Celgene Corporation
CELGENE CORP /DE/ (Form: 10-Q, Received: 07/28/2016 16:06:40)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
 
[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 001-34912
CELGENE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
22-2711928
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification 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
X
 
No
 
 
  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
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.
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
 
 
At July 22, 2016, 775,114,702 shares of Common Stock, par value $.01 per share, were outstanding.





CELGENE CORPORATION
 
FORM 10-Q TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
Consolidated Statements of Income - Three-Month and Six-Month Periods Ended June 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income - Three-Month and Six-Month Periods Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions, except per share amounts)
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 
 
 
 
 
 
 
Net product sales
$
2,744.5

 
$
2,254.1

 
$
5,239.2

 
$
4,309.3

Other revenue
9.8

 
23.7

 
26.7

 
49.3

Total revenue
2,754.3

 
2,277.8

 
5,265.9

 
4,358.6

Expenses:
 

 
 

 
 

 
 

Cost of goods sold (excluding amortization of acquired intangible assets)
110.9

 
100.8

 
216.8

 
204.8

Research and development
948.7

 
1,110.0

 
1,681.9

 
1,616.0

Selling, general and administrative
732.1

 
616.8

 
1,275.1

 
1,146.0

Amortization of acquired intangible assets
174.8

 
63.7

 
266.6

 
127.3

Acquisition related charges and restructuring, net
(35.9
)
 
(29.3
)
 
0.3

 
(10.3
)
Total costs and expenses
1,930.6

 
1,862.0

 
3,440.7

 
3,083.8

Operating income
823.7

 
415.8

 
1,825.2

 
1,274.8

Other income and (expense):
 

 
 

 
 

 
 

Interest and investment income, net
7.2

 
8.8

 
14.0

 
17.8

Interest (expense)
(123.3
)
 
(48.3
)
 
(245.2
)
 
(97.5
)
Other income (expense), net
(12.5
)
 
94.5

 
22.7

 
102.8

Income before income taxes
695.1

 
470.8

 
1,616.7

 
1,297.9

Income tax provision
96.9

 
114.6

 
217.8

 
222.8

Net income
$
598.2

 
$
356.2

 
$
1,398.9

 
$
1,075.1

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.77

 
$
0.45

 
$
1.80

 
$
1.35

Diluted
$
0.75

 
$
0.43

 
$
1.74

 
$
1.30

Weighted average shares:
 

 
 

 
 

 
 

Basic
775.6

 
793.0

 
778.1

 
796.0

Diluted
801.5

 
825.3

 
804.7

 
829.7

 
See accompanying Notes to Unaudited Consolidated Financial Statements

3


CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)

 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
598.2

 
$
356.2

 
$
1,398.9

 
$
1,075.1

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(15.5
)
 
15.5

 
2.7

 
(7.7
)
Pension liability adjustment

 
(1.7
)
 

 
(7.6
)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) related to cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
30.7

 
(62.8
)
 
(190.3
)
 
344.1

Tax benefit (expense)
8.4

 
(31.5
)
 
18.4

 
(21.6
)
Unrealized holding gains (losses), net of tax
39.1

 
(94.3
)
 
(171.9
)
 
322.5

 
 
 
 
 
 
 
 
Reclassification adjustment for (gains) included in net income
(59.9
)
 
(89.0
)
 
(146.6
)
 
(158.2
)
Tax (benefit)
(0.6
)
 
(0.5
)
 
(1.3
)
 
(1.0
)
Reclassification adjustment for (gains) included in net income, net of tax
(60.5
)
 
(89.5
)
 
(147.9
)
 
(159.2
)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on marketable securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
28.5

 
68.8

 
(353.3
)
 
(8.3
)
Tax benefit (expense)
(11.7
)
 
(23.4
)
 
127.3

 
3.1

Unrealized holding gains (losses), net of tax
16.8

 
45.4

 
(226.0
)
 
(5.2
)
 
 
 
 
 
 
 
 
Reclassification adjustment for losses included in net income
30.1

 
1.3

 
40.5

 
0.7

Tax (benefit)
(10.5
)
 
(0.4
)
 
(14.1
)
 
(0.2
)
Reclassification adjustment for losses included in net income, net of tax
19.6

 
0.9

 
26.4

 
0.5

Total other comprehensive income (loss)
(0.5
)
 
(123.7
)
 
(516.7
)
 
143.3

Comprehensive income
$
597.7

 
$
232.5

 
$
882.2

 
$
1,218.4


See accompanying Notes to Unaudited Consolidated Financial Statements

4



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share amounts)
 
 
June 30,
2016
 
December 31,
2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
5,063.7

 
$
4,880.3

Marketable securities available for sale
1,340.0

 
1,671.6

Accounts receivable, net of allowances of $31.3 and $30.3 at June 30, 2016 and December 31, 2015, respectively
1,514.9

 
1,420.9

Inventory
490.4

 
443.4

Other current assets
760.0

 
984.7

Total current assets
9,169.0

 
9,400.9

Property, plant and equipment, net
854.0

 
814.1

Intangible assets, net
10,587.1

 
10,858.1

Goodwill
4,876.5

 
4,879.0

Other assets
1,075.4

 
1,012.3

Total assets
$
26,562.0

 
$
26,964.4

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
229.8

 
240.8

Accrued expenses and other current liabilities
1,695.7

 
1,647.7

Income taxes payable
12.5

 
19.8

Current portion of deferred revenue
49.0

 
60.6

Total current liabilities
1,987.0

 
1,968.9

Deferred revenue, net of current portion
27.9

 
30.0

Income taxes payable
346.0

 
324.2

Other non-current tax liabilities
2,519.2

 
2,519.2

Other non-current liabilities
1,821.0

 
2,041.7

Long-term debt, net of discount
14,312.1

 
14,161.4

Total liabilities
21,013.2

 
21,045.4

Commitments and Contingencies (Note 15)


 


Stockholders’ Equity:
 

 
 

Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding at June 30, 2016 and December 31, 2015, respectively

 

Common stock, $.01 par value per share, 1,150.0 million shares authorized; issued 946.4 million and 940.1 million shares at June 30, 2016 and December 31, 2015, respectively
9.5

 
9.4

Common stock in treasury, at cost; 171.4 million and 153.5 million shares at June 30, 2016 and December 31, 2015, respectively
(15,851.1
)
 
