Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding Amgen’s business. MD&A is provided as a supplement to and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021. Our results of operations discussed in MD&A are presented in conformity with 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 Securities and Exchange Commission (SEC) contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases, 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 Item 1A. Risk Factors in Part II herein and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020, and in Part II, Item 1A. Risk Factors of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021. 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, 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.

Our principal products—those with the most significant annual commercial sales—are ENBREL, Prolia®, Otezla®, XGEVA®, Neulasta®, Aranesp®, Repatha® and KYPROLIS®. We also market a number of other products, including MVASI® (bevacizumab-awwb), Nplate® (romiplostim), Vectibix® (panitumumab), KANJINTI® (trastuzumab-anns), EPOGEN® (epoetin alfa), EVENITY® (romosozumab-aqqg), BLINCYTO® (blinatumomab), AMGEVITA™ (adalimumab), Aimovig® (erenumab-aooe), Parsabiv® (etelcalcetide), NEUPOGEN®, Sensipar®/Mimpara™ (cinacalcet) and LUMAKRAS®/LUMYKRAS™ (sotorasib).

COVID-19 pandemic

A novel strain of coronavirus (SARS-CoV-2, or severe acute respiratory syndrome coronavirus 2, causing coronavirus disease 19, or COVID-19) was declared a global pandemic by the World Health Organization on March 11, 2020. Since the onset of the pandemic in 2020, we have been closely monitoring the pandemic’s effects on our global operations. We continue to take appropriate steps to minimize risks to our employees, a significant number of whom have continued to work virtually. Employee access to company facilities has been 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 to or shortages of our supply of medicines.

Since the beginning of the COVID-19 pandemic, we have seen changes in demand for some of our products driven by changes in patient visits to doctors’ offices that has impacted providing treatments to existing patients and reduced diagnoses in new patients. Through the third quarter, there has been gradual recovery in both patient visits and diagnoses, although overall these remain below pre-COVID-19 levels. The cumulative decrease in diagnoses over the course of the pandemic has suppressed the volume of new patients starting treatment, which we expect to continue to impact our business during the remainder of the year. We are closely monitoring the effects of emerging COVID-19 variants on patient behavior and access.

Since early 2021, global vaccination efforts have been underway to control the pandemic. However, uncertainty remains as to the length of time required for vaccination of a meaningful portion of the population and as to the efficacy of such vaccinations on the trajectory of the pandemic. Challenges to vaccination efforts, new variants and other causes of virus spread may require governments to issue additional restrictions and/or shutdowns in various geographies. As a result, we expect to see continued volatility for at least the duration of the pandemic as governments respond to current local conditions.

With respect to our drug development activities, we are continuously monitoring COVID-19 infection rates, including changes from new variants, and working to mitigate effects on future study enrollment in our clinical trials and evaluating the impact in all countries where clinical trials occur. We remain focused on supporting our active clinical sites in their providing care for patients and in our providing investigational drug supply.

Despite the ongoing pandemic and business impacts noted above, 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 expenditures and debt service requirements as well as to engage in the capital-return and other business initiatives that we plan to pursue. For a discussion of the risks the COVID-19 pandemic presents to our results, see Risk Factors in Item 1A. Risk Factors in Part II herein and in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020, and in Part II, Item 1A. Risk Factors of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021.

Significant developments

Following is a summary of selected significant developments affecting our business that occurred since the filing of our Quarterly Report on Form 10-Q for the period ended June 30, 2021. For additional developments or for a more comprehensive discussion of certain developments discussed below, see our Annual Report on Form 10-K for the year ended December 31, 2020, and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021.

Business Development

Acquisition

Teneobio

*•*On October 19, 2021, Amgen completed its acquisition of Teneobio, a privately held, clinical-stage biotechnology company, for $900 million as well as future contingent milestone payments potentially worth up to an additional $1.6 billion upon the achievement of certain development and regulatory events.

