Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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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, 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, collaborations and effects of pandemics. 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 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 celebrated 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, Prolia®, Neulasta®, Otezla®, XGEVA®, Aranesp®, KYPROLIS® and Repatha®. We also market a number of other products, including Nplate®, Vectibix®, MVASI®, Parsabiv®, EPOGEN®, KANJINTI®, BLINCYTO®, Aimovig®, EVENITY®, AMGEVITATM, Sensipar®/Mimpara®, NEUPOGEN®, IMLYGIC®, Corlanor® and AVSOLA®. 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, CV disease, nephrology and neuroscience, and we conduct discovery research primarily in three therapeutic areas: inflammation, oncology/hematology and CV/metabolic diseases. In 2020, we advanced our innovative pipeline, successfully integrated Otezla®, acquired in November 2019, into our inflammation portfolio, advanced our international expansion and continued to provide uninterrupted supply of our medicines globally through the COVID-19 pandemic. We accomplished these objectives while maintaining a strategic and disciplined approach to capital allocation, and advancing our environmental, social and governance efforts.

During the year, while meeting the challenges of a global pandemic and facing increased competition from biosimilars and generics, total product sales increased 9%, driven by volume growth primarily from Otezla®, partially offset by lower net selling prices. Product sales increased 9% and 10% in the United States and rest of the world, respectively. Total operating expenses increased 19%, driven by expenses related to Otezla®.

We continued to advance our pipeline, including sotorasib and tezepelumab—two molecules with respect to which we have achieved positive registration enabling data from our clinical trial activities. We also continued to advance our biosimilar program with the launch of AVSOLA® and the approval of RIABNITM in the United States. Our biosimilars are expected to launch in new markets throughout 2021. Lastly, we broadened our international reach, particularly in the Asia Pacific region with our investment in and strategic collaboration with BeiGene to expand our oncology presence in China, as well as the establishment of our wholly owned affiliate in Japan.

Cash flows from operating activities totaled $10.5 billion, enabling us to invest in our business while returning capital to shareholders through the payment of cash dividends and stock repurchases. For 2020, we increased our quarterly cash dividend by 10% to $1.60 per share of common stock. In December 2020, we declared a cash dividend of $1.76 per share of common stock for the first quarter of 2021, an increase of 10% for this period, to be paid in March 2021. We also repurchased 15.2 million shares of our common stock throughout 2020, at an aggregate cost of $3.5 billion. During the year, we had proceeds from the issuance of debt of $8.9 billion and repayments of debt of $6.5 billion. In addition, we exchanged some of our higher interest rate debt for newly issued debt with a lower interest rate and a later maturity date.

Amgen’s approach to, and investment in, human capital resource management is directed at attracting, motivating and retaining talent to tackle the challenges of running an enterprise focused on the discovery, development, and commercialization of innovative medicines. Our compensation, benefits and development programs are designed to encourage performance, promote accountability and adherence to Company values, and in alignment with the interests of the Company’s shareholders. Further, we believe that a diverse and inclusive culture fosters innovation, which supports our ability to serve patients. We also believe our global presence is strengthened by having a workforce that reflects the diversity of the patients we serve. It is with these beliefs in mind that we have continued to strengthen and grow our culture of diversity, inclusion and belonging. Our internal efforts include, in 2019, establishing a Diversity, Inclusion and Belonging Council. We are engaging in activities and setting goals to improve our focus on diversity, inclusion and belonging. For further information on these and other efforts, see Part I, Item 1. Business—Human Capital Resources.

We have a long-standing ambition to be environmentally responsible, and we regularly set targets to challenge ourselves to deliver further improvements. In 2020, we met or exceeded our environmental sustainability targets set out in 2013 that called for reducing fleet carbon output by up to 20%, facility carbon output by 10%, water consumption by 10% and waste disposal by 35%2. We achieved our 2020 targets while growing revenues, increasing production capacity, and expanding to more than 100 countries over the same 2013 to 2020 period. To continue on our path to greater environmental sustainability, in January 2021 we announced a new set of long-term environmental targets to achieve by 2027, including achieving carbon neutrality, reducing water consumption by 40% and reducing waste disposed by 75%.

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. We also face increasing regulatory scrutiny of safety and efficacy both before and after products launch.

