Item 1B.
UNRESOLVED STAFF COMMENTS
None.
As of December 31, 2018, we owned or leased approximately 190 properties. The locations and primary functions of significant properties are summarized in the following tables:
Excluded from the information above are (i) undeveloped land and leased properties that have been abandoned and (ii) certain buildings that we still own but are no longer used in our business. There are no material encumbrances on our owned properties.
We believe that our facilities are suitable for their intended uses and, in conjunction with our third-party contracting manufacturing agreements, provide adequate capacity and are sufficient to meet our expected needs. See Item 1A. Risk Factors for a discussion of the factors that could adversely impact our manufacturing operations and the global supply of our products.
See Item 1. Business-Manufacturing, Distribution and Raw Materials.
Item 3.
Item 3.
LEGAL PROCEEDINGS
Certain of the legal proceedings in which we are involved are discussed in Part IV-Note 20, Contingencies and commitments, to the Consolidated Financial Statements, and are hereby incorporated by reference.
Item 4.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock
Our common stock trades on the NASDAQ Global Select Market under the symbol AMGN. As of February 7, 2019, there were approximately 5,760 holders of record of our common stock.
Performance graph
The following graph shows the value of an investment of $100 on December 31, 2013, in each of Amgen common stock, the Amex Biotech Index, the Amex Pharmaceutical Index and Standard & Poor’s 500 Index (S&P 500). All values assume reinvestment of the pretax value of dividends and are calculated as of December 31 of each year. The historical stock price performance of the Company’s common stock shown in the performance graph is not necessarily indicative of future stock price performance.
The material in this performance graph is not soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.
Stock repurchase program
During the three months and year ended December 31, 2018, we had one outstanding stock repurchase program, under which the repurchasing activity was as follows:
(1)
Average price paid per share includes related expenses.
(2)
In December 2018, our Board of Directors increased the amount authorized under our stock repurchase program by an additional $3.6 billion.
Dividends
For the years ended December 31, 2018 and 2017, we paid quarterly dividends. We expect to continue to pay quarterly dividends, although the amount and timing of any future dividends are subject to approval by our Board of Directors. Additional information required by this item is incorporated herein by reference to Part IV-Note 17, Stockholders’ equity, to the Consolidated Financial Statements.
Securities Authorized for Issuance Under Existing Equity Compensation Plans
Information about securities authorized for issuance under existing equity compensation plans is incorporated by reference from Item 12 - Securities Authorized for Issuance Under Existing Equity Compensation Plans.
Item 6.
Item 6.
SELECTED FINANCIAL DATA
In addition to the following notes, see Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis (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 consolidated financial statements and accompanying notes. Our results of operations discussed in MD&A are presented in conformity with U.S. generally accepted accounting principles (GAAP). Amgen operates in one business segment: human therapeutics. Therefore, our results of operations are discussed on a consolidated basis.
Forward-looking statements
This report and other documents we file with the 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 they 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. Risk Factors. 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 forecasted by our forward-looking statements. Reference is made in particular to forward-looking statements regarding product sales, regulatory activities, clinical trial results, reimbursement, expenses, earnings per share (EPS), liquidity and capital resources, trends, planned dividends, stock repurchases and restructuring plans. 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
Amgen is a highly focused biotechnology company committed to unlocking the potential of biology for patients suffering from serious illnesses. A biotechnology pioneer since 1980, Amgen has grown to be one of the world’s leading independent biotechnology companies, has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential.
Our principal products-those with the most significant annual commercial sales-are ENBREL, Neulasta®, Prolia®, Aranesp®, XGEVA®, Sensipar®/Mimpara® and EPOGEN®. We also market a number of other products, including KYPROLIS®, Nplate®, Vectibix®, Repatha®, NEUPOGEN®, Parsabiv®, BLINCYTO®, Aimovig®, IMLYGIC®, Corlanor®, KANJINTITM and AMGEVITATM. For additional information about our products, see Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products.
Our strategy includes a set of integrated activities intended to maintain and strengthen our competitive position in the industry. In 2018, we advanced our strategy while delivering strong financial performance and returning capital to shareholders, advancing our innovative pipeline and branded biosimilar programs, increasing our global geographic reach and expanding our next-generation manufacturing capabilities.
In 2018, total product sales increased 3% driven primarily by Prolia®, XGEVA®, Repatha® and KYPROLIS®, along with our recently launched products Aimovig® and Parsabiv®. Product sales grew 2% in the United States and 9% in the rest of the world. Total operating expenses increased 5% as we supported our recently launched products and R&D pipeline, including early oncology assets. Cash inflows from operating activities were $11.3 billion, enabling us to invest in our business while returning capital to shareholders through the payment of cash dividends and stock repurchases. We increased our quarterly cash dividend by 15% to $1.32 per share of common stock. In December 2018, we declared a cash dividend of $1.45 per share of common stock for the first quarter of 2019, an increase of 10% for this period, to be paid in March 2019. We also repurchased 94.5 million shares of our common stock throughout 2018 at an aggregate cost of $17.9 billion.
In addition to launching Aimovig® in the United States and Parsabiv® in the United States and the EU, we received approvals for new indications for Repatha® and Prolia®, along with KYPROLIS®, BLINCYTO®, XGEVA® and Nplate® within our oncology/hematology portfolio. We continued to strengthen our international footprint with the approvals of Repatha® in China, and in early 2019, EVENITYTM in Japan. In addition to these commercial products, we continue to advance our pipeline of innovative first-in-class molecules, including our phase 3 molecule, tezepelumab. The FDA granted Breakthrough Therapy Designation for tezepelumab in patients with severe asthma without an eosinophilic phenotype. We have also continued to invest in external innovation to augment our internal innovation with a focus when possible, on genetic related investments and genetically validated targets.
We also continued to advance our biosimilar program with the approval of MVASITM for the treatment of five types of cancer in the United States and the EU, and the launches of KANJINTITM and AMGEVITATM in Europe. Lastly, we made regulatory submissions for ABP 710 in the United States and the EU.
We broke ground on our new next-generation biomanufacturing plant in Rhode Island in 2018. This new plant will be the first of its kind in the United States and will use our proven next-generation biomanufacturing capabilities to manufacture our products while maintaining a reliable, high-quality, compliant supply of medicines. Next-generation biomanufacturing plants require a smaller manufacturing footprint and offer greater environmental benefits, including reduced consumption of water and energy and lower levels of carbon emissions. Our first next-generation biomanufacturing facility located in Singapore is already in use for certain commercial-scale production for multiple countries.
While 2018 execution was strong, we face competition on our more mature products. We have established productivity initiatives to enable investment in new products and the defense of existing products to optimize long- and short-term growth.
Our long-term success depends, to a great extent, on our ability to continue to discover, develop and commercialize innovative products and acquire or collaborate on therapies currently in development by other companies. We must develop new products over time in order to provide for revenue growth and to offset revenue losses when products lose their exclusivity or competing products are launched. Certain of our products face increasing pressure from competition, including biosimilars and generics. For additional information, including information on the expiration of patents for various products, see Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products-Patents and see Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products-Competition. We devote considerable resources to R&D activities. However, successful product development in the biotechnology industry is highly uncertain. We are also confronted by increasing regulatory scrutiny of safety and efficacy both before and after products launch.
Rising healthcare costs and economic conditions also continue to pose challenges to our business, including continued pressure by third-party payers, such as governments and private payers, to reduce healthcare expenditures. As a result of public
and private health care provider focus, the industry continues to experience significant pricing pressures and other cost containment measures. Finally, wholesale and end-user buying patterns can affect our product sales. These effects can cause fluctuations in quarterly product sales and have generally not been significant when comparing full-year product performance to the prior year. See Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products and Part I, Item 1A. Risk Factors for further discussion of certain of the factors that could impact our future product sales.
Selected Financial Information
The following is an overview of our results of operations (in millions, except percentages and per-share data):
* Change in excess of 100%
In the following discussion of changes in product sales, any reference to unit demand growth or decline refers to changes in the purchases of our products by healthcare providers (such as physicians or their clinics), dialysis centers, hospitals and pharmacies. In addition, any reference to increases or decreases in inventory refers to changes in inventory held at wholesaler customers and end-users (such as pharmacies).
Total product sales increased for 2018, driven primarily by higher unit demand, offset partially by a decline in net selling price. For 2019, we expect net selling price to continue to decline.
Other revenues increased for 2018, driven primarily by higher milestone payments and royalties.
Operating expenses increased for 2018, driven primarily by investments in product launches and increased spend in R&D, including support of our early pipeline. All expense categories continued to benefit from our transformation and process improvement efforts, which enabled investment in newer and recently launched products.
Although changes in foreign currency exchange rates result in increases or decreases in our reported international product sales, the benefit or detriment that such movements have on our international product sales is offset partially by corresponding increases or decreases in our international operating expenses and our related foreign currency hedging activities. Our hedging activities seek to offset the impacts, both positive and negative, that foreign currency exchange rate changes may have on our net income by hedging our net foreign currency exposure, primarily with respect to product sales denominated in euros. The net impact from changes in foreign currency exchange rates was not material in 2018, 2017 or 2016.
Results of Operations
Product sales
Worldwide product sales were as follows (dollar amounts in millions):
Future sales of our products will depend, in part, on the factors discussed in the Overview, Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products-Competition, in Part I, Item 1A. Risk Factors, and any additional factors discussed in the individual product sections below. In addition, for a list of our products’ significant competitors, see Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products-Competition.
ENBREL
Total ENBREL sales by geographic region were as follows (dollar amounts in millions):
The decrease in ENBREL sales for 2018 was driven primarily by lower unit demand and net selling price.
The decrease in ENBREL sales for 2017 was driven primarily by lower unit demand and net selling price, offset partially by an increase in inventory.
For 2019, we expect the trend of lower unit demand to continue.
Multiple companies are developing proposed biosimilar versions of ENBREL, and we are involved in patent litigation with the company seeking to market the biosimilar version of ENBREL approved by the FDA in 2016. See Part IV-Note 20, Contingencies and commitments, to the Consolidated Financial Statements.
Neulasta®
Total Neulasta® sales by geographic region were as follows (dollar amounts in millions):
The decrease in global Neulasta® sales for 2018 was driven primarily by favorable changes in accounting estimates of product returns in 2017, offset partially by favorable changes in inventory. Neulasta® sales for 2018 included a $55 million order in the fourth quarter from the U.S. government.
The decrease in global Neulasta® sales for 2017 was driven primarily by lower unit demand, offset partially by an increase in net selling price in the United States.
Neulasta® sales have been and will continue to be affected by the development of new protocols, tests and/or treatments for cancer and/or new treatment alternatives, including those that have reduced and may continue to reduce the use of myelosuppressive regimens in some patients.
Our final material U.S. patent for Neulasta® expired in October 2015. Therefore, we face competition in the United States, which over time may have a material adverse impact on future sales of Neulasta®. A biosimilar version of Neulasta® was approved in the second quarter of 2018 and launched in July 2018, and another biosimilar version was approved in the fourth quarter of 2018 and launched in January 2019. Other biosimilar versions of Neulasta® may also receive approval in the near future. For a discussion of ongoing patent litigations with these and other companies that are developing proposed biosimilar versions of Neulasta®, see Part IV-Note 20, Contingencies and commitments, to the Consolidated Financial Statements.
In addition, supplementary protection certificates issued by certain countries, including France, Germany, Italy, Spain and the United Kingdom, that are related to our European patent for Neulasta® expired in August 2017. In 2019, we expect European sales to decline with the launch of multiple long-acting biosimilar competitors.
Prolia®
Total Prolia® sales by geographic region were as follows (dollar amounts in millions):
The increases in global Prolia® sales for 2018 and 2017 were driven primarily by higher unit demand.
Aranesp®
Total Aranesp® sales by geographic region were as follows (dollar amounts in millions):
The decrease in global Aranesp® sales for 2018 was driven primarily by the impact of competition on unit demand.
The decrease in global Aranesp® sales for 2017 was driven primarily by unfavorable changes in foreign currency exchange rates, offset partially by higher unit demand, including a shift of some U.S. dialysis centers from EPOGEN®.
Aranesp® faces competition from a long-acting product. Aranesp® also faces competition from a biosimilar version of EPOGEN®, which was approved in the second quarter of 2018 and launched in the fourth quarter of 2018. Other biosimilar versions of EPOGEN ® may also receive approval. In 2019, we expect sales in the United States to decline at a faster rate than 2018 due to short- and long- acting competition.
XGEVA®
Total XGEVA® sales by geographic region were as follows (dollar amounts in millions):
The increases in global XGEVA® sales for 2018 and 2017 were driven primarily by higher unit demand.
Sensipar®/Mimpara®
Total Sensipar®/Mimpara® sales by geographic region were as follows (dollar amounts in millions):
The increase in global Sensipar®/Mimpara® sales for 2018 was driven primarily by an increase in net selling price in the United States, offset partially by lower unit demand.
The increase in global Sensipar®/Mimpara® sales for 2017 was driven primarily by an increase in net selling price in the United States and, to a lesser extent, higher unit demand.
Our U.S. composition of matter patent related to Sensipar®, a small molecule, expired in March 2018. We are involved in patent litigation with a number of companies seeking to market generic versions of Sensipar®, one of which began selling its generic version in late December 2018 until reaching a settlement agreement with us in early January 2019. In a separate litigation, we have been sued by the manufacturer of another approved generic version of Sensipar® who is contending that provisions of its own settlement agreement with Amgen have been triggered by the first manufacturer’s at-risk launch, giving this second manufacturer a right to market its own generic version under its settlement agreement. See Part IV-Note 20, Contingencies and commitments, to the Consolidated Financial Statements.
In 2019, we expect Sensipar® sales will be lower than 2018 due to the temporary generic market entry, continued adoption of Parsabiv® and higher purchases in 2018 due to the reimbursement change from Medicare Part D to Part B. Further, generic competitors may enter the market at risk at any time.
EPOGEN®
Total EPOGEN® sales were as follows (dollar amounts in millions):
The decrease in EPOGEN® sales for 2018 was driven primarily by a decline in net selling price due to contractual terms negotiated with DaVita (see Part I, Item I. Business-Business Relationships). In 2019, we expect a more significant decline in net selling price.
The decrease in EPOGEN® sales for 2017 was driven primarily by a decline in net selling price due to contractual terms negotiated with DaVita and, to a lesser extent, a shift in some U.S. dialysis centers to Aranesp®.
Our final material U.S. patent for EPOGEN® expired in May 2015. We face competition in the United States, which has had and will continue to have a material adverse impact on sales of EPOGEN ®. Multiple companies are developing proposed biosimilar versions of EPOGEN ®. A biosimilar version of EPOGEN ® was approved in the second quarter of 2018 and launched in the fourth quarter of 2018. Other biosimilar versions of EPOGEN ® may also receive approval. For a discussion of ongoing patent litigation with one of these companies, see Part IV-Note 20, Contingencies and commitments, to the Consolidated Financial Statements.
Other products
Other product sales by geographic region were as follows (dollar amounts in millions):
* Change in excess of 100%
Operating expenses
Operating expenses were as follows (dollar amounts in millions):
* Change in excess of 100%
Transformation and process improvement
During 2014, we announced transformation and process improvement efforts that we continue to execute. As part of these efforts, we committed to a more agile and efficient operating model. Our transformation and process improvement efforts across the Company are enabling us to reallocate resources to fund many of our innovative pipeline and growth opportunities that deliver value to patients and stockholders.
The transformation included a restructuring plan, and the activities associated with the restructuring plan have been completed. As of December 31, 2018, restructuring costs incurred to date were $809 million. During 2018, 2017 and 2016, we incurred restructuring costs of $12 million, $88 million and $37 million, respectively. Since 2014, we have realized approximately $1.9 billion of transformation and process improvement savings. Net savings have not been significant as savings were reinvested in product launches, clinical programs and external business development. Additional information required for our restructuring plan is incorporated herein by reference to Part IV-Note 2, Restructuring, to the Consolidated Financial Statements.
Cost of sales
Cost of sales decreased to 17.3% of total revenues for 2018, driven primarily by lower royalty costs, expenses related to Hurricane Maria in 2017 and lower acquisition-related amortization of intangible assets, offset partially by higher manufacturing costs.
Cost of sales decreased to 17.8% of total revenues for 2017, driven primarily by lower acquisition-related amortization of intangible assets, lower royalty costs and favorable manufacturing costs, offset partially by expenses related to Hurricane Maria, unfavorable product mix and other inventory costs.
Research and development
The Company groups all of its R&D activities and related expenditures into three categories: (1) Research and early pipeline (formerly Discovery Research and Translational Sciences), (2) later-stage clinical programs and (3) marketed products. These categories are described below:
R&D expense by category was as follows (in millions):
The increase in R&D expense for 2018 was driven by higher spend on our early pipeline, later-stage clinical programs as well as external business development expense in research and early pipeline, offset partially by lower marketed product support.
The decrease in R&D expense for 2017 was driven by decreased costs associated with later-stage clinical program support, lower external business development expense in research and early pipeline and lower marketed product support.
Selling, general and administrative
The increase in Selling, general and administrative (SG&A) expense for 2018 was driven primarily by investments in product launches and marketed product support.
The decrease in SG&A expense for 2017 was driven primarily by the expiration of the ENBREL residual royalty payments on October 31, 2016, offset partially by investments in product launches and marketed product support.
The ENBREL co-promotion term expired in October 2013, and we were required to pay Pfizer residual royalties on a declining percentage of ENBREL net sales in the United States and Canada. Effective November 2016, there were no further residual royalty payments. The residual royalty percentage ranged from 10% to 11% in 2016.
Other
Other operating expenses for 2018 included a $330 million impairment charge associated with an intangible asset acquired in a business combination and a $42 million favorable net change in the fair values of contingent consideration. See Part IV-Note 14, Goodwill and other intangible assets, to the Consolidated Financial Statements.
Other operating expenses for 2017 included $284 million of impairment-related charges associated with an intangible asset acquired in a business combination and $83 million of certain net charges related to our restructuring plan.
Other operating expenses for 2016 included $105 million of charges related to legal proceedings.
Nonoperating expenses/income and income taxes
Nonoperating expenses/income and income taxes were as follows (dollar amounts in millions):
Interest expense, net
The increase in Interest expense, net, for 2018 was due primarily to the impact of rising interest rates on variable-rate debt.
The increase in Interest expense, net, for 2017 was due primarily to a higher average amount of debt outstanding compared with the prior year.
Interest and other income, net
The decrease in Interest and other income, net, for 2018 was due primarily to higher investment losses and lower interest income as a result of the liquidation of a portion of our portfolio, offset partially by gains on our equity investments and a net gain recognized in connection with our acquisition of K-A in the first quarter of 2018. See Part IV-Note 3, Business combinations, to the Consolidated Financial Statements.
The increase in Interest and other income, net, for 2017 was due primarily to higher interest income that resulted from higher average investment balances and higher gains on strategic investments.
Income taxes
The decrease in our effective tax rate for 2018 compared with 2017 was due primarily to impacts of U.S. corporate tax reform.
On December 22, 2017, the United States enacted the 2017 Tax Act, which imposes a repatriation tax on accumulated earnings of foreign subsidiaries, imposes a current tax on certain foreign earnings and lowers the general corporate income tax rate to 21%. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have completed our accounting for the tax effects of the 2017 Tax Act, including the repatriation tax, the net deferred tax remeasurement and the impact on our unrealized tax benefits. None of the adjustments we made to our provisional amounts were material to our consolidated financial statements.
As previously disclosed, we received a RAR from the IRS for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. Final resolution of this complex matter is not likely within the next 12 months and could have a material impact on our consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued.
See Summary of Critical Accounting Policies-Income taxes, and Part IV-Note 7, Income taxes, to the Consolidated Financial Statements.
Financial Condition, Liquidity and Capital Resources
Selected financial data was as follows (in millions):
Cash, cash equivalents and marketable securities
We have global access to our $29.3 billion balance of cash, cash equivalents and marketable securities, as we no longer reinvest the related undistributed foreign earnings indefinitely outside the United States. As a result of the 2017 Tax Act, we recorded a repatriation tax liability on undistributed earnings generated from operations in foreign tax jurisdictions estimated at $7.3 billion, which will be paid over eight years. The first annual payment was made in April 2018. See Contractual Obligations below.
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.
Capital allocation
Consistent with the objective to optimize our capital structure, we seek to deploy our accumulated cash balances in an efficient manner, and we consider several alternatives such as payment of dividends, stock repurchases, repayment of debt, and strategic transactions that expand our portfolio of products in areas of therapeutic interest.
