10-Q 1 a2015063010q.htm 10-Q 2015.06.30 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
 
[x]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 24, 2015, 790,540,158 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 June 30,
 
Six-Month Periods Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Net product sales
$
2,254.1

 
$
1,844.6

 
$
4,309.3

 
$
3,552.1

Other revenue
23.7

 
28.1

 
49.3

 
50.6

Total revenue
2,277.8

 
1,872.7

 
4,358.6

 
3,602.7

Expenses:
 

 
 

 
 

 
 

Cost of goods sold (excluding amortization of acquired intangible assets)
100.8

 
98.9

 
204.8

 
185.0

Research and development
1,110.0

 
456.9

 
1,616.0

 
1,170.6

Selling, general and administrative
616.8

 
491.8

 
1,146.0

 
985.9

Amortization of acquired intangible assets
63.7

 
65.3

 
127.3

 
131.0

Acquisition related (gains) charges, net
(29.3
)
 
0.9

 
(10.3
)
 
9.5

Total costs and expenses
1,862.0

 
1,113.8

 
3,083.8

 
2,482.0

Operating income
415.8

 
758.9

 
1,274.8

 
1,120.7

Other income and (expense):
 

 
 

 
 

 
 

Interest and investment income, net
8.8

 
7.3

 
17.8

 
13.7

Interest (expense)
(48.3
)
 
(41.6
)
 
(97.5
)
 
(70.9
)
Other income (expense), net
94.5

 
(17.8
)
 
102.8

 
(24.4
)
Income before income taxes
470.8

 
706.8

 
1,297.9

 
1,039.1

Income tax provision
114.6

 
109.0

 
222.8

 
161.6

Net income
$
356.2

 
$
597.8

 
$
1,075.1

 
$
877.5

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.45

 
$
0.75

 
$
1.35

 
$
1.09

Diluted
$
0.43

 
$
0.72

 
$
1.30

 
$
1.05

Weighted average shares:
 

 
 

 
 

 
 

Basic
793.0

 
799.6

 
796.0

 
805.5

Diluted
825.3

 
831.0

 
829.7

 
838.0

 
See accompanying Notes to Unaudited Consolidated Financial Statements

3


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

 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
356.2

 
$
597.8

 
$
1,075.1

 
$
877.5

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
15.5

 
1.1

 
(7.7
)
 
4.1

Pension liability adjustment
(1.7
)
 

 
(7.6
)
 

 
 
 
 
 
 
 
 
Net unrealized gains (losses) related to cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
(62.8
)
 
(21.7
)
 
344.1

 
(40.3
)
Tax (expense) benefit
(31.5
)
 
8.9

 
(21.6
)
 
12.6

Unrealized holding gains (losses), net of tax
(94.3
)
 
(12.8
)
 
322.5

 
(27.7
)
 
 
 
 
 
 
 
 
Reclassification adjustment for (gains) losses included in net income
(89.0
)
 
3.0

 
(158.2
)
 
4.9

Tax (benefit)
(0.5
)
 
(0.4
)
 
(1.0
)
 
(0.7
)
Reclassification adjustment for (gains) losses included in net income, net of tax
(89.5
)
 
2.6

 
(159.2
)
 
4.2

 
 
 
 
 
 
 
 
Net unrealized gains (losses) on marketable securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
68.8

 
48.0

 
(8.3
)
 
132.3

Tax (expense) benefit
(23.4
)
 
(16.1
)
 
3.1

 
(45.1
)
Unrealized holding gains (losses), net of tax
45.4

 
31.9

 
(5.2
)
 
87.2

 
 
 
 
 
 
 
 
Reclassification adjustment for losses included in net income
1.3

 
1.6

 
0.7

 
3.0

Tax (benefit)
(0.4
)
 
(0.6
)
 
(0.2
)
 
(1.1
)
Reclassification adjustment for losses included in net income, net of tax
0.9

 
1.0

 
0.5

 
1.9

 
 
 
 
 
 
 
 
Total other comprehensive income
(123.7
)
 
23.8

 
143.3

 
69.7

Comprehensive income
$
232.5

 
$
621.6

 
$
1,218.4

 
$
947.2


See accompanying Notes to Unaudited Consolidated Financial Statements

4


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except per share amounts)
 
 
June 30,
2015
 
December 31,
2014
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
4,530.8

 
$
4,121.6

Marketable securities available for sale
2,961.4

 
3,425.1

Accounts receivable, net of allowances of $32.1 and $32.1 at June 30, 2015 and December 31, 2014, respectively
1,273.4

