ALXN 3.31.14 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
or
¨
Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number: 0-27756
 
ALEXION PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
13-3648318
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
352 Knotter Drive, Cheshire Connecticut 06410
(Address of Principal Executive Offices) (Zip Code)
203-272-2596
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)

 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Common Stock, $0.0001 par value
197,796,456
Class
Outstanding as of April 23, 2014










 
Alexion Pharmaceuticals, Inc.
Contents

 
PART I.
FINANCIAL INFORMATION
Page
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013
2

 
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013
3

 
 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013
4

 
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013
5

 
 
Notes to Condensed Consolidated Financial Statements
6

 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
20

 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
33

 
Item 4.
Controls and Procedures
34

PART II.
OTHER INFORMATION
35

 
Item 1.
Legal Proceedings
35

 
Item 1A.
Risk Factors
35

 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57

 
Item 5.
Other Information
57

 
Item 6.
Exhibits
57

SIGNATURES
 
 



Alexion Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(amounts in thousands, except per share amounts)
 
 
March 31,
 
December 31,
 
2014
 
2013
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
528,285

 
$
529,857

Marketable securities
1,029,193

 
984,994

Trade accounts receivable, net
429,021

 
421,752

Inventories
126,154

 
102,602

Deferred tax assets
45,871

 
41,432

Prepaid expenses and other current assets
87,356

 
106,220

Total current assets
2,245,880

 
2,186,857

Property, plant and equipment, net
218,086

 
201,109

Intangible assets, net
603,021

 
609,719

Goodwill
254,073

 
254,073

Deferred tax assets
3,366

 
3,394

Other assets
55,240

 
62,544

Total assets
$
3,379,666

 
$
3,317,696

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
35,339

 
$
21,596

Accrued expenses
196,369

 
402,344

Deferred revenue
58,859

 
53,801

Current portion of long-term debt
48,000

 
48,000

Other current liabilities
58,255

 
56,688

Total current liabilities
396,822

 
582,429

Long-term debt, less current portion
45,500

 
65,000

Contingent consideration
106,241

 
106,744

Facility lease obligation
38,417

 
32,230

Deferred tax liabilities
45,986

 
101,241

Other liabilities
45,722

 
47,973

Total liabilities
678,688

 
935,617

Commitments and contingencies (Note 16)

 

Stockholders' Equity:
 
 
 
Preferred stock, $.0001 par value; 5,000 shares authorized, no shares issued or outstanding

 

Common stock, $.0001 par value; 290,000 shares authorized; 199,319 and 197,941 shares issued at March 31, 2014 and December 31, 2013, respectively
20

 
20

Additional paid-in capital
2,291,363

 
2,106,183

Treasury stock, at cost, 1,122 and 985 shares at March 31, 2014 and December 31, 2013, respectively
(102,422
)
 
(80,365
)
Accumulated other comprehensive loss
(26,435
)
 
(22,857
)
Retained earnings
538,452

 
379,098

Total stockholders' equity
2,700,978

 
2,382,079

Total liabilities and stockholders' equity
$
3,379,666

 
$
3,317,696


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

2


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per share amounts)
 
 
Three months ended March 31,
 
2014
 
2013
Net product sales
$
566,616

 
$
338,941

Cost of sales
32,939

 
35,269

Operating expenses:
 
 
 
Research and development
191,457

 
74,536

Selling, general and administrative
129,291

 
108,826

Impairment of intangible asset
3,464

 

Acquisition-related costs
(38
)
 
3,234

Amortization of purchased intangible assets

 
104

Total operating expenses
324,174

 
186,700

Operating income
209,503

 
116,972

Other income and expense:
 
 
 
Investment income
2,213

 
437

Interest expense
(1,063
)
 
(1,171
)
Foreign currency gain
1,258

 
503

Income before income taxes
211,911

 
116,741

Income tax provision
52,557

 
34,524

Net income
$
159,354

 
$
82,217

Earnings per common share
 
 
 
Basic
$
0.81

 
$
0.42

Diluted
$
0.79

 
$
0.41

Shares used in computing earnings per common share
 
 
 
Basic
197,797

 
194,771

Diluted
201,804

 
199,057

 
 
 
 


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

3


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
(amounts in thousands)

 
Three months ended March 31,
 
2014
 
2013
Net income
$
159,354

 
$
82,217

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation
506

 
(1,449
)
Unrealized gains on marketable securities
811

 

Unrealized losses on pension obligation

 
(1
)
Unrealized (losses) gains on hedging activities, net of tax of $(1,245), and $2,510, respectively
(4,895
)
 
25,777

Other comprehensive (loss) income, net of tax
(3,578
)
 
24,327

Comprehensive income
$
155,776

 
$
106,544


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


4


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in thousands)
 
 
Three months ended March 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
159,354

 
$
82,217

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
9,268

 
6,266

Impairment of intangible asset
3,464

 

Change in fair value of contingent consideration
(38
)
 
2,211

Share-based compensation expense
23,840

 
16,855

Premium amortization of available-for-sale securities
4,175

 

Deferred taxes
(58,311
)
 
25,820

Unrealized foreign currency loss
263

 
2,721

Unrealized loss (gain) on forward contracts
161

 
(7,718
)
Excess tax benefit from stock options
(130,407
)
 
(21,332
)
Other
173

 
25

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
63

 
(26,232
)
Inventories
(20,900
)
 
(5,469
)
Prepaid expenses and other assets
33,633

 
13,522

Accounts payable, accrued expenses and other liabilities
(60,680
)
 
(40,989
)
Deferred revenue
4,887

 
(1,400
)
Net cash (used in) provided by operating activities
(31,055
)
 
46,497

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(145,565
)
 

Proceeds from maturity or sale of available-for-sale securities
99,250

 

Purchases of trading securities
(1,219
)
 

Purchases of other investments
(25,000
)
 

Purchases of property, plant and equipment
(17,733
)
 
(5,493
)
Other
70

 
(76
)
Net cash used in investing activities
(90,197
)
 
(5,569
)
Cash flows from financing activities:
 
 
 
Payments on term loan
(19,500
)
 

Excess tax benefit from stock options
130,407

 
21,332

Repurchase of common stock
(22,057
)
 
(35,107
)
Net proceeds from the exercise of stock options
30,404

 
9,527

Other
(42
)
 
(60
)
Net cash provided by (used in) financing activities
119,212

 
(4,308
)
Effect of exchange rate changes on cash
468

 
(3,161
)
Net change in cash and cash equivalents
(1,572
)
 
33,459

Cash and cash equivalents at beginning of period
529,857

 
989,501

Cash and cash equivalents at end of period
$
528,285

 
$
1,022,960

 
 
 
 
Supplemental cash flow disclosures from investing and financing activities:
 
 
 
Construction in process related to facility lease obligation
$
6,187

 
$

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

5

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)





1.
Business
Alexion Pharmaceuticals, Inc. ("Alexion", the "Company", "we", "our" or "us") is a biopharmaceutical company focused on serving patients with severe and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products. Our marketed product Soliris is the first and only therapeutic approved for patients with either of two severe and ultra-rare disorders resulting from chronic uncontrolled activation of the complement component of the immune system: paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, and atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. We are also evaluating additional potential indications for Soliris in other severe and ultra-rare diseases in which uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional product candidates as potential treatments for patients with severe and life-threatening ultra-rare disorders. We were incorporated in 1992 and began commercial sale of Soliris in 2007.

2.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. In our opinion, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States. The condensed consolidated balance sheet data as of December 31, 2013 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2013 included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year.
The financial statements of our subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for stockholders' equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss), net of tax, in stockholders' equity. Foreign currency transaction gains and losses are included in the results of operations in other income and expense.
The accompanying unaudited condensed consolidated financial statements include the accounts of Alexion Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.


3.
Inventories
Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory using the weighted-average cost method.
The components of inventory are as follows:
 
March 31,
 
December 31,
 
2014
 
2013
Raw materials
$
12,192

 
$
12,170

Work-in-process
68,662

 
62,192

Finished goods
45,300

 
28,240

 
$
126,154

 
$
102,602

 



6

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




4.
Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization:
 
March 31, 2014
 
December 31, 2013
Licenses, patents and purchased technology, net
$
7,971

 
$
11,205

Acquired in-process research and development
595,050

 
598,514

Intangible assets
$
603,021

 
$
609,719

Goodwill
$
254,073

 
$
254,073

During the three months ended March 31, 2014, we reviewed for impairment the value of an early stage, Phase I indefinite-lived intangible asset related to the Taligen acquisition. We initiated such review based on a reassessment of scientific findings associated with this acquired asset. As a result, in the first quarter of 2014, we recognized an impairment charge of $3,464 to adjust this asset to fair value, which was determined to be de minimis.


5.
Debt
On February 7, 2012, we entered into a Credit Agreement (Credit Agreement) with a syndicate of banks that provides for a $240,000 senior secured term loan facility payable in equal quarterly installments of $12,000 starting June 30, 2012 and a $200,000 senior secured revolving credit facility through February 7, 2017. In addition to borrowings upon prior notice, the revolving credit facility includes borrowing capacity in the form of letters of credit up to $60,000 and borrowings on same-day notice, referred to as swingline loans, of up to $10,000. Borrowings can be used for working capital requirements, acquisitions and other general corporate purposes. With the consent of the lenders and the administrative agent and subject to satisfaction of certain conditions, we may increase the term loan facility and/or the revolving credit facility by an aggregate amount not to exceed $150,000.
As of March 31, 2014, we had $93,500 outstanding on the term loan. As of March 31, 2014, we had open letters of credit of $9,773, and our borrowing availability under the revolving facility was $190,227.
The fair value of our long term debt, which is measured using Level 2 inputs, approximates book value.

6.
Earnings Per Common Share
Basic earnings per common share (EPS) are computed by dividing net income by the weighted-average number of shares of common stock outstanding. For purposes of calculating diluted EPS, the denominator reflects the potential dilution that could occur if stock options, unvested restricted stock, unvested restricted stock units or other contracts to issue common stock were exercised or converted into common stock, using the treasury stock method.
The following table summarizes the calculation of basic and diluted EPS for the three months ended March 31, 2014 and 2013:
 
Three months ended
 
March 31,
 
2014
 
2013
Net income used for basic and diluted calculation
$
159,354

 
$
82,217

Shares used in computing earnings per common share—basic
197,797

 
194,771

Weighted-average effect of dilutive securities:
 
 
 
Stock awards
4,007

 
4,286

Dilutive potential common shares
4,007

 
4,286

Shares used in computing earnings per common share—diluted
201,804

 
199,057

Earnings per common share:
 
 
 
Basic
$
0.81

 
$
0.42

Diluted
$
0.79

 
$
0.41


7

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




The following table represents the potentially dilutive shares excluded from the calculation of EPS for the three months ended March 31, 2014, and 2013 because their effect is anti-dilutive:
 
Three months ended
 
March 31,
 
2014
 
2013
Potentially dilutive securities:
 
 
 
Options to purchase common stock
1,136

 
2,998

Unvested restricted stock and restricted stock units
505

 
9

 
1,641

 
3,007



7.
Marketable Securities

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale investments by type of security at March 31, 2014 and December 31, 2013 were as follows:
 
 
March 31, 2014
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
78,941

 
$

 
$

 
$
78,941

Corporate bonds
 
512,935

 
831

 
(218
)
 
513,548

Municipal bonds
 
219,404

 
112

 
(40
)
 
219,476

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
41,975

 
19

 
(17
)
 
41,977

Foreign
 
159,065

 
94

 
(192
)
 
158,967

Bank certificates of deposit
 
18,019

 
1

 

 
18,020

 
 
$
1,030,339

 
$
1,057

 
$
(467
)
 
$
1,030,929


 
 
December 31, 2013
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
112,679

 
$

 
$

 
$
112,679

Corporate bonds
 
476,459

 
487

 
(588
)
 
476,358

Municipal bonds
 
202,396

 
47

 
(40
)
 
202,403

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
46,466

 
30

 
(7
)
 
46,489

Foreign
 
156,974

 
54

 
(204
)
 
156,824

Bank certificates of deposit
 
33,004

 

 

 
33,004

 
 
$
1,027,978

 
$
618

 
$
(839
)
 
$
1,027,757


The aggregate fair value of available-for-sale securities in an unrealized loss position as of March 31, 2014 and December 31, 2013 was $346,410 and $461,634, respectively. These investments have been in a continuous unrealized loss position for less than 12 months. As of March 31, 2014, we believe that the cost basis of our available-for-sale investments is recoverable.

