Document

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 June 30, 2016
or
¨
Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number: 0-27756
 
ALEXION PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
13-3648318
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 

100 College Street, New Haven Connecticut 06510
(Address of Principal Executive Offices) (Zip Code)
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
224,247,998
Class
Outstanding as of July 27, 2016










 
Alexion Pharmaceuticals, Inc.
Contents

 
PART I.
FINANCIAL INFORMATION
Page
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 5.
 
Item 6.
SIGNATURES
 
 



Alexion Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(amounts in thousands, except per share amounts)
 
 
June 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
597,550

 
$
1,010,111

Marketable securities
582,501

 
374,904

Trade accounts receivable, net
609,297

 
532,832

Inventories
329,847

 
289,874

Prepaid expenses and other current assets
242,014

 
208,993

Total current assets
2,361,209

 
2,416,714

Property, plant and equipment, net
825,301

 
697,025

Intangible assets, net
4,547,762

 
4,707,914

Goodwill
5,037,444

 
5,047,885

Other assets
257,631

 
228,343

Total assets
$
13,029,347

 
$
13,097,881

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
28,978

 
$
57,360

Accrued expenses
407,289

 
403,348

Deferred revenue
53,422

 
20,504

Current portion of long-term debt
79,136

 
166,365

Other current liabilities
89,637

 
62,038

Total current liabilities
658,462

 
709,615

Long-term debt, less current portion
3,171,092

 
3,254,536

Facility lease obligation
196,439

 
151,307

Contingent consideration
109,565

 
121,424

Deferred tax liabilities
570,074

 
528,990

Other liabilities
124,376

 
73,393

Total liabilities
4,830,008

 
4,839,265

Commitments and contingencies (Note 17)
 
 
 
Stockholders' Equity:
 
 
 
Common stock, $0.0001 par value; 290,000 shares authorized; 231,403 and 230,498 shares issued at June 30, 2016 and December 31, 2015, respectively
23

 
23

Additional paid-in capital
7,852,432

 
7,726,560

Treasury stock, at cost, 7,179 and 4,851 shares at June 30, 2016 and December 31, 2015, respectively
(1,041,314
)
 
(710,663
)
Accumulated other comprehensive income
694

 
62,301

Retained earnings
1,387,504

 
1,180,395

Total stockholders' equity
8,199,339

 
8,258,616

Total liabilities and stockholders' equity
$
13,029,347

 
$
13,097,881


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

2


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in thousands, except per share amounts)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Net product sales
$
752,546

 
$
635,983

 
$
1,452,971

 
$
1,236,316

Other revenue
570

 
227

 
1,183

 
227

Total revenues
753,116

 
636,210

 
1,454,154

 
1,236,543

Cost of sales
60,627

 
52,007

 
119,613

 
121,406

Operating expenses:
 
 
 
 
 
 
 
Research and development
179,311

 
131,693

 
355,601

 
352,773

Selling, general and administrative
231,802

 
221,383

 
464,363

 
408,499

Amortization of purchased intangible assets
80,055

 

 
160,149

 

Change in fair value of contingent consideration
5,186

 
4,044

 
(9,614
)
 
16,023

Acquisition-related costs
974

 
29,777

 
2,313

 
29,777

Restructuring expenses
455

 
16,224

 
1,177

 
23,276

Total operating expenses
497,783

 
403,121

 
973,989

 
830,348

Operating income
194,706

 
181,082

 
360,552

 
284,789

Other income and expense:
 
 
 
 
 
 
 
Investment income
1,872

 
2,226

 
3,423

 
5,110

Interest expense
(23,793
)
 
(3,971
)
 
(47,683
)
 
(4,622
)
Foreign currency loss
(2,820
)
 
(2,045
)
 
(2,729
)
 
(1,040
)
Income before income taxes
169,965

 
177,292

 
313,563

 
284,237

Income tax provision
55,022

 
7,077

 
106,454

 
22,699

Net income
$
114,943

 
$
170,215

 
$
207,109

 
$
261,538

Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.51

 
$
0.84

 
$
0.92

 
$
1.30

Diluted
$
0.51

 
$
0.83

 
$
0.92

 
$
1.29

Shares used in computing earnings per common share
 
 
 
 
 
 
 
Basic
224,089

 
202,234

 
224,593

 
200,806

Diluted
225,756

 
204,546

 
226,328

 
203,302


 
 
 
 
 
 
 

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 June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
114,943

 
$
170,215

 
$
207,109

 
$
261,538

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
125

 
1,170

 
2,121

 
(4,218
)
Unrealized gains (losses) on marketable securities
1,965

 
(803
)
 
3,463

 
254

Unrealized (losses) gains on pension obligation
(911
)
 
(7,193
)
 
1,210

 
(7,445
)
Unrealized (losses) gains on hedging activities, net of tax of $(1,712), $(27,623), $(37,362) and $11,010, respectively
(4,300
)
 
(50,147
)
 
(68,401
)
 
17,140

Other comprehensive (loss) income, net of tax
(3,121
)
 
(56,973
)
 
(61,607
)
 
5,731

Comprehensive income
$
111,822

 
$
113,242

 
$
145,502

 
$
267,269


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)
 
 
Six months ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
207,109

 
$
261,538

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
194,579

 
23,141

Change in fair value of contingent consideration
(9,614
)
 
16,023

Share-based compensation expense
104,868

 
109,797

Deferred taxes
76,154

 
(3,565
)
Change in excess tax benefit from stock options
(479
)
 
(10,763
)
Unrealized foreign currency gain
(4,073
)
 
(10,434
)
Other
9,088

 
6,094

Changes in operating assets and liabilities, excluding the effect of acquisitions:
 
 
 
Accounts receivable
(65,223
)
 
(108,984
)
Inventories
(39,041
)
 
4,722

Prepaid expenses and other assets
(88,125
)
 
(48,069
)
Accounts payable, accrued expenses and other liabilities
(6,702
)
 
(10,761
)
Deferred revenue
33,376

 
32,517

Net cash provided by operating activities
411,917

 
261,256

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(495,206
)
 
(187,416
)
Proceeds from maturity or sale of available-for-sale securities
294,370

 
1,030,825

Purchases of trading securities
(4,421
)
 
(3,769
)
Purchases of property, plant and equipment
(131,031
)
 
(130,171
)
Payment for acquisition of business, net of cash acquired

 
(3,939,268
)
Other
(52
)
 
1,410

Net cash used in investing activities
(336,340
)
 
(3,228,389
)
Cash flows from financing activities:
 
 
 
Debt issuance costs

 
(45,492
)
Proceeds from revolving credit facility

 
200,000

Proceeds from term loan

 
3,500,000

Payments on revolving credit facility

 
(200,000
)
Payments on term loan
(175,000
)
 