(14,051.8
)
Additional paid-in capital
11,666.1

 
11,119.3

Retained earnings
9,473.3

 
8,074.4

Accumulated other comprehensive income
251.0

 
767.7

Total stockholders’ equity
5,548.8

 
5,919.0

Total liabilities and stockholders’ equity
$
26,562.0

 
$
26,964.4

 
See accompanying Notes to Unaudited Consolidated Financial Statements

5



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
Six-Month Periods Ended June 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
1,398.9

 
$
1,075.1

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

 
 

Depreciation
58.5

 
57.8

Amortization
192.1

 
131.3

Deferred income taxes
(166.7
)
 
(252.6
)
Impairment charges
132.6

 
5.6

Change in value of contingent consideration
(10.7
)
 
(10.3
)
Gain on sale of business
(37.5
)
 

Net (gain) loss on sale of investments
(7.1
)
 
(85.6
)
Share-based compensation expense
304.0

 
276.5

Share-based employee benefit plan expense
19.7

 
17.1

Derivative instruments
(14.3
)
 
(4.0
)
Other, net
1.5

 
(3.8
)
Change in current assets and liabilities, excluding the effect of acquisitions:
 

 
 

Accounts receivable
(80.7
)
 
(140.9
)
Inventory
(45.2
)
 
(19.2
)
Other operating assets
100.4

 
(46.8
)
Accounts payable and other operating liabilities
55.0

 
76.8

Income tax payable
13.6

 
32.8

Deferred revenue
(3.2
)
 
31.1

Net cash provided by operating activities
1,910.9

 
1,140.9

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available for sale
428.0

 
1,579.8

Purchases of marketable securities available for sale
(432.0
)
 
(1,127.1
)
Capital expenditures
(103.3
)
 
(95.0
)
Proceeds from sales of investment securities
11.3

 
85.2

Purchases of investment securities
(89.6
)
 
(200.2
)
Other

 
(3.0
)
Net cash (used in) provided by investing activities
(185.6
)
 
239.7

Cash flows from financing activities:
 

 
 

Payment for treasury shares
(1,706.3
)
 
(1,997.3
)
Proceeds from short-term borrowing

 
970.9

Principal repayments on short-term borrowing

 
(209.7
)
Net proceeds from common equity put options
5.8

 
6.4

Net proceeds from share-based compensation arrangements
75.9

 
104.2

Excess tax benefit from share-based compensation arrangements
82.1

 
174.2

Net cash used in financing activities
(1,542.5
)
 
(951.3
)
Effect of currency rate changes on cash and cash equivalents
0.6

 
(20.1
)
Net increase in cash and cash equivalents
183.4

 
409.2

Cash and cash equivalents at beginning of period
4,880.3

 
4,121.6

Cash and cash equivalents at end of period
$
5,063.7

 
$
4,530.8


 See accompanying Notes to Unaudited Consolidated Financial Statements

6



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(Dollars in millions)
 
 
Six-Month Periods Ended June 30,
 
2016
 
2015
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Change in net unrealized loss on marketable securities available for sale
$
353.3

 
$
8.3

Investment in Human Longevity, Inc. common stock
$
39.6

 
$

Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
264.8

 
$
120.2

Income taxes paid
$
227.1

 
$
247.2

  
See accompanying Notes to Unaudited Consolidated Financial Statements

7



CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In all accompanying tables, amounts of dollars expressed in millions,
except per share amounts, unless otherwise indicated)
 
1. Nature of Business and Basis of Presentation
 
Celgene Corporation, together with its subsidiaries (collectively “we,” “our,”  “us,” “Celgene” or the “Company”), is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation. Celgene Corporation was incorporated in the State of Delaware in 1986.

Our primary commercial stage products include REVLIMID ® , POMALYST ® /IMNOVID ® , ABRAXANE ® , OTEZLA ® , VIDAZA ® , azacitidine for injection (generic version of VIDAZA ® ), THALOMID ® (sold as THALOMID ® or Thalidomide Celgene TM outside of the U.S.), and ISTODAX ® . In addition we earn revenue through licensing arrangements.
 
The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries. Investments in limited partnerships and interests where we have an equity interest of 50% or less and do not otherwise have a controlling financial interest are accounted for by either the equity or cost method. Certain prior year amounts have been reclassified to conform to the current year's presentation.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. We are subject to certain risks and uncertainties related to, among other things, product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition, outcome of legal and governmental proceedings, European credit risk, 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
 
Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 Annual Report on Form 10-K).

New accounting standards which have been adopted

In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 more closely aligns the presentation of debt issuance costs under U.S. GAAP with the presentation under comparable IFRS standards by requiring that debt issuance costs be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, similar to the presentation of debt discounts or premiums. We adopted ASU 2015-03 in the first quarter of 2016. Other assets and Long-term debt, net of discount have been restated as of December 31, 2015 to reflect the retroactive reclassification of $89.0 million of debt issuance costs that have been reclassified from Other assets to Long-term debt, net of discount.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05, "Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement" (ASU 2015-05). ASU 2015-05 provides guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The new guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. ASU 2015-05 was effective for us beginning in the first quarter of 2016. The adoption of this updated standard did not have a material impact on our consolidated financial statements and related disclosures.

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments" (ASU 2015-16). ASU 2015-16 replaces the requirement that an acquirer in a business combination account for measurement period adjustments retrospectively with a requirement that an acquirer recognize adjustments to the provisional

8

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 was effective for us beginning in the first quarter of 2016 and did not have a material impact on our consolidated financial statements and related disclosures.

