NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(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, 2020 and 2019, 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, 2019.
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 $8.5 billion and $8.4 billion as of March 31, 2020 and December 31, 2019, respectively.
Equity method investments
The equity method of accounting is used for equity investments that give us the ability to exert significant influence, but not control, over an investee based on such factors as our ownership percentage, voting and other shareholder rights, board of director representation and the existence of other collaborative or business relationships. The equity method of accounting requires us to allocate the difference between the fair value of securities acquired and our proportionate share of the carrying value of the underlying assets (the basis difference) to various items and amortize such differences over their useful lives. Our share of the investees’ earnings or losses and amortization of basis differences, if any, are recorded one quarter in arrears in Interest and other income, net, in the Condensed Consolidated Statements of Income.
We record impairment losses on our equity method investments if we deem the impairment to be other-than-temporary. We deem an impairment to be other-than-temporary based on various factors including, but not limited to, the length of time the fair value is below the carrying value, volatility of the security price and our intent and ability to retain the investment to allow for a recovery in fair value.
Recent accounting pronouncements
In June 2016, the Financial Accounting Standards Board (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 as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. We adopted this standard as of January 1, 2020, using a modified-retrospective approach. Adoption of the standard did not have a material impact on our condensed consolidated financial statements.
In March 2020, the FASB issued a new accounting standard to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, commonly referred to as reference rate reform. The new standard provides temporary optional expedients and exceptions to current GAAP guidance on contract modifications and hedge accounting. Specifically, a modification to transition to an alternative reference rate is treated as an event that does not require contract remeasurement or reassessment of a previous accounting treatment. Moreover, for all types of hedging relationships, an entity may change the reference rate without having to dedesignate the hedging relationship. The standard is generally effective for all contract modifications made and hedging relationships evaluated through December 31, 2022, as a result of reference rate reform. We are currently evaluating the impact that this new standard will have on our condensed consolidated financial statements.
2. Revenues
We operate in one business segment: human therapeutics. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Revenues by product and by geographic area, based on customers’ locations, are presented below. Rest-of-world (ROW) revenues relate to products that are sold primarily in Europe.
Revenues were as follows (in millions):
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|
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Three months ended March 31,
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2020
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2019
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US
|
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ROW
|
|
Total
|
|
US
|
|
ROW
|
|
Total
|
|
Enbrel® (etanercept)
|
|
$
|
1,117
|
|
|
$
|
36
|
|
|
$
|
1,153
|
|
|
$
|
1,106
|
|
|
$
|
45
|
|
|
$
|
1,151
|
|
|
Prolia® (denosumab)
|
|
422
|
|
|
232
|
|
|
654
|
|
|
390
|
|
|
202
|
|
|
592
|
|
|
Neulasta® (pegfilgrastim)
|
|
534
|
|
|
75
|
|
|
609
|
|
|
893
|
|
|
128
|
|
|
1,021
|
|
|
XGEVA® (denosumab)
|
|
355
|
|
|
126
|
|
|
481
|
|
|
356
|
|
|
115
|
|
|
471
|
|
|
Otezla® (apremilast)
|
|
377
|
|
|
102
|
|
|
479
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Aranesp® (darbepoetin alfa)
|
|
175
|
|
|
247
|
|
|
422
|
|
|
182
|
|
|
232
|
|
|
414
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|
|
KYPROLIS® (carfilzomib)
|
|
187
|
|
|
93
|
|
|
280
|
|
|
154
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|
|
91
|
|
|
245
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|
|
Repatha® (evolocumab)
|
|
124
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|
|
105
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|
|
229
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|
|
83
|
|
|
58
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|
|
141
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|
|
Other products
|
|
988
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|
|
599
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|
|
1,587
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|
|
827
|
|
|
424
|
|
|
1,251
|
|
|
Total product sales(1)
|
|
$
|
4,279
|
|
|
$
|
1,615
|
|
|
5,894
|
|
|
$
|
3,991
|
|
|
$
|
1,295
|
|
|
5,286
|
|
|
Other revenues
|
|
|
|
|
|
267
|
|
|
|
|
|
|
271
|
|
|
Total revenues
|
|
|
|
|
|
$
|
6,161
|
|
|
|
|
|
|
$
|
5,557
|
|
____________
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|
|
(1)
|
Hedging gains and losses, which are included in product sales, were not material for the three months ended March 31, 2020 and 2019.
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3. Income taxes
The effective tax rates for the three months ended March 31, 2020 and 2019, were 9.7% and 13.9%, respectively.
The decrease in our effective tax rate for the three months ended March 31, 2020, was due primarily to amortization related to the Otezla® acquisition, changes in jurisdictional mix of earnings and certain favorable items in the quarter. The effective tax rates differ from the federal statutory rate primarily as a result of foreign earnings from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and are subject to tax incentive grants through 2035. In addition, the Company’s operations conducted in Singapore are subject to a tax incentive grant through 2034. These earnings are also subject to U.S. tax at a reduced rate of 10.5%.
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 of 4% 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 examined by tax authorities in those jurisdictions. Significant disputes may arise with tax authorities involving issues regarding 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 relevant facts. As previously disclosed, we received a Revenue Agent Report (RAR) from the Internal Revenue Service (IRS) for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculations but continued to propose substantial adjustments. We disagree with the proposed adjustments and calculations and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. In addition, in April, we received draft notice of proposed adjustments (NOPAs) from the IRS for the years 2013, 2014 and 2015, which are similar to the proposed adjustments for the years 2010, 2011 and 2012 that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. We disagree with the proposed adjustments and calculations and intend to contest them. We are also currently under examination by a number of other state and foreign tax jurisdictions.
Final resolution of these complex matters is not likely within the next 12 months and could have a material impact on our condensed consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments substantially greater or less than amounts accrued. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009.
During the three months ended March 31, 2020, the gross amounts of our unrecognized tax benefits (UTBs) increased $50 million as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2020, 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 (collectively, dilutive securities), as determined by using the treasury stock method.
The computations for basic and diluted EPS were as follows (in millions, except per-share data):
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Three months ended
March 31,
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2020
|
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2019
|
|
Income (Numerator):
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|
|
|
|
Net income for basic and diluted EPS
|
$
|
1,825
|
|
|
$
|
1,992
|
|
|
|
|
|
|
|
Shares (Denominator):
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|
|
|
|
Weighted-average shares for basic EPS
|
590
|
|
|
622
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|
|
Effect of dilutive securities
|
4
|
|
|
4
|
|
|
Weighted-average shares for diluted EPS
|
594
|
|
|
626
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
3.09
|
|
|
$
|
3.20
|
|
|
Diluted EPS
|
$
|
3.07
|
|
|
$
|
3.18
|
|
For the three months ended March 31, 2020 and 2019, the number of antidilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.
