Celgene Corporation
CELGENE CORP /DE/ (Form: 10-Q, Received: 11/02/2011 16:08:09)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2011

 

OR

 

o

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 001-34912

 

CELGENE CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

22-2711928

(State or other jurisdiction of incorporation

 

(I.R.S. Employer Identification

or organization)

 

Number)

 

 

 

86 Morris Avenue, Summit, NJ

 

07901

(Address of principal executive offices)

 

(Zip Code)

 

                              (908) 673-9000                              

(Registrant’s telephone number, including area code)

 

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 þ      No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 þ      No o

 

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.

 

Large accelerated filer þ

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

(Do not check if a 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 o      No þ

 

At October 25, 2011, 443,930,657 shares of Common Stock, par value $.01 per share, were outstanding.

 

 

 



Table of Contents

 

CELGENE CORPORATION

 

FORM 10-Q TABLE OF CONTENTS

 

 

Page No.

PART I FINANCIAL INFORMATION

 

 

 

Item 1 Financial Statements

 

 

 

Consolidated Statements of Income -
Three-Month and Nine-Month Periods Ended September 30, 2011 and 2010

2

 

 

Consolidated Balance Sheets -
As of September 30, 2011 and December 31, 2010

3

 

 

Consolidated Statements of Cash Flows -
Nine-Month Periods Ended September 30, 2011 and 2010

4

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

56

 

 

Item 4 Controls and Procedures

59

 

 

PART II OTHER INFORMATION

 

 

 

Item 1 Legal Proceedings

59

 

 

Item 1A Risk Factors

59

 

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

76

 

 

Item 3 Defaults Upon Senior Securities

76

 

 

Item 4 (Removed and Reserved)

76

 

 

Item 5 Other Information

76

 

 

Item 6 Exhibits

76

 

 

Signatures

77

 

1



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

CELGENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

1,219,118

 

$

885,656

 

$

3,457,055

 

$

2,468,164

 

Collaborative agreements and other revenue

 

3,766

 

2,241

 

16,468

 

7,165

 

Royalty revenue

 

26,853

 

22,214

 

84,650

 

78,728

 

Total revenue

 

1,249,737

 

910,111

 

3,558,173

 

2,554,057

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Cost of goods sold (excluding amortization of acquired intangible assets)

 

94,645

 

63,542

 

348,356

 

193,450

 

Research and development

 

356,839

 

253,547

 

1,163,837

 

800,965

 

Selling, general and administrative

 

303,303

 

228,281

 

911,207

 

655,522

 

Amortization of acquired intangible assets

 

75,044

 

46,540

 

214,181

 

135,201

 

Acquisition related (gains) charges and restructuring, net

 

(11,209

)

7,495

 

(117,430

)

20,193

 

Total costs and expenses

 

818,622

 

599,405

 

2,520,151

 

1,805,331

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

431,115

 

310,706

 

1,038,022

 

748,726

 

 

 

 

 

 

 

 

 

 

 

Other income and expense:

 

 

 

 

 

 

 

 

 

Interest and investment income, net

 

8,481

 

12,801

 

18,948

 

37,010

 

Equity in losses of affiliated companies

 

1,661

 

1,384

 

966

 

746

 

Interest expense

 

10,292

 

414

 

31,460

 

1,321

 

Other income (expense), net

 

(15,002

)

8,453

 

(6,684

)

7,130

 

Income before income taxes

 

412,641

 

330,162

 

1,017,860

 

790,799

 

 

 

 

 

 

 

 

 

 

 

Income tax provision

 

39,657

 

49,011

 

110,582

 

119,854

 

Net income

 

372,984

 

281,151

 

907,278

 

670,945

 

Less: Net loss attributable to non-controlling interest

 

 

 

694

 

 

Net income attributable to Celgene

 

$

372,984

 

$

281,151

 

$

907,972

 

$

670,945

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to Celgene:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.83

 

$

0.61

 

$

1.97

 

$

1.46

 

Diluted

 

$

0.81

 

$

0.60

 

$

1.94

 

$

1.44

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

452,019

 

459,653

 

460,161

 

459,957

 

Diluted

 

459,530

 

466,332

 

467,052

 

467,137

 

 

See accompanying Notes to Consolidated Financial Statements

 

2



Table of Contents

 

CELGENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,794,927

 

$

1,351,128

 

Marketable securities available for sale

 

784,160

 

1,250,173

 

Accounts receivable, net of allowances of $25,293 and $13,104 at September 30, 2011 and December 31, 2010, respectively

 

888,168

 

706,429

 

Inventory

 

187,525

 

260,130

 

Deferred income taxes

 

152,365

 

151,779

 

Other current assets

 

242,937

 

275,005

 

Assets held for sale

 

52,462

 

348,555

 

Total current assets

 

4,102,544

 

4,343,199

 

 

 

 

 

 

 

Property, plant and equipment, net

 

490,192

 

509,919

 

Investment in affiliated companies

 

27,470

 

23,073

 

Intangible assets, net

 

2,920,012

 

3,248,498

 

Goodwill

 

1,896,283

 

1,896,344

 

Other assets

 

326,606

 

156,129

 

Total assets

 

$

9,763,107

 

$

10,177,162

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

 

$

269,125

 

$

 

Accounts payable

 

98,405

 

94,465

 

Accrued expenses

 

640,247

 

592,336

 

Income taxes payable

 

10,078

 

11,423

 

Current portion of deferred revenue

 

13,626

 

16,362

 

Other current liabilities

 

132,946

 

309,214

 

Liabilities of disposal group

 

7,531

 

46,582

 

Total current liabilities

 

1,171,958

 

1,070,382

 

 

 

 

 

 

 

Deferred revenue, net of current portion

 

12,616

 

12,785

 

Income taxes payable

 

