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EX-32 - EXHIBIT 32 - AMGEN INCamgn-ex32_2017331xq1.htm
EX-31 - EXHIBIT 31 - AMGEN INCamgn-ex31_2017331xq1.htm
EX-10.40 - SOURCING AND SUPPLY AGREEMENT - AMGEN INCamgn-exhibit1040_2017033110q.htm
EX-10.16 - SECOND AMENDMENT TO THE EXECUTIVE INCENTIVE PLAN - AMGEN INCamgn-ex1016_2017033110q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
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,” “smaller reporting company,” and “emerging growth 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 ¨
Emerging growth company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
As of April 18, 2017, the registrant had 735,399,128 shares of common stock, $0.0001 par value, outstanding.



AMGEN INC.
INDEX
 

i


PART I — FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
 
 
Three months ended
March 31,
 
2017
 
2016
Revenues:
 
 
 
Product sales
$
5,199

 
$
5,239

Other revenues
265

 
288

Total revenues
5,464

 
5,527

 
 
 
 
Operating expenses:
 
 
 
Cost of sales
996

 
1,018

Research and development
769

 
872

Selling, general and administrative
1,064

 
1,203

Other
44

 
32

Total operating expenses
2,873

 
3,125

 
 
 
 
Operating income
2,591

 
2,402

 
 
 
 
Interest expense, net
326

 
294

Interest and other income, net
195

 
150

 
 
 
 
Income before income taxes
2,460

 
2,258

 
 
 
 
Provision for income taxes
389

 
358

 
 
 
 
Net income
$
2,071

 
$
1,900

 
 
 
 
Earnings per share:
 
 
 
Basic
$
2.81

 
$
2.52

Diluted
$
2.79

 
$
2.50

 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
Basic
737

 
753

Diluted
741

 
760

 
 
 
 
Dividends paid per share
$
1.15

 
$
1.00


See accompanying notes.

1


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
March 31,
 
2017
 
2016
Net income
$
2,071

 
$
1,900

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
Foreign currency translation gains
24

 
33

Effective portion of cash flow hedges
(73
)
 
(179
)
Net unrealized gains on available-for-sale securities
158

 
358

Other comprehensive income, net of taxes
109

 
212

Comprehensive income
$
2,180

 
$
2,112


See accompanying notes.

2


AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
March 31,
2017
 
December 31,
2016
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,358

 
$
3,241

Marketable securities
35,040

 
34,844

Trade receivables, net
3,248

 
3,165

Inventories
2,871

 
2,745

Other current assets
1,939

 
2,015

Total current assets
46,456

 
46,010

 
 
 
 
Property, plant and equipment, net
4,960

 
4,961

Intangible assets, net
9,922

 
10,279

Goodwill
14,757

 
14,751

Other assets
1,767

 
1,625

Total assets
$
77,862

 
$
77,626

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
902

 
$
917

Accrued liabilities
5,822

 
5,884

Current portion of long-term debt
3,799

 
4,403

Total current liabilities
10,523

 
11,204

 
 
 
 
Long-term debt
30,293

 
30,193

Long-term deferred tax liabilities
2,370

 
2,436

Long-term tax liabilities
2,542

 
2,419

Other noncurrent liabilities
1,497

 
1,499

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding — 736.1 shares in 2017 and 738.2 shares in 2016
30,766

 
30,784

Retained earnings (accumulated deficit)
233

 
(438
)
Accumulated other comprehensive loss
(362
)
 
(471
)
Total stockholders’ equity
30,637

 
29,875

Total liabilities and stockholders’ equity
$
77,862

 
$
77,626


See accompanying notes.

3


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended
March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
2,071

 
$
1,900

Depreciation and amortization
524

 
521

Share-based compensation expense
60

 
52

Deferred income taxes
(77
)
 
(68
)
Other items, net
15

 
135

Changes in operating assets and liabilities:
 
 
 
Trade receivables, net
(47
)
 
(98
)
Inventories
(125
)
 
(133
)
Other assets
(155
)
 
(249
)
Accounts payable
(20
)
 
(150
)
Accrued income taxes
268

 
(6
)
Other liabilities
(129
)
 
11

Net cash provided by operating activities
2,385

 
1,915

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(168
)
 
(156
)
Purchases of marketable securities
(7,077
)
 
(8,595
)
Proceeds from sales of marketable securities
5,612

 
3,898

Proceeds from maturities of marketable securities
1,528

 
458

Other
(52
)
 
5

Net cash used in investing activities
(157
)
 
(4,390
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of debt

 
2,909

Repayment of debt
(605
)
 
(125
)
Repurchases of common stock
(586
)
 
(676
)
Dividends paid
(847
)
 
(752
)
Other
(73
)
 
(129
)
Net cash (used in) provided by financing activities
(2,111
)
 
1,227

Increase (decrease) in cash and cash equivalents
117

 
(1,248
)
Cash and cash equivalents at beginning of period
3,241

 
4,144

Cash and cash equivalents at end of period
$
3,358

 
$
2,896


See accompanying notes.