5. Collaborations
On January 2, 2020, we closed our strategic collaboration with BeiGene, Ltd. (BeiGene) to expand our oncology presence in China. Under the collaboration, BeiGene will commercialize XGEVA®, KYPROLIS® and BLINCYTO® (blinatumomab) in China, and Amgen will share profits and losses equally during the initial product-specific commercialization periods; thereafter, product rights may revert to Amgen, and Amgen will pay royalties to BeiGene on sales in China.
In addition, we will jointly develop a portion of our oncology portfolio with BeiGene sharing in global research and development (R&D) costs by providing cash and development services up to $1.25 billion. Upon regulatory approval, BeiGene will assume commercialization rights in China for a specified period, and Amgen and BeiGene will share profits equally until certain of these product rights revert to Amgen. Upon return of the product rights, Amgen will pay royalties to BeiGene on sales in China for a specified period. For product sales outside of China, Amgen will also pay BeiGene royalties.
For the three months ended March 31, 2020, costs recovered from BeiGene for oncology product candidates were $57 million and were recorded in R&D expense in the Condensed Consolidated Statements of Income. For the three months ended March 31, 2020, no profit share payments or product sales were recorded between Amgen and BeiGene. In connection with this collaboration, we acquired an ownership interest in BeiGene. See Note 6, Investments.
6. Investments
Available-for-sale investments
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of interest-bearing securities, which are considered available-for-sale, by type of security were as follows (in millions):
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|
Types of securities as of March 31, 2020
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Fair
values
|
|
U.S. Treasury notes
|
|
$
|
173
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
176
|
|
|
U.S. Treasury bills
|
|
900
|
|
|
—
|
|
|
—
|
|
|
900
|
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
|
Financial
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
Industrial
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
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|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential-mortgage-backed securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Money market mutual funds
|
|
5,762
|
|
|
—
|
|
|
—
|
|
|
5,762
|
|
|
Other short-term interest-bearing securities
|
|
432
|
|
|
—
|
|
|
—
|
|
|
432
|
|
|
Total interest-bearing securities
|
|
$
|
7,291
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
7,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Types of securities as of December 31, 2019
|
|
Amortized
cost
|
|
Gross
unrealized
gains
|
|
Gross
unrealized
losses
|
|
Fair
values
|
|
U.S. Treasury notes
|
|
$
|
359
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
360
|
|
|
U.S. Treasury bills
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
|
Financial
|
|
1,108
|
|
|
13
|
|
|
—
|
|
|
1,121
|
|
|
Industrial
|
|
824
|
|
|
10
|
|
|
—
|
|
|
834
|
|
|
Other
|
|
195
|
|
|
3
|
|
|
—
|
|
|
198
|
|
|
Residential-mortgage-backed securities
|
|
181
|
|
|
1
|
|
|
—
|
|
|
182
|
|
|
Money market mutual funds
|
|
5,250
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
|
Other short-term interest-bearing securities
|
|
289
|
|
|
—
|
|
|
—
|
|
|
289
|
|
|
Total interest-bearing securities
|
|
$
|
8,206
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
8,234
|
|
The fair values of interest-bearing securities by location in the Condensed Consolidated Balance Sheets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets locations
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Cash and cash equivalents
|
|
$
|
6,969
|
|
|
$
|
5,360
|
|
|
Marketable securities
|
|
325
|
|
|
2,874
|
|
|
Total interest-bearing securities
|
|
$
|
7,294
|
|
|
$
|
8,234
|
|
Cash and cash equivalents in the above table excludes bank account cash of $718 million and $677 million as of March 31, 2020 and December 31, 2019, respectively.
The fair values of interest-bearing securities by contractual maturity, except for residential-mortgage-backed securities that do not have a single maturity date, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Maturing in one year or less
|
|
$
|
7,165
|
|
|
$
|
5,629
|
|
|
Maturing after one year through three years
|
|
129
|
|
|
2,304
|
|
|
Maturing after three years through five years
|
|
—
|
|
|
119
|
|
|
Residential mortgage-backed securities
|
|
—
|
|
|
182
|
|
|
Total interest-bearing securities
|
|
$
|
7,294
|
|
|
$
|
8,234
|
|
For the three months ended March 31, 2020 and 2019, realized gains on interest-bearing securities were $37 million and $1 million, respectively, and realized losses on interest-bearing securities were $4 million and $5 million, respectively. Realized gains and losses on interest-bearing securities are recorded in Interest and other income, net, in the Condensed Consolidated Statements of Income. The cost of securities sold is based on the specific-identification method.
The primary objective of our investment portfolio is to maintain 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.
As of March 31, 2020 and December 31, 2019, aggregated gross unrealized losses of available-for-sale investments were not material, and accordingly, no allowance for credit losses was recorded as of March 31, 2020.
Equity securities
We held investments in equity securities with readily determinable fair values of $220 million and $303 million as of March 31, 2020 and December 31, 2019, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. Gains and losses recognized on equity securities with readily determinable fair values, including gains and losses recognized on sales, were not material for the three months ended March 31, 2020 and 2019.
We held investments of $183 million and $176 million in equity securities without readily determinable fair values as of March 31, 2020 and December 31, 2019, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. Adjustments to the carrying values of these securities were not material for the three months ended March 31, 2020 and 2019.
Equity method investments
Limited partnerships
We held limited partnership investments of $331 million and $320 million as of March 31, 2020 and December 31, 2019, respectively, which are included in Other assets in the Condensed Consolidated Balance Sheets. These investments, primarily investment funds of early-stage biotechnology companies, are accounted for by using the equity method of accounting and measured by using our proportionate share of the net asset values of the underlying investments held by the limited partnerships as a practical expedient. These investments are typically redeemable only through distributions upon liquidation of the underlying assets. As of March 31, 2020, unfunded additional commitments to be made for these investments during the next several years were not material. Gains and losses recognized on our limited partnership investments were not material for the three months ended March 31, 2020 and 2019.
