See notes to consolidated condensed financial statements.
See notes to consolidated condensed financial statements.
See notes to consolidated condensed financial statements.
Notes to Consolidated Condensed Financial Statements
(Tables present dollars in millions, except per-share data)
Note 1: Basis of Presentation
We have prepared the accompanying unaudited consolidated condensed financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). In our opinion, the financial statements reflect all adjustments (including those that are normal and recurring) that are necessary for a fair presentation of the results of operations for the periods shown. In preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019. We issue our financial statements by filing them with the Securities and Exchange Commission and have evaluated subsequent events up to the time of the filing. Certain reclassifications have been made to prior periods in the consolidated condensed financial statements and accompanying notes to conform with the current presentation. These reclassifications include $110.4 million that increased net cash provided by operating activities and increased net cash used for financing activities on the consolidated condensed statements of cash flows as a resultfiling of our adoption in the fourth quarter of 2016 of Accounting Standards Update 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting as discussed in our Annual Report on Form 10-K for the year ended December 31, 2016.10-Q.
All per-share amounts, unless otherwise noted in the footnotes, are presented on a diluted basis, that is, based on the weighted-average number of outstanding common shares plus the effect of incremental shares from our stock-based compensation programs.
We operate as a single operating segment engaged in the discovery, development, manufacturing, marketing, and sales of pharmaceutical products worldwide. A global research and development organization and a supply chain organization are responsible for the discovery, development, manufacturing, and supply of our products. Regional commercial organizations market, distribute, and sell the products. The business is also supported by global corporate staff functions. Our determination that we operate as a single segment is consistent with the financial information regularly reviewed by the chief operating decision maker for purposes of evaluating performance, allocating resources, setting incentive compensation targets, and planning and forecasting for future periods.
Note 2: Implementation of New Financial Accounting PronouncementsRevenue
The following table provides a brief descriptionsummarizes our revenue recognized in our consolidated condensed statements of accounting standards that have not yet been adopted and could have a material effect on our financial statements:operations: |
| | | | | | |
Standard | | Description | | Effective Date | | Effect on the financial statements or other significant matters |
Accounting Standards Update 2014-09 and various other related updates, Revenue from Contracts with Customers
| | This standard will replace existing revenue recognition standards and will require entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity can apply the new revenue standard retrospectively to each prior reporting period presented or with the cumulative effect of initially applying the standard recognized at the date of initial application in retained earnings. We plan to use the latter approach. | | This standard is effective January 1, 2018, and we will adopt on that date. | | We are in the process of completing our evaluation of the impact of adopting the standard. We have identified two revenue streams from our contracts with customers: 1) product sales, which represented 96 percent of our 2016 consolidated revenue and 2) licensing and other arrangements, which represented 4 percent of our 2016 consolidated revenue.
Our evaluation of our contracts for product sales is substantially complete and, based upon the results of our work to date we currently do not expect the application of the new standard to these contracts to have a material impact to our consolidated statements of operations or balance sheets either at initial implementation or on an ongoing basis.
While we have completed most of our reviews of arrangements in which we have licensed or sold intellectual property, we are not yet able to estimate the anticipated impact to our consolidated financial statements from the application of the new standard to these arrangements as we continue to interpret and apply the principles in the new standard to our arrangements.
We are also evaluating the new disclosures required by the standard to determine what additional information will need to be disclosed.
|
Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
| | This standard will require entities to recognize changes in the fair value of equity investments with readily determinable fair values in net income (except for investments accounted for under the equity method of accounting or those that result in consolidation of the investee). An entity should apply the new standard through a cumulative effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. | | This standard is effective January 1, 2018, and we will adopt on that date.
| | We are unable to estimate the impact of adopting this standard as the significance of the impact will depend upon our equity investments as of the date of adoption. |
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Net product revenue | $ | 5,403.5 |
| | $ | 4,692.3 |
|
Collaboration and other revenue (1) | 456.3 |
| | 399.9 |
|
| Revenue | $ | 5,859.8 |
| | $ | 5,092.2 |
|
(1) Collaboration and other revenue associated with prior period transfers of intellectual property was $35.4 million and $35.5 million during the three months ended March 31, 2020 and 2019, respectively.
We recognize revenue primarily from two different types of contracts, product sales to customers (net product revenue) and collaborations and other arrangements. Revenue recognized from collaborations and other arrangements includes our share of profits from the collaboration, as well as royalties, upfront and milestone payments we receive under these types of contracts. See Note 4 for additional information related to certain of our collaborations and other arrangements. Collaboration and other revenue disclosed above includes the revenue from the Trajenta® and Jardiance® families of products resulting from our collaboration with Boehringer Ingelheim discussed in Note 4. Substantially all of the remainder of collaboration and other revenue is related to contracts accounted for as contracts with customers.
Adjustments to Revenue
Adjustments to revenue recognized as a result of changes in estimates for our most significant U.S. sales returns, rebates, and discounts liability balances for products shipped in previous periods were approximately 2 percent and 3 percent of U.S. revenue during the three months ended March 31, 2020 and 2019, respectively.
Contract Liabilities
Our contract liabilities result from arrangements where we have received payment in advance of performance under the contract and do not include sales returns, rebates, and discounts. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract.
The following table summarizes contract liability balances: |
| | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Contract liabilities | $ | 307.8 |
| | $ | 264.6 |
|
During the three months ended March 31, 2020 and 2019, revenue recognized from contract liabilities as of the beginning of the year was not material. Revenue expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied is not expected to be material in any one year.
Disaggregation of Revenue
The following table summarizes revenue by product:
|
| | | | | | |
Standard | | Description | | Effective Date | | Effect on the financial statements or other significant matters |
Accounting Standards Update 2016-02, Leases | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
March 31, | | | 2020 | | 2019 | | | United States (U.S.) (1) | Outside U.S. | Total | | U.S. (1) | Outside U.S. | Total | | Revenue—to unaffiliated customers: | | | | | | | | | Diabetes: | | | | | | | | Trulicity® | $ | 929.5 |
| $ | 299.9 |
| $ | 1,229.4 |
| | $ | 665.6 |
| $ | 214.1 |
| $ | 879.7 |
| Humalog® (2) | 398.6 |
| 297.2 |
| 695.8 |
| | 448.6 |
| 282.2 |
| 730.8 |
| Humulin® | 214.1 |
| 101.5 |
| 315.7 |
| | 201.3 |
| 96.4 |
| 297.7 |
| Basaglar® | 230.4 |
| 73.3 |
| 303.7 |
| | 198.2 |
| 53.2 |
| 251.4 |
| Jardiance (3) | 144.6 |
| 122.9 |
| 267.5 |
| | 125.2 |
| 78.4 |
| 203.6 |
| Trajenta (4) | 28.7 |
| 64.5 |
| 93.2 |
| | 47.4 |
| 84.6 |
| 131.9 |
| | Other Diabetes | 45.3 |
| 18.4 |
| 63.6 |
| | 33.1 |
| 24.7 |
| 57.9 |
| | Total Diabetes | 1,991.2 |
| 977.7 |
| 2,968.9 |
| | 1,719.4 |
| 833.6 |
| 2,553.0 |
| | | | | | | | | | | Oncology: | | | | | | | | Alimta® | 324.2 |
| 235.8 |
| 560.1 |
| | 281.8 |
| 217.4 |
| 499.2 |
| Cyramza® | 89.1 |
| 149.9 |
| 239.0 |
| | 75.1 |
| 123.2 |
| 198.3 |
| Verzenio® | 129.4 |
| 58.6 |
| 188.0 |
| | 93.5 |
| 15.9 |
| 109.4 |
| Erbitux® | 117.8 |
| 13.0 |
| 130.8 |
| | 113.3 |
| 5.1 |
| 118.4 |
| | Other Oncology | (2.6 | ) | 86.3 |
| 83.6 |
| | 30.2 |
| 57.3 |
| 87.4 |
| | Total Oncology | 657.9 |
| 543.6 |
| 1,201.5 |
| | 593.9 |
| 418.9 |
| 1,012.7 |
| | | | | | | | | | | Immunology: | | | | | | | | Taltz® | 327.5 |
| 116.0 |
| 443.5 |
| | 180.8 |
| 71.7 |
| 252.5 |
| Olumiant® | 11.3 |
| 128.4 |
| 139.7 |
| | 6.4 |
| 75.7 |
| 82.1 |
| | Other Immunology | 2.6 |
| — |
| 2.6 |
| | — |
| — |
| — |
| | Total Immunology | 341.4 |
| 244.4 |
| 585.8 |
| | 187.2 |
| 147.4 |
| 334.7 |
| | | | | | | | | | | Neuroscience: | | | | | | | | Cymbalta® | 11.6 |
| 198.8 |
| 210.4 |
| | 10.3 |
| 153.8 |
| 164.1 |
| Zyprexa® | 11.2 |
| 87.2 |
| 98.4 |
| | 9.3 |
| 97.9 |
| 107.2 |
| Emgality® | 67.3 |
| 6.7 |
| 74.0 |
| | 12.2 |
| 2.1 |
| 14.2 |
| | Other Neuroscience | 20.2 |
| 60.5 |
| 80.7 |
| | 19.3 |
| 88.2 |
| 107.6 |
| | Total Neuroscience | 110.3 |
| 353.2 |
| 463.5 |
| | 51.1 |
| 342.0 |
| 393.1 |
| | | | | | | | | | | Other: | | | | | | | | Forteo® | 122.5 |
| 149.8 |
| 272.4 |
| | 125.9 |
| 187.0 |
| 312.9 |
| Cialis® | 26.1 |
| 167.0 |
| 193.0 |
| | 143.2 |
| 164.9 |
| 308.2 |
| | Other | 79.4 |
| 95.3 |
| 174.7 |
| | 70.1 |
| 107.6 |
| 177.6 |
| | Total Other | 228.0 |
| 412.1 |
| 640.1 |
| | 339.2 |
| 459.5 |
| 798.7 |
| | Revenue | $ | 3,328.8 |
| $ | 2,531.0 |
| $ | 5,859.8 |
| | $ | 2,890.8 |
| $ | 2,201.4 |
| $ | 5,092.2 |
|
Numbers may not add due to rounding. (1) U.S. revenue includes revenue in Puerto Rico. (2) Humalog revenue includes Insulin Lispro. (3) Jardiance revenue includes Glyxambi®,Synjardy®, and Trijardy® XR. (4) Trajenta revenue includes Jentadueto®. . | | This standard was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including leases classified as operating leases under current GAAP, on the balance sheet and requiring additional disclosures about leasing arrangements. This standard requires a modified retrospective approach to adoption. | | This standard is effective January 1, 2019, with early adoption permitted. We intend to adopt this standard on January 1, 2019. | | We are in the process of determining the impact on our consolidated financial statements. |
Accounting Standards Update 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
| | This standard will require entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of transfer. This standard requires a modified
retrospective approach to adoption.
| | This standard is effective January 1, 2018, and we will adopt on that date. | | We are continuing to assess the potential impact of this standard on our consolidated financial statements and currently estimate that the cumulative effect of initially applying the standard would result in an increase to deferred tax assets and the opening balance of retained earnings of approximately $2 billion on January 1, 2018. This estimate is subject to change based upon intra-entity transfers of assets other than inventory over the remainder of 2017 and ongoing assessments of the future deductibility and realizability of the deferred tax assets that would result from implementation. |
Accounting Standards Update 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
| | This standard was issued to improve the transparency and comparability among organizations by requiring entities to separate their net periodic pension cost and net periodic postretirement benefit cost into a service cost component and other components. Currently, the costs of the other components along with the service cost component are classified based upon the function of the employee. This standard will require entities to classify the service cost component in the same financial statement line item or items as other compensation costs arising from services rendered by pertinent employees. The other components of net benefit cost will be presented separately from the line items that include the service cost component. When applicable, the service cost component will be the only component eligible for capitalization. An entity should apply the new standard retrospectively for the classification of the service cost and other components and prospectively for the capitalization of the service cost component. | | This standard is effective January 1, 2018, and we will adopt this standard on that date. | | Upon adoption of this standard, pension and postretirement benefit cost components other than service costs will be presented in other–net, (income) expense. We do not expect the application of the new standard to have a material impact on consolidated net income either at initial implementation or on an ongoing basis.
|
The following table summarizes revenue by geographical area: |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
Revenue—to unaffiliated customers (1): | | | |
U.S. (2) | $ | 3,328.8 |
| | $ | 2,890.8 |
|
| Europe | 1,061.0 |
| | 900.3 |
|
| Japan | 592.3 |
| | 543.7 |
|
| China | 267.3 |
| | 211.2 |
|
| Other foreign countries | 610.4 |
| | 546.2 |
|
| Revenue | $ | 5,859.8 |
| | $ | 5,092.2 |
|
Numbers may not add due to rounding.
(1) Revenue is attributed to the countries based on the location of the customer.
(2) U.S. revenue includes revenue in Puerto Rico.
Note 3: Acquisitions
On January 3, 2017,During the three months ended March 31, 2020 we completed the acquisition of Boehringer Ingelheim Vetmedica,Dermira, Inc.'s United States (U.S.) feline, canine, (Dermira) and rabies vaccine portfolio and other related assets (BIVIVP)during the three months ended March 31, 2019, we completed the acquisition of Loxo Oncology, Inc. (Loxo). This transaction,These transactions, as further discussed in this note below in AcquisitionAcquisitions of a Business, wasBusinesses, were accounted for as a business combinationcombinations under the acquisition method of accounting. Under this method, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date in our consolidated condensed financial statements. The determination of estimated fair value required management to make significant estimates and assumptions. The excess of the purchase price over the fair value of the acquired net assets, where applicable, has been recorded as goodwill. The results of operations of this acquisitionthese acquisitions are included in our consolidated condensed financial statements from the date of acquisition.
In addition to the acquisition of a business, weWe also acquired assets in development in the ninethree months ended September 30, 2017,March 31, 2020 and 2019, which are further discussed in this note below in Asset Acquisitions. Upon acquisition, the acquired in-process research and development (IPR&D) charges related to these productscompounds were immediately expensed because the productscompounds had no alternative future use. There wereWe incurred acquired IPR&D charges of $205.0$52.3 million and $1.06 billion$136.9 million for the three and nine months ended September 30, 2017,March 31, 2020 and 2019, respectively. There were no acquired IPR&D charges for the three and nine months ended September 30, 2016.