 
1,166.7

Inventory
414.3

 
393.1

Deferred income taxes
11.2

 
11.7

Other current assets
692.4

 
594.4

Total current assets
9,883.5

 
9,712.6

Property, plant and equipment, net
675.2

 
642.6

Intangible assets, net
3,937.5

 
4,067.6

Goodwill
2,191.2

 
2,191.2

Other assets
1,058.3

 
726.1

Total assets
$
17,745.7

 
$
17,340.1

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
1,362.9

 
$
605.9

Accounts payable
204.9

 
198.2

Accrued expenses
1,007.4

 
991.1

Income taxes payable
11.0

 
12.7

Current portion of deferred revenue
58.2

 
28.5

Other current liabilities
315.1

 
275.8

Total current liabilities
2,959.5

 
2,112.2

Deferred revenue, net of current portion
29.7

 
27.8

Income taxes payable
306.8

 
272.9

Deferred income taxes
315.8

 
555.6

Other non-current liabilities
1,555.9

 
1,581.1

Long-term debt, net of discount
6,256.1

 
6,265.7

Total liabilities
11,423.8

 
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 June 30, 2015 and December 31, 2014, respectively

 

Common stock, $.01 par value per share, 1,150.0 million shares authorized; issued 933.5 million and 924.8 million shares at June 30, 2015 and December 31, 2014, respectively
9.3

 
9.2

Common stock in treasury, at cost; 142.5 million and 124.6 million shares at June 30, 2015 and December 31, 2014, respectively
(12,788.7
)
 
(10,698.8
)
Additional paid-in capital
10,495.7

 
9,827.2

Retained earnings
7,547.5

 
6,472.4

Accumulated other comprehensive income
1,058.1

 
914.8

Total stockholders’ equity
6,321.9

 
6,524.8

Total liabilities and stockholders’ equity
$
17,745.7

 
$
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)
 
Six-Month Periods Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
1,075.1

 
$
877.5

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

 
 

Depreciation
57.8

 
52.1

Amortization
131.3

 
136.4

Deferred income taxes
(252.6
)
 
(181.1
)
Change in value of contingent consideration
(10.3
)
 
9.5

Net (gain) loss on sale of investments
(85.6
)
 
3.2

Share-based compensation expense
276.5

 
207.8

Share-based employee benefit plan expense
17.1

 
17.6

Reclassification adjustment for cash flow hedges included in net income
(158.2
)
 
4.9

Unrealized change in value of derivative instruments
154.2

 
(16.5
)
Other, net
1.8

 
(2.4
)
Change in current assets and liabilities, excluding the effect of acquisitions:
 

 
 

Accounts receivable
(140.9
)
 
(61.8
)
Inventory
(19.2
)
 
(19.1
)
Other operating assets
(46.8
)
 
36.7

Accounts payable and other operating liabilities
76.8

 
(20.1
)
Income tax payable
32.8

 
24.8

Payment of contingent consideration

 
(5.0
)
Deferred revenue
31.1

 
8.3

Net cash provided by operating activities
1,140.9

 
1,072.8

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available for sale
1,579.8

 
1,144.0

Purchases of marketable securities available for sale
(1,127.1
)
 
(1,556.3
)
Payments for acquisition of business

 
(710.0
)
Capital expenditures
(95.0
)
 
(61.4
)
Purchases and sales of investment securities, net
(115.0
)
 
(22.5
)
Other investing activities
(3.0
)
 
0.3

Net cash provided by (used in) investing activities
239.7

 
(1,205.9
)
Cash flows from financing activities:
 

 
 

Payment for treasury shares
(1,997.3
)
 
(2,182.2
)
Proceeds from short-term borrowing
970.9

 
2,235.4

Principal repayments on short-term borrowing
(209.7
)
 
(2,588.0
)
Proceeds from issuance of long-term debt

 
2,470.6

Proceeds from sale of common equity put options
6.4

 
5.2

Payment of contingent consideration

 
(15.0
)
Net proceeds from share-based compensation arrangements
104.2

 
94.0

Excess tax benefit from share-based compensation arrangements
174.2

 
90.0

Net cash provided by (used in) financing activities
(951.3
)
 
110.0

Effect of currency rate changes on cash and cash equivalents
(20.1
)
 
8.2

Net increase (decrease) in cash and cash equivalents
409.2

 
(14.9
)
Cash and cash equivalents at beginning of period
4,121.6

 
3,234.4

Cash and cash equivalents at end of period
$
4,530.8

 
$
3,219.5


 See accompanying Notes to Unaudited Consolidated Financial Statements

6


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(Dollars in millions)
 
 
Six-Month Periods Ended June 30,
 
2015
 
2014
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Fair value of contingent consideration issued in business combinations
$

 
$
1,060.0

Change in net unrealized (gain) loss on marketable securities available for sale
$
8.3

 
$
(132.3
)
Investment in NantBioScience, Inc. preferred equity
$

 
$
90.0

Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
120.2

 
$
75.9

Income taxes paid
$
247.2

 
$
193.4

  
See accompanying Notes to Unaudited Consolidated Financial Statements

7


CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In all accompanying tables, amounts of dollars expressed in millions,
except per share amounts, unless otherwise indicated)
 
1. Nature of Business and Basis of Presentation
 
Celgene Corporation, together with its subsidiaries (collectively “we,” “our,”  “us,” “Celgene” or the “Company”), is 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.