BeiGene
On January 2, 2020, we acquired a 20.5% ownership interest in BeiGene for $2.8 billion, of which $2.6 billion was attributed to the fair value of equity securities upon closing, with the remainder attributed to prepaid R&D. Our equity investment in BeiGene is included in Other assets in the Condensed Consolidated Balance Sheets. The fair value of equity securities acquired exceeded our proportionate share of the carrying value of the underlying net assets of BeiGene by approximately $2.4 billion. This investment is accounted for by using the equity method of accounting, which requires us to identify and allocate amounts to the items that give rise to the basis difference and to amortize these items over their useful lives. This amortization, along with our share of the results of operations of BeiGene, will be recognized in Interest and other income, net, in our Condensed Consolidated Statements of Income. Recognition will occur one quarter in arrears, beginning in the second quarter of 2020. The basis difference was allocated to finite-lived intangible assets, indefinite-lived intangible assets, equity-method goodwill and related deferred taxes. The finite-lived intangible assets will be amortized over a period ranging from 8 to 15 years.
As of March 31, 2020, the carrying and fair values of our approximately 20.5% ownership interest in BeiGene totaled $2.6 billion and $2.0 billion, respectively. As of March 31, 2020, we believe the carrying value of our equity investment in BeiGene is fully recoverable. See Note 1, Summary of significant accounting policies, for factors considered in determining our conclusion. For information on a collaboration agreement we entered into with BeiGene in connection with this investment, see Note 5, Collaborations.
7. Inventories
Inventories consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Raw materials
|
$
|
446
|
|
|
$
|
358
|
|
|
Work in process
|
2,192
|
|
|
2,227
|
|
|
Finished goods
|
1,044
|
|
|
999
|
|
|
Total inventories
|
$
|
3,682
|
|
|
$
|
3,584
|
|
8. Goodwill and other intangible assets
Goodwill
The change in the carrying amount of goodwill was as follows (in millions):
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2020
|
|
Beginning balance
|
$
|
14,703
|
|
|
Currency translation adjustment
|
(20
|
)
|
|
Ending balance
|
$
|
14,683
|
|
Other intangible assets
Other intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
Gross
carrying
amounts
|
|
Accumulated
amortization
|
|
Other intangible
assets, net
|
|
Gross
carrying
amounts
|
|
Accumulated
amortization
|
|
Other intangible
assets, net
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed-product-technology rights
|
$
|
25,549
|
|
|
$
|
(8,876
|
)
|
|
$
|
16,673
|
|
|
$
|
25,575
|
|
|
$
|
(8,322
|
)
|
|
$
|
17,253
|
|
|
Licensing rights
|
3,746
|
|
|
(2,494
|
)
|
|
1,252
|
|
|
3,761
|
|
|
(2,398
|
)
|
|
1,363
|
|
|
Marketing-related rights
|
1,375
|
|
|
(979
|
)
|
|
396
|
|
|
1,382
|
|
|
(965
|
)
|
|
417
|
|
|
Research and development technology rights
|
1,269
|
|
|
(967
|
)
|
|
302
|
|
|
1,273
|
|
|
(947
|
)
|
|
326
|
|
|
Total finite-lived intangible assets
|
31,939
|
|
|
(13,316
|
)
|
|
18,623
|
|
|
31,991
|
|
|
(12,632
|
)
|
|
19,359
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development
|
30
|
|
|
—
|
|
|
30
|
|
|
54
|
|
|
—
|
|
|
54
|
|
|
Total other intangible assets
|
$
|
31,969
|
|
|
$
|
(13,316
|
)
|
|
$
|
18,653
|
|
|
$
|
32,045
|
|
|
$
|
(12,632
|
)
|
|
$
|
19,413
|
|
Developed-product-technology rights consists of rights related to marketed products. Licensing rights consists primarily of contractual rights to receive future milestone, royalty 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 rights consists primarily of rights related to the sale and distribution of marketed products. R&D technology rights pertains to technologies used in R&D that have 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. We review IPR&D projects for impairment annually, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable and upon the establishment of technological feasibility or regulatory approval.
During the three months ended March 31, 2020 and 2019, we recognized amortization associated with our finite-lived intangible assets of $709 million and $315 million, respectively. Amortization of intangible assets is included primarily in Cost of sales in the Condensed Consolidated Statements of Income. The total estimated amortization for our finite-lived intangible assets for the remaining nine months ending December 31, 2020, and the years ending December 31, 2021, 2022, 2023, 2024 and 2025, are $2.1 billion, $2.6 billion, $2.5 billion, $2.4 billion, $2.4 billion and $2.2 billion, respectively.
9. Financing arrangements
Our borrowings consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
4.50% notes due 2020 (4.50% 2020 Notes)
|
$
|
—
|
|
|
$
|
300
|
|
|
2.125% notes due 2020 (2.125% 2020 Notes)
|
750
|
|
|
750
|
|
|
Floating Rate Notes due 2020
|
300
|
|
|
300
|
|
|
2.20% notes due 2020 (2.20% 2020 Notes)
|
700
|
|
|
700
|
|
|
3.45% notes due 2020 (3.45% 2020 Notes)
|
—
|
|
|
900
|
|
|
4.10% notes due 2021 (4.10% 2021 Notes)
|
—
|
|
|
1,000
|
|
|
1.85% notes due 2021 (1.85% 2021 Notes)
|
—
|
|
|
750
|
|
|
3.875% notes due 2021 (3.875% 2021 Notes)
|
1,450
|
|
|
1,750
|
|
|
1.25% €1,250 million notes due 2022 (1.25% 2022 euro Notes)
|
1,379
|
|
|
1,402
|
|
|
2.70% notes due 2022 (2.70% 2022 Notes)
|
500
|
|
|
500
|
|
|
2.65% notes due 2022 (2.65% 2022 Notes)
|
1,500
|
|
|
1,500
|
|
|
3.625% notes due 2022 (3.625% 2022 Notes)
|
750
|
|
|
750
|
|
|
0.41% CHF700 million bonds due 2023 (0.41% 2023 Swiss franc Bonds)
|
728
|
|
|
725
|
|
|
2.25% notes due 2023 (2.25% 2023 Notes)
|
750
|
|
|
750
|
|
|
3.625% notes due 2024 (3.625% 2024 Notes)
|
1,400
|
|
|
1,400
|
|
|
1.90% notes due 2025 (1.90% 2025 Notes)
|
500
|
|
|
—
|
|
|
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)
|
827
|
|
|
841
|
|
|
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)
|
590
|
|
|
630
|
|
|
2.20% notes due 2027 (2.20% 2027 Notes)
|
750
|
|
|
—
|
|
|
3.20% notes due 2027 (3.20% 2027 Notes)
|
1,000
|
|
|
1,000
|
|
|
4.00% £700 million notes due 2029 (4.00% 2029 pound sterling Notes)
|
869
|
|
|
928
|
|
|
2.45% notes due 2030 (2.45% 2030 Notes)
|
1,250
|
|
|
—
|
|
|
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
|
|
|
3.15% notes due 2040 (3.15% 2040 Notes)
|
1,250
|
|
|
—
|
|
|
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
|
|
|
3.375% notes due 2050 (3.375% 2050 Notes)
|
1,250
|
|
|
—
|
|
|
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
|
(892
|
)
|
|
(868
|
)
|
|
Fair value adjustments
|
648
|
|
|
296
|
|
|
Total carrying value of debt
|
31,848
|
|
|
29,903
|
|
|
Less current portion
|
(1,840
|
)
|
|
(2,953
|
)
|
|
Total long-term debt
|
$
|
30,008
|
|
|
$
|
26,950
|
|
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 6.3% and 5.6%, respectively.