Rising healthcare costs and uncertain economic conditions continue to pose challenges to our business, including increasing 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. See Part I, Item 1. Business—Marketing, Distribution and Selected Marketed Products and Part I, Item 1A. Risk Factors for further discussion of certain factors that could impact our future product sales.

COVID-19 pandemic

The COVID-19 pandemic has had a moderate impact to our business in 2020. Since the onset of the pandemic in early 2020, we have been carefully monitoring its impact on our global operations. We have taken appropriate steps to minimize the risk to our employees. A significant number of our employees have been working remotely, with the exception of certain staff that require access to our manufacturing and laboratory research facilities, in accordance with applicable government health and safety protocols and guidance issued in response to the COVID-19 pandemic. To date, our remote working arrangements have not significantly affected our ability to maintain critical business operations, and we have not experienced disruptions or shortages of our supply of medicines.

Since the beginning of the COVID-19 pandemic, we have seen changes in demand trends for some of our products, including lower demand for certain products as continuing patient access to those products has been affected by COVID-19, particularly in the early phases of the pandemic. For example, near the end of March, we began to observe a decline in sales of Prolia®, as elderly patients, who are relatively more vulnerable to COVID-19, avoided doctors’ offices. Demand has since recovered to varying degrees by product as local conditions improved in certain geographies that opened after an initial improvement in COVID-19 infection rates, allowing patients to resume receiving their treatments. During the second half of the year, our own efforts remain focused on assisting patients with improving their continuity of care to increase product access as compared to what they experienced during the earlier stages of the pandemic. Recently, higher rates of infection have been observed in certain geographies, including the United States and Europe, which may further restrict demand, similar to early phases of the pandemic. As a result, we expect to see continued volatility through at least the duration of the pandemic as governments respond to current local conditions.

2 Represents reductions against established baselines, taking into account only verified reduction projects, and does not take into account changes associated with contraction or expansion of the company.

The majority of clinical trials that were paused at the onset of the pandemic to ensure subject safety or data integrity have resumed. Study enrollment was affected negatively the most in the second quarter of the year and by the end of 2020 resumed to around pre-pandemic levels. However, going forward COVID-19 infection rates and related vaccination activities may impact future study enrollment. We continuously monitor our ability for study enrollment on an institution by institution basis and reevaluate the status of studies, pausing when uncertainty arises with regard to the trial sites’ ability to ensure safety or data integrity. We remain focused on supporting our active clinical sites in providing care for these patients and in providing investigational drug supply. In addition, our R&D organization is supporting efforts to combat the COVID-19 pandemic in a number of ways, including by (i) working to support production of therapeutic antibodies that could diminish the impact of COVID-19 on patients, (ii) joining a public–private partnership between leading companies in our industry and U.S. government health agencies to develop a strategy for a coordinated research response and (iii) participating in platform studies to investigate treatments in adult patients hospitalized with severe COVID-19 infections.

We continue to 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 expenditures and debt service requirements as well as to engage in the capital-return and other business initiatives that we plan to strategically pursue. For a discussion of the risks presented by the COVID-19 pandemic to our results, see Part I, Item 1A. Risk Factors of this Form 10-K.

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, 2020		Change		Year ended December 31, 2019
Product sales:
U.S.	$	17,985	9	%	$	16,531
Rest-of-world (ROW)	6,255		10	%	5,673
Total product sales	24,240		9	%	22,204
Other revenues	1,184		2	%	1,158
Total revenues	$	25,424	9	%	$	23,362
Operating expenses	$	16,285	19	%	$	13,688
Operating income	$	9,139	(6)	%	$	9,674
Net income	$	7,264	(7)	%	$	7,842
Diluted EPS	$	12.31	(4)	%	$	12.88
Diluted shares	590		(3)	%	609

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 by wholesaler customers and end users (such as pharmacies).

Total product sales increased for 2020, primarily driven by unit demand increases from newer brands including Otezla®, acquired in November 2019, MVASI®, KANJINTI® and Repatha®. These unit demand increases were partially offset by declines in net selling prices for certain products, unit demand declines for mature brands that face biosimilar or generic competition and the effects of the COVID-19 pandemic. For 2021, we expect that net selling prices will continue to decline. We also expect increasing competition against our biosimilar products. Further, the first quarter historically represents the lowest product sales quarter for the year, in part, due to plan changes, insurance reverifications and higher co-pay expenses as U.S. patients work through deductibles, particularly for our pharmacy benefit products.

