NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In all accompanying tables, amounts of dollars expressed in millions,
except per share amounts, unless otherwise indicated)
1. Nature of Business and Basis of Presentation
Celgene Corporation, together with its subsidiaries (collectively “we,” “our,” “us,” “Celgene” or the “Company”), is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation. Celgene Corporation was incorporated in the State of Delaware in 1986.
Our primary commercial stage products include REVLIMID
®
, POMALYST
®
/IMNOVID
®
, OTEZLA
®
, ABRAXANE
®
, VIDAZA
®
, azacitidine for injection (generic version of VIDAZA
®
) and
THALOMID
®
(sold as THALOMID
®
or Thalidomide Celgene
®
outside of the U.S.).
In addition, we earn revenue from other product sales and licensing arrangements.
The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries. Investments in limited partnerships and interests where we have an equity interest of
50%
or less and do not otherwise have a controlling financial interest are accounted for by either the equity or cost method.
We operate in a single segment engaged in the discovery, development, manufacturing, marketing, distribution and sale of innovative therapies for the treatment of cancer and inflammatory diseases. Consistent with our operational structure, our Chief Executive Officer (CEO), as the chief operating decision maker, manages and allocates resources at the global corporate level. Our global research and development organization is responsible for discovery of new drug candidates and supports development and registration efforts for potential future products. Our global supply chain organization is responsible for the manufacturing and supply of products. Regional/therapeutic area commercial organizations market, distribute and sell our products. The business is also supported by global corporate staff functions. Managing and allocating resources at the global corporate level enables our CEO to assess both the overall level of resources available and how to best deploy these resources across functions, therapeutic areas, regional commercial organizations and research and development projects in line with our overarching long-term corporate-wide strategic goals, rather than on a product or franchise basis. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. We are subject to certain risks and uncertainties related to, among other things, product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition, outcome of legal and governmental proceedings, credit risk, technological change and product liability.
Interim results may not be indicative of the results that may be expected for the full year. In the opinion of management, these unaudited consolidated financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited consolidated financial statements. Certain prior year amounts have been reclassified to conform to the current year's presentation.
Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31,
2016
(2016 Annual Report on Form 10-K).
2. New Accounting Standards
New accounting standards which have been adopted
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" (ASU 2015-11). ASU 2015-11 applies only to inventory for which cost is determined by methods other than last in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 was effective for us beginning in the first quarter of 2017. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In March 2016, the FASB issued Accounting Standards Update No. 2016-07, "Investments-Equity Method and Joint Ventures" (ASU 2016-07). ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in effect during all previous periods that the investment had been held. Under the new guidance, available-for-sale equity securities that become qualified for the equity method of accounting will result in the recognition through earnings of the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 was effective for us beginning in the first quarter of 2017. The adoption of this updated standard did not have a material impact on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Compensation-Stock Compensation" (ASU 2016-09). The new standard was effective for us on January 1, 2017. Among other provisions, the new standard requires that excess tax benefits and tax deficiencies that arise upon vesting or exercise of share-based payments be recognized as income tax benefits and expenses in the income statement. Previously, such amounts were recorded to additional paid-in-capital. This aspect of the new guidance was required to be adopted prospectively, and accordingly, the income tax provision for the period ended March 31, 2017 includes
$75 million
of excess tax benefits arising from share-based compensation awards that vested or were exercised during the period. In addition, at January 1, 2017, the Company recorded a cumulative-effect adjustment to retained earnings, with a corresponding increase to net deferred tax assets, in the amount of
$18 million
related to previously unrecognized excess tax benefits outstanding in the Consolidated Balance Sheet. In addition, the adoption of the new standard increased the diluted share count for the first quarter of 2017 by approximately
7 million
shares. The new standard also amends the presentation of employee share-based payment-related items in the statement of cash flows by requiring that excess income tax benefits and tax deficiencies be classified in Cash flows from operating activities (such amounts were previously included in Cash flows from financing activities). The Company elected to adopt this aspect of the new guidance retrospectively, and accordingly, to conform to the current year presentation,
$25 million
of excess tax benefits were reclassified from Net Cash Used in Financing Activities to Net Cash Provided by Operating Activities and included within the change in Income taxes payable in the Consolidated Statement of Cash Flows for the period ended March 31, 2016. As a result, Net Cash Used in Financing Activities increased by
$25 million
with a corresponding increase in Net Cash Provided by Operating Activities in the Consolidated Statement of Cash Flows for the three-month period ended March 31, 2016.
New accounting standards which have not yet been adopted
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09) and has subsequently issued a number of amendments to ASU 2014-09. The new standard, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The new standard will be effective for us beginning January 1, 2018 and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. We currently anticipate adopting the standard using the modified retrospective method.
We have substantially completed an analysis of existing contracts with our customers and assessed the differences in accounting for such contracts under ASU 2014-09 compared with current revenue accounting standards. Based on our review of current customer contracts, we do not expect the implementation of ASU 2014-09 to have a material quantitative impact on our consolidated financial statements as the timing of revenue recognition for product sales is not expected to significantly change. In limited instances, we may recognize revenue earlier than under the current standard. Currently, we defer certain revenue where the price pursuant to the underlying customer arrangement is not fixed and determinable. Under the new standard, such customer arrangements will be accounted for as variable consideration, which may result in revenue being recognized earlier provided we can reliably estimate the ultimate price expected to be realized from the customer. The new standard will result in additional revenue-related disclosures in the footnotes to our consolidated financial statements. We will continue to assess new customer
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
contracts throughout 2017. Adoption of this standard will require changes to our business processes, systems and controls to support the additional required disclosures. We are in the process of identifying such changes.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" (ASU 2016-01). ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. ASU 2016-01 does not apply to equity investments in consolidated subsidiaries or those accounted for under the equity method of accounting. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values will be measured at fair value with changes in fair value recognized in net income. Companies have the option to either measure equity investments without readily determinable fair values at fair value or at cost adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative will be recognized in net income. Companies that elect the fair value option for financial liabilities must recognize changes in fair value related to instrument-specific credit risk in other comprehensive income. Companies must assess valuation allowances for deferred tax assets related to available-for-sale debt securities in combination with their other deferred tax assets. ASU 2016-01 will be effective for us beginning in the first quarter of 2018 and early adoption is available to publicly traded companies for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We expect the implementation of this standard to have an impact on our consolidated financial statements and related disclosures, as we held publicly traded equity investments as of
March 31, 2017
with a fair value of approximately
$1.2 billion
in a net unrealized gain position of
$446 million
as of March 31, 2017, as well as equity investments accounted for under the cost method. A cumulative-effect adjustment to the balance sheet will be recorded as of the beginning of the fiscal year of adoption. The implementation of ASU 2016-01 is expected to increase volatility in our net income as the volatility currently recorded in other comprehensive income related to changes in the fair market value of available-for-sale equity investments will be reflected in net income after adoption.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases" (ASU 2016-02). ASU 2016-02 provides accounting guidance for both lessee and lessor accounting models. Among other things, lessees will recognize a right-of-use asset and a lease liability for leases with a duration of greater than one year. For income statement purposes, ASU 2016-02 will require leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The new standard will be effective for us on January 1, 2019 and will be adopted using a modified retrospective approach which will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures. We expect the implementation of this standard to have an impact on our consolidated financial statements and related disclosures as we had aggregate future minimum lease payments of approximately
$213 million
as of December 31, 2016 under our current portfolio of non-cancelable leased office and research facilities with various expirations dates between 2017 and 2025 as included in our 2016 Annual Report on Form 10-K. We anticipate recognition of additional assets and corresponding liabilities related to these leases on our consolidated balance sheet.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for us on January 1, 2020. Early adoption will be available on January 1, 2019. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15). ASU 2016-15 clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows where diversity in practice exists. ASU 2016-15 is effective for us in our first quarter of fiscal 2018 and earlier adoption is permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory” (ASU 2016-16). ASU 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized as current period income tax expense or benefit and removes the requirement to defer and amortize the consolidated tax consequences of intra-entity transfers. The new standard will be effective for us on January 1, 2018 and will be adopted using a modified retrospective approach which requires a cumulative effect adjustment to retained earnings as of the
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
beginning of the period of adoption. Early adoption is permitted at the beginning of a fiscal year. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations” (ASU 2017-01). ASU 2017-01 provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard will be effective for us on January 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. We anticipate that the adoption of this standard will result in more acquisitions being accounted for as asset acquisitions.
3. Acquisitions and Divestitures
Acquisitions
Delinia, Inc. (Delinia):
On February 3, 2017, we acquired all of the outstanding shares of Delinia, a privately held biotechnology company focused on developing novel therapeutics for the treatment of autoimmune diseases. The transaction expands our Inflammation and Immunology pipeline primarily through the acquisition of Delinia’s lead program, DEL-106, as well as related second generation programs. DEL-106 is a novel IL-2 mutein Fc fusion protein designed to preferentially upregulate regulatory T cells (Tregs), immune cells that are critical to maintaining natural self-tolerance and immune system homeostasis.