Debt issuances and repayments
During the three months ended March 31, 2020, we issued $5.0 billion of debt, consisting of the 1.90% 2025 Notes, the 2.20% 2027 Notes, the 2.45% 2030 Notes, the 3.15% 2040 Notes and the 3.375% 2050 Notes. 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 notes at a price equal to 101% of the principal amount of the notes plus accrued and unpaid interest. In addition, these 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 and a “make-whole” amount, which are defined by the terms of the notes. The notes may be redeemed without payment of make-whole amounts if redemption occurs during specified periods of time immediately prior to the maturity of the notes. Such time periods range from one month to six months prior to maturity.
A portion of the proceeds from the issuance of these notes were used to redeem the 3.45% 2020 Notes, the 4.10% 2021 Notes, the 1.85% 2021 Notes and $300 million aggregate principal amount of our 3.875% 2021 Notes. In connection with the redemption of these notes, we paid a total of $50 million in make-whole amounts plus associated accrued and unpaid interest, all of which was recognized in Interest expense, net, in the Condensed Consolidated Statements of Income during the three months ended March 31, 2020. In addition to these redemptions, the 4.50% 2020 Notes matured and were repaid during the three months ended March 31, 2020.
Interest rate swaps
In connection with the redemption of certain of the notes discussed above, associated interest rate swap contracts with an aggregate notional value of $2.2 billion were terminated. Additionally, due to historically low interest rates, during the three months ended March 31, 2020, we terminated interest rate swaps with an aggregate notional amount of $5.2 billion that hedged the 3.625% 2024 Notes, 2.60% 2026 Notes, 4.663% 2051 Notes and portions of our 3.625% 2022 Notes and 3.125% 2025 Notes, which resulted in the receipt of $576 million of cash and reduced counterparty credit risk. Immediately following termination of these contracts, we entered into new interest rate swap agreements at then-current interest rates on the same $5.2 billion principal amount of notes. See Note 12, Derivative instruments.
The effective interest rates on notes for which we have entered into interest rate swap contracts and the related notional amounts of these contracts were as follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Notes
|
|
Notional amounts
|
Effective interest rates
|
|
Notional amounts
|
Effective interest rates
|
|
3.45% 2020 Notes
|
|
$
|
—
|
|
LIBOR + 1.1%
|
|
$
|
900
|
|
LIBOR + 1.1%
|
|
4.10% 2021 Notes
|
|
—
|
|
LIBOR + 1.7%
|
|
1,000
|
|
LIBOR + 1.7%
|
|
3.875% 2021 Notes
|
|
1,450
|
|
LIBOR + 2.0%
|
|
1,750
|
|
LIBOR + 2.0%
|
|
3.625% 2022 Notes
|
|
750
|
|
LIBOR + 2.7%
|
|
750
|
|
LIBOR + 1.6%
|
|
3.625% 2024 Notes
|
|
1,400
|
|
LIBOR + 3.2%
|
|
1,400
|
|
LIBOR + 1.4%
|
|
3.125% 2025 Notes
|
|
1,000
|
|
LIBOR + 1.8%
|
|
1,000
|
|
LIBOR + 0.9%
|
|
2.60% 2026 Notes
|
|
1,250
|
|
LIBOR + 1.8%
|
|
1,250
|
|
LIBOR + 0.3%
|
|
4.663% 2051 Notes(1)
|
|
1,500
|
|
LIBOR + 2.6%
|
|
1,500
|
|
LIBOR + 0.0%
|
|
Total notional amounts
|
|
$
|
7,350
|
|
|
|
$
|
9,550
|
|
|
____________
|
|
|
|
(1)
|
Excludes an additional 1.5% of interest for the difference between the coupon rate paid to note holders and the fixed rate received under the interest rate swap contracts.
|
10. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Shares
|
|
Dollars
|
|
Shares
|
|
Dollars
|
|
First quarter
|
4.3
|
|
|
$
|
933
|
|
|
15.9
|
|
|
$
|
3,031
|
|
In December 2019, our Board of Directors increased the amount authorized under our stock repurchase program by an additional $4.0 billion. As of March 31, 2020, $5.5 billion of authorization remained available under our stock repurchase program.
Dividends
In March 2020, the Board of Directors declared a quarterly cash dividend of $1.60 per share, which will be paid in June 2020. In December 2019, the Board of Directors declared a quarterly cash dividend of $1.60 per share, which was paid in March 2020.
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, 2019
|
$
|
(718
|
)
|
|
$
|
175
|
|
|
$
|
22
|
|
|
$
|
(7
|
)
|
|
$
|
(528
|
)
|
|
Foreign currency translation adjustments
|
(52
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
|
Unrealized (losses) gains
|
—
|
|
|
(162
|
)
|
|
8
|
|
|
—
|
|
|
(154
|
)
|
|
Reclassification adjustments to income
|
—
|
|
|
84
|
|
|
(33
|
)
|
|
—
|
|
|
51
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Income taxes
|
—
|
|
|
17
|
|
|
6
|
|
|
—
|
|
|
23
|
|
|
Balance as of March 31, 2020
|
$
|
(770
|
)
|
|
$
|
114
|
|
|
$
|
3
|
|
|
$
|
(9
|
)
|
|
$
|
(662
|
)
|
Reclassifications out of AOCI and into earnings were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
Components of AOCI
|
|
2020
|
|
2019
|
|
Condensed Consolidated
Statements of Income locations
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Foreign currency contract gains
|
|
$
|
49
|
|
|
$
|
14
|
|
|
Product sales
|
|
Cross-currency swap contract losses
|
|
(133
|
)
|
|
(42
|
)
|
|
Interest and other income, net
|
|
|
|
(84
|
)
|
|
(28
|
)
|
|
Income before income taxes
|
|
|
|
18
|
|
|
6
|
|
|
Provision for income taxes
|
|
|
|
$
|
(66
|
)
|
|
$
|
(22
|
)
|
|
Net income
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
$
|
33
|
|
|
$
|
(4
|
)
|
|
Interest and other income, net
|
|
|
|
(7
|
)
|
|
—
|
|
|
Provision for income taxes
|
|
|
|
$
|
26
|
|
|
$
|
(4
|
)
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
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.
