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Fair Value Measurement
 9 Months Ended
Sep. 30, 2019
Fair Value Measurement
NOTE 12 – Fair value measurement:
Teva’s financial instruments consist mainly of cash and cash equivalents, investment in securities, current and
non-current
receivables, short-term debt, current and
non-current
payables, contingent consideration, senior notes and loans, convertible senior debentures and derivatives.
The fair value of the financial instruments included in working capital and
non-current
receivables and payables approximates their carrying value. The fair value of loans and bank facilities approximates their carrying value, since they bear interest at rates close to the prevailing market rates.
Financial instruments measured at fair value
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable inputs that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.
There were no material transfers between Level 1, Level 2 and Level 3 during the first nine months of 2019.
Financial items carried at fair value as of September 30, 2019 and December 31, 2018 are classified in the tables below in one of the three categories described above:
 
  
September 30, 2019
 
  
Level 1
   
Level 2
   
Level 3
   
Total
 
  
(U.S. $ in millions)
 
Cash and cash equivalents:
   
     
     
     
 
Money markets
  $
176
    $
—  
    $
—  
    $
176
 
Cash, deposits and other
   
1,065
     
—  
     
—  
     
1,065
 
Investment in securities:
   
     
     
     
 
Equity securities
   
45
     
—  
     
—  
     
45
 
Other, mainly debt securities
   
2
     
—  
     
12
     
14
 
Derivatives:
   
     
     
     
 
Asset derivatives—options and forward contracts
   
—  
     
40
     
—  
     
40
 
Asset derivatives—cross-currency swaps
   
     
105
     
—  
     
105
 
Liability derivatives—options and forward contracts
   
—  
     
(18
 )    
—  
     
(18
 )
Contingent consideration*
   
—  
     
—  
     
(430
 )    
(430
 )
                                 
Total
  $
1,288
    $
127
    $
(418
 )   $
997
 
                                 
       
  
December 31, 2018
 
  
Level 1
   
Level 2
   
Level 3
   
Total
 
  
(U.S. $ in millions)
 
Cash and cash equivalents:
   
     
     
     
 
Money markets
  $
203
    $
—  
     $
—  
     $
203
 
Cash, deposits and other
   
1,579
     
—  
      
—  
      
1,579
 
Investment in securities:
   
     
     
     
 
Equity securities
   
51
     
—  
      
—  
      
51
 
Other, mainly debt securities
   
2
     
—  
      
10
     
12
 
Derivatives:
   
     
     
     
 
Asset derivatives—options and forward contracts
   
—  
      
18
     
—  
      
18
 
Asset derivatives—interest rate and cross-currency swaps
   
—  
      
58
     
—  
      
58
 
Liability derivatives—options and forward contracts
   
—  
      
(26
 )    
—  
      
(26
 )
Liability derivatives—interest rate and cross-currency swaps
   
—  
      
(50
 )    
—  
      
(50
 )
Contingent consideration*
   
—  
      
—  
      
(507
 )    
(507
 )
                                 
Total
  $
1,835
    $
—  
     $
(497
 )   $
1,338
 
                                 
 
* Contingent consideration represents liabilities recorded at fair value in connection with acquisitions.
Teva determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration is based on several factors, such as: the cash flows projected from the success of unapproved product candidates; the probability of success of product candidates, including risks associated with uncertainty regarding achievement and payment of milestone events; the time and resources needed to complete the development and approval of product candidates; the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the United States and Europe, and the risk adjusted discount rate for fair value measurement.
The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in earnings.
Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liability.
The following table summarizes the activity for those financial
a
ssets and liabilities where fair value measurements are estimated utilizing Level 3 inputs:
         
 
Nine months ended
September 30, 2019
 
 
(U.S. $ in millions)
 
Fair value at the beginning of the period
  $
(497
 )
Revaluation of debt securities
   
3
 
Adjustments to provisions for contingent consideration:
   
 
Actavis Generics transaction
   
96
 
Eagle transaction
   
(100
 )
Settlement of contingent consideration:
   
 
Eagle transaction
   
80
 
         
Fair value at the end of the period
  $
(418
 )
         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial instruments not measured at fair value
Financial instruments measured on a basis other than fair value mostly consist of senior notes and convertible senior debentures and are presented in the table below in terms of fair value:
                 
 
Fair value*
 
 
September 30,
   
December 31,
 
 
2019
   
2018
 
 
(U.S. $ in millions)
 
Senior notes included under senior notes and loans
  $
19,097
    $
23,560
 
Senior notes and convertible senior debentures included under short-term debt
   
2,933
     
2,140
 
                 
Total
  $
22,030
    $
25,700
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* The fair value was based on quoted market price.