During the initial stages of the COVID-19 pandemic, we experienced changes in demand trends for some of our products. The pandemic interrupted many physician–patient interactions, which led to delays in diagnosis and treatment, with varying degrees of impact across our portfolio. In general, sales of negatively affected products fell the most in the early part of the second quarter, with product demand beginning to show some recovery in the second half of the year but still below pre-pandemic levels. Nevertheless, given the increased intensity exiting 2020 and the unpredictable nature of the pandemic, we expect there could be intermittent disruptions in physician–patient interactions going forward, and thus we continue to expect quarter-to-quarter variability. See Part I, Item 1A. Risk Factors of this Form 10-K.

In addition, other changes in the healthcare ecosystem introduce variability into product sales trends. For example, changes in U.S. employment could lead to changes to the insured population, with growth in Medicaid enrollees and uninsured individuals having a negative impact on revenues. Overall, uncertainty has increased around the timing and magnitude of our sales during the COVID-19 pandemic.

Other revenues increased for 2020, primarily driven by higher royalties.

Operating expenses increased for 2020, primarily driven by acquisition- and commercial-related expenses for Otezla®.

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 partially offset 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 2020, 2019 or 2018.

Results of Operations

Product sales

Worldwide product sales were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
ENBREL	$	4,996	(4)	%	$	5,226	4	%	$	5,014
Prolia®	2,763		3	%	2,672		17	%	2,291
Neulasta®	2,293		(29)	%	3,221		(28)	%	4,475
Otezla®	2,195		*		178		N/A		—
XGEVA®	1,899		(2)	%	1,935		8	%	1,786
Aranesp®	1,568		(9)	%	1,729		(8)	%	1,877
KYPROLIS®	1,065		2	%	1,044		8	%	968
Repatha®	887		34	%	661		20	%	550
Other products	6,574		19	%	5,538		(1)	%	5,572
Total product sales	$	24,240	9	%	$	22,204	(1)	%	$	22,533
Total U.S.	$	17,985	9	%	$	16,531	(5)	%	$	17,429
Total ROW	6,255		10	%	5,673		11	%	5,104
Total product sales	$	24,240	9	%	$	22,204	(1)	%	$	22,533

Change in excess of 100%.

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, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
ENBREL — U.S.	$	4,855	(4)	%	$	5,050	5	%	$	4,807
ENBREL — Canada	141		(20)	%	176		(15)	%	207
Total ENBREL	$	4,996	(4)	%	$	5,226	4	%	$	5,014

The decrease in ENBREL sales for 2020 was driven by lower unit demand and net selling price, partially offset by favorable changes to estimated sales deductions and inventory. Consistent with prior periods, ENBREL has continued to lose market share, and this decline has been compounded by a reduction in the growth rate of the rheumatology market as a result of COVID-19. For 2021, we expect ENBREL to follow the historic pattern of lower sales in the first quarter relative to subsequent quarters due to the impact of benefit plan changes, insurance reverification and increase co-pay expenses as U.S. patients work through deductibles. In addition, for 2021, we expect volume and net selling price declines to continue.

The increase in ENBREL sales for 2019 was primarily driven by favorable changes to estimated sales deductions and an increase in net selling price, partially offset by lower unit demand.

In April 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. 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. Other companies are also developing proposed biosimilar versions of ENBREL.

Prolia*®*

Total Prolia® sales by geographic region were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
Prolia® — U.S.	$	1,830	3	%	$	1,772	18	%	$	1,500
Prolia® — ROW	933		4	%	900		14	%	791
Total Prolia®	$	2,763	3	%	$	2,672	17	%	$	2,291

Disruptions in patient visits as a result of the COVID-19 pandemic affected demand during 2020 by altering the timing of patients receiving their semiannual doses and by lowering the diagnosis of osteoporosis in new patients. This deceleration of demand has softened the historical growth rates and altered demand patterns of Prolia® experienced in years prior to the pandemic. For 2021, historical demand patterns may continue to be impacted by the pandemic.

The increase in global Prolia® sales for 2020 was driven by higher unit demand and net selling price.

The increase in global Prolia® sales for 2019 was driven by higher unit demand.

