Document


 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
COMMISSION FILE NUMBER 001-6351
ELI LILLY AND COMPANY
(Exact name of Registrant as specified in its charter)
INDIANA
 
35-0470950
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
LILLY CORPORATE CENTER, INDIANAPOLIS, INDIANA 46285
(Address of principal executive offices)
Registrant’s telephone number, including area code (317) 276-2000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
  
 
 
 
  
Accelerated filer o
Non-accelerated filer o
  
 
  
Smaller reporting company o
 
  
 
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
The number of shares of common stock outstanding as of November 2, 2018:
Class
 
Number of Shares Outstanding
Common
 
1,059,322,255

 




Eli Lilly and Company
Form 10-Q
For the Quarter Ended September 30, 2018
Table of Contents
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions.
In particular, information appearing under “Management's Discussion and Analysis of Results of Operations and Financial Condition” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we (Lilly or the company) express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
the timing of anticipated regulatory approvals and launches of new products;
market uptake of recently launched products;
competitive developments affecting current products;
the expiration of intellectual property protection for certain of our products;
our ability to protect and enforce patents and other intellectual property;
the impact of actions of governmental and private payers affecting pricing of, reimbursement for, and access to pharmaceuticals;
regulatory compliance problems or government investigations;
regulatory actions regarding currently marketed products;
unexpected safety or efficacy concerns associated with our products;
issues with product supply stemming from manufacturing difficulties or disruptions;
regulatory changes or other developments;
changes in patent law or regulations related to data-package exclusivity;
litigation involving past, current, or future products as we are largely self-insured;
unauthorized disclosure or misappropriation of trade secrets or other confidential data stored in our information systems, networks, and facilities, or those of third parties with whom we share our data;
changes in tax law;
changes in foreign currency exchange rates, interest rates, and inflation;
asset impairments and restructuring charges;
changes in accounting standards promulgated by the Financial Accounting Standards Board and the Securities and Exchange Commission (SEC);
acquisitions and business development transactions and related integration costs;
information technology system inadequacies or operating failures;
reliance on third-party relationships and outsourcing arrangements;
the impact of global macroeconomic conditions; and
uncertainties and risks related to timing and potential value to both Elanco and Lilly of the planned separation of the Elanco animal health business, including business, industry, and market risks, as well as risks involving realizing the anticipated tax-free nature of the separation.
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2017, particularly under the caption “Risk Factors”, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018.
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report.

3



PART I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Operations
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars and shares in millions, except per-share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
6,061.9

 
$
5,658.0

 
$
18,117.1

 
$
16,710.6

Costs, expenses, and other:
 
 
 
 
 
 
 
Cost of sales
1,562.3

 
1,586.3

 
4,836.3

 
4,505.9

Research and development
1,343.3

 
1,340.0

 
3,853.3

 
3,870.4

Marketing, selling, and administrative
1,616.6

 
1,578.5

 
4,770.3

 
4,876.6

Acquired in-process research and development (Note 3)
30.0

 
205.0

 
1,654.5

 
1,062.6

Asset impairment, restructuring, and other special charges (Note 5)
83.3

 
406.5

 
236.0

 
670.4

Other–net, (income) expense (Note 11)
15.4

 
(49.9
)
 
(90.1
)
 
(188.6
)
 
4,650.9


5,066.4


15,260.3


14,797.3

Income before income taxes
1,411.0


591.6


2,856.8


1,913.3

Income taxes (Note 7)
261.5

 
36.0

 
749.8

 
460.5

Net income
$
1,149.5


$
555.6


$
2,107.0


$
1,452.8

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
1.13

 
$
0.53

 
$
2.04

 
$
1.38

Diluted
$
1.12

 
$
0.53

 
$
2.03

 
$
1.37

Shares used in calculation of earnings per share:
 
 
 
 
 
 
 
Basic
1,020.4

 
1,053.4

 
1,033.2

 
1,054.8

Diluted
1,026.3

 
1,056.0

 
1,037.8

 
1,057.0

See notes to consolidated condensed financial statements.

4



Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
1,149.5

 
$
555.6

 
$
2,107.0

 
$
1,452.8

Other comprehensive income, net of tax (Note 10) (1)
660.2

 
167.7

 
375.3

 
651.2

Comprehensive income
$
1,809.7


$
723.3


$
2,482.3


$
2,104.0

(1) Other comprehensive income for the three and nine months ended September 30, 2018 was all attributable to controlling interest. Other comprehensive income for the three and nine months ended September 30, 2017 consisted of $165.5 million and $664.6 million, respectively, of other comprehensive income attributable to controlling interest and $2.2 million and $(13.4) million of other comprehensive income (loss) attributable to noncontrolling interest during the same periods.
See notes to consolidated condensed financial statements.


5



Consolidated Condensed Balance Sheets
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

 
September 30, 2018
 
December 31, 2017
Assets
(Unaudited)
 
 
Current Assets
 
 
 
Cash and cash equivalents (Note 6)
$
8,960.0

 
$
6,536.2

Short-term investments (Note 6)
76.1

 
1,497.9

Accounts receivable, net of allowances of $34.0 (2018) and $38.7 (2017)
4,859.4

 
4,546.3

Other receivables
793.2

 
715.9

Inventories
4,118.0

 
4,458.3

Prepaid expenses and other
1,879.2

 
1,447.5

Total current assets
20,685.9

 
19,202.1

Other Assets
 
 
 
Investments (Note 6)
2,005.8

 
5,678.8

Goodwill
4,358.4

 
4,370.1

Other intangibles
3,619.4

 
4,029.2

Deferred tax assets
3,132.3

 
1,166.4

Sundry
2,009.2

 
1,707.9

Total other assets
15,125.1

 
16,952.4

Property and equipment, net of accumulated depreciation of $9,671.7 (2018) and $9,264.6 (2017)
8,814.1

 
8,826.5

Total assets
$
44,625.1

 
$
44,981.0

Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Short-term borrowings and current maturities of long-term debt
$
1,002.2

 
$
3,706.6

Accounts payable
1,281.2

 
1,410.7

Employee compensation
858.5

 
997.9

Sales rebates and discounts
5,129.4

 
4,465.1

Dividends payable

 
590.6

Income taxes payable
409.2

 
532.9

Other current liabilities
2,146.2

 
2,832.1

Total current liabilities
10,826.7

 
14,535.9

Other Liabilities
 
 
 