New accounting standards which have not yet been adopted

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP and requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for us beginning in the first quarter of 2018 using one of two prescribed transition methods. We are currently evaluating the effect that the updated standard and transition method will have on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory" (ASU 2015-11). ASU 2015-11 applies only to inventory for which cost is determined by methods other than last-in, first-out and the retail inventory method, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of this standard is required to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new standard will be effective for us on January 1, 2017. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, "Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" (ASU 2016-01). ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. ASU 2016-01 does not apply to equity investments in consolidated subsidiaries or those accounted for under the equity method of accounting. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values will be measured at fair value with changes in fair value recognized in net income. Companies have the option to either measure equity investments without readily determinable fair values at fair value or at cost adjusted for changes in observable prices minus impairment. Changes in measurement under either alternative will be recognized in net income. Companies that elect the fair value option for financial liabilities must recognize changes in fair value related to instrument-specific credit risk in other comprehensive income. Companies must assess valuation allowances for deferred tax assets related to available-for-sale debt securities in combination with their other deferred tax assets. ASU 2016-01 will be effective for us beginning in the first quarter of 2018 and early adoption is available to publicly traded companies for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We expect the implementation of this standard to have an impact on our consolidated financial statements and related disclosures, as we held publicly traded equity investments at June 30, 2016 with a fair value of $994.8 million , as well as equity investments accounted for under the cost method. A cumulative-effect adjustment to the balance sheet will be recorded as of the beginning of the fiscal year of adoption. The implementation of ASU 2016-01 is expected to increase volatility in our net income as the volatility currently recorded in other comprehensive income related to changes in the fair market value of available for sale equity investments will be reflected in net income after adoption.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, "Leases" (ASU 2016-02). ASU 2016-02 provides accounting guidance for both lessee and lessor accounting models. Among other things, lessees will recognize a right-of-use asset and a lease liability for leases with a duration of greater than one year. For income statement purposes, ASU 2016-02 will require leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The new standard will be effective for us on January 1, 2019 and will be adopted using a modified retrospective approach which will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures, however, we anticipate recognition of additional assets and corresponding liabilities related to leases on our balance sheet.


9

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


In March 2016, the FASB issued Accounting Standards Update No. 2016-07, "Investments-Equity Method and Joint Ventures" (ASU 2016-07). ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively as if the equity method had been in effect during all previous periods that the investment had been held. Under the new guidance, available-for-sale equity securities that become qualified for the equity method of accounting will result in the recognition through earnings of the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The new standard will be effective for us on January 1, 2017 and will be adopted on a prospective basis. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, "Compensation-Stock Compensation" (ASU 2016-09). ASU 2016-09 changes several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, employee tax withholding, calculation of shares for use in diluted earnings per share, and classification on the statement of cash flows. The new standard will be effective for us on January 1, 2017. Early adoption is available. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for us on January 1, 2020. Early adoption will be available on January 1, 2019. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

3. Acquisitions and Divestitures

Receptos, Inc. (Receptos): On August 27, 2015 (Acquisition Date), we acquired all of the outstanding common stock of Receptos, resulting in Receptos becoming our wholly-owned subsidiary. Receptos' lead drug candidate, ozanimod, is a small molecule that modulates sphingosine 1-phosphate 1 and 5 receptors and it is in development for immune-inflammatory indications, including inflammatory bowel disease and relapsing multiple sclerosis (RMS). The acquisition of Receptos also included RPC4046, an anti-interleukin-13 (IL-13) antibody in development for eosinophilic esophagitis (EoE), an allergic/immune-mediated orphan disease. RPC4046 was licensed from AbbVie Bahamas Ltd. and AbbVie Inc. (collectively referred to as AbbVie). The results of operations and cash flows for Receptos are included in our consolidated financial statements from the Acquisition Date and the assets and liabilities of Receptos have been recorded at their respective fair values on the Acquisition Date and consolidated with our assets and liabilities.

We paid approximately $7.626 billion , consisting of $7.311 billion for common stock outstanding and $0.315 billion for the portion of equity compensation attributable to the pre-combination period. In addition, we paid $0.197 billion for the portion of equity compensation attributable to the post-combination service period, which has been recorded as expense over the required service period ending in the fourth quarter of 2015.

The acquisition has been accounted for using the acquisition method of accounting which requires that 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 (IPR&D) to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts.

The total consideration for the acquisition of Receptos is summarized as follows:
 
Total Consideration
Cash paid for outstanding common stock
$
7,311.3

Cash for equity compensation attributable to pre-combination service
314.9

Total consideration
$
7,626.2



10

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective fair values summarized below. During the fourth quarter of 2015, adjustments were recorded to increase the amounts initially recorded for deferred tax assets, deferred tax liabilities and goodwill as of the Acquisition Date.

 
Amounts Recognized as of the Acquisition Date
Working capital 1
$
479.2

Property, plant and equipment
5.0

In-process research and development product rights
6,842.0

Current deferred tax assets 2
241.3

Other non-current assets
7.9

Non-current deferred tax liabilities 3
(2,519.2
)
Total identifiable net assets
5,056.2

Goodwill
2,570.0

Total net assets acquired
$
7,626.2


1  Includes cash and cash equivalents, available for sale marketable securities, other current assets, accounts payable, and accrued expenses and other current liabilities.
2 Following adoption of Accounting Standards Update No. 2015-17, "Balance Sheet Classification of Deferred Taxes" in the fourth quarter of 2015 all deferred tax assets and liabilities and associated valuation allowances are classified as non-current.
3 Upon integration of the acquired intangible assets into our offshore research, manufacturing, and commercial operations, the deferred tax liability was reclassified to a non-current tax liability.

The fair values of current and other non-current assets, current liabilities and property, plant and equipment were determined to approximate their book values.

The fair value assigned to acquired IPR&D was based on the present value of expected after-tax cash flows attributable to ozanimod, which is in phase II and III testing. The present value of expected after-tax cash flows attributable to ozanimod and assigned to IPR&D was determined by estimating the after-tax costs to complete development of ozanimod into a commercially viable product, estimating future revenue and ongoing expenses to produce, support and sell ozanimod, on an after-tax basis, and discounting the resulting net cash flows to present value. The revenue and costs projections used were reduced based on the probability that compounds at similar stages of development will become commercially viable products. The rate utilized to discount the net cash flows to their present value reflects the risk associated with the intangible asset and is benchmarked to the cost of equity. Acquired IPR&D will be accounted for as an indefinite-lived intangible asset until regulatory approval in a major market or discontinuation of development.

The excess of purchase price over the fair value amounts assigned to identifiable assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is primarily attributable to the broadening of our product portfolio and research capabilities in the inflammation and immunology therapeutic area, the assembled workforce and the deferred tax consequences of the IPR&D asset recorded for financial statement purposes. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition has been recorded as a non-current asset in our Consolidated Balance Sheets and is not amortized, but is subject to review for impairment annually.
As a result of the exclusive development license from AbbVie for RPC4046 that Receptos held prior to our acquisition of Receptos, AbbVie holds an option to enter into a global collaboration for RPC4046 with us. If AbbVie does not exercise its option, we will have an exclusive worldwide license for the development and commercialization of RPC4046 for any and all indications. We do not consider this potential collaboration arrangement to be significant.


11

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Pro Forma Financial Information:
The following table provides unaudited pro forma financial information for the three- and six-month periods ended June 30, 2015 as if the acquisition of Receptos had occurred on January 1, 2014.
 