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. 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 2018 using one of two prescribed transition methods. 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

8

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

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. Acquisitions

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. Based on our evaluation of the license agreement, our level of control and decision making authority over the development and application of the intellectual property, the associated transfer of manufacturing agreements and knowhow, and access to employees of Nogra, we concluded that the acquired assets met the definition of a business and we have accounted for the GED-0301 license as in-process research and development (IPR&D) acquired in a business combination. The assets acquired and liabilities assumed of Nogra were recorded on our balance sheet as of May 14, 2014 (Effective Date), at their respective fair values. Nogra's results of operations are included in our consolidated financial statements from the Effective Date.
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.
Subsequent to the Effective Date, we have measured the contingent consideration at fair value each period with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the IPR&D assets and the passage of time. At June 30, 2015, the balance of the contingent consideration was $1.186 billion, of which $24.9 million is included in other current liabilities and $1.161 billion included in other non-current liabilities.

Quanticel Pharmaceuticals, Inc. (Quanticel): In April 2015, we entered into a definitive share purchase agreement under which we would acquire Quanticel, a privately held biotechnology company focused on cancer drug discovery, for consideration consisting of $100.0 million in cash at closing plus contingent consideration consisting of payments for achieving specified discovery and development targets of up to $385.0 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 and is expected to close in the fourth quarter of 2015.


9

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

4. Earnings Per Share
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
(Amounts in millions, except per share)
2015
 
2014
 
2015
 
2014
Net income
$
356.2

 
$
597.8

 
$
1,075.1

 
$
877.5

Weighted-average shares:
 
 
 
 
 
 
 
Basic
793.0

 
799.6

 
796.0

 
805.5

Effect of dilutive securities:
 
 
 
 
 
 
 
Options, restricted stock units and other incentives
32.3

 
31.4

 
33.7

 
32.5

Diluted
825.3

 
831.0

 
829.7

 
838.0

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.75

 
$
1.35

 
$
1.09

Diluted
$
0.43

 
$
0.72

 
$
1.30

 
$
1.05

 
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 9.0 million and 13.5 million for the three-month periods ended June 30, 2015 and 2014, respectively. 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 9.0 million and 14.2 million shares for the six-month periods ended June 30, 2015 and 2014, respectively.

Share Repurchase Program: In June 2015, our Board of Directors approved an increase of $4.000 billion to our authorized share repurchase program, bringing the total amount authorized since April 2009 to an aggregate of up to $17.500 billion of our common stock.

As part of the management of our share repurchase program, we may, from time to time, sell put options on our common stock with strike prices that we believe represent an attractive price to 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 and six-month periods ended June 30, 2015 and 2014, we recorded gains from premiums on put options on our Consolidated Statements of Income in other income (expense), net as follows:
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2015
 
2014
 
2015
 
2014
Gain from sale of put options
$
5.0

 
$
4.0

 
$
8.9

 
$
6.4


At June 30, 2015, we had no outstanding put options.

We have purchased 7.9 million and 17.4 million shares of common stock under the share repurchase program from all sources at a total cost of $901.6 million and $2.028 billion during the three- and six-month periods ended June 30, 2015, respectively. As of June 30, 2015, we had a remaining share repurchase authorization of $5.112 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.


10

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
(7.6
)
 
(5.2
)
 
322.5

 
(7.7
)
 
302.0

Amounts reclassified from accumulated other comprehensive income

 
0.5

 
(159.2
)
 

 
(158.7
)
Net current-period other comprehensive income (loss)
(7.6
)
 
(4.7
)

163.3


(7.7
)

143.3

Balance June 30, 2015
$
(23.1
)
 
$
456.2


$
682.9


$
(57.9
)

$
1,058.1

 
 
 
 
 
 
 
 
 


Balance December 31, 2013
$
(6.9
)
 
$
137.3

 
$
(36.0
)
 
$
(0.4
)
 
$
94.0

Other comprehensive income (loss) before reclassifications

 
87.2

 
(27.7
)
 
4.1

 
63.6

Amounts reclassified from accumulated other comprehensive income

 
1.9

 
4.2

 

