1. Summary of significant accounting policies

Business

Amgen Inc. (including its subsidiaries, referred to as “Amgen,” “the Company,” “we,” “our” and “us”) is a global biotechnology medicines company that discovers, develops, manufactures and markets medicines for grievous illnesses. We concentrate on innovating novel medicines based on advances in cellular and molecular biology and we operate in one business segment, human therapeutics.

Principles of consolidation

The consolidated financial statements include the accounts of Amgen as well as its wholly owned subsidiaries. We do not have any significant interests in any variable interest entities. All material intercompany transactions and balances have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates.

Financial Accounting Standards Board Accounting Standards Codification

Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) became the authoritative source of GAAP. All existing FASB accounting standards and guidance were superseded by the ASC. Instead of issuing new accounting standards in the form of statements, staff positions and Emerging Issues Task Force abstracts, the FASB now issues Accounting Standards Updates that update the Codification. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws continue to be additional sources of authoritative GAAP for SEC registrants.

Change in method of accounting for convertible debt instruments

Effective January 1, 2009, we adopted a new accounting standard that changed the method of accounting for convertible debt that may be partially or wholly settled in cash. As required by this new standard, we retrospectively applied this change in accounting to all prior periods for which we had applicable outstanding convertible debt. Under this method of accounting, the debt and equity components of our convertible notes are bifurcated and accounted for separately. The equity components of our convertible notes, including our 2011 Convertible Notes, 2013 Convertible Notes and 2032 Modified Convertible Notes, are included in “Common stock and additional paid-in capital” in the Consolidated Balance Sheets, with a corresponding reduction in the carrying values of these convertible notes as of the date of issuance or modification, as applicable. The reduced carrying values of our convertible notes are being accreted back to their principal amounts through the recognition of non-cash interest expense. This results in recognizing interest expense on these borrowings at effective rates approximating what we would have incurred had we issued nonconvertible debt with otherwise similar terms. See Note 2, “Change in method of accounting for convertible debt instruments” and Note 16, “Financing arrangements.”

Product sales

Product sales primarily consist of sales of Aranesp^® (darbepoetin alfa), EPOGEN^® (Epoetin alfa), Neulasta^® (pegfilgrastim), NEUPOGEN^® (Filgrastim) and Enbrel^® (etanercept). Sales of our products are recognized when shipped and title and risk of loss have passed. Product sales are recorded net of accruals for estimated rebates, wholesaler chargebacks, discounts and other deductions (collectively “sales deductions”) and returns. Taxes collected from customers and remitted to government authorities related to the sales of the Company’s products, primarily in Europe, are excluded from revenues.

We have the exclusive right to sell Epoetin alfa for dialysis, certain diagnostics and all non-human, non-research uses in the United States. We sell Epoetin alfa under the brand name EPOGEN^®. We granted to Ortho Pharmaceutical Corporation (which has assigned its rights under the product license agreement to Centocor Ortho Biotech Products, L.P. (“Centocor Ortho Biotech Products”)), a subsidiary of Johnson & Johnson (“J&J”), a license relating to Epoetin alfa for sales in the United States for all human uses except dialysis and diagnostics. This license agreement, which is perpetual, may be terminated for various reasons, including upon mutual agreement of the parties, or default. The parties 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, we do not recognize product sales we make into the exclusive market of J&J and do recognize the product sales made by J&J into our exclusive market. Sales in our exclusive market are derived from our sales to our customers, as adjusted for spillover. We are employing an arbitrated audit methodology to measure each party’s spillover based on estimates of and subsequent adjustments thereto of third-party data on shipments to end users and their usage.

