Amgen 2012 Annual Report Download - page 137

F-38
We value our other short-term interest-bearing securities at amortized cost, which approximates fair value given their near
term maturity dates.
Substantially all of our foreign currency forward and option derivatives contracts have maturities of three years or less and
all are with counterparties that have minimum credit ratings of A- or equivalent by S&P, Moody’s or Fitch. We estimate the fair
values of these contracts by taking into consideration valuations obtained from a third-party valuation service that utilizes an
income-based industry standard valuation model for which all significant inputs are observable, either directly or indirectly. These
inputs include foreign currency rates, LIBOR cash and swap rates and obligor credit default swap rates. In addition, inputs for our
foreign currency option contracts also include implied volatility measures. These inputs, where applicable, are at commonly quoted
intervals. See Note 17, Derivative instruments.
Our cross-currency swap contracts are with counterparties that have minimum credit ratings of A- or equivalent by S&P,
Moody’s or Fitch. We estimate the fair values of these contracts by taking into consideration valuations obtained from a third-
party valuation service that utilizes an income-based industry standard valuation model for which all significant inputs are
observable either directly or indirectly. These inputs include foreign currency exchange rates, LIBOR, swap rates, obligor credit
default swap rates and cross-currency basis swap spreads. See Note 17, Derivative instruments.
All of our interest rate swap contracts were terminated in May 2012. (See Note 17, Derivative instruments.) While
outstanding, our interest rate swap contracts were with counterparties that had minimum credit ratings of A- or equivalent by S&P,
Moody’s or Fitch. We estimated the fair values of these contracts by using an income-based industry standard valuation model
for which all significant inputs were observable either directly or indirectly. These inputs included LIBOR, swap rates and obligor
credit default swap rates.
As a result of our acquisition of BioVex in March 2011, we are obligated to pay its former shareholders up to $575 million
of additional consideration contingent upon achieving up to eight separate regulatory and sales-related milestones with regard to
talimogene laherparepvec, which was acquired in the acquisition and is currently in phase 3 clinical development for the treatment
of malignant melanoma. The three largest of these potential payments are $125 million each, including the amount due upon
completion of the filing of a BLA with the FDA. Potential payments are also due upon the first commercial sale in each of the
United States and the EU following receipt of marketing approval which includes use of the product in specified patient populations
and upon achievement of specified levels of sales within specified periods of time.
These contingent consideration obligations are recorded at their estimated fair values with any changes in fair value
recognized in earnings. The fair value measurements of these obligations are based on significant unobservable inputs, including
the estimated probabilities and timing of achieving the related regulatory events in connection with these milestones and, as
applicable, estimated annual sales. Significant changes (increases or decreases) in these inputs would result in corresponding
changes in the fair values of the contingent consideration obligations.
We revalue these contingent consideration obligations each reporting period until the related contingencies are resolved.
We estimate the fair values of these obligations by using a combination of probability-adjusted discounted cash flows, option
pricing techniques and a simulation model of expected annual sales. Quarterly, management in our R&D and commercial sales
organizations review key assumptions used in the fair value measurements of these obligations. In the absence of any significant
changes in key assumptions, the changes in fair values of these contingent consideration obligations reflect the passage of time
and changes in our credit risk adjusted rate used to discount obligations to present value. During the year ended December 31,
2012, the increase in the estimated aggregate fair value of these obligations was $31 million, which was recorded in Other operating
expenses in the Consolidated Statement of Income.
There have been no transfers of assets or liabilities between the fair value measurement levels, and there were no material
remeasurements to fair value during the years ended December 31, 2012 and 2011, of assets and liabilities that are not measured
at fair value on a recurring basis, except as discussed in Note 2, Business combinations, regarding an impairment of an indefinite-
lived intangible asset and Note 8, Cost savings initiatives, regarding an impairment of fixed assets which were recognized during
the year ended December 31, 2012.
Summary of the fair value of other financial instruments
Cash equivalents
The estimated fair values of cash equivalents approximate their carrying values due to the short-term nature of these financial
instruments.