CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
|
Accumulated Other Comprehensive Income (Loss) Components
|
|
Classification in the
Consolidated Statements of Income
|
|
Three-Month Periods Ended June 30,
|
|
Six-Month Periods Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
(Losses) gains related to cash-flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Net product sales
|
|
$
|
(12
|
)
|
|
$
|
81
|
|
|
$
|
(38
|
)
|
|
$
|
167
|
|
Treasury rate lock agreements
|
|
Interest (expense)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(3
|
)
|
Interest rate swap agreements
|
|
Interest (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
|
Income tax provision - (expense) benefit
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded component related to cash-flow hedges:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Net product sales
|
|
1
|
|
|
3
|
|
|
(2
|
)
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) gains on available-for-sale debt securities / marketable securities
(1)
:
|
|
|
|
|
|
|
|
|
Realized (loss) gain on sales of debt securities / marketable securities
|
|
Interest and investment income, net
|
|
—
|
|
|
(34
|
)
|
|
(18
|
)
|
|
(34
|
)
|
|
|
Income tax provision - (expense) benefit
|
|
—
|
|
|
13
|
|
|
4
|
|
|
13
|
|
Total reclassification, net of tax
|
|
|
|
$
|
(11
|
)
|
|
$
|
62
|
|
|
$
|
(55
|
)
|
|
$
|
149
|
|
(1)
(Losses) gains reclassified out of Accumulated other comprehensive income prior to December 31, 2017 are prior to the adoption of ASU 2016-01 and, as such, include equity securities with readily determinable fair values. Upon adoption of ASU 2016-01, we recorded a cumulative effect adjustment for our net unrealized gains related to our equity securities with readily determinable fair values as of January 1, 2018. Therefore, unrealized gains (losses) for the three- and six-month periods ended June 30, 2018 solely relate to debt securities available-for-sale. See Note 1 for further information related to the adoption of ASU 2016-01.
6. Financial Instruments and Fair Value Measurement
The tables below present information about assets and liabilities that are measured at fair value on a recurring basis as of
June 30, 2018
and
December 31, 2017
and the valuation techniques we utilized to determine such fair value.
|
|
•
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Our level 1 assets consist of debt securities available-for-sale and equity investments with readily determinable fair values. Our level 1 liability relates to our publicly traded contingent value rights (CVRs). See Note 18 of Notes to Consolidated Financial Statements included in our
2017
Annual Report on Form 10-K for a description of the CVRs.
|
|
|
•
|
Level 2 inputs utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active. From time to time, our level 2 assets consist of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities (MBS), global corporate debt securities, asset backed securities, ultra short income fund investments, time deposits and repurchase agreements with original maturities of greater than three months, foreign currency forward contracts, purchased foreign currency options and interest rate swap contracts. Our level 2 liabilities relate to written foreign currency options, foreign currency forward contracts and interest rate swap contracts.
|
|
|
•
|
Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity. We do not have any level 3 assets. Our level 3 liabilities consist of contingent consideration related to undeveloped product rights and technology platforms resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester), Nogra Pharma Limited (Nogra), Avila Therapeutics, Inc. (Avila) and Quanticel Pharmaceuticals, Inc. (Quanticel). In addition, in connection with our acquisition of Juno in the first quarter of 2018, we assumed Juno's contingent consideration and success payment liabilities.
|
Our contingent consideration obligations are recorded at their estimated fair values and we revalue these obligations each reporting period until the related contingencies are resolved. The fair value measurements are estimated using probability-weighted discounted cash flow approaches that are based on significant unobservable inputs related to product candidates acquired in business
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
combinations and are reviewed quarterly. These inputs include, as applicable, estimated probabilities and timing of achieving specified development and regulatory milestones, estimated annual sales and the discount rate used to calculate the present value of estimated future payments. Significant changes which increase or decrease the probabilities of achieving the related development and regulatory events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these obligations. The fair value of our contingent consideration as of
June 30, 2018
and
December 31, 2017
was calculated using the following significant unobservable inputs:
|
|
|
|
Inputs
|
Ranges (weighted average) utilized as of:
|
June 30, 2018
|
December 31, 2017
|
Discount rate
|
2.5% to 4.0% (3.2%)
|
2.7% to 12.0% (3.5%)
|
Probability of payment
|
0% to 68% (4.6%)
|
0% to 20% (4%)
|
Projected year of payment for development and regulatory milestones
|
2020 to 2029 (2023)
|
2020 to 2029 (2024)
|
Projected year of payment for sales-based milestones and other amounts calculated as a percentage of annual sales
|
N/A
|
2024 to 2030 (2028)
|
The maximum remaining potential payments related to the contingent consideration from the acquisitions of Gloucester, Avila, Quanticel and those assumed in our acquisition of Juno are estimated to be approximately
$120 million
,
$475 million
,
$214 million
and
$296 million
, respectively, and
$1.8 billion
plus other amounts calculated as a percentage of annual sales pursuant to the license agreement with Nogra.
Success payment obligations assumed through our acquisition of Juno are also recorded at their estimated fair values and are revalued quarterly. Changes in the fair value of contingent consideration and success payment obligations are recognized in Acquisition related charges (income) and restructuring, net in the Consolidated Statements of Income.
Effective January 1, 2018, we adopted ASU 2016-01. Among other provisions, the new standard required modifications to existing presentation and disclosure requirements on a prospective basis. Certain disclosures as of December 31, 2017 below conform to the disclosure requirements of ASU 2016-01. See Note 1 for additional information related to the adoption of ASU 2016-01.
The following tables present the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
as of June 30, 2018
|
|
Balance as of
June 30, 2018
|
|
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
Debt securities available-for-sale
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
79
|
|
|
$
|
—
|
|
Equity investments with readily determinable fair values
|
1,828
|
|
|
1,828
|
|
|
—
|
|
|
—
|
|
Forward currency contracts
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
Purchased currency options
|
33
|
|
|
—
|
|
|
33
|
|
|
—
|
|
Total assets
|
$
|
1,967
|
|
|
$
|
1,828
|
|
|
$
|
139
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent value rights
|
$
|
(18
|
)
|
|
$
|
(18
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swaps
|
(27
|
)
|
|
—
|
|
|
(27
|
)
|
|
—
|
|
Written currency options
|
(81
|
)
|
|
—
|
|
|
(81
|
)
|
|
—
|
|
Other acquisition related contingent consideration and success payments
|
(193
|
)
|
|
—
|
|
|
—
|
|
|
(193
|
)
|
Total liabilities
|
$
|
(319
|
)
|
|
$
|
(18
|
)
|
|
$
|
(108
|
)
|
|
$
|
(193
|
)
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
as of December 31, 2017
|
|
Balance as of December 31, 2017
|
|
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities available-for-sale
|
$
|
3,219
|
|
|
$
|
—
|
|
|
$
|
3,219
|
|
|
$
|
—
|
|
Equity investments with readily determinable fair values
|
1,810
|
|
|
1,810
|
|
|
—
|
|
|
—
|
|
Purchased currency options
|
36
|
|
|
—
|
|
|
36
|
|
|
—
|
|
Total assets
|
$
|
5,065
|
|
|
$
|
1,810
|
|
|
$
|
3,255
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent value rights
|
$
|
(42
|
)
|
|
$
|
(42
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Forward currency contracts
|
(42
|
)
|
|
—
|
|
|
(42
|
)
|
|
—
|
|
Interest rate swaps
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
Written currency options
|
(172
|
)
|
|
—
|
|
|
(172
|
)
|
|
—
|
|
Other acquisition related contingent consideration
|
(80
|
)
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
Total liabilities
|
$
|
(343
|
)
|
|
$
|
(42
|
)
|
|
$
|
(221
|
)
|
|
$
|
(80
|
)
|
As of result of the implementation of ASU 2016-01 and ASU 2018-03, effective on January 1, 2018, we measure equity investments without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer or at NAV, as a practical expedient, if available. We record upward adjustments, downward adjustments and impairments of equity investments without readily determinable fair values within Other income (expense), net on the Consolidated Statement of Income. The following table represents a roll-forward of equity investments without readily determinable fair values:
|
|
|
|
|
|
Six-Month Period Ended June 30, 2018
|
Balance as of December 31, 2017
|
$
|
513
|
|
Cumulative effect adjustment for the adoption of ASU 2018-03 (See Note 1)
|
59
|
|
Purchases
|
46
|
|
Upward adjustments
|
32
|
|
Sales
|
(23
|
)
|
Downward adjustments
|
(1
|
)
|
Impairments
|
(1
|
)
|
Transfer to readily determinable fair value
|
(20
|
)
|
Balance as of June 30, 2018
|
$
|
605
|
|
For equity investments with and without readily determinable fair values held as of
June 30, 2018
, we recorded a net unrealized loss of
$11 million
and a net unrealized gain of
$435 million
within Other income (expense), net on the Consolidated Statement of Income for the three- and six-month periods ended
June 30, 2018
, respectively.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
There were no security transfers between levels 1, 2 and 3 during the three-month periods ended
June 30, 2018
and
2017
. The following table represents a roll-forward of the fair value of level 3 instruments:
|
|
|
|
|
|
|
|
Three-Month Period Ended June 30, 2018
|
Liabilities:
|
|
|
Balance as of March 31, 2018
|
|
$
|
(201
|
)
|
Amounts acquired from Juno, including measurement period adjustments
|
|
6
|
|
Settlements, including transfers to Accrued expenses and other current liabilities
|
|
2
|
|
Balance as of June 30, 2018
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
Three-Month Period Ended June 30, 2017
|
Liabilities:
|
|
|
Balance as of March 31, 2017
|
|
$
|
(1,527
|
)
|
Net change in fair value
|
|
20
|
|
Settlements, including transfers to Accrued expenses and other current liabilities
|
|
19
|
|
Balance as of June 30, 2017
|
|
$
|
(1,488
|
)
|
There were no security transfers between levels 1, 2 and 3 during the six-month periods ended
June 30, 2018
and
2017
. The following table represents a roll-forward of the fair value of level 3 instruments:
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, 2018
|
Liabilities:
|
|
|
Balance as of December 31, 2017
|
|
$
|
(80
|
)
|
Amounts acquired from Juno, including measurement period adjustments
|
|
(116
|
)
|
Net change in fair value
|
|
1
|
|
Settlements, including transfers to Accrued expenses and other current liabilities
|
|
2
|
|
Balance as of June 30, 2018
|
|
$
|
(193
|
)
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, 2017
|
Liabilities:
|
|
|
Balance as of December 31, 2016
|
|
$
|
(1,490
|
)
|
Net change in fair value
|
|
(17
|
)
|
Settlements, including transfers to Accrued expenses and other current liabilities
|
|
19
|
|
Balance as of June 30, 2017
|
|
$
|
(1,488
|
)
|
As previously reported in our 2017 Annual Report on Form 10-K, we reduced our contingent consideration liabilities related to Nogra by
$1,397 million
due to the discontinuance of the GED-0301 phase III REVOLVE (CD-002) trial in Crohn's disease and the SUSTAIN (CD-004) extension trial in the fourth quarter of 2017.
7. Derivative Instruments and Hedging Activities
During the third quarter of 2017, we adopted ASU 2017-12 on a modified retrospective basis. We recorded pre-tax income of
$48 million
and
$37 million
for the three- and six-month period ended June 30, 2017 as a result of applying the new guidance during the nine-month period ended September 30, 2017. As such, certain disclosures for the three- and six-month periods ended June 30, 2017 below have been recast to conform to the disclosure requirements related to the adoption of ASU 2017-12. See Note 1 for additional information related to the adoption of ASU 2017-12.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. In instances where these financial instruments are accounted for as cash flow hedges or fair value hedges we may from time to time terminate the hedging relationship. If a hedging relationship is terminated, we generally either settle the instrument or enter into an offsetting instrument.