4


AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
1. Summary of significant accounting policies
Business
Amgen Inc. (including its subsidiaries, referred to as “Amgen,” “the Company,” “we,” “our” or “us”) is a global biotechnology pioneer that discovers, develops, manufactures and delivers innovative human therapeutics. We operate in one business segment: human therapeutics.
Basis of presentation
The financial information for the three months ended March 31, 2017 and 2016, 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, 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 $7.6 billion and $7.5 billion as of March 31, 2017, and December 31, 2016, respectively.
Recent accounting pronouncements
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, but could have been adopted early beginning January 1, 2017. The new standards are required to be adopted using either a full retrospective or a modified retrospective approach. We expect to adopt this standard using the modified retrospective approach beginning in 2018. We have substantially completed our impact assessment and do not currently anticipate a material impact to our Total revenues. We continue to review the impact that this new standard will have on collaborations and license arrangements, as well as our financial statement disclosures. As we complete our assessment, we are also identifying and preparing to implement changes to our accounting policies, business processes, and internal controls to support the new accounting and disclosure requirements.
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. The impact that this new standard will have on our consolidated financial statements is dependent on the fair value of available-for-sale securities in our portfolio in the future. See Note 5, Available-for-sale investments, for the fair value of equity securities as of March 31, 2017.
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, including leases classified as operating leases under current GAAP, and disclose qualitative and quantitative information about leasing arrangements. The new standard requires a modified retrospective approach to adoption and is effective for interim and

5


annual periods beginning on January 1, 2019, but may be adopted earlier. We expect to adopt this standard beginning in 2019. We continue to evaluate the impact that this new standard will have on our consolidated financial statements, including related disclosures, as well as our business processes and systems, accounting policies and internal controls. We do not expect that this standard will have a material impact to our Consolidated Statements of Income, but we do expect that upon adoption, this standard will have a material impact to our assets and liabilities on our Consolidated Balance Sheets, as well as our systems and processes.
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.
In January 2017, the FASB issued a new accounting standard that changes the definition of a business to assist entities with evaluating when a set of assets acquired or disposed of should be considered a business. The new standard requires an entity to evaluate if substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets; if so, the set would not be considered a business. The new standard also requires a business to include at least one substantive process and narrows the definition of outputs. We expect that these provisions will reduce the number of transactions that will be considered a business. The new standard is effective for interim and annual periods beginning on January 1, 2018, and may be adopted earlier. We expect to adopt this standard beginning in 2018. The standard would be applied prospectively to any transaction occurring on or after the adoption date. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
2. Restructuring
In 2014, we initiated a restructuring plan to invest in continuing innovation and the launch of our new pipeline molecules, while improving our cost structure. As part of the plan, we have closed 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 March 31, 2017, we have incurred a total of $511 million of separation and other headcount-related costs and $237 million of net asset-related charges.
The amounts related to the restructuring recorded in the Condensed Consolidated Statements of Income during the three months ended March 31, 2017 and 2016, were not significant. As of March 31, 2017, the total restructuring liability was not significant.
3. Income taxes
The effective tax rate for the three months ended March 31, 2017, was 15.8% compared with 15.9% for the corresponding period of the prior year. The effective rates differ from the federal statutory rates primarily as a result of indefinitely invested earnings of our foreign operations. We do not provide for U.S. income taxes on undistributed earnings of our foreign operations that are intended to be invested indefinitely outside the United States.
The decrease in our effective tax rate for the three months ended March 31, 2017, was due primarily to the favorable tax impact of changes in the jurisdictional mix of income and expenses, offset partially by lower tax benefits from share-based compensation payments.
The U.S. territory of Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate is 4% and is effective through December 31, 2027. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, 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, regulations and the interpretation of the relevant facts. During the three months ended March 31, 2017, we received Notices of Proposed

6


Adjustment from the Internal Revenue Service (IRS) for the years 2010, 2011, and 2012. The significant proposed adjustments relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico and allocate additional profits to the United States. On April 12, 2017, we received a Revenue Agent’s Report from the IRS for the years 2010, 2011, and 2012 that included the proposed adjustments. We disagree with the proposed adjustments and plan to initiate the administrative appeals process, which will likely not be concluded within the next 12 months. Final resolution of the IRS audit could have a material impact on our results of operations and cash flows if not resolved favorably, however, we believe our income tax reserves are appropriately provided for all open tax years. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009. In addition, we are currently under examination by a number of other state and foreign tax jurisdictions.
During the three months ended March 31, 2017, the gross amount of our unrecognized tax benefits (UTBs) increased by approximately $115 million, as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2017, if recognized, would affect our effective tax rate.
4. 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
March 31,
 
2017
 
2016
Income (Numerator):
 
 
 
Net income for basic and diluted EPS
$
2,071

 
$
1,900

 
 
 
 
Shares (Denominator):
 
 
 
Weighted-average shares for basic EPS
737

 
753

Effect of dilutive securities
4

 
7

Weighted-average shares for diluted EPS
741

 
760

 
 
 
 
Basic EPS
$
2.81

 
$
2.52

Diluted EPS
$
2.79

 
$
2.50

For the three months ended March 31, 2017 and 2016, the number of anti-dilutive employee share-based awards excluded from the computation of diluted EPS was not significant.


7


5. Available-for-sale investments
The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of available-for-sale investments by type of security were as follows (in millions):
Type of security as of March 31, 2017
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
6,915

 
$
4

 
$
(30
)
 
$
6,889

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
240

 

 
(1
)
 
239

Foreign and other
 
1,819

 
20

 
(13
)
 
1,826

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
8,549

 
34

 
(19
)
 
8,564

Industrial
 
8,763

 
62

 
(34
)
 
8,791

Other
 
1,111

 
6

 
(5
)
 
1,112

Residential mortgage-backed securities
 
1,766

 
1

 
(27
)
 
1,740

Other mortgage- and asset-backed securities
 
1,811

 
2

 
(12
)
 
1,801

Money market mutual funds
 
2,891

 

 

 
2,891

Other short-term interest-bearing securities
 
4,080

 

 

 
4,080

Total interest-bearing securities
 
37,945

 
129

 
(141
)
 
37,933

Equity securities
 
133

 
47

 

