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

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

The following 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, 2022, and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023. 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 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, 2022, and in Part II, Item 1A. Risk Factors of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023. 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 by discovering, developing, manufacturing and delivering innovative human therapeutics. 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 are Prolia, ENBREL, XGEVA, Otezla, Repatha, Nplate, KYPROLIS, Aranesp and EVENITY. We also market a number of other products, including Vectibix, BLINCYTO, MVASI, Neulasta, AMJEVITA/AMGEVITA, TEZSPIRE, Parsabiv, Aimovig, LUMAKRAS/LUMYKRAS, EPOGEN, KANJINTI and TAVNEOS.

Macroeconomic challenges

Uncertain macroeconomic conditions, including higher inflation, rising interest rates and instability in the financial system, as well as rising healthcare costs continue to pose challenges to our business. Further, ongoing geopolitical conflicts continue to create additional uncertainty in global macroeconomic conditions. As a result of public and private healthcare-provider focus, the industry continues to be subject to cost containment measures and significant pricing pressures, including net price declines. Moreover, legislation enacted to reduce healthcare expenditures, including provisions of the IRA, have affected, and are likely to continue to affect, our business. See our Quarterly Report on Form 10-Q for the period ended March 31, 2023, Part II, Item 1A. Risk Factors—Global economic conditions may negatively affect us and may magnify certain risks that affect our business.

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, 2023. 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, 2022, and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023.

Acquisition of Horizon Therapeutics plc

On October 6, 2023, Amgen completed its acquisition of Horizon for $116.50 per share in cash, representing a transaction equity value of approximately $27.8 billion. Horizon is a global biotechnology company focused on the discovery, development and commercialization of medicines that address critical needs of patients impacted by rare, autoimmune and severe inflammatory diseases. The acquisition aligns with Amgen’s core strategy of delivering innovative medicines that make a significant difference for patients suffering from serious diseases and strengthens Amgen’s leading inflammation portfolio by adding first-in-class, early-in-lifecycle medicines such as TEPEZZA® (teprotumumab-trbw), KRYSTEXXA® (pegloticase) and UPLIZNA® (inebilizumab-cdon), which treat rare inflammatory diseases. See Part II, Item 1A. Risk Factors—Our efforts to collaborate with or acquire other companies, products, or technology, and to integrate the operations of companies or to support the products or technology we have acquired, may not be successful, and may result in unanticipated costs, delays or failures to realize the benefits of the transactions, of this Quarterly Report.

Products/Pipeline

Tarlatamab

On October 20, 2023, we announced results from the global Phase 2 DeLLphi-301 study, evaluating tarlatamab, an investigational delta-like ligand 3 (DLL3) targeting BiTE® (bispecific T-cell engager) molecule, in patients with advanced stage small cell lung cancer (SCLC) who had failed two or more prior lines of treatment. With a median follow-up of 10.6 months, an intention-to-treat analysis that included 100 patients at the selected 10 mg dose, tarlatamab demonstrated an objective response rate (ORR; primary endpoint) of 40%. For key secondary endpoints, median progression-free survival (mPFS) was 4.9 months and median overall survival (mOS) was 14.3 months. There were no new safety signals observed compared to the Phase 1 study.

LUMAKRAS/LUMYKRAS

On October 5, 2023, the FDA convened an Oncologic Drugs Advisory Committee (ODAC) to discuss whether the LUMAKRAS CodeBreaK 200 study could be considered an adequate and well-controlled trial as part of the FDA’s evaluation of whether this data supports the conversion of LUMAKRAS’ accelerated approval for the treatment of non-small cell lung cancer (NSCLC) to a full approval. Upon review, a majority of the ODAC committee members voted that the CodeBreaK 200 primary endpoint (progression-free survival (PFS) per the blinded independent central review) could not be reliably interpreted. Regulatory review by the FDA is currently ongoing, and while we cannot speculate on the actions of the FDA and subsequent impact to LUMAKRAS, we will continue to work closely with the FDA on the full approval pathway for this important medicine. See Part II, Item 1A. Risk Factors—Our current products and products in development cannot be sold without regulatory approval, of this Quarterly Report.

