UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2016

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: 0-27756

ALEXION PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	13-3648318
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

100 College Street, New Haven Connecticut 06510

(Address of Principal Executive Offices) (Zip Code)

475-230-2596

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report)

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 Website, 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. Check One:

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

Common Stock, $0.0001 par value	223,930,700
Class	Outstanding as of December 29, 2016

Alexion Pharmaceuticals, Inc.

Contents

PART I.		FINANCIAL INFORMATION	Page
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	2
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015	3
		Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	41
PART II.		OTHER INFORMATION	43
	Item 1.	Legal Proceedings	43
	Item 1A.	Risk Factors	43
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
	Item 5.	Other Information	62
	Item 6.	Exhibits	62
SIGNATURES

Alexion Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(amounts in thousands, except per share amounts)

	September 30,			December 31,
	2016			2015
Assets
Current Assets:
Cash and cash equivalents	$	761,989		$	1,010,111
Marketable securities	550,882			374,904
Trade accounts receivable, net	676,837			532,832
Inventories	363,058			289,874
Prepaid expenses and other current assets	241,768			208,993
Total current assets	2,594,534			2,416,714
Property, plant and equipment, net	931,060			697,025
Intangible assets, net	4,467,726			4,707,914
Goodwill	5,037,444			5,047,885
Other assets	262,698			228,343
Total assets	$	13,293,462		$	13,097,881
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable	$	44,849		$	57,360
Accrued expenses	485,234			403,348
Deferred revenue	63,402			20,504
Current portion of long-term debt	322,942			166,365
Current portion of contingent consideration	81,848			55,804
Other current liabilities	36,066			6,234
Total current liabilities	1,034,341			709,615
Long-term debt, less current portion	2,929,384			3,254,536
Facility lease obligation	224,442			151,307
Contingent consideration	126,056			121,424
Deferred tax liabilities	343,794			528,990
Other liabilities	131,342			73,393
Total liabilities	4,789,359			4,839,265
Commitments and contingencies (Note 17)
Stockholders' Equity:
Common stock, $0.0001 par value; 290,000 shares authorized; 231,627 and 230,498 shares issued at September 30, 2016 and December 31, 2015, respectively	23			23
Additional paid-in capital	7,906,523			7,726,560
Treasury stock, at cost, 7,715 and 4,851 shares at September 30, 2016 and December 31, 2015, respectively	(1,110,635		)	(710,663		)
Accumulated other comprehensive income (loss)	(16,617		)	62,301
Retained earnings	1,724,809			1,180,395
Total stockholders' equity	8,504,103			8,258,616
Total liabilities and stockholders' equity	$	13,293,462		$	13,097,881

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Alexion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations

(unaudited)

(amounts in thousands, except per share amounts)

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Net product sales	$	798,524		$	665,791		$	2,251,495		$	1,902,107
Other revenue	582			846			1,765			1,073
Total revenues	799,106			666,637			2,253,260			1,903,180
Cost of sales	71,095			54,057			190,708			175,463
Operating expenses:
Research and development	195,687			165,664			551,288			518,437
Selling, general and administrative	230,128			212,520			694,491			621,019
Amortization of purchased intangible assets	82,036			36,608			242,185			36,608
Change in fair value of contingent consideration	40,290			29,684			30,676			45,707
Acquisition-related costs	—			6,075			2,313			35,852
Restructuring expenses	564			7,461			1,741			30,737
Total operating expenses	548,705			458,012			1,522,694			1,288,360
Operating income	179,306			154,568			539,858			439,357
Other income and expense:
Investment income	4,626			1,967			8,049			7,077
Interest expense	(24,807		)	(19,971		)	(72,490		)	(24,593		)
Foreign currency (loss) gain	(1,011		)	2,795			(3,740		)	1,755
Income before income taxes	158,114			139,359			471,677			423,596
Income tax provision	63,776			323,116			165,113			345,815
Net income (loss)	$	94,338		$	(183,757	)	$	306,564		$	77,781
Earnings (loss) per common share
Basic	$	0.42		$	(0.81	)	$	1.37		$	0.37
Diluted	$	0.42		$	(0.81	)	$	1.35		$	0.37
Shares used in computing earnings per common share
Basic	224,180			226,228			224,454			209,373
Diluted	226,088			226,228			226,560			211,808

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Alexion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(amounts in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Net income (loss)	$	94,338		$	(183,757	)	$	306,564		$	77,781
Other comprehensive income (loss), net of tax:
Foreign currency translation	488			(1,847		)	2,609			(6,065		)
Unrealized (losses) gains on marketable securities	(1,910		)	135			1,553			389
Unrealized gains on pension obligation	15			8,932			1,225			1,487
Unrealized (losses) gains on hedging activities, net of tax of $(8,694), $(8,011), $(46,057) and $2,998, respectively	(15,904		)	(15,308		)	(84,305		)	1,832
Other comprehensive (loss) income, net of tax	(17,311		)	(8,088		)	(78,918		)	(2,357		)
Comprehensive income (loss)	$	77,027		$	(191,845	)	$	227,646		$	75,424

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Alexion Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(amounts in thousands)

	Nine months ended September 30,
	2016			2015
Cash flows from operating activities:
Net income	$	306,564		77,781
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	295,259			72,863
Change in fair value of contingent consideration	30,676			45,707
Share-based compensation expense	151,209			160,853
Deferred taxes	95,771			385,915
Change in excess tax benefit from stock options	—			76,291
Unrealized loss on forward contracts	10,666			769
Other	(921		)	(1,837		)
Changes in operating assets and liabilities, excluding the effect of acquisitions:
Accounts receivable	(129,875		)	(90,952		)
Inventories	(72,190		)	(7,368		)
Prepaid expenses and other assets	(119,897		)	(80,015		)
Accounts payable, accrued expenses and other liabilities	92,775			(147,108		)
Deferred revenue	43,267			(8,557		)
Net cash provided by operating activities	703,304			484,342
Cash flows from investing activities:
Purchases of available-for-sale securities	(655,974		)	(372,537		)
Proceeds from maturity or sale of available-for-sale securities	485,382			1,092,968
Purchases of trading securities	(6,173		)	(12,249		)
Proceeds from sale of trading securities	2,337			8,287
Purchases of property, plant and equipment	(225,995		)	(206,224		)
Payment for acquisition of business, net of cash acquired	—			(3,939,307		)
Other	(1,135		)	5,479
Net cash used in investing activities	(401,558		)	(3,423,583		)
Cash flows from financing activities:
Debt issuance costs	—			(45,492		)
Proceeds from revolving credit facility	—			200,000
Proceeds from term loan	—			3,500,000
Payments on revolving credit facility	—			(200,000		)
Payments on term loan	(175,000		)	(57,500		)
Equity issuance costs for shares issued in connection with acquisition of business	—			(4,053		)
Change in excess tax benefit from stock options	—			(76,291		)
Repurchase of common stock	(399,972		)	(175,383		)
Net proceeds from issuance of common stock under share-based compensation arrangements	27,760			50,824
Payments of contingent consideration	—			(50,000		)
Proceeds from development related grants	—			26,000
Other	(5,325		)	(1,718		)
Net cash (used in) provided by financing activities	(552,537		)	3,166,387
Effect of exchange rate changes on cash	2,669			(7,864		)
Net change in cash and cash equivalents	(248,122		)	219,282
Cash and cash equivalents at beginning of period	1,010,111			943,999
Cash and cash equivalents at end of period	$	761,989		$	1,163,281
Supplemental cash flow disclosures from investing and financing activities:
Common stock issued in acquisition of business	$	—		$	4,917,810
Capitalization of construction costs related to facility lease obligations	$	84,838		$	40,185
Accrued expenses for purchases of property, plant and equipment	$	22,686		$	25,165

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

1. Business

Alexion Pharmaceuticals, Inc. (Alexion, the Company, we, our or us) is a biopharmaceutical company focused on serving patients with devastating and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products.

