NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts, unless otherwise indicated)
1. Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies
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, European credit risk, technological change and product liability.
Certain prior year amounts have been reclassified to conform to the current year's presentation.
Financial Instruments:
Certain financial instruments reflected in the Consolidated Balance Sheets, (e.g., cash, cash equivalents, accounts receivable, certain other assets, accounts payable, short-term borrowings and certain other liabilities) are recorded at cost, which approximates fair value due to their short-term nature. The fair values of financial instruments other than marketable securities are determined through a combination of management estimates and information obtained from third parties using the latest market data. The fair value of available-for-sale marketable securities is determined utilizing the valuation techniques appropriate to the type of security (see Note 4).
Derivative Instruments and Hedges:
All derivative instruments are recognized on the balance sheet at their fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or other comprehensive income (loss), depending on whether a derivative instrument is designated as part of a hedging transaction and, if it is, the type of hedging transaction. For a derivative to qualify as a hedge at inception and throughout the hedged period, we formally document the nature and relationships between the hedging instruments and hedged item. We assess, both at inception and on an on-going basis, whether the derivative instruments that are used in cash flow hedging transactions are highly effective in offsetting the changes in cash flows of hedged items. We assess hedge ineffectiveness on a quarterly basis and record the gain or loss related to the ineffective portion of derivative instruments, if any, to current earnings. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting and any related unrealized gain or loss on the derivative instrument is recognized in current earnings. We use derivative instruments, including those not designated as part of a hedging transaction, to manage our exposure to movements
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
in foreign exchange, our stock price and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce our risk or cost.
Cash, Cash Equivalents and Marketable Securities Available for Sale:
We invest our excess cash primarily in money market funds, repurchase agreements, time deposits, U.S. Treasury securities, U.S. government-sponsored agency mortgage-backed securities (MBS), global corporate debt securities and asset backed securities. All liquid investments with maturities of three months or less from the date of purchase are classified as cash equivalents and all investments with maturities of greater than three months from date of purchase are classified as marketable securities available for sale. We determine the appropriate classification of our investments in marketable debt and equity securities at the time of purchase. In addition, our equity investments in the publicly traded common stock of companies, including common stock of companies with whom we have entered into collaboration agreements, are designated as marketable securities available for sale.
Our marketable securities available for sale are primarily equity investments in the publicly traded common stock of companies, including common stock of companies with whom we have entered into collaboration agreements. In addition, we invest in debt securities that are carried at fair value, held for an unspecified period of time and are intended for use in meeting our ongoing liquidity needs. Unrealized gains and losses on available-for-sale securities, which are deemed to be temporary, are reported as a separate component of stockholders' equity, net of tax. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses and other-than-temporary impairment charges related to debt securities, is included in Interest and investment income, net. Realized gains and losses and other than temporary impairment charges related to equity securities are included in Other income (expense), net.
A decline in the market value of any available-for-sale security below its carrying value that is determined to be other-than-temporary would result in a charge to earnings and decrease in the security's carrying value down to its newly established fair value. Factors evaluated to determine if an investment is other-than-temporarily impaired include significant deterioration in earnings performance, credit rating, asset quality or business prospects of the issuer; adverse changes in the general market condition in which the issuer operates; our intent to hold to maturity and an evaluation as to whether it is more likely than not that we will not have to sell before recovery of its cost basis; our expected future cash flows from the security; and issues that raise concerns about the issuer's ability to continue as a going concern.
Concentration of Credit Risk:
Cash, cash equivalents and marketable securities are financial instruments that potentially subject the Company to concentration of credit risk. We invest our excess cash primarily in money market funds, repurchase agreements, time deposits, U.S. Treasury securities, U.S. government-sponsored agency MBS, global corporate debt securities and asset backed securities (see Note 6). We have established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified to take advantage of trends in yields and interest rates.
We sell our products in the United States primarily through wholesale distributors and specialty contracted pharmacies. Therefore, wholesale distributors and large pharmacy chains account for a large portion of our U.S. trade receivables and net product revenues (see Note 19). International sales are primarily made directly to hospitals, clinics and retail chains, many of which in Europe are government owned and have extended their payment terms in recent years given the economic pressure these countries are facing. We continuously monitor the creditworthiness of our customers, including these governments, and have internal policies regarding customer credit limits. We estimate an allowance for doubtful accounts primarily based on the credit worthiness of our customers, historical payment patterns, aging of receivable balances and general economic conditions, including publicly available information on the credit worthiness of countries themselves and provinces or areas within such countries where they are the ultimate customers.
We continue to monitor economic conditions, including the volatility associated with international economies, the sovereign debt situation in certain European countries and associated impacts on the financial markets and our business. Our current business model in these markets is typically to sell our products directly to principally government owned or controlled hospitals, which in turn directly deliver critical care to patients. Our products are used to treat life-threatening diseases and we believe this business model enables timely delivery and adequate supply of products. Many of the outstanding receivable balances are related to government-funded hospitals and we believe the receivable balances are ultimately collectible. Similarly, we believe that future sales to these customers will continue to be collectible.
Inventory:
Inventories are recorded at the lower of cost or market, with cost determined on a first-in, first-out basis. We periodically review the composition of inventory in order to identify obsolete, slow-moving or otherwise non-saleable items. If non-saleable items are observed and there are no alternate uses for the inventory, we will record a write-down to net realizable value in the period that the decline in value is first recognized. Included in inventory are raw materials used in the production of preclinical and clinical products, which are charged to research and development expense when consumed.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We capitalize inventory costs associated with certain products prior to regulatory approval of products, or for inventory produced in new production facilities, when management considers it highly probable that the pre-approval inventories will be saleable. The determination to capitalize is based on the particular facts and circumstances relating to the expected regulatory approval of the product or production facility being considered, and accordingly, the time frame within which the determination is made varies from product to product. The assessment of whether or not the product is considered highly probable to be saleable is made on a quarterly basis and includes, but is not limited to, how far a particular product or facility has progressed along the approval process, any known safety or efficacy concerns, potential labeling restrictions and other impediments. We could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, a delay in commercialization or other potential factors.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of plant and equipment is recorded using the straight-line method. Building improvements are depreciated over the remaining useful life of the building. Leasehold improvements are depreciated over the lesser of the economic useful life of the asset or the remaining term of the lease, including anticipated renewal options. The estimated useful lives of capitalized assets are as follows:
|
|
|
Buildings
|
40 years
|
Building and operating equipment
|
15 years
|
Manufacturing machinery and equipment
|
10 years
|
Other machinery and equipment
|
5 years
|
Furniture and fixtures
|
5 years
|
Computer equipment and software
|
3-7 years
|
Maintenance and repairs are charged to operations as incurred, while expenditures for improvements which extend the life of an asset are capitalized.
Capitalized Software Costs:
We capitalize software costs incurred in connection with developing or obtaining software. Capitalized software costs are included in property, plant and equipment, net and are amortized over their estimated useful life of
three
to
seven
years from the date the systems are ready for their intended use.
Investments in Other Entities:
We hold a portfolio of investments in equity securities and certain investment funds that are accounted for under either the equity method or cost method. Investments in companies or certain investment funds over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in other income (expense), net. Our equity investments in the publicly traded common stock of companies, including common stock of companies with whom we have entered into collaboration agreements, are designated as marketable securities available for sale. Investments in equity securities of companies that become publicly traded are accounted for as available-for-sale marketable securities prospectively from the date of such companies' initial public offering if we are not restricted from selling our investment for greater than one year. Our cost method and equity method investments are included in other assets on the Consolidated Balance Sheets.
All investments are reviewed on a regular basis for possible impairment. If an investment's fair value is determined to be less than its net carrying value and the decline is determined to be other-than-temporary, the investment is written down to its fair value. Such an evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an other-than-temporary decline in value has occurred include: market value or exit price of the investment based on either market-quoted prices or future rounds of financing by the investee; length of time that the market value was below its cost basis; financial condition and business prospects of the investee; our intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment; issues that raise concerns about the investee's ability to continue as a going concern; any other information that we may be aware of related to the investment.
Other Intangible Assets:
Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Amortization is initiated for in-process research and development (IPR&D) intangible assets when their useful lives have been determined. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense recognized in the income statement. These IPR&D intangible assets are tested at least annually or when a triggering event occurs that could indicate a potential impairment.
Goodwill:
Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination accounted for by the acquisition method of accounting and is not amortized, but is subject to impairment testing. We test our
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
goodwill for impairment at least annually or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts.
Impairment of Long-Lived Assets:
Long-lived assets, such as property, plant and equipment and certain other long-term assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the assets exceed their estimated future undiscounted net cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceed the fair value of the assets.
Contingent Consideration from Business Combinations:
Subsequent to the acquisition date, we measure contingent consideration arrangements at fair value for each period with changes in fair value recognized in income as Acquisition related charges, net. Changes in contingent consideration obligation values can result from movements in publicly listed prices of our Contingent Value Rights (CVRs), adjustments to discount rates, updates in the assumed achievement or timing of milestones or changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. In the absence of new information, changes in fair value reflect only the passage of time as development work towards the achievement of the milestones progresses, and is accrued based on an accretion schedule.
Foreign Currency Translation:
Operations in non-U.S. entities are recorded in the functional currency of each entity. For financial reporting purposes, the functional currency of an entity is determined by a review of the source of an entity's most predominant cash flows. The results of operations for non-U.S. dollar functional currency entities are translated from functional currencies into U.S. dollars using the average currency rate during each month, which approximates the results that would be obtained using actual currency rates on the dates of individual transactions. Assets and liabilities are translated using currency rates at the end of the period. Adjustments resulting from translating the financial statements of our foreign entities into the U.S. dollar are excluded from the determination of net income and are recorded as a component of other comprehensive income (loss). Transaction gains and losses are recorded in other income (expense), net in the Consolidated Statements of Income.
Research and Development Costs:
Research and development costs are expensed as incurred. These include all internal and external costs related to services contracted by us. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Milestone payments made to third parties upon regulatory approval are capitalized and amortized over the remaining useful life of the related product. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Asset acquisition expenses, including expenses to acquire rights to pre-commercial compounds from a collaboration partner when there will be no further participation from the collaboration partner or other parties, are recorded as incurred.
Income Taxes:
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. We recognize the benefit of an uncertain tax position that we have taken or expect to take on income tax returns we file if such tax position is more likely than not to be sustained.
Revenue Recognition:
Revenue from the sale of products is recognized when title and risk of loss of the product is transferred to the customer and the sales price is fixed and determinable. Provisions for discounts, early payments, rebates, sales returns and distributor chargebacks under terms customary in the industry are provided for in the same period the related sales are recorded. We record estimated reductions to revenue for volume-based discounts and rebates at the time of the initial sale. The estimated reductions to revenue for such volume-based discounts and rebates are based on the sales terms, historical experience and trend analysis.
We base our sales returns allowance on estimated on-hand retail/hospital inventories, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits,
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance.
Sales discount accruals are based on payment terms extended to customers.
Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on estimated historical patient data related to Medicaid Managed Care Organizations. We also analyze actual billings received from the states to further support the accrual rates. Manufacturers of pharmaceutical products are responsible for
50%
of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze data for eligible Medicare Part D patients against data for eligible Medicare Part D patients treated with our products as well as the historical invoices. This expense is recognized throughout the year as costs are incurred. In certain international markets government-sponsored programs require rebates to be paid based on program specific rules and, accordingly, the rebate accruals are determined primarily on estimated eligible sales.
Rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from
one
to
15
months from the date of sale. We record a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.
Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Distributor service fee accruals are based on contractual fees to be paid to the wholesale distributor for services provided. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are included in chargeback accruals and are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.
We record estimated reductions to revenue for free goods and volume-based discounts at the time of the initial sale. The estimated reductions to revenue for such free goods and volume-based discounts are based on the sales terms, historical experience and trend analysis. The cost of free goods is included in cost of goods sold (excluding amortization of acquired intangible assets).
We recognize revenue from royalties based on licensees' sales of our products or products using our technologies. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured. If royalties cannot be reasonably estimated or collectability of a royalty amount is not reasonably assured, royalties are recognized as revenue when the cash is received.
Share-Based Compensation:
We utilize share based compensation in the form of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PSUs). Compensation expense is recognized in the Consolidated Statements of Income based on the estimated fair value of the awards at grant date. Compensation expense recognized reflects an estimate of the number of awards expected to vest after taking into consideration an estimate of award forfeitures based on actual experience and is recognized on a straight-line basis over the requisite service period, which is generally the vesting period required to obtain full vesting. Management expectations related to the achievement of performance goals associated with PSU grants is assessed regularly and that assessment is used to determine whether PSU grants are expected to vest. If performance-based milestones related to PSU grants are not met or not expected to be met, any compensation expense recognized to date associated with grants that are not expected to vest will be reversed.
The fair values of stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The fair values of RSU and PSU grants that are not based on market performance are based on the market value of our Common Stock on the date of grant. Certain of our PSU grants are measured based on the achievement of specified performance and market targets, including non-GAAP revenue, non-GAAP earnings per share, and relative total shareholder return. The grant date fair value for the portion of the PSUs related to non-GAAP revenue and non-GAAP earnings per share is estimated using the fair market value of our common stock on the grant date. The grant date fair value for the portion of the PSUs related to relative total shareholder return is estimated using the Monte Carlo valuation model.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Earnings Per Share:
Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, assuming potentially dilutive common shares resulting from option exercises, RSUs, PSUs, warrants and other incentives had been issued and any proceeds thereof used to repurchase common stock at the average market price during the period. The assumed proceeds used to repurchase common stock is the sum of the amount to be paid to us upon exercise of options, the amount of compensation cost attributed to future services and not yet recognized and, if applicable, the amount of excess income tax benefit that would be credited to paid-in capital upon exercise.
New accounting standards which have been adopted
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 more closely aligns the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS standards by requiring that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, similar to the presentation of debt discounts or premiums. We adopted ASU 2015-03 in the first quarter of 2016. Other assets and Long-term debt, net of discount have been restated as of December 31, 2015 to reflect the retroactive reclassification of
$89.0 million
of debt issuance costs that have been reclassified from Other assets to Long-term debt, net of discount.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, "Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement" (ASU 2015-05). ASU 2015-05 provides guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 was effective for us beginning in the first quarter of 2016. The adoption of this updated standard did not have a material impact on our consolidated financial statements and related disclosures.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" (ASU 2015-16). ASU 2015-16 replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 was effective for us beginning in the first quarter of 2016. During the third quarter of 2016 we recorded a measurement period adjustment related to the valuation of contingent consideration and goodwill associated with the 2015 acquisition of Quanticel Pharmaceuticals, Inc. (Quanticel) that reduced the acquisition date fair values of both contingent consideration and goodwill by
$10.7 million
. There was no material impact on 2016 net income.
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
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 contracts during 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 July 2015, the 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. The new standard will be effective for us on January 1, 2017. We do not expect the implementation of the updated standard to have a material impact on our consolidated financial statements and related disclosures.
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 at December 31, 2016 with a fair value of
$891.1 million
, 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 have aggregate future minimum lease payments of
$213.4 million
at December 31, 2016 under our current portfolio of non-cancelable leased office and research facilities with various expirations dates between 2017 and 2025. We anticipate recognition of additional assets and corresponding liabilities related to these leases on our consolidated balance sheet.
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. The new standard will be
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
effective for us on January 1, 2017 and will be adopted on a prospective basis. We do not expect the implementation of the updated standard to 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). ASU 2016-09 changes several aspects of the accounting for share-based payment transactions including requiring all excess tax benefits and tax deficiencies to be recognized in the Statement of Income as a discrete item in the reporting period in which they occur, classification of awards as either equity or liabilities, employee tax withholding, calculation of shares for use in diluted earnings per share, and classification on the Statement of Cash Flows. The new standard will be effective for us on January 1, 2017. Changes introduced by ASU 2016-09 related to the timing of when unrecognized tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value will be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the first quarter of 2017. We anticipate that the updated standard will result in an increase in the shares used in the calculation of diluted earnings per share in an amount that will vary depending primarily on the share price of our common stock during future periods as well as the strike prices of outstanding employee stock options during future periods. We expect the adoption of ASU 2016-09 to have a number of impacts on our consolidated financial statements, the most notable being a decrease in our income tax provision, an increase in the number of shares used in the calculation of diluted earnings per share and a decrease in cash provided by financing activities with a corresponding increase in cash provided by operating activities. The magnitude of such impacts will depend upon future movements in our share price as well as the timing of stock award exercises, which are both difficult to estimate.
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 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 are currently evaluating the effect that the standard will have on our consolidated financial statements and related disclosures.
2. Acquisitions and Divestitures
Acquisitions and Divestitures of Businesses
Receptos, Inc. (Receptos):
On August 27, 2015 (Acquisition Date), we acquired all of the outstanding common stock of Receptos, resulting in Receptos becoming our wholly-owned subsidiary. Receptos' lead drug candidate, ozanimod, is a small molecule that modulates sphingosine 1-phosphate 1 and 5 receptors and it is in development for immune-inflammatory indications, including
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
inflammatory bowel disease and relapsing multiple sclerosis (RMS). The acquisition of Receptos also included RPC4046, an anti-interleukin-13 (IL-13) antibody in development for eosinophilic esophagitis (EoE), an allergic/immune-mediated orphan disease. RPC4046 was licensed from AbbVie Bahamas Ltd. and AbbVie Inc. (collectively referred to as AbbVie). The results of operations and cash flows for Receptos are included in our consolidated financial statements from the Acquisition Date and the assets and liabilities of Receptos have been recorded at their respective fair values on the Acquisition Date and consolidated with our assets and liabilities.
We paid approximately
$7.626 billion
, consisting of
$7.311 billion
for common stock outstanding and
$0.315 billion
for the portion of equity compensation attributable to the pre-combination period. In addition, we paid
$0.197 billion
for the portion of equity compensation attributable to the post-combination service period, which has been recorded as expense over the required service period ending in the fourth quarter of 2015.
The acquisition has been accounted for using the acquisition method of accounting which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and requires the fair value of acquired IPR&D to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts.
