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EX-32 - SECTION 1350 CERTIFICATIONS - AMGEN INCamgn-ex32_2016630xq1.htm
EX-31 - RULE 13A-14(A) CERTIFICATIONS - AMGEN INCamgn-ex31_2016630xq1.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 June 30, 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 July 25, 2016, the registrant had 748,360,906 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
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Product sales
$
5,474

 
$
5,225

 
$
10,713

 
$
10,099

Other revenues
214

 
145

 
502

 
304

Total revenues
5,688

 
5,370

 
11,215

 
10,403

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of sales
1,050

 
1,089

 
2,068

 
2,122

Research and development
900

 
964

 
1,772

 
1,858

Selling, general and administrative
1,292

 
1,160

 
2,495

 
2,186

Other
66

 
81

 
98

 
139

Total operating expenses
3,308

 
3,294

 
6,433

 
6,305

 
 
 
 
 
 
 
 
Operating income
2,380

 
2,076

 
4,782

 
4,098

 
 
 
 
 
 
 
 
Interest expense, net
313

 
277

 
607

 
529

Interest and other income, net
137

 
198

 
287

 
304

 
 
 
 
 
 
 
 
Income before income taxes
2,204

 
1,997

 
4,462

 
3,873

 
 
 
 
 
 
 
 
Provision for income taxes
334

 
344

 
692

 
597

 
 
 
 
 
 
 
 
Net income
$
1,870

 
$
1,653

 
$
3,770

 
$
3,276

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
2.49

 
$
2.18

 
$
5.01

 
$
4.30

Diluted
$
2.47

 
$
2.15

 
$
4.97

 
$
4.26

 
 
 
 
 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
 
 
 
 
Basic
751

 
760

 
753

 
761

Diluted
756

 
768

 
759

 
769

 
 
 
 
 
 
 
 
Dividends paid per share
$
1.00

 
$
0.79

 
$
2.00

 
$
1.58


See accompanying notes.

1


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
1,870

 
$
1,653

 
$
3,770

 
$
3,276

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
 
 
 
 
Foreign currency translation (losses) gains
(17
)
 
18

 
16

 
(155
)
Effective portion of cash flow hedges
(6
)
 
(115
)
 
(185
)
 
63

Net unrealized gains (losses) on available-for-sale securities
184

 
(108
)
 
542

 
32

Other
1

 

 
1

 

Other comprehensive income (loss), net of taxes
162


(205
)

374

 
(60
)
Comprehensive income
$
2,032

 
$
1,448

 
$
4,144

 
$
3,216


See accompanying notes.

2


AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
June 30,
2016
 
December 31,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,630

 
$
4,144

Marketable securities
32,404

 
27,238

Trade receivables, net
3,078

 
2,995

Inventories
2,671

 
2,435

Other current assets
2,164

 
1,703

Total current assets
42,947

 
38,515

 
 
 
 
Property, plant and equipment, net
4,884

 
4,907

Intangible assets, net
11,068

 
11,641

Goodwill
14,799

 
14,787

Other assets
1,773

 
1,599

Total assets
$
75,471

 
$
71,449

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
870

 
$
965

Accrued liabilities
4,666

 
5,452

Current portion of long-term debt
5,294

 
2,247

Total current liabilities
10,830

 
8,664

 
 
 
 
Long-term debt
27,928

 
29,182

Long-term deferred tax liability
2,598

 
2,239

Other noncurrent liabilities
3,982

 
3,281

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding—748.9 shares in 2016 and 754.0 shares in 2015
30,595

 
30,649

Accumulated deficit
(356
)
 
(2,086
)
Accumulated other comprehensive loss
(106
)
 
(480
)
Total stockholders’ equity
30,133

 
28,083

Total liabilities and stockholders’ equity
$
75,471

 
$
71,449


See accompanying notes.

