AMGEN INC. 
The following management's discussion and analysis (MD&A) is intended to assist the reader in understandingAmgen '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 withU.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 theSEC 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, written statements or 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 theSEC , 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. 45 --------------------------------------------------------------------------------
Overview
Amgen is a 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. In 2020, we celebrate our 40th anniversary, continuing our history of focusing on innovative medicines that have the potential to be first-in-class molecules and that have a large-effect size on serious diseases. Our principal products-those with the most significant annual commercial sales-are ENBREL, Neulasta®, Prolia®, XGEVA®, Aranesp®, KYPROLIS®, EPOGEN® and our recently acquired product Otezla®. We also market a number of other products, including Nplate®, Vectibix®, Repatha®, Parsabiv®, Sensipar®/Mimpara®, BLINCYTO®, Aimovig®, NEUPOGEN®, KANJINTITM, AMGEVITATM, EVENITY®, MVASITM, IMLYGIC® and Corlanor®. For additional information about our products, see Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products. Our strategy includes integrated activities intended to maintain and strengthen our competitive position in the industry. We focus on six commercial areas: inflammation, oncology/hematology, bone health, cardiovascular disease, nephrology and neuroscience and conduct discovery research primarily in three therapeutic areas: inflammation, oncology/hematology and cardiovascular/metabolic diseases. In 2019, we advanced our innovative pipeline, launched branded biosimilar programs, built our global geographic reach and expanded our next generation manufacturing capabilities, while returning capital to shareholders. During the year we delivered strong financial results while facing competition from biosimilars and generics. Total product sales decreased 1% as lower net selling prices were offset partially by volume growth. Product sales decreased 5% inthe United States and grew 11% in the rest of the world. Total operating expenses increased 2% as we invested in our innovative R&D pipeline, including our early oncology assets. We continued to advance our pipeline, including AMG 510, which was granted fast track designation from the FDA for the treatment of patients with previously treated metastatic NSCLC with KRAS G12C mutation. We launched EVENITY® inthe United States andJapan , and it was granted marketing authorization inEurope ; andthe United States label for KYPROLIS® was expanded. We also continued to advance our biosimilar program with the launches of KANJINTITM and MVASITM inthe United States and the approval of AVSOLATM for all approved indications of the reference product REMICADE® (infliximab) inthe United States . Lastly, we made a regulatory submission for ABP 798 inthe United States . We have also continued to invest in external opportunities to augment our internal programs and products. We completed our acquisition of worldwide rights to Otezla®, the only oral, non-biologic treatment for psoriasis and psoriatic arthritis. We strengthened our international footprint with the announcement of a strategic collaboration with BeiGene to expand our oncology presence inChina . In addition, we expanded our human genetics capabilities, by entering into a collaboration with a regional healthcare system inthe United States and joining a consortium to perform whole genome sequencing of approximately 500,000 participants from theUnited Kingdom . Our human genetics capabilities allow us to identify new development targets in our chosen areas of therapeutic focus. Cash flows from operating activities were$9.2 billion , enabling us to invest in our business while returning capital to shareholders through the payment of cash dividends and stock repurchases. For 2019, we increased our quarterly cash dividend by 10% to$1.45 per share of common stock. InDecember 2019 , we declared a cash dividend of$1.60 per share of common stock for the first quarter of 2020, an increase of 10% for this period, to be paid inMarch 2020 . We also repurchased 40.2 million shares of our common stock throughout 2019 at an aggregate cost of$7.6 billion . 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 to achieve revenue growth and to offset revenue losses when products lose their exclusivity or when competing products are launched. Certain of our products face increasing pressure from competition, including biosimilars and generics. For additional information, including information on the expirations of patents for various products, see Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products-Patents, and Part I, Item 1. Business-Marketing, Distribution and Selected Marketed Products-Competition. We devote considerable resources to R&D activities, but successful product development in the biotechnology industry is highly uncertain and we also are facing 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 healthcare-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. 