Long-term debt
11,674.7

 
9,940.5

Accrued retirement benefits (Note 8)
2,684.5

 
3,513.9

Long-term income taxes payable
3,740.5

 
3,776.5

Other noncurrent liabilities
1,547.8

 
1,546.3

Total other liabilities
19,647.5

 
18,777.2

Commitments and Contingencies (Note 9)
 
 
 
Eli Lilly and Company Shareholders’ Equity
 
 
 
Common stock
667.1

 
687.9

Additional paid-in capital
6,522.9

 
5,817.8

Retained earnings
14,408.7

 
13,894.1

Employee benefit trust
(3,013.2
)
 
(3,013.2
)
Accumulated other comprehensive loss (Note 10)
(5,439.5
)
 
(5,718.6
)
Cost of common stock in treasury
(69.4
)
 
(75.8
)
Total Eli Lilly and Company shareholders’ equity
13,076.6

 
11,592.2

Noncontrolling interests (Note 3)
1,074.3

 
75.7

Total equity
14,150.9

 
11,667.9

Total liabilities and equity
$
44,625.1

 
$
44,981.0

See notes to consolidated condensed financial statements.

6



Consolidated Condensed Statements of Equity
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

 
Equity of Eli Lilly and Company Shareholders
 
 
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Employee Benefit Trust
 
Accumulated Other Comprehensive Loss
 
Common Stock in Treasury
 
Noncontrolling Interest
Shares
 
Amount
Shares
 
Amount
Balance at July 1, 2017
1,101,646

 
$
688.5

 
$
5,686.1

 
$
15,590.1

 
$
(3,013.2
)
 
$
(4,774.9
)
 
664

 
$
(75.8
)
 
$
68.9

Net income


 


 


 
555.6

 


 


 


 


 
0.3

Other comprehensive income, net of tax


 


 


 


 


 
165.5

 


 


 
2.2

Issuance of stock under employee stock plans, net
26

 


 
(1.2
)
 


 


 


 


 


 


Stock-based compensation


 


 
69.8

 


 


 


 


 


 


Other


 


 


 
(0.2
)
 


 


 


 


 
(1.1
)
Balance at September 30, 2017
1,101,672

 
$
688.5

 
$
5,754.7

 
$
16,145.5

 
$
(3,013.2
)
 
$
(4,609.4
)
 
664

 
$
(75.8
)
 
$
70.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2018
1,077,548

 
$
673.5

 
$
5,825.7

 
$
14,247.3

 
$
(3,013.2
)
 
$
(6,108.7
)
 
604

 
$
(69.4
)
 
$
65.6

Net income (loss)


 


 


 
1,149.5

 


 


 


 


 
(5.2
)
Other comprehensive income, net of tax


 


 


 


 


 
660.2

 


 


 


Retirement of treasury shares
(10,191
)
 
(6.4
)
 


 
(993.7
)
 


 


 
(10,191
)
 
1,000.0

 


Purchase of treasury shares (1)


 


 


 


 


 


 
10,191

 
(1,000.0
)
 


Issuance of stock under employee stock plans, net
17

 


 
(0.5
)
 


 


 


 


 


 


Stock-based compensation


 


 
68.5

 


 


 


 


 


 


Sale of Elanco stock (Note 3)


 


 
629.2

 


 


 
9.0

 


 


 
1,017.2

Other


 


 


 
5.6

 


 


 


 


 
(3.3
)
Balance at September 30, 2018
1,067,374

 
$
667.1

 
$
6,522.9

 
$
14,408.7

 
$
(3,013.2
)
 
$
(5,439.5
)
 
604

 
$
(69.4
)
 
$
1,074.3

(1) As of September 30, 2018, there was $7.00 billion remaining under our $8.00 billion share repurchase program authorized in June 2018.
See notes to consolidated condensed financial statements.


























7



Consolidated Condensed Statements of Equity (Continued)
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)

 
Equity of Eli Lilly and Company Shareholders
 
 
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions, shares in thousands)
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Employee Benefit Trust
 
Accumulated Other Comprehensive Loss
 
Common Stock in Treasury
 
Noncontrolling Interest
Shares
 
Amount
Shares
 
Amount
Balance at January 1, 2017
1,101,586

 
$
688.5

 
$
5,640.6

 
$
16,046.3

 
$
(3,013.2
)
 
$
(5,274.0
)
 
711

 
$
(80.5
)
 
$
72.8

Net income


 


 


 
1,452.8

 


 


 


 


 
14.3

Other comprehensive income (loss), net of tax


 


 


 


 


 
664.6

 


 


 
(13.4
)
Cash dividends declared per share: $1.04


 


 


 
(1,095.7
)
 


 


 


 


 


Retirement of treasury shares
(3,191
)
 
(2.0
)
 


 
(257.9
)
 


 


 
(3,191
)
 
259.9

 


Purchase of treasury shares


 


 
60.0

 


 


 


 
3,191

 
(259.9
)
 


Issuance of stock under employee stock plans, net
3,277

 
2.0

 
(155.0
)
 


 


 


 
(47
)
 
4.7

 


Stock-based compensation


 


 
209.1

 


 


 


 


 


 


Other


 


 


 


 


 


 


 


 
(3.4
)
Balance at September 30, 2017
1,101,672

 
$
688.5

 
$
5,754.7

 
$
16,145.5

 
$
(3,013.2
)
 
$
(4,609.4
)
 
664

 
$
(75.8
)
 
$
70.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
1,100,672

 
$
687.9

 
$
5,817.8

 
$
13,894.1

 
$
(3,013.2
)
 
$
(5,718.6
)
 
664

 
$
(75.8
)
 
$
75.7

Net income (loss)


 


 


 
2,107.0

 


 


 


 


 
(0.6
)
Other comprehensive income, net of tax


 


 


 


 


 
375.3

 


 


 


Cash dividends declared per share: $1.13


 


 


 
(1,148.6
)
 


 


 


 


 


Retirement of treasury shares
(36,014
)
 
(22.5
)
 


 
(3,028.2
)
 


 


 
(36,014
)
 
3,050.7

 


Purchase of treasury shares (1)


 


 


 


 


 


 
36,014

 
(3,050.7
)
 


Issuance of stock under employee stock plans, net
2,716

 
1.7

 
(130.8
)
 


 


 


 
(60
)
 
6.4

 


Stock-based compensation


 


 
206.7

 


 


 


 


 


 


Adoption of new accounting standards (Note 2)


 


 


 
2,584.4

 


 
(105.2
)
 


 


 


Sale of Elanco stock (Note 3)


 


 
629.2

 


 


 
9.0

 


 


 
1,017.2

Other


 


 


 


 


 


 


 


 
(18.0
)
Balance at September 30, 2018
1,067,374

 
$
667.1

 
$
6,522.9

 
$
14,408.7

 
$
(3,013.2
)
 
$
(5,439.5
)
 
604

 
$
(69.4
)
 
$
1,074.3

(1) As of September 30, 2018, there was $7.00 billion remaining under our $8.00 billion share repurchase program authorized in June 2018.
See notes to consolidated condensed financial statements.