In our complement franchise, Soliris® (eculizumab) is the first and only therapeutic approved for patients with either paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, or atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. PNH and aHUS are two disorders resulting from chronic uncontrolled activation of the complement component of the immune system.

In our metabolic franchise, we commercialize Strensiq® (asfotase alfa) for the treatment of patients with hypophosphatasia (HPP) and Kanuma® (sebelipase alfa) for the treatment of patients with lysosomal acid lipase deficiency (LAL-D). HPP is a genetic ultra-rare disease characterized by defective bone mineralization that can lead to deformity of bones and other skeletal abnormalities. LAL-D is a serious, life threatening ultra-rare disease in which genetic mutations result in decreased activity of the LAL enzyme leading to marked accumulation of lipids in vital organs, blood vessels and other tissues.

We are also evaluating additional potential indications for eculizumab in other severe and devastating diseases in which uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional product candidates as potential treatments for patients with severe and life-threatening rare disorders.

2. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. In our opinion, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States. The condensed consolidated balance sheet data as of December 31, 2015 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K. The results of operations for the three and nine months endedSeptember 30, 2016 are not necessarily indicative of the results to be expected for the full year.

The financial statements of our subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for stockholders' equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss), net of tax, in stockholders' equity. Foreign currency transaction gains and losses are included in the results of operations in other income and expense.

The accompanying unaudited condensed consolidated financial statements include the accounts of Alexion Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2017 and allows for adoption using a full retrospective method, or a modified retrospective method. Entities may elect to early adopt the standard for annual periods beginning after December 15, 2016. We are currently assessing the method of adoption and the expected impact the new standard has on our financial position and results of operations.

6

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

In April 2015, the FASB issued a new standard simplifying the presentation of debt issuance costs. The new standard aligns the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs be presented as a direct deduction from the carrying amount of the related debt. We adopted the provisions of this standard in the first quarter 2016 and reclassified $8,635 of deferred financing costs from other current assets to the current portion of long term debt and $26,714 from other non current assets to long-term debt, less current portion in our consolidated balance sheets as of December 31, 2015.

In April 2015, the FASB issued a new standard clarifying the accounting for a customer's fees paid in a cloud computing arrangement. Under this standard, if a cloud computing arrangement includes a software license, the customer would account for the software license consistent with other software licenses. If a cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract. We adopted the provisions of this standard in the first quarter 2016. The adoption did not have a material effect on our financial condition or results of operations.

In February 2016, the FASB issued a new standard requiring that the rights and obligations arising from leases be recognized on the balance sheet by recording a right-of-use asset and corresponding lease liability. The new standard also requires qualitative and quantitative disclosures to understand the amount, timing, and uncertainty of cash flows arising from leases, as well as significant management estimates utilized. The standard is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption. We are currently assessing the impact of this standard on our financial condition and results of operations.

In March 2016, the FASB issued a new standard intended to simplify certain aspects of the accounting for employee share-based payments. We elected to early adopt this standard during the third quarter of 2016. One aspect of the standard requires an entity to recognize all excess tax benefits and deficiencies associated with stock-based compensation as a reduction or increase to tax expense in the income statement. Previously, such amounts were recognized in additional paid-in capital. This aspect of the new standard was adopted prospectively, and accordingly we recorded tax benefits of $2,249 and $7,366, respectively, within income tax expense for the three and nine months ended September 30, 2016. The amendments require recognition of excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. As a result, $237,850 associated with previously unrecognized excess tax benefits was recorded as a deferred tax asset and an increase in retained earnings as of the beginning of 2016. Furthermore, the amendment requires that excess tax benefits be classified as an operating activity in the statement of cash flows instead of a financing activity. We elected to adopt this provision of the standard prospectively and thus, prior periods have not been adjusted. We have also elected to continue to estimate the impact of forfeitures when determining the amount of compensation cost to be recognized each period rather than account for forfeitures as they occur.

3. Acquisitions

On May 6, 2015, we announced that we entered into a definitive agreement to acquire Synageva BioPharma Corp. (Synageva), a publicly-held clinical-stage biotechnology company based in Lexington, Massachusetts for per share consideration of $115 in cash and 0.6581 shares of Alexion stock. At this date, the announced purchase consideration was estimated at approximately $8,400,000, net of Synageva cash, based on the closing price of Alexion stock on May 5, 2015 of $168.55.

On June 22, 2015, we completed the acquisition of Synageva, in a transaction accounted for under the acquisition method of accounting for business combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed from Synageva were recorded as of the acquisition date at their respective fair values. Synageva's results of operations are included in the consolidated financial statements from the date of acquisition. The acquisition furthered our objective to develop and commercialize life-transforming therapies to an increasing number of patients with devastating and rare diseases. Synageva's lead product candidate was Kanuma, an enzyme replacement therapy for patients suffering with LAL-D, a life-threatening, ultra-rare disease for which there were no approved treatments at the closing of the business combination. The U.S. Food and Drug Administration (FDA) and European Commission approved Kanuma in 2015.

We acquired all of the outstanding shares of common stock of Synageva for $4,565,524 in cash and 26,125 shares of common stock. At closing of the business combination on June 22, 2015, the purchase consideration was approximately $8,860,000, net of Synageva cash, based on Alexion's closing share price on the date of acquisition of $188.24. We financed the cash consideration with existing cash and proceeds from our new credit facility described further in Note 6.

7

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

The aggregate consideration to acquire Synageva consisted of:

Stock consideration	$	4,917,810
Cash consideration	4,565,524
Total purchase price	$	9,483,334

The following table summarizes the estimated fair values of assets acquired and liabilities assumed:

Cash	$	626,217
Inventory	23,880
In-process research and development (IPR&D)	4,236,000
Deferred tax liabilities, net	(159,991		)
Other assets and liabilities	(26,143		)
Net assets acquired	4,699,963
Goodwill	4,783,371
Total purchase price	$	9,483,334

The fair value of the assets acquired and liabilities assumed were initially based upon preliminary calculations, and our estimates and assumptions were subject to change as we obtained additional information for our estimates during the measurement period (up to one year from the acquisition date). During the nine months endedSeptember 30, 2016, we recorded fair value adjustments of $10,441 primarily due to tax related items.