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, 2020, using:
|
|
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
176
|
|
|
U.S. Treasury bills
|
|
900
|
|
|
—
|
|
|
—
|
|
|
900
|
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
|
Financial
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
Industrial
|
|
—
|
|
|
12
|
|
|
—
|
|
|
12
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential-mortgage-backed securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Money market mutual funds
|
|
5,762
|
|
|
—
|
|
|
—
|
|
|
5,762
|
|
|
Other short-term interest-bearing securities
|
|
—
|
|
|
432
|
|
|
—
|
|
|
432
|
|
|
Equity securities
|
|
220
|
|
|
—
|
|
|
—
|
|
|
220
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
—
|
|
|
375
|
|
|
—
|
|
|
375
|
|
|
Cross-currency swap contracts
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
Interest rate swap contracts
|
|
—
|
|
|
89
|
|
|
—
|
|
|
89
|
|
|
Total assets
|
|
$
|
7,058
|
|
|
$
|
930
|
|
|
$
|
—
|
|
|
$
|
7,988
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
Cross-currency swap contracts
|
|
—
|
|
|
657
|
|
|
—
|
|
|
657
|
|
|
Interest rate swap contracts
|
|
—
|
|
|
23
|
|
|
—
|
|
|
23
|
|
|
Contingent consideration obligations
|
|
—
|
|
|
—
|
|
|
60
|
|
|
60
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
685
|
|
|
$
|
60
|
|
|
$
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019, using:
|
|
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury notes
|
|
$
|
360
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
360
|
|
|
U.S. Treasury bills
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Corporate debt securities:
|
|
|
|
|
|
|
|
|
|
Financial
|
|
—
|
|
|
1,121
|
|
|
—
|
|
|
1,121
|
|
|
Industrial
|
|
—
|
|
|
834
|
|
|
—
|
|
|
834
|
|
|
Other
|
|
—
|
|
|
198
|
|
|
—
|
|
|
198
|
|
|
Residential-mortgage-backed securities
|
|
—
|
|
|
182
|
|
|
—
|
|
|
182
|
|
|
Money market mutual funds
|
|
5,250
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
|
Other short-term interest-bearing securities
|
|
—
|
|
|
289
|
|
|
—
|
|
|
289
|
|
|
Equity securities
|
|
303
|
|
|
—
|
|
|
—
|
|
|
303
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
—
|
|
|
224
|
|
|
—
|
|
|
224
|
|
|
Cross-currency swap contracts
|
|
—
|
|
|
66
|
|
|
—
|
|
|
66
|
|
|
Interest rate swap contracts
|
|
—
|
|
|
259
|
|
|
—
|
|
|
259
|
|
|
Total assets
|
|
$
|
5,913
|
|
|
$
|
3,173
|
|
|
$
|
—
|
|
|
$
|
9,086
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
31
|
|
|
Cross-currency swap contracts
|
|
—
|
|
|
315
|
|
|
—
|
|
|
315
|
|
|
Interest rate swap contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Contingent consideration obligations
|
|
—
|
|
|
—
|
|
|
61
|
|
|
61
|
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
346
|
|
|
$
|
61
|
|
|
$
|
407
|
|
Interest-bearing and equity securities
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.
As of March 31, 2020, our corporate debt securities are investment grade and have maturity dates of three years or less from the balance sheet date. Our corporate debt securities portfolio has weighted-average credit ratings of BBB or equivalent by Standard & Poor’s Financial Services LLC (S&P), BBB+ by Moody’s Investors Service, Inc. (Moody’s) and A– by Fitch Ratings, Inc. (Fitch). We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use 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. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; 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.
Derivatives
All of our foreign currency forward derivative contracts have maturities of three years or less, and all are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses 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 and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. These inputs, when applicable, are at commonly quoted intervals. See Note 12, Derivative instruments.
Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency-basis swap spreads. See Note 12, Derivative instruments.
Our interest rate swap contracts are with counterparties that have minimum credit ratings of A– or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by using an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include LIBOR, swap rates and obligor credit default swap rates. See Note 12, Derivative instruments.
During the three months ended March 31, 2020 and 2019, there were no material remeasurements to the fair values of assets and liabilities that are not measured at fair value on a recurring basis.
Summary of the fair values of other financial instruments
Cash equivalents
The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.
Borrowings
We estimated the fair values of our borrowings by using Level 2 inputs. As of March 31, 2020 and December 31, 2019, the aggregate fair values of our borrowings were $35.8 billion and $33.7 billion, respectively, and the carrying values were $31.8 billion and $29.9 billion, respectively.
12. 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 such exposures, we use or have used 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 with regard to our international product sales, we enter into foreign currency forward 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, 2020 and December 31, 2019, we had outstanding foreign currency forward contracts with aggregate notional amounts of $4.9 billion and $5.0 billion, respectively. We have designated these foreign currency forward contracts, which are primarily euro based, as cash flow hedges. Accordingly, we report the unrealized gains and losses on these contracts in AOCI in the Condensed Consolidated Balance Sheets, and we reclassify them to Product sales in the Condensed Consolidated Statements of Income 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 such 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, thereby 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. Accordingly, the unrealized gains and losses on these contracts are reported in AOCI in the Condensed Consolidated Balance Sheets and reclassified to Interest and other income, net, in the Condensed Consolidated Statements of Income in the same periods during which the hedged debt affects earnings.