Other revenues

Other revenues primarily consist of royalty income and corporate partner revenues. Royalties from licensees are based on third-party sales of licensed products and are recorded in accordance with contract terms when third-party results are reliably measurable and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected using historical and forecasted trends. Pursuant to the license agreement with J&J, noted above, we earn a 10% royalty on net sales, as defined, of Epoetin alfa by J&J in the United States. For the years ended December 31, 2009, 2008 and 2007, we recognized royalty income from J&J of $128 million, $126 million and $182 million, respectively. Corporate partner revenues are primarily comprised of amounts earned from Kirin-Amgen, Inc. (“KA”) for certain research and development (“R&D”) activities and are generally earned as the R&D activities are performed and the amounts become due. See Note 8, “Related party transactions.” In addition, corporate partner revenues include license fees and milestone payments associated with collaborations with third parties. Revenue from non-refundable, upfront license fees where we have continuing involvement is recognized ratably over the estimated period of ongoing involvement. Revenue associated with at risk performance milestones is recognized based upon the achievement of the milestone, as defined in the respective agreements. Our collaboration agreements with third parties are performed on a “best efforts” basis with no guarantee of either technological or commercial success.

Research and development costs

R&D costs are expensed as incurred and primarily include salaries, benefits and other staff-related costs; facilities and overhead costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs; information systems’ costs and amortization of acquired technology used in R&D with alternative future uses. R&D expenses include costs incurred under R&D arrangements with our corporate partners, such as activities performed on behalf of KA, and costs and cost recoveries associated with collaborative R&D and in-licensing arrangements, including upfront fees and milestones paid to collaboration partners in connection with technologies which have not reached technological feasibility and did not have an alternative future use. Net payment or reimbursement of R&D costs for collaborations is recognized when the obligations are incurred or as we become entitled to the cost recovery. See Note 7, “Collaborative arrangements.”

Selling, general and administrative costs

Selling, general and administrative (“SG&A”) expenses are primarily comprised of salaries, benefits and other staff-related costs associated with sales and marketing, finance, legal and other administrative personnel; facilities and overhead costs; outside marketing, advertising and legal expenses and other general and administrative costs.

 

SG&A expenses also include costs and cost recoveries associated with certain collaborative arrangements including the co-promotion agreement with Pfizer Inc. (“Pfizer”) (formerly Wyeth). Net payment or reimbursement of SG&A costs for collaborations is recognized when the obligations are incurred or as we become entitled to the cost recovery. See Note 7, “Collaborative arrangements.”

Advertising costs are expensed as incurred. For the years ended December 31, 2009, 2008 and 2007, advertising costs were $95 million, $81 million and $93 million, respectively.

Acquired in-process research and development

For business combinations that occurred prior to January 1, 2009, under the then existing accounting rules the estimated fair value of acquired in-process R&D (“IPR&D”) projects, which had not reached technological feasibility at the date of acquisition and which did not have an alternative future use, were immediately expensed. In 2007, we wrote-off $270 million and $320 million of acquired IPR&D related to the Ilypsa, Inc. (“Ilypsa”) and Alantos Pharmaceuticals Holding, Inc. (“Alantos”) acquisitions, respectively. Acquired IPR&D for acquisitions prior to January 1, 2009 is considered part of total R&D expense. See Note 3, “Acquisitions.”

For business combinations that occur on or after January 1, 2009, under current GAAP the estimated fair values of acquired IPR&D projects which have not reached technological feasibility at the date of acquisition are capitalized and subsequently tested for impairment through completion of the development process, at which point the capitalized amounts are amortized over their estimated useful life. If a project is abandoned rather than completed, all capitalized amounts are written-off immediately.

Share based payments

We have employee compensation plans under which various types of stock-based instruments are granted. All share-based payments to employees, including grants of employee stock options, are recognized in the Consolidated Statements of Income as compensation expense (based on their estimated fair values) generally over the vesting period of the awards. See Note 4, “Employee stock-based payments.”

Income taxes

We provide for income taxes based on pretax income, applicable tax rates and tax planning opportunities available in the various jurisdictions in which we operate.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements on a particular tax position are measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits (“UTBs”) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to UTBs in income tax expense. See Note 5, “Income taxes.”