Foreign Currency Risk Management
We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings and changes in the fair value of assets and liabilities denominated in foreign currencies.
Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. Dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next
three years
, with a maximum of
five years
. We manage our anticipated transaction exposure principally with foreign currency forward contracts, a combination of foreign currency put and call options, and occasionally purchased foreign currency put options.
Foreign Currency Forward Contracts:
We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.
We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries. The foreign currency forward hedging contracts outstanding as of
June 30, 2018
and
December 31, 2017
had settlement dates within
36 months
and
20 months
, respectively. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and any unrealized gains or losses are reported in OCI and reclassified to the Consolidated Statement of Income in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. We recognize in earnings the initial value of the forward point components on a straight-line basis over the life of the derivative instrument within the same line item in the Consolidated Statements of Income that is used to present the earnings effect of the hedged item.
Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
Foreign Currency
|
|
June 30, 2018
|
|
December 31, 2017
|
Australian Dollar
|
|
$
|
46
|
|
|
$
|
61
|
|
British Pound
|
|
134
|
|
|
97
|
|
Canadian Dollar
|
|
190
|
|
|
227
|
|
Euro
|
|
962
|
|
|
954
|
|
Japanese Yen
|
|
508
|
|
|
356
|
|
Total
|
|
$
|
1,840
|
|
|
$
|
1,695
|
|
We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis. As of
June 30, 2018
, credit risk did not materially change the fair value of our foreign currency forward contracts.
We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in
Other income (expense), net
in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding as of
June 30, 2018
and
December 31, 2017
were
$748 million
and
$885 million
, respectively.
Foreign Currency Option Contracts:
From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. The foreign currency option contracts outstanding as of
June 30, 2018
and
December 31, 2017
had settlement dates within
30 months
and
36 months
, respectively. If the U.S. Dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. Dollar equivalent value of our anticipated foreign currency cash flows; however, this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the sale of the call option is equal to the premium paid for the purchased put option, resulting in a net zero cost for each collar.
Outstanding foreign currency option contracts entered into to hedge forecasted revenue were as follows as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
Notional Amount
(1)
|
|
June 30, 2018
|
|
December 31, 2017
|
Foreign currency option contracts designated as hedging activity:
|
|
|
|
Purchased Put
|
$
|
2,756
|
|
|
$
|
3,319
|
|
Written Call
|
3,131
|
|
|
3,739
|
|
(1)
U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.
We also have entered into foreign currency put option contracts to hedge forecasted revenue which were not part of a collar strategy. Such put option contracts had a notional amount of
$129 million
and
$258 million
as of
June 30, 2018
and December 31, 2017, respectively, and settlement dates within
6 months
and
12 months
, respectively.
Interest Rate Risk Management
Forward Starting Interest Rate Swaps and Treasury Rate Locks:
In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the forward starting swaps or treasury rate locks are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes. As of
June 30, 2018
and
December 31, 2017
, we did not have any outstanding forward starting swaps or treasury rate locks.
Interest Rate Swap Contracts:
From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in benchmark interest rates. Gains or losses resulting from changes in fair value of the underlying debt attributable to the hedged benchmark interest rate risk are recorded on the Consolidated Statement of Income within Interest (expense) with an associated offset to the carrying value of the notes recorded on the Consolidated Balance Sheet. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged all changes in fair value of the swap are recorded on the Consolidated Statement of Income within Interest (expense) with an associated offset to the derivative asset or liability on the Consolidated Balance Sheet. Consequently, there is no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense on the Consolidated Statements of Income. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the notional amounts of our outstanding interest rate swap contracts as of
June 30, 2018
and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
Notional Amount
|
|
June 30, 2018
|
|
December 31, 2017
|
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
|
|
|
|
3.875% senior notes due 2025
|
$
|
200
|
|
|
$
|
200
|
|
3.450% senior notes due 2027
|
550
|
|
|
250
|
|
3.900% senior notes due 2028
|
200
|
|
|
—
|
|
Total
|
$
|
950
|
|
|
$
|
450
|
|
We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes in 2018 and 2017, and also terminated the hedging relationship by settling certain of those swap contracts during 2018 and 2017. In 2018, we settled
$150 million
notional amount of certain swap contracts. There were no material cash proceeds as a result of settling such swap contracts. During 2017, we terminated the hedging relationship on certain outstanding swap contracts amounting to
$200 million
notional amount by settling such swap contracts. The settlement of swap contracts resulted in the receipt of net proceeds of
$3 million
during the year ended December 31, 2017, which are accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense.
The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Balance Sheet Location
|
|
Fair Value
|
Instrument
|
|
|
Asset
Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
Foreign exchange contracts
(1)
|
|
Other current assets
|
|
$
|
56
|
|
|
$
|
29
|
|
|
|
Accrued expenses and other current liabilities
|
|
4
|
|
|
10
|
|
|
|
Other non-current assets
|
|
4
|
|
|
—
|
|
|
|
Other non-current liabilities
|
|
34
|
|
|
68
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
7
|
|
|
—
|
|
|
|
Other non-current liabilities
|
|
—
|
|
|
36
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts
(1)
|
|
Other current assets
|
|
25
|
|
|
3
|
|
|
|
Accrued expenses and other current liabilities
|
|
3
|
|
|
37
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
2
|
|
|
1
|
|
|
|
Other non-current assets
|
|
7
|
|
|
6
|
|
Total
|
|
|
|
$
|
142
|
|
|
$
|
190
|
|
(1)
Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheet in accordance with ASC 210-20.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
Fair Value
|
Instrument
|
|
Balance Sheet Location
|
|
Asset Derivatives
|
|
Liability Derivatives
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Foreign exchange contracts
(1)
|
|
Other current assets
|
|
$
|
5
|
|
|
$
|
1
|
|
|
|
Accrued expenses and other current liabilities
|
|
30
|
|
|
79
|
|
|
|
Other non-current assets
|
|
1
|
|
|
—
|
|
|
|
Other non-current liabilities
|
|
36
|
|
|
159
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
3
|
|
|
—
|
|
|
|
Other non-current liabilities
|
|
—
|
|
|
11
|
|
Derivatives not designated as hedging instruments:
|
|
Foreign exchange contracts
(1)
|
|
Other current assets
|
|
8
|
|
|
1
|
|
|
|
Accrued expenses and other current liabilities
|
|
4
|
|
|
22
|
|
Interest rate swap agreements
|
|
Other current assets
|
|
2
|
|
|
2
|
|
|
|
Other non-current assets
|
|
4
|
|
|
3
|
|
Total
|
|
|
|
$
|
93
|
|
|
$
|
278
|
|
(1)
Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheet in accordance with ASC 210-20.
As of June 30, 2018 and December 31, 2017, the following amounts were recorded on the Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount of the Hedged Liability
|
|
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
|
Consolidated Balance Sheet Classification in Which the Hedged Item Is Included
|
|
June 30, 2018
(1)
|
|
December 31, 2017
(1)
|
|
June 30, 2018
(2)
|
|
December 31, 2017
(2)
|
Current portion of long-term debt, net of discount
|
|
$
|
503
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
Long-term debt, net of discount
|
|
8,173
|
|
|
7,270
|
|
|
84
|
|
|
128
|
|
(1)
The current portion of long-term debt, net of discount includes approximately
$503 million
of carrying value with discontinued hedging relationships at June 30, 2018. The long-term debt, net of discount includes approximately
$3.2 billion
and
$3.8 billion
of carrying value with discontinued hedging relationships as of June 30, 2018 and December 31, 2017, respectively.
(2)
The current portion of long-term debt, net of discount includes
$4 million
of discontinued hedging relationships at June 30, 2018. The long-term debt, net of discount includes
$120 million
and
$139 million
of hedging adjustment on discontinued hedging relationships on long-term debt as of June 30, 2018 and December 31, 2017, respectively.
The following tables summarize the effect of derivative instruments designated as cash flow hedging instruments in Accumulated OCI for the three-month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended June 30, 2018
|
Instrument
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
(1), (2)
|
|
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Classification of Gain/(Loss) Recognized in Income Related to Amount Excluded from Effectiveness Testing
|
|
Amount of Gain/(Loss) Recognized in Income on Derivative Related to Amount Excluded from Effectiveness Testing
|
Foreign exchange contracts
|
$
|
226
|
|
|
Net product sales
|
|
$
|
(12
|
)
|
|
Net product sales
|
|
$
|
1
|
|
Treasury rate lock agreements
|
—
|
|
|
Interest (expense)
|
|
(1
|
)
|
|
N/A
|
|
—
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(1)
Net losses of
$7 million
are expected to be reclassified from Accumulated OCI into income in the next 12 months.
(2)
For the three-month period ended June 30, 2018, the straight-line amortization of the initial value of the amount excluded from the assessment of hedge effectiveness for our foreign exchange contracts recognized in OCI was a gain of
$1 million
. There were no excluded components for our treasury rate lock and interest rate swap agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended June 30, 2017
|
Instrument
|
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
|
|
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Classification of Gain/(Loss) Recognized in Income Related to Amount Excluded from Effectiveness Testing
|
|
Amount of Gain/(Loss) Recognized in Income on Derivative Related to Amount Excluded from Effectiveness Testing
|
Foreign exchange contracts
|
|
$
|
(181
|
)
|
|
Net product sales
|
|
$
|
81
|
|
|
Net product sales
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
1
|
|
Treasury rate lock agreements
|
|
—
|
|
|
Interest (expense)
|
|
(2
|
)
|
|
N/A
|
|
—
|
|
Forward starting interest rate swaps
|
|
(17
|
)
|
|
Interest (expense)
|
|
—
|
|
|
N/A
|
|
—
|
|
The following tables summarize the effect of derivative instruments designated as cash flow hedging instruments in Accumulated OCI for the six-month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, 2018
|
Instrument
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
(1), (2)
|
|
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Classification of Gain/(Loss) Recognized in Income Related to Amount Excluded from Effectiveness Testing
|
|
Amount of Gain/(Loss) Recognized in Income on Derivative Related to Amount Excluded from Effectiveness Testing
|
Foreign exchange contracts
|
$
|
131
|
|
|
Net product sales
|
|
$
|
(38
|
)
|
|
Net product sales
|
|
$
|
(2
|
)
|
Treasury rate lock agreements
|
(4
|
)
|
|
Interest (expense)
|
|
(2
|
)
|
|
Other income (expense), net
|
|
—
|
|
(1)
Net losses of
$7 million
are expected to be reclassified from Accumulated OCI into income in the next 12 months.
(2)
For the six-month period ended June 30, 2018, the straight-line amortization of the initial value of the amount excluded from the assessment of hedge effectiveness for our foreign exchange contracts recognized in OCI was a loss of
$2 million
. There were no excluded components for our treasury rate lock and interest rate swap agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30, 2017
|
Instrument
|
|
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
|
|
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
|
|
Classification of Gain/(Loss) Recognized in Income Related to Amount Excluded from Effectiveness Testing
|
|
Amount of Gain/(Loss) Recognized in Income on Derivative Related to Amount Excluded from Effectiveness Testing
|
Foreign exchange contracts
|
|
$
|
(249
|
)
|
|
Net product sales
|
|
$
|
167
|
|
|
Net product sales
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
8
|
|
Treasury rate lock agreements
|
|
—
|
|
|
Interest (expense)
|
|
(3
|
)
|
|
N/A
|
|
—
|
|
Forward starting interest rate swaps
|
|
(17
|
)
|
|
Interest (expense)
|
|
(1
|
)
|
|
N/A
|
|
—
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(1)
For the six-month period ended June 30, 2017, the straight-line amortization of the initial value of the amount excluded from the assessment of hedge effectiveness for our foreign exchange contracts recognized in OCI was a gain of
$5 million
. There were no excluded components for our treasury rate lock and interest rate swap agreements.