The total consideration for the acquisition of Receptos is summarized as follows:
|
|
|
|
|
|
Total Consideration
|
Cash paid for outstanding common stock
|
$
|
7,311.3
|
|
Cash for equity compensation attributable to pre-combination service
|
314.9
|
|
Total consideration
|
$
|
7,626.2
|
|
The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the Acquisition Date based upon their respective fair values summarized below. During the fourth quarter of 2015, adjustments were recorded to increase the amounts initially recorded for deferred tax assets, deferred tax liabilities and goodwill as of the Acquisition Date.
|
|
|
|
|
|
Amounts Recognized as of the Acquisition Date
|
Working capital
1
|
$
|
479.2
|
|
Property, plant and equipment
|
5.0
|
|
In-process research and development product rights
|
6,842.0
|
|
Current deferred tax assets
2
|
241.3
|
|
Other non-current assets
|
7.9
|
|
Non-current deferred tax liabilities
3
|
(2,519.2
|
)
|
Total identifiable net assets
|
5,056.2
|
|
Goodwill
|
2,570.0
|
|
Total net assets acquired
|
$
|
7,626.2
|
|
1
Includes cash and cash equivalents, available for sale marketable securities, other current assets, accounts payable, and accrued expenses and other current liabilities.
2
Following adoption of Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes" in the fourth quarter of 2015 all deferred tax assets and liabilities and associated valuation allowances are classified as non-current.
3
Upon integration of the acquired intangible assets into our offshore research, manufacturing, and commercial operations, the deferred tax liability was reclassified to a non-current tax liability.
The fair values of current and other non-current assets, current liabilities and property, plant and equipment were determined to approximate their book values.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair value assigned to acquired IPR&D was based on the present value of expected after-tax cash flows attributable to ozanimod, which is in phase II and III testing. The present value of expected after-tax cash flows attributable to ozanimod and assigned to IPR&D was determined by estimating the after-tax costs to complete development of ozanimod into a commercially viable product, estimating future revenue and ongoing expenses to produce, support and sell ozanimod, on an after-tax basis, and discounting the resulting net cash flows to present value. The revenue and costs projections used were reduced based on the probability that compounds at similar stages of development will become commercially viable products. The rate utilized to discount the net cash flows to their present value reflects the risk associated with the intangible asset and is benchmarked to the cost of equity. Acquired IPR&D will be accounted for as an indefinite-lived intangible asset until regulatory approval in a major market or discontinuation of development.
The excess of purchase price over the fair value amounts assigned to identifiable assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is primarily attributable to the broadening of our product portfolio and research capabilities in the inflammation and immunology therapeutic area, the assembled workforce and the deferred tax consequences of the IPR&D asset recorded for financial statement purposes. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition has been recorded as a non-current asset in our Consolidated Balance Sheets and is not amortized, but is subject to review for impairment annually.
From the Acquisition Date through December 31, 2015, our Consolidated Statements of Income included expenses of
$380.5 million
associated with the acquisition and operations of Receptos as follows
1
:
|
|
|
|
|
|
Statements of Income Location
|
|
Acquisition Date Through December 31, 2015
|
Research and development
|
|
$
|
78.6
|
|
Selling, general and administrative
|
|
5.1
|
|
Acquisition related charges and restructuring, net
2
|
|
296.8
|
|
Total
|
|
$
|
380.5
|
|
1
In addition, Celgene incurred
$19.9 million
of acquisition related costs prior to the acquisition date.
2
Consists of acquisition-related compensation expense and transaction costs.
Pro Forma Financial Information:
The following table provides unaudited pro forma financial information for the twelve-month periods ended December 31, 2015 as if the acquisition of Receptos had occurred on January 1, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
Twelve-Month Periods Ended December 31,
|
|
|
2015
|
|
2014
|
Total revenue
|
|
$
|
9,256.0
|
|
|
$
|
7,676.3
|
|
Net income
|
|
$
|
1,630.8
|
|
|
$
|
1,499.9
|
|
|
|
|
|
|
Net income per common share: basic
|
|
$
|
2.06
|
|
|
$
|
1.87
|
|
Net income per common share: diluted
|
|
$
|
1.98
|
|
|
$
|
1.79
|
|
The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of Celgene and Receptos. The pro-forma financial information assumes that the acquisition-related transaction fees and costs incurred were removed from the twelve-month period ended December 31, 2015 and were assumed to have been incurred during the first quarter of 2014. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the combined operations of Celgene and Receptos. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of the period presented, nor are they intended to represent or be indicative of future results of operations.
Quanticel Pharmaceuticals, Inc. (Quanticel):
On October 19, 2015, we completed our acquisition of Quanticel, a privately held biotechnology company focused on cancer drug discovery, for consideration consisting of
$95.9 million
in cash at closing plus contingent consideration consisting of future payments of up to
$385.0 million
for achieving specified discovery and development targets. We had a research collaboration arrangement with Quanticel since 2011. Through this purchase, Quanticel has become
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
our wholly-owned subsidiary, and we will benefit from full access to Quanticel’s proprietary platform for the single-cell genomic analysis of human cancer, as well as Quanticel’s programs that target specific epigenetic modifiers, which we expect will advance our pipeline of innovative cancer therapies.
The acquisition was accounted for using the acquisition method of accounting for business combinations which requires the assets and liabilities of Quanticel to be recorded at their respective fair values on the acquisition date and consolidated into our Consolidated Balance Sheets. The results of operations and cash flows for Quanticel have been included in our consolidated financial statements from the date of acquisition. Pro-forma results of operations for this acquisition have not been presented because this acquisition is not material to our consolidated results of operations.
Fair value amounts allocated to contingent consideration and goodwill presented below have been reduced by
$10.7 million
during 2016. These measurement period adjustments were not significant and did not have a significant impact on our financial condition, results of operations or cash flows.
The fair value of consideration transferred in the acquisition of Quanticel is shown in the table below:
|
|
|
|
|
|
Fair Value at October 19, 2015 (as adjusted)
|
Cash
|
$
|
95.9
|
|
Fair value of pre-existing equity ownership
|
11.4
|
|
Contingent consideration
|
155.3
|
|
Total fair value of consideration
|
$
|
262.6
|
|
Prior to the acquisition of Quanticel, we had an equity interest equal to approximately
5%
of the company’s total capital stock (on an “as converted” basis). Based on the fair market value of this interest derived from the purchase price, we recognized a gain of
$10.3 million
, which was reflected as a component of Other income (expense), net within our Consolidated Statement of Income for the year ended December 31, 2015.
Our potential contingent consideration payments are classified as liabilities, which were measured at fair value as of the acquisition date. We estimated the fair value of potential contingent consideration using a probability-weighted discounted cash flow approach, which reflects the probability and timing of future potential payments. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a level three liability within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a discount rate based on a market participant assumption. See Note 4 for post-acquisition changes in fair value. The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below.
|
|
|
|
|
|
Fair Value at October 19, 2015
(as adjusted)
|
Working capital
1
|
$
|
7.0
|
|
Property, plant and equipment
|
1.9
|
|
Other non-current assets
|
0.8
|
|
Technology platform intangible asset
2
|
232.0
|
|
Debt obligations
|
(13.9
|
)
|
Non-current deferred tax liabilities
|
(72.3
|
)
|
Total identifiable net assets
|
155.5
|
|
Goodwill
|
107.1
|
|
Total net assets acquired
|
$
|
262.6
|
|
1
Includes cash and cash equivalents, available-for-sale marketable securities, other current assets, accounts payable and accrued expenses and other current liabilities.
2
Technology platform related to Quanticel’s proprietary technology platform for the single-cell genomic analysis of human cancer.
The fair values of current and other non-current assets, property, plant and equipment, current liabilities and debt were determined to approximate their book values.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair value of the technology platform intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset, which was calculated based on the multi-period excess earnings method of the income approach. The multi-period excess earnings method of the income approach included estimating probability adjusted annual after-tax net cash flows through the cycle of development and commercialization of potential products generated by the technology platform then discounting the resulting probability adjusted net post-tax cash flows using a discount rate commensurate with the risk of our overall business operations to arrive at the net present value.
The excess of purchase price over the fair value amounts assigned to the identifiable assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to the deferred tax consequences of the finite-lived technology platform intangible asset recorded for financial statement purposes, as well as intangible assets that do not qualify for separate recognition at the time of the acquisition. We do not expect any portion of this goodwill to be deductible for tax purposes. Goodwill attributable to the acquisition has been recorded as a non-current asset in our Consolidated Balance Sheets and is not amortized, but is subject to review for impairment annually.
Nogra Pharma Limited (Nogra):
On April 23, 2014, we entered into a license agreement with Nogra, pursuant to which Nogra granted us an exclusive, royalty-bearing license for its intellectual property relating to GED-0301, an antisense oligonucleotide targeting Smad7, to develop and commercialize products containing GED-0301 for the treatment of Crohn’s disease and other indications. A phase II trial of GED-0301 in patients with active Crohn's disease has been completed and we have initiated a multi-trial clinical program that is designed to support global registrations of GED-0301 in Crohn's disease.
Under the terms of the agreement, which became effective on May 14, 2014 after receipt of certain governmental clearances and approvals, we made an upfront payment of
$710.0 million
and may make additional contingent developmental, regulatory and sales milestone payments as well as payments based on percentages of annual sales of licensed products. The maximum aggregate amount payable for development and regulatory milestones is approximately
$815.0 million
, which covers such milestones relating to Crohn’s disease and other indications. Starting from global annual net sales of
$500.0 million
, aggregate tiered sales milestone payments could total a maximum of
$1.050 billion
if global annual net sales reach
$4.000 billion
.
The development and application of the intellectual property covered under the license agreement will be managed by joint committees composed of members from each of Nogra and us. We have the tie-breaking vote on the joint steering committee and as such have ultimate decision-making authority for development, regulatory and commercialization decisions. The agreement also includes provisions for access to employees of Nogra, technical assistance, transfer of manufacturing agreements and transfer of Nogra know-how related to GED-0301. Based on the foregoing factors, for accounting purposes, we have concluded that the acquired assets meet the definition of a business and have accounted for the GED-0301 license as IPR&D acquired in a business combination. The acquisition method of accounting requires that (a) the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and (b) the fair value of IPR&D be classified as an indefinite-lived asset until the successful completion or abandonment of the associated research and development efforts. Pro-forma results of operations for this acquisition have not been presented because this acquisition is not material to our consolidated results of operations.
The fair value of consideration transferred to acquire the license amounted to:
|
|
|
|
|
|
Fair Value at
April 23, 2014
|
Cash
|
$
|
710.0
|
|
Contingent consideration
|
1,060.0
|
|
Total fair value of consideration
|
$
|
1,770.0
|
|
Our potential contingent consideration payments were measured at fair value as of the acquisition date and classified as liabilities. We estimated the fair value of potential contingent consideration using a probability-weighted income approach, which reflects the probability and timing of future potential payments. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a level three liability within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a discount rate based on a market participant assumption. See Note 4 for post-acquisition changes in fair value. The purchase price allocation resulted in the following amounts being allocated to the assets acquired at the acquisition date based on their respective fair values:
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
Fair Value at
April 23, 2014
|
In-process research and development product rights
|
$
|
1,620.0
|
|
Current deferred tax assets
|
1.3
|
|
Non-current deferred tax liabilities, net
|
(1.3
|
)
|
Total identifiable net assets
|
1,620.0
|
|
Goodwill
|
150.0
|
|
Total net assets acquired
|
$
|
1,770.0
|
|
The fair value of the acquired IPR&D asset was based on the present value of expected net cash flows from the GED-0301 product candidate. Net cash flows were determined by estimating future sales, net of the costs to complete development of GED-0301 into a commercially viable product. Estimated net cash flows were adjusted to reflect the probability of successfully developing a new drug from a product candidate that has completed a phase II trial. Additionally, the projections considered the relevant market sizes and growth factors and the nature and expected timing of a new product introduction. The resulting net cash flows from such potential products include our estimates of cost of sales, operating expenses, and income taxes. The rates utilized to discount the net cash flows to their present value were commensurate with the stage of development of the project and uncertainties in the economic estimates used in the projections described above. The acquired IPR&D asset is accounted for as an indefinite-lived intangible asset until regulatory approval in a major market or discontinuation.
The excess of purchase price over the fair value amounts assigned to the assets acquired represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to intangible assets that do not qualify for separate recognition. We expect this goodwill to be deductible for tax purposes.
The license agreement may be terminated (i) at our discretion upon
180
days’ written notice to Nogra, provided that such termination will not become effective before May 14, 2017, and (ii) by either party upon material breach of the other party, subject to cure periods. Upon the expiration of our royalty payment obligations under the license agreement, on a country-by-country and licensed product-by-licensed product basis, the license granted under the license agreement will become fully paid-up, irrevocable, perpetual, and non-terminable with respect to such licensed product in such country.
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
$39.6 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 share-holders. The transaction generated a
$37.5 million
gain that was recorded on our Consolidated Statements of Income in Other income (expense), net. As of December 31, 2016 our total investment in HLI represents approximately
16%
of HLI's outstanding capital stock.
Other Acquisitions
EngMab AG (EngMab):
On September 27, 2016, we acquired all of the outstanding shares of EngMab, a privately held biotechnology company focused on T-cell bi-specific antibodies. EngMab’s lead molecule, EM901 is a preclinical T-cell bi-specific antibody targeting B-cell maturation antigen (BCMA). The acquisition also included another early stage program.
The consideration included an initial payment of
606.9 million
Swiss Francs (CHF) (approximately
$625.3 million
at the time of acquisition), contingent development and regulatory milestones of up to CHF
150.0 million
(approximately
$154.7 million
) and contingent commercial milestones of up to CHF
2.250 billion
(approximately
$2.320 billion
) based on cumulative sales levels of between
$1.000 billion
and
$40.000 billion
. The acquisition of EngMab 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 EM901 molecule and another early stage program, resulting in a
$623.3 million
research and development asset acquisition expense and
$2.0 million
of net working capital acquired.
Acetylon Pharmaceuticals, Inc. (Acetylon):
On December 16, 2016, we acquired all of the remaining outstanding equity interests we did not already own (approximately
86%
) in Acetylon, a privately held biotechnology company focused on developing next-generation selective small molecule histone deacetylase (“HDAC”) inhibitors, which allow for epigenetic regulation of gene and protein function. Acetylon’s lead molecule, ACY-241 is a HDAC6 inhibitor in Phase 1 trials for relapsed and/or refractory multiple
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
myeloma. The acquisition also included another early stage molecule. Prior to the acquisition, we had an equity interest equal to approximately
14%
of Acetylon’s total capital stock with a carrying value of approximately
$30.0 million
.
The consideration transferred included an initial payment of
$196.3 million
. In addition, the sellers of Acetylon are eligible to receive contingent regulatory milestones of up to
$375.0 million
per eligible product, contingent commercial milestones of up to
$1.500 billion
based on achieving annual net sales in excess of
$1.000 billion
and tiered royalties on annual net sales of eligible products. 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 and carrying value of our previous equity interest were allocated primarily to ACY-241 and another early stage molecule, resulting in a
$226.1 million
research and development asset acquisition expense and
$0.2 million
of net assets acquired.
Triphase Research and Development I Corporation (Triphase):
On November 17, 2016, we acquired from Triphase Accelerator, L.P. (Sellers) all of the outstanding shares of Triphase by exercising the option we acquired on October 22, 2012. Triphase is a privately held, biotechnology company focusing on the development of marizomib for glioblastoma and relapsed and/or refractory multiple myeloma.
The consideration transferred was valued at
$42.4 million
including the value of the exercised option of
$17.6 million
. In addition, the sellers are eligible to receive contingent development and regulatory milestones of up to
$125.0 million
, contingent commercial milestones of up to
$300.0 million
based on achieving annual net sales equal in excess of
$1.000 billion
and royalties on annual net sales. 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 was allocated primarily to the marizomib asset, resulting in a
$43.5 million
research and development asset acquisition expense and
$1.1 million
of net liabilities acquired.
3. Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net income
|
|
$
|
1,999.2
|
|
|
$
|
1,602.0
|
|
|
$
|
1,999.9
|
|
Weighted-average shares:
|
|
|
|
|
|
|
Basic
|
|
777.2
|
|
|
792.2
|
|
|
802.7
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Options, RSUs, PSUs, warrants and other
|
|
26.1
|
|
|
32.7
|
|
|
33.3
|
|
Diluted
|
|
803.3
|
|
|
824.9
|
|
|
836.0
|
|
Net income per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
2.57
|
|
|
$
|
2.02
|
|
|
$
|
2.49
|
|
Diluted
|
|
$
|
2.49
|
|
|
$
|
1.94
|
|
|
$
|
2.39
|
|
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
23.8 million
in
2016
,
14.1 million
in
2015
and
18.7 million
in
2014
.
During the period of April 2009 through December 2016, our Board of Directors approved repurchases of up to an aggregate of
$20.500 billion
of our common stock, including the authorization in June 2016 to repurchase an additional
$3.000 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 2016, 2015 and 2014 we recorded net gains of
$7.6 million
, net losses of
$9.9 million
, and net gains of
$11.6 million
, respectively, from selling put options on our common stock on the Consolidated Statements of Income in Other income (expense), net. At December 31, 2016, we had
no
outstanding put options.
