AMGN-2013.6.30-10Q

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 June 30, 2013
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 July 30, 2013, the registrant had 753,356,209 shares of common stock, $0.0001 par value, outstanding.


AMGEN INC.
INDEX
 
 
Page No.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.
 

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
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Product sales
$
4,595

 
$
4,200

 
$
8,746

 
$
8,101

Other revenues
84

 
277

 
171

 
424

Total revenues
4,679

 
4,477

 
8,917

 
8,525

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of sales
785

 
752

 
1,529

 
1,502

Research and development
967

 
826

 
1,845

 
1,562

Selling, general and administrative
1,256

 
1,231

 
2,414

 
2,310

Other
121

 
79

 
137

 
85

Total operating expenses
3,129

 
2,888

 
5,925

 
5,459

 
 
 
 
 
 
 
 
Operating income
1,550

 
1,589

 
2,992

 
3,066

 
 
 
 
 
 
 
 
Interest expense, net
241

 
256

 
504

 
491

Interest and other income, net
96

 
124

 
260

 
248

 
 
 
 
 
 
 
 
Income before income taxes
1,405

 
1,457

 
2,748

 
2,823

 
 
 
 
 
 
 
 
Provision for income taxes
147

 
191

 
56

 
373

 
 
 
 
 
 
 
 
Net income
$
1,258

 
$
1,266

 
$
2,692

 
$
2,450

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.67

 
$
1.63

 
$
3.58

 
$
3.13

Diluted
$
1.65

 
$
1.61

 
$
3.52

 
$
3.09

 
 
 
 
 
 
 
 
Shares used in calculation of earnings per share:
 
 
 
 
 
 
 
Basic
752

 
776

 
752

 
783

Diluted
764

 
785

 
764

 
792

 
 
 
 
 
 
 
 
Dividends paid per share
$
0.47

 
$
0.36

 
$
0.94

 
$
0.72


See accompanying notes.

1

AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
1,258

 
$
1,266

 
$
2,692

 
$
2,450

Other comprehensive income (loss), net of reclassification adjustments and taxes:
 
 
 
 
 
 
 
Foreign currency translation losses
(25
)
 
(40
)
 
(48
)
 
(42
)
Effective portion of cash flow hedges
22

 
90

 
97

 
25

Net unrealized gains (losses) on available-for-sale securities
(205
)
 
(5
)
 
(267
)
 
(3
)
Other
—

 
—

 
1

 
—

Other comprehensive income (loss), net of tax
(208
)
 
45

 
(217
)
 
(20
)
Comprehensive income
$
1,050

 
$
1,311

 
$
2,475

 
$
2,430


See accompanying notes.

2

AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
 
June 30,
2013
 
December 31,
2012
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
5,806

 
$
3,257

Marketable securities
16,212

 
20,804

Trade receivables, net
2,674

 
2,518

Inventories
2,773

 
2,744

Other current assets
2,208

 
1,886

Total current assets
29,673

 
31,209

 
 
 
 
Property, plant and equipment, net
5,293

 
5,326

Intangible assets, net
3,776

 
3,968

Goodwill
12,578

 
12,662

Other assets
1,290

 
1,133

Total assets
$
52,610

 
$
54,298

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
1,006

 
$
905

Accrued liabilities
3,771

 
4,791

Current portion of long-term debt
7

 
2,495

Total current liabilities
4,784

 
8,191

 
 
 
 
Long-term debt
23,908

 
24,034

Other noncurrent liabilities
3,324

 
3,013

 
 
 
 
Contingencies and commitments

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock and additional paid-in capital; $0.0001 par value; 2,750.0 shares authorized; outstanding - 752.9 shares in 2013 and 756.3 shares in 2012
29,519

 
29,337

Accumulated deficit
(8,854
)
 
(10,423
)
Accumulated other comprehensive income (loss)
(71
)
 
146

Total stockholders’ equity
20,594

 
19,060

Total liabilities and stockholders’ equity
$
52,610

 
$
54,298


See accompanying notes.

3

AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six months ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
2,692

 
$
2,450

Depreciation and amortization
554

 
528

Stock-based compensation expense
204

 
180

Other items, net
135

 
(139
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Trade receivables, net
(133
)
 
187

Inventories
(34
)
 
(68
)
Other assets
88

 
423

Accounts payable
117

 
188

Accrued income taxes
(592
)
 
(57
)
Other liabilities
(382
)
 
(345
)
Net cash provided by operating activities
2,649

 
3,347

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(317
)
 
(316
)
Cash paid for acquisitions, net of cash acquired
—

 
(1,671
)
Purchases of marketable securities
(10,774
)
 
(12,235
)
Proceeds from sales of marketable securities
10,968

 
9,118

Proceeds from maturities of marketable securities
3,941

 
417

Other
(50
)
 
(99
)
Net cash provided by (used in) investing activities
3,768

 
(4,786
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(2,500
)
 
(102
)
Net proceeds from issuance of debt
—

 
2,979

Repurchases of common stock
(832
)
 
(2,580
)
Dividends paid
(707
)
 
(565
)
Net proceeds from issuance of common stock in connection with the Company’s equity award programs
212

 
584

Other
(41
)
 
26

Net cash (used in) provided by financing activities
(3,868
)
 
342

Increase (decrease) in cash and cash equivalents
2,549

 
(1,097
)
Cash and cash equivalents at beginning of period
3,257

 
6,946

Cash and cash equivalents at end of period
$
5,806

 
$
5,849


See accompanying notes.