We acquired $23,880 of Kanuma inventory. The estimated fair value of work-in-process and finished goods inventory was determined utilizing the comparative sales method, based on the expected selling price of the inventory, adjusted for incremental costs to complete the manufacturing process and for direct selling efforts, as well as for a reasonable profit allowance. The estimated fair value of raw material inventory was valued at replacement cost, which is equal to the value a market participant would pay to acquire the inventory.

Intangible assets associated with IPR&D projects primarily relate to Kanuma. The estimated fair value of IPR&D assets of $4,236,000 was determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The fair value using the multi-period excess earnings method was dependent on an estimated weighted average cost of capital for Synageva of 10%, which represents a rate of return that a market participant would expect for these assets.

The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill, which is not tax-deductible, has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment. The goodwill represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized and expected synergies that are specific to our business and not available to market participants, including our unique ability to commercialize therapies for rare diseases, our existing relationships with specialty physicians who can identify patients with LAL-D, a global distribution network to facilitate drug delivery and other benefits that we believe will result from combining the operations of Synageva within our operations.

We recorded a net deferred tax liability of $159,991. This amount was primarily comprised of $602,887 of deferred tax liabilities related to the IPR&D and inventory acquired, offset by $442,896 of deferred tax assets related to net operating loss carryforwards (NOLs), tax credits, and other temporary differences, which we expect to utilize.

For the three and nine months endedSeptember 30, 2015, we recorded $53,721 and $58,356 of pre-tax operating losses, respectively, associated with the continuing operations of Synageva in our condensed consolidated statements of operations.

Pro forma financial information (unaudited)

The following unaudited pro forma information presents the combined results of Alexion and Synageva as if the acquisition of Synageva had been completed on January 1, 2014, with adjustments to give effect to pro forma events that are directly attributable to the acquisition. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that would have had we completed the transaction on January 1, 2014.

8

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

	Three months ended			Nine months ended
	September 30, 2015			September 30, 2015
Pro forma revenue	$	666,637		$	1,905,388
Pro forma net loss	(177,854		)	(47,565		)
Loss per common share
Basic	$	(0.79	)	$	(0.21	)
Diluted	$	(0.79	)	$	(0.21	)

The unaudited pro forma consolidated results include the following pro forma adjustments related to non-recurring activity:

• Alexion and Synageva expenses of $33,150 and $127,290, respectively, associated with the accelerated vesting of stock based compensation as a result of the acquisition, were excluded from net income for the nine months endedSeptember 30, 2015.

• Alexion and Synageva acquisition-related and restructuring costs of $49,367 and $62,071, respectively, were excluded from income for the nine months endedSeptember 30, 2015. Alexion acquisition-related and restructuring costs of $9,223 were excluded from income for the three months endedSeptember 30, 2015.

Acquisition-Related Costs

Acquisition-related costs associated with our business combinations for the three and nine months endedSeptember 30, 2016 and 2015 include the following:

	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Transaction costs (1)	$	—	$	—	$	375	$	26,799
Integration costs	—		6,075		1,938		9,053
	$	—	$	6,075	$	2,313	$	35,852
(1) Transaction costs include investment advisory, legal, and accounting fees

For the three and nine months endedSeptember 30, 2015, the acquisition of Synageva resulted in $3,149 and $13,470 of restructuring related charges, respectively. Synageva restructuring related charges were not material for the three and nine months endedSeptember 30, 2016. See Note 18 for additional details.

4. Inventories

Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory on a standard cost basis, which approximates average costs.

The components of inventory are as follows:

	September 30,		December 31,
	2016		2015
Raw materials	$	17,005	$	17,924
Work-in-process	192,279		180,324
Finished goods	153,774		91,626
	$	363,058	$	289,874

9

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

5. Intangible Assets and Goodwill

The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization:

		September 30, 2016							December 31, 2015
	Estimated Life (years)	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
Licenses	6-8	$	28,507	$	(28,507	)	$	—	$	28,507	$	(28,504	)	$	3
Patents	7	10,517		(10,517		)	—		10,517		(10,517		)	—
Purchased technology	6-16	4,710,495		(358,769		)	4,351,726		4,708,495		(116,584		)	4,591,911
Acquired IPR&D	Indefinite	116,000		—			116,000		116,000		—			116,000
Total		$	4,865,519	$	(397,793	)	$	4,467,726	$	4,863,519	$	(155,605	)	$	4,707,914
Goodwill	Indefinite	$	5,040,345	$	(2,901	)	$	5,037,444	$	5,050,786	$	(2,901	)	$	5,047,885

Amortization expense for the three and nine months endedSeptember 30, 2016 was $82,035 and $242,188, respectively. Amortization expense for the three and nine months endedSeptember 30, 2015 was $36,619 and $36,640, respectively. Total estimated amortization expense for finite-lived intangible assets is $80,035 for the three months ending December 31, 2016, and $320,142 for each of the years ending December 31, 2017 through December 31, 2021.

The following table summarizes the changes in the carrying amount of goodwill:

Balance at December 31, 2015	$	5,047,885
Change in goodwill associated with prior acquisition	(10,441		)
Balance at September 30, 2016	$	5,037,444

Indefinite-lived intangible assets, including IPR&D, are reviewed for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The value of these assets may become impaired if there are changes since the acquisition date in the underlying assumptions used to estimate expected project sales, development costs and profitability. As of January 4, 2017, we are in the process of completing our annual impairment assessment on our SBC-103 indefinite-lived intangible asset acquired from Synageva. If the results of this assessment indicate that the asset may be impaired, an impairment charge may be recorded during in the fourth quarter of 2016.

6. Debt

In June 2015, Alexion entered into a credit agreement (Credit Agreement) with a syndicate of banks, which provides for a $3,500,000 term loan facility and a $500,000 revolving credit facility maturing in five years. Borrowings under the term loan are payable in quarterly installments equal to 1.25% of the original loan amount, beginning December 31, 2015. Final repayment of the term loan and revolving credit loans are due on June 22, 2020. In addition to borrowings in which prior notice is required, the revolving credit facility includes a sublimit of $100,000 in the form of letters of credit and borrowings on same-day notice, referred to as swingline loans, of up to $25,000. Borrowings can be used for working capital requirements, acquisitions and other general corporate purposes. With the consent of the lenders and the administrative agent, and subject to satisfaction of certain conditions, we may increase the term loan facility and/or the revolving credit facility in an amount that does not cause our consolidated net leverage ratio to exceed the maximum allowable amount.

In connection with entering into the Credit Agreement, we paid $45,492 in financing costs which are being amortized as interest expense over the life of the debt. Amortization expense associated with deferred financing costs for the three and nine months endedSeptember 30, 2016 was $2,382 and $7,278, respectively. Amortization expense associated with deferred financing costs for the three and nine months endedSeptember 30, 2015 was $2,513 and $3,864, respectively.

We made principal payments of $175,000 during the nine months endedSeptember 30, 2016. As of September 30, 2016, we had $3,281,250 outstanding on the term loan. In December 2016, we made a principle payment of $200,000 on our term loan. As of January 4, 2017, we had $3,081,250 outstanding on the term loan.

As of September 30, 2016, we had open letters of credit of $14,632, and our borrowing availability under the revolving facility was $485,368.