8



Consolidated Condensed Statements of Cash Flows
(Unaudited)
ELI LILLY AND COMPANY AND SUBSIDIARIES
(Dollars in millions)
 
 
Nine Months Ended
September 30,
 
2018
 
2017
Cash Flows from Operating Activities
 
Net income
$
2,107.0

 
$
1,452.8

Adjustments to Reconcile Net Income to Cash Flows from Operating Activities:
 
 
 
Depreciation and amortization
1,263.5

 
1,155.4

Change in deferred income taxes
161.6

 
151.7

Stock-based compensation expense
206.7

 
209.1

Acquired in-process research and development
1,654.5

 
1,062.6

Other changes in operating assets and liabilities, net of acquisitions
(1,638.2
)
 
(525.2
)
Other non-cash operating activities, net
320.7

 
365.7

Net Cash Provided by Operating Activities
4,075.8

 
3,872.1

Cash Flows from Investing Activities
 
 
 
Net purchases of property and equipment
(816.3
)
 
(633.3
)
Proceeds from sales and maturities of short-term investments
2,535.5

 
2,320.2

Purchases of short-term investments
(112.2
)
 
(2,973.8
)
Proceeds from sales of noncurrent investments
3,444.7

 
1,686.9

Purchases of noncurrent investments
(719.7
)
 
(3,739.6
)
Cash paid for acquisitions, net of cash acquired (Note 3)

 
(882.1
)
Purchase of in-process research and development (Note 3)
(1,578.2
)
 
(1,036.8
)
Other investing activities, net
(188.8
)
 
(178.0
)
Net Cash Provided by (Used for) Investing Activities
2,565.0

 
(5,436.5
)
Cash Flows from Financing Activities
 
 
 
Dividends paid
(1,739.2
)
 
(1,643.8
)
Net change in short-term borrowings
(2,297.1
)
 
1,226.8

Proceeds from issuance of long-term debt
2,477.7

 
2,232.0

Repayments of long-term debt
(1,001.5
)
 
(630.6
)
Purchases of common stock
(3,050.7
)
 
(199.9
)
Net proceeds from Elanco initial public offering (Note 3)
1,659.7

 

Other financing activities, net
(314.1
)
 
(299.6
)
Net Cash Provided by (Used for) Financing Activities
(4,265.2
)
 
684.9

Effect of exchange rate changes on cash and cash equivalents
48.2

 
21.7

 
 
 
 
Net increase (decrease) in cash and cash equivalents
2,423.8

 
(857.8
)
Cash and cash equivalents at January 1
6,536.2

 
4,582.1

Cash and Cash Equivalents at September 30
$
8,960.0

 
$
3,724.3

See notes to consolidated condensed financial statements.



9



Notes to Consolidated Condensed Financial Statements
(Tables present dollars in millions, except per-share data)
Note 1: Basis of Presentation and Revenue
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, 2017. We issue our financial statements by filing with the Securities and Exchange Commission (SEC) and have evaluated subsequent events up to the time of the filing.
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.
Adoption of Revenue Accounting Standard
Effective January 1, 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers and other related updates (see Note 2 for additional discussion). The new standard has been applied to contracts for which performance was not substantially complete as of the date of adoption. For those contracts that were modified prior to the date of adoption, we reflected the aggregate effect of those modifications when determining the appropriate accounting under the new standard. We don’t believe the effect of applying this practical expedient resulted in material differences. Revenue presented for periods prior to 2018 was accounted for under previous standards and has not been adjusted. Revenue and net income for the three and nine months ended September 30, 2018 do not differ materially from amounts that would have resulted from application of the previous standards.
The following table summarizes our revenue recognized in our consolidated condensed statements of operations:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net product revenue
$
5,664.5

 
$
5,323.8

 
$
16,905.6

 
$
15,841.5

Collaboration and other revenue (1)
397.4

 
334.2

 
1,211.5

 
869.1

Revenue
$
6,061.9

 
$
5,658.0

 
$
18,117.1

 
$
16,710.6

(1) Collaboration and other revenue associated with prior year transfers of intellectual property was $76.2 million and $258.4 million during the three and nine months ended September 30, 2018, respectively, and $36.7 million and $105.5 million during the three and nine months ended September 30, 2017, 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 will include 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 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.
Net Product Revenue
Revenue from sales of products is recognized at the point where the customer obtains control of the goods and we satisfy our performance obligation, which generally is at the time we ship the product to the customer. Payment terms differ by jurisdiction and customer, but payment terms in most of our major jurisdictions typically range from 30 to 75 days from date of shipment. Revenue for our product sales has not been adjusted for the effects of a