The consideration included an initial payment of
$302 million
. In addition, the sellers of Delinia are eligible to receive up to
$475 million
in contingent development, regulatory and commercial milestones. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The initial payment was allocated primarily to the DEL-106 program, resulting in a
$300 million
research and development asset acquisition expense and approximately
$2 million
of net assets acquired.
In addition, during the three-month period ended March 31, 2017, we acquired all of the outstanding shares of a privately held biotechnology company for total initial consideration of
$26 million
. The sellers are also eligible to receive up to
$210 million
in contingent development and regulatory approval milestones. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The consideration transferred resulted in a
$25 million
research and development asset acquisition expense and
$1 million
of net assets acquired.
Divestitures
LifebankUSA:
In February 2016, we completed the sale of certain assets of Celgene Cellular Therapeutics (CCT) comprising CCT's biobanking business known as LifebankUSA, CCT’s biomaterials portfolio of assets, including Biovance
®
, and CCT's rights to PSC-100, a placental stem cell program, to Human Longevity, Inc. (HLI), a genomics and cell therapy-based diagnostic and therapeutic company based in San Diego, California. We received
3.4 million
shares of HLI Class A common stock with a fair value of
$40 million
as consideration in the transaction. The fair value of the shares common stock we received was determined based on the most recent preferred share offering and reduced for the estimated value of the liquidation preference not offered to common shareholders. The transaction generated a
$38 million
gain that was recorded on our Consolidated Statement of Income in Other income, net for the three-months ended March 31, 2016. As of March 31, 2017, our total investment in HLI represents approximately
14%
of HLI's outstanding capital stock.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. Earnings Per Share
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended March 31,
|
(Amounts in millions, except per share)
|
2017
|
|
2016
|
Net income
|
$
|
941
|
|
|
$
|
801
|
|
Weighted-average shares:
|
|
|
|
Basic
|
779.0
|
|
|
780.6
|
|
Effect of dilutive securities:
|
|
|
|
Options, restricted stock units, performance-based restricted stock units and other
|
32.2
|
|
|
27.1
|
|
Diluted
|
811.2
|
|
|
807.7
|
|
Net income per share:
|
|
|
|
Basic
|
$
|
1.21
|
|
|
$
|
1.03
|
|
Diluted
|
$
|
1.16
|
|
|
$
|
0.99
|
|
The total number of potential shares of common stock excluded from the diluted earnings per share computation because their inclusion would have been anti-dilutive was
20.4 million
and
18.5 million
shares for the
three-month periods ended
March 31, 2017
and
2016
, respectively.
Share Repurchase Program:
During the period of April 2009 through March 31, 2017, our Board of Directors approved repurchases of up to an aggregate of
$20.5 billion
of our common stock.
As part of the management of our share repurchase program, we may, from time to time, sell put options on our common stock with strike prices that we believe represent an attractive price to purchase our shares. If the trading price of our shares exceeds the strike price of the put option at the time the option expires, we will have economically reduced the cost of our share repurchase program by the amount of the premium we received from the sale of the put option. If the trading price of our stock is below the strike price of the put option at the time the option expires, we would purchase the shares covered by the option at the strike price of the put option. During the
three-month periods ended
March 31, 2017
and
2016
, we recorded put option activity on our Consolidated Statements of Income in Other income, net as follows:
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended March 31,
|
|
2017
|
|
2016
|
Gain from sale of put options
|
$
|
—
|
|
|
$
|
4
|
|
As of
March 31, 2017
and December 31, 2016, we had
no
outstanding put options.
We have purchased
2.6 million
shares of common stock under the share repurchase program from all sources at a total cost of
$304 million
during the three-month period ended
March 31, 2017
. As of
March 31, 2017
, we had a remaining share repurchase authorization of
$4.4 billion
.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
5. Accumulated Other Comprehensive Income (Loss)
The components of other comprehensive income (loss) consist of changes in pension liability, changes in net unrealized gains (losses) on marketable securities classified as available-for-sale, net unrealized gains (losses) related to cash flow hedges and changes in foreign currency translation adjustments.
The accumulated balances related to each component of other comprehensive income (loss), net of tax, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
Adjustment
|
|
Net Unrealized
Gains (Losses) On
Available-for-Sale Marketable Securities
|
|
Net Unrealized
Gains (Losses)
Related to Cash Flow Hedges
|
|
Foreign
Currency
Translation
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance as of December 31, 2016
|
$
|
(38
|
)
|
|
$
|
144
|
|
|
$
|
415
|
|
|
$
|
(102
|
)
|
|
$
|
419
|
|
Other comprehensive income (loss) before reclassifications, net of tax
|
—
|
|
|
147
|
|
|
(81
|
)
|
|
10
|
|
|
76
|
|
Reclassified (gains) from accumulated other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
(85
|
)
|
|
—
|
|
|
(85
|
)
|
Net current-period other comprehensive income (loss), net of tax
|
—
|
|
|
147
|
|
|
(166
|
)
|
|
10
|
|
|
(9
|
)
|
Balance as of March 31, 2017
|
$
|
(38
|
)
|
|
$
|
291
|
|
|
$
|
249
|
|
|
$
|
(92
|
)
|
|
$
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
$
|
(14
|
)
|
|
$
|
272
|
|
|
$
|
586
|
|
|
$
|
(76
|
)
|
|
$
|
768
|
|
Other comprehensive (loss) income before reclassifications, net of tax
|
—
|
|
|
(243
|
)
|
|
(211
|
)
|
|
18
|
|
|
(436
|
)
|
Reclassified losses (gains) from accumulated other comprehensive income, net of tax
|
—
|
|
|
7
|
|
|
(87
|
)
|
|
—
|
|
|
(80
|
)
|
Net current-period other comprehensive (loss)
income, net of tax
|
—
|
|
|
(236
|
)
|
|
(298
|
)
|
|
18
|
|
|
(516
|
)
|
Balance as of March 31, 2016
|
$
|
(14
|
)
|
|
$
|
36
|
|
|
$
|
288
|
|
|
$
|
(58
|
)
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
|
Accumulated Other Comprehensive Income Components
|
|
Classification in the Consolidated Statements of Income
|
|
Three-Month Periods Ended March 31,
|
|
|
2017
|
|
2016
|
Gains (losses) from cash-flow hedges:
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Net product sales
|
|
$
|
86
|
|
|
$
|
88
|
|
Treasury rate lock agreements
|
|
Interest (expense)
|
|
(1
|
)
|
|
(1
|
)
|
Interest rate swap agreements
|
|
Interest (expense)
|
|
(1
|
)
|
|
(1
|
)
|
|
|
Income tax provision
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
Gains (losses) from available-for-sale marketable securities:
|
|
|
|
|
Realized (loss) on sales of marketable securities
|
|
Interest and investment income, net
|
|
—
|
|
|
(10
|
)
|
|
|
Income tax provision
|
|
—
|
|
|
3
|
|
Total reclassification, net of tax
|
|
|
|
$
|
85
|
|
|
$
|
80
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6. Financial Instruments and Fair Value Measurement
The tables below present information about assets and liabilities that are measured at fair value on a recurring basis as of
March 31, 2017
and
December 31, 2016
and the valuation techniques we utilized to determine such fair value.
|
|
•
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Our level 1 assets consist of marketable equity securities. Our level 1 liability relates to our publicly traded Contingent Value Rights (CVRs). See Note 18 of Notes to Consolidated Financial Statements included in our
2016
Annual Report on Form 10-K for a description of the CVRs.
|
|
|
•
|
Level 2 inputs utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active. Our level 2 assets consist primarily of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities (MBS), global corporate debt securities, asset backed securities, ultra short income fund investments, time deposits and repurchase agreements with original maturities of greater than three months, foreign currency forward contracts, purchased foreign currency options and interest rate swap contracts. Our level 2 liabilities relate to written foreign currency options, foreign currency forward contracts and interest rate swap contracts.
|
|
|
•
|
Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity. We do not have any level 3 assets. Our level 3 liabilities consist of contingent consideration related to undeveloped product rights and technology platforms resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester), Nogra Pharma Limited (Nogra), Avila Therapeutics, Inc. (Avila) and Quanticel Pharmaceuticals, Inc. (Quanticel).