The fair value of our long term debt, which is measured using Level 2 inputs, approximates book value.

10

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

Under the Credit Agreement, we are required to deliver to the administrative agent, not later than 50 days after each fiscal quarter, our quarterly financial statements, and within 5 days thereafter, a compliance certificate.  In November 2016, we obtained a waiver from the necessary lenders for this requirement and the due date for delivery of the financial statements and compliance certificate was extended to January 18, 2017.  The posting of this report on Form 10-Q on our website satisfies the financial statement covenant, and we simultaneously delivered the required compliance certificate, as required by the lenders. 

7. Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of shares of common stock outstanding. For purposes of calculating diluted EPS, the denominator reflects the potential dilution that could occur if stock options, unvested restricted stock units or other contracts to issue common stock were exercised or converted into common stock, using the treasury stock method.

The following table summarizes the calculation of basic and diluted EPS for the three and nine months endedSeptember 30, 2016 and 2015:

	Three months ended					Nine months ended
	September 30,					September 30,
	2016		2015			2016		2015
Net income (loss) used for basic and diluted calculation	$	94,338	$	(183,757	)	$	306,564	$	77,781
Shares used in computing earnings per common share—basic	224,180		226,228			224,454		209,373
Weighted-average effect of dilutive securities:
Stock awards	1,908		—			2,106		2,435
Shares used in computing earnings per common share—diluted	226,088		226,228			226,560		211,808
Earnings (loss) per common share:
Basic	$	0.42	$	(0.81	)	$	1.37	$	0.37
Diluted	$	0.42	$	(0.81	)	$	1.35	$	0.37

We exclude from EPS the weighted-average number of securities whose effect is anti-dilutive. Excluded from the calculation of EPS for the three and nine months endedSeptember 30, 2016 were 4,520 and 4,386 shares of common stock, respectively, because their effect was anti-dilutive. Similarly, we excluded 2,437 shares from the calculation of EPS for the nine months endedSeptember 30, 2015 because their effect was anti-dilutive. For the three months endedSeptember 30, 2015, we reported a net loss; therefore, no outstanding stock awards were included in the computation of diluted net loss per share since such inclusion would have been anti-dilutive.

11

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

8. Marketable Securities

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale investments by type of security at September 30, 2016 and December 31, 2015 were as follows:

	September 30, 2016
	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Estimated Fair Value
Commercial paper	$	238,092	$	—	$	—		$	238,092
Corporate bonds	188,009		32		(237		)	187,804
Municipal bonds	155,421		1		(116		)	155,306
Other government-related obligations:
U.S.	30,503		—		(20		)	30,483
Foreign	133,530		4		(105		)	133,429
Bank certificates of deposit	14,751		—		—			14,751
Total available-for-sale debt securities	$	760,306	$	37	$	(478	)	$	759,865
Equity securities	—		1,775		—			1,775
Total available-for-sale securities	$	760,306	$	1,812	$	(478	)	$	761,640

	December 31, 2015
	Amortized Cost Basis		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Aggregate Fair Value
Commercial paper	$	254,396	$	—	$	—		$	254,396
Corporate bonds	133,062		23		(336		)	132,749
Municipal bonds	87,173		1		(63		)	87,111
Other government-related obligations:
U.S.	25,244		—		(94		)	25,150
Foreign	163,403		—		(504		)	162,899
Bank certificates of deposit	27,000		—		—			27,000
Total available-for-sale securities	$	690,278	$	24	$	(997	)	$	689,305

The aggregate fair value of available-for-sale securities in an unrealized loss position as of September 30, 2016 and December 31, 2015 were $348,525 and $293,947, respectively. Investments that have been in a continuous unrealized loss position for more than 12 months were not material. As of September 30, 2016, we believe that the cost basis of our available-for-sale investments is recoverable.

The fair values of available-for-sale securities by classification in the condensed consolidated balance sheet were as follows:

	September 30, 2016		December 31, 2015
Cash and cash equivalents	$	224,179	$	323,218
Marketable securities	537,461		366,087
	$	761,640	$	689,305

12

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

The fair values of available-for-sale debt securities at September 30, 2016, by contractual maturity, are summarized as follows:

	September 30, 2016
Due in one year or less	$	508,813
Due after one year through three years	251,052
	$	759,865

As of September 30, 2016 and December 31, 2015, the fair value of our trading securities was $13,421 and $8,817, respectively.

We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on our available-for-sale and trading securities were not material for the three and nine months endedSeptember 30, 2016 and 2015.

9. Derivative Instruments and Hedging Activities

We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates. The exposures result from portions of our revenues, as well as the related receivables, and expenses that are denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen. We are also exposed to fluctuations in interest rates on our outstanding term loan debt. We manage these exposures within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes.

We enter into foreign exchange forward contracts, with durations of up to 60 months, to hedge exposures resulting from portions of our forecasted revenues, including intercompany revenues, that are denominated in currencies other than the U.S. dollar. The purpose of these hedges is to reduce the volatility of exchange rate fluctuations on our operating results and to increase the visibility of the foreign exchange impact on forecasted revenues. These hedges are designated as cash flow hedges upon contract inception. At September 30, 2016, we had open foreign exchange forward contracts with notional amounts totaling $1,902,227 that qualified for hedge accounting.

To achieve a desired mix of floating and fixed interest rates on our term loan, we entered into two interest rate swap agreements in June 2016 that qualified for and are designated as cash flow hedges. The first agreement has a notional amount of $3,281,250 and is effective from June 30, 2016 through December 30, 2016. This agreement hedges the contractual floating interest rate of our term loan. As a result of this agreement, the interest rate for our term loan has been fixed at0.535%, plus the borrowing spread, until December 30, 2016. The second agreement has a notional amount of$656,250and is effective December 31, 2016 through December 31, 2019. The second agreement converts the floating rate on a portion of our term loan to a fixed rate of0.98%, plus a borrowing spread, from December 31, 2016 through December 2019.

The impact on accumulated other comprehensive income (AOCI) and earnings from derivative instruments that qualified as cash flow hedges, for the three and nine months endedSeptember 30, 2016 and 2015 were as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Foreign Exchange Contracts:
Gain (loss) recognized in AOCI, net of tax	$	(10,402	)	$	10,206		$	(50,191	)	$	81,794
Gain reclassified from AOCI to net product sales (effective portion), net of tax	$	8,237		$	25,842		$	33,154		$	78,959
Gain (loss) reclassified from AOCI to other income and expense (ineffective portion), net of tax	$	—		$	(328	)	$	—		$	1,003
Interest Rate Contracts:
Gain (loss) recognized in AOCI, net of tax	$	2,517		$	—		$	(1,178	)	$	—
Loss reclassified from AOCI to interest expense, net of tax	$	(218	)	$	—		$	(218	)	$	—

Assuming no change in foreign exchange rates or LIBOR-based interest rates from market rates at September 30, 2016,

13

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

$22,182 and $(717) of gains (losses) recognized in AOCI will be reclassified to revenue and interest expense, respectively, over the next 12 months.