10



financing component as we expect, at contract inception, that the period between when we transfer control of the product and when we receive payment will be one year or less. Any exceptions are either not material or we collect interest for payments made after the due date. Provisions for rebates and discounts, and returns are established in the same period the related sales are recognized. We generally ship product shortly after orders are received; therefore, we generally only have a few days of orders received but not yet shipped at the end of any reporting period. Shipping and handling activities are considered to be fulfillment activities and are not considered to be a separate performance obligation. We exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are imposed on our sales of product and collected from a customer.
Significant judgments must be made in determining the transaction price for our sales of products related to anticipated rebates and discounts and returns. The following describe the most significant of these judgments:
Sales Rebates and Discounts - Background and Uncertainties
Most of our pharmaceutical products are sold to wholesalers that serve pharmacies, physicians and other health care professionals, and hospitals. Most of our animal health products are sold to wholesale distributors. We initially invoice our customers at contractual list prices. Contracts with direct and indirect customers may provide for various rebates and discounts that may differ in each contract. As a consequence, to determine the appropriate transaction price for our product sales at the time we recognize a sale to a direct customer, we must estimate any rebates or discounts that ultimately will be due to the direct customer and other customers in the distribution chain under the terms of our contracts. Significant judgments are required in making these estimates.
The rebate and discount amounts are recorded as a deduction to arrive at our net product revenue. Sales rebates and discounts that require the use of judgment in the establishment of the accrual include managed care, Medicare, Medicaid, chargebacks, long-term care, hospital, patient assistance programs, and various other programs. We estimate these accruals using an expected value approach.
The largest of our sales rebate and discount amounts are rebates associated with sales covered by managed care, Medicare, Medicaid, and chargeback contracts in the U.S. In determining the appropriate accrual amount, we consider our historical rebate payments for these programs by product as a percentage of our historical sales as well as any significant changes in sales trends (e.g., patent expiries and product launches), an evaluation of the current contracts for these programs, the percentage of our products that are sold via these programs, and our product pricing. Although we accrue a liability for rebates related to these programs at the time we record the sale, the rebate related to that sale is typically paid up to six months later. Because of this time lag, in any particular period our rebate adjustments may incorporate revisions of accruals for several periods.
Most of our rebates outside the U.S. are contractual or legislatively mandated and are estimated and recognized in the same period as the related sales. In some large European countries, government rebates are based on the anticipated budget for pharmaceutical payments in the country. An estimate of these rebates, updated as governmental authorities revise budgeted deficits, is recognized in the same period as the related sale.
Sales Returns - Background and Uncertainties
When product sales occur, to determine the appropriate transaction price for our sales, we estimate a reserve for future product returns related to those sales using an expected value approach. This estimate is based on several factors, including: historical return rates, expiration date by product (on average, approximately 24 months after the initial sale of a product to our customer), and estimated levels of inventory in the wholesale and retail channels, as well as any other specifically-identified anticipated returns due to known factors such as the loss of patent exclusivity, product recalls and discontinuances, or a changing competitive environment. We maintain a returns policy that allows U.S. pharmaceutical customers to return product for dating issues within a specified period prior to and subsequent to the product's expiration date. Following the loss of exclusivity for a patent-dependent product, we expect to experience an elevated level of product returns as product inventory remaining in the wholesale and retail channels expires. Adjustments to the returns reserve have been and may in the future be required based on revised estimates to our assumptions. We record the return amounts as a deduction to arrive at our net product revenue. Once the product is returned, it is destroyed; we do not record a right of return asset. Our returns policies outside the U.S. are generally more restrictive than in the U.S. as returns are not allowed for reasons other than failure to meet product specifications in many countries. Our reserve for future product returns for product sales outside the U.S. is not material.

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As a part of our process to estimate a reserve for product returns, we regularly review the supply levels of our significant products sold to major wholesalers in the U.S. and in major markets outside the U.S., primarily by reviewing periodic inventory reports supplied by our major wholesalers and available prescription volume information for our products, or alternative approaches. We attempt to maintain U.S. wholesaler inventory levels at an average of approximately one month or less on a consistent basis across our product portfolio. Causes of unusual wholesaler buying patterns include actual or anticipated product-supply issues, weather patterns, anticipated changes in the transportation network, redundant holiday stocking, and changes in wholesaler business operations. In the U.S., the current structure of our arrangements provides us with data on inventory levels at our wholesalers; however, our data on inventory levels in the retail channel is more limited. Wholesaler stocking and destocking activity historically has not caused any material changes in the rate of actual product returns.
Actual product returns have been less than 2 percent of our net revenue over each of the past three years and have not fluctuated significantly as a percentage of revenue, although fluctuations are more likely in periods following loss of patent exclusivity for major products in the U.S. market.
Adjustments to Revenue
Adjustments to revenue recognized as a result of changes in estimates for the judgments described above during the three and nine months ended September 30, 2018, for product shipped in previous years were not material.
Disaggregation of Revenue
Our disaggregated revenue is disclosed in Note 12.
Collaborations and Other Arrangements
We recognize several types of revenue from our collaborations and other arrangements, which we discuss in general terms immediately below and more specifically in Note 4 for each of our material collaborations and other arrangements. Our collaborations and other arrangements are not contracts with customers but are evaluated to determine whether any aspects of the arrangements are contracts with customers.
Revenue related to products we sell pursuant to these arrangements is included in net product revenue, while other sources of revenue (e.g., royalties and profit sharing from our partner) are included in collaboration and other revenue.
Initial fees and developmental milestones we receive in collaborative and other similar arrangements from the partnering of our compounds under development are generally deferred and amortized into income through the expected product approval date.
Profit-sharing due from our collaboration partners, which is based upon gross margins reported to us by our partners, is recognized as collaboration and other revenue as earned.
Royalty revenue from licensees, which is based on sales to third parties of licensed products and technology, is recorded when the third-party sale occurs and the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). This royalty revenue is included in collaboration and other revenue.
For arrangements involving multiple goods or services (e.g., research and development, marketing and selling, manufacturing, and distribution), each required good or service is evaluated to determine whether it is distinct. If a good or service does not qualify as distinct, it is combined with the other non-distinct goods or services within the arrangement and these combined goods or services are treated as a single performance obligation for accounting purposes. The arrangement's transaction price is then allocated to each performance obligation based on the relative standalone selling price of each performance obligation. For arrangements that involve variable consideration where we have sold intellectual property, we recognize revenue based on estimates of the amount of consideration we believe we will be entitled to receive from the other party, subject to a constraint. These estimates are adjusted to reflect the actual amounts to be collected when those facts and circumstances become known.
Significant judgments must be made in determining the transaction price for our sales of intellectual property. Because of the risk that products in development will not receive regulatory approval, we generally do not recognize any contingent payments that would be due to us upon or after regulatory approval.

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We have entered into arrangements whereby we transferred rights to products and committed to supply for a period of time. For those arrangements for which we concluded that the obligations were not distinct, any amounts received upfront are being amortized to revenue as net product revenue over the period of the supply arrangement as the performance obligation is satisfied.
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 rebates, discounts, and returns. Changes in contract liabilities are generally due to either receipt of additional advance payments or our performance under the contract.
We have the following amounts recorded for contract liabilities:
 
September 30, 2018
 
December 31, 2017
Contract liabilities
$
308.6

 
$
335.2

The contract liabilities amount disclosed above as of September 30, 2018, is primarily related to:
The remaining license period of symbolic intellectual property, and
Obligations to supply product for a defined period of time.
Revenue recognized from contract liabilities as of January 1, 2018, during the three and nine months ended September 30, 2018, 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.
Note 2: Implementation of New Financial Accounting Pronouncements
The following table provides a brief description of accounting standards that were effective January 1, 2018 and were adopted on that date:
Standard
 
Description
 
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 replaced existing revenue recognition standards and requires 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 applied the latter approach.
 