631,376

 

551,896

 

Deferred income taxes

 

786,046

 

882,870

 

Other non-current liabilities

 

278,705

 

416,173

 

Long-term debt, net of discount

 

1,277,316

 

1,247,584

 

Total liabilities

 

4,158,017

 

4,181,690

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $.01 par value per share, 5,000,000 shares authorized; none outstanding at September 30, 2011 and December 31, 2010

 

 

 

Common stock, $.01 par value per share, 575,000,000 shares authorized; issued 485,070,329 and 482,164,353 shares at September 30, 2011 and December 31, 2010, respectively

 

4,851

 

4,822

 

Common stock in treasury, at cost; 39,654,766 and 11,776,036 shares at September 30, 2011 and December 31, 2010, respectively

 

(2,109,066

)

(545,588

)

Additional paid-in capital

 

6,618,937

 

6,350,240

 

Retained earnings

 

1,156,238

 

248,266

 

Accumulated other comprehensive loss

 

(65,870

)

(73,767

)

Total stockholders’ equity

 

5,605,090

 

5,983,973

 

Non-controlling interest

 

 

11,499

 

Total equity

 

5,605,090

 

5,995,472

 

Total liabilities and equity

 

$

9,763,107

 

$

10,177,162

 

 

See accompanying Notes to Consolidated Financial Statements

 

3



Table of Contents

 

CELGENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Nine-Month Periods Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

907,278

 

$

670,945

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation of long-term assets

 

53,051

 

38,880

 

Amortization

 

215,961

 

136,048

 

Allocation of pre-paid royalties

 

16,214

 

37,299

 

Provision (benefit) for accounts receivable allowances

 

3,375

 

(1,485

)

Deferred income taxes

 

(101,510

)

(36,854

)

Impairment of acquired in-process research and development

 

118,000

 

 

Change in value of contingent consideration

 

(122,547

)

16,697

 

Share-based compensation expense

 

168,641

 

134,540

 

Equity in losses of affiliated companies

 

966

 

746

 

Share-based employee benefit plan expense

 

14,567

 

11,072

 

Unrealized change in value of foreign currency forward contracts

 

(30,004

)

12,060

 

Realized (gain) loss on marketable securities available for sale

 

(1,616

)

(12,576

)

Other, net

 

(7,643

)

3,155

 

 

 

 

 

 

 

Change in current assets and liabilities, excluding the effect of acquisitions:

 

 

 

 

 

Accounts receivable

 

(188,503

)

(158,899

)

Inventory

 

73,776

 

(6,372

)

Other operating assets

 

48,113

 

9,412

 

Assets held for sale, net

 

2,647

 

 

Accounts payable and other operating liabilities

 

90,344

 

89,560

 

Income tax payable

 

80,119

 

25,002

 

Deferred revenue

 

(2,756

)

7,481

 

Net cash provided by operating activities

 

1,338,473

 

976,711

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Proceeds from sales of marketable securities available for sale

 

1,814,974

 

3,774,568

 

Purchases of marketable securities available for sale

 

(1,327,244

)

(2,564,876

)

Payments for acquisition of business, net of cash acquired

 

(180,000

)

(337,608

)

Proceeds from the sale of non-core assets, net

 

93,185

 

 

Capital expenditures

 

(90,559

)

(59,138

)

Investment in affiliated companies

 

(2,949

)

(1,759

)

Purchases (refunds) of investment securities

 

6,597

 

(14,020

)

Other investing activities

 

(2,000

)

 

Net cash provided by investing activities

 

312,004

 

797,167

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payment for treasury shares

 

(1,574,415

)

(105,436

)

Proceeds from short-term borrowing

 

404,843

 

 

Principal repayments on short-term borrowing

 

(135,750

)

 

Net proceeds from exercise of common stock options and warrants

 

92,258

 

56,033

 

Excess tax benefit from share-based compensation arrangements

 

15,734

 

9,081

 

Net cash (used in) financing activities

 

(1,197,330

)

(40,322

)

 

 

 

 

 

 

Effect of currency rate changes on cash and cash equivalents

 

(9,348

)

(3,743

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

443,799

 

1,729,813

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

1,351,128

 

1,102,172

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

1,794,927

 

$

2,831,985

 

 

See accompanying Notes to Consolidated Financial Statements

 

4



Table of Contents

 

CELGENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Unaudited)

(Dollars in thousands)

 

 

 

Nine-Month Periods Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activity:

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration issued in acquisition of Gloucester

 

$

 

$

230,201

 

 

 

 

 

 

 

Change in net unrealized (gain) loss on marketable securities available for sale

 

$

(4,928

)

$

(17,480

)

 

 

 

 

 

 

Matured shares tendered in connection with stock option exercises

 

$

(16

)

$

(8,236

)

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

2,026

 

$

1,638

 

 

 

 

 

 

 

Income taxes paid

 

$

79,159

 

$

115,291

 

 

See accompanying Notes to Consolidated Financial Statements

 

5



Table of Contents

 

CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

1.  Nature of Business and Basis of Presentation

 

Celgene Corporation and its subsidiaries (collectively “Celgene” or the “Company”) is a global biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory diseases.  The Company is dedicated to innovative research and development which is designed to bring new therapies to market and is involved in research in several scientific areas that may deliver proprietary next-generation therapies, targeting areas such as intracellular signaling pathways in cancer and immune cells, immunomodulation in cancer and autoimmunity and placental cell, including stem and progenitor cell, research.

 

The Company’s primary commercial stage products include REVLIMID ® , VIDAZA ® , THALOMID ®  (inclusive of Thalidomide Celgene ®  and Thalidomide Pharmion ® ), ABRAXANE ®  and ISTODAX ® .  Additional sources of revenue include a licensing agreement with Novartis Pharma AG, or Novartis, which entitles the Company to royalties on FOCALIN XR ®  and the entire RITALIN ®  family of drugs, the sale of services through its Cellular Therapeutics subsidiary and other licensing agreements.