Collaborative arrangements

Effective January 1, 2009, we adopted a new accounting standard that provides financial statement presentation and disclosure guidance for collaborative arrangements, as defined, which include certain arrangements we have entered into regarding the R&D, manufacture and/or commercialization of products and product candidates.

Under this standard, a collaborative arrangement is defined as a contractual arrangement that involves a joint operating activity. These arrangements involve two or more parties who are both (i) active participants in the activity and (ii) exposed to significant risks and rewards dependent on the commercial success of the activity.

 

We evaluate whether an arrangement is a collaborative arrangement at its inception based on the facts and circumstances specific to the arrangement. We re-evaluate whether an arrangement qualifies or continues to qualify as a collaborative arrangement whenever there is a change in either the roles of the participants or the participants’ exposure to significant risks and rewards dependent on the ultimate commercial success of the endeavor. For collaborative arrangements where it is determined that we are the principal participant, in accordance with existing accounting rules, revenue generated and costs incurred with third parties are recorded on a gross basis in our financial statements.

The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows. See Note 7, “Collaborative arrangements.”

Fair value measurement

We adopted a new accounting standard that defines fair value and establishes a framework for fair value measurements effective January 1, 2008 for financial assets and liabilities and effective January 1, 2009 for non-financial assets and liabilities that are not remeasured on a recurring basis. Under this standard, fair value is generally defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The adoption of this accounting standard did not have a material impact on our consolidated results of operations, financial position or cash flows.

Effective April 1, 2009, we adopted a new accounting standard that modifies the guidance used in determining whether the impairment of a debt security is other-than-temporary. Under this accounting standard, the impairment of a debt security is considered other-than-temporary if an entity concludes that it intends to sell the impaired security, that it is more likely than not it will be required to sell the security before the recovery of its cost basis or that it does not otherwise expect to recover the cost basis of the security. This accounting standard also amends the presentation requirements of other-than-temporarily impaired debt securities and expands disclosure requirements in the financial statements for investments in both debt and equity securities. The adoption of this accounting standard did not have a material impact on our consolidated results of operations, financial position or cash flows.

Effective April 1, 2009, we adopted a new accounting standard that provides additional guidance in estimating fair value when the market volume and level of activity for an asset or liability have significantly decreased and in identifying circumstances that indicate a transaction may not be orderly. The adoption of this accounting standard did not have a material impact on our consolidated results of operations, financial position or cash flows.

Effective October 1, 2009, we adopted a new accounting standard which clarifies guidance for determining the fair value of a liability when a quoted price in an active market for an identical liability is not available. This standard provides for the use of one or more valuation techniques, including quoted prices of identical or similar liabilities when traded as assets, quoted prices of similar liabilities and other techniques consistent with the fair value measurement framework, such as the amount an entity would pay to transfer the identical liability or would receive to enter into the identical liability. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows.

See Note 18, “Fair value measurement.”

Cash equivalents

We consider cash equivalents to be only those investments which are highly liquid, readily convertible to cash and which mature within three months from date of purchase.

 

Available-for-sale securities

We consider our marketable security investment portfolio and marketable equity investments available-for-sale and, accordingly, these investments are recorded at fair value with unrealized gains and losses generally recorded in other comprehensive income. See Note 11, “Available-for-sale securities.”

Inventories

Inventories are stated at the lower of cost or market. Cost, which includes amounts related to materials, labor and overhead, is determined in a manner which approximates the first-in, first-out (“FIFO”) method. The Company capitalizes inventories produced in preparation for product launches when the related product candidates are considered to have a high probability of regulatory approval and the related costs are expected to be recoverable through the commercialization of the product. See Note 12, “Inventories.”

Property, plant and equipment, net

Property, plant and equipment is recorded at cost, net of accumulated depreciation and amortization. We review our property, plant and equipment assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Depreciation of buildings, equipment, furniture and fixtures is provided over their estimated useful lives on a straight-line basis. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. Useful lives by asset category are as follows:

 

 

Asset Category		Years
Buildings and improvements		10-40
Manufacturing equipment		5-12
Laboratory equipment		8-12
Furniture, fixtures and other assets		3-15

See Note 13, “Property, plant and equipment.”