On October 22, 2023, we announced data from the global Phase 3 CodeBreaK 300 trial evaluating two doses of LUMAKRAS/LUMYKRAS (960 mg or 240 mg) in combination with Vectibix. Both doses demonstrated a statistically significant superiority in PFS over the investigator’s choice of therapy in patients with chemorefractory G12C-mutated metastatic colorectal cancer (mCRC). After a median follow-up of 7.8 months, the median PFS was 5.6 months and 3.9 months with LUMAKRAS/LUMYKRAS 960 mg plus Vectibix and LUMAKRAS/LUMYKRAS 240 mg plus Vectibix, respectively, versus 2.2 months with investigator’s choice of therapy (trifluridine and tipiracil, or regorafenib). Patients at both dose regimens of LUMAKRAS/LUMYKRAS plus Vectibix experienced a longer duration of treatment than those treated with investigator’s choice therapy.

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,
	2023		2022		Change		2023		2022		Change
Product sales
U.S.	$	4,691	$	4,466	5	%	$	13,402	$	12,949	3	%
ROW	1,857		1,771		5	%	5,675		5,300		7	%
Total product sales	6,548		6,237		5	%	19,077		18,249		5	%
Other revenues	355		415		(14)	%	917		1,235		(26)	%
Total revenues	$	6,903	$	6,652	4	%	$	19,994	$	19,484	3	%
Operating expenses	$	4,882	$	3,992	22	%	$	13,368	$	12,148	10	%
Operating income	$	2,021	$	2,660	(24)	%	$	6,626	$	7,336	(10)	%
Net income	$	1,730	$	2,143	(19)	%	$	5,950	$	4,936	21	%
Diluted EPS	$	3.22	$	3.98	(19)	%	$	11.06	$	9.11	21	%
Diluted shares	538		538		—	%	538		542		(1)	%

In the following discussion of changes in product sales, any reference to unit demand growth or decline refers to changes in 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) as may be noted.

Total product sales increased for the three months ended September 30, 2023, driven by volume growth for certain brands, including Repatha, Nplate, TEZSPIRE, EVENITY, BLINCYTO and Prolia, partially offset by declines in net selling prices of certain other products, including Neulasta, MVASI and Repatha, and unfavorable changes to estimated sales deductions, including for ENBREL, Neulasta, Otezla and LUMAKRAS/LUMYKRAS.

Total product sales increased for the nine months ended September 30, 2023, primarily driven by volume growth for certain brands, including Repatha, TEZSPIRE, EVENITY, Nplate, Prolia and BLINCYTO, partially offset by declines in net selling prices of certain other products, including Neulasta, MVASI, KANJINTI, Otezla, ENBREL and Repatha, unfavorable changes to estimated sales deductions, including for ENBREL, Prolia and LUMAKRAS/LUMYKRAS, and unfavorable changes to foreign currency exchange rates. For the remainder of 2023, we expect that net selling price will continue to decline year-over-year at a portfolio level, driven by increased competition.

As a result of uncertain macroeconomic conditions and geopolitical conflicts, we expect continued volatility around foreign currency exchange rates. The impact of unfavorable changes to foreign currency exchange rates will be partially offset by corresponding decreases in our international operating expenses. While not designed to completely address foreign currency changes, our hedging activities also seek to offset, in part, such effects on our net income by hedging our net foreign currency exposure, primarily with respect to product sales denominated in euros.

Our product sales were affected by reduced demand as a result of the COVID-19 pandemic, and the cumulative decrease in diagnoses over the course of the pandemic suppressed the volume of new patients starting treatment, which continues to impact the business. Given the unpredictable nature of the pandemic, there could be future intermittent disruptions in physician–patient interactions. In addition, other disruptions, including uncertain macroeconomic conditions, changes in the healthcare ecosystem and geopolitical conflicts, have the potential to introduce variability into product sales. For example, actions by governments and other entities to curb high inflation, provisions of the IRA and growth in numbers of Medicaid enrollees and uninsured individuals may have a negative impact on product sales. See Part II, Item 1A. Risk Factors, of this Quarterly Report.