 

The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries. Certain entities obtained in the acquisition of Abraxis BioScience, Inc., or Abraxis, in October 2010 were determined to be non-core to the Company and a large portion were divested in April 2011 (see Note 3). Investments in limited partnerships and interests where the Company has an equity interest of 50% or less and does not otherwise have a controlling financial interest are accounted for by either the equity or cost method.  The Company records net income or loss attributable to non-controlling interest in its Consolidated Statements of Income equal to the percentage of ownership interest retained in the respective operations by the non-controlling parties.

 

The preparation of these unaudited consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures.  Actual results could differ from those estimates.  The Company is subject to certain risks and uncertainties related to product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition, technological change and product liability.

 

Interim results may not be indicative of the results that may be expected for the full year.  In the opinion of management, these unaudited consolidated financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited consolidated financial statements.

 

2.    Summary of Significant Accounting Policies

 

The Company’s significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, or the 2010 Annual Report on Form 10-K.

 

New Accounting Pronouncements:  In September 2011,   the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-08, “Intangibles — Goodwill and Other (Topic 350):  Testing Goodwill for Impairment, or ASU 2011-08.  The update simplifies how a company tests goodwill for impairment.

 

ASU 2011-08 allows a company the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test.  Under that option, an entity would no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount.

 

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Table of Contents

 

CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted.  The adoption of ASU 2011-08 is not expected to have a material impact on the Company as the Company has only one reporting unit.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” or ASU 2011-05.  ASU 2011-05 was issued to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The guidance in ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  ASU 2011-05 will be effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2011.  The Company is currently evaluating the impact that the adoption of ASU 2011-05 will have on its consolidated financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820),” or ASU 2011-04.  ASU 2011-04 was issued to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, and International Financial Reporting Standards, or IFRS.  The guidance in ASU 2011-04 explains how to measure fair value, but does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting.   ASU 2011-04 will be effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2011.  The Company is currently evaluating the impact that the adoption of ASU 2011-04 will have on its consolidated financial statements.

 

3.    Acquisitions and Divestitures

 

Abraxis BioScience, Inc.

 

On October 15, 2010, or the Acquisition Date, the Company acquired all of the outstanding common stock of Abraxis in exchange for consideration valued at the Acquisition Date at approximately $3.205 billion, consisting of cash, stock and contingent value rights, or CVRs.  The transaction, referred to as the Merger, resulted in Abraxis becoming a wholly owned subsidiary of the Company.

 

As discussed further under “Contingent Value Rights” below, a holder of a CVR is entitled to receive a pro rata portion of cash payments that the Company is obligated to pay to all holders of CVRs, which is determined by achievement of certain net sales and U.S. regulatory approval milestones.  Potential cash payments to CVR holders range from no payment, if no regulatory milestones or net sales thresholds are met, to a maximum of $650.0 million in milestone payments plus payments based on annual net sales levels if all milestones are met at the earliest target dates and annual net sales exceed threshold amounts.

 

The Merger has been accounted for using the acquisition method of accounting which requires that most assets acquired and liabilities assumed be recognized at their fair values as of the Acquisition Date and requires the fair value of acquired in-process research and development, or IPR&D, to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts.  A preliminary purchase price allocation has been made and amounts for certain income tax attributes are subject to change pending the filing of Abraxis pre-acquisition tax returns.  The Company does not expect any material adjustments.

 

No adjustments were made during the nine-month period ended September 30, 2011 to the amounts initially recorded for the assets acquired and liabilities assumed as of the Acquisition Date.  The amounts recognized will be finalized as the information necessary to complete the analyses is obtained, but no later than one year from the Acquisition Date.

 

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Table of Contents

 

CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Sale of Non-core Assets

 

The purchase of Abraxis included a number of assets that are not associated with nab ®  technology or ABRAXANE ® . These assets, or non-core assets, consisted of a number of subsidiaries, tangible assets, equity investments, joint venture partnerships and assets that supported research and sales of products not directly related to the nab ®  technology or ABRAXANE ® . At the time of acquisition, the Company committed to a plan to divest certain non-core assets and they were classified on the Consolidated Balance Sheets as of December 31, 2010 as assets held for sale and the associated liabilities were classified as liabilities of disposal group.  In April 2011, the Company sold these non-core assets to various entities that are owned or controlled by Dr. Patrick Soon-Shiong, the former majority shareholder and executive chairman of Abraxis.

 

The Company received cash consideration of $110.0 million, 10% equity ownership in Active Biomaterials, LLC, which is an entity that was formed with certain of the non-core assets with revenue-producing potential, and a future royalty stream based on net sales of certain products of Active Biomaterials, LLC. The royalties, which commence in 2014 at the earliest and are not to exceed an annual amount of $128.0 million, will be calculated based on a range of between 10% and 12.5% of net sales of certain future products. Dr. Patrick Soon-Shiong holds an option to purchase the 10% equity ownership in Active Biomaterials, LLC from the Company for a price of $15.0 million at any time prior to April 2013.  The Company recorded the equity ownership at its fair market value of $14.0 million based on the present value of the amount likely to be received upon exercise of the purchase option.  The Company recorded the future royalty stream as an asset and assigned a value of $170.0 million based on its fair market value calculated as the present value of estimated future net cash flows.  The sale of the non-core assets resulted in a gain of $2.9 million which was included in the Consolidated Statements of Income, in other income (expense), net.  The Company’s policy is to present gains and losses from sales of businesses as other income or expense .

