FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2022

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 include quoted prices in active markets for identical assets or liabilities;

•Level 2 inputs include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets; 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; and

•Level 3 inputs 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 assets and 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 primarily of cash and cash equivalents, marketable debt securities, accounts receivable, foreign currency exchange contracts, equity securities, accounts payable and short-term and long-term debt. Cash and cash equivalents, marketable debt securities, certain equity securities and foreign currency exchange contracts are reported at their respective fair values on our Condensed Consolidated Balance Sheets. Equity securities without readily determinable fair values are recorded using the measurement alternative of cost less impairment, if any, adjusted for observable price changes in orderly transactions for identical or similar investments of the same issuer. Short-term and long-term debt are reported at their amortized costs 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 types of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy:


	June 30, 2022								December 31, 2021
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale debt securities:
U.S. treasury securities	$	427	$	—	$	—	$	427	$	407	$	—	$	—	$	407
U.S. government agencies securities	—		—		—		—		—		4		—		4
Non-U.S. government securities	—		31		—		31		—		50		—		50
Certificates of deposit	—		88		—		88		—		249		—		249
Corporate debt securities	—		1,386		—		1,386		—		1,363		—		1,363
Residential mortgage and asset-backed securities	—		358		—		358		—		424		—		424
Equity securities:
Money market funds	3,094		—		—		3,094		3,661		—		—		3,661
Equity investment in Galapagos NV (“Galapagos”)	935		—		—		935		931		—		—		931
Equity investment in Arcus Biosciences, Inc. (“Arcus”)	350		—		—		350		559		—		—		559
Other publicly traded equity securities	117		—		—		117		331		—		—		331
Deferred compensation plan	215		—		—		215		261		—		—		261
Foreign currency derivative contracts	—		136		—		136		—		80		—		80
Total	$	5,138	$	1,999	$	—	$	7,137	$	6,150	$	2,170	$	—	$	8,320
Liabilities:
Liability for MYR GmbH (“MYR”) contingent consideration	$	—	$	—	$	306	$	306	$	—	$	—	$	317	$	317
Deferred compensation plan	215		—		—		215		261		—		—		261
Foreign currency derivative contracts	—		3		—		3		—		5		—		5
Total	$	215	$	3	$	306	$	523	$	261	$	5	$	317	$	583

Level 2 Inputs

Available-for-Sale Debt Securities

For our available-for-sale debt securities, we estimate the fair values by reviewing trading activity and pricing as of the measurement date, and taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income-based and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate the 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.

Foreign Currency Derivative Contracts

Substantially all of our foreign currency derivative contracts have maturities within an 18-month time horizon and all are with counterparties that have a minimum credit rating of A- or equivalent by S&P Global Ratings, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. We estimate the fair values of these contracts by taking into consideration the 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 exchange rates, Secured Overnight Financing Rate and swap rates. These inputs, where applicable, are observable at commonly quoted intervals.

Senior Unsecured Notes

The total estimated fair values of our senior unsecured notes, determined using Level 2 inputs based on their quoted market values, were approximately $23.6 billion and $28.6 billion as of June 30, 2022 and December 31, 2021, respectively, and the carrying values were $25.1 billion and $25.6 billion as of June 30, 2022 and December 31, 2021, respectively.

Level 3 Inputs

Contingent Consideration

In connection with our first quarter 2021 acquisition of MYR, we recorded a liability for contingent consideration, which is revalued each reporting period until the related contingency is resolved. The contingent consideration was estimated using probability-weighted scenarios for U.S. Food and Drug Administration (“FDA”) approval of Hepcludex.

The following table summarizes the change in fair value of our contingent consideration:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in millions)	2022		2021		2022		2021
Beginning balance	$	322	$	341	$	317	$	—
Additions	—		—		—		341
Changes in valuation assumptions	—		(1)		11		(1)
Effect of foreign exchange remeasurement	(16)		(6)		(22)		(6)
Ending balance	$	306	$	334	$	306	$	334

Changes in valuation assumptions were primarily related to updated probability rate estimates. The changes in the fair value of this contingent consideration were included in Research and development expenses on our Condensed Consolidated Statements of Income.

Liability Related to the Sale of Future Royalties

We recorded a liability related to the sale of future royalties as part of our fourth quarter 2020 acquisition of Immunomedics, Inc. (“Immunomedics”), which is subsequently amortized using the effective interest method over the remaining estimated life. The fair values of the liability related to the sale of future royalties were $1.1 billion and $1.3 billion as of June 30, 2022 and December 31, 2021, respectively, and the carrying value was $1.1 billion as of June 30, 2022 and December 31, 2021. See Note 9. Debt and Credit Facilities for additional information.

Fair Value Level Transfers

There were no transfers between Level 1, Level 2 and Level 3 in the periods presented.

Nonrecurring Fair Value Measurements

During the six months ended June 30, 2022, we recorded a partial impairment charge of $2.7 billion related to certain IPR&D assets. See Note 7. Goodwill and Intangible Assets for additional information.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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