4

AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(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 and six months ended June 30, 2013 and 2012, 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.
Prior-period amounts for amortization of certain acquired intangible assets have been reclassified within Operating expenses in our Condensed Consolidated Statements of Income to conform to the current-period presentation.
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, 2012 and in our Quarterly Report on Form 10-Q for the period ended March 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 $6.7 billion and $6.6 billion as of June 30, 2013, and December 31, 2012, respectively.
Comprehensive income
In January 2013, we adopted a new accounting standard that requires additional disclosures regarding amounts that are reclassified out of accumulated other comprehensive income (AOCI). In accordance with the requirements of the standard, the effects of significant reclassifications out of AOCI, by component, on the respective lines in the Condensed Consolidated Statements of Income are presented in Note 8, Stockholders' equity. The standard was required to be applied prospectively beginning January 1, 2013.
2. Business combinations
deCODE Genetics
On December 10, 2012, we acquired all of the outstanding stock of deCODE Genetics (deCODE), a privately held company that is a global leader in human genetics, for total consideration of $401 million in cash. The transaction, which was accounted for as a business combination, provides us with an opportunity to enhance our efforts to identify and validate human disease targets. deCODE's operations, which are not material, have been included in our consolidated financial statements commencing on the acquisition date.
We allocated the consideration to acquire deCODE to finite-lived intangible assets of $465 million comprised of discovery capacity in the genetics of human diseases with an estimated useful life of 10 years, $47 million to goodwill which is not deductible

5

for tax purposes, deferred tax liabilities of $93 million and other net liabilities of $18 million. These amounts reflect adjustments recognized during the six months ended June 30, 2013, to the acquisition date fair values of assets acquired and liabilities assumed in this acquisition which did not have a material effect on our current or prior period financial statements. These adjustments reduced goodwill by $46 million due primarily to a revision which increased the acquisition date fair value of finite-lived intangible assets by $64 million.
Our accounting for the acquisition is preliminary and will be finalized upon completion of our analysis to determine the acquisition date fair values of certain tax-related items and residual impact on goodwill.
3. Income taxes
The effective tax rates for the three and six months ended June 30, 2013 and 2012, 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. In addition, the effective tax rate for the six months ended June 30, 2013, was reduced by two significant events that occurred during the three months ended March 31, 2013. First, we settled our examination with the Internal Revenue Service (IRS) for the years ended December 31, 2007, 2008 and 2009 in which we agreed to certain adjustments proposed by the IRS 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 six months ended June 30, 2013, includes a benefit for the full-year 2012 R&D tax credit, recorded as a discrete item in the first quarter. The effective tax rates for the three and six months ended June 30, 2013 and 2012, were further reduced by foreign tax credits associated with the Puerto Rico excise tax described below.
Commencing January 1, 2011, Puerto Rico imposes a temporary excise tax on the purchase of goods and services from a related manufacturer in Puerto Rico. The excise tax is imposed on the gross intercompany purchase price of the goods and services and was initially effective for a six-year period beginning in 2011, with the excise tax rate declining in each year (from 4% in 2011 to 1% in 2016). During the three months ended March 31, 2013, the Puerto Rico government enacted an amendment to the excise tax legislation which increased the excise tax rate to a flat 4% 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 and six months ended June 30, 2013, would have been 15.6% and 7.5%, respectively, compared with 18.5% and 18.6% for the corresponding periods of the prior year.
Several 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 disputes may arise with these tax authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income among various tax jurisdictions because of differing interpretations of tax laws and regulations. The U.S. federal income tax examinations for years ended on or before December 31, 2009, and the California state income tax examinations for years ended on or before December 31, 2005, have been completed.
During the three and six months ended June 30, 2013, the gross amount of our UTBs increased by approximately $75 million and $155 million, respectively, as a result of tax positions taken during the current year. Also, our UTBs decreased by approximately $10 million and $200 million in the three and six months ended June 30, 2013, respectively, due to settlement of federal and state tax matters. The settlements resulted in recognition of net tax benefits of approximately $10 million and $195 million for the three and six months ended June 30, 2013, respectively, including interest, penalties and the federal benefit of state taxes. Substantially all of the UTBs as of June 30, 2013, if recognized, would affect our effective tax rate. As of June 30, 2013, 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, restricted stock and performance unit awards, determined using the treasury stock method; and our convertible notes and warrants while outstanding, as discussed below (collectively, “dilutive securities”). The convertible note hedges purchased in connection with the issuance of our convertible notes, which terminated in February 2013, are excluded from the calculation of diluted EPS because their impact is always anti-dilutive.
Prior to the conversion/maturity of our 0.375% 2013 Convertible Notes in February 2013 which were cash settled, the excess of the notes' conversion value, as defined, over their principal amount were considered dilutive potential common shares

6

for purposes of calculating diluted EPS. Warrants sold concurrent with the issuance of our 0.375% 2013 Convertible Notes were cash settled in May 2013. While outstanding, the 0.375% 2013 Convertible Notes and warrants did not have a significant impact on the number of shares used for purposes of computing diluted EPS for any periods presented. See Note 7, Financing arrangements.
The computation for basic and diluted EPS was as follows (in millions, except per share data):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Income (Numerator):
 
 
 
 
 
 
 
Net income for basic and diluted EPS
$
1,258

 
$
1,266

 
$
2,692

 
$
2,450

 
 