We intend to continue to invest in our business and return capital to stockholders through the payment of cash dividends and stock repurchases reflecting our confidence in the future cash flows of our business. The timing and amount of future dividends and stock repurchases will vary based on a number of factors, including future capital requirements for strategic transactions, the availability of financing on acceptable terms, debt service requirements, our credit rating, changes to applicable tax laws or corporate laws, changes to our business model and periodic determination by our Board of Directors that cash dividends and/or stock repurchases are in the best interests of stockholders and are in compliance with applicable laws and agreements of the Company. In addition, the timing and amount of stock repurchases may also be affected by the stock price and blackout periods, during which we are restricted from repurchasing stock. The manner of stock repurchases may include private block purchases, tender offers and market transactions.
The Board of Directors declared quarterly cash dividends of $1.00 per share of common stock paid in 2016, increased our quarterly cash dividend by 15% to $1.15 per share of common stock paid in 2017, and increased our quarterly cash dividend by 15% to $1.32 per share of common stock paid in 2018. In December 2018, the Board of Directors declared a cash dividend of $1.45 per share of common stock for the first quarter of 2019, an increase of 10% for this period, to be paid in March 2019.
We have also returned capital to stockholders through our stock repurchase program. During 2018, we repurchased $17.9 billion of common stock and had cash settlements of $17.8 billion, which included 52.1 million shares of common stock repurchased through a $10.0 billion tender offer. In 2017 and 2016, we repurchased $3.1 billion and $3.0 billion of our common stock, respectively. As of December 31, 2018, $5.1 billion remained available under the stock repurchase program.
As a result of stock repurchases, including our recent tender offer, and quarterly dividend payments, we have an accumulated deficit as of December 31, 2018 and 2017. Our accumulated deficit is not expected to affect our future ability to operate, repurchase stock, pay dividends or repay our debt given our continuing profitability and strong financial position.
We believe that existing funds, cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital; capital expenditure and debt service requirements; our plans to pay dividends and repurchase stock; and other business initiatives we plan to strategically pursue, including acquisitions and licensing activities. We anticipate that our liquidity needs can be met through a variety of sources, including cash provided by operating activities, sales of marketable securities, borrowings through commercial paper and/or syndicated credit facilities and access to other domestic and foreign debt
markets and equity markets. See Part I, Item 1A. Risk Factors-Global economic conditions may negatively affect us and may magnify certain risks that affect our business.
Financing arrangements
The current and noncurrent portions of our long-term borrowings as of December 31, 2018, were $4.4 billion and $29.5 billion, respectively. The current and noncurrent portions of our long-term borrowings as of December 31, 2017, were $1.2 billion and $34.2 billion, respectively. As of December 31, 2018, Standard & Poor’s Financial Services LLC (S&P), Moody’s Investors Service, Inc. (Moody’s) and Fitch Ratings Inc. (Fitch) assigned credit ratings to our outstanding senior notes of A with a stable outlook, Baa1 with a stable outlook and BBB with a stable outlook, respectively, which are considered investment grade. Unfavorable changes to these ratings may have an adverse impact on future financings.
During 2018, we did not issue any debt or debt securities. During 2017 and 2016, we issued debt with aggregate principal amounts of $4.5 billion and $7.3 billion, respectively. During 2018, 2017 and 2016, we repaid debt of $1.1 billion, $4.4 billion and $3.7 billion, respectively.
To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that effectively converted a fixed-rate interest coupon for certain of our debt issuances to a floating London Interbank Offered Rates (LIBOR)-based coupon over the life of the respective note. These interest rate swap contracts qualify and are designated as fair value hedges. As of December 31, 2018 and 2017, we had interest rate swap contracts with aggregate notional amounts of $10.95 billion and $9.45 billion, respectively.
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, which effectively convert the interest payments and principal repayment of the respective notes from euros, pounds sterling and Swiss francs to U.S. dollars. These cross-currency swap contracts qualify and are designated as cash flow hedges. As of December 31, 2018 and 2017, we had cross-currency swap contracts with aggregate notional amounts of $5.6 billion.
As of December 31, 2018, we had a commercial paper program that allows us to issue up to $2.5 billion of unsecured commercial paper to fund our working-capital needs. During 2017, we issued and repaid an aggregate of $12.3 billion commercial paper and had a maximum outstanding balance of $1.5 billion under our commercial paper program. During 2018 and 2016, we did not issue any commercial paper. No commercial paper was outstanding as of December 31, 2018 or 2017.
In 2014, we entered into a $2.5 billion syndicated, unsecured, revolving credit agreement which is available for general corporate purposes or as a liquidity backstop to our commercial paper program. The commitments under the revolving credit agreement may be increased by up to $500 million with the agreement of the banks. Each bank which is a party to the agreement has an initial commitment term of five years. We extended this term by one year during 2016 and may extend the term for an additional year with the agreement of the banks. Annual commitment fees for this agreement are 0.09% of the unused portion of the facility based on our current credit rating. Generally, we would be charged interest at LIBOR plus 1% for any amounts borrowed under this facility. As of December 31, 2018 and 2017, no amounts were outstanding under this facility.
In 2017, we filed a shelf registration statement with the SEC that allows us to issue unspecified amounts of debt securities; common stock; preferred stock; warrants to purchase debt securities, common stock, preferred stock or depositary shares; rights to purchase common stock or preferred stock; securities purchase contracts; securities purchase units; and depositary shares. Under this shelf registration statement, all of the securities available for issuance may be offered from time to time with terms to be determined at the time of issuance. This shelf registration statement expires in February 2020.
Certain of our financing arrangements contain nonfinancial covenants. In addition, our revolving credit agreement includes a financial covenant, which was modified during 2018. The modified covenant requires that we maintain a specified minimum interest coverage ratio of (i) the sum of consolidated net income, interest expense, provision for income taxes, depreciation expense, amortization expense, unusual or nonrecurring charges and other noncash items (Consolidated EBITDA) to (ii) Consolidated Interest expense, each as defined and described in the amended credit agreement. We were in compliance with all applicable covenants under these arrangements as of December 31, 2018.
See Part IV-Note 16, Financing arrangements, and Note 19, Derivative instruments, to the Consolidated Financial Statements.
Cash flows
Our summarized cash flow activity was as follows (in millions):
Operating
Cash provided by operating activities has been and is expected to continue to be our primary recurring source of funds. Cash provided by operating activities increased during 2018 due primarily to improvements in working capital, offset partially by higher payments to taxing authorities. Cash provided by operating activities increased during 2017 due primarily to higher operating margin and the timing of payments to vendors and receipts from customers, offset partially by higher payments to taxing authorities.
Investing
Cash provided by investing activities during 2018 was due primarily to net cash inflows related to marketable securities of $15.0 billion and cash used in investing activities during 2017 and 2016 was due primarily to net cash outflows related to marketable securities of $3.2 billion, and $7.7 billion, respectively. Capital expenditures, which were associated primarily with site development costs, including our Thousand Oaks campus, as well as the new next-generation biomanufacturing facility in Rhode Island and life-cycle investments across the manufacturing network, were $738 million, $664 million and $738 million in 2018, 2017 and 2016, respectively. We currently estimate 2019 spending on capital projects to be approximately $700 million.
Financing
Cash used in financing activities during 2018 was due primarily to repurchases of our common stock of $17.8 billion, the payment of dividends of $3.5 billion, repayment of debt of $1.1 billion and withholding taxes arising from shares withheld for share-based payments of $126 million. Cash used in financing activities during 2017 was due primarily to the payment of dividends of $3.4 billion, repurchases of our common stock of $3.2 billion and withholding taxes arising from shares withheld for share-based payments of $191 million, offset partially by proceeds from the issuance of debt, net of repayment, of $71 million. Cash used in financing activities during 2016 was due primarily to the payment of dividends of $3.0 billion, repurchases of our common stock of $3.0 billion and withholding taxes arising from shares withheld for share-based payments of $260 million, offset partially by proceeds from the issuance of debt, net of repayment, of $3.6 billion.
See Part IV-Note 16, Financing arrangements, and Note 17, Stockholders’ equity, to the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that are material or reasonably likely to become material to our consolidated financial position or consolidated results of operations.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which we cannot reasonably predict future payment. Additionally, the expected timing of payment of the obligations presented below is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the timing of receipt of goods or services or changes to agreed-upon terms or amounts for some obligations.
The following table represents our contractual obligations aggregated by type (in millions):
(1)
Long-term debt obligations include future interest payments on our fixed-rate obligations at the contractual coupon rates. To achieve a desired mix of fixed-rate and floating-rate debt, we enter into interest rate swap contracts that effectively convert a fixed-rate interest coupon for certain of our debt issuances to a floating LIBOR-based coupon over the terms of the related hedge contracts. We used an interest rate forward curve as of December 31, 2018, in computing net amounts to be paid or received under our interest rate swap contracts, which resulted in an aggregate net increase in future interest payments of $77 million. See Part IV-Note 16, Financing arrangements, to the Consolidated Financial Statements.
(2)
Long-term debt obligations include future interest payments on our LIBOR-based variable-rate obligations. We used an interest rate forward curve as of December 31, 2018, in computing the LIBOR-based portion of interest payments on these debt obligations. See Part IV-Note 16, Financing arrangements, to the Consolidated Financial Statements.
(3)
Long-term debt obligations include contractual interest payments and principal repayment of our foreign-denominated debt obligations. In order to hedge our exposure to foreign currency exchange rate risk associated with certain of our euro-, pound-sterling- and Swiss-franc-denominated long-term debt, we enter into cross-currency swap contracts that effectively convert interest payments and principal repayment on this debt from euros, pounds sterling and Swiss francs to U.S. dollars. For purposes of this table, we used the contracted exchange rates in the cross-currency swap contracts to compute the net amounts of future interest payments and principal repayments on this debt. See Part IV-Note 19, Derivative instruments, to the Consolidated Financial Statements.
(4)
Operating lease obligations exclude $203 million of future receipts under noncancelable subleases of abandoned facilities.
(5)
Purchase obligations relate primarily to: (i) R&D commitments (including those related to clinical trials) for new and existing products; (ii) capital expenditures; and (iii) open purchase orders for the acquisition of goods and services in the ordinary course of business. Our obligation to pay certain of these amounts may be reduced based on certain future events.
(6)
Under the 2017 Tax Act, we elected to pay the repatriation tax related primarily to our prior indefinitely invested earnings of our foreign operations in eight annual installments. See Part IV-Note 7, Income taxes, to the Consolidated Financial Statements.
(7)
Liabilities for UTBs (net of foreign tax credits and federal tax benefit of state taxes) and related accrued interest and penalties of $2.6 billion as of December 31, 2018, are not included in the table above because, due to their nature, there is a high degree of uncertainty regarding the timing of future cash outflows and other events that extinguish these liabilities.
In addition to amounts in the table above, we are contractually obligated to pay additional amounts, which in the aggregate are significant, upon the achievement of various development, regulatory and commercial milestones for agreements we have entered into with third parties, including contingent consideration incurred in the acquisition of K-A and BioVex Group Inc. (BioVex). These payments are contingent upon the occurrence of various future events, substantially all of which have a high degree of uncertainty of occurring. These contingent payments have not been included in the table above, and, except with respect to the fair value of the contingent consideration obligations, are not recorded on our Consolidated Balance Sheets. As of December 31, 2018, the maximum amount that may be payable in the future for agreements we have entered into with third parties is $7.5 billion, including $325 million of contingent consideration payments in connection with the acquisition of BioVex. Contingent consideration with respect to the acquisition of Dezima Pharma B.V. was excluded due to the discontinuation of the development of AMG 899, upon which payments are based. See Part IV-Note 18, Fair value measurement, to the Consolidated Financial Statements.
Summary of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions.
Product sales and sales deductions
Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon delivery, based on an amount that reflects the consideration to which we expect to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively, sales deductions) and returns established at the time of sale.
We analyze the adequacy of our accruals for sales deductions quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that adjustment is appropriate. Accruals are also adjusted to reflect actual results. Amounts recorded in Accrued liabilities in the Consolidated Balance Sheets for sales deductions were as follows (in millions):
For the years ended December 31, 2018, 2017 and 2016, total sales deductions were 39%, 35% and 31% of gross product sales, respectively. The increase in the total sales deductions balance as of December 31, 2018 compared to December 31, 2017, was driven primarily by the impact of higher sales, increases in U.S. rebates and chargebacks, as well as timing of payments. Included in the amounts are immaterial net adjustments related to prior-year sales due to changes in estimates. Such amounts represent less than 1% of the aggregate sales deductions charged against product sales in the years ended December 31, 2016, 2017 and 2018.
In the United States, we utilize wholesalers as the principal means of distributing our products to healthcare providers, such as physicians or their clinics, dialysis centers, hospitals and pharmacies. Products we sell in Europe are distributed principally to hospitals and/or wholesalers depending on the distribution practice in each country where the products are sold. We monitor the inventory levels of our products at our wholesalers by using data from our wholesalers and other third parties, and we believe wholesaler inventories have been maintained at appropriate levels (generally two to three weeks) given end-user demand. Accordingly, historical fluctuations in wholesaler inventory levels have not significantly affected our method of estimating sales deductions and returns.
Accruals for sales deductions are based primarily on estimates of the amounts earned or to be claimed on the related sales. These estimates take into consideration current contractual and statutory requirements, specific known market events and trends, internal and external historical data and forecasted customer buying patterns. Sales deductions are substantially product specific and therefore, for any given year, can be affected by the mix of products sold.
Rebates include primarily amounts paid to payers and providers in the United States, including those paid to state Medicaid programs, and are based on contractual arrangements or statutory requirements, which vary by product, by payer and by individual payer plans. As we sell products, we estimate the amount of rebate we will pay based on the product sold, contractual terms, estimated patient population, historical experience and wholesaler inventory levels, and we accrue these rebates in the period the related sales are 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 because of the time delay between the date of sale and the actual settlement of the liability. We believe the methodology we use to accrue for rebates is reasonable and appropriate given current facts and circumstances, but actual results may differ.
Wholesaler chargebacks relate to our contractual agreements to sell products to healthcare providers in the United States at fixed prices that are lower than the prices we charge wholesalers. When healthcare providers purchase our products through wholesalers at these reduced prices, wholesalers charge us for the difference between their purchase prices and the contractual prices between Amgen and the healthcare providers. The provision for chargebacks is based on the expected sales by our wholesaler customers to healthcare providers. Accruals for wholesaler chargebacks are less difficult to estimate than rebates are, and they closely approximate actual results since chargeback amounts are fixed at the date of purchase by the healthcare providers and because we generally settle the liability for these deductions within a few weeks.
Product returns
Returns are estimated through comparison of historical return data to their related sales on a production lot basis. Historical rates of return are determined for each product and are adjusted for known or expected changes in the marketplace specific to each product, when appropriate. In each of the past three years, sales return provisions have amounted to less than 1% of gross product sales. Changes in estimates for prior-year sales return provisions have historically been immaterial.
Income taxes
We provide for income taxes based on pretax income and applicable tax rates in the various jurisdictions in which we operate.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the consolidated financial statements for a particular tax position is measured based on the largest benefit that is more likely than not to be realized. The amount of UTBs is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We believe our estimates for uncertain tax positions are appropriate and sufficient for any assessments that may result from examinations of our tax returns. We recognize both accrued interest and penalties, where appropriate, related to UTBs in income tax expense.
Certain items are included in our tax return at different times than they are reflected in the financial statements and cause temporary differences between the tax bases of assets and liabilities and their reported amounts. Such temporary differences create deferred tax assets and liabilities. Deferred tax assets are generally items that can be used as a tax deduction or credit in the tax return in future years but for which we have already recorded the tax benefit in the consolidated financial statements. We establish valuation allowances against our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities are either: (i) tax expenses recognized in the consolidated financial statements for which payment has been deferred; (ii) expenses for which we have already taken a deduction on the tax return, but have not yet recognized the expense in the consolidated financial statements; or (iii) liabilities for the difference between the book basis and tax basis of the intangible assets acquired in many business combinations, as future expenses associated with these assets most often will not be tax deductible.
We are a vertically integrated enterprise with operations in the United States and various foreign jurisdictions. We are subject to income tax in the foreign jurisdictions where we conduct activities based on the tax laws and principles of such jurisdictions and the functions, risks and activities performed therein. Our pretax income is therefore attributed to domestic or foreign sources based on the operations performed and risks assumed in each location and the tax laws and principles of the respective taxing jurisdictions. For example, we conduct significant operations in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes, pertaining to manufacturing, distribution and other related functions to meet our worldwide product demand. Income from our operations in Puerto Rico is subject to tax incentive grants through 2035.
On December 22, 2017, the United States enacted the 2017 Tax Act, which imposes a repatriation tax on accumulated earnings of foreign subsidiaries, imposes a current tax on certain foreign earnings and lowers the general corporate income tax rate to 21%. In December 2017, the SEC staff issued SAB 118, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have completed our accounting for the tax effects of the 2017 Tax Act, including the repatriation tax, the net deferred tax remeasurement and the impact on our unrealized tax benefits. None of the adjustments we made to our provisional amounts were material to our consolidated financial statements.
As previously disclosed, we received a RAR from the IRS for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. Final resolution of this complex matter is not likely within the next 12 months and could have a material impact on our consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the
complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. See Part IV-Note 7, Income taxes, to the Consolidated Financial Statements.
Our operations are subject to the tax laws, regulations and administrative practices of the United States, U.S. state jurisdictions and other countries, including the U.S. territory of Puerto Rico, in which we do business. Significant changes in these rules could have a material adverse effect on our results of operations. See Part I, Item 1A. Risk Factors-The adoption and interpretation of new tax legislation or exposure to additional tax liabilities could affect our profitability.
Contingencies
In the ordinary course of business, we are involved in various legal proceedings, government investigations and other matters such as intellectual property disputes, contractual disputes and class action suits which are complex in nature and have outcomes that are difficult to predict. We describe our legal proceedings and other matters that are significant or that we believe could become significant in Part IV-Note 20, Contingencies and commitments, to the Consolidated Financial Statements. 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.
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.
Valuation of assets and liabilities in connection with business combinations
We have acquired and continue to acquire intangible assets in connection with business combinations. These intangible assets consist primarily of technology associated with currently marketed human therapeutic products and IPR&D product candidates. Discounted cash flow models are typically used to determine the fair values of these intangible assets for purposes of allocating consideration paid to the net assets acquired in a business combination. See Part IV-Note 3, Business combinations, to the Consolidated Financial Statements. These models require the use of significant estimates and assumptions, including, but not limited to:
•
determining the timing and expected costs to complete in-process projects, taking into account the stage of completion at the acquisition date;
•
projecting the probability and timing of obtaining marketing approval from the FDA and other regulatory agencies for product candidates;
•
estimating the timing of and future net cash flows from product sales resulting from completed products and in-process projects; and
•
developing appropriate discount rates to calculate the present values of the cash flows.
Significant estimates and assumptions are also required to determine the acquisition date fair values of any contingent consideration obligations incurred in connection with business combinations. In addition, we must revalue these obligations each subsequent reporting period until the related contingencies are resolved and record changes in their fair values in earnings. The acquisition date fair values of contingent consideration obligations incurred or assumed in the acquisitions of businesses were determined using a combination of valuation techniques. Significant estimates and assumptions required for these valuations included, but were not limited to, the probability of achieving regulatory milestones, product sales projections under various scenarios and discount rates used to calculate the present value of the required payments. These estimates and assumptions are required to be updated in order to revalue these contingent consideration obligations each reporting period. Accordingly, subsequent changes in underlying facts and circumstances could result in changes in these estimates and assumptions, which could have a material impact on the estimated future fair values of these obligations.
We believe the fair values used to record intangible assets acquired and contingent consideration obligations incurred in connection with business combinations are based on reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.
Impairment of long-lived assets
We review the carrying value of our property, plant and equipment and our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such circumstances exist, an estimate of undiscounted future cash flows to be generated by the long-lived asset is compared to the
carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value.
Indefinite-lived intangible assets, composed of IPR&D projects acquired in a business combination that have not reached technological feasibility or that lack regulatory approval at the time of acquisition, are reviewed for impairment annually, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and upon establishment of technological feasibility or regulatory approval. We determine impairment by comparing the fair value of the asset to its carrying value. If the asset’s carrying value exceeds its fair value, an impairment charge is recorded for the difference and its carrying value is reduced accordingly.
Estimating future cash flows of an IPR&D product candidate for purposes of an impairment analysis requires us to make significant estimates and assumptions regarding the amount and timing of costs to complete the project and the amount, timing and probability of achieving revenues from the completed product similar to how the acquisition date fair value of the project was determined, as described above. There are often major risks and uncertainties associated with IPR&D projects as we are required to obtain regulatory approvals in order to be able to market these products. Such approvals require completing clinical trials that demonstrate a product candidate is safe and effective. Consequently, the eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods which could have a material adverse effect on our results of operations.
We believe our estimations of future cash flows used for assessing impairment of long-lived assets are based on reasonable assumptions given the facts and circumstances as of the related dates of the assessments.