 

Assets Held For Sale

 

The remaining balances in the assets held for sale and liabilities of disposal group line items on the Consolidated Balance Sheets at September 30, 2011 relate to two facilities that were acquired in the purchase of Abraxis.  The Company intends to sell these assets as it rationalizes certain manufacturing facilities.  No material gain or loss is expected to result from the sale.

 

Contingent Value Rights

 

In connection with the Merger on October 15, 2010, CVRs were issued under a Contingent Value Rights Agreement, or CVR Agreement, entered into between Celgene and American Stock Transfer & Trust Company, LLC, as trustee.  The CVRs are registered for trading on the NASDAQ Global Select Market under the symbol “CELGZ.”  The fair value of the CVRs and the liability of the Company related to payments under the CVR Agreement are subject to fluctuation based on trading prices for the publicly traded CVRs.  Subsequent to the Acquisition Date, the Company has measured the contingent consideration represented by the CVRs at fair value with changes in fair value recognized in operating earnings.

 

Each holder of a CVR is entitled to receive a pro rata portion, based on the number of CVRs then outstanding, of each of the following contingent cash payments:

 

·                   Milestone Payment #1.   $250.0 million upon U.S. Food and Drug Administration, or FDA, approval of ABRAXANE ®  for use in the treatment of non-small cell lung cancer, or NSCLC, if such approval permits the Company to market ABRAXANE ®  with FDA approval that includes a progression-free survival, or PFS, claim, but only if this milestone is achieved no later than the fifth anniversary of the Merger.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

·                   Milestone Payment #2.   $400.0 million (if achieved no later than April 1, 2013) or $300.0 million (if achieved after April 1, 2013 and before the fifth anniversary of the Merger) upon FDA approval of ABRAXANE ®  for use in the treatment of pancreatic cancer, if such approval permits the Company to market ABRAXANE ®  with FDA approval that includes an overall survival claim.

 

·                   Net Sales Payments.   For each full one-year period ending December 31 during the term of the CVR Agreement, which we refer to as a net sales measuring period (with the first net sales measuring period beginning January 1, 2011 and ending December 31, 2011):

 

·                   2.5% of the net sales of ABRAXANE ®  and the Abraxis pipeline products that exceed $1.0 billion but are less than or equal to $2.0 billion for such period, plus

 

·                   an additional amount equal to 5% of the net sales of ABRAXANE ®  and the Abraxis pipeline products that exceed $2.0 billion but are less than or equal to $3.0 billion for such period, plus

 

·                   an additional amount equal to 10% of the net sales of ABRAXANE ®  and the Abraxis pipeline products that exceed $3.0 billion for such period.

 

No payments will be due under the CVR Agreement with respect to net sales of ABRAXANE ®  and the Abraxis pipeline products after December 31, 2025, which we refer to as the net sales payment termination date, unless net sales for the net sales measuring period ending on December 31, 2025 are equal to or greater than $1.0 billion, in which case the net sales payment termination date will be extended until the last day of the net sales measuring period subsequent to December 31, 2025 during which net sales of ABRAXANE ®  and the Abraxis pipeline products are less than $1.0 billion or, if earlier, December 31, 2030.

 

The final results for the ongoing ABRAXANE ®  Phase III study in NSCLC, or the NSCLC study, were presented at a major scientific congress in June 2010.  These results showed that the primary endpoint of the study, response rate, was met and was statistically significant.  An interim analysis for the secondary endpoint of PFS was announced in January 2011 and, although not statistically significant, did not show a negative trend against the comparator.  On June 4, 2011, the Company announced that the final analysis for both PFS and Overall Survival, or OS, was completed during the second quarter of 2011 and the PFS remained consistent with the interim analysis.  In addition, the final OS, similar to the final PFS analysis, did not show a negative trend against the comparator.  The Special Protocol Assessment, or SPA, as agreed with the FDA, states that the NSCLC study must reach the primary endpoint of response rate, which has been met, as well as showing that the secondary endpoints of both PFS and OS are not negative, i.e. no detrimental effect on PFS or OS for the ABRAXANE ®  group of the NSCLC study.  Accordingly, because the final PFS results were not statistically significant, this reduced the probability that a payment will be made for Milestone Payment #1 under the CVR Agreement that the Company entered into with the former shareholders of Abraxis.  Milestone Payment #1 relates to FDA approval of ABRAXANE ®  for the treatment of NSCLC that permits the Company to market ABRAXANE ®  with FDA approval that includes a PFS claim, which the Company believes is now unlikely to be achieved based on the foregoing data. The market value of the publicly traded CVRs, which represents the fair value of the Company’s liability for all potential payments under the CVR Agreement, decreased from $212.0 million at December 31, 2010 to $75.3 million at September 30, 2011. The reduction in the fair value of the Company’s liability was recognized as a gain of $136.7 million in acquisition-related (gains) charges and restructuring, net on the Consolidated Statements of Income for the nine-month period ended September 30, 2011, including a gain of $13.4 million for the three-month period ended September 30, 2011.

 

In the first quarter of 2011, the Company evaluated the value assigned to the IPR&D from Abraxis and determined that, based on a lower level of probable sales than that estimated at the time of the Merger for sales of ABRAXANE ®  for NSCLC with FDA approval that includes a PFS claim, the fair value of the

 

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CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

IPR&D acquired from Abraxis has fallen below the $1.290 billion recorded at the time of acquisition. An impairment charge included in research and development on the accompanying Consolidated Statements of Income in the amount of $118.0 million was recorded in the three-month period ended March 31, 2011 to reduce the value of the IPR&D asset acquired from Abraxis to its revised current fair value of $1.172 billion at September 30, 2011.

 

Gloucester Pharmaceuticals, Inc.