 
 
 
 
 
 
Shares (Denominator):
 
 
 
 
 
 
 
Weighted-average shares for basic EPS
752

 
776

 
752

 
783

Effect of dilutive securities
12

 
9

 
12

 
9

Weighted-average shares for diluted EPS
764

 
785

 
764

 
792

 
 
 
 
 
 
 
 
Basic EPS
$
1.67

 
$
1.63

 
$
3.58

 
$
3.13

Diluted EPS
$
1.65

 
$
1.61

 
$
3.52

 
$
3.09

For the three and six months ended June 30, 2013, there were no anti-dilutive shares of our common stock excluded from the computation of diluted EPS. For the three and six months ended June 30, 2012, there were employee stock-based awards, calculated on a weighted-average basis, to acquire 10 million and 11 million shares of our common stock, respectively, that are not included in the computation of diluted EPS because their impact would have been anti-dilutive.

7

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 June 30, 2013
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
4,800

 
$
—

 
$
(10
)
 
$
4,790

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
1,320

 
—

 
(14
)
 
1,306

Foreign and other
 
1,298

 
8

 
(41
)
 
1,265

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
3,919

 
30

 
(53
)
 
3,896

Industrial
 
4,052

 
27

 
(53
)
 
4,026

Other
 
413

 
3

 
(4
)
 
412

Residential mortgage-backed securities
 
1,477

 
4

 
(16
)
 
1,465

Other mortgage- and asset-backed securities
 
1,444

 
—

 
(37
)
 
1,407

Money market mutual funds
 
1,822

 
—

 
—

 
1,822

Other short-term interest-bearing securities
 
1,175

 
—

 
—

 
1,175

Total interest-bearing securities
 
21,720

 
72

 
(228
)
 
21,564

Equity securities
 
68

 
22

 
—

 
90

Total available-for-sale investments
 
$
21,788

 
$
94

 
$
(228
)
 
$
21,654


Type of security as of December 31, 2012
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Estimated
fair
value
U.S. Treasury securities
 
$
4,443

 
$
15

 
$
—

 
$
4,458

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
1,018

 
12

 
—

 
1,030

Foreign and other
 
1,549

 
60

 
(1
)
 
1,608

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
3,266

 
96

 
(1
)
 
3,361

Industrial
 
4,283

 
100

 
(3
)
 
4,380

Other
 
441

 
11

 
—

 
452

Residential mortgage-backed securities
 
1,828

 
9

 
(8
)
 
1,829

Other mortgage- and asset-backed securities
 
1,769

 
7

 
(9
)
 
1,767

Money market mutual funds
 
2,620

 
—

 
—

 
2,620

Other short-term interest-bearing securities
 
2,186

 
—

 
—

 
2,186

Total interest-bearing securities
 
23,403

 
310

 
(22
)
 
23,691

Equity securities
 
52

 
2

 
—

 
54

Total available-for-sale investments
 
$
23,455

 
$
312

 
$
(22
)
 
$
23,745


8


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
 
June 30,
2013
 
December 31,
2012
Cash and cash equivalents
 
$
5,352

 
$
2,887

Marketable securities
 
16,212

 
20,804

Other assets — noncurrent
 
90

 
54

Total available-for-sale investments
 
$
21,654

 
$
23,745

Cash and cash equivalents in the table above excludes cash of $454 million and $370 million as of June 30, 2013, and December 31, 2012, respectively.
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
 
June 30,
2013
 
December 31,
2012
Maturing in one year or less
 
$
6,814

 
$
7,175

Maturing after one year through three years
 
4,500

 
5,014

Maturing after three years through five years
 
5,949

 
6,286

Maturing after five years through ten years
 
1,429

 
1,620

Mortgage- and asset-backed securities
 
2,872

 
3,596

Total interest-bearing securities
 
$
21,564

 
$
23,691

For the three months ended June 30, 2013 and 2012, realized gains totaled $33 million and $49 million, respectively, and realized losses totaled $26 million and $11 million, respectively. For the six months ended June 30, 2013 and 2012, realized gains totaled $118 million and $116 million, respectively, and realized losses totaled $44 million and $30 million, respectively. The cost of securities sold is based on the specific identification method. Substantially all of our available-for-sale investments that were in an unrealized loss position, which totaled $228 million as of June 30, 2013, have been in a continuous unrealized loss position for less than 12 months. These investments had an aggregate fair value of $10.7 billion as of June 30, 2013.
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 June 30, 2013, and December 31, 2012, 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):
 
June 30,
2013
 
December 31,
2012
Raw materials
$
204

 
$
192

Work in process
1,706

 
1,723

Finished goods
863

 
829

Total inventories
$
2,773

 
$
2,744


9

7. Financing arrangements
The carrying values and the fixed contractual coupon rates of our long-term borrowings were as follows (in millions):

June 30,
2013
 
December 31,
2012
0.375% convertible notes due 2013 (0.375% 2013 Convertible Notes)
$
—

 
$
2,488

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)
1,248

 
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

 
499

4.375% euro-denominated notes due 2018 (4.375% 2018 euro Notes)
717

 
723

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

 
999

2.125% euro-denominated notes due 2019 (2.125% 2019 euro Notes)
875

 
887

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

 
300

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

 
897

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

 
998

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

 
1,745

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)
717

 
763

4.00% pound-sterling-denominated notes due 2029 (4.00% 2029 pound sterling Notes)
1,049