46 -------------------------------------------------------------------------------- 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): Year ended Year ended December 31, December 31, 2019 Change 2018 Product sales: U.S.$ 16,531 (5 )%$ 17,429 Rest of world (ROW) 5,673 11 % 5,104 Total product sales 22,204 (1 )% 22,533 Other revenues 1,158 (5 )% 1,214 Total revenues$ 23,362 (2 )%$ 23,747 Operating expenses$ 13,688 2 %$ 13,484 Operating income$ 9,674 (6 )%$ 10,263 Net income$ 7,842 (7 )%$ 8,394 Diluted EPS$ 12.88 2 %$ 12.62 Diluted shares 609 (8 )% 665 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 decreased for 2019, driven primarily by a decline in net selling price, offset partially by higher unit demand. For 2020, we expect net selling price to continue to decline. Other revenues decreased for 2019, driven primarily by lower milestone payments, offset partially by higher royalties. Operating expenses increased for 2019, driven primarily by higher spending in research and early pipeline in support of our oncology programs, offset partially by an impairment charge associated with an IPR&D asset in 2018. 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 2019, 2018 or 2017. 47 -------------------------------------------------------------------------------- Results of Operations Product sales Worldwide product sales were as follows (dollar amounts in millions): Year ended Year ended Year ended December 31, December 31, December 31, 2019 Change 2018 Change 2017 ENBREL$ 5,226 4 %$ 5,014 (8 )%$ 5,433 Neulasta® 3,221 (28 )% 4,475 (1 )% 4,534 Prolia® 2,672 17 % 2,291 16 % 1,968 XGEVA® 1,935 8 % 1,786 13 % 1,575 Aranesp® 1,729 (8 )% 1,877 (9 )% 2,053 KYPROLIS® 1,044 8 % 968 16 % 835 EPOGEN® 867 (14 )% 1,010 (8 )% 1,096 Sensipar®/Mimpara® 551 (69 )% 1,774 3 % 1,718 Other products 4,959 49 % 3,338 29 % 2,583 Total product sales$ 22,204 (1 )%$ 22,533 3 %$ 21,795 Total U.S.$ 16,531 (5 )%$ 17,429 2 %$ 17,131 Total ROW 5,673 11 % 5,104 9 % 4,664 Total product sales$ 22,204 (1 )%$ 22,533 3 %$ 21,795 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): Year ended Year ended Year ended December 31, December 31, December 31, 2019 Change 2018 Change 2017 ENBREL - U.S.$ 5,050 5 %$ 4,807 (8 )%$ 5,206 ENBREL - Canada 176 (15 )% 207 (9 )% 227 Total ENBREL$ 5,226 4 %$ 5,014 (8 )%$ 5,433 The increase in ENBREL sales for 2019 was driven primarily by favorable impacts from changes in accounting estimates of sales deductions and an increase in net selling price, offset partially by lower unit demand. For 2020, we expect the trend of lower unit demand to continue. The decrease in ENBREL sales for 2018 was driven primarily by lower unit demand and net selling price. InApril 2019 , the FDA approved a second biosimilar version of ENBREL, and we are involved in patent litigations with the two companies seeking to market their FDA-approved biosimilar versions of ENBREL. See Part IV-Note 19, Contingencies and commitments, to the Consolidated Financial Statements. Other companies are also developing proposed biosimilar versions of ENBREL. Companies with approved biosimilar versions of ENBREL may seek to enter the U.S. market if we are not successful in our litigations, or even earlier. 48 --------------------------------------------------------------------------------
Neulasta®
Total Neulasta® sales by geographic region were as follows (dollar amounts in
millions):
Year ended Year ended Year ended
December 31, December 31, December 31,
2019 Change 2018 Change 2017
Neulasta® - U.S. $ 2,814 (27 )% $ 3,866 (2 )% $ 3,931
Neulasta® - ROW 407 (33 )% 609 1 % 603
Total Neulasta® $ 3,221 (28 )% $ 4,475 (1 )% $ 4,534
The decrease in global Neulasta® sales for 2019 was driven by the impact of
biosimilar competition on net selling price and unit demand. Neulasta® sales for
2019 included a $98 million order in the first quarter from the U.S. government.
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.
Biosimilar versions of Neulasta® have been approved and launched, and other
biosimilar versions may also receive approval in the near future. Therefore, we
face increased competition in the United States and Europe , which has had and
will continue to have a material adverse impact on sales of Neulasta®. For a
discussion of ongoing patent litigations related to these and other biosimilars,
see Part IV-Note 19, Contingencies and commitments, to the Consolidated
Financial Statements.
