10. Income Taxes

The Company utilizes the liability method of accounting for deferred income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company’s policy is to record interest and penalties on uncertain tax positions as income tax expense. As of December 31, 2014 and December 31, 2013, the Company does not believe any material uncertain tax positions were present. Accordingly, interest and penalties have not been accrued due to an uncertain tax position.

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:

	Years ended December 31,
	2014 (Restated)		2013		2012
Percent of pre-tax income:
U.S. federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	6.8	%	—		0.0	%
Permanent items	2.3	%	(2.2	)%	(1.0	)%
Research and development credit	—		2.7	%	1.0	%
Change in valuation allowance	(89.5	)%	(35.5	)%	(35.0	)%

Effective income tax rate	(45.4	)%	0.0	%	0.0	%

The components of income tax expense are as follows:

	Years ended December 31,
	2014 (Restated)			2013		2012

Current:
Federal	$	29,505		$	—	$	—
State	11,440			—		—
Deferred:
Federal	(4,469		)	—		—
State	—			—		—

Income tax expense	$	36,476		$	—	$	—

Significant components of the Company’s deferred tax assets (liabilities) for 2014 and 2013 consist of the following:

	As of December 31,
	2014 (Restated)			2013

Deferred tax assets (liabilities)
Deferred revenue	$	120,611		$	16,667
License and technology payments	14,251			6,407
Share-based compensation	5,679			1,396
Accrued Expenses	442			—
Depreciation	(328		)	(7		)
Federal net operating loss carryforwards	—			30,084
State and local net operating loss carryforwards	—			5,026
Federal research and development credit carryforwards	—			2,966
State research and development credit carryforwards	—			1,483
Deferred income tax assets	140,655			64,022
Valuation allowance	(136,138		)	(64,022		)
Net deferred tax assets	$	4,517		$	—

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible, and is impacted by the Company’s ability to carryback losses to previous years in which the Company had taxable income. In connection with the $83.3 million the Company received from Novo A/S in 2014 under the Novo Agreement, the $200.0 million the Company received from Novartis in May 2014, a portion of which has been deferred for income tax purposes, and the $50.0 million enrollment-based milestone payment the Company earned in September 2014 under the Novartis Agreement, the Company expects to have taxable income in 2014, after taking into account the utilization of its federal net operating losses from prior years and the utilization of its research and development tax credits. As such, the Company made income tax payments of $40.2 million during the year ended December 31, 2014. Due to the Company’s history of losses and lack of other positive evidence to support taxable income after the 2014 tax year, the Company has recorded a valuation allowance against those deferred tax assets that are not expected to be realized. The valuation allowance was approximately $136.1 million and $64.0 million as of December 31, 2014 and 2013, respectively, representing an increase of $72.1 million.

Actual tax benefits result from a stock plan award transaction that exceeds the tax benefit associated with the grant date fair value of the related stock award. The Company recognizes these excess tax benefits in additional paid in capital only if an incremental tax benefit would be realized after considering all other tax benefits presently available to the Company. In 2013, deferred tax assets relating to employee share-based compensation deductions were reduced to reflect exercises of non-qualified stock option grants. Although certain of these deductions were reported on the corporate tax returns and increased net operating losses, these related tax benefits were not recognized for financial reporting purposes.

The Company’s federal, state, and local net operating loss carryforwards of approximately $91.3 million are expected to be utilized in 2014. Utilization of the net operating losses and general business tax credits carryforwards may be subject to a substantial limitation under Sections 382 and 383 of the Internal Revenue Code of 1986 due to changes in ownership of the Company that have occurred previously or that could occur in the future. These ownership changes may limit the amount of net operating losses and general business tax credits carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. The Company has completed a study to determine whether it had undergone an ownership change since the Company’s inception. The Company concluded that it had not undergone an ownership change and the Company expects that it will have the ability to utilize its net operating loss carryforwards against taxable income in 2014.

As further described in Note 18, the Company restated its balance sheets and statements of operations as of and for the quarters ended June 30, 2014, September 30, 2014 and December 31, 2014 and as of and for the year ended December 31, 2014 to reflect the correction of its accounting for valuation allowances related to deferred tax assets. See Note 18 for a summary of the effect of the restatement by major financial statement line items as of these dates and for these periods. The restatement has no effect on any amount reported in the periods prior to June 30, 2014.