Neulasta*®*

Total Neulasta® sales by geographic region were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
Neulasta® — U.S.	$	2,001	(29)	%	$	2,814	(27)	%	$	3,866
Neulasta® — ROW	292		(28)	%	407		(33)	%	609
Total Neulasta®	$	2,293	(29)	%	$	3,221	(28)	%	$	4,475

The decreases in global Neulasta® sales for 2020 and 2019 were driven by the impact of biosimilar competition on net selling price and unit demand. Neulasta® sales included a $98 million order from the U.S. government in the first quarter of 2019.

We have increased competition in the United States and Europe as a result of biosimilar versions of Neulasta®, which has had and will continue to have a material adverse impact on sales. We also expect other biosimilar versions to be approved in the future. 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.

Otezla*®*

Total Otezla® sales by geographic region were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change	Year ended December 31, 2019		Change	Year ended December 31, 2018
Otezla® — U.S.	$	1,790	*	$	139	N/A	$	—
Otezla® — ROW	405		*	39		N/A	—
Total Otezla®	$	2,195	*	$	178	N/A	$	—

Change in excess of 100%.

Otezla® was acquired on November 21, 2019, and generated $2.2 billion and $178 million in global sales for the years ended December 31, 2020 and 2019, respectively. For 2021, we expect Otezla® to follow the historic pattern of lower sales in the first quarter relative to subsequent quarters due to the impact of benefit plan changes, insurance reverification and increase co-pay expenses as U.S. patients work through deductibles.

For a discussion of ongoing litigation related to Otezla®, see Part IV—Note 19, Contingencies and commitments, to the Consolidated Financial Statements.

XGEVA*®*

Total XGEVA® sales by geographic region were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
XGEVA® — U.S.	$	1,405	(4)	%	$	1,457	9	%	$	1,338
XGEVA® — ROW	494		3	%	478		7	%	448
Total XGEVA®	$	1,899	(2)	%	$	1,935	8	%	$	1,786

The decrease in global XGEVA® sales for 2020 was driven by lower unit demand as a result of the COVID-19 pandemic.

The increase in global XGEVA® sales for 2019 was primarily driven by higher unit demand.

Aranesp*®*

Total Aranesp® sales by geographic region were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
Aranesp® — U.S.	$	629	(17)	%	$	758	(20)	%	$	942
Aranesp® — ROW	939		(3)	%	971		4	%	935
Total Aranesp®	$	1,568	(9)	%	$	1,729	(8)	%	$	1,877

The decrease in global Aranesp® sales for 2020 was driven by declines in net selling price and unit demand.

The decrease in global Aranesp® sales for 2019 was primarily driven 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®. For 2021, we expect that sales will continue to decline 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, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
KYPROLIS® — U.S.	$	710	9	%	$	654	12	%	$	583
KYPROLIS® — ROW	355		(9)	%	390		1	%	385
Total KYPROLIS®	$	1,065	2	%	$	1,044	8	%	$	968

The increase in global KYPROLIS® sales for 2020 was primarily driven by an increase in net selling price and favorable changes in inventory, partially offset by lower unit demand.

The increase in global KYPROLIS*®* sales for 2019 was primarily driven by higher unit demand.

We are engaged in litigation with two companies that are challenging certain of our 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 reported that it has granted tentative or final approval to Abbreviated New Drug Applications (ANDAs) for generic carfilzomib products filed by a number of companies for generic carfilzomib products. The date of approval of those ANDAs for generic carfilzomib products is governed by the Hatch-Waxman Act and any applicable settlement agreements between the parties.

Repatha*®*

Total Repatha® sales by geographic region were as follows (dollar amounts in millions):


	Year ended December 31, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
Repatha® — U.S.	$	459	22	%	$	376	5	%	$	358
Repatha® — ROW	428		50	%	285		48	%	192
Total Repatha®	$	887	34	%	$	661	20	%	$	550

The increases in global Repatha® sales for 2020 and 2019 were driven by higher unit demand, partially offset by lower net selling price. The decrease to the Repatha® net selling price in 2020 was the result of contracting changes to improve Medicare Part D patient access.