 

On January 15, 2010, the Company acquired all of the outstanding common stock and stock options of Gloucester Pharmaceuticals, Inc., or Gloucester.  T he assets acquired and liabilities assumed of Gloucester were recorded as of the acquisition date, at their respective fair values, and consolidated with those of the Company. Gloucester’s results of operations are included in the Company’s consolidated financial statements from the date of acquisition.

 

The Company paid $338.9 million in cash before milestone payments with potential additional future payments of up to $300.0 million in contingent regulatory milestone payments.  As part of the consideration for the Gloucester acquisition, the Company is contractually obligated to pay certain consideration resulting from the outcome of future events.  The Company updates its assumptions each reporting period based on new developments and records such amounts at fair value until such consideration is satisfied.

 

In June 2011, the FDA granted accelerated approval of the Supplemental New Drug Application for ISTODAX ®  for the treatment of peripheral T-cell lymphoma, or PTCL, in patients who have received at least one prior therapy. This FDA approval was the triggering event for the payment of one of the two contingent regulatory milestone payments associated with the Gloucester acquisition.  The Company made a payment of $180.0 million to the former shareholders of Gloucester in July 2011 in satisfaction of this milestone payment requirement. The single remaining contingent milestone payment is for a $120.0 million cash payment upon the marketing approval for the European Union PTCL.

 

Subsequent to the acquisition date, the Company has measured the contingent consideration arrangement at fair value for each period with changes in fair value recognized in operating earnings.  Changes in fair values reflect new information about the IPR&D assets and the passage of time.  In the absence of new information, changes in fair value reflect only the passage of time as development work towards the achievement of the milestones progresses, and will be accrued based on an accretion schedule.  At September 30, 2011, the balance of the contingent consideration, which reflects the fair value of the single remaining contingent milestone payment, was $87.1 million, and is included in other non-current liabilities.

 

4.   Restructuring

 

The Company has incurred costs from restructuring activities related to the October 15, 2010 acquisition of Abraxis.  Restructuring costs include employee termination costs, contract termination fees and facility closing costs.  Employee termination costs are generally recorded when the actions are probable and estimable and include accrued severance benefits and health insurance continuation, many of which may be paid out during periods after termination of employment.

 

The following tables summarize the restructuring expenses and changes in the restructuring liability related to the Abraxis acquisition during the three- and nine-month periods ended September 30, 2011:

 

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CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Employee termination benefits

 

$

86

 

$

 

$

2,312

 

$

 

Contract termination fees

 

 

 

1,304

 

 

Facility closing costs

 

113

 

 

1,858

 

 

Total restructuring expense

 

$

199

 

$

 

$

5,474

 

$

 

 

 

 

Balance

 

Expense

 

 

 

Balance

 

Cumulative

 

 

 

December 31, 2010

 

Recognized

 

Payments

 

September 30, 2011

 

Payments

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee termination benefits

 

$

14,881

 

$

2,312

 

$

12,047

 

$

5,146

 

$

13,280

 

Contract termination fees

 

 

1,304

 

1,304

 

 

1,304

 

Facility closing costs

 

 

1,858

 

1,066

 

792

 

1,066

 

Total restructuring costs

 

$

14,881

 

$

5,474

 

$

14,417

 

$

5,938

 

$

15,650

 

 

The Company does not expect to incur material additional restructuring expenses related to the acquisition of Abraxis.  Future cash payments related to the restructuring activity are estimated to be approximately $1.3 million in 2011, $4.3 million in 2012 and $0.3 million in 2013.

 

5.    Earnings Per Share

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Celgene

 

$

372,984

 

$

281,151

 

$

907,972

 

$

670,945

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares (in thousands):

 

 

 

 

 

 

 

 

 

Basic

 

452,019

 

459,653

 

460,161

 

459,957

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Options, restricted stock units, warrants and other incentives

 

7,511

 

6,679

 

6,891

 

7,180

 

Diluted

 

459,530

 

466,332

 

467,052

 

467,137

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.83

 

$

0.61

 

$

1.97

 

$

1.46

 

Diluted

 

$

0.81

 

$

0.60

 

$

1.94

 

$

1.44

 

 

The total number of potential shares of common stock excluded from the diluted earnings per share computation because their inclusion would have been anti-dilutive was 21,682,141 and 24,472,208 shares for the three-month periods ended September 30, 2011 and 2010, respectively.  The total number of potential common shares excluded for the nine-month periods ended September 30, 2011 and 2010 was 26,846,063 and 23,624,432, respectively.

 

The Company’s Board of Directors has approved an open-ended common share repurchase program up to an aggregate of $4.0 billion of the Company’s common stock.  As of September 30, 2011, an aggregate of 35,676,097 shares of common stock were repurchased under the program, including 15,549,400 shares of common stock repurchased during the three-month period ended September 30, 2011.

 

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CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

6.    Comprehensive Income

 

A summary of comprehensive income, net of tax, is summarized as follows:

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net income

 

$

372,984

 

$

281,151

 

$

907,972

 

$

670,945

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on marketable securities available for sale, net of tax

 

124

 

4,682

 

4,928

 

17,681

 

Reclassification adjustment for (gains) and losses included in net income

 

(3,072

)

(6,560

)

(1,783

)

(12,432

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (gains) losses related to marketable securities available for sale, net of tax

 

(2,948

)

(1,878

)

3,145

 

5,249

 

Net unrealized gains (losses) related to cash flow hedges, net of tax

 

52,789

 

(118,501

)

(1,356

)

1,663

 

Currency translation adjustments

 

(12,713

)

11,709

 

6,108

 

32,769

 

Total other comprehensive income (loss) items

 

37,128

 

(108,670

)

7,897

 

39,681

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

410,112

 

172,481

 

915,869

 

710,626

 

 

7.    Financial Instruments and Fair Value Measurement

 

The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and the valuation techniques the Company utilized to determine such fair value.  Fair values determined based on Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities.  The Company’s Level 1 assets consist of marketable equity securities.  Fair values determined based on Level 2 inputs utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active.  The Company’s Level 2 assets consist primarily of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities, non-U.S. government, agency and Supranational securities and global corporate debt securities.  Fair values determined based on Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity.  The Company’s Level 3 assets consist of warrants for the purchase of equity securities in non-publicly traded companies.  The Company’s Level 1 liability relates to the Company’s publicly traded CVRs.  The Level 2 liability relates to forward currency contracts and the Level 3 liability consists of contingent consideration related to undeveloped product rights resulting from the Gloucester acquisition.

