Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks that may result from changes in foreign currency exchange rates, interest rates, credit risks and market price. To reduce certain of these risks, we enter into various types of foreign currency or interest rate derivative hedging transactions, follow investment guidelines and monitor outstanding receivables as part of our risk management program.

Foreign Currency Exchange Risk

Our operations include manufacturing and sales activities in the United States, Canada and Ireland as well as sales activities in countries outside the United States, including Europe and Asia Pacific. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in foreign currency exchange rates between the U.S. dollar and various foreign currencies, the most significant of which is the Euro. When the U.S. dollar strengthens against

these currencies, the relative value of sales made in the respective foreign currency decreases. Conversely, when the U.S. dollar weakens against these currencies, the relative amounts of such sales increase. Overall, we are a net receiver of foreign currencies and, therefore, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies in which we transact significant amounts of business.

Approximately 25% of our product sales were denominated in foreign currencies during 2018. To partially mitigate the impact of changes in currency exchange rates on net cash flows from our foreign currency denominated sales, we may enter into foreign currency exchange forward and option contracts. We also hedge certain monetary assets and liabilities denominated in foreign currencies, which reduces but does not eliminate our exposure to currency fluctuations between the date a transaction is recorded and the date that cash is collected or paid. In general, the market risks of these contracts are offset by corresponding gains and losses on the transactions being hedged.

As of December 31, 2018 and 2017, we had open foreign currency forward contracts with notional amounts of $2.2 billion and $2.8 billion, respectively. A hypothetical 10% adverse movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates at December 31, 2018 would have resulted in a reduction in fair value of these contracts of approximately $218 million on this date and, if realized, would negatively affect earnings over the remaining life of the contracts. The same hypothetical movement in foreign currency exchange rates compared with the U.S. dollar relative to exchange rates at December 31, 2017, would have resulted in a reduction in fair value of these contracts of approximately $285 million on this date and, if realized, would negatively affect earnings over the remaining life of the contracts. The analysis does not consider the impact that hypothetical changes in foreign currency exchange rates would have on anticipated transactions that these foreign currency sensitive instruments were designed to offset.

Interest Rate Risk

Our portfolio of available-for-sale marketable debt securities and our fixed and variable rate liabilities create an exposure to interest rate risk. With respect to our investment portfolio, we adhere to an investment policy that requires us to limit amounts invested in securities based on credit rating, maturity, industry group and investment type and issuer, except for securities issued by the U.S. government. The goals of our investment policy, in order of priority, are as follows:

The following table summarizes the expected maturities and average interest rates of our interest-generating assets and interest-bearing liabilities at December 31, 2018 (in millions, except percentages):

Notes:

Credit Risk

We are subject to credit risk from our portfolio of cash equivalents and marketable debt securities. Under our investment policy, we limit amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. We are not exposed to any significant concentrations of credit risk from these financial

instruments. The goals of our investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return.

We are also subject to credit risk from our accounts receivable related to our product sales. The majority of our trade accounts receivable arises from product sales in the United States and Europe.

As of December 31, 2018, our accounts receivable, net, in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $161 million, of which $31 million were greater than 120 days past due, including $27 million greater than 365 days past due. As of December 31, 2017, our accounts receivable, net, in Southern Europe, specifically Greece, Italy, Portugal and Spain, totaled approximately $326 million, of which $131 million were greater than 120 days past due, including $52 million greater than 365 days past due. To date, we have not experienced significant losses with respect to the collection of our accounts receivable.

Market Price Risk

We hold shares of common stock of certain publicly traded biotechnology companies in connection with license and collaboration agreements. These equity securities are measured at fair value with any changes in fair value recognized in earnings starting on January 1, 2018 as a result of our adoption of Accounting Standards Update No. 2016-01 “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. See Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for further information.

The fair value of these equity securities was approximately $881 million and $635 million as of December 31, 2018 and 2017, respectively. Changes in fair value of these equity securities are primarily due to the volatility of the stock market and changes in general economic conditions, among other factors. A hypothetical 20% increase or decrease in the stock prices of these equity securities would increase or decrease their fair value at December 31, 2018 and 2017 by approximately $176 million and $127 million, respectively.