In October 2017, we entered into a global immuno-oncology collaboration agreement with CureVac AG (CureVac), to develop and commercialize up to five potential cancer vaccine products based on CureVac's proprietary RNActive® technology. This transaction is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. Subject to the closingAcquisitions of this transaction, CureVac will receive from us an initial payment of $50.0 million. CureVac will also be eligible to receive potential development and commercialization milestones, as well as tiered royalty payments based on future sales. We anticipate recording an acquired IPR&D charge of approximately $50 million upon the closing of the transaction.Businesses
Acquisition of a Business
Boehringer Ingelheim Vetmedica, Inc. Vaccine PortfolioDermira Acquisition
Overview of Transaction
WeIn February 2020, we acquired BIVIVP in an all-cash transactionall shares of Dermira for $882.1 million.a purchase price of approximately $849.3 million, net of cash acquired. Under the terms of the agreement, we acquired lebrikizumab, a manufacturing and research and development site, a U.S. vaccine portfolio, including vaccines usednovel, investigational, monoclonal antibody being evaluated for the treatment of bordetella, Lyme disease, rabies,moderate-to-severe atopic dermatitis. Lebrikizumab was granted Fast Track designation from the U.S. Food and parvovirus, among others.Drug Administration (FDA). We also acquired Qbrexza® (glycopyrronium) cloth, a medicated cloth approved by the FDA for the topical treatment of primary axillary hyperhidrosis (uncontrolled excessive underarm sweating).
Assets Acquired and Liabilities Assumed
Our access to BIVIVPDermira information was limited prior to the acquisition. As a consequence, we are in the process of determining the fair values and tax bases of a significant portion of the assets acquired and liabilities assumed, including the identification and valuation of intangible assets, inventory, property and equipment, accrued expenses,long-term debt, and tax exposures. The final determination of these amounts will be completed as soon as possible but no later than one year from the acquisition date. The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized. Preliminary fair values related to this acquisition included goodwill of $99.7 million, other intangibles of $1.21 billion, and long-term debt of $375.5 million. After the acquisition, we repaid $276.2 million of long-term debt assumed as part of our acquisition of Dermira.
Loxo Acquisition
Overview of Transaction
In February 2019, we acquired all shares of Loxo for a purchase price of $6.92 billion, net of cash acquired. The accelerated vesting of Loxo employee equity awards was recognized as transaction expense included in asset impairment, restructuring, and other special charges during the three months ended March 31, 2019 (see Note 6).
Under the terms of the agreement, we acquired a pipeline of investigational medicines, including selpercatinib (LOXO-292), an oral RET inhibitor granted Breakthrough Therapy designation and Priority Review by the FDA, and LOXO-305, an oral BTK inhibitor.
Assets Acquired and Liabilities Assumed
The following table summarizes the preliminary amounts recognized for assets acquired and liabilities assumed in the acquisition of Loxo as of the acquisition date: | | | Estimated Fair Value at January 3, 2017 | |
| Inventories | $ | 108.6 |
| |
Marketed products (1) | 298.0 |
| |
| Property and equipment | 148.2 |
| |
| Estimated Fair Value at February 15, 2019 | | Estimated Fair Value at February 15, 2019 |
Acquired IPR&D (1) | | $ | 4,670.0 |
|
Finite-lived intangibles (2) | | 980.0 |
|
| Deferred income taxes | | (1,032.8 | ) |
| Other assets and liabilities - net | 5.2 |
| (26.4 | ) |
| Total identifiable net assets | 560.0 |
| 4,590.8 |
|
Goodwill (2)(3) | 322.1 |
| 2,326.9 |
|
| Total consideration transferred - net of cash acquired | $ | 882.1 |
| $ | 6,917.7 |
|
(1)These intangible assets,$4.60 billion of the acquired IPR&D relates to selpercatinib (LOXO-292).
(2)Contract-based intangibles (primarily related to Vitrakvi®) which are being amortized to cost of sales on a straight-line basis over their estimated useful lives, were expected to have a weighted average useful life of 10 years.approximately 12 years from the acquisition date.
(2) (3)The goodwill recognized from this acquisition is attributable primarily to expected synergies from combining the operations of BIVIVP with our legacy animal health business, future unidentified projects and products and the assembled workforce of BIVIVP. We anticipate that the goodwill associated with this acquisition will befor Loxo and is not deductible for tax purposes.
Our consolidated condensed statement of operations for the three and nine months ended September 30, 2017, includes BIVIVP revenue of $61.2 million and $180.2 million, respectively. BIVIVP has been integrated into our animal health products segment and, as a result of these integration efforts, certain parts of the animal health business were operating on a combined basis during these periods, and we could not distinguish the operations between BIVIVP and our legacy animal health products business.
Asset Acquisitions
The following table and narrative summarizessummarize our asset acquisitions during the ninethree months ended September 30, 2017. There was no asset acquisition which resulted in acquired IPR&D expense during the nine months ended September 30, 2016.March 31, 2020 and 2019: |
| | | | | | | | |
| Counterparty | Compound(s) or Therapy | Acquisition Month | | Phase of Development (1) | | Acquired IPR&D Expense |
| Sitryx Therapeutics Limited | Preclinical targets that could lead to potential new medicines for autoimmune diseases | March 2020 | | Pre-clinical | | $ | 52.3 |
|
| | | | | | | |
AC Immune SA (2) | Tau aggregation inhibitor small molecules for the potential treatment of Alzheimer's disease and other neurodegenerative diseases | January 2019 | | Pre-clinical | | $ | 96.9 |
|
| ImmuNext, Inc. | Novel immunometabolism target | March 2019 | | Pre-clinical | | 40.0 |
|
|
| | | | | | | | |
| Counterparty | Compound(s) or Therapy | Acquisition Month | | Phase of Development (1) | | Acquired IPR&D Expense |
| CoLucid Pharmaceuticals, Inc. (CoLucid) | Oral therapy for the acute treatment of migraine - lasmiditan | March 2017 | | Phase III | | $ | 857.6 |
|
| KeyBioscience AG (KeyBioscience) | Multiple molecules for treatment of metabolic disorders | July 2017 | | Phase II | | $ | 55.0 |
|
| Nektar Therapeutics (Nektar) | Immunological therapy - NKTR-358 | August 2017 | | Phase I | | $ | 150.0 |
|
(1) The phase of development presented is as of the date of the arrangement and represents the phase of development of the most advanced asset acquired, where applicable.
(2)We recognized an additional acquired IPR&D expense of $30.2 millionin September 2019 upon entering into an amendment to the license agreement.
We entered into an agreement with AbCellera Biologics Inc. (AbCellera) to co-develop antibody products for the potential treatment and prevention of COVID-19. Under the terms of the agreement, we have committed to equally share initial development costs towards a product with AbCellera, after which we will be responsible for all further development, manufacturing, and distribution. We expect to record an acquired IPR&D charge of $25.0 million in the second quarter of 2020 upon closing of the transaction.
In connection with thethese arrangements, described herein, our partners may be entitled to future royalties and/or commercial milestones based on sales should these products be approved for commercialization and/or milestones based on the successful progress of the compounds through the development process.
We acquired lasmiditan by acquiring CoLucid. Under the terms of the agreement, we acquired all shares of CoLucid for a cash purchase price of $831.8 million, net of cash acquired, plus net accrued liabilities assumed of $25.8 million. Substantially all of the value of CoLucid was related to lasmiditan, its only significant asset. The acquired IPR&D expense is not tax deductible.
Our collaboration agreement with KeyBioscience provides us with access to KeyBioscience's Dual Amylin Calcitonin Receptor Agonists (DACRAs), a potential new class of treatments for metabolic disorders such as type 2 diabetes, along with multiple molecules. Prior to entering into the agreement, KeyBioscience had initiated Phase II development of the lead molecule. The other assets included in the collaboration range from pre-clinical to Phase I development. Under the terms of the agreement, we receive worldwide rights to develop and commercialize these molecules.
Our collaboration with Nektar is to co-develop Nektar's compound which has the potential to treat a number of autoimmune and other chronic inflammatory conditions. Under the terms of the agreement, we are responsible for all costs of global commercialization. Nektar will have an option to co-promote in the U.S. under certain conditions.
Note 4: Collaborations and Other Arrangements
We often enter into collaborative and other similar arrangements to develop and commercialize drug candidates. Collaborative activities may include research and development, marketing and selling (including promotional activities and physician detailing), manufacturing, and distribution. These arrangements often require milestone and royalty or profit-share payments, contingent upon the occurrence of certain future events linked to the success of the asset in development, as well as expense reimbursements from or payments to the collaboration partner. Elements within a collaboration are separated into individual unitsSee Note 2 for amounts of accounting if they have standalone value from other elements within the arrangement. In these situations, the arrangement consideration is allocated to the elements on a relative selling price basis. Revenue related to products we sell pursuant to these arrangements are included in net product revenue, while other sources of revenue (e.g., royalties and profit-sharing due from our partner) are included in collaboration and other revenue.
The following table summarizes our collaboration and other revenue which is included in revenue in the consolidated condensed statementsrecognized from these types of operations: |
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Collaboration and other revenue | $ | 334.2 |
| | $ | 216.5 |
| | $ | 869.1 |
| | $ | 607.3 |
|
Operating expenses for costs incurred pursuant to these arrangements are reported in their respective expense line item, net of any payments due to or reimbursements due from our collaboration partners, with such reimbursements being recognized at the time the party becomes obligated to pay. Each collaboration is unique in nature, and our more significant arrangements are discussed below.
Boehringer Ingelheim Diabetes Collaboration
We and Boehringer Ingelheim have a global agreement to jointly develop and commercialize a portfolio of diabetes compounds. Currently included in the collaboration are Boehringer Ingelheim’s oral diabetes products: Trajenta,™, Jentadueto,®, Jardiance,®, Glyxambi,®, Synjardy, and Synjardy®,Trijardy XR as well as our basal insulin: Basaglar®.insulin, Basaglar. Jentadueto is included in the Trajenta product family. Glyxambi, Synjardy, and Trijardy XR are included in the Jardiance product family.
The table below summarizes significant regulatory and commercialization events and milestones (deferred) capitalized for the compounds included in this collaboration: |
| | | | |
| Product Family | | Milestones (Deferred) Capitalized (1) |
Trajenta (2) | | $ | 446.4 |
|
Jardiance (3) | | 289.0 |
|
| Basaglar | | (250.0 | ) |
|
| | | | | | | | | | | |
| | | Year Launched | | Milestones (Deferred) Capitalized (1) |
| Product Family | | U.S. | | Europe | | Japan | | Year | Amount |
Trajenta (2) | | 2011 | | 2011 | | 2011 | | Cumulative (4) - all prior to 2016 | $ | 446.4 |
|
Jardiance (3) | | 2014 | | 2014 | | 2015 | | Cumulative (4) - all prior to 2016 | 299.5 |
|
| Basaglar | | 2016 | | 2015 | | 2015 | | 2017 | — |
|
| | | | | 2016 | (187.5 | ) |
| | | | | Cumulative (4) | (250.0 | ) |
(1) In connection with the regulatory approvals of Basaglar in the U.S., Europe, and Japan, milestone payments received were recorded as deferred revenuecontract liabilities and are being amortized through the term of the collaboration (2029) to collaboration and other revenue. In connection with the regulatory approvals of Trajenta and Jardiance, milestone payments made were capitalized as intangible assets and are being amortized to cost of sales.
(2) Jentadueto is included insales through the Trajenta familyterm of product results.
(3) Glyxambi and Synjardyare included in the Jardiance family of product results.
(4) The cumulative amountcollaboration. This represents the total initialcumulative amounts that werehave been (deferred) or capitalized from the start of this collaboration through the end of the reporting period.
(2) The collaboration agreement with Boehringer Ingelheim for Trajenta ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
(3) The collaboration agreement with Boehringer Ingelheim for Jardiance ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
InThrough December 31, 2019, in the most significant markets, we and Boehringer Ingelheim shareshared equally the ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from the collaboration. We recordrecorded our portion of the gross margin associated with Boehringer Ingelheim's compoundsproducts as collaboration and other revenue. We recordrecorded our sales of Basaglar to third parties as net product revenue with the payments made to Boehringer Ingelheim for their portion of the gross margin recorded as cost of sales. For all compounds under this collaboration, we recordrecorded our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company iswas entitled to potential performance payments depending on the sales of the molecules it contributes to the collaboration. These performance payments resultmay have resulted in the owner of the molecule retaining a greater share of the agreed upon gross margin of that product. Subject to achieving these thresholds, in a given period, our reported revenue for Trajenta and Jardiance may behave been reduced by any performance payments we make made
related to these products. Similarly, performance payments we may receivehave received related to Basaglar effectively reducereduced Boehringer Ingelheim's share of the gross margin, which reducesreduced our cost of sales.
Effective January 1, 2020, we and Boehringer Ingelheim modernized the alliance. In the most significant markets, we and Boehringer Ingelheim share equally the ongoing development costs and commercialization costs for the Jardiance product family. We receive a royalty on net sales of Boehringer Ingelheim's products in the most significant markets and recognize the royalty as collaboration and other revenue. We pay to Boehringer Ingelheim a royalty on net sales for Basaglar in the U.S. We record our sales of Basaglar to third parties as net product revenue with the royalty payments made to Boehringer Ingelheim recorded as cost of sales. For the Jardiance product family, we record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Boehringer Ingelheim is entitled to potential performance payments depending on the net sales of the Jardiance product family; therefore, our reported revenue for Jardiance may be reduced by any potential performance payments we make related to this product. Beginning January 1, 2021, the royalty received by us related to the Jardiance product family may also be increased or decreased depending on whether net sales for this product family exceed or fall below certain thresholds.
The following table summarizes our net product revenue recognized with respect to Basaglar and collaboration and other revenue recognized with respect to the TrajentaJardiance and JardianceTrajenta families of products and net product revenue recognized with respect to Basaglar:products: |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Basaglar | $ | 303.7 |
| | $ | 251.4 |
|
| Jardiance | 267.5 |
| | 203.6 |
|
| Trajenta | 93.2 |
| | 131.9 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Trajenta | $ | 153.3 |
| | $ | 115.4 |
| | $ | 408.2 |
| | $ | 330.8 |
|
| Jardiance | 127.2 |
| | 47.5 |
| | 304.3 |
| | 125.8 |
|
| Basaglar | 145.7 |
| | 19.4 |
| | 278.3 |
| | 46.6 |
|
Erbitux®
We have several collaborations with respect to Erbitux. The most significant collaborations are or, where applicable, were in Japan, and prior to the transfer of commercialization rights in the fourth quarter of 2015, the U.S. and Canada (Bristol-Myers Squibb Company); and worldwide except the U.S. and Canada (Merck KGaA). Certain rights to Erbitux outside the U.S. and Canada (collectively, North America) will remain with Merck KGaA (Merck) upon expiration of that agreement.
