Financial Instruments

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Abstract]

Financial Instruments [Text Block]

Note 6: Financial Instruments

Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-sciences products account for a substantial portion of trade receivables; collateral is generally not required. The risk associated with this concentration is mitigated by our ongoing credit-review procedures and insurance. Major financial institutions represent the largest component of our investments in corporate debt securities. In accordance with documented corporate policies, we limit the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.

Accounting Policy for Risk-Management Instruments

Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and do not create additional risk because gains and losses on derivative contracts offset losses and gains on the assets, liabilities, and transactions being hedged. As derivative contracts are initiated, we designate the instruments individually as either a fair value hedge or a cash flow hedge. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.

For derivative contracts that are designated and qualify as fair value hedges, the derivative instrument is marked to market with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative contracts that are designated and qualify as cash flow hedges, the effective portion of gains and losses on these contracts is reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. Hedge ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized currently in earnings during the period of change.

We may enter into foreign currency forward contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, the British pound, and the Japanese yen). Foreign currency derivatives used for hedging are entered into with the same or like currencies and duration as the underlying exposures. Forward contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other — net, (income) expense. We may enter into foreign currency forward contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At September 30, 2012, we had outstanding foreign currency forward commitments to purchase 863.9 million U.S. dollars and sell 669.9 million euro, commitments to purchase 892.2 million euro and sell 1.16 billion U.S. dollars, and commitments to purchase 202.0 million British pounds and sell 252.4 million euro, which will all settle within 30 days.

In the normal course of business, our operations are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing, investing, and operating. We address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact of fluctuations in interest rates on earnings. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and investment positions and may enter into interest rate swaps or collars to help maintain that balance.

Interest rate swaps or collars that convert our fixed-rate debt or investments to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt or investments to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. At September 30, 2012, approximately 100 percent of our total debt is at a fixed rate. We have converted approximately 60 percent of our fixed-rate debt to floating rates through the use of interest rate swaps.

We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of earnings and cash flow associated with forecasted sales of available-for-sale securities.

The Effect of Risk-Management Instruments on the Consolidated Condensed Statement of Operations

The following effects of risk-management instruments were recognized in other—net, (income) expense:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
	(Dollars in millions)
Fair value hedges
Effect from hedged fixed-rate debt	$	12.1		$	245.4		$	43.8		$	255.7
Effect from interest rate contracts	(12.1		)	(245.4		)	(43.8		)	(255.7		)
Cash flow hedges
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss	2.3			2.3			6.7			6.7
Net gains on foreign currency exchange contracts not designated as hedging instruments	(23.7		)	(51.7		)	(38.5		)	(1.0		)

The effective portion of net gains on equity contracts in designated cash flow hedging relationships recorded in other comprehensive income (loss) was $15.5 million and $41.2 million for the three and nine months endedSeptember 30, 2011, respectively. There have been no equity contracts in designated cash flow hedging relationships in 2012.

During the next 12 months, we expect to reclassify from accumulated other comprehensive loss to earnings $9.0 million of pretax net losses on cash flow hedges of the variability in expected future interest payments on our floating rate debt.

During the three and nine months endedSeptember 30, 2012 and 2011, net losses related to ineffectiveness, as well as net losses related to the portion of our risk-management hedging instruments, fair value hedges, and cash flow hedges that were excluded from the assessment of effectiveness, were not material.

Fair Value of Financial Instruments

The following tables summarize certain fair value information at September 30, 2012 and December 31, 2011 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments:

