Amgen 2001 Annual Report Download - page 32

AMGEN 2001 ANNUAL REPORT
to Johnson & Johnson a license relating to Epoetin alfa
for sales in the United States for all human uses except
dialysis and diagnostics. Pursuant to this license, the
Company and Johnson & Johnson are required to com-
pensate each other for Epoetin alfa sales that either party
makes into the other party’s exclusive market, sometimes
referred to as “spillover” sales. Accordingly, Amgen does
not recognize product sales it makes into the exclusive
market of Johnson & Johnson and does recognize the
product sales made by Johnson & Johnson into Amgen’s
exclusive market. Sales in Amgen’s exclusive market
are derived from the Company’s sales to its customers,
as adjusted for any spillover sales. The Company is
employing an arbitrated audit methodology to measure
each party’s spillover sales based on independent third-
party data on shipments to end users and their estimated
usage. Data on end user usage is derived in part using
market sampling techniques, and accordingly, the results
of such sampling can produce variability in recognized
spillover sales. The Company initially recognizes spillover
sales based on estimates of shipments to end users and
their usage, utilizing historical third-party data and sub-
sequently adjusts such amounts based on revised third-
party data as received. Differences between initially
estimated spillover sales and amounts based on revised
third-party data could produce materially different
amounts for recognized EPOGEN®sales. However, such
differences to date have not been material.
Inventory capitalization
The Company capitalizes inventory costs associated with
certain product candidates prior to regulatory approval,
based on management’s judgment of probable future
commercialization. The Company would be required
to expense previously capitalized costs related to pre-
approval inventory upon a change in such judgment, due
to, among other factors, a decision denying approval of
the product candidate by the necessary regulatory bodies.
At December 31, 2001, capitalized inventory related to
the product candidate Neulasta™totaled $8.8 million. In
January 2002, the Company received regulatory approval
to market Neulasta™in the U.S.
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Quantitative and Qualitative Disclosures About Market Risk
Interest income earned on the Company’s investment portfolio is affected by changes in the general level of U.S.
interest rates. In 2001, the Company entered into interest rate swap agreements on a portion of its available-for-sale
investment portfolio, effectively converting these fixed income investments to variable income investments. The
Company’s short-term borrowings effectively bear interest at variable rates and therefore, changes in U.S. interest
rates affect interest expense incurred thereon. Changes in interest rates do not affect interest expense incurred on the
Company’s long-term borrowings because they all bear interest at fixed rates. The following tables provide information
about the Company’s financial instruments that are sensitive to changes in interest rates. For the Company’s investment
portfolio and debt obligations, the tables present principal cash flows and related weighted-average interest rates by
expected maturity dates. Additionally, the Company has assumed its available-for-sale debt securities, comprised pri-
marily of corporate debt instruments and treasury securities, are similar enough to aggregate those securities for
presentation purposes. For the interest rate swaps, the 2001 table presents the notional amount and weighted-average
interest rates by contractual maturity date. The notional amount is used to calculate the contractual cash flows to be
exchanged under the contract.