The following table summarizes our revenue recognized with respect to Erbitux: |
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net product revenue | $ | 137.6 |
| | $ | 155.9 |
| | $ | 403.3 |
| | $ | 455.8 |
|
| Collaboration and other revenue | 25.9 |
| | 28.7 |
| | 73.7 |
| | 77.5 |
|
| Revenue | $ | 163.5 |
|
| $ | 184.6 |
|
| $ | 477.0 |
|
| $ | 533.3 |
|
Bristol-Myers Squibb Company
Pursuant to commercial agreements with Bristol-Myers Squibb Company and E.R. Squibb (collectively, BMS), we had been co-developing Erbitux in North America exclusively with BMS. On October 1, 2015, BMS transferred their commercialization rights to us with respect to Erbitux in North America pursuant to a modification of our existing arrangement, and we began selling Erbitux at that time. This modification did not affect our rights with respect to Erbitux in other jurisdictions. In connection with the modification of terms, we provide consideration to BMS based upon a tiered percentage of net sales of Erbitux in North America estimated to average 38 percent through September 2018. The transfer of the commercialization rights was accounted for as an acquisition of a business. The consideration to be paid to BMS was accounted for as contingent consideration liability. See Note 6 for discussion regarding the estimation of this liability.
Merck KGaA
A development and license agreement grants Merck exclusive rights to market Erbitux outside of North America until December 2018. A separate agreement grants co-exclusive rights among Merck, BMS, and us in Japan and expires in 2032. This agreement was amended in 2015 to grant Merck exclusive commercialization rights in Japan but did not result in any changes to our rights.
Merck manufactures Erbitux for supply in its territory as well as for Japan. We receive a royalty on the sales of Erbitux outside of North America, which is included in collaboration and other revenue as the underlying sales occur. Royalties due to third parties are recorded as a reduction of collaboration and other revenue, net of any royalty reimbursements due from third parties.
Effient®
We are in a collaborative arrangement with Daiichi Sankyo Co., Ltd. (Daiichi Sankyo) to develop, market, and promote Effient. Marketing rights for major territories are shown below. We and Daiichi Sankyo each have exclusive marketing rights in certain other territories.
|
| | | | |
Territory | | Marketing Rights | | Selling Party |
U.S. | | Co-promotion | | Lilly |
Major European markets | | Co-promotion | | Pre-January 1, 2016, Lilly
Post-January 1, 2016, Daiichi Sankyo
|
Japan | | Exclusive | | Daiichi Sankyo |
Beginning January 1, 2016, while major European markets continue to be a co-promotion territory under the terms of our arrangement, Daiichi Sankyo exclusively promotes Effient in these markets. The economic results for the major European markets continue to be shared in the same proportion as they were previously.
The parties share approximately 50/50 in the profits, as well as in the costs of development and marketing in the co-promotion territories. A third party manufactures bulk product, and we continue to produce the finished product for our exclusive and co-promotion territories, including the major European markets.
We record net product revenue in our exclusive and co-promotion territories where we are the selling party. Profit-share payments due to Daiichi Sankyo for co-promotion countries where we are the selling party are recorded as marketing, selling, and administrative expenses. Beginning January 1, 2016, any profit-share payments due to us from Daiichi Sankyo for the major European markets are recorded as collaboration and other revenue. We also record our share of the expenses in these co-promotion territories as marketing, selling, and administrative expenses. In our exclusive territories, we pay Daiichi Sankyo a royalty specific to these territories. All royalties due to Daiichi Sankyo and the third-party manufacturer are recorded in cost of sales. Generic versions of Effient launched in the U.S. in the third quarter of 2017.
The following table summarizes our revenue recognized with respect to Effient: |
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Revenue | $ | 55.9 |
| | $ | 127.7 |
| | $ | 326.6 |
| | $ | 394.3 |
|
Olumiant®
We have a worldwide license and collaboration agreement with Incyte Corporation (Incyte), which provides us the development and commercialization rights to its Janus tyrosine kinase (JAK) inhibitor compound, now known as baricitinib (trade name Olumiant),Olumiant, and certain follow-on compounds, for the treatment of inflammatory and autoimmune diseases. Incyte has the right to receive tiered, double-digit royalty payments on future global sales with rates ranging up to 20 percent if the product is successfully commercialized. The agreement provides Incyte with options to co-develop these compounds on an indication-by-indication basis by funding 30 percent of the associated development costs from the initiation of a Phase IIb trial through regulatory approval in exchange for increased tiered royalties ranging up to percentages in the high twenties. Incyte exercised its option to co-develop Olumiant in rheumatoid arthritis in 2010 and psoriatic arthritis and atopic dermatitis in 2017.percent. The agreement calls for payments by us to Incyte associated with certain development, success-based regulatory, and sales-based milestones.
In the first quarter of 2016, we incurred milestone-related expenses of $55.0 million in connection with the regulatory submissionsapprovals of Olumiant in the U.S., Europe, and Europe, whichJapan, milestone payments made of $180.0 million were recorded as research and development expense. We capitalized as intangible assets $65.0 million in the first quarter of 2017 and $15.0 million in the third quarter of 2017 of milestones in connection with regulatory approvals in Europe and Japan, respectively, which are being amortized to cost of sales overthrough the term of the collaboration. This represents the cumulative amounts that have been capitalized from the start of this collaboration through the end of the reporting period.
As of September 30, 2017,March 31, 2020, Incyte is eligible to receive up to $280.0$130.0 million of additional payments from us contingent upon certain development and success-based regulatory milestones, of which $100.0 million relates to the U.S. regulatory decision for a first indication.milestones. Incyte is also eligible to receive up to $150.0 million of potential sales-based milestones.
We record our sales of Olumiant to third parties as net product revenue with the royalty payments made to Incyte recorded as cost of sales. The following table summarizes our net product revenue recognized with respect to Olumiant:
|
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Olumiant | $ | 139.7 |
| | $ | 82.1 |
|
Tanezumab
We have a collaboration agreement with Pfizer Inc. (Pfizer) to jointly develop and globally commercialize tanezumab for the treatment of osteoarthritis pain, chronic low back pain, and cancer pain. Under the agreement, the companies share equally the ongoing development costs and, if successful, in gross margins and certain commercialization expenses. Following the U.S. Food and Drug Administration's (FDA's) decision in March 2015 to lift the partial clinical hold on tanezumab, certain Phase III trials resumed in July 2015. Upon the FDA's lifting of the partial clinical hold and the decision to continue the collaboration with Pfizer, we paid an upfront fee of $200.0 million, which was expensed as acquired IPR&D. As of September 30, 2017,March 31, 2020, Pfizer is eligible to receive up to $350.0 million in success-based regulatory milestones and up to $1.23 billion in a series of sales-based milestones, contingent upon the commercial success of tanezumab.
Lanabecestat
We have a collaboration agreement with AstraZeneca for the worldwide co-development and co-commercialization of AstraZeneca’s lanabecestat, an oral beta-secretase cleaving enzyme (BACE) inhibitor being investigated for the potential treatment of Alzheimer’s disease. We are responsible for leading development efforts, while AstraZeneca will be responsible for manufacturing efforts. If successful, both parties will take joint responsibility for commercialization. Under the agreement, both parties share equally in the ongoing development costs and, if successful, in gross margins and certain other costs associated with commercialization of the molecule.
Lebrikizumab
As a result of our acquisition of Dermira, we have a worldwide licensing agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc. (collectively Roche), which provides us the molecule moving into Phase III testingglobal development and commercialization rights to lebrikizumab. Roche has the right to receive tiered royalty payments on future global net sales ranging in April 2016, we incurred a $100.0 million developmental milestone, which was recorded as researchpercentages from high single digits to high teens if the product is successfully commercialized. The agreement calls for payments by us to Roche associated with certain success-based regulatory and development expense in the second quarter of 2016. In July 2017, as a result of the outcome of an interim analysis, we incurred a $50.0 million developmental milestone, which was recorded as research and development expense in the third quarter of 2017. sales-based milestones.
As of September 30, 2017, AstraZenecaMarch 31, 2020, Roche is eligible to receive up to $300.0$180.0 million of additional payments from us contingent upon the achievement of success-based regulatory milestones and up to $1.03 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab.
As a result of our acquisition of Dermira, we have a license agreement with Almirall, S.A. (Almirall), under which Almirall licensed the rights to develop and commercialize lebrikizumab for the treatment or prevention of dermatology indications, including, but not limited to atopic dermatitis, in Europe. We have the right to receive tiered royalty payments on future net sales in Europe ranging in percentages from low double digits to low twenties if the product is successfully commercialized. The agreement calls for payments to us by Almirall associated with certain development, and success-based regulatory, and sales-based milestones.
As of March 31, 2020, $43.8 million was recorded as a contract liability on the consolidated condensed balance sheet and is expected to be recognized as collaboration and other revenue over the remaining Phase III development period. During the three months ended March 31, 2020, milestones received and collaboration and other revenue recognized were not material. As of March 31, 2020, we are eligible to receive additional payments of $85.0 million from Almirall contingent upon the achievement of success-based regulatory milestones and up to $1.25 billion in a series of sales-based milestones, contingent upon the commercial success of lebrikizumab.
Note 5: Discontinued Operations
On March 11, 2019, we completed the disposition of our remaining 80.2 percent ownership of Elanco Animal Health (Elanco) common stock through a tax-free exchange offer. As a result, we have presented Elanco as discontinued operations in our consolidated condensed financial statements for all periods presented.
Revenue and net income from discontinued operations for the three months ended March 31, 2019 were $580.0 million and $3.68 billion, respectively. Net income from discontinued operations for the three months ended March 31, 2019 included an approximate $3.7 billion gain related to the disposition of Elanco.
The gain related to the disposition of Elanco in the consolidated condensed statement of cash flows included the operating results of Elanco through the disposition date, which were not material. Net cash flows of our discontinued operations for operating and investing activities for the three months ended March 31, 2019 were not material.
We entered into a transitional services agreement (TSA) with Elanco in order to facilitate the orderly transfer of various services to Elanco. The TSA relates primarily to administrative services, which are generally to be provided over 24 months from March 11, 2019, the disposition date. This agreement is not material and does not confer upon us the ability to influence the operating and/or financial policies of Elanco subsequent to the disposition date.
Note 5:6: Asset Impairment, Restructuring, and Other Special Charges
The components of the charges included in asset impairment, restructuring, and other special charges in our consolidated condensed statements of operations are described below. |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Severance | $ | 9.8 |
| | $ | (3.6 | ) |
| Asset impairment and other special charges | 50.1 |
| | 427.5 |
|
| Total asset impairment, restructuring, and other special charges | $ | 59.9 |
| | $ | 423.9 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Severance: | | | | | | | |
| Human pharmaceutical products | $ | 165.7 |
| | $ | — |
| | $ | 277.1 |
| | $ | — |
|
| Animal health products | 5.8 |
| | 8.3 |
| | 62.1 |
| | 37.0 |
|
| Total severance | 171.5 |
| | 8.3 |
| | 339.2 |
| | 37.0 |
|
| Asset impairment and other special charges: | | | | | | | |
| Human pharmaceutical products | 25.0 |
| | — |
| | 25.0 |
| | — |
|
| Animal health products | 210.0 |
| | 37.2 |
| | 306.2 |
| | 197.9 |
|
| Total asset impairment and other special charges | 235.0 |
| | 37.2 |
| | 331.2 |
| | 197.9 |
|
| Total asset impairment, restructuring, and other special charges | $ | 406.5 |
| | $ | 45.5 |
| | $ | 670.4 |
| | $ | 234.9 |
|
Severance costs recognized during the three months ended September 30, 2017 were incurred as a result of actions taken to reduce our cost structure. Severance costs recognized during the nine months ended September 30, 2017 were incurred as a result of actions taken to reduce our cost structure, as well as the integration of Novartis Animal Health (Novartis AH). Severance costs recognized during the three and nine months ended September 30, 2016 related primarily to the integration of Novartis AH. Severance costs recognized during the nine months ended September 30, 2016 also related to our decision to close an animal health manufacturing plant in Ireland. Substantially all of the severance costs incurred during the three and nine months ended September 30, 2017 are expected to be paid in the next 12 months.
Substantially all of the assetAsset impairment, and other special charges related to animal health products recognized during the three months ended September 30, 2017 related to lower projected revenue for Posilac® (rbST). The company is exploring strategic options for Posilac, including seeking a buyer for the molecule and its Augusta manufacturing site. The assets associated with Posilac were written down to their fair values, which were determined based upon a discounted cash flow valuation. The remaining book value of assets associated with Posilacsubsequent to the impairment charge are not material. Other asset impairmentrestructuring, and other special charges recognized during the three months ended September 30, 2017March 31, 2020 were primarily related to exitacquisition and integration costs associated with site closures. as part of the closing of the acquisition of Dermira.
Asset impairment and other special charges recognized during the ninethree months ended September 30, 2017 resulted primarily from chargesMarch 31, 2019consisted of $400.7 million related to the acquisition of Loxo, substantially all of which was associated with the Posilac impairment, integration costsaccelerated vesting of Novartis AH, as well as asset impairments due to site closures. Asset impairment and other special charges recognized during the three months ended September 30, 2016 related primarily to integration costs related to our acquisition of Novartis AH. Asset impairment and other special charges recognized during the nine months ended September 30, 2016 resulted primarily from $87.2 million of asset impairment and other charges related to our decision to close an animal health manufacturing plant in Ireland. The manufacturing plant was written down to its estimated fair value, which was based primarily on recent sales of similar assets. The remaining asset impairment and other special charges recognized during the nine months ended September 30, 2016 consisted of integration costs related to our acquisition of Novartis AH.
In September 2017, we announced plans to reduce our cost structure by streamlining our operations, including a U.S. voluntary early retirement program. In addition to the asset impairment, restructuring, and other special charges discussed above that were incurred during the three months ended September 30, 2017, we expect to incur additional charges of approximately $800 million in the fourth quarter of 2017 related to these plans. The fourth quarter charge could vary depending on the composition of participants within the U.S. voluntary early retirement program, as well as other actions taken to improve our cost structure.Loxo employee equity awards.
Note 6:7: Financial Instruments
Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Wholesale distributors of life-science products account for a substantial portion of our trade receivables; collateral is generally not required. TheWe seek to mitigate the risk associated with this concentration is mitigated bythrough our ongoing credit-review procedures and insurance. A large portion of our cash is held by a few major financial institutions. We monitor our exposures with these institutions and do not expect any of these institutions to fail to meet their obligations. Major financial institutions represent the largest component of our investments in corporate debt securities. In accordance with documented corporate risk-management policies, we monitor the amount of credit exposure to any one financial institution or corporate issuer. We are exposed to credit-related losses in the event of nonperformance by counterparties to risk-management instruments but do not expect any counterparties to fail to meet their obligations given their high credit ratings.