(57,500
)
Equity issuance costs for shares issued in connection with acquisition of business

 
(3,864
)
Change in excess tax benefit from stock options
479

 
10,763

Repurchase of common stock
(330,651
)
 
(83,563
)
Net proceeds from issuance of common stock under share-based compensation arrangements
19,595

 
31,684

Other
(4,773
)
 
(613
)
Net cash (used in) provided by financing activities
(490,350
)
 
3,351,415

Effect of exchange rate changes on cash
2,212

 
(6,158
)
Net change in cash and cash equivalents
(412,561
)
 
378,124

Cash and cash equivalents at beginning of period
1,010,111

 
943,999

Cash and cash equivalents at end of period
$
597,550

 
$
1,322,123

 
 
 
 
Supplemental cash flow disclosures from investing and financing activities:
 
 
 
Common stock issued in acquisition of business
$

 
$
4,917,849

Capitalization of construction costs related to facility lease obligations
$
49,895

 
$
19,065

Accrued expenses for purchases of property, plant and equipment
$
26,238

 
$
21,299

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

5

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






1.
Business
Alexion Pharmaceuticals, Inc. (Alexion, the Company, we, our or us) is a biopharmaceutical company focused on serving patients with devastating and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products.
In our complement franchise, Soliris® (eculizumab) is the first and only therapeutic approved for patients with either paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, or atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. PNH and aHUS are two disorders resulting from chronic uncontrolled activation of the complement component of the immune system.
In our metabolic franchise, we commercialize Strensiq® (asfotase alfa) for the treatment of patients with hypophosphatasia (HPP) and Kanuma® (sebelipase alfa) for the treatment of patients with lysosomal acid lipase deficiency (LAL-D). HPP is a genetic ultra-rare disease characterized by defective bone mineralization that can lead to deformity of bones and other skeletal abnormalities. LAL-D is a serious, life threatening ultra-rare disease in which genetic mutations result in decreased activity of the LAL enzyme leading to marked accumulation of lipids in vital organs, blood vessels and other tissues.
We are also evaluating additional potential indications for eculizumab in other severe and devastating diseases in which uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional product candidates as potential treatments for patients with severe and life-threatening rare disorders.

2.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. In our opinion, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States. The condensed consolidated balance sheet data as of December 31, 2015 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015 included in our Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the full year.
The financial statements of our subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for stockholders' equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss), net of tax, in stockholders' equity. Foreign currency transaction gains and losses are included in the results of operations in other income and expense.
The accompanying unaudited condensed consolidated financial statements include the accounts of Alexion Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

6

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





In April 2015, the FASB issued a new standard simplifying the presentation of debt issuance costs. The new standard aligns the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs be presented as a direct deduction from the carrying amount of the related debt. We adopted the provisions of this standard in the first quarter 2016 and reclassified $8,635 of deferred financing costs from other current assets to the current portion of long term debt and $26,714 from other non current assets to long-term debt, less current portion in our consolidated balance sheets as of December 31, 2015.
In April 2015, the FASB issued a new standard clarifying the accounting for a customer's fees paid in a cloud computing arrangement. Under this standard, if a cloud computing arrangement includes a software license, the customer would account for the software license consistent with other software licenses. If a cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract. We adopted the provisions of this standard in the first quarter 2016. The adoption did not have a material effect on our financial condition or results of operations.
In February 2016, the FASB issued a new standard requiring that the rights and obligations arising from leases be recognized on the balance sheet by recording a right-of-use asset and corresponding lease liability. The new standard also requires qualitative and quantitative disclosures to understand the amount, timing, and uncertainty of cash flows arising from leases, as well as significant management estimates utilized. The standard is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption. We are currently assessing the impact of this standard on our financial condition and results of operations.
In March 2016, the FASB issued a new standard simplifying aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, statutory withholding requirements, and classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact of this standard on our financial condition and results of operations.

3.
Acquisitions
On May 6, 2015, we announced that we entered into a definitive agreement to acquire Synageva BioPharma Corp. (Synageva), a publicly-held clinical-stage biotechnology company based in Lexington, Massachusetts for per share consideration of $115 in cash and 0.6581 shares of Alexion stock. At this date, the announced purchase consideration was estimated at approximately $8,400,000, net of Synageva cash, based on the closing price of Alexion stock on May 5, 2015 of $168.55.
On June 22, 2015, we completed the acquisition of Synageva, in a transaction accounted for under the acquisition method of accounting for business combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed from Synageva were recorded as of the acquisition date at their respective fair values. Synageva's results of operations are included in the consolidated financial statements from the date of acquisition. The acquisition furthers our objective to develop and commercialize life-transforming therapies to an increasing number of patients with devastating and rare diseases. Synageva's lead product candidate was Kanuma, an enzyme replacement therapy for patients suffering with LAL-D, a life-threatening, ultra-rare disease for which there are no approved treatments.
We acquired all of the outstanding shares of common stock of Synageva for $4,565,524 in cash and 26,125 shares of common stock. At closing of the business combination on June 22, 2015, the purchase consideration was approximately $8,860,000, net of Synageva cash, based on Alexion's closing share price on the date of acquisition of $188.24. We financed the cash consideration with existing cash and proceeds from our new credit facility described further in Note 6.
The aggregate consideration to acquire Synageva consisted of:
Stock consideration
$
4,917,810

Cash consideration
4,565,524

Total purchase price
$
9,483,334


7

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





The following table summarizes the estimated fair values of assets acquired and liabilities assumed:
Cash
$
626,217

Inventory
23,880

In-process research and development (IPR&D)
4,236,000

Deferred tax liabilities, net
(159,991
)
Other assets and liabilities
(26,143
)
Net assets acquired
4,699,963