8

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




The fair values of available-for-sale securities by classification in the condensed consolidated balance sheet were as follows:
 
March 31, 2014
 
December 31, 2013
Cash and cash equivalents
$
4,000

 
$
43,780

Marketable securities
1,026,929

 
983,977

 
$
1,030,929

 
$
1,027,757


The fair values of available-for-sale debt securities at March 31, 2014, by contractual maturity, are summarized as follows:
 
March 31, 2014
Due in one year or less
$
447,201

Due after one year through three years
578,731

Due after three years through five years
4,997

 
$
1,030,929


As of March 31, 2014 and December 31, 2013, the fair value of our trading securities was $2,264 and $1,017, respectively.
We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on our trading securities and available-for-sale investments were not material for the three months ended March 31, 2014.

8.
Derivative Instruments and Hedging Activities
We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates. The exposures result from portions of our revenues, as well as the related receivables, and expenses that are denominated in currencies other than the U.S. dollar, primarily the Euro, Japanese Yen, British Pound and Swiss Franc. We manage our foreign currency transaction risk within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes.
We enter into foreign exchange forward contracts, with durations of up to 36 months, to hedge exposures resulting from portions of our forecasted revenues, including intercompany revenues, that are denominated in currencies other than the U.S. dollar. The purpose of the hedges of revenue is to reduce the volatility of exchange rate fluctuations on our operating results and to increase the visibility of the foreign exchange impact on forecasted revenues. These hedges are designated as cash flow hedges upon contract inception. At March 31, 2014, we have open contracts with notional amounts totaling $1,342,742 that qualified for hedge accounting.
The impact on accumulated other comprehensive income (AOCI) and earnings from foreign exchange contracts that qualified as cash flow hedges, for the three months ended March 31, 2014 and 2013 were as follows:
 
Three months ended
 
March 31,
 
2014
 
2013
Gain (loss) recognized in AOCI, net of tax
$
(3,944
)
 
$
30,924

Gain reclassified from AOCI to net product sales (effective portion), net of tax
$
1,108

 
$
4,715

Gain (loss) reclassified from AOCI to other income and expense (ineffective portion), net of tax
$
(157
)
 
$
432

Assuming no change in foreign exchange rates from market rates at March 31, 2014, $3,209 of losses recognized in AOCI will be reclassified to revenue over the next 12 months.
We enter into foreign exchange forward contracts, with durations of approximately 30 days, designed to limit the balance sheet exposure of monetary assets and liabilities. We enter into these hedges to reduce the impact of fluctuating exchange rates on our operating results. Hedge accounting is not applied to these derivative instruments as gains and losses on these hedge

9

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




transactions are designed to offset gains and losses on underlying balance sheet exposures. As of March 31, 2014, the notional amount of foreign exchange contracts where hedge accounting is not applied was $310,846.
We recognized a gain of $2,289 and $6,950, in other income and expense, for the three months ended March 31, 2014 and 2013, respectively, associated with the foreign exchange contracts not designated as hedging instruments. These amounts were largely offset by gains or losses in monetary assets and liabilities.
The following tables summarize the fair value of outstanding derivatives at March 31, 2014 and December 31, 2013:

 
March 31, 2014
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
18,263

 
Other current liabilities
 
$
21,017

Foreign exchange forward contracts
Other non-current assets
 
6,362

 
Other non-current liabilities
 
13,121

Derivatives not designated as hedging instruments:
 
 

 
 
 

Foreign exchange forward contracts
Other current assets
 
143

 
Other current liabilities
 
327

Total fair value of derivative instruments
 
 
$
24,768

 
 
 
$
34,465




 
December 31, 2013
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
21,815

 
Other current liabilities
 
$
20,228

Foreign exchange forward contracts
Other non-current assets
 
9,839

 
Other non-current liabilities
 
14,864

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 

 
Other current liabilities
 

Total fair value of derivative instruments
 
 
$
31,654

 
 
 
$
35,092



10

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




Although we do not offset derivative assets and liabilities within our condensed consolidated balance sheets, our International Swap and Derivatives Association (ISDA) agreements provide for net settlement of transactions that are due to or from the same counterparty upon early termination of the agreement due to an event of default or other termination event. The following table summarizes the potential effect on our condensed consolidated balance sheets of offsetting our foreign exchange forward contracts subject to such provisions:
 
 
March 31, 2014
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
 
$
24,768

 
$

 
$
24,768

 
$
(21,566
)
 
$

 
$
3,202

Derivative liabilities
 
(34,465
)
 

 
(34,465
)
 
21,566

 

 
(12,899
)
 
 
December 31, 2013
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
 
$
31,654

 
$

 
$
31,654

 
$
(27,256
)
 
$

 
$
4,398

Derivative liabilities
 
(35,092
)
 

 
(35,092
)
 
27,256

 

 
(7,836
)



9.
Stockholders' Equity
In November 2012, our Board of Directors authorized the repurchase of up to $400,000 of our common stock. This repurchase program does not have an expiration date and we are not obligated to acquire a particular number of shares. The program may be discontinued at any time at the Company's discretion. Under the program, we repurchased 137 and 405 shares of our common stock at a cost of $22,057 and $35,107 during the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, there is a total of $300,254 remaining for repurchases under the program.
Subsequent to March 31, 2014, we repurchased 480 shares of our common stock under our repurchase program at a cost of $71,407.


11

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




10.
Other Comprehensive Income and Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI, by component, for the three months ended March 31, 2014 and 2013:
 
Defined Benefit Pension Plans
 
Unrealized Gains (Losses) from Marketable Securities
 
Unrealized Gains (Losses) from Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2013
$
(11,502
)
 
$
(146
)
 
$
(3,827
)
 
$
(7,382
)
 
$
(22,857
)
Other comprehensive income before reclassifications
(72
)
 
812

 
(3,944
)
 
506

 
(2,698
)
Amounts reclassified from other comprehensive income
72

 
(1
)
 
(951
)
 

 
(880
)
Net other comprehensive income (loss)

 
811

 
(4,895
)
 
506

 
(3,578
)
Balances, March 31, 2014
$
(11,502
)
 
$
665

 
$
(8,722
)
 
$
(6,876
)
 
$
(26,435
)

 
Defined Benefit Pension Plan
 
Unrealized Gains (Losses) From Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2012
$
(5,712
)
 
$
15,156

 
$
(2,809
)
 
$
6,635

Other comprehensive income before reclassifications
(71
)
 
30,924

 
(1,449
)
 
29,404

Amounts reclassified from other comprehensive income
70

 
(5,147
)
 

 
(5,077
)
Net other comprehensive income (loss)
(1
)
 
25,777

 
(1,449
)
 
24,327

Balances, March 31, 2013
$
(5,713
)
 
$
40,933

 
$
(4,258
)
 
$
30,962



12

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




The table below provides details regarding significant reclassifications from AOCI during the three months ended March 31, 2014 and 2013:
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified From Accumulated Other Comprehensive Income during the three months ended March 31,
Affected Line Item in the Condensed Consolidated Statements of Operations
 
2014
2013
 
Unrealized Gains (Losses) from Hedging Activity
 
 
 
 
 
Effective portion of foreign exchange contracts
 
$
1,266

$
5,153

 
Net product sales
Ineffective portion of foreign exchange contracts
 
(179
)
472

 
Foreign currency gain
 
 
1,087

5,625

 
 
 
 
(136
)
(478
)
 
Income tax provision
 
 
$
951

$
5,147

 
 
Unrealized Gains (Losses) from Marketable Securities
 
 
 
 
 
Realized gains on sale of securities
 
$
2

$

 
Investment income
 
 
2


 
 
 
 
(1
)

 
Income tax provision
 
 
$
1

$

 
 
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service costs and actuarial losses
 
$
(79
)
$
(76
)
 
(a)
 
 
(79
)
(76
)
 
 
 
 
7

6

 
Income tax provision
 
 
$
(72
)
$
(70
)
 
 
 
(a) This AOCI component is included in the computation of net periodic pension benefit cost (see Note 13 for additional details).

11.
Fair Value Measurement
Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

13

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. 
 
 
Fair Value Measurement at
March 31, 2014
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
236,244

 
$

 
$
236,244

 
$

Cash equivalents
Commercial paper
$
1,000

 
$

 
$
1,000

 
$

Cash equivalents
Corporate bonds
$
3,000

 
$

 
$
3,000

 
$

Marketable securities
Mutual funds
$
2,264

 
$
2,264

 
$

 
$

Marketable securities
Commercial paper
$
77,941

 
$

 
$
77,941

 
$

Marketable securities
Corporate bonds
$
510,548

 
$

 
$
510,548

 
$

Marketable securities
Municipal bonds
$
219,476

 
$

 
$
219,476

 
$

Marketable securities
Other government-related obligations
$
200,944

 
$

 
$
200,944

 
$

Marketable securities
Bank certificates of deposit
$
18,020

 
$

 
$
18,020

 
$

Other current assets
Foreign exchange forward contracts
$
18,406

 
$

 
$
18,406

 
$

Other assets
Foreign exchange forward contracts
$
6,362

 
$

 
$
6,362

 
$

Other current liabilities
Foreign exchange forward contracts
$
21,344

 
$

 
$
21,344

 
$

Other liabilities
Foreign exchange forward contracts
$
13,121

 
$

 
$
13,121

 
$

Other current liabilities
Acquisition-related contingent consideration
$
36,397

 
$

 
$

 
$
36,397

Contingent consideration
Acquisition-related contingent consideration
$
106,241

 
$

 
$

 
$
106,241

 

14

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




 
 
Fair Value Measurement at
December 31, 2013
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
234,212

 
$

 
$
234,212

 
$

Cash equivalents
Commercial paper
$
6,298

 
$

 
$
6,298

 
$

Cash equivalents
Corporate bonds
$
15,255

 
$

 
$
15,255

 
$

Cash equivalents
Municipal bonds
$
2,225

 
$

 
$
2,225

 
$

Cash equivalents
Bank certificates of deposit
$
20,003

 
$

 
$
20,003

 
$

Marketable securities
Mutual funds
$
1,017

 
$
1,017

 
$

 
$

Marketable securities
Commercial paper
$
106,381

 
$

 
$
106,381

 
$

Marketable securities
Corporate bonds
$
461,103

 
$

 
$
461,103

 
$

Marketable securities
Municipal bonds
$
200,178

 
$

 
$
200,178

 
$

Marketable securities
Other government-related obligations
$
203,313

 
$

 
$
203,313

 
$

Marketable securities
Bank certificates of deposit
$
13,001

 
$

 
$
13,001

 
$

Other current assets
Foreign exchange forward contracts
$
21,815

 
$

 
$
21,815

 
$

Other assets
Foreign exchange forward contracts
$
9,839

 
$

 
$
9,839

 
$

Other current liabilities
Foreign exchange forward contracts
$
20,228

 
$

 
$
20,228

 
$

Other liabilities
Foreign exchange forward contracts
$
14,864

 
$

 
$
14,864

 
$

Other current liabilities
Acquisition-related contingent consideration
$
35,932

 
$

 
$

 
$
35,932

Contingent consideration
Acquisition-related contingent consideration
$
106,744

 
$

 
$

 
$
106,744


There were no securities transferred between Level 1, 2 and 3 during the three months ended March 31, 2014.

