10-Q 1 amgn-2014331x10q.htm 10-Q AMGN-2014.3.31-10Q

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, 2014
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-12477
Amgen Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-3540776
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
One Amgen Center Drive,
Thousand Oaks, California
 
91320-1799
(Address of principal executive offices)
 
(Zip Code)
(805) 447-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ 
(Do not check if a smaller reporting company)
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No þ
As of April 22, 2014, the registrant had 757,021,648 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,
 
2014
 
2013
Revenues:
 
 
 
Product sales
$
4,356

 
$
4,151

Other revenues
165

 
87

Total revenues
4,521

 
4,238

 
 
 
 
Operating expenses:
 
 
 
Cost of sales
1,090

 
744

Research and development
1,027

 
878

Selling, general and administrative
1,023

 
1,158

Other
17

 
16

Total operating expenses
3,157

 
2,796

 
 
 
 
Operating income
1,364

 
1,442

 
 
 
 
Interest expense, net
259

 
263

Interest and other income, net
99

 
164

 
 
 
 
Income before income taxes
1,204

 
1,343

 
 
 
 
Provision (benefit) for income taxes
131

 
(91
)
 
 
 
 
Net income
$
1,073

 
$
1,434

 
 
 
 
Earnings per share:
 
 
 
Basic
$
1.42

 
$
1.91

Diluted
$
1.40

 
$
1.88

 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
Basic
757

 
751

Diluted
768

 
764

 
 
 
 
Dividends paid per share
$
0.61

 
$
0.47


See accompanying notes.

1


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
 
March 31,
 
2014
 
2013
Net income
$
1,073

 
$
1,434

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
Foreign currency translation losses
(8
)
 
(23
)
Effective portion of cash flow hedges
2

 
75

Net unrealized gains (losses) on available-for-sale securities
40

 
(62
)
Other
1

 
1

Other comprehensive income (loss), net of tax
35

 
(9
)
Comprehensive income
$
1,108

 
$
1,425


See accompanying notes.

2


AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
March 31,
2014
 
December 31,
2013
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,687

 
$
3,805

Marketable securities
16,115

 
15,596

Trade receivables, net
2,514

 
2,697

Inventories
2,966

 
3,019

Other current assets
3,020

 
2,250

Total current assets
28,302

 
27,367

 
 
 
 
Property, plant and equipment, net
5,365

 
5,349

Intangible assets, net
13,566

 
13,262

Goodwill
14,832

 
14,968

Restricted investments
3,414

 
3,412

Other assets
1,525

 
1,767

Total assets
$
67,004

 
$
66,125

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
949

 
$
787

Accrued liabilities
4,749

 
4,655

Current portion of long-term debt
2,505

 
2,505

Total current liabilities
8,203

 
7,947

 
 
 
 
Long-term debt
29,519

 
29,623

Other noncurrent liabilities
6,541

 
6,459

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding - 756.9 shares in 2014 and 754.6 shares in 2013
29,890

 
29,891

Accumulated deficit
(7,023
)
 
(7,634
)
Accumulated other comprehensive loss
(126
)
 
(161
)
Total stockholders’ equity
22,741

 
22,096

Total liabilities and stockholders’ equity
$
67,004

 
$
66,125


See accompanying notes.

3


AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended
 
March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
1,073

 
$
1,434

Depreciation and amortization
518

 
277

Stock-based compensation expense
87

 
92

Other items, net
(8
)
 
(38
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables, net
180

 
19

Inventories
(3
)
 
(12
)
Other assets
(181
)
 
(10
)
Accounts payable
92

 
35

Accrued income taxes
(48
)
 
(406
)
Other liabilities
(568
)
 
(342
)
Net cash provided by operating activities
1,142

 
1,049

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(172
)
 
(158
)
Cash paid for acquisitions, net of cash acquired
(104
)
 

Purchases of marketable securities
(2,884
)
 
(6,964
)
Proceeds from sales of marketable securities
1,811

 
6,013

Proceeds from maturities of marketable securities
957

 
2,924

Restriction of investments
(329
)
 

Other
(44
)
 
(6
)
Net cash (used in) provided by investing activities
(765
)
 
1,809

Cash flows from financing activities:
 
 
 
Repayment of debt
(125
)
 
(2,500
)
Repurchases of common stock

 
(832
)
Dividends paid
(460
)
 
(353
)
Net proceeds from issuance of common stock in connection with the Company’s equity award programs
38

 
93

Other
52

 
7

Net cash used in financing activities
(495
)
 
(3,585
)
Decrease in cash and cash equivalents
(118
)
 
(727
)
Cash and cash equivalents at beginning of period
3,805

 
3,257

Cash and cash equivalents at end of period
$
3,687

 
$
2,530


See accompanying notes.

4


AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(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, 2014 and 2013, 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, 2013.
Principles of consolidation
The condensed consolidated financial statements include the accounts of Amgen as well as its majority-owned subsidiaries. We do not have any significant interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Property, plant and equipment, net
Property, plant and equipment is recorded at historical cost, net of accumulated depreciation and amortization of $7.1 billion and $6.9 billion as of March 31, 2014, and December 31, 2013, respectively.
Restricted investments
We have restricted investments on our Condensed Consolidated Balance Sheets that are owned by ATL Holdings Limited (ATL Holdings), a wholly-owned subsidiary. ATL Holdings is an entity distinct from the Company and its other subsidiaries, with separate assets and liabilities. Because certain third parties own Class A preferred shares of ATL Holdings, this entity is required to hold restricted investments, which were composed of interest-bearing securities, cash and related interest receivable as of March 31, 2014 and December 31, 2013.
2. Business combinations
Onyx Pharmaceuticals
On October 1, 2013, we acquired all of the outstanding stock of Onyx Pharmaceuticals, Inc. (Onyx), a global biopharmaceutical company engaged in the development and commercialization of innovative therapies for improving the lives of people afflicted with cancer. Onyx has a multiple myeloma franchise, with Kyprolis® (carfilzomib) for Injection already approved in the United States, and with oprozomib being evaluated in clinical trials for patients with hematologic malignancies. In addition, Onyx has three partnered oncology assets: Nexavar® (sorafenib) tablets (an Onyx and Bayer compound), Stivarga® (regorafenib) tablets (a Bayer compound), and palbociclib (a Pfizer, Inc. compound). This transaction, which was accounted for as a business combination, provides us with an opportunity to expand our oncology franchise. Onyx’s operations have been included in our condensed consolidated financial statements commencing on the acquisition date.