|
Our contingent consideration obligations are recorded at their estimated fair values and we revalue these obligations each reporting period until the related contingencies are resolved. The fair value measurements are estimated using probability-weighted discounted cash flow approaches that are based on significant unobservable inputs related to product candidates acquired in business combinations and are reviewed quarterly. These inputs include, as applicable, estimated probabilities and timing of achieving specified development and regulatory milestones, estimated annual sales and the discount rate used to calculate the present value of estimated future payments. Significant changes which increase or decrease the probabilities of achieving the related development and regulatory events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these obligations. Changes in the fair value of contingent consideration obligations are recognized in Acquisition related charges and restructuring, net in the Consolidated Statements of Income. The fair value of our contingent consideration as of
March 31, 2017
and
December 31, 2016
was calculated using the following significant unobservable inputs:
|
|
|
|
Inputs
|
Ranges (weighted average) utilized as of:
|
March 31, 2017
|
December 31, 2016
|
Discount rate
|
1.5% to 12.0% (8.6%)
|
1.5% to 12.0% (8.6%)
|
Probability of payment
|
0% to 95% (41.8%)
|
0% to 95% (42%)
|
Projected year of payment for development and regulatory milestones
|
2017 to 2029 (2019)
|
2017 to 2029 (2019)
|
Projected year of payment for sales-based milestones and other amounts calculated as a percentage of annual sales
|
2019 to 2033 (2024)
|
2019 to 2033 (2024)
|
The maximum remaining potential payments related to the contingent consideration from the acquisitions of Gloucester, Avila and Quanticel are estimated to be approximately
$120 million
,
$475 million
and
$314 million
, respectively and
$1.9 billion
plus other amounts calculated as a percentage of annual sales pursuant to the license agreement with Nogra.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
|
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
3,588
|
|
|
$
|
1,153
|
|
|
$
|
2,435
|
|
|
$
|
—
|
|
Forward currency contracts
|
224
|
|
|
—
|
|
|
224
|
|
|
—
|
|
Purchased currency options
|
125
|
|
|
—
|
|
|
125
|
|
|
—
|
|
Interest rate swaps
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
Total assets
|
$
|
3,968
|
|
|
$
|
1,153
|
|
|
$
|
2,815
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent value rights
|
$
|
(47
|
)
|
|
$
|
(47
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Written currency options
|
(55
|
)
|
|
—
|
|
|
(55
|
)
|
|
—
|
|
Other acquisition related contingent consideration
|
(1,527
|
)
|
|
—
|
|
|
—
|
|
|
(1,527
|
)
|
Total liabilities
|
$
|
(1,629
|
)
|
|
$
|
(47
|
)
|
|
$
|
(55
|
)
|
|
$
|
(1,527
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
1,800
|
|
|
$
|
891
|
|
|
$
|
909
|
|
|
$
|
—
|
|
Forward currency contracts
|
379
|
|
|
—
|
|
|
379
|
|
|
—
|
|
Purchased currency options
|
140
|
|
|
—
|
|
|
140
|
|
|
—
|
|
Interest rate swaps
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
Total assets
|
$
|
2,350
|
|
|
$
|
891
|
|
|
$
|
1,459
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent value rights
|
$
|
(44
|
)
|
|
$
|
(44
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Written currency options
|
(54
|
)
|
|
—
|
|
|
(54
|
)
|
|
—
|
|
Other acquisition related contingent consideration
|
(1,490
|
)
|
|
—
|
|
|
—
|
|
|
(1,490
|
)
|
Total liabilities
|
$
|
(1,588
|
)
|
|
$
|
(44
|
)
|
|
$
|
(54
|
)
|
|
$
|
(1,490
|
)
|
There were no security transfers between levels 1, 2 and 3 during the three-month periods ended
March 31, 2017
and
2016
. The following tables represent a roll-forward of the fair value of level 3 instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended March 31, 2017
|
Liabilities:
|
|
Gloucester
|
|
Nogra
|
|
Avila
|
|
Quanticel
|
|
Total
|
Balance as of December 31, 2016
|
|
$
|
(21
|
)
|
|
$
|
(1,346
|
)
|
|
$
|
(8
|
)
|
|
$
|
(115
|
)
|
|
$
|
(1,490
|
)
|
Amounts acquired or issued, including measurement period adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net change in fair value
|
|
(1
|
)
|
|
(31
|
)
|
|
—
|
|
|
(5
|
)
|
|
(37
|
)
|
Settlements, including transfers to Accrued expenses and other current liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2017
|
|
$
|
(22
|
)
|
|
$
|
(1,377
|
)
|
|
$
|
(8
|
)
|
|
$
|
(120
|
)
|
|
$
|
(1,527
|
)
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended March 31, 2016
|
Liabilities:
|
|
Gloucester
|
|
Nogra
|
|
Avila
|
|
Quanticel
|
|
Total
|
Balance as of December 31, 2015
|
|
$
|
(19
|
)
|
|
$
|
(1,239
|
)
|
|
$
|
(97
|
)
|
|
$
|
(167
|
)
|
|
$
|
(1,522
|
)
|
Amounts acquired or issued, including measurement period adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net change in fair value
|
|
—
|
|
|
(28
|
)
|
|
1
|
|
|
(1
|
)
|
|
(28
|
)
|
Settlements, including transfers to Accrued expenses and other current liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of March 31, 2016
|
|
$
|
(19
|
)
|
|
$
|
(1,267
|
)
|
|
$
|
(96
|
)
|
|
$
|
(168
|
)
|
|
$
|
(1,550
|
)
|
7. Derivative Instruments and Hedging Activities
Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. In instances where these financial instruments are accounted for as cash flow hedges or fair value hedges we may from time to time terminate the hedging relationship. If a hedging relationship is terminated, we generally either settle the instrument or enter into an offsetting instrument.
Foreign Currency Risk Management
We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings and changes in the fair value of assets and liabilities denominated in foreign currencies.
Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. Dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next
three
years, with a maximum of
five years
. We manage our anticipated transaction exposure principally with foreign currency forward contracts, a combination of foreign currency put and call options, and occasionally purchased foreign currency put options.
Foreign Currency Forward Contracts:
We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.
We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries. The foreign currency forward hedging contracts outstanding as of
March 31, 2017
and
December 31, 2016
had settlement dates within
28 months
and
31 months
, respectively. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses are reported in other comprehensive income (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. Any ineffectiveness on these foreign currency forward contracts is reported on the Consolidated Statements of Income in Other income, net. The forward point components of these foreign currency forward contracts are not designated as cash flow hedges and all fair value adjustments of forward point amounts are recorded on the Consolidated Statements of Income in Other income, net.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
Foreign Currency
|
|
March 31, 2017
|
|
December 31, 2016
|
Australian Dollar
|
|
$
|
70
|
|
|
$
|
49
|
|
British Pound
|
|
172
|
|
|
199
|
|
Canadian Dollar
|
|
194
|
|
|
193
|
|
Euro
|
|
1,501
|
|
|
1,812
|
|
Japanese Yen
|
|
637
|
|
|
597
|
|
Total
|
|
$
|
2,574
|
|
|
$
|
2,850
|
|
We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis. As of
March 31, 2017
, credit risk did not materially change the fair value of our foreign currency forward contracts.
We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in Other income, net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding as of
March 31, 2017
and
December 31, 2016
were
$932 million
and
$934 million
, respectively.
Foreign Currency Option Contracts:
From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. The foreign currency option contracts outstanding as of
March 31, 2017
and
December 31, 2016
had settlement dates within
45 months
and
48 months
, respectively. If the U.S. Dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. Dollar equivalent value of our anticipated foreign currency cash flows; however, this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the sale of the call option is equal to the premium paid for the purchased put option, resulting in a net zero cost for each collar. Outstanding foreign currency option contracts entered into to hedge forecasted revenue were as follows as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
Notional Amount
1
|
|
March 31, 2017
|
|
December 31, 2016
|
Foreign currency option contracts designated as hedging activity:
|
|
|
|
Purchased Put
|
$
|
2,361
|
|
|
$
|
1,790
|
|
Written Call
|
2,659
|
|
|
2,009
|
|
1
U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.
We also have entered into foreign currency put option contracts to hedge forecasted revenue which were not part of a collar strategy. Such put option contracts had a notional value of
$510 million
and
$387 million
as of
March 31, 2017
and December 31, 2016, respectively, and settlement dates within
21 months
and
24 months
, respectively.
Interest Rate Risk Management
Forward Starting Interest Rate Swaps and Treasury Rate Locks:
In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the forward starting swaps or treasury rate locks are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.
As of
March 31, 2017
and
December 31, 2016
, we had outstanding forward starting swaps with effective dates in 2017 and 2018 and maturing in
ten
years that were designated as cash flow hedges with notional amounts as shown in the table below:
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
March 31, 2017
|
|
December 31, 2016
|
Forward starting interest rate swap contracts:
|
|
|
|
Forward starting swaps with effective dates in 2017
|
$
|
500
|
|
|
$
|
500
|
|
Forward starting swaps with effective dates in 2018
|
500
|
|
|
500
|
|
Interest Rate Swap Contracts:
From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swap are recorded on the Consolidated Balance Sheets with no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense on the Consolidated Statements of Income. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.