We consider all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The cost of these investments approximates fair value.
Our equity investments are accounted for using three different methods depending on the type of equity investment:
Investments in companies over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other-net, (income) expense.
For equity investments that do not have readily determinable fair values, we measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. Any change in recorded value is recorded in other-net, (income) expense.
Our public equity investments are measured and carried at fair value. Any change in fair value is recognized in other-net, (income) expense.
We review equity investments other than public equity investments for indications of impairment and observable price changes on a regular basis.
Our derivative activities are initiated within the guidelines of documented corporate risk-management policies and are intended to offset losses and gains on the assets, liabilities, and transactions being hedged. Management reviews the correlation and effectiveness of our derivatives on a quarterly basis.
For derivative instruments that are designated and qualify as fair value hedges, the derivative instrument is marked to market, with gains and losses recognized currently in income to offset the respective losses and gains recognized on the underlying exposure. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of gains and losses isare reported as a component of accumulated other comprehensive loss and reclassified into earnings in the same period the hedged transaction affects earnings. For derivative and non-derivative instruments that are designated and qualify as net investment hedges, the effective portion of foreign currency translation gains or
losses due to spot rate fluctuations are reported as a component of accumulated other comprehensive loss. Hedge ineffectiveness is immediately recognized in earnings. Derivative contracts that are not designated as hedging instruments are recorded at fair value with the gain or loss recognized in current earnings during the period of change.
We may enter into foreign currency forward or option contracts to reduce the effect of fluctuating currency exchange rates (principally the euro, British pound, and the Japanese yen). Foreign currency derivatives used for hedging are put in place using the same or like currencies and duration as the underlying exposures. Forward and option contracts are principally used to manage exposures arising from subsidiary trade and loan payables and receivables denominated in foreign currencies. These contracts are recorded at fair value with the gain or loss recognized in other–net, (income) expense. We may enter into foreign currency forward and option contracts and currency swaps as fair value hedges of firm commitments. Forward contracts generally have maturities not exceeding 12 months. At September 30, 2017,March 31, 2020, we had outstanding foreign currency forward commitments to purchase 502.9946.2 million U.S. dollars and sell 422.1856.3 million euro, commitments to purchase 735.7 million1.57 billion euro and sell 878.1 million1.75 billion U.S. dollars, commitments to purchase 428.4291.2 million U.S. dollars and sell 47.9031.26 billion Japanese yen, and commitments to purchase 295.9168.1 million British pounds and sell 334.8 million euro, and commitments to purchase 287.3210.3 million U.S. dollars and sell 212.2 million British pounds, which will all settle within 30 days.
Foreign currency exchange risk is also managed through the use of foreign currency debt and cross-currency interest rate swaps. Our foreign currency-denominated notes had carrying amounts of $3.67$5.43 billion and $3.34$5.49 billion as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, of which $4.02 billion and $4.10 billion have been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations as of March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, we had outstanding cross currency swaps with notional amounts of $2.35 billion swapping U.S. dollars to euro, $1.00 billion swapping Swiss franc-denominated foreign operations.francs to U.S. dollars, and $396.0 million swapping U.S. dollars to British pounds, which have settlement dates ranging through 2028. Our cross-currency interest rate swaps, thatfor which a majority convert a portion of our U.S. dollar-denominated floating rate debt to euro-denominatedforeign-denominated floating rate debt, have also been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated foreign operations.investments.
In the normal course of business, our operations are exposed to fluctuations in interest rates which can vary the costs of financing, investing, and operating. We seek to address a portion of these risks through a controlled program of risk management that includes the use of derivative financial instruments. The objective of controlling these risks is to limit the impact of fluctuations in interest rates on earnings. Our primary interest-rate risk exposure results from changes in short-term U.S. dollar interest rates. In an effort to manage interest-rate exposures, we strive to achieve an acceptable balance between fixed- and floating-rate debt and investment positions and may enter into interest rate swaps or collars to help maintain that balance.
Interest rate swaps or collars that convert our fixed-rate debt to a floating rate are designated as fair value hedges of the underlying instruments. Interest rate swaps or collars that convert floating-rate debt to a fixed rate are designated as cash flow hedges. Interest expense on the debt is adjusted to include the payments made or received under the swap agreements. Cash proceeds from or payments to counterparties resulting from the termination of interest rate swaps are classified as operating activities in our consolidated condensed statements of cash flows. At September 30, 2017,March 31, 2020, substantially all of our total long-term debt is at a fixed rate. We have converted approximately 3011 percent of our long-term fixed-rate notes to floating rates through the use of interest rate swaps.
We may enter into forward contracts and designate them as cash flow hedges to limit the potential volatility of earnings and cash flow associated with forecasted sales of available-for-sale securities.
We also may enter into forward-starting interest rate swaps, which we designate as cash flow hedges, as part of any anticipated future debt issuances in order to reduce the risk of cash flow volatility from future changes in interest rates. Upon completion of a debt issuance and termination of the swap, theThe change in fair value of these instruments is recorded as part of other comprehensive income (loss), and upon completion of a debt issuance and termination of the swap, is amortized to interest expense over the life of the underlying debt. As of March 31, 2020, the total notional amounts of forward-starting interest rate contracts in designated cash flow hedging instruments were $1.75 billion, which have settlement dates ranging between 2023 and 2025.
In May 2017,April 2020, we issued $750.0 millionagreed to issue $1.00 billion of 2.352.25 percent fixed-rate notes due in May 2022, $750.0 million of 3.10 percent fixed-rate notes due in May 2027, and $750.0 million of 3.95 percent fixed-rate notes due in May 2047,2050, with interest to be paid semi-annually. We are usingintend to use the net proceeds of $2.23 billion from the sale of these notes for general corporate purposes, which may include the repayment of outstanding commercial paper. The offering of notes due in 2018 and 2019. Prioris expected to such uses, we may temporarily invest the net proceeds in investment securities.
In May 2016, we issued Swiss franc-denominated notes consisting of Fr.200.0 million of 0.00 percent fixed-rate notes dueclose in May 2018, Fr.600.0 million of 0.15 percent fixed-rate notes due in May 2024, and Fr.400.0 million of 0.45 percent fixed-rate notes due in May 2028, with interest to be paid annually. We are using the net cash proceeds of the offering of $1.21 billion for general corporate purposes, which included the repayment at maturity of certain of our U.S. dollar denominated fixed-rate notes due March 2017.2020.
The Effect of Risk-Management Instruments on the Consolidated Condensed Statements of Operations
The following effects of risk-management instruments were recognized in other–net, (income) expense: |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Fair value hedges: | | | |
| Effect from hedged fixed-rate debt | $ | 117.3 |
| | $ | 39.3 |
|
| Effect from interest rate contracts | (117.3 | ) | | (39.3 | ) |
| Cash flow hedges: | | | |
| Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss | 4.0 |
| | 3.8 |
|
| Cross-currency interest rate swaps | (12.9 | ) | | (28.3 | ) |
| Net (gains) losses on foreign currency exchange contracts not designated as hedging instruments | (5.7 | ) | | 48.9 |
|
| Total | $ | (14.6 | ) | | $ | 24.4 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Fair value hedges: | | | | | | | |
| Effect from hedged fixed-rate debt | $ | (4.0 | ) | | $ | (18.8 | ) | | $ | 3.6 |
| | $ | 92.4 |
|
| Effect from interest rate contracts | 4.0 |
| | 18.8 |
| | (3.6 | ) | | (92.4 | ) |
| Cash flow hedges: | | | | | | | |
| Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss | 3.7 |
| | 3.8 |
| | 11.1 |
| | 11.2 |
|
| Net losses on foreign currency exchange contracts not designated as hedging instruments | 16.3 |
| | 1.4 |
| | 79.2 |
| | 105.6 |
|
During the ninethree months ended September 30, 2017 March 31, 2020 and 2016, net losses related to ineffectiveness, as well as net2019, the amortization of losses related to the portion of our risk-managementrisk management hedging instruments, fair value hedges, and cash flow hedges that werewas excluded from the assessment of effectiveness werewas not material.
The Effect of Risk-Management Instruments on Other Comprehensive Income (Loss)
The effective portion of risk-management instruments that was recognized in other comprehensive income (loss) is as follows: |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Net investment hedges: | | | |
| Foreign currency-denominated notes | $ | 67.4 |
| | $ | 53.7 |
|
| Cross-currency interest rate swaps | 115.8 |
| | 38.3 |
|
| Cash flow hedges: | | | |
| Forward-starting interest rate swaps | (369.8 | ) | | (11.7 | ) |
| Cross-currency interest rate swaps | (69.8 | ) | | (30.0 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net investment hedges: | | | | | | | |
| Foreign currency-denominated notes | $ | (58.7 | ) | | $ | (37.0 | ) | | $ | (332.0 | ) | | $ | (80.0 | ) |
| Cross-currency interest rate swaps | (38.2 | ) | | (4.1 | ) | | (95.8 | ) | | 2.2 |
|
| Foreign currency exchange contracts | — |
| | — |
| | — |
| | 31.9 |
|
| Cash flow hedges: | | | | | | | |
| Forward-starting interest rate swaps | — |
| | — |
| | 13.0 |
| | (3.4 | ) |
During the next 12 months, we expect to reclassify $14.7$16.4 million of pretax net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense. During the three months ended March 31, 2020 and 2019, the amounts excluded from the assessment of hedge effectiveness recognized in other comprehensive income (loss) were not material.
Fair Value of Financial Instruments
The following tables summarize certain fair value information at September 30, 2017March 31, 2020 and December 31, 20162019 for assets and liabilities measured at fair value on a recurring basis, as well as the carrying amount and amortized cost of certain other investments:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using | | |
| | Carrying Amount | | Cost (1) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value |
| March 31, 2020 | | | | | | | | | | | |
| Cash equivalents | $ | 417.1 |
| | $ | 417.1 |
| | $ | 417.1 |
| | $ | — |
| | $ | — |
| | $ | 417.1 |
|
| | | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 9.3 |
| | $ | 9.2 |
| | $ | 9.3 |
| | $ | — |
| | $ | — |
| | $ | 9.3 |
|
| Corporate debt securities | 61.2 |
| | 62.7 |
| | — |
| | 61.2 |
| |
| | 61.2 |
|
| Asset-backed securities | 2.5 |
| | 2.5 |
| | — |
| | 2.5 |
| | — |
| | 2.5 |
|
| Other securities | 5.4 |
| | 5.4 |
| | — |
| |
|
| | 5.4 |
| | 5.4 |
|
| Short-term investments | $ | 78.4 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| Noncurrent investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 81.2 |
| | $ | 77.4 |
| | $ | 81.2 |
| | $ | — |
| | $ | — |
| | $ | 81.2 |
|
| Corporate debt securities | 230.6 |
| | 241.0 |
| | — |
| | 230.6 |
| | — |
| | 230.6 |
|
| Mortgage-backed securities | 102.5 |
| | 99.3 |
| | — |
| | 102.5 |
| | — |
| | 102.5 |
|
| Asset-backed securities | 30.1 |
| | 30.1 |
| | — |
| | 30.1 |
| | — |
| | 30.1 |
|
| Other securities | 60.0 |
| | 27.4 |
| | — |
| | — |
| | 60.2 |
| | 60.2 |
|
| Marketable equity securities | 869.5 |
| | 250.1 |
| | 869.5 |
| | — |
| | — |
| | 869.5 |
|
Equity investments without readily determinable fair values (2) | 426.3 |
| | | | | | | | | | |
Equity method investments (2) | 348.5 |
| | | | | | | | | | |
| Noncurrent investments | $ | 2,148.7 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | |
| Cash equivalents | $ | 1,025.4 |
| | $ | 1,025.4 |
| | $ | 1,025.4 |
| | $ | — |
| | $ | — |
| | $ | 1,025.4 |
|
| | | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 7.2 |
| | $ | 7.2 |
| | $ | 7.2 |
| | $ | — |
| | $ | — |
| | $ | 7.2 |
|
| Corporate debt securities | 81.4 |
| | 81.1 |
| | — |
| | 81.4 |
| | — |
| | 81.4 |
|
| Asset-backed securities | 2.6 |
| | 2.6 |
| | — |
| | 2.6 |
| | — |
| | 2.6 |
|
| Other securities | 9.8 |
| | 9.8 |
| | — |
| |
|
| | 9.8 |
| | 9.8 |
|
| Short-term investments | $ | 101.0 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| Noncurrent investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 77.2 |
| | $ | 76.3 |
| | $ | 77.2 |
| | $ | — |
| | $ | — |
| | $ | 77.2 |
|
| Corporate debt securities | 271.1 |
| | 267.8 |
| | — |
| | 271.1 |
| | — |
| | 271.1 |
|
| Mortgage-backed securities | 101.1 |
| | 99.6 |
| | — |
| | 101.1 |
| | — |
| | 101.1 |
|
| Asset-backed securities | 30.0 |
| | 29.6 |
| | — |
| | 30.0 |
| | — |
| | 30.0 |
|
| Other securities | 60.0 |
| | 27.4 |
| | — |
| | — |
| | 60.0 |
| | 60.0 |
|
| Marketable equity securities | 718.6 |
| | 254.4 |
| | 718.6 |
| | — |
| | — |
| | 718.6 |
|
Equity investments without readily determinable fair values (2) | 405.0 |
| | | | | | | | | | |
Equity method investments (2) | 299.4 |
| | | | | | | | | | |
| Noncurrent investments | $ | 1,962.4 |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using | | |
| | Carrying Amount | | Cost (1) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value |
| September 30, 2017 | | | | | | | | | | | |
| Cash equivalents | $ | 2,066.7 |
| | $ | 2,066.7 |
| | $ | 1,611.0 |
| | $ | 455.7 |
| | $ | — |
| | $ | 2,066.7 |
|
| | | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 742.2 |
| | $ | 742.7 |
| | $ | 742.2 |
| | $ | — |
| | $ | — |
| | $ | 742.2 |
|
| Corporate debt securities | 2,322.9 |
| | 2,322.4 |
| | — |
| | 2,322.9 |
| | — |
| | 2,322.9 |
|
| Asset-backed securities | 149.8 |
| | 149.8 |
| | — |
| | 149.8 |
| | — |
| | 149.8 |
|
| Other securities | 3.9 |
| | 3.9 |
| | — |
| | 3.9 |
| | — |
| | 3.9 |
|
| Short-term investments | $ | 3,218.8 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| Noncurrent investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 411.7 |
| | $ | 415.3 |
| | $ | 411.7 |
| | $ | — |
| | $ | — |
| | $ | 411.7 |
|
| Corporate debt securities | 3,913.2 |
| | 3,903.8 |
| | — |
| | 3,913.2 |
| | — |
| | 3,913.2 |
|
| Mortgage-backed securities | 165.1 |
| | 166.0 |
| | — |
| | 165.1 |
| | — |
| | 165.1 |
|
| Asset-backed securities | 638.8 |
| | 639.2 |
| | — |
| | 638.8 |
| | — |
| | 638.8 |
|
| Other securities | 130.7 |
| | 75.5 |
| | — |
| | — |
| | 130.7 |
| | 130.7 |
|
| Marketable equity securities | 344.7 |
| | 127.5 |
| | 344.7 |
| | — |
| | — |
| | 344.7 |
|
Cost and equity method investments (2) | 544.5 |
| | | | | | | | | | |
| Noncurrent investments | $ | 6,148.7 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | |
| Cash equivalents | $ | 2,986.8 |
| | $ | 2,986.8 |
| | $ | 2,699.4 |
| | $ | 287.4 |
| | $ | — |
| | $ | 2,986.8 |
|
| | | | | | | | | | | | |
| Short-term investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 232.5 |
| | $ | 232.6 |
| | $ | 232.5 |
| | $ | — |
| | $ | — |
| | $ | 232.5 |
|
| Corporate debt securities | 1,219.2 |
| | 1,219.1 |
| | — |
| | 1,219.2 |
| | — |
| | 1,219.2 |
|
| Asset-backed securities | 4.3 |
| | 4.3 |
| | — |
| | 4.3 |
| | — |
| | 4.3 |
|
| Other securities | 0.5 |
| | 0.5 |
| | — |
| | 0.5 |
| | — |
| | 0.5 |
|
| Short-term investments | $ | 1,456.5 |
| | | | | | | | | | |
| | | | | | | | | | | | |
| Noncurrent investments: | | | | | | | | | | | |
| U.S. government and agency securities | $ | 318.9 |
| | $ | 323.8 |
| | $ | 318.9 |
| | $ | — |
| | $ | — |
| | $ | 318.9 |
|
| Corporate debt securities | 3,062.2 |
| | 3,074.3 |
| | — |
| | 3,062.2 |
| | — |
| | 3,062.2 |
|
| Mortgage-backed securities | 183.1 |
| | 185.4 |
| | — |
| | 183.1 |
| | — |
| | 183.1 |
|
| Asset-backed securities | 502.7 |
| | 503.5 |
| | — |
| | 502.7 |
| | — |
| | 502.7 |
|
| Other securities | 153.7 |
| | 77.6 |
| | — |
| | — |
| | 153.7 |
| | 153.7 |
|
| Marketable equity securities | 418.2 |
| | 91.9 |
| | 418.2 |
| | — |
| | — |
| | 418.2 |
|
Cost and equity method investments (2) | 568.7 |
| | | | | | | | | | |
| Noncurrent investments | $ | 5,207.5 |
| | | | | | | | | | |
(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.