Selected financial information

The following is an overview of our results of operations (in millions, except percentages and per-share data):

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Product sales
U.S.			$	4,558					$	4,618					(1)		%				$	12,835					$	13,325					(4)		%
ROW			1,762						1,486						19		%				5,191						4,581						13		%
Total product sales			6,320						6,104						4		%				18,026						17,906						1		%
Other revenues			386						319						21		%				1,107						884						25		%
Total revenues			$	6,706					$	6,423					4		%				$	19,133					$	18,790					2		%
Operating expenses			$	4,328					$	3,970					9		%				$	13,798					$	11,659					18		%
Operating income			$	2,378					$	2,453					(3)		%				$	5,335					$	7,131					(25)		%
Net income			$	1,884					$	2,021					(7)		%				$	3,994					$	5,649					(29)		%
Diluted EPS			$	3.31					$	3.43					(3)		%				$	6.93					$	9.54					(27)		%
Diluted shares			570						589						(3)		%				576						592						(3)		%

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 the three months ended September 30, 2021, primarily driven by higher unit demand for certain brands, including Prolia®, Repatha® and EVENITY®, and by favorable changes to estimated sales deductions, partially offset by declines in the net selling prices of certain products. Total product sales increased for the nine months ended September 30, 2021, primarily driven by higher unit demand for certain brands, including Prolia®, Repatha® and MVASI®, partially offset by declines in the net selling prices of certain products. We expect the trend of net selling price declines to continue to affect our business. Going forward, we expect that net selling price declines will be driven by ENBREL, Neulasta®, Repatha® and some of our biosimilar products. There was gradual recovery through the third quarter of 2021 in patients resuming their treatments and in new patient starts, although overall, both numbers remain below pre-COVID-19 levels.

Throughout the pandemic, we experienced changes in demand for some of our products. The pandemic has interrupted many physician–patient interactions, which has led to delays in diagnoses and treatments, with varying degrees of impact across our portfolio. In general, declines in the sales of our products that were impacted by the dynamics of the pandemic were most significant in the early months of the pandemic with product demand beginning to show some recovery in late 2020. Through the third quarter of 2021, demand continued to gradually recover from the impact of the pandemic and there was improvement in patient visits and diagnoses. Healthcare provider activity also stabilized during the third quarter after having improved during the first half of 2021. However, the cumulative decrease in diagnoses over the course of the pandemic has suppressed the volume of new patients starting treatment, which we expect to continue to impact our business for the remainder of the year. Given the unpredictable nature of the pandemic, we expect there could be ongoing intermittent disruptions in physician–patient interactions, and as a result, we continue to expect quarter-to-quarter variability. In addition, other changes in the healthcare ecosystem have the potential to introduce variability into product sales trends. For example, we expect changes in U.S. employment to lead to changes to the insured population. Growth in numbers of Medicaid enrollees and uninsured individuals may have a negative impact on product demand and sales. Overall, uncertainty remains around the timing and magnitude of our sales during the COVID-19 pandemic. See Risk Factors in Part II, Item 1A. of this Form 10-Q and Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2020, and in Part II, Item 1A. Risk Factors of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021.

Other revenues increased for the three and nine months ended September 30, 2021, primarily driven by the sale of COVID-19 antibody material.

Operating expenses increased for the three months ended September 30, 2021, primarily driven by an upfront payment associated with the KKC licensing agreement. Operating expenses increased for the nine months ended September 30, 2021, primarily driven by IPR&D expense related to the bemarituzumab program acquired as part of the Five Prime acquisition and by an upfront payment associated with the KKC licensing agreement.

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 for the three and nine months ended September 30, 2021 and 2020.