Valuation Techniques
We classify mutual fund investments, which are valued based on quoted market prices in active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.
Items classified as Level 2 within the valuation hierarchy consist of institutional money market funds, commercial paper, municipal bonds, U.S. and foreign government-related debt, corporate debt securities and certificates of deposit. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.
Our derivative assets and liabilities include foreign exchange derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk and our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.
Items classified as Level 3 within the valuation hierarchy, consisting of contingent consideration liabilities related to acquisitions, were valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met.

15

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




As of March 31, 2014, there has not been any impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

Contingent Consideration
In connection with prior acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approval or sales-based milestone events. We determine the fair value of these obligations on the acquisition date using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt ranging from 5.3% to 6.2% for developmental milestones and a weighted average cost of capital ranging from 14% to 21% for sales-based milestones.
Each reporting period, we adjust the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time as development work progresses towards the achievement of the milestones.
Estimated future contingent milestone payments related to prior business combinations range from zero if no milestone events are achieved, to a maximum of $876,000 if all development, regulatory and sales-based milestones are reached. As of March 31, 2014, the fair value of acquisition-related contingent consideration was $142,638. The following table represents a roll-forward of our acquisition-related contingent consideration:

March 31, 2014
Balance at beginning of period
$
(142,676
)
Changes in fair value
38

Balance at end of period
$
(142,638
)
 
12.
Income Taxes
The following table provides a comparative summary of our income tax provision and effective tax rate for the three months ended March 31, 2014 and 2013:
 
Three months ended
 
March 31,
 
2014
 
2013
Provision for income taxes
$
52,557

 
$
34,524

Effective tax rate
24.8
%
 
29.6
%

The tax provision for the three months ended March 31, 2014 and 2013 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The tax provision for the three months ended March 31, 2014 also includes $2,652 attributable to our agreement with the French government that provided reimbursement for shipments of Soliris made prior to January 1, 2014. The tax provision for the three months ended March 31, 2013 also includes a benefit of $2,719 attributable to the 2012 U.S. Federal tax credit for research and experimentation. The reduction in the effective tax rate for the three months ended March 31, 2014 as compared to the same period in the prior year is primarily attributable to the centralization of our global supply chain and technical operations in Ireland.
The U.S. Federal tax credit for research and experimentation expenses expired December 31, 2011.  In connection with this expiration, our 2012 tax provision did not include any benefit from the U.S. Federal tax credit for research and experimentation.  In January 2013, the American Taxpayer Relief Act of 2012, which retroactively extended the tax credit for research and experimentation back to January 1, 2012 through the end of 2013, was signed into law.  The effects of a change in tax law is recognized in the period that includes the date of enactment and, therefore, our tax benefit attributable to the 2012 U.S. Federal tax credit for research and experimentation was recorded in the first quarter of 2013.
The U.S. Federal tax credit for research and experimentation expenses expired on December 31, 2013. In connection with this expiration, our 2014 tax provision does not include any benefit from the U.S. Federal tax credit for research and experimentation.

16

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




We continue to maintain a valuation allowance against certain other deferred tax assets where realization is not certain.
  
13.
Employee Benefit Plans
Deferred Compensation Plan
Effective June 15, 2013, we began sponsoring a nonqualified deferred compensation plan which allows certain highly-compensated employees to make voluntary deferrals of up to 80% of their base salary and incentive bonuses. The plan is designed to work in conjunction with the 401(k) plan and provides for a total combined employer match of up to 6% of an employee's eligible earnings, up to the IRS annual 401(k) contribution limitations. Employee deferrals and employer matching contributions under the plan began in the third quarter of 2013 and were not material for the three months ended March 31, 2014.
Defined Contribution Plan
We have one qualified 401(k) plan covering all eligible employees. Under the plan, employees may contribute up to the statutory allowable amount for any calendar year. We make matching contributions equal to $1.00 for each dollar contributed up to the first 6% of an individual’s base salary and incentive cash bonus. For the three months ended March 31, 2014 and 2013, we recorded matching contributions of $2,657 and $1,767, respectively.
Defined Benefit Plans
We maintain defined benefit plans for employees in certain countries outside the United States, including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increases, and pension adjustments.
The components of net periodic benefit cost are as follows: 
 
Three months ended
 
March 31,
 
2014
 
2013
Service cost
$
1,563

 
$
1,385

Interest cost
200

 
126

Expected return on plan assets
(231
)
 
(158
)
Employee contributions
(395
)
 
(355
)
Amortization
79

 
76

Total net periodic benefit cost
$
1,216

 
$
1,074


14.
Leases
In November 2012, we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. Although we will not legally own the premises, we are deemed to be the owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. Accordingly, the landlord's costs of constructing the facility are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our condensed consolidated balance sheet.
Construction of the new facility began in June 2013 and is expected to be completed in 2015. As of March 31, 2014, we recorded a construction-in-process asset of $39,818, inclusive of the landlord's costs as well as costs incurred by Alexion, and an offsetting facility lease obligation of $38,417 associated with the new facility.

15.
License Agreements

In January 2013, we entered into a license agreement for a technology, which provides an exclusive research license and an option for an exclusive commercial license for specific targets and products to be developed. Due to the early stage of this asset, we recorded expense for an upfront payment of $3,000 during the first quarter of 2013. We will also be required to pay annual

17

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




maintenance fees during the term of the arrangement. In addition, for each target, up to a maximum of six targets we develop, we could be required to pay up to an additional $70,500 in license fees, development and sales milestones as the specific milestones are met over time.
In July 2013, we entered into a license and collaboration agreement with Ensemble Therapeutics Corporation for the identification, development and commercialization of therapeutic candidates based on specific drug targets.  Due to the early stage of these assets, we recorded expense for an upfront payment of $11,500 during the third quarter of 2013. We will also be responsible for funding research activities under the program.  In addition, for each drug target, up to a maximum of four targets, we could be required to pay up to an additional $90,750 in development milestones as the specific milestones are met over time.  The agreement also provides for royalty payments on commercial sales of each product developed under the agreement.
In January 2014, we entered into an agreement with Moderna Therapeutics, Inc. (Moderna) that allows us to purchase ten product options to develop and commercialize treatments for rare diseases with Moderna's messenger RNA (mRNA) therapeutics platform. Alexion will lead the discovery, development and commercialization of the treatments produced through this broad, long-term strategic agreement, while Moderna will retain responsibility for the design and manufacture of the messenger RNA against selected targets. Due to the early stage of these assets, we recorded expense for an upfront payment of $100,000.  We will also be responsible for funding research activities under the program.  In addition, for each drug target, up to a maximum of ten targets, we could be required to make an option exercise payment of $15,000 and to pay up to an additional $120,000 with respect to a rare disease product and $400,000 with respect to a non-rare disease product in development and sales milestones if the specific milestones are met over time as well as royalties on commercial sales. 
In addition to the option agreement, we purchased $25,000 of non-voting preferred equity of Moderna LLC, Moderna's non-public parent company. We recorded this investment at cost within other assets in our condensed consolidated balance sheets. We regularly monitor the investment to evaluate whether there has been an other-than-temporary decline in its fair value, based on the implied value of recent company financings, public market prices of comparable companies, and general market conditions. The carrying value of this investment was not impaired as of March 31, 2014.

16.
Commitments and Contingencies
Commitments
Lonza Agreement
We rely on Lonza Group AG and its affiliates (Lonza), a third party manufacturer, to produce a portion of commercial and clinical quantities of Soliris and for clinical quantities of asfotase alfa, and we have contracted and expect to continue contracting for product finishing, vial filling and packaging through third parties. We have various agreements with Lonza, with remaining total commitments of approximately $147,000 through 2019. Such commitments may be canceled only in limited circumstances. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at Alexion Rhode Island Manufacturing Facility (ARIMF).

Contingent Liabilities
We are currently involved in various claims and legal proceedings. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Because of uncertainties related to claims and litigation, accruals are based on our best estimates based on available information. On a periodic basis, as additional information becomes available, or based on specific events such as the outcome of litigation or settlement of claims, we may reassess the potential liability related to these matters and may revise these estimates, which could result in a material adverse adjustment to our operating results.
We have in the past received, and may in the future receive, notices from third parties claiming that their patents may be infringed by the development, manufacture or sale of Soliris. Under the guidance of ASC 450, Contingencies, we record a royalty accrual based on our best estimate of the fair value percent of net sales of Soliris that we could be required to pay the owners of patents for technology used in the manufacture and sale of Soliris.
In March 2013, we received a Warning Letter from the U.S. Food and Drug Administration (FDA) regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed an FDA inspection which concluded in August 2012. At the conclusion of that inspection, the FDA issued a Form 483 Inspectional Observations, to which we responded in August 2012 and provided additional information to the FDA in September and December 2012. The

18

Alexion Pharmaceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(amounts in thousands except per share amounts)




observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA in April 2013. We continue to manufacture products, including Soliris, in this facility. While the resolution of this Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated.


19

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

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

Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by our management, and may include, but are not limited to, statements regarding the potential benefits and commercial potential of Soliris® (eculizumab) for its approved indications and any expanded uses, timing and effect of sales of Soliris in various markets worldwide, pricing for Soliris, level of insurance coverage and reimbursement for Soliris, level of future Soliris sales and collections, timing regarding development and regulatory approvals for additional indications or in additional territories for Soliris, the medical and commercial potential of additional indications for Soliris, failure to satisfactorily address the issues raised by the U.S. Food and Drug Administration in the March 2013 Warning Letter, costs, expenses and capital requirements, cash outflows, cash from operations, status of reimbursement, price approval and funding processes in various countries worldwide, progress in developing commercial infrastructure and interest about Soliris and our drug candidates in the patient, physician and payer communities, the safety and efficacy of Soliris and our product candidates, estimates of the potential markets and estimated commercialization dates for Soliris and our drug candidates around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for Soliris or our drug candidates, status of our ongoing clinical trials for eculizumab, asfotase alfa and our other product candidates, commencement dates for new clinical trials, clinical trial results, evaluation of our clinical trial results by regulatory agencies, prospects for regulatory approval, need for additional research and testing, the uncertainties involved in the drug development process and manufacturing, performance and reliance on third party service providers, our future research and development activities, plans for acquired programs, our ability to develop and commercialize products with our collaborators, assessment of competitors and potential competitors, the outcome of challenges and opposition proceedings to our intellectual property, assertion or potential assertion by third parties that the manufacture, use or sale of Soliris infringes their intellectual property, estimates of the capacity of manufacturing and other service facilities to support Soliris and our product candidates, potential costs resulting from product liability or other third party claims, the sufficiency of our existing capital resources and projected cash needs, the possibility that expected tax benefits will not be realized, assessment of impact of recent accounting pronouncements, declines in sovereign credit ratings or sovereign defaults in countries where we sell Soliris, delay of collection or reduction in reimbursement due to adverse economic conditions or changes in government and private insurer regulations and approaches to reimbursement, the short and long term effects of other government healthcare measures, and the effect of shifting foreign exchange rates. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled “Risk Factors”. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in this and other reports or documents we file from time to time with the Securities and Exchange Commission (the "SEC").
Business
Overview
We are a biopharmaceutical company focused on serving patients with severe and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products. Our marketed product Soliris is the first and only therapeutic approved for patients with either of two severe and ultra-rare disorders resulting from chronic uncontrolled activation of the complement component of the immune system: paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, and atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. We are also evaluating additional potential indications for Soliris in severe and ultra-rare diseases in which we believe that uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional biotechnology product candidates as treatments for patients with severe and life-threatening ultra-rare disorders. We were incorporated in 1992 and began commercial sale of Soliris in 2007.
Soliris is designed to inhibit a specific aspect of the complement component of the immune system and thereby treat inflammation associated with chronic disorders in several therapeutic areas, including hematology, nephrology, transplant rejection and neurology. Soliris is a humanized monoclonal antibody that effectively blocks terminal complement activity at the

