10-K 1 y89208e10vk.htm FORM 10-K e10vk
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
     
(Mark one)    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2010
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number 001-34912
CELGENE CORPORATION
(Exact name of registrant as specified in its charter)
 
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  22-2711928
(I.R.S. Employer
Identification No.)
     
86 Morris Avenue
Summit, New Jersey
(Address of principal executive offices)
  07901
(Zip Code)
 
(908) 673-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
 
Common Stock, par value $.01 per share
Contingent Value Rights
  NASDAQ Global Select Market
NASDAQ Global Select Market
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of voting stock held by non-affiliates of the registrant on June 30, 2010, the last business day of the registrant’s most recently completed second quarter, was $23,349,073,366 based on the last reported sale price of the registrant’s Common Stock on the NASDAQ Global Select Market on that date.
 
There were 464,898,965 shares of Common Stock outstanding as of February 18, 2011.
 
Documents Incorporated by Reference
 
The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2010. The proxy statement is incorporated herein by reference into the following parts of the Form 10-K:
 
Part II, Item 5, Equity Compensation Plan Information
 
Part III, Item 10, Directors, Executive Officers and Corporate Governance;
 
Part III, Item 11, Executive Compensation;
 
Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters;
 
Part III, Item 13, Certain Relationships and Related Transactions, and Director Independence;
 
Part III, Item 14, Principal Accountant Fees and Services.
 


 

 
CELGENE CORPORATION
 
ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS
 
                 
Item No.       Page
 
 
1.
    Business     1  
 
1A.
    Risk Factors     21  
 
1B.
    Unresolved Staff Comments     34  
 
2.
    Properties     35  
 
3.
    Legal Proceedings     35  
 
4.
    Submission of Matters to a Vote of Security Holders     37  
 
 
5.
    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     38  
 
6.
    Selected Financial Data     40  
 
7.
    Management’s Discussion and Analysis of Financial Condition and Results of Operations     42  
 
7A.
    Quantitative and Qualitative Disclosures About Market Risk     60  
 
8.
    Financial Statements and Supplementary Data     63  
 
9.
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     117  
 
9A.
    Controls and Procedures     117  
 
9B.
    Other Information     120  
 
 
10.
    Directors, Executive Officers and Corporate Governance     120  
 
11.
    Executive Compensation     120  
 
12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     120  
 
13.
    Certain Relationships and Related Transactions, and Director Independence     120  
 
14.
    Principal Accountant Fees and Services     120  
 
 
15.
    Exhibits, Financial Statement Schedules     120  
        Signatures and Power of Attorney     126  
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


Table of Contents

 
PART I
 
ITEM 1.   BUSINESS
 
Celgene Corporation and its subsidiaries (collectively “we”, “our” or “us”) is a global integrated biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory related diseases. We are dedicated to innovative research and development which is designed to bring new therapies to market and are involved in research in several scientific areas that may deliver proprietary next-generation therapies, targeting areas such as immunomodulation and intracellular signaling pathways in hematology, oncology and immune-inflammatory diseases. The products we develop are designed to treat life-threatening diseases or chronic debilitating conditions. Building on our growing knowledge of the biology underlying hematological and solid tumor cancers as well as in immune-inflammatory diseases, we are investing in a range of innovative therapeutic programs that are investigating ways to treat and manage chronic diseases by targeting the disease source through multiple mechanisms of action.
 
Our primary commercial stage products include REVLIMID®, VIDAZA®, THALOMID® (inclusive of Thalidomide Celgene® and Thalidomide Pharmion®), ABRAXANE®, which was obtained in the October 2010 acquisition of Abraxis BioScience, Inc., or Abraxis, and ISTODAX®, which was obtained in the January 2010 acquisition of Gloucester Pharmaceuticals, Inc., or Gloucester. Additional sources of revenue include sales of FOCALIN® exclusively to Novartis Pharma AG, or Novartis, a licensing agreement with Novartis, which entitles us to royalties on FOCALIN XR® and the entire RITALIN® family of drugs, residual royalty payments from GlaxoSmithKline, or GSK, based upon GSK’s ALKERAN® revenues through the end of March 2011, sale of services through our Cellular Therapeutics subsidiary and other miscellaneous licensing agreements.
 
In 1986, we were spun off from Celanese Corporation and, in July 1987, completed an initial public offering. Our initial operations focused on the research and development of chemical and biotreatment processes for the chemical and pharmaceutical industries. We subsequently completed the following strategic acquisitions that strengthened our research and manufacturing capabilities in addition to enhancing our commercialized products:
 
  •  In August 2000, we acquired Signal Pharmaceuticals, Inc., currently Signal Pharmaceuticals, LLC, a privately held biopharmaceutical company focused on the discovery and development of drugs that regulate genes associated with disease.
 
  •  In December 2002, we acquired Anthrogenesis Corp., a privately held New Jersey-based biotherapeutics company and cord blood banking business, developing technologies for the recovery of stem cells from human placental tissues following the completion of full-term, successful pregnancies. Anthrogenesis d/b/a Celgene Cellular Therapeutics, or CCT, now operates as our wholly owned subsidiary engaged in the research, recovery, culture-expansion, preservation, development and distribution of placental cells, including stem and progenitor cells, as therapeutic agents.
 
  •  In March 2008, we acquired Pharmion Corporation, or Pharmion, a global biopharmaceutical company that acquired, developed and commercialized innovative products for the treatment of hematology and oncology patients. Pharmion was acquired to enhance our portfolio of therapies for patients with life-threatening illnesses worldwide with the addition of Pharmion’s marketed products, and several products in development for the treatment of hematological and solid tumor cancers. By combining this new product portfolio with our existing operational and financial capabilities, we enlarged our global market share through increased product offerings and expanded clinical, regulatory and commercial capabilities.
 
  •  In January 2010, we acquired Gloucester, a privately held pharmaceutical company which developed new therapies that address unmet medical needs in the treatment of hematological cancers, including cutaneous T-cell lymphoma, or CTCL, peripheral T-cell lymphoma, or PTCL, and other hematological malignancies. Gloucester was acquired to advance our leadership position in the development of disease-altering therapies through innovative approaches for patients with rare and debilitating blood cancers.
 
  •  In October 2010, we acquired Abraxis, a fully integrated global biotechnology company dedicated to the discovery, development and delivery of next-generation therapeutics and core technologies that offer patients treatments for cancer and other critical illnesses. The acquisition of Abraxis accelerates our strategy


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  to become a global leader in oncology and adds ABRAXANE®, which is based on Abraxis’ proprietary tumor-targeting platform known as nab® technology, to our existing portfolio of leading cancer products.
 
For the year ended December 31, 2010, we reported revenue of $3.626 billion, net income of $880.5 million and diluted earnings per share of $1.88. Revenue increased by $935.9 million in 2010 compared to the year ended December 31, 2009 primarily due to our continuing expansion into international markets, growth of REVLIMID® and VIDAZA® in both U.S. and international markets and the inclusion of sales of ABRAXANE® and ISTODAX® subsequent to the acquisition dates of Abraxis and Gloucester, respectively. Net income and earnings per share for 2010 reflect the earnings contributions from a higher sales level, partly offset by increased spending for new product launches, research and development, expansion of our international operations and additional costs related to the acquisitions of Gloucester and Abraxis.
 
Our future growth and operating results will depend on the continued acceptance of our marketed products, future regulatory approvals and successful commercialization of new products and new product indications, depth of our product pipeline, competition with our marketed products and challenges to our intellectual property. See also Forward-Looking Statements and Risk Factors contained in Part I, Item 1A of this Annual Report on Form 10-K.
 
COMMERCIAL STAGE PRODUCTS
 
REVLIMID® (lenalidomide):  REVLIMID® is an oral immunomodulatory drug marketed in the United States and many international markets, in combination with dexamethasone, for treatment of patients with multiple myeloma who have received at least one prior therapy. In the United States and select international markets, it is also approved for the treatment of transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndromes, or MDS, associated with a deletion 5q cytogenetic abnormality with or without additional cytogenetic abnormalities. In June 2010, Japan’s Ministry of Health, Labor and Welfare granted REVLIMID® full marketing authorization for use in combination with dexamethasone as a treatment for patients with relapsed or refractory multiple myeloma, who have received at least one prior standard therapy and, in August 2010, for the treatment of patients with MDS associated with a deletion 5q cytogenetic abnormality. REVLIMID® has obtained orphan drug designation for the treatment of multiple myeloma and MDS in the United States and a number of international markets. REVLIMID® is approved in 16 countries in Latin America where it is distributed through an agreement with Tecnofarma S.A., or Tecnofarma.
 
REVLIMID® is distributed in the United States primarily through contracted pharmacies under the RevAssist® program, which is a proprietary risk-management distribution program tailored specifically to help ensure the safe and appropriate distribution and use of REVLIMID®. Internationally, REVLIMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure the safe and appropriate distribution and use of REVLIMID®. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies.
 
REVLIMID® continues to be evaluated in numerous clinical trials worldwide either alone or in combination with one or more other therapies in the treatment of a broad range of hematological malignancies, including multiple myeloma, MDS, non-Hodgkin’s lymphoma, or NHL, chronic lymphocytic leukemia, or CLL, other cancers and other diseases.
 
VIDAZA® (azacitidine for injection):  VIDAZA®, which is licensed from Pfizer, is a pyrimidine nucleoside analog that has been shown to reverse the effects of DNA hypermethylation and promote subsequent gene re-expression. VIDAZA® is a Category 1 recommended treatment for patients with intermediate-2 and high-risk MDS according to the National Comprehensive Cancer Network, or NCCN, and is marketed in the United States for the treatment of all subtypes of MDS. VIDAZA® has been granted orphan drug designation for the treatment of MDS through May 2011. In Europe, VIDAZA® is marketed for the treatment of intermediate-2 and high-risk MDS as well as acute myeloid leukemia, or AML, with 30% blasts and has been granted orphan drug designation for the treatment of MDS and AML, expiring December 2018. VIDAZA® is distributed through the traditional pharmaceutical industry supply chain. In Latin America, VIDAZA® is distributed primarily by Tecnofarma and by Labratorio Varifarma S.A. (Argentina) and United Medical (Brazil).


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THALOMID® (thalidomide):  THALOMID® is marketed for patients with newly diagnosed multiple myeloma and for the acute treatment of the cutaneous manifestations of moderate to severe erythema nodosum leprosum, or ENL, an inflammatory complication of leprosy and as maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence.
 
THALOMID® is distributed in the United States under our “System for Thalidomide Education and Prescribing Safety,” or S.T.E.P.S.®, program which we developed and is a proprietary comprehensive education and risk-management distribution program with the objective of providing for the safe and appropriate distribution and use of THALOMID®. Internationally, THALOMID® is also distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure the safe and appropriate distribution and use of THALOMID®. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies.
 
ABRAXANE®:  ABRAXANE® for injectable suspension (paclitaxel protein-bound particles for injectable suspension) (albumin-bound) was approved by the U.S. Food and Drug Administration, or FDA, in January 2005, based on a 505(b)(2) submission, for the treatment of metastatic breast cancer and, as of December 2010, was approved for marketing in 42 countries. ABRAXANE® represents the first in a new class of protein-bound drug particles that takes advantage of albumin, a natural carrier of water insoluble molecules found in humans.
 
ISTODAX® (romidespin):  is a histone deacetylase, or HDAC, inhibitor, which was approved by the FDA for the treatment of CTCL in patients who have received at least one prior systemic therapy. We are currently pursuing an additional indication in PTCL in the United States and plan to file for an approval in both PTCL and CTCL in the European Union, or E.U.
 
FOCALIN® and RITALIN®:  We licensed the worldwide rights (excluding Canada) to FOCALIN® and FOCALIN XR® to Novartis for the treatment of attention deficit hyperactivity disorder, or ADHD, and retained the rights to these products for the treatment of oncology-related disorders. We sell FOCALIN® exclusively to Novartis and receive royalties on all of Novartis’ sales of FOCALIN XR®. FOCALIN® is formulated with the active d-isomer of methylphenidate and contains only the more active isomer responsible for the effective management of the symptoms of ADHD. We also licensed the rights to the RITALIN® family of ADHD-related products to Novartis and receive royalties on their sales.
 
ALKERAN® (melphalan):  ALKERAN® was licensed from GSK and sold under the Celgene label through March 31, 2009, the conclusion date of the ALKERAN® license with GSK. ALKERAN® was approved by the FDA for the palliative treatment of multiple myeloma and of carcinoma of the ovary. Subsequent to the conclusion date of the ALKERAN® license, and ending in March 2011, we will continue to receive residual payments from GSK based upon its ALKERAN® revenues.


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Current evaluations of our commercial stage products and their targeted disease indications are outlined in the following table:
 
         
Product   Disease Indication   Status
 
REVLIMID
  Newly Diagnosed Multiple Myeloma   Phase III complete, submitted EU regulatory filing, US regulatory filing pending
    NHL   Phase III trials ongoing
    CLL   Phase III trials ongoing
    Prostate cancer   Phase III trial ongoing
    MDS   Phase III trial ongoing
         
ABRAXANE
  Non-small cell lung cancer   Phase III trial completed accrual, filing pending
    Pancreatic cancer   Phase III trial ongoing
    Melanoma   Phase III trial ongoing
    Bladder cancer   Phase II trail ongoing
    Ovarian cancer   Phase II trail ongoing
         
ISTODAX
  CTCL   Approved in US, filing in EU pending
    PTCL   Filed for approval in US, filing in EU pending
         
VIDAZA
  AML   Phase III trial enrolling
 
PRECLINICAL AND CLINICAL — STAGE PIPELINE
 
Our preclinical and clinical-stage pipeline of new drug candidates and cell therapies, is highlighted by multiple classes of small molecule, orally administered therapeutic agents designed to selectively regulate disease-associated genes and proteins. The product candidates in our pipeline are at various stages of preclinical and clinical development. Successful results in preclinical or Phase I/II clinical studies may not be an accurate predictor of the ultimate safety or effectiveness of a drug or product candidate.
 
  •  Phase I Clinical Trials
 
Phase I human clinical trials begin when regulatory agencies allow a request to initiate clinical investigations of a new drug or product candidate to become effective and usually involve between 20 to 80 healthy volunteers or patients. The tests study a drug’s safety profile, and may include preliminary determination of a drug or product candidate’s safe dosage range. The Phase I clinical studies also determine how a drug is absorbed, distributed, metabolized and excreted by the body, and therefore potentially the duration of its action.
 
  •  Phase II Clinical Trials
 
Phase II clinical trials are conducted on a limited number of patients with the targeted disease. An initial evaluation of the drug’s effectiveness on patients is performed and additional information on the drug’s safety and dosage range is obtained.
 
  •  Phase III Clinical Trials
 
Phase III clinical trials typically include controlled multi-center trials and involve a larger target patient population to ensure that study results are statistically significant. During Phase III clinical trials, physicians monitor patients to determine efficacy and to gather further information on safety.
 
Pomalidomide:  Pomalidomide is an IMiD® drug, a proprietary, novel, small molecule that is orally available and modulates the immune system and other biologically important targets. Pomalidomide is being evaluated in a Phase III clinical trial for the treatment of myelofibrosis. A Phase III clinical trial is being planned to evaluate pomalidomide as a treatment for patients with relapsed/refractory multiple myeloma.


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Additional IMiDs® compounds are in preclinical development. Our IMiDs® compounds are covered by an extensive and comprehensive intellectual property estate of U.S. and foreign-issued patents and pending patent applications including composition-of-matter, use and other patents and patent applications.
 
ORAL ANTI-INFLAMMATORY AGENTS:  Our oral pluripotent immunomodulators are members of a proprietary pipeline of novel small molecules with anti-inflammatory activities that impede the production of multiple proinflammatory mediators by inhibiting PDE-4, also causing reductions in TNF-α as well as interleukin-8, or IL-8, IL-17 and IL-23, interferon-gamma, leukotrienes and nitric oxide synthase and it up regulates IL-10. Apremilast is our lead investigational drug in this class of anti-inflammatory compounds and is currently being evaluated as a potential therapy for patients with moderate-to-severe psoriasis and psoriatic arthritis as well as rheumatoid arthritis in six Phase III clinical trials. We are also exploring the use of apremilast in additional rheumatic, dermatologic and inflammatory diseases to determine its potential. In addition, we are investigating our next generation oral pluripotent immunomodulator, CC-11050, which has completed Phase I trials, towards evaluating its safety and efficacy in a number of inflammatory conditions and are moving forward with its development.
 
KINASE INHIBITORS:  We have generated valuable intellectual property in the identification of multiple kinases that regulate pathways critical in inflammation and oncology. Our oral kinase inhibitor platform includes inhibitors of the c-Jun N-terminal kinase, or JNK, mTOR kinase, spleen tyrosine kinase, or Syk, c-fms tyrosine kinase, or c-FMS, and DNA-dependent protein kinase, or DNAPK. Our oral Syk, c-FMS and DNAPK kinase inhibitors are being investigated in pre-clinical studies and targeting human trials in 2012. Our oral JNK inhibitor, CC-401, has successfully completed a Phase I trial in healthy volunteers and in AML patients to determine safety and tolerability. No further studies with CC-401 are planned at this time as we intend to advance our new second generation JNK inhibitors, specifically CC-930, which recently completed a Phase Ib multiple dose study. We are also planning to investigate CC-930 in fibrotic conditions assuming safety and tolerability continue to be acceptable.
 
SMALL CELL LUNG CANCER:  Amrubicin is a third-generation fully synthetic anthracycline molecule with potent topoisomerase II inhibition and is currently being studied as a single agent and in combination with anti-cancer therapies for solid tumors. In 2008, the FDA granted amrubicin orphan drug designation for the treatment of small cell lung cancer and fast track product designation for the treatment of small cell lung cancer after first-line chemotherapy. A drug designated as a fast track product is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to provide a therapy where none exists or provide a therapy which may offer a significant improvement in safety and/or effectiveness over existing therapy.
 
ABI COMPOUNDS:  ABI compounds are targeted nanoparticle, albumin-bound compounds being investigated for potential treatment of solid tumor cancers. These compounds include: ABI-008 (nab® -docetaxel), which is in a Phase II trial for hormone refractory prostate cancer; ABI-009 (nab® -rapamycin), which is an mTOR inhibitor currently in a Phase I trial in patients with solid tumors; ABI-010 (nab® -17AAG), which is an Hsp90 inhibitor that completed pre-clinical analysis and the initial new drug application, or IND, was approved by the FDA in May 2008; and ABI-011 (nab® -thiocolchicine dimer), which is a novel thiocolchicine with dual mechanisms of action showing both microtubule destabilization and the disruption of topoisomerase-1 activity. An IND was filed in the third quarter of 2009.
 
COROXANEtm (nanometer-sized paclitaxel, ABRAXANE®, under the trade name COROXANEtm):  COROXANEtm is currently closing its Phase II clinical studies for coronary restenosis as well as peripheral artery (superficial femoral artery) restenosis. The SNAPIST series of studies examines the use of COROXANEtm in the treatment of coronary artery restenosis, including the use of COROXANEtm in patients receiving bare metal stents. COROXANEtm, administered with bare metal stents may address the issue of incomplete re-endothelialization and acute thrombosis associated with drug-eluting stents. COROXANEtm administered following balloon angioplasty in the superficial femoral artery may help reduce the incidence of restenosis in these patients. We currently intend to seek a strategic partner for the further development and marketing of COROXANEtm.
 
CELLULAR THERAPIES:  At CCT, we are researching stem cells derived from the human placenta as well as from the umbilical cord. CCT is our state-of-the-art research and development division dedicated to fulfilling the


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promise of cellular technologies by developing cutting-edge products and therapies to significantly benefit patients. Our goal is to develop proprietary cell therapy products for the treatment of unmet medical needs.
 
Stem cell based therapies offer the potential to provide disease-modifying outcomes for serious diseases which lack adequate therapy. We have developed proprietary technology for collecting, processing and storing placental stem cells with potentially broad therapeutic applications in cancer, auto-immune diseases including Crohn’s disease and multiple sclerosis, neurological disorders including stroke and amyotrophic lateral sclerosis, or ALS, graft-versus-host disease, or GVHD, and other immunological / anti-inflammatory, rheumatologic and bone disorders. We have initiated Phase II studies for our human placenta derived cell product, PDA-001, to evaluate PDA-001 as a potential treatment for patients with moderate-to-severe Crohn’s disease refractory to oral corticosteroids and immune suppressants, patients with multiple sclerosis, and patients with stroke or rheumatoid arthritis.
 
We also maintain an IND with the FDA for a trial with human umbilical cord blood in sickle cell anemia and an IND for human placental-derived stem cells, or HPDSC, to support a study to assess the safety of its transplantation with umbilical cord blood stem cells, obtained from fully or partially matched related donors in subjects with certain malignant hematological diseases and non-malignant disorders. We are continuing additional preclinical and clinical research to define further the potential of placental-derived stem cells and to characterize other placental-derived products.
 
SOTATERCEPT (ACE-011):  We have a collaboration with Acceleron Pharma, or Acceleron, to develop sotatercept. Sotatercept acts as a decoy receptor for members of the growth and differentiation factor, or GDF, family of ligands that bind the ACTIIRB receptor, with highest affinity for Activin A and B. Two Phase I clinical studies have been completed (A011-01 and A011-02); and two Phase II studies (A011-04 and A011-08) are closed and awaiting completion of the clinical study report. Three additional Phase II clinical studies have been initiated and are currently ongoing (A011-REN-001 in end stage renal anemia, A011-NSCL-001 for chemotherapy-induced anemia in non-small cell lung cancer, or NSCLC, patients and A011-ST-001 to evaluate effects on red blood cell mass and plasma volume).


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CELGENE LEADING PRODUCT CANDIDATES
 
The development of our leading new drug candidates and their targeted disease indications are outlined in the following table:
 
         
Product   Disease Indication   Status
 
IMiDs® Compounds:
       
Pomalidomide (CC-4047)
  Myelofibrosis   Phase III trial ongoing
    Multiple myeloma   Phase II trial ongoing, pivotal trial planned
Oral Anti-Inflammatory:
       
Apremilast (CC-10004)
  Psoriasis   Phase III trials ongoing
    Psoriatic arthritis   Phase III trials ongoing
    Rheumatoid arthritis   Phase II trial enrolling
CC-11050
  Cutaneous lupus   Phase II trial ongoing
         
Kinase Inhibitors:
       
JNK CC-930
  Idiopathic pulmonary fibrosis   Phase II trial ongoing
         
Small Cell Lung Cancer:
       
Amrubicin
  Small cell lung cancer   Phase III trial completed
         
Nab®-docetaxel (ABI-008)
  Solid tumors   Phase I completed in hormone-refractory prostate cancer (HRPC).
        Phase II trial ongoing
         
Nab®-rapamycin (ABI-009)
  Solid tumors   Phase I trial ongoing
         
Nab®-17AAG (ABI-010)
  Solid tumors   Phase I trial planned
         
Nab®-thiocolchicine dimer (ABI-011)
  Solid tumors   IND filed
Cellular Therapies:
       
PDA-001
  Crohn’s disease   Phase II trial ongoing
    Multiple sclerosis   Phase Ib trial ongoing
    Ischemic stroke   Phase II trial ongoing
    Rheumatoid arthritis   Phase II trial ongoing
Activin Biology:
       
Sotatercept (ACE-011)
  Renal anemia   Phase II trial ongoing
    Chemotherapy induced anemia   Phase II trial ongoing
 
PATENTS AND PROPRIETARY TECHNOLOGY
 
We consider intellectual property protection (including but not limited to patents and regulatory exclusivities) relative to certain products- particularly those products discussed below- to be critical to our operations. For many of our products, in addition to compound patents we hold other patents on manufacturing processes, formulations, or uses that may extend exclusivity beyond the expiration of the product patent.


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KEY PRODUCTS: TABLE OF EXCLUSIVITIES
 
The following table shows the estimated expiration dates in the United States and in Europe of the last-to-expire period of exclusivity (regulatory or patent) related to the following approved drugs:
 
             
    U.S.     Europe
 
REVLIMID® brand drug
(U.S. drug substance patent) (European Patent Office, or EPO use/drug product patent)
    2026     2023
THALOMID® brand drug
(use and/or drug product patents)
    2023     2019
VIDAZA® brand drug
(U.S. and EMA regulatory exclusivities only)
    2011     2018
ABRAXANE® brand drug
(U.S. use/drug product patent) (EMA regulatory exclusivity)
    2024     2018
ISTODAX® brand drug
(U.S. drug substance patents) (EMA regulatory exclusivity upon approval)
    2021     (10 years regulatory
exclusivity upon approval)
FOCALIN® brand drug
(U.S. use patents)
    2015     N/A
FOCALIN XR® brand drug
(U.S. use patents) (EPO drug product patent)
    2015     2018
RITALIN LA® brand drug
(U.S. use patents) (EPO drug product patent)
    2015     2018
 
In the United States, the patents covering the REVLIMID® brand drug include thirteen (13) patents that are listed in the Orange Book, all of which are assigned to us. The last-to-expire patent (2026), U.S. Patent No. 7,465,800, covers certain polymorphic forms of the pharmaceutically active ingredient of REVLIMID® brand drug.
 
REVLIMID® brand drug is also covered in foreign countries by patents and patent applications that are equivalent to those listed in the U.S. Orange Book. For example, patents related to the active pharmaceutical ingredient, uses and pharmaceutical compositions are granted in Europe. The patents are currently scheduled to expire in 2017 or 2018, except that patents granted in certain European countries such as, for example, Spain, France, Italy, Germany and the United Kingdom will not expire until 2022 due to the supplementary protection certificates, or SPCs, granted in these countries. In addition, patents in Europe that relate to uses of and products comprising lenalidomide relative to multiple myeloma will not expire until 2023.
 
The patents covering THALOMID® brand drug in the United States include thirteen (13) patents that are listed in the Orange Book. The last-to-expire patent (2023), U.S. Patent No. 7,230,012, that is assigned to us, covers marketed THALOMID® formulations.
 
In foreign countries, THALOMID® brand drug is also covered by patents and patent applications that are equivalent to those listed in the U.S. Orange Book. Patents related to the approved uses of thalidomide are granted in Europe. The patents are currently scheduled to expire in 2014 or 2017, except that patents granted in certain European countries, such as for example, Spain, France and Italy, will not expire until 2019 due to the SPCs granted in these countries.
 