Results of operations

Product sales

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
ENBREL			$	1,289					$	1,325					(3)		%				$	3,357					$	3,724					(10)		%
Prolia®			803						701						15		%				2,375						2,014						18		%
Otezla®			609						538						13		%				1,619						1,578						3		%
XGEVA®			517						481						7		%				1,473						1,397						5		%
Neulasta®			415						555						(25)		%				1,383						1,757						(21)		%
Aranesp®			396						384						3		%				1,118						1,193						(6)		%
Repatha®			272						205						33		%				844						634						33		%
KYPROLIS®			293						260						13		%				824						793						4		%
Other products			1,726						1,655						4		%				5,033						4,816						5		%
Total product sales			$	6,320					$	6,104					4		%				$	18,026					$	17,906					1		%

Future sales of our products will depend in part on the factors discussed below and in the following sections of this report: (i) Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview and Selected Financial Information; and (ii) Part II, Item 1A. Risk Factors; and in the following sections of our Annual Report on Form 10-K for the year ended December 31, 2020: (i) Item 1. Business—Marketing, Distribution and Selected Marketed Products, (ii) Item 1A. Risk Factors and (iii) Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview, and Results of Operations—Product Sales, as well as in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021, in (i) Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Product Sales; and (ii) Part II, Item 1A. Risk Factors.

ENBREL

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
ENBREL — U.S.			$	1,263					$	1,289					(2)		%				$	3,270					$	3,619					(10)		%
ENBREL — Canada			26						36						(28)		%				87						105						(17)		%
Total ENBREL			$	1,289					$	1,325					(3)		%				$	3,357					$	3,724					(10)		%

The decrease in ENBREL sales for the three months ended September 30, 2021, was driven by a decline in unit demand, unfavorable changes in inventory and lower net selling price, partially offset by favorable changes to estimated sales deductions. The decrease in ENBREL for the nine months ended September 30, 2021, was driven by declines in net selling price and unit demand. For the remainder of 2021, we expect the trend of net selling price declines to continue compared with the prior year.

We are involved in patent litigation with a company seeking to market its FDA-approved biosimilar version of ENBREL. See Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020, and Note 13, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the period ended June 30, 2021. Companies with approved biosimilar versions of ENBREL may seek to enter the U.S. market if we are not ultimately 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):

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Prolia® — U.S.			$	530					$	478					11		%				$	1,569					$	1,341					17		%
Prolia® — ROW			273						223						22		%				806						673						20		%
Total Prolia®			$	803					$	701					15		%				$	2,375					$	2,014					18		%

The increase in global Prolia® sales for the three and nine months ended September 30, 2021, was primarily driven by higher unit demand.

Otezla*®*

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Otezla® — U.S.			$	495					$	439					13		%				$	1,284					$	1,280					—		%
Otezla® — ROW			114						99						15		%				335						298						12		%
Total Otezla®			$	609					$	538					13		%				$	1,619					$	1,578					3		%

The increase in global Otezla® sales for the three months ended September 30, 2021, was primarily driven by higher unit demand and favorable changes to estimated sales deductions, partially offset by lower net selling price. The increase in global Otezla® sales for the nine months ended September 30, 2021, was driven by higher unit demand, partially offset by lower net selling price.

For a discussion of litigation related to Otezla®, see Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020; Notes 12 and 13, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021, respectively; and Note 14, Contingencies and commitments, to the condensed consolidated financial statements in this Quarterly Report.

XGEVA*®*

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
XGEVA® — U.S.			$	372					$	363					2		%				$	1,061					$	1,036					2		%
XGEVA® — ROW			145						118						23		%				412						361						14		%
Total XGEVA®			$	517					$	481					7		%				$	1,473					$	1,397					5		%

The increase in global XGEVA® sales for the three and nine months ended September 30, 2021, was driven by higher unit demand, partially offset by lower net selling price.

Neulasta*®*

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Neulasta® — U.S.			$	360					$	484					(26)		%				$	1,215					$	1,538					(21)		%
Neulasta® — ROW			55						71						(23)		%				168						219						(23)		%
Total Neulasta®			$	415					$	555					(25)		%				$	1,383					$	1,757					(21)		%

The decrease in global Neulasta® sales for the three months ended September 30, 2021, was primarily driven by the impact of biosimilar competition on net selling price and unit demand. The decrease in global Neulasta® sales for the nine months ended September 30, 2021, was driven by the impact of biosimilar competition on net selling price and unit demand, partially offset by favorable changes to estimated sales deductions. Increased competition in the United States and Europe as a result of biosimilar versions of Neulasta® has had and will continue to have a significant adverse impact on brand sales, including additional net price erosion and lower unit demand. We also expect other biosimilar versions to be approved in the future.

