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EX-10.12 - FIRST AMENDMENT TO THE AMGEN INC. SUPPLEMENTAL RETIREMENT PLAN - AMGEN INCamgn-ex1012_2016930xq3.htm
EX-32 - SECTION 1350 CERTIFICATIONS - AMGEN INCamgn-ex32_2016930xq3.htm
EX-31 - RULE 13A-14(A) CERTIFICATIONS - AMGEN INCamgn-ex31_2016930xq3.htm
EX-10.17 - FIRST AMENDMENT TO THE AMGEN NONQUALIFIED DEFERRED COMPENSATION PLAN - AMGEN INCamgn-ex1017_2016930xq3.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 24, 2016, the registrant had 743,922,473 shares of common stock, $0.0001 par value, outstanding.



AMGEN INC.
INDEX
 

i


PART I — FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Product sales
$
5,516

 
$
5,516

 
$
16,229

 
$
15,615

Other revenues
295

 
207

 
797

 
511

Total revenues
5,811

 
5,723

 
17,026

 
16,126

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of sales
1,027

 
1,034

 
3,095

 
3,156

Research and development
990

 
1,119

 
2,762

 
2,977

Selling, general and administrative
1,244

 
1,244

 
3,739

 
3,430

Other
23

 
(13
)
 
121

 
126

Total operating expenses
3,284

 
3,384

 
9,717

 
9,689

 
 
 
 
 
 
 
 
Operating income
2,527

 
2,339

 
7,309

 
6,437

 
 
 
 
 
 
 
 
Interest expense, net
325

 
282

 
932

 
811

Interest and other income, net
216

 
135

 
503

 
439

 
 
 
 
 
 
 
 
Income before income taxes
2,418

 
2,192

 
6,880

 
6,065

 
 
 
 
 
 
 
 
Provision for income taxes
401

 
329

 
1,093

 
926

 
 
 
 
 
 
 
 
Net income
$
2,017

 
$
1,863

 
$
5,787

 
$
5,139

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
2.70

 
$
2.46

 
$
7.70

 
$
6.76

Diluted
$
2.68

 
$
2.44

 
$
7.63

 
$
6.70

 
 
 
 
 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
 
 
 
 
Basic
747

 
757

 
752

 
760

Diluted
753

 
764

 
758

 
767

 
 
 
 
 
 
 
 
Dividends paid per share
$
1.00

 
$
0.79

 
$
3.00

 
$
2.37


See accompanying notes.

1


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
2,017

 
$
1,863

 
$
5,787

 
$
5,139

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
9

 
(86
)
 
25

 
(241
)
Effective portion of cash flow hedges
(16
)
 
(53
)
 
(201
)
 
10

Net unrealized (losses) gains on available-for-sale securities
(27
)
 
(35
)
 
515

 
(3
)
Other
1

 
5

 
2

 
5

Other comprehensive (loss) income, net of taxes
(33
)

(169
)

341

 
(229
)
Comprehensive income
$
1,984

 
$
1,694

 
$
6,128

 
$
4,910


See accompanying notes.

2


AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
September 30,
2016
 
December 31,
2015
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,485

 
$
4,144

Marketable securities
34,495

 
27,238

Trade receivables, net
3,186

 
2,995

Inventories
2,681

 
2,435

Other current assets
1,997

 
1,703

Total current assets
45,844

 
38,515

 
 
 
 
Property, plant and equipment, net
4,912

 
4,907

Intangible assets, net
10,690

 
11,641

Goodwill
14,802

 
14,787

Other assets
1,902

 
1,599

Total assets
$
78,150

 
$
71,449

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
825

 
$
965

Accrued liabilities
4,920

 
5,452

Current portion of long-term debt
4,797

 
2,247

Total current liabilities
10,542

 
8,664

 
 
 
 
Long-term debt
30,526

 
29,182

Long-term deferred tax liability
2,412

 
2,239

Other noncurrent liabilities
3,897

 
3,281

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding—744.8 shares in 2016 and 754.0 shares in 2015
30,691

 
30,649

Retained earnings (accumulated deficit)
221

 
(2,086
)
Accumulated other comprehensive loss
(139
)
 
(480
)
Total stockholders’ equity
30,773

 
28,083

Total liabilities and stockholders’ equity
$
78,150

 
$
71,449


See accompanying notes.