5


The aggregate consideration to acquire Onyx was paid in cash and consisted of (in millions):
Total consideration transferred
$
9,517

Compensation expense
197

Total cash paid
$
9,714


The $9,517 million cash payment consisted of a $9,186 million cash payment to the outstanding common stockholders and a $331 million cash payment to the Onyx equity award holders for services rendered prior to October 1, 2013 under the Onyx equity award plans. The remaining $197 million of cash, which related to the accelerated vesting of the remaining Onyx equity awards, was recognized as compensation expense during the three months ended December 31, 2013. This amount was included primarily in Selling, general and administrative (SG&A) expense in the Consolidated Statement of Income.
The consideration to acquire Onyx was allocated preliminarily to the acquisition date fair values of assets acquired and liabilities assumed as follows (in millions):
Cash and cash equivalents
$
319

Marketable securities
337

Inventories
170

Indefinite-lived intangible assets - In-process research and development (IPR&D)
1,170

Finite-lived intangible assets - Developed product technology rights
6,190

Finite-lived intangible assets - Licensing rights
2,792

Goodwill
2,393

Convertible debt
(742
)
Assumed contingent consideration
(261
)
Deferred income taxes, net
(2,993
)
Other assets (liabilities), net
142

Total consideration
$
9,517


Onyx’s preliminary goodwill at December 31, 2013 has been revised. Goodwill was reduced by $133 million due primarily to revisions which increased the acquisition date fair values of developed product technology rights by $280 million and deferred income taxes by $75 million, and decreased inventory by $80 million. The adjustments did not have a material effect on our current or prior period financial statements.
The developed product technology rights acquired relate to Kyprolis® which is approved in the United States. This product technology is being amortized on a straight-line basis over the estimated useful life of 12 years.
Licensing rights acquired represent the aggregate estimated fair values of receiving future milestone, royalty and/or profit sharing payments associated with various contract agreements that were entered into by Onyx prior to the acquisition. The weighted-average useful life of these finite-lived intangible assets is ten years, and they are being amortized primarily on a straight-line basis.
Our accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities assumed were based upon preliminary calculations and valuations, and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The primary areas of those preliminary estimates that are not yet finalized relate to certain identifiable intangible assets and tax related items.
Filgrastim and pegfilgrastim rights acquisition
In October 2013, we entered into an agreement to acquire the licenses to filgrastim and pegfilgrastim effective January 1, 2014 (acquisition date), that were held by F. Hoffmann-La Roche Ltd. (Roche) in approximately 100 markets in Eastern Europe, Latin America, Asia, the Middle East and Africa, (Product Rights), and to settle our preexisting relationship related to the Product Rights for total consideration of $497 million. The acquisition of the Product Rights was accounted for as a business combination as the acquired rights and processes are capable of producing an immediate return to us, and the settlement of the preexisting relationship was accounted for separately from the business combination.

6


This transaction provides us with an opportunity to expand our geographic presence and reach more patients in more countries that could benefit from our therapies. The operations of the acquired set of activities have been included in our financial statements commencing on the acquisition date. Pro forma results of operations for this acquisition have not been presented because this acquisition is not material to our consolidated results of operations.
The aggregate consideration transferred consisted of (in millions):
Total consideration transferred or to be transferred
$
497

Settlement of preexisting relationship at fair value
(99
)
Total consideration transferred to acquire the Product Rights
$
398

The settlement of the preexisting relationship relates to a supply contract between Amgen and Roche that was terminated as a result of the acquisition of the Product Rights. The fair value of the contract of $99 million was recognized in Cost of sales in the Condensed Consolidated Statement of Income for the three months ended March 31, 2014.
The consideration to acquire the Product Rights was allocated to the acquisition date fair values of assets acquired as follows (in millions):
Finite-lived intangible assets - Marketing-related rights
$
363

Finite-lived intangible assets - Developed product technology rights
11

Goodwill
3

Other assets
21

Total consideration
$
398

The marketing-related and developed product technology rights acquired relate to the Product Rights and are being amortized on a straight-line basis over their estimated useful lives of five years and three and one-half years, respectively.
Our accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities incurred were based upon preliminary calculations and valuations, and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The primary areas of those preliminary estimates that are not yet finalized relate to certain tangible assets and liabilities incurred, and identifiable intangible assets.
3. Income taxes
The effective tax rate for the three months ended March 31, 2014 was 10.9% compared with (6.8)% for the corresponding period of the prior year. The effective rates are different 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 of the United States. The effective tax rate for the three months ended March 31, 2014, increased due primarily to two significant events that occurred during the three months ended March 31, 2013. First, we settled our federal income tax examination for the years ended December 31, 2007, 2008 and 2009, in which we agreed to certain adjustments and remeasured our unrecognized tax benefits (UTBs) accordingly. Second, the American Taxpayer Relief Act of 2012, enacted during the first quarter of 2013, reinstated the federal research and development (R&D) tax credit for 2012 and 2013. Therefore, our effective tax rate for the three months ended March 31, 2013, included a benefit for the full-year 2012 federal R&D tax credit, recorded as a discrete item in the first quarter of 2013. The federal R&D tax credit expired as of December 31, 2013 and was not reinstated as of March 31, 2014. Therefore, our effective tax rate for the three months ended March 31, 2014, does not include a benefit for the federal R&D tax credit. In addition, the effective tax rates for both periods were reduced by foreign tax credits associated with the Puerto Rico excise tax described below.
Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturing subsidiary in Puerto Rico. The rate was 2.75% in the first half of 2013 and 4.0% effective July 1, 2013 through December 31, 2017. We account for the excise tax as a manufacturing cost that is capitalized in inventory and expensed in cost of sales when the related products are sold. For U.S. income tax purposes, the excise tax results in foreign tax credits that are generally recognized in our provision for income taxes when the excise tax is incurred. Excluding the impact of the Puerto Rico excise tax, our effective tax rates for the three months ended March 31, 2014, would have been 15.4%, compared with (0.8)% for the corresponding period of the prior year.
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