Recently Issued Accounting Standards
See Part IV-Note 1, Summary of significant accounting policies, to the Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 31, 2018.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks that may result from changes in interest rates, foreign currency exchange rates and prices of equity instruments as well as changes in general economic conditions in the countries where we conduct business. To reduce certain of these risks, we enter into various types of foreign currency and interest rate derivative hedging transactions as part of our risk management program. We do not use derivatives for speculative trading purposes.
In the discussion that follows, we have assumed a hypothetical change in interest rates of 100 basis points from those as of December 31, 2018 and 2017. We have also assumed a hypothetical 20% change in foreign currency exchange rates against the U.S. dollar based on its position relative to other currencies as of December 31, 2018 and 2017.
Interest-rate-sensitive financial instruments
Our portfolio of available-for-sale interest-bearing securities as of December 31, 2018 and 2017, was composed of U.S. Treasury securities and other government-related debt securities, corporate debt securities, residential mortgage-backed and other mortgage- and asset-backed securities, money market mutual funds and other short-term interest-bearing securities composed principally of commercial paper. The fair values of our investment portfolio of interest-bearing securities were $28.7 billion and $41.2 billion as of December 31, 2018 and 2017, respectively. Duration is a sensitivity measure that can be used to approximate the change in the value of a security that will result from a 100 basis point change in interest rates. Applying a duration model, a hypothetical 100 basis point increase in interest rates as of December 31, 2018 and 2017, would have resulted in reductions in the fair values of these securities of $360 million and $1.1 billion, respectively, on these dates. In addition, a hypothetical 100 basis point decrease in interest rates as of December 31, 2018 and 2017, would not result in a material effect on income in the respective ensuing year.
As of December 31, 2018, we had outstanding debt with a carrying value of $33.9 billion and a fair value of $35.0 billion. As of December 31, 2017, we had outstanding debt with a carrying value of $35.3 billion and a fair value of $38.6 billion. Our outstanding debt was composed primarily of debt with fixed interest rates, with variable-rate debt having carrying values of $850 million as of December 31, 2018 and 2017. Changes in interest rates do not affect interest expense on fixed-rate debt. Changes in interest rates would, however, affect the fair values of fixed-rate debt. A hypothetical 100 basis point decrease in interest rates relative to interest rates as of December 31, 2018 and 2017, would have resulted in increases of $2.6 billion and $3.3 billion, respectively, in the aggregate fair value of our outstanding debt on each of these dates. Analysis of the debt does not consider the impact that hypothetical changes in interest rates would have on the related interest rate swap contracts and cross-currency swap contracts, discussed below.
To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that qualified and were designated for accounting purposes as fair value hedges for certain of our fixed-rate debt. These interest rate swap contracts effectively converted a fixed-rate interest coupon to a floating-rate LIBOR-based coupon over the life of the respective note. Interest rate swap contracts with aggregate notional amounts of $10.95 billion and $9.45 billion were outstanding as of December 31, 2018 and 2017, respectively. A hypothetical 100 basis point increase in interest rates relative to interest rates as of December 31, 2018 and 2017, would have resulted in reductions in fair values of $460 million and $420 million, respectively, on our interest rate swap contracts on these dates and would not result in a material effect on the related income in the respective ensuing years. Analysis of the interest rate swap contracts does not consider the impact that hypothetical changes in interest rates would have on the related fair values of debt that these interest-rate-sensitive instruments were designed to offset.
As of December 31, 2018 and 2017, we had outstanding cross-currency swap contracts with aggregate notional amounts of $5.6 billion that hedge certain of our foreign-currency-denominated debt and related interest payments. These contracts effectively convert interest payments and principal repayment of this debt to U.S. dollars from euros, pounds sterling and Swiss francs and are designated for accounting purposes as cash flow hedges. A hypothetical 100 basis point adverse movement in interest rates relative to interest rates as of December 31, 2018 and 2017, would have resulted in reductions in the fair values of our cross-currency swap contracts of $320 million and $390 million, respectively.
Foreign-currency-sensitive financial instruments
Our international operations are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies, predominantly the euro. Increases and decreases in our international product sales from movements in foreign currency exchange rates are offset partially by the corresponding increases or decreases in our international operating expenses. Increases and decreases in our foreign-currency-denominated assets from movements in foreign currency exchange rates are offset partially by the corresponding increases or decreases in our foreign-currency-denominated liabilities. To further reduce our net exposure to foreign currency exchange rate fluctuations on our results of operations, we enter into foreign currency forward, option and cross-currency swap contracts.
As of December 31, 2018, we had outstanding euro-, pound-sterling- and Swiss-franc-denominated debt with a principal carrying value and fair value of $5.3 billion and $5.6 billion, respectively. As of December 31, 2017, we had outstanding euro-, pound-sterling- and Swiss-franc-denominated debt with a principal carrying value and fair value of $6.2 billion and $6.7 billion, respectively. A hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates as of December 31, 2018, would have resulted in an increase in fair value of this debt of $1.1 billion on this date and a reduction in income in the ensuing year of $1.1 billion. A hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates as of December 31, 2017, would have resulted in an increase in fair value of this debt of $1.3 billion on this date and a reduction in income in the ensuing year of $1.2 billion. The impact on income from these hypothetical changes in foreign currency exchange rates would be substantially offset by the impact such changes would have on related cross-currency swap contracts, which are in place for the related foreign-currency-denominated debt.
We have cross-currency swap contracts that are designated as cash flow hedges of certain of our debt denominated in euros, pounds sterling and Swiss francs with an aggregate notional amount of $5.6 billion, as of December 31, 2018 and 2017. A hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates on these dates would have resulted in reductions in the fair values of these contracts of $1.2 billion and $1.3 billion on these dates, respectively. The impact of this hypothetical adverse movement in foreign currency exchange rates on ensuing years’ income from these contracts would be fully offset by the corresponding hypothetical changes in the carrying amounts of the related hedged debt.
We enter into foreign currency forward and options contracts that are designated for accounting purposes as cash flow hedges of certain anticipated foreign currency transactions. As of December 31, 2018, we had open foreign currency forward and option contracts, primarily euro based with notional amounts of $4.5 billion and $21 million, respectively. As of December 31, 2017, we had open foreign currency forward and option contracts, primarily euro based with notional amounts of $4.6 billion and $74 million, respectively. As of December 31, 2018 the fair values of these contracts were a $181 million asset and a $26 million liability. As of December 31, 2017 the fair values of these contracts were a $6 million asset and a $204 million liability. With regard to foreign currency forward and option contracts that were open as of December 31, 2018, a hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates as of December 31, 2018, would have resulted in a reduction in fair value of these contracts of $810 million on this date and, in the ensuing year, a reduction in income of $380 million. With regard to contracts that were open as of December 31, 2017, a hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates as of December 31, 2017, would have resulted in a reduction in fair value of these contracts of $930 million on this date and, in the ensuing year, a reduction in income of $360 million. The analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on anticipated transactions that these foreign-currency-sensitive instruments were designed to offset.
As of December 31, 2018 and 2017, we had open foreign currency forward contracts with notional amounts of $737 million and $757 million, respectively, that hedged fluctuations of certain assets and liabilities denominated in foreign currencies but were not designated as hedges for accounting purposes. These contracts had no material net unrealized gains or losses as of December 31, 2018 and 2017. With regard to these foreign currency forward contracts that were open as of December 31, 2018 and 2017, a hypothetical 20% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates on these dates would not have a material effect on the fair values of these contracts or related income in the respective ensuing years. The analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on assets and liabilities that these foreign-currency-sensitive instruments were designed to offset.
Market-price-sensitive financial instruments
As of December 31, 2018 and 2017, we were also exposed to price risk on equity securities included in our portfolio of investments, which were acquired primarily for the promotion of business and strategic objectives. These investments are generally in small-capitalization stocks in the biotechnology industry sector. Price risk relative to our equity investment portfolio as of December 31, 2018 and 2017, was not material.
Counterparty credit risks
Our financial instruments, including derivatives, are subject to counterparty credit risk, which we consider as part of the overall fair value measurement. Our financial risk management policy limits derivative transactions by requiring transactions to be with institutions with minimum credit ratings of A- or equivalent by S&P, Moody’s or Fitch and requires placing exposure limits on the amount with any individual counterparty. In addition, we have an investment policy that limits investments to certain types of debt and money market instruments issued by institutions primarily with investment-grade credit ratings and places restriction on maturities and concentrations by asset class and issuer.
Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to the financial statements and schedule listed in Item 15(a)1 and (a)2 of Part IV and included in this Annual Report on Form 10-K.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.
Item 9A.
CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures,” as such term is defined under the Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in Amgen’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Amgen’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, Amgen’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and in reaching a reasonable level of assurance Amgen’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation under the supervision and with the participation of our management, including Amgen’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Amgen’s disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2018.
Management determined that, as of December 31, 2018, there were no changes in our internal control over financial reporting that occurred during the fiscal quarter then ended that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States. However, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013 framework). Based on our assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
The effectiveness of the Company’s internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report appearing below, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Amgen Inc.
Opinion on Internal Control over Financial Reporting
We have audited Amgen Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Amgen Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Amgen Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 and our report dated February 13, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Los Angeles, California
February 13, 2019
Item 9B.
Item 9B.
OTHER INFORMATION
Not applicable.
PART III
Item 10.
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our Directors is incorporated by reference from the section entitled ITEM 1 - ELECTION OF DIRECTORS in our Proxy Statement for the 2019 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2018 (the Proxy Statement). Information about compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the section entitled OTHER MATTERS-Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement. Information about the procedures by which stockholders may recommend nominees for the Board of Directors is incorporated by reference from APPENDIX A-AMGEN INC. BOARD OF DIRECTORS GUIDELINES FOR DIRECTOR QUALIFICATIONS AND EVALUATIONS and OTHER MATTERS-Stockholder Proposals for the 2020 Annual Meeting in our Proxy Statement. Information about our Audit Committee, members of the committee and our Audit Committee financial experts is incorporated by reference from the section entitled CORPORATE GOVERNANCE-Audit Committee in our Proxy Statement. Information about our executive officers is contained in the discussion entitled Part I-Item 1. Business-Executive Officers of the Registrant.
Code of Ethics
We maintain a Code of Ethics for the Chief Executive Officer and Senior Financial Officers applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, and other persons performing similar functions. To view this code of ethics free of charge, please visit our website at www.amgen.com. (This website address is not intended to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing.) We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics, if any, by posting such information on our website as set forth above.
Information about director and executive compensation is incorporated by reference from the section entitled EXECUTIVE COMPENSATION in our Proxy Statement. Information about compensation committee matters is incorporated by reference from the sections entitled CORPORATE GOVERNANCE-Compensation and Management Development Committee and CORPORATE GOVERNANCE-Compensation Committee Report in our Proxy Statement.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities Authorized for Issuance Under Existing Equity Compensation Plans
The following table sets forth certain information as of December 31, 2018, concerning the shares of our common stock that may be issued under any form of award granted under our equity compensation plans in effect as of December 31, 2018 (including upon the exercise of options, the vesting of awards of restricted stock units (RSUs), or when performance units are earned, and related dividend equivalents have been granted).
(1)
The Amended and Restated 2009 Equity Incentive Plan employs a fungible share counting formula for determining the number of shares available for issuance under the plan. In accordance with this formula, each option or stock appreciation right counts as one share, while each restricted stock unit, performance unit or dividend equivalent counts as 1.9 shares. The number under column (a) represents the actual number of shares issuable under our outstanding awards without giving effect to the fungible share counting formula. The number under column (c) represents the number of shares available for issuance under this plan based on each such available share counting as one share. Commencing with the grants made in April 2012, RSUs and performance units accrue dividend equivalents that are payable in shares only to the extent and when the underlying RSUs vest or underlying performance units have been earned and the related shares are issued to the grantee. The performance units granted under this plan are earned based on the accomplishment of specified performance goals at the end of their respective three-year performance periods; the number of performance units granted represent target performance and the maximum number of units that could be earned based on our performance is 200% of the performance units granted in 2016, 2017 and 2018.
As of December 31, 2018, the number of outstanding awards under column (a) includes: (i) 4,412,073 shares issuable upon the exercise of outstanding options with a weighted-average exercise price of $143.61; (ii) 3,365,817 shares issuable upon the vesting of outstanding RSUs (including 172,613 related dividend equivalents); and (iii) 2,123,085 shares subject to outstanding 2016, 2017 and 2018 performance units (including 94,881 related dividend equivalents). The weighted-average exercise price shown in column (b) is for the outstanding options only. The number of available shares under column (c) represents the number of shares that remain available for future issuance under this plan as of December 31, 2018, employing the fungible share formula and presumes the issuance of target shares under the performance units granted in 2016, 2017 and 2018 and related dividend equivalents. The numbers under columns (a) and (c) do not give effect to the additional shares that could be issuable in the event above target on the performance goals under these outstanding performance units are achieved. Maximum performance under these goals could result in 200% of target shares being awarded for performance units granted in 2016, 2017 and 2018.
(2)
This plan has terminated as to future grants. The number under column (a) with respect to this plan includes 17,030 shares issuable upon the settlement of deferred RSUs (including 2,577 related dividend equivalents).
(3)
The Amgen Profit Sharing Plan for Employees in Ireland (the Profit Sharing Plan) was approved by the Board of Directors on July 28, 2011. The Profit Sharing Plan permits eligible employees of the Company’s subsidiaries located in Ireland who participate in the Profit Sharing Plan to apply a portion of their qualifying bonus and salary to the purchase the Company’s common stock on the open market at the market price by a third-party trustee as described in the Profit Sharing Plan.
Security Ownership of Directors and Executive Officers and Certain Beneficial Owners
Information about security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS and SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS in our Proxy Statement.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information about certain relationships and related transactions and director independence is incorporated by reference from the sections entitled CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS and CORPORATE GOVERNANCE-Director Independence in our Proxy Statement.
Item 14.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information about the fees for professional services rendered by our independent registered public accountants is incorporated by reference from the section entitled AUDIT MATTERS-Independent Registered Public Accountants in our Proxy Statement.
PART IV
Item 15.
Item 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)1.
The following Consolidated Financial Statements are included herein:
(a)2.
Index to Financial Statement Schedules
The following Schedule is filed as part of this Annual Report on Form 10-K:
Page
number
II. Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not required or because the required information is included in the consolidated financial statements or notes thereto.
(a)3.
Exhibits
____________________________
(* = filed herewith)
(** = furnished herewith and not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended)
(+ = management contract or compensatory plan or arrangement)
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMGEN INC.
(Registrant)
Date:
February 13, 2019
By:
/S/ DAVID W. MELINE
David W. Meline
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
•
Registration Statement (Form S-8 No. 333-159377) pertaining to the Amgen Inc. 2009 Equity Incentive Plan;
•
Registration Statement (Form S-8 No. 33-39183) pertaining to the Amended and Restated Employee Stock Purchase Plan;
•
Registration Statements (Form S-8 No. 33-39104, as amended by Form S-8 Nos. 333-144581 and 333-216719) pertaining to the Amended and Restated Amgen Retirement and Savings Plan (formerly known as the Amgen Retirement and Savings Plan);
•
Registration Statements (Form S-8 Nos. 33-47605, 333-144580 and 333-216715) pertaining to the Retirement and Savings Plan for Amgen Manufacturing, Limited (formerly known as the Retirement and Savings Plan for Amgen Manufacturing, Inc.);
•
Registration Statements (Form S-8 Nos. 333-81284, 333-177868 and 333-216723) pertaining to the Amgen Nonqualified Deferred Compensation Plan;
•
Registration Statement (Form S-3 No. 333-216060) relating to debt securities, common stock, preferred stock, warrants to purchase debt securities, common stock, preferred stock or depositary shares, rights to purchase common stock or preferred stock, securities purchase contracts, securities purchase units and depositary shares of Amgen Inc. and in the related Prospectus; and
•
Registration Statement (Form S-8 No. 333-176240) pertaining to the Amgen Profit Sharing Plan for Employees in Ireland;
of our reports dated February 13, 2019, with respect to the consolidated financial statements of Amgen Inc. and the effectiveness of internal control over financial reporting of Amgen Inc. included in this Annual Report (Form 10-K) of Amgen Inc. for the year ended December 31, 2018.
/s/ Ernst & Young LLP
Los Angeles, California
February 13, 2019
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David W. Meline, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming that said attorney-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Amgen Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Amgen Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a)2 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 13, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1980.
Los Angeles, California
February 13, 2019
AMGEN INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2018, 2017 and 2016
(In millions, except per-share data)
See accompanying notes.
AMGEN INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2018, 2017 and 2016
(In millions)
See accompanying notes.
AMGEN INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2018 and 2017
(In millions, except per-share data)
See accompanying notes.
AMGEN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2018, 2017 and 2016
(In millions)
See accompanying notes.
AMGEN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2018, 2017 and 2016
(In millions)
See accompanying notes.
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
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.
Principles of consolidation
The 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 consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.
Revenues
Adoption of new revenue recognition standard
In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new revenue recognition standard and clarifying standards require an entity to recognize revenue when control of promised goods or services is transferred to the customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this new standard as of January 1, 2018, by applying the modified-retrospective method to those contracts that were not completed as of that date.
The results for reporting periods beginning after January 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods.
Upon adoption, we recorded a net decrease of $25 million to Accumulated deficit due to the cumulative impact of adopting the new standard-with the impact related primarily to the acceleration of deferred revenue, net of related deferred tax impact. The adoption of this new standard had an immaterial impact on our reported total revenues and operating income as compared to what reported amounts would have been under the prior standard, and we expect the impact of adoption in future periods to also be immaterial. Our accounting policies under the new standard were applied prospectively and are described below. See Note 4, Revenues.
Product sales and sales deductions
Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon delivery, based on an amount that reflects the consideration to which we expect to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively, sales deductions) and returns established at the time of sale.
We analyze the adequacy of our accruals for sales deductions quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that an adjustment is appropriate. Accruals are also adjusted to reflect actual results. Accruals for sales deductions are based primarily on estimates of the amounts earned or to be claimed on the related sales. These estimates take into consideration current contractual and statutory requirements, specific known market events and trends, internal and external historical data and forecasted customer buying patterns. Sales deductions are substantially product specific and therefore, for any given period, can be affected by the mix of products sold. Included in sales deductions are immaterial net adjustments related to prior-period sales due to changes in estimates. Historically, such amounts have represented less than 1% of the aggregate sales deductions charged against product sales.
Returns are estimated through comparison of historical return data to their related sales on a production lot basis. Historical rates of return are determined for each product and are adjusted for known or expected changes in the marketplace specific to each product, when appropriate. Historically, sales return provisions have amounted to less than 1% of gross product sales. Changes in estimates for prior-period sales return provisions have historically been immaterial.
Our payment terms vary by types and locations of customers and the products or services offered. Payment terms differ by jurisdiction and customer, but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation. For certain products or services and certain customer types, we may require payment before products are delivered or services are rendered to customers.
Indirect taxes collected from customers and remitted to government authorities and that are related to sales of the Company’s products, primarily in Europe, are excluded from revenues.
As a practical expedient, sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in Selling, general and administrative expense in the Consolidated Statements of Income.
Other revenues
Other revenues consist primarily of royalty income and corporate partner revenues. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Royalty estimates are based on historical and forecasted sales trends. Corporate partner revenues are composed mainly of license fees and milestones earned and our share of commercial profits generated from collaborations. See Arrangements with multiple-performance obligations, discussed below.
Arrangements with multiple-performance obligations
From time to time, we enter into arrangements for the research and development (R&D), manufacture and/or commercialization of products and product candidates. Such arrangements may require us to deliver various rights, services and/or goods, including intellectual property rights/licenses, R&D services, manufacturing services and/or commercialization services. The underlying terms of these arrangements generally provide for consideration to Amgen in the form of nonrefundable upfront license fees, development and commercial performance milestone payments, royalty payments and/or profit sharing.
In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available.
The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods or services is transferred. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. We utilize the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.
Research and development costs
R&D costs are expensed as incurred and include primarily salaries, benefits and other staff-related costs; facilities and overhead costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs; information systems’ costs; and amortization of acquired technology used in R&D with alternative future uses. R&D expenses also include costs and cost recoveries associated with third-party R&D arrangements, including upfront fees and milestones paid to third parties in connection with technologies that had not reached technological feasibility and did not have an alternative future use. Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the cost recovery. See Note 9, Collaborations.