3


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six months ended
 
June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
3,770

 
$
3,276

Depreciation and amortization
1,043

 
1,043

Share-based compensation expense
139

 
160

Deferred income taxes
245

 
(126
)
Other items, net
42

 
5

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables, net
(119
)
 
(199
)
Inventories
(156
)
 
196

Other assets
(330
)
 
85

Accounts payable
(100
)
 
(198
)
Accrued income taxes
(328
)
 
369

Other liabilities
386

 
155

Net cash provided by operating activities
4,592

 
4,766

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(344
)
 
(251
)
Purchases of intangible assets
(99
)
 
(50
)
Proceeds from the sale of property, plant and equipment
14

 
226

Purchases of marketable securities
(14,969
)
 
(13,530
)
Proceeds from sales of marketable securities
9,063

 
8,021

Proceeds from maturities of marketable securities
1,339

 
2,500

Other
(51
)
 
(227
)
Net cash used in investing activities
(5,047
)
 
(3,311
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of debt
2,908

 
3,464

Repayment of debt
(1,000
)
 
(2,150
)
Repurchases of common stock
(1,218
)
 
(940
)
Dividends paid
(1,504
)
 
(1,201
)
Settlement of contingent consideration obligation

 
(225
)
Withholding taxes arising from shares withheld for share-based payments
(262
)
 
(390
)
Other
17

 
51

Net cash used in financing activities
(1,059
)
 
(1,391
)
(Decrease) increase in cash and cash equivalents
(1,514
)
 
64

Cash and cash equivalents at beginning of period
4,144

 
3,731

Cash and cash equivalents at end of period
$
2,630

 
$
3,795


See accompanying notes.

4


AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six months ended June 30, 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, and with our condensed consolidated financial statements and the notes thereto contained in our Quarterly Report on Form 10-Q for the period ended March 31, 2016.
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 $7.5 billion and $7.3 billion as of June 30, 2016, and December 31, 2015, respectively.
Recent accounting pronouncements and reclassifications
During the first quarter of 2016, we adopted a new accounting standard that amends the presentation for debt issuance costs. See Note 9, Financing arrangements.
During the first quarter of 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 income tax benefits and expenses in the income statement. See Note 4, Income taxes. Previously, such amounts were recognized as increases and decreases 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 and six months ended June 30, 2016, includes $37 million and $114 million, respectively, 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 (i) that 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) that 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, to conform to the current year presentation, in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2015, we reclassified: (a) $233 million of excess tax benefits from Net cash used in financing activities to Net cash provided by operating activities and (b) $390 million of cash paid to taxing authorities arising from withholding of shares from employees from Net cash provided by operating activities to Net cash used in financing activities.

5


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 has subsequently issued additional clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new 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 by taking 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.
In June 2016, the FASB issued a new accounting standard that amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets are presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded through an allowance for such losses rather than reducing the carrying amount under the current other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning on January 1, 2020. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
Certain amounts in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2015, have been reclassified from Accounts payable to Other liabilities within Changes in operating assets and liabilities, net of acquisitions 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 agile and efficient 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 that will deliver value to patients and stockholders. These efforts include a restructuring, which is also delivering cost savings and funding investments. As part of the restructuring, we are closing or have closed 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 June 30, 2016, we have incurred $471 million of separation and other headcount-related costs and $213 million of asset-related charges. We expect that we will incur most of the remaining estimated costs during the remainder of 2016 and in 2017 in order to support our ongoing transformation and process improvement efforts.
The amounts related to the restructuring recorded in the Condensed Consolidated Statements of Income during the three and six months ended June 30, 2016, were not significant. As of June 30, 2016, the total restructuring liability decreased to $35 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

