Amgen 2013 Annual Report Download - page 115

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 estimated 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
estimated 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.
Our interest rate swap contracts are with counterparties that have 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.
Contingent consideration obligations
We have incurred contingent consideration obligations as the result of our acquisition of a business and upon the assumption of contingent consideration
obligations incurred by an acquired company discussed below. These contingent consideration obligations are recorded at their estimated fair values, and we
revalue these obligations each reporting period until the related contingencies are resolved. Changes in fair values of contingent consideration obligations are
recognized in Other operating expenses in the Consolidated Statements of Income.
The changes in carrying amounts of contingent consideration obligations for the years ended December 31, 2013 and 2012, were as follows (in millions):


Beginning balance $ 221
$ 190
Additions from Onyx acquisition 261
—
Net changes in valuation 113
31
Ending balance $595
$ 221
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 melanoma. The three largest of these potential payments are $125 million
each, including the amount due if a BLA is filed 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. The fair value measurements of these obligations are based on significant unobservable inputs, including the estimated
probabilities and timing of achieving the related regulatory and commercial events in connection with these milestones and, as applicable, estimated annual
sales. Significant changes which increase or decrease the probabilities of achieving the related regulatory and commercial events, shorten or lengthen the time
required to achieve such events, or increase of decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these
obligations, as applicable.
We estimate the fair values of the obligations to the former shareholders of BioVex 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, 2013, there were increases in management's estimates of the probabilities of completing the BLA filing
and receiving approval to market talimogene laherparepvec in specified patient populations in the United States and EU. Due
F-39