For a discussion of ongoing patent litigations related to biosimilars, see Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020; Notes 12 and 13, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021, respectively; and Note 14, Contingencies and commitments, to the condensed consolidated financial statements in this Quarterly Report.

Aranesp*®*

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Aranesp® — U.S.			$	149					$	158					(6)		%				$	409					$	489					(16)		%
Aranesp® — ROW			247						226						9		%				709						704						1		%
Total Aranesp®			$	396					$	384					3		%				$	1,118					$	1,193					(6)		%

The increase in global Aranesp® sales for the three months ended September 30, 2021, was driven by higher unit demand and favorable changes to estimated sales deductions, partially offset by lower net selling price due to competition. The decrease in global Aranesp® sales for the nine months ended September 30, 2021, was primarily driven by lower net selling price due to competition.

Aranesp® continues to face competition from a long-acting erythropoiesis-stimulating agent (ESA) and also faces competition from a biosimilar version of EPOGEN®, which will continue to impact sales in the future.

Repatha*®*

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Repatha® — U.S.			$	139					$	92					51		%				$	421					$	331					27		%
Repatha® — ROW			133						113						18		%				423						303						40		%
Total Repatha®			$	272					$	205					33		%				$	844					$	634					33		%

The increase in global Repatha® sales for the three and nine months ended September 30, 2021, was primarily driven by higher unit demand, partially offset by lower net selling price.

For a discussion of ongoing litigation related to Repatha®, see Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020; Notes 12 and 13, Contingencies and commitments, to the condensed consolidated financial statements for the periods ended March 31, 2021 and June 30, 2021, respectively; and Note 14, Contingencies and commitments, to the condensed consolidated financial statements in this Quarterly Report.

KYPROLIS*®*

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
KYPROLIS® — U.S.			$	198					$	173					14		%				$	547					$	527					4		%
KYPROLIS® — ROW			95						87						9		%				277						266						4		%
Total KYPROLIS®			$	293					$	260					13		%				$	824					$	793					4		%

The increase in global KYPROLIS® sales for the three and nine months ended September 30, 2021, 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 Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2020; and Notes 12 and 13, Contingencies and commitments, to the condensed consolidated financial statements for the periods ended March 31, 2021 and June 30, 2021, respectively. The FDA has reported that it has granted tentative or final approval of ANDAs for generic carfilzomib products filed by a number of companies. 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.

Other products

Other product sales by geographic region were as follows (dollar amounts in millions):

