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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017
Product sales:
U.S.	$	17,429			2	%		$	17,131
Rest of world (ROW)	5,104				9	%		4,664
Total product sales	22,533				3	%		21,795
Other revenues	1,214				15	%		1,054
Total revenues	$	23,747			4	%		$	22,849
Operating expenses	$	13,484			5	%		$	12,876
Operating income	$	10,263			3	%		$	9,973
Net income	$	8,394			*			$	1,979
Diluted EPS	$	12.62			*			$	2.69
Diluted shares	665				(10	)%		735

• 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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
ENBREL	$	5,014			(8	)%		$	5,433			(9	)%		$	5,965
Neulasta®	4,475				(1	)%		4,534				(2	)%		4,648
Prolia®	2,291				16	%		1,968				20	%		1,635
Aranesp®	1,877				(9	)%		2,053				(2	)%		2,093
XGEVA®	1,786				13	%		1,575				3	%		1,529
Sensipar®/Mimpara®	1,774				3	%		1,718				9	%		1,582
EPOGEN®	1,010				(8	)%		1,096				(15	)%		1,282
Other products	4,306				26	%		3,418				8	%		3,158
Total product sales	$	22,533			3	%		$	21,795			—	%		$	21,892
Total U.S.	$	17,429			2	%		$	17,131			(1	)%		$	17,325
Total ROW	5,104				9	%		4,664				2	%		4,567
Total product sales	$	22,533			3	%		$	21,795			—	%		$	21,892

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 December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
ENBREL — U.S.	$	4,807			(8	)%		$	5,206			(9	)%		$	5,719
ENBREL — Canada	207				(9	)%		227				(8	)%		246
Total ENBREL	$	5,014			(8	)%		$	5,433			(9	)%		$	5,965

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
Neulasta® — U.S.	$	3,866			(2	)%		$	3,931			—	%		$	3,925
Neulasta® — ROW	609				1	%		603				(17	)%		723
Total Neulasta®	$	4,475			(1	)%		$	4,534			(2	)%		$	4,648

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
Prolia® — U.S.	$	1,500			18	%		$	1,272			21	%		$	1,049
Prolia® — ROW	791				14	%		696				19	%		586
Total Prolia®	$	2,291			16	%		$	1,968			20	%		$	1,635

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
Aranesp® — U.S.	$	942			(15	)%		$	1,114			3	%		$	1,082
Aranesp® — ROW	935				—	%		939				(7	)%		1,011
Total Aranesp®	$	1,877			(9	)%		$	2,053			(2	)%		$	2,093

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
XGEVA® — U.S.	$	1,338			16	%		$	1,157			4	%		$	1,115
XGEVA® — ROW	448				7	%		418				1	%		414
Total XGEVA®	$	1,786			13	%		$	1,575			3	%		$	1,529

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
Sensipar® — U.S.	$	1,436			5	%		$	1,374			11	%		$	1,240
Sensipar®/Mimpara® — ROW	338				(2	)%		344				1	%		342
Total Sensipar®/Mimpara®	$	1,774			3	%		$	1,718			9	%		$	1,582

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
EPOGEN® — U.S.	$	1,010			(8	)%		$	1,096			(15	)%		$	1,282

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):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
KYPROLIS® — U.S.	$	583			4	%		$	562			1	%		$	554
KYPROLIS® — ROW	385				41	%		273				98	%		138
Nplate® — U.S.	438				12	%		392				12	%		350
Nplate® — ROW	279				12	%		250				7	%		234
Vectibix® — U.S.	288				15	%		251				10	%		229
Vectibix® — ROW	403				3	%		391				2	%		382
Repatha® — U.S.	358				59	%		225				*			101
Repatha® — ROW	192				*			94				*			40
NEUPOGEN® — U.S.	223				(40	)%		369				(31	)%		534
NEUPOGEN® — ROW	142				(21	)%		180				(22	)%		231
Parsabiv® — U.S.	302				*			—				—	%		—
Parsabiv® — ROW	34				*			5				*			—
BLINCYTO® — U.S.	134				18	%		114				34	%		85
BLINCYTO® — ROW	96				57	%		61				*			30
Aimovig® — U.S.	119				*			—				—	%		—
Biosimilars — ROW	55				*			—				—	%		—
Other — U.S.	85				25	%		68				13	%		60
Other — ROW	190				4	%		183				(4	)%		190
Total other product sales	$	4,306			26	%		$	3,418			8	%		$	3,158
Total U.S. — other products	$	2,530						$	1,981						$	1,913
Total ROW — other products	1,776							1,437							1,245
Total other product sales	$	4,306						$	3,418						$	3,158