We enter into foreign exchange forward contracts, with durations of approximately 90 days, designed to limit the balance sheet exposure of monetary assets and liabilities. We enter into these hedges to reduce the impact of fluctuating exchange rates on our operating results. Hedge accounting is not applied to these derivative instruments as gains and losses on these hedge transactions are designed to offset gains and losses on underlying balance sheet exposures. As of September 30, 2016, the notional amount of foreign exchange contracts where hedge accounting is not applied was $569,590.

We recognized a (loss) gain of $(2,528) and $2,676, in other income and expense, for the three months ended September 30, 2016 and 2015, respectively, and $(20,643) and $2,439, for the nine months endedSeptember 30, 2016 and 2015, respectively, associated with the foreign exchange contracts not designated as hedging instruments. These amounts were largely offset by gains or losses in monetary assets and liabilities.

The following tables summarize the fair value of outstanding derivatives at September 30, 2016 and December 31, 2015:

	September 30, 2016
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other current assets	$	48,014	Other current liabilities	$	25,831
Foreign exchange forward contracts	Other assets	31,122		Other liabilities	38,392
Interest rate contracts	Prepaid expenses and other current assets	229		Other current liabilities	946
Interest rate contracts	Other assets	—		Other liabilities	797
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other current assets	2,306		Other current liabilities	9,113
Total fair value of derivative instruments		$	81,671		$	75,079

	December 31, 2015
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other current assets	$	85,058	Other current liabilities	$	1,491
Foreign exchange forward contracts	Other assets	66,309		Other liabilities	4,773
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other current assets	6,687		Other current liabilities	4,157
Total fair value of derivative instruments		$	158,054		$	10,421

14

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

Although we do not offset derivative assets and liabilities within our condensed consolidated balance sheets, our International Swap and Derivatives Association agreements provide for net settlement of transactions that are due to or from the same counterparty upon early termination of the agreement due to an event of default or other termination event. The following tables summarize the potential effect on our condensed consolidated balance sheets of offsetting our foreign exchange forward contracts and interest rate contracts subject to such provisions:

	September 30, 2016
									Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Description	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet			Derivative Financial Instruments			Cash Collateral Received (Pledged)		Net Amount
Derivative assets	$	81,671		$	—	$	81,671		$	(49,423	)	$	—	$	32,248
Derivative liabilities	(75,079		)	—		(75,079		)	49,423			—		(25,656		)

	December 31, 2015
									Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Description	Gross Amounts of Recognized Assets/Liabilities			Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet			Derivative Financial Instruments			Cash Collateral Received (Pledged)		Net Amount
Derivative assets	$	158,054		$	—	$	158,054		$	(10,421	)	$	—	$	147,633
Derivative liabilities	(10,421		)	—		(10,421		)	10,421			—		—

10. Other Investments

Other investments include our investment of $37,500 in the preferred stock of Moderna LLC. Our investment is recorded at cost within other assets in our condensed consolidated balance sheets. The carrying value of this investment was not impaired as of September 30, 2016.

11. Stockholders' Equity

In November 2012, our Board of Directors authorized a share repurchase program. The repurchase program does not have an expiration date, and we are not obligated to acquire a particular number of shares. The repurchase program may be discontinued at any time at the Company's discretion. In May 2015, our Board of Directors increased the authorization to acquire shares with an aggregate value of up to $1,000,000 for future purchases under the repurchase program, which superseded all prior repurchase programs. Under the program, for the three months endedSeptember 30, 2016 and 2015 we repurchased 536 and 556 shares of our common stock at a cost of $69,321 and $91,820, respectively, and during the nine months endedSeptember 30, 2016 and 2015, we repurchased 2,864 and 1,022 shares of our common stock at a cost of $399,972 and $175,383, respectively.

Subsequent to September 30, 2016, we repurchased 250 shares of our common stock under our repurchase program at a cost of $30,695. As of January 4, 2017, there was a total of $325,197 remaining for repurchases under the repurchase program.

15

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

12. Other Comprehensive Income and Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI, by component, for the nine months endedSeptember 30, 2016 and 2015:

	Defined Benefit Pension Plans			Unrealized Gains (Losses) from Marketable Securities			Unrealized Gains (Losses) from Hedging Activities			Foreign Currency Translation Adjustment			Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2015	$	(9,589	)	$	(785	)	$	92,670		$	(19,995	)	$	62,301
Other comprehensive income before reclassifications	1,003			1,893			(51,369		)	2,609			$	(45,864	)
Amounts reclassified from other comprehensive income	222			(340		)	(32,936		)	—			$	(33,054	)
Net other comprehensive income (loss)	1,225			1,553			(84,305		)	2,609			(78,918		)
Balances, September 30, 2016	$	(8,364	)	$	768		$	8,365		$	(17,386	)	$	(16,617	)

	Defined Benefit Pension Plans			Unrealized Gains (Losses) from Marketable Securities			Unrealized Gains (Losses) from Hedging Activities			Foreign Currency Translation Adjustment			Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2014	$	(16,570	)	$	(234	)	$	87,308		$	(13,719	)	$	56,785
Other comprehensive income before reclassifications	1,394			412			81,794			(6,065		)	77,535
Amounts reclassified from other comprehensive income	93			(23		)	(79,962		)	—			(79,892		)
Net other comprehensive income (loss)	1,487			389			1,832			(6,065		)	(2,357		)
Balances, September 30, 2015	$	(15,083	)	$	155		$	89,140		$	(19,784	)	$	54,428

16

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

The table below provides details regarding significant reclassifications from AOCI during the three and nine months endedSeptember 30, 2016 and 2015:

Details about Accumulated Other Comprehensive Income Components	Amount Reclassified From Accumulated Other Comprehensive Income during the three months ended September 30,						Amount Reclassified From Accumulated Other Comprehensive Income during the nine months ended September 30,						Affected Line Item in the Condensed Consolidated Statements of Operations
	2016			2015			2016			2015
Unrealized Gains (Losses) from Hedging Activity
Foreign exchange contracts (effective portion)	$	12,769		$	29,534		$	51,254		$	90,240		Net product sales
Foreign exchange contracts (ineffective portion)	—			(375		)	—			1,146			Foreign currency (loss) gain
Interest rate contracts	(344		)	—			(344		)	—			Interest expense
	12,425			29,159			50,910			91,386
	(4,406		)	(3,645		)	(17,974		)	(11,424		)	Income tax provision
	$	8,019		$	25,514		$	32,936		$	79,962
Unrealized Gains (Losses) from Marketable Securities
Realized gains on sale of securities	$	647		$	—		$	536		$	35		Investment income
	647			—			536			35
	(237		)	—			(196		)	(12		)	Income tax provision
	$	410		$	—		$	340		$	23
Defined Benefit Pension Plans
Amortization of prior service costs and actuarial losses	$	(117	)	$	(313	)	$	(346	)	$	(939	)	(a)
Other	—			821			—			821			(a)
	(117		)	508			(346		)	(118		)
	42			(107		)	124			25			Income tax provision
	$	(75	)	$	401		$	(222	)	$	(93	)

(a) This AOCI component is included in the computation of net periodic pension benefit cost (see Note 15 for additional details).

13. Fair Value Measurement

Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

17

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value.