 
180

Total available-for-sale investments
 
$
38,078

 
$
176

 
$
(141
)
 
$
38,113

Type of security as of December 31, 2016
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
6,681

 
$
1

 
$
(68
)
 
$
6,614

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

 

 
(3
)
 
299

Foreign and other
 
1,784

 
9

 
(34
)
 
1,759

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
8,476

 
21

 
(37
)
 
8,460

Industrial
 
8,793

 
59

 
(63
)
 
8,789

Other
 
1,079

 
5

 
(7
)
 
1,077

Residential mortgage-backed securities
 
1,968

 
1

 
(29
)
 
1,940

Other mortgage- and asset-backed securities
 
1,731

 
1

 
(13
)
 
1,719

Money market mutual funds
 
2,782

 

 

 
2,782

Other short-term interest-bearing securities
 
4,188

 

 

 
4,188

Total interest-bearing securities
 
37,784

 
97

 
(254
)
 
37,627

Equity securities
 
127

 
31

 
(4
)
 
154

Total available-for-sale investments
 
$
37,911

 
$
128

 
$
(258
)
 
$
37,781


8


The fair values of available-for-sale investments by classification in the Condensed Consolidated Balance Sheets were as follows (in millions):
Classification in the Condensed Consolidated Balance Sheets
 
March 31,
2017
 
December 31,
2016
Cash and cash equivalents
 
$
2,893

 
$
2,783

Marketable securities
 
35,040

 
34,844

Other assets — noncurrent
 
180

 
154

Total available-for-sale investments
 
$
38,113

 
$
37,781

Cash and cash equivalents in the above table excludes bank account cash of $465 million and $458 million as of March 31, 2017 and December 31, 2016, respectively.
The fair values of available-for-sale interest-bearing security investments by contractual maturity, except for mortgage- and asset-backed securities that do not have a single maturity date, were as follows (in millions):
Contractual maturity
 
March 31,
2017
 
December 31,
2016
Maturing in one year or less
 
$
8,751

 
$
8,393

Maturing after one year through three years
 
10,952

 
10,404

Maturing after three years through five years
 
11,868

 
12,157

Maturing after five years through ten years
 
2,757

 
2,974

Maturing after ten years
 
64

 
40

Mortgage- and asset-backed securities
 
3,541

 
3,659

Total interest-bearing securities
 
$
37,933

 
$
37,627

For the three months ended March 31, 2017 and 2016, realized gains totaled $35 million and $37 million, respectively, and realized losses totaled $84 million and $67 million, respectively. The cost of securities sold is based on the specific identification method.
The unrealized losses on available-for-sale investments and their related fair values were as follows (in millions):
 
 
Less than 12 months
 
12 months or greater
Type of security as of March 31, 2017
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
5,117

 
$
(30
)
 
$

 
$

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
170

 
(1
)
 

 

Foreign and other
 
792

 
(13
)
 
13

 

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
2,500

 
(19
)
 
23

 

Industrial
 
3,194

 
(33
)
 
72

 
(1
)
Other
 
462

 
(5
)
 
5

 

Residential mortgage-backed securities
 
1,503

 
(25
)
 
132

 
(2
)
Other mortgage- and asset-backed securities
 
1,063

 
(9
)
 
113

 
(3
)
Equity securities
 
25

 

 

 

Total
 
$
14,826

 
$
(135
)
 
$
358

 
$
(6
)

9


 
 
Less than 12 months
 
12 months or greater
Type of security as of December 31, 2016
 
Fair value
 
Unrealized losses
 
Fair value
 
Unrealized losses
U.S. Treasury securities
 
$
5,774

 
$
(68
)
 
$

 
$

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
201

 
(3
)
 

 

Foreign and other
 
1,192

 
(34
)
 
17

 

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
3,975

 
(37
)
 
44

 

Industrial
 
3,913

 
(61
)
 
149

 
(2
)
Other
 
486

 
(7
)
 
7

 

Residential mortgage-backed securities
 
1,631

 
(26
)
 
158

 
(3
)
Other mortgage- and asset-backed securities
 
1,087

 
(10
)
 
118

 
(3
)
Equity securities
 
22

 
(4
)
 

 

Total
 
$
18,281

 
$
(250
)
 
$
493

 
$
(8
)
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. 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 March 31, 2017 and December 31, 2016, we believe the cost bases for our available-for-sale investments were recoverable in all material respects.
6. Inventories
Inventories consisted of the following (in millions):
 
March 31,
2017
 
December 31,
2016
Raw materials
$
216

 
$
225

Work in process
1,496

 
1,608

Finished goods
1,159

 
912

Total inventories
$
2,871

 
$
2,745

7. Goodwill and other intangible assets
Goodwill
Changes in the carrying amounts of goodwill were as follows (in millions):
 
Three months ended March 31,
 
2017
 
2016
Beginning balance
$
14,751

 
$
14,787

Goodwill related to acquisitions of businesses(1)

 
2

Currency translation adjustments
6

 
15

Ending balance
$
14,757

 
$
14,804

(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.