7


disputes may arise with these tax authorities involving issues of the timing and amount of income and deductions, the use of tax credits and allocations of income among various tax jurisdictions because of differing interpretations of tax laws and regulations. We are no longer subject to U.S. federal income tax examinations for years ending on or before December 31, 2009, or to California state income tax examinations for years ending on or before December 31, 2005.
During the three months ended March 31, 2014, the gross amount of our UTBs increased by approximately $65 million as a result of tax positions taken during the current year. Substantially all of the UTBs as of March 31, 2014, if recognized, would affect our effective tax rate. As of March 31, 2014, we believe it is reasonably possible that our gross liabilities for UTBs may decrease by approximately $70 million within the succeeding 12 months due to the resolution of state audits.
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 principally shares that may be issued under our stock option awards and restricted stock and performance unit awards, determined using the treasury stock method (collectively “dilutive securities”).
The computation for basic and diluted EPS was as follows (in millions, except per share data):
 
 
Three months ended
 
 
March 31,
 
 
2014
 
2013
Income (Numerator):
 
 
 
 
Net income for basic and diluted EPS
 
$
1,073

 
$
1,434

 
 
 
 
 
Shares (Denominator):
 
 
 
 
Weighted-average shares for basic EPS
 
757

 
751

Effect of dilutive securities
 
11

 
13

Weighted-average shares for diluted EPS
 
768

 
764

 
 
 
 
 
Basic EPS
 
$
1.42

 
$
1.91

Diluted EPS
 
$
1.40

 
$
1.88

For the three months ended March 31, 2014 and 2013, the number of anti-dilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.

8


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, 2014
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
4,802

 
$
4

 
$
(7
)
 
$
4,799

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
1,005

 

 
(6
)
 
999

Foreign and other
 
1,547

 
18

 
(23
)
 
1,542

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
3,700

 
29

 
(10
)
 
3,719

Industrial
 
3,739

 
42

 
(11
)
 
3,770

Other
 
410

 
4

 
(1
)
 
413

Residential mortgage-backed securities
 
1,449

 
3

 
(16
)
 
1,436

Other mortgage- and asset-backed securities
 
1,519

 

 
(48
)
 
1,471

Money market mutual funds
 
3,434

 

 

 
3,434

Other short-term interest-bearing securities
 
1,306

 

 

 
1,306

Total interest-bearing securities
 
22,911

 
100

 
(122
)
 
22,889

Equity securities
 
91

 
17

 

 
108

Total available-for-sale investments
 
$
23,002

 
$
117

 
$
(122
)
 
$
22,997


Type of security as of December 31, 2013
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
4,737

 
$
2

 
$
(9
)
 
$
4,730

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
1,087

 

 
(8
)
 
1,079

Foreign and other
 
1,574

 
13

 
(41
)
 
1,546

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
3,667

 
28

 
(19
)
 
3,676

Industrial
 
3,745

 
36

 
(21
)
 
3,760

Other
 
388

 
4

 
(2
)
 
390

Residential mortgage-backed securities
 
1,478

 
3

 
(21
)
 
1,460

Other mortgage- and asset-backed securities
 
1,555

 
1

 
(45
)
 
1,511

Money market mutual funds
 
3,366

 

 

 
3,366

Other short-term interest-bearing securities
 
750

 

 

 
750

Total interest-bearing securities
 
22,347

 
87

 
(166
)
 
22,268

Equity securities
 
85

 
10

 

 
95

Total available-for-sale investments
 
$
22,432

 
$
97

 
$
(166
)
 
$
22,363


9


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,
2014
 
December 31,
2013
Cash and cash equivalents
 
$
3,366

 
$
3,266

Marketable securities
 
16,115

 
15,596

Other assets — noncurrent
 
108

 
95

Restricted investments
 
3,408

 
3,406

Total available-for-sale investments
 
$
22,997

 
$
22,363

Cash and cash equivalents in the table above excludes cash of $321 million and $539 million as of March 31, 2014, and December 31, 2013, respectively. Restricted investments in the table above excludes $6 million of interest receivable as of both March 31, 2014 and December 31, 2013.
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,
2014
 
December 31,
2013
Maturing in one year or less
 
$
7,107

 
$
6,799

Maturing after one year through three years
 
5,261

 
4,785

Maturing after three years through five years
 
5,947

 
6,057

Maturing after five years through ten years
 
1,667

 
1,656

Mortgage- and asset-backed securities
 
2,907

 
2,971

Total interest-bearing securities
 
$
22,889

 
$
22,268

For the three months ended March 31, 2014 and 2013, realized gains totaled $28 million and $85 million, respectively, and realized losses totaled $26 million and $18 million, respectively. The cost of securities sold is based on the specific identification method. Most of our available-for-sale investments that were in an unrealized loss position, which totaled $122 million as of March 31, 2014, have been in a continuous unrealized loss position for less than 12 months. These investments had an aggregate fair value of $8.9 billion as of March 31, 2014.
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 places restrictions on maturities and concentration by asset class and issuer.
We review our available-for-sale investments for other-than-temporary declines in fair value below our cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below our cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security. As of March 31, 2014, and December 31, 2013, 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,
2014
 
December 31,
2013
Raw materials
$
212

 
$
217

Work in process
1,885

 
2,064

Finished goods
869

 
738

Total inventories
$
2,966

 
$
3,019


10


7. Goodwill and other intangible assets
Goodwill
The changes in the carrying amounts of goodwill were as follows (in millions):
 
Three months ended
March 31,
 
2014
 
2013
Beginning balance
$
14,968

 
$
12,662

Goodwill related to acquisitions of businesses(1)
(130
)
 
(48
)
Currency translation adjustments
(6
)
 
(10
)
Ending balance
$
14,832

 
$
12,604

(1) 
Composed primarily of adjustments to goodwill resulting from changes to the acquisition date fair values of net assets acquired in business combinations recorded during their respective measurement periods.
Identifiable intangible assets
Identifiable intangible assets consisted of the following (in millions):
 
March 31, 2014
 
December 31, 2013
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
 
Gross
carrying
amount
 
Accumulated
amortization
 
Intangible
assets, net
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Developed product technology rights
$
10,421

 
$
(3,553
)
 
$
6,868

 
$
10,130

 
$
(3,347
)
 
$
6,783

Licensing rights
3,241

 
(463
)
 
2,778

 
3,241

 
(366
)
 
2,875

R&D technology rights
1,210

 
(518
)
 
692

 
1,207

 
(496
)
 
711

Marketing-related rights
972

 
(398
)
 
574

 
619

 
(366
)
 
253

Total finite-lived intangible assets
15,844

 
(4,932
)
 
10,912

 
15,197

 
(4,575
)
 
10,622

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
IPR&D
2,654

 

 
2,654

 
2,640

 

 
2,640

Total identifiable intangible assets
$
18,498

 
$
(4,932
)
 
$
13,566

 
$
17,837

 
$
(4,575
)
 
