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Fair Value Measurement
 3 Months Ended
Mar. 31, 2020
Fair Value Measurement
NOTE 16 – Fair value measurement:
Financial items carried at fair value as of March 31, 2020 and December 31, 2019 are classified in the tables below in one of the three categories of fair value levels:
                                 
 
March 31, 2020
 
 
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
 
(U.S. $ in millions)
 
Cash and cash equivalents:
   
     
     
     
 
Money markets
  $
260
    $
—
    $
—
    $
260
 
Cash, deposits and other
   
1,544
     
—
     
—
     
1,544
 
Investment in securities:
   
     
     
     
 
Equity securities
   
31
     
—
     
—
     
31
 
Other, mainly debt securities
   
2
     
—
     
12
     
14
 
Derivatives:
   
     
     
     
 
Asset derivatives—options and forward contracts
   
—
     
104
     
—
     
104
 
Liability derivatives—options and forward contracts
   
—
     
(94
)
    
—
     
(94
 )
Contingent consideration*
   
—
     
—
     
(435
 )    
(435
 )
                                 
Total
  $
1,837
    $
10
    $
(423
 )   $
1,424
 
                                 
       
 
December 31, 2019
 
 
Level 1
 
  
Level 2
 
  
Level 3
 
  
Total
 
 
(U.S. $ in millions)
 
Cash and cash equivalents:
   
     
     
     
 
Money markets
  $
577
    $
—  
     $
—  
     $
577
 
Cash, deposits and other
   
1,398
     
—  
      
—  
      
1,398
 
Investment in securities:
   
     
     
     
 
Equity securities
   
42
     
—  
      
—  
      
42
 
Other, mainly debt securities
   
2
     
—  
      
12
     
14
 
Derivatives:
   
     
     
     
 
Asset derivatives—options and forward contracts
   
—  
      
32
     
—  
      
32
 
Liability derivatives—options and forward contracts
   
—  
      
(41
)
    
—  
      
(41
)
Liability derivatives—interest rate and cross-currency swaps
   
—  
      
(22
)
    
—  
      
(22
)
Contingent consideration*
   
—  
      
—  
 
    
(460
 )    
(460
)
               
 
                
Total
  $
2,019
    $
(31
) 
   $
(448
 )   $
1,540
 
                                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
* 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.
 
A probability of success factor ranging from 80% to 100% was used in the fair value calculation to reflect inherent regulatory and commercial risk of the contingent payments and IPR&D. The discount rate applied ranged from 8% to 9
%. The weighted average discount rate, calculated based on the relative fair value of our contingent consideration obligations, was 8.6%.
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 assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs:
         
 
Three months ended
March 31, 2020
 
 
(U.S. $ in millions)
 
Fair value at the beginning of the period
   $
(448
 )
Adjustments to provisions for contingent consideration:
   
 
Actavis Generics transaction
   
(5
)
Eagle transaction
   
(1
 )
Settlement of contingent consideration:
   
 
Eagle transaction
   
31
 
         
Fair value at the end of the period
  $
(423
 )
         
 
 
 
 
 
 
 
 
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 (level 1 inputs):
                 
 
Fair value*
 
 
March 31,
 
  
December 31,
 
 
2020
 
  
2019
 
 
(U.S. $ in millions)
 
Senior notes included under senior notes and loans
  $
21,960
    $
22,686
 
Senior notes and convertible senior debentures included under short-term debt
   
1,583
     
2,318
 
                 
Total
  $
23,543
    $
25,004
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Based on quoted market price. See note 7 for carrying value.