We repurchased
21.4 million
shares of common stock under the program from all sources during 2016 at a total cost of
$2.160 billion
. As of December 31, 2016, we had a remaining open-ended repurchase authorization of
$4.731 billion
.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
4. Financial Instruments and Fair Value Measurement
The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2016 and 2015, 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 CVRs. See Note 18 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 MBS, global corporate debt securities, asset backed securities, time deposits 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.
|
|
|
•
|
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, Avila Therapeutics, Inc. (Avila) and 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, net in the Consolidated Statements of Income. The fair value of our contingent consideration as of December 31, 2016 and December 31, 2015 was calculated using the following significant unobservable inputs:
|
|
|
|
Inputs
|
Ranges (weighted average) utilized as of:
|
December 31, 2016
|
December 31, 2015
|
Discount rate
|
1.5% to 12.0% (8.6%)
|
0.8% to 12.0% (8.8%)
|
Probability of payment
|
0% to 95% (42%)
|
0% to 95% (53%)
|
Projected year of payment for development and regulatory milestones
|
2017 to 2029 (2019)
|
2016 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
$120.0 million
,
$475.0 million
and
$313.6 million
, respectively, and
$1.865 billion
plus other amounts calculated as a percentage of annual sales pursuant to the license agreement with Nogra.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
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
|
|
$
|
1,799.8
|
|
|
$
|
891.1
|
|
|
$
|
908.7
|
|
|
$
|
—
|
|
Forward currency contracts
|
|
378.9
|
|
|
—
|
|
|
378.9
|
|
|
—
|
|
Purchased currency options
|
|
139.6
|
|
|
—
|
|
|
139.6
|
|
|
—
|
|
Interest rate swaps
|
|
31.4
|
|
|
—
|
|
|
31.4
|
|
|
—
|
|
Total assets
|
|
$
|
2,349.7
|
|
|
$
|
891.1
|
|
|
$
|
1,458.6
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent value rights
|
|
$
|
(44.6
|
)
|
|
$
|
(44.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Written currency options
|
|
(53.9
|
)
|
|
—
|
|
|
(53.9
|
)
|
|
—
|
|
Other acquisition related contingent consideration
|
|
(1,489.6
|
)
|
|
—
|
|
|
—
|
|
|
(1,489.6
|
)
|
Total liabilities
|
|
$
|
(1,588.1
|
)
|
|
$
|
(44.6
|
)
|
|
$
|
(53.9
|
)
|
|
$
|
(1,489.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31, 2015
|
|
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
|
|
$
|
1,671.6
|
|
|
$
|
1,235.9
|
|
|
$
|
435.7
|
|
|
$
|
—
|
|
Forward currency contracts
|
|
606.0
|
|
|
—
|
|
|
606.0
|
|
|
—
|
|
Purchased currency options
|
|
46.7
|
|
|
—
|
|
|
46.7
|
|
|
—
|
|
Interest rate swaps
|
|
52.5
|
|
|
—
|
|
|
52.5
|
|
|
—
|
|
Total assets
|
|
$
|
2,376.8
|
|
|
$
|
1,235.9
|
|
|
$
|
1,140.9
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Contingent value rights
|
|
$
|
(51.9
|
)
|
|
$
|
(51.9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Written currency options
|
|
(19.1
|
)
|
|
—
|
|
|
(19.1
|
)
|
|
—
|
|
Other acquisition related contingent consideration
|
|
(1,521.5
|
)
|
|
—
|
|
|
—
|
|
|
(1,521.5
|
)
|
Total liabilities
|
|
$
|
(1,592.5
|
)
|
|
$
|
(51.9
|
)
|
|
$
|
(19.1
|
)
|
|
$
|
(1,521.5
|
)
|
There were no security transfers between levels 1 and 2 during years ended December 31, 2016 and 2015. The following table represents a roll-forward of the fair value of level 3 instruments:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Liabilities:
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(1,521.5
|
)
|
|
$
|
(1,279.0
|
)
|
Amounts acquired or issued, including measurement period adjustments
|
|
10.7
|
|
|
(166.0
|
)
|
Net change in fair value
|
|
(28.6
|
)
|
|
(76.5
|
)
|
Settlements
|
|
49.8
|
|
|
—
|
|
Transfers in and/or out of Level 3
|
|
—
|
|
|
—
|
|
Balance at end of period
|
|
$
|
(1,489.6
|
)
|
|
$
|
(1,521.5
|
)
|
The roll-forward of the fair value of level 3 instruments above includes an
$89.6 million
decrease in the fair value of contingent consideration from the acquisition of Avila that was recorded during 2016 as a result of adjustments made to the probability and timing of future potential milestone payments. An adjustment was also made to the technology platform asset obtained in the acquisition of Avila based on probability-weighted future cash flows, which resulted in an
$83.1 million
reduction in the fair value
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
of the technology platform asset during 2016 (see Note 10). The fair value of level 3 liabilities also decreased by
$49.8 million
for milestones related to the acquisition of Quanticel that were achieved during 2016. Lastly, a
$10.7 million
measurement period adjustment was recorded during 2016 related to the valuation of contingent consideration associated with the 2015 acquisition of Quanticel (see Note 2). These decreases were partly offset by accretion of the fair value of our contingent consideration due to the passage of time. Changes to the fair value of contingent consideration are recorded on the Consolidated Statements of Income as Acquisition related charges, net.
5. 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 at
December 31, 2016
and
December 31, 2015
had settlement dates within
31 months
and
36 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 (expense), 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 to Other income (expense), net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
Foreign Currency:
|
|
2016
|
|
2015
|
Australian Dollar
|
|
$
|
48.7
|
|
|
$
|
45.1
|
|
British Pound
|
|
199.0
|
|
|
289.3
|
|
Canadian Dollar
|
|
192.5
|
|
|
135.9
|
|
Euro
|
|
1,811.9
|
|
|
2,934.3
|
|
Japanese Yen
|
|
597.4
|
|
|
510.4
|
|
Total
|
|
$
|
2,849.5
|
|
|
$
|
3,915.0
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
December 31, 2016
, 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 (expense), net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at
December 31, 2016
and
December 31, 2015
were
$933.8 million
and
$920.0 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 at
December 31, 2016
and
December 31, 2015
had settlement dates within
48 months
and
36 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 at
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
Notional Amount
1
|
|
2016
|
|
2015
|
Foreign currency option contracts designated as hedging activity:
|
|
|
|
Purchased Put
|
$
|
1,790.1
|
|
|
$
|
641.5
|
|
Written Call
|
$
|
2,009.4
|
|
|
$
|
690.0
|
|
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
$386.8 million
at December 31, 2016 and settlement dates within
24 months
.
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 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.
During 2014, we entered into forward starting swaps that were designated as cash flow hedges to hedge against changes in interest rates that could impact an anticipated issuance of debt in 2015. During 2015, we entered into additional forward starting swaps and treasury rate locks. Forward starting swaps and treasury rate locks with a combined aggregate notional amount of
$2.900 billion
were settled upon the issuance of debt in August 2015, when the net fair value of the forward starting swaps and treasury rate locks in accumulated OCI was in a loss position of
$21.6 million
. The net loss will be recognized as interest expense over the life of the associated senior notes. At
December 31, 2016
and
December 31, 2015
, 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:
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
2016
|
|
2015
|
Forward starting interest rate swap contracts:
|
|
|
|
Forward starting swaps with effective dates in 2017
|
$
|
500.0
|
|
|
$
|
200.0
|
|
Forward starting swaps with effective dates in 2018
|
$
|
500.0
|
|
|
$
|
—
|
|
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. 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.
We had entered into swap contracts that were designated as hedges of certain of our fixed rate notes and also terminated the hedging relationship by settling certain of those swap contracts during 2016 and 2015. In July 2016, we terminated the hedging relationship on all of our then outstanding swap contracts, amounting to
$3.600 billion
notional amount, by settling such swap contracts. The settlement of swap contracts resulted in the receipt of net proceeds of
$195.6 million
and
$10.8 million
during the years ended December 31, 2016 and
2015
, respectively, which are 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.
The following table summarizes the notional amounts of our outstanding interest rate swap contracts at
December 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
|
2016
|
|
2015
|
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
|
|
|
|
|
1.900% senior notes due 2017
|
|
$
|
—
|
|
|
$
|
300.0
|
|
2.300% senior notes due 2018
|
|
—
|
|
|
200.0
|
|
2.250% senior notes due 2019
|
|
—
|
|
|
500.0
|
|
3.950% senior notes due 2020
|
|
—
|
|
|
500.0
|
|
3.250% senior notes due 2022
|
|
—
|
|
|
1,000.0
|
|
4.000% senior notes due 2023
|
|
—
|
|
|
700.0
|
|
3.625% senior notes due 2024
|
|
—
|
|
|
100.0
|
|
3.875% senior notes due 2025
|
|
200.0
|
|
|
250.0
|
|
Total
|
|
$
|
200.0
|
|
|
$
|
3,550.0
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
Fair Value
|
Instrument
|
|
Balance Sheet
Location
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
$
|
317.5
|
|
|
$
|
10.1
|
|
|
|
Other non-current assets
|
|
177.6
|
|
|
71.1
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
0.8
|
|
|
—
|
|
|
|
Other non-current assets
|
|
38.0
|
|
|
6.9
|
|
|
|
Other non-current liabilities
|
|
0.6
|
|
|
1.9
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
56.6
|
|
|
3.6
|
|
|
|
Accrued expenses and other current liabilities
|
|
0.2
|
|
|
2.5
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
2.4
|
|
|
2.3
|
|
|
|
Other non-current assets
|
|
2.6
|
|
|
1.9
|
|
Total
|
|
|
|
$
|
596.3
|
|
|
$
|
100.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
Fair Value
|
Instrument
|
|
Balance Sheet
Location
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
$
|
356.2
|
|
|
$
|
18.0
|
|
|
|
Other non-current assets
|
|
287.8
|
|
|
28.0
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
30.7
|
|
|
—
|
|
|
|
Other non-current assets
|
|
26.1
|
|
|
4.7
|
|
|
|
Other non-current liabilities
|
|
0.2
|
|
|
0.9
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts
1
|
|
Other current assets
|
|
46.0
|
|
|
5.9
|
|
|
|
Accrued expenses and other current liabilities
|
|
2.9
|
|
|
7.4
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
2.4
|
|
|
2.3
|
|
|
|
Other non-current assets
|
|
2.4
|
|
|
1.4
|
|
Total
|
|
|
|
$
|
754.7
|
|
|
$
|
68.6
|
|
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.
The following table summarizes the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
(Effective Portion)
|
|
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
|
|
|
Instrument
|
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
|
|
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
|
Foreign exchange contracts
|
|
$
|
109.2
|
|
|
Net product sales
|
|
$
|
307.1
|
|
|
Other income, net
|
|
$
|
19.3
|
|
|
2
|
Treasury rate lock agreements
|
|
$
|
—
|
|
|
Interest expense
|
|
$
|
(5.2
|
)
|
|
Other income, net
|
|
$
|
—
|
|
|
|
Forward starting interest rate swaps
|
|
$
|
36.1
|
|
|
Interest expense
|
|
$
|
(1.6
|
)
|
|
Other income, net
|
|
$
|
—
|
|
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
1
|
Net gains of
$310.6 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
$17.1 million
of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and
$2.2 million
in gains related to the ineffective portion of the hedging relationships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
(Effective Portion)
|
|
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
|
|
|
Instrument
|
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
|
|
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
|
|
|
Foreign exchange contracts
|
|
$
|
429.4
|
|
|
Net product sales
|
|
$
|
354.4
|
|
|
Other income, net
|
|
$
|
20.0
|
|
|
1
|
Treasury rate lock agreements
|
|
$
|
(27.9
|
)
|
|
Interest expense
|
|
$
|
(4.2
|
)
|
|
Other income, net
|
|
$
|
(0.2
|
)
|
|
2
|
Forward starting interest rate swaps
|
|
$
|
9.0
|
|
|
Interest expense
|
|
$
|
(1.5
|
)
|
|
Other income, net
|
|
$
|
0.3
|
|
|
2
|
|
|
1
|
The amount of net gains recognized in income represents
$23.0 million
of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and
$3.0 million
of losses related to the ineffective portion of the hedging relationships.
|
|
|
2
|
The amount of net loss recognized in income relates 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 years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
Recognized in Income
on Derivative
|
|
Amount of Gain (Loss)
Recognized in Income
on Derivative
|
Instrument
|
|
2016
|
|
2015
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
45.0
|
|
|
$
|
60.3
|
|
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain (Loss)
Recognized in Income
on Derivative
|
|
Amount of Gain (Loss)
Recognized in Income
on Derivative
|
Instrument
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
$
|
21.3
|
|
|
$
|
81.2
|
|
Put options sold
|
|
Other income (expense), net
|
|
$
|
7.6
|
|
|
$
|
(9.9
|
)
|
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 (expense), 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.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
6. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
Money market funds of
$1.598 billion
and
$1.413 billion
at December 31,
2016
and
2015
, respectively, were recorded at cost, which approximates fair value and are included in cash and cash equivalents.
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 at December 31,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
U.S. Treasury securities
|
|
$
|
120.8
|
|
|
$
|
—
|
|
|
$
|
(0.9
|
)
|
|
$
|
119.9
|
|
U.S. government-sponsored agency MBS
|
|
30.8
|
|
|
—
|
|
|
(0.4
|
)
|
|
30.4
|
|
Corporate debt – global
|
|
378.3
|
|
|
0.1
|
|
|
(0.7
|
)
|
|
377.7
|
|
Asset backed securities
|
|
16.7
|
|
|
—
|
|
|
—
|
|
|
16.7
|
|
Time deposits
1
|
|
364.0
|
|
|
—
|
|
|
—
|
|
|
364.0
|
|
Marketable equity securities
|
|
671.8
|
|
|
237.9
|
|
|
(18.6
|
)
|
|
891.1
|
|
Total available-for-sale marketable securities
|
|
$
|
1,582.4
|
|
|
$
|
238.0
|
|
|
$
|
(20.6
|
)
|
|
$
|
1,799.8
|
|
1
Time deposits with original maturities of greater than three months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
U.S. Treasury securities
|
|
$
|
153.0
|
|
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
|
$
|
152.6
|
|
U.S. government-sponsored agency MBS
|
|
29.8
|
|
|
0.1
|
|
|
(0.4
|
)
|
|
29.5
|
|
Corporate debt – global
|
|
219.7
|
|
|
—
|
|
|
(1.6
|
)
|
|
218.1
|
|
Asset backed securities
|
|
35.6
|
|
|
—
|
|
|
(0.1
|
)
|
|
35.5
|
|
Marketable equity securities
|
|
811.5
|
|
|
468.1
|
|
|
(43.7
|
)
|
|
1,235.9
|
|
Total available-for-sale marketable securities
|
|
$
|
1,249.6
|
|
|
$
|
468.2
|
|
|
$
|
(46.2
|
)
|
|
$
|
1,671.6
|
|
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. Marketable equity securities consist of investments in publicly traded equity securities. The decrease in net unrealized gains in marketable equity securities in
2016
compared to
2015
primarily reflects the decrease in market value for certain equity investments during 2016. During the fourth quarter of 2016, we recorded an expense of
$272.2 million
to reclassify the unrealized loss in OCI related to our holding of Juno Therapeutics, Inc. (Juno) common shares due to a decline in the underlying fair value of the securities, which we concluded to be other-than-temporary. The adjustment reflects Juno’s share price as of December 31, 2016 and is included on the Consolidated Statement of Income in Other income (expense), net. Net unrealized losses in marketable debt securities primarily reflect the impact of increased interest rates at December 31,
2016
.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair value of all available-for-sale securities, which have been in an unrealized loss position for less than and longer than 12 months at December 31,
2016
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
December 31, 2016
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Loss
|
|
Estimated
Fair
Value
|
|
Gross
Unrealized
Loss
|
U.S. Treasury securities
|
|
$
|
109.9
|
|
|
$
|
(0.9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109.9
|
|
|
$
|
(0.9
|
)
|
U.S. government-sponsored agency MBS
|
|
24.9
|
|
|
(0.4
|
)
|
|
3.8
|
|
|
—
|
|
|
28.7
|
|
|
(0.4
|
)
|
Corporate debt – global
|
|
208.2
|
|
|
(0.7
|
)
|
|
2.6
|
|
|
—
|
|
|
210.8
|
|
|
(0.7
|
)
|
Asset backed securities
|
|
11.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11.4
|
|
|
—
|
|
Marketable equity securities
|
|
86.1
|
|
|
(18.5
|
)
|
|
0.6
|
|
|
(0.1
|
)
|
|
86.7
|
|
|
(18.6
|
)
|
Total
|
|
$
|
440.5
|
|
|
$
|
(20.5
|
)
|
|
$
|
7.0
|
|
|
$
|
(0.1
|
)
|
|
$
|
447.5
|
|
|
$
|
(20.6
|
)
|
We believe that the remaining decline in fair value of securities held at December 31,
2016
below their cost is temporary and intend to retain our investment in these securities for a sufficient period of time to allow for recovery in the market value of these investments.
Duration periods of available-for-sale debt securities at December 31,
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
Duration of one year or less
|
|
$
|
219.2
|
|
|
$
|
219.1
|
|
Duration of one through three years
|
|
316.4
|
|
|
314.9
|
|
Duration of three through five years
|
|
10.9
|
|
|
10.7
|
|
Total
|
|
$
|
546.5
|
|
|
$
|
544.7
|
|
7. Inventory
A summary of inventories by major category at
December 31, 2016
and
2015
follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Raw materials
|
|
$
|
274.1
|
|
|
$
|
201.3
|
|
Work in process
|
|
87.2
|
|
|
120.0
|
|
Finished goods
|
|
136.6
|
|
|
122.1
|
|
Total
|
|
$
|
497.9
|
|
|
$
|
443.4
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Property, Plant and Equipment
Property, plant and equipment at
December 31, 2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land
|
|
$
|
76.7
|
|
|
$
|
75.4
|
|
Buildings
|
|
443.0
|
|
|
274.1
|
|
Building and operating equipment
|
|
45.6
|
|
|
33.1
|
|
Leasehold improvements
|
|
150.3
|
|
|
152.3
|
|
Machinery and equipment
|
|
281.5
|
|
|
246.6
|
|
Furniture and fixtures
|
|
59.6
|
|
|
53.2
|
|
Computer equipment and software
|
|
441.7
|
|
|
389.6
|
|
Construction in progress
|
|
148.6
|
|
|
221.3
|
|
Subtotal
|
|
1,647.0
|
|
|
1,445.6
|
|
Less accumulated depreciation and amortization
|
|
717.2
|
|
|
631.5
|
|
Total
|
|
$
|
929.8
|
|
|
$
|
814.1
|
|
The increase in the balance of buildings from December 31, 2015 to
December 31, 2016
primarily relates to the expansion of our corporate headquarters in Summit, New Jersey and the construction of a new manufacturing facility in Couvet, Switzerland.