The following table summarizes the effect of derivative instruments which were designated as fair value hedging instruments on the Consolidated Statements of Income for the three-month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss)/Gain Recognized in
Income on Derivative
|
|
|
|
|
Three-Month Periods Ended
June 30,
|
|
Six-Month Periods Ended June 30,
|
Instrument
|
|
Classification of (Loss)/Gain Recognized in Income on Derivative
|
|
2018
(1)
|
|
2017
(1)
|
|
2018
(1)
|
|
2017
(1)
|
Interest rate swap agreements
|
|
Interest (expense)
|
|
$
|
(2
|
)
|
|
$
|
11
|
|
|
$
|
(7
|
)
|
|
$
|
20
|
|
(1)
The amounts include a benefit of
$8 million
and
$9 million
for the three-month periods ending June 30, 2018 and 2017, respectively and a benefit of
$16 million
and
$18 million
for the six-months periods ending June 30, 2018 and 2017, respectively, relating to the amortization of the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged liability for discontinued hedging relationships.
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of Gain (Loss) Recognized in Income on Derivative
|
|
|
|
|
Three-Month Periods Ended
June 30,
|
|
Six-Month Periods Ended
June 30,
|
Instrument
|
|
Classification of Gain (Loss) Recognized in Income on Derivative
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Foreign exchange contracts
|
|
Other income (expense), net
|
|
$
|
22
|
|
|
$
|
(19
|
)
|
|
$
|
9
|
|
|
$
|
(42
|
)
|
The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Income in
Other income (expense), net
for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
|
|
|
|
Three-Month Period Ended June 30, 2018
|
|
|
|
|
|
Net product sales
|
|
Interest (expense)
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded
|
|
$
|
3,808
|
|
|
$
|
(192
|
)
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships
|
|
|
|
|
|
|
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
—
|
|
|
11
|
|
|
—
|
|
|
|
|
Derivatives designated as hedging instruments
(1)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships
|
|
|
|
|
|
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
(12
|
)
|
|
—
|
|
|
—
|
|
|
|
|
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach / changes in fair value
|
|
7
|
|
|
—
|
|
|
—
|
|
|
|
|
Reclassification adjustment for excluded component (loss) gain
|
|
(6
|
)
|
|
|
|
|
|
|
Treasury rate lock agreements:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
(1)
The amounts include a benefit of
$8 million
relating to the amortization of the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged liability for discontinued hedging relationships for the three-month period ending June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
|
|
|
|
Three-Month Period Ended June 30, 2017
|
|
|
|
|
|
Net product sales
|
|
Interest (expense)
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded
|
|
$
|
3,259
|
|
|
$
|
(126
|
)
|
|
$
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships
|
|
|
|
|
|
|
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
|
|
Derivatives designated as hedging instruments
(1)
|
|
—
|
|
|
11
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships
|
|
|
|
|
|
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
81
|
|
|
—
|
|
|
—
|
|
|
|
|
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach / changes in fair value
|
|
3
|
|
|
—
|
|
|
1
|
|
|
|
Treasury rate lock agreements:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
(1)
The amounts include a benefit of
$9 million
relating to the amortization of the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged liability for discontinued hedging relationships for the three-month period ending June 30, 2017.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
|
|
|
|
Six-Month Period Ended June 30, 2018
|
|
|
|
|
|
Net product sales
|
|
Interest (expense)
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded
|
|
$
|
7,339
|
|
|
$
|
(358
|
)
|
|
$
|
969
|
|
|
|
|
|
|
|
|
|
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships
|
|
|
|
|
|
|
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
—
|
|
|
25
|
|
|
—
|
|
|
|
|
Derivatives designated as hedging instruments
(1)
|
|
—
|
|
|
(7
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships
|
|
|
|
|
|
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
(38
|
)
|
|
—
|
|
|
—
|
|
|
|
|
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach / changes in fair value
|
|
15
|
|
|
—
|
|
|
—
|
|
|
|
|
Reclassification adjustment for excluded component (loss) gain
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
|
Treasury rate lock agreements:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
(1)
The amounts include a benefit of
$16 million
relating to the amortization of the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged liability for discontinued hedging relationships for the six-month period ending June 30, 2018.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships
|
|
|
|
|
|
Six-Month Period Ended June 30, 2017
|
|
|
|
|
|
Net product sales
|
|
Interest (expense)
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
Total amounts of income and expense line items presented in the Consolidated Statements of Income in which the effects of fair value or cash flow hedges are recorded
|
|
$
|
6,211
|
|
|
$
|
(253
|
)
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
The effects of fair value and cash flow hedging:
|
|
|
|
|
|
|
|
Gain (loss) on fair value hedging relationships
|
|
|
|
|
|
|
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
Hedged items
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
|
|
Derivatives designated as hedging instruments
(1)
|
|
—
|
|
|
20
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships
|
|
|
|
|
|
|
|
|
Foreign exchange contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
167
|
|
|
—
|
|
|
—
|
|
|
|
|
Amount excluded from effectiveness testing recognized using a systematic and rational amortization approach / changes in fair value
|
|
5
|
|
|
—
|
|
|
8
|
|
|
|
Treasury rate lock agreements:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
|
Interest rate swap agreements:
|
|
|
|
|
|
|
|
|
|
Amount of gain or (loss) reclassified from AOCI into income
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
(1)
The amounts include a benefit of
$18 million
relating to the amortization of the cumulative amount of fair value hedging adjustments included in the carrying amount of the hedged liability for discontinued hedging relationships for the six-month period ending June 30, 2017.
8. Cash, Cash Equivalents, Debt Securities Available-for-Sale and Equity Investments with Readily Determinable Fair Values
Time deposits, repurchase agreements, and commercial paper instruments with original maturities less than three months and money market funds are included in Cash and cash equivalents. As of
June 30, 2018
, the carrying value of our time deposits and repurchase agreements was
$11 million
and money market funds was
$507 million
, all of which are included in Cash and cash equivalents. As of
December 31, 2017
, the carrying value of our time deposits and repurchase agreements was
$1.2 billion
, commercial paper instruments was
$35 million
, and money market funds was
$4.5 billion
, all of which were included in Cash and cash equivalents. The carrying values approximated fair value as of
June 30, 2018
and
December 31, 2017
.
Effective January 1, 2018, we adopted ASU 2016-01. Among other provisions, the new standard required modifications to existing presentation and disclosure requirements on a prospective basis. As such, certain disclosures as of December 31, 2017 below conform to the disclosure requirements prior to the adoption of ASU 2016-01. See Note 1 for additional information related to the adoption of ASU 2016-01.
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of debt securities available-for-sale by major security type and class of security and equity investments with readily determinable fair values as of
June 30, 2018
and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Estimated Fair Value
|
Time deposits
(1)
and Repurchase agreements
(1)
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79
|
|
Total debt securities available-for-sale
|
|
$
|
79
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Estimated Fair Value
|
U.S. Treasury securities
|
|
$
|
445
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
442
|
|
U.S. government-sponsored agency securities
|
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
U.S. government-sponsored agency MBS
|
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Corporate debt - global
|
|
2,080
|
|
|
—
|
|
|
(5
|
)
|
|
2,075
|
|
Asset backed securities
|
|
203
|
|
|
—
|
|
|
(1
|
)
|
|
202
|
|
Ultra short income fund
|
|
352
|
|
|
—
|
|
|
—
|
|
|
352
|
|
Time deposits
(1)
and Repurchase agreements
(1)
|
|
89
|
|
|
—
|
|
|
—
|
|
|
89
|
|
Total debt securities available-for-sale
|
|
$
|
3,228
|
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
$
|
3,219
|
|
|
|
|
|
|
|
|
|
|
Equity securities with readily determinable fair values
|
|
$
|
935
|
|
|
$
|
881
|
|
|
$
|
(6
|
)
|
|
$
|
1,810
|
|
(1)
Have original maturities of greater than three months.
U.S. Treasury securities include government debt instruments issued by the U.S. Department of the Treasury. U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. government sponsored enterprises. U.S. government-sponsored agency MBS include mortgage-backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Corporate debt-global includes obligations issued by investment-grade corporations, including some issues that have been guaranteed by governments and government agencies. Asset backed securities consist of triple-A rated securities with cash flows collateralized by credit card receivables and auto loans. Ultra short income fund includes investments in certificates of deposit, repurchase agreements, commercial paper and corporate notes. Time deposits and repurchase agreements in the tables above have original maturities greater than three months. Our repurchase agreements are collateralized by U.S. government securities, cash, bonds, commercial paper and bank certificates of deposit. As of
June 30, 2018
, all of our time deposits and repurchase agreements had original maturities less than one year.
Equity securities with readily determinable fair values, which consist of investments in publicly traded equity securities, were
$1,828 million
as of
June 30, 2018
.
Duration periods of available-for-sale debt securities as of
June 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
Duration of one year or less
|
|
$
|
79
|
|
|
$
|
79
|
|
9. Inventory
Inventories as of
June 30, 2018
and
December 31, 2017
are summarized by major category as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Raw materials
|
$
|
344
|
|
|
$
|
289
|
|
Work in process
|
68
|
|
|
89
|
|
Finished goods
|
143
|
|
|
163
|
|
Total
|
$
|
555
|
|
|
$
|
541
|
|
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
10. Intangible Assets and Goodwill
Intangible Assets:
Our finite-lived intangible assets primarily consist of developed product rights and technology obtained from the Pharmion Corp. (Pharmion), Gloucester, Abraxis BioScience, Inc. (Abraxis), Avila, Quanticel and Juno acquisitions. The remaining weighted-average amortization period for finite-lived intangible assets not fully amortized is approximately
8.9 years
. Our indefinite lived intangible assets consist of acquired IPR&D product rights from the Receptos Inc. (Receptos), Gloucester and Juno acquisitions.
The gross carrying amount and accumulated amortization of intangible assets as of
June 30, 2018
and
December 31, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired developed product rights
|
|
$
|
3,406
|
|
|
$
|
(2,087
|
)
|
|
$
|
1,319
|
|
Technology
|
|
1,743
|
|
|
(474
|
)
|
|
1,269
|
|
Licenses
|
|
66
|
|
|
(32
|
)
|
|
34
|
|
Other
|
|
54
|
|
|
(37
|
)
|
|
17
|
|
|
|
5,269
|
|
|
(2,630
|
)
|
|
2,639
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D product rights
|
|
13,831
|
|
|
—
|
|
|
13,831
|
|
Total intangible assets
|
|
$
|
19,100
|
|
|
$
|
(2,630
|
)
|
|
$
|
16,470
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Gross Carrying Value
|
|
Accumulated Amortization
|
|
Intangible Assets, Net
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired developed product rights
|
|
$
|
3,406
|
|
|
$
|
(1,939
|
)
|
|
$
|
1,467
|
|
Technology
|
|
483
|
|
|
(410
|
)
|
|
73
|
|
Licenses
|
|
66
|
|
|
(30
|
)
|
|
36
|
|
Other
|
|
43
|
|
|
(34
|
)
|
|
9
|
|
|
|
3,998
|
|
|
(2,413
|
)
|
|
1,585
|
|
Non-amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
Acquired IPR&D product rights
|
|
6,851
|
|
|
—
|
|
|
6,851
|
|
Total intangible assets
|
|
$
|
10,849
|
|
|
$
|
(2,413
|
)
|
|
$
|
8,436
|
|
The increase in the gross carrying value of intangible assets during the
six-month period ended
June 30, 2018
was primarily due to the addition of approximately
$7.0 billion
of IPR&D and
$1.3 billion
of a technology platform asset from the Juno acquisition. The economic useful life of the technology platform asset is
15 years
(see Note 3).