 
1,117

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)
595

 
595

5.15% notes due 2041 (5.15% 2041 Notes)
2,232

 
2,232

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
112

 
109

Total debt
23,915

 
26,529

Less current portion
(7
)
 
(2,495
)
Total noncurrent debt
$
23,908

 
$
24,034

Convertible notes
In February 2013, our 0.375% 2013 Convertible Notes matured/converted, and accordingly, the $2.5 billion principal amount was settled in cash. We also elected to pay the note holders who converted their notes $99 million of cash for the conversion value that exceeded the principal amount of the notes, as allowed under the original terms of the notes. As a result of this conversion, we received $99 million of cash from the counterparty to the related convertible note hedge to offset the corresponding payment to the convertible note holders. In addition, on May 1, 2013, warrants to acquire 32 million shares of our common stock at an exercise price of $104.80 originally sold in connection with the issuance of the 0.375% 2013 Convertible Notes were exercised, resulting in a net cash payment of $100 million.

10

8. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program was as follows (in millions):
 
2013
 
2012
 
Shares    
 
Dollars    
 
Shares    
 
Dollars    
First quarter
9.1
 
$
771

 
21.0
 
$
1,429

Second quarter
—

 
—

 
17.4

 
1,203

Total stock repurchases
9.1

 
$
771

 
38.4

 
$
2,632

As of June 30, 2013, $1.6 billion remained available under our Board of Directors-approved stock repurchase program.
Dividends
On December 13, 2012, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock, which was paid on March 7, 2013. On March 6, 2013, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock, which was paid on June 7, 2013. On July 26, 2013, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock, which will be paid on September 6, 2013 to all stockholders of record as of the close of business on August 16, 2013.
Accumulated other comprehensive income
The components of AOCI were as follows (in millions):
 
Foreign
currency
translation
 
Cash flow
hedges
 
Available-for-sale
securities
 
Other
 
AOCI
Balance as of December 31, 2012
$
12

 
$
(35
)
 
$
183

 
$
(14
)
 
$
146

Foreign currency translation adjustments
(36
)
 
—

 
—

 
—

 
(36
)
Unrealized gains (losses)
—

 
(25
)
 
(32
)
 
1

 
(56
)
Reclassification adjustments to income
—

 
144

 
(67
)
 
—

 
77

Income taxes
13

 
(44
)
 
37

 
—

 
6

Balance as of March 31, 2013
$
(11
)
 
$
40

 
$
121

 
$
(13
)
 
$
137

Foreign currency translation adjustments
(39
)
 
—

 
—

 
—

 
(39
)
Unrealized gains (losses)
—

 
53

 
(318
)
 
—

 
(265
)
Reclassification adjustments to income
—

 
(18
)
 
(7
)
 
—

 
(25
)
Income taxes
14

 
(13
)
 
120

 
—

 
121

Balance as of June 30, 2013
$
(36
)
 
$
62

 
$
(84
)
 
$
(13
)
 
$
(71
)

11

The reclassifications out of AOCI to Net income were as follows (in millions):
 
 
Amounts reclassified out of AOCI
 
 

 
Three months ended
 
Six months ended
 
Net Income
Components of AOCI
 
June 30, 2013
 
June 30, 2013
 
Line Item Affected
Cash flow hedges:
 
 
 
 
 
 
     Foreign currency contract gains
 
$
7

 
$
3

 
Product sales
     Cross-currency swap contract gains (losses)
 
12

 
(128
)
 
Interest and other income, net
     Forward interest rate contract losses
 
(1
)
 
(1
)
 
Interest expense, net
 
 
18

 
(126
)
 
Total before income tax
 
 
(7
)
 
46

 
Tax (expense)/benefit
 
 
$
11

 
$
(80
)
 
Net of taxes
Available-for-sale securities:
 
 
 

 

     Net realized gains
 
$
7

 
$
74

 
Interest and other income, net
 
 
(3
)
 
(28
)
 
Tax (expense)/benefit
 
 
$
4

 
$
46

 
Net of taxes
9. 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.

12

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 June 30, 2013, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,790

 
$
—

 
$
—

 
$
4,790

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
—

 
1,306

 
—

 
1,306

Foreign and other
 
—

 
1,265

 
—

 
1,265

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
—

 
3,896

 
—

 
3,896

Industrial
 
—

 
4,026

 
—

 
4,026

Other
 
—

 
412

 
—

 
412

Residential mortgage-backed securities
 
—

 
1,465

 
—

 
1,465

Other mortgage- and asset-backed securities
 
—

 
1,407

 
—

 
1,407

Money market mutual funds
 
1,822

 
—

 
—

 
1,822

Other short-term interest-bearing securities
 
—

 
1,175

 
—

 
1,175

Equity securities
 
90

 
—

 
—

 
90

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
—

 
109

 
—

 
109

Cross-currency swap contracts
 
—

 
31

 
—

 
31

Interest rate swap contracts
 
—

 
10

 
—

 
10

Total assets
 
$
6,702

 
$
15,102

 
$
—

 
$
21,804

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
—

 
$
11

 
$
—

 
$
11

Cross-currency swap contracts
 
—

 
64

 
—

 
64

Interest rate swap contracts

—


101


—


101

Contingent consideration obligations in connection with a business combination
 
—

 
—

 
332

 
332

Total liabilities
 
$
—

 
$
176

 
$
332

 
$
508


13

 
 
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, 2012, using:
 
 
 
 
Total
Assets:
 
 
 
 
 
 
 
 
Available-for-sale investments:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,458

 
$
—

 
$
—

 
$
4,458

Other government-related debt securities:
 
 
 
 
 
 
 
 
U.S.
 