Prolia®
Total Prolia® sales by geographic region were as follows (dollar amounts in
millions):
Year ended Year ended Year ended
December 31, December 31, December 31,
2019 Change 2018 Change 2017
Prolia® - U.S. $ 1,772 18 % $ 1,500 18 % $ 1,272
Prolia® - ROW 900 14 % 791 14 % 696
Total Prolia® $ 2,672 17 % $ 2,291 16 % $ 1,968
The increases in global Prolia® sales for 2019 and 2018 were driven by higher
unit demand. Prolia®, which has a six-month dosing interval, has exhibited a
historical sales pattern, with the first and third quarters of a year
representing lower sales than the second and fourth quarters of a year.
XGEVA®
Total XGEVA® sales by geographic region were as follows (dollar amounts in
millions):
Year ended Year ended Year ended
December 31, December 31, December 31,
2019 Change 2018 Change 2017
XGEVA® - U.S. $ 1,457 9 % $ 1,338 16 % $ 1,157
XGEVA® - ROW 478 7 % 448 7 % 418
Total XGEVA® $ 1,935 8 % $ 1,786 13 % $ 1,575 The increases in global XGEVA® sales for 2019 and 2018 were driven primarily by higher unit demand.
49
--------------------------------------------------------------------------------Aranesp®
Total Aranesp® sales by geographic region were as follows (dollar amounts in
millions):
Year ended Year ended Year ended
December 31, December 31, December 31,
2019 Change 2018 Change 2017
Aranesp® - U.S. $ 758 (20 )% $ 942 (15 )% $ 1,114
Aranesp® - ROW 971 4 % 935 - % 939
Total Aranesp® $ 1,729 (8 )% $ 1,877 (9 )% $ 2,053
The decreases in global Aranesp® sales for 2019 and 2018 were driven primarily
by the impact of competition on unit demand in the United States .
Aranesp® faces competition from a long-acting ESA . Aranesp® also faces
competition from a biosimilar version of EPOGEN®. Other biosimilar versions of
EPOGEN® may also receive approval in the future. In 2019, sales in the United
States declined, and we expect them to continue to decline at a faster rate in
2020 due to short- and long-acting competition.
KYPROLIS®
Total KYPROLIS® sales by geographic region were as follows (dollar amounts in
millions):
Year ended
December 31, Year ended Year ended
2019 Change December 31, 2018 Change December 31, 2017
KYPROLIS® - U.S. $ 654 12 % $ 583 4 % $ 562
KYPROLIS® - ROW 390 1 % 385 41 % 273
Total KYPROLIS® $ 1,044 8 % $ 968 16 % $ 835
The increase in global KYPROLIS® sales for 2019 was driven primarily by higher
unit demand.
The increase in global KYPROLIS® sales for 2018 was driven primarily by higher
unit demand, offset partially by lower net selling price.
We are engaged in litigation with two related companies that are challenging our
material patents related to KYPROLIS® and that are seeking to market generic
carfilzomib products. Separately, we have entered into confidential settlement
agreements with other companies developing generic carfilzomib products, and the
court has entered consent judgments enjoining those companies from infringing
certain of our patents, subject to terms of the confidential settlement
agreements. See Part IV-Note 19, Contingencies and commitments, to the
Consolidated Financial Statements. The FDA has reported that it has tentatively
approved Abbreviated New Drug Applications (ANDAs) filed by two companies for
generic carfilzomib products. The date of final approval of those ANDAs is
governed by the Hatch-Waxman Act and any applicable settlement agreements
between the parties.
EPOGEN®
Total EPOGEN® sales were as follows (dollar amounts in millions):
Year ended Year ended
Year ended December 31, December 31,
December 31, 2019 Change 2018 Change 2017
EPOGEN® - U.S. $ 867 (14 )% $ 1,010 (8 )% $ 1,096
The decreases in EPOGEN® sales for 2019 and 2018 were driven primarily by a
decline in net selling price due to our contract with DaVita. See Part I, Item
I. Business-Business Relationships. In 2020, we expect a lower net selling price
compared with 2019 due to our contract with DaVita.