Amortization expense related to intangible assets was
$129 million
and
$89 million
for the
three-month periods ended June 30, 2018
and
2017
, respectively and
$217 million
and
$173 million
for the
six-month periods ended
June 30, 2018
and
2017
. Effective for the second quarter of 2018, we reduced the remaining estimated useful life of our ABRAXANE
®
intangible assets, which will result in full amortization by 2022 in conjunction with the recent settlements of patent-related proceedings (see Note 16). Assuming no changes in the gross carrying amount of finite-lived intangible assets, the future annual amortization expense related to intangible assets is expected to be approximately
$474 million
in 2018,
$442 million
in 2019,
$440 million
in 2020,
$438 million
in 2021 and
$179 million
in 2022.
Goodwill:
The carrying value of goodwill increased to approximately
$8.0 billion
as of
June 30, 2018
compared to December 31, 2017 due to the acquisition of Juno (see Note 3).
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
11. Debt
Short-Term Borrowings and Current Portion of Long-Term Debt:
The carrying value of short-term borrowings and current portion of long-term debt as of
June 30, 2018
and
December 31, 2017
includes:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Commercial paper
|
$
|
995
|
|
|
$
|
—
|
|
2.250% senior notes due 2019
|
502
|
|
|
—
|
|
Total short-term borrowings and current portion of long-term debt
|
$
|
1,497
|
|
|
$
|
—
|
|
Long-Term Debt:
Our outstanding senior notes with maturity dates in excess of one year after
June 30, 2018
have an aggregate principal amount of
$19.850 billion
with varying maturity dates and interest rates. The carrying values of the long-term portion of these senior notes as of
June 30, 2018
and
December 31, 2017
includes:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
2.250% senior notes due 2019
|
$
|
—
|
|
|
$
|
505
|
|
2.875% senior notes due 2020
|
1,496
|
|
|
1,495
|
|
3.950% senior notes due 2020
|
511
|
|
|
514
|
|
2.250% senior notes due 2021
|
497
|
|
|
497
|
|
2.875% senior notes due 2021
|
498
|
|
|
—
|
|
3.250% senior notes due 2022
|
1,039
|
|
|
1,044
|
|
3.550% senior notes due 2022
|
995
|
|
|
994
|
|
2.750% senior notes due 2023
|
746
|
|
|
746
|
|
3.250% senior notes due 2023
|
993
|
|
|
—
|
|
4.000% senior notes due 2023
|
734
|
|
|
737
|
|
3.625% senior notes due 2024
|
1,001
|
|
|
1,001
|
|
3.875% senior notes due 2025
|
2,472
|
|
|
2,478
|
|
3.450% senior notes due 2027
|
974
|
|
|
991
|
|
3.900% senior notes due 2028
|
1,486
|
|
|
—
|
|
5.700% senior notes due 2040
|
247
|
|
|
247
|
|
5.250% senior notes due 2043
|
393
|
|
|
393
|
|
4.625% senior notes due 2044
|
987
|
|
|
987
|
|
5.000% senior notes due 2045
|
1,975
|
|
|
1,975
|
|
4.350% senior notes due 2047
|
1,234
|
|
|
1,234
|
|
4.550% senior notes due 2048
|
1,476
|
|
|
—
|
|
Total long-term debt
|
$
|
19,754
|
|
|
$
|
15,838
|
|
As of
June 30, 2018
and
December 31, 2017
, the fair value of our outstanding Senior Notes was approximately
$19.6 billion
and
$16.6 billion
, respectively, and represented a level 2 measurement within the fair value measurement hierarchy.
Debt Issuance:
In February 2018, we issued
$500 million
principal amount of
2.875%
senior notes due 2021 (2021 Notes),
$1.000 billion
principal amount of
3.250%
senior notes due 2023 (2023 Notes),
$1.500 billion
principal amount of
3.900%
senior notes due 2028 (2028 Notes) and
$1.500 billion
principal amount of
4.550%
senior notes due 2048 (2048 Notes). The 2021 Notes, 2023 Notes, 2028 Notes and 2048 Notes were issued at
99.954%
,
99.758%
,
99.656%
and
99.400%
of par, respectively, and the discount is being amortized as additional interest expense over the period from issuance through maturity. Offering costs of approximately
$32 million
were recorded as a direct deduction from the carrying amount of the 2021 Notes, 2023 Notes, 2028 Notes and 2048 Notes on our Consolidated Balance Sheet. The offering costs are being amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. Interest on the 2021 Notes is payable semi-annually in arrears on February 19 and August 19 of each year, beginning August 19, 2018 and the principal is due in full at the maturity date. Interest on the 2023 Notes, 2028 Notes and 2048 Notes is payable semi-annually in arrears on February 20 and August 20 of each year,
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
beginning August 20, 2018 and the principal is due in full at the maturity date. The 2021 Notes, 2023 Notes, 2028 Notes and 2048 Notes may be redeemed at our option, in whole or in part, at any time at a redemption price equaling accrued and unpaid interest plus the greater of
100%
of the principal amount of the Notes to be redeemed or the sum of the present values of the remaining schedule payments of interest and principal discounted to the date of redemption on a semi-annual basis plus
10
basis points for the 2021 Notes,
15
basis points for the 2023 Notes,
20
basis points for the 2028 Notes and
25
basis points for the 2048 Notes. If we experience a change of control accompanied by a downgrade of the debt to below investment grade, we will be required to offer to repurchase the 2021 Notes, 2023 Notes, 2028 Notes and 2048 Notes at a purchase price equal to
101%
of the principal amount plus accrued and unpaid interest. We are subject to covenants which limit our ability to pledge properties as security under borrowing arrangements and limit our ability to perform sale and leaseback transactions involving our property.
From time to time, we have used treasury rate locks and forward starting interest rate swap contracts to hedge against changes in interest rates in anticipation of issuing fixed-rate notes. As of
June 30, 2018
, and December 31, 2017 a balance of
$33 million
and
$31 million
, respectively, in net losses remained in accumulated OCI related to the settlement of these derivative instruments and will be recognized as interest expense over the life of the notes.
As of
June 30, 2018
, we were party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes as described in Note 7. Our swap contracts outstanding as of
June 30, 2018
effectively converted the hedged portion of our fixed-rate notes to floating rates. From time to time, we terminate the hedging relationship on certain of our swap contracts by settling the contracts or by entering into offsetting contracts. Any net proceeds received or paid in these settlements are accounted for as a reduction or increase of current and future interest expense associated with the previously hedged notes. As of
June 30, 2018
and
December 31, 2017
, we had balances of
$125 million
and
$139 million
, respectively, of unamortized gains recorded as a component of our debt as a result of past swap contract settlements. See Note 7 for additional details related to interest rate swap contract activity.
Commercial Paper:
As of
June 30, 2018
and
December 31, 2017
, we had available capacity to issue up to
$2.0 billion
of Commercial Paper. The carrying value of Commercial Paper as of
June 30, 2018
was
$995 million
. As of December 31, 2017 there were no borrowings under the program. The effective interest rate on our outstanding Commercial Paper as of
June 30, 2018
was
2.3%
Senior Unsecured Credit Facility:
We maintain a senior unsecured revolving credit facility (Credit Facility) that provides revolving credit in the aggregate amount of
$2.0 billion
. During the second quarter of 2018, we amended our Credit Facility to extend the expiration date to April 25, 2023. Amounts may be borrowed in U.S. Dollars for general corporate purposes. The Credit Facility currently serves as backup liquidity for our commercial paper borrowings. As of
June 30, 2018
and
December 31, 2017
, there was
no
outstanding borrowings against the Credit Facility. The Credit Facility contains affirmative and negative covenants, including certain customary financial covenants. We were in compliance with all financial covenants as of
June 30, 2018
.
12. Share-Based Compensation
We have stockholder-approved stock incentive plans, the Celgene Corporation 2017 Stock Incentive Plan and the 2014 Equity Incentive Plan (formerly known as the Juno Therapeutics, Inc. 2014 Equity Incentive Plan) (collectively, the Plans) that provide for the granting of options, restricted stock units (RSUs), performance stock units (PSUs) and other share-based and performance- based awards to our employees, officers and non-employee directors. The Management Compensation and Development Committee of the Board of Directors (Compensation Committee) may determine the type, amount and terms, including vesting, of any awards made under the Plans.
Shares of common stock available for future share-based grants under the 2014 Equity Incentive Plan were
13.9 million
at the Acquisition Date.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the three- and six-month periods ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended June 30,
|
|
Six-Month Periods Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of goods sold (excluding amortization of acquired intangible assets)
|
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
18
|
|
|
$
|
15
|
|
Research and development
(1)
|
|
157
|
|
|
70
|
|
|
356
|
|
|
135
|
|
Selling, general and administrative
(2)
|
|
118
|
|
|
92
|
|
|
311
|
|
|
173
|
|
Total share-based compensation expense
|
|
284
|
|
|
170
|
|
|
685
|
|
|
323
|
|
Tax benefit related to share-based compensation expense
|
|
37
|
|
|
46
|
|
|
74
|
|
|
87
|
|
Reduction in net income
|
|
$
|
247
|
|
|
$
|
124
|
|
|
$
|
611
|
|
|
$
|
236
|
|
(1)
The three- and six-month periods ended
June 30, 2018
include Juno related share-based compensation expense related to the post-combination service period of
$100 million
and
$233 million
, respectively.
(2)
The three- and six-month periods ended June 30, 2018
include Juno related share-based compensation expense related to the post-combination service period of
$50 million
and
$167 million
, respectively.
The tax benefit related to share-based compensation expense above excludes excess tax benefits of
$5 million
and
$95 million
from share-based compensation awards that vested or were exercised during the three-month periods ended June 30, 2018 and 2017, respectively, and
$16 million
and
$170 million
for the
six-month periods ended
June 30, 2018
, and 2017, respectively.
The following table summarizes the activity for stock options, RSUs and PSUs for the
six-month period ended
June 30, 2018
(in millions unless otherwise noted):
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
RSUs
|
|
PSUs (in thousands)
|
Outstanding as of December 31, 2017
|
67.8
|
|
|
7.7
|
|
|
558
|
|
Changes during the Year:
|
|
|
|
|
|
|
|
|
Conversion of Juno awards
|
3.7
|
|
|
2.5
|
|
|
336
|
|
Granted
|
6.8
|
|
|
3.4
|
|
|
162
|
|
Exercised / Released
|
(3.5
|
)
|
|
(2.1
|
)
|
|
(247
|
)
|
Forfeited
|
(1.8
|
)
|
|
(0.4
|
)
|
|
(28
|
)
|
Outstanding as of June 30, 2018
|
73.0
|
|
|
11.1
|
|
|
781
|
|
Total compensation cost related to unvested awards not yet recognized and the weighted-average periods over which the awards are expected to be recognized as of
June 30, 2018
were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
RSUs
|
|
PSUs
|
Unrecognized compensation cost
|
$
|
641
|
|
|
$
|
566
|
|
|
$
|
43
|
|
Expected weighted-average period in years of compensation cost to be recognized
|
2.2
|
|
|
1.9
|
|
|
1.5
|
|
13. Income Taxes
We adopted ASU 2016-01, ASU 2016-16 and ASU 2018-2, effective January 1, 2018. See Note 1 for additional information related to the adoption of these accounting standard updates.
The 2017 Tax Act was enacted on December 22, 2017 which reduced the U.S. statutory tax rate from 35% to 21% beginning in 2018. The 2017 Tax Act requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and introduces a new U.S. tax on certain off-shore earnings referred to as Global Intangible Low-Taxed Income (GILTI) beginning in 2018.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We are applying the guidance issued by the Securities and Exchange Commission (SEC) in Staff Accounting Bulletin 118 when accounting for the enactment-date effects of the 2017 Tax Act. The guidance provides for a measurement period up to one year in which provisional amounts may be adjusted as an income tax expense or benefit in the period the adjustment is determined.