9. Other Financial Information
Other current assets at December 31,
2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Income tax receivable
|
|
$
|
42.9
|
|
|
$
|
—
|
|
Derivative assets
|
|
361.3
|
|
|
409.0
|
|
Other prepaid taxes
|
|
119.2
|
|
|
169.1
|
|
Prepaid income taxes
|
|
95.1
|
|
|
160.7
|
|
Prepaid maintenance and software licenses
|
|
38.5
|
|
|
30.8
|
|
Other
|
|
122.3
|
|
|
215.1
|
|
Total
|
|
$
|
779.3
|
|
|
$
|
984.7
|
|
Accrued expenses and other current liabilities at December 31,
2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Rebates, distributor chargebacks and distributor services
|
|
$
|
561.0
|
|
|
$
|
366.8
|
|
Compensation
|
|
413.8
|
|
|
353.4
|
|
Clinical trial costs and grants
|
|
341.8
|
|
|
255.1
|
|
Litigation-related loss contingency (see Note 18)
|
|
198.5
|
|
|
—
|
|
Interest
|
|
167.7
|
|
|
170.3
|
|
Sales, use, value added, and other taxes
|
|
100.8
|
|
|
69.0
|
|
Contingent consideration
|
|
46.9
|
|
|
109.4
|
|
Royalties, license fees and collaboration agreements
|
|
12.7
|
|
|
116.2
|
|
Other
|
|
271.8
|
|
|
207.5
|
|
Total
|
|
$
|
2,115.0
|
|
|
$
|
1,647.7
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other non-current liabilities at December 31,
2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Contingent consideration
|
|
$
|
1,442.7
|
|
|
$
|
1,412.1
|
|
Deferred compensation and long-term incentives
|
|
215.4
|
|
|
170.5
|
|
Contingent value rights
|
|
44.6
|
|
|
51.9
|
|
Deferred income taxes
|
|
—
|
|
|
377.7
|
|
Other
|
|
68.5
|
|
|
29.5
|
|
Total
|
|
$
|
1,771.2
|
|
|
$
|
2,041.7
|
|
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. The remaining weighted-average amortization period for finite-lived intangible assets not fully amortized is approximately
9.4 years
. Our indefinite lived intangible assets consist of acquired IPR&D product rights from the Receptos, Nogra and Gloucester acquisitions.
Intangible assets outstanding as of December 31, 2016 and December 31, 2015 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangible
Assets,
Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
Acquired developed product rights
|
|
$
|
3,405.9
|
|
|
$
|
(1,693.6
|
)
|
|
$
|
1,712.3
|
|
Technology
|
|
482.6
|
|
|
(326.2
|
)
|
|
156.4
|
|
Licenses
|
|
66.9
|
|
|
(26.6
|
)
|
|
40.3
|
|
Other
|
|
43.3
|
|
|
(31.1
|
)
|
|
12.2
|
|
|
|
3,998.7
|
|
|
(2,077.5
|
)
|
|
1,921.2
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
Acquired IPR&D product rights
|
|
8,470.6
|
|
|
—
|
|
|
8,470.6
|
|
Total intangible assets
|
|
$
|
12,469.3
|
|
|
$
|
(2,077.5
|
)
|
|
$
|
10,391.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
Intangible
Assets,
Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
Acquired developed product rights
|
|
$
|
3,405.9
|
|
|
$
|
(1,448.3
|
)
|
|
$
|
1,957.6
|
|
Technology
|
|
565.7
|
|
|
(197.1
|
)
|
|
368.6
|
|
Licenses
|
|
66.7
|
|
|
(22.3
|
)
|
|
44.4
|
|
Other
|
|
44.0
|
|
|
(27.1
|
)
|
|
16.9
|
|
|
|
4,082.3
|
|
|
(1,694.8
|
)
|
|
2,387.5
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
Acquired IPR&D product rights
|
|
8,470.6
|
|
|
—
|
|
|
8,470.6
|
|
Total intangible assets
|
|
$
|
12,552.9
|
|
|
$
|
(1,694.8
|
)
|
|
$
|
10,858.1
|
|
The gross carrying value of intangible assets decreased by
$83.6 million
in 2016 compared to 2015 primarily due to an
$83.1 million
impairment charge included in Amortization of acquired intangible assets, to write down the technology platform asset obtained in the acquisition of Avila. The impairment charge was due to revised estimates of the probability-weighted forecasted future cash flows expected to be produced from the technology platform compared to prior estimates. An adjustment was also made to the probability and timing of future potential milestone payments, which resulted in a reduction in the fair value of our contingent consideration payable to the former shareholders of Avila (see Note 4).
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Amortization expense was
$465.7 million
,
$284.7 million
and
$263.9 million
for the years ended December 31,
2016
,
2015
and
2014
, respectively. Amortization expense increased by a net
$181.0 million
in 2016 compared to 2015, the increase primarily related to the impairment charge noted above as well as an acceleration of amortization expense related to the Avila technology platform, the amortization of the technology platform received in the October 2015 acquisition of Quanticel and a reduction in the estimated useful lives of intangible assets related to the acquisition of Gloucester following the grant to Fresenius Kabi USA, LLC of a non-exclusive, royalty-free sublicense to manufacture and market a generic version of romidepsin for injection as of February 1, 2018. Assuming no changes in the gross carrying amount of finite lived intangible assets, the future annual amortization expense related to finite lived intangible assets is expected to be approximately
$335.9 million
in
2017
,
$252.3 million
in 2018,
$155.5 million
in 2019,
$154.2 million
in 2020, and
$151.5 million
in 2021.
Goodwill:
At
December 31, 2016
, our goodwill related to the 2015 acquisitions of Receptos and Quanticel, 2014 acquisition of Nogra, the 2012 acquisition of Avila, the 2010 acquisitions of Abraxis and Gloucester, the 2008 acquisition of Pharmion and the 2004 acquisition of Penn T Limited.
The change in carrying value of goodwill is summarized as follows:
|
|
|
|
|
Balance at December 31, 2015
|
$
|
4,879.0
|
|
Sale of LifebankUSA business (see Note 2)
|
(2.5
|
)
|
Acquisition of Quanticel - measurement period adjustment (see Note 2)
|
(10.7
|
)
|
Balance at December 31, 2016
|
$
|
4,865.8
|
|
11. Debt
Short-Term Borrowings and Current Portion of Long-Term Debt:
We had
no
outstanding short-term borrowing as of December 31, 2016 or December 31, 2015. The current portion of long-term debt outstanding as of December 31,
2016
and
2015
includes:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
1.900% senior notes due 2017
|
|
$
|
500.7
|
|
|
$
|
—
|
|
Long-Term Debt:
Our outstanding senior notes with maturity dates in excess of one year after December 31, 2016 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 at December 31,
2016
and
2015
are summarized below:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
1.900% senior notes due 2017
|
$
|
—
|
|
|
$
|
499.9
|
|
2.125% senior notes due 2018
|
997.9
|
|
|
996.7
|
|
2.300% senior notes due 2018
|
401.9
|
|
|
400.2
|
|
2.250% senior notes due 2019
|
509.3
|
|
|
502.6
|
|
2.875% senior notes due 2020
|
1,492.7
|
|
|
1,490.9
|
|
3.950% senior notes due 2020
|
518.5
|
|
|
504.9
|
|
3.250% senior notes due 2022
|
1,053.5
|
|
|
1,010.5
|
|
3.550% senior notes due 2022
|
993.5
|
|
|
992.4
|
|
4.000% senior notes due 2023
|
743.5
|
|
|
706.0
|
|
3.625% senior notes due 2024
|
1,001.0
|
|
|
994.9
|
|
3.875% senior notes due 2025
|
2,475.3
|
|
|
2,461.8
|
|
5.700% senior notes due 2040
|
247.2
|
|
|
247.2
|
|
5.250% senior notes due 2043
|
392.9
|
|
|
392.8
|
|
4.625% senior notes due 2044
|
986.9
|
|
|
986.6
|
|
5.000% senior notes due 2045
|
1,974.4
|
|
|
1,974.0
|
|
Total long-term debt
|
$
|
13,788.5
|
|
|
$
|
14,161.4
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31,
2016
, the fair value of our outstanding Senior Notes was
$14.572 billion
and represented a level 2 measurement within the fair value measurement hierarchy.
In August 2015, we issued an additional
$8.000 billion
principal amount of senior notes consisting of
$1.000 billion
aggregate principal amount of
2.125%
Senior Notes due 2018 (the 2018 notes),
$1.500 billion
aggregate principal amount of
2.875%
Senior Notes due 2020 (the 2020 notes),
$1.000 billion
aggregate principal amount of
3.550%
Senior Notes due 2022 (the 2022 notes),
$2.500 billion
aggregate principal amount of
3.875%
Senior Notes due 2025 (the 2025 notes) and
$2.000 billion
aggregate principal amount of
5.000%
Senior Notes due 2045 (the 2045 notes and together with the 2018 notes, the 2020 notes, the 2022 notes, and the 2025 notes, referred to herein as the “2015 issued notes”).
The 2015 issued notes were issued at
99.994%
,
99.819%
,
99.729%
,
99.034%
, and
99.691%
of par, respectively, and the discount is being amortized as additional interest expense over the period from issuance through maturity. Offering costs of approximately
$50.0 million
have been recorded as debt issuance costs on our Consolidated Balance Sheets and are being amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. Interest on the 2015 issued notes is payable semi-annually in arrears on February 15 and August 15 each year beginning February 15, 2016 and the principal on each 2015 issued note is due in full at their respective maturity dates. The 2015 issued notes may be redeemed at our option, in whole or in part; the 2018 notes, the 2020 notes, and the 2022 notes may be redeemed at any time, the 2025 notes and 2045 notes may be redeemed at three months and six months prior to the maturity dates, respectively.
Early redemption would be at a redemption price equaling accrued and unpaid interest plus the greater of 100% of the principal amount of the 2015 issued notes to be redeemed or the sum of the present values of the remaining scheduled payments of interest and principal discounted to the date of redemption on a semi-annual basis plus 20 basis points in the case of the 2018 notes, 20 basis points in the case of the 2020 notes, 25 basis points in the case of the 2022 notes, 30 basis points in the case of the 2025 notes, and 35 basis points in the case of the 2045 notes. If we experience a change of control accompanied by a downgrade of the debt to below investment grade, we will be required to offer to repurchase the 2015 issued notes at a purchase price equal to
101%
of their principal amount plus accrued and unpaid interest. We are subject to covenants which limit our ability to pledge properties as security under borrowing arrangements and limit our ability to perform sale and leaseback transactions involving our property.
In 2015, the
2.45%
senior notes with a principal amount of
$500.0 million
matured and were repaid. We also assumed
$13.9 million
of debt obligations as part of the acquisition of Quanticel in 2015 that were repaid in 2015.
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 December 31, 2016, a balance of
$60.9 million
in losses remained in accumulated OCI related to settlements of these derivative instruments and will be recognized as interest expense over the life of the notes.
At December 31, 2016, 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 5. Our swap contracts outstanding at December 31, 2016 effectively convert 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 December 31, 2016 and 2015, we had a balances of
$173.5 million
and
$33.1 million
, respectively, of unamortized gains recorded as a component of our debt as a result of past swap contract settlements, including
$160.8 million
and
$6.0 million
related to the settlement of swap contracts during 2016 and 2015, respectively. See Note 5 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
$2.000 billion
. As of December 31, 2016 and December 31, 2015, we had available capacity to issue up to
$2.000 billion
and
$1.750 billion
of Commercial Paper, respectively, 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
$2.000 billion
, which was increased from
$1.750 billion
in April 2016. Also in April 2016, the term of the Credit Facility was extended from April 17, 2020 to April 17, 2021. 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. At December 31,
2016
and
2015
, 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 December 31,
2016
.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
12. Stockholders' Equity
Preferred Stock:
Our Board of Directors is authorized to issue, at any time, without further stockholder approval, up to
5.0 million
shares of preferred stock, and to determine the price, rights, privileges, and preferences of such shares.
Common Stock:
At December 31,
2016
, we were authorized to issue up to
1.150 billion
shares of common stock of which shares of common stock issued totaled
954.1 million
.
Treasury Stock:
During the period of April 2009 through December 2016, our Board of Directors has approved repurchases of up to an aggregate
$20.500 billion
of our common stock, including the June 2016 authorization to repurchase an additional
$3.000 billion
of our common stock. We repurchased
$2.159 billion
,
$3.251 billion
, and
$2.928 billion
of treasury stock under the program in
2016
,
2015
and
2014
, respectively, excluding transaction fees. As of December 31,
2016
an aggregate
168.2 million
common shares were repurchased under the program at an average price of
$93.73
per common share and total cost of
$15.780 billion
.
Other:
When employee awards of RSUs vest and are settled net in order to fulfill minimum statutory tax withholding requirements, the shares withheld are reflected as treasury stock.
A summary of changes in common stock issued and treasury stock is presented below (in millions of shares):
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Common Stock
in Treasury
|
December 31, 2013
|
|
906.5
|
|
|
(101.5
|
)
|
Exercise of stock options and conversion of restricted stock units
|
|
18.3
|
|
|
(1.3
|
)
|
Issuance of common stock for employee benefit plans
|
|
—
|
|
|
0.2
|
|
Shares repurchased under share repurchase program
|
|
—
|
|
|
(22.0
|
)
|
December 31, 2014
|
|
924.8
|
|
|
(124.6
|
)
|
Exercise of stock options and conversion of restricted stock units
|
|
15.3
|
|
|
(1.2
|
)
|
Issuance of common stock for employee benefit plans
|
|
—
|
|
|
0.4
|
|
Shares repurchased under share repurchase program
|
|
—
|
|
|
(28.1
|
)
|
December 31, 2015
|
|
940.1
|
|
|
(153.5
|
)
|
Exercise of stock options and conversion of restricted stock units
|
|
14.0
|
|
|
(1.0
|
)
|
Issuance of common stock for employee benefit plans
|
|
—
|
|
|
0.4
|
|
Shares repurchased under share repurchase program
|
|
—
|
|
|
(21.4
|
)
|
December 31, 2016
|
|
954.1
|
|
|
(175.5
|
)
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. Accumulated Other Comprehensive Income
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
|
|
Net Unrealized
Gains (Losses) From
Marketable Securities
|
|
Net Unrealized
Gains (Losses)
From Hedges
|
|
Foreign
Currency
Translation
Adjustment
|
|
Total
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance December 31, 2014
|
|
$
|
(15.5
|
)
|
|
$
|
460.9
|
|
|
$
|
519.6
|
|
|
$
|
(50.2
|
)
|
|
$
|
914.8
|
|
Other comprehensive income (loss) before reclassifications
|
|
1.6
|
|
|
(204.6
|
)
|
|
417.7
|
|
|
(26.1
|
)
|
|
188.6
|
|
Amount reclassified from accumulated other comprehensive income
|
|
—
|
|
|
15.2
|
|
|
(350.9
|
)
|
|
—
|
|
|
(335.7
|
)
|
Net current-period other comprehensive income (loss)
|
|
1.6
|
|
|
(189.4
|
)
|
|
66.8
|
|
|
(26.1
|
)
|
|
(147.1
|
)
|
Balance December 31, 2015
|
|
$
|
(13.9
|
)
|
|
$
|
271.5
|
|
|
$
|
586.4
|
|
|
$
|
(76.3
|
)
|
|
$
|
767.7
|
|
Other comprehensive income (loss) before reclassifications
|
|
(24.0
|
)
|
|
(359.6
|
)
|
|
131.5
|
|
|
(25.7
|
)
|
|
(277.8
|
)
|
Amount reclassified from accumulated other comprehensive income
|
|
—
|
|
|
232.1
|
|
|
(302.9
|
)
|
|
—
|
|
|
(70.8
|
)
|
Net current-period other comprehensive income (loss)
|
|
(24.0
|
)
|
|
(127.5
|
)
|
|
(171.4
|
)
|
|
(25.7
|
)
|
|
(348.6
|
)
|
Balance December 31, 2016
|
|
$
|
(37.9
|
)
|
|
$
|
144.0
|
|
|
$
|
415.0
|
|
|
$
|
(102.0
|
)
|
|
$
|
419.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
|
Accumulated Other Comprehensive Income Components
|
|
Affected Line Item in the Consolidated Statements of Income
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Gains (losses) from cash-flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Net product sales
|
|
$
|
307.1
|
|
|
$
|
354.4
|
|
|
$
|
27.5
|
|
Treasury rate lock agreements
|
|
Interest (expense)
|
|
(5.2
|
)
|
|
(4.2
|
)
|
|
(3.5
|
)
|
Interest rate swap agreements
|
|
Interest (expense)
|
|
(1.6
|
)
|
|
(1.5
|
)
|
|
(0.9
|
)
|
|
|
Income tax provision
|
|
2.6
|
|
|
2.2
|
|
|
1.7
|
|
Gains (losses) from available-for-sale marketable securities:
|
|
|
|
|
|
|
Realized income (loss) on sales of marketable securities
|
|
Interest and investment income, net
|
|
(357.9
|
)
|
|
(23.4
|
)
|
|
(5.4
|
)
|
|
|
Income tax provision
|
|
125.8
|
|
|
8.2
|
|
|
1.9
|
|
Total reclassification, net of tax
|
|
|
|
$
|
70.8
|
|
|
$
|
335.7
|
|
|
$
|
21.3
|
|
14. 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, RSUs, 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.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On June 15, 2016, our stockholders approved an amendment of the Plan, which included the following key modifications: adoption of an aggregate share reserve of
265,263,282
shares of Common Stock, which includes
17,500,000
new shares of Common Stock; a limitation on the aggregate equity compensation that may be provided to non-employee members of the Board of Directors; and an amendment that includes clarifying changes to employee award provisions regarding vesting acceleration on a change in control or certain employment terminations events and the applicability of the Plan's
five
percent limitation on such awards. The term of the plan is through April 15, 2025.
With respect to options granted under the Plan, the exercise price may not be less than the market closing price of the common stock on the date of grant. In general, options granted under the Plan vest over periods ranging from immediate vesting to
four
-year vesting and expire
ten
years from the date of grant, subject to earlier expiration in case of termination of employment unless the participant meets the retirement provision under which the option would have a maximum of
three
additional years to vest. The vesting period for options granted under the Plan is subject to certain acceleration provisions if a change in control, as defined in the Plan, occurs. Plan participants may elect to exercise options at any time during the option term. However, any shares so purchased which have not vested as of the date of exercise shall be subject to forfeiture, which will lapse in accordance with the established vesting time period.
During 2015, we increased our usage of PSUs and began issuing PSUs to certain executive officers that are payable in shares of our common stock at the end of a
three
-year performance measurement period. The number of shares to be issued at the end of the measurement period will vary, based on performance, from
0%
to
200%
of the target number of PSUs granted, depending on the achievement of specified performance and market targets for non-GAAP revenue (
37.5%
weighting), non-GAAP earnings per share (
37.5%
weighting), and relative total shareholder return (
25%
weighting). All shares delivered upon PSU vesting are restricted from trading for one year and one day from the vesting date.
The grant date fair value for the portion of the PSUs related to non-GAAP revenue and non-GAAP earnings per share was estimated using the fair market value of our common stock on the grant date. The grant date fair value for the portion of the PSUs related to relative total shareholder return was estimated using the Monte Carlo valuation model.