Exclusivity with respect to the currently approved formulation for VIDAZA® brand drug stems from regulatory mechanisms. In the United States, orphan drug exclusivity with respect to VIDAZA® brand drug expires in May 2011. In Europe, new drug and orphan exclusivities relative to VIDAZA® brand drug expire in December 2018.
 
The patents covering ABRAXANE® brand drug in the United States include eight (8) patents that are listed in the Orange Book. The last-to-expire patent (2024), U.S. Patent No. 7,820,788, covers marketed ABRAXANE® formulations. In Europe, new drug exclusivity relative to ABRAXANE® brand drug expires in 2018. We have applied for Supplementary Protection Certificates in Europe relative to EP 0 961 612 B1 that, if granted, would


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extend exclusivity for ABRAXANE® brand drug to 2022. EP 0 961 612 B1 presently is under opposition at the European Patent Office by Teva Pharmaceutical Industries Ltd.
 
Our acquisition of Gloucester Pharmaceuticals Inc. included the acquisition of certain intellectual properties relative to ISTODAX® brand drug. United States Patent No. 4,977,138 is presently estimated to expire on July 6, 2011. The remaining two patents, related to alternate forms of the active pharmaceutical ingredient of ISTODAX® brand drug, expire on the same date: August 22, 2021.
 
In the United States, the patents covering FOCALIN® brand drug include three (3) patents that are listed in the Orange Book. All of these patents are assigned to us. These patents all expire on the same date: December 4, 2015.
 
In the United States, the patents covering FOCALIN XR® brand drug comprise six (6) patents that are listed in the Orange Book. All of these six (6) patents are assigned to us. These patents all expire on the same date: December 4, 2015. A relevant European patent, owned by us, expires on June 9, 2018.
 
In the United States, the patents covering RITALIN LA® brand drug comprise three (3) patents that are listed in the Orange Book. All of these three (3) patents are assigned to us. These patents all expire on the same date: December 4, 2015. A relevant European patent, owned by us, expires on June 9, 2018.
 
In terms of our United States patents for FOCALIN®, FOCALIN XR® and RITALIN LA® brand drugs, the previously disclosed litigations with generic drug companies (i.e. TEVA Pharmaceuticals USA, Inc., IntelliPharmaCeutics Corp., Actavis South Atlantic LLC, Abrika Pharmaceuticals, Inc., Barr Pharmaceutical, Inc. and KV Pharmaceutical Company), see annual report on Form 10-K filed on February 18, 2010, were resolved pursuant to confidential settlements which do allow for the entrance of their respective generic products in the United States prior to the 2015 patent expirations, should their respective ANDA applications have FDA approval.
 
As noted above, patent protection is very important to us and our business and, therefore, we have applied for and received SPCs in Europe relative to certain in-licensed CMCC thalidomide patents. These SPCs, reflected in the chart above, extend the terms of these patents relative to certain uses of thalidomide to 2019. In addition, also as reflected in the chart above, we have applied for and received SPCs to 2022 in Europe relative to lenalidomide. In the United States, we have been granted a patent term extension of our REVLIMID® composition of matter patent to 2019. By way of further example, in the United States, and as reflected in the chart above, we have been granted patent term adjustment with respect to a REVLIMID® polymorph patent; this patent is presently scheduled to expire in 2026.
 
Patent term extensions have been granted in other markets as well including Australia and Korea relative to certain of our patents claiming lenalidomide. Patent term extension applications relative to lenalidomide also are pending in Japan. In addition, we have actively considered and may pursue alternate exclusivity strategies, mostly related to international treaties, in a variety of countries throughout Latin America.
 
Trade secret strategies also are integral to our success. There exist certain trade secrets related to many of our key products, including ABRAXANE® brand drug.
 
Our brand names, logos and trademarks are also important to us and in the aggregate important to our success. We maintain both registered and common law trademarks. Common law trademark protection typically continues where and for as long as the mark is used. Registered trademarks continue in each country for as long as the trademark is registered,
 
In total, we own or have exclusively licensed over 280 issued U.S. patents. In addition, approximately 310 additional pending patent applications are owned by or exclusively licensed to us. We have a policy to seek worldwide patent protection for our inventions and have foreign patent rights corresponding to most of our U.S. patents.
 
In August 2001, we entered into an agreement, termed the “New Thalidomide Agreement,” with EntreMed, Inc., or EntreMed, Children’s Medical Center Corporation, or CMCC, and Bioventure Investments kft relating to patents and patent applications owned by CMCC, which agreement superceded several agreements already in place between CMCC, EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC directly granted to us an exclusive worldwide license under the relevant patents and patent applications relating to thalidomide. Several U.S. and European patents have been issued to CMCC in this patent family and certain of these patents expire in 2013 and 2014. We have applied for and received Supplementary Protection Certificates, or SPCs, in Europe


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relative to certain of these issued CMCC thalidomide patents. These SPCs extend the terms of these patents relative to uses of thalidomide to 2019. Corresponding foreign patent applications and additional U.S. patent applications are still pending.
 
In addition to the New Thalidomide Agreement, we entered into an agreement, entitled the “New Analog Agreement,” with CMCC and EntreMed in December 2002, pursuant to which we have been granted an exclusive worldwide license to certain CMCC patents and patent applications relating to thalidomide analogs. Under the New Analog Agreement, CMCC exclusively licensed to us these patents and patent applications, which relate to analogs, metabolites, precursors and hydrolysis products of thalidomide, and stereoisomers thereof. Under the New Analog Agreement, we are obligated to comply with certain milestones and other obligations, including those relating to REVLIMID® brand drug sales. The New Analog Agreement grants us control over the prosecution and maintenance of the licensed thalidomide analog patent rights.
 
Our research leads us to seek patent protection for molecular targets and drug discovery technologies, as well as therapeutic and diagnostic products and processes. More specifically, proprietary technology has been developed for use in molecular target discovery, the identification of regulatory pathways in cells, assay design and the discovery and development of pharmaceutical product candidates. An increasing percentage of our recent patent applications have been related to potential product candidates or compounds. As of December 2010, included in those inventions described above, we owned, in whole or in part, over 100 issued U.S. patents and have filed over 110 U.S. pending patent applications, including pending provisional applications, some of which are related to sponsored or collaborative research relationships.
 
CCT, our cellular therapeutics subsidiary, seeks patent protection for the collection, processing, composition, formulation and uses of mammalian placental and umbilical cord tissue and placental and umbilical cord stem cells, as well as cells and biomaterials derived from the placenta. As of December 2010, CCT owned, in whole or in part, 10 U.S. patents, including claims to novel cells and cellular compositions. In addition, CCT has approximately 60 U.S. patent applications, including pending provisional applications.
 
Our patents are regularly subject to challenge by generic drug companies and manufacturers. See Part I, Item 3, “Legal Proceedings.” We rely on several different types of patents to protect our products, including, without limitation, compound, polymorph, formulation and method of use patents. We do not know whether any of these patents will be circumvented, invalidated or found unenforceable as a result of challenge by generic companies or manufacturers. For a more detailed discussion of risks related to our patent portfolio see Part I, Item 1A, “Risk Factors.”
 
GOVERNMENTAL REGULATION/EXCLUSIVITIES AFFORDED BY REGULATORY AUTHORITIES
 
Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. Most, if not all, of our therapeutic products require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal and, in some cases, state statutes and regulations also govern or impact upon the manufacturing, testing for safety and effectiveness, labeling, storage, record-keeping and marketing of such products. The lengthy process of seeking required approvals, and the continuing need for compliance with applicable statutes and regulations, requires the expenditure of substantial resources. Regulatory approval, if and when obtained, may be limited in scope which may significantly limit the indicated uses for which a product may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review and discovery of previously unknown problems with such products or the manufacturing or quality control procedures used in their production may result in restrictions on their manufacture, sale or use or in their withdrawal from the market. Any failure by us, our suppliers of manufactured drug product, collaborators or licensees to obtain or maintain, or any delay in obtaining, regulatory approvals could adversely affect the marketing of our products and our ability to receive product revenue, license revenue or profit sharing payments.
 
The activities required before a product may be marketed in the United States begin with preclinical testing not involving human subjects. Preclinical tests include laboratory evaluation of a product candidate’s chemistry and its


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biological activities and the conduct of animal studies to assess the potential safety and efficacy of a product candidate and its formulations. The results of these studies must be submitted to the FDA as part of an IND which must be reviewed by the FDA primarily for safety considerations before proposed clinical trials in humans can begin.
 
Typically, clinical trials involve a three-phase process as previously described. In some cases, further studies (Phase IV) are required as a condition for a new drug application, or NDA, or biologics license application, or BLA, approval, to provide additional information concerning the drug or product. The FDA requires monitoring of all aspects of clinical trials, and reports of all adverse events must be made to the agency before drug approval. After approval, we have ongoing reporting obligations concerning adverse reactions associated with the drug, including expedited reports for serious and unexpected adverse events. Additionally, we may have limited control over studies conducted with our proprietary compounds or biologics if such studies are performed by others (e.g., cooperative groups).
 
The results of the preclinical testing and clinical trials are submitted to the FDA as part of an NDA or BLA for evaluation to determine if the product is sufficiently safe and effective for approval to commence commercial sales. In responding to an NDA or BLA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. When an NDA or BLA is approved, the NDA or BLA holder must a) employ a system for obtaining reports of experience and side effects associated with the drug and make appropriate submissions to the FDA and b) timely advise the FDA if any marketed product fails to adhere to specifications established by the NDA or BLA internal manufacturing procedures.
 
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a drug intended to treat a “rare disease or condition” as an “orphan drug.” The term “orphan drug” can refer to either a drug or biologic. A rare disease or condition is defined as one which affects less than 200,000 people in the United States, or which affects more than 200,000 people, but for which the cost of developing and making available the product is not expected to be recovered from sales of the product in the United States. Upon the approval of the first NDA or BLA for a drug designated as an orphan drug for a specified indication, the sponsor of that NDA or BLA is entitled to seven years of exclusive marketing rights in the United States for such drug or product containing the active ingredient for the same indication unless the sponsor cannot assure the availability of sufficient quantities of the drug to meet the needs of persons with the disease. However, orphan drug status is particular to the approved indication and does not prevent another company from seeking approval of other labeled indications. The period of orphan exclusivity is concurrent with any patent exclusivity that relates to the drug or biologic. Orphan drugs may also be eligible for federal income tax credits for costs associated with the drugs’ development. Possible amendment of the Orphan Drug Act by the U.S. Congress and possible reinterpretation by the FDA has been discussed by regulators and legislators. FDA regulations reflecting certain definitions, limitations and procedures for orphan drugs initially went into effect in January 1993 and were amended in certain respects in 1998. Therefore, there is no assurance as to the precise scope of protection that may be afforded by orphan drug status in the future or that the current level of exclusivity and tax credits will remain in effect. Moreover, even if we have an orphan drug designation for a particular use of a drug, there can be no assurance that another company also holding orphan drug designation will not receive approval prior to us for the same indication. If that were to happen, our applications for that indication could not be approved until the competing company’s seven-year period of exclusivity expired. Even if we are the first to obtain approval for the orphan drug indication, there are certain circumstances under which a competing product may be approved for the same indication during our seven-year period of exclusivity. Further, particularly in the case of large molecule drugs or biologics, a question can be raised whether the competing product is really the “same drug” as that which was approved. In addition, even in cases in which two products appear to be the same drug, the agency may approve the second product based on a showing of clinical superiority compared to the first product. In order to increase the development and marketing of drugs for rare disorders, regulatory bodies outside the United States have enacted regulations similar to the Orphan Drug Act. REVLIMID® brand drug has been granted orphan medicinal product designation by the European Commission, or EC, for treatment of CLL following the favorable opinion of the European Medicines Agency’s, or EMA, Committee for Orphan Medicinal Products.
 
Among the conditions for NDA or BLA approval is the requirement that the prospective manufacturer’s quality control and manufacturing procedures continually conform with the FDA’s current Good Manufacturing


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Practice, or cGMP, regulations (which are regulations established by the FDA governing the manufacture, processing, packing, storage and testing of drugs and biologics intended for human use). In complying with cGMP, manufacturers must devote extensive time, money and effort in the area of production and quality control and quality assurance to maintain full technical compliance. Manufacturing facilities and company records are subject to periodic inspections by the FDA to ensure compliance. If a manufacturing facility is not in substantial compliance with these requirements, regulatory enforcement action may be taken by the FDA, which may include seeking an injunction against shipment of products from the facility and recall of products previously shipped from the facility.
 
Under the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act, or the Act, products covered by approved NDAs or supplemental NDAs may be protected by periods of patent and/or non-patent exclusivity. During the exclusivity periods, the FDA is generally prevented from granting effective approval of an abbreviated NDA, or ANDA. Further, NDAs submitted under 505(b)(2) of the Food, Drug and Cosmetic Act may not reference data contained in the NDA for a product protected by an effective and unexpired exclusivity. ANDAs and 505(b)(2) applications are generally less burdensome than full NDAs in that, in lieu of new clinical data, the applications rely in whole, or in part, upon the safety and efficacy findings of the referenced approved drug in conjunction with bridging data, typically bioequivalence data. Upon the expiration of the applicable exclusivities, through passage of time or successful legal challenge, the FDA may grant effective approval of an ANDA for a generic drug, or may accept reference to a previously protected NDA in a 505(b)(2) application. Depending upon the scope of the applicable exclusivities, any such approval could be limited to certain formulations and/or indications/claims, i.e., those not covered by any outstanding exclusivities. While the Act provides for ANDA and 505(b)(2) abbreviated approval pathways for drugs earlier submitted as NDAs and approved under section 505 of the Act, there are presently no similar provisions for biologics submitted as BLAs and approved under the Public Health Service, or PHS, Act. There is currently no abbreviated application that would permit approval of a generic or “follow-on” biologic based on the FDA’s earlier approval of another manufacturer’s application under section 351 of the PHS Act.
 
Failure to comply with applicable FDA regulatory requirements can result in enforcement actions such as warning letters, recalls or adverse publicity issued by the FDA or in legal actions such as seizures, injunctions, fines based on the equitable remedy of disgorgement, restitution and criminal prosecution.
 
Approval procedures similar to those in the United States must be undertaken in virtually every other country comprising the market for our products before any such product can be commercialized in those countries. The approval procedure and the time required for approval vary from country to country and may involve additional testing. There can be no assurance that approvals will be granted on a timely basis or at all. In addition, regulatory approval of drug and biologics pricing is required in most countries other than the United States. There can be no assurance that the resulting pricing of our products would be sufficient to generate an acceptable return to us.
 
COMPETITION
 
The pharmaceutical and biotechnology industries are each highly competitive. We also compete with universities and research institutions in the development of products and processes, and in the acquisition of technology from outside sources.
 
Competition in the pharmaceutical industry, and specifically in the oncology and immune-inflammatory areas, is particularly intense. Numerous pharmaceutical, biotechnology and generic drug companies have extensive anti-cancer and anti-inflammatory drug discovery, development and commercial resources. Abbott Laboratories, Amgen Inc., or Amgen, AstraZeneca PLC., Biogen Idec Inc., Bristol-Myers Squibb Co., Eisai Co., Ltd., F. Hoffmann-LaRoche Ltd., Johnson and Johnson, Merck and Co., Inc., Novartis AG, Pfizer, Sanofi-Aventis and Takeda Pharmaceutical Co. Ltd., or Takeda, are among some of the companies researching and developing new compounds in the oncology, inflammation and immunology fields. We, along with other pharmaceutical brand-name makers, face the challenges brought on by generic drug manufacturers in their pursuit of obtaining bulk quantities of certain drugs in order for them to be able to develop similar versions of these products and be ready to market as soon as permitted.


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The pharmaceutical and biotechnology industries have undergone, and are expected to continue to undergo, rapid and significant technological change. Consolidation and competition are expected to intensify as technical advances in each field are achieved and become more widely known. In order to compete effectively, we will be required to continually upgrade and expand our scientific expertise and technology, identify and retain capable personnel and pursue scientifically feasible and commercially viable opportunities.
 
Our competition will be determined in part by the indications and geographic markets for which our products are developed and ultimately approved by regulatory authorities. The relative speed with which we develop new products, complete clinical trials, obtain regulatory approvals, receive pricing and reimbursement approvals, finalize agreements with outside contract manufacturers when needed and market our products are critical factors in gaining a competitive advantage. Competition among products approved for sale includes product efficacy, safety, convenience, reliability, availability, price, third-party reimbursement and patent and non-patent exclusivity.
 
SIGNIFICANT ALLIANCES
 
We have entered into a variety of alliances as is customary in our industry. Following is a description of the major agreements in place:
 
Novartis Pharma AG:  We entered into an agreement with Novartis in which we granted to Novartis an exclusive worldwide license (excluding Canada) to develop and market FOCALIN® (d-methylphenidate, or d -MPH) and FOCALIN XR®, the long-acting drug formulation for attention deficit disorder, or ADD, and attention deficit hyperactivity disorder, or ADHD. We also granted Novartis rights to all of our related intellectual property and patents, including formulations of the currently marketed RITALIN LA®. Under the agreement, we are entitled to receive up to $100.0 million in upfront and regulatory achievement milestone payments. To date, we have received upfront and regulatory achievement milestone payments totaling $55.0 million. We also sell FOCALIN® to Novartis and currently receive royalties of between 35% and 30% on sales of all of Novartis’ FOCALIN XR® and RITALIN® family of ADHD-related products.
 
The agreement will continue until the later of (i) the tenth anniversary of the first commercial launch on a country-by-country basis or (ii) when the last applicable patent expires with respect to that country. At the expiration date, we shall grant Novartis a perpetual, non-exclusive, royalty-free license to make, have made, use, import and sell d-MPH and Ritalin® under our technology.
 
Prior to its expiration as described above, the agreement may be terminated by:
 
i. Novartis at its sole discretion, effective 12 months after written notice to us, or
 
ii. by:
 
a. either party if the other party materially breaches any of its material obligations under the agreement,
 
b. us if Novartis fails to pay amounts due under the agreement two or more times in a 12-month period,
 
c. either party, on a product-by-product and country-by-country basis, in the event of withdrawal of the d-MPH product or Ritalin® product from the market because of regulatory mandate,
 
d. either party if the other party files for bankruptcy.
 
If the agreement is terminated by us then all licenses granted to Novartis under the agreement will terminate and Novartis will also grant us a non-exclusive license to certain of their intellectual property related to the compounds and products.
 
If the agreement is terminated by Novartis then all licenses granted to Novartis under the agreement will terminate.
 
If the agreement is terminated by Novartis because of a material breach by us, then Novartis can make a claim for damages against us and we shall grant Novartis a perpetual, non-exclusive, royalty-free license to make, have made, use, import and sell d-MPH and Ritalin® under our technology.


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When generic versions of long-acting methylphenidate hydrochloride and dexmethylphenidate hydrochloride enter the market, we expect Novartis’ sales of Ritalin LA® and Focalin XR® products to decrease and therefore our royalties under this agreement to also decrease.
 
Array BioPharma Inc.:  We have a research collaboration agreement with Array BioPharma Inc., or Array, focused on the discovery, development and commercialization of novel therapeutics in cancer and inflammation. As part of this agreement, we made an upfront payment in September 2007 to Array of $40.0 million, which was recorded as research and development expense, in return for an option to receive exclusive worldwide rights for compounds developed against two of the four research targets defined in the agreement, except for Array’s limited U.S. co-promotional rights. In June 2009, we made an additional upfront payment of $4.5 million to expand the research targets defined in the agreement, which was recorded as research and development expense. Array will be responsible for all discovery and clinical development through Phase I or Phase IIa and be entitled to receive, for each compound, potential milestone payments of approximately $200.0 million if certain discovery, development and regulatory milestones are achieved, and $300.0 million if certain commercial milestones are achieved as well as royalties on net sales. During the fourth quarter of 2010, we made a $10.0 million discovery milestone payment required by the collaboration upon the filing and clearance of an IND with the FDA.
 
Our option will terminate upon the earlier of either a termination of the agreement, the date we have exercised our options for compounds developed against two of the four research targets defined in the agreement, or September 21, 2012, unless the term is extended. We may unilaterally extend the option term for two additional one-year terms until September 21, 2014 and the parties may mutually extend the term for two additional one-year terms until September 21, 2016. Upon exercise of an option, the agreement will continue until we have satisfied all royalty payment obligations to Array. Upon the expiration of the agreement, Array will grant us a fully paid-up, royalty-free license to use certain intellectual property of Array to market and sell the compounds and products developed under the agreement. The agreement may expire on a product-by-product and country-by-country basis as we satisfy our royalty payment obligation with respect to each product in each country.
 
Prior to its expiration as described above, the agreement may be terminated by:
 
(i) us at our sole discretion, or
 
(ii) either party if the other party:
 
a. materially breaches any of its material obligations under the agreement, or
 
b. files for bankruptcy.
 
If the agreement is terminated by us at our sole discretion or by Array for a material breach by us, then our rights to the compounds and products developed under the agreement will revert to Array. If the agreement is terminated by Array for a material breach by us, then we will also grant to Array a non-exclusive, royalty-free license to certain intellectual property controlled by us necessary to continue the development of such compounds and products. If the agreement is terminated by us for a material breach by Array, then, among other things, our payment obligations under the agreement could be either reduced by 50% or terminated entirely.
 
Acceleron Pharma:  We have a worldwide strategic collaboration with Acceleron Pharma, or Acceleron, for the joint development and commercialization of ACE-011, currently being studied for treatment of chemotherapy-induced anemia, metastatic bone disease and renal anemia. The collaboration combines both companies’ resources and commitment to developing products for the treatment of cancer and cancer-related bone loss. The agreement also includes an option for certain discovery stage programs. Under the terms of the agreement, we and Acceleron will jointly develop, manufacture and commercialize Acceleron’s products for bone loss. We made an upfront payment to Acceleron in February 2008 of $50.0 million, which included a $5.0 million equity investment in Acceleron, with the remainder recorded as research and development expense. In addition, in the event of an initial public offering of Acceleron, we will purchase a minimum of $7.0 million of Acceleron common stock.
 
Acceleron will retain responsibility for initial activities, including research and development, through the end of Phase IIa clinical trials, as well as manufacturing the clinical supplies for these studies. In turn, we will conduct the Phase IIb and Phase III clinical studies and will oversee the manufacture of Phase III and commercial supplies. Acceleron will pay a share of the development expenses and is eligible to receive development, regulatory approval


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and sales-based milestones of up to $510.0 million for the ACE-011 program and up to an additional $437.0 million for each of the three discovery stage programs. The companies will co-promote the products in North America. Acceleron will receive tiered royalties on worldwide net sales, upon the commercialization of a development compound.
 
The agreement will continue until we have satisfied all royalty payment obligations to Acceleron and we have either exercised or forfeited all of our options under the agreement. Upon our full satisfaction of our royalty payment obligations to Acceleron under the agreement, all licenses granted to us by Acceleron under the agreement will become fully paid-up, perpetual, non-exclusive, irrevocable and royalty-free licenses. The agreement may expire on a product-by-product and country-by-country basis as we satisfy our royalty payment obligation with respect to each product in each country.
 
Prior to its expiration as described above, the agreement may be terminated by:
 
(i) us at our sole discretion, or
 
(ii) either party if the other party:
 
a. materially breaches any of its material obligations under the agreement, or
 
b. files for bankruptcy.
 
If the agreement is terminated by us at our sole discretion or by Acceleron for a material breach by us, then all licenses granted to us under the agreement will terminate and we will also grant to Acceleron a non-exclusive license to certain of our intellectual property related to the compounds and products. If the agreement is terminated by us for a material breach by Acceleron, then, among other things, (A) the licenses granted to Acceleron under the agreement will terminate, (B) the licenses granted to us will continue in perpetuity, (C) all future royalties payable by us under the agreement will be reduced by 50% and (D) our obligation to make any future milestone payments will terminate.
 
Cabrellis Pharmaceuticals Corp.:  We, as a result of our acquisition of Pharmion, obtained an exclusive license to develop and commercialize amrubicin in North America and Europe pursuant to a license agreement with Dainippon Sumitomo Pharma Co. Ltd, or DSP. Pursuant to Pharmion’s acquisition of Cabrellis Pharmaceutics Corp., or Cabrellis, prior to our acquisition of Pharmion, we will pay $12.5 million for each approval of amrubicin in an initial indication by regulatory authorities in the United States and the E.U. to the former shareholders of Cabrellis. Upon approval of amrubicin for a second indication in the United States or the E.U., we will pay an additional $10.0 million for each market to the former shareholders of Cabrellis. Under the terms of the license agreement for amrubicin, we are required to make milestone payments of $7.0 million and $1.0 million to DSP upon regulatory approval of amrubicin in the United States and upon receipt of the first approval in the E.U., respectively, and up to $17.5 million upon achieving certain annual sales levels in the United States. Pursuant to the supply agreement for amrubicin, we are to pay DSP a semiannual supply price calculated as a percentage of net sales for a period of ten years. In September 2008, amrubicin was granted fast-track product designation by the FDA for the treatment of small cell lung cancer after first-line chemotherapy.
 
The amrubicin license expires on a country-by-country basis and on a product-by-product basis upon the later of (i) the tenth anniversary of the first commercial sale of the applicable product in a given country after the issuance of marketing authorization in such country and (ii) the first day of the first quarter for which the total number of generic product units sold in a given country exceeds 20% of the total number of generic product units sold plus licensed product units sold in the relevant country during the same calendar quarter.
 
Prior to its expiration as described above, the amrubicin license may be terminated by:
 
(i) us at our sole discretion,
 
(ii) either party if the other party:
 
a. materially breaches any of its material obligations under the agreement, or
 
b. files for bankruptcy,
 
(iii) DSP if we take any action to challenge the title or validity of the patents owned by DSP, or
 
(iv) DSP in the event of our change in control.


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If the agreement is terminated by us at our sole discretion or by DSP under circumstances described in clauses (ii)(a) and (iii) above, then we will transfer our rights to the compounds and products developed under the agreement to DSP and will also grant to DSP a non-exclusive, perpetual, royalty-free license to certain intellectual property controlled by us necessary to continue the development of such compounds and products. If the agreement is terminated by us for a material breach by DSP, then, among other things, DSP will grant to us an exclusive, perpetual, paid-up license to all of the intellectual property of DSP necessary to continue the development, marketing and selling of the compounds and products subject to the agreement.
 
