10-Q 1 a2013063010q.htm 10-Q 2013.06.30 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
 
[x]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
 
OR
 
[  ]      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
 
22-2711928
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
86 Morris Avenue, Summit, NJ
 
07901
(Address of principal executive offices)
 
(Zip Code)
 
 
(908) 673-9000
 
 
 
 
(Registrant’s telephone number, including area code)
 
 
 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
X
 
No
 
 
 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
X
 
No
 
 
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.
Large accelerated filer
X
 
Accelerated filer
 

 
 
 
 
Non-accelerated filer (Do not check if a
smaller reporting company)
 
 
Smaller reporting company
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
 
No
X
 
 
At July 23, 2013, 411,276,009 shares of Common Stock, par value $.01 per share, were outstanding.




CELGENE CORPORATION
 
FORM 10-Q TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements.
 
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue:
 

 
 

 
 
 
 
Net product sales
$
1,564.1

 
$
1,336.6

 
$
2,993.4

 
$
2,582.1

Collaborative agreements and other revenue
3.1

 
3.3

 
10.2

 
5.9

Royalty revenue
31.8

 
26.9

 
60.0

 
52.1

Total revenue
1,599.0

 
1,366.8

 
3,063.6

 
2,640.1

Expenses:
 

 
 

 
 
 
 
Cost of goods sold (excluding amortization of acquired intangible assets)
80.9

 
71.9

 
161.4

 
144.4

Research and development
458.1

 
447.2

 
910.5

 
809.2

Selling, general and administrative
418.1

 
323.0

 
787.1

 
648.8

Amortization of acquired intangible assets
65.7

 
44.1

 
131.4

 
85.9

Acquisition related (gains) charges and restructuring, net
12.5

 
39.3

 
45.7

 
28.2

Total costs and expenses
1,035.3

 
925.5

 
2,036.1

 
1,716.5

Operating income
563.7

 
441.3

 
1,027.5

 
923.6

Other income and (expense):
 

 
 

 
 
 
 
Interest and investment income, net
4.5

 
3.1

 
9.3

 
6.8

Interest (expense)
(19.6
)
 
(11.4
)
 
(37.5
)
 
(22.8
)
Other income (expense), net
9.2

 
7.7

 
6.9

 
7.1

Income before income taxes
557.8

 
440.7

 
1,006.2

 
914.7

Income tax provision
79.7

 
73.3

 
143.2

 
145.8

Net income
$
478.1

 
$
367.4

 
$
863.0

 
$
768.9

Net income per common share:
 

 
 

 
 
 
 
Basic
$
1.15

 
$
0.84

 
$
2.07

 
$
1.76

Diluted
$
1.11

 
$
0.82

 
$
2.00

 
$
1.72

Weighted average shares:
 

 
 

 
 
 
 
Basic
414.1

 
436.7

 
416.0

 
437.5

Diluted
429.3

 
445.4

 
431.0

 
447.1

 
See accompanying Notes to Unaudited Consolidated Financial Statements

3


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
 
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
478.1

 
$
367.4

 
$
863.0

 
$
768.9

Other comprehensive income (loss):
 

 
 

 
 
 
 
Foreign currency translation adjustments
10.0

 
(16.3
)
 
4.1

 
2.1

Change in functional currency of a foreign subsidiary

 

 

 
13.1

Net unrealized gains (losses) related to cash flow hedges:
 

 
 

 
 
 
 
Unrealized holding gains (losses), net of tax expense (benefit) of $0 and ($12.1) for the three-months ended June 30, 2013 and 2012, respectively, and $0.2 and ($11.9) for the six-months ended June 30, 2013 and 2012, respectively.
11.5

 
24.6

 
86.4

 
47.9

Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $2.8 and ($0.4) for the three-months ended June 30, 2013 and 2012, respectively, and $6.2 and ($3.0) for the six-months ended June 30, 2013 and 2012, respectively.
(4.0
)
 
(18.6
)
 
(0.2
)
 
(35.0
)
Net unrealized gains (losses) on marketable securities available for sale:
 

 
 

 
 
 
 
Unrealized holding gains (losses), net of tax expense (benefit) of $19.9 and ($0.1) for the three-months ended June 30, 2013 and 2012, respectively, and $19.9 and ($0.1) for the six-months ended June 30, 2013 and 2012, respectively.
34.9

 
(0.9
)
 
33.0

 
1.6

Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $1.0 and $0 for the three-months ended June 30, 2013 and 2012, respectively, and $1.0 and $0 for the six-months ended June 30, 2013 and 2012, respectively.
1.4

 
0.1

 
2.2

 
(0.3
)
Total other comprehensive income (loss)
53.8

 
(11.1
)
 
125.5

 
29.4

Comprehensive income
$
531.9

 
$
356.3

 
$
988.5

 
$
798.3

 
See accompanying Notes to Unaudited Consolidated Financial Statements

4


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except per share amounts)
 
 
June 30, 2013
 
December 31, 2012
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
1,742.3

 
$
2,090.4

Marketable securities available for sale
2,339.1

 
1,809.9

Accounts receivable, net of allowances of $39.4 and $33.0 at June 30, 2013 and December 31, 2012, respectively
1,014.3

 
960.5

Inventory
294.4

 
259.5

Deferred income taxes
64.7

 
93.2

Other current assets
442.3

 
320.2

Total current assets
5,897.1

 
5,533.7

Property, plant and equipment, net
584.9

 
578.4

Intangible assets, net
2,975.6

 
3,100.4

Goodwill
2,042.1

 
2,042.8

Other assets
464.0

 
479.0

Total assets
$
11,963.7

 
$
11,734.3

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings
$
887.8

 
$
308.5

Accounts payable
142.0

 
145.6

Accrued expenses
711.8

 
775.7

Income taxes payable
11.4

 
11.8

Current portion of deferred revenue
25.7

 
17.3

Other current liabilities
476.4

 
431.3

Total current liabilities
2,255.1

 
1,690.2

Deferred revenue, net of current portion
19.0

 
16.2

Income taxes payable
197.8

 
188.2

Deferred income taxes
923.6

 
1,018.4

Other non-current liabilities
430.7

 
355.5

Long-term debt, net of discount
2,730.4

 
2,771.3

Total liabilities
6,556.6

 
6,039.8

Commitments and Contingencies (Note 15)


 


Stockholders’ Equity:
 

 
 

Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding at June 30, 2013 and December 31, 2012, respectively

 

Common stock, $.01 par value per share, 575.0 million shares authorized; issued 506.6 million and 498.4 million shares at June 30, 2013 and December 31, 2012, respectively
5.1

 
5.0

Common stock in treasury, at cost; 95.4 million and 78.7 million shares at June 30, 2013 and December 31, 2012, respectively
(6,717.1
)
 
(4,823.2
)
Additional paid-in capital
8,157.7

 
7,539.8

Retained earnings
3,885.6

 
3,022.6

Accumulated other comprehensive income (loss)
75.8

 
(49.7
)
Total stockholders’ equity
5,407.1

 
5,694.5

Total liabilities and stockholders’ equity
$
11,963.7

 
$
11,734.3

 
See accompanying Notes to Unaudited Consolidated Financial Statements

5


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
 
Six-Month Periods Ended June 30,
 
2013
 
2012
Cash flows from operating activities:
 

 
 

Net income
$
863.0

 
$
768.9

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation
47.4

 
38.5

Amortization
135.8

 
86.6

Provision for accounts receivable allowances
4.2

 
5.5

Deferred income taxes
(94.9
)
 
174.7

Impairment charges
18.8

 
22.2

Change in value of contingent consideration
45.7

 
25.6

Share-based compensation expense
135.4

 
114.2

Share-based employee benefit plan expense
14.0

 
7.9

Reclassification adjustment for cash flow hedges included in net income
6.0

 
(38.0
)
Unrealized change in value of derivative instruments
(21.0
)
 
0.9

Realized (gains) losses on marketable securities available for sale
3.2

 
(0.3
)
Other, net
(0.5
)
 
(7.1
)
Change in current assets and liabilities, excluding the effect of acquisitions:
 

 
 

Accounts receivable
(74.8
)
 
37.4

Inventory
(45.2
)
 
(34.0
)
Other operating assets
(53.7
)
 
194.1

Assets held for sale, net

 
(1.2
)
Accounts payable and other operating liabilities
97.5

 
(50.8
)
Income tax payable
10.7

 
(379.8
)
Deferred revenue
12.5

 
2.3

Net cash provided by operating activities
1,104.1

 
967.6

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available for sale
1,329.1

 
850.4

Purchases of marketable securities available for sale
(1,773.4
)
 
(761.0
)
Payments for acquisition of business, net of cash acquired

 
(352.2
)
Purchases of intellectual property and other assets
(9.4
)
 
1.8

Capital expenditures
(61.3
)
 
(59.3
)
Purchases of investment securities
(10.4
)
 
(29.2
)
Other investing activities
(1.5
)
 
(0.5
)
Net cash used in investing activities
(526.9
)
 
(350.0
)
Cash flows from financing activities:
 

 
 