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
MVASI® — U.S.			$	187					$	185					1		%				$	617					$	442					40		%
MVASI® — ROW			87						46						89		%				245						76						*
Nplate® — U.S.			156						118						32		%				404						352						15		%
Nplate® — ROW			117						94						24		%				341						271						26		%
Vectibix® — U.S.			84						90						(7)		%				255						249						2		%
Vectibix®— ROW			116						103						13		%				375						341						10		%
KANJINTI® — U.S.			92						149						(38)		%				354						346						2		%
KANJINTI® — ROW			24						18						33		%				79						63						25		%
EPOGEN® — U.S.			138						149						(7)		%				393						465						(15)		%
EVENITY® — U.S.			94						54						74		%				230						131						76		%
EVENITY®— ROW			55						5						*						157						129						22		%
BLINCYTO® — U.S.			74						54						37		%				201						167						20		%
BLINCYTO® — ROW			51						35						46		%				139						109						28		%
AMGEVITA™ — ROW			111						80						39		%				324						228						42		%
Aimovig® — U.S.			77						105						(27)		%				225						274						(18)		%
Aimovig® — ROW			2						—						NM						2						—						NM
Parsabiv® — U.S.			24						156						(85)		%				107						462						(77)		%
Parsabiv® — ROW			37						27						37		%				104						82						27		%
NEUPOGEN® — U.S.			32						44						(27)		%				86						117						(26)		%
NEUPOGEN® — ROW			20						21						(5)		%				51						62						(18)		%
Sensipar® — U.S.			—						7						(100)		%				4						81						(95)		%
Sensipar®/Mimpara™ — ROW			19						32						(41)		%				62						162						(62)		%
LUMAKRAS® — U.S.			33						—						NM						42						—						NM
LUMYKRAS™ — ROW			3						—						NM						3						—						NM
Other — U.S.			61						31						97		%				141						78						81		%
Other — ROW			32						52						(38)		%				92						129						(29)		%
Total other products			$	1,726					$	1,655					4		%				$	5,033					$	4,816					5		%
Total U.S. — other products			$	1,052					$	1,142					(8)		%				$	3,059					$	3,164					(3)		%
Total ROW — other products			674						513						31		%				1,974						1,652						19		%
Total other products			$	1,726					$	1,655					4		%				$	5,033					$	4,816					5		%

---

NM - Not meaningful

• • Change in excess of 100%

Operating expenses

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

			Three months ended September 30,																		Nine months ended September 30,
			2021						2020						Change						2021						2020						Change
Operating expenses:
Cost of sales			$	1,609					$	1,561					3		%				$	4,736					$	4,562					4		%
% of product sales			25.5		%				25.6		%										26.3		%				25.5		%
% of total revenues			24.0		%				24.3		%										24.8		%				24.3		%
Research and development			$	1,422					$	1,062					34		%				$	3,471					$	2,978					17		%
% of product sales			22.5		%				17.4		%										19.3		%				16.6		%
% of total revenues			21.2		%				16.5		%										18.1		%				15.8		%
Acquired in-process research and development			$	—					$	—					—		%				$	1,505					$	—					NM
% of product sales			—		%				—		%										8.3		%				—		%
% of total revenues			—		%				—		%										7.9		%				—		%
Selling, general and administrative			$	1,305					$	1,346					(3)		%				$	3,943					$	3,957					—		%
% of product sales			20.6		%				22.1		%										21.9		%				22.1		%
% of total revenues			19.5		%				21.0		%										20.6		%				21.1		%
Other			$	(8)					$	1					*						$	143					$	162					(12)		%

---

NM - Not meaningful

• • Change in excess of 100%

Cost of sales

Cost of sales decreased to 24.0% of total revenues for the three months ended September 30, 2021, primarily driven by lower amortization expense from acquisition-related assets, offset by unfavorable product mix.

Cost of sales increased to 24.8% of total revenues for the nine months ended September 30, 2021, primarily driven by unfavorable product mix, partially offset by lower amortization expense from acquisition-related assets.

Research and development

The increase in R&D expense for the three months ended September 30, 2021, was driven by a licensing-related upfront payment to KKC, partially offset by lower late-stage support for existing programs.

The increase in R&D expense for the nine months ended September 30, 2021, was primarily driven by a licensing-related upfront payment to KKC and higher research and early pipeline spend, partially offset by lower late-stage support for existing programs.

Acquired in-process research and development

Acquired IPR&D expense for the nine months ended September 30, 2021, is related to the bemarituzumab program acquired as part of the Five Prime acquisition.

Selling, general and administrative

The decrease in Selling, general and administrative (SG&A) expense for the three months ended September 30, 2021, was primarily driven by lower spend in general and administrative activities.

The decrease in SG&A expense for the nine months ended September 30, 2021, was primarily driven by lower spend in general and administrative activities and favorable adjustments to estimated U.S. healthcare reform federal excise fees, partially offset by higher marketed-product support and investment in new launches.

Other

Other operating expenses for the three months ended September 30, 2021, consisted primarily of changes in the fair values of contingent consideration liabilities. Other operating expenses for the nine months ended September 30, 2021, consisted primarily of expenses related to cost savings initiatives.