GlobeImmune, Inc.:  In September 2007, we made a $3.0 million equity investment in GlobeImmune, Inc., or GlobeImmune. In April 2009 and May 2009, we made additional $0.1 million and $10.0 million equity investments, respectively, in GlobeImmune. In addition, we have a collaboration and option agreement with GlobeImmune focused on the discovery, development and commercialization of novel therapeutics in cancer. As part of this agreement, we made an upfront payment in May 2009 of $30.0 million, which was recorded as research and development expense, to GlobeImmune in return for the option to license compounds and products based on the GI-4000, GI-6200, GI-3000 and GI-10000 oncology drug candidate programs as well as oncology compounds and products resulting from future programs controlled by GlobeImmune. GlobeImmune will be responsible for all discovery and clinical development until we exercise our option with respect to a drug candidate program and GlobeImmune will be entitled to receive potential milestone payments of approximately $230.0 million for the GI-4000 program, $145.0 million for each of the GI-6200, GI-3000 and GI-10000 programs and $161.0 million for each additional future program if certain development, regulatory and sales-based milestones are achieved. GlobeImmune will also receive tiered royalties on worldwide net sales.
 
Our options with respect to the GI-4000, GI-6200, GI-3000 and GI-10000 oncology drug candidate programs will terminate if we do not exercise our respective options after delivery of certain reports from GlobeImmune on the completed clinical trials with respect to each drug candidate program, as set forth in the initial development plan specified in the agreement. If we do not exercise our options with respect to any drug candidate program or future program, our option with respect to the oncology products resulting from future programs controlled by GlobeImmune will terminate three years after the last of the options with respect to the GI-4000, GI-6200, GI-3000 and GI-10000 oncology drug candidate programs terminates. Upon our exercise of an option, the agreement will continue until we have satisfied all royalty payment obligations to GlobeImmune. Upon the expiration of the agreement, on a product-by-product, country-by-country basis, GlobeImmune will grant us an exclusive, fully paid-up, royalty-free, perpetual license to use certain intellectual property of GlobeImmune to market and sell the compounds and products developed under the agreement. The agreement may expire on a product-by-product and country-by-country basis as we satisfy our royalty payment obligation with respect to each product in each country.
 
Prior to its expiration as described above, the agreement may be terminated by:
 
(i) us at our sole discretion, or
 
(ii) either party if the other party:
 
a. materially breaches any of its material obligations under the agreement, or
 
b. files for bankruptcy.
 
If the agreement is terminated by us at our sole discretion or by GlobeImmune for a material breach by us, then our rights to the compounds and products developed under the agreement will revert to GlobeImmune. If the agreement is terminated by us for a material breach by GlobeImmune, then, among other things, our royalty payment obligations under the agreement will be reduced by 50%, our development milestone payment obligations under the agreement will be reduced by 50% or terminated entirely and our sales milestone payment obligations under the agreement will be terminated entirely.
 
Agios Pharmaceuticals, Inc.:  On April 14, 2010, we entered into a discovery and development collaboration and license agreement with Agios Pharmaceuticals, Inc., or Agios, which focuses on cancer metabolism targets and the discovery, development and commercialization of associated therapeutics. As part of the agreement, we paid Agios a $121.2 million non-refundable, upfront payment, which was expensed by us as research and development in the second quarter of 2010. We also made an $8.8 million equity investment in Agios Series B Convertible Preferred


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Stock, representing approximately a 10.94% ownership interest in Agios and is included in other non-current assets in our Consolidated Balance Sheet. We receive an initial period of exclusivity during which we have the option to develop any drugs resulting from the Agios cancer metabolism research platform and may extend this exclusivity period by providing Agios additional funding. We have an exclusive option to license any resulting clinical candidates developed during this period and will lead and fund global development and commercialization of certain licensed programs. With respect to each product in a program that we choose to license, Agios could receive up to $120.0 million upon achievement of certain milestones plus royalties on sales, and Agios may also participate in the development and commercialization of certain products in the United States. Agios may also receive a one-time milestone payment of $25.0 million upon dosing of the final human subject in a Phase II study, such payment to be made only once with respect to only one program.
 
Unless the agreement is earlier terminated or the option term is extended, our option will terminate on April 14, 2013. However, if certain development targets are not met, we may unilaterally extend the option term: (a) for up to an additional one year without payment; (b) subject to certain criteria and upon payment of certain predetermined amounts to Agios, for up to two additional years thereafter.
 
Following expiration of the option, the agreement will continue in place with respect to programs to which we have exercised our option or otherwise are granted rights to develop. The agreement may expire on a product-by-product and country-by-country basis as we satisfy our payment obligation with respect to each product in each country. Upon the expiration of the agreement with respect to a product in a country, all licenses granted by one party to the other party for such product in such country shall become fully paid-up, perpetual, sub licensable, irrevocable and royalty-free.
 
Prior to its expiration as described above, the agreement may be terminated by:
 
(i) us at its sole discretion, or
 
(ii) either party if the other party:
 
a. materially breaches the agreement and fails to cure such breach within the specified period, or
 
b. files for bankruptcy.
 
The party terminating under (i) or (ii)(a) above has the right to terminate on a program-by-program basis leaving the agreement in effect with respect to remaining programs. If the agreement or any program is terminated by us for convenience or by Agios for a material breach or bankruptcy by us, then, among other things, depending on the type of program and territorial rights: (a) certain licenses granted by us to Agios shall stay in place, subject to Agios’ payment of certain royalties to us: and (b) we will grant Agios a non-exclusive, perpetual, royalty-free license to certain technology developed in the conduct of the collaboration and used in the program (which license is exclusive with respect to certain limited collaboration technology). If the agreement or any program is terminated by us for a material breach or bankruptcy by Agios, then, among other things, all licenses granted by us to Agios will terminate and: (i) our license from Agios will continue in perpetuity and all payment obligations will be reduced or will terminate; (ii) our license for certain programs will become exclusive worldwide: and (iii) with regard to any program where we have exercised buy-in rights, Agios shall continue to pay certain royalties to us.
 
We have determined that Agios is a variable interest entity; however, we are not the primary beneficiary of Agios. Although we would have the right to receive the benefits from the collaboration and license agreement and it is probable that this agreement incorporates the activities that most significantly impact the economic performance of Agios for up to six years, we do not have the power to direct the activities under the collaboration and license agreement as Agios has the decision-making authority for the Joint Steering Committee and Joint Research Committee until we exercise our option to license a product. Our interest in Agios is limited to our 10.94% equity ownership and we do not have any obligations or rights to the future losses or returns of Agios beyond this ownership. The collaboration agreement, including the upfront payment and series B convertible preferred stock investment, does not entitle us to participate in future returns beyond the 10.94% ownership and it does not obligate us to absorb future losses beyond the $8.8 million investment in Agios Series B Convertible Preferred Stock. In addition, there are no other agreements other than the collaboration agreement that entitle us to receive returns beyond the 10.94% ownership or obligate us to absorb additional losses.


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MANUFACTURING
 
We own and operate an FDA approved manufacturing facility in Zofingen, Switzerland which produces the active pharmaceutical ingredient, or API, for REVLIMID® and THALOMID® and have contracted with FDA approved Aptuit Inc. to provide backup API manufacturing services in accordance with our specifications. We also own and operate an FDA approved drug product manufacturing facility in Boudry, Switzerland which is used for the formulation, encapsulation, packaging, warehousing and distribution of REVLIMID® and THALOMID®. Our backup FDA approved drug product manufacturing service providers include Penn Pharmaceutical Ltd. and Institute of Drug Technology Australia Ltd. Our packaging service providers include Sharp Corporation for worldwide packaging and Acino Holding Ltd. for non-U.S. packaging.
 
As a result of the acquisition of Abraxis, we obtained manufacturing facilities in Melrose Park, Illinois; Phoenix, Arizona; Oelwein, Iowa; Elk Grove Village, Illinois and Barceloneta, Puerto Rico. A portion of the manufacturing facility in Melrose Park has been leased to APP Pharmaceuticals, Inc., or APP, and APP has agreed to provide certain contract manufacturing services to us in accordance with the terms of the manufacturing agreement. In addition, we lease from APP a portion of APP’s Grand Island, New York manufacturing facility to enable us to perform our responsibilities under the manufacturing agreement with APP for its term. The initial term of the manufacturing agreement will expire on December 31, 2011, but could be extended for one year if either APP exercises its option to extend the lease for our Melrose Park manufacturing facility for an additional year or we exercise our option to extend the lease for APP’s Grand Island manufacturing facility for an additional year. ABRAXANE® is manufactured at both the Melrose Park and Grand Island facilities. The Puerto Rico facility is an API manufacturing plant which is currently not in use.
 
Prior to a 2007 separation agreement, Abraxis and APP had been a single company named American Pharmaceutical Partners, Inc. In 2007, American Pharmaceutical Partners, Inc. was separated into two independent publicly traded companies: Abraxis which was focused on oncology and research activities; and APP, which was focused on hospital-based activities. After the separation, APP was purchased by Fresenius, a publicly traded global health care company.
 
The API for VIDAZA® is supplied by Ash Stevens, Inc. and Carbogen Amcis. We also have contract manufacturing agreements with Baxter GmbH and Ben Venue Laboratories, Inc., or Ben Venue, for VIDAZA® product formulation, filling vials and packaging. Our packaging service provider for non-U.S. packaging is Catalent Pharma Solutions.
 
The API for ISTODAX® is supplied by Sandoz and Ben Venue provides the product formulation, filling vials and packaging.
 
The API for FOCALIN® and FOCALIN XR® is currently obtained from two suppliers, Johnson Matthey Inc. and Siegfried USA Inc., and we rely on a single manufacturer, Mikart, Inc., for the tableting and packaging of FOCALIN® finished product.
 
CCT currently operates an FDA registered facility in Cedar Knolls, New Jersey for the recovery and storage of cord blood and placental stem cells for LifeBankUSA®. In addition, our Warren, New Jersey facility is FDA registered for production of PDA-001, a culture-expanded placenta-derived stem cell under cGMP to supply clinical studies. This is a multi-purpose facility capable of supporting other products.
 
INTERNATIONAL OPERATIONS
 
We have significant operations outside the United States conducted both through our subsidiaries and through distributors. Revenues from operations outside the United States were 39.6% of total revenues in 2010, 35.6% of total revenues in 2009 and 29.8% of total revenues in 2008. The increase in the percentage of total revenues from outside of the United States is the result of our ongoing efforts to increase the availability of our products to patients.
 
Our international headquarters and a drug product manufacturing facility which performs formulation, encapsulation, packaging, warehousing and distribution are located in Boudry, Switzerland. We continue to expand our international regulatory, clinical and commercial infrastructure and currently conduct our international


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operations in over 65 countries and regions including Europe, Latin America, Middle East, Asia/Pacific and Canada.
 
Our international operations are subject to risks associated with operating on an international basis including currency fluctuations, price and exchange controls and other restrictive governmental actions. Our international operations are also subject to government-imposed constraints including laws on pricing, reimbursement and access to our products. Depending on the direction of change relative to the U.S. dollar, foreign currency values can increase or decrease the reported dollar value of our net assets and results of operations. While we cannot predict with certainty future changes in foreign exchange rates or the effect they will have, we attempt to mitigate their impact through operational means and by using foreign currency forward contracts. See the discussions under “Item 7A Quantitative and Qualitative Disclosures About Market Risk.”
 
SALES AND COMMERCIALIZATION
 
We endeavor to promote our brands globally through our highly trained commercial organization that has significant experience in the pharmaceutical industry, especially in the areas of oncology and immunology. Our commercial organization supports our currently marketed brands and prepares for the launches of new products as well as new indications for existing products. We have a team of dedicated Market Access professionals to help physicians, patients and payers understand the value our products deliver. Given our goal to ensure that patients who might benefit from our therapies have the opportunity to do so and given the complex reimbursement environment in the United States, we offer the services of Celgene Patient Support®. Celgene Patient Support® provides a dedicated, central point of contact for patients and healthcare professionals who use Celgene products. Celgene Patient Support® is a free service that helps patients and healthcare professionals navigate the challenges of reimbursement, providing information about co-pay assistance, and answering questions about obtaining Celgene products.
 
In most countries, we sell our products through our own sales organizations. In some countries, particularly in Latin America, we partner with other third-party distributors. (See Section “COMMERCIAL STAGE PRODUCTS” above.) Generally, we distribute our products through the commonly used channels in local markets. However, REVLIMID® and THALOMID® (inclusive of Thalidomide Celgene® and Thalidomide Pharmion®) are distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure their safe and appropriate distribution and use.
 
EMPLOYEES
 
As of December 31, 2010, we had 4,182 full-time company-wide employees, 526 of which were engaged primarily in manufacturing, 1,983 engaged primarily in research and development activities, 1,013 engaged primarily in sales and commercialization activities and the remainder engaged primarily in executive and general and administrative activities. The number of full-time employees in our international operations has grown from 1,051 at the end of 2009 to 1,273 at the end of 2010. We also employ a number of part-time employees and maintain consulting arrangements with a number of researchers at various universities and other research institutions around the world.
 
FORWARD-LOOKING STATEMENTS
 
Certain statements contained or incorporated by reference in this Annual Report on Form 10-K are forward-looking statements concerning our business, results of operations, economic performance and financial condition based on our current expectations. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are included, for example, in the discussions about:
 
  •  strategy;
 
  •  new product discovery and development;
 
  •  current or pending clinical trials;


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  •  our products’ ability to demonstrate efficacy or an acceptable safety profile;
 
  •  actions by the FDA;
 
  •  product manufacturing, including our arrangements with third-party suppliers;
 
  •  product introduction and sales;
 
  •  royalties and contract revenues;
 
  •  expenses and net income;
 
  •  credit and foreign exchange risk management;
 
  •  liquidity;
 
  •  asset and liability risk management; and
 
  •  operational and legal risks.
 
From time to time, we also provide forward-looking statements in other materials we release to the public, as well as oral forward-looking statements. All our forward-looking statements give our then current expectations or forecasts of future events. None of our forward-looking statements are guarantees of future performance, although we believe we have been prudent in our plans and assumptions. Each forward-looking statement involves risks, uncertainties and potentially inaccurate assumptions that could cause actual results to differ materially from those implied by our forward-looking statement. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider our forward-looking statements. Given these risks, uncertainties and assumptions, you are cautioned not to place undue reliance on any forward-looking statements.
 
We have tried, wherever possible, to identify these forward-looking statements by using words such as “forecast,” “project,” “anticipate,” “plan,” “strategy,” “intend,” “potential,” “outlook,” “target,” “seek,” “continue,” “believe,” “could,” “estimate,” “expect,” “may,” “probable,” “should,” “will” or other words of similar meaning in conjunction with, among other things, discussions of our future operations, business plans and prospects, prospective products or product approvals, our strategies for growth, product development and regulatory approval, our expenses, the impact of foreign exchange rates, the outcome of contingencies, such as legal proceedings, and our financial performance and results generally. You also can identify our forward-looking statements by the fact that they do not relate strictly to historical or current facts.
 
We provide in this report a cautionary discussion of risks and uncertainties relevant to our business under the headings “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We note these factors as permitted by the Private Securities Litigation Reform Act of 1995. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. You should understand, however, that it is not possible to predict or identify all such factors. Consequently, you should not consider the factors that are noted to be a complete discussion of all potential risks or uncertainties.
 
Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, or SEC, we disclaim and do not undertake any obligations to update or revise publicly any of our forward-looking statements, including forward-looking statements in this report, whether as a result of new information, future events, changes in assumptions, or otherwise. You are advised, however, to consult any further disclosure we make on related subjects in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with or furnished to the SEC.


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ITEM 1A.   RISK FACTORS
 
The following statements describe the major risks to our business and should be considered carefully. Any of these factors could significantly and negatively affect our business, prospects, financial condition, operating results or credit ratings, which could cause the trading price of our common stock to decline. The risks described below are not the only risks we may face. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, could also negatively affect our business, our results and operations.
 
We may experience significant fluctuations in our quarterly operating results which could cause our financial results to be below expectations and cause our stock price to be volatile.
 
We have historically experienced, and may continue to experience, significant fluctuations in our quarterly operating results. These fluctuations are due to a number of factors, many of which are outside our control, and may result in volatility of our stock price. Future operating results will depend on many factors, including:
 
  •  demand or lack of demand for our products, including demand that adversely affects our ability to optimize the use of our manufacturing facilities;
 
  •  the introduction and pricing of products competitive with ours, including generic competition;
 
  •  developments regarding the safety or efficacy of our products;
 
  •  regulatory approvals for our products and pricing determinations with respect to our products;
 
  •  regulatory approvals for our and our competitor’s manufacturing facilities;
 
  •  timing and levels of spending for research and development, sales and marketing;
 
  •  timing and levels of reimbursement from third-party payers for our products;
 
  •  development or expansion of business infrastructure in new clinical and geographic markets;
 
  •  the acquisition of new products and companies;
 
  •  tax rates in the jurisdictions in which we operate;
 
  •  timing and recognition of certain research and development milestones and license fees;
 
  •  ability to control our costs;
 
  •  fluctuations in foreign currency exchange rates; and
 
  •  economic and market instability.
 
We are dependent on the continued commercial success of our primary products REVLIMID®, VIDAZA®, THALOMID® and ABRAXANE® and a significant decline in demand for or use of these products or our other commercially available products could materially and adversely affect our operating results.
 
During the next several years, the growth of our business will be largely dependent on the commercial success of REVLIMID®, VIDAZA®, THALOMID®, and ABRAXANE®. We cannot predict whether these or our other existing or new products will be accepted by regulators, physicians, patients and other key opinion leaders as effective drugs with certain advantages over existing or future therapies. We are continuing to introduce our products in additional international markets and to obtain approvals for additional indications both in the United States and internationally. A delay in gaining the requisite regulatory approvals for these markets or indications could negatively impact our growth plans and the value of our stock.
 
Further, if unexpected adverse experiences are reported in connection with the use of our products, physician and patient comfort with the product could be undermined, the commercial success of such products could be adversely affected and the acceptance of our other products could be negatively impacted. We are subject to adverse event reporting regulations that require us to report to the FDA or similar bodies in other countries if our products are associated with a death or serious injury. These adverse events, among others, could result in additional regulatory controls, such as the performance of costly post-approval clinical studies or revisions to our approved


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labeling, which could limit the indications or patient population for our products or could even lead to the withdrawal of a product from the market. Similarly, the occurrence of serious adverse events known or suspected to be related to the products could negatively impact product sales. For example, THALOMID® is known to be toxic to the human fetus and exposure to the drug during pregnancy could result in significant deformities in the baby. REVLIMID® is also considered fetal toxic and there are warnings against use of VIDAZA® in pregnant women as well. While we have restricted distribution systems for both THALOMID® and REVLIMID® and we endeavor to educate patients regarding the potential known adverse events including pregnancy risks, we cannot ensure that all such warnings and recommendations will be complied with or that adverse events resulting from non-compliance will not have a material adverse effect on our business.
 
It is necessary that our primary products achieve and maintain market acceptance as well as our other products including ISTODAX®, FOCALIN XR® and the RITALIN® family of drugs. A number of factors may adversely impact the degree of market acceptance of our products, including the products’ efficacy, safety and advantages, if any, over competing products, as well as the reimbursement policies of third-party payers, such as government and private insurance plans, patent disputes and claims about adverse side effects.
 
If we do not gain or maintain regulatory approval of our products we will be unable to sell our current products and products in development.
 
Changes in law, government regulations or policies can have a significant impact on our results of operations. The discovery, preclinical development, clinical trials, manufacturing, risk evaluation and mitigation strategies (such as our S.T.E.P.S.® and RevAssist® programs), marketing and labeling of pharmaceuticals and biologics are all subject to extensive laws and regulations, including, without limitation, the U.S. Federal Food, Drug, and Cosmetic Act, the U.S. Public Health Service Act, Medicare Modernization Act, Food and Drug Administration Amendments Act, the U.S. Foreign Corrupt Practices Act, the Sherman Antitrust Act, patent laws, environmental laws, privacy laws and other federal and state statutes, including anti-kickback, antitrust and false claims laws, as well as similar laws in foreign jurisdictions. Enforcement of and changes in laws, government regulations or policies can have a significant adverse impact on our ability to continue to commercialize our products or introduce new products to the market, which would adversely affect our results of operations.
 
If we or our agents, contractors or collaborators are delayed in receiving, or are unable to obtain all, necessary governmental approvals, we will be unable to effectively market our products.
 
The testing, marketing and manufacturing of our products requires regulatory approval, including approval from the FDA and, in some cases, from the Environmental Protection Agency, or EPA, or governmental authorities outside of the United States that perform roles similar to those of the FDA and EPA, including the EMA, EC, the Swissmedic, the Australian Therapeutic Goods Administration and Health Canada. Certain of our pharmaceutical products, such as FOCALIN®, fall under the Controlled Substances Act of 1970 that requires authorization by the U.S. Drug Enforcement Agency, or DEA, of the U.S. Department of Justice in order to handle and distribute these products.
 
The regulatory approval process presents a number of risks to us, principally:
 
  •  In general, preclinical tests and clinical trials can take many years, and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretation that could delay, limit or prevent regulatory approval;
 
  •  Delays or rejections may be encountered during any stage of the regulatory process based upon the failure of the clinical or other data to demonstrate compliance with, or upon the failure of the product to meet, a regulatory agency’s requirements for safety, efficacy and quality or, in the case of a product seeking an orphan drug indication, because another designee received approval first or receives approval of other labeled indications;
 
  •  Requirements for approval may become more stringent due to changes in regulatory agency policy, or the adoption of new regulations or legislation;


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  •  The scope of any regulatory approval, when obtained, may significantly limit the indicated uses for which a product may be marketed and reimbursed and may impose significant limitations in the nature of warnings, precautions and contra-indications that could materially affect the sales and profitability of the drug;
 
  •  Approved products, as well as their manufacturers, are subject to continuing and ongoing review, and discovery of previously unknown problems with these products or the failure to adhere to manufacturing or quality control requirements may result in restrictions on their manufacture, sale or use or in their withdrawal from the market;
 
  •  Regulatory authorities and agencies of the United States or foreign governments may promulgate additional regulations restricting the sale of our existing and proposed products, including specifically tailored risk evaluation and mitigation strategies;
 
  •  Guidelines and recommendations published by various governmental and non-governmental organizations can reduce the use of our products;
 
  •  Once a product receives marketing approval, we may not market that product for broader or different applications, and the FDA may not grant us approval with respect to separate product applications that represent extensions of our basic technology. In addition, the FDA may withdraw or modify existing approvals in a significant manner or promulgate additional regulations restricting the sale of our present or proposed products. The FDA may also request that we perform additional clinical trials or change the labeling of our existing or proposed products if we or others identify side effects after our products are on the market;
 
  •  Products, such as REVLIMID®, that are subject to accelerated approval can be subject to an expedited withdrawal if the post-marketing study commitments are not completed with due diligence, the post-marketing restrictions are not adhered to or are shown to be inadequate to assure the safe use of the drug, or evidence demonstrates that the drug is not shown to be safe and effective under its conditions of use. Additionally, promotional materials for such products are subject to enhanced surveillance, including pre-approval review of all promotional materials used within 120 days following marketing approval and a requirement for the submissions 30 days prior to initial dissemination of all promotional materials disseminated after 120 days following marketing approval; and
 
  •  Our risk evaluation and mitigation strategies, labeling and promotional activities relating to our products as well as our post-marketing activities are regulated by the FDA, the Federal Trade Commission, The United States Department of Justice, the DEA, state regulatory agencies and foreign regulatory agencies and are subject to associated risks. In addition, individual states, acting through their attorneys general, have become active as well, seeking to regulate the marketing of prescription drugs under state consumer protection and false advertising laws. If we fail to comply with regulations regarding the promotion and sale of our products, appropriate distribution of our products under our restricted distribution systems, prohibition on off-label promotion and the promotion of unapproved products, such agencies may bring enforcement actions against us that could inhibit our commercial capabilities as well as result in significant penalties.
 
Other matters that may be the subject of governmental or regulatory action which could adversely affect our business include:
 
  •  changes in laws and regulations, including without limitation, patent, environmental, privacy, health care and competition laws;
 
  •  importation of prescription drugs from outside the U.S. at prices that are regulated by the governments of various foreign countries;
 
  •  additional restrictions on interactions with healthcare professionals; and
 
  •  privacy restrictions that may limit our ability to share data from foreign jurisdictions.
 
We collect placentas and umbilical cord blood for our unrelated allogeneic and private stem cell banking businesses. The FDA’s Center for Biologics Evaluation and Research currently regulates human tissue or cells intended for transplantation, implantation, infusion or transfer to a human recipient under 21 CFR Parts 1270 and


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1271. Part 1271 requires cell and tissue establishments to screen and test donors, to prepare and follow written procedures for the prevention of the spread of communicable disease and to register the establishment with FDA. This part also provides for inspection by the FDA of cell and tissue establishments. The FDA recently announced that as of October 21, 2011, a BLA will be required to distribute cord blood for unrelated allogeneic use. Currently, we are required to be, and are, licensed to operate in New York, New Jersey, Maryland and California. If other states adopt similar licensing requirements, we would need to obtain such licenses to continue operating our stem cell banking businesses. If we are delayed in receiving, or are unable to obtain at all, necessary licenses, we will be unable to provide services in those states and this could impact negatively on our revenues.
 
Sales of our products will be significantly reduced if access to and reimbursement for our products by governmental and other third-party payers is reduced or terminated.
 
Sales of our products will depend, in part, on the extent to which the costs of our products will be paid by health maintenance, managed care, pharmacy benefit and similar health care management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers. Generally, in Europe and other countries outside the United States, the government-sponsored healthcare system is the primary payer of healthcare costs of patients. These health care management organizations and third-party payers are increasingly challenging the prices charged for medical products and services. Additionally, the newly enacted Health Care Reform Act has provided sweeping health care reform, which may impact the prices of drugs. In addition to the newly enacted federal legislation, state legislatures and foreign governments have also shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. The establishment of limitations on patient access to our drugs, adoption of price controls and cost-containment measures in new jurisdictions or programs, and adoption of more restrictive policies in jurisdictions with existing controls and measures, including the impact of the Health Care Reform Act, could adversely impact our business and future results. If these organizations and third-party payers do not consider our products to be cost-effective compared to other available therapies, they may not reimburse providers or consumers of our products or, if they do, the level of reimbursement may not be sufficient to allow us to sell our products on a profitable basis.
 