20

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

doses currently prescribed. The initial indication for which we received approval for Soliris is PNH. PNH is a debilitating and life-threatening, ultra-rare genetic blood disorder defined by chronic uncontrolled complement activation leading to the destruction of red blood cells (hemolysis). The chronic hemolysis in patients with PNH may be associated with life-threatening thromboses, recurrent pain, kidney disease, disabling fatigue, impaired quality of life, severe anemia, pulmonary hypertension, shortness of breath and intermittent episodes of dark-colored urine (hemoglobinuria).
Soliris was approved for the treatment of PNH by the FDA and the European Commission (EC) in 2007 and by Japan’s Ministry of Health, Labour and Welfare (MHLW) in 2010, and has been approved in several other territories. Additionally, Soliris has been granted orphan drug designation for the treatment of PNH in the United States, Europe, Japan and several other territories.
In September and November 2011, Soliris was approved by the FDA and EC, respectively, for the treatment of pediatric and adult patients with aHUS in the United States and Europe. In September 2013, the MHLW approved Soliris for the treatment of pediatric and adult patients with aHUS in Japan. aHUS is a severe and life-threatening genetic ultra-rare disease characterized by chronic uncontrolled complement activation and thrombotic microangiopathy (TMA), the formation of blood clots in small blood vessels throughout the body, causing a reduction in platelet count (thrombocytopenia) and life-threatening damage to the kidney, brain, heart and other vital organs. In addition, the FDA and EC have granted Soliris orphan drug designation for the treatment of patients with aHUS.
 
Products and Development Programs
We focus our product development programs on life-transforming therapeutics for severe and life-threatening ultra-rare diseases for which we believe current treatments are either non-existent or inadequate.
Marketed Product/Indications
Our marketed product/indications include the following:
Product
 
Development Area
 
Indication
 
Development Stage
Soliris (eculizumab)
 
Hematology
 
Paroxysmal Nocturnal Hemoglobinuria (PNH)
 
Commercial
 
 
 
 
PNH Registry
 
Phase IV
 
 
Hematology/Nephrology
 
Atypical Hemolytic Uremic Syndrome (aHUS)
 
Commercial
 
 
 
 
aHUS Long-term Follow-up
 
Phase IV
 
 
 
 
aHUS Registry
 
Phase IV
Paroxysmal Nocturnal Hemoglobinuria (PNH)
Soliris is the first and only therapy approved for the treatment of patients with PNH, a debilitating and life-threatening ultra-rare blood disorder in which an acquired genetic deficiency causes uncontrolled complement activation which leads to life-threatening complications. We continue to work with researchers to expand the base of knowledge in PNH and the utility of Soliris to treat patients with PNH. In 2013, the EC extended the Soliris label to include pediatric patients with PNH. The Committee for Medicinal Products for Human Use (CHMP) recommends that the renewal be granted with unlimited validity.  Additionally, we are sponsoring a multinational registry to gather information regarding the natural history of patients with PNH and the longer term outcomes during Soliris treatment.
Atypical Hemolytic Uremic Syndrome (aHUS)
aHUS is a chronic and life-threatening ultra-rare genetic disease in which uncontrolled complement activation causes blood clots in small blood vessels throughout the body (thrombotic microangiopathy, or TMA) leading to kidney failure, stroke, heart attack and death. Soliris is the first and only therapy approved for the treatment of adult and pediatric patients with aHUS. Pursuant to a post marketing requirement imposed by the FDA, we have now completed enrollment in a prospective open-label trial in adults with aHUS and, separately, enrollment has been completed in a prospective trial of pediatric patients with aHUS.

21

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Clinical Development Programs
Our programs, including investigator sponsored clinical programs, include the following:
Product
  
Development Area
  
Indication
  
Development Stage
Soliris (eculizumab)
 
Transplant
  
Antibody Mediated Rejection (AMR) Presensitized Renal Transplant - Living Donor
  
Phase II
 
 
 
 
Antibody Mediated Rejection (AMR) Presensitized Renal Transplant - Deceased Donor
 
Phase II
 
 
 
 
Delayed Kidney Transplant Graft Function*
 
Phase II
 
  
Nephrology
  
STEC-HUS (Shiga-toxin producing E. Coli Hemolytic Uremic Syndrome)
  
Phase II
 
  
Neurology
  
Neuromyelitis Optica (NMO)*
  
Phase II
 
  
 
  
Myasthenia Gravis (MG)
  
Phase II
Asfotase alfa
 
Metabolic Disorders

 
Hypophosphatasia (HPP)
 
Phase II
cPMP (ALXN 1101)
 
Metabolic Disorders

 
MoCD Type A
 
Phase I
ALXN 1007
 
Inflammatory Disorders
 
 
 
Phase I
*
Investigator Initiated Trial


Soliris (eculizumab)

Nephrology
Antibody Mediated Rejection (AMR) in Presensitized Kidney Transplant Patients
Enrollment in a multi-national, multi-site controlled clinical trial of eculizumab in presensitized kidney transplant patients at elevated risk for AMR who received kidneys from deceased organ donors was completed in March 2013. The study was then re-opened in October 2013 to enroll additional patients at the request of participating investigators. AMR is the term used to describe a type of transplant rejection that occurs when the recipient has antibodies to the donor organ.  In September 2013, researchers presented positive preliminary data from the eculizumab deceased-donor AMR kidney transplant study at the European Society of Organ Transplant (ESOT) in Vienna, Austria.
Enrollment is ongoing in a multi-national, multi-site randomized controlled clinical trial of eculizumab in presensitized kidney transplant patients at elevated risk for AMR who received kidneys from living donors. In April 2014, the EC granted orphan drug designation to eculizumab for the prevention of graft rejection following solid organ transplantation.
Delayed Kidney Transplant Graft Function
Enrollment has been completed in an investigator-initiated Phase II study of eculizumab in patients at elevated risk for delayed graft function (DGF) following kidney transplant. DGF is the term used to describe the failure of a kidney or other organs to function immediately after transplantation due to ischemia-reperfusion and immunological injury. We have been granted orphan drug designation for DGF by the FDA and, in the first quarter of 2014, the EC granted orphan drug designation to eculizumab for prevention of DGF after solid organ transplantation.
Shiga-toxin producing E. coli Hemolytic Uremic Syndrome (STEC-HUS)
STEC-HUS is an ultra-rare disorder, comprising only a small sub-set of the already rare population of patients with enterohemorrhagic Escherichia coli (EHEC). Following an authorization by the Paul-Ehrlich-Institut, Germany's health care regulatory body for biologics, and an access program for patients initiated in May 2011, we initiated an open-label clinical trial to investigate eculizumab as a treatment for patients with STEC-HUS. Enrollment in this trial has been completed. We are currently discussing with physician investigators clinical outcome data from an epidemiologic study in approximately 400 STEC-HUS patients who received only best supportive care. The FDA and the EC have each granted orphan designation for eculizumab as a treatment for patients with STEC-HUS.

22

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Neurology
Neuromyelitis Optica (NMO)
NMO is a severe and ultra-rare autoimmune disease of the central nervous system (CNS) that primarily affects the optic nerves and spinal cord. In an investigator-initiated Phase II clinical trial of eculizumab in severe and relapsing NMO, eculizumab reduced the median number of NMO attacks at 12 months with a high degree of statistical significance. A single pivotal trial in patients with relapsing NMO commenced patient enrollment in the first half of 2014. The FDA and the EC have each granted orphan designation for eculizumab as a treatment for patients with NMO.
Myasthenia Gravis (MG)
MG is an ultra-rare autoimmune syndrome characterized by complement activation leading to the failure of neuromuscular transmission. Data from a Phase II trial evaluating the safety and efficacy of eculizumab in patients with refractory generalized MG demonstrated an encouraging disease improvement signal. We have completed collaborations with investigators on the design of a Phase III trial to evaluate eculizumab as a treatment for patients with refractory generalized MG, and this trial commenced patient screening in the second quarter of 2014.

Asfotase Alfa
Hypophosphatasia (HPP)
HPP is an ultra-rare, genetic, and life-threatening metabolic disease characterized by impaired phosphate and calcium regulation, leading to progressive damage to multiple vital organs including destruction and deformity of bones, profound muscle weakness, seizures, impaired renal function, and respiratory failure.
Asfotase alfa, a targeted enzyme replacement therapy in Phase II clinical trials for patients with HPP, is designed to directly address the morbidities and mortality of HPP by targeting alkaline phosphatase directly to the deficient tissue. In this way, asfotase alfa is designed to normalize the genetically defective metabolic process and prevent or reverse its severe, crippling and life-threatening complications in patients with HPP. Initial studies with asfotase alfa in HPP patients indicate that the treatment significantly decreases the levels of targeted metabolic substrates.
We have completed enrollment in a natural history study in infantile-onset patients with HPP and have completed our initial analysis for the study. We believe that the analysis is supportive of our anticipated regulatory filings in the U.S., EU and Japan. We continue to enroll and dose patients in a separate multinational Phase II open-label study of infants and children with HPP. Interim results of this trial were presented at the European Society of Pediatric Endocrinology meeting held in September 2013 in Milan, Italy. Results of 15 enrolled and treated patients representing a range of HPP characteristics were summarized, showing that the primary efficacy endpoint was achieved with a high degree of clinical and statistical significance and several key secondary endpoints were also achieved.  These results provide data in a broader patient population of infants and children.  In 2013, asfotase alfa received Breakthrough Therapy Designation from the FDA.
We have commenced a rolling submission of our BLA for asfotase alfa, which allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis.  We submitted certain portions of the BLA to the FDA during the second quarter and expect to complete the submission of the remaining sections in the fall of 2014.

cPMP (ALXN 1101)
Molybdenum Cofactor Deficiency (MoCD) Disease Type A (MoCD Type A)
MoCD Type A is a rare metabolic disorder characterized by severe and rapidly progressive neurologic damage and death in newborns. MoCD Type A results from a genetic deficiency in cyclic Pyranopterin Monophosphate (cPMP), a molecule that enables production of certain enzymes, the absence of which allows neurotoxic sulfite to accumulate in the brain. To date, there is no approved therapy available for MoCD Type A. There has been some early clinical experience with the cPMP replacement therapy in a small number of children with MoCD Type A, and we have initiated a natural history study in patients with MoCD Type A. In October 2013, cPMP received Breakthrough Therapy Designation from the FDA for the treatment of patients with MoCD Type A. Evaluation of our synthetic cPMP replacement therapy in a Phase I healthy volunteer study is complete. As a result, we have initiated a multi-center, multinational open-label clinical trial of synthetic cPMP in patients with MoCD Type A being treated with recombinant Escherichia coli-derived cPMP.