$
13,262

Developed product technology rights consist of rights related to marketed products acquired in business combinations. Licensing rights are composed primarily of intangible assets acquired as part of the acquisition of Onyx, 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. R&D technology rights consist of technology used in R&D with alternative future uses. Marketing-related intangible assets are composed primarily of rights related to the sale and distribution of marketed products. For information related to the acquisition of certain of these intangible assets, see Note 2, Business combinations.
IPR&D consists of R&D projects acquired in a business combination which are not complete due to remaining technological risks and/or lack of receipt of the required regulatory approvals. These projects include Kyprolis®, a treatment for multiple myeloma being developed for use outside the United States (excluding Japan) acquired in the Onyx transaction (see Note 2, Business combinations); velcalcetide, a treatment for secondary hyperparathyroidism in patients with chronic kidney disease who are on dialysis; blinatumomab, a treatment for acute lymphoblastic leukemia (ALL), and talimogene laherparepvec, a treatment for melanoma.
For all IPR&D projects, there are 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 able to market a human therapeutic without obtaining regulatory approvals, and such approvals require completing clinical trials that demonstrate a product candidate is safe and effective. In addition, the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans, impact the revenues a product can generate. Consequently, the eventual realized value, if any, of these acquired IPR&D projects may vary from their estimated fair values.

11


During the three months ended March 31, 2014 and 2013, we recognized amortization charges associated with our finite-lived intangible assets of $357 million and $117 million, respectively. The total estimated amortization charges for our finite-lived intangible assets for the nine months ended December 31, 2014, and the years ended December 31, 2015, 2016, 2017, 2018 and 2019, are $951 million, $1.3 billion, $1.3 billion, $1.1 billion, $967 million and $894 million, respectively.
8. Financing arrangements
The carrying values and the fixed contractual coupon rates, as applicable, of our long-term borrowings were as follows (in millions):
 
March 31,
2014
 
December 31,
2013
1.875% notes due 2014 (1.875% 2014 Notes)
$
1,000

 
$
1,000

4.85% notes due 2014 (4.85% 2014 Notes)
1,000

 
1,000

2.30% notes due 2016 (2.30% 2016 Notes)
749

 
749

2.50% notes due 2016 (2.50% 2016 Notes)
999

 
999

2.125% notes due 2017 (2.125% 2017 Notes)
1,249

 
1,248

5.85% notes due 2017 (5.85% 2017 Notes)
1,099

 
1,099

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

 
500

Master Repurchase Agreement obligation due 2018
3,100

 
3,100

Term Loan due 2018
4,750

 
4,875

4.375% euro-denominated notes due 2018 (4.375% 2018 euro Notes)
757

 
751

5.70% notes due 2019 (5.70% 2019 Notes)
999

 
999

2.125% euro-denominated notes due 2019 (2.125% 2019 euro Notes)
927

 
925

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

 
300

3.45% notes due 2020 (3.45% 2020 Notes)
898

 
898

4.10% notes due 2021 (4.10% 2021 Notes)
998

 
998

3.875% notes due 2021 (3.875% 2021 Notes)
1,746

 
1,746

3.625% notes due 2022 (3.625% 2022 Notes)
747

 
747

5.50% pound-sterling-denominated notes due 2026 (5.50% 2026 pound sterling Notes)
786

 
781

4.00% pound-sterling-denominated notes due 2029 (4.00% 2029 pound sterling Notes)
1,151

 
1,144

6.375% notes due 2037 (6.375% 2037 Notes)
899

 
899

6.90% notes due 2038 (6.90% 2038 Notes)
499

 
499

6.40% notes due 2039 (6.40% 2039 Notes)
996

 
996

5.75% notes due 2040 (5.75% 2040 Notes)
697

 
697

4.95% notes due 2041 (4.95% 2041 Notes)
596

 
596

5.15% notes due 2041 (5.15% 2041 Notes)
2,233

 
2,233

5.65% notes due 2042 (5.65% 2042 Notes)
1,244

 
1,244

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

 
1,000

Other notes
105

 
105

Total debt
32,024

 
32,128

Less current portion
(2,505
)
 
(2,505
)
Total noncurrent debt
$
29,519

 
$
29,623

Debt repayments
During the three months ended March 31, 2014, we repaid $125 million of principal on our Term Loan Credit Facility.

12


9. Stockholders’ equity
Stock repurchase program
We had no repurchases under our stock repurchase program during the three months ended March 31, 2014. As of March 31, 2014, $1.6 billion remained available under our Board of Directors-approved stock repurchase program.
Dividends
On December 13, 2013, the Board of Directors declared a quarterly cash dividend of $0.61 per share of common stock, which was paid on March 7, 2014. On March 5, 2014, the Board of Directors declared a quarterly cash dividend of $0.61 per share of common stock, which will be paid on June 6, 2014, to all stockholders of record as of the close of business on May 15, 2014.
Accumulated other comprehensive income
The components of accumulated other comprehensive income (AOCI) were as follows (in millions):
 
Foreign
currency
translation
 
Cash flow
hedges
 
Available-for-sale
securities
 
Other
 
AOCI
Balance as of December 31, 2013
$
(68
)
 
$
(33
)
 
$
(43
)
 
$
(17
)
 
$
(161
)
Foreign currency translation adjustments
(12
)
 

 

 

 
(12
)
Unrealized gains

 
17

 
66

 
1

 
84

Reclassification adjustments to income

 
(14
)
 
(2
)
 

 
(16
)
Income taxes
4

 
(1
)
 
(24
)
 

 
(21
)
Balance as of March 31, 2014
$
(76
)
 
$
(31
)
 
$
(3
)
 
$
(16
)
 
$
(126
)
The reclassifications out of AOCI to Net income were as follows (in millions):
 
 
 
Amounts reclassified out of AOCI
 
 
 
 
 
March 31,
 
 
Components of AOCI
 
 
2014
 
2013
 
Line item affected in the Statements of Income
Cash flow hedges:
 
 
 
 
 
 
 
     Foreign currency contract losses
 
 
$

 
$
(4
)
 
Product sales
     Cross-currency swap contract gains (losses)
 
 
14

 
(140
)
 
Interest and other income, net
 
 
 
14

 
(144
)
 
Total before income tax
 
 
 
(5
)
 
53

 
Tax (expense)/benefit
 
 
 
$
9

 
$
(91
)
 
Net of taxes
Available-for-sale securities:
 
 
 
 

 