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A biosimilar version of EPOGEN® has been approved and launched, and other
biosimilar versions may also receive approval in the future. Therefore, we face
increased competition in the United States , which has had and will continue to
have a material adverse impact on sales of EPOGEN®. For a discussion of ongoing
patent litigation related to one of these biosimilars, see Part IV-Note 19,
Contingencies and commitments, to the Consolidated Financial Statements.
Sensipar®/Mimpara®
Total Sensipar®/Mimpara® sales by geographic region were as follows (dollar
amounts in millions):
Year ended Year ended
Year ended December 31, December 31,
December 31, 2019 Change 2018 Change 2017
Sensipar® - U.S. $ 252 (82 )% $ 1,436 5 % $ 1,374
Sensipar®/Mimpara® - ROW 299 (12 )% 338 (2 )% 344
Total Sensipar®/Mimpara® $ 551 (69 )% $ 1,774 3 % $ 1,718
The decrease in global Sensipar®/Mimpara® sales for 2019 was driven by the
impact of generic competitors on unit demand.
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.
Our U.S. composition-of-matter patent related to Sensipar®, a small molecule,
expired in March 2018 . We are involved in litigation with a number of companies
seeking to market generic cinacalcet products surrounding our U.S. formulation
patent, which expires in September 2026 . During the course of the patent
litigation, we have entered into confidential settlement agreements with several
of these companies. The court has entered consent judgments enjoining certain of
those companies from infringing certain of our patents, subject to terms of the
confidential settlement agreements. See Part IV-Note 19, Contingencies and
commitments, to the Consolidated Financial Statements. Companies manufacturing
generics began selling their generic cinacalcet products in the United States in
late 2018 and 2019. Sensipar® sales have been and, we believe, may continue to
be adversely impacted as a result of generic-product sales in the U.S. market.
51
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Other products
Other product sales by geographic region were as follows (dollar amounts in
millions):
Year ended Year ended Year ended
December 31, December 31, December 31,
2019 Change 2018 Change 2017
Nplate® - U.S. $ 480 10 % $ 438 12 % $ 392
Nplate® - ROW 315 13 % 279 12 % 250
Vectibix® - U.S. 316 10 % 288 15 % 251
Vectibix® - ROW 428 6 % 403 3 % 391
Repatha® - U.S. 376 5 % 358 59 % 225
Repatha® - ROW 285 48 % 192 * 94
Parsabiv® - U.S. 550 82 % 302 * -
Parsabiv® - ROW 80 * 34 * 5
BLINCYTO® - U.S. 176 31 % 134 18 % 114
BLINCYTO® - ROW 136 42 % 96 57 % 61
Aimovig® - U.S. 306 * 119 * -
NEUPOGEN® - U.S. 178 (20 )% 223 (40 )% 369
NEUPOGEN® - ROW 86 (39 )% 142 (21 )% 180
KANJINTITM - U.S. 118 * - - % -
KANJINTITM - ROW 108 * 44 * -
AMGEVITATM - ROW 215 * 11 * -
EVENITY® - U.S. 42 * - - % -
EVENITY® - ROW 147 * - - % -
Otezla® - U.S. 139 * - - % -
Otezla® - ROW 39 * - - % -
MVASITM - U.S. 121 * - - % -
MVASITM - ROW 6 * - - % -
Other - U.S. 105 24 % 85 25 % 68
Other - ROW 207 9 % 190 4 % 183
Total other product sales $ 4,959 49 % $ 3,338 29 % $ 2,583
Total U.S. - other products $ 2,907 49 % $ 1,947 37 % $ 1,419
Total ROW - other products 2,052 48 % 1,391 20 % 1,164
Total other product sales $ 4,959 49 % $ 3,338 29 % $ 2,583
* Change in excess of 100%.