Our ability to sell our products to hospitals in the United States depends in part on our relationships with group purchasing organizations, or GPOs. Many existing and potential customers for our products become members of GPOs. GPOs negotiate pricing arrangements and contracts, sometimes on an exclusive basis, with medical supply manufacturers and distributors, and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. If we are not one of the providers selected by a GPO, affiliated hospitals and other members may be less likely to purchase our products, and if the GPO has negotiated a strict sole source, market share compliance or bundling contract for another manufacturer’s products, we may be precluded from making sales to members of the GPO for the duration of the contractual arrangement. Our failure to renew contracts with GPOs may cause us to lose market share and could have a material adverse effect on our sales, financial condition and results of operations. We cannot assure you that we will be able to renew these contracts at the current or substantially similar terms. If we are unable to keep our relationships and develop new relationships with GPOs, our competitive position may suffer.
 
We encounter similar regulatory and legislative issues in most countries outside the United States. International operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe and other countries has and will continue to put pressure on the price and usage of our products. Although we cannot predict the extent to which our business may be affected by future cost-containment measures or other potential legislative or regulatory developments, additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our current and future products, which could adversely affect our revenue and results of operations.
 
Our long-term success depends, in part, on intellectual property protection.
 
Our success depends, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties and to conduct our business without infringing upon the proprietary rights of others. The patent positions of pharmaceutical and biopharmaceutical companies, including ours, can be uncertain


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and involve complex legal and factual questions including those related to our risk evaluation and mitigation strategies (such as our S.T.E.P.S.® and RevAssist® programs). In addition, the coverage sought in a patent application can be significantly reduced before the patent is issued.
 
Consequently, we do not know whether any of our owned or licensed pending patent applications, which have not already been allowed, will result in the issuance of patents or, if any patents are issued, whether they will be dominated by third-party patent rights, whether they will provide significant proprietary protection or commercial advantage or whether they will be circumvented, opposed, invalidated, rendered unenforceable or infringed by others. Further, we are aware of third-party U.S. patents that relate to, for example, the use of certain stem cell technologies and cannot be assured as to any impact to our potential products, or guarantee that our patents or pending applications will not be involved in, or be defeated as a result of, opposition proceedings before a foreign patent office or any interference proceedings before the United States Patent & Trademark Office, or PTO.
 
With respect to patents and patent applications we have licensed-in, there can be no assurance that additional patents will be issued to any of the third parties from whom we have licensed patent rights, or that, if any new patents are issued, such patents will not be opposed, challenged, invalidated, infringed or dominated or provide us with significant proprietary protection or commercial advantage. Moreover, there can be no assurance that any of the existing licensed patents will provide us with proprietary protection or commercial advantage. Nor can we guarantee that these licensed patents will not be either infringed, invalidated or circumvented by others, or that the relevant agreements will not be terminated. Any termination of the licenses granted to us by CMCC could have a material adverse effect on our business, financial condition and results of operations.
 
Because 1) patent applications filed in the United States on or before November 28, 2000 are maintained in secrecy until patents issue, 2) patent applications filed in the United States on or after November 29, 2000 are not published until approximately 18 months after their earliest claimed priority date, 3) United States patent applications that are not filed outside the United States may not publish at all until issued, and 4) publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that we, or our licensors, were the first to make the inventions covered by each of the issued patents or pending patent applications or that we, or our licensors, were the first to file patent applications for such inventions. In the event a third party has also filed a patent for any of our inventions, we, or our licensors, may have to participate in interference proceedings before the PTO to determine priority of invention, which could result in the loss of a U.S. patent or loss of any opportunity to secure U.S. patent protection for the invention. Even if the eventual outcome is favorable to us, such interference proceedings could result in substantial cost to us.
 
We may in the future have to prove that we are not infringing patents or we may be required to obtain licenses to such patents. However, we do not know whether such licenses will be available on commercially reasonable terms, or at all. Prosecution of patent applications and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others can be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, be subject to significant liabilities to such third party and/or be required to license technologies from such third party. Also, different countries have different procedures for obtaining patents, and patents issued by different countries provide different degrees of protection against the use of a patented invention by others. There can be no assurance, therefore, that the issuance to us in one country of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention or that any judicial interpretation of the validity, enforceability or scope of the claims in a patent issued in one country will be similar to the judicial interpretation given to a corresponding patent issued in another country. Competitors have chosen and in the future may choose to file oppositions to patent applications, which have been deemed allowable by foreign patent examiners. Furthermore, even if our owned or licensed patents are determined to be valid and enforceable, there can be no assurance that competitors will not be able to design around such patents and compete with us using the resulting alternative technology. Additionally, for these same reasons, we cannot be sure that patents of a broader scope than ours may be issued and thereby create freedom to


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operate issues. If this occurs we may need to reevaluate pursuing such technology, which is dominated by others’ patent rights, or alternatively, seek a license to practice our own invention, whether or not patented.
 
We also rely upon unpatented, proprietary and trade secret technology that we seek to protect, in part, by confidentiality agreements with our collaborative partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. There can be no assurance that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach or that our trade secrets, proprietary know-how and technological advances will not otherwise become known to others. In addition, there can be no assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology or that such technology will not be found to be non-proprietary or not a trade secret.
 
Our products may face competition from lower cost generic or follow-on products and providers of these products may be able to sell them at a substantially lower cost than us.
 
Generic drug manufacturers are seeking to compete with our drugs, and present an important challenge to us. Even if our patent applications, or those we have licensed-in, are issued, innovative and generic drug manufacturers and other competitors may challenge the scope, validity or enforceability of such patents in court, requiring us to engage in complex, lengthy and costly litigation. Alternatively, innovative and generic drug manufacturers and other competitors may be able to design around our owned or licensed patents and compete with us using the resulting alternative technology. If any of our issued or licensed patents are infringed or challenged, we may not be successful in enforcing or defending our or our licensor’s intellectual property rights and subsequently may not be able to develop or market the applicable product exclusively.
 
Upon the expiration or loss of patent protection for one of our products, or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a generic manufacturer of a generic version of one of our products, we can quickly lose a significant portion of our sales of that product, which can adversely affect our business. In addition, if generic versions of our competitors’ branded products lose their market exclusivity, our patented products may face increased competition which can adversely affect our business.
 
The FDA approval process allows for the approval of an ANDA or 505(b)(2) application for a generic version of our approved products upon the expiration, through passage of time or successful legal challenge, of relevant patent or non-patent exclusivity protection. Generic manufacturers pursuing ANDA approvals are not required to conduct costly and time-consuming clinical trials to establish the safety and efficacy of their products; rather, they are permitted to rely on the innovator’s data regarding safety and efficacy. Thus, generic manufacturers can sell their products at prices much lower than those charged by the innovative pharmaceutical or biotechnology companies who have incurred substantial expenses associated with the research and development of the drug product. Accordingly, while our products currently may retain certain regulatory and or patent exclusivity, our products are or will be subject to ANDA applications to the FDA in light of the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act. The ANDA procedure includes provisions allowing generic manufacturers to challenge the effectiveness of the innovator’s patent protection prior to the generic manufacturer actually commercializing their products — the so-called “Paragraph IV” certification procedure. In recent years, generic manufacturers have used Paragraph IV certifications extensively to challenge the applicability of Orange Book-listed patents on a wide array of innovative pharmaceuticals, and we expect this trend to continue and to implicate drug products with even relatively modest revenues. During the exclusivity periods, the FDA is generally prevented from granting effective approval of an ANDA. Upon the expiration of the applicable exclusivities, through passage of time or successful legal challenge, the FDA may grant effective approval of an ANDA for a generic drug, or may accept reference to a previously protected NDA in a 505(b)(2) application. Further, upon such expiration event, the FDA may require a generic competitor to participate in some form of risk management system which could include our participation as well. Depending upon the scope of the applicable exclusivities, any such approval could be limited to certain formulations and/or indications/claims, i.e., those not covered by any outstanding exclusivities.
 
If an ANDA filer or a generic manufacturer were to receive approval to sell a generic or follow-on version of one of our products, that product would become subject to increased competition and our revenues for that product would be adversely affected.


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We have received a Paragraph IV Certification Letter dated August 30, 2010, advising us that Natco Pharma Limited of Hyderabad, India, or Natco, submitted an ANDA to the FDA. See Part 1, Item 3, “Legal Proceedings — Revlimid®” of this report for further discussion.
 
If we are not able to effectively compete our business will be adversely affected.
 
The pharmaceutical and biotech industry in which we operate is highly competitive and subject to rapid and significant technological change. Our present and potential competitors include major pharmaceutical and biotechnology companies, as well as specialty pharmaceutical firms, including, but not limited to:
 
  •  Takeda and Johnson & Johnson, which compete with REVLIMID® and THALOMID® in the treatment of multiple myeloma and in clinical trials with our compounds;
 
  •  Eisai Co., Ltd., SuperGen, Inc. and Johnson & Johnson, which compete or may potentially compete with VIDAZA®, in addition Eisai Co., Ltd. potentially competes with ABRAXANE®, and in other oncology products in general;
 
  •  Amgen, which potentially competes with our TNF-α and kinase inhibitors;
 
  •  AstraZeneca plc, which potentially competes in clinical trials with our compounds and TNF-α inhibitors;
 
  •  Biogen Idec Inc. and Genzyme Corporation, both of which are generally developing drugs that address the oncology and immunology markets;
 
  •  Bristol Myers Squibb Co., which potentially competes with ABRAXANE®, and in clinical trials with our compounds and TNF-α inhibitors, in addition to other oncology products in general;
 
  •  F. Hoffman-La Roche Ltd., which potentially competes in clinical trials with our IMiDs® compounds and TNF-α inhibitors, in addition to other oncology products in general;
 
  •  Johnson & Johnson, which potentially competes with certain of our proprietary programs, including our oral anti-inflammatory programs;
 
  •  Abbott Laboratories, which potentially competes with our oral anti-inflammatory programs;
 
  •  Novartis, which potentially competes with our compounds and kinase programs;
 
  •  Pfizer, which potentially competes in clinical trials with our kinase inhibitors; and
 
  •  Sanofi-Aventis, which competes with ABRAXANE®, in addition to other oncology products in general.
 
Many of these companies have considerably greater financial, technical and marketing resources than we do. This enables them, among other things, to make greater research and development investments and spread their research and development costs, as well as their marketing and promotion costs, over a broader revenue base. Our competitors may also have more experience and expertise in obtaining marketing approvals from the FDA, and other regulatory authorities. We also experience competition from universities and other research institutions, and in some instances, we compete with others in acquiring technology from these sources. The pharmaceutical industry has undergone, and is expected to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technical advances in the field are made and become more widely known. The development of products, including generics, or processes by our competitors with significant advantages over those that we are seeking to develop could cause the marketability of our products to stagnate or decline.
 
We may be required to modify our business practices, pay fines and significant expenses or experience losses due to litigation or governmental investigations.
 
From time to time, we may be subject to litigation or governmental investigation on a variety of matters, including, without limitation, regulatory, intellectual property, product liability, antitrust, consumer, whistleblower, commercial, securities and employment litigation and claims and other legal proceedings that may arise from the conduct of our business as currently conducted or as conducted in the future.


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In particular, we are subject to significant product liability risks as a result of the testing of our products in human clinical trials and for products that we sell after regulatory approval.
 
Pharmaceutical companies involved in Hatch-Waxman litigation are often subject to follow-on lawsuits and governmental investigations, which may be costly and could result in lower-priced generic products that are competitive with our products being introduced to the market.
 
In the fourth quarter of 2009, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission, or the FTC. The FTC requested documents and other information relating to requests by generic companies to purchase our patented REVLIMID® and THALOMID® brand drugs in order to evaluate whether there is reason to believe that we have engaged in unfair methods of competition. In the first quarter of 2010, the State of Connecticut referenced the same issues as those referenced in the 2009 CID and issued a subpoena. In the fourth quarter of 2010, we received a second CID from the FTC relating to this matter. We continue to respond to requests for information.
 
In the first quarter of 2011, we received a letter from the United States Attorney for the Central District of California informing us that we were under investigation relating to our promotion of the drugs THALOMID® and REVLIMID® regarding off-label marketing and improper payments to physicians. We are cooperating with the Unites States Attorney in connection with this investigation.
 
On January 20, 2011, the Supreme Court of Canada ruled that the jurisdiction of the Patented Medicine Prices Review Board, or the PMPRB, extends to sales of drugs to Canadian patients even if the locus of sale is within the United States. This means that our U.S. sales of THALOMID® brand drug to Canadian patients under the special access program are subject to PMPRB jurisdiction from and after January 12, 1995. In accordance with the ruling of the Supreme Court of Canada, we have provided to-date data regarding these special access program sales to the PMPRB. In light of the approval of THALOMID® brand drug for multiple myeloma by Health Canada on August 4, 2010, this drug is now sold through our Canadian entity and is no longer sold to Canadian patients in the United States. The PMPRB’s proposed pricing arrangement has not been determined. Depending on the calculation, we may be requested to return certain revenues associated with these sales and to pay fines. Should this occur, we would have to consider various legal options to address whether the pricing determination was reasonable.
 
Litigation and governmental investigations are inherently unpredictable and may:
 
  •  result in rulings that are materially unfavorable to us, including claims for significant damages, fines or penalties, and administrative remedies, such as exclusion and/or debarment from government programs, or other rulings that prevent us from operating our business in a certain manner;
 
  •  cause us to change our business operations to avoid perceived risks associated with such litigation or investigations;
 
  •  have an adverse affect on our reputation and the demand for our products; and
 
  •  require the expenditure of significant time and resources, which may divert the attention of our management and interfere with the pursuit of our strategic objectives.
 
While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. It also is not possible to obtain insurance to protect against all potential risks and liabilities. If any litigation or governmental investigation were to have a material adverse result, there could be a material impact on our results of operations, cash flows or financial position. See also Legal Proceedings contained in Part I, Item 3 of this Annual Report on Form 10-K.
 
The development of new biopharmaceutical products involves a lengthy and complex process, and we may be unable to commercialize any of the products we are currently developing.
 
Many of our drug candidates are in the early or mid-stages of research and development and will require the commitment of substantial financial resources, extensive research, development, preclinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to being ready for sale. This process involves a high degree of risk and takes many years. Our product development efforts with respect to a product candidate may fail for many


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reasons, including the failure of the product candidate in preclinical studies; adverse patient reactions to the product candidate or indications or other safety concerns; insufficient clinical trial data to support the effectiveness or superiority of the product candidate; our inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner; our failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate, the facilities or the process used to manufacture the product candidate; or changes in the regulatory environment, including pricing and reimbursement, that make development of a new product or of an existing product for a new indication no longer desirable. Moreover, our commercially available products may require additional studies with respect to approved indications as well as new indications pending approval.
 
The stem cell products that we are developing through our CCT subsidiary may represent substantial departures from established treatment methods and will compete with a number of traditional products and therapies which are now, or may be in the future, manufactured and marketed by major pharmaceutical and biopharmaceutical companies. Furthermore, public attitudes may be influenced by claims that stem cell therapy is unsafe, and stem cell therapy may not gain the acceptance of the public or the medical community.
 
Due to the inherent uncertainty involved in conducting clinical studies, we can give no assurances that our studies will have a positive result or that we will receive regulatory approvals for our new products or new indications.
 
Manufacturing and distribution risks including a disruption at certain of our manufacturing sites would significantly interrupt our production capabilities, which could result in significant product delays and adversely affect our results.
 
We have our own manufacturing facilities for many of our products and we have contracted with third-party manufacturers and distributors to provide API, encapsulation, finishing services packaging and distribution services to meet our needs. These risks include the possibility that our or our suppliers’ manufacturing processes could be partially or completely disrupted by a fire, natural disaster, terrorist attack, governmental action or military action. In the case of a disruption, we may need to establish alternative manufacturing sources for these products. This would likely lead to substantial production delays as we build or locate replacement facilities and seek and obtain the necessary regulatory approvals. If this occurs, and our finished goods inventories are insufficient to meet demand, we may be unable to satisfy customer orders on a timely basis, if at all. Further, our business interruption insurance may not adequately compensate us for any losses that may occur and we would have to bear the additional cost of any disruption. For these reasons, a significant disruptive event at certain of our manufacturing facilities or sites could materially and adversely affect our business and results of operations. In addition, if we fail to predict market demand for our products, we may be unable to sufficiently increase production capacity to satisfy demand or may incur costs associated with excess inventory that we manufacture.
 
In all the countries where we sell our products, governmental regulations exist to define standards for manufacturing, packaging, labeling, distribution and storing. All of our suppliers of raw materials, contract manufacturers and distributors must comply with these regulations as applicable. In the United States, the FDA requires that all suppliers of pharmaceutical bulk material and all manufacturers of pharmaceuticals for sale in or from the United States achieve and maintain compliance with the FDA’s current Good Manufacturing Practice regulations and guidelines. Our failure to comply, or failure of our third-party manufacturers to comply with applicable regulations could result in sanctions being imposed on them or us, including fines, injunctions, civil penalties, disgorgement, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products. In addition, before any product batch produced by our manufacturers can be shipped, it must conform to release specifications pre-approved by regulators for the content of the pharmaceutical product. If the operations of one or more of our manufacturers were to become unavailable for any reason, any required FDA review and approval of the operations of an alternative supplier could cause a delay in the manufacture of our products.
 
If our outside manufacturers do not meet our requirements for quality, quantity or timeliness, or do not achieve and maintain compliance with all applicable regulations, our ability to continue supplying such products at a level that meets demand could be adversely affected.


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We have contracted with specialty distributors, to distribute REVLIMID®, THALOMID®, VIDAZA®, ABRAXANE® and ISTODAX® in the United States. If our distributors fail to perform and we cannot secure a replacement distributor within a reasonable period of time, we may experience adverse effects to our business and results of operations.
 
We are continuing to establish marketing and distribution capabilities in international markets with respect to our products. At the same time, we are in the process of obtaining necessary governmental and regulatory approvals to sell our products in certain countries. If we have not successfully completed and implemented adequate marketing and distribution support services upon our receipt of such approvals, our ability to effectively launch our products in these countries would be severely restricted.
 
The consolidation of drug wholesalers and other wholesaler actions could increase competitive and pricing pressures on pharmaceutical manufacturers, including us.
 
We sell our pharmaceutical products in the United States primarily through wholesale distributors and contracted pharmacies. These wholesale customers comprise a significant part of the distribution network for pharmaceutical products in the United States. This distribution network is continuing to undergo significant consolidation. As a result, a smaller number of large wholesale distributors and pharmacy chains control a significant share of the market. We expect that consolidation of drug wholesalers and pharmacy chains will increase competitive and pricing pressures on pharmaceutical manufacturers, including us. In addition, wholesalers may apply pricing pressure through fee-for-service arrangements, and their purchases may exceed customer demand, resulting in reduced wholesaler purchases in later quarters. We cannot assure you that we can manage these pressures or that wholesaler purchases will not decrease as a result of this potential excess buying.
 
Risks from the improper conduct of employees, agents or contractors or collaborators could adversely affect our business or reputation.
 
We cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts committed by our employees, agents, contractors or collaborators that would violate the laws or regulations of the jurisdictions in which we operate, including without limitation, employment, foreign corrupt practices, environmental, competition and privacy laws. Such improper actions could subject us to civil or criminal investigations, monetary and injunctive penalties and could adversely impact our ability to conduct business, results of operations and reputation.
 
The integration of Abraxis and other acquired businesses may present significant challenges to us.
 
We may face significant challenges in effectively integrating entities and businesses that we acquire, such as Abraxis, and we may not realize the benefits anticipated from such acquisitions. Achieving the anticipated benefits of our acquisition of Abraxis will depend in part upon whether we can integrate our businesses in an efficient and effective manner. Our integration of Abraxis involves a number of risks, including, but not limited to:
 
  •  demands on management related to the increase in our size after the acquisition;
 
  •  the diversion of management’s attention from the management of daily operations to the integration of operations;
 
  •  higher integration costs than anticipated;
 
  •  failure to achieve expected synergies and costs savings;
 
  •  difficulties in the assimilation and retention of employees;
 
  •  difficulties in the assimilation of different cultures and practices, as well as in the assimilation of broad and geographically dispersed personnel and operations; and
 
  •  difficulties in the integration of departments, systems, including accounting systems, technologies, books and records, and procedures, as well as in maintaining uniform standards, controls, including internal control over financial reporting required by the Sarbanes-Oxley Act of 2002 and related procedures and policies.


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If we cannot successfully integrate Abraxis we may experience material negative consequences to our business, financial condition or results of operations. Successful integration of Abraxis will depend on our ability to manage these operations, to realize opportunities for revenue growth presented by offerings and expanded geographic market coverage and, to some degree, to eliminate redundant and excess costs. Because of difficulties in combining geographically distant operations, we may not be able to achieve the benefits that we hope to achieve as a result of the acquisition with Abraxis.
 
Our inability to continue to attract and retain key leadership, managerial, commercial and scientific talent could adversely affect our business.
 
The success of our business depends, in large part, on our continued ability to (i) attract and retain highly qualified management, scientific, manufacturing and commercial personnel, (ii) successfully integrate large numbers of new employees into our corporate culture and (iii) develop and maintain important relationships with leading research and medical institutions and key distributors. Competition for these types of personnel and relationships is intense.
 
Among other benefits, we use share-based compensation to attract and retain personnel. Share-based compensation accounting rules require us to recognize all share-based compensation costs as expenses. These or other factors could reduce the number of shares and options management and our board of directors grants under our incentive plan. We cannot be sure that we will be able to attract or retain skilled personnel or maintain key relationships, or that the costs of retaining such personnel or maintaining such relationships will not materially increase.
 
We could be subject to significant liability as a result of risks associated with using hazardous materials in our business.
 
We use certain hazardous materials in our research, development, manufacturing and general business activities. While we believe we are currently in substantial compliance with the federal, state and local laws and regulations governing the use of these materials, we cannot be certain that accidental injury or contamination will not occur. If an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. This could result in substantial liabilities that could exceed our insurance coverage and financial resources. Additionally, the cost of compliance with environmental and safety laws and regulations may increase in the future, requiring us to expend more financial resources either in compliance or in purchasing supplemental insurance coverage.
 
Changes in our effective income tax rate could adversely affect our results of operations.
 
We are subject to income taxes in both the United States and various foreign jurisdictions, and our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include, but are not limited to, interpretations of existing tax laws, the accounting for stock options and other share-based compensation, changes in tax laws and rates, future levels of research and development spending, changes in accounting standards, changes in the mix of earnings in the various tax jurisdictions in which we operate, the outcome of examinations by the U.S. Internal Revenue Service and other jurisdictions, the accuracy of our estimates for unrecognized tax benefits and realization of deferred tax assets, and changes in overall levels of pre-tax earnings. The impact on our income tax provision resulting from the above-mentioned factors may be significant and could have an impact on our results of operations.
 
Currency fluctuations and changes in exchange rates could increase our costs and may cause our profitability to decline.
 
We collect and pay a substantial portion of our sales and expenditures in currencies other than the U.S. dollar. Therefore, fluctuations in foreign currency exchange rates affect our operating results.


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We utilize foreign currency forward contracts to manage foreign currency risk, but not to engage in currency speculation. We use these forward contracts to hedge certain forecasted transactions and balance sheet exposures denominated in foreign currencies. We use derivative instruments, including those not designated as part of a hedging transaction, to manage our exposure to movements in foreign exchange rates. The use of these derivative instruments mitigates the exposure of these risks with the intent to reduce our risk or cost but may not fully offset any change in operating results that result from fluctuations in foreign currencies. Any significant foreign exchange rate fluctuations could adversely affect our financial condition and results of operations.
 
We may experience an adverse market reaction if we are unable to meet our financial reporting obligations.
 
As we continue to expand at a rapid pace, the development of new and/or improved automated systems will remain an ongoing priority. During this expansion period, our internal control over financial reporting may not prevent or detect misstatements in our financial reporting. Such misstatements may result in litigation and/or negative publicity and possibly cause an adverse market reaction that may negatively impact our growth plans and the value of our common stock.
 
The decline of global economic conditions could adversely affect our results of operations.
 
Sales of our products are dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations. As a result of the current global credit and financial market conditions, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, U.S. federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the availability or extent of reimbursement could negatively affect our product sales, revenue and cash flows.
 
Due to tightened global credit, there may be a disruption or delay in the performance of our third-party contractors, suppliers or collaborators. We rely on third parties for several important aspects of our business, including portions of our product manufacturing, royalty revenue, clinical development of future collaboration products, conduct of clinical trials and raw materials. If such third parties are unable to satisfy their commitments to us, our business could be adversely affected.
 
The price of our common stock may fluctuate significantly and you may lose some or all of your investment in us.
 
The market for our shares of common stock may be subject to disruptions that could cause volatility in its price. In general, current global economic conditions have caused substantial market volatility and instability. Any such disruptions or continuing volatility may adversely affect the value of our common stock. In addition to current global economic instability in general, the following key factors may have an adverse impact on the market price of our common stock:
 
  •  results of our clinical trials or adverse events associated with our marketed products;
 
  •  fluctuations in our commercial and operating results;
 
  •  announcements of technical or product developments by us or our competitors;
 
  •  market conditions for pharmaceutical and biotechnology stocks in particular;
 
  •  stock market conditions generally;
 
  •  changes in governmental regulations and laws, including, without limitation, changes in tax laws, health care legislation, environmental laws, competition laws, and patent laws;
 
  •  new accounting pronouncements or regulatory rulings;
 
  •  public announcements regarding medical advances in the treatment of the disease states that we are targeting;


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  •  patent or proprietary rights developments;
 
  •  changes in pricing and third-party reimbursement policies for our products;
 
  •  the outcome of litigation involving our products or processes related to production and formulation of those products or uses of those products;
 
  •  other litigation or governmental investigations;
 
  •  competition; and
 
  •  investor reaction to announcements regarding business or product acquisitions.
 
