10-Q 1 a201403310q.htm 10-Q 2014.03.3 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 March 31, 2014
 
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 April 21, 2014, 400,416,827 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 (unaudited).
 
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
 
 
Three-Month Periods Ended March 31,
 
2014
 
2013
Revenue:
 
 
 
Net product sales
$
1,707.5

 
$
1,429.3

Collaborative agreements and other revenue
1.9

 
7.1

Royalty revenue
20.6

 
28.2

Total revenue
1,730.0

 
1,464.6

Expenses:
 
 
 
Cost of goods sold (excluding amortization of acquired intangible assets)
86.1

 
80.5

Research and development
713.7

 
452.4

Selling, general and administrative
494.1

 
369.0

Amortization of acquired intangible assets
65.7

 
65.7

Acquisition related charges, net
8.6

 
33.2

Total costs and expenses
1,368.2

 
1,000.8

Operating income
361.8

 
463.8

Other income and (expense):
 
 
 
Interest and investment income, net
6.4

 
4.8

Interest (expense)
(29.3
)
 
(17.9
)
Other income (expense), net
(6.6
)
 
(2.3
)
Income before income taxes
332.3

 
448.4

Income tax provision
52.6

 
63.5

Net income
$
279.7

 
$
384.9

Net income per common share:
 
 
 
Basic
$
0.69

 
$
0.92

Diluted
$
0.66

 
$
0.89

Weighted average shares:
 
 
 
Basic
405.7

 
417.9

Diluted
422.5

 
432.2

 
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 March 31,
 
2014
 
2013
Net income
$
279.7

 
$
384.9

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
3.0

 
(5.9
)
Net unrealized gains (losses) related to cash flow hedges:
 
 
 
Unrealized holding gains (losses), net of tax expense (benefit) of ($3.7) and $0.2 for the three-months ended March 31, 2014 and 2013, respectively.
(14.9
)
 
74.9

Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $0.3 and $3.4 for the three-months ended March 31, 2014 and 2013, respectively.
1.6

 
3.8

Net unrealized gains (losses) on marketable securities available for sale:
 
 
 
Unrealized holding gains (losses), net of tax expense (benefit) of $29.0 and $0 for the three-months ended March 31, 2014 and 2013, respectively.
55.3

 
(1.9
)
Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $0.5 and $0 for the three-months ended March 31, 2014 and 2013, respectively.
0.9

 
0.8

Total other comprehensive income (loss)
45.9

 
71.7

Comprehensive income
$
325.6

 
$
456.6

 
See accompanying Notes to Unaudited Consolidated Financial Statements

4


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except per share amounts)
 
 
March 31,
2014
 
December 31,
2013
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
2,396.6

 
$
3,234.4

Marketable securities available for sale
2,713.5

 
2,452.6

Accounts receivable, net of allowances of $38.4 and $40.0 at March 31, 2014 and December 31, 2013, respectively
1,072.5

 
1,061.4

Inventory
347.8

 
340.4

Deferred income taxes
25.5

 
25.3

Other current assets
386.1

 
436.4

Total current assets
6,942.0

 
7,550.5

Property, plant and equipment, net
595.7

 
593.4

Intangible assets, net
2,772.5

 
2,839.7

Goodwill
2,041.2

 
2,041.2

Other assets
353.1

 
353.4

Total assets
$
12,704.5

 
$
13,378.2

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings
$
869.8

 
$
544.8

Accounts payable
149.4

 
156.2

Accrued expenses
1,166.0

 
1,001.1

Income taxes payable
17.0

 
16.0

Current portion of deferred revenue
30.6

 
27.7

Other current liabilities
192.3

 
199.7

Total current liabilities
2,425.1

 
1,945.5

Deferred revenue, net of current portion
25.3

 
23.7

Income taxes payable
245.2

 
235.0

Deferred income taxes
750.8

 
804.9

Other non-current liabilities
549.2

 
582.7

Long-term debt, net of discount
4,224.3

 
4,196.5

Total liabilities
8,219.9

 
7,788.3

Commitments and Contingencies (Note 14)


 


Stockholders’ Equity:
 

 
 

Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding at March 31, 2014 and December 31, 2013, respectively

 

Common stock, $.01 par value per share, 575.0 million shares authorized; issued 512.5 million and 511.2 million shares at March 31, 2014 and December 31, 2013, respectively
5.1

 
5.1

Common stock in treasury, at cost; 112.1 million and 101.5 million shares at March 31, 2014 and December 31, 2013, respectively
(9,319.2
)
 
(7,662.1
)
Additional paid-in capital
8,906.6

 
8,680.4

Retained earnings
4,752.2

 
4,472.5

Accumulated other comprehensive income
139.9

 
94.0

Total stockholders’ equity
4,484.6

 
5,589.9

Total liabilities and stockholders’ equity
$
12,704.5

 
$
13,378.2

 
See accompanying Notes to Unaudited Consolidated Financial Statements

5


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
Three-Month Periods Ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 

 
 

Net income
$
279.7

 
$
384.9

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

 
 

Depreciation
25.5

 
23.2

Amortization
71.6

 
67.7

Deferred income taxes
(80.4
)
 
(53.1
)
Impairment charges

 
9.3

Change in value of contingent consideration
8.6

 
33.2

Share-based compensation expense
104.4

 
65.6

Share-based employee benefit plan expense
7.4

 
7.6

Reclassification adjustment for cash flow hedges included in net income
1.9

 
7.2

Unrealized change in value of derivative instruments
4.4

 
(33.8
)
Other, net
(1.1
)
 
5.8

Change in current assets and liabilities, excluding the effect of acquisitions:
 

 
 

Accounts receivable
(9.8
)
 
(87.0
)
Inventory
(7.0
)
 
(25.8
)
Other operating assets
29.9

 
35.7

Accounts payable and other operating liabilities
111.5

 
(82.3
)
Income tax payable
11.3

 
7.7

Payment of contingent consideration
(5.0
)
 

Deferred revenue
4.2

 
1.4

Net cash provided by operating activities
557.1

 
367.3

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available for sale
588.3

 
896.0

Purchases of marketable securities available for sale
(766.7
)
 
(1,115.5
)
Purchases of intellectual property and other assets
(1.0
)
 
(0.7
)
Capital expenditures
(24.7
)
 
(25.4
)
Purchases of investment securities
(17.5
)
 
(5.5
)
Other investing activities
1.5

 
(0.4
)
Net cash used in investing activities
(220.1
)
 
(251.5
)
Cash flows from financing activities:
 

 
 

Payment for treasury shares
(1,568.5
)
 
(1,043.7
)
Proceeds from short-term borrowing
1,460.0

 
1,422.9

Principal repayments on short-term borrowing
(1,135.0
)
 
(1,369.6
)
Proceeds from sale of common equity put options
1.2

 

Payment of contingent consideration
(15.0
)
 

Net proceeds from exercise of common stock options and warrants
59.2

 
266.4

Excess tax benefit from share-based compensation arrangements
29.6

 
36.6

Net cash used in financing activities
(1,168.5
)
 
(687.4
)
Effect of currency rate changes on cash and cash equivalents
(6.3
)
 
(23.2
)
Net decrease in cash and cash equivalents
(837.8
)
 
(594.8
)
Cash and cash equivalents at beginning of period
3,234.4

 
2,090.4

Cash and cash equivalents at end of period
$
2,396.6

 
$
1,495.6


 See accompanying Notes to Unaudited Consolidated Financial Statements

6


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(Dollars in millions)
 
 
Three-Month Periods Ended March 31,
 
2014
 
2013
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Change in net unrealized (gain) loss on marketable securities available for sale
$
(84.3
)
 
$
2.0

Investment in NantBioScience, Inc. preferred equity
$
90.0

 
$

Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
52.2

 
$
22.3

Income taxes paid
$
96.6

 
$
76.6

  
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 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®, ABRAXANE®, VIDAZA®, POMALYST®/IMNOVID®, THALOMID® (inclusive of Thalidomide CelgeneTM), azacitidine for injection (generic version of VIDAZA®), ISTODAX® and OTEZLA®.