52
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Operating expenses
Operating expenses were as follows (dollar amounts in millions):
Year ended Year ended Year ended
December 31, 2019 Change December 31, 2018 Change December 31, 2017
Operating expenses:
Cost of sales $ 4,356 6 % $ 4,101 1 % $ 4,069
% of product sales 19.6 % 18.2 % 18.7 %
% of total revenues 18.6 % 17.3 % 17.8 %
Research and development $ 4,116 10 % $ 3,737 5 % $ 3,562
% of product sales 18.5 % 16.6 % 16.3 %
% of total revenues 17.6 % 15.7 % 15.6 %
Selling, general and
administrative $ 5,150 (3 )% $ 5,332 9 % $ 4,870
% of product sales 23.2 % 23.7 % 22.3 %
% of total revenues 22.0 % 22.5 % 21.3 %
Other $ 66 (79 )% $ 314 (16 )% $ 375
Cost of sales
Cost of sales increased to 18.6% of total revenues for 2019, driven primarily by
unfavorable product mix and amortization of intangible assets as a result of our
acquisition of Otezla®, offset partially by lower royalties and lower
manufacturing costs.
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.
Research and development
The Company groups all of its R&D activities and related expenditures into three
categories: (i) research and early pipeline, (ii) later-stage clinical programs
and (iii) marketed products. These categories are described below:
Category Description
R&D expenses incurred in activities substantially in
support of early research through the completion of
Research and early pipeline phase 1 clinical trials, including drug discovery,
toxicology, pharmacokinetics and drug metabolism, and
process development
R&D expenses incurred in or related to phase 2 and
phase 3 clinical programs intended to result in
Later-stage clinical programs registration of a new product or a new indication for
an existing product primarily in the United States or
the EU
R&D expenses incurred in support of the Company's
marketed products that are authorized to be sold
primarily in the United States or the EU. Includes
clinical trials designed to gather information on
product safety (certain of which may be required by
Marketed products regulatory authorities) and their product
characteristics after regulatory approval has been
obtained, as well as the costs of obtaining
regulatory approval of a product in a new market
after approval in either the United States or the EU
has been obtained
R&D expense by category was as follows (in millions):
Years ended December 31,
2019 2018 2017
Research and early pipeline $ 1,649 $ 1,201 $ 972
Later-stage clinical programs 1,062 1,034 879
Marketed products 1,405 1,502 1,711
Total R&D expense $ 4,116 $ 3,737 $ 3,562
53-------------------------------------------------------------------------------- The increase in R&D expense for 2019 was driven primarily by higher spend in research and early pipeline in support of our oncology programs, offset partially by lower marketed-product support. The increase in R&D expense for 2018 was driven by higher spend on our early pipeline and later-stage clinical programs as well as external business development expense in research and early pipeline, offset partially by lower marketed-product support. Selling, general and administrative The decrease in Selling, general and administrative (SG&A) expenses for 2019 was driven primarily by lower general and administrative expenses, the end of certain amortization charges in 2018 and lower spend for launched and marketed products, offset partially by spending for Otezla® commercial-related expenses. The increase in SG&A expense for 2018 was driven primarily by investments in product launches and marketed-product support. Other Other operating expenses for 2019 included$47 million in restructuring costs. Other operating expenses for 2018 included a$330 million impairment charge associated with an IPR&D asset and a$42 million favorable net change in the fair values of contingent consideration liabilities. See Part IV-Note 17, Fair value measurement, 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 a restructuring plan. Nonoperating expenses/income and income taxes Nonoperating expenses/income and income taxes were as follows (dollar amounts in millions): Years ended December 31, 2019 2018 2017
Interest expense, net
14.2 % 12.1 % 79.4 %
Interest expense, net
The decrease in Interest expense, net, for 2019 was due primarily to a reduction
in outstanding long-term debt as a result of maturities in the current year.
The increase in Interest expense, net, for 2018 was due primarily to the impact
of rising interest rates on variable-rate debt.
Interest and other income, net
The increase in Interest and other income, net, for 2019 was due primarily to
net gains on sales of investments in interest-bearing securities liquidated to
fund our acquisition of Otezla® and our investment in BeiGene compared with
losses in the prior year, offset partially by reduced interest income as a
result of lower average cash balances and a gain recognized in connection with
our acquisition of Kirin-Amgen, Inc. (K-A), in the first quarter of 2018. See
Part IV-Note 2, Acquisitions, and Note 21, Subsequent events, to the
Consolidated Financial Statements.
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.
Income taxes
The increase in our effective tax rate for 2019 compared with 2018 was due
primarily to a prior-year tax benefit associated with intercompany sales under
U.S. corporate tax reform.