Goodwill
4,783,371

Total purchase price
$
9,483,334

The fair value of the assets acquired and liabilities assumed were initially based upon preliminary calculations, and our estimates and assumptions were subject to change as we obtained additional information for our estimates during the measurement period (up to one year from the acquisition date). During the six months ended June 30, 2016, we recorded fair value adjustments of $10,441, primarily due to tax related items.
We acquired $23,880 of Kanuma inventory. The estimated fair value of work-in-process and finished goods inventory was determined utilizing the comparative sales method, based on the expected selling price of the inventory, adjusted for incremental costs to complete the manufacturing process and for direct selling efforts, as well as for a reasonable profit allowance. The estimated fair value of raw material inventory was valued at replacement cost, which is equal to the value a market participant would pay to acquire the inventory.
Intangible assets associated with IPR&D projects primarily relate to Kanuma. The estimated fair value of IPR&D assets of $4,236,000 was determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The fair value using the multi-period excess earnings method was dependent on an estimated weighted average cost of capital for Synageva of 10%, which represents a rate of return that a market participant would expect for these assets.
The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill, which is not tax-deductible, has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment. The goodwill represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized and expected synergies that are specific to our business and not available to market participants, including our unique ability to commercialize therapies for rare diseases, our existing relationships with specialty physicians who can identify patients with LAL-D, a global distribution network to facilitate drug delivery and other benefits that we believe will result from combining the operations of Synageva within our operations.
We recorded a net deferred tax liability of $159,991. This amount was primarily comprised of $602,887 of deferred tax liabilities related to the IPR&D and inventory acquired, offset by $442,896 of deferred tax assets related to net operating loss carryforwards (NOLs), tax credits, and other temporary differences, which we expect to utilize.
For the three and six months ended June 30, 2015, we recorded $4,862 of operating expenses associated with the continuing operations of Synageva in our condensed consolidated statements of operations.
Pro forma financial information (unaudited)
The following unaudited pro forma information presents the combined results of Alexion and Synageva as if the acquisition of Synageva had been completed on January 1, 2014, with adjustments to give effect to pro forma events that are directly attributable to the acquisition. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings which may result from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations that would have had we completed the transaction on January 1, 2014.

8

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





 
Three months ended
 
Six months ended
 
June 30, 2015
 
June 30, 2015
Pro forma revenue
$
637,491

 
$
1,238,751

Pro forma net income
98,568

 
130,289

Earnings per common share
 
 
 
     Basic
$
0.44

 
$
0.58

     Diluted
$
0.43

 
$
0.57

The unaudited pro forma consolidated results include the following pro forma adjustments related to non-recurring activity:
Alexion and Synageva expenses of $33,150 and $127,290, respectively, associated with the accelerated vesting of stock based compensation as a result of the acquisition, were excluded from net income for the three and six months ended June 30, 2015.

Alexion and Synageva acquisition-related and restructuring costs of $40,099 and $62,071, respectively, were excluded from income for the three and six months ended June 30, 2015.

Acquisition-Related Costs
Acquisition-related costs associated with our business combinations for the three and six months ended June 30, 2016 and 2015 include the following:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Transaction costs (1)
$

 
$
26,799

 
$
375

 
$
26,799

Integration costs
974

 
2,978

 
1,938

 
2,978

 
$
974

 
$
29,777

 
$
2,313

 
$
29,777

 
 
 
 
 
 
 
 
(1) Transaction costs include investment advisory, legal, and accounting fees
 
For the three and six months ended June 30, 2015, the acquisition of Synageva resulted in $10,322 of restructuring related charges. Synageva restructuring related charges were not material for the three and six months ended June 30, 2016. See Note 18 for additional details.

4.
Inventories
Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory on a standard cost basis, which approximates average costs.
The components of inventory are as follows:
 
June 30,
 
December 31,
 
2016
 
2015
Raw materials
$
19,780

 
$
17,924

Work-in-process
157,097

 
180,324

Finished goods
152,970

 
91,626

 
$
329,847

 
$
289,874






9

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





5.
Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization: 
 
 
 
June 30, 2016
 
December 31, 2015
 
Estimated
Life (years)
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Licenses
6-8
 
$
28,507

 
$
(28,507
)
 
$

 
$
28,507

 
$
(28,504
)
 
$
3

Patents
7
 
10,517

 
(10,517
)
 

 
10,517

 
(10,517
)
 

Purchased technology
6-16
 
4,708,495

 
(276,733
)
 
4,431,762

 
4,708,495

 
(116,584
)
 
4,591,911

Acquired IPR&D
Indefinite
 
116,000

 

 
116,000

 
116,000

 

 
116,000

Total
 
 
$
4,863,519

 
$
(315,757
)
 
$
4,547,762

 
$
4,863,519

 
$
(155,605
)
 
$
4,707,914

Goodwill
Indefinite
 
$
5,040,345

 
$
(2,901
)
 
$
5,037,444

 
$
5,050,786

 
$
(2,901
)
 
$
5,047,885

Amortization expense for the three and six months ended June 30, 2016 was $80,055 and $160,152, respectively. Amortization expense was not material for the three and six months ended June 30, 2015. Total estimated amortization expense for finite-lived intangible assets is $160,070 for the six months ending December 31, 2016, and $320,142 for each of the years ending December 31, 2017 through December 31, 2021.
The following table summarizes the changes in the carrying amount of goodwill:
Balance at December 31, 2015
$
5,047,885

Change in goodwill associated with prior acquisition
(10,441
)
Balance at June 30, 2016
$
5,037,444


6.
Debt
In June 2015, Alexion entered into a credit agreement (Credit Agreement) with a syndicate of banks, which provides for a $3,500,000 term loan facility and a $500,000 revolving credit facility maturing in five years. Borrowings under the term loan are payable in quarterly installments equal to 1.25% of the original loan amount, beginning December 31, 2015. Final repayment of the term loan and revolving credit loans are due on June 22, 2020. In addition to borrowings in which prior notice is required, the revolving credit facility includes a sublimit of $100,000 in the form of letters of credit and borrowings on same-day notice, referred to as swingline loans, of up to $25,000. Borrowings can be used for working capital requirements, acquisitions and other general corporate purposes. With the consent of the lenders and the administrative agent, and subject to satisfaction of certain conditions, we may increase the term loan facility and/or the revolving credit facility in an amount that does not cause our consolidated net leverage ratio to exceed the maximum allowable amount.
In connection with entering into the Credit Agreement, we paid $45,492 in financing costs which are being amortized as interest expense over the life of the debt. Amortization expense associated with deferred financing costs for the three and six months ended June 30, 2016 was $2,382 and $4,895, respectively. Amortization expense associated with deferred financing costs for the three and six months ended June 30, 2015 was not material.
We made principle payments of $175,000 during the six months ended June 30, 2016. As of June 30, 2016, we had $3,281,250 outstanding on the term loan. As of June 30, 2016, we had open letters of credit of $13,829, and our borrowing availability under the revolving facility was $486,171.
The fair value of our long term debt, which is measured using Level 2 inputs, approximates book value.

7.
Earnings Per Common Share
Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of shares of common stock outstanding. For purposes of calculating diluted EPS, the denominator reflects the potential dilution that could occur if stock options, unvested restricted stock units or other contracts to issue common stock were exercised or converted into common stock, using the treasury stock method.