Shares of common stock available for future share-based grants under all plans were
40.9 million
at
December 31, 2016
.
The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Cost of goods sold
|
|
$
|
32.8
|
|
|
$
|
31.7
|
|
|
$
|
26.2
|
|
Research and development
|
|
253.4
|
|
|
250.7
|
|
|
196.5
|
|
Selling, general and administrative
|
|
320.1
|
|
|
294.2
|
|
|
224.9
|
|
Total share-based compensation expense
|
|
606.3
|
|
|
576.6
|
|
|
447.6
|
|
Tax benefit related to share-based compensation expense
|
|
167.2
|
|
|
161.2
|
|
|
129.3
|
|
Reduction in income
|
|
$
|
439.1
|
|
|
$
|
415.4
|
|
|
$
|
318.3
|
|
Included in share-based compensation expense for the years ended
December 31, 2016
,
2015
and
2014
was compensation expense related to non-qualified stock options of
$357.1 million
,
$346.1 million
and
$276.3 million
, respectively. Net proceeds received from share-based compensation arrangements for the years ended
December 31, 2016
,
2015
and
2014
were
$359.1 million
,
$251.7 million
and
$297.2 million
, respectively, and the excess tax benefit recognized was
$188.8 million
,
$300.5 million
and
$250.6 million
, respectively. We do not recognize a deferred tax asset for excess tax benefits that have not been realized and have adopted the tax law method as our accounting policy regarding the ordering of tax benefits to determine whether an excess tax benefit has been realized.
Stock Options:
As of
December 31, 2016
, there was
$602.5 million
of total unrecognized compensation cost related to stock options granted under the plans. That cost will be recognized over an expected remaining weighted-average period of
2.0
years.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The weighted-average grant date fair value of the stock options granted during the years ended
December 31, 2016
,
2015
and
2014
was
$32.49
per share,
$38.83
per share and
$27.92
per share, respectively. We estimated the fair value of options granted using a Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rate
|
|
1.03% - 2.08%
|
|
1.17% - 1.72%
|
|
1.51% - 1.90%
|
Expected volatility
|
|
29% - 35%
|
|
31% - 38%
|
|
28% - 37%
|
Weighted average expected volatility
|
|
32%
|
|
34%
|
|
33%
|
Expected term (years)
|
|
5.04 - 5.06
|
|
5.02 - 5.04
|
|
5.02 - 5.06
|
Expected dividend yield
|
|
0%
|
|
0%
|
|
0%
|
The risk-free interest rate is based on the U.S. Treasury zero-coupon curve. Expected volatility of stock option awards is estimated based on the implied volatility of our publicly traded options with settlement dates of
six
months. The use of implied volatility was based upon the availability of actively traded options on our common stock and the assessment that implied volatility is more representative of future stock price trends than historical volatility. The expected term of an employee share option is the period of time for which the option is expected to be outstanding. We made a determination of expected term by analyzing employees' historical exercise experience from its history of grants and exercises in our option database and management estimates. Forfeiture rates are estimated based on historical data.
The following table summarizes all stock option activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
(in Millions)
|
|
Weighted
Average Exercise
Price Per Option
|
|
Weighted
Average Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value
(in Millions)
|
Outstanding at December 31, 2015
|
|
75.7
|
|
|
$
|
61.99
|
|
|
6.6
|
|
$
|
4,411.8
|
|
Changes during the Year:
|
|
|
|
|
|
|
|
|
Granted
|
|
11.3
|
|
|
105.53
|
|
|
|
|
|
|
Exercised
|
|
(10.9
|
)
|
|
41.70
|
|
|
|
|
|
|
Forfeited
|
|
(2.2
|
)
|
|
94.23
|
|
|
|
|
|
|
Expired
|
|
(0.1
|
)
|
|
101.25
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
73.8
|
|
|
$
|
70.62
|
|
|
6.2
|
|
$
|
3,387.9
|
|
Vested at December 31, 2016 or expected to vest in the future
|
|
73.0
|
|
|
$
|
70.17
|
|
|
6.1
|
|
$
|
3,377.4
|
|
Vested at December 31, 2016
|
|
44.4
|
|
|
$
|
51.09
|
|
|
4.9
|
|
$
|
2,887.0
|
|
The total fair value of shares vested during the years ended
December 31, 2016
,
2015
and
2014
was
$334.5 million
,
$266.5 million
and
$211.3 million
, respectively. The total intrinsic value of stock options exercised during the years ended
December 31, 2016
,
2015
and
2014
was
$747.2 million
,
$993.5 million
and
$946.6 million
, respectively. We primarily utilize newly issued shares to satisfy the exercise of stock options.
Restricted Stock Units:
We issue RSUs, under our equity program in order to provide an effective incentive award with a strong retention component. Equity awards may, at the option of employee participants, be divided between stock options and RSUs. The employee may choose between alternate Company defined mixes of stock options and RSUs, with the number of options to be granted reduced by
four
for every one RSU to be granted.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Information regarding the Company's RSUs for the year ended
December 31, 2016
is as follows (shares in millions):
|
|
|
|
|
|
|
|
|
Nonvested RSUs
|
|
Share Equivalent
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at December 31, 2015
|
|
7.7
|
|
|
$
|
86.28
|
|
Changes during the period:
|
|
|
|
|
Granted
|
|
2.9
|
|
|
103.83
|
|
Vested
|
|
(3.1
|
)
|
|
62.90
|
|
Forfeited
|
|
(0.4
|
)
|
|
98.64
|
|
Nonvested at December 31, 2016
|
|
7.1
|
|
|
$
|
103.00
|
|
As of
December 31, 2016
, there was
$374.0 million
of total unrecognized compensation cost related to non-vested RSU awards. That cost is expected to be recognized over a weighted-average period of
1.6
years. The Company primarily utilizes newly issued shares to satisfy the vesting of RSUs.
Performance-Based Restricted Stock Units:
We grant performance-based restricted stock units that vest contingent upon the achievement of pre-determined performance-based milestones that are either related to product development or the achievement of specified performance and market targets, including non-GAAP revenue, non-GAAP earnings per share, and relative total shareholder return. The following table summarizes the Company's performance-based restricted stock unit activity for the year ended
December 31, 2016
(shares in thousands):
|
|
|
|
|
|
|
|
|
Nonvested Performance-Based RSUs
|
|
Share Equivalent
|
|
Weighted Average Grant Date Fair Value
|
Nonvested at December 31, 2015
|
|
334
|
|
|
$
|
96.07
|
|
Changes during the period:
|
|
|
|
|
Granted
|
|
235
|
|
|
106.52
|
|
Vested
|
|
(73
|
)
|
|
59.49
|
|
Forfeited
|
|
(33
|
)
|
|
92.49
|
|
Non-vested at December 31, 2016
|
|
463
|
|
|
$
|
107.38
|
|
As of
December 31, 2016
, there was
$27.2 million
of total unrecognized compensation cost related to non-vested awards of performance-based RSUs that is expected to be recognized over a weighted-average period of
1.7
years.
15. Employee Benefit Plans
We sponsor an employee savings and retirement plan, which qualifies under Section 401(k) of the Internal Revenue Code, as amended (the Code) for our U.S. employees. Our contributions to the U.S. savings plan are discretionary and have historically been made in the form of our common stock (see Note 12). Such contributions are based on specified percentages of employee contributions up to
6%
of eligible compensation or a maximum permitted by law. Total expense for contributions to the U.S. savings plans were
$40.2 million
,
$35.1 million
and
$40.7 million
in
2016
,
2015
and
2014
, respectively.
We also sponsor defined contribution plans in certain foreign locations. Participation in these plans is subject to the local laws that are in effect for each country and may include statutorily imposed minimum contributions. We also maintain defined benefit plans in certain foreign locations for which the obligations and the net periodic pension costs were determined to be immaterial at December 31,
2016
.
In 2000, our Board of Directors approved a deferred compensation plan. The plan was frozen effective as of December 31, 2004, and no additional contributions or deferrals can be made to that plan. Accrued benefits under the frozen plan will continue to be governed by the terms under the tax laws in effect prior to the enactment of American Jobs Creation Act of 2004, Section 409A (Section 409A).
In February 2005, our Board of Directors adopted the Celgene Corporation 2005 Deferred Compensation Plan, effective as of January 1, 2005, and amended the plan in February 2008. This plan operates as our ongoing deferred compensation plan and is intended to comply with Section 409A. Eligible participants, which include certain top-level executives as specified by the plan,
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
can elect to defer up to an amended
90%
of the participant's base salary,
100%
of cash bonuses and equity compensation allowed under Section 409A. Company contributions to the deferred compensation plan represent a match to certain participants' deferrals up to a specified percentage, which currently ranges from
10%
to
20%
, depending on the employee's position as specified in the plan, of the participant's base salary. We recorded expenses of
$0.3 million
,
$0.3 million
and
$0.3 million
related to our contributions to the deferred compensation plans in
2016
,
2015
and
2014
, respectively. The Company's matches are fully vested upon contribution. All other Company contributions to the plan do not vest until the specified requirements are met. At December 31,
2016
and
2015
, we had a deferred compensation liability included in other non-current liabilities in the Consolidated Balance Sheets of approximately
$125.1 million
and
$104.5 million
, respectively, which included the participant's elected deferral of salaries and bonuses, the Company's matching contribution and earnings on deferred amounts as of that date. The plan provides various alternatives for the measurement of earnings on the amounts participants defer under the plan. The measurement alternatives are based on returns of a variety of funds that offer plan participants the option to spread their risk across a diverse group of investments.
We have established a Long-Term Incentive Plan, or LTIP, designed to provide key officers and executives with performance-based incentive opportunities contingent upon achievement of pre-established corporate performance objectives covering a
three
-year period. At December 31, 2016, we had recorded liabilities for
three
separate
three
-year performance cycles running concurrently and ending December 31, 2016, 2017 and 2018. Performance measures for each of the performance cycles are based on the following components:
37.5%
on non-GAAP earnings per share (as defined in the LTIP);
37.5%
on total non-GAAP revenue (as defined in the LTIP); and
25%
on relative total shareholder return, which is a measurement of our stock price performance during the applicable three-year period compared with a group of other companies in the biopharmaceutical industry.
Threshold, target and maximum cash payout levels are calculated as a percentage between
0%
to
200%
of each participant’s base salary at the time the LTIP was approved by the Compensation Committee. Such awards are payable in cash or common stock or a mixture of cash and common stock, which will be determined by the Compensation Committee at the time of award delivery. Share-based payout levels are calculated using the cash-based threshold, target and maximum levels, divided by the average closing price of Celgene stock for the
30
trading days prior to the commencement of each performance cycle. Therefore, final share-based award values are reflective of the stock price at the end of the measurement period. The Compensation Committee may determine that payments made in common stock are restricted from trading for a period of time. The estimated payout value for the
three
-year performance cycle ended December 31, 2016 is
$24.8 million
, which is included in Accrued expenses and other current liabilities at December 31, 2016, and the maximum potential cash-based payout, assuming maximum objectives are achieved for performance cycles ending in 2017, 2018 and 2019 are
$14.2 million
,
$14.6 million
and
$14.9 million
, respectively. The reduction in the maximum potential cash-based payout for cycles ending after 2016 reflect a shift in the mix of compensation components for certain senior executives, including performance-based equity compensation in lieu of LTIP participation. We accrue the long-term incentive liability over each three-year cycle. Prior to the end of a three-year cycle, the accrual is based on an estimate of our level of achievement during the cycle. Upon a change in control, participants will be entitled to an immediate payment equal to their target award or, if higher, an award based on actual performance through the date of the change in control. For the years ended December 31,
2016
,
2015
and
2014
, we recognized expense related to the LTIP of
$12.8 million
,
$24.9 million
and
$42.3 million
, respectively.
16. Income Taxes
Income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
U.S.
|
|
$
|
734.7
|
|
|
$
|
524.8
|
|
|
$
|
565.0
|
|
Non-U.S.
|
|
1,637.8
|
|
|
1,498.7
|
|
|
1,762.4
|
|
Income before income taxes
|
|
$
|
2,372.5
|
|
|
$
|
2,023.5
|
|
|
$
|
2,327.4
|
|
For the years ended December 31, 2016, 2015 and 2014, U.S. income before income taxes reflects charges related to share-based compensation, upfront collaboration payments, asset impairments, acquisitions and interest expense which in the aggregate, increased from 2014 to 2016. Many of these charges are not deductible for U.S. income tax purposes. Non-U.S. income before income taxes reflects the results of our commercial, research and manufacturing operations outside the U.S.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The provision (benefit) for taxes on income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
United States:
|
|
|
|
|
|
|
Taxes currently payable:
|
|
|
|
|
|
|
Federal
|
|
$
|
569.1
|
|
|
$
|
320.7
|
|
|
$
|
489.4
|
|
State and local
|
|
42.4
|
|
|
63.1
|
|
|
56.3
|
|
Deferred income taxes
|
|
(342.5
|
)
|
|
(28.7
|
)
|
|
(273.8
|
)
|
Total U.S. tax provision
|
|
269.0
|
|
|
355.1
|
|
|
271.9
|
|
International:
|
|
|
|
|
|
|
Taxes currently payable
|
|
105.8
|
|
|
71.1
|
|
|
54.1
|
|
Deferred income taxes
|
|
(1.5
|
)
|
|
(4.7
|
)
|
|
1.5
|
|
Total international tax provision
|
|
104.3
|
|
|
66.4
|
|
|
55.6
|
|
Total provision
|
|
$
|
373.3
|
|
|
$
|
421.5
|
|
|
$
|
327.5
|
|
Amounts are reflected in the preceding tables based on the location of the taxing authorities.
Deferred taxes arise because of different treatment between financial statement accounting and tax accounting, known as temporary differences. We record the tax effect on these temporary differences as deferred tax assets (generally items that can be used as a tax deduction or credit in future periods) or deferred tax liabilities (generally items for which we received a tax deduction but have not yet recorded in the Consolidated Statements of Income and the tax effects of acquisition related temporary differences). We evaluate the likelihood of the realization of deferred tax assets and record a valuation allowance if it is more likely than not that all or a portion of the asset will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes, tax planning strategies and other relevant factors. Significant judgment is required in making this assessment. At December 31, 2016 and 2015, it was more likely than not that we would realize our deferred tax assets, net of valuation allowances. The
$52.5 million
increase in the valuation allowance from 2015 to 2016 relates primarily to certain state and foreign net operating loss (NOL) carryforwards.
We do not provide for U.S. federal or state income taxes on unremitted earnings of our international subsidiaries that are indefinitely reinvested outside the United States. As of December 31, 2016, we have not made a U.S. tax provision on
$13.300 billion
of unremitted earnings of our international subsidiaries. As these earnings are expected to be reinvested overseas indefinitely, it is not practicable to compute the estimated deferred tax liability on these earnings. Approximately
$900.0 million
of our foreign earnings may not be required for use in offshore operations and are not treated as permanently reinvested. Our deferred tax liabilities include
$316.5 million
for the estimated U.S. federal and state income taxes that may be incurred should these earnings be repatriated. In drawing this conclusion, we considered our future sources of funds as well as our global operating and strategic liquidity needs, including common share repurchase activities and expansion of our commercial, research, manufacturing and administrative operations worldwide.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31,
2016
and
2015
the tax effects of temporary differences that give rise to deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
NOL carryforwards
|
|
$
|
133.2
|
|
|
$
|
—
|
|
|
$
|
56.2
|
|
|
$
|
—
|
|
Capitalized research expenses
|
|
19.3
|
|
|
—
|
|
|
3.8
|
|
|
—
|
|
Tax credit carryforwards
|
|
13.7
|
|
|
—
|
|
|
10.7
|
|
|
—
|
|
Share-based compensation
|
|
411.8
|
|
|
—
|
|
|
340.9
|
|
|
—
|
|
Inventory
|
|
12.7
|
|
|
—
|
|
|
11.3
|
|
|
—
|
|
Other assets and liabilities
|
|
46.4
|
|
|
(9.9
|
)
|
|
46.8
|
|
|
(3.7
|
)
|
Intangible assets
|
|
789.4
|
|
|
(1,013.1
|
)
|
|
661.3
|
|
|
(1,135.4
|
)
|
Accrued and other expenses
|
|
263.3
|
|
|
—
|
|
|
233.2
|
|
|
—
|
|
Unremitted earnings
|
|
—
|
|
|
(316.5
|
)
|
|
—
|
|
|
(316.5
|
)
|
Unrealized (gains) losses on securities
|
|
—
|
|
|
(69.3
|
)
|
|
—
|
|
|
(129.9
|
)
|
Subtotal
|
|
1,689.8
|
|
|
(1,408.8
|
)
|
|
1,364.2
|
|
|
(1,585.5
|
)
|
Valuation allowance
|
|
(143.3
|
)
|
|
—
|
|
|
(90.8
|
)
|
|
—
|
|
Total deferred taxes
|
|
$
|
1,546.5
|
|
|
$
|
(1,408.8
|
)
|
|
$
|
1,273.4
|
|
|
$
|
(1,585.5
|
)
|
Net deferred tax asset (liability)
|
|
$
|
137.7
|
|
|
|
|
|
|
|
|
$
|
(312.1
|
)
|
At December 31,
2016
and
2015
, deferred tax assets and liabilities were classified on our Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Other assets (non-current)
|
|
$
|
137.7
|
|
|
$
|
65.6
|
|
Other non-current liabilities
|
|
—
|
|
|
(377.7
|
)
|
Net deferred tax asset (liability)
|
|
$
|
137.7
|
|
|
$
|
(312.1
|
)
|
Reconciliation of the U.S. statutory income tax rate to the Company's effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentages
|
|
2016
|
|
2015
|
|
2014
|
U.S. statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Foreign tax rate differences
|
|
(21.1
|
)%
|
|
(21.0
|
)%
|
|
(22.3
|
)%
|
State taxes, net of federal benefit
|
|
0.8
|
%
|
|
1.2
|
%
|
|
1.0
|
%
|
Change in valuation allowance
|
|
0.5
|
%
|
|
2.0
|
%
|
|
0.2
|
%
|
Acquisition and collaboration related differences
|
|
(0.7
|
)%
|
|
4.5
|
%
|
|
(0.3
|
)%
|
Changes in uncertain tax positions
|
|
(0.4
|
)%
|
|
(0.5
|
)%
|
|
(0.4
|
)%
|
Other
|
|
1.6
|
%
|
|
(0.4
|
)%
|
|
0.9
|
%
|
Effective income tax rate
|
|
15.7
|
%
|
|
20.8
|
%
|
|
14.1
|
%
|
Our reconciliation of the U.S. statutory income tax rate to our effective tax rate includes foreign tax rate differences from our foreign operations which are subject to income taxes at different rates than the United States. The benefit related to foreign tax rate differences primarily results from our commercial operations in Switzerland, which include significant research and development and manufacturing for worldwide markets. We operated under an income tax agreement in Switzerland through 2015 that provided an exemption from most Swiss income taxes on our operations in Switzerland. Beginning in 2016, we are operating under a new agreement with the Swiss tax authorities which reflects a reorganization and expansion of our Swiss operations, and results in similar tax benefits through the end of 2024. The difference between the maximum statutory Swiss income tax rate (approximately
15.6%
in 2016,
17.0%
in 2015 and
18.4%
in 2014) and our Swiss income tax rate under the tax agreements resulted in a reduction in our 2016, 2015 and 2014 effective tax rates of
20.5
,
25.7
and
18.0
percentage points, respectively. The impact of acquisition and collaboration related differences on our effective tax rate was higher in 2015 primarily due to initiations of collaborations with AstraZeneca and Juno in that year. The reconciliation also includes the effect of changes in uncertain tax positions, which include the effect of settlements, expirations of statutes of limitations, and other changes in prior year tax positions.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
At December 31, 2016, we had federal NOL carryforwards of approximately
$200.7 million
and state NOL carryforwards of approximately
$1.313 billion
that will expire in the years 2017 through 2036. We also have research and experimentation credit carryforwards of approximately
$16.1 million
that will expire in the years 2018 through 2036. Deferred tax assets for most of these carryforwards are subject to a full valuation allowance. Excess tax benefits related to share-based compensation deductions incurred after December 31, 2005 are required to be recognized in the period in which the tax deduction is realized through a reduction of income taxes payable. As a result, we have not recorded deferred tax assets for these share-based compensation deductions included in our NOL carryforwards and research and experimentation credit carryforwards. At December 31, 2016, deferred tax assets have not been recorded for state NOL carryforwards of approximately
$527.8 million
and research and experimentation tax credits of approximately
$4.0 million
. Upon adoption of ASU 2016-09 on January 1, 2017, unrecorded deferred tax assets for NOL carryforwards and research and experimentation credit carryforwards generated by excess tax benefits are required to be recorded, net of valuation allowances, by means of a cumulative-effect adjustment to equity. We do not expect the cumulative-effect adjustment to have a material impact on our net deferred tax assets.