The decrease in our effective tax rate for 2018 compared with 2017 was due
primarily to impacts of U.S. corporate tax reform.
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As previously disclosed, we received an 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
substantially greater or less than amounts accrued.
See Summary of Critical Accounting Policies-Income taxes, and Part IV-Note 6,
Income taxes, to the Consolidated Financial Statements.
Financial Condition, Liquidity and Capital Resources
Selected financial data was as follows (in millions):
December 31,
2019 2018
Cash, cash equivalents and marketable securities
$ 59,707 $ 66,416 Current portion of long-term debt$ 2,953 $ 4,419 Long-term debt$ 26,950 $ 29,510 Stockholders' equity$ 9,673 $ 12,500 Cash, cash equivalents and marketable securities We have global access to our$8.9 billion balance of cash, cash equivalents and marketable securities. The primary objective of our investment portfolio is to maintain 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. 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 while returning capital to stockholders through the payment of cash dividends and stock repurchases, thereby 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, 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 the Company's agreements. In addition, the timing and amount of stock repurchases may also be affected by 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$1.15 per share of common stock paid in 2017, increased our quarterly cash dividend by 15% to$1.32 per share of common stock paid in 2018 and increased our quarterly cash dividend by 10% to$1.45 per share of common stock paid in 2019. InDecember 2019 , the Board of Directors declared a cash dividend of$1.60 per share of common stock for the first quarter of 2020, an increase of 10% for this period, to be paid inMarch 2020 . We also returned capital to stockholders through our stock repurchase program. During 2019, we repurchased$7.6 billion of common stock and had cash settlements of$7.7 billion . In 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, we repurchased$3.1 billion of common stock and had cash settlements of$3.2 billion . InMay 2019 andDecember 2019 , 55 -------------------------------------------------------------------------------- our Board of Directors increased the amount authorized under our stock repurchase program by an additional$5.0 billion and$4.0 billion , respectively. As ofDecember 31, 2019 ,$6.5 billion remained available under the stock repurchase program. As a result of stock repurchases and quarterly dividend payments, we have an accumulated deficit as ofDecember 31, 2019 and 2018. 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 ofDecember 31, 2019 , were$3.0 billion and$27.0 billion , respectively. The current and noncurrent portions of our long-term borrowings as ofDecember 31, 2018 , were$4.4 billion and$29.5 billion , respectively. As ofDecember 31, 2019 ,Standard & Poor's Financial Services LLC (S&P),Moody's Investors Service, Inc. (Moody's), andFitch 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 2019 and 2018, we did not issue any debt or debt securities. During 2017, we issued debt with an aggregate principal amount of$4.5 billion . During 2019, 2018 and 2017, we repaid debt of$4.5 billion ,$1.1 billion and$4.4 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 LIBOR-based coupon over the life of the respective note. These interest rate swap contracts qualify and are designated as fair value hedges. As ofDecember 31, 2019 and 2018, we had interest rate swap contracts with aggregate notional amounts of$9.6 billion and$11.0 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 toU.S. dollars. These cross-currency swap contracts qualify and are designated as cash flow hedges. As ofDecember 31, 2019 and 2018, we had cross-currency swap contracts with aggregate notional amounts of$4.8 billion and$5.6 billion , respectively. As ofDecember 31, 2019 , 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 of commercial paper and had a maximum outstanding balance of$1.5 billion under our commercial paper program. During 2019 and 2018, we did not issue any commercial paper. No commercial paper was outstanding as ofDecember 31, 2019 or 2018. In 2019, we amended and restated our$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$750 million with the agreement of the banks. Each bank that is a party to the agreement has an initial commitment term of five years. This term may be extended for up to two additional one-year periods 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 for any amounts borrowed under this facility, based on our current credit rating, at (i) LIBOR plus 1% or (ii) the highest of (A) the syndication agent bank base commercial lending rate, (B) the overnight federal funds rate plus 0.50% or (C) one-month LIBOR plus 1%. The agreement contains provisions relating to the determination of successor rates to address the possible phase-out or unavailability of designated reference rates. As ofDecember 31, 2019 and 2018, no amounts were outstanding under this facility. It is anticipated that LIBOR will be phased out and replaced by 2022. While various replacement reference rates have been discussed, an alternative reference rate to LIBOR has not yet been widely adopted. Therefore, the mechanics to modify existing contracts that reference LIBOR have not been finalized. However, we do not expect that a change in the reference rate of our contracts will be material. See Part 1, Item 1A. Risk Factors-Our sales and operations are subject to the risks of doing business internationally, including in emerging markets. 