3


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine months ended
 
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
5,787

 
$
5,139

Depreciation and amortization
1,546

 
1,566

Share-based compensation expense
222

 
242

Deferred income taxes
80

 
(251
)
Other items, net
93

 
26

Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables, net
(192
)
 
(302
)
Inventories
(125
)
 
284

Other assets
(335
)
 
192

Accounts payable
(147
)
 
(74
)
Accrued income taxes
(140
)
 
478

Other liabilities
465

 
358

Net cash provided by operating activities
7,254

 
7,658

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(511
)
 
(389
)
Proceeds from the sale of property, plant and equipment
15

 
271

Purchases of marketable securities
(22,682
)
 
(19,792
)
Proceeds from sales of marketable securities
14,072

 
11,784

Proceeds from maturities of marketable securities
1,932

 
3,179

Other
(262
)
 
(367
)
Net cash used in investing activities
(7,436
)
 
(5,314
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of debt
6,713

 
3,464

Repayment of debt
(2,725
)
 
(2,275
)
Repurchases of common stock
(1,982
)
 
(1,684
)
Dividends paid
(2,251
)
 
(1,800
)
Settlement of contingent consideration obligation

 
(225
)
Withholding taxes arising from shares withheld for share-based payments
(254
)
 
(394
)
Other
22

 
65

Net cash used in financing activities
(477
)
 
(2,849
)
Decrease in cash and cash equivalents
(659
)
 
(505
)
Cash and cash equivalents at beginning of period
4,144

 
3,731

Cash and cash equivalents at end of period
$
3,485

 
$
3,226


See accompanying notes.

4


AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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 Reports on Form 10-Q for the periods ended March 31, 2016, and June 30, 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 U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Property, plant and equipment, net
Property, plant and equipment is recorded at historical cost, net of accumulated depreciation and amortization, of $7.5 billion and $7.3 billion as of September 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 nine months ended September 30, 2016, includes $7 million and $121 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 nine months ended September 30, 2015, we reclassified: (a) $247 million of excess tax benefits from Net cash used in financing activities to Net cash provided by operating activities and (b) $394 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 on 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 approach 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 will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded 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 nine months ended September 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 deliver value to patients and stockholders. The efforts include a restructuring, which is also delivering cost savings and is funding investments. As part of the restructuring, we have exited our facilities in Washington state and Colorado and are 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 September 30, 2016, we have incurred $473 million of separation and other headcount-related costs and $225 million of asset-related charges. We expect that we will incur most of the remaining estimated costs through 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 nine months ended September 30, 2016, were not significant. As of September 30, 2016, the total restructuring liability was not significant.
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.

6


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 nine months ended September 30, 2016, were 16.6% and 15.9%, respectively, compared with 15.0% and 15.3% 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 increase in our effective tax rate for the three months ended September 30, 2016, was due primarily to the unfavorable tax impact of changes in the jurisdictional mix of income and expenses.
The increase in our effective tax rate for the nine months ended September 30, 2016, was due primarily to the unfavorable tax impact of changes in the jurisdictional mix of income and expenses and a state tax audit settlement in the prior year. The 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 and discrete benefits associated with tax incentives.
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 nine months ended September 30, 2016, the gross amount of our unrecognized tax benefits (UTBs) increased by approximately $115 million and $335 million, respectively, as a result of tax positions taken during the current year. Substantially all of the UTBs as of September 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 primarily shares that may be issued under our stock option, restricted stock and performance unit award programs, 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
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Income (Numerator):
 
 
 
 
 
 
 
Net income for basic and diluted EPS
$
2,017

 
$
1,863

 
$
5,787


$
5,139

 
 
 
 
 
 
 
 