Other operating expenses for the nine months ended September 30, 2020, consisted of legal settlement expenses.

Nonoperating expense/income and income taxes

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

			Three months ended September 30,												Nine months ended September 30,
			2021						2020						2021						2020
Interest expense, net			$	(296)					$	(302)					$	(862)					$	(944)
Other income, net			$	73					$	55					$	97					$	69
Provision for income taxes			$	271					$	185					$	576					$	607
Effective tax rate			12.6		%				8.4		%				12.6		%				9.7		%

Interest expense, net

The decrease in Interest expense, net, for the three months ended September 30, 2021, was primarily due to lower LIBOR rates in the current year period on debt for which we effectively pay a variable rate of interest through the use of interest rate swaps, partially offset by higher overall debt outstanding in the current year period.

The decrease in Interest expense, net, for the nine months ended September 30, 2021, was primarily due to net costs associated with the early retirement of debt in the first quarter of the prior year and lower LIBOR rates in the current year period on debt for which we effectively pay a variable rate of interest through the use of interest rate swaps, partially offset by higher overall debt outstanding in the current year period.

Other income, net

The increase in Other income, net, for the three and nine months ended September 30, 2021, was primarily due to net gains recognized on our strategic equity investments, partially offset by higher losses in connection with our BeiGene investment.

Income taxes

The increase in our effective tax rate for the three and nine months ended September 30, 2021, was primarily due to the non-deductible IPR&D expense arising from the acquisition of Five Prime and prior year favorable items partially offset by a change in earnings mix.

The Administration and Congress are considering significant changes to existing tax law, including an increase in the corporate tax rate and the tax rate on foreign earnings. These changes could substantially increase U.S. taxation of our operations both in and outside the United States, including the U.S. territory of Puerto Rico. In addition, the Organisation for Economic Co-operation and Development (OECD) recently reached agreement to align countries on a minimum corporate tax rate and an expansion of the taxing rights of market countries. If enacted, this agreement could result in tax increases in both the United States and foreign jurisdictions.

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 disagreed with the proposed adjustments and calculations and pursued a resolution with the IRS administrative appeals office. As previously reported, we were unable to reach resolution with the IRS appeals office. In July 2021, we filed a petition in the U.S. Tax Court to contest two duplicate Notices for 2010, 2011 and 2012 that we received in May and July 2021. The duplicate Notices seek to increase our U.S. taxable income by an amount that would result in additional federal tax of approximately $3.6 billion, plus interest. Any additional tax that could be imposed would be reduced by up to approximately $900 million of repatriation tax previously accrued on our foreign earnings. In any event, we firmly believe that the IRS’s positions in the Notices are without merit, and we will vigorously contest the Notices 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 proposed adjustments and calculations and have been pursuing resolution with the IRS administrative appeals office. As a consequence of the Tax Court litigation for the 2010-2012 period, the IRS administrative appeals office recently informed us that it does not plan to engage in discussions at this time regarding the allocation of profits between our entities in the United States and the U.S. territory of Puerto Rico for the 2013-2015 period. We are currently under examination by the IRS for the years 2016, 2017 and 2018. 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 as noted above and could have a material adverse impact on our condensed consolidated financial statements.

See Note 4, Income taxes, to the condensed consolidated financial statements for further discussion.

Financial condition, liquidity and capital resources

Selected financial data were as follows (in millions):

			September 30, 2021						December 31, 2020
Cash, cash equivalents and marketable securities			$	12,921					$	10,647
Total assets			$	64,993					$	62,948
Current portion of long-term debt			$	4,288					$	91
Long-term debt			$	33,291					$	32,895
Stockholders’ equity			$	8,217					$	9,409

Cash, cash equivalents and marketable securities

Our balance of cash, cash equivalents and marketable securities was $12.9 billion at September 30, 2021. 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 investment-grade credit ratings, and it places restrictions on maturities and concentration by asset class and issuer.