ALXN 1007
ALXN 1007 is a novel humanized antibody designed to target rare and severe inflammatory disorders and is a product of our proprietary antibody discovery technologies. We have completed enrollment in both a Phase I single-dose, dose escalating safety and pharmacology study in healthy volunteers, as well as in a multi-dose, dose escalating safety and pharmacology study in healthy volunteers. Results are currently being analyzed. We also completed successful meetings with the FDA to discuss

23

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

initiation of proof of concept studies. As a result, proof of concept studies in two severe life-threatening and ultra-rare disorders are expected to start in the first half of 2014.
Manufacturing
We currently rely on three manufacturing facilities, Alexion's Rhode Island manufacturing facility (ARIMF) and two facilities operated by Lonza Group AG and its affiliates (Lonza), to produce commercial and clinical bulk quantities of Soliris, and we rely on a facility operated by Lonza for clinical quantities of asfotase alfa. We produce our clinical and preclinical quantities of our other product candidates at ARIMF. We also depend on a limited number of third party providers for other services with respect to our clinical and commercial requirements, including manufacturing services, product finishing, packaging, vialing and labeling.
In March 2013, we received a Warning Letter from the FDA regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed an FDA inspection which concluded in August 2012. At the conclusion of that inspection, the FDA issued a Form 483 Inspectional Observations, to which we responded in August 2012 and provided additional information to the FDA in September and December 2012. The observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA in April 2013. We continue to manufacture products, including Soliris, in this facility. In the first quarter of 2014, we submitted our request for inspection to the FDA, and we are currently awaiting this re-inspection of our manufacturing facility. While the resolution of the issues raised in this Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated. To the extent that circumstances related to this matter change, the impact could have a material adverse effect on our financial operations.
The European Medicines Agency (EMA) inspected ARIMF in January 2013, and a good manufacturing practices (GMP) certificate was issued in May 2013.
In August 2013, we initiated a voluntary recall and replacement of the remaining vials of a single lot of Soliris due to the presence of visible particles in a limited number of vials in the lot. Subsequently, in November 2013, we initiated a voluntary recall and replacement of a limited number of vials of Soliris due to the presence of similar visible particles. These recalls did not interrupt the supply of Soliris to patients. Following investigation, we believe that we have identified the filling process step that resulted in the presence of the visible particles and we are implementing the changes necessary to modify the process step. During the fourth quarter of 2013, we recorded expense of $14,277 in cost of sales resulting from the expected disposal of inventory in 2014.
In January 2014, we agreed to purchase a vialing facility in Athlone, Ireland, and the closing of the acquisition occurred in April 2014.  Following refurbishment of the facility, and after successful completion of the appropriate validation processes and regulatory approvals, the facility will become our first company-owned vialing and packaging facility for Soliris and other clinical and commercial products. Our plans for future expansion in Ireland also include the purchase of property in Dublin, Ireland, which we completed in April 2014, for the construction of office and laboratory facilities.
Critical Accounting Policies and the Use of Estimates
The significant accounting policies and basis of preparation of our consolidated financial statements are described in Note 1, “Business Overview and Summary of Significant Accounting Policies,” of our financial statements included in our Form 10-K for the year ended December 31, 2013. Under accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities in our financial statements. Actual results could differ from those estimates.
We believe the judgments, estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on our consolidated financial statements:
Revenue recognition;
Contingent liabilities;
Inventories;
Research and development expenses;
Share-based compensation;
Valuation of goodwill, acquired intangible assets and in-process research and development (IPR&D);
Valuation of contingent consideration; and
Income taxes.


24

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

For a complete discussion of these critical accounting policies, refer to “Critical Accounting Policies and Use of Estimates” within “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” included within our Form 10-K for the year ended December 31, 2013.  We have reviewed our critical accounting policies as disclosed in our Form 10-K, and we have not noted any material changes.
Results of Operations

Net Product Sales
The following table summarizes net product sales for the three months ended March 31, 2014 and 2013:
 
Three months ended
 
 
 
March 31,
 
$
 
2014
 
2013
 
Variance
Net product sales
$
566,616

 
$
338,941

 
$
227,675


In March 2014, we entered into an agreement with the French government which positively impacts prospective reimbursement of Soliris and also provides for reimbursement for shipments made in years prior to January 1, 2014. As a result of the agreement, in the first quarter of 2014, we recognized $87,830 of net product sales from Soliris in France relating to years prior to January 1, 2014.
Exclusive of the $87,830 recognized related to prior years, the increase of 41.3% in revenue for the three months ended March 31, 2014, as compared to the same period in 2013, was primarily due to an increased volume of unit shipments and increased price, partially offset by a negative impact of foreign exchange. The increase in revenue of 41.3% for the three months ended March 31, 2014 was due to an increase in unit volumes of 36.8% and a positive price impact of 6.5%, offset by a negative impact on foreign exchange of 2.0%. The increase in volume was largely due to physicians globally requesting Soliris therapy for additional patients. The positive price impact of 6.5% for the three months ended March 31, 2014 was primarily due to the agreement with the French government, a reduction in estimated rebates in Germany, and a price increase in the United States, offset by an increase in rebates in certain countries in Europe.
The negative impact of foreign exchange of $6,861, or 2.0%, for the three months ended March 31, 2014 was due to changes in foreign currency exchange rates (inclusive of hedging activity) versus the U.S. dollar for the three months ended March 31, 2013. The negative impact was primarily due to changes in the Japanese Yen. We recorded a gain in revenue of $1,266 and $5,153 related to our foreign currency cash flow hedging program for the three months ended March 31, 2014 and 2013, respectively.
Cost of Sales
In the first quarter of 2014, the Company entered into a settlement agreement with a third party related to the calculation of royalties payable to such third party under a pre-existing license agreement. Based on this settlement agreement, the Company recorded a reversal of accrued royalties of $5,124 as a reduction of cost of sales.
In the first quarter of 2014, the Company also recorded an incremental impact in cost of sales of $2,055 for additional royalties related to the $87,830 of net product sales from prior year shipments.
Exclusive of the royalty items noted above, cost of sales were $36,008 and $35,269, or 7.5% and 10.4% of product revenue (exclusive of the $87,830 recognized related to prior years), for the three months ended March 31, 2014 and 2013, respectively. Cost of sales includes manufacturing costs as well as actual and estimated royalty expenses associated with sales of Soliris. The decrease in cost of sales as a percentage of sales resulted from a decrease in royalties on sales of Soliris.
Research and Development Expense
Our research and development expense includes personnel, facility and external costs associated with the research and development of our product candidates, as well as product development costs. We group our research and development expenses into two major categories: external direct expenses and all other research and development (R&D) expenses.
External direct expenses are comprised of costs paid to outside parties for clinical development, product development and discovery research. Clinical development costs are comprised of costs to conduct and manage clinical trials related to eculizumab and other product candidates. Product development costs are those incurred in performing duties related to manufacturing development and regulatory functions, including manufacturing of material for clinical and research activities. Discovery research costs are incurred in conducting laboratory studies and performing preclinical research for other uses of

25

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

eculizumab and other product candidates. Clinical development costs have been accumulated and allocated to each of our programs, while product development and discovery research costs have not been allocated.
All other R&D expenses consist of costs to compensate personnel, to maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs relate to efforts on our clinical and preclinical products, our product development and our discovery research efforts. These costs have not been allocated directly to each program.
The following table provides information regarding research and development expenses: 
 
Three months ended
 
 
 
March 31,
 
$
 
2014
 
2013
 
Variance
Clinical development
$
23,917

 
$
11,495

 
$
12,422

Product development
13,039
 
23,595

 
(10,556
)
Discovery research
104,506
 
4,330

 
100,176

Total external direct expenses
141,462
 
39,420

 
102,042

Payroll and benefits
44,019
 
30,718

 
13,301

Operating and occupancy
2,876
 
2,236

 
640

Depreciation and amortization
3,100
 
2,162

 
938

Total other R&D expenses
49,995
 
35,116

 
14,879

Research and development expense
$
191,457

 
$
74,536

 
$
116,921


For the three months ended March 31, 2014, the increase of $116,921 in research and development expense, as compared to the same period in the prior year, was primarily related to the following:
Increase of $12,422 in external clinical development expenses related primarily to an expansion of studies within our eculizumab programs and additional clinical costs associated with our asfotase alfa program (see table below).
Decrease of $10,556 in external product development expenses related primarily to a decrease in costs associated with the production of asfotase alfa for clinical trials.
Increase of $100,176 in discovery research expenses primarily related to the upfront payment of $100,000 on the license agreement entered into with Moderna Therapeutics, Inc. in the first quarter of 2014.
Increase of $13,301 in R&D payroll and benefit expense related primarily to global expansion of staff supporting our increasing number of clinical and development programs.

The following table summarizes external direct expenses related to our clinical development programs. Please refer to "Clinical Development Programs" above for a description of each of these programs:
 
Three months ended
 
 
 
March 31,
 
$
 
2014
 
2013
 
Variance
External direct expenses
 
 
 
 
 
Eculizumab
$
15,496

 
$
6,743

 
$
8,753

Asfotase alfa
4,242

 
2,265

 
1,977

cPMP
1,553

 
1,320

 
233

Other programs
1,601

 
808

 
793

Unallocated
1,025

 
359

 
666

 
$
23,917

 
$
11,495

 
$
12,422

The successful development of our drug candidates is uncertain and subject to a number of risks. We cannot guarantee that results of clinical trials will be favorable or sufficient to support regulatory approvals for our other programs. We could decide to abandon development or be required to spend considerable resources not otherwise contemplated. For additional discussion regarding the risks and uncertainties regarding our development programs, please refer to Item 1A "Risk Factors" in this Form 10-Q.

26

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Selling, General and Administrative Expense
Our selling, general and administrative expense includes commercial and administrative personnel, corporate facility and external costs required to support the marketing and sales of our commercialized products. These selling, general and administrative costs include: corporate facility operating expenses and depreciation; marketing and sales operations in support of Soliris; human resources; finance, legal, information technology and support personnel expenses; and other corporate costs such as telecommunications, insurance, audit, government affairs and legal expenses.
The table below provides information regarding selling, general and administrative expense:
 
Three months ended
 
 
 
March 31,
 
$
 
2014
 
2013
 
Variance
Salary, benefits and other labor expense
$
82,418

 
$
67,929

 
$
14,489

External selling, general and administrative expense
46,873

 
40,897

 
5,976

Total selling, general and administrative expense
$
129,291

 
$
108,826

 
$
20,465

For the three months ended March 31, 2014, the increase of $20,465 in selling, general and administrative expense, as compared to the same period in the prior year, was related to the following:
Increase in salary, benefits and other labor expenses of $14,489. The increase was a result of increased headcount related to commercial development activities, including increases in payroll and benefits costs of $8,900 related to our global commercial staff to support global expansion. This increase was also due to increases in payroll and benefits of $5,600 within our general and administrative functions to support our infrastructure growth as a global commercial entity.
Increase in external selling, general and administrative expenses of $5,976. The increase was primarily due to an increase in marketing costs to support the continued growth in global sales of Soliris, as well as an increase in costs associated with professional services.