Selling, general and administrative costs
Selling, general and administrative (SG&A) costs are composed primarily of salaries, benefits and other staff-related costs associated with sales and marketing, finance, legal and other administrative personnel; facilities and overhead costs; outside marketing, advertising and legal expenses; the U.S. healthcare reform federal excise fee on Branded Prescription Pharmaceutical Manufacturers and Importers; and other general and administrative costs. Advertising costs are expensed as incurred and were $674 million, $620 million and $489 million during the years ended December 31, 2018, 2017 and 2016, respectively. SG&A expenses also include costs and cost recoveries associated with marketing and promotion efforts under certain collaborative
arrangements. Net payment or reimbursement of SG&A costs is recognized when the obligations are incurred or we become entitled to the cost recovery. See Note 9, Collaborations.
Stock-based compensation
We have stock-based compensation plans under which various types of equity-based awards are granted, including restricted stock units (RSUs), performance units and stock options. The fair values of RSUs and stock option awards, which are subject only to service conditions with graded vesting, are recognized as compensation expense, generally on a straight-line basis over the service period, net of estimated forfeitures. The fair values of performance unit awards are recognized as compensation expense, generally on a straight-line basis from the grant date to the end of the performance period. See Note 5, Stock-based compensation.
Income taxes
We provide for income taxes based on pretax income and applicable tax rates in the various jurisdictions in which we operate. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. Deferred income taxes are recorded for the expected tax consequences of temporary differences between the bases of assets and liabilities, as well as for loss and tax credit carryforwards for financial reporting purposes and amounts recognized for income tax purposes. We record a valuation allowance to reduce our deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the consolidated financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits (UTBs) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to UTBs in income tax expense. See Note 7, Income taxes.
Business combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method, assets acquired, including in-process research and development (IPR&D) projects, and liabilities assumed are recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with a business combination (including the assumption of an acquiree’s liability arising from a business combination it consummated prior to our acquisition) are recorded at their fair values on the acquisition date and remeasured at their fair values each subsequent reporting period until the related contingencies are resolved. The resulting changes in fair values are recorded in earnings. See Note 3, Business combinations, and Note 18, Fair value measurement.
Cash equivalents
We consider cash equivalents to be only those investments that are highly liquid, readily convertible to cash and which mature within three months from the date of purchase.
Interest-bearing securities
We consider our interest-bearing securities investment portfolio available-for-sale, and accordingly, these investments are recorded at fair value, with unrealized gains and losses recorded in Accumulated other comprehensive income (loss) (AOCI). Investments with maturities beyond one year may be classified as short-term marketable securities in the Consolidated Balance Sheets due to their highly liquid nature and because they represent the Company’s investments that are available for current operations. See Note 11, Investments, and Note 18, Fair value measurement.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost, which includes amounts related to materials, labor and overhead, is determined in a manner that approximates the first-in, first-out method. Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. See Note 12, Inventories.
Derivatives
We recognize all of our derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. The accounting for changes in the fair value of a derivative instrument depends on whether the derivative has been formally designated and qualifies as part of a hedging relationship under the applicable accounting standards and, further, on the type of
hedging relationship. For derivatives formally designated as hedges, we assess both at inception and quarterly thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. Our derivatives that are not designated and do not qualify as hedges are adjusted to fair value through current earnings. See Note 18, Fair value measurement, and Note 19, Derivative instruments.
Property, plant and equipment, net
Property, plant and equipment is recorded at historical cost, net of accumulated depreciation, amortization and, if applicable, impairment charges. We review our property, plant and equipment assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation is provided over the assets’ useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. See Note 13, Property, plant and equipment.
Goodwill and other intangible assets
Finite-lived intangible assets are recorded at cost, net of accumulated amortization, and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis or based on the pattern in which economic benefits are consumed, if reliably determinable. We review our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 14, Goodwill and other intangible assets.
The fair values of IPR&D projects acquired in a business combination that are not complete are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related R&D efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. There are often major risks and uncertainties associated with IPR&D projects as we are required to obtain regulatory approvals in order to be able to market the resulting products. Such approvals require completing clinical trials that demonstrate a product candidate is safe and effective. Consequently, the eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods.
Capitalized IPR&D projects are tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We consider various factors for potential impairment, including the current legal and regulatory environment and the competitive landscape. Adverse clinical trial results, significant delays in obtaining marketing approval, the inability to bring a product to market and the introduction or advancement of competitors’ products could result in partial or full impairment of the related intangible assets.
We perform an impairment test of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To date, an impairment of goodwill has not been recorded. See Note 14, Goodwill and other intangible assets.
Contingencies
In the ordinary course of business, we are involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. Certain of these proceedings are discussed in Note 20, Contingencies and commitments. 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.
Foreign currency translation
The net assets of international subsidiaries whose local currencies have been determined to be the functional currencies are translated into U.S. dollars using current exchange rates. The U.S. dollar effects that arise from translating net assets of these subsidiaries at changing rates are recognized in AOCI. The earnings of these subsidiaries are translated into U.S. dollars using average exchange rates.
Other recently adopted pronouncements
In January 2016, the FASB issued a new accounting standard that amends the accounting and disclosures of financial instruments, including a provision requiring that equity investments (except for investments accounted for under the equity method of accounting) be measured at fair value, with changes in fair value recognized in current earnings. With the exception of equity investments that were previously accounted for at cost, a modified-retrospective approach was used to reflect the cumulative-effect of adoption as an adjustment to Accumulated deficit as of the beginning of the fiscal year. The new standard will be applied prospectively to investments currently that were previously accounted for at cost. Upon adoption, on January 1, 2018, we recorded
an immaterial adjustment to Accumulated deficit from AOCI, which represented the net unrealized gain on all equity investments with readily determinable fair values as of December 31, 2017. The impact that this new standard has on our consolidated statements of income after adoption will depend on changes in fair values of equity securities in our portfolio in the future. See Note 11, Investments.
In October 2016, the FASB issued a new accounting standard that amends the income tax accounting guidance for intra-entity transfers of assets other than inventory. The new standard requires that entities recognize the income tax consequences of an intercompany transfer of an asset, other than inventory, in the period the transfer occurs. The current exception to defer the recognition of any tax impact on intercompany transfers of inventory until the inventory is sold to a third party remains unaffected. We adopted this standard as of January 1, 2018, and will apply it to any transaction occurring on or after the adoption date. The adoption of this standard did not have a material impact on our consolidated financial statements; however, the impact on our consolidated financial statements in future periods will depend on the facts and circumstances of future transactions.
In January 2017, the FASB issued a new accounting standard that changes the definition of a business to assist entities with the evaluation of when a set of assets acquired or disposed of should be considered a business. The new standard requires that an entity evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets; if so, the set of assets would not be considered a business. The new standard also requires that a business include at least one substantive process, and it narrows the definition of outputs. We adopted this standard as of January 1, 2018. Adoption of this new standard may result in more transactions being accounted for as asset acquisitions versus business combinations; however, the impact on our consolidated financial statements in future periods will depend on the facts and circumstances of future transactions.
In August 2017, the FASB issued a new accounting standard that amends the accounting and reporting of hedging activities, which we elected to adopt early during the second quarter of 2018. Among its provisions, the new standard (i) eliminates the separate measurement and reporting of hedge ineffectiveness and (ii) permits an entity to recognize in earnings the initial fair value of an excluded component of a hedging instrument’s fair value under a systematic and rational method over the life of the derivative instrument. In accordance with the transition provisions of the new standard, the separate measurement of ineffectiveness for our cash flow hedging instruments existing as of the date of adoption is required to be eliminated through a cumulative-effect adjustment to Accumulated deficit as of January 1, 2018, the beginning of the fiscal year. In addition, certain provisions in the guidance require modifications to existing presentation and disclosure requirements on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements. See Note 19, Derivative instruments.
Other recent accounting pronouncements
In February 2016, the FASB issued a new accounting standard that amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize on the balance sheet the assets and liabilities that arise from leases, including leases classified as operating leases under current GAAP, and disclose qualitative and quantitative information about leasing arrangements. The new standard requires a modified-retrospective approach to adoption and is effective for interim and annual periods beginning on January 1, 2019. In July 2018, the FASB further amended this standard to allow for a new transition method that offers the option to use the effective date as the date of initial application. We intend to elect this alternative transition method and therefore will not adjust comparative-period financial information. In addition, we intend to elect the package of practical expedients permitted under the transition guidance of the new standard to not reassess prior conclusions related to contracts that are or that contain leases, lease classification and initial direct costs. We do not expect that this standard will have a material impact on our Consolidated Statements of Income. The primary effect of adoption will be the requirement to record the present value of lease liabilities for current operating leases and corresponding right-of-use (ROU) assets. Upon adoption, we estimate we will have additional liabilities ranging from $400 million to $450 million with corresponding ROU assets of a similar amount for lease agreements in effect as of December 31, 2018. The actual impact will depend on our lease portfolio at the time of adoption. We are currently finalizing the implementation of the lease accounting information system, documenting processes, and establishing internal controls to properly track, record and account for our lease portfolio. The new standard also provides practical expedients for the ongoing accounting. We also currently expect to elect the practical expedient to not separate lease and nonlease components for most of our asset classes.
In June 2016, the FASB issued a new accounting standard that amends the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the incurred-loss model with an expected-loss model. Accordingly, these financial assets will be presented at the net amount expected to be collected. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The new standard is effective for interim and annual periods beginning on January 1, 2020, but may be adopted earlier, beginning on January 1, 2019. With certain exceptions, adjustments are to be applied using a modified-retrospective approach by reflecting adjustments through a cumulative-effect impact on retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impact that this new standard will have on our consolidated financial statements.
2. Restructuring
In 2014, we initiated a restructuring plan to invest in continuing innovation and the launch of our new pipeline molecules, while improving our cost structure. As part of the plan, we closed facilities in Washington State and Colorado and are reducing the number of buildings we occupy at our headquarters in Thousand Oaks, California, as well as at other locations. We completed the activities associated with this restructuring plan in 2018.
Through December 31, 2018, we incurred $548 million of separation costs and other headcount-related costs for staff reductions and $261 million of net asset-related charges, which consist primarily of asset impairments, accelerated depreciation and other related costs resulting from the consolidation of our worldwide facilities. During the years ended December 31, 2018, 2017 and 2016, we incurred restructuring costs of $12 million, $88 million and $37 million, respectively. As of December 31, 2018 and 2017, the restructuring liabilities were not significant.
3. Business combinations
Kirin-Amgen, Inc.
During the first quarter of 2018, we acquired the remaining 50% ownership of Kirin-Amgen, Inc. (K-A), from Kirin Holdings Company, Limited (Kirin), making K-A a wholly owned subsidiary of Amgen. Upon its acquisition, K-A’s operations have been included in our consolidated financial statements commencing on the share acquisition date. The acquisition relieved Amgen of future royalty obligations to K-A.
Prior to the share acquisition date, we owned 50% of K-A and accounted for our interest in K-A by using the equity method of accounting. See Note 10, Related party transactions.
The transaction was accounted for as a step acquisition of a business in which we were required to remeasure our existing 50% ownership interest at fair value. In addition, we were required to effectively settle our preexisting relationship with K-A, which resulted in a loss. Together the gain on the remeasurement of our existing ownership interest and the loss from the settlement of the preexisting relationship resulted in a net gain of $80 million, which was recorded in Interest and other income, net, in the Consolidated Statements of Income.
The primary means of consideration for this transaction was a payment of $780 million in cash. The aggregate share acquisition date consideration to acquire the remaining 50% ownership in K-A and the fair value of Amgen’s preacquisition investment consisted of the following (in millions):
In connection with this acquisition, we are obligated to make single-digit royalty payments to Kirin contingent upon sales of brodalumab. The estimated fair value of this contingent consideration obligation was $45 million as of the share acquisition date.
The fair values of assets acquired and liabilities assumed consisted of cash of $977 million, licensing rights of $470 million, deferred tax liabilities of $102 million, other assets and liabilities of $131 million and goodwill of $6 million. The estimated fair value of acquired licensing rights was determined by using a probability-weighted-income approach, which discounts expected future cash flows to present value by using a discount rate that represents the estimated rate that market participants would use to value the assets. The projected cash flows were based on certain assumptions, including estimates of future revenues and expenses and the time and resources needed to maintain the assets through commercialization. The licensing rights will be amortized over a weighted-average period of four years by using the straight-line method. The excess of the share acquisition date consideration over the fair values assigned to the assets acquired and the liabilities assumed of $6 million was recorded as goodwill, which is not deductible for tax purposes. The $131 million in other assets and liabilities represents primarily receivables for royalties earned by K-A but not yet received, offset partially by payables representing R&D expenses incurred but not yet reimbursed by K-A.
Pro forma results of operations for this acquisition have not been presented because this acquisition is not material to our consolidated results of operations.
4. Revenues
We operate in one business segment: human therapeutics. Therefore, results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Revenues by product and by geographic area, based on customers’ locations, are presented below. Rest-of-world (ROW) revenues relate to products that are sold principally in Europe.
Revenues were as follows (in millions):
____________
(1)
Hedging gains and losses, which are included in product sales, were not material for the years ended December 31, 2018 and 2017. For the year ended December 31, 2016, hedging gains were $308 million.
(2)
Prior-period amounts are not adjusted under the modified-retrospective method of adoption of the new revenue recognition accounting standard.
5. Stock-based compensation
Our Amended and Restated 2009 Equity Incentive Plan (the Amended 2009 Plan) authorizes for issuance to employees of Amgen, employees of Amgen subsidiaries and nonemployee members of our Board of Directors shares of our common stock pursuant to grants of equity-based awards, including RSUs, stock options and performance units. The pool of shares available under the Amended 2009 Plan is reduced by one share for each stock option granted and by 1.9 shares for other types of awards granted, including RSUs and performance units (full-value awards). In general, if any shares subject to an award granted under the Amended 2009 Plan expire or become forfeited, terminated or canceled without the issuance of shares, the shares subject to such awards are added back into the authorized pool on the same basis that they were removed. In addition, under the Amended 2009 Plan, shares withheld to pay for minimum statutory tax obligations with respect to full-value awards are added back into the authorized pool on the basis of 1.9 shares. As of December 31, 2018, the Amended 2009 Plan provides for future grants and/or issuances of up to 32 million shares of our common stock. Stock-based awards under our employee compensation plans are made with newly issued shares reserved for this purpose.
The following table reflects the components of stock-based compensation expense recognized in our Consolidated Statements of Income (in millions):
Restricted stock units and stock options
Eligible employees generally receive an annual grant of RSUs and, for certain executive-level employees, stock options, with the size and type of award generally determined by the employee’s salary grade and performance level. In 2016, we reinstated the practice of granting stock options to eligible employees annually, which had been suspended from 2012 through 2015. In addition, certain management and professional-level employees typically receive RSU grants upon commencement of employment. Nonemployee members of our Board of Directors also receive an annual grant of RSUs.
Our RSU and stock option grants provide for accelerated or continued vesting in certain circumstances as defined in the plans and related grant agreements, including upon death, disability, termination in connection with a change in control and the retirement of employees who meet certain service and/or age requirements. RSUs and stock options generally vest in equal amounts on the second, third and fourth anniversaries of the grant date. RSUs accrue dividend equivalents, which are typically payable in shares, only when and to the extent the underlying RSUs vest and are issued to the recipient.
Restricted stock units
The grant date fair value of an RSU equals the closing price of our common stock on the grant date, as RSUs accrue dividend equivalents during their vesting period. The weighted-average grant date fair values of RSUs granted during the years ended December 31, 2018, 2017 and 2016, were $179.18, $163.99 and $156.76, respectively.
The following table summarizes information regarding our RSUs:
The total grant date fair values of RSUs that vested during the years ended December 31, 2018, 2017 and 2016, were $167 million, $182 million and $193 million, respectively.
As of December 31, 2018, there was $304 million of unrecognized compensation cost related to nonvested restricted stock units and unvested stock options, which is expected to be recognized over a weighted-average period of 1.7 years.
Stock options
The exercise price of stock options is set as the closing price of our common stock on the grant date, and the related number of shares granted is fixed at that point in time. Awards expire 10 years from the date of grant. We use the Black-Scholes option valuation model to estimate the grant date fair value of stock options.
The weighted-average assumptions used in the option valuation model and the resulting weighted-average grant date fair values of stock options granted were as follows:
The following table summarizes information regarding our stock options:
The total intrinsic values of options exercised during the years ended December 31, 2018, 2017 and 2016, were $53 million, $60 million and $102 million, respectively. The actual tax benefits realized from tax deductions from option exercises during the years ended December 31, 2018, 2017 and 2016, were $12 million, $21 million and $37 million, respectively.
Performance units
Certain management-level employees also receive annual grants of performance units, which give the recipient the right to receive common stock that is contingent upon achievement of specified preestablished goals over the performance period, which is generally three years. The performance goals for the units granted during the years ended December 31, 2018, 2017 and 2016, which are accounted for as equity awards, are based on (i) Amgen’s stockholder return compared with a comparator group of companies, which are considered market conditions and are therefore reflected in the grant date fair values of the units, and (ii) Amgen’s stand-alone financial performance measures, which are considered performance conditions. The expense recognized for awards is based on the grant date fair value of a unit multiplied by the number of units expected to be earned with respect to the related performance conditions, net of estimated forfeitures. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of units greater or less than the number of units granted. Shares of our common stock are issued on a one-for-one basis for each performance unit earned. In general, performance unit awards vest at the end of the performance period. The performance award program provides for accelerated or continued vesting in certain circumstances as defined in the plan, including upon death, disability, a change in control and retirement of employees who meet certain service and/or age
requirements. Performance units accrue dividend equivalents that are typically payable in shares only when and to the extent the underlying performance units vest and are issued to the recipient, including with respect to market and performance conditions that affect the number of performance units earned.
We use a payout simulation model to estimate the grant date fair value of performance units. The weighted-average assumptions used in this model and the resulting weighted-average grant date fair values of performance units granted were as follows:
The payout simulation model assumes correlations of returns of the stock prices of our common stock and the common stocks of the comparator groups of companies and stock price volatilities of the comparator groups of companies to simulate stockholder returns over the performance periods and their resulting impact on the payout percentages based on the contractual terms of the performance units.
As of December 31, 2018 and 2017, 2.0 million and 2.2 million performance units were outstanding with weighted-average grant date fair values of $180.12 and $177.16 per unit, respectively. During the year ended December 31, 2018, 0.8 million performance units with a weighted-average grant date fair value of $189.21 were granted, and 0.2 million performance units with a weighted-average grant date fair value of $177.95 were forfeited.
The total fair values of performance units that vested during the years ended December 31, 2018, 2017 and 2016 were $133 million, $219 million and $347 million, respectively, based on the number of performance units earned multiplied by the closing stock price of our common stock on the last day of the performance period.
As of December 31, 2018, there was $131 million of unrecognized compensation cost, which is expected to be recognized over a weighted-average period of one year.
6. Defined contribution plan
The Company has defined contribution plans to which employees of the Company and participating subsidiaries may defer compensation for income tax purposes. Participants are eligible to receive matching contributions based on their contributions, in addition to other Company contributions. Defined contribution plan expenses were $173 million, $196 million and $174 million for the years ended December 31, 2018, 2017 and 2016, respectively.
7. Income taxes
On December 22, 2017, the United States enacted major tax reform legislation, Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (2017 Tax Act). The 2017 Tax Act imposes a repatriation tax on accumulated earnings of foreign subsidiaries, imposes a current tax on certain foreign earnings and lowers the general corporate income tax rate to 21%. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have completed our accounting for the tax effects of the 2017 Tax Act, including the repatriation tax, the net deferred tax remeasurement and the impact on our UTBs. None of the adjustments we made to our provisional amounts were material to our consolidated financial statements.
Income before income taxes included the following (in millions):
The provision for income taxes included the following (in millions):
Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, tax credit carryforwards and the tax effects of net operating loss (NOL) carryforwards. Significant components of our deferred tax assets and liabilities were as follows (in millions):
Valuation allowances are provided to reduce the amounts of our deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.
The valuation allowance increased in 2018 due primarily to the Company’s expectation that some state R&D credits will not be utilized.
As of December 31, 2018, we had $20 million of federal tax credit carryforwards available to reduce future federal income taxes and have provided no valuation allowance for those federal tax credit carryforwards. The federal tax credit carryforwards expire between 2026 and 2035. We had $556 million of state tax credit carryforwards available to reduce future state income taxes and have provided a valuation allowance for $444 million of those state tax credit carryforwards. A portion of the state credits for which no valuation allowance has been provided will expire between 2022 and 2024.
As of December 31, 2018, we had $145 million of federal NOL carryforwards available to reduce future federal income taxes and have provided a valuation allowance for $6 million of those federal NOL carryforwards. The federal NOL carryforwards, for which no valuation allowance has been provided, expire between 2020 and 2035. We had $287 million of state NOL carryforwards available to reduce future state income taxes and have provided a valuation allowance for $263 million of those state NOL carryforwards. The state NOLs for which no valuation allowance has been provided expire between 2019 and 2032. We had $1.8 billion of foreign NOL carryforwards available to reduce future foreign income taxes and have provided a valuation allowance for $485 million of those foreign NOL carryforwards. For the foreign NOLs with no valuation allowance provided, $620 million has no expiry; and the remainder will expire between 2019 and 2024.