10

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





The following table summarizes the calculation of basic and diluted EPS for the three and six months ended June 30, 2016 and 2015:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income used for basic and diluted calculation
$
114,943

 
$
170,215

 
$
207,109

 
$
261,538

Shares used in computing earnings per common share—basic
224,089

 
202,234

 
224,593

 
200,806

Weighted-average effect of dilutive securities:
 
 
 
 
 
 
 
Stock awards
1,667

 
2,312

 
1,735

 
2,496

Shares used in computing earnings per common share—diluted
225,756

 
204,546

 
226,328

 
203,302

Earnings per common share:
 
 
 
 

 

Basic
$
0.51

 
$
0.84

 
$
0.92

 
$
1.30

Diluted
$
0.51

 
$
0.83

 
$
0.92

 
$
1.29

We exclude from EPS the weighted-average number of securities whose effect is anti-dilutive. Excluded from the calculation of EPS for the three and six months ended June 30, 2016 were 4,345 and 4,156 shares of common stock, respectively, because their effect was anti-dilutive. Similarly, we excluded 2,435 and 2,387 shares from the calculation of EPS for the three and six months ended June 30, 2015, respectively, because their effect was anti-dilutive.
 
8.
Marketable Securities

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale investments by type of security at June 30, 2016 and December 31, 2015 were as follows:
 
 
June 30, 2016
 
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Estimated Fair Value
Commercial paper
 
$
147,523

 
$

 
$

 
$
147,523

Corporate bonds
 
209,816

 
596

 
(31
)
 
210,381

Municipal bonds
 
91,884

 
88

 

 
91,972

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
33,144

 
44

 
(59
)
 
33,129

Foreign
 
148,035

 
393

 
(8
)
 
148,420

Bank certificates of deposit
 
13,001

 

 

 
13,001

Total available-for-sale debt securities
 
$
643,403

 
$
1,121

 
$
(98
)
 
$
644,426

Equity securities
 

 
2,888

 

 
2,888

Total available-for-sale securities
 
$
643,403

 
$
4,009

 
$
(98
)
 
$
647,314


11

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






 
 
December 31, 2015
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
254,396

 
$

 
$

 
$
254,396

Corporate bonds
 
133,062

 
23

 
(336
)
 
132,749

Municipal bonds
 
87,173

 
1

 
(63
)
 
87,111

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
25,244

 

 
(94
)
 
25,150

Foreign
 
163,403

 

 
(504
)
 
162,899

Bank certificates of deposit
 
27,000

 

 

 
27,000

Total available-for-sale securities
 
$
690,278

 
$
24

 
$
(997
)
 
$
689,305


The aggregate fair value of available-for-sale securities in an unrealized loss position as of June 30, 2016 and December 31, 2015 were $97,047 and $293,947, respectively. Investments that have been in a continuous unrealized loss position for more than 12 months were not material. As of June 30, 2016, we believe that the cost basis of our available-for-sale investments is recoverable.
The fair values of available-for-sale securities by classification in the condensed consolidated balance sheet were as follows:
 
June 30, 2016
 
December 31, 2015
Cash and cash equivalents
$
76,891

 
$
323,218

Marketable securities
570,423

 
366,087

 
$
647,314

 
$
689,305


The fair values of available-for-sale debt securities at June 30, 2016, by contractual maturity, are summarized as follows:
 
June 30, 2016
Due in one year or less
$
394,939

Due after one year through three years
249,487

 
$
644,426


As of June 30, 2016 and December 31, 2015, the fair value of our trading securities was $12,078 and $8,817, respectively.
We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on our available-for-sale and trading securities were not material for the three and six months ended June 30, 2016 and 2015.

9.
Derivative Instruments and Hedging Activities
We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates. The exposures result from portions of our revenues, as well as the related receivables, and expenses that are denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen. We are also exposed to fluctuations in interest rates on our outstanding term loan debt. We manage these exposures within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes.
We enter into foreign exchange forward contracts, with durations of up to 60 months, to hedge exposures resulting from portions of our forecasted revenues, including intercompany revenues, that are denominated in currencies other than the U.S.

12

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





dollar. The purpose of these hedges is to reduce the volatility of exchange rate fluctuations on our operating results and to increase the visibility of the foreign exchange impact on forecasted revenues. These hedges are designated as cash flow hedges upon contract inception. At June 30, 2016, we had open foreign exchange forward contracts with notional amounts totaling $1,987,340 that qualified for hedge accounting.
To achieve a desired mix of floating and fixed interest rates on our term loan, we entered into two interest rate swap agreements in June 2016 that qualified for and are designated as cash flow hedges. The first agreement has a notional amount of $3,281,250 and is effective from June 30, 2016 through December 30, 2016. This agreement hedges the contractual floating interest rate of our term loan. As a result of this agreement, the interest rate for our term loan has been fixed at 0.535%, plus the borrowing spread, until December 30, 2016. The second agreement has a notional amount of $656,250 and is effective December 31, 2016 through December 31, 2019. The second agreement converts the floating rate on a portion of our term loan to a fixed rate of 0.98%, plus a borrowing spread, from December 31, 2016 through December 2019.
The impact on accumulated other comprehensive income (AOCI) and earnings from derivative instruments that qualified as cash flow hedges, for the three and six months ended June 30, 2016 and 2015 were as follows:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Foreign Exchange Contracts:
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI, net of tax
$
9,653

 
$
(22,221
)
 
$
(39,789
)
 
$
71,588

Gain reclassified from AOCI to net product sales (effective portion), net of tax
$
10,258

 
$
27,670

 
$
24,917

 
$
53,117

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

 
$
256

 
$

 
$
1,331

Interest Rate Contracts:
 
 
 
 
 
 
 
Loss recognized in AOCI, net of tax
$
(3,695
)
 
$

 
$
(3,695
)

$

Loss reclassified from AOCI to interest expense, net of tax
$

 
$

 
$


$

Assuming no change in foreign exchange rates or LIBOR-based interest rates from market rates at June 30, 2016, $36,074 and $(1,010) of gains (losses) recognized in AOCI will be reclassified to revenue and interest expense, respectively, over the next 12 months.
We enter into foreign exchange forward contracts, with durations of approximately 90 days, designed to limit the balance sheet exposure of monetary assets and liabilities. We enter into these hedges to reduce the impact of fluctuating exchange rates on our operating results. Hedge accounting is not applied to these derivative instruments as gains and losses on these hedge transactions are designed to offset gains and losses on underlying balance sheet exposures. As of June 30, 2016, the notional amount of foreign exchange contracts where hedge accounting is not applied was $433,634.
We recognized a loss of $5,146 and $6,660, in other income and expense, for the three months ended June 30, 2016 and 2015, respectively, and $18,115 and $237, for the six months ended June 30, 2016 and 2015, respectively, associated with the foreign exchange contracts not designated as hedging instruments. These amounts were largely offset by gains or losses in monetary assets and liabilities.