Impairment of Intangible Asset
During the three months ended March 31, 2014, we reviewed for impairment the value of an early stage, Phase I indefinite-lived intangible asset related to the Taligen acquisition. We initiated such review based on a reassessment of scientific findings associated with this acquired asset. As a result, in the first quarter of 2014, we recognized an impairment charge of $3,464 to adjust this asset to fair value, which was determined to be de minimis. We did not recognize any impairment loss for intangible assets during the three months ended March 31, 2013.
Acquisition-related Costs
For the three months ended March 31, 2014 and 2013, acquisition-related costs associated with our business combinations included the following:
 
Three months ended
 
March 31,
 
2014

2013
Separately-identifiable employee costs
$

 
$
248

Professional fees

 
775

Changes in fair value of contingent consideration
(38
)
 
2,211

 
$
(38
)
 
$
3,234


27

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

The following table provides information for acquisition-related costs for each business combination:
 
Three months ended
 
March 31,
 
2014
 
2013
Enobia Pharma Corp.
$
2,450

 
$
2,991

Taligen Therapeutics, Inc.
(2,458
)
 
115

Orphatec Pharmaceuticals GmbH
(30
)
 
128

 
$
(38
)
 
$
3,234


Included in the acquisition-related costs for Taligen for the three months ended March 31, 2014 is a benefit of $2,458 related to the decrease in the fair value of contingent consideration related to this acquisition. The decrease in fair value was a result of a decreased likelihood of payments for contingent consideration due to a reassessment of scientific findings associated with an early stage Phase I asset.
Other Income and Expense
The following table provides information regarding other income and expense:
 
Three months ended
 
 
 
March 31,
 
$
 
2014
 
2013
 
Variance
Investment income
$
2,213

 
$
437

 
$
1,776

Interest expense
(1,063
)
 
(1,171
)
 
108

Foreign currency gain
1,258

 
503

 
755

Total other income and expense
$
2,408

 
$
(231
)
 
$
2,639

We recognize investment income primarily from our portfolio of cash equivalents and marketable securities. Investment income was $2,213 and $437, for the three months ended March 31, 2014 and 2013, respectively.
We incur interest on our term notes and revolving credit facility. Interest expense was $1,063 and $1,171, for the three months ended March 31, 2014 and 2013, respectively.
Foreign currency transaction gains and losses relate to changes in the fair value of monetary assets and liabilities denominated in foreign currencies. The foreign currency transaction gains totaled $1,258 and $503, for the three months ended March 31, 2014 and 2013, respectively. The amounts recorded in these periods were a result of the costs of hedging our exposures, as well as the fluctuation in exchange rates on the portion of our monetary assets and liabilities that were not fully hedged as part of our hedging programs.
Income Taxes
During the three months ended March 31, 2014, we recorded an income tax provision of $52,557 and an effective tax rate of 24.8%, compared to an income tax provision of $34,524 and an effective tax rate of 29.6% for the three months ended March 31, 2013. The reduction in the effective tax rate is primarily attributable to the centralization of our global supply chain and technical operations in Ireland.
The tax provision for the three months ended March 31, 2014 and 2013 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The tax provision for the three months ended March 31, 2014 also includes $2,652 attributable to our agreement with the French government that provided reimbursement for shipments of Soliris made prior to January 1, 2014. The tax provision for the three months ended March 31, 2013 also includes a benefit of $2,719 attributable to the 2012 U.S. Federal tax credit for research and experimentation.
The U.S. Federal tax credit for research and experimentation expenses expired December 31, 2011.  In connection with this expiration, our 2012 tax provision did not include any benefit from the U.S. Federal tax credit for research and experimentation.  In January 2013, the American Taxpayer Relief Act of 2012, which retroactively extended the tax credit for research and experimentation back to January 1, 2012 through the end of 2013, was signed into law.  The effects of a change in tax law is recognized in the period that includes the date of enactment and, therefore, our tax benefit attributable to the 2012 U.S. Federal tax credit for research and experimentation was recorded in the first quarter of 2013.

28

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

The U.S. Federal tax credit for research and experimentation expenses expired on December 31, 2013. In connection with this expiration, our 2014 tax provision does not include any benefit from the U.S. Federal tax credit for research and experimentation.
We continue to maintain a valuation allowance against certain other deferred tax assets where realization is not certain.
Financial Condition, Liquidity and Capital Resources
The following table summarizes the components of our financial condition as of March 31, 2014 and December 31, 2013:
 
March 31, 2014
 
December 31, 2013
 
$
Variance
Cash and cash equivalents
$
528,285

 
$
529,857

 
$
(1,572
)
Marketable securities
$
1,029,193

 
$
984,994

 
$
44,199

Long-term debt (includes current portion)
$
93,500

 
$
113,000

 
$
(19,500
)
 
 
 
 
 
 
Current assets
$
2,245,880

 
$
2,186,857

 
$
59,023

Current liabilities
396,822

 
582,429

 
(185,607
)
Working capital
$
1,849,058

 
$
1,604,428

 
$
244,630

 
The decrease in cash and cash equivalents was primarily attributable to the purchase of marketable securities, payments on our outstanding term loan, purchases of property, plant and equipment, and the repurchase of common stock. We also paid an upfront fee of $100,000 during the first quarter of 2014 related to an option agreement we entered into with Moderna Therapeutics, Inc. and an additional $25,000 for the purchase of Moderna LLC preferred equity. Offsetting these decreases in cash were cash generated from operations (excluding the reclassification of windfall tax benefits and the upfront payment for Moderna), proceeds from the maturity or sale of available-for-sale securities, and net proceeds from the exercise of stock options.
We expect continued growth in our expenditures, particularly those related to research and product development, clinical trials, regulatory approvals, international expansion, commercialization of products and capital investment. However, we anticipate that cash generated from operations and our existing available cash, cash equivalents and marketable securities should provide us adequate resources to fund our operations as currently planned.
We have financed our operations and capital expenditures primarily through positive cash flows from operations. We expect to continue to be able to fund our operations, including principal and interest payments on our credit facility and contingent payments from our acquisitions principally through our cash flows from operations. We may, from time to time, also seek additional funding through a combination of equity or debt financings or from other sources, if necessary, for future acquisitions or other strategic purposes.
Financial Instruments
Until required for use in the business, we may invest our cash reserves in money market funds or high-quality marketable securities in accordance with our investment policy. The stated objectives of our investment policy is to preserve capital, provide liquidity consistent with forecasted cash flow requirements, maintain appropriate diversification and generate returns relative to these investment objectives and prevailing market conditions.
Financial instruments that potentially expose us to concentrations of credit risk are cash equivalents, marketable securities, accounts receivable and our foreign exchange derivative contracts. At March 31, 2014, two individual customers accounted for 21% and 10% of the accounts receivable balance. At December 31, 2013, two individual customers accounted for 20% and 10% of the accounts receivable balance. For the three months ended March 31, 2014 and 2013, one customer accounted for 16% and 20% of our product sales, respectively.
We continue to monitor economic conditions, including volatility associated with international economies and the associated impacts on the financial markets and our business. The credit and economic conditions in Italy and Spain, among other members of the European Union, have deteriorated over the last several years. Substantially all of our accounts receivable due from these countries are due from or backed by sovereign or local governments, and the amount of non-sovereign accounts receivable is not material.

29

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

As of March 31, 2014 and December 31, 2013, our gross accounts receivable in Italy and Spain totaled approximately $61,228 and $78,072, respectively. The decrease during the first quarter reflects an improved rate of collections in the quarter: as of March 31, 2014 and December 31, 2013, approximately $9,078 and $17,318, respectively, of these amounts has been outstanding for greater than one year, and we have recorded an allowance of approximately $1,353 and $1,493, respectively, related to these gross receivables. As of December 31, 2013, we recorded $8,052 of accounts receivable in Spain within other non-current assets, which approximated the amount of the receivables that we estimated with collection periods beyond one year. As of March 31, 2014, all amounts due in Spain are classified as current.
Our net accounts receivable from these countries as of March 31, 2014 and December 31, 2013 are summarized as follows:
 
Total Accounts Receivable, net
 
Accounts Receivable, net > one year
 
March 31, 2014
December 31, 2013
 
March 31, 2014
December 31, 2013
Italy
$
31,862

$
28,510

 
$
2,430

$
2,660

Spain
$
28,013

$
48,069

 
$
5,296

$
13,165

We manage our foreign currency transaction risk within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes. As of March 31, 2014, we have foreign exchange forward contracts with notional amounts totaling $1,653,588. These outstanding foreign exchange forward contracts had a net fair value of $(9,697), of which an unrealized gain of $24,768 is included in other assets, offset by an unrealized loss of $34,465 included in other liabilities. The counterparties to these foreign exchange forward contracts are large multinational commercial banks, and we believe the risk of nonperformance is not material.
At March 31, 2014, our financial assets and liabilities were recorded at fair value. We have classified our financial assets and liabilities as Level 1, 2 or 3 within the fair value hierarchy. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Our Level 1 assets consist of mutual fund investments. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, but substantially the full term of the financial instrument. Our Level 2 assets consist primarily of money market funds, marketable securities and foreign exchange forward contracts. Our Level 2 liabilities consist also of foreign exchange forward contracts. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. Our Level 3 liabilities consist of contingent consideration related to acquisitions.
Business Combinations and Contingent Consideration Obligations
 The purchase agreements for our business combinations include contingent payments totaling up to $876,000 that will become payable if and when certain development and commercial milestones are achieved.  Of these milestone amounts, $561,000 and $315,000 of the contingent payments relate to development and commercial milestones, respectively. During the next 12 months, we expect to make milestone payments totaling approximately $40,000. We do not expect these amounts to have an impact on our liquidity in the near-term.  As future payments become probable, we will evaluate methods of funding payments, which could be made from available cash and marketable securities, cash generated from operations or proceeds from other financing.
Leases
In November 2012, we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. Although we will not legally own the premises, we are deemed to be the owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. Accordingly, the landlord's costs of constructing the facility are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet. As of March 31, 2014, we recorded a construction-in-process asset of $39,818, inclusive of the landlord's costs as well as costs incurred by Alexion, and an offsetting facility lease obligation of $38,417 associated with the new facility.
License Agreements
In January 2013, we entered into a license agreement for a technology, which provides an exclusive research license and an option for an exclusive commercial license for specific targets and products to be developed. Due to the early stage of this asset, we recorded expense for an upfront payment of $3,000 during the first quarter of 2013. We will also be required to pay annual maintenance fees during the term of the arrangement. In addition, for each target, up to a maximum of six targets we develop, we could be required to pay up to an additional $70,500 in license fees, development and sales milestones as the specific milestones are met over time.

30

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

In July 2013, we entered into a license and collaboration agreement with Ensemble Therapeutics Corporation for the identification, development and commercialization of therapeutic candidates based on specific drug targets.  Due to the early stage of these assets, we recorded expense for an upfront payment of $11,500 during the third quarter of 2013. We will also be responsible for funding research activities under the program.  In addition, for each drug target, up to a maximum of four targets, we could be required to pay up to an additional $90,750 in development milestones as the specific milestones are met over time.  The agreement also provides for royalty payments on commercial sales of each product developed under the agreement.
In January 2014, we entered into an agreement with Moderna Therapeutics, Inc. (Moderna) that allows us to purchase ten product options to develop and commercialize treatments for rare diseases with Moderna's messenger RNA (mRNA) therapeutics platform. Alexion will lead the discovery, development and commercialization of the treatments produced through this broad, long-term strategic agreement, while Moderna will retain responsibility for the design and manufacture of the messenger RNA against selected targets. Due to the early stage of these assets, we recorded expense for an upfront payment of $100,000.  We will also be responsible for funding research activities under the program.  In addition, for each drug target, up to a maximum of ten targets, we could be required to make an option exercise payment of $15,000 and to pay up to an additional $120,000 with respect to a rare disease product and $400,000 with respect to a non-rare disease product in development and sales milestones if the specific milestones are met over time as well as royalties on commercial sales.  In addition to the option agreement, we purchased $25,000 of non-voting preferred equity of Moderna LLC, Moderna's non-public parent company.
Long-term Debt
In February 2012, we entered into a Credit Agreement (Credit Agreement) with a syndicate of lenders and other parties named in the Credit Agreement that provides for a $240,000 senior secured term loan facility payable in equal quarterly installments of $12,000 starting June 30, 2012 and a $200,000 senior secured revolving credit facility, which includes up to a $60,000 sublimit for letters of credit and a $10,000 sublimit for swingline loans. We may also use the facilities for working capital requirements, acquisitions and other general corporate purposes. Any of Alexion's wholly-owned foreign subsidiaries may borrow funds under the facilities upon satisfaction of certain conditions described in the Credit Agreement. As of March 31, 2014, we had $93,500 outstanding on the term loan. As of March 31, 2014, we had open letters of credit of $9,773, and our borrowing availability under the revolving facility was $190,227 at March 31, 2014. We expect that cash generated from operations will be sufficient to meet debt service obligations.  
Lonza Agreement
We have supply agreements with Lonza relating to the manufacture of eculizumab and asfotase alfa, which requires payments to Lonza at the inception of contract and upon the initiation and completion of product manufactured. On an ongoing basis, we evaluate our plans for future levels of manufacturing by Lonza, which depends upon our commercial requirements, the progress of our clinical development programs and the production levels of ARIMF.
We have various agreements with Lonza, with remaining total commitments of approximately $147,000 through 2019. Such commitments may be canceled only in limited circumstances. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at ARIMF.
Taxes
We do not record U.S. tax expense on the undistributed earnings of our controlled foreign corporation (CFC) subsidiaries as these earnings are intended to be permanently reinvested offshore. During the fourth quarter of 2013, in connection with the centralization of our global supply chain and technical operations in Ireland, our U.S. parent company became a direct partner in a foreign partnership subsidiary. To the extent that our U.S. parent company receives its allocation of partnership taxable income, the amounts will be taxable in the U.S. and therefore the permanent reinvestment assertion will no longer apply. The recognition of deferred tax liabilities associated with the aforementioned partnership resulted in tax expense of approximately $95,800 during the fourth quarter of 2013. We also distributed the majority of earnings and profits of our non-U.S. subsidiaries via a dividend in the amount of $152,000 during the fourth quarter of 2013. This resulted in repatriation of a significant portion of our unremitted earnings at December 31, 2013.
We do not have any present or anticipated future need for cash held by our CFCs, as cash generated in the U.S., as well as borrowings, are expected to be sufficient to meet U.S. liquidity needs for the foreseeable future. At March 31, 2014, approximately $246,000 of our cash and cash equivalents was held by foreign subsidiaries, a significant portion of which is required for liquidity needs of our foreign subsidiaries. Due to the liability position of our foreign subsidiaries, these subsidiaries will repay any outstanding intercompany debt, prior to having excess cash available which could be used to repatriate to our entities in the United States. While our expectation is that all future undistributed earnings of our CFCs will be permanently reinvested, there could be certain unforeseen future events that could impact our permanent reinvestment assertion. Such events include acquisitions, corporate restructurings or tax law changes not currently contemplated.