Other revenues decreased for the three and nine months ended September 30, 2023, due to lower revenue from our COVID-19 manufacturing collaboration.

Operating expenses increased for the three months ended September 30, 2023, driven by a net impairment charge resulting from the termination of AMG 340, higher profit share expenses and changes in our product mix. See Note 9, Goodwill and other intangible assets, and Note 12, Fair value measurement, to the condensed consolidated financial statements.

Operating expenses increased for the nine months ended September 30, 2023, primarily driven by a net impairment charge resulting from the termination of AMG 340, changes in our product mix, higher profit share expenses, higher amortization expense from acquisition-related assets and expenses related to our restructuring plan initiated in the first quarter of 2023, partially offset by our loss on the divestiture of Gensenta in the prior period. See Note 2, Restructuring; Note 3, Acquisitions and divestitures; Note 9, Goodwill and other intangible assets; and Note 12, Fair value measurement, to the condensed consolidated financial statements.

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,
	2023		2022		Change		2023		2022		Change
Prolia	$	986	$	862	14	%	$	2,941	$	2,636	12	%
ENBREL	1,035		1,106		(6)	%	2,682		3,019		(11)	%
XGEVA	519		495		5	%	1,585		1,530		4	%
Otezla	567		627		(10)	%	1,559		1,672		(7)	%
Repatha	406		309		31	%	1,218		963		26	%
Nplate	419		288		45	%	1,091		838		30	%
KYPROLIS	349		318		10	%	1,053		922		14	%
Aranesp	323		358		(10)	%	1,043		1,073		(3)	%
EVENITY	307		201		53	%	842		562		50	%
Other products(1)	1,637		1,673		(2)	%	5,063		5,034		1	%
Total product sales	$	6,548	$	6,237	5	%	$	19,077	$	18,249	5	%

(1) Consists of product sales of our non-principal products, as well as sales in prior periods of our divested Bergamo and Gensenta subsidiaries.

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, 2022: (i) Part I, Item 1. Business—Marketing, Distribution and Selected Marketed Products; (ii) Part I, Item 1A. Risk Factors; and (iii) Part II, 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, 2023 and June 30, 2023: (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.

Prolia

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
Prolia — U.S.	$	673	$	590	14	%	$	1,987	$	1,783	11	%
Prolia — ROW	313		272		15	%	954		853		12	%
Total Prolia	$	986	$	862	14	%	$	2,941	$	2,636	12	%

The increase in global Prolia sales for the three and nine months ended September 30, 2023, was primarily driven by volume growth and higher net selling price.

For a discussion of litigation related to Prolia, see Part I—Note 14, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the period ended June 30, 2023; and Note 14, Contingencies and commitments, to the condensed consolidated financial statements in this Quarterly Report.

ENBREL

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
ENBREL — U.S.	$	1,026	$	1,086	(6)	%	$	2,645	$	2,965	(11)	%
ENBREL — Canada	9		20		(55)	%	37		54		(31)	%
Total ENBREL	$	1,035	$	1,106	(6)	%	$	2,682	$	3,019	(11)	%

The decrease in ENBREL sales for the three months ended September 30, 2023, was primarily driven by unfavorable changes to estimated sales deductions.

The decrease in ENBREL sales for the nine months ended September 30, 2023, was driven by lower inventory, unfavorable changes to estimated sales deductions and lower net selling price.

For the remainder of 2023, we expect improved coverage will lead to growth in new patients and declining net selling price.

