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Long-Term Obligations and Commitments
12 Months Ended
Dec. 31, 2016
Long-Term Obligations and Commitments [Abstract]  
Long-Term Obligations and Commitments
3. Long-Term Obligations and Commitments

The carrying value of our long-term obligations was as follows (in thousands):

  
December 31,
 
  
2016
  
2015
 
1 percent convertible senior notes
 
$
500,511
  
$
339,847
 
2¾ percent convertible senior notes
  
124
   
49,523
 
Long-term financing liability for leased facility
  
72,359
   
72,217
 
Fixed rate note with Morgan Stanley
  
12,500
   
 
Leases and other obligations
  
3,611
   
2,856
 
Total
 
$
589,105
  
$
464,443
 
Less: current portion
  
(1,185
)
  
(515
)
Total Long-Term Obligations
 
$
587,920
  
$
463,928
 


Convertible Notes

In November 2014, we completed a $500 million offering of convertible senior notes, which mature in 2021 and bear interest at 1 percent. We raised $487 million of proceeds, net of issuance costs. We used a substantial portion of the net proceeds from the issuance of the 1 percent convertible senior notes to repurchase $140 million in principal of our 2¾ percent convertible senior notes at a price of $441.9 million, including accrued interest. As a result, the new principal balance of the 2¾ percent notes was $61.2 million. We recognized an $8.3 million non-cash loss as a result of the early retirement of a portion of the 2¾ percent notes.

In December 2016, we issued an additional $185.5 million of 1 percent convertible senior notes in exchange for the redemption of $61.1 million of our 2¾ percent convertible senior notes. As a result of the debt exchange we completed in December 2016, we recorded a $4.0 million non-cash loss on early retirement of debt, reflecting the early retirement of the majority of our remaining 2¾ percent convertible notes in December 2016.

At December 31, 2016, we had a nominal amount of our 2¾ percent convertible senior notes outstanding. At December 31, 2016 we had the following 1 percent convertible senior notes outstanding (amounts in millions except price per share data):

  
1 Percent
Convertible Senior Notes
 
Outstanding balance
 
$
685.5
 
Original issue date ($500 million of principal)
 
November 2014
 
Additional issue date ($185.5 million of principal)
 
December 2016
 
Maturity date
 
November 2021
 
Interest rate
 
1 percent
 
Conversion price per share
 
$
66.81
 
Total shares of common stock subject to conversion
  
10.3
 

Interest is payable semi-annually in arrears on May 15 and November 15 of each year for the 1 percent notes. The 1 percent notes are convertible at the option of the note holders prior to July 1, 2021 only under certain conditions. On or after July 1, 2021, the notes are initially convertible into approximately 10.3 million shares of common stock at a conversion price of approximately $66.81 per share. We will settle conversions of the notes, at our election, in cash, shares of our common stock or a combination of both. We may not redeem the 1 percent notes prior to maturity, and no sinking fund is provided for them. If we undergo a fundamental change, holders may require us to purchase for cash all or any portion of their 1 percent notes at a purchase price equal to 100 percent of the principal amount of the notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.

We account for our convertible notes using an accounting standard that requires us to assign a value to our convertible debt equal to the estimated fair value of similar debt instruments without the conversion feature and to record the remaining portion in equity. As a result, we recorded our convertible notes at a discount, which we are amortizing as additional non-cash interest expense over the expected life of the respective debt. We determined our nonconvertible debt borrowing rate using a combination of the present value of the debt’s cash flows and a Black-Scholes valuation model. The following table summarizes the nonconvertible borrowing rate, effective interest rate and amortization period of our debt discount for our convertible notes:

 
1 Percent
Convertible Senior Notes Issued in November 2014
 
1 Percent
Convertible Senior Notes Issued in December 2016
Nonconvertible debt borrowing rate
7.4 percent
 
6.8 percent
Effective interest rate
7.8 percent
 
7.2 percent
Amortization period of debt discount
7 years
 
5 years

Interest expense for the year ended December 31, 2016, 2015 and 2014 included $25.1 million, $23.2 million and $9.6 million, respectively, of non-cash interest expense related to the amortization of the debt discount and debt issuance costs for our convertible notes.

The following table summarizes information about the equity and liability components of our outstanding 1 percent convertible notes (in thousands). We measured the fair values of the convertible notes outstanding based on quoted market prices, which is a Level 2 measurement:

  
December 31,
 
  
2016
  
2015
 
       
Fair value of outstanding notes
 
$
700,969
  
$
555,000
 
Principal amount of convertible notes outstanding
 
$
685,450
  
$
500,000
 
Unamortized portion of debt discount
 
$
175,699
  
$
152,786
 
Long-term debt
 
$
500,511
  
$
339,847
 
Carrying value of equity component
 
$
219,011
  
$
174,770
 


Financing Arrangements

In June 2015, we entered into a five-year revolving line of credit agreement with Morgan Stanley Private Bank, National Association, or Morgan Stanley. We amended the credit agreement in February 2016 to increase the amount available for us to borrow. Under the amended credit agreement, we can borrow up to a maximum of $30 million of revolving credit for general working capital purposes. Under the credit agreement interest is payable monthly in arrears on the outstanding principal at a rate based on our option of:

(i)
a floating rate equal to the one-month London Interbank Offered Rate, or LIBOR, in effect plus 1.25 percent per annum;
(ii)
a fixed rate equal to LIBOR plus 1.25 percent for a period of one, two, three, four, six, or twelve months as elected by us; or
(iii)
a fixed rate equal to the LIBOR swap rate during the period of the loan.