—

 
1,030

 
—

 
1,030

Foreign and other
 
—

 
1,608

 
—

 
1,608

Corporate debt securities:
 
 
 
 
 
 
 
 
Financial
 
—

 
3,361

 
—

 
3,361

Industrial
 
—

 
4,380

 
—

 
4,380

Other
 
—

 
452

 
—

 
452

Residential mortgage-backed securities
 
—

 
1,829

 
—

 
1,829

Other mortgage- and asset-backed securities
 
—

 
1,767

 
—

 
1,767

Money market mutual funds
 
2,620

 
—

 
—

 
2,620

Other short-term interest-bearing securities
 
—

 
2,186

 
—

 
2,186

Equity securities
 
54

 
—

 
—

 
54

Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
—

 
46

 
—

 
46

Cross-currency swap contracts
 
—

 
65

 
—

 
65

Total assets
 
$
7,132

 
$
16,724

 
$
—

 
$
23,856

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
$
—

 
$
59

 
$
—

 
$
59

Cross-currency swap contracts
 
—

 
6

 
—

 
6

Contingent consideration obligations in connection with a business combination
 
—

 
—

 
221

 
221

Total liabilities
 
$
—

 
$
65

 
$
221

 
$
286

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 (S&P) or Fitch, Inc. (Fitch) and AA- or equivalent by Moody's Investors Service, Inc. (Moody's); and our corporate debt securities portfolio has a weighted-average credit rating of A- or equivalent 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; and other observable inputs.
Our residential mortgage-, other mortgage- and asset-backed securities portfolio is composed entirely of senior tranches, with credit ratings of AA+ by S&P and AAA or equivalent by 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.

14

Substantially 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 10, 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 10, 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. See Note 10, Derivative instruments.
As a result of our acquisition of BioVex Group, Inc. 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 (BLA) 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.
These contingent consideration obligations are recorded at their estimated fair values with any changes in fair value recognized in earnings. 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 (increases or decreases) in these inputs would result in corresponding changes in the fair values of the contingent consideration obligations.
We revalue these contingent consideration obligations each reporting period until the related contingencies are resolved. We estimate the fair values of these obligations 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 the absence of any significant changes in key assumptions, the changes in fair values of these contingent consideration obligations reflect the passage of time and changes in our credit risk adjusted rate used to discount obligations to present value. During the three months ended June 30, 2013, there were increases in management's estimates of probabilities of completing the BLA filing and receiving approval to market talimogene laherparepvec in specified patient populations in the United States and EU. Primarily due to these changes in key assumptions, the estimated aggregate fair value of the contingent consideration obligations increased during the three and six months ended June 30, 2013 by $110 million and $111 million, respectively, which were recorded in Other operating expenses in the Condensed Consolidated Statements of Income, compared with $1 million and $3 million for the corresponding periods of the prior year.
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 six months ended June 30, 2013 and 2012, 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 values of our long-term notes (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

15

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 June 30, 2013, and December 31, 2012, the aggregate fair values of our long-term debt were $25.5 billion and $29.9 billion, respectively, and the carrying values were $23.9 billion and $26.5 billion, respectively.
10. 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 June 30, 2013, and December 31, 2012, we had open foreign currency forward contracts with notional amounts of $3.8 billion and $3.7 billion, respectively, and open foreign currency option contracts with notional amounts of $123 million and $200 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):
 
 
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
%
In connection with the anticipated issuance of long-term fixed-rate debt, we occasionally enter into forward interest rate contracts in order to hedge the variability in cash flows due to changes in the applicable Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on such contracts, which are designated as cash flow hedges, are reported in AOCI and amortized into earnings over the lives of the associated debt issuances.

16

The effective portion of the unrealized gain/(loss) recognized in other comprehensive income for our derivative instruments designated as cash flow hedges was as follows (in millions):
 
 
Three months ended
 
Six months ended
 
 
June 30,
 
June 30,
Derivatives in cash flow hedging relationships
 
2013
 
2012
 
2013
 
2012
Foreign currency contracts
 
$
21

 
$
189

 
$
121

 
$
102

Cross-currency swap contracts
 
32

 
(35
)
 
(93
)
 
(27
)
Forward interest rate contracts
 
—

 
(7
)
 
—

 
(7
)
Total
 
$
53

 
$
147

 
$
28

 
$
68

The location in the Condensed Consolidated Statements of Income and the effective portion 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
 
Six months ended
 
 
 
 
June 30,
 
June 30,
Derivatives in cash flow hedging relationships
 
Statements of Income location
 
2013
 
2012
 
2013
 
2012
Foreign currency contracts
 
Product sales
 
$
7

 
$
18

 
$
3

 
$
29

Cross-currency swap contracts
 
Interest and other income, net
 
12

 
(17
)
 
(128
)
 
(4
)
Forward interest rate contracts
 
Interest expense, net
 
(1
)
 
(1
)
 
(1
)
 
(1
)
Total
 
 
 
$
18

 
$
—

 
$
(126
)
 