Payment for treasury shares
(1,877.9
)
 
(746.7
)
Proceeds from short-term borrowing
3,211.0

 
2,624.3

Principal repayments on short-term borrowing
(2,633.8
)
 
(2,759.7
)
Net proceeds from exercise of common stock options and warrants
320.5

 
240.9

Excess tax benefit from share-based compensation arrangements
81.2

 
28.6

Net cash used in financing activities
(899.0
)
 
(612.6
)
Effect of currency rate changes on cash and cash equivalents
(26.3
)
 
(2.0
)
Net (decrease) increase in cash and cash equivalents
(348.1
)
 
3.0

Cash and cash equivalents at beginning of period
2,090.4

 
1,859.5

Cash and cash equivalents at end of period
$
1,742.3

 
$
1,862.5

 See accompanying Notes to Unaudited Consolidated Financial Statements

6


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(Dollars in millions)
 
 
Six-Month Periods Ended June 30,
 
2013
 
2012
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Change in net unrealized (gain) loss on marketable securities available for sale
$
(52.9
)
 
$
(1.5
)
Matured shares tendered in connection with stock option exercises
$
(29.9
)
 
$
(0.2
)
Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
45.8

 
$
24.5

Income taxes paid
$
154.8

 
$
172.4

  
See accompanying Notes to Unaudited Consolidated Financial Statements

7


CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In all accompanying tables, amounts of dollars expressed in millions,
except per share amounts, unless otherwise indicated)
 
1.  Nature of Business and Basis of Presentation
 
Celgene Corporation, together with its subsidiaries (collectively “we,” “our,”  “us,” “Celgene” or the “Company”) is a global 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 intracellular signaling pathways in cancer and immune cells, immunomodulation in cancer and autoimmune diseases, and therapeutic application of cell therapies.
 
Our primary commercial stage products include REVLIMID®, VIDAZA®, ABRAXANE®, THALOMID® (inclusive of Thalidomide Celgene®), POMALYST® and ISTODAX®.

During the six-months ended June 30, 2013, we have received the following approvals in major markets for new products or additional approvals for existing products:

POMALYST® received its first approval from the U.S. Food and Drug Administration (FDA) in February 2013 for patients with multiple myeloma who have received at least two prior therapies, including lenalidomide and bortezomib, and have demonstrated disease progression on or within 60 days of completion of the last therapy. 
REVLIMID® was approved by the FDA in June 2013 for the treatment of patients with mantle cell lymphoma (MCL) whose disease has relapsed or progressed after two prior therapies, one of which included bortezomib.
REVLIMID® was approved by the European Commission in June 2013 for the treatment of patients with transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndrome (MDS) associated with an isolated deletion 5q cytogenetic abnormality when other therapeutic options are insufficient or inadequate.

Additional sources of revenue include royalties from Novartis on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, other licensing royalties, and the sale of services through our Celgene Cellular Therapeutics subsidiary.
 
The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries. Investments in limited partnerships and interests where we have an equity interest of 50% or less and do not otherwise have a controlling financial interest are accounted for by either the equity or cost method.  We record net income (loss) attributable to non-controlling interest, if any, in our Consolidated Statements of Income equal to the percentage of ownership interest retained in the respective operations by the non-controlling parties.  Certain prior year amounts have been reclassified to conform to the current year’s presentation.
 
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures.  Actual results could differ from those estimates.  We are subject to certain risks and uncertainties related to, among other things, product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition, outcome of civil and governmental proceedings, European credit risk, technological change and product liability.
 
Interim results may not be indicative of the results that may be expected for the full year.  In the opinion of management, these unaudited consolidated financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited consolidated financial statements.
 
2.   Summary of Significant Accounting Policies
 
Our significant accounting policies are described in Note 1 of Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Annual Report on Form 10-K). The following significant accounting policy also applies:

Investments in Other Entities: Investments in equity securities that become publicly traded are accounted for as available-for-sale marketable securities prospectively from the date of their initial public offering.
 

8

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


New Accounting Pronouncements: In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update “Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-2).  ASU 2013-2 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified in its entirety to net income.  The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component.  An entity shall provide this information together, in one location, either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements.  The amendments are effective prospectively for reporting periods beginning after December 15, 2012.  The adoption of ASU 2013-2 did not have a material impact on our financial position or results of operations.
 
3.    Acquisitions and Divestitures
 
Avila Acquisition
 
On March 7, 2012 (Acquisition Date) we acquired all of the outstanding common stock of Avila Therapeutics, Inc., which was subsequently renamed Celgene Avilomics Research (Avila).  The acquisition resulted in Avila becoming our wholly-owned subsidiary.  The results of operations for Avila are included in our consolidated financial statements from the Acquisition Date and the assets and liabilities of Avila have been recorded at their respective fair values on the Acquisition Date and consolidated with our other assets and liabilities.
 
We paid $352.2 million in cash, net of cash acquired, and we may make additional payments based on achievement of developmental and regulatory milestones.  Our potential contingent milestone payments are classified as liabilities, which were measured at fair value as of the Acquisition Date.  The range of potential milestone payments is from no payment if none of the milestones are achieved to an estimated maximum of $595.0 million if all milestones are achieved.  The potential milestones consist of the initiation of phase II and phase III studies, investigational new drug (IND) filings, and other regulatory events related to certain potential products in various stages of development.
 
4.    Earnings Per Share
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
(Amounts in millions, except per share)
2013
 
2012
 
2013
 
2012
Net income
$
478.1

 
$
367.4

 
$
863.0

 
$
768.9

Weighted-average shares:
 

 
 

 
 
 
 
Basic
414.1

 
436.7

 
416.0

 
437.5

Effect of dilutive securities:
 

 
 

 
 
 
 
Options, restricted stock units, warrants and other incentives
15.2

 
8.7

 
15.0

 
9.6

Diluted
429.3

 
445.4

 
431.0

 
447.1

Net income per share:
 

 
 

 
 
 
 
Basic
$
1.15

 
$
0.84

 
$
2.07

 
$
1.76

Diluted
$
1.11

 
$
0.82

 
$
2.00

 
$
1.72

 
The total number of potential shares of common stock excluded from the diluted earnings per share computation because their inclusion would have been anti-dilutive was 3.8 million and 10.4 million shares for the three-month periods ended June 30, 2013 and 2012, respectively. The total number of potential shares of common stock excluded for the six-month periods ended June 30, 2013 and 2012 was 4.1 million and 8.5 million, respectively.

During the period of April 2009 through June 2012, our Board of Directors had approved repurchases of up to an aggregate of $6.500 billion of our common stock. During the three-month period ended June 30, 2013 we repurchased $834.2 million of our common stock and exhausted nearly all previously authorized amounts. In June 2013, our Board of Directors authorized an additional $3.000 billion for repurchases of our common stock, which amount remained available at June 30, 2013 for future share repurchases.

As part of the Board authorized share repurchase program, in February 2013 we entered into an Accelerated Share Repurchase (ASR) agreement with an investment bank to repurchase an aggregate of $600.0 million of our common stock.  As part of the ASR

9

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


agreement we received an initial delivery of 3.0 million shares in February 2013 and a final delivery of 2.2 million shares in May 2013. The total number of shares repurchased under the ASR agreement was 5.2 million shares at a weighted average price of $114.30 per share.
 
We have repurchased 6.9 million and 16.3 million shares of common stock under the program from all sources, including the ASR, during the three- and six-month periods ended June 30, 2013, respectively.
 
5.    Accumulated Other Comprehensive Income (Loss)
 
The components of other comprehensive income (loss) consist of changes in pension liability, changes in net unrealized gains (losses) on marketable securities classified as available-for-sale, net unrealized gains (losses) related to cash flow hedges and changes in foreign currency translation adjustments, which includes changes in a subsidiary’s functional currency.
 