 
Three-Month Period Ended June 30, 2015
 
Six-Month Period Ended June 30, 2015
Total revenue
 
$
2,277.8

 
$
4,358.6

Net income
 
$
271.8

 
$
922.4

Net income per common share: basic
 
$
0.34

 
$
1.16

Net income per common share: diluted
 
$
0.33

 
$
1.11


The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of Celgene and Receptos. The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the combined operations of Celgene and Receptos. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of the period presented, nor are they intended to represent or be indicative of future results of operations.

Quanticel Pharmaceuticals, Inc. (Quanticel): On October 19, 2015, we completed our previously announced acquisition of Quanticel, a privately held biotechnology company focused on cancer drug discovery, for consideration consisting of $95.9 million in cash at closing plus contingent consideration consisting of future payments of up to $385.0 million for achieving specified discovery and development targets. We have had a research collaboration arrangement with Quanticel since 2011. Through this purchase, Quanticel has become our wholly-owned subsidiary, and we will benefit from full access to Quanticel’s proprietary platform for the single-cell genomic analysis of human cancer, as well as Quanticel’s programs that target specific epigenetic modifiers, which we expect will advance our pipeline of innovative cancer therapies.

The acquisition was accounted for using the acquisition method of accounting for business combinations which requires the assets and liabilities of Quanticel to be recorded at their respective fair values on the acquisition date and consolidated into our Consolidated Balance Sheets. The results of operations and cash flows for Quanticel have been included in our consolidated financial statements from the date of acquisition.

The fair value of consideration transferred in the acquisition of Quanticel is shown in the table below:
 
Fair Value at October 19, 2015
Cash
$
95.9

Fair value of pre-existing equity ownership
11.4

Contingent consideration
166.0

Total fair value of consideration
$
273.3


Prior to the acquisition of Quanticel, we had an equity interest equal to approximately 5% of the company’s total capital stock (on an “as converted” basis). Based on the fair market value of this interest derived from the purchase price, we recognized a gain of $10.3 million , which was reflected as a component of other income (expense), net within our Consolidated Statements of Income for the year ended December 31, 2015.

Our potential contingent consideration payments are classified as liabilities, which were measured at fair value as of the acquisition date, with $82.3 million classified as current liabilities and $83.7 million classified as non-current liabilities. We estimated the fair value of potential contingent consideration using a probability-weighted discounted cash flow approach, which reflects the probability and timing of future potential payments. This fair value measurement is based on significant inputs that are not observable in the market and thus represents a level three liability within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a discount rate based on a market participant assumption. See Note 6 for post-acquisition changes in fair value. The preliminary purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the acquisition date based upon their respective preliminary fair values summarized below. 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.

12

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
Fair Value at October 19, 2015 (Provisional)
Working capital 1
$
7.0

Property, plant and equipment
1.9

Other non-current assets
0.8

Technology platform intangible asset 2
232.0

Debt obligations
(13.9
)
Non-current deferred tax liabilities
(72.3
)
Total identifiable net assets
155.5

Goodwill
117.8

Total net assets acquired
$
273.3

1  Includes cash and cash equivalents, available-for-sale marketable securities, other current assets, accounts payable and accrued expenses and other current liabilities.
2 Technology platform related to Quanticel’s proprietary technology platform for the single-cell genomic analysis of human cancer.

The fair values of current and other non-current assets, property, plant and equipment, current liabilities and debt were determined to approximate their book values.

The fair value of the technology platform intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset, which was calculated based on the multi-period excess earnings method of the income approach. The multi-period excess earnings method of the income approach included estimating probability adjusted annual after-tax net cash flows through the cycle of development and commercialization of potential products generated by the technology platform then discounting the resulting probability adjusted net post-tax cash flows using a discount rate commensurate with the risk of our overall business operations to arrive at the net present value.

The excess of purchase price over the fair value amounts assigned to the identifiable assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is largely attributable to the deferred tax consequences of the finite-lived technology platform intangible asset recorded for financial statement purposes, as well as intangible assets that do not qualify for separate recognition at the time of the acquisition. We do not expect any portion of this goodwill to be deductible for tax purposes. Goodwill attributable to the acquisition has been recorded as a non-current asset in our Consolidated Balance Sheets and is not amortized, but is subject to review for impairment annually.

LifebankUSA: In February 2016, we completed the sale of certain assets of Celgene Cellular Therapeutics (CCT) comprising CCT's biobanking business known as LifebankUSA, CCT’s biomaterials portfolio of assets, including Biovance ® , and CCT's rights to PSC-100, a placental stem cell program, to Human Longevity, Inc. (HLI), a genomics and cell therapy-based diagnostic and therapeutic company based in San Diego, California. We received 3.4 million shares of HLI Class A common stock with a fair value of $39.6 million as consideration in the transaction. The fair value of the shares common stock we received was determined based on the most recent preferred share offering and reduced for the estimated value of the liquidation preference not offered to common share holders. The transaction generated a $37.5 million gain that was recorded on our Consolidated Statements of Income in Other income (expense). As of June 30, 2016 our total investment in HLI represents approximately 16% of HLI's outstanding capital stock.


13

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


4. Earnings Per Share
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
(Amounts in millions, except per share)
2016
 
2015
 
2016
 
2015
Net income
$
598.2

 
$
356.2

 
$
1,398.9

 
$
1,075.1

Weighted-average shares:
 
 
 
 
 
 
 
Basic
775.6

 
793.0

 
778.1

 
796.0

Effect of dilutive securities:
 
 
 
 
 
 
 
Options, restricted stock units, performance-based restricted stock units and other
25.9

 
32.3

 
26.6

 
33.7

Diluted
801.5

 
825.3

 
804.7

 
829.7

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.77

 
$
0.45

 
$
1.80

 
$
1.35

Diluted
$
0.75

 
$
0.43

 
$
1.74

 
$
1.30

 
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 19.2 million and 9.0 million shares for the three-month periods ended June 30, 2016 and 2015 , respectively. 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 19.7 million and 9.0 million shares for the six-month periods ended June 30, 2016 and 2015 , respectively.

Share Repurchase Program: In June 2016, our Board of Directors approved an increase of $3.000 billion to our authorized share repurchase program, bringing the total amount authorized since April 2009 to an aggregate of up to $20.500 billion of our common stock.