10


Identifiable intangible assets
Identifiable intangible assets consisted of the following (in millions):
 
March 31, 2017
 
December 31, 2016
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Developed product technology rights
$
12,548

 
$
(6,191
)
 
$
6,357

 
$
12,534

 
$
(5,947
)
 
$
6,587

Licensing rights
3,275

 
(1,375
)
 
1,900

 
3,275

 
(1,300
)
 
1,975

Marketing-related rights
1,331

 
(829
)
 
502

 
1,333

 
(793
)
 
540

Research and development technology rights
1,133

 
(729
)
 
404

 
1,122

 
(704
)
 
418

Total finite-lived intangible assets
18,287

 
(9,124
)
 
9,163

 
18,264

 
(8,744
)
 
9,520

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
759

 

 
759

 
759

 

 
759

Total identifiable intangible assets
$
19,046

 
$
(9,124
)
 
$
9,922

 
$
19,023

 
$
(8,744
)
 
$
10,279

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. Marketing-related intangible assets consist primarily of rights related to the sale and distribution of marketed products. Research and development (R&D) technology rights consist of technology used in R&D with alternative future uses.
In-process research and development (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 March 31, 2017, the projects include primarily AMG 899 (formerly TA-8995), acquired in the acquisition of Dezima Pharma B.V. (Dezima) in 2015 and oprozomib, acquired in the acquisition of Onyx Pharmaceuticals, Inc. in 2013. The valuation of AMG 899 reflects delayed development pending competitor clinical trials in the class. Information from these trials is expected in the second quarter of 2017.
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 March 31, 2017 and 2016, we recognized amortization charges associated with our finite-lived intangible assets of $373 million and $369 million, respectively. The total estimated amortization charges for our finite-lived intangible assets for the remaining nine months ending December 31, 2017, and the years ending December 31, 2018, 2019, 2020, 2021 and 2022, are $1.0 billion, $1.2 billion, $1.1 billion, $1.1 billion, $0.9 billion and $0.9 billion, respectively.

11


8. Financing arrangements
The carrying values and the fixed contractual coupon rates of our borrowings were as follows (in millions):
 
March 31,
2017
 
December 31,
2016
Short-term loan
$

 
$
605

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

4.375% €550 million notes due 2018 (4.375% 2018 euro Notes)
598

 
577

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% €675 million notes due 2019 (2.125% 2019 euro Notes)
719

 
710

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

 
750

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

 
1,750

1.25% €1,250 million notes due 2022 (1.25% 2022 euro Notes)
1,332

 
1,315

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

 
500

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

 
750

0.41% CHF700 million bonds due 2023 (0.41% 2023 Swiss franc Bonds)
698

 
687

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

 
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% €750 million notes due 2026 (2.00% 2026 euro Notes)
799

 
789

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

 
1,250

5.50% £475 million notes due 2026 (5.50% 2026 pound sterling Notes)
596

 
586

4.00% £700 million notes due 2029 (4.00% 2029 pound sterling Notes)
879

 
864

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

 
552

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

 
291

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

 
466

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

 
412

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

 
600

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

 
974

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

 
487

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

 
261

4.40% notes due 2045 (4.40% 2045 Notes)
2,250

 
2,250

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

 
1,415

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

 
3,541

Other notes due 2097
100

 
100

Unamortized bond discounts, premiums and issuance costs, net
(928
)
 
(936
)
Total carrying value of debt
$
34,092

 
$
34,596

Less current portion
(3,799
)
 
(4,403
)
Total noncurrent debt
$
30,293

 
$
30,193


12


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.
Under the terms of all of our outstanding notes, except our Other notes, in the event of a change-in-control triggering event, we may be required to purchase all or a portion of these debt securities at a price equal to 101% of the principal amount of the notes plus accrued and unpaid interest. In addition, all of our outstanding notes, except for our floating rate notes, 0.41% 2023 Swiss franc Bonds and Other notes, may be redeemed at any time at our option, in whole or in part, at the principal amount of the notes being redeemed plus accrued and unpaid interest. Redemption of certain of our notes would also require the payment of a make-whole amount as defined by the terms of the notes, except if such redemption occurs during a specified period of time immediately prior to the maturity date of the notes. Such time periods generally range from one to six months prior to the maturity date.
Debt repayments
During the three months ended March 31, 2017, we repaid the $605 million short-term loan.
9. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
 
2017
 
2016
 
Shares
 
Dollars 
 
Shares
 
Dollars
First quarter
3.4

 
$
555

 
4.7

 
$
690

As of March 31, 2017, $3.5 billion remained available under our stock repurchase program.
Dividends
In March 2017, the Board of Directors declared a quarterly cash dividend of $1.15 per share of common stock, which will be paid in June 2017.
In December 2016, the Board of Directors declared a quarterly cash dividend of $1.15 per share of common stock, which was paid in March 2017.
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, 2016
$
(610
)
 
$
282

 
$
(138
)
 
$
(5
)
 
$
(471
)
Foreign currency translation adjustments
21

 

 

 

 
21

Unrealized gains

 
17

 
116

 

 
133

Reclassification adjustments to income

 
(131
)
 
49

 

 
(82
)
Income taxes
3

 
41

 
(7
)
 

 
37

Balance as of March 31, 2017
$
(586
)
 
$
209

 
$
20

 
$
(5
)
 
$
(362
)

13


The reclassifications out of AOCI and into earnings were as follows (in millions):
 
 
Amounts reclassified out of AOCI
 
 
Components of AOCI
 
Three months ended March 31, 2017
 
Three months ended March 31, 2016
 
Line item affected in the Condensed
Consolidated Statements of Income
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
57

 
$
96

 
Product sales
     Cross-currency swap contract gains
 
74

 
70

 
Interest and other income, net
 
 
131

 
166

 
Income before income taxes
 
 
(47
)
 
(61
)
 
Provision for income taxes
 
 
$
84

 
$
105

 
Net income
Available-for-sale securities:
 
 
 
 
 
 
     Net realized losses
 
$
(49
)
 
$
(30
)
 
Interest and other income, net
 
 

 

 
Provision for income taxes
 
 
$
(49
)
 
$
(30
)
 
Net income
10. 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.