The accumulated balances related to each component of other comprehensive income (loss), net of tax, are summarized as follows:
 
 
Pension
Liability
 
Net Unrealized
Gains (Losses) From
Marketable Securities
 
Net Unrealized
Gains (Losses)
From Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
Balance December 31, 2012
$
(10.1
)
 
$
4.2

 
$
(16.1
)
 
$
(27.7
)
 
$
(49.7
)
Other comprehensive income before reclassifications

 
33.0

 
86.4

 
4.1

 
123.5

Amounts reclassified from accumulated other comprehensive income

 
2.2

 
(0.2
)
 

 
2.0

Net current-period other comprehensive income

 
35.2


86.2


4.1


125.5

Balance June 30, 2013
$
(10.1
)
 
$
39.4


$
70.1


$
(23.6
)

$
75.8

 
 
 
 
 
 
 
 
 


Balance December 31, 2011
$
(5.4
)
 
$
1.8

 
$
8.7

 
$
(67.4
)
 
$
(62.3
)
Other comprehensive income before reclassifications

 
1.6

 
47.9

 
15.2

 
64.7

Amounts reclassified from accumulated other comprehensive income

 
(0.3
)
 
(35.0
)
 

 
(35.3
)
Net current-period other comprehensive income

 
1.3


12.9


15.2

 
29.4

Balance June 30, 2012
$
(5.4
)
 
$
3.1


$
21.6


$
(52.2
)
 
$
(32.9
)
 
 
 
 
 
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
Accumulated Other Comprehensive
 
Affected Line Item in the Consolidated Statements of
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 Income Components
 
 Income
 
2013
 
2012
 
2013
 
2012
Gains (losses) from cash-flow hedges:
 
 

 
 

 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
2.1

 
$
19.0

 
$
(4.3
)
 
$
38.0

Treasury rate lock agreements
 
Interest (expense)
 
(0.9
)
 

 
(1.7
)
 

 
 
Income tax benefit (expense)
 
2.8

 
(0.4
)
 
6.2

 
(3.0
)
Gains (losses) from available-for-sale marketable securities:
 
 

 
 

 


 


Realized gain (loss) on sales of marketable securities
 
Interest and investment income, net
 
(2.4
)
 
(0.1
)
 
(3.2
)
 
0.3

 
 
Income tax benefit (expense)
 
1.0

 

 
1.0

 

Total reclassification, net of tax
 
 
 
$
2.6


$
18.5

 
$
(2.0
)
 
$
35.3



10

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


6.    Financial Instruments and Fair Value Measurement
 
The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2013 and the valuation techniques we utilized to determine such fair value.  Fair values determined based on Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.  Our Level 1 assets consist of marketable equity securities.  Fair values determined based on Level 2 inputs utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active.  Our Level 2 assets consist primarily of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities, non-U.S. government, agency and Supranational securities, global corporate debt securities, asset backed securities, foreign currency forward contracts, purchased foreign currency options and interest rate swap contracts.  Fair values determined based on Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity.  We do not have any Level 3 assets.  Our Level 1 liability relates to our publicly traded Contingent Value Rights (CVRs). See Note 2 of Notes to the Consolidated Financial Statements included in our 2012 Annual Report on Form 10-K for a description of the CVRs.  Our Level 2 liabilities relate to interest rate swap contracts and written foreign currency options.  Our Level 3 liabilities consist of contingent consideration related to undeveloped product rights resulting from the acquisition of Gloucester Pharmaceuticals, Inc. (Gloucester) and contingent consideration related to the undeveloped product rights and the technology platform acquired from the Avila acquisition.  The maximum potential payments related to the contingent consideration from the acquisitions of Gloucester and Avila are estimated to be $120.0 million and $595.0 million, respectively.
 
Balance at
June 30, 2013
 
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Available-for-sale securities
$
2,339.1

 
$
110.2

 
$
2,228.9

 
$

Forward currency contracts
119.3

 

 
119.3

 

Purchased currency options
0.9

 

 
0.9

 

Total assets
$
2,459.3

 
$
110.2

 
$
2,349.1

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(316.3
)
 
$
(316.3
)
 
$

 
$

Written currency options
(0.4
)
 

 
(0.4
)
 

Interest rate swaps
(42.3
)
 

 
(42.3
)
 

Other acquisition related contingent consideration
(204.9
)
 

 

 
(204.9
)
Total liabilities
$
(563.9
)
 
$
(316.3
)
 
$
(42.7
)
 
$
(204.9
)
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2012
 
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 

 
 

 
 

 
 

Available-for-sale securities
$
1,809.9

 
$
0.3

 
$
1,809.6

 
$

Cash equivalents
27.0

 

 
27.0

 

Interest rate swaps
1.7

 

 
1.7

 

Forward currency contracts
17.8

 

 
17.8

 

Purchased currency options
2.7

 

 
2.7

 

Total assets
$
1,859.1

 
$
0.3

 
$
1,858.8

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(277.4
)
 
$
(277.4
)
 
$

 
$

Written currency options
(5.1
)
 

 
(5.1
)
 

Other acquisition related contingent consideration
(198.1
)
 

 

 
(198.1
)
Total liabilities
$
(480.6
)
 
$
(277.4
)
 
$
(5.1
)
 
$
(198.1
)
  

11

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


There were no security transfers between Levels 1 and 2 during the six-month periods ended June 30, 2013 and 2012.  The following table represents a roll-forward of the fair value of Level 3 instruments (significant unobservable inputs): 
 
Six-Month Periods Ended June 30,
 
2013
 
2012
Liabilities:
 

 
 

Balance at beginning of period
$
(198.1
)
 
$
(76.9
)
Amounts acquired or issued

 
(169.4
)
Net change in fair value
(6.8
)
 
(8.3
)
Settlements

 

Transfers in and/or out of Level 3

 

Balance at end of period
$
(204.9
)
 
$
(254.6
)
 
Level 3 liabilities issued during the six-month period ended June 30, 2012 consisted of contingent consideration related to the acquisition of Avila. 

7.    Derivative Instruments and Hedging Activities
 
Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates.  We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency forward contracts, foreign currency option contracts, treasury rate lock agreements and interest rate swap contracts.
 
Foreign Currency Risk Management
 
We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings, and changes in the fair value of assets and liabilities denominated in foreign currencies.
 
Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next three years.  We manage our anticipated transaction exposure principally with foreign currency forward contracts and occasionally foreign currency put and call options.
 
Foreign Currency Forward Contracts:  We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.
 
We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries.  The foreign currency forward hedging contracts outstanding at June 30, 2013 and December 31, 2012 had settlement dates within 36 months.  These foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses on them are reported in other comprehensive income (loss) (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect operations.  Any ineffectiveness on these foreign currency forward contracts is reported in other income (expense), net.  Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at June 30, 2013 and December 31, 2012:


12

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
 
Notional Amount
Foreign Currency
 
June 30, 2013
 
December 31, 2012
Australian Dollar
 
$
15.3

 
$
5.1

British Pound
 
221.7

 
77.9

Canadian Dollar
 
71.6

 
134.4

Euro
 
1,748.1

 
969.3

Japanese Yen
 
656.1

 
236.2

Total
 
$
2,712.8

 
$
1,422.9

 
 
We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis.  As of June 30, 2013, credit risk did not materially change the fair value of our foreign currency forward contracts.
 
We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in other income (expense), net in the current period.  The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at June 30, 2013 and December 31, 2012 were $534.2 million and $795.4 million, respectively.
 
Foreign Currency Option Contracts: We hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in Euros.  Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and amounts but with different strike prices; this combination of transactions is generally referred to as a “collar”.  The expiration dates and notional amounts correspond to the amount and timing of forecasted future foreign currency sales.  If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. dollar equivalent value of our anticipated foreign currency cash flows, however this benefit would be capped at the strike level of the written call, which forms the upper end of the collar.  The premium collected from the call option partially offsets the premium paid for the purchased put option, resulting in a net cost for the collars.
 
In order to fully offset the net cost of the collars, we also sold local currency put options with a lower strike price and the same expiration dates and amounts as the option contracts that were used to hedge sales.  These written put options introduced risk of loss if the U.S. dollar were to strengthen beyond the strike price of the written put options.  We entered into purchased put options that are not designated as hedges in order to partially offset the risk of loss that would be incurred on the written put options if the US dollar were to strengthen beyond the strike price of the written put.  Gains and losses associated with the non-hedge put options have been recorded on the income statement as other income (expense), net.
 
Foreign currency option contracts entered into to hedge forecasted revenue and expenses were as follows at June 30, 2013 and December 31, 2012:
 
 
Notional Amount*
Foreign Currency Option
 
June 30, 2013
 
December 31, 2012
Designated as hedging activity:
 
 

 
 

Purchased Put
 
$
84.9

 
$
228.8

Written Call
 
$
88.8

 
$
235.9

Not designated as hedging activity:
 
 

 
 

Purchased Put
 
$
79.9

 
$
160.5

Written Put
 
$
(79.9
)
 
$
(216.0
)
 
* U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied times the strike value of the foreign currency option.  The local currency notional amounts of our purchased put, and written call that are designated as hedging activity are equal to each other.
 


13

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Interest Rate Risk Management
 
Treasury Rate Lock Agreements:  In anticipation of issuing fixed-rate debt, we may use treasury rate lock agreements (treasury rate locks) that we designate as cash-flow hedges.  To the extent treasury rate locks are effective cash-flow hedges, any realized or unrealized gains or losses on the treasury rate locks are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.
 
During 2012, we entered into treasury rate locks in anticipation of issuing fixed-rate notes that were issued in August 2012.  The treasury rate locks were settled during 2012, resulting in losses of $35.3 million that were recorded to OCI.  No material amounts were recorded in income during the six-month periods ended June 30, 2013 or 2012 as a result of hedge ineffectiveness or hedge components excluded from the assessment of effectiveness. We have not entered into any treasury rate locks during the six months ended June 30, 2013 and at June 30, 2013 we had no outstanding treasury rate locks.
 
Interest Rate Swap Contracts:  From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts.  The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates.  Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swap are recorded on the Consolidated Balance Sheets with no net impact recorded in income.  Any net interest payments made or received on interest rate swap contracts are recognized as interest expense.  We may terminate the hedging relationship of certain swap contracts by settling the contracts or by entering into offsetting contracts.  At the time a hedging relationship is terminated, accumulated gains or losses associated with the swap contract are measured and recorded as a reduction of current and future interest expense associated with the previously hedged notes.
 