31

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Common Stock Repurchase Program
In November 2012, we announced that our Board of Directors authorized the repurchase of up to $400,000 of our common stock. This repurchase program does not have an expiration date. We expect that cash generated from operations and our existing available cash and cash equivalents are sufficient to fund any share repurchases.
Under the program, we repurchased 137 and 405 shares of our common stock at a cost of $22,057 and $35,107 during the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, there is a total of $300,254 remaining for repurchases under the program.
Cash Flows
The following summarizes our net change in cash and cash equivalents:
 
Three months ended March 31,
 
 
 
2014
 
2013
 
$
Variance
Net cash (used in) provided by operating activities
$
(31,055
)
 
$
46,497

 
$
(77,552
)
Net cash used in investing activities
(90,197
)
 
(5,569
)
 
(84,628
)
Net cash provided by (used in) financing activities
119,212

 
(4,308
)
 
123,520

Effect of exchange rate changes on cash
468

 
(3,161
)
 
3,629

Net change in cash and cash equivalents
$
(1,572
)
 
$
33,459

 
$
(35,031
)
We reclassified $130,407 of windfall tax benefits from cash flows from operations to cash flows from financing activities, which caused a decrease in cash from operations during the first quarter of 2014. Excluding this adjustment, cash from operations was $99,352. The amount of the windfall tax benefit was significantly higher in the first quarter of 2014 due to an increased stock price and increased level of stock option exercises.
The decrease in cash and cash equivalents was primarily attributable to the purchase of marketable securities, payments on our outstanding term loan, purchases of property, plant and equipment, and the repurchase of common stock. We also paid an upfront fee of $100,000 during the first quarter of 2014 related to an option agreement we entered into with Moderna Therapeutics, Inc. and an additional $25,000 for the purchase of Moderna LLC preferred equity. Offsetting these decreases in cash were cash generated from operations (excluding the reclassification of windfall tax benefits and the upfront payment for Moderna), proceeds from the maturity or sale of available-for-sale securities, and net proceeds from the exercise of stock options.

Operating Activities
The components of cash flows from operating activities, as reported in our Condensed Consolidated Statements of Cash Flows, are as follows:

Our net income was $159,354 and $82,217 for the three months ended March 31, 2014 and 2013, respectively. During the first quarter of 2014, we recorded expense of $100,000 for an upfront payment related to an option agreement we entered into with Moderna Therapeutics, Inc.
Non-cash items included depreciation and amortization, impairment of intangible asset, change in fair value of contingent consideration, share-based compensation expense, premium amortization of available-for-sale securities, deferred taxes, unrealized foreign currency losses, and unrealized gains and losses on forward contracts, and were $(17,005) and $46,180 for the three months ended March 31, 2014 and 2013, respectively.
We reclassified $130,407 of windfall tax benefits from cash flows from operations to cash flows from financing activities, which caused a decrease in cash from operations during the first quarter of 2014.
Net cash outflow due to changes in operating assets and liabilities was $42,997 and $60,568 for the three months ended March 31, 2014 and 2013, respectively. The $42,997 change in operating assets and liabilities primarily relates to:
Increase in inventory of $20,900 related to increased production of inventory to support commercial growth.
Decrease of $33,633 in prepaid expenses and other assets primarily related to a decrease in prepaid manufacturing expenses and prepaid taxes.

32

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Decrease of $60,680 in accounts payable, accrued expenses and other liabilities primarily related to a decrease in accruals for rebates of approximately $87,800 resulting from the agreement with the French government for reimbursement of prior year shipments and a decrease in accruals for royalties of approximately $20,100 resulting from the settlement agreement we entered into with a third party related to the calculation of royalties under a pre-existing license agreement. The decrease was also due to a decrease in accrued compensation, offset by a change in accrued income taxes.
Investing Activities
The components of cash flows from investing activities consisted of the following:
Purchases of available-for-sale marketable securities of $145,565 for the three months ended March 31, 2014, offset by proceeds from the maturity or sale of available-for-sale marketable securities of $99,250 during the same period.
Purchase of $25,000 of preferred equity of Moderna LLC during the three months ended March 31, 2014.
Additions to property, plant and equipment of $17,733 and $5,493 for the three months ended March 31, 2014 and 2013, respectively.
Financing Activities
Net cash flows from financing activities reflected proceeds from the exercise of stock options of $30,404 and $9,527 for the three months ended March 31, 2014 and 2013, respectively. Net cash flows for the three months ended March 31, 2014 and 2013 also include $130,407 and $21,332 of excess tax benefits from stock options attributable to the utilization of the excess tax benefit portion of federal and state net operating losses and tax credits.
In connection with the acquisition of Enobia in February 2012, we borrowed $240,000 under our term loan facility. During the three months ended March 31, 2014, we made payments of $19,500 against the term loan, and the facility had $93,500 remaining outstanding as of March 31, 2014.
During the three months ended March 31, 2014 and 2013, we repurchased $22,057 and $35,107 worth of shares of our common stock under a repurchase program that was approved by our Board of Directors in November 2012. As of March 31, 2014, there is a total of $300,254 remaining for repurchases under the program.
Contractual Obligations
The disclosure of payments we have committed to make under our contractual obligations are summarized in our Annual Report on Form 10-K for the twelve months ended December 31, 2013, in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Contractual Obligations.”

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of March 31, 2014, we invested our cash in a variety of financial instruments, principally money market funds, corporate bonds, municipal bonds, commercial paper and government-related obligations. Most of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates fluctuate. Our investment portfolio is comprised of marketable securities of highly rated financial institutions and investment-grade debt instruments, and we have guidelines to limit the term-to-maturity of our investments. Based on the type of securities we invest in, we do not believe a change in interest rates would have a material impact on our financial statements. If interest rates were to increase or decrease by 1%, the fair value of our investment portfolio would (decrease) increase by approximately $(11,729) and $6,881, respectively.
In February 2012, we entered into the Credit Agreement with a floating rate of interest based on LIBOR, Prime Rate, Federal Funds Rate or Eurodollar Rate, at our election, plus an applicable credit spread. We do not expect changes in interest rates related to the Credit Agreement to have a material effect on our financial statements. At March 31, 2014, we had approximately $93,500 of variable rate debt outstanding. If interest rates were to increase or decrease by 1% for the year, annual interest expense would increase or decrease by approximately $935.

33


Foreign Exchange Market Risk
As a result of our foreign operations, we face exposure to movements in foreign currency exchange rates, primarily the Euro, Japanese Yen, Swiss Franc and British Pound against the US dollar. The current exposures arise primarily from cash, accounts receivable, intercompany receivables and payables, and product sales denominated in foreign currencies. Both positive and negative impacts to our international product sales from movements in foreign currency exchange rates are partially mitigated by the natural, opposite impact that foreign currency exchange rates have on our international operating expenses. We have operations based in Switzerland, and accordingly, our expenses are also impacted by fluctuations in the value of the Swiss Franc against the US dollar.
We currently have a derivative program in place to achieve the following: 1) limit the foreign currency exposure of our monetary assets and liabilities on our balance sheet, using contracts with durations of up to 30 days and 2) hedge a portion of our forecasted product sales, including intercompany sales, using contracts with durations of up to 36 months. The objectives of this program are to reduce the volatility of exchange rate fluctuations on our operating results and to increase the visibility of the foreign exchange impact on forecasted revenues. This program utilizes foreign exchange forward contracts intended to reduce, not eliminate, the impact of fluctuations in foreign currency rates.
As of March 31, 2014 and December 31, 2013, we held foreign exchange forward contracts with notional amounts totaling $1,653,588 and $1,222,464, respectively. As of March 31, 2014 and December 31, 2013, our outstanding foreign exchange forward contracts had a net fair value of $(9,697) and $(3,438), respectively. The increase in outstanding foreign exchange forward contracts resulted primarily from increases in forecasted intercompany revenues.
We do not use derivative financial instruments for speculative trading purposes. The counterparties to these foreign exchange forward contracts are multinational commercial banks. We believe the risk of counterparty nonperformance is not material.
Based on our foreign currency exchange rate exposures at March 31, 2014, a hypothetical 10% adverse fluctuation in exchange rates would decrease the fair value of our foreign exchange forward contracts that are designated as cash flow hedges by approximately $136,000 at March 31, 2014. The resulting loss on these forward contracts would be offset by the gain on the underlying transactions and therefore would have minimal impact on future anticipated earnings and cash flows. Similarly, adverse fluctuations in exchange rates that would decrease the fair value of our foreign exchange forward contracts that are not designated as hedge instruments would be offset by a positive impact of the underlying monetary assets and liabilities.
Credit Risk
As a result of our foreign operations, we are exposed to changes in the general economic conditions in the countries in which we conduct business. We continue to monitor economic conditions, including volatility associated with international economies and the associated impacts on the financial markets and our business. The credit and economic conditions in Italy and Spain, among other members of the European Union, have deteriorated over the last several years. Substantially all of our accounts receivable due from these countries are due from or backed by sovereign or local governments, and the amount of non-sovereign accounts receivable is not material. We have provided detail on amounts outstanding in Italy and Spain in the "Financial Condition, Liquidity and Capital Resources" section in Item 2 above.

Item 4.
CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2014. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

34



PART II. OTHER INFORMATION

Item 1.
LEGAL PROCEEDINGS.
None.
 