(2) Fair value disclosures are not applicable for cost method and equity method investments and investments accounted for under the measurement alternative for equity investments.
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using | | |
| | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value |
| Short-term commercial paper borrowings | | | | | | | | | |
| March 31, 2020 | $ | (3,243.1 | ) | | $ | — |
| | $ | (3,239.0 | ) | | $ | — |
| | $ | (3,239.0 | ) |
| December 31, 2019 | (1,494.2 | ) | | — |
| | (1,491.6 | ) | | — |
| | (1,491.6 | ) |
| Long-term debt, including current portion | | | | | | | | | |
| March 31, 2020 | $ | (13,987.2 | ) | | $ | — |
| | $ | (15,119.0 | ) | | $ | — |
| | $ | (15,119.0 | ) |
| December 31, 2019 | (13,823.0 | ) | | — |
| | (15,150.0 | ) | | — |
| | (15,150.0 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using | | |
| | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value |
| Short-term commercial paper borrowings | | | | | | | | | |
| September 30, 2017 | $ | (2,526.0 | ) | | $ | — |
| | $ | (2,523.7 | ) | | $ | — |
| | $ | (2,523.7 | ) |
| December 31, 2016 | (1,299.3 | ) | | — |
| | (1,299.3 | ) | | — |
| | (1,299.3 | ) |
| Long-term debt, including current portion | | | | | | | | | |
| September 30, 2017 | $ | (10,938.7 | ) | | $ | — |
| | $ | (11,448.4 | ) | | $ | — |
| | $ | (11,448.4 | ) |
| December 31, 2016 | (9,005.9 | ) | | — |
| | (9,419.1 | ) | | — |
| | (9,419.1 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using | | |
| | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value |
| March 31, 2020 | | | | | | | | | |
| Risk-management instruments: | | | | | | | | | |
| Interest rate contracts designated as fair value hedges: | | | | | | | | | |
| Other noncurrent assets | $ | 189.3 |
| | $ | — |
| | $ | 189.3 |
| | $ | — |
| | $ | 189.3 |
|
| Interest rate contracts designated as cash flow hedges: | | | | | | | | | |
| Other noncurrent assets | 0.5 |
| | — |
| | 0.5 |
| | — |
| | 0.5 |
|
| Other noncurrent liabilities | (327.0 | ) | | — |
| | (327.0 | ) | | — |
| | (327.0 | ) |
| Cross-currency interest rate contracts designated as net investment hedges: | | | | | | | | | |
| Other receivables | 18.0 |
| | — |
| | 18.0 |
| | — |
| | 18.0 |
|
| Other noncurrent assets | 116.1 |
| | — |
| | 116.1 |
| | — |
| | 116.1 |
|
| Other current liabilities | (1.8 | ) | | — |
| | (1.8 | ) | | — |
| | (1.8 | ) |
| Cross-currency interest rate contracts designated as cash flow hedges: | | | | | | | | | |
| Other noncurrent liabilities | (74.1 | ) | | — |
| | (74.1 | ) | | — |
| | (74.1 | ) |
| Foreign exchange contracts not designated as hedging instruments: | | | | | | | | | |
| Other receivables | 14.5 |
| | — |
| | 14.5 |
| | — |
| | 14.5 |
|
| Other current liabilities | (24.6 | ) | | — |
| | (24.6 | ) | | — |
| | (24.6 | ) |
| | | | | | | | | | |
| December 31, 2019 | | | | | | | | | |
| Risk-management instruments: | | | | | | | | | |
| Interest rate contracts designated as fair value hedges: | | | | | | | | | |
| Other noncurrent assets | 72.0 |
| | — |
| | 72.0 |
| | — |
| | 72.0 |
|
| Interest rate contracts designated as cash flow hedges: | | | | | | | | | |
| Other noncurrent assets | 43.3 |
| | — |
| | 43.3 |
| | — |
| | 43.3 |
|
| Cross-currency interest rate contracts designated as net investment hedges: | | | | | | | | | |
| Other noncurrent assets | 45.1 |
| | — |
| | 45.1 |
| | — |
| | 45.1 |
|
| Other current liabilities | (21.4 | ) | | — |
| | (21.4 | ) | | — |
| | (21.4 | ) |
| Other noncurrent liabilities | (5.7 | ) | | — |
| | (5.7 | ) | | — |
| | (5.7 | ) |
| Cross-currency interest rate contracts designated as cash flow hedges: | | | | | | | | | |
| Other noncurrent assets | 3.0 |
| | — |
| | 3.0 |
| | — |
| | 3.0 |
|
| Other noncurrent liabilities | (20.1 | ) | | — |
| | (20.1 | ) | | — |
| | (20.1 | ) |
| Foreign exchange contracts not designated as hedging instruments: | | | | | | | | | |
| Other receivables | 18.4 |
| | — |
| | 18.4 |
| | — |
| | 18.4 |
|
| Other current liabilities | (11.9 | ) | | — |
| | (11.9 | ) | | — |
| | (11.9 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using | | |
| | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value |
| September 30, 2017 | | | | | | | | | |
| Risk-management instruments: | | | | | | | | | |
| Interest rate contracts designated as fair value hedges: | | | | | | | | | |
| Other receivables | $ | 2.0 |
| | $ | — |
| | $ | 2.0 |
| | $ | — |
| | $ | 2.0 |
|
| Sundry | 43.0 |
| | — |
| | 43.0 |
| | — |
| | 43.0 |
|
| Other current liabilities | (0.4 | ) | | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
| Other noncurrent liabilities | (1.8 | ) | | — |
| | (1.8 | ) | | — |
| | (1.8 | ) |
| Cross-currency interest rate contracts designated as net investment hedges: | | | | | | | | | |
| Other current liabilities | (43.4 | ) | | — |
| | (43.4 | ) | | — |
| | (43.4 | ) |
| Other noncurrent liabilities | (20.5 | ) | | — |
| | (20.5 | ) | | — |
| | (20.5 | ) |
| Foreign exchange contracts not designated as hedging instruments: | | | | | | | | | |
| Other receivables | 21.0 |
| | — |
| | 21.0 |
| | — |
| | 21.0 |
|
| Other current liabilities | (13.9 | ) | | — |
| | (13.9 | ) | | — |
| | (13.9 | ) |
Contingent consideration liabilities (1): | | | | | | | | | |
| Other current liabilities | (201.8 | ) | | — |
| | — |
| | (201.8 | ) | | (201.8 | ) |
| Other noncurrent liabilities | (92.2 | ) | | — |
| | — |
| | (92.2 | ) | | (92.2 | ) |
| | | | | | | | | | |
| December 31, 2016 | | | | | | | | | |
| Risk-management instruments: | | | | | | | | | |
| Interest rate contracts designated as fair value hedges: | | | | | | | | | |
| Other receivables | $ | 2.4 |
| | $ | — |
| | $ | 2.4 |
| | $ | — |
| | $ | 2.4 |
|
| Sundry | 37.0 |
| | — |
| | 37.0 |
| | — |
| | 37.0 |
|
| Other noncurrent liabilities | (0.5 | ) | | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
| Cross-currency interest rate contracts designated as net investment hedges: | | | | | | | | | |
| Sundry | 31.4 |
| | — |
| | 31.4 |
| | — |
| | 31.4 |
|
| Foreign exchange contracts not designated as hedging instruments: | | | | | | | | | |
| Other receivables | 31.8 |
| | — |
| | 31.8 |
| | — |
| | 31.8 |
|
| Other current liabilities | (21.7 | ) | | — |
| | (21.7 | ) | | — |
| | (21.7 | ) |
Contingent consideration liabilities (1): | | | | | | | | | |
| Other current liabilities | (215.9 | ) | | — |
| | — |
| | (215.9 | ) | | (215.9 | ) |
| Other noncurrent liabilities | (242.6 | ) | | — |
| | — |
| | (242.6 | ) | | (242.6 | ) |
(1) Contingent consideration liabilities primarily relate to the Erbitux arrangement with BMS discussed in Note 4.
Risk-management instruments above are disclosed on a gross basis. There are various rights of setoff associated with certain of the risk-management instruments above that are subject to an enforceable master netting arrangementarrangements or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties to the risk-management instruments above, individually, these financial rights are not material.
We determine our Level 1 and Level 2 fair value measurements based on a market approach using quoted market values, significant other observable inputs for identical or comparable assets or liabilities, or discounted cash flow analyses. Level 3 fair value measurements for other investment securities are determined using unobservable inputs, including the investments' cost adjusted for impairments and price changes from orderly transactions. The fair values of cost and equity method investments and investments measured under the measurement alternative for equity investments that do not have readily determinable fair values are not readily available.
Contingent consideration liabilities primarily include contingent consideration related to Erbitux, for which the fair value was estimated using a discounted cash flow analysis and Level 3 inputs, including projections representative of a market participant view for net sales in North America through September 2018 and an estimated discount rate. The amount to be paid is calculated as a tiered percentage of net sales (see Note 4) and will, therefore, vary directly with increases and decreases in net sales of Erbitux in North America. There is no cap on the amount that may be paid pursuant to this arrangement. The decrease in the fair value of the contingent consideration liabilities during the nine months ended September 30, 2017 was due primarily to cash payments of $151.3 million related to Erbitux. The change in the fair value of the contingent consideration liabilities recognized in earnings during the three and nine months ended September 30, 2017 and 2016 due to changes in time value of money was not material.
The table below summarizes the contractual maturities of our investments in debt securities measured at fair value as of September 30, 2017:March 31, 2020: |
| | | | | | | | | | | | | | | | | | | |
| | Maturities by Period |
| | Total | | Less Than 1 Year | | 1-5 Years | | 6-10 Years | | More Than 10 Years |
| Fair value of debt securities | $ | 517.8 |
| | $ | 73.3 |
| | $ | 240.3 |
| | $ | 77.0 |
| | $ | 127.2 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Maturities by Period |
| | Total | | Less Than 1 Year | | 1-5 Years | | 6-10 Years | | More Than 10 Years |
| Fair value of debt securities | $ | 8,343.7 |
| | $ | 3,214.9 |
| | $ | 4,795.2 |
| | $ | 122.4 |
| | $ | 211.2 |
|
We adjust our equity investments without readily determinable fair values based upon changes in the equity instruments' values resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Downward adjustments resulting from an impairment are recorded based upon impairment considerations, including the financial condition and near term prospects of the issuer, general market conditions, and industry specific factors. Adjustments recorded during the three months ended March 31, 2020 and 2019 were not material.
A summary of the fair value of available-for-sale securities in an unrealized gain or loss position and the amount of unrealized gains and losses (pretax) in accumulated other comprehensive loss follows:
|
| | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Unrealized gross gains | $ | 11.2 |
| | $ | 10.3 |
|
| Unrealized gross losses | 3.7 |
| | 4.0 |
|
| Fair value of securities in an unrealized gain position | 297.7 |
| | 426.5 |
|
| Fair value of securities in an unrealized loss position | 63.8 |
| | 141.1 |
|
|
| | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Unrealized gross gains | $ | 259.7 |
| | $ | 352.6 |
|
| Unrealized gross losses | 27.2 |
| | 34.1 |
|
| Fair value of securities in an unrealized gain position | 3,400.7 |
| | 1,869.7 |
|
| Fair value of securities in an unrealized loss position | 4,013.9 |
| | 3,262.3 |
|
We periodically assess our investment in available-for-sale securities for other-than-temporary impairment losses. Other than temporary impairment losses were not material in the three months ended March 31, 2020. There were no0 other-than-temporary impairment losses in the three and nine months ended September 30, 2017. Other-than-temporary impairment losses recognized during the three and nine months ended September 30, 2016were $11.4 million and $53.0 million, respectively. March 31, 2019.