On March 21, 2014, OTEZLA® was approved by the U.S. Food and Drug Administration (FDA) for the treatment of adults with active psoriatic arthritis. Launch activities for OTEZLA® commenced in March 2014 and we will begin recognizing revenue related to OTEZLA® during the second quarter of 2014.

Additional sources of revenue include royalties from Novartis Pharma AG (Novartis) on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, the sale of services through our Celgene Cellular Therapeutics (CCT) subsidiary and other licensing agreements.
 
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. 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 legal 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 Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013 (2013 Annual Report on Form 10-K).


8

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


3. Earnings Per Share
 
 
Three-Month Periods Ended March 31,
(Amounts in millions, except per share)
2014
 
2013
Net income
$
279.7

 
$
384.9

Weighted-average shares:
 
 
 
Basic
405.7

 
417.9

Effect of dilutive securities:
 
 
 
Options, restricted stock units and other incentives
16.8

 
14.3

Diluted
422.5

 
432.2

Net income per share:
 
 
 
Basic
$
0.69

 
$
0.92

Diluted
$
0.66

 
$
0.89

 
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 6.8 million and 2.0 million shares for the three-month periods ended March 31, 2014 and 2013, respectively.

Stock Split: In February 2014, our Board of Directors voted to recommend a two-for-one split of the Company’s common stock to be effected through an amendment to the Company’s Certificate of Incorporation. Implementation of the stock split is subject to stockholder approval of the amendment at the Annual Meeting of Stockholders, which is currently scheduled to take place on June 18, 2014. Per share information contained in this Quarterly Report on Form 10-Q has not been restated to reflect this recommended stock split as it is subject to stockholder approval.

Share Repurchase Program: In April 2014, our Board of Directors approved an increase of $4.000 billion to our authorized share repurchase program, bringing the total amount authorized during the period of April 2009 through April 2014 up to an aggregate of $13.500 billion of our common stock.

As part of the management of our share repurchase program, we may, from time to time, sell put options on our common stock with strike prices that we believe represent an attractive price to repurchase our shares. If the trading price of our shares exceeds the strike price of the put option at the time the option expires, we will have economically reduced the cost of our share repurchase program by the amount of the premium we received from the sale of the put option. If the trading price of our stock is below the strike price of the put option at the time the option expires, we would repurchase the shares covered by the option at the strike price of the put option. During the three-month period ended March 31, 2014, we sold a put option on $200.0 million notional amount of shares of our common stock which matured in March 2014 when the trading price of our stock was below the strike price of the put option. The financial impact of the option was a net gain of $2.4 million, which was recorded in other income (expense), net, and the repurchase of approximately 1.0 million shares of our common stock at an average cost of $140.45 per share, which reflected the market value of the shares on the dates the option expired. At March 31, 2014, we had no outstanding put options. In April 2014, we sold a put option on $200.0 million notional amount of shares of our common stock with a strike price of $132.78 and maturing in June 2014 for a premium of $4.0 million.

During the three-month period ended March 31, 2014, we have repurchased 10.7 million shares of common stock under the share repurchase program from all sources at a total cost of $1.661 billion. As of March 31, 2014, we had a remaining open-ended share repurchase authorization of $0.407 billion, which was increased by the Board of Directors in April 2014 to $4.407 billion.


9

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


4. 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.
 
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, 2013
$
(6.9
)
 
$
137.3

 
$
(36.0
)
 
$
(0.4
)
 
$
94.0

Other comprehensive income (loss) before reclassifications

 
55.3

 
(14.9
)
 
3.0

 
43.4

Amounts reclassified from accumulated other comprehensive income

 
0.9

 
1.6

 

 
2.5

Net current-period other comprehensive income (loss)

 
56.2


(13.3
)

3.0


45.9

Balance March 31, 2014
$
(6.9
)
 
$
193.5


$
(49.3
)

$
2.6


$
139.9

 
 
 
 
 
 
 
 
 


Balance December 31, 2012
$
(10.1
)
 
$
4.2

 
$
(16.0
)
 
$
(27.8
)
 
$
(49.7
)
Other comprehensive income (loss) before reclassifications

 
(1.9
)
 
74.9

 
(5.9
)
 
67.1

Amounts reclassified from accumulated other comprehensive income

 
0.8

 
3.8

 

 
4.6

Net current-period other comprehensive income (loss)

 
(1.1
)

78.7


(5.9
)
 
71.7

Balance March 31, 2013
$
(10.1
)
 
$
3.1


$
62.7


$
(33.7
)
 
$
22.0

 
 
 
 
 
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
Accumulated Other Comprehensive Income Components
 
Affected Line Item in the Consolidated Statements of Income
 
Three-Month Periods Ended March 31,
 
 
2014
 
2013
Gains (losses) from cash-flow hedges:
 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
(1.0
)
 
$
(6.4
)
Treasury rate lock agreements
 
Interest (expense)
 
(0.9
)
 
(0.8
)
 
 
Income tax benefit (expense)
 
0.3

 
3.4

Gains (losses) from available-for-sale marketable securities:
 
 
 
 
Realized income (loss) on sales of marketable securities
 
Interest and investment income, net
 
(1.4
)
 
(0.8
)
 
 
Income tax benefit (expense)
 
0.5

 

Total reclassification, net of tax
 
 
 
$
(2.5
)
 
$
(4.6
)


5. 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 March 31, 2014 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 (MBS), 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

10

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


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 18 of Notes to Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K for a description of the CVRs. Our Level 2 liabilities relate to foreign currency forward contracts and interest rate swap contracts, including forward starting interest rate swap contracts. 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 Therapeutics, Inc. (Avila) acquisition. The maximum remaining potential payments related to the contingent consideration from the acquisitions of Gloucester and Avila are estimated to be $120.0 million and $575.0 million, respectively.
 
Balance at
March 31, 2014
 
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
$
2,713.5

 
$
551.4

 
$
2,162.1

 
$

Cash equivalents
50.0

 

 
50.0

 

Total assets
$
2,763.5

 
$
551.4

 
$
2,212.1

 
$

Liabilities:
 

 
 

 
 

 
 

Forward currency contracts
$
(19.9
)
 
$

 
$
(19.9
)
 
$

Contingent value rights
(121.6
)
 
(121.6
)
 

 

Interest rate swaps
(35.3
)
 

 
(35.3
)
 

Other acquisition related contingent consideration
(213.7
)
 

 

 
(213.7
)
Total liabilities
$
(390.5
)
 
$
(121.6
)
 
$
(55.2
)
 
$
(213.7
)
 
 
 
 
 
 
 
 
 
Balance at
December 31, 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
$
2,452.6

 
$
433.1

 
$
2,019.5

 
$

Cash equivalents
20.0

 

 
20.0

 

Total assets
$
2,472.6

 
$
433.1

 
$
2,039.5

 
$

Liabilities:
 

 
 

 
 

 
 

Forward currency contracts
$
(9.2
)
 
$

 
$
(9.2
)
 
$

Contingent value rights
(118.1
)
 
(118.1
)
 

 

Interest rate swaps
(49.6
)
 

 
(49.6
)
 

Other acquisition related contingent consideration
(228.5
)
 

 

 
(228.5
)
Total liabilities
$
(405.4
)
 
$
(118.1
)
 
$
(58.8
)
 
$
(228.5
)

There were no security transfers between Levels 1 and 2 during the three-month periods ended March 31, 2014 and 2013. The following table represents a roll-forward of the fair value of Level 3 instruments (significant unobservable inputs): 
 
Three-Month Periods Ended March 31,
 
2014
 
2013
Liabilities:
 

 
 

Balance at beginning of period
$
(228.5
)
 
$
(198.1
)
Amounts acquired or issued

 

Net change in fair value
(5.2
)
 
(3.4
)
Settlements
20.0

 

Transfers in and/or out of Level 3

 

Balance at end of period
$
(213.7
)
 
$
(201.5
)
 

11

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


Level 3 liabilities outstanding as of March 31, 2014 and March 31, 2013 primarily consisted of contingent consideration related to the acquisition of Avila. The $14.8 million net decrease in the fair value of Level 3 liabilities in 2014 was primarily due to a $20.0 million milestone payment related to our acquisition of Avila.