As part of the management of our share repurchase program, we may, from time to time, sell put options on our common stock with strike prices that we believe represent an attractive price to purchase our shares. If the trading price of our shares exceeds the strike price of the put option at the time the option expires, we will have economically reduced the cost of our share repurchase program by the amount of the premium we received from the sale of the put option. If the trading price of our stock is below the strike price of the put option at the time the option expires, we would purchase the shares covered by the option at the strike price of the put option. During the three-month and six-month periods ended June 30, 2016 and 2015, we recorded gains from put option activity on our Consolidated Statements of Income in Other income (expense), net as follows:
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2016
 
2015
 
2016
 
2015
Gain from sale of put options
$
3.2

 
$
5.0

 
$
7.6

 
$
8.9


At June 30, 2016 , we had no outstanding put options.

We have purchased 3.4 million and 17.5 million shares of common stock under the share repurchase program from all sources at a total cost of $343.1 million and $1.753 billion during the three- and six-month periods ended June 30, 2016 , respectively. As of June 30, 2016 , we had a remaining share repurchase authorization of $5.138 billion .


14

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


5. Accumulated Other Comprehensive Income (Loss)
 
The components of other comprehensive income (loss) consist of changes in pension liability, changes in net unrealized gains (losses) on marketable securities classified as available-for-sale, net unrealized gains (losses) related to cash flow hedges and changes in foreign currency translation adjustments.

The accumulated balances related to each component of other comprehensive income (loss), net of tax, are summarized as follows:
 
Pension
Liability
 
Net Unrealized
Gains (Losses) From
Marketable Securities
 
Net Unrealized
Gains (Losses)
From Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
Balance December 31, 2015
$
(13.9
)
 
$
271.5

 
$
586.4

 
$
(76.3
)
 
$
767.7

Other comprehensive income (loss) before reclassifications

 
(226.0
)
 
(171.9
)
 
2.7

 
(395.2
)
Amounts reclassified from accumulated other comprehensive income

 
26.4

 
(147.9
)
 

 
(121.5
)
Net current-period other comprehensive income (loss)

 
(199.6
)

(319.8
)

2.7


(516.7
)
Balance June 30, 2016
$
(13.9
)
 
$
71.9


$
266.6


$
(73.6
)

$
251.0

 
 
 
 
 
 
 
 
 


Balance December 31, 2014
$
(15.5
)
 
$
460.9

 
$
519.6

 
$
(50.2
)
 
$
914.8

Other comprehensive income (loss) before reclassifications
(7.6
)
 
(5.2
)
 
322.5

 
(7.7
)
 
302.0

Amounts reclassified from accumulated other comprehensive income

 
0.5

 
(159.2
)
 

 
(158.7
)
Net current-period other comprehensive income (loss)
(7.6
)
 
(4.7
)

163.3


(7.7
)
 
143.3

Balance June 30, 2015
$
(23.1
)
 
$
456.2


$
682.9


$
(57.9
)
 
$
1,058.1

 
 
 
 
 
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
Accumulated Other Comprehensive Income Components
 
Affected Line Item in the Consolidated Statements of Income
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Gains (losses) from cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
61.6

 
$
90.2

 
$
150.0

 
$
160.7

Treasury rate lock agreements
 
Interest (expense)
 
(1.3
)
 
(0.9
)
 
(2.6
)
 
(1.8
)
Interest rate swap agreements
 
Interest (expense)
 
(0.4
)
 
(0.3
)
 
(0.8
)
 
(0.7
)
 
 
Income tax benefit
 
0.6

 
0.5

 
1.3

 
1.0

 
 
 
 
 
 
 
 
 
 
 
Gains (losses) from available-for-sale marketable securities:
 
 
 
 
 
 
 
 
Realized income (loss) on sales of marketable securities
 
Interest and investment income, net
 
(30.1
)
 
(1.3
)
 
(40.5
)
 
(0.7
)
 
 
Income tax benefit
 
10.5

 
0.4

 
14.1

 
0.2

Total reclassification, net of tax
 
 
 
$
40.9

 
$
88.6

 
$
121.5

 
$
158.7




15

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


6. Financial Instruments and Fair Value Measurement

The tables below present information about assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 and the valuation techniques we utilized to determine such fair value.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Our level 1 assets consist of marketable equity securities. Our level 1 liability relates to our publicly traded Contingent Value Rights (CVRs). See Note 18 of Notes to Consolidated Financial Statements included in our 2015 Annual Report on Form 10-K for a description of the CVRs.
Level 2 inputs utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active. Our level 2 assets consist primarily of U.S. Treasury securities, U.S. government-sponsored agency mortgage-backed (MBS) securities, global corporate debt securities, asset backed securities, foreign currency forward contracts, purchased foreign currency options and interest rate swap contracts. Our level 2 liabilities relate to written foreign currency options, foreign currency forward contracts and interest rate swap contracts.
Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity. We do not have any level 3 assets. Our level 3 liabilities consist of contingent consideration related to undeveloped product rights and technology platforms resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester), Nogra Pharma Limited (Nogra), Avila Therapeutics, Inc. (Avila) and Quanticel.

Our contingent consideration obligations are recorded at their estimated fair values and we revalue these obligations each reporting period until the related contingencies are resolved. The fair value measurements are estimated using probability-weighted discounted cash flow approaches that are based on significant unobservable inputs related to product candidates acquired in business combinations and are reviewed quarterly. These inputs include, as applicable, estimated probabilities and timing of achieving specified development and regulatory milestones, estimated annual sales and the discount rate used to calculate the present value of estimated future payments. Significant changes which increase or decrease the probabilities of achieving the related development and regulatory events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these obligations. Changes in the fair value of contingent consideration obligations are recognized in Acquisition related charges and restructuring, net in the Consolidated Statements of Income. The fair value of our contingent consideration as of June 30, 2016 and December 31, 2015 was calculated using the following significant unobservable inputs:
Inputs
Ranges (weighted average) utilized as of:
June 30, 2016
December 31, 2015
Discount rate
0.8% to 12.0% (8.5%)
0.8% to 12.0% (8.8%)
Probability of payment
0% to 95% (42%)
0% to 95% (53%)
Projected year of payment for development and regulatory milestones
2016 to 2029 (2019)
2016 to 2029 (2019)
Projected year of payment for sales-based milestones and other amounts calculated as a percentage of annual sales
2019 to 2033 (2024)
2019 to 2033 (2024)

The maximum remaining potential payments related to the contingent consideration from the acquisitions of Gloucester, Avila and Quanticel are estimated to be $120.0 million , $475.0 million and $385.0 million respectively, and $1.865 billion plus other amounts calculated as a percentage of annual sales pursuant to the license agreement with Nogra.