In addition, our operations may be materially affected by conditions in the global markets and economic conditions throughout the world, including the current global economic and market instability. The global market and economic climate may continue to deteriorate because of many factors beyond our control, including continued economic instability and market volatility, sovereign debt issues, rising interest rates or inflation, terrorism or political uncertainty. In the event of a continued or future market downturn in general and/or the biotechnology sector in particular, the market price of our common stock may be adversely affected.
 
In addition to the risks relating to our common stock, CVR holders are subject to additional risks.
 
On October 15, 2010, we acquired all of the outstanding common stock of Abraxis BioScience, Inc. in connection with our acquisition, contingent value rights or, CVRs, were issued under a CVR agreement entered into by and between us and American Stock Transfer & Trust Company, LLC, the trustee. A copy of the CVR agreement was filed on Form 8-A with the SEC on October 15, 2010. Pursuant to the CVR agreement, each holder of a CVR is entitled to receive a pro rata portion, based on the number of CVRs then outstanding, of certain milestone and net sales payments, each of the following cash payments that we are obligated to pay. See Note 2, Acquisitions, of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
 
In addition to the risks relating to our common stock, CVR holders are subject to additional risks, including:
 
  •  an active public market for the CVRs may not develop or the CVRs may trade at low volumes, both of which could have an adverse effect on the resale price, if any, of the CVRs;
 
  •  because a public market for the CVRs has a limited history, the market price and trading volume of the CVRs may be volatile;
 
  •  if the clinical approval milestones specified in the CVR agreement are not achieved for any reason within the time periods specified therein, and if net sales do not exceed the thresholds set forth in the CVR agreement for any reason within the time periods specified therein, no payment will be made under the CVRs and the CVRs will expire valueless;
 
  •  since the U.S. federal income tax treatment of the CVRs is unclear, any part of any CVR payment could be treated as ordinary income and required to be included in income prior to the receipt of the CVR payment;
 
  •  any payments in respect of the CVRs are subordinated to the right of payment of certain indebtedness of ours;
 
  •  we may under certain circumstances redeem the CVRs; and
 
  •  upon expiration of our obligations to use diligent efforts to achieve each of the CVR milestones and to sell ABRAXANE® or any of the other Abraxis pipeline products, we may discontinue such efforts, which would have an adverse effect on the value, if any, of the CVRs.
 
Our business could be adversely affected if we are unable to service our obligations under our recently incurred indebtedness.
 
On October 7, 2010, we issued a total of $1.25 billion principal amount of senior notes, consisting of the 2015 notes, the 2020 notes and the 2040 notes, collectively referred to as the notes. Our ability to pay interest on the notes, to repay the principal amount of the notes when due at maturity, to comply with the covenants of the notes or to


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repurchase the notes if a change of control occurs will depend upon, among other things, continued commercial success of our products and other factors that affect our future financial and operating performance, including, without limitation, prevailing economic conditions and financial, business, and regulatory factors, many of which are beyond our control.
 
If we are unable to generate sufficient cash flow to service the debt service requirements under the notes, we may be forced to take actions such as:
 
  •  restructuring or refinancing our debt, including the notes;
 
  •  seeking additional debt or equity capital;
 
  •  reducing or delaying our business activities, acquisitions, investments or capital expenditures; or
 
  •  selling assets.
 
Such measures might not be successful and might not enable us to service our obligations under the notes. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.
 
A breakdown or breach of our information technology systems could subject us to liability or interrupt the operation of our business.
 
We rely upon our information technology systems and infrastructure for our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Likewise, data privacy breaches by employees and others who access our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we believe that we have taken appropriate security measures to protect our data and information technology systems, there can be no assurance that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
 
We have certain charter and by-law provisions that may deter a third-party from acquiring us and may impede the stockholders’ ability to remove and replace our management or board of directors.
 
Our board of directors has the authority to issue, at any time, without further stockholder approval, up to 5,000,000 shares of preferred stock, and to determine the price, rights, privileges and preferences of those shares. An issuance of preferred stock could discourage a third-party from acquiring a majority of our outstanding voting stock. Additionally, our board of directors has adopted certain amendments to our by-laws intended to strengthen the board’s position in the event of a hostile takeover attempt. These provisions could impede the stockholders’ ability to remove and replace our management and/or board of directors. Furthermore, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law, which may also dissuade a potential acquirer of our common stock.
 
AVAILABLE INFORMATION
 
Our Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K are electronically filed with or furnished to the SEC, and all such reports and amendments to such reports filed have been and will be made available, free of charge, through our website (http://www.celgene.com) as soon as reasonably practicable after such filing. Such reports will remain available on our website for at least 12 months. The contents of our website are not incorporated by reference into this Annual Report on Form 10-K. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NW, Washington, D.C. 20549.
 
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.


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ITEM 2.   PROPERTIES
 
Our corporate headquarters are located in Summit, New Jersey and our international headquarters are located in Boudry, Switzerland. Summarized below are the locations, primary usage and approximate square footage of the facilities we own worldwide:
 
             
        Approximate
Location   Primary Useage   Square Feet
 
Summit, New Jersey
  Administration, marketing, research     400,000  
Melrose Park, Illinois
  Manufacturing, warehousing, research     269,000  
Phoenix, Arizona
  Manufacturing and warehousing     247,000  
Costa Mesa, California
  Research     180,000  
Elk Grove Village, Illinois
  Manufacturing and warehousing     150,100  
Boudry, Switzerland
  Administration and manufacturing     148,166  
Barceloneta, Puerto Rico
  Manufacturing     90,000  
Oelwein, Iowa
  Manufacturing     48,500  
Zofingen, Switzerland
  Manufacturing     12,222  
 
We occupy the following facilities, located in the United States, under operating lease arrangements that have remaining lease terms greater than one year. Under these lease arrangements, we also are required to reimburse the lessors for real estate taxes, insurance, utilities, maintenance and other operating costs. All leases are with unaffiliated parties.
 
             
        Approximate
Location   Primary Useage   Square Feet
 
Basking Ridge, New Jersey
  Office space     180,200  
San Diego, California
  Research     78,200  
Warren, New Jersey
  Office space and research     73,500  
Los Angeles, California
  Office space     60,900  
San Francisco, California
  Office space and research     55,900  
Marina Del Rey, California
  Research     50,700  
Durham, North Carolina
  Clinical trial management     36,000  
Somerset, New Jersey
  Research     35,800  
Bridgewater, New Jersey
  Office space     33,000  
Cedar Knolls, New Jersey
  Office space and stem cell recovery     25,284  
Warren, New Jersey
  Office space     23,500  
Overland Park, Kansas
  Office space     18,500  
Auburn, California
  Research     12,800  
Chicago, Illinois
  Office space     7,400  
Grand Island, New York
  Manufacturing     5,700  
 
We also lease a number of offices under various lease agreements outside of the United States for which the minimum annual rents may be subject to specified annual rent increases. At December 31, 2010, the non-cancelable lease terms for our operating leases expire at various dates between 2011 and 2018 and in some cases include renewal options. The total amount of rent expense recorded for all leased facilities in 2010 was $30.1 million.
 
ITEM 3.   LEGAL PROCEEDINGS
 
We and certain of our subsidiaries are involved in various patent, commercial and other claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of our business. These legal proceedings and other matters are complex in nature and have outcomes that are difficult to predict and could have a material adverse effect on the Company.


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Patent proceedings include challenges to scope, validity or enforceability of our patents relating to our various products or processes. Although we believe we have substantial defenses to these challenges with respect to all our material patents, there can be no assurance as to the outcome of these matters, and a loss in any of these cases could result in a loss of patent protection for the drug at issue, which could lead to a significant loss of sales of that drug and could materially affect future results of operations.
 
Among the principal matters pending to which we are a party, are the following:
 
REVLIMID®
 
We have publicly announced that we have received a notice letter dated August 30, 2010, sent from Natco Pharma Limited of India (“Natco”) notifying us of a Paragraph IV certification alleging that patents listed for REVLIMID® in the Orange Book are invalid, and/or not infringed (the Notice Letter). The Notice Letter was sent pursuant to Natco having filed an ANDA seeking permission from the FDA to market a generic version of 25mg, 15mg, 10mg and 5mg capsules of REVLIMID®. Under the federal Hatch-Waxman Act of 1984, any generic manufacturer may file an ANDA with a certification (a “Paragraph IV certification”) challenging the validity or infringement of a patent listed in the FDA’s Approved Drug Products With Therapeutic Equivalence Evaluations (the “Orange Book”) four years after the pioneer company obtains approval of its New Drug Application, or an NDA. On October 8, 2010, Celgene filed an infringement action in the United States District Court of New Jersey against Natco in response to the Notice Letter with respect to United States Patent Nos. 5,635,517 (the “’517 patent”), 6,045,501 (the “’501 patent”), 6,281,230 (the “’230 patent”), 6,315,720 (the “’720 patent”), 6,555,554 (the “’554 patent”), 6,561,976 (the “’976 patent”), 6,561,977 (the “’977 patent”), 6,755,784 (the “’784 patent”), 7,119,106 (the “’106 patent”), and 7,465,800 (the “’800 patent”). If Natco is successful in challenging our patents listed in the Orange Book, and the FDA were to approve the ANDA with a comprehensive education and risk management program for a generic version of lenalidomide, sales of REVLIMID® could be significantly reduced in the United States by the entrance of a generic lenalidomide product, potentially reducing our revenue.
 
Natco responded to our infringement action on November 18, 2010, with its Answer, Affirmative Defenses and Counterclaims. Natco has alleged (through affirmative defenses and counterclaims) that the patents are invalid, unenforceable and/or not infringed by Natco’s proposed generic productions. After filing the infringement action, we learned the identity of Natco’s U.S. partner, Arrow International Limited, and filed an amended complaint on January 7, 2011, adding Arrow as a defendant.
 
ELAN PHARMA INTERNATIONAL LIMITED
 
On February 23, 2011, the parties entered into a settlement and license agreement for $78.0 million, whereby all claims were resolved and we obtained the rights to certain patents in and related to the litigation including rights to U.S. Reissue Patent REI 41,884 (the “Reissued Patent”), as well as all foreign counterparts, all of which expire in 2016. Prior to the settlement, on July 19, 2006, Elan Pharmaceutical Int’l Ltd. filed a lawsuit against the predecessor entity of Abraxis (“Old Abraxis”) in the U.S. District Court for the District of Delaware alleging that Old Abraxis willfully infringed two of its patents by making, using and selling the ABRAXANE® brand drug. Elan sought unspecified damages and an injunction. In response, Old Abraxis contended that it did not infringe the Elan patents and that the Elan patents are invalid and unenforceable. Before trial, Elan dropped its claim that Old Abraxis infringed one of the two asserted patents. Elan also dropped its request for an injunction as to the remaining patent. On June 13, 2008, after a trial with respect to the remaining patent, a jury ruled that Old Abraxis had infringed that patent, that Abraxis’ infringement was not willful, and that the patent was valid and enforceable. The jury awarded Elan $55.2 million in damages for sales of ABRAXANE® through the judgment date. For accounting purposes, Abraxis assumed approximately a 6% royalty on all U.S. sales, moving forward from the verdict, of ABRAXANE® brand drug, plus interest. The patent expired on January 25, 2011.


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ABRAXIS SHAREHOLDER LAWSUIT
 
Abraxis, the members of the Abraxis board of directors and Celgene Corporation are named as defendants in putative class action lawsuits brought by Abraxis stockholders challenging the Abraxis acquisition in Los Angeles County Superior Court. The plaintiffs in such actions assert claims for breaches of fiduciary duty arising out of the acquisition and allege that Abraxis’ directors engaged in self-dealing and obtained for themselves personal benefits and failed to provide stockholders with material information relating to the acquisition. The plaintiffs also allege claims for aiding and abetting breaches of fiduciary duty against us and Abraxis.
 
On September 14, 2010, the parties reached an agreement in principle to settle the actions pursuant to the Memorandum of Understanding, or the MOU. Without admitting the validity of any allegations made in the actions, or any liability with respect thereto, the defendants elected to settle the actions in order to avoid the cost, disruption and distraction of further litigation. Under the MOU, the defendants agreed, among other things, to make additional disclosures relating to the acquisition, and to provide the plaintiffs’ counsel with limited discovery to confirm the fairness and adequacy of the settlement. Abraxis, on behalf of itself and for the benefit of the other defendants in the actions, also agreed to pay the plaintiffs’ counsel $600,000 for their fees and expenses. Plaintiffs agreed to release all claims against us and Abraxis relating to our acquisition of Abraxis, except claims to enforce the settlement or properly perfected claims for appraisal in connection with the acquisition of Abraxis by us.
 
On November 15, 2010, the parties executed and filed a stipulation and settlement with the Court and plaintiffs filed a motion for preliminary approval of the class action settlement. On January 26, 2011, the Court granted plaintiffs’ motion for preliminary approval of the class action settlement, certified the class for settlement purposes only and approved the form of notice of the settlement of the class action.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None.


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PART II
 
ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
(a)   MARKET INFORMATION
 
Our common stock is traded on the NASDAQ Global Select Market under the symbol “CELG.” The following table sets forth, for the periods indicated, the intra-day high and low prices per share of common stock on the NASDAQ Global Select Market:
 
                 
    High   Low
 
2010
               
Fourth Quarter
  $ 63.46     $ 54.24  
Third Quarter
    59.00       48.02  
Second Quarter
    64.00       51.21  
First Quarter
    65.79       54.03  
2009
               
Fourth Quarter
  $ 57.79     $ 49.74  
Third Quarter
    58.31       45.27  
Second Quarter
    48.77       36.90  
First Quarter
    56.60       39.32  
 
(PERFORMANCE GRAPH)
 
                                                             
      12/05     12/06     12/07     12/08     12/09     12/10
Celgene Corporation
    $ 100.00       $ 177.56       $ 142.62       $ 170.62       $ 171.85       $ 182.53  
                                                             
S&P 500
      100.00         113.62         117.63         72.36         89.33         100.84  
                                                             
NASDAQ Composite
      100.00         109.52         120.27         71.51         102.89         120.29  
                                                             
NASDAQ Biotechnology
      100.00         101.02         105.65         92.31         106.74         122.76  
                                                             
 
 
* $100 Invested on 12/31/05 in Stock or Index — Including Reinvestment of Dividends, Fiscal Year Ended December 31.


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(b)   HOLDERS
 
The closing sales price per share of common stock on the NASDAQ Global Select Market on February 18, 2011 was $53.47. As of February 8, 2011, there were approximately 337,463 holders of record of our common stock.
 
(c)   DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
(d)   EQUITY COMPENSATION PLAN INFORMATION
 
We incorporate information regarding the securities authorized for issuance under our equity compensation plans into this section by reference from the section entitled “Equity Compensation Plan Information” in the proxy statement for our 2011 Annual Meeting of Stockholders.
 
(e)   REPURCHASE OF EQUITY SECURITIES
 
The following table presents the total number of shares purchased during the quarter ended December 31, 2010, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase program and the approximate dollar value of shares that still could have been purchased:
 
                                         
                            Maximum Number
 
                            (or Approximate
 
                Total Number of
          Dollar Value) of
 
                Shares (or Units)
          Shares (or Units)
 
    Total Number of
    Average
    Purchased as Part of
    Dollar Increase to
    that may yet be
 
    Shares (or Units)
    Price Paid per
    Publicly Announced
    Share Repurchase
    Purchased Under the
 
Period   Purchased     Share (or Unit)     Plans or Programs     Program     Plans or Programs  
 
October 1 — October 31
        $                 $ 186,492,850  
November 1 — November 30
        $                 $ 186,492,850  
December 1 — December 31
    1,392,803     $ 56.77       1,392,803       500,000,000     $ 607,423,220  
 
In April 2009, our Board of Directors approved a $500.0 million common share repurchase program and, on December 15, 2010, authorized the repurchase of up to an additional $500.0 million common shares, extending the repurchase period to December 2012. Approved amounts exclude share repurchase transactions fees. As of December 31, 2010 an aggregate 7,561,228 common shares were repurchased under the program at an average price of $51.92 per common share and total cost of $392.6 million.
 
On February 16, 2011, our Board of Directors authorized the repurchase of up to an additional $1.0 billion of our common shares during a repurchase period ending in December 2012. This authorization is in addition to the $500.0 million authorization made on December 15, 2010 and the $500.0 million authorization made in April 2009.


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ITEM 6.   SELECTED FINANCIAL DATA
 
The following Selected Consolidated Financial Data should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto, Management’s Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this Annual Report on Form 10-K. The data set forth below with respect to our Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 and the Consolidated Balance Sheet data as of December 31, 2010 and 2009 are derived from our Consolidated Financial Statements which are included elsewhere in this Annual Report on Form 10-K and are qualified by reference to such Consolidated Financial Statements and related Notes thereto. The data set forth below with respect to our Consolidated Statements of Operations for the years ended December 31, 2007 and 2006 and the Consolidated Balance Sheet data as of December 31, 2008, 2007 and 2006 are derived from our Consolidated Financial Statements, which are not included elsewhere in this Annual Report on Form 10-K.
 
                                         
    Years Ended December 31,  
    2010     2009     2008     2007     2006  
    In thousands, except per share data  
 
Consolidated Statements of Operations
Data:
                               
Total revenue
  $ 3,625,745     $ 2,689,893     $ 2,254,781     $ 1,405,820     $ 898,873  
Costs and operating expenses
    2,636,110       1,848,367       3,718,999       980,699       724,182  
                                         
Operating income (loss)
    989,635       841,526       (1,464,218 )     425,121       174,691  
                                         
Interest and investment income, net
    44,757       76,785       84,835       109,813       40,352  
Equity in losses of affiliated companies
    1,928       1,103       9,727       4,488       8,233  
Interest expense
    12,634       1,966       4,437       11,127       9,417  
Other income (expense), net
    (7,220 )     60,461       24,722       (2,350 )     5,502  
                                         
Income (loss) before tax
    1,012,610       975,703       (1,368,825 )     516,969       202,895  
Income tax provision
    132,418       198,956       164,828       290,536       133,914  
                                         
Net income (loss)
  $ 880,192     $ 776,747     $ (1,533,653 )   $ 226,433     $ 68,981  
Less: Net loss attributable to non-controlling interests
    320                          
                                         
Net income (loss) attributable to Celgene
  $ 880,512     $ 776,747     $ (1,533,653 )   $ 226,433     $ 68,981  
                                         
 
                                         
    Years Ended December 31,  
    2010     2009     2008     2007     2006  
 
Net income (loss) per share attributable to Celgene:
                                       
Basic
  $ 1.90     $ 1.69     $ (3.46 )   $ 0.59     $ 0.20  
Diluted
  $ 1.88     $ 1.66     $ (3.46 )   $ 0.54     $ 0.18  
Weighted average shares:
                                       
Basic
    462,298       459,304       442,620       383,225       352,217  
Diluted
    469,517       467,354       442,620       431,858       407,181  
 


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    As of December 31,  
    2010     2009     2008     2007     2006  
 
Consolidated Balance Sheets Data:
                                       
Cash, cash equivalents and marketable securities
  $ 2,601,301     $ 2,996,752     $ 2,222,091     $ 2,738,918     $ 1,982,220  
Total assets
    10,177,162       5,389,311       4,445,270       3,611,284       2,735,791  
Long-term debt, net of discount
    1,247,584                          
Convertible notes
                      196,555       399,889  
Retained earnings (accumulated deficit)
    248,266       (632,246 )     (1,408,993 )     124,660       (101,773 )
Total equity
    5,995,472       4,394,606       3,491,328       2,843,944       1,976,177  
 
Subsequent to our issuance of a press release on January 27, 2011 reporting our financial results for the year ended December 31, 2010, adjustments were made to the Consolidated Statements of Operations for the year ended December 31, 2010, resulting in a decrease in net income attributable to Celgene in the amount of $4.0 million and a reduction of $0.01 in basic net income per share attributable to Celgene for the year ended December 31, 2010. There was no change to the reported diluted net income per share attributable to Celgene for the year ended December 31, 2010.

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Executive Summary
 
Celgene Corporation and its subsidiaries (collectively “we”, “our” or “us”) is a global integrated biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory related diseases.
 
Our primary commercial stage products include REVLIMID®, VIDAZA®, THALOMID® (inclusive of Thalidomide Celgene® and Thalidomide Pharmion®), ABRAXANE® and ISTODAX®. REVLIMID® is an oral immunomodulatory drug primarily marketed in the United States and select international markets, in combination with dexamethasone, for treatment of patients with multiple myeloma who have received at least one prior therapy and for the treatment of transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndromes, or MDS, associated with a deletion 5q cytogenetic abnormality with or without additional cytogenetic abnormalities. VIDAZA®, which is licensed from Pfizer, is a pyrimidine nucleoside analog that has been shown to reverse the effects of DNA hypermethylation and promote subsequent gene re-expression. VIDAZA® is a Category 1 recommended treatment for patients with intermediate-2 and high-risk MDS according to the National Comprehensive Cancer Network, or NCCN and is marketed in the United States for the treatment of all subtypes of MDS. VIDAZA® has been granted orphan drug designation for the treatment of MDS through May 2011. In Europe, VIDAZA® is marketed for the treatment of certain qualified adult patients and has been granted orphan drug designation for the treatment of MDS and acute myeloid leukemia, or AML. THALOMID® is marketed for patients with newly diagnosed multiple myeloma and for the acute treatment of the cutaneous manifestations of moderate to severe erythema nodosum leprosum, or ENL, an inflammatory complication of leprosy and as maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence. ABRAXANE®, which was obtained in the 2010 acquisition of Abraxis BioScience Inc., or Abraxis, is a nanoparticle, albumin-bound paclitaxel that was approved by the U.S. Food and Drug Administration, or FDA, in January 2005 for the treatment of metastatic breast cancer. ABRAXANE® is based on a tumor-targeting platform known as nab® technology. ISTODAX®, which was obtained in the 2010 acquisition of Gloucester Pharmaceuticals, Inc., or Gloucester, was approved by the FDA for the treatment of cutaneous T-cell lymphoma, or CTCL, in patients who have received at least one prior systemic therapy. ISTODAX® has received both orphan drug designation for the treatment of non-Hodgkin’s T-cell lymphomas, which includes CTCL and peripheral T-cell lymphoma, or PTCL, and fast-track status in PTCL from the FDA. The European Agency for the Evaluation of Medicinal Products, or EMA, has granted orphan status designation for ISTODAX® for the treatment of both CTCL and PTCL. We also sell FOCALIN®, which is approved for the treatment of attention deficit hyperactivity disorder, or ADHD, exclusively to Novartis Pharma AG, or Novartis.
 
Additional sources of revenue include a licensing agreement with Novartis, which entitles us to royalties on FOCALIN XR® and the entire RITALIN® family of drugs, residual payments from GlaxoSmithKline, or GSK, based upon GSK’s ALKERAN® revenues through the end of March 2011, sale of services through our Cellular Therapeutics subsidiary and other miscellaneous licensing agreements.
 
We continue to invest substantially in research and development, and the drug candidates in our pipeline are at various stages of preclinical and clinical development. These candidates include our IMiDs® compounds, which are a class of compounds proprietary to us and having certain immunomodulatory and other biologically important properties, our leading oral anti-inflammatory agents and cell products and, after the acquisition of Abraxis, our nanoparticle, albumin-bound compounds. We believe that continued acceptance of our primary commercial stage products, participation in research and development collaboration arrangements, depth of our product pipeline, regulatory approvals of both new products and expanded use of existing products provide the catalysts for future growth.


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The following table summarizes total revenue and earnings for the years ended December 31, 2010, 2009 and 2008:
 
                                         
                      % Change  
                      2010
    2009
 
    Years Ended December 31,     Versus
    Versus
 
    2010     2009     2008     2009     2008  
    (In thousands $, except earnings per share)  
 
Total revenue
  $ 3,625,745     $ 2,689,893     $ 2,254,781       34.8 %     19.3 %
Net income (loss) attributable to Celgene
  $ 880,512     $ 776,747     $ (1,533,653 )     13.4 %     N/A  
Diluted earnings (loss) per share attributable to Celgene
  $ 1.88     $ 1.66     $ (3.46 )     13.3 %     N/A  
 
Total revenue increased by $935.9 million in 2010 compared to 2009 primarily due to the continued growth of REVLIMID® and VIDAZA® in both U.S. and international markets, in addition to sales of Gloucester and Abraxis products subsequent to their acquisition dates. Net income and diluted earnings per share for 2010 reflects the higher level of revenue, partly offset by increased spending for new product launches, research and development activities, expansion of our international operations and additional costs related to the acquisitions of Gloucester and Abraxis. Net income for 2010 also included an $86.7 million increase in upfront payments related to research and development collaboration arrangements compared to 2009.
 
Acquisition of Abraxis BioScience, Inc.:  On October 15, 2010, or the acquisition date, we acquired all of the outstanding common stock of Abraxis. The transaction, referred to as the Merger, resulted in Abraxis becoming our wholly owned subsidiary. The results of operations for Abraxis are included in our consolidated financial statements from the date of acquisition and the assets and liabilities of Abraxis have been recorded at their respective fair values on the acquisition date and consolidated with ours. Abraxis contributed net revenues of $88.5 million and losses of $43.0 million, after consideration of non-controlling interest, for the period from the acquisition date through December 31, 2010.
 
Prior to the Merger, Abraxis was a fully integrated global biotechnology company dedicated to the discovery, development and delivery of next-generation therapeutics and core technologies that offer patients treatments for cancer and other critical illnesses. Abraxis’ portfolio includes an oncology compound, ABRAXANE®, which is based on Abraxis’ proprietary tumor-targeting platform known as nab® technology. ABRAXANE®, the first FDA approved product to use the nab® technology, was launched in 2005 for the treatment of metastatic breast cancer. Abraxis has continued to expand the nab® technology through a clinical program and a product pipeline containing a number of nab® technology products in development. The acquisition of Abraxis accelerates our strategy to become a global leader in oncology by the addition of ABRAXANE® and the nab® technology to our portfolio.
 