14


The fair values of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in millions):
 
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
 
 
 
 
 
 
Fair value measurement as of March 31, 2017, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
6,889

 
$

 
$

 
$
6,889

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
239

 

 
239

Foreign and other
 

 
1,826

 

 
1,826

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
8,564

 

 
8,564

Industrial
 

 
8,791

 

 
8,791

Other
 

 
1,112

 

 
1,112

Residential mortgage-backed securities
 

 
1,740

 

 
1,740

Other mortgage- and asset-backed securities
 

 
1,801

 

 
1,801

Money market mutual funds
 
2,891

 

 

 
2,891

Other short-term interest-bearing securities
 

 
4,080

 

 
4,080

Equity securities
 
180

 

 

 
180

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
148

 

 
148

Cross-currency swap contracts
 

 
20

 

 
20

Interest rate swap contracts
 

 
30

 

 
30

Total assets
 
$
9,960

 
$
28,351

 
$

 
$
38,311

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
15

 
$

 
$
15

Cross-currency swap contracts
 

 
481

 

 
481

Interest rate swap contracts
 

 
15

 

 
15

Contingent consideration obligations in connection with business combinations
 

 

 
184

 
184

Total liabilities
 
$

 
$
511

 
$
184

 
$
695


15


 
 
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, 2016, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
6,614

 
$

 
$

 
$
6,614

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
299

 

 
299

Foreign and other
 

 
1,759

 

 
1,759

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
8,460

 

 
8,460

Industrial
 

 
8,789

 

 
8,789

Other
 

 
1,077

 

 
1,077

Residential mortgage-backed securities
 

 
1,940

 

 
1,940

Other mortgage- and asset-backed securities
 

 
1,719

 

 
1,719

Money market mutual funds
 
2,782

 

 

 
2,782

Other short-term interest-bearing securities
 

 
4,188

 

 
4,188

Equity securities
 
154

 

 

 
154

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
203

 

 
203

Interest rate swap contracts
 

 
41

 

 
41

Total assets
 
$
9,550

 
$
28,475

 
$

 
$
38,025

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
4

 
$

 
$
4

Cross-currency swap contracts
 

 
523

 

 
523

Interest rate swap contracts
 

 
7

 

 
7

Contingent consideration obligations in connection with business combinations
 

 

 
179

 
179

Total liabilities
 
$

 
$
534

 
$
179

 
$
713

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

16


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 exchange 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 11, 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 11, 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
March 31,
 
2017
 
2016
Beginning balance
$
179

 
$
188

Net changes in valuation
5

 
6

Ending balance
$
184

 
$
194

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.
As a result of our acquisition of BioVex Group, Inc. (BioVex), in 2011, we are obligated to pay its former shareholders up to $325 million of additional consideration contingent upon the achievement of certain sales thresholds related to IMLYGIC® (talimogene laherparepvec) within specified periods of time.
We estimate the fair values of the obligations to the former shareholders of Dezima and BioVex by using probability-adjusted discounted cash flows, and we review underlying key assumptions on a quarterly basis. There were no significant changes in the estimated aggregate fair values of contingent consideration obligations during the three months ended March 31, 2017 and 2016.
During the three months ended March 31, 2017 and 2016, 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.

17


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 March 31, 2017, and December 31, 2016, the aggregate fair values of our long-term debt were $36.2 billion and $36.5 billion, respectively, and the carrying values were $34.1 billion and $34.6 billion, respectively.
11. Derivative instruments
The Company is exposed to foreign currency exchange rate and interest rate risks related to its business operations. To reduce our risks related to 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 March 31, 2017 and December 31, 2016, we had open foreign currency forward contracts with notional amounts of $3.5 billion and $3.4 billion, respectively, and open foreign currency option contracts with notional amounts of $425 million and $608 million, respectively. 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 in 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 enter 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 in the Condensed Consolidated Balance Sheets and reclassified to earnings in the same periods during which the hedged debt affects earnings.

18


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

 
2.125
%
 
$
864

 
2.6
%
1.25% 2022 euro Notes
 
1,250

 
1.25
%
 
$
1,388

 
3.2
%
0.41% 2023 Swiss franc Bonds
 
CHF
700

 
0.41
%
 
$
704

 
3.4
%
2.00% 2026 euro Notes
 
750

 
2.00
%
 
$
833

 
3.9
%
5.50% 2026 pound sterling Notes
 
£
475

 
5.50
%
 
$
747

 
6.0
%
4.00% 2029 pound sterling Notes
 
£
700

 
4.00
%
 
$
1,111

 
4.5
%
The effective portions of the unrealized gain/(loss) recognized in other comprehensive income for our derivative instruments designated as cash flow hedges were as follows (in millions):
 
 
Three months ended
March 31,
Derivatives in cash flow hedging relationships
 
2017
 
2016
Foreign currency contracts
 
$
(47
)
 
$
(148
)
Cross-currency swap contracts
 
64

 
31

Total
 
$
17

 
$
(117
)
The locations in the Condensed Consolidated Statements of Income and the effective portions of the gain/(loss) reclassified out of AOCI and into earnings for our derivative instruments designated as cash flow hedges were as follows (in millions):
 
 
 
 
Three months ended
March 31,
Derivatives in cash flow hedging relationships
 
Statements of Income location
 
2017
 
2016
Foreign currency contracts
 
Product sales
 
$
57

 
$
96

Cross-currency swap contracts
 
Interest and other income, net
 
74

 
70

Total
 
 
 