     Net realized gains
 
 
$
2

 
$
67

 
Interest and other income, net
 
 
 
(1
)
 
(25
)
 
Tax expense
 
 
 
$
1

 
$
42

 
Net of taxes

13


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 the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:
Level 1
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
Level 2
Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs
Level 3
Valuations based on inputs that are unobservable and significant to the overall fair value measurement
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.
The fair value of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis was as follows (in millions):
 
 
Quoted prices in
active markets for
identical assets
(Level 1)
 
Significant
other observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
 
 
Fair value measurement
 
 
 
 
 
as of March 31, 2014, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,799

 
$

 
$

 
$
4,799

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
999

 

 
999

Foreign and other
 

 
1,542

 

 
1,542

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
3,719

 

 
3,719

Industrial
 

 
3,770

 

 
3,770

Other
 

 
413

 

 
413

Residential mortgage-backed securities
 

 
1,436

 

 
1,436

Other mortgage- and asset-backed securities
 

 
1,471

 

 
1,471

Money market mutual funds
 
3,434

 

 

 
3,434

Other short-term interest-bearing securities
 

 
1,306

 

 
1,306

Equity securities
 
108

 

 

 
108

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
62

 

 
62

Cross-currency swap contracts
 

 
195

 

 
195

Interest rate swap contracts
 

 
4

 

 
4

Total assets
 
$
8,341

 
$
14,917

 
$

 
$
23,258

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
101

 
$

 
$
101

Cross-currency swap contracts
 

 
2

 

 
2

Interest rate swap contracts
 

 
103

 

 
103

Contingent consideration obligations in connection with business combinations
 

 

 
596

 
596

Total liabilities
 
$

 
$
206

 
$
596

 
$
802


14


 
 
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, 2013, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,730

 
$

 
$

 
$
4,730

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 

 
1,079

 

 
1,079

Foreign and other
 

 
1,546

 

 
1,546

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 

 
3,676

 

 
3,676

Industrial
 

 
3,760

 

 
3,760

Other
 

 
390

 

 
390

Residential mortgage-backed securities
 

 
1,460

 

 
1,460

Other mortgage- and asset-backed securities
 

 
1,511

 

 
1,511

Money market mutual funds
 
3,366

 

 

 
3,366

Other short-term interest-bearing securities
 

 
750

 

 
750

Equity securities
 
95

 

 

 
95

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 

 
53

 

 
53

Cross-currency swap contracts
 

 
193

 

 
193

Total assets
 
$
8,191

 
$
14,418

 
$

 
$
22,609

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$

 
$
107

 
$

 
$
107

Cross-currency swap contracts
 

 
4

 

 
4

Interest rate swap contracts
 

 
161

 

 
161

Contingent consideration obligations in connection with business combinations
 

 

 
595

 
595

Total liabilities
 
$

 
$
272

 
$
595

 
$
867

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 by Standard & Poor's Financial Services LLC (S&P), A+ by Moody's Investor Service, Inc. (Moody's) or Fitch, Inc. (Fitch); and our corporate debt securities portfolio has a weighted-average credit rating of A- by S&P, BBB+ by Moody's, and A by Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.
Our residential mortgage-, other mortgage- and asset-backed securities portfolio is composed entirely of senior tranches, with credit ratings of AAA by S&P, Moody's or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.
We value our other short-term interest-bearing securities at amortized cost, which approximates fair value given their near term maturity dates.

15


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, Moody’s or Fitch. We estimated the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency rates, London Interbank Offered Rates (LIBOR) cash and swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts also include implied volatility measures. These inputs, where applicable, are at commonly quoted intervals. See Note 11, 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 estimated the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit default swap rates and cross-currency basis swap spreads. See Note 11, 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 estimated the fair values of these contracts by using an income-based industry standard valuation model for which all significant inputs were observable either directly or indirectly. These inputs included LIBOR, swap rates and obligor credit default swap rates.
Contingent consideration obligations
We have incurred contingent consideration obligations as the result of our acquisition of a business and upon the assumption of contingent consideration obligations incurred by an acquired company 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. Changes in fair values of contingent consideration obligations are recognized in Other operating expenses in the Condensed Consolidated Statements of Income.
The changes in carrying amounts of contingent consideration obligations were as follows (in millions):
 
Three months ended
March 31,
 
2014
 
2013
Beginning balance
$
595

 
$
221

Net changes in valuation
1

 
1

Ending balance
$
596

 
$
222

As a result of our acquisition of BioVex Group, Inc. (BioVex) in March 2011, we are obligated to pay its former shareholders up to $575 million of additional consideration contingent upon achieving up to eight separate regulatory and sales-related milestones with regard to talimogene laherparepvec, which was acquired in the acquisition and is currently in phase 3 clinical development for the treatment of melanoma. The three largest of these potential payments are $125 million each, including the amount due if a Biologics License Application is filed with the U.S. Food and Drug Administration (FDA). Potential payments are also due upon the first commercial sale in each of the United States and the European Union (EU) following receipt of marketing approval which includes use of the product in specified patient populations and upon achievement of specified levels of sales within specified periods of time. The fair value measurements of these obligations are based on significant unobservable inputs, including the estimated probabilities and timing of achieving the related regulatory and commercial events in connection with these milestones and, as applicable, estimated annual sales. Significant changes which 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 of decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these obligations, as applicable.
We estimate the fair values of the obligations to the former shareholders of BioVex by using a combination of probability-adjusted discounted cash flows, option pricing techniques and a simulation model of expected annual sales. Quarterly, management in our R&D and commercial sales organizations review key assumptions used in the fair value measurements of these obligations. In April 2014, we announced top-line results from the primary overall survival (OS) analysis of a phase 3 trial in melanoma. We are currently reviewing the results from this study with clinicians, regulators and payers to determine the best course forward. However, during the quarter ended March 31, 2014, there were no significant changes in underlying key assumptions, and there was no change in the estimated aggregate fair value of these contingent consideration obligations of $334 million.
We assumed contingent consideration obligations of $261 million upon the acquisition of Onyx arising from Onyx's 2009 acquisition of Proteolix, Inc. As of March 31, 2014, there are two separate milestone payments of $150 million each which would be triggered if Kyprolis® receives specified marketing approvals for relapsed multiple myeloma on or before March 31, 2016, by