The following table summarizes the notional amounts of our outstanding interest rate swap contracts as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
March 31, 2017
|
|
December 31, 2016
|
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
|
|
|
|
3.875% senior notes due 2025
|
$
|
300
|
|
|
$
|
200
|
|
We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes in 2017 and
2016
and also terminated the hedging relationship by settling certain of those swap contracts during 2017. The settlement of swap contracts resulted in the receipt of net proceeds which was not material during the
three-month periods ended March 31, 2017
, which is accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
Consolidated
Balance Sheet
Classification
|
|
Fair Value
|
Instrument
|
|
|
Asset
Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
$
|
222
|
|
|
$
|
20
|
|
|
|
Other non-current assets
|
|
127
|
|
|
66
|
|
|
|
Other non-current liabilities
|
|
3
|
|
|
3
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
1
|
|
|
—
|
|
|
|
Other non-current assets
|
|
38
|
|
|
7
|
|
|
|
Other non-current liabilities
|
|
—
|
|
|
2
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
40
|
|
|
6
|
|
|
|
Accrued expenses and other current liabilities
|
|
1
|
|
|
4
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
1
|
|
|
1
|
|
|
|
Other non-current assets
|
|
3
|
|
|
2
|
|
Total
|
|
|
|
$
|
436
|
|
|
$
|
111
|
|
1
Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Consolidated
Balance Sheet
Classification
|
|
Fair Value
|
Instrument
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
$
|
317
|
|
|
$
|
10
|
|
|
|
Other non-current assets
|
|
178
|
|
|
71
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
1
|
|
|
—
|
|
|
|
Other non-current assets
|
|
38
|
|
|
7
|
|
|
|
Other non-current liabilities
|
|
—
|
|
|
2
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
57
|
|
|
4
|
|
|
|
Accrued expenses and other current liabilities
|
|
—
|
|
|
2
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
2
|
|
|
2
|
|
|
|
Other non-current assets
|
|
3
|
|
|
2
|
|
Total
|
|
|
|
$
|
596
|
|
|
$
|
100
|
|
1
Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the effect of derivative instruments designated as cash flow hedging instruments on the Consolidated Statements of Income for the three-month periods ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended March 31, 2017
|
|
|
|
(Effective Portion)
|
|
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
|
|
|
Instrument
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
|
|
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Classification of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
|
Foreign exchange contracts
|
$
|
(81
|
)
|
|
Net product sales
|
|
$
|
86
|
|
|
Other income, net
|
|
$
|
19
|
|
|
2
|
Treasury rate lock agreements
|
—
|
|
|
Interest (expense)
|
|
(1
|
)
|
|
Other income, net
|
|
—
|
|
|
|
Interest rate swap agreements
|
—
|
|
|
Interest (expense)
|
|
(1
|
)
|
|
Other income, net
|
|
—
|
|
|
|
1
Net gains of
$197 million
are expected to be reclassified from Accumulated OCI into income in the next 12 months.
2
The amount of net gains recognized in income represents
$19 million
of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended March 31, 2016
|
|
|
|
(Effective Portion)
|
|
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
|
|
|
Instrument
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
|
|
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Classification of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
|
Foreign exchange contracts
|
$
|
(195
|
)
|
|
Net product sales
|
|
$
|
88
|
|
|
Other income, net
|
|
$
|
14
|
|
|
1
|
Treasury rate lock agreements
|
—
|
|
|
Interest (expense)
|
|
(1
|
)
|
|
Other income, net
|
|
—
|
|
|
|
Interest rate swap agreements
|
(26
|
)
|
|
Interest (expense)
|
|
(1
|
)
|
|
Other income, net
|
|
—
|
|
|
|
1
The amount of net gains recognized in income represents
$13 million
of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and
$1 million
of gains related to the ineffective portion of the hedging relationships.
The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the three-month periods ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain Recognized in
Income on Derivative
|
|
|
Classification of Gain Recognized in Income on Derivative
|
|
Three-Month Periods Ended March 31,
|
Instrument
|
|
|
2017
|
|
2016
|
Interest rate swap agreements
|
|
Interest (expense)
|
|
$
|
9
|
|
|
$
|
13
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three-month periods ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain Recognized in
Income on Derivative
|
|
|
Classification of Gain (Loss) Recognized in Income on Derivative
|
|
Three-Month Periods Ended March 31,
|
Instrument
|
|
|
2017
|
|
2016
|
Foreign exchange contracts
|
|
Other income, net
|
|
$
|
(22
|
)
|
|
$
|
(28
|
)
|
Put options on our common stock
|
|
Other income, net
|
|
—
|
|
|
4
|
|
The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Income in Other income, net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods.
8. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
Time deposits, repurchase agreements, and commercial paper instruments with original maturities less than three months and money market funds are included in Cash and cash equivalents. As of
March 31, 2017
, the carrying value of our time deposits and repurchase agreements was
$1.3 billion
, commercial paper instruments was
$25 million
, and money market funds was
$1.7 billion
, all of which are included in Cash and cash equivalents. As of
December 31, 2016
, the carrying value of our time deposits and repurchase agreements was
$2.8 billion
, commercial paper instruments was
$65 million
, and money market funds was
$1.6 billion
, all of which were included in Cash and cash equivalents. The carrying values approximated fair value as of
March 31, 2017
and
December 31, 2016
.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale securities by major security type and class of security as of
March 31, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Estimated Fair Value
|
U.S. Treasury securities
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
99
|
|
U.S. government-sponsored agency securities
|
|
23
|
|
|
—
|
|
|
—
|
|
|
23
|
|
U.S. government-sponsored agency MBS
|
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Corporate debt - global
|
|
490
|
|
|
—
|
|
|
—
|
|
|
490
|
|
Asset backed securities
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Ultra short income fund
|
|
200
|
|
|
—
|
|
|
—
|
|
|
200
|
|
Time deposits
1
and Repurchase agreements
1
|
|
1,578
|
|
|
—
|
|
|
—
|
|
|
1,578
|
|
Marketable equity securities
|
|
707
|
|
|
474
|
|
|
(28
|
)
|
|
1,153
|
|
Total available-for-sale marketable securities
|
|
$
|
3,143
|
|
|
$
|
474
|
|
|
$
|
(29
|
)
|
|
$
|
3,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Estimated Fair Value
|
U.S. Treasury securities
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
120
|
|
U.S. government-sponsored agency MBS
|
|
31
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Corporate debt - global
|
|
378
|
|
|
—
|
|
|
(1
|
)
|
|
377
|
|
Asset backed securities
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Time deposits
1
|
|
364
|
|
|
—
|
|
|
—
|
|
|
364
|
|
Marketable equity securities
|
|
672
|
|
|
238
|
|
|
(19
|
)
|
|
891
|
|
Total available-for-sale marketable securities
|
|
$
|
1,583
|
|
|
$
|
238
|
|
|
$
|
(21
|
)
|
|
$
|
1,800
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
1
Have original maturities of greater than three months.
U.S. Treasury securities include government debt instruments issued by the U.S. Department of the Treasury. U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. government sponsored enterprises. U.S. government-sponsored agency MBS include mortgage-backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Corporate debt-global includes obligations issued by investment-grade corporations, including some issues that have been guaranteed by governments and government agencies. Asset backed securities consist of triple-A rated securities with cash flows collateralized by credit card receivables and auto loans. Ultra short income fund includes investments in certificates of deposits, repurchase agreements, commercial paper and corporate notes. Time deposits and repurchase agreements in the tables above have original maturities greater than three months. Our repurchase agreements are collateralized by U.S. government securities, cash, bonds, commercial paper and bank certificates of deposit. As of March 31, 2017, all of our time deposits and repurchase agreements had original maturities less than one year. Marketable equity securities consist of investments in publicly traded equity securities. The increase in net unrealized gains in marketable equity securities during the
three-month period ended
March 31, 2017
primarily reflects the increase in market value for certain equity investments subsequent to
December 31, 2016
.
Duration periods of available-for-sale debt securities as of
March 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
Duration of one year or less
|
|
$
|
541
|
|
|
$
|
541
|
|
Duration of one through three years
|
|
308
|
|
|
307
|
|
Duration of three through five years
|
|
9
|
|
|
9
|
|
Total
|
|
$
|
858
|
|
|
$
|
857
|
|
9. Inventory
Inventories as of
March 31, 2017
and
December 31, 2016
are summarized by major category as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
257
|
|
|
$
|
274
|
|
Work in process
|
111
|
|
|
87
|
|
Finished goods
|
141
|
|
|
137
|
|
Total
|
$
|
509
|
|
|
$
|
498
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. Intangible Assets and Goodwill
Intangible Assets:
Our finite-lived intangible assets primarily consist of developed product rights and technology obtained from the Pharmion Corp. (Pharmion), Gloucester, Abraxis BioScience, Inc. (Abraxis), Avila and Quanticel acquisitions. Our indefinite lived intangible assets consist of acquired in-process research and development (IPR&D) product rights from the Receptos Inc. (Receptos), Nogra and Gloucester acquisitions.