6. Derivative Instruments and Hedging Activities

Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. 

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 to 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 March 31, 2014 and December 31, 2013 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 earnings. 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 March 31, 2014 and December 31, 2013:

 
 
Notional Amount
Foreign Currency
 
March 31, 2014
 
December 31, 2013
Australian Dollar
 
$
41.7

 
$

British Pound
 
307.8

 
279.4

Canadian Dollar
 
22.7

 

Euro
 
3,335.0

 
3,318.2

Japanese Yen
 
601.9

 
559.1

Total
 
$
4,309.1

 
$
4,156.7

 
 
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 March 31, 2014, 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),

12

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


net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at March 31, 2014 and December 31, 2013 were $817.7 million and $878.5 million, respectively.
 
Interest Rate Risk Management
 
In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the treasury rate locks or forward starting swaps are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

Forward Starting Interest Rate Swaps: During the three months ended March 31, 2014, we entered into forward starting swaps that were designated as cash flow hedges, with an aggregate notional value of $500.0 million, and effective dates in November 2014, with $100.0 million maturing in five years and $400.0 million maturing in ten years to hedge against changes in interest rates that could impact an anticipated issuance of debt. In April 2014 we accelerated our planned debt issuance date to May 2014, which will result in hedge ineffectiveness in the forward starting swaps due to the effective dates of the swaps being in November 2014. The hedge ineffectiveness will be recognized on the Consolidated Statements of Income as other income (expense), net.

The following table summarizes the notional amounts of our outstanding forward starting swap contracts at March 31, 2014 and December 31, 2013: 
 
 
Notional Amount
 
 
March 31, 2014
 
December 31, 2013
Forward starting swap contracts entered into as cash flow hedges:
 
 
 
 
Maturing in five years
 
$
200.0

 
$
100.0

Maturing in ten years
 
600.0

 
200.0

Total
 
$
800.0

 
$
300.0


Interest Rate Swap Contracts:  From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swap are recorded on the Consolidated Balance Sheets with no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense. 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 or increase of current and future interest expense associated with the previously hedged notes.
 
We have entered into swap contracts that were designated as hedges of our fixed rate notes due in 2015, 2017, 2018, 2020, 2022 and 2023 and also terminated the hedging relationship by settling certain of those swap contracts during 2013 and 2014. The settlement of swap contracts resulted in the receipt of net proceeds of $7.0 million and $2.8 million in 2014 and 2013, respectively, which is accounted for as a reduction of current and future interest expense associated with these notes. See Note 10 for additional details related to reductions of current and future interest expense.


13

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


The following table summarizes the notional amounts of our outstanding swap contracts at March 31, 2014 and December 31, 2013

 
 
 
Notional Amount
 
 
March 31, 2014
 
December 31, 2013
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 

 
 

2.450% senior notes due 2015
 
$
200.0

 
$
300.0

1.900% senior notes due 2017
 
200.0

 
300.0

2.300% senior notes due 2018
 
200.0

 
200.0

3.950% senior notes due 2020
 
500.0

 
500.0

3.250% senior notes due 2022
 
850.0

 
850.0

4.000% senior notes due 2023
 
100.0

 
150.0

Total
 
$
2,050.0

 
$
2,300.0

 

The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of March 31, 2014 and December 31, 2013:
 
 
 
March 31, 2014
 
 
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
 
$
48.1

 
Other current assets
 
$
27.6

 
Other current liabilities
 
29.8

 
Other current liabilities
 
57.5

 
Other non-current assets
 
13.6

 
Other non-current assets
 
3.4

 
Other non-current liabilities
 
29.6

 
Other non-current liabilities
 
53.3

 
Interest rate swap agreements
 
Other current assets
 
14.6

 
Other current assets
 

 
Other non-current liabilities
 

 
Other non-current liabilities
 
51.4

Derivatives not designated as hedging instruments:
 
 
 
 

 
 
 
 

Foreign exchange contracts*
 
Other current assets
 
6.7

 
Other current assets
 
0.9

 
Other current liabilities
 
2.5

 
Other current liabilities
 
7.5

Interest rate swap agreements
 
Other non-current assets
 
1.5

 
Other non-current assets
 

Total
 
 
 
$
146.4

 
 
 
$
201.6


14

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


   
 
 
December 31, 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
 
$
63.6

 
Other current assets
 
$
24.9

 
Other current liabilities
 
41.5

 
Other current liabilities
 
84.7

 
Other non-current assets
 
60.6

 
Other non-current assets
 
41.9

 
Other non-current liabilities
 
4.3

 
Other non-current liabilities
 
25.6

 
Interest rate swap agreements
 
Other current assets
 
17.1

 
Other current assets
 

 
Other non-current liabilities
 

 
Other non-current liabilities
 
68.3

Derivatives not designated as hedging instruments:
 
 
 
 

 
 
 
 

Foreign exchange contracts*
 
Other current assets
 
11.3

 
Other current assets
 
0.7

 
Other current liabilities
 
6.0

 
Other current liabilities
 
18.7

Interest rate swap agreements
 
Other current assets
 
0.1

 
Other current assets
 

 
Other non-current assets
 
1.5

 
Other non-current assets
 

Total
 
 
 
$
206.0

 
 
 
$
264.8

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

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the three-month periods ended March 31, 2014 and 2013:
 
 
Three-Month Period Ended March 31, 2014
 
 
 
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
$
(8.9
)
 
Net product sales
 
$
(1.0
)
 
Other income, net
 
$
(3.5
)
 
(2
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(0.9
)
 
 
 
 

 
 
Interest rate swap agreements
$
(9.7
)
 
Interest expense
 
$

 
 
 
 
 
 
 
(1) Net losses of $15.2 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
(2) The amount of net losses recognized in income represents $0.3 million in losses related to the ineffective portion of the hedging relationships and $3.2 million of losses related to amounts excluded from the assessment of hedge effectiveness.

15

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


 
 
Three-Month Period Ended March 31, 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
$
75.0

 
Net product sales
 
$
(6.4
)
 
Other income, net
 
$
3.5

 
(1)
Treasury rate lock agreements
$

 
Interest expense
 
$
(0.8
)
 
 
 


 
 
 
(1) The amount of net gains recognized in income represents $2.0 million in gains related to the ineffective portion of the hedging relationships and $1.5 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-month periods ended March 31, 2014 and 2013:
 
 
 
 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Three-Month Periods Ended March 31,
Instrument
 
 
2014
 
2013
Interest rate swap agreements
 
Interest expense
 
$
10.4

 
$
6.9

 
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three-month periods ended March 31, 2014 and 2013:
 
 
 
 
 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Three-Month Periods Ended March 31,
Instrument
 
 
2014
 
2013
Foreign exchange contracts
 
Other income (expense), net
 
$
(3.3
)
 
$
38.7

Put options on our common stock
 
Other income (expense), net
 
$
2.4

 
$

 
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. 












16

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


7. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
 
Money market funds of $1.091 billion and $1.697 billion at March 31, 2014 and December 31, 2013, respectively, were recorded at cost, which approximates fair value and are included in cash and cash equivalents. The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale securities by major security type and class of security at March 31, 2014 and December 31, 2013 were as follows:
March 31, 2014
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
711.4

 
$
0.6

 
$
(0.5
)
 
$
711.5

U.S. government-sponsored agency securities
 
199.0

 
0.2

 
(0.2
)
 
199.0

U.S. government-sponsored agency MBS
 
611.7

 
0.5

 
(5.6
)
 
606.6

Non-U.S. government, agency and Supranational securities
 
19.9

 

 

 
19.9

Corporate debt - global
 
433.0

 
1.3

 
(0.7
)
 
433.6

Asset backed securities
 
191.7

 

 
(0.2
)
 
191.5

Marketable equity securities
 
247.5

 
304.1

 
(0.2
)
 
551.4

Total available-for-sale marketable securities
 
$
2,414.2

 
$
306.7

 
$
(7.4
)

$
2,713.5

 
December 31, 2013
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
795.2

 
$
0.3

 
$
(0.4
)
 
$
795.1

U.S. government-sponsored agency securities
 
208.9

 
0.2

 
(0.2
)
 
208.9

U.S. government-sponsored agency MBS
 
450.8

 
0.1

 
(6.9
)
 
444.0

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

 

 

 
10.4

Corporate debt - global
 
379.2

 
1.1

 
(0.6
)
 
379.7

Asset backed securities
 
181.6

 

 
(0.2
)
 
181.4

Marketable equity securities
 
212.9

 
220.2

 

 
433.1

Total available-for-sale marketable securities
 
$
2,239.0

 
$
221.9


$
(8.3
)

$
2,452.6

 
U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. Government Sponsored Enterprises. U.S. government-sponsored agency MBS include mortgage-backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Non-U.S. government, agency and Supranational securities consist of direct obligations of highly rated governments of nations other than the United States 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 three-month period ended March 31, 2014 primarily reflects the increase in market value for certain equity investments subsequent to December 31, 2013. Net unrealized losses in marketable debt securities were essentially the same at the end of both periods.

Duration periods of available-for-sale debt securities at March 31, 2014 were as follows:
 
 
 
Amortized
Cost
 
Fair
Value
Duration of one year or less
 
$
468.4

 
$
468.2

Duration of one through three years
 
1,441.0

 
1,440.2

Duration of three through five years
 
211.4

 
208.6

Duration of over five years
 
45.9

 
45.1

Total
 
$
2,166.7

 
$
2,162.1

 
 

17

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


8. Inventory
 
A summary of inventories by major category at March 31, 2014 and December 31, 2013 follows:
 
March 31, 2014
 
December 31, 2013
Raw materials
$
152.4

 
$
147.4

Work in process
122.0

 
99.6

Finished goods
73.4

 
93.4

Total
$
347.8

 
$
340.4

 
9. Intangible Assets and Goodwill
 
Intangible Assets:  Our intangible assets consist of developed product rights obtained primarily from the Pharmion Corp. (Pharmion), Gloucester and Abraxis BioScience, Inc. (Abraxis) acquisitions, 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 seventeen years.

The following summary of intangible assets by category includes intangibles currently being amortized and intangibles not yet subject to amortization:
March 31, 2014
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted Average Life (Years)
Amortizable intangible assets:
 
 

 
 

 
 

 
 
Acquired developed product rights
 
$
3,405.9

 
$
(1,079.5
)
 
$
2,326.4

 
13.0
Technology
 
333.7

 
(99.3
)
 
234.4

 
7.0
Licenses
 
66.2

 
(15.0
)
 
51.2

 
16.5
Other
 
42.5

 
(19.9
)
 
22.6

 
8.6
 
 
3,848.3

 
(1,213.7
)

2,634.6


12.5
Non-amortized intangible assets:
 


 
 

 
 

 
 
Acquired IPR&D product rights
 
137.9

 

 
137.9

 
 
Total intangible assets
 
$
3,986.2

 
$
(1,213.7
)

$
2,772.5

 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
 
Weighted Average Life (Years)
Amortizable intangible assets:
 
 

 
 

 
 

 
 
Acquired developed product rights
 
$
3,405.9

 
$
(1,026.4
)
 
$
2,379.5

 
13.0
Technology
 
333.7

 
(87.4
)
 
246.3

 
7.0
Licenses
 
66.2

 
(13.9
)
 
52.3

 
16.5
Other
 
42.5

 
(18.8
)
 
23.7

 
8.6
 
 
3,848.3

 
(1,146.5
)
 
2,701.8

 
12.5
Non-amortized intangible assets:
 
 

 
 

 
 

 
 
Acquired IPR&D product rights
 
137.9

 

 
137.9

 
 
Total intangible assets
 
$
3,986.2

 
$
(1,146.5
)
 
$
2,839.7

 
 
 
There were no additions or deletions to the gross carrying value of intangible assets during the three-month period ended March 31, 2014.

Amortization expense was $67.1 million and $66.9 million for the three-month periods ended March 31, 2014 and 2013, respectively. Assuming no changes in the gross carrying amount of intangible assets, the amortization of intangible assets for years 2014 through 2018 is estimated to be in the range of approximately $255.0 million to $265.0 million annually. 
 
Goodwill:  At March 31, 2014, 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.

18

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


The carrying value of goodwill was $2.041 billion on March 31, 2014 and December 31, 2013.

10. Debt
 
Senior Notes: Summarized below are the carrying values of our senior notes at March 31, 2014 and December 31, 2013:
 
 
March 31, 2014
 
December 31, 2013
2.450% senior notes due 2015
$
511.9

 
$
513.9

1.900% senior notes due 2017
500.4

 
499.9

2.300% senior notes due 2018
400.0

 
399.0

3.950% senior notes due 2020
490.5

 
484.6

3.250% senior notes due 2022
974.6

 
956.6

4.000% senior notes due 2023
700.7

 
696.3

5.700% senior notes due 2040
249.6

 
249.6

5.250% senior notes due 2043
396.6

 
396.6

Total long-term debt
$
4,224.3

 
$
4,196.5

 
At March 31, 2014, the fair value of our outstanding Senior Notes was $4.356 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 March 31, 2014, a balance of $29.7 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 March 31, 2014, 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 6. Our swap contracts outstanding at March 31, 2014 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 March 31, 2014, we had a balance of $33.0 million of unamortized gains recorded as a component of our debt as a result of past swap contract settlements, including $3.6 million related to the settlement of swap contracts during the three months ended March 31, 2014. As of December 31, 2013, we had a balance of $32.1 million of unamortized gains recorded as a component of our debt as a result of past swap contract settlements.
 
Commercial Paper:  The carrying value of Commercial Paper as of March 31, 2014 and December 31, 2013 was $869.8 million and $544.8 million, respectively, and approximated its fair value. The effective interest rate on our outstanding Commercial Paper at March 31, 2014 was 0.3%.
 
Senior Unsecured Credit Facility:  In September 2011, we entered into a senior unsecured revolving credit facility (Credit Facility) providing for revolving credit. The Credit Facility is currently at an aggregate maximum amount of $1.500 billion with an expiration date of 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 under the Credit Facility for working capital, capital expenditures and other corporate purposes. The Credit Facility serves as backup liquidity for our Commercial Paper borrowings. As of March 31, 2014 and December 31, 2013 there were no outstanding borrowings under 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 March 31, 2014


19

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


11. 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.

The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the three-month periods ended March 31, 2014 and 2013:
 
 
Three-Month Periods Ended
March 31,
 
2014
 
2013
Cost of goods sold (excluding amortization of acquired intangible assets)
$
6.1

 
$
2.8

Research and development
47.0

 
27.0

Selling, general and administrative
51.3

 
35.8

Total share-based compensation expense
104.4

 
65.6

Tax benefit related to share-based compensation expense
30.0

 
17.9

Reduction in income
$
74.4

 
$
47.7

 
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 three-month period ended March 31, 2014 (in millions unless otherwise noted):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
(in thousands)
Outstanding at December 31, 2013
39.6

 
5.1

 
58

Changes during the Year:
 

 
 

 
 

Granted
2.3

 
0.1

 

Exercised / Released
(1.2
)
 
(0.1
)
 
(12
)
Expired
(0.2
)
 
(0.1
)
 

Outstanding at March 31, 2014
40.5

 
5.0


46

 
Total compensation cost related to unvested awards not yet recognized and the weighted-average periods over which the awards are expected to be recognized at March 31, 2014 were as follows (dollars in millions):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
Unrecognized compensation cost
$
490.8

 
$
215.6

 
$
3.2

Expected weighted-average period in years of compensation cost to be recognized
2.2

 
1.3

 
2.0

 
 
12. 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

20

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


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. For the three-month period ended March 31, 2014 gross unrecognized tax benefits decreased by $2.3 million, exclusive of interest, primarily as a result of ongoing examinations related to tax positions taken in prior years. Increases to the amount of unrecognized tax benefits since January 1, 2014 of approximately $12.5 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. 

13. 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 Consolidated Financial Statements included in our 2013 Annual Report on Form 10-K for a description of certain other collaboration agreements entered into prior to January 1, 2014. The following is a brief description of significant developments in the relationships between Celgene and our collaboration partners during the three months ended March 31, 2014:
 
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

21

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


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. On October 7, 2013, we entered into the first ex-US license with FORMA and paid the applicable upfront payment under such license.

On March 21, 2014, we entered into a second collaboration arrangement with FORMA, pursuant to which FORMA granted us an option to license the rights to select current and future FORMA drug candidates during a term of three and one half years. We agreed to pay an upfront payment of $225.0 million. In addition, with respect to each licensed drug candidate, we have the obligation to pay designated amounts when certain development, regulatory and sales milestone events occur, with such amounts being variable and contingent on various factors. With respect to each licensed drug candidate, we will assume responsibility for all global development activities and costs after completion of Phase 1 clinical trials. FORMA will retain U.S. rights to all such licensed assets, including responsibility for manufacturing and commercialization.

Under this collaboration arrangement, we also have an option to enter into up to two additional collaborations with terms of two years each for additional payments totaling approximately $375.0 million. If we exercise our option to enter into both of these additional collaborations, we will receive an exclusive option to acquire FORMA, including the U.S. rights to all licensed drug candidates, and worldwide rights to other wholly owned assets within FORMA at that time.
NantBioScience, Inc. (NantBioScience): In January 2014, we entered into a collaboration agreement with NantBioScience, an entity controlled by Dr. Patrick Soon-Shiong in which Celgene contributed $75 million of cash, the rights to the future royalty stream based on net sales of certain products of Active Biomaterials, LLC, another entity controlled by Dr. Patrick Soon-Shiong, and licenses to two nab® product candidates. In return, Celgene received a 14 percent preferred equity ownership in NantBioScience, an option to license a certain number of product candidates developed by NantBioScience, including the two nab® product candidates that Celgene is licensing to NantBioScience, and the parent company of NantBioScience assumed, and agreed to pay and satisfy when due, our obligation to pay The Chan Soon-Shiong Institute for Advanced Health (CSS Institute) $50.0 million in contingent, matching contributions. The transaction became effective in March 2014. Unless Celgene terminates the collaboration earlier, in Celgene’s sole discretion upon 30 days written notice, the collaboration will continue until the earliest to occur of: (a) Celgene licensing four NantBioScience product candidates; (b) NantBioScience presenting data packages for ten product candidates; and (c) the date which is ten years after the effective date. Regardless of any termination of the collaboration, the 14 percent preferred equity ownership in NantBioScience and the assumption of the $50.0 million in contingent, matching contributions by the parent company of NantBioScience remain in effect. We performed a valuation of the components of the transaction and allocated the consideration transferred as follows: $50.0 million for the collaboration agreement upfront expense; $25.0 million related to the settlement of contingent matching contributions, and; $90.0 million related to the equity ownership in NantBioScience.
In addition to the collaboration arrangements described above, we entered into a new collaborative arrangement during the three months ended March 31, 2014 that includes the potential for future milestone payments of up to an aggregate $12.0 million related to the attainment of specified developmental milestones over a period of several years. Our obligation to fund these efforts is contingent upon our continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs.

22

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


A financial summary of the period activity related to our collaboration agreements is presented below1:
 
 
Three-Month Periods Ended March 31,
 
 
Research and Development Expense
 
Selling, General and Administrative Expense
 
 
 
 
Upfront Fees
 
Milestones
 
Extension of Agreements
 
Amortization of Prepaid R&D and Intangibles
 
 
Equity Investments Made During Period
Acceleron2
2014
$—
 
$—
 
$—
 
$—
 
$—
 
$15.0
 
2013
 
10.0
 
 
 
 
bluebird
2014
 
 
 
 
 
 
2013
74.7
 
 
 
 
 
Epizyme
2014
 
 
 
 
 
9.9
 
2013
 
 
 
 
 
FORMA
2014
225.0
 
 
 
 
 
 
2013
 
 
 
 
 
NantBioScience
2014
50.0
 
 
 
 
25.0
 
90.0
Other Collaboration Arrangements
2014
34.0
 
 
 
3.8
 
 
20.9
2013
21.1
 
 
 
0.8
 
 
4.0
A financial summary of the period-end balances related to our collaboration agreements is presented below:
 
Balances as of:
 
Intangible Asset Balance
 
Equity Investment Balance
 
Percentage of Outstanding Equity
Acceleron2
March 31, 2014
 
$—
 
$121.2
 
11%
 
December 31, 2013
 
 
127.2
 
11%
bluebird
March 31, 2014
 
0.2
 
 
N/A
 
December 31, 2013
 
0.2
 
 
N/A
Epizyme
March 31, 2014
 
 
83.7
 
11%
 
December 31, 2013
 
 
69.4
 
12%
FORMA
March 31, 2014
 
0.2
 
 
N/A
 
December 31, 2013
 
0.2
 
 
N/A
NantBioScience
March 31, 2014
 
 
90.0
 
14%
Other Collaboration Arrangements
March 31, 2014
 
57.5
 
366.4
 
N/A
December 31, 2013
 
61.3
 
254.6
 
N/A
1 Activity and balances are presented specifically for notable new collaborations and for those collaborations which we have described in detail in our 2013 Annual Report on Form 10-K if there has been new activity during the periods presented. Amounts related to collaborations that are not specifically described are presented in the aggregate as Other Collaboration Arrangements.
2 We agreed to purchase 1.1 million shares of Acceleron common stock for $47.1 million on April 2, 2014. Immediately following this additional investment, it is expected that we will beneficially own approximately 14.8% of the outstanding shares of Acceleron's common stock. The closing of this transaction is subject to customary closing conditions including expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

14. 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 our 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 March 31, 2014 and December 31, 2013. See Note 13 for additional details related to collaboration arrangements.
 

23

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


Contingencies:  We believe we maintain insurance coverage adequate for our current needs. Our operations are subject to environmental laws and regulations, which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. We review the effects of such laws and regulations on our operations and modify our operations as appropriate. We believe we are in substantial compliance with all applicable environmental laws and regulations.

We have ongoing customs, duties and VAT examinations in various countries that have yet to be settled. Based on our knowledge of the claims and facts and circumstances to date, none of these matters, individually or in the aggregate, are deemed to be material to our financial condition. 

15. Legal Proceedings

Like many companies in our industry, we have from time to time received inquiries and subpoenas and other types of information requests from government authorities and others and we have been subject to claims and other actions related to our business activities.  While the ultimate outcome of investigations, inquires, information requests and legal proceedings is difficult to predict, adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, product recalls, costs and significant payments, which may have a material adverse effect on our results of operations, cash flows or financial condition.
 
Pending patent proceedings include challenges to the scope, validity and/or enforceability of our patents relating to certain of our products, uses of products or processes. Further, we are subject to claims of third parties that we infringe their patents covering products or processes. Although we believe we have substantial defenses to these challenges and claims, there can be no assurance as to the outcome of these matters and an adverse decision in these proceedings could result in one or more of the following: (i) a loss of patent protection, which could lead to a significant reduction of sales that could materially affect future results of operations, (ii) our inability to continue to engage in certain activities, and (iii) significant liabilities, including payment of damages, royalties and/or license fees to any such third party.
 
Among the principal matters pending are the following:

Patent Related Proceedings:

REVLIMID®: We received Notice Letters, dated August 30, 2010 and June 12, 2012 from Natco Pharma Limited of India (Natco) notifying us of Natco’s Abbreviated New Drug Application (ANDA), which contain 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). Natco’s Notice Letters were 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. We filed separate infringement actions (which were subsequently consolidated) in the United States District Court for the District of New Jersey against Natco, Natco’s U.S. partner, Arrow International Limited (Arrow), and Arrow’s parent company, Watson Laboratories, Inc. (Watson, a wholly-owned subsidiary of Actavis, Inc. and formerly known as Watson Pharmaceuticals, Inc.) (Natco, Arrow and Watson are collectively referred to hereinafter as “Natco”). In its answer and counterclaim, Natco asserts that our patents are invalid, unenforceable and/or not infringed by Natco’s proposed generic products. As a result of the filing of our actions, the FDA cannot grant final approval of Natco’s ANDA until the earlier of (i) a decision of the court that each of the patents is not infringed, invalid or unenforceable, or (ii) December 12, 2014.

The patents in dispute include United States Patent Nos. 5,635,517; 6,045,501; 6,315,720; 6,555,554; 6,561,976; 6,561,977; 6,755,784; 7,119,106; 7,465,800; 6,281,230; 7,189,740; 7,968,569; 8,288,415; 8,315,886 and 8,404,717, plus three non-Orange Book listed patents, United States Patent Nos. 7,977,357;8,193,219 and 8,431,598.

On April 14, 2014, the court extended the close of fact discovery to June 20, 2014. Claim construction was fully briefed on April 8, 2014, and the claim construction hearing is scheduled for May 15, 2014. No trial date has been set.

We believe that Natco’s defenses and counterclaims are unlikely to be sustained and we intend to vigorously assert our patent rights.  Although there can be no assurance as to the ultimate outcome of this proceeding, we currently expect that it will not have a material adverse effect on our financial condition or results of operations. However, if Natco is successful in challenging all the patents in dispute or if the court rules that certain of our key patent claims are invalid or not infringed, such events could have a material adverse effect on our financial condition and results of operations.


24

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


We received a third Notice Letter from Natco dated April 3, 2014, notifying us of Natco’s Paragraph IV certifications against five patents, including United States Patent Nos. 8,404,717 (already in suit), 8,530,498; 8,589,188; 8,626,531; and 8,648,095.  We are reviewing the Notice Letter and its implications and considering our response.

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. On December 3, 2013, the court issued an order construing certain claim terms. Based on that order, on March 18, 2014, the parties agreed to a judgment of noninfringement in Celgene’s favor. On April 15, 2014, plaintiffs’ filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit seeking a review of the lower court’s construction of certain claim terms. On April 22, 2014 we filed a Notice of Cross-Appeal seeking review of certain terms defined in the lower court’s order.

THALOMID® and REVLIMID®: On October 2, 2013, Andrulis Pharmaceuticals Corporation (Andrulis) filed a lawsuit against us in the United States District Court for the District of Delaware claiming infringement of U.S. Patent No. 6,140,346 (“the ‘346 patent”).  Andrulis alleges that we are liable for infringement of one or more claims of the ‘346 patent, which covers the use of THALOMID® (and, as asserted by Andrulis, REVLIMID®) in combination with an alkylating agent (e.g., melphalan) to treat cancers.  Andrulis is seeking an unspecified amount of damages, attorneys’ fees and injunctive relief. We disagree with Andrulis’ allegations and intend to vigorously defend against this infringement suit. On November 25, 2013, we filed a motion to dismiss Andrulis’ complaint. Andrulis’ motion seeking leave to file an amended complaint was granted on December 30, 2013. We filed a motion to dismiss Andrulis’ amended complaint on January 30, 2014. On April 11, 2014, the court denied our motion in part and granted our motion in part, dismissing two of Andrulis' four infringement claims without leave to amend. We filed an answer to the remaining claims on April 25, 2014. We do not expect the ultimate outcome of this lawsuit to have a material adverse effect on our financial condition or results of operations.

ISTODAX® (romidepsin): We received a Notice Letter dated March 17, 2014 from Fresenius Kabi USA, LLC (Fresenius) notifying us of Fresenius’s ANDA that seeks approval from the FDA to market a generic version of romidepsin for injection. The Notice Letter contains Paragraph IV certifications against U.S. Patent Nos. 7,608,280 and 7,611,724 that are listed in the Orange Book for ISTODAX®.  We are reviewing the Notice Letter and its implications and considering our response.

Non-Patent Related Proceedings:
 
In 2009, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission (FTC) seeking documents and other information relating to requests by manufacturers of generic drugs to purchase our patented REVLIMID® and THALOMID® brand drugs in order for the FTC to evaluate whether there may be reason to believe that we have engaged in unfair methods of competition. In 2010, the State of Connecticut issued a subpoena referring to the same issues raised by the 2009 CID. Also in 2010, we received a second CID from the FTC relating to this matter.  We continue to cooperate with the FTC and State of Connecticut investigations.
 
On April 3, 2014, Mylan Pharmaceuticals Inc. (Mylan) filed a lawsuit against us in the United States District Court for the District of New Jersey alleging that we violated various federal and state antitrust and unfair competition laws by allegedly refusing to sell samples of our THALOMID® and REVLIMID® brand drugs so that Mylan can conduct the bioequivalence testing needed to submit ANDAs to the FDA for approval to market generic versions of these products. Mylan is seeking injunctive relief, damages and declaratory judgment. Our answer to Mylan’s complaint is due on May 25, 2014. An initial scheduling conference in this matter will be held on June 3, 2014. We intend to vigorously defend against Mylan’s claims.

In 2011, the United States Attorney’s Office for the Central District of California informed us that they were investigating possible off-label marketing and improper payments to physicians in connection with the sales of THALOMID® and REVLIMID®. In 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 were conducting related investigations.  In February 2014, three civil qui tam actions related to those investigations brought by three former Celgene employees on behalf of the federal and various state governments under the federal false claims act and similar state laws were unsealed after the United States Department of Justice (DOJ) declined to intervene in any of these actions. The DOJ retains the right to intervene in these actions at any time. Additionally, while several states have similarly declined to intervene in some of these actions, they also retain the right to intervene in the future. The plaintiffs in the Northern District of Alabama and Eastern District of Texas actions have voluntarily dismissed their cases. We intend to vigorously defend against the remaining Central District of California action and on April 25, 2014, we filed a motion to dismiss the complaint in that action.

25

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



Other Proceedings:

On June 7, 2013, Children's Medical Center Corporation (CMCC) filed a lawsuit against us in the Superior Court of the Commonwealth of Massachusetts alleging that our obligation to pay a 1% royalty on REVLIMID® net sales revenue and a 2.5% royalty on POMALYST®/IMNOVID® net sales revenue under a license agreement entered into in December 2002  extended beyond February 28, 2013 and that our failure to make royalty payments to CMCC subsequent to February 28, 2013 breached the license agreement.  CMCC is seeking unspecified damages and a declaration that the license agreement remains in full force and effect.  In July 2013, we removed these proceedings to the United States District Court for the District of Massachusetts. On August 5, 2013, we filed an answer to CMCC’s complaint and a counterclaim for declaratory judgment that our obligations to pay royalties have expired. On August 26, 2013, CMCC filed an answer to our counterclaim. A scheduling conference was held on February 11, 2014 and the court ordered fact discovery to be completed by December 15, 2014. No trial date has as yet been set by the court. We intend to vigorously defend against CMCC's claims. As of March 31, 2014, we consider the range of reasonably possible loss relating to this lawsuit to be between zero and $47.3 million, with the high end of the range being the royalty payments on REVLIMID® we would have made to CMCC under the license agreement through March 31, 2014, if our obligation to pay royalties remained in effect. CMCC contends that our royalty obligation continues on net sales of REVLIMID®, as well as POMALYST®/IMNOVID®, at least until May 2016 and if CMCC prevails, we may be obligated to continue to pay royalties on sales for periods after March 31, 2014.

16. Subsequent Event

Nogra Pharma Limited (Nogra): On April 23, 2014, we entered into a license agreement with Nogra Pharma Limited, pursuant to which Nogra granted us an exclusive, royalty-bearing license in its intellectual property relating to GED-0301, an antisense oligonucleotide targeting Smad7, to develop and commercialize products containing GED-0301 for the treatment of Crohn’s disease and other indications. The development and application of the intellectual property covered under the license agreement will be managed by a joint committee composed of members from each of Nogra and us. Under the terms of the license agreement, we are obligated to make an upfront payment of $710.0 million. In addition, we have the obligation to pay designated amounts when certain development, regulatory and sales milestone events occur, as well as tiered royalties on sales of licensed products, with such amounts being variable and contingent on various factors. The maximum aggregate amount payable for development and regulatory milestones is approximately $815.0 million, which covers such milestones relating to Crohn’s disease and other indications. Starting from global annual net sales levels of $500.0 million, aggregate tiered sales milestones could total a maximum of $1,050.0 million if annual net sales reach $4,000.0 million.

The license agreement will become effective upon the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The license agreement may be terminated (i) at our discretion upon 180 days’ written notice to Nogra, provided that such termination will not become effective before the third anniversary of the effective date of the license agreement, and (ii) by either party upon material breach of the other party, subject to cure periods. Upon the expiration of our royalty payment obligations under the license agreement, on a country-by-country and licensed product-by-licensed product basis, the license granted under the license agreement will become fully paid-up, irrevocable, perpetual, and non-terminable with respect to such licensed product in such country.



26


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 2013 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, 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 designed to bring new therapies to market and we are involved in research in several scientific areas that may deliver proprietary next-generation therapies, targeting areas including intracellular signaling pathways, protein homeostasis and epigenetics in cancer and immune cells, immunomodulation in cancer and autoimmune diseases and therapeutic application of cell therapies.

Our primary commercial stage products include REVLIMID®, ABRAXANE®, VIDAZA®, POMALYST®/IMNOVID®, THALOMID® (inclusive of Thalidomide CelgeneTM), azacitidine for injection (generic version of VIDAZA®), ISTODAX® and OTEZLA®. OTEZLA® was approved by the U.S. Food and Drug Administration (FDA) in March 2014 for the treatment of adult patients with active psoriatic arthritis and is under review for psoriasis in the United States and for psoriasis and psoriatic arthritis in the European Union. Launch activities for OTEZLA® commenced in March 2014 and we will begin recognizing revenue related to OTEZLA® during the second quarter of 2014. Additional sources of revenue include royalties from Novartis Pharma AG (Novartis) on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, the sale of services through our Celgene Cellular Therapeutics (CCT) subsidiary and other licensing agreements. The approved diseases for our primary commercial stage products are described below for the major markets of the United States, the European Union and Japan. Approvals in other international markets are indicated in the aggregate for the disease indication that most closely represents the majority of the other international approvals.


27


REVLIMID® (lenalidomide): REVLIMID® is an oral immunomodulatory drug marketed in the United States and many international markets for the treatment of patients as indicated below:
Disease
Geographic Approvals
Multiple myeloma (MM), in combination with dexamethasone, in patients who have received at least one prior therapy
- United States
- European Union
- Japan
- Other international markets
Myelodysplastic syndromes (MDS)
 
Transfusion-dependent anemia due to low- or intermediate-1-risk MDS associated with a deletion 5q abnormality with or without additional cytogenetic abnormalities
- United States
- Other international markets
Transfusion-dependent anemia due to low- or intermediate-1-risk MDS in patients with isolated deletion 5q cytogenetic abnormality when other options are insufficient or inadequate
- European Union
MDS with a deletion 5q cytogenetic abnormality. The efficacy or safety of REVLIMID for International Prognostic Scoring System (IPSS) intermediate-2 or high risk MDS has not been established.
- Japan
Mantle cell lymphoma (MCL) in patients whose disease has relapsed or progressed after two prior therapies, one of which included bortezomib.
- United States
ABRAXANE® (paclitaxel albumin-bound particles for injectable suspension):  ABRAXANE® is a solvent-free chemotherapy product which was developed using our proprietary nab® technology platform. This protein-bound chemotherapy agent combines paclitaxel with albumin. ABRAXANE® is approved for the treatment of patients as indicated below:
Disease
Geographic Approvals
Breast Cancer
 
Metastatic breast cancer, after failure of combination chemotherapy for metastatic disease or relapse within six months of adjuvant chemotherapy. Prior therapy should have included an anthracycline unless clinically contraindicated.
- United States
- Other international markets

Metastatic breast cancer in adult patients who have failed first-line treatment for metastatic disease for whom standard, anthracycline containing therapy is not indicated
- European Union
Breast cancer
- Japan
Non-Small Cell Lung Cancer (NSCLC)
 
Locally advanced or metastatic NSCLC, as first-line treatment in combination with carboplatin, in patients who are not candidates for curative surgery or radiation therapy
- United States
- Other international markets
NSCLC
- Japan
Metastatic adenocarcinoma of the pancreas, a form of pancreatic cancer, as first line treatment in combination with gemcitabine
- United States
- European Union
- Other international markets
Gastric cancer
- Japan
VIDAZA® (azacitidine for injection):  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 has been granted orphan drug designation for the treatment of MDS and AML. The U.S. regulatory exclusivity for VIDAZA® expired in May 2011. After the launch of a generic version of VIDAZA® in the United States by a competitor in September 2013, we experienced a significant reduction in our U.S. sales of VIDAZA® in the fourth quarter of 2013. In 2013, we also contracted with Sandoz AG to sell a generic version of VIDAZA® in the United States, which we supply. Regulatory exclusivity for VIDAZA® is expected to continue in

28


Europe through 2018. VIDAZA® is marketed in the United States and many international markets for the treatment of patients as indicated below:
Disease
Geographic Approvals
Myelodysplastic syndromes (MDS)
 
All French-American-British (FAB) subtypes
- United States
Intermediate-2 and high-risk MDS
- European Union
- Other international markets
Chronic myelomonocytic leukemia with 10% to 29% marrow blasts without myeloproliferative disorder
- European Union
- Other international markets
Acute myeloid leukemia (AML) with 20% to 30% blasts and multi-lineage dysplasia
- European Union
- Other international markets

POMALYST®/IMNOVID®1(pomalidomide): POMALYST®/IMNOVID® is a proprietary, distinct, small molecule that is administered orally and modulates the immune system and other biologically important targets. POMALYST®/IMNOVID® received its first approvals from the FDA and the European Commission (EC) during 2013 for the treatment of patients as indicated below:
Disease
Geographic Approvals
Multiple myeloma for patients 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.
- United States
Relapsed and refractory multiple myeloma, in combination with dexamethasone, for adult patients who have received at least two prior therapies including both lenalidomide and bortezomib and have demonstrated disease progression on the last therapy.
- European Union
1 We received FDA approval for pomalidomide under the trade name POMALYST®. We received EC approval for pomalidomide under the trade name IMNOVID®.
THALOMID® (thalidomide):  THALOMID®, sold as Thalidomide CelgeneTM outside the United States, is administered orally for the treatment of diseases as indicated below:
Disease
Geographic Approvals
Multiple myeloma
 
Newly diagnosed multiple myeloma, in combination with dexamethasone
- United States
Thalomid in combination with dexamethasone is indicated for induction therapy prior to high dose chemotherapy with autologous stem cell rescue, for the treatment of patients with untreated multiple myeloma.
- Other international markets
Multiple myeloma after failure of standard therapies (relapsed or refractory)
- Other international markets
Thalidomide CelgeneTM in combination with melphalan and prednisone as a first line treatment for patients with untreated multiple myeloma who are aged sixty-five years of age or older or ineligible for high dose chemotherapy
- European Union
- Other international markets
Erythema Nodosum Leprosum
 
Cutaneous manifestations of moderate to severe erythema nodosum leprosum (ENL), an inflammatory complication of leprosy
- United States
- Other international markets
Maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence
- United States
- Other international markets

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azacitidine for injection (generic version of VIDAZA®): After the launch of a generic version of VIDAZA® in the United States by a competitor in September 2013, we contracted with Sandoz AG to sell azacitidine for injection, which we supply. We recognize net product sales from sales of azacitidine for injection to Sandoz AG.
ISTODAX® (romidepsin):  ISTODAX® is administered by intravenous infusion for the treatment of diseases as indicated below and has received orphan drug designation for the treatment of non-Hodgkin’s T-cell lymphomas, including CTCL and PTCL.
Disease
Geographic Approvals
Cutaneous T-cell lymphoma (CTCL) in patients who have received at least one prior systemic therapy
- United States
- Other international markets
Peripheral T-cell lymphoma (PTCL) in patients who have received at least one prior therapy
- United States
- Other international markets
OTEZLA® (apremilast): OTEZLA® is an oral small-molecule inhibitor of phosphodiesterase 4 (PDE4) specific for cyclic adenosine monophosphate (cAMP). PDE4 inhibition results in increased intracellular cAMP levels. OTEZLA® received approval from the FDA for psoriatic arthritis in March 2014 and has been submitted for approval in the United States in psoriasis and in the European Union for the treatment of psoriasis and psoriatic arthritis. OTEZLA® is approved for the treatment of patients as indicated below:
Disease
Geographic Approvals
Adult patients with active psoriatic arthritis
- United States (Approved March 2014)

We continue to invest substantially in research and development in support of multiple ongoing proprietary clinical development programs which support our existing products and pipeline of new drug candidates. REVLIMID® is in several phase III trials across a range of hematological malignancies that include newly diagnosed multiple myeloma and maintenance, lymphomas, chronic lymphocytic leukemia (CLL) and MDS. POMALYST®/IMNOVID® was approved in the United States and European Union for indications in multiple myeloma based on phase II and phase III results, respectively, and additional phase III trials are underway with POMALYST®/IMNOVID® in relapsed and refractory multiple myeloma. Phase III trials are also underway for VIDAZA® and CC-486 in MDS and AML and ISTODAX® in first-line PTCL. In solid tumors, ABRAXANE® is currently in various stages of investigation for breast, pancreatic and non-small cell lung cancers. Our lead product in inflammation and immunology, OTEZLA® is being evaluated in a broad phase III program for psoriatic arthritis, psoriasis and ankylosing spondylitis.
Beyond our phase III programs, we have access to a growing early-to-mid-stage pipeline of novel therapies to address significant unmet medical needs that consists of a combination of in-house developed compounds, compounds licensed from other companies and options to acquire compounds from collaboration partners.
We believe that continued use of our primary commercial stage products, participation in research and development collaboration arrangements, depth of our product pipeline, regulatory approvals of new products and expanded use of existing products will provide the catalysts for future growth.

The following table summarizes total revenue and earnings for the three-month periods ended March 31, 2014 and 2013 (dollar amounts in millions, except per share data):
 
Three-Month Periods Ended
March 31,
 
Increase
(Decrease)
 
Percent Change
 
2014
 
2013
 
 
Total revenue
$
1,730.0

 
$
1,464.6

 
$
265.4

 
18.1
 %
Net income
$
279.7

 
$
384.9

 
$
(105.2
)
 
(27.3
)%
Diluted earnings per share
$
0.66

 
$
0.89

 
$
(0.23
)
 
(25.8
)%
 
Revenue increased by $265.4 million in the three-month period ended March 31, 2014 compared to the three-month period ended March 31, 2013, primarily due to the continued growth in sales of REVLIMID® and ABRAXANE® as well as sales of POMALYST®/IMNOVID® which was approved by the FDA in February 2013 and by the European Commission (EC) in August 2013. The $105.2 million decrease in net income and $0.23 decrease in diluted earnings per share in the current year quarter were primarily due to a $203.3 million increase in research and development expenses related to collaboration arrangements, partly offset by a higher level of net product sales.

30


Results of Operations

Three-Month Periods Ended March 31, 2014 and 2013

Total Revenue:  Total revenue and related percentages for the three-month periods ended March 31, 2014 and 2013 were as follows (dollar amounts in millions):
 
Three-Month Periods Ended
March 31,
 
Increase (Decrease)
 
Percent Change
 
2014
 
2013
 
 
Net product sales:
 

 
 

 
 

 
 

REVLIMID®
$
1,143.8

 
$
1,002.8

 
$
141.0

 
14.1
 %
ABRAXANE®
184.8

 
122.7

 
62.1

 
50.6
 %
VIDAZA®
148.4

 
204.1

 
(55.7
)
 
(27.3
)%
POMALYST®/IMNOVID®
135.6

 
28.5

 
107.1

 
375.8
 %
THALOMID®
58.0

 
57.4

 
0.6

 
1.0
 %
azacitidine for injection
18.4

 

 
18.4

 
N/M

ISTODAX®
16.1

 
12.9

 
3.2

 
24.8
 %
Other
2.4

 
0.9

 
1.5

 
166.7
 %
Total net product sales
$
1,707.5

 
$
1,429.3

 
$
278.2

 
19.5
 %
Collaborative agreements and other revenue
1.9

 
7.1

 
(5.2
)