We realized excess tax benefits related to share-based compensation in
2016
,
2015
and
2014
for income tax purposes and have increased additional paid-in capital in the amount of approximately
$185.4 million
,
$302.1 million
and
$252.6 million
, respectively. Effective January 1, 2017, ASU 2016-09 requires that all excess tax benefits and tax deficiencies related to share-based compensation be recognized in the income tax provision as a discrete item in the reporting period in which they occur. We have recorded deferred income taxes related to net unrealized gains on securities as a component of accumulated other comprehensive income resulting in a deferred income tax liability at December 31,
2016
and
2015
of
$69.3 million
and
$129.9 million
, respectively.
In 2015, we acquired all of the outstanding common stock of Receptos. The acquisition was accounted for using the acquisition method of accounting, and we recorded a deferred tax liability of
$2.519 billion
related to the acquisition. Upon integration of the acquired assets into our offshore research, manufacturing, and commercial operations, the deferred tax liability was reclassified to a non-current tax liability. This liability represents an estimate of income tax that may be incurred in the future. This income tax liability is contingent upon successful development of the acquired IPR&D into a commercially viable product and would be incurred over the product's economic useful life.
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 tax 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 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, but not limited to, most U.S. states and major European and Asian 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.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Unrecognized tax benefits, generally represented by liabilities on the consolidated balance sheet 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. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at beginning of year
|
|
$
|
325.8
|
|
|
$
|
251.8
|
|
Increases related to prior year tax positions
|
|
—
|
|
|
—
|
|
Decreases related to prior year tax positions
|
|
(11.1
|
)
|
|
—
|
|
Increases related to current year tax positions
|
|
108.3
|
|
|
84.8
|
|
Settlements
|
|
(0.3
|
)
|
|
—
|
|
Lapses of statutes of limitations
|
|
(8.5
|
)
|
|
(10.8
|
)
|
Balance at end of year
|
|
$
|
414.2
|
|
|
$
|
325.8
|
|
These unrecognized tax benefits relate primarily to issues common among multinational corporations. If recognized, unrecognized tax benefits of approximately
$388.3 million
would have a net impact on the effective tax rate. We account for interest and penalties related to uncertain tax positions as part of our provision for income taxes. Accrued interest at December 31,
2016
and
2015
is approximately
$40.1 million
and
$32.6 million
, respectively.
We have recorded changes in the liability for unrecognized tax benefits related to income tax audits in various taxing jurisdictions. The liability for unrecognized tax benefits is expected to increase in the next twelve months relating to operations occurring in that period. Any settlements of examinations with taxing authorities or expirations of statutes of limitations 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 expirations of statutes of limitations. 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 the 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 financial statements in the period of settlement or when the statutes of limitations expire.
17. Collaboration Agreements
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 for options to acquire rights to products and product candidates and other rights, as well as potential development, regulatory and commercial performance milestone payments, cost sharing arrangements, royalty payments, profit sharing and equity investments. These arrangements could include obligations for us to make equity investments in the event of an initial public offering of equity by our partners. The activities under these collaboration agreements 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 below. Summarized financial information related to our alliances is presented in tabular format after the description of alliances:
Acceleron Pharma (Acceleron):
We have worldwide strategic collaboration agreements with Acceleron for the joint development and commercialization of sotatercept (ACE-011) and luspatercept (ACE-536). Luspatercept is currently in phase III studies for beta-thalassemia and MDS.
On January 1, 2013 we became responsible for the payment of all development costs related to sotatercept and luspatercept and have recognized development expenses as research and development expense as they were incurred.
With respect to the sotatercept program, Acceleron is eligible to receive up to
$367.0 million
in development, regulatory approval and sales-based milestones and up to an additional
$348.0 million
for each of
three
specific discovery stage programs. We also agreed to co-promote the developed products in North America. Acceleron will receive tiered royalties on worldwide net sales upon the commercialization of a development compound.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
With respect to the luspatercept program, we have an exclusive, worldwide, royalty-bearing license to luspatercept and future Acceleron products for the treatment of anemia. We also agreed to co-promote the products in the United States, Canada and Mexico. Acceleron is eligible to receive development, regulatory approval and sales-based milestones of up to
$217.5 million
for luspatercept and up to an additional
$170.8 million
for the first discovery stage program,
$148.8 million
for the second discovery stage program and
$125.4 million
for each additional discovery stage program thereafter. Acceleron will receive tiered royalties on worldwide net sales upon the commercialization of a development compound.
The sotatercept agreement may be terminated by us, at our sole discretion, at any time or by either party, among other things, upon a material breach by the other party. The luspatercept agreement may be terminated by us, at our sole discretion, or by either party, among other things, upon a material breach by the other party.
Agios Pharmaceuticals, Inc. (Agios):
During 2010, we entered into a discovery and development collaboration and license agreement with Agios (2010 Collaboration Agreement) that focused on cancer metabolism targets and the discovery, development and commercialization of associated therapeutics.
With respect to each product that we choose to license, Agios could receive up to approximately
$120.0 million
upon achievement of certain milestones and other payments plus royalties on worldwide sales, and Agios may also participate in the development and commercialization of certain products in the United States.
In June 2014, we exercised our option to license AG-221 (enasidenib) from Agios on an exclusive worldwide basis, with Agios retaining the right to conduct a portion of commercialization activities for enasidenib in the United States. Enasidenib is currently in a phase III study in patients that present an isocitrate dehydrogenase-2 (IDH2) mutation in relapsed refractory acute myeloid leukemia (rrAML). A New Drug Application (NDA) was submitted to the U.S. Food and Drug Administration (FDA) in the fourth quarter of 2016 based on Phase I/II data generated in the rrAML population.
In January 2015, we exercised our option to an exclusive license from Agios to AG-120, an orally available, selective inhibitor of the mutated isocitrate dehydrogenase-1 (IDH1) protein for the treatment of patients with cancers that harbor an IDH1 mutation, outside the United States, with Agios retaining the right to conduct development and commercialization within the United States. In May 2016, we agreed to return to Agios the AG-120 lead development candidate. As a result, Agios obtained global rights to AG-120 and the IDH1 program. Neither Agios nor Celgene have any continuing financial obligation, including royalties or milestone payments, to the other concerning AG-120 or the IDH1 program.
In April 2015, we and Agios entered into a new joint worldwide development and profit share collaboration for AG-881. AG-881 is a small molecule that has shown in preclinical studies to fully penetrate the blood brain barrier and inhibit IDH1 and IDH2 mutant cancer cells. Under the terms of the AG-881 collaboration, Agios received an initial payment of
$10.0 million
and is eligible to receive contingent payments of up to
$70.0 million
based on the attainment of specified regulatory goals. The upfront payment to Agios was accounted for as
$9.0 million
of upfront research and development collaboration expense and
$1.0 million
of prepaid manufacturing rights recorded on the balance sheet. We and Agios will jointly collaborate on the worldwide development program for AG-881, sharing development costs equally. The
two
companies will share profits equally, with Celgene recording commercial sales worldwide. Agios will lead commercialization in the U.S. with both companies sharing equally in field-based commercial activities, and we will lead commercialization ex-U.S. with Agios providing one third of field-based commercial activities in the major European Union (EU) markets.
In May 2016, we and
one
of our subsidiaries entered into a new global collaboration agreement with Agios (2016 Collaboration Agreement), focused on the research and development of immunotherapies against certain metabolic targets that exert their antitumor efficacy primarily via the immune system. In addition to new programs identified under the 2016 Collaboration Agreement, we and Agios have also agreed that all future development and commercialization of
two
programs that were conducted under the 2010 Collaboration Agreement will now be governed by the 2016 Collaboration Agreement.
During the term of the 2016 Collaboration Agreement, Agios plans to conduct research programs focused on discovering compounds that are active against metabolic targets in the immuno-oncology (IO) field. The initial
four
-year term will expire in May 2020. We may extend the term for up to
two
additional
one
-year terms or in specified cases, up to
four
additional years.
Under the 2016 Collaboration Agreement, Agios has granted us exclusive options to obtain development and commercialization rights for each program that we have designated for further development. We may exercise each such option beginning on the designation of a development candidate for such program (or on the designation of such program as a continuation program) and ending on the earlier of the end of a specified period after Agios has furnished us with specified information for such program, or January 1, 2030. Programs that have applications in the inflammation or autoimmune (I&I) field that may result from the 2016 Collaboration Agreement will also be subject to the exclusive options described above.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Under the terms of the 2016 Collaboration Agreement, following our exercise of an option with respect to a program, we and Agios (and, if applicable,
one
of its affiliates) will enter into either a co-development and co-commercialization agreement if such program is in the IO field, typically with a
50/50
profit and cost share, or a license agreement if such program is in the I&I field.
In connection with the 2016 Collaboration Agreement, we made an initial upfront payment to Agios in the amount of
$200.0 million
for the initial
four
-year term. We have specified rights to extend the term by paying a per-year extension fee. We will pay Agios a designation fee for each program that we designate for further development and for each continuation program. For each program as to which we exercise our option to develop and commercialize, we will pay Agios an option exercise fee of at least
$30.0 million
for any designated development program and for any continuation programs, plus up to
$169.0 million
(or up to
$209.0 million
for
one
program designated by Celgene which will have a profit and cost share of
65 percent
for Celgene and
35 percent
for Agios) in clinical and regulatory milestone payments (and in the case of licensed programs in the I&I field, up to
$386.0 million
in clinical, regulatory and commercial milestone payments, as well as double-digit tiered royalties on any net sales). Agios will remain responsible for the initial phase I dose escalation study for each program including associated costs.
The 2016 Collaboration Agreement may be terminated by us at our sole discretion on a program-by-program basis upon 90 days prior written notice, or by either party for material breach or bankruptcy by the other party.
Sutro Biopharma, Inc. (Sutro):
In December 2012, we entered into a collaboration and license agreement with Sutro for the development of an antibody drug conjugate (ADC) and a bispecific antibody construct (BAC). Sutro controls and conducts initial development activities. We have the right to select
one
ADC among a number of different sequence-payload combinations and positional variants, and
one
BAC. Sutro is obligated to provide adequate quantities of any selected ADC and selected BAC to allow us to conduct all necessary preclinical studies, including toxicology and pharmacokinetics studies.
Under the terms of the 2012 agreement, Sutro received payments totaling
$35.0 million
, which included an equity investment and other rights. In addition, the 2012 agreement includes certain development and regulatory milestones that could total up to
$204.0 million
for a selected ADC if approved in multiple indications, and up to
$279.0 million
for a selected BAC if approved in multiple indications, as well as tiered royalties based on annual net sales of licensed products.
In September 2014, we entered into a second collaboration and license agreement with Sutro to jointly develop up to
six
prioritized anti-cancer BACs and/or ADCs directed primarily to immune-oncology targets. Sutro will control and conduct initial development activities. We have the right to advance any BAC and/or ADC to investigational new drug (IND)-enabling studies or to designate it as a development candidate, and in either case, we would then have the sole right and responsibility for development activities, although Sutro would still have certain limited manufacturing and supply obligations.
Under the terms of the 2014 agreement, Sutro received payments totaling
$95.0 million
, which included an equity investment that increased our ownership to approximately
15%
, rights with respect to manufacturing and supply of BAC and ADC development candidates, and an option to acquire all of the outstanding equity of Sutro based on a pre-specified valuation procedure. The option is exercisable beginning September 2016 and expires upon the termination of the research term (as extended).
We have the right to obtain access to Sutro’s proprietary protein expression platform to use in conjunction with our intellectual property. Additionally, we have the right to have Sutro evaluate the performance of certain monospecific ADCs directed against up to
five
non-natural amino acid targets, and reengineer, express, and provide antibodies which incorporate a single non-natural amino acid sequence in a number of preferred locations.
The research term of the collaboration and license agreement is
three
years, with an extension available for an additional one-and-a-half years for a payment of an additional fee. We have worldwide commercialization rights for development candidates in which at least
one
binding domain is directed to a certain undisclosed target, plus the first development candidate which does not include at least
one
binding domain directed to that certain undisclosed target but which achieves IND clearance in the U.S. For all other development candidates, Sutro has U.S. rights, while we have all ex-U.S. rights.
Under the terms of the 2014 agreement, Sutro is eligible to receive research and manufacturing milestones of up to
$75.0 million
, clinical development and regulatory approval milestones of up to
$275.0 million
for each compound selected under the collaboration if approved in multiple indications, as well as tiered royalties based on annual net sales of licensed products.
The collaboration and license agreement may be terminated by us at our discretion on a program-by-program basis upon
120
days prior written notice, or by either party for material breach, intellectual property challenge, or bankruptcy by the other party. With certain exceptions, the collaboration and license agreement expires in its entirety upon the expiration of all applicable royalty terms under the Agreement.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
bluebird bio, Inc. (bluebird):
In June 2015, we amended and restated the March 2013 collaboration agreement with bluebird. The amended and restated collaboration focuses on the discovery, development and commercialization of novel disease-altering gene therapy product candidates targeting BCMA. BCMA is a cell surface protein that is expressed in normal plasma cells and in most multiple myeloma cells, but is absent from other normal tissues. The collaboration applies gene therapy technology to modify a patient’s own T-cells, known as chimeric antigen receptor (CAR) T-cells, to target and destroy cancer cells that express BCMA. We have an option to license any anti-BCMA products resulting from the collaboration after the completion of a phase I clinical study by bluebird.
Under the amended and restated collaboration agreement we made an additional
$25.0 million
payment for bluebird to develop the lead anti-BCMA product candidate (bb2121) through a phase I clinical study and to develop next-generation anti-BCMA product candidates. The payment was recorded as prepaid research and development on the balance sheet and is being recognized as expense as development work is performed. Upon exercising our option to license a product and achievement of certain milestones, we may be obligated to pay up to
$230.0 million
per licensed product in aggregate potential option fees and clinical and regulatory milestone payments. bluebird also has the option to participate in the development and commercialization of any licensed products resulting from the collaboration through a 50/50 co-development and profit share in the United States in exchange for a reduction of milestone payments. Royalties would also be paid to bluebird in regions where there is no profit share, including in the United States, if bluebird declines to exercise their co-development and profit sharing rights. In February 2016, we exercised our option to license bb2121 and made a corresponding
$10.0 million
license payment to bluebird.
We have the ability to terminate the collaboration at our discretion upon
90
days written notice to bluebird. If a product is optioned, the parties will enter into a pre-negotiated license agreement and potentially a co-development agreement should bluebird exercise its option to participate in the development and commercialization in the United States. The license agreement, if not terminated sooner, would expire upon the expiration of all applicable royalty terms under the agreement with respect to the particular product, and the co-development agreement, if not terminated sooner, would expire when the product is no longer being developed or commercialized in the United States. Upon the expiration of a particular license agreement, we will have a fully paid-up, royalty-free license to use bluebird intellectual property to manufacture, market, use and sell such licensed product.
FORMA Therapeutics Holdings, LLC (FORMA):
In April 2013, we entered into a collaboration agreement with FORMA to discover, develop and commercialize drug candidates to regulate protein homeostasis targets. Protein homeostasis, which is important in oncology, neurodegenerative and other disorders, involves a tightly regulated network of pathways controlling the biogenesis, folding, transport and degradation of proteins.
The collaboration was launched with an upfront payment that enables us to evaluate selected targets and lead assets in protein homeostasis pathways during the pre-clinical phase. Based on such evaluation, we have the right to obtain exclusive licenses with respect to the development and commercialization of multiple drug candidates outside of the United States, in exchange for research and early development payments of up to approximately
$200.0 million
to FORMA. Under the terms of the collaboration agreement, FORMA is incentivized to advance the full complement of drug candidates through phase I, while Celgene is responsible for all further global clinical development for each licensed candidate. FORMA is eligible to receive up to an additional
$315.0 million
in potential payments based upon development, regulatory and sales objectives for the first ex-U.S. license. FORMA is also eligible to receive potential payments for successive licenses, which escalate for productivity, increasing up to a maximum of an additional
$430.0 million
per program. In addition, FORMA will receive royalties on ex-U.S. sales and additional payments if multiple drug candidates reach defined cumulative sales objectives. The collaboration agreement includes provisions for Celgene to obtain rights with respect to development and commercialization of drug candidates inside the United States in exchange for additional payments.