XGEVA

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
XGEVA — U.S.	$	374	$	363	3	%	$	1,145	$	1,122	2	%
XGEVA — ROW	145		132		10	%	440		408		8	%
Total XGEVA	$	519	$	495	5	%	$	1,585	$	1,530	4	%

The increase in global XGEVA sales for the three months ended September 30, 2023, was driven by higher net selling price.

The increase in global XGEVA sales for the nine months ended September 30, 2023, was driven by higher net selling price, partially offset by unfavorable changes to estimated sales deductions.

For a discussion of litigation related to XGEVA, see Part I—Note 14, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the period ended June 30, 2023; and Note 14, Contingencies and commitments, to the condensed consolidated financial statements in this Quarterly Report.

Otezla

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
Otezla — U.S.	$	462	$	529	(13)	%	$	1,251	$	1,366	(8)	%
Otezla — ROW	105		98		7	%	308		306		1	%
Total Otezla	$	567	$	627	(10)	%	$	1,559	$	1,672	(7)	%

The decrease in global Otezla sales for the three months ended September 30, 2023, was driven by lower net selling price, unfavorable changes to estimated sales deductions and lower inventory, partially offset by volume growth.

The decrease in global Otezla sales for the nine months ended September 30, 2023, was driven by lower net selling price and inventory, partially offset by volume growth.

For the remainder of 2023, we expect demand to be affected by free drug programs from newly launched competition.

For a discussion of litigation related to Otezla, see Part IV—Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022; and Part I—Note 14, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Report on Form 10-Q for the period ended March 31, 2023.

Repatha

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
Repatha — U.S.	$	183	$	142	29	%	$	592	$	461	28	%
Repatha — ROW	223		167		34	%	626		502		25	%
Total Repatha	$	406	$	309	31	%	$	1,218	$	963	26	%

The increase in global Repatha sales for the three and nine months ended September 30, 2023, was driven by volume growth, partially offset by lower net selling price.

For a discussion of ongoing litigation related to Repatha, see Part IV—Note 19, Contingencies and commitments, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022; Part I—Note 14, Contingencies and commitments, to the condensed consolidated financial statements in our Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023; and Note 14, Contingencies and commitments, to the condensed consolidated financial statements in this Quarterly Report.

Nplate

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
Nplate — U.S.	$	322	$	162	99	%	$	744	$	474	57	%
Nplate — ROW	97		126		(23)	%	347		364		(5)	%
Total Nplate	$	419	$	288	45	%	$	1,091	$	838	30	%

The increase in global Nplate sales for the three and nine months ended September 30, 2023, was driven by volume growth resulting from U.S. government orders of $142 million and $224 million, respectively.

KYPROLIS

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
KYPROLIS — U.S.	$	231	$	217	6	%	$	699	$	626	12	%
KYPROLIS — ROW	118		101		17	%	354		296		20	%
Total KYPROLIS	$	349	$	318	10	%	$	1,053	$	922	14	%

The increase in global KYPROLIS sales for the three and nine months ended September 30, 2023, was primarily driven by volume growth.

Aranesp

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
Aranesp — U.S.	$	107	$	128	(16)	%	$	345	$	397	(13)	%
Aranesp — ROW	216		230		(6)	%	698		676		3	%
Total Aranesp	$	323	$	358	(10)	%	$	1,043	$	1,073	(3)	%

The decrease in global Aranesp sales for the three months ended September 30, 2023, was driven by lower volume and net selling price and unfavorable changes to foreign currency exchange rates.

The decrease in global Aranesp sales for the nine months ended September 30, 2023, was driven by unfavorable changes to foreign currency exchange rates and lower net selling price, partially offset by volume growth.

U.S. Aranesp sales for the three and nine months ended September 30, 2023, decreased due to lower unit demand as a result of independent and medium-sized dialysis organizations transitioning from Aranesp to EPOGEN. We expect Aranesp to continue to face competition from EPOGEN and its biosimilars, which will impact volume and net selling price in the future.

