Amgen 2002 Annual Report Download - page 32

Page 30
AMGEN 2002 ANNUAL REPORT
tax rate was lower than the 2001 effective tax rate of
33.6% primarily due to the Puerto Rico restructuring
described below.
During 2002, the Company restructured its Puerto
Rico manufacturing operations using a controlled foreign cor-
poration. As permitted in APB Opinion No. 23, “Accounting
for Income Taxes,” the Company does not provide U.S.
income taxes on the controlled foreign corporation’s undis-
tributed earnings that are intended to be permanently rein-
vested outside the United States. Therefore, the Company’s
effective tax rate for 2002 reflected the permanent rein-
vestment of foreign earnings outside the United States.
In addition, the Puerto Rico manufacturing operations
were entitled to a possession tax credit for a portion of
2002. This credit is capped based on the 1995 income level
and expires in 2005. The higher effective tax rate in 2001
versus 2000 was a result of increased taxable income com-
bined with the cap on the possession tax credit.
Summary of Critical Accounting Policies
The preparation of the Company’s consolidated financial
statements in conformity with accounting principles gen-
erally accepted in the United States requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and the notes to the
financial statements. Some of those judgments can be sub-
jective and complex, and therefore actual results could
differ materially from those estimates under different
assumptions or conditions.
EPOGEN
®
revenue recognition
The Company has the exclusive right to sell Epoetin alfa
for dialysis, certain diagnostics, and all non-human, non-
research uses in the United States. Amgen has granted to
Johnson & Johnson a license relating to Epoetin alfa for
sales in the United States for all human uses except dialy-
sis and diagnostics. Pursuant to this license, the Company
and Johnson & Johnson are required to compensate each
other for Epoetin alfa sales that either party makes into the
other party’s exclusive market, sometimes referred to as
“spillover”. Accordingly, Amgen does not recognize prod-
uct 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 spillover. The Company
is employing an arbitrated audit methodology to measure
each party’s spillover 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 the amount of recognized spillover.
The Company initially recognizes spillover based on esti-
mates of shipments to end users and their usage, utilizing
historical third-party data and subsequently adjusts such
amounts based on revised third-party data as received.
Differences between initial estimates of spillover 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.
Immunex purchase price allocation
The purchase price for Immunex was allocated to the tan-
gible and identifiable intangible assets acquired and lia-
bilities assumed based on their estimated fair values at the
acquisition date. An independent third-party valuation
firm was engaged to assist in determining the fair values
of in-process research and development, identifiable intan-
gible assets, and certain property, plant, and equipment. Such
a valuation requires significant estimates and assumptions
including but not limited to: determining the timing and
expected costs to complete the in-process projects, pro-
jecting regulatory approvals, estimating future cash flows
from product sales resulting from completed products and
in-process projects, and developing appropriate discount
rates and probability rates by project. The Company believes
the fair values assigned to the assets acquired and liabili-
ties assumed are based on reasonable assumptions. However,
these assumptions may be incomplete or inaccurate,
and unanticipated events and circumstances may occur.
Additionally, estimates for the purchase price allocation
may change as subsequent information becomes available.
Deferred income taxes
The Company’s effective tax rate reflects the impact of
undistributed foreign earnings for which no U.S. taxes have
been provided because such earnings are intended to be