The reconciliations of the total gross amounts of UTBs (excluding interest, penalties, foreign tax credits and the federal tax benefit of state taxes related to UTBs) were as follows (in millions):
Substantially all of the UTBs as of December 31, 2018, if recognized, would affect our effective tax rate. During the year ended December 31, 2018, we effectively settled various examinations with state tax authorities for prior tax years. As a result of these developments, we remeasured our UTBs accordingly.
Interest and penalties related to UTBs are included in our provision for income taxes. During the years ended December 31, 2018, 2017 and 2016, we recognized $137 million, $56 million and $125 million, respectively, of interest and penalties through the income tax provision in the Consolidated Statements of Income. As of December 31, 2018 and 2017, accrued interest and penalties associated with UTBs were $469 million and $332 million, respectively.
The reconciliations between the federal statutory tax rate applied to income before income taxes and our effective tax rate were as follows:
The effective tax rate for the year ended December 31, 2018 differs from the federal statutory rate due primarily to impacts of the jurisdictional mix of income and expenses. The effective tax rate for 2017 differs from the federal statutory rate primarily as a result of the 2017 Tax Act. The effective tax rate for 2016 differs from the federal statutory rate primarily as a result of indefinitely invested earnings of our foreign operations. Substantially all of the benefit to our effective tax rate from foreign earnings results from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign
jurisdiction for U.S. tax purposes and is subject to tax incentive grants through 2035; these earnings are also subject to U.S. tax at a reduced 10.5% rate.
The U.S. territory of Puerto Rico imposes an excise tax on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico. The rate of 4% is effective through December 31, 2027. 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.
Income taxes paid during the years ended December 31, 2018, 2017 and 2016, were $1.9 billion, $1.5 billion and $1.1 billion, respectively.
One or more of our legal entities file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and certain foreign jurisdictions. Our income tax returns are routinely examined by the tax authorities in those jurisdictions. Significant disputes may arise with authorities involving issues of the timing and amount of deductions, the use of tax credits and allocations of income and expenses among various tax jurisdictions because of differing interpretations of tax laws, regulations and the interpretation of the relevant facts. As previously disclosed, we received a Revenue Agent Report (RAR) from the Internal Revenue Service (IRS) for the years 2010, 2011 and 2012. The RAR proposes to make significant adjustments that relate primarily to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. In November 2017, we received a modified RAR that revised the IRS’s calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with the IRS administrative appeals office, which currently has jurisdiction over the matter. If we deem necessary, we will vigorously contest the proposed adjustments through the judicial process. Final resolution of this complex matter is not likely within the next 12 months and could have a material impact on our consolidated financial statements. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes, the ultimate resolution of any tax matters may result in payments greater or less than amounts accrued. We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009. In addition, we are currently under examination by a number of other state and foreign tax jurisdictions.
8. 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 primarily shares that may be issued under our stock option, restricted stock and performance unit award programs, as determined by using the treasury stock method (collectively, dilutive securities).
The computations for basic and diluted EPS were as follows (in millions, except per-share data):
For each of the three years ended December 31, 2018, the number of antidilutive employee stock-based awards excluded from the computation of diluted EPS was not significant.
9. Collaborations
A collaborative arrangement is a contractual arrangement that involves a joint operating activity. Such arrangements involve two or more parties that are both (i) active participants in the activity and (ii) exposed to significant risks and rewards dependent on the commercial success of the activity.
From time to time, we enter into collaborative arrangements for the R&D, manufacture and/or commercialization of products and/or product candidates. These collaborations generally provide for nonrefundable upfront license fees, development and commercial-performance milestone payments, cost sharing, royalty payments and/or profit sharing. Our collaboration arrangements are performed with no guarantee of either technological or commercial success, and each is unique in nature. See Note 1, Summary of significant accounting policies, for additional discussion of revenues recognized for these types of arrangements. Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line items in the consolidated statements of income, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Our significant arrangements are discussed below.
Novartis AG
In April 2017, we expanded our existing migraine collaboration with Novartis AG (Novartis). In the United States, Amgen and Novartis jointly develop and collaborate on the commercialization of Aimovig® (erenumab-aooe). Amgen, as the principal, recognizes product sales of Aimovig® in the United States, shares U.S. commercialization costs with Novartis and pays Novartis a significant royalty on net sales in the United States. Novartis holds global co-development rights and exclusive commercial rights outside the United States and Japan for Aimovig® and other specified migraine programs. Novartis pays Amgen double-digit royalties on net sales of the products in the Novartis exclusive territories and funds a portion of global R&D expenses. In addition, Novartis will make a payment to Amgen of up to $100 million if certain commercial and expenditure thresholds are achieved with respect to Aimovig® in the United States. Amgen manufactures and supplies Aimovig® worldwide.
The migraine collaboration will continue for the commercial lives of the products unless terminated in accordance with its terms.
During the year ended December 31, 2018, net costs paid to Novartis for migraine products were $44 million and were recorded primarily in Selling, general and administrative expense in the Consolidated Statements of Income. During the years ended December 31, 2017 and 2016, net costs recovered from Novartis for the migraine products were $124 million and $33 million, respectively, and were recorded primarily in Research and development expense in the Consolidated Statements of Income. During the year ended December 31, 2018, royalties due to Novartis for the migraine products were $43 million and were recorded in Cost of sales in the Consolidated Statements of Income. As a result of certain regulatory and commercial events, we received milestone payments from Novartis of $295 million and $60 million during the years ended December 31, 2018 and 2017, respectively, which were recorded in Other revenues in the Consolidated Statements of Income.
UCB
We are in a collaboration with UCB for the development and commercialization of EVENITYTM (romosozumab). Under our collaboration, UCB has the rights to lead commercialization for EVENITYTM for all indications in Europe, China (excluding Hong Kong) and Brazil. All other territories have been allocated to Amgen. Generally, development costs and future worldwide commercialization profits and losses related to the collaboration after accounting for expenses are shared equally. The collaboration agreement will continue in effect unless terminated earlier in accordance with its terms. During the years ended December 31, 2018, 2017 and 2016, net costs recovered from UCB were not material and were recorded primarily in Research and development expense in the Consolidated Statements of Income.
Bayer HealthCare Pharmaceuticals Inc.
We are in a collaboration with Bayer HealthCare Pharmaceuticals Inc. (Bayer) to jointly develop and commercialize Nexavar® (sorafenib) worldwide, except in Japan. The rights to develop and market Nexavar® in Japan are reserved to Bayer. Nexavar® is currently marketed and sold in more than 100 countries around the world for the treatment of unresectable liver cancer and advanced kidney cancer. In the United States, Nexavar® is also approved for the treatment of patients with locally recurrent or metastatic, progressive, differentiated thyroid carcinoma refractory to radioactive iodine treatment.
In 2015, we amended the terms of our collaboration agreement with Bayer, which terminated the co-promotion agreement in the United States and transferred all U.S. operational responsibilities to Bayer, including commercial and medical affairs activities. Prior to the termination of the co-promotion agreement, we co-promoted Nexavar® with Bayer and shared equally in the profits or losses in the United States. In lieu of this profit share, Bayer now pays Amgen a royalty on U.S. sales of Nexavar® at a percentage rate in the high 30s. Amgen no longer contributes sales force personnel or medical liaisons to support Nexavar®
in the United States. There are no changes to the global R&D or non-U.S. profit share arrangements in the original agreement, as discussed below.
In all countries outside the United States, excluding Japan, Bayer manages all commercialization activities and incurs all of the sales and marketing expenditures and mutually agreed R&D expenses, for which we continue to reimburse Bayer for half. In these countries, we continue to receive 50% of net profits on sales of Nexavar® after deducting certain Bayer-related costs.
The agreement with Bayer will terminate at the later of the date when patents expire that were issued in connection with product candidates discovered under the agreement or on the last day that we or Bayer market or sell products commercialized under the agreement anywhere in the world. Patents related to Nexavar® begin to expire in 2020.
During the years ended December 31, 2018, 2017 and 2016, Amgen recorded Nexavar® net profits of $164 million, $161 million and $167 million, respectively, which were recognized as Other revenues in the Consolidated Statements of Income. During the years ended December 31, 2018, 2017 and 2016, Amgen recorded royalty income of $91 million, $133 million and $137 million, respectively, in Other revenues in the Consolidated Statements of Income, pursuant to the 2015 amendment to the collaboration agreement. Net R&D expenses related to the agreement were not material for the years ended December 31, 2018, 2017 and 2016.
Other
In addition to the collaborations discussed above, we have various others that are not individually significant to our business at this time. Pursuant to the terms of those agreements, we may be required to pay or we may receive additional amounts upon the achievement of various development and commercial milestones, which in the aggregate could be significant. We may also incur or have reimbursed to us significant R&D costs if the related product candidate were to advance to late-stage clinical trials. In addition, if any products related to these collaborations are approved for sale, we may be required to pay or we may receive significant royalties on future sales. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurrence.
10. Related party transactions
As of December 31, 2017, we owned a 50% interest in K-A, a corporation formed in 1984 with Kirin for the development and commercialization of certain products based on advanced biotechnology. All of our rights to manufacture and market certain products including pegfilgrastim, filgrastim, darbepoetin alfa, recombinant human erythropoietin and romiplostim are pursuant to exclusive licenses from K-A, which we currently market under the brand names Neulasta®, NEUPOGEN® (filgrastim)/GRANULOKINE®, Aranesp®, EPOGEN® and Nplate® (romiplostim), respectively. During the first quarter of 2018, we acquired the remaining 50% ownership of K-A from Kirin, making K-A a wholly owned subsidiary of Amgen. The transaction was accounted for as a business combination. K-A’s results of operations are now included in our consolidated financial statements, and as a result, transactions between us and K-A are eliminated in consolidation. See Note 3, Business combinations. License agreements with Kirin and Johnson & Johnson (J&J) remain in place.
Prior to the share acquisition, we accounted for our interest in K-A using the equity method and included our share of K-A’s profits or losses in Selling, general and administrative expense in the Consolidated Statements of Income. Our share of K-A’s profits was insignificant for the period January 1, 2018 through the 2018 share acquisition date. For the years ended December 31, 2017 and 2016, our share of K-A’s profits was $68 million and $58 million, respectively. The carrying value of our equity method investment in K-A was $570 million as of December 31, 2017, and is included in Other assets in the Consolidated Balance Sheets.
K-A’s revenues consist of royalty income related to its licensed technology rights. Prior to the share acquisition, K-A received royalty income from us. K-A also received and continues to receive royalty income from Kirin and J&J under separate product license contracts for certain geographic areas outside the United States. Royalties earned by K-A from us were insignificant for the period January 1, 2018 through the 2018 share acquisition date. During the years ended December 31, 2017 and 2016, K-A earned royalties from us of $221 million and $239 million, respectively. These amounts are included in Cost of sales in the Consolidated Statements of Income.
K-A’s expenses consist primarily of costs related to R&D activities conducted on its behalf by us through the 2018 share acquisition and by Kirin. Payment for these services is based on negotiated rates. Revenues from K-A for certain R&D activities performed on K-A’s behalf were insignificant for the period January 1, 2018 through the 2018 share acquisition date. During the years ended December 31, 2017 and 2016, we earned revenues from K-A of $28 million and $31 million, respectively, for certain R&D activities performed on K-A’s behalf. These amounts were recognized as Other revenues in the Consolidated Statements of
Income. Cost recoveries from K-A recorded during the period January 1, 2018 through the 2018 share acquisition date and the years ended December 31, 2017 and 2016, were insignificant. These amounts are included in Research and development expense in the Consolidated Statements of Income.
As of December 31, 2017, we owed K-A $80 million, which is included in Accrued liabilities in the Consolidated Balance Sheets.
11. Investments
Available-for-sale investments
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available-for-sale investments by type of security were as follows (in millions):
The fair values of available-for-sale investments by location in the Consolidated Balance Sheets were as follows (in millions):
Cash and cash equivalents in the above table excludes bank account cash of $580 million and $509 million as of December 31, 2018 and 2017, respectively. Other assets as of December 31, 2017, consisted of equity securities, which are no longer classified as available-for-sale.
As a result of the adoption of the new accounting standard related to the classification and measurement of financial instruments on January 1, 2018, equity investments (except for investments accounted for under the equity method of accounting) are now measured at fair value, with changes in fair value recognized in earnings. These investments were previously measured at fair value, with changes in fair value recognized in AOCI. Accordingly, these securities are no longer classified as available-for-sale and their presentation is not comparable to the presentation as of December 31, 2017. See Equity securities, discussed below, and Note 1, Summary of significant accounting policies.
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):
For the years ended December 31, 2018, 2017 and 2016, realized gains on interest-bearing securities were $29 million, $147 million and $304 million, respectively, and realized losses on interest-bearing securities were $394 million, $213 million and $367 million, respectively. Realized gains and losses on interest-bearing securities are recorded in Interest and other income, net, in the Consolidated Statements of Income. The cost of securities sold is based on the specific-identification method.
The fair values and gross unrealized losses of available-for-sale investments in an unrealized loss position aggregated by type and length of time that the securities have been in a continuous loss position were as follows (in millions):
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 it 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. The 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, as well as adverse conditions related specifically to the security such as any changes to the credit rating of the security and the intent to sell or whether we will more likely than not be required to sell the security before recovery of its amortized cost basis. Our assessment of whether a security is other-than-temporarily impaired could change in the future based on new developments or changes in assumptions related to that particular security. As of December 31, 2018, unrealized losses on available-for-sale investments were due primarily to higher interest rates on that date than at the time the securities were purchased. As of December 31, 2018 and 2017, we believe the cost bases for our available-for-sale investments were recoverable in all material respects.
Equity securities
We held investments in equity securities with readily determinable fair values of $176 million and $149 million as of December 31, 2018 and 2017, respectively, which are included in Other assets in the Consolidated Balance Sheets. As a result of the adoption of the new accounting standard related to the classification and measurement of financial instruments on January 1, 2018, equity investments (except for investments accounted for under the equity method of accounting) are now measured at fair value, with changes in fair value recognized in earnings. These investments were previously measured at fair value, with changes in fair value recognized in AOCI. Accordingly, these securities are no longer classified as available-for-sale and their presentation is not comparable to the presentation as of December 31, 2017. See Available-for-sale investments, discussed above, and Note 1, Summary of significant accounting policies. Gains and losses recognized on equity securities with readily determinable fair values, including gains and losses recognized on sales, were not material for the years ended December 31, 2018, 2017 and 2016.
We held investments in equity securities without readily determinable fair values of $222 million and $95 million as of December 31, 2018 and 2017, respectively, which are included in Other assets in the Consolidated Balance Sheets. Adjustments to the carrying values of these securities were not material for the years ended December 31, 2018, 2017 and 2016.
Limited partnership investments
We held limited partnership investments of $285 million and $213 million as of December 31, 2018 and 2017, respectively, which are included in Other assets in the Consolidated Balance Sheets. These investments are measured by using the net asset values of the underlying investments as a practical expedient. These investments are typically redeemable only through distributions upon liquidation of the underlying assets. As of December 31, 2018, unfunded additional commitments to be made during the next several years for these investments were not material. Gains and losses recognized on our limited partnership investments were not material for the years ended December 31, 2018, 2017 and 2016.
12. Inventories
Inventories consisted of the following (in millions):
13. Property, plant and equipment
Property, plant and equipment consisted of the following (dollar amounts in millions):
During the years ended December 31, 2018, 2017 and 2016, we recognized depreciation and amortization expense associated with our property, plant and equipment of $630 million, $604 million and $619 million, respectively.
Geographic information
Certain geographic information with respect to property, plant and equipment, net (long-lived assets), was as follows (in millions):
14. Goodwill and other intangible assets
Goodwill
The changes in the carrying amounts of goodwill were as follows (in millions):
Other intangible assets
Other intangible assets consisted of the following (in millions):
Developed-product-technology rights consist of rights related to marketed products acquired in business combinations. Licensing rights consist primarily of contractual rights acquired in business combinations to receive future milestone, royalty and profit-sharing payments; capitalized payments to third parties for milestones related to regulatory approvals to commercialize products; and upfront payments associated with royalty obligations for marketed products. Licensing rights increased in 2018 due to the K-A share acquisition. See Note 3, Business combinations. Marketing-related rights assets consist primarily of rights related to the sale and distribution of marketed products. R&D technology rights consist of technology used in R&D with alternative future uses.
IPR&D consists of R&D projects acquired in a business combination that are not complete at the time of acquisition due to remaining technological risks and/or lack of receipt of required regulatory approvals. During 2018, we discontinued the internal development of a non-key program, resulting in an impairment charge of $330 million, which was recognized in Other operating expenses in the Consolidated Statements of Income and included in Other items, net, in the Consolidated Statements of Cash Flows.
All IPR&D projects have major risks and uncertainties associated with the timely and successful completion of the development and commercialization of product candidates, including our ability to confirm safety and efficacy based on data from clinical trials, our ability to obtain necessary regulatory approvals and our ability to successfully complete these tasks within budgeted costs. We are not permitted to market a human therapeutic without obtaining regulatory approvals, and such approvals require the completion of clinical trials that demonstrate that a product candidate is safe and effective. In addition, the availability and extent of coverage and reimbursement from third-party payers, including government healthcare programs and private insurance plans as well as competitive product launches, affect the revenues a product can generate. Consequently, the eventual realized value, if any, of acquired IPR&D projects may vary from their estimated fair values. We review IPR&D projects for impairment annually, whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable and upon the establishment of technological feasibility or regulatory approval.
During the years ended December 31, 2018, 2017 and 2016, we recognized amortization expenses associated with our finite-lived intangible assets of $1.3 billion, $1.3 billion and $1.5 billion, respectively. Amortization of intangible assets is included primarily in Cost of sales in the Consolidated Statements of Income. The total estimated amortization expenses for our finite-lived intangible assets for each of the next five years are $1.3 billion, $1.2 billion, $1.0 billion, $0.9 billion and $0.9 billion in 2019, 2020, 2021, 2022 and 2023, respectively.
15. Accrued liabilities
Accrued liabilities consisted of the following (in millions):
16. Financing arrangements
Our borrowings consisted of the following (in millions):
There are no material differences between the effective interest rates and coupon rates of any of our borrowings, except for the 4.563% 2048 Notes and the 4.663% 2051 Notes, which have effective interest rates of 6.3% and 5.6%, respectively.
Under the terms of all of our outstanding notes-including debt exchange issuances, discussed below, and except our Other notes due 2097-in the event of a change-in-control triggering event we may be required to purchase all or a portion of these debt securities at prices equal to 101% of the principal amounts of the notes plus accrued and unpaid interest. In addition, all of our outstanding notes-except our floating-rate notes, 0.41% 2023 Swiss franc Bonds and Other notes due 2097-may be redeemed at any time at our option-in whole or in part-at the principal amounts of the notes being redeemed plus accrued and unpaid
interest and make-whole amounts, which are defined by the terms of the notes. Certain of the redeemable notes do not require the payment of make-whole amounts if redeemed during a specified period of time immediately prior to the maturity of the notes. Such time periods range from one to six months prior to maturity.
Debt issuances
We did not issue any debt or debt securities during the year ended December 31, 2018. We issued debt and debt securities in various offerings during the years ended December 31, 2017 and 2016 as follows:
•
In 2017, we issued $4.5 billion principal amount of notes, consisting of the Floating Rate Notes due 2019, the 1.90% 2019 Notes, the Floating Rate Notes due 2020, the 2.20% 2020 Notes, the 2.65% 2022 Notes and the 3.20% 2027 Notes.
•
In 2016, we issued $6.7 billion principal amount of notes, consisting of the 1.85% 2021 Notes, the 1.25% 2022 euro Notes, the 0.41% 2023 Swiss franc Bonds, the 2.25% 2023 Notes, the 2.00% 2026 euro Notes and the 2.60% 2026 Notes and $1.0 billion of the 4.40% 2045 Notes. We received a $79 million premium on the 4.40% 2045 Notes. In addition, we borrowed $605 million under a short-term floating-rate loan.
As of December 31, 2018, we have a commercial paper program that allows us to issue up to $2.5 billion of unsecured commercial paper to fund our working-capital needs. During the year ended December 31, 2017, we issued and repaid an aggregate of $12.3 billion of commercial paper and had a maximum outstanding balance of $1.5 billion under our commercial paper program. During the years ended December 31, 2018 and 2016, we did not issue any commercial paper. No commercial paper was outstanding as of December 31, 2018 or 2017.