16

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
Balance at
June 30, 2016
 
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Available-for-sale securities
$
1,340.0

 
$
994.8

 
$
345.2

 
$

Forward currency contracts
342.0

 

 
342.0

 

Purchased currency options
56.7

 

 
56.7

 

Interest rate swaps
153.6

 

 
153.6

 

Total assets
$
1,892.3

 
$
994.8

 
$
897.5

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(63.2
)
 
$
(63.2
)
 
$

 
$

Written currency options
(42.2
)
 

 
(42.2
)
 

Other acquisition related contingent consideration
(1,469.5
)
 

 

 
(1,469.5
)
Total liabilities
$
(1,574.9
)
 
$
(63.2
)
 
$
(42.2
)
 
$
(1,469.5
)
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2015
 
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 

 
 

 
 

 
 

Available-for-sale securities
$
1,671.6

 
$
1,235.9

 
$
435.7

 
$

Forward currency contracts
606.0

 

 
606.0

 

Purchased currency options
46.7

 

 
46.7

 

Interest rate swaps
52.5

 

 
52.5

 

Total assets
$
2,376.8

 
$
1,235.9

 
$
1,140.9

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(51.9
)
 
$
(51.9
)
 
$

 
$

Written currency options
(19.1
)
 

 
(19.1
)
 

Other acquisition related contingent consideration
(1,521.5
)
 

 

 
(1,521.5
)
Total liabilities
$
(1,592.5
)
 
$
(51.9
)
 
$
(19.1
)
 
$
(1,521.5
)

There were no security transfers between levels 1 and 2 during the six-month periods ended June 30, 2016 and 2015 . The following table represents a roll-forward of the fair value of level 3 instruments: 
 
Six-Month Periods Ended June 30,
 
2016
 
2015
Liabilities:
 

 
 

Balance at beginning of period
$
(1,521.5
)
 
$
(1,279.0
)
Amounts acquired or issued

 

Net change in fair value
22.0

 
(36.0
)
Settlements

 

Transfers in and/or out of level 3
30.0

 

Balance at end of period
$
(1,469.5
)
 
$
(1,315.0
)
 
The $52.0 million decrease in the fair value of our level 3 liabilities during the six-month period ended June 30, 2016 was primarily the result of an $81.1 million decrease in the fair value of contingent consideration from the acquisition of Avila. This decrease resulted from adjustments made to the probability and timing of future potential milestone payments. An adjustment was also made to the technology platform asset obtained in the acquisition of Avila based on probability-weighted future cash flows, which resulted in an $83.1 million reduction in the fair value of the technology platform asset (see Note 10). The fair value of level 3

17

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


liabilities also decreased by $30.0 million in 2016 due to Quanticel milestones that were achieved and transferred to Accrued expenses and other current liabilities. These decreases were partly offset by $59.1 million accretion of the fair value of our contingent consideration due to the passage of time. Changes to the fair value of contingent consideration are recorded on the Consolidated Statements of Income as Acquisition related charges and restructuring, net.

7. Derivative Instruments and Hedging Activities

Our revenue and earnings, cash flows and fair values of assets and liabilities can be impacted by fluctuations in foreign exchange rates and interest rates. We actively manage the impact of foreign exchange rate and interest rate movements through operational means and through the use of various financial instruments, including derivative instruments such as foreign currency option contracts, foreign currency forward contracts, treasury rate lock agreements and interest rate swap contracts. In instances where these financial instruments are accounted for as cash flow hedges or fair value hedges we may from time to time terminate the hedging relationship. If a hedging relationship is terminated we generally either settle the instrument or enter into an offsetting instrument.

Foreign Currency Risk Management

We maintain a foreign exchange exposure management program to mitigate the impact of volatility in foreign exchange rates on future foreign currency cash flows, translation of foreign earnings and changes in the fair value of assets and liabilities denominated in foreign currencies.

Through our revenue hedging program, we endeavor to reduce the impact of possible unfavorable changes in foreign exchange rates on our future U.S. Dollar cash flows that are derived from foreign currency denominated sales. To achieve this objective, we hedge a portion of our forecasted foreign currency denominated sales that are expected to occur in the foreseeable future, typically within the next three years, with a maximum of five years . We manage our anticipated transaction exposure principally with foreign currency forward contracts and occasionally foreign currency put and call options.
 
Foreign Currency Forward Contracts:  We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.

We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries. The foreign currency forward hedging contracts outstanding at June 30, 2016 and December 31, 2015 had settlement dates within 54 months and 36 months , respectively. The spot rate components of these foreign currency forward contracts are designated as cash flow hedges and, to the extent effective, any unrealized gains or losses are reported in other comprehensive income (OCI) and reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. If a hedging relationship is terminated with respect to a foreign currency forward contract, accumulated gains or losses associated with the contract remain in OCI until the hedged forecasted transaction occurs and are reclassified to operations in the same periods during which the underlying hedged transactions affect earnings. Any ineffectiveness on these foreign currency forward contracts is reported on the Consolidated Statements of Income in Other income (expense), net. The forward point components of these foreign currency forward contracts are not designated as cash flow hedges and all fair value adjustments of forward point amounts are recorded to Other income (expense), net. Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows at June 30, 2016 and December 31, 2015 :

 
 
Notional Amount
Foreign Currency
 
June 30, 2016
 
December 31, 2015
Australian Dollar
 
$
50.9

 
$
45.1

British Pound
 
230.9

 
289.3

Canadian Dollar
 
217.8

 
135.9

Euro
 
2,284.8

 
2,934.3

Japanese Yen
 
762.1

 
510.4

Swedish Krona
 
7.6

 

Total
 
$
3,554.1

 
$
3,915.0

 

18

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


  We consider the impact of our own and the counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract on an ongoing basis. As of June 30, 2016 , credit risk did not materially change the fair value of our foreign currency forward contracts.
 