During the six-month period ended June 30, 2013, we entered into swap contracts that were designated as hedges of our fixed rate notes due in 2015, 2017, 2020, and 2022 and also terminated the hedging relationship by settling certain of those swap contracts during the six-month period ended June 30, 2013.  This resulted in net proceeds received of $16.2 million which is accounted for as a reduction of current and future interest expense associated with these notes.  See Note 11 for additional details related to reductions of current and future interest expense.

At June 30, 2013, we were a party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts match the amount of the hedged fixed-rate notes.  The following table summarizes the notional amounts of our outstanding swap contracts at June 30, 2013 and December 31, 2012: 
 
 
 
Notional Amount
 
 
June 30, 2013
 
December 31, 2012
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 

 
 

2.450% senior notes due 2015
 
$
300.0

 
$

1.900% senior notes due 2017
 
300.0

 
100.0

3.950% senior notes due 2020
 
500.0

 

3.250% senior notes due 2022 (1)
 
800.0

 
200.0

Total
 
$
1,900.0

 
$
300.0

 
(1) Additional pay-floating, receive-fixed interest rate swap contracts with a notional amount of $100.0 million were entered into during July 2013. These additional interest rate swap contracts are designated as fair value hedges of fixed-rate notes.

14

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of June 30, 2013 and December 31, 2012:
 
 
 
June 30, 2013
 
 
Asset Derivatives
 
Liability Derivatives
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 

 
 
 
 

 
Foreign exchange contracts*
 
Other current assets
 
$
102.2

 
Other current assets
 
$
43.5

 
Other current liabilities
 
17.3

 
Other current liabilities
 
20.1

 
Other non-current assets
 
54.8

 
Other non-current assets
 
7.7

 
Other non-current liabilities
 
2.4

 
Other non-current liabilities
 
9.9

 
Interest rate swap agreements
 
Other current assets
 
3.8

 
Other current assets
 

 
Other non-current assets
 

 
Other non-current assets
 

 
Other non-current liabilities
 

 
Other non-current liabilities
 
47.8

Derivatives not designated as hedging instruments:
 
 
 
 

 
 
 
 

Foreign exchange contracts*
 
Other current assets
 
55.4

 
Other current assets
 
24.5

 
Other current liabilities
 
11.3

 
Other current liabilities
 
19.9

 
Other non-current assets
 
2.1

 
Other non-current assets
 

Interest rate swap agreements
 
Other non-current assets
 
1.6

 
Other non-current assets
 

Total
 
 
 
$
250.9

 
 
 
$
173.4

 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
Asset Derivatives
 
Liability Derivatives
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 

 
 
 
 

 
Foreign exchange contracts*
 
Other current assets
 
$
35.2

 
Other current assets
 
$
12.7

 
Other current liabilities
 
9.1

 
Other current liabilities
 
31.4

 
Other non-current assets
 
30.5

 
Other non-current assets
 
13.8

 
Interest rate swap agreements
 
Other current assets
 
0.1

 
Other current assets
 

 
Other non-current assets
 
0.1

 
Other non-current assets
 
0.2

 
Other non-current liabilities
 

 
Other non-current liabilities
 
0.6

Derivatives not designated as hedging instruments:
 
 
 
 

 
 
 
 

Foreign exchange contracts*
 
Other current assets
 
45.8

 
Other current assets
 
36.3

 
Other current liabilities
 
10.4

 
Other current liabilities
 
21.4

Interest rate swap agreements
 
Other current assets
 
0.6

 
Other current assets
 

 
Other non-current assets
 
1.7

 
Other non-current assets
 

Total
 
 
 
$
133.5

 
 
 
$
116.4

 
* Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20. 
 

15

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2013 and 2012:
 
Three-Month Period Ended June 30, 2013
 
 
 
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative (1)
 
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Instrument
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
 
Foreign exchange contracts
$
11.5

 
Net product sales
 
$
2.1

 
Other income, net
 
$
0.5

 
(2)
Treasury rate lock agreements
$

 
Interest Expense
 
$
(0.9
)
 
 
 
 

 
 
 
(1) Net gains of $51.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
(2) The amount of net gains recognized in income represents $0.5 million of gains related to amounts excluded from the assessment of hedge effectiveness.

 
Three-Month Period Ended June 30, 2012
 
 
 
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
 
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Instrument
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
 
Foreign exchange contracts
$
44.2

 
Net product sales
 
$
19.0

 
Other income, net
 
$
0.1

 
(1)
Treasury rate lock agreements
$
(31.8
)
 
 
 


 
 
 


 
 
 
(1) The amount of net gains recognized in income represents $0.8 million in losses related to the ineffective portion of the hedging relationships and $0.9 million of gains related to amounts excluded from the assessment of hedge effectiveness. 

 
Six-Month Period Ended June 30, 2013
 
 
 
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
 
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Instrument
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
 
Foreign exchange contracts
$
86.6

 
Net product sales
 
$
(4.3
)
 
Other income, net
 
$
3.9

 
(1
)
Treasury rate lock agreements
$

 
Interest Expense
 
$
(1.7
)
 
 
 
 

 
 
 
(1) The amount of net gains recognized in income represents $1.9 million in gains related to the ineffective portion of the hedging relationships and $2.0 million of gains related to amounts excluded from the assessment of hedge effectiveness.
 
 

16

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
Six-Month Period Ended June 30, 2012
 
 
 
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
 
Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Instrument
(Effective Portion)
 
(Effective Portion)
 
(Effective Portion)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)
 
 
Foreign exchange contracts
$
67.8

 
Net product sales
 
$
38.0

 
Other income, net
 
$
(1.7
)
 
(1)
Treasury rate lock agreements
$
(31.8
)
 
 
 


 
 
 


 
 
 
(1) The amount of net losses recognized in income represents $5.2 million in losses related to the ineffective portion of the hedging relationships and $3.5 million of gains related to amounts excluded from the assessment of hedge effectiveness. 
 
The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2013 and 2012:
 
 

 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
Location of Gain (Loss) Recognized in Income
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
Instrument
 
on Derivative
 
2013
 
2012
 
2013
 
2012
Interest rate swap agreements
 
Interest expense
 
$
5.2

 
$
1.8

 
$
12.0

 
$
3.6

 
 
 
 
 
 
 
 
 
 
 
 
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2013 and 2012:
 
 
 

 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
Location of Gain (Loss) Recognized in Income
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
Instrument
 
on Derivative
 
2013
 
2012
 
2013
 
2012
Foreign exchange contracts
 
Other income, net
 
$
30.6

 
$
23.8

 
$
69.2

 
$
15.9

Treasury rate lock agreements
 
Other income, net
 
$

 
$
3.7

 
$

 
$
3.7

 
The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included in other income (expense), net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods. 

8.    Cash, Cash Equivalents and Marketable Securities Available-for-Sale
 
Money market funds of $598.1 million and $1.160 billion at June 30, 2013 and December 31, 2012, respectively, were recorded at cost, which approximates fair value and are included in cash and cash equivalents.
 





17

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale securities by major security type and class of security at June 30, 2013 and December 31, 2012 were as follows:
June 30, 2013
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
849.1

 
$
0.2

 
$
(0.5
)
 
$
848.8

U.S. government-sponsored agency securities
 
238.8

 
0.1

 
(0.6
)
 
238.3

U.S. government-sponsored agency MBS
 
578.2

 
0.5

 
(10.5
)
 
568.2

Non-U.S. government, agency and Supranational securities
 
10.4

 

 
(0.1
)
 
10.3

Corporate debt - global
 
404.4

 
0.4

 
(2.9
)
 
401.9

Asset backed securities
 
161.8

 

 
(0.4
)
 
161.4

Marketable equity securities
 
39.3

 
71.3

 
(0.4
)
 
110.2

Total available-for-sale marketable securities
 
$
2,282.0

 
$
72.5

 
$
(15.4
)

$
2,339.1

 
December 31, 2012
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
902.0

 
$
0.5

 
$

 
$
902.5

U.S. government-sponsored agency securities
 
303.5

 
0.3

 

 
303.8

U.S. government-sponsored agency MBS
 
387.2

 
1.6

 
(1.8
)
 
387.0

Non-U.S. government, agency and Supranational securities
 
7.1

 

 

 
7.1

Corporate debt - global
 
208.5

 
0.9

 
(0.2
)
 
209.2

Marketable equity securities
 
0.4

 

 
(0.1
)
 
0.3

Total available-for-sale marketable securities
 
$
1,808.7

 
$
3.3


$
(2.1
)

$
1,809.9

 
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 mortgage-backed securities (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 and 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.  Asset backed securities consist of triple-A rated securities with cash flows collateralized by credit card receivables and auto loans. Marketable equity securities consist of investments in equity securities that have become publicly traded.  The increase in net unrealized gains in marketable equity securities during the six-month period ended June 30, 2013 primarily reflects the increase in market value for certain equity investments subsequent to their respective initial public offerings. Net unrealized losses in the marketable debt securities primarily reflect the impact of increased interest rates at June 30, 2013.