 

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CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

 

Quoted Price in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

Balance at

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

September 30, 2011

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

$

 

$

 

$

 

Available-for-sale securities

 

784,160

 

424

 

783,736

 

 

Forward currency contracts

 

9,824

 

 

9,824

 

 

Warrants

 

2,077

 

 

 

2,077

 

Total assets

 

$

796,061

 

$

424

 

$

793,560

 

$

2,077

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Acquisition related contingent consideration

 

$

(162,390

)

$

(75,297

)

$

 

$

(87,093

)

 

 

 

 

 

Quoted Price in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

Balance at

 

Identical Assets

 

Inputs

 

Inputs

 

 

 

December 31, 2010

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

5,000

 

$

 

$

5,000

 

$

 

Available-for-sale securities

 

1,250,173

 

4,268

 

1,242,402

 

3,503

 

Warrants

 

1,757

 

 

 

1,757

 

Warrants classified as held for sale

 

1,904

 

 

 

1,904

 

Securities classified as held for sale

 

19,863

 

3,655

 

 

16,208

 

Total assets

 

$

1,278,697

 

$

7,923

 

$

1,247,402

 

$

23,372

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

(18,436

)

$

 

$

(18,436

)

$

 

Acquisition related contingent consideration

 

(464,937

)

(212,042

)

 

(252,895

)

Total liabilities

 

$

(483,373

)

$

(212,042

)

$

(18,436

)

$

(252,895

)

 

There were no security transfers between Levels 1 and 2 in the nine-month period ended September 30, 2011.  The following tables represent a roll-forward of the fair value of Level 3 instruments (significant unobservable inputs):

 

 

 

Nine-Month Periods Ended September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

Balance at beginning of period

 

$

23,372

 

$

1,598

 

Amounts acquired or issued

 

 

 

Net realized and unrealized gains (losses)

 

1,182

 

(10

)

Settlements

 

(22,477

)

169

 

Transfers in and/or out of Level 3

 

 

 

Balance at end of period

 

$

2,077

 

$

1,757

 

 

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CELGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Settlements of $22.5 million during the nine-month period ended September 30, 2011 consisted of Level 3 instruments that were considered non-core assets acquired in the acquisition of Abraxis and were included in the sale of the non-core assets in April 2011.

 

 

 

Nine-Month Periods Ended September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Balance at beginning of period

 

$

(252,895

)

$

 

Amounts acquired or issued

 

 

(230,201

)

Net accretion

 

(14,198

)

(16,697

)

Settlements

 

 

 

Transfers in and/or out of Level 3

 

180,000

 

 

Balance at end of period

 

$

(87,093

)

$

(246,898

)

 

Transfers out of Level 3 during the nine-month period ended September 30, 2011 consisted of $180.0 million related to a milestone that was part of the contingent consideration in the Gloucester acquisition.  The milestone was achieved and valued based on its contractually defined amount.  The milestone was paid in July 2011.

 

8.    Derivative Instruments and Hedging Activities

 

Foreign Currency Forward Contracts:   The Company uses foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies and to reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.

 

The Company enters into foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries.  The foreign currency forward hedging contracts outstanding at September 30, 2011 and December 31, 2010 had settlement dates within 36 months.  These foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses on them are reported in other comprehensive income (loss), or OCI, and reclassified to operations in the same periods during which the underlying hedged transactions affect operations.  Any ineffectiveness on these foreign currency forward contracts is reported on the Consolidated Statements of Income in other income (expense), net.  Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at September 30, 2011 and December 31, 2010:

 

 

 

Notional Amount

 

Foreign Currency

 

September 30, 2011

 

December 31, 2010

 

 

 

 

 

 

 

Australian Dollar

 

$

14,280

 

$

51,809

 

British Pound

 

 

58,440

 

Canadian Dollar

 

93,768

 

133,128

 

Euro

 

794,766

 

675,438

 

Japanese Yen

 

647,960

 

632,962

 

Swiss Franc

 

56,376

 

77,669

 

Others

 

 

2,835

 

Total

 

$

1,607,150

 

$

1,632,281

 

 

The Company considers the impact of its own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis.

 

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Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

As of September 30, 2011, credit risk did not materially change the fair value of the Company’s foreign currency forward contracts.

 

The Company also enters into foreign currency forward contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies.  These foreign currency forward contracts have not been designated as hedges and, accordingly, any changes in their fair value are recognized on the Consolidated Statements of Income in other income (expense), net in the current period.  The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding at September 30, 2011 and December 31, 2010 were $1,023.2 million and $848.6 million, respectively.

 

From time to time the Company hedges the fair value of certain debt obligations through the use of interest rate swap contracts.  The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates.  Since the specific terms and notional amount of the swap match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swaps are recorded on the Consolidated Balance Sheets with no net impact recorded in the Consolidated Statements of Income.  Additionally, any net interest payments made or received are recognized as interest expense.  At June 30, 2011, the Company was a party to three pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes in which the notional amounts matched the amount of the hedged fixed-rate notes. In August 2011, the Company settled the swap contracts resulting in the receipt of $34.3 million.  The proceeds from the swap settlement are being accounted for as a reduction of current and future interest expense.  There were no interest rate swap contracts outstanding at September 30, 2011.