For a discussion of ongoing litigation related to Repatha®, see Part IV—Note 19, 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, 2020		Change		Year ended December 31, 2019		Change		Year ended December 31, 2018
Nplate® — U.S.	$	485	1	%	$	480	10	%	$	438
Nplate® — ROW	365		16	%	315		13	%	279
Vectibix® — U.S.	342		8	%	316		10	%	288
Vectibix® — ROW	469		10	%	428		6	%	403
MVASI® — U.S.	656		*		121		N/A		—
MVASI® — ROW	142		*		6		N/A		—
Parsabiv® — U.S.	605		10	%	550		82	%	302
Parsabiv® — ROW	111		39	%	80		*		34
EPOGEN® — U.S.	598		(31)	%	867		(14)	%	1,010
KANJINTI® — U.S.	475		*		118		N/A		—
KANJINTI® — ROW	92		(15)	%	108		*		44
BLINCYTO® — U.S.	231		31	%	176		31	%	134
BLINCYTO® — ROW	148		9	%	136		42	%	96
Aimovig® — U.S.	378		24	%	306		*		119
EVENITY® — U.S.	191		*		42		N/A		—
EVENITY® — ROW	159		8	%	147		N/A		—
AMGEVITATM — ROW	331		54	%	215		*		11
Sensipar® — U.S.	92		(63)	%	252		(82)	%	1,436
Sensipar®/Mimpara® — ROW	196		(34)	%	299		(12)	%	338
NEUPOGEN® — U.S.	144		(19)	%	178		(20)	%	223
NEUPOGEN® — ROW	81		(6)	%	86		(39)	%	142
Other — U.S.	109		4	%	105		24	%	85
Other — ROW	174		(16)	%	207		9	%	190
Total other product sales	$	6,574	19	%	$	5,538	(1)	%	$	5,572
Total U.S. — other products	$	4,306	23	%	$	3,511	(13)	%	$	4,035
Total ROW — other products	2,268		12	%	2,027		32	%	1,537
Total other product sales	$	6,574	19	%	$	5,538	(1)	%	$	5,572

Change in excess of 100%.

Operating expenses

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


	Year ended December 31, 2020			Change		Year ended December 31, 2019			Change		Year ended December 31, 2018
Operating expenses:
Cost of sales	$	6,159		41	%	$	4,356		6	%	$	4,101
% of product sales	25.4		%			19.6		%			18.2		%
% of total revenues	24.2		%			18.6		%			17.3		%
Research and development	$	4,207		2	%	$	4,116		10	%	$	3,737
% of product sales	17.4		%			18.5		%			16.6		%
% of total revenues	16.5		%			17.6		%			15.7		%
Selling, general and administrative	$	5,730		11	%	$	5,150		(3)	%	$	5,332
% of product sales	23.6		%			23.2		%			23.7		%
% of total revenues	22.5		%			22.0		%			22.5		%
Other	$	189		*		$	66		(79)	%	$	314

Change in excess of 100%.

Cost of sales

Cost of sales increased to 24.2% of total revenues for 2020, primarily driven by the amortization of expenses related to our acquisition of Otezla®, and higher royalty expenses and profit share, partially offset by lower manufacturing costs.

Cost of sales increased to 18.6% of total revenues for 2019, primarily driven by unfavorable product mix and amortization of intangible assets as a result of our acquisition of Otezla®, partially offset by lower royalties and lower 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
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 primarily 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 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 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,
	2020		2019		2018
Research and early pipeline	$	1,405	$	1,649	$	1,201
Later-stage clinical programs	1,365		1,062		1,034
Marketed products	1,437		1,405		1,502
Total R&D expense	$	4,207	$	4,116	$	3,737

The increase in R&D expense for 2020 was driven by higher spend for later-stage clinical programs, including sotorasib, biosimilar programs and Otezla®, and higher spend for Otezla® included in marketed-product support. These increases were partially offset by recoveries from our collaboration with BeiGene that reduced expenses in later-stage clinical programs and in research and early pipeline, and lower spend in certain oncology programs included in research and early pipeline.

The increase in R&D expense for 2019 was primarily driven by higher spend in research and early pipeline in support of our oncology programs, partially offset by lower marketed-product support.

Selling, general and administrative

The increase in Selling, general and administrative (SG&A) expense for 2020 was driven by investments in certain marketed products, primarily Otezla®, and preparation for product launches, partially offset by a reduction in conference-related expenses due to the impact of COVID-19.

The decrease in SG&A expense for 2019 was primarily driven by lower general and administrative expenses, the end of certain amortization charges in 2018 and lower spend for launched and marketed products, partially offset by spending for Otezla® commercial-related expenses.

Other

Other operating expenses for 2020 primarily consisted of legal settlement expenses.