Duration periods of available-for-sale debt securities at June 30, 2013 were as follows:
 
 
 
Amortized
Cost
 
Fair
Value
Duration of one year or less
 
$
310.5

 
$
310.5

Duration of one through three years
 
1,528.8

 
1,523.8

Duration of three through five years
 
356.3

 
348.7

Duration of over five years
 
47.1

 
45.9

Total
 
$
2,242.7

 
$
2,228.9

 
 






18

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


9.    Inventory
 
A summary of inventories by major category at June 30, 2013 and December 31, 2012 follows:
 
June 30, 2013
 
December 31, 2012
Raw materials
$
111.2

 
$
79.2

Work in process
83.6

 
86.5

Finished goods
99.6

 
93.8

Total
$
294.4

 
$
259.5

 
10.    Intangible Assets and Goodwill
 
Intangible Assets:  Our intangible assets consist of developed product rights obtained primarily from the Pharmion, Gloucester and Abraxis acquisitions, in-process research and development (IPR&D) product rights from the Gloucester and Avila acquisitions and technology obtained primarily from the Avila acquisition. Also included are contract-based licenses and other miscellaneous intangibles.  The amortization periods related to our finite-lived intangible assets range from one to 17 years.  The following summary of intangible assets by category includes intangibles currently being amortized and intangibles not yet subject to amortization:
June 30, 2013
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted Average Life (Years)
Amortizable intangible assets:
 
 

 
 

 
 

 
 
Acquired developed product rights
 
$
3,405.9

 
$
(920.4
)
 
$
2,485.5

 
13.0
Technology
 
333.7

 
(63.6
)
 
270.1

 
7.0
Licenses
 
66.2

 
(11.9
)
 
54.3

 
16.5
Other
 
44.9

 
(17.1
)
 
27.8

 
8.3
 
 
3,850.7

 
(1,013.0
)

2,837.7


12.5
Non-amortized intangible assets:
 


 
 

 
 

 
 
Acquired IPR&D product rights
 
137.9

 

 
137.9

 
 
Total intangible assets
 
$
3,988.6

 
$
(1,013.0
)

$
2,975.6

 
 
 
 

 
 
 

 

December 31, 2012
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted Average Life (Years)
Amortizable intangible assets:
 
 

 
 

 
 

 
 
Acquired developed product rights
 
$
3,400.4

 
$
(814.5
)
 
$
2,585.9

 
13.0
Technology
 
333.3

 
(39.8
)
 
293.5

 
7.0
Licenses
 
64.3

 
(10.0
)
 
54.3

 
16.8
Other
 
43.4

 
(14.6
)
 
28.8

 
8.5
 
 
3,841.4

 
(878.9
)
 
2,962.5

 
12.5
Non-amortized intangible assets:
 
 

 
 

 
 

 
 
Acquired IPR&D product rights
 
137.9

 

 
137.9

 
 
Total intangible assets
 
$
3,979.3

 
$
(878.9
)
 
$
3,100.4

 
 
 
The gross carrying value of intangible assets increased by $9.3 million at June 30, 2013 compared to December 31, 2012 primarily resulting from the acquisition of $5.5 million in developed product rights and $3.8 million from other miscellaneous agreements.

Amortization expense was $67.2 million and $44.6 million for the three-month periods ended June 30, 2013 and 2012, respectively, and $134.1 million and $86.6 million for the six-month periods ended June 30, 2013 and 2012, respectively.  The increases in amortization expense in the quarter and year-to-date periods ended June 30, 2013 were primarily due to the October 2012 approval of ABRAXANE® in the U.S. for the treatment of non-small cell lung cancer (NSCLC) which resulted in the commencement of amortization of the related intangible asset and an increase in amortization of technology related to the March 7, 2012 acquisition of Avila and its Avilomics™ platform.  Assuming no changes in the gross carrying amount of intangible assets, the amortization

19

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


of intangible assets for years 2013 through 2017 is estimated to be in the range of approximately $255.0 million to $270.0 million annually. 
 
Goodwill:  At June 30, 2013, our goodwill related to the 2012 acquisition of Avila, the 2010 acquisitions of Abraxis and Gloucester, the 2008 acquisition of Pharmion and the 2004 acquisition of Penn T Limited.
 
The change in carrying value of goodwill is summarized as follows:
Balance at December 31, 2012
$
2,042.8

Tax benefit on the exercise of Pharmion converted stock options
(0.7
)
Balance at June 30, 2013
$
2,042.1

 
 
11.  Debt
 
Senior Notes: Summarized below are the carrying values of our senior notes at June 30, 2013 and December 31, 2012:
 
 
June 30, 2013
 
December 31, 2012
2.450% senior notes due 2015
$
517.0

 
$
520.1

1.900% senior notes due 2017
499.2

 
500.6

3.950% senior notes due 2020
491.4

 
499.0

3.250% senior notes due 2022
973.2

 
1,002.1

5.700% senior notes due 2040
249.6

 
249.5

Total long-term debt
$
2,730.4

 
$
2,771.3

 
At June 30, 2013, the fair value of our outstanding Senior Notes was $2.755 billion and represented a Level 2 measurement within the fair value measurement hierarchy.
 
During 2012, we entered into treasury rate locks in anticipation of issuing the fixed-rate notes that were issued in August 2012.  As of June 30, 2013, a balance of $32.3 million in losses remained in OCI related to treasury rate locks and will be recognized as interest expense over the life of the 2017 notes and the 2022 notes.
 
At June 30, 2013, we were party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes as described in Note 7.  Our swap contracts outstanding at June 30, 2013 effectively convert the hedged portion of our fixed-rate notes to floating rates.  From time to time we terminate the hedging relationship on certain of our swap contracts by settling the contracts or by entering into offsetting contracts.  Any net proceeds received or paid in these settlements are accounted for as a reduction or increase of current and future interest expense associated with the previously hedged notes.  As of June 30, 2013, we had a balance of $31.2 million of gains recorded as a reduction of our debt as a result of past swap contract settlements, including $9.7 million related to the settlement of swap contracts during the six months ended June 30, 2013.
 
Commercial Paper:  The maximum aggregate amount available under our Commercial Paper program was increased by $500.0 million to $1.500 billion in May 2013. The carrying value of Commercial Paper as of June 30, 2013 and December 31, 2012 was $887.8 million and $308.5 million, respectively, and approximated its fair value.  The effective interest rate on the outstanding Commercial Paper balance at June 30, 2013 was 0.3%.
 
Senior Unsecured Credit Facility:  We maintain a senior unsecured revolving credit facility (Credit Facility) that provides revolving credit in the aggregate amount of $1.500 billion, which was increased from $1.000 billion in April 2013. During April 2013, the term of the Credit Facility was also extended from September 2, 2016 to April 18, 2018.   Subject to certain conditions, we have the right to increase the amount of the Credit Facility (but in no event more than one time per annum) up to a maximum aggregate amount of $1.750 billion.  Amounts may be borrowed in U.S. dollars for working capital, capital expenditures and other corporate purposes. The Credit Facility currently serves as backup liquidity for our Commercial Paper borrowings.  At June 30, 2013 and December 31, 2012, there was no outstanding borrowing against the Credit Facility.
 
The Credit Facility contains affirmative and negative covenants including certain customary financial covenants.  We were in compliance with all financial covenants as of June 30, 2013. 


20

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


12.    Share-Based Compensation
 
We have a stockholder-approved stock incentive plan, the 2008 Stock Incentive Plan (Amended and Restated as of April 17, 2013) (Plan) which provides for the granting of options, restricted stock awards (RSUs), stock appreciation rights, performance awards (PSUs) and other share-based awards to our employees and officers.  The Management Compensation and Development Committee of the Board of Directors (Compensation Committee) may determine the type, amount and terms, including vesting, of any awards made under the Plan.

On June 12, 2013, our stockholders approved an amendment and restatement of the Plan, which included the following key modifications: adoption of an aggregate share reserve of 104,981,641 shares of Common Stock, which includes 9,000,000 new shares of Common Stock; increase in the maximum payment to an eligible employee under a cash-based performance award from $4.0 million to $6.0 million; and extension of the term of the plan through April 17, 2023.
 
The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2013 and 2012:
 
 
Three-Month Periods Ended
June 30,
 
Six-Month Periods Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Cost of goods sold
$
3.7

 
$
3.0

 
$
6.5

 
$
5.8

Research and development
31.8

 
23.5

 
58.8

 
48.6

Selling, general and administrative
34.3

 
27.1

 
70.1

 
53.9

Total share-based compensation expense
69.8

 
53.6

 
135.4

 
108.3

Tax benefit related to share-based compensation expense
18.3

 
14.1

 
36.2

 
28.7

Reduction in income
$
51.5

 
$
39.5

 
$
99.2

 
$
79.6

 
Share-based compensation cost included in inventory was $1.7 million and $1.2 million at June 30, 2013 and December 31, 2012, respectively.
 