Debt repayments
In 2018, we repaid $1.1 billion of debt, including the $500 million aggregate principal amount of the 6.15% 2018 Notes and the €550 million aggregate principal amount of the 4.375% 2018 Notes revalued at $621 million upon maturity. In 2017, we repaid $4.4 billion of debt, including the $605 million short-term floating-rate loan, the $1.25 billion aggregate principal amount of the 2.125% 2017 Notes, the $600 million aggregate principal amount of the Floating Rate Notes due 2017, the $850 million aggregate principal amount of the 1.25% 2017 Notes and the $1.1 billion aggregate principal amount of the 5.85% 2017 Notes. In 2016, we repaid $3.7 billion of debt, including the remaining $1.975 billion of principal on a term loan credit facility, the $750 million aggregate principal amount of the 2.30% 2016 Notes and the $1.0 billion aggregate principal amount of the 2.50% 2016 Notes.
Debt exchange
During 2016, we completed a private offering to exchange portions of certain outstanding senior notes due 2037 through 2043 (collectively, the Old Notes), for new senior notes, consisting of principal amounts of $1.4 billion of 4.563% 2048 Notes and $3.5 billion of 4.663% 2051 Notes (collectively, the New Notes).
The New Notes bear lower fixed-coupon rates while requiring higher principal repayments on extended maturity dates compared with the Old Notes that were exchanged. There were no other significant changes to the terms between the Old Notes and the New Notes. The exchange was accounted for as a debt modification, and there were no cash payments to or cash receipts from the noteholders as a result of the exchange. Existing deferred financing costs associated with the Old Notes as well as discounts associated with the New Notes aggregating $801 million are being accreted over the term of the New Notes and recorded as Interest expense, net, in the Consolidated Statements of Income. Transaction costs of $24 million incurred for the exchange were expensed immediately in Interest and other income, net, in the Consolidated Statements of Income.
Interest rate swaps
To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that effectively converted fixed-rate interest coupons for certain of our debt issuances to floating London Interbank Offered Rate (LIBOR)-based coupons over the lives of the respective notes. These interest rate swap contracts qualified and are designated as fair value hedges.
The effective interest rates on notes for which we have entered into interest rate swap contracts and the related notional amounts of these contracts were as follows (dollar amounts in millions):
Cross-currency swaps
In order 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. The terms of these contracts effectively convert the interest payments and principal repayment on our 2.125% 2019 euro Notes, 1.25% 2022 euro Notes, 0.41% 2023 Swiss franc Bonds, 2.00% 2026 euro Notes, 5.50% 2026 pound sterling Notes and 4.00% 2029 pound sterling Notes from euros, pounds sterling and Swiss francs to U.S. dollars. These cross-currency swap contracts have been designated as cash flow hedges. For information regarding the terms of these contracts, see Note 19, Derivative instruments.
Shelf registration statements and other facilities
In 2014, we entered into a $2.5 billion syndicated, unsecured, revolving credit agreement, which is available for general corporate purposes or as a liquidity backstop to our commercial paper program. The commitments under the revolving credit agreement may be increased by up to $500 million with the agreement of the banks. Each bank that is a party to the agreement has an initial commitment term of five years. We extended this term by one year during 2016 and may extend the term for an additional year with the agreement of the banks. Annual commitment fees for this agreement are 0.09% of the unused portion of the facility based on our current credit rating. Generally, we would be charged interest at LIBOR plus 1% for any amounts borrowed under this facility. As of December 31, 2018 and 2017, no amounts were outstanding under this facility.
In 2017, we filed a shelf registration statement with the SEC that allows us to issue unspecified amounts of debt securities; common stock; preferred stock; warrants to purchase debt securities, common stock, preferred stock or depositary shares; rights to purchase common stock or preferred stock; securities purchase contracts; securities purchase units; and depositary shares. Under this shelf registration statement, all of the securities available for issuance may be offered from time to time with terms to be determined at the time of issuance. This shelf registration statement expires in February 2020.
Certain of our financing arrangements contain nonfinancial covenants. In addition, our revolving credit agreement includes a financial covenant, which was modified during 2018. The modified covenant requires that we maintain a specified minimum interest coverage ratio of (i) the sum of consolidated net income, interest expense, provision for income taxes, depreciation expense, amortization expense, unusual or nonrecurring charges and other noncash items (Consolidated EBITDA) to (ii) Consolidated Interest expense, each as defined and described in the amended credit agreement. We were in compliance with all applicable covenants under these arrangements as of December 31, 2018.
Contractual maturities of debt obligations
The aggregate contractual maturities of all borrowings due subsequent to December 31, 2018, are as follows (in millions):
Interest costs
Interest costs are expensed as incurred except to the extent such interest is related to construction in progress, in which case interest is capitalized. Interest costs capitalized for the years ended December 31, 2018, 2017 and 2016, were not material. Interest paid, including the ongoing impact of interest rate and cross-currency swap contracts, during the years ended December 31, 2018, 2017 and 2016, was $1.5 billion, $1.3 billion and $1.2 billion, respectively.
17. Stockholders’ equity
Stock repurchase program
Activity under our stock repurchase program, on a trade date basis, was as follows (in millions):
* Total shares do not add due to rounding.
In January, April and December 2018, our Board of Directors increased the amount authorized under our stock repurchase program by $10.0 billion, $5.0 billion and $3.6 billion, respectively. Repurchase activity for the year ended December 31, 2018, included 52.1 million shares of our common stock acquired under a tender offer at an aggregate cost of $10.0 billion. As of December 31, 2018, $5.1 billion remained available under our stock repurchase program.
Dividends
Our Board of Directors declared quarterly dividends per share of $1.32, $1.15 and $1.00, which were paid in each of the four quarters of 2018, 2017, and 2016, respectively.
Historically, we have declared dividends in December of each year, which were paid in the first quarter of the following fiscal year, and in March, July and October, which were paid in the second, third and fourth quarters, respectively, of the same fiscal year. Additionally, on December 7, 2018, the Board of Directors declared a quarterly cash dividend of $1.45 per share of common stock, which will be paid on March 8, 2019, to all stockholders of record as of the close of business on February 15, 2019.
Accumulated other comprehensive income (loss)
The components of AOCI were as follows (in millions):
____________
(1)
See Note 1, Summary of significant accounting policies, for additional information regarding the adoption on January 1, 2018, of the new accounting standard related to the classification and measurement of financial instruments and the related cumulative effect from the change in accounting principle.
With respect to the table above, income tax expenses or benefits for unrealized gains and losses and the related reclassification adjustments to income for cash flow hedges were a $21 million expense and $55 million expense in 2018, a $68 million expense and $226 million benefit in 2017 and a $68 million benefit and $46 million expense in 2016, respectively. Income tax expenses or benefits for unrealized gains and losses and the related reclassification adjustments to income for available-for-sale securities were a $9 million benefit and $3 million expense for 2018, a $9 million expense and $8 million benefit in 2017 and a $9 million benefit and $11 million expense in 2016, respectively.
Reclassifications out of AOCI and into earnings were as follows (in millions):
Other
In addition to common stock, our authorized capital includes 5 million shares of preferred stock, $0.0001 par value. As of December 31, 2018 and 2017, no shares of preferred stock were issued or outstanding.
18. 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 an 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 an 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
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Valuations based on inputs that are unobservable and significant to the overall fair value measurement
The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.
The fair values of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis were as follows (in millions):
Interest-bearing and equity securities
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 and have 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- or equivalent by Standard & Poor’s Financial Services LLC (S&P), Moody’s Investors Service, Inc. (Moody’s) or Fitch Ratings, Inc. (Fitch); and our corporate debt securities portfolio has weighted-average credit ratings of A- or equivalent by Fitch and BBB + or equivalent by S&P or Moody’s. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use 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. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.
Our residential-mortgage-, other-mortgage- and asset-backed-securities portfolio is composed entirely of senior tranches with credit ratings of AAA by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services use 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. The inputs include reported trades of and broker-dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment or 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.
Derivatives
All of our foreign currency forward and option derivative 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 estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses 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 and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts include implied volatility measures. These inputs, where applicable, are at commonly quoted intervals. See Note 19, 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 estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that uses 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 19, 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 estimate the fair values of these contracts by using an income-based industry-standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include LIBOR, swap rates and obligor credit default swap rates. See Note 19, Derivative instruments.
Contingent consideration obligations
As a result of our business acquisitions, we have incurred contingent consideration obligations, as discussed below. The contingent consideration obligations are recorded at their fair values by using probability-adjusted discounted cash flows, and we revalue these obligations each reporting period until the related contingencies have been resolved. The fair value measurements of these obligations are based on significant unobservable inputs related to licensing rights and product candidates acquired in business combinations, and are reviewed quarterly by management in our R&D and commercial sales organizations. These inputs include, as applicable, estimated probabilities and the timing of achieving specified regulatory and commercial milestones as well as estimated annual sales. Significant changes that increase or decrease the probabilities of achieving the related regulatory and commercial events or that shorten or lengthen the time required to achieve such events or that increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of the obligations, as applicable. Changes in the fair values of contingent consideration obligations are recognized in Other operating expenses in the Consolidated Statements of Income.
Changes in the carrying amounts of contingent consideration obligations were as follows (in millions):
As a result of our acquisition of K-A in 2018, we are obligated to make single-digit royalty payments to Kirin contingent upon sales of brodalumab. See Note 3, Business combinations.
As a result of our acquisition of Dezima in 2015, we are obligated to pay its former shareholders up to $1.25 billion of additional consideration contingent upon achieving certain development and sales-related milestones and low single-digit royalties on net product sales above a certain threshold for AMG 899, an IPR&D asset. The fair values of the contingent consideration obligations had an aggregate value of $110 million at acquisition. During 2017, we decided to discontinue the internal development of AMG 899 and accordingly, reduced from $116 million to zero the related contingent consideration liabilities and recognized an impairment charge of $400 million on the IPR&D asset in Other operating expenses in the Consolidated Statements of Income. The remeasurement of these liabilities and the impairment charge are included in Other items, net, in the Consolidated Statements of Cash Flows.
As a result of our acquisition of BioVex Group Inc. in 2011, we are obligated to pay its former shareholders up to $325 million upon achieving separate regulatory and sales-related milestones with regard to IMLYGIC® (talimogene laherparepvec) if certain sales thresholds are met within specified periods of time.
During the years ended December 31, 2018 and 2017, there were no transfers of assets or liabilities between fair value measurement levels. During the years ended December 31, 2018 and 2017, there were no material remeasurements to the fair values of assets and liabilities that are not measured at fair value on a recurring basis, except with respect to the IPR&D asset discussed above and in Note 14, Goodwill and other intangible assets.
Summary of the fair values of other financial instruments
Cash equivalents
The fair values of cash equivalents approximate their carrying values due to the short-term nature of such financial instruments.
Borrowings
We estimated the fair values of our borrowings by using Level 2 inputs. As of December 31, 2018 and 2017, the aggregate fair values of our borrowings were $35.0 billion and $38.6 billion, respectively, and the carrying values were $33.9 billion and $35.3 billion, respectively.
19. 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 such exposures, we use or have used 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.
During 2018, we adopted early a new accounting standard that amends the accounting and reporting of hedging activities. Certain required disclosures have been made on a prospective basis in accordance with the guidance of the standard. See Note 1, Summary of significant accounting policies.
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 corresponding increases and decreases in the cash flows from our international operating expenses resulting from these foreign currency exchange rate movements. To further reduce our exposure to foreign currency exchange rate fluctuations with regard to 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 December 31, 2018, 2017 and 2016, we had foreign currency forward contracts with notional amounts of $4.5 billion, $4.6 billion and $3.4 billion, respectively, and foreign currency option contracts with notional amounts of $21 million, $74 million and $608 million, respectively. We have designated these foreign currency forward and foreign currency option contracts, which are primarily euro based, as cash flow hedges. Accordingly, we report the unrealized gains and losses on these contracts in AOCI in the Consolidated Balance Sheets, and we reclassify them to Product sales in the Consolidated Statements of Income 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 debt denominated in foreign currencies, we enter into cross-currency swap contracts. Under the terms of such contracts, we paid euros, pounds sterling and Swiss francs and received U.S. dollars for the notional amounts at the inception of the contracts; and based on these notional amounts, we exchange interest payments at fixed rates over the lives of the contracts by paying U.S. dollars and receiving euros, pounds sterling and Swiss francs. In addition, we will pay U.S. dollars to and receive euros, pounds sterling and Swiss francs from the counterparties at the maturities of the contracts for these same notional amounts. The terms of these contracts correspond to the related hedged debt, thereby effectively converting the interest payments and principal repayment on the debt from euros, pounds sterling and Swiss francs to U.S. dollars. We have designated these cross-currency swap contracts as cash flow hedges. Accordingly, the unrealized gains and losses on these contracts are reported in AOCI in the Consolidated Balance Sheets and
reclassified to Interest and other income, net, in the Consolidated Statements of Income in the same periods during which the hedged debt affects earnings.
The notional amounts and interest rates of our cross-currency swaps as of December 31, 2018, were as follows (notional amounts in millions):
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 U.S. Treasury rate between the time we enter into these contracts and the time the related debt is issued. Gains and losses on forward interest rate contracts, which are designated as cash flow hedges, are recognized in AOCI in the Consolidated Balance Sheets and are amortized into Interest expense, net, in the Consolidated Statements of Income over the lives of the associated debt issuances. Amounts recognized in connection with forward interest rate swaps during the year ended December 31, 2018, and amounts expected to be recognized during the subsequent 12 months are not material.
The unrealized gains and losses recognized in AOCI for our derivative instruments designated as cash flow hedges were as follows (in millions):
The locations in the Consolidated Statements of Income and the gains and losses reclassified out of AOCI and into earnings for our derivative instruments designated as cash flow hedges were as follows (in millions):
No portions of our cash flow hedge contracts were excluded from the assessment of hedge effectiveness. As of December 31, 2018, the amount expected to be reclassified out of AOCI and into earnings during the next 12 months is $110 million of net losses on our foreign currency and cross-currency swap contracts.
Fair value hedges
To achieve a desired mix of fixed-rate and floating-rate debt, we entered into interest rate swap contracts that qualified for and were designated as fair value hedges. These interest rate swap contracts effectively convert fixed-rate coupons to floating-rate LIBOR-based coupons over the terms of the related hedge contracts. During the year ended December 31, 2018, we entered into $1.5 billion of interest rate swaps. As of December 31, 2018 and 2017, we had interest rate swap contracts with aggregate notional amounts of $10.95 billion and $9.45 billion, respectively, that hedge certain of our long-term debt issuances. See Note 16, Financing arrangements-Interest rate swaps.
For interest rate swap contracts that qualify for and are designated as fair value hedges, we recognize in Interest expense, net, in the Consolidated Statements of Income, 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. If a hedging relationship involving an interest rate swap contract is terminated, the gain or loss realized on contract termination is recorded as an adjustment to the carrying value of the debt and amortized into Interest expense, net, over the remaining life of the previously hedged debt.
Net unrealized gains and losses on our outstanding interest rate swap contracts were as follows (in millions):
The hedged liabilities and related cumulative-basis adjustments for fair value hedges of those liabilities were recorded in the Consolidated Balance Sheets as follows (in millions):
____________
(1)
Current portion of long-term debt includes $1.0 billion and $500 million of carrying value with discontinued hedging relationships as of December 31, 2018 and 2017, respectively. Long-term debt includes $137 million and $1.1 billion of carrying value with discontinued hedging relationships as of December 31, 2018 and 2017, respectively.
(2)
Current portion of long-term debt includes $3 million and $23 million of hedging adjustments on discontinued hedging relationships as of December 31, 2018 and 2017, respectively. Long-term debt includes $37 million and $40 million of hedging adjustments on discontinued hedging relationships as of December 31, 2018 and 2017, respectively.
The following table summarizes the amounts recorded in income and expense line items and the effects thereon from fair value and cash flow hedging, including discontinued hedging relationships (in millions):
__________
(1)
The amounts include benefits of $23 million related to the amortization of the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged debt for discontinued hedging relationships for the year ended December 31, 2018.
Derivatives not designated as hedges
To reduce our exposure to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies, we enter into foreign currency forward contracts that are not designated as hedging transactions. These exposures are hedged on a month-to-month basis. As of December 31, 2018, 2017 and 2016, the total notional amounts of these foreign currency forward contracts were $737 million, $757 million and $666 million, respectively. The fair values of these derivatives as of December 31, 2018 and 2017, were not material.
The location in the Consolidated Statements of Income and the amounts of gains (losses) recognized in earnings for our derivative instruments not designated as hedging instruments were as follows (in millions):
The fair values of derivatives included in the Consolidated Balance Sheets were as follows (in millions):
Our derivative contracts that were in liability positions as of December 31, 2018, 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 either to or from a counterparty under the contracts may be offset against other amounts due either to or from the same counterparty only if an event of default or termination, as defined, were to occur.
The cash flow effects of our derivative contracts are included within Net cash provided by operating activities in the Consolidated Statements of Cash Flows.
20. Contingencies and commitments
Contingencies
In the ordinary course of business, we are involved in various legal proceedings, government investigations and other matters that are complex in nature and have outcomes that are difficult to predict. See Part I, Item 1A. Risk Factors-Our business may be affected by litigation and government investigations. We describe our legal proceedings and other matters that are significant or that we believe could become significant in this footnote.
We record accruals for loss contingencies to the extent that we conclude 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 involve various aspects of our business and a variety of claims, some of which present novel factual allegations and/or unique legal theories. In each of the matters described in this filing in which we could incur a liability, our opponents 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 we face often extend for several years. As a result, none of the matters described in this filing in which we could incur a liability have progressed sufficiently through discovery and/or the 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. In addition, while some of the matters described in this filing do not present circumstances in which we could incur a liability (such as some matters involving our claims that others have infringed our patents and in which such others have not asserted counterclaims against us), such matters nevertheless have the potential to significantly impact our business. While it is not possible to accurately predict or determine the eventual outcomes of these matters, an adverse determination in one or more of these matters currently pending could have a material adverse effect on our consolidated results of operations, financial position or cash flows.
Certain recent developments concerning our legal proceedings and other matters are discussed below:
Sensipar® (cinacalcet) Abbreviated New Drug Application (ANDA) Patent Litigation
Amgen Inc. v. Aurobindo Pharma Ltd. et al.
Beginning in September 2016, Amgen filed 14 separate lawsuits in the U.S. District Court for the District of Delaware (the Delaware District Court) for infringement of our U.S. Patent No. 9,375,405 (the ’405 Patent) against a number of manufacturers of purported generic versions of our Sensipar® product. In February 2017, the Delaware District Court consolidated these 14 lawsuits into a single case, Amgen Inc. v. Aurobindo Pharma Ltd. et al. The ’405 Patent is entitled “Rapid Dissolution Formulation of a Calcium Receptor-Active Compound” and expires in 2026. All defendants responding to the complaint denied infringement and sought judgment that the ’405 Patent is invalid and/or not infringed. Between September and November of 2017, Amgen filed, and the Delaware District Court signed, stipulated dismissals of the lawsuit against Micro Labs Ltd. and Micro Labs USA, Inc., and the lawsuit against Apotex Inc. and Apotex Corp. (collectively, Apotex), as well as consent judgments filed by Amgen and each of (1) Sun Pharma Global FZE, Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively, Sun), (2) Ajanta Pharma Limited and Ajanta Pharma USA, Inc., (3) Hetero USA Inc., Hetero Labs Ltd. and Hetero Labs Ltd. Unit V and (4) Breckenridge Pharmaceutical, Inc. (Breckenridge). Each consent judgment stipulated to an entry of judgment of infringement and validity of the ’405 Patent and an injunction prohibiting the manufacture, use, sale, offer to sell, importation of, or distribution into the United States of the respective defendant’s cinacalcet product during the term of the ’405 Patent unless specifically authorized pursuant to the confidential settlement agreement.
In June 2017, Amgen filed four additional lawsuits in the Delaware District Court for infringement of the ’405 Patent against additional defendants. These defendants also responded to the complaint denying infringement and seeking a declaration of noninfringement and invalidity of the ’405 Patent. One of these lawsuits was subsequently consolidated into Amgen Inc. v. Aurobindo Pharma Ltd. et al. and the remaining three of these lawsuits were consolidated into a separate single case, Amgen Inc. v. Alkem et al. (see below).
On March 5, 2018, the Delaware District Court commenced trial on the infringement claims and defenses in the Amgen Inc. v. Aurobindo Pharma Ltd. et al. consolidated lawsuit against the defendants that remained in the lawsuit, collectively consisting of (1) Aurobindo Pharma Ltd. and Aurobindo Pharma USA, Inc. (collectively, Aurobindo), (2) Watson Laboratories, Inc. and Actavis Pharma, Inc. (collectively, Watson), (3) Amneal Pharmaceuticals LLC, Amneal Pharmaceuticals of New York, LLC and Amneal Pharmaceuticals Co. India Private Limited, (4) Zydus Pharmaceuticals (USA) Inc. and Cadila Healthcare Ltd. (collectively, Zydus) and (5) Piramal Healthcare UK Limited (Piramal).