Intangible assets and goodwill

Intangible assets other than goodwill are recorded at cost, net of accumulated amortization. Amortization of intangible assets is provided over their estimated useful lives on a straight-line basis. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. See Note 14, “Intangible assets.”

Goodwill principally relates to our 2002 acquisition of Immunex Corporation (“Immunex”). We perform an impairment test annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable.

Derivative instruments

Effective January 1, 2009, we adopted a new accounting standard that requires additional disclosures about our derivative instruments and hedging activities. This standard requires that the objectives for using derivative instruments be disclosed to better convey the purpose of their use in terms of the risks that we are intending to manage. This standard also requires disclosure of how derivatives and related hedged items affect our financial statements. The adoption of this standard did not have a material impact on our consolidated results of operations, financial position or cash flows. See Note 19, “Derivative instruments.”

Subsequent events

We have evaluated subsequent events through the date of issuance of our financial statements in this Form 10-K.

 

Recent accounting pronouncements

In June 2009, the FASB issued a new accounting standard which amends guidance regarding consolidation of variable interest entities to address the elimination of the concept of a qualifying special purpose entity. This standard also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of the variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. Additionally, this standard requires any enterprise that holds a variable interest in a variable interest entity to make ongoing assessments of whether it has a controlling financial interest in the variable interest entity and to provide enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in the variable interest entity. This standard is effective for us beginning January 1, 2010. The adoption of this standard is not expected to have a material impact on our consolidated results of operations, financial position or cash flows.

In October 2009, the FASB issued a new accounting standard which amends guidance on accounting for revenue arrangements involving the delivery of more than one element of goods and/or services. This standard addresses the unit of accounting for arrangements involving multiple deliverables and removes the previous separation criteria that objective and reliable evidence of fair value of any undelivered item must exist for the delivered item to be considered a separate unit of accounting. This standard also addresses how the arrangement consideration should be allocated to each deliverable. Finally, this standard expands disclosures related to multiple element revenue arrangements. This standard is effective for us beginning January 1, 2011. The adoption of this standard is not expected to have a material impact on our consolidated results of operations, financial position or cash flows.

2. Change in method of accounting for convertible debt instruments

As discussed in Note 1, “Summary of significant accounting policies—Change in method of accounting for convertible debt instruments,” effective January 1, 2009, we adopted a new accounting standard which changed the method of accounting for certain types of convertible debt, including our 2011 Convertible Notes, 2013 Convertible Notes and our 2032 Modified Convertible Notes, and, as required by this standard, we retrospectively applied this change in accounting to all prior periods for which we had applicable outstanding convertible debt.

 

The following tables illustrate the impact of adopting this accounting standard on our Consolidated Statements of Income (in millions, except per share information):

 

		Year ended December 31, 2009
		Excluding the effect of the accounting standard			Effect of the accounting standard				Including the effect of the accounting standard
Operating income		$	5,506		$	—			$	5,506
Interest expense, net			328			250				578
Interest and other income, net			276			—				276
Income before income taxes			5,454			(250	)			5,204
Provision for income taxes			694			(95	)			599
Net income		$	4,760		$	(155	)		$	4,605
Earnings per share:
Basic		$	4.69		$	(0.16	)		$	4.53
Diluted		$	4.66		$	(0.15	)		$	4.51
		Year ended December 31, 2008
		As originally reported			Effect of the accounting standard				“Revised”
Operating income		$	5,214		$	—			$	5,214
Interest expense, net			316			235				551
Interest and other income, net			352			—				352
Income before income taxes			5,250			(235	)			5,015
Provision for income taxes			1,054			(91	)			963
Net income		$	4,196		$	(144	)		$	4,052
Earnings per share:
Basic		$	3.92		$	(0.13	)		$	3.79
Diluted		$	3.90		$	(0.13	)		$	3.77
		Year ended December 31, 2007
		As originally reported			Effect of the accounting standard				“Revised”
Operating income		$	3,980		$	—			$	3,980
Interest expense, net			328			168				496
Interest and other income, net			309			—				309
Income before income taxes			3,961			(168	)			3,793
Provision for income taxes			795			(80	)			715
Net income		$	3,166		$	(88	)		$	3,078
Earnings per share:
Basic		$	2.83		$	(0.07	)		$	2.76
Diluted		$	2.82		$	(0.08	)		$	2.74