 
6.1

Net current-period other comprehensive income (loss)

 
89.1


(23.5
)

4.1

 
69.7

Balance June 30, 2014
$
(6.9
)
 
$
226.4


$
(59.5
)

$
3.7

 
$
163.7

 
 
 
 
 
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 June 30,
 
Six-Month Periods Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Gains (losses) from cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
90.2

 
$
(2.0
)
 
$
160.7

 
$
(3.0
)
Treasury rate lock agreements
 
Interest (expense)
 
(0.9
)
 
(0.8
)
 
(1.8
)
 
(1.7
)
Interest rate swap agreements
 
Interest (expense)
 
(0.3
)
 
(0.2
)
 
(0.7
)
 
(0.2
)
 
 
Income tax benefit
 
0.5

 
0.4

 
1.0

 
0.7

 
 
 
 
 
 
 
 
 
 
 
Gains (losses) from available-for-sale marketable securities:
 
 
 
 
 
 
 
 
Realized income (loss) on sales of marketable securities
 
Interest and investment income, net
 
(1.3
)
 
(1.6
)
 
(0.7
)
 
(3.0
)
 
 
Income tax benefit
 
0.4

 
0.6

 
0.2

 
1.1

Total reclassification, net of tax
 
 
 
$
88.6

 
$
(3.6
)
 
$
158.7

 
$
(6.1
)


6. Financial Instruments and Fair Value Measurement

The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of June 30, 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

11

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
June 30, 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
$
2,961.4

 
$
1,086.4

 
$
1,875.0

 
$

Forward currency contracts
660.9

 

 
660.9

 

Purchased currency options
27.5

 

 
27.5

 

Interest rate swaps
77.9

 

 
77.9

 

Total assets
$
3,727.7

 
$
1,086.4

 
$
2,641.3

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(90.0
)
 
$
(90.0
)
 
$

 
$

Written currency options
(10.9
)
 

 
(10.9
)
 

Other acquisition related contingent consideration
(1,315.0
)
 

 

 
(1,315.0
)
Total liabilities
$
(1,415.9
)
 
$
(90.0
)
 
$
(10.9
)
 
$
(1,315.0
)
 
 
 
 
 
 
 
 
 
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
)


12

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

There were no security transfers between Levels 1 and 2 during the six-month periods ended June 30, 2015 and 2014. The following table represents a roll-forward of the fair value of Level 3 instruments: 
 
Six-Month Periods Ended June 30,
 
2015
 
2014
Liabilities:
 

 
 

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

 
(1,060.0
)
Net change in fair value
(36.0
)
 
(15.1
)
Settlements

 
20.0

Transfers in and/or out of Level 3

 

Balance at end of period
$
(1,315.0
)
 
$
(1,283.6
)
 
Level 3 liabilities outstanding as of June 30, 2015 primarily consisted of contingent consideration related to the acquisitions of Avila and Nogra. The $36.0 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 June 30, 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

13

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 June 30, 2015 and December 31, 2014:

 
 
Notional Amount
Foreign Currency
 
June 30, 2015
 
December 31, 2014
Australian Dollar
 
$
62.6

 
$
18.8

British Pound
 
387.6

 
304.8

Canadian Dollar
 
131.2

 
43.7

Euro
 
3,365.1

 
3,375.7

Japanese Yen
 
475.2

 
541.1

Total
 
$
4,421.7

 
$
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 June 30, 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 June 30, 2015 and December 31, 2014 were $847.8 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 June 30, 2015 and December 31, 2014:
 
Notional Amount1
 
June 30, 2015
 
December 31, 2014
Foreign currency option contracts designated as hedging activity:
 
 
 
Purchased Put
$
331.6

 
$
152.6

Written Call
$
353.9

 
$
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 and Treasury Rate Locks: We have entered into forward starting swaps, that were designated as cash flow hedges, with an aggregate notional value of $1.300 billion and effective dates in November 2015, with $800.0 million maturing in 10 years and $500.0 million maturing in 30 years to hedge against changes in interest rates that could impact an

14

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

anticipated issuance of debt in 2015. During July 2015, we also entered into treasury rate locks with effective dates in August 2015 and maturing in five, ten and thirty years.

In anticipation of issuing debt in 2014, we had entered into 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.

