FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2023

The following table summarizes the types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy:


	March 31, 2023								December 31, 2022
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale debt securities:
U.S. treasury securities	$	344	$	—	$	—	$	344	$	410	$	—	$	—	$	410
U.S. government agencies securities	—		155		—		155		—		35		—		35
Non-U.S. government securities	—		23		—		23		—		34		—		34
Certificates of deposit	—		90		—		90		—		54		—		54
Corporate debt securities	—		1,379		—		1,379		—		1,427		—		1,427
Residential mortgage and asset-backed securities	—		335		—		335		—		333		—		333
Equity securities:
Money market funds	3,175		—		—		3,175		3,831		—		—		3,831
Equity investment in Galapagos NV (“Galapagos”)	639		—		—		639		736		—		—		736
Equity investment in Arcus Biosciences, Inc. (“Arcus”)	252		—		—		252		286		—		—		286
Other publicly traded equity securities	235		—		—		235		175		—		—		175
Deferred compensation plan	249		—		—		249		220		—		—		220
Foreign currency derivative contracts	—		32		—		32		—		60		—		60
Total	$	4,895	$	2,014	$	—	$	6,909	$	5,658	$	1,943	$	—	$	7,600
Liabilities:
Liability for MYR GmbH (“MYR”) contingent consideration	$	—	$	—	$	277	$	277	$	—	$	—	$	275	$	275
Deferred compensation plan	249		—		—		249		220		—		—		220
Foreign currency derivative contracts	—		49		—		49		—		42		—		42
Total	$	249	$	49	$	277	$	575	$	220	$	42	$	275	$	538

Level 2 Inputs

Available-for-Sale Debt Securities

For our available-for-sale debt securities, we estimate the fair values by reviewing trading activity and pricing as of the measurement date, and by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the 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.

Foreign Currency Derivative Contracts

Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration the 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, Secured Overnight Financing Rate and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.

Senior Unsecured Notes

The total estimated fair values of our senior unsecured notes, determined using Level 2 inputs based on their quoted market values, were approximately $22.6 billion and $21.9 billion as of March 31, 2023 and December 31, 2022, respectively, and the carrying value was $24.1 billion as of March 31, 2023 and December 31, 2022.

Level 3 Inputs

Contingent Consideration Liability

In connection with our first quarter 2021 acquisition of MYR, we are subject to a potential contingent consideration payment of up to €300 million, subject to customary adjustments, which is revalued each reporting period using probability-weighted scenarios for U.S. Food and Drug Administration (“FDA”) approval of Hepcludex until the related contingency is resolved.

The following table summarizes the change in fair value of our contingent consideration liability:


	Three Months Ended
	March 31,
(in millions)	2023		2022
Beginning balance	$	275	$	317
Changes in valuation assumptions(1)	(3)		10
Effect of foreign exchange remeasurement(2)	5		(6)
Ending balance	$	277	$	322

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(1) Included in Research and development expenses on our Condensed Consolidated Statements of Income. The change in 2023 primarily related to updated expected payment dates and the change in 2022 primarily related to updated probability rate estimates.

(2) Included in Other income (expense), net on our Condensed Consolidated Statements of Income.

Liability Related to Future Royalties

We recorded a liability related to future royalties as part of our fourth quarter 2020 acquisition of Immunomedics, Inc. (“Immunomedics”), which is subsequently amortized using the effective interest method over the remaining estimated life. The fair value of the liability related to future royalties was $1.1 billion as of March 31, 2023 and December 31, 2022, and the carrying value was $1.1 billion as of March 31, 2023 and December 31, 2022.

Nonrecurring Fair Value Measurements

During the three months ended March 31, 2022, we recorded a partial impairment charge of $2.7 billion related to certain acquired in-process research and development (“IPR&D”) assets. See Note 7. Intangible Assets for additional information. There were no indicators of impairment to IPR&D assets noted during the three months ended March 31, 2023.

Fair Value Level Transfers

There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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