Capital allocation

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 and our desire to optimize our cost of capital. The timing and amount of future dividends and stock repurchases will vary based on a number of factors, including future capital requirements for strategic transactions, availability of financing on acceptable terms, debt service requirements, our credit rating, changes to applicable tax laws or corporate laws, changes to our business model and periodic determination by our Board of Directors that cash dividends and/or stock repurchases are in the best interests of stockholders and are in compliance with applicable laws and the Company’s agreements. In addition, the timing and amount of stock repurchases may also be affected by our overall level of cash, stock price and blackout periods, during which we are restricted from repurchasing stock.

In July 2021, March 2021 and December 2020, the Board of Directors declared a quarterly cash dividend of $1.76 per share of common stock, which were paid on September 8, 2021, June 8, 2021 and March 8, 2021, respectively, an increase of 10% over the quarterly cash dividend paid in each quarter in 2020. In October 2021, the Board of Directors declared a quarterly dividend of $1.76 per share, which will be paid on December 8, 2021.

We also returned capital to stockholders through our stock repurchase program. During the nine months ended September 30, 2021, we executed trades to repurchase $3.5 billion of common stock. As of September 30, 2021, $2.9 billion of authorization remained available under our stock repurchase program. In October 2021, the Board of Directors increased the amount authorized under our stock repurchase program by an additional $4.5 billion.

As a result of stock repurchases and quarterly dividend payments, we have an accumulated deficit as of September 30, 2021 and December 31, 2020. Our accumulated deficit is not anticipated 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, to meet capital expenditure and debt service requirements, to fund our plans to pay dividends and repurchase stock and to fulfill other business initiatives we expect 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, equity markets and borrowings (including commercial paper and/or syndicated credit facilities and access to other domestic and foreign debt markets). See our Annual Report on Form 10-K for the year ended December 31, 2020, Part I, Item 1A. Risk Factors—Global economic conditions may negatively affect us and may magnify certain risks that affect our business.

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 September 30, 2021.

Cash flows

Our summarized cash flow activity was as follows (in millions):

			Nine months ended September 30,
			2021						2020
Net cash provided by operating activities			$	6,453					$	8,344
Net cash provided by (used in) investing activities			$	963					$	(4,017)
Net cash used in financing activities			$	(1,713)					$	(1,277)

Operating

Cash provided by operating activities is expected to be our primary recurring source of funds. Cash provided by operating activities during the nine months ended September 30, 2021, decreased primarily due to (i) the monetization of interest rate swaps in the prior year, (ii) a difference in the timing of payments to tax authorities and sales deductions paid to customers, (iii) lower Net income, after adjustments for noncash items and (iv) the timing of collections from customers.

Investing

Cash provided by investing activities during the nine months ended September 30, 2021, was primarily due to net cash inflows related to marketable securities of $3.4 billion, partially offset by the acquisition of Five Prime for $1.6 billion, net of cash acquired, and capital expenditures of $593 million. Cash used in investing activities during the nine months ended September 30, 2020, was due to our $3.2 billion of equity investments, primarily BeiGene, capital expenditures of $435 million and net cash outflows related to marketable securities of $394 million. We currently estimate 2021 spending on capital projects to be approximately $900 million.

Financing

Cash used in financing activities during the nine months ended September 30, 2021, was primarily due to payments to repurchase our common stock of $3.5 billion and the payment of dividends of $3.0 billion, partially offset by proceeds from the issuance of debt of $4.9 billion. Cash used in financing activities during the nine months ended September 30, 2020, was primarily due to the payment of dividends of $2.8 billion and payments to repurchase our common stock of $2.3 billion, partially offset by proceeds from the issuance of debt, net of repayments, of $3.9 billion. See Note 10, Financing arrangements, and Note 11, Stockholders’ equity, to the condensed consolidated financial statements for further discussion.

Critical accounting policies

The preparation of our condensed 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. A summary of our critical accounting policies is presented in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020.