 

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Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the fair value and presentation in the consolidated balance sheets for derivative instruments as of September 30, 2011 and December 31, 2010:

 

 

 

September 30, 2011

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

Instrument

 

Location

 

Fair Value

 

Location

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts designated as hedging instruments*

 

Other current assets

 

$

22,556

 

Other current assets

 

$

1,448

 

 

 

Other current liabilities

 

23,764

 

Other current liabilities

 

34,665

 

 

 

Other non-current assets

 

3,231

 

Other non-current assets

 

213

 

 

 

Other non-current liabilities

 

6,533

 

Other non-current liabilities

 

34,722

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments*

 

Other current assets

 

34,870

 

Other current assets

 

3,877

 

 

 

Other current liabilities

 

2,499

 

Other current liabilities

 

8,813

 

 

 

Other non-current assets

 

1,450

 

Other non-current assets

 

 

 

 

Other non-current liabilities

 

 

Other non-current liabilities

 

1,341

 

Total

 

 

 

$

94,903

 

 

 

$

85,079

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

 

 

Balance Sheet

 

 

 

Instrument

 

Location

 

Fair Value

 

Location

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts designated as hedging instruments*

 

Other current assets

 

$

23,536

 

Other current assets

 

$

1,177

 

 

 

Other current liabilities

 

16,656

 

Other current liabilities

 

21,645

 

 

 

Other non-current liabilities

 

 

Other non-current liabilities

 

33,824

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts not designated as hedging instruments*

 

Other current assets

 

8,127

 

Other current assets

 

1,976

 

 

 

Other current liabilities

 

2,444

 

Other current liabilities

 

10,577

 

Total

 

 

 

$

50,763

 

 

 

$

69,199

 

 

*                      Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheets in accordance with ASC 210-20.

 

16



Table of Contents

 

Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following tables summarize the effect of derivative instruments designated as hedging instruments on the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2011 and 2010, respectively:

 

 

 

For the Three-Month Period Ended September 30, 2011

 

 

 

Amount of
Gain/(Loss)
Recognized in OCI
on Derivative

 

Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Location of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Amount of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Instrument

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)

 

(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

47,987

(1)

Net product sales

 

$

(4,802

)

Other income, net

 

$

(6,256)

(2)

Interest rate swaps

 

 

Interest expense

 

$

1,724

 

 

 

 

 

 

(1)    Gains of $10,675 are expected to be reclassified from Accumulated OCI into operations in the next 12 months.

 

(2)    The amount of net loss recognized in income represents $2,125 in gains related to the ineffective portion of the hedging relationships and $8,381 of losses related to amounts excluded from the assessment of hedge effectiveness.

 

 

 

For the Three-Month Period Ended September 30, 2010

 

 

 

Amount of
Gain/(Loss)
Recognized in OCI
on Derivative

 

Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Location of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Amount of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Instrument

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)

 

(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(97,916

)

Net product sales

 

$

20,585

 

Other income, net

 

$

5,975

(1)

 

 

 

 

Research and development

 

$

(1

)

 

 

 

 

 

(1)    The amount of net gains recognized in income represents $394 in gains related to the ineffective portion of the hedging relationships, and $5,581 of gains related to amounts excluded from the assessment of hedge effectiveness.

 

17



Table of Contents

 

Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

For the Nine-Month Period Ended September 30, 2011

 

 

 

Amount of
Gain/(Loss)
Recognized in OCI
on Derivative

 

Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Location of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Amount of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Instrument

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)

 

(Ineffective Portion
and Amount Excluded
From Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

(9,190)

(1)

Net product sales

 

$

(7,833

)

Other income, net

 

$

(6,021)

(2)

Interest rate swaps

 

 

Interest expense

 

$

5,460

 

 

 

 

 

 

(1)    Gains of $10,675 are expected to be reclassified from Accumulated OCI into operations in the next 12 months.

 

(2)    The amount of net losses recognized in income represents $566 in losses related to the ineffective portion of the hedging relationships and $5,455 of losses related to amounts excluded from the assessment of hedge effectiveness.

 

 

 

For the Nine-Month Period Ended September 30, 2010

 

 

 

Amount of
Gain/(Loss)
Recognized in OCI
on Derivative

 

Location of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income

 

Location of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Amount of
Gain/(Loss)
Recognized in
Income on
Derivative

 

Instrument

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

(Amount Excluded
From Effectiveness
Testing)

 

(Amount Excluded
From Effectiveness
Testing)

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

$

43,377

 

Net product sales

 

$

41,718

 

Other income, net

 

$

3,019

(1)

 

 

 

 

Research and development

 

$

(4

)

 

 

 

 

 

(1)    The amount of net gain recognized in income represents $415 in losses related to the ineffective portion of the hedging relationships and $3,434 of gains related to amounts excluded from the assessment of hedge effectiveness.

 

18



Table of Contents

 

Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and nine-month periods ended September 30, 2011 and 2010:

 

 

 

Location of Gain/(Loss)

 

Amount of Gain/(Loss) Recognized in Income on Derivative

 

 

 

Recognized in Income

 

Three-Month Periods Ended September 30,

 

Nine-Month Periods Ended September 30,

 

Instrument

 

on Derivative

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forward contracts

 

Other income, net

 

$

(46,586

)

$

(49,661

)

$

(11,666

)

$

(4,177

)

 

The impact of gains and losses on derivatives not designated as hedging instruments are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Income in other income (expense), net for all periods presented.

 

9.    Cash, Cash Equivalents and Marketable Securities Available-for-Sale

 

Money market funds of $0.603 billion and $1.050 billion at September 30, 2011 and December 31, 2010, respectively, were recorded at cost, which approximates fair value and are included in cash and cash equivalents.