$
131

 
$
166

No portions of our cash flow hedge contracts are excluded from the assessment of hedge effectiveness, and the gains and losses of the ineffective portions of these hedging instruments were not material for the three months ended March 31, 2017 and 2016. As of March 31, 2017, the amounts expected to be reclassified out of AOCI and into earnings during the next 12 months are approximately $2 million of net gains on our foreign currency and cross-currency swap contracts and approximately $2 million of losses on forward interest rate contracts.
Fair value hedges
To achieve the desired mix of fixed and floating interest rates on our long-term debt, we entered into interest rate swap contracts that qualified and are designated as fair value hedges. The terms of these interest rate swap contracts correspond to the related hedged debt instruments and effectively convert a fixed interest rate coupon to a floating LIBOR-based coupon over the lives of the respective notes. As of March 31, 2017 and December 31, 2016, we had interest rate swap agreements with aggregate notional amounts of $6.65 billion that hedge certain of our long-term debt issuances. These contracts have rates that range from three-month LIBOR plus 0.4% to three-month LIBOR plus 2.0%.
For derivative instruments that qualify and are designated as fair value hedges, we recognize in current earnings the unrealized gain or loss on the derivative resulting from the change in fair value during the period, as well as the offsetting unrealized loss or gain of the hedged item resulting from the change in fair value during the period attributable to the hedged risk. For the three months ended March 31, 2017 and 2016, we included unrealized losses of $19 million and unrealized gains of $149 million, respectively, on our interest rate swap agreements in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized gains of $19 million and unrealized losses of $149 million, respectively, on the related hedged debt.


19


Derivatives not designated as hedges
To reduce our exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. These exposures are hedged on a month-to-month basis. As of March 31, 2017 and December 31, 2016, the total notional amounts of these foreign currency forward contracts were $740 million and $666 million, respectively.
The location in the Condensed Consolidated Statements of Income and the amounts of gain/(loss) recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
  
 
 
 
Three months ended
March 31,
Derivatives not designated as hedging instruments
 
Statements of Income location
 
2017
 
2016
Foreign currency contracts
 
Interest and other income, net
 
$
1

 
$
(10
)
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
 
 
Derivative assets
 
Derivative liabilities
March 31, 2017
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
$
148

 
Accrued liabilities/ Other noncurrent liabilities
 
$
14

Cross-currency swap contracts
 
Other current assets/ Other noncurrent assets
 
20

 
Accrued liabilities/ Other noncurrent liabilities
 
481

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 
30

 
Accrued liabilities/ Other noncurrent liabilities
 
15

Total derivatives designated as hedging instruments
 
 
 
198

 
 
 
510

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

 
Accrued liabilities
 
1

Total derivatives not designated as hedging instruments
 
 
 

 
 
 
1

Total derivatives
 
 
 
$
198

 
 
 
$
511

 
 
Derivative assets
 
Derivative liabilities
December 31, 2016
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
$
203

 
Accrued liabilities/ Other noncurrent liabilities
 
$
4

Cross-currency swap contracts
 
Other current assets/ Other noncurrent assets
 

 
Accrued liabilities/ Other noncurrent liabilities
 
523

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 
41

 
Accrued liabilities/ Other noncurrent liabilities
 
7

Total derivatives designated as hedging instruments
 
 
 
244

 
 
 
534

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

 
Accrued liabilities
 

Total derivatives not designated as hedging instruments
 
 
 

 
 
 

Total derivatives
 
 
 
$
244

 
 
 
$
534


20


Our derivative contracts that were in liability positions as of March 31, 2017, contain certain credit-risk-related contingent provisions that would be triggered if: (i) we were to undergo a change in control and (ii) our or the surviving entity’s creditworthiness deteriorates, which is generally defined as having either a credit rating that is below investment grade or a materially weaker creditworthiness after the change in control. If these events were to occur, the counterparties would have the right, but not the obligation, to close the contracts under early-termination provisions. In such circumstances, the counterparties could request immediate settlement of the contracts for amounts that approximate the then current fair values of the contracts. In addition, our derivative contracts are not subject to any type of master netting arrangement, and amounts due to or from a counterparty under the contracts may be offset against other amounts due to or from the same counterparty only if an event of default or termination, as defined, were to occur.
The cash flow effects of our derivative contracts for the three months ended March 31, 2017 and 2016, are included within Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
12. Contingencies and commitments
Contingencies
In the ordinary course of business, we are involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. (See our Annual Report on Form 10-K for the year ended December 31, 2016, Part I, Item 1A. Risk Factors—Our business may be affected by litigation and government investigations.) We describe our legal proceedings and other matters that are significant or that we believe could become significant in this Note; and in Note 18, Contingencies and commitments to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016.
We record accruals for loss contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously.
Our legal proceedings range from cases brought by a single plaintiff to a class action with thousands of putative class members. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims—including but not limited to patent infringement, marketing, pricing and trade practices and securities law—some of which present novel factual allegations and/or unique legal theories. In each of the matters described in this filing or in Note 18, Contingencies and commitments to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, plaintiffs seek an award of a not-yet-quantified amount of damages or an amount that is not material. In addition, a number of the matters pending against us are at very early stages of the legal process (which in complex proceedings of the sort faced by us often extend for several years). As a result, none of the matters pending against us described in this filing or in Note 18, Contingencies and commitments to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016, have progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any, or such amounts are not material. While it is not possible to accurately predict or determine the eventual outcomes of these matters, an adverse determination in one or more of these matters currently pending could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Certain recent developments concerning our legal proceedings and other matters are discussed below:
Sanofi/Regeneron Patent Litigation
As previously disclosed, defendants Sanofi, Sanofi-Aventis U.S. LLC, Aventisub LLC, formerly doing business as Aventis Pharmaceuticals Inc., and Regeneron Pharmaceuticals, Inc. appealed the judgment of the U.S. District Court for Delaware (the Delaware District Court) that the patents in suit are valid and infringed by the defendants and the permanent injunction granted by the Delaware District Court prohibiting the infringing manufacture, use, sale, offer for sale or import of alirocumab in the United States. The U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court) has scheduled argument on the appeal for June 6, 2017.
Sensipar® (cinacalcet) Patent Litigation
As previously disclosed, Amgen filed 13 separate lawsuits in the Delaware District Court for infringement of our U.S. Patent No. 9,375,405 (the ‘405 Patent). On February 22, 2017, Amgen filed a lawsuit in the Delaware District Court against Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Ltd. (collectively, Zydus). In each of the 14 lawsuits, Amgen seeks an order of the Delaware District Court making any U.S. Food and Drug Administration (FDA) approval of the defendants’ generic version of Sensipar® effective no earlier than the expiration of the ‘405 Patent. In each lawsuit, all defendants except Zydus have responded to the complaint denying infringement and seeking judgment that the ‘405 Patent is invalid and/or not infringed. On February 23,