EVENITY

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


	Three months ended September 30,						Nine months ended September 30,
	2023		2022		Change		2023		2022		Change
EVENITY — U.S.	$	214	$	136	57	%	$	570	$	376	52	%
EVENITY — ROW	93		65		43	%	272		186		46	%
Total EVENITY	$	307	$	201	53	%	$	842	$	562	50	%

The increase in global EVENITY sales for the three and nine months ended September 30, 2023, was driven by volume growth.

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,
	2023		2022		Change		2023		2022		Change
Vectibix — U.S.	$	116	$	106	9	%	$	345	$	287	20	%
Vectibix — ROW	136		141		(4)	%	388		368		5	%
BLINCYTO — U.S.	147		84		75	%	418		240		74	%
BLINCYTO — ROW	73		58		26	%	202		179		13	%
MVASI — U.S.	140		139		1	%	384		468		(18)	%
MVASI — ROW	73		70		4	%	228		228		—	%
Neulasta — U.S.	92		205		(55)	%	502		772		(35)	%
Neulasta — ROW	32		42		(24)	%	107		133		(20)	%
AMJEVITA — U.S.	23		—		NM		93		—		NM
AMGEVITA — ROW	129		117		10	%	373		341		9	%
TEZSPIRE — U.S.	161		55		*		390		91		*
Parsabiv — U.S.	59		61		(3)	%	171		189		(10)	%
Parsabiv — ROW	36		39		(8)	%	102		100		2	%
Aimovig — U.S.	88		103		(15)	%	230		289		(20)	%
Aimovig — ROW	6		4		50	%	15		11		36	%
LUMAKRAS — U.S.	48		61		(21)	%	146		160		(9)	%
LUMYKRAS — ROW	4		14		(71)	%	57		54		6	%
EPOGEN — U.S.	50		136		(63)	%	171		392		(56)	%
KANJINTI — U.S.	7		58		(88)	%	78		207		(62)	%
KANJINTI — ROW	13		14		(7)	%	39		46		(15)	%
TAVNEOS — U.S.	32		—		NM		84		—		NM
TAVNEOS — ROW	5		—		NM		6		—		NM
Other — U.S.(1)	136		105		30	%	412		284		45	%
Other — ROW(1)	31		61		(49)	%	122		195		(37)	%
Total other products	$	1,637	$	1,673	(2)	%	$	5,063	$	5,034	1	%
Total U.S. — other products	$	1,099	$	1,113	(1)	%	$	3,424	$	3,379	1	%
Total ROW — other products	538		560		(4)	%	1,639		1,655		(1)	%
Total other products	$	1,637	$	1,673	(2)	%	$	5,063	$	5,034	1	%

NM = not meaningful

Change in excess of 100%

(1) Consists of AVSOLA, Corlanor, RIABNI, NEUPOGEN, IMLYGIC, Sensipar/Mimpara and BEKEMV as well as sales in prior periods of our divested Bergamo and Gensenta subsidiaries.

Operating expenses

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


	Three months ended September 30,								Nine months ended September 30,
	2023			2022			Change		2023			2022			Change
Operating expenses:
Cost of sales	$	1,806		$	1,588		14	%	$	5,339		$	4,659		15	%
% of product sales	27.6		%	25.5		%			28.0		%	25.5		%
% of total revenues	26.2		%	23.9		%			26.7		%	23.9		%
Research and development	$	1,079		$	1,112		(3)	%	$	3,250		$	3,110		5	%
% of product sales	16.5		%	17.8		%			17.0		%	17.0		%
% of total revenues	15.6		%	16.7		%			16.3		%	16.0		%



Selling, general and administrative	$	1,353		$	1,287		5	%	$	3,905		$	3,842		2	%
% of product sales	20.7		%	20.6		%			20.5		%	21.1		%
% of total revenues	19.6		%	19.3		%			19.5		%	19.7		%
Other	$	644		$	5		*		$	874		$	537		63	%
Total operating expenses	$	4,882		$	3,992		22	%	$	13,368		$	12,148		10	%

Change in excess of 100%

Cost of sales

Cost of sales increased to 26.2% and 26.7% of total revenues for the three and nine months ended September 30, 2023, respectively, primarily driven by higher profit share expenses, higher amortization expense from acquisition-related assets and changes in our product mix, partially offset by the impact of the Puerto Rico tax law change. The 2022 Puerto Rico tax law change replaced an excise tax with an income tax beginning in 2023. See Note 5, Income taxes, to the condensed consolidated financial statements.