The notional amounts and interest rates of our cross-currency swaps as of March 31, 2020, were as follows (notional amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
U.S. dollars
|
|
Hedged notes
|
|
Notional amounts
|
|
Interest rates
|
|
Notional amounts
|
|
Interest rates
|
|
1.25% 2022 euro Notes
|
|
€
|
1,250
|
|
|
1.3
|
%
|
|
$
|
1,388
|
|
|
3.2
|
%
|
|
0.41% 2023 Swiss franc Bonds
|
|
CHF
|
700
|
|
|
0.4
|
%
|
|
$
|
704
|
|
|
3.4
|
%
|
|
2.00% 2026 euro Notes
|
|
€
|
750
|
|
|
2.0
|
%
|
|
$
|
833
|
|
|
3.9
|
%
|
|
5.50% 2026 pound sterling Notes
|
|
£
|
475
|
|
|
5.5
|
%
|
|
$
|
747
|
|
|
6.0
|
%
|
|
4.00% 2029 pound sterling Notes
|
|
£
|
700
|
|
|
4.0
|
%
|
|
$
|
1,111
|
|
|
4.5
|
%
|
In connection with the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate contracts in order to hedge the variability in cash flows due to changes in the applicable U.S. Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, are recognized in AOCI in the Condensed Consolidated Balance Sheets and are amortized into Interest expense, net, in the Condensed Consolidated Statements of Income over the lives of the associated debt issuances. Amounts recognized in connection with forward interest rate swaps during the three months ended March 31, 2020, and amounts expected to be recognized during the subsequent 12 months are not material.
The unrealized gains and losses recognized in AOCI 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
|
|
2020
|
|
2019
|
|
Foreign currency contracts
|
|
$
|
239
|
|
|
$
|
85
|
|
|
Cross-currency swap contracts
|
|
(401
|
)
|
|
(55
|
)
|
|
Total unrealized (losses) gains
|
|
$
|
(162
|
)
|
|
$
|
30
|
|
Fair value hedges
To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that qualified for and were designated as fair value hedges. These interest rate swap contracts effectively convert fixed-rate coupons to floating-rate LIBOR-based coupons over the terms of the related hedge contracts. As of March 31, 2020 and December 31, 2019, we had interest rate swap contracts with aggregate notional amounts of $7.4 billion and $9.6 billion, respectively, that hedge certain portions of our long-term debt issuances.
Interest rate swaps with an aggregate notional value of $2.2 billion were terminated during the three months ended March 31, 2020, in connection with the redemption of certain of our notes. The termination of these interest rate swaps resulted in a gain of $17 million recognized in Interest expense, net, in the Condensed Consolidated Statements of Income. Additionally, we terminated $5.2 billion aggregate notional amount of interest rate swaps, which resulted in the receipt of $576 million from the counterparties that was included in Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020. This amount will be recognized in Interest expense, net, in the Condensed Consolidated Statements of Income over the remaining life of the underlying notes. Immediately following the termination of these interest rate swap contracts, we entered into new interest rate swap agreements at then-current interest rates on the same $5.2 billion principal amount of notes. See Note 9, Financing arrangements, for information on our interest rate swaps.
For interest rate swap contracts that qualify for and are designated as fair value hedges, we recognize in Interest expense, net, in the Condensed Consolidated Statements of Income 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. If a hedging relationship involving an interest rate swap contract is terminated, the gain or loss realized on contract termination is recorded as an adjustment to the carrying value of the debt and amortized into Interest expense, net, over the remaining life of the previously hedged debt.
The hedged liabilities and related cumulative-basis adjustments for fair value hedges of those liabilities were recorded in the Condensed Consolidated Balance Sheets as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amounts of hedged liabilities(1)
|
|
Cumulative amounts of fair value hedging adjustments related to the carrying amounts of the hedged liabilities(2)
|
|
Condensed Consolidated Balance Sheets locations
|
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Current portion of long-term debt
|
|
$
|
90
|
|
|
$
|
903
|
|
|
$
|
90
|
|
|
$
|
4
|
|
|
Long-term debt
|
|
$
|
7,784
|
|
|
$
|
8,814
|
|
|
$
|
558
|
|
|
$
|
292
|
|
____________
|
|
|
|
(1)
|
Current portion of long-term debt includes $90 million of carrying value with discontinued hedging relationships as of March 31, 2020. Long-term debt includes $592 million and $136 million of carrying value with discontinued hedging relationships as of March 31, 2020 and December 31, 2019, respectively.
|
|
|
|
|
(2)
|
Current portion of long-term debt includes $90 million of hedging adjustments on discontinued hedging relationships as of March 31, 2020. Long-term debt includes $492 million and $36 million of hedging adjustments on discontinued hedging relationships as of March 31, 2020 and December 31, 2019, respectively.
|
Impact of hedging transactions
The following tables summarize the amounts recorded in income and expense line items and the effects thereon from fair value and cash flow hedging, including discontinued hedging relationships (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
|
|
Product sales
|
|
Interest and other income, net
|
|
Interest (expense), net
|
|
Total amounts recorded in income and (expense) line items presented in the Condensed Consolidated Statements of Income
|
|
$
|
5,894
|
|
|
$
|
11
|
|
|
$
|
(346
|
)
|
|
The effects of cash flow and fair value hedging:
|
|
|
|
|
|
|
|
Gains (losses) on cash flow hedging relationships reclassified out of AOCI:
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cross-currency swap contracts
|
|
$
|
—
|
|
|
$
|
(133
|
)
|
|
$
|
—
|
|
|
Gains (losses) on fair value hedging relationships—interest rate swap agreements:
|
|
|
|
|
|
|
|
Hedged items(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
210
|
|
|
Derivatives designated as hedging instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
Product sales
|
|
Interest and other income, net
|
|
Interest (expense), net
|
|
Total amounts recorded in income and (expense) line items presented in the Condensed Consolidated Statements of Income
|
|
$
|
5,286
|
|
|
$
|
185
|
|
|
$
|
(343
|
)
|
|
The effects of cash flow and fair value hedging:
|
|
|
|
|
|
|
|
Gains (losses) on cash flow hedging relationships reclassified out of AOCI:
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cross-currency swap contracts
|
|
$
|
—
|
|
|
$
|
(42
|
)
|
|
$
|
—
|
|
|
(Losses) gains on fair value hedging relationships—interest rate swap agreements:
|
|
|
|
|
|
|
|
Hedged items(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(130
|
)
|
|
Derivatives designated as hedging instruments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
133
|
|
__________
|
|
|
|
(1)
|
Gains (losses) on hedged items do not completely offset gains (losses) on the related designated hedging instruments due to amortization of the cumulative amounts of fair value hedging adjustments included in the carrying amount of the hedged debt for discontinued hedging relationships and the recognition of gains on terminated hedges where the corresponding hedged item was paid down in the period.
|
No portions of our cash flow hedge contracts were excluded from the assessment of hedge effectiveness. As of March 31, 2020, we expected to reclassify $162 million of net gains on our foreign currency and cross-currency swap contracts out of AOCI and into earnings during the next 12 months.
