Fair value measurement

12 Months Ended

Dec. 31, 2011

Fair value measurement [Abstract]

Fair value measurement

16. Fair value measurement

To determine the fair value of our financial assets and liabilities we use valuation approaches within a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy is divided into three levels based on the source of inputs as follows:

Level 1	—	Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access
Level 2	—	Valuations for which all significant inputs are observable, either directly or indirectly, other than level 1 inputs
Level 3	—	Valuations based on inputs that are unobservable and significant to the overall fair value measurement

The availability of observable inputs can vary among the various types of financial assets and liabilities. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used for measuring fair value may fall into different levels of the fair value hierarchy. In such cases, for financial statement disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is categorized is based on the lowest level of input used that is significant to the overall fair value measurement.

The fair value of each major class of the Company’s financial assets and liabilities measured at fair value on a recurring basis was as follows (in millions):

Fair value measurement as of December 31, 2011, using:	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Available-for-sale investments:
U.S. Treasury securities	$	3,946	$	—	$	—	$	3,946
Other government-related debt securities:
Obligations of U.S. government agencies and FDIC-guaranteed bank debt		—		1,571		—		1,571
Foreign and other		—		450		—		450
Corporate debt securities:
Financial		—		2,508		—		2,508
Industrial		—		3,146		—		3,146
Other		—		289		—		289
Mortgage- and asset-backed securities		—		1,785		—		1,785
Money market mutual funds		6,266		—		—		6,266
Equity securities		42		—		—		42
Derivatives:
Foreign currency contracts		—		172		—		172
Interest rate swap contracts		—		377		—		377
Total assets	$	10,254	$	10,298	$	—	$	20,552
Liabilities:
Derivatives:
Foreign currency contracts	$	—	$	48	$	—	$	48
Cross currency swap contracts		—		26		—		26
Contingent consideration obligations in connection with a business combination		—		—		190		190
Total liabilities	$	—	$	74	$	190	$	264

Fair value measurement as of December 31, 2010, using:	Quoted prices in active  markets for identical assets (Level 1)		Significant  other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Available-for-sale investments:
U.S. Treasury securities	$	5,080	$	—	$	—	$	5,080
Other government-related debt securities:
Obligations of U.S. government agencies and FDIC-guaranteed bank debt		—		2,208		—		2,208
Foreign and other		—		852		—		852
Corporate debt securities:
Financial		—		2,296		—		2,296
Industrial		—		2,507		—		2,507
Other		—		316		—		316
Mortgage- and asset-backed securities		—		841		—		841
Money market mutual funds		3,030		—		—		3,030
Other short-term interest-bearing securities		—		147		—		147
Equity securities		48		—		—		48
Derivatives:
Foreign currency contracts		—		154		—		154
Interest rate swap contracts		—		195		—		195
Total assets	$	8,158	$	9,516	$	—	$	17,674
Liabilities:
Derivatives:
Foreign currency contracts	$	—	$	103	$	—	$	103
Total liabilities	$	—	$	103	$	—	$	103

The fair values of our U.S. Treasury securities, money market mutual funds and equity securities are based on quoted market prices in active markets with no valuation adjustment.

Substantially all of our other government related and corporate debt securities are investment grade with maturity dates of five years or less from the balance sheet date. Our other government related debt securities portfolio is composed of securities with weighted-average credit ratings of AA+ by Standard & Poor’s (S&P) and AAA or equivalent by Moody’s Investors Service, Inc. (Moody’s) or Fitch, Inc. (Fitch); and our corporate debt securities portfolio has a weighted-average credit rating of A- by S&P and A or equivalent by Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs.

Our mortgage and asset backed securities portfolio is composed entirely of senior tranches, with credit ratings of AAA or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these securities by taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

We value our other short-term interest bearing securities at amortized cost, which approximates fair value given their near-term maturity dates.

Substantially all of our foreign currency forward and option derivatives contracts have maturities of three years or less and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These inputs include foreign currency rates, LIBOR, swap rates and obligor credit default swap rates. In addition, inputs for our foreign currency option contracts also include implied volatility measures. These inputs, where applicable, are at commonly quoted intervals. As of December 31, 2011 and 2010, we had open foreign currency forward contracts with notional amounts of $3.5 billion and $3.2 billion, respectively, and open foreign currency option contracts with notional amounts of $292 million and $398 million, respectively, that were primarily euro-based and were designated as cash flow hedges. In addition, as of December 31, 2011 and 2010, we had $389 million and $670 million, respectively, of open foreign currency forward contracts to reduce exposure to fluctuations in value of certain assets and liabilities denominated in foreign currencies that were primarily euro-based and that were not designated as hedges. (See Note 17, Derivative instruments.)

Our interest rate and cross currency swap contracts are with counterparties that have a minimum credit rating of A- or equivalent by S&P, Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly. These inputs include foreign currency rates, LIBOR, swap rates, obligor credit default swap rates and cross currency basis swap spreads. We had interest rate swap contracts with an aggregate notional amount of $3.6 billion as of December 31, 2011 and 2010, that were designated as fair value hedges. We had cross currency swap contracts on all of our 5.50% 2026 pound sterling Notes as of December 31, 2011, that were designated as cash flow hedges. (See Note 17, Derivative instruments.)

Contingent consideration obligations in connection with a business combination result from our acquisition of BioVex in March 2011. The fair value measurements of these obligations are based on significant unobservable inputs, and accordingly, such amounts are considered Level 3 measurements. There were no changes in assumptions that had a material impact on the estimated fair values of these obligations during the period from the acquisition date to December 31, 2011, and accordingly, there was no significant impact on net income for this period. For a description of the valuation methodology and related assumptions used for estimating the fair values of these obligations, see Note 2, Business combinations.

There have been no transfers of assets or liabilities between the fair value measurement levels, and there were no material remeasurements to fair value during the years ended December 31, 2011 and 2010, of assets and liabilities that are not measured at fair value on a recurring basis, except as discussed in Note 8, Cost savings initiatives and restructuring, regarding an impairment of fixed assets that we recognized in 2010.

Summary of the fair value of other financial instruments

Cash equivalents

The estimated fair values of cash equivalents approximate their carrying values due to the short-term nature of these financial instruments.

Borrowings

We estimate the fair values of our convertible notes by using an income-based industry standard valuation model for which all significant inputs are observable either directly or indirectly, including benchmark yields adjusted for our credit risk (Level 2). The fair value of our convertible notes represent only the liability components of these instruments, as their equity components are included in Common stock and additional paid-in capital in the Consolidated Balance Sheets. We estimate the fair values of our other long-term notes by taking into consideration indicative prices obtained from a third-party financial institution that utilizes industry standard valuation models, including both income- and market-based approaches, for which all significant inputs are observable either directly or indirectly. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; credit spreads; benchmark yields; and other observable inputs (Level 2). As of December 31, 2011 and 2010, the aggregate fair values of our long-term debt were $23.0 billion and $14.5 billion, respectively, and the carrying values were $21.4 billion and $13.4 billion, respectively.