Intangible assets outstanding as of
March 31, 2017
and
December 31, 2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired developed product rights
|
|
$
|
3,406
|
|
|
$
|
(1,755
|
)
|
|
$
|
1,651
|
|
Technology
|
|
483
|
|
|
(347
|
)
|
|
136
|
|
Licenses
|
|
66
|
|
|
(28
|
)
|
|
38
|
|
Other
|
|
43
|
|
|
(32
|
)
|
|
11
|
|
|
|
3,998
|
|
|
(2,162
|
)
|
|
1,836
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D product rights
|
|
8,471
|
|
|
—
|
|
|
8,471
|
|
Total intangible assets
|
|
$
|
12,469
|
|
|
$
|
(2,162
|
)
|
|
$
|
10,307
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired developed product rights
|
|
$
|
3,406
|
|
|
$
|
(1,694
|
)
|
|
$
|
1,712
|
|
Technology
|
|
483
|
|
|
(326
|
)
|
|
157
|
|
Licenses
|
|
66
|
|
|
(26
|
)
|
|
40
|
|
Other
|
|
43
|
|
|
(31
|
)
|
|
12
|
|
|
|
3,998
|
|
|
(2,077
|
)
|
|
1,921
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D product rights
|
|
8,471
|
|
|
—
|
|
|
8,471
|
|
Total intangible assets
|
|
$
|
12,469
|
|
|
$
|
(2,077
|
)
|
|
$
|
10,392
|
|
Amortization expense related to intangible assets was
$84 million
and
$94 million
for the three-month periods ended
March 31, 2017
and
2016
, respectively. Assuming no changes in the gross carrying amount of finite lived intangible assets, the future annual amortization expense related to intangible assets is expected to be approximately
$336 million
in 2017,
$252 million
in 2018,
$156 million
in 2019,
$154 million
in 2020 and
$152 million
in 2021.
Goodwill:
As of
March 31, 2017
and December 31,2016, our goodwill related to the 2015 acquisitions of Receptos and Quanticel, 2014 acquisition of Nogra, 2012 acquisition of Avila, 2010 acquisitions of Abraxis and Gloucester, 2008 acquisition of Pharmion and 2004 acquisition of Penn T Limited.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. Debt
Short-Term Borrowings and Current Portion of Long-Term Debt:
We had
no
outstanding short-term borrowing as of
March 31, 2017
or
December 31, 2016
. The current portion of long-term debt outstanding as of
March 31, 2017
and
December 31, 2016
includes:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
1.900% senior notes due 2017
|
|
$
|
500
|
|
|
$
|
501
|
|
Long-Term Debt:
Our outstanding senior notes with maturity dates in excess of one year after March 31, 2017 have an aggregate principal amount of
$13.750 billion
with varying maturity dates and interest rates. The carrying values of the long-term portion of these senior notes as of
March 31, 2017
and
December 31, 2016
includes:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
2.125% senior notes due 2018
|
$
|
998
|
|
|
$
|
998
|
|
2.300% senior notes due 2018
|
402
|
|
|
402
|
|
2.250% senior notes due 2019
|
508
|
|
|
509
|
|
2.875% senior notes due 2020
|
1,493
|
|
|
1,493
|
|
3.950% senior notes due 2020
|
517
|
|
|
518
|
|
3.250% senior notes due 2022
|
1,051
|
|
|
1,054
|
|
3.550% senior notes due 2022
|
994
|
|
|
994
|
|
4.000% senior notes due 2023
|
742
|
|
|
744
|
|
3.625% senior notes due 2024
|
1,001
|
|
|
1,001
|
|
3.875% senior notes due 2025
|
2,476
|
|
|
2,475
|
|
5.700% senior notes due 2040
|
247
|
|
|
247
|
|
5.250% senior notes due 2043
|
393
|
|
|
393
|
|
4.625% senior notes due 2044
|
987
|
|
|
987
|
|
5.000% senior notes due 2045
|
1,975
|
|
|
1,974
|
|
Total long-term debt
|
$
|
13,784
|
|
|
$
|
13,789
|
|
As of
March 31, 2017
and December 31, 2016, the fair value of our outstanding Senior Notes was approximately
$14.6 billion
, and represented a Level 2 measurement within the fair value measurement hierarchy.
From time to time, we have used treasury rate locks and forward starting interest rate swap contracts to hedge against changes in interest rates in anticipation of issuing fixed-rate notes. As of
March 31, 2017
, a balance of
$59 million
in losses remained in accumulated OCI related to the settlement of these derivative instruments and will be recognized as interest expense over the life of the notes.
As of
March 31, 2017
, we were party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes as described in Note 7. Our swap contracts outstanding as of
March 31, 2017
effectively converted the hedged portion of our fixed-rate notes to floating rates. From time to time, we terminate the hedging relationship on certain of our swap contracts by settling the contracts or by entering into offsetting contracts. Any net proceeds received or paid in these settlements are accounted for as a reduction or increase of current and future interest expense associated with the previously hedged notes. As of
March 31, 2017
and
December 31, 2016
, we had balances of
$166 million
and
$174 million
, respectively, of unamortized gains recorded as a component of our debt as a result of past swap contract settlements. See Note 7 for additional details related to interest rate swap contract activity.
Commercial Paper:
In April 2016, our Board of Directors authorized an increase in the maximum amount of commercial paper issuable to
$2.0 billion
. As of
March 31, 2017
and
December 31, 2016
, we had available capacity to issue up to
$2.0 billion
of Commercial Paper, and there were
no
borrowings under the program.
Senior Unsecured Credit Facility:
We maintain a senior unsecured revolving credit facility (Credit Facility) that provides revolving credit in the aggregate amount of
$2.0 billion
. During the second quarter of 2017, we amended our Credit Facility to extend the
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
expiration date to April 17, 2022. Amounts may be borrowed in U.S. Dollars for general corporate purposes. The Credit Facility currently serves as backup liquidity for our commercial paper borrowings. As of
March 31, 2017
and
December 31, 2016
, there was
no
outstanding borrowing against the Credit Facility. The Credit Facility contains affirmative and negative covenants, including certain customary financial covenants. We were in compliance with all financial covenants as of
March 31, 2017
.
12. Share-Based Compensation
We have a stockholder-approved stock incentive plan, the 2008 Stock Incentive Plan (Amended and Restated as of April 15, 2015, as amended effective June 15, 2016) (Plan) that provides for the granting of options, restricted stock units (RSUs), performance stock units (PSUs) and other share-based awards to our employees, officers and non-employee directors. The Management Compensation and Development Committee of the Board of Directors (Compensation Committee) may determine the type, amount and terms, including vesting, of any awards made under the Plan.
The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the three-month periods ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended March 31,
|
|
2017
|
|
2016
|
Cost of goods sold (excluding amortization of acquired intangible assets)
|
$
|
7
|
|
|
$
|
9
|
|
Research and development
|
65
|
|
|
62
|
|
Selling, general and administrative
|
81
|
|
|
75
|
|
Total share-based compensation expense
|
153
|
|
|
146
|
|
Tax benefit related to share-based compensation expense
|
41
|
|
|
40
|
|
Reduction in income
|
$
|
112
|
|
|
$
|
106
|
|
The following table summarizes the activity for stock options, RSUs and PSUs for the three-month period ended
March 31, 2017
(in millions unless otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
RSUs
|
|
PSUs (in thousands)
|
Outstanding as of December 31, 2016
|
73.8
|
|
|
7.1
|
|
|
463
|
|
Changes during the Year:
|
|
|
|
|
|
|
|
|
Granted
|
2.9
|
|
|
0.1
|
|
|
96
|
|
Exercised / Released
|
(4.4
|
)
|
|
(0.2
|
)
|
|
(1
|
)
|
Forfeited
|
(0.5
|
)
|
|
(0.1
|
)
|
|
(9
|
)
|
Outstanding as of March 31, 2017
|
71.8
|
|
|
6.9
|
|
|
549
|
|
Total compensation cost related to unvested awards not yet recognized and the weighted-average periods over which the awards are expected to be recognized as of
March 31, 2017
were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
RSUs
|
|
PSUs
|
Unrecognized compensation cost
|
$
|
554
|
|
|
$
|
299
|
|
|
$
|
34
|
|
Expected weighted-average period in years of compensation cost to be recognized
|
2.1
|
|
|
1.4
|
|
|
1.7
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. Income Taxes
We adopted ASU 2016-09, effective January 1, 2017. See Note 2 for additional information related to the adoption of this accounting standard update.
We regularly evaluate the likelihood of the realization of our deferred tax assets and reduce the carrying amount of those deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. Significant judgment is required in making this assessment.
