Note 4. Other Deductions—Net

The following table provides components of Other deductions––net:

	Three Months Ended						Six Months Ended
(millions of dollars)	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011

Interest income(a)	$	(86	)	$	(117	)	$	(167	)	$	(222	)
Interest expense(a)		379			404			769			862
Net interest expense		293			287			602			640
Royalty-related income		(124	)		(140	)		(221	)		(311	)
Net gains on asset disposals		(17	)		(14	)		(24	)		(26	)
Certain legal matters, net(b)		474			(14	)		1,287			487
Certain asset impairment charges(c)		77			320			510			480
Other, net		(39	)		(16	)		167			(15	)
Other deductions––net	$	664		$	423		$	2,321		$	1,255

(a)	Interest income decreased in both periods in 2012 due to lower interest rates earned on investments. Interest expense decreased in both periods in 2012 due to lower debt balances and the effective conversion of some fixed-rate liabilities to floating-rate liabilities.

(b)

In the second quarter and first six months of 2012, primarily includes charges for hormone-replacement therapy litigation. The first six months of 2012 also includes $450 million in settlement of a lawsuit by Brigham Young University related to Celebrex. In 2011, primarily includes charges for hormone-replacement therapy litigation. (See Note 12. Commitments and Contingencies.)

(c)

In the second quarter of 2012, includes intangible asset impairment charges of approximately $53 million, primarily reflecting a $45 million impairment of developed technology rights. In the first six months of 2012, includes intangible asset impairment charges of $449 million reflecting (i) $305 million of in-process research and development (IPR&D), substantially all related to compounds that targeted autoimmune and inflammatory diseases (full write-off), (ii) $45 million related to our Consumer Healthcare indefinite-lived brand, Robitussin, and (iii) $99 million related to three developed technology rights. The intangible asset impairment charges for 2012 reflect, among other things, the impact of new scientific findings, updated commercial forecasts and an increased competitive environment specifically for Robitussin. The impairment charges for the six months of 2012 are associated with the following: Worldwide Research and Development ($297 million); Consumer Healthcare ($45 million); Established Products ($45 million); Primary Care ($43 million) and Specialty Care ($19 million). In addition, the second quarter and first six months of 2012 also include charges of approximately $24 million and $61 million, respectively, for certain investments. These investment impairment charges reflect the difficult global economic environment.

In the second quarter of 2011, includes intangible asset impairment charges of approximately $320 million, reflecting a $200 million impairment of IPR&D assets, primarily related to a single compound for the treatment of certain autoimmune and inflammatory diseases, and a $120 million impairment of developed technology rights. In the first six months of 2011, includes intangible asset impairment charges of approximately $480 million, reflecting a $360 million impairment of IPR&D assets, primarily related to two compounds for the treatment of certain autoimmune and inflammatory diseases, and a $120 million impairment of developed technology rights. The intangible asset impairment charges for 2011 reflect, among other things, the impact of new scientific findings and updated commercial forecasts. The impairment charges for the six months of 2011 are associated with the following: Worldwide Research and Development ($355 million); Specialty Care ($116 million) and Animal Health ($9 million).

The asset impairment charges included in Other deductions––net income for the first six months of 2012 primarily relate to identifiable intangible assets and are based on estimates of fair value.

The following table provides additional information about the intangible assets that were impaired in 2012:

	Fair Value(a)								Six Months Ended July 1, 2012
(millions of dollars)	Amount		Level 1		Level 2		Level 3		Impairment
Intangible assets––IPR&D(b)	$	52	$	––	$	––	$	52	$	305
Intangible assets––Other(b)		551		––		––		551		144
Total	$	603	$	––	$	––	$	603	$	449

(a)	Fair value as of the date of impairment, as these assets are not measured at fair value on a recurring basis. See also Note 1C. Basis of Presentation and Significant Accounting Policies: Fair Value.

(b)

Reflects intangible assets written down to their fair value of $603 million in the first six months of 2012. The impairment charges of $449 million are included in Other deductions––net. When we are required to determine the fair value of intangible assets other than goodwill, we use an income approach, specifically the multi-period excess earnings method, also known as the discounted cash flow method. We start with a forecast of all the expected net cash flows associated with the asset, which includes the application of a terminal value for indefinite-lived assets, and then we apply an asset-specific discount rate to arrive at a net present value amount. Some of the more significant estimates and assumptions inherent in this approach include: the amount and timing of the projected net cash flows, which includes the expected impact of competitive, legal and/or regulatory forces on the projections and the impact of technological risk associated with IPR&D assets, as well as the selection of a long-term growth rate; the discount rate, which seeks to reflect the various risks inherent in the projected cash flows; and the tax rate, which seeks to incorporate the geographic diversity of the projected cash flows.