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.

Nonoperating expenses/income and income taxes

Nonoperating expenses/income and income taxes were as follows (dollar amounts in millions):


	Years ended December 31,
	2020			2019			2018
Interest expense, net	$	1,262		$	1,289		$	1,392
Interest and other income, net	$	256		$	753		$	674
Provision for income taxes	$	869		$	1,296		$	1,151
Effective tax rate	10.7		%	14.2		%	12.1		%

Interest expense, net

The decrease in Interest expense, net, for 2020 was primarily due to lower LIBOR rates on debt for which we effectively pay a variable rate of interest, partially offset by net costs associated with the early retirement of debt.

The decrease in Interest expense, net, for 2019 was primarily due to a reduction in outstanding long-term debt as a result of maturities in 2019.

Interest and other income, net

The decrease in Interest and other income, net, for 2020 was primarily due to reduced interest income as a result of lower average cash balances and a decline in interest yields and losses incurred in connection with our BeiGene investment, partially offset by gains recognized on our investments in publicly traded equity securities and limited partnerships. We may continue to recognize losses in connection with our BeiGene investment in 2021. See Part IV—Note 9, Investments, to the Consolidated Financial Statements.

The increase in Interest and other income, net, for 2019 was primarily due 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, partially offset 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, to the Consolidated Financial Statements.

Income taxes

The decrease in our effective tax rate for 2020 compared with 2019 was primarily driven by favorable items, including audit settlements, adjustments to prior year tax liabilities, lower interest expense on uncertain tax positions and amortization related to the Otezla® acquisition, partially offset by changes in valuation allowance.

The increase in our effective tax rate for 2019 compared with 2018 was primarily driven by a prior-year tax benefit associated with intercompany sales under U.S. corporate tax reform.

In March and December 2020, in response to the COVID-19 pandemic, the CARES Act and the Consolidated Appropriations Act, 2021, were passed into law and provide additional economic stimulus to address the impact of the COVID-19 pandemic. We do not expect any significant benefit to our income tax provision as a result of this legislation.

In 2017, we received an RAR and a modified RAR from the IRS for the years 2010, 2011 and 2012 proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. We disagree with the proposed adjustments and calculations and have been pursuing resolution with the IRS administrative appeals office. However, we have been unable to reach resolution at the administrative appeals level, and we anticipate that we will receive a Notice of Deficiency which we would expect to vigorously contest through the judicial process. In addition, in 2020, we received an RAR and a modified RAR from the IRS for the years 2013, 2014 and 2015 also proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico similar to those proposed for the years 2010, 2011 and 2012. We disagree with the 2013, 2014 and 2015 proposed adjustments and calculations and are pursuing resolution with the IRS administrative appeals office. The IRS audit for years 2016, 2017 and 2018 is expected to start in the near term. We are also currently under examination by a number of other state and foreign tax jurisdictions.

Final resolution of these complex matters is not likely within the next 12 months. We believe our accrual for income tax liabilities is appropriate based on past experience, interpretations of tax law, application of the tax law to our facts and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes and uncertain resolution of these matters, the ultimate outcome of any tax matters may result in payments substantially greater than amounts accrued and could have a material adverse impact on our consolidated financial statements.

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,
	2020		2019
Cash, cash equivalents and marketable securities	$	10,647	$	8,911
Total assets	$	62,948	$	59,707
Current portion of long-term debt	$	91	$	2,953
Long-term debt	$	32,895	$	26,950
Stockholders’ equity	$	9,409	$	9,673

Cash, cash equivalents and marketable securities

We have global access to our $10.6 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 deploy our accumulated cash balances in a strategic manner and consider a number of alternatives, including strategic transactions (including those that expand our portfolio of products in areas of therapeutic interest), repayment of debt, payment of dividends and stock repurchases.

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 determinations 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 our overall level of cash, 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 $1.60, $1.45 and $1.32 per share of common stock paid in 2020, 2019 and 2018, respectively, an increase of 10% over the prior year in both 2020 and 2019. In December 2020, the Board of Directors declared a cash dividend of $1.76 per share of common stock for the first quarter of 2021, an increase of 10% for this period, to be paid in March 2021.

We also returned capital to stockholders through our stock repurchase program. During 2020, we repurchased $3.5 billion of common stock and had cash settlements of $3.5 billion. In 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 May 2019 and December 2019, 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 of December 31, 2020, $3.0 billion remained available under the stock repurchase program.