As of June 30, 2018, we have not completed our accounting for the tax effects of the 2017 Tax Act and the provisional amounts recorded at December 31, 2017 were not adjusted during the quarter ended June 30, 2018. We will continue to analyze the impact of the 2017 Tax Act during the accounting measurement period. Our actual results may materially differ from our current estimates due to, among other things, further guidance that may be issued by U.S. tax authorities or regulatory bodies to interpret the 2017 Tax Act.
The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such as a tax cost in the year incurred. We have not yet determined our tax accounting policy and we have included in current income tax expense an amount related to our estimate of 2018 current year GILTI.
We regularly evaluate the likelihood of the realization of our deferred tax assets and reduce the carrying amount of those deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. Significant judgment is required in making this assessment.
Our tax returns are under routine examination in many taxing jurisdictions. The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed. Our U.S. federal income tax returns have been audited by the Internal Revenue Service (IRS) through the year ended December 31, 2008. Tax returns for the years ended December 31, 2009, 2010 and 2011 are currently under examination by the IRS. We are also subject to audits by various state and foreign taxing authorities, including most U.S. states and countries where we have operations.
We regularly reevaluate our tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, judicial precedents, etc.) that would reduce the technical merits of the position to below more likely than not. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We apply a variety of methodologies in making these estimates and assumptions, which include studies performed by independent economists, advice from industry and subject matter experts, evaluation of public actions taken by the IRS and other taxing authorities, as well as our industry experience. These evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if management’s estimates are not representative of actual outcomes, our results of operations could be materially impacted.
Unrecognized tax benefits, generally represented by liabilities on the Consolidated Balance Sheets and all subject to tax examinations, arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Virtually all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. We account for interest and potential penalties related to uncertain tax positions as part of our provision for income taxes. For the six-month period ended
June 30, 2018
gross unrecognized tax benefits increased by
$200 million
, including interest, primarily due to prior year tax positions. Of this amount,
$38 million
was an increase to income tax expense during the six-month period ended June 30, 2018 and the remainder were adjustments to non-current assets and non-current liabilities. The liability for unrecognized tax benefits is expected to increase in the next 12 months relating to operations occurring in that period. Any settlements of examinations with taxing authorities or statute of limitations expirations would likely result in a decrease in our liability for unrecognized tax benefits and a corresponding increase in taxes paid or payable and/or a decrease in income tax expense. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period as a result of settlements or statute of limitations expirations. Finalizing examinations with the relevant taxing authorities can include formal administrative and legal proceedings and, as a result, it is difficult to estimate the timing and range of possible change related to the Company’s unrecognized tax benefits. An estimate of the range of possible change cannot be made until issues are further developed or examinations close. Our estimates of tax benefits
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and potential tax benefits may not be representative of actual outcomes and variation from such estimates could materially affect our consolidated financial statements in the period of settlement or when the statutes of limitations expire.
14. Collaboration Arrangements
We enter into collaborative arrangements for the research and development, license, manufacture and/or commercialization of products and/or product candidates. In addition, we also acquire products, product candidates and research and development technology rights and establish research and development collaborations with third parties to enhance our strategic position within our industry by strengthening and diversifying our research and development capabilities, product pipeline and marketed product base. These arrangements may include non-refundable, upfront payments, payments by us for options to acquire rights to products and product candidates and other rights, as well as contingent obligations by us for potential development, regulatory and commercial performance milestone payments, cost sharing arrangements, royalty payments, profit sharing and equity investments (including equity investments in the event of an initial public offering of equity by our partners). The activities under these collaboration agreements are performed with no guarantee of either technological or commercial success. Although we do not consider any individual alliance to be material, certain of the more notable alliances are described in Note 17 of Notes to Consolidated Financial Statements included in our
2017
Annual Report on Form 10-K. The following is a brief description for notable new collaborations and for those collaborations which we have described in detail in our
2017
Annual Report on Form 10-K if there has been significant activity during the
six months ended June 30, 2018
. Amounts related to collaborations that are not specifically presented are included in the aggregate as Other Collaboration Arrangements.
Lycera Corp. (Lycera):
In June 2018, our collaboration and option agreement with Lycera expired. As a result, we do not have an exclusive right to acquire Lycera. We have retained our equity interest in Lycera, an exclusive license for Lycera’s portfolio of novel ex-vivo RORγ
agonist compounds and an exclusive license for Lycera’s RORγ antagonist compounds.
Prothena Corporation plc (Prothena):
On March 20, 2018, we entered into a collaboration agreement with Prothena to develop new therapies for a broad range of neurodegenerative diseases. The collaboration is focused on three proteins implicated in the pathogenesis of several neurodegenerative diseases, including tau, TDP-43 and an undisclosed target. In addition, we purchased approximately
1.2 million
of Prothena's ordinary shares. We made a total payment of
$150 million
, which was accounted for as a
$40 million
equity investment with a readily determinable fair value and
$110 million
as upfront collaboration consideration that was expensed immediately as research and development.
For each of the programs, we have an exclusive right to license clinical candidates in the U.S. at the investigational new drug (IND) filing and if exercised, would also have a right to expand the license to global rights at the completion of Phase 1. Following the exercise of global rights, we will be responsible for funding all further global clinical development and commercialization. Prothena may receive future potential exercise payments and regulatory and commercial milestones for each licensed program. Prothena will also receive additional royalties on net sales of any resulting marketed products.
The collaboration agreement has an initial term of
six years
, which may be extended up to
two
additional years. The collaboration agreement may be terminated at our discretion upon 60 days prior written notice to Prothena and by either party upon material breach of the other party, subject to cure periods.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A financial summary of certain period activity and the period-end balances related to Prothena is presented below
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30,
|
|
Research and Development Expense
|
|
|
|
Upfront Fees
|
|
Milestones
|
|
Extension/Termination of Arrangements
|
|
Amortization of Prepaid Research and Development
|
|
Equity Investments Made During Period
|
2018
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of:
|
|
Intangible Asset Balance
|
|
Equity Investment Balance
|
|
Percentage of Outstanding Equity
|
June 30, 2018
|
|
$
|
—
|
|
|
$
|
17
|
|
|
2.9
|
%
|
(1)
There was no collaboration activity related to Prothena during the three-month period ended June 30, 2018. In addition to the expenses noted in the table above, we may also incur expenses for collaboration agreement related activities that are managed or funded by us.
Vividion Therapeutics, Inc. (Vividion):
On March 1, 2018, we entered into a collaboration agreement with Vividion for the identification and development of small molecules against targets for a range of oncology, inflammatory and neurodegenerative indications. In addition, we purchased an immaterial amount of Vividion's Series A-3 preferred shares. We made a total upfront payment of
$101 million
, which was accounted for as a
$4 million
equity investment without a readily determinable fair value and
$97 million
as upfront collaboration consideration that was expensed immediately as research and development.
Vividion will lead initial discovery efforts and identification of programs to be included in the collaboration, and we have the right to opt in on certain programs at a defined stage of development. For certain programs, including the first program, we will have the exclusive worldwide rights, with the potential for Vividion to receive up to double-digit royalties on sales and milestone payments. In accordance with the collaboration agreement, other programs will allow for us and Vividion to share equally either U.S. or worldwide development costs and profits and losses.
The collaboration agreement has an initial term of
four
years, which may be extended up to
two
additional years. The collaboration agreement may be terminated at our discretion upon 90 days prior written notice to Vividion and by either party upon material breach of the other party, subject to cure periods.
A financial summary of certain period activity and the period-end balances related to Vividion is presented below
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30,
|
|
Research and Development Expense
|
|
|
|
Upfront Fees
|
|
Milestones
|
|
Extension/Termination of Arrangements
|
|
Amortization of Prepaid Research and Development
|
|
Equity Investments Made During Period
|
2018
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of:
|
|
Intangible Asset Balance
|
|
Equity Investment Balance
|
|
Percentage of Outstanding Equity
|
June 30, 2018
|
|
$
|
—
|
|
|
$
|
4
|
|
|
5.8
|
%
|
(1)
There was no collaboration activity related to Vividion during the three-month period ended June 30, 2018. In addition to the expenses noted in the table above, we may also incur expenses for collaboration agreement related activities that are managed or funded by us.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other Collaboration Arrangements in 2018:
In addition to the collaboration arrangements described above, we entered into collaboration arrangements for the three- and six-month periods ended June 30, 2018 that include the potential for future milestone payments of
$177 million
related to the attainment of specified development, regulatory and sales milestones over a period of several years. Our obligation to fund these efforts is contingent upon our continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs.
A financial summary of certain period activity and the period-end balances related to our other collaboration arrangements is presented below
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Periods Ended June 30,
|
|
Research and Development Expense
|
|
|
|
Upfront Fees
|
|
Milestones
|
|
Extension/Termination of Arrangements
|
|
Amortization of Prepaid Research and Development
|
|
Equity Investments Made During Period
|
2018
|
$
|
146
|
|
|
$
|
15
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
20
|
|
2017
|
75
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Periods Ended June 30,
|
|
Research and Development Expense
|
|
|
|
Upfront Fees
|
|
Milestones
|
|
Extension/Termination of Arrangements
|
|
Amortization of Prepaid Research and Development
|
|
Equity Investments Made During Period
|
2018
|
$
|
184
|
|
|
$
|
15
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
77
|
|
2017
|
85
|
|
|
—
|
|
|
7
|
|
|
7
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of:
|
|
Intangible Asset Balance
|
|
Equity Investment Balance
|
|
Percentage of Outstanding Equity
|
June 30, 2018
|
|
$
|
7
|
|
|
$
|
1,710
|
|
|
N/A
|
December 31, 2017
|
|
12
|
|
|
1,806
|
|
|
N/A
|
(1)
In addition to the expenses noted in the table above, we may also incur expenses for collaboration agreement related activities that are managed or funded by us.
In addition to the collaboration arrangements described above, in conjunction with the acquisition of Juno we assumed Juno's legacy collaboration arrangements including Fred Hutchinson Cancer Research Center and Memorial Sloan Kettering Cancer Center.
15. Commitments and Contingencies
Collaboration Arrangements and Acquired Research and Development Assets:
We have entered into certain research and development collaboration arrangements with third parties that include our funding of certain development, manufacturing and commercialization efforts and the potential for making future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial targets. In addition, we have also made certain acquisitions that included potential future development, regulatory and commercial milestones. Our obligation to fund these efforts and make milestone payments is contingent upon our continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs. Due to the nature of these arrangements, the future potential payments are inherently uncertain, and accordingly no amounts have been recorded for the potential future achievement of these targets in our accompanying Consolidated Balance Sheets as of
June 30, 2018
and
December 31, 2017
. With our acquisition of Juno, we have assumed additional research and development collaboration arrangements with third parties that include our funding of certain development, manufacturing and commercialization efforts and the potential for making future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial targets. See Note 3 for additional details related to our acquisitions and Note 14 for additional details related to collaboration arrangements.
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contingencies:
We believe we maintain insurance coverage adequate for our current needs. Our operations are subject to environmental laws and regulations which, among other things, impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. We review the effects of such laws and regulations on our operations and modify our operations as appropriate. We believe we are in substantial compliance with all applicable environmental laws and regulations.
We have ongoing customs, duties and value-added-tax examinations in various countries that have yet to be settled. Based on our knowledge of the claims and facts and circumstances to date, none of these matters, individually or in the aggregate, are deemed to be material to our financial condition.