For fixed-incomedebt securities, the amount of credit losses are determined by comparing the difference between the present value of future cash flows expected to be collected on these securities and the amortized cost. Factors considered in assessing credit losses include the position in the capital structure, vintage and amount of collateral, delinquency rates, current credit support, and geographic concentration.
For equity Credit losses related to debt securities factors consideredwere not material in assessing other-than-temporary impairment losses include the length of time and the extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, our intent and ability to retain the securities for a period of time sufficient to allow for recovery in fair value, and general market conditions and industry specific factors.three months ended March 31, 2020.
As of September 30, 2017,March 31, 2020, the available-for-sale securities in an unrealized loss position include primarily fixed-rate debt securities of varying maturities, which are sensitive to changes in the yield curve and other market conditions. Approximately 9596 percent of the fixed-rate debt securities in a loss position are investment-grade debt securities. As of September 30, 2017,March 31, 2020, we do not intend to sell, and it is not more likely than not that we will be required to sell, the securities in a loss position before the market values recover or the underlying cash flows have been received, and there is no indication of default on interest or principal payments for any of our debt securities.
Activity related to our investment portfolio, substantially all of which related to equity and available-for-sale securities, was as follows: |
| | | | | | | |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Proceeds from sales | $ | 63.3 |
| | $ | 93.7 |
|
| Realized gross gains on sales | 11.6 |
| | 2.5 |
|
| Realized gross losses on sales | 0.8 |
| | 0.4 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Proceeds from sales | $ | 951.5 |
| | $ | 926.3 |
| | $ | 3,003.0 |
| | $ | 2,503.4 |
|
| Realized gross gains on sales | 9.0 |
| | 12.8 |
| | 82.9 |
| | 18.0 |
|
| Realized gross losses on sales | 0.8 |
| | 1.3 |
| | 3.2 |
| | 11.7 |
|
Realized gains and losses on sales of available-for-sale investments are computed based upon specific identification of the initial cost adjusted for any other-than-temporary declines in fair value that were recorded in earnings.
Accounts Receivable Factoring Arrangements
We have entered into accounts receivable factoring agreements with financial institutions to sell certain of our non-U.S. accounts receivable. These transactions are accounted for as sales and result in a reduction in accounts receivable because the agreements transfer effective control over and risk related to the receivables to the buyers. Our factoring agreements do not allow for recourse in the event of uncollectibility, and we do not retain any interest in the underlying accounts receivable once sold. We derecognized $678.9$687.0 million and $661.6$678.8 million of accounts receivable as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, under these factoring arrangements. The costcosts of factoring such accounts receivable on our consolidated condensed results of operations for the ninethree months ended September 30, 2017 March 31, 2020 and 2016 was2019 were not material.
Note 7: Shareholders’ Equity
During the nine months ended September 30, 2017 and 2016, we repurchased $259.9 million and $300.1 million of shares, respectively, associated with our $5.00 billion share repurchase program announced in October 2013. A payment of $60.0 million was made in the fourth quarter of 2016 for shares repurchased in 2017. As of September 30, 2017, there were $2.15 billion of shares remaining in that program.
Note 8: Income Taxes
The effective tax rates were 6.113.3 percent and 24.123.3 percent for the three and nine months ended September 30, 2017, respectively, compared with 19.9 percentMarch 31, 2020 and 20.8 percent for the same respective periods of 2016.2019, respectively. The decrease in thehigher effective tax rate forin the thirdfirst quarter of 2017 is2019 was primarily due to the income tax benefitnon-deductibility of acquired IPR&D charges and asset impairment, restructuring, and other special charges. The increase in the effective tax rate foraccelerated vesting of Loxo employee equity awards as part of the first nine monthsclosing of 2017 is primarily due to the non-tax deductible $857.6 million acquired IPR&D charge for the acquisition of CoLucid, partially offset byLoxo, as well as tax expenses associated with the income tax benefitwithdrawal of acquired IPR&D charges and asset impairment, restructuring, and other special charges.Lartruvo®.
During the firstfourth quarter of 2016, we completed and effectively settled2019, the U.S.Internal Revenue Service began its examination of tax years 2010-2012. As a result2016-2018. Because this examination is still in the early stages of this resolution, our gross uncertain tax positions were reduced by approximately $140 million, and our consolidated condensed results of operations benefited from an immaterial reduction in income tax expense. During 2016, we made cash payments of approximately $150 million related to tax years 2010-2012 after application of available tax credit carryforwards and carrybacks. The U.S. examination of tax years 2013-2015 began in 2016 and is ongoing. Theinformation gathering, the resolution of matters in thisthe audit period will likely extend beyond the next 12 months.
Note 9: Retirement Benefits
Net pension and retiree health benefit (income) cost included the following components: |
| | | | | | | |
| | Defined Benefit Pension Plans |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Components of net periodic benefit cost: | | | |
| Service cost | $ | 78.7 |
| | $ | 61.8 |
|
| Interest cost | 105.0 |
| | 120.7 |
|
| Expected return on plan assets | (221.2 | ) | | (211.1 | ) |
| Amortization of prior service cost | 1.1 |
| | 1.5 |
|
| Recognized actuarial loss | 111.0 |
| | 69.6 |
|
| Net periodic benefit cost | $ | 74.6 |
| | $ | 42.5 |
|
|
| | | | | | | | | | | | | | | |
| | Defined Benefit Pension Plans |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Components of net periodic benefit cost: | | | | | | | |
| Service cost | $ | 86.0 |
| | $ | 70.2 |
| | $ | 251.6 |
| | $ | 212.2 |
|
| Interest cost | 103.6 |
| | 104.2 |
| | 309.2 |
| | 314.4 |
|
| Expected return on plan assets | (196.4 | ) | | (187.6 | ) | | (585.7 | ) | | (566.7 | ) |
| Amortization of prior service cost | 1.4 |
| | 2.9 |
| | 4.3 |
| | 8.6 |
|
| Recognized actuarial loss | 72.5 |
| | 71.0 |
| | 215.6 |
| | 213.4 |
|
| Net periodic benefit cost | $ | 67.1 |
| | $ | 60.7 |
| | $ | 195.0 |
| | $ | 181.9 |
|
|
| | | | | | | |
| | Retiree Health Benefit Plans |
| | Three Months Ended
March 31, |
| | 2020 | | 2019 |
| Components of net periodic benefit income: | | | |
| Service cost | $ | 9.8 |
| | $ | 8.8 |
|
| Interest cost | 11.0 |
| | 14.6 |
|
| Expected return on plan assets | (37.4 | ) | | (36.0 | ) |
| Amortization of prior service benefit | (14.9 | ) | | (15.7 | ) |
| Recognized actuarial loss | 0.8 |
| | 0.5 |
|
| Net periodic benefit income | $ | (30.7 | ) | | $ | (27.8 | ) |
|
| | | | | | | | | | | | | | | |
| | Retiree Health Benefit Plans |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Components of net periodic benefit income: | | | | | | | |
| Service cost | $ | 11.6 |
| | $ | 9.7 |
| | $ | 34.8 |
| | $ | 29.3 |
|
| Interest cost | 13.2 |
| | 13.0 |
| | 39.6 |
| | 39.0 |
|
| Expected return on plan assets | (40.2 | ) | | (37.6 | ) | | (120.6 | ) | | (112.7 | ) |
| Amortization of prior service benefit | (22.5 | ) | | (21.5 | ) | | (67.5 | ) | | (64.3 | ) |
| Recognized actuarial loss | 4.6 |
| | 5.2 |
| | 13.8 |
| | 15.5 |
|
| Net periodic benefit income | $ | (33.3 | ) | | $ | (31.2 | ) | | $ | (99.9 | ) | | $ | (93.2 | ) |
We have contributed approximately $30$15 million required to satisfy minimum funding requirements to our defined benefit pension and retiree health benefit plans during the ninethree months ended September 30, 2017. Additional March 31, 2020. There was 0 additional discretionary funding in the aggregate was not material during the ninethree months ended September 30, 2017. During March 31, 2020. In April 2020, we made a $200 million discretionary contribution to our defined benefit pension plans, and during the remainder of 2017,2020, we expect to make contributions of approximately $15 million to our defined benefit pension and retiree health benefit plans of approximately $10 million to satisfy minimum funding requirements. No additional discretionary funding for the remainder of 2017 has been approved at this time.
Note 10: Contingencies
We are a party to various legal actions and government investigations. The most significant of these are described below. It is not possible to determine the outcome of these matters, and we cannot reasonably estimate the maximum potential exposure or the range of possible loss in excess of amounts accrued for any of these matters;
however, we believe that, except as noted below with respect to the Alimta® patent litigation and administrative proceedings, the resolution of all such matters will not have a material adverse effect on our consolidated financial position or liquidity, but could possibly be material to our consolidated results of operations in any one accounting period.
Patent Litigation
Alimta Patent Litigation and Administrative Proceedings
A number of generic manufacturers are seeking approvals in variousthe U.S., a number of countries in Europe, and Japan to market generic forms of Alimta prior to the expiration of our vitamin regimen patents, alleging that those patents are invalid, not infringed, or both. We believe our Alimta vitamin regimen patents are valid and enforceable against these generic manufacturers. However, it is not possible to determine the ultimate outcome of the proceedings, and accordingly, we can provide no assurance that we will prevail. An unfavorable outcome in the U.S. could have a material adverse impact on our future consolidated results of operations, liquidity, and financial position. We expect that a loss of exclusivity for Alimta in any of the below jurisdictions would result in a rapid and severe decline in future revenue for the product in the relevant market.
U.S. Patent Litigation and Administrative Proceedings
We are engaged in various U.S. patent litigation matters involving Alimta brought pursuant to procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act). More than 10 Abbreviated New Drug Applications (ANDAs) seeking approval to market generic versions of Alimta prior to the expiration of our vitamin regimen patent (expiring in 2021 plus pediatric exclusivity expiring in 2022) have been filed by a number of companies, including Teva Parenteral Medicines, Inc. (Teva) and APP Pharmaceuticals, LLC (APP). These companies have also alleged the patent is invalid.
In October 2010, we filed a lawsuit inJune 2018, the U.S. District Court for the Southern District of Indiana against Teva, APPruled in our favor in 2 cases, finding Dr. Reddy's Laboratories' (Dr. Reddy) and two other defendants seeking rulings thatHospira, Inc.'s (Hospira) proposed products using an alternative form of pemetrexed (the active ingredient in Alimta) would infringe our method of use patent under the U.S. vitamin regimen patent is valid and infringed (the Teva/APP litigation). A trial occurred in August 2013; the sole issue before thedoctrine of equivalents. The district court at that time was to determine patent validity. In March 2014, the district courtalso ruled that the asserted claimsuse of the vitamin regimen patent are valid. The U.S. District Court for the Southern DistrictHospira’s proposed product would literally infringe our method of Indiana held a hearing on the issue of infringement in May 2015.use patent. In September 2015, the district court ruled that the vitamin regimen patent would be infringed by the generic challengers' proposed products. Teva and APP appealed all of the district court’s substantive decisions. In January 2017,August 2019, the U.S. Court of Appeals for the Federal Circuit affirmed the district court’s decisions concerning validityruling that the use of Dr. Reddy’s and infringement. The defendants did not fileHospira’s proposed products would infringe our patent under the doctrine of equivalents but reversed the finding of literal infringement with respect to Hospira’s product. In November 2019, the court denied Dr. Reddy and Hospira’s petition for writrehearing of certiorari withthe court’s doctrine of equivalents ruling. Dr. Reddy and Hospira have petitioned the U.S. Supreme Court makingto review the case.
We have 2 additional lawsuits pending in federal courts in which we allege infringement against Actavis LLC (Actavis) and Apotex Inc. (Apotex) in response to their applications to market products using alternative forms of pemetrexed. In December 2019, the U.S. District Court for the Southern District of Indiana granted our motion for summary judgment of infringement under the doctrine of equivalents against Apotex. Apotex has appealed that ruling to the U.S. Court of Appeal's decision final.
From 2012 through 2017, we filed similar lawsuitsAppeals for the Federal Circuit. The lawsuit against other ANDA defendants seeking a ruling that our patents are valid and infringed. As a result of the completion of the Teva/APP litigation,Actavis pending in the U.S. District Court for the Southern District of Indiana has enteredbeen stayed, pending the conclusion of the Dr. Reddy and Hospira appeals (described above).
In December 2019, we settled a judgmentlawsuit we filed against five companies. Cases remain pending against an additional six ANDA defendants.
We have filed lawsuits in the U.S. District Court for the Southern District of Indiana alleging infringement against Dr. Reddy's Laboratories (Dr. Reddy's), Hospira,Eagle Pharmaceuticals, Inc. (Hospira), Apotex, and Actavis LLC(Eagle) in response to theirits application to market a product using an alternative formsform of pemetrexed products. In November 2017,pemetrexed. Per the court is expected to hold a hearing on a motion for summary judgment filed by Dr. Reddy's. If that motion is denied, trial is expected in early 2018. We have also filed a lawsuit against Eagle Pharmaceuticals (Eagle) in the U.S. District Court for Delaware.settlement agreement, Eagle has filed suit against us in U.S. District Court of New Jersey alleging violations of federal competition law relatinga limited initial entry into the market with its product starting February 2022 (up to its application for an alternative salt form of pemetrexed (the active ingredient in Alimta).
In June 2016, the U.S. Patentapproximate three-week supply) and Trademark Office (USPTO) granted petitionssubsequent unlimited entry starting April 2022. Alimta is protected by Neptune Generics, LLC and Sandoz Inc. seeking inter partesreview (IPR) of our vitamin regimen patent. Several additional generic companies filed petitions and joined these proceedings. In October 2017, the USPTO ruled in our favor, finding that the claims of thea vitamin regimen patent are valid. The generic companies which filed petitions with the USPTO may appeal these rulings to the U.S. Court of Appeals for the Federal Circuit.until 2021, plus pediatric exclusivity through May 2022.
European Patent Litigation and Administrative Proceedings
In the United Kingdom (U.K.), Actavis Group ehf and other Actavis companies (collectively, Actavis) filed litigation asking for a declaratory judgment that commercialization of certain salt forms of pemetrexed would not infringe the vitamin regimen patents for Alimta in the U.K., Italy, France, and Spain. In trial court and court of appeal decisions, the alternative salt forms were found to indirectly infringe the Alimta vitamin regimen patent when reconstituted in saline, but not to directly infringe the patents as an equivalent. We appealed. In July 2017, the U.K. Supreme Court ruled that Actavis’s products directly infringe our vitamin regimen patents in the U.K., Italy, France, and Spain. The U.K. Supreme Court also affirmed an earlier finding by the U.K. Court of Appeal that the Alimta vitamin regimen
patent would be indirectly infringed by commercialization of Actavis’s products diluted in saline. We intend to pursue Actavis and others that launched at risk for damages.