Additionally, after June 1, 2016, we pay 0.25 percent per annum, payable quarterly in arrears, for any amount unused under the credit facility. As of December 31, 2016 we had $12.5 million in outstanding borrowings under the credit facility with a 2.31 percent fixed interest rate and a maturity date of September 2019, which were used to fund our capital equipment needs and is consistent with our historical practice to finance these costs.

The credit agreement includes customary affirmative and negative covenants and restrictions. We are in compliance with all covenants of the credit agreement.

Maturity Schedules

Annual debt and other obligation maturities, including fixed and determinable interest, at December 31, 2016 are as follows (in thousands):

2017
 
$
7,271
 
2018
  
7,211
 
2019
  
19,801
 
2020
  
6,915
 
2021
  
692,365
 
Thereafter
  
840
 
Subtotal
 
$
734,403
 
Less: current portion
  
(52
)
Less: fixed and determinable interest
  
(35,959
)
Less: unamortized portion of debt discount
  
(175,721
)
Plus: Deferred rent
  
2,130
 
Total
 
$
524,801
 

Operating Leases

We lease office, laboratory and manufacturing space under non-cancelable operating leases with terms through December 2031. We are located in three buildings in Carlsbad, California, which consists of laboratory, manufacturing and office space. Our facilities include a primary research and development facility, a manufacturing facility and a building adjacent to our manufacturing facility. We account for the lease of our primary research and development facility as a financing obligation as discussed below. Our manufacturing facility is used for our drug development business and was built to meet current Good Manufacturing Practices and the facility adjacent to our manufacturing facility has laboratory and office space that we use to support our manufacturing activities. The lease for our manufacturing facility expires in 2031 and has four five-year options to extend. Under the lease agreement, we have the option to purchase the facility at the end of each year from 2016 through 2020, and at the end of 2026 and 2031. The lease for the facility adjacent to our manufacturing facility has an initial term ending in June 2021 with an option to extend the lease for up to two five-year periods. Additionally, Akcea leases office space in a building in Cambridge, Massachusetts. The lease for Akcea has a three-year term and expires in July 2018. We also lease office equipment under non-cancelable operating leases with terms through January 2019.

Annual future minimum payments under operating leases as of December 31, 2016 are as follows (in thousands):

  
Operating
Leases
 
2017
 
$
1,954
 
2018
  
1,690
 
2019
  
1,474
 
2020
  
1,527
 
2021
  
1,411
 
Thereafter
  
14,714
 
Total minimum payments
 
$
22,770
 


Rent expense was $2.0 million each of the years ended December 31, 2016 and 2015. Rent expense for 2014 was $1.8 million. We recognize rent expense on a straight line basis over the lease term for the lease on our manufacturing facility, the lease on our building adjacent to our manufacturing facility and Akcea’s office space, which resulted in a deferred rent balance of $2.1 million and $2.0 million at December 31, 2016 and 2015, respectively.

Research and Development Facility Lease Obligation

In March 2010, we entered into a lease agreement with an affiliate of BioMed Realty, L.P., or BioMed. Under the lease, BioMed constructed our primary research and development facility in Carlsbad, California. The lease expires in 2031 and has four five-year options to extend. Under the lease agreement, we have the option to purchase the facility and land at the end of each year from 2016 through 2020, and at the end of 2026 and 2031. To gain early access to the facility, we agreed to modify our lease with BioMed to accept additional responsibility. As a result, we recorded the costs for the facility as a fixed asset and we also recorded a corresponding liability in our non-current liabilities as a long-term financing obligation. In July 2011, we took possession of the facility and began depreciating the cost of the facility over its economic useful life. At December 31, 2016 and 2015, the facility and associated parcel of land had a net book value of $60.0 million and $62.2 million, respectively, which included $12.1 million and $9.9 million, respectively, of accumulated depreciation. We are applying our rent payments, which began on January 1, 2012, against the liability over the term of the lease.

In conjunction with the lease agreement with BioMed, we purchased a parcel of land for $10.1 million and subsequently sold it to BioMed. Since we have the option to purchase the facility, including the land, we have continuing involvement in the land, which requires us to account for the purchase and sale of the land as a financing transaction. As such, our property, plant and equipment at December 31, 2016 and 2015 included the value of the land. Additionally, we have recorded a corresponding amount in our non-current liabilities as a long-term financing obligation. Since land is not a depreciable asset, the value of the land and financing obligation we recorded will not change until we exercise our purchase option or the lease terminates.

Annual future rent payments as of December 31, 2016 for our primary research and development facility are as follows (in thousands):

  
Future Rent
Payments
 
2017
 
$
6,550
 
2018
  
6,943
 
2019
  
6,943
 
2020
  
7,359
 
2021
  
7,359
 
Thereafter
  
83,846
 
Total minimum payments
 
$
119,000