Just prior to trial, the Delaware District Court signed consent judgments filed by Amgen and each of Cipla Limited and Cipla USA, Inc. (collectively, Cipla) and Strides Pharma Global PTE Limited and Strides Pharma, Inc. (collectively, Strides), and in
March 2018 the Delaware District Court signed a consent judgment filed by Amgen and Aurobindo. In each consent judgment, the parties stipulated to an entry of judgment of infringement and validity of the ’405 Patent and an injunction prohibiting the manufacture, use, sale, offer to sell, importation of, or distribution into the United States of the applicable defendant’s cinacalcet product during the term of the ’405 Patent unless specifically authorized pursuant to the applicable confidential settlement agreement. Just prior to trial, the Delaware District Court also entered orders dismissing each of Dr. Reddy’s Laboratories, Ltd. and Dr. Reddy’s Laboratories, Inc. (collectively, Dr. Reddy’s), and Mylan Pharmaceuticals Inc. and Mylan Inc. (collectively, Mylan), on stipulations between Amgen and such parties, respectively, subject to the terms of confidential settlement agreements.
On July 27, 2018, the Delaware District Court issued a trial order finding on the infringement claims and defenses in the Amgen Inc. v. Aurobindo Pharma Ltd. et al. consolidated lawsuit that Zydus infringes the ’405 Patent and that Amneal Pharmaceuticals LLC and Amneal Pharmaceuticals of New York, LLC (collectively, Amneal), Piramal and Watson do not infringe the ’405 Patent. On August 24, 2018, the Delaware District Court issued an order dismissing, without prejudice, the invalidity counterclaims of Amneal, Piramal and Watson and entered judgment of noninfringement of the ’405 Patent in favor of Amneal, Piramal and Watson. On September 20, 2018, Amgen filed a notice of appeal to the Federal Circuit Court. On October 9, 2018, the Delaware District Court dismissed, without prejudice, the invalidity counterclaims of Zydus and entered judgment of infringement of the ’405 Patent by Zydus in favor of Amgen, including an order that the effective date of the U.S. Food and Drug Administration (FDA) approval of Zydus’ generic version of Sensipar® shall be no earlier than the expiry date of our ’405 Patent. On October 11, 2018, Zydus filed a notice of appeal to the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit Court) and on October 24, 2018, the Federal Circuit Court consolidated the appeals of Zydus and Amgen.
In December 2018, the FDA approved Watson’s generic version of Sensipar® and Watson’s parent company, Teva Pharmaceutical Industries Ltd. (Teva), began selling its product at-risk notwithstanding that the appeals were pending at the Federal Circuit Court. On January 2, 2019, Amgen, Watson and Teva entered into a settlement agreement in which Teva agreed to stop selling its generic product until the mid-year 2021, or earlier under certain circumstances, and to pay Amgen an undisclosed amount. On January 9, 2019, Watson and Amgen filed a motion asking the Delaware District Court to vacate its final judgment of noninfringement as to Watson and to enter a proposed consent judgment of infringement and validity of the ’405 Patent and an injunction prohibiting the making, having made, using, selling, offering to sell, or distributing Watson’s cinacalcet product in the United States, or importing Watson’s cinacalcet product into the United States, consistent with the confidential settlement agreement. On January 11, 2019, the Federal Circuit Court stayed the pending appeal as to Watson in order for the Delaware District Court to rule on the motion of Watson and Amgen. On January 18, 2019 and January 23, 2019, respectively, Cipla and Sun filed oppositions to the motion of Watson and Amgen.
On January 8, 2019, Cipla filed a separate lawsuit in the Delaware District Court against Amgen seeking a declaration that provisions of its settlement agreement with Amgen have been triggered by Teva’s at-risk launch of Watson’s generic version of Sensipar®, giving Cipla a right to market its own generic version under its settlement agreement. Cipla’s complaint also alleges antitrust violations by Amgen. The portions of the complaint covering Cipla’s settlement agreement were filed with the court under seal and remain confidential.
Amgen Inc. v. Alkem et al.
As stated above, Amgen filed four lawsuits in June 2017 for infringement of the ’405 Patent. In December 2017, the lawsuits filed against (1) Alkem Laboratories Ltd. (Alkem), (2) Lupin Ltd. and Lupin Pharmaceuticals, Inc. (collectively, Lupin) and (3) Macleods Pharmaceuticals Ltd. and Macleods Pharma USA, Inc. (collectively, Macleods) were consolidated into a separate single case, Amgen Inc. v. Alkem et al. In each of those three lawsuits, all defendants responded to the complaint denying infringement and seeking a declaration of noninfringement and invalidity of the ’405 Patent; Macleods’ response also included a counterclaim alleging sham litigation in violation of the Sherman Antitrust Act, which Amgen has denied and which the Delaware District Court stayed pending resolution of the patent claims.
In March 2018, the Delaware District Court signed a consent judgment filed by Amgen and Macleods in which the parties stipulated to an entry of judgment of infringement and validity of the ’405 Patent and an injunction prohibiting the manufacture, use, sale, offer to sell, importation of, or distribution into the United States of Macleods’ cinacalcet product during the term of the ’405 Patent unless specifically authorized pursuant to the confidential settlement agreement. In April 2018, the Delaware District Court also entered orders respectively dismissing Lupin and Alkem on stipulations between the parties, subject to the terms of confidential settlement agreements.
Other Sensipar® ANDA Patent Litigation
In December 2017, Amgen filed four additional lawsuits in the Delaware District Court for infringement of the ’405 Patent against (1) Watson, (2) Teva Pharmaceuticals, USA, Inc., (3) Barr Laboratories, Inc. and (4) Torrent Pharma Inc. and Torrent Pharmaceuticals Ltd. These lawsuits were distinct from the suits consolidated into Amgen Inc. v. Aurobindo Pharma Ltd. et al., and all four additional suits were subsequently dismissed by agreement between Amgen and the respective defendants.
In June 2018, Amgen filed a lawsuit in the Delaware District Court against Accord Healthcare, Inc. (Accord) and Intas Pharmaceuticals Ltd. (Intas) for infringement of the ’405 Patent. Amgen seeks an order making any FDA approval of these defendants’ generic version of Sensipar® effective no earlier than the expiration of the ’405 Patent. On September 18, 2018, Accord denied infringement of the ’405 Patent and alleged that the patent is invalid. On September 20, 2018, Intas was dismissed from the Delaware District Court lawsuit without prejudice by joint stipulation of the parties. On February 1, 2019, Accord filed a motion for summary judgment of noninfringement. Trial is scheduled to begin June 15, 2020.
On September 7, 2018, Amgen filed a lawsuit in the Delaware District Court for infringement of the ’405 Patent against Emcure Pharmaceuticals Ltd., Heritage Pharmaceuticals Inc. and Heritage Pharma Labs Inc. In December 2018, the Delaware District Court entered an order dismissing all defendants on a stipulation between the parties, subject to the terms of a confidential settlement agreement.
KYPROLIS® (carfilzomib) ANDA Patent Litigation
Beginning in October 2016, our subsidiary Onyx Therapeutics, Inc. (Onyx Therapeutics), filed four separate lawsuits in the Delaware District Court against: (1) Cipla, (2) Sagent Pharmaceuticals, Inc. (Sagent), (3) Breckenridge and (4) Fresenius Kabi, USA LLC, Fresenius Kabi USA, Inc., Fresenius Pharmaceuticals Holding, Inc. and Fresenius Kabi Oncology Limited, each for infringing U.S. Patent Nos. 7,232,818 (the ’818 Patent), 7,417,042 (the ’042 Patent), 7,491,704 (the ’704 Patent), 7,737,112 (the ’112 Patent), 8,129,346 (the ’346 Patent), 8,207,125 (the ’125 Patent), 8,207,126 (the ’126 Patent), 8,207,127 (the ’127 Patent) and 8,207,297 (the ’297 Patent). By joint stipulation of the parties, Fresenius Pharmaceuticals Holding, Inc. and Fresenius Kabi Oncology Limited were subsequently dismissed from the lawsuit against them. In October and November 2016, Onyx Therapeutics also filed four separate lawsuits in the Delaware District Court against: (1) MSN Laboratories Private Limited and MSN Pharmaceuticals, Inc. (collectively, MSN), (2) Dr. Reddy’s, (3) Qilu Pharma, Inc. and Qilu Pharmaceutical Co. Ltd. (collectively, Qilu) and (4) Apotex, each for infringing the ’112 Patent; and a separate lawsuit against InnoPharma, Inc. (InnoPharma) for infringement of the ’042, ’112 and ’297 Patents. In April 2017, Onyx Therapeutics filed a separate lawsuit in the Delaware District Court against Teva Pharmaceuticals USA, Inc. and Teva Pharmaceutical Industries Ltd. for infringement of the ’818, ’042, ’704, ’112, ’346, ’125, ’126, ’127 and ’297 Patents. The Delaware District Court has consolidated these ten lawsuits for purposes of discovery into a single case, Onyx Therapeutics, Inc. v. Cipla Limited., et al.
In August 2017, Onyx Therapeutics filed additional lawsuits in the Delaware District Court against InnoPharma for infringement of the ’818, ’704, ’346, ’125, ’126 and ’127 Patents; and against Apotex and Qilu for infringement of the ’818, ’042, ’704, ’346, ’125, ’126, ’127 and ’297 Patents. On September 14, 2017, the Delaware District Court consolidated these three additional lawsuits for purposes of discovery into the existing consolidated case.
In September 2017, by joint stipulation of the parties, Teva Pharmaceutical Industries Ltd. was dismissed from the suit against it, leaving Teva Pharmaceuticals USA, Inc., as the remaining defendant in that litigation.
In November 2017, Onyx Therapeutics filed a lawsuit in the Delaware District Court against Aurobindo Pharma USA, Inc. (Aurobindo) for infringement of the ’818, ’042, ’704, ’112, ’346, ’125, ’126, ’127 and ’297 Patents. In December 2017, Onyx Therapeutics filed additional lawsuits in the Delaware District Court against Dr. Reddy’s for infringement of the ’818, ’042, ’704, ’346, ’125, ’126, ’127 and ’297 Patents, and against MSN for infringement of the ’112 Patent. In January 2018, Onyx Therapeutics filed a lawsuit in the Delaware District Court against Apotex for infringement of the ’818, ’042, ’704, ’112, ’346, ’125, ’126, ’127 and ’297 Patents.
In February 2018, Qilu and Teva Pharmaceuticals USA, Inc. were each dismissed from the applicable lawsuits by joint stipulation of the parties. On February 7, 2018, the Delaware District Court also consolidated for purposes of discovery the lawsuit against Aurobindo into the existing consolidated case, Onyx Therapeutics, Inc. v. Cipla Limited, et al. On March 20, 2018, the Delaware District Court entered a stipulation between the parties providing Aurobindo a covenant not to sue on the ’818,’704,’346 and ’297 Patents.
On February 15, 2018, Onyx Therapeutics filed a lawsuit in the Delaware District Court against Breckenridge for patent infringement, and subsequently amended the complaint on March 9, 2018 to assert infringement of the ’042, ’112, ’125, ’126 and ’127 Patents. On April 20, 2018, Onyx Therapeutics filed a lawsuit in the Delaware District Court against Cipla for patent infringement of the ’042, ’112, ’125, ’126 and ’127 Patents.
The lawsuits filed between 2016-2018 are based on ANDAs that seek approval to market generic versions of KYPROLIS® before expiration of the asserted patent or patents. In each lawsuit, Onyx Therapeutics seeks an order of the Delaware District Court making any FDA approval of the respective defendant’s ANDA effective no earlier than the expiration of the applicable patents. Responses to the complaints have been filed by all defendants alleging invalidity and, in certain instances, noninfringement of the patents.
During April 2018, the Delaware District Court entered orders on stipulations between Onyx Therapeutics and each of Apotex, Dr. Reddy’s and Sagent, respectively, that each defendant infringes the ’042, ’112, ’125, ’126 and ’127 Patents, and that Onyx Therapeutics will not assert patent infringement of the ’818, ’704, ’346 and ’297 Patents against certain of the respective defendants’ ANDA applications and products. During May, June and July of 2018, the Delaware District Court entered orders on stipulations between Onyx Therapeutics and each of Fresenius Kabi, USA LLC and Fresenius Kabi USA, Inc. (collectively, Fresenius), Breckenridge, Aurobindo, Cipla and Innopharma, respectively, that each defendant infringes the ’042, ’112, ’125, ’126 and ’127 Patents. Onyx Therapeutics had previously provided those defendants a covenant that it would not assert patent infringement of the ’818,’704,’346 and ’297 Patents against certain of the respective defendants’ ANDA applications and products. On June 4, 2018, the Delaware District Court also entered an order on a stipulation between Onyx Therapeutics and MSN that MSN infringes the ’112 Patent.
In December 2018, Apotex, Dr. Reddy’s, Fresenius, InnoPharma, Sagent, Breckenridge, Aurobindo and Cipla amended their responses to the complaints to add the defense of unclean hands and to seek declarations of unenforceability of the asserted patents based on allegations of inequitable conduct. In January 2019, MSN amended its responses to the complaints to add the defense of unclean hands. Trial in the consolidated case is scheduled to commence on May 6, 2019.
On January 11, 2019, Onyx Therapeutics filed a separate lawsuit in the Delaware District Court against Breckenridge for infringing the ’042, ’112 and ’125 Patents in connection with its ANDA that seeks approval to market generic versions of KYPROLIS® before expiration of those patents. Onyx Therapeutics seeks an order from the Delaware District Court making any FDA approval of Breckenridge’s ANDA effective no earlier than the expiration of the applicable patents.
Sandoz ENBREL (etanercept) Patent Litigation
On February 26, 2016, two affiliates of Amgen Inc. (Immunex Corporation and Amgen Manufacturing, Limited (AML) (collectively, Amgen)), along with Hoffmann-La Roche Inc. (Roche), filed a lawsuit in the U.S. District Court for the District of New Jersey (the New Jersey District Court) against Sandoz Inc., Sandoz International GmbH and Sandoz GmbH (collectively, Sandoz). This lawsuit stems from Sandoz’s submission of an application for FDA licensure of an etanercept product as biosimilar to Amgen’s ENBREL. Amgen and Roche have asserted infringement of five patents: U.S. Patent Nos. 8,063,182 (the ’182 Patent); 8,163,522 (the ’522 Patent); 7,915,225; 8,119,605; and 8,722,631 (the ’631 Patent). By their complaint, Amgen and Roche seek an injunction to prohibit Sandoz from commercializing its biosimilar etanercept product in the United States prior to the expiry of such patents. Responses have been filed by all Sandoz defendants denying infringement and/or asserting that the patents at issue are invalid. On August 11, 2016, and subject to the terms of a confidential stipulation, the New Jersey District Court entered a preliminary injunction prohibiting Sandoz from making, using, importing, selling or offering for sale Sandoz’s etanercept product. On August 30, 2016, the FDA approved Sandoz’s ErelziTM, a biosimilar to ENBREL.
On September 14, 2017, Amgen filed a motion for summary judgment that Sandoz infringed claim 1 of the ’631 Patent and, on October 23, 2017, Sandoz filed its brief in opposition to the motion.
On September 10, 2018, the New Jersey District Court entered an order that the making, using, offering to sell or selling in the United States, or the importation into the United States by Sandoz of Sandoz’s biosimilar etanercept product infringes the ’182 Patent and the ’522 Patent. The New Jersey District Court held a bench trial from September 11, 2018, to September 25, 2018, focusing on Sandoz’s challenges to the validity of these patents. Closing arguments were heard on November 19, 2018, and the parties await the court’s verdict.
NEUPOGEN® (filgrastim) / Neulasta® (pegfilgrastim) Patent Litigation
Adello NEUPOGEN® Patent Litigation
On March 8, 2018, Amgen Inc. and AML (collectively, Amgen) filed a lawsuit in the New Jersey District Court against Adello Biologics, LLC (Adello). This lawsuit stems from Adello’s submission of an application for FDA licensure of a filgrastim product as biosimilar to Amgen’s NEUPOGEN®. Amgen has asserted infringement of 17 of our patents. Amgen seeks an injunction to prohibit Adello from commercializing its biosimilar filgrastim product in the United States prior to the expiry of these patents. On May 17, 2018, Adello responded to Amgen’s lawsuit for patent infringement, denying infringement and seeking judgment that the patents-in-suit are invalid and not infringed.
On October 3, 2018, Amgen filed a first amended complaint in the New Jersey District Court adding as defendants Amneal Pharmaceuticals LLC and Amneal Pharmaceuticals, Inc. (collectively, Amneal) and reducing the number of patents-in-suit from 17 to 4: U.S. Patent Nos. 8,940,878 (the ’878 Patent); 8,952,138 (the ’138 Patent); 9,643,997 (the ’997 Patent); and 9,856,287 (the ’287 Patent). On October 17, 2018, Adello responded to the first amended complaint, seeking judgment that our patents-in-suit are not infringed by Adello’s biosimilar filgrastim product and that our patents are invalid. On December 5, 2018, Amneal filed a motion to dismiss the claims against it for failure to state a claim and for lack of subject-matter jurisdiction.
Apotex NEUPOGEN® / Neulasta® Patent Litigation
On August 7, 2018, Amgen filed a lawsuit in the U.S. District Court for the Southern District of Florida against Apotex for infringement of the ’287 Patent in accordance with the patent provisions of the Biologics Price Competition and Innovation Act (BPCIA). This lawsuit stems from Apotex’s submissions of applications for FDA licensure of a pegfilgrastim product as biosimilar to Amgen’s Neulasta® and a filgrastim product as biosimilar to Amgen’s NEUPOGEN®. By its complaint, Amgen seeks, among other remedies, an injunction prohibiting Apotex from infringing the ’287 Patent. On December 10, 2018, Apotex filed a motion to dismiss the complaint for failure to state a claim. A hearing on the motion to dismiss is scheduled for March 15, 2019.
On October 1, 2018, Apotex and Adello Biologics, LLC filed a petition in the U.S. Patent and Trademark Office requesting that the Patent Trial and Appeal Board (PTAB) institute post grant review proceedings on the ’287 Patent. On January 23, 2019, Amgen filed a patent owner’s preliminary response.
On February 17, 2017, the PTAB of the U.S. Patent and Trademark Office granted Apotex’s petition to institute an inter partes review (IPR) of the ’138 Patent, challenging claims of the ’138 Patent as unpatentable. On May 22, 2017, Amgen filed its response and oral argument was held before the PTAB on December 13, 2017. The PTAB issued a final decision on the IPR of the ’138 Patent holding all but one claim of the ’138 Patent as unpatentable. On March 16, 2018, Apotex filed a request for rehearing on the PTAB’s finding that this one claim is patentable.
Coherus Neulasta® Patent Litigation
On May 10, 2017, Amgen filed a lawsuit in the Delaware District Court against Coherus BioSciences, Inc. (Coherus) for infringement of our U.S. Patent No. 8,273,707 (the ’707 Patent). This lawsuit stems from Coherus’ submission of an application for FDA licensure of a pegfilgrastim product as biosimilar to Amgen’s Neulasta® under the BPCIA. By its complaint, Amgen seeks, among other remedies, an injunction prohibiting Coherus from infringing the ’707 Patent. On March 26, 2018, the Delaware District Court granted Coherus’ motion to dismiss Amgen’s complaint for failure to state a claim and final judgment was entered dismissing Amgen’s complaint on April 18, 2018. On May 17, 2018, Amgen appealed the judgment to the Federal Circuit Court. On November 2, 2018, the FDA approved Coherus’ UDENYCATM, a biosimilar to Neulasta®, which was subsequently launched in January 2019.
We are also engaged in a separate lawsuit in which we have alleged that Coherus and others misappropriated our confidential information and trade secrets through hiring of former Amgen employees and that they have used such information to develop and market UDENYCATM. Trial is scheduled to begin on April 22, 2019.
