Amgen 2012 Annual Report Download - page 82

75
that a liability has been incurred and the amount of the related loss can be reasonably estimated. We consider all relevant factors
when making assessments regarding these contingencies.
While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination
in one or more of these items currently pending could have a material adverse effect on our consolidated results of operations,
financial position or cash flows.
Valuation of assets and liabilities in connection with business combinations
We have acquired and continue to acquire intangible assets in connection with business combinations. These intangible
assets consist primarily of technology associated with currently marketed human therapeutic products and IPR&D product
candidates. Discounted cash flow models are typically used to determine the fair values of these intangible assets for purposes of
allocating consideration paid to the net assets acquired in a business combination. These models require the use of significant
estimates and assumptions, including, but not limited to:
• determining the timing and expected costs to complete in-process projects taking into account the stage of completion
at the acquisition date;
• projecting the probability and timing of obtaining marketing approval from the FDA and other regulatory agencies for
product candidates;
• estimating the timing of and future net cash flows from product sales resulting from completed products and in-process
projects; and
• developing appropriate discount rates to calculate the present values of the cash flows.
Significant estimates and assumptions are also required to determine the acquisition date fair values of any contingent
consideration obligations incurred in connection with business combinations. In addition, we must revalue these obligations each
subsequent reporting period until the related contingencies are resolved and record changes in their fair values in earnings. The
acquisition date fair values of the various contingent consideration obligations incurred in the acquisition of BioVex (see Note 2,
Business combinations, to the Consolidated Financial Statements) were determined using a combination of valuation techniques.
Significant estimates and assumptions required for these valuations included, but were not limited to, the probability of achieving
regulatory milestones, product sales projections under various scenarios and discount rates used to calculate the present value of
the required payments. These estimates and assumptions are required to be updated in order to revalue these contingent consideration
obligations each reporting period. Accordingly, subsequent changes in underlying facts and circumstances could result in changes
in these estimates and assumptions, which could have a material impact on the estimated future fair values of these obligations.
We believe the fair values used to record intangible assets acquired and contingent consideration obligations incurred in
connection with business combinations are based upon reasonable estimates and assumptions given the facts and circumstances
as of the related valuation dates.
Impairment of long-lived assets
We review the carrying value of our property, plant and equipment and our finite-lived intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such
circumstances exist, an estimate of undiscounted future cash flows to be generated by the long-lived asset is compared to the
carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based
on the difference between the asset's fair value and its carrying value.
Indefinite-lived intangible assets, composed primarily of IPR&D projects acquired in a business combination which have
not reached technological feasibility, are reviewed annually for impairment and whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. We determine impairment by comparing the fair value of the asset to
its carrying value. If the asset's carrying value exceeds its fair value, an impairment charge is recorded for the difference and its
carrying value is reduced accordingly.
Estimating future cash flows of an IPR&D product candidate for purposes of an impairment analysis requires us to make
significant estimates and assumptions regarding the amount and timing of costs to complete the project and the amount, timing
and probability of achieving revenues from the completed product similar to how the acquisition date fair value of the project was
determined, as described above. There are often major risks and uncertainties associated with IPR&D projects as we are required
to obtain regulatory approvals in order to be able to market these products. Such approvals require completing clinical trials that
demonstrate a product candidate is safe and effective. Consequently, the eventual realized value of the acquired IPR&D project
may vary from its estimated fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods
which could have a material adverse effect on our results of operations.