16. Legal Proceedings
Like many companies in our industry, we have, from time to time, received inquiries and subpoenas and other types of information requests from government authorities and others and we have been subject to claims and other actions related to our business activities. While the ultimate outcome of investigations, inquiries, information requests and legal proceedings is difficult to predict, adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, product recalls, costs and significant payments, which may have a material adverse effect on our results of operations, cash flows or financial condition.
Pending patent proceedings include challenges to the scope, validity and/or enforceability of our patents relating to certain of our products, uses of products or processes. Further, as certain of our products mature or they near the end of their regulatory exclusivity periods, it is more likely that we will receive challenges to our patents, and in some jurisdictions we have received such challenges. We are also subject, from time to time, to claims of third parties that we infringe their patents covering products or processes. Although we believe we have substantial defenses to these challenges and claims, there can be no assurance as to the outcome of these matters and an adverse decision in these proceedings could result in one or more of the following: (i) a loss of patent protection, which could lead to a significant reduction of sales that could materially affect our future results of operations, cash flows or financial condition; (ii) our inability to continue to engage in certain activities; and (iii) significant liabilities, including payment of damages, royalties and/or license fees to any such third party.
Among the principal matters pending are the following:
Patent-Related Proceedings:
REVLIMID
®
: In 2012, our European patent EP 1 667 682 (the ’682 patent) relating to certain polymorphic forms of lenalidomide expiring in 2024 was opposed in a proceeding before the European Patent Office (EPO) by Generics (UK) Ltd. and Teva Pharmaceutical Industries Ltd. On July 21, 2015, the EPO determined that the ’682 patent was not valid. Celgene appealed the EPO ruling to the EPO Board of Appeal, thereby staying any revocation of the patent until the appeal is finally adjudicated. No appeal hearing date has been set.
We believe that our patent portfolio for lenalidomide in Europe, including the composition of matter patent which expires in 2022, is strong. In the event that we do not prevail on the appeal relating to the ’682 patent, we still expect that we will have protection in the EU for lenalidomide until at least 2022.
In June 2017, Accord Healthcare Ltd. (Accord) commenced lawsuits against us in the United Kingdom (UK) seeking to revoke our UK patents protecting REVLIMID
®
. In June 2018, we entered into a settlement agreement with Accord resolving the lawsuits.
We received a Notice of Allegation dated June 13, 2017 from Dr. Reddy’s Laboratories Ltd. (DRL) notifying us of the filing of DRL’s Abbreviated New Drug Submission (ANDS) with Canada’s Minister of Health, with respect to Canadian Letters Patent Nos. 2,261,762; 2,476,983; 2,477,301; 2,537,092; 2,687,924; 2,687,927; 2,688,694; 2,688,695; 2,688,708; 2,688,709; 2,741,412; and 2,741,575. DRL is seeking to manufacture and market a generic version of 5mg, 10mg, 15mg, 20mg, and 25mg REVLIMID
®
(lenalidomide) capsules in Canada. We commenced a proceeding in the Federal Court of Canada on July 27, 2017, seeking an order prohibiting the Minister of Health from granting marketing approval to DRL until expiry of these patents.
We received a further Notice of Allegation dated September 20, 2017 from DRL relating to the same submission, but also referencing 2.5mg REVLIMID
®
(lenalidomide) capsules. DRL’s Notices of Allegation contains invalidity allegations relating to Canadian Letters Patent Nos. 2,537,092; 2,687,924; 2,687,927; 2,688,694; 2,688,695; 2,688,708; 2,688,709; 2,741,412; and 2,741,575. We commenced a proceeding in the Federal Court of Canada on November 2, 2017, seeking an order prohibiting the Minister of Health
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
from granting marketing approval to DRL until expiry of these patents. The hearings for these proceedings are scheduled for September 23-24, 2019 and September 30-October 3, 2019, respectively.
We received a Notice Letter dated September 9, 2016 from DRL notifying us of its Abbreviated New Drug Application (ANDA) which contains Paragraph IV certifications against U.S. Patent Nos. 7,465,800; 7,855,217; 7,968,569; 8,530,498; 8,648,095; 9,101,621; and 9,101,622 that are listed in the U.S. Food and Drug Administration (FDA) list of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly referred to as the Orange Book (Orange Book), for REVLIMID
®
. DRL is seeking to manufacture and market a generic version of 2.5mg, 5mg, 10mg, 15mg, 20mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States. In response to the Notice Letter, we timely filed an infringement action against DRL in the U.S. District Court for the District of New Jersey on October 20, 2016. As a result of the filing of our action, the FDA cannot grant final approval of DRL's ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) March 10, 2019. On November 18, 2016, DRL filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. On December 27, 2016, we filed a reply to DRL’s counterclaims. Fact discovery is set to close on August 31, 2018. The court has not yet entered a schedule for expert discovery or trial.
We received an additional Notice Letter from DRL dated June 8, 2017 notifying us of additional Paragraph IV certifications against U.S. Patent Nos. 7,189,740; 8,404,717; and 9,056,120 that are listed in the Orange Book for REVLIMID
®
. In response to that Notice Letter, we timely filed an infringement action against DRL in the U.S. District Court for the District of New Jersey on July 20, 2017. As a result of the filing of our action, the FDA cannot grant final approval of DRL's ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) December 9, 2019. On October 18, 2017, DRL filed an amended answer and counterclaims asserting that each of the patents is invalid and/or not infringed. We filed our reply to DRL’s counterclaims on November 15, 2017. Fact discovery is set to close on March 15, 2019. The court has not yet entered a schedule for expert discovery or trial.
We received another Notice Letter from DRL dated February 26, 2018 notifying us of additional Paragraph IV certifications against U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 8,315,886; and 8,626,531 that are listed in the Orange Book for REVLIMID®. In response to the Notice Letter, we timely filed an infringement action against DRL in the U.S. District Court for the District of New Jersey on April 12, 2018. As a result of the filing of our action, the FDA cannot grant final approval of DRL's ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) August 27, 2020. DRL filed an amended answer and counterclaims on May 31, 2018 asserting that each of the patents is invalid and/or not infringed. We filed our reply to DRL’s counterclaims on June 28, 2018. The court has not yet entered a schedule for fact discovery, expert discovery, or trial.
We received a Notice Letter dated February 27, 2017 from Zydus Pharmaceuticals (USA) Inc. (Zydus) notifying us of Zydus’ ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 7,465,800; 7,855,217; 7,968,569; 8,530,498; 8,648,095; 9,101,621; and 9,101,622 that are listed in the Orange Book for REVLIMID
®
. Zydus is seeking to manufacture and market a generic version of 2.5 mg, 5 mg, 10 mg, 15 mg, 20 mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States. In response to the Notice Letter, we timely filed an infringement action against Zydus in the U.S. District Court for the District of New Jersey on April 12, 2017. As a result of the filing of our action, the FDA cannot grant final approval of Zydus’ ANDA at least until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) August 28, 2019. On August 7, 2017, Zydus filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. On September 11, 2017, we filed a reply to Zydus’s counterclaims. Fact discovery is set to close on March 15, 2019. The court has yet to enter a schedule for expert discovery and trial.
On April 27, 2018, we filed another infringement action against Zydus in the U.S. District Court for the District of New Jersey. The patents-in-suit are U.S. Patent Nos. 7,977,357; 8,193,219 and 8,431,598, which are patents not listed in the Orange Book. Zydus filed its answer on July 9, 2018 asserting that each of the patents is invalid and/or not infringed. The court has not yet entered a schedule for fact discovery, expert discovery, or trial.
We received a Notice Letter dated June 30, 2017 from Cipla Ltd., India (Cipla) notifying us of Cipla’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 7,465,800; 7,855,217; 7,968,569; 8,530,498; 8,648,095; 9,101,621 and 9,101,622 that are listed in the Orange Book for REVLIMID
®
. Cipla is seeking to manufacture and market a generic version of 5mg, 10mg, 15mg, 20mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States. In response to the Notice Letter, on August 15, 2017, we timely filed an infringement action against Cipla in the U.S. District Court for the District of New Jersey. As a result of the filing of our action, the FDA cannot grant final approval of Cipla’s ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) January 5, 2020. On October 13, 2017, Cipla filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. We filed our reply to Cipla’s
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
counterclaims on November 17, 2017. Fact discovery is set to close on March 15, 2019. The court has yet to enter a schedule for expert discovery and trial.
On May 8, 2018, we filed another infringement action against Cipla in the U.S. District Court for the District of New Jersey. The patents-in-suit are U.S. Patent Nos. 7,977,357; 8,193,219 and 8,431,598, which are patents that are not listed in the Orange Book. Cipla has not yet responded to the complaint.
We received a Notice Letter dated July 24, 2017 from Lotus Pharmaceutical Co., Inc. (Lotus) notifying us of Lotus’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 5,635,517; 6,315,720; 6,561,977; 6,755,784; 7,189,740; 7,465,800; 7,855,217; 7,968,569; 8,315,886; 8,404,717; 8,530,498; 8,626,531; 8,648,095; 9,056,120; 9,101,621; and 9,101,622 that are listed in the Orange Book for REVLIMID
®
. Lotus is seeking to manufacture and market a generic version of 2.5mg, 5mg, 10mg, 15mg, 20mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States. In response to the Notice Letter, we timely filed an infringement action against Lotus in the U.S. District Court for the District of New Jersey on September 6, 2017. As a result of the filing of our action, the FDA cannot grant final approval of Lotus’s ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) January 25, 2020. On October 5, 2017, Lotus filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. We filed our reply to Lotus’s counterclaims on November 9, 2017. Fact discovery is set to close on March 15, 2019. The court has yet to enter a schedule for expert discovery and trial.
On July 10, 2018, we filed another infringement action against Lotus in the U.S. District Court for the District of New Jersey. The patents-in-suit are U.S. Patent Nos. 7,977,357; 8,193,219 and 8,431,598, which are patents that are not listed in the Orange Book. Lotus has not yet responded to the complaint.
We received a Notice Letter dated November 28, 2017 from Apotex Inc. (Apotex) notifying us of Apotex’s ANDA, which contains Paragraph IV certifications against U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 7,465,800; 7,468,363; 7,855,217; 8,315,886; 8,626,531; and 8,741,929 that are listed in the Orange Book for REVLIMID
®
. Apotex is seeking to manufacture and market a generic version of 2.5mg, 5mg, 10mg, 15mg, 20mg, and 25mg REVLIMID
®
(lenalidomide) capsules in the United States. In response to the Notice Letter, we timely filed an infringement action against Apotex in the U.S. District Court for the District of New Jersey on January 11, 2018. As a result of the filing of our action, the FDA cannot grant final approval of Apotex’s ANDA until at least the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) May 29, 2020. On April 2, 2018, Apotex responded to the complaint by filing a motion to dismiss the case for failure to join a necessary party. We filed our response on May 21, 2018. Apotex filed its reply brief on June 11, 2018. The court has not yet decided Apotex's motion or entered a schedule for fact discovery, expert discovery, or trial.
POMALYST
®
: We received a Notice Letter dated March 30, 2017 from Teva Pharmaceuticals USA, Inc. (Teva) (the Teva Notice Letter) notifying us of Teva’s ANDA submitted to the FDA, which contains Paragraph IV certifications against U.S. Patent Nos. 6,316,471; 8,198,262; 8,673,939; 8,735,428 and 8,828,427 that are listed in the Orange Book for POMALYST
®
. Teva is seeking to manufacture and market a generic version of 1 mg, 2 mg, 3 mg, and 4 mg POMALYST
®
(pomalidomide) capsules in the United States. We later received similar Notice Letters (together with the Teva Notice Letter, the Pomalidomide Notice Letters) from other generic drug manufacturers -Apotex; Hetero USA, Inc. (Hetero); Aurobindo Pharma Ltd. (Aurobindo); Mylan Pharmaceuticals Inc. (Mylan); and Breckenridge Pharmaceutical, Inc. (Breckenridge) - relating to these and other POMALYST® patents listed in the Orange Book. In May 2018, we received a similar Notice Letter from Synthon Pharmaceuticals Inc. (the Synthon Notice Letter).