16


each of the FDA and the European Medicines Agency. The fair value measurements of these obligations are based on significant unobservable inputs, including the estimated probabilities and timing of achieving the related regulatory approvals, which are reviewed quarterly. Significant changes which increase or decrease the probabilities of receiving regulatory approvals or shorten or lengthen the time required to achieve such approvals would result in corresponding increases or decreases in the fair values of these obligations. We estimate the fair values of contingent obligations to the former shareholders of Proteolix, Inc. by using probability-adjusted discounted cash flows. The estimated aggregate fair value of the contingent consideration obligations increased by $1 million during the three months ended March 31, 2014.
There have been no transfers of assets or liabilities between the fair value measurement levels, and there were no material remeasurements to fair value during the three months ended March 31, 2014 and 2013, of assets and liabilities that are not measured at fair value on a recurring basis.
Summary of the fair value of other financial instruments
Cash equivalents
The estimated fair values of cash equivalents approximate their carrying values due to the short-term nature of these financial instruments.
Borrowings
We estimated the fair value of our long-term debt (Level 2) by taking into consideration indicative prices obtained from a third-party financial institution that utilizes industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; credit spreads; benchmark yields; foreign currency exchange rates, as applicable; and other observable inputs. As of March 31, 2014, and December 31, 2013, the aggregate fair values of our long-term debt were $33.8 billion and $33.5 billion, respectively, and the carrying values were $32.0 billion and $32.1 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 the corresponding increases and decreases in our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations on our international product sales, we enter into foreign currency forward and option contracts to hedge a portion of our projected international product sales primarily over a three-year time horizon, with, at any given point in time, a higher percentage of nearer-term projected product sales being hedged than in successive periods. As of March 31, 2014, and December 31, 2013, we had open foreign currency forward contracts with notional amounts of $3.9 billion and $4.0 billion, respectively, and open foreign currency option contracts with notional amounts of $366 million and $516 million, respectively. These foreign currency forward and option contracts, primarily euro based, have been designated 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 transactions affect earnings.
To hedge our exposure to foreign currency exchange rate risk associated with certain of our long-term notes denominated in foreign currencies, we entered into cross-currency swap contracts. Under the terms of these contracts, we paid euros/pounds sterling and received U.S. dollars for the notional amounts at the inception of the contracts, and we exchange interest payments based on these notional amounts at fixed rates over the lives of the contracts in which we pay U.S. dollars and receive euros/pounds sterling. In addition, we will pay U.S. dollars to and receive euros/pounds sterling from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged notes, effectively converting the interest payments and principal repayment on these notes from euros/pounds sterling to U.S. dollars. These cross-currency swap contracts have been designated as cash flow hedges, and accordingly, the effective portions of the unrealized gains and losses on these contracts are reported in AOCI and reclassified to earnings in the same periods during which the hedged debt affects earnings. The notional amounts and interest rates of our cross-currency swaps are as follows (notional amounts in millions):

17


 
 
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
%
5.50% 2026 pound sterling Notes
 
£
475

 
5.50
%
 
$
748

 
5.8
%
4.00% 2029 pound sterling Notes
 
£
700

 
4.00
%
 
$
1,122

 
4.3
%
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
 
2014
 
2013
Foreign currency contracts
 
$
13

 
$
100

Cross-currency swap contracts
 
4

 
(125
)
Total
 
$
17

 
$
(25
)
The locations in the Condensed Consolidated Statements of Income and the effective portions of the gain/(loss) reclassified out of AOCI 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
 
2014
 
2013
Foreign currency contracts
 
Product sales
 
$

 
$
(4
)
Cross-currency swap contracts
 
Interest and other income, net
 
14

 
(140
)
Total
 
 
 
$
14

 
$
(144
)
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, 2014 and 2013. As of March 31, 2014, the amounts expected to be reclassified out of AOCI into earnings over the next 12 months are approximately $39 million of net losses on our foreign currency and cross-currency swap contracts and approximately $1 million of losses on forward interest rate contracts.
Fair value hedges
To achieve a desired mix of fixed and floating interest rates on our long-term debt, we entered into interest rate swap contracts, which qualified and are designated as fair value hedges. The terms of these interest rate swap contracts correspond to the related hedged debt instruments and effectively converted a fixed interest rate coupon to a floating LIBOR-based coupon over the lives of the respective notes. During the year ended December 31, 2013, we entered into interest rate swap contracts with an aggregate notional amount of $4.4 billion with respect to our 3.45% 2020 Notes, 4.10% 2021 Notes, 3.875% 2021 Notes and 3.625% 2022 Notes. The contracts have rates that range from three-month LIBOR plus 1.1% to three-month LIBOR plus 2.0%.
For derivative instruments that are designated and qualify as fair value hedges, 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 is recognized in current earnings. For the three months ended March 31, 2014 and 2013, we included the unrealized losses on the hedged debt of $62 million and $22 million, respectively, in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized gains of $62 million and $22 million, respectively, on the related interest rate swap agreements.
Derivatives not designated as hedges
We enter into foreign currency forward contracts that are not designated as hedging transactions to reduce our exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies. These exposures are hedged on a month-to-month basis. As of March 31, 2014, and December 31, 2013, the total notional amounts of these foreign currency forward contracts were $977 million and $999 million, respectively.

18


The location in the Condensed Consolidated Statements of Income and the amount of gain/(loss) recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
 
 
 
 
Three months ended
  
 
 
 
March 31,
Derivatives not designated as hedging instruments
 
Statements of Income location
 
2014
 
2013
Foreign currency contracts
 
Interest and other income, net
 
$
2

 
$
(16
)
The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
 
 
Derivative assets
 
Derivative liabilities
March 31, 2014
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Cross-currency swap contracts
 
Other current assets/ Other noncurrent assets
 
$
195

 
Accrued liabilities/ Other noncurrent liabilities
 
$
2

Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
60

 
Accrued liabilities/ Other noncurrent liabilities
 
99

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 
4

 
Accrued liabilities/ Other noncurrent liabilities
 
103

Total derivatives designated as hedging instruments
 
 
 
259

 
 
 
204

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other current assets
 
2

 
Accrued liabilities
 
2

Total derivatives not designated as hedging instruments
 
 
 
2

 
 
 
2

Total derivatives
 
 
 
$
261

 
 
 
$
206

 
 
Derivative assets
 
Derivative liabilities
December 31, 2013
 
Balance Sheet location
 
Fair value
 
Balance Sheet location
 
Fair value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Cross-currency swap contracts
 
Other current assets/ Other noncurrent assets
 
$
193

 
Accrued liabilities/ Other noncurrent liabilities
 
$
4

Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
53

 
Accrued liabilities/ Other noncurrent liabilities
 
104

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 

 
Accrued liabilities/ Other noncurrent liabilities
 
161

Total derivatives designated as hedging instruments
 
 
 