As a result of stock repurchases and quarterly dividend payments, we have an accumulated deficit as of December 31, 2020 and 2019. Our accumulated deficit is not anticipated to affect our future ability to operate, repurchase stock, pay dividends or repay our debt given our expected continued 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, 2020, were $0.1 billion and $32.9 billion, respectively. The current and noncurrent portions of our long-term borrowings as of December 31, 2019, were $3.0 billion and $27.0 billion, respectively. The carrying values of our long-term borrowings are net of fair value adjustments for interest rate swaps and unamortized discounts, premiums and offering costs. As of December 31, 2020, 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 2020, we issued debt with an aggregate principal amount of $9.0 billion. During 2019 and 2018, we did not issue any debt or debt securities. During 2020, 2019 and 2018, we repaid debt of $6.5 billion, $4.5 billion and $1.1 billion, respectively. In addition, during 2020, we exchanged $0.7 billion of certain of our outstanding note issuances with $0.9 billion of newly issued notes with a lower interest rate and later maturity date.

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 lives of the respective notes. These interest rate swap contracts qualify and are designated as fair value hedges. As of December 31, 2020 and 2019, we had interest rate swap contracts with aggregate notional amounts of $5.9 billion and $9.6 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 both December 31, 2020 and 2019, we had cross-currency swap contracts with aggregate notional amounts of $4.8 billion.

As of December 31, 2020, 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 2020, 2019 and 2018, we did not issue any commercial paper. No commercial paper was outstanding as of December 31, 2020 and 2019.

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 related to the determination of successor rates to address the possible phase-out or unavailability of designated reference rates. As of December 31, 2020 and 2019, no amounts were outstanding under this facility.

It is anticipated that LIBOR will be phased out and replaced by 2023. 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. We are currently evaluating the impact that the change in the reference rate will have on our financial condition. See Part I, Item 1A. Risk Factors—Our sales and operations are subject to the risks of doing business internationally, including in emerging markets.

In February 2020, 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 2023.

Certain of our financing arrangements contain nonfinancial covenants. In addition, our revolving credit agreement includes a financial covenant that requires us to 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 of December 31, 2020.

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 December 31,
	2020		2019		2018
Net cash provided by operating activities	$	10,497	$	9,150	$	11,296
Net cash (used in) provided by investing activities	$	(5,401)	$	5,709	$	14,339
Net cash used in financing activities	$	(4,867)	$	(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 increased during 2020 primarily due to higher Net income after adding back the noncash amortization related to the acquisition of Otezla®, the monetization of interest rate swap contracts and working capital adjustments. Cash provided by operating activities decreased during 2019 primarily due to changes in working capital, an increase in payments to the IRS related to an advance deposit and lower Net income.

Investing

Cash used in investing activities during 2020 was primarily due to our $3.2 billion of purchases of equity method investments, primarily BeiGene, and net cash outflows related to marketable securities of $1.5 billion. Cash provided by investing activities during 2019 and 2018 was primarily due 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 primarily the result of funding the acquisition of Otezla® and our investment in BeiGene and, in 2018, to fund our tender offer to repurchase our common stock. Capital expenditures were $608 million, $618 million and $738 million in 2020, 2019 and 2018, respectively. We currently estimate 2021 spending on capital projects to be approximately $900 million. A majority of the increase in expenditures relates to expansion of manufacturing capacity to enable supply of products and product candidates.

Financing

Cash used in financing activities during 2020 was primarily due to repayments of debt of $6.5 billion, the payment of dividends of $3.8 billion and payments to repurchase our common stock of $3.5 billion, partially offset by proceeds from issuance of debt of $8.9 billion. Cash used in financing activities during 2019 was primarily due 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 primarily due to repurchases of common stock of $17.8 billion, payments of dividends of $3.5 billion and repayments of debt of $1.1 billion.

See Part IV—Note 9, Investments, 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.