In response to the Pomalidomide Notice Letters, we timely filed infringement actions in the U.S. District Court for the District of New Jersey against Teva on May 4, 2017 and against Apotex, Hetero, Aurobindo, Mylan, and Breckenridge on May 11, 2017. As a result of the filing of our actions, the FDA cannot grant final approval of these ANDAs at least until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) August 8, 2020.
On July 13, 2017, Apotex and Hetero each filed answers and counterclaims asserting that each of the patents is invalid and/or not infringed, and further seeking declaratory judgments of noninfringement and invalidity for additional patents listed in the Orange Book for POMALYST
®
, namely U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 8,315,886 and 8,626,531. On August 17, 2017, we filed replies to Apotex’s and Hetero’s counterclaims, as well as counter-counterclaims against Apotex and Hetero asserting infringement of U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 8,315,886 and 8,626,531. Apotex and Hetero filed replies to our counter-counterclaims on September 6 and September 8, 2017, respectively.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On July 31, 2017, Breckenridge filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. We filed our reply to Breckenridge’s counterclaims on September 5, 2017. On December 6, 2017, Breckenridge filed an amended pleading to include counterclaims seeking declaratory judgments of noninfringement and invalidity for additional patents listed in the Orange Book for POMALYST
®
, namely U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 8,315,886 and 8,626,531. Celgene replied to Breckenridge’s amended counterclaims and asserted counter-counterclaims on January 3, 2018.
On August 7, 2017, Teva filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. On September 11, 2017, we filed a reply to Teva’s counterclaims.
On August 9, 2017, Mylan filed a motion to dismiss the complaint, and on March 2, 2018, the court denied Mylan’s motion to dismiss without prejudice and granted our request for venue-related discovery.
On September 15, 2017, Aurobindo filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed, and further seeking declaratory judgments of noninfringement and invalidity for additional patents listed in the Orange Book for POMALYST
®
, namely U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 8,315,886; and 8,626,531. We filed our reply to Aurobindo’s counterclaims and counter-counterclaims concerning U.S. Patent Nos. 6,315,720; 6,561,977; 6,755,784; 8,315,886; and 8,626,531 on October 20, 2017. Aurobindo filed its answer to our counter-counterclaims on November 24, 2017.
In response to the Synthon Notice Letter, we timely filed an infringement action against Synthon in the U.S. District Court for the District of New Jersey on June 19, 2018. As a result of the filing of our actions, the FDA cannot grant final approval of Synthon’s ANDA at least until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) November 7, 2020. On July 16, 2018, Synthon filed an answer and counterclaims asserting that each of the patents asserted in the complaint is invalid and/or not infringed.
Fact discovery in the Apotex, Aurobindo, Breckenridge, Hetero, Mylan, and Teva cases is scheduled to close on March 1, 2019 and expert discovery in these cases is scheduled to close on September 30, 2019. Trial has not been scheduled in any POMALYST
®
litigation.
ABRAXANE
®
: We received a Notice Letter dated February 23, 2016 from Actavis LLC (Actavis) notifying us of Actavis’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 7,820,788; 7,923,536; 8,138,229; and 8,853,260 that are listed in the Orange Book for ABRAXANE
®
. We then received a Notice Letter dated October 25, 2016 from Cipla notifying us of Cipla’s ANDA, which contains Paragraph IV certifications against the same four patents for ABRAXANE
®
. Actavis and Cipla are each seeking to manufacture and market a generic version of ABRAXANE
®
100 mg/vial.
On April 6, 2016, we filed an infringement action against Actavis in the U.S. District Court for the District of New Jersey. We entered into a settlement with Actavis, effective January 23, 2018, to terminate that patent litigation and Inter Partes Review (IPR) challenges between the parties relating to certain patents for ABRAXANE
®
. As part of the settlement, the parties filed a Consent Judgment with the U.S. District Court for the District of New Jersey, which was entered on January 26, 2018, enjoining Actavis from marketing generic paclitaxel protein-bound particles for injectable suspension before expiration of the patents-in-suit, except as provided for in the settlement. In the settlement, we agreed to provide Actavis with a license to our patents required to manufacture and sell a generic paclitaxel protein-bound particles for injectable suspension product in the United States beginning on March 31, 2022.
On December 7, 2016, we filed an infringement action against Cipla in the U.S. District Court for the District of New Jersey. As a result of the filing of our action, the FDA cannot grant final approval of Cipla’s ANDA until the earlier of (i) a final decision that each of the patents is invalid, unenforceable, and/or not infringed, and (ii) April 25, 2019. On January 20, 2017, Cipla filed an answer and counterclaims asserting that each of the patents is invalid and/or not infringed. Our reply was filed on February 24, 2017. The court has not yet set a date for trial.
On January 13, 2017, the UK High Court of Justice handed down a ruling after a hearing held on December 20, 2016 in which we argued that the UK Intellectual Property Office improperly rejected our request for an SPC to the ABRAXANE
®
patent UK No. 0 961 612 (the ’612 patent). In that ruling, the High Court referred the matter to the Court of Justice for the EU (CJEU). A hearing was held at the CJEU on June 21, 2018. We expect a decision from the CJEU later this year. If the CJEU were to find in our favor, the ruling would need to be implemented in other jurisdictions in which the proceedings are pending, potentially resulting in the grant of SPCs not only in the UK, but also in other jurisdictions that have previously rejected our initial request including Germany and Ireland. The ’612 patent expired in Europe in September 2017. However, if granted, the SPCs will expire in 2022. Data exclusivity in Europe will expire in January 2019.
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We received a Notice of Allegation (NOA) dated March 22, 2018 from Panacea Biotec Ltd. (Panacea) notifying us of the filing of Panacea’s ANDS with Canada’s Minister of Health, with respect to Canadian Letters Patent No. 2,509,365 (the '365 patent). Panacea is seeking to manufacture and market a generic version of 100 mg/vial ABRAXANE® (paclitaxel powder for injectable suspension, nanoparticle, albumin-bound (nab®) paclitaxel) in Canada. On May 4, 2018, our subsidiaries, Abraxis BioScience, LLC and Celgene Inc. commenced an action for patent infringement in the Federal Court of Canada seeking, among other relief, a declaration of infringement in relation to the ‘365 patent.
In June 2018, Celgene and Apotex settled certain patent disputes involving ABRAXANE
®
that were triggered by Apotex filing an ANDA in the United States, IPR patent challenges before the U.S. Patent Office (see below), and the aforementioned NOA filed by Apotex's marketing partner, Panacea. In addition to dismissing the patent proceedings, in the settlement we agreed to provide Apotex with a license to our patents required to manufacture and sell a generic paclitaxel protein-bound particles for injectable suspension product in the United States beginning on September 27, 2022, and in certain countries outside of the United States, including Canada, beginning on a later date.
OTEZLA®: We received Notice Letters from each of the following companies between May 14, 2018 and June 8, 2018: Alkem Laboratories Ltd. (Alkem); Amneal Pharmaceuticals LLC (Amneal); Annora Pharma Private Ltd. (Annora); Aurobindo; Cipla; DRL and Dr. Reddy’s Laboratories, Inc.; Emcure Pharmaceuticals Ltd. (Emcure); Glenmark Pharmaceuticals Ltd. (Glenmark); Macleods Pharmaceuticals Ltd. (Macleods); Mankind Pharma Ltd. (Mankind); MSN Laboratories Private Ltd. (MSN); Pharmascience Inc. (Pharmascience); Prinston Pharmaceutical Inc. (Prinston); Sandoz Inc. (Sandoz); Shilpa Medicare Ltd. (Shilpa); Teva; Torrent Pharmaceuticals Ltd. (Torrent); Unichem Laboratories, Ltd. (Unichem); and Zydus notifying us of their ANDAs, which contain Paragraph IV certifications against one or more of the following patents: U.S. Patent Nos. 6,962,940; 7,208,516; 7,427,638; 7,659,302; 7,893,101; 8,455,536; 8,802,717; 9,018,243; and 9,872,854, which are listed in the Orange Book for OTEZLA®. Each of the companies is seeking to market a generic version of OTEZLA®. In response to the Notice Letters, we timely filed infringement actions in the U.S. District Court for the District of New Jersey. As a result of the filing of our actions, the FDA cannot grant final approval of any of these companies' ANDAs until the earlier of (i) a final decision that each of the asserted patents is invalid, unenforceable, and/or not infringed, and (ii) September 21, 2021.
Juno patent-related proceedings:
KITE:
On October 18, 2017, the day on which the FDA approved Kite Pharma, Inc.’s (Kite) Yescarta™ KTE-C19 product, Juno filed a complaint against Kite in the U.S. District Court for the Central District of California. The complaint alleged that Yescarta™ infringes claims 1-3, 5, 7-9, and 11 of U.S. Patent No. 7,446,190 (the ’190 Patent). Kite answered the complaint on November 28, 2017, and filed counterclaims of non-infringement and invalidity against Juno. Juno filed a motion to dismiss Kite’s counterclaims and to strike certain affirmative defenses on December 19, 2017.
On March 8, 2018, the court granted Juno’s motion to dismiss and strike, and ordered Kite to file an amended answer and counterclaims. On the same day, the court denied Kite’s motion to stay. On March 29, 2018, Kite filed an amended answer and counterclaims, asserting that the ’190 Patent is invalid and/or not infringed. On April 9, 2018, we filed an answer to Kite’s counterclaims. Fact and expert discovery are set to close on September 24, 2018 and December 10, 2018, respectively, and trial is scheduled to begin on March 26, 2019.
CITY OF HOPE: On August 22, 2017, City of Hope (COH) filed a lawsuit against Juno in the U.S. District Court for the Central District of California alleging that Juno, prior to its acquisition by Celgene, breached an exclusive license agreement (ELA) between Juno and COH by sublicensing COH intellectual property to Celgene without COH’s consent and by failing to pay COH related sublicensing revenues. COH sought damages in an amount no less than
$93.75 million
in alleged sublicense revenues and a judicial declaration that the ELA has terminated. In July 2018, Juno and COH entered into a confidential settlement agreement dismissing the lawsuit and reinstating the ELA. The settlement amount was not materially different than the amount we had previously accrued for this matter.
Proceedings involving the U.S. Patent and Trademark Office (USPTO):
REMS IPR: Under the America Invents Act (AIA), any person may seek to challenge an issued patent by petitioning the USPTO to institute a post grant review. On April 23, 2015, we were informed that the Coalition for Affordable Drugs VI LLC filed petitions for IPR challenging the validity of our U.S. Patent Nos. 6,045,501 (the ’501 patent) and 6,315,720 (the ’720 patent) covering certain aspects of our REMS program. On October 27, 2015, the USPTO Patent Trial and Appeal Board (PTAB) instituted IPR proceedings relating to these patents. An oral hearing was held on July 21, 2016. The PTAB's decisions, rendered on October 26,
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2016, held that the ’501 and ’720 patents are invalid, primarily due to obviousness in view of certain publications. On November 25, 2016, we requested a rehearing with respect to certain claims of these patents. On September 8, 2017, the PTAB denied our rehearing request for the ’501 patent, but granted our rehearing request pertaining to a certain claim of the ’720 patent.
We timely appealed to the U.S. Court of Appeals for the Federal Circuit the PTAB’s determinations regarding certain claims of the ’720 patent and the ’501 patent on November 6, 2017 and on November 9, 2017, respectively. On February 26, 2018, the USPTO intervened in our appeal. Our opening briefs were filed on May 31, 2018. The ’501 and ’720 patents remain valid and enforceable pending appeal. We retain other patents covering certain aspects of our REMS program, as well as patents that cover our products that use our REMS system.