13

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





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

 
June 30, 2016
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
$
57,505

 
Other current liabilities
 
$
21,432

Foreign exchange forward contracts
Other assets
 
44,196

 
Other liabilities
 
36,450

Interest rate contracts
Prepaid expenses and other current assets
 

 
Other current liabilities
 
1,010

Interest rate contracts
Other assets
 

 
Other liabilities
 
4,813

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
5,833

 
Other current liabilities
 
8,740

Total fair value of derivative instruments
 
 
$
107,534

 
 
 
$
72,445



 
December 31, 2015
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
$
85,058

 
Other current liabilities
 
$
1,491

Foreign exchange forward contracts
Other assets
 
66,309

 
Other liabilities
 
4,773

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
6,687

 
Other current liabilities
 
4,157

Total fair value of derivative instruments
 
 
$
158,054

 
 
 
$
10,421





14

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





Although we do not offset derivative assets and liabilities within our condensed consolidated balance sheets, our International Swap and Derivatives Association (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 tables summarize the potential effect on our condensed consolidated balance sheets of offsetting our foreign exchange forward contracts and interest rate contracts subject to such provisions:
 
 
June 30, 2016
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
 
$
107,534

 
$

 
$
107,534

 
$
(42,874
)
 
$

 
$
64,660

Derivative liabilities
 
(72,445
)
 

 
(72,445
)
 
42,874

 

 
(29,571
)


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

 
$

 
$
158,054

 
$
(10,421
)
 
$

 
$
147,633

Derivative liabilities
 
(10,421
)
 

 
(10,421
)
 
10,421

 

 


10.
Other Investments
Other investments include our investment of $37,500 in the preferred stock of Moderna LLC. Our investment is recorded at cost within other assets in our condensed consolidated balance sheets. The carrying value of this investment was not impaired as of June 30, 2016.


11.
Stockholders' Equity
In November 2012, our Board of Directors authorized a share repurchase program. The repurchase program does not have an expiration date, and we are not obligated to acquire a particular number of shares. The repurchase program may be discontinued at any time at the Company's discretion. In May 2015, our Board of Directors increased the authorization to acquire shares with an aggregate value of up to $1,000,000 for future purchases under the repurchase program, which superseded all prior repurchase programs. Under the program, for the three months ended June 30, 2016 and 2015 we repurchased 245 and 132 shares of our common stock at a cost of $34,136 and $23,537, respectively, and during the six months ended June 30, 2016 and 2015, we repurchased 2,328 and 466 shares of our common stock at a cost of $330,651 and $83,563, respectively. As of June 30, 2016, there was a total of $425,213 remaining for repurchases under the repurchase program.

15

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





12.
Other Comprehensive Income and Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI, by component, for the six months ended June 30, 2016 and 2015:

 
Defined Benefit Pension Plans
 
Unrealized Gains (Losses) from Marketable Securities
 
Unrealized Gains (Losses) from Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2015
$
(9,589
)
 
$
(785
)
 
$
92,670

 
$
(19,995
)
 
$
62,301

Other comprehensive income before reclassifications
1,063

 
3,393

 
(43,484
)
 
2,121

 
(36,907
)
Amounts reclassified from other comprehensive income
147

 
70

 
(24,917
)
 

 
(24,700
)
Net other comprehensive income (loss)
1,210

 
3,463

 
(68,401
)
 
2,121

 
(61,607
)
Balances, June 30, 2016
$
(8,379
)
 
$
2,678

 
$
24,269

 
$
(17,874
)
 
$
694


 
Defined Benefit Pension Plans
 
Unrealized Gains (Losses) from Marketable Securities
 
Unrealized Gains (Losses) from Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2014
$
(16,570
)
 
$
(234
)
 
$
87,308

 
$
(13,719
)
 
$
56,785

Other comprehensive income before reclassifications
(8,153
)
 
276

 
71,588

 
(4,218
)
 
59,493

Amounts reclassified from other comprehensive income
708

 
(22
)
 
(54,448
)
 

 
(53,762
)
Net other comprehensive income (loss)
(7,445
)
 
254

 
17,140

 
(4,218
)
 
5,731

Balances, June 30, 2015
$
(24,015
)
 
$
20

 
$
104,448

 
$
(17,937
)
 
$
62,516



16

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





The table below provides details regarding significant reclassifications from AOCI during the three and six months ended June 30, 2016 and 2015:
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified From Accumulated Other Comprehensive Income during the three months ended June 30,
 
Amount Reclassified From Accumulated Other Comprehensive Income during the six months ended June 30,
 
Affected Line Item in the Condensed Consolidated Statements of Operations
 
2016
2015
 
2016
2015
 
Unrealized Gains (Losses) from Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts (effective portion)
 
$
15,673

$
31,622

 
$
38,485

$
60,705

 
Net product sales
Foreign exchange contracts (ineffective portion)
 

293

 

1,521

 
Foreign currency loss
 
 
15,673

31,915

 
38,485

62,226

 
 
 
 
(5,415
)
(3,989
)
 
(13,568
)
(7,778
)
 
Income tax provision
 
 
$
10,258

$
27,926

 
$
24,917

$
54,448

 
 
Unrealized Gains (Losses) from Marketable Securities
 
 
 
 
 
 
 
 
Realized gains (losses) on sale of securities
 
$
151

$
22

 
$
(111
)
$
35

 
Investment income
 
 
151

22

 
(111
)
35

 
 
 
 
(56
)
(8
)
 
41

(13
)
 
Income tax provision
 
 
$
95

$
14

 
$
(70
)
$
22

 
 
Defined Benefit Pension Plans
 
 
 
 
 
 
 
 
Amortization of prior service costs and actuarial losses
 
$
(115
)
$
(626
)
 
$
(229
)
$
(937
)
 
(a)
 
 
(115
)
(626
)
 
(229
)
(937
)
 
 
 
 
54

153

 
82

229

 
Income tax provision
 
 
$
(61
)
$
(473
)
 
$
(147
)
$
(708
)
 
 
(a) This AOCI component is included in the computation of net periodic pension benefit cost (see Note 15 for additional details).

13.
Fair Value Measurement
Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

17

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





The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. 
 