246

 
 
 
269

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

 
Accrued liabilities
 
3

Total derivatives not designated as hedging instruments
 
 
 

 
 
 
3

Total derivatives
 
 
 
$
246

 
 
 
$
272

Our derivative contracts that were in liability positions as of March 31, 2014, 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

19


derivative contracts are not subject to any type of master netting arrangement, and amounts due to or from a counterparty under these contracts may only be offset against other amounts due to or from the same counterparty if an event of default or termination, as defined, were to occur.
The cash flow effects of our derivatives contracts for the three months ended March 31, 2014 and 2013, 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 and other matters, including those discussed in this Note, that are complex in nature and have outcomes that are difficult to predict. See Note 18, Contingencies and commitments to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013, for further discussion of certain of our legal proceedings and other matters.
We record accruals for loss contingencies to the extent that we conclude that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. We evaluate, on a quarterly basis, developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously.
Our legal proceedings range from cases brought by a single plaintiff to class actions with thousands of putative class members. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims (including but not limited to patent infringement, marketing, pricing and trade practices and securities law), some of which present novel factual allegations and/or unique legal theories. In each of the matters described in this filing or in Note 18, Contingencies and commitments to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013, 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 described in this filing have progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to estimate a range of possible loss, if any, or such amounts are not material. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Certain recent developments concerning our legal proceedings and other matters are discussed below:
Onyx Litigation
On March 21, 2014, plaintiff Phil Rosen filed a motion seeking to certify a class and to be designated class representative in this consolidated class action matter pending against the former members of the board of directors of Onyx in which the plaintiffs allege, among other things, that the Onyx director defendants breached their fiduciary duties to Onyx shareholders in connection with the sale of Onyx to Amgen.
Federal Securities Litigation - In re Amgen Inc. Securities Litigation
On April 14, 2014, the U.S. District Court for the Central District of California entered an order allowing plaintiffs leave to file a second consolidated amended class action complaint in this securities class action lawsuit. While the new complaint was filed under seal, like the first consolidated class action complaint the new complaint alleges that Amgen and certain of its officers and directors (the Federal Defendants) made false statements that resulted in: (i) deceiving the investing public regarding Amgen's prospects and business; (ii) artificially inflating the prices of Amgen's publicly traded securities and (iii) causing plaintiff and other members of the class to purchase Amgen publicly traded securities at inflated prices. In addition, like the first consolidated class action complaint, the new complaint makes off-label marketing allegations that, throughout the class period, the Federal Defendants improperly marketed Aranesp® (darbepoetin alfa) and EPOGEN® (epoetin alfa) for off-label uses while aware that there were alleged safety signals with these products. The named defendants have not changed and the alleged class period remains the same. Plaintiffs continue to seek compensatory damages, legal fees and other relief deemed proper.

20


13. Subsequent event
On April 1, 2014, we entered into a Termination and Transition Agreement (the Transition Agreement) with Glaxo Group Limited (Glaxo) which terminated, in part, and amended, in part, our agreement with Glaxo (the Collaboration Agreement) for the commercialization of denosumab for osteoporosis indications in certain geographic territories, including the EU, Switzerland, Australia, Norway, Russia and Mexico. The Transition Agreement terminates the Collaboration Agreement for all countries and regions, except for Australia. All commercial activities assigned to Glaxo under the Collaboration Agreement other than those in Australia will be transitioned back to us no later than December 31, 2014. In exchange for the early termination (except Australia) of the Collaboration Agreement, we will make payments to Glaxo totaling $275 million.
The Transition Agreement does not change the terms of the related Expansion Agreement under which Glaxo will commercialize denosumab for all indications in certain other geographic territories.
We evaluated whether the Transition Agreement should be accounted for as a business combination and concluded that the agreement represents the reacquisition of a previously shared economic interest, which qualifies as an asset acquisition.

21


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements regarding product sales, regulatory activities, clinical trial results, reimbursement, expenses, EPS, liquidity and capital resources, trends and planned dividends and stock repurchases. 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
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, 2013. Our results of operations discussed in MD&A are presented in conformity with GAAP.
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 biologics manufacturing 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 the world’s largest independent biotechnology company, has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential. Amgen operates in one business segment: human therapeutics. Therefore, our results of operations are discussed on a consolidated basis.
Currently, we market primarily recombinant protein therapeutics for supportive cancer care, inflammation, nephrology and bone disease. Our principal products are Neulasta® (pegfilgrastim), NEUPOGEN® (filgrastim), Enbrel® (etanercept), XGEVA® (denosumab), Prolia® (denosumab), Sensipar®/Mimpara® (cinacalcet) and our erythropoiesis-stimulating agents: Aranesp® (darbepoetin alfa) and EPOGEN® (epoetin alfa). Our product sales outside the United States consist principally of sales in Europe. For the three months ended March 31, 2014 and 2013, our principal products represented 93% and 94% of worldwide product sales, respectively. We market several other products including Vectibix® (panitumumab), Nplate® (romiplostim) and, through our wholly owned subsidiary Onyx, Kyprolis® (carfilzomib).

22


Significant developments
Following is a summary of selected significant developments affecting our business that have occurred since December 31, 2013. 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, 2013.
Pipeline
Evolocumab
In March 2014, we announced that the phase 3 TESLA (Trial Evaluating PCSK9 Antibody in Subjects with LDL Receptor Abnormalities) trial evaluating evolocumab met its primary endpoint of the percent reduction from baseline at week 12 in low-density lipoprotein cholesterol (LDL-C). The percent reduction in LDL-C, or "bad" cholesterol, was clinically meaningful and statistically significant.
Talimogene Laherparepvec
In April 2014, we announced top-line results from the primary OS analysis of a phase 3 trial in melanoma, which evaluated the efficacy and safety of talimogene laherparepvec for the treatment of unresected stage IIIB, IIIC or IV melanoma compared to treatment with subcutaneous granulocyte-macrophage colony-stimulating factor. Results showed that, while the primary end point of durable response rate was met (as previously reported), the secondary endpoint of OS was not met, although there was a strong trend in favor of talimogene laherparepvec (p=0.051). The estimated OS hazard ratio and improvement in median OS were similar to what was previously reported at the interim OS analysis.
Brodalumab
In April 2014, we announced the recent initiation of two phase 3 studies in patients with psoriatic arthritis.
Blinatumomab
In April 2014, we announced that a confirmatory phase 2 study in relapsed/refractory ALL had completed.
Selected financial information
The following is an overview of our results of operations (in millions, except percentages and per share data):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change
Product sales:
 
 
 
 
 
 
U.S.
 