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 $12.4 million during the six-month periods ended June 30, 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 June 30, 2015 and December 31, 2014

 
 
 
Notional Amount
 
 
June 30, 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
 
700.0

 
150.0

3.625% senior notes due 2024
 
150.0

 

Total
 
$
3,650.0

 
$
2,700.0

 


15

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 June 30, 2015 and December 31, 2014:
 
 
 
 
 
June 30, 2015
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
$
340.9

 
$
41.4

 
 
Other current liabilities
 
0.2

 
1.9

 
 
Other non-current assets
 
384.0

 
28.4

Interest rate swap agreements
 
Other current assets
 
30.1

 

 
 
Other non-current assets
 
57.4

 

 
 
Other non-current liabilities
 

 
10.9

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
38.4

 
12.6

 
 
Other current liabilities
 
0.2

 
1.9

Interest rate swap agreements
 
Other current assets
 
0.1

 

 
 
Other non-current assets
 
1.2

 

Total
 
 
 
$
852.5

 
$
97.1

   
 
 
 
 
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.


16

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 June 30, 2015 and 2014:
 
 
Three-Month Period Ended June 30, 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
$
(144.7
)
 
Net product sales
 
$
90.2

 
Other income, net
 
$
13.6

 
(2
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(0.9
)
 
 
 
 

 
 
Interest rate swap agreements
$
81.9

 
Interest expense
 
$
(0.3
)
 
 
 
 
 
 
 
(1) Net gains of $322.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
(2) The amount of net gains recognized in income represents $13.6 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).
 
Three-Month Period Ended June 30, 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
$
1.0

 
Net product sales
 
$
(2.0
)
 
Other income, net
 
$
0.7

 
(1
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(0.8
)
 
 
 
 
 
 
Interest rate swap agreements
$
(22.7
)
 
Interest expense
 
$
(0.2
)
 
Other income, net
 
$
(3.6
)
 
(2
)
 
(1) The amount of net gains recognized in income represents $1.0 million in gains related to the ineffective portion of the hedging relationships and $0.3 million of losses related to amounts excluded from the assessment of hedge effectiveness.
(2) The amount of net loss recognized in income relates to the ineffective portion of the hedging relationships.

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the six-month periods ended June 30, 2015 and 2014:
 
 
Six-Month Period Ended June 30, 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
$
287.9

 
Net product sales
 
$
160.7

 
Other income, net
 
$
17.4

 
(2
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(1.8
)
 
 
 
 

 
 
Interest rate swap agreements
$
56.2

 
Interest expense
 
$
(0.7
)
 
 
 
 
 
 
 
(1) Net gains of $322.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.

17

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

(2) The amount of net gains recognized in income represents $20.8 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.
 
Six-Month Period Ended June 30, 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
$
(7.9
)
 
Net product sales
 
$
(3.0
)
 
Other income, net
 
$
(2.8
)
 
(1
)
Treasury rate lock agreements
$

 
Interest expense
 
$
(1.7
)
 
 
 
 

 
 
Interest rate swap agreements
$
(32.4
)
 
Interest expense
 
$
(0.2
)
 
Other income, net
 
$
(3.6
)
 
(2
)
 
(1) The amount of net losses recognized in income represents $3.5 million of losses related to amounts excluded from the assessment of hedge effectiveness and $0.7 million in gains related to the ineffective portion of the hedging relationships.
(2) The amount of net loss recognized in income relates 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- and six-month periods ended June 30, 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 June 30,
 
Six-Month Periods Ended June 30,
Instrument
 
 
2015
 
2014
 
2015
 
2014
Interest rate swap agreements
 
Interest expense
 
$
15.3

 
$
10.4

 
$
29.3

 
$
20.9

 
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 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 June 30,
 
Six-Month Periods Ended June 30,
Instrument
 
 
2015
 
2014
 
2015
 
2014
Foreign exchange contracts
 
Other income (expense), net
 
$
(19.6
)
 
$
(7.7
)
 
$
54.9

 
$
(11.1
)
Put options on our common stock
 
Other income (expense), net
 
$
5.0

 
$
4.0

 
$
8.9

 
$
6.4

 
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. 

18

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


8. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
 
Money market funds of $715.1 million and $2.251 billion at June 30, 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 June 30, 2015 and December 31, 2014 were as follows:
June 30, 2015
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
401.0

 
$
0.5

 
$

 
$
401.5

U.S. government-sponsored agency securities
 
85.0

 
0.2

 

 
85.2

U.S. government-sponsored agency MBS
 
371.2

 
0.8

 
(2.8
)
 
369.2

Non-U.S. government, agency and Supranational securities
 
22.8

 

 

 
22.8

Corporate debt - global
 
820.6

 
1.2

 
(1.1
)
 
820.7

Asset backed securities
 
175.7

 

 
(0.1
)
 
175.6

Marketable equity securities
 
379.7

 
711.5

 
(4.8
)
 
1,086.4

Total available-for-sale marketable securities
 
$
2,256.0

 
$
714.2

 
$
(8.8
)