6


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.
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.
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 rates for the three and six months ended June 30, 2016, were 15.2% and 15.5%, respectively, compared with 17.2% and 15.4% for the corresponding periods 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 decrease in our effective tax rate for the three months ended June 30, 2016, was due primarily to the favorable tax impact of discrete benefits associated with tax incentives and 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 income tax benefits and expenses in the income statement. The decrease was offset partially by the unfavorable tax impact of the changes in the jurisdictional mix of income and expenses.
The increase in our effective tax rate for the six months ended June 30, 2016, was due primarily to the unfavorable tax impact of changes in the jurisdictional mix of income and expenses and by a state tax audit settlement in the three months ended March 31, 2015. The increase was offset partially by discrete benefits associated with tax incentives and the adoption of a new accounting standard that amends certain aspects of the accounting for employee share-based compensation payments.
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 and expenses 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. We are currently under audit in several jurisdictions, including a U.S. federal income tax examination for tax years ended December 31, 2010, 2011, and 2012. Tax audits can involve complex issues, interpretations and judgments, and their resolution can take many years, particularly if subject to negotiation or litigation. Our assessments of uncertain tax benefits are based on information available to us at this time, including estimates and assumptions that have been deemed appropriate by management but may not be representative of final audit resolutions.
During the three and six months ended June 30, 2016, the gross amount of our unrecognized tax benefits (UTBs) increased by approximately $110 million and $220 million, respectively, as a result of tax positions taken during the current year. Substantially all of the UTBs as of June 30, 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, as 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
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Income (Numerator):
 
 
 
 
 
 
 
Net income for basic and diluted EPS
$
1,870

 
$
1,653

 
$
3,770


$
3,276

 
 
 
 
 
 
 
 
Shares (Denominator):
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
751

 
760

 
753

 
761

Effect of dilutive securities
5

 
8

 
6

 
8

Weighted-average shares for diluted EPS
756

 
768

 
759

 
769

 
 
 
 
 
 
 
 
Basic EPS
$
2.49

 
$
2.18

 
$
5.01

 
$
4.30

Diluted EPS
$
2.47

 
$
2.15

 
$
4.97

 
$
4.26

For the three and six months ended June 30, 2016 and 2015, the number of anti-dilutive employee share-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 June 30, 2016
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
7,916

 
$
104

 
$

 
$
8,020

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
345

 
2

 

 
347

Foreign and other
 
1,814

 
54

 
(2
)
 
1,866

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
8,120

 
121

 
(3
)
 
8,238

Industrial
 
8,345

 
141

 
(13
)
 
8,473

Other
 
1,002

 
17

 
(1
)
 
1,018

Residential mortgage-backed securities
 
1,729

 
15

 
(6
)
 
1,738

Other mortgage- and asset-backed securities
 
2,197

 
10

 
(27
)
 
2,180

Money market mutual funds
 
1,673

 

 

 
1,673

Other short-term interest-bearing securities
 
1,014

 

 

 
1,014

Total interest-bearing securities
 
34,155

 
464

 
(52
)
 
34,567

Equity securities
 
89

 
34

 

 
123

Total available-for-sale investments
 
$
34,244

 
$
498

 
$
(52
)
 
$
34,690


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
 
June 30,
2016
 
December 31,
2015
Cash and cash equivalents
 
$
2,163

 
$
3,738

Marketable securities
 
32,404

 
27,238

Other assets — noncurrent
 
123

 
136

Total available-for-sale investments
 
$
34,690

 
$
31,112

Cash and cash equivalents in the above table excludes cash of $467 million and $406 million as of June 30, 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
 
June 30,
2016
 
December 31,
2015
Maturing in one year or less
 
$
3,965

 
$
4,578

Maturing after one year through three years
 
11,141

 
9,370

Maturing after three years through five years
 
12,155

 
9,932

Maturing after five years through ten years
 
3,335

 
3,087

Maturing after ten years
 
53

 
70

Mortgage- and asset-backed securities
 
3,918

 
3,939

Total interest-bearing securities
 
$
34,567

 
$
30,976

For the three months ended June 30, 2016 and 2015, realized gains totaled $31 million and $18 million, respectively, and realized losses totaled $54 million and $27 million, respectively. For the six months ended June 30, 2016 and 2015, realized gains totaled $68 million and $54 million, respectively, and realized losses totaled $121 million and $98 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 June 30, 2016
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
174

 
$

 
$

 
$

Other government-related debt securities:
 

 

 

 

Foreign and other
 
53

 
(1
)
 
67

 
(1
)
Corporate debt securities:
 

 

 

 

Financial
 
420

 
(2
)
 