 

The following tables illustrate the impact of adopting this accounting standard on our Consolidated Balance Sheets (in millions):

 

		December 31, 2009
		Excluding the effect of the accounting standard				Effect of the accounting standard				Including the effect of the accounting standard
Non-current assets:
Other assets		$	1,069			$	(12	)		$	1,057
Non-current liabilities:
Convertible notes			5,082				(570	)			4,512
Other non-current liabilities			2,274				214				2,488
Stockholders’ equity:
Common stock and additional paid-in capital			26,030				914				26,944
Accumulated deficit			(3,752	)			(570	)			(4,322	)
		December 31, 2008
		As originally reported				Effect of the accounting standard				“Revised”
Non-current assets:
Other assets		$	1,016			$	(16	)		$	1,000
Non-current liabilities:
Convertible notes			5,081				(824	)			4,257
Other non-current liabilities			1,995				309				2,304
Stockholders’ equity:
Common stock and additional paid-in capital			25,527				914				26,441
Accumulated deficit			(5,258	)			(415	)			(5,673	)

The effect of this accounting standard on “Other non-current liabilities” in the Consolidated Balance Sheets reflects the impact of deferred taxes. In addition, the effect of this accounting standard on “Common stock and additional paid-in capital” in the Consolidated Balance Sheets reflects, principally, the impact of the equity component of our convertible debt partially offset by deferred taxes.

As a result of the accounting change, our common stock and additional paid-in capital as of January 1, 2007, increased from $24.2 billion, as originally reported, to $25.2 billion and our accumulated deficit as of January 1, 2007, increased from $5.2 billion, as originally reported, to $5.4 billion after applying this accounting standard. There was no impact resulting from this accounting change on our cash flows from operating activities, investing activities or financing activities as reflected in the Consolidated Statements of Cash Flows.

3. Acquisitions

Dompé Biotec, S.p.A

On January 4, 2008, we completed the acquisition of Dompé Biotec, S.p.A (“Dompé”), a privately held company that marketed certain of our products in Italy. This acquisition was accounted for as a business combination. The purchase price was approximately $168 million, which included the carrying value of our existing 49% ownership in Dompé. The purchase price paid was allocated to the net assets acquired of approximately $63 million, principally comprised of marketing rights to marketed products, based on their estimated fair values at the acquisition date and the excess of the purchase price over the fair values of net assets acquired of approximately $105 million was assigned to goodwill. There was no material gain or loss related to the reacquisition of marketing rights previously granted to Dompé as a result of this business combination. The results of Dompé’s operations have been included in the consolidated financial statements commencing January 4, 2008. Pro forma results of operations for the year ended December 31, 2008 assuming the acquisition of Dompé had taken place at the beginning of 2008 would not differ significantly from the actual reported results.

Ilypsa, Inc.

On July 18, 2007, we completed the acquisition of Ilypsa, which was accounted for as a business combination. Ilypsa was a privately held company that specialized in the development of non-absorbed drugs for renal disorders. Pursuant to the merger agreement, we paid cash of approximately $400 million to acquire all of the outstanding shares of Ilypsa. The purchase price paid, including transaction costs, was allocated to acquired IPR&D of $320 million and other net assets acquired of $42 million, based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair values of assets and liabilities acquired of approximately $41 million was assigned to goodwill. The estimated fair value of the acquired IPR&D was determined based upon discounted after-tax cash flows adjusted for the probabilities of successful development and commercialization. The amount allocated to acquired IPR&D was immediately expensed in the Consolidated Statement of Income (see Note 1, “Summary of significant accounting policies — Acquired in-process research and development”). The results of Ilypsa’s operations have been included in the consolidated financial statements commencing July 18, 2007. Pro forma results of operations for the year ended December 31, 2007 assuming the acquisition of Ilypsa had taken place at the beginning of 2007 would not differ significantly from the actual reported results.