Under the collaboration, the parties perform initial research and development for a term of
four
years. If, during such research term, a drug candidate meets certain criteria, then the parties enter into a pre-negotiated license agreement and the collaboration continues until all license agreements have expired and all applicable royalty terms under the collaboration with respect to the particular products have expired. Each license agreement, if not terminated sooner, expires upon the expiration of all applicable royalty terms under such agreement. Upon the expiration of each license agreement, we will have an exclusive, fully-paid, royalty-free license to use the applicable FORMA intellectual property to manufacture, market, use and sell the product developed under such agreement outside of the United States. As of December 31, 2016, we have entered into
five
such license agreements with FORMA and paid the applicable upfront payments under such license agreements totaling
$118.0 million
.
On March 21, 2014, we entered into a second collaboration arrangement with FORMA, pursuant to which FORMA granted us an option, for an additional fee, to license the rights to select current and future FORMA drug candidates during a term of three and one half years. We agreed to pay an upfront payment of
$225.0 million
. In addition, with respect to each subsequently licensed drug candidate, we have the obligation to pay designated amounts when certain development, regulatory and sales milestone events occur, with such amounts being variable and contingent on various factors. With respect to each licensed drug candidate, we
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
assume responsibility for all global development activities and costs after completion of phase I clinical trials. FORMA retains U.S. rights to all such licensed assets, including responsibility for manufacturing and commercialization.
Under this collaboration arrangement, we also have an option to enter into up to
two
additional collaborations with successive terms of
two
years each for additional payments totaling approximately
$375.0 million
. If we exercise our option to enter into both of these additional collaborations, we will receive an exclusive option to acquire FORMA, including the U.S. rights to all licensed drug candidates, and worldwide rights to other wholly owned assets within FORMA at that time. As of December 31, 2016, we have entered into
two
such license agreements with FORMA under the second collaboration and paid the applicable upfront payments under such licenses totaling
$41.0 million
.
OncoMed Pharmaceuticals, Inc. (OncoMed):
On December 2, 2013, we entered into a collaboration agreement to jointly develop and commercialize up to
six
anti-cancer stem cell (CSC) product candidates from OncoMed’s biologics pipeline, including demcizumab (OMP-21M18, Anti-DLL4). OncoMed will control and conduct initial clinical studies. We will have an option to license worldwide rights to up to
six
novel anti-CSC therapeutic candidates commencing upon the completion of enrollment of patients in a phase I trial (and with respect to demcizumab, a phase II trial) and ending
60
days after delivery by OncoMed of the applicable data package for each therapeutic candidate, subject to certain extensions. We will also have research, development and commercialization rights to small molecule compounds in another cancer stem cell pathway, with OncoMed eligible to receive milestones and royalties on any resulting products.
Demcizumab is currently in multiple phase Ib, phase Ib/II, and phase II clinical studies in combination with standard-of-care therapeutics, including a trial in patients with first-line advanced pancreatic cancer. Subsequent to the exercise of our option rights, the parties will co-develop demcizumab and share global development costs on a one-third OncoMed and two-thirds Celgene split. Outside the United States, we would lead development and commercialization efforts, with OncoMed eligible to receive milestones and tiered royalties on sales outside the United States. For sales in the United States, OncoMed and Celgene would share profits equally.
In addition to demcizumab, the collaboration includes up to
five
phase Ia, preclinical- or discovery-stage biologics programs: OncoMed’s anti-DLL4/VEGF bispecific antibody and up to
four
additional biologics programs targeting either the RSPO-LGR CSC pathway or another CSC pathway. We have exclusive options on these programs during or after completion of certain phase I clinical trials to be conducted by OncoMed, which if exercised, contain U.S. profit sharing and co-commercialization terms, plus one-third OncoMed and two-thirds Celgene global development cost-sharing and royalties outside the profit-sharing territory.
The collaboration agreement also includes option exercise payments and payments for achievement of development, regulatory and commercial milestones, paid on a per-program basis. For the demcizumab program, these contingent payments could total up to approximately
$790.0 million
, including a
$70.0 million
payment due as a result of predetermined safety criteria in phase II clinical trials achieved on December 31, 2015. For the anti-DLL4/VEGF bispecific antibody program, contingent payments could total up to
$505.0 million
. For the other
four
programs, each program is eligible for up to approximately
$440.0 million
of contingent payments. OncoMed could also receive more than
$100.0 million
in contingent payments for the small molecule program.
The collaboration agreement may be terminated by us on a program-by-program basis upon
120
days prior written notice before exercise of that program option, and after such program option exercise, by either party for material breach by the other party. With certain exceptions, the collaboration agreement expires upon the later of (a) the last-to-expire option term and (b) if
one
or more options are exercised, the termination or expiration of the last to expire agreement with respect to such exercised option.
NantBioScience, Inc. (NantBioScience):
In January 2014, we entered into a collaboration agreement with NantBioScience, an entity controlled by Dr. Patrick Soon-Shiong in which Celgene contributed
$75.0 million
of cash, the rights to the future royalty stream based on net sales of certain products of Active Biomaterials, LLC, another entity controlled by Dr. Patrick Soon-Shiong, and licenses to
two
nab
®
product candidates. In return, Celgene received a
14 percent
preferred equity ownership in NantBioScience, an option to license a certain number of product candidates developed by NantBioScience, including the
two
nab
®
product candidates that Celgene is licensing to NantBioScience, and the parent company of NantBioScience assumed, and agreed to pay and satisfy when due, our obligation to pay The Chan Soon-Shiong Institute for Advanced Health (CSS Institute)
$50.0 million
in contingent, matching contributions. The transaction became effective in March 2014. Unless Celgene terminates the collaboration earlier, in Celgene’s sole discretion upon
30
days written notice, the collaboration will continue until the earliest to occur of: (a) Celgene licensing
four
NantBioScience product candidates; (b) NantBioScience presenting data packages for
ten
product candidates; and (c) the date which is
10
years after the effective date. Regardless of any termination of the collaboration, the
14 percent
preferred equity ownership in NantBioScience and the assumption of the
$50.0 million
in contingent, matching contributions by the parent company of NantBioScience remain in effect. We performed a valuation of the components of the transaction and allocated the consideration transferred as follows:
$50.0 million
for the collaboration agreement upfront expense;
$25.0 million
related to the settlement of contingent matching contributions, and;
$90.0 million
related to the equity ownership in NantBioScience.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
AstraZeneca PLC (AstraZeneca):
In April 2015, we entered into a strategic collaboration agreement with MedImmune Limited (MedImmune), a subsidiary of AstraZeneca, to develop and commercialize durvalumab, a novel anti-PD-L1 monoclonal antibody, for hematologic malignancies. The agreement provides for a negotiation period to expand the agreement for other immuno-therapeutics. Under the terms of the agreement, we made an upfront payment of
$450.0 million
to MedImmune. We lead clinical development across all new clinical trials within the collaboration and are responsible for all costs associated with such trials until December 31, 2016, after which we will be responsible for
75
percent of those costs. We also will be responsible for the global commercialization of approved durvalumab indications in hematology, and will receive royalty rates starting at
70
percent of worldwide sales from all uses in hematology. Royalty rates will decrease gradually to
50
percent over a period of
4 years
after the start of commercial sales. The agreement may be terminated at our discretion upon
nine
months’ prior written notice to MedImmune, and by either party upon material breach of the other party, subject to cure periods. The agreement, if not terminated sooner, expires upon the expiration of all applicable royalty terms under such agreement.
Lycera Corp. (Lycera):
In June 2015, we entered into a collaboration and option agreement with Lycera. Under the agreement, the parties will support the development of Lycera’s portfolio of immune modulator assets, including (1) oral agonists that target ROR
y
, a master control switch of immune system activation, for the potential treatment of a broad range of cancers, and (2) LYC-30937, an oral gut-directed ATPase modulator currently in phase II clinical studies. In addition, we have an exclusive right to acquire Lycera at a later date at a purchase price based upon future independent company valuations.
Lycera has developed orally bioavailable RORy agonists that have demonstrated single agent therapeutic activity in multiple animal models of cancer. Ex-vivo treatment with ROR
y
agonist compounds has been shown to enhance the therapeutic benefit of adoptive T-cell therapy by improving both immune cell persistence and activation. Development of LYC-30937 is focused on the treatment of inflammatory bowel disease, with the goal of delivering significant disease improvement without global immune suppression. Under the collaboration, Lycera also will continue to advance its other programs, including a Rho-associated protein kinase 2 (ROCK2) inhibitor.
Under the terms of the agreement, we made an upfront payment of
$82.5 million
to Lycera. We received an exclusive option for an additional fee to license Lycera’s portfolio of ex-vivo ROR
y
agonist compounds, an equity interest and an exclusive right to acquire Lycera. If we exercise the acquisition right, Lycera shareholders will be also eligible to receive future success-based milestone payments of up to
$190.0 million
. The upfront payment to Lycera was accounted for as
$69.5 million
of upfront collaboration payment included in research and development expense and
$13.0 million
as non-current assets consisting of
$10.0 million
for an equity investment and
$3.0 million
for an option to acquire the remaining shares outstanding.
The agreement has an initial term of
three
and may be terminated earlier at our discretion upon
six
months’ prior written notice to Lycera and by either party upon material breach of the other party, subject to cure periods. In December 2015, we entered into a license agreement with Lycera, under which Lycera granted to us an exclusive license for Lycera’s portfolio of novel ex vivo RORy agonist compounds and we made a
$17.5 million
upfront payment which is included in research and development expense.
Juno Therapeutics, Inc. (Juno):
In June 2015, we announced a collaboration and investment agreement with Juno for the development and commercialization of immunotherapies for cancer and autoimmune diseases. The collaboration and investment agreement became effective on July 31, 2015. Under the terms of the agreement, we have the option to be the commercialization partner for Juno’s oncology and cell therapy auto-immune product candidates, including Juno’s CD19 and CD22 directed CAR T-cell product candidates. For Juno-originated programs co-developed under the collaboration, (a) Juno will be responsible for research and development in North America and will retain commercialization rights in those territories, (b) we will be responsible for development and commercialization in the rest of the world, and will pay Juno a royalty on sales in those territories, and (c) we have certain co-promotion options for global profit sharing arrangements under which the parties will share worldwide expenses and profits equally, except in China.
Juno will have the option to enter into co-development and co-commercialization arrangements on certain Celgene-originated development candidates that target T-cells. For any such Celgene-originated programs co-developed under the collaboration, (a) the parties will share global costs and profits, with
70
percent allocated to us and
30
percent allocated to Juno, and (b) we will lead global development and commercialization, subject to a Juno co-promote option in the US and certain EU territories.
Upon closing, we made a
$1.000 billion
payment to Juno, of which
$575.1 million
was recorded to research and development expense as a collaboration-related upfront expense and the balance of the payment was recorded as an equity investment in Available-for-sale marketable securities.
The collaboration agreement has an initial term of
ten
years. If the parties enter into any pre-negotiated license or co-commercialization agreement during the initial term, the collaboration agreement will continue until all such license and co-
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
commercialization agreements have expired. The collaboration agreement may be terminated at our discretion upon
120
days prior written notice to Juno and by either party upon material breach of the other party, subject to cure periods.
In April 2016, we exercised our option to develop and commercialize Juno’s CD19 program outside North America and China and entered into a pre-negotiated license agreement with Juno with respect to such program by making a
$50.0
million license payment.
Nurix, Inc. (Nurix):
In September 2015, we entered into a strategic collaboration agreement with Nurix for the discovery, development and commercialization of novel small molecule therapeutics in oncology and inflammation and immunology. Nurix will work exclusively with us in these therapeutic areas to advance new therapies that function through the ubiquitin proteasome system (UPS) to modulate protein homeostasis, a fundamental cellular process controlling protein levels.
Under the terms of the collaboration, we made an upfront payment to Nurix of
$149.8 million
, plus an equity investment of
$17.0 million
, which amounted to approximately
11
percent of Nurix outstanding equity, for an option to license future programs. The option term for each of these programs is the earlier of either (a)
45
days after the delivery of a phase I data package, or (b)
four
years, which period we may extend twice for the payment of additional fees. During the term, Nurix may focus on investigating E3 ubiquitin ligases and E2 conjugating enzymes to identify the most promising drug discovery programs for use in oncology or inflammation and immunology therapeutic applications. Nurix will control and is responsible for all drug discovery and development activities through the end of phase I clinical trials.
We may opt to license global development and commercialization rights to a program in exchange for an option fee, potential clinical, regulatory and sales milestone payments totaling up to
$405.0 million
, as well as future tiered single-digit to low double-digit royalties on global sales. We would also have worldwide rights to collaboration products, with the exception of certain collaboration products for which Nurix would retain U.S. development and commercialization rights. These rights include the opportunity for the companies to co-develop and co-commercialize up to
two
programs in the U.S., sharing profits and losses equally, and we would retain ex-US rights, in exchange for an option fee, milestone payments and royalties on ex-U.S. sales on a program-by-program basis. For candidates not optioned by us under the collaboration, Nurix would retain worldwide rights.
Jounce Therapeutics, Inc. (Jounce):
In July 2016, we entered into a collaboration agreement with Jounce for the development and commercialization of immunotherapies for cancer, including Jounce’s lead product candidate, JTX-2011, targeting ICOS (the Inducible T cell CO-Stimulator), up to
four
early stage programs to be selected from a defined pool of B cell, T regulatory cell and tumor-associated macrophage targets emerging from Jounce’s research platform, and a Jounce checkpoint immuno-oncology program. Under the terms of the collaboration agreement we made an upfront payment to Jounce in the amount of
$237.6 million
for the initial
four
year term. Jounce is also eligible to receive regulatory, development, and net sales milestone payments.
We have the right to opt into the collaboration programs at defined stages of development. Following opt-in, the parties will share U.S. profits and losses on the collaboration programs as follows: (a) Jounce will retain a
60 percent
U.S. profit share of JTX-2011, with
40 percent
allocated to us; (b) Jounce will retain a
25 percent
U.S. profit share on the first additional program, with
75 percent
allocated to us; and (c) the parties will equally share U.S. profits on up to
three
additional programs. Also, following opt-in to each of the foregoing programs, we will receive exclusive ex-U.S. commercialization rights with respect to such program, Jounce will be eligible to receive tiered royalties on sales outside the United States, and development costs will be shared by the parties in a manner that is commensurate with their respective product rights under such program. The parties will equally share global profits from the checkpoint program.
The collaboration agreement has an initial term of
four years
, which may be extended up to
three
additional years. If the parties enter into any pre-negotiated license or co-commercialization agreement during the initial term, the collaboration agreement will continue until all such license and co-commercialization agreements have expired. The collaboration agreement may be terminated at our discretion upon
120
days prior written notice to Jounce and by either party upon material breach of the other party, subject to cure periods.
Other Collaboration Arrangements in 2016:
In addition to the collaboration arrangements described above, we entered into a number of collaborative arrangements during 2016 that include the potential for future milestone payments of up to an aggregate
$95.0 million
related to the attainment of specified developmental, regulatory and sales milestones over a period of several years. Our obligation to fund these efforts 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.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summarized financial information related to our collaboration agreements is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
As of December 31,
1
|
|
|
Research and Development Expense
|
|
|
|
|
|
|
|
|
Upfront
Fees
|
Milestones
|
Extension/ Termination of
Agreements
|
Amortization of Prepaid Research and
Development
|
|
Equity Investments Made During
Period
|
|
Intangible Asset
Balance
|
Equity Investment
Balance
|
Percentage of Outstanding
Equity
|
Acceleron
|
2016
|
$
|
—
|
|
$
|
15.0
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
32.0
|
|
|
$
|
—
|
|
$
|
138.1
|
|
14
|
%
|
|
2015
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
224.9
|
|
14
|
%
|
|
2014
|
—
|
|
—
|
|
—
|
|
—
|
|
|
52.4
|
|
|
|
|
|
|
2013 and prior
|
70.0
|
|
44.5
|
|
—
|
|
—
|
|
|
40.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agios
|
2016
|
200.0
|
|
25.0
|
|
—
|
|
0.8
|
|
|
—
|
|
|
0.2
|
|
218.8
|
|
12
|
%
|
|
2015
|
9.0
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
1.0
|
|
340.4
|
|
13
|
%
|
|
2014
|
—
|
|
—
|
|
20.0
|
|
—
|
|
|
38.3
|
|
|
|
|
|
|
2013 and prior
|
121.2
|
|
—
|
|
40.0
|
|
—
|
|
|
50.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AstraZeneca
|
2016
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
N/A
|
|
N/A
|
|
|
2015
|
450.0
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bluebird
|
2016
|
10.0
|
|
—
|
|
—
|
|
8.3
|
|
|
50.0
|
|
|
11.8
|
|
40.6
|
|
2
|
%
|
|
2015
|
—
|
|
—
|
|
—
|
|
4.9
|
|
|
—
|
|
|
20.2
|
|
N/A
|
|
N/A
|
|
|
2014
|
—
|
|
—
|
|
—
|
|
0.1
|
|
|
—
|
|
|
|
|
|
|
2013 and prior
|
74.7
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORMA
|
2016
|
71.0
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
N/A
|
|
N/A
|
|
|
2015
|
59.0
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
0.1
|
|
N/A
|
|
N/A
|
|
|
2014
|
225.0
|
|
—
|
|
—
|
|
0.1
|
|
|
—
|
|
|
|
|
|
|
2013 and prior
|
52.8
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jounce
|
2016
|
237.6
|
|
—
|
|
—
|
|
—
|
|
|
23.6
|
|
|
—
|
|
23.6
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Juno
3
|
2016
|
50.0
|
|
—
|
|
—
|
|
—
|
|
|
41.0
|
|
|
—
|
|
193.7
|
|
10
|
%
|
|
2015
|
575.1
|
|
—
|
|
—
|
|
—
|
|
|
424.9
|
|
|
—
|
|
401.8
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Lycera
|
2016
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
3.0
|
|
10.0
|
|
8
|
%
|
|
2015
|
87.0
|
|
—
|
|
—
|
|
—
|
|
|
10.0
|
|
|
3.0
|
|
10.0
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
NantBioScience
2
|
2016
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
90.0
|
|
13
|
%
|
|
2015
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
90.0
|
|
13
|
%
|
|
2014
|
50.0
|
|
—
|
|
—
|
|
—
|
|
|
90.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nurix
|
2016
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
0.2
|
|
17.0
|
|
11
|
%
|
|
2015
|
149.8
|
|
—
|
|
—
|
|
—
|
|
|
17.0
|
|
|
0.2
|
|
17.0
|
|
11
|
%
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
As of December 31,
1
|
|
|
Research and Development Expense
|
|
|
|
|
|
|
|
|
Upfront
Fees
|
Milestones
|
Extension/ Termination of
Agreements
|
Amortization of Prepaid Research and
Development
|
|
Equity Investments Made During
Period
|
|
Intangible Asset
Balance
|
Equity Investment
Balance
|
Percentage of Outstanding
Equity
|
OncoMed
|
2016
|
—
|
|
—
|
|
—
|
|
—
|
|
|
15.0
|
|
|
—
|
|
22.9
|
|
8
|
%
|
|
2015
|
2.5
|
|
70.0
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
33.1
|
|
5
|
%
|
|
2014
|
2.5
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
|
|
|
|
2013 and prior
|
155.0
|
|
—
|
|
—
|
|
—
|
|
|
22.2
|
|
|
|
|
|
|
|
|
|
|
Sutro
|
2016
|
—
|
|
35.0
|
|
—
|
|
17.0
|
|
|
—
|
|
|
5.9
|
|
17.6
|
|
15
|
%
|
|
2015
|
—
|
|
—
|
|
—
|
|
4.8
|
|
|
—
|
|
|
22.9
|
|
17.6
|
|
16
|
%
|
|
2014
|
72.6
|
|
—
|
|
—
|
|
0.2
|
|
|
11.9
|
|
|
|
|
|
|
2013 and prior
|
26.3
|
|
—
|
|
—
|
|
2.3
|
|
|
5.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Collaboration Arrangements
|
2016
|
247.0
|
|
1.5
|
|
8.8
|
|
0.2
|
|
|
7.7
|
|
|
1.3
|
|
79.6
|
|
N/A
|
|
2015
|
69.8
|
|
8.0
|
|
18.1
|
|
21.1
|
|
|
65.0
|
|
|
25.2
|
|
194.3
|
|
N/A
|
|
2014
|
103.5
|
|
8.3
|
|
—
|
|
22.8
|
|
|
65.6
|
|
|
|
|
|
1
Year-end balance and percentage of outstanding equity are presented for the current and prior year.