171

 
(1
)
Industrial
 
884

 
(8
)
 
405

 
(5
)
Other
 
64

 

 
31

 
(1
)
Residential mortgage-backed securities
 
100

 
(1
)
 
289

 
(5
)
Other mortgage- and asset-backed securities
 
168

 
(4
)
 
481

 
(23
)
Equity securities
 
1

 

 

 

Total
 
$
1,864

 
$
(16
)
 
$
1,444

 
$
(36
)
 
 
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 based on new developments or changes in assumptions related to any particular security. As of June 30, 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):
 
June 30,
2016
 
December 31,
2015
Raw materials
$
205

 
$
201

Work in process
1,510

 
1,529

Finished goods
956

 
705

Total inventories
$
2,671

 
$
2,435

8. Goodwill and other intangible assets
Goodwill
Changes in the carrying amounts of goodwill were as follows (in millions):
 
Six months ended June 30,
 
2016
 
2015
Beginning balance
$
14,787

 
$
14,788

Goodwill related to acquisitions of businesses(1)
2

 

Currency translation adjustments
10

 
(65
)
Ending balance
$
14,799

 
$
14,723

(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):
 
June 30, 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
$
12,313

 
$
(5,472
)
 
$
6,841

 
$
12,310

 
$
(4,996
)
 
$
7,314

Licensing rights
3,275

 
(1,149
)
 
2,126

 
3,275

 
(998
)
 
2,277

Research and development technology rights
1,138

 
(675
)
 
463

 
1,134

 
(635
)
 
499

Marketing-related rights
1,349

 
(726
)
 
623

 
1,186

 
(650
)
 
536

Total finite-lived intangible assets
18,075

 
(8,022
)
 
10,053

 
17,905

 
(7,279
)
 
10,626

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
IPR&D
1,015

 

 
1,015

 
1,015

 

 
1,015

Total identifiable intangible assets
$
19,090

 
$
(8,022
)
 
$
11,068

 
$
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 that are not complete at the time of acquisition due to remaining technological risks and/or lack of receipt of required regulatory approvals. As of June 30, 2016, the projects include primarily 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 our 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, as well as competitive product launches, 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 the establishment of technological feasibility or regulatory approval.
During the three months ended June 30, 2016 and 2015, we recognized amortization charges associated with our finite-lived intangible assets of $371 million and $345 million, respectively. During the six months ended June 30, 2016 and 2015, we recognized amortization charges associated with our finite-lived intangible assets of $740 million and $686 million, respectively. The total estimated amortization charges for our finite-lived intangible assets for the remaining six months ending December 31, 2016, and the years ending December 31, 2017, 2018, 2019, 2020 and 2021, are $0.7 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):
 
June 30,
2016
 
December 31,
2015
2.30% notes due 2016 (2.30% 2016 Notes)
$

 
$
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 (Term Loan)
1,725

 
1,975

4.375% euro-denominated notes due 2018 (4.375% 2018 euro Notes)
606

 
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)
750

 
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)
1,388

 

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)
717

 

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)
833

 

5.50% pound-sterling denominated notes due 2026 (5.50% 2026 pound sterling Notes)
633

 
700

4.00% pound-sterling denominated notes due 2029 (4.00% 2029 pound sterling Notes)
932

 
1,032

6.375% notes due 2037 (6.375% 2037 Notes)
552

 
900

6.90% notes due 2038 (6.90% 2038 Notes)
291

 
500

6.40% notes due 2039 (6.40% 2039 Notes)
466

 
1,000

5.75% notes due 2040 (5.75% 2040 Notes)
412

 
700

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

 
600

5.15% notes due 2041 (5.15% 2041 Notes)
974

 
2,250

5.65% notes due 2042 (5.65% 2042 Notes)
487

 
1,250

5.375% notes due 2043 (5.375% 2043 Notes)
261

 
1,000

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

 
1,250

4.563% notes due 2048 (4.563% 2048 Notes)
1,415

 

4.663% notes due 2051 (4.663% 2051 Notes)
3,541

 