Alantos Pharmaceuticals Holding, Inc.

On July 16, 2007, we completed the acquisition of Alantos, which was accounted for as a business combination. Alantos was a privately held company that specialized in the development of drugs for the treatment of diabetes and inflammatory diseases. Pursuant to the merger agreement, we paid cash of approximately $300 million to acquire all of the outstanding shares of Alantos. The purchase price paid, including transaction costs, was allocated to acquired IPR&D of $270 million and other net assets acquired of approximately $10 million, based on their estimated fair values at the acquisition date. The excess of the purchase price over the fair values of assets and liabilities acquired of $23 million was assigned to goodwill. The estimated fair value of the acquired IPR&D was determined based upon discounted after-tax cash flows adjusted for the probabilities of successful development and commercialization. The amount allocated to acquired IPR&D was immediately expensed in the Consolidated Statement of Income (see Note 1, “Summary of significant accounting policies — Acquired in-process research and development”). The results of Alantos’ operations have been included in the consolidated financial statements commencing July 16, 2007. Pro forma results of operations for the year ended December 31, 2007 assuming the acquisition of Alantos had taken place at the beginning of 2007 would not differ significantly from the actual reported results.

In addition, proforma results of operations for the year ended December 31, 2007, assuming both the acquisitions of Ilypsa and Alantos had taken place at the beginning of 2007, would not differ significantly from the actual reported results.

4. Employee stock-based payments

On May 6, 2009, our stockholders approved the Amgen Inc. 2009 Equity Incentive Plan (the “2009 Plan”) for non-employee members of our Board of Directors, the employees and consultants of Amgen, its subsidiaries and affiliates. The 2009 Plan replaced our existing equity plans (the “Prior Plans”). After May 6, 2009, no further awards may be made under these Prior Plans. The 2009 Plan authorizes the issuance of 100 million shares of our common stock. Under the terms of the 2009 Plan, the pool of available shares that may be used for all types of awards, including those issued under our Prior Plans after December 31, 2008 and before May 6, 2009, will be reduced by one share for each stock option granted and by 1.9 shares for other types of awards granted, including restricted stock or performance units. If any shares subject to an award granted under our Prior Plans after December 31, 2008 or any awards granted under the 2009 Plan expire, or are forfeited, terminated or cancelled without the issuance of shares, the shares subject to such awards will be added back to the pool of available shares under the 2009 Plan on the same basis that they were removed. As of December 31, 2009, the 2009 Plan provides for future grants and/or issuances of up to approximately 85 million shares of our common stock. Our stock-based instruments, more fully described below, principally include stock options, restricted stock units and performance units. Stock-based awards under our employee compensation plans are made with newly issued shares reserved for this purpose.

The following table reflects the components of stock-based compensation expense recognized in our Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007 (in millions):

 

		2009				2008				2007
Stock options		$	115			$	103			$	181
Restricted stock units			134				105				76
Performance units			35				54				6
Total stock-based compensation expense, pre-tax			284				262				263
Tax benefit from stock-based compensation expense			(97	)			(89	)			(81	)
Total stock-based compensation expense, net of tax		$	187			$	173			$	182

Employee stock option and restricted stock unit grants

Our equity-based compensation plan provides for grants of stock options to employees. The option exercise price is set at the closing price of our common stock on the date of grant and the related number of shares granted is fixed at that point in time. This plan also provide for grants of restricted stock units. Grants of these equity instruments generally vest over a four year period. In addition, stock option awards expire seven years from the date of grant. Eligible employees generally receive a grant of stock options and/or restricted stock units annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive stock options and/or restricted stock unit grants upon commencement of employment. Our stock-based plans provide for accelerated or continued vesting of restrictions in certain circumstances as defined in the plans, including upon death, disability, a change in control, or retirement of employees who meet certain service and/or age requirements. For stock option and restricted stock unit awards subject to graded vesting, we recognize compensation cost on a straight-line basis over the service period for the entire award.