$
24

No portions of our cash flow hedge contracts are excluded from the assessment of hedge effectiveness, and the ineffective portions of these hedging instruments were no net gain or loss for the three months ended June 30, 2013, and approximately $1 million of gains for the six months ended June 30, 2013. The ineffective portions of these hedging instruments were approximately $1 million of gains for the three months ended June 30, 2012, and no net gain or loss for the six months ended June 30, 2012. As of June 30, 2013, the amounts expected to be reclassified out of AOCI into earnings over the next 12 months are approximately $41 million of net gains 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 were designated as fair value hedges. The terms of these interest rate swap contracts corresponded 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. Due to historically low interest rates, during the three months ended June 30, 2012, we terminated our interest rate swap contracts with aggregate notional amounts of $3.6 billion with respect to our 4.85% 2014 Notes, 5.85% 2017 Notes, 6.15% 2018 Notes and 5.70% 2019 Notes with rates that ranged from LIBOR plus 0.3% to LIBOR plus 2.6%.
During the three months ended March 31, 2013, we entered into interest rate swap contracts with an aggregate notional amount of $2.5 billion with respect to our 3.875% 2021 Notes and our 3.625% 2022 Notes. During the three months ended June 30, 2013, we entered into interest rate swap contracts with an aggregate notional amount of $1.9 billion with respect to our 3.450% 2020 Notes and our 4.100% 2021 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 and six months ended June 30, 2013, we included the unrealized gains on the hedged debt of $113 million and $91 million, respectively, in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized losses of $113 million and $91 million, respectively, on the related interest rate swap contracts. For the three and six months ended June 30, 2012, we included the unrealized losses on the hedged debt of $38 million and $20 million, respectively, in the same line item, Interest expense, net, in the Condensed Consolidated Statements of Income, as the offsetting unrealized gains of $38 million and $20 million, respectively, on the related interest rate swap contracts.

17

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 June 30, 2013, and December 31, 2012, the total notional amounts of these foreign currency forward contracts were $652 million and $629 million, respectively.
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
 
Six months ended
  
 
 
 
June 30,
 
June 30,
Derivatives not designated as hedging instruments
 
Statements of Income location
 
2013
 
2012
 
2013
 
2012
Foreign currency contracts
 
Interest and other income, net
 
$
11

 
$
20

 
$
(5
)
 
$
10


The fair values of derivatives included in the Condensed Consolidated Balance Sheets were as follows (in millions):
 
 
Derivative assets
 
Derivative liabilities
June 30, 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
 
$
31

 
Accrued liabilities/ Other noncurrent liabilities
 
$
64

Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
109

 
Accrued liabilities/ Other noncurrent liabilities
 
11

Interest rate swap contracts
 
Other current assets/ Other noncurrent assets
 
10

 
Accrued liabilities/ Other noncurrent liabilities
 
101

Total derivatives designated as hedging instruments
 
 
 
150

 
 
 
176

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

 
Accrued liabilities
 
—

Total derivatives not designated as hedging instruments
 
 
 
—

 
 
 
—

Total derivatives
 
 
 
$
150

 
 
 
$
176


18

 
 
Derivative assets
 
Derivative liabilities
December 31, 2012
 
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
 
$
65

 
Accrued liabilities/ Other noncurrent liabilities
 
$
6

Foreign currency contracts
 
Other current assets/ Other noncurrent assets
 
45

 
Accrued liabilities/ Other noncurrent liabilities
 
58

Total derivatives designated as hedging instruments
 
 
 
110

 
 
 
64

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other current assets
 
1

 
Accrued liabilities
 
1

Total derivatives not designated as hedging instruments
 
 
 
1

 
 
 
1

Total derivatives
 
 
 
$
111

 
 
 
$
65

Our derivative contracts that were in liability positions as of June 30, 2013, contain certain credit-risk-related contingent provisions that would be triggered if: (i) we were to undergo a change in control and (ii) our or the surviving entity’s creditworthiness deteriorates, which is generally defined as having either a credit rating that is below investment grade or a materially weaker creditworthiness after the change in control. If these events were to occur, the counterparties would have the right, but not the obligation, to close the contracts under early-termination provisions. In such circumstances, the counterparties could request immediate settlement of these contracts for amounts that approximate the then current fair values of the contracts. In addition, our derivative contracts are not subject to any type of master netting arrangement, and amounts due 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 six months ended June 30, 2013 and 2012, are included within Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
11. 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, 2012, and Note 11, Contingencies and commitments to our condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the period ended March 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, in Note 18 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012, or in Note 11 to our condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the period ended March 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 these filings 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.