Shares (Denominator):
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
747

 
757

 
752

 
760

Effect of dilutive securities
6

 
7

 
6

 
7

Weighted-average shares for diluted EPS
753

 
764

 
758

 
767

 
 
 
 
 
 
 
 
Basic EPS
$
2.70

 
$
2.46

 
$
7.70

 
$
6.76

Diluted EPS
$
2.68

 
$
2.44

 
$
7.63

 
$
6.70

For the three and nine months ended September 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 September 30, 2016
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
7,495

 
$
55

 
$
(3
)
 
$
7,547

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
302

 
1

 

 
303

Foreign and other
 
1,773

 
52

 
(2
)
 
1,823

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
8,381

 
110

 
(2
)
 
8,489

Industrial
 
8,636

 
142

 
(8
)
 
8,770

Other
 
1,040

 
15

 
(1
)
 
1,054

Residential mortgage-backed securities
 
2,106

 
8

 
(5
)
 
2,109

Other mortgage- and asset-backed securities
 
1,759

 
7

 
(4
)
 
1,762

Money market mutual funds
 
2,089

 

 

 
2,089

Other short-term interest-bearing securities
 
3,619

 

 

 
3,619

Total interest-bearing securities
 
37,200

 
390

 
(25
)
 
37,565

Equity securities
 
124

 
39

 

 
163

Total available-for-sale investments
 
$
37,324

 
$
429

 
$
(25
)
 
$
37,728


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
 
September 30,
2016
 
December 31,
2015
Cash and cash equivalents
 
$
3,070

 
$
3,738

Marketable securities
 
34,495

 
27,238

Other assets — noncurrent
 
163

 
136

Total available-for-sale investments
 
$
37,728

 
$
31,112

Cash and cash equivalents in the above table excludes cash of $415 million and $406 million as of September 30, 2016, and December 31, 2015, respectively.
The fair values of available-for-sale interest-bearing securities by contractual maturity, except for mortgage- and asset-backed securities that do not have a single maturity date, were as follows (in millions):
Contractual maturity
 
September 30,
2016
 
December 31,
2015
Maturing in one year or less
 
$
7,121

 
$
4,578

Maturing after one year through three years
 
10,900

 
9,370

Maturing after three years through five years
 
12,068

 
9,932

Maturing after five years through ten years
 
3,525

 
3,087

Maturing after ten years
 
80

 
70

Mortgage- and asset-backed securities
 
3,871

 
3,939

Total interest-bearing securities
 
$
37,565

 
$
30,976

For the three months ended September 30, 2016 and 2015, realized gains totaled $215 million and $19 million, respectively, and realized losses totaled $192 million and $58 million, respectively. For the nine months ended September 30, 2016 and 2015, realized gains totaled $283 million and $73 million, respectively, and realized losses totaled $313 million and $156 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 September 30, 2016
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
957

 
$
(3
)
 
$

 
$

Other government-related debt securities:
 

 

 

 

U.S.
 
77

 

 

 

Foreign and other
 
192

 
(2
)
 
18

 

Corporate debt securities:
 

 

 

 

Financial
 
638

 
(2
)
 
47

 

Industrial
 
1,275

 
(6
)
 
204

 
(2
)
Other
 
110

 
(1
)
 
25

 

Residential mortgage-backed securities
 
667

 
(2
)
 
182

 
(3
)
Other mortgage- and asset-backed securities
 
266

 
(2
)
 
102

 
(2
)
Total
 
$
4,182

 
$
(18
)
 
$
578

 
$
(7
)
 
 
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 securities to certain types of debt and money market instruments issued by institutions with primarily investment-grade credit ratings, and it places restrictions on maturities and concentration by asset class and issuer.
We review our available-for-sale investments for other-than-temporary declines in fair value below our cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. The evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below our cost basis 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 that particular security. As of September 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):
 
September 30,
2016
 
December 31,
2015
Raw materials
$
220

 
$
201

Work in process
1,356

 
1,529

Finished goods
1,105

 
705

Total inventories
$
2,681

 
$
2,435

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

 
$
14,788

Goodwill related to acquisitions of businesses(1)
2

 