Research and development

The decrease in R&D expense for the three months ended September 30, 2023, was driven by lower spend in research and early pipeline, partially offset by higher spend in later-stage clinical programs and marketed products.

The increase in R&D expense for the nine months ended September 30, 2023, was driven by higher spend in later-stage clinical programs and marketed products, partially offset by lower spend in research and early pipeline.

Selling, general and administrative

The increase in SG&A expense for the three and nine months ended September 30, 2023, was primarily driven by higher general and administrative expenses, including acquisition-related expenses, partially offset by lower spend for marketed products.

Other

Other operating expenses for the three and nine months ended September 30, 2023, consisted of a net impairment charge resulting from the termination of AMG 340 and expenses related to our restructuring plan initiated in the first quarter of 2023. See Note 2, Restructuring; Note 9, Goodwill and other intangible assets; and Note 12, Fair value measurement, to the condensed consolidated financial statements.

Other operating expenses for the three months ended September 30, 2022, consisted primarily of an impairment charge associated with an intangible asset acquired in a business combination. Other operating expenses for the nine months ended September 30, 2022, consisted primarily of our loss on the divestiture of Gensenta. See Note 3, Acquisitions and divestitures, to the condensed consolidated financial statements.

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,
	2023			2022			2023			2022
Interest expense, net	$	(759)		$	(368)		$	(2,054)		$	(991)
Other income (expense), net	$	685		$	100		$	2,431		$	(747)
Provision for income taxes	$	217		$	249		$	1,053		$	662
Effective tax rate	11.1		%	10.4		%	15.0		%	11.8		%

Interest expense, net

The increase in Interest expense, net, for the three and nine months ended September 30, 2023, was primarily due to higher overall debt outstanding and higher interest rates on the debt.

Other income (expense), net

During the first quarter of 2023, we changed the method of accounting for our investment in BeiGene from the equity method to recording the investment at fair value, with changes in fair value recognized in earnings. See Note 7, Investments, to the condensed consolidated financial statements.

The increase in Other income (expense), net, for the three and nine months ended September 30, 2023, was primarily due to the net gain recognized in the current year period on our investment in BeiGene and the increase in interest income due to the higher cash balance and higher interest rates.

Income taxes

The increase in our effective tax rate for the three months ended September 30, 2023, was primarily due to the Puerto Rico income tax beginning in 2023, partially offset by a prior year nondeductible loss from the divestiture of Gensenta and net earnings mix including the tax benefit from a net impairment charge related to AMG 340. See Note 9, Goodwill and other intangible assets, to the condensed consolidated financial statements. The increase in our effective tax rate for the nine months ended September 30, 2023, was primarily due to the Puerto Rico income tax beginning in 2023 and net change in earnings mix, partially offset by a prior year nondeductible loss from the divestiture of Gensenta.

The Administration and Congress continue to discuss changes to existing tax law that could substantially increase the taxes we pay to the U.S. government. Further, the OECD recently reached an agreement to align countries on a minimum corporate tax rate and an expansion of the taxing rights of market countries. Some individual jurisdictions, including the United Kingdom and some EU member countries, have begun to implement the global minimum tax agreement with effective dates as early as January 1, 2024. If enacted, either by all OECD participants or unilaterally by individual countries, this agreement could result in a tax increase that could affect our U.S. and foreign tax liabilities.