Acquisition of Gloucester Pharmaceuticals, Inc.:  On January 15, 2010, we acquired all of the outstanding common stock and stock options of Gloucester. The results of operations for Gloucester are included in our consolidated financial statements from the date of acquisition and the assets and liabilities of Gloucester have been recorded at their respective fair values on the acquisition date and consolidated with ours. Gloucester contributed net revenues of $15.8 million and losses of $50.3 million. Prior to the acquisition, Gloucester was a privately held biopharmaceutical company that acquired clinical-stage oncology drug candidates with the goal of advancing them through regulatory approval and commercialization. We acquired Gloucester to enhance our portfolio of therapies for patients with life-threatening illnesses worldwide.
 
Debt Issuance:  On October 7, 2010, we issued a total of $1.25 billion principal amount of senior notes consisting of $500.0 million aggregate principal amount of 2.45% Senior Notes due 2015, or the 2015 notes, $500.0 million aggregate principal amount of 3.95% Senior Notes due 2020, or the 2020 notes, and $250.0 million aggregate principal amount of 5.7% Senior Notes due 2040, or the 2040 notes, and, together with the 2015 notes and the 2020 notes, referred to herein as the “notes.” The notes were issued at 99.854%, 99.745% and 99.813% of par, respectively, and the discount is amortized as additional interest expense over the period from issuance through maturity. Offering costs of approximately $10.3 million have been recorded as debt issuance costs on our consolidated balance sheet and are amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. Interest on the notes is payable semi-annually in arrears on April 15 and October 15 each year beginning April 15, 2011 and the principal on each note is due in full at their


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respective maturity dates. The notes may be redeemed at our option, in whole or in part, at any time at a redemption price defined in a make-whole clause equaling accrued and unpaid interest plus the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of interest and principal. 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 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.
 
Results of Operations:
 
Fiscal Years Ended December 31, 2010, 2009 and 2008
 
Total Revenue:  Total revenue and related percentages for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                                         
                      % Change  
                      2010
    2009
 
                      versus
    versus
 
    2010     2009     2008     2009     2008  
    (In thousands $)  
 
Net product sales:
                                       
REVLIMID ®
  $ 2,469,183     $ 1,706,437     $ 1,324,671       44.7 %     28.8 %
VIDAZA ®
    534,302       387,219       206,692       38.0 %     87.3 %
THALOMID ®
    389,605       436,906       504,713       (10.8 )%     (13.4 )%
ABRAXANE ®
    71,429                   N/A       N/A  
ISTODAX ®
    15,781                   N/A       N/A  
ALKERAN ®
          20,111       81,734       (100.0 )%     (75.4 )%
Other
    28,138       16,681       19,868       68.7 %     (16.0 )%
                                         
Total net product sales
  $ 3,508,438     $ 2,567,354     $ 2,137,678       36.7 %     20.1 %
Collaborative agreements and other revenue
    10,540       13,743       14,945       (23.3 )%     (8.0 )%
Royalty revenue
    106,767       108,796       102,158       (1.9 )%     6.5 %
                                         
Total revenue
  $ 3,625,745     $ 2,689,893     $ 2,254,781       34.8 %     19.3 %
                                         
 
Total revenue increased by $935.9 million, or 34.8%, to $3.626 billion in 2010 compared to 2009, reflecting increases of $456.4 million, or 26.3%, in the United States, and $479.5 million, or 50.1% in international markets. The $435.1 million, or 19.3%, increase in 2009 compared to 2008, included increases of $150.3 million, or 9.5%, in the United States and $284.8 million, or 42.3%, in international markets.
 
Net Product Sales:
 
Total net product sales for 2010 increased by $941.1 million, or 36.7%, to $3.508 billion compared to 2009. The increase was comprised of net volume increases of $892.5 million, price decreases of $2.1 million and the favorable impact from foreign exchange of $50.7 million. The decrease in prices was primarily due to increased Medicaid rebates resulting from the Health Care Reform Act and an increase in rebates to U.S. and international governments resulting from their attempts to reduce health care costs.
 
Total net product sales for 2009 increased by $429.7 million, or 20.1%, to $2.567 billion compared to 2008. The increase was comprised of net volume increases of $428.0 million and price increases of $61.5 million, partly offset by an unfavorable impact from foreign exchange of $59.8 million.
 
REVLIMID® net sales increased by $762.7 million, or 44.7%, to $2.469 billion in 2010 compared to 2009, primarily due to increased unit sales in both U.S. and international markets. Increased market penetration and the increase in treatment duration of patients using REVLIMID® in multiple myeloma contributed to U.S. growth. The


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growth in international markets reflects the expansion of our commercial activities in over 65 countries in addition to product reimbursement approvals and the launch of REVLIMID® in Japan in the latter part of 2010.
 
Net sales of REVLIMID® increased by $381.8 million, or 28.8%, to $1.706 billion in 2009 compared to 2008. The increase was primarily due to increased unit sales in both U.S. and international markets, reflecting increases in market penetration and duration of therapy in the United States, in addition to the expansion of our commercial activities in international markets.
 
VIDAZA® net sales increased by $147.1 million, or 38.0%, to $534.3 million in 2010 compared to 2009, primarily due to increased sales in international markets resulting from the completion of product launches in key European regions during the latter part of 2009 and the increase in treatment duration of patients using VIDAZA®.
 
Net sales of VIDAZA® increased by $180.5 million, or 87.3%, to $387.2 million in 2009 compared to 2008 primarily due to the December 2008 full marketing authorization granted by the European Commission, or E.C., for the treatment of adult patients who are not eligible for haematopoietic stem cell transplantation with Intermediate-2 and high-risk MDS according to the International Prognostic System Score, or IPSS, or chronic myelomonocytic leukemia, or CMML, with 10-29 percent marrow blasts without myeloproliferative disorder, or AML with 20-30 percent blasts and multi-lineage dysplasia, according to World Health Organization, or WHO, classification of VIDAZA®. In addition, sales for 2008 only included VIDAZA® sales subsequent to the March 7, 2008 acquisition of Pharmion.
 
THALOMID® net sales decreased by $47.3 million, or 10.8%, to $389.6 million in 2010 compared to 2009, primarily due to lower unit volumes in the United States resulting from the increased use of REVLIMID®.
 
Net sales of THALOMID® decreased by $67.8 million, or 13.4%, to $436.9 million in 2009 compared to 2008. The decrease was primarily due to lower unit volumes in the United States resulting from the increased use of REVLIMID®, partially offset by higher pricing and volume increases in international markets.
 
ABRAXANE® was obtained in the acquisition of Abraxis in October 2010 and was approved by the FDA in January 2005 in the treatment of metastatic breast cancer.
 
ISTODAX® was obtained in the acquisition of Gloucester in January 2010 and was approved in November 2009 by the FDA for the treatment of CTCL in patients who have received at least one prior systemic therapy. ISTODAX® was launched in the first quarter of 2010.
 
ALKERAN® net sales decreased by $61.6 million, or 75.4%, to $20.1 million in 2009 compared to 2008. This product was licensed from GSK and sold under our label through March 31, 2009, the conclusion date of the ALKERAN® license with GSK.
 
The “other” net product sales category for 2010 includes sales of FOCALIN® and former Pharmion and Abraxis products to be divested. The “other” net product sales category for 2009 includes sales of FOCALIN® and former Pharmion products to be divested.
 
Gross to Net Sales Accruals:  We record gross to net sales accruals for sales returns and allowances, sales discounts, government rebates, and chargebacks and distributor service fees.
 
REVLIMID® is distributed in the United States primarily through contracted pharmacies under the RevAssist® program, which is a proprietary risk-management distribution program tailored specifically to help ensure the safe and appropriate distribution and use of REVLIMID®. Internationally, REVLIMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure the product’s safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. THALOMID® is distributed in the United States under our “System for Thalidomide Education and Prescribing Safety,” or S.T.E.P.S.®, program which we developed and is a proprietary comprehensive education and risk-management distribution program with the objective of providing for the safe and appropriate distribution and use of THALOMID®. Internationally, THALOMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure the safe and appropriate distribution and use of THALOMID®. These programs may vary by country and, depending upon the country and


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the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. VIDAZA® and ABRAXANE® are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as THALOMID® and REVLIMID®.
 
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, 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. REVLIMID® is distributed primarily through hospitals and contracted pharmacies, lending itself to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity to date. THALOMID® is drop-shipped directly to the prescribing pharmacy and, as a result, wholesalers do not stock the product.
 
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. Full year 2010 revenues were negatively impacted by the U.S. Health Care Reform Act which increased the Medicaid rebate from 15.1% to 23.1% and extended that rebate to Medicaid Managed Care Organizations. We utilized historical patient data to estimate the incremental costs related to the Medicaid Managed Care Organizations. In addition, certain international markets have government-sponsored programs that 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, GPOs and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from date of sale. We provide a provision for rebates at the time of sale based on the 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 based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.
 
See Critical Accounting Estimates and Significant Accounting Policies for further discussion of gross to net sales accruals.


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Gross to net sales accruals and the balance in the related allowance accounts for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                                         
    Returns
                Chargebacks
       
    and
          Government
    and Distributor
       
    Allowances     Discounts     Rebates     Service Fees     Total  
    In thousands $  
 
Balance at December 31, 2007
  $ 16,734     $ 2,895     $ 9,202     $ 8,839     $ 37,670  
Pharmion balance at March 7, 2008
    926       283       1,266       2,037       4,512  
Allowances for sales during 2008
    20,624       36,024       35,456       100,258       192,362  
Credits/deductions issued for prior year sales
    (17,066 )     (2,428 )     (7,951 )     (4,127 )     (31,572 )
Credits/deductions issued for sales during 2008
    (3,419 )     (33,115 )     (27,163 )     (83,621 )     (147,318 )
                                         
Balance at December 31, 2008
  $ 17,799     $ 3,659     $ 10,810     $ 23,386     $ 55,654  
Allowances for sales during 2009
    14,742       37,315       48,082       88,807       188,946  
Credits/deductions issued for prior year sales
    (13,168 )     (2,306 )     (11,042 )     (10,333 )     (36,849 )
Credits/deductions issued for sales during 2009
    (12,013 )     (35,070 )     (29,739 )     (72,619 )     (149,441 )
                                         
Balance at December 31, 2009
  $ 7,360     $ 3,598     $ 18,111     $ 29,241     $ 58,310  
Abraxis balance at October 15, 2010
    815             4,336       7,253       12,404  
Allowances for sales during 2010
    6,440       52,975       117,788       123,625       300,828  
Credits/deductions issued for prior year sales
    (5,764 )     (3,304 )     (14,437 )     (15,882 )     (39,387 )
Credits/deductions issued for sales during 2010
    (4,072 )     (44,997 )     (40,834 )     (96,870 )     (186,773 )
                                         
Balance at December 31, 2010
  $ 4,779     $ 8,272     $ 84,964     $ 47,367     $ 145,382  
                                         
 
2010 compared to 2009:  Returns and allowances decreased by $8.3 million in 2010 compared to 2009, primarily due to reduced U.S. provisions resulting from decreased revenue from products with higher return rates.
 
Discounts increased by $15.7 million in 2010 compared to 2009, primarily due to revenue increases in the United States and international markets, both of which offer different discount programs, and expansion into new international markets.
 
Government rebates increased by $69.7 million in 2010 compared to 2009, primarily due to an approximate $28.4 million increase in Medicaid rebates resulting from the Health Care Reform Act, $40.6 million from reimbursement rate increases in certain international markets and approvals in new markets and the inclusion of ABRAXANE® sales subsequent to the October 2010 acquisition of Abraxis.
 
Chargebacks and distributor service fees increased by $34.8 million in 2010 compared to 2009, primarily due to a $17.7 million increase in chargebacks resulting from both an increase in sales, including the addition of ABRAXANE®, and an increase in certain chargeback rates, which are closely aligned with Medicaid rebate rates. Other increases included $5.6 million from TRICARE due to increased utilization in the current year, distributor service fees of $6.5 million and $2.3 million resulting from the Health Care Reform Act.
 
2009 compared to 2008:  Returns and allowances decreased by $5.9 million in 2009 compared to 2008 primarily due to the completion of an inventory centralization and rationalization initiative conducted by a major pharmacy chain during 2009, decreased revenue from products with a higher return rate history in 2009 compared to 2008 and a decrease in ALKERAN® returns due to the March 31, 2009 conclusion of the ALKERAN® license with GSK. In addition, 2008 includes an increase in THALOMID® returns resulting from the anticipated increase in the use of REVLIMID® in multiple myeloma.


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Discounts increased by $1.3 million in 2009 compared to 2008 primarily due to revenue increases in the United States and international markets, both of which offer different discount programs.
 
Government rebates increased by $12.6 million in 2009 compared to 2008 primarily due to increased sales levels of REVLIMID® and VIDAZA® in the United States and international markets, as well as reimbursement approvals in new markets.
 
Chargebacks and distributor service fees decreased by $11.5 million in 2009 compared to 2008 primarily due to reduced revenue from products with a higher chargeback history in 2009 compared to 2008 and a decrease in ALKERAN® chargebacks, partially offset by an increase in international distributor service fees due to certain programs commenced in 2009.
 
Collaborative Agreements and Other Revenue:  Revenues from collaborative agreements and other sources decreased by $3.2 million to $10.5 million in 2010 compared to 2009. The decrease was primarily due to receipt of a $5.0 million milestone payment in 2009 which was not duplicated in 2010, partly offset by an increase in licensing fees and the inclusion of Abraxis other revenues subsequent to the October 2010 acquisition date.
 
Revenues from collaborative agreements and other sources decreased by $1.2 million to $13.7 million in 2009 compared to 2008. The decrease was primarily due to the elimination of license fees and amortization of deferred revenues related to Pharmion subsequent to the March 7, 2008 acquisition and was partly offset by an increase in milestone payments received in 2009.
 
Royalty Revenue:  Royalty revenue decreased by $2.0 million to $106.8 million in 2010 compared to 2009. A $5.9 million decrease in residual payments earned by us based upon GSK’s ALKERAN® revenues subsequent to the conclusion of the ALKERAN® license with GSK was partly offset by a net $3.9 million increase in royalties earned from Novartis based upon its FOCALIN XR® and RITALIN® sales.
 
Royalty revenue increased by $6.6 million to $108.8 million in 2009 compared to 2008 primarily due to the 2009 inclusion of $9.0 million in residual ALKERAN® payments earned by us based upon GSK’s ALKERAN® revenues subsequent to the conclusion of the ALKERAN® license with GSK. Royalty revenue related to Novartis’ sales of RITALIN® decreased by $2.1 million from 2008.
 
Cost of Goods Sold (excluding amortization of acquired intangible assets):  Cost of goods sold and related percentages for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                         
    2010   2009   2008
    In thousands $
 
Cost of goods sold (excluding amortization of acquired intangible assets)
  $ 306,521     $ 216,289     $ 258,267  
Increase (decrease) from prior year
  $ 90,232     $ (41,978 )   $ 128,056  
Percent increase (decrease) from prior year
    41.7 %     (16.3 )%     98.3 %
Percent of net product sales
    8.7 %     8.4 %     12.1 %
 
Cost of goods sold (excluding amortization of acquired intangible assets) increased by $90.2 million to $306.5 million in 2010 compared to 2009. The increase was primarily due to the inclusion of a $34.7 million inventory step-up amortization adjustment related to sales of ABRAXANE® subsequent to the October 15, 2010 acquisition date of Abraxis, in addition to increased sales of REVLIMID® and VIDAZA®, partly offset by the elimination of higher cost ALKERAN® sales, resulting from the March 31, 2009 conclusion of the GSK license agreement. As a percent of net product sales, cost of goods sold (excluding amortization of acquired intangible assets) increased to 8.7% in the 2010 compared to 8.4% in 2009 primarily due to the inventory step-up amortization for ABRAXANE®. Excluding the step-up adjustment, the cost of goods sold ratio for 2010 was 7.7%.
 
Cost of goods sold (excluding amortization of acquired intangible assets) decreased by $42.0 million to $216.3 million in 2009 compared to 2008 partly due to the March 31, 2009 conclusion date of the ALKERAN® license with GSK, reducing cost of goods sold by approximately $39.0 million compared to 2008. In addition, costs related to THALOMID® decreased as a result of lower unit volumes. Finally, 2008 included a $24.6 million inventory step-up adjustment related to the March 7, 2008 acquisition of Pharmion compared to an adjustment of $0.4 million included in 2009. The impact of these reductions was partly offset by higher costs related to increased


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unit volumes for REVLIMID® and VIDAZA®. As a percent of net product sales, cost of goods sold (excluding amortization of acquired intangible assets) decreased to 8.4% in 2009 from 12.1% in 2008 primarily due to lower ALKERAN® sales, which carried a higher cost to sales ratio relative to our other products, and the decrease in the inventory step-up adjustment.
 
Research and Development:  Research and development expenses and related percentages for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                         
    2010   2009   2008
    In thousands $
 
Research and development
  $ 1,128,495     $ 794,848     $ 931,218  
Increase (decrease) from prior year
  $ 333,647     $ (136,370 )   $ 530,762  
Percent increase (decrease) from prior year
    42.0 %     (14.6 )%     132.5 %
Percent of total revenue
    31.1 %     29.5 %     41.3 %
 
Research and development expenses increased by $333.6 million to $1.128 billion in 2010 compared to 2009, partly due to an increase of $86.7 million in upfront payments related to research and development collaboration arrangements. A $121.2 million upfront payment was made to Agios Pharmaceuticals, Inc., or Agios, in 2010, compared to a combined $34.5 million in payments made to GlobeImmune, Inc., or GlobeImmune, and Array BioPharma, Inc., or Array, in 2009. In addition, 2010 included $65.6 million in expenses related to Abraxis and Gloucester subsequent to their acquisition dates, an increase of approximately $55.0 million in salary and benefits related to an increase in employees, an increase of approximately $50.0 million in research and development project spending and increases in spending in support of multiple programs across a broad range of diseases.
 
Research and development expenses decreased by $136.4 million in 2009 compared to 2008 primarily due to a $303.1 million charge included in 2008 for a royalty obligation payment to Pfizer that related to the yet to be approved forms of VIDAZA® partly offset by 2009 spending increases related to drug discovery and clinical research and development in support of multiple programs across a broad range of diseases. Included in 2009 were upfront payments of $30.0 million and $4.5 million to GlobeImmune and Array, respectively, related to research and development collaboration agreements. Included in 2008 was an upfront payment of $45.0 million made to Acceleron Pharma, Inc. related to a research and development collaboration agreement.
 
The following table provides a breakdown of research and development expenses:
 
                         
    2010     2009     Increase  
    In thousands $  
 
Human pharmaceutical clinical programs
  $ 480,491     $ 371,189     $ 109,302  
Other pharmaceutical programs(1)
    505,518       323,702       181,816  
Drug discovery and development
    120,362       85,208       35,154  
Placental stem cell
    22,124       14,749       7,375  
                         
Total
  $ 1,128,495     $ 794,848     $ 333,647  
                         
 
 
(1) Other pharmaceutical programs include spending for toxicology, analytical research and development, quality and regulatory affairs and upfront payments for research and development collaboration arrangements.
 
Research and development expenditures support multiple ongoing clinical proprietary development programs for REVLIMID® and other IMiDs® compounds; VIDAZA®; ABRAXANE® in melanoma, non-small cell lung and pancreatic cancers; ABI compounds, which are targeted nanoparticle, albumin-bound compounds for treatment of solid tumor cancers; amrubicin, our lead compound for small cell lung cancer; apremilast (CC-10004), our lead anti-inflammatory compound that inhibits multiple proinflammatory mediators and which is currently being evaluated in Phase III clinical trials for the treatment of psoriasis and psoriatic arthritis; pomalidomide, which is currently being evaluated in Phase I, II and III clinical trials; CC-11050, for which Phase II clinical trials are planned; our kinase inhibitor programs; as well as our cell therapy programs.


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Selling, General and Administrative:  Selling, general and administrative expenses and related percentages for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                         
    2010   2009   2008
    In thousands $
 
Selling, general and administrative
  $ 950,634     $ 753,827     $ 685,547  
Increase from prior year
  $ 196,807     $ 68,280     $ 244,585  
Percent increase from prior year
    26.1 %     10.0 %     55.5 %
Percent of total revenue
    26.2 %     28.0 %     30.4 %
 
Selling, general and administrative expenses increased by $196.8 million to $950.6 million in 2010 compared to 2009, partly due to the inclusion of $50.0 million in expenses related to former Abraxis and Gloucester subsequent to their acquisition dates, a $19.1 million increase in facilities costs and a $11.7 million increase in donations to non-profit foundations. The remaining increase includes higher marketing and sales related expenses, resulting from ongoing product launch activities of VIDAZA® in Europe and ISTODAX® in the United States, in addition to the continued expansion of our international commercial activities and an increase in facilities costs.
 
Selling, general and administrative expenses increased by $68.3 million to $753.8 million in 2009 compared to 2008, primarily reflecting increases in marketing and sales related expenses of $75.1 million, which were partly offset by a $6.7 million reduction in bad debt expense and other customer account charges. Marketing and sales related expenses in 2009 included product launch activities for REVLIMID®, VIDAZA® and THALOMID® in Europe, Canada and Australia, in addition to VIDAZA® relaunch expenses in the United States upon receipt of an expanded FDA approval to reflect new overall survival data. The increase in expense also reflects the continued expansion of our international commercial activities.
 
Amortization of Acquired Intangible Assets:  Amortization of acquired intangible assets is summarized below for the years ended December 31, 2010, 2009 and 2008:
 
                         
    2010     2009     2008  
    In thousands $  
 
Abraxis acquisition
  $ 21,648     $     $  
Gloucester acquisition
    21,833              
Pharmion acquisition
    159,750       83,403       102,331  
Penn T acquisition
                1,636  
                         
Total amortization
  $ 203,231     $ 83,403     $ 103,967  
Increase (decrease) from prior year
  $ 119,828     $ (20,564 )   $ 94,897  
 
Amortization of acquired intangible assets increased by $119.8 million to $203.2 million in 2010 compared to 2009, primarily due to $95.8 million of incremental expense associated with an acceleration of amortization beginning in 2010 related to the VIDAZA® intangible resulting from the acquisition of Pharmion. The revised monthly amortization reflects an updated sales forecast related to VIDAZA®. An increase in amortization expense due to the initiation of amortization related to the Abraxis and Gloucester acquired intangibles was partly offset by a reduction in expense associated with certain developed product rights obtained in the Pharmion acquisition becoming fully amortized during 2009.
 
Amortization of acquired intangible assets decreased by $20.6 million to $83.4 million in 2009 compared to 2008 primarily due to several intangible assets obtained in the Pharmion acquisition in March 2008 becoming fully amortized during the fourth quarter of 2008 and third quarter of 2009.
 
Acquisition Related Charges and Restructuring, net:  Acquisition related charges and restructuring, net was $47.2 million in 2010 and included $22.7 million in accretion of the contingent consideration related to the acquisition of Gloucester in January 2010 and $24.5 million in net costs related to the acquisition of Abraxis in October 2010. In addition to acquisition related fees of $21.4 million, the costs related to Abraxis included restructuring costs of $16.1 million, partly offset by a $13.0 favorable adjustment to the fair value of our liability related to publicly traded contingent value rights, or CVRs, that were issued as part of the acquisition of Abraxis. The restructuring costs are primarily severance related and are expected to be incurred in both 2011 and 2012.


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Interest and Investment Income, Net:  Interest and investment income, net is summarized below for the years ended December 31, 2010, 2009 and 2008:
 
                         
    2010   2009   2008
    In thousands $
 
Interest and investment income, net
  $ 44,757     $ 76,785     $ 84,835  
Decrease from prior year
  $ (32,028 )   $ (8,050 )   $ (24,978 )
Percentage decrease from prior year
    (41.7 )%     (9.5 )%     (22.7 )%
 
Interest and investment income, net decreased by $32.0 million to $44.8 million in 2010 compared to 2009. The decrease was primarily due to a $19.6 million net reduction in gains on sales of marketable securities in 2010 compared to 2009 and a $13.6 million reduction in interest income due to lower overall yields and the liquidation of securities to fund the Abraxis acquisition.
 
Interest and investment income decreased by $8.1 million to $76.8 million in 2009 compared to 2008 primarily due to reduced yields on invested balances, partly offset by higher invested balances.
 
Equity in Losses of Affiliated Companies:  Under the equity method of accounting, we recorded losses of $1.9 million, $1.1 million and $9.7 million in 2010, 2009 and 2008, respectively. The loss for 2010 included $1.3 million in losses from former Abraxis equity method investments. The loss for 2008 included impairment losses of $6.0 million which were based on an evaluation of several factors, including an other-than-temporary decrease in fair value of an equity method investment below our cost.
 
Interest Expense:  Interest expense was $12.6 million, $2.0 million and $4.4 million in 2010, 2009 and 2008, respectively. The $10.6 million increase in 2010 compared to 2009 was due to the interest accrued on the $1.25 billion in senior notes issued in October 2010.
 
Other income, net:  Other income, net is summarized below for the years ended December 31, 2010, 2009 and 2008:
 
                         
    2010   2009   2008
    In thousands $
 
Other income (expense), net
  $ (7,220 )   $ 60,461     $ 24,722  
Increase (decrease) in income from prior year
  $ (67,681 )   $ 35,739     $ 27,072  
 
Other income, net decreased by $67.7 million in 2010 to a net expense of $7.2 million compared to an income of $60.5 million in 2009 primarily due to a reduction in net gains on foreign currency forward contracts that had not been designated as hedges entered into in order to offset net foreign exchange gains and losses.
 
Other income increased by $35.7 million to $60.5 million in 2009 compared to 2008 primarily due to transaction exchange gains and net gains on foreign currency forward contracts that had not been designated as hedges. In addition, 2008 included an impairment loss of $4.1 million.
 
Income Tax Provision:  The income tax provision decreased by $66.5 million to $132.4 million in 2010 compared to 2009. The 2010 effective tax rate of 13.1% reflects the impact from our low tax Swiss manufacturing operations, our overall global mix of income, and tax deductions related to our acquisitions. The income tax provision in 2010 includes the favorable impact of a shift in earnings between the U.S. and lower tax foreign jurisdictions. The income tax provision in 2010 also includes certain discrete items including a tax benefit of $12.5 million related to the settlement of a tax examination, a tax benefit of $5.4 million which was primarily the result of filing our 2009 income tax returns with certain items being more favorable than originally estimated, and a tax benefit of $19.8 million for the reduction in a valuation allowance related to certain tax carryforwards, partially offset by an increase in unrecognized tax benefits related to certain ongoing income tax audits.
 