2
$25.0 million
of expense related to the settlement of contingent matching contributions was also recognized in 2014 at the inception of the collaboration agreement with NantBioScience and included in Selling, General and Administrative expense.
3
See Note 6 for additional information relating to our equity investment balance in Juno.
18. Commitments and Contingencies
Contingent Value Rights:
In connection with the acquisition of Abraxis in 2010, CVRs were issued under a Contingent Value Rights Agreement, or CVR Agreement, entered into between Celgene and American Stock Transfer & Trust Company, LLC, as trustee. The CVRs are registered for trading on the NASDAQ Global Market under the symbol "CELGZ." The fair value of the liability of the Company related to payments under the CVR Agreement are subject to fluctuation based on trading prices for the publicly traded CVRs. Subsequent to the Abraxis acquisition date, we measured the contingent consideration represented by the CVRs at fair value with changes in fair value recognized in operating earnings. The fair value of our liability related to the CVRs was
$44.6 million
at the end of 2016 compared to
$51.9 million
at the end of 2015.
For each full
one
-year period ending December 31 during the term of the CVR Agreement, which we refer to as a net sales measuring period, each holder of a CVR is entitled to receive a
pro rata
portion, based on the number of CVRs then outstanding, of net sales related payments, calculated as follows:
|
|
•
|
2.5%
of the net sales of ABRAXANE
®
and the Abraxis pipeline products that exceed
$1.000 billion
but are less than or equal to
$2.000 billion
for such period, plus
|
|
|
•
|
an additional amount equal to
5%
of the net sales of ABRAXANE
®
and the Abraxis pipeline products that exceed
$2.000 billion
but are less than or equal to
$3.000 billion
for such period, plus
|
|
|
•
|
an additional amount equal to
10%
of the net sales of ABRAXANE
®
and the Abraxis pipeline products that exceed
$3.000 billion
for such period.
|
No payments will be due under the CVR Agreement with respect to net sales of ABRAXANE
®
and the Abraxis pipeline products after December 31, 2025, which we refer to as the net sales payment termination date, unless net sales for the net sales measuring period ending on December 31, 2025 are equal to or greater than
$1.000 billion
, in which case the net sales payment termination date will be extended until the last day of the first net sales measuring period subsequent to December 31, 2025 during which net sales of ABRAXANE
®
and the Abraxis pipeline products are less than
$1.000 billion
or, if earlier, December 31, 2030.
In addition to the above, each holder of a CVR was entitled to receive a pro rata portion of
two
potential contingent milestone payments. The first contingent milestone payment was not achieved, as the October 2012 FDA approval of ABRAXANE
®
for use in the treatment of NSCLC did not result in the use of a marketing label that included a progression-free survival claim. The second contingent milestone payment was achieved upon the FDA approval of ABRAXANE
®
for use in the treatment of pancreatic cancer
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
permitting us to market with a label that included an overall survival claim. This approval resulted in a subsequent payment of
$300.0 million
to CVR holders in October 2013.
Leases:
We lease offices and research facilities under various operating lease agreements in the United States and international markets. We also lease automobiles and certain equipment in these same markets. At December 31, 2016, the non-cancelable lease terms for the operating leases expire at various dates between 2017 and 2025 and include renewal options. In general, the Company is also required to reimburse the lessors for real estate taxes, insurance, utilities, maintenance and other operating costs associated with the leases.
Future minimum lease payments under non-cancelable operating leases as of December 31, 2016 are:
|
|
|
|
|
|
Operating
Leases
|
2017
|
$
|
55.4
|
|
2018
|
42.7
|
|
2019
|
31.7
|
|
2020
|
26.7
|
|
2021
|
21.7
|
|
Thereafter
|
35.2
|
|
Total minimum lease payments
|
$
|
213.4
|
|
Total rental expense under operating leases was approximately
$69.5 million
in
2016
,
$66.2 million
in
2015
and
$62.2 million
in
2014
.
Lines of Credit:
We maintain lines of credit with several banks to support our hedging programs and to facilitate the issuance of bank letters of credit and guarantees on behalf of our subsidiaries. Lines of credit supporting our hedging programs as of December 31, 2016 allowed us to enter into derivative contracts with settlement dates through 2020. As of
December 31, 2016
, we have entered into derivative contracts with net notional amounts totaling
$9.170 billion
. Lines of credit facilitating the issuance of bank letters of credit and guarantees as of
December 31, 2016
allowed us to have letters of credit and guarantees issued on behalf of our subsidiaries totaling
$132.7 million
.
Other Commitments:
Our obligations related to product supply contracts totaled
$172.2 million
at
December 31, 2016
. In addition, we have committed to invest an aggregate
$66.0 million
in investment funds, which are callable at any time.
Collaboration Arrangements:
We have entered into certain research and development collaboration agreements, as identified in Note 17 above, with third parties that include the funding of certain development, manufacturing and commercialization efforts with the potential for future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial targets. Our obligation to fund these efforts is contingent upon 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 at
December 31, 2016
and
2015
.
Contingencies:
We believe we maintain insurance coverage adequate for our current needs. Our operations are subject to environmental laws and regulations, which 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 VAT 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.
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,
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, which stays 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, which stays 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.
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 patent protection in the EU for lenalidomide 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 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 at least 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. 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 European Patent Office (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. 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. Regulatory exclusivity for POMALYST
®
will expire in Europe in 2023. We have applied for Supplementary Protection Certificates (SPC’s) in each member state in Europe, which if granted, will extend the patent term of the ‘135 patent by
five
years. The patent will then expire in 2028 in each member state that grants the SPC assuming the ‘135 patent is deemed to be valid.
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 is scheduled for March 21, 2017 at the EPO to determine the validity of the ‘483 patent. This patent will expire
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. On March 27, 2015, Lannett filed a motion to dismiss our complaint for lack of personal jurisdiction and we filed a response to the motion on April 20, 2015. A hearing was held on July 27, 2015 and the Court decided to administratively terminate the motion to dismiss in order to allow us to conduct jurisdictional discovery. On November 17, 2015, Lannett withdrew its motion to dismiss.
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. Fact discovery is currently set to close on April 6, 2017. The Court has not set dates for Markman briefing, hearing, close of expert 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. Cipla filed an answer and counterclaims on January 20, 2017 asserting that the patents are invalid and/or not infringed. Our reply is due on February 24, 2017. A scheduling conference will be held on February 23, 2017.
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 USPTO:
Under the America Invents Act (AIA), any person may seek to challenge an issued patent by petitioning the United States Patent and Trademark Office (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
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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 rest of the 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. 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.
The parties 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. No trial date has been set. While we believe that the relator's remaining claims and requested damages are unsubstantiated, we are unable at this time to predict the outcome of this matter or the ultimate legal and financial liability, if any, and cannot reasonably estimate the possible loss or range of loss, if any. We intend to vigorously defend against the claims in this action.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In February 2014, we received a letter purportedly on behalf of a stockholder demanding access to certain books and records of the Company for the purpose of investigating matters pertaining to the Brown Action. The Company complied with the demand, as modified through negotiation with counsel for the purported stockholder. In July 2014, we received a letter purportedly on behalf of
two
stockholders (one of which was referenced in the February 2014 letter) demanding, primarily on the basis of the allegations in the Brown Action, that our board of directors take action on the Company’s behalf to correct alleged deficiencies in the Company’s internal controls and to recover from current and past directors and officers damages those stockholders allege to have resulted from breaches of fiduciary duties related to the matters alleged in the Brown Action (the Demand). Our Board formed a Demand Investigation Committee, and with the assistance of independent counsel retained by it, the Demand Investigation Committee considered the issues raised in the stockholders’ letter. In October 2015, the Demand Investigation Committee reported to the Board of Directors, and the Board of Directors accepted the Committee’s recommendation, that the Company take no action at this time, legal or otherwise, in response to the stockholders’ demands. In November 2015, we received another letter purportedly on behalf of the same two stockholders demanding access to certain books and records of the Company for the purpose of investigating whether the Demand was wrongfully refused, the independence, good faith and due care of the Demand Investigation Committee, and whether the Demand Investigation Committee conducted a reasonable investigation of the Demand. On February 22, 2016, the Company produced additional documents pursuant to the November 2015 letter.
In November 2014, we received another letter purportedly on behalf of a stockholder demanding access to certain books and records of the Company for the purpose of investigating matters pertaining to the Brown Action. The Company complied with the demand, as modified through negotiation with counsel for the purported stockholder, and in November 2015 the stockholder filed a complaint in Delaware Chancery Court asserting derivative claims on behalf of the Company against
eight
current, and
four
former members of the Board of Directors. On November 23, 2016, the court entered an order dismissing the amended complaint as a result of plaintiff’s withdrawal of the lawsuit.
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 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 a substantial portion of the royalty payments owed by Celgene on the sale of REVLIMID
®
to CR Rev. 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
$198.5 million
(see Note 9) 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 state 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
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
programs, including our support of 501(c)(3) organizations that provide financial assistance to eligible patients. We are cooperating with these requests.
19. Geographic and Product Information
Operations by Geographic Area:
Revenues primarily consisted of sales of our primary commercial stage products including 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
7,009.5
|
|
|
$
|
5,604.0
|
|
|
$
|
4,482.8
|
|
Europe
|
|
3,046.4
|
|
|
2,624.3
|
|
|
2,310.8
|
|
All other
|
|
1,173.3
|
|
|
1,027.7
|
|
|
876.8
|
|
Total revenues
|
|
$
|
11,229.2
|
|
|
$
|
9,256.0
|
|
|
$
|
7,670.4
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived Assets
1
|
|
2016
|
|
2015
|
United States
|
|
$
|
667.4
|
|
|
$
|
585.5
|
|
Europe
|
|
250.8
|
|
|
215.2
|
|
All other
|
|
11.6
|
|
|
13.4
|
|
Total long lived assets
|
|
$
|
929.8
|
|
|
$
|
814.1
|
|
|
|
1
|
Long-lived assets consist of net property, plant and equipment.
|
Revenues by Product:
Total revenues from external customers by product for the years ended December 31,
2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
REVLIMID
®
|
|
$
|
6,973.6
|
|
|
$
|
5,801.1
|
|
|
$
|
4,980.0
|
|
POMALYST
®
/IMNOVID
®
|
|
1,310.7
|
|
|
983.3
|
|
|
679.7
|
|
OTEZLA
®
|
|
1,017.2
|
|
|
471.7
|
|
|
69.8
|
|
ABRAXANE
®
|
|
973.4
|
|
|
967.5
|
|
|
848.2
|
|
VIDAZA
®
|
|
608.0
|
|
|
590.7
|
|
|
611.9
|
|
azacitidine for injection
|
|
66.0
|
|
|
83.9
|
|
|
78.2
|
|
THALOMID
®
|
|
152.1
|
|
|
185.4
|
|
|
221.2
|
|
ISTODAX
®
|
|
79.3
|
|
|
69.1
|
|
|
65.6
|
|
Other
|
|
4.3
|
|
|
8.4
|
|
|
9.2
|
|
Total net product sales
|
|
11,184.6
|
|
|
9,161.1
|
|
|
7,563.8
|
|
Other revenue
|
|
44.6
|
|
|
94.9
|
|
|
106.6
|
|
Total revenue
|
|
$
|
11,229.2
|
|
|
$
|
9,256.0
|
|
|
$
|
7,670.4
|
|
Major Customers:
We sell our products primarily through wholesale distributors and specialty pharmacies in the United States, which account for a large portion of our total revenues. International sales are primarily made directly to hospitals, clinics and retail chains, many of which are government owned. During the three-year period of
2016
,
2015
and
2014
, customers that accounted for more than 10% of our total revenue in at least one of those years are summarized below. The percentage of amounts due from these customers compared to total net accounts receivable is also summarized below as of December 31,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Revenue
|
|
Percent of Net Accounts Receivable
|
Customer
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
CVS
|
|
12.0
|
%
|
|
10.7
|
%
|
|
9.8
|
%
|
|
7.9
|
%
|
|
8.2
|
%
|
McKesson Corp.
|
|
10.3
|
%
|
|
8.5
|
%
|
|
6.0
|
%
|
|
9.1
|
%
|
|
10.6
|
%
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
20. Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
1Q
|
|
2Q
|
|
3Q
3
|
|
4Q
|
|
Year
|
Total revenue
|
|
$
|
2,511.6
|
|
|
$
|
2,754.3
|
|
|
$
|
2,982.8
|
|
|
$
|
2,980.5
|
|
|
$
|
11,229.2
|
|
Gross profit
1
|
|
2,388.8
|
|
|
2,633.6
|
|
|
2,860.9
|
|
|
2,863.3
|
|
|
10,746.6
|
|
Income tax provision
|
|
120.9
|
|
|
96.9
|
|
|
85.4
|
|
|
70.1
|
|
|
373.3
|
|
Net income
|
|
800.7
|
|
|
598.2
|
|
|
171.4
|
|
|
428.9
|
|
|
1,999.2
|
|
Net income per share:
2
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.03
|
|
|
$
|
0.77
|
|
|
$
|
0.22
|
|
|
$
|
0.55
|
|
|
$
|
2.57
|
|
Diluted
|
|
$
|
0.99
|
|
|
$
|
0.75
|
|
|
$
|
0.21
|
|
|
$
|
0.53
|
|
|
$
|
2.49
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
780.6
|
|
|
775.6
|
|
|
775.8
|
|
|
776.8
|
|
|
777.2
|
|
Diluted
|
|
807.7
|
|
|
801.5
|
|
|
801.5
|
|
|
802.2
|
|
|
803.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
1Q
|
|
2Q
|
|
3Q
4
|
|
4Q
|
|
Year
|
Total revenue
|
|
$
|
2,080.8
|
|
|
$
|
2,277.8
|
|
|
$
|
2,334.1
|
|
|
$
|
2,563.3
|
|
|
$
|
9,256.0
|
|
Gross profit
1
|
|
1,951.2
|
|
|
2,153.3
|
|
|
2,202.7
|
|
|
2,433.8
|
|
|
8,741.0
|
|
Income tax provision
|
|
108.2
|
|
|
114.6
|
|
|
14.2
|
|
|
184.5
|
|
|
421.5
|
|
Net income (loss)
|
|
718.9
|
|
|
356.2
|
|
|
(34.1
|
)
|
|
561.0
|
|
|
1,602.0
|
|
Net income (loss) per share:
2
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.90
|
|
|
$
|
0.45
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.71
|
|
|
$
|
2.02
|
|
Diluted
|
|
$
|
0.86
|
|
|
$
|
0.43
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.69
|
|
|
$
|
1.94
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
798.9
|
|
|
793.0
|
|
|
791.1
|
|
|
785.8
|
|
|
792.2
|
|
Diluted
|
|
834.1
|
|
|
825.3
|
|
|
791.1
|
|
|
816.5
|
|
|
824.9
|
|
|
|
1
|
Gross profit is computed by subtracting cost of goods sold (excluding amortization of acquired intangible assets) from net product sales.
|
|
|
2
|
The sum of the quarters may not equal the full year due to rounding. In addition, quarterly and full year basic and diluted earnings per share are calculated separately.
|
|
|
3
|
The decrease in net income in the third quarter of 2016 was primarily due to a
$623.3 million
research and development asset acquisition expense associated with the purchase of EngMab.
|
|
|
4
|
Net income for 2015 was a loss in the third quarter primarily due to costs related to collaborations and the acquisition of Receptos.
|
21. Subsequent Event
In January 2017, we entered into an agreement to acquire Delinia, Inc. (Delinia), a privately held biotechnology company developing novel therapeutics for autoimmune diseases. The transaction will expand our Inflammation and Immunology pipeline primarily through the acquisition of Delinia's lead program, DEL106, as well as related second generation programs. DEL106 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. Under the terms of the agreement, we will make an initial payment of
$300 million
. Delinia shareholders will be eligible to receive up to an additional
$475 million
in contingent payments upon achievement of certain development, regulatory and commercial milestones. The transaction is anticipated to close in the first quarter of 2017.