$
2,961.4

 
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 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 publicly traded equity securities. The decrease in net unrealized gains in marketable equity securities during the six-month period ended June 30, 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 June 30, 2015 were as follows:
 
 
 
Amortized
Cost
 
Fair
Value
Duration of one year or less
 
$
313.5

 
$
313.8

Duration of one through three years
 
1,431.0

 
1,429.9

Duration of three through five years
 
131.8

 
131.3

Total
 
$
1,876.3

 
$
1,875.0

 

 

19

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

9. Inventory
 
A summary of inventories by major category at June 30, 2015 and December 31, 2014 follows:
 
June 30, 2015
 
December 31, 2014
Raw materials
$
136.8

 
$
200.0

Work in process
112.2

 
101.5

Finished goods
165.3

 
91.6

Total
$
414.3

 
$
393.1


The decrease in raw materials and increase in finished goods during the six-month period ended June 30, 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 six-month period ended June 30, 2015 many of those materials were converted into finished goods.
 
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 10.7 years.

Intangible assets outstanding as of June 30, 2015 and December 31, 2014 are summarized as follows:
June 30, 2015
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortizable intangible assets:
 
 

 
 

 
 

Acquired developed product rights
 
$
3,405.9

 
$
(1,336.1
)
 
$
2,069.8

Technology
 
333.7

 
(158.9
)
 
174.8

Licenses
 
66.9

 
(20.2
)
 
46.7

Other
 
42.6

 
(25.1
)
 
17.5

 
 
3,849.1

 
(1,540.3
)

2,308.8

Non-amortized intangible assets:
 


 


 
 

Acquired IPR&D product rights
 
1,628.7

 

 
1,628.7

Total intangible assets
 
$
5,477.8

 
$
(1,540.3
)

$
3,937.5

 
 
 
 
 
 
 
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

 
Amortization expense related to intangible assets was $65.0 million and $66.7 million for the three-month periods ended June 30, 2015 and 2014, respectively, and $130.1 million and $133.8 million for the six-month periods ended June 30, 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. 
 

20

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

Goodwill: At June 30, 2015, our goodwill related to the 2014 acquisition of Nogra, 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 June 30, 2015 and December 31, 2014.

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 June 30, 2015 and December 31, 2014 includes:
 
 
June 30, 2015
 
December 31, 2014
Commercial paper
 
$
860.6

 
$
99.6

2.450% senior notes due 2015
 
502.3

 
506.3

Total
 
$
1,362.9

 
$
605.9


Long-Term Debt: Summarized below are the carrying values of our senior notes at June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
December 31, 2014
1.900% senior notes due 2017
$
502.1

 
$
501.0

2.300% senior notes due 2018
402.2

 
401.2

2.250% senior notes due 2019
505.3

 
502.5

3.950% senior notes due 2020
504.6

 
502.8

3.250% senior notes due 2022
1,003.2

 
1,010.2

4.000% senior notes due 2023
698.4

 
708.5

3.625% senior notes due 2024
997.5

 
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
$
6,256.1

 
$
6,265.7

 
At June 30, 2015, the fair value of our outstanding Senior Notes was $6.825 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 June 30, 2015, a balance of $49.6 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 June 30, 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 June 30, 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 June 30, 2015, we had a balance of $34.8 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 six months ended June 30, 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.

Please see Note 17 for information related to our July 2015 announcement of the proposed acquisition of Receptos, Inc. (Receptos) and our planned issuance of senior notes.


21

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

Commercial Paper: The carrying value of Commercial Paper as of June 30, 2015 and December 31, 2014 was $860.6 million and $99.6 million, respectively, and approximated its fair value. The effective interest rate on our outstanding Commercial Paper at June 30, 2015 was 0.5%.
 
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 serves as backup liquidity for our Commercial Paper borrowings. At June 30, 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 June 30, 2015

12. Share-Based Compensation
 
We have a stockholder-approved stock incentive plan, the 2008 Stock Incentive Plan (Amended and Restated as of April 15, 2015) (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 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 six-month period ended June 30, 2015 was $122.90.

The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2015 and 2014:
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of goods sold (excluding amortization of acquired intangible assets)
$
8.1

 
$
5.9

 
$
14.8

 
$
12.0

Research and development
63.6

 
45.8

 
119.8

 
92.8

Selling, general and administrative
76.0

 
51.7

 
141.9

 
103.0

Total share-based compensation expense
147.7

 
103.4

 
276.5

 
207.8

Tax benefit related to share-based compensation expense
44.8

 
31.0

 
81.2

 
61.0

Reduction in income
$
102.9

 
$
72.4

 
$
195.3

 
$
146.8











22

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




The following table summarizes the activity for stock options, RSUs and PSUs for the six-month period ended June 30, 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
5.8

 
1.6

 
211

Exercised / Released
(5.9
)
 
(2.8
)
 

Forfeited
(0.9
)
 
(0.2
)
 
(7
)
Outstanding at June 30, 2015
76.2

 
8.0


337

 


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 June 30, 2015 were as follows (dollars in millions):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
Unrecognized compensation cost
$
587.8

 
$
345.1

 
$
24.0

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

 
1.7

 
1.5

 
 
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 conclude 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.
 