The income tax provision increased by $34.2 million to $199.0 million in 2009 compared to 2008. The 2009 effective tax rate of 20.4% reflected the impact from our low tax Swiss manufacturing operations and our overall global mix of income. The income tax provision in 2009 included the favorable impact of a shift in earnings between the U.S. and lower tax foreign jurisdictions. The income tax provision in 2009 also included a $17.0 million net tax benefit which was primarily the result of filing our 2008 income tax returns with certain items being more


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favorable than originally estimated, the reduction in a valuation allowance related to capital loss carryforwards, and the settlement of tax examinations, partially offset by an increase in unrecognized tax benefits related to certain ongoing income tax audits.
 
Net income (loss):  Net income (loss) and per common share amounts for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                         
    2010   2009   2008
    In thousands $, except per share amounts
 
Net income (loss) attributable to Celgene
  $ 880,512     $ 776,747     $ (1,533,653 )
Per common share amounts:
                       
Basic
  $ 1.90     $ 1.69     $ (3.46 )
Diluted(1)
  $ 1.88     $ 1.66     $ (3.46 )
Weighted average shares:
                       
Basic
    462,298       459,304       442,620  
Diluted
    469,517       467,354       442,620  
 
 
(1) In computing diluted earnings per share for 2008, no adjustment to the numerator or denominator was made due to the anti-dilutive effect of any potential common stock as a result of our net loss. As of their maturity date, June 1, 2008, substantially all of our convertible notes were converted into shares of common stock.
 
Net income for 2010 reflect the earnings impact from higher sales of REVLIMID® and VIDAZA®. The favorable impact of higher revenues was partly offset by increased spending for new product launches, research and development activities, expansion of our international operations and the additional costs and intangible amortization related to acquisitions.
 
Net income for 2009 reflects the earnings impact from higher sales of REVLIMID® and VIDAZA®, which was partly due to sales increases in the United States and our continued expansion into new international markets and the granting of full marketing authorization by the European Commission, or E.C., of VIDAZA® for specified treatment of adult patients. The earnings generated from increased sales were partly offset by increased spending on research and development, the costs related to new product launches and our ongoing expansion of international operations. The net loss for 2008 included $1.74 billion in IPR&D charges related to our acquisition of Pharmion and a $303.1 million charge for the October 2008 royalty obligation payment to Pfizer related to unapproved forms of VIDAZA®.
 
Liquidity and Capital Resources
 
Cash flows from operating, investing and financing activities for the years ended December 31, 2010, 2009 and 2008 were as follows:
 
                                         
                Increase (Decrease)
                2010
  2009
                versus
  versus
    2010   2009   2008   2009   2008
    In thousands $
 
Net cash provided by operating activities
  $ 1,181,556     $ 909,855     $ 182,187     $ 271,701     $ 727,668  
Net cash used in investing activities
  $ (2,107,305 )   $ (856,078 )   $ (522,246 )   $ (1,251,227 )   $ (333,832 )
Net cash provided by (used in) financing activities
  $ 1,177,167     $ (61,872 )   $ 281,629     $ 1,239,039     $ (343,501 )
 
Operating Activities:  Net cash provided by operating activities in 2010 increased by $271.7 million to $1,181.6 million as compared to 2009. The increase in net cash provided by operating activities was primarily attributable to an expansion of our operations and related increase in net earnings, partially offset by the increase in accounts receivable associated with expanding international sales, which take longer to collect and the timing of receipts and payments in the ordinary course of business.


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Investing Activities:  Net cash used in investing activities in 2010 increased by $1.251 billion to $2.107 billion as compared to a net cash use of $856.1 million in 2009. The 2010 investing activities are principally related to proceeds from the sales of marketable securities that were sold in preparation for the purchase of Abraxis and net cash used in the acquisition of Abraxis of $2.315 billion and the acquisition of Gloucester of $337.6 million. Net sales of marketable securities available for sale amounted to $659.7 million in 2010 compared to net purchases of $749.3 million in 2009.
 
Financing Activities:  Net cash provided by financing activities in 2010 was $1.177 billion compared to a net cash usage of $61.9 million in 2009. The $1.239 billion increase in net cash provided by financing activities in 2010 was primarily attributable to proceeds from the issuance of long-term debt in 2010 that provided net cash of $1.237 billion.
 
Cash, Cash Equivalents, Marketable Securities Available for Sale and Working Capital:  Cash, cash equivalents, marketable securities available for sale and working capital for the years ended December 31, 2010 and 2009 were as follows:
 
                         
            2010
    2010   2009   Increase
    In thousands $
 
Cash, cash equivalents and marketable securities available for sale
  $ 2,601,301     $ 2,996,752     $ (395,451 )
Working capital(1)
  $ 2,835,427     $ 3,302,109     $ (466,682 )
 
 
(1) Includes cash, cash equivalents and marketable securities available for sale, accounts receivable, net of allowances, inventory and other current assets, less accounts payable, accrued expenses, income taxes payable and other current liabilities.
 
Cash, Cash Equivalents and Marketable Securities Available for Sale:  We invest our excess cash primarily in money market funds, U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities, non-U.S. government, agency and Supranational securities and global corporate debt 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 the 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. The $395.5 million decrease in cash, cash equivalents and marketable securities available for sale at the end of 2010 compared to 2009 was primarily due to the $2.315 billion net cash payment made for the Abraxis acquisition, $337.6 million net cash payment made for the Gloucester acquisition, $121.2 million upfront payment made to Agios related to a research and development collaboration arrangement and $183.1 million cash paid out under our share repurchase program announced in April 2009, partly offset by $1.237 billion in net proceeds from our debt issuance in October 2010 and cash generated from operations.
 
Accounts Receivable, Net:  Accounts receivable, net increased by $267.8 million to $706.4 million in 2010 compared to 2009, primarily due to increased U.S. and international sales of REVLIMID® and VIDAZA® among existing customers as well as new customers in countries we have recently entered and the inclusion of $52.7 million in accounts receivable related to our acquisition of Abraxis in October 2010. Days of sales outstanding at the end of 2010 increased to 59 days compared to 56 days in 2009. The increase in days of sales outstanding was primarily due to increased international sales in countries where payment terms are typically greater than 60 days, thereby extending collection periods beyond those in the United States. We expect this trend to continue as our international sales continue to expand.
 
Inventory:  Inventory balances increased by $159.4 million to $260.1 million at the end of 2010 compared to 2009, primarily due to the inclusion of $136.7 million in ABRAXANE® inventory, which included a $90.3 million inventory step-up adjustment to fair value resulting from the acquisition of Abraxis in October 2010.
 
Other Current Assets:  Other current assets increased by $16.1 million to $275.0 million at the end of 2010 compared to 2009 primarily due to increases in prepaid value added taxes, income taxes and an increase in the fair


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value of foreign currency forward contracts, partly offset by a decrease in prepaid royalties related to VIDAZA® sales and interest receivable on short-term investments.
 
Accounts Payable, Accrued Expenses and Other Current Liabilities:  Accounts payable, accrued expenses and other current liabilities increased by $550.0 million to $996.0 million at the end of 2010 compared to 2009. The increase was primarily due to the $171.9 million current portion of the contingent consideration related to the acquisition of Gloucester, increases in governmental rebates and Medicaid reimbursements, increased value added taxes, increased royalties and payroll-related and other accruals.
 
Income Taxes Payable (Current and Non-Current):  Income taxes payable increased by $94.1 million to $563.3 million at the end of 2010 compared to 2009 primarily from the current provision for income taxes of $236.3 million, mostly offset by tax payments of $122.0 million and a tax benefit of stock options of $32.5 million.
 
We expect continued growth in our expenditures, particularly those related to research and development, clinical trials, commercialization of new products, international expansion and capital investments. However, we anticipate that existing cash and cash equivalent balances and marketable securities available for sale combined with cash generated from future net product sales, will provide sufficient capital resources to fund our normal operations for the foreseeable future.
 
Contractual Obligations
 
The following table sets forth our contractual obligations as of December 31, 2010:
 
                                         
    Payment Due By Period  
    Less Than
                More than
       
    1 Year     1 to 3 Years     3 to 5 Years     5 Years     Total  
    In thousands $  
 
Senior notes
  $     $     $ 500,000     $ 750,000     $ 1,250,000  
Operating leases
    36,679       42,398       29,117       28,953       137,147  
Manufacturing facility note payable
    4,388       8,563       8,563       4,281       25,795  
Other contract commitments
    164,216       116,215       59,577       31,151       371,159  
                                         
Total
  $ 205,283     $ 167,176     $ 597,257     $ 814,385     $ 1,784,101  
                                         
 
Senior Notes:  On October 7, 2010, we issued a total of $1.25 billion principal amount of senior notes consisting of $500.0 million aggregate principal amount of 2.45% Senior Notes due 2015 (the “2015 notes”), $500.0 million aggregate principal amount of 3.95% Senior Notes due 2020 (the “2020 notes”) and $250.0 million aggregate principal amount of 5.7% Senior Notes due 2040 (the “2040 notes” and, together with the 2015 notes and the 2020 notes, referred to herein as the “notes”). The notes were issued at 99.854%, 99.745% and 99.813% of par, respectively, and the discount will be amortized as additional interest expense over the period from issuance through maturity. Offering costs of approximately $10.3 million have been recorded as debt issuance costs on our consolidated balance sheet and are amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity.
 
Operating leases:  We lease office and research facilities under various operating lease agreements in the United States and various international markets. The non-cancelable lease terms for the operating leases expire at various dates between 2010 and 2018 and include renewal options. In general, we are also required to reimburse the lessors for real estate taxes, insurance, utilities, maintenance and other operating costs associated with the leases. For more information on the major facilities that we occupy under lease arrangements refer to Part I, Item 2, “Properties” of this Annual Report on Form 10-K.
 
Manufacturing Facility Note Payable:  In December 2006, we purchased an API manufacturing facility and certain other assets and liabilities from Siegfried Ltd. and Siegfried Dienste AG (together referred to herein as Siegfried) located in Zofingen, Switzerland. At December 31, 2010, the fair value of our note payable to Siegfried approximated the carrying value of the note of $25.0 million.


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Other Contract Commitments:  Other contract commitments include $362.5 million in contractual obligations related to product supply contracts. In addition, we have committed to invest $20.0 million in an investment fund over a ten-year period, which is callable at any time. On December 31, 2010, our remaining investment commitment was $8.0 million. For more information refer to Note 19 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
 
Collaboration Arrangements:  Potential milestone payments total approximately $3.8 billion, including approximately $2.3 billion contingent on the achievement of various research, development and regulatory approval milestones and approximately $1.5 billion in sales-based milestones.
 
We have entered into certain research and development collaboration agreements, as identified in Note 18 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K, 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 in our Consolidated Balance Sheets at December 31, 2010 and 2009 contained in this Annual Report on Form 10-K.
 
New Accounting Principles
 
New Accounting Pronouncements:  In October 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update, or ASU, No. 2009-13, “Multiple-Deliverable Revenue Arrangements,” or ASU 2009-13, which amends existing revenue recognition accounting pronouncements that are currently within the scope of FASB Accounting Standards Codificationtm, or ASC, 605. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the impact, if any, that the adoption of this amendment will have on our consolidated financial statements.
 
In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures About Fair Value Measurements,” or ASU 2010-06, which amends ASC 820 to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. ASU 2010-06 also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Further, ASU 2010-06 amends guidance on employers’ disclosures about postretirement benefit plan assets under ASC 715 to require that disclosures be provided by classes of assets instead of by major categories of assets. ASU 2010-06 was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. The section of the amendment pertaining to transfers into and out of Levels 1 and 2 was effective for us beginning January 1, 2010. The adoption of this section of the amendment did not have any impact on our consolidated financial statements. The section of the amendment pertaining to Level 3 measurements will be effective for us beginning January 1, 2011. We are currently evaluating the impact, if any, that the adoption of this amendment will have on our consolidated financial statements.
 
In April 2010, the FASB issued ASU No. 2010-17, “Milestone Method of Revenue Recognition,” or ASU 2010-17, to (1) limit the scope of this ASU to research or development arrangements and (2) require that guidance in this ASU be met for an entity to apply the milestone method (record the milestone payment in its entirety in the period received). However, the FASB clarified that, even if the requirements in ASU 2010-17 are met, entities would not be precluded from making an accounting policy election to apply another appropriate accounting policy that results in the deferral of some portion of the arrangement consideration. The guidance in ASU 2010-17 will apply to milestones in both single-deliverable and multiple-deliverable arrangements involving research or


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development transactions. ASU 2010-17 will be effective for fiscal years (and interim periods within those fiscal years) beginning on or after June 15, 2010. Early application is permitted. Entities can apply this guidance prospectively to milestones achieved after adoption. However, retrospective application to all prior periods is also permitted. The adoption of this accounting standard will not have an impact on our consolidated financial statements.
 
In December 2010, the FASB issued ASU No. 2010-27, “Fees Paid to the Federal Government by Pharmaceutical Manufacturers,” or ASU 2010-27. ASU 2010-27 provides guidance concerning the recognition and classification of the new annual fee payable by branded prescription drug manufactures and importers on branded prescription drugs which was mandated under the U.S. Health Care Reform Act enacted in the United States in March 2010. Under this new accounting standard, the annual fee would be presented as a component of operating expenses and recognized over the calendar year. Such fees are payable using a straight-line method of allocation unless another method better allocates the fee over the calendar year. This ASU is effective for calendar years beginning on or after December 31, 2010. As this standard relates only to classification, the adoption of this accounting standard will not have an impact on our consolidated financial statements.
 
In December 2010, the FASB issued ASU No. 2010-29, “Disclosure of Supplementary Pro Forma Information,” or ASU 2010-29. ASU 2010-29 clarifies disclosure requirements to require public entities that enter into business combinations that are material on an individual or aggregate basis to disclose pro forma information for business combinations that occurred in the current reporting period, including pro forma revenue and earnings of the combined entity as though the acquisition date had been as of the beginning of the comparable prior annual reporting period only. ASU 2010-29 is effective for material business combinations for which the acquisition date is on or after January 1, 2011 and early adoption is permitted. We have chosen early adoption of ASU 2010-29 and the pro forma information related to our acquisitions of Abraxis and Gloucester complies with the provisions of this standard (See Note 2 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K).
 
Critical Accounting Estimates and Significant Accounting Policies
 
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are more fully described in Note 1 of the Notes to the Consolidated Financial Statements included in this Annual Report, we believe the following accounting estimates and policies to be critical:
 
Revenue Recognition:  Revenue from the sale of products is recognized when title and risk of loss of the product is transferred to the customer. 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 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 collectibility is reasonably assured. If royalties cannot be reasonably estimated or collectibility of a royalty amount is not reasonably assured, royalties are recognized as revenue when the cash is received.
 
Gross to Net Sales Accruals:  We record gross to net sales accruals for sales returns and allowances, sales discounts, government rebates, and chargebacks and distributor service fees.
 
REVLIMID® is distributed in the United States primarily through contracted pharmacies under the RevAssist® program, which is a proprietary risk-management distribution program tailored specifically to help ensure the safe and appropriate distribution and use of REVLIMID®. Internationally, REVLIMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure the product’s safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail


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pharmacies. THALOMID® is distributed in the United States under our S.T.E.P.S.® program which we developed and is a proprietary comprehensive education and risk-management distribution program with the objective of providing for the safe and appropriate distribution and use of THALOMID®. Internationally, THALOMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities’ specifications to help ensure the safe and appropriate distribution and use of THALOMID®. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. VIDAZA® and ABRAXANE® are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as THALOMID® and REVLIMID®.
 
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, 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. REVLIMID® is distributed primarily through hospitals and contracted pharmacies, lending itself to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity to date. THALOMID® is drop-shipped directly to the prescribing pharmacy and, as a result, wholesalers do not stock the product.
 
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. Full year 2010 revenues were negatively impacted by the U.S. Health Care Reform Act which increased the Medicaid rebate from 15.1% to 23.1% and extended that rebate to Medicaid Managed Care Organizations. We utilized historical patient data to estimate the incremental costs related to the Medicaid Managed Care Organizations. In addition, certain international markets have government-sponsored programs that 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, GPOs and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from date of sale. We provide a provision for rebates at the time of sale based on the contracted rates and historical redemption rates. Upon receipt of chargeback, due to the availability of product and customer specific information on these programs, we then establish a specific provision for fees or rebates based on the specific terms of each agreement.
 
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 based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.
 
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. We provide a valuation allowance when it is more likely than not that deferred tax assets will not be realized.


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We account for interest and penalties related to uncertain tax positions as part of our provision for income taxes. These unrecognized tax benefits relate primarily to issues common among multinational corporations in our industry. We apply a variety of methodologies in making these estimates which include studies performed by independent economists, advice from industry and subject experts, evaluation of public actions taken by the U.S. Internal Revenue Service and other taxing authorities, as well as our own industry experience. We provide estimates for unrecognized tax benefits. If our estimates are not representative of actual outcomes, our results of operations could be materially impacted.
 
We periodically evaluate the likelihood of the realization of deferred tax assets, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including our recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, carryforward periods available to us for tax reporting purposes, various income tax strategies and other relevant factors. Significant judgment is required in making this assessment and, to the extent future expectations change, we would have to assess the recoverability of our deferred tax assets at that time. At December 31, 2010, it was more likely than not that we would realize our deferred tax assets, net of valuation allowances.
 
Share-Based Compensation:  The cost of share-based compensation is recognized in the Consolidated Statements of Operations based on the fair value of all awards granted, using the Black-Scholes method of valuation. The fair value of each award is determined and the compensation cost is recognized over the service period required to obtain full vesting. Compensation cost to be 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.
 
Other-Than-Temporary Impairments of Available-For-Sale Marketable Securities:  A decline in the market value of any available-for-sale marketable security below its cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to operations and a new cost basis for the security established. The determination of whether an available-for-sale marketable security is other-than-temporarily impaired requires significant judgment and requires consideration of available quantitative and qualitative evidence in evaluating the potential impairment. Factors evaluated to determine whether the investment is other-than-temporarily impaired include: significant deterioration in the issuer’s earnings performance, credit rating, asset quality, business prospects of the issuer, adverse changes in the general market conditions in which the issuer operates, length of time that the fair value has been below our cost, our expected future cash flows from the security, our intent not to sell and an evaluation as to whether it is more likely than not that we will not have to sell before recovery of our cost basis. Assumptions associated with these factors are subject to future market and economic conditions, which could differ from our assessment.
 
Derivatives and Hedging Activities:  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 effectiveness 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 in foreign exchange and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce our risk or cost. We do not use derivative instruments for speculative trading purposes and are not a party to leveraged derivatives.
 
Investment in Affiliated Companies:  We apply the equity method of accounting to our investment in common stock of an affiliated company and certain investment funds, which primarily invest in companies conducting business in life sciences such as biotechnology, pharmaceuticals, medical technology, medical devices, diagnostics and health and wellness.


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Equity 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; and any other information that we may be aware of related to the investment.
 
Accounting for Long-Term Incentive Plans:  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. We currently have three three-year performance cycles running concurrently ending December 31, 2011, 2012 and 2013. Performance measures for each LTIP are based on the following components in the last year of the three-year cycle: 25% on non-GAAP earnings per share, 25% on non-GAAP net income and 50% on total non-GAAP revenue, as defined.
 
Payouts may be in the range of 0% to 200% of the participant’s salary for the plans. Awards are payable in cash or, at our discretion, in our common stock based upon our stock price at the payout date. 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 an award based on actual performance, if higher, through the date of the change in control.
 
Accruals recorded for the LTIP entail making certain assumptions concerning future non-GAAP earnings per share, non-GAAP net income and non-GAAP revenues, as defined; the actual results of which could be materially different than the assumptions used. Accruals for the LTIP are reviewed on a regular basis and revised accordingly so that the liability recorded reflects updated estimates of future payouts. In estimating the accruals, management considers actual results to date for the performance period, expected results for the remainder of the performance period, operating trends, product development, pricing and competition.
 
Valuation of Goodwill, Acquired Intangible Assets and IPR&D:
 
We have recorded goodwill, acquired intangible assets and IPR&D primarily through the acquisitions of Pharmion, Gloucester and Abraxis. When identifiable intangible assets, including in-process research and development, are acquired, we determine the fair values of these assets as of the acquisition date. Discounted cash flow models are typically used in these valuations if quoted market prices are not available, and the models require the use of significant estimates and assumptions including but not limited to:
 
  •  projecting regulatory approvals,
 
  •  estimating future cash flows from product sales resulting from completed products and in-process projects and
 
  •  developing appropriate discount rates and probability rates
 
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 subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. We test our goodwill annually for impairment each November 30. We are organized as a single reporting unit and therefore the goodwill impairment test is done using our overall market value, as determined by our traded share price, as compared to our book value of net 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 occur. Intangible assets related to IPR&D product rights are treated as indefinite-lived intangible assets and not amortized until the product is approved for sale by regulatory authorities in specified markets. At that time, we will determine the useful life of the asset, reclassify the asset out of


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IPR&D and begin amortization. Impairment testing is also performed at least annually or when a triggering event occurs that could indicate a potential impairment. Our IPR&D product rights were obtained in the Gloucester and Abraxis acquisitions. The Gloucester related product rights will become definite-lived intangibles when marketing approval is received for ISTODAX® for treatment of PTCL in the United States and the European Union. The Abraxis related product rights will become definite-lived intangibles when marketing approval is received for ABRAXANE® for treatment of either NSCLC, pancreatic cancer or melanoma in a major market, typically either the United States or the European Union, or in a series of other countries, subject to certain specified conditions and management judgment.
 
Valuation of Contingent Consideration Resulting from a Business Combination:
 
We record contingent consideration resulting from a business combination at its fair value on the acquisition date, and for each subsequent reporting period revalue these obligations and record increases or decreases in their fair value as an adjustment to operating earnings in the consolidated statements of operations. Changes to contingent consideration obligations can result from movements in publicly traded share prices of CVRs, adjustments to discount rates and periods, updates in the assumed achievement or timing of any development milestones or changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. The assumptions related to determining the value of a contingent consideration include a significant amount of judgment and any changes in the assumptions could have a material impact on the amount of contingent consideration expense recorded in any given period. Our contingent consideration liabilities were acquired in the acquisitions of Gloucester and Abraxis. The fair value of the Gloucester contingent consideration liability is based on the discount rates, probabilities and estimated timing of two cash milestone payments to the former Gloucester shareholders. The fair value of the Abraxis contingent consideration liability is based on the quoted market price of the publicly traded CVRs.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The following discussion provides forward-looking quantitative and qualitative information about our potential exposure to market risk. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings.
 
We have established guidelines relative to the diversification and maturities of investments to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified depending on market conditions. Although investments may be subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. At December 31, 2010, our market risk sensitive instruments consisted of marketable securities available for sale, our long-term debt, our note payable and certain foreign currency forward contracts.
 
Marketable Securities Available for Sale:  At December 31, 2010, our marketable securities available for sale consisted of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities, non-U.S. government, agency and Supranational securities, global corporate debt securities and marketable equity securities. U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. Government Sponsored Enterprises. U.S. government-sponsored agency MBS include mortgage backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Non-U.S. government, agency and Supranational securities, consist of direct obligations of highly rated governments of nations other than the United States, obligations of sponsored agencies and other entities that are guaranteed or supported by highly rated governments of nations other than the United States. Corporate debt — global includes obligations issued by investment-grade corporations including some issues that have been guaranteed by governments and government agencies.
 
Marketable securities available for sale 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,


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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, is included in interest and investment income, net.
 
As of December 31, 2010, the principal amounts, fair values and related weighted-average interest rates of our investments in debt securities classified as marketable securities available for sale were as follows:
 
                                         
    Duration
    Less than
          More than
   
    1 Year   1 to 3 Years   3 to 5 Years   5 Years   Total
    In thousands $
 
Principal amount
  $ 435,227     $ 742,537     $ 38,994     $ 12,401     $ 1,229,159  
Fair value
  $ 438,813     $ 755,827     $ 38,490     $ 12,774     $ 1,245,904  
Average interest rate
    0.5 %     1.0 %     3.7 %     2.6 %     0.9 %
 
Long-Term Debt:  On October 7, 2010, we issued a total of $1.25 billion principal amount of senior notes consisting of $500.0 million aggregate principal amount of 2.45% Senior Notes due 2015, $500.0 million aggregate principal amount of 3.95% Senior Notes due 2020 and $250.0 million aggregate principal amount of 5.7% Senior Notes due 2040. The notes were issued at 99.854%, 99.745% and 99.813% of par, respectively, and the discount amortized as additional interest expense over the period from issuance through maturity. Offering costs of approximately $10.3 million have been recorded as debt issuance costs on our consolidated balance sheet and are amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. Interest on the notes is payable semi-annually in arrears on April 15 and October 15 each year beginning April 15, 2011 and the principal on each note is due in full at their respective maturity dates. The notes may be redeemed at our option, in whole or in part, at any time at a redemption price defined in a make-whole clause equaling accrued and unpaid interest plus the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of interest and principal. 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 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. At December 31, 2010, the fair value of our senior notes outstanding was $1.197 billion.
 
Note Payable:  In December 2006, we purchased an active pharmaceutical ingredient, or API, manufacturing facility and certain other assets and liabilities from Siegfried. At December 31, 2010, the fair value of our note payable to Siegfried approximated the carrying value of the note of $25.0 million. Assuming other factors are held constant, an increase in interest rates generally will result in a decrease in the fair value of the note. The note is denominated in Swiss francs and its fair value will also be affected by changes in the U.S. dollar/Swiss franc exchange rate. The carrying value of the note reflects the U.S. dollar/Swiss franc exchange rate and Swiss interest rates.
 
Foreign Currency Forward Contracts:  We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies and to reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.
 
We enter into 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, 2010 and 2009 had settlement dates within 36 months. These foreign currency forward contracts are designated as cash flow hedges under ASC 815 and, accordingly, to the extent effective, any unrealized gains or losses on them are reported in other comprehensive income (loss), or OCI, and reclassified to operations in the same periods during which the underlying hedged transactions affect operations.