We use the Black-Scholes option valuation model to estimate the grant date fair value of our employee stock options. The weighted-average assumptions used in the Black-Scholes option valuation model and the resulting weighted-average estimated grant date fair values of our employee stock options were as follows for the years ended December 31, 2009, 2008 and 2007:

 

		2009			2008			2007
Fair value of our common stock		$	50.65		$	43.60		$	62.92
Fair value of stock options granted		$	18.35		$	14.50		$	19.06
Expected volatility			39.6%			31.6%			24.9%
Expected life (in years)			4.6			4.6			4.7
Risk-free interest rate			2.1%			2.9%			4.5%
Expected dividend yield			0%			0%			0%

The expected volatility reflects the consideration of the implied volatility in publicly traded instruments associated with Amgen’s common stock during the period the options were granted. We believe implied volatility in these instruments is more indicative of expected future volatility than the historical volatility in the price of our common stock. We estimated the expected life of stock options using the “simplified” method during the year ended December 31, 2007. Under this method, the expected life was equal to the arithmetic average of the vesting term and the original contractual term of the option. Commencing in 2008, we use historical data to estimate the expected life of the options. The risk-free interest rates for periods within the expected life of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted.

Stock option information with respect to our stock-based compensation plans during the three years ended December 31, 2009 is as follows:

 

		Options (in millions)			Weighted- average exercise price			Weighted- average remaining contractual life (years)		Aggregate intrinsic value (in millions)
Balance unexercised at December 31, 2006		68.2			$	60.11
Granted		7.6			$	62.89
Exercised		(4.2	)		$	42.92
Forfeited/expired		(9.5	)		$	65.99
Balance unexercised at December 31, 2007		62.1			$	60.70
Granted		6.9			$	43.60
Exercised		(3.8	)		$	37.82
Forfeited/expired		(14.4	)		$	63.39
Balance unexercised at December 31, 2008		50.8			$	59.31
Granted		6.6			$	50.65
Exercised		(3.9	)		$	39.96
Forfeited/expired		(2.7	)		$	61.94
Balance unexercised at December 31, 2009		50.8			$	59.50		3.1		$	150
Vested or expected to vest at December 31, 2009		50.1			$	59.64		3.1		$	145
Exercisable at December 31, 2009		35.4			$	62.20		2.2		$	53

The total intrinsic value of options exercised during the year ended December 31, 2009 was $57 million.

The fair value of a restricted stock unit is equal to the closing price of Amgen common stock on the grant dates. Information regarding our restricted stock units during the three years ended December 31, 2009 is as follows:

 

Nonvested units		Units (in millions)			Weighted-average grant date fair value
Nonvested at December 31, 2006		4.1			$	65.77
Granted		3.6			$	60.59
Vested		(1.2	)		$	64.74
Forfeited		(0.9	)		$	64.85
Nonvested at December 31, 2007		5.6			$	62.94
Granted		5.2			$	42.63
Vested		(1.7	)		$	62.94
Forfeited		(0.6	)		$	55.58
Nonvested at December 31, 2008		8.5			$	50.73
Granted		3.6			$	51.24
Vested		(2.8	)		$	53.94
Forfeited		(0.5	)		$	49.14
Nonvested at December 31, 2009		8.8			$	50.00

 

The total fair value of shares of restricted stock units that vested during the year ended December 31, 2009 was $139 million.

As of December 31, 2009, there was $470 million of total unrecognized compensation cost related to nonvested awards of both stock options and restricted stock units, which is expected to be recognized over a weighted-average period of 1.7 years.