23

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

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 six-month period ended June 30, 2015 gross unrecognized tax benefits increased by $34.0 million, primarily from unrecognized tax benefits related to current year operations of $28.9 million and accrued interest of $5.1 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. 

14. Collaboration Agreements

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, payments for options to purchase licenses of additional rights, as well as potential 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 six months ended June 30, 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, we 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, subject to applicable regulatory approvals which were subsequently achieved, 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 an orally available, selective inhibitor of the mutated isocitrate dehydrogenase-1 (IDH1) protein for the treatment of patients with cancers that harbor an IDH1 mutation. 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.

24

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


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 IDH1 and IDH2 mutant cancer cells. Under the terms of the AG-881 collaboration, Agios received an initial payment of $10.0 million and is eligible to receive contingent payments of up to $70.0 million based on the attainment of specified regulatory goals. The upfront payment to Agios was accounted for as $9.0 million of upfront research and development collaboration expense and $1.0 million of prepaid manufacturing rights recorded on the balance sheet. We and Agios 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 recording 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-U.S. with Agios providing one third of field-based commercial activities in the major EU markets.

Epizyme Inc. (Epizyme): In July 2015 we entered into an amendment and restatement of the collaboration and license agreement dated April 2, 2012 with Epizyme (the Amended Agreement). Under the original agreement, we had an exclusive license, for all countries other than the United States, to small molecule HMT inhibitors targeting DOT1L, including pinometostat (EPZ-5676), and an option, on a target-by-target basis, to exclusively license, for all countries other than the United States, rights to small molecule HMT inhibitors targeting any other HMT targets. Under the Amended Agreement:

We retain our exclusive license to small molecule HMT inhibitors targeting DOT1L outside of the United States, including pinometostat (EPZ-5676),
We have narrowed our option rights to HMT inhibitors targeting three predefined targets (the “Option Targets”),
The exclusive licenses to HMT inhibitors targeting two of the Option Targets that we may acquire have been expanded to include the United States, with the exclusive license to the third Option Target continuing to be for all countries other than the United States,
Our option period has been extended for each of the Option Targets and is exercisable at the time of Epizyme's IND filing for an HMT inhibitor targeting the applicable Option Target,
Epizyme may complete phase 1 clinical trials as to each Option Target following our exercise of our option at IND filing. If Epizyme chooses not to complete phase 1 clinical trials to an Optioned Target, future milestones and royalties on products developed for such Option Targets will be reduced.

Under the terms of the Amended Agreement, we made a $10.0 million payment to Epizyme. In addition, Epizyme may earn up to $75.0 million in development milestone payments, up to $365.0 million in regulatory milestone payments and up to $170.0 million in sales milestone payments related to the Option Targets. For the DOT1L program, Epizyme remains eligible to earn $35.0 million in clinical development milestone payments and up to $100.0 million in regulatory milestone payments. Epizyme is also entitled to tiered royalties ranging from the mid-single digits to the mid-teens on annual net product sales in our territory, subject to reductions in specified circumstances.
 
The Amended Agreement extends the research and development collaboration for at least an additional three years until July 8, 2018, subject to our exercise of our options at IND filing. The Amended Agreement will expire on a product-by-product and country-by-country basis on the date of the expiration of the applicable royalty term with respect to each licensed product in each country and in its entirety upon the expiration of all applicable royalty terms for all licensed products in all countries. We have the right to terminate the Amended Agreement in its entirety or with respect to one or more Optioned Targets upon 120 days’ notice. Upon the expiration of the royalty term of a particular license product, we will have a fully paid-up, royalty-free license to use Epizyme intellectual property to manufacture, market, use and sell such licensed products in our territory.

bluebird bio, Inc. (bluebird):  In June 2015, we amended and restated the March 2013 collaboration agreement with bluebird. The amended and restated collaboration will focus on the discovery, development and commercialization of novel disease-altering gene therapy product candidates targeting B-cell maturation antigen (BCMA). BCMA is a cell surface protein that is expressed in normal plasma cells and in most multiple myeloma cells, but is absent from other normal tissues. The collaboration applies gene therapy technology to modify a patient’s own T-cells, known as chimeric antigen receptor (CAR) T-cells, to target and destroy cancer cells that express BCMA. We have an option to license any anti-BCMA products resulting from the collaboration after the completion of a phase I clinical study by bluebird.