56 -------------------------------------------------------------------------------- InFebruary 2020 , we filed a shelf registration statement with theSEC 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 inFebruary 2023 . Certain of our financing arrangements contain nonfinancial covenants. In addition, our revolving credit agreement includes a financial covenant, which 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 credit agreement. We were in compliance with all applicable covenants under these arrangements as ofDecember 31, 2019 . See Part IV-Note 15, Financing arrangements, and Note 18, Derivative instruments, to the Consolidated Financial Statements. Cash flows Our summarized cash flow activity was as follows (in millions): Years ended
2019 2018 2017
Net cash provided by operating activities$ 9,150 $ 11,296 $ 11,177 Net cash provided by (used in) investing activities$ 5,709 $ 14,339 $ (4,024 ) Net cash used in financing activities$ (15,767 ) $ (22,490
)
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 decreased during 2019 due primarily to changes in working capital, an increase in payments to theIRS related to an advance deposit and lower Net income. Cash provided by operating activities increased during 2018 due primarily to improvements in working capital, offset partially by higher payments to tax authorities. Investing Cash provided by investing activities during 2019 and 2018 was due primarily to net cash inflows related to marketable securities of$20.0 billion and$15.0 billion , respectively. The liquidation of portions of our marketable securities portfolio in 2019 was due primarily to fund the acquisition of Otezla® and our investment in BeiGene and, in 2018, to fund the tender offer to repurchase our common stock. Cash used in investing activities during 2017 was due primarily to net cash outflows related to marketable securities of$3.2 billion . Capital expenditures were$618 million ,$738 million and$664 million in 2019, 2018 and 2017, respectively. We currently estimate 2020 spending on capital projects to be approximately$700 million . Financing Cash used in financing activities during 2019 was due primarily to repurchases of our common stock of$7.7 billion , repayments of debt of$4.5 billion and payments of dividends of$3.5 billion . Cash used in financing activities during 2018 was due primarily to repurchases of our common stock of$17.8 billion , payments of dividends of$3.5 billion and repayments of debt of$1.1 billion . Cash used in financing activities during 2017 was due primarily to payments of dividends of$3.4 billion and repurchases of common stock of$3.2 billion , offset partially by proceeds from issuances of debt, net of repayments, of$71 million . See Part IV-Note 15, Financing arrangements, and Note 16, 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. 57 --------------------------------------------------------------------------------
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):
Payments due by period as of December 31, 2019
Years 6
Contractual obligations Total Year 1 Years 2 and 3 Years 4 and 5 and beyond
Long-term debt obligations
(1) (2) (3) $ 48,080 $ 4,086 $ 9,612 $ 4,467 $ 29,915
Operating lease obligations (4) 910 159 266 157 328
Purchase obligations (5) 1,938 1,512 255 100 71
U.S. repatriation tax (6) 6,162 587 1,174 2,567 1,834
Unrecognized tax benefits
(UTBs) (7) - - - - -
Total contractual obligations $ 57,090 $ 6,344 $ 11,307 $ 7,291 $ 32,148 (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
interest rate swap contracts, which resulted in an aggregate net decrease in
future interest payments of
arrangements, to the Consolidated Financial Statements.
(2) Long-term debt obligations include future interest payments on ourLIBOR-based variable-rate obligations. We used an interest rate forward
curve as of
interest payments on these debt obligations. See Part IV-Note 15, Financing
arrangements, to the Consolidated Financial Statements.
(3) Long-term debt obligations include contractual interest payments andprincipal repayments 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 entered into cross-currency swap contracts that effectively
converted interest payments and principal repayments on this debt from
euros, pounds sterling and Swiss francs to U.S. dollars. For purposes ofthis 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 18, Derivative
instruments, to the Consolidated Financial Statements.