We also manage a portfolio of foreign currency contracts to reduce exposures to foreign currency fluctuations of certain recognized assets and liabilities denominated in foreign currencies and, from time to time, we enter into foreign currency contracts to manage exposure related to translation of foreign earnings. These foreign currency forward contracts have not been designated as hedges 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 June 30, 2016 and December 31, 2015 were $901.1 million and $920.0 million , respectively.
Foreign Currency Option Contracts: From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. The foreign currency option contracts outstanding at June 30, 2016 and December 31, 2015 had settlement dates within 54 months and 36 months , respectively. If the U.S. Dollar weakens relative to the currency of the hedged anticipated sales, the purchased put option value reduces to zero and we benefit from the increase in the U.S. Dollar equivalent value of our anticipated foreign currency cash flows; however, this benefit would be capped at the strike level of the written call, which forms the upper end of the collar. The premium collected from the sale of the call option is equal to the premium paid for the purchased put option, resulting in a net zero cost for each collar. Outstanding foreign currency option contracts entered into to hedge forecasted revenue were as follows at June 30, 2016 and December 31, 2015 :
 
Notional Amount 1
 
June 30, 2016
 
December 31, 2015
Foreign currency option contracts designated as hedging activity:
 
 
 
Purchased Put
$
1,001.6

 
$
641.5

Written Call
$
1,109.4

 
$
690.0

1 U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.
Interest Rate Risk Management
Forward Starting Interest Rate Swaps and Treasury Rate Locks: In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the forward starting swaps or treasury rate locks are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

During 2014, we entered into forward starting swaps that were designated as cash flow hedges to hedge against changes in interest rates that could impact an anticipated issuance of debt in 2015. During 2015, we entered into additional forward starting swaps and treasury rate locks. Forward starting swaps and treasury rate locks with a combined aggregate notional amount of $2.900 billion were settled upon the issuance of debt in August 2015, when the net fair value of the forward starting swaps and treasury rate locks in accumulated OCI was in a loss position of $21.6 million . The net loss will be recognized as interest expense over the life of the associated senior notes. At June 30, 2016 and December 31, 2015, we had outstanding forward starting swaps with effective dates in 2017 and 2018 and maturing in ten years that were designated as cash flow hedges with notional amounts as shown in the table below:
 
Notional Amount
 
June 30, 2016
 
December 31, 2015
Forward starting interest rate swap contracts:
 
 
 
Forward starting swaps with effective dates in 2017
$
500.0

 
$
200.0

Forward starting swaps with effective dates in 2018
$
500.0

 
$


19

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Interest Rate Swap Contracts: From time to time we hedge the fair value of certain debt obligations through the use of interest rate swap contracts. The interest rate swap contracts are designated hedges of the fair value changes in the notes attributable to changes in interest rates. Since the specific terms and notional amount of the swap are intended to match those of the debt being hedged, it is assumed to be a highly effective hedge and all changes in fair value of the swap are recorded on the Consolidated Balance Sheets with no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.

The following table summarizes the notional amounts of our outstanding swap contracts at June 30, 2016 and December 31, 2015
 
 
 
Notional Amount
 
 
June 30, 2016
 
December 31, 2015
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 

 
 

1.900% senior notes due 2017
 
$
300.0

 
$
300.0

2.300% senior notes due 2018
 
200.0

 
200.0

2.250% senior notes due 2019
 
500.0

 
500.0

3.950% senior notes due 2020
 
500.0

 
500.0

3.250% senior notes due 2022
 
1,000.0

 
1,000.0

4.000% senior notes due 2023
 
700.0

 
700.0

3.625% senior notes due 2024
 
100.0

 
100.0

3.875% senior notes due 2025
 
300.0

 
250.0

Total
 
$
3,600.0

 
$
3,550.0

 

In July 2016, we terminated the hedging relationship for $3.600 billion notional amount of interest rate swaps by settling such swap contracts. The settlement of swap contracts resulted in the receipt of net proceeds of $195.6 million which will be accounted for as a reduction of current and future interest expense associated with these notes. See Note 11 for additional details related to reductions of current and future interest expense.

The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of June 30, 2016 and December 31, 2015 :
 
 
 
 
 
June 30, 2016
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset
Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
$
299.0

 
$
28.4

 
 
Other non-current assets
 
128.6

 
52.6

 
 
Accrued expenses and other current liabilities
 
1.3

 
8.5

 
 
Other non-current liabilities
 
29.5

 
44.4

Interest rate swap agreements
 
Other current assets
 
33.8

 

 
 
Other non-current assets
 
162.5

 
38.3

 
 
Other non-current liabilities
 
2.1

 
7.6

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
49.8

 
16.1

 
 
Accrued expenses and other current liabilities
 

 
1.7

Interest rate swap agreements
 
Other current assets
 
2.4

 
2.3

 
 
Other non-current assets
 
6.8

 
5.8

Total
 
 
 
$
715.8

 
$
205.7


20

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


     
 
 
 
 
December 31, 2015
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
$
356.2

 
$
18.0

 
 
Other non-current assets
 
287.8

 
28.0

Interest rate swap agreements
 
Other current assets
 
30.7

 

 
 
Other non-current assets
 
26.1

 
4.7

 
 
Other non-current liabilities
 
0.2

 
0.9

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
46.0

 
5.9

 
 
Accrued expenses and other current liabilities
 
2.9

 
7.4

Interest rate swap agreements
 
Other current assets
 
2.4

 
2.3

 
 
Other non-current assets
 
2.4

 
1.4

Total
 
 
 
$
754.7

 
$
68.6

 
1 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.

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the three-month periods ended June 30, 2016 and 2015 :
 
Three-Month Period Ended June 30, 2016
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
 
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
 
 
Foreign exchange contracts
$
53.0

 
Net product sales
 
$
61.6

 
Other income (expense), net
 
$
8.6

 
2
Treasury rate lock agreements
$

 
Interest (expense)
 
$
(1.3
)
 
Other income (expense), net
 
$

 
 
Interest rate swap agreements
$
(22.3
)
 
Interest (expense)
 
$
(0.4
)
 
Other income (expense), net
 
$

 
 
 
1 Net gains of $277.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
2 The amount of net gains recognized in income represents $8.1 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $0.5 million in gains related to the ineffective portion of the hedging relationships.