Application of the new standard to applicable contracts resulted in an increase of approximately $5 million to retained earnings as of January 1, 2018. Disclosures required by the new standard are included in Note 1, Note 4, and Note 12.
Accounting Standards Update 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
 
This standard requires 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.
 
Upon adoption, we reclassified from accumulated other comprehensive loss the after-tax amount of net unrealized gains resulting in an increase to retained earnings of approximately $105 million. Adoption of this standard did not result in a material change in net income for the three and nine months ended September 30, 2018.

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Standard
 
Description
 
Effect on the financial statements or other significant matters
Accounting Standards Update 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
 
This standard requires 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.
 
Upon adoption, the cumulative effect of applying the standard resulted in an increase to deferred tax assets and retained earnings of approximately $2.5 billion. Adoption of this standard did not result in a material change in net income for the three and nine months ended September 30, 2018.
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. Previously, the costs of the other components along with the service cost component were classified based upon the function of the employee. This standard requires 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 are now presented separately from the line items that include the service cost component. When applicable, the service cost component is now 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.
 
Upon adoption of this standard, pension and postretirement benefit cost components other than service costs are presented in other–net, (income) expense. The application of the new standard resulted in reclassification to other income of $63.8 million for the three months ended September 30, 2017, while increasing cost of sales by $20.2 million, marketing, selling, and administrative expenses by $23.0 million, and research and development expenses by $20.6 million for the same period. The application of the new standard resulted in reclassification to other income of $191.3 million for the nine months ended September 30, 2017, while increasing cost of sales by $60.5 million, marketing, selling, and administrative expenses by $69.0 million, and research and development expenses by $61.8 million for the same period. We do not expect application of the new standard to have a material impact on an ongoing basis.

The following table provides a brief description of the accounting standard that has not yet been adopted and could have a material effect on our financial statements:
Standard
 
Description
 
Effective Date
 
Effect on the financial statements or other significant matters
Accounting Standards Update 2016-02, Leases
 
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. An entity can apply the new leases 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, 2019, with early adoption permitted. We intend to adopt on that date.
 
We are in the process of determining the impact on our consolidated financial statements. We have selected a software solution to be compatible with our enterprise software system. Development of our selected solution is ongoing, as it is not yet fully compliant with the requirements of the standard. The timely readiness of the lease software system is critical to ensure an efficient and effective adoption of the standard.

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Note 3: Divestiture and Acquisitions
Divestiture
Formation of Elanco and Initial Public Offering
On September 24, 2018, Elanco Animal Health Incorporated (Elanco) completed an initial public offering (the IPO) resulting in the issuance of 72.3 million shares of its common stock, which represents 19.8 percent of Elanco's outstanding shares, at $24 per share. Elanco shares began trading on the New York Stock Exchange under the symbol "ELAN" in September 2018.
In connection with the completion of the IPO, through a series of equity and other transactions, we transferred to Elanco the animal health businesses that form its business going forward. In exchange, Elanco transferred to us, or will transfer to us, consideration of approximately $4.2 billion, which consists primarily of the net proceeds from the IPO, the net proceeds from the debt offering completed by Elanco in August 2018, and the term loan facility entered into by Elanco during the period (see Note 6). The consideration that we receive is intended to be used for debt repayment, dividends, and/or share repurchases. The excess of the net proceeds from the IPO over the net book value of our divested interest was $629.2 million and was recorded in additional paid-in capital. Of our consolidated cash and cash equivalents as of September 30, 2018, approximately $300 million is retained by Elanco for working capital purposes.
We continue to consolidate Elanco, as we retain control over Elanco. The earnings attributable to the divested, noncontrolling interest for the period from IPO until September 30, 2018 were not material for the three and nine months ended September 30, 2018. As of September 30, 2018, the noncontrolling interest of $1.02 billion associated with Elanco is reflected in noncontrolling interests in the consolidated condensed balance sheet.
Acquisitions
On January 3, 2017, we completed the acquisition of Boehringer Ingelheim Vetmedica, Inc.'s United States (U.S.) feline, canine, and rabies vaccine portfolio and other related assets (BIVIVP). This transaction, as further discussed in this note below in Acquisition of a Business, was accounted for as a business combination 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 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 acquisition have been included in our consolidated condensed financial statements from the date of acquisition.
In addition to the acquisition of BIVIVP, we acquired assets in development in the nine months ended September 30, 2018, 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 products were immediately expensed because the products had no alternative future use. We incurred acquired IPR&D charges of $30.0 million and $1.65 billion for the three and nine months ended September 30, 2018, respectively, and $205.0 million and $1.06 billion for the three and nine months ended September 30, 2017, respectively.

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Acquisition of a Business
Boehringer Ingelheim Vetmedica, Inc. Vaccine Portfolio Acquisition
Overview of Transaction
In 2017, we acquired BIVIVP in an all-cash transaction for $882.1 million. Under the terms of the agreement, we acquired a manufacturing and research and development site and a U.S. vaccine portfolio, including vaccines used for the treatment of bordetella, Lyme disease, rabies, and parvovirus, among others.
Assets Acquired and Liabilities Assumed
The following table summarizes the amounts recognized for assets acquired and liabilities assumed as of the acquisition date:
Estimated Fair Value at January 3, 2017
Inventories
$
108.6

Marketed products (1)
297.0

Property and equipment
148.2

Other assets and liabilities - net
8.2

Total identifiable net assets
562.0

Goodwill (2)
320.1

Total consideration transferred - net of cash acquired
$
882.1

(1) These intangible assets, 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.
(2) 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. The goodwill associated with this acquisition is deductible for tax purposes.
Asset Acquisitions
The following table and narrative summarize our asset acquisitions during the nine months ended September 30, 2018 and September 30, 2017.
Counterparty
Compound(s) or Therapy
Acquisition Month
 
Phase of Development (1)
 
Acquired IPR&D Expense
Sigilon Therapeutics (Sigilon)
Encapsulated cell therapies for the potential treatment of type 1 diabetes
April 2018
 
Pre-clinical
 
$
66.9

AurKa Pharma, Inc. (AurKa)
AK-01, an Aurora kinase A inhibitor
June 2018
 
Phase I
 
81.8

ARMO Biosciences, Inc. (ARMO)
Cancer therapy - pegilodecakin
June 2018
 
Phase III
 
1,475.8

Anima Biotech (Anima)
Translation inhibitors for selected neuroscience targets
July 2018
 
Pre-clinical
 
30.0

 
 
 
 
 
 
 
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.
In connection with the 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.