Performance award program

Certain management-level employees also receive annual grants of performance units, which give the recipient the right to receive common stock that is contingent upon achievement of specified pre-established performance goals over the performance period, which is generally three years. The performance goals for the units granted in 2009, 2008 and 2007 are based upon one or more of the following, as defined in the program: (i) Amgen’s standalone financial performance, (ii) Amgen’s annual stockholder return and (iii) Amgen’s annual stockholder return compared to a comparator group of companies. Depending on the outcome of these performance goals, a recipient may ultimately earn a number of units greater or less than the number of units granted. The number of shares of Amgen’s common stock payable to the recipient for performance units granted in 2009, 2008 and 2007 will equal the number of performance units earned. In general, participants vest in their performance unit awards at the end of the performance period. The performance award program provides for accelerated or continued vesting in certain circumstances as defined in the plan, including upon death, disability, a change in control, or retirement of employees who meet certain service and/or age requirements.

The performance units granted in 2009, 2008 and 2007 include total stockholder return performance goals, which are considered market conditions. The performance units granted in 2009 and 2007 also included performance goals based on the Company’s standalone financial performance, which are considered performance conditions. The expense recognized for the awards granted in 2009 and 2007 was based on the grant date fair value of a unit multiplied by the estimated number of units to be earned with respect to the performance conditions, net of estimated forfeitures. The expense recognized for the awards granted in 2008 is based on the grant date fair value of a unit multiplied by the number of units granted, net of estimated forfeitures. The impact of the Company’s stockholder returns for the awards granted in 2009, 2008 and 2007 is reflected in the grant date fair values of the units.

Information regarding our performance units is as follows (in millions):

 

Year granted		Plan year end date		Units granted		As of December 31, 2009						Number of shares of common stock issued, net of tax			Date issued
						Units outstanding			Number of units earned
2004		12/31/2006		1.3		—			1.7			1.0			May 2007
2005		12/31/2007		1.1		—			1.7			1.0			May 2008
2006		12/31/2008		1.1		—			0.6			0.4			May 2009
2007		12/31/2009		1.3		1.1	(1)		1.1	(2)		N/A	(3)		N/A(3)
2008		12/31/2010		0.9		0.9	(1)		N/A	(3)		N/A	(3)		N/A(3)
2009		12/31/2011		1.0		0.9	(1)		N/A	(3)		N/A	(3)		N/A(3)

 

(1)

The performance period for the performance units which were granted in 2007 is complete and these units are no longer subject to any performance goals. The performance units which were granted in 2009 and 2008 continue to be subject to performance goals with respect to the Company’s total stockholder return.

(2)	Shares of common stock related to the units earned for the 2007 plan year are anticipated to be issued in 2010.

(3)	N/A = Not applicable

 

We used a Monte Carlo simulation model to estimate the grant date fair value of performance units granted in 2009. We used a lattice model to estimate the grant date fair value of performance units granted in 2008 and 2007. The assumptions used in these models and the resulting grant date fair values of our performance units were as follows for the years ended December 31, 2009, 2008 and 2007.

 

		2009			2008			2007
Fair value of our common stock		$	47.63		$	44.62		$	56.56
Fair value of unit		$	48.22		$	36.91		$	71.41
Expected volatility			34.3%			32.4%			28.1%
Risk-free interest rate			1.2%			2.0%			4.0%
Expected dividend yield			0%			0%			0%

For the year ended December 31, 2009, the Monte Carlo simulation model also assumed correlations of returns of the stock prices of our common stock and the common stock of a comparator group of companies and stock price volatilities of the comparator group of companies. The valuation models also use terms based on the length of the performance period and compound annual growth rate goals for total stockholder return based on the provisions of the award.

As of December 31, 2009, there was approximately $38 million of total estimated unrecognized compensation cost related to the 2009 and 2008 performance unit grants that is expected to be recognized over a weighted-average period of approximately 1 year.