends and planned dividends, stock repurchases and restructuring plans. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.
Overview
Amgen is committed to unlocking the potential of biology for patients suffering from serious illnesses by discovering, developing, manufacturing and delivering innovative human therapeutics. This approach begins by using tools like advanced human genetics to unravel the complexities of disease and understand the fundamentals of human biology.
Amgen focuses on areas of high unmet medical need and leverages its expertise to strive for solutions that improve health outcomes and dramatically improve people’s lives. A biotechnology pioneer since 1980, Amgen has grown to be one of the world’s leading independent biotechnology companies, has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential.
Currently, we market therapeutics for supportive cancer care, inflammation, nephrology, and bone health. Our principal products are Enbrel® (etanercept), Neulasta® (pegfilgrastim), Aranesp® (darbepoetin alfa), XGEVA® (denosumab), Sensipar®/Mimpara® (cinacalcet), Prolia® (denosumab), EPOGEN® (epoetin alfa), and NEUPOGEN® (filgrastim). We market several other products as well, including Vectibix® (panitumumab), Nplate® (romiplostim), and more recently launched, Kyprolis® (carfilzomib), BLINCYTO® (blinatumomab), Repatha® (evolocumab), IMLYGIC(talimogene laherparepvec) and Corlanor® (ivabradine). Our product sales outside the United States consist principally of sales in Europe and we continue to expand the commercialization and marketing of our products, including in Latin America, the Middle East and Asia.

25


Significant developments
Following is a summary of selected significant developments affecting our business that have occurred since the filing of our Annual Report on Form10-K for the year ended December 31, 2015. For additional developments or for a more comprehensive discussion of certain developments discussed below, see our Annual Report on Form 10-K for the year ended December 31, 2015.
Products/Pipeline
Bone health
Romosozumab
In February 2016, we and UCB, our collaboration partner in the development of romosozumab, announced that the phase 3 FRAME study (FRActure study in postmenopausal woMen with ostEoporosis) met its co-primary endpoints.
In March 2016, we and UCB announced that the phase 3 BRIDGE study (placeBo-contRolled study evaluatIng the efficacy anD safety of romosozumab in treatinG mEn with osteoporosis) met its primary endpoint.
Inflammation
Enbrel® (etanercept)
In March 2016, we announced that the FDA accepted for review the supplemental Biologics License Application (sBLA) for the expanded use of Enbrel® to treat pediatric patients with chronic severe plaque psoriasis. The FDA has set a Prescription Drug User Fee Act target action date of November 5, 2016, as a goal for the completion of its review of our application.
Oncology/Hematology
BLINCYTO®(blinatumomab)
In March 2016, we announced that we submitted an sBLA to the FDA for BLINCYTO® to include new data supporting the treatment of pediatric and adolescent patients with Philadelphia chromosome-negative relapsed or refractory B-cell precursor acute lymphoblastic leukemia.
Nplate®(romiplostim)
In April 2016, we announced that the phase 3 study of Nplate® in children with symptomatic immune thromobocytopenia met its primary endpoint.
Selected financial information
The following is an overview of our results of operations (dollar and share amounts in millions, except per share data):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2016
 
2015
 
Change
Product sales:
 
 
 
 
 
 
U.S.