Fair Value Measurements

6 Months Ended

Jun. 30, 2015

Fair Value, Assets, Liabilities and Stockholders' Equity Measured on Recurring Basis [Abstract]

Fair Value Measurements

FAIR VALUE MEASUREMENTS

We determine the fair value of financial and non-financial assets and liabilities using the fair value hierarchy, which establishes three levels of inputs that may be used to measure fair value, as follows:

• Level 1 inputs which include quoted prices in active markets for identical assets or liabilities;

• Level 2 inputs which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. For our marketable securities, we review trading activity and pricing as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from various third-party data providers. These inputs either represent quoted prices for similar assets in active markets or have been derived from observable market data; and

• Level 3 inputs which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Our Level 3 liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, foreign currency exchange contracts, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable securities and foreign currency exchange contracts that hedge accounts receivable and forecasted sales are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Short-term and long-term debt are reported at their amortized cost on our Condensed Consolidated Balance Sheets. The remaining financial instruments are reported on our Condensed Consolidated Balance Sheets at amounts that approximate current fair values.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis, by level, within the fair value hierarchy (in millions):

	June 30, 2015								December 31, 2014
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	5,594	$	—	$	—	$	5,594	$	7,926	$	—	$	—	$	7,926
Corporate debt securities	—		3,435		—		3,435		—		938		—		938
U.S. treasury securities	2,085		—		—		2,085		363		—		—		363
Residential mortgage and asset-backed securities	—		914		—		914		—		269		—		269
Certificates of deposit	—		361		—		361		—		—		—		—
Foreign currency derivative contracts	—		342		—		342		—		349		—		349
U.S. government agencies securities	—		293		—		293		—		113		—		113
Non-U.S. government securities	—		169		—		169		—		—		—		—
Municipal debt securities	—		43		—		43		—		16		—		16
Deferred compensation plan	63		—		—		63		54		—		—		54
	$	7,742	$	5,557	$	—	$	13,299	$	8,343	$	1,685	$	—	$	10,028
Liabilities:
Contingent consideration	$	—	$	—	$	140	$	140	$	—	$	—	$	133	$	133
Deferred compensation plan	63		—		—		63		54		—		—		54
Foreign currency derivative contracts	—		39		—		39		—		—		—		—
	$	63	$	39	$	140	$	242	$	54	$	—	$	133	$	187

Level 2 Inputs

We estimate the fair values of our corporate debt securities, residential mortgage and asset-backed securities, government related securities and certificates of deposit 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.

Substantially all of our foreign currency derivative contracts have maturities primarily over an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by Standard & Poor's, Moody's Investors Service, Inc. or Fitch, Inc. 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, London Interbank Offered Rates (LIBOR) and swap rates. These inputs, where applicable, are at commonly quoted intervals.

The fair values of our convertible senior notes and senior unsecured notes were determined using Level 2 inputs based on their quoted market values. The following table summarizes the carrying values and fair values of our convertible senior notes and senior unsecured notes (in millions):

		June 30, 2015				December 31, 2014
Type of Borrowing	Description	Carrying Value		Fair Value		Carrying Value		Fair Value
Convertible Senior	May 2016 Notes	$	352	$	1,851	$	483	$	2,097
Senior Unsecured	April 2021 Notes	995		1,094		995		1,108
Senior Unsecured	December 2016 Notes	700		720		700		727
Senior Unsecured	December 2021 Notes	1,248		1,366		1,248		1,377
Senior Unsecured	December 2041 Notes	998		1,152		998		1,229
Senior Unsecured	April 2019 Notes	499		501		499		500
Senior Unsecured	April 2024 Notes	1,748		1,789		1,747		1,836
Senior Unsecured	April 2044 Notes	1,747		1,809		1,747		1,954
Senior Unsecured	February 2020 Notes	499		502		499		504
Senior Unsecured	February 2025 Notes	1,748		1,759		1,748		1,797
Senior Unsecured	February 2045 Notes	1,740		1,735		1,740		1,872

Level 3 Inputs

As of June 30, 2015 and December 31, 2014, the only assets or liabilities that were measured using Level 3 inputs were contingent consideration liabilities of $140 million and $133 million. Our policy is to recognize transfers into or out of Level 3 classification as of the actual date of the event or change in circumstances that caused the transfer.

The contingent consideration liabilities included the potential future contingent consideration payments resulting from the acquisition of Arresto Biosciences, Inc. for royalty obligations on future sales once specified sales-based milestones are achieved, and the acquisitions of CGI Pharmaceuticals, Inc. and Calistoga Pharmaceuticals, Inc. upon achievement of development or regulatory approval-based milestones.