 

The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale securities by major security type and class of security at September 30, 2011 and December 31, 2010 were as follows:

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

September 20, 2011

 

Cost

 

Gain

 

Loss

 

Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

222,678

 

$

401

 

$

(236

)

$

222,843

 

U.S. government-sponsored agency securities

 

137,312

 

575

 

(79

)

137,808

 

U.S. government-sponsored agency MBS

 

303,028

 

2,343

 

(2,056

)

303,315

 

Non-U.S. government, agency and Supranational securities

 

11,182

 

198

 

 

11,380

 

Corporate debt - global

 

107,470

 

1,151

 

(231

)

108,390

 

Marketable equity securities

 

407

 

17

 

 

424

 

Total available-for-sale marketable securities

 

$

782,077

 

$

4,685

 

$

(2,602

)

$

784,160

 

 

 

 

 

 

Gross

 

Gross

 

Estimated

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2010

 

Cost

 

Gain

 

Loss

 

Value

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

431,913

 

$

921

 

$

(378

)

$

432,456

 

U.S. government-sponsored agency securities

 

359,060

 

1,055

 

(267

)

359,848

 

U.S. government-sponsored agency MBS

 

250,618

 

1,230

 

(1,332

)

250,516

 

Non-U.S. government, agency and Supranational securities

 

35,382

 

182

 

(18

)

35,546

 

Corporate debt - global

 

167,876

 

1,002

 

(1,340

)

167,538

 

Marketable equity securities

 

4,050

 

368

 

(149

)

4,269

 

Total available-for-sale marketable securities

 

$

1,248,899

 

$

4,758

 

$

(3,484

)

$

1,250,173

 

 

19



Table of Contents

 

Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. Government Sponsored Enterprises.  U.S. government-sponsored agency mortgage-backed securities, or MBS, include mortgage-backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association.  Non-U.S. government, agency and Supranational securities consist of direct obligations of highly rated governments of nations other than the United States and obligations of sponsored agencies and other entities that are guaranteed or supported by highly rated governments of nations other then the United States.  Corporate debt—global includes obligations issued by investment-grade corporations, including some issues that have been guaranteed by governments and government agencies.  Net unrealized gains in the marketable debt securities primarily reflect the impact of decreased interest rates at September 30, 2011 and December 31, 2010.

 

Duration periods of available-for-sale debt securities at September 30, 2011 were as follows:

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

 

 

 

 

 

 

Duration of one year or less

 

$

171,765

 

$

171,428

 

Duration of one through three years

 

514,872

 

516,676

 

Duration of three through five years

 

95,033

 

95,632

 

Total

 

$

781,670

 

$

783,736

 

 

10.    Inventory

 

A summary of inventories by major category at September 30, 2011 and December 31, 2010 follows:

 

 

 

September 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Raw materials

 

$

51,609

 

$

37,458

 

Work in process

 

100,429

 

95,822

 

Finished goods

 

35,487

 

126,850

 

Total

 

$

187,525

 

$

260,130

 

 

The finished goods inventory balance at December 31, 2010 includes the unamortized acquisition accounting step-up to fair value resulting from the acquisition of Abraxis in the amount of $90.3 million which has been fully amortized as of September 30, 2011.

 

20



Table of Contents

 

Celgene CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

11.    Investment in Affiliated Companies

 

As of September 30, 2011, the Company maintained three equity method investments, including two limited partnership investment funds.  Additional equity method investment contributions, net of investment returns totaled $2.9 million during the nine-month period ended September 30, 2011.  A summary of the Company’s equity investments in affiliated companies follows:

 

 

 

September

 

December 31,

 

Investment in Affiliated Companies

 

2011

 

2010

 

 

 

 

 

 

 

Investment in affiliated companies (1)

 

$

26,358

 

$

21,419

 

Excess of investment over share of equity (2)

 

1,112

 

1,654

 

Investment in affiliated companies

 

$

27,470

 

$

23,073

 

 

 

 

Three-Month Periods Ended

 

Nine-Month Periods Ended

 

 

 

September 30,

 

September 30,

 

Equity in Losses of Affiliated Companies

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Affiliated companies losses (1) (3)

 

$

1,661

 

$

1,384

 

$

966

 

$

746

 

 

(1)              The Company records its interest and share of losses based on its ownership percentage.

 

(2)              Consists of goodwill.

 

(3)              Affiliated companies losses for the nine-month period of 2011 includes certain losses related to non-core former Abraxis equity method investments which were divested in the second quarter of 2011.

 

12.    Intangible Assets and Goodwill

 

Intangible Assets:   The Company’s intangible assets consist of developed product rights from the Pharmion, Gloucester and Abraxis acquisitions, IPR&D product rights from the Gloucester and Abraxis acquisitions, contract-based licenses, technology and other.  The amortization periods related to non-IPR&D intangible assets range from one to 17 years.  The following summary of intangible assets by category includes intangibles currently being amortized and intangibles not yet subject to amortization:

 

 

 

Gross

 

 

 

Intangible

 

Weighted

 

 

 

Carrying

 

Accumulated

 

Assets,

 

Average

 

September 30, 2011

 

Value

 

Amortization

 

Net

 

Life (Years)

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

Acquired developed product rights

 

$

2,186,000

 

$

(592,844

)

$

1,593,156

 

11.9

 

Licenses

 

64,250

 

(5,149

)

59,101

 

16.8

 

Technology and other

 

43,148

 

(9,393

)

33,755

 

8.9

 

 

 

2,293,398

 

(607,386

)

1,686,012

 

11.9

 

 

 

 

 

 

 

 

 

 

 

Nonamortized intangible assets:

 

 

 

 

 

 

 

 

 

Acquired IPR&D product rights

 

1,234,000

 

 

1,234,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Total intangible assets

 

$