The U.S. Treasury released final foreign tax credit regulations in December 2021 that eliminated U.S. creditability of the Puerto Rico excise tax beginning in 2023. In response, on June 30, 2022, the U.S. territory of Puerto Rico enacted Act 52-2022, which provides for an alternative income tax rate on industrial development income that the U.S. Treasury confirmed will be creditable under federal law. As part of this new law, eligible businesses will be subject to incremental income and withholding taxes in lieu of payment of the Puerto Rico excise tax. In order to qualify for the alternative income tax, our current tax grant with the Puerto Rico government was amended in December 2022. We qualified for this alternative income tax beginning on January 1, 2023, and our tax expense increased. See Note 5, Income taxes, to the condensed consolidated financial statements.

In 2017, we received an RAR and a modified RAR from the IRS for the years 2010–2012, 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 resolution with the IRS appeals office but were unable to reach resolution. In July 2021, we filed a petition in the U.S. Tax Court to contest two duplicate Statutory Notices of Deficiency (Notices) for the years 2010–2012 that we received in May and July 2021, which seek to increase our U.S. taxable income for the years 2010–2012 by an amount that would result in additional federal tax of approximately $3.6 billion plus interest. Any additional tax that could be imposed for the years 2010–2012 would be reduced by up to approximately $900 million of repatriation tax previously accrued on our foreign earnings.

In 2020, we received an RAR and a modified RAR from the IRS for the years 2013–2015, 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 2010–2012. We disagreed with the proposed adjustments and calculations and pursued resolution with the IRS appeals office but were unable to reach resolution. In July 2022, we filed a petition in the U.S. Tax Court to contest a Notice for the years 2013–2015 that we previously reported receiving in April 2022 that seeks to increase our U.S. taxable income for the years 2013–2015 by an amount that would result in additional federal tax of approximately $5.1 billion, plus interest. In addition, the Notice asserts penalties of approximately $2.0 billion. Any additional tax that could be imposed for the years 2013–2015 would be reduced by up to approximately $2.2 billion of repatriation tax previously accrued on our foreign earnings.

We firmly believe that the IRS positions set forth in the 2010–2012 and 2013–2015 Notices are without merit. We are contesting the 2010–2012 and 2013–2015 Notices through the judicial process. The two cases were consolidated in the U.S. Tax Court on December 19, 2022. On February 10, 2023, the U.S. Tax Court entered an order setting a trial date of November 4, 2024.

We are currently under examination by the IRS for the years 2016–2018 with respect to issues similar to those for the 2010 through 2015 period. In addition, we are under examination by a number of state and foreign tax jurisdictions.

Final resolution of these complex matters is not likely within the next 12 months. We continue to 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 condensed consolidated financial statements.

We are no longer subject to U.S. federal income tax examinations for years ended on or before December 31, 2009.

See our Annual Report on Form 10-K for the year ended December 31, 2022, Part I, Item 1A, Risk Factors—The adoption and interpretation of new tax legislation or exposure to additional tax liabilities could affect our profitability, and Note 5, Income taxes, to the condensed consolidated financial statements in this filing for further discussion.

Financial condition, liquidity and capital resources

Selected financial data were as follows (in millions):


	September 30, 2023		December 31, 2022
Cash, cash equivalents and marketable securities	$	34,741	$	9,305
Total assets	$	90,534	$	65,121
Current portion of long-term debt	$	1,428	$	1,591
Long-term debt	$	59,040	$	37,354
Stockholders’ equity	$	7,656	$	3,661

Cash, cash equivalents and marketable securities

Our balance of cash, cash equivalents and marketable securities was $34.7 billion as of September 30, 2023, the majority of which was used for the acquisition of Horizon. See Note 3, Acquisitions and divestitures, to the condensed consolidated financial statements. 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 investments in innovation both internally and externally (including investments that expand our portfolio of products in areas of therapeutic interest), capital expenditures, 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 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 in applicable tax laws or corporate laws, changes in 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, our stock price and blackout periods, during which we are restricted from repurchasing stock. The manner of stock repurchases may include block purchases, tender offers, ASRs and market transactions.