Currency translation adjustments
13

 
(114
)
Ending balance
$
14,802

 
$
14,674

(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):
 
September 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
$
12,320

 
$
(5,710
)
 
$
6,610

 
$
12,310

 
$
(4,996
)
 
$
7,314

Licensing rights
3,275

 
(1,225
)
 
2,050

 
3,275

 
(998
)
 
2,277

Research and development technology rights
1,142

 
(696
)
 
446

 
1,134

 
(635
)
 
499

Marketing-related rights
1,348

 
(764
)
 
584

 
1,186

 
(650
)
 
536

Total finite-lived intangible assets
18,085

 
(8,395
)
 
9,690

 
17,905

 
(7,279
)
 
10,626

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
IPR&D
1,000

 

 
1,000

 
1,015

 

 
1,015

Total identifiable intangible assets
$
19,085

 
$
(8,395
)
 
$
10,690

 
$
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 September 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 September 30, 2016 and 2015, we recognized amortization charges associated with our finite-lived intangible assets of $371 million and $340 million, respectively. During the nine months ended September 30, 2016 and 2015, we recognized amortization charges associated with our finite-lived intangible assets of $1.1 billion and $1.0 billion, respectively. The total estimated amortization charges for our finite-lived intangible assets for the remaining three months ending December 31, 2016, and the years ending December 31, 2017, 2018, 2019, 2020 and 2021, are $372 million, $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):
 
September 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)

 
1,975

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)
758

 
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

1.85% notes due 2021 (1.85% 2021 Notes)
750

 

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)
1,404

 

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)
721

 

2.25% notes due 2023 (2.25% 2023 Notes)
750

 

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

 
1,400

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

 
1,000

2.00% euro-denominated notes due 2026 (2.00% 2026 euro Notes)
843

 

2.60% notes due 2026 (2.60% 2026 Notes)
1,250

 

5.50% pound-sterling denominated notes due 2026 (5.50% 2026 pound sterling Notes)
616

 
700

4.00% pound-sterling denominated notes due 2029 (4.00% 2029 pound sterling Notes)
908

 
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)
2,250

 
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, premiums and issuance costs, net
(942
)
 
(210
)
Total carrying value of debt
$
35,323

 
$
31,429

Less current portion
(4,797
)
 
(2,247
)
Total noncurrent debt
$
30,526

 
$
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 in our Condensed Consolidated Balance Sheets. As a result of adopting this new accounting standard, our Condensed Consolidated Balance Sheet as of December 31, 2015, was restated to reflect the 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 nine months ended September 30, 2016, we repaid the remaining $1.975 billion of principal on our Term Loan and the $750 million aggregate principal amount of the 2.30% 2016 Notes.
Debt issuances
During the nine months ended September 30, 2016, we issued debt securities in the following offerings:
In August 2016, we issued $3.75 billion principal amount of notes, consisting of the 1.85% 2021 Notes, 2.25% 2023 Notes, 2.60% 2026 Notes and 4.40% 2045 Notes. We received a $79 million premium on the issuance of $1.0 billion of 4.40% 2045 Notes, which represents a further issuance of, and aggregated into a single series with, the 4.40% 2045 Notes issued in May 2015.
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 (€1.25 billion principal amount) and the 2.00% 2026 euro Notes (€750 million principal amount).
In the event of a change-in-control triggering event, as defined in the terms of the notes, we may be required to purchase all or a portion of these 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 these debt securities, except for the Swiss franc Bonds, may be redeemed at any time at our option, in whole or in part, at the principal amount of the notes being redeemed plus accrued and unpaid interest and, except as discussed below, a make-whole amount, which is defined by the terms of the notes. The notes may be redeemed without payment of the make-whole amount if redemption occurs during a specified period of time immediately prior to the maturity dates of the notes. Such time periods range from one to six months prior to the maturity date.
Debt exchange
During the second quarter of 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

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

14


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

Third quarter
4.4

 
747

 
4.6

 
703

 
12.9

 
$
2,028

 
10.8

 
$
1,669

* Shares do not foot due to rounding.
 