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We entered into a collaboration agreement with Sigilon to develop encapsulated cell therapies for the potential treatment of type 1 diabetes. Sigilon will create proprietary products comprised of induced pluripotent stem cells engineered into differentiated insulin-producing pancreatic beta cells and encapsulated using Sigilon's Afibromer technology. We will receive an exclusive worldwide license to Sigilon's Afibromer technology for islet cell encapsulation. Under the terms of the agreement, we paid an upfront fee of $62.5 million and made an equity investment in Sigilon.
We acquired AK-01 through the acquisition of AurKa. Under the terms of the agreement, we acquired all shares of AurKa for a cash purchase price of $81.3 million, net of cash acquired, plus net accrued liabilities assumed of $0.5 million. Substantially all the value of AurKa was related to AK-01, its only significant asset. The acquired IPR&D expense was not tax deductible.
We acquired pegilodecakin through the acquisition of ARMO. Under the terms of the agreement, we acquired all shares of ARMO for a cash purchase price of $1.40 billion, net of cash acquired, plus net accrued liabilities assumed of $75.8 million. Substantially all of the value of ARMO was related to pegilodecakin, its only significant asset. The acquired IPR&D expense was not tax deductible.
We entered into a collaboration agreement with Anima for the discovery and development of translation inhibitors for several target proteins by using Anima's translation control therapeutics platform. Under the terms of the agreement, we paid an upfront fee of $30.0 million. Anima will use its technology platform to discover lead candidates that are translation inhibitors of our selected neuroscience targets. We will be responsible for all clinical development and commercialization activities and costs related to the collaboration.
We acquired lasmiditan through the acquisition of 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 was 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.
In September 2018, we announced a license agreement with Chugai Pharmaceutical Company for OWL833, an oral non-peptidic GLP-1 receptor agonist. OWL833 is a preclinical asset that is being studied for the treatment of type 2 diabetes. Under the terms of the agreement, we will acquire worldwide development and commercialization rights to OWL833 for a cash purchase price of $50.0 million and success-based milestones and royalties. The transaction is expected to close in the fourth quarter of 2018, subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. We expect an acquired IPR&D charge of $50.0 million in the fourth quarter of 2018.
In October 2018, we announced a global license and research agreement with Dicerna Pharmaceuticals (Dicerna) for the discovery, development, and commercialization of potential new medicines in the areas of cardio-metabolic disease, neurodegeneration, and pain. Under terms of the agreement, we will pay an upfront fee of $100.0 million and make an equity investment in Dicerna. The transaction is subject to clearance under the Hart-Scott-Rodino Antitrust Improvements Act and other customary closing conditions. Upon closing, we will record an acquired IPR&D expense of approximately $135 million.
In October 2018, we acquired a Priority Review Voucher from SIGA Technologies, Inc. for a cash purchase price of $80.0 million. We intend to utilize the voucher to fast track a product application for an existing R&D project, although the specific project has not yet been determined. As a result of this transaction, we will record an acquired IPR&D expense of $80.0 million in the fourth quarter of 2018.

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In November 2018, we entered into a collaboration agreement with NextCure, Inc. (NextCure) for the discovery and development of immuno-oncology cancer therapies. NextCure will apply its discovery platform technology to identify novel, functional immune-related targets and we will develop antibodies to these targets. The parties will be able to exclusively license antibodies resulting from the collaboration. Under terms of the agreement, we will pay an upfront fee of $25.0 million and make an equity investment in NextCure. As a result of this transaction, we will record an acquired IPR&D expense of approximately $30 million in the fourth quarter of 2018.
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 or payments to the collaboration partner. See Note 1 for amounts of collaboration and other revenue recognized from these types of arrangements.
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®, and Synjardy®, as well as our basal insulin: Basaglar®.
The table below summarizes significant regulatory and commercialization events and milestones (deferred) capitalized for the compounds included in this collaboration:
 
 
Year Launched
 
Milestones
(Deferred) Capitalized (1)
Product Family
 
U.S.
 
Europe
 
Japan
 
Year
Amount
Trajenta (2)
 
2011
 
2011
 
2011
 
Cumulative (4) - all prior to 2017
$
446.4

Jardiance (3)
 
2014
 
2014
 
2015
 
Cumulative (4) - all prior to 2017
299.5

Basaglar
 
2016
 
2015
 
2015
 
Cumulative (4) - all prior to 2017
(250.0
)
(1) In connection with the regulatory approvals of Basaglar in the U.S., Europe, and Japan, milestone payments received were recorded as contract 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 through the term of the collaboration.
(2) Jentadueto is included in the Trajenta product family. The collaboration agreement with Boehringer Ingelheim for Trajenta ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
(3) Glyxambi and Synjardy are included in the Jardiance product family. The collaboration agreement with Boehringer Ingelheim for Jardiance ends upon expiration of the compound patent and any supplementary protection certificates or extensions thereto.
(4) The cumulative amount represents the total initial amounts that were (deferred) or capitalized from the start of this collaboration through the end of the reporting period.
In the most significant markets, we and Boehringer Ingelheim share equally the ongoing development costs, commercialization costs, and agreed upon gross margin for any product resulting from the collaboration. We record our portion of the gross margin associated with Boehringer Ingelheim's compounds as collaboration and other revenue. We record 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 record our portion of the development and commercialization costs as research and development expense and marketing, selling, and administrative expense, respectively. Each company is entitled to potential performance payments depending on the sales of the molecules it contributes to the collaboration. These performance payments result 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 be reduced by any performance payments we make related to these products. Similarly, performance payments we may receive related to Basaglar effectively reduce Boehringer Ingelheim's share of the gross margin, which reduces our cost of sales.