		Fair Value Measurement at September 30, 2016
Balance Sheet Classification	Type of Instrument	Total		Level 1		Level 2		Level 3
Cash equivalents	Institutional money market funds	$	83,864	$	—	$	83,864	$	—
Cash equivalents	Commercial paper	$	96,765	$	—	$	96,765	$	—
Cash equivalents	Corporate bonds	$	6,003	$	—	$	6,003	$	—
Cash equivalents	Municipal bonds	$	93,659	$	—	$	93,659	$	—
Cash equivalents	Bank certificates of deposit	$	1,750	$	—	$	1,750	$	—
Cash equivalents	Other government-related obligations	$	26,002	$	—	$	26,002	$	—
Marketable securities	Mutual funds	$	13,421	$	13,421	$	—	$	—
Marketable securities	Commercial paper	$	141,327	$	—	$	141,327	$	—
Marketable securities	Corporate bonds	$	181,801	$	—	$	181,801	$	—
Marketable securities	Municipal bonds	$	61,647	$	—	$	61,647	$	—
Marketable securities	Other government-related obligations	$	137,910	$	—	$	137,910	$	—
Marketable securities	Bank certificates of deposit	$	13,001	$	—	$	13,001	$	—
Marketable securities	Equity securities	$	1,775	$	1,775	$	—	$	—
Prepaid expenses and other current assets	Foreign exchange forward contracts	$	50,320	$	—	$	50,320	$	—
Other assets	Foreign exchange forward contracts	$	31,122	$	—	$	31,122	$	—
Other current liabilities	Foreign exchange forward contracts	$	34,944	$	—	$	34,944	$	—
Other liabilities	Foreign exchange forward contracts	$	38,392	$	—	$	38,392	$	—
Prepaid expenses and other current assets	Interest rate contracts	$	229	$	—	$	229	$	—
Other current liabilities	Interest rate contracts	$	946	$	—	$	946	$	—
Other liabilities	Interest rate contracts	$	797	$	—	$	797	$	—
Current portion of contingent consideration	Acquisition-related contingent consideration	$	81,848	$	—	$	—	$	81,848
Contingent consideration	Acquisition-related contingent consideration	$	126,056	$	—	$	—	$	126,056

18

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

		Fair Value Measurement at December 31, 2015
Balance Sheet Classification	Type of Instrument	Total		Level 1		Level 2		Level 3
Cash equivalents	Institutional money market funds	$	179,898	$	—	$	179,898	$	—
Cash equivalents	Commercial paper	$	192,418	$	—	$	192,418	$	—
Cash equivalents	Corporate bonds	$	12,250	$	—	$	12,250	$	—
Cash equivalents	Municipal bonds	$	60,001	$	—	$	60,001	$	—
Cash equivalents	Other government-related obligations	$	31,549	$	—	$	31,549	$	—
Cash equivalents	Bank certificates of deposit	$	27,000	$	—	$	27,000	$	—
Marketable securities	Mutual funds	$	8,817	$	8,817	$	—	$	—
Marketable securities	Commercial paper	$	61,978	$	—	$	61,978	$	—
Marketable securities	Corporate bonds	$	120,499	$	—	$	120,499	$	—
Marketable securities	Municipal bonds	$	27,110	$	—	$	27,110	$	—
Marketable securities	Other government-related obligations	$	156,500	$	—	$	156,500	$	—
Prepaid expenses and other current assets	Foreign exchange forward contracts	$	91,745	$	—	$	91,745	$	—
Other assets	Foreign exchange forward contracts	$	66,309	$	—	$	66,309	$	—
Other current liabilities	Foreign exchange forward contracts	$	5,648	$	—	$	5,648	$	—
Other liabilities	Foreign exchange forward contracts	$	4,773	$	—	$	4,773	$	—
Current portion of contingent consideration	Acquisition-related contingent consideration	$	55,804	$	—	$	—	$	55,804
Contingent consideration	Acquisition-related contingent consideration	$	121,424	$	—	$	—	$	121,424

There were no securities transferred between Level 1, 2 and 3 during the nine months endedSeptember 30, 2016.

Valuation Techniques

We classify mutual fund investments and equity securities, which are valued based on quoted market prices in active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.

Cash equivalents and marketable securities classified as Level 2 within the valuation hierarchy consist of institutional money market funds, commercial paper, municipal bonds, U.S. and foreign government-related debt, corporate debt securities and certificates of deposit. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

19

Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

Our derivative assets and liabilities include foreign exchange and interest rate derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk as well as an evaluation of our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.

Contingent consideration liabilities related to acquisitions are classified as Level 3 within the valuation hierarchy and are valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met.

As of September 30, 2016, there has not been any impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

Contingent Consideration

In connection with prior acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. We determine the fair value of these obligations on the acquisition date using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt of 5.5% for developmental milestones and a weighted average cost of capital ranging from 10% to 21% for sales-based milestones.

Each reporting period, we adjust the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time.

Estimated future contingent milestone payments related to prior business combinations range from zero if no milestone events are achieved, to a maximum of $826,000 if all development, regulatory and sales-based milestones are reached. As of September 30, 2016, the fair value of acquisition-related contingent consideration was $207,904. The following table represents a roll-forward of our acquisition-related contingent consideration:

	Nine months ended
	September 30, 2016
Balance at December 31, 2015	$	(177,228	)
Changes in fair value	(30,676		)
Balance at September 30, 2016	$	(207,904	)

In the fourth quarter 2016, the criteria was met for the achievement of a milestone payment associated with our acquisition of Enobia Pharma Corp. In connection with this, $60,000 was paid in December 2016.

14. Income Taxes

The following table provides a comparative summary of our income tax provision and effective tax rate for the three and nine months endedSeptember 30, 2016 and 2015:

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Provision for income taxes	$	63,776		$	323,116		$	165,113		$	345,815
Effective tax rate	40.3		%	231.9		%	35.0		%	81.6		%

The tax provision for the three and nine months endedSeptember 30, 2016 and 2015 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The decrease in the effective tax rate for the three and nine months endedSeptember 30, 2016 as compared to the same period in the prior year is primarily attributable to a one-time tax charge recorded in Q3 2015 of $315,569 associated with integration of the Synageva business, partially offset by the deferred tax cost

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Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

associated with a distribution of 2016 earnings from our captive foreign partnership. The partnership earnings we distributed were not previously subject to our indefinite reinvestment assertion.

Tax years 2013 and 2014 are currently under review by the Examination Division of the Internal Revenue Service (IRS). As of September 30, 2016, we have not been notified of any significant proposed adjustments by the IRS.

We continue to maintain a valuation allowance against certain deferred tax assets where realization is not certain.

15. Defined Benefit Plans

We maintain defined benefit plans for employees in certain countries outside the United States, including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increases, and pension adjustments.