• Change in excess of 100%

Operating expenses

Operating expenses were as follows (dollar amounts in millions):

	Year ended December 31, 2018				Change			Year ended December 31, 2017				Change			Year ended December 31, 2016
Operating expenses:
Cost of sales	$	4,101			1	%		$	4,069			(2	)%		$	4,162
% of product sales	18.2		%					18.7		%					19.0		%
% of total revenues	17.3		%					17.8		%					18.1		%
Research and development	$	3,737			5	%		$	3,562			(7	)%		$	3,840
% of product sales	16.6		%					16.3		%					17.5		%
% of total revenues	15.7		%					15.6		%					16.7		%
Selling, general and administrative	$	5,332			9	%		$	4,870			(4	)%		$	5,062
% of product sales	23.7		%					22.3		%					23.1		%
% of total revenues	22.5		%					21.3		%					22.0		%
Other	$	314			(16	)%		$	375			*			$	133

• 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:

Category		Description
Research and early pipeline		R&D expenses incurred in activities substantially in support of early research through the completion of phase 1 clinical trials, including drug discovery, toxicology, pharmacokinetics and drug metabolism, and process development.
Later-stage clinical programs		R&D expenses incurred in or related to phase 2 and phase 3 clinical programs intended to result in registration of a new product or a new indication for an existing product in the United States or the EU.
Marketed products		R&D expenses incurred in support of the Company’s marketed products that are authorized to be sold in the United States or the EU. Includes clinical trials designed to gather information on product safety (certain of which may be required by 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,
	2018				2017				2016
Research and early pipeline	$	1,201			$	972			$	1,039
Later-stage clinical programs	1,034				879				1,054
Marketed products	1,502				1,711				1,747
Total R&D expense	$	3,737			$	3,562			$	3,840

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):

	Years ended December 31,
	2018				2017				2016
Interest expense, net	$	1,392			$	1,304			$	1,260
Interest and other income, net	$	674			$	928			$	629
Provision for income taxes	$	1,151			$	7,618			$	1,441
Effective tax rate	12.1		%		79.4		%		15.7		%

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):

	December 31,
	2018				2017
Cash, cash equivalents and marketable securities	$	29,304			$	41,678
Total assets	$	66,416			$	79,954
Current portion of long-term debt	$	4,419			$	1,152
Long-term debt	$	29,510			$	34,190
Stockholders’ equity	$	12,500			$	25,241

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):

	Years ended December 31,
	2018				2017				2016
Net cash provided by operating activities	$	11,296			$	11,177			$	10,354
Net cash provided by (used in) investing activities	$	14,339			$	(4,024	)		$	(8,658	)
Net cash used in financing activities	$	(22,490	)		$	(6,594	)		$	(2,599	)

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):

		Payments due by period as of December 31, 2018
Contractual obligations		Total				Year 1				Years 2 and 3				Years 4 and 5				Years 6 and beyond
Long-term debt obligations (1) (2) (3)		$	54,276			$	5,856			$	8,777			$	7,444			$	32,199
Operating lease obligations (4)		569				164				239				120				46
Purchase obligations (5)		1,153				609				305				124				115
U.S. repatriation tax (6)		6,739				586				1,172				1,685				3,296
Unrecognized tax benefits (UTBs) (7)		—				—				—				—				—
Total contractual obligations		$	62,737			$	7,215			$	10,493			$	9,373			$	35,656

(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):

	Rebates				Chargebacks				Other deductions				Total
Balance as of December 31, 2015	$	1,119			$	273			$	94			$	1,486
Amounts charged against product sales	3,479				5,270				905				9,654
Payments	(3,181		)		(5,201		)		(884		)		(9,266		)
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

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.