ABRAXANE
®
IPR: On April 4, 2017, Actavis filed petitions for IPRs challenging the validity of our U.S. Patent Nos. 8,138,229 (the ’229 patent); 7,923,536 (the ’536 patent); 7,820,788 (the ’788 patent); and 8,853,260 (the ’260 patent) covering certain aspects of our ABRAXANE
®
product. On October 10, 2017, the PTAB instituted IPR proceedings on the ’229, ’536, and ’788 patents and on October 11, 2017 denied institution of the IPR on the ‘260 patent. On January 29, 2018, the parties submitted a joint motion to terminate all three IPRs in connection with the settlement entered into with Actavis mentioned above. On May 8, 2018, the PTAB granted the parties’ joint motion to terminate.
On November 9, 2017, Apotex and Cipla each filed petitions for IPRs challenging the validity of the ’229, ’536, and’788 patents. On May 8, 2018, the PTAB denied institution of all IPRs.
REVLIMID
®
IPR
:
On February 23, 2018, Apotex filed a petition for IPR challenging the validity of our U.S. Patent Nos. 8,741,929 (the ’929 patent). Our preliminary response was filed on June 28, 2018. The PTAB has until September 28, 2018 to determine whether it will institute the IPR.
JUNO IPR: On August 13, 2015, Kite filed a petition for IPR challenging the validity of U.S. Patent Nos. 7,446,190 (the ’190 Patent), exclusively licensed from Memorial Sloan Kettering Cancer Center. On February 11, 2016, the PTAB instituted the IPR proceedings. A hearing was held before the PTAB on October 20, 2016. On December 16, 2016, the PTAB issued a final written decision upholding all claims of the ’190 Patent. On February 16, 2017, Kite filed a notice of appeal of the PTAB’s final written decision to the U.S. Court of Appeals for the Federal Circuit. On June 6, 2018, the Federal Circuit affirmed the decision of the Patent Trial and Appeal Board, upholding all claims of the ’190 Patent.
Other Proceedings:
MYLAN: On April 3, 2014, Mylan filed a lawsuit against us in the U.S. District Court for the District of New Jersey alleging that we violated various federal and state antitrust and unfair competition laws by allegedly refusing to sell samples of our THALOMID
®
and REVLIMID
®
brand drugs so that Mylan may conduct the bioequivalence testing necessary to submit ANDAs to the FDA for approval to market generic versions of these products. Mylan is seeking injunctive relief, damages and a declaratory judgment. We filed a motion to dismiss Mylan’s complaint on May 25, 2014. Mylan filed its opposition to our motion to dismiss on June 16, 2014. The Federal Trade Commission filed an amicus curiae brief in opposition to our motion to dismiss on June 17, 2014.
On December 22, 2014, the court granted our motion to dismiss (i) Mylan’s claims based on Section 1 of the Sherman Act (without prejudice), and (ii) Mylan's related claims arising under the New Jersey Antitrust Act. The court denied our motion to dismiss the remaining claims which primarily relate to Section 2 of the Sherman Act. On January 6, 2015, we filed a motion to certify for interlocutory appeal the order denying our motion to dismiss with respect to the claims relating to Section 2 of the Sherman Act, which appeal was denied by the U.S. Court of Appeals for the Third Circuit on March 5, 2015. On January 20, 2015, we filed an answer to Mylan’s complaint. Fact discovery closed in June 2016 and expert discovery closed in November 2016. On December 16, 2016, we moved for summary judgment, seeking a ruling that judgment be granted in our favor on all claims. The motion for summary judgment was argued on December 13, 2017. Thereafter, the court ordered the parties to mediate and administratively stayed the case pending the mediation. The mediation was held on January 25, 2018, but no settlement was reached. Supplemental briefing on the motion for summary judgment was filed on February 1, 2018. No trial date has been set.
THALOMID AND REVLIMID ANTITRUST LITIGATION: On November 7, 2014, the International Union of Bricklayers and Allied Craft Workers Local 1 Health Fund (IUB) filed a putative class action lawsuit against us in the U.S. District Court for the District of New Jersey alleging that we violated various antitrust, consumer protection, and unfair competition laws by (a) allegedly securing an exclusive supply contract with Seratec S.A.R.L. so that Barr Laboratories allegedly could not secure its own supply of thalidomide active pharmaceutical ingredient, (b) allegedly refusing to sell samples of our THALOMID
®
and REVLIMID
®
brand drugs to various generic manufacturers for the alleged purpose of bioequivalence testing necessary for
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
ANDAs to be submitted to the FDA for approval to market generic versions of these products, and (c) allegedly bringing unjustified patent infringement lawsuits in order to allegedly delay approval for proposed generic versions of THALOMID
®
and REVLIMID
®
. IUB, on behalf of itself and a putative class of third party payers, is seeking injunctive relief and damages.
In February 2015, we filed a motion to dismiss IUB’s complaint, and upon the filing of a similar putative class action making similar allegations by the City of Providence (Providence), the parties agreed that the decision in the motion to dismiss IUB’s complaint would apply to the identical claims in Providence’s complaint. In October 2015, the court denied our motion to dismiss on all grounds.
We filed our answers to the IUB and Providence complaints in January 2016. On June 14, 2017, a new complaint was filed by the same counsel representing the plaintiffs in the IUB case, making similar allegations and adding
three
new plaintiffs - International Union of Operating Engineers Stationary Engineers Local 39 Health and Welfare Trust Fund (Local 39), The Detectives’ Endowment Association, Inc. (DEA) and David Mitchell. Plaintiffs added allegations that our settlements of patent infringement lawsuits against certain generic manufacturers have had anticompetitive effects. Counsel identified the new complaint as related to the IUB and Providence cases and, on August 1, 2017, filed a consolidated amended complaint on behalf of IUB, Providence, Local 39, DEA, and Mitchell. On September 28, 2017, the same counsel filed another complaint, which it identified as related to the consolidated case, and which made similar allegations on behalf of an additional asserted class representative, New England Carpenters Health Benefits Fund (NEC). The NEC action has been consolidated with the original action involving IUB, Providence, DEA, Local 39, and Mitchell into a master action for all purposes.
On October 2, 2017, the plaintiffs filed a motion for certification of two damages classes under the laws of thirteen states and the District of Columbia and a nationwide injunction class. On February 26, 2018, we filed our opposition to the plaintiffs’ motion and a motion for judgment on the pleadings dismissing all state law claims where the plaintiffs no longer seek to represent a class. The plaintiffs filed their opposition to our motion for judgment on the pleadings on April 2, 2018, and we filed our reply on April 13, 2018. The plaintiffs filed their reply in support of their class certification motion on May 18, 2018. Fact discovery in these cases closed on May 17, 2018. The plaintiffs filed opening expert reports on June 18, 2018; responsive and rebuttal reports are due on August 27, 2018 and October 15, 2018, respectively. Expert discovery in these cases is scheduled to close on October 29, 2018. No trial date has been set.
In December 2015, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts, and in November 2016, we received a second subpoena related to the same inquiry. The materials requested primarily relate to patient assistance programs, including our support of 501(c)(3) organizations that provide financial assistance to eligible patients. We are cooperating with these requests.
In August 2017, we received an order issued by the Federal Court in Ottawa, Ontario, Canada at the request of the Canadian Competition Bureau, requiring that we provide certain materials and information relating to our risk management program and requests by generic manufacturers to purchase our products in Canada. We are cooperating with this request.
JUNO SECURITIES CLASS ACTION: In July 2016, two putative securities class action complaints (the Veljanoski Complaint and the Wan Complaint) were filed against Juno and its chief executive officer, Hans E. Bishop, in the U.S. District Court for the Western District of Washington. On September 7, 2016, an additional putative securities class action complaint (the Paradisco Complaint and, together with the Velianoski Complaint and the Wan Complaint, the Complaints) was filed against Juno, Mr. Bishop, and its chief financial officer, Steve Harr, in the U.S. District Court for the Western District of Washington. The Complaints generally allege material misrepresentations and omissions in public statements regarding patient deaths in Juno’s Phase II clinical trial of JCAR015 as well as, violations by all named defendants of Sections 10(b) and 20(a) of the Securities Exchange Act. On October 7, 2016, the Complaints were consolidated into a single action. On December 12, 2016, the court-appointed lead plaintiff and a named plaintiff filed a Consolidated Amended Complaint (Consolidated Complaint), which includes claims against Juno, Mr. Bishop, Dr. Harr, and Juno’s chief medical officer, Dr. Mark J. Gilbert (the Defendants). The Consolidated Complaint includes allegations similar to those in the previous Complaints, as well as additional allegations regarding purported material misrepresentations and omissions in public statements after July 7, 2016 regarding the safety of JCAR015. The parties mediated on May 9, 2018, following which the parties agreed to a settlement in principle of the class action for which the parties will be seeking court approval. The settlement amount was not materially different than the amount we had previously accrued for this matter.
CELGENE SECURITIES CLASS ACTION: On March 29, 2018, the City of Warren General Employees’ Retirement System filed a putative class action against us and certain of our officers in the U.S. District Court for the District of New Jersey. The complaint alleges that the defendants violated federal securities laws by making misstatements and/or omissions concerning (1)
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
trials of GED-0301, (2) 2020 outlook and projected sales of OTEZLA
®
, and (3) the new drug application for Ozanimod. On May 3, 2018, a similar putative class action lawsuit against us and certain of our officers was filed by Charles H. Witchcoff in the U.S. District Court for the District of New Jersey. The complaint alleges that defendants violated federal securities laws by making material misstatements and/or omissions concerning (1) trials of GED-0301, (2) 2020 outlook and projected sales of OTEZLA®, and (3) the new drug application for Ozanimod. The date by which defendants will be obligated to answer or otherwise respond to the claims against them will be set after the court appoints a lead plaintiff, which has not yet occurred.
On July 12, 2018, Saratoga Advantage Trust Health and Biotechnology Portfolio filed a shareholder derivative complaint against certain members of our board of directors in the U.S. District Court for the District of New Jersey. The complaint alleges that (1) certain defendants made misrepresentations and omissions of material fact concerning, among other things, trials of GED-0301, sales of OTEZLA
®
, 2017 and 2020 fiscal guidance, and the new drug application for Ozanimod and (ii) all defendants failed to adequately supervise Celgene with regard to trials of GED-0301, sales of OTEZLA
®
, 2017 and 2020 fiscal guidance, the new drug application for Ozanimod, and the promotion and marketing of REVLIMID
®
.
The plaintiff has agreed to stay the defendants’ obligation to answer or otherwise respond to the allegations in the complaint in deference to the Celgene Securities Class Actions and subject to thirty days’ notice by either plaintiff or defendants of an intent to proceed.
HUMANA, INC (HUMANA): On May 16, 2018, Humana filed a lawsuit against us in the Pike County Circuit Court of the Commonwealth of Kentucky. Humana’s complaint alleges we engage in unlawful off-label marketing in connection with sales of THALOMID
®
and REVLIMID
®
and asserts claims against us for fraud, breach of contract, negligent misrepresentation, unjust enrichment, and violations of New Jersey’s Racketeer Influenced and Corrupt Organizations Act. The complaint seeks, among other things, treble and punitive damages, injunctive relief and attorneys’ fees and costs. On June 13, 2018, we removed Humana’s lawsuit to the U.S. District Court for the Eastern District of Kentucky and, on July 11, 2018, filed a motion to dismiss Humana’s complaint in full. On July 12, 2018, Humana moved to remand the case to state court. The court has not set a hearing date for the motions.