Mylan Neulasta® Patent Litigation
On September 22, 2017, Amgen Inc. and AML (collectively, Amgen) filed a lawsuit in the District Court for the Western District of Pennsylvania (the Pennsylvania Western District Court) against Mylan Inc., Mylan Pharmaceuticals Inc., Mylan GmbH, and Mylan N.V. (collectively, Mylan) for infringement of our ’707 Patent and the ’997 Patent. This lawsuit stems from Mylan’s submission of an application for FDA licensure of a pegfilgrastim product as biosimilar to Amgen’s Neulasta® under the BPCIA. By its complaint, Amgen seeks, among other remedies, an injunction prohibiting Mylan from infringing the ’707 and ’997 Patents. On November 22, 2017, Mylan answered the complaint, denying patent infringement and alleging that the patents are invalid. On April 6, 2018, Mylan filed a motion for judgment on the pleadings of noninfringement of our ’707 Patent, which was denied by the court without prejudice on November 15, 2018. On June 4, 2018, the FDA approved Mylan’s Fulphila®, a biosimilar to Neulasta®, which was subsequently launched in July 2018. On November 20, 2018, the Pennsylvania Western District Court issued a claim construction opinion and order. On January 23 and 30, 2019, Mylan filed a renewed motion for judgment on the pleadings of noninfringement of the ’707 Patent and a motion for summary judgment of noninfringement of the ’997 Patent, respectively.
Pfizer NEUPOGEN® Patent Litigation
On July 18, 2018, Amgen Inc. and AML (collectively, Amgen) filed a lawsuit in the Delaware District Court against Pfizer Inc. and Hospira Inc. (collectively, Pfizer). This lawsuit stems from Pfizer’s submission of an application for FDA licensure of a filgrastim product as biosimilar to Amgen’s NEUPOGEN®. Amgen has asserted infringement of the ’997 Patent and seeks, among other remedies, injunctive relief to prohibit Pfizer from infringing the ’997 Patent. On July 20, 2018, the FDA approved Pfizer’s NIVESTYMTM, a biosimilar to NEUPOGEN®, which was subsequently launched in October 2018.
On August 9, 2018, Pfizer answered the complaint and counterclaimed seeking a declaration that Pfizer does not infringe Amgen’s ’997 Patent and that the patent is invalid. Trial is scheduled to commence on June 15, 2020.
Sandoz NEUPOGEN® Patent Litigation
On October 24, 2014, Amgen Inc. and AML (collectively, Amgen) filed a lawsuit in the U.S. District Court for the Northern District of California (the California Northern District Court) against Sandoz Inc., Sandoz International GmbH and Sandoz GmbH
(collectively, Sandoz) for infringement of our U.S. Patent No. 6,162,427 (the ’427 Patent) and various state law claims. The lawsuit stems from Sandoz filing an application for FDA licensure of a filgrastim product as biosimilar to NEUPOGEN® under the BPCIA, while having deliberately failed to comply with the BPCIA’s disclosure requirement to Amgen as the reference product sponsor. By its complaint, Amgen seeks, among other remedies, an injunction to cease Sandoz’s unauthorized reliance on Amgen’s Biologics License Application (BLA) for filgrastim and an injunction to prevent infringement of the ’427 Patent.
On March 19, 2015, the California Northern District Court issued an order dismissing with prejudice Amgen’s state law claims and entered judgment in favor of Sandoz Inc. on its cross-motion for partial judgment on the pleadings. The order also denied Amgen’s motion for a preliminary injunction, as well as Amgen’s motion for partial judgment on the pleadings. On a joint motion of the parties, on March 25, 2015, the California Northern District Court entered final judgment on the claims and counterclaims decided by the court’s March 19 order. The remaining patent infringement claim, counterclaim and defenses were stayed by the court pending appeal. On March 25, 2015, Amgen appealed both the judgment in favor of Sandoz Inc. and the denial of Amgen’s motion for preliminary injunction to the Federal Circuit Court. On May 5, 2015, the Federal Circuit Court entered an injunction prohibiting Sandoz Inc. from marketing, selling, offering for sale, or importing into the United States Sandoz’s FDA-approved Zarxio® biosimilar product until the Federal Circuit Court resolved the appeal.
On July 21, 2015, the Federal Circuit Court affirmed the California Northern District Court’s dismissal of Amgen’s state law claims concluding that the only remedies available for a biosimilar applicant’s failure to provide its BLA by the statutory deadline is to bring a patent infringement claim and seek those patent remedies provided by the statute. The Federal Circuit Court also concluded that a biosimilar applicant must give 180-day advance notice of first commercial marketing after the FDA has licensed the biosimilar product. Accordingly, the Federal Circuit Court entered an order that its previously entered injunction be extended through September 2, 2015 (180 days from Sandoz Inc.’s notice given after FDA approval).
In 2016, Sandoz filed a petition for certiorari with the U.S. Supreme Court and Amgen filed a conditional cross-petition for certiorari. Both petitions were granted and on June 12, 2017, the U.S. Supreme Court reversed the Federal Circuit Court ruling that a biosimilar applicant must wait to give the 180-day advance notice of first commercial marketing until after the FDA has licensed the biosimilar product, holding that such notice can be given either before or after the FDA approval. The U.S. Supreme Court also vacated the Federal Circuit Court’s decision that the only remedy available when a biosimilar applicant refuses to provide its BLA is to bring a patent infringement claim. The U.S. Supreme Court agreed with the Federal Circuit Court that there is no remedy under federal law for failing to make the disclosure but remanded the case to the Federal Circuit Court to determine whether California law would treat noncompliance with such requirement as unlawful and, if so, to determine whether the BPCIA pre-empts any additional remedy available under state law and whether Sandoz forfeited any pre-emption defense. On December 14, 2017, the Federal Circuit Court affirmed the California Northern District Court’s dismissal of Amgen’s state law claims, holding that the BPCIA pre-empts state law remedies for a biosimilar applicant’s failure to comply with the BPCIA’s disclosure requirement.
Following the California Northern District Court’s September 8, 2015 lift of the stay of the case, the parties continued to litigate the remaining patent infringement claim, counterclaim and defenses. On October 15, 2015, Amgen filed a first supplemental and amended complaint adding to the lawsuit Sandoz’s infringement of the ’878 Patent, which covers methods of purifying proteins. On September 13, 2017, by joint stipulation of the parties, the California Northern District Court dismissed from the case the parties’ respective claims and counterclaims related to the ’427 Patent. On October 25, 2017, Sandoz filed motions for summary judgment of noninfringement of the ’878 Patent and for summary judgment regarding damages. On December 19, 2017, the California Northern District Court granted Sandoz’s summary judgment of noninfringement. Sandoz’s motion for summary judgment regarding damages was denied as moot. On January 8, 2018, the California Northern District Court entered judgment of noninfringement of the ’878 and ’427 Patents and dismissed without prejudice Sandoz’s counterclaims of invalidity of the ’878 and ’427 Patents. On February 5, 2018, Amgen appealed the judgment to the Federal Circuit Court. A hearing on the appeal has been scheduled for March 4, 2019.
Sandoz Neulasta® Patent Litigation
On May 12, 2016, Amgen filed a lawsuit in the California Northern District Court against Sandoz and Lek Pharmaceuticals d.d. for infringement of the ’878 Patent and U.S. Patent No. 5,824,784 (the ’784 Patent) in accordance with the patent provisions of the BPCIA. The lawsuit stems from Sandoz filing an application for FDA licensure of a pegfilgrastim product as biosimilar to Neulasta®. On June 23, 2016, Sandoz responded to the complaint, denying infringement and seeking judgment that the patents-in-suit are invalid and/or not infringed. On December 7, 2016, by joint stipulation of the parties, the California Northern District Court dismissed from the case all claims and counterclaims related to the ’784 Patent. On October 25, 2017, Sandoz filed motions for summary judgment of noninfringement of the ’878 Patent and for summary judgment regarding damages. On December 19, 2017, the California Northern District Court granted Sandoz’s summary judgment of noninfringement of the ’878 Patent. Sandoz’s motion for summary judgment regarding damages was denied as moot. On January 8, 2018, the California Northern District Court entered judgment of noninfringement of the ’878 Patent and dismissed without prejudice Sandoz’s counterclaims of invalidity of the ’878 Patent. On February 5, 2018, Amgen appealed the judgment to the Federal Circuit Court. A hearing on the appeal has been scheduled for March 4, 2019.
PCSK9 Antibody Patent Litigation
U.S. Patent Litigation-Sanofi/Regeneron
On October 17, 2014, Amgen initiated a series of lawsuits in the Delaware District Court against Sanofi, Aventisub LLC, formerly doing business as Aventis Pharmaceuticals Inc., and Regeneron Pharmaceuticals, Inc. (Regeneron) for patent infringement. On December 15, 2014, these lawsuits were consolidated by the Delaware District Court into a single case against Sanofi, Sanofi-Aventis U.S. LLC and Aventisub LLC, formerly doing business as Aventis Pharmaceuticals Inc. (collectively, Sanofi) and Regeneron, addressing seven of our patents: U.S. Patent Nos. 8,563,698; 8,829,165 (the ’165 Patent); 8,859,741 (the ’741 Patent); 8,871,913; 8,871,914; 8,883,983; and 8,889,834. These patents describe and claim monoclonal antibodies to proprotein convertase subtilisin/kexin type 9 (PCSK9). By its complaints, Amgen seeks an injunction to prevent the infringing manufacture, use and sale of Sanofi and Regeneron’s alirocumab, a monoclonal antibody targeting PCSK9. On January 29, 2016, the Delaware District Court granted Amgen’s motion to amend the complaint to add AML and Amgen USA Inc. as plaintiffs and to add the allegation that defendants’ infringement of Amgen’s patents is willful.
On February 22, 2016, the Delaware District Court entered a stipulated order finding alirocumab and the drug product containing it, PRALUENT®, infringe certain of Amgen’s patents, including claims 2, 7, 9, 15, 19 and 29 of the ’165 Patent and claim 7 of the ’741 Patent. On March 18, 2016, the Delaware District Court entered judgment in favor of Amgen following a five-day jury trial and a unanimous jury verdict that these patent claims from the ’165 Patent and the ’741 Patent are all valid. On January 3, 2017, the Delaware District Court denied Sanofi and Regeneron’s post-trial motions seeking a new trial and for judgment as a matter of law, and on January 5, 2017, granted Amgen’s motion for a permanent injunction prohibiting the infringing manufacture, use, sale, offer for sale or import of alirocumab in the United States.
On January 12, 2017, Sanofi and Regeneron filed an appeal of the judgment and the permanent injunction to the Federal Circuit Court. On February 8, 2017, following a motion by Sanofi and Regeneron, the Federal Circuit Court entered a stay of the permanent injunction during the pendency of the appeal. On October 5, 2017, the Federal Circuit Court reversed in part the judgment of the Delaware District Court and remanded for a new trial two of Sanofi and Regeneron’s patent validity defenses (failure to meet the law’s requirements for patentability of written description and enablement of the claimed inventions), and affirmed the Delaware District Court’s judgment of infringement of claims 2, 7, 9, 15, 19 and 29 of the ’165 Patent and claim 7 of the ’741 Patent and patent validity on Sanofi and Regeneron’s third patent validity defense (finding that the claimed inventions were not obvious to a person of ordinary skill in the field of the patents). The Federal Circuit Court also vacated and remanded for further consideration by the Delaware District Court the permanent injunction. On July 23, 2018, Amgen filed a petition for certiorari with the U.S. Supreme Court seeking review of the Federal Circuit Court’s conclusion that the judgment affirming the validity of Amgen’s patents was based, in part, on an erroneous application of the law of written description. On January 7, 2019, the Supreme Court denied Amgen’s petition for certiorari.
On remand from the appellate court, the Delaware District Court scheduled a new trial to begin on February 19, 2019 on Sanofi and Regeneron’s challenges to the validity of our patents based on lack of written description and enablement of the claimed inventions. Consideration of damages and injunctive relief will follow, as appropriate. The court also entered judgment on the pleadings for Sanofi and Regeneron on Amgen’s claim of willful infringement.
Patent Disputes in the International Region
On February 24, 2016, the European Patent Office (EPO) granted European Patent No. 2,215,124 (EP 2,215,124) to Amgen. This patent describes and claims monoclonal antibodies to PCSK9 and methods of treatment. On February 24, 2016, Sanofi filed an opposition to the patent in the EPO seeking to invalidate it. In November 2016, Sanofi-Aventis Deutschland GmbH, Sanofi-Aventis Groupe S.A. and Sanofi Winthrop Industrie S.A. filed a joint opposition against Amgen’s patent, and each of Eli Lilly and Company, Regeneron and Strawman Ltd. also filed oppositions to Amgen’s patent. Following a three-day hearing, on November 30, 2018, the EPO confirmed the validity of Amgen’s EP 2,215,124.
We are also involved in and expect future involvement in additional disputes regarding our PCSK9 patents in other jurisdictions and regions, including matters filed against us and that we have filed in the United Kingdom, Germany, France and Japan.
Hospira EPOGEN® (epoetin alfa) Patent Litigation
On September 18, 2015, Amgen filed a lawsuit in the Delaware District Court against Hospira, Inc. (Hospira), a subsidiary of Pfizer, for infringement of Amgen’s U.S. Patent Nos. 5,856,298 (the ’298 Patent) and 5,756,349 (the ’349 Patent) in accordance with the patent provisions of the BPCIA and for a declaration that Hospira has failed to comply with certain requirements of the BPCIA. This lawsuit stems from the submission by Hospira under the BPCIA of an application for FDA licensure of an epoetin product as biosimilar to Amgen’s EPOGEN®. By its complaint, Amgen seeks, among other remedies, an injunction prohibiting Hospira from using or selling infringing cells and/or product manufactured during the ’298 or the ’349 Patent terms and enjoining
Hospira from commencing commercial marketing of any biosimilar epoetin product until a date that is at least 180 days after Hospira provides legally effective notice to Amgen.
On August 19, 2016, Hospira responded to the complaint denying patent infringement and any violation of the BPCIA and seeking judgment that the patents-in-suit are invalid and not infringed by Hospira. On January 23, 2017, the Delaware District Court entered an order construing the claims of the ’349 and ’298 Patents and holding that two claims of the ’298 Patent are invalid for failure to properly narrow the claim on which they depend.
On September 22, 2017, after a five-day trial, the jury returned a verdict finding the ’298 Patent valid and infringed by Hospira and the ’349 Patent not infringed. The jury awarded Amgen $70 million in damages for Hospira’s infringement. On October 23, 2017, Hospira moved for judgment as a matter of law of noninfringement and invalidity of the ’298 Patent or, in the alternative, for reduction of the damage award or a new trial on the ’298 Patent.
On May 15, 2018, the FDA approved Hospira’s RETACRIT®, a biosimilar to EPOGEN®, which was subsequently launched on November 14, 2018.
On August 27, 2018, the Delaware District Court denied Hospira’s October 23, 2017, motion and entered final judgment on September 11, 2018. On October 3, 2018, Hospira filed a notice of appeal to the Federal Circuit Court and on October 15, 2018, Amgen filed a notice of cross-appeal.
Litigation relating to our Biosimilar Products
MVASITM (bevacizumab-awwb) Patent Litigation
On October 6 and October 18, 2017, Genentech, Inc. (Genentech) and City of Hope filed separate lawsuits in the Delaware District Court respectively alleging Amgen’s infringement of (i) 24 of the 27 patents listed by Genentech in the BPCIA exchange and (ii) 25 of the same 27 patents, in each case by Amgen’s submission for FDA licensure of MVASITM as biosimilar to Genentech’s Avastin® (bevacizumab), and for non-compliance with certain provisions of the BPCIA. On December 6, 2017, Genentech and City of Hope amended their complaints to allege that Amgen will also infringe newly issued U.S. Patent No. 9,795,672. On April 17, 2018, the Delaware District Court granted Amgen’s motion to dismiss certain claims by Genentech and City of Hope that Amgen had not complied with the BPCIA.
Amgen responded to the complaints on May 1 and June 5, 2018, respectively, denying patent infringement and any violation of the BPCIA and seeking judgment that the patents-in-suit are invalid, unenforceable and/or not infringed by Amgen. On May 22 and June 19, 2018, respectively, Genentech and City of Hope moved to dismiss from each case all of Amgen’s counterclaims and certain of Amgen’s defenses.
On August 31, 2018, in accordance with the scheduling order issued by the Delaware District Court, Genentech and City of Hope reduced the number of asserted patents in each lawsuit to 8, asserting the same patents in each case. On October 22, 2018, the two cases were consolidated by the court. Trial is scheduled to begin on July 13, 2020.
KANJINTITM (trastuzumab) Patent Litigation
On June 21, 2018, Genentech and City of Hope filed a lawsuit in the Delaware District Court alleging Amgen’s infringement of 37 patents by Amgen’s submission of an application for FDA licensure of KANJINTITM, Amgen’s biosimilar version of Genentech’s Herceptin® (trastuzumab). On July 19, 2018, Genentech, City of Hope and Amgen filed a joint stipulation to dismiss certain of the patents from the lawsuit and Genentech and City of Hope filed an amended complaint narrowing its allegations of infringement to 18 of the 37 patents. Among other remedies, Genentech and City of Hope seek injunctive relief prohibiting patent infringement.
On August 23, 2018, Genentech and City of Hope moved to dismiss Amgen’s unenforceability counterclaims and affirmative defense. On November 7, 2018, in accordance with the scheduling order issued by the Delaware District Court, Genentech and City of Hope reduced the number of asserted patents from 18 to 10. On January 17, 2019, Genentech and the City of Hope filed a second amended complaint that removed one of the remaining 10 asserted patents and added a different patent. Trial is scheduled to begin on or after December 9, 2019.
AMJEVITATM (adalimumab-atto) / AMGEVITATM Patent Litigation
On January 24, 2019, Coherus filed a lawsuit in the Delaware District Court that the formulation of AMJEVITATM infringes three patents: U.S. Patent Nos. 10,155,039; 10,159,732; and 10,159,733. By its complaint, Coherus seeks, among other remedies, injunctive relief prohibiting patent infringement.
Amgen has also been sued in a number of European countries by Fresenius Kabi Deutschland GmbH (Fresenius), alleging that AMGEVITATM infringes various patents of Fresenius and seeking, among other remedies, injunctive relief prohibiting patent infringement.
U.S. Attorney’s Office for the District of Massachusetts-Patient Assistance Investigation
Amgen, together with other companies in our industry, has received inquiries from the U.S. Attorney’s Office for the District of Massachusetts relating to support of charitable 501(c)(3) organizations that provide financial assistance to Medicare patients. Amgen is cooperating with this ongoing inquiry.
Commitments
Lease commitments
We lease certain facilities and equipment related primarily to administrative, R&D, sales and marketing activities under noncancelable operating leases that expire through 2029. The following table summarizes the minimum future rental commitments under noncancelable operating leases as of December 31, 2018 (in millions):
Included in the table above are future rental commitments for abandoned leases in the amount of $222 million. There were no material charges for lease abandonments related to the restructuring plan that commenced in 2014. See Note 2, Restructuring. We expect to receive total future rental income of $203 million relating to noncancelable subleases of abandoned facilities. Rental expenses on operating leases for the years ended December 31, 2018, 2017 and 2016, were $166 million, $159 million and $134 million, respectively.
U.S. repatriation tax commitments
Under the 2017 Tax Act, we elected to pay the repatriation tax related primarily to our prior indefinitely invested earnings of our foreign operations in eight annual installments. See Note 7, Income taxes. The following table summarizes the remaining scheduled repatriation tax payments as of December 31, 2018 (in millions):
21. Major customers
In the United States, we sell primarily to pharmaceutical wholesale distributors that we utilize as the principal means of distributing our products to healthcare providers. Outside the United States, we sell principally to healthcare providers and/or pharmaceutical wholesale distributors depending on the distribution practice in each country. We monitor the financial condition of our larger customers and limit our credit exposure by setting credit limits and, in certain circumstances, by requiring letters of credit or obtaining credit insurance.
We had product sales to three customers, each of them accounting for more than 10% of total revenues for each of the years ended December 31, 2018, 2017 and 2016. For the year ended December 31, 2018, on a combined basis, these customers accounted for 84% and 98% of total gross revenues and U.S. gross product sales, respectively, as shown in the following table. Certain information with respect to these customers was as follows (dollar amounts in millions):
As of December 31, 2018 and 2017, amounts due from these three customers each exceeded 10% of gross trade receivables and accounted for 76% and 75%, respectively, of net trade receivables on a combined basis. As of December 31, 2018 and 2017, 23% and 25%, respectively, of trade receivables, net, were due from customers located outside the United States-primarily in Europe. Our total allowance for doubtful accounts as of December 31, 2018 and 2017 was not material.
22. Quarterly financial data (unaudited)
The following tables summarize the Company’s unaudited financial data on a quarterly basis. The sum of the quarterly earnings (loss) per-share amounts may not equal the amount reported for the full year because per-share amounts are computed independently for each quarter and for the full year based on respective weighted-average shares outstanding and dilutive securities.
Quarterly financial data is summarized as follows (in millions, except per-share data):
____________
(1)
During periods of net loss, diluted loss per share is equal to basic loss per share because the antidilutive effect of potential common shares is disregarded.
SCHEDULE II
AMGEN INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2018, 2017 and 2016
(In millions)