19

Certain recent developments concerning our legal proceedings and other matters are discussed below:
Sandoz Patent Litigation
On June 24, 2013, Sandoz, Inc. filed suit in the U.S. District Court for the Northern District of California against Amgen and Hoffman-La Roche, Inc. (“Roche”). Sandoz's complaint alleges that Sandoz has recently initiated a Phase III clinical study of an etanercept product in patients with moderate to severe chronic plaque-type psoriasis. The complaint states that Sandoz is preparing to file an application with the FDA for regulatory approval to market and sell etanercept in the United States. Sandoz alleges that U.S. Patent Nos. 8,063,182 and 8,163,522 are invalid and seeks a declaratory judgment of non-infringement, invalidity and unenforceability of the '182 and '522 patents. These patents are owned by Roche, and Amgen holds an exclusive license to these patents. The '182 and '522 patents expire in November 2028 and April 2029, respectively.
State Derivative Litigation
Larson v. Sharer, et al.
On July 3, 2013, the parties in this stockholder derivative lawsuit pending against Amgen and various individual defendants filed a stipulation to permit the plaintiffs to file an amended complaint asserting additional grounds for the defendants' alleged breaches of fiduciary duty.
Purnell v. Sharer, et al.
On July 11, 2013, by agreement of all parties, this stockholder derivative lawsuit pending against Amgen and various individual defendants was dismissed with prejudice and without any payment by any defendant to the plaintiff or to plaintiff's counsel.
ERISA Litigation
On June 4, 2013, the U.S. Court of Appeals for the Ninth Circuit (the Ninth Circuit Court) reversed the decision of the U.S. District Court for the Central District of California (the California Central District Court) in this ERISA class action lawsuit pending against Amgen and various individual defendants and remanded the case back to the California Central District Court for further proceedings. On June 18, 2013, Amgen petitioned the Ninth Circuit Court for rehearing and/or rehearing en banc.
Government Investigations and Qui Tam Actions
As previously disclosed, in October 2011 Amgen announced it had reached an agreement in principle to settle various allegations related to its sales and marketing practices arising out of several federal investigations, and on December 19, 2012, Amgen announced that it had finalized a settlement agreement with the U.S. government, 49 states and the District of Columbia related to those allegations (the 2012 Settlement). As previously disclosed, as part of those settlement discussions, Amgen was made aware that it was a defendant in five other civil qui tam actions (the Other Qui Tams) in addition to those included in the October 2011 agreement in principle. As previously disclosed, one of the Other Qui Tams was resolved by the 2012 Settlement and Amgen was dismissed from two additional Other Qui Tams and settled for an immaterial amount the fourth Other Qui Tam. In July 2013, Amgen also entered into a settlement agreement to resolve the fifth Other Qui Tam action, which had been filed in the California Central District Court, for an immaterial amount. The fifth Other Qui Tam action had included allegations that Amgen's promotional, contracting, sales and marketing activities and arrangements relating to Aranesp® (darbepoetin alfa), NEUPOGEN® (filgrastim), Neulasta® (pegfilgrastim), XGEVA® (denosumab), Prolia® (denosumab), Vectibix® (panitumumab) and Nplate® (romiplostim) caused the submission of various false claims under the Federal Civil False Claims Act.


20

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, 2012. 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, 2012 and our Quarterly Report on Form 10-Q for the period ended March 31, 2013. Our results of operations discussed in MD&A are presented in conformity with GAAP.
Amgen discovers, develops, manufactures, and delivers innovative human therapeutics. A biotechnology pioneer since 1980, Amgen was one of the first companies to realize the new science's promise by bringing safe, effective medicines from lab to manufacturing plant to patient. Amgen therapeutics have changed the practice of medicine, helping people around the world in the fight against serious illnesses. With a deep and broad pipeline of potential new medicines, Amgen remains committed to advancing science to dramatically improve people's lives. 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 in supportive cancer care, inflammation, nephrology and bone disease. Our principal products are Neulasta® (pegfilgrastim), NEUPOGEN® (filgrastim), Enbrel® (etanercept), XGEVA® (denosumab), Prolia® (denosumab) 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 both the three and six months ended June 30, 2013, our principal products represented 88% of worldwide product sales compared with 90% for the corresponding periods of the prior year. Our other marketed products include principally Sensipar®/Mimpara® (cinacalcet), Vectibix® (panitumumab) and Nplate® (romiplostim).


21

Significant developments
Following is a summary of selected significant developments affecting our business that have occurred since March 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, 2012 and our Quarterly Report on Form 10-Q for the period ended March 31, 2013.
Products/Pipeline
Trebananib
•
On June 12, 2013, we announced that the phase 3 TRINOVA-1 trial evaluating trebananib plus paclitaxel versus placebo plus paclitaxel in recurrent ovarian cancer met its primary endpoint of progression-free survival (PFS). A statistically significant difference was observed in PFS with a 34 percent reduction in the risk of disease progression or death. The median PFS was 7.2 months in the trebananib arm versus 5.4 months in the control arm. The primary analysis of the event-driven overall survival secondary endpoint is projected to occur in the second half of 2014.
XGEVA® 
•
On June 13, 2013, the FDA approved XGEVA® for the treatment of giant cell tumor of bone.
AMG 145
•
In July 2013, we announced that pivotal data from AMG 145 phase 3 studies in subjects with elevated LDL cholesterol are expected in the first quarter of 2014.
Talimogene Laherparepvec
•
In July 2013, we announced that primary analysis of the event-driven overall survival secondary endpoint from a phase 3 study in melanoma is projected to occur in the first half of 2014.
Biosimilars
•
In July 2013, we announced that enrollment in a pivotal study for biosimilar Herceptin® (trastuzumab) has been temporarily suspended due to a delay in the availability of biosimilar trastuzumab manufactured by a contract organization. Enrollment will resume when continuous supply is available.
Selected financial information
The following is an overview of our results of operations for the three and six months ended June 30, 2013, as well as our financial condition as of June 30, 2013 (in millions, except percentages and per share data):
 
Three months ended
 
 
 
Six months ended
 
 
 
June 30,
 
 
 
June 30,
 
 
 
2013
 
2012
 
Change
 
2013
 
2012
 
Change
Product sales:
 
 
 
 
 
 
 
 
 
 
 
