15. Income Taxes

As a result of losses incurred, the Company did not provide for any income taxes in the years ended December 31, 2013, 2012 and 2011. A reconciliation of the Company’s effective tax rate to the statutory federal income tax rate is as follows:


	Year Ended December 31,
	2013			2012			2011
Federal income tax at statutory federal rate		35.0	%		35.0	%		35.0	%
State taxes		4.3			4.5			4.2
Permanent differences		(2.0	)		(0.2	)		(0.4	)
Stock-based compensation		(0.6	)		(0.3	)		(1.2	)
Tax credits		12.4			1.1			3.9
Foreign rate differential		(2.8	)		(4.1	)		(4.4	)
Other		(1.5	)		(0.5	)		(0.8	)
Change in valuation allowance		(44.8	)		(35.5	)		(36.3	)

		—	%		—	%		—	%

During the year ended December 31, 2013, the Company recorded a deferred tax liability related to the embedded conversion option of the 4.50% convertible senior notes through equity. This deferred tax liability is reflected in the deferred tax table below, but is appropriately excluded from the effective tax rate.

Temporary differences that give rise to significant net deferred tax assets as of December 31, 2013 and 2012 are as follows:


(in thousands)	2013			2012
Deferred tax assets
Net operating losses	$	113,843		$	77,806
Capitalized research and development expenses		32,771			40,083
Credit carryforwards		37,304			14,398
Depreciation		2,735			2,931
Deferred compensation		8,249			5,068
Accrued expenses		841			1,184
Deferred revenue		28,381			29,936
Other temporary differences		5,885			1,934

Total gross deferred tax asset		230,009			173,340
Valuation allowance		(207,304	)		(169,651	)

Net deferred tax asset		22,705			3,689
Deferred tax liabilities
Intangible assets		(3,234	)		(3,689	)
Debt discount		(19,471	)		—

Net deferred taxes	$	—		$	—

The Company concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2010 through 2013, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2013. However, to the extent the Company utilizes net operating losses from years prior to 2010, the statute remains open to the extent of the net operating losses utilized. The Company annually files a federal income tax return and a state income tax return in Massachusetts. The Company’s policy is to recognize interest and penalties for uncertain tax positions as a component of income tax expense. The Company has not recognized any interest and penalties historically through December 31, 2013.

At December 31, 2013, the Company had net operating loss carryforwards for federal and state income tax purposes of $304.2 million and $230.7 million, respectively. Included in the federal and state net operating loss carryforwards is approximately $11.6 million of deduction related to the exercise of stock options. This amount represents an excess tax benefit, which will be realized when it results in reduction of cash taxes in accordance with Accounting Standards Codification 718. This excess tax benefit will be directly credited to additional paid-in capital when it is realized. The Company’s existing federal and state net operating loss carryforwards will expire in years through 2033. The Company also has available research and development credits for federal and state income tax purposes of approximately $18.6 million and $6.3 million, respectively. The federal and state research and development credits will begin to expire in 2022 and 2024, respectively. As of December 31, 2013, the Company also had available investment tax credits for state income tax purposes of $0.3 million, which will expire in years through 2016 if unused. In addition we have federal orphan drug credits of $14.4 million which begin to expire in 2031. The Company’s management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards, deferred revenue and capitalized research and development expenses. Under the applicable accounting standards, management has considered the Company’s history of losses and concluded that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. Accordingly, the Company has established a full valuation allowance against the deferred tax assets.

Utilization of the net operating loss and research and development credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating loss and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax. The Company has not currently completed an evaluation of ownership changes through December 31, 2013 to assess whether utilization of the Company’s net operating loss or research and development credit carryforwards would be subject to an annual limitation under Section 382 of the Internal Revenue Code. To the extent an ownership change occurs in the future, the net operating loss and credit carryforwards may be subject to limitation.

The Company has not yet conducted a study of its domestic research and development credit carryforwards and orphan drug credits. This study may result in an increase or decrease to the Company’s credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s credits, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. As a result, there would be no impact to the statement of operations and comprehensive loss or cash flows if an adjustment were required.

The change in the valuation allowance against the deferred tax assets in the years ended December 31, 2013, 2012 and 2011 was as follows:


(in thousands)	Balance at beginning of period		Additions		Deductions		Balance at end of period
December 31, 2011	$	103,881		28,802		—	$	132,683
December 31, 2012	$	132,683		36,968		—	$	169,651
December 31, 2013	$	169,651		37,653		—	$	207,304