Other notes
100

 
100

Unamortized bond discounts and issuance costs
(1,011
)
 
(210
)
Total carrying value of debt
$
33,222

 
$
31,429

Less current portion
(5,294
)
 
(2,247
)
Total noncurrent debt
$
27,928

 
$
29,182


13


The principal amounts of notes denominated in foreign currencies 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, except for the 4.563% 2048 Notes and the 4.663% 2051 Notes, which have effective interest rates of approximately 6.3% and 5.6%, respectively.
During the first quarter of 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 deferred charges 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 six months ended June 30, 2016, we repaid $250 million of principal on our Term Loan due 2018 and the $750 million aggregate principal amount of the 2.30% 2016 Notes.
Debt issuances
During the six months ended June 30, 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 (as well as the debt exchange issuances discussed below) 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.
Debt exchange
During the three months ended June 30, 2016, we completed a private offering to exchange portions of certain outstanding senior notes due 2037 through 2043 (collectively, the Old Notes), listed below, for new senior notes, consisting of principal amounts of $1.4 billion of 4.563% 2048 Notes and $3.5 billion of 4.663% 2051 Notes (collectively, the New Notes).
The following principal amounts of each series of Old Notes were validly tendered and subsequently canceled (in millions):
 
 
 
 
Principal Amount Exchanged
6.375% 2037 Notes
 
 
 
$
348

6.90% 2038 Notes
 
 
 
209

6.40% 2039 Notes
 
 
 
534

5.75% 2040 Notes
 
 
 
288

5.15% 2041 Notes
 
 
 
1,276

5.65% 2042 Notes
 
 
 
763

5.375% 2043 Notes
 

 
739


14


The New Notes bear lower fixed coupon rates while requiring higher principal repayments on extended maturity dates, compared with the Old Notes that were exchanged. There were no other significant changes to the terms between the Old Notes and the New Notes. The exchange is considered a debt modification, and there were no cash payments to or cash receipts from the note holders as a result of the exchange. Existing deferred financing costs associated with the Old Notes, as well as discounts associated with the New Notes aggregating $801 million, will be accreted over the term of the New Notes and recorded as Interest expense, net. Transaction costs of $24 million incurred for the exchange were expensed immediately in Interest and other income, net.
10. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
 
2016
 
2015
 
Shares
 
Dollars 
 
Shares
 
Dollars
First quarter
4.7

 
$
690

 
2.9

 
$
451

Second quarter
3.9

 
591

 
3.3

 
515

 
8.6

 
$
1,281

 
6.2

 
$
966

As of June 30, 2016, $3.6 billion remained available under our stock repurchase program.
Dividends
In July 2016, the Board of Directors declared a quarterly cash dividend of $1.00 per share of common stock, which will be paid in September 2016.
In March 2016 and December 2015, the Board of Directors declared quarterly cash dividends of $1.00 per share of common stock, which were paid in June 2016 and March 2016, respectively.
Accumulated other comprehensive income/(loss)
The components of accumulated other comprehensive income/(loss) (AOCI) were as follows (in millions):
 
Foreign
currency
translation
 
Cash flow
hedges
 
Available-for-sale
securities
 
Other
 
AOCI
Balance as of December 31, 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
)
Foreign currency translation adjustments
(22
)
 

 

 

 
(22
)
Unrealized (losses) gains

 
(144
)
 
268

 

 
124

Reclassification adjustments to income

 
133

 
23

 

 
156

Other

 

 

 
1

 
1

Income taxes
5

 
5

 
(107
)
 

 
(97
)
Balance as of June 30, 2016
$
(495
)
 
$
112

 
$
282

 
$
(5
)
 
$
(106
)

15


The reclassifications out of AOCI and into earnings were as follows (in millions):
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Three months ended June 30, 2016
 
Three months ended June 30, 2015
 
Line item affected in the
 Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
79

 
$
91

 
Product sales
     Cross-currency swap contract (losses) gains
 
(212
)
 
136

 
Interest and other income, net
     Forward interest rate contract losses
 

 
(1
)
 
Interest expense, net
 
 
(133
)
 
226

 
Total before income tax
 
 
49

 
(81
)
 
Tax benefit (expense)
 
 
$
(84
)
 
$
145

 
Net of taxes
Available-for-sale securities:
 
 
 

 

     Net realized losses
 
$
(23
)
 
$
(9
)
 
Interest and other income, net
 
 
8

 
3

 
Tax benefit
 
 
$
(15
)
 
$
(6
)
 
Net of taxes
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Six months ended June 30, 2016
 
Six months ended June 30, 2015
 
Line item affected in the
 Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
175

 
$
160

 
Product sales
     Cross-currency swap contract losses
 
(142
)
 
(47
)
 
Interest and other income, net
     Forward interest rate contract losses
 

 
(1
)
 
Interest expense, net
 
 
33

 
112

 
Total before income tax
 
 
(12
)
 
(40
)
 
Tax expense
 
 
$
21

 
$
72

 
Net of taxes
Available-for-sale securities:
 
 
 
 
 
 
     Net realized losses
 
$
(53
)
 
$
(44
)
 
Interest and other income, net
 
 
8

 
16

 
Tax benefit
 
 
$
(45
)
 
$
(28
)
 
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 an asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing an asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:
Level 1
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
Level 2
Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs
Level 3
Valuations based on inputs that are unobservable and significant to the overall fair value measurement
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.

16


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 June 30, 2016, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
8,020

 
$

 
$

 
$
8,020

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
347

 

 
347

Foreign and other
 

 
1,866

 

 
1,866

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
8,238

 

 
8,238

Industrial
 

 
8,473

 

 
8,473

Other
 

 
1,018

 

 
1,018

Residential mortgage-backed securities
 

 
1,738

 

 
1,738

Other mortgage- and asset-backed securities
 

 
2,180

 

 
2,180

Money market mutual funds
 
1,673

 

 

 
1,673

Other short-term interest-bearing securities
 

 
1,014

 

 
1,014

Equity securities
 
123

 

 

 
123

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
68

 

 
68

Cross-currency swap contracts
 

 
17

 

 
17

Interest rate swap contracts
 

 
266

 

 
266

Total assets
 
$
9,816

 
$
25,225

 
$

 
$
35,041

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
27

 
$

 
$
27

Cross-currency swap contracts
 

 
456

 

 
456

Forward interest rate contracts
 

 
4

 

 
4

Contingent consideration obligations in connection with business combinations
 

 

 
171

 
171

Total liabilities
 
$

 
$
487

 
$
171

 
$
658


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, 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 Moody’s Investors Service, Inc. (Moody’s) and A- by Standard & Poor’s Financial Services LLC (S&P) or 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.

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 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), swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts 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 the fair values of contingent consideration obligations are recognized in Other operating expenses in the Condensed Consolidated Statements of Income.
Changes in the carrying amounts of contingent consideration obligations were as follows (in millions):
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
194

 
$
215

 
$
188

 
$
215

Net changes in valuation
(23
)
 

 
(17
)
 

Ending balance
$
171

 
$
215

 
$
171

 
$
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 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 during the three and six months ended June 30, 2016.
During the six months ended June 30, 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.

19


Summary of the fair values of other financial instruments
Cash equivalents
The estimated fair values of cash equivalents approximate their carrying values due to the short-term nature of such 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 June 30, 2016, and December 31, 2015, the aggregate fair values of our long-term debt were $36.8 billion and $33.1 billion, respectively, and the carrying values were $33.2 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 the cash flows from our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations 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 June 30, 2016, and December 31, 2015, we had open foreign currency forward contracts with notional amounts of $3.5 billion and $3.3 billion, respectively, 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, 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 these notional amounts, we exchange interest payments at fixed rates over the lives of the contracts by paying U.S. dollars and receiving euros, pounds sterling and Swiss francs. In addition, we will pay U.S. dollars to and receive euros, pounds sterling and Swiss francs from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged debt, effectively converting the interest payments and principal repayment on the debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges, 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.

20


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
%