21


2017, and on April 6, 2017, for Zydus, the Delaware District Court consolidated the 14 lawsuits into a single case. The Delaware District Court has scheduled trial for March 5, 2018.
KYPROLIS® (carfilzomib) Patent Litigation
As previously disclosed, our subsidiary Onyx Therapeutics, Inc. (Onyx Therapeutics) filed nine separate lawsuits in the Delaware District Court for infringing certain of our patents. On April 18, 2017, the Delaware District Court consolidated these nine lawsuits for purposes of discovery and scheduled trial for March 11, 2019. On April 20, 2017, Onyx Therapeutics filed a separate lawsuit in the Delaware District Court against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. for infringement of U.S. Patent Nos. 7,232,818; 7,417,042; 7,491,704; 7,737,112; 8,129,346; 8,207,125; 8,207,126; 8,207,127; and 8,207,297. These ten lawsuits are based on Abbreviated New Drug Applications (ANDAs) that seek approval to market generic versions of KYPROLIS® before expiration of the asserted patents. In each lawsuit, Onyx Therapeutics seeks an order of the Delaware District Court making any FDA approval of the defendant’s ANDA effective no earlier than the expiration of the applicable patents.
Biosimilar Patent Litigations
We have filed a number of lawsuits against manufacturers of products that purport to be biosimilars of certain of our products. In each case, our complaint alleges that the manufacturer’s actions infringe certain patents we hold and that the manufacturer has failed to comply with certain provisions of the Biologics Price Competition and Innovation Act (BPCIA).
Sandoz Filgrastim Litigation
As previously disclosed, the U.S. Supreme Court granted certiorari on both Sandoz’s petition seeking review of the Federal Circuit Court ruling concluding that a biosimilar applicant must give 180-day advance notice of first marketing and that notice can be given only after the FDA has licensed the biosimilar product and Amgen’s conditional cross-petition seeking review of the Federal Circuit Court’s ruling that the only remedy available when a biosimilar applicant refuses to provide its Biologics License Application is to bring a patent infringement claim. On April 26, 2017, the U.S. Supreme Court heard arguments on Sandoz’s petition and Amgen’s conditional cross-petition.
Apotex Pegfilgrastim/Filgrastim Litigation
On February 17, 2017, the Patent Trial and Appeal Board of the U.S. Patent and Trademark Office granted a petition filed by Apotex to institute an inter partes review of our U.S. Patent No. 9,952,138 (the ‘138 Patent) challenging claims of the ‘138 Patent as unpatentable.
Hospira Epoetin Alfa Litigation
On April 3, 2017, the Federal Circuit Court heard arguments on Amgen’s appeal seeking review of the Delaware District Court’s order that Hospira need not provide Amgen discovery of certain of its manufacturing processes that Hospira withheld during the BPCIA dispute resolution process.
State Derivative Litigation
As previously disclosed, the Superior Court of the State of California, County of Ventura, lifted the stay in Larson v. Sharer, et al., a state stockholder derivative lawsuit. On March 15, 2017, the plaintiffs in this lawsuit filed a motion for leave to file a third amended complaint.
ERISA Litigation
On April 5, 2017, the U.S. District Court for the Central District of California entered a final order approving the settlement of this class action lawsuit.

22


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding Amgen’s business. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended December 31, 2016. Our results of operations discussed in MD&A are presented in conformity with GAAP. Amgen operates in one business segment: human therapeutics. Therefore, our results of operations are discussed on a consolidated basis.
Forward-looking statements
This report and other documents we file with the U.S. Securities and Exchange Commission (SEC) contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. In addition, we or others on our behalf may make forward-looking statements in press releases or written statements or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Such words as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “assume” and “continue,” as well as variations of such words and similar expressions, are intended to identify such forward-looking statements. These statements are not guarantees of future performance, and they involve certain risks, uncertainties and assumptions that are difficult to predict. We describe our respective risks, uncertainties and assumptions that could affect the outcome or results of operations in Item 1A. Risk Factors in Part II herein. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements regarding product sales, regulatory activities, clinical trial results, reimbursement, expenses, EPS, liquidity and capital resources, trends, planned dividends, stock repurchases and restructuring plans. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise.
Overview
Amgen is committed to unlocking the potential of biology for patients suffering from serious illnesses by discovering, developing, manufacturing and delivering innovative human therapeutics. This approach begins by using tools like advanced human genetics to unravel the complexities of disease and understand the fundamentals of human biology.
Amgen focuses on areas of high unmet medical need and leverages its expertise to strive for solutions that improve health outcomes and dramatically improve people’s lives. A biotechnology pioneer since 1980, Amgen has grown to be one of the world’s leading independent biotechnology companies, has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential.
Currently, we market therapeutics for oncology/hematology, inflammation, nephrology, bone health and cardiovascular disease. Our principal products are Neulasta® (pegfilgrastim), Enbrel® (etanercept), Aranesp® (darbepoetin alfa), Prolia® (denosumab), Sensipar®/Mimpara® (cinacalcet), XGEVA® (denosumab), and EPOGEN® (epoetin alfa). We market several other products as well, including KYPROLIS® (carfilzomib), Nplate® (romiplostim), NEUPOGEN® (filgrastim), Vectibix® (panitumumab), and more recently launched, Repatha® (evolocumab), BLINCYTO® (blinatumomab), IMLYGIC® (talimogene laherparepvec) and Corlanor® (ivabradine).