In August 2023, March 2023 and December 2022, our Board of Directors declared quarterly cash dividends of $2.13 per share, which were paid in September 2023, June 2023 and March 2023, respectively, and was an increase of 10% over the quarterly cash dividends paid each quarter in 2022. In October 2023, our Board of Directors declared a quarterly cash dividend of $2.13 per share that will be paid in December 2023.

During the nine months ended September 30, 2023, we did not repurchase any of our common stock. As of September 30, 2023, $7.0 billion of authorization remained available under our stock repurchase program.

As a result of stock repurchases and quarterly dividend payments, we have an accumulated deficit as of September 30, 2023 and December 31, 2022. 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, 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 our Quarterly Report on 10-Q for the period ended March 31, 2023, Part II, Item 1A. Risk Factors—Global economic conditions may negatively affect us and may magnify certain risks that affect our business.

Financing arrangements

In February 2023, 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 2026.

During the three months ended March 31, 2023, in connection with the acquisition of Horizon, we issued $24.0 billion of debt composed of eight series of notes. In connection with the issue of these notes, we elected to terminate all remaining commitments under the bridge credit agreement we entered into in December 2022. In October 2023, in connection with the completion of the acquisition of Horizon, we borrowed $4.0 billion under a term loan credit agreement that we entered into in December 2022. This borrowing has an interest rate of three-month SOFR plus 1.225%, of which $2.0 billion is due in April 2025 and $2.0 billion is due in October 2026. See Note 10, Financing arrangements, to the condensed consolidated financial statements.

During the three months ended March 31, 2023, we amended and restated our syndicated, unsecured, revolving credit agreement, under which we may borrow up to $4.0 billion (increased from $2.5 billion prior to the amendment) for general corporate purposes, including as a liquidity backstop for our commercial paper program. The commitments under the revolving credit agreement may be increased by up to $1.25 billion with the agreement of the banks (increased from $750 million prior to the amendment). 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) SOFR plus 1.01% or (ii) the highest of (A) the administrative agent bank base commercial lending rate, (B) the overnight federal funds rate plus 0.50% or (C) one-month SOFR plus 1.1%. As of September 30, 2023 and December 31, 2022, no amounts were outstanding under this facility.

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 earnings before interest, taxes, depreciation and amortization) 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, 2023.

Cash flows

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


	Nine months ended September 30,
	2023		2022
Net cash provided by operating activities	$	7,933	$	7,072
Net cash provided by (used in) investing activities	$	885	$	(2,571)
Net cash provided by (used in) financing activities	$	18,294	$	(2,988)

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 during the nine months ended September 30, 2023, increased due to timing of payments to tax authorities, partially offset by lower net income after adjustments for noncash items.

Investing

Cash provided by investing activities during the nine months ended September 30, 2023, was primarily due to net cash inflows from sales and maturities of marketable securities of $1.7 billion, partially offset by capital expenditures of $863 million, including construction costs of new plants in North Carolina and Ohio. Cash used in investing activities during the nine months ended September 30, 2022, was primarily due to net cash outflows related to marketable securities activity of $1.9 billion and capital expenditures of $596 million. We currently estimate 2023 spending on capital projects to be approximately $950 million.

Financing

Cash provided by financing activities during the nine months ended September 30, 2023, was primarily due to proceeds from the issuance of debt of $23.8 billion, partially offset by the payment of dividends of $3.4 billion as well as the repayment and extinguishment of debt of $2.0 billion. Cash used in financing activities during the nine months ended September 30, 2022, was primarily due to payments to repurchase our common stock of $6.4 billion, including amounts paid under the ASR agreements, the payment of dividends of $3.2 billion and the extinguishment of debt of $297 million, partially offset by proceeds from the issuance of debt of $6.9 billion. See Note 10, Financing arrangements, and Note 11, Stockholders’ equity, to the condensed consolidated financial statements for further discussion.

Critical Accounting Policies and Estimates

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 and estimates 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, 2022.

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