Derivatives not designated as hedges
To reduce our exposure to foreign currency fluctuations in certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. Most of these exposures are hedged on a month-to-month basis. As of March 31, 2020 and December 31, 2019, the total notional amounts of these foreign currency forward contracts were $0.8 billion and $1.2 billion, respectively. Gains and losses recognized in earnings for our derivative instruments not designated as hedging instruments were not material for the three months ended March 31, 2020 and 2019.
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
Derivative liabilities
|
|
March 31, 2020
|
|
Condensed Consolidated
Balance Sheets locations
|
|
Fair values
|
|
Condensed Consolidated
Balance Sheets locations
|
|
Fair values
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets/ Other assets
|
|
$
|
375
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
$
|
5
|
|
|
Cross-currency swap contracts
|
|
Other current assets/ Other assets
|
|
10
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
657
|
|
|
Interest rate swap contracts
|
|
Other current assets/ Other assets
|
|
89
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
23
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
474
|
|
|
|
|
685
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
—
|
|
|
Accrued liabilities
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
—
|
|
|
|
|
—
|
|
|
Total derivatives
|
|
|
|
$
|
474
|
|
|
|
|
$
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
Derivative liabilities
|
|
December 31, 2019
|
|
Condensed Consolidated
Balance Sheets locations
|
|
Fair values
|
|
Condensed Consolidated
Balance Sheets locations
|
|
Fair values
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets/ Other assets
|
|
$
|
223
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
$
|
31
|
|
|
Cross-currency swap contracts
|
|
Other current assets/ Other assets
|
|
66
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
315
|
|
|
Interest rate swap contracts
|
|
Other current assets/ Other assets
|
|
259
|
|
|
Accrued liabilities/ Other noncurrent liabilities
|
|
—
|
|
|
Total derivatives designated as hedging instruments
|
|
|
|
548
|
|
|
|
|
346
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Other current assets
|
|
1
|
|
|
Accrued liabilities
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
1
|
|
|
|
|
—
|
|
|
Total derivatives
|
|
|
|
$
|
549
|
|
|
|
|
$
|
346
|
|
Our derivative contracts that were in liability positions as of March 31, 2020, contain certain credit-risk-related contingent provisions that would be triggered if (i) we were to undergo a change in control and (ii) our or the surviving entity’s creditworthiness deteriorates, which is generally defined as having either a credit rating that is below investment grade or a materially weaker creditworthiness after the change in control. If these events were to occur, the counterparties would have the right but not the obligation to close the contracts under early-termination provisions. In such circumstances, the counterparties could request immediate settlement of these contracts for amounts that approximate the then current fair values of the contracts. In addition, our derivative contracts are not subject to any type of master netting arrangement, and amounts due either to or from a counterparty under the contracts may be offset against other amounts due either 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 in the Condensed Consolidated Statements of Cash Flows are included in Net cash provided by operating activities, except for the settlement of notional amounts of cross-currency swaps, which are included in Net cash used in financing activities.
13. 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, 2019, 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 footnote.
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 involve various aspects of our business and a variety of claims, some of which present novel factual allegations and/or unique legal theories. In each of the matters described in this filing, or in Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019, in which we could incur a liability, our opponents 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 we face often extend for several years. As a result, none of the matters described in this filing, or in Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019, in which we could incur a liability, have progressed sufficiently through discovery and/or the 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:
Abbreviated New Drug Application (ANDA) Patent Litigation
KYPROLIS® (carfilzomib) ANDA Patent Litigation
Onyx Therapeutics, Inc. v. Cipla Limited, et al.
On March 30, 2020, the U.S. District Court for the District of Delaware (the Delaware District Court) issued an order advising the parties in the litigation that, due to the recent and current challenges, the court does not anticipate issuing its post-trial opinion until approximately on or before May 8, 2020.
Otezla® (apremilast) ANDA Patent Litigation
Amgen Inc. v. Sandoz Inc., et al.
On February 14, 2020, the U.S. District Court for the District of New Jersey (the New Jersey District Court) granted the motion by Amgen and Celgene Corp. (Celgene) and issued an order substituting Amgen for Celgene as plaintiff in the consolidated action and all related actions, terminating Celgene as plaintiff in the consolidated action and all related actions, and amending the case caption in the consolidated action and all related actions to reflect Amgen as the sole plaintiff.
On March 25, 2020, based on a joint request by Amgen and Unichem Laboratories, Ltd. (Unichem), the New Jersey District Court entered a consent judgment and injunction prohibiting the making, using, selling, offering to sell, or importing of Unichem’s apremilast product during the term of the U.S. Patent Nos. 6,962,940 (the ’940 Patent); 7,427,638 (the ’638 Patent); 7,659,302 (the ’302 Patent); 7,893,101 (the ’101 Patent); 8,455,536 (the ’536 Patent); 9,018,243 (the ’243 Patent); 9,724,330 (the ’330 Patent); and 10,092,541 (the ’541 Patent), unless authorized pursuant to a confidential settlement agreement. On April 3, 2020, based on a joint request by Amgen and Annora Pharma Private Ltd. and Hetero USA Inc. (collectively, Hetero), the New Jersey District Court entered a consent judgment and injunction prohibiting the making, using, selling, offering to sell, or importing of Hetero’s apremilast product during the term of the ’940 Patent; U.S. Patent No. 7,208,516; the ’638 Patent; the ’302 Patent; the ’101 Patent; the ’536 Patent; U.S. Patent No. 8,802,717; the ’243 Patent; the ’330 Patent; U.S. Patent No. 9,872,854 and the ’541 Patent, unless authorized pursuant to a confidential settlement agreement. Trial in the consolidated action is scheduled to commence in May 2021.
Sensipar® (cinacalcet) ANDA Patent Litigation
Amgen Inc. v. Amneal Pharmaceuticals LLC, et al. (formerly, Amgen Inc. v. Aurobindo Pharma Ltd. et al.) Consolidated Case
On February 13, 2020, Amgen petitioned the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court) to rehear Amgen’s appeal of the judgment of noninfringement with respect to Piramal Healthcare UK Limited, and Amneal Pharmaceuticals LLC and Amneal Pharmaceuticals of New York, LLC (collectively, Amneal) petitioned the Federal Circuit Court for panel rehearing of the court’s opinion vacating and remanding the judgment of noninfringement with respect to Amneal. On April 15, 2020, the Federal Circuit Court denied each of Amgen’s and Amneal’s petitions. On April 22, 2020, the Federal Circuit Court issued a mandate returning the case to the Delaware District Court.