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Any ineffectiveness on these foreign currency forward contracts is reported in other income, net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows:
 
                 
    Notional Amount  
    December 31,  
Foreign Currency   2010     2009  
    In thousands $  
 
British Pound
  $ 58,440     $  
Canadian Dollar
    133,128        
Euro
    675,438       1,107,340  
Japanese Yen
    632,962        
Swiss Franc
    77,669        
Others
    54,644        
                 
Total
  $ 1,632,281     $ 1,107,340  
                 
 
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. As of December 31, 2010, credit risk did not materially change the fair value of our foreign currency forward contracts.
 
We recognized an increase in net product sales for certain effective cash flow hedge instruments of $47.7 million for 2010 and a reduction in net product sales of $36.4 million for 2009. These settlements were recorded in the same period as the related forecasted sales occurred. We recognized a decrease in other income, net for the settlement of certain effective cash flow hedge instruments of $0.1 million for 2010 compared to an increase of $6.5 million for 2009. These settlements were recorded in the same period as the related forecasted expenses occurred. Changes in time value, which we excluded from the hedge effectiveness assessment, were included in other income, net.
 
We also enter into foreign currency forward contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies. These foreign currency forward contracts have not been designated as hedges under ASC 815 and, accordingly, any changes in their fair value are recognized in other income, net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at December 31, 2010 and 2009 were $848.6 million and $483.2 million, respectively.
 
Although not predictive in nature, we believe a hypothetical 10% threshold reflects a reasonably possible near-term change in foreign currency rates. Assuming that the December 31, 2010 exchange rates were to change by a hypothetical 10%, the fair value of the foreign currency forward contracts would change by approximately $259.0 million. However, since the contracts either hedge specific forecasted intercompany transactions denominated in foreign currencies or relate to assets and liabilities denominated in currencies other than the entities’ functional currencies, any change in the fair value of the contract would be either reported in other comprehensive income and reclassified to earnings in the same periods during which the underlying hedged transactions affect earnings or remeasured through earnings each period along with the underlying asset or liability.
 
On February 23, 2011, we entered into an interest rate swap contract to convert a portion of our interest rate exposure from fixed rate to floating rate to more closely align interest expense with interest income received on its cash equivalent and investment balances. The floating rate is benchmarked to LIBOR. The swap is designated as a fair value hedge on the fixed-rate debt issue maturing October 2015. Since the specific terms and notional amount of the swap match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swaps will be recorded on the Consolidated Balance Sheets with no net impact recorded in the Consolidated Statements of Operations. As of this filing, the total notional amount of debt hedged with an interest rate swap is $125.0 million.


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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
CELGENE CORPORATION AND SUBSIDIARIES
 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    Page
 
Consolidated Financial Statements
       
    63  
    64  
    65  
    66  
    67  
    68  
Financial Statement Schedule
       
    127  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Celgene Corporation:
 
We have audited the accompanying consolidated balance sheets of Celgene Corporation and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule, “Schedule II — Valuation and Qualifying Accounts.” These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celgene Corporation and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in the Notes to the consolidated financial statements, the Company has, as of January 1, 2009, changed its method of accounting for business combinations and, as of January 1, 2008, changed its method of accounting for the measurement of the fair value of financial assets and liabilities, each due to the adoption of new accounting requirements issued by the Financial Accounting Standards Board.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. This report includes an explanatory paragraph stating that management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, the internal control over financial reporting of Abraxis BioScience, Inc. associated with total net assets of approximately $3.2 billion (of which approximately $2.6 billion represents goodwill and identifiable intangible assets which are included within the scope of the assessment) as of December 31, 2010 and total revenue of $88.5 million for the year ended December 31, 2010.
 
/s/  KPMG LLP
 
Short Hills, New Jersey
February 28, 2011


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CELGENE CORPORATION AND SUBSIDIARIES
 
 
                 
    December 31,  
    2010     2009  
    (Dollars in thousands, except per share amounts)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 1,351,128     $ 1,102,172  
Marketable securities available for sale
    1,250,173       1,894,580  
Accounts receivable, net of allowances of $13,104 and $10,787 at December 31, 2010 and 2009
    706,429       438,617  
Inventory
    260,130       100,683  
Deferred income taxes
    151,779       49,817  
Other current assets
    275,005       258,935  
Assets held for sale
    348,555        
                 
Total current assets
    4,343,199       3,844,804  
Property, plant and equipment, net
    509,919       297,792  
Investment in affiliated companies
    23,073       21,476  
Intangible assets, net
    3,248,498       349,542  
Goodwill
    1,896,344       578,116  
Other assets
    156,129       297,581  
                 
Total assets
  $ 10,177,162     $ 5,389,311  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 94,465     $ 36,629  
Accrued expenses
    592,336       315,608  
Income taxes payable
    11,423       46,874  
Current portion of deferred revenue
    16,362       1,827  
Other current liabilities
    309,214       93,767  
Liabilities of disposal group
    46,582        
                 
Total current liabilities
    1,070,382       494,705  
Deferred revenue, net of current portion
    12,785       6,527  
Income taxes payable
    551,896       422,358  
Deferred income taxes
    882,870        
Other non-current liabilities
    416,173       71,115  
Long-term debt, net of discount
    1,247,584        
                 
Total liabilities
    4,181,690       994,705  
                 
Commitments and Contingencies
               
Equity:
               
Preferred stock, $.01 par value per share, 5,000,000 shares authorized; none outstanding at December 31, 2010 and 2009
           
Common stock, $.01 par value per share, 575,000,000 shares authorized; issued 482,164,353 and 467,629,433 shares at December 31, 2010 and 2009, respectively
    4,822       4,676  
Common stock in treasury, at cost; 11,776,036 and 8,337,961 shares at December 31, 2010 and 2009, respectively
    (545,588 )     (362,521 )
Additional paid-in capital
    6,350,240       5,474,122  
Retained earnings (accumulated deficit)
    248,266       (632,246 )
Accumulated other comprehensive loss
    (73,767 )     (89,425 )
                 
Total stockholders’ equity
    5,983,973       4,394,606  
Non-controlling interest
    11,499        
                 
Total equity
    5,995,472       4,394,606  
                 
Total liabilities and equity
  $ 10,177,162     $ 5,389,311  
                 
 
See accompanying Notes to Consolidated Financial Statements


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CELGENE CORPORATION AND SUBSIDIARIES
 
 
                         
    Years Ended December 31,  
    2010     2009     2008  
    (In thousands, except per share amounts)  
 
Revenue:
                       
Net product sales
  $ 3,508,438     $ 2,567,354     $ 2,137,678  
Collaborative agreements and other revenue
    10,540       13,743       14,945  
Royalty revenue
    106,767       108,796       102,158  
                         
Total revenue
    3,625,745       2,689,893       2,254,781  
                         
Expenses:
                       
Cost of goods sold (excluding amortization of acquired intangible assets)
    306,521       216,289       258,267  
Research and development
    1,128,495       794,848       931,218  
Selling, general and administrative
    950,634       753,827       685,547  
Amortization of acquired intangible assets
    203,231       83,403       103,967  
Acquired in-process research and development
                1,740,000  
Acquisition related charges and restructuring, net
    47,229              
                         
Total costs and expenses
    2,636,110       1,848,367       3,718,999  
                         
Operating income (loss)
    989,635       841,526       (1,464,218 )
Other income and expense:
                       
Interest and investment income, net
    44,757       76,785       84,835  
Equity in losses of affiliated companies
    1,928       1,103       9,727  
Interest expense
    12,634       1,966       4,437  
Other income (expense), net
    (7,220 )     60,461       24,722  
                         
Income (loss) before income taxes
    1,012,610       975,703       (1,368,825 )
Income tax provision
    132,418       198,956       164,828  
                         
Net income (loss)
    880,192       776,747       (1,533,653 )
Less: Net loss attributable to non-controlling interest
    320              
                         
Net income (loss) attributable to Celgene
  $ 880,512     $ 776,747     $ (1,533,653 )
                         
Net income (loss) per share attributable to Celgene:
                       
Basic
  $ 1.90     $ 1.69     $ (3.46 )
Diluted
  $ 1.88     $ 1.66     $ (3.46 )
Weighted average shares:
                       
Basic
    462,298       459,304       442,620  
                         
Diluted
    469,517       467,354       442,620  
                         
 
See accompanying Notes to Consolidated Financial Statements


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CELGENE CORPORATION AND SUBSIDIARIES
 
 
                         
    Years Ended December 31,  
    2010     2009     2008  
    (Dollars in thousands)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 880,192     $ 776,747     $ (1,533,653 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation of long-term assets
    54,234       41,682       33,797  
Amortization
    204,855       84,386       104,365  
Allocation of pre-paid royalties
    47,241       36,045       10,739  
Provision (benefit) for accounts receivable allowances
    (2,309 )     2,664       6,232  
Deferred income taxes
    (103,923 )     (26,939 )     (104,588 )
Change in value of contingent consideration
    9,712              
Acquired in-process research and development
                1,740,000  
Share-based compensation expense
    186,989       145,929       106,578  
Equity in losses of affiliated companies
    1,928       518       8,884  
Share-based employee benefit plan expense
    14,403       11,515       8,314  
Unrealized change in value of foreign currency forward contracts
    9,970       (9,738 )     8,250  
Realized (gain) loss on marketable securities available for sale
    (11,531 )     (31,013 )     1,206  
Other, net
    (2,352 )     8,715       2,224  
Change in current assets and liabilities, excluding the effect of acquisitions:
                       
Accounts receivable
    (234,452 )     (122,615 )     (107,685 )
Inventory
    18,723       1,540       (25,867 )
Other operating assets
    (45,674 )     (53,847 )     (129,199 )
Assets held for sale, net
    2,999              
Accounts payable and other operating liabilities
    51,557       652       (17,087 )
Income tax payable
    78,110       39,823       69,610  
Deferred revenue
    20,884       3,791       67  
                         
Net cash provided by operating activities
    1,181,556       909,855       182,187  
                         
Cash flows from investing activities:
                       
Proceeds from sales of marketable securities available for sale
    3,931,883       2,258,376       1,148,116  
Purchases of marketable securities available for sale
    (3,272,225 )     (3,007,673 )     (835,967 )
Payments for acquisition of business, net of cash acquired
    (2,652,377 )           (746,779 )
Capital expenditures
    (98,632 )     (93,384 )     (77,379 )
Investment in affiliated companies
    (1,934 )     (3,603 )     (12,855 )
Purchases of investment securities
    (14,020 )     (13,127 )     (9,436 )
Other
          3,333       12,054  
                         
Net cash provided by (used in) investing activities
    (2,107,305 )     (856,078 )     (522,246 )
                         
Cash flows from financing activities:
                       
Proceeds from issuance of long-term debt
    1,237,270              
Payment for treasury shares
    (183,116 )     (209,461 )      
Net proceeds from exercise of common stock options and warrants
    86,889       49,751       128,583  
Excess tax benefit from share-based compensation arrangements
    36,124       97,838       153,046  
                         
Net cash provided by (used in) financing activities
    1,177,167       (61,872 )     281,629  
                         
Effect of currency rate changes on cash and cash equivalents
    (2,462 )     17,881       (67,457 )
                         
Net increase (decrease) in cash and cash equivalents
    248,956       9,786       (125,887 )
Cash and cash equivalents at beginning of period
    1,102,172       1,092,386       1,218,273  
                         
Cash and cash equivalents at end of period
  $ 1,351,128     $ 1,102,172     $ 1,092,386  
                         
Supplemental schedule of non-cash investing and financing activity:
                       
Contingent consideration issued in acquisition of Gloucester
  $ 230,201     $     $  
                         
Change in net unrealized (gain) loss on marketable securities available for sale
  $ (13,808 )   $ (3,326 )   $ 87,349  
                         
Matured shares tendered in connection with stock option exercises
  $ (8,245 )   $ (2,014 )   $ (7,676 )
                         
Conversion of convertible notes
              $ 196,543  
                         
Supplemental disclosure of cash flow information:
                       
Interest paid
  $ 1,752     $ 1,882     $ 3,811  
                         
Income taxes paid
  $ 121,976     $ 70,539     $ 29,319  
                         
 
See accompanying Notes to Consolidated Financial Statements


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CELGENE CORPORATION AND SUBSIDIARIES
 
 
                                                                 
    Celgene Corporation Shareholders              
                            Accumulated
                   
                            Other
                   
                Additional
    Retained
    Comprehensive
          Non-
       
    Common
    Treasury
    Paid-in
    Earnings
    Income
    Stockholders’
    Controlling
       
Years Ended December 31, 2010, 2009 and 2008   Stock     Stock     Capital     (Deficit)     (Loss)     Equity     Interest     Total  
    (Dollars in thousands)  
 
Balances at December 31, 2007
  $ 4,072     $ (149,519 )   $ 2,780,849     $ 124,660     $ 83,882     $ 2,843,944     $     $ 2,843,944  
Net loss
                            (1,533,653 )             (1,533,653 )             (1,533,653 )
Other comprehensive income:
                                                               
Increase in unrealized gains on available for sale securities, net of $5,211 tax
                                    8,413       8,413               8,413  
Reversal of unrealized gains on Pharmion investment, net of $38,904 tax
                                    (62,806 )     (62,806 )             (62,806 )
Reclassification of losses on available for sale securities included in net loss,net of $736 tax
                                    1,188       1,188               1,188  
Unrealized losses on cash flow hedges
                                    (50,117 )     (50,117 )             (50,117 )
Pension liability adjustment
                                    (3,290 )     (3,290 )             (3,290 )
Net asset transfer of common control foreign subsidiaries
                    4,337               (4,337 )                    
Currency translation adjustments
                                    (100,477 )     (100,477 )             (100,477 )
                                                                 
Comprehensive (loss)
                                          $ (1,740,742 )   $     $ (1,740,742 )
Mature shares tendered related to option exercise
            (7,646 )     3,861                       (3,785 )             (3,785 )
Acquisition of Pharmion Corp. 
    308               1,793,838                       1,794,146               1,794,146  
Conversion of long-term convertible notes
    162               196,381                       196,543               196,543  
Exercise of stock options and warrants
    90               128,439                       128,529               128,529  
Issuance of common stock for employee benefit plans
    1               5,178                       5,179               5,179  
Expense related to share-based compensation
                    106,951                       106,951               106,951  
Income tax benefit upon exercise of stock options
                    160,563                       160,563               160,563  
                                                                 
Balances at December 31, 2008
  $ 4,633     $ (157,165 )   $ 5,180,397     $ (1,408,993 )   $ (127,544 )   $ 3,491,328     $     $ 3,491,328  
Net income
                            776,747               776,747               776,747  
Other comprehensive income:
                                                               
Increase in unrealized gains on available for sale securities, net of $11,316 tax benefit
                                    14,642       14,642               14,642  
Reclassification of gains on available for sale securities included in net income, net of $20,675 tax
                                    (31,013 )     (31,013 )             (31,013 )
Unrealized gains on cash flow hedges
                                    55,479       55,479               55,479  
Pension liability adjustment
                                    5,180       5,180               5,180  
Net asset transfer of common control foreign subsidiaries
                    (3,198 )             3,198                      
Currency translation adjustments
                                    (9,367 )     (9,367 )             (9,367 )
                                                                 
Comprehensive income
                                          $ 811,668     $     $ 811,668  
Mature shares tendered related to option exercise
            (2,014 )     1,213                       (801 )             (801 )
Exercise of stock options and warrants
    43       (33 )     50,491                       50,501               50,501  
Shares purchased under share repurchase program
            (209,461 )                             (209,461 )             (209,461 )
Issuance of common stock for employee benefit plans
            6,152       2,784                       8,936               8,936  
Expense related to share-based compensation
                    143,659                       143,659               143,659  
Income tax benefit upon exercise of stock options
                    98,776                       98,776               98,776  
                                                                 
Balances at December 31, 2009
  $ 4,676     $ (362,521 )   $ 5,474,122     $ (632,246 )   $ (89,425 )   $ 4,394,606     $     $ 4,394,606  
Net income
                            880,512               880,512       (320 )     880,192  
Other comprehensive income:
                                                               
Increase in unrealized gains on available for sale securities, net of $469 tax benefit
                                    14,277       14,277               14,277  
Reclassification of gains on available for sale securities included in net income, net of $7,591 tax
                                    (11,387 )     (11,387 )             (11,387 )
Unrealized losses on cash flow hedges
                                    (20,918 )     (20,918 )             (20,918 )
Pension liability adjustment
                                    (5,695 )     (5,695 )             (5,695 )
Net asset transfer of a common control foreign subsidiary
                    106               (106 )                    
Change in functional currency of a foreign subsidiary
                    (57,668 )             57,668                      
Currency translation adjustments
                                    (18,181 )     (18,181 )             (18,181 )
                                                                 
Comprehensive income
                                          $ 838,608     $ (320 )   $ 838,288  
Mature shares tendered related to option exercise
            (8,245 )     7,335                       (910 )             (910 )
Exercise of stock options, warrants and conversion of restricted stock units
    39       (1,410 )     91,039                       89,668               89,668  
Shares purchased under share repurchase program
            (183,116 )                             (183,116 )             (183,116 )
Issuance of common stock for employee benefit plans
            9,704       2,722                       12,426               12,426  
Issuance of common stock related to Abraxis acquisition
    107               617,651                       617,758               617,758  
Expense related to share-based compensation
                    182,404                       182,404               182,404  
Income tax benefit upon exercise of stock options
                    32,529                       32,529               32,529  
Non-controlling interest resulting from acquisition of Abraxis, net
                                                  11,819       11,819  
                                                                 
Balances at December 31, 2010
  $ 4,822     $ (545,588 )   $ 6,350,240     $ 248,266     $ (73,767 )   $ 5,983,973     $ 11,499     $ 5,995,472  
                                                                 
 
See accompanying Notes to Consolidated Financial Statements


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CELGENE CORPORATION AND SUBSIDIARIES
 
(Thousands of dollars, except per share amounts, unless otherwise indicated)
 
1.   Nature of Business and Basis and Summary of Significant Accounting Policies
 
Celgene Corporation and its subsidiaries (collectively “Celgene” or the “Company”) is a global biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory diseases. The Company is dedicated to innovative research and development which is designed to bring new therapies to market and is involved in research in several scientific areas that may deliver proprietary next-generation therapies, targeting areas such as intracellular signaling pathways in cancer and immune cells, immunomodulation in cancer and autoimmunity and placental cell, including stem and progenitor cell, research.
 
The Company’s primary commercial stage products include REVLIMID®, VIDAZA®, THALOMID® (inclusive of Thalidomide Celgene® and Thalidomide Pharmion®), ABRAXANE® which was obtained in the October 2010 acquisition of Abraxis BioScience, Inc., or Abraxis, and ISTODAX®, which was obtained in the January 2010 acquisition of Gloucester Pharmaceuticals, Inc., or Gloucester (See Note 2). Additional sources of revenue include sales of FOCALIN® exclusively to Novartis Pharma AG, or Novartis, a licensing agreement with Novartis, which entitles the Company to royalties on FOCALIN XR® and the entire RITALIN® family of drugs, residual payments from GlaxoSmithKline, or GSK, based upon GSK’s ALKERAN® revenues through the end of March 2011, sale of services through the Company’s Cellular Therapeutics subsidiary and other miscellaneous licensing agreements.
 
The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries, including certain former Abraxis entities determined to be non-core to the Company and reported as assets held for sale and liabilities of disposal group on the consolidated balance sheet. Investments in limited partnerships and interests where the Company has an equity interest of 50% or less and does not otherwise have a controlling financial interest are accounted for by either the equity or cost method. The Company records net income (loss) attributable to non-controlling interest in its Consolidated Statements of Operations equal to the percentage of ownership interest retained in the respective operations by the non-controlling parties.
 
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. The Company is subject to certain risks and uncertainties related to product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition, technological change and product liability.
 
Financial Instruments:  Certain financial instruments reflected in the Consolidated Balance Sheets, (e.g., cash, cash equivalents, accounts receivable, certain other assets, accounts payable 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 5).
 
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, the Company formally documents the nature and relationships between the hedging instruments and hedged item. The Company assesses, 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. The Company assesses hedge ineffectiveness on a quarterly basis and records the gain or loss related to the ineffective portion of derivative instruments, if any, to current earnings. If the Company determines that a forecasted transaction is no longer probable of occurring, it discontinues hedge accounting and any related unrealized gain or loss on the derivative instrument is recognized in current earnings. The Company uses derivative instruments, including those not designated as part of a hedging transaction, to manage its exposure to


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CELGENE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
movements in foreign exchange and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce the Company’s risk or cost. The Company does not use derivative instruments for speculative trading purposes and is not a party to leveraged derivatives.
 
Cash, Cash Equivalents and Marketable Securities Available for Sale:  The Company invests its excess cash primarily in money market funds, U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities, non-U.S. government, agency and Supranational securities and global corporate debt 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. The Company determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase. Marketable securities available for sale are carried at fair value, held for an unspecified period of time and are intended for use in meeting the Company’s 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, is included in interest and investment income, 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; the Company’s intent to hold to maturity and an evaluation as to whether it is more likely than not that the Company will not have to sell before recovery of its cost basis; 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. The Company invests its excess cash primarily in money market funds, U.S. Treasury fixed rate securities, U.S. government-sponsored agency fixed rate securities, U.S. government-sponsored agency mortgage-backed fixed rate securities and FDIC guaranteed fixed rate corporate debt, non-U.S. government issued securities and non-U.S. government guaranteed securities (See Note 7). The Company may also invest in unrated or below investment grade securities, such as equity in private companies. The Company has 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.
 
The Company sells its 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 the Company’s U.S. trade receivables and net product revenues (See Note 20). 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. The Company continuously monitors the creditworthiness of its customers, including these governments, and has internal policies regarding customer credit limits. The Company also continues to monitor economic conditions, including the volatility associated with international sovereign economies, associated impacts on the financial markets and its business and the sovereign debt crisis in certain European countries. The Company believes the credit and economic conditions within Spain, Italy and Portugal, among other members of the European Union, have deteriorated during 2010. Total net receivables in these three countries amounted to $231.6 million at December 31, 2010. These conditions, as well as inherent variability of timing of cash receipts, have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect on the accounts receivable outstanding in these countries. The Company estimates an allowance for doubtful accounts primarily based on the credit worthiness of its customers, historical payment patterns, aging of receivable balances and general economic conditions.


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CELGENE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Inventory:  Inventories are recorded at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company periodically reviews 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, the Company 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.
 
Assets Held for Sale:  Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of their carrying amount or fair value less costs to sell, and are not depreciated. The assets and related liabilities of a disposal group classified as held for sale are presented separately in the current asset and current liability sections of the consolidated balance sheet.
 
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:  The Company capitalizes 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.
 
Investment in Affiliated Companies:  The Company applies the equity method of accounting to its investments in common stock of affiliated companies and certain investment funds, which primarily invest in companies conducting business in life sciences such as biotechnology, pharmaceuticals, medical technology, medical devices, diagnostics and health and wellness. Equity method investments obtained through the acquisition of former Abraxis have been determined to be non-core activities and are classified as assets held for sale on the consolidated balance sheet.
 
Equity 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; the Company’s 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 the Company 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 occur as described in “Impairment of Long-Lived Assets” below. Intangible assets which are not amortized include acquired in-process


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CELGENE CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
research and development, or IPR&D, and acquired intangible assets held for sale. Amortization is initiated for 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 through the earnings statement. These 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 subject to impairment testing at least annually or when a triggering event occurs that could indicate a potential impairment. The Company tests its goodwill annually for impairment each November 30.
 
Impairment of Long-Lived Assets:  Long-lived assets, such as property, plant and equipment 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 by the amount by which the carrying amount of the assets exceed the fair value of the assets.
 
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. Effective January 1, 2010, the Company changed the functional currency of Celgene International Sarl from the Euro to the U.S. Dollar. Significant changes in economic facts and circumstances supported this change in functional currency and the change was applied on a prospective basis. 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 the Company’s 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 Operations. The Company had net foreign exchange losses of $9.8 million in 2010 and gains of $54.5 million and $4.7 million in 2009 and 2008, respectively.
 
Research and Development Costs:  Research and development costs are expensed as incurred. These include all internal and external costs related to services contracted by the Company. 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 subsequent to regulatory approval are capitalized and amortized over the remaining useful life of the related product.
 
Income Taxes:  The Company utilizes 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. The Company recognizes the benefit of an uncertain tax position that it has taken or expects to take on income tax returns it files 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. 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.
 
Sales discount accruals are based on payment terms extended to customers.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
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 Company utilized historical patient data to estimate the incremental costs related to the Medicaid Managed Care Organizations. In addition, certain international markets have government-sponsored programs that 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, GPOs and end-user customers, consistent with pharmaceutical industry practices. The Company provides a provision for rebates at the time of sale based on the contracted rates and historical redemption rates. Upon receipt of chargeback, due to the availability of product and customer specific information on these programs, the Company then establishes a specific provision for fees or rebates based on the specific terms of each agreement.
 
The Company bases its 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. If the historical data used by the Company to calculate these estimates does 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, the Company tracks 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, 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.
 
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 based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.
 
The Company records 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).
 
The Company recognizes revenue from royalties based on licensees’ sales of its products or products using its technologies. Royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectibility is reasonably assured. If royalties cannot be reasonably estimated or collectibility of a royalty amount is not reasonably assured, royalties are recognized as revenue when the cash is received.
 
Share-Based Compensation:  The cost of share-based compensation is recognized in the Consolidated Statements of Operations based on the fair value of all awards granted, using the Black-Scholes method of valuation. The fair value of each award is determined and the compensation cost is recognized over the service period required to obtain full vesting. Compensation cost to be 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.
 
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 adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt issuance that may be dilutive by the weighted-average number of common shares outstanding


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
during the period increased to include all additional common shares that would have been outstanding as if the outstanding convertible debt was converted into shares of common stock and assuming potentially dilutive common shares, resulting from option exercises, restricted stock units, 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 the Company 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. As of their maturity date, June 1, 2008, substantially all of the Company’s convertible notes were converted into shares of common stock.
 
Comprehensive Income:  The components of comprehensive income (loss) consist of net income (loss), 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, which includes changes in a subsidiary’s functional currency and net asset transfers of common control subsidiaries.
 
A summary of accumulated other comprehensive income (loss), net of tax, is summarized as follows: