Amgen 2007 Annual Report Download - page 143

AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For purposes of this pro forma disclosure, the fair values of stock options were estimated using the Black-
Scholes option valuation model and amortized to expense over the options’ vesting periods.
Employee stock option and restricted stock grants
Several of our equity-based compensation plans provide for grants of stock options to employees. The op-
tion exercise price is set at the closing price of our common stock on the date of grant, and the related number of
shares granted is fixed at that point in time. These plans also provide for grants of restricted stock and restricted
stock units. Grants of these equity instruments generally vest/have restrictions which lapse over a four year peri-
od. In addition, stock option awards expire seven years from the date of grant. Eligible employees generally
receive a grant of stock options and/or restricted stock units annually with the number of shares and type of
instrument generally determined by the employee’s salary grade and performance level. In addition, certain man-
agement and professional level employees typically receive a stock option grant upon commencement of
employment. These stock-based plans provide for accelerated or continued vesting/lapse of restrictions in certain
circumstances, including upon death, disability, a change in control as defined in the plans, or retirement of em-
ployees who meet certain service and/or age requirements. The number of outstanding grants affected by these
provisions varies based upon the circumstances.
We use the Black-Scholes option valuation model to estimate the grant date fair value of employee stock op-
tions. The expected volatility reflects the consideration of the implied volatility in publicly traded instruments
associated with Amgen’s common stock during the period the option is granted. We believe implied volatility in
these instruments is more indicative of expected future volatility than the historical volatility in the price of our
common stock. Upon the adoption of SFAS 123(R) the expected life of the option has been estimated using the
“simplified” method as provided in Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin
No. 107. Under this method, the expected life equals the arithmetic average of the vesting term and the original
contractual term of the option. Prior to adoption of SFAS 123(R), we used historical data to estimate the expected
life of the options. The risk-free interest rates for periods within the expected life of the option are based on the
U.S. Treasury yield curve in effect during the period the options were granted. Upon adoption of SFAS 123(R),
we began using historical data to estimate forfeiture rates applied to the gross amount of expense determined us-
ing the option valuation model. Prior to adoption of SFAS 123(R), we recognized forfeitures as they occurred.
There was no material impact upon adoption of SFAS 123(R) between these methods of accounting for for-
feitures. The weighted-average assumptions used to estimate the fair value of the stock options using the Black-
Scholes option valuation model were as follows for the years ended December 31, 2007, 2006 and 2005:
2007 2006 2005
Fair value of common stock ............................................ $62.92 $ 71.16 $ 63.47
Fair value of stock options granted ...................................... $19.06 $ 21.70 $ 18.46
Risk-free interest rate ................................................. 4.5% 4.8% 4.0%
Expected life (in years) ............................................... 4.7 4.8 5.0
Expected volatility ................................................... 24.9% 24.1% 23.4%
Expected dividend yield ............................................... 0% 0% 0%
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