U.S.
$
3,561

 
$
3,255

 
9
 %
 
$
6,733

 
$
6,252

 
8
 %
Rest-of-the-world (ROW)
1,034

 
945

 
9
 %
 
2,013

 
1,849

 
9
 %
Total product sales
4,595

 
4,200

 
9
 %
 
8,746

 
8,101

 
8
 %
Other revenues
84

 
277

 
(70
)%
 
171

 
424

 
(60
)%
Total revenues
$
4,679

 
$
4,477

 
5
 %
 
$
8,917

 
$
8,525

 
5
 %
Operating expenses
$
3,129

 
$
2,888

 
8
 %
 
$
5,925

 
$
5,459

 
9
 %
Operating income
$
1,550

 
$
1,589

 
(2
)%
 
$
2,992

 
$
3,066

 
(2
)%
Net income
$
1,258

 
$
1,266

 
(1
)%
 
$
2,692

 
$
2,450

 
10
 %
Diluted EPS
$
1.65

 
$
1.61

 
2
 %
 
$
3.52

 
$
3.09

 
14
 %
Diluted shares
764

 
785

 
(3
)%
 
764

 
792

 
(4
)%
The increases in global product sales for the three and six months ended June 30, 2013, were driven by ENBREL, Neulasta®, XGEVA® and Prolia®. Product sales included a positive adjustment of $185 million to previous estimates for managed Medicaid rebates based on recent claims experience (the Medicaid rebate adjustment). In the United States, we pay rebates to the states for our products that are covered and reimbursed by state Medicaid programs. One of the provisions of the Affordable Care Act, a

22

U.S. healthcare reform law that became effective in 2010, was the extension of the Medicaid drug rebate program to patients in Medicaid managed care insurance plans for whom rebates were not previously required. As we sell product, we estimate the amount of Medicaid rebate that will be paid by us based on the product sold, contractual terms, estimated patient population, historical experience and wholesaler inventory levels and accrue these rebates in the period the related sale is recorded. We then adjust the rebate accruals as more information becomes available and to reflect actual claims experience. Estimating such rebates is complicated, in part, due to the time delay between the date of sale and the actual settlement of the liability, which can take more than one year.
The decreases in other revenues for the three and six months ended June 30, 2013, were due primarily to revenue recognized in the second quarter of 2012 related to changes in our motesanib collaboration with Takeda. In addition, during the three months ended March 31, 2012, we received milestone payments from AstraZeneca and Astellas Pharma Inc.
The increases in operating expenses for the three and six months ended June 30, 2013, were driven primarily by R&D spending.
Net income for the three months ended June 30, 2013, decreased slightly. The increase in net income for the six months ended June 30, 2013, was due primarily to a lower effective income tax rate driven by tax benefits recognized in the first quarter.
The increase in diluted EPS for the three months ended June 30, 2013, was driven by the favorable impact of our stock repurchase program over the past 12 months, which reduced the number of shares used to compute diluted EPS. The increase in diluted EPS for the six months ended June 30, 2013, was driven primarily by an increase in net income and, to a lesser extent, by the favorable impact of our stock repurchase program. We did not repurchase any shares during the second quarter of 2013 and have $1.6 billion remaining under our stock repurchase authorization.
As of June 30, 2013, our cash, cash equivalents and marketable securities totaled $22.0 billion, and total debt outstanding was $23.9 billion. Of our total cash, cash equivalents and marketable securities balances as of June 30, 2013, approximately $19.2 billion was generated from operations in foreign tax jurisdictions and is intended to be invested indefinitely outside of the United States. Under current tax laws, if these funds were repatriated for use in our U.S. operations, we would be required to pay additional U.S. federal and state income taxes at the applicable marginal tax rates.
Results of operations
Product sales
Worldwide product sales were as follows (dollar amounts in millions):
 
Three months ended
 
 
 
Six months ended
 
 
 
June 30,
 
 
 
June 30,
 
 
 
2013
 
2012
 
Change  
 
2013
 
2012
 
Change  
Neulasta®/NEUPOGEN®
$
1,444

 
$
1,347

 
7
 %
 
$
2,782

 
$
2,691

 
3
 %
ENBREL
1,157

 
1,058

 
9
 %
 
2,196

 
1,996

 
10
 %
Aranesp®
524

 
536

 
(2
)%
 
992

 
1,054

 
(6
)%
EPOGEN®
502

 
525

 
(4
)%
 
937

 
971

 
(4
)%
XGEVA® 
249

 
179

 
39
 %
 
472

 
332

 
42
 %
Prolia® 
188

 
120

 
57
 %
 
330

 
208

 
59
 %
Other products
531

 
435

 
22
 %
 
1,037

 
849

 
22
 %
Total product sales
$
4,595

 
$
4,200

 
9
 %
 
$
8,746

 
$
8,101

 
8
 %
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 - 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, 2012.

23

Neulasta®/NEUPOGEN® 
Total Neulasta®/NEUPOGEN® sales by geographic region were as follows (dollar amounts in millions):
 
Three months ended
 
 
 
Six months ended
 
 
 
June 30,
 
 
 
June 30,
 
 
 
2013
 
2012
 
Change  
 
2013
 
2012
 
Change  
Neulasta®— U.S.
$
897

 
$
794

 
13
 %
 
$
1,724

 
$
1,608

 
7
 %
Neulasta®— ROW
223

 
221

 
1
 %
 
435

 
446

 
(2
)%
Total Neulasta®
1,120