Our tax returns are under routine examination in many taxing jurisdictions. The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed. Our U.S. federal income tax returns have been audited by the Internal Revenue Service (IRS) through the year ended December 31, 2008. Tax returns for the years ended December 31, 2009, 2010 and 2011 are currently under examination by the IRS. We are also subject to audits by various state and foreign taxing authorities, including most U.S. states and countries where we have operations.
We regularly reevaluate our tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, judicial precedents, etc.) that would reduce the technical merits of the position to below more likely than not. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We apply a variety of methodologies in making these estimates and assumptions, which include studies performed by independent economists, advice from industry and subject matter experts, evaluation of public actions taken by the IRS and other taxing authorities, as well as our industry experience. These evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if management’s estimates are not representative of actual outcomes, our results of operations could be materially impacted.
Unrecognized tax benefits, generally represented by liabilities on the Consolidated Balance Sheets and all subject to tax examinations, arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Virtually all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. We account for interest and potential penalties related to uncertain tax positions as part of our provision for income taxes. For the three-month period ended
March 31, 2017
gross unrecognized tax benefits increased by
$21 million
, primarily from an increase in unrecognized tax benefits related to current year operations of
$17 million
and accrued interest of
$4 million
. The liability for unrecognized tax benefits is expected to increase in the next 12 months relating to operations occurring in that period. Any settlements of examinations with taxing authorities or statute of limitations expirations would likely result in a decrease in our liability for unrecognized tax benefits and a corresponding increase in taxes paid or payable and/or a decrease in income tax expense. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period as a result of settlements or statute of limitations expirations. Finalizing examinations with the relevant taxing authorities can include formal administrative and legal proceedings and, as a result, it is difficult to estimate the timing and range of possible change related to the Company’s unrecognized tax benefits. An estimate of the range of possible change cannot be made until issues are further developed or examinations close. Our estimates of tax benefits and potential tax benefits may not be representative of actual outcomes and variation from such estimates could materially affect our consolidated financial statements in the period of settlement or when the statutes of limitations expire.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
14. Collaboration Arrangements
We enter into collaborative arrangements for the research and development, license, manufacture and/or commercialization of products and/or product candidates. In addition, we also acquire products, product candidates and research and development technology rights and establish research and development collaborations with third parties to enhance our strategic position within our industry by strengthening and diversifying our research and development capabilities, product pipeline and marketed product base. These arrangements may include non-refundable, upfront payments, payments by us for options to acquire rights to products and product candidates and other rights, as well as contingent obligations by us for potential development, regulatory and commercial performance milestone payments, cost sharing arrangements, royalty payments, profit sharing and equity investments (including equity investments in the event of an initial public offering of equity by our partners). The activities under these collaboration arrangements are performed with no guarantee of either technological or commercial success. Although we do not consider any individual alliance to be material, certain of the more notable alliances are described in Note 17 of Notes to Consolidated Financial Statements included in our
2016
Annual Report on Form 10-K. During the first quarter of 2017, we did not enter into any new collaboration arrangements or make any payments pursuant to any existing collaboration arrangements that were material individually or in the aggregate.
Potential Future Milestone Payments:
We entered into an arrangement during 2017 that includes the potential for future milestone payments of
$23.0 million
related to the attainment of specified development and regulatory milestones over a period of several years. Our obligation to fund these efforts is contingent upon our continued involvement in the program and/or the lack of any adverse events which could cause the discontinuance of the program.
A financial summary of certain period activity and the period-end balances related to our collaboration arrangements is presented below
1,2
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended March 31,
|
|
|
Research and Development Expense
|
|
|
|
|
Upfront Fees
|
|
Milestones
|
|
Extension/Termination of Arrangements
|
|
Amortization of Prepaid Research and Development
|
|
Equity Investments Made During Period
|
Juno
3
|
2017
|
$—
|
|
$—
|
|
$—
|
|
$—
|
|
$2
|
|
2016
|
—
|
|
—
|
|
—
|
|
—
|
|
41
|
Other Collaboration Arrangements
|
2017
|
10
|
|
—
|
|
7
|
|
4
|
|
10
|
|
2016
|
80
|
|
65
|
|
—
|
|
6
|
|
37
|
|
|
|
|
|
|
|
|
|
|
Balances as of:
|
|
Intangible Asset Balance
|
|
Equity Investment Balance
|
|
Percentage of Outstanding Equity
|
Juno
|
March 31, 2017
|
|
$—
|
|
$230
|
|
10%
|
|
December 31, 2016
|
|
—
|
|
194
|
|
10%
|
Other Collaboration Arrangements
|
March 31, 2017
|
|
19
|
|
848
|
|
N/A
|
|
December 31, 2016
|
|
22
|
|
658
|
|
N/A
|
|
|
1
|
Activity and balances are presented specifically for notable new collaborations and for those collaborations which we have described in detail in our
2016
Annual Report on Form 10-K if there has been significant activity during the periods presented. Amounts related to collaborations that are not specifically presented are included in the aggregate as Other Collaboration Arrangements.
|
|
|
2
|
In addition to the expenses noted in the tables above, we may also incur expenses for collaboration agreement related activities that are managed or funded by us.
|
|
|
3
|
Our equity investment in Juno made in the first quarter of 2016 was transacted at a price per share that exceeded the market value of Juno's publicly traded common stock on the transaction closing date, resulting in an expense for the premium of
$6 million
that was recorded in the Consolidated Statement of Income as Other income, net in the first quarter of 2016.
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15. Commitments and Contingencies
Collaboration Arrangements and Acquired Research and Development Assets:
We have entered into certain research and development collaboration arrangements with third parties that include our funding of certain development, manufacturing and commercialization efforts and the potential for making future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial targets. In addition, we have also made certain acquisitions that included potential future development, regulatory and commercial milestones. Our obligation to fund these efforts and make milestone payments is contingent upon our continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs. Due to the nature of these arrangements, the future potential payments are inherently uncertain, and accordingly no amounts have been recorded for the potential future achievement of these targets in our accompanying Consolidated Balance Sheets as of
March 31, 2017
and
December 31, 2016
. See Note 3 for additional details related to our acquisitions and Note 14 for additional details related to collaboration arrangements.
Contingencies:
We believe we maintain insurance coverage adequate for our current needs. Our operations are subject to environmental laws and regulations which, among other things, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. We review the effects of such laws and regulations on our operations and modify our operations as appropriate. We believe we are in substantial compliance with all applicable environmental laws and regulations.
We have ongoing customs, duties and value-added-tax examinations in various countries that have yet to be settled. Based on our knowledge of the claims and facts and circumstances to date, none of these matters, individually or in the aggregate, are deemed to be material to our financial condition.
16. Legal Proceedings
Like many companies in our industry, we have from time to time received inquiries and subpoenas and other types of information requests from government authorities and others and we have been subject to claims and other actions related to our business activities. While the ultimate outcome of investigations, inquiries, information requests and legal proceedings is difficult to predict, adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, product recalls, costs and significant payments, which may have a material adverse effect on our results of operations, cash flows or financial condition.
Pending patent proceedings include challenges to the scope, validity and/or enforceability of our patents relating to certain of our products, uses of products or processes. Further, we are subject to claims of third parties that we infringe their patents covering products or processes. Although we believe we have substantial defenses to these challenges and claims, there can be no assurance as to the outcome of these matters and an adverse decision in these proceedings could result in one or more of the following: (i) a loss of patent protection, which could lead to a significant reduction of sales that could materially affect our future results of operations, cash flows or financial condition (ii) our inability to continue to engage in certain activities, and (iii) significant liabilities, including payment of damages, royalties and/or license fees to any such third party.
Among the principal matters pending are the following:
Patent-Related Proceedings:
REVLIMID
®
: In 2012, our European patent EP 1 667 682 (the ’682 patent) relating to certain polymorphic forms of lenalidomide expiring in 2024 was opposed in a proceeding before the European Patent Office (EPO) by Generics (UK) Ltd. and Teva Pharmaceutical Industries Ltd. On July 21, 2015, the EPO determined that the ’682 patent was not valid. Celgene appealed the EPO ruling to the EPO Board of Appeal, thereby staying any revocation of the patent until the appeal is finally adjudicated. No appeal hearing date has been set. We do not anticipate a decision from the EPO Board of Appeal for several years and intend to vigorously defend all of our intellectual property rights.
In 2010, Celgene’s European patent EP 1 505 973 (the ’973 patent) relating to certain uses of lenalidomide expiring in 2023 was opposed in a proceeding before the EPO by Synthon B.V. and an anonymous party. On February 25, 2013, the EPO determined that the ’973 patent was not valid. Celgene appealed the EPO ruling to the EPO Board of Appeal, thereby staying any revocation of the patent until the appeal is finally adjudicated. No appeal hearing date has been set. We do not anticipate a decision from the EPO Board of Appeal for several years and intend to vigorously defend all of our intellectual property rights.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We believe that our patent portfolio for lenalidomide in Europe, including the composition of matter patent which expires in 2022, is strong and defensible. Although we believe that we will prevail in the EPO proceedings, in the event these patents are found not to be valid, we still expect that we will have protection in the EU for lenalidomide under other patents through at least 2022.