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The following table summarizes our collaboration and other revenue recognized with respect to the Trajenta and Jardiance families of products and net product revenue recognized with respect to Basaglar:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Basaglar
$
201.2

 
$
145.7

 
$
569.0

 
$
278.3

Jardiance
166.9

 
127.2

 
465.1

 
304.3

Trajenta
135.7

 
153.3

 
418.5

 
408.2

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,
 
2018
 
2017
 
2018
 
2017
Net product revenue
$
133.7

 
$
137.6

 
$
397.0

 
$
403.3

Collaboration and other revenue
25.8

 
25.9

 
78.5

 
73.7

Revenue
$
159.5


$
163.5


$
475.5


$
477.0

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 provided 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.
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 inhibitor compound, now known as 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, atopic dermatitis, alopecia areata, and systemic lupus erythematosus (SLE) in 2017. The

19



agreement calls for payments by us to Incyte associated with certain development, success-based regulatory, and sales-based milestones.
The following table summarizes our milestones achieved:
Year
Event
Classification
Amount
2016
Regulatory submissions in the U.S. and Europe
R&D expense
$
55.0

2017
Regulatory approval in Europe
Intangible asset
65.0

Regulatory approval in Japan
Intangible asset
15.0

Began Phase III testing for atopic dermatitis
R&D expense
30.0

2018
Regulatory approval in the U.S.
Intangible asset
100.0

Began Phase III testing for SLE
R&D Expense
20.0

As of September 30, 2018, Incyte is eligible to receive up to $130.0 million of additional payments from us contingent upon certain development and success-based regulatory milestones. Incyte is also eligible to receive up to $150.0 million of potential sales-based milestones.
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
 
Daiichi Sankyo
Japan
 
Exclusive
 
Daiichi Sankyo
While major European markets are a co-promotion territory under the terms of our arrangement, Daiichi Sankyo exclusively promotes Effient in these markets.
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 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. 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,
 
2018
 
2017
 
2018
 
2017
Revenue
$
45.3

 
$
55.9

 
$
104.8

 
$
326.6

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. As of September 30, 2018, 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.

20



Note 5: 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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Severance:
 
 
 
 
 
 
 
Human pharmaceutical products
$

 
$
165.7

 
$
(24.7
)
 
$
277.1

Animal health products
(5.4
)
 
5.8

 
(0.6
)
 
62.1

Total severance
(5.4
)
 
171.5

 
(25.3
)
 
339.2

Asset impairment and other special charges:
 
 
 
 
 
 
 
Human pharmaceutical products
3.5

 
25.0

 
2.0

 
25.0

Animal health products
85.2

 
210.0

 
259.3

 
306.2

Total asset impairment and other special charges
88.7

 
235.0

 
261.3

 
331.2

Total asset impairment, restructuring, and other special charges
$
83.3

 
$
406.5

 
$
236.0

 
$
670.4

Severance charges recognized during the nine months ended September 30, 2018 primarily relate to severance adjustments recorded in the second quarter of 2018. Our severance charges recognized in the second half of 2017 as part of planned restructuring activities were based upon estimates for the number of employees that either lost or were going to lose their then current roles and would ultimately leave the company. During the second quarter of 2018, we determined that more displaced employees than expected were able to find other roles within the company, resulting in an immaterial reduction in the actual severance costs incurred. We expect the majority of the remaining severance payments to be made in the next 12 months.
Asset impairment and other special charges recognized during the three months ended September 30, 2018 resulted primarily from asset impairment and other restructuring charges related to the sale of the Posilac® (rbST) brand and the associated Augusta, Georgia manufacturing site. We also incurred expenses associated with the IPO and separation of Elanco. These expenses were offset by a gain recognized associated with the pension curtailment (see Note 8 for additional discussion).
In addition to the charges for the three months ended September 30, 2018, additional asset impairment and other special charges for the nine months ended September 30, 2018 included asset impairment, exit costs, and other charges related to the decision to end Posilac (rbST) production at the Augusta, Georgia manufacturing site, and charges related to the decision to suspend commercialization of Imrestor®, an animal health product. We also incurred expenses associated with the review of strategic alternatives for the Elanco animal health business.
Severance costs recognized during the three and 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).
Substantially all of the asset impairment and other special charges recognized during the three months ended September 30, 2017 were related to lower projected revenue for Posilac (rbST). The assets associated with Posilac (rbST) were written down to their fair values, which were determined based upon a discounted cash flow valuation. Other asset impairment and other special charges recognized during the three months ended September 30, 2017 related to exit costs associated with site closures. Asset impairment and other special charges recognized during the nine months ended September 30, 2017 resulted primarily from charges associated with the Posilac (rbST) impairment, integration costs of Novartis AH, as well as asset impairments due to site closures.

21



Note 6: 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. The risk associated with this concentration is mitigated by 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.
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 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 is 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, 2018, we had outstanding foreign currency forward commitments to purchase 1.40 billion U.S. dollars and sell 1.19 billion euro, commitments to purchase 1.57 billion euro and sell 1.84 billion U.S. dollars, commitments to purchase 426.9 million U.S. dollars and sell 47.94 billion Japanese yen, commitments to purchase 234.1 million Swiss Francs and sell 243.2 million U.S. dollars, commitments to purchase 512.2 million U.S. dollars and sell 389.4 million British pounds, and commitments to purchase 466.4 million British pounds and sell 613.0 million U.S. dollars, which will all settle within 30 days.

22



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 $3.45 billion and $3.70 billion as of September 30, 2018 and December 31, 2017, respectively, and have been designated as, and are effective as, economic hedges of net investments in certain of our euro-denominated and Swiss franc-denominated foreign operations. Our cross-currency interest rate swaps that convert a portion of our U.S. dollar-denominated floating rate debt to foreign-denominated floating rate debt have also been designated as, and are effective as, economic hedges of net investments. At September 30, 2018, we had outstanding cross currency swaps with notional amounts of $1.53 billion swapping euro to U.S. dollars and $350.0 million swapping British pounds to U.S. dollars, which will all settle within 12 months.
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 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, 2018, substantially all of our total long-term debt is at a fixed rate. We have converted 20 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, the change in fair value of these instruments is recorded as part of other comprehensive income (loss) and is amortized to interest expense over the life of the underlying debt.
Elanco Debt Issuance
In August 2018, our wholly owned subsidiary, Elanco, issued $2.00 billion of senior notes in a private placement. The senior notes are comprised of $500.0 million of 3.91 percent senior notes due in August 2021, $750.0 million of 4.27 percent senior notes due in August 2023, and $750.0 million of 4.90 percent senior notes due in August 2028. Interest is to be paid semi-annually and the interest rate payable on each series of senior notes is subject to adjustment if certain bond rating agencies downgrade, or subsequently upgrade, their ratings on the respective series of senior notes.
The indenture that governs the Elanco senior notes contains covenants, including limitations on the ability of Elanco and certain Elanco subsidiaries to incur liens or engage in sale-leaseback transactions. The indenture also contains restrictions on Elanco's ability to consolidate, merge or sell substantially all of their assets, in addition to other customary terms. Elanco was in compliance with all such covenants under the indentures governing the senior notes as of September 30, 2018.
Elanco has entered into an agreement that requires them to use commercially reasonable efforts to cause a registration statement to become effective with the SEC by August 28, 2019, relating to an offer to exchange the senior notes for registered senior notes having substantially identical terms, or in certain cases, to register the senior notes for resale. If they do not register or exchange the senior notes pursuant to the terms of the registration rights agreement, they will be required to pay additional interest to the holders of the senior notes under certain circumstances.
In September 2018, Elanco entered into a revolving credit agreement with a syndicate of banks providing for a five-year $750.0 million senior revolving credit facility (Revolving Facility). The Revolving Facility bears interest at a variable rate plus specified margin as defined in the agreement and is payable quarterly. There were no borrowings outstanding under the Revolving Facility at September 30, 2018. The Revolving Facility is payable in full at the end of the term.