Actavis sought a declaration of non-infringement from the U.K. High Court for a different proposed product diluted in dextrose solution. In February 2016, the trial court ruled that Actavis’ commercialization of this product would not infringe the patent in the U.K., Italy, France, and Spain. We are still seeking to appeal this ruling for procedural purposes, although it has now been superseded by the U.K. Supreme Court's recent decision.
We commenced separate infringement proceedings against certain Actavis companies in Germany. In April 2014, the German trial court ruled in our favor. The defendants appealed and the German Court of Appeal overturned the trial court and ruled that our vitamin regimen patent in Germany would not be infringed by a dipotassium salt form of pemetrexed. In June 2016, the German Federal Supreme Court granted our appeal, vacating the prior decision denying infringement, and returned the case to the German Court of Appeal to reconsider issues relating to infringement.
In separate proceedings, in May 2016 and June 2016, the German courts confirmed preliminary injunctions against Hexal AG (Hexal), which had stated its intention to launch a generic disodium salt product diluted in saline solution, and ratiopharm GmbH (ratiopharm), a subsidiary of Teva, which had stated its intention to launch a proposed alternative salt form of pemetrexed product diluted in dextrose solution. The German Court of Appeal affirmed the preliminary injunction against ratiopharm in May 2017. The preliminary injunctions against both Hexal and ratiopharm will remain in place pending the outcome of the cases on the merits.
In late 2016, the German courts issued preliminary injunctions against two other companies that had stated their intentions to launch a proposed alternative salt form of pemetrexed product diluted in dextrose solution.
Hexal and Stada Arzneimittel AG have separately challenged the validity of our vitamin regimen patent before the German Federal Patent court. The hearing will take place in mid-2018.
We do not anticipate any generic entry into the German market at least until the German Court of Appeal considers the issues remanded by the German Federal Supreme Court in the proceedings against Actavis, or if the injunctions are lifted.
Additional legalLegal proceedings are ongoing regarding our Alimta patents in various national courts of other European countries.throughout Europe. We are aware that generic competitorsseveral companies have received approval to market generic versions of pemetrexed in major European markets and that a generic product is(including generics currently on the market at risk in France, Germany, and the Netherlands) and that additional generic competitors may choose to launch at least one major European market. In light of the U.K. Supreme Court's judgment finding infringement in the U.K., Italy, France, and Spain, Actavis has withdrawn its previously launched-at-risk generic products from these markets.risk. We will continue to seek to remove any generic pemetrexed products launched at risk in other European markets.markets, seek damages with respect to such launches, and defend our patents against validity challenges.
Japanese Administrative Proceedings
ThreeNaN separate sets of demands for invalidation of our two2 Japanese vitamin regimen patents, involving several companies, werehave been filed with the Japanese Patent Office (JPO). In November 2015, theThe JPO issued written decisions in thehas rejected demands for invalidation trials initiated by Sawai Pharmaceutical Co., Ltd. (Sawai), which hadand Nipro Corporation, and both rejections have been joined by three other companies, upholding both vitamin regimen patents. In February 2017,affirmed on appeal. The JPO scheduled a hearing in March 2020 concerning the Japan Intellectual Property High Court confirmed the decisions of the JPO and ruled in our favor in the invalidation trials initiated by Sawai. The Japan Intellectual Property High Court’s decisions regarding the demands initiated by Sawai are now final. In May 2017, the JPO resumed one of the two remaining sets of demands, brought by Nipro Corporation. We expect a decision from the JPO on those demands in the first half of 2018. The other set of demands brought by Hospira, but the hearing has been
postponed because of the COVID-19 pandemic and Hospira Japan remain suspended.the court has not yet scheduled a new date for the hearing. If upheld through all challenges, these patents would provide intellectual property protection for Alimta until June 2021.
Notwithstanding our patents, generic versions of Alimta were approvedreceived regulatory approval in Japan starting in February 2016. We do not currently anticipate that generic versions of Alimta will proceed to pricing approval.
EffientJardiance Patent Litigation
Boehringer Ingelheim, our partner in marketing and Administrative Proceedings
We, along with Daiichi Sankyo, Daiichi Sankyo, Inc., and Ube Industries (Ube) are engaged indevelopment of Jardiance, initiated U.S. patent litigation in the U.S. District Court of Delaware involving Effient brought pursuant toJardiance, Glyxambi, and Synjardy in accordance with the procedures set out in the Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch-Waxman Act. More than 10 differentAct). Several companies have submitted ANDAsAbbreviated New Drug Applications seeking approval to market generic versions of EffientJardiance prior to the expiration of Daiichi Sankyo’s and Ube’sthe relevant patents, (expiringalleging certain patents, including in 2023) covering methods of using Effient with aspirin, and alleging the patents are invalid. One of these ANDAs also alleged thatsome allegations the compound patent, are invalid or would not be infringed. Trial is scheduled for Effient (which expiredApril 2021.
Taltz Patent Litigation
We have been named as a defendant in April 2017) was invalid. Beginning in March 2014, welitigation filed lawsuitsby Genentech, Inc. (Genentech) in the U.S. District Court for the Southern District of Indiana against these companies,California seeking a ruling that Genentech’s patent would be infringed by our continued sales of Taltz. Separately, the patents are validU.S. Patent and infringed. FollowingTrademark Office (USPTO) granted our request to initiate a post grant review (PGR) to examine the
settlement validity of Genentech’s patent asserted against us in the litigation. Genentech asked the USPTO to enter adverse judgment against it in the PGR proceeding, and the district court case has been dismissed with prejudice naming us the prevailing party. We have filed a motion seeking attorneys' fees and costs related to the compoundour successful defense.
We have also been named as defendant in litigation filed by Genentech in Germany asserting infringement of a related Genentech patent challenge, generic products launchedby sales of Taltz in the U.S. in the third quarter of 2017. The remaining cases have been consolidated and stayed. The entry of generic competition has caused a rapid and severe decline in revenue for the product.
In 2015, several generic pharmaceutical companies filed petitions with the USPTO, requesting IPR of the method-of-use patents. In September 2016, the USPTO determined that the method-of-use patents are invalid. Daiichi Sankyo and Ube have appealed these decisions to the U.S. Court of Appeals for the Federal Circuit.Germany. We expect a final decisiontrial to assess Genentech's infringement claims could take place in late 2017. The consolidated lawsuit is currently stayed with respect to all parties pending2021. We have been named in litigation in the outcome of this appeal.U.K. in which Genentech has asserted similar claims regarding Genentech’s corresponding U.K. patent.
We believe the Effient method-of-use patents are valid and enforceable against these generic manufacturers. However, it is not possible to determine the outcome of the proceedings, and accordingly, we can provide no assurance that we will prevail.
Actos® Product Liability Litigation
We were named along with Takeda Chemical Industries, Ltd. and Takeda affiliates (collectively, Takeda) as a defendant in approximately 6,700 product liability cases in the U.S. related to the diabetes medication Actos, which we co-promoted with Takeda in the U.S. from 1999 until 2006. In general, plaintiffs in these actions alleged that Actos caused or contributed to their bladder cancer. Almost all of these cases were included as part of a resolution program announced by Takeda in April 2015 in which Takeda agreed to pay approximately $2.4 billion to resolve the vast majority of the U.S. product liability lawsuits involving Actos. Although the vast majority of U.S. product liability lawsuits involving Actos are included in the resolution program, there may be additional cases pending against Takeda and us following completion of the resolution program.
We are also named along with Takeda as a defendant in three purported product liability class actions in Canada related to Actos, including one in Ontario (Casseres et al. v. Takeda Pharmaceutical North America, Inc., et al. and Carrier et al. v. Eli Lilly et al.), one in Quebec (Whyte et al. v. Eli Lilly et al.), and one in Alberta (Epp v. Takeda Canada et al.). We promoted Actos in Canada until 2009.
We believe these lawsuits are without merit and we are vigorously defending against them.
Emgality Patent Litigation
We have been named as a defendant in litigation filed by Teva Pharmaceuticals International GMBH and TakedaTeva Pharmaceuticals USA, Inc. (collectively, Teva) in the U.S. District Court for the District of Massachusetts seeking a ruling that various claims in 9 different Teva patents would be infringed by our launch and continued sales of Emgality for the prevention of migraine in adults. We believe this lawsuit is without merit and are prepareddefending against it vigorously. Separately, the USPTO granted our request to defendinitiate an inter partes review (IPR) to reexamine the validity of the 9 Teva patents asserted against them vigorously.us in the litigation. In February 2020, the USPTO ruled in our favor and found that the claims asserted against us in 6 of Teva's 9 patents were invalid. In March 2020, the USPTO ruled against us on the remaining three Teva patents, finding that we failed to show that the remaining 3 patents were unpatentable based on the subset of invalidity arguments available in an IPR proceeding. We plan to appeal the USPTO's March 2020 ruling. The district court litigation will proceed in parallel with any appeals of the IPR rulings on the 9 Teva patents.
Cymbalta®Product Liability Litigation
In October 2012, weCymbalta Product Liability Litigation
We were named as a defendant in a purported class-action lawsuit in the U.S. District Court for the Central District of California (now called Strafford et al. v. Eli Lilly and Company) involving Cymbalta. The plaintiffs, purporting to represent a class of all persons within the U.S. who purchased and/or paid for Cymbalta, asserted claims under the consumer protection statutes of four states, California, Massachusetts, Missouri, and New York, and sought declaratory, injunctive, and monetary relief for various alleged economic injuries arising from discontinuing treatment with Cymbalta. In December 2014,their purchases. After the district court denied the plaintiffs' motion for class certification. Plaintiffs filed a petition with the U.S. Court of Appeals for the Ninth Circuit requesting permission to file an interlocutory appeal of the denial of class certification, which was denied. Plaintiffs filed a second motion for certification under the consumer protection acts of New York and Massachusetts. The district court denied that motionmotions for class certification, in July 2015.plaintiffs voluntarily dismissed their claims. The district court dismissed the suits and plaintiffs subsequently appealed to the U.S. Court of Appeals for the Ninth Circuit. In June 2017, we moved to dismiss the appeal for lack of jurisdiction based on the U.S. Supreme Court's recent decision in Microsoft v. Baker. In OctoberNovember 2017, the U.S. Court of Appeals for the Ninth Circuit granted our motion.dismissed the appeal for lack of jurisdiction. In July 2018, the U.S. District Court for the Central District of California denied the plaintiffs’ motion to reopen the case. In January 2020, the Ninth Circuit affirmed the district court's decision and subsequently denied plaintiffs’ petition for rehearing.
We arenamed in approximately 140 lawsuits involving approximately 1,470 plaintiffs filed in various federal and state courts alleging injuries arising from discontinuation of treatment with Cymbalta. These include approximately 40 individual and multi-plaintiff cases filed in California state court, centralized in a California Judicial Counsel Coordination Proceeding pending in Los Angeles. The first individual product liability cases were tried in August 2015 and resulted in defense verdicts against approximately fiveplaintiffs. We believe all these Cymbalta lawsuits and claims are without merit. We have reached a settlement framework which provides for a comprehensive resolution of nearly all of these personal injury claims, filed or unfiled, alleging injuries from discontinuing treatment with Cymbalta. There can be no assurances, however, that a final settlement will be reached.
Brazil–Employee
Other Matters
Brazil Litigation – Cosmopolis Facility
Labor Attorney Litigation
Our subsidiary in Brazil, Eli Lilly do Brasil Limitada (Lilly Brasil), is named in a lawsuit brought by the Labor Attorney for the 15th Region in the Labor Court of Paulinia, State of Sao Paulo, Brazil, alleging possible harm to employees and former employees caused by exposure to heavy metals at a former Lilly Brasil manufacturing facility in Cosmopolis, Brazil, operated by the company between 1977 and 2003. The plaintiffs allege that some employees at the facility were
exposed to benzene and heavy metals; however, Lilly Brasil maintains that these alleged contaminants were never used in the facility. In May 2014, the labor court judge ruled against Lilly Brasil. The judge's ruling orders Lilly Brasil, ordering it to undertake several actions of unspecified financial impact, including paying lifetime medical insurancehealth coverage for the employees and contractors who worked at the Cosmopolis facility more than six months during the affected years and their children born during and after this period. While we cannot currently estimateWe appealed this decision. In July 2018, the range of reasonably possible financial losses that could arise inappeals court affirmed the event we do not ultimately prevail in the litigation, the judge has estimatedlabor court's ruling with the total financial impact of the ruling estimated to be approximately 1.0 billion500 million Brazilian real (approximately $315$95 millionas of March 31, 2020). The appeals court restricted the broad health coverage awarded by the labor court to health problems that claimants could show arose from exposure to the alleged contamination. In August 2019, Lilly Brasil filed an appeal to the superior labor court. In September 2019, the appeals court stayed a number of elements of its prior decision, including the obligation to provide health coverage for contractors, their children, and children of employees who worked at the Cosmopolis facility, pending the determination of Lilly Brasil’s appeal to the superior labor court.
In June 2019, the Labor Attorney filed an application in the labor court for enforcement of the healthcare coverage granted by the appeals court in its July 2018 ruling and requested restrictions on Lilly Brasil’s assets in Brazil. In July 2019, the labor court issued a ruling requiring either a freeze of Lilly Brasil’s immovable property or, alternatively, a security deposit of 500 million Brazilian real (approximately $95 million as of September 30, 2017) plus interest. We strongly disagree withMarch 31, 2020). Lilly Brasil filed a writ of mandamus challenging this ruling, but the court stayed its decision and filed an appeal in May 2014. We expect a ruling on this appealwrit and instead directed the parties to attend conciliation hearings, a process which is ongoing. The labor court also stayed the Labor Attorney’s application to enforce the previous healthcare coverage ruling until after the appeals court ruled on the various motions pending before it. If the endconciliation hearings are unsuccessful, once concluded, we intend to file a motion to strike the Labor Attorney’s application to enforce the previous healthcare coverage given the appeals court’s stay in September 2019 of the year.a number of elements of its prior decision described above.
Individual Former Employee Litigation
We are also named in approximately 4030 lawsuits filed in the same labor court by individual former employees making similar claims.