We received a Notice Letter dated September 9, 2016 from Dr. Reddy’s Laboratories (DRL) notifying us of DRL’s Abbreviated New Drug Application (ANDA) which contains Paragraph IV certifications against U.S. Patent Nos. 7,456,800; 7,855,217; 7,968,569; 8,530,498; 8,648,095; 9,101,621; and 9,101,622 that are listed in the Orange Book for REVLIMID
®
. DRL is seeking to manufacture and market a generic version of 2.5mg, 5mg, 10mg, 15mg, 20mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States.
In response to the Notice Letter, we timely filed an infringement action against DRL in the United States District Court for the District of New Jersey on October 20, 2016. As a result of the filing of our action, the FDA cannot grant final approval of DRL's ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed; or (ii) March 9, 2019. On November 18, 2016, DRL filed an answer and counterclaims asserting that the patents-in-suit are invalid and/or not infringed. On December 27, 2016, we filed a reply to DRL’s counterclaims. Fact discovery is set to close on May 31, 2018. The Court has not yet entered a schedule for expert discovery or trial.
We received a Notice Letter dated February 27, 2017 from Zydus Pharmaceuticals (USA) Inc. (Zydus) notifying us of Zydus’ ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 7,456,800; 7,855,217; 7,968,569; 8,530,498; 8,648,095; 9,101,621; and 9,101,622 that are listed in the Orange Book for REVLIMID
®
. Zydus is seeking to manufacture and market a generic version of 2.5 mg, 5 mg, 10 mg, 15 mg, 20 mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States.
In response to the Notice Letter, we timely filed an infringement action against Zydus in the United States District Court for the District of New Jersey on April 12, 2017. As a result of the filing of our action, the FDA cannot grant final approval of Zydus’ ANDA at least until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed; or (ii) August 27, 2019. Zydus has not yet filed a response and the Court has not yet entered a scheduling order.
POMALYST
®
: In 2015, our European patent EP 2 105 135 (the ’135 patent) relating to certain pharmaceutical compositions for treating cancer expiring in 2023 was opposed in a proceeding before the EPO by Generics (UK) Ltd., Accord Healthcare Ltd., Hexal AG, IPS Intellectual Property Services, Synthon B.V., and Actavis Group PTC EHF. On December 19, 2016 the EPO determined that the ’135 patent was not valid. Regulatory exclusivity for POMALYST
®
will expire in Europe in 2023.
We received a Notice Letter dated March 30, 2017 from Teva Pharmaceuticals USA, Inc. (Teva) notifying us of Teva’s ANDA submitted to the FDA that contains Paragraph IV certifications against U.S. Patent Nos. 6,316,471; 8,198,262; 8,673,939; 8,735,428; and 8,828,427 that are listed in the FDA’s list of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book. Teva is seeking to manufacture and market a generic version of 1 mg, 2 mg, 3 mg, and 4 mg POMALYST® (pomalidomide) capsules in the United States. We later received similar Notice Letters from six other generic drug manufacturers relating to these and other POMALYST® patents listed in the Orange Book. We are in the process of assessing these Notice Letters. With respect to each of the foregoing, we intend to vigorously defend our intellectual property rights.
OTEZLA
®
(Apremilast): In February 2015, Polypharma S.A., Teva Pharmaceuticals, Ltd., Zentiva k.s. and LEK Pharmaceutical d.d. opposed Celgene’s European patent EP 2 276 483 (the ‘483 patent), which is directed to certain crystalline forms of apremilast. An oral hearing was held on March 21, 2017 at the EPO, whereby the Opposition Division determined that the '483 patent was not valid. Celgene plans to appeal the EPO ruling to the EPO Board of Appeal, which will have the effect of staying any revocation of the patent until the appeal is finally adjudicated. Upon the filing of an appeal, we would not anticipate a decision from the EPO Board of Appeal for several years. This patent will expire on March 27, 2028 and has been granted an SPC which extends the patent term to January 16, 2030. The regulatory exclusivity will expire on January 15, 2025.
THALOMID
®
(thalidomide): We received a Notice Letter dated December 18, 2014 from Lannett Holdings, Inc. (Lannett) notifying us of Lannett’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 5,629,327; 6,045,501; 6,315,720; 6,561,976; 6,561,977; 6,755,784; 6,869,399; 6,908,432; 7,141,018; 7,230,012; 7,435,745; 7,874,984; 7,959,566; 8,204,763; 8,315,886; 8,589,188; and 8,626,531 that are listed in the Orange Book for THALOMID
®
(thalidomide). Lannett is seeking to market a generic version of 50mg, 100mg, 150mg, and 200mg of THALOMID
®
capsules.
On January 30, 2015, we filed an infringement action against Lannett in the United States District Court for the District of New Jersey. As a result of the filing of our action, the FDA cannot grant final approval of Lannett’s ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed; or (ii) June 22, 2017.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On December 8, 2015, Lannett filed an answer and counterclaims asserting that the patents-in-suit are invalid, unenforceable, and/or not infringed and on January 19, 2016 we filed a reply to Lannett's counterclaims. On April 18, 2016, Lannett amended its answer to narrow the scope of its unenforceability counterclaims and we filed an amended reply on May 5, 2016. The Court has not set dates for close of discovery, or trial.
ABRAXANE
®
(paclitaxel protein-bound particles for injectable suspension) (albumin bound): We received a Notice Letter dated February 23, 2016 from Actavis LLC (Actavis) notifying us of Actavis’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 7,820,788; 7,923,536; 8,138,229; and 8,853,260 that are listed in the Orange Book for ABRAXANE
®
. We then received a Notice Letter dated October 25, 2016 from Cipla Limited (Cipla) notifying us of Cipla’s ANDA, which contains Paragraph IV certifications against the same four patents for ABRAXANE
®
. Actavis and Cipla are seeking to manufacture and market a generic version of ABRAXANE
®
(paclitaxel protein-bound particles for injectable suspension) (albumin bound) 100 mg/vial.
On April 6, 2016, we filed an infringement action against Actavis in the United States District Court for the District of New Jersey. As a result of the filing of our action, the FDA cannot grant final approval of Actavis’s ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed; or (ii) August 24, 2018. On May 3, 2016, Actavis filed an answer and counterclaims asserting that the patents-in-suit are invalid and/or not infringed and we filed a reply to Actavis’s counterclaims on June 10, 2016. Fact discovery is currently set to close on May 15, 2017 and expert discovery is currently set to close on November 17, 2017. The Court has not yet set a date for a trial.
On December 8, 2016, we filed an infringement action against Cipla in the United States District Court for the District of New Jersey. As a result of the filing of our action, the FDA cannot grant final approval of Cipla’s ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed; or (ii) April 25, 2019. On January 20, 2017, Cipla filed an answer and counterclaims asserting that the patents-in-suit are invalid and/or not infringed. Our reply was filed on February 24, 2017. Fact discovery is currently set to close on April 26, 2018 and expert discovery is currently set to close on November 1, 2018. The Court has not yet set a date for trial.
On January 13, 2017, the UK High Court of Justice handed down a ruling after a hearing held on December 20, 2016 in which Celgene argued that the UK Intellectual Property Office improperly rejected our request for an SPC to the ABRAXANE
®
patent UK No. 0 961 612 (the ‘612 patent). In that ruling, the High Court referred the matter to the Court of Justice for the EU (“CJEU”). No hearing date has been set at the CJEU. If the CJEU were to find in Celgene’s favor, the SPC would not only be granted in the UK, but in other jurisdictions that have previously rejected our initial request including Germany, Sweden and Ireland. The ‘612 patent will expire in Europe in September, 2017. However, if the SPC is granted, the patent will expire in 2022. Data exclusivity in Europe will expire in January 2019.
Proceedings involving the United States Patent and Trademark Office (USPTO):
Under the America Invents Act (AIA), any person may seek to challenge an issued patent by petitioning the USPTO to institute a post grant review. On April 23, 2015, we were informed that the Coalition for Affordable Drugs VI LLC filed petitions for Inter Partes Review (IPRs) challenging the validity of Celgene’s patents U.S. 6,045,501 (the ‘501 patent) and U.S. 6,315,720 (the ‘720 patent) covering certain aspects of our REMS program. On October 27, 2015, the USPTO Patent Trial and Appeal Board (PTAB) instituted IPR proceedings relating to these patents. An oral hearing was held on July 21, 2016; the decisions, rendered on October 26, 2016, held that the ’501 and ’720 patents are invalid, primarily due to obviousness in view of certain publications.
On November 25, 2016, we requested a rehearing with respect to these patents.