 
Fair Value Measurement at
June 30, 2016
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
27,319

 
$

 
$
27,319

 
$

Cash equivalents
Commercial paper
$
30,995

 
$

 
$
30,995

 
$

Cash equivalents
Corporate bonds
$
2,003

 
$

 
$
2,003

 
$

Cash equivalents
Municipal bonds
$
41,892

 
$

 
$
41,892

 
$

Cash equivalents
Bank certificates of deposit
$
2,001

 
$

 
$
2,001

 
$

Marketable securities
Mutual funds
$
12,078

 
$
12,078

 
$

 
$

Marketable securities
Commercial paper
$
116,528

 
$

 
$
116,528

 
$

Marketable securities
Corporate bonds
$
208,378

 
$

 
$
208,378

 
$

Marketable securities
Municipal bonds
$
50,080

 
$

 
$
50,080

 
$

Marketable securities
Other government-related obligations
$
181,549

 
$

 
$
181,549

 
$

Marketable securities
Bank certificates of deposit
$
11,000

 
$

 
$
11,000

 
$

Marketable securities
Equity securities
$
2,888

 
$
2,888

 
$

 
$

Prepaid expenses and other current assets
Foreign exchange forward contracts
$
63,338

 
$

 
$
63,338

 
$

Other assets
Foreign exchange forward contracts
$
44,196

 
$

 
$
44,196

 
$

Other current liabilities
Foreign exchange forward contracts
$
30,172

 
$

 
$
30,172

 
$

Other liabilities
Foreign exchange forward contracts
$
36,450

 
$

 
$
36,450

 
$

Other current liabilities
Interest rate contracts
$
1,010

 
$

 
$
1,010

 
$

Other liabilities
Interest rate contracts
$
4,813

 
$

 
$
4,813

 
$

Other current liabilities
Acquisition-related contingent consideration
$
58,049

 
$

 
$

 
$
58,049

Contingent consideration
Acquisition-related contingent consideration
$
109,565

 
$

 
$

 
$
109,565

 

18

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





 
 
Fair Value Measurement at
December 31, 2015
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
179,898

 
$

 
$
179,898

 
$

Cash equivalents
Commercial paper
$
192,418

 
$

 
$
192,418

 
$

Cash equivalents
Corporate bonds
$
12,250

 
$

 
$
12,250

 
$

Cash equivalents
Municipal bonds
$
60,001

 
$

 
$
60,001

 
$

Cash equivalents
Other government-related obligations
$
31,549

 
$

 
$
31,549

 
$

Cash equivalents
Bank certificates of deposit
$
27,000

 
$

 
$
27,000

 
$

Marketable securities
Mutual funds
$
8,817

 
$
8,817

 
$

 
$

Marketable securities
Commercial paper
$
61,978

 
$

 
$
61,978

 
$

Marketable securities
Corporate bonds
$
120,499

 
$

 
$
120,499

 
$

Marketable securities
Municipal bonds
$
27,110

 
$

 
$
27,110

 
$

Marketable securities
Other government-related obligations
$
156,500

 
$

 
$
156,500

 
$

Prepaid expenses and other current assets
Foreign exchange forward contracts
$
91,745

 
$

 
$
91,745

 
$

Other assets
Foreign exchange forward contracts
$
66,309

 
$

 
$
66,309

 
$

Other current liabilities
Foreign exchange forward contracts
$
5,648

 
$

 
$
5,648

 
$

Other liabilities
Foreign exchange forward contracts
$
4,773

 
$

 
$
4,773

 
$

Other current liabilities
Acquisition-related contingent consideration
$
55,804

 
$

 
$

 
$
55,804

Contingent consideration
Acquisition-related contingent consideration
$
121,424

 
$

 
$

 
$
121,424


There were no securities transferred between Level 1, 2 and 3 during the six months ended June 30, 2016.

Valuation Techniques
We classify mutual fund investments and equity securities, which are valued based on quoted market prices in active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.
Cash equivalents and marketable securities classified as Level 2 within the valuation hierarchy consist of institutional money market funds, commercial paper, municipal bonds, U.S. and foreign government-related debt, corporate debt securities and certificates of deposit. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

19

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





Our derivative assets and liabilities include foreign exchange and interest rate derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk as well as an evaluation of our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.
Contingent consideration liabilities related to acquisitions are classified as Level 3 within the valuation hierarchy and are valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met.
As of June 30, 2016, there has not been any impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

Contingent Consideration
In connection with prior acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. We determine the fair value of these obligations on the acquisition date using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt of 5.5% for developmental milestones and a weighted average cost of capital ranging from 10% to 21% for sales-based milestones.
Each reporting period, we adjust the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time.
Estimated future contingent milestone payments related to prior business combinations range from zero if no milestone events are achieved, to a maximum of $826,000 if all development, regulatory and sales-based milestones are reached. As of June 30, 2016, the fair value of acquisition-related contingent consideration was $167,614. The following table represents a roll-forward of our acquisition-related contingent consideration:
 
Six months ended
 
June 30, 2016
Balance at December 31, 2015
$
(177,228
)
Changes in fair value
9,614

Balance at June 30, 2016
$
(167,614
)

14.
Income Taxes
The following table provides a comparative summary of our income tax provision and effective tax rate for the three and six months ended June 30, 2016 and 2015:
 
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Provision for income taxes
$
55,022

 
$
7,077

 
$
106,454

 
$
22,699

Effective tax rate
32.4
%
 
4.0
%
 
33.9
%
 
8.0
%

The tax provision for the three and six months ended June 30, 2016 and 2015 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The increase in the effective tax rate for the three and six months ended June 30, 2016 as compared to the same period in the prior year is primarily attributable to the deferred tax costs associated with the distribution of earnings from our captive foreign partnership. This non-cash deferred tax cost increased the effective tax rate by approximately 18%. Additionally, the tax provision for the three and six months ended June 30, 2015 included increased tax benefits associated with Orphan Drug Credits as compared to the same periods in 2016.

20

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





Tax years 2013 and 2014 are currently under review by the Examination Division of the Internal Revenue Service (IRS). As of June 30, 2016, we have not been notified of any significant proposed adjustments by the IRS.
We continue to maintain a valuation allowance against certain deferred tax assets where realization is not certain.

15.
Defined Benefit Plans
We maintain defined benefit plans for employees in certain countries outside the United States, including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increases, and pension adjustments.
The components of net periodic benefit cost are as follows: 
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
2,075

 
$
4,861

 
$
4,098

 
$
7,282

Interest cost
56

 
372

 
116

 
552

Expected return on plan assets
(166
)
 
(508
)
 
(329
)
 
(751
)
Employee contributions
(403
)
 
(900
)
 
(755
)
 