The components of net periodic benefit cost are as follows:

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Service cost	$	2,113		$	2,380		$	6,211		$	7,241
Interest cost	56			179			172			551
Expected return on plan assets	(167		)	(248		)	(496		)	(756		)
Employee contributions	(448		)	(442		)	(1,203		)	(1,342		)
Amortization	117			313			346			939
Other	—			(821		)	—			(821		)
	$	1,671		$	1,361		$	5,030		$	5,812

16. Facility Lease Obligations

New Haven Facility Lease Obligation

In November 2012 we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. The term of the lease commenced in 2015 and will expire in 2030, with a renewal option of ten years. Although we do not legally own the premises, we are deemed to be the owner of the building due to the substantial improvements directly funded by us during the construction period based on applicable accounting guidance for build-to-suit leases. Accordingly, the landlord's costs of constructing the facility during the construction period are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet.

Construction of the new facility was completed and the building was placed into service in the first quarter 2016. As of September 30, 2016 and December 31, 2015, our facility lease obligation related to this facility was $135,442 and $132,866, respectively.

Lonza Facility Lease Obligation

During the third quarter 2015, we entered into a new agreement with Lonza Group AG and its affiliates (Lonza) whereby Lonza will construct a new manufacturing facility dedicated to Alexion at its existing Portsmouth, New Hampshire facility. The agreement requires us to make certain payments during the construction of the new manufacturing facility and annual payments for ten years thereafter. As a result of our contractual right to full capacity of the new manufacturing facility, a portion of the payments under the agreement are considered to be lease payments and a portion as payment for the supply of inventory. Although we will not legally own the premises, we are deemed to be the owner of the manufacturing facility during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. As of September 30, 2016 and December 31, 2015, we recorded a construction-in-process asset of $100,068 and $19,259 and an offsetting facility lease obligation of $89,668 and $15,229 associated with the manufacturing facility, respectively.

Payments to Lonza under the agreement are allocated to the purchases of inventory and the repayment of the facility lease obligation on a relative fair value basis. In 2016, we incurred $49,000 of payments to Lonza under this agreement, of which $6,370 was applied against the outstanding facility lease obligation and $42,630 was recognized as a prepayment of inventory.

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Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

17. Commitments and Contingencies

Commitments

Manufacturing Agreements

We have various manufacturing development agreements to support our clinical and commercial product needs. We rely on Lonza, a third party manufacturer, to produce a portion of commercial and clinical quantities of Soliris and Strensiq. We have various agreements with Lonza, with remaining total non-cancellable future commitments of approximately $1,122,029. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at Alexion Rhode Island Manufacturing Facility (ARIMF) and a payment with respect to sales of Soliris manufactured at Lonza facilities.

In addition to Lonza, we have non-cancellable commitments of approximately $33,000 with other third party manufacturers.

Contingent Liabilities

We are currently involved in various claims, lawsuits and legal proceedings. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Because of uncertainties related to claims and litigation, accruals are based on our best estimates based on available information. On a periodic basis, as additional information becomes available, or based on specific events such as the outcome of litigation or settlement of claims, we may reassess the potential liability related to these matters and may revise these estimates, which could result in a material adverse adjustment to our operating results.

We have in the past received, and may in the future receive, notices from third parties claiming that their patents may be infringed by the development, manufacture or sale of Soliris. Under the guidance of ASC 450, Contingencies, we record a royalty accrual based on our best estimate of the fair value percent of net sales of Soliris that we could be required to pay the owners of patents for technology used in the manufacture and sale of Soliris. A costly license, or inability to obtain a necessary license, could have a material adverse effect on our financial results.

In May 2015, we received a subpoena in connection with an investigation by the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting information related to our grant-making activities and compliance with the Foreign Corrupt Practices Act (FCPA) in various countries. In addition, in October 2015, Alexion received a request from the U.S. Department of Justice (DOJ) for the voluntary production of documents and other information pertaining to Alexion's compliance with FCPA. The SEC and DOJ also seek information related to Alexion’s recalls of specific lots of Soliris and related securities disclosures. Alexion is cooperating with these investigations. At this time, Alexion is unable to predict the duration, scope or outcome of these investigations. While it is possible that a loss related to these matters may be incurred, given the ongoing nature of these investigations, management cannot reasonably estimate the potential magnitude of such loss or range of loss, if any.

Several securities class action lawsuits have been filed against the Company and former officers in federal district court alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, promulgated thereunder, alleging that defendants made misstatements and/or omissions concerning the Company’s sales of Soliris.  

On November 17, 2016, a shareholder filed a putative class action in the U.S. District Court for the Southern District of New York.  While the litigation was in the early stages, and before defendants had responded to the complaint, on December 30, 2016 plaintiffs filed a notice of voluntary dismissal and dismissed all claims without prejudice.   

On December 29, 2016, a second shareholder filed a putative class action against the Company and certain former employees in the U.S. District Court for the District of Connecticut, alleging that defendants made misrepresentations and omissions about Soliris between February 10, 2014 and December 9, 2016.  The litigation is in the early stages, and defendants have not yet responded to the complaint.  Given the early stages of this litigation, management does not currently believe that a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated.  

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Alexion Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(amounts in thousands, except per share amounts)

In December 2016, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting documents relating generally to our support of 501(c)(3) organizations that provide financial assistance to Medicare patients taking drugs sold by Alexion,  Alexion’s provision of free drug to Medicare patients, and Alexion compliance policies and training materials concerning the anti-kickback statute or payments to any 501(c)(3) organization that provides financial assistance to Medicare patients.  Other companies have disclosed similar inquiries. We are cooperating with this inquiry.

In March 2013, we received a Warning Letter (Warning Letter) from the U.S. Food and Drug Administration (FDA) regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed receipt of a Form 483 Inspectional Observations by the FDA in connection with an FDA inspection that concluded in August 2012. The observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA dated in April 2013. As previously disclosed, the FDA issued Form 483s in August 2014 and August 2015 related to observations at ARIMF and the inspectional observations from the August 2014 and 2015 Form 483s have since been closed out by the FDA. During July 2016, the FDA completed a routine inspection at ARIMF and have since confirmed receipt of our responses to the inspectional observations included in the Form 483 received during that inspection. The observations are inspectional and do not represent a final FDA determination of compliance. We continue to manufacture products, including Soliris, in this facility. While the resolution of the issues raised in the Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated.

18. Restructuring

In connection with the acquisition and integration of Synageva in 2015, we recorded restructuring charges of $3,149 and $13,470for the three and nine months endedSeptember 30, 2015, respectively, primarily related to employee costs. Synageva restructuring charges were not material for the three and nine months endedSeptember 30, 2016.

In the fourth quarter 2014, we announced plans to relocate our European headquarters from Lausanne to Zurich, Switzerland. The relocation of our European headquarters supports our operational needs based on growth in the European region. During the three and nine months endedSeptember 30, 2016, we incurred additional restructuring costs of $377 and $2,392, respectively, as compared to $4,312 and $17,267, for the three and nine months endedSeptember 30, 2015, respectively.