(4) Operating lease obligations includes payments for leases that have not yet
commenced, net of lease incentives, and excludes
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 in eight annual installments the
repatriation tax related primarily to our prior indefinitely invested
earnings of our foreign operations. See Part IV-Note 19, Contingencies and
commitments-Commitments - U.S. repatriation tax, to the Consolidated
Financial Statements.
(7) Liabilities for UTBs are not included in the table above because due totheir nature there is a high degree of uncertainty regarding the timing of
future cash outflows and other events that extinguish these liabilities. See
Part IV-Note 6, Income taxes, to the Consolidated Financial Statements.
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 acquisitions ofK-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 ofDecember 31, 2019 , the maximum amount that may be payable in the future for agreements we have entered into with third parties is$7.3 billion , including$325 million of contingent consideration payments in connection with the acquisition ofBioVex . Contingent 58 -------------------------------------------------------------------------------- consideration with respect to the acquisition ofDezima Pharma B.V. was excluded due to the discontinuation of the development of AMG 899, upon which payments are based. See Part IV-Note 17, Fair value measurement, to the Consolidated Financial Statements. Summary of Critical Accounting Policies The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Product sales and sales deductions Revenue from product sales is recognized upon transfer of control of a product to a customer, generally upon delivery, based on an amount that reflects the consideration to which we expect to be entitled, net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively, sales deductions) and returns established at the time of sale. We analyze the adequacy of our accruals for sales deductions quarterly. Amounts accrued for sales deductions are adjusted when trends or significant events indicate that adjustment is appropriate. Accruals are also adjusted to reflect actual results. Amounts recorded in Accrued liabilities in the Consolidated Balance Sheets for sales deductions were as follows (in millions): Rebates Chargebacks Other deductions Total Balance as of December 31, 2016$ 1,417 $ 342 $ 115$ 1,874 Amounts charged against product sales 4,909 6,098 992 11,999 Payments (4,459 ) (6,168 ) (999 ) (11,626 ) Balance as of December 31, 2017 1,867 272 108 2,247 Amounts charged against product sales 6,180 6,926 1,180 14,286 Payments (5,458 ) (6,744 ) (1,161 ) (13,363 ) Balance as of December 31, 2018 2,589 454 127 3,170 Amounts charged against product sales 6,825 7,090 1,292 15,207 Payments (6,249 ) (6,985 ) (1,263 ) (14,497 )
Balance as of
156
For the years endedDecember 31, 2019 , 2018 and 2017, total sales deductions were 41%, 39% and 35% of gross product sales, respectively. The increase in the total sales deductions balance as ofDecember 31, 2019 compared toDecember 31, 2018 , was driven primarily by the impact of increases inU.S. rebates and to a lesser extent, higher chargebacks. 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 endedDecember 31, 2019 , 2018 and 2017. Inthe 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 inEurope 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 inthe 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 59 -------------------------------------------------------------------------------- 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 inthe 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 betweenAmgen 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 tax 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 tax 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 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 inthe United States and various foreign jurisdictions. We are subject to income tax in the foreign jurisdictions where we conduct operations 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 inPuerto Rico , a territory ofthe United States that is treated as a foreign jurisdiction forU.S. tax purposes, pertaining to manufacturing, distribution and other related functions to meet our worldwide product demand. Income from our operations inPuerto Rico is subject to tax incentive grants through 2035. As previously disclosed, we received an RAR from theIRS 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 inthe United States and theU.S. territory ofPuerto Rico . InNovember 2017 , we received a modified RAR that revised theIRS's calculation but continued to propose substantial adjustments. We disagree with the proposed adjustments and are pursuing resolution with theIRS 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 substantially greater or less than amounts accrued. See Part IV-Note 6, Income taxes, to the Consolidated Financial Statements. 60 -------------------------------------------------------------------------------- Our operations are subject to the tax laws, regulations and administrative practices ofthe United States ,U.S. state jurisdictions and other countries, including theU.S. territory ofPuerto 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 19, 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 acquisitions We have acquired and continue to acquire intangible assets in connection with business combinations and asset acquisitions. 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 an acquisition. See Part IV-Note 2, Acquisitions, 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
business combination 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 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 and assets acquisitions are based on reasonable estimates and
assumptions given the facts and circumstances as of the related valuation dates.
61--------------------------------------------------------------------------------
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 ofDecember 31, 2019 .
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