We utilize share-based compensation in the form of stock options, RSUs and PSUs.  The following table summarizes the activity for stock options, RSUs and PSUs for the six-month period ended June 30, 2013 (in thousands):
 
Stock
Options
 
Restricted
Stock
Units
 
Performance-
Based Restricted
Stock
Units
Outstanding at December 31, 2012
42,592

 
4,463

 
26

Changes during the Year:
 

 
 

 
 

Granted
4,371

 
1,410

 
45

Exercised / Released
(7,118
)
 
(773
)
 
(6
)
Forfeited
(670
)
 
(125
)
 
(8
)
Expired
(34
)
 
N/A

 
N/A

Outstanding at June 30, 2013
39,141

 
4,975


57

 
Total compensation cost related to nonvested awards not yet recognized and the weighted-average periods over which the awards are expected to be recognized at June 30, 2013 were as follows (dollars in millions):
 
Stock
Options
 
Restricted
Stock
Units
 
Performance-
Based Restricted
Stock Units
Unrecognized compensation cost
$
364.9

 
$
303.0

 
$
5.6

Expected weighted-average period in years of compensation cost to be recognized
2.3

 
1.8

 
2.1

 
 




21

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


13.    Income Taxes
 
We regularly evaluate the likelihood of the realization of our deferred tax assets and reduce the carrying amount of those deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized.  We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors.  Significant judgment is required in making this assessment.
 
Our tax returns are under routine examination in many taxing jurisdictions.  The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed.   Our U.S. federal income tax returns have been audited by the IRS through the year ended December 31, 2008. Tax returns for the years ended December 31, 2009, 2010, and 2011 are currently under examination by the IRS.  We are also subject to audits by various state and foreign taxing authorities, including, but not limited to, most U.S. states and major European and Asian countries where we have operations.
 
We regularly reevaluate our tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, judicial precedents, etc.) that would reduce the technical merits of the position to below more likely than not. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We apply a variety of methodologies in making these estimates and assumptions, which include studies performed by independent economists, advice from industry and subject experts, evaluation of public actions taken by the IRS and other taxing authorities, as well as our industry experience.  These evaluations are based on estimates and assumptions that have been deemed reasonable by management.  However, if management’s estimates are not representative of actual outcomes, our results of operations could be materially impacted.
 
Unrecognized tax benefits, generally represented by liabilities on the consolidated balance sheet and all subject to tax examinations, arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above.  These unrecognized tax benefits relate primarily to issues common among multinational corporations.  Virtually all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate.  We account for interest and potential penalties related to uncertain tax positions as part of our provision for income taxes. During the second quarter of 2013, gross unrecognized tax benefits decreased by $4.3 million, exclusive of interest, as a result of net settlements and ongoing examinations related to tax positions taken in prior years. Increases to the amount of unrecognized tax benefits since January 1, 2013 of approximately $13.9 million relate primarily to current year operations.  The liability for unrecognized tax benefits is expected to increase in the next 12 months relating to operations occurring in that period.  Any settlements of examinations with taxing authorities or statute of limitations expirations would likely result in a significant decrease in our unrecognized tax benefits.  Our estimates of tax benefits and potential tax benefits may not be representative of actual outcomes, and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire.
 
14.    Collaboration Agreements
 
From time to time, we enter into collaborative arrangements, for the research and development, license, manufacture and/or commercialization of products and/or product candidates.  In addition, we also acquire product and research and development technology rights and establish research and development collaborations with third parties to enhance our strategic position within our industry by strengthening and diversifying our research and development capabilities, product pipeline and marketed product base. These arrangements may include non-refundable, upfront payments, option payments for the purchase or license of additional rights, development, regulatory and commercial performance milestone payments, cost sharing arrangements, royalty payments and profit sharing. Certain of these arrangements obligate us to make additional equity investments in the event of an initial public offering of equity by our partners. The activities under these collaboration agreements are performed with no guarantee of either technological or commercial success.  We do not consider any individual arrangement to be material.  See Note 17 of Notes to the Consolidated Financial Statements included in our 2012 Annual Report on Form 10-K for a description of certain other collaboration agreements entered into prior to January 1, 2013.  The following is a brief description of certain collaborations entered into during the six months ended June 30, 2013:
 

22

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


bluebird bio, Inc.:  On March 19, 2013, we entered into a collaboration agreement with bluebird bio, Inc. (bluebird) to discover, develop and commercialize novel disease-altering gene therapies in oncology. The collaboration focuses on applying gene therapy technology to modify a patient’s own T-cells, known as chimeric antigen receptor (CAR) T-cells, to target and destroy cancer cells. The collaboration has the potential to lead to the development of multiple CAR T-cell products. Under the agreement, we have an option to license any products resulting from the collaboration after the completion of a phase I clinical study by bluebird for each such product.
 
The financial terms of the agreement include an upfront payment and up to $225.0 million per product in aggregate potential option fees and clinical and regulatory milestones. Bluebird also has the right to participate in the development and commercialization of any licensed products resulting from the collaboration through a 50/50 co-development and profit share in the United States in exchange for a reduction of milestone payments. Royalties would also be paid to bluebird in regions where there is no profit share, including in the United States if bluebird declines to exercise their co-development and profit sharing rights. 
 
The agreement has a termination date of March 19, 2016 and we have the right to unilaterally extend the agreement until March 19, 2019 with the payment of extension fees.  Further, we have the ability to terminate the collaboration at our discretion upon 90 days written notice to bluebird.  If a product is optioned, the parties will enter into a pre-negotiated license agreement and potentially a co-development agreement should bluebird exercise its right to participate in the development and commercialization in the United States.  The license agreement, if not terminated sooner, would expire upon the expiration of all applicable royalty terms under the agreement with respect to the particular product and the co-development agreement, if not terminated sooner, would expire when the product is no longer being developed or commercialized in the United States.  Upon the expiration of a particular license agreement, we will have a fully paid-up, royalty-free license to use bluebird intellectual property to manufacture, market, use and sell such licensed product developed under the agreement.

FORMA Therapeutics Holdings, LLC: On April 19, 2013, we entered into a collaboration agreement with FORMA Therapeutics Holdings, LLC (FORMA) under which the parties will discover, develop and commercialize drug candidates to regulate protein homeostasis targets. Protein homeostasis, which is important in oncology, neurodegenerative and other disorders, involves a tightly regulated network of pathways controlling the biogenesis, folding, transport and degradation of proteins.

The collaboration was launched with an upfront payment that enables us to evaluate selected targets and lead assets in protein homeostasis pathways during the pre-clinical phase. Based on such evaluation, we will have the right to obtain exclusive licenses with respect to the development and commercialization of multiple drug candidates outside of the United States, in exchange for research and early development payments of up to approximately $200.0 million to FORMA. Under the terms of the collaboration agreement, FORMA is incentivized to advance the full complement of drug candidates through Phase I, while Celgene will be responsible for all further global clinical development for each licensed candidate.  FORMA is eligible to receive up to an additional $315.0 million in potential payments based upon development, regulatory and sales objectives for the first ex-U.S. license. FORMA is also eligible to receive potential payments for successive licenses, which escalate for productivity, increasing up to a maximum of an additional $430.0 million per program.  In addition, FORMA will receive royalties on ex-U.S. sales and additional payments if multiple drug candidates reach defined cumulative sales objectives. The collaboration agreement includes provisions for Celgene to obtain rights with respect to development and commercialization of drug candidates inside the United States in exchange for additional payments.

Under the collaboration, the parties will perform initial research and development for a term of four years. If, during such research term, a drug candidate meets certain criteria, then the parties will enter into a pre-negotiated license agreement and the collaboration will continue until all license agreements have expired and all applicable royalty terms under the collaboration with respect to the particular products have expired. Each license agreement, if not terminated sooner, would expire upon the expiration of all applicable royalty terms under such agreement. Upon the expiration of each license agreement, we will have an exclusive, fully-paid, royalty-free license to use the applicable FORMA intellectual property to manufacture, market, use and sell the product developed under such agreement outside of the United States.

In addition to the collaboration arrangements described above, we entered into a number of collaborative arrangements during the six months ended June 30, 2013 that resulted in $12.0 million of assets for investments in equity or other assets.  These additional arrangements include the potential for future milestone payments of up to an aggregate $228.0 million related to the attainment of specified development and regulatory approval milestones over a period of several years.  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.
 

23

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Upfront payments to all collaboration partners during the three- and six-month periods ended June 30, 2013 resulted in research and development expenses of $81.8 million and $177.5 million, respectively.
 
15.    Commitments and Contingencies
 
Collaboration Arrangements:  We have entered into certain research and development collaboration agreements 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 and uncertainty of these arrangements and any future potential payments, no amounts have been recorded in our accompanying Consolidated Balance Sheets at June 30, 2013 and December 31, 2012.
 
Contingencies:  We believe we maintain insurance coverage adequate for our current needs.  Our operations are subject to environmental laws and regulations, which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes.  We review the effects of such laws and regulations on our operations and modify our operations as appropriate.  We believe we are in substantial compliance with all applicable environmental laws and regulations.
 