23



In September 2018, Elanco also entered into a $500.0 million three-year term loan under a term credit facility with a syndicate of banks (the Term Facility and collectively with the Revolving Facility, the Credit Facilities). The Term Facility bears interest at a variable rate plus margin as defined in the Term Facility and is payable quarterly. The Term Facility is payable in full at the end of the term.
The Credit Facilities are subject to various financial and other covenants including restrictions on Elanco's level of borrowings based on their consolidated leverage ratio and their consolidated interest coverage ratio. Elanco was in compliance with all such covenants as of September 30, 2018.
The aggregate net proceeds of the senior notes and Term Facility was $2.48 billion. See Note 3 for a discussion of the use of the proceeds of the debt offerings as part of the formation of Elanco and their IPO process.
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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Fair value hedges:
 
 
 
 
 
 
 
Effect from hedged fixed-rate debt
$
(19.6
)
 
$
(4.0
)
 
$
(94.1
)
 
$
3.6

Effect from interest rate contracts
19.6

 
4.0

 
94.1

 
(3.6
)
Cash flow hedges:
 
 
 
 
 
 
 
Effective portion of losses on interest rate contracts reclassified from accumulated other comprehensive loss
3.7

 
3.7

 
11.1

 
11.1

Net losses on foreign currency exchange contracts not designated as hedging instruments
0.7

 
16.3

 
76.5

 
79.2

During the nine months ended September 30, 2018 and 2017, net losses related to ineffectiveness, as well as net losses related to the portion of our risk-management hedging instruments, fair value hedges, and cash flow hedges that were excluded from the assessment of effectiveness, were 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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net investment hedges:
 
 
 
 
 
 
 
    Foreign currency-denominated notes
$
(47.8
)
 
$
(58.7
)
 
$
53.0

 
$
(332.0
)
    Cross-currency interest rate swaps
14.7

 
(38.2
)
 
52.3

 
(95.8
)
Cash flow hedges:
 
 
 
 
 
 
 
    Forward-starting interest rate swaps

 

 

 
13.0

During the next 12 months, we expect to reclassify $15.0 million of pretax net losses on cash flow hedges from accumulated other comprehensive loss to other–net, (income) expense.

24



Fair Value of Financial Instruments
The following tables summarize certain fair value information at September 30, 2018 and December 31, 2017 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
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
6,646.3

 
$
6,646.3

 
$
6,646.3

 
$

 
$

 
$
6,646.3

 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
10.5

 
$
10.6

 
$
10.5

 
$

 
$

 
$
10.5

Corporate debt securities
52.7

 
52.7

 

 
52.7

 

 
52.7

Asset-backed securities
11.5

 
11.6

 

 
11.5

 

 
11.5

Other securities
1.4

 
1.4

 

 
1.4

 

 
1.4

Short-term investments
$
76.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
152.0

 
$
159.6

 
$
152.0

 
$

 
$

 
$
152.0

Corporate debt securities
622.0

 
631.5

 

 
622.0

 

 
622.0

Mortgage-backed securities
109.5

 
114.1

 

 
109.5

 

 
109.5

Asset-backed securities
27.0

 
27.3

 

 
27.0

 

 
27.0

Other securities
137.4

 
39.3

 

 

 
137.4

 
137.4

Marketable equity securities
287.9

 
146.4

 
287.9

 

 

 
287.9

Equity investments without readily determinable fair values (2)
394.7

 
 
 
 
 
 
 
 
 
 
Equity method investments (2)
275.3

 
 
 
 
 
 
 
 
 
 
Noncurrent investments
$
2,005.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
4,763.9

 
$
4,763.9

 
$
4,712.4

 
$
51.5

 
$

 
$
4,763.9

 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
217.8

 
$
218.2

 
$
217.8

 
$

 
$

 
$
217.8

Corporate debt securities
1,182.3

 
1,183.2

 

 
1,182.3

 

 
1,182.3

Asset-backed securities
94.2

 
94.3

 

 
94.2

 

 
94.2

Other securities
3.6

 
3.6

 

 
3.6

 

 
3.6

Short-term investments
$
1,497.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent investments:
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency securities
$
360.0

 
$
365.0

 
$
360.0

 
$

 
$

 
$
360.0

Corporate debt securities
3,464.3

 
3,473.5

 

 
3,464.3

 

 
3,464.3

Mortgage-backed securities
202.4

 
204.2

 

 
202.4

 

 
202.4

Asset-backed securities
653.9

 
656.0

 

 
653.9

 

 
653.9

Other securities
132.1

 
66.4

 

 

 
132.1

 
132.1

Marketable equity securities
281.3

 
131.0

 
281.3

 

 

 
281.3

Cost and equity method investments (2)
584.8

 
 
 
 
 
 
 
 
 
 
Noncurrent investments
$
5,678.8

 
 
 
 
 
 
 
 
 
 
(1) For available-for-sale debt securities, amounts disclosed represent the securities' amortized cost.
(2) Fair value disclosures are not applicable for equity method investments and investments accounted for under the measurement alternative for equity investments that do not have readily determinable fair values.

25



 
 
 
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, 2018
$
(399.7
)
 
$

 
$
(398.4
)
 
$

 
$
(398.4
)
December 31, 2017
(2,696.8
)
 

 
(2,690.6
)
 

 
(2,690.6
)
Long-term debt, including current portion
 
 
 
 
 
 
 
 
 
September 30, 2018
$
(12,277.1
)
 
$

 
$
(12,542.2
)
 
$

 
$
(12,542.2
)
December 31, 2017
(10,950.3
)
 

 
(11,529.9
)
 

 
(11,529.9
)

26



 
 
 
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, 2018
 
 
 
 
 
 
 
 
 
Risk-management instruments:
 
 
 
 
 
 
 
 
 
Interest rate contracts designated as fair value hedges: