10-Q 1 a2015033110q.htm 10-Q 2015.03.31 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, 2015
 
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 24, 2015, 793,144,382 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,
 
2015
 
2014
Revenue:
 
 
 
Net product sales
$
2,055.2

 
$
1,707.5

Other revenue
25.6

 
22.5

Total revenue
2,080.8

 
1,730.0

Expenses:
 

 
 

Cost of goods sold (excluding amortization of acquired intangible assets)
104.0

 
86.1

Research and development
506.0

 
713.7

Selling, general and administrative
529.2

 
494.1

Amortization of acquired intangible assets
63.6

 
65.7

Acquisition related charges, net
19.0

 
8.6

Total costs and expenses
1,221.8

 
1,368.2

Operating income
859.0

 
361.8

Other income and (expense):
 

 
 

Interest and investment income, net
9.0

 
6.4

Interest (expense)
(49.2
)
 
(29.3
)
Other income (expense), net
8.3

 
(6.6
)
Income before income taxes
827.1

 
332.3

Income tax provision
108.2

 
52.6

Net income
$
718.9

 
$
279.7

Net income per common share (Note1):
 

 
 

Basic
$
0.90

 
$
0.34

Diluted
$
0.86

 
$
0.33

Weighted average shares (Note 1):
 

 
 

Basic
798.9

 
811.5

Diluted
834.1

 
845.1

 
See accompanying Notes to Unaudited Consolidated Financial Statements

3


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)

 
Three-Month Periods Ended March 31,
 
2015
 
2014
Net income
$
718.9

 
$
279.7

 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(23.2
)
 
3.0

Pension liability adjustment
(5.9
)
 

 
 
 
 
Net unrealized gains (losses) related to cash flow hedges:
 
 
 
Unrealized holding gains (losses)
406.9

 
(18.6
)
Tax benefit
9.9

 
3.7

Unrealized holding gains (losses), net of tax
416.8

 
(14.9
)
 
 
 
 
Reclassification adjustment for (gains) losses included in net income
(69.2
)
 
1.9

Tax (benefit)
(0.5
)
 
(0.3
)
Reclassification adjustment for (gains) losses included in net income, net of tax
(69.7
)
 
1.6

 
 
 
 
Net unrealized gains (losses) on marketable securities available for sale:
 
 
 
Unrealized holding gains (losses)
(77.1
)
 
84.3

Tax (expense) benefit
26.5

 
(29.0
)
Unrealized holding gains (losses), net of tax
(50.6
)
 
55.3

 
 
 
 
Reclassification adjustment for (gains) losses included in net income
(0.6
)
 
1.4

Tax expense (benefit)
0.2

 
(0.5
)
Reclassification adjustment for (gains) losses included in net income, net of tax
(0.4
)
 
0.9

 
 
 
 
Total other comprehensive income
267.0

 
45.9

Comprehensive income
$
985.9

 
$
325.6


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,
2015
 
December 31,
2014
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
4,367.7

 
$
4,121.6

Marketable securities available for sale
2,945.8

 
3,425.1

Accounts receivable, net of allowances of $31.8 and $32.1 at March 31, 2015 and December 31, 2014, respectively
1,179.4

 
1,166.7

Inventory
386.7

 
393.1

Deferred income taxes
11.2

 
11.7

Other current assets
774.6

 
594.4

Total current assets
9,665.4

 
9,712.6

Property, plant and equipment, net
649.7

 
642.6

Intangible assets, net
4,002.4

 
4,067.6

Goodwill
2,191.2

 
2,191.2

Other assets
971.8

 
726.1

Total assets
$
17,480.5

 
$
17,340.1

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
504.4

 
$
605.9

Accounts payable
204.0

 
198.2

Accrued expenses
1,039.2

 
991.1

Income taxes payable
13.1

 
12.7

Current portion of deferred revenue
28.6

 
28.5

Other current liabilities
308.0

 
275.8

Total current liabilities
2,097.3

 
2,112.2

Deferred revenue, net of current portion
27.4

 
27.8

Income taxes payable
288.1

 
272.9

Deferred income taxes
412.8

 
555.6

Other non-current liabilities
1,587.1

 
1,581.1

Long-term debt, net of discount
6,303.0

 
6,265.7

Total liabilities
10,715.7

 
10,815.3

Commitments and Contingencies (Note 15)


 


Stockholders’ Equity:
 

 
 

Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding at March 31, 2015 and December 31, 2014, respectively

 

Common stock, $.01 par value per share, 1,150.0 million shares authorized; issued 928.8 million and 924.8 million shares at March 31, 2015 and December 31, 2014, respectively
9.3

 
9.2

Common stock in treasury, at cost; 133.8 million and 124.6 million shares at March 31, 2015 and December 31, 2014, respectively
(11,803.7
)
 
(10,698.8
)
Additional paid-in capital
10,186.1

 
9,827.2

Retained earnings
7,191.3

 
6,472.4

Accumulated other comprehensive income
1,181.8

 
914.8

Total stockholders’ equity
6,764.8

 
6,524.8

Total liabilities and stockholders’ equity
$
17,480.5

 
$
17,340.1

 
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,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
718.9

 
$
279.7

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

 
 

Depreciation
28.1

 
25.5

Amortization
66.6

 
71.6

Deferred income taxes
(106.6
)
 
(80.4
)
Change in value of contingent consideration
19.0

 
8.6

Share-based compensation expense
128.8

 
104.4

Share-based employee benefit plan expense
7.7

 
7.4

Reclassification adjustment for cash flow hedges included in net income
(69.2
)
 
1.9

Unrealized change in value of derivative instruments
62.2

 
4.4

Other, net
2.7

 
(1.1
)
Change in current assets and liabilities, excluding the effect of acquisitions:
 

 
 

Accounts receivable
(59.5
)
 
(9.8
)
Inventory
7.3

 
(7.0
)
Other operating assets
(26.4
)
 
29.9

Accounts payable and other operating liabilities
59.2

 
111.5

Income tax payable
15.8

 
11.3

Payment of contingent consideration

 
(5.0
)
Deferred revenue
1.9

 
4.2

Net cash provided by operating activities
856.5

 
557.1

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available for sale
1,079.8

 
588.3

Purchases of marketable securities available for sale
(678.8
)
 
(766.7
)
Capital expenditures
(42.3
)
 
(24.7
)
Purchases of investment securities
(20.7
)
 
(17.5
)
Other investing activities

 
0.5

Net cash provided by (used in) investing activities
338.0

 
(220.1
)
Cash flows from financing activities:
 

 
 

Payment for treasury shares
(1,012.6
)
 
(1,568.5
)
Proceeds from short-term borrowing
90.0

 
1,460.0

Principal repayments on short-term borrowing
(189.6
)
 
(1,135.0
)
Proceeds from sale of common equity put options
5.2

 
1.2

Payment of contingent consideration

 
(15.0
)
Net proceeds from share-based compensation arrangements
114.4

 
59.2

Excess tax benefit from share-based compensation arrangements
84.5

 
29.6

Net cash used in financing activities
(908.1
)
 
(1,168.5
)
Effect of currency rate changes on cash and cash equivalents
(40.3
)
 
(6.3
)
Net increase (decrease) in cash and cash equivalents
246.1

 
(837.8
)
Cash and cash equivalents at beginning of period
4,121.6

 
3,234.4

Cash and cash equivalents at end of period
$
4,367.7

 
$
2,396.6


 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,
 
2015
 
2014
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Change in net unrealized (gain) loss on marketable securities available for sale
$
77.1

 
$
(84.3
)
Investment in NantBioScience, Inc. preferred equity
$

 
$
90.0

Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
50.2

 
$
52.2

Income taxes paid
$
106.7

 
$
96.6

  
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 an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation. 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 designed to 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®, POMALYST®/IMNOVID®, VIDAZA®, azacitidine for injection (generic version of VIDAZA®), THALOMID® (sold as THALOMID® or Thalidomide CelgeneTM outside of the U.S.), OTEZLA® and ISTODAX®. 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 in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. In January 2015, OTEZLA® was approved by the European Commission (EC) for the treatment of both psoriasis and psoriatic arthritis in certain adult patients. We began 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 products and services through our Celgene Cellular Therapeutics (CCT) subsidiary and other licensing arrangements.
 
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.

In June 2014, our stockholders voted to approve an amendment to our Certificate of Incorporation that increased the number of shares of common stock that we are authorized to issue and effected a two-for-one stock split of outstanding shares (Stock Split). As a result, our total number of authorized shares of common stock increased from 575.0 million to 1.150 billion on June 18, 2014. Stockholders of record received one additional share of common stock for each share of common stock owned. All impacted share numbers and per share amounts presented in the consolidated financial statements and the accompanying notes to the financial statements have been restated to reflect the impact of the Stock Split. Common stock held in treasury was not adjusted for the Stock Split.

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, 2014 (2014 Annual Report on Form 10-K).

New Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP and requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.

8

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

Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for us beginning in the first quarter of 2017 using one of two prescribed transition methods. Early adoption is not permitted. In April 2015, the FASB voted to delay the implementation of ASU 2014-09 by one year. The proposed delay in implementation is not currently effective. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

On April 7, 2015, the FASB issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 will more closely align the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS standards by requiring that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, similar to the presentation of debt discounts or premiums. This accounting guidance is effective for us beginning in the first quarter of 2016. We do not expect this updated standard to have a material impact on our consolidated financial statements and related disclosures.

On April 15, 2015, the FASB issued Accounting Standards Update No. 2015-05, "Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement" (ASU 2015-05). ASU 2015-05 provides guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 is effective for us beginning in the first quarter of 2016. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

3. Acquisition

Nogra Pharma Limited (Nogra): On April 23, 2014, we entered into a license agreement with Nogra, 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. A randomized, double-blind endoscopy trial with GED-0301 began enrollment during the three-month period ended March 31, 2015 and we expect phase III trials with GED-0301 in Crohn’s disease to begin enrollment in mid-2015.
Under the terms of the agreement, which became effective on May 14, 2014 after receipt of certain governmental clearances and approvals, we made an upfront payment of $710.0 million and may make additional contingent developmental, regulatory and sales milestone payments as well as payments based on percentages of annual sales of licensed products. 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 of $500.0 million, aggregate tiered sales milestone payments could total a maximum of $1.050 billion if global annual net sales reach $4.000 billion.
The development and application of the intellectual property covered under the license agreement will be managed by joint committees composed of members from each of Nogra and us. We have the tie-breaking vote on the joint steering committee and as such have ultimate decision-making authority for development, regulatory and commercialization decisions. The agreement also includes provisions for access to employees of Nogra, technical assistance, transfer of manufacturing agreements and transfer of Nogra know-how related to GED-0301. Based on the foregoing factors, for accounting purposes, we have concluded that the acquired assets meet the definition of a business and have accounted for the GED-0301 license as in-process research and development (IPR&D) acquired in a business combination. The acquisition method of accounting requires that (a) the assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and (b) the fair value of IPR&D be classified as an indefinite-lived asset until the successful completion or abandonment of the associated research and development efforts. Pro-forma results of operations for this acquisition have not been presented because this acquisition is not material to our consolidated results of operations.
The fair value of consideration transferred to acquire the license amounted to:
 
Fair Value at the Acquisition Date
Cash
$
710.0

Contingent consideration
1,060.0

Total fair value of consideration transferred
$
1,770.0


9

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

Our potential contingent consideration payments are classified as liabilities, which were measured at fair value as of the acquisition date, with $5.0 million classified as current liabilities and $1.055 billion classified as non-current liabilities. We estimated the fair value of potential contingent consideration using a probability-weighted income approach, which reflects the probability and timing of future potential payments. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a level three liability within the fair value hierarchy. The resulting probability weighted cash flows were discounted using a discount rate based on a market participant assumption.

The purchase price allocation resulted in the following amounts being allocated to the assets acquired at the acquisition date based on their respective fair values:
 
Fair Value at the Acquisition Date
In-process research and development product rights
$
1,620.0

Current deferred tax asset
1.3

Non-current deferred tax liabilities, net
(1.3
)
Total identifiable net assets
1,620.0

Goodwill
150.0

Total net assets acquired
$
1,770.0


The fair value of the acquired IPR&D asset was based on the present value of expected net cash flows from the GED-0301 product candidate. Net cash flows were determined by estimating future sales, net of the costs to complete development of GED-0301 into a commercially viable product. Estimated net cash flows were adjusted to reflect the probability of successfully developing a new drug from a product candidate that has completed a phase II trial. Additionally, the projections considered the relevant market sizes and growth factors and the nature and expected timing of a new product introduction. The resulting net cash flows from such potential products include our estimates of cost of sales, operating expenses, and income taxes. The rates utilized to discount the net cash flows to their present value were commensurate with the stage of development of the project and uncertainties in the economic estimates used in the projections described above. The acquired IPR&D asset is accounted for as an indefinite-lived intangible asset until regulatory approval in a major market or discontinuation.

The excess of purchase price over the fair value amounts assigned to the assets acquired represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to intangible assets that do not qualify for separate recognition. We expect this goodwill to be deductible for tax purposes.

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 May 14, 2017, 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.


10

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

4. Earnings Per Share
 
 
Three-Month Periods Ended March 31,
(Amounts in millions, except per share)
2015
 
2014
Net income
$
718.9

 
$
279.7

Weighted-average shares:
 
 
 
Basic
798.9

 
811.5

Effect of dilutive securities:
 
 
 
Options, restricted stock units and other incentives
35.2

 
33.6

Diluted
834.1

 
845.1

Net income per share:
 
 
 
Basic
$
0.90

 
$
0.34

Diluted
$
0.86

 
$
0.33

 
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 6.1 million and 13.5 million shares for the three-month periods ended March 31, 2015 and 2014, respectively.

Stock Split: See Note 1.

Share Repurchase Program: 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 purchase 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 purchase the shares covered by the option at the strike price of the put option. During the three-month period ended March 31, 2015, we sold put options on $400.0 million notional amount of shares of our common stock, which expired unexercised in March 2015, and recorded a gain from the premium of $3.9 million, which was recorded on the Consolidated Statements of Income in other income (expense), net. During the three-month period ended March 31, 2014, we recorded a gain of $2.4 million from selling put options on our common stock. At March 31, 2015, we had no outstanding put options.

We have purchased 9.5 million shares of common stock under the share repurchase program from all sources at a total cost of $1.127 billion during the three-month period ended March 31, 2015. As of March 31, 2015, we had a remaining share repurchase authorization of $2.014 billion.

5. Accumulated Other Comprehensive Income (Loss)
 
The components of other comprehensive income (loss) consist of changes in pension liability, changes in net unrealized gains (losses) on marketable securities classified as available-for-sale, net unrealized gains (losses) related to cash flow hedges and changes in foreign currency translation adjustments.


11

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

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, 2014
$
(15.5
)
 
$
460.9

 
$
519.6

 
$
(50.2
)
 
$
914.8

Other comprehensive income (loss) before reclassifications
(5.9
)
 
(50.6
)
 
416.8

 
(23.2
)
 
337.1

Amounts reclassified from accumulated other comprehensive income

 
(0.4
)
 
(69.7
)
 

 
(70.1
)
Net current-period other comprehensive income (loss)
(5.9
)
 
(51.0
)

347.1


(23.2
)

267.0

Balance March 31, 2015
$
(21.4
)
 
$
409.9


$
866.7


$
(73.4
)

$
1,181.8

 
 
 
 
 
 
 
 
 


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

 
 
 
 
 
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,
 
 
2015
 
2014
Gains (losses) from cash-flow hedges:
 
 
 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
70.5

 
$
(1.0
)
Treasury rate lock agreements
 
Interest (expense)
 
(0.9
)
 
(0.9
)
Interest rate swap agreements
 
Interest (expense)
 
(0.4
)
 

 
 
Income tax benefit
 
0.5

 
0.3

 
 
 
 
 
 
 
Gains (losses) from available-for-sale marketable securities:
 
 
 
 
Realized income (loss) on sales of marketable securities
 
Interest and investment income, net
 
0.6

 
(1.4
)
 
 
Income tax benefit (expense)
 
(0.2
)
 
0.5

Total reclassification, net of tax
 
 
 
$
70.1

 
$
(2.5
)


6. Financial Instruments and Fair Value Measurement

The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2015 and the valuation techniques we utilized to determine such fair value.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Our Level 1 assets consist of marketable equity securities. 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 2014 Annual Report on Form 10-K for a description of the CVRs.
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 MBS, non-U.S. government, agency and supranational securities, global corporate debt securities, asset backed securities, foreign currency

12

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

forward contracts, purchased foreign currency options and interest rate swap contracts. Our Level 2 liabilities relate to written foreign currency options, foreign currency forward contracts and interest rate swap contracts.
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 3 liabilities consist of contingent consideration related to undeveloped product rights resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester) and Nogra in addition to contingent consideration related to the undeveloped product rights and technology platform acquired as part of the acquisition of Avila Therapeutics, Inc. (now known as Celgene Avilomics Research, Inc.) (Avila). 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 $555.0 million, respectively, and $1.865 billion plus amounts based on sales pursuant to the license agreement with Nogra.
 
Balance at
March 31, 2015
 
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
$
2,945.8

 
$
967.1

 
$
1,978.7

 
$

Forward currency contracts
901.8

 

 
901.8

 

Purchased currency options
25.3

 

 
25.3

 

Interest rate swaps
32.8

 

 
32.8

 

Total assets
$
3,905.7

 
$
967.1

 
$
2,938.6

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(128.5
)
 
$
(128.5
)
 
$

 
$

Written currency options
(3.8
)
 

 
(3.8
)
 

Other acquisition related contingent consideration
(1,305.8
)
 

 

 
(1,305.8
)
Total liabilities
$
(1,438.1
)
 
$
(128.5
)
 
$
(3.8
)
 
$
(1,305.8
)
 
 
 
 
 
 
 
 
 
Balance at
December 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
$
3,425.1

 
$
1,051.3

 
$
2,373.8

 
$

Forward currency contracts
550.7

 

 
550.7

 

Purchased currency options
9.8

 

 
9.8

 

Interest rate swaps
20.0

 

 
20.0

 

Total assets
$
4,005.6

 
$
1,051.3

 
$
2,954.3

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(136.3
)
 
$
(136.3
)
 
$

 
$

Written currency options
(4.6
)
 

 
(4.6
)
 

Other acquisition related contingent consideration
(1,279.0
)
 

 

 
(1,279.0
)
Total liabilities
$
(1,419.9
)
 
$
(136.3
)
 
$
(4.6
)
 
$
(1,279.0
)


13

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

There were no security transfers between Levels 1 and 2 during the three-month periods ended March 31, 2015 and 2014. The following table represents a roll-forward of the fair value of Level 3 instruments: 
 
Three-Month Periods Ended March 31,
 
2015
 
2014
Liabilities:
 

 
 

Balance at beginning of period
$
(1,279.0
)
 
$
(228.5
)
Amounts acquired or issued

 

Net change in fair value
(26.8
)
 
(5.2
)
Settlements

 
20.0

Transfers in and/or out of Level 3

 

Balance at end of period
$
(1,305.8
)
 
$
(213.7
)
 
Level 3 liabilities outstanding as of March 31, 2015 primarily consisted of contingent consideration related to the acquisitions of Avila and Nogra. The $26.8 million net increase in the fair value of Level 3 liabilities in 2015 was related to accretion of the fair value of our contingent consideration due to the passage of time. Changes to the fair value of contingent consideration are recorded on the Consolidated Statements of Income as acquisition related charges, net.

7. Derivative Instruments and Hedging Activities

Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. In instances where these financial instruments are accounted for as cash flow hedges or fair value hedges we may from time to time terminate the hedging relationship. If a hedging relationship is terminated we generally either settle the instrument or enter into an offsetting instrument.

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, 2015 and December 31, 2014 had settlement dates within 36 months. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses are reported in other comprehensive income (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are 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 on the Consolidated Statements of Income in other income (expense), net. The forward point components of these foreign currency forward contracts are not designated as cash flow hedges and all fair value adjustments of forward point amounts

14

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

are recorded to other income (expense), net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at March 31, 2015 and December 31, 2014:

 
 
Notional Amount
Foreign Currency
 
March 31, 2015
 
December 31, 2014
Australian Dollar
 
$
54.5

 
$
18.8

British Pound
 
363.8

 
304.8

Canadian Dollar
 
66.4

 
43.7

Euro
 
3,181.7

 
3,375.7

Japanese Yen
 
504.2

 
541.1

Total
 
$
4,170.6

 
$
4,284.1

 
 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, 2015, credit risk did not materially change the fair value of our foreign currency forward contracts.
 
We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in other income (expense), net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at March 31, 2015 and December 31, 2014 were $875.2 million and $835.5 million, respectively.
Foreign Currency Option Contracts: From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. If the U.S. dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. dollar equivalent value of our anticipated foreign currency cash flows; however, this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the sale of the call option is equal to the premium paid for the purchased put option, resulting in a net zero cost for each collar. Outstanding foreign currency option contracts entered into to hedge forecasted revenue were as follows at March 31, 2015 and December 31, 2014:
 
Notional Amount1
 
March 31, 2015
 
December 31, 2014
Foreign currency option contracts designated as hedging activity:
 
 
 
Purchased Put
$
207.9

 
$
152.6

Written Call
$
220.5

 
$
160.9

1 U.S. dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.
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: We have entered into forward starting swaps, that were designated as cash flow hedges, with an aggregate notional value of $1,250.0 million and effective dates in November 2015, with $750.0 million maturing in 10

15

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

years and $500.0 million maturing in 30 years to hedge against changes in interest rates that could impact an anticipated issuance of debt in 2015. During April 2015, we entered into additional forward starting swaps with effective dates in November 2015.

In anticipation of issuing debt in 2014, we entered into an aggregate notional value of $1.500 billion in forward starting swaps that were designated as cash flow hedges. In April 2014 we accelerated our planned debt issuance date, which resulted in hedge ineffectiveness in the forward starting swaps and a $3.6 million charge to other income (expense), net due to differences between the effective date of the swaps and the accelerated debt issuance date. In addition, all forward starting swaps were settled upon the issuance of debt in May 2014 when the net fair value of the forward starting swaps in accumulated OCI was a loss position of $25.9 million. The net loss of $25.9 million is being recognized as interest expense over the life of the associated senior notes.

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. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.

We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes and also terminated the hedging relationship by settling certain of those swap contracts during 2014 and 2015. The settlement of swap contracts resulted in the receipt of net proceeds of $3.4 million and $7.0 million during the three-month period ended March 31, 2015 and 2014, respectively, which are accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense.

The following table summarizes the notional amounts of our outstanding swap contracts at March 31, 2015 and December 31, 2014

 
 
 
Notional Amount
 
 
March 31, 2015
 
December 31, 2014
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 

 
 

2.450% senior notes due 2015
 
$
300.0

 
$
300.0

1.900% senior notes due 2017
 
300.0

 
300.0

2.300% senior notes due 2018
 
200.0

 
200.0

2.250% senior notes due 2019
 
500.0

 
500.0

3.950% senior notes due 2020
 
500.0

 
500.0

3.250% senior notes due 2022
 
1,000.0

 
750.0

4.000% senior notes due 2023
 
600.0

 
150.0

Total
 
$
3,400.0

 
$
2,700.0

 


16

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

The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of March 31, 2015 and December 31, 2014:
 
 
 
 
 
March 31, 2015
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
$
424.1

 
$
57.2

 
 
Other current liabilities
 
0.3

 
1.7

 
 
Other non-current assets
 
529.4

 
17.6

Interest rate swap agreements
 
Other current assets
 
21.0

 

 
 
Other non-current assets
 
21.7

 

 
 
Other non-current liabilities
 

 
11.2

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
49.8

 
2.9

 
 
Other current liabilities
 
0.1

 
1.0

Interest rate swap agreements
 
Other current assets
 

 

 
 
Other non-current assets
 
1.3

 

Total
 
 
 
$
1,047.7

 
$
91.6

   
 
 
 
 
December 31, 2014
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
$
264.9

 
$
44.9

 
 
Other current liabilities
 
0.1

 
1.7

 
 
Other non-current assets
 
322.3

 
17.5

Interest rate swap agreements
 
Other current assets
 
17.9

 

 
 
Other non-current assets
 
4.8

 
0.3

 
 
Other non-current liabilities
 

 
3.8

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
39.7

 
6.0

 
 
Other current liabilities
 
0.1

 
1.1

Interest rate swap agreements
 
Other current assets
 
0.1

 

 
 
Other non-current assets
 
1.3

 

Total
 
 
 
$
651.2

 
$
75.3

 
1 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.


17

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

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the three-month periods ended March 31, 2015 and 2014:
 
 
Three-Month Period Ended March 31, 2015
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
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
 
 
Foreign exchange contracts
$
432.6

 
Net product sales
 
$
70.5

 
Other income, net
 
$
3.8

 
(2
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(0.9
)
 
 
 
 

 
 
Interest rate swap agreements
$
(25.7
)
 
Interest expense
 
$
(0.4
)
 
 
 
 
 
 
 
(1) Net gains of $391.6 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
(2) The amount of net gains recognized in income represents $7.2 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $3.4 million in losses related to the ineffective portion of the hedging relationships.
 
Three-Month Period Ended March 31, 2014
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
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
 
 
Foreign exchange contracts
$
(8.9
)
 
Net product sales
 
$
(1.0
)
 
Other income, net
 
$
(3.5
)
 
(1
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(0.9
)
 
 
 
 

 
 
Interest rate swap agreements
$
(9.7
)
 
 
 
$

 
 
 
 
 
 
 
(1) The amount of net losses recognized in income represents $3.2 million of losses related to amounts excluded from the assessment of hedge effectiveness and $0.3 million in losses related to the ineffective portion of the hedging relationships.

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, 2015 and 2014:
 
 
 
 
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
 
 
2015
 
2014
Interest rate swap agreements
 
Interest expense
 
$
14.0

 
$
10.4

 

18

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

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, 2015 and 2014:
 
 
 
 
 
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
 
 
2015
 
2014
Foreign exchange contracts
 
Other income (expense), net
 
$
74.5

 
$
(3.3
)
Put options on our common stock
 
Other income (expense), net
 
$
3.9

 
$
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 on the Consolidated Statements of Income in other income (expense), net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods. 

8. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
 
Money market funds of $1.281 billion and $2.251 billion at March 31, 2015 and December 31, 2014, 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, 2015 and December 31, 2014 were as follows:
March 31, 2015
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
587.3

 
$
1.2

 
$
(0.1
)
 
$
588.4

U.S. government-sponsored agency securities
 
97.0

 
0.3

 

 
97.3

U.S. government-sponsored agency MBS
 
357.6

 
1.3

 
(1.4
)
 
357.5

Non-U.S. government, agency and Supranational securities
 
27.8

 

 

 
27.8

Corporate debt - global
 
761.6

 
2.4

 
(0.3
)
 
763.7

Asset backed securities
 
144.0

 
0.1

 
(0.1
)
 
144.0

Marketable equity securities
 
335.2

 
642.9

 
(11.0
)
 
967.1

Total available-for-sale marketable securities
 
$
2,310.5

 
$
648.2

 
$
(12.9
)

$
2,945.8

 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
1,044.7

 
$
0.3

 
$
(0.8
)
 
$
1,044.2

U.S. government-sponsored agency securities
 
145.1

 
0.1

 
(0.1
)
 
145.1

U.S. government-sponsored agency MBS
 
531.1

 
1.0

 
(2.7
)
 
529.4

Non-U.S. government, agency and Supranational securities
 
32.4

 

 
(0.1
)
 
32.3

Corporate debt - global
 
446.3

 
0.6

 
(1.2
)
 
445.7

Asset backed securities
 
177.3

 

 
(0.2
)
 
177.1

Marketable equity securities
 
335.2

 
716.3

 
(0.2
)
 
1,051.3

Total available-for-sale marketable securities
 
$
2,712.1

 
$
718.3


$
(5.3
)

$
3,425.1

 
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

19

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

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 decrease in net unrealized gains in marketable equity securities during the three-month period ended March 31, 2015 primarily reflects the decrease in market value for certain equity investments subsequent to December 31, 2014.

Duration periods of available-for-sale debt securities at March 31, 2015 were as follows:
 
 
 
Amortized
Cost
 
Fair
Value
Duration of one year or less
 
$
327.9

 
$
328.2

Duration of one through three years
 
1,547.5

 
1,550.2

Duration of three through five years
 
99.9

 
100.3

Total
 
$
1,975.3

 
$
1,978.7

 

 
9. Inventory
 
A summary of inventories by major category at March 31, 2015 and December 31, 2014 follows:
 
March 31, 2015
 
December 31, 2014
Raw materials
$
120.1

 
$
200.0

Work in process
100.3

 
101.5

Finished goods
166.3

 
91.6

Total
$
386.7

 
$
393.1


The decrease in raw materials and increase in finished goods during the three-month period ended March 31, 2015 was primarily related to the production of ABRAXANE® to support recently launched new indications. Raw materials for ABRAXANE® had been at elevated levels at December 31, 2014 and during the three-month period ended March 31, 2015 many of those materials were converted into finished goods.
 

20

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

10. Intangible Assets and Goodwill
 
Intangible Assets: Our finite lived intangible assets primarily consist of developed product rights and technology obtained from the Pharmion Corp. (Pharmion), Gloucester, Abraxis BioScience, Inc. (Abraxis) and Avila acquisitions. Our indefinite lived intangible assets consist of acquired IPR&D product rights from the Nogra and Gloucester acquisitions. The remaining weighted-average amortization period for finite-lived intangible assets not fully amortized is approximately 10.9 years.

Intangible assets outstanding as of March 31, 2015 and December 31, 2014 are summarized as follows:
March 31, 2015
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortizable intangible assets:
 
 

 
 

 
 

Acquired developed product rights
 
$
3,405.9

 
$
(1,285.1
)
 
$
2,120.8

Technology
 
333.7

 
(147.0
)
 
186.7

Licenses
 
66.9

 
(19.2
)
 
47.7

Other
 
42.5

 
(24.0
)
 
18.5

 
 
3,849.0

 
(1,475.3
)

2,373.7

Non-amortized intangible assets:
 


 
 

 
 

Acquired IPR&D product rights
 
1,628.7

 

 
1,628.7

Total intangible assets
 
$
5,477.7

 
$
(1,475.3
)

$
4,002.4

 
 
 
 
 
 
 
December 31, 2014
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortizable intangible assets:
 
 

 
 

 
 

Acquired developed product rights
 
$
3,405.9

 
$
(1,234.1
)
 
$
2,171.8

Technology
 
333.7

 
(135.1
)
 
198.6

Licenses
 
67.0

 
(18.1
)
 
48.9

Other
 
42.5

 
(22.9
)
 
19.6

 
 
3,849.1

 
(1,410.2
)
 
2,438.9

Non-amortized intangible assets:
 
 

 
 

 
 

Acquired IPR&D product rights
 
1,628.7

 

 
1,628.7

Total intangible assets
 
$
5,477.8

 
$
(1,410.2
)
 
$
4,067.6

 
The slight change in the gross carrying value of intangible assets during the three-month period ended March 31, 2015 was related to fluctuations in foreign currency exchange rates.

Amortization expense related to intangible assets was $65.1 million and $67.1 million for the three-month periods ended March 31, 2015 and 2014, respectively. Assuming no changes in the gross carrying amount of intangible assets, the amortization of intangible assets for years 2015 through 2019 is estimated to be in the range of approximately $215.3 million to $260.1 million annually. 
 
Goodwill: At March 31, 2015, our goodwill related to the April 2014 Nogra acquisition, the 2012 acquisition of Avila, the 2010 acquisitions of Abraxis and Gloucester, the 2008 acquisition of Pharmion and the 2004 acquisition of Penn T Limited.

The carrying value of goodwill was $2.191 billion as of March 31, 2015 and December 31, 2014.


21

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

11. Debt
 
Short-Term Borrowings and Current Portion of Long-Term Debt: The carrying value of short-term borrowings and current portion of long-term debt outstanding at March 31, 2015 and December 31, 2014 includes:
 
 
March 31, 2015
 
December 31, 2014
Commercial paper
 
$

 
$
99.6

2.450% senior notes due 2015
 
504.4

 
506.3

Total
 
$
504.4

 
$
605.9


Long-Term Debt: Summarized below are the carrying values of our senior notes at March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
 
December 31, 2014
1.900% senior notes due 2017
$
502.4

 
$
501.0

2.300% senior notes due 2018
402.9

 
401.2

2.250% senior notes due 2019
507.8

 
502.5

3.950% senior notes due 2020
510.4

 
502.8

3.250% senior notes due 2022
1,024.9

 
1,010.2

4.000% senior notes due 2023
715.0

 
708.5

3.625% senior notes due 2024
996.8

 
996.8

5.700% senior notes due 2040
249.6

 
249.5

5.250% senior notes due 2043
396.7

 
396.7

4.625% senior notes due 2044
996.5

 
996.5

Total long-term debt
$
6,303.0

 
$
6,265.7

 
At March 31, 2015, the fair value of our outstanding Senior Notes was $7.152 billion and represented a Level 2 measurement within the fair value measurement hierarchy.

From time to time, we have used treasury rate locks and forward starting interest rate swap contracts to hedge against changes in interest rates in anticipation of issuing fixed-rate notes. As of March 31, 2015, a balance of $50.8 million in losses remained in accumulated OCI related to these derivative instruments and will be recognized as interest expense over the life of the notes.
 
At March 31, 2015, we were party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes as described in Note 7. Our swap contracts outstanding at March 31, 2015 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, 2015, we had a balance of $38.1 million of unamortized gains recorded as a component of our debt as a result of past swap contract settlements, including $2.6 million related to the settlement of swap contracts during the three months ended March 31, 2015. As of December 31, 2014, we had a balance of $38.6 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, 2015 and December 31, 2014 was $0.0 million and $99.6 million, respectively, and approximated its fair value.
 
Senior Unsecured Credit Facility: We maintain a senior unsecured revolving credit facility (Credit Facility) that provides revolving credit in the aggregate amount of $1.750 billion, which was increased from $1.500 billion in April 2015. In April 2015, the term of the Credit Facility was also extended from April 18, 2018 to April 17, 2020. 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 $2.000 billion. Amounts may be borrowed in U.S. dollars for general corporate purposes. The Credit Facility currently

22

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

serves as backup liquidity for our Commercial Paper borrowings. At March 31, 2015, there was no outstanding borrowing against the Credit Facility.

The Credit Facility contains affirmative and negative covenants, including certain customary financial covenants. We were in compliance with all financial covenants as of March 31, 2015

12. Share-Based Compensation
 
We have a stockholder-approved stock incentive plan, the 2008 Stock Incentive Plan (Amended and Restated as of April 17, 2013 and as further amended on April 17, 2014) (Plan) that provides for the granting of options, restricted stock units (RSUs), performance stock units (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.
During the three-month period ended March 31, 2015, we increased our usage of PSUs and began issuing PSUs to certain executive officers that are payable in shares of our common stock at the end of a three-year performance measurement period. The number of shares to be issued at the end of the measurement period will vary, based on performance, from 0% to 200% of the target number of PSUs granted, depending on the achievement of specified performance and market targets for revenue (37.5% weighting), earnings per share (37.5% weighting), and relative total shareholder return (25% weighting). All shares delivered upon PSU vesting are restricted from trading for one year and one day from the vesting date.

The grant date fair value for the portion of the PSUs related to revenue and earnings per share was estimated using the fair market value of our common stock on the grant date. The grant date fair value for the portion of the PSUs related to relative total shareholder return was estimated using the Monte Carlo valuation model. The weighted average grant date fair value per share of the PSUs granted to certain executive officers during the three-month period ended March 31, 2015 was $122.90.

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, 2015 and 2014:
 
 
Three-Month Periods Ended March 31,
 
2015
 
2014
Cost of goods sold (excluding amortization of acquired intangible assets)
$
6.7

 
$
6.1

Research and development
56.2

 
47.0

Selling, general and administrative
65.9

 
51.3

Total share-based compensation expense
128.8

 
104.4

Tax benefit related to share-based compensation expense
36.4

 
30.0

Reduction in income
$
92.4

 
$
74.4


The following table summarizes the activity for stock options, RSUs and PSUs for the three-month period ended March 31, 2015 (in millions unless otherwise noted):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
(in thousands)
Outstanding at December 31, 2014
77.2

 
9.4

 
133

Changes during the Year:
 

 
 

 
 

Granted
2.8

 
0.1

 
73

Exercised / Released
(3.7
)
 
(0.2
)
 

Forfeited
(0.4
)
 
(0.2
)
 
(2
)
Outstanding at March 31, 2015
75.9

 
9.1


204

 

23

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

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, 2015 were as follows (dollars in millions):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
Unrecognized compensation cost
$
573.8

 
$
227.7

 
$
13.3

Expected weighted-average period in years of compensation cost to be recognized
2.1

 
1.0

 
2.0

 
 
13. Income Taxes
 
We regularly evaluate the likelihood of the realization of our deferred tax assets and reduce the carrying amount of those deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. Significant judgment is required in making this assessment.
Our tax returns are under routine examination in many taxing jurisdictions. The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed. Our U.S. federal income tax returns have been audited by the Internal Revenue Service (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, which may be completed within the next twelve months. We are also subject to audits by various state and foreign taxing authorities, including, but not limited to, most U.S. states and major European and Asian countries where we have operations.
 
We regularly reevaluate our tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, judicial precedents, etc.) that would reduce the technical merits of the position to below more likely than not. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We apply a variety of methodologies in making these estimates and assumptions, which include studies performed by independent economists, advice from industry and subject experts, evaluation of public actions taken by the IRS and other taxing authorities, as well as our industry experience. These evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if management’s estimates are not representative of actual outcomes, our results of operations could be materially impacted.
 
Unrecognized tax benefits, generally represented by liabilities on the consolidated balance sheet and all subject to tax examinations, arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Virtually all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. We account for interest and potential penalties related to uncertain tax positions as part of our provision for income taxes. For the three-month period ended March 31, 2015 gross unrecognized tax benefits increased by $15.2 million, primarily from unrecognized tax benefits related to current year operations of $12.7 million and accrued interest of $2.5 million. 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 decrease in our liability for unrecognized tax benefits and a corresponding increase in taxes paid or payable and/or a decrease in income tax expense. Certain examinations may conclude within the next twelve months. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period as a result of settlements or statute of limitations expirations. Finalizing examinations with the relevant taxing authorities can include formal administrative and legal proceedings and, as a result, it is difficult to estimate the timing and range of possible change related to the Company’s unrecognized tax benefits. An estimate of the range of possible change cannot be made until issues are further developed or examinations close. 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. 


24

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

14. Collaboration Agreements

From time to time, we enter into collaborative arrangements for the research and development, license, manufacture and/or commercialization of products and/or product candidates. In addition, we also acquire product and research and development technology rights and establish research and development collaborations with third parties to enhance our strategic position within our industry by strengthening and diversifying our research and development capabilities, product pipeline and marketed product base. These arrangements may include non-refundable, upfront payments, option payments for the purchase or license of additional rights, development, regulatory and commercial performance milestone payments, cost sharing arrangements, royalty payments, profit sharing and equity investments. 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. Although we do not consider any individual alliance to be material, certain of the more notable alliances are described below. See Note 17 of Notes to Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K for a description of certain other collaboration agreements entered into prior to January 1, 2015. 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, 2015:

Agios Pharmaceuticals, Inc. (Agios):    During 2010, we entered into a discovery and development collaboration and license agreement with Agios that focuses on cancer metabolism targets and the discovery, development and commercialization of associated therapeutics. We have an exclusive option to license any potential products that result from the Agios cancer metabolism research platform through the end of phase I clinical trials.

With respect to each product that we choose to license, Agios could receive up to approximately $120.0 million upon achievement of certain milestones and other payments plus royalties on worldwide sales, and Agios may also participate in the development and commercialization of certain products in the United States. In December 2014, Celgene elected to extend the collaboration and license agreement for an additional year for a payment of $20.0 million. Our option to license products will terminate on April 14, 2016.

In June 2014, we exercised our option to license AG-221 from Agios on an exclusive worldwide basis, with Agios retaining the right to conduct a portion of commercialization activities for AG-221 in the United States. AG-221 is currently in a phase I study in patients that present an isocitrate dehydrogenase-2 (IDH2) mutation with advanced hematologic malignancies, including acute myeloid leukemia (AML).

In January 2015, we exercised our option to an exclusive license from Agios to AG-120 outside the United States, with Agios retaining the right to conduct development and commercialization within the United States. AG-120 is currently being evaluated in two phase I dose escalation trials, one in advanced hematological malignancies and the other in advanced solid tumors.

In April 2015 we and Agios entered into a new joint worldwide development and profit share collaboration for AG-881. AG-881 is a small molecule that has shown in preclinical studies to fully penetrate the blood brain barrier and inhibit isocitrate dehydrogenase-1 (IDH1) and IDH2 mutant cancer cells. Under the terms of the AG-881 collaboration, Agios will receive an initial payment of $10 million in the second quarter of 2015 and is eligible to receive contingent payments of up to $70 million based on the attainment of specified regulatory goals. Agios and Celgene will jointly collaborate on the worldwide development program for AG-881, sharing development costs with an equal share worldwide. The two companies will share worldwide profits with equal shares, with Celgene booking commercial sales worldwide. Agios will lead commercialization in the U.S with both companies sharing equally in field-based commercial activities, and we will lead commercialization ex-US with Agios providing one third of field-based commercial activities in the major EU markets.

FORMA Therapeutics Holdings, LLC (FORMA): On April 19, 2013, we entered into a collaboration agreement with 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

25

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

$315.0 million in potential payments based upon development, regulatory and sales objectives for the first ex-U.S. license. FORMA is also eligible to receive potential payments for successive licenses, which escalate for productivity, increasing up to a maximum of an additional $430.0 million per program. In addition, FORMA will receive royalties on ex-U.S. sales and additional payments if multiple drug candidates reach defined cumulative sales objectives. The collaboration agreement includes provisions for Celgene to obtain rights with respect to development and commercialization of drug candidates inside the United States in exchange for additional payments.

Under the collaboration, the parties will perform initial research and development for a term of four years. If, during such research term, a drug candidate meets certain criteria, then the parties will enter into a pre-negotiated license agreement and the collaboration will continue until all license agreements have expired and all applicable royalty terms under the collaboration with respect to the particular products have expired. Each license agreement, if not terminated sooner, would expire upon the expiration of all applicable royalty terms under such agreement. Upon the expiration of each license agreement, we will have an exclusive, fully-paid, royalty-free license to use the applicable FORMA intellectual property to manufacture, market, use and sell the product developed under such agreement outside of the United States. In October, 2013, we entered into the first ex-US license with FORMA and paid the applicable upfront payment under such license. In February, 2015, we entered into the second ex-US license with FORMA and made a $19.0 million upfront payment for the license.

On March 21, 2014, we entered into a second collaboration arrangement with FORMA, pursuant to which FORMA granted us an option for an additional fee 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 I 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 successive 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. In April, 2015, we entered into the first license with FORMA under the second collaboration and will make a $20.0 million upfront payment for the license.

MorphoSys AG (MorphoSys):  On March 26, 2015, we and MorphoSys agreed to terminate our collaboration, license and equity purchase agreement for the co-development and co-promotion of the anti-CD38 antibody, MOR202. As part of the termination, we made a final payment of $8.1 million to settle all obligations. The termination of our agreement eliminates all potential future payments for development, regulatory and sales milestones. We have retained our equity interest in MorphoSys.



26

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

A financial summary of certain period activity related to our collaboration agreements is presented below1,2:
 
 
Three-Month Periods Ended March 31,
 
 
Research and Development Expense
 
 
 
 
Upfront Fees
 
Milestones
 
Termination of Agreements
 
Amortization of Prepaid R&D and Intangibles
 
Equity Investments Made During Period
Acceleron
2015
$—
 
$—
 
$—
 
$—
 
$—
 
2014
 
 
 
 
15.0
Epizyme
2015
 
 
 
 
 
2014
 
 
 
 
9.9
FORMA
2015
19.0
 
 
 
 
 
2014
225.0
 
 
 
 
MorphoSys
2015
 
 
8.1
 
 
 
2014
 
 
 
 
NantBioScience(3)
2015
 
 
 
 
 
2014
50.0
 
 
 
 
90.0
Other Collaboration Arrangements
2015
 
 
 
5.5
 
 
2014
34.0
 
 
 
3.8
 
20.9
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
Acceleron
March 31, 2015
 
$—
 
$175.5
 
14%
 
December 31, 2014
 
 
179.7
 
14%
Epizyme
March 31, 2015
 
 
69.0
 
9%
 
December 31, 2014
 
 
69.3
 
11%
FORMA
March 31, 2015
 
0.1
 
 
N/A
 
December 31, 2014
 
0.1
 
 
N/A
MorphoSys
March 31, 2015
 
 
50.3
 
3%
 
December 31, 2014
 
 
73.9
 
3%
NantBioScience
March 31, 2015
 
 
90.0
 
13%
 
December 31, 2014
 
 
90.0
 
14%
Other Collaboration Arrangements
March 31, 2015
 
76.0
 
633.2
 
N/A
 
December 31, 2014
 
67.7
 
720.8
 
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 2014 Annual Report on Form 10-K if there has been new significant activity during the periods presented. Amounts related to collaborations that are not specifically described are presented in the aggregate as Other Collaboration Arrangements.
2 
In addition to the expenses noted in the tables above, we may also incur expenses for collaboration agreement related activities that are managed or funded by us.

3 
$25.0 million of expense related to the settlement of contingent matching contributions was also recognized at the inception of the collaboration agreement with NantBioScience during the three-month period ended March 31, 2014 and included in Selling, General and Administrative expense.


27

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

15. Commitments and Contingencies

Collaboration Arrangements: We have entered into certain research and development collaboration agreements with third parties that include the funding of certain development, manufacturing and commercialization efforts with the potential for future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial targets. Our obligation to fund these efforts is contingent upon continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs. Due to the nature and uncertainty of these arrangements and any future potential payments, no amounts have been recorded in our accompanying Consolidated Balance Sheets at March 31, 2015 and December 31, 2014. See Note 14 for additional details related to collaboration arrangements.
 
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.
16. 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, inquiries, 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.

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.


28

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

A claim construction decision was issued on May 27, 2014, and fact discovery closed on August 4, 2014. On November 18, 2014, the court granted-in-part Natco’s motion to amend its invalidity contentions, which decision we appealed. A hearing has not yet been set for the appeal. Expert discovery has been extended and is set to close on September 4, 2015. 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.

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. On May 15, 2014, we filed an infringement action in the United States District Court for the District of New Jersey against Natco, Arrow and Watson. Natco filed its answer and counterclaim on June 13, 2014, and asserts that our patents are invalid, unenforceable and/or not infringed by Natco’s proposed generic products. A scheduling order has yet to be issued.

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. The 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, the 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.

On April 10, 2015, the Federal Circuit Court heard arguments on the appeals. A decision has yet to be issued.

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 January 30, 2014, we filed a motion to dismiss Andrulis’ amended complaint. 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. In February 2015, we filed a partial summary judgment motion, which is scheduled for oral argument on May 28, 2015. A Markman hearing to determine the construction of certain claims for the Andrulis patent is scheduled for May 27, 2015.

Fact discovery is set to close on June 16, 2015. Expert discovery is set to close on December 21, 2015. A claim construction hearing has yet to be scheduled. Trial is scheduled to begin on June 6, 2016. 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 (the ‘280 and ‘724 patents) that are listed in the Orange Book for ISTODAX®.

On April 30, 2014, Celgene and Astellas Pharma Inc., filed an infringement action in the United States District Court for the District of Delaware against Fresenius. In its answer and counterclaim, Fresenius asserts that the ‘280 and ‘724 patents are invalid and/or not infringed by its proposed generic products. As a result of the filing of our action, the FDA cannot grant final approval of Fresenius’s ANDA until the earlier of (i) a final decision that each of the patents is invalid and/or not infringed; or (ii) May 5, 2017.

On August 4, 2014, we received a Notice Letter from InnoPharma, Inc. (InnoPharma) notifying us of Innopharma'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 (the '280 and '724 patents) that are listed in the Orange Book for ISTODAX®.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On September 12, 2014, we and Astellas Pharma Inc., filed an infringement action in the United States District Court for the District of Delaware against InnoPharma. In its answer and counterclaim, InnoPharma asserts that the ‘280 and ‘724 patents are invalid and/or not infringed by its proposed generic products. As a result of the filing of our action, the FDA cannot grant final approval of InnoPharma's ANDA until the earlier of (i) a final decision that each of the patents is invalid and/or not infringed; or (ii) May 5, 2017.

These two cases were consolidated in December 2014. Fact discovery is set to close in the consolidated cases on November 6, 2015. A claim construction hearing is scheduled for October 16, 2015. Expert discovery in the consolidated cases is set to close on July 13, 2016 and trial is scheduled to begin on September 19, 2016.

THALOMID® (thalidomide): We received a Notice Letter dated December 18, 2014 from Lannett Holdings, Inc. (Lannett) notifying us of Lannett’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 5,629,327; 6,045,501; 6,315,720; 6,561,976; 6,561,977; 6,755,784; 6,869,399; 6,908,432; 7,141,018; 7,230,012; 7,435,745; 7,874,984; 7,959,566; 8,204,763; 8,315,886; 8,589,188; and 8,626,531 that are listed in the Orange Book for THALOMID® (thalidomide). Lannett is seeking to market a generic version of 50mg, 100mg, 150mg and 200mg of THALOMID® capsules. On January 30, 2015, we filed an infringement action against Lannett in the United States District Court for the District of New Jersey. On March 27, 2015, Lannett filed a motion to dismiss our complaint for lack of personal jurisdiction. We filed a response to the motion to dismiss on April 20, 2015. A hearing on this motion has not yet been scheduled.

Other 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. We filed a motion to dismiss Mylan’s complaint on May 25, 2014. Mylan filed its opposition to our motion to dismiss on June 16, 2014. The Federal Trade Commission filed an amicus curiae brief in opposition to our motion to dismiss on June 17, 2014. On December 22, 2014, the court granted Celgene’s motion to dismiss (i) Mylan’s claims based on Section 1 of the Sherman Act (without prejudice), and (ii) Mylan's claims arising under the New Jersey Antitrust Act. The court denied our motion to dismiss the rest of the claims which primarily relate to Section 2 of the Sherman Act. On January 6, 2015 we filed a motion to certify for interlocutory appeal the order denying our motion to dismiss with respect to the claims relating to Section 2 of the Sherman Act, which appeal was denied by the United State Court of Appeals for the Third Circuit on March 5, 2015. On January 20, 2015, we filed an answer to Mylan’s complaint. Fact discovery is set to close January 11, 2016 and expert discovery is set to be completed by July 31, 2016. No trial date has been set. 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. On April 25, 2014, we filed a motion to dismiss the complaint in the remaining (Central District of California) action, United States of America ex. rel. Beverly Brown V. Celgene Corp., unsealed February 5, 2014 (the Brown Action), which was denied except with respect to certain state claims. We filed our answer to the complaint on August 28, 2014. Fact discovery is set to close on July 24, 2015 and expert discovery is set to close on September 25, 2015. Summary judgment motions are due November 16, 2015. We intend to vigorously defend against the remaining claims in the Brown Action.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In a related matter, in July 2014, we received a letter purportedly on behalf of two stockholders that demands, primarily on the basis of the allegations in the Brown Action, that our board of directors take action on the Company’s behalf to correct alleged deficiencies in the Company’s internal controls and to recover from current and past directors and officers damages those stockholders allege to have resulted from breaches of fiduciary duties related to the matters alleged in the Brown Action. Our Board has formed a Demand Investigation Committee, and with the assistance of independent counsel retained by it, the Demand Investigation Committee is considering the issues raised in the stockholders’ letter.

In November 2014, we received another letter purportedly on behalf of a stockholder that demands access to certain books and records of the Company for the purpose of investigating matters pertaining to the Brown Action. The Company intends to comply with the demand to the extent it considers reasonable in view of the Demand Investigation Committee’s ongoing consideration of matters pertaining to the Brown Action.

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. Fact discovery closed on February 13, 2015. Expert discovery is set to be completed by June 16, 2015. No trial date has as yet been set by the court.

On July 8, 2014, CR Rev Holdings, LLC (“CR Rev”) filed a complaint against Celgene in the same action. CR Rev alleges that CMCC sold and assigned a substantial portion of the royalty payments owed by Celgene on the sale of REVLIMID® to CR Rev. CR Rev has alleged causes of action with respect to REVLIMID® identical to those alleged by CMCC, and seeks unspecified damages and a declaration that the license agreement is still in effect. We intend to vigorously defend against CMCC's and CR Rev’s claims. As of March 31, 2015, we consider the range of reasonably possible loss relating to this lawsuit to be between zero and $98.4 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, 2015, 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, 2015.

In the second quarter of 2014, we received a Health Insurance Portability and Accountability Act (HIPAA) subpoena from the United States Attorney’s Office for the District of Massachusetts requesting certain documents relating to an investigators meeting in 2011 with respect to a clinical study relating to ABRAXANE®. The Company is cooperating with the United States Attorney in connection with this subpoena.

On October 2, 2014, a complaint was filed in Delaware Chancery Court by a stockholder asserting derivative claims on behalf of the Company against the non-employee members of the Board of Directors. The complaint alleges that equity grants made to non-employee directors in 2012 and 2013 were excessive compared to the equity grants to directors of peer companies, and that the award of such allegedly excessive compensation constituted a breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint seeks equitable relief, disgorgement of the alleged excess compensation, modification of the Company’s compensation process to limit the equity awards that may be granted to non-employee directors, and attorneys’ fees and other costs. The Company is a nominal defendant in the case. Neither the Company nor the individual defendants have yet responded to the complaint. On March 30, 2015, plaintiff served on the Company plaintiff’s First Request for Production of Documents and Notice of Deposition of the Company.
 
On November 7, 2014, the International Union of Bricklayers and Allied Craft Workers Local 1 Health Fund (IUB) filed a putative class action lawsuit against us in the United States District Court for the District of New Jersey alleging that we violated various state antitrust, consumer protection, and unfair competition laws by (a) allegedly securing an exclusive supply contract with Seratec S.A.R.L. so that Barr Laboratories (“Barr” who at one time held an ANDA for THALOMID®) allegedly could not secure its own supply of thalidomide active pharmaceutical ingredient; (b) allegedly refusing to sell samples of our THALOMID® and REVLIMID® brand drugs to Mylan Pharmaceuticals, Lannett Company, and Dr. Reddy’s Laboratories so that those companies could conduct the bioequivalence testing needed to submit ANDAs to the FDA for approval to market generic versions of these products; and (c) allegedly bringing unjustified patent infringement lawsuits against Barr and Natco Pharma Limited in order to allegedly delay those companies from obtaining approval for proposed generic versions of THALOMID® and REVLIMID®. IUB, on behalf of itself and a putative class of third party payors, is seeking injunctive relief and damages. On February 6, 2015, we

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

filed a motion to dismiss IUB’s complaint. On March 3, 2015, the City of Providence (“Providence”) filed a similar putative class action making similar allegations. Both IUB and Providence, on behalf of themselves and a putative class of third party payors, are seeking injunctive relief and damages. Providence agreed that the decision in the motion to dismiss IUB’s complaint would apply to the identical claims in Providence’s complaint as well. The Court has not yet issued a decision. A supplemental motion to dismiss Providence’s state law claims was filed on April 20, 2015. We intend to vigorously defend against IUB’s claims.

17. Subsequent Events

In April 2015, we entered into a strategic collaboration agreement with MedImmune Limited (MedImmune), a subsidiary of AstraZeneca PLC, to develop and commercialize MEDI4736, a novel anti-PD-L1 monoclonal antibody, for hematologic malignancies. The agreement provides for a negotiation period to expand the agreement for other immuno-therapeutics. Under the terms of the agreement, we will make an upfront payment of $450 million to MedImmune. We will lead clinical development across all new clinical trials within the collaboration and will be responsible for all costs associated with such trials until December 31, 2016, after which we will be responsible for 75 percent of those costs. We also will be responsible for the global commercialization of approved MEDI4736 indications in hematology, and will receive royalty rates starting at 70 percent of worldwide sales from all uses in hematology. Royalty rates will decrease gradually to 50 percent over a period of four years after the start of commercial sales.

In April 2015, we entered into a definitive share purchase agreement under which we would acquire Quanticel Pharmaceuticals, Inc. (Quanticel), a privately held biotechnology company focused on cancer drug discovery, for consideration consisting of $100 million in cash at closing plus contingent consideration consisting of payments for achieving specified discovery and development targets of up to $385 million. Celgene has had a research collaboration arrangement with Quanticel since 2011. Through this purchase, Quanticel will become our wholly-owned subsidiary, and we will gain full access to Quanticel’s proprietary platform for the single-cell genomic analysis of human cancer, as well as Quanticel’s lead programs that target specific epigenetic modifiers to advance Celgene’s pipeline of innovative cancer therapies. The purchase is subject to customary closing conditions, including regulatory approvals and the approval of Quanticel's shareholders, and is expected to close in the second half of 2015.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Information
 
This report contains forward-looking statements that reflect the current views of our management with respect to future events, results of operations, economic performance and/or financial condition. Any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “may,” “could,” “will,” “will continue,” “seeks,” “should,” “predicts,” “potential,” “outlook,” “guidance,” “target,” “forecast,” “probable,” “possible” or the negative of such terms and similar expressions. Forward-looking statements are based on current plans, estimates, assumptions and projections, which are subject to change and may be affected by risks and uncertainties, most of which are difficult to predict and are generally beyond our control. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws and other applicable laws. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements and therefore you should not place too much reliance on them. These factors include, among others, those described in the sections “Forward-Looking Statements” and “Risk Factors” contained in our 2014 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 an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation. 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 designed to 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®, POMALYST®/IMNOVID®, VIDAZA® , azacitidine for injection (generic version of VIDAZA®), THALOMID® (sold as THALOMID® or Thalidomide CelgeneTM outside of the U.S.), OTEZLA® and ISTODAX®. 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 products and services through our Celgene Cellular Therapeutics (CCT) subsidiary and other licensing arrangements.

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 multiple myeloma, lymphomas, chronic lymphocytic leukemia (CLL) and myelodysplastic syndromes (MDS). POMALYST®/IMNOVID® was approved in the United States and the European Union (EU) for indications in multiple myeloma based on phase II and phase III trial results, respectively, and an additional phase III trial is underway with POMALYST®/IMNOVID® in relapsed and refractory multiple myeloma. Phase III trials are also underway for CC-486 in MDS and acute myeloid leukemia (AML) and ISTODAX® in first-line peripheral T-cell lymphoma (PTCL). In solid tumors, ABRAXANE® is currently in various stages of investigation for breast, pancreatic and non-small cell lung cancers. In inflammation and immunology, OTEZLA® is being evaluated in phase III trials for Behçet's disease and expanded indications in psoriatic arthritis and psoriasis. Also in the inflammation and immunology therapeutic area, we have acquired a global development and commercialization license to GED-0301 from Nogra Pharma Limited (Nogra) and have initiated a multi-trial clinical program that is designed to support global registrations of GED-0301 in Crohn's disease.

Beyond our phase III programs, we have access to a growing early-to-mid-stage pipeline of novel potential therapies to address significant unmet medical needs that consists of new drug candidates and cell therapies developed in-house, licensed from other companies or able to be optioned from collaboration partners.


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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 diseases that our primary commercial stage products are approved to treat 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.

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)
 
Multiple myeloma in combination with dexamethasone, in patients who have received at least one prior therapy
- United States
- European Union
- Japan
- Other international markets
Multiple myeloma in combination with dexamethasone for newly diagnosed patients
- United States (Approved February 2015)
Adult patients with previously untreated multiple myeloma who are not eligible for transplant
- European Union (Approved February 2015)
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


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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
- European Union (Approved March 2015)
- Other international markets
NSCLC
- Japan
Pancreatic Cancer
 
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
Unresectable pancreatic cancer
- Japan
Gastric cancer
- Japan

POMALYST®/IMNOVID®-(pomalidomide)1: POMALYST®/IMNOVID® is a proprietary, distinct, small molecule that is administered orally and modulates the immune system and other biologically important targets. POMALYST®/IMNOVID® is approved for the treatment of patients as indicated below:
Disease
Geographic Approvals
Multiple myeloma, in combination with dexamethasone, for patients who have received at least two prior therapies, including lenalidomide and a proteasome inhibitor 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
Relapsed and refractory multiple myeloma for patients who have received REVLIMID or bortezomib
- Japan (Approved March 2015)
1 We received approval for pomalidomide under the trade name POMALYST® in the United States and Japan. We received approval for pomalidomide under the trade name IMNOVID® in the European Union.


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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. 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 2013, we also contracted with Sandoz AG to sell a generic version of VIDAZA® in the United States, which we supply. We recognize net product sales from our sales of azacitidine for injection to Sandoz AG. Regulatory exclusivity for VIDAZA® is expected to continue in 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
MDS
- Japan
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
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. During 2014 and January 2015, OTEZLA® received initial approvals in the U.S. and EU as indicated below:
Disease
Geographic Approvals
Psoriatic arthritis
 
Adult patients with active psoriatic arthritis
- United States
Adult patients with active psoriatic arthritis who have had an inadequate response or who have been intolerant to a prior DMARD therapy
- European Union (Approved January 2015)
Psoriasis
 
Patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy
- United States
- Other international markets
Adult patients with moderate to severe chronic plaque psoriasis who failed to respond to or who have a contraindication to, or are intolerant to other systemic therapy including cyclosporine, methotrexate or psoralen and ultraviolet-A light
- European Union (Approved January 2015)

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THALOMID® (thalidomide): THALOMID®, sold as THALOMID® or Thalidomide CelgeneTM outside of 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