(1,327
)
Amortization
115

 
626

 
229

 
937

Total net periodic benefit cost
$
1,677

 
$
4,451

 
$
3,359

 
$
6,693


16.
Facility Lease Obligations
New Haven Facility Lease Obligation
In November 2012 we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. The term of the lease commenced in 2015 and will expire in 2030, with a renewal option of ten years. Although we do not legally own the premises, we are deemed to be the owner of the building due to the substantial improvements directly funded by us during the construction period based on applicable accounting guidance for build-to-suit leases. Accordingly, the landlord's costs of constructing the facility during the construction period are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet.
Construction of the new facility was completed and the building was placed into service in the first quarter 2016. As of June 30, 2016 and December 31, 2015, our facility lease obligation related to this facility was $135,598 and $132,866, respectively.
Lonza Facility Lease Obligation
During the third quarter 2015, we entered into a new agreement with Lonza Group AG and its affiliates (Lonza) whereby Lonza will construct a new manufacturing facility dedicated to Alexion at its existing Portsmouth, New Hampshire facility. The agreement requires us to make certain payments during the construction of the new manufacturing facility and annual payments for ten years thereafter. As a result of our contractual right to full capacity of the new manufacturing facility, a portion of the payments under the agreement are considered to be lease payments and a portion as payment for the supply of inventory. Although we will not legally own the premises, we are deemed to be the owner of the manufacturing facility during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. As of June 30, 2016 and December 31, 2015, we recorded a construction-in-process asset of $65,125 and $19,259 and an offsetting facility lease obligation of $57,715 and $15,229 associated with the manufacturing facility, respectively.
Payments made to Lonza under the agreement are allocated to the purchases of inventory and the repayment of the facility lease obligation on a relative fair value basis. In 2016, we made $26,000 of payments to Lonza under this agreement, of which $3,380 was applied against the outstanding facility lease obligation and $22,620 was recognized as a prepayment of inventory.


21

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





17.
Commitments and Contingencies
Commitments
Manufacturing Agreements
We have various manufacturing development agreements to support our clinical and commercial product needs. We rely on Lonza, a third party manufacturer, to produce a portion of commercial and clinical quantities of Soliris and Strensiq. We have various agreements with Lonza, with remaining total non-cancellable future commitments of approximately $1,143,638. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at Alexion Rhode Island Manufacturing Facility (ARIMF) and a payment with respect to sales of Soliris manufactured at Lonza facilities.
In addition to Lonza, we have non-cancellable commitments of approximately $33,670 with other third party manufacturers.

Contingent Liabilities
We are currently involved in various claims, lawsuits and legal proceedings. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Because of uncertainties related to claims and litigation, accruals are based on our best estimates based on available information. On a periodic basis, as additional information becomes available, or based on specific events such as the outcome of litigation or settlement of claims, we may reassess the potential liability related to these matters and may revise these estimates, which could result in a material adverse adjustment to our operating results.
We have in the past received, and may in the future receive, notices from third parties claiming that their patents may be infringed by the development, manufacture or sale of Soliris. Under the guidance of ASC 450, Contingencies, we record a royalty accrual based on our best estimate of the fair value percent of net sales of Soliris that we could be required to pay the owners of patents for technology used in the manufacture and sale of Soliris. A costly license, or inability to obtain a necessary license, could have a material adverse effect on our financial results.
In May 2015, we received a subpoena in connection with an investigation by the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting information related to our grant-making activities and compliance with the Foreign Corrupt Practices Act (FCPA) in various countries. In addition, in October 2015, Alexion received a request from the U.S. Department of Justice (DOJ) for the voluntary production of documents and other information pertaining to Alexion's compliance with FCPA. The SEC and DOJ also seek information related to Alexion’s recalls of specific lots of Soliris and related securities disclosures. Alexion is cooperating with these investigations, which are in the early stages. At this time, Alexion is unable to predict the duration, scope or outcome of these investigations. Given the ongoing nature of these investigations, management does not currently believe a loss related to these matters is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated.
In March 2013, we received a Warning Letter (Warning Letter) from the U.S. Food and Drug Administration (FDA) regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed receipt of a Form 483 Inspectional Observations by the FDA in connection with an FDA inspection that concluded in August 2012. The observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA dated in April 2013. As previously announced, the FDA issued Form 483s in August 2014 and August 2015 related to observations at ARIMF. The inspectional observations from the August 2015 letter have since been closed out by the FDA.
The observations are inspectional and do not represent a final FDA determination of compliance. We continue to manufacture products, including Soliris, in this facility. While the resolution of the issues raised in the Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated.

18.
Restructuring
In connection with the acquisition and integration of Synageva in 2015, we recorded a restructuring charge of $10,322 for the three and six months ended June 30, 2015 primarily related to employee costs. Synageva restructuring charges were not material for the three and six months ended June 30, 2016.

22

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





In the fourth quarter 2014, we announced plans to relocate our European headquarters from Lausanne to Zurich, Switzerland. The relocation of our European headquarters supports our operational needs based on growth in the European region. During the three and six months ended June 30, 2016, we incurred additional restructuring costs of $369 and $2,015, respectively, as compared to $5,902 and $12,954, for the three and six months ended June 30, 2015, respectively. We expect to pay all remaining accrued amounts related to this restructuring activity by the first quarter of 2017.
The following table presents a reconciliation of the restructuring reserve recorded within accrued expenses on the Company's condensed consolidated balance sheet for the three and six months ended June 30, 2016:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2016
 
Employee Separation Costs
 
Contract Termination Costs
 
Other Costs
 
Total
 
Employee Separation Costs
 
Contract Termination Costs
 
Other Costs
 
Total
Liability, beginning of period
$
1,436

 
$
1,627

 
$
16

 
$
3,079

 
$
6,390

 
$
682

 
$
169

 
$
7,241

Restructuring expenses

 

 
475

 
475

 

 
35

 
892

 
927

Cash settlements
(537
)
 
(174
)
 
(395
)
 
(1,106
)
 
(4,343
)
 
(682
)
 
(965
)
 
(5,990
)
Adjustments to previous estimates
100

 
(120
)
 

 
(20
)
 
(1,048
)
 
1,298

 