23


Significant developments
Following is a summary of selected significant developments affecting our business that have occurred since the filing of our Annual Report on Form 10-K for the period ended December 31, 2016. For additional developments or for a more comprehensive discussion of certain developments discussed below, see our Annual Report on Form 10-K for the year ended December 31, 2016.
Products/Pipeline
Bone Health
XGEVA® 
In April 2017, we announced the submission of a supplemental Biologics License Application (sBLA) to the FDA and an application for a variation to the marketing authorization to the European Medicines Agency (EMA) for XGEVA®. The submissions to regulatory authorities seek to expand the currently approved XGEVA® indication for the prevention of skeletal-related events in solid tumors to include patients with multiple myeloma.
Cardiovascular
Repatha® 
In February 2017, we announced that the European Commission (EC) adopted a decision to change the Repatha® marketing authorization, approving a new single-dose, monthly delivery option. The new automated mini-doser with a pre-filled cartridge is a hands-free device that provides 420 mg of Repatha® in a single injection per administration.
In March 2017, we announced that the Phase 3 study evaluating Repatha® in patients who were receiving apheresis to reduce low-density lipoprotein cholesterol (LDL-C) met its primary endpoint.
In March 2017, we announced that the Repatha® cardiovascular outcomes study established for the first time that maximally reducing LDL-C levels with Repatha®, beyond what is possible with the current best therapy alone, leads to a further reduction in major cardiovascular events, including heart attacks, strokes and coronary revascularizations. No new safety concerns were identified.
In March 2017, we announced that the Repatha® cognitive function study met its primary endpoint, demonstrating that Repatha® did not negatively impact cognition when added to optimized statin therapy.
Neuroscience
Erenumab
In April 2017, we announced an expanded collaboration with Novartis AG (Novartis) for erenumab, which is being investigated for the prevention of migraine. As part of the expanded collaboration, Amgen and Novartis agreed to combine capabilities to co-commercialize erenumab in the United States.
Oncology/Hematology
BLINCYTO® 
In March 2017, we announced that the FDA accepted for priority review the sBLA for BLINCYTO® to include overall survival data from the Phase 3 TOWER study. The application also included new data supporting the treatment of patients with Philadelphia chromosome-positive relapsed or refractory B-cell precursor acute lymphoblastic leukemia. The FDA has set a Prescription Drug User Fee Act target action date of August 14, 2017.
KYPROLIS® 
In February 2017, we announced positive results from a planned overall survival interim analysis of the Phase 3 head-to-head ENDEAVOR (RandomizEd, OpeN Label, Phase 3 Study of Carfilzomib Plus DExamethAsone Vs Bortezomib Plus DexamethasOne in Patients With Relapsed Multiple Myeloma) trial. The study met the key secondary endpoint of overall survival demonstrating that patients with relapse or refractory multiple myeloma treated with KYPROLIS® and dexamethasone lived 7.6 months longer than those treated with VELCADE® (bortezomib) and dexamethasone.
Biosimilars
AMJEVITA (adalimumab-atto)/AMGEVITA (biosimilar adalimumab)
In March 2017, we announced that the EC granted market authorization for AMGEVITAin all available indications. For a discussion of ongoing, related litigation, see Note 18, Contingencies and commitments, to our consolidated financial statements in Part IV of our Annual Report on Form 10-K for the year ended December 31, 2016.


24


ABP 980
In March 2017, we announced the submission of a Marketing Authorization Application to the EMA for ABP 980, a biosimilar candidate to Herceptin® (trastuzumab). ABP 980 is being developed in collaboration with Allergan plc.
Selected financial information
The following is an overview of our results of operations (dollar and share amounts in millions, except per share data):
 
Three months ended
March 31,
 
 
 
2017
 
2016
 
Change
Product sales:
 
 
 
 
 
U.S.
$
4,095

 
$
4,119

 
(1
)%
Rest of the world (ROW)
1,104

 
1,120

 
(1
)%
Total product sales
5,199

 
5,239

 
(1
)%
Other revenues
265

 
288

 
(8
)%
Total revenues
$
5,464

 
$
5,527

 
(1
)%
Operating expenses
$
2,873

 
$
3,125

 
(8
)%
Operating income
$
2,591

 
$
2,402

 
8
 %
Net income
$
2,071

 
$
1,900

 
9
 %
Diluted EPS
$
2.79

 
$
2.50

 
12
 %
Diluted shares
741

 
760

 
(3
)%
Global product sales decreased one percent for the three months ended March 31, 2017.
The decrease in other revenues for the three months ended March 31, 2017, was driven primarily by an upfront payment for a licensing transaction in the prior period, offset partially by higher milestone payments received and higher Ibrance® (palbociclib) royalty income.
Operating expenses decreased for the three months ended March 31, 2017. All expense categories be