 
 
 
 
 
 
As of September 30, 2016, $2.9 billion remained available under our stock repurchase program. In October 2016, our Board of Directors authorized an increase that resulted in a total of $5.0 billion available under the stock repurchase program.
Dividends
In October 2016, the Board of Directors declared a quarterly cash dividend of $1.00 per share of common stock, which will be paid in December 2016.
In July 2016, 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 September 2016, 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
)
Foreign currency translation adjustments
11

 

 

 

 
11

Unrealized gains (losses)

 
35

 
(19
)
 

 
16

Reclassification adjustments to income

 
(65
)
 
(23
)
 

 
(88
)
Other

 

 

 
1

 
1

Income taxes
(2
)
 
14

 
15

 

 
27

Balance as of September 30, 2016
$
(486
)
 
$
96

 
$
255

 
$
(4
)
 
$
(139
)

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 September 30, 2016
 
Three months ended September 30, 2015
 
Line item affected in the
 Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
67

 
$
86

 
Product sales
     Cross-currency swap contract losses
 
(1
)
 
(67
)
 
Interest and other income, net
     Forward interest rate contract losses
 
(1
)
 

 
Interest expense, net
 
 
65

 
19

 
Total before income tax
 
 
(27
)
 
(7
)
 
Tax expense
 
 
$
38

 
$
12

 
Net of taxes
Available-for-sale securities:
 
 
 

 

     Net realized gains (losses)
 
$
23

 
$
(39
)
 
Interest and other income, net
 
 
(8
)
 
15

 
Tax (expense) benefit
 
 
$
15

 
$
(24
)
 
Net of taxes
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
 
Line item affected in the
 Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
242

 
$
246

 
Product sales
     Cross-currency swap contract losses
 
(143
)
 
(114
)
 
Interest and other income, net
     Forward interest rate contract losses
 
(1
)
 
(1
)
 
Interest expense, net
 
 
98

 
131

 
Total before income tax
 
 
(39
)
 
(47
)
 
Tax expense
 
 
$
59

 
$
84

 
Net of taxes
Available-for-sale securities:
 
 
 
 
 
 
     Net realized losses
 
$
(30
)
 
$
(83
)
 
Interest and other income, net
 
 

 
31

 
Tax benefit
 
 
$
(30
)
 
$
(52
)
 
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 September 30, 2016, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
7,547

 
$

 
$

 
$
7,547

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
303

 

 
303

Foreign and other
 

 
1,823

 

 
1,823

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
8,489

 

 
8,489

Industrial
 

 
8,770

 

 
8,770

Other
 

 
1,054

 

 
1,054

Residential mortgage-backed securities
 

 
2,109

 

 
2,109

Other mortgage- and asset-backed securities
 

 
1,762

 

 
1,762

Money market mutual funds
 
2,089

 

 

 
2,089

Other short-term interest-bearing securities
 

 
3,619

 

 
3,619

Equity securities
 
163

 

 

 
163

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
43

 

 
43

Cross-currency swap contracts
 

 
69

 

 
69

Interest rate swap contracts
 

 
205

 

 
205

Total assets
 
$
9,799

 
$
28,246

 
$

 
$
38,045

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
35

 
$

 
$
35

Cross-currency swap contracts
 

 
442

 

 
442

Contingent consideration obligations in connection with business combinations
 

 

 
176

 
176

Total liabilities
 
$

 
$
477

 
$
176

 
$
653


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 Standard & Poor’s Financial Services LLC (S&P), Moody’s Investors Service, Inc. (Moody’s) or Fitch Ratings Inc. (Fitch); and our corporate debt securities portfolio has 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.

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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 estimate 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 estimate 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 estimate 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 September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Beginning balance
$
171

 
$
215

 
$
188

 
$
215

Net changes in valuation
5

 
(18
)
 
(12
)
 
(18
)
Ending balance
$
176

 
$
197

 
$
176

 
$
197

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 nine months ended September 30, 2016 and 2015.
During the nine months ended September 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.

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Summary of the fair values of other financial instruments
Cash equivalents