ENBREL (etanercept) Patent Litigation
Immunex Corporation, et al. v. Sandoz Inc., et al.
On March 4, 2020, the Federal Circuit Court heard oral argument on the appeal by Sandoz Inc., Sandoz International GmbH and Sandoz GmbH from final judgment upholding the validity of U.S. Patent Nos. 8,063,182 and 8,163,522.
Repatha® (evolocumab) Patent Litigation
Patent Disputes in the International Region
A two-day hearing before the Technical Board of Appeal of the European Patent Office, which was scheduled to begin on March 24, 2020, has been rescheduled to begin on October 28, 2020.
As previously disclosed, we are also involved in and expect future involvement in additional disputes regarding our proprotein convertase subtilisin/kexin type 9 (PCSK9) patents in other jurisdictions and regions, including matters filed against us and that we have filed in the United Kingdom, Germany, France and Japan.
On April 24, 2020, the Supreme Court of Japan declined to hear Sanofi K.K.’s appeals making final the Japanese High Court’s decisions that PRALUENT® infringes Amgen’s valid patent rights in Japan.
NEUPOGEN® (filgrastim)/Neulasta® (pegfilgrastim) Patent Litigation
Apotex PTAB Challenge
On March 24, 2020, the Federal Circuit Court vacated the decision by the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office and remanded the case to the PTAB for proceeding consistent with the Federal Circuit Court’s decision in Arthrex Inc. v. Smith & Nephew, Inc., 941 F.3d 1320 (Fed. Cir. 2019).
Amgen Inc., et al. v. Pfizer Inc. et al.
On February 18, 2020, the Delaware District Court entered an amended scheduling order moving the trial on the infringement of our U.S. Patent No. 9,643,997 to May 17, 2021, to enable Amgen Inc. and its wholly owned subsidiary, Amgen Manufacturing, Limited (collectively Amgen), to seek additional discovery into the defenses of Pfizer Inc. (Pfizer) and Hospira Inc. (Hospira).
On April 24, 2020, Amgen filed a separate lawsuit in the Delaware District Court against Hospira and Pfizer for infringement of U.S. Patent No. 10,577,392 (the ’392 Patent) and seeks, among other remedies, damages and injunctive relief to prohibit Hospira and Pfizer from infringing the ’392 Patent by the manufacture, import and sale of Pfizer’s NIVESTYMTM biosimilar filgrastim product, which was launched in the U.S. in October 2018.
Amgen Inc., et al. v. Hospira Inc. et al.
On March 4, 2020, Hospira and Pfizer filed a motion requesting the Delaware District Court to dismiss the complaint by Amgen Inc. and its wholly owned subsidiary, Amgen Manufacturing, Limited, alleging non-infringement of U.S. Patent No. 8,273,707. The motion has been fully briefed.
Fresenius PTAB Challenge
On March 30, 2020, Amgen filed its preliminary response to a petition to institute inter partes review before the PTAB to challenge the patentability of U.S. Patent No. 9,856,287 filed by Fresenius Kabi USA, LLC and Fresenius Kabi SwissBioSim GmbH, and the PTAB will have 3 months to render a decision on whether to institute trial proceedings.
EPOGEN® (epoetin alfa) Patent Litigation
Amgen Inc., et al. v. Hospira, Inc.
The Federal Circuit Court denied petition for rehearing en banc by Hospira and issued the mandate on March 23, 2020 affirming the final judgment of the Delaware District Court that Amgen’s U.S. Patent No. 5,856,298 is valid and infringed by Hospira, that Amgen’s U.S. Patent No. 5,756,349 is not infringed by Hospira, and awarding Amgen $70 million in damages for Hospira’s infringement. On April 17, 2020, Amgen acknowledged satisfaction of judgment upon receipt of $83 million in damages, interest and cost.
Litigation relating to our Biosimilar Products
KANJINTI® (trastuzumab-anns) Patent Litigation
Genentech, Inc. v. Amgen Inc.
On March 6, 2020, the Federal Circuit Court affirmed the District Court’s denial of Genentech Inc.’s (Genentech) motion for a preliminary injunction. On March 9, 2020, the Delaware District Court entered a Markman order construing a term of U.S. Patent No. 8,574,869 (the ’869 Patent). On March 16, 2020, the Delaware District Court signed a joint stipulation and order vacating the April 20, 2020 trial date. On April 17, 2020, the Delaware District Court rescheduled the jury trial to begin on February 22, 2021.
MVASI® (bevacizumab-awwb) Patent Litigation
Genentech, Inc. and City of Hope v. Amgen Inc.
On February 19, 2020, Genentech filed its second amended complaint in the Delaware District Court, adding additional claims for legal and declaratory relief with respect to patents already in suit. On March 4, 2020, Amgen filed its second amended affirmative answer and counterclaims, adding affirmative defenses and counterclaims that the ’869 Patent is unenforceable for inequitable conduct and unclean hands. On March 9, 2020, the Delaware District Court entered a Markman order construing a term of the ’869 Patent.
Genentech, Inc. and City of Hope v. Immunex Rhode Island Corp. and Amgen Inc.
Argument before the Federal Circuit Court on Genentech’s appeal of the Delaware District Court’s denial of Genentech’s motions for injunctive relief has been scheduled for June 3, 2020.
Breach of Contract Action
Cipla Ltd. et al. v. Amgen Inc.
On February 6, 2020, Amgen’s motion was transferred to the U.S. Magistrate Judge for the District of Delaware for a recommendation. A hearing on the motion was held on April 28, 2020.
Novartis Pharma AG v. Amgen Inc.
On February 18, 2020, Novartis Pharma AG filed in the U.S. District Court for the Southern District of New York its answer and affirmative defenses to Amgen’s second amended counterclaims.
Antitrust Class Action
Sensipar® Antitrust Class Actions
On February 6, 2020, the motions in the class action lawsuits against Amgen and various entities affiliated with Teva Pharmaceutical Industries Limited were transferred to the U.S. Magistrate Judge for the District of Delaware for a recommendation. A hearing on the motions was held on April 28, 2020.
The multidistrict litigation panel certified its conditional transfer order on February 6, 2020 transferring the additional class action lawsuit brought in the U.S. District Court for the Southern District of Florida, captioned MSP Recovery Claims v. Amgen Inc., et al., to the Delaware District Court.