Item 1A.
Risk Factors.
(amounts in thousands, except percentages)
You should carefully consider the following risk factors before you decide to invest in Alexion and our business because these risk factors may have a significant impact on our business, operating results, financial condition, and cash flows. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected.
Risks Related to Our Lead Product Soliris
We depend heavily on the success of our lead product, Soliris. If we are unable to increase sales of Soliris, or obtain approval or commercialize Soliris in new territories for the treatment of PNH, aHUS or for additional indications, or if we are significantly delayed or limited in doing so, our business may be materially harmed.
Our ability to generate revenues will continue to depend on commercial success of Soliris in the United States, Europe, Japan and in a number of key markets in the rest of the world and whether physicians, patients and health care payers view Soliris as therapeutically effective and safe relative to cost. Since we launched Soliris in the United States in April 2007, essentially all of our revenue has been attributed to sales of Soliris, and we expect that Soliris product sales will continue to contribute to a significant percentage or almost all of our total revenue over the next several years.
In September and November 2011 we obtained marketing approval in the United States and the European Union, respectively, for Soliris for the treatment of a second indication, aHUS. In September 2013, the MHLW approved Soliris for the treatment of patients with aHUS in Japan.
We dedicate significant resources to the worldwide commercialization of Soliris. We have established sales and marketing capabilities in the United States and in many countries throughout the world. We cannot guarantee that any marketing application for Soliris for the treatment of PNH, aHUS or any other indication, will be approved or maintained in any country where we seek marketing authorization to sell Soliris. In certain countries, we continue discussions with authorities to finalize operational, reimbursement, price approval and funding processes so that we may, upon conclusion of such discussions, commence commercial sales of Soliris for the treatment of PNH in those countries. We have had and will continue to have similar discussions with authorities to facilitate the commercialization of Soliris for the treatment of aHUS in certain countries in the European Union. Our ability to complete such processes successfully is subject to the risks and uncertainties described in this Quarterly Report on Form 10-Q. We cannot guarantee that we will be able to obtain reimbursement for Soliris or successfully commercialize Soliris in any additional countries, or that we will be able to maintain coverage or reimbursement at anticipated levels in any country in which we have already received marketing approval. As a result, sales in certain countries may be delayed or never occur, or may be subsequently reduced.

The commercial success of Soliris and our ability to generate and increase revenues will depend on several factors, including the following:  
receipt of marketing approvals for Soliris for the treatment of PNH in new territories and the maintenance of marketing approvals for the treatment of PNH in the United States, the European Union, Japan and other territories;
receipt and maintenance of marketing approvals for Soliris for the treatment of aHUS in other territories and the maintenance of the marketing approval in the United States, Japan and the European Union;
our ability to obtain sufficient coverage or reimbursement by government or third-party payers and our ability to maintain coverage or reimbursement at anticipated levels;
establishment and maintenance of commercial manufacturing capabilities ourselves or through third-party manufacturers;

35


the number of patients with PNH and aHUS, and the number of those patients who are diagnosed with PNH and aHUS and identified to us;
the number of patients with PNH and aHUS that may be treated with Soliris;
successful continuation of commercial sales in the United States, Japan and in European countries where we are already selling Soliris for the treatment of PNH, and successful launch in countries where we have not yet obtained, or only recently obtained, marketing approval or commenced sales;
successfully launching commercial sales of Soliris for the treatment of aHUS in the United States, Japan and Europe, and in countries where we have not yet obtained marketing approval;
acceptance of Soliris and maintenance of safety and efficacy in the medical community; and
our ability to develop, register and commercialize Soliris for indications other than PNH, including aHUS.

 If we are not successful in increasing sales of Soliris in the United States, Europe and Japan and commercializing in the rest of the world, or are significantly delayed or limited in doing so, we may experience surplus inventory, our business may be materially harmed and we may need to significantly curtail operations.
Because the target patient populations of Soliris for the treatment of PNH and aHUS are small and have not been definitively determined, we must be able to successfully identify patients in order to maintain profitability and growth.
PNH and aHUS are each ultra-rare diseases with small patient populations that have not been definitively determined. There can be no guarantee that any of our programs will be effective at identifying patients and the number of patients in the United States, Japan and Europe and elsewhere may turn out to be lower than expected, may not be otherwise amenable to treatment with Soliris, or new patients may become increasingly difficult to identify, all of which would adversely affect our results of operations and our business.
If we are unable to obtain, or maintain at anticipated levels, reimbursement for Soliris from government health administration authorities, private health insurers and other organizations, our pricing may be affected or our product sales, results of operations or financial condition could be harmed.
We may not be able to sell Soliris on a profitable basis or our profitability may be reduced if we are required to sell our product at lower than anticipated prices or reimbursement is unavailable or limited in scope or amount. Soliris is significantly more expensive than traditional drug treatments and almost all patients require some form of third party coverage to afford its cost. Our future revenues and profitability will be adversely affected if we cannot depend on governmental payers, such as Medicare and Medicaid in the United States or country specific governmental organizations, and private third-party payers to defray the cost of Soliris to patients. These entities may refuse to provide coverage and reimbursement with respect to Soliris, determine to provide a lower level of coverage and reimbursement than anticipated, or reduce previously approved levels of coverage and reimbursement, including in the form of higher mandatory rebates or modified pricing terms. In any such case, our pricing or reimbursement for Soliris may be affected and our product sales, results of operations or financial condition could be harmed.
  In certain countries where we sell or are seeking or may seek to commercialize Soliris, including certain countries where we both sell Soliris for the treatment of PNH and sell or seek to commercialize Soliris for the treatment of aHUS, if approved by the appropriate regulatory authority, pricing, coverage and level of reimbursement of prescription drugs are subject to governmental control. We may be unable to timely or successfully negotiate coverage, pricing, and reimbursement on terms that are favorable to us, or such coverage, pricing, and reimbursement may differ in separate regions in the same country. For example, in January 2013, we were informed by the Advisory Group for National Specialised Services that although Soliris would help save lives and improve the quality of life for children and adults with aHUS, the U.K. Health Ministers decided not to recommend national commissioning of Soliris for the treatment of aHUS and at that time determined to refer the evaluation of Soliris for treatment of patients with aHUS to National Institute for Health and Clinical Excellence (NICE) for further review as part of its new Highly Specialised Technologies program. In July 2013, the Government's Clinical Priorities Advisory Group (CPAG) decided to recommend a formal clinical access policy that includes aHUS patients who have functioning kidneys as well as patients on dialysis who are transplantable. In September 2013, England's National Health Service adopted the positive CPAG recommendation and commissioned Soliris for the treatment of children and adults with aHUS. In March 2014, NICE acknowledged the value of Soliris to treat patients with aHUS, but requested more information from Alexion prior to finalizing its funding decision. Funding for patients in England is expected to be available through completion of NICE review. In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country, and we cannot guarantee

36


that we will have the capabilities or resources to successfully conclude the necessary processes and commercialize Soliris in every or even most countries in which we seek to sell Soliris.
Reimbursement sources are different in each country and in each country may include a combination of distinct potential payers, including private insurance and governmental payers. For example, the European Union member states' authorities may restrict the range of medicinal products for which their national health insurance systems provide reimbursement and adopt additional measures to control the prices of medicinal products for human use. This includes the use of reference pricing and Health Technology Assessment (HTA). HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of the use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcare system. These elements of medicinal products are compared with other treatment options available on the market. The national authorities of some European Union member states may from time to time approve a specific price for the medicinal product. Others may adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the national market. Some countries have and others may seek to impose limits on the aggregate reimbursement for Soliris or for the use of Soliris for certain indications. In such cases, our commercial operations in such countries and our results of operations and our business are and may be adversely affected. Our results of operations may suffer if we are unable to successfully and timely conclude reimbursement, price approval or funding processes and market Soliris in such foreign countries or if coverage and reimbursement for Soliris is limited or reduced. If we are not able to obtain coverage, pricing or reimbursement on terms acceptable to us or at all, or if such terms should change in any foreign countries, we may not be able to or we may determine not to sell Soliris for one or more indications in such countries, or we could decide to sell Soliris at a lower than anticipated price in such countries, and our revenues may be adversely affected as a result.
The potential increase in the number of patients receiving Soliris may cause third-party payers to modify or limit coverage or reimbursement for Soliris for the treatment of PNH, aHUS, or both indications.
Changes in pricing or the amount of reimbursement in countries where we currently commercialize Soliris may also reduce our profitability and worsen our financial condition. In the United States, the European Union member states, and elsewhere, there have been, and we expect there will continue to be, efforts to control and reduce health care costs. Government and other third-party payers in the United States and the European Union member states are challenging the prices charged for health care products and increasingly limiting and attempting to limit both coverage and level of reimbursement for prescription drugs. A significant reduction in the amount of reimbursement or pricing for Soliris in one or more countries may have a material adverse effect on our business. See additional discussion below under the headings “Government initiatives that affect coverage and reimbursement of drug products could adversely affect our business” and “The credit and financial market conditions may aggravate certain risks affecting our business.” In addition, certain countries establish pricing and reimbursement amounts by reference to the price of the same or similar products in other countries. If coverage or the level of reimbursement is limited in one or more countries, we may be unable to obtain or maintain anticipated pricing or reimbursement in current or new territories.
Many third-party payers cover only selected drugs, making drugs that are not preferred by such payer more expensive for patients, and require prior authorization or failure on another type of treatment before covering a particular drug. Third-party payers may be especially likely to impose these obstacles to coverage for higher-priced drugs such as Soliris.
Even in countries where patients have access to insurance, their insurance co-payment amounts or annual or lifetime caps on reimbursements may represent a barrier to obtaining or continuing Soliris. We have financially supported non-profit organizations which assist patients in accessing treatment for PNH and aHUS, including Soliris. Such organizations assist patients whose insurance coverage leaves them with prohibitive co-payment amounts or other expensive financial obligations. Such organizations' ability to provide assistance to patients is dependent on funding from external sources, and we cannot guarantee that such funding will be provided at adequate levels, if at all. We have also provided Soliris without charge to patients who have no insurance coverage for drugs for related charitable purposes. We are not able to predict the financial impact of the support we may provide for these and other charitable purposes; however, substantial support could have a material adverse effect on our profitability in the future.
We are also focusing development efforts on the use of eculizumab for the treatment of additional diseases. The success of these programs depends on many factors, including those described under the heading "Risks Related to Development, Clinical Testing and Regulatory Approval of Our Product Candidates." As eculizumab is approved by regulatory agencies for indications other than PNH, the potential increase in the number of patients receiving Soliris may cause third-party payers to refuse coverage or reimbursement for Soliris for the treatment of PNH or for any other approved indication, or provide a lower level of coverage or reimbursement than anticipated or currently in effect.

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We may not be able to gain or maintain market acceptance among the medical community or patients, which would prevent us from maintaining profitability or growth in the future.
We cannot be certain that Soliris will gain or maintain market acceptance in a particular country among physicians, patients, health care payers, and others. Although we have received regulatory approval for Soliris in certain territories, including the United States, Japan and the European Union, such approvals do not guarantee future revenue. We cannot predict whether physicians, other health care providers, government agencies or private insurers will determine or continue to accept that Soliris is safe and therapeutically effective relative to its cost. Medical doctors' willingness to prescribe, and patients' willingness to accept, Soliris depends on many factors, including prevalence and severity of adverse side effects in both clinical trials and commercial use, effectiveness of our marketing strategy and the pricing of Soliris, publicity concerning Soliris, our other product candidates or competing products, our ability to obtain and maintain third-party coverage or reimbursement, and availability of alternative treatments, including bone marrow transplant as an alternative treatment for PNH. The likelihood of medical doctors to prescribe Soliris for patients with aHUS may also depend on how quickly Soliris can be delivered to the hospital or clinic and our distribution methods may not be sufficient to satisfy this need. In addition, we are aware that medical doctors have determined not to continue Soliris treatment for some patients with aHUS . If Soliris fails to achieve or maintain market acceptance among the medical community or patients in a particular country, we may not be able to market and sell it successfully in such country, which would limit our ability to generate revenue and could harm our overall business.
If we or our contract manufacturers fail to comply with continuing United States and foreign regulations, we could lose our approvals to market Soliris or our manufacturers could lose their approvals to manufacture Soliris, and our business would be seriously harmed.