The following table presents a reconciliation of the restructuring reserve recorded within accrued expenses on the Company's condensed consolidated balance sheet for the three and nine months endedSeptember 30, 2016:

	Three months ended September 30, 2016											Nine months ended September 30, 2016
	Employee Separation Costs		Contract Termination Costs			Other Costs			Total			Employee Separation Costs			Contract Termination Costs			Other Costs			Total
Liability, beginning of period	$	999	$	1,333		$	96		$	2,428		$	6,390		$	682		$	169		$	7,241
Restructuring expenses	—		—			564			564			—			35			1,456			1,491
Cash settlements	—		(335		)	(495		)	(830		)	(4,343		)	(1,017		)	(1,460		)	(6,820		)
Adjustments to previous estimates	—		—			—			—			(1,048		)	1,298			—			250
Liability, end of period	$	999	$	998		$	165		$	2,162		$	999		$	998		$	165		$	2,162

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Alexion Pharmaceuticals, Inc.

(amounts in thousands, except per share amounts)

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by our management, and may include, but are not limited to, statements regarding the potential benefits and commercial potential of Soliris®, Strensiq® and Kanuma® for approved indications and any expanded uses, timing and effect of sales of our products in various markets worldwide, pricing for our products, level of insurance coverage and reimbursement for our products, level of future product sales and collections, timing regarding development and regulatory approvals for additional indications or in additional territories, the medical and commercial potential of additional indications for Soliris, failure to satisfactorily address the issues raised by the U.S. Food and Drug Administration (FDA) in the March 2013 Warning Letter and Form 483s issued by the FDA, costs, expenses and capital requirements, cash outflows, cash from operations, status of reimbursement, price approval and funding processes in various countries worldwide, progress in developing commercial infrastructure and interest about our products and our product candidates in the patient, physician and payer communities, the safety and efficacy of our products and our product candidates, estimates of the potential markets and estimated commercialization dates for our product and our product candidates around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for our products or our product candidates, status of our ongoing clinical trials for eculizumab, asfotase alfa, sebelipase alfa and our other product candidates, commencement dates for new clinical trials, clinical trial results, evaluation of our clinical trial results by regulatory agencies, the adequacy of our pharmacovigilance and drug safety reporting processes, prospects for regulatory approval of our products and our product candidates, need for additional research and testing, the uncertainties involved in the drug development process and manufacturing, performance and reliance on third party service providers, our future research and development activities, plans for acquired programs, our ability to develop and commercialize products with our collaborators, assessment of competitors and potential competitors, the outcome of challenges and opposition proceedings to our intellectual property, assertion or potential assertion by third parties that the manufacture, use or sale of our products infringes their intellectual property, estimates of the capacity of manufacturing and other service facilities to support our products and our product candidates, potential costs resulting from product liability or other third party claims, the sufficiency of our existing capital resources and projected cash needs, the possibility that expected tax benefits will not be realized, assessment of impact of recent accounting pronouncements, declines in sovereign credit ratings or sovereign defaults in countries where we sell our products, delay of collection or reduction in reimbursement due to adverse economic conditions or changes in government and private insurer regulations and approaches to reimbursement, uncertainties surrounding legal proceedings, company investigations and government investigations, including our Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigations, the class action filed in December 2016, and the Audit Committee Investigation, risks related to potential disruptions to our business as a result of the leadership changes and transition announced in December 2016, the risk that hiring a new CEO may take longer than anticipated, the short and long term effects of other government healthcare measures, and the effect of shifting foreign exchange rates. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled “Risk Factors”. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in this and other reports or documents we file from time to time with the SEC.

Business

We are a biopharmaceutical company focused on serving patients with devastating and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products.

In our complement franchise, Soliris (eculizumab) is the first and only therapeutic approved for patients with either PNH or aHUS. In our metabolic franchise, we commercialize Strensiq (asfotase alfa) for the treatment of patients with HPP and Kanuma (sebelipase alfa) for the treatment of patients with LAL-D.

We are also evaluating additional potential indications for eculizumab in other severe and devastating diseases in which uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional product candidates as potential treatments for patients with severe and life-threatening rare disorders.

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Alexion Pharmaceuticals, Inc.

(amounts in thousands, except per share amounts)

Recent Developments

As previously reported, the Audit and Finance Committee of the Company’s Board of Directors (Audit Committee) commenced an investigation of allegations made by a former employee concerning the Company's Soliris sales practices. The former employee alleged that certain of such practices resulted in certain customers placing orders for shipments of Soliris in an earlier fiscal quarter than the fiscal quarter they otherwise would have (referred to here as pull-in or advanced sales, and more fully described below). The former employee alleged that such practices were used by the Company in order to meet certain financial targets and at times involved inappropriate business conduct. The Audit Committee conducted its investigation (Audit Committee Investigation) with the assistance of outside counsel, forensic accountants and other accounting firm advisors. The Audit Committee Investigation is substantially complete, and no further investigative procedures are currently planned except as necessary to respond to regulatory inquiries, if any, or because of matters that arise in the ordinary course of the Company's future business activities.

The Audit Committee concluded based on the facts of the investigation that the Company’s previously issued financial results do not require restatement. In addition, the Audit Committee Investigation did not identify any instances of improper revenue recognition associated with pull-in sales, instances where Soliris orders were not placed by customers for patients in order to fulfill an actual need, or instances where Soliris was sold to build stock of unwanted product. However, the Company concluded and the Audit Committee concurred that there was a material weakness in the Company's internal controls over financial reporting because senior management did not set an appropriate "Tone at the Top" for an effective control environment and such failure resulted in inappropriate business conduct, including conduct that was inconsistent with, and in violation of, the Company's policies and procedures. The Audit Committee Investigation found that senior management applied pressure on personnel to use pull-in sales to meet targets, and such pressure was particularly significant during the fourth quarter of 2015. The Audit Committee Investigation also found that certain Company personnel engaged in inappropriate business conduct to realize pull-in sales, as a result of pressure from senior management. Additional information concerning the Audit Committee Investigation is described further below.

For purposes of this Quarterly Report on Form 10-Q, "pull-in" or "advanced" sales are certain Soliris sales transactions, coordinated by Company personnel (primarily personnel in the customer operations department in their capacity as coordinators for the shipment of orders for customers) that increase revenue recognized in an earlier fiscal quarter than the one in which a sale otherwise would have occurred and result in a corresponding decrease in the revenue that will be recognized in the subsequent fiscal quarter. The Company is able to forecast the estimated date of certain shipments of Soliris due to customer order history, known infusion dates, or other similar data to support the operations of our business and patient needs. Pull-in sales may occur, for example, when a customer, as a result of encouragement by a Company employee, places an order for a patient earlier than the customer might otherwise place the order. Pull-in sales are not inherently problematic or impermissible, when in accordance with U.S. GAAP. The Audit Committee Investigation included a review of sales transactions for evidence of pull-in sales, the reasons for pull-in sales, whether such transactions were conducted in accordance with the Company's policies and procedures, and whether revenue from pull-in sales was properly recognized in accordance with U.S. GAAP.

The Audit Committee Investigation concluded that revenue from the pull-in sales under review was appropriately recognized in the quarter in which such sales actually occurred and that there were no financial statement errors related to the pull-in sales. However, the Audit Committee Investigation found that certain revenue pulled into the fourth quarter of 2015 from the first quarter of 2016 was realized as the result of employee actions that involved inappropriate business conduct, including conduct that was inconsistent with, and in violation of Company policies and procedures. Pull-in sales during the fo