$
3,289

 
$
3,172

 
4
 %
Rest of the world (ROW)
 
1,067

 
979

 
9
 %
Total product sales
 
4,356

 
4,151

 
5
 %
Other revenues
 
165

 
87

 
90
 %
Total revenues
 
$
4,521

 
$
4,238

 
7
 %
Operating expenses
 
$
3,157

 
$
2,796

 
13
 %
Operating income
 
$
1,364

 
$
1,442

 
(5
)%
Net income
 
$
1,073

 
$
1,434

 
(25
)%
Diluted EPS
 
$
1.40

 
$
1.88

 
(26
)%
Diluted shares
 
768

 
764

 
1
 %
The increase in global product sales for the three months ended March 31, 2014, was driven by the addition of Kyprolis® as a result of the Onyx acquisition on October 1, 2013 and XGEVA®, Prolia® and Neulasta®.
The increase in other revenues for the three months ended March 31, 2014, was due primarily to our Nexavar® collaboration revenues and Stivarga® royalties as a result of the Onyx acquisition.
The increase in operating expenses for the three months ended March 31, 2014, was driven primarily by Cost of sales as a result of acquisition-related expenses, including amortization of the acquired developed product technology rights.
The decreases in net income and diluted EPS were due primarily to favorable tax items in the three months ended March 31, 2013.

23


Results of operations
Product sales
Worldwide product sales were as follows (dollar amounts in millions):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change  
Neulasta®/NEUPOGEN®
 
$
1,379

 
$
1,338

 
3
 %
ENBREL
 
988

 
1,039

 
(5
)%
Aranesp®
 
460

 
468

 
(2
)%
EPOGEN®
 
462

 
435

 
6
 %
XGEVA® 
 
279

 
223

 
25
 %
Prolia® 
 
196

 
142

 
38
 %
Sensipar®/Mimpara®
 
270

 
264

 
2
 %
Other products
 
322

 
242

 
33
 %
Total product sales
 
$
4,356

 
$
4,151

 
5
 %
Future sales of our products are influenced by a number of factors, some of which may impact sales of certain of our products more significantly than others. Such factors are discussed below and in the Overview, Item 1. Business — Marketing, Distribution and Selected Marketed Products, Item 1A. Risk Factors and Item 7 — Product Sales in our Annual Report on Form 10-K for the year ended December 31, 2013.
Neulasta®/NEUPOGEN® 
Total Neulasta®/NEUPOGEN® sales by geographic region were as follows (dollar amounts in millions):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change  
Neulasta®— U.S.
 
$
852

 
$
827

 
3
 %
Neulasta®— ROW
 
238

 
212

 
12
 %
Total Neulasta®
 
1,090

 
1,039

 
5
 %
NEUPOGEN®— U.S.
 
214

 
242

 
(12
)%
NEUPOGEN®— ROW
 
75

 
57

 
32
 %
Total NEUPOGEN®
 
289

 
299

 
(3
)%
Total Neulasta®/NEUPOGEN®
 
$
1,379

 
$
1,338

 
3
 %
ROW Neulasta® and NEUPOGEN® included sales in new markets as a result of reacquiring rights to filgrastim and pegfilgrastim effective January 1, 2014.
The increase in global Neulasta® sales for the three months ended March 31, 2014, was driven mainly by an increase in the average net sales price in the United States, offset partially by lower wholesaler inventory.
The decrease in global NEUPOGEN® sales for the three months ended March 31, 2014, was driven by a decrease in unit demand in the United States.
Our material U.S. patents for filgrastim (NEUPOGEN®) expired in December 2013. We now face competition in the United States, which may have a material adverse impact over time on future sales of NEUPOGEN® and, to a lesser extent, Neulasta®. Our outstanding material U.S. patent for pegfilgrastim (Neulasta®) expires in 2015.

24


ENBREL
Total ENBREL sales by geographic region were as follows (dollar amounts in millions):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change  
ENBREL — U.S.
 
$
924

 
$
974

 
(5
)%
ENBREL — Canada
 
64

 
65

 
(2
)%
Total ENBREL
 
$
988

 
$
1,039

 
(5
)%
The decrease in ENBREL sales for the three months ended March 31, 2014, was driven primarily by a decline in unit demand, which included a larger draw-down in end-customer inventory compared to the first quarter of the prior year.
Aranesp® 
Total Aranesp® sales by geographic region were as follows (dollar amounts in millions):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change  
Aranesp® — U.S.
 
$
177

 
$
168

 
5
 %
Aranesp® — ROW
 
283

 
300

 
(6
)%
Total Aranesp®
 
$
460

 
$
468

 
(2
)%
The decrease in global Aranesp® sales for the three months ended March 31, 2014, was driven primarily by a decline in unit demand.
EPOGEN® 
Total EPOGEN® sales were as follows (dollar amounts in millions):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change  
EPOGEN® — U.S.
 
$
462

 
$
435

 
6
%
EPOGEN® sales for the three months ended March 31, 2014, increased 6%.
EPOGEN® and Aranesp® may face competition from the launch of MIRCERA® in the United States. Pursuant to a December 2009 settlement agreement between Amgen and Roche, Roche is allowed to begin selling MIRCERA® in the United States in mid-2014 under terms of a limited license agreement.
XGEVA® and Prolia®  
Total XGEVA® and total Prolia® sales by geographic region were as follows (dollar amounts in millions):
 
 
Three months ended
 
 
 
 
March 31,
 
 
 
 
2014
 
2013
 
Change  
XGEVA®  —  U.S.
 
$
200

 
$
178

 
12
%
XGEVA®  —  ROW
 
79

 
45

 
76
%
Total XGEVA®
 
279

 
223

 
25
%
Prolia® — U.S.
 
119

 
87

 
37
%
Prolia® — ROW
 
77

 
55

 
40
%
Total Prolia®
 
196

 
142

 
38
%
Total XGEVA®/Prolia®
 
$
475

 
$
365

 
30
%
The increases in global XGEVA® and Prolia® sales for the three months ended March 31, 2014, were driven by increases in unit demand.

25


Sensipar®/Mimpara® 
Total Sensipar®/Mimpara® sales by geographic region were as follows (dollar amounts in millions):
 
 
Three months ended