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, 2020
Contractual obligations	Total		Year 1		Years 2 and 3		Years 4 and 5		Years 6 and beyond
Long-term debt obligations(1)(2)	$	54,293	$	1,207	$	7,857	$	4,944	$	40,285
Operating lease obligations(3)	864		166		268		102		328
Purchase obligations(4)	2,697		2,129		375		121		72
U.S. repatriation tax(5)	5,575		587		1,687		3,301		—
Unrecognized tax benefits (UTBs)(6)	—		—		—		—		—
Total contractual obligations	$	63,429	$	4,089	$	10,187	$	8,468	$	40,685

(1)Long-term debt obligations includes 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, 2020, in computing net amounts to be paid or received under our interest rate swap contracts, which resulted in an aggregate net decrease in future interest payments of $67 million. See Part IV—Note 15, Financing arrangements, to the Consolidated Financial Statements.

(2)Long-term debt obligations includes contractual interest payments and principal repayments of our foreign-denominated debt obligations. In order to hedge our exposure to foreign currency exchange rate risk associated with 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 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 18, Derivative instruments, to the Consolidated Financial Statements.

(3)Operating lease obligations includes payments for leases that have not yet commenced, net of lease incentives, and excludes $107 million of future receipts under noncancelable subleases of abandoned facilities.

(4)Purchase obligations relates 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.

(5)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.

(6)Liabilities for UTBs 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. 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 that 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 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, 2020, the maximum amount that may be payable in the future for agreements we have entered into with third parties is $5.4 billion, including $250 million of contingent consideration payments in connection with the acquisition of BioVex.

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, 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 December 31, 2019	3,165		559		156		3,880
Amounts charged against product sales	9,167		8,223		1,818		19,208
Payments	(8,353)		(8,191)		(1,735)		(18,279)
Balance as of December 31, 2020	$	3,979	$	591	$	239	$	4,809

For the years ended December 31, 2020, 2019 and 2018, total sales deductions were 44%, 41% and 39% of gross product sales, respectively. The increase in the total sales deductions balance as of December 31, 2020, compared to December 31, 2019, was primarily driven by the increase in gross sales and the impact of higher U.S. commercial rebate rates. 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, 2020, 2019 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 that 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 because 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 by 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 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 they 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 in the United States and various foreign jurisdictions. We are subject to income tax in the 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 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.

As previously disclosed, in 2017 we received an RAR and a modified RAR from the IRS for the years 2010, 2011 and 2012 proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico. We disagree with the proposed adjustments and calculations and have been pursuing resolution with the IRS administrative appeals office. However, we have been unable to reach resolution at the administrative appeals level, and we anticipate that we will receive a Notice of Deficiency which we would expect to vigorously contest through the judicial process. In addition, in 2020 we received an RAR and a modified RAR from the IRS for the years 2013, 2014 and 2015 also proposing significant adjustments that primarily relate to the allocation of profits between certain of our entities in the United States and the U.S. territory of Puerto Rico similar to those proposed for the years 2010, 2011 and 2012. We disagree with the 2013, 2014 and 2015 proposed adjustments and calculations and are pursuing resolution with the IRS administrative appeals office. The IRS audit for years 2016, 2017 and 2018 is expected to start in the near term. We are also currently under examination by a number of other state and foreign tax jurisdictions. Final resolution of these complex matters is not likely within the next 12 months. We believe our accrual for income tax liabilities is appropriate based

on past experience, interpretations of tax law, application of the tax law to our facts and judgments about potential actions by tax authorities; however, due to the complexity of the provision for income taxes and uncertain resolution of these matters, the ultimate outcome of any tax matters may result in payments substantially greater than amounts accrued and could have a material adverse impact on our consolidated financial statements. See Part IV—Note 6, Income taxes, to the Consolidated Financial Statements.

Our operations are subject to the tax laws, regulations and administrative practices of the United States, the U.S. territory of Puerto Rico, U.S. state jurisdictions and other countries 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 that 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 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.

We believe the fair values used to record intangible assets acquired in connection with business combinations and asset acquisitions 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.

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.

Impairment of equity method investments

We review the carrying value of our equity method investments whenever events or changes in circumstances indicate that the carrying amount of an investment may not be recoverable. We record impairment losses on our equity method investments if we deem the impairment to be other-than-temporary. We deem an impairment to be other-than-temporary based on various factors, including but not limited to, the length of time and the extent to which the fair value is below the carrying value, volatility of the security price, the financial condition of the issuer, changes in technology that may impair the earnings potential of the investment and our intent and ability to retain the investment to allow for a recovery in fair value.

We believe our judgments used in assessing impairment of equity method investments 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, 2020.

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