16.    Legal Proceedings
 
We and certain of our subsidiaries are involved in various patent, trademark, commercial and other claims; government investigations; and other legal proceedings that arise from time to time in the ordinary course of business.  Like many companies in our industry, we have from time to time received inquiries and subpoenas and other types of information requests from government authorities, and we have been subject to claims and other actions related to our business activities.  While the ultimate outcome of investigations and legal proceedings are difficult to predict, adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, product recalls, incurrence of costs and payment of significant penalties, which may have a material adverse effect on our results of operations, cash flows or financial condition.
 
Pending patent proceedings include challenges to the scope, validity or enforceability of our patents relating to certain of our 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 proceedings could result in a loss of patent protection for the drug at issue, which could lead to a significant loss of sales of that product and could materially affect future results of operations.
 
Among the principal matters pending are the following:
 
In the fourth quarter of 2009, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission (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 for the FTC 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 cooperate with the FTC and State of Connecticut investigations.
 
In the first quarter of 2011, the United States Attorney’s Office for the Central District of California informed us that they are investigating possible off-label marketing and improper payments to physicians in connection with the sales of THALOMID® and REVLIMID®.  In the third quarter of 2012, we learned that two other United States Attorneys’ offices (the Northern District of Alabama and the Eastern District of Texas) and various state Attorneys General are conducting related investigations.  We are cooperating with these investigations.

On June 7, 2013, Children's Medical Center Corporation (CMCC) filed a lawsuit against us in the Superior Court of the Commonwealth of Massachusetts.  CMCC alleges that our obligation under a license agreement relating to certain thalidomide analog patents entered into in December 2002 to pay a 1% royalty on REVLIMID® net sales revenue and a 2.5% royalty on POMALYST® net sales revenue extends beyond February 28, 2013 and that our failure to make royalty payments to CMCC with respect to REVLIMID® and POMALYST® subsequent to February 28, 2013 breached the license agreement.  We disagree with CMCC's allegations.  CMCC is seeking an unspecified amount of damages and a declaration that the license agreement remains in full force and effect.  In July 2013, we removed these proceedings to the Federal District Court for the District of Massachusetts.

24

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


We intend to vigorously defend against CMCC's claims.  We do not believe that the ultimate outcome of this proceeding will have a material adverse impact on our financial condition.
 
REVLIMID®: We had previously announced that we received a Notice Letter dated August 30, 2010, from Natco Pharma Limited of India (Natco) notifying us of Natco’s Abbreviated New Drug Application (ANDA), which contains Paragraph IV certifications against certain of Celgene’s patents that are listed in the FDA Approved Drug Products With Therapeutic Equivalence Evaluations (the “Orange Book”) for REVLIMID® (lenalidomide).  Under the Hatch-Waxman Act of 1984, a generic manufacturer may file an ANDA containing a certification (a “Paragraph IV certification”) challenging the validity or infringement of a patent listed in the Orange Book.  Natco’s Notice letter alleges, among other things, that certain claims of United States Patent Nos. 5,635,517 (the “’517 patent”), 6,045,501 (the “’501 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”) are invalid, unenforceable, and/or not infringed.  Natco’s Notice Letter was sent in connection with its filing of an ANDA seeking permission from the FDA to market a generic version of 25mg, 15mg, 10mg and 5mg REVLIMID® capsules.
 
On October 8, 2010, we filed an infringement action in the United States District Court of New Jersey against Natco in response to the Notice Letter with respect to the ’517 patent, the ’501 patent, United States Patent No. 6,281,230 (the “’230 patent”), the ’720 patent, the ’554 patent, the ’976 patent, the ’977 patent, the ’784 patent, the ’106 patent and the ’800 patent.
 
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 products.  After filing the infringement action, we learned the identity of Natco’s U.S. partner, Arrow International Limited (“Arrow”), and filed an amended complaint on January 7, 2011, adding Arrow as a defendant.  On March 25, 2011, we filed a second amended complaint naming Natco, Arrow and Watson Laboratories, Inc. (“Watson”, a wholly-owned subsidiary of Actavis, Inc. (formerly known as Watson Pharmaceuticals, Inc.), which is Arrow’s parent) as defendants.  Those three entities remain the current defendants in that action.
 
On June 12, 2012, we received a Second Notice Letter from Natco, notifying us of Natco’s submission in its ANDA of new, additional Paragraph IV certifications against the ’517 patent, the ’230 patent and United States Patent Nos. 7,189,740 (the “’740 patent”), 7,855,217 (the “’217 patent”) and 7,968,569 (the “’569 patent”).  On July 20, 2012, we filed a new infringement action in the United States District Court of New Jersey against Natco, Arrow, and Watson in response to the Second Notice Letter with respect to the ’517 patent, the ’230 patent, the ’740 patent, and the ’569 patent, as well as two non-Orange Book listed patents, United States Patent Nos. 7,977,357 (the “’357 patent”) and 8,193,219 (the “’219 patent”). That action was consolidated with the original action. Natco filed its Answer and Counterclaims on September 28, 2012. Natco’s counterclaims in the second action are similar to its counterclaims in the first action. In the second action, Natco added counterclaims against United States Patent No. 8,204,763 (the “’763 patent”), which we have not asserted against Natco.  We moved to dismiss those counterclaims related to the ’763 patent for lack of subject matter jurisdiction, and Natco withdrew its counterclaims after the Court ordered jurisdictional discovery.

On March 14, 2013, we received a Third Notice Letter from Natco notifying us of Natco’s submission in its ANDA of new, additional Paragraph IV certifications against United States Patent Nos. 8,288,415 (the “’415 patent”), and 8,315,886 (the “’886” patent).  On March 22, 2013, we filed a Third Amended Complaint in the original action in the United States District Court of New Jersey against Natco, Arrow and Watson in response to the Third Notice Letter regarding the ‘415 and ‘886 patent.  Natco filed its Answer and Counterclaims on April 8, 2013.  Natco’s counterclaims in response to the Third Amended Complaint are similar to its counterclaims in the two previous actions.
 
On April 16, 2013, we filed a Fourth Amended Complaint in the original action, in the United States District Court of New Jersey, which asserts another recently issued patent, United States Patent No. 8,404,717, against Natco, Arrow and Watson. Natco filed its Answer and Counterclaims on May 2, 2013. Natco's counterclaims in response to the Fourth Amended Complaint are similar to its counterclaims in the three previous actions. On May 6, 2013, we filed a Fifth Amended Complaint in the original action in the United States District Court of New Jersey, which asserts another recently issued patent, United States Patent No. 8,431,598, against Natco, Arrow and Watson.  Natco filed its Answer and Counterclaims on May 23, 2013.  Natco's counterclaims in response to the Fifth Amended Complaint are similar to its counterclaims in the four previous actions.

A revised Scheduling Order was entered by the Court on May 7, 2013, setting the close of fact discovery for January 20, 2014. Claim construction is currently expected to be fully briefed by the end of December 2013. Dates for a claim construction hearing and trial have yet to be set.
 

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CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


We believe that Natco’s defenses and counterclaims are unlikely to be sustained and we intend to vigorously defend our patent rights.  We believe it unlikely that (i) Natco will prevail on each and every patent and patent claim subject to the lawsuits, and (ii) all of the patent claims will be deemed to be invalid, unenforceable and/or not infringed.  Accordingly, the ultimate outcome is not expected to have a material adverse effect on our financial condition or results of operations.
 
However, if Natco is successful in challenging our patents, and the FDA were to approve Natco’s ANDA with a comprehensive education and risk management program for a generic version of lenalidomide and a generic product were to be introduced, sales of REVLIMID® could be significantly reduced in the United States, which would have a material adverse effect on our results of operations, cash flows and financial condition.
 
ABRAXANE® On December 14, 2011, Cephalon, Inc. and Acusphere, Inc. filed a complaint against us in the United States District Court for the District of Massachusetts, alleging, among other things, that the making, using, selling, offering to sell, and importing  of ABRAXANE® brand drug infringes claims of United States Patent No. RE40,493. Plaintiffs are seeking damages and injunctive relief. Pursuant to the agreement of the parties, discovery will proceed only with respect to claim construction.  A hearing regarding the disputed claims of the patent is currently scheduled to take place in August 2013. After the Court’s ruling on the disputed claims, discovery on all other issues will proceed. We intend to vigorously defend against this infringement suit.  If the suit against us is successful, we may have to pay damages, ongoing royalties and may have to license rights from plaintiffs.  However, we believe that (a) it is unlikely that the plaintiffs in this matter will prevail and (b) the ultimate outcome will not have a material adverse effect on our financial condition or results of operations. 
 