					Fair Value Measurements Using
Description	Carrying Amount		Amortized Cost		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)	Fair Value
	(Dollars in millions)
September 30, 2012
Cash and cash equivalents	$	5,319.2	$	5,319.2	$	5,235.3	$	83.9	$	$	5,319.2
Short-term investments
U.S. government and agencies	$	61.0	$	61.0	$	61.0	$		$	$	61.0
Corporate debt securities	1,509.1		1,507.1				1,509.1			1,509.1
Other securities	10.6		10.6				10.6			10.6
Short-term investments	$	1,580.7	$	1,578.7
Noncurrent investments
U.S. government and agencies	$	1,124.1	$	1,121.1	$	885.7	$	238.4	$	$	1,124.1
Corporate debt securities	2,623.8		2,593.2				2,623.8			2,623.8
Mortgage-backed	401.6		405.3				401.6			401.6
Asset-backed	676.1		692.5				676.1			676.1
Other securities	3.3		3.3				3.3			3.3
Marketable equity	183.4		83.0		183.4					183.4
Equity method and other investments(1)	212.0		212.0
Noncurrent investments	$	5,224.3	$	5,110.4
December 31, 2011
Cash and cash equivalents	$	5,922.5	$	5,922.5	$	5,264.6	$	657.9	$	$	5,922.5
Short-term investments
U.S. government and agencies	$	362.3	$	362.3	$	351.3	$	11.0	$	$	362.3
Corporate debt securities	600.7		601.1				600.7			600.7
Other securities	11.6		11.6				11.6			11.6
Short-term investments	$	974.6	$	975.0
Noncurrent investments
U.S. government and agencies	$	908.8	$	901.3	$	673.5	$	235.3	$	$	908.8
Corporate debt securities	2,081.3		2,093.3				2,081.3			2,081.3
Mortgage-backed	443.8		479.1				443.8			443.8
Asset-backed	245.0		253.2				245.0			245.0
Other securities	10.0		11.9				8.7		1.3	10.0
Marketable equity	180.8		107.5		180.8					180.8
Equity method and other investments(1)	160.1		160.1
Noncurrent investments	$	4,029.8	$	4,006.4

¹ Fair value not applicable

				Fair Value Measurements Using
Description	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)	Fair Value
	(Dollars in millions)
Long-term debt, including current portion
September 30, 2012	$	(5,520.0	)	$	$	(6,072.2	)	$	$	(6,072.2	)
December 31, 2011	$	(6,981.5	)	$	$	(7,451.5	)	$	$	(7,451.5	)

				Fair Value Measurements Using
Description	Carrying Amount			Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)	Fair Value
	(Dollars in millions)
September 30, 2012
Risk-management instruments
Interest rate contracts designated as hedging instruments
Sundry	$	581.7		$	$	581.7		$	$	581.7
Foreign exchange contracts not designated as hedging instruments
Other receivables	7.0				7.0				7.0
Other current liabilities	(18.4		)		(18.4		)		(18.4		)
December 31, 2011
Risk-management instruments
Interest rate contracts designated as hedging instruments
Other receivables	$	6.1		$	$	6.1		$	$	6.1
Sundry	531.7				531.7				531.7
Foreign exchange contracts not designated as hedging instruments
Other receivables	16.2				16.2				16.2
Other current liabilities	(25.9		)		(25.9		)		(25.9		)

The fair value of the contingent consideration liability related to prior acquisitions, a Level 3 measurement in the fair value hierarchy, was $66.9 million and $121.6 million as of September 30, 2012 and December 31, 2011, respectively. The decrease in the fair value of the contingent consideration was primarily due to a $50.0 million approval milestone paid for Amyvid™ in the second quarter of 2012.

We determine fair values based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. The fair value of equity method investments and other investments is not readily available.

Approximately $5.44 billion of our investments in debt securities, measured at fair value, will mature within five years.

A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows:

	September 30, 2012		December 31, 2011
	(Dollars in millions)
Unrealized gross gains	$	150.6	$	103.0
Unrealized gross losses	34.7		80.0
Fair value of securities in an unrealized gain position	5,050.6		2,498.9
Fair value of securities in an unrealized loss position	942.3		2,164.4

Other-than-temporary impairment losses on fixed income securities of $0.8 million and $8.2 million were recognized in the statement of operations for the three and nine months endedSeptember 30, 2012, respectively, compared with $10.9 million and $17.9 million for the same periods in 2011. The amount of credit losses represents the difference between the present value of cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing the credit loss were the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.

The securities in an unrealized loss position include fixed-rate debt securities of varying maturities. The value of fixed income securities is sensitive to changes in the yield curve and other market conditions. Approximately 85 percent of the securities in a loss position are investment-grade debt securities. At this time, there is no indication of default on interest or principal payments for debt securities other than those for which an other-than-temporary impairment charge has been recorded. We do not intend to sell and it is not more likely than not we will be required to sell the securities in a loss position before the market values recover or the underlying cash flows have been received, and we have concluded that no additional other-than-temporary loss is required to be charged to earnings as of September 30, 2012.

Activity related to our available-for-sale investment portfolio was as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	(Dollars in millions)
Proceeds from sales	$	1,698.8	$	775.7	$	5,334.1	$	1,274.2
Realized gross gains on sales	43.1		25.6		70.0		113.6
Realized gross losses on sales	2.2		2.5		7.4		7.6

Realized gains and losses on sales of available-for-sale securities are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.