Under the amended and restated collaboration agreement we made an additional $25.0 million payment for bluebird to develop the lead anti-BCMA product candidate (bb2121) through a phase I clinical study and to develop next-generation anti-BCMA product candidates. The payment was recorded as prepaid research and development on the balance sheet and is being recognized as expense as development work is performed. Upon exercising our option to license a product and achievement of certain

25

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

milestones, we may be obligated to pay up to $230.0 million per licensed product in aggregate potential option fees and clinical and regulatory milestone payments. bluebird also has the option to participate in the development and commercialization of any licensed products resulting from the collaboration through a 50/50 co-development and profit share in the United States in exchange for a reduction of milestone payments. Royalties would also be paid to bluebird in regions where there is no profit share, including in the United States, if bluebird declines to exercise their co-development and profit sharing rights.

We have the ability to terminate the collaboration at our discretion upon 90 days written notice to bluebird.  If a product is optioned, the parties will enter into a pre-negotiated license agreement and potentially a co-development agreement should bluebird exercise its option to participate in the development and commercialization in the United States.  The license agreement, if not terminated sooner, would expire upon the expiration of all applicable royalty terms under the agreement with respect to the particular product, and the co-development agreement, if not terminated sooner, would expire when the product is no longer being developed or commercialized in the United States.  Upon the expiration of a particular license agreement, we will have a fully paid-up, royalty-free license to use bluebird intellectual property to manufacture, market, use and sell such licensed product.

FORMA Therapeutics Holdings, LLC (FORMA): In April 2013, we entered into a collaboration agreement with FORMA to 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 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 is responsible for all further global clinical development for each licensed candidate. FORMA is eligible to receive up to an additional $315.0 million in potential payments based upon development, regulatory and sales objectives for the first ex-U.S. license. FORMA is also eligible to receive potential payments for successive licenses, which escalate for productivity, increasing up to a maximum of an additional $430.0 million per program. In addition, FORMA will receive royalties on ex-U.S. sales and additional payments if multiple drug candidates reach defined cumulative sales objectives. The collaboration agreement includes provisions for Celgene to obtain rights with respect to development and commercialization of drug candidates inside the United States in exchange for additional payments.

Under the collaboration, the parties 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 enter into a pre-negotiated license agreement and the collaboration continues 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, expires 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 subsequently 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 assume responsibility for all global development activities and costs after completion of phase I clinical trials. FORMA retains 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 made 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,

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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.

AstraZeneca PLC (AstraZeneca): In April 2015, we entered into a strategic collaboration agreement with MedImmune Limited (MedImmune), a subsidiary of AstraZeneca, 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 made an upfront payment of $450.0 million to MedImmune. We lead clinical development across all new clinical trials within the collaboration and are 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 4 years after the start of commercial sales. The agreement may be terminated at our discretion upon nine months’ prior written notice to MedImmune, and by either party upon material breach of the other party, subject to cure periods. The agreement, if not terminated sooner, expires upon the expiration of all applicable royalty terms under such agreement.

Lycera Corp. (Lycera): In June 2015, we entered into a collaboration and option agreement with Lycera. Under the agreement, the parties will support the development of Lycera’s portfolio of immune modulator assets, including (1) oral agonists that target RORy, a master control switch of immune system activation, for the potential treatment of a broad range of cancers, and (2) LYC-30937, an oral gut-directed ATPase modulator currently in phase I clinical studies.

Lycera has developed orally bioavailable RORy agonists that have demonstrated single agent therapeutic activity in multiple animal models of cancer. Ex-vivo treatment with RORy agonist compounds has been shown to enhance the therapeutic benefit of adoptive T-cell therapy by improving both immune cell persistence and activation. Development of LYC-30937 is focused on the treatment of inflammatory bowel disease, with the goal of delivering significant disease improvement without global immune suppression. Under the collaboration, Lycera also will continue to advance its other programs, including a Rho-associated protein kinase 2 (ROCK2) inhibitor.

Under the terms of the agreement, we made an upfront payment of $82.5 million to Lycera. We received an exclusive option for an additional fee to license Lycera’s portfolio of ex-vivo RORy agonist compounds, a 7 percent equity interest and an exclusive right to acquire Lycera. If we exercise the acquisition right, Lycera shareholders will be also eligible to receive future success-based milestone payments of up to $190.0 million. The upfront payment to Lycera was accounted for as $69.5 million of upfront collaboration payment included in research and development expense and $13 million as non-current assets consisting of $10 million for an equity investment and $3 million