VIDAZA® On September 28, 2012, we were named as a defendant in a complaint filed by Ivax LLC (formerly Ivax Corporation) (“Ivax”) in the United States District Court for the Southern District of Florida.  Ivax LLC alleges that we have infringed the claims of United States Patent No. 7,759,481 (the “‘481 patent”) by making, using, and selling VIDAZA® brand drug in the United States.  On October 19, 2012, we filed an answer to this complaint and filed a counterclaim asserting that the ‘481 patent was invalid and unenforceable.  We filed a motion for judgment on the pleadings on November 15, 2012, to which Ivax LLC filed an opposition on December 7, 2012.  On March 7, 2013 the Court granted in part and denied in part our motion for judgment on the pleadings.  Specifically, the Court dismissed Ivax’s complaint without prejudice and ordered Ivax to (i) either file an amended complaint with all necessary factual allegations or (ii) file dismissal papers by March 15, 2013.  The Court denied our motion for judgment on the pleadings with respect to our counterclaim.
 
On March 13, 2013 Ivax filed an amended complaint. On March 28, 2013 we filed an answer and invalidity counterclaim in response to Ivax’s amended complaint.  A trial date of July 14, 2014 is currently scheduled.  At Celgene's request, the Court has ordered that discovery shall be phased to focus on a threshold issue relating to the potential invalidity of the patent.  Pursuant to the Court's Order, on or before September 16, 2013, Ivax must complete its evaluation of the discovery from the initial phase and report to the Court whether it will continue with the case.  In the interim, all discovery as to other issues is stayed.  We intend to vigorously defend against this infringement suit.  If the suit against us is successful, we may have to pay damages and/or ongoing royalties to the plaintiff.  However, we believe (a) that it is unlikely that the plaintiff in this matter will prevail and (b) that the ultimate outcome will not have a material adverse effect on our financial condition or results of operations.
 
17. Subsequent Events
 
MorphoSys AG:  On June 26, 2013, we signed a collaboration, license and equity purchase agreement with MorphoSys AG (MorphoSys) to jointly develop MOR202 globally and to co-promote MOR202 in Europe.  The proposed transaction is subject to clearance by the U.S. Federal Trade Commission under the Hart Scott Rodino Act and as such, has not been recorded in the financial statements.  MOR202 is a fully human monoclonal antibody targeting CD38 to treat patients with multiple myeloma and certain leukemias.  MOR202 is currently being evaluated in a phase I/IIa trial in patients with relapsed/refractory multiple myeloma.

The financial terms of the proposed transaction include an initial payment of EUR 117.0 million (approximately $152.1 million) that includes an upfront payment and an equity investment in new shares of MorphoSys AG.  In addition, MorphoSys could receive up to EUR 511.0 million (approximately$664.5 million) in development, regulatory and sales milestones and tiered royalties on net sales of MOR202 outside the co-promotion territory.  In the co-promotion territory, MorphoSys retains a 50/50 profit sharing right on MOR202 in exchange for paying one third of the MOR202 development costs. Should MorphoSys choose to opt out of its co-promotion rights, MorphoSys would receive tiered royalties on net sales of MOR202 globally.

The agreement may be terminated at our discretion upon 6 months written notice to MorphoSys, or by either party upon material breach of the other party. Upon the expiration of the agreement, we will have a fully paid-up, irrevocable, perpetual, non-terminable license to use the intellectual property licensed from MorphoSys to research, develop, make, commercialize, use and sell MOR202.

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CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Acetylon Pharmaceuticals, Inc.: On July 26, 2013, we entered into a strategic collaboration and option agreement with Acetylon Pharmaceuticals, Inc. (Acetylon). Under the agreement, the parties will support the development of Acetylon's portfolio of oral, selective HDAC inhibitors in oncology, hematology, immunology, and neurologic disease indications. In addition, we will have an exclusive right to acquire Acetylon at a later date at a purchase price based upon future independent company valuations and rights to receive certain research and development services from Acetylon.

The collaboration will focus on the continued clinical advancement of Acetylon's lead candidate, ACY-1215, an HDAC6 inhibitor being developed for hematological malignancies, ACY-738 for neurological diseases, an HDAC1/2 inhibitor, and a yet unnamed project, spanning cancer and non-cancer disease indications. Under the agreement, we have agreed to make an upfront $100.0 million cash payment to Acetylon, which payment includes an upfront fee for entering into the collaboration, fees for the exclusive right to acquire Acetylon and the rights to receive certain research and development services from Acetylon. During the term of the agreement, Acetylon will retain control of its drug development programs. If we exercise our right to acquire Acetylon, in addition to the purchase price based upon independent company valuations to be paid at the time of the acquisition, Acetylon shareholders will be eligible to receive potential future milestone payments for either approvals of, or additional indications of, drugs developed by Acetylon and for accomplishing defined sales targets. If all the milestones are achieved, the aggregate amount of the milestone payments would be $1.100 billion.

The agreement has an expiration date of December 31, 2015, and we have the right to unilaterally extend the agreement until either June 30, 2016 or December 31, 2016 with the payment of an extension fee. Further, we have the ability to terminate the agreement at our discretion upon written notice to Acetylon.


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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Information
 
This report contains forward-looking statements that reflect the current views of our management with respect to future events, results of operations, economic performance and/or financial condition. Any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements.  Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “may,” “could,” “will,” “will continue,” “seeks,” “should,” “predicts,” “potential,” “outlook,” “guidance,” “target,” “forecast,” “probable,” “possible” or the negative of such terms and similar expressions.  Forward-looking statements are based on current plans, estimates, assumptions and projections, which are subject to change and may be affected by risks and uncertainties, most of which are difficult to predict and are generally beyond our control. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws and other applicable laws. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements, and therefore you should not place too much reliance on them. These factors include, among others, those described in the sections “Forward-Looking Statements” and “Risk Factors” contained in our 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) and in this report and our other public reports filed with the SEC. If these or other risks and uncertainties materialize, or if the assumptions underlying any of the forward-looking statements prove incorrect, our actual performance and future actions may be materially different from those expressed in, or implied by, such forward-looking statements. We can offer no assurance that our estimates or expectations will prove accurate or that we will be able to achieve our strategic and operational goals.
 
Executive Summary
 
Celgene Corporation (collectively with its subsidiaries, “we,” “our,”  “us,” “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 related diseases.  We are dedicated to innovative research and development, 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 intracellular signaling pathways in cancer and immune cells, immunomodulation in cancer and autoimmune diseases, and therapeutic application of cell therapies.  Celgene was incorporated in the State of Delaware in 1986.

Our primary commercial stage products include REVLIMID®, VIDAZA®, ABRAXANE®, THALOMID® (inclusive of Thalidomide Celgene®), POMALYST®, and ISTODAX®.
 
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.

REVLIMID® is also marketed in the United States and certain international markets for the treatment of transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndromes (MDS) associated with a deletion 5q cytogenetic abnormality with or without additional cytogenetic abnormalities (MDS del 5q). In June 2013, REVLIMID® was approved by the European Commission for the treatment of patients with MDS del 5q when other therapeutic options are insufficient or inadequate.

REVLIMID® was approved by the U.S. Food and Drug Administration (FDA) in June 2013 for the treatment of patients with mantle cell lymphoma (MCL) whose disease has relapsed or progressed after two prior therapies, one of which included bortezomib.

VIDAZA® 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, and is marketed in the United States for the treatment of all subtypes of MDS.  The U.S. regulatory exclusivity for VIDAZA® expired in May 2011.  If a generic version of VIDAZA® is successfully launched, we may quickly lose a significant portion of our sales for this product in the United States.  In Europe, VIDAZA® is marketed for the treatment of intermediate-2 and high-risk

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MDS, as well as acute myeloid leukemia (AML) with 30% blasts and has been granted orphan drug designation for the treatment of MDS and AML.  European regulatory exclusivity is expected to continue through 2018.
 
ABRAXANE® is a solvent-free chemotherapy treatment option for metastatic breast cancer and non-small cell lung cancer which was developed using our proprietary nab® technology platform. This protein-bound chemotherapy agent combines paclitaxel with albumin. It is approved for the treatment of metastatic breast cancer in the United States and many international markets and, in the United States for the treatment of metastatic non-small cell lung cancer.  In January 2013, we announced the results from a phase III trial for ABRAXANE® in combination with gemcitabine in treatment-naïve patients with metastatic pancreatic cancer.  The ABRAXANE® combination demonstrated a statistically significant improvement in overall survival compared to patients receiving gemcitabine alone.  Based on these results, we have submitted dossiers for registration in the United States and Europe in March and April 2013, respectively, and plan submissions in other countries and regions during the second half of 2013.  ABRAXANE® is currently in various stages of investigation for the treatment of the following cancers: pancreatic; expanded applications for metastatic breast; malignant melanoma; and bladder and ovarian.
 
THALOMID®, in combination with dexamethasone, 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 (ENL) an inflammatory complication of leprosy and as maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence.
 
POMALYST® (pomalidomide) was approved by the FDA in February 2013 for patients with multiple myeloma who have received at least two prior therapies, including lenalidomide and bortezomib, and have demonstrated disease progression on or within 60 days of completion of the last therapy, and is under review by the European Medicines Agency (EMA) for use in Europe.  POMALYST® is a proprietary, distinct, small molecule that is administered orally and modulates the immune system and other biologically important targets.  POMALYST® is also being evaluated in multiple trials in various phases for expanded usage in multiple myeloma, and in a phase II trial for systemic sclerosis.