 
250

Liability, end of period
$
999

 
$
1,333

 
$
96

 
$
2,428

 
$
999

 
$
1,333

 
$
96

 
$
2,428


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

Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by our management, and may include, but are not limited to, statements regarding the potential benefits and commercial potential of Soliris®, Strensiq® and Kanuma® for approved indications and any expanded uses, timing and effect of sales of our products in various markets worldwide, pricing for our products, level of insurance coverage and reimbursement for our products, level of future product sales and collections, timing regarding development and regulatory approvals for additional indications or in additional territories, the medical and commercial potential of additional indications for Soliris, failure to satisfactorily address the issues raised by the U.S. Food and Drug Administration (FDA) in the March 2013 Warning Letter and Form 483s issued by the FDA, costs, expenses and capital requirements, cash outflows, cash from operations, status of reimbursement, price approval and funding processes in various countries worldwide, progress in developing commercial infrastructure and interest about our products and our product candidates in the patient, physician and payer communities, the safety and efficacy of our products and our product candidates, estimates of the potential markets and estimated commercialization dates for our product and our product candidates around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for our products or our product candidates, status of our ongoing clinical trials for eculizumab, asfotase alfa, sebelipase alfa and our other product candidates, commencement dates for new clinical trials, clinical trial results, evaluation of our clinical trial results by regulatory agencies, the adequacy of our pharmacovigilance and drug safety reporting processes, prospects for regulatory approval of our products and our product candidates, need for additional research and testing, the uncertainties involved in the drug development process and manufacturing, performance and reliance on third party service providers, our future research and development activities, plans for acquired programs, our ability to develop and commercialize products with our collaborators, assessment of competitors and potential competitors, the outcome of challenges and opposition proceedings to our intellectual property, assertion or potential assertion by third parties that the manufacture, use or sale of our products infringes their intellectual property, estimates of the capacity of manufacturing and other service facilities to support our products and our product candidates, potential costs resulting from product liability or other third party claims, the sufficiency of our existing capital resources and projected cash needs, the possibility that expected tax benefits will not be realized, assessment of impact of recent accounting pronouncements, declines in sovereign credit ratings or sovereign defaults in countries where we sell our products, delay of collection or reduction in reimbursement due to adverse economic conditions or changes in government and private insurer regulations and approaches to reimbursement, uncertainties surrounding the government investigations, including our Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigations, the short and long term effects of other government healthcare measures, and the effect of shifting

23

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

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 (SEC).
Business
We are a biopharmaceutical company focused on serving patients with devastating and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products.
In our complement franchise, Soliris (eculizumab) is the first and only therapeutic approved for patients with either PNH or aHUS. In our metabolic franchise, we commercialize Strensiq (asfotase alfa) for the treatment of patients with HPP and Kanuma (sebelipase alfa) for the treatment of patients with LAL-D.
We are also evaluating additional potential indications for eculizumab in other severe and devastating diseases in which uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional product candidates as potential treatments for patients with severe and life-threatening rare disorders.

Products and Development Programs
We focus our product development programs on life-transforming therapeutics for devastating and ultra-rare diseases for which current treatments are either non-existent or inadequate.
Marketed Products
Our marketed products 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 Registry
 
Phase IV
Strensiq (asfotase alfa)
 
Metabolic Disorders
 
Hypophosphatasia (HPP)
 
Commercial
 
 
 
 
HPP Registry
 
Phase IV
Kanuma (sebelipase alfa)
 
Metabolic Disorders
 
Lysosomal Acid Lipase Deficiency (LAL-D)
 
Commercial
 
 
 
 
LAL-D Registry
 
Phase IV

Soliris (eculizumab)
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 doses currently prescribed. The initial indication for which we received approval for Soliris is PNH.
Paroxysmal Nocturnal Hemoglobinuria (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). We continue to work with researchers to expand the base of knowledge in PNH and the utility of Soliris to treat patients with PNH. Soliris is approved for the treatment of PNH in the United States, Europe, Japan and in several other territories. We are

24

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

sponsoring a multinational registry to gather information regarding the natural history of patients with PNH and the longer term outcomes during Soliris treatment. In addition, Soliris has been granted orphan drug designation for the treatment of PNH in the United States, Europe, Japan and several other territories.
Atypical Hemolytic Uremic Syndrome (aHUS)
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. Soliris is approved for the treatment of pediatric and adult patients with aHUS in the United States, Europe and Japan. In addition, the FDA and EC have granted Soliris orphan drug designation for the treatment of patients with aHUS.
Strensiq (asfotase alfa)
Hypophosphatasia (HPP)
HPP is an ultra-rare genetic and progressive metabolic disease in which patients experience devastating effects on multiple systems of the body, leading to debilitating or life-threatening complications. HPP is characterized by defective bone mineralization that can lead to deformity of bones and other skeletal abnormalities, as well as systemic complications such as profound muscle weakness, seizures, pain, and respiratory failure leading to premature death in infants.
Strensiq, a targeted enzyme replacement therapy, is the first and only approved therapy for patients with HPP, and is designed to directly address underlying causes of HPP by aiming to restore the genetically defective metabolic process, thereby preventing or reversing the severe and potentially life-threatening complications in patients with HPP. In 2015, the FDA approved Strensiq for patients with perinatal-, infantile- and juvenile-onset HPP, the European Commission (EC) granted marketing authorization for Strensiq for the treatment of patients with pediatric-onset HPP, and Japan’s Ministry of Health. Labour and Welfare (MHLW) approved Strensiq for the treatment of patients with HPP.
In April 2016, new long-term data was presented showing clinically significant and sustained improvements in bone healing, respiratory support, and physical function in children with perinatal and infantile-onset HPP treated with Strensiq. In addition, adolescents and adult patients reduced or eliminated their need of ambulatory assistive devices and had improvements in physical function.
Kanuma (sebelipase alfa)
Lysosomal Acid Lipase Deficiency (LAL Deficiency or LAL-D)
LAL-D is a serious, life-threatening ultra-rare disease associated with premature mortality and significant morbidity. LAL-D is a chronic disease in which genetic mutations result in decreased activity of the LAL enzyme that leads to marked accumulation of lipids in vital organs, blood vessels, and other tissues, resulting in progressive and systemic organ damage including hepatic fibrosis, cirrhosis, liver failure, accelerated atherosclerosis, cardiovascular disease, and other devastating consequences.
Kanuma, a recombinant form of the human LAL enzyme, is the only enzyme-replacement therapy that is approved for the treatment for patients with LAL-D. In 2015, the FDA approved Kanuma for the treatment of patients with LAL-D and the EC granted marketing authorization of Kanuma for long-term enzyme replacement therapy in patients of all ages with LAL-D. On March 28, 2016, we announced that Japan's MHLW approved Kanuma for the treatment of patients of all ages in Japan with LAL-D.
In March 2016, researchers presented new two-year data from an ongoing, open-label Phase 2/3 trial of Kanuma in infants with LAL-D. Data from this study demonstrated a substantial survival benefit to beyond 2 years of age for patients with rapidly progressive LAL-D during infancy who were treated with Kanuma. Patients also had improvements in a number of key parameters, including weight gain, important markers of liver disease, gastrointestinal symptoms, anemia, and hepatosplenomegaly (enlargement of both the liver and spleen), and 4 out of 5 patients demonstrated normal development.

25

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)
 
Neurology
 
Refractory Generalized Myasthenia Gravis (gMG)
 
Phase III
 
 
 
 
Relapsing Neuromyelitis Optica Spectrum Disorder (NMOSD)
 
Phase III
 
 
Transplant
 
Delayed Kidney Transplant Graft Function (DGF)
 
Phase III
 
 
 
 
Antibody Mediated Rejection (AMR) Presensitized Renal Transplant - Living Donor