An appeal of the final written decisions of the PTAB can be made to the United States Court of Appeals for the Federal Circuit within 63 days of PTAB’s final action on our November 25, 2016 rehearing request. The ’501 and ’720 patents remain valid and enforceable pending rehearing and appeal. We retain other patents covering certain aspects of our REMS program, as well as other patents that cover our products that use our REMS system. We are evaluating the decisions, and we intend to continue to vigorously defend our intellectual property rights.
On April 4, 2017, Actavis LLC filed petitions for IPRs challenging the validity of our patents U.S. 8,138,229 (the '229 patent); 7,923,536 (the '536 patent); 7,820,788 (the '788 patent); and 8,853,260 (the '260 patent) covering certain aspects of our ABRAXANE® product. Our preliminary response is due on July 12, 2017.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Proceedings:
In 2009, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission (FTC) seeking documents and other information relating to requests by manufacturers of generic drugs to purchase our patented REVLIMID
®
and THALOMID
®
brand drugs in order for the FTC to evaluate whether there may be reason to believe that we have engaged in unfair methods of competition. In 2010, the State of Connecticut issued a subpoena referring to the same issues raised by the 2009 CID. Also in 2010, we received a second CID from the FTC relating to this matter. We continue to cooperate with the FTC and State of Connecticut investigations.
On April 3, 2014, Mylan Pharmaceuticals Inc. (Mylan) filed a lawsuit against us in the United States District Court for the District of New Jersey alleging that we violated various federal and state antitrust and unfair competition laws by allegedly refusing to sell samples of our THALOMID
®
and REVLIMID
®
brand drugs so that Mylan can conduct the bioequivalence testing necessary for ANDAs to be submitted to the FDA for approval to market generic versions of these products. Mylan is seeking injunctive relief, damages and declaratory judgment. We filed a motion to dismiss Mylan’s complaint on May 25, 2014. Mylan filed its opposition to our motion to dismiss on June 16, 2014. The Federal Trade Commission filed an amicus curiae brief in opposition to our motion to dismiss on June 17, 2014. On December 22, 2014, the court granted Celgene’s motion to dismiss (i) Mylan’s claims based on Section 1 of the Sherman Act (without prejudice), and (ii) Mylan's related claims arising under the New Jersey Antitrust Act. The court denied our motion to dismiss the remaining claims which primarily relate to Section 2 of the Sherman Act. On January 6, 2015, we filed a motion to certify for interlocutory appeal the order denying our motion to dismiss with respect to the claims relating to Section 2 of the Sherman Act, which appeal was denied by the United State Court of Appeals for the Third Circuit on March 5, 2015. On January 20, 2015, we filed an answer to Mylan’s complaint. Fact discovery closed in June 2016 and expert discovery closed in November 2016. On December 16, 2016, we moved for summary judgment, seeking a ruling that judgment be granted in our favor on all claims. The motion for summary judgment has been fully briefed by the parties. No trial date has been set. We intend to vigorously defend against Mylan’s claims.
A civil qui tam action brought by a former Celgene employee is pending in the U.S. District Court for the Central District of California (the Brown Action). The complaint was unsealed in February 2014 when the United States Department of Justice (DOJ) declined to intervene in the action, reserving its right to intervene in the action at a later time. The complaint alleges off-label marketing and improper payments to physicians in connection with sales of THALOMID
®
and REVLIMID
®
and is brought on behalf of the federal and various state governments under the federal false claims act and similar state laws. On April 25, 2014, we filed a motion to dismiss the complaint, which was denied except with respect to certain state claims. The complaint in the Brown Action seeks, among other things, treble damages, civil penalties and attorneys’ fees and costs. We filed our answer to the complaint in August 2014. Fact discovery closed in September 2015 and expert discovery closed on June 30, 2016.
The Relator (the person who brought the lawsuit on behalf of the government) submitted an expert report that, based on certain theories, purported to calculate damages and penalties. On July 25, 2016, we filed a motion to strike the Relator’s expert report, and on August 23, 2016, the Magistrate Judge granted our motion striking substantial portions of the report, which significantly reduced the expert’s calculation of damages and penalties. The Relator appealed this decision to the District Court judge.
Relator and Celgene filed a Joint Stipulation regarding Defendant Celgene's Motion for Summary Judgment or, In the Alternative, Partial Summary Judgment on August 29, 2016. On December 28, 2016, the court entered an order granting in part and denying in part Celgene’s motion for summary judgment. Specifically, the court dismissed plaintiff’s anti-kickback claims and all claims related to prescriptions submitted to TRICARE, the Veterans Administration and the Tennessee, Texas and Wisconsin Medicaid programs. The court denied Celgene’s motion as to all other issues and upheld the District Court’s decision to strike substantial portions of the Relator’s expert report. On January 30, 2017, we filed a Motion for Reconsideration of The Order Partially Denying Summary Judgment or For Certification For Immediate Appeal And Stay. This motion seeks to dispose of the remainder of the relator’s claims. Relator filed an Opposition to our motion on February 6, 2017.
A confidential mediation under Federal Rule of Civil Procedure Rule 408 was held on February 25, 2017. Relator and Celgene participated in the mediation and discussions continued after that date. On March 6, 2017, the Judge ordered that the trial begin on April 25, 2017. Relator and Celgene jointly sought, and obtained, a 90-day continuance of the trial date until July 25, 2017. Discussions to resolve this matter continue, and any resolution would require the concurrence of the Unites States and the various state and local governments involved in the action. We are currently unable to predict whether an acceptable agreement can be reached by all of the parties involved, and therefore we cannot reasonably estimate the possible loss or range of loss, if any. We intend to continue to vigorously defend against the claims in this action.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On June 7, 2013, Children's Medical Center Corporation (CMCC) filed a lawsuit against us in the Superior Court of the Commonwealth of Massachusetts alleging that our obligation to pay a
1%
royalty on REVLIMID
®
net sales revenue and a
2.5%
royalty on POMALYST
®
/IMNOVID
®
net sales under a license agreement entered into in December 2002 extended beyond February 28, 2013 and that our failure to make royalty payments to CMCC subsequent to February 28, 2013 breached the license agreement.
On July 8, 2014, CR Rev Holdings, LLC (CR Rev) filed a complaint against Celgene in the same action. CR Rev alleged that CMCC sold and assigned to CR Rev a substantial portion of the royalty payments owed by Celgene on the sale of REVLIMID
®
. CR Rev has alleged causes of action with respect to REVLIMID
®
identical to those alleged by CMCC, and sought unspecified damages and a declaration that the license agreement is still in effect.
On February 2, 2017, we entered into a Settlement Agreement with CMCC and CR Rev resolving the litigation, providing CMCC with a payment of approximately
$199 million
(see Notes 9 and 18 to Notes to Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K) and providing us with an exclusive, worldwide, royalty free license to certain patent rights. The Settlement Agreement also provides for potential contingent royalty and other payments, which have not been accrued for as we do not believe such payments are probable.
On November 7, 2014, the International Union of Bricklayers and Allied Craft Workers Local 1 Health Fund (IUB) filed a putative class action lawsuit against us in the United States District Court for the District of New Jersey alleging that we violated various antitrust, consumer protection, and unfair competition laws by (a) allegedly securing an exclusive supply contract with Seratec S.A.R.L. so that Barr Laboratories (Barr) allegedly could not secure its own supply of thalidomide active pharmaceutical ingredient; (b) allegedly refusing to sell samples of our THALOMID
®
and REVLIMID
®
brand drugs to various generic manufacturers for the alleged purpose of bioequivalence testing necessary for ANDAs to be submitted to the FDA for approval to market generic versions of these products; and (c) allegedly bringing unjustified patent infringement lawsuits against Barr and Natco Pharma Limited in order to allegedly delay those companies from obtaining approval for proposed generic versions of THALOMID
®
and REVLIMID
®
. IUB, on behalf of itself and a putative class of third party payers, is seeking injunctive relief and damages. On February 6, 2015, we filed a motion to dismiss IUB’s complaint. On March 3, 2015, the City of Providence (“Providence”) filed a similar putative class action making similar allegations. Both IUB and Providence, on behalf of themselves and a putative class of third party payers, are seeking injunctive relief and damages. Providence agreed that the decision in the motion to dismiss IUB’s complaint would apply to the identical claims in Providence’s complaint. A supplemental motion to dismiss Providence's state law claims was filed on April 20, 2015. On October 30, 2015, the court denied our motion to dismiss on all grounds.
Celgene filed its Answer to the IUB and Providence complaints on January 11, 2016. The completion of fact discovery and expert discovery is scheduled for February 1, 2018 and July 15, 2018, respectively. No trial date has been set. We intend to vigorously defend against IUB and Providence’s claims.
In December 2015, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts, and in November 2016, we received a second subpoena related to the same inquiry. The materials requested primarily relate to patient assistance programs, including our support of 501(c)(3) organizations that provide financial assistance to eligible patients. We are cooperating with these requests.