Lilly Brasil and Elanco Quimica Ltda. have also been named in a lawsuit in 15th Region These lawsuits are each at various stages in the Labor Courtlitigation process, with judgments being handed down in approximately half of Paulinia, Statethe lawsuits, nearly all of Sao Paulo, involving approximately 305 individuals alleging thatwhich are on appeal in the companies failed to provide warnings regarding exposure to heavy metals or proper equipment at the former Cosmopolis facility, and that this alleged failure could result in possible harm to employees, former employees, and their dependents. In June 2017, the court denied the plaintiffs' request for a preliminary injunction. In September 2017, the court dismissed all claims except the one filed by the first named plaintiff. The other plaintiffs have filed a motion for clarification, which may lead to the filing of an appeal.labor courts.
We believe all of these lawsuits are without merit and are prepared to defenddefending against them vigorously.
Pricing Litigation, Investigations, and Inquiries
Litigation
We, along with Sanofi and Novo Nordisk, are named as defendants in a consolidated purported class action lawsuit, In re. Insulin Pricing Litigation, in the U.S. District Court of New Jersey relating to insulin pricing seeking damages under various state consumer protection laws and the Federal Racketeer Influenced and Corrupt Organization Act (federal RICO Act). Separately, we, along with Sanofi and Novo Nordisk, are named as defendants in MSP Recovery Claims, Series, LLC et al. v. Sanofi Aventis U.S. LLC et al., in the same court, seeking damages under various state consumer protection laws, common law fraud, unjust enrichment, and the federal RICO Act. In both In re. Insulin Pricing Litigation and the MSP Recovery Claims litigation, the court dismissed claims under the federal RICO Act and certain state laws. Also in the same court, we, along with Sanofi, Novo Nordisk, CVS, Express Scripts, and Optum, have been sued in a purported class action, FWK Holdings, LLC v. Novo Nordisk Inc., et al., for alleged violations of the federal RICO Act as well as the New Jersey RICO Act and anti-trust law. That same group of defendants, along with Medco Health and United Health Group, also have been sued in other purported class actions in the same court, Rochester Drug Co-Operative Inc. v. Eli Lilly & Co. et al. and Value Drug Co. v. Eli Lilly & Co. et al., for alleged violations of the federal RICO Act.
The Minnesota Attorney General’s Office has initiated litigation against us, Sanofi, and Novo Nordisk, State of Minnesota v. Sanofi-Aventis U.S. LLC et al., in the U.S. District Court of New Jersey, alleging unjust enrichment, violations of various Minnesota state consumer protection laws, and the federal RICO Act. Additionally, the Kentucky Attorney General’s Office filed a complaint against us, Sanofi, and Novo Nordisk, Commonwealth of Kentucky v. Novo Nordisk, Inc. et al., in Kentucky state court, alleging violations of the Kentucky consumer
protection law, false advertising, and unjust enrichment. Harris County in Texas filed a complaint against us, Sanofi, Novo Nordisk, Express Scripts, CVS, Optum, and Aetna, County ofHarris Texas v. Eli Lilly & Co., et al., in federal court in the Southern District of Texas, alleging violations of the federal RICO Act, federal and state anti-trust law, and the state deceptive trade practices-consumer protection act. Harris County also alleges common law claims such as, fraud, unjust enrichment, and civil conspiracy. This lawsuit relates to our insulin products as well as Trulicity.
We believe all of these claims are without merit and are defending against them vigorously.
Investigations, Subpoenas, and Inquiries
We have received a subpoena from the New York Attorney General’s Office and civil investigative demands from the Washington, New Mexico, and Colorado Attorney General Offices relating to the pricing and sale of our insulin products. The Offices of the Attorney General in Mississippi, Washington D.C., California, Florida, Hawaii, and Nevada have requested information relating to the pricing and sale of our insulin products. We also received interrogatories from the California Attorney General's Office regarding our competition in the long-acting insulin market. We received 2 requests from the House of Representatives’ Committee on Energy and Commerce and a request from the Senate’s Committee on Health, Education, Labor, and Pensions, seeking certain information related to the pricing of insulin products, among other issues. We also received requests from the House of Representatives’ Committee on Oversight and Reform and the Senate’s Committee on Finance, which seek detailed commercial information and business records. We are cooperating with all of these aforementioned investigations, subpoenas, and inquiries.
Product Liability Insurance
Because of the nature of pharmaceutical products, it is possible that we could become subject to large numbers of additional product liability and related claims in the future. Due to a very restrictive market for product liability insurance, we are self-insured for product liability losses for all our currently and previously marketed products.
Note 11: Other Comprehensive Income (Loss)
The following tables summarize the activity related to each component of other comprehensive income (loss) during the three months ended September 30, 2017March 31, 2020 and 2016:2019: | | | | | | | | | | | | | | Continuing Operations | | | | |
| (Amounts presented net of taxes) | Foreign Currency Translation Gains (Losses) | | Unrealized Net Gains (Losses) on Securities | | Defined Benefit Pension and Retiree Health Benefit Plans | | Effective Portion of Cash Flow Hedges | | Accumulated Other Comprehensive Loss | Foreign Currency Translation Gains (Losses) | | Unrealized Net Gains (Losses) on Securities | | Defined Benefit Pension and Retiree Health Benefit Plans | | Effective Portion of Cash Flow Hedges | | Discontinued Operations | | Accumulated Other Comprehensive Loss |
| Balance at July 1, 2017 | $ | (1,349.4 | ) | | $ | 153.2 |
| | $ | (3,348.5 | ) | | $ | (197.6 | ) | | $ | (4,742.3 | ) | |
| | | | | | | | | | | |
| Balance at January 1, 2020 | | $ | (1,678.0 | ) | | $ | 4.9 |
| | $ | (4,638.6 | ) | | $ | (211.9 | ) | | $ | — |
| | $ | (6,523.6 | ) |
| Other comprehensive income (loss) before reclassifications | 135.8 |
| | 33.9 |
| | (28.7 | ) | | — |
| | 141.0 |
| (126.5 | ) | | 1.0 |
| | 30.9 |
| | (348.2 | ) | | — |
| | (442.8 | ) |
| Net amount reclassified from accumulated other comprehensive loss | 8.1 |
| | (23.9 | ) | | 40.1 |
| | 2.4 |
| | 26.7 |
| — |
| | (0.1 | ) | | 77.4 |
| | 3.2 |
| | — |
| | 80.5 |
|
| Net other comprehensive income (loss) | 143.9 |
| | 10.0 |
| | 11.4 |
| | 2.4 |
| | 167.7 |
| (126.5 | ) | | 0.9 |
| | 108.3 |
| | (345.0 | ) | | — |
| | (362.3 | ) |
| | | | | | | | | | | |
Balance at September 30, 2017 (2) | $ | (1,205.5 | ) | | $ | 163.2 |
| | $ | (3,337.1 | ) | | $ | (195.2 | ) | | $ | (4,574.6 | ) | |
| Balance at March 31, 2020 | | $ | (1,804.5 | ) | | $ | 5.8 |
| | $ | (4,530.3 | ) | | $ | (556.9 | ) | | $ | — |
| | $ | (6,885.9 | ) |
| | | | | | | | | | | | | | Continuing Operations | | | | |
| (Amounts presented net of taxes) | Foreign Currency Translation Gains (Losses) | | Unrealized Net Gains (Losses) on Securities | | Defined Benefit Pension and Retiree Health Benefit Plans | | Effective Portion of Cash Flow Hedges | | Accumulated Other Comprehensive Loss | Foreign Currency Translation Gains (Losses) | | Unrealized Net Gains (Losses) on Securities | | Defined Benefit Pension and Retiree Health Benefit Plans | | Effective Portion of Cash Flow Hedges | | Discontinued Operations | | Accumulated Other Comprehensive Loss |
| Balance at July 1, 2016 | $ | (1,273.0 | ) | | $ | 36.8 |
| | $ | (2,919.1 | ) | | $ | (215.9 | ) | | $ | (4,371.2 | ) | |
| | | | | | | | | | | |
Balance at January 1, 2019 (1) | | $ | (1,569.7 | ) | | $ | (22.1 | ) | | $ | (3,852.7 | ) | | $ | (238.9 | ) | | $ | (56.8 | ) | | $ | (5,740.2 | ) |
| Other comprehensive income (loss) before reclassifications | 5.8 |
| | 48.9 |
| | 18.7 |
| | — |
| | 73.4 |
| (31.7 | ) | | 16.8 |
| | (5.7 | ) | | (32.9 | ) | | (27.2 | ) | | (80.7 | ) |
| Net amount reclassified from accumulated other comprehensive loss | — |
| | (0.4 | ) | | 38.0 |
| | 2.5 |
| | 40.1 |
| — |
| | 1.7 |
| | 44.7 |
| | 3.0 |
| | 84.0 |
| | 133.4 |
|
| Net other comprehensive income (loss) | 5.8 |
| | 48.5 |
| | 56.7 |
| | 2.5 |
| | 113.5 |
| (31.7 | ) | | 18.5 |
| | 39.0 |
| | (29.9 | ) | | 56.8 |
| | 52.7 |
|
| | | | | | | | | | | |
Balance at September 30, 2016 (2) | $ | (1,267.2 | ) | | $ | 85.3 |
| | $ | (2,862.4 | ) | | $ | (213.4 | ) | | $ | (4,257.7 | ) | |
| Balance at March 31, 2019 | | $ | (1,601.4 | ) | | $ | (3.6 | ) | | $ | (3,813.7 | ) | | $ | (268.8 | ) | | $ | — |
| | $ | (5,687.5 | ) |
Except for the tax effects of foreign currency translation gains and losses related to our foreign currency-denominated notes, cross-currency interest rate swaps, and other foreign currency exchange contracts designated as net investment hedges (see Note 6)7), income taxes were not provided for foreign currency translation. Generally, the assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. For those operations, changes in exchange rates generally do not affect cash flows; therefore, resulting translation adjustments are made in shareholders' equity rather than in the consolidated condensed statements of operations.
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
This section provides an overview of our financial results, recent product and late-stage pipeline developments, and other matters affecting our company and the pharmaceutical industry. Earnings per share (EPS) data are presented on a diluted basis.
Our long-term success depends to a great extent on our ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on molecules currently in development by other biotechnology or pharmaceutical companies. We currently have approximately 5040 potential new drugs in human testing or under regulatory review and a larger number of projects in preclinical research.
The following new molecular entities (NMEs) have been approved by regulatory authorities in at least one of the major geographies for use in the diseasesconditions described. The first quarter in which each NMEthe NMEs initially waswere approved in any major geography for any indication is shown in parentheses:
As a global company with substantial operations outside the U.S., we face foreign currency risk exposure from fluctuating currency exchange rates, primarily the U.S. dollar against the euro and Japanese yen, and British pound; and the British pound against the euro.yen. While we manage a portion of these exposures through hedging and other risk management techniques, significant fluctuations in currency rates can have a substantial impact, either positive or negative, on our revenue, cost of sales, and operating expenses. Over the past two years, we have seen significant foreign currency rate fluctuations between the U.S. dollar and several other foreign currencies, including the euro, British pound, and Japanese yen. While there is uncertainty in the future movements in foreign exchange rates, fluctuations in these fluctuationsrates could negatively impact our future consolidated results of operations and cash flows.
In the U.S., public concern over access to and affordability of pharmaceuticals continues to drive the regulatory and legislative debate. These policy and political issues increase the risk that taxes, fees, rebates, or other cost control measures may be enacted to manage federal and state measures may be enacted.budgets. Key health policy proposalsinitiatives affecting biopharmaceuticals includeinclude:
proposals that would require biopharmaceutical manufacturers to disclose proprietary drug pricing information,information; and
state-level proposals related to prescription drug prices and reducing the cost of pharmaceuticals purchased by government health care programs. Several
In the private sector, consolidation and integration among healthcare providers is also a major factor in the competitive marketplace for human pharmaceuticals. Health plans, pharmaceuticalpharmacy benefit managers, wholesalers, and other supply chain stakeholders have been consolidating into fewer, larger entities, increasingly through vertical integration, thus enhancing their purchasing strength and importance. Payers typically maintain formularies which specify coverage (the conditions under which drugs are included on a plan's formulary) and reimbursement (the associated out-of-pocket cost to the consumer). Formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage restrictions, such as prior authorizations and formulary exclusions, or due to reimbursement limitations whichthat result in higher consumer out-of-pocket cost, such as non-preferred co-pay tiers, increased co-insurance levels and higher deductibles. Consequently, pharmaceutical companies compete for formulary placement not only on the basis of product attributes such as greater efficacy, fewer side effects, or greater patient ease of use, but also by providing rebates. Value-based agreements are another tool which may be utilized between payers and pharmaceutical companies as formulary placement and pricing are negotiated. Price is an increasingly important factor in formulary decisions, particularly in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable. These downward pricing pressures could continue to negatively affect future consolidated results of operationsoperations. In addition to formulary placement, changes in insurance designs continue to drive greater consumer cost sharing through high deductible plans and cash flows.higher co-insurance or co-pays (including co-pay accumulator and maximizer programs). We continue to invest in patient affordability solutions (resulting in lower revenue) in an effort to assist patients in affording their medicines.
The main coverage expansion provisions of the Affordable Care Act (ACA) are currently in effect through both state-based exchanges and the expansion of Medicaid. A trend has been the prevalence of benefit designs containing high out-of-pocket costs for patients, particularly for pharmaceuticals. In addition to the coverage expansions, many employers in the commercial market driven in part by ACA changes such as the 2020 implementation of the excise tax on employer-sponsored health care coverage for which there is an excess benefit (the so-called "Cadillac tax"), continue to evaluate strategies such as private exchanges and wider use of consumer-driven health plans to reduce their healthcare liabilities over time. Repealing and replacingFederal legislation, litigation, or administrative actions to repeal or modify some or all of the provisions of the ACA remains a priority for President Trump and Congress. Provisions included in final legislation could have a material adverse effect on our consolidated results of operations and cash flows. At the same time, the broader paradigm shift towards performance-based reimbursement and the launch of several value-based purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-world outcomes data and a favorable economic profile.
International operations also are generally subject to extensive price and market regulations. Cost-containment measures exist in a number of countries, including additional price controls and mechanisms to limit reimbursement for our products. Such policies are expected to increase in impact and reach, given the pressures on national and regional health care budgets that come from a growing, aging population and ongoing economic challenges. As additional reforms are finalized, we will assess their impact on future revenues. In addition, governments in many emerging markets are becoming increasingly active in expanding health care system offerings. Given the budget challenges of increasing health care coverage for citizens, policies may be proposed that promote generics and biosimilars only and reduce current and future access to branded human pharmaceutical products.
Information regarding contingencies relating to certain legal proceedings can be found in Note 10 to the consolidated condensed financial statementsItem 1, "Legal Proceedings," of Part II of this Quarterly Report on Form 10-Q and is incorporated here by reference.