21

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
Three-Month Period Ended June 30, 2015
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
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
 
 
Foreign exchange contracts
$
(144.7
)
 
Net product sales
 
$
90.2

 
Other income (expense), net
 
$
13.6

 
1
Treasury rate lock agreements
$

 
Interest (expense)
 
$
(0.9
)
 
Other income (expense), net
 
$

 
 
Interest rate swap agreements
$
81.9

 
Interest (expense)
 
$
(0.3
)
 
Other income (expense), net
 
$

 
 
 
1 The amount of net gains recognized in income represents $13.6 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).

The following tables summarize the effect of derivative instruments designated as cash-flow hedging instruments on the Consolidated Statements of Income for the six-month periods ended June 30, 2016 and 2015 :
 
 
Six-Month Period Ended June 30, 2016
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
 
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
 
 
Foreign exchange contracts
$
(142.0
)
 
Net product sales
 
$
150.0

 
Other income (expense), net
 
$
22.9

 
2
Treasury rate lock agreements
$

 
Interest (expense)
 
$
(2.6
)
 
Other income (expense), net
 
$

 
 
Interest rate swap agreements
$
(48.3
)
 
Interest (expense)
 
$
(0.8
)
 
Other income (expense), net
 
$

 
 
 
1 Net gains of $277.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
2 The amount of net gains recognized in income represents $21.1 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $1.8 million in gains related to the ineffective portion of the hedging relationships.

 
Six-Month Period Ended June 30, 2015
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
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
 
 
Foreign exchange contracts
$
287.9

 
Net product sales
 
$
160.7

 
Other income (expense), net
 
$
17.4

 
1
Treasury rate lock agreements
$

 
Interest (expense)
 
$
(1.8
)
 
Other income (expense), net
 
$

 
 
Interest rate swap agreements
$
56.2

 
Interest (expense)
 
$
(0.7
)
 
Other income (expense), net
 
$

 
 
 
1 The amount of net gains recognized in income represents $20.8 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $3.4 million in losses related to the ineffective portion of the hedging relationships.


22

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table summarizes the effect of derivative instruments designated as fair value hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2016 and 2015 :
 
 
 
 
Amount of Gain Recognized in
Income on Derivative
 
 
Location of Gain Recognized in Income on Derivative
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended
June 30,
Instrument
 
 
2016
 
2015
 
2016
 
2015
Interest rate swap agreements
 
Interest (expense)
 
$
12.9

 
$
15.3

 
$
26.3

 
$
29.3

 
The following table summarizes the effect of derivative instruments not designated as hedging instruments on the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2016 and 2015 :
 
 
 
 
 
Amount of Gain (Loss) Recognized in
Income on Derivative
 
 
Location of Gain (Loss) Recognized in Income on Derivative
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
Instrument
 
 
2016
 
2015
 
2016
 
2015
Foreign exchange contracts
 
Other income (expense), net
 
$
0.3

 
$
(19.6
)
 
$
(27.2
)
 
$
54.9

Put options on our common stock
 
Other income (expense), net
 
$
3.2

 
$
5.0

 
$
7.6

 
$
8.9

 
The impact of gains and losses on foreign exchange contracts not designated as hedging instruments related to changes in the fair value of assets and liabilities denominated in foreign currencies are generally offset by net foreign exchange gains and losses, which are also included on the Consolidated Statements of Income in Other income (expense), net for all periods presented. When we enter into foreign exchange contracts not designated as hedging instruments to mitigate the impact of exchange rate volatility in the translation of foreign earnings, gains and losses will generally be offset by fluctuations in the U.S. Dollar translated amounts of each Income Statement account in current and/or future periods. 

8. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
 
Money market funds of $1.599 billion and $1.413 billion at June 30, 2016 and December 31, 2015 , 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 June 30, 2016 and December 31, 2015 were as follows:
June 30, 2016
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
124.6

 
$
0.4

 
$

 
$
125.0

U.S. government-sponsored agency MBS
 
28.6

 
0.1

 

 
28.7

Corporate debt - global
 
163.9

 
1.1

 
(0.1
)
 
164.9

Asset backed securities
 
26.5

 
0.1

 

 
26.6

Marketable equity securities
 
887.2

 
213.6

 
(106.0
)
 
994.8

Total available-for-sale marketable securities
 
$
1,230.8

 
$
215.3

 
$
(106.1
)

$
1,340.0

 
December 31, 2015
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
153.0

 
$

 
$
(0.4
)
 
$
152.6

U.S. government-sponsored agency MBS
 
29.8

 
0.1

 
(0.4
)
 
29.5

Corporate debt - global
 
219.7

 

 
(1.6
)
 
218.1

Asset backed securities
 
35.6

 

 
(0.1
)
 
35.5

Marketable equity securities
 
811.5

 
468.1

 
(43.7
)
 
1,235.9

Total available-for-sale marketable securities
 
$
1,249.6

 
$
468.2


$
(46.2
)

$
1,671.6


23

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


U.S. government-sponsored agency MBS include mortgage-backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Corporate debt-global includes obligations issued by investment-grade corporations, including some issues that have been guaranteed by governments and government agencies. Asset backed securities consist of triple-A rated securities with cash flows collateralized by credit card receivables and auto loans. Marketable equity securities consist of investments in publicly traded equity securities. The decrease in net unrealized gains in marketable equity securities during the six-month period ended June 30, 2016 primarily reflects the decrease in market value for certain equity investments subsequent to December 31, 2015 .

Duration periods of available-for-sale debt securities at June 30, 2016 were as follows:
 
 
Amortized
Cost
 
Fair
Value
Duration of one year or less
 
$
41.4

 
$
41.4

Duration of one through three years
 
288.4

 
289.8

Duration of three through five years
 
13.8

 
14.0

Total
 
$
343.6

 
$
345.2

 
 
9. Inventory

Inventories as of June 30, 2016 and December 31, 2015 are summarized by major category as follows:
 
June 30, 2016
 
December 31, 2015
Raw materials
$
255.9

 
$
201.3

Work in process
79.8

 
120.0

Finished goods
154.7

 
122.1

Total
$
490.4

 
$
443.4

 


24

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


10. Intangible Assets and Goodwill
 
Intangible Assets:  Our finite-lived intangible assets primarily consist of developed product rights and technology obtained from the Pharmion Corp. (Pharmion), Gloucester, Abraxis BioScience, Inc. (Abraxis), Avila and Quanticel acquisitions. Our indefinite lived intangible assets consist of acquired IPR&D product rights from the Receptos, Nogra and Gloucester acquisitions. The remaining weighted-average amortization period for finite-lived intangible assets not fully amortized is approximately 9.5 years .

Intangible assets outstanding as of June 30, 2016 and December 31, 2015 are summarized as follows:
June 30, 2016
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortizable intangible assets:
 
 

 
 

 
 

Acquired developed product rights
 
$
3,405.9

 
$
(1,570.9
)
 
$
1,835.0

Technology
 
482.6

 
(257.1
)